Tyson Foods, Inc.

Good morning and welcome to the Tyson Foods second quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. 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.

Hello, and welcome to the second quarter fiscal 2022 earnings conference call for Tyson Foods. Prepared remarks today will be provided by Donna King, President and Chief Executive Officer, and Stuart Glendening, EVP and Chief Financial Officer. Additionally, David Bray, Group President, Poultry, Noel O'Mara, Group President, Prepared Foods, Shane Miller, Group President, Fresh Meats, and Chris Langholz, Group President, International, will join the live Q&A session. We have prepared presentation slides to supplement our comments, which are available on the investor relations section of the Tyson website and through the link to our webcast. During this call, we'll make forward-looking statements regarding our expectations for the future. These statements are subject to risks, uncertainties, and assumptions which may cause actual results to differ materially from our current projections. Please refer to our forward-looking statement disclaimers on slide two, as well as our SEC filings for additional information concerning risk factors that could cause our actual results to differ materially from our projections. Please note that references to our earnings per share, operating income, and operating margin in our remarks are on an adjusted basis unless otherwise noted. For reconciliation 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. Earlier today, we reported a strong second quarter and first half fiscal year 22 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 deliver double-digit sales and earnings growth driven by strong market fundamentals, acceleration of our productivity actions, and improving operational execution across our segments. Our diverse protein portfolio, omnichannel capabilities, leading brands, and value-added products all contributed to our results. Strong performance in our beef segment, continued recovery in prepared foods, and improvement in chicken-supported improved sales and earnings. Our retail core business lines, which include our iconic brands, Tyson, Jimmy Dean, Hillshire Farm, and Ballpark, have driven strong share performance in the retail channel since the onset of the pandemic. This quarter, we delivered share gains in bacon, hot dogs, and snacking. We also continue to see recovery in the food service channel with our relative strength in QSRs and K12s supporting continued share gains in branded value-added chicken. 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. We are seeing our investments in team members making an impact. Despite continued labor challenges during the Omicron surge this quarter, we are seeing lower turnover and absenteeism. We have invested in higher wages, benefits, and other workplace enhancements, such as flexible schedules, childcare, and transportation. The construction of new plants continues to progress. This additional capacity will enable our team to address capacity constraints and better serve growing demand for protein across all segments. Along with ramping up utilization of our newest plants in Humboldt, Eagle Mountain, and Thailand, we have four plants expected to commence operation in the fourth quarter of fiscal year 22. In addition to the new sites, we're continually upgrading capacity as needed with approximately 10 projects planned in the third quarter, representing 25 million pounds of volume in prepared foods alone. In addition, we are working closely with our customers to ensure that 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. We experience higher costs across our supply chain for all inputs from feed ingredients, live animals, and other raw materials to cooking oils and basic supplies. We're also managing higher costs of labor and transportation due to robust demand, higher fuel costs, and limited availability. As part of our effort to combat inflation and increase profitability, I'm pleased by our accomplishments 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 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. Sales improved 16% in the second quarter and 20% during the first half. Our sales gains were largely driven by higher average sales price and mix improvement. Average sales price trends reflect disciplined 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. We delivered solid operating income performance, up 57% during the second quarter and 47% for the first half. The performance in the first half was due to strength in beef, chicken, and prepared foods. Overall, our operating income performance translated to $2.29 in earnings per share for the second 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. 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. Approximately a third of this decline was related to the pet treats divestiture, with the remainder as a result of a challenging supply environment and uneven recovery of the food service channel. We are working to improve these results over the remainder of FY22 as we continue to take actions to expand and improve capacity utilization. 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. We expect continued volume improvements for the remainder of our fiscal year 22 as new team member recruitment strategies support an improved labor position and higher throughput. In pork, 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. Overall, we will continue to take actions across our business to optimize our existing footprint, add new capacity, adjust our product mix, and align our 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 fiscal year 22. 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. In April, we announced that we are investing over $1 million in several nonprofit groups to expand legal and citizenship support for the team members aspiring to become U.S. citizens. This will allow us to scale a program from seven Tyson facilities 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. Starting this summer, U.S. team members will have access to free education, including master's, undergraduate and associate degrees, 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 million over the next four 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 and safe. We have educated and encouraged team members to get vaccine boosters and have offered over 100 clinics across our office and plant locations. We are also investing to support team member well-being more proactively in our rural communities. We now have seven on- or near-site Tyson Health Centers open and operating. These clinics provide comprehensive health care services, including preventive screenings, chronic condition coaching, mental health counseling, lab services, and sick visits at little to no cost to most of our team members or their spouses and dependents. Overall, we're confident that our actions will increase Tyson's 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 productivity program, which will deliver more than $1 billion in recurring productivity savings by the end of fiscal year 24. Based on current progress, we now expect to deliver more than $400 million of savings in fiscal year 22, which is on 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. 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 will continue to maximize our service levels. The early results of our finance, automation, and digitization work also remain promising. For example, this program is providing more accurate billing and improved collections for Tyson while lowering our intensive labor. We are also investing aggressively in automation and technology to help address some of our most difficult roles and repetitive tasks. This is a well-planned program of automation to use common designs and equipment across our plants to optimize cost, maintenance, and asset utilization. The debone automation program is continuing to scale in plants, and our Tyson proprietary debone automation solution is also beginning to roll out in select facilities. We're starting to scale new programs like Packout Robotics to continue automating highly manual processes and deliver savings. Chicken remains a top priority, and we continue to execute against our roadmap 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 FY22. 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 burrs to run our plants full. 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. We are committed to growing our harvest capacity utilization, and we outpaced the industry in the second quarter. Achieving improved chicken harvest and higher capacity utilization will allow us to build on the volume growth delivered by chicken in the first half. In parallel 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 22, 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. 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 five 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, safety, and well-being, as well as investing in improving our team member experience. 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 overall market growth over the next several years. We are aggressively restoring competitiveness in our chicken segment and continue to achieve key milestones on our roadmap to top quartile profitability. Fourth, 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 million in savings this year. Fifth, 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 billion in fiscal year 22 with a disproportionate share focused on new capacity and automation objectives. We also continue to return cash to shareholders. Through the first half, we returned approximately $850 million in dividends and share repurchases. 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 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 second quarter.

Thank you, Donnie. Let me turn first to a summary of our total company financial performance. We're pleased to report 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 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. Looking at our sales results by channel, retail drove $424 million of top-line improvement in the second quarter relative to the same quarter last year. Through the first half, retail sales have improved $773 million. In the second quarter, improvements in sales through the food service channel drove an increase of $684 million, and domestic export sales to international markets were $311 million stronger than the prior year period, as we leveraged our global scale to grow our business. Second quarter adjusted operating income of $1.2 billion was up 57% relative to the same quarter last year, led by increases in chicken, beef, and prepared foods. First half adjusted operating income of $2.6 billion was up 47% supported by increases in beef and chicken. Driven by the strong increase in operating income, second quarter adjusted EPS of $2.29 grew 71% compared to the same period last year. Second quarter earnings per share also benefited from lower net interest expense and higher other income. Slide 11 bridges year-to-date operating income for the second quarter, which was $422 million higher than fiscal 2021. Volumes were down 1.5% in the second quarter. Volume improvement in chicken, international other, and beef were offset by declines in pork and prepared foods, where continued labor and supply chain challenges impacted throughput. 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, lean hogs, and freight costs. STNA was $46 million 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. As a final note, both cost of goods sold and STNA expenses in the quarter were partially offset by productivity savings. Moving to the B segment on slide 12, segment sales were approximately $5 billion for the second quarter. up 24% versus the same period last year. Sales growth in the quarter was driven by continued robust 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 experienced by the business. We expect volume to continue to improve in the second half of this fiscal year as new team member recruitment strategies support improved staffing and higher throughput levels. On expenses, we incurred greater costs during the second quarter versus the comparable period.

Our cattle costs increased approximately. We had sufficient livestock available in the quarter driven by higher herd liquidation due to drought conditions. As of February, 54% of Canada liquidation through the remainder of the fiscal year.

We delivered segment operating income of $638 million in the quarter, up 43% versus the comparable period. This improvement was driven by solid global demand for beef products, supporting specialty product values, 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. Looking next at the pork segment, sales were approximately $1.6 billion for the quarter, same period last year. Average sales price increased 10.8%, but volumes were 4.8% lower relative to the same period last year. Average sales price was up due to higher input costs, while volumes were lower due to labor challenges from the Omicron surge, which led to lower processing throughput. Segment operating income was $59 million for the quarter, down 12% versus the comparable. Trading margins for the segment declined to 3.8%. The operating income deterioration was driven by softer exports, higher input costs, and labor challenges. Moving now to prepared foods, sales were approximately $2.4 billion for the quarter, up 11% relative to the same period last year. Total volume was down in the quarter given labor and supply chain challenges and uneven food service recovery and the sale of our pet treats business. Sales growth outpaced volume growth driven by higher average sales price. Consumer demand has remained durable. even as we've worked to manage inflation through price increase. 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. To offset higher costs, we've executed productivity, revenue management, and commercial spend optimization initiatives while ensuring the continued development of brand equity through increased marketing and trade support, were 11% or $263 million for the quarter, up 21% versus the same quarter last year. Moving on to the chicken segments results. Sales were $4.1 billion for the quarter, up 15%. 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 2022 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. This increase was primarily due to price recovery offsetting inflationary costs. On pricing, we made meaningful progress to shift our pricing mechanisms toward more variable structures and are now seeing those benefits. We restructured our pricing strategies, giving our experience in fiscal 2021 to be more agile in response to market and inflationary conditions. Chicken delivered adjusted operating income of $203 million in the second quarter of fiscal 22, representing an operating margin of 5%. Operating income increased in the second 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 second quarter of fiscal 22, we experienced $100 million of higher feed ingredient costs and $101 million of... net derivative gain as compared to $10 million of net derivative gains in the second quarter of fiscal 2021. During the fiscal month of April, the beginning of our third quarter, we have achieved an approximate 5% operating margin, excluding market-to-market derivative impacts. 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. Turning to slide 16, our healthy cash flows have continued to support a broad capital allocation approach. We have focused on building financial strength, investing in our team members, investing in our business, and returning cash to shareholders. 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. In pursuit of our priority to build financial strength and flexibility, we used our existing liquidity to retire $1 billion of debt in the second quarter. Since the start of the pandemic, which this quarter now marks as two years ago, we have reduced gross debt by approximately $3.8 billion. We maintained our leverage ratio at 1.1 times net debt to adjusted EBITDA, demonstrating our powerful balance sheet and our 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. 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. We bought back $175 million of shares at an average price of $88.50 per share during the second quarter. This is in addition to the $348 million of shares we purchased during the first quarter. Let's now discuss the fiscal 22 financial outlook. Based on the strong first half results, we're raising our total company sales guidance to a range of $52 to $54 billion. 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 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 to be 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. In pork, we expect similar performance during fiscal 22 to what we accomplished during fiscal 2021. 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 order, we anticipate reduced results from our foreign operations in fiscal 22 due to supply chain disruptions and other impacts related to COVID-19. Our expectations for CapEx and interest expense and tax rate remain unchanged. Our net leverage is expected to remain well below two times net debt to adjusted EBITDA, 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&A instructions. 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&A. Operators, please provide the Q&A instructions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Please limit yourself to one question and one follow-up. If you have further questions, you may re-enter the question queue. At this time, we will pause momentarily to assemble our roster. And our first question will come from Ken Goldman of J.P. Morgan. Please go ahead.

Hi, thanks, and good morning. Donnie, I think you mentioned your expectation for sequential improvements in operating margins in 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? or are you 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. I just wanted to be sure what you were suggesting there. Yeah. Let me pick that up for Donnie. This is 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, but we expect our business to strengthen over the back half. You'll recall from the prepared remarks that we expect – uh beef to start to weaken in the second half so some of that quarter by quarter timing will depend a little bit on the on on the timing uh update okay thank you stuart that's helpful and then how are you thinking about the timing of the cattle cycle right now 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 when you might expect the liquidation cycle to end next year?

Thanks, Ken. This is Donnie. You know, we expected to, in fact, you know, we thought we would have already seen lower supply than what we are seeing right now. You know, an interesting data point is that cattle on feed reported over 12 million heads, a record high for March 1.

So there's a little bit of... But we... As we said, we think in the back half of the year we'll see the spread tighten in our beef business.

But, you know, I would also point out that we think it'll be much higher. In fact, we call it 6% to 8%.

you know, in a normalized range. It's holding up pretty good right now.

And while it's not going to be a record back half, we think it will be a very good one.

Thank you to you both. Thank you.

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

Yes, thanks. Good morning, everyone. Good morning, Adam.

So I just wanted to dig in a little bit more in chicken and thinking through the margin expectations in the back half of the year specifically and what that implies as you move into fiscal 23. I think in the prepared comments you talked about April being at 5% even after any mark-to-market period. um impact on grain um how do we think about the different levers to further margin improvement in chicken through the back half of the year whether it's volume in terms of the hatch and your throughput uh in the slaughter plants um mix uh pricing actions uh versus some of incremental inflation as we look at grain and some of your other uh purchase inputs

Thanks, Adam. Let me say a few words, then I'll flip it to David Gray to add a few details. It was a year ago this quarter that I talked about the turnaround in check-in and, in fact, talked about being at a 5% to 7% business. I will tell you in this quarter, January, from the Omicron resurgence was painful across all of our businesses. But we've improved sequentially throughout the quarter. The back half of the year in chicken specifically, you know, the thing that we need is greater volume, greater efficiency from the assets that we currently have. And we've announced a further processing plant that will come online next year that will add some incremental support. But our productivity program is working. We are becoming more efficient, and our volume is growing. And I would expect you to see that to continue to grow and develop over the balance of the year. I would tell you in short, we're on plan. And let me flip it to David, and he can add a little more texture.

Adam, good morning, and thank you for the question. I think first and foremost what I do want you to hear is that 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 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 volumes, And we also said that we would outpace the market for growth. And within the Q2 timeframe, we did that as well. In Q2, our harvest head was up 2.9%, and our harvest volume was up 4.9%, which actually allowed Tyson to gain share in the Q2 timeframe of about three-quarters of a point. We've also improved our adjusted operating income and our AOI margins sequentially quarter over quarter. And this was the case whether we include or exclude any impacts of derivatives against our business. 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, growing our business, and to drive overall operational improvement.

If I could, David, if I could add one more thing, Adam. On Friday, we closed on April. By the way, it was a five-day close, which is a new record, thanks to Stuart and Philip Thomas and the team. But in chicken specifically, April was a good month, and Stuart referenced in his prepared remarks around 5%. I can tell you from the close that it's better than five. So I'll leave it at that.

All right. Now, that's really helpful. And if I can maybe just follow up in chicken, I'm just trying 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 wings, kind of, risk around avian influenza and what that could potentially do to exports relative to the grain markets. And just trying to think about how changes in that external environment would or would not impact kind of how you think about chicken moving forward.

Thanks, Adam. You know, I will tell you, we started over a year ago with four with what we call our four pillars. which was staffing our plant, servicing our customers, growing our business, and restoring industry-leading operating performance. That's still our plan. As you well know, there are a number of variables going on right now in the poultry business. What I can tell you is volume is good. Demand is strong. In fact, I would tell you that if you look at the price of boneless, I think Friday was somewhere around $3.60. It's been a long time since I've seen that kind of strength in breast meat and the chicken overall. And so grain is higher, of course. We are seeing that. Dave 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 if there's any other things he'd like to add.

Yeah, I think just from the grain standpoint, despite what we're seeing from volatility in grain, the turnaround ticking is progressing as planned. And, 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 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. This includes testing every block that we have for AI before it leaves the farm. We are operating under heightened measures in some geographic areas of the country right now, and the heightened measures would basically be we're limiting the amount of 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. All right, that color's all really helpful. I'll pass it on. Thank you.

Thank you.

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

Hey, good morning, everybody. Morning, Ben. I want to follow up on Adam's questions about the chicken business. Obviously, your commentary on April is quite strong. 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 mechanics of cost plus. I think we have an understanding of what happens when you have derivative gains and why, but would you talk about when and why you hedge your grain. And to the extent that we look into the balance of the year and that reflects hedges that you have on and benefits that you might enjoy as a result of that, could you talk about that versus, you know, a cost plus sort of mechanism that would, you know, as grain prices go up, allow you to take higher prices? Just trying to understand the moving pieces around what we should be mindful of as we monitor the environment going forward.

Yeah, 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, that make sure that we're not exposed to a fixed price with a moving commodity base. This year, we've seen a shift. We've talked about that in a couple of our calls. We have shifted to more variable or commodity-driven pricing, which means that we don't have to hedge as much. Keep in mind also, though, that those pricing mechanisms will have various triggers, 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 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?

Perfect. Very helpful. Thank you. Pivoting and thinking about the prepared food business, really solid margin results in the quarter. I know there's this cost price dynamics that you and all of your peers are navigating. The back half of the year suggests maybe a little bit of margin pressure and then expansion thereafter. Can you talk about how you feel about your price elasticities in that business, how you feel about your ability to operate the business well and perhaps, you know, as we cycle through some of the volume losses from the pet food business, pet treat business, you know, 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.

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 statement, you know, the first half was down. We had lower production throughput. Again, January was troubling with Omicron resurgence, challenging labor. And we did have the sale of pet treats in the quarter or in the first half. Yeah, we expect the volume to improve. Retail demand remains strong, and we had some uneven recoveries. in our food service business, meaning there's some spots, and I'll call them out specifically, and then I'll flip it to Noelle. In our pizza topping business, for example, it was softer than expected. Our Philly business was softer than expected, and our tortilla business was softer than projected. And with that, I'll flip it over to Noelle, and she can talk about the elasticities.

That's great. 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. We expect to be back to pre-pandemic levels. In the second half, we also have investments coming online that we referenced in the prepared remarks on capacity. As Johnny referenced in food service, we are seeing a bit of uneven recovery. Overall, I would say it's showing momentum. Where we did see impacts is in January and February, where the Omicron variant surge was had a brief negative impact as consumer mobility waned and food service traffic declined. 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. So broadly speaking, QSRs and C-stores continue to lead recovery relative to other channels. We're also seeing great momentum in K-12s and continue to be optimistic in the overall recovery. And as referenced, you know, 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.

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

Thank you.

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

Hi, good morning. Thank you for taking the questions.

We did.

Maybe we could start with beef. You know, you guys have obviously seen your business, I think, you know, disaggregate a bit from some of the third-party sources. And I do think a lot of that probably comes from your export business and maybe some of the byproduct business. But can you talk about, you know, maybe those two specifically in the quarter and how we should think about them going forward as we monitor external data versus, you know, kind of what your stronger results are reporting in beef?

And, Peter, I'll make a couple comments, and I'll flip it to Shane to make a couple. You know, in our Q2, sales volume did increase. We had improved staffing and higher harvest weights. We talked a lot about the fact that we're buying a higher grade of animal to process. Grades 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, particularly in the fat and tallow area, our relationship with Jacob Stearns 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 to get some really – great value out of those products, and that's providing some tailwinds for us in our beef business. But I'll flip it to Shane, and he can add a little bit more color to that.

Yes, thanks, Donnie, and thanks, Peter, for the question. Donnie, he hit on a couple of the categories, obviously specialty products, which is everything that's coming off of the drop or the harvest side of our operations has improved. We continue to see better value coming from the fats and oils category, but also If you think about areas like proteins, you think about hives, you think about some of the variety meats that are typically sold into the export arena, we're seeing very strong demand globally from the product mix that we're supplying to the marketplace. You know, this is still a cyclical business. We believe, you know, 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 ultimately to the consumer, The meat quality and the cattle genetics that are being supplied to us today have never been better. So I think, you know, as we look forward here, you know, strong quality, great product mix, and diversification of customers and programs will lend a stronger support.

That's helpful. Thank you. And then, Donnie, I just wanted to reconcile, you know, some of your comments in chicken around, you know, your hatch 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, you know, what that implied around back half chicken volumes. I think previously, you know, we had talked about them being up in double digits to kind of make the year. So just wanted to reconcile kind of those two aspects.

Sure. You know, there's a number of things going on there. We had the – you know, our hatch has improved. We're better than the average of the industry, for example, today. A year ago, we could not say that. So we have seen improvement there. We have also reduced our outside purchase of meat, and that's had a pretty significant impact on our overall volume in chickens specifically. We also, if you'll recall, we had a fire in Hantsville, Alabama that impacted our volume, not only of the rendered product that we produced ourselves, but the ability to go buy that on the outside. 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. So we didn't grow at the rate which we said, and if you'll recall, we wanted to grow, you know, faster than the market, which we did, but not where we want to be in terms of overall volume. And I'll let Dave touch on some of that.

Yeah, I think one other comment to that is we have seen several weeks, five weeks of continuous improvements. within our live operations. And one big component of what's going to continue to improve for us is 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 rigs within our facilities as well as improved weight gain across with the new mail coming in.

Thanks very much, Chris. Thank you.

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

Good morning, Donia Stewart. Congrats on the results. First question, just if you could elaborate a little more about the productivity program and the savings realizations which you had, the roughly $400 million you've mentioned. Can you give us a breakdown on, like, sector basis, how we should think about where our focus has been mainly put within more recently, and where do you think low-hanging fruits are for the back half to deliver here? I hope you mind. First question. Thanks.

Sure. Thank you. But in terms of productivity, I'll just start out by reminding what we said in our investor day. We said that from an operational and functional excellence perspective, between now and 24, we would say $300-plus million. From a digital, applying digital throughout our supply chain was worth another $250 million. And automation was $450 million. What I can tell you today is that we'll deliver near $400 million in year one. And each and every day, we identify new things that we can put on our tracker that will deliver better results. 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 as we say in our poultry business, you know, we want to be a top quartile of better in every place that we play. And we still got room to do that. So I tell you that we're on track. You know, there are things like trucking fleet resources and optimization and our procurement program to address total company spend, and then gaps in fulfillment. The debone 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, one, we'll have a fair market value price in the marketplace, but two, we want to be among the very best in every place that we participate.

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 and prepared foods to get this to the 10% level. So obviously, if we look into first half was very strong, roughly nine and a half percent. So that's already the higher end of the range. So how should we think about that eight to 10%? Is it really achievable 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 eight. Is that fair?

Well, what I start by saying is to your point, and you heard this in the prepared remarks and Stuart emphasized it 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, the improvements that we saw in labor, the cost transformation starting to come through, as well as mix. As I referenced a few minutes ago, the demand expectations that we see continue to outpace supply. And with labor momentum and the capacity investments, we do expect volume improvements as we continue through the second half. We also anticipate continued food service recovery. As we look towards the back half on the inflationary side, we do continue to expect inflationary pressures through the back half, which is why it's sort of top of mind on the cost transformation efforts that Donnie just referenced. And so, holistically, we're confident about the 8% to 10% ROS range. Okay. Perfect. Thank you.

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

Good morning, everyone. 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, your vacancy rates and how they're trending over time. And specifically, just more philosophically, you've been improving pay and benefits for two years now since that summer of 2020. And it seems as though the pandemic is easing, and yet these labor challenges are persisting. I think you alluded to the diversity of your team members. Is there a more structural problem with the tightening 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, I'm just thinking from a cultural perspective or a moral perspective. I think your automation processes are talking about a 3,000-person reduction in job counts over the next three years to fiscal 24. How do you recruit and retain people as you're going through that automation process? 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.

Thank you for that question, and I'll hit on a few points. For example, we realize, fully realize, that we have to create a desirable place to work. In fact, we've talked about it in terms of being the most sought-after place to work. We realize that those team members that we have can work wherever they choose to work, 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 for 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 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.

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 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. It's true. We continue to invest in wages and benefits and booster shots and booster clinics. We've done over 100 of those. And we think we're seeing a positive impact from those things. We're seeing improved absenteeism and turnover rates. You know, we announced that we're going to support team members through nonprofits for legal citizenship support. And then two weeks ago, I think it was, we announced Upward Academy program, and we're going to spend $60 million over the next four years for education for our team members. That's master's degree, bachelor's degree, associate's degree, life skills training, English, for example. You know, 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 bonus. And we were happy to do that. Those team members we have are the lifeblood of this company. We don't do anything without them. And so investing in them, taking care of them, keeping them safe is our highest priority.

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

One other question.

Okay.

The next question is from Ken Zapp.