Tyson details chicken performance hiccup

by Keith Nunes
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 Tyson
Tyson does not expect Chicken business issues to carry over into fiscal 2017. 
 
SPRINGDALE, Ark. — Despite reporting record fiscal 2016 earnings on Nov. 21, executives with Tyson Foods Inc. found themselves on the defensive during a conference call with securities analysts. Questions were raised over the lackluster performance of the company’s Chicken segment and the timing of the announcement of Tom Hayes succeeding CEO Donnie Smith at the end of the year. The Chicken business shortfall combined with the CEO news, pushed the company’s stock price down 14 percent in trading on Nov. 21.

 

Hayes, who was appointed president earlier this year, addressed the challenges the company faced, most notably in its Chicken business, during the fourth quarter.

In the Chicken segment, the company’s largest, for the fourth quarter, operating income was $220 million with a 7.8 percent operating margin. Adjusted volume was down 3.2 percent and average price was up 3.5 percent.

Tom Haynes
Tom Hayes, president of Tyson 

“There were three factors leading to the lower-than-expected results in the fourth quarter in Chicken,” Hayes said. “First, our production forecasts are based on consumer demand, and through our sales and operations planning process we received indications of lower demand in July and August. As our business models dictates we reduced production in response to softening consumer demand.

“Secondly, we absorbed a sharp spike in soybean meal input costs within the quarter that affected margins in the short term. And third, having completed the restaging of the Tyson brand we turned MAP back on to grow points of distribution heading into the new fiscal year. As a result, our Tyson brand frozen and value-added chicken volume was up 6 percent in Q4 of 2016 and is gaining momentum, portending very strong Chicken segment volume in our first quarter of 2017.”

For the year, Chicken segment operating income was $1.31 billion on sales of $10,927 million. Both were below segment results during fiscal 2015.

Analysts on the conference call expressed concern the fourth quarter Chicken business performance may continue in fiscal 2017. Hayes said he expected strong results in the first quarter, and Smith added that he expected Chicken earnings to be at or above the company’s normalized range.

Looking ahead, the company said in fiscal 2017, the U.S. Dept. of Agriculture indicates domestic meat protein production will increase approximately 2 percent to 3 percent from fiscal 2016 levels. Specifically, chicken production is expected to increase 2 percent, beef 2 percent to 3 percent and pork 3 percent.

Increased meat production may translate into lower input costs in Tyson's Prepared Foods business.

 Tyson
Increased meat production may translate into lower input costs in Tyson's Prepared Food business. 
 
The increased production is expected to translate into lower input costs of an estimated $125 million in Tyson’s Prepared Foods business.

 

“Looking forward, we will continue building this business for long-term, sustainable growth by investing in innovation, consumer insights, our brands, our customer relationships, our facilities and our people,” Hayes said. “In addition to allocating $1 billion for capital expenditures in fiscal 2017, we are investing in initiatives such as improved worker safety, food safety, animal well-being, warehouse and distribution optimization and attracting and retaining talent throughout our company. These investments will pay off in the coming years through, among other things, improved costs and reduced turnover.”

Dennis Leatherby, CFO, said much of the capital expenditures will be invested in expanding production capacity on cooked chicken and fully cooked chicken.

“…We’re pretty close to being well through that capacity and we need to build more,” he said.

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