Tyson Foods Inc - Class A (TSN) — Q2 2020 Earnings Call Transcript

Good morning and welcome to the Tyson Foods Incorporated earnings conference call for the second quarter of fiscal 2020. On today’s call are Noel White, Chief Executive Officer; Dean Banks, President and Stewart Glendinning, our Chief Financial Officer. Slides accompanying today’s prepared remarks are available as a supplemental report in the Resource Center of the Tyson Investor website at ir.tyson.com. Tyson Foods issued an earnings release this morning, which has been furnished to the SEC on Form 8-K and is available on our website at ir.tyson.com. Our remarks today include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements reflect current views with respect to future events such as Tyson’s outlook for future performance on sales, margin, earnings growth, and various other aspects of its business. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. I encourage you to read the release issued earlier this morning and our filings with the SEC for a discussion of the risks that can affect our business including those listed in our 10-Q filed this morning, our most recent Annual Report on Form 10-K and our current report on Form 8-K filed March 13, 2020. I would like to remind everyone that this call is being recorded on Monday, May 4th at 9:00 am Eastern Time. A replay of today’s call will be available on our website approximately one hour after the conclusion of this call. This broadcast is the property of Tyson Foods and any redistribution, retransmission, or rebroadcast of this call in any form without the expressed written consent of Tyson Foods is strictly prohibited. Please note that our references to earnings per share, operating income, and operating margin in today’s remarks are on an adjusted basis unless otherwise noted. For reconciliations to our GAAP results, please refer to this morning’s press release. I’ll now turn the call over to Noel White.

Thank you, Jon, and good morning, everyone. We have a lot to cover today, but I want to start by saying how proud I am of our team members and the work they’re doing to help feed America during this difficult time. I’ll then touch briefly on our operations and results. Dean will go into further detail about our current operations and Stewart will handle the financial update from this quarter. Day in and day out in the midst of the challenges so many families are facing during this pandemic, our team members are going above and beyond to help us maintain a healthy and stable food supply to our nation and the world. From the bottom of my heart, I want to say thank you to all of them. They’re truly central to everything we’re doing right now. Our number one priority is ensuring their health and safety. The only way we can operate this business is for our team members to feel safe, protected, and not fearful of coming to work. It’s why we put in place a host of safeguards and guidelines at all of our facilities to protect our teams. And as we’ve shown in recent days, we will not hesitate to idle any plant for deep cleaning when the need arises. Simply put, we will not send anyone into our plants to work unless we are confident that it’s safe. To do that, we have transformed how we operate. Today, if you visit our facilities, you’ll see state-of-the-art health checkpoints at the entrance; and inside, you’ll see team members wearing proper personal protective equipment, including face masks. You’ll also see tools to help with social distancing. We’ve installed partitions on production lines and in break rooms. And we’ve stepped up our efforts to clean and sterilize everything we can. Education is an important part of this effort, and we’re doing our best to ensure our team members understand how they can stay safe at work and at home. Soon, team members will have on-site access to COVID-19 testing and other medical care through our new partnership with Matrix Medical Network, a leading provider of mobile health clinics. We also continue to work closely with federal, state, and local health and safety authorities. Last week, as you know, the U.S. government recognized the essential work our team members do by reaffirming meat and poultry processors as a critical part of America’s infrastructure. The President’s executive order under the Defense Production Act establishes clear lines of authority and consistent standards that will help us continue to provide American families with a reliable supply of beef, pork, and poultry. I’d now like to briefly talk about the state of our operations. Over the last several weeks, we’ve had to idle several facilities temporarily for deep cleaning, and others are not operating at full capacity due to worker shortages. Despite our slower lines and lower volumes resulting from this pandemic, we believe our core business and financial strength position us well to deliver market share and earnings growth over the long term. And while COVID-19 has been disruptive, we do not believe it changes the outlook for a strong future for Tyson Foods. Now, a quick summary of the quarterly results. Second quarter sales increased to a record $10.9 billion. That’s an increase of more than 4% over last year. This growth was driven by volume increases of 2.6% and price increases of 1.6%. Our adjusted earnings of $0.77 per share were driven by typical seasonality, soft chicken pricing, and the impacts of COVID-19. In addition, we experienced $115 million in negative derivative mark-to-market adjustments that Dean will discuss in further detail. Important to note that we expect to benefit from the physical offsets associated with these transactions in future periods. From a global perspective, exports to many parts of the world performed well throughout the period. During the second quarter, we saw particular strength in exports to Japan and Mexico with double-digit increases in our market share. Research data indicates China is reopening its economy, which is an encouraging signal of domestic protein disappearance. Lower levels of supply caused by African swine fever continued to present opportunities to fulfill international demand. Now, let’s talk about the current operating environment. The COVID-19 pandemic in the United States has had a significant impact on our channel mix with increased retail and plummeting foodservice demand. From a supply chain perspective, where possible, our facilities have adapted to new product mixes, which has enabled us to ship millions of pounds per week between channels and has set us apart from many of our competitors. Foodservice customers have also reacted with high levels of innovation and adaptation, focusing on takeout and delivery. In fact, some have only seen minimal volume loss. Supermarkets and club stores have been trying to meet heavy demand, and we’ve been able to convert a number of production lines from food service to retail to help meet those consumer needs. The direct impacts of the virus have created operational challenges, including absenteeism, reduced production speeds, and selected idling of plants. The scope of our operations continued to provide us with flexibility and redundancy. This is a clear benefit to our Company’s scale. COVID-19-related pressure has affected parts of the industry supply chain, especially pork. However, our diversity of protein provides our customers with options. In addition, our geographic diversity provided important lessons from China, where we first encountered COVID-19-related issues. This includes ways to maintain the health and safety of our people, opportunities to pivot to retail, and potential pathways for recovery. We expect current conditions to continue during our third quarter with a gradual recovery beginning in the fourth quarter. However, all this depends on the extent to which businesses and schools are able to reopen. We’re well-positioned to operate during this period and to take advantage of increasing demand during the recovery. Our balance sheet is sound and our liquidity position was strong going into the crisis. It’s been further bolstered by the term loan we closed at the end of Q2 and by focusing on continuing operations and managing costs. We committed $13 million to support critical needs in our local communities. This includes $2 million in community grants and more than $11 million worth of food and meals donated by the Company since March 11th. Over the coming days, we’ll make product donations equal to an additional 100 million meals. Despite the immediate challenges from COVID-19 and its associated impacts, we’re maintaining a clear focus on the long term. This includes our strategy to grow, deliver, and sustain. Global population and income growth will continue to drive an increased need for protein. Our size, diversity of portfolio, and broad geographic presence will give us an advantage. In addition, there are changes which will undoubtedly remain with us after the crisis. For example, we expect continued higher levels of ecommerce for both grocery and foodservice. Our early investments in this space have allowed us to capitalize on the growth, and we expect to benefit further in the future. Our industry is heavily dependent on people, but our company is investing aggressively in automating the most difficult jobs in our processing plants. Our balance sheet, liquidity, and scale, as well as our diverse product portfolio of products and distribution channels position Tyson to benefit from long-term industry dynamics. Now, I’d like Dean to give us a recap of our business segments.

Thanks, Noel, and good morning, everyone. I’d like to start by discussing our response to the pandemic, but I’ll spend a majority of my time discussing channel dynamics, current operating environment, and the long-term outlook for each segment. As Noel discussed, we’ve experienced multiple challenges during our second quarter related to COVID-19. The response by our team members has been nothing short of heroic, and it makes me incredibly proud to be part of this great company. I personally visited many of our impacted facilities and witnessed firsthand the steps we’re taking to protect our teams. Local health departments and the CDC have also toured our facilities and have been extremely complimentary of the measures we have put in place to protect our team members and community. The health and safety of our team members remains our top priority. We took early decisive action to provide workspace distancing, PPE, and other protective measures. We’ve had no layoffs or furloughs and have extended $120 million of bonuses and improved benefits to our frontline team members. This will also allow us to quickly recover once we move past the effects of COVID-19. Now, let’s discuss some channel dynamics we’ve observed in the wake of COVID-19. Each of our businesses has witnessed a profound shift from foodservice to retail. Our retail business remains strong and our core retail lines posted gains of more than 20% in the last 13 weeks, outpacing total food and beverage, as well as the top 10 food manufacturers. While panic buying has subsided from extreme levels, we continue to see 15% to 40% volume increases versus last year, depending on the category. As a result of these trends, we have successfully increased volume, margin, and share within retail. Historically, approximately 45% of our total company sales were retail, 40% foodservice, and 15% international. During early Q3, we saw our retail sales move to approximately two-thirds of our total company sales. While we were successful in shifting some of our production from foodservice to retail, not all of our facilities are able to do so. The volume increases in retail have not been sufficient to offset the losses in foodservice. As a result, we expect negative year-over-year volumes in the second half of fiscal 2020. Operationally, we have faced two meaningful challenges: slowdown resulting from team member shortages or choices we made to ensure operational safety and temporary closures related to COVID-19 infection. We’ve continued to pay team members during the slowdowns and closures since maintaining the health and continued employment of our team members is important for our longer-term success. As a result, we’ve experienced lower levels of productivity and higher costs of production. This will likely continue in the short term until local infection rates begin to decrease. Within the ecommerce channel, we witnessed significant sales growth including a more than 140% month-to-month growth rate in our core business lines sold to a major ecommerce customer. We expect this trend to continue. Going forward, we expect sustained retail sales growth and a slow recovery in our foodservice channel. Now, let’s take a look at our segments. During the second quarter, our Prepared Foods segment produced an operating margin of 9.2%. Top-line growth continued with the seventh straight quarter of volume and dollar share growth. Sales were up 2.6% for the quarter, and pricing was up 2.7%. Within the last 13 weeks, total volume, sales, household penetration, and share increased across the core business lines. Historically, 60% of our Prepared Foods sales have been to the retail channel and 40% to foodservice. During Q3, we’ve seen greater than 20% growth in our retail sales. This channel, driven by our strong brands and innovation capabilities, provides the highest growth potential and margin opportunity across our portfolio. In the current environment, our retail-centric products continue to show strength, while the current reduction in raw material availability may cause short-term outages. Our ability to flex our production footprint between the foodservice and retail channels is limited. Consequently, we currently believe the full effect of these new consumption patterns will result in a net reduction in volume. Looking forward, our market insight, channel flexibility, access to raw material, and growing demand give us long-term optimism. We are responding to the changes in consumer demand by pivoting our branded investments and innovation to more value-oriented offerings and formats and sizes relevant for rapidly evolving channel dynamics such as ecommerce acceleration. Our retail businesses and brands are well-positioned to deliver sustained growth even if we enter into a recessionary environment. Our Beef segment produced an operating margin of 2.7% in the second quarter. Commodity volatility during the quarter resulted in a negative impact of $55 million in derivative mark-to-market adjustments. As Noel mentioned, it’s important to note that this amount does not include physical assets, which may be recognized in future periods. Our beef business has done an excellent job of pivoting from foodservice to retail and continuing to drive innovation. We found new retail applications for products that have traditionally supplied the foodservice channel, which we believe could generate continued demand even in the post-COVID-19 environment. These exports remain strong, posting double-digit increases compared to the same quarter last year, which have exceeded industry growth rates. Export markets are an important outlet for us now and in the future. In the current environment, we see strong demand and ample supply of cattle, but reduced industry processing capacity due to COVID-19 has pressured the supply chain and has reduced overall profitability. Temporary plant closings dramatically increased operating costs and weakened what would otherwise be a strong margin environment. As a result of the shutdown, cattle producers are met with much lower processing demand for their fed cattle. We recognize how this impacts our producer community and are anxious to safely resume operations at our facilities to provide them with an outlet for their cattle. Looking forward, we expect clinical supplies of cattle coupled with strong demand for beef both domestically and via export. Our relationships with producers, industry-leading production capabilities, and customer-centric solutions give us confidence in the long-term outlook for this business. Moving to our Pork segment, strong demand, solid operational execution, and ample hog supplies led to a 7.3% operating margin in Q2. As we transition to a ractopamine-free hog supply, our ability to sell pork to global markets has expanded. This new capability has been met with increasing global demand as African swine fever continues to reduce pork supplies in Asia. Year-over-year increases of pork to China were up significantly for the quarter, and we expect strong demand to continue as China recovers from this COVID-19 lockdown. In the current environment, we see strong demand and ample supply of hogs, but reduced industry processing capacity of nearly 50% due to COVID-19 has pressured the supply chain and dramatically reduced overall profitability. As pork plants across the country have continued to shut down, hog producers are met with much lower processor demand for their market-ready hogs. We recognize how this impacts our producer community and are anxious to safely resume operations at our facilities to provide them with an outlet for their hogs. Looking ahead, we see large supplies of livestock and strong demand driven by a global shortage of pork. We continue to believe the impact of African swine fever in Asia could generate significant future margin potential. Our Chicken segment produced an operating margin of 2.9% in the second quarter. Operating income was negatively affected by a $40 million increase in net feed ingredient costs and negative derivative mark-to-market adjustments. This, along with weaker pricing from increased domestic availability of chicken, has offset the benefits of our operational improvement initiatives. Weaker pricing dynamics have persisted into the third quarter. Our Chicken segment has higher foodservice exposure than Beef, Pork, and Prepared Foods. We responded to demand shifts caused by COVID-19 by adjusting parts of our production capacity from foodservice to retail, but higher retail volumes have not entirely offset the lost volumes from foodservice. Additionally, this channel shift has resulted in lower margin realization as volumes have moved to lower margin products. Also, worker shortages have reduced overall plant efficiency, resulting in higher production costs. Due to large domestic supplies coupled with reduced foodservice consumption, we believe our chicken operations are likely to incur losses in the back half of the year. Profit trends will improve as foodservice activity recovers. Turning to our international business, our China operations were impacted by COVID-19 more than any other region during the second quarter. Despite this, our China team produced record sales and operating income as production was shifted to meet rising retail demand. While China is recovering, other geographies where we produce or sell are being impacted negatively by COVID-19, especially since our international business has historically had a high level of exposure to the foodservice channel. We expect to see a slow recovery across each of our geographies as demand patterns normalize. The profitability will be impacted negatively in the short term. In closing, our businesses across the enterprise are adapting to the dramatic changes brought about by COVID-19 and the response of our team has provided consumers continued access to a safe and affordable food supply. Short-term challenges do not diminish our belief in the Company’s long-term outlook. Our unique business model, diverse portfolio, and industry-leading scale will make us stronger and more resilient. Before I hand over to Stewart to take us through the financials, I’d like to thank our 141,000 team members who continue to support our mission of feeding the world. Their health and safety are critical to that mission. Over to you, Stewart.

Thanks, Dean, and good morning, everyone. I hope you and your families are all staying healthy and safe. I’ll start my remarks this morning by calling out a few highlights from our performance for the quarter. As Noel mentioned, our second quarter results included earnings of $0.77 per share and operating income of $501 million. Our adjusted results excluded a $110 million non-operating gain or $0.23 per share, as we executed the termination of two frozen pension plans by purchasing annuities for the participants. Due to the assets held in the plans, this did not result in a significant cash outflow. We have now exited four pension plans in the last two years as we continue to minimize volatility and cash flow risks associated with pension plans. Sales in Q2 were up over 4% and nearly $10.9 billion with a 4.6% return on sales. Average sales price for the quarter was up 1.6%. Year-to-date operating cash flows were $1.3 billion. As Noel mentioned earlier, our balance sheet is sound and our liquidity position was strong going into the crisis. On March 27th, we successfully entered into a term loan agreement of $1.5 billion, and we borrowed these funds in the first week of our third quarter. This loan ensures financial flexibility and enables us to navigate potential uncertainties in the capital markets, while alleviating our reliance on the commercial paper market that typically serves as our primary means of short-term liquidity. Our liquidity on March 28th, including the undrawn term loan, was $2.5 billion and was highest still as of the end of April. During the quarter, we continued to experience some operational effects from our recent ERP system implementation, which impacted margins by roughly $30 million in the quarter. About half of this was discounted sales with the remainder related to inventory write-downs and donations. We believe that we have turned the corner on this issue and expect the incremental costs to ramp down throughout Q3 before returning to historical run rates in Q4. Because of the shift from foodservice to retail, we are closely managing our foodservice-related inventories to minimize any losses and, of course, we are working to ensure that our outstanding accounts receivables are collected in this higher risk environment. Including cash of $437 million, net debt was $11.7 billion and net debt to adjusted EBITDA was 2.9 times for the 12 months ending March 28th. Net interest expense was $116 million for the quarter and capital expenditures were $312 million. We continue to target an overall CapEx return of approximately twice our cost of capital. In the second quarter, we repurchased 700,000 shares for $64 million. Weighted average shares outstanding were approximately $365 million in the quarter. Our effective tax rate was 25.8% in the second quarter and depreciation and amortization was $293 million. Dean has articulated the qualitative aspects of our outlook, which should give you some indication of how we expect our businesses to perform for the balance of the fiscal year. Due to the uncertainty of the COVID-19 impacts, the degree of absenteeism, and the temporary closure of some of our facilities, we are currently unable to provide segment operating margin guidance. Now, I’d like to provide some additional commentary on our outlook. Keep in mind that fiscal 2020 is a 53-week year. However, we have adjusted our outlook to be comfortable to 52 weeks. Net interest expense should approximate $470 million. We project CapEx spending of approximately $1.2 billion for the fiscal year as we progress with building additional processing capacity for case-ready fresh chicken, beef, and pork. This is a reduction of more than $100 million from our previous guidance. We may elect to slow down parts of our CapEx spending where appropriate to ensure adequate liquidity. Having said that, we expect liquidity in the back half of the year to remain well above our minimum liquidity target of $1 billion, especially after the issuance of the $1.5 billion term loan. Our capital allocation will continue to prioritize debt reduction. This includes approximately $1 billion of senior note maturities during Q3 and Q4. We do not expect to repurchase shares in the back half of the year, except for minor repurchases related to an employee stock ownership plan. We currently expect our adjusted effective tax rate to be around 23%. We expect to deliver profit in the back half of the year, assuming that we can continue to operate and supply our plants. Q3 has begun with higher levels of volatility. Early in the quarter, we saw huge volume falls in our retail channel. This demand partially offset declines in our foodservice channel. In recent weeks, we’ve seen a leveling off followed by another surge in retail demand. But as Dean has said, the volume shift from foodservice to retail is likely to be a net negative. The major challenge facing us currently is the degree to which our plants are able to operate. All plants are experiencing varying levels of crewing. We will continue to operate our plants with team member health and safety as a top priority. As you can imagine, the slowdowns and temporary closures related to the pandemic drive higher production costs and we expect to see those until we resume under more normal conditions. Also, our COVID-19 risk mitigation activities have added costs on the broad range of safety measures we have implemented and continue to support. Despite this, we continue to focus on financial fitness and have partially offset some of these impacts. To sum it up, our long-term outlook remains positive. Our diversified business model allows us to react to changes created by major events like COVID-19 and African swine fever. Our balance sheet, liquidity, scale, and diversified portfolio of businesses remain strong and should provide some level of protection as we move through the year. We will continue to drive long-term growth in all parts of our business as we execute against our strategic plan with a constant focus on maximizing long-term value for shareholders. That concludes our prepared remarks. Operator, we are ready to begin Q&A.

Good morning, everyone. I hope you and your families are staying safe. I have one question and a follow-up. Can you provide an overview of Tyson's operations in each division and the related costs? Specifically, what levels are the divisions operating at, and how are you managing the return to work for employees and absenteeism? I'd appreciate more detail on that, as it's one of my key questions.

Sure, Ken. First, I want to emphasize that our team member safety is our top priority, and we are making every effort to ensure their safety. We are fully compliant and actively engaging with government authorities, including the USDA, CDC, OSHA, and local governments. We have experienced intermittent outages as necessary to keep our team members safe. In terms of expenses related to these closures, we have invested significantly in protective equipment for our team members, including chartering planes to supply masks even before the CDC mandated them. We have also purchased expensive thermal scanners to check temperatures of our team members at our plants. Other expenses include the inefficiencies caused by slowing or idling the plants during safety checks and testing. Another important priority for us is ensuring food is available for our consumers. This means operating plants at reduced capacities and offering overtime to maximize output while maintaining safety. One specific expense I can share is the $120 million in bonuses we provided to our team members for their hard work during this period. As always, with safety as our top priority, it is difficult to predict how these costs will evolve over time.

Can you discuss the utilization rate? Which plants are being brought back online, and what percentage of your plants are currently offline? Please provide an update on your operational status.

Yes. Ken, this is Noel. It’s very dynamic. I would say that on the pork side of our business, we did take down our Logansport plant, we took down our Waterloo plant, Perry, which was closed for a short period of time. Each one of those plants is in the process of either coming back up or finishing the testing of all our team members. On the beef side of our business, we took down Dakota City, which is a large facility for us, this past weekend. We’re working with local county, state, and federal officials to bring it back up. We took down our Pasco, Washington plant since two weeks ago, to go through the entire testing protocol. Those test results we’re receiving back through the weekend. So, there’ve been various impacts, Ken. We will take the plant down for a period of time, and that period of time has varied anywhere from a few days to a couple of weeks. Does that give you a sense?

Yes. And then, my follow-up question is, you guys wrote in the press release that you think chicken prices will not go up. Let me just frame this and help me understand where I’m wrong. We have less chicken production, we have less beef production, we have less pork production, we potentially will have less hogs, we potentially might have less cattle, and we do still have a shortage of protein globally. How do you expect chicken prices to not go up in that scenario? What am I missing? And I get the demand shift. But, I think that’s more fluid.

Ken, it really depends on the assumptions. And our assumptions are that plants will come back up as we go through Q3 and Q4. It’s really the impacts of each one of those, the poultry plants, pork plants, and beef plants. Total animals available, as you know, are up year-over-year, 4-plus percent. So, we’re assuming that these plants, not only ours but others will, in fact, go down for a period of time and then reopen. So, we are actually looking at an increase in total protein available as we go through the balance of Q3 and Q4.

Ken, I would just add that mix plays a really strong role in this. As you probably know, a substantial portion of our business has been in foodservice, which is down. Our retail business is up. But as we mentioned in the call, those do not perfectly counterbalance. That will also have an impact on our long-term blended sale price.

So, I’d like to actually follow up on the chicken situation. So, in the past, we’ve always seen in your case a little less volatility, just because of the way you price through. And I understand that foodservice is substantially under pressure and you can’t offset that for retail. But, could you walk us a little through your relationship with the different customers feed and retail and foodservice, what you’re seeing on the featuring side, and how you think of pricing those products towards the back half of your fiscal year?

Sure. Our retail customers have been phenomenally supportive. We continue to work with them as we always would, and we’re not planning to take price increases there. As it relates to foodservice specifically, we have seen some of our customers really get decimated due to the COVID crisis and the closure of restaurants, limited supply in deli and that sort of thing. We have seen some of our customers, specifically QSRs recover very well. Their model of having takeout food and drive-thrus have really allowed them to be resilient and continue to thrive in the market.

Okay. And then, my follow-up is more of a medium-long-term question. Clearly, and you’ve mentioned it in your prepared remarks, there’s currently a significant decrease in demand from a processing point of view on pork and beef, which obviously causes all the farmers to basically stick with the animals. What is your expectation in terms of cattle and hog supply looking out a couple of years from now and in terms of potential reactions from farmers on the loss-making? And how are you actually paying your suppliers, the farmers when you buy off? Do you really get the benefit of the low live cattle and live hog prices right now or do you not see that much of a benefit coming through because you’d rather look long-term and want to support the farmers in the short-term to basically secure supply in the medium-long-term?

Yes, we believe it’s crucial for our livestock suppliers to succeed and remain profitable. We are making every effort to process as many animals as possible to ensure there is a market for them. The long-term outlook is largely dependent on plant closures over the next 60 to 90 days. A backlog of inventory has accumulated with both hogs and cattle, and this will persist if plant closures continue at the current rate. Regarding pork, the situation will really depend on the extent of liquidation we observe in the next 90 days. For instance, if weaned or baby pigs are euthanized, that will affect the market later this year. If sows are liquidated, the repercussions will stretch over the next 12 to 24 months. Cattle are not experiencing the same issues yet; most are still in pasture or have been on feed for some time, and while their weight is increasing, it's not at the critical level that pork is facing right now.

I just wanted to follow up actually on Ken’s initial question just around the cost. Obviously, it’s helpful to have the detail on the $120 million in bonuses. And Dean, you outlined a number of other costs in terms of medical equipment or PPE. Is there any way at least at this point to quantify that and to the extent that you’re willing to say? On a go-forward basis, I mean, some of these costs are going to be recurring. Is it fair to assume that there’s now just structurally higher costs in the business, and we’ve kind of changed from a paradigm standpoint, in terms of the equipment we need in plants for employees?

As this disease has progressed and we have gained more understanding, we are taking any measures we can to enhance safety in our facilities. In terms of the long-term structural costs for the business, we are implementing certain things now. For instance, we are installing thermal scanners that will remain in place and will provide ongoing benefits as we transition into the next flu season, helping our team members identify early signs of illness. However, it is difficult to quantify or predict the exact costs associated with COVID-19.

And one of the other things you spoke about was automation, moving to put as much automation into plants as much as you can, as quickly as you can. Can you maybe just rank order for us among the four kind of top segments, from top to bottom, most automated, the least automated, and to that extent, is it 25% of the operations are automated, 50% of the operations are automated? Any color there would be helpful.

I think it’s challenging to describe in detail because some of our plants incur costs associated with specialized equipment for producing items like ground beef and sausage. We have implemented some robotic automation, including palletizing. It's important to emphasize that automation offers many advantages, particularly flexibility. For example, we have installed Multivac vacuum packaging systems for beef and pork, which has allowed these businesses to quickly transition products between retail and foodservice, proving to be very beneficial. However, it’s hard to specify a percentage of automation for each business unit.

Yes, thanks. Good morning, everyone. So, I guess, my first question goes back in the prepared remarks. I believe the comment was the expectation for chicken business with the operating losses for the balance of the fiscal year. I’m just trying to maybe break that apart a little bit and tie it into some of Ken’s questioning. Just can you help think about that from a kind of commodity price outlook versus volume versus mix versus operating costs? Just help us think about how we’re going from where we’ve been on margins to losses, and just think about the drivers, so that we can watch the market evolve and assess your performance against?

Sure. You’re correct. That was mentioned in the prepared remarks. Based on our current observations in the marketplace, as I pointed out earlier, we anticipate an increase in protein supplies for the remainder of the fiscal year, similar to the calendar year. Consequently, there is likely to be, as we have seen in recent months, an oversupply of poultry in the market. The total number of animals available has not changed at this time. Therefore, whether it’s beef, pork, or chicken, we expect an increase in supply. Recently, over the past couple of weeks, there have been some shortages in specific categories. However, overall, as we approach Q4, we expect supplies to increase, which will likely prevent any recovery in pricing.

Okay. For my follow-up, I would like to understand more broadly across the business. Considering the significant volume and throughput challenges related to labor availability, could you clarify what percentage of costs are fixed in the business? I assume that labor will be the largest fixed cost during this period, which could help us understand the volume challenges you are facing.

Each plant is a little different. So, it’s hard to give you a precise number. I can tell you, it’s significant in the millions of dollars per week in some of our larger facilities such as some of our beef and pork operations; poultry, not to the same extent but still expensive; and then, we have a number of plants that we operate in our Prepared Foods space that we’ve not seen a big impact. We certainly hope that that continues. So, each plant is a little bit different, depending on which plant we need to take down and how long.

Good morning. Thanks for taking the questions. I wanted to follow up on the chicken pricing comment. So, is that a Tyson-specific comment? And also, you mentioned mix, but is there also an element of you guys have cost-plus contracts and clearly see costs are down? So, is that a component for that comment as well?

Well, anytime we make any comments, it is specific to Tyson. Obviously, we don’t know what others in the industry are going to do. All we can do is look at industry data. So, yes, the outlook is specific to us. We can look at egg sets and placements. We can look at a lot of different numbers, and we have no sense of what others are going to do. That’s purely our outlook at this point in time.

I wanted to dig in on the comment that you expect chicken production to be up in the back half of your fiscal year. I think, that’s a critical point here, because we’re already seeing exits way down. We’re seeing chicks place numbers down even more. So, there’s eggs being cracked. There are some at least rumors about some in the industry, ordering fewer pullets and maybe killing off heavy hens at a faster rate. If that’s already happening and I’m asking if it is, as far as you can tell, and if the industry is margin negative, why would the industry increase production in the back half of the year? I understand part of it is because plants are coming back online, I do get that. But I don’t quite get why we would assume that given all this what’s happening already that industry production wouldn’t be a little bit less than what we thought previously. Maybe I can just pause there and hear what you say about that. Thanks.

Yes, that is certainly a possibility. We analyze the same public data that you do and are beginning to see signs of some reductions. We cannot say for sure what others are doing. However, given the current profit structure, it seems likely that could be the case. In the poultry industry, changes can occur significantly faster compared to pork and beef. Therefore, your hypotheses could very well materialize in that manner.

A couple of questions. I think, Noel, you just said that you think the industry could get back to 2.8 million pigs per week, if attendance improves, but you’re also implementing more social restrictions in the plants and more safety precautions. And I got to imagine that that slows down facilities as well. So, is it possible to break down your incremental costs and your utilization rates based on what you’re seeing in terms of attendance right now? And then, also in terms of the safety measures you need to put in place, because I got to imagine the safety measures are going to be with us for a while?

Yes, I believe that's a reasonable assumption, Rob. Given the slowdown in speeds and production throughput, we've taken every possible step to protect our team members and employees, including implementing social distancing. At this stage, it's too early to determine if this is a permanent structural change that would require us to slow down operations to maintain necessary social distancing. Therefore, we cannot specifically quantify what that might entail in the future. We are still in discussions with both state and federal officials about what the future may look like.

Well, you’re doing it right now, aren’t you? I mean, you’re saying that you’re taking all these precautions right now. It’s obviously the right thing to do. Have you made any estimates as to the degree to which that slows down the facilities and reduces utilization?

So, first of all, we didn’t say that margins will be negative. We said that chicken would likely be unprofitable in the backdrop of the year. A couple of questions ago, I sort of framed that. There’s a combination of factors. The only one that I didn’t point out just because it’s ongoing is weaker pricing. But if you go back and just look at those factors, the ongoing weaker pricing that we’ve seen, the negative impact of loss of volume, the mix shift between foodservice and retail, and then, of course, just the efficiency levels in the farm, which have been impacted by worker availability, the measures we’ve taken, and bonuses, sort of frames out the picture in chicken. I can’t give you any more detail than that.

To sum it up, our long-term outlook remains positive. Our diversified business model allows us to react to changes created by major events like COVID-19 and African swine fever. Our balance sheet, liquidity, scale, and diversified portfolio of businesses remain strong and should provide some level of protection as we move through the year. We will continue to drive long-term growth in all parts of our business as we execute against our strategic plan with a constant focus on maximizing long-term value for shareholders.

Thank you for your time today. One of the hallmarks of Tyson is turning insights into actions. The current environment presents significant opportunities for our company as we assess and react to changes in the consumer landscape. We’ll leverage our resources and infrastructure as we continue our role as a leader in food production. Let me conclude by saying, the responsibility of feeding our nation goes beyond any one business. Working together, we’re confident we can mitigate the spread of COVID-19 in our communities and keep it away from our plants and help the food supply chain intact. Please stay safe. We look forward to talking to you soon.