Tyson Foods, Inc. (NYSE:TSN) Q2 2018 Earnings Conference Call - Final Transcript
May 07, 2018 • 09:00 am ET
from home, we serve consumers wherever they eat. With breadth and depth that give us unmatched insights into consumer behavior, we are partnering now more than ever with our customers to drive growth together.
We're innovating across every part of Tyson Foods from state-of-the-art technology in robotics and automation to transforming our information systems from analog to digital. We're investing in new disruptive technologies through Tyson Ventures and delivering best-in-class new products in the fastest-growing categories in food. We're making agility contagious in each of our segments as we gain momentum against our Financial Fitness Program. Across the business, we achieved $65 million in savings for the quarter and $102 million for the first half of fiscal year. We're on track to deliver at least $200 million in fiscal 2018 and we're building momentum for fiscal 2019.
In Q1, I spoke of transportation cost challenges. Increased freight costs affected all four segments and had a net impact of about $0.14 per share for the quarter. Also, as I mentioned on our last call, we took early action in the form of pricing to mitigate the impact to our margins. While we were climbing the hill, the grade steepened. And now, we're estimating the full year impact to be roughly $250 million. We'll be working to recover the increase for the remainder of the year through pricing and additional cost reduction programs such as improving truck weights, lead time and continuous improvement projects. We're expecting the cost impact in Q3 to decline. And in Q4, we should be close to full recovery. However, the gap on cost recovery for the fiscal year is estimated to be $155 million or about $0.31 in EPS.
Our guidance includes these variances and assumes no additional cost increases. Going forward, product prices must reflect the true cost, because we cannot subsidize the increased freight. In addition to freight, we're seeing increased labor costs as we invest in our team members to increase productivity, efficiency and yield. We've already had positive results from our programs to reduce team member turnover and improve both safety and productivity. These types of 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.
So, as I move into my commentary on each segment, please note that references to operating income and operating margin will be on an adjusted basis. In the Beef segment in Q2, we generated operating income of $120 million with a 3.3% operating margin. Volume was up 1.8% and that's a good outcome, especially considering the poor weather conditions which prevented us from running some of our plants during the quarter. Revenue increased 5.6% as domestic and international demand for US Beef remained strong. Our Beef exports were up 22% versus the same quarter last year and despite all the conversation about trade and tariffs, we haven't seen a significant impact on our Beef business.