KANSAS CITY, Mo. – Shortly after announcing on Aug. 6 disappointing results in its beef and pork segments, the increasing costs of doing business plus the soft domestic demand among other things that led to a 61 percent decline in income at Tyson Foods Inc. for its third quarter, Donnie Smith, chief executive officer and president, and Jim Lochner, chief operating officer, answered questions about the company’s third-quarter performance during a media teleconference.
When asked what caused reduced demand for beef and pork products during the quarter, Smith replied, “We saw volume declines driven by retail price increases. Hey, this was the situation, let’s face it, I don’t see that changing. With the current production environment that we’re going to be facing among all four of the major proteins — beef, pork, chicken and turkey — it stands to reason per capita consumption is going to go down again in 2013. If you [include] 2006, this [marks] seven years in a row of declining protein availability in the US; that’s unprecedented.”
Meat inflation is higher than the average inflation rate, he added. “So that tells you people want [meat], it’s just as your cutouts continue to increase, it becomes a tougher call for folks and they have to end up voting with their pocketbooks,” he continued.
Chicken lbs. were flat at retail, “which is about how we had called it,” Smith said. “Beef lbs. were down about 7 percent; pork was down close to 2 percent,” he added. “Another thing that drove that is you’ve seen some pretty heavy featuring in national account foodservice chains. There has been quite a bit of chicken feature activity at foodservice, particularly among the QSRs. I think that has helped a little bit, too.”
Of the three proteins, pork felt the softest to Smith. “If you look at the [chicken] slaughter lbs. today and the supply situation, the market is oversupplied at this point,” Smith said. “The reason I say that is if you look at what breast prices have been over the last two weeks or so — they’re going down. Typically, going into August you see a ramp-up in pricing going into Labor Day.”
Smith predicted the US meat industry will be flirting this year with record-high cutout values in beef and pork, as well. “So, this may be the year when we test elasticity [for chicken, beef, pork and possibly turkey],” Smith predicted.
Smith said one of the points the company tried to make during its earlier analyst teleconference is it had production pulled well back of its demand all year long and had bought a lot of breast meat in its third quarter. “Demand is softening a little bit now without a robust pricing environment,” Smith said. “So, we’re starting to buy a few less loads of breast meat a week now versus what we were doing in Q3. I’m glad our production model is the way it is. I think we’re very well positioned going into this year.”
Tyson Foods is doing the things a business needs to do to earn pricing, Smith insisted, which is offering great service, great quality products and innovative capabilities. “We have added several new items into the portfolio to continue to grow our customers’ business,” he added. “We are very responsive on QSR feature activity and those kinds of things. We’re pulling all the right levers to keep ourselves well positioned.”
Tyson Foods has a very strong value-added mix in chicken, beef and pork proteins, Lochner said. “You’re going to see increased prices, even though I hear what a lot of retailers and foodservice executives say...’We can’t absorb higher prices,’ Lochner added. “The reality is that will happen because the supplies at some point in time are going to contract because the commodity producer has to have a viable business. If not, supplies go away. That’s the trend line we have seen for the last seven years because producer profitability has always driven the available forward supply.”
However, because the US is an efficient producer of protein, Smith feels the US meat and poultry industry is going to experience another good year of beef, pork and chicken exports.
When asked if Tyson’s chicken operations in Brazil and China are similar to the US integrated system, Smith answered, “In Brazil, although we still have a second shift to fill out in two of the three facilities, they are largely like our US operations. We have contract growers, processing plants, feed mills and hatcheries, etc. However, in China today, the market trades a lot like the US market did many years ago, where there’s a market for day-old chicks. You buy day-old chicks from someone, you would buy feed from someone else and then you would sell those market birds to a processor so it’s not truly integrated. There are a couple of smaller integrated players. We’re going into China and trying integration where we will own very technologically advanced bio-secure houses, farms and we’ll grow our own chickens there on company owned farms. That way we have control of the whole supply chain from the pullet to the plate.”
One reporter asked Smith if Tyson Foods was actively looking for acquisitions and if so, what types of businesses are being targeted. “We don’t typically talk about acquisitions that we’re pursuing,” Smith said. “[But] we have talked about the parts of our business we want to accelerate our growth: value-added poultry, our prepared [foods] business and our international business. Those are the three areas we would likely be pursuing acquisitions.”
Tyson Foods must be careful and think through a lot of things before it would take on” a big mound of debt,” Smith said regarding possible acquisitions. “But it’s not to say we couldn’t [acquire a business] if the opportunity arises. We like what we call ‘optionality ‘— I’m not sure if that’s a real word....but we use it a lot. I like the way our business is positioned.”
When MEATPOULTRY.com asked which Tyson Foods protein group was being hurt most by the ongoing drought, Smith said, “Maybe because we’re integrated and we bear the costs and capital requirements for the chicken side of our business, maybe [the chicken business is affected most by this situation], I don’t know,” Smith continued. "But certainly we also have close relationships with all of the feedlots and all of the farmers we buy hogs from so we’re kind of a family and we all feel [the impact of the ongoing drought] together.”
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