Quarterly net income was $316 million, or $0.85 per share, dropping from $340 million, or $0.92 per share, for the same period last year. Adjusted earnings per share (EPS) was $1.27.
Except for its Pork business unit, which reported a sales decline of 1.1 percent to $1.27 billion, Tyson’s Beef, Pork, Chicken and Prepared Foods segments all saw volume increases, led by Prepared Foods, with an increase of nearly 11 percent to $2.15 billion.
“Overall, we’re pleased with the progress we made in the second quarter and the first half of the fiscal year,” said Thomas Hayes, president and CEO, during a May 7 conference call with analysts. While company officials were aware of challenging market conditions in the first quarter, some of those headwinds, most notably transportation and labor costs, were stronger than expected. Despite those challenges, Hayes said the company expects to achieve its annual adjusted earnings guidance of between $6.55 and $6.70 EPS.
“In Q1 I spoke of transportation cost challenges,” said Hayes. “Increased freight costs affected all four segments and had a net impact of about $0.14 per share for the quarter,” he said, and the impact is expected to translate to a total of $250 million in costs for the full fiscal year, about $50 million more than the forecast made during the first quarter. “While we were climbing the hill, the grade steepened,” Hayes said.
The company plans to offset the cost in the second half of the year through pricing and cost-reduction programs, including maximizing truck weights and lead times for shipments. Even after the cost-recovery plans are executed, however, the remaining gap is expected to be $155 million, or about $0.31 EPS.
“Going forward, product prices must reflect the true cost because we cannot subsidize the increased freight,” Hayes said.
Increasing labor costs continue to challenge the industry and Tyson is no exception. Hayes pointed out the company is investing in its employees by implementing programs to increase productivity, efficiency, safety and product yield. “These initiatives are an added cost now, but we expect a return on our investment over time in addition to simply being the right thing to do for our team members.”
In the company’s beef segment, adjusted operating income during Q2 was $120 million, compared to $126 million during the same quarter the prior year with an operating margin of 3.3 percent versus 3.6 percent last year. Sales Volume was up 1.8 percent, which Hayes said was a positive outcome considering the adverse weather conditions, which caused production interruptions during the quarter. A bright spot was the company’s beef exports, up 22 percent over the same period in 2017 despite chatter about backlash over trade agreements during 2018.
“Despite all the conversation about trade and tariffs, we haven’t seen a significant impact on our beef business,” Hayes said.
He added that while there is a slowing in expansion of the US cattle herd, there is enough positive momentum in the beef industry to continue into 2020. Operating margins for fiscal 2018 are forecast to be about 6 percent.
Tyson’s Pork segment’s adjusted operating income for the quarter was $79 million with a 6.2 percent margin. The drop in sales to $1.23 billion in fiscal 2018 from $1.30 billion in 2017 was attributed to Tyson’s reducing volume in response to declining livestock prices to offset decreasing demand. Like the Beef segment, unfavorable weather also had a negative impact by interrupting operations at plants and creating staffing shortages. Hog supplies are expected to be up by 2 percent to 3 percent for the year, but margins are being suppressed by several companies’ new processing facilities coming online, which will likely increase the availability of hogs in the fall. Operating margin in the Pork segment is expected to be about 8 percent in 2018.
The company’s Chicken segment reported operating income of $288 million with an operating margin of 9.7 percent. Sales of $2.95 billion represented a 2 percent volume increase over the previous year’s quarter of $2.80 billion. The industry-wide decrease in hatchability rates also had a negative impact on Tyson, with continued demand for its chicken creating some supply inefficiencies. Nevertheless, operating income was up nearly 15 percent year to date compared to 2017, which Hayes said gives the company reason to expect operating margin of 10 percent for 2018, which he said is momentum that will carry into 2019.
Tyson’s Prepared Foods segment reported adjusted operating income of $222 million with a 10.3 percent margin for the quarter. Sales topped $2.14 billion in Q2 compared to $1.75 billion in the previous year’s same period. The nearly 23 percent volume increase was attributed primarily to the performance of its AdvancePierre Foods business unit. Hayes pointed out the segment also reached the milestone of integration of AdvancePierre and Original Philly businesses during the quarter, allowing the company to realize synergies and savings. The segment is on track to deliver an 11 percent margin for the year.