Tyson Clocks Record Operating Income from Beef and Pork Segments

Operating cash flows reached a record of over $1.1 billion in Q1 FY17

Tyson Foods Inc. (NYSE: TSN), the largest US meat processor by sales, announced its Q1 FY17 financial results on February 06th, 2017.

The Springdale, Arkansas-based company is one of the world’s largest food companies with leading brands including Tyson, Jimmy Dean, Hillshire Farm, Sara Lee, Ball Park, Wright, Aidells, and State Fair. It operates through five segments: Chicken, Beef, Pork, Prepared Foods, and Other. The company raises and processes chickens into fresh, frozen, and value-added chicken products; processes live fed cattle and live market hogs; and fabricates dressed beef and pork carcasses into primal and sub-primal meat cuts, as well as case ready beef and pork, and fully-cooked meats. It also manufactures and markets frozen and refrigerated food products including pepperoni, bacon, breakfast sausage, turkey, hot dogs, and processed meats. Read more about Tyson’s financial results below.

Q1 FY17 financial highlights

During Q1 FY17, Tyson Foods’ revenue remained almost flat at $9.18 billion compared to $9.15 billion in the year-ago same period. Total Company sales volume increased 2.4% during the reporting quarter; all segments reported sales volume growth from the prior year’s comparable period.

On the brighter side, Tyson’s operating income grew by a record 27% to $982 million, driving a record total Company operating margin at 10.7%. In the Pork segment, Tyson reported record operating margin of 19.7%, and in the Beef segment, operating margin was at a record 8.5% during the reporting quarter. Chicken and Prepared Foods segment operating margin came in within normalized range.

Tyson Foods was the leader among retail food manufacturers in both sales volume and sales dollars for the 13-week period ended January 01st, 2017. According to IRI, Tyson was the only Company to show volume growth among the top 10 branded food companies.

In all, Q1 FY17 net income surged to $593 million from $461 million in the year-ago corresponding period, exceeding analyst expectations. EPS jumped 38% Y-o-Y to $1.59 during Q1 FY17 from $1.15 in Q1 FY16.

During the reporting quarter, Tyson captured $161 million in total synergies and $40 million in incremental synergies versus Q1 FY16. The Company also reported record operating cash flows of over $1.1 billion during the reporting quarter.

Segmental highlights

Chicken: This segment’s sales volume grew 1.3% Y-o-Y while average price change grew 1.4% during Q1 FY17. Sales increased to $2.70 billion versus $2.63 billion in Q1 FY16. Sales volume increased as a result of better demand for our chicken products, partially offset by a decrease in rendered product sales. Average sales price increased as a result of sales mix changes which offset general market price declines. Operating income fell to $263 million from $358 million, due to increased marketing, advertising and promotion spend and higher operating costs which included $23 million of compensation and benefit integration expense. Feed costs decreased $20 million during Q1 FY17.

Beef: This segment’s sales volume grew 4.5% Y-o-Y while average price change fell 6.6% during Q1 FY17. Sales increased to $3.52 billion versus $3.61 billion in the year-ago same period. Sales volume increased due to improved availability of cattle supply and stronger domestic and export demand for beef products. Average sales price decreased due to higher domestic availability of beef supplies and lower livestock cost. Operating income surged to $299 million from $71 million in the year ago comparable period due to more favorable market conditions as the Company maximized revenues relative to the decline in live fed cattle costs, partially offset by higher operating costs.

Cattle and hog futures have been sinking over the past few months amid record American production of beef and pork, leaving US meat producers grappling with lower prices since the beginning of 2016. Livestock producers across the US have been able to increase meat supplies as cheaper grains have lowered the cost to feed larger herds. The US hog herd has expanded to the largest on record for this time of year, according to government data. Feedlots sold approximately 8.9% more animals in July 2016 than the year earlier corresponding period.

Pork: This segment’s sales volume grew 4.3% Y-o-Y while average price change fell 1% during Q1 FY17. Sales increased to $1.26 billion versus $1.21 billion in Q1 FY16. Sales volume increased due to strong demand for pork products and increased exports. Live hog supplies increased, which drove down livestock cost and average sales price. Operating income increased to $247 million from $158 million in the year-ago period as Tyson maximized 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.

Prepared Foods: This segment’s sales volume grew 2.9% Y-o-Y while average price change fell 2.9% during Q1 FY17. Sales remained flat at $1.89 billion during the reporting quarter. Sales volume increased due to improved demand for our 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 fell to $190 million from $207 million in the year-ago comparable period due to higher operating costs at some of facilities, increased marketing, advertising and promotion spend and $22 million of compensation and benefit integration expense.

During the reporting quarter, Prepared Foods operating income was positively impacted by $127 million in synergies, of which $32 million was incremental synergies in Q1 FY17, above the $95 million of synergies realized in Q1 FY16. The positive impact of these synergies to operating income was partially offset with investments in innovation, new product launches and supporting the growth of Tyson’s brands.

Other: In Q1 FY17, this segment reported sales of $90 million versus $99 million in the year-ago same period. Operating loss narrowed to $17 million versus $18 million in Q1 FY16.

Other highlights

Product innovations: Tyson has been investing in product innovations due to a shift in preference among health-conscious consumers from red meat to low-calorie chicken and processed chicken food items. Hence, Tyson began offering low-calorie protein foods under its NatureRaised Farms brand.

Appointment of new CEO: Tyson announced that Tom Hayes, President of Tyson Foods, will succeed Donnie Smith as CEO with effect from December 31st, 2016. Hayes will continue to serve as President and has been appointed to the Board of Directors, effective immediately. Smith, who has been CEO of Tyson Foods since November 2009, will be available to consult with the Company for a three-year period.

Share repurchases: During Q1 FY17, Tyson repurchased 8.1 million shares for $520 million, excluding shares repurchased to offset dilution from its equity compensation plan.

Guidance for full year FY17

In FY17, Tyson expects domestic protein production (chicken, beef, pork, and turkey) to increase approximately 2% to 3% from FY16 levels and moderate export growth. Tyson also expects to realize synergies of approximately $675 million in FY17 from the Hillshire Brands acquisition in the Prepared Foods segment. Tyson also expects capital expenditures of about $1 billion in FY17. Finally, the Company expects EPS of $4.70 to $4.85, a growth of 4% to 7% and adjusted EPS growth of 7% to 10%.

After the recent quarterly results, Tyson increased EPS guidance to $4.90-$5.05, representing a 12% Y-o-Y increase. Previously, the Company expected earnings to be in the range of $4.7 to $4.85, up 7% to 10% Y-o-Y.

Stock Performance

Tyson’s stock ended the day at $65.26, gaining 0.55%, at the close on Friday, February 17th, 2017, having vacillated between an intraday high of $65.40 and a low of $64.28 during the session. The stock’s trading volume was at 2,850,472 for the day. The Company’s market cap was at $23.17 billion as of Friday’s close.

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