Donnie Smith, president and CEO of Tyson Foods
President and CEO Donnie Smith said the backlog at West Coast ports and short supplies of cattle-on-feed hindered progress in Tyson Foods' beef segment.

SPRINGDALE, Ark. – It appears that beef was a buzz kill to Tyson Foods Inc.’s third-quarter earnings performance. President and CEO Donnie Smith told analysts during an earnings conference call on Aug. 3 that the company’s beef segment “under-delivered” expectations by $84 million.

“We could not offset the quick and substantial impact of beef in the quarter despite the significant progress across the rest of the portfolio,” Smith said. Two issues caused the operating loss of $7 million, he said.

“First was the West Coast port situation. There was a significant amount of meat in the pipeline and we sold it at lower values in alternative markets rather than building inventory and tying up our working capital,” Smith explained. “This cost us about $84 million in the third quarter.

“The second issue began in late May, early June when feed-lot margin erosion accelerated. Feed lots slowed the pace of their cattle marketings from the normal 150 days to about 180 days. As a result, we haven’t seen the anticipated summer push of cattle.”

Despite the fact the most recent cattle-on-feed report indicated an increase in feedlot cattle compared to a year ago, Tyson was unwilling to overpay for cattle. As a result, Smith said, the company cut back on plant processing hours that resulted in inefficiencies and added costs. Markets will achieve equilibrium and conditions will improve, although Tyson will be negatively impacted in the short term, he said.

“The beef cow herd should have the largest percentage increase since 1980 at 3 percent or 750,000 head year over year,” Smith said. “When those cattle come to market we'll be ready with the plant’s position close to high density feeding areas, the most efficient operations in the industry and the most knowledgeable, experienced team in the business to run them. So, while the current headwinds in our beef segment don’t have a quick fix and challenges will continue into 2016, we still believe in the long-term viability of our beef business.”

Progress in Prepared Foods

Jimmy Dean breakfast options delivered a strong performance in the Prepared Foods segment.
Jimmy Dean frozen breakfast options delivered a strong performance in the Prepared Foods segment.

Progress in the quarter, Smith explained, included a strong performance in the Prepared Foods and chicken segments, in addition to cash flow of $864 million, which enabled Tyson to reduce its net debt by $688 million.

Efficiencies in Tyson’s legacy Prepared Foods brands, coupled with synergies from the Hillshire Brands acquisition, drove a strong performance in the segment. Adjusted operating income for the quarter was $197 million. Sales volume for the quarter jumped 77.4 percent on the addition of Hillshire Brands. Average sales price advanced 13 percent for the period.

Jimmy Dean frozen breakfast products had a stand-out performance, growing at more than two times the category growth rate and up 15 percent in the most recent 13-week period.

“Synergy capture from the integration of Hillshire Brands is going extremely well,” Smith said. “We had raised our estimates last quarter to more than $250 million this fiscal year, and now we’re on track for about $300 million, largely driven by operational improvements in the Tyson legacy Prepared Foods operation. The majority of the synergies, $79 million for the quarter, fell within the Prepared Foods segment where we continue to re-rate the cost structure of the business.”

Smith added the company expects to see the impact of reductions in some product lines will occur when Tyson responds to commodity declines, particularly in pork-raw materials. The long-term strategy is to protect margins while maintaining competitive price premiums.

“The fundamentals in this segment remain strong and we continue to focus on a long-term growth and brand building,” he said. “We anticipate our retail margins will moderate a bit in the fourth quarter as we spend against the national launches of Hillshire Snacking and Ball Park Jerky, as well as increased MAP spending behind innovation in the base business.”

The chicken segment also provided positive news for Tyson. For the most recent quarter, adjusted operating income in the chicken segment grew to $313 million, up from $195 million in 2014 despite sales decline of $2.76 billion compared to $2.83 billion a year ago. Tyson’s retail value-added poultry business continues to improve.

“We’re pulling innovation projects forward and adding new ideas to the pipeline that include dark-meat utilization,” Smith said. “Most of these products will fall into our Prepared Foods segment for branded items like Aidells Sausage, Ball Park Flame Grilled Chicken Patties, and a host of foodservice applications. So, we're excited about the opportunities there, not just for the short term but for the longer term, as well.”

Tyson’s International segment achieved adjusted operating income of $1 million for the third quarter. Average sales prices dropped 10.5 percent while volumes plunged 25.3 percent on the sale of the company’s operations in Brazil and weak demand in China. However, stronger demand in Mexico partially offset volume declines.

“We’re still in a holding pattern in China,” Smith noted, “and the sale of our Mexico business closed on June 29 following the end of the third quarter.”

Optimistic outlook

Hillshire Snacking will go nationwide in fiscal 2016.
Fourth quarter highlights include the nationwide expansion of Hillshire Snacking, flame-grilled beef jerky and dark meat chicken in Aidells, Ball Park  and foodservice applications.

Looking ahead to the fourth quarter, Dennis Leatherby, executive vice president and CFO said the company is on track to capture $300 million from its Prepared Foods profit improvement initiatives and Hillshire Brands synergies in fiscal 2015 and more than $400 million in fiscal 2016.”

“We expect revenues of approximately $41 billion for [fiscal year 2015] which is over 9 percent growth compared to [fiscal 2014],” Leatherby said. “This is driven primarily by a full year of Hillshire Brands results offset by reductions in our international operations. We believe 2016 revenues should be similar to FY15 as we grow our current businesses to offset the impact of FY15 divestitures.”

Additionally, Hillshire Snacking will expand nationally and the Ball Park Brand will enter the jerky category with an added twist. “Our flame-grilled process delivers a uniquely tender jerky that both consumers and customers are enthusiastic about,” Smith said. “We have many more new products, new platforms and innovations in the pipeline and I look forward to sharing those with you in the coming quarters.”