International - "Most opportunity for significant growth"

International - "Most opportunity for significant growth"

Hot on the heels of Tyson Foods' entry into alternative proteins, the global meat giant chose the prestigious New York Stock Exchange to host its annual investor day, with the category set to play a major role in capturing new growth opportunities. Simon Harvey looks at the highlights.

Further acquisitions outside of the US look likely to form a key component of Tyson Foods' growth strategy as it seeks to attain a bigger foothold in the international marketplace, but at the same time continuing the shift from a pure-play fresh meat company.

Chief executive Noel White and his colleagues sought to lay out the ground work at an annual investor day held last week at the New York Stock Exchange following a stellar performance in 2018, when the US$40bn company saw net income surge 70%. That result is perhaps testament to a business the CEO describes as one built on "strategic acquisitions", with a couple of notable recent deals designed to expand Tyson's global presence, particularly in the Asia Pacific.

And having announced plans earlier in June to enter the fast-growing meat-alternative sphere with the launch of a 'blended' brand Raised & Rooted, combining traditional animal proteins with plant-based ingredients, White's marketing counterpart, Noelle O'Mara, tells attendees Tyson's prepared foods division will become a "large, profitable growth engine".

Chicken will also strut further into the growth arena as Tyson unwittingly expects to benefit from the outbreak of African swine fever in China, which has decimated hog herds and led to an upsurge in global pork prices, although the company acknowledges the inherent risks if the disease spreads to the US. It has already emerged in Europe and across the wider Asian region.

White, who became Tyson president and CEO last September, says: "We're poised for long-term growth because we understand consumers and can meet their needs through a broad portfolio of diverse products. As we look ahead, prepared foods and value-added chicken are expected to be the most profitable segments, and international is where we see the most opportunity for significant growth." 

Tyson's 2018 sales show beef accounting for 37% of its $40.05bn top-line, followed by chicken at 30%, pork 10%, and prepared foods making up the tally with 22%.

Tyson's upbeat outlook for international unit

White achieved a notable deal this year with the purchase of assets from fellow meat heavyweight BRF of Brazil, acquiring operations in Europe and Thailand.

It included four processing facilities in Thailand, one in the Netherlands and another in the UK, which the Tyson CEO said enhance "our ability to serve growing global demand for value-added protein". 

The deal built on another initiated before White took the hot seat at the Arkansas-based business, that of Keystone Foods, then a subsidiary of Brazil's Marfrig Global Foods.

Keystone counts the fast-food chain McDonald's as one of its key customers, with six processing plants in the US. And it also encompassed plants in China, South Korea, Malaysia, Thailand and Australia.   

However, Tyson's international segment is still relatively small, representing 11% of the business, compared to 48% for consumer products as a whole, 30% for foodservice, and another 11% that falls into the 'other' category.

Robert Moskow, an analyst at Credit Suisse, gives his interpretation: "Management admitted that its previous efforts to expand internationally did not meet with much success, but it has learned from its mistakes. It has implemented a 'demand model' that aligns its products with customers' specific needs rather than just 'pushing' product into the market.

"In response to the strong growth in the local markets, management expects to increase capacity in China, Thailand, and Malaysia. The legacy China business has now improved to break-even after several years of losses."

Emphasising the importance of its global aspirations, White says: "Through recent international acquisitions, Tyson Foods is positioned to take advantage of rising global protein demand. Over the next five years, it is estimated that nearly 98% of protein consumption growth will happen outside the US, and approximately 70% of that growth will be in Asia.

"Our international business has a firm foothold and is beginning to flourish."

Talking up organic growth opportunities in prepared foods

Prepared foods is expected to play its part, with half of that division centred around foodservice in categories such as pizza toppings, tortillas, sandwiches and burgers, according to White. Chief marketing officer O'Mara describes it as a "mission" with "brand-led growth" at its heart.

Tyson kicked off its prepared foods ambitions in 2014 when it acquired Hillshire Farms, the owner of the Jimmy Dean brand now under the company's umbrella. The segment has since grown to account for 30% of total profits, from 3% five years ago, and in terms of sales, is up from 10% to 22% last year.

Jeremy Scott, a director at Mizuho Securities' US division, summarises its position: "We expect prepared foods to absorb meaningful raw material inflation that may more than offset the company's operational improvements and market share gains. While the company is taking pricing to offset that inflation, our takeaways from the investor day indicate management is keen to stay disciplined and focused on growing market share."

O'Mara says Tyson amassed $8.7bn from prepared foods last year at 11.3% margins, 310 basis points more than the group. And volumes were up a tad over 4%, 160 basis points more than the group.

She says: "Higher growth and high margins [prepared foods] improves Tyson Foods' profitability and stabilises earnings. The model is based on two simple principles: grow demand and expand margins. 

CEO White fielded a question asking where any M&A deals in prepared foods might arise.

"There are significant opportunities for organic growth within our prepared foods business," White says. "Of course, we are always open to inorganic growth opportunities but at the right price ... we will be fiscally responsible, we would be paying for brands, and frankly we have not found those opportunities. In the meantime, we do have a number of organic growth opportunities we plan on executing."

Tyson "very focused" on debt reduction

Stewart Glendinning, Tyson's chief finance officer, painted a positive outlook for prepared foods, which he says will make up 10% to 12% of adjusted operating margins in fiscal 2019, above beef at around 7%. Pork will represent in excess of 6% and chicken about 6%.

And he reiterates Tyson will continue to look for strategic acquisitions, new brands and capabilities that offer "scale and synergy", and opportunities in new geographies.

From a financial perspective, Glendinning reaffirmed the outlook for 2019, comprising high-single-digit growth in adjusted earnings per share, and a projected 3% annual increase in value-added sales. EPS guidance has been set at $5.75 to $6.10.

On capital expenditure, the CFO says Tyson "remains committed to generating capex returns in excess of our cost of capital", and will inject $1.3 to $1.4bn this year to spur organic growth. Spending is likely to dip to around $1.1-1.3bn next year.

Meanwhile, Glendinning is aiming to lower debt levels and reduce leverage, although his endeavours to achieve the latter has been put on hold every time the company instigates M&A.

Gross debt amounted to $9.9bn last year, down from $10.2bn in the previous 12 months. While net-debt-to-EBITDA stood at 2.4 times at fiscal year-end it edged up to 2.9 times in March. Still, Glendinning says "we are very focused on debt reduction and trying to achieve our target level of two times", adding that deleveraging will primarily come in during the back half of the year.

"Our target is to try and get back to two times in a 18 to 24 months," the CFO confirms. "The reason you haven't seen the number go back down is because as we've pushed the number down we've seen some good opportunities to acquire, and that of course has put us back up again."

Tyson believes diversification provides muscle amid ASF crisis

While China has been most heavily hit by the outbreak of African swine fever, 14 countries have reported cases, either new or ongoing outbreaks, according to the latest update from the World Organization for Animal Health. In Europe, the affected countries include Belgium, Hungary, Latvia, Moldova, Poland, Romania, Russia and Ukraine. And in Asia, Hong Kong, South Korea, Laos and Vietnam have joined China, with South Africa so far the only case in that geographical region.

Tyson cites figures from Dutch lender Rabobank stating China has lost 35% of its pig herd from the disease, equal to 5% of the entire global protein supply and exceeding the whole of the US hog population.

The company still expects to reap benefits, which Tyson predicts will start to filter through in the fourth quarter of the current fiscal year or early in 2020. 

"A worldwide decrease in pork supply due to the impact of African swine fever on the Chinese pig herd could offer significant upside to Tyson Foods' poultry, pork and beef businesses, but could also increase raw material costs for the company's prepared foods business," the company says.

White continues: "We believe that this event will underscore the power of Tyson Foods' diversified business model. We are proactively engaged in our efforts to work with farmers, with industry groups and government agencies to be prepared if ASF spreads to North America."

However, CFO Glendinning cautioned Tyson could face higher input costs next year as a result of ASF, although he says benefits may be seen in greater demand for chicken.

Scott at Mizuho says: "In the short term, we expect consumption of alternative meats in China to grow, driving import growth of chicken and beef. It's important to note chicken and beef aren't perfect substitutes for pork in China, and most of that incremental trade flow will come from Brazil, EU and Australia (for beef) for now. However, even if the US isn't a direct supplier of chicken to China, US chicken will back-fill the deficits that emerge in global trade, supporting prices."

Tyson's entry into alternative proteins may also fill any void in pork consumption as the Raised & Rooted brand – plant-based nuggets and burgers – as well as additions to the Aidells line-up – sausages and meatballs combining plant ingredients – seek to appeal to meat lovers looking for other options. 

Justin Whitmore, executive vice president for alternative proteins and chief sustainability officer, says growth in the category is being driven by 57% of people seeking health and well being, 25% who are after taste and convenience, and 13% concerned about environmental issues.

Of course they might not be to the liking of all consumers, with Moskow at Credit Suisse a case in point. "With 40% fewer calories and 60% less saturated fat, the pea-beef blended burger seems to be targeting people who are willing to sacrifice taste for health. Unfortunately, I am not in that category. On a more positive note, the pea-based 'chicken nuggets' tasted delicious and are likely to cater to families looking to give their children a meatless option."