story by Kim Souza
ksouza@thecitywire.com
Editor's note: Story updated with changes and additions throughout.
A more than $900 million gain in prepared food segment revenue helped push fiscal third quarter net income for Tyson Foods up to $343 million, up 31.9% compared to the same period in 2014. Quarterly revenue was $10.071 billion, up more than 40% compared to the $9.682 billion during the same quarter in 2014.
However, the big gains in the quarterly report were below Wall Street expectations. The per share earnings of 83 cents missed the consensus estimate of 93 cents per share. The consensus estimate on revenue was $10.3 billion.
Wall Street reacted strongly to the meat giant’s earnings miss, but more so to its reduced 2015 guidance amid challenging beef climate and poultry export bans which hindered overall chicken sales.
Tyson Foods shares (NYSE: TSN) tumbled more than 9% in the heavy trading following Monday’s (Aug. 3) earnings miss. The stock price fell more than $4 to $40.21 in the mid-morning session. The share price has ranged from a $45.10 high to a low of $36.12 over the past 52-week period. Since the first of this year Tyson shares had gained nearly 11% against a largely flat market. Most of the gain was given back on Monday.
However, Tyson Foods’ President and CEO Donnie Smith told analysts and media on Monday that this marked the ninth consecutive quarter of earnings growth for Tyson Foods.
“We’ve positioned ourselves well for fiscal 2016 and we’re confident in our ability to achieve at least 10% annual EPS (earnings per share) growth over time,” Smith said.
Third quarter financials ending June 30 include the combined businesses of Tyson Foods and Hillshire Brands, which were operated as separate companies in that period of 2014 as the merger was not completed until the fourth quarter of 2014.
“The Prepared Foods and Chicken segments performed very well in the fiscal third quarter while managing numerous challenges,” Tyson Foods’ President and CEO Donnie Smith said in the earnings report released early Monday (Aug. 3). “The strong results in these two segments demonstrate the benefits of our branded, value-added product portfolio and multi-channel, multi-protein business model by partially offsetting soft results in the Beef and Pork segments.”
For the first three fiscal quarters of Tyson’s year, net income totaled $1.685 billion, better than the $1.18 billion during the same period of the previous fiscal year. Total revenue during the first three fiscal quarters hit $30.687 billion, up 12.34% compared to the $27.475 billion during the same period of the 2014 fiscal year.
The company also reduced its full-year earnings guidance based on “export market disruptions” in its beef segment. Previous guidance was in the $3.30 to $3.40 per share range, with new guidance adjusted downward by 20 cents per share.
BEEF TROUBLES
The beef segment posted an operating loss of $7 million during the third fiscal quarter, a wide swing from the $101 million operating income posted in the same quarter of 2014.
• Beef Revenue
Q1-Q3 2015: $12.826 billion
Q1-Q3 2015: $11.748 billion
• Operating income
Q1-Q3 2015: -$33 million (loss)
Q1-Q3 2015: $194 million
"Our beef business suffered from export market disruptions that had an $84 million impact on third quarter results, and we continue to see very high cattle costs at a time when product values and export issues are making it difficult to realize expected revenue levels in this spread business,” Smith noted in the report.
Smith saud prior to the Memorial Day holiday some of the company’s export customers notified them they couldn’t take receipt of the beef they ordered. He said this happened as a result of the backlog of beef held up in the West Coast port shutdown months before. With beef price topping out and heading downward, Smith said he made the decision to sell the beef elsewhere at reduced prices. Some of the cuts went into ground meat which would have brought a premium in Korea as short ribs.
“We are glad that we sold the beef elsewhere because prices continued to decline and we are not sitting on inventories. This decision did cost us in the quarter, but when metrics improve, we sit ready (to) run ahead with production increases and not worry about beef inventory stockpiles,” Smith explained in the earnings call.
POULTRY PROFITS
• Chicken Revenue
Q1-Q3 2015: $8.366 billion
Q1-Q3 2015: $8.327 billion
•Operating income
Q1-Q3 2015: $996 million
Q1-Q3 2015: $682 million
Smith said sales volumes grew as a result of stronger retail demand for chicken products in the quarter. The chicken segment also is benefiting from lower feed costs by $125 million in the quarter and $310 million saved in the first three quarters of fiscal 2015, against last year.
“For fiscal 2015, we believe our chicken segment's operating margin should be approximately 12% based on the strong demand and pricing environment. This compares to a normalized range of 7% to 9%,” he said.
Smith said export disruptions related to Avian Influenza have been an issue, particularly in Arkansas production. But even so, he expects the chicken segment will finish the year strong.
He said the company’s innovation team continues to look for ways to use leg quarters, the main export item, in food service offerings. He said finding alternative uses for leg quarters can help insulate against export bans each time a bird flu case is reported.
He reiterated that the company is buying breast meat on the open market to the tune of 90 truck loads a week in the recent quarter to help fill further-processed orders. This helps the company keep from stockpiling leg quarters in the freezer while some export markets are closed.
In the past few years, Smith said Tyson has been able to reduce its exposure to leg quarter price volatility by 50% and it will continue to do so. Smith said Tyson’s chicken production for the year will be flat against 2014, while demand is expected to grow 3%.
PREPARED FOODS WINNER
• Prepared Foods Revenue
Q1-Q3 2015: $5.814 billion
Q1-Q3 2015: $2.669 billion
•Operating income
Q1-Q3 2015: $438 million
Q1-Q3 2015: -$13 million (loss)
Smith could barely contain his excitement about financial performance in the company’s prepared foods segment after having merged in Hillshire Brands in late 2014. As expected, sales growth was a given due to the acquisition, but the operating income was hoisted higher from a $170 million savings in raw material costs in the quarter, and $200 million for the nine-month period.
He said synergies realized in the quarter also resulted in $79 million of incremental operating income. For the nine months, the synergies raised operating income by $204 million. For the full year Tyson expects synergies of $300 million from the Hillshire merger, up from the previously expected $250 million. They expect synergies will exceed $400 million in 2016.
Analysts have said this segment is important to Tyson’s long term growth strategy as it continues to move away from a commodity meat packer into a value-added food company and house of branded meats.
LEANER PORK
• Pork Revenue
Q1-Q3 2015: $3.951 billion
Q1-Q3 2015: $4.677 billion
• Operating income
Q1-Q3 2015: $285 million
Q1-Q3 2015: $356 million
Tyson’s pork segment saw reduced sales primarily related to the divestiture of its Heinold Hog Markets business earlier this year.
“Excluding the impact of the divestiture, our sales volume grew 2.9% and 2.6% for the third quarter and first nine months of fiscal 2015, respectively, driven by better U.S. demand for our pork products,” Smith said in the call.
He said increased hog supplies reduced sales prices as there were too many piggies going to market in recent weeks. This helped to compress pork margin during the recent quarter. Smith said weaker Asian economies and a strong U.S. dollar are also hindering pork exports. This is expected to continue at least for the short term.
INTERNATIONAL STALLED
•International Revenue
Q1-Q3 2015: $771 million
Q1-Q3 2015: $1.020 billion
•Operating income
Q1-Q3 2015: -$28 million (loss)
Q1-Q3 2015: -$73 million (loss)
Tyson Foods’ international segment posted smaller revenue amid growing losses as it recently completed the sale of its Brazil operations and Mexican business to competitor Pilgrim’s Pride.
Smith said demand remains weak in China which has kept the company’s expansion there on hold for much of this year. He is not yet seen sufficient signs that warrant moving ahead in China.
CONSUMER TRENDS
Smith said consumers are eating more chicken and pork this summer than burgers and steaks at least according to sales metrics at grocery retail.
“In the past four weeks beef pricing moved up 11% to 12%, volume was down. In June even though consumers had a little more money in their pocket from lower gasoline prices they weren’t buying beef,” Smith told The City Wire in the media call on Monday.
He said chicken sold at retail was up in 1% in volume and 2% in pricing, pork was up 13% in volume and priced 10% lower. With that, Smith said the price spread between fresh chicken and fresh pork narrowed to 55-cents a pound in the recent quarter, down from the prior $1 a pound.
Smith said consumers are opting to eat out a little more given the added money in their pocket. He said the two largest winners in the restaurant category are quick service Mexican chains and quick service chicken venues.
He expects with back-to-school just around the corner that frozen fully cooked products will rebound after a lull this summer. Smith said fully-cooked frozen products often become center of the plate during the school months as parents look for convenient dinner options.
SUPPORTING STOCK
Tyson Foods continues to have a strong balance sheet and more than $1.7 billion in cash liquidity at the end of the quarter. Tyson Foods’ Chief Financial Officer Dennis Leatherby said the company was able to reduce its total debt by $688 million in the third quarter and still keep more than the $1.2 billion cash threshold.
He said the added synergies coming a full quarter ahead of schedule also puts the company in a position to begin buying back stock in the fourth quarter. Tyson Foods halted its stock repurchase plans following the $8.5 billion acquisition of Hillshire Brands.
Leatherby said with the share price being a value at this time, Tyson will begin acquiring shares and also look at dividends as a way to support its investor base.
Jim Cramer, CNBC Mad Money Host, was high on Tyson Foods ahead of Monday’s earnings. He said the company over promised and under-delivered and investors were backing off in the interim.