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

All right. Good morning, everyone. My name is Andrew Strelzik. I am BMO's agribusiness protein beverages and restaurants analyst, and I'm delighted to welcome everyone to our 18th Annual Farm to Market Conference. This is my 16th Farm to Market, and it's truly amazing to see how the conference has grown. From a 1-day event with 11 companies my first year to having over 80 companies more than 400 investors and 1,000 total attendees over the course of today and tomorrow. As is the case each year, our goal is to provide a venue to explore investment opportunities across the food value chain. The conference will highlight fireside chats and presentations from senior executives of leading companies from the farm to the market, including the fertilizer, agribusiness, protein, food, beverage, distribution, retailer and restaurant sectors. New this year, we're excited to have our inaugural beverage track tomorrow, including a mix of exciting public and private companies. And for the first time, we also have the addition of chemicals companies on day 2. Before I go any further, I want to take a moment to thank the many people involved to truly make the conference the success you see today. The management teams have been unbelievably gracious with their time and insights upon which the conference has been built. In addition, our tremendous sales force devoted editorial staff and tireless conference coordinators are remarkable in their commitment to making this event of success for investors and companies in attendance. Last, but certainly not least, I thank the investors that have joined us from all parts of the world to really make this event special. We expect to explore numerous themes over the 2 days, including the outlook for farmers and whether crop prices can hold above average levels, ag earning sustainability, including crush margins and grain handling, the impact of renewable diesel and green energy and earnings power, the ability for fertilizer prices to be resilient amid many conflicting forces. The potential implications as inflation hopefully has peaked and deflation is a possibility. Demand elasticity and other signals of the U.S. consumer health. Details on end market and regional demand trends in chemicals given macro cost currents and the implications of government policy changes. Each year, we seek to keep the conference relevant given the rapidly evolving dynamics across the agriculture and food value chain. We're fortunate to have as our keynote lunch panel today representatives from ADM and Corteva to discuss the future of sustainable farming and regenerative ag. And tomorrow's keynote discussion is with Kroger, the largest U.S. traditional supermarket to discuss the evolving grocery landscape and state of the U.S. consumer. We hope you come away from the conference with incremental insights and a better understanding of company strategies and outlooks, opportunities and challenges, key issues and new ideas. If you have any questions or need any help, please don't hesitate to ask. Thank you, and enjoy the conference. Good morning. All right. Tyson has been gracious enough to kick off this conference for the last 18 years. We're pleased to have CEO, Donnie King with us today, now almost 2 years since being named to the role to lead Tyson out of one of the most unprecedented operating environments and into the next growth phase, leveraging his nearly 4 decades of industry experience and strong track record of superior performance. Donnie is joined by Tyson's CFO, John R. Tyson, who has been with the company since 2019 and was appointed CFO last October to enhance the leadership team. Over that time, he's continued to execute the financial discipline and strategic investments to enable Tyson to achieve its growth potential. So both of you, thank you very much for being here today. We really appreciate it.

Thank you for having us.

So maybe if I start the conversation with the chicken business. And in particular, if you could discuss your strategy and how you think about the trade-offs between growth and profitability?

Sure. I will start off, and John add what you will. So our strategy at Tyson is really focused around 3 pillars. It's growth in the core proteins, chicken, beef, pork, but it's also growth in the value-added branded arena. And then finally, in our international markets as we scale there outside the United States. And if you think about the branded and value-added piece of our business, the first objective is growing the core protein is in service to the second, which is the value-added brand part of our portfolio. But Andrew, your question around growth versus profitability, I'll tell you, I don't look at it that way. I never consider growth without profitability. They -- I want both. And so let me ground you in that and tell you that upfront. So we are growing as a company, particularly in the chicken business. And if you look at why we're doing that, it's in service, as I mentioned in our strategy to our value-added and branded portfolio. And we're navigating this challenging macroeconomic time as is everyone else. And so we're trying to get balance. So very simply for us, we start with the demand plan. It's 18 months out, and we work all the way back to a supply plan. And as we get closer in, then we obviously make adjustments based on what we're seeing in the market. That is core to how we operate our business and has been the way we've operated all of our businesses for some time. and we'll continue to do that. So how did we get here? And why are we doing growth? One, we have underutilized assets in our facility. And post pandemic, we've been, like most everyone else trying to get back up to speed and we want to grow that business. And we want to do that behind the #1 brand in chicken, and we've had great success in doing that, and we'll continue to do that. But if you go back the last 3 years, and it seems like I've been talking about this forever in terms of the road map to -- for our chicken business. But we had some genetics issues and so forth. And you may recall that we were over-indexed in terms of an outside buy of meat. And so quite literally, we were on the market buying roughly at times, 15% of our breast meat needs on the market paying near $3.50 [indiscernible]. But we didn't like those economics either because you couldn't pass along all those to a consumer. So as part of our plan, we wanted to get back to where we had historically been and buy some smaller percent on the market. We continue to buy meat on the market. We continue to grow, but it's all in service to our value-added branded portfolio, and we'll continue that. But to be really clear, we're not outgrowing chickens and then once they arrive at a plant trying to determine where and how we're going to sell those. We have -- we know how to do that before we ever place the chicken. And so as you might be aware, we also have to make adjustments along the way and we do.

And so I think one of the challenges from the outside is we look at chicken breast prices that maybe haven't gone up as much as you would have otherwise expected and seasonally at least, and we look at the growth of the industry and the growth that Tyson is putting up in their volumes and chicken. So I guess the question is, how do you -- how do we get comfortable that Tyson is not leaning into what seems to be maybe an oversupplied environment? And how are you making those adjustments?

Sure. Well, just to add on to my earlier statements. I'll tell you that we are aware of the industry numbers and what goes on there. But we're not solving or trying to solve for that. We are aware of it, but we're working on the things that we can control. And I'll tell you, there's a number of things that we can control and operational excellence, functional excellence is where our primary focus is at this point. And we're having good success at that. But we look at the market. If you look in our Q1 -- go back to our Q1, we came into Q1, and we had some strong demand signals in our demand plan. Quite frankly, in parts of our business, particularly the fresh parts of our business, the demand did not materialize like we thought. That carried over into Q2. We made some adjustments going into Q2. But if you look at this or our belief in this is that the downside of this was more -- the magnitude was much greater. The length of time in which this has gone on is much greater. We would have modeled that the markets would have improved by this point, and they've been slower than what we expected. And I'm seeing that persist a little bit here through Q3, and we'll see how it goes from that point.

Yes. And Andrew, if I could add to that, and good morning, everybody. Thank you for being here with us. I think if we go back to the rationale on some of the growth choices that we've made, I think we still feel good about the underlying thought process and those decisions. I think, number one, you heard Donnie talk about running our plants full, utilizing capacity. I think we see that long term as a way to be competitive and serve our customers. And I think we also made projections about the overall protein complex and protein availability, I think, especially around beef. And so knowing what we knew now versus what we knew then, I think we would still feel good about the logic that we had. I think the other thing though, and we've talked about this with a few people in this room and others following our revised outlook from a week or 2 ago is we also do have the flexibility to be responsiveness -- to be responsive to what's going on in the market. We've tempered the outlook for the back half of the year for the total business, inclusive of poultry. And so I think just -- it's important that we emphasize that to address the question that you're asking.

And so I guess, if you think about the way that the market materialized over the last several months relative to your expectations, most of it being on the demand side, How have you dialed that in, I guess, to make sure that we don't have a similar type of conversation 3 months from now?

Sure. It's a simple, Andrew, as we start with this demand plan. When we see the demand plan soften, and we've seen some of that. I mean we obviously make adjustments. I mean, we don't -- we're not attempting to be reckless in this because we do believe that you can grow and you can be profitable at the same time and that's what we're trying to unlock, not growth for a growth sake. But we do have some underutilized assets on the harvest side of our chicken business in particular. And we were over-indexed on the outside buy. And we needed all those components and parts. So we're just -- we're producing a little more of that for ourselves.

And so on the chicken asset base, in particular, in the footprint now you've closed 2 facilities. Is there more to do there? Are you happy with where you are now relative to the plans on the go forward?

Well, I'd say no, we're not happy. I'm happy being unhappy or dissatisfied. But we're always looking for those things, and we made some tough decisions around some capacity in a couple of locations. And I'll tell you, we continue to look across all of our businesses around where we could be more efficient. And -- but with this particular move in the 2 assets, we essentially were able to remain -- to have the same level of production but do it in 2 less facilities. And so the business didn't shrink. We just reduced the cost in there and eliminated some additional overheads that we had.

Switching gears a little bit to the capital allocation side. The balance sheet has gotten more attention here recently, just given the earnings outlook. So I guess, can you walk through your comfort level with the balance sheet and the leverage, some of the remedies. I know you're going to be around twice, I think, your targeted leverage ratio. So just the comfort level around that?

Yes. Let me talk about that. And we've got a bunch of questions about this in the last couple of weeks. So I think, first off, we -- the headline is we are comfortable with where we are. In terms of covenant ratios or things we have to be mindful of. We have interest coverage ratio, but we see that being well in line with that kind of given our outlook for the business in the next 6, 18 months. We do acknowledge that we are going to uptick to something like 3.5 to 4x as we go in the back of the year. And that's why I think people have been saying, hey, what levers do you have in order to manage that? And I think there's a couple of things. Number one, if I just take you through kind of what is our capital allocation focus; and then two, the levers that we've got in order to influence what is our total leverage for the business in the coming year or so. So we think about in priority order, investing in our business, discipline and focused M&A. I think we've been very conservative and thoughtful in that arena. We did just announce a deal that we feel really great about a couple of months ago. And then we do focus on preserving and growing modestly the dividend, returning some cash to shareholders that way and through share buybacks. And then -- and I guess prior to all that is kind of overarching is thinking about preserving the leverage ratio that we like. And so I do point out to people when they are interested over the last couple of years, we were making a lot of money. We took that down to almost 1x from a debt-to-EBITDA basis. So I think that we have demonstrated in the past our commitment to that and being conservative in terms of how we manage our overall balance sheet. If I go forward and think about what does the balance of this year look like and what does next year look like? Long term, a total CapEx number for us on a normalized basis is closer to $1.5 billion. We're at -- we were at $2.5 billion thinking now somewhere around $2.3 billion. But we've only put to work in the first half of this year, a little over $1 billion. So I think even $2.3 billion, we feel comfortable as being a high watermark. So that's one area where we've got to manage some cash. We'll be able to manage some cash going forward. And then we'll obviously be thoughtful about what is our share buyback program. And we also probably have a little bit of opportunity in working capital to release a little bit of cash into the business. But more than anything, I think if you just think about where we are from a financial results standpoint, and what does the go-forward look like? We'll be under a little bit of pressure as last year results roll off when we go into the back half of this year. But I think we project the second half of this year to be about equal to maybe a little bit softer than the first half of the year. And hopefully, especially in our chicken business, we see that momentum continue into '24.

Can you dig in a little bit more on the CapEx side and the flexibility around the CapEx side? So it's already come down a little bit. You're saying that you're comfortable that, that's a high watermark, but you had plans and things that are in process...

Yes. I think there's 2 things on the CapEx side, right? So number one, we've talked a lot about some of the growth investments that we've made, both in the U.S. and outside the U.S. So think about fully cooked chicken capacity coming online to think about some bacon capacity coming online in the back half of the year. And then we've also built a lot outside the U.S. And so most of that should wrap up in the second half of the calendar quarter -- second half of the calendar year. And so when those projects are done, those projects are done. And we don't propose to go on a new space and building a bunch of new assets. So that kind of takes us back in closer to that normalized range. And then after that, I think we just -- given where we are in the operating environment become more thoughtful across the portfolio and segments across what we think about as our maintenance side of the house versus some of the profit improvement products, and we just have to get, I think, as aggressive as possible and figuring out where we can pull back and slow down the spend. But I think overall, we feel comfortable in that we are trending towards that $1.5 billion number. I think it's probably premature to say exactly what the number will be for '24, but we feel comfortable with, I think, the levers that we have in order to manage cash in the business.

Okay. Great. And we get a lot of questions about book value. And so I'm just curious how you gauge the risk of impairments and things like that?

So I think when we look at the impairments across the business, this is something that I think anyone here is dealing with this kind of does on a quarterly or semiannual or annual basis. So we do that in our Q, we talk a little bit about a couple of our businesses in the U.S. and some outside the U.S. where we're paying attention to that. And with where things are trading, we'll go through the normal processes that we have to and see what [ super ] shakes out.

Okay. Great. Moving over to the beef side, I think it's pretty well known what's going on with the cattle cycle, but I think the export dynamics are interesting to and how they may be contributing to the beef margin. So what are you guys seeing there? What does your guidance assume on the export side is that, that remains weaker or not? How are you thinking about it?

It's -- it has been a little bit weaker and we would expect it probably will. We'll see -- we have good markets there. The demand for U.S. grain-fed beef is still very, very strong outside the United States. So those are all good things. But where we are in the beef cycle, we've been talking about it now it seems like for about the last year or more. But we're getting closer to the bottom of the cycle, and we feel good about that. We are seeing fewer cows harvested, which is one of the signs that we were looking for. We have seen some heifer retention, but not really in a sustained way. So whenever we start seeing that in a meaningful way, then we'll feel comfortable that we've kind of reached the bottom on our way out. So that's a bit about the cycle. We'll get some help from dairy cattle and the mixed breeds around that. I think there will be -- the supply of beef has been good. It's actually been a little bit more than what we would have expected at this point. So we feel good about that. We're working on the things at Tyson around operational excellence, which I mentioned. We're moving a campus from South Dakota into Springdale and where we have everyone together. And that's getting us a lot of visibility or much better visibility and creates an opportunity for a much richer conversation standing at the water cooler, if you will. And so we feel good about that. The demand for tallow, for example, we have a -- we feel really good about that domestically and then from outside the U.S. with some of the lower-value unit parts that are in strong demand outside the United States. But the tallow business, we have a joint venture with JST Global, and that's worked really, really well for us. And so we'll continue to work on that and work on all the drop credits and try to do that. But we are -- we have had to move more product domestically than maybe we would like. But the markets are good, just not growing at the rates in which we would like.

Does the new guidance -- the valuing up of the drop credit has been nice contributor, I guess, to the margins over time and the way you've thought about your normal margins in the Beef segment over time. Does the guidance now assume that, that recovers or because we've seen a little bit of weakness?

Can I answer that question. So I think -- what is in the beef outlook for Tyson. I think it's multiple things. So we talked about some of the softness in exports and thinking about what that looks like, you talked about the drop credit. I think that although that's softened up recently, we're still around 5-year highs. And so we try to be thoughtful in terms of what assumptions we can make about that going forward. But then I think the other thing that is in the outlook is just the volatility in the market and how much timing can influence on the buy and the sell can influence the money that you're making. And I think we're trying to make so many different choices that are dependent or not dependent, but influenced by what is the behavior of the other packers, what's going on with the consumer, what's going on with pork and chicken in the marketplace at any point in time, that there's a lot of, I think, I don't want to call it uncertainty or volatility in what the second half of the year could look like. Typically, we would expect from a time of the year standpoint to -- for this time of the year and going into the back half of the year to be stronger than coming out of the winter months. And I think that we've seen that in April and May, for example. The real test will be what happens as we get past Memorial Day and into the summertime. And we'll be looking for all the same things that I think anyone here is also paying attention to.

The -- one of the interesting dynamics as well has been kind of that branded versus choice premium, which has degraded. The choice versus select spread has been widening. Can you talk about those dynamics and how that impacts the business as well?

Sure. The consumer is moving around with that. The Choice versus Select, I think at the very end of our Q2, we saw that actually the spread improving on that. But yes, it has been compressed. Branded versus Choice has been compressed. It's just -- there's just a number of moving parts and as it relates to the price of cattle that we're buying and the ability then to take that to a retailer and that retail wholesale spread has been wider than normal, but the traffic has been good at retail and well, foodservice for that matter. And so right now, it's compressed. I don't see any immediate change. What I would look for, and we look for the signposts when -- if you see traffic at retail begin to dip than perhaps there's the opportunity then to do something and adjust that retail wholesale spread and recreate that margin or widen that margin.

And maybe we could dig in a little bit more on the cattle supply side. We have some data that will be coming out from the USDA soon. Kind of what are your expectations? What are you guys looking for? You talked about a little bit of heifer retention, but not sustained. What does it take to turn the tide there?

My expectation, and I think it would be most everyone else from January till the next report comes out. I would expect we'll continue to see a reduction. I've talked about cattle harvest being down from what it's been over recent months, but cattle on feed and I would expect it to be down mid-single digits that would be the expectation. But we're getting down near the bottom of this. I'm not prepared to call the bottom because until we see greater heifer retention, it's going to be difficult to do that. We still need some moisture. If you think about Central Texas up to Nebraska, I mean it's still fairly dry there, and that's our supply region here. And of course, the ranchers are looking at that and how they augment that and the price of grain has been really, really expensive, and we're seeing a little moderation in that. So that make it change a few minds. But we're watching all that, but I would expect it to continue to decline mid-single digits.

When you talk about getting to the bottom of this, you're talking about from a supply perspective, I would assume. But how do you tie the cattle cycle and the bottom of your beef margins? How do you tie those 2 things together?