Tyson Foods is on the Right Track

Tyson Foods (TSN, Financial) is one of the world's largest producers of chicken, beef, pork and prepared foods. Its leading brands are Tyson, Jimmy Dean, Hillshire Farm, Sara Lee frozen bakery, Ball Park, Wright, Aidells, and State Fair. The company operates an integrated poultry production process that consists of breeding stock, contract growers, feed production, processing, further-processing, marketing and transportation of chicken and related allied products, including animal and pet food ingredients. Tyson operates in five segments: Chicken, Beef, Pork, Prepared Foods, and International. The company provides products and services to customers throughout the United States and approximately 130 countries.

First quarter highlights

"Tyson's fiscal year is off to a great start with our first full quarter as a combined company producing record sales and adjusted operating income," said Donnie Smith, president and chief executive officer of Tyson Foods. "We used our strong cash flows to pay down debt by $650 million in the quarter.

"We achieved $60 million in synergies in the first quarter, and we are confident we will exceed the $225 million synergy target for this fiscal year. We also reiterate our guidance of adjusted earnings in the range of $3.30-3.40 per share based on the strength of our diversified and balanced business model.

"We are proceeding with the integration of Hillshire Brands. I want to thank our team members for their ability to quickly focus on the business as we brought the two companies together. The first quarter was a crucial time, and the team handled it well. Their efforts will be vital to our success going forward, and I don't think Tyson Foods could be in a better position. We've set ourselves up for another record year, and we are building momentum that will take us into fiscal 2016."

Summary of segment results

  • Chicken –Â Sales volume grew as a result of stronger demand for chicken products. Average sales price increased as a result of market conditions and sales mix changes. Operating income increased due to higher average sales price and volumes in addition to lower feed ingredient costs which decreased $110 million during the first quarter of fiscal 2015.
  • Beef –Â 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 higher fed cattle costs and periods of reduced consumption of beef products, which made it difficult to pass along increased input costs, as well as lower sales volumes and increased operating costs.
  • Pork –Â Increased demand for our pork products drove higher average sales price and sales volume. Additionally, average sales price increased due to lower total hog supplies which resulted in higher input costs. Operating income remained strong as we maximized revenues relative to live hog markets, partially attributable to operational and mix performance.
  • Prepared Foods –Â Sales volume increased primarily due to incremental volumes from the acquisition of Hillshire Brands as well as improved demand for prepared foods products. Average sales price increased due to price increases associated with better product mix which was positively impacted by the acquisition of Hillshire Brands, as well as increased prices associated with higher input costs. Despite incurring $10 million of higher raw material costs related to legacy Prepared Foods business along with $40 million of ongoing costs related to a legacy Hillshire Brands plant fire and merger and acquisition costs, operating income improved due to an increase in sales volume and average sales price mainly attributed to Hillshire Brands. Additionally, Prepared Foods operating income was positively impacted by $55 million related to profit improvement initiatives and Hillshire Brands synergies.
  • International –Â Sales volume decreased due to the sale of the Brazil operation during the first quarter of fiscal 2015. Average sales price decreased due to supply imbalances associated with weak demand in China. Operating loss improved due to the sale of the Brazil operation and better market conditions in Mexico.

Record sales of $10.8 billion, an increase of 23% over first quarter of prior year

  • Record adjusted operating income up 37% to $564 million
  • Adjusted EPS up 7% to $0.77 compared to $0.72 in first quarter of prior year
  • Reduced total debt by $650 million during the first quarter
  • Overall adjusted operating margin was 5.2%
  • Chicken segment operating margins of 12.6% in first quarter
  • Captured $60 million in synergies during the first quarter

Current steps taken

It is making major improvements to its Vienna, Georgia, poultry plant as part of an ongoing plan to maximize efficiencies and meet growing demand for its products. The capital improvement project, valued at more than $110 million, will bolster the future of the operation and create more than 500 jobs in Vienna.

"Tyson Foods' decision to expand in Georgia underscores how our No. 1 business climate and highly skilled workforce keeps leading companies competitive in today's fast-paced market," said Georgia Governor Nathan Deal. "Tyson Foods is one of our state's largest employers in food processing, and I'm confident that it will continue to benefit from our top talent and robust industry network in order to deliver high-quality jobs to Georgia's citizens."

The Vienna plant has been producing chicken for foodservice customers, including restaurant chains, but will convert to supply fresh tray pack chicken to meet the needs of regional retail customers. Work began at the location in mid-January and is scheduled to be completed in mid-2015.

New launch

TSN will introduce two Aidells chicken sausage flavors in January 2015. There is a constant shift in consumer preferences, which is shifting from beef to chicken due to escalated prices. “We’ll be adding much needed value-added capacity in the spring for fully-cooked and tray-packed chicken,” CEO Mr. Smith said. “Demand for tray pack is growing as retail consumers seek fresh, healthy options. It’s important to understand that we’re not increasing supply, but rather shifting capacity to a more value-added product mix.”

“We anticipate fed cattle supplies to be down about 4% in 2015, but that should be the worst of it,” Mr. Smith said. “With good export demand, domestic pricing in 2015 will test how much people really want beef. But it’s clear that demand for beef is very strong and will provide support for chicken and pork pricing.”

Expectations

Tyson expects adjusted earnings in the range of $3.30-3.40 per share for fiscal 2015. It also expects its overall domestic protein production (chicken, beef, pork and turkey) will increase approximately 1% for fiscal 2015. Estimates from the USDA are that chicken production will increase 2-3%, which will generate 7-9% return on sales; however, Tyson expects its return to be more than 10%.

To end

Tyson has strong market leadership and produces approximately one out of every five pounds of chicken, beef and pork in the United States. Tyson’s worldwide presence is also quite strong. It has 46 chicken plants, 13 beef plants, nine pork plants, 41 prepared food plants, 11 international plants, six turkey facilities and two R&D centers. The company’s growth strategies are to accelerate, innovate and cultivate. I feel bullish that this global meat producer will continue its trend and won’t let its valued investors down in the long run.