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

All right. Perfect. So good morning, everyone. Next on stage, we're glad to have with us Tyson Foods, which is one of the world's largest protein producers across all major proteins, chicken, pork and beef and has a very sizable brand of Prepared Foods business. With us today are Jeffrey Schomburger, who was recently announced as the next CEO of the company beginning in October and along with Curt Calaway, CFO. Now before addressing the recent guidance changes, let's welcome, Jeff, and we'll get to the outlook changes right after. But before that, Curt, a couple of forward-looking statements, please kick it off.

Just a quick housekeeping matter, our comments may include forward-looking statements. Actual results may differ materially due to risks and uncertainties, and I refer you to our SEC filings for a discussion of these risks and factors. These risk factors and we undertake no obligation to update these statements.

All right. Thank you. With that, Jeff, as you step into the CEO role in about a month, what would you say are the primary focus for you as you begin your tenure? And what opportunities excite you most when you start?

Ben, it's good to be here with you and to see you again. I've been around this company a long time. And Fortunately, I got to know the team and the business and the Board really well. And most importantly, they made it very clear. stay the course. The work this team has done over the past 3 or 4 years to stabilize the business and set us on a path to growth is outstanding. So just staying the course there. I've also had the chance in the last 60 days to get out in a lot of plants. I think I've been in 8 plans. I've gotten to visit 10 customers. I've been with 4 consumers in their homes to see how they experience our categories and brands. So I've really gotten and with our business teams as well. So I've just gotten a really good chance to think about what we do and how we do it and formulate the strategies going forward. But what excites me are the most important primary -- the most important trial, none at Tyson Food is always operational excellence. 1% improvement or savings in our footprint is $330 million in profit. That's the culture of this company. We're outstanding at operational excellence, and I certainly will get behind that 100%. But where I'll spend the most of my time is with consumers and customers and growth, right? I really -- I'm going to spend a lot of time with R&D, with innovation, building our brand-building capabilities and helping us win with customers. Number 1 priority growth, most excitement, consumers and customers. And I really want to bring that same operational expertise and the discipline and rigor of which we run our plants to our 3-year innovation pipeline. to our master brand plans and to our joint business planning with customers, and that excites me a big time.

So you've been on the Board for many years at Tyson Foods. So talk a little bit about the time when you were a Board member. What was your role? And then what ultimately made you actually interested in accepting the role as CEO when you got provided?

Well, 10 years on the board, so I've learned a lot about the great brands that we have. The culture of this company is outstanding. I've got to know the family really well, and I've known John Tyson for 25 years since I was in Arkansas previously with Procter & Gamble. So just deep respect for the culture, the brands, the company and the family and the Board. I think the Board has strengthened over 10 years and a lot of that credit goes to Mr. Tyson. . And what -- as I look out in the future, it's really just what I said. We are standing here with 3 iconic brands, Tyson, Jimmy Dean, Hillshire Farms. And the biggest priority in the company right now is to shift and grow our business disproportionately in our branded and our value-added products. So with that strategic choice it really maybe you want to jump right in. So I'm really excited to help lead this journey to becoming a house of brands.

Okay. Perfect. We'll come back with a couple of questions for you as well. But maybe on the new guidance, Curt, can you walk us through what really drove the changes? You've highlighted cattle as a big thing, but there were a couple of dynamics in the quarter. So maybe talk to us, what was like just those dynamics versus what may be more on the underlying consumer softness that drove some of the other parts of the revision.

Sure. Let me start with, obviously, as you read, we changed our guidance in our release last week, but it was beef lead right? Beef was the driver associated with that. We revised our range down about $125 million in our Beef segment, but that was really driven by the cattle pricing and the cattle cycle, right? So we have a small portion of our beef business that has some vertical integration, and we have exposure to live animals. We acquired those live animals, call it, 6 months or so ago. And as the price has fallen relative to these animals will need to take or we anticipated we would need to take a noncash impairment on those live cattle? . That is shifting loss into Q4 for animals that would otherwise be processed in our facilities in the first half of 27%. So the majority of the beef adjustment was really related just to the live cattle noncash impairment that we're anticipating at the end of the fourth quarter. Now we did leave the range of $150 million wide because that price ultimately still has some flexibility until we get to the end of the period. And so there is still some range associated with that, that we left in. But it was a beef driven and specifically live cattle generated adjustment that we made. To your point, we did make a couple of other changes as we opened up and provided a new guidance range. We did revise down slightly our pork outlook as well. And we really narrowed the range in chicken and boxed that in around the low end of our previous range. So our previous range was $1.9 billion to $2.05 billion, and we adjusted that to box it in around the $1.9 billion at $1.85 billion to $1.95 billion. And that was really driven by, as we announced in our release, we've seen a little bit of consumer softness, as you've probably heard through this conference. But specifically for us, we saw our foodservice business pull back a little bit. And that really is what led to the change in our chicken guidance for the quarter.

Okay. Now just as we think about it and you talked about the cattle dynamics on that pricing and obviously, the consumer as well moving into the next quarter, which then is fiscal '27 is going to be same. I understand you're not going to be able to provide a guidance, but just a general setup, how should we think about the coming year?

Yes. I think while we're not -- certainly not here to give guidance for '27, what we did say a quarter ago largely still rings true, right? We expect in our Prepared Foods business to continue to grow, both at the top line volume and the bottom line profitability. We've demonstrated a track record right? You got to go back over a year ago where we made the claim. We are going to grow volume, and we're going to grow profitability in Prepared Foods, and we've been delivering that. With respect to our chicken business, we've continued to grow volume and very much a focus and expectation under Jeff, as he said earlier, expectation of driving growth and driving growth in the value-added and branded part of our businesses. And that extends into chicken as well. You should expect us to continue to operate with the same level of discipline, operational excellence, Jeff commented on that earlier, but specifically in the chicken business. Expect that continued strong performance. Within our beef business, the changes that we've made to the footwear -- the footprint is really about operating for where the cattle are and where we think they'll be in the future. And large-scale plants in the cattle belt that we have a very good chance -- a very good opportunity to execute really high efficiency in those plants and concentrate then on revenue mix and continuing to add value to our customers and consumers through seasoned marinated case-ready beef and pork that sets us up in continuation of operational excellence, but also allows us plenty of opportunity for growth.

Okay. We'll come back to that in a bit. But you've talked a lot about the consumer health. And Jeff, obviously, you have a long-standing history and followed the market for many years as to seeing different cycles. So there's a lot of pressure across retail, but also food service, yet protein demand still is somewhat supportive. Talk to us a little bit about the long-term opportunities being protein exposed, but then at the same time, how to manage through those challenges of a little bit of a softer consumer?

You know what we see is protein is resilient. and the consumer is very resilient in protein. And if you look at our protein business in this, particularly the chicken business, it is in service to a consumer and a customer, and that's what we produce to that demand. So that cycle is working and it appears to be working very well. Now as we look further out, how do we build on that and maintain it. First of all, I'll tell you our quarter 3, our poultry -- our chicken business, both in the foodservice and in retail is up 3.8% on the value-added branded while poultry is only up 1%. So we see the retail growth pretty consistent, but there is softness in the food service as the consumer is under pressure. We think over time, with the attractiveness of the industry, the consumers priority and our ability to innovate, renovate and reach new consumers, particularly through the premium tiers of the category, we see a lot of tailwind in growth over the long term in poultry.

Okay. And across the other segments, I mean, is there -- are you seeing any trade downs happening, like people switching maybe from beef or within beef down to different cuts. what is like consumer behavior? And has that had any impact on the level of profitability as you walk through?

What we see consumers doing, and we think this is a long-term trend and that is searching for value. And we're seeing segments of the consumers trade up to larger sizes to get a better value, and we see some consumers trading into smaller packs to get a better value. And what we have to do is make sure that we have the lowest cost operations and have the ability to meet that consumer where they are. So we feel confident with our footprint that we'll be able to compete effectively in the value tier in the mid-tier and the premium tier, so we can grow consistently and sustainably over time.

Okay. Got it. Just coming back to the beef thing and you've talked about the network optimization early on. So as we look at beef obviously, many dynamics, not only you have taken decisions to shut down capacity, some of your peers have done similar transactions. We had the issue of New Wells crew warm with limitations of exports of Mexican cattle back to the U.S. for 1.5 years now finally opening up. So as you think about it, your new footprint and with the potential of cattle coming into the U.S. and maybe some rebuild happening, and I'll let you comment on what you're seeing there. How do you think that your beef business ultimately is going to be structured in a little bit more detail from a profitability perspective. as to leverage your decisions coupled with some of tailwinds, at least from market supply coming back in?

Yes. I think -- look, we've made a couple of decisions as we got across -- as we and across this year. to set our footprint up as we believe the cattle cycle will evolve, right? Those are tough choices, and -- but we needed to be bold and decisive and ultimately land on a network that's 3 really large scale facilities in the cattle belt, right? We believe that gives us the best position to operate with a great deal of efficiency within those facilities. And it will take us, right, just as it did from our previous announcement, it takes a little bit of time to get set in that new footprint. But setting up for the long term from an efficiency standpoint and where the cattle are you referenced where we are in a rebuild situation, right? We've been on this stage before talking about that last year. a very topical item to ask. We've said, right, that it's been slow. It's been spotty, various references to that. And there's more data out that it's occurring, but it's not occurring at the rate at which it had in some previous rebounds. We're not dependent upon that. We set our network up to be successful in 3 large-scale plants in the cattle belt. To the extent that we have more cattle available in the future, to the extent that the border continues to open from Mexico to flow those animals through, that will be additive and helpful to us. But we are focused on operational efficiency and effectiveness in our plants and then maximizing the mix and the revenue management and ultimately meeting consumer demand with season and marinated and case-ready products. That's our pathway forward.

Okay. Perfect. Leaving beef aside and maybe staying with the other big commodity more exposed segment chicken, Obviously, that has been very strong. And we've seen a very good growth over the last couple of years, very solid profits. So as you think about it within the category, how much actually has mix shifted, right, to drive that profitability up to make that profitability more sustainable? What is value add doing to it? Where do we stand ultimately in terms of like mix within chicken towards value add and how sustainable is the profitability level at that top end?

Yes. We think it's got a long tailwind, as I mentioned, and protein trend is going to stay with consumers. It's going to be a priority consumers, and we see a long-term tailwind there. And we see also this demand from consumers for convenience, okay, for affordability, for bold flavors. And we have a portfolio that can service all those needs in our poultry business. So the energy we're putting behind now in our prepared business, we're also putting it behind our poultry business. to include better performing products, superior packaging, superior in-store presence. We feel the investments we're making, about 30% increase in advertising, more research capability, more R&D capability and more marketing capability, we see the runway shifting to the premium tiers of those categories and the value adds growing fast, and we're going to play in a big way.

Okay. And then within chicken, one of the topics that has come up is new genetics and what you bring to the table. So can you speak more about what the improved genetics actually have been contributing or helping you? And how much upside do you still get as this gets further developed as we compare to prior flocks and they get replaced from contribution perspective for you guys?