Tyson Foods, Inc. (TSN) Earnings Call Transcript & Summary

[Audio Gap] and against the backdrop of all-time high unemployment and looming global shortage of protein from African swine fever. Third, how a potential global recession, the oil price collapse and falling gas consumption ripple across the industry in terms of food consumption, export demand, the state of the ethanol industry, crop input demand and U.S. pharma economics. Fourth, how companies capitalize on or navigate the political tension across trade and biofuel policy. The government will play an unprecedented role in the future of the U.S.-China trade relations, the sustainability of biofuels industry and the health of the farmer. Fifth, what internal actions across the product portfolio, supply chain and cost structure are required for food companies to adapt to the changing consumer purchasing habits, particularly in terms of food preferences and delivery options. Can food companies excel at revenue management and pricing decisions as well? Sixth, in a slow-growth environment and lower crop prices, how oversupplied fertilizer markets respond in terms of product, producer discipline and balancing price versus volume. In terms of seed and chemicals, can suppliers convince growers to pay a higher share of benefits for new and better yielding products? Though the world has become more fluid and complicated, our underlying goals today are largely unchanged from past years: to help investors understand and explore key issues and identify investment opportunities. In addition, we hope investors gain insights and answers to pressing questions about the food supply issues facing the U.S., something on the minds of most Americans as we navigate the consequences of this global pandemic. Thank you again for your participation. And from the entire team at BMO, welcome to the farm to market conference. Hey, good morning to all. We're in unprecedented times, but you have been more than gracious to continue a 15-year-old tradition of kicking off our conference. Tyson is a linchpin to the U.S. protein supply for which COVID-19 has created a precarious situation. With more than 35 years of experience at Tyson and ibp and 1.5 years as Tyson's CEO, you are in a unique position to help steer the country through this pandemic, ensure consistency across the protein supply chain. We're also joined by Stewart, your CFO, who will continue to execute financial discipline and strategic investments. With all you have going on, you guys made it a priority to join us today. We cannot be more appreciative. And with that, let me just kick it off with the first question.

Can you guys discuss the changes in demand profile across your divisions? Seeing what has changed and since third quarter, what is the update and what are you seeing in terms of the changing of demand patterns?

Before I start, Ken, first of all, let me say it's a pleasure to participate in your conference, as always. But before we get started, I'd like to remind everybody that today's comments include forward-looking statements. And for a list of the risks that we -- can affect our business, look at our most recent SEC filings at ir.tyson.com. So Ken, can you repeat the question for me?

Yes. Can you talk about the demand profile across your divisions? And what have you seen that has changed most recently? The environment is changing so quickly, so I just wanted to see what you're seeing across your divisions and demand profile.

Sure. Sure. With the onset of COVID, the most significant change, Ken, was really the rapid transition from foodservice to retail. We saw a significant increase in our retail demand, up 40%, 50%, and we saw the same -- a similar decline in our foodservice business. It was down 50%, 60% with different sectors of the foodservice being impacted in different ways. Those QSRs that had drive-through or take-out were less affected. Sit-down dining was certainly the most affected. However, I would say in the last couple of weeks that we have seen the foodservice sector recover from where they were at over the last -- over the course of the last 2 or 3 weeks. So it's a positive trend that foodservice is returning and retail continues to be very strong as well.

And how is your Prepared Foods position? And can you also frame the QSR -- your QSR exposure?

Our Prepared Foods business has been exceptionally strong really in all segments, all categories. The only softness that we've seen at all is a slight softness in the snacking area. But all of our other areas have been very strong. Relative to QSR, they are a significant portion of our foodservice business, that many of the larger foodservice establishments across the country, we are primary supplier. I would say that their business has been surprisingly resilient through the whole crisis. So it took a dip initially, but over the course of the last few weeks, it's come back and has been fairly strong.

Great. Can you give us a status of your operations and production levels? What is your estimate of when capacity utilization will return?

Ken, that literally changes on an hourly and daily basis. It's -- as an example, a week ago at this time, we had 6 beef and pork facilities that were closed for varying amounts of time. All those operations are -- have restarted. Most of them came back online midweek of last week. So it's a process. We still have some facilities that are not operating at full capacity, and there's a range of facilities that might be anywhere from 50% to 100%. So it literally changes on a daily basis. I would say, Ken, that safety is by far our foremost concern. And if we do believe that any of our team members are at risk, we will not hesitate to take the plant dark to assure their safety.

How long do you think it will take for you to return to normal? Like is this -- or will there be a normal? And is -- will social distancing and absenteeism structurally reduce line speed and throughput? And can you talk separately about beef and pork?

Yes. I think that with the DPA being enacted, that, that did establish some standards for all of us to operate within. We're working very closely with Department of Agriculture, the USDA, CDC to make sure that we are in compliance with those guidelines. And those measures are in place today. So all of the PPE that's necessary, the physical distancing, where possible, is all in place. We now have both face masks and face shields available to our team members. We do temperature checks. So we feel good about where we're at right now. I think the question is going to be what the community spread is going to look like over the course of the next 3 to 6 months. We closely track the positive rates not only at each one of our plants but within the surrounding community and see if our infection rate is running higher, lower, the same. But it also gives us a sense of where the spread is moving to. So as an example, we had our first outbreak in 2 plants that we operate in Southern Georgia. They were poultry plants. And then we saw the virus spread to more of the Upper Midwest, a number of plants that we operate in Iowa, Indiana, Nebraska, Kansas, in those regions, and that's when we took those -- the number of plants dark I mentioned 2 weeks ago. So we're tracking, Ken, where the virus seems to be moving and then working with the local and county and state health officials along with the CDC to make sure that we stay ahead of it.

But do you think -- even for the industry, I think the current pork capacity utilization is roughly around 75%. I just did a back-of-the-envelope calculation. Do you think that social distancing and absentee will structurally reduce that line speed and throughput that we'll never get back to that 100%? And is there a right level to think about from our perspective either from beef and pork? Or...

No. I do think, Ken, that it can get back to those type of levels. I think many of us in the industry are working on solutions that are longer term, such as social distancing in break rooms and cafeterias, locker rooms, and we have temporary structures that are set up to accommodate that. It's going to take some structural changes in the plants to make sure that we maintain at least a 6-feet distance between all of the individuals. But from a line speed capacity standpoint, I think that we can get back to the levels that we are operating. And if you just look 2 weeks ago, Ken, at what the slaughter was running both in beef and in pork, particularly in pork where there's a number of major production plants that were closed, I think that most, if not all, of those facilities are back online today. And there is a period of time that -- and there's still absenteeism where we have people out of the plant for -- to make sure that they're quarantined for the appropriate amount of time. So some line speeds have slowed down to accommodate the number of team members that we have in the plants. But as they come back, and they are, then the line speeds should resume back to where they were at pre-COVID.

We get, either fortunate or unfortunate depending on how you look at it, of looking at what publicly traded beef and pack -- beef and pork packer margins are using certain different mechanism, HedgersEdge, things like that. Can you answer a couple of things on this? One is, is that a fair metric given how exposed the margins are? And what is your outlook for Beef and Pork segments at this point?

Yes. I'd say it's directionally correct. I don't think that you can take them as absolute. But directionally, they are. And an example of that is within most of the common calculations, there's a cutout number, a cost of livestock number, and then there's a number that's plugged for plant operating costs. And with the decrease in throughput, operating costs are sharply higher than what they were pre COVID. Our business is -- we have a high fixed cost in our facilities. So when you decrease throughput, it does have a significant impact on costs. But I do think directionally, you can look at that as being correct. The outlook for both beef and pork and poultry for that matter is very positive that if we go back to pre COVID, we talked about the growth in global protein demand, which has been growing historically at about a 2% rate, which is faster than what production has been growing. And then the -- that was compounded by the African swine fever that broke in China, which was decimating to their industry. There's -- roughly half of the hogs in the country perished, and about 25% of the total global pork supply disappeared as well. So I do think that from a global perspective, demand continues to be strong. Export interest continues in both beef, pork and poultry. So we're very encouraged from a long-term perspective. But we have, obviously, the issue at hand to deal with, which is COVID, but it, too, shall pass. But we're very encouraged by the long-term outlook that we have.

Do you think that the hog and cattle producers will end up in a liquidation? And can you compare and contrast the hog and cattle outlook on protein supply?

Yes. I think it depends how quickly these -- the -- all the production plants come back online and up to near capacity. There's a WASDE report that was recently released, and there are some pretty sizable changes in that report. It showed production going down, which obviously has an impact on domestic disappearance, the amount of protein that's available domestically. However, the hogs for the balance of 2020 have been born and are on the ground today. And the same thing would be true with the cattle, that there's about a 2-year pipeline of cattle. So we have good visibility of availability over the course of the next 6 to 18 months, and in case of beef, up to 24 months. Poultry, on the other hand, egg sets were significantly reduced this past month. We went from mid-single digits increase to roughly an 11% decrease. So there's a pretty sharp reduction in the number of egg sets for poultry, which will, in fact, affect supplies kind of in the midsummer months. But beef and pork, there should be -- continue to be good availability. And I don't think that the livestock producers will need to liquidate provided the plants can get up and running, and that's why I keep going back to the safety of our team members, keeping them safe, making them believe that our workplace is a safe place for them to be. And that's truly the key in being able to process the number of animals that the industry needs to right now.

So the elevated sow slaughter, you think, is temporary and won't affect the supplies going forward, and you think the cow cycle has not been short-circuited in any way. Is that a fair commentary?

I'd say it's too soon to tell, Ken. I mean it's just been recently that we've seen the sow numbers go up. On the cattle side, it appears like we're either at or reaching the peak in the cycle, but it doesn't appear at this point that there's liquidation that's taking place with the increase in [ helpers ] as an example moving into the market.

Okay. On your call, you kind of gave an outlook for chicken supply, which I think was surprising to many, including myself, that you thought that the supply would actually expand in 2020. Can you give us an update on what you're thinking on that? I know yesterday the USDA did come out saying that chicken supplies will actually be flat rather than up 3%. What's your thinking on that now?

Well, if the egg sets were any indication, Ken, that somewhere around flat is probably a pretty good estimate at this point. That's with 1 month of data that showed actually a decline. So when -- on the call, you asked the question of pricing as we go out 2020, and I think you were expecting a decrease in production, therefore an increase in price. And our outlook has been basically flat to slight increase in production numbers, which is the reason I answered the question the way that I did, which is, didn't see any strength at that point in pricing. Now if volume does decrease and production decreases, then economic modeling would say prices typically go up.

In terms of the production reductions, is it a function -- has it been a function of the labor constraints or a function of the margin structure? And what are the implications if prices start to go higher?

For poultry specifically, Ken?

I'm sorry. Yes, for chicken. I'm sorry. Yes, 100% for poultry.

Okay. I think that what we're seeing in the marketplace today, we've seen a fairly rapid rise in beef and pork prices. The cutout has risen pretty sharply over the course of the last 2 to 3 weeks, which makes chicken very attractive both at a retail and a foodservice standpoint. So I think that with that potential strong demand that we're seeing now in poultry, I think it's very feasible that prices could react to the most recent shortages of supply in beef and pork. And right now, poultry is just an attractive alternative.

And do you think the production cuts have been more labor related? Or do you think it's been because of the margin structure was so weak?

Probably some of each, Ken. I would say probably more so on the margin structure. Labor has had an impact in different plants, and it does affect the mix of the products that you produce. It can affect the yields, which are all very important in our ability to make money. So I think that it was a secondary effect of having some labor shortages that you can't necessarily optimize what you typically would because of the available supply of labor. And then that, in turn, affected margins.

So it sounds like you're a little bit more constructive on chicken pricing given the recent data of egg sets. Is that at least a fair commentary?

It's fair, Ken, but I am somewhat hesitant and cautious in the fact that -- I mean, the number of hogs and cattle that were available are still available. So if the plants resume to normal operating speeds fairly soon, then that's going to fill the void that has developed over the course of the last several weeks. And that can quickly change then, right, with increased supplies of both beef and pork. Typically, when that would happen, the prices would move lower from historical levels that they're at today. And at that point in time, then poultry wouldn't be quite as attractive as what it is today. So I think that what we see over the course of the next 60 to 90 days in plant operations are really going to dictate what happens to the availability and, in turn, the pricing of poultry.

We talked a little bit about labor and the cost structure, but I'd like to just touch a little bit more deeply on that. Can you give us an idea of the magnitude of increased operating -- operational costs across each division? And how much is temporal versus how much is structural? And how do we assess that?

Yes. Ken, it's Stewart. So let me pick that up. I think -- so first of all, we haven't broken anything down by division. But let me just try to give you a top-level picture of how we see the costs. So as Noel mentioned, of course safety is our highest priority because that's the surest path to getting our plants back to operation. And there's a fairly high degree of cost that we put against that. And I quoted the other day that we were spending about $8 million to $10 million a month on face masks just alone, right? We've been -- we've also enrolled some online company -- on some online medical -- on-site -- online. We enrolled some on-site medical assistance from Matrix and Axiom, 2 medical companies to help us test and case-manage our team members. We obviously have put up barriers. Those are a range of PP&E costs. I think Noel has pointed to some of those. From an employee welfare perspective, I mean, we've been very, very quick to ensure that our employees don't suffer any sort of financial consequences of contracting the disease and feeling like they have to come to work. And so we've continued to pay employees. We've paid employees while plants have been closed or while they've slowed down. And noteworthy, we mentioned in our call that we've spent $120 million on employee bonuses. So when you start to add up the cost of PP&E, the employee welfare and bonuses and the cost of some -- of slowdowns or even shutdowns, I mean, we're certainly running costs into the hundreds of millions of dollars. Having said that, to your -- to the most important part of the question, is it structural or is it temporal? And I would argue that the vast majority of this is temporal.

And timing of when they'll start to subside, like how do we see the -- I know that's a difficult question, maybe a little bit of an unfair question. But nevertheless, how do I think about how the costs will start to subside? And what is the timing of that?

Well, I mean, I think that's sort of trying to predict what the course of the virus itself and what kind of recovery we're going to see in the marketplace is. That's very difficult to say. But it's instructive to look at what has happened where we have taken plants down. And in most of those cases, you see the plants coming back in a couple of weeks. So operations, I think, over time, and Noel probably can comment more on this, we will start to see that, that improves. But the timing of that is very difficult to say.

Yes. Stewart, I really can't add anything to that because it is trying to predict when we're going to see the virus subside. And as that happens, then our costs will subside at the same rate.

Just -- I get this question a lot. Can you talk about the antitrust concerns raised by several states regarding pricing? I don't know what you can say publicly, but it would be helpful to at least give your view on that.

Well, we -- Ken, I can tell you that in the course of my career, there's this, I don't know, third, maybe fourth time that's -- faced the same accusation. We believe in honest and fair competition. And we did have to shut down some of our facilities for varying lengths of time, and that resulted in some lower volumes in both cattle and hogs, which eventually resulted in a higher price. That's basic economics that we didn't have the demand for the livestock, therefore livestock prices went down. And without generating the supply, prices went up. So it's pretty fundamental economics. And it's the same argument that's been made a number of times before, so we have complete confidence that the ruling will be in our favor again as it has been in the past.

Yes. And just going a little bit on corporate strategy. Look, over the last several years, Tyson made a series of acquisitions. You moved into rendering. You've done Keystone in hopes to generating more consistent, higher margins and international growth. Can you update on your progress? And are you rethinking at all your M&A strategy?

Stewart, I'll let you handle that, and then I'll add on.

Sure. I mean look, Ken, I think that the companies that we bought have been really powerful for the -- for Tyson and for its shareholders. I mean if you went back and you looked at Hillshire Farm, you look at how some of those brands are performing now, that's been tremendous. The addition of some of the foodservice capabilities really expanded our nationwide reach, and that has been overall good for our company's capabilities. The most recent acquisitions have opened up the door to us more aggressively internationally, and we think those have been a terrific addition to our footprint. Of course, in COVID, we are seeing some interruption to that, but the company holds a great hand when you look at the long-term perspective of our business. Most of the growth is going to be outside the United States. We know that. The kind of scale and capability that exists in our business sets us up in a position to really take advantage of it. And so I don't think you're going to see any real need for change in the strategy that we're pursuing. We laid that out in some detail at our Investor Day last year. I think Noel's been fairly consistent on the topic. And I like the words he used with respect to COVID, "This, too, shall pass." Our long-term picture is good. I think our strategy is good, and we're going to continue on that path.

You say this, too, shall pass, and I agree that COVID-19 hopefully will eventually pass. There's this underlying trend or this underlying issue, African swine fever, that is not spoken about that much. Can you talk about the current export picture as well as what -- is African swine fever still something that is looming out there? Does this help or hurt? And how do you think about this both in the immediate term on the exports as well as a little bit longer term?

Let me answer that, Ken, and I'm going to talk on a longer-term basis. As I mentioned before, our export interest continues to be strong, beef, pork and chicken. And it's not just due to African swine fever, certainly that's a component, but it's more so the global growth in demand. So we do export about $5 billion, $6 billion worth of product per year. Our market shares continue to be exceptionally strong and growing. So we're very encouraged by the opportunities not only for in-country operations such as Hillshire provided for us, but the export opportunities as well. And keep in mind that exports are really necessary for this country. It -- roughly 25% of all the pork in this country the last few years has been exported, providing value to the producers. And many of the products that are exported are not commonly consumed here in the United States in beef, pork or chicken. So we think it's an important market that the United States needs to continue to participate in. And it's all about adding value back to the cattle, the hogs and the chickens for our producer base to continue to be profitable.

And are you seeing -- a couple of things on this export side. One is the shortage in the U.S. on the shelves, is that because we're exporting more? And then on the flip side, there's been some talk, obviously, with President Trump maybe making some unique comments that maybe there might be some issues on the export side. What are your thinking on both those pieces?

Well, first of all, as I mentioned, a lot of the products that we export are not commonly consumed here in the United States. And some of the shortages that you're seeing in the marketplace right now is simply because of the sharp decrease in production that's taken place in the last 3 weeks or so. And I think beef slaughter was down, I don't know, 2 or 3 weeks ago in the 50% to 60% range. Pork was similar. So no, it's not attributable necessarily to exports. It's simply the decrease in domestic production. But then again, a lot of the products that we are exporting are not commonly consumed here in the United States.

And then what about the near term on exports? Because I was under the impression that maybe China had purchased a lot in March and may be slowing down a little bit for the next, call it, 6 to 8 weeks and then maybe pick up again. How do you -- is there any sort of ups and downs on export picture?

No. It's been fairly consistent, Ken. We continue -- we've had good interest and continuing to see good interest.

Then just kind of moving to the last part. And if I didn't answer -- asked this question, you know it wouldn't be made. So how -- when you put all this together, can you talk about will COVID-19 have a structural impact on your earnings? And how do you envision the current environment coming out of this? Is your earnings power going to be more or less or different? Give us a little confidence, and let's walk through a little bit of this, if you don't mind.

Yes. Stewart, I'll let you take first cut at that and then I'll clean up.

Yes. I mean I think, Ken, if you looked at our business, and I made the comment earlier -- I mean, let's start with the demand side of the picture. I mean food is an essential ingredient for people's daily lives, and we've seen a mix, a channel mix. And so you have to start with deciding whether or not you think that mix is going to come back. As Noel mentioned on the QSR side, we've already seen that. You're starting to see restaurants open around the country. The question will be what takes place in colleges and schools. So I'd argue that we're going to see that we start to recover in foodservice. The timing of that, the speed with which it occurs is yet to be determined, but I don't think that that's a structural change. There are some structural changes. For example, we've seen much higher usage of e-commerce. And the good news for us is given that the -- our brands and our scale, we're really positioned well to take advantage of e-commerce, and we're going to look to dial that up. So there are some structural changes there. I think you will see that ongoing. There's going to be higher e-commerce usage. Good news is we're well positioned to take advantage of that. On the cost side, I think we've addressed that at some length, and I don't think that there are -- that the majority of the additional costs we've seen are structural. I think they're temporal. And while you will see some impacts, of course, to earnings, we talked about that during our quarter, the business will come back to its long-term trajectory, which is take advantage of a growing global demand for protein and our ability to meet that demand.

Yes. So not much to add to that because it is a long-term play. I mean we have issues that we're dealing with here in the short term that could exist through the balance of our 2020, which is at the end of September, potentially a little bit longer. But as we move into 2021, 2022, we're encouraged by the long-term outlook and our position in the marketplace. So -- and we feel good. Stewart has a good position from a liquidity standpoint, so we are prepared for whatever we face.

So I guess just -- so you don't think COVID-19 will have a structural change. I think last year, we talked about African swine fever actually having a structural increase to it -- to your earnings because of the need for greater exports. Is that still a fair way of looking at it over a 2-, 3-year period? And is there any sort of concern on the change of the animal cycles? Or again, generally speaking, how do you kind of put it all together? Just making sure I fully get it.

Yes. At this point, Ken, I don't see the structural change. It goes back to one of the first questions you asked about line speeds and operating capacities and if that's going to be structural or temporary. And we think at this point it's temporary. Protein production in the United States, both poultry -- actually all 3 species have been increasing the last few years, and a lot of that has been because of the strong export markets. Pork has consistently been growing in the 2% to 4% range and poultry at about 2%. And beef at this point, it looks like good availability of cattle out at least into 2022, potentially 2023. So no, we don't, at this point, see structural changes. And the outlook for the protein industry in the United States at this point continues to be strong despite the short-term challenges.

Guys, I could not be more appreciative of you guys doing this, particularly in this time of -- unprecedented times. We truly appreciate it. Thank you so much. And with that, we'll end here. Take care, guys.

Very good.

Thanks for having us, Ken.

Thanks, Ken.

Cheers.