Profits shrink; Tyson Foods mounts defense

Tyson Foods says it will stay profitable in 2012 despite soaring grain costs related to the worst drought in a half-century. But the meat giant’s third quarter profits of $76 million fell 61% from a year ago, with total revenue marginally better at $8.308 billion.

CEO Donnie Smith considered Tyson’s third quarter results “solid with respect to the ongoing operating challenges,” he noted in the earnings call on Monday.

The company’s net earnings per share in the quarter totaled 21 cents, well below Wall Street’s 54-cent consensus and the 51 cents pocketed a year ago.

While the tone voiced by Tyson executives was optimistic, it wasn’t enough to convince investors to stay onboard. Tyson shares sold off at the opening bell, trading down 5.5% by mid-morning at $14.55 down 85 cents on heavy volume.

It looks as if Tyson has planned to play conservative defense in the coming months by scaling back capital expenditures from $700 million in 2012 to roughly $550 million in 2013, and citing a need for more operating capital. Tyson said some of its ongoing projects will not be completed this year due to reduced spending.

The company scaled back 2012 sales revenue expectations to $33 billion, $1 billion less than its previous estimate. It forecasts 2013 sales of $35 billion related to price increases helped by a decline in the U.S. meat supply and higher raw material costs.

Analysts were expecting sales of $34.02 billion for 2012 and $35.40 billion for 2013.

“With our strong balance sheet, customer relationships, new product development capabilities, and efficient operations, we believe Tyson Foods is in the best position in our industry to succeed now and in the future,” Smith said  “We can't make it rain, but we can execute against our strategy by producing high quality foods using innovative and cost effective processes. It's tough right now, but I'm confident we will come out of this in even better shape than we are in today."

For the first nine months of the company's fiscal year, total revenue reached $24.905 billion, ahead of the $23.862 billion in the 2011 period. Net income for the first nine fiscal months is $398 million, down considerably from the $653 million for the same period of 2011.

CHICKEN LITTLE
Smith said Tyson continues to operate its chicken segment with caution, running production some 6% to 8% below prior years and purchasing the parts it needs on the open market to fill customer orders. He said high input prices ($9 corn and $550 soybean mea) equate to about 52 cents per pound in a live bird and price increases will be taken where they can to help offset the higher operating costs.

In the quarter ending June 30, Tyson posted chicken sales of $2.902 billion with a segment operating income of $153 million. This compared to sales of $2.8 billion and segment income of $28 million a year ago. Operating income was positively impacted by increases in average sales price, improved mix and operational improvements. These increases were partially offset by increased grain and feed ingredients costs of $25 million for the third quarter.

Despite higher grain costs, Tyson expects its chicken business to be profitable next year, something J.P. Morgan analyst Ken Goldman said was a "significant upside surprise" to his expectations.

"We think Tyson's optimism here should be interpreted as the most important part of the release, and a positive for the stock," Goldman said in a research note. Goldman recently downgraded Tyson shares to a neutral hold position because of the challenging operating climate across multiple meat sectors.

Tyson has said it will stay as close as possible to the market in its grain hedges. In the quarter the company recorded a $16 million loss in its commodity risk management activities related to grain and energy purchases.

When asked if Tyson has been purchasing corn from Brazil like its competitor Smithfield Foods, Smith said not so far.

“We have bought a lot corn from local farmers positioned near our feed mills and we continue to do the math on finding the cheapest grain (delivered) if that means importing, then we will look at it,” Smith said.

Tyson said its foreign start-up businesses in Brazil and China incurred operating losses of $30 million for the third quarter.

Smith said in Brazil the market relied too heavily on cheap wholesale pricing amid lackluster demand for pricier European exports. In China, he said the business is just a struggling start-up but the model they are using is a good one and should start to reap dividends in the next couple of years.      

RED MEAT
The company's beef and pork segments have been experiencing "very difficult market conditions" that will result in lower-than-expected 2012 profit, Smith said, adding that rising grain costs would hurt earnings next year on the red meat side of the business.

"While we ultimately expect to pass along rising input costs, these costs, coupled with continued soft demand, are likely to pressure earnings in 2013," Smith said.

Tyson said its beef segment should remain profitable, but margins could be below the typical range. The beef segment returned total sales of $3.487 billion, $28 million less than a year ago. Operating income totaled $71 million, down 49% from $140 million in the year-ago period.

Jim Lochner, chief operating officer, said higher increased livestock costs resulted in fewer cattle processed. He said overall demand for beef products have been sluggish which made it difficult to pass along increased input costs.

Margins in the pork segment should be at or above the normal range going forward. In the recent quarter the pork segment had total sales of $1.344 billion, down 4.5% from a year ago. Operating income was $69 million, down 45% from a year earlier.

Tyson attributed the lowers profits to waning domestic demand for pork products and compressed margins. Hedgers Edge reported hog processing margins ran negative the entire quarter for fresh pork products, because too many pigs were being slaughtered thereby flooding the market with excess product.

PREPARED FOODS
One bright spot in Tyson’s overall quarterly results were the higher operating margins and profits in its prepared foods segment from a year ago. This segment sells products like Wright Brand bacon in the retail market and pizza toppings to Pizza Hut in the food service sector.

Even though segment sales were down 4.8% to $764 million, overall operating income rose 56% in the quarter.

Total operating income was $47 million, compared to $30 million a year ago. This segment is able to adjust quicker to volatile grain costs associated with core ingredients.

“Many of our sales contracts are formula based or shorter-term in nature, we typically offset changing input costs through pricing, but this is a slight lag time before price changes take effect,” the company noted in the release.

FINANCIAL SNAPSHOT
Tyson Foods (9 months of fiscal 2012)

Total Revenue
$24.905 billion, up 4.3%

Net Income
$398 million, down 39%

Earnings Per Share
$1.11, down 37.2%