Tyson Foods sets its sights, future profits on brand innovation

Springdale-based Tyson Foods is serious about its 2.0 version update now one-year following the $8.55 billion acquisition of Hillshire Brands. Tyson Foods executive Tom Hayes recently told analysts that the meat giant’s vision is to be the “global innovative leader in food experiences” as it continues its metamorphosis from a commodity meat packer into packaged food company focused on brand development.

Hayes, chief commercial officer at Tyson, spoke at the Barclays Global Consumer Staples Conference on Sept. 9 in Boston.

“Innovation is a huge thing that is going to be in the forefront and the lifeblood of Tyson Foods going forward,” Hayes said.

The meat company is moving fast in its effort to capture savings, expand brand marketshare and development new products for in line with customer demand. Hayes said Tyson is in the process of linking its supply chain and incorporating many of the raw materials produced through Tyson’s chicken, beef and pork business segments and incorporating them into higher-valued brands of Hillshire products.

“Hillshire Brands as a company is a catalyst for a transformation that’s happening at Tyson Foods,” Hayes said. “We’re moving from a commodity portfolio to one that is a portfolio of high-value brands.”

Hayes also shared that despite some challenges in Tyson Food’s beef business, consumer interest in healthy food products, convenience foods and quality ingredients have never been higher. He said the marriage of Tyson Foods to Hillshire gives the company the best of both worlds with respect to innovation and brand loyalty. To put this in context, Hayes said retail categories in protein are growing 3.3% overall compared to total food and beverage grocery store sales that are growing at 1.4%.

“So, you can see that protein is driving the bus in terms of growth,” he said.

Hayes said Tyson and Hillshire take a scientific approach to the study of consumer trends. The company recently created a “trends council” to analyze and evaluate consumer trends, including change shopping patterns and demographic shifts. Hayes said this group works directly with product innovators to keep new products in the pipeline. He said consumers can look forward to Ball Park Jerky, Hillshire grilled “anytime” frozen meals and Hillshire’s “clean label” deli meats, all new innovations since the merger with Tyson Foods.

He said Tyson’s commitment to brands that consumers want is easy to see when you consider that between 2016 and 2018 Tyson will devote 72% of its resources toward brands that exhibit the highest potential, premium pricing. Those brands include Tyson Foods, Wright, Jimmy Dean, Hillshire Farm, Ball Park and Aidells.

“We’re going to always do line extensions and other sort of sustaining innovation,” Hayes said. “But, the platform innovation that we’re building and driving, 72% of that is against these brands and against growing areas where we know we have a shot to build a great business.”

Hayes also said 13% to 15% of Tyson Foods’ net sales year-over-year are expected to come from products introduced in the past three years, with that rising to 14% in 2015.

Tyson executives have said they expect sales revenue of $41 billion this year and roughly $41 billion in 2016, as the company’s international presence has shrunk and the beef market remains challenged. Dennis Leatherby, chief financial officer, said at the Barclay’s meeting the company’s “synergy story” following the acquisition of Hillshire Brands is strong. He estimated the company will achieve $300 million by the end of fiscal 2015.

“We’re expecting more than $400 million next year and more than $600 million in 2017,” he said. “These synergies, I want to remark, are companywide. I’d say about 85% to 90% are currently in the prepared foods segment. Over time, that will probably move to more 80% to 85% as some of those synergies are spread across beef, pork, and chicken as well.”

He warned that not all of those synergy savings will make it to the bottom line as the company continues to invest in future innovation.

BEARISH SENTIMENT
Analysts remain mixed on Tyson Foods’ earnings outlook given the company’s recent third quarter miss and pullback on annual guidance. A more than $900 million gain in prepared food segment revenue helped push fiscal third quarter net income for Tyson Foods up to $343 million, up 31.9% compared to the same period in 2014. Quarterly revenue was $10.071 billion, up more than 40% compared to the $9.682 billion during the same quarter in 2014.

However, the big gains in the quarterly report were below Wall Street expectations. The per share earnings of 83 cents missed the consensus estimate of 93 cents per share. The consensus estimate on revenue was $10.3 billion.

“The bulls on this stock will argue that the third quarter miss and the fourth quarter guide-down are short-term issues and that nothing has changed regarding the company’s outlook for growth in 2016 and beyond. But the stronger U.S. dollar and the resistance of Asian customers to pay high prices for U.S. exports will continue to pressure the business,” noted Robert Moskow, analyst with Credit Suisse, who is neutral on the shares.

“We fear that this will lead to an excess of protein supplies right at a time when cattle, hog, and chicken producers are increasing production. Management said that it expects a 3% increase in industry chicken and hog supplies in 2016 and probably a 4-5% 
increase in beef in 2017. Domestic demand is good right now, but it will have to get even better to absorb these increases. As a result, we are lowering our earnings per share estimates for fiscal 15 and fiscal 16 to $3.17 and $3.30, respectively, and remaining below Wall Street consensus,” Moskow added.

He said Tyson’s guidance on fiscal 2016 also gives off mixed signals as exports are pressured because of higher U.S. dollar and some caution on the direction of pricing in the Hillshire business. Moskow maintains a target share price of $42 for Tyson Foods. He said while Tyson “has made enormous strides toward becoming a more predictable value-added protein company, there is still a high degree of commodity exposure for Tyson today.” 

Tyson Foods shares (NYSE: TSN) closed Thursday (Sept. 10) at $42.85, up 35 cents. For the past 52-weeks the share price has ranged from a $45.10 high to a $37.02 low.

Tyson’s stock price has risen 6.71% so far this year, better than the 8.6% decline in the Dow Jones Industrial Average, and 0.56% uptick in the NASDAQ composite for the same period.