Tyson’s Earnings Rise on Lower Feed and Livestock Costs

Meat processor reports record growth in Q3 FY16 EPS to $1.25

Source: Tyson
Source: Tyson

Tyson Foods Inc. (NYSE: TSN), the largest U.S. meat processor by sales, announced its Q3 FY16 financial results on August 8th, 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, lunchmeat, hot dogs and processed meats. Read more about Tyson’s financial results below.

Q3 FY16 financial highlights

During Q3 FY16, Tyson’s overall sales dipped 6.7% to $9.4 billion, yet edged past estimates of $9.33 billion. The Company’s Q3 FY16 operating income jumped 36% to $767 million versus the year-ago period, with adjusted operating income growing 35% compared to Q3 FY15. Tyson reported record total operating margins of 8.2% during the quarter. Finally, the Company posted strong Q3 FY16 earnings, helped in part by lower costs for feed and livestock. Tyson reported a record EPS growth of 51% Y-o-Y to $1.25 during Q3 FY16, and record adjusted EPS growth of 51% to $1.21 as compared to Q3 FY15.

T2At the retail level, Tyson’s products reported strong growth in sales volume, sales dollars, and category share, making Tyson a leader in volume sales growth among the top 10 branded food companies. During the reporting quarter, Tyson achieved $150 million in total synergies and $63 million incremental synergies over Q3 FY15.

Segmental highlights

T3Chicken: This segment’s sales volume decreased 0.9% Y-o-Y to $2.7 billion in Q3 FY16 as a result of optimizing mix and the buy versus grow strategy. Average sales price increased 0.4% in Q3 FY16 as feed ingredient costs declined, partially offset by mix changes. Operating income increased to $380 million from $313 million in the year-ago quarter due to improved operational execution and lower feed ingredient costs. Feed costs decreased $50 million during Q3 FY16.

Beef: This segment’s sales volume increased 2.9% Y-o-Y to $3.7 billion in Q3 FY16 due to an increase in live cattle processed as a result of higher fed cattle supplies. Sales volume increased due to better demand for beef products despite the closure of the Denison, Iowa, facility in Q4 FY15. Average sales price decreased 14.6% due to higher domestic availability of beef supplies, which drove down livestock costs. Operating income increased to $91 million from a loss of $7 million in the year-ago period due to more favorable market conditions associated with an increase in cattle supply which resulted in lower fed cattle costs.

Source: Tyson
Source: Tyson

Pork: This segment’s sales volume fell 1.7% Y-o-Y to $1.2 billion in Q3 FY16, 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 1.5% driven by high demand for pork products. Average sales price increased 7.2% as demand for pork products outpaced the increase in live hog supplies. Operating income increased to $122 million from $64 million in the year-ago quarter due to better plant utilization associated with higher volumes.

Prepared Foods: This segment’s sales volume increased 1.9% Y-o-Y to $1.8 billion in Q3 FY16 due to robust demand for prepared foods products. Average sales price decreased 1.9% due to a decline in input costs, partially offset by a change in product mix. Operating income was at a healthy $197 million in Q3 FY16 due to strong demand for all products, partially offset by higher promotional spending. Additionally, Prepared Foods’ operating income was positively impacted by $116 million in synergies, of which $37 million was incremental synergies in Q3 FY16 in addition to the $79 million of synergies realized in Q3 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 $99 million during Q3 FY16.

Other highlights

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.

During Q3 FY15, Tyson’s overall volumes increased 0.3%, excluding the divestiture of its Mexico chicken operation. Excluding the divestitures of its chicken operations in Brazil and Mexico as well as its Heinold Hog Markets business, total company volume increased 0.3% for the first nine months of FY16.

Share repurchases

During Q3 FY16, Tyson used $425 million to repurchase 6.6 million shares, excluding shares repurchased to offset dilution from its equity compensation plan. Continuing with its share repurchases, the Company bought back an additional $380 million worth of shares to date in Q4 FY16. For the remainder of FY16 and FY17, Tyson expects to continue with share repurchases. As of July 2nd, 2016, 49.1 million shares remain authorized for repurchases.

Guidance for full year FY16

Tyson forecasts sales of $37 billion for full year FY16 versus expectations for $37.12 billion. The Company has also raised full year FY16 GAAP EPS guidance to $4.47-$4.57 and adjusted EPS guidance to $4.40-$4.50. In FY17, Tyson expect domestic protein production (chicken, beef, pork and turkey) to increase approximately 2-3% from FY16 levels and moderate export growth. Tyson also expects to realize synergies of approximately $700 million in FY17 from the Hillshire Brands acquisition in the Prepared Foods segment. Tyson also expects capital expenditures of about $725 million in FY16 and an increase in capital expenditures in FY17.

Stock Performance

T5Tyson’s stock ended the day at $74.64, gaining 0.23%, at the close on Wednesday, August 10th, 2016, having vacillated between an intraday high of $75.00 and a low of $74.30 during the session. The stock’s trading volume was at 1,445,021 for the day. The Company’s market cap was at $27.63 billion as of Wednesday’s close.

————————————————————————————————————————————————

Industry overview

————————————————————————————————————————————————

Tyson Foods operates under the umbrella of the larger U.S. food processing industry, which has about 21,000 companies including The Kraft Heinz Company (NASDAQ: KHC), General Mills Inc. (NYSE: GIS) and Kellogg Company (NYSE: K), and Sanderson Farms Inc. (NASDAQ: SAFM), with annual revenues of about $750 billion, according to industry estimates. The burgeoning population growth is the biggest driver for the industry, while price is the major point of competition. Processed meat accounts for roughly 25% of the total industry revenue.

T6One of the major industry trends is the extensive usage of technology and automation to gain a competitive edge in the market. The use of technology enables packaged meat processors to rapidly prototype, test, and launch new products as per customer tastes. Automation is generally used in the areas of quality control, canning, baking, freezing, and packaging. In recent years, meat processors are using radio frequency identification (RFID) tags to keep tab of the entire origin, processing, and distribution paths of their meat products. Companies also use irradiation techniques to eliminate bacteria using low doses of radiation.

T7Another major trend is the development of high quality food packaging and processing technologies. The processed food industry is witnessing the inclusion of recycled and bio-degradable materials for packaging snacks and pet food, while new types of films have been developed to keep meat fresher for a longer time with active labels to sense when meat is past its expiry date. Many large companies are seeking to differentiate their offerings through value-added processed food items aimed at the working class consumers.

However, the food processing industry is faced with challenges to its growth in the form of recurrent outbreaks of avian influenza combined with the health risks associated with the consumption of processed meat. Recently, the meat processing industry suffered a serious setback when a World Health Organization came out with a report that stated that eating processed meat causes cancer, and unprocessed red meat might also be carcinogenic. Another major challenge is that companies operating in the meat processing industry face extreme price volatility due to unpredictable weather conditions and disease outbreaks. To combat such volatility, operators are vertically integrating their operations, negotiating multi-year contracts with suppliers, and using financial hedging instruments as a compensation measure.

Going forward, industry experts forecast that the per capita meat consumption is expected to remain stagnant in 2016. However, due to recovering consumer sentiment, population growth and strong export demand, meat-processing revenue is forecast to increase during the five years to 2021. Higher meat prices are expected to keep the industry revenue stable even in volatile conditions over the next few years.

Be the first to comment

Leave a Reply

Your email address will not be published.


*