Cost-cutting measures to prepare Tyson for Hillshire

by Erica Shaffer
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SPRINGDALE, Ark. – Tyson Foods Inc. is nearing the end of what company executives believe will be the best fiscal year in the company's history. But there is no dearth of excitement for what lies ahead with the acquisition of The Hillshire Brands Co.

"Several of us had the opportunity to spend some time in Hillshire in Chicago and we're beyond impressed with their team," said Donnie Smith, president and CEO of Tyson Foods, during a conference call with investors. "We're excited about taking their expertise and combining it with ours to create a Prepared Foods business with strong, stable margins and steady growth."

Tyson's prepared foods segment reported a 5.5 percent decline in operating margin for the third quarter. The company incurred a $49 million impairment charge related to plant closures. High raw material costs of $95 million also dragged on segment results. But the acquisition of The Hillshire Brands Company could provide a turnaround.

"As we execute our Prepared Foods strategy, we're estimating the impact of the synergies with Hillshire along with the cost savings and production efficiencies associated with the plant closures that I'll say more about shortly will be more than $225 million in FY15, and should exceed $500 million by the end of year three," Smith added. "We expect the acquisition to be accretive in FY15 and substantially accretive thereafter as we generate synergies."

The company's strategy for prepared foods includes closing three plants in Iowa, New York and New Mexico, and the pending sale of Tyson de Mexico and Tyson do Brasil to Sáo Paulo, Brazil-based JBS SA The sale will be used to pay down debt associated with the Hillshire acquisition.

Also in the financing mix: Tyson announced the start of concurrent public offerings of 24 million shares of its Class A common stock and 30 million equity units valued at $50. The notes are due July 2017. The company plans to use the proceeds from the offerings, along with debt financing and cash on hand, to finance the Hillshire Brands acquisition and to pay related fees and expenses. Tyson will use the proceeds for general corporate purposes if for any reason the Hillshire Brands acquisition is unsuccessful.

Results for the third quarter ended June 28 included net income of $260 million, an increase compared to the same period during the previous year when the company earned $249 million.

Sales for the quarter were $9.68 billion compared with $8.731 billion during the previous year.

Sales in the chicken segment rose slightly to 2.83 billion, a 1.3 percent increase in volume. Smith said damage from a fire at one of Tyson's fully cooked processing plants was worse than originally thought and disrupted supplies of Tyson brand value-added products. Also, operational problems at another plant impacted supplies.

"These temporary disruptions and the resulting actions we took with customers have and will cost us between 1.5 percent and 2 percent return on sales in Q3 and Q4 in our Chicken segment," Smith said. "In FY15 we'll be back to our full productive capability, and we'll have additional fully cooked capacity coming online in the spring, so our Chicken segment is expected to fully recover and deliver a 10 percent return on sales in 2015."

Sales volumes declined in Tyson's Beef segment on lower supplies of live cattle. Smith said the quarter got off to a slow start but finished strong on robust demand for the summer grilling season despite record-high prices for beef.

"Even with those high prices, we were successful in promoting our premium branded beef programs, he added.

Operating income for the company's International segment lost $50 million due to market challenges in China and Brazil, poor operational execution in Brazil and costs incurred while growing the international business.

"Sales volume has improved and operating losses were cut in half from Q2 to Q3," Smith said during the analysts call. "Demand in China is in the early stages of recovery but it's slow, and as indicated by the recent news of another food scandal, still vulnerable to food safety concerns. While a negative short-term demand, these events continue to reinforce the validity of our business model in China which emphasizes biosecurity, supply chain integrity, and food safety."

Tyson's Pork segment delivered a record performance despite tight supplies of hogs due to a widespread outbreak of porcine epidemic diarrhea virus (PEDv). The segment reported $1.77 billion in sales on a 5 percent increase in sales volumes, and $128 million in operating income.

“We are nearing the end of what looks to be the best year in our company’s history,” Smith said. “We’re looking forward to closing on the Hillshire acquisition before the end of our fourth quarter, and we’re excited about combining the protein industry’s best marketing and operations talent into one team. We’ll be ready to start the new fiscal year together and anticipate delivering Tyson’s sixth year in a row of strong earnings and operating income and also achieving our goal of at least 10 percent EPS growth in 2015.”

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