Tyson Foods raw chicken
Tyson's Chicken business generated an operating income of $358 million on $2,636 million in segment sales.

SPRINGDALE, ARK. — After posting record earnings for the first quarter of fiscal 2015, Tyson Foods chief executive officer Donnie Smith didn’t gloat. He told financial analysts the company can do better.

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

“With each of our segments demonstrating tremendous overall performance, we view Q1 not as an exception, but as a new foundation that provides momentum for our continued growth,” he said Feb. 5 in a conference call with financial analysts to discuss first-quarter results (See “Profit up, sales down for Tyson Foods”).

As a specific example, he cited the company’s Chicken business, which generated an operating income of $358 million on $2,636 million in segment sales. The results compared favorably to the previous year when the Chicken business recorded an operating income of $351 million on $2,780 million in sales.

“As we continue to grow our value-added sales, produce less than we sell, execute extremely well, and gain some benefit from lower grain costs, we now expect the chicken segment margin to improve to more than 11% for the year, up from our previous estimate of more than 10%,” Mr. Smith said. “We are in the position where we can grow even more, especially in the further processing side, (and) take advantage of oversupply situations where we can buy meat really cheap (and) put a nice spread on it. So in our tray pack business, with the conversion of our plant in south Georgia, is really starting to take off at even a higher level. And we’re just going to continue to improve our value-added mix over time.”

Improving value-added mix was a theme of the call and is clearly a key strategy for the company.

Tyson Foods prepared foods
Tyson's Prepared Foods segment experienced a 10.9% return on sales.

“In the Prepared Foods segment, operating income was $207 million, with a 10.9% return on sales, which was a record,” Mr. Smith said. “Returns benefited primarily from declining raw materials and synergy capture.

“Volume for the quarter was down 7.7% with pricing lower by 3.6%. The lower volume was a result of optimizing the sales mix, by reducing private label products at retail, and to a lesser extent the impact of avian influenza on our turkey lunch meat business, and a slower than planned price reduction reflected on the retail shelf. For the plans of F.Y. ‘16, we anticipate continued savings on raw materials, as well as synergy capture, and we’ll invest a good portion of these savings into pricing, innovation and brand building.”

Mr. Smith said future growth would come from such “advantaged” categories where the company competes as protein snacks and frozen foods.

Tyson Foods frozen breakfast, Jimmy Dean
Tyson plans to focus on its frozen breakfast category.

“Looking on into the frozen categories, breakfast and value-added poultry are two categories that are growing faster than total frozen and total food and beverage,” he said. “And that’s our key focus. But also if you look at 84% of the refrigerated categories in which we compete are growing, and then 87% of the fresh categories in which we compete are growing.”

Beef operating income for the first quarter was $71 million, which compared with a loss of $6 million the year before. Mr. Smith said, with regards to the beef category, the worst is over and he hopes to see a 3% to 5% cattle supply increase during the back half of the year.

“… As the supply of cattle improves, then we should see our margins improve as well,” he said. “So that's the reason for the confidence in our outlook, that Q1 is not an aberration.”