Tyson Foods posts record first quarter income, raises full-year earnings guidance (Updated)

Editor’s note: Story update with changes and additions throughout.
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The folks based out of Springdale have been selling the meats. Tyson Foods on Monday announced record fiscal first quarter net income of $594 million, up almost 29% compared to the same period in the previous fiscal quarter thanks to big gains in the beef and pork segments.

Earnings per share of $1.59 far outpaced analysts’ consensus estimate of $1.26. Total revenue for the quarter was $9.182 billion, better than the $9.152 billion in the same quarter of 2016 and better than the consensus estimate of $9.05 billion.

“The year is off to the best start in company history with record earnings, record operating income and record cash flows,” Tom Hayes, Tyson Foods president and CEO said in the earnings statement. “Return on sales for each operating segment was in or above the normalized range. The tremendous returns generated in the Beef and Pork segments are providing fuel for growth in our value-added Chicken and Prepared Foods segments.”

Hayes, a New England native, told analysts during the call that it’s a record year for his Patriots and Tyson Foods. Hayes said the company is on track for a fifth straight year of record earnings. To that point, the company raised fiscal year 2017 earnings guidance from a $4.70-$4.85 range to $4.90-$5.05.

While Tyson is off to a banner start, Hayes said the company will continue to invest in its prepared foods segment to try and optimize this returns for the future. Tyson said it captured $161 million in synergies though not all of it flows through to bottom line as more investment is needed.

Dennis Leatherby, chief financial officer for Tyson Foods, said the company allocated $1 billion in capital spending for the year, with most in the prepared foods segment and chicken segments. Tyson reported $1 billion in free cash flow, with net debt of $5.7 billion and $1.6 billion in liquidity after the first quarter results. Tyson also continues to repurchase shares with its free cash to the tune of 8.1 million shares, or $520 million in the quarter.

But the one sticking point in investors minds was the flat sales revenue projection despite Tyson’s efforts to push more volume amid declining prices in beef and other proteins. Tyson shares fell about 4% in heavy trading during the morning session. Shares were trading around $63.40, down $1.99 in the early afternoon session. For the past 52 weeks Tyson shares have ranged from $55.72 to $77.05, and analysts project a one-year target price of $70.50.

Tyson management also forecast an operating loss in China and India operations of $70 million, which includes the company’s New Ventures subsidiary of this year. Other factors weighing the stock down could be news that Tyson was recently subpoenaed by the federal Securities and Exchange Commission regarding anti-trust allegations of price collusion among the industry.

Hayes told the media during their call the company was “anxious to defend ourselves in court.” He said the subpoena served Jan. 20 related to an early stage investigation based on allegations and the anti-trust litigation and the company is fully compliant with the investigation. When asked about a second suit filed by contract growers in eastern Oklahoma, Hayes defended the company’s position with its growers saying the average grower has 15 years with the company and contracts are completely voluntary.

He said growers are free to discuss their contract concerns with Tyson at any time and they are also free to switch to other chicken processors that might also be in their areas.

CHICKEN POTENTIAL
Operating income in the chicken segment during the quarter was $263 million, down from $358 million in the same quarter of 2016. Segment sales reached $2.706 billion, up from $2.636 billion.

“Operating income decreased due to increased marketing, advertising and promotion spend and higher operating costs which included $23 million of compensation and benefit integration expense. Feed costs decreased $20 million during the first quarter of fiscal 2017,” the company noted.

Valued-added sales were up 9%, while commodity sales down, Hayes said during the call. Additional spending will be necessary to support growth in the Tyson brand. He said feed costs are expected to be flat for the year and unless there is some unforeseen grain shock, he expects the chicken segment will have an operating margin between 9%-11%.

Hayes said Tyson expects to grow its fresh and frozen chicken sales volumes and the company has added capacity for cooked chicken while feed costs are low. He agreed chicken prices are soft because there is a lot of protein available. He said competitive pricing is just part of the business and that won’t abate anytime soon. Poultry economist Paul Aho, said the alignment of low grain costs and healthy demand have created a “sweet spot” for the poultry industry to start 2017. Aho said the underlying fundamentals of the chicken industry are about “as good as it gets.”

Hayes told analysts Tyson would continue grow whole birds as needed but aggressively buy parts as needed to fill food service orders. He said the quarter which ends March 31 is seasonally the weakest quarter of the year and 2017 won’t likely be an exception.

SOLID FRESH MEATS
Beef segment operating income totaled $299 million, more than quadrupling the $71 million in the same quarter of 2016. Segment sales totaled $3.528 billion, below the $3.614 billion in the comparable quarter.

“Average sales price decreased due to higher domestic availability of beef supplies and lower livestock cost. Operating income increased due to more favorable market conditions as we maximized our revenues relative to the decline in live fed cattle costs, partially offset by higher operating costs,” company officials said of the segment.

Despite the record first quarter operating income, the beef business has been challenged in the last few weeks, but Hayes said Tyson will see a 5% operating margin for the full year. He said the beef business benefited from mark-to-market losses logged in the previous quarter which were recaptured in the first quarter.

Hayes said there should be ample fed cattle supplies to support a strong operating margin. Beef prices continue to fall, but with more cattle on the market plants can run more efficiently. He expects robust exports to also support the business this year. When asked how Tyson managed to outperform its beef competitors, Hayes said the company’s plants are located in areas where there are good cattle supplies, and thanks to exports and decent consumer demand the company’s margins were strong.

Operating income in the pork segment was $247 million, up from $158 million in the same quarter of 2016. Segment sales totaled $1.252 billion, just ahead of the $1.213 billion in the same quarter of 2016. The company cited “strong demand for our pork products and increased exports” as reasons for the operating income gain.

As with the beef segment, Tyson pork is a margin business in that the company has to balance the cost of the procuring the animal, processing expenses with the value the finished meat brings. Hayes said this year he expects the pork segment to have an operating margin around 12%, again a high mark for the company.

CHALLENGED PREPARED FOODS
One area that remains challenged is the prepared foods segment, despite the fact that’s where the majority of Hillshire Brands went. Operating income in the prepared foods segment totaled $190 million, down from $207 million in the same quarter of 2016. Segment sales reached $1.895 billion, just below the $1.896 billion in the same quarter of 2016.

“Operating income decreased due to higher operating costs at some of our facilities, increased marketing, advertising and promotion spend and $22 million of compensation and benefit integration expense,” the company said.

Hayes said the prepared food segment as really two very different businesses — food service which is restaurants and institutions and retail segment like the Tyson Tastemaker meal kits sold on Amazon.com. Hayes the large food service business is largely private label, but the company has identified a few areas where it will focus that growth which include pizza toppings and chicken nuggets.

Hayes said the Tyson Foods business has been a challenge with respect to margins because much of it has been private label, in contrast to Hillshire’s branded products. He said the company will continue to position itself to grow to meet the biggest demand and that could mean shifting production, expanding production and even closing plants like in the recent past.

Hayes said the prepared foods segment will make up a much larger share of the company’s operating income, but for the near-term he’s expecting strong beef, pork and chicken segments to carry the load.