Tyson Foods’ share price falls on missed earnings, legal probe and compressed margins

Two plant fires and continued disruptions in Tyson Foods’ chicken and prepared foods segments hindered profits for the Springdale-based meat giant in the second quarter ending April 1. But that didn’t stop Tyson from achieving decent net income growth of 4.47% on slightly lower revenue through the first half of fiscal 2017.

Tyson posted net income of $933 million in the first half of fiscal 2017, compared to $893 million in the year-ago period. Revenue dipped to $18.265 billion  just under the $18.322 billion in the same period of the previous fiscal year.

Tyson said operating income reductions for the first half of the year included $23 million in the chicken segment related to two plant fires, and $52 million in the prepared foods segment resulting from a plant closure, supply disruptions related to quality and transferring the production to other plants.

Tyson Foods CEO Tom Hayes told analysts Monday (May 8) the company has a strong trajectory despite a few short-term challenges. Through the halfway mark of 2017 Tyson reiterated its earnings guidance range of $4.90 to $5.05 per share which represents a 12% growth rate.

In spite of the optimistic outlook Tyson executives gave in the calls with analysts and media on Monday, investors remain bearish on the Tyson Foods in the short run.

Tyson Foods’ shares (NYSE: TSN) closed Monday at $59.48, down $3.85. Part of the reason for the more than 6% decline in share price is the second quarter earnings miss as Tyson’s adjusted earnings were $1.01, a cent short of the consensus estimate, as well as tighter operating margins in chicken and prepared foods segments.

LEGAL PROBES
The bearish investor attitude is also connected  to Tyson’s disclosure that the Florida Attorney General requested information related to the alleged price collusion in connection with the Georgia Dock pricing index. Tyson disclosed the probe in a federal filing Monday saying Florida state officials began reviewing the index last year amid concerns it could be manipulated by chicken companies. This probe comes on the heels of a subpoena from the Securities and Exchange Commission in February that relates to the allegations of price fixing.

When asked to comment on the Florida probe, Tyson said it won’t disclose what is being requested except that it is tied to antitrust complaints also previously disclosed. Hayes told the media during the call the Georgia Dock pricing index was a small part of its customer base and since the index was shuttered it has no negative impact on business. He has also said the company is eager to defend its stance in pending litigation which now includes civil, state and federal regulators.

Even if Tyson is found to have not participated in price fixing, there is still the legal expenses with the multiple lawsuits. Tyson has not disclosed the costs. Tyson did say it spent $16 million in legal fees in the recent quarter related to a former subsidiary owned by Hillshire Brands and litigation related to a plant closure litigation in the Philippines.

ACQUISITION GROWTH
Also in the quarter, Tyson announced plans to spend $4.2 billion acquiring AdvancePierre which is expected to close by this summer. Tyson estimates $1.7 billion will be added in sales for fiscal 2018, and said the company will also be accretive to Tyson earnings by the fourth quarter of this year. Sandwich maker AdvancePierre posted net income of $136 million last year with revenue of $1.56 billion.

Hayes told analysts that Tyson reviewed AdvancePierre for some time before they decided to buy it. He said AdvancePierre has done a great job taking costs of their business with operational discipline that he expects will help Tyson in the long run.

“They have prowess that we lack in some areas. We finished our strategic planning in February and looked at where we want to play. We know the perimeter of the grocery store is where the growth opportunities lie, particularly in fresh and convenience items. AdvancePierre will be excellent for our shareholders over time,” he said.

Tyson includes AdvancePierre in its earnings guidance for this year with the bigger results happening next year. Hayes said it’s too early to discuss specifics, but he promised to do so in the third quarter report. The company estimates in 2018 AdvancePierre will add between $10 million and $15 million in net profits which doesn’t include synergies.

Tyson has said several times it was prepared to do another Hillshire size acquisition but the AdvancePierre deal is about half of that amount, so the media asked Hayes about the next possible deal. Hayes said the first priority is to fully integrate the AdvancePierre deal then pay down some of the related debt. Then, he said, other acquisition targets must meet one of three criteria set by the management team.
• Be a recognizable brand.
• Provide Tyson with new markets or improved efficiencies.
• Be able to help Tyson Foods grow profits.

He said a company having all three would be best target for acquisition in the future. He was clear about not wanting to acquire any direct-to-consumer retail brand like Blue Apron. He said Tyson doesn’t wish to compete with its retail customers. But he added that companies which offer sustainability advances for Tyson are in play for the company’s Venture Capital Fund.

CHICKEN SEGMENT
Tyson made less profit in its chicken segment in the second quarter. Operating income down $114 million from a year ago. Tyson reported $233 million in operational  income, which was softer because of an 8.3% operating margin, compared to 12.7% a year ago.

The company had  $23 million in incremental net costs and lower sales volume attributable to the two plant fires, and compensation and benefit integration expense of $7 million in the quarter compared to a year ago. Feed costs were also up $10 million in the quarter compared to being down $10 million a year ago.

Hayes said Tyson’s chicken segment should see operational margins improve to a normalized range of 9%-11% in the coming quarter. Tyson is launching a new fully-cooked organic line of chicken products at retail and warehouse clubs on July 14.  He told Talk Business & Politics there are three different items which include breast strips, breast and nuggets.

“We are excited about his launch at retail because we know consumers are asking for it,” he said.

He said the “No Antibiotics Ever” line of fresh chicken products at retail are also coming this summer. Hayes said bringing the line to consumers is not a big cost to the company because they have been working on it for several years. He also said there is no real effort to do a similar product line in pork and beef because those are not fully integrated businesses for Tyson Foods. He said Tyson would support any of its suppliers who want to offer NAE products.

Chicken sales revenue was up for the quarter at $2.798 billion, compared to $2.737 billion a year ago. For the first half of this year Tyson’s chicken sales have totaled $5.504 billion, up 2.43% from the same period last year.

BEEF AND PORK
Beef operating income was $126 million in the quarter compared to $46 million a year ago. Operating margins averaged 3.6% in beef as consumer demand, domestic and abroad, are helping to propel the industry forward.

“Our Beef and pork segments generated tremendous operating income in the second quarter, allowing us to invest in the long-term growth of our value-added businesses,” Hayes noted in the release.

Beef sales totaled $3.487 billion, down 1.1% on volume compared to a year ago. Steve Kay, publisher of Cattle Buyers Weekly, recently said more grocers are promoting beef given the increased supplies and that is helping reduce costs for consumers. He said 2017 should “be a banner year for beef packers.”

Hayes expects the company’s beef margin to be 5% for the year despite a few bumps from a supply standpoint. Hayes said the beef segment is run very well out the Dakota Dunes headquarters and beef should continue to a cash driver for the company going forward. He’s equally as optimistic in pork. The company’s second quarter net operating income was $141 million, up from $140 million a year ago.

“Pork feels good and exports are really robust for us as preferred supplier in the Pacific Rim region,” he said.

He said with more pork capacity coming online in the next year it would be Tyson’s play to chose margin over market share. Pork sales totaled $1.302 billion in the quarter, down 1.3% on volume but up 10.9% on price.

PREPARED FOODS
This segment has been the most challenging for Tyson this year and the second quarter was no exception with the $52 million impairment charge relating to its San Diego pizza topping facility. There was also increased marketing and advertising costs with this segment as well as $3 million spent on compensation and benefit expenses related to departing executives.

Prepared Foods had operating income of $87 million, well below the $197 million reported a year ago. Part of that is related to a much softer foodservice division, Hayes said. The segment’s margin shrunk to 5% which was less than half of the 10.8% realized a year ago, and that’s after the positive impact from $28 million in operational synergies realized in the quarter.

Hayes said there is a lot more work to do in the foodservice area but the retail part of this segment is growing at a healthy clip. Total sales were $1.751 billion, down 2.1% on volume and 0.8% lower on price. Without the healthy retail growth the sales decline in this segment would have been worse.