Tyson 2.0 in 2015

by Keith Nunes
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Tyson is experiencing double-digit growth in its NatureRaised Farms brand, which is sourced from chickens that have never received antibiotics.

 

SPRINGDALE, ARK. — Changes are taking place in the market for meat proteins, said Donnie Smith, president and chief executive officer of Tyson Foods, Inc. Tight supplies combined with good demand are reshaping market segments and management is optimistic about the company’s ability to benefit in the coming year.

“… We feel really good about 2015 and 2016,” Mr. Smith said Nov. 17 in a conference call with financial analysts to discuss year-end earnings. “It’s Tyson 2.0 and we’re a different company.”

With consumption shifting away from beef due to higher prices, Tyson Foods expects chicken demand to increase by at least 3% in 2015. The company also expects its feed costs will be down by about $350 million due to lower costs for feed grains.

“We’ll be adding much needed value-added capacity in the spring for fully-cooked and tray-packed chicken,” Mr. Smith said. “Demand for tray pack is growing as retail consumers seek fresh, healthy options. It’s important to understand that we’re not increasing supply, but rather shifting capacity to a more value-added product mix.”

Mr. Smith added that the company is experiencing double-digit growth in its NatureRaised Farms brand, which is sourced from chickens that have never received antibiotics.

“Although it’s only a small piece of our branded Chicken business, we’re pleased with the demand for these products and the premium consumers are willing to pay for them,” he said.

In Tyson Foods’ Beef business unit, fiscal 2014 volume was down 2.6%, because pricing was up 21.5%, according to the company.

“We anticipate fed cattle supplies to be down about 4% in 2015, but that should be the worst of it,” Mr. Smith said. “With good export demand, domestic pricing in 2015 will test how much people really want beef. But it’s clear that demand for beef is very strong and will provide support for chicken and pork pricing.”

Volume was flat for Tyson’s Pork segment in 2014 as pricing was increased 16.5%.

“Looking at F.Y.15 we expect a 2% to 3% expansion in hog supplies,” Mr. Smith said. “And it appears there will be fewer instances of PEDV (porcine epidemic diarrhea virus). Coming off of reduced numbers last year in addition to constrained beef production, we think consumer demand will support a 2% to 3% pork supply increase. So 2015 should be another good year for Pork segment margins.”

The big story for Tyson Foods in fiscal 2015 will be Prepared Foods, which will feature a fully integrated Hillshire Brands.

“Looking forward, the new Prepared Foods segment, including Hillshire, is starting 2015 in a good position,” Mr. Smith said. “With the plant closures, our capacity utilization is improving to the desired levels and our operations are becoming more efficient.

“We recovered pork and beef input pricing, but we’ll have to stay on top of it as we anticipate $140 million of incremental raw material cost in 2015, primarily from increased beef trim and turkey pricing. With the price increases we’ve implemented so far, pro forma volume has been about flat to a year ago.”

Management expects earnings in fiscal 2015 to be in the range of $3.30 to $3.40 per share, and sales are expected to be approximately $42 billion.

It is not often that a company looks beyond the next fiscal year, but Mr. Smith offered his thoughts on fiscal 2016 as well.

“We’ll be in our second year of capturing synergies and improvements as we maximize the benefits of combining Tyson and Hillshire,” Mr. Smith said. “If chicken supply allows, we’ll buy more on the open market, add value to it and sell it at a higher margin. Elevated beef and pork pricing should continue to provide an umbrella for chicken pricing and consumption. We’ll have a full year of the new tray-pack and fully-cooked capacity in our results.

“There should be adequate supply of cattle and hogs, with growth coming in the regions where our plants are located. We’ll be generating a lot of cash, which we’ll use to pay down debt, thereby reducing interest expense.”
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