Tyson's Smith focuses on positives during challenging year
Nov. 23, 2015
by Joel Crews
Tyson Foods will increase MAP spending in fiscal 2016 to support the recently launched Hillshire Snacking, Ballpark Jerky lines and other products.
SPRINGDALE, Ark. – During a Nov. 23 conference call with analysts to discuss the results of its fiscal fourth quarter and its 2015 fiscal year, ended Oct. 3, 2015, executives from Tyson Foods Inc. highlighted what was, in many regards, a record-breaking quarter and fiscal year and discussed what hindered it from being an otherwise record-shattering performance.
|Donnie Smith, president and CEO, Tyson Foods
In recapping some of the good news, CEO and President Donnie Smith pointed out the company’s record-high adjusted earnings per share (EPS) of $3.15 per, which was its fourth consecutive year of EPS growth. Tyson’s adjusted sales of $40.6 billion for the fiscal year represents its sixth consecutive record year. Operating income of $2.3 billion, which represents an increase of 37 percent over the previous year, represents the third consecutive year of growth in this category. Additionally, the company’s three-year, compound annual growth rate for adjusted EPS is an unprecedented 17 percent, Smith said.
The accomplishments were especially notable, according to Smith, given the challenges facing the company and the entire meat and poultry industry. Mentioning the West Coast port slowdown earlier this year and its impact on beef and pork exports, Smith said the negative impact on Tyson translated to a $90 million loss. Avian influenza, likewise had a negative effect on Tyson’s chicken business as many trading partners cut off imports of US chicken and turkey to the tune of $139 million and most have not resumed shipments. Smith also pointed out that “in the last couple of weeks in the fiscal year, there was an unprecedented decline in the live cattle futures market,” which resulted in a loss of approximately $70 million that he said was a case of bad timing from a fiscal standpoint and not a sustained condition. Despite these setbacks, of nearly $300 million, “we still produced record adjusted sales, earnings, operating income and cash flows,” during the first full year with Hillshire as part of the new Tyson 2.0, said Smith, which captured $322 million in synergies, mostly in the company’s Prepared Foods business unit. Synergies in fiscal 2016 are expected to top $500 million and $700 million in fiscal 2017. This year’s synergies came in the form of operational improvements of $81 million for Q4 and $285 million in fiscal 2015. Part of the savings is utilized for marketing and promotion (MAP) as well as pricing to grow brands and launching new platforms.
Smith said in Fiscal 2016, MAP spending is increasing more to support the recently launched Hillshire Snacking, Ball Park jerky lines and the new Jimmy Dean “Shine on” marketing campaign. Another new product already on the shelves in some markets, and coming to more in the coming year is Jimmy Dean bacon. Supplementing the Wright Brand Bacon and Tyson brand of bacon, “we see room to expand loyalty for a premium, L-board bacon behind the Jimmy Dean brand bolstered by our deep capabilities in sourcing, making and selling bacon,” Smith said.
Other plans moving forward include optimizing Tyson’s Prepared Foods business unit, said Smith, referencing this past week’s announcement to close two plants due to age and proximity to raw material.
In the Chicken business unit, Smith pointed out that while volume was up 3 percent in Q4, average sales price declined 2 percent. Operating income for fiscal 2015 was $1.3 billion, with a 12 percent return on sales, while volume was up 2 percent and pricing was down 1.6 percent. Tyson’s practice of buying up to 10 percent of its chicken on the open market and then further processing it is proving to deliver strong results despite the drop in commodity chicken prices. This limited exposure to the recent volatility in commodity pricing serves Tyson well.
The focus on the company’s value-added chicken business is based largely in consumer retail products (52 percent), Smith said. Demand for these products is driven by brands, convenience and freshness. About 15 percent of the company’s chicken sales are in foodservice national accounts and are demand driven by quality, ease of preparation, flavor and innovation.
The Hillshire Brands acquisition gave Tyson Foods a better product mix, which positively impacted the company's Prepared Foods business.
Within the foodservice and value-added category Tyson sells about 17 percent of its chicken using broadline distributors that rely on the quality and consistency of the Tyson brand. Commodity sales have diminished to 15 percent, about half of what it was just a few years ago. “We’re working to continue reducing our commodity exposure through growth in consumer demand for dark meat and our buy-versus-grow strategy,” which rationalizes when it makes sense to buy parts on the market as opposed to growing those birds within the Tyson system. This year, for example, “We would have had an additional 4 million lbs. of leg quarters per week to sell,” Smith said. Based on its business model where consumer and customer pull about 90 percent of Tyson’s production of products versus 10 percent of its products being pushed into the market, the company is forecasting the chicken segment will produce returns in excess of 10 percent in fiscal 2016.
On the beef front, operating income for Q4 was negative $20 million on volume that slipped 1.5 percent while the average sales price slipped by 6 percent. For the year, operating income was down $53 million with return on sales of -.30 percent. Volume for the year slipped 2.2 percent based in large part because fewer cattle were processed, while the average sales price for the year increased 7 percent. Improvement and profitability in Q4 for the beef business was shirked by the late September drop-off in live cattle futures. “With cattle supplies flat to perhaps slightly higher in fiscal 2016 the beef business should approximate the low end of the newly revised, normalized range of 1.5 to 3 percent.”
Tyson’s pork business operating income was $88 million with a return on sales of 7.2 percent for the quarter. Sales volume increased about 7 percent as sales prices languished 23 percent lower during the quarter. Pork operating income for the year was $373 million with a 7.2 percent return on sales with increased volume of 4 percent while average sales price lagged by 16 percent. Looking ahead, Smith said the pork segment in fiscal 2016 with returns up to 8 percent.
Internationally, Tyson’s focus on India remains a priority as it is profitable and has plenty of potential despite it representing a small amount of business for now. China, on the other hand, has not been profitable for Tyson. “Given the ongoing losses generated in this business, record-low chicken prices, the slower economic outlook for China and our changing strategy, we recorded an impairment charge of $169 million in the fourth quarter,” said Smith, stating that details of the company’s plans in the two markets would be announced in the coming months.
Expecting overall foodservice traffic to remain mostly flat as fast-casual concepts fuel growth and breakfast and snacking provide opportunities in terms of dayparts. Smith said new products utilizing value-added chicken and prepared foods will take advantage of this ripe segment. As for the retail channel, Smith said opportunities to feature pork products are promising thanks to declining prices as of late. Year-over-year, fresh pork volume increased 6 percent on pricing that was 2 percent lower. Meanwhile, fresh chicken volume was up 1.5 percent on pricing that was 3 percent higher. Accentuating the trend, this past month, pork volume was up 11 percent on 13 percent lower pricing as fresh chicken volume decreased 2 percent with a 2 percent increase in pricing. Also in the past month, pricing finally eased on whole muscle and ground beef, Smith said.