Tyson Foods, Inc. (TSN) Earnings Call Transcript & Summary

Well, good afternoon. Welcome back. Next on stage, I'd like to introduce Tyson Foods, one of the world's largest food companies and are recognized later in protein. 2020 has been quite a volatile year for Tyson, reaching outstanding results in its Beef and Pork division, but facing at the same time, challenges in its Chicken segment. Joining us today from Tyson Foods are Dean Banks, President and incoming CEO; as well as Stewart Glendinning, Executive Vice President and CFO. Dean Banks has been President of Tyson Foods since last December and a Board member since 2017. He'll succeed in October noel White as the company's Chief Executive Officer and will retain the title of President and remain with the Board. Dean has a unique background in innovation and technology, which includes building and investing in early-stage advanced technology companies. And before joining Tyson, Dean was on the leadership team at X formally known as Google, an Alphabet company. He's had leadership roles in venture capital, worked for Johnson&Johnson, founded several companies and was a sergeant in the Marines. Dean has a bachelor's degree from Miami University and an MBA from Harvard Business School. Stewart Glendinning is responsible for worldwide finance and accounting functions for Tyson. Stewart joined Tyson Foods in December of 2017 from Molson Coors Brewing Company, where he most recently served as President and CEO of Molson Coors International. Before joining Molson Coors in 2005, Stewart worked with KPMG and The Hackett Group, both professional service companies where he held various senior audit and consulting roles. Gentlemen, thank you very much for joining us today. Before we jump into Q&A, any opening remarks?

Sure. Thanks, Ben, and really thanks to the entire audience for joining in today. Ben, this is a great format. And we hope everybody is staying home and staying safe and healthy during these very, very complex times. We're really excited to present to you all today and share what's going on in Tyson Foods. And just a reminder, our remarks today do include forward-looking statements. And they are subject to risks and uncertainties. So for details on those risks that may impact our business, please refer to the risk factors in our SEC filings, which are available at ir.tyson.com.

Perfect. Thanks, Dean. Now let's jump into Q&A and let me kick it off with the Chicken segment. I mean, last week, you announced that Donnie King will be taking the reins of this business. So could you speak more about this leadership change and also elaborate a little bit on the status of the operating efficiency initiatives you announced pretty much 1 year ago? If I remember right, it was a target to save a run rate of about $200 million per annum. So where were we pre-COVID? How much of that is lost? How easy is it to recover? And where do you think this is heading to in the near future?

Sure, Ben. Certainly. Thanks for the question. And first, I want to congratulate Donnie King on his recent appointment to President of Poultry. He's a recognized leader in the industry. He's been 37 years in the food industry and 35 of those have been in poultry. He previously led the Chicken segment for a number of years and he'll be working closely with Chad Martin, who's been the President for some time and will now take the role of Chief Operating Officer of Poultry. They're going to work with the team to make sure they're accelerating our strategic growth plan and continuing to strengthen our Chicken business, which will include exploring a whole bunch of things to drive operational efficiency and safety. As you know, safety is their highest priority. And the Chicken business really wants to put in a tremendous amount of effort to make sure that we are maintaining safety, also remaining flexible during these very, very challenging times. The results for chicken have just not been as strong as we'd hoped. However, it's really an excellent asset and has lots of room for improvement. We have the highest market share. We have high-quality products. We have a household brand and we have the largest cold chain in the industry. And so we're confident in our ability to recapture strong returns here. Our Chicken segments, big bird, small bird, tray pack and even a rendering business, which we recently expanded with an acquisition, those are all really critical assets in helping us fuel long-term value added growth. We did put out this goal of achieving $200 million in savings. We were on track for that. And as you know, through COVID-19, we had the wave of absenteeism, lots of disruptions in our production. And we really prioritized getting food on the shelves and in the refrigerators of Americans. We -- and actually global citizens. We delayed our progress towards those savings, but we did it for really the right reasons and for our consumers. And as absenteeism rates improve, we expect to resume our progress on capturing that. Team member health and safety still remains our top priority and we are clearly always looking for opportunities for returns improvement. We're confident about the progress that we made already to achieving that $200 million. And as soon as we're through this pandemic, which no one knows for certain when we're going to be through it, we'll know we'll be on -- back on track to achieving it.

Perfect. Now let me stay within the Chicken segment. Clearly, I mean, current industry capacity, relatively weak pricing in spot markets. How does that impact your ability to lock in pricing for next year? How much do you think is there a tailwind or not from prices of higher -- of higher prices from competing proteins? And how does chicken fit into that?

Sure. So as you probably know, our pricing strategy and contracting approach is very multifaceted. Many of -- some of our contracts have fixed annual pricing, but that's only part of our overall portfolio. We do use formula, cost-plus and a variety of other pricing arrangements and strategies. A meaningful portion of our business does have annual pricing. And as we've previously disclosed, a lot of that happens in the first half of the year. Now we're not really in a stage where we can speculate on those pricing discussions. We are optimistic that we should see an uptick in poultry takeaway and consumption and we think that's ultimately going to be a benefit. We have a very diverse portfolio. As you know that, currently, our Beef and Pork business is outperforming. The Poultry business is suffering hard times as the entire industry. And we think that, that balanced portfolio gives us a countercyclical effect and allows us to generate relatively stable returns. It insulates our business and ultimately helps us reduce volatility over time.

Okay. Perfect. Now let's switch within the segments and take a closer look at the Prepared Foods business. I mean, you've posted recently somewhat lower levels of profitability, and obviously, hasn't -- have not maybe passed on some of the input cost pressure you had from beef and pork within Prepared Foods. Can you elaborate a little more on what your marketing and pricing strategy is within Prepared Foods? It almost feels like investors could need a little bit of clarification of the strategy considering that this business was ultimately meant to deliver higher and more stable margins to the overall results.

Sure. As you know, the Prepared Foods business is a key growth engine for Tyson. It drives margin expansion and earnings stability for our broader portfolio. The ability to value up our products is a tremendous advantage of that franchise. It does this through innovation, branding, marketing, coupled with supply expertise. We have a variety of leading brands, whether it's Hillshire Farms. Obviously, Tyson is a tremendous brand. We have Jimmy Dean. These have become both household names and tremendous growth drivers for us. Our retail brands are performing exceptionally well. We've experienced 8 consecutive quarters of growth, and cumulative volume gains have been tremendous, not only during the crisis where retail as a whole has gone up, but even before the crisis we're really taking share. It's been just an impressive performance. Retail demand is exceptionally strong, but it hasn't fully offset the volume that we've lost in foodservice. Prepared foods is a combination of both retail branded products and foodservice. And as we've seen through the crisis, there's been a significant shift towards retail, and that's been lower foodservice volumes, and it's really had a net negative impact on our volume. Adding optionality, being able to shift a lot of our foodservice production into retail has been a critical component. We're continuing to look for opportunities to do that across our network. And lower foodservice volumes have contributed some margin erosion because our plants then aren't really running as full in the areas where we couldn't shift that volume to retail. And we've also seen some increases in raw material costs, which have made their way into our formula pricing. In other areas, we don't utilize formula pricing. And if we see some sort of permanent structural shift in raw material enterprises, it's normal to push that into our prices. But when we see temporary spikes in raw material, like we've just seen, it actually affects our business in a lot of different ways. Increasing price in reaction to some temporary increase in raw material could have some challenges, as it could erode volume or erode demand and we want to grow volume. We see -- we've grown our share, we've grown our volume through the crisis. And volatility is really the enemy when it comes to that. We've got a lot of confidence in the business. And we're confident that our foodservice customers that have really struggled through the crisis, we're hoping that the crisis ends relatively soon and they can recover. Some of our foodservice businesses have just been exceptional, increasing drive through and meal delivery and takeout and they performed incredibly well. So we're confident that we'll be able to drive this business back to our better -- our classic historically strong margins and maybe even exceed them when we get through the crisis.

Okay. Perfect. Now a little bit -- let me talk a little bit about growth opportunities and increasing demand protein worldwide. I remember very well at CAGNY about half a year ago, you presented that growth outlook and the demand outlook. And clearly, a lot of that is meant to come from emerging markets. And we've been active on M&A about 2 years ago. So could you give us an update on the status quo of those operations, the integration, how it performed recently? And what ultimately is your medium- to long-term strategy in order to gain that international market share?

Sure. First, it's really easy to say that we've been really pleased with the assets we bought. Strategically, they're important. We believe they're actually delivering good returns. We continue to see international protein demand is key and a very important long-term driver for our growth. We've hired about a year ago Chris Langholz, came in about the same time I did, who is a long time industry veteran in the space and has done a phenomenal job at helping us organize and structure our legacy footprint. And the assets that we brought on, he's -- the way they've pulled them together, it really complements both the domestic and our legacy international footprint. And it's really important to remember, many of the products that we export outside of the U.S. are not traditionally consumed in the U.S. And that makes for phenomenal synergies in really optimizing our returns because we can use the whole animal. Our Asian assets are very especially poised for growth. Remember, we export about $5 billion from our U.S. business. Our broader global footprint is allowing us to accelerate growth in a variety of ways, especially with exports. We're also looking at taking our branded and commodity products, our branded products, also international. We're already seeing opportunities to value up the portfolio when we take some of the offal product that we landed in our international businesses. They can then value that product up, has turned out extremely well. And we've done a lot of things with that. So for example, we recently launched the Tyson brand and our European foodservice business, which is going well. There's also a lot of branding opportunities in China. So the Tyson brand actually carries a really -- really a lot of power in those markets. Focus on international growth remains very, very consistent for us. And we do look to expand our platform more broadly into a multi-geography play. We're always looking to expand that through acquisition and through organic growth. And even with the challenging COVID-19 environment globally, we've seen some markets hit more substantially than others. For example, Europe has really, really struggled in this COVID-19 climate. And Asia has really recovered much more quickly. We're confident that we can return above our cost of capital.

Okay. Perfect. Good stuff. Now African swine fever, that's clearly been a topic much talked about, well, then came COVID. So clearly, we can all agree there's still a protein supply shortage, mainly caused by ASF because the herd is just not rebuilt, but there's also a little bit cost because of COVID. Now what does that mean in the case of Tyson and the industry? How do you see what's been required to get supply back up? How does that align with your capital allocation process? And how are your -- the current priorities of Tyson, among leverage, shareholder return, CapEx?

Sure. Well, I'll start. Just generally, the protein supply shortage is obviously a real challenge, but we've made team member health and safety our top priority. And so any time that there's a conflict with production and team member safety, the team member safety has to take priority. We believe that the substantial investments we've made during the pandemic will help us keep our team members safe. And we're actually pushing to get our production back to normalized levels. And we think a lot of that is dependent on COVID-19 and how it's affecting the communities where our team members live and work. Related to ASF, we still think there's a lot of opportunity there. We have seen the impact globally. The impacts on our business have been a little slower than originally anticipated, somewhat due to our ability to produce. Stewart, you might actually want to comment a little bit on our capital allocation?

Yes, sure, Dean. Ben, as Dean mentioned, our ability to produce at normalized levels really is influenced by the persistence of COVID-19. And when you think about how that impacts our capital allocation, I mean, the short answer is we don't think that it does. We've been investing CapEx in the $1.2 billion range over the last couple of years. And I wouldn't anticipate that to have a meaningful change to our capital allocation. As long as we continue to have good investment opportunities with strong returns, we're going to continue to invest. Our priorities specifically have remained consistent. We focused on our debt levels, we focused on our leverage ratio and we've invested in growth. And at the same time, we've given shareholders consistent dividend increases and been buying back stock. In the short run, our net debt to adjusted EBITDA was 2.7x at the end of Q3, and we prioritized our debt reduction with approximately $700 million of senior notes, which will mature this quarter. Our stock buyback has been limited, mainly as a result of the crisis to minor activity in our equity compensation plans. And probably, I'll just finish off by saying the balance sheet is strong. If you look at our liquidity position, as we started the fourth quarter, $3.1 billion of liquidity, which really leaves us in a very solid financial place.

Okay. Perfect. Yes, that's good. Now you've mentioned a little bit, obviously, the investments and so on. So Dean, maybe question back to you. What's your view on the company's future strategy? Are there any substantial changes we should be expecting? I mean, you have a unique background you can bring to the show here. So what's your Tyson going to look like?

Thanks, Ben. I have to compliment the Board here a little bit. As you know, I've been on the Board for about 3 years and have been a member of the Strategy and Acquisitions Committee. So I had overseen the development of the current company strategy. I'm a big believer and supporter of the direction that the team had put forward in the past. The company's mission is to feed the world with the strongest portfolio of products across brands, channels and proteins. And I don't expect any meaningful deviation from that. We're always evaluating how we're going to accomplish that mission. And both due to dynamics with incidents like COVID-19 and ASF, we're always looking for ways in which we can more effectively and efficiently accomplish that mission. But generally, the strategic plan that was put forward, I was a big fan of, and I'm still a very big fan of. With my background, I do think it's probably obvious to assume that we're going to be heavily looking at automation and technology because we believe they offer a lot of opportunity across our footprint globally, for continued improvement in worker safety, for food safety and quality assurance and a variety of other important areas. And these initiatives are really key to unlocking a lot of our efficiencies and enhancing agility, and they'll drive higher returns. And it gives us a lot more flexibility in our business, which I think, ultimately, again, drives much higher returns and better service to our customers.