Tyson Foods’ first fiscal quarter net income declines more than 8%

Negative impacts from COVID-19 plant disruptions and a weak foodservice sector resulted in first fiscal quarter net income for Tyson Foods of $467 million, or $1.28 cents per share, down 8.2% from $509 million, or $1.38 per share, in the year-ago period.

The Springdale-based meat giant said earnings were adjusted from $1.94 a year ago because of the $320 million in legal costs related to legal settlements and a $6 million restructuring charge in the beef segment. The adjusted earnings beat the Wall Street consensus of $1.50 per share. Total revenues were $10.46 billion, down from $10.815 billion a year ago.

Tyson reported direct impact costs from COVID-19 at $120 million in the quarter ending Jan. 2, saying the pandemic continues to hinder overall operating results. The company expects those costs will be $420 million this year, saying some costs may be permanent.

Tyson’s operating income was $705 million in the quarter, down from $758 million a year ago. This includes an operating loss of $216 million in the chicken segment from the price-fixing settlement and rising grain costs. Tyson said its chicken segment did see some improvements in the quarter and on an adjusted basis (before the settlement) operating income was $104 million, up from $78 million a year ago.

“We delivered strong operating earnings performance, exceeding $1 billion in operating income for the quarter,” said Dean Banks, president and CEO of Tyson Foods. “This performance was driven by higher earnings in our Prepared Foods, Beef, and Chicken segments and demonstrates our effectiveness in addressing customer and consumer needs, while continuing to manage the ongoing effects of the global pandemic. I am exceptionally proud of our global team for their contributions to this strong result.”

BEEF, PORK AND CHICKEN
Tyson’s beef segment reported a stellar quarter with an operating income of $528 million, an operating margin of 13.2%, up from $342 million, and a margin of 8.9% in the year-ago period. Beef sales rose to $3.987 billion, up 5.6% from a year ago, on slightly lower volumes.

“Operating income increased due to strong demand as we continued to optimize revenues relative to live cattle supply, partially offset by production inefficiencies and direct incremental expenses related to COVID-19. Additionally, operating income in the first quarter of fiscal 2021 was impacted by a cattle supplier’s misappropriation of Company funds, which resulted in a $55 million gain related to the recovery of cattle inventory as compared to a $68 million loss recognized in the first quarter of fiscal 2020,” Tyson noted in the release.

Tyson expects its beef segment to deliver similar results this year as production is expected to be flat to 2020 levels.

Tyson’s pork segment was weaker in the period, with an operating income of $116 million, down from $191 million a year ago. Operating margin fell to 8.1% from 13.9% the prior-year period. Tyson attributed the operating income decrease to production inefficiencies and direct incremental expenses related to COVID-19 as well as periods of compressed pork margins as livestock costs increased faster than sales prices. Pork sales were $1.439 billion, down 3%.

Tyson expects its pork segment will produce strong operating results this year, but lower than the stellar 2020 results.

Banks said Tyson’s chicken segment did see improvements despite the operating loss from the price-fixing lawsuit. He said it takes time to turn around a segment as large as Tyson’s chicken business but he’s confident in the progress being made, despite escalating grain costs that will add more challenges this year. Sales volume decreased 7% from lower production outputs from COVID-19 partially offset by a 2.7% uptick in chicken prices. Sales totaled $2.831 billion in the quarter, down from $3.392 billion a year ago.

The segment had an operating loss of $216 million, compared to $57 million in operating income in the prior-year period. The loss was a result of the $320 million legal settlement, production inefficiencies and costs related to COVID-19. Tyson said the segment results also included a $70 million gain from grain derivatives in the quarter. Tyson expects rising grain costs to negatively impact the chicken segment results this year, forecasting lower margins for the segment relative to 2020.

PREPARED FOODS, INTERNATIONAL GAINS
The prepared foods segment at Tyson Foods is turning into a giant with an operating income of $266 million in the quarter, up 68% from the same period last year. Operating margin rose to 12.6%, up from 7.4% a year ago.

This diverse segment reported sales of $2.113 billion, up 7.5% on higher prices and down 8.8% on volumes as the foodservice segment remains challenged amid the ongoing COVID-19 pandemic. Tyson said this segment also saw a $35 million uptick in raw material costs. Tyson expects the prepared foods segment will see improvements in fiscal 2021 over last year.

“We will continue to be responsive to rising raw material costs and changes in consumer behavior as a result of the impacts of COVID-19 as we move through fiscal 2021,” Tyson noted in the release.

Tyson’s growing international business did see modest improvements in the first quarter with operating income of $11 million, up from $10 million last year. Sales were down to $469 million, with 6.8% less volume and a 1% uptick in pricing. The company said it expects improved results from its foreign operations in fiscal 2021.

“As we navigate continued market volatility, our multi-protein portfolio creates the fuel for disciplined investments in higher margin, higher growth opportunities ahead. We will continuously seek to remove unnecessary costs from the business and invest in the right areas. Looking forward, I’m confident that our team is executing on the right priorities to meet our commitments and drive shareholder value creation,” Banks said in his prepared remarks.

He said Tyson is optimistic about the long-term, sustainable growth potential of the business.

Wall Street was bearish given the immediate mixed outlook for fiscal 2021. Shares of Tyson Foods (NYSE: TSN) traded lower on Thursday following the earnings release. Shares fell 6% to $65 in the morning session in higher-than-normal volume.

Ben Bienvenu, an analyst with Stephens Inc., said he stands by his recent stock upgrade to “overweight” because the first quarter results reflect a trough. He said Tyson’s adjusted results beat the consensus handily as well as his estimate of $1.65, but he is reviewing his price target and earnings estimates for the year following the quarter. (Stephens Inc. conducts investment banking services for Tyson Foods and is compensated accordingly.)