Net income up more than 1% for Tyson Foods in the first fiscal quarter; revenue misses estimates

Tyson Foods reported Thursday (Feb. 6) better overall results in its first quarter ending Dec. 28, with net income of $557 million, up from $551 million in the year-ago period. Revenue topped $10.815 billion, up 6.10% from a year ago.

Earnings per share of $1.66 were just ahead of the consensus estimate of $1.65.

While the results were solid, Tyson Foods failed to meet bullish Wall Street expectations. The company missed revenue estimates of $11 billion, and earnings growth was also lower than the consensus estimate, sending Tyson Foods shares (NYSE: TSN) down. In heavy trading, shares fell below the $80 in the morning session Thursday, but had climbed back to around $81, or down more than $3, in the early afternoon.

“Our overall results in the first quarter of fiscal 2020 were in line with expectations,” said Noel White, CEO of Tyson Foods. “Our Beef and Pork segments performed well as the effects of African swine fever are beginning to materialize. Our Chicken segment performed better operationally, although in a soft pricing environment. Our Prepared Foods segment produced its sixth consecutive quarter of retail consumption growth, demonstrating the strength of our brands and innovation as we grew or held market share in all core categories.

“With improved access to global markets resulting from recent trade developments, there are reasons to be optimistic about fiscal 2020 and beyond and we are well-positioned to capitalize on opportunities in the global marketplace. Although we anticipate the challenges and volatility typical in our second fiscal quarter, our long-term outlook remains positive.”

SEGMENT RESULTS
Chicken sales volume totaled $3.292 billion, up 1.2% largely because of acquisitions. Operating income fell to $57 million from $160 million reported a year ago. Tyson’s operating margin was a dismal 1.7% in chicken which was off the $5.1% achieved a year ago. Margin was slightly better on an adjusted basis at 2.4% but still fell short of expected results and last year’s performance.

During the earnings call with analysts, White said the chicken business is performing better internally, but weaker wholesale chicken prices from oversupply will continue to drag on this segment’s results through the next quarter. He said the pricing weakness is likely to continue through the second quarter.

He said operating income in the chicken segment decreased because of challenging pricing conditions. Additionally, operating income in the first quarter of fiscal 2020 was impacted by $21 million in restructuring costs.

White told Talk Business & Politics the chicken segment is still on track to capture $200 million in cost reductions this fiscal year which ends Oct. 3. He said many internal issues have been resolved and plants are running at near capacity for a 40-hour workweek. When asked about the new chicken plant in Humble, Tenn., expected to come online this year, White said he’s not concerned about excess capacity.

“The chicken industry historically sees demand grow by 2% annually in the U.S. That’s about one new plant per year. When we announced this plant a year ago, we needed it to be able to keep up with growing customer demand, which is still the case,” White said in a brief interview on Thursday.

BIG BEEF
Tyson Foods’ beef segment reported an operating income of $410 million, up from $305 million a year ago. The segment produced a strong operating margin of 10.7% with sales of $3.838 billion, somewhat lower given the fire that took a large packing plant offline for several months.

White said the Holcomb, Kan., plant is now operational. Average sales price increased as beef demand remained strong. Operating income increased as the company continued to maximize revenues relative to live fed cattle costs. This was partially offset by increased operating costs and $16 million of net incremental costs from the production facility fire. White said the beef segment is poised to have another solid year.

“We expect industry fed cattle supplies to increase by approximately 1% in fiscal 2020 as compared to fiscal 2019. We expect ample supplies in regions where we operate our plants. For fiscal 2020, we believe our beef segment’s adjusted operating margin will be toward the upper end of 6.5% to 7.5%, absent additional impacts from ASF (Asian swine fever),” White noted in the release.

PREPARED FOODS
White said he is excited about the growth potential for the company’s prepared foods segment, despite a lackluster quarter. This diverse segment had sales of $2.14 billion, down from $2.149 billion a year ago. The segment returned a lower operating income of $158 million, down 40% because of higher raw materials costs to the tune of $80 million and $22 million in restructuring costs.

White said the company expects raw material costs to increase throughout fiscal 2020, over the 2019 levels. He also expects to recover the costs through pricing. He said there is a lag and Tyson may not fully recover all the increased costs in fiscal 2020.

He does expect the segment’s operating margin to range between 10% and 12%, which is better than the 7.4% achieved in the first quarter of fiscal 2018.

FATTER PORK 
White said the pork segment also had a great quarter with sales revenue of $1.379 billion, up from $1.179 billion a year ago. Operating income was $191 million, up from $95 million last year. The operating margin rose to 13.9%.

“We expect industry hog supplies to increase by approximately 4% in fiscal 2020 as compared to fiscal 2019. We expect increased livestock costs in fiscal 2020 as compared to fiscal 2019. For fiscal 2020, we believe our pork segment’s adjusted operating margin will be 6% to 8%, absent additional impacts from ASF,” White noted in the release.

He said this segment is benefiting from higher pork prices and strong export demand. White said Tyson Foods is already helping to fill the hole left from the devastating ASF in China.

“We are backfilling pork orders in those markets where demand is outpacing supply,” White said

WHAT’S NEXT
Ben Bienvenu, an analyst with Stephens Inc., anticipated softness in Tyson Foods’ chicken and prepared foods segments and recently downgraded the company to neutral from a buy. He said the company’s fundamentals remain strong, but the turnaround in chicken is taking longer than expected. Bienvenue reduced the company’s full-year guidance to $6.37, down from $6.49. That said, for 2021, he predicts earnings will grow to $7.17 per share, an improvement over his previous estimates of $7.12 per share

Tyson Foods does not provide earnings guidance beyond the next quarter. White told Talk Business & Politics the company is positioned to grow long-term and he doesn’t focus too much on quarter-to-quarter or even one-year results. He said Tyson Foods is growing to sustainably feed an estimated 10 billion people on the planet by 2050. He said 70% of that increased demand will come from Asia and the company’s growing international footprint is one way the company is positioning for success.

He also said Tyson will continue to look for opportunities to invest in alternative protein sources. White said given the increased population projections over the next 30 years, blended proteins of plants and animals will likely be needed to satisfy the demand. He said Tyson will later this year release more of its Raised and Rooted products at retail and in foodservice distribution. He said a blended burger will be among the first new products to hit the market in the coming months.