Donnie Smith, Tyson Foods
As Hillshire Brands contracts expire, Tyson Foods will be able to use its own raw materials to fulfill commitments.

SPRINGDALE, ARK. — When Tyson Foods acquired Hillshire Brands Co. in 2014, the company inherited Hillshire’s contracts for raw materials. After those contracts expire over the course of the next two years, Tyson expects to benefit financially and otherwise by using its own raw material, said Donnie Smith, president and chief executive officer, during a Nov. 23 call with the media to discuss Tyson’s fourth-quarter performance.

“Hillshire had about a four- or five-year, long-term agreement for raw materials and I think there are still about 18 to 24 months or so still left on that contract,” Mr. Smith said, adding that Tyson is committed to honoring this and all of its contractual obligations.

“As we progress, though, we suspect that it will make a lot of sense for us to source those raw materials from our own pork business,” he said. “We think there (will) probably be some end-to-end efficiencies,” specifically when it comes to a benefitting from cost and efficiency advantages realized from the balance of muscle cuts and sub-primals from hogs in the Tyson system.

“As we work through and get into those contracts, my guess is that late in our (2017 fiscal) year and on into our ’18 year, we’ll be talking a lot about increasing efficiencies, about utilizing our own raw material,” which will likely include savings in freight cost, he added.

In terms of cost for shipping, Mr. Smith addressed how the recent drop in gasoline prices has benefitted Tyson and how it might affect earnings moving forward. Without specifying an amount of savings lower fuel prices has had on Tyson’s results, Mr. Smith said sustained increases and drops in gasoline costs are felt by the company, but also influence spending by consumers.

“I couldn’t tell you what the freight savings is year-over-year,” Mr. Smith said, “but we ship a lot of trucks and the number will be significant and that’s based into our projections for 2016.”

He agreed that consumers with more disposable income can be positive for food companies, but spending habits tend to be seasonally based.

“Having lower fuel prices has added to the consumers’ spending habits,” Mr. Smith said. “Where they spend that money is typically at food service first. And so, we think over the past year, we’ve added about one meal a week at food service versus retail.”