Chief Executive C. Larry Pope said the nation's largest pork producer was switching its focus from buying up its hard-pressed competitors to operating more efficiently. He said Smithfield would shift away from low-margin businesses and instead work on expanding its packaged meat business, where it can make more money.
The company plans to combine seven of its independent operating companies into three main units and close plants in six cities, including one in Smithfield, Va., by December. The moves will lead to annual cost savings, after expenses, of about $55 million in fiscal 2010 and $125 million by the following year.
Shares of Smithfield fell 77 cents, or 8 percent, to $8.80 in afternoon trading Tuesday.
The meat industry is slumping as companies like Smithfield recover from volatile energy and commodity costs that reached record highs over the summer. An oversupply of meat on the market has been keeping prices down, while tight credit markets have hurt the potential for exports, a key market for meat producers. Further, a drop in restaurant spending by consumers has lowered demand.
Pilgrim's Pride Corp., the nation's largest chicken producer, filed for Chapter 11 bankruptcy protection last year as it was hobbled by the volatile costs and high debt. Tyson Foods Inc., the world's largest meat producer, which makes chicken, beef and pork, has seen its chicken unit slump. Dick Bond abruptly resigned as chief executive last month and was replaced on an interim basis by former CEO Leland Tollett.
BMO Capital Markets analyst Kenneth Zaslow said Smithfield's restructuring was "long-awaited and exceedingly appropriate." In a note to clients Tuesday he said the moves could put the company into position to at least break even in its hog production in the first quarter of fiscal 2010. The company is due to release its third-quarter 2009 results next month.
"The cost savings are somewhat larger than our expectation and likely will structurally improve Smithfield's pork processing margins," he wrote.
He said the cost savings will more than cover the costs of the restructuring. Smithfield said it will take a pre-tax charge of $85 million in its third quarter that ended Feb. 1, as well as another $30 million over the next three quarters. It will spend $53 million in capital expenditures related to plant consolidation.
Within the past two weeks the company renegotiated the terms of financing for its U.S. and European borrowing agreements to lower the cost of interest payments through the third quarter of fiscal 2010.
"This action should remove any question about the financial strength of Smithfield Foods," Pope said.
Smithfield will combine seven of its independent operating companies into three main units: The Smithfield Packing Co., John Morrell & Co. and Farmland Foods Inc. Further, John Morrell and Farmland will combine their sales forces.
Plants slated for closure include: Smithfield Packing Co. plants in Smithfield, Va.; Plant City, Fla.; and Elon, N.C.; as well as a John Morrell plant in Great Bend, Kan.; a Farmland Foods plant in New Riegel, Ohio; and an Armour-Eckrich Meats factory in Hastings, Neb.
The company said it would offer transfers to some employees.
In the town of Smithfield, the company plans to close one of its two plants, Smithfield spokesman Dennis Pittman said. The South plant employs 1,375 workers, and more than 1,000 will be offered transfers to either the North plant or to plants in North Carolina.
The move would eliminate duplication, Pittman said. South plant workers process and pack meat; North plant workers slaughter, process and pack meat.