Tyson Foods misses Wall Street expectations, second quarter income down 7.3%

Tyson Foods reported second quarter net income of $315 million for the quarter ending March 31, down 7.35% from the year-ago period thanks to rising labor and freight costs. The company managed to grow sales to $9.773 billion in the quarter, up 8.39%. However, a $717 million rise in cost of sales pushed gross profit down to $1.02 billion.

Tyson’s net income was 85 cents a share, down from 92 cents a year ago. Analysts had forecast $1.32 per share on net income of $485 million. Tyson Foods didn’t come near those predictions.

“We are continuing to grow our business as we create a modern food company focused on protein,” President and CEO Tom Hayes said during a media call. “We’ve built a strong foundation of sustainable growth that positions us well for the second half of the fiscal year and beyond. We’re outpacing the food and beverage industry today and looking ahead, and we’ll keep challenging the status quo and driving growth across our iconic brands.”

Hayes said Tyson Foods had good quarterly results against challenging conditions. The company paid $109 million in one-time cash bonuses to employees as it passed on benefits of changes in the U.S. tax code. Excluding certain items, the company earned $1.27 per share, while revenue rose 7.6% to $9.77 billion, which was more in line with analysts’ expectations.

Tyson Foods also faces higher feed costs as prices of commodities like soybean and corn increase. It expects chicken feed costs to rise by about $100 million in fiscal 2018 and the freight and rising labor costs are estimated at $250 million more this year. Hayes said the company should be able recoup about $100 million of those added costs with higher pricing.

SEGMENT INCOME
Tyson Foods earned $92 million in its beef segment for the quarter, down from $126 million a year ago. The company’s operating margin was 2.5%, down from 3.6% a year ago. For the first half of the year beef income totaled $348 million, down $425 million from a year ago as the operating margin contracted to 4.6% from 6.1%. Higher live cattle costs are squeezing the spread as are higher labor costs inside slaughter plants. Tyson Foods said it has raised pay to ensure less turnover. Beef sales rose to $3.681 billion in the quarter, up 1.8% on volume while rising 3.7% on price increases over a year ago.

Tyson’s chicken business had sales of $2.959 billion in the quarter, up 2% in volume and 3.6% on higher prices. Through the first six months of the year chicken sales have totaled $7.567 billion, up from $7.015 billion a year, rising 3.2% on volume and 4.5% because of higher prices. Chicken operating income totaled $231 million in the quarter, down from $233 million a year ago. Tyson’s operating margin fell to 7.8% from 8.3% in the year-ago period.

The prepared foods segment, which includes operations of AdvancePierre Foods acquired in 2017, had sales of $2.147 billion in the quarter, up from $1.751 billion a year ago with the added business of AdvancePierre. Operating income was $123 million, up from $87 million a year ago. For the first six months of 2018 this segment has operating income of $384 million, up from $277 million a year ago. The operating margin has improved to 8.7% as benefits from the AdvancePierre deal have been realized.

The pork segment is the smallest of the domestic protein operations for Tyson Foods with sales of $1.265 billion, down from $1.302 billion a year ago. Operating income fell to $67 million in the quarter, down from $141 million last year. The pork segment has battled soft pricing amid excess supplies, and higher grain costs to feed hogs.

Tyson Foods also reported $82 million in sales from its “other” segment which includes the international businesses in China and India and the venture capital arm that has invested in three non-meat protein startups in the past year. Hayes said this is a long-term play for Tyson Foods and the company aims to be at the forefront as plant-based diets and cultured meats gain traction. He said Tyson could be a distributor of these meat alternatives.

SECOND HALF OUTLOOK
Through the first half of 2018, Tyson Foods reported total sales revenue of $20.002 billion, up 9.5% from the same period last year. Sales are up in all of its meat segments, except pork which is flat with a year ago. Operating income of $1.425 billion is down 8% for the six months from a year ago. Operating margins slid to 7.1% from 8.5% in the same period of 2017.

The company said domestic meat production is expected to increase about 3% this year over 2017.  Strong export markets should partially absorb the increase, according to the company. Hayes said the company’s financial fitness program will continue to seek operational efficiencies including overhead reduction. Through a combination of synergies from the integration of AdvancePierre and additional elimination of non-value added costs, the program is estimated to result in net savings of $200 million in fiscal 2018, $400 million in fiscal 2019, and $600 million in fiscal 2020.

A majority of the savings, which are focused on supply chain, procurement and overhead improvements, are expected to be realized in the prepared foods and chicken segments.

Tyson Foods continues the process of selling its non-protein brands Sara Lee Frozen Bakery and Van’s. Hayes said the company is narrowing down potential suitors for Sara Lee, but it’s trickier than usual because whoever buys the business will also be a supplier to Tyson Foods.

“We want to ensure the acquiring company is the right fit,” he said.

Tyson Foods lowered its fiscal 2018 sales forecast range by $1 billion to between $40 billion and $41 billion. The meat giant also reeled in its capital expenditure.

Chief Financial Officer Stewart Glendinning told the media the company’s original capital expenditures were set at $1.4 billion for this year. He said the company’s long-term investments in higher wages required a capital expenditure adjustment down to $1.3 billion for fiscal 2018.

Hayes said he doesn’t expect freight costs to get much worse. He said Tyson Foods is mitigating the impact by ensuring its own fleet is running with full trucks. He said Tyson has raised the pay 15% for over-the-road drivers and the biggest wildcard now is how much more fuel costs will rise. When asked about the passing the costs on to customers, Hayes said that will be the reality, but he doesn’t expect consumers to notice anything major in the way of higher prices.

Tyson said its chicken business is short of processing capacity. Hayes said the company will continue to execute its buy versus grow strategy and is about 1.5 to two plants behind the demand. He said the new plant under construction in Tennessee will put the company only slightly behind demand where it plans to stay. He said Tyson Foods benefits from weaker chicken prices in the open market because it buys chicken parts wholesale for some of its further processing plants.

Tyson Foods shares initially traded down on the report losing 6% early in the day. But in the afternoon session shares rebounded into positive territory trading at $67.09, up 15 cents  For the past 52 weeks the company’s shares (NYSE: TSN) have traded between a high $84.65 and a low of $57.20. Analysts give Tyson Foods a one -year target price of $81.