Southfield, MI - Thorn Apple Valley reported a net loss of $230,233, or 4 cents per share, on sales of $226.0 million for the second quarter ended December 12, 1997. Results compare with net income of $2.0 million, or 33 cents per share, on sales of $259.1 million in the second quarter ended December 13, 1996.
Second-quarter Financial Highlights
Net sales for the second quarter ended December 12, 1997, declined 13 percent to $226.0 million from $259.1 million in the second quarter ended December 13, 1996. Thorn Apple Valley recorded a second-quarter operating loss before income taxes of $336,233 versus operating income before income taxes of $3.3 million in the prior-year period. The company's net loss of $230,233, or 4 cents per share, compares with net income of $2.0 million, or 33 cents per share, in the year-earlier period.
Year-to-date Financial Highlights
Net sales for the first half of fiscal 1998 were down 8 percent to $503.9 million from $546.0 million posted in the first half of fiscal 1997. The company recorded an operating loss before income taxes of $5.2 million versus operating income of $653,743 in the comparable period. A net loss of $3.3 million, or 54 cents per share, compares with first-half fiscal 1996 net income of $304,743, or 5 cents per share.
Processed Meats
Sales volume (in pounds) of processed meats decreased 6 percent as compared with last year's second quarter. According to the company, the sales decline significantly affected results because it occurred in higher-margin product lines where incremental costs are minimal. Thorn Apple Valley's processed meats operations were also negatively affected by excessive inventory build-up during a period when raw material prices were declining.
Fresh Pork
Sales volume (pounds) of fresh pork grew by 11 percent compared with the prior-year period. However, the industry-wide increase in hog supply was less than anticipated during the period, which, the company said, delayed Thorn Apple Valley's ability to achieve expected improvements in hog slaughter margins. Currently, the hog supply is more in line with the projected increases and the company reports margins are ahead of last year's early third-quarter performance.
Cost Reductions, Management Changes and Sales Initiatives
"Although we didn't expect to experience the full benefits of a growing hog supply and certain strategic initiatives until the second half of fiscal 1998, clearly, we thought our second-quarter performance would be better than it was," stated President and Chief Executive Officer Joel Dorfman. "In response to our under-performance, last week we cut a number of staff positions and reduced top management's compensation. The staff reduction was in part made possible by the implementation of our new management information system and included the strategic reorganization of remaining personnel. We expect these moves and other overhead reductions to cut annual expenses by $7 to $8 million dollars beginning in June 1998.
"In addition, we replaced two key managers -- our general manager at Thorn Apple Valley's Ponca City plant and our product manager, who is in charge of scheduling production, timing raw material acquisitions and other important operational responsibilities. We expect to see improved performance in these areas of our business immediately."
Dorfman continued, "Thorn Apple Valley's three-year, $180-million dollar modernization program has yielded one of the most potentially efficient infrastructures in the industry. The lack of top-line performance, however, has delayed realization of the resulting benefits. In response, it is management's intention to apply the same energies and type of bold initiatives to improving top-line performance that we did to the modernization of our operations. Our commitment is demonstrated by Thorn Apple Valley's recently signed, three-year sponsorship of Cale Yarborough's NASCAR racing team.
"We expect the returns on our first-year, $5-million NASCAR investment to be substantial and measurable," said Dorfman. "Benefits should begin to accrue in the fourth quarter. Not only will this partnership provide Thorn Apple Valley with exposure to the 6 million racing circuit attendees in 30 of our key markets, but the televised events will give us invaluable access to the millions of NASCAR devotees nationwide, delivering an estimated $8 to $10 million worth of 'focused exposure time media value.' Moreover, demographically, NASCAR fans match our target consumer perfectly, and they are some of the most sponsor-loyal consumers, having measured 72 percent brand loyalty by U.S.A. Today/Performance Research.
"Our sponsorship puts the Thorn Apple Valley brand in the company of Tide, Budweiser, Winston, Kodak and other leading brands, provides the broad, national exposure that had been missing from our marketing arsenal and gives us a significant marketing advantage over our competitors. It is a multifaceted program representing almost limitless tie-in promotional opportunities, the success of which will be measured by improved product volume and margins."
Dorfman added, "To fully leverage this and other marketing opportunities, we are adding two key, high-level managers who are proven performers. Their job will be to inject more marketing discipline in the sales process -- which is vital to and consistent with our emphasis on selling more higher-margin product."
Outlook
Looking forward, Dorfman said, "We continue to expect operational improvement in the second half of fiscal 1998 as we should benefit from several developments, especially in the fourth quarter. Closing the Council Bluffs facility has begun to provide $4 million in annual pretax savings. Savings from our staff reduction and reorganization should begin to accrue in the fourth quarter and reach an annual run-rate of approximately $7 to $8 million beginning in the first quarter of fiscal 1999. As our operations evolve, we will continue to take advantage of further efficiencies.
"While we will always seek to cut costs where appropriate, our challenge is to build volumes and improve margins in both divisions," Dorfman emphasized. "The rising hog supply will benefit our fresh pork as well as our processed meat operations -- more hogs means lower raw material costs as well as more bacon and hams to sell. New management talent, products and promotions will be key to improving processed meats performance. We are especially enthusiastic about Thorn Apple Valley's NASCAR sponsorship. We are also encouraged by initial orders for a higher-margin, sliced lunch meat program we recently introduced to the major grocery chains and feel that this line could represent as much as 300,000 pounds per week of new business. Production is scheduled to begin in March," he said.
"Additionally, export volume continues to build. Although currently operating near break-even due to the significant learning curve and start-up costs associated with penetrating the international market place, we feel confident that the groundwork is being laid for long-term growth and profitability in this segment of our business."
Dorfman concluded by saying, "Maximizing shareholder value remains our overriding objective. With 42 percent of the Thorn Apple Valley's total outstanding shares in the hands of top management, our interests are aligned with those of Thorn Apple Valley's shareholders and we are committed to realizing the potential we have worked so hard to create in this company."
Following a three-year, $180-million modernization program, Thorn Apple Valley has emerged as a leading meat processor with a low-cost infrastructure, an extensive product portfolio that includes five #1-selling national branded products, and a rapidly expanding international presence. The company is also one of the largest slaughterers of hogs and sellers of related fresh pork products in the United States. Thorn Apple Valley's common shares are traded on the Nasdaq National Market system under the symbol "TAVI."
This press release contains forward-looking statements with respect to the results of operations of Thorn Apple Valley, Inc. Management of the company believes that the expectations reflected in the forward-looking statements made in this press release are based on reasonable assumptions. Certain developments could occur that might cause actual results to vary from the expectations reflected in this press release. These include changes in raw material supplies or prices, changes in economic conditions, changes in relationships with customers or suppliers and unforeseen loss contingencies.
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