Tyson Foods (TSN) Misses Q3 EPS by 13c, Lowers FY15 EPS Guidance, Offers FY16 Guidance

Tyson Foods (NYSE: TSN) reported Q3 EPS of $0.80, $0.13 worse than the analyst estimate of $0.93. Revenue for the quarter came in at $10.1 billion versus the consensus estimate of $10.31 billion.

Tyson Foods sees FY2015 EPS of $3.10-$3.20, versus prior guidance of $3.30-$3.40 and the consensus of $3.44.

"The Prepared Foods and Chicken segments performed very well in the fiscal third quarter while managing numerous challenges," said Donnie Smith, president and chief executive officer of Tyson Foods. "The strong results in these two segments demonstrate the benefits of our branded, value-added product portfolio and multi-channel, multi-protein business model by partially offsetting soft results in the Beef and Pork segments.

"Our beef business suffered from export market disruptions that had an $84 million impact on third quarter results, and we continue to see very high cattle costs at a time when product values and export issues are making it difficult to realize expected revenue levels in this spread business.

"While we are pleased with the performance of our business overall, unless beef market conditions improve rapidly, we will not achieve our previous guidance of $3.30-$3.40 adjusted earnings per share. As a result, we are modifying fiscal 2015 guidance to $3.10-$3.20 adjusted EPS.

"We reduced our total net debt $688 million during the third quarter. Because we expect to be ahead of schedule on reaching leverage ratio goals, and we see great value in our shares, we plan to start buying back stock in the fourth quarter. Synergy capture from the integration of Hillshire Brands and profit improvement from our legacy Prepared Foods operations is going extremely well. Previously, we raised synergy estimates to more than $250 million, and now we are on track to achieve approximately $300 million in fiscal 2015.

"We've positioned ourselves well for fiscal 2016 and we're confident in our ability to achieve at least 10% annual EPS growth over time," Smith said.

Outlook

• In fiscal 2016, we expect domestic protein production (chicken, beef, pork and turkey) to increase approximately 3% from fiscal 2015 levels. Grain supplies are expected to decrease in fiscal 2016, which should result in higher input costs as well as increased costs for cattle and hog producers. The following is a summary of the outlook for each of our segments, as well as an outlook on sales, capital expenditures, net interest expense, liquidity and share repurchases for the remainder of fiscal 2015 and fiscal 2016. Our accounting cycle results in a 53-week year in fiscal 2015 as compared to a 52-week year. Accordingly, the outlook for fiscal 2015 is based on a 52-week year.
• Chicken – Current USDA data shows an increase in chicken production around 3% in fiscal 2016 compared to fiscal 2015. However, more recent data indicates a greater increase in supply which could outpace the demand. Based on current futures prices, we anticipate lower feed cost in fiscal 2015 compared to fiscal 2014 of approximately $400 million and anticipate similar feed costs in fiscal 2016 compared to fiscal 2015. Many of our sales contracts are formula based or shorter-term in nature, but there may be a lag time for price changes to take effect. Additionally, we expect disruptions related to export bans to continue into early fiscal 2016. For fiscal 2015, we believe our Chicken segment's operating margin should be approximately 12% based on the strong demand and pricing environment. For fiscal 2016, we believe our Chicken segment's operating margin should be at or above the top end of its normalized range of 7-9%.
• Beef – We expect industry fed cattle supplies to increase around 1% in fiscal 2016 compared to fiscal 2015. Although we generally expect adequate supplies in regions we operate our plants, there may be periods of imbalance of fed cattle supply and demand. We believe our Beef segment should be near break-even for fiscal 2015 and profitable but below its normalized range of 2.5%-4.5% for fiscal 2016.
• Pork – We expect industry hog supplies to increase around 3% in fiscal 2016 compared to fiscal 2015. For fiscal 2015 and fiscal 2016, we believe our Pork segment's operating margin will be in its normalized range of 6-8%.
• Prepared Foods – As we proceed with the integration of Hillshire Brands, we expect to realize synergies of approximately $300 million in fiscal 2015, more than $400 million in fiscal 2016 and more than $600 million in fiscal 2017, from the acquisition as well as our profit improvement plan for our legacy Prepared Foods business. The majority of these benefits will be realized in our Prepared Foods segment. In fiscal 2015, we expect lower raw material costs of approximately $320 million related to our legacy Prepared Foods business. We expect our Prepared Foods segment's adjusted operating margin to be approximately 8% for fiscal 2015. In fiscal 2016, we should reach the low-end of our new range of 10-12% which is a full year earlier than originally planned as we continue to realize the value of our branded portfolio and benefit from synergies from the Hillshire acquisition and operational improvements within our legacy Prepared Foods business. In addition, we expect lower raw material costs of approximately $250 million related to the Prepared Foods segment in fiscal 2016.
• International – The sale of the Mexico operation closed on June 29, 2015, in our fourth quarter of fiscal 2015. We received proceeds of $400 million, subject to potential working capital and net debt adjustments. We anticipate we will realize a gain, net of income tax impacts, on sale of approximately $80 million, subject to additional adjustments. We expect the International segment's adjusted operating loss to improve by more than $25 million compared to fiscal 2014 and expect similar results in fiscal 2016 compared to fiscal 2015.
• Sales – We expect sales to approximate $41 billion for fiscal 2015 and fiscal 2016, respectively. (Street sees revenue of $41.72, $41.84 for FY15, FY16)
• Capital Expenditures – We expect capital expenditures to approximate $900 million for fiscal 2015 and range between $900-$950 million for fiscal 2016.
• Net Interest Expense – We expect net interest expense will approximate $280 million and $260 million for fiscal 2015 and fiscal 2016, respectively.
• Liquidity – We expect total liquidity, which was $1.7 billion at June 27, 2015, to be above our goal to maintain liquidity in excess of $1.2 billion.
• Share Repurchases – In fiscal 2016, we expect to increase share repurchases under our share repurchase program. As of June 27, 2015, 27.9 million shares remain authorized for repurchases. The timing and extent to which we repurchase shares will depend upon, among other things, our working capital needs, market conditions, liquidity targets, our debt obligations and regulatory requirements.

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