Three-pronged approach

by Steve Kay
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Tyson Foods must like doing things in threes. For years solely a poultry company, Tyson startled the meat world in 2001 with its acquisition of red meat giant IBP. This gave Tyson chicken, beef and pork in its portfolio, a multi-protein approach that has worked in its favor for the past 11 years.

The approach helped Tyson produce better-than-expected results in its fiscal 2012 second quarter. Net income was $166 million, or $0.44 per share, versus $159 million or $0.42 a year earlier. Total sales were $8.268 billion versus $8.000 billion. Sales volumes were down 4.3 percent but average selling prices were up 7.7 percent. Significantly, Tyson’s chicken results returned to their normalized range after being well below the range. This outweighed a marginal loss in its beef business and a 21.2 percent year-on-year decline in pork earnings.

Tyson’s multi-protein business again proved advantageous in the quarter, said President and CEO Donnie Smith in a press release. Both in the release and on a call with financial analysts, Smith said Tyson has the potential to earn $2 per share in fiscal 2012 if it executes as planned.

Eight days later, Smith outlined Tyson’s new three-pronged growth strategy, “Accelerate, Innovate, Cultivate,” at the BMO Capital Markets 2012 Farm-to-Market Conference. His presentation also stressed Tyson’s financial fundamentals of a strong balance sheet and capital structure, as well as its stable earnings over several years.

Tyson will accelerate growth through its international businesses and will grow its value-added product sales domestically, Smith said. Tyson will innovate through products, processes and analytics, and it will cultivate its team members through practical talent development programs, he said.

The strategy is built on a foundation of managing business fundamentals and on a strong capital structure, Smith said. Tyson’s balance sheet gives the company flexibility to build or buy assets to fill product offering gaps while continuing to invest in its existing infrastructure, he said. Smith noted that Tyson has gone from a net debt to capital ratio of about 55 percent at the start of fiscal 2002 to 20.5 percent at the end of fiscal 2011. This has put Tyson in a better position to capitalize on changing protein fundamentals, even in times of challenging market dynamics, he said.

One of Tyson’s primary strategic themes is to accelerate growth in its international and value-added businesses, Smith said. Tyson will aggressively grow value-added chicken and its Prepared Foods market share in under-penetrated channels. These include convenience stores, drug stores, dollar stores, regional chains, delis, schools and retail. It will also complete the transition from and sell out its dry sausage capacity, he said.

Internationally, its growth platform includes: concentrating in-country production in China, Brazil, Mexico and India; accelerating in-country growth by strengthening relationships with quick-service restaurant and retail customers; innovating against locally-identified, country-specific consumer needs by leveraging US expertise; building a scalable supply chain to ensure quality and food safety; cultivating team member development, with an emphasis on building in-country management teams.

To this end, Tyson announced May 16 it had appointed Arex Lee as CEO of Tyson Foods’ China operations. Lee is a native of Taiwan and worked for more than 25 years with a leading poultry company in China in all areas of the business before joining Tyson. Tyson has had a business presence in China since 2001 and now aims to ramp up its chicken production there to produce 3 million birds per week, versus 2 million now. In addition, it aims to produce 2 million birds per week in its Brazilian chicken business, versus 1.3 million now. It also aims to produce 450,000 birds per week in its Indian chicken business, versus 280,000 now.

Tyson has achieved $800 million in operating efficiencies since fiscal 2008, Smith told the BMO conference. It anticipates $125 million in savings in fiscal 2012. Tyson will continue to invest in its business, with capital expenditures of $800-850 million in 2012, notably on poultry production and labor efficiencies, yield improvements and sales channel flexibility, he said.

One reason for Tyson’s optimism about fiscal 2012 is that its chicken results returned to their normalized range (5 to 7 percent) in the second quarter. Operating income was $145 million for a margin of 5.0 percent versus $37 million and a 1.4 percent margin a year earlier. Pork margins remained above their 6-8 percent normalized range. Operating income was $115 million for an 8.4 percent margin, versus $146 million and a 10.5 percent margin a year earlier.

Pork sales and income were lower for several reasons, noted COO Jim Lochner. High-priced bacon put pressure on bellies’ prices, domestic ham sales were the biggest disappointment and pork trimming prices took a big hit. This was due to the impact of the media furor over lean finely textured beef, very heavy hogs and some pullback in pizza sales, he said.

Tyson’s beef business had a losing quarter for the first time since the first quarter of fiscal 2009. But Tyson surprised analysts by reporting an operating loss of only $1 million. This compared with the $50 per head or more losses calculated by industry analysts. It is also better than a $17.6 million loss recently reported by National Beef Packing, which in recent years has out-performed other companies in per head margins.

In fact, Tyson Beef likely would have had an operating profit in the quarter but for the lean finely textured beef (LFTB) furor and its subsequent impact on ground beef sales and beef cutout values. Tyson’s beef margins averaged 0.9 percent in its fiscal first quarter (October-December). They briefly returned to their normalized range of 2-4 percent in late February-early March, Lochner said. But then came the LFTB controversy and a $120 decline in four weeks in the value of a carcass. The entire $120 came back, as margins turned up nicely the last two weeks of April, he said. Tyson believes its beef margins will return to their normalized range in the fourth quarter and that its beef segment will be profitable in fiscal 2012. Should this occur, $2 per share for the year looks achievable.

Steve Kay is editor and publisher of Petaluma, Calif.-based Cattle Buyers Weekly (www.cattlebuyersweekly.com ).

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