Tyson Foods, JBS Pilgrim's Pride primed for competition

During the past week Tyson Foods and Pilgrim’s Pride reported results for their most recent quarters. Since these titans of the protein industry collectively dominate U.S. broiler production, their performance and relative success provides a valuable insight into the current state of production and future profitability.
Integrators in the U.S. are benefiting from a recovering economy and stable costs for feed, fuel and labor. Judicious cutbacks in late 2008 and 2009, both intended and forced, have restored the equilibrium of domestic supply to demand. Concurrently, exports representing 15% of production volume have been adversely impacted by trade barriers imposed by the two largest importing nations.
For the second quarter of FY 2010, ended April 3, Tyson Foods reported net income of $159 million ($119 million loss in Q2 FY 2009) on sales of $6.916 billion ($6.307). The Chicken Segment (broilers) representing 36% of company sales, generated an operating margin (contribution) of $114 million ($46 million loss) on $2.491 billion turnover ($2.360 billion). For Q2 the operating margin for Tyson broiler operations attained 4.5% of sales. Tyson attributed the improvement in operating results to enhanced unit revenue from changes to their market mix and replacing some exports and low-value products with higher-margin items. Operating results were improved by appropriate commodity risk management in comparison to the corresponding quarter in FY 2009 which incurred a loss of $63 million on injudicious forward ingredient purchases. The results for Q2 included an escalation in feed costs amounting to $19 million compared to Q2 of FY 2009.
The consolidated balance sheet for the period ending April 3 shows total current assets of $4.229 billion ($4.375 billion) and current liabilities of $1.917 billion ($1.9913 billion). Long-term debt was reduced 11.3% from $3.258 billion as of October 3, 2009 to $2.889 billion for the current period. Capital expenditure amounted to $264 million during the first two quarters of FY 2010 compared to $160 million in the first half of FY 2009.
Pilgrim’s Pride which is now undergoing extensive restructuring since acquisition by JBS of Brazil reported on their first quarter for FY 2010 ended March 28. This company is essentially a pure broiler operation and results can be compared with the Tyson Food’s Chicken Segment or soon to be announced results from Sanderson Farms. Pilgrim’s Pride posted a net loss of $45.5 million ($58 million loss in Q1 of FY 2009) on sales of $1.643 billion ($1.698 billion). Non-recurring restructuring charges for Q1 amounted to $35.8 million.
Even after excluding these expenditures the company generated a 0.2% operating margin against sales compared to the Tyson Foods value of 4.5%. The Pilgrim’s Pride balance sheet shows current assets of $1.195 billion ($1.367 billion, September 2009) and current liabilities of $657.1 million ($508.2 million).
Commenting on their Q1 release, Don Jackson, president and CEO of Pilgrim’s Pride stated “while I am encouraged by the progress we have made in several areas of our business, our overall performance in the first quarter of 2010 was below our expectations.” The reasons provided in the narrative accompanying the figures implicate an adverse $11 million grain hedge, lower unit revenue for dark meat, low unit revenue for commodity chicken associated with delays in ramping up further processing and suboptimal efficiency.
Pilgrim’s Pride has announced that they intend to restart the Douglas, Ga., plant in January 2011 followed by two other mothballed operations in mid-2011 and early 2012. The Sanderson Farms New Kinston, N.C., operation will come on-line in late 2010 and this company has announced a second complex in western North Carolina.
Intentions to expand have prompted Tyson Foods to express concern over current trends despite the relatively short supply situation arising from recent cutbacks. Don Smith, CEO of Tyson Foods, stated in a recent conference call that “as we grow, we’ll look at forward demand, then determine inventory levels necessary to fill that demand and then we will adjust our supply plans to optimize margins by either buying the parts we need, or by adding to our production base.”
Tyson is no longer competing with a faltering giant in Pilgrim’s Pride. They are now facing the subsidiary of a multinational protein power of equal stature. Parent company JBS has assets of over $8 billion, with sales of $15 billion and a profit of $500 million in FY 2008. With little long term debt ($1.5 billion) and considerable managerial acumen JBS will restructure and revitalize Pilgrim’s Pride to represent a formidable competitor to established U.S. integrators.