Tyson reports sour quarter, executives remain upbeat

Optimism was harder to sell by Tyson Foods’ management team on Monday (May 6) as the meat giant posted sour quarterly results amid challenges in China and softer food service demand that pushed operating margins lower across the board.

Net income for the company’s second quarter sank nearly 43% as Tyson pocketed $95 million in profits, down from $166 million a year ago. This equated to 26 cents a share, falling short of the 44 cents earned a year ago and the 45 cents Wall Street expected.

These results included a $56 million impairment charge related to an older chicken complex in the company’s China operations. After an internal assessment Tyson opted to walk away from a major upgrade that had been planned for that facility which resulted in the charge. The net impact to earnings in the quarter was 10 cents a share. Analysts expect Tyson will divest this property, its oldest investment in China.

Total sales revenue in the quarter increased to $8.419 billion, as the price of meat sold rose 3.9% from a year ago. Tyson’s total sales volume was down 1.8%.

Wall Street backed away from Tyson following the report and earnings call as shares traded roughly 4% lower. Throughout the morning session, Tyson shares were trading down more than $1 at $23.85.

For the first six months of the company's fiscal year net income totaled $268 million, down from $322 million during the same period in 2012. Revenue for the six-month period totaled $16.821 billion, slightly ahead of the $16.597 billion in the 2012 period.

Tyson CEO Donnie Smith admitted that the challenges were widespread but he and his management team continued to be upbeat during the hour-long call promising the back half of this year will be strong.

A closer look at the company report shows Tyson failed to meet the bar in any of its operating segments, but the company said the metrics had improved since the quarter ended on March 31.

CHICKEN LITTLE
The poultry industry is making money despite elevated corn costs, but Tyson’s operating income failed to measure up in the recent quarter. Operating income totaled $78 million, impaired by the $56 million charge in China, down sharply from $145 million a year ago.

Chicken prices are high and the industry’s disciplined supply approach is paying off for most companies. Tyson competitor Pilgrim’s Pride posted record quarterly earnings on Friday.

Tyson, on the other hand, reported a compressed operating margin of roughly 4% in the quarter, below the industry normalized range of 7%.

Smith said restaurant traffic was weaker in the period which is reflected in a slighter lower sales volume for Tyson Foods, but at the same time chicken prices rose 7.1%.

He said the company’s business in Mexico is strong and he believes China will pay off down the road, but he doesn’t expect the Chinese operations to break even until mid 2014. Tyson is in the process of building company controlled poultry houses to supply two large processing plants it owns in the Shanghai region.

Tim Ramey, analyst with D.A. Davidson, said Tyson has a good story to tell with its China investments, and wonders when the company or its supply chain partner Yum Brands will tell it.

Smith said with the Avian Influenza scares throughout China, the country is in dire need of a more bio-secure and controlled infrastructure, which it is trying to implement with its investments there. The Chinese market is very fragmented with lots of small players, some of which have been impacted from the Avian Influenza outbreak.

Smith said Tyson remains committed to China, it is just going to take a little more time for the consumers to come back around to meat in general as many have shifted to a more vegetarian diet.

In the quarter Tyson said it absorbed $165 million in additional grain costs, offset somewhat by higher meat prices passed through to its customers.

“We expect higher feed costs in fiscal 2013 compared to fiscal 2012 of approximately $450 million. The capital investment and significant operational improvements we have made in our chicken segment have better positioned us to adjust to rising feed costs. We anticipate our chicken segment will return to its normalized range of 5 to 7% for the second-half of fiscal 2013,” the company noted in the release.

Chicken sales totaled $3.094 billion in the quarter, up 6.2%, nearly all of which was price induced on flat volume.

BEEF LOSSES
Beef is not what is being served for dinner these days, according to Tyson Foods chief operating officer Jim Lochner. He said overall demand and consumption for beef is down amid high prices which has consumers eating more chicken and pork.

Tyson Foods posted a net operating loss of $26 million in its beef segment for the three-months ending March 31. The loss widened from a $1 million deficit in the year-ago period.

It was Tyson’s worst second quarter since 2007, despite a 6.5% price increase but weaker overall consumer demand for high priced cuts.

Lochner said the company overpaid for some of the beef procured in its northern slaughter plants in the quarter despite seeing better operational margins in the plants located in the south thanks the Cargill plant closure in west Texas. He said premium Angus steaks were in excess supply to demand as consumers opted to eat more hamburger. Lochner said cattle procurement strategies have been altered as higher priced cuts are not selling well.

Tyson’s total beef sales were $3.44 billion in the quarter, up 2.3% in the year-over-year period.

For fiscal 2013, Tyson believes its beef segment will remain profitable, but will be below its normalized range of 2.5% to 4.5% growth.

LEANER PORK
Tyson’s pork segment ran below optimal efficiency in the recent quarter with an operating income of $72 million, down from $115 million in the same period last year.

Lochner said pork exports were lower which put supplies out of sync with demand. Russia and other countries banned U.S. pork in December because of the feed additive ractopamine which is routinely used in the U.S. pork industry. Lochner said those bans did cause a temporary glut in supplies, which is reflected in the recent quarter as the company scaled back production.

“We expect industry hog supplies to be flat and pork exports to decrease compared to fiscal 2012. For fiscal 2013, we believe our pork segment will be in its normalized range of 6 to 8%,” he said.

Pork sales totaled $1.311 billion in the quarter, down 4.44% from a year ago. The decrease was evenly split between lighter volume and declining prices.

PIZZA CUTS
Tyson’s prepared foods segment also had a tough quarter with operating income of $28 million, down from $44 million a year ago.

Smith said Tyson continues to revamp its lunch meat business which will pay off in the future quarters. He said pizza topping orders were also down in the period, while other fast food ideas like taco sales improved.

The prepared food segment posted total sales of $803 million in the quarter, down from $807 million reported a year ago.

The recent quarter results were the worst operating margins for this segment in six quarters, according to Ken Goldman, analyst with J.P Morgan, but he expects those metrics have since improved.

“For fiscal 2013, we believe our prepared foods segment may be below its normalized range of 4 to -6%,” Lochner said.

LOOK AHEAD
Tyson said the investments it’s making now will pay off in future quarters. The company’s capital expenditures this year will range from $550 million to $600 million. much of which are in Brazil and China.

In fiscal 2013, Tyson expects overall domestic protein production (chicken, beef, pork and turkey) to increase approximately 1% from fiscal 2012 levels. The meat giant expects fiscal 2013 sales to approximate $34.5 billion, slightly lower than previously stated.

Smith said the company remains committed to growing its value-added sales and moving further away the commodity market. In the recent quarter he said value added sales grew 3.3%, which is a good start toward the 6 to 8% annual growth he projects. (Value-added sales offer higher profit margins in an otherwise pennies-per-pound commodity business.)

Last year roughly 45% of Tyson Foods’ sales came from value-added products. That was $15 billion of the $33.3 billion the meat giant posted in total revenue, according to analysts with Fitch Rating Service.

Smith has pledged to grow value-added sales by $1 billion annually.

This year he said Tyson will bring 90 new retail products to market not to mention dozens of additional products for its food service customers. Some of the products consumers can expect to include gluten free and antibiotic free.

Smith said consumers are clamoring for these products and are willing to pay more them.