Q3 2022 Tyson Foods Inc Earnings Call
Okay.
Good morning, everyone and welcome to the Tyson Foods third quarter 2022 earnings Conference call.
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Please also note today's event is being recorded.
At this time I'd like to turn the floor over to Brendan Tucker senior manager.
Sir Please go ahead.
Hello, and welcome to the third quarter fiscal 2022 earnings conference call for Tyson Foods.
Prepared remarks today will be provided by Donnie King <unk>.
Resident and Chief Executive Officer.
And Stewart Glendinning.
EVP and Chief Financial Officer.
Additionally, Shane Miller group President fresh meats.
Noelle Omara group President prepared foods.
David Bray group, President poultry and Chris Langhorst Group, President International will join the Q&A session.
We have prepared presentation slides to supplement our comments, which are available on the Investor Relations section of the Tyson website and through the link to our webcast.
During this call we will make forward looking statements regarding our expectations for the future.
These statements are subject to risk uncertainties, and assumptions, which may cause actual results to differ materially from our current projections.
Please refer to our forward looking statement disclaimers on slide two.
As well as our SEC filings.
For additional information concerning risk factors that could cause our actual results to differ materially from our projections.
Please note the references to earnings per share operating income and operating margin in our remarks.
On an adjusted basis, unless otherwise noted.
For reconciliations of these non-GAAP measures.
To their corresponding GAAP measures. Please refer to our earnings press release.
I will now turn the call over to Dani.
Thank you Brandon and thank you to everyone for joining us for the call earlier today, we reported solid third quarter and year to date results. We continue to navigate through a complex and dynamic operating environment and I'm grateful for the hard work and dedication of our team members. Our results would not have been possible without them.
At our Investor Day last year, we shared three priorities with you.
Winning with team members, winning with customers and consumers and winning with execution and I'm pleased to say that we're making progress.
For team members are continuing investments are reducing turnover and improving staffing levels for customers. Our service levels are improving our execution, we're getting stronger driving substantial savings and improving business results I'm confident we're on the right track and recognize that there is more work to do.
Yeah.
Let me cover some highlights from the quarter.
Our multi protein portfolio enabled our business results in the third quarter versus last year, we delivered substantially improved earnings in our chicken segment as well as higher earnings in prepared foods, which partially offset a decline in beef and pork earnings and we continue to accelerate our productivity actions to.
Prove efficiency across all segments.
With our iconic retail brands Tyson, Jimmy Dean he'll share farm and ballpark Tyson core business lines outpaced total food and beverage up 13% in the last 13 weeks compared to pre pandemic levels.
We continue to be the market share leader in the majority of the retail core categories in which we compete.
Well gaining share in both Bacon and breakfast sausage and six of the nine core business lines, we grew share versus our second quarter.
I was also pleased to see continued growth in our E Commerce channel, where approximately one in five U S households bought a tyson product during the past quarter with ecommerce sales growing 15% versus last year.
We're seeing some recovery in the foodservice channel with continued gains in quarterly sales and broadline distribution, we've seen specific strength in branded value added chicken.
Breakfast sausage and Bacon.
In this challenging economic environment.
Where our cost of goods has continued to increase consumer demand for protein remains relatively steady our diverse portfolio allows us to meet customer and consumer needs across a broad range of products and price points, even as consumers shift between proteins and products.
Our balance sheet grew stronger providing optionality to invest in growth across our portfolio and return cash to shareholders. We have a disciplined approach to deploying capital with a focus on total shareholder return.
Our year to date results clearly demonstrate that our diverse portfolio supports our growth objectives of growing faster than the overall market improving operating margins and driving stronger returns for our shareholders.
Now for highlights from our financial performance.
Sales improved 8% for the third quarter, and 16% year to date compared to the prior period.
Our sales gains were largely driven by higher average sales price in chicken and prepared foods average sales price increased in these segments in response to persistent increase in the cost of goods.
<unk> were lower in beef in line with expectations and pork segment versus the same quarter last year.
We delivered solid operating income of nearly $1 billion because of our diversified portfolio year to date, we're up 15% over prior year.
As expected year over year third quarter earnings were lower as beef margin declined relative to a year ago, but still performed well in comparison to historical results.
Overall earnings per share came in at $1 94 for the third quarter and $7.10 year to date, we remain.
Confident our actions will improve our long term volume performance. However, our total volume was down both for the quarter and year to date, we are focused on overcoming the supply chain challenges running our plants full and reducing our cost.
Volume is up year to date, driven by demand and operational improvements, but down for the quarter lower quarterly volumes were driven by the fiscal year 'twenty, one fire at our rendering plant enhance he'll, Alabama as well as lower outside purchases of meat chicken and eggs. This was partially offset by increased <unk>.
Level of internal harvest versus the same quarter last year, and we expect internal growth to continue as we ramp up our bird supply for the full year, we expect chicken to deliver 1% to 2% volume growth.
In prepared foods volumes were down five 5% year to date due to supply chain challenges uneven.
Uneven foodservice recovery and the impact of increased pricing.
Note also that the divestiture of our pet treats business last year drives one 2% of the total decline.
Although retail volume is down we maintained our market leadership positions, while the foodservice channel continues to recover volume growth remains strong in the broadline distribution led by breakfast sausage and Bacon.
And beef volumes are down year to date, but were up one 3% versus the same quarter last year, and we continued to increase quarter over quarter due to higher head throughput in carcass weights.
In port volumes are down year to date by 2.1% because of limited hog supply and lower export demand, we expect tightness and live hog inventories and declining export demand to continue to impact volumes in the fourth quarter.
In the international other segment volumes are up 11, 7% year to date and 21, 9% versus the same quarter last year.
Investments in capacity innovation and brands are supporting our market share growth.
Volume growth was driven by our strengthening <unk> and retail performance overall, our international business is growing both organically and Inorganically. During Q4, we signed a joint venture agreement with 10 me a food company in Saudi Arabia.
This partnership will enable us to better serve our large global customers as well as expand our reach to new customers in the middle East.
We're investing in new plants, and expanding existing capacity across our global network eight plants are being constructed with two expected to begin operation This fiscal year and six more by the end of fiscal year 'twenty three this additional.
Capacity will enable our team to address capacity constraints accelerate our value added growth and better serve growing consumer demand for protein.
We continued to make significant investments to attract and retain team members, including childcare citizenship support transportation free technical and college education, onside health clinics maternity and paternity leave and other health benefits.
Our near side health centers in rural communities are seeing increased usage. These clinics to provide team members spouses and dependents comprehensive health care services at little to no cost <unk>.
Investment in team members are making an impact is higher pay and enhanced benefit offerings have led to lower turnover and absenteeism in our plants, which positions Tyson for future growth we.
We are committed to creating a differentiated work experience for our team members.
These investments were making in our people are part of our broader effort to evolve our business from an E. S. G standpoint.
Over the past several years, we've made many investments to these and today. We are focused on three core pillars of our ESG framework the formula to feed the future.
Those three pillars are re imagine people and community impact drag.
Drive product responsibility from farm to table.
And working toward achieving net zero.
Earlier this quarter, we released our sustainability report for 'twenty, 'twenty, one, which highlights our ambition and commitments to become the world's most sustainable and transparent protein company.
In addition to the investments in people I mentioned, a few moments ago. We also highlighted in our report our efforts around animal welfare sustainable packaging minimizing waste water stewardship, and working within our operations and supply chain to reduce emissions.
We're setting aggressive ESG goals and working to meet them.
As we run our business better, we're making process improvements digital lives in the supply chain, increasing automation and aggressively managing SG&A across our operations are.
Our productivity program continues to deliver at the upper range of our initial projections and we will realize more than $1 billion in recurring productivity savings by the end of fiscal year 2024.
We're continuing to accelerate digitalization across Tyson through supply chain planning and execution of processes to better serve our customer.
Automation remains a top priority for our business and I'm very pleased with the aggressive rollout of automation technologies.
And given the macroeconomic environment, we are taking action to cut cost reduced span.
And reassess every role across the business to ensure that the work we do is value added for our customers and consumers.
Finally, as we look for new and innovative ideas that can have the greatest impact on tysons productivity and sustainability objectives. We held the first ever Tyson demo day more than 100 companies were considered as presenters where the demo day 20 were selected to make their pitch and ultimately six companies were chosen for <unk>.
Gartner ship.
We're committed to strengthening our position as a global protein leader and driving value creation for our shareholders at our Investor day, we outlined five imperatives, we're strengthening our position as a global protein leader I've.
I've spoken about transforming our team member experience, increasing capacity investing in digital and automation and the strength of our balance sheet.
Chicken remains a key focus for our long term success and we're executing against our roadmap to restore top quartile performance for this segment.
This quarter, we surpassed a 6% adjusted operating margin, we expect to reach 40 million head per week by the end of this fiscal year and to continue to grow after that enabling us to maximize our fixed cost leverage and grow our value added business.
We're optimizing our plant network by adding fully cooked capacity converting plants for value added production implementing plant flexibility and optimizing our portfolio mix.
We've come a long way and had more work to do but I am pleased with the progress we're making in chicken.
As we look to address projected demand growth over the next decade, we're using our financial strength to invest in our business we.
We will have invested nearly $1 $9 billion in fiscal year 'twenty to focus primarily on new capacity and automation objectives.
Year to date, we returned to shareholders approximately $1.2 billion in dividends and share repurchases as we continue to prioritize shareholder return.
I will now turn the call over to Stuart to walk us through more detail on our financial results for the third quarter.
Thank you Donnie let me turn first to a summary of our total company financial performance. We're pleased to report solid results in the third quarter and year to date.
Sales were up for both the third quarter and year to date benefiting from our pricing initiatives to offset the increasing cost of goods.
Volumes were down both for the third quarter and year to date due to supply constraints and a challenging macroeconomic environment impacting consumer demand.
Looking at our sales results by channel retail drove $173 million of top line improvement in the third quarter relative to the same quarter last year.
In the third quarter, the ongoing recovery in the foodservice channel drove an increase of $165 million.
Sales to international markets, including both domestically and internationally produce products with $339 million greater than the prior year period, as we leveraged our global scale to grow our business.
<unk> covered our earnings and EPS results.
Slide 11 bridges operating income for the third quarter, which was $374 million lower than fiscal 2021.
Volumes were down one 9% in the quarter.
Our pricing actions, which partially offset the higher input costs led to higher sales during the quarter.
We saw continued increases in cost of goods across the business in some instances up to 15%.
Notable examples where labor feed ingredients live animals and freight costs.
SG&A was $20 million unfavorable to the same period last year due to increased investment in advertising and promotional spend and technology related costs, partially offset by lower commission costs incurred by selling direct to customers rather than the brokers.
As Donnie said, we're assessing all of our SG&A expenses across the business to identify non value added spend.
Savings from our productivity program initiatives continued to have a positive impact on margins.
Moving to the beef segment sales were approximately $5 billion for the third quarter flat versus the same period last year, but up 15% year to date at nearly $15 billion.
Sales in the quarter remained strong supported by higher volume, but offset by lower average sales price driven by softer consumer demand for premium cuts of beef.
Global consumer demand for beef products remains strong and we expect volume to continue to improve in the fourth quarter as improved labor participation supports higher plant productivity.
On expenses, we incurred greater costs during the third quarter versus the comparable prior year period.
As live cattle costs increased approximately $480 million in the quarter.
We had sufficient livestock available in the quarter driven by higher herd liquidation due to drought conditions.
We delivered segment operating income of $506 million in the quarter.
155% versus the prior year comparable period.
Our operating margin of 10, 2% was lower than the same quarter last year, but remains a strong performance we.
We expect to see beef margins returned closer to an expected long term, 5% to 7% average.
Looking next at the pork segment.
Sales were approximately $1 $6 billion for the quarter down 6% versus the same period last year, but up 4% year to date at $4 $8 billion.
Global demand is being impacted domestically by high retail prices and internationally by the strong dollar.
In U S pork relatively expensive as compared to alternative sources globally.
For the quarter the average sales price decreased three 9%.
Segment operating income was $25 million and $248 million for the quarter and year to date, respectively.
While down 63% versus the comparable prior year quarter operating income is down less than 1% year to date.
Overall operating margins for the segment declined to one 5% for the quarter.
The operating income deterioration was driven by compressed pork margins with rising hog costs and a constrained cut out.
Moving now to prepared foods.
Sales were approximately $2 4 billion for the quarter up 5% relative to the same period last year and up 9% year to date at $7 2 billion.
Sales increased despite a volume decline driven by higher average sales prices.
No. It's part of the volume decline in the quarter was driven by the sale of our pet treats business.
Our brand strength and category relevance has enabled continued strong performance across multiple categories.
Operating margin for the segment.
Was seven 6% or $186 million for the quarter up.
Versus last year.
Year to date operating margin is eight 9% and flat compared to the prior year at $635 million.
Cost of goods continues to increase pressuring our cost of production.
Offset higher costs, we've executed productivity initiatives revenue management.
And optimized our spend.
To support our growth aspirations, we continue to invest in marketing and trade to increase the market share of our brands.
Moving into the chicken segment's results sales were $4 $4 billion for the quarter up 26% year to date sales are up 25% at $12 $3 billion.
Average sales price increased in the quarter compared to the same period last year.
A shift in pricing mechanisms to more variable structures has reduced risk.
By allowing us to be more agile in response to increasing cost of goods.
Chicken delivered adjusted operating income of $269 million in the third quarter, representing an operating margin of six 2%.
Quarterly operating income increased over the same quarter last year due to higher average sales price and efficiency improvements, partially offset by increased cost of goods.
For the third quarter, we experienced a $145 million in higher feed ingredient costs versus prior year, and we recognized $23 million in net derivative losses compared to $56 million of net derivative gains in the prior year.
Turning to slide 16.
Our healthy cash flows and improved balance sheet have continued to support our disciplined capital allocation approach.
We remain focused on building financial strength investing in our team members and business and returning cash to shareholders.
We produced $1 $9 billion of operating cash flow so far during fiscal year 'twenty two and that's after funding of $1 9 billion increase in our working capital.
Our leverage ratio at one two times net debt to adjusted EBITDA demonstrates our powerful balance sheet and our continued capital allocation optionality.
Investing in our business for both organic and inorganic growth and operational efficiency will continue to be an important priority and will help Tyson increased production capacity market capabilities and profitability.
This will support return on capital generation above the market for our shareholders.
Finally, we remain committed to returning cash to shareholders through both dividends and share buybacks.
Year to date, we've returned $491 million in dividends and repurchased $693 million of shares including $170 million of shares during the third quarter.
Let's now discuss the financial outlook for the remainder of the fiscal year.
Based on the strong results year to date, we're maintaining our total company sales guidance at a range of $52 billion to $54 billion.
We now expect total volume growth to be flat on a year over year basis.
Looking at our margin target ranges for our segments and chicken our operational turnaround is on track and we expect full year margins to be between 5% and 7%, but at the lower end.
Based on the current trends in retail and foodservice, we expect the full year margin in prepared foods to be at the lower end of the 8% to 10% range.
In beef, we expect margins to move toward our expected, 5% to 7% range as the life castle to cut out price spread continues to decline. However, we still expect to deliver our full year AOI margin of 11% to 13%.
And pork due to margin compression from hog costs and global demand headwinds, we are reducing our full year E O I margin outlook to be in the range of 3% to 5%.
In international other we anticipate slightly lower results from our foreign operations in fiscal 'twenty, two Judah supply chain disruptions and other impacts related to COVID-19.
Our expectations for Capex, and net interest expense of lowered to $1 $9 billion and $350 million respectively.
Tax rate expectation is lowered from approximately 23% to approximately 22, 5%.
Our net leverage is expected to remain well below two times net debt to adjusted EBITDA, providing optionality for inorganic investment and additional return of cash to shareholders for the remainder of the year.
I'll now turn the call back over to Brandon for Q&A instructions Brendan.
Stuart we will now move on to your questions.
Please recall that our cautions on forward looking statements and non-GAAP measures apply to both our prepared remarks and the following Q&A.
Operator, please provide the Q&A instructions.
We will now begin the Q&A session to ask a question you May Press Star and then one on your Touchtone phone if.
If you are using a speaker phone, we do ask that you. Please pick up the handset prior to pressing the keys.
Withdraw your question you May press Star two.
We do ask you please limit yourselves to one question and one follow up.
If you do have additional questions you may reenter the question queue.
At this time, we will pause momentarily to assemble the roster.
Our first question today comes from Ben Theurer from Barclays. Please go ahead with your question.
Yeah, good morning, and thank thank you very much for taking questions.
The first one I wanted to kind of understand a little bit in your commentary around the chicken segment and obviously the on one side improvements you have within your operations, but then at the same time, there seems to be a few headwinds arising on the industry side to help us frame a little bit into.
The final quarter, but also maybe bridging into next year, how you think about the chicken segment and what's your competitive advantage on the pricing side and how you think your investments into labor better hatch ability as well as better pricing is going to basically bring you to that 5% to 7% range.
Which you're almost there already on a year to date basis, but how should we think about next year. Thank you.
Thank you Ben in for that question.
I will turn the turnaround that we've talked about for the last year now continues and I.
I am pleased with the I'm pleased with the progress that we've made and.
That in the script.
Yes, we still have work to do grain and the volatility around grain supply demand and so forth.
<unk>.
<unk> out there, but the demand for chicken is extremely strong.
Demand for ready to eat chicken for example.
Is very strong and and you know we're at capacity as it relates to that we are investing in a new asset coming online early next year and.
That will obviously be a help but the business did grow and there's a lot of noise in this particular quarter around the Haynesville fire.
Q4 of 'twenty, one that will work through.
But.
The thing I would want you to hear is that our harvest rates continue to improve and there'll be over.
The $40 million or so could be in Q4, and we will continue to grow from there, but I want to stop and pause at that point.
I'm going to pass it to David Bray, and David if you'd like to add some more color. Yes. Good morning, Dan just a little bit of additional color to that and I think it's important to note that we are doing what we said we would do in chicken and we are progressing but we are far from finished and we know where opportunities exist and a large part of that will be uncovered as we can see that our volume grow through the Q4.
Time frame the ability for us to process more head through our facilities will help us from a cost standpoint, which will benefit us as we continue to progress through FY 'twenty four 'twenty three and as Don stated we are seeing share gains our harvest is up and we will continue to grow share through the Q4 time frame and into FY 'twenty three as well.
Okay perfect. Thank you very much for that and then just as that's a very technical question maybe for Stuart. So as we are on a year to date basis still down on the volume on a consolidated basis.
Is the flat guidance really a function of because for Q prepared foods, you get the easier comp because the divestiture happened last year during <unk> and that's where the volume impact was is that the right way, how we should think about it.
Well I would just say Dan I mean, there's probably a few more moving parts than that of course, you know you are looking at all parts of the business to get to flat, but of course, you're right. I mean, the divestiture is one of those things okay.
Okay perfect. Thank you I'll pass it on.
Thank you.
Our next question comes from Alexia Howard from Bernstein. Please go ahead with your question.
Yeah.
MS. Howard Your line is open. Please proceed with your question is it possible your phone is on mute.
Good morning, everyone.
Good morning, good morning.
Can you hear me okay.
Yes.
Alright.
First question is around the prepared foods.
I'm wondering if you can talk about.
Which categories what particularly.
Time, and whether you expect that kind of trend to continue I'm wondering why the competitive pricing dynamics for quoting from pressure back on let's stop that.
Okay.
I'll start and then I'll flip it over to Noel to add some detail, but I would start with that.
We are seeing some movements in the marketplace between.
Food service to retail.
In home dining continues to increase in this environment, which we would <unk>.
Fact that we're also seeing some movement from quick.
Quick service chain account type.
Two more.
Two to more in on premise dining.
Covid wanes and people are more adventurous or they get out and so we're seeing some improvement in that as well, but I would tell you overall.
We are starting to see some elasticity, but I would tell you. They are below historical elasticity as you would expect noelle anything you'd like to add to that.
Thanks for the question.
And as they look at our prepared performance Holistically topline remains strong behind disciplined revenue management actions and profit is above prior year as pricing and productivity.
Partially offset by the cost increases and as referenced are prepared volumes on an organic basis are down about 5% year to date and it's really three key focus areas. The first is supply.
We continue to not be able to fill all of the orders that we have across our portfolio and as capacity continues to come online and as we improve our supply capabilities. It will allow us to not only improve the availability, but also merchandising that center.
And so youll see those improvements continue to take shape in Q4, I think investing back in merchandising.
Second area is really around pricing and as Tony referenced.
Well, Eli <unk> are better than historical levels. They still are impacting the business and given the macro economic environment for ensuring that we provide a breadth of value offerings across our portfolio and you'll see us launching items focused on opening price points as well as larger sizes that can provide consumers value and.
Then the third area is really foodservice recovery it looks like they've done not only getting back volume that we lost during the pandemic, but also driving portfolio offerings in many solutions that aligns to the operator and consumer need.
What I feel good about is we have categories that continue to outpace total food and beverage we have a portfolio of leading brands.
Based on continuing to innovate and meet our consumer and customer needs and then obviously a very dynamic environment.
Despite the continued market challenges I'm expecting volume growth in the coming quarter is driven by the increased decline in commercial investments in merchandising and innovation and continued foodservice recovery.
Great. Thank you very much for the comprehensive response that I have a quick follow up and sticking with that part of the business.
<unk> dynamics it seems that that is.
That being particularly affected by private label I know you make private label, presumably it may be a lot of the margin for you I'm just wondering what you.
Is that.
Okay. Thank you and I'll hop off.
Sure as we look at private label performance, we don't see any acceleration as we look at the past couple of periods.
Where we do see share pressure in our portfolio. We also see the availability and merchandising lagging versus prior years. So that's why going back to our focus now is on supply. Our focus is on driving that volume. So we can get back to the availability levels as well as the merchandising outperformance in the quarters ahead.
Okay. Thank you very much I'll pass it on.
Thank you.
Our next.
Comes from Ken Goldman from Jpmorgan. Please go ahead with your question.
Hi, Thank you I had two on beef and cattle first is do you have any additional color on when you expect you know me.
The turn in the cycle right from the point of we're still in the liquidation phase two maybe that ending and heading toward a little bit more of a shortage. Then then what's ideal for you any any more insights into how we should think about modeling that from a timing perspective.
Thanks, Ken and good morning, we still are maintaining our guidance for the segment to a 11% to 13% for the full year.
I think our number with pinpoint 2%.
The cost increases we're seeing on cattle.
Certainly impacting the spread in and we've been talking now of course, a number of periods about.
About the fact that there were going to be fewer cattle.
We're current now from the cattle that were involved in the backlog of Covid.
Current on that in the prices of those animals have continued to increase.
So.
There is a drought.
Are those kind of conversations, but let me let.
Let me flip it over to Shane and I will let him give you some some color around beef.
Yeah, Ken good morning, and thanks for the question, yes, so to <unk> point earlier.
<unk>.
We as an industry have moved through the backlog of the Covid impact in the harvest disruptions from Covid.
We are still experiencing drought and I'd say the drought impact is still impacting over 40% of the of the regions, where we grow grow cattle out in this country. So the drought is real and it's still having an impact today I think getting precise and specific on the timing of when it's going to flip is awfully difficult to do because we are dealing with mother nature.
Now, but I would say if you look at beef demand in general we continue to see real robust demand not just in the United States, but globally. So we feel real good from a demand perspective, the quality of beef that we're still bringing to the marketplace is historically strong grading continues to maintain.
A high level, so from a from a demand perspective and quality perspective, we feel real good about this.
But as to getting precise on the timing of when that's going to flip I think thats awfully difficult to do.
Well, if you don't know I don't think anyone knows but I'll. Thank you for that I have a quick follow up.
On the in the prepared remarks, and thank you. So much for these you did provide a little bit more color on the ranges that you expect for the chicken segment margin and the prepared foods margin. It still leaves a little bit of a wide range in beef.
Maybe you purposely left it that way because there's so much uncertainty, but any direction that you can send us sort of how to think about that margin for the year.
The year is getting closer to them in that particular segment would be helpful. If you can.
I'll, just reiterate what I said before Ken.
For the full year of 11% to 13% we will see this move to let's call it 6% to 8% as we're in Q4. The latter part of Q4 and then over time, let's talk 'twenty three.
We've been saying for a couple of quarters now that we see that being a 5% to 7% which is lower than where we've been over the last couple of years.
<unk> versus the historical level.
What we would be seeing there is.
Very much in line with what we've built into our modeling and what we would anticipate.
Great. Thanks, so much.
Thanks, Ken.
Our next question comes from Adam Samuelson from Goldman Sachs. Please go ahead with your question.
Hi, yes. Thank you good morning, everyone.
Good morning.
Good morning, I guess my first question is maybe going back to the prepared food.
Stuart I think I heard you say at the low end of the.
8% to 10% range for the full fiscal year, which I guess for the for the fourth quarter.
What would get you something below 8%.
And I guess I'm trying to just make sure I understand some of the key moving pieces.
Around the margins there I would have thought you were in a.
Better place on the price cost side by now given some of the pricing actions in the marketplace.
And I guess, the corollary to that is when thinking about the foodservice parts of this business many of which.
Alright, you know legacy Typhoon came from the advance payer acquisition.
Can you talk about kind of how those have been performing at this juncture it would seem like for retail brands in Nielsen.
Quite healthy and those have.
Yes.
Good better margins than the segment average and so I'm just trying to get a sense of how.
The foodservice pieces are performing.
Margin wise.
If theres something that maybe more and more significant needs to happen to that part of the business.
Well I'll just pick up the margin point quickly and then Noel can expand on some of the other pieces, but just look from a margin perspective as I said, we are going to come in at the low end of the range.
That gives you a little bit of flex certainly that means that we would just mathematically we'd be in the high high sevens low eights.
For.
For Q4.
Just to build on.
Stuart's comment when you look at industry forecast they do show a slowdown in 2018. However, the industry is still expected to rebound by 2025 and this unevenness of recovery.
The macroeconomic landscape as well as mix shifting between channels.
See that Tony.
Tony referenced with improved consumer mobility and comfort eating out.
Increase in on premise dining in a slowdown in some of the quick service restaurants that had originally led through the recovery will be specifically seen some slowdown in our Turkey isn't pepperoni business that index against our commercial checking accounts and we gave up some of the volume through the pandemic because of the spike in.
And so we're not only focused on getting back volumes, but also as I referenced innovating and partnering with customers to ensure that we're leading through the.
Overall recovery.
Okay.
Alright, and then maybe a question for Stuart.
Look at the balance sheet.
During the quarter.
Uhm.
You bought back a little bit of stock in the fiscal.
Third quarter, but I guess, just looking forward into the next over the next 12 to 24 months.
I mean, I'm trying to just the balance sheet kind of comfortably below your leverage target you already investing quite aggressively.
On the organic Capex side.
And so I guess I'm, just trying to make sense of kind of the comfort level you have with the balance sheet kind of where it is versus what it would take.
A significant re leveraging event, but.
Well, maybe a bigger step up in.
In share repurchase that there isn't continued excess cash building on the balance sheet.
From here so any any added color that you could provide just the priority of share repurchase moving forward.
Sure of course, we'll look first I mean, we're very pleased with the strength of our balance sheet. When you look at our leverage levels, we havent seen leverage levels like these since.
2011, and that sort of timeframe. So we're pleased with having come through COVID-19 and put ourselves in a place where we've got a rock solid balance sheet.
With respect to the capital allocation.
Our capital allocation approach will be about a very good balanced approach and that is.
Strengthening our balance sheet, which we've done by investing in our business, which you pointed out.
We have amped up our spend on Capex and that is good spend because it's coming in at strong returns and it is helping to grow our business and then of course.
Your question really about well why don't we go to the share buyback I mean last year at this time we'd be.
And about 50 million on buybacks.
We've got almost $700 million in and part of that is catching.
Catching up on the dilution that we had from last year.
So we'll see how that goes but we're very pleased with where we are from a balance sheet standpoint.
Okay I appreciate that I'll I'll pass it on thank you.
Thank you Adam.
Our next question comes from Ben <unk> from Stephens. Please go ahead with your question.
Hey, Thanks, good morning.
Good morning, Ben.
I want to revisit the chicken segment and I wanted to ask when.
When we think about kind of your new more dynamic.
<unk> that you have in that business relative to variable costs.
How should we think about the factors that create variability in the chicken market in the chicken margin be the external or internal factors.
And how insulated is that margin now relative to cyclicality in the industry.
Let me, let me say a couple of things and then I'll flip it to David.
Talk about a few things we.
So we feel very good about.
Feel better about our chicken business and I have been in a long time.
We're making progress every day as I mentioned earlier, we're not where we want to be at this point, but I would.
If you look at across channels foodservice retail.
We gained share with branded value added chicken in foodservice I think it was two six points or.
Maybe a little more than that in foodservice.
We lost a little share because the capacity.
In retail the branded portfolio and we're gaining that back.
Quickly.
But as we think about.
Chicken and all of these pieces and parts coming together.
We're through the the whole live animal.
Live ability hatch kind of.
Conversation, we now have the supply chain on the ground is going to continue to grow our supply. So that we can service our customers in the way that we'd like.
Got more.
Fully cooked capacity coming online, which which helps which is already sold so we like that and so we'll continue to optimize and improve the mix, which helps and we will brand.
It'll be a branded portfolio play as well.
But.
There is still volatility in grain out there.
But we.
We like what we're seeing we like our opportunity going forward and we think we have the foundation of this business.
In a good place today, and we look for things.
Things to improve over Q4 and into next year, David Yes, I think I think one other thing to mention to that Ben and despite what we're seeing from an inflationary standpoint.
And despite what we're seeing from an overall grain volatility standpoint, we're continuing to progress as planned and a large block part of that was changing the way that we worked with our great customers across the country and pricing more closer to what's going on within the market as well as inflation and where pricing quarterly now versus what we would have done previously from a 52.
Weak standpoint so.
<unk> given us a lot more flexibility in what we do but again theres a lot of other things that we are doing that will put us in a position to win and again the volume unlock that we will see coming into this quarter. We will go a long way to help us to build a much more sustainable model.
Ben Stewart.
And then Stuart just just wanted to add one thing there don't overlook.
In David's model.
The leverage that you will get from the increased volume.
Do you see them going up to 40 million boats this quarter.
Every time, you add to those goods, they're not coming in any increase in fixed costs, that's already been painful.
That's going to that's going to be helped <unk> P&L.
Yes, okay great.
My second question is around beef and I appreciate the commentary around margins next year as we navigate through the cycle.
I'd be curious.
When thinking about that margin commentary for next year would you characterize those margins as mid cycle trough cycle margins kind of as we think about.
Up versus down in that business line, recognizing it's hard to see exactly where we are in the cycle that.
That would be helpful to us I think.
Okay.
<unk> been the Shane.
I think the way I would I would characterize it as we are.
This year were in the 11% to 13% range for.
For fiscal year, 'twenty, two and as we transition to less numbers and back to the prior conversation around trying to pinpoint exactly when this is flipped.
It was like trying to predict the weather right now so it's awfully difficult to do that.
I would say it would be more of the mid term.
We believe over time to <unk> earlier point over time, we're going to be trading.
Somewhere in the 5% to 7% returns.
<unk> business and.
And we think about it in a couple of ways to as you think about how we're de commoditize and this business is the quality aspect that I mentioned earlier.
We're partnered with some of the best cattle feeders in the world.
And when you look at this global demand and it's going to continue and we're not able to service all of that today because of some of the disruptions at the ports that were dealing with.
And having the ability to value up these components through our case ready business to prepared foods and then also through our international business unit.
As an additional pro that this company has so we.
We feel like we're going to be scaling into that here as we go through the next 12 to 18 months.
Okay very good thanks, and best of luck with the remainder of the year.
Thank you.
Our next question comes from Peter Galbo from Bank of America. Please go ahead with your question.
Hey, guys. Good morning, just two really quick ones for me.
You know Shane and Donnie, maybe just to stick on the beef topic and I know we've covered a lot of ground there, but one of the questions. We've gotten just given the level of liquidation you've seen this year.
Realizing the 5% to 7% kind of medium term margin target, but like what's the possibility, though that next year comes in somewhat below that just because you're dealing with such a high level of liquidation this unit realm.
Relatively unprecedented.
Yes, thanks for the question.
Similar to the comments I just made.
We are still seeing quite a bit of kind of liquidation.
To add a little more color to that you haven't seen the heifer retention, yet really start to build back. So if you think of the timeline.
Building back.
The calf crop and so forth, it's going to be a two to three year cycle.
And then in respect to that.
5% to 7% comment.
We feel like we're in a good spot.
Unfortunately, we cant control mother nature, and the drought conditions were dealing with here, but there is there is still further liquidation I think thats going to occur and trying to pinpoint exactly when that finishes up and you start to see more heifer retention is.
Awfully challenging.
Recent cattle on feed numbers would show the third highest amount here as of July one so we have plenty of cattle and feed yards here today.
That are going to take us through the balance of this quarter, obviously and then.
Into into our fiscal excuse me Q1 of fiscal 'twenty three.
But.
In respect to overall, the 5% to 7% range I still feel good about where we're at.
Okay. No. That's helpful. Thank you Shane and then maybe just a technical one for Stewart and Noel unprepared margins again kind of exiting this year.
With that kind of high Sevens low eights that Stuart mentioned just.
What's it going to take to build that back to a double digit.
I know you had just come out of <unk> at 11%, but now it seems like those margins have taken a step back and.
Based on some of your commentary doesn't feel like there's a lot more pricing. They can go through so like what do we need to see I guess to restore those margins back to a double digit run rate. Thanks very much.
Sure I can I can take that so no.
Our building blocks remain the same.
<unk>.
Taking a step back we play in attractive categories, we have leading share positions in those categories topline growth will come from the accident that we're taking to increase capacity and for investments in innovation and continued equity building.
Well continue to have disciplined revenue management and cost transformation to drive our bottom line.
So while I expect a continued dynamic marketplace I believe we have the right building blocks in place on a path to deliver sustainable double digit margins.
Yes, maybe just to build on that.
As Noel focuses on recovering some of that foodservice volume.
And.
It gets busy with the merchandising that she was talking about again you start then to see that she has the potential to gain volume into.
And to start gaining back some of that fixed cost deleverage.
Peter.
Operator.
Yeah.
And we will go to our next question. Our next question comes from Robert Moskow from Credit Suisse. Please go ahead with your question.
Hi, good morning good.
Two additional questions on chicken.
I think you are guiding to the low end of your margin range for chicken as well.
That reflect a weaker outlook for for Q or <unk> pretty much how you thought it would be.
And then also you mentioned youre trying to get to top quartile among your peers.
Here's our.
From what I can see like delivering really strong margins. So.
Where are you now versus that top quartile are you in top 50% or are you below it.
So couple of things there, so first and foremost with EQT for I would say we are on pace with our expectations.
What we've done through the course of FY 'twenty, two is making a lot of changes within our business related to mix.
And the industry from that standpoint, as had strong favorability because it's more tied to the big bird debone breast meat market as you know Tyson does not operate in that and we're continuing to shift towards what is more of a value added standpoint, as we think about benchmarking versus our competition, we are making progress and the biggest piece of that Robert is us getting our.
<unk> back in our facilities and we spent a lot of time talking about being at 37 million head and growing at a $40 million. During the Q4 timeframe, we will put us in a much stronger position as we look to close out this year.
Okay, and a follow up.
The USDA for next year is forecasting.
Even less than 1% volume growth for chicken.
Do you think that's like the right amount of volume for the market given the demand.
Framework.
From what Youre reporting pricing is up a lot, but demand has been pretty stable.
Do you think that that's in line with how the overall industry will perform.
I would tell you from a chicken standpoint, and especially as we enter into the Q4 timeframe. What we're seeing from a demand standpoint in both foodservice and retail continues to be strong and our customer orders continue to outpace our ability to fill them and again with additional volume coming through we will we will be in a much better position to service our customers, but we anticipate strong demand.
In both retail and foodservice to continue.
So does that mean that 1% supply growth is not enough to meet the market.
Well, we will we will grow in excess of that next year. So we will be we will be driving a lot of share within the industry next year as we continue to increase our head I think I think there is an opportunity for chicken to be very strong from a demand standpoint, as we go into 'twenty three.
Got it thank you.
And our next question comes from Ken Zaslow from Bank of Montreal. Please go ahead with your question.
Hey, guys good morning.
Ken I just wanted to follow up on.
Im just Rob's question real quick what do you think chicken production will be in 2022, and what do you think the production will be I'm, sorry in 2023, I'm sorry, we're using chicken production will be in 2023, and what do you think the production will be in 2023, just trying to get a flavor for that.
Based on what we've quoted in the prior call USDA is reporting a 1% maybe flat.
Thats probably realistic I.
I think our demand is going to be stronger than that.
As we go into 'twenty three and.
From a beef perspective with the herd liquidation.
There's going to be fewer there's going to be fewer cattle in the harvest.
And youre going to have more and more Packers.
Chasing those heads.
Particularly the.
Yes.
Those which have better genetics that great better that provide additional.
Revenue and margin opportunity and so that's going to become very tight and as we move into 'twenty, three and even into 'twenty for beef is going to see some.
Basis, Youre going to see some higher cut outs in higher priced cattle in the marketplace.
Okay.
In the prepared remarks, it was said panic about.
Supply chain issues in prepared foods as you talked about the margins and stuff like that I don't know, maybe I missed a little bit.
Is there options for you guys to improve your supply chain. What are you doing there and does that have meaningful impact in 2023, 2024, and I'm not talking about pricing or anything like that.
Maybe I misheard the prepared remark.
I thought there was some opportunity in supply chain can you talk about that.
Let me say a couple of things about that Ken and then I'll flip it to Noel.
What we're talking about there is.
Big portion of that for example is in the first half, particularly in the first quarter you may remember that we had resurgence in COVID-19.
Excuse me at that point, and so we got a little bit behind.
As we started the year our in our second quarter.
But we've been out of capacity on a few key categories.
That we're seeing now come online, we got more capacity coming online next year for prepared foods the demand as well.
Well, it's been impacted a little bit in some key categories around the.
The pricing.
It's still let's.
Let's say the less elastic than maybe you would or even our models would have indicated but we're still we're seeing some elasticity, but we expect we expect the volume to grow we expect to.
To put forth a great deal of effort in our supply chain those things that we can control.
The productivity program for example is a huge huge for us in the way of automation and technology.
<unk> been investing now for.
Over a year and we're starting to see some of those things bear fruit.
And not only for this quarter, but as we move forward.
So those investments are paying off.
Some of the things that we've done around autonomous planning and trying to eliminate our.
Our improved forecast accuracy and eliminate distress and those type things, we're much better today than we were a quarter or two quarters ago, but theres still things to do and but supply chain is improving.
We're running at rate in many cases, our most cases, we are staffed.
Completely.
But we just we're looking for opportunities to continue to get better.
Anything you want to add to that I think you covered it well Donnie.
To your point, we have made significant traction from a labor perspective.
Think about automation within our facility Digitization.
The reduction in profitability that we've created in our network and so all of those improvements are leading to a better supply picture.
As we've continued to progress through this year and as we are expected to progress for next year.
Great I really appreciate it thank you guys.
Thank you. Thank you.
And ladies and gentlemen, with that we will be concluding today's question and answer session I would like to turn the floor back over to Donnie King for any closing remarks.
Okay. Thank you. Thank you everyone for joining our conference call today.
We have a powerful and diverse portfolio across proteins channels and geographies improving operational efficiency.
A team that is positioned to take advantage of the opportunities in front of us for these reasons. We're confident we will we will maintain strong volume and profitability in the short term and have future long term growth ahead of it Tyson, we're focused on making food affordable accessible and nutritious for our customers and consumers around the world. Thanks.
Again for your interest in Tyson Foods, we look forward to speaking to you again soon.
And ladies and gentlemen, with that we'll conclude today's conference call and presentation. We thank you for joining.
You may now disconnect your lines.