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

[Audio Gap] who are the best in protein. The global pandemic officially started just a few months into my tenure. It really started right when I joined in December in China, where we have substantial operations. And it tested all facets of our organization. And it was impressive in a lot of ways for me to come in and get to see the resilience of our global team members and see how our supply chain can flex and the dexterity within it, and then also the durability of our overall strategy. And there were a lot of challenges, of course, but I was really proud to see the team leap into action. The first priority was and always will be the health and safety of our team members. The virus was new. Not a lot of people understood it. So we had to learn, and we had to lead and we had to innovate. We were one of the first companies to do mass testing inside our facilities. And we learned a lot about asymptomatic positives, and we learned a lot about what was going on in our broader communities. That led to our always on testing program, which really helped us keep the disease out of our facilities and identify what was going on in the broader communities well beyond the initial surge. And then we're also really proud of vaccine deployment. It's been phenomenal. We've been partnering with Matrix Medical and doing a lot of work on our own, and we've vaccinated over 44,000 of our workers. So we're really proud of that learning efforts in protecting our team members through the initial portion of the crisis. My next priority and the team's next priority is really making sure we continue to feed the world and accommodating what was, at that time, a pretty dramatic change in consumer behaviors. We saw this huge shift, as everyone knows on the call, from foodservice to retail. And we had to respond to that. And it was challenging not only because of this shift, but we were also very strong in retail. We had 11 straight quarters of core product growth. We were in 81% of households, I think, 80% of the time. We've grown that through the crisis. And so that shift put a lot of pressure on our supply chain. Poultry was struggling, as you pointed out. And what I had to do was really shift some of the team around to get just the right folks in place, including bringing Donnie into Poultry early to help drive the operational improvements that we needed. Coming out of what was that tremendous dynamism, we're building for the long haul. So we do have a strong balance sheet, and we're taking a lot of what we learned from an agility perspective, the pace of innovation. We've seen some of our processes internally on how we can take that nimbleness that we showed during the crisis and memorialized that into permanent customer-centric processes. And we've also seen that we can expand capacity and digitize our business and bring automation to help address some of our labor challenges. And again, the team, we've made some changes on the team to make sure that we are best in protein in all facets, and I'm really proud of the people that have decided to join us for the long haul. We're going to use all these learnings going forward. So coming in the fall, you're going to see we're going to be having an Investor Day, where we're going to share a strategy refresh. We're going to need it because -- we need those learnings because we are facing some inflationary pressures in the second half, as we mentioned on our earnings call. And we're -- also challenging, but a good problem to have, is that retail remains white-hot as foodservice is recovering and we're seeing restocking. So we've got a lot to deal with going forward, but we got the right focus. I'm obviously getting into the business even more over the past 1.5 years. I've been really impressed with how complementary our set of assets are, both having a multi-protein portfolio, having the commodity business plus Prepared, gives us some really unique advantages. The global acquisitions that we've made have really fit together to equal a 1 plus 1 equals 3 in our global supply chain. And again, I just can't thank the team enough because we've got just the right folks in here to manage this complexity and really lead the change.

Let's unravel a lot of the stuff that you said, which is great. So let's start with the chicken side of it. Look, now that the pandemic seems to be -- and there's an end in sight in the pandemic. Can you give us a perspective on what you think went wrong? What are the key steps to fix? And then can you give some examples of key investments that you expect to change the operations?

Sure. It's really nice to have Donnie on the call. As you've mentioned at the outset, I know you want to hear from him on this. But I want to compliment him before he gets a chance to share all the great things that we're doing. He's made tremendous progress towards improving the business in the first quarter. As we discussed in the earnings call, we've actually -- we're making pretty substantial progress in making operational improvements, and those were becoming visible to us. The recent headwinds in grain costs, hatch, it veiled a lot of that progress. And Donnie will give you some really clear picture, not only on the things that we're doing, things that we've done and how that's going to manifest itself in quarters to come. Donnie?

Yes. Good morning, everyone. Just it's a pleasure to be with you. And good to see you again, Ken. Talk about our Chicken business. As we started our fiscal '21 in October, we had a single objective, and that was to be the best chicken company, period. We've been there. We know what that looks like. And we were -- we had a plan, a solid plan in place to reach that, specifically competing with the very best in the industry, staffing our plants, which was an issue at that time and continues to be, to some degree, and servicing our customers and growing our business. I mean those are the things that we prioritize coming into the year. I'd tell you that our goal hasn't changed. In fact, as Dean just alluded to, as we entered into our Q1, all through Q1, we saw improvement in our Chicken business. And certainly, we weren't there yet, but we were headed in the right direction. And then in January, our rate of recovery slowed really because of 5 things. One was -- and really a big one with the volume constraints due to chicken availability from an unexpected decline in hatch. And we've talked about that in the past, and I'll get into some more detail later. But -- and then we had a Winter Storm Uri in February, which really affected our operations broadly. As a result of the volume constraint because of the weather, because of the hatch, it resulted in a supply shortage. And we compensated for that by going outside and purchasing meat at a rate much higher than what we were comfortable with and really what we had ever done with our buy versus grow strategy, which then made the market rally sharply. And so the cost of that raw material went up and went into our cost of goods. And at the same time all of this is going on, we saw cost inflation, and it began to accelerate. Grain is well noted in this in how much it's gone up. But we also had wage increases, freight cost increases. And then early October, November, December, we locked in a relatively large share of our portfolio before the prices begin to increase materially. And then lastly, we continue to see higher turnover and absenteeism, the knock-on effects from COVID. But I would tell you, despite all these headwinds, and there are many, the fundamentals of our business are looking good. They're actually quite good. We have strong customer and consumer demand. We have sustained demand at retail. And the foodservice recovery, particularly with the chicken sandwich promotions that are going on, are pretty incredible and a pretty good lift to our business as well. We also have a number of ongoing operational improvements. And obviously, hatch and fertility, which hurt us from a volume perspective, but a reduction in some of our outside meat purchases will be helpful to us as we move forward. But we've also begun to engage our customers where we had those fixed-price contracts in mid-contract, and we've gone to almost all of them at this point and ask for relief because of the inflationary nature of where we are at this point. And I've got to tell you, we've had good success at that as well. And as we think about what we want to be longer term, we want to be a place where others want to work. And we have to be -- have a differentiated work environment. So we're doing things like automation and flexible work schedules and increased wages and just a whole litany of things to try to create a better environment for our team members. And most of these solutions were driven by our team members, and we're responding to some of their requests. But that's a little bit about the chicken and the recovery. If I think about -- I think your next question was some of the key investments. We -- I've talked about being the importer of choice. I covered that in a little detail there, but it's that whole list of things. What many people didn't realize is that we're already at $22 per hour pay for our hourly domestic production workers, and we have instituted some flexible work schedules already. We got a lot of effort here, and this is a big one for us to improve our overall operational performance. We obviously had the volume issue that we talked about as a result of hatch, but we were behind on some capacity as it relates to some of our ready-to-eat fully cooked-type products as well as some of our par-fry capacity. But at the same time, we had allowed our cost structure to get out of line. And so we're having to go back and work on some of the fundamentals of the labor yield on the spend and to make sure we're competitive in the marketplace. We certainly do not expect our customers to pay for our operational inefficiencies. We would expect them to pay for inflation of grain and freight and those type things, but not for our operational inefficiencies. And that was a pretty good-sized bucket, and we're continuing to work on that. And then finally, the investments around servicing our customers. Having the -- with the pandemic and the consumer moving from almost overnight from foodservice to retail, and we had to create a great deal of more flexibility in our operations. And our team responded very well to that. And so we were able to service at a very high rate the retail -- our retail customers when the dynamics changed. But I've got to tell you, over the last couple of years, we've struggled with servicing our customers. For example, in 2019, we did an SAP cutover that really hurt us with our customers. And then we moved into '20, and then we've got this once-in-a-hundred-year pandemic show up. So it's been a challenge, and we have great customers, and we have a long history of serving them well. And -- but to be candid, I think it would be hard to say that we, over the last couple of years, have been our customers' go-to supplier. We know that as critical. That's mission-critical for this company, for our Chicken business, but we have to return this Chicken business to top-tier performance. And then we have to regain our coveted position of being our customers' go-to supplier. So that's a little bit of color around Chicken, and I'll halt with that, Ken.

Yes. Let me ask a quick follow-up. I know on the conference call, you said that by fiscal 2Q '22, you want your operations to be restored. You just said that you want to be best in class. There was a, I guess, mix-up that you thought that by that time, you'd be 5% to 7%. Is that the goal? Or is the goal to truly be the best in class? And if the margins are what they are, the 5% to 7% doesn't really matter, right? It will kind of play itself out? I'm just trying to figure out because I think there was some confusion on the call that you're targeting 5% to 7% by fiscal 2Q '22 or -- but just what you said was, look, we want to be best in class. If you're best in class and the margins are above that, I'm assuming you'd be happy with taking that to the bank.

Absolutely. Let me try to add a little color to it. And think of this as a journey for us. I had expectations by the end of our Q2. Uri delayed that a little bit, but by the end of Q2 of being very competitive in the marketplace from a -- with the industry. And also in, let's call it, halfway into '22, being a top quartile performer. Now what I don't know, and I talked about 5% to 7%, the 5% to 7%, I think, is in route. If I look at the current market conditions, 5% to 7% would be on the low side. By the time we get to mid-'22, it may be top quartile. I would expect it to be something a little higher than that, but -- so I talked about 5% to 7% because it was in route to where we want to be. But to be really clear, we want to be among the very best in this industry. We believe we have all the reasons, all the assets, all the people, all the talent we need and customers we need to hold that position. We've held it for a long time, but -- and we've lost our way a little bit, but that's exactly where we're headed.

Great. Stewart, just think about this, you just sold your pet snack business. Can you talk about why you wanted to sell it? You're flush with cash. What do you do? How do you prioritize your cash at this point, particularly given that your cash situation seems quite good?

Yes. Thanks for that, Ken. Well, look, choosing to sell the pet business is a matter of strategic focus. And we just think there are places in our business where we can get sharper and go deeper than pet. We serve a lot of pet customers in our business. We'd rather not run into them in the marketplace. In terms of cash, look, we're enormously pleased. Tyson generates a lot of cash, as you point out, and the first half has been good. Our liquidity position is great and our balance sheet is strong. But cash allocation for us is important, and there are 3 big places for us. First, build financial strength; second, invest in our business; and third, share cash back with shareholders. And we've done all of those consistently. I'll just point a couple. The first -- well, these last 12 months, we've been pretty focused on deleveraging. You've seen that take place. Our balance sheet is a lot stronger. Our debt ratio is closer to 2x now. That is a good place to be. We'll continue to focus on deleverage. At the same time, if you went back over the last couple of years, you will see that our CapEx has increased. And we think it's really important to invest behind our business. You can't go through 11 quarters of retail share growth and not start to put a little bit of pinch on your overall capacity. So we want to make sure that as an organization we continue to grow, we continue to invest in capacity and we stay ahead of the game. And so you'll see some of that. And then, of course, we have invested in M&A in the last number of years. And I think our record is good. Hillshire was a great acquisition, there are number in there. We came into COVID with our recent acquisitions performing ahead of our cost of capital. So we think our M&A track is good. Last, on sharing cash to shareholders. We have had a long track of increasing our dividends, and that has been good for shareholders. And we have peppered that with stock buybacks. So you can continue to see all of those as we pursue a pretty disciplined financial future.

Great. Going back to the operational side of it, what key operational improvements need to be taken in the Prepared Foods division? There was a previous management team that laid out this goal that you wanted to increase sales 50% more than the industry. Is that a priority? How do you think about the long-term sales growth and margin structure of this business? And what are the key steps to get there? A little loaded question, but a lot of pieces to unravel there, please.

Sure, Ken. I'll actually touch on a few things that Stewart said to just -- they will actually play this question quite well. The first is optimizing our portfolio towards our long-term customers. So the decision to sell pet for all the reasons that Stewart mentioned were good decisions. We're obviously happy with that transaction. Happy for General Mills to be taking the business. When we thought about the 85 years that we've been building our franchise, if we look at the brand growth that we've had and the success we've had with customers and consumers in restaurants, in the freezer, in the meat case, those are customers that we're committed to and we're going to be with for a long time. And if you've got the value of an asset on the books in the Prepared Foods division that has been able to take capital and build these world-class household brands, you could -- we could go compete in the pet aisle, but we know there are folks that are really good at that. And General Mills is really good at that. We're excited to see what they're going to do with that business. That allows us to take that value and deploy it into Prepared Foods where we have the right to win. So we'll be looking at our portfolio top to bottom constantly for opportunities like that, that allow us to really focus our attention, our capital in our business. When it comes to Prepared Foods, just generally, we have been thrilled with the acquisition of Hillshire Farms. When you look at the complementary assets of Tyson historically having a very strong foodservice brand and ibp having a very strong foodservice brand, you look at the power of the Tyson brand in retail and then you bring an omni-protein complement to that, like what we have with Hillshire Farms, it has really unlocked a lot of value. I think one example that is evident there is product innovation. So even when we add a new form of protein to world-class brands like Jimmy Dean, for example, like our plant-based protein, you see a 1 plus 1 equals 3 again, where the innovation and a variety of proteins can actually complement these -- the power of these household brands. And you see us with an understanding of what's going on in big categories like breakfast, where we launched a whole new concept of breakfast nuggets. This sort of product innovation that came out of Prepared Foods is just phenomenal for us and presents a whole new opportunity for us to grow new brands and new products in the field. You will see the margins in Prepared Foods be a little bit irregular in the coming half. We talked a bit about this on our call. We're thrilled that our foodservice partners are picking up steam with the recovery of the pandemic, at least here in the United States. We're still seeing some pressures in the pandemic globally, which is in the news and I'm sure you all know about. So picking up that historically slightly lower-margin foodservice volume is going to have some impact. And then maintaining and supporting that business while retail remains strong is going to be a challenge for us, but we're up to it. And last but not least, in Prepared Foods, you will see some inflationary pressures coming in the second half. We've talked a bit about that related to input costs in that business, and you'll see that play itself out. The last thing that I'll mention...

Are there...

Sorry. Just related to the margins that I think is complementary, we talked about this whenever foodservice was in decline because of the pandemic. We had some deleveraging. We were able to move some of our foodservice volume into retail and do that with some innovation, but that -- we couldn't move it all. And that left some assets less than optimized, not only due to labor, which affects Prepared Foods like a lot of our other businesses and some of them were value-added products like sandwich assembly and that sort of thing. If there's labor challenges, you can't quite add the value to the product that you want, and that's why our team members are so important to us, and we're doing all the things that Donnie mentioned. But just getting those plants running full again, it's going to create some operational leverage and margin improvement in that through the second half.

Do you envision the margin structure in that 10% to 12%? And I don't mean this year, I'm talking about when you think about longer term, is it something that could be 12% to 13% more than that? Or is the 10% to 12% is still the kind of the goal longer term, even if you get more operational leverage and there's some operational improvements there?

Yes. The target -- Stewart, you probably want to give a little color to this, but we know this is a double-digit margin business. We've just got to get our assets optimized in order to do that. Stewart, do you want to talk a little bit more about long-term expectations?

Yes. I'd say, Ken, look, definitely a double-digit business. We gave 10% to 12%. We've demonstrated our ability to perform in that range. I hesitate to give you more detail on that, but I'm going to tantalize you a little bit because we're expecting to have some kind of Investor Day later this year, in which we'll have a chance to go deeper. And that's probably the place to do that.

Great. In terms of demand elasticity, can you talk about what you're seeing across the portfolio in terms of is there a certain price that you'll see some demand elasticity anywhere from in Prepared Foods to the wing shortage? I mean there seems to be -- people just are willing to pay astronomical prices for proteins right now. Is there a point in time that you're worried about demand elasticity? And how do you think about that?

I'll have Donnie give some color to that. But I think, historically, we've seen not only a shift from premium products to more commodity, but higher-value proteins even like when you see beef run, you can see that shift to more cost-effective proteins like chicken. We haven't seen that so far. The demand is just exceptional. And there's a lot of cash in the market through the stimulus. We know that there are a number of people who've had a really rough time through the pandemic, and those stimulus checks are helping them eat well. But our premium products and the pricing that we're seeing, we have not yet seen any pressure on demand so far. Donnie, do you want to add any color to that?

Yes. Just a few things. First thing I would tell you is this is a new place for all of us in terms of trying to determine where the consumer is going to be. But we put forth a great deal of resources and activity against this. But throughout the pandemic, we had 54% of our consumers indicating a deliberate intent to increase their protein and 20% indicating that they are consuming animal protein more often than they were just a year prior. This is in the middle of the pandemic. So we're monitoring the reopening very closely. What we do know is food consumed away from home is increasing on a sequential basis, just being led by QSR and C-store. They're leading the recovery. People are obviously more comfortable ordering takeout. But this foodservice business is continuing to ramp up as people are trying to get out and resume life as normal. The vaccination certainly helped with this. Government stimulus checks, I would suggest, probably helped some through this most recent period. With beef at the price that it is today, we're still seeing great consumption. And -- but over time, over time, consumers will tend to migrate toward the best value. Chicken tends to be that and -- but right now, it's -- we're doing well across all proteins and have very strong demand across all proteins. And so not only with foodservice opening up, and as I mentioned earlier, also with respect to -- with retail maintaining pretty strong demand as we move into the summer grilling season.

And Ken, I'd just add one more thing. I think what your question really points out is the power of Tyson Foods. Whether it's foodservice or retail, our strength in both and our flexibility that we've shown in the supply chain allows us to service the customer wherever they go. Our mix of proteins really helps us service the customer wherever they go. Price gets too high in beef, we start seeing demand drop. We have poultry and pork to step in, and we play in that space as well. It's created a bit of powerful kind of countercyclical effect for our portfolio, like a stabilizing effect on our long-term margins. When one is outperforming, if it affects the other, we can make up for that. And our ability to flex through our supply chain today, but also as we digitize and build out in the future, it's key to monopolizing on that. And I think we're -- that's one of the things that I've seen after coming into the business. I saw that on the board, but it's really visible inside is how the blend of these assets come together to make Tyson a really unique player in the space.

If the demand elasticity is not that dramatic, does the sustainability of your earnings over a longer period of time last and maybe the cycles aren't as pronounced as they were before? Does that -- is that a reasonable way to think about it? Or are we still in this kind of squishy balloon where one business goes down, the other one goes up? Or is there a different structural environment that we're in?

I would say that you heard it from Donnie, both in consumer preference and consuming more protein, the global demand for protein, we are seeing what at least looks like some structural lift in the fundamental margins of our businesses. Can we maintain the beef margins that we posted in the past quarter for decades to come? I don't think anybody is expecting that to persist at that level. But have we stepped up from where those margins were in the past? We think there is a step, and we'll try to give more color on what we're seeing there as the next few quarters materialize. But generally, we're seeing just tremendous demand across the portfolio, and we see that demand at least from all the macro trends continuing into the foreseeable future.

Stewart, I just wanted to touch quickly on this. I know labor is a big issue. Automation, how much capital have you committed to this? And what are the returns?

So Ken, we've shared in the past the returns on our capital definitely exceed our cost of capital and have, on average, been in double digits. We've actually seen a fairly strong year this year with the kinds of projects we've been investing in this year. I've actually seen an improvement in returns. Automation is good for us in specific because it tends to have strong returns and solve a problem. It makes our work environment better for our team members, and that is a place that is going to help us certainly as we try to fill the gaps of -- employment gaps.

Ken, one other thing I'll add to complement there, you will see for a few years to come a relatively high CapEx compared to what you've seen in the past from us. And we're solving labor problems with automation in ways that it might not be obvious. So we're in our facilities where we have high turnover, where it's tough to fill jobs, as Donnie mentioned, we will be automating those. We also are solving labor problems for our customers. So you take the deli, for example, or the case at a place like Walmart. And the investments we're making in South Carolina and Utah in case-ready for fresh meats, this is solving a labor problem for the industry as a whole. We're solving a service problem for our customers. And that might not necessarily be intuitive, but as we're scaling our production facilities internationally, we mentioned we got a bunch of -- we have 6 sites, actually, we're adding capacity in the coming year. That capacity is going to come online even more automated. And that teaches us where we can automate in our legacy facilities. And so we're making quite a bit of progress in that, but we're also automating in ways and solving labor problems for our customers in ways that might not have been obvious.

Great. When I put all this together, how do you envision Tyson's earning power off of base earnings? Like how do we all put this together? Because it seems like there's a lot of leverage going on. We've got an operational improvement. We got a good environment to work within. How do I put this all together to kind of think about? And again, not this year, but how do you think about it over the next 2 to 4 years?

Stewart, do you want to cover it from a margin perspective?

Yes. I think, Ken, look, we expect to see a couple of dynamics underway. Dean pointed out that beef is at an all-time high. One of the things I've been pointed out in a couple of calls recently is that we think that the base for beef now is going to be higher ongoing. Why do we think that? Because the U.S., as I said, production assets that are relatively unique in the world and the demand for beef across the globe is growing. So the old 1 to 3 percentage as a base, we don't think that is the place where beef's going to end up, but it will be lower than where we are. Prepared, as we pointed out, has runway as the business gets back to normal. We can expect to see that the margins in that space improve and get back to historic levels. I think if you look at chicken, you've heard what Donnie had to say. We intend to be best in class. They sort of add all those things together. And when you combine that, I think, with some of the initiatives that Dean is driving around our cost base and our service to customers, we've got a very positive future for our margin structure.

Great. We only have 3 minutes. But Dean, I just want to ask you kind of one final question. In 3 years from now, how are you going to measure your success, both quantitatively and qualitatively, to see if you actually did exactly what you set out to do?

First and foremost, we want to see our team members coming in to Tyson Foods every day and thriving, building careers. And that should manifest itself in lower turnover, lower absenteeism, et cetera. So that's a big focus of ours. But from a business perspective, we expect to see all of our businesses outperforming the market. The expansion of our business globally is going to continue both organically and through M&A. We've had success there. We're not necessarily judging that unfairly because of much of that was in foodservice over the -- and over the past year, foodservice has taken a big hit. But we're really thrilled with what we've been able to do from an M&A perspective, and that will continue. We will have increased our value-added portfolio, brand to retail, further processed and even case-ready. Those are the things that are slowly raising the margin expectations in every single one of our businesses, and that's going to continue. We'll be customer-centric, top to bottom. The process improvements that we have planned and that we are looking at going for the next 3 years are going to allow us to better service our customers and probably contribute to the bottom line. We'll talk more about that in September. And we're going to be digitized and automated. And that will give us end-to-end visibility through our entire supply chain and hopefully with our partners. And that's ultimately going to give us efficiencies, both in creating margin, but also being a more sustainable company and lowering our overall ecological footprint. From our perspective, we think that is a comprehensive way to not only be the best company in protein, but also the most sustainable and do that while servicing our customers best in class.

Well, I appreciate all your time, everybody. Thank you very much. It's exceedingly helpful. Thank you, and be well.

Ken, thank you. Good to see you.

Thanks, Ken.