Tyson Foods Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2023

There are 16 speakers on the call.

Operator

Good morning, and welcome to the Tyson Foods Second Quarter 2023 Earnings Conference Call. All participants will be

Speaker 1

in a listen only mode. After today's presentation, there will be an opportunity to ask

Operator

Please also note today's event is being recorded.

Speaker 1

At this time, I'd like to turn the conference call over to Sean Cornett, Vice President, Investor Relations. Sir, please go ahead.

Speaker 2

Good morning, and welcome to Tyson Foods' fiscal Q2 2023 earnings conference call and webcast. Prepared remarks today will be provided by Donnie King, President and Chief Executive Officer and John R. Tyson, Executive Vice President and Chief Financial Officer. Additionally, Brady Stewart, Group President, Fresh Meats Stuart Glendinning, Group President, Prepared Foods Wes Morris, Group President, Poultry and Amy Tu, President, International and Chief Administrative Officer will join the live Q and 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 on our webcast.

Speaker 2

During today's call, we will make forward looking statements regarding our expectations for the future. These forward looking statements made during this call are provided pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements include all comments reflecting our expectations, assumptions or beliefs about future events or performance that do not relate solely to historical periods. These forward looking statements are subject to certain risks, uncertainties and assumptions, which may cause actual results to differ materially from our current projections. Concerning risk factors that could cause our actual results to differ materially from our projections.

Speaker 2

We assume no obligation to update any forward looking statements.

Speaker 3

Please note

Speaker 2

that references to earnings per share, operating income and operating margin in our remarks are on an adjusted basis unless otherwise noted. For reconciliations of these non GAAP measures to their corresponding GAAP measures, please refer to our earnings press release. Now, I'll turn the call over to Don.

Speaker 4

Thanks, Sean, and thank you to everyone for joining us this morning. Last quarter, we said that we expected Q2 to be tougher than Q1, and this quarter was definitely a tough one. As you will have seen on our release early this morning, results were weaker than expected and top line performance was mixed, particularly when compared to our strong performance last year. At the same time, we outperformed our large branded food peers in volume and dollar sales and continue to gain pound and dollar share in our retail core business lines. As I also said last quarter, I can't remember a Time when our business faced a highly unusual situation that we're currently seeing, where all three of our core protein categories, Beef, pork and chicken are experiencing market challenges at the same time.

Speaker 4

This unusual confluence of issues continued in Q2 and directly impacted our results. I know that you watch the protein markets closely and like us know that there are many factors at play here that are macro in nature. For example, beef is cycling out of historically strong margins that we're seeing throughout most of fiscal 2021 in 2022. Cut out values across protein complex are much lower than a year ago. Inflation has also remained elevated and persistent, which has dramatically impacted our cost.

Speaker 4

The current macro backdrop is clearly tough. We have a strong growth strategy and are bullish on our long term outlook. We continue to implement our strategy, focus on the things that we can control and build upon the strong foundation we have in place. Late last month, we announced important initiatives to simplify our structure and right size our team. These are a logical next step in our ongoing efforts to drive operational and functional excellence as we strive to be best in class in our industry.

Speaker 4

Last quarter, we talked about executional issues that we needed to improve and operational performance did get better. We set a high bar to execute with excellence and are making progress. Despite our overall results, there were strong positive highlights in the quarter that serve as proof points that our strategy is working. As you know, our branded foods business is a key growth pillar for the future, and in Q2, the business performed well. These results were driven by the strength of our share position, especially for our core brands, including Jimmy Dean, Tyson and Hillshire Farm, which helped deliver strong margins compared to the same 13 week period last year.

Speaker 4

We continue to grow both pound and dollar share and to Our large food peers in volume based on Nielsen data. It's clear we are winning with consumers. We also continue to win with our customers. We're proud to have been moved up into the top 10 for the first time ever in the most recent Kantar Power Rankings. In fact, Tyson finished in the top 10 in 6 of the 9 categories they measure, as we continue to focus on meeting customer needs and planning the future together with them.

Speaker 4

While strong performance continued in our branded foods business, I know that our results in chicken are top of mind for many of you. So I want to spend a few minutes walking through our chicken business in detail. I want to point you to 3 important things on the macro environment. 1st, market conditions remain very challenging. Commodity prices for most fresh chicken cuts are much lower than last year, with boneless breast meat, Tenders and wings down more than 50%.

Speaker 4

While we're not fully exposed to commodity markets, we are not immune to their dynamics. Some might expect these dynamics to impact our results immediately, but in fact, they work through on a lag. As chicken commodity prices declined in Q1, The impact continued into our Q2, while price increases we saw during the quarter are expected to affect Q3. 2nd, input costs were higher compared to last year as our feed ingredient costs increased $145,000,000 We also realized an unfavorable year over year derivative impact of approximately $135,000,000 due to volatility in commodity grain prices. 3rd, while high path avian influenza has not had a significant impact on our live operations, key export markets remain closed.

Speaker 4

While we can't control markets, we are focused on the things we can control. We made a series of strategic decisions to better position us for the future. For example, we converted 2 of our plants from bone in to bone less specifically to add new business and to continue growing with an important customer. We further rationalized assets, SKUs and inventory. In fact, we reduced our finished inventory pounds by nearly 20% during the quarter.

Speaker 4

We also made the difficult choice earlier this quarter to close 2 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. Despite challenging market conditions, we continue to execute our strategy and have significant opportunities in front of us. We increased our internal production, gaining 130 basis points of harvest share compared to last year. This led to pound share gains of 250 basis points in value added retail and 60 basis points in foodservice.

Speaker 4

As you can see, We are well positioned to keep growing. We continue to invest in automation and digital capabilities with opportunities to improve our yield. We now have 50 debone lines that are fully automated. We have room to optimize our cost structure and a portion of the actions we took last month are focused on this. Importantly, we're working more closely than ever with our customers to create value jointly.

Speaker 4

We're building long term supply partnerships They have clear benefits for both sides. We improved order fill rates by more than 20%. This was no accident, and I'm proud of our team for accomplishing this. We're winning in the marketplace by winning with our customers. Now I've given you specific details on the business, I want to step back and remind you of our overall strategy.

Speaker 4

Our approach to building and growing chicken is based on 3 key elements. First, we strive to be the best in class operator by executing with excellence. This includes filling our plants to continue increasing our capacity utilization. 2nd, we plan to grow our value added business on fully cooked in retail and foodservice channels and by innovating and differentiating our offerings. And third, We expect to win with consumers behind the number one brand in chicken and win with our customers by being their go to supplier.

Speaker 4

I want to underscore that we are focused on improving our results in chicken. 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. Now turning to the continued strong performance of our retail branded business. With our iconic retail brands Tyson, Jimmy Dean, Hillshire Farm and Ballpark, Tyson core business lines continue to outpace total food and beverage and our peers in both sales dollars and volume growth, up 13% and 7%, respectively, compared to a year ago, per Nielsen.

Speaker 4

Our brands continue to perform well as Tyson Core Business Lines grew pound share by 2.4 points relative to prior year quarter. We continue to show market share leadership in most of the retail categories in which we compete, delivering both dollar and pound share growth in the aggregate by more than 2 points and also across all dayparts. As proven by our growth compared to last year, We know that consumers will spend on categories and brands they know and trust. The trajectory of our Tyson Core business lines volume share growth shows The momentum we have gained with consumers. We remain focused on maintaining our improved fill rates and on chef availability, while investing in merchandising and advertising to support our brands, which along with our strong business fundamentals resulted in pound share growth increasing sequentially over the past 4 quarters.

Speaker 4

Tyson, Jimmy Dean, Hillshire Farm In ballpark, all hold favorite brand status with consumers by a large margin over our nearest competitor. It is evident that we're delivering the brands and products As I mentioned earlier, our move into the Kantor Top 10 demonstrates that we continue to gain the confidence of our customers. Winning with customers and consumers is a key priority and it's clear we're having success with both. Now let me tell you why I'm so optimistic about our future. Tyson is an iconic company with a broad portfolio of products and powerful brands that has been a recognized leader in protein for nearly 90 years.

Speaker 4

We've been through market cycles before. I've been through them before myself, and we've always come out stronger on the other side. We have the right strategy, seasoned leadership and team members in place to do it once again. Our vision is to deliver sustainable top line growth and margin improvement. Our strategy to drive growth is built on the foundation of 3 key pillars.

Speaker 4

First, we will drive growth in our core protein platform where we harvest and process fresh meat across a diverse portfolio. We expect global demand for protein to continue to grow in the years ahead, driven by population growth and per capita income expansion. Tyson is well positioned with the capacity in place to meet demand. 2nd, we will drive growth through our branded food portfolio. We have over 30 prepared food and snacking brands, including some of the strongest brands in all of food, namely Tyson, Jimmy Dean and Hillshire Farm.

Speaker 4

Branded food is our best opportunity to drive faster growth, higher margins and stronger results. 3rd, we will expand internationally where it makes sense. Most of the growth in protein consumption is expected to take place outside the U. S. We can capture this significant opportunity by scaling our existing business, expanding our customer base and exploring new markets.

Speaker 4

These pillars are enabled by our relentless focus on customers and consumers, operational excellence and digital capabilities to drive margin improvement. We win with customers and consumers by building growth partnerships, delivering top tier customer service and fill rates And product innovation. We expect to realize our operational excellence goals as we modernize our operations, driving efficiencies, saving on cost and increasing throughput. And we continue to build our digital capabilities, operating at scale with digitally enabled standard operating procedures and utilizing data, automation and AI tech for decision making. With the combination of Growth strategies and focus on margin improvement, we can deliver the food that consumers love and create long term value for our customers, for our team members and for our shareholders.

Speaker 4

We put a strong proven leadership team in place here at Tyson. I've never been more confident in the talent that we have, and I know that we have the right people to capture the opportunities in front of us. Now, I'll turn things over to John to discuss our financial results for the quarter in more detail.

Speaker 5

Thank you, Donnie. 1st for a quick touch on our total company financial performance and then a review of the individual segments. Total company revenue was up slightly compared to last year's Previous record Q2 performance as the benefits from significant volume growth in chicken were offset by the reduction in price per pound in beef and in pork. For the total company and individually in chicken and prepared foods, we continue to deliver record high sales performance now for a 5th consecutive quarter. We remain focused on driving growth in these businesses to enhance our margin profile over time.

Speaker 5

Now turning to profitability, more than 90% of the decline in adjusted operating income was driven by lower earnings in beef and chicken. Higher input cost per pound in all segments except pork increased our cost of goods sold. The majority was driven by inflationary impacts on raw material and labor costs. The remainder of the increase was due to a few things, Inventory value adjustments, unfavorable derivative impacts and a shift producing more value added mix. And this was partially offset by savings from our productivity program, reduced outside meat purchases in chicken and decreased supply chain costs.

Speaker 5

Our pricing decreased led by lower cutout values in beef import. This is partially offset by volume growth in chicken. Now let me go to the individual segment results starting with beef. Sales in our Beef segment decreased 8.3% compared to record high sales in the Q2 last year. Price was down 5.4 due to reduced domestic demand and softer export markets and volume was down 2.9% due to fewer head process.

Speaker 5

Live cattle costs increased approximately $305,000,000 on a like for like volume in the quarter as the reduction in the beef cattle herd continues to tighten supply and increased competition for cattle. The margin compression resulting from reduced sales and increased cattle costs led to a segment operating income of $8,000,000 and an operating margin of 0.2%, down from the historically high second quarter margin of 12.7% last year. Looking next at the Pork segment, the volume gain of 1.1% driven by improved hog availability was more than offset by the 10.3% decline in average sales price due to the soft global demand environment, leading to a decrease in overall sales of 9.2% versus the Q2 of last year. The Pork segment posted an operating loss of $31,000,000 for the quarter, which was driven by the industry headwinds compressing Pork Packing margins and inflationary pressures on operating costs. Moving on to the Chicken segment's results.

Speaker 5

The sales increase in chicken of 8.4% over the prior year quarter was driven by a 6.4% uptick in volume due to increased internal production. Benefits of prior period pricing actions drove 2% growth in sales despite a challenging commodity market. At a loss of $166,000,000 2nd quarter operating income was impacted adversely by market conditions and near term impacts of strategic decisions we made that Donnie discussed earlier. Other headwinds experienced in the quarter included continuing export impacts from HPAI as well as higher feed ingredient costs of $145,000,000 and an unfavorable year over year derivative impact of approximately $135,000,000 including a $35,000,000 loss in this current quarter and a $100,000,000 gain in Q2 of last year. The industry operational headwinds do not change our approach though.

Speaker 5

We expect to perform as the industry best in class operator while growing our internal production with our customer demand, enabling us to improve our fixed cost leverage, grow volume and gain market share. In addition to the continuous improvement of our operations, Growing the market share of our portfolio of value added products is imperative to maximizing our profitability and our long term strategy. Now lastly, to Prepared Foods, where our retail brands like Jimmy Dean, Hillshire Farm and State Fair continue to deliver industry leading performance, outpacing all peers in both revenue and volume growth in the quarter. Total sales revenue grew 1.2%, primarily driven by pricing gains. The slight volume decline of 0.4% was driven by softness in foodservice volumes as the trajectory of this channel's recovery remains uneven.

Speaker 5

This was almost all offset though by the strong performance of our retail brands driven by their category leading position, improved supply and our MAP investment. Compared to the prior year period, segment operating income decreased modestly due to increased raw material costs and brand building investments. This is partially offset by productivity gains and price increases. While down slightly against the historically strong comp, We are pleased with the operating margin performance of 10.4% in this challenging macro environment. We continue to be excited for the future in Prepared Foods as the segment is critical to valuing our beef, pork and chicken commodity meat products and delivering strong earnings at a time when the commodity protein segment's profitability is under pressure.

Speaker 5

We will continue to unlock value by increasing plant utilization, implementing productivity initiatives and we will grow through innovation of new offerings, expansion of our existing product portfolio and the recovery of our foodservice business. Now to our financial position and capital priorities, We're building financial strength, investing in our business and returning cash to shareholders remain the priorities of our capital allocation strategy. First, let me spend a minute talking about our financial policy and long term capital allocation and provide a bit more color around our approach to CapEx deployment. Our financial policy remains unchanged. We are committed to building financial strength, maintaining our investment grade credit rating and targeting net leverage of atorbelow2xnetdebt to EBITDA for the long term.

Speaker 5

Our capital allocation prioritizes investing in our business through CapEx as well as strategic and disciplined M and A, while also returning cash to shareholders through dividends and share repurchases. As owner operators, Our approach to CapEx is simple and effective. We support our maintenance CapEx needs and then we focus on growth and profit optimization, investing in opportunities that generate the greatest returns while maintaining a strong balance sheet. We don't expect our total CapEx this year to exceed $2,300,000,000 which is down from our prior guidance of at or around $2,500,000,000 Now moving on from CapEx, during Q2, we returned $167,000,000 to shareholders through dividends and $19,000,000 in share repurchases. We have increased our dividend for 11 consecutive years and remain committed to supporting our dividend.

Speaker 5

We ended the quarter with $2,200,000,000 of liquidity and net leverage of 2.4 times. Last week, we entered into new term loan agreements for $1,750,000,000 to further enhance our liquidity. These funds will be used to pay off our existing commercial paper that's outstanding and some upcoming bond maturities and also to fund our investments in the business, including the pending acquisition of William Sausage, which will support our strategic focus on branded retail growth. We remain committed to maintaining a disciplined yet opportunistic capital allocation strategy, ensuring that we deploy resources to maximize long term shareholder value. Now let's review our updated outlook for fiscal 2023.

Speaker 5

Based on performance year to date and a moderating outlook for revenue growth, We are lowering our total company sales guidance to $53,000,000,000 to $54,000,000,000 or flat to 1% growth for the year. In our Beef segment, based on the deterioration in current market dynamics, we now expect margins to be between a loss of 1% and a gain of 1% for the fiscal year. Also due to challenging market dynamics, this time in our Pork segment, we are lowering margin guidance for the year to be between a loss of 2% and breakeven. In Chicken, we now expect full year margins to be between a loss of 1% and a gain of 1%. Based on our results so far in April, we anticipate Q3 margins to be roughly breakeven as we gain momentum and exit the 4th quarter at or above the high end of the full year range.

Speaker 5

In the Q2, Prepared Foods continued to its strong performance resulting in a first half margin above the guided range for the fiscal year. So we are maintaining that at 8% to 10%, driven by historical seasonality and continued brand support. And in our international business, we remain committed to expanding globally in the fastest growing protein consumption markets in the world, driven by continued year over year volume and revenue growth from new facilities ramping up, we are confident of our improved profitability in fiscal 2023 with stronger quarterly performance in the back half of the year compared to Q2. As I mentioned earlier, we're reducing our expectations for CapEx to approximately $2,300,000,000 and our net interest expense and tax rate are now expected to be around $340,000,000 22%, respectively. In summary, the first half was challenging and many of the headwinds experienced are likely to persist for the remainder of the fiscal year.

Speaker 5

Although the current operating environment has proven to be difficult, We view this as an opportunity to grow and improve our business operations and we are optimistic on our long term value driver prospects. We have great leadership and operational teams, growing demand for our products, robust portfolio diversity and the differentiated asset footprint needed to win in the marketplace as we continue to grow our business and provide desirable returns for our shareholders. So now Let me turn the call back over to Sean for Q and A instructions. Thanks, Sean.

Speaker 2

Thanks, John. Now we will move on to your questions. Please recall our cautions on forward looking statements and non GAAP measures apply to both our prepared remarks and the following Q and A. Operator, Please provide the Q and A instructions.

Speaker 1

Ladies and gentlemen, we'll now begin the question and answer session.

Operator

We do have further questions, you may reenter the question queue. At this time, we will

Speaker 1

pause momentarily to assemble the roster. And our first question today comes from Ben Bienvenu from Stephens Incorporated. Please go ahead with your question.

Speaker 6

Hey, thanks. Good morning.

Speaker 4

Good morning.

Speaker 1

So my first question is

Speaker 6

a 2 part question on the Chicken segment. So first Part of the question, in the quarter, results obviously were weak and considerably weaker than we saw, I think, in the broader market.

Speaker 4

Could you talk to a few of the

Speaker 6

things that might have contributed to company specific weakness in the segment? And then as you look going forward, You talked about John Randall margins being flat in 3Q breakeven and then ramping into 4Q. What all is incorporated into that assumption? Is it what we've seen already in terms of improvement in quality fundamentals? Do you need to take further actions around closing underperforming facilities or reducing inventory and maybe just help us understand what's embedded in that expectation going forward?

Speaker 4

Okay, Ben, this is Donnie. I'll start off and then for the chicken portion of this, I'll flip it over to Wes and let him add some detail to this. But I would say this quarter was not a surprise to us. We knew Q2 was going to be challenging and it was. I've talked about the fact that I've never seen this highly unusual situation where beef, pork and chicken are all experiencing challenges at the same time.

Speaker 4

Many of these are macro in nature. But in chicken specifically, Yes. In chicken, we have seen operational improvements and market recovery. While slower than expected, it will recover and Of all of our businesses that are challenged right now, Chick'n will recover first. In the quarter, we had Of our $166,000,000 loss, dollars 90,000,000 of that came from 3 main areas.

Speaker 4

There was about a third of it in mark to market. Inventory adjustments, SKU rationalization accounted for about a third of it and start up costs associated with the mix change and improvement from bone in to boneless Plus a few asset impairments. So I would then go on to say chicken remains a top priority for me. We have the number one brand in chicken. Our model doesn't give us the highs and lows of the commodity markets.

Speaker 4

That doesn't mean that we're not impacted by that. In variable pricing models that we have in place, there are lags that go with that. About 2 years ago, I laid out for you the plan that we have with our chicken business and we're following it. We're growing our volume and improving our mix. We sold what we harvested and we reduced inventory by 20%.

Speaker 4

And I would tell you that we are relentless on operational execution. We continue to invest in automation and digital capabilities and we will and do compete with the very best in the industry. We're winning in every area in which we play. We have market leadership in every category. Customers and consumers are key priorities for us and it's clear we're having success with them.

Speaker 4

We've just recently announced that we moved up into the top 10 for Kansar for the first time ever in the most recent power rankings. We expect to win with consumers behind the number one brand in chicken and win with our customers by being their go to supplier. And I have confidence in the team that we have in our Chicken business. We have the right strategy and are doing the right things for growth. We continue to implement this strategy and focus on the things that we can control and we'll build on this strong foundation that we have in place.

Speaker 4

Now with that, let me stop Ben and let me flip this to Wes Morris, who leads that chicken business and that team and let him add some additional color.

Speaker 7

Good morning, Ben, and thanks for the question. No question Q2 was tough for us and for the industry as a whole. The combination of grains and markets, Some of the key parts being down as much as 50% and then the ongoing export opportunities. Simply said versus a year ago, Grain up 11%, price up 2% and then the $135,000,000 change in derivatives. We did something nobody else though in the industry has done growing net sales 8.4%, volume 6.4% and improving our capacity 4%.

Speaker 7

Based on published data, we competed actually better than average company in the industry and we kept investing at the same time. Donnie referenced the $90,000,000 I'd ask you to think of 2 thirds of that as investments in our business going forward, The SKU rationalization and inventory adjustments along with packaging ingredients makes us both more efficient and more consumer centric at the same time. So let me talk about 4 key areas that my team is focused on and give you Some insight into what we got done in the quarter. Four key areas of people, service, growth and performance. Our plants were staffed for the entire Quarter, our teams delivered the volume we needed to win with customers and consumers and we sold everything we processed plus another £100,000,000 so demand for our products were good in Q2.

Speaker 7

Our service levels increased 20 points year over year, we're back to historical levels of service. We executed very well at the holidays of Super Bowl and March Madness, Gaining share in both foodservice and retail. We continue to invest in Danville Fully Cooked location, which will come on this fall. We're now filling over 99% of what we call our core 8 retail products and so winning with consumers and customers at the same time. Donnie referenced the 2 plants we converted in the quarter from bone in to boneless.

Speaker 7

And then we announced the closure of 2 facilities which will improve our efficiency while increasing our volume. And we've seen operational improvements every week in the last quarter and in April. So we're well positioned to win with customers, consumers and drive out cost at the same time going forward.

Speaker 5

And Ben, I want to just pick up on a couple of specific parts of your question there. I think first off, you asked, are there further actions that we're contemplating And just to address that directly, we're always looking

Speaker 4

at the footprint, but everything

Speaker 5

that we're doing is focused on growing our business today. And I would note that with the 2 announcements we made Earlier in the quarter, we're still growing the business. You mentioned inventory too, part of working through kind of some of Changing market conditions does mean continuing to pull down inventory. And so that will influence the outlook. But you noted correctly from the earlier remarks on kind of moving to breakeven and improving through the back half of the year is

Speaker 3

what we expect to see in poultry. Okay.

Speaker 6

Thanks to all. That's helpful color. Maybe shifting gears a little bit to the Prepared Foods segment. That's been a bright spot certainly for the first half of the fiscal year. The guidance for the balance of the year implies Some margin moderation.

Speaker 6

I know you guys are focused on picking up some foodservice business that you lost and I think carries some lower margins. Is that key to what's embedded in the operating margin guidance for the balance of the year? And what are the potential sources of upside or downside to that expectation?

Operator

Got it. Well, let me pick up on that. We're pleased with the overall performance in the first half of the year. And I can see that we're making progress with both of our brands and our operations to improve margins. You're seeing that in the results.

Operator

There also by the way you're seeing it in absolute dollars because I think you looked at the first half this year versus last year rough about 10%. So all of that is good news. When you're looking forward, the shape of our year on a quarterly basis will look similar to last year in the sense that we expect a stronger first half than the second half. And this is because of 2 things. First, because of normal seasonality in the business.

Operator

And second, because we expect to have some higher brand investments behind our retail brands in the back half. That's important. Those brands are doing well. They have strong engagement with customers and I want to make sure that we have continued investment to reinforce that. There is more work to do in foodservice.

Operator

And in that space, the customer decision and contract cycles are longer.

Speaker 1

It takes

Operator

a little bit to win back that business, but we have a strong platform. We have good products and I'm confident we're going to start to see the benefits of that Improvement in the future.

Speaker 6

Okay. Thanks so much. That's a lot.

Speaker 3

Thank you, Ben.

Speaker 1

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

Speaker 8

Yes. Thank you. Good morning, everyone.

Speaker 4

Good morning. Good morning.

Speaker 8

Good morning. Maybe my first question just in beef and taking kind of the revised outlook and Would seem to imply the business is operating kind of breakeven or a loss for the next couple of quarters. And I just want to make sure I'm Thinking about that properly in the context of kind of industry packer margins, which while certainly off their highs are not negative. And just how do we then think about the implications of that into fiscal 2024 and 2025 candidly as cattle availability is just going to get worse progressively over the next couple of years given kind of what we know about the cattle herd right now.

Speaker 4

Okay, Adam. Let me I'll start off and then I will pass it to Brady for some greater detail around that. But As expected in beef, if there was tightness in cattle supply, we saw increased live cost and a softer export market. Probably the thing that is most interesting there and unfortunately I'm

Speaker 7

not going to be able

Speaker 4

to give you the answer to this, but It's around cow and heifer retention. We do have better pasture growing conditions. If you look at Central Texas up to Nebraska, There still needs to be some moisture. We saw cow harvest towards the end of the quarter began to decline. Some indication of the closure of the liquidation cycle.

Speaker 4

If you look at heparound feet numbers, We're not in a rebuild phase just yet. More attention is needed on the heifers Before we're ready to signal that the rebuild has begun. So with that Brady, you add some additional color if you would.

Speaker 9

Thanks Donnie and thanks Adam for the question. I think there's a few specific callouts relative to standard industry gross margin calculations that we need to into account during this specific timeframe here in 2023. And number 1 is, while we still see Export demand being relatively strong from a quarter over quarter perspective and versus prior periods. The opportunity for us to arbitrage our exports Opportunities versus domestic with some cutout runs that have occurred in specific products has actually diminished our opportunity to capture some of those results from a Tyson perspective. Number 2 is we've seen some pullback on drop credit values and again versus the previous cattle to gross margin.

Speaker 9

And number 3, from a branded versus choice perspective, we've seen a pullback in USDA data indicates The spread between branded and choice actually decreased $4.03 a 100 weight quarter over quarter from a sequential standpoint. So those are certainly some of the factors that are in our mind as we continue to look at the remainder of 2023. As we move into 2024 and beyond, in addition to the comments that Donnie made relative to the cycle that we're in, There's reasons for both challenges from an industry perspective relative to gross margin. There's also reason for us to be optimistic. And number 1, we'll absolutely be relentless in terms of operational excellence.

Speaker 9

And really it's about Tyson and our team controlling what we can control. The markets will do their job over time, but we have a world class beef business and the expectation is we'll continue to perform at a very high level as we move through this cycle. Number 2 is we have the opportunity to get closer to our customers and our consumers. We have capacity within our case ready and value added business. We've been working diligently to fill that capacity and feel very good and comfortable in terms of the future of that business to get closer to the consumer as well.

Speaker 9

So while there are challenges ahead relative to the markets, I feel we're in a very good position to whether those challenges as we move forward.

Speaker 8

Okay. I appreciate that color. And maybe a follow-up for John Randall. You guys don't give a specific EPS or EBITDA guidance, but if I kind of roll through the revised sales outlook and kind of Middle of the range on the different operating units. It would seem to imply that by the end of the fiscal year, Net debt to EBITDA could be atorabove4x.

Speaker 8

Just want to get your perspective on Given kind of your own earnings outlook, kind of if that's actually correct and kind of your comfort level of operating at that place for a period of time, particularly if beef isn't kind of quickly reversing?

Speaker 5

Yes. Thank you for that question. And let me talk about the outlook and get a little more clarity on that and then we talk about leverage. I'm glad you asked this question. So if you look at the return on sales guidance that we've given kind of on a segment by segment basis, It could take a few different shapes.

Speaker 5

A point I want to make sure that our listeners take away today is that when we look at a total operating income number for the second half of the year, We expect that to be in aggregate similar to or maybe slightly down compared to the first half of the year. So depending on the different movements within the various Core proteins, that's kind of the net of it. We want to make sure lands from an outlook perspective. And as you suggested that does have implications for what our total leverage ratio is as we move into the back half of the year. And what I can say is We're focused in the long run on that 2 times number.

Speaker 5

And I think just pointing to what we've done in the last couple of years, We were diligent in paying off $3,000,000,000 worth of debt. We've invested in the business from a growth standpoint. We've got new operations coming online and retail branded chicken, bacon and a lot of growth outside the U. S. Align with our strategy.

Speaker 5

So I think while The timing on some of the capital expenditures, for example, kind of puts pressure on the operating cash flows. I think We're comfortable with where we are and feel good about the outlook. I think that We know there's volatility in our business. Ratings agencies keep up with that. I mean, I can't speak for them this morning, but we're in constant communication providing them outlooks about the business.

Speaker 5

So overall, we feel good, but yes, the leverage ratio will tick up for a little while.

Speaker 8

I appreciate that color. I'll pass it on.

Speaker 3

Thanks, Ed.

Speaker 1

Our next question comes from Andrew

Speaker 3

guess I

Speaker 10

wanted to start on the excuse me, on the chicken side. And I'm curious kind of philosophically how you're thinking about Growth and which is clearly the focus, growing the volumes versus balancing that with kind of the medium term margin outlook. Have you changed at all your expectations on the back half, chicken volumes that you would expect to realize

Speaker 3

and just kind of philosophically how you think about that?

Speaker 7

Yes. Andrew, this is Wes. Thanks for the question. 1st and foremost, we got to stay focused on our business and our customer expectations. And so we will in fact improve our capacity utilization over time.

Speaker 7

I think it's important to understand that our supply plan is actually our demand plan that we start with a demand plan and work backwards. And as we see more demand for our products, we improve our capacity utilization. So, thank you. Hopefully that answers your question.

Speaker 5

If I can add to that though, I think you asked specifically about how do we balance the profitability versus the growth. And what I want to point out is that and we've pulled down the total sales outlook for the business, but we're still projecting to grow from a volume standpoint. So I think the chicken Call compared to a quarter ago is still up but slightly less than what we had initially projected just because of the demand that Wes referenced.

Speaker 10

Got it. Okay. That's helpful. And if I could ask one also on productivity, obviously, Have achieved the targets well ahead of your original expectations. How are you thinking about the productivity opportunity from here?

Speaker 10

I know there's a continuous improvement mindset, but any way to frame kind of how you think About magnitude of opportunity around productivity? Thanks.

Speaker 4

Well, thanks for that question. It's still As we've said, I mean, we are continually focused on being the absolute best from an operations perspective. We want to be the best company, the best brand, the best protein wherever we choose to play. And what we're doing very simply is executing those things through productivity, through efficiency, to deliver that. Some of that requires adding volume, for example, in chicken.

Speaker 4

Some of that requires improved yields and labor utilization. It includes it also looking at the assets that you have and try to make sure that we modernize those and invest in those and get the right footprint, not only today, but going forward. We'll do all those things and are continue doing all those things. But the whole efficiency productivity piece is Top of mind for everyone in this organization today.

Speaker 5

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

Operator

Thank you.

Speaker 1

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

Speaker 11

Good morning, everyone. Good morning. Hi. Sticking with chicken, can I ask about the price the market pricing dynamics? I know obviously Last quarter, there was a challenge because there was an excess of chicken of fresh chicken flooding the markets over the holiday period.

Speaker 11

I get the point that that sort of bled into this quarter as well. Is there any visibility into how that might whether that Might come up in the second half of the fiscal year or where are we in that cycle? And then I have a follow-up.

Speaker 7

Yes, sure. This is Wes. I'll answer that. We didn't see a lot of movement in January February and we started seeing a little more strength in March, which for us will flow through the next quarter. We have seen some pull up numbers that would indicate A little stronger markets in the back half of the year.

Speaker 11

Great. Thank you. And then on the Prepared Foods with the Kantar Power ranking study. I'm just wondering what it was that's Changed in your retailer relationship because that is a big move. So I mean to get into the top 10, there's a lot of larger, more established CPG type companies that are not in the top 10.

Speaker 11

I'm just wondering what you think changed over the last couple of years to have got you there?

Speaker 4

Thank you, Alexia. Well, first, I would tell you it was on purpose. We talked about a very simple And the mantra around here is winning with our team members, creating a differentiated place to work. Getting happy team members, having a fully staffed Operations was important. And then winning with customers and consumers.

Speaker 4

We've invested a lot and continue to support Customers and consumers with our brands, with innovation, with all those things. We want to be The best or be their go to supplier in every part of our business. And then finally, and this is kind of where the rubber meets the road, but winning with executional excellence throughout this organization. And it is that is The result what you're seeing in this survey is the result of the work that this team has done.

Speaker 1

Our next question comes from Ken Goldman from JPMorgan. Please go ahead with your question.

Speaker 12

Hey, thank you. I do appreciate, Donna, your comments about the macro. Certainly, there's a lot of challenges that everyone's facing. I'm just I wanted to ask, it looks to me like at least for this 1 quarter, sort of the performance gap as measured by margin, did widen a little bit between the industry and Tyson in both beef packing And in chicken. I'm just looking at some of your bigger competitors in chicken and I'm just looking at sort of hedger's edge and our own model for beef margins.

Speaker 12

So I know those aren't perfect comparisons, but just trying to get a sense of A, is that how you guys see it as well or are my assumptions there wrong? And B, How quickly, if they are right, can we kind of reverse that and you can kind of get back to growing in line or having a margin in line with those kind of major segments.

Speaker 4

So Ken, I'll start off and then I will flip that to give a little more color from Wes around chicken and Brady on beef. But I did talk about the macro a lot. And I got to tell you, it pains me to talk about that because that We've never been able to control macro or economic issues or market conditions. But what I can tell you is we are controlling what we can and we have a full court press On being the best that we can be with an operational excellence and winning with customers and consumers. The other thing I would tell you, Kent, is that here at Tyson and as you know, I've been through a number of these cycles before.

Speaker 4

This company has been in its 90 year history has been through a number of them before. But what we have done in the past and we're doing this time is we're accelerating in the bottom of this cycle and we always come out better and stronger. And I see no reason to believe that we won't do that This time as well. And let me flip it to Wes to add some chicken color.

Speaker 7

Yes. Good morning, Ken. I think take into consideration The timing of how our pricing flows through is different than others. We have a further lag. Number 2, the $135,000,000 year over Derivative change and then the $60,000,000 of the $90,000,000 Donnie talked about in efficiency investment, I believe we competed better than the average In the industry.

Speaker 12

All right. Thank you for that. If I could ask another quick question. The William Sausage acquisition, I think we got a price today in the 10 Q of $200,000,000 to $250,000,000 Could you give us a little bit of detail on what the expected revenues are in the last 12 month revenues and sort of why now is the right time to do a deal given some of the challenges you have in the balance sheet?

Speaker 5

Yes. This is John. Let me say a couple of things on that. First off, let me just Make a shout out and thanks to the Williams family who we've got this transaction with and we're grateful to them for entrusting 50 plus years of the family business is to be part of the Tyson family. As it relates to the kind of contours of the transaction, Let me answer the question why now.

Speaker 5

We're always being diligent and thoughtful about the M and A opportunities that we're pursuing. And I think this was a transaction that we got across the finish line based on the characteristics of the branded portfolio and the return profile. So when we close that in the coming months, we're excited to Bring that into

Speaker 3

the Tyson prepared foods business. Yes.

Speaker 6

Ken, let me just add

Operator

a little bit here to Stuart. Look, this is a company with some great brands and some really great facilities. And 2 things are going to come out of this. First, There are capabilities we're going to have because right now most of our This is going to provide some redundancy that makes sense for our business, particularly because Jimmy Dean is so important to the portfolio. And then second, when you look at the brands that are going to be complementary to our brands along with a DSD network that Frankly, we haven't had in our portfolio before.

Operator

I think we're setting up for a very interesting deal here that is going to be A good addition to Tyson.

Speaker 1

And our next question comes from Peter Galvo from Bank of America. Please go ahead with your question.

Speaker 13

Hey, good morning, everyone. Thanks for taking the question.

Speaker 1

Good morning.

Speaker 13

Maybe we can just start going back off of Ken's question, particularly around beef. First, I think there's probably been some noise out there in the market that just shifts are being cut across kind of the entire beef network and some of that maybe is due to the lower kind of harvest levels, but if you can kind of comment there. And then secondly, Brady, I'd just be curious for your perspective with cattle prices basically at all time highs. In speaking to Cow Calf operators, like what are the unit economics looking for them like in real time? How does that Kind of change their decision making process around retention or not?

Speaker 13

Because again, looking at the spreadsheet math, you'd think the price would be enough of an incentive, but obviously a lot of their cost structure probably changed as well. So would appreciate any color there.

Speaker 9

Thanks for the question, Peter. First of all, let me address Both the question that Ken posed and you posed as well around the East. And I think there's a few important aspects of Q2 that we need to focus on. So 1st is relative to timing. Tyson has quarterly pricing that we use for several of our large customers.

Speaker 9

And so in very specific primal areas where we've seen some inflation from a cutout perspective in those primals quarter over quarter, We have a timing lag relative to those specific customers and agreements. 2nd is, we did see some hedging losses in the quarter that impacted performance. 3rd would be our volume. And so as you mentioned, we did see a decrease relative to volume. And so when we saw that volume, we lost some volume leverage relative to our cost structure and our assets.

Speaker 9

We're working diligently from an efficiency perspective and have seen Some good improvements in that area as well to help offset that as we move forward. As I mentioned earlier, export demand has been softened. The strength of the U. S. Dollar and FX has had an impact on some export demand And specifically the substitution products that we see from a domestic portfolio, we're not seeing those large gains as we did in previous quarters.

Speaker 9

That relative to drop value, all go into play in terms of what our actual results are versus some of the index modeling that occurs as well. And relative to the cow calf operator and how they look at the business, obviously, a lot has changed since the last cycle. Interest rates are up right now. There is some incentive for the cow calf operator to go ahead and market the heifer into feed yards as opposed to retain just relative to the strength we're seeing from a feeder market as well. So We're still seeing some drought conditions from Central Texas up through Central Nebraska.

Speaker 9

That's creating some challenges. But the good news is for the CavCafe operators that are working outside of that space, we've seen some remedy relative to drought conditions and moisture here within the last several months. That provides some optimism as well.

Speaker 13

Great. That's very helpful. And Donnie, I just wanted to go back to one of your comments. I think you did mention, I think around chicken that you took some asset impairments in the quarter. I'm not sure that I saw those in the queue, but just maybe thinking on a longer term basis, look, Chicken has been a business where you've been quite acquisitive.

Speaker 13

I think the margin profile, Self admittedly has probably been a little bit weaker than you would have thought. Just as we kind of sit here today and go through the For the year, like how do we think about further impairment risk in that business, particularly as the margin improvement even coming out of this year isn't expected to be kind of at your long term average.

Speaker 4

Thanks for that question. I'll touch on this at a high level. In terms of your question, for the past few years, we've taken bold and aggressive steps to advance productivity and efficiency. We're constantly evaluating how we can be more efficient, push down decision making and remove duplication of work. Those are all top of mind today.

Speaker 4

But we have also have done a number of things looking at our footprint, looking for what it would take to make our less efficient assets and this would be across the portfolio. How do we either make them efficient? How do we automate them? How do we redesign them? Or in some cases, You could look at how would you sell it or how would you close it.

Speaker 4

And we look at all those different options. But I want to remind you that our strategy is all about growth. Growth in our base or core protein businesses, growth in our branded portfolio and growth internationally where it makes sense. So making sure that you understand clearly that we are in a growth mode And at the same time trying to right size our footprint in our production machines to deliver those products that customers and consumers

Speaker 1

And our next question comes from Ben Theurer from Barclays.

Speaker 14

Just wanted to Come back to checking in and actually some of it like historic context and ask about your performance, particularly as it relates To hatch rates and hatchability? Because it was interesting in the past, it seems like the performance itself Was impacted by the very specific issues you were facing. We saw the industry relatively soft, I would say, in the last couple of weeks. But it feels like that your performance at least from a volume perspective has done better. So any comment you can share as to your own initiatives and improving that Supply and then ultimately less need to buy outside.

Speaker 14

How do you feel about this? How was it in the last quarter and how do you feel about it go forward? That will be my first question. I have a quick follow-up as well.

Speaker 4

Okay. I will start off and then I'll flip it for Wes for even greater level of detail. But I would remind you that couple of years ago, I outlined a roadmap for us to what I would call restore our chicken business to its rightful position. Those are my exact almost my exact words. And we're still on that road map.

Speaker 4

We've had bumps along the way in a lot of production and the lifecycle Of the animals that we had some issues with some of the breeding stock, particularly the males and That's been well chronicles everywhere. We had issues with Hatch and we're very competitive as it relates to that today. We've made lots of improvement. We were buying, if you recall, a significant amount of product on the outside and paying a premium in the height of the market. And we began to reduce our dependence on outside meat and wanted to utilize the assets that we have in place and get the fixed cost leverage by producing those live animals and then converting those into those products that our customers and consumers And we've done all those things and we're still on this journey.

Speaker 4

And I would tell you that we got the right people in place to complete that mission, not that you ever arrived, but to continue down the road. Great leadership, a great team in place now to do that. And I'm excited. I'm optimistic about the future of our chicken business and where it's going. And even in this quarter losing $166,000,000 I'm still excited about the future of the number one brand in chicken and the opportunities that we still have before us.

Speaker 4

Wes?

Speaker 7

Yes. Thanks for the question, Ben. The whole industry is not The kind of hat trades we saw 4 or 5 years ago, 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. 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 We'll continue to buy and grow as we have fluctuations in our demand, but much more imbalance than in years past.

Speaker 14

Perfect. Thank you very much. And then just the second question, just around capital allocation, obviously. You've reduced the CapEx a little bit, but then at the same time, because of the loan, you got a little higher interest. You did some share Fair repurchases throughout the quarter.

Speaker 14

How should we think about for the balance of the year also in light of what Adam pointed out as leverage Could go somewhere north of 4 times. How should we think about share purchases, dividends, further CapEx and ultimately M and A, which is also something that Kind of popped up during the quarter. So just to understand the priorities here. Thank you.

Speaker 4

Yes, sure thing and thanks

Speaker 5

for the question. Let me just talk about the priorities and then talk about where we are in the year and what the outlook is. So 1st and foremost, we're always looking to invest in our business and I think it's important to recognize that The CapEx deployment wave that we're in right now is typically is higher than kind of our historical average. Over the long run, something more like $1,500,000,000 is what we would target on an annual CapEx number. So I think that if we go into the coming years, we'll trend in that direction.

Speaker 5

And then we look at strategic M and A where we can. We've been Pretty, I think thoughtful in that approach. We're really pleased about the Williams deal and see that as a valuable part of Investing our business. And then on the returning cash to shareholders, we remain committed to the dividend and Share repurchases, I think, will continue to be conservative and look at something that's in line with historical norms. Obviously, there are a lot of different variables that go into that on a quarterly or annual basis as we make those choices.

Speaker 5

But yes, I think just where we are with the Profitability outlook in the business, kind of the CapEx cycle and the borrowing, we're conscious of and aware that our leverage ratio will pick up. But again, we're kind of making choices and decisions around investments for the long term of this business. So we're comfortable, although we don't like the pickup, we're comfortable with these cycles where leverage ratios may be a little bit elevated compared to our long term target.

Speaker 14

Okay. Thanks for that, John.

Speaker 1

And our next question comes from Michael Lavery from Piper Sandler. Please go ahead with your question.

Speaker 15

Thank you. Good morning.

Speaker 3

Good morning. I just wanted

Speaker 15

to come back to the idea of growth versus profitability and just How to think about balancing that not just for one segment, but broadly? And I guess just with so many of the headwinds you're pointing to Broad in the macro environment and without really much change ahead in terms of it sounds like it's going to get better very soon. Does that impact how you think about maybe different priorities to improve profitability or just To make sure the margins come through better as much as you have some things you can control or what's the right way to think about some of that in terms of Just any investment trade offs or ways to maybe improve the execution a little bit?

Speaker 4

Yes. Thanks for that question. And first thing I would tell you is that Just to acknowledge the macro environment and what it's been and the fact that the magnitude and the duration of the challenges, They do continue. However, if you think about this company in particular, We've had a 90 year history of successfully managing macroeconomic cycles and we've always come out stronger. We have never been able to control those cycles and what we can do is control what we can control.

Speaker 4

And there's a lot of opportunity there for us to be better. And we are obviously focused on that and across all businesses and functions. In terms of growth at any cost, that's not what we're talking about here. The growth that we have is in service to our customers and those consumers. And I think as Wes had mentioned this earlier That we always start with a demand plan and we work back to a supply plan.

Speaker 4

And so we wouldn't be growing chicken, beef or pork or be prepared foods for that matter if we didn't have a demand plan that says that we have a consumer wanting this. And then the second part of that is We obviously had no intention of just growing for growth sake and but we always balance Growth with profitability and I wouldn't expect this time to be any different than that. But we see this cycle is Something we've seen before and we've always accelerated out of these type cycles and we've in a growth pattern accelerating out of the curve, if you will. And that's what we're doing this time as well.

Speaker 5

And I think if I can add on to what Johnny is saying just to emphasize Growth and the focus on high quality growth, we've just completed a 5th consecutive quarter of record sales growth. The same is true for the Chicken segment and the Prepared Foods segment and we're growing in the parts of those businesses that we see is attractive from a margin standpoint. And of course, in poultry, as we've talked about, part of that has to do a little bit with just you getting the capacity utilization footprint back right. And then it's also worth pointing out that we've got a business outside the U. S.

Speaker 5

That is trending towards tripling in about 5 years. And so I think as we think about the long term, That becomes a profit engine for us and we're excited about the investments we've made there as well.

Speaker 3

Okay. Thanks so much. Thank you.

Speaker 1

And ladies and gentlemen, with that, we'll be ending today's question and answer session. I'd like to turn the floor back over to Donnie King for any closing remarks.

Speaker 4

Thank you. And as you've heard today, this is a challenging moment, but my optimism about the future has not changed. Our customers and consumers are behind us. We're winning with both. This is not an accident, but is a result of the hard work our team members do every day and I thank them for it.

Speaker 4

As we continue to build a world class organization is positioned to take advantage of the opportunities in front of us. We remain confident that our strategy will deliver long term growth and shareholder value. Thanks for your interest in Tyson Foods and we look forward to speaking soon.

Speaker 1

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.

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Earnings Conference Call
Tyson Foods Q2 2023
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