Tyson Foods posts record sales but net income down 36%

The coronavirus rained hard on Tyson Foods’  second-quarter earnings and there is no end in sight for the financial weight of the pandemic that CEO Noel White says is the biggest hurdle he has witnessed in his 30 years of industry work.

Tyson Foods missed quarterly earnings projections with an unadjusted net income of $364 million ending March 31. Unadjusted net earnings of $1 per share were short of the $1.12 Wall Street had projected. Tyson Foods also took a 23-cent charge relating to pension plan termination costs, resulting in adjusted net earnings per share of 77 cents. (Financial results on segments are based on the adjusted net income.)

The Springdale-based meat giant saw record second-quarter sales of $10.888 billion and strong beef operating results, but higher operating costs across the board reduced income. Tyson Foods also missed revenue estimates of $11 billion, which sent shares (NYSE: TSN) down more than 8% in early trading on Monday.

“During the quarter, we witnessed an unprecedented shift in demand from foodservice to retail, temporary plant closures, reduced team member attendance, and supply chain volatility as a result of the virus. Despite these challenges, we were able to adjust our product mix and redirect products to the appropriate channels,” White said in his prepared comments.

White opened Monday’s call with investors by discussing the steps the company is taking to ensure its plants can stay open and still protect the health of its workforce. White said the pork segment is operating at about 50% capacity and the beef segment is in the midst of temporary closures for testing which can take up to two weeks. He said the costs associated with taking fresh meat plants down is more than $1 million per week. White said Tyson Foods’ chicken segment was also hurt from the loss of foodservice sales as restaurants have largely been shuttered in recent weeks.

While the retail chicken segment has picked up 20%, it has not been enough to offset the foodservice losses, according to Dean Banks, president of Tyson Foods. The company’s prepared foods division has also been hampered by the loss of foodservice. Company leaders expect the recovery to be slow given the gradual return to full-capacity seating in restaurants is likely months away.

Tyson Foods’ adjusted operating income was $501 million in the quarter, down from $654 million from a year ago. The operating margin was 4.6% which again was lower as plant efficiencies have been compromised from the COVID-19 impact. Operating margin was 6.3% in the prior-year period.

SEGMENT RESULTS
2Q BEEF RESULTS
$3.979 billion sales, versus $3.884 billion
$109 million operating income, versus $156 million
2.7% operating margin, versus 4%

2Q PORK RESULTS
$1.266 billion sales, versus $1.172 billion
$93 million operating income, versus $100 million
7.3% operating margin, versus 8.5%

2Q CHICKEN RESULTS
$3.397 billion sales, versus $3.407 billion
$99 million operating income, versus $141 million
2.3% operating margin, versus 4.6%

2Q PREPARED FOOD
$2.080 billion in sales, versus $2.027 billion
$191 million operating income, versus $248 million
9.2% operating margin, versus 12.1%

2Q INTERNATIONAL
$465,000 sales, versus $277,000
$9 million operating income, versus $1 million loss
operating margin not provided.

For the first half of fiscal 2020, Tyson Foods reported adjusted earnings per share of $2.43, down 13% from the prior year. Operating margins for the first six months were 6.4%, and revenue was a record $21.703 million.

“While near term results will likely be challenged by the current operating environment at plants and foodservice demand, fundamentals for protein and Tyson Foods were solid heading into COVID and we expect it to improve as the pressure subsides,” Peter Galbo, an analyst with Bank of America, said after the earnings call.

CAUTIOUS OUTLOOK 
Tyson Foods expects losses in the chicken segment in the back half of the year impacted by foodservice and the ongoing added costs of the precautionary measures in its plants, which reduce line speeds and slow production. White said “we can’t run the business without people” and keeping the company’s 116,000 employees safe remains the first priority.

White said the biggest challenge the company faces in the near-term is being able to run its plants at optimum levels with additional costs. The company is grateful for the executive order by President Donald Trump of the Production Defense Act that will help standardize the protocol for operating in this unprecedented time.

Typically, 40% of Tyson Foods’ business is in the foodservice industry and while the beef segment has been able to shift some into retail, White said not all the chicken and prepared foods plants can easily make that shift. Tyson Foods execs said the shift in demand and sales from foodservice to retail has ranged from 15% to 40% depending on the category. Tyson Foods said prepared food sales have shifted to 80% retail from the former 60% since foodservice has slowed.

The company expects increased production this year in spite of the disruption from COVID-19. White said plants will continue to run, adding extra shifts when necessary to help clear up the backlog. Exports to Japan and Mexico were up in the quarter and White said China is recovering. However, given the uncertainty, there was no forward guidance given.

Tyson Foods will suspend open market buybacks in the second half of the year and has secured $1.5 billion through debt debentures issued in the first quarter. Chief financial officer Stewart Glendinning said the company’s liquidity remains well above its minimum target of $1 billion, despite COVID-19 related spending. The company also reduced capital expenditures for the year by more than $100 million. Glendinning said expenditures would be closer to $1.2 billion.

Shares of Tyson Foods traded down sharply on the lackluster results on Monday. The stock was trading around $55.10 in the morning session, down $4.91 or 8.18%. For the past 52-weeks the shares have traded between $42.57 and $94.24. Since the start of the year, Tyson Foods shares are down more than 39%.