SPRINGDALE, ARK. – In remarks following the announcement of its fiscal second quarter financial results on May 10, Tyson Foods Inc. executives said there were commonalities among the causes of inefficiencies in some of its business units, specifically Chicken and Pork.
While higher operating income and sales in the company’s Beef and Prepared Foods business segments for Q2, ended April 3, 2021, were highlights, headwinds in Chicken and Pork were discussed in a conference call with financial analysts. Factors contributing to the challenged segments were inflation, a supply shortage of chicken meat, the impact of a devastating winter storm, continued absenteeism among plant workers and rising transportation costs.
Tyson’s adjusted net income for the quarter totaled $476 million, or $1.30 per share of the common stock compared to $376 million and $1.03 per share during the same period last year. Overall operating income, led by the beef segment, totaled $720 million on sales of $11.3 billion in Q2, compared to $515 million on sales of $10.89 billion in 2020, with an operating margin of 6.4% versus 4.7% in the same period last year.
Donnie King, chief operating officer and group president of poultry, said the company’s chicken supply is very tight, and because of several factors, Tyson had to make up for the shortfall by purchasing more poultry than it planned on the open market from other companies. He said the shortage was due in part to lower-than-expected hatching rates that became evident in January, after Tyson switched the type of rooster used in breeding at production facilities. Making progress in terms of operational efficiencies at its processing facilities have also fallen short, King said.
“Although we have made some progress improving our plant performance, we're not where we plan to be at this stage. Our strategy to improve our operational performance includes restoring our production volume to full capacity. However, we have struggled to raise the harvest to full capacity due to upstream supply issues, including issues caused by lower hatchability rates,” he said.
Chicken segment sales, at $3.55 billion, topped the previous year’s quarter with a volume change of 3.2%, although operating income decreased to $6 million (0.2%) compared to $99 million in 2020 (2.9%).
“Consequently, we have offset raw material shortages with outside meat purchases at a higher level than we have historically. With the recent move in market prices, our cost disadvantage from outside purchases has widened,” King said.
To compensate for those higher costs, Tyson plans to better control its costs in its live production to decrease reliance on supplies from the open market.
Part of Tyson’s plan for recovery in the segment includes addressing labor issues that have plagued the entire industry. The company is working to become the preferred employer in the industry.
“Despite implementing pay rate increases, we continue to deal with elevated absenteeism and turnover. We are implementing a range of initiatives to improve the team member experience and achieve the status of the employer of choice, including flexible work schedules and a competitive wage rate,” King said. “At this time, we estimate our average base pay plus benefits for domestic production workers is valued at over $22 per hour.”
A February winter storm that swept across much of the Southeast also contributed to Tyson’s chicken woes.
“The winter storm Uri affected our operations broadly; a significant event,” King said. “We essentially lost a week across our entire poultry enterprise and, more broadly, across the rest of the businesses as well.”
Compounding the market headwinds this year were inflated costs for grains, which reached levels not seen in six years, while increased wages and rising freight costs also created hurdles, King said.
The continued challenges facing Tyson’s chicken business has the attention of King and his team and they are committed to addressing it moving forward.
“What I can tell you is we know where we are really, and we're not happy with where we are. And we fully understand that we can't talk our way through our poor performance. We do have a great plan in place to be the best chicken company, and we've made great progress. And we'll accelerate that in the back half of the year,” King said.
Labor challenges also challenged the company’s pork business.
“We're short-staffed right now in our pork plants,” King added. “We’re working on things that you might expect in terms of work schedules. We’re looking at wages in all those cases. And we’re also investing in terms of automation and technology to try to alleviate these more difficult and higher-turnover jobs.
“Think of it in terms of a staffing issue impacting capacity. If I think about our Pork business, it’s been taking us about six days to do five days’ worth of work because of turnover and absenteeism.
The other part of that in terms of the performance is related to not having skilled people in place. And so, we’ve not been able to give mix optimization in terms of maximizing the cutout, all those variety meats, all those components that are highly attractive from a margin perspective,” King said.
Pork segment sales in the quarter increased to $1.48 billion over the same period last year at $1.27 billion, with volume declining by 0.5% compared to 17.5% in 2020. Operating income in the Pork segment lagged the previous year at $67 million (4.5%) compared to $93 million (7.3%). Declining sales volume reductions were attributed to fewer live hogs processed as a result of severe winter weather while operating income dropped as the result of production inefficiencies and expenses related to COVID-19, the company said.
“Second quarter results reflect the benefit of strong retail demand and higher exports, which were more than offset by higher hog costs and operating expenses,” King said. “To improve our operating income results for the segment we have implemented several actions to alleviate production constraints and to improve our volume throughput.”
Tyson is vigilantly monitoring hog supplies in the market, and it expects a historic drop in hog supplies, based on US Department of Agriculture projections. Meanwhile, demand is expected to continue.
“The sharp decline in supply and strong demand for certain pork items have pushed the cutout up 59% from the end of December. As it stands now, pork cutout is at the highest level for this time of year since 2014,” King said.
For the remainder of 2021, with expectations of lower pork production, continued strong demand will likely result in higher hog prices compared to 2020, according to the company.
Dean Banks, Tyson’s president and chief executive officer, pointed out that expansion and investment in the company’s poultry operations continued, including the recent start-up of operations at the recently completed chicken complex in Humboldt, Tenn., which made its first shipment of saleable products in late April.
He added that investments in the company’s beef and pork operations are ongoing as capacity expansion continues to be a focus as does implementation of automation technology.
“To support growth in case-ready beef and pork, we are also excited for the reopening of our Columbia, SC, plant as well as the grand opening of our Eagle Mountain, Utah, plant, both occurring later this year,” Banks said.
He said the company’s executives and operations teams are keenly aware of the challenges and has established a plan to address them.
“As we look at the balance of the year, we realized that we had a challenging second half ahead as inflationary pressure has continued to build,” Banks said. “We also have several bright spots, notably our performance in the retail channel and the continued strength in our Beef segment. Looking past the inflationary headwinds that are impacting our input costs, I’m confident that our team is executing on the right priorities to meet our commitments and drive shareholder value creation.”