“As we started this year in chicken, in particular, we had a good plan … but there were a lot of moving parts Q1” and unexpected challenges that derailed some of those plans, CEO Donnie King said during the company’s first quarter earnings call yesterday.
These caused the company’s adjusted operating income for the chicken segment to drop 34% to $77m in the first quarter compared to $117m in the first quarter of 2022.
The most significant impact came from an overproduction of fresh chicken in November and December that was based on missed opportunities in the last three years in which Tyson fell short “in a significant way” during the fourth quarter, King said.
“We had a plan in place this holiday season to not have that happen again,” but then November and December were softer than expected or planned for in retail fresh chicken, which triggered a resale of excess chicken at much lower prices than modelled for the original sale, he explained.
“About two-thirds of our miss was market-driven and about a third of the miss was related to labor, yield and spend, some of which was associated with the movement of product because of the miss on fresh chicken, the movement of product form one location to another impacted labor, yield and created incremental freight costs,” he added.
Avian flu also impacted pricing and volume on both cost and chicken leg quarters during the period, he said.
Plus, he noted, there was more chicken, beef and pork in the market than anticipated – increasing competition and diluting market share.
‘We still have a great chicken business'
“It sounds like a lot of excuses. I get that,” King said. But, he added, “we still have a great chicken business. We still have a good plan.”
For example, he said the company is “cleaning up” some of the issues from Q1 to better control the controllables, grow the business and improve product selection and customer service, he said.
This includes investing heavily in a better workplace experience through automation, including scaling its chicken deboning automation across multiple facilities and piloting a robotic tray pack machine that is showing promising results, as well as expanding its smart factory program to digitize its new plants and more of its processes.
King added that “we don’t have something that’s broken” and needs fixing, like the company did in recent years when it struggled with low hatch and genetic issues, both of which are under control now.
The company also continues to grow its domestic production to 42 million head per week during this fiscal year, which CFO John Tyson said “should enable us to improve our fixed cost leverage, grow volume and gain market share.”
He added: “We will continue optimizing our plant network and portfolio mix to maximizing the profitability of our chicken segment, particularly by growing our portfolio of value-added products, which remain in high demand.”
He also noted Tyson’s strong brand awareness and consumer loyalty will help as it continues to diversify and shift away from commodity chicken.
“The one thing that’s obvious we can do better is understanding the consumer shifts in our business and making sure we got the right amount of birds in the right place at the right time,” added poultry group president Wes Morris.
Inflation, demand still question marks
Some of the elements contributing to the chicken segment’s tight margins that are out of the company’s control are expected to ease in the back of the year.
For example, operating income in the quarter was negatively impacted by $255m of higher feed ingredient costs and an unfavorable year-over-year derivative impact of approximately $40m.
Cost inputs, while still high, are expected to slow in the back half of the year.
Demand should also increase in the back half of the year, but executives noted the second quarter will likely be softer – indicating the company still has challenges to overcome.
Record sales, new leadership buoy spirits
Despite these set backs, chicken sales hit a record first quarter high at $4.3b – up 9.6% from the prior year, Tyson said. The bulk of this came from a 7.1% gain in pricing compared to the same time last year and just a 2.5% uptick in volume.
King also celebrated the recent appointment of Wes Morris as the group president for poultry, calling out his experience in many parts of Tyson’s chicken business and his leadership of the prepared foods business.
“I feel really good about where we are from a chicken perspective and the leadership there.”