For a company that was posting spiralling losses, Tyson Foods was surprisingly upbeat during the group’s conference call with analysts. With a solid performance from three of its four major business units, management had cause for optimism. The question, then, is whether Tyson can turnaround the fortunes of its troubled chicken segment. Incoming CEO Donnie Smith certainly thinks so. Katy Humphries reports.
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Tyson Foods, the US meat processing giant, yesterday (23 November) said that its net losses jumped to US$537m, including a $560m charge associated with the refinancing of debt at its beef division. Excluding one time items, the company earned $23m in fiscal 2009, down from $86m the year before.
However, Tyson struck an upbeat tone in its guidance for fiscal 2010, which began on 3 October, insisting that it expects to grow profits as it improves the performance of the company’s struggling chicken business.
Tyson said that its pork and beef businesses had remained “very profitable” during the fourth quarter, even as poor economic conditions and fears over swine flu hit sales.
In beef, earnings totalled $120m, with an operating margin of about 4% this quarter after adjusting for the goodwill. Meanwhile, the company said its pork business had a “respectable” quarter, with earnings totalling $48m, or 5.5% operating margin.
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By GlobalDataMoreover, Tyson said that it anticipates sales volumes in pork and beef to benefit from an expected return of demand on the global protein market over the next twelve months.
Additionally, the group’s prepared foods business – which manufactures toppings, tortilla, crust, bacon and lunch meats – posted a leap in operating income in the fiscal. Operating income rose to $3m, with 4.7% operating margin, compared to $63m and a 2.3% margin in the comparable period of 2008.
Over the past few years, chicken has proven Tyson’s biggest challenge. Weak demand, falling prices and rising corn and other input costs have hurt profits at the group’s unit – and indeed the chicken industry as a whole.
However, the company insisted that the performance of its chicken segment has shown year-on-year improvement.
During the fourth quarter, Tyson’s chicken business posted operating income of $32m, with an operating margin of 1.2%, an improvement over the fourth quarter of the previous year when the unit saw losses of $91m and a negative 3.8% operating margin.
Indeed, Morningstar analyst Ann Gilpin said that the company’s improved fourth-quarter performance supports the company’s suggestion that profits will continue to grow throughout 2010.
“Meat producer Tyson Foods’ fourth-quarter results confirm our thesis that profitability should improve as the firm cuts costs and rolls through its unfavourable hedges,” Gilpin said
“Fourth-quarter results demonstrate how far the company has come since a year earlier, as profitability greatly improved.”
The company’s ongoing efforts to stop the losses in its chicken segment are beginning to pay off, Tyson’s newly-appointed chief executive Donnie Smith confirmed during the company’s earnings call.
A major factor behind Tyson’s optimistic view of the coming year is that it goes into the fiscal year without a significant build-up of frozen chicken inventory, which was sold off during 2009. Without this inventory backlog, Smith said that the company will be free to increase production in fiscal 2010, even if demand remains flat.
Rising production would help improve efficiency at the group’s plants, he expained.
“We need to fill up our plants and get better yield, lot efficiencies and labour efficiencies,” CFO Dennis Leatherby added.
Smith said that increased productivity will benefit margins, although he conceded that the group was still subject to the volatility that marks the global market for corn.
While Tyson relies on a number of fixed-price contracts to supply its grain, it also buys corn on the open market – playing things “pretty close to the vest” – Smith said.
“You can look at the forward curve on the futures markets, and kind of predict what the grain prices are going to look like and of course I don’t have any way to predict what the volatility will be through the year,” he added.
While Smith emphasised that the first quarter of Tyson’s financial year is usually weaker than its fourth quarter, he also revealed that, almost eight weeks into the new fiscal year, all of the group’s operating segments are profitable and running “ahead of target”.
Smith added that the group’s gains will likely be weighted towards the second half of the year and the company’s key grilling summer season.
The group also said that it expects to regain some power over pricing, as global demand is expected to pick up throughout the course of the year.
“By focusing on operational excellence we will succeed. I’m really proud of the work everyone’s doing here and I believe our team members, our customers, and our shareholders will see the benefits in 2010 and years to come,” Smith concluded.
With ongoing improvements expected to yield increasing gains at Tyson’s chicken segment, the US meat manufacturer has cause for some optimism going into fiscal 2010 – a year when, with Pilgrim’s Pride under the new ownership of JBS, the world’s largest meat processor, Tyson is likely to face fierce competition.
