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

Feb 05, 2016 • 09:00 am ET

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

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Executive
Donald Smith

and we'll a 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, produced less than we sell, execute extremely well and gain some benefit from lower grain cost, we now expect the chicken segment margins 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 in LCM from Q4. We 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 the 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 lands, so we are going to remain conservative with our guidance of an operating margin at or above the low-end of 1.5% to 3% normalized range. I'll add that. I'm pleased about the repeal of MCOOL. Our contention was that it added incremental cost with no real consumer benefit. And now that it's been repealed, we're able to reduce the complexity of our business by eliminating around 800 SKUs.

In the pork segment, operating income was $158 million with a 13% return on sales. Volume was down 2.2% with pricing down 19.5%. Volume was down due to the divestiture of our Heinold Hog Markets business