Tyson Foods, Inc. (NYSE:TSN) Q4 2023 Earnings Call Transcript

Tyson Foods, Inc. (NYSE:TSN) Q4 2023 Earnings Call Transcript November 13, 2023

Tyson Foods, Inc. beats earnings expectations. Reported EPS is $0.37, expectations were $0.33.

Operator: Good morning, everyone. and welcome to the Tyson Foods Fourth Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please also note, today the event is being recorded. And at this time, I’d like to turn the floor over to Sean Cornett, VP of Investor Relations. Sir, you may begin.

Sean Cornett: Good morning, and welcome to Tyson Foods’ fiscal fourth quarter 2023 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 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 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 and 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 a reconciliation 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. Earlier this morning, we announced our fourth quarter and total fiscal year 2023 results. In Q4, we saw another quarter of sequential improvements in our overall earnings, as we continue to make good progress in improving our performance. And I want to thank our team members for delivering these results in what continues to be a tough macro environment. Consumer demand for protein remains relatively stable and we are well-positioned to meet this demand, giving us confidence in our long-term prospects. Q4 also wraps up an unusual fiscal year for all of our core protein categories were challenged and yet one, where our Branded business delivered solid results, while we continue to see challenging market dynamics, our broader portfolio is set up well for the future.

As we anticipated, our results continue to improve sequentially in chicken, with Q4 building on the momentum we gained in Q3 as part of a much better second half of fiscal ’23, after a difficult start. Our brands continue to perform well and we grew market share across our core business line, outperforming our peers. This helped our Prepared Foods segment generate solid adjusted operating income in 2023. Market dynamics in beef and pork were challenging this past year, causing spread compression, although for different reasons. Despite these headwinds, our goal remains to be best-in-class operators, so that we can manage these businesses as efficiently as possible. We remain focused on what we can control. One of our priorities is to execute with excellence.

Our operations have improved across the business and we have a long runway of opportunities to perform better. Controlling the controllable extends to capital allocation as well, where we will remain disciplined with CapEx and working capital. We continue to execute our multi-point plan focused on efficiency and modernization. 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 are seeing tangible benefits of our efforts to end fiscal 2023. I remain very confident in our long-term strategy and optimistic about our future. Rest assured, we are leaving no stone unturned to drive long-term value for our shareholders. Let’s dive into an overview of segment performance by starting with an update on market share.

Our brands continue to outpace the broader food and beverage category in volume growth across the retail channel in Q4. Our volume grew, while the overwhelming majority of food and beverage peers saw volume declines. Our core business lines including the iconic retail brands, Tyson, Jimmy Dean, Hillshire Farm, and Ball Park, saw a Q4 volume growth of 3.2% versus last year, far outpacing our competition. Those four brands also all hold favorite brand status with consumers over our nearest competitor by a wide margin. We continue to show market share leadership in most of the retail categories in which we compete, delivering both pound and dollar share gains across our core business lines. We are accelerating foodservice, where our Focus 6 categories, including value-added chicken, breakfast sausage, dinner sausage, pepperoni pizza toppings, bacon, and Philly Steak outpaced the broad-line industry in volume growth in the quarter both versus last year and sequentially.

We have a strong foodservice portfolio and are aligning with key customers as we build momentum for the future. Speaking of winning with customers, we’re proud to have made the Top 10 for the second year in a row in the most recent Kantar Power Rankings. In fact, Tyson, finished in the Top 10 in seven of the nine categories they measure, as we continue to focus on meeting customer needs and planning the future together with them. Moving to our segments, beginning with Prepared Foods. As I mentioned, our brands performed well in Q4, in fact, over the last year, nearly three quarter of US households purchased a Tyson core business line product, which is an increase of 90 basis points. While this is impressive across our portfolio, it’s worth noting that our product with the highest penetration rate is only in about a third of households, leaving us room for continued growth.

This performance in retail health Prepared Foods have a solid year in fiscal ’23, with strong growth in AOI. As you know, our Branded Foods business is a strategic growth pillar for the future. We believe it is imperative to support our brands with marketing and advertising. As consumers began to face what could be a more difficult economic environment, we ramped up our math support for our brands in the second half of the year and will continue to do so as we move into fiscal 2024. While the full-year AOI for chicken was a modest loss, our progress toward improved performance continued in Q4, with sequential improvement versus Q3. In fact, this is the second consecutive quarter with more than $100 million in sequential AOI increases. I’m proud of what our team has accomplished over the past six months.

Not only did we hold on to the operational enhancements we made in Q3, we made incremental improvements in yield and in our live operations. This allowed us to take advantage of improving market conditions, including lower grain costs, leading to a positive margin to end the year. As we head into the new fiscal year, we expect a better outlook for input costs, while we’re seeing the benefits of some of the bold actions we took this year. Coming into fiscal ’23, we expect it to be under pressure due to limited cattle supply. This trend held true, as cattle costs appreciated at a faster rate than the wholesale price of boxed pieces, eroding export opportunities due to a strong US dollar and low prices of competing exporters, and ultimately creating a very tight spread scenario.

We also expected to see signs of rebuild of the herd to surface as cattle prices moved higher. However, this did not materialize. Until significant heifer retention and subsequent herd rebuilding takes place, we expect challenging supply conditions to remain. In this context, while the timing remains uncertain, we will be prepared by focusing on operational discipline. Moving to pork, as you know in fiscal ’23 the industry suffered from supply-and-demand imbalances, which negatively impacted spreads. While we are seeing some signs of improving spreads and lower grain costs, there is still an imbalance between the supply and demand of pork. Our team is focused on running the business as efficiently as possible while continuing to review all the options.

We saw significant sequential and year-over-year improvement in AOI in Q4, driven primarily by improving spreads and operational enhancements. Before I turn the call over to John to review our financials and FY ’24 guidance, I want to give you my priorities for the coming year. First is improving our financial strength with a focus on cash. I want to emphasize that we will be disciplined and prudent with capital while remaining committed to our dividend as the primary way of returning cash to shareholders. As you saw in our earnings press release this morning, we increased our dividend for the 12th consecutive year. We will continue to evaluate our production footprint and network to drive efficiencies. As you saw, we’ve made significant changes in chicken by announcing the closure of six of our older, less efficient plants, which we expect to improve our capacity utilization and mix.

In a similar move to leverage efficiencies and reduce network redundancies, we also recently made the difficult decision to take two of our smaller fresh meat’s case-ready value-added facilities offline. Production from these locations will shift to larger, more efficient plants, and our harvest capacity, sales volume, and importantly, our customers will see no impact. We are reviewing, whether there are similar opportunities across our segments. In chicken, we will remain focused on further enhancing our competitiveness going forward. Prepared Foods was the profit engine for the company last year. We want to sustain and build on ad strength by supporting our brands and driving momentum in food service while being responsive to changes in market conditions.

Some of the key focus areas are making better use of our data, shifting more of our MAP support to digital media, and being disciplined with revenue management. In beef, multiple outcomes are possible during the current cattle cycle. We believe we have best-in-class assets and team members and are aligning with the right suppliers and customers, giving us confidence that we’ll be prepared for all of them. In pork, we believe we have a bright future ahead of us and are excited about the team we’ve built that continues to drive operational improvements and synergies with our prepared foods business. As we said before, we’re taking a hard look at our cost structure to drive operational excellence. Our ongoing productivity initiatives are focused on things that can be deployed at scale enterprise-wide, including procurement, logistics, and digitalization.

These are a few of the initiatives that will make us a fundamentally stronger business as we go forward. With that, I’ll turn the call over to John.

John R. Tyson: Thank you, Donnie. Let me start with a quick summary of our total company results, and then review our individual segments. Our sales were down year-over-year in Q4 and for fiscal ’23, driven by pork and chicken, where we saw a reduction in price per pound. The decline in adjusted operating profit for both periods was driven by lower profitability in beef and chicken. While profit in Q4 was down substantially versus last year, it’s important to note that it continued to improve on a sequential basis and adjusted EPS more than doubled compared to Q3. Challenges remain, but we continue to drive efficiencies and improve our operations, and we believe we’re headed in the right direction. Now, onto the individual segment results, starting with Prepared Foods.

In Prepared Foods, revenue was down modestly in Q4 year-over-year, driven by lower bacon pricing. This lower pricing was offset by volume growth, which highlights the strength of our brands. AOI improved slightly year-over-year, despite lower sales. Our ongoing productivity initiatives and easing inflation offset lower pricing, increased marketing, advertising, and promotional support, and the onset of start-up costs for our new facilities. AOI margin declined sequentially in Q4 due to seasonality, increased brand support, and start-up costs. However, the $151 million of AOI the segment generated is the second-highest Q4 result in the past five years. In the full year, fiscal ’23, AOI grew by more than $100 million, representing growth of nearly 14% year-over-year.

Now, moving to chicken, sales declined 10% year-over-year in the quarter, driven by lower pricing, reflecting primarily lower commodity protein prices. Volume grew modestly in Q4 versus last year, driven by continued sell-through of finished goods inventory, and this was partially offset by a decline in production. This decrease in production highlights our ongoing focus on balancing supply with our customer’s demand. Year-over-year profitability declined primarily due to lower commodity chicken pricing, but this was partially offset by lower input costs and operational efficiencies. On a sequential basis, lower grain cost and productivity enhancements drove another quarter of AOI improvement. In fact, when we compare to Q4 to Q2, chicken AOI increased by more than $240 million.

In beef, revenue increased modestly year-over-year in Q4, with lower head throughput offset by higher pricing. Operating profit was down, reflecting compressed spreads, primarily due to higher cattle costs. As we have been discussing all year, beef is likely to continue to face headwinds, including in fiscal ’24, as we don’t expect the ongoing tightening of cattle supply and spread compression to abate until herd rebuilding is underway. Moving on to pork, revenue was down nearly 7%, driven primarily by lower pricing due to softer global demand. AOI for the quarter was a modest loss, but importantly it increased by more than $40 million year-over-year and by more than $60 million sequentially as spreads improved along with operating performance.

Before moving to our capital priorities, it’s worth noting that our international business posted solid Q4 and fiscal ’23 results, driven by growing penetration across our key markets and channels. We remain focused on market share growth and continued operational excellence, as we ramp up our new facilities. Now to our financial position and capital priorities, where building financial strength, investing in our business, and returning cash to shareholders primarily via our dividend remain the priorities of our capital allocation strategy. As Donnie said earlier, we will remain disciplined and prudent with capital. We came into fiscal ’23 with a plan to spend roughly $2.5 billion dollars in CapEx. As you saw, we ended up reducing our spend by $600 million, as we reacted to market conditions driving lower profitability and impacting our operating cash flow.

We were also disciplined in managing working capital, which was a source of cash this year. We ended the year with $3 billion of liquidity and net leverage of just over four times. Our balance sheet management approach remains unchanged as we are committed to building financial strength, maintaining our investment grade credit rating, and returning to net leverage of at or below two times net debt to EBITDA. During the year, we returned $670 million to shareholders via dividends and $354 million in share repurchases, primarily to offset dilution. We remain committed to maintaining a disciplined capital allocation strategy, ensuring that we deploy resources to maximize long-term shareholder value. Now, let’s review our outlook for fiscal 2024.

Fiscal ’23 was a challenging year, and we took a hard look at how we managed the business in times like these and how we can better communicate and manage expectations for investors. Our focus for fiscal ’24 is to manage the business for profit and cash dollar generation. These are our internal goals and what we want investors to understand. So for this year, as you’ll see, we are giving guidance in dollar terms instead of a margin percentage. While there are some top-line uncertainties within the individual protein categories, we expect our overall sales to be approximately in line with fiscal ’23. Moving on to the segments, prepared foods has been solid and stable driver of operating cash flow. We expect that to continue in fiscal ’24, driven by volume growth, disciplined revenue management, and productivity offset by MAP support for our brands and the start-up costs for our new facilities, as well as risks from changes in consumer behavior.

Reflecting these dynamics, our expectations for adjusted operating income is in the range of $800 million to $1 billion. To help navigate any potential shifts in consumer spending and sentiment, we are focused on the most efficient marketing, advertising and promotions that drive the highest ROI and the most effective consumer engagement and demand. To help meet demand in value-added brands and categories, we had previously invested in new capacity and we expect to incur start-up costs in fiscal ’24. On to chicken, our operational turnaround in chicken is progressing as we expected. We demonstrated sequential profit improvement in Q3 and again in Q4. We anticipate operational improvements to continue into next year and that along with lower input costs net of pass-through pricing, the segment should generate between $400 million and $700 million of adjusted operating income.

Now onto our beef segment, when and how fast meaningful heifer retention will take hold is uncertain at this point, and this influences our outlook for our beef segment in 2024. Multiple outcomes are possible and we will be prepared for all of them to operate as efficiently as we can. Our guidance for this segment is a loss of $400 million to break even for the year, reflecting uncertainty in market dynamics. Now onto our pork segment, where we see momentum in the business. As spreads begin to improve and we continue to execute, we expect AOI to improve versus last year, to roughly break even for fiscal 2024. For the total company, we’ve given a range of outcomes for each segment, but we expect any outsized weakness or strength in any one area to be balanced by the remainder of the portfolio.

In other words, neither the low end nor high end of the range is anticipated to happen simultaneously across all the businesses. As a result, we expect our total company, AOI for fiscal ’24 to be between $1.0 billion and $1.5 billion. To further help understand the shape of the year, let me provide some context on the quarterly phasing. While we foresee more typical seasonality in our business for next year, things like start-up costs and prepared foods and rising cattle costs will impact Q1 and Q2, and generally shift profitability to the back half of Fiscal ’24. In addition, we are monitoring potential impacts to the consumer of higher interest rates and inflation, which could create some volatility. Now, to round out the key P&L items, we anticipate interest expense to be roughly $400 million for the year and our tax rate to be approximately 23%.

We moderated our pace of CapEx in Fiscal ’23 in a challenging environment. We ended the year with $375 million of expenditures in Q4, which annualizes to $1.5 billion. As we maintain tight controls in our spending in line with profitability and cash flow, we expect CapEx for the year to be between $1.0 billion and $1.5 billion. While there are a range of possible outcomes for AOI, we expect to manage our working capital and CapEx so that we’re free cash flow positive for the year. In summary, while the current operating environment remains difficult, we are making improvements across our operations, and remain optimistic on our long-term prospects. We have great teams, growing demand for our products, and the right portfolio mix to win in the marketplace.

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

Sean Cornett: Thanks, John. We will now move on to your question. 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: Ladies and gentlemen, at this time we’ll begin our question-and-answer session. [Operator Instructions] And our first question today comes from Adam Samuelson from Goldman Sachs. Please go ahead with your question.

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

Donnie King: Good morning, Adam.

Adam Samuelson: So I guess my first question, John, Donnie, I’d love to get a little bit more color as we think about the high and low end of the segment profit ranges in chicken, beef, and prepared foods, specifically, kind of, how do we think about what gets to the high and low end of those ranges? What do we think are the key year-on-year kind of profit drivers increases in chicken and decreases in beef in particular to help kind of narrow the range of kind of company-level outcomes?

Donnie King: Okay. Adam, this is Donnie here. Thanks for the question this morning and thank you for being with us. As we said earlier, 2023 was a very unusual year, one that I’ve not seen, where all core protein categories were challenged at the same time. And at the same time, our brands continue to perform well, outperforming the broader food and beverage category. The demand for protein remains strong. We’re controlling the controllables and we’re focused on efficiency, modernization, and cost structure. Over this past year, we’ve taken bold actions to improve performance. We’re managing the business for cash. We also have pulled down our capital spend and if you go back to ’22, we spent $2.6 billion, in ’23, we pulled that down to $1.9 billion and we’re projecting between $1 billion and $1.5 billion in ’24.

We will continue to return cash to shareholders predominantly through the dividend and we shared that earlier today. We had the 12th consecutive year of increasing dividends. We’re winning with customers and consumers. We do have advantage brands and advantage categories and are very proud to be in the Top 10 for the second year in a row with Kantar Power Ranking. We’ve seen sequential improvement across all the businesses in the second half of ’23. We expect fiscal ’24 to be better year-over-year in cash flow and profitability. Chicken AOI improving considerably and prepared foods continuing to perform well. In short, our plan is working and delivering tangible results. FY ’24 is off to a great start and I could not be more excited about our future.

We do have a good plan. We do have the right team, and we are executing at levels I’ve not seen in a long, long time. And in terms of individual segments, John, do you want to add something to that?

John R. Tyson: Yeah, Adam, I think your question was around what gets you to the high or bottom end of the range in a few different segments. What I can tell you is in chicken, there’s a few different things that will influence the profitability in the year. One, I think our plan, we have an aggressive operational improvement plan and so our range reflects some different timing on how we achieve that. We also expect timing benefits from the closures last year to roll through as we get into around the midpoint of the year. And then of course, there’s just market movement that we can’t necessarily predict, although I think recent market data would show you there’s more tailwinds than there are headwinds in our chicken segment.

On beef, the width of that range really just reflects the range of outcomes and the spread in that business. Naturally, we would expect that range to tighten as we move through the year. But just to comment on some of the movements in those markets, even Q4 for us that we just finished was better than we anticipated, you know, a quarter ago. So just acknowledging that there’s a lot of movement there, and I think then on prepared was the last one you asked about, that’ll be driven by execution, consumer demand strength, how we invest our brands, and how they perform. So I think that this range is actually by going to the AOI dollars, we’ve hopefully for you and all of our investors, kind of tightened up the band of outcomes here, but there is still some natural unpredictability in just how close we can nail the number.

Adam Samuelson: And I think the AOI dollar guidance ranges are definitely appreciated versus the percent. And if I could give — ask a follow up just on cash flow, so you said free cash flow positive, is that free cash flow positive after dividends or what’s the big plugin there would be? How much working capital do you think you can release if given the sales and profit outlook that you have?

Donnie King: Yeah, I think on working capital, the drivers will be pulling down some of the finished goods inventory, but we might give some of that back on inventory just in terms of the cattle prices and kind of what we’ve got on the balance sheet. As it relates to free cash deposit, we are committed to supporting the dividend for the year. And so we’ve given a range of CapEx numbers that we would expect to kind of reflect, wherever the AOI and EBITDA is, so that we can be free cash flow positive for the year.

Adam Samuelson: Okay, I appreciate it.

Donnie King: Okay. I think to clarify one thing is that would be net of — that would not include any opportunistic M&A. I think we’ve always been pretty active in the market, evaluating opportunities. And so we don’t have any predictions or news to share there, but just acknowledging that we’ll consider things should they come to market during the year.

Adam Samuelson: Okay. I appreciate that color. I’ll pass it on. Thanks.

Donnie King: Thanks, Adam.

Operator: Our next question comes from Andrew Strelzik from BMO. Please go ahead with your question.

Andrew Strelzik: Hey, good morning. Thanks for taking the questions.

Donnie King: Good morning, Andrew.

Andrew Strelzik: Good morning. I’d like to actually start on the CapEx guidance, please. If you could maybe unpack, how you landed where you did, what the buckets are? I think you previously talked about $1.7 billion, maybe getting as low as $1.5 billion over time. Obviously, this is lower than that. So, what types of things are removed from the plan? How does that shift and where do we go from here?

John R. Tyson: Yeah. I guess, I’ll give you three or four data points on how to think about CapEx. Number one, we communicated throughout last year, that we were trending towards a $1.5 billion number, did not mean to make any commitments last year as to when we got there, although we feel as though that’s the high watermark this year. And so, I think I mentioned in my prepared remarks, Q4 was at $370 spend for us and so that would track out to being at the high-end of our range for the year. I think that the other — the other two things, that are worth pointing out is, number one, we have a lot of capacity expansion projects that are rolling off and finishing up, as we start ’24. And then last but not least, if you just think about a normalized investment level in our business, if I were to go back to before we embarked on this period of significant capital investment, [$1.25 billion] (ph) was probably the — was the average number between I think ’17 and ’21, so that’s just recent history that would support the range that we’re sharing today is in line with what we need to invest in our business.