Tyson Foods, Inc. (NYSE:TSN) Q1 2024 Earnings Call Transcript

Tyson Foods, Inc. (NYSE:TSN) Q1 2024 Earnings Call Transcript February 5, 2024

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Operator: Good morning, and welcome to the Tyson Foods First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Sean Cornett, Vice President, Investor Relations. Please go ahead.

Sean Cornett: Good morning, and welcome to Tyson Foods’ fiscal first 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 and 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 have also provided a supplemental presentation, which may be referenced on today’s call and is available on Tyson’s Investor Relations website and 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’s not related 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 disclaimers on Slide 2 as well as our SEC filings for additional information concerning risk factors that could cause our actual results to differ materially from our projections. 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. 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 Donnie.

Donnie King: Thanks, Sean, and thank you to everyone for joining us this morning. As you may have seen in our press release this morning, fiscal 2024 is off to a good start with solid performance in Q1 giving us confidence in our full-year outlook. The momentum we established in the back half of last year continued in Q1, highlighted by a $175 million improvement in adjusted operating income, a 130 basis points of AOI margin expansion and near doubling of adjusted EPS, all on a sequential basis. As we begin fiscal ’24, we’re witnessing the benefits of our core multi-protein portfolio. Chicken and Pork are offsetting Beef headwinds, while Prepared Foods continues to generate strong profit dollars and margins. While we can’t control the macro environment, our focus on what we can control has been evident in Q1.

Our performance reflects a commitment to operational excellence, we are more agile, collaborative, and disciplined business than a year ago, and we have a long runway of opportunities in front of us. I’m proud of our team members’ continued efforts to enhance operational performance and want to thank all of them for their high level of engagement and their part in delivering our results in this quarter. We’re controlling what we can to drive cash flow as well. Our disciplined approach to CapEx and working capital helped generate strong cash flow in the quarter. Prudent cash deployment is part of our strategy to build financial strength and will position us well when market dynamics turn in our favor. You’ve seen us take bold actions to improve performance, and everything remains on the table to drive operational excellence and address inefficiencies.

Our plan is working, and we’re seeing tangible benefits of our efforts as evidenced by improvements in Chicken and Pork. While I’m pleased by the performance in Q1, we still have more work ahead of us, and we’re cautiously optimistic and laser-focused on achieving what we set out to do this year. Our brands resonate with consumers, and we’re maintaining strong market share despite comparing to our record position last year and some overall category consumption softness in Q1. We will continue to support our brands through innovation, marketing, and strong customer partnerships while meeting consumers where they are. I remain highly confident in our long-term strategy based on a broad portfolio of core proteins and strong brands and I’m optimistic about our future.

We’re leaving no stone unturned to drive long-term value for our shareholders. Now, let’s delve into an update on share position of our branded portfolio. Our Q1 pound share in our core business lines, which include product lines from our iconic brands, Tyson, Jimmy Dean, Hillshire Farm, State Fair, Aidells, and Ball Park, remains at historically high levels despite a modest decline compared to record share in Q1 last year. In fact, our core business lines have grown pound share by more than 400 basis points since Q1 of 2019. While inflation is easing, consumers are still facing high prices compared to two years ago. However, they are still willing to purchase brands they know and trust, and this is reflected in our share. We’re also focused on customer elasticity and balancing with our own cost.

We believe our approach is working. The value proposition of our iconic brands resonate strongly with consumers. Over the past year, nearly three out of four US households purchased a Tyson core business line product, and this penetration rate is growing. What gets me even more excited is that our product line with the highest penetration rate is only in about a third of households, leaving us plenty of room for continued growth over the long run. Moving on to segment performance, starting with Prepared Foods. Our foodservice volumes 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 strong adjusted operating profits and margins.

Our Branded Foods business remains a strategic growth pillar, and we are committed to supporting and growing our brands through innovation, price pack architecture, high ROI marketing support and strong customer partnerships. This is critically important in an economic environment where consumers remain more discerning with their purchasing decisions. In Chicken, the momentum established in the second half of fiscal ’23 continued in Q1 with a third consecutive quarter of over $100 million in sequential AOI increase. Operational improvements, including the bold actions we’ve taken along with improvements in live operations, yield, labor efficiency, and customer service, as well as improving market conditions, were the primary drivers in Q1. In Beef, limited cattle supply led to spread compression as we expected.

Roughly half the loss in Q1 was related to an inventory valuation adjustment, which was primarily driven by highly volatile cattle futures. While spreads are expected to remain tight, our goal remains to be best-in-class operators so that we can manage the business as efficiently as possible. We have identified incremental opportunities to improve our execution and help offset some of the challenges from the current cattle cycle. Turning to Pork, better supply drove lower hog cost leading to improving spreads. Our team’s focus on operational execution allowed us to capture the benefits of these favorable market dynamics, which resulted in improved profits both on a year-over-year and sequential basis. Before I hand it over to John for a financial review, let’s reiterate our priorities for the year.

First, we’re committed to improving our financial strength and driving cash flow to support our dividend, as demonstrated in Q1. Over the past year, we announced the closure of six of our older, less-efficient plants in chicken and two of our smaller beef case-ready value-added facilities. We’re already seeing the benefits of these actions and we’ll continue to evaluate opportunities to drive efficiency across our segments. In Chicken, our focus on enhancing our competitiveness continues. In Prepared Foods, we want to build growth momentum behind capacity additions coming online, increase our brand household penetration, and diversify and grow our foodservice business. In Beef, we acknowledge the challenges and will be prepared for multiple outcomes during the current cattle cycle.

In Pork, we’re gaining momentum in operational execution and are excited for continued improvements. With that, I’ll turn the call over to John to discuss our financial results and outlook.

John R. Tyson: Thanks, Donnie. I’ll start with an overview of our total company results before moving on to our individual segments. Sales in Q1 grew slightly year-over-year as an increase in Beef revenue was nearly offset by a decrease in Chicken. The decline in adjusted operating profit was driven by lower profitability in Beef, which was partially offset by growth in Chicken and Pork. It’s important to note that AOI improved significantly on a sequential basis despite the modest decline versus last year. Adjusted EPS nearly doubled compared to last quarter, highlighting the ongoing improvement in our operational performance. Now, let’s review our segment results starting with Prepared Foods. In Prepared Foods, Q1 revenue was flat year-over-year.

Volume growth was led by benefits from the Williams acquisition and continued recovery in our foodservice business. Lower pricing primarily reflects the mix impact of the lower contribution from retail. AOI in Q1 was also in-line with last year. Lower raw material costs and operational efficiencies were offset by increased brand support expenses, start-up costs associated with new capacity additions and mix. AOI dollars and margin both increased significantly on a sequential basis due to strong operational performance and great seasonal execution by the team. Moving on to Chicken. Sales in Q1 declined 5.4% year-over-year, primarily driven by the impact of lower commodity protein prices. Volume declined 1.5% due to lower production, which was partially offset by continued sell-through of finished goods inventory.

Despite the decline in sales versus last year, AOI more than doubled in Q1, primarily driven by the benefits of our strategic actions and other operational efficiencies. These include lower plant spend, improved yield and better live performance. While input costs were a clear tailwind, these were largely offset by the impact of lower pricing. As Donnie mentioned, this is the third consecutive quarter of more than $100 million of AOI improvement as we were able to pull forward the benefits of closures of inefficient plants in improvements in our live operations. Now moving to Beef. In Beef, revenue increased 6.4% year-over-year in Q1, with lower head throughput more than offset by higher prices per pound. While revenue increased, AOI decreased versus last year, primarily reflecting compressed spreads, as was expected.

As Donnie mentioned, in Q1, nearly half of the operating loss was driven by an unfavorable inventory valuation adjustment, which was primarily due to the rapid and significant decline in cattle futures. Moving to Pork, Q1 revenue was down modestly as volume growth was offset by lower pricing. However, AOI increased year-over-year, benefiting primarily from improved spreads driven by lower hog cost as well as better execution. And finally, a brief comment on our International business. AOI improved as we begin to lap some of the start-up cost of our newer facilities and continue to focus on improving execution despite a decline in sales, driven by macroeconomic challenges. Shifting to our financial position and capital allocation. Our commitment to building financial strength, investing in our business and returning cash to shareholders, primarily via our dividend, remains unwavering.

While market conditions remain challenging, we are laser-focused on disciplined management and deployment our capital resources to drive cash flow. Q1 showcased robust operating cash flow of $1.3 billion, above our expectations, and working capital was a solid source of cash as we continued to manage inventory levels. We were also disciplined with CapEx, which came in at just over $350 million in the quarter, below last year’s exit rate. During the quarter, we returned $171 million to shareholders via dividends. Our net leverage declined sequentially, coming below 4 times, driven by our improved profitability and strong cash generation. We ended Q1 with more than $3.7 billion of liquidity. Our balance sheet management approach remains unchanged.

We are committed to building financial strength and maintaining our investment-grade credit rating, and returning net leverage to at or below 2 times net debt to EBITDA. 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. Given the solid results in Q1, we have confidence that our financial performance in 2024 will improve versus last year. However, as it’s still early in the new fiscal year and uncertainties remain, especially in our Beef segment, we have made only modest changes to our outlook. Our focus for fiscal 2024 remains to manage the business for profit and cash dollar generation, reflected in our guidance presented in dollar terms rather than margin percentages.

With that in mind, we are reiterating our overall sales guidance to be roughly flat year-over-year. Moving to each of the segments. Prepared Foods had a solid start in a seasonally strong period. For the remainder of the year, we expect strong volume results as we continue our momentum in foodservice and see the benefits of our capacity additions. We remain focused on operational efficiencies while we support our brands and anticipate continued start-up costs. Taking all this into account, we’re maintaining our AOI guidance to be in the range of $800 million to $1 billion. In Chicken, our operational turnaround is progressing as anticipated. For the remainder of the year, we expect to return to normal seasonality where Q2 is typically a weaker quarter.

Given the strong start in Q1 and that we believe that there were more tailwinds than headwinds, we are tightening our AOI guidance range to be between $500 million and $700 million. In Beef, spreads are compressing as expected. However, uncertainty remains around how the cattle cycle will progress. Therefore, we are maintaining our full-year guidance at a loss of $400 million to breakeven. In Pork, on the back of our strong Q1 results, we’re now raising our guidance to be between breakeven and $100 million. For the total company AOI, we’re maintaining our guidance of between $1 billion and $1.5 billion, reflecting the portfolio nature of our segments. To round out the key P&L items, we anticipate interest expense to be roughly $400 million, and a tax rate to now be between 23% and 24%.

Turning to CapEx, we’re maintaining tight controls on spending in-line with profitability and cash flow, and we expect CapEx to remain between $1 billion and $1.5 billion this year. Finally, on free cash flow, we’re committed to managing working capital and CapEx, and we’re even more confident now than we were last quarter that we will generate positive free cash flow for the year. To further help model the shape of the rest of the year, we anticipate more typical seasonality across our business. As a reminder, Q2 is seasonally our weakest quarter for AOI and cash flow, driven by Beef and Chicken. As you may be aware, this January has already been impacted by severe winter weather disrupting operations. And again, we expect start-up costs in Prepared Foods to impact Q2 as well.

So, in summary, 2024 is off to a promising start and we’re cautiously optimistic on our prospects for the remainder of the year as well as for the long term. Tyson is a leader in the global protein industry. We have strong brands, a broad portfolio of products and a great team, all of which uniquely position us to win in the market. With that, I’ll turn the call back over to Sean for Q&A instructions.

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

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Peter Galbo with Bank of America. Please go ahead.

Peter Galbo: Hey, guys. Good morning. Thanks for taking the question.

Donnie King: Hi, Peter. Good morning.

John R. Tyson: Good morning, Peter.

Peter Galbo: Donnie, I was just wondering if you could give kind of maybe a brief state of the union, I know you gave some in your prepared remarks, but across the segments. And then maybe specifically, if you could start on Prepared Foods, where unlike a lot of CPG peers, you’re showing actual volume growth. Some of that may be acquired, but just some of the dynamics around foodservice there seem to be a pretty important driver. So, if you can unpack that for us would be great.

Donnie King: Sure. Thanks, Peter. I’ll start off and maybe I’ll have others to weigh in. Let me start off just kind of State of the Union. We had a solid first quarter and we continue to build on the momentum of the back half of 2023. We are seeing the benefits of our portfolio where Chicken and Pork improvements are offsetting challenges in Beef and where our Prepared Foods continues to deliver strong results. We continue to restore performance in our Chicken business. As I said earlier, this was our third consecutive quarter of $100 million of AOI improvement. And this — our Chicken business remains a top priority of mine. We’re managing Beef through the volatility and spread tightening of the cycle. We’re making great progress in driving out the inefficiency all across the supply chain in Pork.

Prepared Foods is performing to plan. While we have seen softness in the retail channel, our brands have performed well. Core brand share remains near-record levels and we’re regaining share in our foodservice business, and I’ll talk more about that in a moment. We’re cautiously optimistic about FY ’24. We have considered our better-than-expected results in this quarter. We’ve considered our initiatives to improve performance, while also still accounting for the ongoing macro uncertainty. As John said in his opening statement, Q2 is seasonally weaker and our Q2 started off — has started off with several significant weather events. But, having said all that, taken together, it’s still early in the year and we don’t want to get ahead of ourselves.

We have a lots of work ahead of us, and we’re leaving no stone unturned. We’re focused on CapEx and working capital to drive cash flow and support our dividend. We are controlling the controllables and taking necessary action, including right-sizing and modernizing our footprint and network design to drive efficiencies. We are pleased with the quarter and believe we’re taking the right steps. We are excited about our future and are focused on creating value for our shareholders. Specifically — or a little bit more specifically in terms of Prepared Foods, to your question, Peter, we had — in the quarter, we had strong top- and bottom-line performance in the quarter, with meaningful sequential improvement versus Q4 of ’23. If you look at the makeup of the volume, it was driven by a balanced portfolio between retail and foodservice.

We’re regaining some share lost in the middle of the pandemic that we couldn’t support and we also had the acquisition from a volume standpoint of Williams sausage. Our branded core business line remained a key focus, and we have a competitive advantage with volume share near-record levels and 400 basis points above Q1 ’19. Let me stop with that. Melanie, anything you would add to what I’ve said?

Melanie Boulden: Yeah. Donnie, I think you did a great job I’m hitting the highlights. The only thing I’ll add for you Peter is, as Donnie said, our foodservice performance was strong, and I believe you asked about this question. Our growth this quarter was up 3% and that was due to customer expansion. Look, as this channel is rebounding, it continues to be an important part of our portfolio that we are focused on because we want to be where our consumers are at. And so, we’re diversifying our customer base, we’re building digital capabilities to drive demand, and we are focused on profitable growth.

Peter Galbo: Great. Thanks for all that. And then just maybe quickly as a follow-up on Beef, Donnie. Look, the cattle inventory report out last week seems like maybe we’re nearing a bottom or seeing potentially some improvement. But just, what’s the conversation like with ranchers at this point? Like what’s it going to take to get them to actually start the heifer retention process? Because I think that remains kind of the biggest linchpin in the whole chain and it doesn’t seem like we have a lot of clarity there yet. Thanks very much.

Donnie King: Sure. I mean, I’ll tell you we look at the same information that I’m sure you’ve seen and we saw the cattle on feed report that you referenced. Unfortunately, Peter, the data doesn’t indicate that heifer retention is taking place and that’s obviously one of the signposts we’re looking for. In the quarter, we continue to see volatility and spread tightening. We expected that. As we think about our outlook, we continue to project high cattle supplies for the balance of 2024 and even beyond. And let me pause. Brady, do you want to add anything to that?

Brady Stewart: Yeah. Thanks, Donnie. And Peter, that’s a great question and one that we continually are studying. I think when you unpack that cattle on feed report, there’s a few comments that obviously are lending itself to the numbers that we’re seeing, and part of it’s relative to some slower turnover that we’ve seen. We’ve seen placements for cattle on feed from some of the drought areas as well from a geographical perspective. And as you indicated, which is the spotlight of the conversation is, we have not seen significant heifer retention to-date and continue to see those heifers move into the cattle on feed report. So, continuing to focus on a few factors relative to heifer retention, obviously, how these interest rates that we see today relative to the difference or the delta today versus some of the cycles in the pack — in the past is a highlight for us to continue to watch.

And then, we’ll continue to evaluate and understand how weather conditions are changed and lend themselves into a more favorable heifer retention strategy for these ranchers.

Peter Galbo: Thanks very much.

Donnie King: Thanks, Peter.

Operator: The next question comes from Adam Samuelson with Goldman Sachs. Please go ahead.

Adam Samuelson: Yes, thank you. Good morning, everyone.

Donnie King: Good morning, Adam.

Adam Samuelson: Good morning. So, maybe coming back to Chicken, and John, you gave some color in your prepared remarks, but hoping to expand on a little bit on just the profit drivers in the business in the quarter. There was $170 million of feed tailwind year-on-year, some offset with price. But can you walk through the year-on-year profit bridge in Chicken a little bit more closely? And I guess, apart from seasonality in the fiscal first quarter — fiscal second quarter, excuse me, the first quarter would imply kind of tracking to at or above the high end of the segment profit guidance for the year. So, just want to make sure we’re understanding kind of some of the moving pieces you’re looking at for the balance of fiscal ’24.

John R. Tyson: Yeah, Adam, thanks for the question. And maybe let me give a few point that will help you shape our ’24 outlook compared to ’23. I think the first thing to point out is we talked about the network moves, operational performance improvement, we started to realize that, and the adjustment in our guidance range of taking the bottom end up by $100 million, roughly equivalent in-line with where we were ahead of expectations for the balance of the year — or excuse me, where we were compared to expectations. Then, when I move through the balance of the year, I know one question is sometimes on investors’ mind is, “Hey, where is your return on sales guidance? How does that peaking, or not peaking?” We’ve heard some questions about that.

We’re not going to return on sales guidance, but there’s reasons to believe that our quarter three and quarter four could be around where we delivered the result in Q1, but frankly, it’s probably premature to make any strong assertions around that. And then again, Q2, we had weather impacts across all of our segments. Chicken was not immune to that. And so, that’s kind of the overall picture that we can give today based on the shape of the year. A couple of other things we’re saying, we did talk about a couple of hundred million dollars in improvements on some previous earnings calls, thinking about the benefits we’ve realized from the network moves. We believe that we have achieved that. We have one facility still going core in Indiana. And when we close out that process, then we’ll be nearly finished there.

And then, there are some tailwinds from a market standpoint. I think last quarter Donnie was the one who said more tailwinds than headwinds. I think that sentiment prevails. As you know it’s not just grain prices, but it is kind of the interplay between that and what chicken markets are doing and what’s going on from a supply-demand standpoint to influence things. So, I think overall the $500 million to $700 million range, for a lot of those reasons, is our best estimate today of where we think the year will be. And, yeah, hopefully that gives you a little extra color. Wes, maybe you got something to add in there for Adam.

Wes Morris: Yeah, I had a couple of comments, Adam. We expect to realize our strategic change funding throughout the year. And specifically to your question on year-over-year, both grains and markets were both lower. So, we stayed focused on improving our fundamentals year-over-year, did have a little tailwind, but it’s mostly the material change we made in our fundamentals. We improved our live performance, specifically hatch and livability. We have a very disciplined S&OP process that got really tight in Q1, and our sales are not only sold out position, but our forecast accuracy has allowed us to do a better job filling orders with material less working capital.

Adam Samuelson: That’s very helpful color. And then just as a follow-up, especially in Chicken and Prepared Foods. Just wondering if you have any views on changes in consumer behavior and how consumer demand elasticity has been evolving as you kind of enter — as the calendar flipped and how you’re thinking about the state of the US consumer over the balance of calendar ’24.

Melanie Boulden: Thanks, Adam. So, I’ll start first to talk about how we’re looking at it from a Prepared Foods perspective and our Branded portfolio. So generally, we’re seeing elasticities returning to pre-COVID levels. And as you know, we seek to balance both price and volume growth to maximize the value of our Branded portfolio. But at the end of the day, we do understand the financial uncertainty that our consumers are faced with as inflation remains elevated, which is why we continue to leverage our strong revenue growth management capabilities in support of our brands, and we’re prioritizing their health and their profitability when determining our pricing strategy. And additionally, across the board for any of our Branded business, we remain focused on understanding our category dynamics, assessing our competition and, of course, meeting our consumer needs when making pricing decisions.