SPRINGDALE, ARK. — Shares for Tyson Foods, Inc. tumbled nearly 10% after the company issued its latest earnings report. For the third quarter ended June 27, Tyson had net income of $344 million, equal to 83c per share on the common stock, up 33% from $258 million, or 73c per share, for the year-ago period. Sales increased 4% to $10,071 million compared with $9,682 million.
Despite reporting higher earnings and sales in the quarter, the company lowered its full-year guidance for adjusted earnings per share to a range of $3.10 to $3.20, from the previous target of $3.30 to $3.40, on unfavorable market conditions for beef.
The company’s stock price on the New York Stock Exchange ended the day at $39.96, down $4.39 from the previous close of $44.35.
During the quarter, Tyson Foods’ Beef business unit sustained an operating loss of $7 million, which compared with operating income of $101 million the year before. Sales rose to $4,305 million, up 2.8% from $4,189 million for the prior-year period, reflecting a 4% decline in sales volume that was offset by a 7% increase in average sales price from the third quarter of the previous year.
|Donnie Smith, president and c.e.o. of Tyson Foods.|
“There were two issues in the Beef segment that caused the loss,” said Donnie Smith, president and chief executive officer of Tyson Foods, during an Aug. 3 earnings call with financial analysts. “First was the West coast port situation. There was a significant amount of meat in the pipeline, and we sold it at lower values in alternative markets rather than building inventory and tying up our working capital. This cost us about $84 million in the third quarter.
“The second issue began in late May, early June when feed-lot margin erosion accelerated. Feed lots slowed the pace of their cattle marketings from the normal 150 days to about 180 days. As a result, we haven’t seen the anticipated summer push of cattle.
“However, the most recent cattle-owned feed report indicates that there are more cattle-owned feed than a year ago. Because we run for margin and not for market share, we’re not willing to overpay for cattle, and we’ve had to cut back on our hours at our plants, resulting in inefficiencies and added costs. In the short term, we are negatively impacted, but markets will equilibrate, and conditions are expected to improve for the long term.”
Pasture conditions have begun to improve, supporting the rebuilding of the cattle herd and positioning the company for longer-term growth, Mr. Smith said.
“When those cattle come to market we’ll be ready with the plant’s position close to high-density feeding areas, the most efficient operations in the industry and the most knowledgeable, experienced team in the business to run them,” Mr. Smith said. “So, while the current headwinds in our Beef segment don’t have a quick fix and challenges will continue into 2016, we still believe in the long-term viability of our beef business.”
Aside from Tyson’s beef woes, the company posted positive performance elsewhere in its portfolio.
Prepared Foods operating income for the quarter soared to a record $207 million, which compared with a loss of $50 million for the same period of the previous year. Sales for the business were $1,810 million compared with $901 million a year earlier.
“Volume was up 77%, reflecting the addition of Hillshire Brands, and average sales price was up 13%,” Mr. Smith said. “The fundamentals in this segment remain strong and we continue to focus on a long-term growth and brand building. We anticipate our retail margins will moderate a bit in the fourth quarter as we spend against the national launches of Hillshire Snacking and Ball Park Jerky, as well as increased (marketing, advertising and promotions) spending behind innovation in the base business.”
Tyson Foods’ Chicken business unit had an operating income of $313 million during the third quarter, up 61% from $195 million for the year-ago period. Sales declined 2.5% to $2,757 million, reflecting a 3% increase in volume offset by a 5% decline in average sales price compared with the third quarter of fiscal 2014.
“The Chicken segment should finish strong with an operating margin of around 12% for the year,” Mr. Smith said. “And despite disruptions caused by export bans and predicted supply increases, we expect our Chicken segment to perform at or above the top end of its normalized range of 7% to 9% again next year.”
The Pork business had operating income of $64 million during the quarter, down from $128 million during the third quarter of fiscal 2014. Sales fell 32% to $1,207 million, driven by a decline in volumes from the divesture of Tyson’s Heinhold Hog Markets business in the first quarter, and a 28% decrease in average sales price, Mr. Smith said.
“Exports continue to be a challenge,” he said. “A strong dollar, lower prices from the E.U. and Canada, and the West coast port slowdown have been contributing factors. Despite all this we still came close to being in a normalized range for the quarter.
“Expansion of the hog herd has been taking place, as expected, and it should continue into 2016. With productivity improvement we expect 3% to 4% more hogs and more pork on the domestic market, which should be a positive for our Prepared Foods segment. Demand for pork is strong, especially when consumers compare it to the price of beef, so we expect our Pork segment to continue to do well and be in its normalized range for FY15 and FY16.”
During the quarter, Tyson achieved $87 million in synergies during the quarter due to the Hillshire Brands acquisition. Tyson is on track to capture approximately $300 million in synergies for the full year, largely driven by operational improvements in the company’s legacy prepared foods operation. Tyson generated cash flow of $864 million, which allowed the company to reduce net debt by $688 million.
In the fourth quarter, the company is slated to introduce new product platforms, including Hillshire Snacking and Ball Park Jerky.“…in the near term we continue managing the acute issues of beef supply and exports while accelerating momentum in Chicken and Prepared Foods,” Mr. Smith said. “Although we never expect a perfect operating environment, most things are going very well and we’re positioned for long-term growth. We’re excited about what’s ahead and we’re confident in our ability to achieve at least 10% e.p.s. growth next year and average at least 10% over time.”