Tyson Foods faces challenges during Q2

Two chicken plant fires hurt segment results.

Tyson Food released May 8 first-half and second-quarter results for 2017. The company reported record first-half adjusted earnings per share (EPS) of $2.60, up 17% from last year, as well as record adjusted operating income, up 8% to $1.6 billion.

While first-half results were positive, the company’s second quarter experienced some challenges. Adjusted EPS was $1.01, down from $1.07 during the same period last year. Adjusted operating income was also lower, at $623 million, down from $704 million in the second quarter of 2016.

The company reported an adjusted EPS guidance of $4.90-5.05, representing a 12% increase from fiscal 2016.

“We generated record adjusted EPS in the first half of the fiscal year,” said Tom Hayes, president and chief executive officer of Tyson Foods. “Despite seasonal challenges typical of our second quarter and one-time events, adjusted earnings per share was up 17% over the first half of fiscal 2016.”

Hayes said the Beef and Pork segments generated tremendous operating income in the second quarter, allowing Tyson Foods to invest in the long-term growth of its value-added businesses. The Prepared Foods segment results, on the other hand, were negatively affected by ongoing challenges in the company’s pizza toppings and ingredients meats businesses, he added.

“We expect our results to improve as we continue to address operational efficiency and capacity through fiscal year 2018. Unfortunately, we experienced fires in two chicken plants in our second quarter. Had it not been for the fires, our Chicken segment return on sales would have been within its normalized range.”

Despite the setbacks, Hayes said the company is experiencing continued strong volume and share growth in its retail Core 9 product lines, which are some of our most profitable businesses. “The Core 9 growth illustrates that we get results when we focus our efforts on doing what we do best: innovating, understanding what motivates consumers, building brands and helping our customers grow their businesses,” he said.

According to Hayes, Tyson Foods is concentrating on growing the protein-packed brands, as demonstrated by the announcements two weeks ago of an intended merger with AdvancePierre Foods and the expected sale of some non-protein businesses. “We plan to grow Tyson Foods and fuel that growth with next-generation manufacturing capabilities focused on fresh and convenient foods that consumers demand across both retail and foodservice channels.”

Hayes concluded, “We’re halfway to another strong year of financial performance at Tyson, and we reiterate our adjusted earnings guidance of $4.90-5.05 per share, which would be approximately 12% growth over the prior year.”

Segment results

In the Beef segment, sales volume increased for the six months of fiscal 2017 due to improved cattle supply availability, stronger domestic demand for Tyson's beef products and increased exports. However, sales volume decreased in the second quarter of fiscal 2017 due to a reduction in live cattle processed, the company said. The average sales price also decreased due to increased live cattle supply availability and lower livestock costs.

“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,” Tyson Foods added.

The Pork segment showed increased sales volume for the first six months of fiscal 2017 due to strong demand for its pork products and increased exports. Sales volume decreased in the second quarter of fiscal 2017 as a result of the company balancing its supply with customer demand, which was partially offset by increased exports.

The average sales price increased as domestic availability of products decreased due to strong exports. Operating income for the Pork segment also increased as the company maximized its revenues relative to the live hog markets; this was partially attributable to stronger export markets and operational and mix performance, which was partially offset by higher operating costs.

The Chicken segment had a challenging quarter. Tyson said sales volume decreased in the six months and second quarter of fiscal 2017 due to operational disruptions from fires at two of its plants and decreased rendered product sales. However, this was partially offset by better demand for its chicken products.

The average sales price increased for the six months and second quarter of fiscal 2017 as a result of sales mix changes. Operating income for both periods was negatively affected by higher operating costs, which included increased marketing, advertising and promotion spending, $23 million of incremental net costs and lower sales volume attributable to the two plant fires, as well as compensation and benefit integration expenses of $30 million for the six months and $7 million for second quarter of fiscal 2017. Feed costs decreased $10 million for the six months and increased $10 million for the second quarter of 2017.

In the Prepared Foods segment, sales volume was up slightly for the first six months due to improved demand for the retail products, partially offset by declines in foodservice. Sales volume decreased in the second quarter primarily as a result of declines in foodservice, Tyson Foods said.

Average sales price decreased for the six-month period primarily due to a decline in input costs of approximately $80 million that was partially offset by product mix changes. The average sales price decreased in the second quarter mostly due to declines in foodservice that were partially offset by increased input costs of approximately $20 million. Operating income decreased due to an impairment of $52 million related to the company’s San Diego, Cal., operation, in addition to higher operating costs at some of its facilities, increased marketing, advertising and promotion spending and $25 million and $3 million of compensation and benefit integration expense for the six months and second quarter of 2017, respectively.

Prepared Foods operating income was positively affected by $139 million in synergies, $28 million of which were incremental synergies in the second 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,” the company said.

Outlook

While noting that the U.S. Department of Agriculture forecasts domestic protein production to increase approximately 3-4% from fiscal 2016 levels, Tyson Foods, in its outlook, added that strong export markets should partially offset the increase.

“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. The majority of these benefits will be realized in our Prepared Foods segment,” the company said.

For the beef sector, Tyson expects industry fed cattle supplies in fiscal 2017 to increase approximately 6-7%, partially offset by reduced weights, compared to fiscal 2016. “We generally expect adequate supplies in regions we operate our plants. For fiscal 2017, our Beef segment's operating margin should be around 5%,” it said.

On the pork side, the company expects industry hog supplies to increase approximately 3-4% in fiscal 2017 versus fiscal 2016, with the Pork segment's operating margin estimated at around 12% for fiscal 2017.

USDA projects chicken production in fiscal 2017 to increase approximately 1-2% from fiscal 2016. “Based on current futures prices, we expect similar feed costs in fiscal 2017 as compared to fiscal 2016," Tyson said. "For fiscal 2017, our Chicken segment's operating margin should be in its normalized range of 9-11%.”

Given the expected timing of the closing of the sale of the company’s Sara Lee Frozen Bakery, Kettle and Van’s businesses, which was announced in April, Tyson said it does not anticipate that these transactions will have a significant impact on fiscal 2017 Prepared Foods results. Additionally, it doesn’t anticipate that the AdvancePierre acquisition will add $1.7 billion in revenues in fiscal 2018. “We expect to realize cost synergies of approximately $200 million, to be realized within three years, from combining our Prepared Foods business with AdvancePierre.”

Cost synergies are expected to come from the manufacturing footprint, procurement efficiencies and distribution network consolidation as well as addressing redundant sales and marketing functions and duplicative corporate overhead at the combined companies, the company added.

“We currently expect input costs to be flat for fiscal 2017 as compared to fiscal 2016," Tyson said. "For fiscal 2017, we now expect operating margins to approximate 9% as we invest in some of our facilities to enable operational improvements and cost efficiencies as well as invest in innovation and growth of our brands. We will continue to evaluate our normalized range as we close the sale of the three non-protein businesses and integrate AdvancePierre.”

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