Tyson Foods, Inc. — 2024 Q2

Thanks, Peter, and I appreciate everyone for being on this morning. Your first part of your question is essentially am I satisfied? I'm encouraged, I would -- I'd stop short of saying satisfied in terms of the results. I'm proud of the results that we delivered in Q2, and we're seeing the benefits of our diverse portfolio across proteins, channels, categories and eating occasions, where we saw Chicken and Pork are offsetting the headwinds in Beef. In our Q2, our momentum continues to strengthen on all of our businesses, and they're running better today than they were last year.

So Peter, I think you were asking specifically about our projections for Q3 as well as the rest of the full year. And so I'll just talk specifically about Prepared Foods and let any of the other leaders chime in. So the first half of the year, Prepared Foods delivered $500 million in AOI and you also know that profit delivery in the second half of the year has historically been lower than the first half, and we expect this year to be the same. So therefore, the midpoint of our second half guidance is $400 million. And I also want to point out that historically, Q3 has performed better than Q4, but we're seeing higher commodity costs in Q3, so we expect a pretty even split between the 2 quarters.

Melanie, why don't you answer that?

Yes, happy to. So Peter, in both retail and foodservice, as you know, the consumer is under pressure, especially the lower income households. And in retail, we're seeing roughly 20% cumulative inflation over the last 3 years. Now the inflation impact, coupled with historically low savings rate has created a more cautious price-sensitive consumer. And we're also seeing a cautious consumer prioritized essential staples over discretionary categories. Now that said, we're advantaged, in that our protein categories enjoy lower levels of elasticity compared to the broader consumer landscape. And in retail, we're experiencing -- well, I should say, but in retail, we are experiencing a little slippage to private label with lower income households. However, our share remains strong with growth in bacon, snacking and sausage.

I think I caught all the questions. Let me start out here was -- if I heard correctly, it was a kind of a supply question and then let me talk about that, and I will flip it to Wes to add some very specific details. But in terms of chicken supply, if you look at the publicly available data, USDA has projected chicken supply increased about 1% in 2024. But if you look at the data underneath it, there are some things that you need to get from this. This is a livability and hatchability story for the industry. If you look, pull it and [ hen ] mortality continues to be elevated. Broiler mortality continues to be elevated. Hatchability continues to be 3% to 5% below historical rates.

Yes, Ben, we certainly see the USDA numbers projecting up 1%, but we're seeing the egg sets up, but slaughter pounds relatively flat. Now the good news is I'm very proud of our live performance. We hashed [ 82 34 ] in the quarter, livability is up 50 points year-over-year. And so looking at our live performance and then our S&OP process, our supply-demand group, we're in a good position for the back half of the year to stay balanced, to take care of our customers, and I'm very pleased with our live and supply-demand planning group.

Sure, Ben. This is Brady. And thanks for the question. And first of all, I guess, really at a high level, we haven't seen anything relative to any of the industry numbers that have been published that really indicate that true meaningful heifer retention has begun. And so at this point, we can potentially anticipate retention beginning in the fall, but there's some caveats to that. And certainly, as we shift from an El Nino weather pattern to a La Nina, the pasture conditions are extremely important to heifer retention. And there's a potential we could see some drier conditions as well persist. We'll continue to monitor that along with additional metrics around heifer retention and the percentage of heifer that move into slaughter.

Sure. Let me start off, and I will let Wes add a little color to this as well. But one of the things I got to point out is that the focus on the fundamentals that Wes and our Chicken team have had over the past year actually is quite impressive, and that's a result of some of this. I would point out this that there have been some market tailwinds that as far as Chicken is concerned. But of the $325 million that were better year-over-year, more than half of that came from execution type things, such as the footprint and network as well as some of the other tougher decisions that we made.

Yes, sure. We're certainly focused on controlling the controllables, and Donnie talked about live operational performance, which includes our network changes. And then probably the biggest change is making sure that we match our supply and demand. We've talked about the lives being better. Our plant performance and network optimization is right on target. Our capacity utilization continues to improve sequentially. We've improved our order fill rate while actually lowering our working capital over $400 million, driven almost exclusively by inventory. Demand solid and '23 is not a very good comp.

Thanks for the question, Tom. Certainly, the compression we've seen on some of the feed stuff has helped move some numbers back to profitability within the industry from a Pork production standpoint, which is certainly good news for our producer partners as well. What we've seen consistently for the last year, which is of importance is we've seen genetic improvement across the entire industry, leading to additional pigs per liter. And when you compound that with the fact that we've seen over the last 10 years, probably the best year relative to true industry herd health. We're seeing ample supply as we move forward as well.

Sure. Let me -- Chicken specifically, but let me start with the -- across the portfolio, just managing working capital and CapEx, driving cash flow and really in support of the dividend. That's still a priority for us and part of the controlling the controllables, optimizing the footprint and network, still a huge priority for us. Restoring Chicken performance is right there at the top and also strengthening our Prepared Foods business, really important to us.

Yes, I think I'd say it this way, Adam. In the long term, Tyson is the market leader in the industry, and I would fully expect us to deliver best-in-class results over time regardless of the market conditions, but we still got work to do.

And Adam, I think -- this is John, just with one final clarifying point. You had a specific question around, can you quantify the operational performance opportunity? I would just say that -- we've got a range of guidance out there. I think that reflects the balance take and the midpoint of that is probably a reasonable place to be for the total company. But we've left things open a little bit on the top side and the high end of all the estimates of the various segments would reflect, at least what we believe to be achievable in our fiscal from an operational improvement opportunity. So I think that's about as much detail as we're intending to provide here. But safe to say, I think we see a lot of opportunities around the portfolio. The guidance reflects what we can get in '24, and we're optimistic about '25 and beyond, too.

Thanks for the follow-up question there. And we've been pretty consistent with our message over the last few quarters, whereas there is absolutely a variety of expected outcomes here and how we move through relative to supply and pounds. One of the good signs we've seen is we have seen additional weight for carcass. And so that has provided some dilutive effect relative to cost structure, which is one of the concerns as you move through lower supplies, how that translates itself into potentially higher grading cattle is of interest as well, and we'll be monitoring that. But as we looked at the cycle and the potential outcomes of the cycle, we created a strategy that was completely focused on understanding a range of outcomes and how we can provide deliverables within those outcomes as well.

Sure, Heather. Let me start out and just maybe remind us of last year. In '23, at least the first half of '23 is not a real good comparator. If you look at Q1 of last year, we absolutely missed the demand signal in Q1 of last year, and that carried on into Q2 of last year. And so if you look at volume in Q2 of last year, versus Q2 of this year, you're going to see that it is down and -- but last year was really overstated. Volume growth was, in fact, there, but there was also issues with profitable sales as it relates to Q1 and Q2 last year. So we're beyond that, we've cleaned all of that up, and we're moving forward. We're running a much better business today in our Chicken business.

Yes, Heather, thank you for your question and asking for clarity. Our volume is in line with our expectations. We are well positioned in supply-demand balance. And we have strong growth plans put in place, and you'll start to see that in the second half.

Yes, Heather, thanks for the question. I would say relative to demand, we've seen a fantastic demand on both the Chicken side and the Pork side relative to retail promotional activity as well. While we've seen fantastic demand being driven by that retail and promotional activity, Beef really has not received much promotional activity at all. And so where in the past, as we move into the summer months, you've seen that activity. We'll be watching for that as we move into Q3 to see if we see additional promos, where retail specifically going to drive the consumer relative to any of the proteins. Luckily for us, we're in good shape on the Pork side, good shape on the Chicken side in terms of meeting that customer in those channels as well.

So just to maybe cleanup for clarity, I think you may have misspoken on. It is Pork and Chicken, where we are seeing the future activity right now.

That's correct.

The Beef -- Beef promotion, that's been -- that's really been a calendar '24 story. And again, we'll continue to monitor that as we move through the remainder of the quarter, but we won't provide any additional guidance on Q3 other than what we've provided already.

Well, let me say this in short, Ben, and then Wes can give you the details. As I mentioned in my opening statements, we have made great progress, but I would be -- I would also make sure that you understand that we believe there's still a lot of work to do. Good progress, but much work to do. And so you can define that financially, if you'd like, but we're not where we need to be yet in our Chicken business.

Yes, Ben, I'd say we certainly got more tailwinds than headwinds, and it's really a function of the volatility of the grain market, what ultimately happens in the supply and chicken markets and then the consumer mindset. And then as I've said a couple of times, we do have some go-forward investments in our value-added business in the back half of the year.

Ben, this is John Randall. Let me try to answer that question. So short version, yes. We're not making any adjustments to long-term outlook on normalized ranges today. We plan to do that maybe as we go through the balance of this year and start to look to '25 and kind of give some color around that potentially. But let me take the opportunity just to talk about the shape of the total -- of the rest of the year for the total company and build on some things that have already been said today.

Alexia, this is John again. I would say that we typically plan for a little bit of that weather in the quarter. When we talked to you in February, we were pretty early on and had experienced some significant event just at that point, kind of one month in. I would say overall, though, the impacts in the quarter were not so significant that it had a disproportionate impact on earnings. So I think nothing to read into there.

Alex, this is Melanie. And in terms of our start-up costs, we may experience a little bit bleeding over into Q3, but we think the majority of them have hit in Q2.

And to your second question, Alexia, on leverage, not placing a specific number where we expect to exit the year. But safe to say, we're definitely trending towards lower leverage and 2x or below is the long-term target. But that's as much as we can give right now.

Thanks for the question, Andrew. And specifically, we talk a lot about beef demand. We talk a lot about beef cutout pricing as well. But also, we need to factor in the fact that drop as a significant amount of value that falls within the beef supply chain and also our largest cost is relative to live cattle costs as well. And so when you really balance the 2 revenue streams, the cutout pricing and the drop pricing and you take that into account with live cattle and where potentially we could see some live cattle pricing going, that really creates the range of outcomes. It's trying to balance those 3, the 2 revenue and the 1 supply cost perspective when we look at particular guidance and the range of outcomes.

This is John. Let me take that question. So you are right in that we had talked in the past about being responsive to the operating environment and managing cash flows. I would tell you that, first off, we feel good about our free cash flow projection for the year in terms of being in excess of covering our dividend, so just pointing that out. But I would also tell you that the tighter range on our CapEx today, $1.2 billion to $1.4 billion that's really reflective of us determining what are the needs for the business and where are there opportunities for good investment. What I want you to take away from that is we're not turning on and off this big. It's kind of based on our outlook on profitability, but rather trying to return to a normalized level of spend.

Yes. Thanks for this question. So let me answer it in two ways. I think, first off, on the network moves that we've made up until this point. We anticipate that we have either recovered all or should recover nearly all of that -- all of the volume in chicken and nearly all of the volume related to our pork moves and the other moves. So I think I just want to be clear that when we talk about that rationalization, we're talking about being more efficient, taking cost out and losing none of the business. So I think that, that is a point we're emphasizing.

If I might add one more thing relative to chicken. The back half of the year for chicken, if you look, grains have moderated, the demand for chicken is very strong, and we've built a fundamentally stronger Chicken business. So we're excited about that. We're executing better, and demand is certainly working in our favor.

Well, thanks for the question on international. And I think it's important to remind this came up a little bit in the CapEx question. But I think we should remember over the last 2-plus years, we've built 12 processing plants around the world. That was part of the driver as it relates to the capital spend, and we're beyond that, and we're moving into filling up those capacities. But we're also lapping -- if you look at the International, we're lapping a ramp-up cost for the 7 facilities outside the United States, and our execution should continue to improve. Our focus short term is operational excellence and capacity utilization as it relates to our International business.

Thanks for the question, Michael. As Donnie said, we are absolutely focused on delivering the results that is expected of us. So we're focusing on driving operational efficiencies across our plants. We are focused on improving our conversion costs. We're identifying available and open -- available capacity, reviewing our SKUs and delivering the more profitable mix of products, and we're also tightening our spending. So all of these actions are beginning to -- we're beginning to see the results and improve gross margins and AOI delivery.

Thanks for your continued interest in Tyson Foods. We look forward to speaking with you again soon.