Tyson Misses Earnings and Sales Forecasts, New CEO in Place

Meat processor’s sales fell 12.8% Y-o-Y to $9.16 billion from $10.51 billion

t1Tyson Foods Inc. (NYSE: TSN), the largest U.S. meat processor by sales, announced its Q4 FY16 and full-year FY16 financial results on November 21st, 2016.

The Springdale, Arkansas-based company 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.

Q4 FY16 financial highlights

During Q4 FY16, Tyson reported profits and sales that both missed expectations owing to a continuous decline in food prices as well as volumes. Tyson’s overall sales fell 12.8% Y-o-Y to $9.16 billion from $10.51 billion in the year-ago period, partly reflecting the pricing challenges confronting food companies. The revenue miss was also as a result of lesser-than-expected beef, pork, and prepared foods sales, which offset better-than-expected chicken sales. Tyson’s average sales price (ASP) fell 5.1% during Q4 FY16, and included a 14.9% decline in beef pricing, as livestock availability soared, and a 3.9% decline in prepared-foods pricing. Sales volume fell 8.2%, as a result of which Tyson is focusing on selling more branded, higher-margin and value-added products.

t2On the brighter side, Tyson’s operating income grew 7% to $586 million, while adjusted operating income gained 3% versus the year-ago period due to lower feed costs. Adjusted operating margin inflated 60 basis points (bps) to 6.4% during the reporting quarter. As a result, net income surged 51.6% to $391 million from $258 million in the year-ago period, but fell short of expectations for $462 million. EPS jumped 63% Y-o-Y to $1.03 during Q4 FY16 from $0.63 in the year-ago period. During the reporting quarter, Tyson captured $165 million in total synergies and $67 million in incremental synergies versus Q4 FY15.

Full-year FY16 financial highlights

For the full-year FY16, Tyson reported a 10.85% fall in net sales to $36.88 billion versus $41.37 billion in the year-ago period, missing expectations of $37.05 billion. On the other hand, operating income jumped 31% to over $2.8 billion, while adjusted operating income grew 26% Y-o-Y versus FY15. Tyson reported a record operating margin of 7.7% during the year. As a result, net income surged to $1.76 billion versus $1.22 billion a year ago. EPS jumped by a record 54% to $4.53 versus $2.95, while adjusted EPS jumped 39% to $4.39 from FY15.

During the year, Tyson captured $580 million in total synergies and $258 million in incremental synergies over FY15. The company also reported record cash flows from operations of over $2.7 billion during FY16.

Segmental highlights

t3Chicken: This segment’s sales volume fell 10.1% Y-o-Y to $2.8 billion in Q4 FY16 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. ASP increased 3.5% in Q4 FY16 as a result of mix changes. Operating income plunged to $220 million from $370 million in the year-ago quarter due to 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 decreased $20 million during Q4 FY16.

Beef: This segment’s sales volume fell 7.4% Y-o-Y to $3.47 billion in Q4 FY16 from $4.41 billion due to higher availability of cattle supply and better demand for beef products. Sales volume increased due to better demand for beef products despite the closure of the Denison, Iowa, facility in Q4 FY15. ASP fell 14.9% due to higher domestic availability of beef supplies, which drove down livestock costs. On the brighter side, operating income increased to $139 million from a loss of $33 million in the year-ago period due to more favorable market conditions associated with an increase in cattle supply, in addition to reduced losses from mark-to-market open derivative positions.

t4Pork: This segment’s sales volume fell 6.8% Y-o-Y to $1.23 billion in Q4 FY16 from $1.31 billion, despite increased production, due to reduced inventory levels as well as the result of mix changes related to internally sourcing more hogs from live operations. Also, Tyson divested its Heinold Hog Markets business in Q1 FY15. Excluding the impact of the divestiture, sales volume grew 1.2%, driven by higher demand for pork products. ASP grew 1% as Tyson maximized its revenues relative to the decline in live hog cost. Operating income increased to $108 million from $95 million in the year-ago quarter due to better plant utilization associated with higher volumes.

Prepared Foods: This segment’s sales volume fell 4.8% Y-o-Y to $1.83 billion in Q4 FY16 from $2 billion due to unfavorable mix. ASP fell 3.9% due to a decline in input costs, partially offset by a change in product mix. Operating income declined to $133 million in Q4 FY16 from $150 million due to increased marketing, advertising and promotion spend, higher operational costs, and a temporary operational disruption in a food service business unit. On the other hand, Prepared Foods’ operating income was positively impacted by $119 million in synergies, of which $38 million was incremental synergies in Q4 FY16 in addition to the $81 million of synergies realized in Q4 FY15. The positive impact of these synergies was partially offset with investments in innovation and new product launches.

Other: In Q4 FY15, Tyson began reporting the International segment under ‘Other’ due to the sale of its Mexico and Brazil chicken productions. As a result, ‘Other’ includes chicken production operations in China and India, in addition to third-party merger and integration costs. This segment reported sales of $96 million during Q4 FY16 versus $108 million in the year-ago period.

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: On November 21st, 2016, Tyson announced that Tom Hayes, President of Tyson Foods, will succeed Donnie Smith as CEO on 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 and dividend: During Q4 FY16, Tyson repurchased 8.3 million shares for $600 million, excluding shares repurchased to offset dilution from its equity compensation plan. For the full-year FY16, Tyson repurchased 28.2 million shares for $1.7 billion, excluding shares repurchased to offset dilution from its equity compensation plan. The Board of Directors increased the quarterly dividend by $0.075, or 50%, to $0.225 per share, as part of the company’s plans to increase dividends for Class A shares by at least $0.10 per share annually.

Guidance for full year FY16

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%.

Stock Performance

t5Tyson’s stock ended the day at $58.96, gaining 1.06%, at the close on Tuesday, November 29th, 2016, having vacillated between an intraday high of $59.75 and a low of $58.18 during the session. The stock’s trading volume was at 5,666,944 for the day. The Company’s market cap was at $21.26 billion as of Tuesday’s close.

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