Tyson shares rally on strong profits, bright outlook

Tyson management expects better food service demand, strong retail sales and improving international metrics to propel profits higher in 2014, building momentum in this last quarter of 2013.

The meat giant’s third quarter profits soared past expectations on Monday morning, (Aug. 5) with net income of $249 million, three times better than the $76 million earned in the same period of last year.

Tyson earned 69 cents per share in the fiscal third quarter period ending June 30. These results were above the 59 cents that Wall Street analysts predicted, and better than 51 cents recorded a year ago — on an adjusted basis.

Investors approved as shares rose $1.50 to $29.70 in heavy trading on Monday morning following the announcement.

"As expected, we are delivering robust results in the second half of our fiscal year." said Donnie Smith, Tyson's president and CEO. "We see a tremendous amount of opportunity in our business. I am very proud of the team because I'm seeing good long-term decision making to sustain us in the future, and that gives me confidence.”

Sales revenue topped $8.73 billion in the quarter, helped by a 2.2% gain in volume and a 3.7% improvement in prices. A year ago, Tyson rang up $8.261 billion in sales.

Through nine months in fiscal 2013 Tyson’s sales total $25.48 billion, compared to the $24.74 billion in the same period of the previous fiscal year. Net income in the first nine months is $517 million, up almost 30% compared to the $398 million in the same period of last year.

Smith said in the company’s earnings call that Tyson’s move toward growing value-added sales 6% to 8% this year is on track with 5% gains made through three quarters of 2013. He said the recent WTO ruling against tariffs in China will likely have a positive impact to U.S. chicken exporters like Tyson Foods, but a likely appeal will mean those benefits are delayed another full year or more.

The company also reported that it sold Weifang, one of its smaller chicken operations in China during the quarter. Weifang is a partially integrated operation acquired in 2009 as part of a joint venture. Tyson assumed full ownership in 2011. Smith said the investment needed to bring Weifang inline with Tyson’s operational goals was too great and the best alternative was to sell it.

Smith told analysts that roughly 50% of its chicken business in China is vertically integrated at this point, and by the end of 2014 it should reach 100%.

Tyson expects sales to top $34.5 billion in fiscal 2013, increasing to $36 billion next year.

Company officials said capital expenditures of about $550 million by the end of the 2013 fiscal year, much of which is for plant renovations and expanding operations in China. Tyson expects fiscal 2014 capital expenditures to approximate $650 to $700 million.

Tyson said it continues to look for acquisition possibilities inline with growing its value-added sales. Value-added sales refer to higher margin food products that have been trimmed, deboned, marinated, breaded and are partially or fully cooked.

BIG CHICKEN
Chicken was the big ticket item for Tyson Foods in the recent quarter, returning $220 million in operating income, up from $159 million a year ago. The operating gains were attributed to strong demand — domestic and international — as well as a healthy increase in pricing.

Smith said just 8% of its food service contracts were on the longer, 1-year pricing adjustment schedule. By going with shorter pricing adjustments Tyson has been able to pass along higher costs as they are incurred.

Sales totaled $3.158 billion, rising 38% from a year earlier. The higher revenue related to improved wholesale poultry prices and disciplined production across the industry. 

Breast meat prices averaged $2 per pound in the quarter, up from $1.50 per pound in the same period last year. Tyson said it spent $105 million extra on grain in the quarter over a year ago.

Smith expects the chicken segment to remain strong well into 2014 given it’s lower price to beef and consumers opting for leaner meat options. He said almost all of Tyson’s food service offerings have reformulated as part of an eat healthier initiative.

Grain prices are now moving down, which helps Tyson Foods as it continues to stay close to the market on its grain purchases. Tyson said it sources corn to its chicken complexes on a buy local basis, when it can. But it has and will continue to import corn from Brazil if needed, as long as the price and logistical costs make it worthwhile.

Looking ahead Tyson expects U.S. chicken production to increase 2% to 3% in fiscal 2014. Tyson said its chicken segment should be in or well above its normalized range of 5% to 7% through fiscal 2014.

BETTER BEEF
Tyson’s beef segment returned $114 million in its third quarter operating profits, improving over the $71 million in the year-ago period.

Beef sales totaled $3.723 billion in the quarter, 24% higher than a year ago. Fed cattle supplies decreased which drove up average sales prices and livestock cost in the quarter, but Tyson said better demand for premium beef products helped push sales volumes up 3.8% from a year ago.

Tyson benefits from having its beef slaughter plants located in areas where there is ample supplies of cattle, said Jim Lochner, chief operating officer. Lochner said fourth quarter operating income should be on par with the recent results.

LEANER PORK
Tyson’s pork operating profits totaled $67 million, down from $69 million in last year’s quarter. Total segment revenue was $1.332 billion, compared to $1.344 billion a year ago.

Too many pigs going to market in 2013 continues to drive down average sales price and livestock cost. Tyson said a 6% decline in pork exports added to the domestic oversupply problem.

Fresh pork processing margins continue to run in negative territory because of the depressed pricing, according to Sterling Beef Report.

“We expect industry hog supplies to be flat and exports to improve compared to fiscal 2013. For fiscal 2014, we believe our pork segment will be in its normalized range of 6 to 8.0%,” said Lochner.

PREPARED FOODS
Operating profits for the “prepared foods” segment totaled $24 million, down 48% from the prior-year.

Tyson said it took a hit in its lunch meat business because of a major plant renovation ongoing in its Houston facility that has thrown the operational efficiencies off balance.

The segment sales revenue totaled $797 million, helped by better pricing increase and a slight increase in total volume. A year ago, Tyson reported $764 million sales in its diverse “prepared foods” segment.

Tyson’s diverse “prepared foods” segment is a major part of the company’s valued added game plan.