Tyson's Smith discusses remaining Hillshire supply contracts

by Joel Crews
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Donnie Smith, president and CEO of Tyson Foods
As Hillshire Brands contracts expire, Tyson Foods will be able to use its own raw materials to fulfill commitments.

KANSAS CITY, Mo. – During a Nov. 23 call with the media to discuss its Q4 performance, Donnie Smith, Tyson Foods president and CEO, addressed several inquiries from MEAT+POULTRY. Pointing out that a big part of Tyson’s record success in fiscal 2015 was due to it being the first complete year since its 2014 acquisition of Hillshire Brands Co., earlier that morning, during a call with analysts, Smith mentioned that along with the market share and brands that were part of the blockbuster deal, Tyson also inherited Hillshire’s contracts for raw materials, which will expire over the course of the next two years.

When asked about how those contracts will impact the company’s efficiencies when they expire, Smith said utilizing its own raw material will benefit the company financially and otherwise.

“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,” he 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. We think there (will) probably be some end-to-end efficiencies,” he said, 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.

On the topic of cost for shipping, Smith also 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 of lower price for fuel has had on Tyson’s results, Smith said sustained increases and drops in gasoline costs are felt by the company, but also influences spending by consumers.

“I couldn’t tell you what the freight savings is year-over-year,” 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 a positive for food companies, but spending habits tend to be seasonally based.

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

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