Cutting costs yields positive results for Tyson Foods

by Keith Nunes
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SPRINGDALE, ARK. — In an effort to return to profitability, Tyson Foods, Inc. announced several cost reduction programs this past July to cut $200 million from the company’s budget. The results of the effort were apparent when Tyson Foods announced a net income of $57 million, equal to 17c per share on the common stock, for the first quarter of fiscal 2007, which ended Dec. 30, 2006. For the same period last year, Tyson Foods had net income of $39 million, or 12c per share.

Sales for the first quarter of fiscal years 2007 and 2006 were $6,558 million and $6,454 million, respectively. Selling and general administrative expenses decreased $44 million compared with the same period last year. The decline was due to the cost reduction program, according to the company.

"Our immediate goal was to return to profitability, and I am pleased to say we have accomplished our objective," said Richard L. Bond, president and chief executive officer. "We have put the $200 million cost management initiative into action while driving innovation and growth with our customers. As a result of our profitability and cash flow improvements, our debt is now below $3 billion."

Wade Miquelon, chief financial officer for Tyson Foods, said the company’s cost saving initiative is sustainable.

"We don’t believe we’ve hit bone," he said. "In terms of the overall profile, about 50% of (the savings) is employee cost, consulting cost and the like. Maybe 30% of the total is eliminating inefficient sales and marketing spend, but not eliminating anything we believe is efficient spend."

In a Jan. 29 conference call with financial analysts, Mr. Bond noted that while the company’s cost management initiative is having the desired effects, its long-term impact is limited.

"We’re not going to cost save our way to glory," he said. "We did a lot in the cost savings to get our cost structure right, but at the end of the day, to the extent grains continue to go up, we will need to pass it through to pricing, and that is what we are doing. Energy is a little bit better, but we’re still not anywhere near the levels we were a couple of years ago. Rather than move from here with one big one-time cost savings we’re just trying to create a culture of discipline."

Tyson Foods’ chicken segment made up 29.9% of the company’s net sales for the quarter, but accounted for 50.3% of the total operating income. Segment sales were $2 billion and operating income was $73 million.

Beef segment sales were $3.1 billion and it suffered a $23 million loss for the quarter. Overall, the segment accounted for 46.7% of net sales and 15.9% of operating income.

The company’s pork and prepared foods segments made up 12.6% and 10.6% of net sales and accounted for 26.9% and 21.4% of operating income, respectively. Both segments were positively impacted by lower raw material costs.

"While we still anticipate the second quarter to be challenging, we expect it to be profitable," Mr. Bond said. "We remain on track to meet our earnings guidance for the year, but emphasize the dramatic rise in corn prices has become a major issue for us and others in the food industry. Companies will be forced to pass along rising costs to their customers, meaning consumers will pay significantly more for food.

"If left unaddressed, the bigger long-term issue will be the availability of U.S. and global grain for protein and other foods. We fully support efforts toward renewable energy; however, as the food versus fuel debate unfolds, we must carefully consider the negative and unintended consequences of over-using grains."

In the conference call with financial analysts, Mr. Bond expanded on the topic of rising corn costs.

"Quite simply, this is an issue that is not going away anytime soon," he said. "We need to decide as a country what the proper balance is in using corn for food or corn for fuel, and by food I mean food for humans as well as food for animals that provide protein for humans.

"Because of the way grain input costs flow through our inventory we didn’t experience the full effect of the run-up in grain costs in our first quarter, though we did realize higher corn prices in some of our more commodity-based items. The spike in corn prices will increasingly impact cost of good for the balance of our fiscal year."

For fiscal 2007, the company affirmed its prior outlook, estimating earnings per share to be in the range of 50c to 80c.

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