Q2 2022 Tyson Foods Inc Earnings Call
Good morning, and welcome to the Tyson Foods second quarter 2022 earnings Conference call.
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After todays presentation, there will be an opportunity to ask questions.
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I would now like to turn the conference over to Megan Britt Vice President of Investor Relations. Please.
Please go ahead.
Hello, and welcome to the second quarter fiscal 2022 earnings conference call for Tyson.
Prepared remarks today will be provided by Donnie King President and Chief Executive Officer, and Stewart, Glendinning, EVP and Chief Financial Officer.
Additionally, David Bray for President poultry Noelle Omara, President prepared food, Shane Miller group President of fresh meat and Chris My holds group President International will join the live Q&A session.
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 to earnings per share operating income and operating margin and our remarks are on an adjusted basis unless otherwise noted.
For a reconciliation of these non-GAAP measures to their corresponding GAAP measures. Please refer to our earnings press release.
I'll now turn the call over to Dani.
Thank you Megan and thank you to everyone for joining us for the call earlier today, we reported strong second quarter and first half fiscal year 'twenty. Two results. Our results would not have been possible without the work of our team members I'm grateful for their dedication and diligent efforts this quarter as.
As we continue to manage a complex and dynamic operating environment we.
We delivered double digit sales and earnings growth driven by strong market fundamentals acceleration of our productivity actions and improving operational execution across our segments.
Our diverse protein portfolio omnichannel capabilities, leading brands and value added products all contributed to our results.
Strong performance in our beef segment continued recovery in prepared foods and an improvement in chicken supported improved sales and earnings.
Our retail core business lines, which include our iconic brands Tyson, Jimmy Dean he'll shower farm and ballpark have driven strong share performance in the retail channel since the onset of the pandemic.
This quarter, we delivered share gains in Bacon hot dogs and snacking.
We also continue to see recovery in the foodservice channel with our relative strength in Q S. Ours in K 12, supporting continued share gains in branded value added chicken.
Overall consumer demand for protein is remains strong and we're taking deliberate actions by segment to improve our volumes to better meet customer needs, including investing in new capacity brands product innovation and our team member experience.
We're seeing our investments in team members, making an impact despite continued labor challenge during the omicron serves this quarter, we're seeing lower turnover and absenteeism, we have invested in higher wages benefits and other workplace enhancements such as flexible schedules child care and transportation.
The construction of new plants continues to progress. This additional capacity will enable our team to address capacity constraints and better serve growing demand for protein across all segments, along with ramping up utilization of our newest plants in Humboldt Eagle Mountain.
In Thailand, we have four plants expected to commence operation in the fourth quarter of fiscal year 'twenty two.
In addition to the new sites, we're continually upgrading capacity as needed with approximately 10 projects planned in the third quarter, representing 25 million pounds of volume and prepared foods alone.
In addition, we are working closely with our customers to ensure that the fair value of our product incorporates the inflationary cost pressures impacting our business for the first half our cost of goods. So rose 15% relative to the same period last year.
Every part of our business has been impacted by inflation.
We experienced higher cost across our supply chain for all inputs from feed ingredients live animals, and other raw materials to cooking oils and basic supplies.
We're also managing higher cost of labor and transportation due to robust demand higher fuel costs and the limited availability.
As part of our effort to combat inflation and increased profitability I'm pleased by our accomplishments to drive costs lower by accelerating our productivity actions.
Also our balance sheet and liquidity position remain healthy providing optionality to invest in growth across our portfolio and return cash to shareholders. We.
We have a disciplined approach to deploying capital with a focus on total shareholder return.
Our first half results clearly demonstrate that we are making progress on our growth objectives, and we remain focused on outpacing the overall market improving operating margins and driving stronger returns for our shareholders.
Now turning to the financial results, let me give you some highlights.
Sales improved 16% in the second quarter and 20% during the first half.
Our sales gains were largely driven by higher average sales price and mix improvement average sales price trends reflect disciplined revenue management strategies in the context of a volatile high inflation environment like many other companies, we've seen varying levels of heightened inflation, notably in grains Les.
<unk> live animals raw material and transportation costs as I mentioned earlier, our teams have worked together with our customers to manage inflationary pressures.
We delivered solid operating income performance, 57% during the second quarter and 47% for the first half their.
Their performance in the first half was due to strength in beef chicken and prepared foods overall.
Overall, our operating income performance translated to $2.29 in earnings per share for the second quarter up 71% and $5.16 in earnings per share for the first half up 57%.
Looking at our results on volume, we remain confident that our actions will improve our performance, but we're not where we expect it to be by now as we face the I'm a crime surge in the quarter and other labor and supply chain challenges due to these factors. Our total volume was down slightly for the first half versus last year.
<unk> remained a bright spot where volume was up 2.1% through the first half compared to the same period last year. This improvement was driven by solid fundamental demand as well as operational improvements. There is much more work to be done as we focus on filling our existing capacity, we're pulling multiple levers to drive sequential improvement.
In our performance and as a result, I'm confident that we will see continued volume performance in the second half.
In prepared foods volumes were down 4% in the first half compared to the same period last year.
Approximately a third of this decline was related to the pet treats divestiture with the remainder of the result of the challenging supply environment and uneven recovery of the foodservice channel.
We're working to improve these results over the remainder of FY 'twenty two as we continued to take actions to expand and improve capacity utilization.
And beef volumes were down two 9% in the first half compared to the same period last year, however, beef volumes increased quarter over quarter due to higher harvest weights. We expect continued volume improvements for the remainder of our fiscal year 'twenty to his new team member recruitment strategies support and improved labor position.
And higher throughput.
In pork.
The impacts associated with the challenging labor environment contributed to a two 3% decline in volume in the first half compared to the same period last year we.
We expect tightness in live hog inventories to affect our second half volume.
And international other our investments in capacity innovation and brands are supporting our market share growth objectives and volume improvement.
Overall, we will continue to take actions across our business to optimize our existing footprint add new capacity adjust our product mix and a lot of our portfolio with customer and consumer needs.
Although we have reduced our expectation for the full year, we still expect to grow our total company volumes in fiscal year 'twenty two.
We continued to take meaningful action toward becoming the most sought after place to work and we're making significant investments to attract and retain team members.
Our U S. Based workforce is comprised of team members for more than 160 countries. In April we announced that we are investing over $1 million and several nonprofit groups to expand legal and citizenship support for the team members aspiring to become U S. Citizens. This will allow us to scale like program from seven Tyson facilities.
To serve 40 company locations in 14 states.
We recently announced an expansion of the upward Academy program as our latest investment in our team members. Starting this summer U S team members will have access to free education, including master's undergraduate and associate degrees career certificates as well as class in our literacy and technology fundamentals and Tyson.
I'll pay 100% of the cost of tuition books and fees with an estimated investment of $60 million over the next four years.
Ensuring the health and safety of our global team is a top priority.
We continue to challenge ourselves to be an organization that stays ahead of the unforeseen events and adjusting our protocols to keep our team members healthy and safe.
We have educated and encourage team members to get vaccine boosters and have offered over 100 clinics across our office and plant locations.
We are also investing to support team member well being more proactively in our rural communities. We now have seven on our near site Tyson Health centers open and operating these clinics to provide comprehensive health care services, including preventative screenings.
Onyx condition coaching mental health counseling lab services and sick visits that little to no cost to most of our team members or their spouses and dependents overall, we're confident that our actions will increase Tyson staffing levels and position us for future growth and we will continue to explore innovative benefit offerings.
Make our team members' lives better.
We're making excellent progress on our productivity program, which will deliver more than $1 billion in recurring productivity savings by the end of fiscal year 'twenty four based on current progress. We now expect to deliver more than 400 million of savings in fiscal year 'twenty, two which is on the high end of our previously disclosed range.
For the year.
Last quarter I highlighted our work in prepared foods to build a digital manufacturing platform that utilizes data to simplify complexity and optimize processing also shared our work to enhance the mix and allocation of our trucking fleet resources to enable better on time deliveries to customers.
This quarter deployment of our Tyson production system approach has improved our yield across all segments versus a year ago. Additionally, our procurement program is addressing total company spin, including direct material as well as plant and corporate indirect areas. This program continues to deliver savings in line with.
The expectation.
Our digital solutions journey has also progressed in our supply chain, we're leveraging new processes and digital tools to quickly identify gaps and fulfillment meeting the demands of our customers on time and in full is at the utmost priority and we will continue to maximize our service levels.
The early results of our finance automation and Digitization work also remain promising for example, this program is writing more accurate billing and improve collections for Tyson, while lowering our intensive labor.
We're also investing aggressively in automation and technology to help address some of our most difficult roles and repetitive tasks.
This is well planned program of automation to use common designs and equipment across our plants to optimize cost maintenance and asset utilization.
The Debone automation program is continuing to scale in plants and our Tyson proprietary depot and automation solution is also beginning to rollout and select facilities. Looking ahead, we're starting to scale new programs like pack out robotics to continue automating highly manual processes and deliver savings.
Chicken remains a top priority and we continue to execute against our roadmap to restore top quartile profitability for this segment.
We've been committed to returning our operating margins to 5% to 7% level by the middle of FY 'twenty to.
This quarter, we delivered a 5% adjusted operating margin in line with our previously communicated plan.
Critical to improving our profitability is maximizing our fixed cost leverage being staff to standard and having enough first run our plants full.
Since September we've seen an improvement in our hatch rate that is consistent with the expectations that we shared at our December Investor day.
We are committed to growing our harvest capacity utilization and we outpaced the industry in the second quarter, achieving improved chicken harvest and higher capacity utilization will allow us to build on the volume growth delivered by a chicken in the first half.
In parallel to actions to improve volume. We have also worked with customers to manage inflationary pressures are adjusting pricing to achieve a fair value for our products. This will be important to ensuring we deliver sequential improvement in our operating margins in the second half of fiscal year 'twenty, two especially with continued increase.
As in key input costs, such as labor and feed ingredients as.
As I mentioned, a moment ago. We are also making good progress on our automation objectives for the segment. This includes the rollout of depot and automation and a range of other equipment, which will enhance our productivity and cost effectiveness. We've come a long way in a short period of time and I'm pleased with the progress we're making in chicken.
To recap, we have strong consumer demand, a powerful and diverse portfolio across geographies and channels and a team that is positioned to take advantage of the opportunities in front of us.
The five imperatives on this slide show, how we will achieve our commitments and drive value creation for our shareholders.
This starts first with our commitment to our team members with a focus on ensuring their health safety and wellbeing as well as investing in improving our team member experience.
Second we are working to enhance our portfolio and capacity to better address demand. This includes increasing the contribution of branded and value added sales as a result, we expect our volume to outpace overall market growth over the next several years.
Third we are aggressively restoring competitiveness in our chicken segment and continue to achieve key milestones on our road map to top quartile profitability.
Fourth we are driving operational and functional excellence in investing in digital and automation initiatives. This is at the heart of our productivity program, where we are accelerating our efforts and now expect to deliver more than 400 million in savings this year.
Fifth to address projected demand growth over the next decade, we're using our financial strength to invest in our business. We're on track to invest $2 billion in fiscal year 'twenty, two with a disproportionate share of focused on new capacity and automation objectives.
We also continue to return cash to shareholders through the first half we returned approximately $850 million in dividends and share repurchases.
As a final comment before turning the call over to Stuart I want to highlight that Tyson foods understands we have a critical role to play in the global food system to make it more resilient more sustainable and more equitable for current and future generations. Just recently, we completed a materiality of analysis that will inform our long range strategy.
These insights from key stakeholders shape, our strategic framework and provide direction on the expectations of our company.
I will now turn the call over to Stuart to walk us through more detail on our financial results for the second quarter.
Thank you Donnie let me turn finished a summary of our total company financial performance.
We're pleased to report strong results in the second quarter and first half of this fiscal year.
Sales were up in the second quarter and the first half benefiting from our pricing initiatives to offset inflation as well as improved product and channel mix.
Volumes were down slightly through the first half impacted by continued labor challenges and the temporary disruption from the underground Barron search.
Looking at our sales results by channel retail drove $424 million up top line improvement in the second quarter relative to the same quarter last year.
Through the first half retail sales have improved $773 million.
In the second quarter improvements in sales through the foodservice channel drove an increase of $684 million and domestic export sales to international markets, where $311 million stronger than the prior year period, as we leveraged our global scale to grow our business.
Second quarter adjusted operating income of $1 $2 billion was up 57% relative to the same quarter last year led by increases in chicken and beef and prepared foods.
First half adjusted operating income of $2 6 billion.
47% supported by increases in beef and chicken.
Driven by the strong increase in operating income second quarter, adjusted EPS of $2.29 grew 71% compared to the same period last year second.
Second quarter earnings per share also benefited from lower net interest expense and higher other income.
Slide 11 bridges year to date operating income for the second quarter, which was $422 million higher than fiscal 2021.
Volumes were down one 5% in the second quarter.
Volume improvement in chicken international other than beef.
Offset by declines in pork and prepared foods, where continued labor and supply chain challenges impacted throughput.
Our pricing mix and portfolio of assets led to higher sales during the quarter, which offset the higher input costs.
We saw continued inflation across the business in some instances up 25% or more notable examples where labor feed ingredients like cattle lean hogs and freight costs.
SG&A was $46 million unfavorable to the same period last year due to increased team member related costs and investments in advertising and promotional spend in support of our brands.
As a final note both cost of goods sold and SG&A expenses in the quarter were partially offset by productivity savings.
Nothing to the beef segment on Slide 12 segment sales were approximately $5 billion for the second quarter.
Up 24% versus the same period last year.
Sales growth in the quarter was driven by continued robust demand for beef products, which supported higher average sales price and volume.
I cut out and our average sales price remained relatively strong during the quarter. Despite some consumer demand shifting toward lower cost beef cuts.
Quarterly volume improved compared to the prior year, despite the omicron surge experienced by the business.
We expect volume to continue to improve in the second half of this fiscal year as new team member recruitment strategies support.
Staffing and higher throughput levels.
On expenses, we incurred greater cost during the second quarter versus the comparable period, a year ago as live cattle costs increased approximately $545 million in the quarter.
We had sufficient livestock available in the quarter driven by higher herd liquidation due to drought conditions.
As of February 54% of cattle inventory, where in areas experiencing drought conditions, which may lead to additional herd liquidation through the remainder of the fiscal year.
We delivered segment operating income of $638 million in the quarter up 43% versus the comparable period.
This improvement was driven by solid global demand for beef products supporting a higher cut out as well as higher specialty product values, which were partially offset by higher operating costs.
Our operating margin of 12, 7% was higher than the same quarter last year, but was down on a sequential basis versus the last two quarters as cost increases led to a narrowing of the spread.
Looking next at the pork segment sales were approximately $1 $6 billion for the quarter.
Up 6% versus the same period last year.
Average sales price increased 10, 8%, but volumes were four 8% lower relative to the same period last year.
Average sales price was up due to higher input costs, while volumes were lower due to labor challenges from the omicron Serge.
Which led to lower processing throughput.
Segment operating income was $59 million for the quarter down 12% versus the comparable period.
Overall operating margins for the segment declined to three 8%.
The operating income deterioration was driven by softer exports higher input costs and labor challenges.
Moving now to prepared foods sales were approximately $2 $4 billion for the quarter.
Up 11% relative to the same period last year.
Total volume was down in the quarter, given labor and supply chain challenges and uneven foodservice recovery and the sale of our pet treats business.
Sales growth outpaced volume growth driven by higher average sales price.
Consumer demand has remained durable.
Even as we've worked to manage inflation through price increase.
Overall consumer response to higher price levels is below historical expectations as our brand strength and category relevance has enabled continuing strong demand.
Raw material costs logistics ingredients packaging and labor all increased our cost of production.
To offset higher costs, we have executed productivity revenue management and commercial spend optimization initiatives, while ensuring the continued development of brand equity through increased marketing and trade support.
Operating margins for the segment were 11% or $263 million for the quarter up 21% versus the same quarter last year.
Moving onto the chicken segment's results sales were $4 1 billion for the quarter up 15%.
Volumes improved in the quarter due to strong consumer demand and operational improvements our teams have been focused on streamlining our plans to deliver higher volumes.
We expect to deliver further volume improvements in the second half of fiscal 2022.
As harvest numbers improve and we continue to optimize the operational efficiency of our plants.
Average sales price improved 14, 4% in the quarter compared to the same period last year.
This increase was primarily due to price recovery offsetting inflationary costs.
On pricing, we made meaningful progress to shift our pricing mechanisms towards more variable structures and are now seeing those benefits.
We restructured our pricing strategies, given our experience in fiscal 2021 to be more agile in response to market and inflationary conditions.
Chicken delivered adjusted operating income of $203 million in the second quarter of fiscal 'twenty two.
Representing an operating margin of 5%.
Operating income increased in the second quarter due to increased sales volume and higher average sales prices.
Partially offset by the impacts of an inflationary market conditions, including increased supply chain costs and a challenging labor environment.
In the second quarter of fiscal 'twenty two.
We experienced a $100 million of higher feed ingredient costs and $101 million up net derivative gain as compared to $10 million of net derivative gains in the second quarter of fiscal 2021.
During the fiscal month of April the beginning of our third quarter, we have achieved an approximate 5% operating margin, excluding mark to market derivative impacts.
We're starting competitiveness in our chicken business remains a top priority and we are making progress on achieving our long term targets for adjusted operating margin, but we still have work to do.
Turning to slide 16.
Our healthy cash flows have continued to support a broad capital allocation approach.
We are focused on building financial strength investing in our team members investing in our business and returning cash to shareholders.
Consistent with our expectations, our operating cash flows were down slightly in the first half of the year due to planned investment in working capital.
Appreciate it our priority to build financial strength and flexibility.
We used our existing liquidity to retire $1 billion of debt in the second quarter.
Since the start of the pandemic, which this quarter now marks just two years ago.
We have reduced gross debt by approximately $3 8 billion.
We maintained our leverage ratio at one one times net debt to adjusted EBITDA, demonstrating a powerful balance sheet and our continued capital allocation optionality.
Investing in our business for both organic and inorganic growth will continue to be an important priority and will help tighten increased production capacity and market capabilities.
This will support strong return on capital generation for our shareholders.
Finally, as our track record has demonstrated we are committed to returning cash to shareholders through both dividends and share buybacks.
We bought back $175 million of shares at an average price of $88 50 per share during the second quarter.
This is in addition to the $348 million of shares repurchased during the first quarter.
Let's now discuss the fiscal 'twenty two financial outlook.
Based on our strong first half results, we are raising our total company sales guidance to a range of $52 billion to $54 billion.
In support of our sales growth, we now expect 1% to 2% volume growth on a year over year basis, as we work to optimize our existing footprint and run our plants full.
Looking at our margin target ranges for our segments in chicken our operational turnaround is working and we expect full year margins to be between five and 7%.
Based on our first half performance, we now expect the full year margin in prepared foods to be in the range of 8% to 10%.
In beef, we are raising our margin to 11% to 13% we.
We still expect the first half of the year to be meaningfully stronger than the back half as industry and labor conditions are expected to normalize in the second half.
We expect the cattle price increases will reduce the overall margin in the back half.
In pork, we expect similar performance during fiscal 'twenty two to what we accomplished during fiscal 2021, equating to a margin of between five and 7%.
As is normal seasonality for pork, we expect the first quarter to be the strongest.
And international other we anticipate reduced results from our foreign operations in fiscal 'twenty, two due to supply chain disruptions and other impacts related to COVID-19.
Our expectations for Capex net interest expense and tax rate remain unchanged.
Our net leverage is expected to remain well below two times net debt to adjusted EBITDA, providing optionality inorganic investment and additional return of cash to shareholders over the course of the year.
I'll now turn the call back over to Meghan for Q&A instructions Megan.
Thanks, Stuart will 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 operator, please provide the Q&A instruction.
We will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
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 Ken Goldman of Jpmorgan. Please go ahead.
Hi, Thanks, and good morning.
Tony I think you mentioned your expectation for sequential improvements in operating margins in the back half of the year I. Just wanted to clarify does this mean that you expect your operating margin in <unk> to be above <unk>. So above eight 9% and then for <unk> to be above that once again.
Or are you simply saying that the second half will be above the first half with I guess no comment on the cadence of <unk> versus <unk> I know, it's hard to measure. These things I just wanted to be sure. What you were what you were suggesting there.
Yes, let.
Let me, let me pick that up with Donny.
This is Stuart I think you can take it as the first half is going to be not as strong as the second half we haven't gone obviously into giving you quarter by quarter, but we expect our business to strengthen over the back half Youll recall from the prepared remarks that we expect our beads to start to weaken in the second half so some of that quarter by quarter timing will depend a little bit on the on the.
On the timing update.
Okay. Thank you that's helpful and then.
How are you thinking about the timing of the cattle cycle right now what I mean by that is you mentioned that you expected the herd liquidation to continue the rest of the year again, no. One has a crystal ball on these things, but do you have even a rough estimate for when you might expect the liquid liquidation cycle to end next year.
Thanks, Ken.
As Dani.
We expect it to in fact.
We thought we would've already seen lower supply than what we're seeing right now in.
An interesting data point is that cattle on feed reported over $12 million hit a record high for March one. So there is a little bit of noise in the steel drought conditions.
Grain costs there are certainly.
Impacting our supply but.
We as we said we think in the back half of the year, we will see the spread tightened in.
Our beef business and.
But I would also point out that we think it will be much higher in fact, we call it 6% to 8%.
On a normalized range these days, but.
It's.
It's holding up pretty good right now and while we're not going to be a record back half we think it will be a very good one.
Thank you to you both.
Thank you.
Yeah.
The next question comes from Adam Samuelson of Goldman Sachs. Please go ahead.
Yes, thanks, good morning, everyone.
Good morning, Adam.
So I just wanted to dig in a little bit more in chicken and thinking through.
The margin expectations are in the back half of the year, specifically and then what that implies as you move into fiscal 'twenty three I think in the prepared comments you talked about April being at 5% kind of exclude even after any mark to market.
Impact on grain.
How do we think about the different levers to further margin improvement in chicken through the back half of the year, whether its volume in terms of the hatch and your throughput.
And the slaughter plants mix.
<unk> actions.
And some of the incremental inflation as we look at grain and some of your other purchases.
Thanks, Adam Let me, let me say, a few words and I'll flip it to David Ray to add a few a few details.
It was a year ago this quarter that I talked about the turnaround in chicken in fact talked about being at a 5% 5% to 7% business.
I would tell you in this quarter January from a from a omicron.
Resurgence.
Haynesville across all of our businesses.
But we have improved sequentially throughout the quarter the back half of the year in chicken specifically.
The thing that we need is greater volume greater efficiency from the assets that we currently have.
We've announced a further processing plant that will come online next year that will add some incremental capacity, but our productivity program is working.
We are becoming more efficient and our volume is growing and I would expect you to see that to continue to grow and develop over the balance of the year.
I would tell you in short we're on plan.
Let me flip it to David and he can add yeah.
Adam Good morning, and thank you for the question I think first and foremost what I do want you to here is we have made progress within the chicken segment, but we also know that we have much much more work to do and we're focused against that I would also tell you that we said that we would deliver sequential improvement throughout the fiscal year and we have.
We also shared that we would see improved volumes sequentially quarter over quarter. We have seen improved volume of improved volume and we also said that we would outpace the market for growth and within the Q2 timeframe, we did that as well in Q2, our harvest head was up two 9% and our <unk>.
Harvest volume was up four 9%, which actually allowed Tyson to gain share in the in the Q2 timeframe of about three quarters of a point.
We've also improved our adjusted operating income in our OE margins sequentially quarter over quarter and this was the case, whether we include or exclude any impacts of derivatives against our business and so again I would tell you we're making progress we have more work to do we are focused and our goal has not changed to be the best Chicken company as we.
<unk> on the levers of our business, we're continuing to work hard to staff, our plans and today I would tell you. The poultry segment is staffed to standard we're continuing to work on servicing our customers growing our business and to drive overall operational improvement.
If I could David if I can add one more thing Adam.
On Friday, we closed.
We closed on the on April .
By the way it was a five day closed which is a new record thanks to steward Philip Thomas and the team.
But in chicken specifically April was a good month and Stuart referenced in his prepared remarks around 5%.
I can tell you from the close it is better than five so.
I'll leave it at that.
Alright, Thats really helpful and if I could maybe just follow up in chicken and I'm just trying to think about the internal kind of actions, you're taking and what you have under your control.
Very clear and I'm trying to make sure we can calibrate how the external environment has evolved in terms of record.
Breast meat prices.
Maybe some declines in wings.
Risk around avian influenza and what that could potentially do to exports.
Relative to the.
The grain markets and just trying to thinking about how changes in that external environment.
It would or would not impact kind of how you think about chicken moving forward.
Thanks, Adam.
I will tell you we started <unk>.
A year ago with a four.
What we call our core pillars.
Which was staffing our plant servicing our customers growing our business and our story and industry, leading operating performance that's still our plan.
As you well know there are number of variables.
Going on right now in the poultry business what I can tell you is volume is good demand.
Demand is strong in fact, I would tell you that.
If you look at the price of boneless skinless breast meat.
Friday was somewhere around $3 60.
It's been a long time since I've seen that kind of strength in breast meats and.
For chicken overall.
So grain is higher of course.
We are seeing that David and his team are responding with shorter term contracts to try to protect Tyson and try to protect our customers as well.
Asaf flip it over to David if there is any other things you'd like to add yes, I think just from the grain standpoint.
Despite what we're seeing from volatility in green.
The turnaround in chicken is progressing as planned and ill again, a large part of that is based off of a variable pricing structures.
To move much faster than we have in the past and thats been a big benefit to us relative to the avian influenza. Yes, we are watching that closely and it is it is always a risk within this business, but I would tell you that we mitigate that risk through the use of our bio security measures and they are in place across all of our facilities right. Now. This includes testing every block.
We have four AI before it leaves the farm we are operating under heightened measures in some geographic areas of the country right now.
Heightened measures would basically be we're limiting the amount of people and trips that are taken to our farms as well as making sure that the people to do go to the farms are in clean vehicles, and we will continue to monitor that to that I would tell you that any bird loss related to disease impacts our growers and flex our plants as well, but these had.
Relatively minimal to our business to date.
Alright that colors, all really really helpful. I'll pass it on thank you.
Thank you.
The next question comes from Ben.
Of Stephens. Please go ahead.
Hey, good morning, everybody.
Good morning, Ben.
So I want to ask I wanted to follow up on Adam's question about the chicken business.
Obviously your commentary on April is quite strong your guidance suggests continued strength in that business.
If we could I wanted to ask a little bit about the mechanics of what happened in the quarter and kind of mechanics of cost plus.
I think.
I think we have an understanding of what happens when you have derivative gains and why but would you talk about when and why you hedge your grain.
And to the extent that we look into the balance of the year and that reflects hedges that you have on.
The benefits that you might.
Enjoy as a result of that could you talk about that versus.
Cost plus sort of mechanism that wood grain prices go up.
Allow you to take higher prices.
Trying to understand the moving pieces around what we should be mindful of as we monitor the environment going forward.
Let me do it let me go ahead and pick up the question on hedging so.
We we hedged primarily when we are obligated to fixed pricing, particularly any kind of agreements.
Is that a longer term that makes sure that we're not exposed to.
To a fixed price with a with a moving.
Commodity base.
This year, we've seen a shift we've talked about that in a couple of our calls we have shifted to more.
Variable of commodity driven pricing.
Which means that we don't have to we don't have to hedge as much.
In mind also though that.
Those pricing mechanisms will have various triggers and therefore, they won't be repricing every day and so you will see us of course hedging over the shorter term to make sure that during that kind of lag period, where we were obligated to price that we've got.
That we've got protection from movements in the AR in grains and other commodities.
Is that helpful.
Perfect very helpful. Thank you.
Pivoting and thinking about the prepared food business really solid margin results in the quarter I know, there's the cost price dynamics that you and all of your peers.
Navigating.
The back half of the year suggests maybe a little bit of margin pressure and then expansion. Thereafter can you talk about how you feel about your price elasticities in that business. How you feel about your ability to operate the business well and perhaps you know as we cycle through some of the volume losses.
The pet food business Patrick business.
Improve and deliver on fixed cost absorption and your balance of the margin balance when we move through this year and into next year would be helpful. Thanks.
Thank you Ben Let me, let me hit a couple of points and I'll flip it over to Noel and she can she can go into greater detail with you.
And you saw in our statements.
First half was down we had a lower production throughput again January was.
Trebling with omicron resurgence challenging labor.
We did have the sale of pet treats in the quarter.
In the first half we expect volume to improve retail demand remained strong and we had some uneven recovery.
In our foodservice business meeting.
There are some spots in I'll call them out specifically and then I'll flip it to Noel and our pizza topping business. For example, it was softer than expected are fairly business was softer than expected in our tortilla business was softer than projected and with that I'll flip it over to Noel and she can talk about the elasticity.
Right. Thanks, Toni so.
Any reference demand really does continue to be strong driven by our strong brand equities and our diverse portfolio and we do see that demand continues to exceed supply in a majority of our categories.
We've made significant improvements in our labor vacancy rate, we expect to be back to pre pandemic levels in the second half we also have.
Investments coming online that we referenced in the prepared remarks on capacity.
As Tony referenced in foodservice, we are seeing if it is uneven recovery overall I would say, it's showing momentum where we did see.
Impact is in January and February where are the omicron variant Serge had a brief negative impacts as consumer mobility waned and secured a traffic decline and this along with some of the other dynamics from a labor perspective in the industry slowed recovery at the beginning of the here that as we look at March traffic data shows that we are rich.
Turning to <unk> recovery levels as Covid cases dropped back to a bit more normative level, but broadly speaking <unk>.
<unk> continued to lead recovery relative to other channels. We're also seeing great momentum in K 12, and continue to be optimistic in the overall recovery and as referenced we continue to make significant impacts in cost transformation.
And so you'll continue to see a focus on that holistically for us across the business as we continued to improve labor as we continue to expand our capacity as we continue to invest in our portfolio and our leading brands and expect to deliver 8% to 10% or less for the year.
Okay, great. Thanks, so much and best of luck with the rest of the year.
Thank you.
The next question comes from Peter Galbo of Bank of America. Please go ahead.
Hi, Good morning, Thank you for taking the questions.
Maybe we could start with beef.
You know you guys have had obviously senior business I think.
You know disaggregate a bit from from some of the third party sources and I do think a lot of that probably comes from your export business and maybe some of the byproduct business, but can you talk about you know.
Maybe those two specifically in the quarter and how we should think about them going forward as we monitor external data versus you know kind of what you report stronger results at our reporting in beef.
Yeah, Peter I'll make a couple of comments and I'll flip it to Shane to make a couple of them.
In our Q2 sales volume did increase we had improved staffing and higher harvest weights.
We've talked a lot about the fact that we're buying a higher grade.
Animal <unk>.
Process.
Rates have improved significantly through the last couple of decades.
That continues to be the case for us, but as you pointed out we are seeing.
We're seeing a lot of help from our specialty products group, particularly.
In the past and tallow area, our relationship with Jacobs turns.
And that we've had there.
To take a lot of that product and with the price of diesel and fuels, we're able to.
We're able to turn out.
To get some really great value out of those products and thats, providing some tailwind for us in our beef business, but I'll flip it to shayne and he can add a little bit more color to that.
Yes, Thanks, Dani and thanks, Peter for the question.
Donnie he hit on a couple of the categories, obviously specialty products, which is everything thats coming off of the.
The drop or the harvest side of our operations has improved we continue to see better value coming from the fats and oils category, but also if.
If you think about areas like proteins, you think about how do you think about some of the variety meats that are typically sold into the export arena.
We're seeing very strong demand globally from them from the product mix that we're supplying to the marketplace.
This is still a cyclical business we believe.
Over that continuum that beef demand will continue to be very strong from a global perspective.
And on top of that if you think about the value that we're bringing to the marketplace and also to the ultimately to the consumer.
The quality and the cattle genetics that are being supplied to us today have never been better.
So I think as we look forward here strong quality, great product mix and diversification of customers and programs will lend to stronger support.
That's helpful. Thank you.
And then Tony I, just wanted to reconcile some of your comments in chicken around your hatch plan or hatch improvement plan being being on track.
I think for total company, though you took the volume guide down and just wanted to understand.
What that implied around back half chicken volumes I think previously we had talked about them being up double digits to kind of make the year. So just wanted to reconcile kind of those those two aspects.
Sure.
There's a number of things going on there.
We have the.
Our hach has improved.
We're better than the.
Then the average of the industry for example today.
Year ago, we could not say that so.
So we have seen improvement there.
We have also reduced our outside purchase of meat and.
That's that's had a pretty significant impact on our overall volume in chicken specifically.
We also if youll recall, we had a fire in Haynesville, Alabama that impacted our volume not only of the.
Rendered product that we produce ourselves, but the ability to go buy that on the outside that had a pretty significant impact as well.
So those are those are kind of the top line things relative to volume what I will tell you is.
We grew in the quarter, we grew in the first half.
We didn't grow at the rate, which we said if you'll recall we were we wanted to grow.
Faster than the market, which we did.
But not where we want to be in terms of overall volume and I will let David touch on some of that yeah. I think one other comment to that as we have seen several weeks five weeks of continuous improvement within our live operations in one big component of what's going to continue to improve for us as we are on track with the delivery of the new mail until all of our.
Farms and so we feel very optimistic about that it's a mail that we know very well with that we will continue to see improved hatch rates within our facilities as well as improved weight gain across with the with the new mail coming in.
Thanks, very much guys.
Thank you.
The next question comes from Ben Theurer of Barclays. Please go ahead.
Yeah, Yeah. Good morning, Dani Stuart Congress on the results first question, just if you could elaborate a little more about the.
<unk>.
Productivity program and the savings realizations, which you had the roughly $4 million you've mentioned can you give us a breakdown on like sector basis. How we should think about where were focus has been mainly put within more recently and where do you think low hanging fruits are for the back half to deliver here.
My.
The first question.
Sure. Thank you.
But in terms of productivity I would just start out by reminding what we said in our Investor day.
We said.
We said that from an operational and functional excellence perspective between now and 'twenty four we would say 300 plus million.
From a digital.
Making that.
Applying digital throughout our supply chain was worth another $250 million in automation was $450 million.
What I can tell you today is that we.
We will deliver near $400 million in year, one and each and every day, we identified new things that we can put on our tracker that.
Will deliver better results.
But I would want you to take away from this is is that there is unprecedented inflation inflation, we haven't seen in generation drilling.
And.
So this is not just a pricing for inflation. We're also doing everything we know to do to become a more productive or more efficient at a lower cost producer.
And as we say in our poultry business, we want to be a top quartile or better in every place that we play and we still got room to do that so I would tell you that we're on track.
There are things like trucking fleet resources and optimization.
Our procurement program.
The address total company spin.
And then gaps in fulfillment.
The debone automation projects that we have in poultry. They are progressing as planned in fact, they are a little ahead of that and so we feel good about that but our future. Our future is going to when we will have a fair market value price in the marketplace, but two we want to be among the very best in every.
Place that we participate.
Okay Perfect and then my follow up is actually just a quick one for how long one of her comments you made around.
The adjusted operating margin in prepared foods to get this to the 10% level. So obviously, if we look into first half was very strong roughly nine 5%. So.
So that's already the higher end of the range. So how should we think about that 8% to 10% is it really achievable or a higher level. Because I think you said something like you want to be a pattern. So you wanna be Tim, but there might be some uncertainty, which could bring it down for whatever reason, which we don't know today, but we should more plan on 10, and maybe 8% fair.
Well, what I would start by saying is to your point and you've heard this in the prepared remarks in Syria emphasize as well that we had a better than expected first half really driven by the actions that we took.
Price to offset inflationary impacts.
And instead, we saw in labor.
Cost transformation is starting to come through as well as mix.
As I referenced a few minutes ago the demand.
The expectations that we see continue to outpace supply and with labor and we'll then turn to the capacity investments. We can expect volume improvement as we continue through the second half. We also anticipate continued foodservice recovery.
As we look towards the back half on the inflationary side, we do continue to expect inflationary pressures through the back half, which is why I. So top of mind on the cost transformation efforts that Danny just referenced itself holistically for confidence about the 8% to 10% or less range.
Okay perfect. Thank you.
The next question comes from Alexia Howard of Bernstein. Please go ahead.
Good morning, everyone.
Good morning.
Digging into the labor cost issue.
To begin with maybe some numbers is how it is.
If you have them.
The labor labor costs, as a percentage of Cogs, especially in chicken.
Your they can see rates and how that trending over time.
And specifically just more philosophically you've been improving pay and benefits for two years now since that summer of 2020, and it seems as though the pandemic is easing and yet these labor challenges are persisting I.
I think you alluded to the diversity of your team members.
Is there a more structural problems with the tightening of immigration policies that that sort of dried up the well as why you can recruit.
People into those types of roles and then secondly on the labor side.
Just thinking from a cultural perspective or from a morale perspective.
I think youll automation processes are talking about a 3000 person reduction in job counts over the next three years to fiscal 'twenty four.
How do you recruit and retain people as you're going through that automation process. I mean is this like I'm trying I'm trying to get at whether this labor issue is likely to be a persistent problem. Despite all the efforts that youre, making to improve the working conditions. Thank you and I'll pass it on.
Thank you for that question and I'll hit on a few points.
For example, we realize fully realize that.
We have to create it.
Desirable place to work and in fact, we've talked about it.
In terms of being the most sought after place to work we realized that.
Those team members that we have can work wherever they choose to work and we want to give them a reason to work for us.
I believe I said in the last call. It is not my objective to fix the labor problem for the United States.
Our objective is to fix the labor issues that we have at Tyson foods, and we're doing that.
And it's not.
There is not a one one thing that fits all of the needs. For example, childcare you could talk about child care and there is a subset of the population.
As a value.
But there's also other areas, where it's not transportation is more desired and needed in other areas.
We have in some rural communities for example.
The need for healthcare, so we created on site or near site health clinics that our team members and their families have access to little or no cost.
That's one more opportunity for us.
To have a differentiated place to work.
True, we've continued to invest in wages and benefits.
And booster shots and booster clinics, we've done over 100 of those.
And we think we're seeing a positive impact from those things we are seeing improved absenteeism at turnover rates.
We announced that we're going to support.
Team members through nonprofits to trial for legal citizenship support and.
And then two weeks ago I think it was we announced upward Academy program.
We're going to spend $60 million over the next four.
For years for education for our team members.
Masters degree Bachelors degree associates degrees skewed life skills training English for example.
Whatever we can do to try to differentiate Tyson as a place to work. We're committed to that result, this past year paid all of our team members.
We ended the year. Thank you bonus.
And we were happy to do that.
Those team members. We have are the lifeblood of this company, we don't do anything without them, so investing in them taking care of them keeping them safe is our highest priority.
Thank you very much I'll pass it on.
One other question.
Yes.
Okay.
Our next question is from Ken Zaslow of BMO. Please go ahead.
Hey, good morning, guys.
Good morning, Ken.
Can you talk about the prepared foods business it sounds like Theres a lot of internal improvements.
Is the margin structure that you've created for this year.
Kind of forecast, how youre going to be going forward in 2023, and 2024 does this give you more confidence or are you more tempered because of the inflation.
Got a sense of both those sides throughout the conference. So far so I'm just trying to figure out I would've thought it would've been more.
Bullish longer term, but it sounded like you were tempering it a little bit on the inflation I'll leave it there for now.
Thanks, Ken I'll start off and then I'll, let Nols if he wants to add anything I think it's important that everyone hears that.
We're pricing and.
And trying to get a fair market value for a product in the marketplace. That's one.
<unk> Avenue.
Secondly, and the one is absolutely in our control is to be able to do what we do better.
As being best in class and operations as the labor Thats yield that span productivity running lines at rate.
And then let's not forget the fact that the.
A location, we all have 168 hours in a week.
How do we run more hours in a week and get greater asset utilization of the assets that we currently have and so we're looking at all of those things. So productivity don't think of it as something to offset inflation think of it as a way of life and who we are as a company.
And it's it's the gift that pardon expression as the gift is going to keep on giving for us and it will never go out of style for us So with that let me pause and I'll, let <unk> add some color to that thank you Tony and thanks for the question Ken So.
What we've talked about.
Through Investor Day, and as these come together on these calls we continue to believe and are confident that this portfolio is a double digit rls business and the foundations of the building blocks.
Continue to be the same demand continues to be strong cross retail as well as the expected continued.
If its recovery.
As we look holistically at the top line acceleration.
Come from the actions that we're taking to increase capacity both in our existing footprint as well as through expansion in our network, including step change investments in automation that Tony referenced.
We're also taking significant actions to transform our cost base and we'll continue navigating the increases input with pricing to offset inflation thats necessary and so you do recognize.
The theory inflationary dynamics that we're mindful of as well as continuing to keep a V.
Very close launched on the elasticity as high as we go throughout the second half, but as we look holistically in terms of the strength of this business the demand outlet coupled with investments across our portfolio mix opportunities within the business, which includes organic discriminating investments as well as inorganic portfolio.
So shaping and aggressive cost transformation, we're confident in our path to deliver sustainable double digit margins and then for the year as we referenced we do expect to be in that eight to 10 <unk> range.
Great I appreciate that and then my second question is when you think about the cattle cycle longer term there seems to be a lot of or a fair bit of new capacity announcements over the last six or so months going out 2023, 2024, how do you think about that new capacity versus the cat.
The supply versus the demand and how does that impact how you think about.
Steve.
Margins longer term not just this year.
I. Thank you very much.
Thank you Ken.
I will start off and then I'll flip it to Shane to add a little extra color.
In terms of incremental capacity.
Competition makes us better so we're not we're not frightened by that we welcome that so but in terms of cattle supply because of the drought in herd liquidation and a number of other things going on.
They will have some impact on supply in the cattle out front in.
In terms of.
In terms of our business. So I think it's really important to understand.
A cow is not a cow and the fact that we.
We work with our ranchers and.
Peters.
And we buy a premium cap.
And that premium cattle, we pay more for it but we also get a better cut out for it.
And then we've talked earlier about specialty products, particularly fats and oils and hides and the like and.
And how that helps that hole cut out value.
No.
We've had some really extraordinary mark.
Margins and over the last couple of years.
We don't think that will maintain that level. It was a point in time in a shock to the system. However, we do believe that we'll be in that 6% to 8% range on a go forward basis because of some of those things that I talked about earlier.
And with that chain any anything I've missed.
Yes, and thank you for the question Donnie you hit on most of it here I would say you know a couple of things here and I mentioned it earlier that you know from a P.
Head of cattle genetics perspective, and the quality that that are feeding partners are bringing to the marketplace today, it's never been better and.
The drought conditions that are plaguing I'd say over 50% to 55% of the country continue to persist so you've seen heavy Cal liquidation year to date that's impacting.
The forward curve because this is what's going to impact two and three years out and thats due to the lack of grass and for US that's in the country right now so.
As Dani mentioned.
We expect to see more competition for livestock here as we go forward.
Laser focused on staffing our plans building our supply chain enhancing our relationships servicing customers and performing with the best and.
This is a very competitive industry and it always has been.
But at the end of the day is having a diversification of programs and customers.
We feel we offer a solution to customers through our through our case ready business with two new plants that have been added here. This past year theyre going to lend to our overall success too so.
Yeah, we're seeing higher prices here from a capital perspective, and we anticipated that here and we continue to navigate that.
Your point in your question is spot on and Theres going to be more competition in the future.
Great I appreciate it guys.
It can't just Joe just one thing to add I mean, I think important to just think about.
How this impacts the shape of the year, Ken Goldman opened with a question on the sequential improvement.
That answer I gave him just all of your really clear related specifically to chicken that was John Dannys comment on chicken sequential improvement in chicken and the guidance that supports that.
Comment on beef, which ties into your question is that you have to watch beef in the back part of the year. When you start thinking about pricing as a whole because the first half of the year has been better it's been a better off near 16% in total.
And that's.
That's been a great result for us of course, the back part of the year, we will start to see that come often in the coming quarters, we'll be able to give you the guidance on the future years, but.
Clear that we've been consistent in Investor day, and in recent calls and saying and we think that global demand for beef is strong and so long as the camera there to supply that are over the long haul.
Think it will be a better business than it has been historically.
Hi, great. Thank you very much.
Thank you Ken.
This concludes our question and answer session I would like to turn the conference back over to Mr. Donnie King for any closing remarks.
Thanks again for your interest in Tyson Foods, we look forward to speaking to you again soon.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
Okay.
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