Tyson Foods beats estimates with annual income at $864 million (Updated)

Thanks to an operating income boost of 20% and record annual sales of $37.58 billion, Tyson Foods blew past market expectations and posted quarterly income of 87 cents per share and fiscal year income of $2.94 per share.

The consensus of analyst estimates was the company would earn 76 cents in the quarter and $2.83 for the year.

Fiscal year revenue of $37.58 billion was well ahead of the $34.374 billion in the previous fiscal year, with annual income of $864 million, up 11.05% over the 2013 fiscal year.

Fourth quarter revenue was $10.105 billion, up 13.6% compared to the previous fourth quarter. Income in the quarter was $469 million, up over the $416 million in the 2013 period.

The solid results and an optimistic outlook sent Tyson shares up nearly 5% in active trading at Monday’s (Nov. 17) market opening. Shares were up $2 to $42.68 in the morning session, according to Yahoo! Finance.

"Two years ago, I told our team members, 'The turnaround is over; it's time to turn it on.' They did and the proof is in our second year in a row of record sales and earnings," Donnie Smith, president and CEO of Tyson Foods, said in the earnings report issued early Monday (Nov. 17).

Leading the way for Tyson Foods during the fiscal year was the chicken segment which recorded $883 million in operating income, well ahead of the $683 million during the previous fiscal year. Sales in the segment totaled $11.116 billion, up over the $10.988 billion in the previous fiscal year.

CHICKEN POTENTIAL
The company said higher demand for chicken and lower feed costs helped the segment grow operating income at a faster pace than total segment sales. Feed costs in the segment were down $140 million in the quarter and down $600 million for the fiscal year.

Smith said there were some hiccups in the fourth quarter which negatively impacted the chicken segment. He said plant disruptions and increased demand forced the company to buy more breast meat on the open market during the peak summer months. 

Tyson began supplementing its chicken production with a “buy versus grow” program more than two years ago. The company found it cheaper to buy breast meat on the open market that is run through its further-processing facilities and marked up accordingly for sale to its customers, as opposed to growing that production. The “buy versus grow” model is still a small part of the company’s total production, Smith said.

“We bought a 100 loads of breast meat per week this summer so we could satisfy our customer demand. This added about $1.5 million to $2 million in weekly costs to our chicken production. In a normal situation, we would have bought 50 to 55 loads. The supply disruptions have been addressed and we were able to keep our valuable customers happy,” Smith said.

Smith expects chicken production to be up 3% in fiscal 2015, which began Oct. 1 for Tyson Foods. He said there are a couple of shifts taking place with the consumer — a move to more fresh chicken in the retail case and uptick in fully-cooked frozen sales. In response, he said the company is adding more capacity in these areas. Two further processing lines opened Monday (Nov. 17) in the Rogers plant, and there are new lines coming to a plant in Broken Bow, Okla. In 2015 a complex in Georgia is being updated to handle more tray pack (fresh) product for retail.

Smith believes higher beef costs will continue to push more consumers toward chicken, and he doesn’t believe lower gas prices will mean they trade back up to beef.

“We see more people eating out with the relief they are getting in gas prices, which should benefit food service customers,” Smith said. “We also see a structural demographic change in demand as more Millennials enter the workforce they index higher toward chicken than previous demographics. We expect to see food service customers begin to offer more chicken promotion in the coming months as supplies come back up.”

Smith said the retail trade toward chicken became apparent in the past four weeks. He said fresh beef pounds were down 22% and price rose 15%. In the same period, chicken pounds rose 3.3% and the price was up 2.7%.

BEEF CONSTRAINTS
Operating income in the beef segment was $153 million in the fourth quarter, down from $162 million in the same quarter of 2013. For the full fiscal year operating income in the segment was $347 million, better than the $296 million in the previous fiscal year.

“Operating income decreased for the fourth quarter of fiscal 2014 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,” the company noted in the earnings report.

Smith said higher beef prices are going to be a reality for some time because they are directly related to supply issues. In 2015, Smith said there are more indications of heifer retention which is an early sign of herd rebuilding. 

He warned that Tyson’s beef segment profitability will be below the fiscal 2014 levels.

“We expect to see a reduction of industry fed cattle supplies of 4-to 5% in fiscal 2015 as compared to fiscal 2014. Although we generally expect adequate supplies in regions we operate our plants, there may be periods of imbalance of fed cattle supply and demand,” Smith said.

Data for federally inspected slaughter through Nov. 1 indicates that total cattle slaughter was down 7.2% for the year to date compared to last year. 

FATTER PORK 
Tyson’s pork segment had another good year with fiscal year sales hitting $6.304 billion, better than the $5.408 billion in fiscal 2013. Operating income for the year was $455 million, up 37% over the 2013 tally. The company said higher demand for pork along with higher sales prices related to decreased pork supplies helped the segment.

Tyson said it was able to balance supply and demand in the quarter in spite of lower pork exports and consumption levels.

“We expect industry hog supplies to increase around 2-to 3% in fiscal 2015 compared to fiscal 2014. For fiscal 2015, we believe our Pork segment's operating margin will be in its normalized range of 6-to 8%,” Smith noted in the release.

MERGER SYNERGIES
The company said it is “pleased with the progress” made in integrating the $8.5 billion acquisition of Hillshire Brands that closed in late August.

"Although it's still early in the process ... We've identified the synergy targets, and now we're working to bring those dollars to the bottom line,” Smith said in the earnings report. “We're very confident we'll meet the expected synergy amounts of $225 million or more for fiscal '15 and more than $500 million by the end of year three, and when we get there in fiscal 2017, we expect the Prepared Foods segment to earn a 10-to 12% return on sales.”

The prepared foods segment posted fiscal year sales of $3.927 billion, up over the $3.322 billion in fiscal 2013. However fiscal year adjusted segment operating income was just $53 million, down from $101 million in the 2013 fiscal year. In addition to a $210 operating income hit related to higher raw materials costs, the company also saw its fiscal year operating income reduced further by $113 million “due to additional costs associated with the Prepared Foods improvement plan, Hillshire Brands post-closing results, purchase price accounting adjustments and ongoing costs related to a legacy Hillshire Brands plant fire.”

Smith said he’s been a part of several acquisitions through the years and the Hillshire deal has been by far the smoothest transition of them all. The first three months were spent getting the new organization structure in place which officially begins Dec. 1.

“We have teams working on synergy capture and creating business plans around those savings,” Smith said.

Once of the first areas beyond the low hanging fruit synergies has been the shared service contracts. He said the pro forma company uncovered $15 million to $25 million in freight savings this year when combining the two operations.

“We are just getting started on the deeper layers of synergy capture,” Smith said.

He said the company will keep its research and development teams working at their respective Discovery and Innovation Centers in Springdale and Downers Grove, Ill., with one top management team led by Sally Grimes, overseeing both facilities.

“It doesn’t make sense to uproot families. Managing them on location is a far better option for Tyson Foods,” Smith said.

FORWARD LOOK
The company is optimistic about fiscal year 2015, with its projected guidance set at per share earnings to range between $3.30 and $3.40. Prior to Monday’s earnings report, the consensus analyst estimate was for fiscal year per share earnings to be $3.33.

Tyson projects its fiscal 2015 revenue to top $42 billion, after a full year of integration with Hillshire Brands. Tyson announced capital spending of $900 million for fiscal 2015 on projects that will create more shareholder value, but no details about the spending were included in the release.

The company said it continues to use its strong cash flow – $1.2 billion annually – to pay down debt and execute more value-added sales for year to come.

In an unusual move, Tyson management spoke briefly about 2016 projections.

“We have a lot to be confident about in the future. We expect to restart our buyback in 2016 and feel really good about Tyson 2.0.” Smith said.

He said the sale of the Brazilian business should close next month and the divestiture of Mexico will close shortly after calendar 2015 begins. These cash proceeds ($575 million) will be applied to outstanding debt incurred in the Hillshire acquisition.