Tyson Foods CEO Richard Bond Talks Firm’s Future in Foreign Markets

Tyson Foods Inc. wants bigger chickens and smaller cattle. Ideally, a clucker would weigh about eight pounds and a mooer less than 1,000.

These are just two of the steps the world’s largest meat processor is taking to both increase profits and productivity, and to satisfy customer demands during what have been a turbulent couple of years in a volatile industry.

Other steps include an increased presence in foreign markets, continued elimination of plant inefficiencies, alterations to some prepared foods and increased prices for Tyson products.

Higher grain costs as a result of federal corn-based ethanol mandates have hit Tyson hard. The company will likely spend $500 million more on grain in fiscal 2008 than it did in 2007.

Companywide, operating income for the first quarter, which for Tyson ended Dec. 29, was down 42 percent from the same quarter in 2007.

The company’s beef business has taken some hard hits. Losses for the segment were up 269 percent in the first quarter – a loss of $85 million – from the same quarter in 2007.

Its pork segment fared well, though, and was up by $37 million, or 95 percent, compared to the same quarter a year prior.

For the fiscal year ended Sept. 30, 2007, Tyson’s net income increased 236 percent from they year prior. The company ended 2007 with $268 million in income from a 2006 loss of $196 million.

Despite a rough couple of years, Tyson has continued to donate millions of pounds of food to charities and food banks – 50 million pounds since 2000.

In January, former CEO and chairman Don Tyson – who holds about 70 million restricted Class B shares in the company – settled a lawsuit brought by a shareholder and an index fund for $4.5 million.

Through his Tyson Family LP, he sold nearly $350 million worth of stock in the company from April 2006 to May 2007. The stock price was $14.42 at the start of his selling spree and $21.67 when it ended.

Tyson’s stock price has fluctuated substantially over the last year, hitting a high of $24.32 on June 21 and a low of $12.81 on Jan. 23.

And shareholder groups recently criticized Tyson Foods for what they say is excessive executive pay, lagging stock performance and lack of shareholder power.

Some people close to the company have speculated Tyson Foods is positioning itself to sell off some segments and convert its core business back to a private company.

A private company has different reporting requirements than a public one, and doesn’t have to answer to shareholders. Nonetheless, president and CEO Richard L. Bond said he doesn’t “see any significant benefits for us to now try to change our structure from a public company to a private company.”

There has never been any consideration of taking the company private, he said. Nor would the company consider selling off any portion of its business.

“We did look, back in the fall, at all of our segments and said, from a strategic standpoint, ‘should we stay in all these segments?'” he said.

“And we did a fair amount of in-depth analysis.”

But Tyson’s leaders “came to conclusion that the strategy of being in multi-protein was a good strategy and a strategy we’re very committed to,” Bond said.

Analyst opinion about the company is generally positive, with Deutsche Securities and BMO Capital Markets giving the stock a buy or outperform rating with an $18 target price.

Stephens Inc. and Wachovia were slightly more cautious, but still predicted the stock would perform well.

Foreign Concepts

Tyson Foods has operated in other countries for many years, but recently announced it is heading further into foreign markets, including China, Brazil and India.

At the 2008 Tyson shareholders meeting, Bond announced a partnership with Jiangsu Jinghai Poultry Industry Group Co. of China.

The joint venture will eventually process a million birds a week, producing fresh chicken for 139 million people in three Chinese provinces.

Tyson also recently announced its intent to purchase Brazilian poultry company Pena Branca for $74.4 million.

Foreign markets accounted for about 10 percent, or $3 billion, of Tyson’s 2007 sales. By 2010, that figure will increase to $5 billion, Bond said.

One of the cornerstones of operating in a foreign country is understanding its culture and business environment, Bond said.

Tyson has had a presence in Mexico for about 10 years and is the third largest poultry processor there, so the company understands that nation’s culture, he said.

After finishing fiscal 2006 in the red, the company rebounded in 2007. Tyson’s board appointed Bond CEO in May 2006. It’s been under his helm that the company returned to profitability, albeit with some deep cuts along the way.

Other profit-enhancing measures included eliminating redundant reports and activities that didn’t add value, Bond said.

“Really, we achieved more than what we anticipated,” he said, estimating the savings “in excess of $265 million.”

In addition to eliminating positions in 2006, Tyson also recently announced it would cease beef slaughter at a plant in Emporia, Kan. and close an oven-roasted chicken plant North Carolina.

Those moves will eliminate about 2,200 positions, leaving the company with about 102,000 employees worldwide.

That number will probably increase this summer, as the company reconfigures its Berry Street plant in Springdale to accommodate de-boning equipment and to deal with larger chickens. Tyson will likely add 370 positions as a result of that project.

The shift at the plant to more in-house processing will cost about $17 million and has already been approved.

Heavier bird weight – eight pounds as opposed to six – and the de-boning process will increase efficiency by reducing the amount of meat shipped between plants, said Donnie King, group vice president of poultry and prepared foods operations.

The new positions would bring the number of people employed at the plant to 1,120. Wages for production positions would start from $8.85 to $10.10 an hour, topping out at about $10.85 an hour.

Approval of the $10 million personnel capital is “highly likely,” with new positions open by July or August, Bond said.

Tyson also recently announced a new pricing grid for cattle, implemented to discourage the production of excessively heavy animals.

This is important because the company has found many of its customers want smaller cuts of meat.

Corn Costs

Ancient Mayans believed the gods created humans out of corn flour. Such was the importance of the grain in their culture. A thousand years later, mankind uses corn to make everything from paper, textiles and packing materials to adhesives, fuel and even laptop computers.

While some are hailing the use of alternatives to oil, such as corn-based ethanol, others see the transformation of food into fuel as a troubling development. Bond is one of the latter.

“We would love for ethanol expansion to occur outside of the use of corn,” he said, adding that what began as an attempt to reduce the nation’s dependence on foreign oil has mainly resulted in increased food costs.

“If you took the whole corn crop and used it all for ethanol, you’d only reduce gasoline consumption by 3 percent,” he said. “And with the energy that it takes to produce that ethanol, from natural gas or another source, you net out very little energy savings.”

That’s not to say that Tyson isn’t exploring energy alternatives. But those methods will use animal byproducts, not vegetable sources to produce fuel.

In April 2007, Tyson announced a venture with ConocoPhillips to produce diesel from animal tallow.

And in June 2007, the poultry giant announced the formation of Dynamic Fuels LLC, a 50-50 partnership with Syntroleum Corp. of Tulsa. In February, Dynamic Fuels awarded CDI Corp. of Philadelphia a $150 million contract for the construction of a processing facility in Geismar, La.

The plant’s capacity will be 75 million gallons per year of synthetic fuel refined from pork, beef and chicken byproducts. It is on schedule to be completed by January 2010, Bond said.

Higher grain costs as a result of ethanol mandates have hit many in the agriculture industry hard, and Tyson has certainly experienced this.

“Unfortunately, one of the primary ways that we have to keep pace with increased grain prices is to raise our finished food prices to our customers, and ultimately to the consumer,” Bond said.

To minimize price increases, Bond is looking at ways to lower costs for many of the company’s finished foods. One element of that is to use more pieces of dark meat in prepared products, so that the consumer gets high quality food at a lower price, Bond said.

Tyson’s Discovery Center plays a key role in all of this. The $45 million, 100,000-SF facility has the look and feel of a modern airport, but serves to let the company test new products and get them to market much more quickly than in the past.

“We can do in a day and a half what used to take two months,” Bond said.

The center, which opened in March 2007, employs 120 food research professionals – 50 with advanced degrees, 11 with Ph.D.s and 65 who will soon be certified as “culinologists.”

Corporate Compensation

In January, three shareholder advisory groups issued statements critical of Tyson’s leadership. The groups said the company’s stock performance has been lackluster, its executives are paid too much and shareholders don’t have enough say in the company’s management.

Bond disagreed with that assessment.

“People can have whatever opinion they want,” he said.

After examining pay levels compared to similar industries and taking into account what is required to make sure the company retains the type of talent it needs, Tyson’s board of directors and compensation committee determined pay levels are where they need to be, Bond said.

As part of the settlement of the lawsuit filed against several Tyson directors, Don Tyson and Tyson Family LP, the company agreed to implement new or continued governance measures.

These include the establishment of a nominating committee, appointment of a new independent director, and limitations on new related party transactions between the company and Tyson Limited Partnership, Don Tyson, members of his family, or executive officers, according to SEC filings.

Philanthropic Focus

Another area to which Tyson is committed is giving food to hunger relief programs. To date, the company has donated more than 50 million pounds of food to charities and food banks across the country, such as America’s Second Harvest.

“We have a philanthropic focus on food relief,” said Ed Nicholson, director of community and public relations.

The effort really got off the ground in May 2000.

“We determined that Tyson had been involved in a lot of different philanthropic activities, but didn’t have national single philanthropic focus,” Nicholson said. “Because we’re a food manufacturer, hunger relief was the best fit.

“Obviously we keep our doors open by selling food to people who can afford it, so it made sense to help the groups who feed people who can’t afford it,” he said.

Tyson usually budgets about 3 million pounds of food for donation each year, with additional food becoming available depending on market conditions. Higher grain costs could mean there is less food available for Tyson to donate.

“The price of grain has enormous potential to create challenges in the area of hunger relief,” Nicholson said.