Q1 2021 Tyson Foods Inc Earnings Call
Back in 1935, John Tyson motto was when better chickens are hatched, we will hatched them.
It's why today all of the Tyson chicken the bears his name will be raised with no antibiotics ever.
Every nugget.
Every strip.
And every drumstick.
Because everyone deserves something a little better.
Good morning, and welcome to the Tyson first quarter fiscal 'twenty 'twenty, One earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please limit yourself to one question and one follow up. Please note. This event is being recorded I would now.
I would like to turn the conference over to Megan Britt Vice President Investor Relations. Please go ahead.
Hello, and welcome to the first quarter fiscal of 'twenty 'twenty, One earnings conference call for Tyson Foods.
On the call today are Dean banks, President and Chief Executive Officer, and Stewart, Glendinning, EVP and Chief Financial Officer.
We have prepared presentation slides to supplement our comments, which are available on the Investor Relations section of the Tyson wildfire and three of the link to our webcast.
During this call we will make forward looking statements regarding our expectations for the future.
These statements are subject to risks uncertainties and assumptions, which may cause actual results to differ materially from our current projections.
Please refer to our forward looking statement disclaimers on slide two as well as our SEC filings for additional information concerning risk factors that could cause our actual results to differ materially from our projections.
Please note that references to earnings per share operating income and operating margin and our remarks are on an adjusted basis unless otherwise noted for.
For reconciliations of these non-GAAP measures to their corresponding GAAP measures. Please refer to our earnings press release on.
I'll now turn the call over to Dean. Thank you. Megan we are pleased to have you is of new member of our Tyson Foods family and appreciate your leadership.
I want to thank everyone listening for your interest in Tyson foods, and I want to think of our 139000 dedicated team members who come to work every day to help keep each other safe and feed the world. Your work is raising the world's expectations for how much good food can do.
Earlier today, we released our first quarter results for fiscal 2021, we delivered strong operating earnings performance exceeding $1 billion on operating income for the quarter.
The performance was driven by higher earnings in our prepared foods beef and chicken segments and demonstrates our effectiveness in addressing customer and consumer needs while.
While continuing to manage the ongoing effects of the global pandemic I am exceptionally proud of our global team for their contributions to the strong result.
Fundamental to our results are the considerable investments that we've made to safeguard the health safety and wellness of our global team members. This remains our top priority.
We also continue to monitor consumer trends the pandemic spurt of changes in consumer demand patterns and create a new operational complexities for our team we.
We have risen to the challenge that these changes have created reflects our footprint to adapt to shifting channel demand scaling retail production up dramatically and innovating with attractive retail offerings.
Our investments into insights innovation and R&D are helping us win with consumers as demonstration. We now have delivered 10 consecutive quarters of retail volume growth across our core business lines.
As we navigate continued market volatility we are focused on operational excellence and disciplined cost management during.
During the quarter, we realized cost savings and progressively improved our order fulfillment results were.
We are also on track relative to our stated capital allocation objectives and of prioritized key growth investments to diversify our asset base looking forward I am confident that our team is executing on the right priorities to meet our commitments and drive shareholder value creation.
Turning to slide for team member Health and safety is and will continue to be our top priority. We have an intense focus on team member wellbeing is a fundamental driver of engagement and satisfaction across our enterprise.
This quarter, we announced the hiring of of Chief Medical Officer, We welcomed Dr. Claudia Copeland in January and look forward to her additional leadership and ensuring that our organization continues to remain vigilant and aggressive towards overall team member of wellness.
We have also hired 200, new nurses and administrative staff, bringing the total occupational health staff to almost 600 team members with these resources, we are advancing our health and safety priorities to support our vaccine rollout and build our wellness programs.
We're also opening seven pilot health clinics for team members and their families. This year to increase their access to health care in the communities, where we operate.
I am exceptionally pleased to report that our advanced preparations investments have allowed us to start COVID-19, vaccinations on a limited basis as vaccines have become available.
We've extended our ongoing partnership with matrix medical of leading clinical services provider to prepare for broad vaccine distribution and to ensure the U S. Team members are educated across multiple languages about the COVID-19 vaccine. This is part of our ongoing effort to ensure our team members have information and access to the best protections available.
In addition to supporting vaccine deployment, we continue to use testing is a major component of our COVID-19 monitoring strategy and part of our health and safety measures to protect team members. We're testing thousands of team members every week and currently estimate that we have tested more than half our work force.
Our always on testing strategy is another proactive step in our efforts to search for and fight the virus.
The result of our proactive approach has been a dramatic reduction in COVID-19 occurrence within our plants the strong accomplishment given the surge in cases nationally.
As we look forward to the prospect of recovery in the months ahead, we have an incredible opportunity through our leading position in sustainability and social responsibility to drive a more sustainable future for our company and our planet.
We are excited for the upcoming publication of our annual sustainability report later this spring, which will show continued progress across our three key focus areas, including empowering people conserving natural resources and cultivating innovation in agriculture.
As I consider our impact on these important objectives I'm very proud of how our teams continue to drive progress and their tireless efforts towards the lasting change.
Since February of 2020, Tyson has donated nearly 90 million meals to aid hunger relief efforts in our communities and we will continue to support those local communities where help is needed.
We will also improve our environmental footprint as we feed the world. In fact, we were the first across our peer group to announce the greenhouse gas reduction targets that were accepted by the science based targets initiative of bold commitment to achieving a 30% reduction in greenhouse gas emissions by 2030.
We are also committed to leading in the advancement of animal welfare outcomes with transparency to this end. We recently partnered with the University of Arkansas Division of Agriculture to fund research and animal welfare and commercial broiler farms, which will guide industry efforts to continuously improve welfare for the birds entrusted to our care.
These initiatives and many more to come solidify tyson's position as the leader within this space and our consistent progress is being recognized.
We ranked number one in the food production category on the 2021 Fortune magazine's world's most admired companies list. This is our fifth consecutive year in a row to receive that recognition.
Turning now to slide six while we've experienced an operating environment that has seen pockets of volatility over the past few quarters. We are starting to see consumer behaviors stabilize within the retail and foodservice channels are diverse protein portfolio continues to be well positioned to support current consumption patterns.
Consistent with our experienced last year continued strength in at home consumption is delivering historically high retail and E. Commerce sales, we continue to outperform peers with stronger retail volume growth.
Our total Tyson and core business lines have posted 10 consecutive quarters of growth and four straight quarters of double digit expansion continuing to outpace total food and beverage volumes and core business lines were up nearly 14% during the latest 13 weeks and 19% during the latest 52 weeks.
Our growth during these periods was driven in large part by our ability to bring incremental households into our brand and product lines total Tyson household penetration reached 81% and we continue to see an increased number of shopping trips that included of Tyson product up 11% versus a year ago.
As consumers increase their reliance on low to no contact buying methods during the quarter, we experienced E commerce sales growth of 89% in the latest 13 weeks compared to last year. This equated to approximately $330 million of sales through our ecommerce channel partners.
We expect E commerce channels to remain very relevant moving forward as consumers maintain and shift to convenient low to no contact buying methods.
Foodservice volumes were still down relative to pre COVID-19 levels, but our channel and category mix sets us up well for a recovery as nationwide vaccination efforts are expected to drive more away from home protein consumption occasions.
It is important to note that some foodservice operators of adapted very well to the current environment and of embraced drive thru and takeout.
Many of these operators are not seeing the volume declines others have and some are even outpacing historical pre COVID-19 performance.
Winning with consumers by meeting their needs is core to our strategy and new innovations are a big part of that turning to slide seven we are excited to share some new product launches that are showing signs of early success.
Our air Fried Chicken line has been in market for just over a year and is already showing great momentum with very strong repeat purchase rates.
We're proud of how our innovation capabilities help us meet consumers' health and wellness needs and of driven new buyers to the category approximately 11% of volumes from the air fried lines of initial launch period were generated by new consumers.
Jimmy Dean one of our iconic billion dollar brands recently extended into the breakfast Burrito category and natural progression for an industry, leading product line rooted in convenient and <unk> offerings across breakfast occasion.
We're seeing strong incremental Jimmy Dean volumes from this product offering as well as solid repeat purchase rates.
And just last month, we launched new alternative protein offerings under the Jimmy Dean label, including the plant based Patty croissant, which is already exceeding our original demand forecast.
Recognize and trusted brands like Jimmy Dean provide a powerful platform to offer of plant based options, which is an illustration of our one Tyson strategy inaction.
Each of these exciting product launches reaffirms tyson's ability to bring innovative and on trend products to market as part of our overall growth strategy.
This innovation engine create synergies across not only the retail channel, but also foodservice.
Turning to slide eight we are also making progress on several other key strategic areas that will create long term shareholder value for.
First the core part of Tyson strategy is operational excellence, we strive to produce high quality products with efficient operations and top notch customer service, we are working aggressively to realize improvement opportunities, especially in our chicken segment.
Later on the call Stewart will share additional detail on our actions to improve operating results in the chicken segment in general to our ongoing financial fitness, we are pursuing significant cost savings opportunities across our business next we are making the organic investments necessary to meet growing global protein demand our internet.
One of the platform increasingly provides an opportunity to grow overall sales and margins by leveraging our global production capabilities to reach an international customer base, we're using our one Tyson framework to identify synergy opportunities and to maximize the value from farm to table at the global level because of our existing depth of experience and protein production brand management.
And global customer relationships, we believe we have the right recipe for growth and the right to win in these attractive international markets.
Overall, we estimate that approximately 60% of our capital expenditures are going toward growth objectives.
In the area of increased investment is value added capacity expansion and automation technology, which will support increased sales high efficiency processing and better customer service. Among others. In addition, we are using technology to improve employee health and safety animal well being and environmental management.
Lastly, our capital allocation priorities build financial strength, allowing us to continue to invest in our business and return capital to shareholders. We.
We have disciplined processes to ensure that investments, we make optimize our returns and drive long term shareholder value. We are also committed to return capital to shareholders. Our business performance has allowed us to increase our dividend per share each year for the last nine years.
I'd like to move now to a review of our first quarter fiscal 2021 performance for the total company, which is captured on slide nine we delivered sales of $10 $5 billion in the quarter slightly down versus the same period last year volumes were lower primarily due to reduced foodservice volumes, partially offset by higher retail.
Volumes note also that the $320 million charge related to our poultry litigation accrual was recorded as a reduction of sales in the quarter.
We delivered operating income of over $1 billion during the quarter up 24% versus the same period a year ago. The company experienced strong operating income performance in beef and prepared foods, while the pork segment softened in the chicken business showed signs of improvement.
Total company operating income margin was nine 5%.
This strong performance resulted in a $1 90 for an earnings per share for the quarter, an increase of approximately 28% versus the same period last year.
In line with our focus on team member health and safety, we incurred $120 million of direct incremental COVID-19 costs. During the first quarter. These costs have not been adjusted out of our results and include items, such as PPE testing medical partnerships product downgrades donations as well as enhanced <unk>.
Employee pay and benefits.
Overall, our business performed well during the quarter, while showing profitability and operational improvements on a year over year basis in key areas.
Our retail business has seen continued strong performance as a result of our depth of brand and product offerings based on our growing share positions and increasing presence within consumer shopping carts. We believe we're well positioned for continued strength of retail.
We're also partnering with our foodservice customers to ensure they are prepared to meet increasing channel demand as the COVID-19 vaccination rollout continues and consumers gradually become more active away from home.
Finally, I am proud of how our team and business performed but we certainly still have growth and execution opportunities ahead that we are actively pursuing.
I will now turn the call over to Stewart, who will share our detailed financial performance before I return to provide closing remarks.
Thanks, Steve and good morning, everyone, starting with prepared foods sales with $2 1 billion for the quarter roughly flat versus the same period last year.
Reflecting higher retail on lower foodservice sales.
Total volume was down 9%.
Segment operating income was $266 million for the quarter up 48% versus prior year.
The substantial improvement in profitability was driven by strong retail performance lower commercial spending as a result of continued strength in retail demand and lapping of issues experienced as a result of our ERP rollout last year offsetting.
Offsetting these improvements were higher costs related to commodity price increases and other input cost inflation.
Along with Covid related costs and impacts on our manufacturing efficiency.
As demand gradually normalizes post COVID-19, we expect higher levels of commercial spending in order to meet our category growth objectives and negative mix impacts from higher foodservice volumes.
As this shift occurs we expect some benefits from improving fixed cost deleverage as volumes increase back to historical levels.
Operating margins for the segment were 12, 6% for the first quarter, an improvement of more than 400 basis points versus the comparable period.
We're also happy to see our business operations stabilizing in key areas, which has allowed us to improve our service levels as well as fill rates with our customers.
Moving on to our chicken segment first quarter results showing improved operating income relative to the same period last year.
Segment sales were $2 8 billion for the quarter down 14% versus prior year in large part because of a $320 million reduction in sales from the poultry litigation accrual.
Volumes were down 7% relative to the same period last year, primarily due to lost foodservice sales.
But were offset by bright spots in our retail value added categories as well as strong sales to certain national account Kyocera change.
Sales and volume continued to be impacted by both channel shifts and intermittent operational issues, resulting from the pandemic, including higher absenteeism at our production facilities.
Segment operating income was $104 million for the quarter up 33% versus the same quarter last year.
The operating income improvement was driven by price increases on certain products and cost saving initiatives as we continue working to improve the competitiveness of our chicken operations.
We also saw a positive impact from derivatives of approximately $70 million in the quarter.
Operating margins for the segment improved 90 basis points to three 3% for the first quarter.
We are driving actions in three areas within our chicken business in order to restore top tier performance.
Being the employer of choice improving operational performance and a relentless focus on serving our customers' needs.
Higher levels of absenteeism on turnover have created inefficiency in our operations as they lead US short of team members to fully staff of our plants and also drive higher levels of overtime pay.
As a result, we're implementing a range of measures designed to enhance the attractiveness of our production related roles, including increased pay and the use of automation and technology to supplement some of the more difficult on the high turnover of jobs.
Next our process flow and the plant has not been optimal and we've been working steadily to correct. This.
Clearly the disruptions caused by Covid have not helped but we're starting to see improvement and expect that to continue during the year.
This will be the source of considerable savings over time.
Lastly, COVID-19 channel shifts and volatile demand have negatively impacted our order fulfillment rates.
The changes we've made the plant operations in response to Covid are yielding improvements and we expect of further improvements for will result, as we reduce our staffing gaps and drive operational flow improvements. This is of course in addition to the benefits expected as foodservice begins to recover.
Moving to the beef segment.
First quarter results show, an improvement relative to the same period last year.
Segment sales were approximately $4 billion for the quarter up 4% versus the same period last year.
Key sales drivers include strong domestic and export demand for beef products with volumes up five 6% for the quarter.
Segment operating income was $528 million for the quarter up 45% versus prior year.
Operating income improvement was driven by higher volumes as we lapped the prior year impacts of our Finney County plant fire.
We also realized a $55 million gain related to recoveries from the catalyst supplier of fraud offset by higher COVID-19 related operating costs. These.
These higher costs were mostly driven by bonus paid to our frontline team members.
Note also that the comparable period last year was revised down by $68 million associated with the cattle supply of fraud affecting the year over year comparison on.
Operating margins for the segment improved 370 basis points to 13, 2% for the first quarter.
Now, let's move on to the pork segment on slide 14.
The first quarter results show, a softening relative to the same period last year segment.
Segment sales were $1 4 billion for the quarter up about 4% versus the comparable period last year.
The sales drivers for the segment included lower volumes as a result of temporary idling of one of our production facilities offset by stronger demand.
Volumes are down 3% for the quarter relative to the same period last year.
Segment operating income was $116 million for the quarter down 40% versus the comparable period.
Operating income degradation was driven by production inefficiencies the temporary idling of the previously mentioned production facility and Covid related operating costs.
We also experienced higher live animal cost, which was not fully offset by price.
Operating margins for the segment declined by 590 basis points to eight 1% for the first quarter.
Moving to slide 15, I'll share the quarterly results impact on certain cash flow and balance sheet metrics on.
Operating cash flow totaled $1 4 billion up nearly $500 million versus the prior year.
Liquidity strength into $4 2 billion as of January 2021.
Gross debt to adjusted EBITDA of two six times was down slightly compared to prior year end.
And on a net debt basis, we were at two times aided by the strong cash flows in this quarter.
Net interest expense totaled $108 million.
Our adjusted effective tax rate was 23, 5%.
Capital expenditures came in at $289 million.
We paid $159 million of dividends during the quarter and purchase of $17 million of shares related to our employee stock plans.
Turning now to a discussion on our financial outlook clearly an important headline this quarter as the sharp rise in grain costs grain.
<unk> futures for 2021 have continued to strength in due to diminished stocks to use expectations for corn, and soybeans and strong export demand, particularly from China.
We expect hedging and pricing actions will allow our team to mitigate some grain cost impacts moving ahead, but at this time. It is difficult to estimate just how much can be mitigated through those actions.
As a reminder of 10 cent per bushel, moving corn price or a $10 per ton moving soybean meal translates into an approximate change of $25 million and cost of goods sold.
We have also seen some recent inflationary pressure in our freight costs largely due to a shortage of drivers in our international and export businesses. These freight dynamics are manifesting themselves through increased container costs.
Our team's effort to mitigate future freight and transportation risks will continue to ensure our products are shipped efficiently and effectively to meet customer needs.
Lastly, looking at our assumptions related to the adequacy of live animal inventory live cattle inventories remain ample to support our beef business and we believe hog inventories will remain adequate despite a small decrease in supply.
Having said that both cattle and hog futures have moved higher since October and we're working to minimize the impact to our business, particularly in the prepared foods segment, where retail prices do not move as dynamically.
Slide 17 captures our financial outlook for fiscal 2021.
We expect to deliver annual revenues at the top end of our previous range of 42% of $44 billion.
Supported by our strong first quarter performance.
We also expect our directional annual guidance versus last year of improved operating margins in prepared foods and lower operating margin is important to hold of.
At current grain prices operating margins in chicken will likely be lower than prior year.
Because of the stronger than expected performance in beef and current market conditions, we expect beef to deliver on operating margin similar to last year's 10, 1% on marginally lower.
The risks of this guidance include freight rates as well as labor availability and cost across all segments.
Grain costs in the chicken segment.
The raw material costs for our prepared foods business and continued export market strength.
We are revising our capital expenditures outlook to one three to $1 $5 billion as we continue to build capacity across our network. As we noted last quarter. The majority of the spend will be toward capacity expansions in chicken in case ready beef and pork prepared foods and international.
Net interest expense is expected to be lower than our previous outlook at approximately $430 million, which reflects a recent term loan repayment of $750 million that occurred during our second quarter.
Our outlook on effective tax rate is unchanged, but we will continue to monitor the potential implications of legislation from the new administration on.
Our expectations related to liquidity our unchanged, although we expect our liquidity the decrease from $4 2 billion at the end of the first quarter based on the term loan repayment as well as our seasonally higher cash usage during our second quarter.
Finally, we have continued to invest in health and safety and wellbeing of our team members on our COVID-19 related costs, which totaled $120 million on the quarter on now expected to be approximately $440 million for the year.
It remains to be seen what portion of these costs will be permanent.
Now I'd like to turn the call back to Dean.
Thanks Stewart in summary on our multi protein portfolio delivered strong first quarter results that will create the fuel for disciplined investments in higher margin higher growth opportunities ahead, and we will seek opportunities to remove unnecessary costs and invest in the right areas of <unk>.
Retail performance of showing tremendous strength and our operational flexibility positions us well for a gradual recovery in foodservice volumes.
We remain focused on fostering a culture of health safety and wellness and protecting our team members through workplace protections and of leading COVID-19 monitoring program as well as our vaccine preparations.
I'm energized by our team's commitment to delivering healthy safe and accessible protein to global consumers their ability to continuously innovate and their ongoing emphasis on operational execution.
We are optimistic about the continued success of Tyson foods is our diverse portfolio has us well positioned for long term sustainable growth and with that I'll now turn the call back to Megan.
Thanks, Dan we'll now move to your questions. Please recall that our caution on forward looking statements and non-GAAP measures apply to both our prepared remarks and the following Q&A opt.
Operator, please provide the Q&A instruction.
We will now begin the question and answer session.
To ask the question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two please.
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.
The first question.
Comes from Ben the end of the New <unk> with Stephens Inc. Please go ahead.
Hey, Thanks, good morning, everybody.
Good morning, Ben.
I've got two questions one about guidance and then the second of kind of bigger picture strategic question.
First on guidance I wanted to focusing on the chicken guidance given that I think most of the other elements of our guidance makes sense, but I wanted to probe on chicken.
I understand the view around rising grain costs.
And I know it.
Relatively low stocks to use debt.
B of particularly tight environment this year.
When you juxtapose that with what chicken prices have done year to date I'm curious around what's embedded in your outlook as it relates to chicken prices.
For the year relative to grain costs.
And then also relative to last year, which was was tumultuous for the industry and for you.
You've had some unusual charges on costs last year.
In some ways of artificially suppressed your chicken margins.
So maybe talk about that relative to your view on your guidance. This morning that chicken margins will be lower year over year.
Sure Ben first off thanks for the question. Thanks for the interest in the company.
As you saw in the slide presentation.
We are making substantial investments towards improving the chicken business overall.
First off and being the employer of choice.
We're making investments in operational performance and really getting our fill rates up to ultimately service of our customers.
Those are not those are not bullets on the slide those are actions that are actively taking place and as we said before we are one of the world's largest chicken businesses. So it's going to take some time for those activities to materialize into our operational performance overall.
As it relates to the pricing as we've said before.
A lot of the pricing and the company happens for poultry happens in the first and second quarter, we've made substantial progress there and are.
Per satisfied satisfied with how it's coming together.
Okay. So.
Just as a quick follow up on that when we look at kind of commodity chicken markets.
I guess, we need to assume a more tempered impact of the dynamics in that market on your chicken sales prices.
To square up with your guidance and in your release this morning that a fair characterization.
The interest of industry as a whole of certainly facing a number of headwinds with cranes.
The transportation costs labor et cetera.
We're managing those the some of that's on controllable.
We'll see with vaccinations, we will see foodservice recovery, but.
Its effect on price.
I'll knock on for John.
Okay fair enough.
My second question is kind of bigger picture.
On the the renewable diesel industry and the projected growth in that industry, that's growing rapidly.
Even already a pretty meaningful impact on bringer of animal fats.
And Richard animal fats pricing.
You guys are large ringer in the chicken operation I'm curious one how you think you're positioned relative to that bigger picture structural demand driver and two <unk> you can comment on that.
And how actively you are involved in being of feedstock provider to any producers.
For a few things there the rendering as it is a fantastic part of our business. It gives us certainly some improved margins that we can make full use of whatever animals are entrusted into our care.
It also gives us a lot of flexibility.
In production.
So the purchase of API that we made a few years ago has turned out to be great for the business.
You May also know that we've made an investment in a joint venture with Jacobs turns in our beef and pork business to take a lot of the the byproduct and make that ready and more ready for renewable diesel.
That's a great partnership and progressing well.
We do see strong demand for all of the animal byproduct that could be going into that space and we think it's a promising part of the business.
Okay, Great and best of luck. Thank you.
Thank you.
The next question comes from Adam Samuelson of Goldman Sachs. Please go ahead.
Yes, thanks, good morning, everyone.
Good morning, Good morning, Adam Good morning, Good morning, So I guess just.
Continuing on the chicken business, so I guess I'm trying to make sure I'm thinking about the moving pieces here properly.
Is the outlook.
The revised outlook for profit to be down year on year is that.
Solely a function of grain is the is there is some of the absorption of the incremental COVID-19 costs has your underlying productivity kind of expectations.
Change in a material way kind of thoughts on Nick on just trying to make sure I understand how the how the view has evolved since you gave the outlook in November and maybe put a finer point on some of those buckets.
So like I said on the previous answer we are investing heavily in getting that business back on track.
And we do expect the foodservice recovery to help with some of the historical deleveraging we've seen there as we convert business for.
Back to back the foodservice.
Stewart do you want to add anything yes, that'd be great look in the in the presentation, we shared with you some.
On specifics on where we are working in chicken. We wanted you to be clear that we understand where the challenges are and we and where we are making changes with respect to the change in forecast Youre right. I mean, the biggest change is greens minute that the change in pricing in <unk> has been nothing less than enormous and that is going to weigh on the business.
So that's the simple.
The easiest answer.
Okay.
That's all very helpful. And then as we think about maybe beyond this year I'm just look the grain environment is what it is the.
Things will work themselves out one way or the other either.
Pricing in the industry will move.
The move higher over time or Greg it.
It will actually will get back into surplus of one day.
Help me.
The view on kind of through cycle profitability in the chicken business change or how do you think about kind of where the opportunity really is I mean, the business has had.
Been a lot of different places from a profitability perspective in the last five years seven years and I think we're all kind of struggling to calibrate a little bit where the portfolio is currently structured can really get to in a normal market environment when it's executing properly.
Yes, I think we described before that we do expect the operational improvements that we're making the materialize in the second half of the year.
And really really show up in 2022.
Again with being on.
One of the largest flow.
The three businesses in the world. It takes some time to get those operational improvements back on track, we've put Donnie King in place of of very strong team. There that are that are really on top of the things that we know that we need to improve to be.
To be where we want to be.
The long term supply demand dynamics of the the classic goes recycles on not necessarily going to comment on but I will say debt or our ability to value up our portfolio into our retail businesses and to add features and attributes of that bring new households into our brands and into our poultry business like you've seen with air fried are nothing short of except.
I think that gives us a real advantage in the future to expand upon to make the business not only competitive but women winning in the space.
Okay I appreciate the color gene I'll pass it on thank you.
Thank you.
The next question comes from Peter Galbo of Bank of America. Please go ahead.
Hey, guys good morning.
Taking the question.
Good morning.
Maybe the pivot a little bit to prepared foods.
The slide I think of <unk> and the gap Inc. Is helpful. In understanding kind of some of these some of the input cost and understanding that maybe it's foodservice comes back if theres, a little bit of a negative mix, but.
I wanted to shift the conversation to.
Pricing ability there within prepared foods, maybe on the retail side.
Youre seeing this level of the deep levels of employee churn.
Anything you've done or anything you've seen in your internal research that would say.
Consumer the elasticity of our different this time around whether its due to higher savings rates or people being stuck at home even in a post COVID-19 world that you feel like your ability to pass on pricing in prepared foods, this time might be might be easier.
So just given some of the dynamics of the consumer that have changed and then all of a follow up as well.
I would say that we do see.
Higher consumer interest in spending on foods I think thats benefited of couple of our businesses prepared foods is one the beef is another just very very strong demand.
And again, our flexibility from retail to foodservice is going to allow us to step in and meet consumers wherever they are some some of the costs that we incur we can happily pass along to customers.
Some we can't that we do see rising input costs there but.
So we're very very well positioned with the portfolio to meet consumers, where they are and make sure that we're able to take care of them.
Okay.
Maybe just one on on chicken and then maybe to ask the Adam's question in a bit of of a different way.
Looking at the three kind of pillars, you guys of outline for for improving chicken.
Those are those of all helpful for from our perspective, but.
I guess, what's top of.
It's hard for us to view this from the outside perspective and to understand if things are actually going right underlying so.
Is there any way for us to track how these improvements are going from an external basis or anywhere you would want the skyros for us to know that youre on the right track.
I would say that.
What what you can do is take a look at our historical financial performance.
Steve where we're going a lot of the market indicators related to our retail product performance is indicative of us being able to gain customer traction there and then you can probably look back debt the.
The historical foodservice performance.
With some rough estimates and see that when we pick pickup foodservice when that volume comes back and we can pick our volume back up that the operational improvements that we've put in place are going to help us deleverage for fixed the deleverage and operate at a higher level.
Okay. Thanks, very much guys.
The next question comes from Ken Goldman of Jpmorgan. Please go ahead.
Hi, good morning, and Meg and welcome.
I wanted to ask about the guidance improvement I know, it's not officially quantitative but the tones better on I just wanted to ask how much of that is from underlying fundamentals getting a little bit better versus the change in comp period results and the gain from your cattle supply.
Share issue I, just wanted to get a sense of what the underlying I guess dynamics out there.
Generally the dynamics are very good for the business and the team is managing those dynamics extremely well there's.
Very strong demand.
And really all channels, including exports.
And from a supply perspective.
Really clear that we have seen a slight downtick of about one percentage breeder stock, but the cattle supply remains remained strong for the business and for it.
As we've said before it's the spread business. So the operational component of the teams are nailing and the dynamics for the industry are actually looking attractive.
Thanks, and then my follow up is.
A little more than 10 years ago grain prices for even more volatile than they are now at the time of the chicken industry reacted.
And part by changing some of its pricing dynamics. So I think some agreements went from once a year. So maybe adjusting a few times of year.
You have dozens of pricing mechanisms and agreements, it's probably understanding it but in general do you have the desire and the ability to amend some of your contracts. So that you get a little bit closer to cost plus across the board in chicken or something of effectively like that I guess the reason I'm asking is I think the stocks multiple sometimes is held back by.
On predictability and the more that you can.
Have to worry about grain because of there is an.
On adjustment mechanism for your chicken prices the better I'm just curious about your thoughts along those lines. Yes. There is a variety of mechanisms that we use in managing input costs, we've talked about the hedging and forward strategy were when we signed agreements we do try to lock in the price for those agreements to fix the margin.
As it relates to the market pricing.
As we've described before there's a lot of different mechanisms of some cost plus some market based et cetera, I can't really give any.
Input on how we would consider changing pricing mechanisms for obvious reasons.
Okay. Thanks, Steve.
No problem.
The next question comes from Ken Zaslow of Bank of Montreal. Please go ahead.
Hey, good morning, everyone.
Good morning, Ken.
My first question is.
You said that 60% of your capital spending is going to growth.
<unk>.
I mean, where you are.
The little struggling with your operational efficiencies, particularly in chicken.
Why not dedicate more resources to that to ensure the margin structure gets to where you want to do on an operational basis, rather than focus on growth.
A philosophical question of gas yes.
Yes, Ken I wouldn't necessarily of conflate those two things I think first of all on the chicken side all of resources that are necessary to help bring net business back on.
Being deployed debt so absolutely no shortage of of investment there, but when you look across the portfolio.
There are a number of places where we have opportunity to grow our business by adding capacity.
You think about R. R.
Case ready plant debt assessing in Utah, we've got a number of opportunities in prepared foods and we recognize that unless we put money ahead to meet that capacity, we're going to be in a place, where we where we miss out on sales.
Okay.
And then my.
Follow up question is what is your ability of realize the higher pricing in chicken it sounds like.
I understand the feed cost side, even the operational side, but it sounds like.
We're seeing breast prices move we're seeing like prices move wing prices are pretty substantially higher.
And yet it doesn't seem like you're fully incorporating is it just because of the contracts you have to kind of get through and we will start to see that by the end of the year or into next year. How do you think about the just the realization of pricing seems a little bit more delayed than I would've thought.
We are obviously good.
Gaining from the the market prices, we do have some buy versus growth strategy.
Where we do buy from the breast meat on the market et cetera.
I can't really comment on pricing looking forward.
<unk>.
So I can't comment there Ken the only thing I'd say is debt to Dan's earlier comments, we have a wide range of pricing mechanisms. Some of those of as we've shared in the past fixed over a longer period of time plenty of those enough kind of move as quickly others are spot and we will respond quickly.
The market rises.
I wouldn't discount obviously, the fact that.
My earlier point, which is that the move in grains was pretty substantial.
I Wouldnt overlook either the increase in transportation costs debt.
That we're seeing in the marketplace.
Dave.
Factors, there that are going to play out in the P&L.
Okay I appreciate it good luck.
The next question comes from Ben Theurer of Barclays. Please go ahead.
Yes, Hey, good morning, Deane Stewart.
Thanks for taking the question congratulations on the surprisingly strong quarter.
Quick two quick ones. So so first of all within the broader.
Concept of chicken and obviously your investments in new plant for just to understand and if you could maybe reiterate what you've said about three months ago.
So clearly there is still going to be the startup cost of considered right and that's part of your guidance just to be clear on what you said three months ago to have this properly reflected in the model is that correct. Yes. That's correct I will just give you a little bit of update on net.
I did say at the time that of the startup in Humboldt was going to cost about $100 million, that's coming in a little less expensive day now and we think it's going to kind of run about $75 million on the year.
Okay perfect. That's the good update and then John.
Just following up on a little bit on.
On the beef segment and what you can do obviously Darren.
Really looks like it's going it's going to be a very profitable year.
How do you think about the beef business more on the medium term I mean, clearly it's been on a on the profitable basis and on a strong run rate over the last couple of years now all of last year was by far exceptional you expect in of a very very strong year in 'twenty, one with the updated guidance, but where do you think this is going to turn out in more of like.
The normalized run rate, how do you think capital suppliers are going to work through and where do you think.
There might be a little bit of a headwind of grain prices for it to stay high to reflect also maybe higher capital prices and how can you prepare for that.
So we.
We do see the <unk>.
Well Greg.
<unk> is a slight down tick in could decline over time.
Heard suppliers are actually still very very strong into the foreseeable future.
And what is also.
Quite quite good for the business as the demand is very strong and so we feel like the business is positioned good for the long term, we're not setting long term margin guidance for the business, but we feel like the dynamics dual of positive into the foreseeable future.
Okay perfect I'll leave it here. Thank you very much.
The next question comes from Alexia Howard of Bernstein. Please go ahead.
Good morning, everyone.
Morning, Alexia good morning.
Hi.
So coming back from the prepared business on the <unk>.
Margin, obviously improved very nicely the time around.
You mentioned the <unk> pulled back on the marketing spending I'm just wondering.
In fact on assuming that that comes back on I would like to hand on what you.
The plan was off the marketing spending going forward.
Is that is the kind of the margin run rate, we might expect on that business or is the sales lumpiness that could that could play out of that.
A few things that I would just emphasize you are correct that we will.
Continue to reinvest in marketing and advertising as as needed there's been such strong demand and now.
And then on stripping production in many ways and so we've pulled that cost back for the time being it will ultimately return we won't be giving projections necessarily on how much that will return to the.
The other thing to keep in mind is just from the mix perspective.
We've been thrilled to.
Having consumers go to retail outlets in order to get our foods, we will see foodservice recover and from the mix perspective that will come in probably at a slightly lower margin and therefore.
We do know that prepared foods, we will have some normalization as foodservice ultimately recovers with vaccination rollouts et cetera.
Okay, Great and then the follow up on.
On the pork side of the Big day.
Can you talk about the strength of the yeah, the export market at the moment.
You talked about that in recent quarters, particularly given the African swine fever that dynamic.
As we see the swine herd in China.
Kind of get back to not quite normal level side.
Moving in that direction.
Do you think that the that whole dynamic of African swine fever, pushing on global pulp price is.
<unk> innings of wheat, I guess is the question.
We more than halfway through that at this point I imagine we on it.
It's hard to project to be honest, we still hear reports of ASF in China. We also do know that they are making aggressive measures to build a commercial herd, there and making making some progress towards that.
We've seen the global redistribution of protein related to ASF cases in Germany in Vietnam and others.
That's.
On that continues to play itself out generally positively we see very strong demand for.
Pork, which is helping offset some of the increase in hog prices.
And.
And so far the the business is performing well projecting ASF is very difficult we have seen historically.
To take the decade, plus to recover from ASF in certain markets and so we hesitate to call whether or not we're halfway through that.
Thank you very much I'll pass it on.
Thank you.
The next question comes from Michael <unk> of Cleveland Research. Please go ahead.
Yes, good morning, I, just wanted to get up the flavor.
Flavor on the pork side of the business are you doing anything in terms of trying to prepare for California's prop 12, which is supposed to take effect next year.
So we were obviously aware of the legislation we are looking at the impacts on the business, but otherwise can't comment.
Okay, and then I guess.
Just kind of shifting gears over back to the peak side a little bit.
I know you mentioned that you think there's going to be adequate available ability of our cattle on what are your expectations in terms of as we progress through the year in terms of cash.
On the cat awaits the grading and does that have any impact on your mix.
Weights come off between the choice slack or is it relatively are you guys relatively indifferent.
Theres any changes in the way it is kind of moving forward.
Whether it's weather or Greens, we will we will always be looking for the most of the.
<unk> value in the most valuable capital on the market, it's not really at this point not really the time, where we can project out impacts from that although our team has done a phenomenal job at buying in the marketplace and making sure that we get the rate cuts and we can put those out in the highest margin highest value we have invested.
<unk> and our and our portion of business, we have capacity coming on line in a couple of places.
And this year and next and I think thats going to actually continue to support both beef and pork in those businesses as we continue to add value and really meet the customers, where they want to volume with the portions of the pieces that they want.
Okay. Thank you.
And just to reiterate is the time for one last question today.
One last question.
Thank you that question will be from Michael Lavery of Piper Sandler. Please go ahead.
Thank you good morning.
Good morning, John.
I wanted to touch on the international piece of the business.
I guess, maybe understand how much if any of the growth Capex is there is directed there and where you see the biggest opportunities internationally either from an organic growth perspective or potentially interest in M&A.
As we've said before the international markets are where we see the majority of protein demand growth coming from going forward. We're really proud of our teams embracing the one Tyson concept and looking at how we can use our global footprint to take.
Whether it's a variety of meets in the U S and export those and have those valued up into the global marketplace.
On the acquisitions that we've made internationally are really helping us.
Both in further processing product that's exported from the U S. But also in.
And really taking.
Taking advantage of synergies related to different skill sets functions innovation that we've established globally. So the.
On the international businesses of continued focus for ours will continue to invest capital from an organic perspective, and we are always looking for acquisitions you've seen the recent.
<unk> debt, we are partnering with millions of flour mills there'll be more deals like that and others to come.
On the end of the thing I'd, just add on top tier of specific on the Capex Michael that.
We have announced investments in plants in both the <unk>.
In both Asia.
As well as in Europe. So, yes specific money is going there to build out new capacity to meet the demand that we see.
Okay, that's great. Thanks.
Just a follow up on the Jimmy Dean Clamped based Patty could.
Could you just touch on some of your thinking using the Jimmy Dean brand with plant based and what the consumer insights we are behind that and how you think about that launch.
Sure sure that the brand has just tremendous.
The value to the customer and if you've been to a retail grocery store and looked at the freezer, the breadth and depth of debt portfolio resonates with just a variety of customers plant based protein not only do we have a phenomenal substrate and our innovation there, but we think that that brings another customer to that freezer aisle and complement.
Our business and so it was a very thoughtful approach and youll see more of that to come.
And so I think you just alluded to this at the very end, but there'll be we should look for more plant based options to come as well.
Our investments in plant based protein are continuing to to show of velocities and results debt that we would expect so we will continue to be investing in that area.
Thank you very much.
This concludes our question and answer session I would like to turn the conference back over to Mr. Dean banks for any closing remarks.
Thanks again, everyone for your interest in Tyson Foods, we hope you and your families stay healthy and safe.
We look forward to speaking to you all again soon.
<unk>.
Yes.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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