Tyson Foods Inc - Class A (TSN) — Q2 2021 Earnings Call Transcript

Hello, and welcome to the second quarter fiscal 2021 earnings conference call for Tyson Foods. On the call today are Dean Banks, President and Chief Executive Officer; Donnie King, Group President Poultry & Chief Operating Officer; and Stewart Glendinning, EVP and Chief Financial Officer. We have prepared presentation slides to supplement our comments, which are available on the Investor Relations section of the Tyson website and through the link to our webcast. During this call, we'll make forward-looking statements regarding our expectations for the future. These statements are subject to risks, uncertainties and assumptions which may cause actual results to differ materially from our current projections. Please refer to our forward-looking statement disclaimers on slide two, as well as our SEC filings for additional information concerning risk factors that could cause our actual results to differ materially from our projections. Please note that references on earnings per share, operating income, and operating margin in our remarks are on an adjusted basis unless otherwise noted. For reconciliations of these non-GAAP measures to their corresponding GAAP measures, please refer to our earnings press release. I'll now turn the call over to Dean.

Thank you, Megan. Before we get started, I'd like to welcome Donnie King to the earnings call and congratulate him on his recent promotion to Chief Operating Officer. I would also like to thank our 140,000 team members for their continued efforts and resilience. They are what makes this company an incredible place to work, and I'm proud of their focus on raising the world's expectations for how much good food can do. Earlier today, we released our second-quarter results for fiscal 2021. We delivered a solid operating earnings performance recording $739 million in adjusted operating income for the quarter, which represents a 43% increase relative to the same period last year. We delivered $1.34 in adjusted earnings per share, a 68% increase from the same period last year. These results were reinforced by our solid performance in retail, our continuing efforts to ensure the safety of our team members, our partnership with customers to enable recovery and our focused execution to overcome inflationary headwinds. Our results in the quarter reflect our continued focus on team member health and safety. This is our top priority, and I'm proud of the progress that we've made on our comprehensive safety, health and wellness agenda, along with our recent vaccine deployment efforts. We also saw improvement in the foodservice channel during the quarter. We've been working closely with our customers to support foodservice recovery. As consumer demand patterns continue to create operational complexities, we've taken action to make our organization more responsive to demand signals and customer needs to accelerate our speed to market. Agility is increasingly important as we look to extend the gains that we have achieved in the retail channel. We continue to drive retail volume growth across our core business lines, delivering growth in the recent quarter is particularly notable as we are now comparing to a prior quarter that included some benefit from initial COVID-19 pantry loading. As we navigate market volatility and rising inflationary pressures, we're focused on operational excellence and disciplined cost management. Our balance sheet is strong, and we continue to invest in our business. We have prioritized capacity expansion and automation technology investments and have significantly increased our capital allocated to both of these areas. As an example, our Humboldt production facility in Tennessee has recently commenced operations and our team shipped the first saleable product in late April. To support growth in case-ready beef and pork, we were also excited for the reopening of our Columbia South Carolina plant, as well as the grand opening of our Eagle Mountain, Utah plant, both occurring later this year. We are expanding capacity in our international operations and have six sites where new capacity is currently under construction, positioning our international business for continued growth and profitability in the future. As we look at the balance of the year, we realized that we have a challenging second half ahead as inflationary pressure has continued to build. We also have several bright spots, notably our performance in the retail channel and the continued strength in our Beef segment. Looking past the inflationary headwinds that are impacting our input costs, I'm confident that our team is executing on the right priorities to meet our commitments and drive shareholder value creation. Turning to Slide 4. Team member health and safety is and will continue to be our top priority. Through our partnership with Matrix Medical and our local communities, over 42,000 of our team members have been vaccinated since February. As of today, we've offered onsite vaccination clinics at over 100 locations in more than 30 states. We've also launched a pilot project to enhance health and wellness of our team members. This involves the opening of seven clinics that will enable team members and their families to receive easier access to high-quality healthcare services. Our first facility opened recently in Newbern, Tennessee. Turning now to Slide 5. Our total Tyson and Core Business Lines have posted 11 consecutive quarters of volume and share growth. Notably, our team delivered volume growth in Q2, despite the unusually strong demand associated with pantry loading that occurred during the comparable quarter last year. Sales volume for Tyson Core Business Lines are up 12.7%. In total, Tyson is up 8.5% in the latest 52 weeks. Our share growth has been the strongest in breakfast, sausage, hot dogs, frozen value-added poultry and frozen protein breakfast. Our growth during these periods was driven in large part by our ability to bring incremental households into our brand and product lines. Total Tyson household penetration reached 81% for the latest 52 weeks. Also consumers continue to rely on low to no contact buying methods. As a result, we experienced e-commerce sales growth of 105% in the latest 13 weeks compared with last year. This equated to approximately $425 million of sales through our e-commerce channel partners. Turning to Slide 6. Innovation is important to our success in both retail and foodservice channels, and we continue to invest in the launch and scaling of new product innovations. On this slide, we have three examples of how our product innovation is tied to meaningful consumer insights. In a recent survey, nearly half of Americans expressed dissatisfaction with available plant-based options for the grill. This insight spurred our recent nationwide Raised & Rooted launch, which includes three new products to meet increasing demand for plant-based protein options. We're also excited for our recent launch of alternative protein offerings in the Europe and Asia-Pacific markets, which will support growing global demand for protein. For Jimmy Dean Breakfast Nuggets are another example of our ability to pair brand and category leadership in frozen breakfast with our unique production capabilities to deliver protein dense offerings that complement Tyson's current product portfolio. Finally, annual servings per capita for breaded chicken sandwiches at restaurants are up 14%. And our products in this space have enabled us to capitalize on the growing popularity. Moving to Slide 7. As we continue to navigate complex consumer dynamics overall, we're closely monitoring several factors to effectively engage with our customers and consumers in support of the overall recovery. Protein has remained relevant throughout the pandemic, with 54% of consumers indicating a deliberate intent to increase protein intake within their daily diet and 20% indicating that they are consuming animal protein more often than they were a year ago. In addition to overall protein consumption, we are closely monitoring reopening and recovery patterns. Approximately 76% of the U.S. states are now at 75% or more capacity for in-restaurant dining. With vaccine rollouts and consumer mobility improving, away from home traffic is gradually increasing on a sequential basis. Currently QSR and C-stores are leading the recovery as consumers are very comfortable with ordering takeout. While we are seeing some challenges in our international markets, progress against COVID domestically should continue to improve consumer confidence and mobility in the second half. The U.S. economy is improving rapidly in part due to government stimulus. But we expect some degree of elevated retail consumption to remain post-COVID. Our success in growing retail share and driving relevant innovation will allow us to meet the strong demand for protein and serve our customers across all channels. I'll now turn the call over to Donnie to walk us through the segment operating results in detail.

Thanks, Dean. I will start with the Chicken segment performance captured on Slide 8. Sales were $3.6 billion for the second quarter, up 5%. Overall volumes were down in the quarter, primarily due to COVID-related production inefficiencies. Severe winter weather also impacted volumes, operating costs and production efficiencies in the quarter. Average sales price was up substantially during the period due to the favorable mix and the benefit of higher retail volume. Our reported price improvement also reflects actions that we've taken to cover the inflationary pressure we have experienced from higher grain, labor and freight costs. Despite our efforts in the quarter, we did not fully offset the inflationary impacts as a substantial portion of our business is contracted on a fixed annual price basis. The terms negotiated and locked ahead of the recent surge in grain cost. Adjusted operating income was $6 million during the second quarter and $110 million for the fiscal year-to-date, down versus both comparable periods. Fiscal year-to-date operating income was negatively impacted by $145 million of higher feed ingredient costs, as well as $95 million of increased grow-out expenses and outside meat purchases. For the second quarter, feed ingredients were $135 million higher. Our grow-out expenses and outside meat purchases were $60 million higher. Segment performance also reflects net derivative gains during the second quarter of $40 million and $110 million for the fiscal year to-date, both versus the respective comparable periods. These gains are associated with realized gains, as well as open positions. Last quarter, we shared our imperatives for improving Chicken operating results, which are captured on Slide 9. Our goal has not changed. We remain committed to restoring top-tier performance. The first imperative is related to being the employer of choice. Despite implementing pay rate increases, we continue to deal with elevated absenteeism and turnover. We're implementing a range of initiatives to improve the team member experience and achieve the status of the employer of choice, including flexible work schedules and a competitive wage rate. At this time, we estimate our average base pay plus benefits for domestic production workers is valued at over $22 per hour. The second imperative relates to our strategy to improve overall operational performance. Although we have made some progress improving our plant performance, we're not where we plan to be at this stage. Our strategy to improve our operational performance includes restoring our production volume to full capacity. However, we've struggled to raise the harvest to full capacity due to upstream supply issues, including issues caused by lower hatchability rates. Consequently, we have offset raw material shortages with outside meat purchases at a higher level than we have historically, which has led to a cost disadvantage. To compensate for cost headwinds, we are working to recover our historical advantage on live costs, reduce the number of pounds we're sourcing in the open market, and to increase our plant efficiency as we gradually restore volume over the balance of the year. The final imperative relates to serving our customers. Our focus is to deliver the highest levels of service to our customers too with respect to order fill rates. When our customers are successful, we are successful. We are sustaining share gains in retail value-added as we start to lap the COVID-19 surge and are also leading foodservice recovery and growth. At the same time, our sales team is working to recover raw material and supply chain cost inflation via pricing. To sum up all of these imperatives, our goal is to restore our Chicken business to top-tier competitiveness and regain the coveted position of being our customer's go-to supplier. Acknowledging the uncertainty associated with continued COVID-19 recovery, we are increasingly confident in our ability to bring our adjusted operating income margin back to at least the 5% to 7% range over time. Moving to Prepared Foods. Sales were $2.2 billion for the quarter, up 4% relative to the same period last year. Total volume was down 4% in the quarter as growth in the retail channel was offset by a reduction in foodservice volumes. Sales growth outpaced volume growth, driven by the partial pass-through of raw material costs, lower commercial spending, and a better sales mix. Segment operating income was $217 million for the quarter, up 14% versus the prior year. For the first half, operating income was $483 million, up 30%. Operating margins for the segment were 10% for the second quarter, an improvement of 80 basis points versus the comparable period. Improvement in operating income was driven by the mixed benefit of strong retail performance, lower commercial spending, and pricing pass-throughs, which more than offset higher operating and raw material costs. In the second half, demand is expected to remain elevated at retail, with volumes continuing to exceed pre-COVID levels and foodservice showing sequential improvement. Overall, we're seeing an accelerating inflationary environment that is creating a meaningful headwind for Prepared Foods in the back half of the year. We're seeing raw material costs up over 15%, as well as increases in logistics, packaging, and labor. To offset inflationary pressure, we're focused on pricing, revenue management, commercial spend optimization, while ensuring the continued development of brand equity through marketing and trade support. Moving to the Beef segment. Segment sales were approximately $4 billion for the quarter, up 2% versus the same period last year. Key sales drivers included a strong domestic and export demand for beef products, with average sales price up 7.5% for the quarter. Sales volume for the quarter was down due to the severe winter weather and production inefficiencies related to the challenging labor environment. Segment operating income was $445 million for the quarter. Operating income improvement was driven by strong global demand for beef products and a higher cutout, which were partially offset by higher operating costs. Operating margins for the segment improved 790 basis points to 11% for the second quarter. Our Beef segment performance has been driven by favorable supply and demand dynamics, which look to persist deeper into the year. On beef supply, slightly higher domestic production for the calendar year is being more than offset by lower imports and higher exports, resulting in lower projected domestic availability for the full year. Adequate supply coupled with continued strong domestic and export demand will sustain cutout values and our strong segment results. Now, let's move on to the Pork segment on Slide 12. Second quarter results reflect the benefit of strong retail demand and higher exports, which were more than offset by higher hog costs and operating expenses. Segment sales were $1.5 billion for the quarter, up 17% versus the same period last year. Key sales drivers for the segment included higher average sales price due to stronger demand, partially offset by lower volumes due to production inefficiencies. Average sales price increased by over 17%, while volumes were down slightly relative to the same period last year. Segment adjusted operating income was $67 million for the quarter, down 28% versus the comparable period. Overall, operating margins for the segment declined by 280 basis points to 4.5% for the quarter. The operating income decline was driven by lower volumes, higher hog costs, and increased labor and freight costs. To improve our operating income results for the segment, we have implemented several actions to alleviate production constraints and to improve our volume throughput. As we look ahead, we're closely monitoring hog supply estimates. Recent USDA projections show a historically sharp drop in hog supplies. The sharp decline in supply and strong demand for certain pork items have pushed the cutout up 59% from the end of December. As it stands now, pork cutout is at the highest level for this time of year since 2014. Looking at the overall calendar year, lower projected 2021 pork production and continued robust consumer demand are expected to support hog prices at well above 2020 levels. Slide 13 captures some highlights related to our international business. We continue to invest behind our international platform, which provides an opportunity to grow our sales and our margin by leveraging global production capabilities to feed consumers abroad. We're using our One Tyson framework to identify opportunities to maximize the value of our products and capabilities from farm to table at a global level. Our existing depth of experience in protein production, brand management and global customer relationships creates the right recipe for growth and positions us with the right to win internationally. I'll now turn the call over to Stewart to provide additional detail on our financial performance.

Thanks Donnie. Turning now to a summary of our total company financial results, we are pleased with year-over-year growth in sales, adjusted operating income, and earnings per share. We performed well despite the challenging operating environment that experienced tough labor availability, significant inflationary pressures in raw material costs, global supply chain challenges, and an evolving demand backdrop. Adjusted operating income was up 43% during the second quarter due to strong performance in our Beef business, along with growth in Prepared Foods earnings, partially offset by softness in Chicken and Pork. For the first half of fiscal 2021, we delivered adjusted operating income growth of 32%. Adjusted EPS grew nearly 70% during the second quarter driven by higher operating income. Fiscal year-to-date adjusted EPS was up 41% on a year-to-date basis. Slide 15 bridges our total company sales for the first half. Ongoing retail strength drove much of our sales results. We delivered growth across all our reporting segments in the retail channel. Overall, retail accounted for $700 million in sales improvement during the first half and over $260 million in the second quarter versus comparable periods. Moving to foodservice. Sales declined over $400 million in the first half compared to the same period last year, but improved $69 million in the second quarter. Foodservice recovery was most evident during the second quarter in higher Chicken and Prepared Foods sales versus the same period last year. Our foodservice mix in Chicken indexes to QSRs, which saw volumes above pre-COVID levels during the period. In Prepared Foods, we are seeing recovery in foodservice foot traffic and strong sales into the distribution channel. Exports were up over 5% versus the comparable period, led by Beef where sales improved nearly $100 million for the first half. China is a key driver of Beef export strength. Lastly, we've seen some strength in industrial, particularly in Pork as renewable fuels continue to drive growth in fat and oils demand. In addition, the pace and shape of foodservice recovery will affect the composition of our channel and segment sales in the second half of the fiscal year. Slide 16 shows the bridge for adjusted operating income for the first half. Lower volumes, primarily from production inefficiencies in foodservice were a $100 million headwind on gross margin in the first half. Price mix benefited during the first half from price recovery of raw material cost inflation, improved mix, strong Beef segment performance, and continued retail strength across segments. Adjusted operating income was burdened by $664 million in cost of goods sold pressure for the period. This amount reflects significant raw material and supply chain cost inflation. Of the total, feed ingredients, scrub costs, and outside meat purchases associated with the Chicken segment contributed $240 million of pressure. Other large contributors included freight and labor costs. Year-to-date SG&A benefited from the $54 million loss in fiscal 2020 compared to a $55 million gain in fiscal 2021 associated with the cattle supplier fraud and certain reductions in trade spin and travel costs. Slide 17 captures our financial outlook for fiscal 2021. Given continued strength in the Beef segment and our expectations for ongoing foodservice recovery, we are raising our sales guidance for the full year. We now expect to deliver annual revenues in the range of $44 billion to $46 billion. This guidance reflects our expectation of partial price recovery relative to continued feed ingredient and supply chain cost inflation. At the segment level, we expect our directional annual guidance of lower operating margins in Chicken and Pork versus the prior year to hold. Because of stronger than expected performance in Beef and current market conditions, we are raising our guidance on the Beef segment. We now expect segment earnings to be up versus the prior year. Finally, we are lowering our guidance in Prepared Foods due to back-off inflationary pressures, and now expect the segment's earnings to be flat versus the prior year. Key risks to this guidance include freight rates, labor costs, grain costs in the Chicken segment; raw material costs for our Prepared Foods business, and continued export market strength along with price volatility in commodity meats. Our capital expenditures outlook of $1.3 billion to $1.5 billion remains unchanged, but we now expect to be at the lower end of the range. Net interest expense is expected to be lower than our previous outlook at approximately $420 million. This update reflects an incremental term loan repayment of $750 million relative to our prior guidance that resulted in the early payoff of our $1.5 billion term loan offset by $500 million of new indebtedness associated with a new bilateral term loan facility. Our outlook on the effective tax rate is unchanged. We will continue to monitor the potential implications of any new legislation, but do not currently expect to see impacts to our adjusted rate this fiscal year. Our expectations related to liquidity are also unchanged. As we noted last quarter, liquidity decreased from $4.2 billion at the end of the first quarter, ending the second quarter at $2.6 billion. Finally, our COVID-related costs, which totaled $95 million in the quarter, are now expected to be approximately $365 million for the year. Turning to Slide 18. With our strong operational performance through the first half of 2021, we've seen an increase in operating cash flows. We have prioritized deleveraging through the first half, consistent with our priority to maintain a strong balance sheet with financial flexibility. Investing organically in our business has been an important priority, which will increase our production capacity and our market capabilities, as well as modernize our operations while providing strong returns. We will continue to explore paths to optimize our portfolio through M&A. We have a disciplined approach which focuses on returns and generation of shareholder value. Finally, we're committed to return cash to shareholders through dividends and buybacks. In short, we view the cash generation capabilities of this business as strong and diverse, and we expect our deployment to deliver strong shareholder returns. Now, I'd like to turn the call back to Dean.

Thanks, Stewart. To close our prepared remarks, I just want to make a few comments about our priorities for the second half. Looking at the work ahead of us, we are focused on improving operating margins, growing above the market, and driving sustainable returns for shareholders. To improve our operating margins, we are driving enterprise-wide operational excellence, working aggressively to restore our competitive position in our Chicken segment, and structuring our teams to operate at the speed of the market. To grow above the market, our team is focused on working closely with our customers to enable foodservice recovery and support ongoing retail demand. We've also increased investment in value-added capacity expansions in automation technology, which will support increased sales, high efficiency processing, and more agile customer service. Lastly, the strength of our balance sheet will allow us to continue to invest in our business and return capital to shareholders consistent with our stated priorities. And with that, I'll now turn the call back to Megan.

Thanks, Dean. We will now move onto your questions. Please recall that our cautions on forward-looking statements and non-GAAP measures apply to both our prepared remarks and the following Q&A. Operator, please provide the Q&A instructions.

Hey, good morning and thank you very much for taking my questions. So, maybe, Donnie, that's one for you. Just wanted to follow-up on the initiatives within Chicken, and I mean, clearly, you've laid out very much detailed the plan on how to work on improving and get back to that mid to – mid-single-digit, high single-digit operating income margin level. Now, more short-term, if we take a look at the cost headwinds, corn, soy, I mean, obviously, that's significantly impacting. How do you feel about your ability to negotiate on pricing with what you usually have on your negotiators and contract pricing with customers, just considering that the overall environment seems to be very inflationary? So do you see any flexibility around the pricing mechanisms in the short-term? Thank you.

Thanks for the question. Short answer is, yes. We have, obviously, locked in some pricing early, before we saw the run-up in grain. But we've been having non-stop conversations with all of our customers around the inflationary need for pricing, and they have been very responsive. We've had a lot of good results in mid-contract discussions with those customers. Remember our relationships with our customers; it is a relationship. It is not a transactional event for us and we've invested as they have through the years. And so, they've been very supportive. They certainly understand the inflationary needs, and I think we will be quite successful in this endeavor.

Okay. Perfect. And just to kind of look ahead, I mean, where do you think are low-hanging fruits in terms of operating efficiencies to bring margins back up aside from the headwinds, like really what's in your hand? What have you identified since you took over a more serious review of the business a couple of months ago? And where do you think are the low-hanging fruits and more the bigger challenges, just to bring that back to that 5% to 7% margin range you've talked about?

Sure. As we began the fiscal year, our primary goal was to be the best chicken company as we progressed. We understood that we were not there yet, and we started working towards that objective. We experienced promising results, particularly in the first quarter. However, in January, we noticed a slowdown in recovery due to volume constraints primarily caused by lower chick availability from an unforeseen drop in hatch rates. The winter storm named Uri significantly impacted our operations, resulting in a week of losses across our poultry sector and other businesses. To address these supply shortages, we had to turn to external meat purchases, which increased our costs as market prices rose sharply, especially after the first quarter. Additionally, inflation affected costs related to grain, which had its highest increase in six years, along with rising wage and freight expenses. We had contracted a significant portion of our portfolio in the fall and early winter before prices began to rise substantially. We're also managing issues with employee turnover and absenteeism. Nonetheless, despite these challenges, the fundamentals of our business are actually promising looking ahead. Demand from customers and consumers remains strong, with sustained retail demand and recovery in foodservice driven by ongoing chicken sandwich promotions. The outlook, combined with the operational improvements we are implementing and pricing opportunities available to us, is positive. Specifically, I think about the business and its seven key strategies. We need to ensure we're compensated fairly for our products, as we cannot absorb all the current inflation. We must regain our production volumes, as our business is expanding, and we need to increase our harvest numbers. We also must enhance our capacity. We've seen improvements in our product mix, but absenteeism continues to pose challenges. Furthermore, we need to align our spending with the volume of processing. Lastly, we need to restore our live production margins. I want to emphasize that we are aware of our current situation and are not satisfied with it. We recognize that we cannot simply talk our way out of our poor performance. However, we have a solid plan to become the best chicken company, and we have made significant strides. We aim to accelerate our efforts in the second half of the year. Our team is well-prepared and knowledgeable, and we are not discouraged. While we faced delays due to winter conditions and inflation in the second quarter, we remain very optimistic about the future of our business.

And I just want to add a compliment to Donnie and the team; we’d committed in previous calls to have visible operating metric improvement at the end of the second quarter. And from everything we've seen early in the quarter and coming out of the previous year, we had seen those operating improvements materializing. It's unfortunate that we're experiencing all the headwinds, but I'm proud of how Donnie and the team is managing those headwinds and the operating improvements they made, which will become visible as we navigate the headwinds coming forward.

Okay. Perfect. Thank you very much, Donnie, Dean for the comments. Congrats.

Thank you.

Hi. Thank you. Good morning.

Good morning.

I wanted to make sure I understood guidance. When you say that the results in a particular segment are likely to be higher or lower than the prior year, I think you're talking about operating margin because that's what it says in the slide, and that's what you've historically done. But in your prepared remarks, I thought you said profit or earnings. I just wanted to clarify whether it's margin or earnings or both when you're talking about those terms.

Yeah. Ken, Stewart here. Absolutely. It's percentage with some of our rate of return on sales, and as you point out, that's what you see in the slide.

Great. Thank you for that. And then, as a quick follow-up, can you talk a little bit about some of those hatch issues that you mentioned? How structural are those? How much of those related or related to some of the weather that we saw? I'm just trying to get a sense of your outlook for those.

Sure. That's a great question. We believe some of the issues are structural in our program. We changed one of the males we were using in our business and, although we are observing great broiler performance, we are not seeing the expected maternal characteristics such as egg production and hatch rates, which is the main concern. In February, the weather had a significant impact due to the Uri storm, which caused power outages. As a result, we had eggs on a farm without power, leading to embryo losses. The chicks that were affected went through the grow-out cycle and experienced issues, resulting in a substantial initial impact. The consequences of this situation persisted through April, and we are just beginning to recover. On a more positive note, their hatch rate is improving and is expected to improve slightly as we move forward. Our breeder performance shows a variation from the best to the worst, and by elevating and tightening that spread, we can achieve improvements. Seasonally, we will see some enhancements, and the knock-on effects from the winter storm will also contribute to improvements. However, it's important to note that it will take time to fully see the benefits of the male changes we are implementing. We plan to have a new male in place everywhere soon, but it will take a full year to fully realize the improvements. We are confident this will happen, and that's the current situation.

Thank you very much.

Good morning, everyone.

Good morning.

Good morning.

Okay. So, two questions from me. The first one you talked about operational inefficiencies. I was just wondering if you could clarify what those problems were and how quickly you expect them to be resolved? And then I have a follow-up.

Thank you for your question. The issue relates to staffing, which is affecting our capacity. In our Pork business, we've been accomplishing about six days' worth of work in five days due to turnover and absenteeism. Additionally, our performance is hindered by the lack of skilled personnel. As a result, we haven't achieved optimal mix utilization for maximizing the cutout and the various high-margin meat components. Currently, our pork plant is short-staffed. We are addressing this by adjusting work schedules, reviewing wages, and investing in automation and technology to ease the challenges associated with difficult roles that see high turnover.

Could you please provide an update on the current status of the African swine fever situation in China? We didn't hear any updates this time. I understand that you believe it will continue to influence the global meat supply and demand balance for a while. Are we progressing towards a situation where it has a reduced impact on your export business?

Yeah. So, first off, the case is not just in China, but what we've seen in Germany really disrupted global protein flows. Some of the protein was obviously destined for Asia. China, early reports, where they were having some success repopulating, but our latest research shows that that's really not happening anywhere near the pace that they hope. So, we still see really strong exports going into China to cover that gap.

Right.

I would add that China is still at an important deficit. There are new herd losses from ASF, which is slowing their recovery. So, based on the numbers, I saw quoted from Rabobank recently, there'll be flat to about 2020.

Great. Thank you very much. I'll pass it on.

Yes. Thanks. Good morning, everyone.

Good morning, Adam.

Good morning.

I wanted to connect some of the comments you've made regarding the Chicken business during this call. As we look ahead to the end of this fiscal year and the path toward achieving 5% to 7% margins, could you provide insight on where we might stand at the end of September and at the close of fiscal 2021? Specifically, I'd like to know your expectations for live productivity in relation to labor and nutrition, as well as your thoughts on the price versus feed dynamics. Additionally, since you mentioned this as a medium-term target, what do you believe is a realistic timeline for reaching that goal?

Sure. Let’s begin with the hatch issue. I mentioned several aspects regarding its sequential improvement. We are moving away from a poor decision we made, and we won’t be fully bright until around mid-year 2022. However, we will see steady improvement from now until then, which will assist us in meeting our current supply needs. Right now, we are overly reliant on outside meat purchases, and with the market prices rising, it has become nearly impossible to transfer those costs to consumers. Therefore, we need to establish our own livestock. It's important to note that most of our outside purchases are breast meat, while we also have strong sales for the back halves of the chicken and the associated rendered products. When I refer to achieving 5% to 7%, I am speaking about that percentage within a growing business, specifically the FP business. This could involve meat production and harvesting animals to support that business. We believe there is substantial upside potential, making the future look significantly more promising than it does at present.

One other point I wanted to make related to the hatch issue is that it's a bit of a double-edged sword in that not only are we buying a protein in the market to service our further process customers, but in the primary processing, our plant's not running full as some deleveraging. And so, you'll see us in the coming quarters, as we get hatch fixed, we increased capacity in our facilities. We'll absorb some of that deleveraging and get back to operating metrics and operating performance that come alongside that.

That information is very useful. I have a follow-up question, perhaps for Stewart. Regarding capital allocation, Tyson has reached its long-term leverage target of two times at the end of the second quarter. Can you help us understand how you plan to deploy incremental cash flow moving forward? In your prepared remarks, there was a mention of M&A with a focus on optimizing the portfolio, but it didn't seem like there are plans for significant offensive M&A. Could you clarify your approach to cash deployment from this point onward?

Yeah. Sure. Well, look, I mean, I'll tell you. I feel really pretty good about our options here. If you think about our capital allocation in three big planks. First, we've been focused on building financial strength, and that’s certainly true as you pointed out our debt-to-EBITDA ratio is looking good. We do have more debt coming due later this year. And, of course, we have a term loan that’s outstanding. So, there's about $1 billion between those two. Then, think about investing in the business. M&A is opportunistic, but, of course, we have and will continue to be pretty disciplined there from a return standpoint. Where you have seen increased capital deployment has been around CapEx; we did earlier this year guide that we would be as high as $1.5 billion. We haven't been able to get some of the projects away as quickly as we've wanted, but you might take away from that early guidance that we have an appetite to invest behind our company in organic kinds of investments. And there are lots of strong opportunities in automation and other profit improvement areas in our business. Notably, lots of opportunity for us to invest in new capacity in our business. We talked about six different sites in our international business where we're investing in new capacity. Donnie spoke about a couple of new plants coming online in the U.S.; Humboldt has come online. So, more capital is going against capacity and then as needed for growing business. And then lastly, of course, with 10 years of building growth, we have not been shy to share that cash with shareholders, and we expect to continue to do that in the future. So, I think, step back; we've got a well thought out, well-balanced approach to capital allocation.

All right. I appreciate all that color. I'll pass it on. Thanks.

Hey. Good morning, everybody.

Good morning, Ben.

Want to ask about the Prepared Foods segment. Your commentary makes perfect sense just given the raw material cost inflation that we've seen. I'd love to hear some commentary on the cadence of pricing that you expect to realize. What you're looking at from a competitive standpoint and demand elasticity standpoint in that business? And how we should be thinking about kind of the realization of margin recovery in that business relative to raw material costs and pricing increases.

Sure, I’ll start and then pass it on. We continue to see strong retail performance in Prepared Foods, backed by 11 consecutive quarters of growth in our core business areas, which gives us a solid foothold there. Regarding pricing, we are facing high input costs in the Pork sector, which will ultimately be reflected in our pricing. In retail, we regularly communicate with our partner customers about these challenges, allowing us to adjust accordingly. We anticipate increasing our spend in the coming months to stay competitive, and our past investments have proven beneficial. With a household penetration rate of 81%, we have long-term opportunities to leverage this strength. Additionally, foodservice is on the mend; we’ve noted that about 75% of the regions we serve are rebounding. Despite a 10% decline in restaurants, we see new kitchen models and other creative solutions filling in the gaps. We believe this sector will recover robustly, although it operates with lower margins, which will require adjustment as we ramp up operations in both restaurants and distribution channels. It's important to remember that foodservice recovery varies by region and channel, and we haven’t seen the expected improvements in K-12 services. Also, some parts of Europe are still struggling with COVID impacts, so overall foodservice recovery is not as strong as we had hoped. With that, I’ll hand it over to Stewart for the margin outlook.

Yeah. Look, the only thing I would add to what Dean has said is that our expectations for price recovery in the second half are already included in the guidance. Of course, philosophically, we believe as a company that raw material costs ultimately will be passed along. And therefore, you should think about seeing more to come next year. But the current expectations around pricing are built into our guidance.

Understood. Okay. Great. My second question is just around the buy versus grow strategy in Chicken. You talked about the hatchability issues and how that should resolve some of your issues over time related to the need to buy breast meat on the outside market. What role does Humboldt play, if any, in that equation? And as it relates to Humboldt, is that on time, on budget? What are the latest qualitative or quantitative commentary points that you could offer us?

Sure. Humboldt is a fresh chicken plant, and as we evaluate that business, it's an expanding segment primarily for our retail clients. We initiated operations in late April with some new product lines at Humboldt, and we expect to start harvesting animals by late July. This will provide us with added flexibility in our operations. The developments at Humboldt and in our fresh portfolio will enhance our efficiency and streamline our processes. Regarding the buy versus grow strategy, we continue to support a mixed approach and will remain committed to that strategy. We had to shift two quarters to buying instead of producing our own due to delays in getting animals ready. This year, we started moving in the right direction. In Q1, we saw solid performance, but we were impacted by hatchability issues in January and a severe storm in February. We are still analyzing these events to gauge their long-term effects. Nevertheless, we are confident about our prospects in the long run. Our reliance on buying rather than growing has increased, which is something we need to address. Traditionally, the market price for jumbo boneless skinless breast meat hovered around $1.10 to $1.20, but as of Friday, it had risen to $2.11, indicating a substantial market increase. Adjusting pricing in this environment can be challenging, but our models suggest that increasing our production is the best path forward given current market conditions.

One other thing just to add to Donnie's answer. Just thinking about Humboldt specifically, as a reminder, there is a startup cost for Humboldt, which is about $60 million in the year with most of that in the second half. So, just keep that in mind for your model.

Okay. Thanks very much.

Hey. Good morning, guys. I have two questions. First, regarding the Beef sector, how long do you think the cattle supply will remain in this situation compared to the packing capacity? I understand the cattle from last year haven't all been processed yet. How long do you anticipate this positive environment will last? Also, moving into 2022, it seems like the environment is still favorable. I'd like your thoughts on that, and I have a follow-up question afterward.

Sure. We're projecting and observing ample cattle supply through the end of the year. And as we're continuing to set up our plants and increase production, we're going to continue to work through that. But everything looks strong through the end of the year and into 2022. Donnie, do you want to add any color?

Sure. I will add a little bit to it. There is obviously higher grain costs on the Beef side and then, of course, the drought conversations which could impact heifer retention, which could portend some longer-term negative implications. But based on everything we see throughout 2020 – into 2022, at least for the first half, we can say there will be ample cattle supply.

Great. And my second question, Donnie, if I look back at 2008, how do you compare and contrast this cycle on the Chicken operation versus then? And again, if you kind of do that compare and contrast, it seems like there is a real linear path to those type of margins that you once got back in the 2009, 2010 period? And I'll leave it there, and I appreciate it.

Thank you. There are many similarities. The positive and negative aspect is that we have experienced this situation before. Looking back to 2015, our harvest volume in pounds sold has remained flat compared to that year, which is an issue. During that timeframe, we acquired Keystone, which processed about 4.5 million chickens weekly. We have effectively distributed that volume across all our locations. Our capacity utilization is currently in the low 80s for harvesting. If you analyze the current figures and consider a potential 20% increase with all the unused capacity, there is considerable opportunity to improve costs. However, our volumes have stayed flat while our operational expenses have increased at about a 5% compound annual growth rate. We are operating on flat volume, and frankly, our customers are not going to cover our inefficiencies, nor do we expect them to. We have experienced significant price drops, estimating around $500 million in decreases from 2015 to 2021 due to market conditions. We dealt with a few major events, like the SAP transition in 2019 and COVID-19 in 2020. In summary, we face higher costs with lower volume. To correct this and aim for 5% to 7% growth, we need to focus on the FP business. This growth could come from meat or harvesting animals to support that sector. We see substantial potential ahead, and the future appears much more promising than the present.

Thank you very much. See you all, guys.

Thanks, Ken.

Hey, guys. Good morning. Thank you for taking the question.

Good morning, Peter.

Good morning. Stewart, the operating income range is very helpful. Thank you for including that. I have a question. It seems that in the first half of the year, your sales price mix was more than double the COGS inflation. You're expecting that to change significantly in the second half of the year. Can you provide any insight on how much the price might recover relative to COGS in the latter half, considering it from an enterprise-wide perspective?

There are a few points I'd like to highlight. Firstly, it's important to emphasize that a significant factor affecting this number is Beef, as indicated in the segment details in Note 14. While the overall movement may seem one way, breaking it down by business unit reveals a different picture, particularly in Prepared Foods, which Dean discussed regarding the back half of the year. Additionally, a modeling tip is that grain costs have risen substantially. Since the start of this quarter, grain prices have surged. For reference, in the first quarter, grain costs were approximately $10 million higher than the previous year, and in the second quarter, they increased by $135 million compared to the same quarter last year. This increase is due to the higher grain costs. Yes, we're using hedges, but as those hedges roll over, some of the higher grain costs will start to come through in your numbers. Therefore, grain costs will be significantly higher in the second half of the year, and our ability to offset this will depend on Donnie's set price recovery. We've provided our best estimates in the guidance we've outlined, noting that there are areas of considerable inflation in the latter half of the year.

Got it. That’s helpful. Donnie, I wanted to clarify regarding Chicken. Are the labor issues that we're consistently hearing about across various industries additional to what you've been dealing with over the last six months to a year? How do you view the labor situation, especially in Chicken, and when do you think it might start to improve, at least from your perspective?

Looking at the past year, I would say conditions have slightly improved compared to the peak of COVID. We are close to fully staffing the plant, but the level of absenteeism we are currently experiencing is quite unusual for us. Compared to the period before COVID, absenteeism is roughly 50% higher. There isn't a simple solution; we are exploring various worker-driven strategies. We've discussed our current wage rates, but we are also considering different shift models. Our workforce prefers to have clear start and end times, and many are not interested in a six-day workweek or shifts that change based on consumer demand. Additionally, we are making significant investments in automation and technology to reduce the number of difficult jobs with high turnover rates. Currently, across our Chicken, Beef, Pork, and Prepared divisions, we are taking about six days to complete five days' worth of work, which is affecting our capacity and costs.

Peter, I want to highlight the impact of stimulus, which is expected to wind down and should positively influence our ability to recruit. Additionally, as Donnie mentioned, we have made significant investments in automation. This will allow us to redeploy the talent from the more challenging areas of the facilities to other parts. You can expect to see that progress in the second half of the year.

Thanks very much, guys.

Thanks again, everyone, for your interest in Tyson Foods. We hope you and your families stay healthy and safe, and we look forward to speaking to you again soon.