Chicken, Prepared Foods issues slow Tyson Foods' momentum

by Keith Nunes
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Tyson chicken
Disruptions in its chicken supply chain hindered Tyson Foods’ earnings during the second quarter.

SPRINGDALE, ARK. — Disruptions in its chicken supply chain and weak food service results in its Prepared Foods business hindered Tyson Foods’ earnings during the second quarter of fiscal 2017. The supply chain problems may be considered short term, but the food service issue may take longer to resolve, according to the company.

Net income during the quarter ended April 1 was $341 million, equal to 95c per share on the common stock, and a decline compared to the same period of the previous year when the company earned $434 million, equal to $1.14 per share.

Sales for the quarter were $9,083 million, down from $9,170 million in the same period a year ago.

Tom Hayes, Tyson Foods
Tom Hayes, president and c.e.o. of Tyson Foods

“Our Beef and Pork segments generated tremendous operating income in the second quarter, allowing us to invest in the long-term growth of our value-added businesses,” said Tom Hayes, president and chief executive officer. “Our Prepared Foods segment results were negatively affected by the on-going challenges in our pizza toppings and ingredients meats businesses discussed last quarter. We expect our results to improve as we continue to address operational efficiency and capacity through fiscal year 2018. Unfortunately, we experienced fires in two chicken plants in our second quarter. Had it not been for the fires, our Chicken segment return on sales would have been within its normalized range.”

In Tyson Foods’ Beef business, operating income for the second quarter was $126 million with an operating margin of 3.6%. Business unit sales for the quarter were $3,487 million.

“Sales volume was down 1.1% as we ran our plants for margin, not for market share, as price was down 3.1%, reflecting the continued lower cut-out due to improved cattle availability,” Mr. Hayes said during a May 8 conference call with financial analysts to discuss the second quarter results. “Consumer demand for beef, both domestically and internationally, has remained strong …”

Tyson beef
In Tyson Foods’ Beef business, operating income for the second quarter was $126 million.

The Pork segment's operating income in the second quarter was $141 million with a 10.8% operating margin, according to the company. Volume was down 1.3%, while average price was up nearly 11% due to tighter domestic availability resulting from heavy export demand. Business unit sales during the quarter were $1,302 million.

“With hog supplies increasing 3% to 4% and continued strong export demand, we think the Pork segment’s operating margin for the full year will come in around 12% and looks to stay strong into fiscal ‘18,” Mr. Hayes said. “Like Beef, Pork is performing well above its normalized range of 6% to 8%. These commodity businesses are great contributors because of the cash they generate, the raw materials they supply for our Prepared Foods businesses and the total protein portfolio we’re able to offer our customers.”

Chicken segment operating income was $233 million with an operating margin of 8.3%, and sales for the quarter were $2,798 million. Average price was up 4.3% on 2% lower volume due to operational disruptions as well as ongoing mix changes away from commodities toward higher-margin products, the company said.

Tyson pork
Tyson's Pork segment's operating income in the second quarter was $141 million.

“While the Chicken segment fell below its normalized operating margin range of 9% to 11%, it would have been within the normalized range had it not been for the fires we experienced in two of our plants,” Mr. Hayes said. “These unforeseen events cost about 4c in e.p.s. and reduced volumes.”

Prepared Foods sales during the quarter were $1,751 million. Operating income was $87 million and operating margin was 5%.

“Within Prepared Foods, we continue to see strong growth in some areas and others that need work,” Mr. Hayes said. “We’ll accelerate profitable growth with a very focused fix-and-grow approach. We’re investing in improving our food service Prepared Foods businesses, including pizza toppings and ingredient meats. And as I explained on our Q1 call, this will take about 18 months, and we’re progressing as planned.”

Tyson chicken
Tyson's Chicken segment operating income was $233 million.

Mr. Hayes emphasized that the issues in Prepared Foods are in food service and not affecting the rest of the business unit.

“The retail business continues to perform very well, growing both volume and share while delivering strong financial performance,” he said.

For the first half of fiscal 2017, Tyson Foods earned $933 million, equal to $2.59 per share on the common stock, and an increase when compared to the previous year when the company earned $893 million, equal to $2.32 per share.

Sales for the first half were down slightly at $18,265 million compared with $18,322 million the previous year. 
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