Good morning everyone and welcome to the Tyson Foods third quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star followed by zero. After today’s presentation, there will be an opportunity to ask questions.

To ask a question, you may press star and then one using a touchtone telephone. To withdraw your question, you may press star and two. Please also note that today’s event is being recorded. At this time, I’d like to turn the conference call over to Megan Britt, Vice President of Investor Relations. Ma’am, please go ahead..

Hello and welcome to the third quarter of fiscal 2021 earnings conference call for Tyson Foods. On the call today are Donnie King, President and Chief Executive Officer, and Stewart Glendinning, EVP and Chief Financial Officer.

We have prepared presentation slides to supplement our comments and these are available on the Investor Relations section of the Tyson website and through the link to our webcast. During this call, we will make forward-looking statements regarding our expectations for the future.

These statements are subject to risks, uncertainties and assumptions which may cause actual results to differ materially from our current projections.

Please refer to our forward-looking statement disclaimers on Slide 2 as well as our SEC filings for additional information concerning risk factors that could cause our actual results to differ materially from our projections.

Please note that references to earnings per share, operating income, and operating margin in our remarks are on an adjusted basis unless otherwise noted. For a 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..

one, to be the go-to supplier for customers and consumers; two, to be the most sought after place to work; and three, to be operationally excellent. We want to be the most sought after place to work. This starts with an unrelenting focus on safety every minute, every shift, every day.

Health and safety have been and will continue to be our top priority. We have a history of using all the tools at our disposal to protect our team members, and the vaccine is no different. As many of you will have seen, last week we announced that Tyson will require COVID-19 vaccinations for our entire U.S. workforce by November 1.

We do this now because the delta variant is more contagious and getting vaccinated is the single most effective thing people can do to protect themselves, their families and their communities.

We have raised wages in many markets to ensure we’re competitive and are exploring other ways to make Tyson the most sought after place to work in the communities where we operate.

For example, we are piloting childcare facilities at some of our plants and we have opened medical clinics to make healthcare more accessible to team members and their families. Finally, we are accelerating investments in automation and advanced technologies to make the team members’ jobs easier.

We look forward to providing more detail on our automation and technology road map at our upcoming investor day. We’re taking aggressive actions to add new capacity to meet demand, adjust our product mix by plant, and match our portfolio more closely with customer and consumer needs.

We are listening to our customers and are committed to improving reliability of supply. In the third quarter, we improved volume levels across all segments.

In prepared foods, we continued to optimize our product portfolio, remove processing and supply chain complexity, and prioritize products with the highest demand, resulting in lower cost and better service to our customers. In beef, ample cattle supply, heavier animal weights and strong demand have driven volumes higher year to date.

In pork, our volumes are up year to date versus pandemic lows. We are pleased to have additional capacity coming online at Eagle Mountain, Utah and Columbia, South Carolina. Both facilities are expected to grow our prepackaged beef and pork products. In chicken, volume declined year to date despite improved food service demand led by QSRs.

We also saw sustained retail demand, including the frozen value-added poultry category. Limited capacity and persistent labor challenges have impacted customer fill rates in this segment; however, our new plant in Humboldt, Tennessee continues to ramp up production, including harvest capacity. This ramp-up is helping us improve customer fill rates.

Chicken remains a top priority for me and for our company. We continue to execute against our road map to bring operating income margin to at least the 5% to 7% range by mid fiscal ’22. Our goal has not changed and we remain committed to restoring top tier performance. We are making progress.

The first imperative is to be the most sought after place to work. I’ve outlined the investments we’re making to enhance our team member experience in my earlier comments. The second imperative is to improve operational performance. Last quarter, we highlighted the impact of lower hatch rates on our chicken operations.

We have begun to deploy new male parent stock. Where this stock has been deployed, hatch rates are improving. We expect the full roll-out of this breeder stock to be complete this fall with harvest capacity improvements occurring by mid fiscal ’22.

Our rate of outside meat purchases has declined 25% versus last quarter and will continue to decline as hatch rates and utilization improve. We have identified opportunities to reduce mix complexity across our chicken footprint, which will help us operate more efficiently. The final imperative is to service our customers on time and in full.

We’re pleased by the continued share performance of our value-added products like Tyson chicken nuggets, crispy strips and air fried. We gained share during the third quarter and the last 52 weeks. Looking ahead, we expect further growth and as a result, we’re investing in line upgrades and increased capacity to drive branded product growth.

We have increased prices to help offset significant raw material and supply chain cost inflation. Pricing improved nearly 16% in the quarter versus the comparable period last year. We will staff our plants, service our customers, grow our business, and be the best chicken company, period.

Part of being customer-centric means being as efficient as possible in taking costs out where you can without compromising our ability to execute against our strategic and operational priorities. We have ongoing efforts across the business to reduce costs, but we must also find new, innovative ways to be better and stronger.

This means investing in advances like automation and artificial intelligence to deliver productivity gains and competitive advantage. We have already delivered strong productivity gains in fiscal year ’21.

Across our business, we are looking to build upon the strength of those actions in the months and years to come, which we will detail at the investor day later this year. These improvements come at a time when we are investing heavily in capacity expansions across segments to better with our partners and meet long term demand.

I’ll now turn the call over to Stewart to walk us through our financial results in detail..

Thank you Donnie. Let me turn first to a summary of our total company financial results. Sales were up approximately 25% in the third quarter. Volumes were up 9.7% primarily due to strength in retail and the ongoing food service recovery.

Average sales price was also up about 17% largely due to strong results in our beef segment, the mix benefit from retail volume, and the partial recovery of raw material inflation in net sales price. Operating income was up 81% in the third quarter due to continued strong performance in our beef business.

Chicken and prepared foods also improved their respective segment earnings, while pork earnings were down versus the comparable period a year ago. Year to date operating income for the total company improved by 49%. Earnings per share grew 93% in the third quarter due largely to strength in operating income, specifically within our beef segment.

EPS was up 61% on a year-to-date basis. We performed well despite a challenging operating environment that spanned tough labor availability, significant inflationary pressures on raw material costs, global supply chain challenges, and an evolving demand backdrop. Slide 11 bridges our total company sales on a year-to-date basis.

We delivered growth in the retail channel along all reporting segments which, in aggregate, accounted for more than $1 billion in sales improvement over the year-to-date period and more than $300 million in the third quarter versus the respective comparable periods.

Moving to food service, sales improved by approximately $1.3 billion in the third quarter, leading to a year-to-date improvement for the channel of nearly $1 billion compared to the same period last year. Exports were up over 18% versus the comparable period, led by beef where sales improved by more than $350 million on a year-to-date basis.

Asia has been a key driver of beef export strength. We’ve also seen some strength in industrial, particularly in beef and pork, and finally year-to-date sales grew $79 million or approximately 6% in our international business.

This business is a growth priority for Tyson and we continue to invest to develop further capacities and capabilities in new markets to meet growing global consumer demand for protein products. Current capacity expansions across seven international locations are expected to dramatically increase our fully cooked production capabilities.

These investments are fully aligned to our strategic growth priorities and when complete will enhance our international processing capacity by close to 30% versus fiscal 2020. Overall, we’re pleased with the company’s top line growth year to date.

We are carefully managing the current inflationary pressures through pricing actions as well as commercial and operational excellence with emphasis on productivity and cost. We know that our price recovery efforts relative to inflation must be matched by equal aggressiveness on productivity. Slide 12 bridges year-to-date operating income.

Production inefficiencies and low labor availability resulted in total company volumes roughly flat to the comparable period a year ago; however, we are encouraged by the volume improvement we are seeing across our segments in the third quarter.

Price mix benefited substantially in the year-to-date period from price recovery of raw material cost inflation, improved mix, strong beef segment performance, and continued retail strength across segments.

Operating income was partially offset by $2.2 billion in increased cost of goods sold for the period, reflecting meaningful inflation in raw material and supply chain costs. Feed ingredients, labor, packaging and freight are all key components of this COGS increase, which we’re working to mitigate.

On a comparative basis, SG&A benefited from the $56 million loss in the year-to-date fiscal 2020 period as compared to a $55 million gain in the first quarter of fiscal 2021, associated with the cattle supplier incident. This was in addition to certain reductions in trade spend and travel costs.

Moving into the chicken segment results, sales were $3.5 billion for the third quarter, up 12%. Volumes were also up in the quarter due to continued strength in retail, improving demand through food service and segment-wide operational improvements. These were partially offset by COVID-related production inefficiencies.

Average sales price was up 15% in the quarter due to favorable mix, sustained retail volume, and strong supply and demand fundamentals. Our reported price improvement also reflects actions we took to cover the inflationary pressures seen from higher grain, labor, and freight costs.

Our conversations with customers on widespread inflationary pressures have been productive and we’ll continue to partner with customers to ensure we receive a fair return on our products while working to deliver service levels and fill rates that meet or exceed their expectations.

Operating income was $27 million in the third quarter and $137 million on a fiscal year-to-date basis, both stronger than comparable periods a year ago. This represents an operating margin of 1.3% year to date.

Fiscal year-to-date operating income was negatively impacted by $410 million of higher feed ingredient costs as well as $210 million of increased grow-out expenses and outside meat purchases. For the third quarter, feed ingredients were $270 million higher while grow-out expenses and outside meat purchases were $110 million higher.

Segment performance also reflects net derivative gains during the third quarter of $125 million and $235 million on a year-to-date basis, both versus the respective comparable periods. These results are associated with realized gains as well as open positions.

Moving now to prepared foods, sales were $2.3 billion for the quarter, up 14% relative to the same period last year. Total volume was up 4.5% in the quarter with strength in the retail channel and continued recovery in food service.

Sales growth outpaced volume growth driven by the pass-through of raw material costs, lower commercial spending, and better sales mix. Segment operating income was $150 million for the quarter, up over 3% versus the prior year. Year-to-date operating income was $633 million, up 23% versus the prior year period.

Operating margins for the segment were 6.5% for the third quarter, a decline of 60 basis points versus the comparable year-ago period.

The slow-down in segment operating margins versus the same quarter last year were driven by significant increases in raw material input costs; however, on a year-to-date basis, our operating margin of 9.6% was up 170 basis points versus last year, driven by favorable pricing and lower commercial spend.

Demand for the balance of the year is expected to remain elevated at retail with volumes continuing to exceed pre-COVID levels and food service continuing to recover. During the third quarter, core business lines experienced volume share growth of 90 basis points while dollar share grew 70 basis points.

We continue to believe that the ongoing inflationary environment will create a meaningful headwind for prepared foods in the upcoming quarter. Raw material costs, logistics, ingredients, packaging and labor are all challenging our cost of production.

To offset inflationary pressure, we’re focused on pricing, revenue management, and commercial spend optimization while ensuring the continued build of brand equity through marketing and trade support. Moving to the beef segment, segment sales were over $4.9 billion for the quarter, up 36% versus the same period last year.

Key sales drivers included strong domestic and export demand for beef products with average sales price up 12% for the quarter. We had ample livestock available in the quarter driven by strong front-end supplies.

Mounting drought conditions in the western United States cattle growing region as well as elevated costs for grain also drove some cattle supply liquidation. We have good visibility into cattle availability through fiscal ’22 and currently believe it will also be sufficient to support our customer needs.

Sales volume for the quarter was up year-over-year due to continued strong demand in contrast to a soft comparable period a year ago, driven by lower production volumes. We delivered segment operating income of $1.1 billion for the quarter. This improvement was driven by strong global demand for beef products and a higher cut-out.

This was partially offset by higher operating costs. Operating margins for the segment improved 520 basis points to 22.6% for the third quarter.

While our beef segment experienced tremendous results on a year-to-date basis, we’re still not at optimal levels of capacity throughput within our beef plants due to labor challenges; meanwhile, drought conditions and elevated grain prices are creating incremental costs and risks for cattle producers.

Until these conditions stabilize and within the constraints I’ve mentioned, we will work to maximize our beef processing capacity to provide a reliable outlook for our livestock farmers and adequate product supply for customers and consumers. Now let’s move onto the pork segment on Slide 16.

Third quarter results reflect higher hog costs and operating expenses that weren’t fully offset through pork cut-out. Segment sales were $1.7 billion for the quarter, up 54% versus the same period last year. Key sales drivers for the segment included higher average sales price due to strong demand partially offset by a challenging labor environment.

Average sales price increased more than 39% while volumes were also up relative to the same period last year. Segment operating income was $67 million for the quarter, down 37% versus the comparable period. Overall operating margins for the segment declined by 570 basis points to 3.9% for the quarter.

The operating income decline was driven by higher hog costs and increased labor and freight costs. Through the end of this calendar year, lower projected 2021 pork production and strong consumer demand are expected to support hog prices well above 2020 levels. Slide 17 captures our financial outlook for fiscal 2021.

Given the continued strength in our beef segment and ongoing inflationary pressures that are partially being recovered through price, we’re raising our sales guidance for the full year. We now expect to deliver annual revenues in the range of $46 billion to $47 billion. At the segment level, we expect our directional annual guidance to hold.

Key risks to this guidance include freight rates, labor cost and availability, grain costs in the chicken segment, raw material costs for each of our businesses, and continued export market strength along with price volatility in commodity meats. We’re slightly revising our outlook on effective tax rate to approximately 22.5%.

We’ll continue to monitor the potential implications of new legislation, but we do not currently expect to see impacts to our adjusted rate this fiscal year.

While our expectations related to liquidity are also unchanged, liquidity during the third quarter improved substantially to $3.4 billion and has since benefited from $1.2 billion of pre-tax proceeds from the divestiture of our pet treats business in early July.

Finally, we expect our COVID-related costs, which totaled $55 million in the quarter, to be approximately $325 million for the year. As a reminder, some of the costs that were previously described as COVID-related have evolved to become structural.

Turning to Slide 18, in pursuit of our priority to build financial strength and flexibility, we have substantially de-levered our business over the past 12 months, reducing leverage to 1.7 times net debt to adjusted EBITDA.

Investing organically in our business will continue to be an important priority and will help Tyson increase production capacity and market capabilities. Each of these levers individually and in aggregate will support strong return generation for our shareholders.

We will also continue to explore paths to optimize our portfolio through M&A through the lens of value creation and shareholder return. Finally, we are committed to return cash to shareholders through both dividends and share buybacks.

In short, we view the cash generation capabilities of this business as both strong and diverse, and we expect our capital allocation framework to deliver solid returns for our shareholders in the future. With that, I’ll turn the call back to Donnie..

being the most sought after place to work, being our customers’ go-to supplier, and doing so while driving operational and functional excellence across all areas of our business. There’s a lot to be excited about. We look forward to discussing where we’re headed during our upcoming investor day and hope you can join us.

Thank you for your interest today in Tyson Foods.

Megan?.

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

[Operator instructions] Our first question today comes from Peter Galbo from Bank of America. Please go ahead with your question..

Hey guys, good morning. Thank you for taking the question..

Morning Peter..

Donnie, maybe if we could just start reiterating the back half ’22 chicken outlook of 5% to 7%.

Based on your prepared comments, a lot of things are starting to move slowly but in the right direction, so I guess the question is what prevents that from getting pulled forward a bit? Is it just that these hatch related issues just take much more time, the automation doesn’t kick in until later into ’22, or does something else change incrementally, and maybe really around the labor picture, has it gotten worse since the last time we spoke?.

Thanks for that question, Peter. Let me start with this - as we look forward, the fundamentals of our business look good going forward. We have strong retail and food service demand. We haven’t changed our approach - chicken is our top priority for me and for our company.

We continue to execute our plan, that hasn’t changed, and that starts with staffing our plants and servicing our customers, and we have to be the most competitive chicken business, but we also want to grow the business. We are committed to top tier performance.

We’re committed to the 5% to 7% AOI by mid-FY22 that we talked about earlier, and we’re committed to becoming the most sought after place to work, and we talked a lot about that in the prepare remarks. We’ve increased wages, and this includes a benefit up to $22 an hour. We’ve instituted flexible work schedules and shifts.

We’re piloting childcare and onsite health clinics for our team members and their families. We’re solving transportation problems for our team members. We’re investing heavily in automation and technology and trying to automate those most difficult and higher turnover jobs.

I talked last time, just so you can understand the basis of this, the seven levers of our business in chicken are price, volume, mix, labor, [indiscernible] in live, and so let me touch on each of those for a moment. In our live operations, the plan to improve hatch is well underway. The new males will be in place by this fall, as we talked about 2Q.

We will see harvest capacity increase by mid-fiscal ’22, so here is kind of the formula, that better hatch equals more birds, which equals more volume which equals better service which equals a better cost structure, which equals better performance and ultimately better results for us.

But until then, to your point and your question, we are improving hatch and harvest volumes now. Even with these headwinds, we are better than an average company by a sizeable margin in our live production area, and we’ll get sequentially better between now and mid-’22.

If I look at spend, we talked a lot last time about outside purchases, and Stewart mentioned earlier that we decreased that by 25%, although at a higher price. The thing that is challenging now is we’re paying a lot of overtime because of the inefficiency associated with labor, which is absenteeism and turnover. We’ve had inflation on all inputs.

We believe grain in our cost of goods will crest in early Q4 - in fact, it has based on the forward-looking curve. This is in our cost of goods. We’ve seen great improvements in our cost management and our execution by our team. Much of that has been masked by inflation.

Then go to labor - labor is our single biggest issue we face, not only in chicken but also in our other businesses. We’ve increased wages and created flexible shifts and childcare onsite clinics. The delta variant has been a disruptor - we were on a good trajectory and then the delta variant showed up, and we’ve taken a step back as a result of that.

We’ve got plans to mitigate that, but the health and safety of our team members is our highest priority. We are more inefficient than we have historically been, certainly a big part of what we have to solve, but essentially it takes us six days to get five days’ worth of work. I will tell you that execution has improved sequentially through the year.

Our volumes’ up in the quarter. [Indiscernible] as our finished good sales. Volume is negatively impacted by harvesting below plan, which we’ve talked about, as a result of hatch.

We started this year with a plan to grow the business and grow our head and grow our sales, but our by-product and export sales are our biggest misses from a volume perspective. We will see volume increase between now and mid-’22 - that’s in hatch, that’s in head harvest, and that’s in volume to our plants. From a mix standpoint, we’ve added volume.

Value-added volume is very strong - that’s ready-to-eat product, that’s par fry product, that’s our frozen value-added branded products. That’s the heart and soul of our business in chicken. We are at capacity with strong retail and food service demand. As Stewart referenced earlier, we’re adding lines and plants to address very strong demand.

Our pricing is up 16% in the quarter. Most of this increase came in June and even more in July. We worked with our customers and they’ve been very responsive. Our relationships are very strong with our customers. We’ve been successful in getting pricing.

Grain also at the same time has continued to escalate and pricing will certainly lag the cost in this scenario. We’re just simply asking for fair market value for these products. Long story short, we are executing better, we are performing better.

We have a great deal of inflation led by grain, but we’ve gotten pricing around and so as we move into every month and quarter from here, I would expect us to be sequentially better, and that 5% to 7% that we talked about by mid-’22, we’re committed to that and we stand with that number..

Great, thanks Donnie. That’s very helpful, just all of the detail there.

For the follow-up question, Stewart, I guess what’s changed in your prepared comments around prepared foods? Last quarter, I think you had talked about the inflation coming through, maybe it’s accelerated a bit, but that you’d be turning on that spending in the back half of the year, and maybe that wasn’t the case in 3Q and more so in 4Q, so is there just a change there and maybe when can we expect that to start to flow through more? Thanks..

Yes, thanks. We did turn that on Q3 - it was one of the downward levers as we had to dial back in, in the retail space, so it’s already running through the numbers. It’s earlier in the year where you saw the benefit, and the back half of the year you’re going to see the increases, and that’s part of what’s in our guidance..

Our next question comes from Ken Zaslow from Bank of Montreal. Please go ahead with your questions..

Hey, good morning guys..

Good morning..

Just a quick follow-up.

You know, the parent stock that’s being rolled out fairly quickly, which is actually positive, can you talk about how confident you are that it will take and that there will not be any issues, that the hatch rates and the productivity will be in line with your expectations, and if there are any risks in how you see it? That’s my first question..

Sure, thanks Ken. As you know, we talked about the fact that this would be phased in starting and completing by, let’s call it fall. That work is underway, and we have converted some of the male stock and we’ve seen some results associated with that.

Everything we have seen thus far would be in line with what we expected, and we see no reason to expect any disruption from that. From that standpoint, everything looks good. It looks like it’s on track to deliver what the--the timing that we’ve talked about thus far. .

Great.

Just to flip to the other side, the beef business, for the last year or so, between COVID and unfortunately your fire, it seems like there’s been a lot of cattle that just hasn’t [indiscernible] as quickly as people may have expected, so although we maybe going through an underlying contraction, there seems to be a lot more cattle out there through probably at least--you know, through the winter, if not through 2022.

Would you agree with that, would you kind of put parameters around that? How do you see that? Then as a follow-up to that, the export side with China and Japan, the trade policies, that seems to be--and a shortage of Australian beef, that seems like there’s a duration to the export picture as well. I’ll leave it there, and I appreciate your time..

You bet, Ken. Let me say this, and I think your view of beef, where we had ample cattle supplies and where we had really strong demand, we were constricted in the middle based on labor availability.

I talked about this in chicken earlier, but in our beef business it essentially takes us six days to get five days’ worth of work, so the inefficiency associated with that allowed cattle to back up on the ranch and in feed lots. Here’s what we know as we look into ’22.

Fed supplies are expected to be down about half a percent, June cattle on feed is projected to be up 1.9%. There has been some herd liquidation in the west and northern plains, which according to Cattlefacts is about 33% of the U.S. cow calf production is in this drought area, but ’22 is looking good.

Is it going to be at the same level at which we were--where we are in ’21? Probably not, I don’t think it will be that good. I think it will be better than historical returns, and I’m talking that 1% to 3% which we’ve talked about forever. It’ll be north of that, we think, but we think all in all beef will have a very nice year in ’22.

In terms of exports, to the other part of your question, Asian growth is still solid. U.S. grain fed beef is preferred around the world and, as you mentioned, key global beef suppliers are rebuilding herds in Australia, Brazil and Canada, so all of that is true, so strong export demand for us as well as domestic..

Okay, I appreciate it as always..

Thank you..

Our next question comes from Ben Theurer from Barclays. Please go ahead with your question..

Thank you very much, good morning Donnie and Stewart. The first question is on what your plans are within the prepared foods business, just more structurally.

Clearly we’re seeing how pricing is coming through and impacting your beef and pork results, but that obviously puts a lot of pressure on prepared foods, and you’ve talked about the input cost pressure by the end of the year.

So far we’re running at about a 9.5% bridge, but you’ve always talked about this 10% to 12% range, so what is it, what keeps you away from being more aggressive on pricing within the prepared foods business, to really pass on more of that internal inflationary pressure you’re seeing on the ingredients side, just to bring it back to the low teens levels, but I think guidance as well for the year is just below that 10% level.

Just to understand what needs to be seen in the market so you’re going to be able to put pricing through..

Yes, that’s a great question, Ben. We’re still very proud of our prepared foods business, and if I look at the detail behind this, demand is expected to remain elevated. Retail orders, for example, are up 30% versus pre-COVID levels. Food service is showing a sequential improvement as well.

We have seen accelerating and unprecedented inflation, so what do you do about that? Well, we have significant food service pricing already in the market. Retail pricing will be in the market by September 5. Inflation is up about 14% during our 3Q and 9% year-to-date.

We’ve had--just like other businesses, we’ve had labor and absenteeism and turnover in the business, we have a number of open positions, so that certainly has made us inefficient, and so we’ve got aggressive pricing going on. Aggressive revenue management and commercial spend management will help mitigate a portion of these inflationary impacts.

We’ll have to get more price, but we’re comfortable that over time that our prepared foods is a double-digit business for us, and it’s just costs are hitting us faster that we can get pricing at this point..

Perfect, and then my follow-up question is around the capital allocation. You’ve mentioned M&A would be one of the opportunities.

Could you, without obviously going into specifics, but could you explore a little bit of where you think you would have to invest? Is it on the international business, is it investing into new facilities or just acquiring new facilities to sort of broaden the footprint in a certain segment? Just to understand a little bit where your focus would be from an M&A perspective.

.

Yes, this is Stewart, I’ll pick that up. I think in terms of the specifics from M&A, I don’t think we’ve talked to what specific places we’re going to put the money, but let’s just talk about overall our view of capital allocation. First of all, we really feel great about the current position of our balance sheet.

Our liquidity was $3.4 billion coming out of the quarter - that was before we took the receipt of the $1.2 billion from pet, and we did repay about $500 million worth of debt subsequent to the end of the quarter, so the balance sheet is very healthy.

From an investment standpoint, one of the things that we talked about both in the prepared remarks and in last quarter is that we expect to invest behind our business. We have significant opportunities to invest in expanding our capacity, and I spoke this morning about international, that that will be a growth area for us.

The capex that’s going into the international space and new facilities will expand their capacity by 30% when compared to last year - that’s a big deal, and I think when you look at the rest of our business, Donnie spoke this morning about automation, and you’re seeing that both across prepared foods as well as in our chicken business, which will certainly help our labor, it will help our efficiency.

Then you look at where we’re putting money in terms of new facilities. Humboldt has gone live, we’ve got a new case-ready facility in Utah that will be coming online shortly, as well as one in South Carolina, so we’ve got a pretty active internal agenda.

If something on the outside presents itself that we think makes sense for our investors, then we’ll obviously take a look at that. Hopefully that gives you a flavor for where we’re investing our money..

Perfect, thanks Stewart..

Our next question comes from Robert Moskow from Credit Suisse. Please go ahead with your question..

Hi, thank you. I’ve got a couple questions, one on the retail side, Donnie. You said that pricing is having trouble keeping up with the inflation, but you do have an increase coming in September.

To what extent does that fully offset all the inflation you’ve seen, or should you need another price increase right after that because it’s an upward sloping curve?.

Thanks Robert. What you’ve said--I mean, you quoted everything I said earlier, but with retail with the branded portfolio, it can take a little bit longer to get pricing in.

We typically don’t disclose that kind of information about when we’d do it, but here’s generally the way we think about this, is that when raw materials--when inputs go up, pricing has to go up, particularly in an environment where we have such rapid and accelerating inflation.

We have little choice but to go and to--we certainly have to be competitive, but we certainly have to get pricing to cover the increase in inputs, and we’re doing that and we’re doing that very methodically. We’re looking at all the metrics around that as we do that, but we’re doing it in a very responsible way.

Noelle O’Mara and her team are managing that around the clock..

Okay. It sounds like it’s--well, I’m not sure what that means, Donnie.

If the inflation that you experienced in the middle of this year is being offset by pricing on September 5, like you say, but it sounds like inflation continues to rise, can I say that that’s a fair statement?.

Maybe just a couple things. I’m going to just jump in and give you a couple of facts here. Actually if you looked at inflation, the biggest driver for prepared foods as being the input costs of commodities, and of course for prepared foods that mostly is pork, you’ve got that along with the increase in that spend, which I referred to later.

In terms of thinking about price, I think what Donnie’s saying is when we think that commodities are going up, or any inputs are going up, we’re going to match that with pricing. That pricing may not follow exactly the track of input inflation, but you also need to think about how that input inflation can move along.

When we’ve got labor cost increases which are going into our workforce, you should think about those as more permanent, of course, but you’ve seen these cycles around commodities and you’ll have to take a view of what you think pork, the cost of pork will do over the course of next year.

If pork comes off, then that will be a help to us; if pork doesn’t come off, then I think Donnie’s point is that we will continue to take price to match the nature of the cost that’s coming to us..

Okay, great. I appreciate it. On food service, obviously continued sequential improvement and then big improvement versus a year ago.

How are your customers viewing the next three to six months? Do they view reopening pace continuing to accelerate or are there concerns about the delta variant slowing things down, and to what extent are you back to 2019 levels in terms of food service?.

Well food service, from everyone I’ve talked to, based on what we see from a demand perspective is very strong. We’re at or near across all businesses, and some are even above from food service, from let’s call it pre-COVID levels in ’19.

I don’t know that anyone fully understands what’s going to happen with the delta variant, and there is certainly some concern about that; but everyone I talk to in food service is optimistic about the future and for their businesses in particular..

Great. Okay, thank you..

Our next question comes from Ben Bienvenu from Stephens. Please go ahead with your question..

Hey, thanks so much. Good morning everybody. .

Morning Ben..

I want to ask about the decision to mandate the COVID vaccines in your facilities, and really from the standpoint of knowing that labor is exceptionally tight, does that create a dynamic where it potentially makes labor more tight or is the net impact of that, you know, it gives you enough certainty around your ability to have continuity in running your facilities that in some ways it kind of [indiscernible] the labor dynamic when you think about trying to get the chicken margins back up and managing your plants at target utilization rates?.

Sure, thank you Ben. As we’ve talked a lot, even in our prepared remarks today but they didn’t just start today, the health and safety of our team is our highest priority.

If you go back and look even in the beginnings of the pandemic, Tyson did a number of things to protect our team members; in fact, I would tell you we did everything we knew to do to protect our team members, that was our highest priority, to mask mandates to barriers within plants to social distancing to staggering shifts to temperature sensors and health screenings prior to going to work every day.

We did everything that we knew to do. With the new vaccine, it’s a new tool. We believe that vaccine is the most effective thing, the most effective tool available today.

We’ve studied the data, we’ve researched it to the nth degree, and we’re confident in doing that, and so we mandated that because we thought it would be irresponsible not to do that and irresponsible not to protect our team members in every way that we could.

Now there could be some short term impacts, but I think they certainly will be offset by long term benefit in doing this, so that’s the position that we have taken. It’s out of just an abundance of caution and care for our team members..

Okay, thanks for that. My second question is on the chicken business. You talked about the critical path to achieving the margin targets you have for middle of next fiscal year. Could I ask about it from a capacity utilization standpoint? I know you have Humboldt coming online and ramping up to capacity.

In the years past, I think your utilization rate has been 89%, 90% or so.

When you think about the full year for 2022, is that too high of a water mark to hit on capacity utilization, or should we think about maybe you getting back to that level by the end of fiscal 2022? How should we think about the ramp of getting back to those utilization rates?.

Yes, great question Ben. A couple things with respect to that. When we started fiscal ’21, we had plans in place to increase our harvest head based on capacity utilization, based on demand that we already had, and with the hatch issues, certainly that created a shortfall in terms of head for our business, and then we’d go outside and start buying.

As we have changed this male out and we are starting to see results of that, that will ultimately end up in more head for us to harvest, which is exactly our plan to--we already have that product sold, but I would expect as we move into ’22 and beyond, that you’ll see our capacity utilization increase at Tyson from a harvest perspective, and all that will be in service to supporting our value-added branded portfolio..

Okay, thanks and best of luck..

Thank you..

Our next question comes from Adam Samuelson’s line from Goldman Sachs. Please go ahead with your question. .

Yes, thanks. Good morning everyone..

Good morning..

I guess my first question is really on that last point, Donnie, around capacity utilization in poultry. I’m just trying to think about how quickly and how far you could push it. If I’m looking the last 10-K based on a five-day week, the poultry business was at an 84% operating rate in fiscal ’20.

I’d imagine it probably was leaking lower than that in fiscal ’21 given some of the hatch issues.

I’m just trying to just dimensionalize where do we think that’s actually going? You guys are about 20% of the industry, so if there’s a meaningful change in your own internal production and hatch, it starts to have some meaningful impacts at the industry level in terms of available live supply.

Any way you could help frame that?.

Sure Adam, I think you described it very well and in a lot of ways even answered this. You talked about based on what you saw, that it was 84%. Well, obviously 84% capacity utilization in a protein business is not a good number - we acknowledge that.

It certainly has cost implications for your product and in fact can keep you uncompetitive in that space, so we acknowledge that. There is a number of--we need a number of head, you can do the math on how much outside meat we’re purchasing based on volume, and you could probably convert that to head.

I mean, one of the things that we could--the quick math would tell you is that being able to run those products through our plants and being able to debone those chickens and go into our further processed assets, and at the same time get credit for all the by-products through the ingredient solution group and then have the ability with our One Tyson approach to being able to sell export leg quarters and paws and so forth, along with just the further processing volume increases that we would get, all of that adds up to a much better cost scenario and a much better performance in our chicken business..

Okay, that’s really helpful. Then the follow-up on an unrelated topic, California has their Prop 12 mandate supposedly coming into effect on January 1 and has implications in terms of the pork that’s supplied into the California market.

Wondering how, if at all, we should be thinking about the impact of that both to your pork and prepared foods businesses next year..

Yes, great question Adam. As we look at Prop 12, it’s about 4% of total production - that’s not significant for us today. Tyson is currently aligning and incentivizing suppliers where appropriate.

We can do multiple programs simultaneously, including Prop 12, so it’s not something we’re excited about but we can align suppliers and we can certainly provide the raw material to service our customers in that way..

Okay, I appreciate the color. I’ll pass it on, thanks..

Our next question comes from Alexia Howard from Bernstein. Please go ahead with your question..

Good morning everyone. .

Good morning Alexia..

Can I ask first of all about labor costs - they’ve obviously escalating, I think you talked about $22 an hour. I’m just wondering how much of an increase you’re expecting on a permanent basis.

I know that right now with overtime and incremental payments, it’s probably higher than the long term level, but I’m just trying to get a sense for how much it’s going up relative to pre-COVID levels..

There is a pretty significant increase and a pretty significant cost increase associated with that, but in a lot of respects the market is doing its job. Based on availability of labor as being in shorter supply, it’s going up and I don’t see any reduction in that. We believe we’re in a good place.

We believe we are at the top of the market, if you will, in terms of jobs similar to this. We certainly are very competitive in all the communities where we have assets producing protein, so we’re comfortable with where we are but it certainly has increased. But in order to get people into your production location, it’s more than just wage.

I want to make that clear. We have to do other things, and I outlined a number of those things that we’re doing around childcare, transportation, onsite clinics, providing a safe place to work, flexible shifts and number of shifts in a week.

It’s a combination of all those things and doing all those things well, so when you hear us talk about being the most sought after place to work, those are the type of things that we have to do in order to be able to service our customers and grow our business..

Great, and as a follow-up, just a quick one, of the $325 million in incremental COVID costs expected this year, you talked about a certain proportion of that becoming permanent.

Can you quantify that?.

Yes Alexia, it’s Stewart. First of all, we feel good about COVID sequentially going down $65 million or so in the quarter, so that’s about half. We’ve seen sort a progressive--the progression has sort of been 50%, but we think over the course of the year the structural costs are going to be counted in around $200 million or more.

But understand that’s in our run rate, right, so anything that has become structural, you’re already seeing it’s flowing through the numbers. I wouldn’t think about that in terms of all of a sudden that’s going to be added to next year. A lot of that are the labor increases that Donnie was talking to..

Very helpful, thank you very much. I’ll pass it on..

Ladies and gentlemen, with that we’ll be concluding today’s question and answer session. I’d like to turn the floor back over to Mr. Donnie King for any closing remarks. .

Thanks again for your interest in Tyson Foods. We hope you and your families stay healthy and safe, and we’ll look forward to speaking again soon. Have a great day..

Ladies and gentlemen, with that we’ll conclude today’s conference call. We do thank you for attending today’s presentation. You may now disconnect your lines..