Editor’s note: This story is updated with changes and additions throughout.
Tyson Foods finished its fiscal year on a record-setting pace, with total sales of $41.373 billion up 10.1% over fiscal 2014. Unadjusted net income of $2.95 per share for the year was above the $2.37 per share in 2014, and topped the consensus estimate of $2.94.
The strong results factor in plenty of challenges like the $90 million effect of the West Coast slowdown earlier this year, a $139 million impact Tyson felt from Avian Influenza outbreaks and more recently a $70 million mark-to-market loss from sharp declines in live cattle prices.
“Despite the challenging climate we did not adjust earnings and we also managed to pay down debt ($1.7 billion) from a year ago,” Tyson Foods CEO Donnie Smith, said during the company’s earnings call on Monday (Nov. 23).
For the fourth fiscal quarter, unadjusted net income of 63 cents per share – $1.22 billion – was well below the 88 cents in the consensus estimate, and almost double the 35 cents per share in the 2014 fourth quarter. However, fourth quarter revenue of $10.34 billion beat the consensus of $10.34 billion.
Wall Street approved of the overall Tyson’s results despite the fourth quarter earnings miss as the share price rallied 10% in heavy volume following the announcement. Tyson Shares (NYSE: TSN) were trading around $48, up $4.30 in Monday’s morning session. During the past 52 weeks the share price has ranged from a $47.71 high to a $37.10 low.
Smith was bullish on the company’s outlook for fiscal 2016 because of its diversified portfolio, noting that the beef woes are largely behind them. Reflecting on fiscal 2015 Smith shared the following insight.
“Fiscal 2015 was an important year for Tyson Foods, because it proved that our house of brands gives us the ability to produce record sales and earnings in less than optimum conditions, all while successfully merging two large companies,” Smith said.
Also in the report, Tyson Foods explained some adjustments which occurred because of an additional week in the fourth quarter and 12 months of fiscal 2015, as well as one month in fiscal 2014 that included Hillshire Brands post-closing sales. Tyson reported adjusted 2015 fiscal year revenue of $40.623 billion, better than adjusted 2014 fiscal year revenue of $37.255 billion. Adjusted operating income for the year was $2.253 billion, a 36.6% increase from $1.649 billion in 2014.
“We achieved adjusted sales of more than $40 billion and adjusted EPS of $3.15, generated free cash flow of more than $1.5 billion, reduced net debt by $1.7 billion, repurchased $250 million of our stock in the fourth quarter and launched Ball Park Jerky and Hillshire Snacking – two entirely new platforms for the company,” Smith said.
Tyson Foods also reported an estimated $322 million in synergies for the fiscal year resulting from the $8.5 billion acquisition of Hillshire Brands completed in the fourth fiscal quarter of 2014. Smith said fiscal 2016 synergies should top $500 million and reach $700 million in fiscal 2017.
“The additional synergies will allow for more investment in innovation, new product launches and the strengthening of our brands,” Smith said.
He added that in 2016 the company will optimize its production footprint, moving some lines of production and consolidation in others which will help with efficiencies and lower the cost of production overall. On Friday (Nov. 19) Tyson Foods announced plans to shutter two plants in the Midwest (Chicago and Minnesota) this next year. Smith said these two plants had product mixes that could be moved into other plants.
“It’s never easy to close a plant, but after a thorough analysis the results we found an overwhelming case for shifting the production,” Smith explained during the media call on Monday.
He said more synergies will be gleaned from a complete review of the distribution network, looking at logistics costs and paring down some of the products and optimizing efficiencies inside the network.
“We will begin working on the distribution network synergies in fiscal 2016, but the majority of those cost savings will likely be reflected in fiscal 2017,” Smith said.
The company set per share earnings guidance of $3.50 to $3.65 for fiscal 2016 and Smith expects strong profits in chicken and pork with better results in prepared foods with a somewhat challenging beef climate. He did say the beef segment is about 18 to 24 months away from having significantly higher herd numbers and a much bigger supply of fed cattle.
On an unadjusted look, the company’s chicken segment and prepared food segment drove gains in operating income for the year and quarter. While the beef and pork segments struggled.
Chicken (fiscal year, unadjusted)
2015 operating income: $1.366 billion
2014 operating income: $883 million
Tyson said chicken sales continued to be strong through the fourth quarter of fiscal 2015. Total unadjusted chicken sales were $11.39 billion for the year, up 4.2% on more volume, offset by a 1.6% average price decline. For the quarter Tyson’s unadjusted chicken sales were $3.024 billion, up 10.8% from a year ago. On an adjusted basis, sales grew 2.9% for the growth and 2.2% for the year.
Smith said chicken prices have been falling in recently weeks from excess supplies and the normal seasonal downturn. Tyson’s chicken segment also benefited from $130 million in fewer grain costs in the quarter, saving $440 million in grain costs for the full year.
The company expects its chicken segment will continue to be a shining star in the diversified portfolio this next year. USDA data shows an increase in chicken production around 2% in fiscal 2016 compared to fiscal 2015. However, more recent data indicates a greater increase in supply which could outpace the demand.
“Based on current futures prices, we expect lower feed costs in fiscal 2016 compared to fiscal 2015 of approximately $100 million. Many of our sales contracts are formula based or shorter-term in nature, but there may be a lag time for price changes to take effect. For fiscal 2016, we believe our chicken segment’s operating margin should exceed 10%,” Smith said.
Beef (fiscal year, unadjusted)
2015 operating income: –$66 million
2014 operating income: $347 million
The troubled beef segment posted an unadjusted operating losses of $33 million for the quarter compared to $153 million gain a year ago. Losses for the year were $66 million compared to a $347 million gain in fiscal 2014.
Smith said the $70 million mark-to-market loss recorded in the beef segment was directly related to the hedging Tyson Foods does against its forward beef sales. He said Tyson Foods sells its beef forward and then hedges those trades buy purchasing cattle futures, which have to be marked to the market at the end of each quarter. The futures market dipped sharply on the last day of Tyson’s fiscal year end. If not for the mark-to-market loss, Tyson Foods would have showed a small profit in its beef segment for the fourth quarter and the year.
“We expect industry fed cattle supplies to be flat to slightly higher in fiscal 2016 compared to fiscal 2015. 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 in the release.
Tyson adjusted its normalized range of the beef segment to 1.5 to 3% based on historical performance and future expectations given existing beef fundamentals, tight cattle supplies and an imbalance of processing capacity. For fiscal 2016, Smith said the beef segment’s operating margin should approximate the low end of the new range.
Unadjusted beef sales were $4.429 billion in the quarter, up 6.1%, from a year ago. Sales rose to $17.236 billion, up 6.9% for the year. On an adjusted basis, beef sales were essentially flat to a year ago. Unadjusted sales for the year were $16.921 billion, with 2.2% less volume against prices that were up 6.9% from a year ago.
Pork (fiscal year, unadjusted)
2015 operating income: $380 million
2014 operating income: $455 million
Tyson’s pork segment had unadjusted sales of $1.311 billion in the quarter, up 5.1% on volume, with prices falling 23.3%. For the year, unadjusted sales were $5.262 billion compared to $6.304 billion in fiscal 2014. Tyson’s adjusted sales totaled $1.219 billion in the quarter, down 25% from a year ago. For the year adjusted pork sales were $5.169 billion, falling 18% from the fiscal 2014.
Tyson said the adjusted sales volume decreased due to the divestiture of our Heinold Hog Markets business in the first quarter of fiscal 2015.
“Excluding the impact of the divestiture, our adjusted sales volume grew 6.5% and 3.5% for the fourth quarter and 12 months of fiscal 2015, respectively, driven by better demand for our pork products. Live hog supplies increased, which drove down livestock cost and adjusted average sales price,” Smith noted in the release.
He said even though the operating income was lower, the company was able to maximize revenues relative to live hot market prices.
“We expect industry hog supplies to increase around 2% to 3% in fiscal 2016 compared to fiscal 2015. For fiscal 2016, we believe our pork segment’s operating margin will be in its normalized range of 6% to 8%
Prepared Foods (fiscal year, unadjusted)
2015 operating income: $588 million
2014 operating income: –$60 million
Tyson said Avian Influenza impacted the prepared foods segment in part because of a lack of turkey for its large lunchmeat business. Smith said the prepared foods business is evenly split between food service and retail. The food service side being pizza toppings, other ingredient meats, bread, tortillas and desserts. The only hitch has been a supply issue with sweet potatoes following the flooding in South Carolina.
“Pie sales have been going pretty well ahead of this holiday season, despite the supply disruption in sweet potatoes. We managed to get the supply we needed,” he said.
The bigger concern has been the absence of turkey related to the Avian Influenza outbreaks. Smith said Tyson tried to fill the gap with some new ham and chicken offerings in lunchmeat but they lost business overall because the lack of turkey.
“By late January our turkey lunchmeat production should be back to normal and we will try and regain those lost sales,” Smith said during the call.
He said there has been unprecedented competition in the rolled sausage category which is one of the company’s strongest retail businesses. Smith said there is heavy promotional activity going on through the holiday with Jimmy Dean sausage as the company is trying to regain some lost market share.
“Our business model is working. The Prepared Foods segment had a very strong performance in the first full year of Tyson and Hillshire coming together. The Chicken segment had an outstanding year. Pork produced solid results. Beef experienced a tough operating environment most of fiscal 2015, but the other segments more than made up for it,” Smith concluded.