Despite rising grain and transportation costs and the lingering impact of COVID-19, Tyson Foods reported strong second-quarter earnings with net income rising 26% to $476 million from the $376 million reported a year ago.
Unadjusted earnings per share were $1.30 on a diluted basis compared to $1.03 a year earlier. The results beat Wall Street consensus by 20 cents per share. Revenue totaled $11.3 billion in the quarter, up 3.8% from a year ago. Tyson Foods execs expect fiscal 2021 sales to range between $44 billion and $46 billion as demand for meat remains strong. Sales were higher across the board for all of Tyson’s operating units as meat prices ran higher on lower average volumes.
“We delivered a very strong performance in a complex operating environment with continued success in retail and improvements in foodservice as the industry is recovering. We generated adjusted operating income growth of 32% for the first half of fiscal 2021, driven by solid results in beef and prepared foods,” said president and CEO Dean Banks. “We’re seeing substantial inflation across our supply chain, which will likely create margin pressure during the back half of the year.”
For the first fiscal six months, Tyson’s revenue totaled $21.76 billion, up slightly from $21.73 billion, in the prior year. Net income attributable to Tyson Foods grew to $943 million, up from $888 million in the year-ago period.
The U.S. Department of Agriculture expects domestic protein production – beef, pork, chicken and turkey – to increase by less than 1% compared to fiscal 2020 levels. Tyson said its prepared foods segment should have a similar performance to last year, while the pork and chicken segment are expected to perform lower this year compared to last and the beef segment is expected to see improved income in 2021 from a year ago.
Second-quarter net income was largely driven by robust results in the beef segment behind an operating margin of 11% which pushed operating income to $445 million, compared to $123 million in the year-ago period. Tyson said the operating gains resulted from strong demand for beef but higher costs related to COVID-19 continue to offset plant efficiency. Beef sales totaled $4.046 billion and Tyson expects cattle supply to be ample for the balance of this year despite higher export and domestic demand.
Tyson’s chicken segment remains challenged by supply constraints from low hatch rates in its flock, rising grain costs and other inflationary pressures on the chicken Tyson is buying to supplement the increased demand. Tyson reported a dismal operating income of $6 million in the quarter, falling well short of the $99 million reported a year ago. The operating margin was 0.2% and a level executives say is unacceptable. Revenue in the chicken segment was $3.553 billion.
Donnie King, chief operations officer, said winter weather disruptions took a week out of production which will have a lingering impact for several more quarters. He said Tyson also erred in using a male chicken for breeding purposes that have resulted in decreased hatches and other issues with bird health later in the growth cycle. He said it could be mid-next year before the breeding stock error has worked its way out of the system. King said Tyson is correcting the problem and buying more birds from the outside market to meet increased demand, but that’s coming at higher costs.
The chicken operating income was negatively impacted by $125 million in higher grain costs in the quarter partially offset by $40 million in net gains from grain derivatives.
Tyson’s pork segment reported operating income of $67 million with a 4.5% margin, down from $93 million and an operating margin of 7.3% in the year-ago period. Pork sales rose to $1.477 billion, up 17.2% on prices with slightly negative volumes. Tyson said plant production inefficiencies and higher incremental costs related to COVID-19 hindered profits.
The prepared foods segment posted an operating income of $217 million, with 10% more volume and 9.2% higher prices from a year ago. The segment had revenue of $2.164 billion compared to $2.08 billion a year ago. This segment is also seeing inflationary prices of raw materials to the tune of $105 million in the first two quarters of this year.
A problem Tyson continues to experience is plant absenteeism. King said on an average day plants are running between 15% to 20% absenteeism rates being attributed to child care issues and COVID concerns.
“Think of it like this – It’s taking up to six days to do five days work at these absentee rates,” King said.
He said continued stimulus is also a reason people are less willing to return to their jobs. Tyson said the company is allowing flexible schedules to assist with child care needs and the company published its average hourly pay that includes benefits of up to $22 per hour. The company is also promoting vaccinations and working to adhere to CDC guidelines on social distancing and returning to work at the company’s corporate offices.
Banks told Talk Business & Politics the company has not set a specific date for return but some employees have already returned to better serve customers. He said some have been working from corporate offices for several months.
Tyson incurred direct incremental COVID-19 expenses of approximately $95 million for the second quarter and $215 million in the first six months of fiscal 2021. These costs included providing personal protection equipment, plant sanitization, COVID-19 testing, donations and product downgrades. The costs do not include plant underutilization and reconfiguration and rising materials and transportation costs.
Tyson said its core business lines that include brands like Tyson Foods, Ball Park and Hillshire Farms, have posted 11 consecutive quarters of retail sales growth, with the recent second-quarter being the smallest margin at 1.2%. Banks said the numbers were up against a year ago when consumers were stocking freezers and hoarding meats at the start of the pandemic.
Tyson said the foodservice industry is coming back after a tough year with 76% of restaurants in the U.S. now at 75% capacity guidelines. Tyson also said 50% of consumers say they are still eating more at home and 60% said they use meal preparation at home. Tyson said retail sales grew $261 million in the second quarter, while foodservice sales improved $69 million in the quarter compared to a year ago.
The company said market penetration reached 81% of U.S. households in the second quarter and online sales rose 105% as the company works to expand its retail relationships for e-commerce.
Ben Bienvenu, an analyst with Stephens Inc., said Tyson has a very solid setup over the next year.
“We think results are inflecting out of a trough and the company is squarely positioned to benefit from post-COVID reopening demand. We reiterate our “overweight” rating while our earnings estimates and price target of $90 are under review,” Bienvenu said. (Stephens conducts investment banking services for Tyson Foods and is compensated accordingly.)
Shares (NYSE: TSN) were trading down about 1.75% at $77.43 in the early afternoon session. Tyson shares are up 20% year to date and Wall Street analysts remain bullish on the company’s ability to turn its chicken segment around, grow international sales and benefit from increased demand as the global pandemic subsides. Over the past 52 weeks Tyson shares have traded between $55.28 and $79.77.