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

[Audio Gap] everyone. I'm Andrew Strelzik. I'm BMO's agribusiness, protein, beverages and restaurants analyst, and I'm delighted to welcome everyone to our 19th Annual Farm to Market Conference. I'm proud to say that this is my 17th Farm to Market. It's truly amazing to see how the conference has grown over that time. Starting as a 1-day event with 11 companies, my first year, we now have the pleasure of hosting over 100 companies, 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 key issues and 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, chemical, agribusiness, protein, food, beverage, distribution and food retail sectors. Before I go any further, I want to take a moment to thank the many people who make the conference the success you see today. The management teams have been unbelievably gracious with their time and insights upon which conference has been built. Our tremendous sales force, devoted editorial staff and tireless conference coordinators are remarkable in their commitment to making this event a 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 next 2 days, including: the outlook for farmers and potential for grower margin expansion; implications across the ag and protein industries from recovering crop supplies and resulting decline in prices; the impact of multiyear inflationary pressures on the U.S. consumer and how companies are responding to pockets of trade down if the page has turned on crop chemicals destocking; company strategies to drive food away from home volumes to generate sales growth in a less inflationary environment and how M&A strategies are evolving to meet consumer preferences. Each year, we seek to keep the conference relevant for the rapidly evolving dynamics across the agriculture and food value chain. We're fortunate to have as our keynote lunch panel today BMO senior commercial ag lenders to discuss the state of the farmer, crop supply demand dynamics and the agriculture operating environment. And tomorrow's keynote panel will explore how private equity firms are managing existing portfolio companies and deploying new capital amidst current market uncertainties. 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. Tyson has been gracious enough to kick off this conference for the last 19 years. As CEO since 2021, Donnie King has led Tyson out of an unprecedented operating environment, leveraged just 4 decades of industry experience to manage through a challenging environment across proteins and once again driven the turnaround in its chicken operations, building on a strong track record of superior performance. Donnie is joined by John R. Tyson, who has been with the company since 2019, and spent the last 2.5 years enhancing the leadership team as CFO. Over that time, John has continued to manage Tyson's balance sheet through the lens of financial discipline, opportunistic capital allocation and cash returns to shareholders against an evolving operating backdrop. Donnie, John, thank you so much both for being here today.

Thank you for having us.

Good morning. Thanks for having us.

So I guess I wanted to start it off this way. The company has been -- has taken a number of actions over the last 12 months or so to improve performance across segments. Can you reflect on those changes that you've made, what those have contributed and where there are additional actions that you're considering?

Sure. I will -- let me start off by saying good morning, everyone, and thanks for having us again. I didn't realize it was 19 years, but -- so good morning. One of the comments I make is what a difference a year makes. If I think about, at least the first half of this year, we are fundamentally a stronger company, and fundamentally is -- talking about all the fundamentals of the business, controlling the controllables, operational excellence. We've done things such as made a pretty strategic network moves across our organization. We've closed 6 poultry plants, 2 case-ready beef plants and we announced the closure of one of our more inefficient pork plants. But I would characterize it as back to the basics. And once again, we are seeing the benefits of our diverse portfolio across proteins, channels, categories and eating occasions. And in this particular case, we're seeing tailwinds from chicken offset headwinds in beef. And if I could step into each one of the business, just really top line, they're all doing better than they did a year ago. And so very proud of the execution from our team. Now I would also hurry on to tell you that the mindset is continuous improvement. And we're certainly engaged in that. But from a chicken standpoint, we talked about in November that we were going to make some moves and we were going to make some changes and perform better. And we talked about that in terms of 2/3 of that would come from things like operational execution, it would come from the network optimization. And about 1/3 of that would come from market tailwinds in chicken. We'll update that guidance as we move along. But the way we look at chicken right now, the grains have moderated, still elevated over prepandemic levels. Demand for chicken is solid. And as we think about our Chicken business going forward, in the last quarter, made $325 million improvement. Very proud of that again, but a much, much stronger Chicken business. And I'm most excited about the fact that it's driven by execution and action and those type of things. So that's the story as it relates to Chicken. Prepared Foods. We have 3 of the top 10 protein brands in food. Our brand health is good. Our share is strong. We're seeing some consumer dynamics. This bifurcated consumer is the way we've described it, where those on the lower end are making a, in some cases, move from branded to private label, and then in some cases, moving from foodservice into retail. The good news for Tyson is that we have an assortment across the various price points. So we meet the consumer wherever they are. If I go to Beef, the progression of the cattle cycle continues. I don't know today when heifer retention will resume. What I can tell you is this, what we're looking for, and what we think will be the drivers of that is, one, is pasture conditions. And those are much improved from where they have been. That would be one sign. So it'd be a positive indicator. Interest rates are up. So borrowing power is going to be more expensive and tying up more working capital. So ranchers are looking at that, and I'd say that maybe you put in a headwind category. Grains have moderated, as I mentioned earlier, would be positive. And so we're closer today to heifer retention than we have been, but I can't predict exactly when that's going to occur in a meaningful way. What I can tell you about our Beef business is we continue to value up into things like marinated meats and so forth and then push those products into our Prepared Foods. I can tell you that the fundamentals in our Beef business are very, very good. They continue to improve, a lot more database decision-making. And so we're excited about once this cycle gets kind of looks normal again, I'm excited about what we're going to be able to deliver from a Beef standpoint. Our Pork business is just about driving out inefficiency and waste. And I can tell you, our Pork business is performing better than it has in a long, long time at Tyson. And so very excited about that. Have plenty of hogs around us, and demand for pork is very strong. And then we talked a little bit about our international business on our earnings call, and we're starting to see some scale in our international business in -- I think at the end of our '23, we were $2.5 billion in sales, and we invested in 7 assets over the last 2 or 3 years, which drove a lot of capital allocation. And so from that standpoint, we're in a point now where we're valuing up or we're actually filling up those assets. And so we like our chances. So we're in a better place overall than we were a year ago or 2 years ago.

You talked on the earnings call on the Chicken business about all the work that you've done, but still having more work to do. So can you kind of frame where you still see opportunities in that business to continue to improve performance, maybe where performance is now versus where it's been or historical. Any ways to think about that?

Sure. And John, you add into this, if you'd like. But I'll try to tell you, and it's very simple in terms of the approach that we've had in Chicken, and simple worked really well for us. And so we had essentially 3 or 4 priorities going into the year, which are core in my mind to success in Chicken. Our live operations, we've had issues with our genetics and with our performance in live and capacity utilization and a number of things like that. We made the decision several months ago to move from a no antibiotics ever for the Tyson brand to a no antibiotics in human medicine. So we made that switch. We've seen a number of benefits from that. The livability, the performance of the animal in terms of feed conversion, but probably most importantly, and many of you will understand this, is the uniformity of that flock that we get into a plant and how that works through trying to service customers who need different sizes of product and so forth. And so we really like that. So our live performance has really come a long way. I know industry data talks a lot about hatch and livability and how that is kind of has a lid on or muting supply potential. Our supply -- our genetics, we have -- based on what we see in public data around hatch and livability, we are significantly better than that. And we've not been able to say that in a long time. In terms of our plant operations, it's fundamentals, it's labor, it's yield, it's utilization. There's -- and then with a mindset of always valuing up. We have the -- we've been able to do that. That's been a bit of our legacy as a company through the years, and we're back on track with doing those type of things. You may recall, in 2023, we had some demand signals that created an oversupply for us. And in Q1, Q2 of '23, we had to clean that up and we've done that. But as we're in -- have gone through the first half of our fiscal year, we're seeing the benefits of that supply/demand balance that we have. We've been able to service our customers in a much, much better way. And at the same time, lowering inventory and working capital and that type of thing. So -- and we continue to invest and -- behind our Tyson brand in Chicken. We're the #1 brand in retail, and we're the #1 brand in foodservice, and that's our sweet spot. That's where we want to grow. That's where we choose to play. Anything?

I think that was a good summary, Donnie. And if I may just add a couple of things just to put some numbers around what we're talking about. Last Monday, we released earnings. We beat expectations and raised guidance. That was driven principally by our Chicken business. Donnie's talking about live operations. Based on data that we see, we are beating and better than our competition there, which we see as being good for our business. If we think about, from an operational standpoint, we announced last year a bunch of strategic moves, discussed that being well north of $200 million in terms of the year-over-year improvement. I think we've realized that today. And the question we get a lot is, okay, how much more room do you have to go? We haven't broken that out yet, but it's safe to say we feel like there is headroom to continue improving our operations. Why is that relevant? I think the question we get a lot from investors is, hey, what more can chicken do? Or what is going on in the chicken environment that potentially offsets some of what's going on in the beef environment? I think we see today the industry trying to supply more bird, but there's been a little bit of a bump in our heads against the ceiling because of some of the hatch and livability issues. So I think we would see that as being constructive for Chicken margins. And anyone in this room -- actually, there's probably people in this room that could guess better than we can about where things are going to go from a grain standpoint. But safe to say, I think consensus projections now I would say that the environment continues to get better as each week and month goes on. So I think all in all, we're feeling optimistic about the Chicken business.

You talked about some of the productivity issues that have been -- that are certainly constructive for the business. Can you kind of dive into that a little bit more? What's causing that? Is there a path to recovery? It feels like we've been dealing with this now for several years in some shape or form. So how is this different than that? Or the same as that? And what's the pathway forward?

Sure. I think the thing that -- I guess the punchline is that companies are looking and projecting what forecast ahead and weight's going to be. And to your point, we have underdelivered on that. Yes, you see today an environment with more placements and a little bit heavier bird weights, but net, in terms of overall supply in Chicken, it's relatively flat. A number of things from disease to -- in terms of hatchability, mortality of pullets, mortality of hens, hatchability and even with some disease livability issues in the meat birds, the broilers. And so I don't know that anybody has a real answer for that from an industry standpoint. So I'll let someone else try to explain that. I can tell you that from a hatchability perspective, we're -- we said it on the call, we were up 260 basis points in. So we're in pretty good shape from a hatch standpoint. Livability with some of the things that we changed from no antibiotics ever to NAIHM, that protocol. We're seeing greater livability and uniformity as I've talked about before. But it's just always a combination of things that is lurking in that, partly genetics, partly could be husbandry on the farm. I know that we had to go back and do some really basic things in our live production operations and just get back to the blocking and tackling of the business. And we've been able to do that. And so we like our chances relative to that. We have some -- we have more room to go, but we have good plans in place to attack that.

You talked about your expectations for chicken production this year to come in below the 1% growth that the USDA has been -- or at the time was projecting. So obviously, a constrained supply environment. Can you talk a little bit more about what you're seeing in terms of demand shifting between proteins or demand across proteins, I guess? You talked a little bit about bifurcating consumer in Prepared. If I rewind a year ago, I think there was an expectation that we were going to see demand shift from beef to chicken that hadn't quite played out at that time. So how does the environment now compared to where we were and maybe where we're going?

Maybe I can take that one. So a couple of things we've discussed, and maybe some just additional observations that -- we talked a little bit last week about features in retail, driving pork and chicken. I think we see that as being supportive for demand in those proteins. Net-net, overall, I think the total protein mix doesn't change over year-to-year. And I don't think we're meeting to make any bold assertions around the composition of kind of the protein mix. But I think what we do see is as the price gap start to get wider between these proteins, chicken and pork should stand to benefit. And I think we've already started to see that. It should probably continue. And retail features is one area where you can see the kind of activity. Other places that we see it show up is we work -- we have a good foodservice business. We start to project into the summer and in the winter time, customers planning for next year, what's going to be the composition, what are they putting on their menus to drive volume? And I think we see that as being -- as continuing to be positive for chicken and for pork.

I know you said that there are others that maybe have a different or clearer lens, so to speak, on the feed cost outlook, but when you've approached the outlook for your business for this year, and you think about maybe the next 12 months, I know we're kind of early in the planning season here, how do you approach the guidance from a feed cost perspective? And kind of what are your assumptions about feed costs in terms of becoming more of a tailwind, more of a headwind going forward?

I think -- we try to not get into market calls, but typically cast a projection kind of wherever things are at the point in time where we're talking to the markets or building our outlook. I think it's safe to say that if you were to look through some historical norms, and we project where we're going to be from a stock-to-use standpoint, we project -- I mean even though we're still early in the planning season, I think everyone's comfortable and confident about where production is headed this year. So it's possible that we're getting back into those pre-COVID levels, or 10 years ago where corn was trading $4 minus as compared to where we were a year ago, above $6. So I think that's the -- that's probably the consensus opinion. That's kind of how we operate. But I think what I want our investors to take away is that we manage our portfolio from a commercial standpoint in terms of the contracts we have. We try to manage our mix so that we can win no matter if it's high prices or low prices. I think since a year ago, we've made a lot of good moves to get our poultry business in balance specifically. And so we're not betting on the up or down either way, but really focused on what we can do for our customers so that they're able to get chicken at great value for their customers.

And maybe just to wrap up on the chicken side. It seems like between the external environment of tight supplies, tight beef and how that benefits chicken demand, feed cost outlook, your internal dynamics and the ability to continue to improve that on the chicken side, it feels like there's a pretty good runway here. I think investors generally view the chicken cycle as shorter in duration than obviously some of the others given the life cycles. Does it feel like -- without asking you to give '25 guidance or anything like that, does it feel like we are -- your Chicken business is set up for a sustained run here that has a little bit more durability to it just given the sets of external and internal dynamics?

I think the best way we can answer that question today is our -- we raised the outlook for the back half of the year. That implies that we are exiting the year equal to and better -- or better than the first the way we started the year. And so I think if -- it would be reasonable to extrapolate that based on what we know today, but I don't think we mean to make any assertions about 9 months out from now just because we've seen things turn in a short period of time. Even the -- some of the dynamics that we've seen in the first 6 months of this year may have been easy to look back and say, okay, that makes a lot of sense. But I think we had a more cautious outlook when we began the year and just because there's a lot of predictability in the business.

If I could add to that, Andrew. The thing that I'm looking at relative to our Chicken business, we've talked about grains moderating in what they do going forward. I mean everybody here sees all that information, but certainly not pre-COVID levels, but certainly moderated from where it's been. Demand for chicken is solid across our portfolio. And execution is better than it's been in some time. And as I mentioned earlier, we are fundamentally a much better chicken company. And so very proud of that, what that can do not only for the balance of the year, but as we move into '25, '26 and so on.

Okay. That makes a lot of sense. If I shift gears to beef, you've talked about some of the uncertainties in the outlook, not seeing herd rebuilding yet, some of the pros and cons. I guess can you just maybe dig in a little deeper in terms of what it might take to get folks over the hump or get the supply chain over the hump to start to do that and kind of how you think that might play out?

Sure. And I touched on this earlier. But in terms of what -- I think what ranchers are looking for, feedlots are looking for is going to be better pasture conditions. That's #1 on the list, and that is much improved. So that's very positive in terms of sentiment. In terms of grain costs, as I said earlier, as it relates to chicken, and you could put pork in this as well, feed costs continue to moderate. I mean that's positive. The unknown around -- well, interest rates are known, and that's a bit of a headwind, but we're much closer. There's a lot of people that would speculate in terms of when to do that. We choose to talk about it in terms of what the data says. And we see nothing that has -- that heifer retention is taking place in a meaningful way. Roughly 41% of those heifers are going to a processing plant. Historical levels are somewhere around 35%. So there's still some room there. And so that's what we're looking for. That's what we see from that perspective. But cattle supplies are tight, and compression continues in terms of the spread.

And I guess the context of some of the uncertainties that exist in the beef market, can you maybe frame how you think about getting to the high end and the low of the guidance range for this year? Obviously, pretty divergent back half implications just based on those ranges. So can you talk about some of the sets of circumstances that would drive you to one versus the other?

Yes. I think when we put the guidance together, I mean we do some pretty -- in our Beef business specifically, we make some assumptions around here's the range of outcomes on cattle prices. Here are the range of outcomes in terms of cutout values and drop values. And you just put that, plus minus either way, I think. Where we started the year so far, puts us right roughly year-to-date in the middle of that range. And so in a world where we've -- you've heard us already say today about how we try to project market calls, I think that's the easiest way for us to explain where we sit with the guidance today. But if you follow Tyson, if you follow the beef industry, it's easier to -- there's data out there to track what margins are doing in the -- for the industry. So we do make investments to try to make more stable, the earnings and more resilient in our Beef business, invested pretty significantly in our case-ready business. We're always trying to figure out how to value up to drop and do things in kind of the byproducts business. We haven't -- that is kind of a focus, I think, for us. And so we'll see how things play out. But we're going towards a point in time with tighter cattle supplies, and that will continue to influence the Beef business.