Quarterly income up 21% for Tyson Foods, tariffs hurt chicken and pork sales

Tyson Foods continued its solid earnings performance through the third quarter, reporting $541 million in net income for the quarter ending June 30, a 21% gain over the $447 million earned in the year-ago period, the company reported Monday (Aug. 6).

The Springdale-based company’s earnings per share were $1.47, compared to $1.21 a year ago and beating analyst consensus by 4 cents per share. For the first nine months of fiscal 2018 earnings per share totaled $6.72, up 80% from the same period last year.

Revenue totaled $10.051 billion in the quarter, up 2% from a year ago, but fell short of Wall Street’s expectation by $220 million. Fiscal year to date, Tyson Foods has rung up revenue of $30.053 billion, up 6.89% from the $28.115 billion reported a year ago.

“We continued to grow our business in Q3, even with the headwinds we faced related to oversupply and pricing,” said Tom Hayes, Tyson Foods CEO and president. “In this challenging environment, we delivered a solid quarter overall, growing earnings, operating income and margins.”

Hayes told analysts during the earnings call Tyson Foods’ strategy is solid, but its model was stressed in the fourth quarter which began July. 1. He said Tyson is confident in its diversified portfolio, which is still is a key advantage for the company.

Tyson Foods benefited from operating income gains in beef and prepared foods, while its chicken and pork segments were challenged by export woes which created an excess supply of meat and price weakness through the third quarter. Hayes said while the company expects to grow profits ranging from $5.70 to $6 per share for the full year, Tyson Foods has not yet given guidance into 2019. Hayes did say the company’s sustainable growth trajectory remains intact despite the market challenges.

He said freight costs this year will be an additional $270 million, compared to 2017. He said that impacts fiscal 2018 earnings by 33 cents per share. He said Tyson Foods is working to recover those costs but it’s difficult to raise prices when there is an excess supply of meat in the market.

BIG BEEF
Beef was the big star for Tyson Foods in the recent quarter with operating income of $318 million and a strong operating margin of 8%, almost unheard of in the industry, according to Steve Kay of Cattle Buyers Weekly.

The company’s beef segment improved income 116% from the year-ago period. Beef sales totaled $11.56 billion in the quarter, up 4.94% from a year ago. Tyson Foods sold 2.7% more beef at 2.8% lower prices than a year ago.

Tyson Foods said it’s operating income boost came from lower live cattle costs, offset partially by increased labor and freight expenses. Looking to the fourth quarter, the company expects its beef margin to dip to 6% which is part of the reason for the recently issued lower guidance. Hayes said Tyson Foods is still making good money in beef, but the export challenges in Mexico are a hiccup. He estimates an annual impact of roughly $600 million to the beef segment this year from pressures in Mexico.

LEAN PORK
Tyson Foods’ pork business suffered in the recent quarter amid excess supplies and low prices brought on by trade issues with China, resulting from tariffs imposed by the administration of President Donald Trump. Tyson Foods said it experienced margin compression in this segment because of the imbalance of supply and demand. TysonThe company’s operating income fell to $67 million in the quarter, down 50% year-over-year. The margin shrunk to 5.6% from 10.3% a year-ago.

Pork sales totaled $1.197 billion in the quarter, down 0.9% from a year ago. The company sold 2.1% less pork and prices fell 7.4% from a year ago because of the excess supply. The pork business is not integrated, and it relies on export markets to keep prices and margins up. Hayes said pressure with Mexico created about $400 million in lost income for Tyson Foods’ pork segment on an annual basis.

Hayes said it’s lower pork values, not necessarily the volume, that is hindering margins.

CHICKEN LITTLE
Tyson Foods’ chicken segment also suffered in the quarter with additional weakness forecast to year-end. The chicken segment had operating income of $189 million in the quarter, down 35% year-over-year, equating to $105 million in less income. Operating margins was hammered in the quarter, down to 5.6% compared to $10.3% a year ago. Tyson Foods said throughout the summer it was hurt by fast food restaurants promoting more hamburgers than chicken entrees among its largest national accounts.

Hayes said increased labor costs, freight and grain costs also weighed on the segment’s profitability in the quarter. Grain cost $89 million more in the third quarter, relative to a year ago. Hayes said because of the lackluster demand for chicken, the company was not able to leverage its buy-versus-grow program to maximize margins in the recent quarter.

Tyson Foods’ chicken segment had sales of $2.973 billion, with flat volumes and a 3.7% price uptick in the quarter. Tyson expects to see its chicken segment recover in the next quarter or two.

PREPARED FOODS
The prepared foods segment is a shining star in Tyson Foods’ portfolio, with operating income of $243 million, up from $174 million a year ago. Operating margin rose to 11.4% from 9% a year ago. Sales in the segment totaled $2.132 billion, up 2.7% on volume and rising 6.98% on higher prices.

On July 30, Tyson Foods completed the sale of Sara Lee Frozen Bakery and Vans for $615 million. The company said it will close the sale of its pizza crust business in the fourth quarter.

OUTLOOK
Tyson Foods expects to grow sales to $42 billion next year. Hayes said the company will see a $150 million impact from the Tecumseh Poultry and American Proteins acquisition and the sale of its non-protein businesses. Tyson Foods said it expects the majority of sales growth will come in its chicken and beef segments next year. Hayes said the prepared food segment is also poised to grow, excluding the sale of several non-protein businesses in that segment.

Hayes told Talk Business & Politics during a media call the temporary challenges with weak chicken demand will not force it to reign in, nor ramp up, any of its its planned marketing expenditures this year. He said the financial fitness program is working to help the company better control costs, but labor is tight and taking those costs higher. He said the reduction in corporate headcount is mostly behind the company now.

When asked about the new technology jobs the company is adding in Springdale, Hayes said the investment will make a big difference across the entire company in the long run because it will create a more digital enterprise from manufacturing to procurement to sales. Efficiencies already gleaned from the technology division are helping the company better mitigate some of the challenges it is now facing, according to Stewart Glendinning, Tyson Foods’ chief financial officer.

When asked about possible acquisitions such as Keystone Foods, Hayes said the company will look for deals that allow the company to increase its scale and still allow for synergies. He had no comment on the Keystone negotiations. Looking at trade, Hayes said there is still plenty of uncertainty with relation to China and Mexico and for the company to best maximize its model, exports have to be strong.

Wall Street liked what it heard Monday from Tyson Foods (NYSE: TSN) as shares rallied 3.5% to $59.76, up $2 per share on heavier volume than normal in the morning session. For the past 52 weeks the Tyson Foods share price has ranged from $58.36 to $84.65.