story by Kim Souza and Michael Tilley
ksouza@thecitywire.com
Editor's note: Story updated with many changes and additions throughout.
Tyson Foods is making good on its claim that the $8.5 billion acquisition of Hillshire Brands in August 2014 would boost top and bottom lines. The Springdale-based company reported Monday (May 4) that fiscal second quarter earnings were up 45.5% and earnings in the first half of the fiscal year are up 32.5% compared to the same periods in 2014.
Second quarter net income of $310 million was better than what market watchers expected. The per share earnings of 75 cents was better than the consensus estimate of 72 cents per share.
Total revenue in the second quarter was $9.979 billion, better than that $9.032 billion in the same quarter of 2014, but slightly below the consensus estimate of $10.11 billion.
"This was another great quarter and better than we initially expected," Donnie Smith, president and CEO of Tyson Foods, said in the earnings report. "Our fiscal second quarter is seasonally challenging, but we came in above our projections due to strong performances by our Prepared Foods and Chicken segments.”
Net income for the first six months of the fiscal year reached $619 million, well ahead of the $467 million during the same period in the previous fiscal year. Revenue for the six months was $20.796 billion, up compared to the $17.793 billion in the fiscal 2014 six months.
Investors took note of Tyson’s record quarter with the share price (NYSE: TSN) rising to $41.16 in the morning session, up 1.65% on heavy volume. The share price has been somewhat stagnate over the past year as the company took on considerable debt in acquiring Hillshire Brands. Over the past 52 weeks the share price has ranged from $34.90 to $44. Wall Street has predicted a $50.25 one-year target price, but investors are still somewhat gun shy given the Avian Influenza concerns that continue to shut off exports.
CONCERNS CITED
Smith told analysts that bird flu concerns and West Coast port congestion issues each had negative impacts on the company’s bottom line in the quarter. He said the West Coast port issues cost the company around $20 million in operating income, or 3 cents a share to net earnings.
With the bird flu outbreak in turkey flocks and egg breeders, Smith said exports of chicken leg quarters have been disrupted. With each new case, Smith said the time clock restarts for another 60 day to 90 days.
On the plus side, Smith said Tyson Foods is exporting about 50% less chicken leg quarters than it did in 2010. Over the past year Tyson said it has purchased more chicken parts in the open market, roughly 50% more loads per week in the first half of fiscal 2015 than a year ago. With this buy versus grow policy Tyson also mitigated its risks with the leg quarters, which are primarily exported.
Smith said when Tyson buys the parts it needs, that includes up to 10% of breasts that enter the processing facilities. Buying just the needed part eliminates the leg-quarters sitting in the freezers like processors slaughtering the whole bird. He expects leg quarter pricing to be soft as long as export markets are closed.
CHICKEN, PREPARED FOODS
The chicken and prepared foods segment – where most of the Hillshire Brands business is now reported – have been the stars for Tyson Foods. For the first half of the fiscal year, operating income for poultry was $683 million compared to $487 million in the same period of the 2014 fiscal year. Prepared foods posted first half operating income of $268 million, a big increase compared to the $37 million in the same period in 2014.
Operating income in the chicken segment increased due to improved sales and lower feed costs which decreased $75 million and $185 million during the second quarter and first six months of fiscal 2015, respectively.
Revenue in the prepared food segment also provides a clear example of the Hillshire impact. The prepared foods segment hit $4.004 billion in sales during the first six months of the fiscal year, more than 126% than the $1.768 billion during the comparable fiscal 2014 period.
Operating income in the prepared food segment improved due to an increase in sales volume and average sales price from Hillshire Brands products. Also, the company reported lower raw material costs of approximately $40 million and $30 million for the second quarter and first six months of fiscal 2015, respectively.
The prepared foods segment posted a record 8.4% operating margin in the quarter behind the realized synergies which included operation realignment with Hillshire with some procurement and logistics savings as well.
Smith said the company is ahead of its goal to gain value out of the Hillshire deal.
“The acquisition of Hillshire Brands has played an important role in Tyson Foods' transformation, and we are very pleased with the progress of the integration and synergy capture, achieving $77 million in synergies in the second quarter,” Smith noted in the earnings report. “Because we are ahead of pace in reaching our stated target of more than $225 million in fiscal 2015, we are raising our synergy target to more than $250 million for this year, $400 million in 2016 and $600 million in annual synergies by the end of fiscal 2017.”
All pistons are firing in Tyson’s poultry segment behind an 11.7% operating margin, low feed costs and growing consumer demand up 3% for fresh chicken. Smith said deli and quick-serve chicken sales are also up. Quick serve was up 8% and Mexican quick-serve sales rose 11%.
BEEF, PORK CHALLENGES
As expected, Tyson Foods’ beef segment posted a $20 million operating loss during the second quarter, and has a $26 million operating loss for the first six months of the fiscal year. Operating income in the first half of fiscal 2014 was $93 million.
Smith said the beef segment was more challenging than expected in part because of the West Coast port congestion. Also weighing down profits were thin processing margins squeezed by high live cattle prices at a time when Tyson needed to fire up the expansion at its Dakota City, Neb., beef processing plant.
“We had this huge capital investment in Dakota City that we needed to run at the same time live cattle prices were the highest,” Smith said.
On a positive note, Smith said the updated facility is state-of-the-art and will pay off in the future when beef demand and supplies recover. With that, Smith believes the worst of the beef downturn in behind them noting that the back half 2015 should be positive, though not as profitable as last year.
He said the 19% that wholesale ground beef prices rose in the past month has not yet been fully passed on to consumers.
Tyson’s pork segment had an operating income of $99 million in the quarter, down from $107 million a year ago. Sales revenue declined to $1.2 billion, on softer than expect pricing which was down 15.4% from the year-ago period. Sales volume in the pork segment decreased because of the sale Heinold Hog Markets business in the first quarter of fiscal 2015. Excluding the impact of that sales, sales volume grew 3.2% and 2.4% for the second quarter and first six months of fiscal 2015, respectively, driven by better pork demand.
INTERNATIONAL SCALEDOWN
Tyson Foods international footprint continues to shrink. International sales for the quarter were $222 million, down from $328 million a year ago. Operating losses of $15 million, where halved from the $30 million loss reported a year ago.
Sales volume in the international segment declined because of the sale of the company’s Brazil operation during the first quarter of fiscal 2015, and weak demand in China. Average sales price decreased due to supply imbalances associated with weak demand in China and currency devaluation in Mexico.
Smith said Tyson expects to close the sale of its Mexico business before the next quarter ends if approved by Mexican antitrust officials.
With regard to China, Smith said Tyson is in holding pattern waiting for any signal that demand has returned. He said an older sow population in China is going to mean less pork in the coming months, which should boost demand for chicken.
LOOK AHEAD
Tyson Foods expects fiscal 2015 sales to reach $41 billion based on gains in the chicken and prepared food segments. Smith said beef and pork the segments should also recover in the back half of this year.
“The economics are better for spending than they have been in several years. We will be looking to promote more branded products that have higher margins. The restaurant sector is also showing growth with traffic up 3%,” the company noted.
Smith reiterated annual guidance of $3.30 to 3.40 adjusted earnings per share, noting that it was conservative given the synergies projected. Smith said Tyson would be reinvesting some of the savings into a few brands that have lost market share in an attempt to regain share and revive sales.
The top priority after overall sales growth is to reduce debt. Chief Financial Officer Dennis Leatherby said with free cash, the company will continue to pay down its debt to two times EBIDTA earnings to ensure a sounder balance sheet in keeping with its “investment grade” credit rating.