Q2 2020 Earnings Call
Today.
Continues to find new ways to be families across the country and around the world.
Hello, but a chicken in every part.
[music] grill.
Slow cooker.
And skills.
[music] because no matter who they are.
Well aware there from.
Everyone deserves to serve up a good meal.
[music] whenever they want to.
To get farm raised chicken is the highest quality.
Real chicken.
That's how I assume we remain committed to this simple promise to always keep it really to always keep it Tyson.
[music], our craftsmen begin each day perfectly seasoning or Hillshire farm smoked sausage, so by simply adding the red ingredient you can and each day crafting a perfectly delicious dinner.
[noise] back in 1935, John Tysons motto was when better chickens are hedged we will hatch them.
It's why today all of the Tyson chicken that bears his name will be raised with no antibiotics ever.
Every nugget.
Every strip.
And every drumstick.
[music], because everyone deserve something a little better keep it real keep it Tyson.
Introducing the Delta area and a new breed of either they can pull off magic with artisan elements like their signature Adele's pineapple and Bacon sausage tacos other things they are known to pull Oh Hawaiian shirt with a current again.
And correctly pronouncing Hawaii's official state fish, the Houma, whom will not go no go up but.
The Adela terrarium, the perfect fusion of the best fit.
Good morning, and welcome to the Tyson Foods second quarter 2020 earnings Conference call.
All participants will be any listen only mode.
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I'd now like to turn the conference over to John Kuzdal, Vice President of Investor Relations. Please go ahead.
Good morning, welcome to the Tyson Foods incorporated earnings conference call for the second quarter fiscal 2020 odd todays call, our Norway, Chief Executive Officer Gene Banks, President and Stewart Glendinning, our Chief Financial Officer.
Buys accompanying today's prepared remarks are available as a supplemental report in the resource center, the Tyson Investor website that IR Tyson dotcom.
Hi, Some foods issued an earnings release this morning, which has been furnished to the FCC on form 8-K and is available on our website at <unk> Dot Tyson Dot com.
Our remarks today include forward looking statements as defined in the private Securities Litigation Reform Act of 1995.
These statements reflect current views with respect to future events, such as Tysons outlook for future performance on sales margin earnings growth and various other aspects of its business.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.
I encourage you to read the release issued earlier this morning, and our filings with the FCC for a discussion of the risk that can affect our business, including those listed in our 10-Q filed this morning. Our most recent annual report on form 10-K, and our current report on form 8-K filed March 13 2020.
I would like to remind everyone that this call is being recorded on Monday may 4th at nine am Eastern time, a replay of todays call will be available on our website approximately one hour. After the conclusion of this call. This broadcast is the property of Tyson foods, and any redistribution retransmission or rebroadcast of this call in any form.
Without the express written consent of Tyson foods is strictly prohibited.
Please note that our references to earnings per share operating income and operating margin in today's remarks are on an adjusted basis unless otherwise noted.
Reconciliations to our GAAP results. Please refer to this mornings press release I'll now turn the call over to Norway.
Thank you John and good morning, everyone well lots of covered today I want to start by saying how proud I am our team members and the work they're doing to help feed America. During this difficult time.
Well, then touch briefly on our operations and results.
We'll go into further detail about our current operations and Stuart will handle the financial update from this quarter.
Then in day out in the midst of the challenges. So many families are facing during this pandemic. Our team members are going above and beyond to help us maintain a healthy and stable foods applied to our nation in the world.
From a bottom my heart I want to say, thank you to all of them.
There are truly central to everything we're doing right now our number one priority is ensuring or health and safety.
The only way we can operate this business is for our team members to feel safe protected and Dr., Paul coming to work.
It's why we put in place as a host of safeguards and guidelines with all of our facilities to protect our teams.
And as we've shown in the recent days will not hesitate to idle any plan for deep cleaning one of the need arises.
Simply put we will not send to anyone into our plans work unless we're confident that is safe.
And to do that we have transformed how we operate.
Today, if you visit our facilities you will see state of the art help checkpoints that the entrance and inside you'll see team members were improper personal protective equipment, including face mouse.
Well all season also see tools to help with social distancing.
We've installed partitions on production lines and break rooms.
And we've stepped up our efforts to clean and sterilized everything we can.
As you came in as important part of this effort and we're doing our best to ensure our team members I understand how they can.
Safe at work and at home.
Soon team members will have onsite access to Cook Cobot, 19 testing and other medical care for new partnership with matrix Medical network, a leading provider of mobile health clinics.
We also continue to work closely with federal state and local health and safety authorities.
Last week as you know the U.S. government recognizes the essential work our team members do.
Reaffirming meat and poultry processors as a critical part of a merger America's infrastructure.
The President's executive order under the Defense production Act establishes clear lines of authority and consistent standards that will help us continue to provide American families with reliable supply of beef pork and poultry.
I'd now like to briefly talked about the state of our operations.
Over the last several weeks, we've had to idle several office facilities temporarily for deep cleaning and others are not operating at full capacity due to worker shortages.
Despite our slower lines lower volumes, resulting from this pandemic, we believe our core business and financial strength position us well to deliver market share in earnings growth over the long term.
Walkover 19 has been disruptive we do not believe it changes the outlook for a strong future for Tyson foods.
Now a quick summary of the quarterly results second quarter sales increased to a record $10.9 billion, that's an increase of more than 4% over last year.
This growth was driven by volume increases of 2.6% and price increases of 1.6%.
Our adjusted earnings of 77 cents per share were driven by typical seasonality soft chicken pricing in the impacts of cobot 19.
In addition, we expect experienced a $115 million negative derivative mark to market adjustments that Dean will discuss in further detail.
Important to note that we expect to benefit the physical offsets associated with these transactions in future periods.
From a global perspective exports to many parts of the world performed well throughout the period.
During the second quarter, we saw particular strength in exports to Japan in Mexico with double digit increases in our market share.
Data indicates China is reopening its economy, which is encouraging signals of domestic protein just some parents lower levels of supply caused by African swine fever continue to present opportunities to fulfill international demand.
Now, let's talk about the current operating environment.
The cobot 19 pandemic in the United States has had a significant impact on our channel mix with increased retail and plummeting foodservice demand.
The supply chain perspective, where possible our facilities have adapted to new product mixes, which has enabled us to ship millions of pounds per week between channels and has set us apart from many of our competitors.
Food service customers have also reacted with high levels of innovation and adaptation focusing on takeout and delivery.
In fact, some have always seen minimum volume loss.
Supermarkets and club stores had been trying to meet heavy demand and we've been able to convert a number of production lines from food service to retail.
Help me those consumer needs.
The direct to impacts of the virus have created operational challenges, including absenteeism reduced production speeds and selected idling of plants.
I hope of our operations continue to provide us with flexibility and redundancy. This is a clear benefit to our company scale.
Over 19 related pressure has affected parts of the industry supply chain, especially port.
However, our diversity of protein provides our customers with options.
In addition, our geographic diversity provided important lessons from China, where we first encountered cobot 19 related issues.
This includes ways to maintain health and safety of our people opportunities to pivot to retail potential pathways for recovery.
We expect current conditions to continue during our third quarter with a gradual recovery beginning in the fourth quarter.
However, all this depends on the extent to which businesses and schools are able to reopen.
We're well positioned to operate during this period and to take advantage of increasing demand during the recovery.
Our balance sheet is sound and our liquidity position was strong going into the crisis. It's been further bolstered by the term loan we close at the end of Q2 and by focusing on continuing operations and managing costs.
Sure, we'll give you more details.
We committed $13 million to support critical needs in our local communities. This includes $2 million and community grants in more than $11 million worth of food and and meals donated by the company since March 11.
Over the coming days.
We will make product donations equal to an additional 100 million meals.
Despite the immediate challenges from covert 19, and its associated impacts were maintaining a clear focus on the long term. This includes our strategy to grow deliver and sustain.
Global population in the income growth.
We'll continue to drive an increase need for protein and our size diversity of portfolio and broad geographic presence will give us an advantage.
In addition, there are changes will which will undoubtedly remains with us after the crisis.
For example, we expect continued higher levels of ecommerce for both grocery and foodservice.
Early investments in this space have allowed us to capitalize on the growth.
We expect to benefit further on the future.
Our industry is heavily dependent on people, but our company is investing aggressively in automating the most difficult jobs processing plants.
Our balance sheet liquidity and scale as well as our diverse product portfolio of products and distribution channels positioned Tyson some benefit from long term industry dynamics now I'd like Jane to give us a recap of our business segments.
Thanks, Phil and good morning, everyone I'd like to start by discussing our response the pandemic, but I'll spend the majority of my time discussing channel dynamics current operating environment and the long term outlook for each segment.
No discussed we've experienced multiple challenges during our second quarter related to covert 19. The response by our team members has been nothing short of a road and it makes me incredibly proud to be part of this great company.
Personally visited many of our impacted facilities and witness firsthand the steps, we're taking to protect our team local health departments and the CDC have also toward our facilities and had been extremely complementary of the measures we put in place to protect our team members and community.
The health and safety of our team members remains our top priority. We took early decisive action to provide workspace distancing PE and other protective measures, we've had no layoffs or furloughs and have extended $120 million of bonuses and improved benefit to our frontline team members.
It will also allow us to quickly recover once we move past the effects of cobot 19.
Now, let's discuss some channel dynamics, we've observed in the wake up covert 19.
Each of our businesses has witnessed a profound shift from foodservice to retail our retail business remains strong and our core retail lines posted gains of more than 20% in the last 13 weeks outpacing total food and beverage as well as the top 10 food manufacturers.
Well panic buying us cited from extreme levels, we continue to see 15% to 40% volume increases versus last year, depending on the category. As a result of these trends we have successfully increased volume margin and share within retail.
Historically, approximately 45% of our total company sales were to retail, 40% foodservice and 15% International.
During early Q3, we saw our retail sales move to approximately two thirds of our total companies do.
Well, we were successful in shifting some of our production from foodservice to retail not all of our facilities are able to do so.
The volume increases in retail have not been sufficient to offset the losses in foodservice and as a result, we expect negative year over year volumes in the second half of fiscal 2020.
Operationally, we have phase two meaningful challenges slowdown, resulting from team member shortages or choices, we made to ensure operational safety and temporary closure is related to covert 19 infections. We've continued to be team members. During these slowdowns enclosure since maintaining health and continued employment of our team members is important for our longer term success.
As a result, we've experienced lower levels of productivity and higher cost of production. This will likely continue in the short term until local infection rates begin to decrease.
Within the ecommerce channel, we've witnessed significant sales growth, including a more than 140% month to month growth rate in our core business lines sold to a major ecommerce customer. We expect this trend to continue going forward, we expect sustained at retail sales growth in a slow recovery in our foodservice channel now, let's take a look at our.
Second.
During the second quarter, our prepared foods segment produced an operating margin of 9.2% topline growth continued with a seventh straight quarter of volume and dollar share growth sales were up 2.6 for the quarter and pricing was up 2.7%.
Within the last 13 weeks total volume sales household penetration and share increased across the core business lines.
Historically, 60% of our prepared foods sales of into the retail channel and 40% to foodservice during Q3, we've seen greater than 20% growth in our retail sales.
This channel driven by our strong brands and innovation capabilities provides our highest growth potential and margin opportunity across our portfolio.
The current environment, our retail centric products continue to show strength over the current reduction in raw material availability may cause short term outages.
Our ability to flex our production footprint between the foodservice and retail channels is limited. Consequently, we currently believe the full effect of these new consumption pattern will result in a net reduction in volume.
Looking forward, our market insights channel flexibility access to raw materials and growing demand give us long term optimism, we're responding to the changes in consumer demand by pivoting our brand investments in innovation to more value oriented offerings and to formats in size is relevant for rapidly evolving channel dynamics.
Such as E commerce acceleration or retail businesses and brands are well position to deliver sustained growth, even if we enter into a recessionary environment.
Our beep segment produced an operating margin of 2.7% in the second quarter.
Of the volatility during the quarter, resulting in a negative impact of $55 million and derivative mark to market adjustments. There's no mentioned, it's important to note. This amount does not include physical office, which may be recognized in future periods.
Our be business has done an excellent job of pivoting from foodservice to retail and continuing to drive innovation, we found new retail applications for products that have traditionally supplied the foodservice channel, which we believe could generate continued demand even in the post cobot ninetym environment.
Exports remain strong posting double digit increases compared to the same quarter last year, which have exceeded industry growth rate export markets are an important outlet for us now and in the future.
And the current environment, we see strong demand and ample supply of cattle, but reduce industry processing capacity due to covert 19 has pressured the supply chain and is reduced overall profitability.
Temporary plant closing dramatically increase operating costs, and we can what would otherwise be a strong margin environment.
The result of the shutdowns cattle producers are met at much lower processing demand for their fed cattle, we recognize how this impacts our producer community and are anxious to safely resume operations at our facility to provide them with an outlet for their capital.
Looking forward, we expect clinical supplies of cattle, coupled with strong demand for beef, both domestically and be export relationships with producers industry, leading production capabilities and customer centric solutions gives us confidence in the long term outlook for this business.
Moving to our pork segment strong demand solid operational execution and ample hog supplies led to a 7.3% operating margin in Q2.
As we transition to erect token mean free hog supply our ability to sell pork to the global markets has expanded this new capability of the met with increasing global demand as African swine fever continues to reduce pork supplies in Asia.
Year over year increases of pork to China were up significantly for the quarter and we expect strong demand to continue as China recovers from this covert 19 lockdown.
And the current environment, we see strong demand and ample supply of logs, but reduced industry processing capacity of nearly 50% to to covert 19 has pressured the supply chain and dramatically reduced overall profitability.
As poor plants across the country have continued to shutdown hog producers are met with much lower processor demand for their market ready August.
We recognize how this impacts our producer community and are anxious to safely resume operations at our facilities to provide them with an outlet for their off.
Looking ahead, we see large supplies of livestock and strong demand driven by a global shortage of port. We continue to believe the impact of African swine fever in Asia could generate significant future margin potential.
Our chicken segment produced an operating margin of 2.9% in the second quarter operating income was negatively affected by a 40 million dollar increase in net feed ingredient costs and negative derivative mark to market adjustments.
This along with weaker pricing from increased domestic availability of chicken has offset the benefits of our operational improvement initiatives.
Weaker pricing dynamic that persisted into the third quarter.
Our chicken segment has higher foodservice exposure than beef pork and prepared foods.
We responded to demand shift caused by coven 19 by adjusting parts of our production capacity from foodservice to retail, but higher retail volumes have not entirely offset lots volumes foodservice. Additionally, this channel shift has resulted in lower margin realization as volumes have moved to lower margin products also worker shortages have reduced overall plant efficiencies.
Hoping and higher production costs.
Due to large domestic supplies, coupled with reduced foodservice consumption. We believe our chicken operations are likely to incur losses in the back half of the year profit trends will improve as foodservice activity recovers.
Turning to our international business, our China operations were impacted by Coven 19 more than any other region. During the second quarter. Despite this our China team produced record sales operating income as production was shifted to meet rising retail demand.
While China is recovering other geographies, where we produce or so are being back negatively by covert 19, especially since our international business has historically had a high level of exposure to the foodservice channel, we expect to see a slow recovery across each of our geography that demand patterns normalized profitability will be impacted negatively in the short term.
In closing our businesses across the enterprise are adapting to the dramatic changes brought about by Cobot 19, and the response of our team has provided consumers continued access to a safe and affordable food supply.
Short term challenges do not diminish our belief in the company's long term outlook, our unique business model diverse portfolio, an industry, leading scale will make us stronger and more resilient.
Before I hand over to Stuart to take us through the financials I'd like to thank our 141000 team members, who continue to support our mission of feeding the world their health and safety are critical to that mission over to you Stewart.
Thanks, Jane and good morning, everyone have a few families are all staying healthy and say I'll start my remarks. This morning by calling out a few highlights from our performance for the quarter.
As Bill mentioned, our second quarter results included earnings of 77 cents per share and operating income of $501 million.
Our adjusted results excluded $110 million nonoperating gain or 23 cents per share as we executed the termination of two frozen pension plans by purchasing annuities for the participants.
Due to the assets held in the plans. This did not result in a significant cash outflow.
We have now exited all pension plans in the last two years as we continue to minimize volatility and cash flow risks associated with pension plans.
Sales in Q2 were up of a 4% to nearly 10.9 billion with a 4.6% return on sales average sales price for the quarter was up 1.6%.
Year to date operating cash flows were $1.3 billion.
As Neal mentioned earlier, our balance sheet is sound and our liquidity position with strong going into the crisis.
On March 27th we successfully entered into a term loan agreement $1.5 billion and we borrowed these funds in the first week about the quarter.
This loan ensures financial flexibility and enables us to navigate potential uncertainties in the capital markets, while ALLEVYN alleviating our reliance on the commercial paper market that typically serves as our primary means of short term liquidity.
Our liquidity on March 20, Eightth, including the Undrawn term loan was $2.5 billion and was higher still as of the end of April.
During the quarter, we continue to experience some operational effects from our recent ERP system implementation, which impacted margins by roughly $30 million in the quarter.
About half of this was discounted sales with the remainder related to inventory write downs and donations.
We believe that we have turned the corner on this issue and expect the incremental costs to ramp down throughout Q3 before returning to historical run rates in Q4.
Because of the ship from food service to retail we have closely managing our foodservice related inventories to minimize any losses and of course, we're working to ensure that our outstanding accounts receivables are collected in this higher risk environment.
Including cash of $437 million net debt was 11.7 billion net debt to adjusted EBITDA was 2.9 times for the 12 months ending March 28.
Net interest expense was $116 million for the quarter and capital expenditures were 312 million.
We continue to target and overall Capex return of approximately twice our cost of capital.
In the second quarter, we repurchased 700000 shares for $64 million.
Weighted average shares outstanding were approximately 365 million in the quarter.
Our effective tax rate was 25.8% in the second quarter, depreciation and amortization was $293 million.
Dean has articulated the qualitative aspects of our outlook, which should give you some indication of how we expect our businesses to perform for the balance of the fiscal year.
Due to the uncertainty of the cobot 19 impacts the degree of absenteeism in the temporary closure of some of our facilities. We are currently unable to provide segment operating margin guidance.
Now I'd like to provide some additional commentary on our outlook keep in mind that fiscal 2020 is a 53 week yet however.
Adjusted our outlook to be comparable to 52 weeks net interest expense should approximate $470 million, we project capex spending of approximately $1.2 billion for the fiscal year as we progress with building additional processing capacity foot case ready fresh chicken beef and pork. This is a reduction of more than 100 million.
In dollars from our previous guidance.
We may elect to slow down thoughts about capex spending where appropriate to ensure adequate liquidity I.
Having said that we expect liquidity in the back half of the to remain well above our minimum liquidity target of $1 billion.
Especially after the issuance of the $1.5 billion terminal.
Our capital allocation will continue to prioritize debt reduction. This includes approximately $1 billion of senior note maturities during Q3 in Q4.
We do not expect to repurchase shares in the back half of the it except for a minor repurchases related to an employee stock ownership plan.
Currently expect our adjusted effective tax rate to be around 23%.
We expect to deliver profit in the back half of the year, assuming that we can continue to operate in supply our plans.
Q3, as began with higher levels of volatility.
Early in the quarter, we saw a huge volume pulls in our retail channel.
This demand, partially offset declines in our foodservice channel.
Recent weeks, we've seen a leveling off followed by another surge in retail demand.
But as Dennis said the volume shipped from food service to retail is likely to be a net negative.
The major challenge facing US currently is the degree to which our plants are able to operate all plants are experiencing varying levels of crewing.
We will continue to operate our plants with team member health and safety as a top priority.
You can imagine the slowdowns and temporary closure is related to the pandemic drive higher production costs and we expect to see those until we resumed under normal conditions also October 19 risk mitigation activities that added costs on the broad range of safety measures, we have implemented and continued to support.
Despite this we have continued to focus on financial fitness.
And that has partially offset some of these impacts.
We will continue to seek out opportunities to remove unnecessary costs from our business.
Summing up our long term outlook remains positive.
Our diversified business model allows us to react to changes created by major events like Cobot, 19, and African swine fever.
Our balance sheet liquidity scale and diversified portfolio of businesses remained strong.
Should provide some level of protection as we move through the year.
We will continue to drive long term growth in all parts of our business as we execute against our strategic plan.
On a constant focus on maximizing long term value for shareholders that concludes our prepared remarks, operator, we're ready to begin today.
We will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
If you're using his speakerphone, please pick up your handset before pressing Mickey.
To withdraw your question. Please press Star then too.
Please limit yourself to one question and one follow up if you have further questions you may reenter the question queue.
At this time, we will pause momentarily to assemble our roster.
And our first question comes from Ken Zaslow of Bank of Montreal. Please go ahead.
Hey, good morning, everyone I Hope you in your name reserve in safe.
Thank you again.
Let me just ask one question follow up one is can you can you frame the status of.
Tysons operations, each division and the associated costs, So which divisions are operating at what levels and how you complying with.
Getting people back to work absenteeism can you give us a lot of color on that Thats kind of one of the pressing questions.
Sure Ken first thing I want to say and I'm sure. You know this team member safety remains our top priority and were sparing no expense to keep them safe.
We are fully complying and been interacting with the government authorities, including the U.S.T.J.C.D.C. Osha and even counting on local governments and we've had interim and outages from time to time is it's been necessary to make sure that our team members are kept.
Absolutely safe.
The expenses related to these closures.
Starting with PPD, we've invested substantially and our protective equipment for our team members, including things like chartering planes, so supply math, even before they were.
Mandated by the CDC.
We bought some quite expensive thermal scanners to make sure that we can check temperatures for our team members coming in and out of our plans.
In other expenses is the inefficiency of the plants driven by the slowing or idling the plants well, there whether being checked to our team members are being tested.
Another priority of ours is to keep it on the table of our consumers.
So that includes running and recovering plants.
It's lower capacity so it's from time being but also running them with overtime and additional cost to make sure that whenever we can run them in control or we can put food on the American tables, one expense I can't quantify for you is the $120 million and thank you bonuses, we provided to our team members. During this time for the hard work and again team member safety.
Being our top priority it is hard to predict the extent of these costs over time.
But can you talk about the utilization rate what plants are coming back online, which plants are off what percentage of your plants are off kind of giving us.
Kind of a status of the progression of where you are on your operations on that side.
Yes, Ken this funnel, it's very dynamic I would say that on the port cyber business.
We did take rate ticked down our Logans port Port plant, we took down or Waterloo plant.
Harry which was closed for a short period of time.
In each one of those plants or are in the process of either coming back up or finishing testing of all of our team members.
On on the beef side of our business, we took down Dakota City, which is a large facility for us this past weekend.
We're working with.
Local counties state and federal officials to bring it back up.
We took down or Pascoe, Washington plant.
Two weeks ago.
To go through the entire testing protocol those test results were receiving back through through the weekend.
So there has been various impacts can we will take the plant down for a period of time in the period of time has varied anywhere from a few days to to a couple of weeks.
They give you a sense, yes. It does and then my follow up question is.
Got it wrote in the press release that you think chicken prices will not go up.
Let me just frame this help me understand where I'm wrong.
We have less chicken production, we have less beef production, we have less part production, we potentially will have less hogs, we potentially might have less cattle.
And we do still have a shortage of protein globally.
How do you expect chicken prices to go up in that scenario, what am I missing and I get the demand shift but I.
I think thats more fluid.
Ken It really depends on the assumptions in our assumptions as the plants will come back up as we go through Q3 in Q4, and it's really the impact of each one of those ultra plant work plants. These plants.
Total animals available as you know it's up year over year four plus.
Percent.
So we're assuming that these plants not only hours with others will in fact will go down for a period of time and then reopened so we're actually looking in increase in total protein available as we as we go through.
Balance of Q3, Q4 content I'd I'd, just add that mix plays a really strong role and this is you probably know a substantial portion of our business has been in foodservice, which is down and our retail business is up but it as we mentioned the call.
Those those do not perfectly counterbalancing. So that will also have an impact on our long term blended sales price.
Great. Thank you very much.
Thank you again.
Our next question comes from Ben Borough of Barclays. Please go ahead.
Yeah, good morning, everyone and.
Thanks for my Thats hope, you're all safe and sound, so I'd like to actually follow up on on the chicken situation, So and the path. We've always seen in New York, a little less volatility.
Just because of the way you price through and I understand that foodservice is substantially under pressure and you can't offset that for retail, but could you walk us a little through your relationship with the different customers speed in retail and foodservice, which you're seeing on the featuring side and how.
You think of pricing those products towards the back half off your off your fiscal year.
Sure.
Our retail customers have been phenomenally supportive and we continue to work with them as we always always would and we're not not planning to take price increase there is it as it relates to foodservice and specifically we have seen some of our customers really.
Get decimated due to the Colby crisis enclosure restaurant.
Limited limited supply in Delhi isn't that sort of thing.
We have we have seen some of our customers specifically QSR as.
Recovered very well there their model of having takeout food and drive throughs.
Have have really allowed them to be resilient.
And continue to thrive in the market.
Okay and then my follow up is more of the medium long term question, So clearly and Youve mentioned it in your prepared remarks.
Currently a significant decrease in demand from a processing.
Point of view on pork and beef, which obviously causes all.
All the farmers to basically stick with the animals.
What is your expectation in terms of capital Hawk supply looking out a couple of years from now and in terms of potential reaction from farmers on on the loss, making and how are you actually paying your suppliers for farmers. When you buy off do you really get the benefit of the low life close life.
Capital and life Hog prices right now or do you not feed that much of a benefit coming through because youd, rather look long term I want to support the farmers in the short term to basically secure supply and in the medium long term.
Yes, Ben let me say first of all we believe is critically important that are livestock suppliers.
Striving continuing to be profitable, so we're doing everything possible to.
Processes Minneapolis as possible to make sure that there is a market for those animals longer term outlook.
Ben is truly depending on the closures of plants over the course for the next 60 to 90 days.
There has been.
A backlog of inventory that is developed with both hogs and and cattle and that will continue if.
Plant closure is continuing at the pace that were out right now longer term.
Okay. That's on Fourq it really depends on the degree of liquidation that we see over the course for the next 90 days. So if as an example, the wind or be pigs.
Okay.
Our in fact euthanized that'll have an impact you know sometime later this calendar year.
If the size of the mothers our liquidated than that has longer term implications that goes out over the course of the next 12 to 2024 months.
We've not seen the same thing happened on on with capital yet one of the cattle are still in pasture, we're done bid on feed for.
A number of days the weight is increasing but it's not at the credit critical points. The pork is at this point.
Okay.
Perfect I understood. Thank you very much.
Our next question comes from Peter Galbo of Bank of America. Please go ahead.
Hey, guys. Good good morning, Thanks for taking the question.
Just wanted to follow up actually on tend to initial question you know just around around the cost.
Obviously, it's helpful to have the detail on the other $120 million in bonuses and you know Dean you outlined a number of other cost in terms of medical equipment or pp masks. I mean is there any way at least at this point to quantify that.
And to the extent that you're willing to say.
On a go forward basis I mean, some of these costs are going to be recurring I mean as it is it fair to assume that Theres now just structurally higher costs in the business and you know we've kind of.
Change from a paradigm standpoint in terms of the equipment, we need implants for employee.
So well just mentioned a few things here is that as this has this disease is progressing as we've learned more.
Anything that we can find or discover that can improve safety in our facilities. We are we're doing.
And when it comes to the long term structural.
Cost of the business there are some things that we're installing now for example, these thermal scanners.
That will we will leave installed and they'll they'll provide even benefit whenever we move into the next flu season. So just help our team members better understand they're starting to develop sequence early in that sort of thing.
But no it's not possible to really quantify or put a number on what those costs are going to look like related to go the 19.
Got it okay.
And one of the other things you guys spoke about woods automation, you're moving to put as much automation into plants is as much as you can as quickly as you can.
Can you maybe just.
Rank order for us among the before kind of top segments from top to bottom most automated the least automated and to that extent is it.
25% of the operations are automated 50% of the operations are automated any any color there would be helpful.
I think it's difficult to describe in lot of ways, because some of our plants have expensive.
Scaled equipment for things like producing ground beef and sausage and that sort of thing.
We do have some robotic item is eight automation and things like palletizing and that sort of thing.
Thing that I would stress is that.
Automation provides really a lot of things, but one of the things that I would stress is flexibility, where we had installed some multi back back in packaging systems for products like beef and pork. What we've seen is that bid those businesses ability to very quickly shift those products from retailer from food service to retail which has been re.
Really really beneficial to those businesses, but it's difficult to really put a percentage on automation across each of the business units.
Our next question comes from Adam Samuelson of Goldman Sachs. Please go ahead.
Yes, thanks, good morning, everyone.
So I guess my my first question. It was like in the prepared remarks I believe the comment was the expectation of the chicken business with the operating losses.
For the balance of the fiscal year and I'm, just trying to maybe break that apart a little better than with ties into kind of Ken's questioning just can you help think about that from.
A kind of commodity price outlook versus.
Versus volume versus mix versus operating cost I'm, just help us think about how we're going from where we've been on margins to two losses and just thinking about the drivers that we can watch the market evolve and assess your performance against.
Sure.
The.
You're accurate that it wasn't we've prepared remarks.
Based on what we see right now in the marketplace as I mentioned on or earlier question that we are in fact expecting an increase in protein supplies through the balance of this to lease fiscal year likely calendar year.
And with that there will likely be as there has been the last few months, an oversupply poultry in the market.
Total number of animals.
Level has not changed at this point.
So whether its beef or chicken, we're looking at increased supplies. So most recently in the market over the course last weeks there have been some shortages in some specific.
Categories. However in total.
As we go into two Q4, we expect supplies to be increasing and therefore, not any pricing recovery.
Okay.
And then.
I guess my follow up is it's more broad across the business.
In the in the case of seem pretty unprecedented kind of volume and throughput issue that you're facing.
Well labor availability can you just help frame in in the business is kind of what percent of costs that are that are fixed I mean in this period I presume labor is going to be the single biggest fixed cost.
Just to help us think about the volume decrementals that you to you'd be experiencing.
The face of the throughput challenges that you have.
Image plants, a little different so it's hard to give you.
Product precise number I can tell you. It's it's a it's significant in the millions of dollars per week in some of our larger facilities such as some of our beef and.
For corporations poultry not.
The same extent, but still expensive and then we we have a number of plants that we operate in our prepared foods space.
We've not seen a big impact and we certainly hope that that continues so each plants, a little bit different depending on which plant we need to take down and how long.
Okay.
Okay.
Thank you.
Our next question comes from Heather Jones of Heather Jones Research LLC. Please go ahead.
Good morning, Thanks for.
Taking the questions.
I wanted to follow up on the chicken pricing comments so.
Is that a tysons specific comment and also you mentioned.
Mix, but is there also element.
You guys have cost plus contracts and clearly feed costs are down so is that a component and and for that comment as well.
Well anytime we make any comments whether it is specific to two Tyson.
Obviously, we don't know with others in the industry are going to do all we are we can do is looked at.
Industry data so yes the.
The outlook.
Outlook is specific to us and.
We can look at egg sets, we can placements, we can look a lot of different numbers and we have no sense, what others going to do that's purely our outlook at this point in time.
Due to my question to does that include some effect to cost plus contracts given lower feed.
Cost plus.
Lower that would be pass through in the cost plus contracts yes.
Okay alternate or alternatively costs go up price goes up cost inputs go down price goes down.
Okay. My follow up question is on the production side or volume side, I should say I realize on the beef and pork side is going to be a function of how soon you guys are able to get those up and fully running.
The chicken side, how should we be thinking about volumes on that front.
For the back half.
Different plants have been impacts in two different extent I would say Heather.
So far we have had some disruption.
As a couple of our facilities that we've taken them down for a relatively short period of time days or weak and we don't know obviously with the with the effect is going to be in the future. We are and will continue to work with all the local accounting state and federal officials to make sure that.
Our team member members are saves so at this point, we've not seen a tremendous impact on our poultry business and obviously, we don't know that's going to look like over the course the next to.
Three to six months.
So you aren't able to ballpark, what you're checking volumes will be up or down year on year on the back half.
As just total production, we think will be up as I mentioned earlier.
Okay. Thank you.
Our next question comes from Alexia Howard of Bernstein. Please go ahead.
Good morning, everyone.
Good morning morning.
Okay, and so I guess.
Well my question is.
Are you able to go segment by segment I will tell us roughly what the mixes between seven and reach out and then give us an idea right how much the retail is down at the moment post the panic buying period, So I guess April.
But.
Obviously please.
And then retail how much you've got.
Beef and chicken and prepared foods, as well and I have a follow up.
Okay, Let's say I don't I don't have the numbers in hand buys specific.
[noise] poultry group however, the inside of the his remarks retail is up its up sharply.
It depends on the weekends on month that thinks in terms of 30% to 40% up.
Foodservice is recovering I would say and each within foodservice itself. Each sector is down varying degrees, so down in rough numbers, 25% to 30%.
Food service in total, but it does vary substantially depending on the type of the foodservice establishment.
If you take a look at our our segment data in the queue you get some sense of what our Hes historic numbers. It looked like by by channel. So that doesn't give a key by segment, but it'll give you a good sense of what the various volumes on the exposure to food service.
If you apply some of the percentages that no has suggested to that I think it'll give you a it'll give you a sense that bear in mind that when you look at that.
One of those channels as industrial and part of that is going to be food service. So we sell on to somebody else that then persistence footprint service, but I think thats the best price to look.
Great. That's very helpful. Thank you and then.
Follow up I.
Obviously, you could give guidance for the next quarter, but youre just the way into that you mentioned that chicken perfect for likely be negative in the back half that the yeah.
Can you give us any.
On IDR, how things are looking so far in the fresh Porsche Thank you.
Let's say, it's too early for us to do that and like I said it is very fluid. So on a given day given week it can change and stances I'm not comfortable in making any comment today.
Okay. Thank you very much I'll pass it on.
Thank you.
Our next question comes from Ken Goldman of Jpmorgan. Please go ahead.
Okay.
Hi, My name is open on already are you muted on your end.
Yeah, I sure was needed sorry about that let's try that again.
I wanted to dig in on the comment that you expect chicken production to be.
Up in the back half of your fiscal year, I think thats a critical point here because we're already seeing.
Egg sets way down we're seeing.
Okay.
Chicks placed a numbers, particularly the numbers down even more so theres eggs being being cracked a there are some at least rumors about some in the industry ordering fewer pullets and maybe killing off heavy handed a at a faster rate.
If that's already happening and I'm asking if it is as far as you can tell and if the industry is margin negative why would the industry increased production in the back half the year I understand part of it is because plants are coming back online I do get back, but I don't quite get why we would assume that.
Given all that's what's happening already that in that industry production wouldn't be a little bit less than what we thought previously maybe I could just pause there and here what you say about that thanks, yeah, Ken that very well could be the case, we look for public data just like you do we're starting to see indications that there have been some cutbacks we.
Don't know what others are doing but given the.
Profit structure right now I would say that certainly could be the case, we don't know.
So I think that as you know in poultry business. It can change much quicker than what it would be in wood and pork and beef.
So I think the promise that you're proposing put in fact play out that way.
Okay.
And then my follow up thank you for that my follow up is on.
You know a little bit about the nature of the industry.
Whereby labor is such a big part of the cost basis, and when you think about other.
Production facilities like if I walk around the Hershey plant or a Kellogg plant I mean, there's nobody that you can see except a couple of people, making sure that the boxes are falling off the lines you will create a chicken plant it's wall to wall people and I know you guys are doing everything you can sit to prevent us from.
No problem of your plant, but as we think about going forward.
How do we.
Potentially reduce the number of people in your plants is there a way I know the industry's tried for years to get better at automation is it more of a priority now for you or for the industry to automate somebody's production factors or is it just something that the nature of meat is that you can't do it it's more specialized park by park. So I'm, hoping that makes sense I'm just curious.
As for what your thoughts there what the opportunity as well.
Mentioned, a public close to a year ago that we started investing fairly heavily in technology automation and that hasn't changed we continue to invest.
In that segment I do think that over the course of.
A time that.
The amount of automation will in fact continued to increase.
Particularly in some of the more difficult jobs and positions I.
I can tell you that.
We as an example, we've invested a significant amount of money I would say in.
Our attempt to minimize any.
Any foreign objects, where we're using that vision technologies to try and identify and it we're working in the debone area within poultry, we have number of initiatives within beef and pork. So.
I believe not only us as a company I think the industry will continue to.
Look for solves through automation, so I think it will probably it will likely accelerate from this point.
Great. Thanks, so much.
Thank you.
Our next question comes from Michael Lavery of Piper Sandler. Please go ahead.
Oh, Thank you good morning.
Good morning.
You did you have good channel splits even by segment in your full year filings and so just curious within foodservice you mentioned that a range of performances of how those customers are doing can you give us a sense of a food sparing the best and how you forecast given how they compare.
And just what some of that landscape looks like.
Hi, This is dean we're not going able to comment on customer by customer basis, but what we are.
Hoping for is a relatively U shaped curve on U shaped curve coming out of this crisis, which will be really beneficial to the small business owner restaurants and distributors are we'd love to see their business really start to recover in the coming quarters, especially states start to open up.
As it relates to a who is fairing Beth as I said before QSR customers are really those that are that are outperforming because of the flexibility of their model in both the historical ability to either delivered through click and collect a takeout try through et cetera.
Okay. That's helpful and just as a follow up back on chicken.
Just curious maybe how much visibility you have in specifically things like.
What amount of the pressure on margins as onetime say the use of the worker bonuses. For example, and you know just should we expect losses in both quarters I know you're talking about it in the aggregate just any sense of maybe given at least what you know now how you think that plays out.
Yeah, I look I mean, we were now that we're not going to give you quoted by quarter. We wanted to make sure that we highlighted the back half of the year and I think look when you stand back and looked at chicken for a second just say first of all this is a net negative in volume.
Second as a margin impact as a result switching from foodservice and third you've got some incremental cost which relate both to some of it a onetime worker costs and also more inefficiency in the plans as we try to run them in this environment.
Those last two.
Big numbers and I do not think that those are with us permanent.
Okay, Great. That's helpful. Thank you very much.
Our next question comes from Michael Picken of Cleveland Research. Please go ahead.
Yeah, Hi, I just wanted to get your sense in terms of I know you'd mentioned that you that some of the hogs are being back up or whatever but by the time, let's say all the workers came back with all the social this thing and things needed to maintain worker safety I mean, what do you think is you know either an industry or your capacity utilization rate that we could expect.
In pork and at the beef, perhaps relative to maybe where it was recovered 19 can you get back to kind of those same day, we killed rates could we saw three months ago.
Assuming that the plants continue to operate Michael yes, assuming the plants are operating let's say the workers were willing to show up.
Due to the safety like could we get back to where I mean could we'd be doing 2.8 million hogs awake.
The answer is yes the to.
You know over the course of last number of years book industry has been growing between two and 4% per year.
The interest industry infrastructure is set up to deal with that number of Hawks.
So yes, we can certainly get back to those type numbers.
Okay, and then I know you mentioned in your prepared remarks with beef.
Central to be a feel quite profitable in the back half the year, but you didnt really comment too much on pork is.
Is it just because the operating rates are lower in pork that you were left.
Yeah, I'm confident in on that side of the business or without reading the remarks wrong or the lack of commentary.
No. There is there is nothing intended by the lack of.
Commentary Michael that.
If the plants get back up and running as we as we expect them to be we would expect the margin structure within.
Or.
To continue it fairly healthy numbers year to date so.
We're just short of 11% return on sales for Q2 is little over 7%, So I think that.
Certainly possible that we'd be able to maintain.
Those type of numbers as we as we look forward.
Okay. Thanks.
Our next question comes from Rob Moskow of Credit Suisse. Please go ahead.
Okay.
Hi, Thanks, a couple of questions.
I think Oh, you just said that you think the industry could get back to 2.8 million pigs per week, if yes attendance improves but you're also implementing more social restrictions in the plants in more safety.
Cautions and I got to imagine that that slows down to facilities as well so is it possible to break down.
Your your incremental costs and your utilization rates based on on what you're seeing in terms of attendance right now and then also in terms of.
The safety measures you need to to put in place because I cannot imagine the safety measures are going to be with us for awhile.
Yes, I think that's a fair assumption from.
I think that.
The slowdown in speeds in production throughput Robyn.
We've done everything possible to protect all of our team members all of our employees, including social distancing.
And I'd say, it's too soon to tell at this point you know if in fact, that's a permanent structural change where we would have to slow down all line.
To have the social distancing that's needed so.
We can't quantify specifically what that might mean going forward, we're still working through.
With all the both the.
State and federal officials as to what that might look like going forward.
Well, what you're doing it right now as you I mean, you're saying that you're taking all these precautions right now. It's obviously the right thing to do have you made any estimate tested the degree to which.
That slows down the facilities and reduces utilization.
We know specifically what that means right now Rob but.
We're a company that continuously innovate and works on better processes and that continues to be the case. So I don't think it's accurate to think that what we're doing today necessarily has to be the case six or 12 months from now.
Okay.
And then a follow up you said the chicken margins are likely to be negative in the back half.
Is it possible there to kind of isolate.
The degree to which that.
Has to do with.
Yes, indeed excess supply is on the market versus.
Incremental operating costs at the plants for for safety and also the absenteeism.
Yeah that Britain.
Rob stood here. So first of all we didn't say that margins will be negatively said the chicken would likely be unprofitable in the back half of the and I think just a couple of questions ago I sort of frame that there's a combination of factors and anyone that I didn't point to just because it's ongoing is weaker pricing, but if you go back and just look at those factors you ongoing weaker price.
Thing that we've seen the negative impact of lots of volume.
The mix shift between foodservice and retail and then of course just the.
The efficiency levels in the pump, which has have been impacted by by worker availability by some of the measures that we've taken and then of course, the the bonuses I mean, that's sort of frames out the picture in chicken.
Hi, I'm I can't give you any more detail.
Than that.
Sure pay help me understand what you meant bang on profitable then it's not negative margins what what has been.
Well I mean I'm risk seemed when you said margin than you were thinking about gross margin, but if you think about operating margin and that's that's true I was saying, it's going be unprofitable at the up at the operating income level.
And that gets worse or both in line. That's that's what I met okay, yeah, Okay and were lined up.
Our next question will come from Ben BMW of Stephens. Please go ahead.
Hey, good morning, guys.
Good morning.
I want to ask about the executive order I think I think it was helpful and standardizing the processes and procedures around which you guys could open across various states and counties and facilities across the industry.
I'm wondering what else. It does I think there's been some reference to potentially defraying P E com TV costs and liabilities if he's elaborate on kind of the benefits of what that executive order brings to you guys and the rest of the industry from a cost perspective, as well as a clarifying that operating procedure.
Yes.
Hi. This is the stress your first point is really.
I'd be understated, so we cannot be overstated, the uniformity with which our plants are governed really being dictated by the experts the CDC Osha you Sta.
Is critical for us to both.
Maintain industry standards, Hi, we've actually had a few of our plants visited by folks like state government health officials in the CDC and if.
They've actually asked to work with not only food industry food industry is coming back online, but also other industries to show them, how we've taken care of our team members.
The second point about P.. We we are we moved very very quickly early in the process to secure pp for our team members.
But those those go quickly in our business and so the other benefit of the executive orders really to make sure that.
We have long term abundant supplies the depending on how long. This this pandemic ultimately last.
Things like masks Ethernet et cetera, we've gone so far in some screwed up master team members as they can operate in their community, where where they know that there may be some leaving disease. So that they can operate safely commuter and not bring that back into the plant. So those are really the two main benefits for the order.
Okay, and you made some allusions to.
Export and and how those have fared year to date and kind of your outlook at that but I'm curious I know it it varies by protein segment, but you know do we need to see higher crude oil prices and a weaker relative dollar at more stable global environment or in the context of coverage policy.
Supports improved where do you think that we can see significant improvements in exports exclusive of those factors.
I think we can see them exclusive of those factors behind that.
Exports year to date have been strong interest continues to be strong despite.
Very low oil prices so no the global fundamentals that we were looking at.
Six to 12 months ago haven't changed.
It's a global protein demand still continues to grow.
At about 2% rate.
Production volume is not increasing at the same level United States historically has been a low cost supplier of protein.
Before can chicken to to global markets. So we don't see that changing in the demand that we've seen over the course last 30 60 days I think just just reinforces that.
That's why that's why we're encouraged on a long term basis of the outlook that that hasn't changed we have.
The headwinds and challenges in front of US right now that we deal with it.
And as long as we make sure that our team members are safe in our plants.
That's priority number one priority number two is making sure that this this company is positioned for long term over the course of the next 10 2050 years to continue to be successful. So we're not only dealing with the short term, but we also are deeply.
We're.
We're deeply.
With that we view the long term on on a on a bigger ticket very very seriously.
Okay, Thanks, do well and best of luck.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to no wait for any closing remarks.
Thank you for your time today, one of the hallmarks of Tyson is turning insights into action. The current environment presents significant opportunities for our company as we assess and react to changes in the consumer landscape will leverage our resources and infrastructure as we continue our role as a leader in food production.
Let me conclude by saying that the responsibility of eating our nation goes beyond anyone business working together, we're confident we can mitigate the spread of cobot 19 in our communities up or keep it away from our plants and help the food supply chain intact. Please stay say, if we look forward to talk mucin.
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