Strong Q4 propels Tyson Foods to record year

Lower feed costs and good protein demand boost profits.

Lower feed costs and strong animal protein demand boosted profits for Tyson Foods’ fourth quarter as the company’s Chicken and Beef segments experienced exceptional returns.

Fourth-quarter highlights included a net income of $394 million, up from $391 million during the same period last year.  The company’s earnings per share (EPS) were $1.07, 4% above the fourth quarter of 2016. Adjusted EPS was $1.43, up 49% from last year.

“The fourth quarter was a strong finish to another record year,” Tyson president and chief executive officer Tom Hayes said. “We delivered well over our goals of at least 4% operating income growth, EPS growth in the high single digits and 3% volume growth in value-added products and expect to meet or exceed these goals again in fiscal 2018.”

Hayes said the Beef and Pork segments delivered outstanding returns for the quarter and for the year, generating significant cash to fuel investments in the Chicken and Prepared Foods segments.

“For the 2017 fiscal year, our Core 9 product lines and our total retail business continued to outpace total food and beverage growth in both dollars and volume. At foodservice, our Focus 5 products are growing at six times the rate of the broadline distribution channel," he said.

The company reported net income for fiscal 2017 of $1.77 billion, slightly higher than for fiscal 2016.

“Fiscal 2017 was a year of great change, and despite some challenges, our team remained focused on the long term by keeping consumer relevance, customer growth and shareholder value creation at the forefront,” Hayes said. “Not only did we generate exceptional financial results; we also strengthened the foundation needed to accelerate growth through several initiatives. We refined our strategy and put in place a new management team to implement it. With a renewed focus on protein packed brands, we initiated the divestiture of some non-protein businesses.”

Tyson acquired and is successfully integrating AdvancePierre Foods to expand its manufacturing capabilities in sandwiches and other prepared foods and to increase its presence in the convenience store channel. Additionally, it repurchased roughly $650 million in shares before the AdvancePierre acquisition and then redirected cash flow and proceeded to pay down more than $600 million of debt.

Hayes reported that Tyson also announced a restructuring and cost-cutting program to increase agility as an organization. To cap off a great year, he said the board of directors increased the dividend by 30 cents to $1.20 per share annually -- an increase of 33%.

“Fiscal 2018 is off to a great start, and we’re currently expecting adjusted earnings growth of 7-10% to $5.70-5.85 per share. We’re confident in our ability to realize in excess of $200 million in net savings this fiscal year from our Financial Fitness program, including AdvancePierre synergies," Hayes said.

He continued, “We’re planning capital expenditures of $1.4 billion in fiscal 2018 while we continue reducing debt to reach our net debt to EBITDA (earnings before interest, taxes, depreciation and amortization) target of around 2x, which we anticipate will happen by the third quarter. When we reach that target, we intend to resume repurchasing our shares.”

Hayes said Tyson’s plan is to grow the business year after year through differentiated capabilities, deliver ongoing financial fitness through continuous improvement and sustain the company as it sustainably feeds the world with the fastest-growing portfolio of protein-packed brands.

Segment results

In Tyson’s Beef segment, the sales volume increased due to improved availability of the cattle supply, stronger domestic demand for its beef products and increased exports.

“Average sales prices increased as demand for our beef products and strong exports outpaced the increase in live cattle supplies,” the company reported. “Operating income increased due to more favorable market conditions as we maximized our revenues relative to the decline in live fed cattle costs, partially offset by higher operating costs.”

Sales volume also increased in the Pork segment for fiscal 2017 due to strong demand for pork products and increased exports, Tyson said.

Although sales volume decreased in the fourth quarter of fiscal 2017 as a result of balancing supply with customer demand, the average sales price increased as demand for pork products and strong exports outpaced the increase in live hog supplies.

“Operating income increased as we maximized our revenues relative to the live hog markets, partially attributable to stronger export markets and operational and mix performance, which were partially offset by higher operating costs,” the company said.

The Chicken segment reported increased sales volume due to better demand for chicken products, along with incremental volume from the AdvancePierre acquisition. The average sales price increased due to sales mix changes.

Operating income for fiscal 2017 was below the prior year's record results due to higher operating costs, which included an increased compensation and benefit integration expense of $41 million, incremental net costs of $17 million attributable to two plant fires as well as restructuring and related charges of $56 million in the fourth quarter of 2017. However, operating income increased in the fourth quarter -- despite the $56 million of restructuring and related charges -- due to improved operational execution and lower feed ingredient costs.

Tyson said feed costs decreased $65 million and $80 million for the fourth quarter and fiscal 2017, respectively.

Sales volume increased in the Prepared Foods segment for fiscal 2017 due to improved demand for retail products and incremental volumes from the AdvancePierre acquisition, which were partially offset by declines in foodservice. Sales volume increased in the 2017 fourth quarter primarily as the result of incremental volumes from the AdvancePierre acquisition, also partially offset by declines in foodservice.

“Average sales prices increased due to better product mix, which was positively impacted by the acquisition of AdvancePierre as well as higher input costs of $50 million for fiscal 2017 and $105 million in the fourth quarter of fiscal 2017,” the company noted.

Operating income for fiscal 2017 decreased due to: impairments of $52 million related to the company’s San Diego, Cal., operation and $45 million related to the expected sale of a non-protein business; $30 million in compensation and benefit integration expenses; $34 million for the AdvancePierre purchase accounting and acquisition-related costs, and $82 million in restructuring and related charges, in addition to higher operating costs at some facilities. Operating income for the fourth quarter also decreased due to an impairment of $45 million related to the expected sale of a non-protein business, $82 million of restructuring and related charges, $14 million in costs related to the AdvancePierre purchase accounting and acquisition and higher operating costs at some of the company’s facilities.

Tyson said Prepared Foods operating income was positively affected by $137 million in synergies, $18 million of which were incremental synergies in the 2017 fourth quarter. For the full fiscal 2017, Prepared Foods operating income was positively affected by $538 million in synergies, $97 million of which were incremental synergies in fiscal 2017 above the $156 million of synergies realized in fiscal 2016 and the $285 million realized in fiscal 2015.

“The positive impact of these synergies to operating income was partially offset with investments in innovation, new product launches and supporting the growth of our brands,” the company said.

Outlook

In fiscal 2018, Tyson noted that the U.S. Department of Agriculture indicates that domestic protein production (beef, pork, chicken and turkey) should increase approximately 3-4% from fiscal 2017 levels. However, stronger export markets should partially absorb the increase.

As previously announced, in the fourth quarter of fiscal 2017, Tyson’s board of directors approved a multiyear restructuring program called the “Financial Fitness Program” that is expected to contribute to the company’s overall strategy of financial fitness through increased operational effectiveness and overhead reduction.

Through a combination of synergies from the integration of AdvancePierre and additional elimination of non-value-added costs, the program is estimated to result in net savings of $200 million in fiscal 2018, $400 million in fiscal 2019 -- including new savings of $200 million -- and $600 million in fiscal 2020, including additional savings of $200 million. The majority of these savings, which are focused on supply chain, procurement and overhead improvements, are expected to be realized in the Prepared Foods and Chicken segments.

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