Q2 2023 Tyson Foods Inc Earnings Call
Good morning, and welcome to the Tyson Foods second quarter 2023 earnings Conference call.
All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
I'll ask a question you May press Star then one on your Touchtone telephone.
Draw your questions you May press star two.
Please also note today's event is being recorded.
At this time I'd like to turn the conference call over to Sean Cornett, Vice President Investor Relations.
Sir Please go ahead.
Good morning, and welcome to Tyson Foods fiscal second quarter 2023 earnings conference call and webcast.
Prepared remarks today will be provided by Donnie King President and Chief Executive Officer, and John Our Tyson Executive Vice President and Chief Financial Officer.
Additionally, Rady Stuart group, President Fresh meats Stewart Glendinning group President prepared foods.
Morris group President in poultry and Amy to President International and Chief administrative officer will join the live Q&A session.
We have prepared presentation slides to supplement our comments, which are available on the investor Relations section of the tightened website.
There's a link on our webcast.
During today's call, we will make forward looking statements regarding our expectations for the future.
These forward looking statements made during this call are provided pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Forward looking statements include all comments, reflecting our expectations assumptions or beliefs about future events or performance that do not relate solely to historical periods.
These forward looking statements are subject to certain risks uncertainties and assumptions, which may cause actual results to differ materially from our current projections.
Please refer to our forward looking statements disclaimer 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.
We assume no obligation to update any forward looking statements.
Please note that references to earnings per share operating income and operating margin in our remarks are 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.
Now I'll turn the call over to Dani.
Thanks, Sean and thank you to everyone for joining us. This morning last quarter, we said that we expected Q2 to be tougher than Q1, and this quarter was definitely a tough one.
As you will have seen on our release early this morning results were weaker than expected and topline performance was mixed, particularly when compared to our strong performance last year.
At the same time, we outperformed our large branded food peers in volume and dollar sales and continued to gain pound and dollar share in our retail core business lines.
And as I also said last quarter I can't remember a time when our business faced a highly unusual situation that we're currently seeing.
Where all three of our core protein categories beef pork and chicken are experiencing market challenges at the same time. This unusual confluence of issues continued in Q2 and directly impacted our results.
I know that you watch the protein markets closely and like US know that there are many factors at play here that are macro in nature. For example, beef is cycling out of historically strong margins that we're seeing throughout most of fiscal 2021 and 'twenty two.
Cutout values across protein complex are much lower than a year ago inflation has also remained elevated and persistent.
Each has dramatically impacted our cost the current macro backdrop is clearly tough.
We have a strong growth strategy and are bullish on our long term outlook. We continue to implement our strategy focus on the things that we can control and build upon the strong foundation, we have in place.
Late last month, we announced important initiatives to simplify our structure and right size. Our team. These are the logical next step in our ongoing efforts to drive operational and functional excellence as we strive to be best in class in our industry.
Last quarter, we talked about execution issues that we needed to improve and operational performance did get better we set a high bar to execute with excellence and are making progress.
Despite our overall results there were strong positive highlights in the quarter. The service proof points that our strategy is working as you know our branded food business as a key growth pillar for the future and in Q2, the business performed well.
These results were driven by the strength of our share position, especially for our core brands, including Jimmy Dean Tyson and he'll shower farm, which helped deliver strong margins compared to the same 13 week period last year.
We continue to grow both pound and dollar share and to outperform our large food peers in volume based on Nielsen data is clear we are winning with consumers.
We also continued to win with our customers. We're proud to have been moved up into the top 10 for the first time ever in the most recent kantar power rankings. In fact Tyson finished in the top 10 in six of the nine categories. They measure as we continue to focus on meeting customer needs and planning of the future together with them.
While strong performance continued in our branded foods business I don't know that our results in chicken are top of mind for many of you. So I want to spend a few minutes walking through our chicken business in detail.
I want to point you to three important things on the macro environment.
First marketing conditions remain very challenging commodity prices for most fresh chicken cuts are much lower than last year with boneless breast meat tenders and wings down more than 50%.
While we're not fully exposed to commodity markets, we are not immune to their dynamics.
So I might expect these dynamics to impact our results immediately but in fact, they worked through on a lag as chicken commodity prices declined in Q1, the impact continued into our Q2 well price increases we saw during the quarter are expected to affect Q3.
Second input costs were higher compared to last year as our feed ingredient cost increased $145 million. We also realized an unfavorable year over year derivative impact of approximately $135 million due to volatility in commodity grain prices.
Third well high path avian influenza is not had a significant impact on our live operations key export markets remain closed.
Well, we can't control markets, we're focused on the things we can control.
We made a series of strategic decisions to better position us for the future.
For example, we converted two of our plants from bone in to boneless, specifically to add new business and to continue growing with an important customer. We further rationalized assets Skus and inventory in fact, we reduced our finished inventory pounds by nearly 20% during the quarter. We also made the difficult choice earlier this.
Quarter to close two of our less productive chicken plants.
These strategic actions are expected to generate significant efficiencies going forward, although some of them generate incremental cost in our current results.
Despite challenging market conditions, we continue to execute our strategy and have significant opportunities in front of us we.
We increased our internal production, gaining 130 basis points of harvest share compared to last year. This led to pound share gains of 250 basis points and value added retail and 60 basis points in foodservice as you can see we are well positioned to keep growing.
We continue to invest in automation and digital capabilities with opportunities to improve our yield. We now have 50 debone lines that are fully automated we.
We have room to optimize our cost structure and a portion of the actions. We took last month are focused on this.
Importantly, we are working more closely than ever with our customers to create value jointly we're building long term supply partnerships that have clear benefits for both sides.
We improved order fill rates by more than 20%. This was no accident and I'm proud of our team for accomplishing this we're winning in the marketplace by winning with our customers.
Now I'm, giving you specific details on the business I want to step back and remind you of our overall strategy our approach to building and growing chicken is based on three key elements.
First we strive to be the best in class operator by executing with excellence. This includes filling our plants to continue increasing our capacity utilization.
We plan to grow our value added business focusing on fully cooked in retail and foodservice channels and by innovating and differentiating our offerings and third we expect to win with consumers behind the number one brand in chicken and win with our customers by being their go to supplier.
I want to underscore that we are focused on improving our results in chicken, we can do that by implementing our strategy leading to continued growth and improved margins and I'm confident that we have the right leadership team in place to get us there.
Now turning to the continued strong performance of our retail branded business with our iconic retail brands Tyson, Jimmy Dean he'll shower farm and ballpark Tyson core business lines continue to outpace total food and beverage and our peers in both sales dollars and volume growth up 13% and 7%.
<unk>, respectively, compared to a year ago per Nielsen our brands continue to perform well as Tyson core business lines grew pound share about 2.4 points relative to prior year quarter.
We continue to show market share leadership in most of the retail categories in which we compete delivering both dollar and pound share growth in the aggregate by more than two points and also across all day parts.
As proven by our growth compared to last year, we know that consumers will spend on categories and brands They know and trust.
The trajectory of our Tyson core business lines volume share growth shows the momentum we have gained with consumers. We remain focused on maintaining our improved fill rates and on shelf availability, while investing in merchandising and advertising to support our brands, which along with our strong business fundamentals resulted in pound share growth.
Increasing sequentially over the past four quarters.
Tyson, Jimmy Dean Hilscher Forum, and ballpark, all whole favorite brand status with consumers by a large margin over our nearest competitor.
It is evident that we are delivering the brands and products that consumers desire.
As I mentioned earlier, our move into the Cantor top 10 demonstrates that we continue to gain the confidence of our customers.
Winning with customers and consumers is a key priority and it's clear we're having success with both.
Now let me tell you why I'm, so optimistic about our future Tyson is an iconic company with a broad portfolio of products and powerful brands that has been a recognized leader in protein for nearly 90 years.
We've been through market cycles before I've been through them before myself and we've always come out stronger on the other side, we have the right strategy seasoned leadership and team members in place to do it once again.
Our vision is to deliver sustainable topline growth and margin improvement our strategy to drive growth is built on the foundation of three key pillars first.
We will drive growth in our core protein platform, where we harvest in process fresh meat across a diverse portfolio.
We expect global demand for protein to continue to grow in the years ahead, driven by population growth and per capita income expansion Tyson is well positioned with the capacity in place to meet demand.
Second we will drive growth through our branded food portfolio, we have over 30 prepared food and snacking brands, including some of the strongest brands in all of the food, namely Tyson, Jimmy Dean and he'll shower farm.
Branded food is our best opportunity to drive faster growth higher margins and stronger results.
Third we will expand internationally, where it makes sense most of the growth in protein consumption is expected to take place outside the U S. We can capture this significant opportunity by scaling our existing business, expanding our customer base and exploring new markets.
These pillars are enabled by our relentless focus on customers and consumers operational excellence and digital capabilities to drive margin improvement.
We went in with customers and consumers by building growth partnerships, delivering top tier customer service and fill rates and product innovation, we expect to realize our operational excellence goals as we modernize our operations driving efficiencies saving on cost and increasing throughput and we continue to build our digital.
Capabilities operating at scale with digitally enabled standard operating procedures and utilizing data automation and AI attack for decision making with.
With the combination of our growth strategies and focus on margin improvement, we can deliver the food that consumers love and create long term value for our customers our team members and for our shareholders well.
We put a strong proven leadership team in place here at Tyson I've never been more confident in the talent that we have and I know that we have the right people to capture the opportunities in front of us.
Now I'll turn things over to John to discuss our financial results for the quarter in more detail.
Thank you Dani.
First for a quick touch on our total company financial performance and then a review of the individual segments.
Total company revenue was up slightly compared to last year's previous record Q2 performance as the benefits from significant volume growth in chicken were offset by the reduction in price per pound and beef and pork.
For the total company and individually in chicken and prepared foods, we continue to deliver record high sales performance now for a fifth consecutive quarter.
We remain focused on driving growth in these businesses to enhance our margin profile over time.
Now turning to profitability more than 90% of the decline in adjusted operating income was driven by lower earnings in beef and chicken.
Higher input costs per pound in all segments, except pork increase our cost of goods sold the majority was driven by inflationary impacts on raw material and labor costs.
The remainder of the increase was due to a few things inventory value adjustments unfavorable derivative impacts and a shift to producing more value added mix and this was partially offset by savings from our productivity program reduced outside meat purchases in chicken and decrease supply chain costs.
Our pricing decrease led by lower cutout values and beef and pork. This was partially offset by volume growth in chicken.
Now let me go to the individual segment results starting with beef.
Sales in our beef segment decreased eight 3% compared to a record high sales in the second quarter last year.
Price was down five 4% due to reduced domestic demand and softer export markets and volume was down two 9% due to fewer head processed.
Live cattle costs increased approximately $305 million on a like for like volume in the quarter as the reduction in the beef cattle herd continues to tighten supply and increased competition for cattle.
The margin compression, resulting from reduced sales and increased cattle costs led to a segment operating income of $8 million and an operating margin of 0.2%.
From the historically high second quarter margin of 12, 7% last year.
Yeah.
Looking next at the pork segment, the volume gain of 1.1% driven by improved hog availability was more than offset by the 10, 3% decline in average sales price due to the soft global demand environment, leading to a decrease in overall sales of nine 2% versus the second quarter of last year.
The pork segment posted an operating loss of 31 million for the quarter, which was driven by the industry headwinds compressing pork packing margins and inflationary pressures on operating costs.
Moving onto the chicken segment's results the.
The sales increase in chicken of eight 4% over the prior year quarter was driven by a six 4% uptick in volume due to increased internal production benefits of prior period pricing actions drove 2% growth in sales despite a challenging commodity market.
At a loss of 166 million second quarter operating income was impacted adversely by market conditions and near term impacts of the strategic decisions. We made the Donny discussed earlier.
Other headwinds experienced in the quarter include continuing export impacts from H P. A R as well as higher feed ingredient cost of $145 million and an unfavorable year over year derivative impact of approximately $135 million, including a $35 million loss in this current quarter and $100 million gain in Q2 of last year.
The industry operational headwinds do not change our approach, though we expect to perform as the industry best in class operator, while growing our internal production with our customer demand, enabling us to improve our fixed cost leverage grow volume and gain market share.
In addition to the continuous improvement of our operations growing the market share of our portfolio of value added products is imperative to maximizing our profitability and our long term strategy.
Now lastly to prepared foods, where our retail brands like Jimmy Dean He'll Shire farm and state Fair continues to deliver industry, leading performance outpacing all peers in both revenue and volume growth in the quarter.
Total sales revenue grew one 2% primarily driven by pricing gains.
The slight volume decline of 0.4% was driven by softness in foodservice volumes as the trajectory of this channel's recovery remains uneven.
It was almost all offset though by the strong performance of our retail brands driven by their category, leading position improved supply and our map investments.
Compared to the prior year period.
Operating income decreased modestly due to increased raw material costs and brand building investments. This was partially offset by productivity gains and price increases.
While down slightly against a historically strong comp we are pleased with the operating margin performance of 10, 4% in this challenging macro environment.
We continue to be excited for the future in prepared foods as the segment is critical to valuing our beef pork and chicken commodity meat products and delivering strong earnings at a time when the commodity protein segments profitability is under pressure.
We will continue to unlock value by increasing plant utilization implementing productivity initiatives and we will grow through innovation of new offerings expansion of our existing product portfolio and a recovery of our foodservice business.
Now to our financial position and capital priorities, we're building financial strength investing in our business and returning cash to shareholders remain the priorities of our capital allocation strategy.
First let me spend a minute talking about our financial policy and long term capital allocation and provide a bit more color around our approach to capex deployment.
Our financial policy remains unchanged, we are committed to building financial strength, maintaining our investment grade credit rating and targeting net leverage of at or below two times net debt to EBITDA for the long term.
Our capital allocation prioritizes investing in our business through Capex as well as strategic and disciplined M&A, while also returning cash to shareholders through dividends and share repurchases.
As owner operators, our approach to Capex is simple and effective we support our maintenance Capex needs and then we focus on growth and profit optimization investing in opportunities that generate the greatest returns, while maintaining a strong balance sheet.
We don't expect our total capex this year to exceed $2 3 billion, which.
Which is down from our prior guidance of at or around $2 5 billion.
Now moving on from Capex. During Q2, we returned $167 million to shareholders through dividend and $19 million in share repurchases. We have increased our dividend for 11 consecutive years and remain committed to supporting our dividend. We ended the quarter with $2 2 billion in liquidity and net leverage of two four times.
Last week, we entered into a new term loan agreements for 127 $5 billion to further enhance our liquidity. These funds will be used to pay off our existing commercial paper, that's outstanding and some upcoming bond maturities and also to fund our investments in the business, including the pending acquisition of Williams sausage, which will support our strategic focus on branded REIT.
<unk> growth.
We remain committed to maintaining a disciplined yet opportunistic capital allocation strategy, ensuring that we deploy resources to maximize long term shareholder value now.
Now, let's review our updated outlook for fiscal 2023.
Based on performance year to date and a moderating outlook for revenue growth. We are lowering our total company sales guidance to <unk> $53 billion to $54 billion.
Or flat to 1% growth for the year.
Yeah.
And our beef segment based on the deterioration in current market dynamics, we now expect margins to be between a loss of 1% and a gain of 1% for the fiscal year.
Also due to challenging market dynamics this time in our pork segment.
We are lowering margin guidance for the year to be between a loss of 2% and breakeven.
In chicken, we now expect full year margins to be between a loss of 1% and a gain of 1%.
Based on our results so far in April we anticipate Q3 margins to be roughly breakeven as we gain momentum and exit the fourth quarter at or above the high end of the full year range.
In the second quarter prepared foods continue to its strong performance, resulting in our first half margin above the guided range for the fiscal year. So we are maintaining that at 8% to 10% driven by historical seasonality and continued brand support.
And in our international business, we remain committed to expanding globally in the fastest growing protein consumption markets in the world.
Driven by continued year over year volume and revenue growth from new facilities ramping up we are confident of our improved profitability in fiscal 2023 with stronger quarterly performance in the back half of the year compared to Q2.
As I mentioned earlier, we're reducing our expectations for capex to approximately $2 3 billion.
And our net interest expense and tax rate are now expected to be around $340 million and 22% respectively.
In summary, the first half was challenging in many of the headwinds experienced are likely to persist for the remainder of the fiscal year.
Although the current operating environment has proven to be difficult. We view this as an opportunity to grow and improve our business operations and we are optimistic on our long term value driver prospects.
We have great leadership and operational teams growing demand for our products robust portfolio diversity, and a differentiated asset footprint needed to win in the marketplace. As we continue to grow our business and provide desirable returns for our shareholders.
So now let me turn the call back over to Sean for Q&A instructions. Thanks, Sean.
Thanks, John now we will move onto your questions. Please recall our caution 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.
Ladies and gentlemen, we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone telephone you are using a speaker phone. We do ask you. Please pickup your handset before pressing the keys.
So it's all your questions you May press star and Q.
We do ask you please limit yourselves to one question and one follow up.
You do have further questions you may reenter the question queue.
At this time, we will pause momentarily to assemble the roster.
And our first question today comes from Ben <unk> from Stephens incorporated. Please go ahead with your question.
Hey, Thanks, good morning.
Good morning.
So my first question is a two part question on the Chicken segment. So first part of the question in the quarter.
Obviously where were.
Were weak and considerably weaker than we saw I think in the broader market could you talk to a few of the things that might have contributed to company specific weakness in the segment.
And then as you look going forward, you talked about John Randall margins being flat in <unk>.
Making event and then ramping into <unk>, what all is incorporated into that assumption isn't it and is it what we've seen already in terms of improvement in quality fundamentals do you need to take further actions around closing underperforming facilities are reducing inventory and maybe just help us understand what's embedded in that expectation going forward.
Okay. Ben this is donny.
Start off and then for the chicken portion of this I'll flip it over to Wes and let him add some detail.
To this.
I would say.
This quarter was not a surprise to us.
We knew Q2 was going to be challenging and it was.
I've talked about the fact that.
Never seen this highly unusual situation, where beef pork and chicken.
All experiencing challenges at the same time many of these are.
Macro in nature.
But in chicken specifically.
Chicken, we have seen operational improvements and market recovery.
Slower than expected it will recover and of all of our businesses that are challenged right now chicken will recover first.
In the quarter, we had.
Of our $166 million loss $90 million of that came from three main areas.
There was about a third of it and mark to market.
Inventory adjustments SKU rationalization accounted for about a third of it and startup costs associated with the mix change and improvement from bone into boneless plus a few asset impairments.
So.
I would then go on to say.
<unk> remains a top priority for me.
We have the number one brand in chicken.
Our model doesn't give us the highs and lows of the commodity markets that doesn't mean that we're not impacted by that and variable pricing models that we have in place. There are lags that go with that.
About two years ago I laid out for you the plan that we had with our chicken business and we're following it.
Growing our volume and improving our mix.
We saw what we harvested and we reduced inventory by 20%.
And I would tell you that we are relentless on operational execution.
We continue to invest in automation and digital capabilities, and we will and do compete with the very best in the industry.
We are winning in every area in which we play.
We have market leadership in every category.
Customers and consumers are key priorities for us and it's clear, we're having success with them.
We just recently announced that we moved up into the top 10 for Cantor for the first time ever in the most recent power rankings.
We expect to win with consumers behind the number one brand in chicken and win with our customers by being their go to supplier.
And I have confidence in the team that we have in our chicken business.
Have the right strategy and are doing the right things for growth. We continue to implement this strategy and focus on the things that we can control and we will build on this strong place a strong foundation that we have in place now with that let me stop Ben and let me flip it to West Morris, who leads that chicken business and that team and let him answer.
<unk> color.
Good morning, Ben and Thanks for the question No question Q2 was tough for us and for the industry as a whole the combination of grains and markets. Some of the key parts being down as much as 50% and then the ongoing export opportunities simply said versus year ago grind up 11% price up too.
And then the 135.
Change in derivatives.
We did something nobody else, though and the industry has done growing net sales eight 4% OEM six four and improvement of our capacity 4%.
Based on published data, we competed actually better than average company in the industry and we kept investing at the same time.
Dani referenced the $90 million I'd ask you to think that two thirds of that as investments in our business going forward, the SKU rationalization and inventory adjustments along with packaging and ingredients makes us both more efficient.
And more consent consumer centric at the same time. So let me talk about four key areas that my team is focused on and give you some.
Some insight into what we got done in the quarter four key areas of people service growth and performance.
Our plans for staff for the entire quarter, our teams delivered the volume we needed.
To win with customers and consumers and we sold everything we processed plus another 100 million pounds. So demand for our products were good in Q2, our service levels increased 20 points year over year, we're back to historical levels of service.
We executed very well at the holidays, a Super Bowl and March madness, gaining share in both foodservice and retail.
Continued to.
West in Danville fully cooked.
Location, which will come on this fall.
We are now selling over 99% of what we call our core retail products and so winning with consumers and customers at the same time.
<unk> referenced the two plants, we converted in the quarter from bone and the boneless.
And then we announced the closure of two facilities, which will improve our efficiency, while increasing our volume.
And we've seen it operational improvements every week.
In the last quarter.
And in April so we are well positioned to win with customers consumers and drive out cost at the same time going forward.
And then I wanted to just pick up on a couple of specific parts of your your question. There I think first off you're asking are there further actions that we're contemplating and just to address that directly we're always looking at the footprint, but everything that we're doing is focused on growing our business today and I would note that with the two announcements we made.
Earlier in the quarter, we're still growing the business you.
You mentioned inventory too part of working through kind of some of the changing market conditions does mean, continuing to pull down inventory and so that will influence the outlook, but you noted correctly from the from the earlier remarks on kind of hoping to break even and improving through the back half of the year is what we expect to see in poultry.
Okay.
So all that's helpful color, maybe shifting gears, a little bit to the prepared foods segment.
Yes, that's been a bright spot certainly for the first half of the fiscal year the guidance for the balance of the year implies some.
Margin moderation I know you guys are focused on picking up some foodservice business that you lost and I think carrying some lower margins is that a key to whats embedded in the operating margin guidance for the balance of the year and what are the potential sources of upside or downside to that expectation.
Got it well, let me, let me pick up on that.
Where we're pleased with the overall performance in the first half of the year and.
Can see that we're making progress with both our <unk>.
<unk> and our operations to improve margins youre seeing that.
In the results.
We're also by the way you're seeing it in absolute dollars because I think if you looked at the first half of this year versus last year.
Up about 10% so all of that is good news.
When youre looking forward the shape of our year on a quarterly basis, we will look similar to last year and.
In the sense that we expect a stronger first half than the second half.
And this is because of two things first because of normal seasonality in the business and second because we expect to have some higher brand investments behind our retail brands in the back half. That's important those brands are doing well they have strong engagement with customers and I want to make sure that we.
We have continued investment to reinforce that there is more work to do in foodservice.
And that in that space the customer decision in contract cycles are long.
Takes a little bit to win back that business, but we have a strong platform.
We have good products and I'm confident we're going to start to see the benefits of that.
<unk> in the future.
Yeah.
Okay. Thanks, so much that's all.
Thank you Beth.
Our next question comes from Adam Samuelson from Goldman Sachs. Please go ahead with your question.
Yes. Thank you good morning, everyone.
Good morning morning, maybe.
Maybe my first question just in beef.
Taking kind of the revised outlook would seem to imply that business is operating.
Of breakeven or a loss for the next couple of quarters and I just want to make sure I'm thinking about that properly in the context of kind of industry Packer margins, which while certainly off their highs or not.
Negative.
And just how do we then think about the implications of that into fiscal 'twenty four.
And 25 candidly.
Cattle availability is just going to get worse progressive.
Progressively over the next couple of years, given kind of what we know about that.
The calendar right now.
Okay, Adam let me I'll start off and then I will pass it to Brady for some greater detail around that but as expected and beef there was tightness in catalyst supply.
We saw increased labor cost and a softer export markets.
<unk>.
The thing that is most interesting there and unfortunately.
I'm not going to be able to give you the answer to this but it's around Cowen heifer retention.
And we do have better passenger growing conditions.
At Central Texas up to Nebraska, there still needs to be some moisture.
We saw a cow harvest towards the end of the quarter began to decline some indication.
The closure of the liquidation cycle.
You look at <unk> numbers.
We're not in a rebuild phase just yet.
More attention more retention is needed on the efforts before we're ready to signal that.
That.
The rebuild has begun so with that Brady you add some additional color if you would.
Thanks, Danny and thanks, Adam for the question.
I think there's a few specific callouts relative to standard industry gross margin calculations that we need to take into account during this specific timeframe here.
In 'twenty three and number one is while we still see.
Export demand being relatively strong from a quarter over quarter perspective versus prior periods the opportunity for us to arbitrage our exports opportunities versus domestic with some cut out runs that have occurred in specific.
Alex is actually diminished our opportunity to capture some of those results from a Tyson perspective.
Number two is we've seen some pullback on on drop credit values and again versus the previous cattle cycle. We saw drop values are.
Our strong however from a quarter over quarter perspective, again, we saw some pullback as well that certainly impact some of the calculations relative to gross margin.
And number three from a branded versus choice perspective, we have seen a pullback in USDA data indicates that the spread between branded and choice actually decreased $4 three.
Since 100 weight quarter over quarter from a sequential standpoint. So those are certainly some of the factors that are in our mind as we continue to look at the remainder of 'twenty three.
As we move into 2024 and beyond.
In addition to the comments that Donnie made relative to the cycle that we're in.
Theres reasons for both the challenges from a industry perspective relative to gross margin. There is also a reason for us to be optimistic and number one.
We will absolutely be relentless in terms of operational excellence and really it's about Tyson and our team controlling what we can control the markets will do their job over time, but we have a world class beef business and the expectation is we will continue to perform at a very high level as we move through the cycle.
Number two is we have the opportunity to get closer to our customers and our consumers we have capacity within our case ready and value added business.
<unk> been working diligently to fill that capacity and feel very good and comfortable in terms of the future of that business as you get closer.
Closer to the consumer as well.
So while there are challenges ahead relative to the markets I feel we're in a very good position to weather.
Whether those challenges.
As we move forward.
Okay, I appreciate that color and maybe a follow up.
<unk> John Randall.
You guys don't give a specific EPS or EBITDA guidance, but if I kind of bolster the revised sales outlook in kind of middle of the range on the different operating units it would seem to imply that by the end of the fiscal year net debt to EBITDA could be.
At or above four times.
Just wanted to get your perspective on given kind of your own earnings outlook kind of if that's actually correct in kind of your comfort level of operating at that at that place for.
For a period of time, particularly if beef is.
Kind of quickly reversing.
Yes. Thank you. Thank you for that question and.
Let me talk about the outlook and give a little more clarity on that and when we talk about leverage.
I'm glad you asked this question. So if you look at the return on sales guidance that we've given kind of on a segment by segment basis. It could take a few different shapes a point I want to make sure. They are.
Listeners takeaway today is that when we look at a total operating income number for the second half of the year, we expect that to be an aggregate similar to or maybe slightly down compared to the first half of the year.
So depending on the different movements within the various core proteins, that's kind of the net of it we want to make sure.
Land from a from an outlook perspective.
And as you suggest that that does have implications for what our total leverage ratio as we move into the back half of the year and what I can say is.
We're focused in the long run on that two times number.
And I think just pointing to what we've done in the last couple of years, we were diligent and paying off $3 billion worth of debt we've invested in the business.
From a growth standpoint, we've got new operations coming online and retail branded chicken Bacon and a lot of growth outside the U S aligned with our strategy. So I think well the timing on some of the capital expenditures for example.
Kind of puts pressure on the operating cash flows I think we're comfortable with where we are and.
And feel.
Feel good about about the outlook I think.
We know there is volatility in our business ratings agencies keep up with that I mean, I can't speak for them.
Morning, but we're in constant communication.
Providing them.
Outlooks about the business. So overall, we feel good but the leverage ratio will will tick up for a little while.
I appreciate that color I'll pass it on.
Thanks, guys.
Our next question comes from Andrew Charles.
Click from BMO. Please go ahead with your question.
Hey, good morning, Thanks for taking the questions.
I guess I wanted to start on the excuse me on the chicken side.
And I'm curious kind of philosophically, how youre thinking about growth and which is clearly the focus on growing the volumes versus balancing that with kind of the medium term margin outlook.
You changed at all your expectations on the back half.
Chicken volumes that you would expect to.
Realized and just kind of philosophically, how you think about that.
Yes, Andrew this is Wes thanks for the question first first and foremost we got to stay focused on our business and our customer expectations.
So we will in fact improve our capacity utilization over time.
As well.
It's important to understand that our supply plan is actually our demand plan that we start with the demand plan and work backwards and as we see more demand for our products, we improve our capacity utilization so.
Hopefully that answers your question.
If I can add to that though I think.
You asked specifically about how do we balance that profitability versus the growth and what I want to point out is that we pulled down the total sales outlook for the business, but we're still projecting to grow from a volume standpoint.
I think the chicken.
The call compared to a quarter ago is still.
Slightly less than what we had initially projected just because of the demand that was.
Got it okay, that's helpful and.
If I could ask one also on productivity, obviously have achieved the targets well ahead of your original expectations. How are you thinking about the productivity opportunity from here I know there is a continuous improvement mindset, but any way to frame kind of how you think about.
Magnitude of opportunity around productivity.
Well thanks for that question.
It's still as we said.
We're continually focused on being the absolute best.
From an operations perspective.
We want to be the best company, the best brand the best protein wherever we choose to play.
And what we're doing very simply is executing those things through productivity through efficiency to deliver that some of that requires adding volume for example, and chicken.
Some of that requires <unk>.
Proved yields and labor utilization. It includes is it also.
Looking at the assets that you have in and tried to make sure that we modernize those and invest in those and get the right footprint.
Not only today, but going forward, we will do all of those things.
Our continue doing all those things but.
The whole efficiency productivity piece is top of mind for everyone. In this organization today.
Great. Thank you very much a personal thank you.
Our next.
Comes from Alexia Howard from Bernstein. Please go ahead with your question.
Good morning, everyone.
Good morning morning.
Hi.
Sticking with chicken can I ask about the price the market pricing dynamics I know, obviously last quarter that was a challenge because that was in excess of chicken and fresh chicken flooding the markets the holiday period.
I get the point that that.
I'll lead into this quarter as well is there any visibility into how that whether that Mike.
In the second half of the fiscal year or where are we in that cycle and then I have a follow up.
Yes sure. This is Wes I'll answer that we didn't see a lot of movement in January and February when we started seeing a little more strength in March which for us will.
Flow through the next quarter.
We have seen some pullet numbers that would indicate.
Although stronger markets in the back half of the year.
Great. Thank you and then.
Prepared foods with the Yadkin TARP power ranking study.
I'm just wondering.
Won't it was that's changed in your retailer relationships because that is the big move I mean to.
To get into the top 10, there's a lot of larger more established CPG type companies that are not in the top 10 I'm. Just wondering what you think has changed over the last couple of years.
Thank you and I'll pass it on.
Thank you Alexia, but first I would tell you it was on purpose.
We talked about.
Very simply and the mantra around here.
Is winning with our team members, creating a differentiated place to work getting happy team members, having fully staffed operations was important and then winning with customers and consumers.
We've invested a lot and continue to support customers and consumers with our brands with innovation with all of those things.
We want to be.
Best.
B there go to supplier.
And every part of our business and then finally and this is kind of where the rubber meets the road.
But winning with execution excellence throughout this organization and it is that is the result of what Youre seeing in this survey is a result of the work that this team has done.
Thank you and I'll pass it on.
Cute.
Our next question comes from Ken Goldman from Jpmorgan. Please go ahead with your question.
Hey, Thank you.
I do appreciate.
Dan on your comments about the macro certainly theres a lot of challenges that everyone's facing I'm just I wanted to ask it looks to me like at least for this one quarter sort of the performance gap as measured by margin did widened a little bit between the industry and Tyson in both beef packing.
And in chicken and I'm, just looking at some of your bigger competitors in chicken and I'm, just looking at sort of hedgers edge in our own model for beef margins. So I know those aren't perfect comparisons, but I'm just trying to get a sense of a is that how you guys see it as well or Rmi.
Assumptions theyre wrong and B.
How quickly if they're outright can we kind of reverse that and you can kind of get back to growing in line or having a margin in line with those kind of major.
Segments.
So Ken.
Ill start off and then I'll flip that.
To give a little more color from west around chicken and Brady on beef, but.
Did talk about the macro a lot and I got to tell you. It pains me to talk about that because that.
We've never been able to control macro.
Economic issues our market condition.
But what I can tell you is we are controlling what we can.
We have a full court press on on being the best we can be with operational excellence and winning with customers and consumers.
The other thing I would tell you Ken is that here at Tyson as you know I've been through a number of these cycles before this companies and its 90 year history has been through a number of them before.
But.
What we have done in the past and were doing this time as we're accelerating.
In the bottom of this cycle and we always come out better and stronger and I see no reason to believe that we won't do that at this time as well.
And let me, let me flip it to west to add some chicken color, yes. Good morning, Ken I think take into consideration.
I mean, that's how our pricing flows through is different than others. We have a further lag.
Number two the $135 million year over year derivative change and then the $60 million of the $90 million <unk> talked about an efficiency investment I believe we completed better than the average in the industry.
Alright, thank you for that.
Another quick question William Sausage acquisition, I think we got a price today in the 10-Q of $200 million to $250 million could you give us a little bit of detail on what the expected revenues are in the last 12 months revenues and sort of why now is the right time to do a deal given some of the challenges you have in the balance sheet.
Yes. This is John let me, let me say a couple of things on that first off let me just make a shout out and things of the Williams family, who are we've got this transaction with and we're grateful to them.
For interest in 60, plus years of a family business.
The part of the <unk> family.
As it relates to the contours of the transaction.
Let me answer the question why now we're always being a diligent.
And.
Thoughtful about the M&A opportunities that we're pursuing and I think this was a transaction that we we got across the finish line based on the characteristics of the branded portfolio and the return profile. So when.
When we closed that in the coming months.
We're excited to.
To bring that into the into the Tyson prepared foods business.
Yes, Ken let me just add a little bit. He is Stuart look this is a company with some great brands in some really great facilities.
And two things are going to come out of this first their capabilities, we're going to have because right now most of our.
Our style harvest goes through a single facility. This is going to provide some redundancy that makes sense for our business, particularly because Jimmy Dean is so important to the portfolio.
And then second when you look at the brands that are going to be complementary to our brands along with a.
A DSD network that frankly, we haven't had enough portfolio before I think we're setting up for a very interesting deal here that is going to be a.
Good.
A good addition to Tyson.
And our next question comes from Peter Galbo from Bank of America. Please go ahead with your question.
Hey, good morning, everyone. Thanks for taking the question good morning.
Maybe if we can just start going back off of Ken's question, particularly around around beef.
First I think there's probably been some some noise out there in the market that you know just just shifts are being cut across kind of the entire beef network and some of that maybe is due to the lower kind of harvest levels, but if you can kind of comment there.
And then secondly, you know Brady I'd just be curious for your perspective.
With cattle prices basically at all time highs in.
And speaking of the cow calf operators like what are the unit economics looking for them like in in real time, you know how does that kind of change their decision, making process around retention or not because again looking at the spreadsheet math you'd think the price would be enough of an incentive but obviously a lot of their cost structure has probably changed as well. So would appreciate any color there.
Sure.
Thanks for the question Peter first of all let me address.
Both the question that Ken posed in your posts as well around beef and I think there's a few important aspects of Q2 that we need to focus on so first is relative to timing Tyson has.
Quarterly pricing that we use for several of our large customers and so it's very specific primary areas, where we've seen some inflation from a cut out perspective in <unk> quarter over quarter, we have a timing lag relative to those specific customers and agreements second is we did see some.
Hedging losses in the quarter.
Impacted performance.
Third would be our volume and so as you mentioned, we did see a decrease relative to volume and so when we saw that volume we lost some volume leverage relative to our cost structure and our assets are working diligently from an efficiency perspective and seen some.
Some good improvements in that area as well to help offset that as we move forward.
As I mentioned earlier export demand has been softened.
The strength of the U S dollar and FX has had a impact on some export demand and specifically the substitution products that we see from a domestic portfolio, we're not seeing those large gains as we did in previous quarters.
That relative to drop value all go into play in terms of what our actual results are versus some of the index modeling that occurs as well and relative to the cow calf, operator, and how they look at the business. Obviously a lot has changed since the last cycle interest rates are up right now there is some incentives.
For the cow calf operator to go ahead and market the heifer into feed yards as opposed to retain just relative to the strength, we're seeing from our feeder market as well so.
We're still seeing some drought conditions from central Texas up through Central Nebraska, that's creating some challenges, but the good news is for the cap cap operators that are working outside of that space. We've seen some remedy relative to drought conditions in moisture here within the last several months that provides some optimism as well.
Great that's very helpful.
And Donnie I just wanted to go back to one of your comments I think you did mention I.
I think around chicken that you took some some asset impairments in the quarter.
I'm not sure that I saw those in the queue, but just maybe thinking about a longer term basis.
Chicken has been a business, where you have been quite acquisitive I think the margin profile.
Self admittedly has probably been a little bit weaker than you would've thought just as we kind of sit here today and go through the balance of the year like how do we think about further impairment risk in that business.
Particularly as the margin improvement even coming out of this year isn't expected to be kind of at your long term average.
Thanks for that question.
Touch on this in a high level.
But in terms of your question for the past few years, we've taken bold and aggressive steps to advance productivity and efficiency.
Constantly evaluating how we can be more efficient.
Down decision, making and remove duplication of course.
Those are all top of mind today, but.
But we have also.
Also have done a number of things looking at our footprint looking for what it would take to make our less efficient assets and this will be across the portfolio. How do we how do we need to make them efficient how do we automate them how do we redesign them.
Or in some cases.
Look at how would you sell it or how would you close it and we look at all those different options, but.
I want to remind you that of.
Our strategy is all about growth.
Growth in.
In our base our core protein businesses.
Growth in our branded portfolio and growth internationally, where it makes sense, so making sure that you understand clearly that we are in a growth mode and at the same time trying to right size our footprint.
Our production machines to deliver those products that customers and consumers love.
And our next question comes from Ben Theurer from Barclays. Please go ahead with your question.
Yes, good morning, everyone and thanks for taking my question.
Just wanted to come back to chicken and actually some of them like historic context, and ask you about your performance, particularly as it relates to to hatch rates and hatch ability because it was interesting in the past it seems like.
The.
Performance itself.
Impacted by the very specific issues you were facing we.
We saw the industry relatively soft I would say in the last couple of weeks.
It feels like that your performance at least from a volume perspective has done better. So any comment you can share as to your own initiatives and improving that supply and then ultimately less need to buy outside how do you feel about this how was it in the last quarter and how do you feel about it go forward that will be my first question I have a quick follow up as well.
I'll start off and then I'll flip it from west for even greater level of detail.
But I would remind you that a couple of years ago.
Outlined a road map.
For us too.
Two.
What I would call restore our chicken business to its rightful position those are my exact almost my exact words.
And we're still on that road map.
We've had bumps along the way.
In a lot of production in the lifecycle.
The animals.
<unk> had some we had some issues with some of the breeding stock, particularly the males and has been well chronicled.
Everywhere, we had issues with hatch.
We're very competitive as it relates to that today.
We've made lots of improvement.
We were buying if you recall.
A significant amount of product on the outside and paying a premium and the height of the market and we began to reduce our dependence on outside meat and wanted to utilize the assets that we have in place and get the fixed cost leverage by producing those.
Live animals, and then converting those into those products that our customers and consumers.
And we've done all of those things and we're still on this journey.
And I would tell you that.
We got the right people in place to to complete that mission.
Not the chamber.
Two to continue down the road.
Great leadership, a great team in place now to do that and I'm excited I'm optimistic about the future of our chicken business and where it's going.
Even even in this quarter.
Losing $166 million I'm still excited about the future of the number one brand in chicken and the opportunity that we still have before us.
Yes, thanks for the question Ben.
The whole industry is not saying that kind of hedge rates, we saw four or five years ago.
<unk> in particular is down a few points from from Q1, but not near the volatility that we're seeing in the industry as a whole.
And so we have a more stable predictable supply chain to include our hatch rate that makes it.
Aesir to manage going forward.
As for outside we will continue to buy and grow as we have fluctuations in our demand.
Much more imbalanced than in years past.
Okay.
Perfect. Thank you very much and then.
Just the second question is just around capital allocation obviously.
You've you've reduced the capex a little bit, but then the same time because of the loan you've got a little higher interest you did some share per basic share repurchases throughout the quarter. How should we think about for the balance of the year also in light of what Adam pointed out as leverage could go somewhere north of four times, how should we think about.
Share purchases dividends further capex and ultimately M&A, which is also something that kind of popped up during the quarter. So just to understand the priorities here. Thank you.
Yes, sure thing and thanks for the question, let me just talk about the priorities and then and then talk about where we are in the year and what the outlook is.
So first and foremost we're always looking to invest in our business and I think it's important to recognize that the capex.
Deployment wave that we're in right now is typically is higher than our historical average over the long run something more like one 5 billion is what we would target on an annual.
Capex.
Number so I think that as we go into the coming years will trend in that direction.
And then we look at strategic M&A, where we can we've been pretty.
I think thoughtful and that approach, we're really pleased about the Williams deal.
And see that as a valuable part of investing in our business and then on the returning cash to shareholders.
We remain committed to the dividend and.
Share repurchases I think we will continue to be conservative.
Look at something Thats in line with historical norms. Obviously, there are a lot of different variables that go into that on a quarterly or annual basis as we make those choices.
But yes, I think just where we are with the profitability outlook of the business kind of the capex cycle and the borrowing.
We're conscious of and aware that our leverage ratio will tick up but.
Again, we're kind of making choices and.
Decisions around investments for the long term of this business. So we're comfortable although we don't like the tick up we're comfortable with these cycles, where where leverage ratios may be a little bit elevated compared to our long term target.
Okay. Thanks for that John .
And our next question comes from Michael elaborate from Piper Sandler. Please go ahead with your question.
Thank you and good morning.
Good morning, just wanted to I just wanted to come back to the idea of growth versus profitability and just how to think about balancing that not just for one segment, but broadly.
And I guess, just with so many of the headwinds you're pointing to broad and the macro environment and without really much change ahead in terms of it sounds like it's going to get better very soon.
Does that impact how you think about.
Maybe.
Current priorities.
<unk> profitability or just.
Make sure the margins come through better as much as you have some things you can control or what's the right way to think about some of that in terms of just an investment tradeoffs or ways to maybe improve the execution of a little bit.
Yes, thanks for that question.
<unk>.
First thing I would tell you is that.
Just to acknowledge the macro environment and what it's been in and the fact that.
The magnitude and the duration of the challenges they.
Do continue.
However.
If you think about this company in particular.
We've had a 90 year history of successfully managing macroeconomic cycles, and we've always come out stronger.
We have never been able to control those cycles.
What we can do is control what we can control and there's a lot of opportunity there for us to be better.
We are obviously focused on that and across all businesses and functions.
The.
In terms of growth growth at any cost that's not what we're talking about here the growth that we have is in service to our customers and those consumers and I think as Wes had mentioned this earlier that we always start with the demand plan and we work back to our supply chain and so we wouldn't be growing.
Kick in beef or pork.
Our prepared foods for that matter, if we didn't have a demand plan that says that.
We have a consumer wanting this and then the second part of that as we.
We obviously have no intention.
Just growing for growth's sake.
But we always balance.
Growth with profitability and I wouldn't expect this time to be any different than that.
We see this as this cycle is.
Something we've seen before and we've always accelerated out of these types of cycles and we.
Growth pattern accelerating out of the curve, if you will and that's what we're doing this time as well.
And I think if I can add onto what donny, saying just to emphasize.
Growth in the focus on high quality growth.
We've just completed a fifth.
Second quarter of record sales growth. The same is true for the chicken segment and the prepared foods segment and we're growing in the parts of those businesses that we see as attractive.
From a margin standpoint and of course in poultry as we've talked about part of that has to do a little bit with just you get into capacity utilization footprint back right and then it's also worth pointing out that we've got a business outside the U S debt.
Trending towards tripling in about five years, and so I think as we think about the long term that becomes a <unk>.
<unk> engine for Us and we're excited about the investments we've made there as well.
Okay. Thanks, so much.
Thank you.
And ladies and gentlemen, with that we will be ending today's question and answer session I would like to turn the floor back over to Donnie King for any closing remarks.
Thank you and then as you've heard today. This is a challenging moment, but my optimism about the future has not changed our customers and consumers are behind us we're winning with both.
This is not an accident, but as a result of the hard work our team members do every day and I thank them for it.
As we continue to build a world class organization positioned to take advantage of the opportunities in front of US we remain confident that our strategy will deliver long term growth and shareholder value. Thanks for your interest in Tyson foods, and we look forward to speaking soon.
Ladies and gentlemen, the conference has now concluded we thank you for attending today's presentation. You may now disconnect your lines.