Tyson Foods trades up on African Swine Flu fears, outperforms expectations

Tyson Foods outperformed Wall Street estimates in the second quarter ending March 30, with net income of $426 million, or $1.20 per share, on an adjusted basis and $1.17 on a net basis. That was better than the Wall Street consensus of $1.14 per share. Revenue rose to $10.443 billion, up 6.85% from a year ago.

For the first six months of the year, earnings per share totaled $2.67, down 49% from the record period in 2018 that benefited from a one-time $2.71 per share tax benefit, Tyson Foods noted in the earnings report posted early Monday (May 6).

CEO Noel White said in his 29 years in the business this is an unprecedented time with respect to African Swine Flu that is rapidly spreading across Asia in key markets like China, Vietnam and Thailand. White said Tyson Foods is in a position to reap significant gains as millions of hogs are killed in the outbreak.

“African swine fever has the potential to impact the global protein industry on a level that we have never experienced,” White noted in the earnings call on Monday. “No company is better positioned than Tyson Foods to handle what lies ahead.”

A decrease in global pork supplies would boost the company’spork business, while the chicken and beef units could benefit as consumers look for alternatives to higher-priced pork, White said. He expects Tyson could begin seeing benefits late this year as ASF escalates.

Strong beef and prepared foods sales helped Tyson Foods’ overall performance in the second quarter. White said the chicken segment was seasonally weak as expected but he believes the worst is over. In the quarter, beef prices rose 2.3% and prepared foods average prices increased by 3.9%. Chicken and pork prices fell 8.3% and 11%, respectively.

Wall Street was pleased with Tyson Foods’ results as shares rose more than 2.3% in the morning session. Tyson Foods shares (NYSE: TSN) were trading at $76.88, up $1.79 in heavy volume. Tyson Foods shares are close to their 52-week high of $77.26, and have risen more than 46% year-to-date.

SEGMENT RESULTS
Beef posted sales of $3.884 billion in the second quarter with operating income of $156 million as Tyson Foods increased its operating margin to 4%. Revenue rose 2.3% and operating income was up 69% for another record quarter as the operating margin improved from 2.5%.

Tyson Foods expects industry-fed cattle supplies to increase approximately 2% in fiscal 2019 as compared to fiscal 2018. White said that includes ample supplies in regions where Tyson Foods operates plants.

“We believe our beef segment’s adjusted operating margin will be approximately 7% in fiscal 2019,” he noted in the release.

The chicken segment was seasonally weak with sales of $3.407 billion, up 26% on increased volume but down 11% on lower prices. Tyson Foods’ operating income in chicken was $141 million, down from $231 million a year ago, thanks to the integration of Keystone Foods. But the operating margin fell to 4.1% from 7.8% a year ago. White said the margin decrease was mostly related to market conditions but there were also some operational inefficiencies the company is working.

The U.S. Department of Agriculture projects an increase in chicken production of approximately 1% in fiscal 2019 over fiscal 2018 production. Tyson expects the chicken segment’s adjusted operating margin to improve to roughly 6% in fiscal 2019.

The prepared foods segment had another record quarter with operating income of $245 million, well ahead of the $119 million a year ago. The operating margin was a healthy 12.1%, up from 5.5% in the year-ago period. Revenue in the segment totaled $2.027 billion, down from $2.147 billion a year ago. There was 9.5% lower volume as Tyson Foods divested its Sara Lee and Van’s business from the segment. However, pricing rose 3.9% in the quarter.

White said the prepared foods segment saw higher raw material costs in the quarter, but the company expects to recapture the margin through shorter pricing contracts. He said African Swine Flu also has the potential to impact material costs for the prepared foods segment but the company’s other proteins should benefit, helping to keep earnings stable in the wake of market volatility.

“We believe our prepared foods segment’s adjusted operating margin will be between 10-12% in fiscal 2019,” White noted the release.

Tyson Foods’ pork business posted sales of $1.172 billion, down from $1.265 billion a year ago. The operating income totaled $100 million, up from $67 million a year ago as the operating margin rose to 8.5% in the quarter. The company expects industry hog supplies to increase approximately 2%-3% this year. White said there is a risk of sharp increases in livestock costs in the back half fiscal 2019 and there may be periods in which costs rise faster than price recovery. Tyson Foods forecasts a 6% operating margin for its pork segment this year.

With the acquisition of Keystone and BRF’s assets in Thailand and Europe, Tyson Foods is growing rapidly on the global stage. The Keystone results were included in the company’s other category, which narrowed its operating loss to $1 million in the second quarter. A year ago the segment lost $15 million.

The $340 million BRF Thai and European acquisition is expected to close in the fiscal third quarter which ends June 30. Those results have not yet been factored into the company’s fiscal year outlook. White said the integration of Keystone has gone well. He expects the same for the Thai and European assets once the date is finalized. There will be more details around the impact of this deal after it closes.

LAWSUITS, ALTERNATIVE MEAT
White was asked by the media during the call what impact Tyson Foods is likely to see from Walmart’s recent announcement of a direct supply chain for Angus beef. He said Walmart has been a great customer and Tyson Foods will work with Walmart to the extent it can and he expects the Walmart business will continue to be strong.

Tyson Foods is also among a group of several protein companies facing multiple class action suits alleging price fixing. White told the media he was disappointed that one of the cases has convened a Grand Jury to review the evidence. He said the company will continue to defend itself against these “baseless claims.”

White also Tyson Foods is moving ahead with its alternative meat protein products which will hit the retail market in June on a small scale and go nationwide this fall. He declined to give Talk Business & Politics any details about the types of alternative meat products, only to say they will be offered at retail as well as in foodservice.

“We will be making our announcement with more details in early June,” White said.

Tyson Foods recently expanded its voluntary recall of frozen chicken that involved nearly 12 million pounds of product sold nationwide. Tyson Foods told Talk Business & Politics the company has looked at the recall impact and believes it is not materially significant to the company’s earnings. White said the company expanded the recall to remove all the product that could be a potential problem. He said that was necessary for keeping the company’s promise to deliver high-quality food to its customers and consumers.

White reaffirmed Tyson Foods’ fiscal 2019 earnings guidance to a range of $5.75 to $6.10 per share and said the company remains in a strong financial position. Cash will be used to retire the company’s upcoming maturing debt.