Tyson Foods Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2022

Key Takeaways

  • Tyson Foods delivered double-digit sales and earnings growth in Q2, with adjusted EPS up 71% year-over-year to $2.29 and H1 EPS rising 57% to $5.16.
  • Persistent inflationary pressures drove a 15% rise in cost of goods sold in H1, with higher costs for feed, live animals, labor, transportation, and packaging.
  • The company’s productivity program is on track to achieve over $400 million of savings in FY 2022, as part of a plan to deliver $1 billion by FY 2024.
  • In the chicken segment, improved hatch rates and operational efficiencies boosted volume by 2.1% in H1 and restored a 5% adjusted operating margin in Q2, with full-year margin guidance at 5–7%.
  • Tyson expects 1–2% volume growth in FY 2022 and will invest $2 billion in new capacity and automation, including four plant startups in Q4 and 10 capacity upgrades in Q3.
AI Generated. May Contain Errors.
Earnings Conference Call
Tyson Foods Q2 2022
00:00 / 00:00

There are 11 speakers on the call.

Operator

Good morning and welcome to the Tyson Foods Second Quarter 2022 Earnings Conference Call. To the call. Please note this event is being recorded. I would now like to turn the conference over to Megan Britt, Vice President of Investor Relations. Please go ahead.

Speaker 1

Hello, and welcome to the Q2 fiscal 2022 earnings conference call for Tyson Foods. Listen. Prepared remarks today will be provided by Donna King, President and Chief Executive Officer and Stuart Glendinning, EVP and Chief Financial Officer. Additionally, David Bray, Group President, Poultry Noelle O'Mara, Group President, Prepared Foods Shane Miller, Group President, Fresh Meats and Chris Langholz, Group President International will join the live Q and A session. We have prepared presentation slides to supplement to the comments, which are available on the Investor Relations section of the Tyson website and through the link to our webcast.

Speaker 1

During this call, we will make forward looking statements regarding our expectations for the future. These statements are subject to risks, in listen to the SEC filings, 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 to differ materially from our projections. Please note that references to our earnings per share, operating income and operating margin in our remarks or on an adjusted basis unless otherwise noted. For a reconciliation of these non GAAP measures to their corresponding GAAP measures, please refer to our earnings press release.

Speaker 1

I'll now turn the call over to Donnie.

Speaker 2

Thank you, Megan, and thank you to everyone for joining us for the call. Earlier today, we reported strong second quarter and first half fiscal year 'twenty two results. Our results would not have been possible without the work of our team members. I'm grateful for their dedication and diligent efforts this quarter as we continue to manage a complex and dynamic operating environment. We delivered double digit sales and earnings growth driven by strong market fundamentals, acceleration of our productivity actions in improving operational execution across our segments.

Speaker 2

Our diverse protein portfolio, omnichannel capabilities, listen Leading brands and value added products all contributed to our results. Strong performance in our Beef segment, continued recovery in Prepared Foods in listen and improved Chicken supported improved sales and earnings. Our retail core business lines, which include our iconic brands Tyson, listen. Jimmy Dean, Hillshire Farm and Ballpark have driven strong share performance in the retail channel since the onset of the pandemic. In QSRs and K-twelve supporting continued share gains and branded value added chicken.

Speaker 2

Overall consumer demand for protein has remained strong and we are taking deliberate actions by segment to improve our volumes to better meet customer needs, including investing in new capacity, brands, product innovation and our team member experience. Listen. We are seeing our investments in team members making an impact. Despite continued labor challenge during the omicron surge this quarter, we're seeing lower turnover and in listen to the music industry. We have invested in higher wages, benefits and other workplace enhancements such as flexible schedules, listen.

Speaker 2

Child Care and Transportation. The construction of new plants continues to progress. This additional capacity will enable our team to address capacity constraints and in a listen to the strength and better serve growing demand for protein across all segments. Along with ramping up utilization of our newest plants in Humboldt, listen. Eagle Mountain and Thailand, we have 4 plants expected to commence operation in the Q4 of fiscal year 'twenty two.

Speaker 2

In addition to the new sites, we're continually upgrading capacity as needed with approximately 10 projects planned in the 3rd quarter, Representing £25,000,000 of volume in Prepared Foods alone. In addition, we are working closely with our customers to ensure that to the fair value of our products incorporates the inflationary cost pressures impacting our business. For the first half, Our cost of goods sold rose 15% relative to the same period last year. Every part of our business has been impacted by inflation. Listen.

Speaker 2

We experienced higher costs across our supply chain for all inputs from feed ingredients, live animals and other raw materials to cooking oils and basic listen to the music supply. We're also managing higher cost of labor and transportation due to robust demand, higher fuel costs in limited availability. As part of our efforts to combat inflation and increase profitability,

Speaker 3

I'm pleased by

Speaker 2

our accomplishments to drive in listen to drive costs lower by accelerating our productivity actions. Also, our balance sheet and liquidity position remain healthy, providing optionality to invest in growth across our portfolio and return cash to shareholders. We have a disciplined approach listen to deploying capital with a focus on total shareholder return. Our first half results clearly demonstrate that we are making progress on our growth objectives and that we remain focused on outpacing the overall market, improving operating margins and driving stronger returns for our shareholders. Now turning to the financial results, let me give you some highlights.

Speaker 2

Sales improved 16% in the 2nd quarter and 20% during the to that. Our sales gains were largely driven by higher average sales price and mix improvement. Average sales price trends reflect listen to the discipline of revenue management strategies in the context of a volatile high inflation environment. Like many other companies, We've seen varying levels of heightened inflation, notably in grains, labor, live animals, raw material and transportation costs. As I mentioned earlier, our teams have worked together with our customers to manage inflationary pressures.

Speaker 2

We delivered solid operating income performance, up 57% during the 2nd quarter and 47% for the first half. The performance in the first half was due to strength in beef, to the question and prepared foods. Overall, our operating income performance translated to $2.29 in earnings per share for the 2nd quarter, up 71% and $5.16 in earnings per share for the first half, up 57%. Looking at our results on volume, we remain confident that our actions will improve our performance, but we are not where we expected to be by now as we face the Omicron surge in the quarter and other labor and supply chain challenges. Due to these factors, our total volume was down slightly for the first half versus last year.

Speaker 2

Chicken remained a bright spot where volume was up 2.1% through the first half compared to the same period last year. This improvement was driven by solid fundamental demand as well as operational improvements. There is much more work to be done as we focus on filling our existing capacity. We are pulling multiple levers to drive sequential improvement in our performance and as a result, I'm confident that we will see continued volume performance in the second half. In Prepared Foods, volumes were down 4% in the first half compared to the same period last year.

Speaker 2

Approximately a third of this decline was related to the Pet Treats divestiture with the remainder of the result of a challenging supply environment and uneven recovery of the foodservice channel. We're working to improve these results over the remainder of FY 2022 as we continue to take actions to expand and improve capacity utilization. In listen. In beef, volumes were down 2.9% in the first half compared to the same period last year. However, Beef volumes increased quarter over quarter due to higher harvest weights.

Speaker 2

We expect continued volume improvements for the remainder of our fiscal year 2022 as new team member recruitment strategies support and improve labor position and higher throughput. In pork, listen. Impacts associated with a challenging labor environment contributed to a 2.3% decline in volume in the first half compared to the same period last year. We expect tightness in live hog inventories to affect our second half volume. In international other, our investments in capacity, innovation and brands are supporting our market share growth objectives and volume improvement.

Speaker 2

Overall, we will continue to take to actions across our business to optimize our existing footprint, add new capacity, adjust our product mix and align our to the portfolio with customer and consumer needs. Although we have reduced our expectations for the full year, we still expect to grow our total company volumes in to fiscal year 'twenty two. We continue to take meaningful action toward becoming the most sought after place to work and we're making significant investments to attract and retain team members. Our U. S.-based workforce is comprised of team members from more than 160 countries.

Speaker 2

For the team members aspiring to become U. S. Citizens. This will allow us to scale a program from 7 Tyson facilities listen to serve 40 company locations in 14 states. We recently announced an expansion of the Upward Academy program as our latest investment in our team members.

Speaker 2

Starting this summer, U. S. Team members will have access to free education, including master's, undergraduate and associate degrees, listen to career certificates as well as class in literacy and technology fundamentals and Tyson will pay 100% of the cost of tuition, books and fees with an estimated investment of $60,000,000 over the next 4 years. Ensuring the health and safety of our global team is a top priority. We continue to challenge ourselves to be an organization that stays ahead of the unforeseen events and adjusting our protocols to keep our team members healthy in listen and safe.

Speaker 2

We have educated and encouraged team members to get vaccine boosters and have offered over 100 clinics across our office and plant locations. Listen. We are also investing to support team member well-being more proactively in our rural communities. We now have 7 on or near site Tyson Health listen to chronic condition coaching, mental health counseling, lab services and sick visits at little to no cost to most of our team members are their spouses Overall, we're confident that our actions will increase Tyson staffing levels and position us for future growth, and we will continue to explore innovative benefit offerings that make our team members' lives better. We're making excellent progress on our listen to the program, which will deliver more than $1,000,000,000 in recurring productivity savings by the end of fiscal year 2024.

Speaker 2

Based on current progress, we now expect to deliver more than $400,000,000 of savings in fiscal year to the high end of our previously disclosed range for the year. Last quarter, I highlighted our work in prepared foods to build a digital manufacturing platform that utilizes data to simplify complexity and optimize processing. I also shared our work to enhance the mix and allocation of our trucking fleet resources to enable better on time deliveries to customers. This quarter deployment of our Tyson production system approach has improved our yield across all segments versus a year ago. Listen.

Speaker 2

Additionally, our procurement program is addressing total company spend, including direct material as well as plant and corporate indirect areas. This program continues to deliver savings in line with expectations. Our digital solutions journey has also progressed. In our supply chain, we are leveraging new processes and digital tools to quickly identify gaps in fulfillment, meeting the demands of our customers on time and in full is of the utmost priority and we are continuing to maximize our service levels. Listen.

Speaker 2

The early results of our finance automation and digitization work also remain promising. For example, this program is providing more accurate billing in improved collections for Tyson while lowering our intensive labor. We are also investing aggressively in automation and technology to help listen to address some of our most difficult roles in repetitive tasks. This is well planned program of automation to use common designs and equipment across our plants to listen to the cost, maintenance and asset utilization. The deboned automation program is continuing to scale in plants in listen.

Speaker 2

And our Tyson proprietary debott automation solution is also beginning to roll out in select facilities. Looking ahead, We're starting to scale new programs like Packout Robotics to continue automating highly manual processes and deliver savings. Listen. Chicken remains a top priority and we continue to execute against our road map to restore top quartile profitability for this segment. We've been committed to returning our operating margins to 5% to 7% level by the middle of FY 'twenty two.

Speaker 2

This quarter we delivered a 5% adjusted operating margin, in line with our previously communicated plan. Critical to improving our profitability is maximizing our fixed cost leverage by being staffed to standard and having enough burners to run our plants full. Listen. Since September, we have seen an improvement in our hatch rate that is consistent with the expectations that we shared at our December Investor Day. Listen.

Speaker 2

We are committed to growing our harvest capacity utilization and we outpaced the industry in the Q2. Achieving improved chicken harvest and higher to actions to improve volume, we have also worked with customers to manage inflationary pressures by adjusting pricing to achieve a fair value for our products. This will be important to ensuring we deliver sequential improvement in our operating margins in the second half of fiscal year 'twenty two, especially with continued increases in key input costs such as labor and feed ingredients. As I mentioned a moment ago, We are also making good progress on our automation objectives for the segment. This includes the rollout of debone automation and a range of other equipment, which will enhance our productivity and cost effectiveness.

Speaker 2

We've come a long way in a short period of time and I'm pleased with the progress we're making in chicken. To recap, 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. The 5 imperatives on this slide show how we will achieve our commitments and drive value creation for our shareholders. This starts first with our commitment to our team members with a focus on ensuring their health, listen to better address demand. This includes increasing the contribution of branded and value added sales.

Speaker 2

As a result, we expect our volume to outpace overall market growth over the next several years. 3rd, we are aggressively restoring competitiveness in our Chicken segment and continue to achieve key milestones on our roadmap to top quartile profitability. 4th, We are driving operational and functional excellence and investing in digital and automation initiatives. This is at the heart of our productivity program, where we are accelerating our efforts and now expect to deliver more than $400,000,000 in savings this year. Listen.

Speaker 2

5th, to address projected demand growth over the next decade, we're using our financial strength to invest in our business. We're on track to invest $2,000,000,000 in fiscal year 2022 with a disproportionate share focused on new capacity and automation objectives. Listen. We also continue to return cash to shareholders. Through the first half, we returned approximately $850,000,000 in dividends and share repurchases.

Speaker 2

As a final comment before turning the call over to Stuart, I want to highlight that Tyson Foods understands we have a critical role to play in the global food system to make it more resilient, more sustainable and more equitable for current and future generations. Just recently, we completed a materiality to the analysis that will inform our long range strategy. These insights from key stakeholders shape our strategic framework and provide direction on the expectations of our company. I will now turn the call over to Stuart to walk us through more detail on the financial results for the Q2. Listen.

Speaker 3

Thank you, Donnie. Let me turn first to a summary of our total company financial performance. We're pleased to report to strong results in the second quarter and first half of this fiscal year. Sales were up in the second quarter and the first half benefiting from our in listen to the pricing initiatives to offset inflation as well as improved product and channel mix. Volumes were down slightly through the first half, impacted by continued labor challenges and the temporary disruption from the omicron variant surge.

Speaker 3

Looking at our sales results by channel, retail drove to the Q2 relative to the same quarter last year. Through the first half, retail sales have improved $773,000,000 In the second quarter, improvements in sales through the foodservice channel drove an increase of $684,000,000 and domestic export sales to international markets were 311,000,000 stronger than the prior year period as we leveraged our global scale to grow our business. 2nd quarter adjusted operating income of 1 to $200,000,000 was up 57% relative to the same quarter last year, led by increases in chicken, beef and prepared foods. To the first half adjusted operating income of $2,600,000,000 was up 47%, supported by increases in beef and chicken.

Speaker 2

Driven by

Speaker 3

the strong increase in operating income, 2nd quarter adjusted EPS of $2.29 Grew 71% compared to the same period last year. 2nd quarter earnings per share also benefited from lower net interest expense and higher other income. Listen. Slide 11 bridges year to date operating income for the Q2, which was $422,000,000 higher than fiscal 2021. Volumes were down 1.5% in the 2nd quarter.

Speaker 3

Volume improvement in chicken, international, other and beef listen. Our pricing mix and portfolio efforts led to higher sales during the quarter, which offset the higher input costs. We saw continued inflation across the business, in some instances, up 25% or more. Notable examples were labor, feed ingredients, live cattle, listen. SG and A was $46,000,000 unfavorable for the same period last year due to increased team member related costs and investments in advertising and promotional spend in support of our brands.

Speaker 3

As a final note, both cost of goods sold and SG and A expenses in the quarter were partially offset by productivity savings. Moving to the Beef segment on Slide 12. Segment sales were approximately 5 to the Q2, up 24% versus the same period last year. Sales growth in the quarter was driven by continued robust listen to the demand for beef products, which supported higher average sales price and volume. The cutout and our average sales price remained relatively strong during the quarter despite some consumer demand shifting toward lower cost beef cuts.

Speaker 3

Quarterly volume improved compared to the prior year despite the omicron listen to the results of the company's earnings call. We expect volume to continue to improve in the second half of this fiscal year as new team member recruitment strategies listen to the Q2 and the higher throughput levels. On expenses, we incurred greater costs during the Q2 versus the comparable period listen a year ago as live cattle costs increased approximately $545,000,000 in the quarter. We had sufficient livestock available in the quarter driven by higher herd liquidation due to drought conditions. As of February, to the 4% of cattle inventory were in areas experiencing drought conditions, which may lead to additional herd liquidation through the remainder of the fiscal year.

Speaker 3

Listen. We delivered segment operating income of $638,000,000 in the quarter, up 43% versus the comparable period. Listen. This improvement was driven by solid global demand for beef products supporting a higher cutout as well as higher specialty product values, to the call, which were partially offset by higher operating costs. Our operating margin of 12.7% was 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.

Speaker 3

Listen. Looking next at the Pork segment. Sales were approximately $1,600,000,000 for the quarter, up 6% versus the same period last year. Listen. Average sales price increased 10.8%, but volumes were 4.8% lower relative to the same period last year.

Speaker 3

In listen. Segment operating income was $59,000,000 for the quarter, down 12% versus the comparable period. To the segment. Overall operating margins for the segment declined to 3.8%. The operating income deterioration was driven by softer exports, higher input costs in labor challenges.

Speaker 3

Moving now to Prepared Foods, sales were approximately $2,400,000,000 for the quarter, up 11% relative to the to the same period last year. Total volume was down in the quarter given labor and supply chain challenges and uneven food service recovery Consumer demand has remained durable even as we've worked to manage inflation through price increase. Listen. Overall consumer response to higher price levels is below historical expectations as our brand strength and category relevance has enabled continuing strong demand. Raw material costs, logistics, ingredients, packaging and labor all increased our cost of production.

Speaker 3

To the operator. To offset higher costs, we have executed productivity, revenue management and commercial spend optimization initiatives, while ensuring the continued development of to the brand equity through increased marketing and transport. Operating margins for the segment were 11% or $263,000,000 for the quarter, to the Chicken segment's results. Listen. Sales were $4,100,000,000 for the quarter, up 15%.

Speaker 3

Volumes improved in the quarter due to strong consumer demand and operational improvements. Our teams have been focused on streamlining our plants to deliver higher volumes. We expect to deliver further volume improvements in the second half of fiscal twenty twenty two. Listen as harvest numbers improve and we continue to optimize the operational efficiency of our plants. Average sales price improved 14.4% in the quarter compared to the same period last year.

Speaker 3

This increase was primarily due to price recovery offsetting inflationary costs. On pricing, we made meaningful progress to shift our pricing mechanisms listen to the experience in fiscal 2021 to be more agile in response to market and inflationary conditions. Listen. Chicken delivered adjusted operating income of $203,000,000 in the Q2 of fiscal 'twenty two, representing an operating margin of 5%. Listen.

Speaker 3

Operating income increased in the 2nd quarter due to increased sales volume and higher average sales prices, partially offset by the impacts of inflationary market conditions, including increased supply chain costs and a challenging labor environment. In the Q2 of fiscal 'twenty two, we experienced $100,000,000 of higher feed ingredient costs and $101,000,000 of net derivative gain as compared to $10,000,000 of net derivative gains in the Q2 of fiscal listen to the Q3 of 2020 1. During the fiscal month of April, the beginning of our Q3, we have achieved an approximate five listen to the Q2 earnings conference call. Restoring competitiveness in our Chicken business remains a top priority, and we are making progress on achieving our long term targets for adjusted operating margin, but we still have work to do. To Slide 16.

Speaker 3

Our healthy cash flows have continued to support a broad capital allocation approach. We are focused on building financial strength, investing in our team members, investing in our business and returning cash to shareholders. In listen. Consistent with our expectations, our operating cash flows were down slightly in the first half of the year due to planned investment in working capital. Listen.

Speaker 3

In pursuit of our priority to build financial strength and flexibility, we used our existing liquidity to retire $1,000,000,000 of debt in the 2nd quarter. Listen. Since the start of the pandemic, which this quarter now marks as 2 years ago, we have reduced gross debt by approximately $3,800,000,000 listen. We maintained our leverage ratio at 1.1x net debt to adjusted EBITDA, demonstrating our powerful balance sheet and our to continued capital allocation optionality. 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.

Speaker 3

This will support strong return on capital 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. Listen. We bought back $175,000,000 of shares at an average price of $88.50 per share during the 2nd quarter. This is in addition to the $348,000,000 of shares repurchased during the Q1.

Speaker 3

Let's now discuss the fiscal 'twenty two financial outlook. Based on the strong first half results, we're raising our total company sales guidance to a range of 52 to $54,000,000,000 In support of our sales growth, we now expect 1% to 2% 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 listen. In chicken, our operational turnaround is working, and we expect full year margins to be between 5% and 7%. Based on our first half performance, we now expect the full year margin in Prepared Foods

Speaker 4

to be

Speaker 3

in the range of 8% to 10%. In beef, we are raising our AOI margin to 11% to 13%. We still expect the first half of the year to be meaningfully stronger than the back half as industry and labor conditions are expected to normalize in the second half. We expect the cattle price increases will reduce the overall margin in the back half. Listen.

Speaker 3

In pork, we expect similar performance during fiscal 2022 to what we accomplished during fiscal 2021, listen to a margin of between 5% and 7%. As is normal seasonality for pork, We expect the Q1 to be the strongest. In international other, we anticipate reduced results from our foreign operations in fiscal 2022 listen to the Q2. Our net leverage is expected to remain well below 2x net debt to adjusted EBITDA, listen, providing optionality for inorganic investment and additional return of cash to shareholders over the course of the year. I'll now turn the call back over to Megan for Q and A instructions.

Speaker 1

Megan? Thanks, Stuart. 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 and A. Operator, please provide the Q and A instructions.

Operator

We will now begin the question and answer session. In listen. Time. We will pause momentarily to assemble our roster. Listen.

Operator

Our first question will come from Ken Goldman of JPMorgan. Please go ahead.

Speaker 5

Hi, thanks and good morning.

Speaker 6

In listen to sequential improvements in operating margins in

Speaker 5

the back half of the year. I just wanted to clarify, does this mean that you expect your operating margin in 3Q to be above 2Q, so above 8.9% and then for 4Q to be above that once again? Listen. Or you're simply saying that the second half will be above the first half with, I guess, no comment on the cadence of 3Q versus 4Q? I know it's hard to measure these things.

Speaker 5

I just wanted to

Speaker 6

be sure what you were suggesting there.

Speaker 3

Yes. Let me take that up for Donnie. This is listen. Stuart, I think you can take it as the first half is going to be not as strong as the second half. We haven't got obviously into giving you quarter by quarter, listen.

Speaker 3

But we expect our business to strengthen over the back half. You'll recall from the prepared remarks that we expect our beef to start to weaken in the second half. So Some of that quarter by quarter timing will depend a little bit on the timing update.

Speaker 5

Listen. Okay. Thank you, Stuart. That's helpful. And then how are you thinking about the timing of the cattle cycle right now?

Speaker 5

What I mean by that is, You mentioned that you expected the herd liquidation to continue the rest of the year. Again, no one has a crystal ball on these things. But do you have even a rough estimate for to when you might expect the liquidation cycle to end next year?

Speaker 2

Thanks, Ken. This is Donnie. We expected to in fact, we thought we would have already seen lower supply than what we are seeing right now. An interesting data point listen to the Cattle and Feed reported over 12,000,000 head, a record high for March 1. So there's a little bit of noise in listen to that still.

Speaker 2

Drought conditions and grain costs are certainly impacting supply. But As we said, we think in the back half of the year, we'll see the spread tighten in our beef business. And listen. But I would also point out that we think it will be much higher. In fact, we call it 6% to 8% It's holding up pretty good right now.

Speaker 2

And while we're it's not going to be a record back half, we think it'll be a very good one. Listen. Thank you to you both. Thank you.

Operator

The next question comes from Adam Samuelson of Goldman Sachs. Please go ahead.

Speaker 5

Yes. Thanks. Good morning, everyone.

Speaker 2

Good morning, Alan.

Speaker 5

So I just wanted to dig in a little bit more in in listen to the margin expectations in the back half of the year specifically and what that implies as you move into to fiscal 'twenty three. I think in the prepared comments, you talked about April being at 5% kind of even after any mark to market Impact on Grain. How do we think about the different levers to further margin improvement in Chicken to the back half of the year, whether it's volume in terms of the hatch and your throughput in the slaughter plants, mix, pricing actions versus some of the incremental inflation as we look at grain and some of your other purchase inputs.

Speaker 2

Thanks, Adam. Let me say a few words, and I'll flip it to David Bray to add a few details. It was a year ago this quarter that I talked about to the turnaround and check-in and in fact talked about being at a 5% to 7% business. Listen. I will tell you in this quarter, January, from a omicron resurgence Painful across all of our businesses, but we've improved sequentially throughout the quarter.

Speaker 2

Listen The back half of the year in chicken specifically, the thing that we need is greater volume, greater efficiency from the assets that we currently have. In listen. We've announced a further processing plant that will come online next year that will add some incremental listen to the capacity, but our productivity program is working. We are becoming more efficient and our volume is growing. And I would And let me flip it to David and he can add

Speaker 6

some more color.

Speaker 2

Thanks for that.

Speaker 6

Adam, good morning and thank you for the question. I think first and foremost what I do want you to hear listen. We have made progress within the Chicken segment, but we also know that we have much, much more work to do and we're focused against that. I would also tell you that we said that we would deliver listen to sequential improvement throughout the fiscal year and we have. We also shared that we would see improved volumes sequentially and quarter over quarter we have seen improved listen.

Speaker 6

And we also said that we would outpace the market for growth. And within the Q2 time frame, we did that as well. In Q2, our harvest head was up 2.9% listen and our harvest volume was up 4.9%, which actually allowed pricing to gain share in the Q2 timeframe of about 3 quarters of a point. Listen. We've also improved our adjusted operating income and our AOI margin sequentially quarter over quarter and this was the case whether We include or exclude any impacts of derivatives against our business.

Speaker 6

And so again, I would tell you, we're making progress. We have more work to do. We are focused and our goal has not changed to be the best chicken company as we focus on the levers of our business. We're continuing to work hard to staff our plants and today I would say the poultry segment is staffed to standard. We're continuing to work on servicing our customers, in a listen to our business and to drive overall operational improvement.

Speaker 2

If I could, David, if I could add one more thing, Adam. On Friday, we closed on April. By the way, it was a 5 day close, which to the new record, thanks to Stuart and Philip Thomas and the team. But in chicken specifically, April was a good month. And listen.

Speaker 2

Stuart referenced in his prepared remarks around 5%. I can tell you from the close that it's better than 5%. So listen. I'll leave it at that.

Speaker 5

All right. That's really helpful. And if

Speaker 3

I can maybe just follow-up in chicken, I'm just trying

Speaker 5

to think about The internal kind of actions you're taking and what you have under your control is very clear. And I'm trying to make sure we can calibrate how The external environment has evolved in terms of record breast meat prices, maybe some declines in wing, kind of risk around avian influenza and what that could potentially do to exports relative to to the grain markets and just trying to think about how changes in that external environment would or would not impact kind of how

Speaker 7

you think about chicken moving forward?

Speaker 2

Listen. Thanks, Adam. I will tell you, we started over a year ago with 4 with what we call our 4 pillars, in listen At which we're staffing our plant, servicing our customers, growing our business and restoring industry leading operating That's still our plan. As you well know, there are a number of variables going on right now in the poultry listen. What I can tell you is volume is good.

Speaker 2

Demand is strong. In fact, I would tell you that if It's been a long time since I've seen that kind of strength in breast meat and the chicken overall. And so listen. Grain is higher, of course. We are seeing that.

Speaker 2

David and his team are responding with shorter term contracts to try to protect Tyson and try to protect our customers as well. And I'll flip it over to David to see if there's any other Thanks. Do you like to add that? Yes.

Speaker 6

I think just from the grain standpoint, despite what we're seeing from volatility in grain, the turnaround in chicken is progressing as planned. Again, a large part of that is based off of our variable pricing structures. We're able to move much faster than we have in the past and that's been a big benefit to us. Relative to the avian influenza, yes, we are watching that closely and it is always a risk within this business. But I would tell you that we mitigate that risk through the use of our biosecurity measures and that they are in place across all of our facilities right now.

Speaker 6

This includes testing every flock that we have for AI before listen. We are operating under heightened measures in some geographic areas of the country right now and the heightened measures were basically we're limiting

Speaker 3

the amount in listen to

Speaker 6

people and trips that are taken to our farms, as well as making sure that the people that do go to the farms are in clean vehicles and we will continue to monitor that. To that, I would tell you that any bird loss related to disease impacts our growers and it impacts our plants as well. But these have been relatively minimal to our business to date.

Speaker 5

Listen. All right. That color is all really helpful. I'll pass it on. Thank you.

Speaker 5

Thank you.

Operator

Listen. The next question comes from Ben Bienvenu of Stephens. Please go ahead.

Speaker 8

Hey, good morning, everybody.

Speaker 9

Good morning, Ben.

Speaker 8

Listen. So I want to ask I want to follow-up on Adam's questions about the Chicken business. Obviously, your commentary on April is quite to the Q2. Your guidance suggests continued strength in that business. If we could, I want to ask a little bit about the mechanics of what happened in the quarter and kind of listen.

Speaker 8

I think we have an understanding of what happens when you have derivative gains and why, but would you talk about listen to the mechanism that would as grain prices go up, allow you to take higher prices. I'm just trying to understand the moving pieces around What we should be mindful of as we monitor the environment going forward?

Speaker 3

Yes. Let me this is Stuart. Let me go ahead and pick up the question on hedging. So we hedge primarily when we are obligated to fixed pricing, particularly any kind of agreements that are longer term and make sure that we're not exposed to a fixed price with a moving commodity base. This year, we've seen a listen to the question and answer session.

Speaker 3

You talked about that in a couple of our calls. We have shifted to more variable commodity driven pricing, listen, which means that we don't have to hedge as much. Keep in mind also though that those pricing mechanisms will have various and therefore they won't be repricing every day. And so you will see us, of course, hedging over the shorter term to make sure that in listen during that kind of lag period where we're obligated to price that we've got protection from movements in grains and other commodities. Is that helpful?

Speaker 8

Perfect. Very helpful. Thank you. Pivoting and thinking about the Prepared Foods business, really solid margin results in to the quarter. I know there's this cost price dynamics that you and all of your peers are navigating.

Speaker 8

The back half of the year Suggest maybe a little bit of margin pressure and then expansion thereafter. Can you talk about how you feel about your price As we cycle through some of the volume losses from the pet food business, pet treat business, improve and deliver on fixed cost absorption and your balance of the margin balance when we move through this year and into next year would be helpful. Thanks.

Speaker 2

Thank you, Ben. Let me hit a couple of points, and I'll flip it over to Noelle, and she can go into greater detail with you. And you saw in our statements, The first half was down. We had lower production throughput. Again, January was troubling with listen.

Speaker 2

Omicron resurgent challenging labor, and we did have the sale of Pet Treats in the quarter or in the first half. Listen. Yes, we expect the volume to improve. Retail demand remains strong, and we had some uneven recovery in our foodservice business, meaning listen. There are some spots and I'll call them out specifically and then I'll flip it to Noelle.

Speaker 2

In our pizza topping business, for example, it was softer than expected. Our Philly business was softer than expected and our Torqueta business was softer than projected. And with that, I'll flip it over to Noelle and she can talk about the elasticities.

Speaker 4

Listen. Thanks, Donnie. So as Donnie referenced, demand really does continue to be strong, driven by our strong brand equities and our diverse portfolio. And we do see that demand continues to exceed supply in a majority of our categories. We've made significant improvements in our labor vacancy rates.

Speaker 4

We expect to be back to pre pandemic levels. In the second half, we also have in investments coming online that we referenced in the prepared remarks on capacity. As Donnie referenced in foodservice, we are seeing a bit of uneven recovery. Overall, I would say it's showing momentum. Where we did see impacts is in January February, where the Omicron variant surge had a brief negative impact as consumer mobility waned and food service traffic listen.

Speaker 4

This along with some of the other dynamics from a labor perspective in the industry slowed recovery at the beginning of the year. But as we look at March traffic, the data shows that we are returning to pre omicron recovery levels as COVID cases drop back to a bit more normative levels. But broadly speaking, listen. QSRs and C Stores continue to lead recovery relative to other channels. We're also seeing great momentum in K-twelve and Continues to be optimistic in the overall recovery.

Speaker 4

And as referenced, we continue to make significant impacts in cost transformation. And so you'll continue to see a focus on that holistically for us across the business as we continue to improve labor, as we continue to expand our capacity as we continue to invest in our portfolio and our leading brands and expect to deliver 8% to 10% ROS for the year.

Speaker 8

Okay, great. Thanks so much. And best of luck with the rest of

Speaker 6

the year.

Speaker 3

Thank you.

Operator

The next question comes from Peter Galbo of Bank of America. Please go ahead.

Speaker 5

Hi, good morning. Thank you for taking the questions. Good morning, David. Maybe we could start with beef. You guys Have obviously seen your business, I think, disaggregate a bit from some of the 3rd party sources.

Speaker 5

And I do think a lot of that comes from your export business and maybe some of the byproduct business. But can you talk about maybe those 2 specifically in the quarter and how we should think about them going forward as we in listen. Monitor external data versus kind of what you report stronger results that you're reporting in, Steve.

Speaker 2

Yes, Peter. I'll make a couple of comments, and I'll flip listen to Shane to make a couple. In our Q2, sales volume did increase. We had improved staffing and higher harvest weight. We talked a lot about the fact that we're buying a higher grade of animal listen to the process.

Speaker 2

Rates have improved significantly through the last couple of decades, and that continues to be the case for us. But as you pointed out, we're seeing a lot of help from our specialty products group, listen. Particularly in the fat and tallow area, our relationship with Jacob Stearns listen that we've had there. We're able to take a lot of that product and with the price of diesel and fuels, we're able listen to get some really great value out of those products, and that's providing some tailwinds for us in our beef business. Listen.

Speaker 2

I'll flip this to Shane and he can add a little bit more color to that.

Speaker 6

Yes. Thanks, Donnie and thanks, Peter for the question. Donny, he hit on a couple of the categories, obviously specialty products, which is everything that's coming off of the drop or the hardest side of our operations has improved. Listen. We continue to see better value coming from the fastened oil category, but also if you think about areas like proteins, you think about highs, listen to the variety of meats that are typically sold into the export arena.

Speaker 6

We're seeing very strong demand globally from the product mix that we're supplying to the marketplace. In listen. This is still a cyclical business. We believe over that continuum that beef demand will continue to be very strong from a global perspective. And on top of that, if you think about the value that we're bringing to the marketplace and also to ultimately to the consumer, the meat quality and the cattle genetics that are being supplied to us today have never been better.

Speaker 6

So I think, as we look forward here, strong quality, to great product mix and diversification of customers and programs will lend a stronger support.

Speaker 3

That's helpful. Thank you.

Speaker 5

Listen. And then Donnie, I just wanted to reconcile some of your comments in Chicken around your Hatch listen. Plan or Hatch Improvement Plan being on track. I think for total company though, you took the volume guide down and just wanted to understand What that implied around back half chicken volumes, I think previously we had talked about them being up maybe double digits to kind of make the year. So just wanted to reconcile kind of those two aspects.

Speaker 2

Sure. There's a number of things going on there. Listen. We have the our hatch has improved. We're better than the average of the industry, for example, today.

Speaker 2

A year ago, we could not say that. So we have seen improvement there. Listen. We have also reduced our outside purchase of meat, and that's had a a pretty significant impact on our overall volume in chicken specifically. We also, if you recall, we had a fire in Hanceville, Alabama listen that impacted our volume, not only of the rendered product that we produce ourselves, but on the ability to go buy that on the outside.

Speaker 2

That had a pretty significant impact as well. So those are kind of the top line things relative to volume. What I will tell you is we grew in the quarter. We grew in the first half. Listen.

Speaker 2

We didn't grow at the rate which we said, if you'll recall, we wanted to grow faster than the market, which we did, listen. But not where we want to be in terms of overall volume. And I'll let Dave touch on some of that.

Speaker 6

Yes. I think one other to that is we have seen several weeks, 5 weeks of continuous improvement within our live operations. And one big component of what's going to continue to improve for us We are on track with the delivery of the new mail into all of our farms and so we feel very optimistic about that. It's a mail that we know very well. With that, we will continue to see improved hatch rates within our facilities as well and improved weight gain across with the new mail coming in.

Speaker 5

Listen. Thanks very much, guys. Thank you.

Operator

The next question comes from Ben Theurer of Barclays. Please go ahead.

Speaker 7

Yes. Good morning, Donnie and Stuart. Congrats on the results. First question, just if you could elaborate a little more about the productivity program and the savings realization What you had, the roughly $400,000,000 you've mentioned. Can you give us a breakdown on like sector basis, how we should to think about where the focus has been mainly put within more recently and where do you think low hanging fruits are for the back half to deliver here?

Speaker 7

That will First question. Thanks.

Speaker 2

Sure. Thank you. But in terms of productivity, I'll just start out by reminding what we said in our Investor Day. In listen We said that from an operational and functional excellence perspective, between now and 'twenty four, we would say $300 plus 1,000,000 From a digital making applying digital throughout our supply chain was worth another $250,000,000 and automation was to $450,000,000 What I can tell you today is that we'll deliver near $400,000,000 in in year 1. And each and every day, we identify new things that we can put on our tracker that listen.

Speaker 2

What I would want you to take away from this is that there's Unprecedented inflation, inflation we haven't seen in generations, really. And so this is not just a pricing for inflation. We're also doing everything we know to do to become a more productive, a more efficient, a lower cost producer. And listen. As we say in our poultry business, we want to be a top quartile veteran every place that we play.

Speaker 2

And we still got room to do that. So I'd tell you that we're on track. There are things like trucking fleet resources and optimization. In our procurement program to address total company spend and then gaps in fulfillment. In listen.

Speaker 2

The debo and automation projects that we have in poultry, they're progressing as planned. In fact, they're a little ahead of that. And so we feel good about that. But Our future is going to, 1, we'll have a fair market value price in the marketplace listen to the 2. We want to be among the very best in every place that we participate.

Speaker 7

Okay, perfect. And then my follow-up is actually just a quick one for Noelle on one of her comments she made around the adjusted operating margin listen to prepared foods to get this to the 10% level. So obviously, if we look into first half was very strong, roughly 9.5%. So that's already the higher end of the range. How should we think about that 8% to 10%?

Speaker 7

Is it really achievable at the higher level? Because I think you said something like you want to be a 10%. So you want to be a 10%, but There might be some uncertainty which could bring it down for whatever reason, which we don't know today, but we should more plan on 10 than maybe 8. Is that fair? Listen.

Speaker 4

What I'd start by saying is to your point and you heard this in the prepared remarks and Stuart emphasized as well that We had a better than expected first half, really driven by the actions that we took on price to offset inflationary impacts, As I referenced a few minutes ago, the demand expectations that we see continue to outpace supply. Listen. And with labor momentum and the capacity investments, we do expect volume improvements as we continue through the second half. We also anticipate continued foodservice a listen. As we look towards the back half on the inflationary side, we do continue to expect inflationary pressures listen through the back half, which is why it's so top of mind on the cost transformation efforts that Donnie just referenced.

Speaker 4

And so holistically, we're confident about the 8% to 10% ROS range.

Speaker 7

Okay. Perfect. Thank you.

Operator

Listen. The next question comes from Alexia Howard of Bernstein. Please go ahead.

Speaker 1

Good morning, everyone. Good morning.

Speaker 10

Good morning. Can I dig into the labor cost issue? To begin with maybe some numbers, if you have them. The labor costs as a percentage of COGS, especially in chicken, in listen to your vacancy rates and how they're trending over time. And specifically, just more philosophically, you've been improving pay and benefits listen in listen.

Speaker 10

I think you alluded to the diversity of your team members. Is there a more structural problem that with the typing of immigration policies that That sort of dried up the well of where you can recruit people into those types of roles. And then secondly, on the labor side, listen. I'm just thinking from a cultural perspective, from a morale perspective, I think your automation processes are talking about a 3,000 person reduction in job counts over the next 3 years to fiscal 'twenty four. Listen.

Speaker 10

How do you recruit and retain people as you're going through that automation process? I mean is this like I'm trying to get at whether this labor issue is likely to be a persistent problem despite all the efforts that you're making to improve the working conditions. Thank you, and I'll pass it on.

Speaker 2

Thank you for that question. And I'll hit on a few points. For example, we realize, fully realize listen. We have to create a desirable place to work. In fact, we talked about it in terms of being the most sought after place to work.

Speaker 2

We realize that those team members that we have can work wherever they choose to work, listen and we want to give them a reason to work for us. I believe I said in the last call, it is not my objective to fix the labor problem The United States. My objective is to fix the labor issues that we have at Tyson Foods, and we're doing that. And it's not a there's not a in one thing that fits all the needs. For example, child care, you can talk about child care and there's a subset of the population that, that is of value.

Speaker 2

But there's also other areas where it's not. Transportation is more desired and needed in other areas. We have in some rural communities, for example, the need for health care. So we created on-site or near site health clinics listen that our team members and their families have access to little or no cost. And that's one more opportunity for us to have a differentiated place to work.

Speaker 2

It's true. We continue to invest in wages and benefits in and booster shots and booster clinics, we've done over 100 of them. And we think we're seeing a positive impact from those things. We're seeing improved in listen to the terms of turnover rates. We announced that we're going to support team members through nonprofits to try for legal citizenship support.

Speaker 2

And then 2 weeks ago, I think it was, we announced the Upward Academy program. Listen to the master's degree, bachelor's degree, associate's degree, life skills training, English, for example, in listen. Whatever we can do to try to differentiate Tyson as a place to work, we are committed to that result. We, this past year, paid all of our team members End of the year. Thank you, both.

Speaker 2

And we were happy to do that. Those team members we have

Speaker 4

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

Speaker 2

One other question. Listen. Okay.

Operator

The next question is from Ken Zaslow of now. Please go ahead.

Speaker 9

Hey, good morning, guys.

Speaker 3

Good morning.

Speaker 2

Good morning, Ken.

Speaker 9

Can you talk about the prepared foods business, it sounds like there's

Speaker 3

a lot of internal improvement. How does this margin structure that you've created for this year confidence or are you more tempered because of the inflation? I got

Speaker 9

a sense of both those sides throughout the conference so far. So I'm just trying to figure out, I would have thought it would have been more bullish longer term, but it sounds like you were tempering it a little bit on the inflation. I'll leave it there for

Speaker 2

Thanks, Ken. I'll start off and then I'll let well, she wants to add anything. I think it's important that everyone here listen. We're pricing and trying to get a fair market value for our product in the marketplace. That's one avenue.

Speaker 2

But secondly, and the one that's absolutely in our control is to be able to do what we do better, in listen to the best in class in operations. That's labor, that's yield, that's spend, productivity, running lines at rate. And then let's not forget the fact that a location. We all have 168 hours in a week. How do we run more hours in a week and get greater asset utilization off the assets that to what we currently have.

Speaker 2

And so we're looking at all those things. So think productivity. Don't think of it as something to offset inflation. Think of it as a way of life in who we are as a company. And it's the gift that pardon expression, it's the gift that's going to keep on giving And it will never go out of style for us.

Speaker 2

So with that, let me pause and I'll let Noelle add some color to that.

Speaker 4

Thank you, Dione, and thanks for the question, Ken. Listen. So what we've talked about through Investor Day and as we've come together on these calls, we continue to believe and are confident that this portfolio is a double digit ROS business and the foundations of those building blocks listen continue to be the same. Demand continues to be strong across retail as well as the expected continued foodservice recovery. As we look holistically, the top line acceleration will come from actions that we're taking to increase capacity, both in our existing footprint listen as well as through expansion in our network, including step change investments in automation that Donnie referenced.

Speaker 4

We're also taking significant actions to transform our cost base and will continue navigating the increase of inputs with pricing to offset inflation as necessary. And so you do recognize that There is inflationary dynamics that we're mindful of as well as continuing to keep a very close watch on the elasticities listen as we go throughout the second half. But as we look holistically in terms of the strength of this business, the demand outlook coupled with in listen to investments across our portfolio, mixed opportunities within the business, which includes organic discriminating investments as well as inorganic portfolio shaping and aggressive cost transformation. We're confident in our path to deliver sustainable double digit margins. And then for the year, as we referenced, we do expect to be in that 8 to 10 ROS range.

Speaker 9

Listen. Great. I appreciate that. And then my second question is, when you think about the cattle cycle longer term, there seems to be a lot of for a fair bit of new capacity announcements over the last 6 or so months going out 2023, 2024. How do you think about that new capacity versus the cattle supply versus the demand?

Speaker 9

And how does that impact how you think about

Speaker 2

I will start off and then I will flip it to Shane to add a little extra color. In terms of incremental capacity, Competition makes us better. So we're not frightened by that. We welcome that. So But in terms of cattle supply, because of the drought and herd liquidation and a number of other things going on, I mean that listen.

Speaker 2

It will have some impact on supply and the cattle out front. Listen. In terms of our business, so I think it's really important to understand that a cow is not a cow and the fact that We work with our ranchers and feeders, and we buy premium cattle. In listen. And that premium cattle, we pay more for it, but we also get a better cutout for it.

Speaker 2

And then we talked earlier about specialty products, particularly fats and oils and hives and the like, and how that helps that whole cutout value. Listen. We've had some really extraordinary margins over the last couple of years. We don't think they'll maintain that level. It was a point in time and a shock to the system.

Speaker 2

However, we do believe that we will be in that 6 And with that, Shane, anything I've meant that you'd like to add?

Speaker 6

Yes. And thank you for the question. Donnie, you hit on most of it here. I would say a couple here and I mentioned it earlier that from a cattle genetics perspective and the quality that our feeding partners are bringing to the marketplace today, listen. It's never been better and the drought conditions that are plaguing, I'd say over 50%, 55% of the country continue to persist.

Speaker 6

So listen. You've seen heavy cow liquidation year to date that's impacting the forward curve because this is what's going to impact you 2 3 years out listen. And that's due to the lack of grass and forage that's in the country right now. So, as Donnie mentioned, we expect to see more competition for livestock here as we go forward. Laser focused on staffing our plants, building our supply chain, enhancing our relationships, servicing customers and performing with the best.

Speaker 6

And This is a very competitive industry and it always has been. But at the end of the day is having a diversification of programs and customers. Listen. We feel we offer a solution to customers through our case ready business with 2 new plants that have been added here this past year. They're going to lend to our overall success too.

Speaker 6

So, yes, we're seeing higher prices here from a cattle perspective and we anticipated that here and we continue to navigate that. But your point and your question is spot on. There's going to be more competition in the future.

Speaker 9

Listen. Great. I appreciate it, guys.

Speaker 3

Hey, Ken. It's Stuart. Yes, just one thing to add. I mean, I think

Speaker 2

it's important to just think about how this impacts to

Speaker 3

the next question on sequential improvement. That answer I gave him, just so all of you are really clear, related specifically to chicken. That was Donnie's comment on chicken, sequential improvement in chicken and the guidance that supports that. On my comment on beef, which ties into listen. Your question is that you have to watch beef in the back part of the year when you start thinking about Tyson as a whole because the first half of the year has been better.

Speaker 2

In a better half of

Speaker 3

the year, 16% in total. And that's been a great result for us. Of course, the back part of the year, we'll start to see that come off. And in to the guidance on the future years. But to be clear that we've been consistent in Investor Day and in recent calls in saying And we think that global demand for beef is strong.

Speaker 3

And so long as the cattle are there to supply that, over the long haul, listen We think will be a better business than it has been historically. I agree. Thank you very much.

Speaker 2

Listen. Thank you, Ken.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mr. Donnie King for any closing remarks.

Speaker 2

Thanks again for your interest in Tyson Foods. We look forward to speaking to you again soon.

Operator

Listen. The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

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