Chicken operations challenge Tyson Foods

by Keith Nunes
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SPRINGDALE, ARK. – Operational issues in its Chicken business hindered Tyson Foods, Inc.’s earnings during the third quarter. In a conference call with financial analysts on July 28, company management noted it left “money on the table” in the third quarter and may leave more on the table in the fourth quarter.

“In February of this year, we experienced a fire at one of our fully cooked processing plants,” said Donnie Smith, president and chief executive officer. “Fortunately, no one was injured, but the damage to the infrastructure was more serious than we had originally thought and our ability to supply product suffered.”

Additionally, a second fully cooked processing plant experienced a series of operational issues, and its ability to supply the market with value-added products was impacted significantly. The company declined to describe the issues at the plant for competitive reasons.

“These temporary disruptions and the resulting actions we took with customers have and will cost us between 1.5% and 2% return on sales in Q3 and Q4 in our Chicken segment,” Mr. Smith said. “In F.Y. 15 we’ll be back to our full production capability, and we'll have additional fully cooked capacity coming on-line in the spring, so our Chicken segment is expected to fully recover and deliver a 10% return on sales in 2015.”

The company recorded net income of $260 million during the third quarter ended June 28, equal to 75c per share on the common stock, and an increase compared to the same period during the previous year when the company earned $249 million, equal to 73c per share.

Sales for the quarter were $9,682 million compared with $8,731 during the previous year.

“F.Y. 15 is setting up to be another record year for sales, operating income, and e.p.s.,” Mr. Smith said. “We'll have a better idea of how it will look on our November call, but initially we expect Chicken margins to be at or above 10% as we get past the issues in the two value-added plants I told you about, and we see the benefits from around $400 million in lower feed ingredient costs.

“We think Beef and Pork margins will look similar to F.Y. 14. Prepared Foods margins should be much stronger as we run a sound legacy business and integrate Hillshire into the Prepared Foods segment.”

Mr. Smith said Tyson’s beef business started slowly during the quarter, but increased as the summer grilling season increased demand despite record-high pricing.

“Looking on to 2015, we expect next year to look a lot like this year from a cattle supply and an operating margin perspective,” he said. “Heavier-weight cattle are expected to continue coming to market, and we're starting to see signs of heifer retention, but we're seeing adequate supply of cattle in our regions.”

The company was able to weather supply disruptions caused by the porcine epidemic diarrhea (P.E.D.) virus.

“We've managed the supply challenges created by the P.E.D. virus very well,” Mr. Smith said. “We were able to move supply among our facilities, adjust orders and maximize revenue. In fact, our volume was up 5% versus the same quarter of year ago, and demand remains strong as indicated by pricing that was up 26%.”

Mr. Smith also updated the company’s progress of acquiring the Hillshire Brands Co. Company management is estimating the synergies generated by the acquisition to be approximately $225 million in fiscal year 2015 and should exceed $500 million by the end of year three. Tyson Foods initially estimated year three synergies to be approximately $300 million.

“When we looked at combining our legacy Prepared Foods business and Hillshire together, the businesses are very complementary,” Mr. Smith said. “The more time that we now have gotten to spend with some of the Hillshire folks as we begin planning the integration, it’s pretty easy to see that there’s going to be significant synergies in the supply chain arena, in logistics, in operational efficiencies and those kinds of things.”

On July 25, Tyson Foods announced it was closing three plants in Cherokee, Iowa, Buffalo, N.Y., and Santa Teresa, N.M.

“We had an early conversation about latent capacity and the footprint, and so as we work through that, what it made sense to do was to unfortunately close those three locations and then move that production into more efficient facilities that, frankly, had better supply chain costs as well,” Mr. Smith said.
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