Tyson sees demand for chicken, challenges with beef

03-Aug-2015 - Last updated on 06-Aug-2015 at 13:02 GMT

Lower feed prices combine with chicken and prepared foods sales boost Tyson Food’s third quarter, despite weaker beef returns.

The company reported its third quarter (Q3) financial results on Monday. The net income attributable to Tyson was $343m for the quarter, an improvement from $260m in 2014 and the net income for the nine months increased to $962m, the poultry processor said.

And, looking into next year, Tyson said it expects US chicken, beef, pork and turkey production to jump around 3% from fiscal 2015 levels.

“Grain supplies are expected to decrease in fiscal 2016, which should result in higher input costs as well as increased costs for cattle and hog producers,” said the meat processing giant.

Expected outlook

The company is projecting revenues of about $41bn for the current fiscal year, a jump of more than 9% from fiscal year 2014, said Dennis Leatherby, Tyson CFO and executive vice president, on a call with analysts. Similar results were also anticipated for 2016, hinging on profit from prepared foods and Hillshire Brands synergies.

“Our chicken and prepared foods segments have driven great results so far in fiscal 2015,” he said on the call. “However, as a result of the unanticipated export disruptions experienced in our beef segment in Q3 and its continued margin pressure, we have modified our guidance to $3.10 to $3.20 adjusted EPS [earnings per share] for fiscal 2015. While not what we previously anticipated, it still represents growth of 5% to 9% over fiscal 2014 despite the headwinds we faced.”

Stephens’ based analysts said they were reducing their EPS estimates for Tyson for both 2015 and 2016.

The change for 2015, they said, is based on underperformance for the quarter and a drop in profits for the beef segment.

However, the equity group said the company is placed to capitalize on a strong market for protein as the chicken sector offers the ability to provide consistent earnings, while the pork and beef areas should see some improvement from expected greater livestock availability.

A closer look at the numbers

The reported operating margin for Tyson’s chicken segment was 11.4%, with the sales volume improving about 2.9% for the quarter.

Higher sales volume and lower feed prices reportedly contributed to the operating income improvement. Feed prices declined about $125m during the quarter and $310 for the first nine months of the fiscal year, reported the company.

"The prepared foods and chicken segments performed very well in the fiscal third quarter while managing numerous challenges," said Donald Smith, president and CEO of Tyson Foods.

The strong results in these two segments partially offset soft results in the beef and pork segments, he added.

Pork production showed a drop in sales volume when compared to the same period in 2014, but, the decrease stemmed from the divestiture of the Heinold Hog Markets business at the start of the financial year, said Smith on the call.

Margins lowered because of an unexpected increase in pork availability in the US.

Tyson’s beef segment reported a decrease in the volume sold from 2014 and an increase in average sales price. There was a loss of about $84m in the third quarter when Tyson sold product to alternative markets instead of building inventory after export problems started, said Smith on the call. And there was an erosion of the feedlot margin when the pace of cattle marketing was slowed by about 30 days.

Both problems are anticipated to be temporary, he said.

Outlook

For poultry, based on current futures prices, the company anticipates lower feed cost this year compared to 2014 of about $400m with that trend to continue into 2016.

“For fiscal 2015, we believe our chicken segment's operating margin should be approximately 12% based on the strong demand and pricing environment. For fiscal 2016, we believe our chicken segment's operating margin should be at or above the top end of its normalized range of 7-9%,” said Tyson.

It expects industry fed cattle supplies to increase around 1% in 2016 from current levels.

“We believe our beef segment should be near break-even for fiscal 2015 and profitable but below its normalized range of 2.5%-4.5% for fiscal 2016,” said the group.

Meanwhile, the company forecasts that hog supplies will rise around 3% in 2016 on 2015 figures.

“For fiscal 2015 and 2016, we believe our pork segment's operating margin will be in its normalized range of 6-8%.”