Tyson Foods Inc - Class A (TSN) — Q4 2021 Earnings Call Transcript

Hello, and welcome to the Fourth Quarter Fiscal 2021 Earnings Conference Call for Tyson Foods. Prepared remarks today will be provided by Donnie King, President and Chief Executive Officer; and Stewart Glendinning, EVP, and Chief Financial Officer. Additionally, David Bray, Group President Poultry, Noelle O'mara, Group President Prepared Foods, and Shane Miller, Group President Fresh Meats will join the live Q&A session. We have prepared presentation slides to supplement our remarks and these 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 disclaimer on slide 2, as well as our SEC filings for additional information concerning risk factors that could cause our actual results to differ materially from our projections. Please note that references to earnings per share, operating income, and operating margin, and our remarks are on an adjusted basis, unless otherwise noted. For reconciliations on these non-GAAP measures to their corresponding GAAP measures, please refer to our earnings press release. I'll now turn the call over to Donnie.

Thank you, Megan. I'll start by saying that the safety of our team members continues to be our top priority, and I'm very pleased that we now have a team in the U.S. that is fully vaccinated. As we focus on meeting the needs of our customers and consumers, vaccination is the best way to protect our team members from the impacts related to COVID-19 and ensure business continuity. Earlier today, we reported strong fourth quarter and fiscal year 2021 results. We delivered double-digit sales and earnings growth in a challenging year. Our performance was supported by continued strength in consumer demand for protein. Our retail core business lines which include our iconic brands, Tyson, Jimmy Dean, Hillshire Farm, and Ball Park have driven strong share growth in the retail channel, delivering 13 quarters of consecutive growth. Continued recovery in the food service channel led by QSRs also supported our strong results. Overall, we saw our volume recovery in the second half from the pandemic lows to finish the fiscal year only slightly down. We are taking several deliberate actions by segment to improve our volumes including investing behind capacities, brand, and product innovation, and our team members. Our investments in team members include our successful vaccination mandate as well as automation and technology initiatives that I'll discuss in a moment. The construction of the 12 new plants that we've mentioned previously are progressing well, and once complete, will enable Tyson to address capacity constraints and growing global demand for protein. These new capacities include 9 chicken plants, 2 case-ready beef and pork plants, and 1 new bacon plant. In parallel to our actions to improve volume, we have also worked to recover inflation through pricing, achieving a 13 % price improvement for the fiscal year and a 24 % increase for the fourth quarter. In this dynamic environment, we will be aggressive in monitoring inflation and driving price recovery activities. And the diversity of our portfolio showed its value again this quarter as demonstrated by earnings performance in our beef segment supported the delivery of strong fiscal year earnings results. Our performance has allowed us to build financial strength. Our Balance Sheet is strong, resilient, and provides Tyson the optionality needed to pursue strategic growth priorities. And to that point, our investment in future growth across our portfolio continues. We demonstrated resilience in fiscal year 2021, and we are entering fiscal 2022 with tremendous momentum. Our results demonstrate the dedication of our global team, the importance of our diverse portfolio strategy, and our ability to meet consumer demand across proteins, channels, and meal occasions. Now turning to financial results, let me give you some highlights overall. I was pleased with both a strong quarter and full-year. Sales improved 20 % in the fourth quarter and 11 % during the full year. Our sales gains were largely driven by higher average sales price. Average sales price trends reflect successful pricing strategies during the ongoing inflationary environment, but we still have opportunities specifically in prepared foods, where we delivered softer results than anticipated. Like many other companies, we were faced with a range of higher levels of inflation; notably higher grains, labor, meat, and transportation costs. Our teams have worked together with our customers to pass along that inflation through price increases. On volume, we saw improvement in the second half relative to the same period last year. Volumes were up 3 % for the second half or nearly 350 million pounds. Although we're working diligently to achieve optimal throughput across our segments, labor challenges are still impacting our volumes and ability to achieve optimal mix across our processing footprint. Having said that, we're taking aggressive actions as a team to address the labor constraints, and we're seeing improvement. We delivered solid operating income performance, up 26 % during the fourth quarter and 42 % for the full year. This performance was largely due to strength in our beef segment, where continued strong consumer demand and ample cattle supply have driven higher earnings. Overall, our operating income performance translated to earnings per share of $2.30 for the fourth quarter, up 35 %, and $8.28 for the full year, up 53 %. Looking at our results on volume. We're taking aggressive actions to optimize our existing footprint, add new capacity, adjust our product mix by plant, and match our portfolio more closely with customer and consumer needs. For the fiscal year, our volume was down slightly. Customer demand during fiscal '21 outpaced our ability to supply products, but we're working aggressively to fill that void. We recognize how important service levels are to our customers, and we're committed to improving our fill rates and reliability of supply. With respect to supply, we have focused on ensuring our ability to maintain business continuity, and our team has been resilient in the face of numerous supply chain challenges. As we look towards fiscal '22, improving volumes will be key to delivering against our commitments. We expect to grow our total Company volumes by 2% to 3% next year, outpacing overall protein consumption growth. A large percentage of that growth will come from the chicken segment. And across our business, we're working to optimize our product portfolio, remove complexities, enhance capacities, and pursue operational improvement initiatives to deliver against these volume growth objectives. Moving now to Slide 6, we acknowledge the challenging and competitive labor environment, and it's no secret that we want to be the most sought after place to work. We fully understand that this starts with an unrelenting focus on safety every minute, every shift, every day. The health, safety, and wellness of our team members has been and will continue to be our top priority. So, I'd like to take a minute to stop and commend our team members and our leadership team for doing their part to keep themselves, their colleagues, their families, and their communities safe, which has helped us reach our vaccination goals. But vaccines and investments in COVID-19 protection measures are certainly not the only actions that we've taken to become the most sought after place to work. To ensure that every Tyson team member feels as though they can bring their true and complete self to work each day, we've invested behind diversity, equity, and inclusion efforts. And we also understand the importance of a strong compensation offering, and we believe that we hold a leadership position in this space. We have raised wages and across our business today, we pay an average of $24 per hour, which includes full medical, vision, dental, and other benefits like access to retirement plan and sick pay, and we will continue to explore other innovative benefit offerings that remove barriers and make our team members' lives easier. We're also accelerating investments in automation and advanced technologies to make existing roles safer and easier while reducing cost. We're confident that our actions will increase Tyson's staffing levels and position us for volume growth. Relating to operational excellence and market competitiveness, today, we are announcing the launch of a new productivity program, designed to drive a better, faster, and more agile organization that is supported by a culture of continuous improvement and faster decision-making. The program is targeted to deliver $1 billion in recurring productivity savings by the end of fiscal '24 relative to fiscal 2021 cost baseline. These savings are included in the guidance expectations as Stewart will share in a moment. Execution of the effort will be supported by a program management office that will ensure delivery of key project milestones and report on savings achievements connected to 3 imperatives. The first is operational and functional excellence and is targeted to deliver greater than $300 million in recurring savings. This includes functional efficiency efforts in finance, HR, and procurement that are focused on applying best practices to reduce cost. The second is digital solutions, which is targeted to deliver more than $250 million in recurring savings. We'll achieve this goal by leveraging new digital solutions like artificial intelligence and predictive analytics to drive efficiency and operations, supply chain planning, logistics, and warehousing. For example, we're using technology to ensure that our shipments are optimally loaded to save on freight costs and enhance customer service levels. In many ways, the pandemic has already accelerated our push to more digital footing and our commitment in this space will continue that focus. The third is automation. We will leverage automation and robotics technologies to automate difficult and higher turnover positions. For example, we have substantial opportunity to automate the deboned process within our poultry harvest facilities using a combination of both third-party and proprietary technologies. Chicken remains a top priority for me personally and for our Company. We continue to execute against our roadmap to bring operating income margin to at least the 5 % to 7 % range on a run rate basis by mid fiscal '22. Our goal has not changed and we remain committed to restoring top-tier performance. The first imperative is to be the most sought after place to work. I've outlined the investments we're making to enhance our team member experience in my earlier comments. This will ensure that we have the right levels of staffing to fulfill our customer orders on time and in full. The second imperative is to improve operational performance. Critical to improving operational performance is maximizing our fixed cost leverage, which means having enough birds in our internal networks to run our plants full. By reconfiguring and optimizing our existing footprint, we can increase our harvest capacity by more than 10 % without building another plant. In addition, we have clear initiatives to remove complexity from our plants, reduce transportation and handling, and minimize waste. Our operational improvements will unlock significant unused capacity in our network and take advantage of the fixed cost leverage. Each of these initiatives will support leading operational performance from our chicken business in the future. Hatch rates have impacted our ability to do this, and we've shared the initiatives underway to correct this. Our new male rollout is progressing as planned, and we believe we've hit the inflection point that will lead to sequential improvements through the entirety of fiscal 2022. The new male rollout at our pullet farms is nearly complete, and we continue to observe improved hatch rates associated with these new males. We've also mentioned how strengthened spot prices for commodity chicken products throughout the fiscal year have put our buy-versus-grow program at a relative disadvantage versus history. From Q3 to Q4, we again reduced our rate of outside purchases, this time by nearly 30 %. The final imperative is to service our customers on time and in full. Tyson's branded value-added product offerings have continued to gain share during both the fourth quarter and the latest 52 weeks and new capacity expansions will help us maintain momentum. Inflation has clearly had an impact on the business. Our commercial teams have successfully pursued inflation-justified pricing, delivering top-line growth for the business to offset the cost increases. As rates of inflation continue, so will our pricing actions. Whether in equivalent level of emphasis on disciplined operational execution and volume throughput. We will staff our plants, service our customers, grow volumes, and be the best chicken business. The plan we have in place is still the right plan, and our level of confidence, conviction, and excitement as the team continue to grow. Looking forward to fiscal year 2022, I feel confident in our ability to drive value creation. We have strong consumer demand, a powerful and diverse portfolio across geographies and channels, and a team that is positioned to take advantage of the opportunities in front of us. Our priorities are clear. Winning with customers and consumers, winning with team members, and winning with excellence in execution. With these priorities as our guide, we're taking aggressive actions to accelerate our growth relative to the overall market, improve operating margins, and drive stronger returns on invested capital. We are committed to our team members with a focus on ensuring their health, safety, and well-being as well as ensuring an inclusive and equitable work environment every shift, every day, every location, with no exceptions. We have shown that we are willing to take bold actions in support of this commitment. Second, we are working to enhance our portfolio and capacity to better serve demand. This includes increasing the contribution of branded and value-added sales, by focusing our product portfolio and by adding capacity to meet demand. We expect our volume to outpace the market in the intermediate term. Third, we are aggressively restoring competitiveness in our chicken segment. This starts by returning our operating margin to the 5 % to 7 % level by the middle of fiscal 2022. Fourth, we are driving operational and functional excellence, and investing in digital and automation initiatives. This is at the heart of our new productivity program. We are working diligently to drive out waste, minimize bureaucracy, and enhance decision-making speed across the organization. Finally, to address expected demand growth over the next decade, we're using our financial strength to invest in our business through both organic investments and strategic M&A. On capital alone, we expect to invest $2 billion in fiscal year 2022 with a disproportionate share focused on new capacity and automation objectives. Tyson has the right portfolio, the consumer-driven insight, and the scale and capabilities to win in the marketplace across proteins, channels, and meal occasions. We also have the financial strength to invest behind our business to accelerate growth and maintain our momentum. I look forward to sharing with you our progress as we work through the year, and I'll be sharing more details with you at our Investor Day in a few weeks. I will now turn the call over to Stewart to walk us through our financial results in detail.

Thank you, Donnie. Let me turn first to a summary about total Company financial results. We're pleased to report a strong overall finish to the year. Sales were up approximately 20 % in the fourth quarter, largely a function of our successful pricing initiatives that were pursued to offset inflationary pressures. Volumes were down 4 % during the fourth quarter, primarily due to labor challenges hampering our efforts to fully benefit from strong retail demand and recovery in food service. Fourth quarter operating income of nearly $1.2 billion was up 26 % due to continued strong performance in our beef business. For the full year, operating income improved in nearly $4.3 billion, up 42 %. Driven by the strength in operating income, fourth-quarter EPS grew 35 % to $2.30, with the full-year up 53 % to $8.28. Slide 11 bridges our total Company sales for fiscal year '21. Sales dollars were up across all segments. As you can see, the most substantial sales dollars benefit came from the Beef segment, which saw market conditions that led to a wider than historical cutout margin. At the same time, we saw price increases across the business to offset the high levels of inflation we faced. Looking at our channel results, sales at retail drove over $1 billion of top-line improvement versus last year, even after exceptionally strong volumes in the comparable period. Improvements in sales through the food service channel drove an increase of $1.6 billion, and our fiscal year export sales were nearly $1 billion stronger than the prior year. As we leveraged our global scale to grow our business. Slide 12 bridges year-to-date operating income, which was about $1.3 billion higher than fiscal 2020. As I mentioned previously, volumes were down slightly during the year, primarily a result of a challenging labor environment. Our pricing actions and strength in the Beef segment led to approximately $5.6 billion of sales price mix benefit, which more than offset the higher COGS price mix of $4.6 billion. We saw inflation across the business. Notable areas were in wages, grain costs, live animal costs, and pork, meat costs, and prepared foods, and freight costs across the enterprise. Incremental direct COVID-19 costs were favorable by approximately $200 million during the year. Also, our total spending at $335 million was still substantial. The decrease was driven primarily by cycling one-time bonuses that were paid last year, and a large portion of that was reinvested in permanent wage increases for our team members this year. Lower one-time bonus costs were partially offset by higher testing and vaccination costs incurred during fiscal 2021. While these costs are expected to reduce in fiscal '22, we will continue to spend against initiatives to keep our team members safe. And finally, SG&A was over $100 million higher than the prior year, which was largely a result of a net benefit associated with the beef supplier fraud. Now, moving to the beef segment. Segment sales were over $5 billion for the quarter, up 26 % versus the same period last year. Key sales drivers included strong domestic and export demand for beef products. Offsetting higher sales prices were higher cattle costs up more than 20 % during the fourth quarter. We had ample livestock available in the quarter driven by strong front-end supplies. And we have good visibility into cattle availability through fiscal '22 and currently believe it will also be sufficient to support our customer needs. Sales volume for the quarter was up year-over-year due to continued strong demand in contrast to a soft comparable period a year ago, driven by lower production volumes. We delivered segment operating income of $1.1 billion, or 22.9% for the fourth quarter. This improvement was driven by strong global demand for beef products and a higher cutout, which were partially offset by higher operating costs. While our Beef segment experienced strong results during the quarter and fiscal year, we're still not at optimal levels of capacity throughput due to labor challenges, which we expect to normalize over the course of fiscal '22. Now, let's move on to the Pork segment. Segment sales were over $1.6 billion for the quarter, up 30 % versus the same period last year. Key sales drivers for the segment included higher average sales price due to strong demand and increased hog costs, partially offset by a challenging labor environment. Average sales price increased more than 40 %. Our volumes were down relative to the same period last year. Segment operating income was $78 million for the quarter, down 52 % versus the comparable period. Overall, operating margins for the segment declined to 4.7% for the quarter. The operating income decline was driven by higher hog costs and increased labor and freight costs. Moving now to Prepared Foods. Sales were $2.3 billion for the quarter, up 7 % relative to the same period last year. Total volume was down 5.7% in the quarter with strength in the retail channel and continued recovery in food service more than offset by labor challenges. Sales growth outpaced volume growth, driven by inflation-justified pricing and better sales mix. During the fourth quarter, retail core business lines experienced the 13th straight quarter of volume share growth driven by consumer demand for our brands and continued strong brand execution by our team. Operating margins for the segment were 1.7% or $39 million for the fourth quarter. A slowdown in segment operating margins versus the same quarter last year was driven by significant increases in raw material input costs that we were not able to fully recover through price during the quarter. For the full-year, operating income margin was 7.6% or $672 million. As we mentioned last quarter, the ongoing inflationary environment created a meaningful headwind for Prepared Foods during the fourth quarter. Raw material costs, logistics, ingredients, packaging, and labor have increased our cost of production. We've executed pricing, revenue management, and commercial spend optimization initiatives while ensuring the continued development of brand equity through marketing and trade support. We expect to take continued pricing actions to ensure that any inflationary cost increases that our business incurs are passed along. Our pricing has lagged inflation, but we expect to recover those cost increases during fiscal '22. Moving into Chicken segment's results, sales were $3.9 billion for the fourth quarter, up 21 %. Volumes improved 1.3% in the quarter as strong consumer demand offset both labor challenges and the detrimental impact of a fire at our handling build rendering facility. Our teams have been focused on streamlining our plants to deliver higher volumes, and we expect to deliver substantial volume improvements in fiscal '22 as the hatch rate recovers, and we operate our plants more efficiently. Average sales price improved over 20 % in the fourth quarter and 11.4% for the fiscal year compared to the same periods last year. This increase is due to favorable product mix and price recovery to offset cost inflation. Our pricing has admittedly lagged our realization of cost inflation, but we made tremendous progress in the last few months to close that gap and are now seeing those benefits. We have restructured our pricing strategies given our experience in fiscal '21 to ensure that we have the flexibility to better respond to market and inflationary conditions. Chicken experienced an operating loss of $113 million in the fourth quarter. The segment earned $24 million, representing an operating margin of 0.2% for the fiscal year 2021. Operating income was negatively impacted by $945 million of higher feed ingredient costs, grow-out expenses, and outside meat purchases. For the fourth quarter, feed ingredients were $325 million higher than the same period last year. Segment performance also reflects net derivative losses of $75 million during the fourth quarter, which was a $120 million worse than the same period last year. Turning to Slide 17. In pursuit of our priority to build financial strength and flexibility, we have substantially delivered our business over the past 12 months, reducing leverage to 1.2 times net debt to adjusted EBITDA as we paid down $2 billion of debt while growing our earnings and cash flow. Investing organically in our business will continue to be an important priority and will help Tyson increase production capacity and market capabilities. Each of these leaders will support strong return generation for our shareholders. We will also continue to explore paths to optimize our portfolio through M&A, through the lens of value creation and shareholder return. Finally, as our track record has demonstrated, we are committed to returning cash to shareholders through both dividends and share buybacks. We're pleased to announce that last week our board approved a $0.06 increase to our annual dividend payment, now totaling $1.84 per Class A share. Let's now discuss the fiscal '22 financial outlook. We currently anticipate total Company sales between $49 billion and $51 billion, which translates to sales growth of between 5 % and 7 %. We expect 2 % to 3 % volume growth on a year-over-year basis as we work to optimize our existing footprint and run our plants full. Our new productivity initiative is expected to deliver $300 to $400 million of savings during fiscal '22, driven by operational and functional excellence initiatives. The rollout of digital solutions across the enterprise and extensive automation projects that are currently underway. Now, as we look at the organic growth opportunities ahead for our business, we expect a meaningful increase in CapEx spending to pursue a healthy pipeline of projects with strong return profiles. We currently anticipate CapEx spending of approximately $2 billion during fiscal '22, an increase of roughly $800 million. This investment will support our initiatives to meet global protein demand growth into the future, allow us to gain share, and will deliver strong financial returns for our shareholders. Excluding the impact of changes from potential tax legislation, we currently expect our adjusted tax rate to be around 23 %. We anticipate net interest expense of approximately $380 million because of intentional deleveraging during fiscal '21. Liquidity is expected to significantly exceed our target while net leverage is expected to remain well below 2 times net debt to adjusted EBITDA. It is important to note though that over the last 2 years, working capital has been a source of cash. We don't expect this to be the case in fiscal '22. Moving forward, our business growth will require increased working capital, which combined with deferred tax payments under the CARES Act, taxes on the gain of the pet treats divestiture, litigation settlements, and other discrete items will lead to a substantial use of cash during fiscal 2022. Now, let's look at how each of our segments will contribute to that total Company performance. Prepared Foods is expected to deliver margins during fiscal '22 of between 7 % and 9 %. We will remain disciplined and agile in our pricing initiatives to ensure that any additional inflationary pressures are passed along to customers, while also working diligently to deliver productivity savings to reduce costs. We expect the Beef segment to continue to show strength due to prolonged industry dynamics, leading to segment margins of between 9 % and 11 %. We expect the front half of the year to be meaningfully stronger than the back half as industry and labor conditions are expected to normalize partway through the year. In chicken, our operational turnaround is working, and we still expect to achieve run-rate profitability of 5 % to 7 % by the middle of the year. We expect this will be achieved through sequential quarterly margin improvements during the first half of the year, resulting in full-year margins that fall between 5 % to 7 % at the lower end of that range. In pork, we expect similar performance during fiscal '22 to what we accomplished during fiscal '21, equating to a margin of between 5 % and 7 %. In International and other, we expect margins of 2 % to 3 % as capacity expansions and strong global demand support volume growth and improved profitability. Our segments individually and in aggregate have clear and compelling roles within Tyson's portfolio strategy. They deliver diverse counter-cyclical performance that supports the Company's long-term earnings objectives and delivers strong value for shareholders. I will now turn the call back over to Megan for Q&A instructions.

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

Thanks. Good morning, everybody.

Morning.

Morning.

I want to ask within the commentary on the guidance, the productivity savings of $300 million to $400 million for this year and $1 billion by the end of 2024. Could you talk about how much of that you expect to be realized on a net basis to the bottom line and how much of it might be reinvested back into the business to drive growth?

Ben, good morning, Stewart here. Look, we're trying to drive for as much of it as possible to the bottom line, but keep in mind that our assumptions around what's going to drop to the bottom line are already embedded in the guidance that we've given you by segment, but that's the short story.

Okay, perfect. If I look at the balance sheet, even with a significant increase in capital expenditures for 2022, you may have a cash build. Stewart, you mentioned some insights about the business and that working capital will be a cash outflow in 2022. Could you explain what you anticipate that cash usage will be so we can understand the year-end cash balance? Additionally, you mentioned reinvestment in M&A; how do you prioritize that compared to share repurchase, especially since you've increased the authorization?

Let me elaborate a bit. We're very happy with how the year has turned out. Our diverse portfolio has produced excellent results, which has led to an increase in cash. Currently, we are at 1.2 times leverage with $1 billion in debt that we plan to pay down this year. Additionally, as mentioned, we anticipate significantly higher capital expenditures, which will benefit our investors. As our business expands, it will require more working capital. Furthermore, we expect several one-time payments this year, including around a billion dollars in deferred taxes related to the CARES Act, taxes owed from the sale of the pet business, and some payments for litigation accruals reflected in our records.

Okay.

To M&A, maybe the last question on an M&A versus buyback. Look, it's a normal course. We don't comment on any specific M&A, but we've shared the levers in our business. We have successfully pulled all those levers over the last number of years, and I think that's been a good effect. We don't imagine that we're going to change that this year.

Okay. Fair enough. Great. Thanks and look forward to catching up with you guys at the Investor Day.

Thank you.

Thank you.

Good morning, Donnie, Stewart.

Good morning.

Thank you for taking my question. Congratulations on the results. I’d like to clarify something and maybe you can share your plans for 2022. It seems much of your growth this quarter was affected by labor shortages, both in beef and pork. You've mentioned labor shortages in your commentary, and while we know you are investing in your workforce, what steps do you plan to take in 2022 to address these labor market challenges? How do you intend to achieve the volume you aim for? It appears you have the resources but are short on personnel for processing. Would that be an accurate observation?

Let me address that, Stewart, and good morning. Labor has been quite challenging this year; however, as we noted earlier, we are starting to see some improvement. Our staffing levels at the plants, particularly in poultry, are nearly back to normal since November 1, and we've made significant strides in our Prepared Foods and beef and pork sectors since the end of our vaccine mandate. We are optimistic about 2022. Besides struggling with a labor shortage that has limited our capacity, we have also faced capacity issues in some key areas, such as ready-to-eat products in both poultry and Prepared Foods. We are currently launching two new case-ready beef and pork facilities to increase our capacity in this area. While labor has indeed posed challenges, we are witnessing progress and are excited about 2022. We believe we’ve navigated the toughest part of this situation and are eager for what’s to come. Additionally, we have 12 new plants either operational or under construction to enhance our capacity to meet strong demand, and we look forward to the outcomes this will bring not just this year, but in the years ahead.

And then within Prepared Foods, clearly, we're seeing the headwinds from some of the input cost most here and just you holding back a little bit on pushing through price with that operating income margin adjusted down to a little less than 2 %. Now, the guidance for next year basically implies something flat. Does that mean on over the course of the year, would you just think about still headwinds in the first half and as pricing comes through in the second half, we're going to see that picking up a little bit or how should we think about the cadence of margins into 2022 in the Prepared Foods business?

Hi, Ben. I'll share a few thoughts before turning it over to our expert, Noelle O'Mara, who leads our Prepared Foods businesses. Much of what we are experiencing is related to the rapid inflation, especially in pork products and meat. As we introduce our branded portfolio to the market, it aligns with challenges faced by other companies in the consumer packaged goods industry. We are trying to balance market share and pricing, which takes time, especially compared to the commodity side of our business like beef and pork. We are continuously looking for ways to speed up this process, but it requires coordination with customers and aligning our promotional activities. Now, I'll pass it on to Noelle for further insights.

Sure. Thanks, Donnie. As we mentioned, demand continues to be incredibly strong across the portfolio. Our Q4 performance was impacted because of the inflationary environment accelerating faster than anticipated. Despite the unprecedented inflationary headwinds, the actions that we took in the second half of '21 and the beginning here of '22, I expect will allow us to offset the headwinds and drive sequential improvements in profitability.

Perfect. Thank you very much.

Thank you.

Hi, everyone. Good morning. Thank you for taking the question.

Good morning.

Morning, Peter.

Donnie and Noelle, I'd like to get your thoughts on this. As you're taking a lot more pricing in Prepared and across the rest of the portfolio, just what are you seeing from a consumer perspective in terms of trade down? Is our elasticity still kind of holding or I should say, holding at an inelastic level or are you starting to see just some of that roll through? And how do you think about the end of '22 as prices continue to go up?

Let me take that. Demand continues to be strong across the portfolio on both retail and food service. We're pleased with the market performance we're seeing despite the price increases. Elasticity has been less than historical models would've predicted. We're seeing penetration in buy-rate increases versus pre-COVID levels across categories, as Donnie referenced. We've had our 13th consecutive quarter of share growth, but we'll continue to learn and adapt as the landscape changes.

That's helpful. Thank you. And then Donnie, in terms of the productivity plan and the CapEx, is there a way for us to think about it? You used some helpful detail on the slides, but just to think about it by segment?

Let me start by saying that Peter mentioned this applies to all segments. The first part of the program focuses on operational and functional excellence, which essentially means improving our jobs and reducing bureaucracy. This mainly targets our finance, human resources, and procurement teams to enhance execution. Another aspect involves digital solutions, which are expected to yield around $250 million in recurring savings, primarily in operational areas like supply chain planning, logistics, and warehousing, applicable across all businesses. In fact, the first two components pertain to every segment of our operations. The third aspect is automation, utilizing robotics and technology, and we are allocating a significant portion of the $2 billion capital investments towards expanding capacity in the 12 plants we've mentioned over the upcoming three years. Additionally, this investment will focus on implementing automation and technology to reduce challenging jobs that have high turnover. For instance, we're looking at automation in deboning for both white and dark meat and enhancing material handling particularly in our Prepared Foods division. Looking beyond the U.S., we're also implementing a wide range of automation and technology as we develop new plants internationally.

Hi. Good morning. We wanted to get some additional color on some of the chicken initiatives you discussed. You talked about optimization efforts increasing the harvest capacity by 10 %. Over what time-frame are you thinking you'll be able to achieve that level of capacity expansion? And does the run rate EBITDA margin of 5 % to 7 % already contemplate that higher fixed cost leverage from these efforts?

Great question. I'll begin with some high-level information and then pass it to David Bray, who leads our Poultry group. We see the 5% to 7% margin as a waypoint, not a goal, and we expect to reach that by the middle of '22. To achieve this and more, we need to focus on volume. We've experienced some challenges with hatching in the males, but as we approach '22, we're already seeing positive results. The male we're using is tried and tested, and we've had great success with it in the past, giving us confidence. Efficiency is also key; we aim to run our plants at full capacity and reduce our reliance on purchasing boneless or skinless breast meat externally like we did in '21. We're close to full staffing and are seeing excellent results from that. Our team is enthusiastic about the efficiency gains since implementing our vaccine mandate on November 1st. Ultimately, it comes down to execution, and volume is crucial for reaching the 5% to 7% waypoint and moving forward. Now, I'll hand it over to David, who can provide further insights.

Thank you for the opportunity, Donnie. It's essential to emphasize that volume is a key component for our success. We have established a structured program aimed at making our organization the most desirable workplace while also focusing on customer service, optimizing our products and brands, and achieving high performance. Hatch is an integral part of this initiative, and we are experiencing consistent week-over-week progress, which gives us confidence in our strategy. Furthermore, we are pursuing additional priorities within our business that began in Q4. We are ramping up our investment in dark meat debone capacity, and we also saw notable price improvements this quarter. Overall, we are enhancing plant efficiency in preparation for our increased harvest. Improvements are stemming from price, mix, volume, expenditure, and labor. In summary, we are committed to operational excellence across our poultry segment and are unified in our approach. I can assure you that we have the right strategy and the right team to effectively implement the fundamentals of our business.

Good morning, everyone.

Good morning.

Good morning.

Can I ask, first of all, about the labor cost implications for the longer-term? You're obviously spending up, presumably raising wage rates, and so on. How much do you expect the entire labor cost to be above pre-pandemic levels once all the dust has settled? And then I have a follow-up.

Thank you for the question. I would tell you that as we stated, we have to win with team members. We have to be the most sought-after place to work, and we've done a number of things already to try to do that. It's the recognition that the workforce today, they have many options and there are a few people chasing the number of jobs that are actually out there. And so as we've talked internally, we're not trying to solve the labor problem for America, we're trying to solve it for Tyson Foods. And we want to give people an option. We want to give them a better option. And we think the key to the staffing plants, but more importantly, being able to serve our customers and execute at a high-level, absolutely starts with people. So the $24 an hour includes a number of things, but it's the benefits that go with that. We've had to enhance a number of those things, do things like scheduling different. Differences meaning multiple shifts or being very creative at each location. Childcare is a component of that. We've experimented with on-site health clinic, is another we've experimented with, but we're trying to be creative and trying to make sure that we're positioned well to have a place people want to come to work. And we see that as being critical to our future success. And so that's what we're doing, $24 an hour. I will tell you that's maybe leading in the marketplace, but it's also a competitive wage, and so we want to be on the lean side of that. And so that is our intent, that's how you can think about it as we think about labor going forward. We see that as the cost of inflation and the cost of labor going forward.

Great. Thank you. And just as you look out to fiscal '22, what do you see as the biggest uncertainties and risks this year? It sounds that you're fairly confident in the chicken margin recovery; but across the business, what do you see is the biggest uncertainties from distant back to today?

In my experience, there are always unforeseen risks in this industry. Looking ahead to 2022, I am confident that we will encounter unexpected challenges. Last year, we thought we had a solid strategy for poultry and grain pricing, but we faced a significant increase in grain costs while being locked into fixed pricing. These situations can arise, but we're excited because we have adapted our pricing model to mitigate risks for both us and our customers. This allows us to adjust prices in response to inflation and maintain strong relationships with our customers, which have led to productive discussions. We're proud of this win-win approach that starts with our customer relationships. We believe that by adjusting our pricing and preparing for inflation, we are in a stronger position. Regarding labor, while I can't predict new COVID variants or vaccine inefficacies, we have taken proactive measures to protect our team by having a vaccinated workforce. This is an investment that we believe reduces complexity and risk for our business this year.

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

Yes. Thank you. Good morning, everyone.

Good morning.

Good morning.

So maybe just a bit of a clarification question on the guidance as we think about what's embedded in the segment margin assumptions. Can you help us think, at the total Company level, what level of non-raw material inflation is assumed for things around logistics and labor, and packaging too in there? And as well, what is assumed on a year-on-year basis for feed costs in the Chicken segment?

Thanks, Adam. I'll begin the discussion and then hand it over to Stewart for more detail on some non-grain aspects. We have positioned ourselves well in both the Poultry and Prepared Foods sectors to respond to inflation, particularly in grain, labor, transportation, and warehousing costs, which are our primary concerns. Prices for packaging and ingredients have also increased significantly. In fact, it might be easier to list what hasn't experienced inflation this past year. However, we believe our model is structured to adapt in terms of pricing and responsiveness, and we don't anticipate customers covering our inefficiencies. We believe we maintain strong relationships with our customers that enable us to share part of the inflation we encounter in the marketplace, which can ultimately be passed on to the consumer. This has been our strategic approach and adjustment over the past year, and we feel we’re currently in a solid position. Regarding chicken, based on the current inflation levels, we have effectively adjusted our pricing in the Chicken segment to keep pace. We are in the process of implementing similar pricing in Prepared Foods, and our commodity businesses in Beef and Pork are responding swiftly to inflation as intended. Stewart, would you like to share any additional insights?

Sure, Donnie. Adam, just a couple of points to make here. So first of all, we had a question early on about the savings. That's the $300 to $400 million that's coming through as a benefit in the year. We shared with you that obviously volume is increasing, so you're going to see some increase from volume. And of course, we're continuing to pass through price and have the benefit of some mix. When you look at the top line of the business though, keep in mind and actually look at the costs, keep in mind the guidance around Beef, which is lower than last year, right? And for Beef, you should expect to see both crowd-out ball and you should expect to see the cattle cost increase, and that's going to be part of it. A couple of other things to keep in mind, there are ingredient costs that are outside of grains. Things like cooking oils, you've seen the price of oils have increased. Distribution is up. And we've had 13 strong quarters of share gain in our Prepared Foods business. And that business will likely invest money behind our brands this year to make sure that kind of momentum continues. So that probably will run through the big guidance.

That's really helpful. Regarding productivity, you mentioned that it's more about gross productivity efforts where you aim to maximize contributions to the bottom line or choose to reinvest. Can you clarify the scope of the spending related to this productivity initiative? Clearly, it won't significantly affect direct raw materials like feed ingredients, cattle, or hog purchases. What is the appropriate metric to consider when evaluating the potential savings?

It's complicated in our business costs due to the various commodity meat inputs, and while I can't provide a specific number on that, I want to emphasize your starting point, which is that we hope these costs decrease. Our strategy is not just a temporary fix; we have a robust plan in place to reduce these costs effectively, which will be part of our overall equations for next year. You'll see this reflected in our guidance. The outlook for next year is positive, with significant improvements in Prepared Foods and Chicken from the fourth quarter. We still anticipate a strong year for Beef, even with lower numbers than this year. Overall, I believe the situation looks promising, and the cost savings are included in the forecasts I've shared.

Stewart, I would like to add that to all the savings we've discussed for the next three years, we have a program management office that monitors these impacts on our bottom line. We've integrated this into our 2022 plan, and similarly for 2023 and 2024, we have included it in our operating income. We only accounted for these savings if we could demonstrate their effect on the operating income. We've put in the effort to ensure that this is not just a trick but a genuine delivery of results, along with the enhancement of our processes across the board.

I appreciate all that color. I will pass it on. Thank you.

Good morning, everyone.

Morning, Ken.

Good morning, Ken.

I have a couple of jobs, specifically with Bank of America and Bank of Montreal, and I have some questions. You mentioned that you have managed to cover costs through pricing in the Chicken business at this point. Can you clarify that for me? Does this indicate that the current issues are mainly operational? As you enter the new year, will you be adjusting prices further as your pricing contracts reach their anniversary? Is that the correct way to think about it, or have I gotten it wrong?

I believe it’s a snapshot of the current situation. As of today, our pricing is set to cover the inflation costs. In the most recent quarter, we faced challenges with labor availability and some associated inefficiencies, but we are now fully staffed. I want to emphasize that in terms of the Chicken business, we will be fully staffed and much more efficient moving forward. David and his team are highly focused on executing excellently, and we’re seeing significant progress. Noelle and her team are also ready to achieve similar results. Therefore, we are optimistic about the future. We think the toughest times are behind us, and we are excited about what we’re experiencing in our first quarter and what we anticipate for the year. This aligns well with our projections.

To clarify, what you can control in the next year or two relates to aligning with the industry on pricing and costs. Currently, you are focusing on internal improvements that will influence the next couple of years, rather than solely capturing market pricing versus costs. Is that an accurate interpretation?

It's fair and largely accurate. Of the all thing I would add about that is in some of the more branded part of the portfolio, there's typically a lag between inflation and it's point we're able to get pricing, and we're looking constantly at ways to try to shorten that cycle with our customers. So think of that as being the differentiator there. But I would tell you much of what we have to do and the way we structured our model, executional excellence, and our call that out specifically in the script, it will be a top of mind to all of us across all businesses and functions at Tyson.

If I could squeeze in 1 more and then I'll leave it there.

Sure.

When you put in the capital spending that you're doing, and I know we all have to think about 2022, but when we think about 2023, 2024; what do you think the returns on that would be? And does that enhance either the stability of your model or the growth algorithm of your model as you are now deploying enough capital that it's almost like an acquisition, right? You're not actually making acquisition, but you're putting enough capital there, there should be a return on that, that may be something changes in 2023, 2024. And I will leave it there and I appreciate your time.

I will start with that. And Stewart may want to add something to it, but the spend that we have, the return on that invested capital, we certainly understand that we've had a few issues in delivering that over the past; but I will tell you that return on invested capital is a part of the entire leadership team's scorecard. So we're approving those dollars as spending against a demand that is known and a return that is that is known. And so we feel very confident about the returns on those businesses and we're not concerned about the fact that we're going to get a really, really good return on that investment. In fact, we think it, versus other options, is a much better return; but it's still ours to ultimately still have to execute.

Yes. Ken, just a couple of things. So first of all, we're targeting double-digit returns, and let us shape via the guidance as we move forward, so you get the timing of that right; but, I mean, we have strong returns here. In terms of the algorithm, it's going to do 2 things for us: first of all, it's bringing some of the savings we're talking about in $300 to $400 million. It is providing a better and safer workplace for our team members. And let's not forget that there's going to be considerable expansion of capacity here, particularly in the international business on a percentage basis, so that is going to procure that future growth. We feel great about it, the numbers are big; but one thing about internal CapEx, you know exactly where you're putting the money. You know exactly what you're getting for it.

Great. I appreciate it, guys. Take care.

Thanks again for your interest in Tyson Foods. We look forward to speaking again soon and hope to hear from you at our Investor Day on December 9th. Have a great day.