Tyson Foods Boss Predicts 12% Earnings Growth In 2015

CEO Donnie Smith said Tyson Foods “2.0” is at the beginning of a new growth phase with the integration of Hillshire Brands it acquired earlier this year at a cost of around $8.5 billion.

“We have the right brands and the products people most want. This is a very exciting time to be a leading food company in the world,” Smith said Wednesday (Nov. 19) at the Morgan Stanley Global Consumer & Retail Conference in New York City.

Tyson Foods just completed a record fiscal year. Fiscal year revenue of $37.58 billion was well ahead of the $34.374 billion in the previous fiscal year, with annual income of $864 million, up 11.05% over the 2013 fiscal year. Fourth quarter revenue was $10.105 billion, up 13.6% compared to the previous fourth quarter. Income in the quarter was $469 million, up over the $416 million in the 2013 period.

On Wednesday the company gave a fiscal 2015 earnings guidance range between $3.30 to $3.40 per share, which would be a 12% net gain year-over-year. Smith said the company has worked hard to build credibility with investors in recent years. He said market volatility is less of a financial threat because the company found ways to insulate itself from wide swings in commodity prices.

Smith said the major operational improvements in the chicken segment and the use of a “buy versus growth” strategy has helped the company grow the majority of the birds it needs, but also buy the breast meat parts in the open market. The parts are then pushed through value-added processes to raise their wholesale margin and retail price points.

Breast meat is the higher margin item and most favored in food service and retail, but it’s only half of the bird. The dark half often ends up in cold storage or sold for pennies per pound. Tyson’s solution is to purchase the parts it needs to fill certain orders and then make sure it can mark up the commodity price by trimming, seasoning and/or cooking the product for its customers.

Smith said this has been a winning proposition for the company and helped to ensure it doesn’t overproduce the amount of chicken it needs to fill orders. He said the beef and pork operations at Tyson Foods are each a spread business as they procure the raw materials — cows and hogs — and they process them for added value. They have applied that same approach in the chicken segment to some degree.

Tyson Foods has impressive depth and breadth in the products it makes. About 1 out of every 5 pounds of chicken, beef and pork processed in the U.S. comes from Tyson Foods, the company said.

The marriage with Hillshire Brands gives Tyson Foods the No. 1 market share in 11 leading categories. Tyson already has the No. 1 market share in fresh chicken, frozen chicken, frozen uncooked chicken and stack pack bacon. Hillshire Brands owns the breakfast sausage and frozen protein breakfast categories with Jimmy Dean. Hillshire smoked sausage, Ball Park franks, State Fair corn dogs and Aidells specialty sausage each also have a No. 1 market share in their respective categories.

Smith said having a No. 1 share is great, but doing it in key categories that are exploding in growth is far better. For instance, Tyson Foods commands 12% of the fresh chicken market that is growing at 6.5% annually, and which the company has 85% household penetration.

He said in breakfast sausage Jimmy Dean commands 20% of the market which has a 69% penetration level. This category is growing at 5.7% annually. The same is true for frozen protein breakfasts growing at 7% annually.

Smith said being No. 1 in the categories that are growing the fastest gives Tyson Foods plenty of upside in fiscal 2015. He said the $225 million in synergies the company has identified for fiscal 2015 are another added layer of insulation to support higher profits.

When asked about the 3% he expects chicken production to increase in 2015, Smith said it will take that much to fill the protein hole left by the shrinking beef production.

“Beef demand is still strong, but the price has gotten so high that consumers have started reaching for chicken in the meat case. We have been talking about this for two years but it’s just now happening. Millennials also index higher for chicken. These two dynamics are going to be with us for some time in the future,” he said.

Smith doesn’t expect to see beef supplies increase over the 2014 levels until 2020 given the length of time it takes to regrow a herd. Until then, Smith said consumers will eat more chicken, because it’s more affordable than beef or even pork.

Shares of Tyson Foods (NYSE: TSN) closed Wednesday at $43.18, up 53 cents. During the past 52 weeks the share price has ranged from a $44.24 high to a $30.75 low.