SPRINGDALE, ARK. — The promise and the peril of an outbreak of African swine fever in China was evident during Tyson Foods, Inc.’s second-quarter financial earnings call. The promise may be seen in how meat protein markets may move due to the culling of Chinese swine herds to stem the spread of the virus. The peril is in what may happen if the virus spreads elsewhere around the world, including the United States.
Tyson Foods’ scale and diversified product portfolio will help it weather global shifts in meat protein demand. If the virus reaches the United States, both the company’s Pork and Prepared Foods business units could face significant pressure.
“This is an unusual, perhaps unprecedented time for the protein industry,” said Noel White, president and chief executive officer of Tyson Foods. “In my 39 years in the business, I’ve never seen an event that has the potential to change global protein production and consumption patterns as African swine fever does. The situation is fluid and fast-moving but, we’re working with others in the industry, government agencies and producers to prepare in the event A.S.F. spreads to North America.
“A worldwide decrease in pork supply could put pressure on our Prepared Foods business by increasing raw material costs while offering significant upside to our Pork, Chicken and Beef businesses. The power of our diversified business model and broad product portfolio across more world geographies will be even more important under these circumstances.”
A challenge facing Tyson Foods and others is a lack of transparency from China about the extent of the outbreak. Mr. White estimated that between 150 million to 200 million hogs have died in China due to the outbreak.
“That correlates to about 10 million metric tons of product coming out of the marketplace,” he said. “From a total protein global supply, that’s something in the area of 5%. So, it’s an event that I have never seen happen before, that we are well positioned to deal with that in all three proteins.”
Mr. White added that he is seeing the market react to A.S.F.
“We have seen pork prices start to move in reaction to A.S.F., but hog prices have risen faster than what product prices have,” he said. “When product is in fact produced on a large scale for China, that product will come out of the U.S. market, and prices are expected to escalate fairly rapidly.”
For the second quarter ended March 30, Tyson Foods earned $426 million, equal to $1.20 per share on the common stock, and an improvement over the same period of the previous year when the company earned $315 million, or 88c per share.
Sales for the quarter rose to $10,443 million, up from $9,773 million the year prior.
The Beef business unit generated sales of $3,884 million, up from 2018 when the company had beef sales of $3,681 million. Second-quarter Beef operating income rose to $156 million from $92 million the year prior.
“Average price was up 2.3%, and volume increased 3.2% compared to the second quarter last year on improved cattle availability and strong demand,” Mr. White said. “The herd rebuilding continues, and we see ample cattle supplies into 2021.”
Chicken business sales rose sharply during the quarter to $3,407 million from $2,959 million the previous year. The business unit’s operating income fell to $141 million from $231 million in 2018.
“Volume was up 26.2%, and average price was down 11% primarily attributable to the acquisition of the American Proteins rendering business last year that added considerable volume at relatively low prices,” Mr. White said. “In the second quarter, pricing began to improve as A.S.F. news drove incremental demand for chicken. We are in a solid position to improve pricing as we talk to customers about contracts in 2019 and into 2020.”
Prepared Foods sales fell to $2,027 million from $2,147 million the previous year. Operating income, on the other hand, spiked to $245 million from $119 million.
“Prepared Foods was up 16% in operating income and relatively flat on volume and average price when excluding the divestitures of several noncore businesses last year,” Mr. White said. “We expect our Prepared Foods input costs to increase in the third and fourth quarters as beef and pork prices rise on concerns of the African swine fever outbreak in China. Our plan is to recover these additional costs through pricing, but it will take some time.”
Mr. White added that Tyson Foods will be introducing alternative protein products this summer and early in the next fiscal year.
“We’re well positioned to capture growth in this space,” he said. “We have a deep understanding of how to develop new products, brands and categories, and our distribution reach will allow us to move quickly into the marketplace.”
Quarterly Pork business sales dipped to $1,172 million from $1,265 million. Operating income rose to $100 million from $67 million.
“It is difficult to predict when A.S.F. might positively impact our Pork business,” Mr. White said. “However, we believe any financial benefit will likely occur in late 2019 or later. We are well positioned to be agile and meet customer and consumer needs internationally and domestically.”