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

All right. First of all, good afternoon. Welcome back to the almost final presentation. I think there's one over there a little afterwards. And we have now next on stage, Tyson Foods, one of the world's largest protein producer across major proteins; chicken, pork, beef, sizable branded Prepared Foods operation as well. The company produces most of its product in the U.S., but actually, [indiscernible] in how we can reach globally. Presenting today, we've got John Randal Tyson, the company's CFO; as well as Brady Stewart, Group President for Beef, Pork and Chief Supply Chain -- I can't even make [indiscernible].

First of all, how we kick it off. First question, you published an 8-K earlier this morning about Stewart, Former President for Prepared Foods departing. Maybe John, just an opening comment on the reasonings here?

Yes. Stewart shared with us earlier this week that he was departing for another opportunity. We wish him well in his endeavors. I think it's a great opportunity that news should be out, I think, later today or tomorrow, or something like that. And we plan to announce our plans about leadership in Prepared Foods in due course.

Okay. Perfect. With that, so thanks for joining us. Obviously, it's been very dynamic across your business right now. So maybe let's just take a step back and if you could give us just an overall take on recent results and help us put things into context and how we should think about the puts and takes in the short term?

Sure thing. Well, first off, it's a pleasure to be here. And I want to compliment the 3-day warriors that are here at the end of the long week, and so we appreciate you being with us. If it's your first day here, we'll just assume you're here to listen to us. So we thank you for that as well. To talk about the business and what's going on at Tyson, I think that the story in our business right now is, we've seen this year in our fiscal some market headwinds that have been challenging. We've talked a lot about beef, pork and chicken for really the first time in recent memory facing some challenges that are not unexpected, but to see them all go on at once, I think, has been unique. But despite all that, we're really happy -- I would not say we're happy, but we're seeing sequential improvement as we go back through our Q2 into Q3 and as we go into the balance of this year and the next year. And I think that we're happy with the direction that we're going. We're not satisfied with where we are yet. But in that backdrop, we have in the last year also, I think, made some pretty tough moves that we expect to yield results for our business, especially in the Poultry segment. And if I just go back to a year ago, we started by consolidating 3 of our North American headquarters into one. We announced some plant closures back in March. We made some choices in our poultry supply chain related to ionophores and the NAE part of our live operations. We announced more plant closures. And so, I point all that out to say what we have done this year has really, I think, been -- it's been a challenging year, but one where we have made some choices to try to come out on the other side. I think we feel like we're well positioned as we go into the remaining part of this year. And as we start to get into '24, I think we feel confident about the moves that we're seeing.

Okay. Well, we'll come back and talk about chicken in a bit. Just one thing from a more strategic point of view, you've always talked about in the past, particularly during the last Investor Day as well, about all the growth potential that's coming from international markets. And obviously, I said in my opening remarks, you produced primarily in the United States and served the market through exports. But if there would be no constraints on cash, do you think there's something missing in the Tyson portfolio where you want to maybe be from an international footprint perspective, with it being on the ground?

So I think it's important to note that 90% of the growth in protein consumption in the world is going to come outside the United States and the next dedicated. The majority of that is going to come in Asia. Your specific question is, is there something missing in the portfolio? And I think the answer to that is, I would point to the investments we've made in the last, call it, 5 years. We made the Keystone acquisition, which was kind of a 2-part deal where we've got some business in the U.S. with a value-added Chicken segment, and we got some scale in China specifically. We also made an acquisition where we got some business in Thailand. So I think when you take those, plus the investments we've made in new facilities in China that are ramping up now, a new facility in Malaysia that's coming on later -- coming online later this year, I think the story for international business right now is to get that set up given the footprint that we've established and to grow it. If I think that there are opportunities in our business where we want to keep growing, I really point to the value-added part of our Chicken portfolio, as well as our Prepared Foods business, which has been a bright spot for us in '23.

Let's come back to chicken, which has obviously been one of the pain points recently. You've highlighted and you've mentioned a few of the announcements around plant closures. Obviously, the headquarter is prior to that. So if you think about the steps you've taken so far and aligned with the announcements, is there anything missing? Where do you stand today on these more recent announcements of shutdowns, when is there going to be an actual closure happening? So how are you going to balance your supply chain here as it relates to having certain plants close, but still keeping up the production houses?

Yes. I think there's probably 3 things I would want people to take away as it relates to our Chicken business. So number one, talking about the moves that we made, I kind of outlined a second ago, we would project once we work through all of those changes, shutting down the facilities, reapportioning the birds elsewhere in the network, plus the NAE move. But that's probably a $200 million run rate number that we'd get to sometime in '24. It's hard to peg exactly the timing, but we feel confident in that. That's the first thing. The second thing is we have demonstrated some operational results improvement quarter-over-quarter. And I think if you were just to compare our Q2 and Q3 by and large with market conditions, I think the inside and the market side were the same, and we showed some quarter-over-quarter improvement. So I think we expect to continue to go get that. And I would expect that when we get to November and start making calls about '24, we may quantify what we think the headroom is to go get from an operational standpoint. And then I think the last thing that I would want people to take away about our business specifically as well as the Chicken industry in North America is, there are some positive fundamentals shaping up that I think should support chicken margins as we move in the balance of this year and into '24, which think about input costs and I think how markets are moving. We've seen some recovery in chicken prices, and we've seen some of the kind of consumer prices start to level off a little bit. And what I can say is we probably would have expected that to take place sooner if I go back into '22, '23, just with what we were expecting from a beef standpoint. I think beef probably held on a lot longer than expected. There's been a lot more pork in the marketplace because we start to see that level out. We would expect chicken to be a beneficiary from those changing market dynamics.

One more on chicken before we move over to the other proteins. You've just mentioned the antibiotics change. And you've also had, obviously, a couple of like hatch issues so more recently. Can you give us an update why the decision -- an explanation why the decision on no antibiotics had been like moving away from that? And then at the same time, how do you think you can go forward recover a little bit sort of the hatch [indiscernible].

Yes. I think when we make any decision about our business, we're trying to figure out how to service the demand from our customers and the direction that they're headed. And when we made the choices related to no antibiotics ever in 2017 and '18, we feel confident in that choice. I think what we have learned in the past few years, a couple of things. Number one, that the demand, not as much of the industry moved maybe as was expected. I think the second thing is what we saw from a performance standpoint in our live operations and what that did for health and livability as you referenced, as well as the uniformity and consistency we see coming in the backdoor [indiscernible] not as consistent. And so ultimately beginning a conversation with our customer who are representing to us what they felt like the end consumer wanted to do. And ultimately, we made the choice to know antibiotics are important in the medicine aligned to what -- where we know our customers [indiscernible].

Now over to you, Brady, just to talk a little bit about beef maybe to begin with. From your point of view, what are you seeing in the markets? And how do you think the capital supply is just to kind of walk through us -- walk us through, through the next, whatever, 1 or 2 years, but it's a long cycle. And how you think this is going to impact your profitability in light of what John just said, it was hoping on a little longer than initially expected. Does that mean the recovery is going to come a little later?

Sure. So that's a relatively important question in terms of the cycle [indiscernible] from this perspective. So good news is relative to true cattle and cattle liquidation from our partners in the cow and calf operators and ranches is we're not seeing that continuation relative to cattle liquidation, which is a good sign in terms of continuity of supply into the fed cattle segment here as we move forward. More of the challenging news here is we have not yet seen meaningful heifer retention. So that's really the trigger point we're looking at is when we start to see the cow and calf operators go ahead and start to lay those efforts back into their herds and that will really start to allow us to pinpoint out into the future 2 years and beyond when we see some meaningful recovery to the fed cattle supply that will ultimately impact our supply chain. So those are really the triggers we're looking for. And as we model out, obviously, we're looking at a variety of different outcomes depending on the timing and the impact of that heifer retention. But we're really optimistic that we're set to manage through all those different scenarios.

Just quickly follow up on that on the heifer retention because economics right now would be really good. So why is it not happening? Is the pasture conditions just not good enough in key areas? Or what's the driver behind that?

Sure. So we're seeing a financial motivation relative to what a heifer is worth into the fed cattle market, this is definitely impacting that decision from a cow and calf operators standpoint. We're seeing a different set of metrics relative to the cost of capital for them to invest into those heifers to retain them as well. And we're seeing really a variety of different pasture conditions. And so we've got some spots that have really turned over and look like they're primed for retention of heifers. And we have some spots that are still a little bit too dry as well. So a lot of different aspects that play in that.

Okay. I mean, obviously, the cost of capital and carrying this out is different maybe to the last cycle. Now I remember when cattle prices were very low, you were obviously out there supporting the capital supply with some help here. So in light of that, is there anything you could do to like kind of support profit so -- just to support some of these suppliers to maybe help you manage through faster?

Sure. So obviously, we look internally first and make sure that within our true operating system and our supply chain, we're operating as efficiently as possible. And by efficiency, I'm not only referring to the assets that we operate, so our plants and our team members, how we perform our business, but also looking in terms of making sure we really marry our supply base in terms of the deals and the grades that were expected with alignment with the demand from our consumers. And we obviously focus on case-ready and value-added business too, to get as close to the consumer as possible. And so just by providing that signaling to our supply base, what our expectation is, so that we can generate the most value through our system is very, very important. So we work with our supply partners to make sure that we are really aligned from that supply perspective.

And then just one quick follow-up on that and like the level of profitability. How do you feel about the near-term profitability looks like implied in your guidance and how that compares to the more mid-cycle, maybe 5% to 7% margin?

Sure. So obviously, we're seeing diminished margins relative to that mid-cycle number. It's been interesting here as we've moved and navigated through 2023 with the inflation rate seen in beef cutouts provide some optimism in terms of the real demand of these domestically. And how we model that out from a spread perspective. We're continuing to focus on that and work on that and provide additional guidance later in terms of our expectations in '24.

Okay. Got it. Now staying within the fresh meats [indiscernible] pork as well. Another category that has been under pressure. There's been challenges right now, but not only for you but for the entire industry. There are some signs of some stabilization, at least short term, for the broader market. So tell us how you think it's going to play out? And do you believe that there is a big export market or not, like just what has been built to supply China, but then ultimately, China retailed with a snip of a finger. And if that's a major cause of these current headwinds?

Yes, it's been nearly half a decade until we've seen a real clear picture relative to the fact that we saw ASF in 2018 and '19, there are some expansion that occurred at relatively the same time. And then obviously, we went through really 2 major pandemic cycles, the initial in 2020 and then the blip relative to Omnicon in 2021 that gave us varying supply pictures, and that's from an end-to-end perspective. So while we may have had availability of supply from a live perspective, how we actually manufacture those processes -- those products via some labor shortages also provided mixed signals relative to true gross margins in the business. So I really feel like we're set up for a reset. We've seen some liquidation that's occurred relative to the sell harvest numbers that we're seeing from an industry perspective. We are still seeing some wean big prices that are a little bit too low relative to cash flows on independent producers that have self-farms and expect that may drive additional liquidation. And then we are still seeing, what I would call as promising demand specifically from Mexico and Southeast Asia on the pork products. Relative to China, I don't think we're going to see a lot of red meat exports. However, it's still a very, very strong market for the U.S. on a lot of the products that we don't need domestically. So a lot of the [indiscernible] items as well. So expect that to continue. I think the factor relative to the strength of the dollar is going to be somewhat of an impact in terms of the total drop value we see, but are optimistic that we'll still be able to export our fair share of work.

Okay. And then just within like that, you talked about chicken and the decision to close down some facilities on headquarter, you were unified. Within beef and pork, is that something you would also consider if there is a need to kind of support profitability going forward, particularly in pork?

We really look at everything on the table and evaluate every single asset we have, every process we have, every channel, every category. So we're evaluating our entire business. We have some operational opportunities that we've been focused on. We're optimistic that we have the right plan in place from a manufacturing standpoint. And a management perspective to continue to develop those and really excited about the team we have in Springdale to manage through what is a relatively challenging time in the revenue. So we're excited about that. And again, we're evaluating every aspect of our business.

Okay. Perfect. Now let's switch gears. Talk something positive, like [indiscernible]. That's actually the one business that has been holding up really well. You're very much at the high single-digit mark on operating income margins. You've shared a thing [indiscernible] the way you gained market share, profit [indiscernible], holding up very nicely. Just about $1 billion per annum in operating income. Do you have any plans to grow the business maybe through M&A or through investments? And how can you further leverage for Prepared Foods business model by just taking product from the more commoditized piece into Prepared Foods? Is there investments needed? Is it M&A? What can be done to maybe grow that business to be even more supportive than what it is right now?

Yes. So a couple of questions in there. Maybe let me comment on just the Prepared Foods business, and then you asked about how we grow it and let's see if Brady has got anything to add in. But I think for us, this business has been -- kind of the whole story of Tyson's history has been how do we take these commodity businesses and move them up the value chain into more value-added space is what we've done in our Poultry business. Our Prepared business, we really know was a product of the Hillshire deal we did almost 10 years ago at this point. And I think that in '23, we've been really pleased with the results of that business, high single-digit return on sales. We've continued to grow share in both volume and dollars in an environment where I think we've seen some of our competitive set as well as other CPG players taking price and maybe losing some share and some volume, we feel like we've struck a really great balance with that business. And I think that's just a testament to the strength of our Tyson brand, which really sits in our Poultry segment, but our Hillshire Brand, Ball Park and Jimmy Dean have been successful for us. I think we expect the strength of those brands to continue to carry -- carrying that portfolio. I think as we think about growing the business, we're always looking to figure out how can we find those things that are near to our existing suite of capabilities or products or integrate with the proteins that we do have, I think. For us at Tyson, we always are trying to figure out how can we be better at going to market as one portfolio. And how can we expect value through the chain, especially if you think about our Pork business that inputs into like our Jimmy Dean brands or lunchmeat, for example. On the M&A front, I think that we've been disciplined. It's just worth commenting on. The one deal we did recently was a William Sausage acquisition. We're really proud to have the Williams family be part of the Tyson family now. And I think there are some characteristics of that, that you might expect as we evaluate what the market is like out there, in terms of kind of fitting into the portfolio that we've got, in terms of the good, better, best strategy, and having some great regional brand strength, as well as providing some redundancy for us on the supply side with our Jimmy Dean brand, which, of course, we want to invest in to protect.

Okay. Now anything to add?

We're just really excited to be able to truly capitalize on the power of Tyson. And so when we consolidated the office locations to Springdale and the talent we have in Springdale, we can really define what the Tyson way is for us moving forward. And it's not necessarily a poultry, not necessarily a prepared foods or pork and beef, it's really how we attack the challenges within our business, how we decide we're going to run our systems from a management operating system perspective and then how we truly deliver the expectations with a customer. So I think our Prepared Foods and the strength of those brands truly allow us big opportunities of growth that we have from a capacity perspective to really meet those needs.

That's obviously a very retail-exposed business on the Prepared Foods [indiscernible] have you seen any sensitivities on some of the more recent pricing actions you have taken? How has Prepared Food been? I think you mentioned a little more advertising spend to maintain visibility of demand. How should we think about the need to invest for in the brand in order to retain volumes at the levels?

We've invested behind the brands. And I think that's been -- that's what we've -- that's an outcome with the growth that we've achieved. We're paying attention to where the consumer is going. And I think thus far, we've seen good health in the performance of that business. We have talked about just to reference where we are in the year, some seasonality that we typically expect in the winter months compared to where we are in the summer. So as we move into the balance of the year, we wouldn't expect it to look like what we were doing at the beginning, but still confident in meeting those results in terms of the high end of our guidance just to be clear. So I think that as we move into '24, we'll try to be pretty deliberate and focused kind of on a category by category and channel by channel basis to make sure that we're doing what's right for the whole portfolio in a way that allows us to keep managing and expanding the margins.

Okay. And then maybe one more for Brady just to like kind of conceptually. Have you seen on the demand side within beef or within pork and then maybe down to chicken, some sort of the down-trading as it relates to like the type of demand of customers or the different levels of the cuts?

Absolutely. I really saw -- when we saw the inflation occur and the beef cutout this summer. And maybe saw maybe unexpected demand movement specific to some of our case-ready pork products and certainly saw some down-trading as well into chicken. So it's going to be really interesting as we move into the latter part of '23 and into '24, how this plays out and really excited about our complete portfolio of proteins.

Okay. We touched a little bit on capital allocation already, but I want to give a little more focus. More recently, you had a relatively high CapEx, about $2 billion, I think still part of the guidance. Obviously, it were used to more like a run rate -- maybe 1.5-ish or something like that. You've done a lot of investments. Maybe, John, just quickly recap what where like the bigger ticket items under higher CapEx recently and how we should think about the run rate CapEx going forward?

Sure. So let's talk about CapEx and then kind of put that in the picture of the broader capital allocation. So the last couple of years have been an uptick in terms of what we would see from a normalized standpoint. That includes investments in our value-added chicken facility in Virginia. We're talking about building a vacant facility in Kentucky. We've also built multiple plants in China, another one in Malaysia. So it's really been a lot going on at the same time. And we would expect that to all roll off at the end of calendar '23. But I think just to put in context of broader capital allocation priorities, we always talk about; number one, building financial strength; number two, investing in our business; and number three, returning cash to shareholders. And at that same time, in '21 and '22 that we were initiating a build on these new facilities. We were also making some -- we paid down a lot of debt in that time frame. And now we find ourselves in just a better financial position to endure what we project that is coming. I think it's probably fair to say, and we've talked about this a little bit in the past from our initial projections around timing. I think that the dropoff, if you will, in beef operating margins was probably quicker and sooner than expected, I think, and we would have expected that to be a smoother glide path, which would have had a little bit smaller dislocation in terms of cash flows in the business. I think also, we didn't make the predictions about what was going to happen in chicken across the whole industry last year. But having said all that, we -- again, in the good times when beef was making a lot of money and we were making some money in chicken, we were taking that and paying down debt. I think that we plan for a lot of different scenarios as we think about '24 and '25 and beyond. I think in all scenarios, we feel confident about continuing to return cash to shareholders and the levers that we have to pull in order to keep generating cash in the business.

Just following up on the leverage. Obviously, it's a bit elevated right now. The rating agencies, they tend to look through that knowing about the cyclicality of the business, but how do you believe you can bring down leverage up to more healthy level?

Yes. I think the 2 things I would say on that. Number one, if you just look at where consensus projections are and what we've guided to for the end of this year, we're starting to get close to or at that 4x number. I think it would be premature to try to give a point in time as to [indiscernible] just thinking about the LTM number and we go in '24. But I think it's safe to say that, again, maybe repeating myself a little bit, we feel comfortable with where we are. The conversations with our rating agencies account for and they're appreciative of the cyclical nature of the business. It's just -- I think, we've gotten the stable outlook. So we're constantly in communication there, and I think we're satisfied with where we are from a leverage standpoint. I mean, we don't want to run for an extended period of time at the level that we're seeing now even. Obviously, we want to look at that 2x number, but I think we feel like the moves we've made for the [indiscernible].

One of the things we've also talked a lot about in the past was the drive for more automation, which obviously, in the industry is fairly complicated, particularly on the larger animals. More of your CapEx has been dedicated to that, also in order to balance the higher labor costs. So if you think about urban need and maybe even just the possibility to really automate this business that is very manual, where do you see the big space opportunities, particularly in the larger animal category?

Sure. I'd say, probably speak more to Tyson in general. And we still have plenty of runway relative to automation. It's an ongoing initiative that we have and we're executing towards. We've got a great team that works on that. And really, it's a focus on everything in terms of where do we franchise specific automation efforts across our entire Poultry portfolio, entire Prepared portfolio. And then obviously, you pointed out the fact that there's some challenges relative to automation in the red meat segment as well. So we've got a seamless focus on it. We've got some really good wins that are in place. Obviously, we're going to franchise those and continue to scale that and use our learnings and the opportunities in front of us. We continue to kind of knock down those hurdles that are in front of us.

And Brady is talking about automation. He used the term franchising a lot. We also say like how do we go from projects to programs in terms of finding one isolated application and then deploying that. I think automation is one example of technology in the manufacturing floor, but we've also made some interesting investments that we expect to help us be a better decision maker around using digital tools in our supply chain for business decision-makers so that we can -- and that tends to be maybe sometimes more universal and easy to roll out once you build the platform across the system. And I think that we're excited about those investments as well.

And then one of the last topics that I wanted to bring up just [indiscernible] you've been in the role in the past, sustainability. There's always like the negative news flow about the [indiscernible] footprint on carbon and the environment. You obviously have a target to get to [indiscernible]. Has anything changed on that? Where do you stand on that? And what I like the type of investments you're doing in order to reach those goals?

So I think there's a couple of things to think about. When you think about our carbon footprint, 70-plus percent is sitting -- or excuse me, 90% is sitting in scope in the supply chain, a significant majority of that is in beef. And the next biggest group is in our feed supply chain which is part of our Poultry business, but also indirectly what happens in rural crops influences our pork and beef business as well. I think that -- when we look at what the marketplace is doing, I think there's a couple of things. First off, we expect it to be a group effort. And what I mean by that is it's going to require consumers or customers, NGOs, companies like Tyson [indiscernible] producers to all work together to try to come up with a solution. What is great about the position that we're in is recent times, like say, we're one of the biggest farm-to-table companies in the country in the world. And so we're in this really special place to try to match-make where the demand is to drive through the solution -- to pull through the solution in the marketplace. To that end, we're really proud of and pleased that we were recognized by the USDA for a large grant to invest in climate-smart agricultural commodities and of beef supply chain and [indiscernible] supply chain. So I think we're feeling some validation out there with what's going on. And I think that for us, we just want to make sure that we are investing at the right level to be in a position to when that demand begins to materialize, we're in a place where we can serve our consumers and consumers with the adequate solutions related to this. I think the other component of the issue that we talked about is all around -- is I think, a building threat around biodiversity. And I think we'll start to see some interesting and exciting development in terms of how we manage that as a food company.

Great. John, Brady, we're just about a minute out. We'll cut it down. Thank you very much. [indiscernible] more questions. And thank you very much for joining us this afternoon.

Thank you.

Thank you.