SPRINGDALE, ARK. – The coronavirus (COVID-19) has added several levels of complexity to managing Tyson Foods, Inc. The dramatic acceleration of demand at retail combined with the deceleration at foodservice and mixed with operational supply chain challenges is pressuring and will continue to pressure company performance.
“Q3 has begun with higher levels of volatility,” said Stewart F. Glendinning, chief financial officer, during a May 3 conference call with securities analysts to discuss second-quarter financial results. “Early in the quarter, we saw huge volume pulls in our retail channel. This demand partially offset declines in our foodservice channel. In recent weeks, we’ve seen a leveling off followed by another surge in retail demand.
“The volume shift from foodservice to retail is likely to be a net negative. The major challenge facing us currently is the degree to which our plants are able to operate. All plants are experiencing varying levels of crewing. We will continue to operate our plants with team member health and safety as a top priority.”
Ironically, while the phrase “meat shortage” has appeared in headlines across the country, Tyson Foods management sees any such shortages as a short-term issue. The company is expecting an increase in protein supplies through the balance of the calendar year.
“Total number of animals available has not changed at this point,” said Noel W. White, chief executive officer. “So, whether it’s beef, pork or chicken, we’re looking at increased supply. So most recently, in the market, over the course of the last couple of weeks, there have been some shortages in some specific categories. However, in total, as we go into Q4, we expect supplies to be increasing and therefore not any pricing recovery.”
Historically, approximately 45% of company sales were to retail, 40% to foodservice and 15% international. Since the pandemic started, two-thirds of Tyson’s sales have shifted to retail, according to the company.
“Our ability to flex our production footprint between the foodservice and retail channels is limited,” said Samuel Dean Banks, executive president. “Consequently, we currently believe the full effect of these new consumption patterns will result in a net reduction in volume. Looking forward, our market insights, channel flexibility, access to raw materials and growing demand give us long-term optimism.”
Tyson Foods’ net income for the second quarter ended March 28 totaled $364 million, equal to $1 per share on the common stock, and a decline when compared with the same period of fiscal 2019 when the company earned $426 million, or $1.17 per share.
Sales rose 3% during the quarter to $10.9 billion.
The company’s Beef business unit had sales of $4 billion, a 3% increase over the year prior period. Operating income fell to $109 million from $156 million in 2019.
“Commodity volatility during the quarter resulted in a negative impact of $55 million in derivative mark-to-market adjustments,” Mr. Banks said. “Beef exports remained strong, posting double-digit increases compared to the same quarter last year, which have exceeded industry growth rates.”
The Chicken business unit sales during the quarter were basically flat at $3.4 billion. Operating income fell to $99 million from $141 million.
“Operating income was negatively affected by a $40 million increase in net feed ingredient costs and negative derivative mark-to-market adjustments,” Mr. Banks said. “This, along with weaker pricing from increased domestic availability of chicken, has offset the benefits of our operational improvement initiatives.”
Going forward, Mr. Banks said the Chicken businesses higher exposure to foodservice will impact results.
“We’ve responded to demand shifts caused by COVID-19 by adjusting parts of our production capacity from foodservice to retail, but higher retail volumes have not entirely offset the lost volumes from foodservice,” he said. “Additionally, this channel shift has resulted in lower-margin realization as volumes have moved to lower-margin products.”
Second-quarter Pork sales rose to $1.3 billion from $1.2 billion. Operating income declined 7% to $93 million during the quarter.
“As we’ve transitioned to a ractopamine-free hog supply, our ability to sell pork to the global markets has expanded,” Mr. Banks said. “This new capability has been met with increasing global demand as African swine fever continues to reduce pork supplies in Asia. Year-over-year increases of pork to China were up significantly for the quarter, and we expect strong demand to continue as China recovers from this COVID-19 lockdown.”
Like all other food and beverage companies, Tyson Foods had to adapt to dramatic market shifts. Adding to the pressure on the company are crowded processing plants that have been idled as COVID-19 spread through the local community and its workforce.
“Operationally, we have faced two meaningful challenges: slowdown resulting from team member shortages or choices we made to ensure operational safety and temporary closures related to COVID-19 infections,” Mr. Banks said. “We have continued to pay team members during these slowdowns and closures since maintaining health and continued employment of our team members is important for our longer-term success. As a result, we’ve experienced lower levels of productivity and higher cost of production. This will likely continue in the short term until local infection rates begin to decrease.”
Analysts participating in the call sought clarification from management about the costs involved with temporarily shutting down plants and then restarting them. The response was that it is a fluid situation.
“As you can imagine, the slowdowns and temporary closures related to the pandemic drive higher production costs, and we expect to see those until we resume under more normal conditions,” Mr. Glendinning said. “Also, our COVID-19 risk mitigation activities have added costs on the broad range of safety measures we have implemented and continued to support.”
Mr. White added, “Despite our slower lines and lower volumes resulting from this pandemic, we believe our core business and financial strength position us well to deliver market share and earnings growth over the long term. And while COVID-19 has been disruptive, we do not believe it changes the outlook for a strong future for Tyson Foods.”