Tyson Foods expects $220 million in lower profits; half relates to chicken recalls

Tyson Foods CEO Noel White and Chief Financial Officer Stewart Glendinning told investors Wednesday (Sept. 4) the earnings adjustment announced late Tuesday would be about $220 million, half of which relates to the company’s chicken segment.

The Tyson execs spoke in detail about the charges at the Barclay Global Consumer Staples Conference in Boston early Wednesday, which was webcast for investors. White said three product recalls in recent weeks caused Tyson Foods to slow its line speeds and product volume production that came at a significant cost. The company is now working to ramp up to normal processing speeds, but it could be early 2020 before the segment has fully recovered.

He said about $66 million, or 30%, of the lost profits related to mark-to-market losses for grain contracts the company wrote down in the third quarter. White said the recent drop in grain prices created some volatility in the commodity and futures markets. He said if prices were to come back up before the end of the month some of that expected cost could be mitigated. But if prices fall further, the loss could widen.

Corn prices fell more than 10% over the past month and they were down 0.7% this past week. Corn makes up between 60-70% of feed costs for chickens. Soybean meal, the other main feed ingredient for chickens, is down 1.6% over the past month, but was up 1.5% last week, according to a Stephens Inc. Commodity Monitor Report dated Sept. 4. Corn prices rose sharply between April and July to nearly $4.40 a bushel before plummeting to the $3.60 range in August. Soybean prices also softened between July and August after production forecasts were raised for this year’s harvest amid improved weather conditions.

White said the rest of the charge related to the market volatility also impacted the prepared foods segment, namely higher pork prices amid shorter hog supplies due to African swine fever. He said the recent fire in the large beef packing plant in Holcomb, Kansas also had a costly deductible that the company has to bear.

White said the repairs should take about two months as two large electrical panels in the plant were part of the fire and the facility must be rewired. He said workers on the slaughter and processing side of the business who have been impacted from the closure will continue to be paid for a 40-hour week over the duration of the repair time.

“We are absorbing that cost,” White said.

The other side of the plant, which does further processing, was not impacted by the fires and remains operational. He said the company is also incurring some additional costs to move cattle to other plants for slaughter and shift some of the orders for customers as well.

“It is extremely unusual to have so many events in one quarter. Tyson could easily cover one of them, but the combined impact will compromise earnings as we noted yesterday,” White said.

Analysts asked White why Tyson’s chicken segment has been slower to recover than some of its industry competitors as chicken prices continue to rise. White said Tyson has moved its business toward a more stable and predictable model focusing on higher-margin chicken products and shifting away from commodity processing.

“In doing so, we don’t benefit from the market highs in commodity chicken prices, but we also don’t suffer when prices fall like commodity-based processing models,” White said. “Demand for all of our proteins remain very strong and we are running our plants about as fast as we can.”

White was also asked about the “Raised & Ready” brand of alternative meat items that recently launched in retail. He said the products are in about 5,000 stores now and selling well. He said Tyson would continue to innovate in this space and launch products as demand dictates. He said it took about nine months to develop the chicken nugget product and get it to market. White said Tyson will be thoughtful about the products it launches in the space to ensure it is tasty and nutritious and it’s not concerned with what its competitors do. White added there is ample opportunity in retail and foodservice where alternative proteins are concerned and Tyson will play in both channels.

When asked about the company’s international strategy, White said the platform is set. Tyson has about $7 billion a year in international sales, most of which are exports ($5 billion) with $2 billion in-country sales. White said with recent acquisitions, Tyson has added processing capacity in Asia, further processing in Europe, and the recent deal to acquire a 40% stake in Grupo Vibra in Brazil will give Tyson more opportunities.

“We are looking at where we want to be in the world relative to demand growth and either building organically or acquisition capacity in those markets. Our international strategy is purely demand-based, which is quite different from Tyson’s former international strategy,” White said.

He said the integration of the recent acquisitions has gone smoothly and Donnie King, who was brought out of retirement to lead Tyson’s international business, has chosen strong leadership to help manage the businesses abroad.

When asked about the possibility of taking on more leverage to do more acquisitions, White said the opportunity would have to be compelling.

“There are a few opportunities on the table we have been evaluating … we will likely add to our international platform systematically over time,” he added.

Glendinning said the $4 billion Tyson Foods has spent in the past year is already returning itself on an after-tax basis.

“We have a very healthy balance sheet and we have the ability to pull all the levers at that same time,” he said. “Over time, we will continue to have a more stable and profitable international platform fueled by our growing international customer base.”

Wall Street sold off shares of Tyson Foods (NYSE: TSN) early on Wednesday following the after-market slump the prior day. Shares were trading down 5.63% at $88.04 in heavy volume. The price slide was directly related to the weaker earnings guidance given by Tyson Foods late Tuesday (Sept. 3). Tyson expects fiscal 2019 earnings to range from $5.30 to $5.70 per share, down more than 8% from previous estimates.