Tyson Q4 profits rise, sales fall

Company readies for new leader as 2017 forecast is reduced.

Despite showing a more than 51% increase in profits for the fourth quarter compared to last year, Tyson Foods Inc. shares tumbled Monday by more than 14% after the company forecasted lower-than-anticipated 2017 profits and announced the company’s chief executive officer Donnie Smith is stepping down December 31. Tom Hayes, president of Tyson, was appointed as the new CEO.

Net income for the quarter was $391 million, compared to $258 million for the same quarter last year. The company’s adjusted quarterly earnings per share were 96 cents, up from 83 cents during the same period last year. Tyson reported an EPS of $4.39. Operating income for the quarter increased from $2.3 billion to $2.8 billion year-over-year. Sales, on the other hand, fell from $41.37billion to $36.88 billion.

“Fiscal 2016 was our fourth consecutive year of record results,” said Smith, chief executive officer of Tyson Foods. “We produced record earnings per share, operating income and operating margin. We’re growing where we want to grow by selling more branded, higher margin products. Sales volume was up in our Core 9 product lines at retail and our top tier products in foodservice.

Smith said the company’s Prepared Foods segment had a record margin for the year, while simultaneously driving industry-leading category growth at retail. The Pork segment had a record year, as well, while the Chicken segment nearly matched last year’s record margin. Smith called the Beef segment “a great turnaround story,” as it produced normalized margins for the year.

“Synergies and profit improvement for the fiscal year totaled $580 million, well exceeding our $500 million target,” Dennis Leatherby, Tyson Foods’ executive vice president and chief financial officer, said. “Our business generated record cash flows that give us the flexibility to drive long-term shareholder value. Our priorities for capital allocation continue to be investing in our existing businesses, acquiring businesses that support our strategic objectives and returning cash to shareholders through share repurchases and dividends, all while prudently managing our debt profile.”

Looking forward, Hayes said Tyson will continue building the business for long-term, sustainable growth by investing in innovation, consumer insights, our brands, our customer relationships, our facilities and our people. “In addition to allocating $1 billion for capital expenditures in fiscal 2017, we are investing in initiatives such as improved worker safety, food safety, animal well-being, warehouse and distribution optimization and attracting and retaining talent throughout our company. These investments will pay off in the coming years through, among other things, improved costs and reduced turnover.”

Smith added, “The first seven weeks of fiscal 2017 have been phenomenal as we are off to the best start we have ever experienced. We’re confident we can increase the investment in our business while still growing and delivering another record year with earnings in the range of $4.70-$4.85 per share. We are in a great position now, and we're positioning ourselves for long-term success.”

Summary of segment results

In the Chicken segment, adjusted sales volume decreased for the fourth quarter of fiscal 2016 as a result of planned temporary decrease in production, continued transition to sell more value-added and less commodity products, and mix changes of rendered product sales. For fiscal 2016, adjusted sales volume decreased slightly due to the fourth quarter of fiscal 2016 planned decrease in production along with optimizing our mix and our buy versus grow strategy. Adjusted average sales price increased in the fourth quarter of fiscal 2016 as a result of mix changes. For the 12 months of fiscal 2016, adjusted average sales price decreased as feed costs declined, partially offset by mix changes. Adjusted operating income was negatively impacted in the fourth quarter of fiscal 2016 by lower sales volume as well as increases in plant variances associated with reduced production, grain and feed ingredients costs, marketing, advertising and promotion expenses and higher operating costs. Feed costs increased $20 million and decreased $170 million during the fourth quarter and 12 months of fiscal 2016, respectively.

Adjusted sales volume in the Beef segment was relatively flat in the fourth quarter of fiscal 2016 and increased during the 12 months of fiscal 2016 due to increased availability of cattle supply and better demand for our beef products, despite a reduction in live cattle processing capacity due to the closure of our Denison, Iowa, facility in the fourth quarter of fiscal 2015. Adjusted average sales price decreased due to higher domestic availability of beef supplies and lower livestock cost. Adjusted operating income increased due to more favorable market conditions as we maximized our revenues relative to the decline in live fed cattle cost, in addition to reduced losses from mark-to-market open derivative positions and lower-of-cost-or market inventory adjustments that were incurred in the fourth quarter of fiscal 2015, partially offset by higher operating costs.

The Pork segment showed an increase in its adjusted sales volume in the fourth quarter of fiscal 2016 driven by better demand for pork products. For the 12 months of fiscal 2016, adjusted sales volume decreased due to the divestiture of our Heinold Hog Markets business in the first quarter of fiscal 2015. Excluding the impact of the divestiture, adjusted sales volume grew 1.2% driven by better demand for our pork products. Adjusted average sale price increased in the fourth quarter of fiscal 2016 as we maximized our revenues relative to the decline in live hog cost. For the 12 months of fiscal 2016, adjusted average sales price decreased due to increased live hog supplies and lower livestock cost. Adjusted operating income increased as we maximized our revenues relative to the decline in the live hog markets and due to better plant utilization associated with higher volumes, which were partially offset by higher operating costs and losses incurred in our live hog operation.

Adjusted sales volume in the Prepared Foods segment increased in the fourth quarter of fiscal 2016 due to improved demand for our prepared foods products. For the 12 months of fiscal 2016, adjusted sales volume decreased due to lower sales volume in the first six months of fiscal 2016 due to changes in sales mix and the carryover effect of the 2015 turkey avian influenza occurrence into the first half of fiscal 2016.

Outlook

Tyson said it expects to realize synergies of around $675 million in fiscal 2017 from the acquisition of Hillshire Brands as well as its profit improvement plan for the company’s legacy Prepared Foods business. However, the company reduced its forecast for fiscal 2017 from its previous estimate of $700 million as some incremental synergies are now expected to be realized in fiscal 2018. The majority of these benefits will be realized in our Prepared Foods segment, the company said. 
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