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Tyson Foods' outlook clouded by feed, freight inflation - Food Business News

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SPRINGFIELD, ARK. – Tyson Foods’ fiscal 2021 first quarter was overshadowed by the impact high feed and freight costs may have on the business’ outlook later in the year.

During a Feb. 11 presentation to securities analysts to discuss quarterly results, management highlighted the inflationary pressures it is facing, with the spot prices of corn and soybeans rising 28% and 26%, respectively, during October 2020 to December 2020. Refrigerated freight costs rose 9% during the year.

Since October, the March futures contracts for corn and soybeans have risen 40% and 34%, respectively. Tyson Foods is projecting refrigerated freight contract rates will be 10% above 2020 this year.

“Clearly, an important headline this quarter is the sharp rise in grain costs,” said Stewart F. Glendinning, chief financial officer, during a conference call with analysts. “Grain futures for 2021 have continued to strengthen due to diminished stocks to use expectations for corn and soybeans and strong export demand, particularly from China. We expect hedging and pricing actions will allow our team to mitigate some grain cost impacts moving ahead. But at this time, it is difficult to estimate just how much can be mitigated through those actions.

“As a reminder, a 10¢ per bu move in corn price or a $10 per ton move in soybean meal translates into an approximate change of $25 million in cost of goods sold.”

The company’s two business units that may be most affected are Chicken and Prepared Foods. Cattle and hog futures have both moved higher since October, Mr. Glendinning said, and the company is working to minimize the impact of rising raw material costs to the Prepared Food business. At current grain prices, it’s expected Chicken unit operating margins will be lower this year when compared to fiscal 2020.

Net income for the quarter ended Jan. 2 was $467 million, equal to $1.31 per share on the common stock, and a decline when compared to the same period of the previous year when the company earned $505 million, equal to $1.42 per share.

Sales fell slightly, from $10.8 billion during the first quarter of fiscal 2020 to $10.5 billion this quarter.

Tyson Foods’ Beef business unit had a stellar quarter, with sales rising to $4 billion from $3.8 billion the year prior. Beef operating income jumped to $528 million from $342 million in 2020.

Mr. Glendinning said strong domestic and export demand for beef pushed up sales, and the operating income improvement was due to higher volumes as the company lapped the prior year impact of a fire at a beef plant that affected production.

Chicken business unit sales fell to $2.8 billion from $3.3 billion the year before, and the unit recorded an operating loss of $216 million vs. an operating profit of $57 million in 2020. The loss was attributable to “the recognition of legal contingency accrual” and production inefficiencies, according to the company.

To improve unit performance, the company outlined three steps it is taking, including increasing pay to attract workers and reduce turnover, optimizing process flow in some plants, and improving order fulfillment rates.

Pork unit sales rose to $1.44 billion from $1.38 billion the year before. Operating income fell to $116 million from $191 million.

“First-quarter results show a softening relative to the same period last year,” Mr. Glendinning said.

The operating income decline was attributed to production inefficiencies, the temporary idling of a plant and COVID-19-related operating costs.

Prepared Foods sales ticked down from $2.14 million to $2.11 million during the quarter. Unit operating income surged to $266 million from $158 million.

“This substantial improvement in profitability was driven by strong retail performance, lower commercial spending as a result of continued strength in retail demand and lapping of issues experienced as a result of our ERP rollout last year,” Mr. Glendinning said. “Offsetting these improvements were higher costs related to commodity price increases and other input cost inflation, along with covered related costs and impacts on our manufacturing efficiency. As demand gradually normalizes post-COVID, we expect higher levels of commercial spending in order to meet our category growth objectives and negative mix impacts from higher foodservice volumes.”

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