Tyson Foods : Second Quarter 2024 Transcript

PRESENTATION

Operator

Good day and welcome to the Tyson Foods' second quarter 2024 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing "*" "0".

After today's presentation there will be an opportunity to ask questions. To ask a question, you may press "*" "1" on a touchtone phone. To withdraw your question, please press "*" "2".

Please note, this event is being recorded. I would now like to turn the conference over to Sean Cornett, Investor Relations. Please go ahead.

Sean Cornett

Good morning. and welcome to Tyson Foods' fiscal second quarter 2024 earnings conference call. On today's call, Tyson's President and Chief Executive Officer, Donnie King; and Chief Financial Officer, John R. Tyson, will provide some prepared remarks followed by Q&A. Additionally, joining us today are Brady Stewart, Group President, Beef, Pork and Chief Supply Chain Officer; Melanie Boulden, Group President, Prepared Foods and Chief Growth Officer; Wes Morris, Group President, Poultry; and Amy Tu, President, International.

We also have provided a supplemental presentation, which may be referenced on today's call and is available on Tyson's Investor Relations website via the link in our webcast. 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 risks, uncertainties and assumptions, which may cause actual results to differ materially from our current projections. Please refer to our forward-looking statements disclaimer 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. We assume no obligation to update any forward-looking statements.

Please note that references to earnings per share, operating income, and operating margin in our remarks are on an adjusted basis, unless otherwise noted. A reconciliation of these non-GAAP measures to the corresponding GAAP measures, please refer to our earnings press release.

Now I'll turn the call over to Donnie.

Donnie King

Thanks, Sean, and thank you to everyone for joining us this morning. I'm pleased with our performance in Q2, and I want to thank our team members for their ongoing commitment to driving operational excellence. We've certainly come a long way from where we were a year ago and wouldn't be where we are today without their hard work.

Our momentum continues to strengthen, and all of our businesses are running better today than they were last year. Our results this quarter are part of our solid performance in the first half of fiscal 2024 compared to the first half of last year. Adjusted EPS and adjusted operating income

Tyson Foods, Inc.

Monday, May 6, 2024, 9:00 AM ET

are both up nearly 60% while operating cash flow increased by more than 50%, and CapEx decreased by more than 40%. This performance gives us confidence in our improved outlook for the fiscal year and in our long-term future.

As you saw in our results, tailwinds in chicken again offset headwinds in beef as we benefit from our multi-protein portfolio. While we're not immune to the macro environment, we are taking steps to reduce our exposure to commodity markets. We are expanding our offerings in seasoned and marinated meats to value up our portfolio across beef, pork, and chicken to provide consumers convenience and new flavor options. Across our brands, we are focusing on meeting the consumers where they are by offering convenient, restaurant-quality food options at home.

We are a leader in protein with some of the most iconic brands in food with offerings that span the value spectrum. This is why our share remains healthy despite a more challenging environment for consumers. We continue to support our brands through efficient marketing, effective innovation, and strong partnerships with our customers. We continue to build financial strength by being disciplined in our capital deployment to improve cash flow and position us well to tackle challenges and capture opportunities. We also continue to take bold actions to improve performance and drive long-term value for shareholders, and I remain highly confident in our strategy and optimistic about our future.

Now let's delve into an update on market share. At Tyson Foods, we have a broad portfolio of offerings across food service and retail at a range of price points to meet consumers where they are, even as they manage through a challenging macro environment. We also have some of the strongest and most iconic brands across food and beverage behind the Tyson, Jimmy Dean, and Hillshire Farm names, which allows us to make efficient choices to maintain margin while strengthening our shelf position. We see this in the strength of our dollar share in our core business lines, which we believe reflects the quality of our share position.

Since Q2 of fiscal 2019, we've added 400 basis points of dollar share in our core business lines. While our share is down modestly versus last year as we lap some record performance, we have gained dollar share over each of the past 3 quarters. Our core bacon brands, Wright and Jimmy Dean have contributed to this recent growth. In fact, our dollar share in bacon for Q2 was at a record high level over the past 5 years, and we were the fastest growing in the category during the quarter. I'm excited about our opportunities in bacon and expect our share to continue improving as our new bacon facility that opened in January ramps up.

The value proposition of our iconic brands resonates strongly with our consumers and our market share and household penetration rates remain healthy. We continue to have opportunity to expand the household penetration of our great brands. leaving room for continued share growth over the long run.

Moving on to the segment performance, starting with Prepared Foods. Consumers' focus on value continues to impact our retail volumes. However, our share remains healthy and as I mentioned, we are gaining dollar share in bacon. Our volumes outside of retail continue gaining traction as we strive to grow this business with a focus on customer diversification and margin-accretive channels. Operational efficiencies and lower raw material costs drove solid profitability both in Q2 and the first half of fiscal '24.

In Chicken, the momentum established in the second half of fiscal '23 continued in Q2. In fact, versus the second quarter of last year, AOI increased more than $325 million. While we are benefiting from better market conditions, including lower grain costs, our bold actions and focus on the fundamentals are also evident in our results.

Tyson Foods, Inc.

Monday, May 6, 2024, 9:00 AM ET

We have made progress across the value chain. Our live operations are substantially better. We've improved yield, labor efficiencies, and utilization in our plants. Our demand planning and customer service have also taken significant steps forward. When our live operations are running well and our demand plan is more accurate, we can operate more efficiently and better service our customers. In summary, our focus on getting back to the basics in chicken is working.

As you all know, in Beef, limited cattle supplies led to spread compression. Despite some quarterly volatility reflecting market conditions, our results for the first half of fiscal year have come in as we expected. Our goal remains to offset some of the challenges of a tight cattle supply environment by focusing on the controllables such as labor utilization and managing mix to meet customer and consumer demand.

Turning to Pork. Better spreads and ongoing operational execution led to improved profitability in the quarter and in the first half of the year. As you may have seen, we made the difficult decision to close one of our pork facilities. This is part of our efforts to optimize our footprint and improve performance by reallocating resources to nearby more efficient plants while improving mix and better serving our customers.

Now let me take a step back and talk about our recent corporate rebranding initiative. We launched a new corporate logo earlier this year that captures our One Team, One Tyson spirit. It encompasses our differentiated capabilities and scale and our diverse portfolio across channels, categories, and eating occasions. Our Tyson Foods corporate logo represents our company's legacy and our team's purpose, which is to feed the world like family.

Our approach to driving long-term value hasn't changed and is built on a core of 3 key pillars. First, we are fortifying our foundation of core proteins. We strive to be best-in-class operators while continuing to look for ways to value up our portfolio. Second, we are building our brands by delivering innovation for new occasions, categories, and channels to better serve consumers.

Today, we have 3 of the top 10 protein brands with room to expand our household penetration. Brands are our best opportunity to drive faster growth, higher margins, and stronger returns. Third, we're growing globally. Our international business grew revenue eightfold to $2.5 billion over the 5 years through fiscal '23. We expect to drive profitable growth over time by capturing expanding consumer markets, particularly in Asia, and we believe we are well positioned to win. These strategic pillars are supported by key enablers of operational excellence, customer and consumer obsession, along with data and digital.

A key element of operational excellence is to gain enterprise scale and unlock savings in our controllables by modernizing our operations and driving performance to standards. We win with our customers by building long-term partnerships and delivering top-tier experiences. We enrich consumers' lives by creating best-in-class marketing and innovation. Finally, we continue to build our digital capabilities utilizing data, automation, and AI tech for better decision-making and outcomes.

Before I hand it over to John to review our financial performance, let me remind you of our priorities this year, where we focused on controlling the controllables. Our results for the first half of the year clearly show that we are controlling our CapEx and working capital to drive strong cash flow.

Another priority is to optimize our footprint and network. We closed the last of the 6 chicken facilities that we announced in 2023, along with the 2 case-ready beef facilities and as mentioned earlier, we are closing one of our pork plants. We're also focused on operational excellence by restoring performance in chicken, strengthening prepared foods, managing beef

Tyson Foods, Inc. Monday, May 6, 2024, 9:00 AM ET

through a difficult cattle cycle and driving efficiencies in pork. As you have seen in our results so far this year, we are making tangible progress in all these areas.

With that, I'll turn the call over to John.

John Tyson

Thanks, Donnie. I'll start with an overview of our total company results before moving on to our individual segments.

Sales in Q2 were essentially in line year-over-year at $13.1 billion as a decrease in chicken was nearly offset by an increase in beef. Adjusted operating income increased $341 million year-over-year to $406 million, driven primarily by significant improvement in chicken profitability. Operational performance and substantially higher AOI led to an (inaudible) increase in adjusted EPS, which came in at $0.62 in Q2.

Now let's review our segment results, starting with Prepared Foods. In Prepared Foods, Q2 revenue was down slightly year-over-year. Volume growth was led by benefits from the Williams acquisition. The pricing decline reflects the mix impact of the lower contribution from retail. AOI in Q2 was down modestly versus last year. Lower raw material costs and operational efficiencies were more than offset by start-up costs and mix. Despite the decline in AOI, our margin for the first half of the fiscal year remained in the low double digits.

Moving to chicken. Sales in Q2 declined 8.2% year-over-year, primarily due to lower volume. Volume declined 6.1%, driven by lower production as we better aligned our supply to customer demand, while the 2.1% reduction in pricing was due in part to the pass-through of lower input costs. Despite the decline in sales, AOI increased $326 million year-over-year to $160 million.

The benefits of our strategic actions and the substantial operational improvements we've executed since last year are clear. Market conditions, including lower input costs, net of pass-through pricing, and a better supply-demand balance were also key contributors to improved profitability. The current quarter results include a $55 million derivative loss compared to a $35 million loss in the year ago quarter. As a reminder, our grain hedging program is part of an overarching risk management strategy and not a speculative tool.

In our Beef segment, revenue was up 7.3% year-over-year in Q2, with both volume and pricing increases. The 2.8% increase in volume was primarily driven by higher average carcass weights, while pricing increased 4.5%. While revenue increased AOI decreased versus last year, primarily reflecting compressed spreads as expected. This more than offset continued progress on our operational efficiencies, including better labor utilization and better management of product mix to meet customer and consumer demand.

Moving to Pork. Q2 revenue increased 4.6%, driven by volume growth and higher pricing. Volume growth of 2.9% was led by more plentiful hog supply. Pricing improved due to healthy global demand. AOI also increased year-over-year going from a loss of $31 million last year to a profit of $33 million this year in Q2, benefiting primarily from improved spreads and better operational execution. Year-to-date, Pork AOI has improved $151 million.

Finally, our international business continues to make progress towards stronger profitability. AOI increased versus last year as we begin to lap some of the start-up costs of our newer facilities and continue to focus on operational execution.

Shifting to our financial position and capital allocation. Year-to-date showcased strong operating cash flow of approximately $1.2 billion as we continue to manage working capital. We remain very disciplined with CapEx, which came in at $621 million for the first half. The $267 million in Tyson Foods, Inc.

Monday, May 6, 2024, 9:00 AM ET

CapEx for Q2 was the lowest quarterly spend in several years and represents the fifth quarter in a row of sequential decline as we lap our elevated CapEx from the previous 2 fiscal years and focus on controlling where and when we deploy capital. Year-to-date, free cash flow of $556 million increased nearly $900 million versus the first half of last year and was more than $200 million ahead of our year-to-date dividend payments.

Our balance sheet management approach remains unchanged as we are committed to building financial strength, investing in our business, and returning cash to shareholders while maintaining our investment-grade credit rating and returning net leverage to at or below 2x net debt to EBITDA.

Our net leverage again declined sequentially, coming in at 3.6x in Q2, driven by improving last 12 months' EBITDA, and we expect it to continue to improve for the balance of the year. We ended Q2 with $4.4 billion of liquidity. As you may have seen from our press release in March, we successfully raised $1.5 billion in new senior notes, and we paid down a portion of our term loans.

We plan to use the remaining proceeds to retire our outstanding notes coming due this August. 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 take a look at our updated outlook for fiscal 2024. We are reiterating our overall sales guidance to be roughly flat year-over-year. However, given our strong year-to-date results, we are raising our AOI guidance driven primarily by an improved outlook for Chicken. For the total company, we now expect between $1.4 billion and $1.8 billion of operating income.

Moving to the segments. In Chicken, given the strong start in the first half of the year, we continue to believe that there are more tailwinds than headwinds. We are raising our AOI guidance range to be between $700 million and $900 million.

Prepared Foods also had a solid first half. In this segment, we are tightening our AOI outlook to be between $850 million and $950 million, indicating a weaker second half of the year, which reflects typical seasonality.

In Beef, the first half of fiscal 2024 has progressed in line with our expectations. However, uncertainties remain, including the progression of the cattle cycle, and we now expect our full year AOI to be between a loss of $400 million and a loss of $100 million. In Pork, we've seen solid first half performance and are raising our guidance to be between $50 million and $150 million.

To add some color to the shape of the rest of the year, uncertainties remain around consumer strength and behavior, the progression of the cattle cycle, and key commodity costs. When we factor in these variables with pork and prepared foods seasonality, there are reasons to believe that Q3 could be weaker than Q4. To round out these key P&L items, we anticipate interest expense to be roughly $400 million and our tax rate to now be approximately 24%.

Turning to CapEx. We're maintaining tight controls on spending in line with profitability and cash flow, and we are narrowing our CapEx range to be between $1.2 billion and $1.4 billion this year. And finally, on free cash flow, we're committed to managing working capital and CapEx and we're even more confident now that we can fully fund our dividend this year through our free cash flow generation.

Now I'll turn the call back over to Donnie to wrap up before we move to Q&A.

Tyson Foods, Inc.

Monday, May 6, 2024, 9:00 AM ET

Donnie King

Thanks, John. Before we get to your questions, I'd like to thank our 139,000 team members who work tirelessly to feed the world like family and fulfill our mission to bring high-quality food to every table in the world. It is the strength of our team that secures our position as a world-class food company and a recognized leader in protein. Together, we delivered a solid first half. We still have more work to do and believe we have the strategy in place to continue our progress and deliver long-term shareholder value.

Now I'll turn the call back over to Sean for Q&A instructions.

Sean Cornett

Thanks, Donnie. We will 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.

QUESTION AND ANSWER

Operator

We will now begin the question-and-answer session. To ask a question, you may press "*" "1" on your touchtone phone. If you are using a speaker phone please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press "*" "2".

At this time, we will pause momentarily to assemble our roster. The first question today comes from Peter Galbo with Bank of America. Please go ahead.

Peter Galbo

Donnie, maybe just to start, you typically give, I think, kind of an update on the state of the business and things have improved sequentially at least pretty dramatically. I guess just curious a little bit on two things.

One, kind of are you happy now with kind of the state of the portfolio and the state of plant closures and asset rationalization? And then secondly, just trying to understand the commentary around Q3 weaker than Q4 seasonally in light of what you've been saying that that would run kind of counter to what has been the case seasonally for the past, I don't know, 5 or 6 years. So maybe if you can just unpack those 2 areas would be helpful.

Donnie King

Thanks, Peter, and I appreciate everyone for being on this morning. Your first part of your question is essentially am I satisfied. I'm encouraged, I'd stop short of saying satisfied in terms of the results. I'm proud of the results that we delivered in Q2, and we're seeing the benefits of our diverse portfolio across proteins, channels, categories, and eating occasions.

Where we saw chicken and pork are offsetting the headwinds in beef. In our Q2, our momentum continues to strengthen on all of our businesses, and they're running better today than they were last year. We've come a long way from where we were a year ago and my thanks to all of our team members for continued improvement in execution.

Tyson Foods, Inc.

Monday, May 6, 2024, 9:00 AM ET

We're executing against the priorities we laid out for fiscal '24. We are controlling the controllables. We're optimizing our network. We remain focused on operational excellence. We've taken bold actions to drive performance and to build financial strength.

We're delivering meaningful results compared to the first half of last year in profitability, cash flow, CapEx in line with historical rates. Our performance has given us confidence to raise our guidance while acknowledging uncertainties remain, and we have much work to do.

In terms of your specific question around Prepared, let me make a few comments, and then I'll pass it over to Melanie to add some detail. Our results were in line with our expectations. Our brands are strong, and our share remains healthy. Persistent inflation is weighing on our bifurcated consumer. Our strategy is to meet the consumers where they are with offerings at various price points.

In terms of more details, let me flip it over to Melanie to add a little color to your questions.

Melanie Boulden

So, Peter, I think you were asking specifically about our projections for Q3 as well as the rest of the full year. And so, I'll just talk specifically about Prepared Foods and let any of the other leaders chime in.

So, the first half of the year, Prepared Foods delivered $500 million in AOI, and you also know that profit delivery in the second half of the year has historically been lower than the first half, and we expect this year to be the same. So therefore, the midpoint of our second half guidance is $400 million. And I also want to point out that historically, Q3 has performed better than Q4, but we're seeing higher commodity costs in Q3, so we expect a pretty even split between the 2 quarters.

Peter Galbo

Great. Melanie, that's very helpful. Yes, we've gotten certainly a number of questions on that. So, thank you for the context.

And then Donnie, maybe just as a follow-up. Look, we've had a number of companies this quarter, both in the CPG industry and in restaurants just kind of comment on the state of the consumer and low-income consumer. I know that was in some of your prepared remarks, but curious if you could dive a little bit deeper on just your view on food service and some of the channels that you service there. Just any commentary around quick service, casual dining, and noncommercial would be helpful.

Donnie King

Melanie, why don't you answer that?

Melanie Boulden

Yes, happy too. So, Peter, in both retail and food service, as you know, the consumer is under pressure, especially the lower-income households. And in retail, we're seeing roughly 20% cumulative inflation over the last 3 years. Now the inflation impact, coupled with historically low savings rate has created a more cautious price-sensitive consumer. And we're also seeing a cautious consumer prioritize essential staples over discretionary categories.

Now that said, we're advantaged in that our protein categories enjoy lower levels of elasticity compared to the broader consumer landscape. And in retail, well, I should say, but in retail, we Tyson Foods, Inc.

Monday, May 6, 2024, 9:00 AM ET

are experiencing a little slippage to private label with lower income households. However, our share remains strong with growth in bacon, snacking, and sausage.

Now in foodservice, where you specifically noted, we continue to deliver solid performance, but we are seeing shifts from fine dining into QSR. We're also seeing QSR slippage to more meals being consumed at home. But for Tyson, we're advantaged as we serve both in-home and away-from-home consumers.

The key point, I guess I'd like you to take away from all of this is that we've intentionally built the portfolio diversified across strong brands spanning multiple protein offerings and value tiers, and our scale allows consumers to find our products in multiple places throughout retail and foodservice channels. And this allows us to deliver on our goal of meeting our consumers where they're at, across a variety of value spectrum.

Operator

The next question comes from Ben Theurer with Barclays.

Benjamin Theurer

Congrats on those very outstanding results. Just wanted to dig a little bit into the dynamics in Chicken that you've seen and kind of unpack a little bit the volume performance on the production side. Can you help us to kind of frame it a little bit more? Is it lower (inaudible)? Is it lower weight? Is it a combination of it? What have you done differently in terms of like adjusting your operations to kind of have those sales down, but at the same time, with a very nice profit spread? And that would be my first question and then I have a quick follow-up.

Donnie King

I think I caught all the questions. Let me start out here was -- if I heard correctly, it was a kind of a supply question and then let me talk about that, and I will look at Wes to add some very specific details.

But in terms of chicken supply, if you look at the publicly available data, USDA has projected chicken supply to increase about 1% in 2024. But if you look at the data underneath it, there are some things that you need to get from this.

This is a livability and hatchability story for the industry. If you look, pullet and hen mortality continues to be elevated. Broiler mortality continues to be elevated. Hatchability continues to be 3% to 5% below historical rates. So, the net of all that is this. There will be fewer live pounds delivered to the processing plant than forecast.

So, if I look at that, I believe the supply will be lower than 1% projected by USDA. The other thing I would say with that is this is not a short-term fix. If you remember, we have a genetics company as well. And we've seen some of this activity as well. So, this can be a little bit of a longer-term issue.

So you ask -- you didn't ask, but I would tell you, at least from our perspective, genetic selection over the last several years have been skewed towards broiler characteristics like yield and feed conversion. There has been some impact, cumulative impact, from no antibiotics ever across the supply chain. And there's some, I won't say, new disease, but the disease persists, creating mortality in the broiler.

There's a new one or new to me called Avian meta pneumonia virus that's out there laryngotracheitis, or LT, is out there today, and there are other things. But I think the supply will Tyson Foods, Inc.

Monday, May 6, 2024, 9:00 AM ET

be less than 1% based on the data points I'm looking at and from flat to 0.5% or something along that order.

Let me flip it to Wes and let him talk about our supply and see if that answers your question.

Wes Morris

Yes, Ben, we certainly see the USDA numbers projecting up 1%, but we're seeing the egg sets up by, weight up but slaughter pounds relatively flat. The good news is I'm very proud of our live performance. We hatched 82 34 in the quarter. livability is up 50 points year-over-year.

And so, looking at our live performance and then our S&OP process, our supply-demand group, we're in a good position for the back half of the year to stay balanced to take care of our customers, and I'm very pleased with our live and supply demand planning group.

Specifically, to Q2 volume, our volume is solid. It's consistent with Q1 and our expectations. Just as a reminder, 2023 is a challenging comparison period. Our pricing is solid. Just as a reminder, we lag a quarter to a quarter plus. And then the other dynamic unique to us is we have quite a few grain-based models that pull pricing down, but it does stabilize our margin.

Benjamin Theurer

Okay. Perfect. And then just a quick follow-up on Beef in terms of like what you're seeing on the industry. Have you seen any signs of heifer retention so just what you like getting on the ground to get a better feel on how bad it is still going to get until it might get better? A little bit of a preview maybe into '25.

Brady Stewart

Sure, Ben. This is Brady. And thanks for the question. And first of all, I guess, really at a high level, we haven't seen anything relative to any of the industry numbers that have been published that really indicate that true meaningful heifer retention has begun.

And so, at this point, we can potentially anticipate retention beginning in the fall, but there's some caveats to that. And certainly, as we shift from an El Nino weather pattern to a La Nina, the pasture conditions are extremely important to heifer retention. And there's a potential we could see some drier conditions as well persist.

We'll continue to monitor that along with additional metrics around heifer retention and the percentage of heifers that move into slaughter. And then lastly, one of the promising signs would be we have seen a meaningful decline of the number of cows that are going to slaughter, down double digits from '22 and '23, both and so really, we find ourselves what looks like in the midst of a transition pattern, and we'll continue to monitor to understand the timing of that as we move forward.

Operator

The next question comes from Tom Palmer with Citi.

Thomas Palmer

Maybe start off on the chicken side, at least relative to consensus estimates, the guidance boost would seem to indicate more than just upside in the quarter. So maybe talk on the components that are driving that increased outlook for the second half of the year? I mean it does seem, obviously, like feed is favorable. It seems like the pricing environment it's getting better. And Tyson Foods, Inc.

Monday, May 6, 2024, 9:00 AM ET