SPRINGDALE, Ark. – The future positive impact of this past month’s $3.2 billion acquisition of AdvancePierre Foods Holdings Inc., along with the dampening effect of fires at two of its poultry processing plants this past February, were dominant topics of discussion during a conference call to discuss Tyson Foods Inc.’s Q2 results with analysts the morning of May 8. The fires, one at the company’s facility in Vicksburg, Mississippi, and the other at the company’s recently renovated Vienna, Georgia, tray-pack plant, produced a hiccup that translated into about a 2 percent drop in production. Incidentally, both plants have been repaired and are now fully operational.
During his comments, Tom Hayes, president and CEO, said the company plans to continue with its product innovations, including the July introduction of organic chicken to its Nature Raised Farm brand. He also said Tyson will expand its Tastemakers meal kits beyond the e-commerce platform and will be test marketing the brand with a limited number of retailers in Texas. He reiterated recently announced plans to transition all of Tyson’s retail branded chicken to “No Antibiotics Ever” by June.
He also recapped the significance of appointing Justin Whitmore as Tyson’s first-ever chief sustainability officer, “as sustainability comes to the forefront of the company.” He explained how the company’s sustainability efforts not only include feeding the world with a portfolio of protein-based foods, but also providing improved workplace conditions system wide by increasing training, accentuating workplace safety, increasing compensation and overall transparency. Tyson will utilize third-party social compliance audits to monitor its success in these endeavors.
“To be successful we must step up our focus on continuous improvement, to reduce waste and cost,” Hayes said, adding that the AdvancePierre acquisition will put an emphasis on Lean and Six Sigma manufacturing practices throughout Tyson.
During the second quarter ended April 1, 2017, both net income and sales declined at Tyson. Net income attributable to Tyson was $341 million, or $1.01 per share, down 21 percent from $434 million, or $1.07 per share, reported in the second quarter of 2016. Sales for the second quarter were $9,083 million, down from $9,170 million reported a year ago.
With hog supplies expected to increase by up to 4 percent in the coming year along with continued growth in export demand, Hayes believes the Pork segment operating margin for the remainder of the year will finish at about 12 percent and momentum expected to continue into 2018. Not unlike its Beef segment, Pork is performing above its normalized level of 6 percent to 8 percent. With the commodities operating well, cash generation is increasing while they generate raw materials for the company’s Prepared Foods businesses.
In the Beef segment, sales volume decreased in the second quarter on lower volumes of live cattle processed, while average sales price retreated due to increased availability of live cattle supply and lower livestock cost, according to Tyson. Operating income in the segment advanced on more favorable market conditions.
As for the company’s value added businesses, operating income for the chicken segment was $233 million at an 8.3 percent operating margin as average price increased by 4.3 percent and volume dipped by 2 percent. “While the chicken segment fell below its normalized operating margin range of 9 to 11 percent, it would have been within the normalized range had it not been for the fires we experienced in two of our plants,” Hayes said. Based on the US Dept. of Agriculture’s forecast of a 2 percent increase in chicken supply for the year, Tyson expects to be able to absorb that increase while balancing supply and demand.
In the company’s Prepared Foods segment, Hayes said there are some areas continuing to grow, “and others that need work.” He said plans are to accelerate profitable growth using a focused “fix-and-grow” approach. Tyson is about six months into an 18 month investment plant to bolster business in the foodservice channel within the segment, including pizza toppings and ingredient meats.
Prepared Foods restructuring is ongoing in an effort to realize cost savings, especially with the acquisition of AdvancePierre. “That said, we are still in the fix it phase,” and due to drops in volume and increased cost in the foodservice Prepared Foods business, expectations for the segment have been lowered to 9 percent return on sales for the year.
Cost synergies are expected to be approximately $200 million within three years with the AdvancePierre acquisition, according to Hayes, which will serve to improve the Prepared Foods business even more.
The company continues to contend with flat or declining traffic at Foodservice hindering check sizes. Quick-service chicken growth “continues to be a bright spot with traffic growing in the mid-single digits,” Hayes said. Broadline distributor growth is being driven by value-added chicken, breakfast sausage and dinner sausage while the company’s CPG growth (its “Core 9” retail products) has been one of the only firms to realize volume and dollar sales.