Tyson chicken wingettes
Tyson does not expect Chicken business issues to carry over into fiscal 2017.

SPRINGDALE, ARK. — Record fiscal 2016 earnings for Tyson Foods, Inc. were overshadowed by a shortfall in the company’s Chicken business unit during the fourth quarter of the fiscal year. The Chicken business shortfall combined with the announcement chief executive officer Donnie Smith is retiring at the end of the year, pushed the company’s stock price down 14% in trading on Nov. 21.

Net income for the year ended Oct. 1 totaled $1,768 million, equal to $4.67 per share on the common stock, up from net income of $1,220 million, or $3.06 per share, in fiscal 2015.

Sales for the year fell to $36,881 million from $41,373 million.

Donnie Smith, Tyson
Donnie Smith, c.e.o. of Tyson

“The company is performing exceptionally well and realizing significant growth and shareholder returns through our hybrid strategy of branded prepared foods and fresh meat,” said Mr. Smith during a conference call Nov. 21 with securities analysts to discuss the results.

Prior to the call, the company had announced Mr. Smith’s pending retirement and that Tom Hayes, president of the company, will succeed him. It was Mr. Hayes who addressed the challenges the company faced, most notably in its Chicken business, during the fourth quarter.

During the quarter Tyson Foods recorded net income of $391 million, or $1.06 per share, up from $258 million, or 65c per share, in the same period a year ago. Sales for the quarter dipped to $9,156 million from $10,506 million the previous year.

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

Tom Hayes, Tyson Foods
Tom Hayes, president of Tyson

“There were three factors leading to the lower-than-expected results in the fourth quarter in Chicken,” Mr. 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 model 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% 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 $1,305 million 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. Mr. Hayes said he expected strong results in the first quarter, and Mr. Smith added that he expected Chicken results to be at or above the company’s normalized range.

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

Tyson prepared foods
Increased meat production may translate into lower input costs in Tyson's Prepared Foods 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,” Mr. 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, chief financial officer, 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.