Tyson Foods Inc. continues to perform very well, delivering record second-quarter operating income and return on sales in what is typically the most challenging quarter of its fiscal year, Donnie Smith, president and chief executive officer of Tyson Foods, told analysts this week.

The company released financial results May 9 that showed record second-quarter operating income of $704 million, a 27% increase from adjusted results in the second quarter of 2015. The company also set an operating margin record of 7.7%

“Sales are growing in key retail product lines. The pricing and marketing investments we’ve made are paying off in increased volumes in strategic products, including Hillshire Farm smoked sausage and lunch meat, Jimmy Dean breakfast sausage and Ball Park hot dogs,” Smith said. “With a focus on the longer term, we have a three-year pipeline of innovation across all segments, with exciting new product launches to keep our offerings in the retail, foodservice and international channels relevant to consumers.”

Smith said Tyson has differentiated its chicken business by being more consumer driven, upgrading its mix, diversifying its pricing mechanisms, improving cost structure, implementing its "Buy Versus Grow" strategy and providing industry-leading quality and customer service.

“Because of the actions we’ve taken, and because those actions have proven to produce higher, more stable margins, we’re raising the annual normalized margin range for the Chicken segment to 9-11%,” he added.

Solid performances by all of the company’s segments provided strong cash flows, $400 million of which was used to repurchase 6.9 million shares during the quarter. Tyson captured $144 million in synergies, with $67 million incremental to the fiscal second quarter of 2015, Smith said.

“We’re in a great position, and we’re generating momentum that will take us into 2017 and beyond. We’ve produced record results in the first half of the fiscal year, and we expect continued strong performance in the second half. To reflect what we’ve accomplished and to demonstrate our confidence, we’re raising adjusted earnings guidance for fiscal 2016 to $4.20-4.30 per share,” he said.

Segment performance

Tyson reported that sales volume in its Chicken segment increased in the second quarter of fiscal 2016 as a result of stronger demand for its chicken products. For the first six months of fiscal 2016, sales volume was flat as demand for chicken products was offset by optimizing mix and the Buy Versus Grow strategy. The average sales price decreased as feed ingredient costs declined, but that was partially offset by mix changes. Operating income increased due to improved operational execution and lower feed ingredient costs. Feed costs decreased $80 million during the second quarter and $140 million for the six-month period of fiscal 2016.

Sales volume in the company’s Beef segment increased in the second quarter due to an increase in live cattle processed as a result of higher fed cattle supplies.

“Sales volume increased for the six months of fiscal 2016 due to better demand for beef products despite a reduction in live cattle processed, primarily due to the closure of our Denison, Iowa, facility in the fourth quarter of fiscal 2015,” Tyson noted.

The average sales price decreased due to higher domestic availability of fed cattle supplies, which drove down livestock costs. Operating income increased due to more favorable market conditions associated with an increased cattle supply, which drove down fed cattle costs.

Pork sales volume increased in the second quarter, driven by better demand for pork products. Sales volume decreased for the first six months of fiscal 2016 due to divestiture of the Heinold Hog Markets business in the first quarter of fiscal 2015, the company said. Excluding the impact of the divestiture, pork sales volume grew 3.1%, driven by better demand for pork products. Live hog supplies increased, which drove down livestock costs and the average sales price.

“Operating income increased as we maximized our revenues relative to live hog markets and due to better plant utilization associated with higher volumes,” the company reported.

Sales volume was relatively flat within Tyson’s Prepared Foods segment during the quarter but decreased for the six-months period due to a change in the sales mix and to the carryover effect of the 2015 avian influenza occurrence in turkeys into the first half of fiscal 2016.

The average sales price decreased primarily due to a decline in input costs, partially offset by a change in product mix. Tyson said operating rating income improved due to mix changes as well as lower input costs of approximately $95 million for the second quarter and $220 million for the first six months of fiscal 2016.

Additionally, Prepared Foods operating income was positively affected by $111 million in synergies, $41 million of which were incremental synergies in the second quarter of 2016 above the $70 million of synergies realized in the second quarter of 2015.

For the first half of fiscal 2016, the Prepared Foods segment saw a $206 million positive impact from synergies, with $81 million in incremental synergies in the 2016 period above the $125 million in synergies realized in the same six months of 2015. The positive impact of the synergies to operating income were partially offset by heavy investments in innovation, new product launches and the strengthening of the company's brands.