Tyson Foods’ Quarterly Income Rises 40% to $568 Million
- Record cash flows from operations of $864 million
- Sales increase of 4% to approximately $10.1 billion
- Record third quarter Adjusted EPS of $0.80, up 7% compared to $0.75 in prior year
- Overall adjusted operating margin was 5.6%, with the chicken and prepared foods segments posting operating margins of 11.4% and 10.9%, respectively
- Captured $87 million in total synergies during the third quarter
- Decrease of $11 million related to the legacy Hillshire Brands Company plant fire insurance proceeds (net of ongoing costs)
- Increase of $1 million related to merger and integration costs.
- Chicken. Sales volumes grew as a result of stronger demand for chicken products and mix of rendered product sales. Average sales price decreased as feed ingredient costs declined, partially offset by mix changes. Operating income increased due to higher sales volume and lower feed ingredient costs, partially offset by disruptions caused by export bans. Feed costs decreased $125 million and $310 million during the third quarter and first nine months of fiscal 2015, respectively.
- Beef. Sales volume decreased due to a reduction in live cattle processed. Average sales price increased due to lower domestic availability of beef products. Operating income decreased due to unfavorable market conditions associated with a decrease in supply of approximately 8%, which drove up fed cattle costs, export market disruptions, the relative value of competing proteins and increased operating costs.
- Pork. Sales volume decreased due to the divestiture of the Heinold Hog Markets business in the first quarter of fiscal 2015. Excluding the impact of the divestiture, sales volume grew 2.9% and 2.6% for the third quarter and first nine months of fiscal 2015, respectively, driven by better demand for pork products. Live hog supplies increased, which drove down livestock cost and average sales price. Operating income decreased due to compressed pork margins during the third quarter of fiscal 2015 caused by a decline in exports and excess domestic availability of pork products.
- Prepared Foods. Sales volume increased due to incremental volumes from the acquisition of Hillshire Brands. Average sales price increased primarily due to better product mix, which was positively impacted by the acquisition of Hillshire Brands. Operating income improved due to an increase in sales volume and average sales price mainly attributed to Hillshire Brands, as well as lower raw material costs of approximately $170 million and $200 million for the third quarter and first nine months of fiscal 2015, respectively, related to the company’s legacy prepared foods business. Additionally, profit improvement initiatives and Hillshire Brands synergies positively impacted prepared foods operating income by $79 million and $204 million for the third quarter and first nine months of fiscal 2015, respectively.
- International. Sales volume decreased due to the sale of Tyson’s Brazil operation during the first quarter of fiscal 2015 and weak demand in China, partially offset by stronger demand in Mexico. Average sales price decreased due to supply imbalances associated with weak demand in China and currency devaluation in Mexico. Operating results improved due to the sale of the Brazil operation and better market conditions in Mexico, partially offset by challenging market conditions in China.
- Chicken. Current USDA data shows an increase in chicken production around 3% in fiscal 2016 compared to fiscal 2015. However, more recent data indicates a greater increase in supply, which could outpace the demand. Based on current futures prices, the company anticipates lower feed cost in fiscal 2015 compared to fiscal 2014 of approximately $400 million, and figures on similar feed costs in fiscal 2016 compared to fiscal 2015. Many of Tyson’s sales contracts are formula-based or shorter-term in nature, but there may be a lag time for price changes to take effect.
Additionally, disruptions related to export bans are expected to continue into early fiscal 2016. For fiscal 2015, the company believes the chicken segment's operating margin should be approximately 12%, based on the strong demand and pricing environment. For fiscal 2016, it is expected that the segment's operating margin should be at or above the top end of its normalized range of 7-9%.
- Beef. Tyson anticipates industry fed cattle supplies to increase around 1% in fiscal 2016 compared to fiscal 2015. Although it is generally expected that there will be adequate supplies in regions where the company operates plants, there may be periods of imbalance of fed cattle supply and demand. It is believed that the beef segment should be near break-even for fiscal 2015 and profitable, but below its normalized range of 2.5%-4.5% for fiscal 2016.
- Pork. Industry hog supplies are likely to increase around 3% in fiscal 2016 compared to fiscal 2015. Operating margin will be in its normalized range of 6-8%.
- Prepared Foods. As the company proceeds with the integration of Hillshire Brands, it expects to realize synergies of approximately $300 million in fiscal 2015, more than $400 million in fiscal 2016 and more than $600 million in fiscal 2017, from the acquisition as well as the profit improvement plan for legacy prepared foods business. The majority of these benefits will be realized in the prepared foods segment. In fiscal 2015, lower raw material costs of approximately $320 million are expected related to legacy prepared foods business, and the segment's adjusted operating margin is likely to be approximately 8% for fiscal 2015. In fiscal 2016, the company should reach the low-end of its new range of 10-12%, which is a full year earlier than originally planned thanks to the continued realization of the value of its branded portfolio and benefit from synergies from the Hillshire acquisition and operational improvements within the legacy prepared foods business. In addition, lower raw material costs of approximately $250 million related to the Prepared Foods segment in fiscal 2016 are likely.
- International. The sale of the Mexico operation closed on June 29, 2015, in the fourth quarter of fiscal 2015. Tyson received proceeds of $400 million, subject to potential working capital and net debt adjustments. It anticipates a gain, net of income tax impacts, on sale of approximately $80 million, subject to additional adjustments. The international segment's adjusted operating loss is expected to improve by more than $25 million compared to fiscal 2014, and similar results are likely in fiscal 2016 compared to fiscal 2015.
- Sales. Tyson expects sales to approximate $41 billion for fiscal 2015 and fiscal 2016, respectively.
Strong chicken sales and solid returns in the prepared foods category added up to record adjusted operating Income of $568 million for Tyson Foods during the third quarter of fiscal 2015. That was up 40% over the same period in 2014. Operating income for the first nine months of 2015 amounted to $1.685 billion, compared to $1.180 billion during the first three quarters of the previous year.
Among third quarter highlights the Springdale, Arkansas, USA-headquartered company reported to stockholders on August 3 were:
"The prepared foods and chicken segments performed very well in the fiscal third quarter, while managing numerous challenges," said Donnie Smith, president and chief executive officer of Tyson Foods. "The strong results in these two segments demonstrate the benefits of our branded, value-added product portfolio and multi-channel, multi-protein business model by partially offsetting soft results in the beef and pork segments.
The prepared foods segment features a wide variety of frozen products ranging from retail packs of Tyson Grilled & Ready Chicken Breast Strips, Gluten Free Chicken Nuggets, and Any’tizers Boneless Chicken Wyngs snacks, to Jimmy Dean brand Bacon, Egg and Cheese Biscuit Sandwiches and Original Pancake Sausage Bites, to State Fair Classic Mini Corn Dogs.
Smith pointed out that Tyson’s beef business suffered from export market disruptions that had an $84 million impact on third quarter results.
“We continue to see very high cattle costs at a time when product values and export issues are making it difficult to realize expected revenue levels in this spread business,” said the chief executive officer. "While we are pleased with the performance of our business overall, unless beef market conditions improve rapidly, we will not achieve our previous guidance of $3.30-$3.40 adjusted earnings per share. As a result, we are modifying fiscal 2015 guidance to $3.10-$3.20 adjusted EPS.”
Adjustments to Segments for Q3
Prepared foods operating income was adjusted for the following:
Other adjusted operating income increased by $15 million related to merger and integration costs.
Segment Results Summary
Outlook for 2016
In fiscal 2016, Tyson expects US domestic protein production (chicken, beef, pork and turkey) to increase approximately 3% from fiscal 2015 levels. Grain supplies are likely to decrease in fiscal 2016, which should result in higher input costs as well as increased costs for cattle and hog producers. The following is a summary of the outlook for each of the company’s segments, as well as an outlook on sales.