Q3 2020 Tyson Foods Inc Earnings Call
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Good morning, and welcome to the Tyson Foods third quarter, 2000, and Tony Earnings Conference call.
All participants will be and they listen only mode.
Should you need assistance. Please signal a conference specialist presenter Mr., Keith followed by zero.
After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone.
To withdraw your question. Please press Star then too.
Please note this event is being recorded.
I would now like to turn the conference over to John Kuzdal, Vice President Investor Relations. Please go ahead.
Good morning, and welcome to the Tyson Foods incorporated earnings conference call for the third quarter fiscal 2020.
On today's call, our nor White, Chief Executive Officer, Dean Banks, President and Stewart Glendinning, our Chief Financial Officer slides accompanying today's prepared remarks are available as a supplemental report in the resource center of the Tyson Investor website at IR Dot Tyson Dot com.
Tyson Foods issued an earnings release this morning, which has been furnished to the FCC on form 8-K and is available on our website that IR Dod Tyson dotcom.
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 issue.
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 and during this fiscal year as well as 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 in them on Monday August Threerd 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 for reconciliations to our GAAP results. Please refer to this mornings press release I.
Ill now turn the call over to know away.
Thanks, John and good morning, everyone before we get to the quarter I'd like to take them on to discuss the announcement. We made earlier. This morning. Later this year Dean banks will take over President and Chief Executive Officer, Tyson Foods effective October Threerd.
Excited continue at Tyson in the new role as executive Vice Chairman of the board of directors.
Hi, This is future is bright with team in at the helm as our chairman said in the press release. This morning, Dean in the entire executive leadership team have a strong breadth and depth of capabilities and they bring energy and vision to Tyson foods.
Scene has an impressive background in entrepreneurship technology, and the healthcare industry, which makes him ideally suited to lead Tyson on our efforts to integrate advanced technologies into our operations further our focus on team member health and safety.
Even as the right person to lead our company in the next stage of growth.
I mean would you like to say a few words.
Thank you know for those kind words and for your 37 years of service in many contributions to Tyson.
I also want to offer my sincere thanks to the more than 140000 team members, who have given me a warm welcome over the past three years.
The opportunity to get to know many of you and your integrity passion and commitment to feeding the world is a critical part of why Im here.
I am honored to lead Tyson Foods is next CEO.
And look forward to working with our company's leadership in executing our strategy to capitalize on opportunities for innovation across the protein spectrum.
Building upon the strong foundation established vinyl I will continue to serve our customers team members stakeholders and shareholders to drive our strategic initiatives and build our business in current and new categories and geographies.
And finally, thank you to the board of directors for Entrusting me to lead Tyson into our next phase no.
Thank you Jane now will discuss the third quarter I want to start by thanking our team members for their dedication intelligence as we continue to navigate the pandemic.
This quarter has been fall chance challenges in ever changing environment. However, I'm pleased with how we've adapted and adjusted to the circumstances and continue to operate our facilities without layoffs.
Well, we've worked hard to avoid the supply chain disruptions experienced by our lives start suppliers and customers our top priority as corporate remains the health and safety of our team members. We've made substantial investments in cobot 19 related safety measures for our team.
Earlier this year, we transformed our facilities with a host of safeguards that meet or exceed CDC and Osha guidance.
We purchased 150 walk through temperature scanners to check workers when they arrive.
We supply face masks have installed workstation dividers and have more than 500, social distance monitors and our facilities.
About 40000 of our team members.
Our third of our U.S. workforce has been tested for the virus.
Currently less than 1% of Tyson foods U.S. workforce of over 120000 team members has active cobot 19.
Tyson Foods has partnered with outside medical experts and public health officials to understand and prevent the spread of the virus in the share what we've learned.
We have partnered with matrix medical to set up on site medical clinics at some of our locations. We also supplied more than 300000 mass tort team members across the country to share with our families friends and loved ones.
And last week, we announced the launch of a new strategic Cobot 19 monitoring program and the expansion of our occupational health staff, including a new Chief Medical officer position.
The new data driven program was designed with the help of outside medical experts in the vaults weekly testing of a sampling of team members to monitor for the presence of the virus.
It also includes testing of workers symptoms as well as those we have come in close contact with others, who have the virus.
Protecting our team members is essential to the long term growth and will remain our top priority.
Now I'll turn to the third quarter results, which reflect the value of our comprehensive portfolio and operational agility Dean will take us through the segment results and Stuart will provide detail on a third quarter results.
Without a doubt our third quarter was one of the most volatile and uncertain periods I've seen during my four year career in the industry.
However, our commitment to team member health and safety, our investments in operations and portfolio strategy effectively position us to weather unprecedent marketplace volatility, while supporting our farmers ranchers and producers while working to meet our customer needs.
Our scale across proteins products and brands helps to insulate us during economic cycles, even a historically volatile ones enables us to more readily adjust to consumer demands across brands and channels.
While cobot 19 has had impacts on our business I'm pleased to say that our company has performed well.
Third quarter sales were just over $10 billion, which is about 8% lower than the same quarter last year, driven by 10.6% lower volumes offset by 2.6% higher price.
Our adjusted earnings of $1.40 per share were driven by strong performance in our beef and pork segments.
While chicken results were weak early in the quarter driven by significant declines in foodservice and deli demand that affected both volume and mix we experience a volume rebound later in the third quarter at states began to reopen and this is carried over into the fourth quarter again, the overall strength of our business to.
His earlier in the quarter speaks to the value of our portfolio based strategy.
In Q3, we experienced substantial demand for core retail and branded products and we worked diligently to get as much product to our customers as possible.
This demand shift resulted in core retail line volume growth of more than 26% compared to Q3 last year and share gains in those categories. Meanwhile, we absorbed major declines in foodservice, which resulted in net reduction to overall volumes during the quarter.
Retail channel continued to show strong levels of demand in both volume and dollars.
I was pleased to see another quarter of share growth across our core business lines. This makes eight quarters in Roe.
Another area, where we benefit as the strength of our brands the breadth of our reach and the ability to produce locally in our international markets in responding to.
Global demand growth and fluctuations.
In the third quarter exports to many parts of the world performed well, including to Japan in Mexico.
In country performance in China remains strong and the impact of Coven 19 within the other countries, where we operate has been less than expected.
Reduce hog supplies caused by African swine fever continued present opportunities.
Phil International demand from U.S. exports and in country production.
It's important to note that a large portion of Tysons export sales are associated with products that don't traditionally fit within the American consumers diet.
This means export markets helps serve as a way for us to optimize utilization of livestock.
This contributes to the profitability of the livestock farmer will depend on for supply.
In the third quarter, we took a number of action to support our supply chain.
We unilaterally instituting an increase in payments for the prices, we paid for our cattle ranchers provided weight discount relief or haagen cattle producers and cap price is uncertain cuts of beef toward customers.
Supporting our partners and customers is essential to our business.
Now, let's talk about the current operating environment, we have enhanced operations to ensure agility continued to implement automation to improve safety and efficiencies for our team members and deploy technology to meet consumer demand because of these investments we were positioned to weather the impacts of over 19 on a channel mix.
As we've experienced increased retail and reduce foodservice demand.
From a supply chain perspective, our facilities quickly adapted where possible through new product mixes to take advantage of changing customer needs and market dynamics due to colder 19.
We operate more than 140 food production facilities in the United States and all those some continue to operate a decrease production levels. The scope of our operations continue to provide us with the flexibility agility and redundancy needed to support our customers and help keep refrigerators and shelves stock.
This is a clear benefit to our company's scale and how we continue our crucial myth mission of feeding families. During this unprecedented global crisis.
Despite our strong performance during the third quarter covert 19 created significant direct incremental costs for our business totaling approximately $340 million.
This does not include the indirect impacts we've experienced such as lower volumes or operational inefficiencies as a result of absenteeism and lower capacity.
Our direct incremental costs, primarily associated with ensuring the health safety and recognition of our team members, which include enhanced team member safety precautions and our facilities.
Communication and education within communities team member bonuses enhanced benefits and other Covance 19 protection measures.
Due to the nature of these direct incremental expenses our segments were primarily impacted based on the relative number of team members.
And the degree of production disruptions they have experience.
We know that solve these expenses will continue likely it will lower run rate.
We know that we will need to prepare to adjust our operation as a virus process.
Even after accounting for these covered 19 related costs during the quarter, our business continued to show strength and resilience.
Well Cobot 19 has been disruptive we have a strong long term outlook for Tyson foods.
Global population income growth will continue to drive an increased need for protein.
That's why we expanded the international footprint we've established.
Is so important to our future growth our assets capabilities and products in China, Asia Pacific and Europe give us the ability to meet that growing demand.
Our lessons from Asia Cobot 19 experience also help shortened the learning curve for us domestically.
Furthermore, the virus has accelerated consumer demand for food through alternative channels, such as E Commerce.
We believe E commerce demand in grocery and foodservice will remain elevated and we intend to capitalize on this shift.
We also continue to invest aggressively in our brands and in automation and technology.
As we seek to create new and more effective ways of doing business.
The technology area alone we've initiated hundreds of projects over the last three years.
Many of which are both enterprise and scale and focused on automation and advanced analytics.
Automation will help drive efficiencies and protect team members in our facilities. We expect these initiative to generate strong returns as we move into the future.
Of course, there is under way more work ahead of US we remain focused on continued execution of operational improvements to drive a more efficient agile organization, which in turn enables us to remain nimble and unlock opportunities to grow the business.
As we look beyond this year, we're prepared to navigate prolong pandemic related uncertainty.
We are investing in operational flexibility to ensure that we have continued to meet customer demand while living in a potentially long term cobot 19 environment.
We recognized that our level of future growth is dependent on away from home eating occasions.
We will be impacted by communities opening up and potentially re closing.
We will vest remain nimble and remained right ready to adjust our facilities as demand picks up four ships.
We are managing our business, well and our balance sheet and liquidity position continuing to show strength as a result of strong cash flow generation, we believe higher levels of liquidity are prudent and so we'll have more visibility into recovery and realization of a new dynamic environment.
We can't say, how long the impacts of Coburn 19 will last but we've demonstrated the ability to operate while facing the current challenges.
Our business is flexible and ready to take advantage of channel and business shifts.
We'll continue to adapt our business to address market challenges I believe shareholders will benefit from our strengths, which include our portfolio distribution channels dedicate workforce and scale.
Now I'd like tend to give us a recap of our business segments.
Thank you know I want to start by echoing no sentiment as it relates to the resilience that our team members have shown in light of Cobot 19.
Im humbled by the response during this difficult time, and it's been both remarkable and extraordinary.
I will focus my remarks today on our third quarter results and then provide additional color on each of our segments.
Under the circumstances, our performance has been good despite challenges and with team member safety is our top priority, we did everything possible to maintain operations in order to keep customers shelved and refrigerator stock and consumers fed.
We shifted some of our foodservice production to focus on retail and demonstrated the strength in resonance of our brands with consumers.
Our performance in the core retail categories continues and an incredible pace in both volume and dollars as a result of evolving demand.
Our Nielsen results show gains of more than 26% in the latest 13 weeks outpacing total food and beverage as well as the top 10 food manufacturers again outpacing all of the top 10 food manufacturers.
Our retail lines are leading their categories with overall volume share growth of 2% and dollar share growth of 1.6%.
Our core business lines, which represent approximately two thirds of our measured branded retail sales have now experienced eight consecutive quarters of growth.
Again, that's eight consecutive quarters of growth.
Within the ecommerce channel because we were well positioned for the increase in online buying we continue to see significant sales growth and showed strong performance similar to last quarter total ecommerce sales more than doubled versus the prior year its consumer buying patterns evolved with a continued emphasis on click and collect and delivery weeks.
Spec this strength in ecommerce to continue.
The other way from home continue to remain soft during the quarter, but are slowly starting to recover foodservice customers seem varying degrees of recovery with strength in quick service restaurants focused on takeout and delivery.
Some have returned to pre cobot 19 levels, which led us to ship some capacity back to historical patterns.
Weakness remains in schools and dining channels, which may persist, depending upon states reopening agendas.
In contrast, and the retail channel supermarkets in club stores have continued to see gains across our categories.
Because of flexibility within our operations, we were able to convert parts of our foodservice production network to accommodate the shift to retail.
Other parts of our network could not be converted during the third quarter. As a result current buying patterns remain a net negative across our business and we don't expect to realize full recovery until meals away from home increase.
There's no mentioned our margins for the third quarter.
Included direct incremental costs totaling approximately $340 million related to covert 19.
Indirect costs and additional inefficiencies created by unplanned absenteeism and reduced production across our business segments have not been included in this number.
Think of the segments I'll start with prepared foods.
During the third quarter, our prepared foods segment produced an operating margin of 7.1% on just over $2 billion of sales.
Our retail growth and the performance of our brands were very strong well, our foodservice volumes remain weak driven by cobot 19 related temporary idling and slowdowns.
In total for this segment sales were down 2.6% with volume down, 6% and pricing up 3.4%.
Despite these challenges we were pleased that our total household penetration increased in the third quarter with significant gains in Jimmy Dean breakfast sausage ballpark Hot dogs, and Hillshire farm lunch meat.
Although availability of raw material is started to return to pre virus levels. The surgeon demanded retail coupled with raw material supply shortages has resulted in lower finished goods inventory levels across the network.
Some of the tail effects of this shortage will continue to impact us in the fourth quarter.
Despite these coded 19 related inventory challenges, we're pleased to say that the historical inventory issues caused by our ERP system rollout are behind us.
Alternative protein remains a top growth priority for Tyson foods, we saw growth in distribution in velocity during the quarter, while introducing two new plant based protein offerings to market as spicy nugget and a whole grain tender both under our raised and rooted brand.
We are focused on our new product launch timing to drive category growth in line with customer and consumer needs.
Our teams will continue to work with our foodservice customers to provide relevant product offerings that will enable them to adapt to the changing marketplace. The economy reopened and we will continue to focus our brand investment and innovation to more value oriented offerings.
We are focusing on formats and size is relevant for rapidly evolving channel dynamics, such as the acceleration in ecommerce overall, the prepared foods business is well positioned to deliver sustained retail growth even in this dynamic environment.
Our beef segment produced an operating margin of 17.4% in the third quarter on approximately $3.7 billion of sales.
We saw a large supplies of market ready livestock during the quarter, but continue to experience production inefficiencies and lower throughput due to our decisions to temporarily idle some facilities in an effort to protect our team members.
The combination of large supplies of livestock production shortfalls and strong consumer demand drove a much wider margins bread.
Our business has done an excellent job managing through this uncertain environment, especially in its ability to protect team members, while continuing to produce.
As foodservice demand softened, we were able to shift parts of our operation to retail it's cutout values rose during the quarter, we offered price caps to support our customers and preserve demand and both retail and foodservice.
Exports are an important complemented domestic markets and benefit us cattle and be producers since many exported products are not typically consumed in the American diet.
We expect strong exports to continue as the impacts of cobot 19 start to level out in some areas, but we will continue to emphasize keeping domestic shelves and refrigerators stock.
The current environment shows plentiful supplies of cattle, coupled with strong demand for beef the quality of domestic fed cattle continues to be excellent, allowing us to provide a high quality product for customers with a continued focus on our premium programs as one of our key growth platforms.
Moving to our pork segment.
The third quarter strong demand and ample hog supplies led to a 9.6% operating margin in Q3 on approximately $1.1 billion of sales.
As port plants were idled or ran a reduced capacities in order to protect the health and safety of our team members Hog producers were met with lower processor demand for their market ready hogs.
We recognize how this impacts our producer community and we have safely resumed operations at or near full scale production to provide them with an outlet for their hogs.
Additionally, idled plants and reduce capacity in our port facilities at impacts on the availability of raw materials for our prepared foods business and affected our ability to produce at optimum levels.
We directed more product to our domestic channels, where we saw strong demand for whole muscle cuts, including pork lines butts and ribs.
Like our beef segment exports remain an important complements domestic markets and benefit U.S. hog and pork producers since many exported products are not typically consumed in the American diet.
Turning to chicken. This segment produced an operating margin of negative 3.9% in Q3 on approximately $3.1 billion of sales.
So part of our business is seeing greater cobot 19 impacts than our chicken segment.
We've experienced significant amounts of complexity in the current environment and continue to work through what is proven to be a very dynamic situation.
Sales were down during the quarter as a result of lower volume and price operating income was negatively affected by the volume decline costs associated with cobot, 19, and $110 million of negative derivative mark to market adjustments as compared to the same period in fiscal 2019.
Additionally, we experienced some degradation in our mix as we shifted capacity to serve retail channels and struggled to maintain efficient levels of production.
As I mentioned during the quarter, we responded to the dramatic shift in demand from foodservice to retail shifting some of our chicken production capacity accordingly, although this cost us in the form of capital investments and some plant efficiency, we were able to get more meat to consumers when retail capacity was particularly strain.
Despite adjusting parts of our operational footprint the higher retail volumes didn't entirely offset the lost volumes from foodservice in Delhi.
We began the year with positive progress toward operational improvements within our chicken business, but the impacts of the virus resulted in operating disruptions that slowed our progress during the third quarter.
We prioritize throughput in order to meet customer demand that we expect to resume meaningful progress against these programs as conditions level off.
Looking at current market conditions in the chicken segment, we saw improved results late in the third quarter and into our fourth quarter as foodservice demand started to slowly recover while retail demand remains strong.
And international Cobot, 19 affected our regional businesses in different in varying degrees.
Our in country, China operations performed well despite disruptions caused by covert 19, and African swine fever by leveraging its diversified operating model and continuing its strong performance throughout the third quarter.
Our APAC operations were able to shift at least some production to retail to mitigate the impact of lower foodservice volume and successfully execute promotional activities with our key customers.
Our business in Europe was slower and experienced more negative profit impacts, resulting from higher exposures to foodservice and the impacts on that channel from Cobot 19.
Our international footprint is providing a platform for growth across the enterprise.
We are committed to becoming the global leader in protein by serving emerging markets and strategic customers across channels and segments.
With recent acquisitions, we've made significant progress towards reaching critical mass and our international operations to take advantage of higher growth demand patterns.
It is worth noting that across our business, we're monitoring trade tensions among countries working with government agencies and evaluating the impact of a potential shift and longstanding trade agreements.
Chris remain an obstacle putting the U.S. at a price disadvantaged in many markets in which we participate.
If tariffs are lifted our reduced we would likely see an acceleration of already increased global demand for U.S. pork beef and chicken.
In summary, our team members and businesses across the enterprise have shown tremendous flexibility and agility.
Successfully adapted to the continued change brought on by covert 19.
Response from our team members has provided consumers with continued access to a safe and affordable food supply and we will continue to make investments to prioritize their health and safety.
Jason is well positioned to respond to future market conditions, our strong balance sheet unique business model diverse portfolio and scale will allow us to meet the needs of the marketplace with that I'll now ask Stuart to take us through the financials.
Thanks, Dean and good morning, everyone I'd like to start by congratulating Dean on his appointment to the role of CEO.
I really enjoyed working with him and know that he is going to do a terrific job congratulations Dean.
Now I'd like to start by calling out a few performance highlights for the quarter as Neal mentioned earlier third quarter results included earnings of $1.40 per share and operating income of $760 million.
Sales in Q3 was down approximately 8% to just over $10 billion with a 7.6% return on sales.
Average sales price for the quarter was up 2.6%.
Year to date operating cash flows with $2.7 billion.
Now as Neal mentioned earlier, our balance sheet is sound in fact, our liquidity position improved as we progress through the quarter.
As of June 27th our liquidity was $3.1 billion.
Which is up $600 million from our second quarter.
This substantial increase was attributable to strong operating cash flow performance and was partially offset by a reduction in debt, including our $350 million of bonds that matured and were paid off in Q3 and $150 million of dividends, which were paid during the quarter.
We continue to emphasize inventory and accounts receivable management to mitigate the business as cash flow risk during this uncertain and volatile environment.
Including cash of $1.4 billion net debt was 10.7 billion and net debt to adjusted EBITDA was 2.7 times for the 12 months ended June 27.
Net interest expense was $119 million for the quarter.
Our effective tax rate was 21% in the third quarter and weighted average shares outstanding were approximately 364 million.
Depreciation and amortization totaled $295 million.
Capital expenditures during the third quarter totaled 283 million.
We continue to target an overall capex return of approximately twice our cost of capital.
With a focus on projects, which as support our long term strategies and enhance our business performance.
Don automation and expansion of our global footprint of good examples of this.
It's also worth noting that we have deployed significant capital against M&A over the past few years and those assets are proving to be valuable now with a lot more value expected in the future.
As examples are hillshire assets at performed exceptionally well over the past two years and the increased exposure to retail has been especially important based on recent coated related channel shifts.
Our investments and expanding our global footprint have increased our ability to serve multinational customers in both foodservice and retail as well as giving us exposure to some of the worlds fastest growing protein markets.
Due to the uncertainty of the covered 19 impacts including sales channel shifts the degree of absenteeism and the temporary idling of some facilities. We are currently unable to provide segment operating margin guidance.
In addition, the accuracy of any outlook, we do provide during this call will be influenced by a wide range of factors connected to the course of the pandemic.
Now I'd like to provide some additional commentary on our outlook for the full fiscal year keep in mind that fiscal 2020 is a 53 week year.
However, we've adjusted our outlook to be comparable to 52 weeks.
Net interest expense should approximate $470 million.
We project Capex spending of approximately 1.25 billion for the fiscal year as we progress with building additional processing capacity for case ready fresh chicken beef and pork.
We may elect to slowdown parts of our capex spending where appropriate to ensure adequate liquidity.
Having said that we expect liquidity for the remainder of the yet to remain well above our minimum liquidity target of $1 billion.
As the spread of covered 19 continues to present, new an unforeseen challenges to our business.
We believe that a heightened degree of liquidity relative to historical levels is prudent to ensure financial strength and flexibility.
This coupled with strong operating cash flows and disciplined capital allocation priorities gives us confidence in our ability to meet our financial obligations.
Our capital allocation will continue to prioritize debt reduction.
This includes approximately $700 million of senior note maturities in Q4.
We do not expect to repurchase shares through the end of the year, except for minor repurchases related to equity compensation plans.
Our effective tax rate is expected to be around 23%.
As Q4 is started we continue to see heightened levels of retail demand, which still only partially offset the covered related decline seen in the foodservice channel.
Well, we're not certain the positive covered we have demonstrated our ability to deliver profits. During this challenging time and we expect to continue to do so.
Our plants are experiencing varying levels of challenges in the current environment. The capacities have significantly improved since the extremes experienced during the third quarter.
Our actions taken to ensure the health and safety about team members will enable us to move capacity closer to historical levels.
As a result recovered 19, we have incurred direct incremental costs based on the broad range of safety measures, we have implemented and continue to support.
Which is no mention totaled approximately $340 million during the quarter.
Because some of these initial investments a onetime in nature and as such will provide long term benefits. We expect that only a portion of the $340 million in Q3 covered costs will persist going forward.
We also incurred indirect costs and production inefficiencies as a result, as a result covered 19.
And have not been separately identified.
We will continue to operate our plans with team member health and safety as the top priority.
We expect to offset some of these incremental costs through our continued diligence to drive ongoing financial fitness, where we continue to seek out opportunities to remove unnecessary costs from our business.
The sunrise despite the challenges to our industry brought about by covet, we've demonstrated our ability to perform during the crisis and we're encouraged by our long term outlook.
Broad business model with multiple proteins allows us to meet a wide range of customer and consumer demands across all of the food sales channels.
That model is built on a large scale platform, which is increasingly exposed to higher growth rate countries as we expand our geographic footprint and it provides us the capability of serving largest multinational companies as well as the smallest single outlets.
Our balance sheet liquidity scale and portfolio of businesses differentiate Tyson from other food companies and position us for long term growth.
We will drive for that long term growth in all parts of our business as we execute against our strategic plan.
With a constant focus on maximizing long term value for shareholders.
That concludes our prepared remarks, operator, we're ready to begin QNX.
We will now begin no question answer session.
Ask a question you May press Star then one on your Touchtone phone.
If you are using his speakerphone, please pick up your handset before pressing the key.
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 read enter the question Q.
At this time, we will pause momentarily to assemble our roster.
And the first question will come from Peter Galbo of Bank of America. Please go ahead.
Hey, guys. Good good morning, and congratulations to Dean and to NOL.
I appreciate the color around the coded cost 340 million.
Obviously, a chunk of that was was worker bonuses as well.
But just wondering if you actually give a little bit more granularity on some of the major cost buckets right.
Related to some of those those direct co would cost just as we start to think about the fourth quarter. What what are those could be actually continuing and possibly into fiscal 2001, then I have a follow up as well.
Yeah. Thanks, Good morning, Peter stood here, let me give you a little bit of Carla first of all as you know of course, the safety of our team members is our top priority. What's good for our team members is of course very good for our business.
If you look at the $340 million does represent only the direct costs and as you rightly called out the biggest chunk of that as is the thank you bonus we disclose that that amount was $114 million. So that gives a sense of of drivers the biggest driver, but they will also and then in terms of other big drivers were enhanced.
Benefits and pay that we paid to employees.
Once we close but they were out.
In addition of course, we had all of the medical costs and the PE costs. I think if you took those buckets that would be the the biggest chunk.
Ongoing.
Of course, if you went back we announced those thank you bonuses ahead of time.
We don't expect the run rates to be at the same level, but we're not getting any specific guidance on what we think that number will look like for Q4.
Got it okay.
That's helpful and then.
Being maybe just stepping back from a from a hi, hi kind of strategy level.
You know the priority is obviously going forward with you stepping in as CEO is going to continue to be on prepared foods and growing international but I think the biggest pointed pushback that we've gotten this morning is just.
Around chicken, obviously, it's been a very challenged year with co bid and with a lot of the cobot costs going into chicken, but.
How are you thinking about prioritizing a turnaround in chicken.
And when should we expect I guess for three to come to us with a more comprehensive and on I want to turnaround to potentially look like thank you.
Sure. Thanks, Peter I would say if you consider we incurred from direct koby costs and some of the derivative losses.
And really the disruption from coated in general I think our team did a phenomenal job at weathering the storm, we'd love to see.
A better financial number post, but but also in the team did a good job and managing a lot of the challenges and uncertainties.
What what I would say that clearly some of the covert cost will fall out over time, assuming that we get the recovery that we'd like to see.
And we do we did see some real progress prior to coven of picking up some operational efficiencies and then we're going to be going back after that as soon as our operations return to normal. So you will you will see.
Improvements in the coming quarters, I believe but.
It's really too early to tell with with what's going on with Covidien.
The disruption to our mix.
And related absenteeism has been quite challenging, although we do see absenteeism trends recovery.
Our next question comes from Ben VM Avenue of Stephens. Please go ahead.
Hi, Thanks, good morning, everyone.
Good morning event.
I want to ask.
On the the four can be section of the business segments performed obviously the market with favorable as it relates to backing margins, but performed pretty nicely given quarter, despite how challenging.
Operating environment Must've been for you guys I know you in a number of plants closed.
We've also the we've gotten.
Pretty big backlog of live animals coming for the balance of this calendar year in light of what's happened with Covance I'd love to hear your commentary on what you think around.
The input cost side of things looks like for Packer margins for the balance of this calendar year and then I'd also like to here in light of the most recent cattle inventory update we got from the U.S.J. just kind of how you guys are thinking about the cattle cycle.
And we are.
We're in a really strong profitability environment at what point do you think that starts to.
Taper off.
Then I'll take that this funnel.
As we as we look into 2021, we're expecting.
Well without covered we would expect to somewhat flat supplies, particularly in cattle.
Breeding intention on harms or off a couple of percent put productivity has been picking up.
A couple of percent so basically flat again.
So our outlook for domestic visibility has previously been roughly flat to perhaps down half of 1% due to continued strong exports.
The number of hogs.
I've been process. So the last few months, obviously, particularly in Q3 they were down substantially.
And we don't know exactly but we estimate some place into the city of about 3 million hogs.
Did not come to market. So that will continue to work its way through the.
The system over the coming months and on cattle theres, probably somewhere in the vicinity of about 1 million head of cattle.
And then backlog as well.
So over the course of.
Months that will work itself out but.
Regardless, we expect.
Adequate supplies.
Strong supplies of cattle and hogs as we look into our fiscal 2021.
Okay, great. Thanks.
Stuart you made some comments or Dean I think you made comments on S&P.
Our.
Off entirely behind US you noted there behind you prepared foods as you recall that maybe the chicken segment was being impacted by S&P as well.
Hi, recalling that correctly and if so is that cost behind you as well.
Yeah, our ERP related inventory write downs in distressed our normalized at this point.
We're still rolling out S&P across the business, but but the relative gone smoothly, we've not seen an uptick.
In any of the challenging aspects related inventory to be shown in the back. So we feel like we got that behind us an entre okay.
Fantastic, Thanks, and best of luck.
Thank you.
Our next question comes from Michael Piken of Cleveland Research. Please go ahead.
Yes, hi, good morning, and.
Congratulations to both of you guys gave the NOL.
Couple of questions here the first a question.
Chicken side.
I guess, we've seen some weakness in commodity leg quarters recently.
Just wondering how much that.
Welcome to potentially ups quotes on downloading Justine ability.
Depot, not talk me, but just sort of your thoughts on called the overall size of tops business a lot of some of the weaker commodity prices, which Oakland on them. How do you see sort of I'll call solve some of them. How are you thinking about your around low double checking.
So our mix was certainly affected by absenteeism and we really wanted to just get food to American global population as quickly as we could so.
We had made it takes some mentioned there from mix and then as it relates to.
[music].
General operational improvements Weve.
Like I said recaptured about $100 million in total operational savings.
Coming into coded which benefited us, but looking forward that's going to take some time to work through that.
And we do.
In our and our contract pricing business, we will be going into pricing negotiations. This fall.
I will see any any impacts from that coming in the first for second quarter.
And then related to exports are exports have generally been strong we're seeing pursing ports move there somewhat back up but we are seeing product flow through.
Testing of the borders in places like China on exports in spend Mexico's continue to be strong.
Okay, Yeah, and then as a follow up on just on the Red meat side. If you could talk a little bit I know the daily slaughter rates have come back you know and glow strong.
Okay, but on the fabrication side are you guys are able to deliver specific called so at this point on beef and pork too are you targeting customers are there still shortages of particular skews or earnings call optimism on the qualification side. Thanks.
Yes, Michael I can take that I can tell you that that no production has largely rebounded to a pre cobot activities. So skew in product mix.
Is not being impacted anywhere to the extent that it was through the March April may time period, so nearly back to normal.
Our next question comes from Heather Jones of Heather Jones Research LLC. Please go ahead.
Good morning, Thanks for taking the questions.
Good morning.
My first question is all chicken I was wondering if you could give us more granularity as to how much of your.
Capacity, you've been able to shift to reef retail away from foodservice and how that may cause volumes to look going forward relative to what we saw in Q3.
So we're not.
Not necessarily calling out the percentages that we've been able to shift but weve.
We've we've seen foodservice recovered about.
Hey to 90% in general and so we have we have obviously strong products and in Qs ours.
Maybe Heather just a couple of additional fats just to help but with your model.
You look back to Q3 last year.
Retail versus foodservice.
In chicken that was about 60 with about 50 50, and thank you look at that ratio.
In 2020, that's about 60 40, so you've seen that you've seen that you've seen a shift. They obviously it would have been worse it'd be not being able to to.
Shift some of the manufacturing over to retail.
Thank you you look in our Q, you'll get some of that data.
Okay. Thank you.
A follow up I was wondering so all the initiatives you put in place as far as healthcare for your workers et cetera, just.
I'm wondering if you could give us your thoughts about the preparedness going into the fall like I know, there's some concern in the industry about.
There potentially being another surge and just like how do you. How do you think your prepared relative to this morning, if there is a surge and workers getting stuck like.
How do you think it'll look for you relative to what it looks like in April may this year.
From a earlier this year.
Sure there thanks.
As you note team member safety is our top priority Weve you can tell by our numbers we've invested heavily.
In a variety of precautionary measures the protective equipment is stuff that we put in including temperature testing that stuff will benefit us and quarters in years to come you probably also sold in the recent announcement that weve.
Really to implemented what I would consider it cutting edge monitoring program.
When we get from that.
As to ensure that we're assessing the health of our team members and making sure that we know what's going on in our plans, but also helps better understand what's going on in the communities and that's that's really been the key is knowing what's going on in the disease loading the communities and Weve been very open about sharing that with public health officials to make sure that they see what we're seeing and they're working with us.
So putting a lot of efforts to.
Educate and form our team members about what we're learning about the virus and how it spreads and we've seen them.
The very responsive and respond positively to protective measures at home and.
In their communities and so I would say, whereas prepared as we can be we are still investing in research, making sure that very much understand.
This virus.
We are really.
Working closely with communities and health officials to ensure that we've got every possible caution in place.
Okay. Thank you.
Our next question comes from Ken Goldman of JP Morgan. Please go ahead.
Hi, good morning.
Jim Congratulations.
Thanks, Ken I wanted to ask.
Thanks, I wanted to ask.
So for a similar call like this 10 20 years from now your retiring what do you want to be known for what are the biggest changes that you want to see.
Tyson I would the obvious.
You know.
Caveat that right now is a completely uncertain time for everybody, but I'm just curious about your long term strategy and the changes you want to implement.
So first first off I've been really lucky to get a chance to work with no entirety LT and the board.
For the past.
'cause past three years now.
And then on the Stratagen acquisitions Committee and we've all been working closely to make sure that we've got a long term perspective on the business that that that's not only leads to long term growth, but also tysons physician in helping see the world sustainably so.
If it's 2030 years down the road, we know we're going to add a few more billion people on the planet and we're going to have to.
Make sure that we can provide food for them and do it in a sustainable way and given sizes balanced portfolio or investments in alternative proteins and our global footprint we are.
We're confident that we can really take both position are doing that.
Okay. Thank you for that and then.
Follow up is I'm just curious if you got you guys talked about chicken margins, improving a little bit.
Can you give us some idea of the range. There obviously, you'll have some costs.
In terms of your mark to market or your derivatives that won't repeat but excluding that can you just give us some idea how things are beginning so far.
A month or so into the quarter. So we can.
Model up a bit more accurately as we as we look ahead.
Look I think as Joe here I think you could probably look at.
At some of the data coming through public data on pricing I think what that will show actually is pricing for the moment is a little bit weaker than we saw it in the middle of the quarter.
If you look then at some of the big impacts that Dean called out earlier in the quarter, we had $70 million with the worth of impact on derivatives.
And on a year over year basis that was there was 100 million Bucks. So certainly I can't say, what derivatives will do but that will be they impact going forward. The other the other cost. That's noteworthy is to call out the $340 million with cultivate cost chicken took a big chunk of that and as I mentioned earlier, we expected that run rate will be low.
[music].
If I think those are probably the big.
It's probably the big factors to call out as we get into this quarter.
Thank you.
Our next question comes from Michael Library of Piper Sandler. Please go ahead.
Good morning, and congratulations to you so at the end again.
Thank you.
Just wanted to touch on the guidance you mentioned in.
Chicken and prepared foods that you expect a decline in volumes in the fourth quarter.
Do we read that correctly that you think.
Beef and pork will be up or just that you're not sure and can you give us some of what the assumptions are around your thinking there.
Mike when you say beef and pork will be up.
In what terms.
Well I think its specific volumes that you mentioned the expected decline for chicken and prepared foods and so it would we infer correctly that the volumes in beef and pork are expected to rise.
Well, we're not going to give any guidance specifically on on on volumes. I mean, you can of course takeout are.
Comments that we've made this morning, but.
You could look back of course, this past quarter, and you'll see that beef and pork.
You know had considerable disruption NOL earlier talked about the backlog of animals of course, we're looking to get our our operations back to normal levels as quickly as you can so that's about all that detail. We can we want to give you looking forward I think it'd be fair to say, though as we come into Q4 that so.
Volumes are.
Stronger than what they were in Q3.
So relative to Q3, I'd say the answer would be yes, we're we're a month into our Q4 have compared relative to a year ago, but that's that's a different question because it depends on absenteeism, but theres certainly enough livestock to be able to ron equal or greater numbers in Q4 than a year ago.
Okay. That's helpful. And then just following up on your comment on Ass off you said it presents opportunities.
Obviously, there's been some expectation to that for some time and and it always seems to twist and turn in different ways and of course overshadowed by krona virus in some respects, but as you.
As you size it up and think of potential opportunities. There do you have any sense of how it's likely to play out or what we should be looking for FERC for catalyst there that maybe we haven't seen yet.
Michael I don't think that Theres really been any substantial change from roughly a year ago that.
Yes.
No it continues to spread, albeit at a lower rate than I think what it was a year ago.
There's been a substantial reduction and global hoggart, so others, there is down roughly 25%.
And the demand continues to to be equal or growing season. So.
Our outlook a year ago, it's no different today than it was basically a year ago that there continues to be strong demand from basically all parts of the world and including China. So fundamentals have not has not changed just refer back to Dean's comments it from a longer term perspectives that that.
Spect.
Global demand for protein to continuing to grow over the coming years that at a pace greater than what the expansion production is going to be.
Okay, great. Thank you very much.
Our next question comes from Adam Samuelson of Goldman Sachs. Please go ahead.
Yes, thanks, good morning, everyone.
Turning more so maybe continuing just thinking about kind of how the chicken business, specifically is evolving and I think going forward. It seems like you've got this kind of tension between kind of absenteeism on the workers side and the inefficiencies production challenges that presents to your top tier.
Production footprint.
And the ongoing disruption in foodservice markets and.
Any way to maybe give us sense of how those two have evolved over the course of last three months through July even just to help us down the trajectory of where things stand today.
And on the balance of those in terms of margin impact.
Oh, probably will breakout specific margin impact or what I will describe is.
The foodservice so I'll start with the latter first with foodservice the volumes have returned similar to nearly 90% depending upon the channel customer we've seen some areas of foodservice that are key key chicken customers performing extremely well.
At or near record levels.
So so that's that's performing well in some areas, we do have centers still struggling to catch up.
Distribution et cetera.
And then remind me in the first part of the question.
Hi, just absenteeism and the impact that's that's had on your cost and your production mix through the second or third quarter and into the fourth.
Sure a clear clearly we had had a big spike in absenteeism related to coded.
In a variety of other things.
Like I said before the trend line turn on and absenteeism is trending to the positive. So we we expect the absenteeism impact on our.
On our production to start to return to normal here relatively soon.
Okay and then my second question.
More of a clarification, but just going through the disclosure in the queue related to to retail sales by by segment looks like kinda chicken and prepared foods chickens up 8% year on year for retail sales prepared foods up 12, and I'm just trying to think about kind of the implications of that relative to what we see.
In the whether it's the core business lines or total Tyson.
[music].
Sales change the you put in your.
From Nielsen equal in your slide deck.
I know that there's some things aren't deli and some of the some of the tray pack product that can create some noise there, but I'm just trying to think about how to reconcile just the retail component of what you disclosed for sales growth.
Yes, I mean any metrics cells that'd be really difficult for us that sort of take you through the full reconciliation on the call, but well first of all I mean, great performance from the prepared foods team eight quarters in a row share gains so that that's not a flip.
But having said that that is just all of the branded all of the branded products, primarily prepared foods, but also in in chicken as well.
If you go if you look at that our core core retail lines are about two thirds of the branded retail volume. So just to give you a sense, but of course all the Nonbranded stuff also is coming through most of that is the food service. So when you go back to that node in the Q.
Big moves that retail up driven which is largely driven by that tuck that core retail move.
And then foodservice it down because of code.
Is that helpful.
Yeah, maybe I'll follow up offline I appreciate the color. Thank you.
Our next question comes from Robert Moskow of Credit Suisse. Please go ahead.
Hi, Thank you.
I think you talked about price negotiations that beginning for chicken and the fall.
I guess I've been although Arnold see egg sets turning positive in the last couple of weeks here.
Right.
Leading flock is up.
And yet total demand for chicken is down because of.
In this channel.
Is there a hope for a stronger negotiating power and this contract season.
Our.
This has supply environment that is.
Not conducive to.
To getting the price you need to get to normal margins.
But certainly appreciate your through diligence and looking into the public data, we're just not going to able to comment.
On what we'd expect to happen in pricing negotiations and it's just it's just too early to tell so.
Okay, and one follow up bigger evidence losses, I assume that's encore right because corn prices fell during the quarter or are there other overhead bins involved for chicken.
Now you are correct, Rob it was corn and soybean meal combination too.
Okay. Thank you very much.
Thank you.
Our next question comes from Ben There of Barclays. Please go ahead.
Hey, good morning, everyone. Thanks for taking my question I just wanted to follow up on the prepared foods commentary you've you've made on on Adam's question. So I wanted to understand what we exactly impact wasn't profitability, which clearly was down on a year over year basis, but you've mentioned the strength within the retail portion which brand.
At home and then obviously with weakness in foodservice could you elaborate a little more on how much actually input cost pressure you had from the raw material side, considering that brand that piece actually grew by the not brand piece within prepared foods declined opposite to understand a little bit the magnitude of the input cost pressure.
So.
I won't give a specific number related to input costs, but but clearly the increase in poor can be prices had an impact on our business as you know some of our foodservice business primarily.
As a formulaic in nature and there's some lag related to win the formulas ultimately materialize into our market price in the retail side and.
Some parts foodservice, we actually have contract pricing and the blips in input costs.
Come and go before we actually get back into price negotiations on those products.
We're also seeing.
[laughter] exceptional demand on the retail side too so.
Taking in all of the price is related to what we're experiencing beef and pork.
Could have a discretionary effect on on demand. So we're we're focused on growing that category and that's that's important to us so.
Not necessarily able to capitalize on the full spike in beef and pork and capture all that margin back.
Okay perfect no doubt that was that was good commentary. Thank you very much and then just one question as it comes back to the beef piece and your outlook into into next year and thanks for elaborating on on the capital you're seeing available.
So fair to assume this was obviously, a very strong quarter and how we should not assume that to be a normalized margin environment, but.
Thinking everything else equal what we would you were initially expecting for 2019 is most likely going for 2020 is most likely going to be where we should in than normal environment expect for next year, considering via the inability of cattle et cetera is that fair assumption.
Well this.
Ben This is all the fundamentals as we go into next year.
Demand has been strong.
Supplies or are adequate now.
Turning to forecast where margins will be next year roll up to this year, we're not we're not prepared to do that but the fundamentals then I would say.
Look favorable with continued strong demand and adequate supplies.
Okay I'll take it from there. Thank you very much. Thank you.
Our next question will come from Ken Zaslow of Bank of Montreal. Please go ahead.
Hey, good morning, everyone No best of luck in Dean congratulations.
Thanks, Ken Thank you Kim.
That is just two questions one is.
[noise] as you look at your balance sheet, you have more cash than Youve, probably has a long time.
How do you expect to.
Allocate that what is the thought behind that and how do you tie that into a strategy.
Well I would say for the time being with all of the uncertainty related to co that we think it's important that have ample liquidity to make sure that we can adapt we've invested heavily.
And to capital equipment, and a variety of things to make sure that we can service retail versus foodservice, we've seen demand shift in our markets.
Stuart you want to.
Yes, 10 look maybe just a couple other comments.
Very pleased obviously with our liquidity position, but just thinking about the fourth quarter.
We do have some some cash payments that are coming up we've got debt of almost $700 million that's going to.
Mature this quarter, we've got dividends.
You know, we called out of $1.2 billion, a cap capex for the year, So you've got about $300 million coming coming through and capital expenditures. There's a number of places in which cash will go out the door don't forget also.
And that as we see the market.
Got to improve then you're going to also csone some increased use of working capital so.
I think there a few specific things on the on the docket that will absorb some of that cash.
My second question is I know you talked about the direct costs, but the indirect costs can you provide the magnitude relative I know you probably not going to give an exact number but can we kind of size is bigger than a bread box.
Closer to $340 million something like that of how much indirect cost you think pressured.
The company's margins and where was the greatest degree and sort of kind of helping us frame and not so much to give away corporate secrets, but just helps us kind of forecast going forward. If that's okay.
Yes, Ken is no there's no specific way to give you a number on indirect costs and that's why we haven't called them out.
Obviously things like absenteeism causes a huge amount of disruption in our plants I think dean spoke to that that obviously does drive very different financial results, but there's a huge amount of of opportunity cost I mean, just think about at our our foodservice business is way down ordinarily that would be that would be operating a full steam so.
Very difficult to give you a number my best advisors to let's start with.
The current run rates and it makes some assumptions from that but can I think it's fair to say they were significant.
Like sort of said, it's impossible to quantify because a lot as opportunity costs. However product mix was also impacted in a fairly substantial way.
As far as a degree of impacted largely as depend on the number of team members that happened in each one of the sectors pull through has our groups number of team members. So they were impacted for greater extent than our other businesses.
But it's fair to say that that the likely impact was substantial.
We do see that.
Absolutely.
Back to normal three quarters back to normal.
Just some sort of Romit I know, it's really hard and I'm not trying to talk to into according to just trying to figure out.
The volatility of note.
Of numbers don't because this quarter is really not representative what's going to happen in the future I did this quarter is isolated event I'm just trying to figure out if there is a way to kind of start figuring out fundamentals and adjusting it for the in opportune cough.
Yeah Aliante.
Okay, Ken it's really it's not possible to do that but a lot of the inefficiencies were driven by absenteeism as Dean Jane said. This the that has improved so we can't give you a specific number of the degree, but it's better than what it was a couple months ago.
All right well anyway best of luck everybody. Thank you very much. Thank you. Thank you Ken.
This concludes our question and answer session I would like to turn the conference back over to Mr. No light for any closing remarks.
Thank you for your time today, well the pandemic has been challenging.
Convince will come through as an even stronger company.
The REIT portfolio right resources in the right team to drive long term performance and shareholder value through our strategy to grow deliver and sustain.
Once again I want to think or team members for their continued efforts. During this unprecedented times their health and safety are fundamental to our long term success.
Please stay safe and thank you for interest and Tyson foods.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.