Tyson Foods, Inc. (NYSE:TSN) Q1 2016 Earnings Conference Call - Preliminary Transcript

Feb 05, 2016 • 09:00 am ET

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Tyson Foods, Inc. (NYSE:TSN) Q1 2016 Earnings Conference Call - Preliminary Transcript

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Executive
Donald J. Smith

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 lunchmeat business and a slower than planned price reduction reflected on retail shelves.

For the balance of fiscal 2016, 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. Our margin outlook for Prepared Foods is near the low end of the 10% to 12% range.

The Chicken segment produced record operating income of $358 million with a record 13.6% return on sales. Volume for the quarter was down 0.5% with 4.7% lower pricing. The slight sales volume decline in Chicken again is a reflection of upgrading our mix. Results in the Chicken segment can be chalked up to solid execution. We're outperforming the industry and widening the gap.

I believe we've demonstrated separation from the commodity players in large part due to the disproportionately high mix of value-added products in our portfolio as well as the production flexibility created with our buy versus grow strategy, which also reduces commodity exposure. Remember on the last call, I broke out the categories of how we sell chicken and only 15% is pure commodity. 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%.

In the Beef segment, operating income was $71 million with a 2% return on sales. Volume for the quarter was down 3.8%, while price was down 14.4%. Volume was down due to the Denison plant closure. Retail pricing has declined significantly, but Beef is still expensive for consumers with the beef-to-pork and the beef-to-chicken price ratios at record levels. I'm pleased with the turnaround from the losses we sustained in Q4. Some of the improvement can be attributed to the mark-to-market and LCM from Q4. We've got about half of it back in Q1, and the remainder will come over the next year or so. Better cattle supplies in Q1 coupled with the realignment of our Denison and Dakota City plants moderately improved our capacity utilization.

We feel good about our Beef business and the team is executing very well. Cattle supplies appear to be growing and the recent semi-annual cattle on feed report indicated that total inventory is up 3.2% over the previous year. However, there is still regional disparity in the location of the cattle. Q2 can be a little uneven due to the weather and consumption around lent. So, we're going to remain conservative with our guidance of an operating margin at or above the low end of 1.5% to 3%