Tyson Foods, Nation's Largest Meat Company, Expects Further Price Increases

By Lisa Baertlein and Martinne Geller

Aug 6 (Reuters) - Tyson Foods Inc reported weaker-than-expected quarterly sales and earnings and lowered its full-year outlook as higher meat prices dented U.S. demand, and its shares fell 4.5 percent.

The nation's largest meat company predicted further price increases, as the worst drought in more than a half-century pushes up prices for feed corn, but said its chicken business would remain profitable next year.

Tyson's beef and pork segments have been experiencing "very difficult market conditions" that will result in lower-than-expected 2012 profit, Chief Executive Donnie Smith said, adding that rising grain costs would hurt earnings next

"While we ultimately expect to pass along rising input costs, these costs, coupled with continued soft demand, are likely to pressure earnings in 2013," Smith said.

J.P. Morgan analyst Ken Goldman called the comments about Tyson's chicken business -- which produces more operating income than other units -- a "significant upside surprise" to his expectations.

"We think Tyson's optimism here should be interpreted as the most important part of the release, and a positive for the
stock," Goldman said in a research note. He has a neutral rating on the shares.

Tyson said its beef segment should remain profitable, but margins could be below the typical range. Margins in the pork segment should be at or above the normal range, while prepared foods' margins should be in the normal range, it said.


The U.S. drought is making meat more expensive and will test demand for chicken, beef, pork and possibly even turkey as consumer prices are expected to climb, executives said.

Sales of beef and pork through grocery stores and other retail outlets were down in the latest quarter, while chicken
sales were flat.

Sales of chicken at restaurants, cafeterias and other food service customers held up during the summer, boosted somewhat by fast-food restaurants featuring chicken on the menu. Beef demand
was softer, but was better than pork, they said.

U.S. shoppers have remained frugal in a still-recovering
economy. Also, domestic demand for ground beef took a hit in the
spring following a controversy over a filler product critics
called "pink slime."

Shoppers appear to be buying less expensive cuts within meat
categories, rather than trading down from beef to chicken or
other segments, Tyson officials said.

While retailers and restaurants are trying to avoid raising
prices, Tyson executives said increases are virtually inevitable
because producers will cut meat supplies if they are not making
profitable sales.

"Supplies at some point in time are going to contract
because the commodity producer has to have a viable business,"
Chief Operating Officer Jim Lochner said.

"You're going to see increased prices," he said.


Tyson said net profit tumbled to $76 million, or 21 cents
per share, for the fiscal third quarter ended June 30, from $196
million, or 51 cents per share, a year earlier.

Excluding a $167 million charge for the early extinguishment
of debt, earnings were 50 cents per share. On that basis,
analysts on average were expecting 54 cents, according to
Thomson Reuters I/B/E/S.

Sales rose to $8.31 billion from $8.25 billion a year
earlier. Analysts were expecting $8.72 billion.

The company said it now expects 2012 sales of $33 billion,
$1 billion less than its previous estimate. It expects 2013
sales of $35 billion due to price increases related to a likely
decline in the U.S. meat supply and higher raw material costs.

Analysts were expecting sales of $34.02 billion for 2012 and
$35.40 billion for 2013.

The company also lowered its forecast for capital spending
this year, saying its ongoing projects will not be completed.

After buying 3.9 million company shares in the third
quarter, executives said they would reduce share repurchases
until they have better visibility into Tyson's working capital

Tyson shares fell 85 cents to $14.55 in midday trading on
the New York Stock Exchange.