Tyson Foods posts record income, but gives cautious guidance for fiscal 2019

Tyson Foods posted another record year in fiscal 2018 which ended Sept. 30, with revenue of $40.052 billion, up 4.62% from 2017. Net income totaled $3.027 billion, compared to $1.778 billion in the year-ago period. Earnings per share hit a record $6.16, up 16% from the prior year. Tyson Foods said the lower federal tax rate added about 78 cents to the total annual earnings.

The Springdale-based meat giant also reported its fiscal fourth quarter results on Tuesday (Nov. 13), which were mixed with revenue of $9.999 billion, down slightly year-over-year and missing analysts’ expectations of $10.27 billion. The company’s net income for the quarter was $537 million, with net earnings per share of $1.58, beating Wall Street expectations of $1.35 and last year’s $1.43 per share. Tyson Foods said about 20 cents of the fourth quarter earnings were related to the lower corporate tax rate implemented by Congress.

“Tyson Foods produced solid earnings in fiscal 2018, demonstrating the strength of our differentiated portfolio and diversified business model,” said Noel White, Tyson Foods president and CEO. “We exceeded our revised guidance due to a strong finish in the fourth quarter in the beef and pork segments. Prepared foods drove margin expansion, while the chicken segment closed the gap from earlier in the year with increased promotional activity.”

While White said he’s confident in the company’s ability to execute its strategy to sustainably feed the world with the fastest growing protein brands, his immediate focus will be to grow Tyson’s value-added business to further reduce volatility related to commodity markets, while also containing costs.

CAUTIOUS GUIDANCE
Tyson also softened guidance for fiscal 2019 which began Oct. 1. The company expects adjusted earnings will be $5.75 to $6.10 per share, based on assumptions which factor in zero growth. Wall Street took that news negatively as shares sold off in the early morning session. Tyson Foods shares (NYSE: TSN) closed Tuesday at $58.17, down $3.44 in heavy volume. During the past 52 weeks, the share price has ranged between $84.65 and $56.79.

Despite the solid fiscal 2018 results, equity analysts were fixated on the slight revenue miss and the cautious guidance for 2019. Analysts on the earnings call asked Tyson Foods executives why the guidance was cautious when the company is profitable in all operating segments. White said the outlook is how he sees it today, noting there is room for adjustments if some of the obstacles in pork and chicken are overcome.

Stewart Glendinning, chief financial officer at Tyson Foods, said it’s more important to focus on the overall operating margin than sales. He said the top line revenue expectation of now $41 billion is down from previous expectations of $42 billion because of price softness in pork and chicken.

“Margins matter more than meat pricing and we will continue to focus on managing the margins across our protein business which is good for the bottom line long-term,” he said. “Our margins are strong across the board.”

Tyson Foods has budgeted $1.5 billion in capital expenditures for projects related to growth, animal well-being, infrastructure replacements and upgrades as well as operational improvements that should result in production and labor efficiencies, yield improvements and flexibility across sales segments. The company has net debt of $9 billion with annual interest expense of $350 million this coming year. That does not include the $2.16 billion acquisition of Keystone Foods, which White said is expected to close by early second quarter (January 2019).

Glendinning said the company is confident it will be able to finance the Keystone deal without compromising its investment-grade credit ranking. That said, the company is focused on paying down its debt with free cash flow. Tyson Foods also has $1.4 billion cash liquidity on its books, which is above its targeted $1 billion minimum liquidity target.

Glendinning said investors also have benefited from 5.9 million shares repurchased by the company last year. Tyson Foods’ board also increased the quarterly cash dividend beginning in December to 37.5 cents per share for Class A stockholders. That will raise the total annual share dividend to $1.50, up 25% from the prior year. He said paying down debt and returning cash to shareholders remain top priorities for in 2019.

White told Talk Business & Politics he would not make any major personnel or structural changes to the management team. He said Steve Stouffer is taking over as president of the beef and pork segments and a search is underway for an executive to take over the international operations. Each of these was a position White previously held before being promoted to CEO. While said Stouffer has 36 years of experience in the meat industry, and rose through the ranks with IBP and then joined Tyson Foods with that merger in 2001.

White said with 90% of the future growth in protein demand coming from outside the U.S. Tyson has to be focused on growing its international footprint. The Keystone Foods acquisition will be a catalyst for that agenda. Tyson Foods has not had a separate international executive for several years, but White is again separating the duties of international from other segments.

BIGGER BEEF
The beef segment had a banner year with total sales of $15.473 billion, up 3.1% on volume and 1.2% on price. Segment operating income rose to $1.013 billion, a record for the company. The fourth quarter operating revenue was also strong at $347 million with an operating margin of 8.9%.

White said Tyson Foods sold more beef because there were improved cattle supply and strong consumer demand domestically and abroad. Operating income increased as Tyson continued to maximize revenues relative to live feed cattle costs, which were partially offset by increased labor and freight costs and a one-time cash bonus to employees of $27 million incurred in the second quarter of fiscal 2018.

White said Tyson Foods expects strong beef results will continue for a couple of years barring no major hiccups with labor or trade impairments.

LEAN PORK
The pork market is swimming in excess supply which is hindering sales prices and squeezing the margin for Tyson Foods. For the year, the company had pork sales of $4.879 billion, down from $5.238 billion in 2017. Total operating income was $361 million, down sharply from the $645 million reported a year ago. In the recent quarter sales were down 10.4% on volume and 14.5% on price at $1.134 billion. Operating income for the quarter was $76 million, from $121 million a year ago.

Tyson Foods said the imbalance of supply and demand compressed margins, which were also hindered by higher labor and freight costs and a one-time cash bonus to plant employees of $12 million which occurred in the second quarter. Tyson Foods expects hog supplies to increase by approximately 3% in fiscal 2019 as compared to fiscal 2018. White said the company expects a pork operating margin around 6% in fiscal 2019.

BETTER CHICKEN
Tyson Foods has seen improvements in its chicken segment which posted total 2018 sales of $12.044 billion, up 4.9% on volume, despite a tepid price increase of 0.7%. For the year the company’s operating income in chicken was $866 million, down from $1.053 billion a year ago as the margin was squeezed to 7.9% form 9.8% in the year-ago period.

For the recent quarter, Tyson Foods’ chicken sales totaled $3.115 billion, up 10.4% on volume and down 7% on lower prices. The operating income fell to $174 million, down from $263 million a year ago. Operating margin was compressed to 6.7% from 8.9% in part because of lower chicken prices.

The U.S. Department of Agriculture projects an increase in chicken production of 2% in fiscal 2019 as compared to fiscal 2018. Tyson expects its chicken segment will see improved operating margins of 8%. White said there were one-time expenses in the segment which also compromised margins which won’t be a factor going forward.

PREPARED FOODS RISE
The rising star in Tyson Foods’ portfolio is the prepared foods segment, which grew sales revenue to $8.668 billion for the year. Sales rose 4.1% on volume and 6.1% on higher prices. Operating income rose to $868 million, up from $462 million a year ago. The operating margin for the year was 10%, up from 5.9% in 2017.

For the fourth quarter, prepared food sales totaled $2.097 billion, down from $2.263 billion in the prior year period. This decline relates to the sale of Sara Lee Frozen Bakery, Kettle, Van’s and TNT Crust which were divested by Tyson Foods this past year. Operating income in the quarter was $241 million with an operating margin of 11.5%, up from 0.5% in the prior year. The company expects the operating margin in the prepared foods segment will exceed 11% this year.