020834 Smithfield Foods Profit Hit by Hog Prices

Chicago (Reuters) - Smithfield Foods Inc. , the largest U.S. pork producer, reported a nearly 80% drop in quarterly profits, blaming lower hog prices, and it warned that the poor hog market will likely weigh on future results.

The Smithfield, Virginia-based company, which has the nation's largest hog herd as well as beef and pork processing plants, said net income in the fiscal first quarter ended July 28 fell to $11.8 million, or 11 cents per share, from nearly $57 million, or 53 cents a share, a year ago.

Those results were on the low side of analysts' forecasts, which ranged from 8 cents to 26 cents and averaged 15 cents per share, according to a poll by Thomson First Call

"I knew the earnings were going to be bad, and they were," said John McMillin, food analyst with Prudential Securities. "Historically, when hog prices are down, you make money on the processing side, and they really didn't make much."

A larger U.S. hog herd and huge domestic meat supplies have hurt prices for beef, pork, and chicken this year. Hogs traded at about $40 per 100 pounds late in the quarter, compared with $50 a year ago. Prices have since dropped further to about $30.

Following the lead of other major companies, Smithfield said it would expense the cost of stock options beginning with the current quarter. The company said the move would reduce earnings by less than 1 cent per share in the current fiscal year.

Recent accounting scandals have led many companies to expense options in a bid to improve investor confidence, as critics have argued that failing to log options as a cost makes profits look artificially high.

Low hog prices have also hurt other producers. U.S. meat giant Tyson Foods Inc. said this week it was drastically reducing the size of its money-losing hog operations.

Quarterly earnings at Smithfield's hog production group dropped 84% to $18.9 million from a year ago, hurt by the drop in hog prices.

"Looking forward, it appears that live hog prices will remain depressed for the remainder of the calendar year 2002," said Joseph W. Luter III, Smithfield's chairman and chief executive, in a statement.

"This will negatively impact earnings in our production operations, and it is unlikely that we can fully recover this profitability in meat processing," he said.

But in a conference call with analysts, Luter said he sees some improvement ahead, since meat sales often improve later in the year.

"I expect that the second quarter will be dramatically better than the first quarter, despite the fact that I expect hogs to be cheaper in the second quarter," Luter said.

The pork division earned $3.6 million, compared with a year-ago loss of $5.3 million, helped by returns on processed meat.

Revenue rose 22% in the quarter to $2.0 billion. The figure included results from beef companies Packerland Holdings Inc., which Smithfield acquired last October, and Moyer Packing Company, which it bought in June 2001.

The oversupply of meat that has affected results at companies like Smithfield, Tyson and Hormel Foods Corp. was caused by a drop in beef exports to top buyer Japan, a drop in poultry exports to top buyer Russia, and increased beef and pork production in the United States.

Smithfield's meat processing group reported earnings of $39.2 million compared with a loss of $500,000 a year ago, due to improvements in its beef division and processed meats.

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