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Vertical Integ. and Pork Profits

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Mike

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STRONG SALES
A $400 million increase in third-quarter sales boosts Smithfield's bottom line.

Smithfield, Virginia-headquartered pork and beef processor Smithfield Foods Inc. announced that net income for its fiscal 2005 third quarter was $97.5 million -- versus income last year of $42.1 million. Sales were $3.1 billion compared with $2.7 billion last year.

The substantial increase in earnings is attributable to the continued success of Smithfield’s vertically integrated pork operations, enabling the company to realize improved profitability during this period of increased livestock cost, the company said in a news release. In the quarter, the company’s hog production operations benefited from a 48 percent increase in live hog market prices year over year. Raising costs remained about the same as last year, but down about $1.50 per hundredweight from the second quarter. Despite the sharply higher livestock prices, fresh pork margins remained solid as the result of continued strong export and domestic pork demand. The company’s beef segment operated at near breakeven levels due to the continuing difficult market conditions in the beef and cattle industries.

Pork exports continued strong in the quarter, running 26 percent ahead of the same period last year and increasing 23 percent year-to-date, after adjusting for the additional week last year. Price increases in fresh pork, however, were not sufficient to fully recover the much higher raw material costs.

Processed meats margins also were down from a year ago on considerably higher input costs. The company continued to drive volume, however, in important value-added, pre-cooked categories, including bacon, entrees and ribs, which grew at double-digit rates.

Smithfield’s beef segment earnings were at a break-even level in spite of weak demand, closed export markets, tight cattle supplies and high cattle costs. Beef volume was down four percent compared with a year ago, after adjusting for the additional week a year ago. Last year’s third quarter was adversely impacted by $11 million in pre-tax costs and inefficiencies in the beef segment related to the reported case of bovine spongiform encephalopathy in Washington state.

“Through our vertical integration strategy, our pork processing and hog production operations combined to produce a record quarter from operations, even though we had no earnings contribution from our beef business,” Joseph Luter, III, Smithfield’s chairman and CEO ,said. “I am confident that this combination of businesses should produce improved fourth quarter results over a year ago, despite a relatively strong fourth quarter in fiscal 2004.”

Luter noted that the company recently announced an important transaction that will strengthen substantially the latest addition to its business model, cattle feeding. Smithfield has signed an agreement in principle to form a 50/50 stand-alone joint venture cattle feeding business with ContiBeef LLC, a subsidiary of ContiGroup Companies, Inc. “This will be a significant transaction that further supports our growth in the beef and cattle industries,” Luter said. “The financing for the venture will come from equity investments by ContiGroup Companies and ourselves and a non-recourse bank credit facility. More importantly, we will be partnering with management, whom we believe, are the best operators in the cattle feeding industry to run the business.”

“I continue to be optimistic about our future, Luter said. “It appears that the pork export market will remain at high levels, which will drive the domestic pork market and live hog markets. The futures markets confirm the positive live hog market outlook. Additionally, the U.S. hog breeding herd remains stable. We are positioned for consistent, future growth.”

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