Tyson sees higher profits

Tyson Foods benefited from higher meat pricing which pushed second quarter profits well past Wall Street expectations today (May 7).

The Springdale-based protein giant pocketed $166 million in net income for the quarter ending March 31. Bottomline profits equaled 44 cents per share, up from 42 cents or $159 million earned a year ago, according to the release.

Investors applauded as Tyson shares rose more than 3% at the opening bell, trading around $18.64 on the brighter outlook from company executives and positive analyst comments.

The street consensus among 15 analysts polled by Yahoo! Finance expected 39 cents per share, after shaving back their estimates in recent weeks in part due to sluggish consumer demand for both beef and pork.

"We still think we have the potential for earnings per share of $2 for the year if we execute as planned, but we have some more work to do," Tyson CEO Donnie Smith said in a statement. “Our multi-protein business again proved advantageous, producing solid earnings for the fiscal second quarter.”

He said the company is pleased with the rate of improvement in the chicken segment. The chicken, pork and prepared foods units all were in or above their normalized operating margin ranges, while beef essentially broke even despite extremely challenging market conditions.

“We're positioned for another great year as we expect to gain momentum in our third and fourth quarters,” Smith told analysts during the earnings call.

Tyson reported second quarter sales revenue of $8.268 billion, up 3.35% on higher prices. Overall, Tyson saw a 3.4% decline in the amount of meat sold which was offset by a 7.7% average price increase from a year ago.

A bright spot for the meat processing industry is stronger restaurant sales across all food service channels. Smith reminded analysts the growth is primarily related to higher prices, and not more volume sales.

He said exports are solid and the company is pleased with its emerging poultry operations in China while still working out some kinks in its Brazilian expansion.

POULTRY PROFITS
Tyson has worked continuously over the past two years to regain normalized operating margins in its expansive domestic poultry operations. The pay-off is beginning to show as the company posted $145 million in operating income, up from $37 million year ago.

Smith said operating margins hit 5% in the recent quarter which is deemed optimal. Just a year ago margins were weak at 1.4%.

One key difference in company operations is that Tyson is carefully monitoring chicken production buying chicken parts on the open market to fill orders.

“We won’t raise a whole chicken unless we can sell all the parts,” Tyson Foods' Chief Operating Office Jim Lochner said during the earnings call.

Looking ahead, Tyson said it should benefit from $125 million in savings generated from more efficient processing models. That said, grain costs were $65 million higher in the quarter.

Chicken sales totaled $2.911 billion, up from $2.739 billion a year ago. Volume was down slightly but prices rose 8%.

BEEF CHALLENGES
Tyson’s beef segment posted a $1 million operating loss in the quarter, hindered by record live cattle prices and sluggish demand. A year ago the company had $94 million in operating income.

“We were challenged by volatile market conditions and reduced demand for beef products, which made it difficult to pass along increased input costs,” Lochner noted in the release.

The losses continued into April but have since turned positive and Tyson expects them to recover throughout the remainder of the of the second-half of the fiscal year due to improved cattle supplies and typical seasonal demand.

Beef sales totaled $3.369 billion in the quarter, down 10.7% on volume sold, offset by a 13.2% price increase.

Tyson said beef supply disruptions were minimal in the “pink slime” pull back during the quarter.

Derrell Peel, livestock analyst at Oklahoma State University, says industry beef exports this year have been weaker than expected and he gives them an uncertain outlook for the remainder of 2012 given the high prices and risk of recession spreading outside of Europe.

On the bright side, Peel says the summer grilling season is ahead of schedule and Walmart’s recent beef promotion should encourage more domestic demand.

The biggest threat to better domestic demand is volatile gas prices, analysts say.

LEANER PORK
Tyson reported operating income of $115 million in the quarter in its pork segment, down from $146 million a year ago. Sales were down slightly to $1.372 billion as consumers pulled back purchases.

Farha Aslam, analyst with Stephens Inc. noted, “The fresh pork margins have been weak because retailers have kept pork prices high and have been pushing back on wholesale prices. Tyson has been able to manage through this difficult period well because the company buys hogs very efficiently and operates plants well.”  (Stephens Inc. conducts investment banking with Tyson Foods and is compensated accordingly.)

PREPARED FOOD
Tyson reported a 41% improvement its vast prepared foods segment during the quarter with operating income of $44 million, compared to $31 million a year ago.

Segment sales totaled $807 million, down 1.2% in volume but up 4.9% in price from the prior year.

The prepared food segment includes everything from tortillas to pizza toppings and chicken soup.

FINANCIAL GAINS
Tyson continues to boast a strong balance sheet with capital expenditures of $800 million planned this year.

The company’s annual net interest expense of $190 million is $41 million lower in 2011.

Total liquidity at March 31, was $1.7 billion, well above the company’s goal to maintain liquidity in excess of $1.2 billion.

“We do not have any significant scheduled maturities of debt due until October 2013 and may use our available cash to repurchase notes when available at attractive rates,” said Dennis Leatherby, chief financial officer for Tyson Foods.

Tyson’s board recently approved an increase of 35 million shares under the repurchase program. In the first half of this year, Tyson has bought back approximately $70 million of its outstanding shares.

“The timing and extent to which we repurchase shares will depend upon, among other things, market conditions, liquidity targets, our debt obligations and regulatory requirements,” Leatherby said.