The Fix at Tyson Foods

Tyson Foods’ $97 million second-quarter loss is just one component of a tumultuous period for the protein producer. (*Michael Woods*)

Tyson Foods Inc. of Springdale is battling market forces and its own errors to get its global protein business running right, trimming its corporate ranks and refocusing on its chicken division, where it made its name.

Executives said they expected the company’s second quarter to be a rough one, and they were right. On May 8, Tyson Foods reported a $97 million loss as tough economic conditions hit its beef, pork and chicken segments. The chicken segment, the foundation of the company’s beginnings, reported a $258 million operating loss.

It was Tyson Foods’ first negative quarter since 2009.

The report capped a tumultuous three years for the protein producer, including a pandemic, three CEOs in less than two years, the announcement of the OneTyson initiative to relocate 1,000 executives to Springdale, the arrest and guilty plea of Chief Financial Officer John R. Tyson after he was found sleeping in a stranger’s bed, layoffs and plant closures (see timeline).

“We knew Q2 was going to be challenging and it was,” Tyson Foods CEO Donnie King said during a conference call with industry analysts. “I’ve talked about the fact that I’ve never seen this highly unusual situation where beef, pork and chicken were all experiencing challenges at the same time.”

Some of the headwinds hitting the protein industry were universal and crossed segment lines, factors such as the price of animal feed and labor and transportation costs. Tyson’s chicken problems were also partially self-inflicted, which King said was part of his motivation to remove David Bray as the poultry division president and replace him with Wes Morris in January.

At the time of the leadership change, Tyson Foods had finished its first quarter with poultry sales of $4.3 billion. But the division’s operating income had dropped to $69 million from $140 million in the same quarter the previous year.

“[I]n Q1 strategically, the only thing that went awry was the fact that the demand didn’t materialize in the place at retail in which we thought it would, and so that triggered a number of other inefficient moves and activities,” King said in January. “I’d like to have seen those decisions faster and perhaps some better quality of decisions, and there were things in Q1 as it relates to chicken that we could have done better. And I made the change.”

Tyson Foods declined to comment for this article.

‘Difficult Decisions’

Ben Bienvenu

Analyst Ben Bienvenu of Stephens Inc. of Little Rock said Tyson Foods had some “company-specific operational challenges” that it had to work through.

The chicken market was strong — until it wasn’t — and demand for protein was high, so companies such as Tyson increased production, which also increased their overhead costs. And when demand declined, markets were left with an oversupply of chicken.

Around the same time Tyson Foods was changing poultry leaders, it was announcing that two poultry production facilities — in Van Buren and Glen Allen, Virginia — would close. Those closures, affecting more than 1,600 workers, were finalized May 12.

“I think the market forced them to make those difficult decisions,” said Bienvenu, managing director of Stephens’ food and agribusiness research division.

“There were some operational or tactical missteps in planning out the level of supply they wanted to bring to the market relative to the demand. Missing the mark on that, overplanning the supply relative to the demand, forced them to have to cut costs in the short term and also made leadership changes in hopes of making better tactical and medium-term demand planning.”

A Tyson Foods Inc. office at 319 E. Emma Ave. in Springdale, which houses some of its information technology employees. (*Michael Woods*)

Morris, a veteran industry executive, spent 18 years at Tyson Foods, and retired as president of prepared foods in 2017 before joining Simmons Foods of Siloam Springs as CFO.

“He is well respected and has an enormous amount of experience, which I think is really what they need,” Bienvenu said. “They need chicken know-how in that business. He certainly brings that to bear.”

Tyson isn’t facing calamity because of the current chicken market. Chicken is a segment that has shorter peaks and valleys, so recovery shouldn’t be a long-range task.

Once Tyson Foods and other chicken producers get their supply more in line with demand, results should stabilize. But inflationary pressures and continued increased labor and feed costs could complicate matters.

“We made a series of strategic decisions to better position us for the future,” King said in the conference call. “We also made the difficult choice earlier this quarter to close two of our less productive chicken plants. These strategic actions are expected to generate significant efficiencies going forward, although some of them generate incremental cost in our current results.”

Managing Efficiencies

The two plant closures come in coordination with new investments Tyson Foods has made to maximize production efficiency, including $1.3 billion to automate facilities and a new state-of-the-art chicken processing plant in Humboldt, Tennessee.

Marvin Childers, the president of the Arkansas Poultry Federation, said he attended a grand opening of a smart farm on the University of Arkansas campus in Fayetteville that will try to maximize efficiency in chicken production down to each grain of feed and each drop of water a bird needs. Arkansas processes as many as 20.5 million chickens every week, meaning that even minute savings can quickly add up to big savings.

“Every company is going to look for efficiencies,” Childers said. “When you become more efficient with that many chickens, it doesn’t take long to recover from some of those market adjustments. It is on such a large scale.”

Economies of scale matter to Tyson. When the price of a bag of grain goes up, so do the company’s costs; in the second quarter, the company’s feed bill increased by $145 million.

That’s bearable when consumers are demanding chicken and are willing to pay more for it. Even a more-expensive chicken is cheaper than beef and pork for the average consumer.

“In this case, everyone tries to run their plants as full as they can; they want to produce as much chicken as they can because the margins are so good,” Bienvenu said. “You get oversupply, prices come down, and then you find yourself in a scenario where you or one of your competitors have to make a decision based on your profitability level about what rate of production level you want to sustain at. That is where the debate is in the market at the moment, who is going to need to curb production to help balance the market and over what time frame.”

Hatching a Recovery

One complication that Tyson Foods is already working through was a hatchability problem from several years ago. Tyson Foods’ hatch rate, the percentage of eggs that hatch into chicks, dropped from 84% to 60%. That forced Tyson to feed more chickens and buy more chickens on the open market, raising costs. Tyson reverted to its original male breeder line, which has improved hatchability rates and lowered its chicken supply costs.

“Ours, in particular, is down a few points from Q1, but not near the volatility that we’re seeing in the industry as a whole,” Tyson’s Morris said May 8 about hatch rates. “And so we have a more stable, predictable supply chain to include our hatch rate that makes it easier to manage going forward. As for outside buy, we’ll continue to buy and grow as we have fluctuations in our demand, but much more balanced than in years passed.”

Tyson Foods’ challenge is now two-fold: figure out the sweet spot of production to perfectly balance supply and demand while becoming more efficient to temper production costs.

“I want to underscore that we are focused on improving our results in chicken,” King said. “We can do that by implementing our strategy leading to continued growth and improved margins, and I’m confident that we have the right leadership team in place to get us there.”