Tyson posts record third quarter income, exits Brazil and Mexico (Updated)

The metamorphosis of Tyson Foods is well underway as the meat giant sheds its chicken operations in Brazil and Mexico to Brazilian-based JBS Holdings for $575 million and continues its own acquisition of Hillshire Brands. Both deals are expected to close by the end of the year.

Also on Monday, (July 28) Tyson Foods reported adjusted third quarter earnings of 75 cents, below Wall Street expectations of 78 cents per share. Net income for the quarter attributable to continuing operations was $260 million, just above the $249 million for the same quarter in 2013.

The company adjusted earnings by factoring out $29 million in fees (5 cent per share gain) related to the Hillshire Brands acquisition and $49 million in costs (8 cent per share gain) related to the closure of plants in Iowa, New Mexico and New York. The adjustment also includes removing $40 million (11 cent per share gain) for a tax benefit. Tyson had total sales of $9.682 billion in the third quarter ending June 30. Sales revenue improved from $8.731 billion a year ago, on higher meat prices. Sales topped the consensus analyst estimate of $9.47 billion.

"With $0.75 adjusted EPS, this was a record third quarter," Donnie Smith, Tyson Foods' president and CEO, said in the earnings statement. "Overall, our results were in line with our expectations. The Chicken segment could have performed better had it not been for isolated issues at a couple of plants. The Beef segment finished the quarter remarkably well after a difficult start. The Pork segment had a record third quarter despite tight hog supplies due to the PED virus. The Prepared Foods segment had a disappointing quarter primarily due to the continued run up in pork raw material inputs.”

Total revenue hit $27.475 billion for the first nine months of the company’s fiscal year, 7.8% higher than the $25.48 billion during the same period in 2013. Net income for the first nine months is $727 million, ahead of the comparable $517 million in 2013.

"We are nearing the end of what looks to be the best year in our company's history," Smith said. "We're looking forward to closing on the Hillshire acquisition before the end of our fourth quarter, and we're excited about combining the protein industry's best marketing and operations talent into one team. We'll be ready to start the new fiscal year together and anticipate delivering Tyson's sixth year in a row of strong earnings and operating income and also achieving our goal of at least 10% EPS growth in 2015."

INVESTOR APPROVAL
Investors approved of the Tyson results and added commentary on the pending merger with Hillshire Brands sending shares nearly 5% higher in early trading Monday. Shares (NYSE: TSN) were trading at $41.45, up $1.91 on high volume in the morning session. 

Tyson also announced plans to issue 24 million shares of its Class A common stock and 30 million tangible equity units with a stated $50 value, comprised of prepaid stock purchase contract and a senior note due July 2017, backed by the meat giant.

Net proceeds of this equity offering combined with additional debt financing and cash on hand, will help finance the previously announced acquisition of The Hillshire Brands Company and to pay related fees and expenses. Smith said Tyson remains committed to its investment grade rating and will working diligently to de-leverage its balance sheet from debt taken on to finance the $8.55 billion purchase of Hillshire  Brands. He expects the Hillshire acquisition to be accretive to earnings in 2015.

Fitch recently maintained Tyson Foods “stable” rating following the announcement of the Hillshire deal.

"Fitch views the pending acquisition of Hillshire as in line with Tyson's strategy of expanding in prepared foods and value-added products," according to Fitch analysts. "Pro forma for the acquisition, prepared foods will increase to 18% and 20% of Tyson's revenue and operating income, respectively, from 9% and 5% during the last 12 months ended March 29, 2014."

Fitch also expects Tyson to report its fifth-consecutive year of strong operating performance. The ratings firm said that Tyson's diversification and synergies with Hillshire Brands will help the bottom line despite mixed market fundamentals.

Not all analysts think the Hillshire deal is a slam dunk for Tyson investors. Robert Moskow, analyst with Credit Suisse recently downgraded Tyson stock to underperform, citing the “excessive premium paid to Hillshire Brands investors”.

“We certainly see how Tyson's offer to acquire Hillshire Brands at a 70% premium can create value for investors if they have a seven, ten, or twenty-year investment horizon. Unfortunately, most investors don't have the luxury of investing with such a long-term view,” Moskow noted.

SEGMENT INCOME
Operating income in the chicken segment was $195 million during the fiscal third quarter, below the $215 million in the same quarter of 2013.

Smith told analyst during the earnings call Monday, that demand for fully-cooked chicken products outpaced the company’s production capacity hindered by a fire in one plant and outdated equipment in another facility. He said Tyson has been buying more chicken on the open market to fill customer orders amid its own production shortfalls.

“We are completely out of fully-cooked capacity. We have ordered new equipment and are also bringing two more lines into production in the coming months. We expect our own production to be back to normal by the second quarter of 2015. This temporary disruption will reduce our return of sales by 1.2% to 2% in the fourth quarter,” Smith told analysts.

He said consumers are wanting more fresh retail chicken and Tyson plans to increase its processing capacity in this area in the coming months with increased companywide capital spending in 2015 to $900 million.

“We expect our chicken segment to fully recover in 2014 to a 10% return in sales. We feel good about the future. Grain costs are down, the products with the most demand are those with the highest margins,” Smith said.

Tyson’s beef segment income was $101 million, down from $114 million in the third quarter of 2013. The company cited fewer live cattle processed during the quarter as the reason for the decline.

Smith said Tyson expects adequate cattle for its operations which are located in the grain belt. He said retail beef prices continue to escalate. They have risen 10% in the past four weeks.

Tyson’s pork segment posted operating income of $128 million, almost double that of the $67 million in the 2013 quarter. Rising pork demand and higher pork prices contributed to the improved quarter for the segment. Smith said pork prices are up 23% in the past four weeks, and Tyson has been able to manage through the PED virus concerns better than expected.

The prepared food segment lost $50 million during the quarter compared to a $24 million gain in the same quarter of 2013. The loss was blamed on higher raw material costs of $95 million and investment in “growth platforms.”

Smith said the closure of the prepared foods facilities announced July 25 was part of the effort to streamline the prepared foods operations ahead of the Hillshire merger. 

“The closures were necessary to improve our cost structure, we are shifting the product mix to other, more efficient facilities. We continue to look for ways to improve the operational efficiencies in our private label products given we are facing higher costs of raw materials. We expect a positive outlook for 2015,” Smith said.

He told analysts that this segment would benefit from $225 million in synergies next year from the merger with Hillshire Brands. Those synergy savings are expected to top $500 million by year three.

“Combining Tyson’s legacy business with Hillshire branded business, it’s pretty easy to see to supply chain, purchasing and logistics synergies. Closing the 3 plants add to that.
This does not include marketing synergies and product innovation gains, which provide more upside,” Smith said.

INTERNATIONAL CHANGES
The company’s international segment lost $15 million compared to a $5 million gain in the 2013 quarter. 

Last quarter Tyson said it was disappointed with its Brazilian operations and it had cleaned house replacing management from the president to the field supervisors after several missteps.

Smith said at the time, “We have the right people in place there (Brazil) and expect this business to turn around in the back of this year.” 

On Monday, Smith said Tyson’s decision to sell its Latin American operations to JBS and Pilgrim’s Pride is a way it can quickly generate $575 million to help offset the cost the Hillshire acquisition. This deal is expected to close by the end of 2014.

"Although these are good businesses with great team members, we haven't had the necessary scale to gain leading share positions in these markets," Smith said. "In the short term, we'll use the sale proceeds to pay down debt associated with our acquisition of Hillshire Brands. Longer term, we remain committed to our international business and will continue to explore opportunities to extend our international presence."

Tyson de Mexico is a vertically integrated poultry business based in Gomez Palacio in North Central Mexico. It has three plants and employs more than 5,400 team members in its plants, offices and seven distribution centers. Tyson do Brasil operates two production plants in Santa Catarina and one in the state of Parana. Tyson do Brasil employs 5,000 team members.

Tyson Foods still plans to sell U.S.-processed chicken in Mexico. Part of the sales will include a “co-packaging” deal with Pilgrim’s Pride, which is a subsidiary of JBS.

Tyson’s three poultry plants in China, and the 5,000 people employed in Asian poultry operations, will not be sold. Smith said China continues to improve slowly. 

“We are now processing 100% company controlled in China today,” he added.