Balance is a word Tyson Foods uses a lot when describing strategies for its multi-protein business. Since losing hundreds of millions of dollars in its beef business in 2006 and then in chicken in 2008, Tyson has strived to keep what it produces in balance with what its customers want.
Another key strategy is continuous improvement in its operations, from hatcheries to plants to distribution. This has allowed the company to achieve nearly $800 million in operating efficiencies over the past several years, it says.
Balance also applies to the fact that Tyson is one of the world’s largest producers of chicken, beef and pork. Its size and diversity have allowed it to weather the storms when margins in one business segment or another are squeezed. This business model means Tyson is well positioned to continue delivering profits in 2011 in line with last year’s levels, president and CEO Donnie Smith told analysts last month.
Smith made his comment after Tyson reported net income of $159 million or 42 cents per share for its fiscal 2011 second quarter ended April 2. The results were flat with the prior year’s quarter. Sales though, at $8 billion, were up 3 percent year–on-year because of a 12.3 percent increase in average selling prices. This mostly reflected a 19.6 percent increase in beef prices and an 18.4 percent increase in pork prices. Challenges ahead
Like other meat and poultry processors, Tyson faces significant challenges the rest of its fiscal year. These include: sluggish spring demand for all proteins because of bad weather; rising gasoline prices and their impact on consumer food spending; the slow economic recovery in the US; rising input costs, notably of feed for its chicken business; and overall market volatility.
“We have a wall of costs heading toward us,” Smith told analysts. Tyson expects feed costs to be $500 million higher during the second half of the fiscal year than they were in 2010. This would mean a 13 percent increase over the approximately $4 billion the company spent on grain last year, according to analyst Stephen Share, Morgan Joseph TriArtisan LLC, New York.
“Tyson is facing challenging markets and rising inputs, but it is important to put this in context of global protein markets,” Smith said.
Stable demand, limited global meat and poultry supplies and lower imports into the US means Tyson will be able to continue to push through price increases. Smith was also keen to tout what he called Tyson’s competitive advantage because of its multi-protein model, plus its prepared foods model.
“We also go to market in multiple channels,” he added. “We are multinational and, although our international businesses by and large are startups, that paints a picture of force in the future. We have a very diverse business model within each of the proteins and those business models each have a commodity and/or value-added component.
“No competitor has our product diversification,” Smith said. “We have unparalleled resources – our team and our Discovery Center – to create value for our customers through product innovation. We have had great cash flow over the past 24 months and that has allowed us to strengthen our balance sheet and invest in the business.” Optimistic for chicken
Regarding balance in chicken, Tyson’s focus is on keeping inventories at a reasonable level to be able to supply customers, Smith said in a media conference call. In addition, Tyson believes it presents a very good value proposition to its customers, from quality to on-time deliveries. All this helped Tyson Chicken achieve operating income of $37 million in the quarter. Although down from the previous year’s $114 million, the profits contrasted with the $121 million net loss incurred by Pilgrim’s Pride in the same quarter.
Noting that meat demand was sluggish this spring, Smith said recent Nielsen Co. research indicated consumers are likely to remain conservative and maintain belt-tightening behavior adopted in the early stages of the 2008-09 recession. This includes eating out less, value-conscious shopping and increased use of coupons.
Tyson is also seeing more chicken promotions at both retail and foodservice as the summer grilling season approaches, Smith said. “Chicken is still a more affordable option for people trying to feed their families in tough economic times,” he added.Retail beef and pork prices are very strong. Eventually, this should support chicken prices. Tyson’s chicken prices must increase to cover the unprecedented grain cost increases.
Tyson’s chicken margins were well below their normalized range, but Tyson expects chicken to remain profitable during the remainder of fiscal 2011. It expects to see another $200 million in operational improvements in fiscal 2011, it says. It remains even more optimistic about its beef and pork businesses the rest of the fiscal year. Beef had operating income of $94 million in the quarter. Although this was down from the record $126 million in the year earlier quarter, operating margin was still 4.6 percent and it expects to see a similar margin the rest of 2011.
Pork was Tyson’s outstanding performer in the quarter, with operating income of $146 million, vs. $69 million last year. Operating margin was 10.5 percent. Tyson says margins will remain above their normalized range the rest of 2011, although not at the 12.3 percent level of the first half of the year. The bottom line is that Tyson remains bullish about the protein markets and expects to earn about $2 per share in 2011. Steve Kay is editor and publisher of Petaluma, Calif.-based Cattle Buyers Weekly (www.cattlebuyersweekly.com).