Tyson Foods morphing into modern food company; acquires Original Philly Holdings

Tyson Foods is not your grandfather’s chicken processor or your dad’s meat company. The Springdale-based protein titan says it continues transforming into a higher-margin, modern food company. CEO Tom Hayes said the past year has been one of change with the company making significant progress in its transformation.

“It was a great year, exceptional record year for Tyson Foods. We have a new purpose for the company and continue to flush out various initiatives around our three main goals to grow, deliver and sustain,” Hayes said during a call with the media following Monday’s earnings announcement.

One of the ways Tyson Foods is growing is via acquisition. The company also announced Monday the recent purchase of Original Philly Holdings for an undisclosed price. The Philadelphia-based maker of raw and fully-cooked Philly-style sandwich steak and cheese steak appetizer products will be part of Tyson Foods’ diverse prepared foods segment.

Talk Business & Politics asked management about other possible acquisitions and for clarity into the types of companies on its radar, given its goal to also pay down debt and restore share buybacks. Chief Financial Officer Dennis Leatherby said Tyson Foods will continue to pay down debt from the AdvancePierre deal and plans to restore share buybacks by the third quarter of 2018, with the understanding there could be more merger and acquisitions in the pipeline. He said the company is looking for opportunities in the prepared food segment or around innovations in the chicken segment that would allow the company to leverage its capacity.

The Original Philly Holdings will likely help Tyson Foods grow sales in prepared foods and also in the convenience store retail segment. Sally Grimes, president of prepared foods, said Original Philly Holdings is a “natural, strategic fit into our prepared foods business.”

The deal includes two business units: Original Philly Cheesesteak Company, which manufactures raw Philly Style sandwich steak products, and Philadelphia Pre-Cooked Steak Company, which manufactures fully-cooked Philly-style sandwich steak products. Its customers include foodservice, retail and convenience store providers. The company employs 250 people and operates two plants in Philadelphia.

FISCAL 2017, BEYOND
Hayes said 2017 was not without a few challenges, but overall he’s pleased with progress made in the company’s focus on meeting its goals — to grow, deliver and sustain all the way down at the segment level. He told the media Tyson Foods is also focused on maintaining a tight cost structure, while also ensuring it makes strides in sustainability, which is why they added a new chief sustainability officer and chief technology officer because the two areas work hand-in-hand.

He said the company’s efforts to put a new management team in place and refine the company’s overall strategy in 2017 have gone well. The sale of the company’s non-protein businesses – Sara Lee, Van’s and Kettle – is expected to close by the end of December. Revenues from the businesses were about $650 million for fiscal 2017, and they carry a net value of $803 million.

Tyson Foods expects to record a net pretax gain from the sale, but that has not been included in the company’s 2018 forecast. Tyson Foods expects to earn between $5.70 and $5.85 per share in fiscal 2018, which would represent earnings growth of 7%-10% over this year.

“We’re confident in our ability to realize in excess of $200 million in net savings this fiscal year from our Financial Fitness program, including AdvancePierre synergies,” Hayes said. “We’re planning capital expenditures of $1.4 billion in fiscal 2018 while we continue reducing debt to reach our net debt to EBITDA target of around 2x, which we anticipate will happen by the third quarter. … Our plan is to grow our business year after year through differentiated capabilities, deliver ongoing financial fitness through continuous improvement and sustain our company as we sustainably feed the world with the fastest growing portfolio of protein packed brands.”

MANUFACTURING CHALLENGES
Hayes was also asked about tight labor and its impact on the beef packing business. He admitted tight labor is a concern, and the company is offering higher pay to attract talent, as well as looking at more automation with the use of robotics where applicable. He said plants are managing but the company is looking at numerous ways to combat this issue without compromising plant safety.

Reporters also asked Hayes about the tight chicken capacity and the company’s plans to build a new chicken processing plant and complex. The plan to build in Kansas was recently nixed after citizen backlash. Hayes said Tyson Foods still plans to build a plant and there are numerous communities interested. He said the reason the company decided to build a new facility was because it is having to buy more chicken on the open market to fill orders and the other plants have maxed out capacity.

“Tyson hasn’t built a new complex since the 1990s,” he said. “We had a strong plan going into Kansas, but we are not sure how in-touch the state and regional leadership was with the community leadership in Tonganoxie. Moving ahead we are going more due diligence at the local level and we still plan to build a new facility, but this has extended the timeline a bit.”

WILL THE GOOD TIMES LAST?
Wall Street applauded Tyson Foods’ earnings and positive outlook with shares (NYSE: TSN) trading at $75.36, up $1.22 in active volume Monday morning. For the past 52 weeks, Tyson Foods shares have traded between a high of 75.82 and a low of $55.72. Since Jan. 1, Tyson Foods shares have risen 20.3%.

Despite the better-than-expected earnings and another record year, J.P. Morgan analyst Ken Goldman has a neutral rating on the stock, saying there’s a lot going right for Tyson Foods but things can change quickly in the protein space.

“We do not doubt management’s analysis that there are a lot of costs to pull out of its operations, nor do we question whether today’s spending on areas like marketing and innovation are at appropriate levels,” Goldman noted. “And based on management’s analysis of these items, Tyson seems to have a multi-year path toward higher earnings. But we have learned in the protein space that the good times – which are being experienced concurrently in chicken, beef, and pork – do not always last.

“There is a good chance, we believe, that 2018 proves to be the peak of the beef cycle. Pork margins could experience progressively greater margin pressure this year as new processing capacity ramps up. And though Tyson’s chicken business is more insulated from commodity chicken prices that other companies, there is plenty capacity growth looming for tray pack chicken, the product for which Tyson has greatest exposure. While see a favorable near-term set up for the TSN stock, we see somewhat limited earnings growth over the next couple of years.”