Chicken & prepared foods up, beef down in Tyson’s Q3 results
Tyson Foods Inc. reported the following results for the third quarter. Sales increased 4% to approximately $10.1 billion, and adjusted operating income rose 40% to a record $568 million. Overall adjusted operating margin was 5.6%, thanks to the chicken segment operating margin of 11.4% and a record prepared foods segment adjusted operating margin of 10.9%.
"The Prepared Foods and Chicken segments performed very well in the fiscal third quarter while managing numerous challenges," said Donnie Smith, president and chief executive officer of Tyson Foods. "The strong results in these two segments demonstrate the benefits of our branded, value-added product portfolio and multi-channel, multi-protein business model by partially offsetting soft results in the Beef and Pork segments.
"Our beef business suffered from export market disruptions that had an $84 million impact on third quarter results, and we continue to see very high cattle costs at a time when product values and export issues are making it difficult to realize expected revenue levels in this spread business.
"While we are pleased with the performance of our business overall, unless beef market conditions improve rapidly, we will not achieve our previous guidance of $3.30-$3.40 adjusted earnings per share. As a result, we are modifying fiscal 2015 guidance to $3.10-$3.20 adjusted EPS.
"We reduced our total net debt $688 million during the third quarter. Because we expect to be ahead of schedule on reaching leverage ratio goals, and we see great value in our shares, we plan to start buying back stock in the fourth quarter. Synergy capture from the integration of Hillshire Brands and profit improvement from our legacy Prepared Foods operations is going extremely well. Previously, we raised synergy estimates to more than $250 million, and now we are on track to achieve approximately $300 million in fiscal 2015.
"We've positioned ourselves well for fiscal 2016 and we're confident in our ability to achieve at least 10% annual EPS growth over time," Smith said.
Summary of Segment Results
- Chicken - Sales volumes grew as a result of stronger demand for chicken products and mix of rendered product sales. Average sales price decreased as feed ingredient costs declined, partially offset by mix changes. Operating income increased due to higher sales volume and lower feed ingredient costs, partially offset by disruptions caused by export bans. Feed costs decreased $125 million and $310 million during the third quarter and first nine months of fiscal 2015, respectively.
- Beef - Sales volume decreased due to a reduction in live cattle processed. Average sales price increased due to lower domestic availability of beef products. Operating income decreased due to unfavorable market conditions associated with a decrease in supply of approximately 8%, which drove up fed cattle costs, export market disruptions, the relative value of competing proteins and increased operating costs.
- Pork - Sales volume decreased due to the divestiture of the Heinold Hog Markets business in the first quarter of fiscal 2015. Excluding the impact of the divestiture, sales volume grew 2.9% and 2.6% for the third quarter and first nine months of fiscal 2015, respectively, driven by better demand for Tyson’s pork products. Live hog supplies increased, which drove down livestock cost and average sales price. Operating income decreased due to compressed pork margins during the third quarter of fiscal 2015 caused by a decline in exports and excess domestic availability of pork products.
- Prepared Foods - Sales volume increased due to incremental volumes from the acquisition of Hillshire Brands. Average sales price increased primarily due to better product mix which was positively impacted by the acquisition of Hillshire Brands. Operating income improved due to an increase in sales volume and average sales price mainly attributed to Hillshire Brands, as well as lower raw material costs of approximately $170 million and $200 million for the third quarter and first nine months of fiscal 2015, respectively, related to the company’s legacy Prepared Foods business. Additionally, profit improvement initiatives and Hillshire Brands synergies positively impacted Prepared Foods operating income by $79 million and $204 million for the third quarter and first nine months of fiscal 2015, respectively.
- International - Sales volume decreased due to the sale of Tyson’s Brazil operation during the first quarter of fiscal 2015 and weak demand in China, partially offset by stronger demand in Mexico. Average sales price decreased due to supply imbalances associated with weak demand in China and currency devaluation in Mexico. Operating results improved due to the sale of the Brazil operation and better market conditions in Mexico, partially offset by challenging market conditions in China.
In fiscal 2016, Tyson says it expects domestic protein production (chicken, beef, pork and turkey) to increase approximately 3% from fiscal 2015 levels. Grain supplies are expected to decrease in fiscal 2016, which should result in higher input costs as well as increased costs for cattle and hog producers.
“We expect industry fed cattle supplies to increase around 1% in fiscal 2016 compared to fiscal 2015,” the company said in its statement. “Although we generally expect adequate supplies in regions we operate our plants, there may be periods of imbalance of fed cattle supply and demand. We believe our Beef segment should be near break-even for fiscal 2015 and profitable but below its normalized range of 2.5%-4.5% for fiscal 2016.”
Bloomberg Business reports that Tyson’s shares fell the most in five years as a result of the company cutting its full-year earnings forecast. The shares fell 9.6 percent to $40.09 at 9:48 a.m. in New York after earlier posting an 11 percent decline, the most intraday since May 2010.
Sources: Tyson Foods, Bloomberg