11 October 2024
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Global Industry

Tyson Foods: Lifts Annual Guidance as Record Second Quarter Adjusted Earnings Increase 43 Percent

Springdale / AR. (tsn) Tyson Foods Inc. reported its financial results for the second quarter and six months ended April 02, 2016. Overview:

(in millions, except per share data) Q2/2016 Q2/2015 H1/2016 H1/2015
Sales USD 9’170 USD 9’979 USD 18’322 USD 20’796
Operating Income 704 547 1’480 1’056
Net Income 434 311 895 621
Less: Net Income (Loss) Attributable to Noncontrolling Interests 2 1 2 2
Net Income Attributable to Tyson USD 432 USD 310 USD 893 USD 619
Net Income Per Share Attributable to Tyson USD 1.10 USD 0.75 USD 2.25 USD 1.49
Adjusted Operating Income USD 704 USD 553 USD 1’480 USD 1’117
Adjusted Net Income Per Share Attributable to Tyson USD 1.07 USD 0.75 USD 2.22 USD 1.52

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Second Quarter Highlights

  • Record second quarter operating income up 27 percent to 704 million USD compared to Q2/2015 adjusted results
  • Record second quarter total company operating margin of 7.7 percent
    • Record second quarter Chicken segment operating margin at 12.7 percent
    • Record second quarter Pork segment operating margin at 11.8 percent
    • Prepared Foods segment operating margin at 10.9 percent
  • Captured 144 million USD in total synergies; 67 million USD incremental synergies over Q2’15
  • Repurchased 6.9 million shares for 400 million USD, excluding shares repurchased to offset dilution from our equity compensation plan

«Our business continues to perform very well, delivering record second quarter operating income and return on sales, in what is typically the most challenging quarter of our fiscal year», Donnie Smith, president and chief executive officer of Tyson Foods, said.

«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 lunchmeat, «Jimmy Dean» breakfast sausage and «Ball Park» hot dogs. 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, food service and international channels relevant to consumers».

«We’ve differentiated our chicken business by being more consumer driven, upgrading our mix, diversifying our pricing mechanisms, improving our cost structure, implementing our «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 percent».

«Solid performances by all of our segments provided strong cash flows, of which we used 400 million USD to repurchase 6.9 million shares during the quarter. We captured 144 million USD in synergies, with 67 million USD incremental to fiscal second quarter 2015».

«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 USD to 4.30 USD per share».

Segment Results (in millions)

Sales for the second quarter and six months ended April 02, 2016, and March 28, 2015:

Volume Avg. Price Volume Avg. Price
Q2/2016 Q2/2015 Change Change H1/2016 H1/2015 Change Change
Chicken USD 2’737 USD 2’829 1.7 % (4.9 )% USD 5’373 USD 5’609 — % (4.2 )%
Beef 3’639 4’130 2.8 % (14.2 )% 7’253 8’521 0.3 % (15.2 )%
Pork 1’190 1’204 3.1 % (4.1 )% 2’403 2’744 (0.7 )% (11.8 )%
Prepared Foods 1’804 1’871 (0.3 )% (3.3 )% 3’700 4’004 (4.0 )% (3.8 )%
Other 86 222 (62.0 )% 2.2 % 185 527 (65.4 )% 1.5 %
Intersegment Sales (286 ) (277 ) n/a n/a (592 ) (609 ) n/a n/a
Total USD 9’170   USD 9’979   (0.9 ) % (7.3 ) % USD 18’322   USD 20’796   (4.0 ) % (8.2 ) %

Note: Excluding the divestiture of our Mexico chicken operation in the second quarter of fiscal 2015, total company volume increased 2.1 percent. Excluding the divestitures of our chicken operations in Brazil and Mexico, along with our Heinold Hog Markets business, total company volume increased 0.4 percent for the first six months of fiscal 2016.

Operating Income (Loss) for Q2/2016 and six months ended April 02, 2016, and March 28, 2015:

Operating Margin Operating Margin
Q2/2016 Q2/2015 Q2/2016 Q2/2015 H1/2016 H1/2015 H1/2016 H1/2015
Chicken USD 347 USD 332 12.7 % 11.7 % USD 705 USD 683 13.1 % 12.2 %
Beef 46 (20 ) 1.3 % (0.5 )% 117 (26 ) 1.6 % (0.3 )%
Pork 140 99 11.8 % 8.2 % 298 221 12.4 % 8.1 %
Prepared Foods 197 160 10.9 % 8.6 % 404 231 10.9 % 5.8 %
Other (26 ) (24 ) n/a n/a (44 ) (53 ) n/a n/a
Total USD 704   USD 547   7.7 % 5.5 % USD 1’480   USD 1’056   8.1 % 5.1 %

Note: In the fourth quarter of fiscal 2015 we began reporting the International segment in Other due to the sale of our Mexico and Brazil chicken production operations in fiscal 2015. As a result, Other includes our foreign chicken production operations in China and India, in addition to third-party merger and integration costs. All periods presented have been reclassified to reflect this change. Chicken, Beef, Pork and Prepared Foods were not impacted by this change.

Adjusted Segment Results (in millions)

Adjusted Operating Income (Loss) for Q2/2016 and six months ended April 02, 2016, and March 28, 2015:

Adj. O. Margin Adj. O. Margin
Q2/2016 Q2/2015 Q2/2016 Q2/2015 H1/2016 H1/2015 H1/2016 H1/2015
Chicken USD 347 USD 332 12.7 % 11.7 % USD 705 USD 683 13.1 % 12.2 %
Beef 46 (20 ) 1.3 % (0.5 )% 117 (26 ) 1.6 % (0.3 )%
Pork 140 99 11.8 % 8.2 % 298 221 12.4 % 8.1 %
Prepared Foods 197 157 10.9 % 8.4 % 404 268 10.9 % 6.7 %
Other (26 ) (15 ) n/a n/a (44 ) (29 ) n/a n/a
Total USD 704   USD 553   7.7 % 5.5 % USD 1’480   USD 1’117   8.1 % 5.4 %

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Adjustments to segment results for the second quarter of fiscal 2015

  • Prepared Foods operating income was adjusted for the following:
    • Decrease of 8 million USD related to the legacy Hillshire Brands Company («Hillshire Brands») plant fire insurance proceeds (net of costs).
    • Increase of 5 million USD related to merger and integration costs.
  • Other operating income was adjusted for the following:
    • Increase of 9 million USD related to merger and integration costs.

Adjustments to segments results for the six months of fiscal 2015

  • Prepared Foods operating income was adjusted for the following:
    • Increase of 28 million USD of costs (net of insurance proceeds) related to a legacy Hillshire Brands plant fire.
    • Increase of 9 million USD related to merger and integration costs.
  • Other operating income was adjusted for the following:
    • Increase of 24 million USD related to merger and integration costs.

Adjusted operating income and adjusted operating margin are presented as supplementary measures of our operating performance that are not required by, or presented in accordance with, GAAP. We use adjusted operating income and adjusted operating margin as internal performance measurements and as two criteria for evaluating our performance relative to that of our peers. We believe adjusted operating income and adjusted operating margin are meaningful to our investors to enhance their understanding of our operating performance and are frequently used by securities analysts, investors and other interested parties to compare our performance with the performance of other companies that report adjusted operating income and adjusted operating margin. Further, we believe that adjusted operating income and adjusted operating margin are useful measures because they improve comparability of results of operations from period to period. Adjusted operating income and adjusted operating margin should not be considered as a substitute for operating income or operating margin or any other measure of operating performance reported in accordance with GAAP. Investors should rely primarily on our GAAP results and use non-GAAP financial measures only supplementally in making investment decisions. Our calculation of adjusted operating income and adjusted operating margin may not be comparable to similarly titled measures reported by other companies.

Summary of Segment Results

  • Chicken: Sales volume increased in the second quarter of fiscal 2016 as a result of stronger demand for our chicken products. For the six months of fiscal 2016, sales volume was flat as demand for our chicken products was offset by optimizing mix and our buy versus grow strategy. Average sales price decreased as feed ingredient costs declined, partially offset by mix changes. Operating income increased due to improved operational execution and lower feed ingredient costs. Feed costs decreased 80 million USD and 140 million USD during the second quarter and six months of fiscal 2016, respectively.
  • Beef: Sales volume increased in the second quarter of fiscal 2016 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. 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 increase in cattle supply which drove down fed cattle costs.
  • Pork: Sales volume increased in the second quarter of fiscal 2016 driven by better demand for pork products. Sales volume decreased for the six months of fiscal 2016 due to the divestiture of our Heinold Hog Markets business in the first quarter of fiscal 2015. Excluding the impact of the divestiture, our sales volume grew 3.1 percent driven by better demand for pork products. Live hog supplies increased, which drove down livestock cost and 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.
  • Prepared Foods: Sales volume was relatively flat in the second quarter of fiscal 2016 but decreased for the six months of fiscal 2016 due to a change in sales mix in addition to the carryover effect of the 2015 Türkiye avian influenza occurrence into the first half of fiscal 2016. Average sales price decreased primarily due to a decline in input costs, partially offset by a change in product mix. Operating income improved due to mix changes as well as lower input costs of approximately 95 million USD and 220 million USD for the second quarter and six months of fiscal 2016, respectively. Additionally, Prepared Foods operating income was positively impacted by 111 million USD in synergies, of which 41 million USD was incremental synergies in the second quarter of fiscal 2016 above the 70 million USD of synergies realized in the second quarter of fiscal 2015. For the six months of fiscal 2016, Prepared Foodswas positively impacted by 206 million USD in synergies, of which 81 million USD was incremental synergies in fiscal 2016 above the 125 million USD of synergies realized in the six months of fiscal 2015. The positive impact of these synergies to operating income were partially offset with heavy investments in innovation, new product launches and the strengthening of our brands.

Outlook

In fiscal 2016, we expect domestic protein production (chicken, beef, pork and Türkiye) to increase approximately 2-3 percent from fiscal 2015 levels and moderate export growth. As a result, increased domestic availability could pressure protein pricing. As we continue with the integration of Hillshire Brands, we expect to realize incremental synergies in excess of 200 million USD above the amount of synergies realized in fiscal 2015. In total, we expect synergies of more than 500 million USD in fiscal 2016 and more than 700 million USD in fiscal 2017 from the acquisition as well as our profit improvement plan for our legacy Prepared Foods business. The majority of these benefits will be realized in our Prepared Foods segment. The following is a summary of the outlook for each of our segments, as well as an outlook on sales, capital expenditures, net interest expense, liquidity and share repurchases for fiscal 2016.

  • Chicken: USDA data shows an increase in chicken production around 2 percent in fiscal 2016 compared to fiscal 2015. Based on current futures prices, we expect lower feed costs in fiscal 2016 compared to fiscal 2015 of approximately 200 million USD. Many of our sales contracts are formula based or shorter-term in nature, but there may be a lag time for price changes to take effect. For fiscal 2016, we now believe our Chicken segment’s operating margin should be more than 12 percent, up from our previous estimate of more than 11 percent and above our new normalized range of 9-11 percent.
  • Beef: We expect industry fed cattle supplies to increase around 1 percent in fiscal 2016 compared to fiscal 2015. Although we generally expect adequate supplies in regions we operate our plants, there may be periods of imbalance of fed cattle supply and demand. For fiscal 2016, we believe our Beef segment’s operating margin will be in its normalized range of 1.5-3.0 percent.
  • Pork: We expect industry hog supplies to increase around 2 percent in fiscal 2016 compared to fiscal 2015. For fiscal 2016, we believe our Pork segment’s operating margin will be around 10 percent.
  • Prepared Foods: We expect lower raw material costs of approximately 300 million USD in fiscal 2016. As we continue to invest heavily in innovation, new product launches and the strengthening of our brands, we believe the operating margin of our Prepared Foodssegment should be near the low-end of its normalized range of 10-12 percent in fiscal 2016.
  • Other: Other includes our foreign operations related to raising and processing live chickens in China and India in addition to third-party merger and integration costs. We now expect Other operating loss should increase to approximately 85 million USD in fiscal 2016 from our previous estimate of 70 million USD.
  • Sales: We believe sales will approximate 37 billion USD. This is down from fiscal 2015 due to declines in beef, pork and chicken prices.
  • Capital Expenditures: We expect capital expenditures to approximate 850 million USD for fiscal 2016.
  • Net Interest Expense: We expect net interest expense to approximate 245 million USD for fiscal 2016.
  • Liquidity: We expect total liquidity, which was 1.2 billion USD at April 2, 2016, to remain in line with our minimum liquidity target of 1.2 billion USD.
  • Share Repurchases: For the remainder of fiscal 2016, we expect to continue our share repurchases under our share repurchase program. As of April 2, 2016, 56.2 million shares remain authorized for repurchases. The timing and extent to which we repurchase shares will depend upon, among other things, our working capital needs, market conditions, liquidity targets, our debt obligations and regulatory requirements. During the third quarter of fiscal 2016 to date, we repurchased approximately 3 million shares for 200 million USD, excluding shares repurchased to offset dilution from our equity compensation plans.

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