Tyson posts record sales of $10.8 billion, income up 21.6% (Updated)

It is indeed a happy new year at Tyson Foods. The Springdale-based global meat processing, marketing and distribution company reported record revenue of $10.817 billion for the first fiscal quarter, up 23.4%. The quarterly net income of $309 million was ahead of the $254 million in the same quarter of 2013.

Per share earnings of 77 cents also beat the consensus analyst estimate of 73 cents. Also, the $10.817 billion in revenue was well ahead of the consensus estimate of $10.35 billion.

The improved numbers largely reflect the integration of Hillshire Brands into the Tyson portfolio. Tyson Foods completed the $8.5 billion acquisition of Hillshire in August.

"Tyson's fiscal year is off to a great start with our first full quarter as a combined company producing record sales and adjusted operating income," Donnie Smith, president and CEO of Tyson Foods, said in the earnings report issued Friday morning (Jan. 30). "We used our strong cash flows to pay down debt by $650 million in the quarter.”

The debt move is likely to be well received in investor circles. The Hillshire deal came with concerns that the expensive deal would be a debt burden on Tyson Foods.

"We are proceeding with the integration of Hillshire Brands. I want to thank our team members for their ability to quickly focus on the business as we brought the two companies together. The first quarter was a crucial time, and the team handled it well,” Smith noted in the earnings report.

The company also stayed with a healthy fiscal year per share earnings guidance in the $3.30-$3.40 range – or around $42 billion. The company earned $2.94 a share in the recent fiscal year.

“We expect fiscal 2015 sales to approximate $42 billion as we integrate Hillshire Brands and continue to accelerate growth in domestic value-added chicken sales and Prepared Food sales,” the company noted.

BRIGHT CHICKEN
The chicken segment had a record quarter with sales revenue of $2.78 billion, up 4.66% compared to $2.656 billion in the same quarter of the previous fiscal year. Operating income rose 39% in the segment to $351 million during the quarter.

“Operating income increased due to higher average sales price and volumes in addition to lower feed ingredient costs which decreased $110 million during the first quarter of fiscal 2015,” the company said of its chicken segment.

Smith said during Friday mornings earnings call that there continues to be a push in consumer demand for fresh chicken that rose 8% across the nation and Tyson Foods saw the same uptick in its fresh chicken business for the quarter. 

“We are still a little short of supply in the fresh tray pack chicken for retail,” Smith said.

Hence the company has added lines of production in two of its chicken plants and recently announced a third plant expansion to meet the growing demand. Smith said food service sales were also strong in the quarter with some of the categories posting their highest gains since the recession. He said Tyson’s chicken sales growth to food service was double that of the nation on a sales basis.

The frozen chicken category sales are also strong as Tyson said it works to fill the pent-up demand from its supply glitches in recent quarters resulting from lower production levels following a plant fire.

Looking forward Smith said he’s not concerned about the uptick in industry production despite the fact that slaughter numbers were up 7% in the first quarter.

He said wing and breast meat prices held up just fine amid the higher production levels because the demand is there for the meat. 

BEEF CHALLENGES
As expected, the beef segment struggled. The company posted a $6 million loss compared to a $58 million gain in the first fiscal quarter of 2013. Total sales in the beef segment was $4.391 billion, up compared to the $3.734 billion in same quarter of 2013. The company said sales volume declined 2.7%, but average prices for beef jumped 20.9% in the quarter.

Smith said record high beef high prices in retail have shifted demand away from beef and compressed Tyson’s margins. He does not think that will change because 60% of consumers say high beef prices are causing them to shift to other meats.

“We are starting to see ground meat prices come down a little in recent weeks,” Smith said, but added that prices remain historically high.

The USDA forecasts beef prices will increase 4.5% to 5.5% this year from last. That’s far less than the 11% to 12% increase it forecast for prices in 2014 versus 2013. 

Steve Kay, publisher of Cattle Buyers Weekly, has said this should be positive for fed-beef processors like Tyson Foods as they might have to pay record prices for live cattle in the first half of the year and will need to get higher boxed-beef prices as a result.

FATTER PORK
The pork segment posted total first quarter sales of $1.54 billion, better than the $1.424 billion in the previous year’s quarter. Operating income was $122 million, just slightly higher than the $121 million in the first quarter of 2013. The company said higher demand for pork combined with a smaller supply of hogs allowed the company to boost average prices by 7% during the quarter.

“We expect further recovery from PED (hog virus) and it’s going to be another good year for the pork segment,” Smith said.

The consumption level for pork is relatively flat, but Smith said exports comprise 25% of the nation’s pork business. 

With U.S. pork production heading up this year to 23.62 billion pounds, industry analysts predict live hog prices to drop sharply to $65 per hundredweight. A year ago the prices were $76 per hundredweight. Tyson expects its pork margin in fiscal 2015 to be in its normalized range of 6% to 8%.

PREPARED FOODS
Bolstered by the Hillshire Brands business, Tyson Foods’ prepared foods segment had total quarterly sales of $2.133 billion, a big jump over the $907 million in the first quarter of 2013. Operating income in the quarter for the segment was $71 million, up 343.75% compared to the same quarter in 2013.

“We have streamlined our operations in this segment and the integration of Hillshire has gone extremely well,” Smith said.

He said lower gas prices are helping push food service sales higher with the casual dinning traffic recording its first positive results since the recession in 2008.

Smith said this segment will continue to improve as synergies are realized from the Hillshire merger.

INTERNATIONAL STALL
Tyson reported international sales of $305 million in the quarter, down 2.9% from the $327 million recorded a year ago. The decline resulted from the sale of Tyson’s business in Mexico and Brazil which netted the company $130 million in the quarter. Tyson still expects to receive $30 million more from the sale to be paid in the second quarter.

“We are still in a holding pattern in China as we wait for demand to improve. The international business is tough, but we reduced our loss,” Smith said.

The segment posted an operating loss of $14 million in the quarter, which was better than $28 million loss recorded a year ago.

FINANCIAL UPDATE
Tyson Food Chief Financial Officer Dennis Leatherby said the company had capital expenditures of $231 million in the quarter.

Tyson expects fiscal year capital expenditures to be approximately $900 million with the company execs focused on investments they believe will provide the highest return.

He expects fiscal 2015 net interest expense to be approximately $280 million as the company took on additional debt for the Hillshire acquisition. Leatherby said total liquidity which was $1.6 billion at Dec. 27, continues to be above the company’s benchmark goal of $1.2 billion. 

Wall Street took some profits selling off Tyson shares on Friday following the report. Shares of Tyson Foods (NYSE: TSN) were trading at $39.62 when the earning call concluded on Friday morning  Shares were down 2.16% in heavy trading. During the past 52 weeks, the share price has ranged from a $44.24 high to a $34.90 low.