Innovation and R&D to be robust for Tyson in 2015

by Bryan Salvage
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SPRINGDALE, Ark. – On the heels of releasing its upbeat fourth-quarter financial performance, Donnie Smith, Tyson Foods president and CEO said during a conference call with the media that the company intends to continue pursuing new product innovations on two fronts as it transitions into the new organizational structure to include its recent acquisition of Hillshire Brands.

As a result of the merger, Tyson Foods now operates two Discovery Centers—one in Springdale, Ark. and the other in Downers Grove, Ill. “Both facilities have different capabilities; we intend to keep both of them open,” Smith said. “We’ll obviously use all that great talent around innovation and R&D to be able to grow our great brands as we move forward.

Completed in late August, the merger of Tyson Foods and Hillshire Brands creates a single company with more than $40 billion in annual sales and a portfolio of popular brands such as Tyson, Wright, Jimmy Dean, Ball Park, State Fair and Hillshire Farm. The merger also is expected to generate savings of $225 million in fiscal 2015 and more than $500 million by fiscal 2017. Shares of Hillshire Brands common stock were delisted and ceased trading on the New York Stock Exchange and Chicago Stock Exchange before the opening on Aug. 29.

“All of the insights, innovations and R&D efforts have been consolidated under Sally Grimes, who comes to us through the Hillshire acquisition,” he added. [Sally Grimes, former chief innovation officer and president of Hillshire’s Gourmet Food Group, is leading Tyson’s innovation, sales and global brand strategy teams]. “She also heads our retail sales efforts. She’s a remarkable, talented lady who has integrated both Tyson and Hillshire Brands legacy team members into a really great team that has the capability to mine insights [from] both the consumer and customer and bring those insights to life through our R&D and innovation capabilities. We’re very optimistic about our future.”

Despite the enormous chore ahead, Smith is optimistic about the progress made thus far.
“I have been a part of several [business] integrations throughout the years and this one is, by far, the smoothest acquisition integration I have ever been a part of,” Smith said “The teams have come together very well. We spent most of the first three months working on two primary things…No. 1 getting the organizational structure in place and letting our team members know as soon as we can about what the work structure is going to look like and where their role in the work structure is going to be.”

Teams have also been assembled to create business cases and placing synergy captures into place. “There are a few of those things that have already launched and we’ll be seeing the benefits of those synergy captures earlier in the process,” Smith said. “We’ll see the benefits from more of those in our last two quarters of this fiscal year.”

Looking forward, Smith said Tyson Foods sees at least a 3 percent increase in demand for chicken. One thing driving some of this change, in addition to high beef prices, is the number of millennials (those with birth years ranging from the early 1980s to the early 2000s) entering the workplace. “Millennials index very high [consuming] chicken compared to previous generations,” he added. “We think we see the beginning of a longer-term growth trend towards chicken -- that’s the biggest consumer trend we see.”

Although consumers have new dollars in their pockets primarily due to lower gasoline prices, Smith and Tyson management don’t expect a shift back to beef because of this drop. “Typically what happens is as consumers get a little bit more spending money, they tend to want to eat out more often,” Smith said. “Last year, many of our foodservice customers would have wanted to promote chicken more heavily, but there was not the production capability in the supply chain in the further-processed chicken capacity throughout the country to be able to supply that need. This year you are still going to have very high ground-beef prices and because of that I think it makes a lot of sense that our foodservice customers will want to promote chicken -- and we’re putting the further-processed production capability in place to be able to fill those orders. At retail, there is growth in the frozen, fully cooked chicken area. But the largest growth has come in fresh tray pack.”

Smith drilled down into the last month of what he and Tyson management have seen. Year over year, pounds of fresh beef are down about 3.6 percent on pricing that’s up 8 percent over a year ago while pounds of chicken are up 2.2 percent on an almost 5 percent pricing increase. “You’ve seen an increase in both, but you’re at a point now where beef pricing is so high it’s curbing [beef] demand year over year,” Smith said. “Now let’s look at the last four weeks. Fresh-beef pounds are down 15.5 percent on a 22 percent increase in pricing while fresh chicken pounds are up 3.3 percent on 2.7 percent increase pricing. So, that’s the shift you’re seeing – beef pounds are down based on this really high pricing the consumers are starting to see – and we don’t see that trend changing very much in FY 15 because the beef herd will be down then another 4 percent. The macro environment just won’t change.”

Breakfast is a very fast-growing category at retail and foodservice, Smith observed. “We’re optimistic with lower energy [gasoline in particular] prices there will more dollars in consumers’ pockets and you’ll probably see continued growth in those categories and maybe a little more growth in the foodservice category than we’ve seen in previous years. Fully cooked chicken at retail will continue to be a very strong category and a very good category for us. We also think retail, hand-held breakfast will continue to grow in the 7-8 percent range … that, too, will be a good category for us.

The snacking portfolio is here to stay, Smith said in an earlier analysts’ teleconference. “We’ll be addressing that in a couple of different ways,” Smith said. “One will be the Hillshire snacking platform, which we had in the marketplace now for a few months. The early signs are encouraging and when we have our Investors’ Day in New York on Dec. 10, we plan to showcase a few of those new items.”
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