Lower Gas Prices, Millennials Boosting Tyson Foods Chicken Demand

Incorporating its first quarter with newly-merged Hillshire Brands and its strong full-year performance, Tyson Foods’ stock closed nearly 6% higher in Monday’s trading after reporting more than $864 million in annual profits, an 11% increase from the previous year.

For the full fiscal year, the Springdale-based meat company reported $864 million in net income on revenue of $37.58 billion. In the previous fiscal year, Tyson recorded net income of $778 million on sales of $34.37 billion.

On Monday (Nov. 17), Tyson Foods’ shares closed at $43.03, up $2.37 from Friday’s close at $40.66.

Kim Souza with our content partner, The City Wire, breaks down the segment income from Tyson Foods in its latest quarter.

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.

CEO Donnie 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 prices 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 million 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.

One 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.

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