Updated Nov. 21, 2016 1:14 p.m. ET
Tyson Foods Inc. said it would replace its chief executive as the largest U.S. meat company faces questions over its ability to maintain rapid profit growth, and broader market scrutiny over the way chicken is priced.
Tyson President Tom Hayes will take over from current CEO Donnie Smith at the end of this year, the company said Monday, as Tyson reported lower-than-expected quarterly profits and sales, and offered a downbeat outlook for earnings in the year ahead.
The Springdale, Ark.-based company’s shares surged this year thanks to profit margins fattened by ample supplies of chickens, hogs and cattle, and strong consumer demand for meat. Tyson’s stock dropped 15% by early afternoon trading Monday, however, as its earnings report raised concerns that its earnings may have peaked amid questions around a key industry benchmark for retail poultry prices and a continuing lawsuit over chicken pricing.
Mr. Smith and Mr. Hayes said the pricing questions didn’t factor into the CEO shift, and that Tyson’s prospects remain excellent.
“The timing I think from everybody’s perspective couldn’t be better given the great shape that Donnie’s brought the company to,” Mr. Hayes said on a conference call with analysts.
Among Mr. Hayes’ first tasks since being named Tyson’s next CEO was to field analysts’ questions about Tyson’s ability to sustain its growth. After posting record profits for four straight years, for its year that began in October, Tyson projected earning between $ 4.70 to $ 4.85 a share, below the $ 4.98 estimate from analysts polled by Thomson Reuters.
Analysts questioned the trajectory of Tyson’s chicken business, its largest source of profits, after the division undershot Wall Street expectations in the fourth quarter. Tyson executives attributed the 3.2% decline in quarterly sales to slower sales, a planned production slowdown and a spike in the cost of soybean meal, a key ingredient in chicken feed, that boosted feed costs by $ 20 million in the quarter.
Tyson’s Mr. Hayes on the conference call played down the significance of the Georgia Dock index, a pricing benchmark for chicken sold in grocery stores that has drawn scrutiny after a Wall Street Journal article raised questions about how it was calculated.
The index is calculated by the Georgia Department of Agriculture and based on prices reported by chicken companies maintaining operations in Georgia, though these aren’t independently verified. Mr. Hayes told analysts Monday that Tyson prices 3.5% to 4% of its chicken volume off the measure and that it has generally “had very little influence on our pricing strategy,” as retail buyers increasingly look to other factors such as the price of feed grain.
“It will have no impact, if the Georgia Dock went away,” said Dennis Leatherby, Tyson’s chief financial officer.
A representative for the Georgia Department of Agriculture said the agency was addressing concerns raised about the index while drafting a new model for calculating it.
Mr. Smith said on the conference call that Tyson disputed separate claims in a lawsuit alleging price-fixing by major U.S. chicken companies. The suit, which is seeking class-action status, has been contributing to price swings in meat companies’ shares since it was filed in September.
The C-suite handoff to Mr. Hayes, which was widely expected after he was promoted to president in June, comes after his rapid rise through Tyson’s ranks over the last two years. Mr. Hayes came to Tyson via its $ 7.7 billion purchase of Hillshire Brands Co. in 2014, a deal shepherded by Mr. Smith that brought aboard a deep portfolio of well-known consumer brands like Jimmy Dean’s sausages and Ball Park hot dogs, hastening Tyson’s evolution to a more-diversified food company from its roots as a commodity meatpacker.
At Hillshire, Mr. Hayes oversaw its meat supply functions, and since joining Tyson has managed its food service business and served as chief commercial officer. Mr. Smith, a 36-year veteran at Tyson who helped steer the company through a tough patch for the chicken industry after he took over as CEO in 2009, said he would be available to consult for the company over the next three years.
Mr. Smith said the first few weeks of Tyson’s new fiscal year “have been phenomenal,” and Mr. Hayes noted that the company plans to invest about $ 1 billion into the business in the year ahead, and he said that Tyson aims to invest both in traditional marketing and e-commerce.
The Springdale, Ark.-based meatpacking company’s stock has climbed 54% in the past 12 months through Friday’s close as it has worked to reorient its business around products like premium chicken sausages to reduce its reliance on shrink-wrapped meats, which typically carry lower profits.
Tyson added Mr. Hayes to the board last week, increasing its size to 10 members, according to a Monday regulatory filing. Mr. Smith also informed the board last week of his intent to resign as a director, the filing said.
For its fourth quarter, which ended in October, Tyson posted a profit of $ 391 million, or $ 1.03 a share, up from $ 258 million, or 63 cents a share, a year earlier. Excluding certain items, per-share earnings were 96 cents a share, up from 83 cents. Analysts surveyed by Thomson Reuters had forecast per-share earnings of $ 1.17.
Revenue slid 13% to $ 9.16 billion. Analysts had anticipated $ 9.38 billion.
—Kelsey Gee contributed to this article.
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