Smith Guides Tyson Through Changing Market Conditions

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Editor’s Note: The following profile is part of a series originally published by Arkansas Business highlighting the chief executive officers of the 17 publicly traded companies headquartered in the state. The Northwest Arkansas Business Journal is running the profiles of the CEOs whose companies are headquartered in our coverage area as a service to our readers.

Four days after Donnie Smith became president and CEO of Tyson Foods Inc. on Nov. 19, 2009, the Springdale-based company reported a net loss of $455 million for the fourth fiscal quarter that had ended Oct. 3, compared with net income of $48 million for the same quarter a year earlier.

Richard Bond had resigned as CEO in January 2009, and Leland Tollett, a former Tyson CEO, had been working as interim chief while the meat-processing giant looked for a permanent replacement.

The terrible fourth-quarter result left the company with a $547 million loss for fiscal 2009. But Tyson bounced back in a big way during Smith’s first two years as CEO: net income of $780 million in fiscal 2010 and $750 million in fiscal 2011. Sales in the year that ended last Oct. 1 topped $32 billion.

Tyson, the world’s largest processor of chicken, beef and pork, is the second-largest food company in the Fortune 500 and employs about 115,000 workers at more than 400 locations around the world.

Smith, now 52, came to the top post as senior group vice president of poultry and prepared foods. On graduating from the University of Tennessee with a degree in animal science, Smith joined Tyson in 1980.

With seven years of experience in live poultry production in Tennessee, he moved to corporate headquarters to work in Tyson’s commodities purchasing group. He has held a number of leadership posts at the company.

Smith responded to a number of questions from Arkansas Business in an email interview. Among them:

How is demand for Tyson’s products holding up?

“We’re operating in a different world than we were a few years ago. After decades of steady growth, U.S. per-capita consumption of protein declined 11 percent from the peak in 2006, and it’s a trend that will likely continue.

“Americans are eating less protein because there’s less available to eat, not because of a reduced intent to purchase — as evidenced by the inflation rate of meat products outpacing the inflation rate of other food items. Strong export demand is sending more meat and poultry overseas.

“In addition, less protein is being produced because of the pressure on the profitability of livestock and poultry farming. As input costs for such things as corn have gone up, food inflation has accelerated, creating more margin shifts and disrupting the supply chain.

“Despite reduced protein supplies, our company is committed to helping our customers grow their businesses. We have a diversified portfolio of chicken, beef, pork and prepared foods available. In addition, we don’t just sell meat in a box. We provide innovation to our customers and consumers, and we believe that differentiates us from our competitors.”

Asked about demand for poultry products — the company was founded in 1935 as a poultry producer — Smith said:

“First of all, let’s take a look at economic indicators. Consumer confidence and spending improved in the last part of calendar 2011 as expected. According to the Conference Board Consumer Research Center, consumers are more optimistic that business conditions, employment prospects, and their financial situations will continue to get better. But it’s still too soon to tell if this is a rebound from earlier declines, or a sustainable shift in attitudes.

“Second, let’s examine both meat and poultry market conditions. According to the Perishables Group data, while dollar sales of fresh meat at retail outlets were up 3 percent versus last year, volume was down a little more than 5 percent, led by beef and pork, down 8 percent and 7 percent, respectively, while chicken pounds were about flat. Our view is that this trend will continue. Bacon and lunch meat sales were stronger in the first quarter versus last year, again, driven by price improvements.”

“Demand for exports in poultry, as well as beef and pork, remains strong,” he added. “Although leg quarters are still the primary driver of these sales, we have seen increased demand for whole birds. Additionally, we do sell breast meat on the export market from our Brazil operations.

“We’ve done a nice job of expanding our export market base and we see this trend continuing as the emerging economies have an increasing demand for protein. We sell our products where we get the best net price. Five years ago, the industry sold 50 percent of its exports to the top three export markets. Today, the industry sells 29 percent to the top three export markets.”

As for the biggest challenges facing Tyson during the next year or two, Smith replied:

“Managing rising input costs will likely continue to be among our primary concerns. The cost of livestock and poultry feed has risen to record levels. Corn is the primary component of chicken feed, and accounts for 55 percent of the wholesale cost of whole, ready-to-cook chickens. In our poultry business, we’re working to offset the increased feed costs with pricing and product mix improvements as well as operational efficiencies expected to result in additional savings of $125 million in fiscal 2012.”

Tyson’s proxy statement, filed Dec. 22, shows that Smith holds 617,251 Tyson shares, worth about $11.56 million, according to Tyson’s $17.83 stock price as of midmorning on June 18.

As Tyson’s performance has improved, so has Smith’s total compensation. In 2009, it was $1,176,133; in 2010, $8,862,433; and in 2011, $7,704,561. A sizable part of 2010’s $8,862,433 consisted of $1,478,641 in stock awards, according to the proxy. Smith received no stock awards in 2011, the proxy indicated.

For the second quarter of fiscal 2012, which ended March 31, Tyson posted earnings of $166 million, or 44 cents per share.

That’s up 4.4 percent from last year’s second-quarter earnings of $159 million, or 42 cents per share.

Revenue rose 3.38 percent to $8.27 billion.

“Our multiprotein business again proved advantageous, producing solid earnings for the fiscal second quarter,” Smith said in a news release. “We were pleased with the rate of improvement in our chicken business. The chicken, pork and prepared foods segments all were in or above their normalized operating margin ranges, while beef essentially broke even despite extremely challenging market conditions.”

Smith said he expects the company to gain momentum in the third and fourth quarters, with potential earnings of $2 per share for the year.

Tyson will report third-quarter earnings Aug. 6.

Smith, asked by Arkansas Business what he knows now as CEO that he didn’t know before he took the post, said:

“The experience as CEO has reinforced my belief about the importance of a company’s culture and prompted me to drive cultural change within our company.

This has involved such things as encouraging our people to really know their business and deliver results; to manage cost and expenses like they were their own; and to win and have fun as a team.”

Serenah McKay of the Northwest Arkansas Business Journal contributed to this report.