Tyson Foods Inc - Class A (TSN) — Q1 2022 Earnings Call Transcript

Hello, and welcome to the first quarter fiscal 2022 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; Shane Miller, Group President, Fresh Meat; and Chris Langholz, Group President, International, 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 disclaimers 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 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 Donnie.

Thank you, Megan, and thank you to everyone for joining us for the call today. Earlier today, we announced our first quarter fiscal 2022 results. Tyson Foods once again delivered strong financial results. I would like to start by thanking our team members for their dedication and Herculean efforts this quarter as we managed a complex and dynamic operating environment. At our Investor Day, I shared our plan to grow our top and bottom lines aggressively over the next three years. This meant EPS growth in the high single digits relative to a 2019 baseline and volume growth ahead of the market. Our results this quarter put us firmly on that path. We achieved double-digit sales and earnings growth, both of which were driven by ongoing demand strength, productivity savings, and improving execution across our segments. Our diverse protein portfolio, omnichannel capabilities, leading brands, and value-added products contributed to our results. Strong performance in our Beef segment, earlier-than-expected recovery in Prepared Foods, and improvement in Chicken and Pork all supported strong earning results. Our retail core business lines, which include our iconic brands, Tyson, Jimmy Dean, Hillshire Farm, and Ball Park, maintained their volume share position, even as we work through price increases to address inflationary pressures. Our foodservice-focused six product lines grew share year-over-year in broadline distribution. This growth was driven in large part by value-added chicken, which outperformed the industry recovery and breakfast sausage where we were seeing improved fill rates. Importantly, despite the continued impact of COVID-19, our volumes improved slightly across the company relative to the same quarter last year. Chicken was a bright spot, where we saw our volumes improve by 3.6%. While this is a good start, we are not where we want to be on volume. So we're taking actions segment by segment to improve our volume performance. These actions include investing in our team members, in additional capacity, and in brands and product innovation. As discussed at Investor Day, we are also in the process of building 12 new plants. Each of these is progressing, and each will enable Tyson to address capacity constraints and meet the growing global demand for protein. Bottom line, we're committed to improving our total company volumes during the year. We're also making sure that our pricing incorporates inflationary cost pressures on our business. In the quarter, our cost of goods sold was up 18% relative to the same period last year. We are seeing higher costs across our supply chain, including higher input costs, such as feed and ingredients. We're also managing higher labor costs and transportation expenses due to strong demand and limited availability. With these higher costs, we work closely with our customers to achieve a fair value for our products. As a result, our average sales price for the quarter increased 19.6% relative to the same period last year. This helped us capture some of the unrecovered costs due to the timing lag between inflation and price. Finally, our balance sheet and overall liquidity position are strong, providing optionality to pursue strategic growth priorities and invest in growth across our portfolio. We have a disciplined approach to deploying capital to support capacity expansion while achieving improved returns on invested capital. Our first-quarter results clearly demonstrate that we are making progress on our growth objectives, that we remain focused on outpacing the overall market, improving operating margins and driving strong returns for our shareholders. While we're growing our business, we are mindful of our corporate responsibilities around environmental, social, and governance goals. For example, we committed to investing in and supporting our communities in rural America and around the world. Last year, Tyson Foods donated more than 16 million pounds of protein, the equivalent of 64 million meals to fight hunger. We're incredibly proud of this work and the people that make it possible. Tyson is a great company with a great team doing great things, and I'm pleased that this was recognized just last week by Fortune Magazine, who announced that for the sixth year in a row, Tyson Foods was number one in our sector in their rankings of the world's most admired companies. Now let's look at a few financial highlights from the first quarter. Our results included double-digit top and bottom line growth. We delivered solid operating income performance, up 40% for the quarter. This performance was broad-based across segments, where continued strong consumer demand and effective pricing to mitigate the impact of inflation drove higher earnings. On volume, we are up slightly. And while we're working to achieve optimal throughput across our segments, labor challenges are still impacting our volumes and the ability to achieve optimal mix across our network. Compared to pre-pandemic levels, our volume performance is outpacing our peer set. In retail, despite substantial market pressures, core business lines held share in the first quarter, led by strong performance in lunch meat, hotdogs, snacking, and bacon. We also realized strong e-commerce results, with Tyson Foods outpacing total food and beverage growth and our core lines gaining share in the quarter. Still, customer demand continues to outpace our ability to supply products. So we have targeted actions in each segment to improve volumes. This is key to delivering on our commitments. To realize our volume goals, we must be able to fully staff our plants across the company. We continue to take meaningful action toward becoming the most sought after place to work. For example, we provided our hourly team members with more than $50 million in bonuses during the first quarter. We are piloting subsidized and on-site childcare and we are adjusting schedules to flex with workforce needs. These actions are bearing fruit as we see some improvement on the labor front. And while we have seen some labor challenges during the Omicron surge, we are generally seeing lower turnover and absenteeism. We saw Chicken volumes grow 3.6% in the quarter, driven by strong fundamental demand and improved live production. What is important to note is that we grew ahead of the market and gained market share. In Prepared Foods, volumes were down 2.6% in the first quarter. About half of the decline was related to the Pet Treats divestiture. We expect to sequentially improve these results over the remainder of fiscal year '22 as we take actions to expand and improve capacity utilization. In Beef, volumes were down 6.2%, driven by labor shortages previously mentioned. In addition, port congestion has also dipped export volumes in the segment. We expect these headwinds on volume to normalize over the course of fiscal 2022. In Pork, we have sequentially improved our capacity utilization. We are still working to optimize the mix. In International/Other, while we are starting from a relatively small base, our investment in capacity, innovation, and brands are supporting our market share growth objective. Overall, we expect to grow our total company volumes by 2% to 3% in FY '22, outpacing protein consumption growth. Chicken remains a top priority and we continue to execute against our roadmap to achieve an operating income margin of 5% to 7% on a run-rate basis by mid-fiscal '22. I remain confident we will meet this goal. In the first quarter, we've started to see profitability improvement resulting from our actions. For example, we're investing aggressively in automation and technology to help us address some of the hardest-to-fill roles. This is not a series of projects, but a well-planned program with automation designed to use common designs and equipment across our plants to optimize cost, maintenance, and asset utilization. The second imperative is to improve operational performance, and critical to improving performance is maximizing our fixed cost leverage, which means having enough birds to run our plants full. Since September, we've seen an improvement in our hatch rate ahead of our expectations. We continue to expect full recovery this year. We were pleased with our volume growth in the quarter and expect further improvements as we grow our harvest capacity utilization from an average of 37 million head per week in FY '21 to 40 million head per week by year-end. We've noted previously that strength in spot prices for commodity chicken products put our buy versus grow program at a relative disadvantage. We have reduced our reliance on outside meat accordingly. We will staff our plants, service our customers, grow our volumes, and be the best in the business. The plan we have continues to be the right plan, and our commitment to winning with our team members, winning with our customers and consumers, and winning with operational excellence is delivering results. Last year, we announced the launch of a new productivity program designed to drive a better, faster, more agile organization that is supported by a culture of continuous improvement and faster decision-making. The program aims to deliver $1 billion in recurring productivity savings by the end of fiscal '24 relative to a fiscal 2021 cost baseline and has three critical focus areas, which are operational and functional excellence, digital solutions, and automation. We're making some good progress on this front. I spoke just a minute ago about our investments in automation, but we've also attacked other issues. In Prepared Foods, we're making use of supply chain digitization and advanced analytics. Our digital manufacturing platform allows us to analyze real-time data to take actions to optimize process conditions that drive better yields, lower costs, consistent quality, and increased output. In transportation and logistics, we have established ongoing optimization of the mix and allocation of our private fleet, dedicated fleet, and third-party fleet, mitigating inflationary pressures and supporting better on-time deliveries to our customers. In addition, we continued the expansion of our direct shipment program, reducing miles driven and product touches in our supply chain. As a result of projects like these, we're on track to deliver $300 million to $400 million of savings in fiscal 2022. We shared at our Investor Day that we are taking actions to accelerate our growth and drive disciplined return on invested capital. The five imperatives on this slide show how we will achieve our commitments and drive value creation. This starts first with our commitment 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. We are proud of our COVID-19 vaccine policy implemented last year in the U.S. and of the broader investments that we have made to keep our team members, their families, and our communities safe. Because of our policy, our team members are better protected, and the cases we do see have been mild or asymptomatic, resulting in an extremely low number of hospitalizations. We are strongly encouraging boosters and are hosting clinics to make it easier for our team members and their families to get boosted. Second, we are working to enhance our portfolio and capacity to better address demand. This includes increasing the contribution of branded and value-added sales. As a result, we expect our volume to outpace this growing market. 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're working diligently to drive out waste, minimize bureaucracy, and enhance decision-making speed across the organization. Fifth, to address projected demand growth over the next decade, we are using our financial strength to invest in our business. On capital alone, we're expected to invest $2 billion in fiscal year '22, with a disproportionate share focused on new capacity and automation objectives. And we continue to return cash to shareholders. During the quarter, we returned over $500 million in dividends and share repurchases. To wrap it up, we are committed to winning with our team members, customers, and consumers, as well as winning with operational excellence. I'm more excited about the future of Tyson Foods with each passing day. And 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 of our total company financial results. We're pleased to report a strong overall start to the year. Our sales were up approximately 24% in the first quarter, largely a function of our pricing initiatives to offset inflationary pressures. Volumes were also up slightly, although impacted by continued labor challenges. Looking at our sales results by channel, retail drove almost $350 million of top line improvements versus last year. Improvements in sales through the foodservice channel drove an increase of $1 billion, and our export sales were nearly $333 million stronger than the prior year period as we leveraged our global scale to grow our business. First quarter operating income of $1.4 billion was up 40% relative to the same quarter last year due to increased earnings in Beef, Pork, and Chicken. Driven by the strength in operating income, first quarter earnings per share grew 48% to $2.87. Higher operating income led to higher adjusted earnings per share compared to the same period last year, and first quarter EPS also benefited from lower interest expense and taxes. Slide 10 bridges year-to-date operating income, which was $407 million higher than fiscal 2021. Volumes were up slightly during the year, primarily a result of improvement in Chicken, Pork, and International/Other, offset by declines in Beef and Prepared Foods. Declines in Beef and Prepared Foods were largely due to continued labor challenges in those segments. Our pricing actions led to approximately $2.1 billion in sales and price/mix benefit during the quarter, which offset the higher cost of goods sold of $1.6 billion. We saw continued inflation across the business, in some instances, up 20% to 30%. Notable examples were labor, grain costs, live cattle and hog costs, and freight costs. And finally, SG&A was $88 million unfavorable to the same period last year, which was largely a result of cycling a $55 million benefit recorded last year for the recovery of cattle. Moving to the Beef segment. Segment sales were more than $5 billion for the quarter, up 25% versus the same period last year. Sales growth was driven by continued strong demand for beef products, which has supported higher average sales prices. Partially offsetting higher sales prices were higher capital costs during the first quarter versus the comparable prior year period. We had sufficient livestock available in the quarter driven by strong front-end supplies. We have good visibility into cattle availability through fiscal year 2022 and continue to expect it will also be sufficient to support our customer needs. We delivered segment operating income of $956 million, up 81% versus the prior comparable period. This improvement was driven by strong global demand for beef products and a higher cut-out, which were partially offset by higher operating costs. Our operating margin of 19.1% was notably higher than the same quarter last year but was down on a sequential basis versus the last two quarters as cost increases led to a narrowing of the spread. Now let's move on to the Pork segment. Segment sales were over $1.6 billion for the quarter, up 13% 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 12.8%, and volumes were slightly higher relative to the same period last year. Segment operating income was $164 million for the quarter, up 41% versus the comparable period. Overall, operating margins for the segment improved to 10.1% for the quarter. The operating income improvement was driven by higher spreads in the business. Moving now to Prepared Foods. Sales were $2.3 billion for the quarter, up 10% relative to the same period last year. Total volume was down in the quarter, with strength in the retail channel and continued recovery in foodservice more than offset by labor and supply chain challenges. Sales growth outpaced volume growth driven by inflation-justified pricing. During the quarter, retail core business lines maintained share, driven by consumer demand for our brands and continued strong execution by our team. Operating margins for the segment were 8%, or $186 million for the first quarter. The decline in segment operating margins versus the same quarter last year was driven by significant increases in raw material and other input costs that we were able to recover during fiscal 2022. In addition to pricing, we've executed productivity, revenue management, and commercial spend optimization initiatives while ensuring the continued development of brand equity through marketing and trade support. Moving into the Chicken segment's results. Sales were $3.9 billion for the quarter, up 37%. Volumes improved 3.6% in the quarter due to strong consumer demand and increased live production. Our teams have been focused on streamlining our plants to deliver higher volumes, and we expect to deliver substantial volume improvements in fiscal 2022 as hatch recovers, and we continue to look for ways to operate our plant more efficiently. Average sales price improved around 20% in the first quarter compared to the same period last year. This increase is due to favorable product mix and price recovery to offset cost inflation. On pricing, we made tremendous progress toward driving our pricing mechanisms toward more variable structures and are now seeing those benefits. We restructured our pricing strategies given our experience in fiscal 2021 to ensure that we have the flexibility to better respond to market and inflationary conditions. Chicken delivered adjusted operating income of $117 million in the first quarter of fiscal 2022, representing an operating margin of 3%. Operating income in the quarter was negatively impacted by $185 million of higher feed ingredient costs. Now turning to Slide 15. As part of our capital allocation approach, we focused on building financial strength, investing in our business, and returning cash to shareholders. In pursuit of our priority to build financial strength and flexibility, we used improved earnings to retire debt in fiscal year 2021 and expect to do the same this year. Continued strength in our earnings this quarter have further improved our leverage ratio to 1.1 times net debt to adjusted EBITDA. Investing in our business for both organic and inorganic growth will continue to be an important priority and will help Tyson increase production capacity and market capabilities. This will support strong return generation for our shareholders. Finally, as our track record has demonstrated, we are committed to returning cash to shareholders through both dividends and share buybacks. We finished the quarter with a powerful balance sheet and continued capital allocation optionality. Let's now discuss the fiscal '22 financial outlook. We are maintaining our total company sales guidance of $49 billion to $51 billion, although we expect to perform at the upper end of the range. In support of our sales growth, we still expect a 2% to 3% volume growth on a year-over-year basis as we work to optimize our existing footprint and run our plants full. Looking at AOI margin target ranges for our segments, in Chicken, our operational turnaround is working, and we still expect to achieve a run rate profitability of 5% to 7% by the middle of the year. We expect full-year margins that also fall between 5% to 7%. Prepared Foods is expected to deliver margins during fiscal '22 of between 7% and 9%. Based on our first quarter performance, we now expect the full-year margin performance in Prepared Foods to be at the upper end of the range. In Beef, we are maintaining our AOI margin at 9% to 11%, but we expect to perform at the upper end of the range. Also, 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 Pork, we expect similar performance during fiscal '22 to what we accomplished during fiscal '21, equating to a margin of between 5% and 7%. As is normal seasonality for pork, we expect the first quarter to be the strongest. In International/Other, we expect margins of 2% to 3% as capacity expansions and strong global demand support volume growth and improved profitability. Consistent with our expectation for a meaningful increase in CapEx spending to pursue a healthy pipeline of projects with strong return profiles, we anticipate CapEx spending of approximately $2 billion during fiscal 2022. We now expect lower net interest expense due to lower anticipated average debt balances during the fiscal year. Our expectations for productivity savings and tax rate changes remain unchanged. Our net leverage is expected to remain well below 2 times net debt-to-adjusted EBITDA, providing optionality for inorganic investment and additional return of cash to shareholders over the course of the year. In summary, we've had a strong start to the fiscal year. We have a great team, growing demand for our products, strong portfolio diversity, and the differentiated asset footprint needed to win in the marketplace. We set out ambitious calls at our Investor Day, and we expect to achieve them. I'll 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 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 instruction.

My first question is about the recent quarter and the updated perspective for fiscal 2022. Can you outline the areas where margin expectations have slightly increased on a point estimate basis and some of the factors contributing to that? Does this reflect the strong performance in the first quarter, or is it a more positive outlook on pricing and cost balance for the rest of the year? Please help us understand how your outlook has changed since what was initially communicated in November.

Let me start off by saying that we really got off to a good start in Q1. And there are a number of factors with Q1 and what we saw in Q1 and our optimism as we look to the balance of the year. We've adjusted a number of pricing mechanisms to be more variable in nature. We've seen prior elasticities, for example, in Prepared Foods being less than what they have historically been, which is exciting there. We've been able to maintain volume in this inflationary environment. Inflation, as we see it, is continuing to move upwards. We're really excited about our productivity program relative to the whole company. We're anticipating $300 million to $400 million, and we're on track through Q1 relative to that. Just doing what we do better and we talk about becoming a more agile, faster decision-making organization. Essentially, that's all about process and being better, faster, and making decisions with greater speed at lower levels within the organization. But because of our vaccination position, we've now moved past the surge of the Omicron spike, as we call it, which occurred predominantly in the first three weeks of January, and we're back to normal levels. We think our vaccine mandate served us well in making that commitment and really making our team members' health and safety, and their families and communities our highest priority has served us through the new variant. We've seen better absenteeism and turnover throughout the organization. We think labor will be available and will be much greater in the balance of the year. And we certainly have capacities coming online with head and harvest and Chicken and further processing capabilities, value-added capabilities in Prepared and Chicken. We've got labor going back into beef and pork plants, and we'll be able to improve those mixes as well as increase the harvest capacity.

All right. That color is really helpful. And I guess just a quick follow-up. On capital allocation, you stepped up the buyback in the fiscal first quarter. It was something that was notably absent from the kind of multiyear view at the Analyst Day in December. I was wondering if you could just help us think, Stewart, maybe just cadence on buybacks going forward? Should we think about it being more ratable, more opportunistic? Just certainly have the balance sheet capacity to make it more ratable, but I'm just trying to think about how to bring that expectation going forward.

Yes. Look, thanks for that, Adam. If you go back to Investor Day, we were really focused on being able to point to the strong growth story that sits in front of Tyson's future. Part of that was a pretty significant allocation of increased capital to CapEx spending and various capacity expansion. So it was an intention to leave stock buyback to the end, but stock buybacks have been talked about in history, and they will be in the future. The one thing we've said is that we do look each year to try to buy back the dilution. And after that, it will be more opportunistic. But growth is a focus for our company.

I guess first question for Donnie. And I believe David is on the line as well. Donnie, you've spoken in the past about how buy versus grow gets put at a disadvantage, particularly when spot prices move, you've made some strides to lower outside meat purchases here on a sequential basis. But just in the month of January with where spot prices kind of moved, how should we think about that impact on Chicken and on the overall turnaround maybe just in the short term here?

Okay, Peter, I'll tell you. I'll start, and then I will let David make a few comments. But over the last year or so, the recovery for our Chicken business has been a priority. Specifically, as it relates to buy versus grow, the fact of the matter is, we became too dependent on the buy portion of the model. We forgot to grow Chicken, which hurt us from a capacity utilization perspective and those additional pounds flowing through our business really impacted our fixed cost leverage. So we tilted too far on the buy portion of this. And over the last year, as we have been building the breeding stock and getting past the hatch issue that we talked about so much last year, we're now in a better position to get more head through our processing and harvest facilities, which will give us more breast meat at a much more attractive price point versus the buy in the marketplace right now. We have not totally abandoned the buy portion and do not anticipate totally abandoning that, but there's a smaller percentage of our overall needs that we will go to the market to secure. But we're on plan with what we intended to do. And with that, David, why don't you add a little bit.

Yes. Thank you for the question, Peter. One way to approach this is that we will purchase outside meat if it makes financial sense. We will continue to evaluate whether to buy or grow based on what is best for us. Generally, outside meat purchases will be used to complement our efforts when they are financially viable. As Donnie mentioned, volume is essential. It is one of the key factors we aim to leverage in fiscal year 2022 to grow our own animals through processing, making us significantly more efficient.

Got it. Okay. And Donnie, in both your comments, prepared remarks and Stewart, you both commented on restructuring the pricing strategy to be more variable in nature, particularly in Chicken. I'm just curious, what percentage of that business now is tied to more of the spot market versus where you had been historically? I think that would be just helpful for us as we think about how to think about the new business going forward.

Yes. I would tell you, within Chicken specifically, we have restructured our pricing approach, and that's really in large part due to our commercial organization and the great customer relationships that we have across both our retail and foodservice networks. I would tell you today, we are significantly more variable pricing versus fixed. And again, we're not even utilizing fixed rate within our conversations. Every contractor program that we have is either tied to grain, tied to market value, and we will continue to use that. Pricing was up significantly in Chicken in the Q1 timeframe of over 20%, and a large part of that was because of the variable programs that we put in place.

I wanted to ask, it's obviously extremely early, and this could lead to nothing, but there have been a couple of cases of avian influenza, obviously not in the poultry industry. I'm just curious, are you seeing anything? Are you doing anything on your part to take extra precautions against this? I think you're probably one of the most up-to-speed companies in the world in terms of already taking those precautions. So maybe you're already there. I'm just trying to get a sense of what you see the industry doing and if there's been a lot of changes since the last time title came around.

Yes, absolutely. Ken, good morning. Thank you. The USDA has reported that this high path variant has only been found in the wild bird population, and it's really been within the East Coast of the United States. I would tell you more specifically to what Tyson is doing versus what the industry is doing. We have very robust biosecurity measures in place across all of our facilities, which includes testing every flock for avian influenza. In addition, at Tyson, we have heightened our biosecurity measures in all of our facilities on the East Coast. Some of those things that we've done are we're reducing the number of trips that we're taking to farms. We're actually taking extra time and doing more cleaning of our vehicles that do go to the farms, but we are ahead of this and have been watching it very closely.

I would add to this that we have in our biosecurity programs, we have green, which is just normal business; yellow, orange, and red, which are progressive. On the East Coast, as Dave mentioned, we are in the orange category at this point. So a lot of attention and a lot of monitoring. I saw the case over the weekend in Florida, which I think now is five states where we have seen avian influenza.

That is helpful. I also wanted to ask about your plant-based alternative business. It’s not the largest part of your operations at the moment, but it was a significant initiative for you a couple of years ago and is still occasionally mentioned. We’ve heard some competitors discuss a slowdown in demand for that sector. I’m curious about your perspective on the industry as a whole. Has your optimism diminished at all regarding that? I want to understand how you view the current balance between animal-based and alternative-based needs.

Sure. I mean, we're still in the plant-based protein business. We still like it. Consumer demand continues to be good. We've seen a lot more growth lately. But across retail and foodservice, we continue to see growth. Now, that's off a very small base, as you might imagine. But we're continuing to see growth. But for us, with our presence outside the United States, in Europe and China, and also in Southeast Asia, we also have plant-based products in those markets that are doing really, really well also. So we're still excited about the plant-based business, and when consumers prefer that, we want to have the opportunity to provide that for them, and we are currently growing. And let me ask Noelle if there's anything she'd like to add to that.

Sure. Just as a build, we want to be leaders across all the proteins that consumers seek. We know that consumer interest in adoption is growing in this space. And we'll continue to be guided by the consumer needs and the opportunities, and you see the Raised & Rooted products that we've launched domestically. We continue to have opportunities internationally, and we'll continue to ensure that we are participating with consumer interest and adoption growth.

This is Antonio Hernandez on behalf of Ben Theurer. My question is regarding Prepared Foods, and you basically performed in line with guidance during this last quarter. I think you mentioned over the long-term target of 10% to 12%. How do you see the potential in the purpose to follow pricing to recover margins within this year and also next fiscal year?

I can give you a bit of context to what we're currently seeing. Demand continues to be strong across both retail and foodservice, driven by our strong equities in our diverse portfolio. And as you said, we're pleased with the market performance that we're seeing despite the price increases, which is really due to the strength of our brands and the strong partnership and relationships that we've built with our customers. Elasticity has been less than the historical models that Donnie has mentioned, but it's clearly something that we're watching closely. And so we're constantly reviewing our pricing and revenue management strategies. As the landscape changes, we'll continue to take thoughtful approaches on those critical levers. As you also heard in the comments, we're taking significant actions to transform our cost base and we're creating good momentum there. And so on the year, we continue to feel good about the 7% to 9% range that we've given, and we believe we have the right building blocks in place on our path to deliver sustainable double-digit margin.

Just two questions. One is automation. Can you talk about the progress and what anecdotal evidence you've seen, and how much has been actually done? And is it changing automation story would be helpful.

Well, automation is a key focus in our productivity program, and I discussed it at Investor Day. We expect it to provide us with approximately $450 million over the next three years, which is why we are investing heavily in this area. Stewart mentioned the $2 billion in capital expenditures for capacity, a significant portion of which is dedicated to automation and technology projects. In Q1, we are progressing well, transitioning from a project-based approach to a more programmatic strategy that targets common challenges across our production operations. This includes standardizing processes like deboning in chicken production and enhancing palletizing and material handling across the enterprise, particularly in roles that are harder to staff. In short, we are on track to achieve $300 million to $400 million in productivity savings, with a portion stemming from automation efforts. While we haven't specified the contributions from each sector, we are working as quickly as possible within the constraints of the supply chain to acquire new equipment and advance our initiatives.

Great. My second question is about hatchability. We haven't really seen it in the public data, but you're indicating that you're progressing faster than anticipated. Can you share what you're experiencing in your operations? When do you expect this to reflect in the publicly available data? Additionally, please provide some insight into what actions you have taken to improve hatchability and achieve results ahead of schedule.

Thank you, Ken. First and foremost, we are performing better than we anticipated for Q1 regarding our overall hatch. I want to emphasize that this information is specific to Tyson, and I cannot comment on the broader industry trends. We finished FY '22 with a growth-oriented mindset, which was reflected in Q1 as we increased our volumes by 3.6%. Heading into '21, I'm pleased to report that we have seen an increase in egg sets, chicks placed, and overall breeder production. Our objective is to maintain the growth seen in Q1 for the remainder of '22, as our hatch is a crucial factor in achieving that.

I would add this piece of context, Ken, that in '22, we have intersected public benchmark data. We have crossed that line with competitors in the industry at large with our hatch.

So I want to ask, in your presentation that you issued concurrent with the results this morning, you noted on the pork business that there's a continued opportunity around mix. I hope that you could elaborate a little bit on that. And then also to the extent that you think about that as a component of your Chicken business, I know repricing contracts, hatchability, and plant productivity are all kind of the highlight items associated with improving that business. Where does mix stand and the opportunity to margin up the Chicken business?

Okay. Let me start broadly, and then I will let Shane speak to a few details around Pork as there are similarities with that. But for example, in the Pork business, the labor availability in pork and chicken has been the single biggest challenge that we've had over the last two years in the pandemic. Capacity utilization has been better in pork than it has been in chicken. Labor and capacity utilization is continuing and has been good in pork and continues to get better. The thing that has hurt us to some degree in both pork and chicken is mix; capturing some of the value-added products in chicken or pork specialty products. We've just not been able to fully optimize that. For example, in pork, we've seen an inability to debone a ham versus selling a whole ham. But as we enter '22 in both businesses, we're in a much better position in terms of labor improving, and we still have some ways to go, but we see improving mix and capacity utilization across all businesses. And I'll let Shane speak to a few more things in Pork.

Yes. Thanks, Donnie, and you hit on most of it there. But I think the other thing to add to this, too, is as we think globally here, Tyson is a global company, and we're servicing a lot of companies and countries across the globe. The key to this is being able to balance that with our domestic business and looking at what we have from a throughput and a labor perspective. So labor has been a challenge. We'll get animals through the facility, but it's the further processing we're doing on the back end of the plant that's been a bit of a challenge. Staying focused on optimizing our labor usage and maximizing throughput and contributions when we look at it on a labor-per-man-hour basis has been the key.

Okay. That's great. And then my second question is related to export demand. You called out in the presentation as well around Beef that port congestion and labor shortages impacted the business. Export demand has been exceptionally strong for Beef in particular. I'm curious your outlook for this year for continued export demand? And then for Chicken, I know that there's mix challenges that perhaps weighed on leg quarters domestically. But with this very strong crude backdrop, I would think that would also benefit export demand for domestic leg quarters. So can you talk a little bit about exports and your outlook for that across all the businesses for the balance of the year?

Yes. So I'll take the Beef question. The U.S. is a leader in global beef production, and it's centered around our superior taste and quality. The producers that we're partnering with in this country are doing a phenomenal job are increasingly preferring U.S.-produced beef, and we're seeing stronger global demand as a result of that. Port congestion on the West Coast, as you mentioned, has been an issue, and it's impacting not only the short-term international demand, but also fulfillment on orders. We're implementing strategies and options to not only diversify shipping ports but also to mitigate our risk as we go forward. But we continue to see very good interest coming out of Asia, especially for our high-quality yield beef. A good example around that is China. China has become the number three destination for U.S. beef. Tyson has a competitive advantage with not only our direct business but our international business unit that we have in-country there in China. So significant resources in-country, a lot of customer demand for beef, and we feel real good about 2022 and going forward.

To answer your question relative to what we're seeing within poultry, very similar to the comments Shane was making about demand; it remains extremely strong. I would tell you that it's really not a demand and price issue. We're dealing with the same port congestion in the poultry organization. But that really underscores the need for us as an organization to make sure that we are upgrading our mix and utilizing those in domestic use. We're cutting those drumsticks and thighs and using them within alternate channels domestically. We are targeting both deli and food service for some of those opportunities.

Let me add a comment to remind everyone about the One Tyson approach, particularly regarding our international business unit in China. This includes leg quarters, pork, beef products, and prepared foods. When we export these commodity-based products from the United States, we often further process chicken leg quarters and similar items into value-added branded products in China. This One Tyson approach allows us to sell these products and capture additional margins by reducing the number of steps involved in the process. I'll stop there.

I have a couple of questions. One, I think easy to answer and maybe one that's not so easy. So I'll start with the first. You talked about being able to get fair value for transportation surcharges. A lot of food peers can't seem to recoup those charges. So why is yours easier in fresh meat than it is in branded foods to charge the customer for that surcharge? And then I'll wait and ask another one.

Freight costs have risen by 32%, as I mentioned earlier. We are actively working on optimizing our operations by integrating our private fleet, contract fleet, and outside carriers. We have achieved significant success in this area, although the rapid inflation posed challenges initially. So far, we have managed to secure transportation costs and have successfully communicated these charges to our customers, who have agreed to pay for them.

So is it your turn?

I don't think if you're a branded portfolio versus a more commodity-oriented business, that really matters. What we tried to do with our customers is say, freight is freight, and the price of the product is the price of the product, and we don't try to blend the two. So I wouldn't say one is any easier than the other. But I think the fact of the matter is that the freight being up 32%, that's what it cost to get the product moved and delivered to a customer, and we're asking our customers to pay for that. Anything to add?

The only other component I'd add is that there are certain markets that are a little more difficult to shift into versus others. So you have to think about backhauls and what your cost mechanism is going to be to recover that too. So that would be the only other component I'd add to what Donnie said.

Here's the second question. The industry has been experiencing a labor shortage for quite some time, and it's uncertain when it will improve. In the past, I recall hearing that Tyson and other companies have identified communities of international immigrants to enhance their labor utilization in specific facilities. Is your access to international immigrants affected in the current situation more than it has been in the past? Is there anything the industry can do to legally increase access to more individuals from international locations?

Well, you're right. Labor has been a challenge for a bit now. We looked at this in terms of trying to solve for Tyson. Our approach has been to try to create a better place for people to work, a better work experience with less turnover and less absenteeism, while keeping team members safe. In our first quarter, we paid $50 million in bonuses to our team members for no reason other than to say thank you for choosing Tyson. Thank you for being on our team. And we've had to do a number of things like piloting childcare, providing subsidized childcare, onsite clinics. We're also investing with our strong balance sheet heavily in terms of automation to take away some of those more difficult jobs. Now our workforce, to be clear, is made up of various immigrants and people from all over the world of different nationalities. We’ve benefited through the years from having such a diverse workforce. We continue to pursue those things like Afghan refugees. We're trying to work with the government in terms of having availability and we've worked with communities to build or define housing to support that, making it easier. I mean we're doing all kinds of things to make it easy to do business with Tyson, easy to go to work for Tyson and do it the right way. That's been our approach. I know of no magic pool of people anywhere that we are targeting to alleviate the labor situation. We're trying to solve it by doing a number of things to make us a better place to work.

Good morning. You touched on elasticities a little bit, and I realize they've held up quite well. We've heard that from a lot of companies. But just curious how you think about some of your assumptions for that going forward? And especially just with pricing up as strongly as it is, that's a few multiples of what wage growth looks like. So just curious what your planning assumptions are for how that unfolds over the rest of the year? And maybe a little bit of color by segment if you can.

Noelle? Would you like to start with that?

Sure. As I mentioned, we're constantly reviewing pricing and revenue management strategies, and it is a dynamic environment. As the environment continues to evolve, we'll be very thoughtful about our approaches. Pricing is just one of the levers in our toolkit. We look at productivity and cost opportunities and other levers to ensure that we have all the pieces coming together to best grow our brands and create business continuity and profitability. The other aspects that I would point to are that we have a broad and diverse portfolio with a range of price points to ensure that we have offerings that meet a variety of consumer needs, and price pack architecture also becomes critical in these inflationary times, and you see that focus for us across the business.

Yes. I would add this to what Noelle said; we have seen a lot of inflation. But I would remind you that the cost of food in the U.S., while it is higher, is relative to the balance of the world. Labor costs have been up 20%; cattle costs are up 22%. Grain has been up 29% this year, and freight, as I mentioned earlier, is up 32%. We're not asking customers or the consumer ultimately to pay for our inefficiencies. We're asking them to pay for inflation. The rest of what we do is find ways to be more productive, lower costs, and increase throughput. We feel good about our ability to do a lot of that while serving our customers.

The inflation headwinds are obviously clear and certainly a driver of the pricing. But just maybe expect to some of your assumptions on the elasticities. Maybe, at a very high level, do you assume they revert to more normal levels or that they can hold at sort of what we're seeing currently?

They are where they are right now. I know that's not a very good answer. There is a price point where it could be impactful. But at Tyson, we play across the spectrum from the most value-added products to the most commodity of commodity products, and we meet the consumer wherever they are on the value chain. We intend to continue to grow our business and serve those consumers wherever they are.

Okay, great. I just want to follow up on the chicken pricing and understand some of the flexibility that you've implemented. And maybe just understand if it's meant to allow for more upside or if it drives more volatility. Is it flexible in both directions? Or does it have any sort of floors that just mostly allow for easier increases?

Absolutely. Thank you very much. There's flexibility both going up and there's flexibility going down. Our partners in both retail and food stores understand what those metrics are. We will go up and we will go down based on how we put our programs together. But the biggest piece is the fact that it is much more variable today than it has been at any point in time.

Thank you, Andrea, and thanks again for your interest in Tyson Foods. We look forward to speaking again soon.