With the ink barely dry on its blockbuster $8.55 billion deal, Tyson Foods CEO Donnie Smith wasted no time in providing an upbeat “Brady Bunch” assessment on the integration of Hillshire Foods brands’ and operations.
"We're moving forward quickly with the integration and finding synergies, and we feel good about our ability to capture $225 million in synergies in the first year and $500 million by year three," Smith said Monday during the Barclay’s Consumer Conference in New York. "The more we get into it, the better we feel."
Smith said as the companies come together, it will be important to keep the best aspects of both organizations intact. He especially wants to keep the spark that led to the brand-building, marketing, innovation and product-development success at Hillshire. He said the Hillshire merger moves Tyson forward faster.
“What have to be careful not to over Tysonize Hillshire Farms. We know what our strengths are and theirs and we want to bring the best of both companies to the table,” Smith said.
While the deal was still being finalized, the first mission among Tyson Foods’ execs was step back and assess, “Who is Tyson 2.0?” Smith told investors. Realigning talent also was a first initiative. That announcement was made Aug. 28. Smith referred to their blended corporate family as the “Brady Bunch approach.”
“I feel like we’ve brought the best of both companies together and used the strengths of both companies to help move our business forward,” Smith said.
Tyson Foods’ Chief Financial Officer Dennis Leatherby also reassured investors by announcing that the company is sticking to its 2014 full year earnings guidance of $2.78 per share – independent of the Hillshire costs and merger activities. Tyson's fiscal 2014 year ends Sept. 27.
Tyson expects the addition of Hillshire to be accretive to earnings in fiscal 2015 and substantially accretive thereafter. Leatherby said he expects at least 10% earnings per share growth in fiscal 2015.
"We're staying focused on our strategy. We're going to leverage our iconic brands and No. 1 market share positions to grow the prepared foods segment, and we've hit the ground running to capture synergies. If we do all these things well, the result will be reduced volatility and expanded operating margins," he said.
Leather told investors that Hillshire’s business is 74% retail and 26% food service, which makes for a complimentary blend into Tyson’s prepared foods segment which is the opposite.
Tyson Foods also expects beef and pork margins in its red meat business to improve in 2015.
“I see a much better year ahead for the chicken business too,” Smith said.
Smith projects the beef herd will shrink about 2% to 3% this coming year, but with more cattle moving toward to the Midwest, Tyson expects no problem with procurement given that’s where its slaughter facilities are located.
“All of our beef processing plants are around the big high-efficiency feedlots. So cattle are actually moving toward our plants,” Smith said.
Plants at a distance from the Midwest will become more challenged over time, given the cost of moving live cattle is about 10 cents per mile per head, Smith said.
“So if you're 500 miles away from the cattle supply, you've got a $50 a head disadvantage, for example, to someone like Tyson who is sitting right on top of the big high-density feedlots,” he said.
Smith said Tyson has been able to maintain decent beef margins and he doesn’t see that changing in the near term. In pork, lower corn prices will provide incentive for production to expand, after double-digit declines tied to the Porcine Epidemic Diarrhea Virus. Bio-security measures put in place at hog farms around the country should help reduce the PEDV effect going forward, Smith said.
“It would likely be the latter part of 2015, maybe moving on into 2016 before that increased supply manifests itself in a meaningful way, but I think we can say that production could be up 1% or 2% next year,” Smith added.
Smith predicted Tyson’s chicken segment margins will reach or exceed 10% percent in 2015. Smith said overall supply won’t begin to increase until about July 2015 because of the limited breeder flock.
Margins in the company’s prepared foods business will be “significantly stronger” next year, boosted by the addition of Hillshire Brands and operational improvements, Smith concluded.