Tyson Foods off to best start in company history

Beef and pork segments providing tremendous returns and fuel for growth.

Tyson Foods

Tyson Foods Inc., one of the world's largest food companies, said this year is off to the best start in company history, with record earnings, record operating income and record cash flows.

“Return on sales for each operating segment was in or above the normalized range,” Tyson president and chief executive officer Tom Hayes said. “The tremendous returns generated in the beef and pork segments are providing fuel for growth in our value-added chicken and prepared foods segments.

Hayes said Tyson again led retail food manufacturers in both sales volume and sales dollars for the 13-week period corresponding with its fiscal first quarter. “Not only did we lead in sales volume, according to IRI, (but) we were the only company to show volume growth among the top 10 branded food companies.”

Total sales for the first quarter of 2017 were $9.182 million, a 2.4% increase over the same period a year ago. Operating income of $982 million was up 26.5% year over year. The company also posted a 28.6% increase in net operating income as well as a 38% increase in earnings per share to a record $1.59.

Due to the outstanding performance in beef and pork and strong market conditions in the first quarter, the company raised its annual earnings guidance to $4.90-5.05 per share. Hayes added that the company expects the earnings cadence for the remainder of the fiscal year to follow more normal patterns, including the seasonality typical of the second quarter.

“We’re on a path toward what we expect to be our fifth straight year of record results. Our path won’t be linear, but our team is focused on delivering long-term growth and creating shareholder value,” he said.

Segment results

In the chicken segment, the company said sales volume increased as a result of better demand for its chicken products, partially offset by a decrease in rendered product sales. Average sales price increased as a result of sales mix changes that offset general market price declines. Operating income decreased due to increased marketing, advertising and promotion spending and higher operating costs, which included $23 million of compensation and benefit integration expense. Feed costs decreased $20 million during the first quarter of fiscal 2017.

Sales volume in the beef segment increased due to the improved availability of the cattle supply and stronger domestic and export demand for Tyson's beef products. The average sales price decreased due to higher domestic availability of beef supplies and lower livestock cost. “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,” the company noted.

Sales volume in the pork segment also increased due to strong demand for company pork products and increased exports. Live hog supplies increased, which Tyson said drove down livestock costs and the average sales price. “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.

In the prepared foods division, sales volume increased due to improved demand for Tyson's  prepared foods products. Average sales price decreased primarily due to a decline in input costs of approximately $100 million, partially offset by product mix changes. Operating income decreased due to higher operating costs at some of the company’s facilities, increased marketing, advertising and promotion spending and $22 million of compensation and benefit integration expenses.

Additionally, prepared foods operating income was positively impacted by $127 million in synergies, $32 million of which were incremental synergies in the first quarter of fiscal 2017 above the $95 million of synergies realized in the first quarter of fiscal 2016. “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,” Tyson reported.

Outlook

In fiscal 2017, Tyson said the U.S. Department of Agriculture indicates that domestic protein production (chicken, beef, pork and turkey) should increase approximately 2-3% from fiscal 2016 levels, while export growth should be moderate.

“As we continue with the integration of Hillshire Brands, we expect to realize synergies of around $675 million in fiscal 2017 from the acquisition as well as our profit improvement plan for our legacy prepared foods business, with some incremental synergies expected to be realized in fiscal 2018,” Tyson said.

The majority of these benefits will be realized in the prepared foods segment, the company added.

In the chicken segment, Tyson expects similar feed costs in fiscal 2017 as in fiscal 2016. “For fiscal 2017, our chicken segment's operating margin should be at the upper end of its normalized range of 9-11%,” it added.

In the beef division, the company expects industry fed cattle supplies to increase approximately 3-4% in fiscal 2017 versus fiscal 2016, noting, “We generally expect adequate supplies in regions we operate our plants. For fiscal 2017, our beef segment's operating margin should be around 5%.”

On the pork side, Tyson said it expects industry hog supplies to increase approximately 3-4% in fiscal 2017 compared to fiscal 2016. For fiscal 2017, the company said its pork segment's operating margin should be around 12%.

Input costs for the prepared foods segment for the remainder of fiscal 2017 are expected to be flat with 2016. “For fiscal 2017, we now expect operating margins to be a little below fiscal 2016 as we invest in innovation and growth of our brands as well as invest in some of our facilities to enable operational improvements and cost efficiencies,” Tyson said.

Sales for fiscal 2017 are projected to be flat compared to fiscal 2016 as the company grows sales volume across each segment, offset by the impact of lower beef prices, according to Tyson.

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