Back to basics
by Bryan Salvage
Meat&Poultry Senior Editor Bryan Salvage visited Tyson Foods’ corporate headquarters in Springdale, Ark. on Aug. 9, just hours after the company announced a record-breaking, third-quarter performance. Salvage sat down with Donnie Smith, president and CEO, and Jim Lochner, COO, for one of their first interviews since their appointments to Tyson’s leadership team last November. Both men insist it was the “return to the basics” that has re-energized the entire company.
When long-time Tyson Foods veterans Donnie Smith and Jim Lochner were appointed president/CEO and COO, respectively, of their company on Nov. 19, 2009, many questioned if they could sustain and further boost Tyson’s turnaround. On Aug. 9, 2010, the answer was loud and clear when Tyson announced a record-breaking FY 2010 third quarter.
“This was a fantastic quarter for Tyson Foods, with record earnings, sales and operating margin,” Smith said.
With more than $600 million in operating cash flow, Tyson Foods was also able to pay down its debt by $400 million while continuing to invest in its business – bringing its debt to its lowest level since 2001.
Tyson’s Beef and Pork segments posted phenomenal results with record return on sales. Its once-struggling Chicken segment continued to improve and performed within its normalized range. Although its Prepared Foods division struggled with rapidly rising input costs, the business still managed a decent return.
Third-quarter 2010 EPS was $0.65 compared to $0.35 the same quarter last year, sales were $7.4 billion, up 11.6 percent, and overall operating margin was 6.8 percent, above historical normalized ranges. Thanks in part to strong export demand, Pork segment operating income was $125 million, representing 10 percent of the company’s sales. Chicken segment operating income was $186 million, or 7.4 percent of sales; Beef segment operating income was $176 million, or 5.6 percent of sales; and Prepared Foods operating income was $22 million, or 2.9 percent of sales.
“Looking ahead, our operational improvements and lower interest expense will help us finish 2010 in a great position and give us a strong start to 2011,” Smith said regarding Tyson’s gaining momentum.
Tyson expects capital expenditures for fiscal 2010 to total approximately $600 million. Its preliminary capital expenditures plan for fiscal 2011 is approximately $700 million.
“In the last 15 months as we returned to profitably, we have been able to generate a lot of cash,” Smith told Meat&Poultry. “And it has freed up capital to be able to spend against our business. For a couple of years, we were pretty constrained on our capital spending. The first phase of improvement was fundamental improvements in yields and those kinds of things. Now we’re able to spend against our business and improve our mix.” One small example was last month’s announcement that the company will invest $9 million in new equipment at its Monroe, N.C., poultry plant in the near future.
Last year began on an uncertain note when it was announced on Jan. 5 President and CEO Dick Bond was immediately leaving the company. Former chairman and CEO Leland Tollett stepped in as interim president and CEO. Ten months later, Tyson announced Smith, then senior group vice president of poultry and prepared foods, was chosen as the company’s new president and CEO, and Lochner, senior group vice president of fresh meats, was promoted to COO.
“Tyson achieved such a great quarter because of great teamwork,” Smith said. “Our team is laser-focused on what it takes to be our customers’ go-to supplier, and we have focused a lot in the last several years on our ability to operate and fundamentally get better in our businesses.
“If you look at our efforts to improve operating efficiencies and couple that with our top-line sales growth, these factors have been key to Tyson’s turnaround,” he added.
Ensuring all company salespeople, operations people and customer-service representatives understand their business models was another driver, Lochner said. “There’s not one business model across all of the proteins...we have a diversity of businesses and models,” he added. “The key is teaching their roles in the business models where they play in revenue, costs or a combination of both so they instinctively learn what they have to do to change the drive toward that operating income and what they need to change to improve customer-service quality.”
As Smith spends a lot of time on leadership and Lochner focuses on business models, both men have empowered Tyson employees to voice issues and develop clearer approaches to solve daily issues. “Team members make many decisions at their level on an every-day basis,” Lochner added. “Donnie and I must solve bigger issues, such as ‘Where do we put capital or what do we have to change from an organizational structure?’ But for team members to feel empowered, they must know the business.”
Rising through the ranks
Both Smith and Lochner rose through Tyson’s ranks. Smith, 50, joined Tyson in 1980 after graduating from the Univ. of Tennessee with a degree in Animal Science. Lochner, 57, joined IBP inc. in 1983 as director of research. Before that, he was a quality control food technologist at Oscar Mayer Foods. Tyson acquired IBP in 2001.
“Everybody on my team is the consummate professional,” Smith boasted. Lochner has a tremendous ability to analyze processes, simplify them and structure a plan around optimizing the process and putting the right controls in place to make sure the process stays in line, he added.
“People say our styles are complementary,” Smith said. “We work well together. I’ve known Jim since the IBP days and we got along great. It has been real fun.”
In recent years, Tyson’s leadership initiated a number of plant consolidations and closings, as well as expansion and remodeling projects to adjust to market realities and meet customer demands. Smith said Tyson’s team today is as engaged as he has ever seen it.
“If you did a poll of team members, you’d find a renewed sense of optimism,” he added. “Our folks know they have an impact every day on what’s going on around here. “We have our people take ownership in their business and we turn them loose to do what they need to do to serve their customers.”
Tyson has not restricted R&D during this tough economy. “We stay focused on driving innovation because that’s important to our customers,” Smith said. “We made operational changes to become as efficient as possible. In every one of our businesses, customers are our first priority and then we prioritize what we need to do to grow our customers’ business.”
To achieve this, Tyson must earn its customers’ confidence and trust on product quality, customer service and innovation every day, Lochner said. “We have become the go-to supplier, but our next obligation is to find waste in the system,” he added. “Whether it’s eliminating double handling, improving transaction speed, removing labor costs where we can or improving the quality, yields and service, we foster a complete process. The key to having sustained success is continuing to drive that operational customer awareness throughout the organization.
“We have to provide the capital and the resources to provide the most efficient plans, be it transactions, software, market strategies or cash procurement strategies, and really understand our supply chain,” he continued.
In describing one example of removing waste, Lochner said: “We’ll slaughter the bird, bone the bird, add further process or par-fried capacity all in one location without having to move product to different areas. We look into how we track product movement within a plant to keep product moving and simplify the process flow.”
Tyson recently reduced one shift at its Council Bluffs, Iowa, case-ready plant and added more capacity to its case-ready beef and pork plants in Sherman, Texas and Goodlettesville, Tenn., because this improved the efficiency of the process flow. “We get the same amount of pounds out in five shifts instead of six. That winds up better for the customer from a freight standpoint,” Lochner said. “That also falls under sustainability because you’re burning less fuel.”
Increasing exports, diversifying export markets and building in-country production are essential to Tyson’s long-term growth. In 2009, it exported chicken, beef, pork and prepared foods to more than 90 countries.
Tyson has made several acquisitions and joint ventures in key locations in recent years offering the right climate for poultry production, a large population, ample labor force, access to corn and soybean meal, a cost of production advantage and an emerging middle class.
Tyson has been in China since 2001 with Tyson Da Long, a small chicken further-processing joint venture. The Chinese market, with a population of 1.3 billion and chain restaurants opening at a rate of one every 18 hours, needs more poultry production. Annual per capita meat consumption in China is about 20 lbs. per person, compared to 89 lbs. in the U.S., according to Tyson. If consumption increased by only 10 lbs. per person, it would be equal to Tyson’s total annual U.S. production. Tyson established Jiangsu Tyson Foods in 2008 to produce fresh chicken sold under the Tyson brand for the Shanghai retail market.
In 2009, Tyson entered another joint venture, Shandong Tyson Xinchang Foods, a fully integrated chicken and duck operation. This business will have a production capacity of more than 400,000 birds per day and further-processing operations with export certifications for Japan, Southeast Asia and Europe.
In 2008, Tyson also acquired three poultry companies in southern Brazil. Each will be vertically integrated and supply domestic growth in addition to serving as an export platform to Europe and other markets. By combining these three companies into Tyson do Brazil, the company has created an operation with modern technology and an experienced management team. The production capacity of Tyson do Brazil is approximately 800,000 chickens per day, making Tyson one of the top producers in Brazil.
India is the third key location targeted for Tyson’s international growth. With a population of more than one billion people, per capita chicken consumption is less than 5 lbs. a year. Its annual growth rate of more than 10 percent is among the highest in the world.
In 2008, Tyson acquired majority ownership of one of India’s leading branded chicken companies. Serving the foodservice market, Godrej Tyson Foods also produces retail fresh chicken under the Real Good Chicken brand and further-processed chicken under the Yummiez brand. Combined production of the two plants in Mumbai and Bangalore is approximately 60,000 chickens per day. Tyson plans to expand the production capacity of the existing operations and build additional processing facilities to better reach consumers in the northern and eastern regions of the country.
Tyson, which has been selling chicken in Mexico for 20 years, currently holds the third market-share position in that country. It is No. 1 in value-added chicken production and has reached full capacity in its plants in a market that continues growing.
Tyson’s long-term strategy could include acquiring or building more assets to solidify Tyson de México’s market position in the northern part of the county and expand into the central region.
In 2007, Tyson entered a joint venture to create the first vertically integrated beef operation in Argentina. This country is the world’s fifth- leading beef producer and the second-leading beef exporter known for its low beef production costs and high-quality breeds of cattle.
New product development
In a tough economy, retail and foodservice customers always look for ways to create value for their customers and drive their business, Smith said. “If I had to use a word to describe what most of our R&D activity has been around, it would be driving value,” he added. “This may involve portion size, a new flavor offering or optimizing the meat block. In the next few months, our retail Any’tizers line will launch new products that will refresh that product line.”
Tyson invests heavily in researching insights around consumer behavior. “When we talk to a customer, we’re asking him what is that insight driving the consumer behavior and how can we get in front of that behavioral change and provide an offering so their business can grow?” Smith said. “It may be creating a unique taste in a value offering at retail or maybe introducing more dark-meat items at retail.”
Tyson has spent much time focusing on how to deliver an extraordinary lower-sodium product and maintain the taste and other attributes important to the customer, Smith said. “God gave us two ears and one mouth for a reason...we listen to what consumers are telling us and what our customer needs are,” he adds. “We have a tremendous group of talented folks in our Discovery Center. They take those insights and find ways to extend shelf-life, reduce sodium and more.”
Innovation drives product development. “For example, several years ago, we came out with a great-tasting wing item designed for a pizza oven,” Smith said “That required a lot of R&D work because our foodservice customer in the pizza segment wanted to use a pizza oven, which is much hotter than a convection oven, and still deliver a good tasting, top-quality wing.”
Tyson also creates value-added products that enable inexperienced meal preparers to do a better job, Smith said. “Our individually quick-frozen boneless, skinless retail chicken comes in marinated and non-marinated offerings,” he added. “I spend a lot of time on my grill and marinated chicken breast is a lot more goof-proof.”
Expect Tyson’s product mix to continue to change with customer and consumer needs, Smith said. “We’re seeing more customers wanting to take commodities and convert them into convenience items,” Lochner added. “The ease-of-preparation trend isn’t going to slow down.”
Tyson is a leading pizza topping producer. “Value pizza options are here to stay for a while,” Smith predicted. “We’re talking about expanding our productive capability in pizza toppings to keep up with that demand.”
There are no limits to new product innovation other than the imagination. “Our product-development people can take a chance on an idea and know if it doesn’t work, they’re not going to get reprimanded for a failure,” Smith said.
Reducing and eliminating food-safety threats are major Tyson responsibilities. “Industry has always been under a very strong degree of scrutiny regarding E. coli in beef, Salmonella in chicken and Listeria in fully cooked items,” Lochner said. “Tyson is a strong industry leader in effectively dealing with these hazards.”
A tremendous amount of research goes on behind the scenes at Tyson in building better processes and systems to control foodborne diseases and being on top of other threats. “We address and remove those threats to the best of our ability while maintaining product quality,” he added.
Smith doesn’t see a dramatic increase coming in the domestic availability of the major proteins. “If retail remains somewhat stable and foodservice stabilizes, I think there’s plenty of room to absorb the available meat that will be on the market without having an ugly pricing scenario,” he said.
“Most people forget you don’t have an instantaneous response to change in protein supplies,” Lochner added. “You have a lag in production.”
In discussing newer competitors like JBS S.A., Smith said, “We’re aware of our competitors, but our primary focus is how to grow our customers’ business; how to add value to their business because that’s how we’re going to grow ours.”
Gaining market share is good...if done right. “If you’re trying to grow market share with an uncompetitive market-cost structure, you’re going to end up in a very bad place,” Smith warned. “What we have focused on over the last few years is the ‘back to basics’ fundamental approach of running our business better – driving out costs, driving out wastes and running a better business. As a result, our costs per pound are lower than they were a year ago and from recent years.
“We’re much more competitive in our capacity utilization, yields, those types of things that are cost-structure related,” Smith said. “We have a much better cost structure today in all of our segments then we did a year ago.”
Tyson Foods was a pilot member of the Basic Pilot Program, which is now called E-Verify. Tyson recently took its hiring process a step further by adopting use of the Social Security Number Verification System (SSNVS). This on-line service offered by the Social Security Administration allows registered users to verify the names and Social Security numbers of employees.
“I feel very comfortable in saying we are leading our industry in making sure we’re hiring legal immigrants in this country,” Smith said. “Obviously, they are important to our work force, but because we’re a responsible corporate citizen, we’re going to obey the law and do everything possible to verify employment.”
Doing the right thing
“We only need one reason around here to do the right thing...and that’s because it’s right,” Smith insisted. “We pride ourselves on that. Sometimes we may add a little bit to our cost structure. E-Verify and all the training we go through is not free. But we think it’s important that our customers, team members and communities know we care enough to do what’s right and be responsible as we conduct business.
“If you ask me what has been key to the turnaround at Tyson, it has been defining what we believe and how we behave while we do what we do,” Smith continued.
Tyson is not afraid of change, Smith said. “We anticipate, embrace and thrive on change,” he adds. “If we’re not changing, we’re dying. We’re going to embrace change, thrive on it and stay relevant to our people and customers. We’re going to win, have a lot of fun and we’ll do it as a team.”
Reflecting on the past year, Smith said, “We have done everything possible to keep this business moving at a good level. We previously were a little slow to respond to our customers, and that’s not good. We talk about how responsible we are; part of being responsible is being responsive. We had to pick up the pace and get quicker about responding to customer inquiries, needs and demands, and we have done a good job in picking up the pace. Focus and speed...that’s what this year has been about.”
Before the interview ended, M&P asked Smith if he thought early on in his career he would someday become Tyson’s president and CEO. “No way!” he replied. “I started out as a broiler service man back in December 1980. I can remember thinking after a year or two, ‘Maybe I have what it takes to be a poultry complex manager some day before I retire.’”