Q2 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 that bears his name will be raised with no antibiotics ever.
Every nugget.
Good morning, and welcome to the Tyson Foods second quarter 2021 earnings conference call.
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I'd now like to turn the conference over to Megan Britt of Investor Relations. Please go ahead.
Hello, and welcome to the second quarter fiscal 2021 earnings conference call for Tyson Foods on the call today are Dean banks, President and Chief Executive Officer, Donnie King Group, President Poultry and Chief operating 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 website and through 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 on earnings per share operating income and operating margin and our remarks are on an adjusted basis unless otherwise noted.
For reconciliations of these non-GAAP measures to their corresponding GAAP measures. Please refer to our earnings press release on.
Now I'll turn the call over to Dean.
Thank you Megan before we get started I'd like to welcome Donnie King to the earnings call and congratulate him on his recent promotion to Chief operating Officer I would also like to thank our 140000 team members for their continued efforts and resilience. They are what makes this company an incredible place to work and I'm proud of their focus on raising the world's expectations for how.
How much good food can do.
Earlier today, we released our second quarter results for fiscal 2021.
We delivered a solid operating earnings performance recording $739 million on adjusted operating income for the quarter, which represents a 43% increase relative to the same period last year we.
We delivered $1 34 and <unk>.
<unk> earnings per share of <unk>, 68% increase from the same period last year. These results were reinforced by our solid performance in retail our continuing efforts to ensure the safety of our team members our partnership with customers to enable recovery and our focused execution to overcome inflationary headwinds our results in the quarter reflect our continued focus on team.
Health and safety. This is our top priority and Im proud of the progress that we've made on our comprehensive safety health and wellness agenda, along with our recent vaccine deployment efforts.
We also saw improvement in the foodservice channel during the quarter, we've been working closely with our customers to support foodservice recovery.
As consumer demand patterns continue to create operational complexities, we've taken action to make our organization more responsive to demand signals and customer needs to accelerate our speed to market.
Agility is increasingly important as we look to extend the gains that we've achieved in the retail channel. We continue to drive retail volume growth across our core business lines delivering growth in the recent quarter is particularly notable as we are now comparing to a prior quarter that included some benefit from initial COVID-19 pantry loading.
As we navigate market volatility and rising inflationary pressures, we're focused on operational excellence and disciplined cost management.
Our balance sheet is strong and we've continued to invest in our business. We are prioritize capacity expansion and automation technology investments and have significantly increased our capital allocated to both of these areas.
As an example, our Humboldt production facility in Tennessee has recently commenced operations and our team shipped the first sellable product in late April.
To support growth in case ready beef and pork. We are also excited for the reopening of our Columbia, South Carolina plant as well as the Grand opening of our Eagle Mountain, Utah plant both occurring later this year.
We are expanding capacity in our international operations and have six sites, where new capacity is currently under construction positioning our international business for continued growth and profitability in the future.
As we look at the balance of the year, we realized that we had a challenging second half ahead as inflationary pressure has continued to build.
We also have several bright spots, notably our performance in the retail channel and the continued strength in our beef segment.
Looking past the inflationary headwinds that are impacting our input costs I am confident that our team is executing on the right priorities to meet our commitments and drive shareholder value creation.
Turning to slide four team member health and safety is and will continue to be our top priority.
Through our partnership with matrix medical and our local communities over 42000 of our team members have been vaccinated since February.
As of today, we've offered on site vaccination clinics and over 100 locations and more than 30 states.
We've also launched a pilot project to enhance health and wellness of our team members. This involves the opening of seven clinics that will enable team members and their families to receive easier access to high quality health care services.
Our first facility opened recently in Newbern, Tennessee.
Turning now to slide five our total Tyson and core business lines posted 11 consecutive quarters of volume and share growth.
Notably our team delivered volume growth in Q2, despite the unusually strong demand associated with pantry loading that occurred during the comparable quarter last year.
Sales volume for Tyson core business lines are up 12, 7% and total Tyson is up eight 5% in the latest 52 weeks our share growth has been the strongest and breakfast sausage hotdogs frozen value added poultry and frozen protein breakfast our growth. During these periods was driven in large part by our ability.
To bring incremental households into our branded product lines.
Total Tyson household penetration reached 81% for the latest 52 weeks.
Also consumers continue to rely on low to no contact buying methods. As a result, we experienced e-commerce sales growth of 105% in the latest 13 weeks compared with last year.
This equated to approximately $425 million of sales through our ecommerce channel partners.
Turning to slide six innovation is important to our success in both retail and foodservice channels and we've continued to invest in the launch and scaling of new product innovations.
On this slide we have three examples of how our product innovation is tied to meaningful consumer insights.
In a recent survey nearly half of Americans expressed dissatisfaction with available plant based options for the grille.
This insight spurred our recent nationwide raised <unk> rooted launch which includes three new products to meet increasing demand for plant based protein options.
We're also excited for our recent launch of alternative protein offerings in the Europe, and Asia Pacific markets, which will support growing global demand for protein.
Our Jimmy Dean Breakfast Nuggets are another example of our ability to per brand and category leadership in frozen breakfast with our unique production capabilities to deliver protein dense offerings that complement Tyson current product portfolio.
Finally annual servings per capita for breaded chicken sandwiches or restaurants are up 14% and our products in this space have enabled us to capitalize on the growing popularity.
Moving to chart seven as we continue to navigate complex consumer dynamics overall, we're closely monitoring several factors to effectively engage with our customers and consumers and support of the overall recovery.
Protein has remained relevant throughout the pandemic with 54% of consumers, indicating a deliberate attempt to increase protein intake within their daily diet, and 20%, indicating that they are consuming animal protein more often than they were a year ago and.
In addition to overall protein consumption.
Closely monitoring reopening and recovery patterns, approximately 76% of the U S States are now at 75% or more capacity for in restaurant dining.
With vaccine Rollouts in consumer mobility, improving away from home traffic is gradually increasing on a sequential basis currently to USR in C stores are leading the recovery as consumers are very comfortable with ordering takeout.
While we are seeing some challenges in our international markets progress against COVID-19 domestically should continue to improve consumer confidence and mobility in the second half.
The U S economy is improving rapidly in part due to government stimulus on we expect some degree of elevated retail consumption to remain post COVID-19 our success in growing retail share and driving relevant innovation will allow us to meet the strong demand for protein and serve our customers across all channels I'll now turn the call over to Donnie.
To walk us through the segment operating results in detail.
Thanks, Dean I will start with the chicken segment performance captured on slide eight sales were $3 6 billion for the second quarter up 5%.
Overall volumes were down in the quarter, primarily due to COVID-19 related production inefficiencies severe.
Severe winter weather also impacted volumes operating cost and production efficiencies in the quarter.
Average sales price was up substantially during the period due to the favorable mix and the benefit of higher retail volume.
Our reported price improvement also reflects actions we've taken to cover the inflationary pressure, we have experienced from higher grain labor and freight cost.
Despite our efforts in the quarter, we did not fully offset the inflationary impacts as a substantial portion of our business is contracted on a fixed annual price basis.
With terms negotiated in locked ahead of the recent surge in grain costs.
Adjusted operating income was $6 million during the second quarter and $110 million for the fiscal year to day.
Down versus both comparable periods fiscal year to date operating income was negatively impacted by $145 million of higher feed ingredient costs as well as $95 million of increase grow out expenses and outside meat purchases.
For the second quarter feed ingredients were $135 million higher white.
Grow out expenses and outside meat purchases were $60 million higher.
Segment performance also reflects net derivative gains during the second quarter, a $40 million and $110 million for the fiscal year to day.
Both versus the respective comparable periods. These gains are associated with realized gains as well as open positions.
Last quarter, we shared our imperatives for improving chicken operating results.
Which are captured on slide nine.
Our goal has not changed we remain committed to restoring top tier performance the.
The first imperative is related to being the employer of choice. Despite.
Despite implementing pay rate increases, we continue to deal with elevated absenteeism and turnover.
We're implementing a range of initiatives to improve the team member experience and achieved the status of the employer of choice.
Including flexible work schedules and a competitive wage rate.
At this time, we estimate our average base pay plus benefits for domestic productions production workers is valued at over $22 per hour.
The second imperative relates to our strategy to improve overall operational performance. Although we have made some progress improving our plant performance, we're not where we plan to be at this stage.
Our strategy to improve our operational performance includes restoring our production volume to full capacity. However, we have struggled to raise the harvest to full capacity due to upstream supply issues, including issues caused by lower hatch ability rates.
Consequently, we have offset raw material shortages with outside meat purchases at a higher level than we have historically.
With the recent move in market prices or cost disadvantage from outside purchases as wide.
To compensate for cost headwind, we are working to recover our historical vantage on log costs.
We reduced the number of pounds, we're sourcing in the open market and to increase our plant efficiency as we gradually restore volume over the balance of the year.
The final imperative relates to serving our customers our focus is to deliver the highest levels of service to our customers, especially with respect to order fill rates.
When our customers are successful we are successful we are sustaining share gains in retail value added as we start to lap. The COVID-19 surge and are also a leading foodservice recovery and growth.
At the same time, our sales team is working to recover raw material and supply chain cost inflation via pricing.
To sum all of these imperatives is a restoration of our chicken business to top tier competitiveness and the coveted position of being our customers go to supplier <unk>.
Acknowledging the uncertainty associated with the continued COVID-19 recovery, we are increasingly confident in our ability to bring our adjusted operating income margin back to at least 5% to 7% range over time.
Moving to prepared foods.
Sales were $2 2 billion for the quarter.
Up 4% relative to the same period last year.
Total volume was down 4% in the quarter as growth in the retail channel was offset by a reduction in foodservice volumes sales growth outpaced volume growth driven by the partial pass through.
But raw material costs, lower commercial spending and better sales mix.
Segment operating income was $217 million per the quarter up 14% versus prior year.
For the first half operating income was $483 million up 30%.
Operating margin for the segment were 10% for the second quarter, an improvement of 80 basis points versus the comparable period.
The improvement in operating income was driven by the mixed benefit of strong retail performance lower commercial spending and pricing pass throughs, which more than offset higher operating and raw material costs.
In the second half demand is expected to remain elevated at retail with volumes continuing to exceed pre COVID-19 levels and foodservice showing sequential improvement.
Overall, we're seeing on accelerating inflationary environment that is creating a meaningful headwind for prepared foods in the back half of the year.
We're seeing raw material cost up over 15% as well as increases in logistics packaging and labor.
To offset inflationary pressure, we're focused on pricing revenue management commercial spend optimization, while ensuring the continued development of brand equity through marketing and trade support.
Moving to the beef segment.
Segment sales were approximately $4 billion for the quarter up 2% versus the same period last year.
Key sales drivers included strong domestic and export demand for beef products with average sales price up seven 5% per the quarter.
Sales volume for the quarter was down to the severe winter weather and production inefficiencies related to the challenging labor environment.
Segment operating income was $445 million per the quarter.
Operating income improvement was driven by strong global demand for beef products and a higher cut out which were partially offset by higher operating cost.
Operating margin for the segment improved 790 basis points to 11% for the second quarter.
Our beef segment performance has been driven by a favorable supply and demand dynamics, which look to persist deeper into the year on.
On base supply slightly higher domestic production for the calendar year is being more than offset by lower imports and higher exports, resulting in lower projected domestic availability for the full year.
Adequate supply coupled with continued strong domestic and export demand will sustain cutout values and our strong segment results.
Now, let's move on to Port segment on Slide 12.
Second quarter results reflect the benefit of strong retail demand and higher exports, which were more than offset by higher hog cost and operating expenses.
Segment sales were $1 5 billion for the quarter.
Up 17% versus the same period last year.
Key sales drivers from the segment included higher average sales price due to stronger demand, partially offset by lower volumes due to production inefficiencies.
Average sales price increased by over 17% while volumes were down slightly relative to the same period last year.
Segment, adjusted operating income was $67 million per the quarter down 28% versus the comparable period.
Overall operating margins for the segment declined by 280 basis points to four 5% for the quarter.
The operating income decline was driven by lower volume higher hog costs and increased labor and freight cost.
To improve our operating income results for the segment, we have implemented several actions to alleviate production constraints and to improve our volume throughput.
As we look ahead, we are closely monitoring hog supply estimates recent USDA projections show, a historically sharp drop in hog supplies, the sharp decline in supply and strong demand for certain Cork items have pushed it cut out up 59% from the end of December.
As it stands now <unk>.
Pork cutout is at the highest level for this time of year since 2014.
Looking at the overall calendar year lower projected 2021, CT production and continued robust consumer demand are expected to support hog prices at well above 2020 levels.
Finally, slide 13 capture some highlights related to our international business we.
We continue to invest behind our international platform, which provides an opportunity to grow our sales and our margin by leveraging global production capabilities the food consumers abroad.
We are using our one tyson framework to identify opportunities to maximize the value of our products and capabilities from farm to table a global level.
Our existing depth of experience in protein production brand management and global customer relationships creates the right recipe for growth and positions us with the right to win internationally.
I'll now turn the call over to Stewart to provide additional detail on our financial performance.
Thanks Donnie.
Turning now to a summary of our total company financial results. We're pleased with our year over year growth in sales adjusted operating income and earnings per share, we performed well despite a challenging operating environment that spend tough labor availability significant inflationary pressures in raw material costs global supply chain.
Challenges and evolving demand backdrop.
Adjusted operating income was up 43% during the second quarter due to strong performance in our beef business along with growth in prepared foods earnings, partially offset by softness in chicken and pork.
For the first half of fiscal 2021, and we delivered adjusted operating income growth of 32%.
Adjusted EPS grew nearly 70% during the second quarter driven by higher operating income.
Year to date, adjusted EPS was up 41%.
On a year to date basis.
Slide 15 bridges, our total company sales for the first half ongoing retail strength drove much of our sales results.
We delivered growth across all our reporting segments in the retail channel.
Overall retail accounted for $700 million in sales improvement during the first half and over $260 million in the second quarter versus comparable periods.
Moving to foodservice sales declined over $400 million in the first half compared to the same period last year, but improved $69 million in the second quarter food.
Food service recovery was most evident during the second quarter and higher chicken and prepared foods sales versus the same period last year.
Our food service mix and chicken index as to <unk>, which saw volumes above pre COVID-19 levels during the period.
On prepared foods, we are seeing recovery in foodservice foot traffic and strong sales into the distribution channel.
Exports were up over 5% versus the comparable period led by beef, where sales improved nearly $100 million for the first half.
China is a key driver of beef exports strength.
Lastly, we have seen some strength in industrial, particularly in pork as renewable fuels continued to drive growth in fats and oils demand.
In addition, the pace and shape of foodservice recovery will affect the composition of our channel and segment sales in the second half of the fiscal year.
Slide 16 shows the bridge for adjusted operating income for the first half.
Lower volumes, primarily from production inefficiencies in foodservice, where $100 million headwind on gross margin in the first half.
This mix benefited during the first half from price recovery of raw material cost inflation improved mix.
Strong beef segment performance and continued retail strength across segments.
Adjusted operating income was burdened by $664 million Inc.
Cost of goods sold pressure for the period.
This amount reflects significant raw material and supply chain cost inflation.
Of the total feed ingredient costs and outside meat purchases associated with the chicken segment contributed $240 million of pressure.
Other large contributors included freight and labor costs.
Year to date SG&A benefited from the $54 million loss in fiscal 2020 compared to a $55 million gain in fiscal 2021 associated with the capital supplier fraud, and certain reductions in trade spend and travel costs.
Slide 17 captures our financial outlook for fiscal 2021.
Given continued strength in the beef segment and our expectations for ongoing foodservice recovery, we are raising our sales guidance for the full year.
We now expect to deliver annual revenues in the range of $44 billion to $46 billion.
This guidance reflects our expectation of partial price recovery relative to continued feed ingredient and supply chain cost inflation.
At the segment level, we expect our directional annual guidance of lower operating margins in chicken and pork versus the prior year to hold.
Because of stronger than expected performance in beef and current market conditions, we are raising our guidance on the beef segment.
We now expect segment earnings to be up versus prior year.
Finally.
We are lowering our guidance and prepared foods due to back half inflationary pressures and now expect the segment's earnings to be flat versus the prior year.
A risk to this guidance include freight rates labor cost grain costs in the chicken segment raw.
Raw material costs for our prepared foods business and continued export market strength, along with price volatility in commodity meats.
Our capital expenditures outlook of one three to $1 5 billion remains unchanged.
We now expect to be at the lower end of the range.
Net interest expense is expected to be lower than our previous outlook at approximately $420 million.
This update reflects an incremental term loan repayment of $750 million relative to our prior guidance that resulted in the early payoff of our $1 $5 billion term loan offset by $500 million of new indebtedness associated with a new bilateral term loan facility.
Our outlook on effective tax rate is unchanged.
We will continue to monitor the potential implications of any new legislation, but do not currently expect to see impacts to our adjusted rate this fiscal year.
Our expectations related to liquidity are also unchanged.
As we noted last quarter liquidity decreased from $4 2 billion at the end of the first quarter ending the second quarter at $2 6 billion.
Finally, our COVID-19 related costs, which totaled $95 million in the quarter and now expected to be approximately $365 million for.
For the year.
Turning to slide 18, with our strong operational performance through the first half of 2021, we've seen an increase in operating cash flows.
We have prioritized deleveraging through the first half consistent with our priority to maintain a strong balance sheet with financial flexibility.
Investing organically in our business has been an important priority.
Which will increase our production capacity in our market capabilities as well as modernize our operations, while providing strong returns.
We will continue to explore paths to optimize our portfolio through M&A.
We have a disciplined approach, which focuses on returns and generation of shareholder value.
Finally, we're committed to return cash to shareholders.
Through dividends and buybacks in short we view the cash generation capabilities of this business is both strong and diverse and.
And we expect our deployment to deliver strong shareholder return.
Now I'd like to turn the call back to Dean.
Thanks Stewart to close our prepared remarks, I just want to make a few comments about our priorities for the second half looking.
Looking at the work ahead of US we are focused on improving operating margins growing above the market and driving sustainable return for shareholders.
To improve our operating margins, we are driving enterprise wide operational excellence working aggressively to restore our competitive position in our chicken segment and structuring our teams to operate at the speed of the market.
To grow above the market. Our team is focused on working closely with our customers to enable foodservice recovery and support ongoing retail demand.
<unk> also increased investment in value added capacity expansions and automation technology, which will support increased sales efficiency processing and more agile customer service.
Lastly, the strength of our balance sheet will allow us to continue to invest in our business and return capital to shareholders consistent with our stated priorities.
And with that I'll now turn the call back to Mike.
Thanks, Deane, we will now move on 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.
Operator, please provide the Q&A instructions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you're using a speaker phone.
The handset before pressing the key.
John Your question. Please press Star then two.
Thank you please limit yourself to one question and one follow up if you have further questions you may reenter the question queue.
At this time, we will pause momentarily to assemble our roster.
And our first question will come from Ben Theurer of Barclays. Please go ahead.
Hey, good morning, and thank you. Thank you very much from taking my question. So.
Maybe Donnie that's that's one for you just wanted to follow up on the initiatives within chicken and I mean, clearly you've laid out very much detailed plan on how to work on improving and get back to that.
Net to mid single digit high single digit operating income margin <unk> now more short term if we take a look at the cost headwinds corn soy I mean, obviously that significantly impacting.
How do you feel about your ability to negotiate on pricing.
With what you usually have on your on negotiating contract pricing.
With customers just considering that the overall environment seems to be very inflationary. So do you have do you see any flexibility around the pricing mechanisms in the short term. Thank you.
Thanks for the question short answer is yes.
We have.
We have obviously locked in some pricing.
Early before we saw the run up in grain, but we've been having non stop conversations with all of our customers.
Rounding inflationary need for pricing.
They have been very responsive.
Had.
We've had a lot of really good results.
Let's call it mid contract going and having conversations with those customers remember our relationships with our customers.
It is a relationship it is not a transactional event for us and we invested as they have through the years and so they've been very supportive. They certainly understand the inflationary need and I think we will be quite successful in this.
Endeavor.
Okay, perfect and just to.
Kind of looking at I mean, where do you think are low hanging fruits in terms of operating efficiencies to bring margins back up from from the headwinds like really what's in your hand, what have you identified since you. Since you took over a more serious review of the business a couple of months ago, and where do you think.
On the low hanging fruits in world, where most of the bigger challenges just to bring that back to that 5% to 7% margin range you've talked about.
Sure.
Let me start with as we started the.
The fiscal year, we had one objective and that was to simply be the best Chicken company.
As we move forward and we obviously recognize that's not where we were.
And where we are and so we began to work on that and as we get into.
As we got into this.
We started seeing good results, particularly in Q1.
However in January we start the recovery has slowed down.
<unk> by volume constraints due primarily to check available availability from an unexpected decline in hedge.
The winter storm Yuri affected our operations broadly.
<unk> event, we essentially lost a week across our entire poultry enterprise and more broadly across.
The rest of the businesses as well.
As a result of the supplier shortages.
We compensated with outset meat purchases, which has driven our cost up its market price rallied sharply.
Particularly after the first quarter.
At the same time cost inflation accelerated with grain and.
The highest in the last six years wage increases in freight costs also impacted us.
Yes.
And as I mentioned earlier, we contracted on <unk>.
Our share of our portfolio in the fall and early winter before the prices began to increase materially.
We are continuing to to deal with turnover and absenteeism.
But.
What I would tell you. Despite these headwinds the fundamentals of our business looking forward, we are actually quite good customer and consumer demand is strong sustained demand in retail and foodservice recovery with ongoing chicken sandwich promotions. So the outlook.
Along side the operational improvements that we're making.
And the pricing opportunities that we have.
Are quite good so but.
Specifically I think about this business and the seven levers of this business or this business model and the levers are price, we simply need to be.
To get paid fair market value, we certainly can't eat all the inflation that we're experiencing now.
We got to get volume back under Us our business is growing.
And we got to get the harvest numbers backup for our business and we have to continue to get more FP capacity online.
We've had great improvement in mix.
We're still struggling with absenteeism.
And then we need to make sure our spend is in balance with the volume at which we are we're processing.
And finally, we need to return on our live production.
Spreads are historical spread to the industry, we need to regain those those spreads.
So what I can tell you.
As we know where we are.
And we're not happy with where we are.
And we fully understand that we can't talk our way through our poor performance.
We do have a great plan in place to be the best Chicken company and we've made great progress and we will accelerate that in the back half of the year.
I will tell you we have a great team in place.
Everybody knows what they're doing.
And.
We're not afraid we're not discouraged we're a little bit delayed from the some of the winter and some of the activities inflation in Q2.
But we're very optimistic about this business as we move forward.
And I just want to add just a complement to donnie and the team we had committed in previous calls.
Visible operating metric improvement.
At the end of the second quarter and from everything we've seen early in the quarter and coming out of the previous year.
We had seen those operating improvements materializing.
It's unfortunate that we're experiencing all the headwinds, but I'm proud of how Donnie and his team in managing those headwinds in the operating improvements they made which will become visible as we navigate the headwinds coming from.
Okay perfect. Thank you very much Donnie theme for the comments congrats Steve.
The next question comes from Ken Goldman of Jpmorgan. Please go ahead.
Hi, Thank you and good morning.
I wanted to make sure I understood guidance.
When you say that the results on a particular segment are likely to be higher or lower than the prior year I think youre talking about operating margin because thats, what it says on the slides and that's what you've historically done but in your prepared remarks, I thought you said profit or earnings I, just wanted to clarify whether its margin or earnings were both when you are talking about those terms.
Yes, Ken Stewart.
Absolutely its percentage it took about rate of return on sales.
As you point out that that's what you see in the slide.
Great. Thank you for that and then as a quick follow up can you talk a little bit.
About some of those hatch issues.
Hey, you mentioned, how structural are those how much of those related or related to some of the weather that we saw I'm just trying to get a sense of your outlook for those.
Sure Great question.
We think some of them are structural in that.
And our.
In our program, we changed one of the miles that we were using.
In our business and the great broader performance, but we're.
We're not seeing those maternal characteristics such as <unk>.
Egg production and hatch.
Namely hatch and so we've got some of those issues.
Going on but.
But in terms of the weather.
A little hard to in February with Yuri.
The impact of that with all of the power outages and so forth we had.
Sitting on the arm without power. So we saw on loss of embryos as a result of that so from February into March think about this those those animals that were those checks that were impacted.
<unk> went through the grow out cycle and they had issues as I went through there. So the initial impact was very expensive.
But you think about the knock on effects of that.
Yes.
Yes.
Persistent all the way through April and we're just now clearing ourselves of that.
But.
The other side of this are the view of this as they are in terms of hatch is improving it will improve marginally as we move forward.
As we elevate if you think about our business and our our greater performance.
Yes.
We have a spread from the best of the worst so just elevating and tightening of that spread will give us improvement seasonally we will get a little bit of improvement and the knock on effects from the winter storm will give us a little improvement so we're not going to be all the way bright.
Will take us time to work.
The males that we're changing apps.
We will have a new mill in place everywhere.
Let's call it.
Paul.
But it will take.
Our full year to see this come back to bright.
But we're confident in that and.
So thats, where we are.
Thank you very much.
The next question comes from Alexia Howard of Bernstein. Please go ahead.
Good morning, everyone.
Good morning, good morning.
Okay. So two questions from me the first one you talked about pork operational inefficiencies.
Just wondering if you could clarify what those problems.
How quickly you expect them to be resolved and then I have a follow up.
Thanks, Great question.
Terms of the issue.
Think of it in terms of a staffing issue impacting capacity.
If I think about our port business, it's been taking us about 60 days to do five days worth of work because of <unk>.
Turnover absenteeism. The other part of that is in terms of the performance is related to not having skilled people in place and so we've not been able to get mix optimization in terms of maximizing the cut out all those variety meets all of those components.
Our highly attractive from a margin perspective.
We're short staffed right now in our fourth plant.
We are working on things that you would expect in terms of work schedules.
We're looking at wages and all of those cases, and we're also investing in terms of automation and technology to try to alleviate these more difficult and higher turnover jobs.
Great and then as a follow up.
Could you give us a quick sort of update on on the current status of the African swine fever situation in China.
Didn't hear anything about that this time around.
I know that you think that it's probably going to continue to have an impact on the global supply and demand balance for some time, but are we getting through to the other side of that so that it is having less of an impact on your export business for example.
Yes.
First off the cases, not just in China, but what we've seen in Germany. It really disrupted global protein flows some of the some of the protein was obviously destined for.
Our Asia, China early reports, where they were having some success at free populating, but our latest our latest research shows that that's really not happening anywhere near the pace that they had hoped so we still see really strong exports going into China to cover that gap.
Yes.
Yes.
Okay, I would add I would add to that just that China is still.
An important deficit.
There are new herd losses from ASF, which is slowing their recovery. So based on the numbers I saw quoted from Rabobank recently.
Will be flat to about 2020.
Great. Thank you very much I'll pass it on.
Our next question comes from Adam Samuelson of Goldman Sachs. Please go ahead.
Hi, Thanks, good morning, everyone.
Good morning, good morning.
Wanted to maybe tie together some of the comments that you've given on the on the chicken business.
Through the call already.
As we think about the balance of this fiscal year.
And that kind of pathway to that to 5% to 7% margin.
Maybe can you help us think about where we would be kind of at the end of September at the end of fiscal 'twenty. One in terms of some of the bhilai productivity issues, where you'd hoped to be from a.
Our labor and attrition perspective kind of where you think youll be on kind of price versus feed kind of balance by the end of the fiscal year on the 5% to 7%.
Help us think about we've talked about it as a medium term target.
What do you think the timeline.
Realistically is the ticket to get back there.
Sure.
So as I think about the.
Let's start with the hatch issue.
I covered off on a number of those things in terms of it will be improving sequentially.
We're changing out of mail that quite frankly, we made we made a bad decision on.
And we will not be all the way right.
Let's call it.
Mid year of 'twenty two.
But we will sequentially get better between <unk>.
Between now and then and hats that will help us on supply and supply that we quite frankly need today.
We're too dependent on the outside purchases meet right now.
And.
The market has run up in there so.
The ability to pass on that cost in the marketplaces.
Next to impossible and.
So we need to get our own animals in place and by the way that outside purchases predominantly breast meat and but we have good sales for the back half of the chicken or the rendered products that come with that and of course, you see the wing market.
Well over that are over three bucks right now.
But in terms of getting to the 5% to 7%.
And when I say five to seven.
Talking about 5% to 7% of businesses growing.
Growing top line growing bottom line.
And.
So.
We got to staff the plants, I mean, thats, an imperative here and.
We'd have to compete with the very best and competing in this example is we need to have a cost structure.
That is best in class and quite frankly, we haven't had that in.
But we're well on the road we have.
Much like we did in 2008, we have a path forward.
We're looking at those big rocks most of them would be in labor yield spin.
Volume is certainly a big component of that as well.
<unk>.
We got to service customers better.
No.
Honestly, we have not serviced our customers well and almost.
Well, two and a half years talked.
Talked about the SAP cutover, and then COVID-19 of last year, and so we got to do that better for our customers and that certainly helps us and then that puts us in a position to continue to grow our business, where we have been very successful right now with the growth in the business and when we have service to.
And for all.
All the time across all channels, then we get the opportunity to grow our business, even a higher rate.
<unk>.
All of those things are.
All of those things that would.
What gets you to the 5% to 7% and growing but it's the fundamentals the fundamentals of the.
The business sector.
We have to get an order and.
We're very much aware of those were very much aware of where our gaps are to each one of those cost components.
And so.
And we've got a good team working on it so more to come.
One other point I wanted to make related to the hatch issue is that.
It's a bit of a double edged sword on that not only are we buying protein in the market to service our further process customers, but in.
And the primary processing plant is not running full as from deleveraging.
And so we'll you'll see us in the coming quarters as we get hatch fixed we increased capacity in our facilities.
Some of that deleveraging and get back to operating metrics and operating performance.
Come alongside them.
All right that color is really helpful. And then maybe a follow up question and maybe this is for Stewart.
Just thinking on on the capital allocation front.
You're at your kind of long term kind of leverage target of two times at the end of the second quarter.
Maybe just help us think about kind of deploying incremental cash flow from here and I think in your prepared remarks I think.
Any reference to M&A that was interesting and kind of talk about optimize the portfolio didn't seem.
Have aspirations for a lot of offensive M&A, but.
Maybe just help us think about cash deployment from here John.
Sure well look I mean.
Tell you.
We feel pretty good about our options here, if you think about our capital allocation in three big planks first we've been focused on building financial strength and that's certainly true as you pointed out our debt EBITDA ratio is looking good we do have more debt coming due later this year and of course, we have the term loan that's outstanding says about $1 billion.
Those two.
Then think about investing in the business.
M&A is opportunistic but of course, we have and will continue to be pretty disciplined there from a return standpoint, where you have seen increased capital deployment has been around capex.
Earlier this year guide that we would be as high as $1 5 billion. We haven't we haven't been able to get some of the projects away as quickly as we wanted but but you might take away from that.
Early guidance that we have an appetite to invest behind our company and in an organic kinds of investments on their lots of strong opportunities in automation and in other profit improvement areas in our business.
And notably.
It's a opportunity for us to invest in new capacity in our business and we've got a number of new plants are coming online in the prepared remarks, you talked about a six different sites in our international business, where we're investing in.
New.
Capacity Donnie spoke about a couple of new plants coming online in the U S. Humboldt just come on line.
More capital is going against capacity and that is needed for a growing business and then lastly of course of 10 years of dividend growth, we have not been shy to share net cash for share holders and we expect to continue to do that in the future. So I think step back we've got a well thought out well balanced.
As to capital allocation.
Alright, I appreciate all that color I'll pass it on thanks.
The next question comes from Ben <unk>.
Steven Please go ahead.
Hey, good morning, everybody.
Okay.
I wanted to ask about the prepared foods segment your commentary.
Perfect sense, just given the raw material cost inflation that we've seen I'd love to hear some commentary on the cadence of pricing that you expect to realize what you are looking at from a competitive standpoint and demand elasticity standpoint in that business.
And how we should be thinking about kind of the realization of margin recovery in that business relative to raw material cost and pricing increases.
Sure I'll take first shot at this and then pass it over but.
We still see tremendous continued retail strength in prepared foods and with 11 straight quarters.
Our growth in our core business lines, we're able.
Demand a strong presence there and as it relates to pricing.
We are obviously experiencing high input costs.
From the Port business.
And that will ultimately get passed along most of our pricing in retail specifically, we're in we're in a position where we interact with our partner customers.
Quite frequently and they see what we're experiencing there and we're able to pass some of that on.
We are but we do expect in the next half to be increasing map spend it's going to be a requirement obviously to remain competitive marketplace. Those investments have paid off in the past taking against as you read and heard 81% household penetration thats something that we can leverage long term.
In prepared foods the other the other thing to really keep in mind is that foodservice is coming back. So we've mentioned that 75%.
The areas, which we cover are recovered at about 75%, while we've seen about a 10% drop out in restaurants, those are getting backfill with ghost kitchens, and a variety of other creative models that and ultimately.
The addition of restaurants to fill that void.
We think that business is going to recover recover strong it's a lower margin business. So we'll see that balancing out not only due to throughput in our restaurants, but also channel filling as we get get prepared for the full full recovery.
I mentioned about.
Foodservice is there.
Please keep in mind, it's obviously regional and it's very different across channel. So clearly we have not seen the recovery in K through 12, but we'd expected in some areas of the world that impact our business specifically in Europe.
There is still buckling under the pressures of COVID-19, So foodservice hasnt covered quite as much as we'd want.
But with that I'll hand over to Stewart talk about margin, yes look the only thing I would add to what Dennis said is that our expectations for price recovery in the second half are already included in the guidance of course philosophically, we believe as a company that raw material costs ultimately will be passed along.
And therefore, you should think about.
Seeing see more to come next year, but the current expectations around pricing are built into our guidance.
Understood Okay great.
My second question is just around the buy versus grow strategy in chicken and in particular, you talked about the hatch ability issues and that how that should resolve some of your issues over time related to the need to buy breast meat on the outside market.
What role does Humboldt play if any in that equation and as it relates to Humboldt is that on time on budget what are the latest.
Qualitative or quantitative commentary points that you could offer us.
Sure.
Great question Humboldt.
Let me start with it how about this.
As a fresh chicken plant.
As we look at that business, it's a growing category for predominantly for our retail customers. So.
We started in late April with ASP type products.
Flowing through Humboldt.
July late July before we actually are harvesting any animals in Humboldt.
It will be incremental.
It will help us from a flexibility of our footprint.
There is how both are actually all across our fresh portfolio.
Help us clogging.
Clog and streamline some of our operations now the question around buy versus grow we still support five versus growth. It's still a good program and we will continue to use that.
What I've tried to portray is that.
We moved too far on the buy instead of growing our own and we were late.
Honestly too to be able to get the animal's down and grow but we started this year and if you look at the Q1 numbers.
We were seeing pretty nice performance in Q1, and then we get into January and hedge really hit us and then and there.
Then the storm in February and so we're still processing all of that to understand what it means but long term.
We will be fine.
But buy versus grow is still a good strategy, where just over dependent upon it right now if you think about the marketplace.
Historically, the market would be around $1 $10 20, maybe.
Even inching up from there for jumbo boneless skinless breast meat.
As of Friday, It was $2 11.
So pretty significant increase.
And the market.
And.
So trying to get pricing around that.
You got to be.
That's a little tricky, but certainly all of our models would indicate that growing.
Would be the right course, and this market environment.
One other thing just to add to Tony's answer.
Just thinking about humbled, specifically as a reminder.
As a startup cost per Humboldt, which is about 60 million Bucks.
On the year with most of that in the second half. So just just keep that in mind for your models.
Okay. Thanks very much.
The next question comes from Ken Zaslow of Bank of Montreal. Please go ahead.
Hey, good morning, guys good.
Good morning.
Just two questions one is on the.
The beef side, how long do you think that the cattle supply relative to the packing will be in this situation because I understand that there hasnt been on the cattle from last year Hasnt been fully killed.
So this positive environment, how long does it last and then obviously into 2022 and you're still on the clean environment. Just wanted to comment on that and then I have a follow up.
Sure.
We're projecting and observing ample cattle supply through the end of the year.
As we're continuing to step up our plans and increased production, we're going to continue to work through that but everything looks strong through the end of the year and into 'twenty. Two Donnie do you want add any color sure I'll add a little bit too.
There is there is obviously.
Higher grain costs on the beef side, and then of course, the drought conversations which could impact heifer retention, which could.
Portend some longer term.
Negative implications.
Based on everything we see throughout 'twenty.
The end of 'twenty, two at least half way from what we can see today, there will be ample catalyst plus.
Great and my second question Donnie if I look back in 2008, how do you compare and contrast, this fix on the chicken operation versus then.
Again, if you can kind of do that compare and contrast.
It seems like there's a real linear path to those type of margins that you.
Scott back in the two.
2910 period and I'll.
I'll leave it there and I appreciate it.
Thanks.
There are a lot of similarities.
The good news bad news is that.
We've been down this road before.
If I look at.
Some of the differences.
If I go back to 2015 for example.
Our volume our harvest volume and pound sold is flat to 2015.
So thats problem one.
If you think about in this timeframe, we purchased Keystone, which.
It was about $4 5 million chickens.
Week from that so we've essentially rationalize that volume through all of our locations our capacity utilization is in the low eighties from harvest perspective. So.
If you look at the numbers today and you look at a 20% opportunity on top of that with all of the latent capacity. There is a lot of upside from a from a cost perspective.
As you look at that.
At the same time, our volumes remained flat on our operational costs.
Have risen.
Let's call it a 5% CAGR.
We.
On flat volume.
Quite honestly our customers.
Arent willing to pay for our inefficiencies and we don't expect them to.
We've seen pretty significant price increase I think from 2015 to 2021.
Looks like probably a $500 million worth of price decreases.
Because of the market dynamics.
And we've had a couple of special events.
The SAP cutover in 2019.
And then COVID-19 in 2020.
So a long story short there is we got we got a higher cost and we got lower volume.
And.
You can you can put together.
Very simplistically, what we have to do.
This business right to get it to 5% to 7% and then.
And I would say 5% to seven.
Where we're going but I want to point out that it's 5% to seven and growing our business.
Meaning FP business could be made it would mean harvesting animals to support that business and so we think we've got a lot of upside.
The future looks a lot brighter than it does today.
Thank you very much guys.
Yes.
Thanks again.
The next question comes from Peter Galbo of Bank of America. Please go ahead.
Hey, guys. Good morning, Thank you for taking the question.
Good morning Stewart.
The operating income bridge first of all very helpful. Thank you for including that.
Just a question there it looks like kind of on the front half of the year.
Your sales price mix was more than double.
On the Cogs inflation, and obviously youre expecting that to reverse pretty materially in the second half of the year.
Is there anything you can do to help us understand the magnitude of how much price we will cover on the Cogs side on the back half as you think about it on an enterprise wide level.
Look maybe just a couple of things to point out first of all you rightly point out that the mix has a big impact.
Place to go for best a little bit more detail is send acute.
The segment segment detail in note 14, because youre going to be able to take away from that chart net of heavy influence on this number is Steve.
And that is why youre going to youre going to see the movement looking like Youre getting coverage, but you are on top.
But when you break it down at the business level.
Youre going to see a very different dynamic oversee in prepared foods, Inc. Cover that for the back half of the year on.
On the other thing I'd point out just as a.
As a modeling tip is the cost of grains has gone up substantially and even since the beginning of this quarter youll see the grain.
On a shut up things.
<unk> back to the data that we gave you during the prepared remarks.
For our grain cost in the first quarter, we set a $10 million or so higher than last year in the second quarter, we were $135 million higher than the same quarter last year, that's reflecting that higher cost of grain coming through yes, we're hedging but unique those hedges that arose from the further you get out.
At some point you start actually taking that higher cost of grain and Thats, what youre seeing as you look through those numbers. So.
The second half of the year is going to be bearing grain costs debt.
On that are a lot higher in and our ability to offset that will be dependent.
On Donnie.
Donnie set price recovery, but we've given you our best estimates in the in the guidance that we've laid out.
There are some some areas of a fairly significant inflation in the back half.
Got it no that's helpful.
And Donnie maybe just to share kind of got the eye on on chicken.
I just wanted to understand it.
The labor problems that were now reading about pretty consistently across all industries are really incremental to what you had been experiencing over the past six months to a year.
And how you kind of see that labor picture, particularly in chicken and how you see that labor picture I guess shaping up when we would expect it to maybe start to alleviate a little bit at least from from your perspective.
Well, if I look at the time horizon over the last year.
I wouldn't I would say it would be improved somewhat too.
Let's call it the height of COVID-19.
We are able to.
We're able to staff plants, we're pretty close to staffing just the absenteeism.
We're seeing.
Is really unusual.
For us and.
But.
If I look at prior to COVID-19.
We're probably something order.
Sure.
Let's call it 50, maybe 50% more.
<unk> and what we experienced prior to GAAP.
So there's not a there's.
There's not a magic bullet here.
We're looking at all kinds of things and trying to generate worker driven solutions.
We talked about wage and we quoted our wage rates that we have today.
But we're also looking at different shift models so that.
Our workforce today wants us to be able to tell them exactly when they start to work on exactly when they get often and very few are interested in a six day week or a surprise based on customer consumer demand and of course, we're investing heavily in terms of automation and technology to <unk>.
To eliminate the more difficult higher turnover jobs, but.
I would say across chicken beef pork prepared.
In terms of.
It takes about six days right now to get five days' worth of work done.
So it is impacting capacity and cost.
Peter one other thing I'd mention is it's just not.
We wouldn't want to avoid mentioning the impact of stimulus and that's ultimately going to wind down and should have a positive impact on our ability to recruit and also further something Donnie said, we have invested heavily into automation and some of the some of the tougher to staff.
Portions of the facilities, we can take that talent and redeploy it to other parts of the facilities Youll see that coming in the second half of the year.
Thanks, very much guys.
This concludes our question and answer session I would like to turn the conference back over to Mr. Keith banks for any closing remarks.
Thanks again, everyone for your interest in Tyson Foods, we hope you and your families stay healthy and safe and we look forward to speaking to you again soon.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.