Tyson anticipates massive drop in feed costs

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Tyson Foods saw a hike in operating income in second quarter report, and credits some segment gains to lower feed prices. 

Tyson released its second quarter financial report this week. Overall it saw growth in operating income for its Q2 2016, which ended April 2, and improvement for the first six months of fiscal year 2016 when compared to 2015.

“Versus Q2 last year, operating income grew 27% to $704m with an operating margin of 7.7%, both records for a second quarter which is typically our most challenging,” said Donald Smith, CEO on an earnings call. “We delivered adjusted EPS of $1.07.”

The quarter's results support the idea that company strategies are working, he said. “We're adjusting to consumer trends and shifts in the marketplace and we're capturing synergies,” he added.

The first six months of 2015 had an operating income of $1.05bn, while those earnings in the same time period in 2016 hit $1.48bn.

But Q2 sales were down on the equivalent period in 2015.

Looking forward, sales are expected to be about $37bn, said Tyson. The amount is down from fiscal 2015 based on the reduction in prices for beef, pork and chicken.

Chicken volumes up 

“Prepared foods, chicken and pork were in or above their normalized margin ranges while beef just missed its range after recovering from losses a year ago,” said Smith. “Total volume was up 2.1% excluding the divestiture of our Mexico chicken operation.”

In chicken, Tyson reported increased sales volume for Q2 2016 as demand grew.

“The chicken segment produced operating income of $347m and the 12.7% return on sales was a Q2 record,” said Smith. “Volume was up 1.7% while sales dollars were down 3.3%.”

Declining feed costs lowered average sale prices and partially offset the mix changes, the company reported. Income improved based on both lower feed costs and operation execution.

“Feed costs decreased $80m and $140m during the second quarter and six months of fiscal 2016, respectively,” it said.

Feed expenditure 

Looking forward, chicken feed costs, based on current futures prices, are anticipated to be about $200m lower overall than what was found in fiscal 2015, reported Tyson. “For fiscal 2016, we now believe our chicken segment's operating margin should be more than 12% up from our previous estimate,” it added.

“We’ve differentiated our chicken business by being more consumer driven, upgrading our mix, diversifying our pricing mechanisms, improving our cost structure, implementing our ‘buy vs grow’ strategy and providing industry leading quality and customer service,” said Smith. “Because of the actions we’ve taken, and because those actions have proven to produce higher, more stable margins, we’re raising the annual normalized margin range for the chicken segment to 9-11%.”

The pork segment saw $140m in operating income and had 11.8% return on sales, said Smith. Volume improved by 3.1% compared to the previous year.

“As pricing declined, sales dollars were down 1.2%,” he said. “With the increased hog supplies in fiscal 2016, we believe the pork segment's operating margin will be above its normalized range at around 10%.”

“Live hog supplies increased, which drove down livestock cost and average sales price,” the company said. “Operating income increased as we maximized our revenues relative to live hog markets and due to better plant utilization associated with higher volumes.”

Beef demand better

In beef, it was a challenging quarter, although there was some improvement seen due to a pick-up in demand, reported Tyson.

“Volume was up 2.8% due to an increase in live cattle processed as a result of higher fed cattle supplies while sales dollars were down 11.9%,” said Smith. “We're pleased with the performance of our beef business and we expect the segment's operating margin to be in its normalized range of 1.5%to 3%.”

Operating income was $46m and there was a 1.3% return on sales, he said.

The company said sales volume increased for the six months of fiscal 2016 due to better demand for beef products despite a reduction in live cattle processed primarily due to the closure of its Denison, Iowa, facility in Q4 2015.

In terms of outlook for the segment, Tyson said it expects industry fed cattle supplies to increase around 1% in fiscal 2016 compared to last year. "Although, we generally expect adequate supplies in regions we operate our plants, there may be periods of imbalance of fed cattle supply and demand," added the processor.  

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