Tyson Foods Q3 2024 Earnings Call Transcript

Good morning, Ken, and thank you for the question. Let me start with we're pleased with our Q3 results, which is the best quarter in the last seven. We're seeing the benefits of our multi-protein portfolio where chicken prepared and pork are offsetting the headwinds in beef. In Q3, momentum continues to strengthen, and all of our businesses are executing better than they have in quite some time. We're executing against the priorities we laid out for fiscal year '24. In short, we are controlling the controllables, we are optimizing our network, and we remain focused on operational excellence. We have taken decisive action to drive performance and to build financial strength. Our performance has given us confidence to raise our guidance again.

Now let me step into the segments and I'll start with chicken. Our focus on the fundamentals behind the number one brand is delivering results. Chicken had a strong Q3. We had the best adjusted operating income since fiscal year '16. That was eight years ago. Best capacity utilization since Q4 of 2018, six years ago, the best livability since fiscal year '20. Supply chain and SNOP processes allowing us to improve order fill rate while simultaneously lowering our inventory and working capital. In beef, we're managing through volatility and spread tightening. We continue to focus on operational excellence. In pork, better spreads and ongoing operational execution led to better profitability. In prepared foods, our results were in line with our expectations. Our brands are strong and our share remains healthy.

So, thanks, Ken. Just as a reminder, in the protein space, there typically are lower levels of elasticity, and protein is a consumer staple. And I'd also remind you, Ken, and then I'll pass this over to Melanie to add a little more color on food service. But in retail, we hold leadership positions in eight of 10 categories, and three of the top 10 brands in protein. So, with that, Melanie, why don't you speak a little bit to.

Thank you, Donnie, happy to do so. And Ken, I'm going to talk to you with my enterprise CGO hat on. So, first of all, the food service industry, as you know, is large, and demand for protein is strong, as consumers see protein as an essential staple in their diets and meal routines. And Tyson Foods were advantaged because Tyson's diverse food service portfolio spans major proteins -- chicken, beef and pork. And this year, we've also seen a particular interest in our poultry offerings as quick serve restaurants have been emphasizing value menu offerings. These factors, combined with our large and flexible manufacturing infrastructure, have been instrumental in driving our performance. For example, our ability to quickly partner with customers on LTOs or limited time offerings to meet their business objectives, you know, we're operating its best in class. At the same time, that flexibility is also helping us to better partner with our customers to quickly develop innovation.

Now, our commercial scale is also a strategic advantage. On any given day, you'll find our products in school lunch programs, quick serve restaurants, fine dining establishments and hospitals. You'll also find us in travel and entertainment venues such as airports, cruise ships, movie theaters, amusement parks and concert venues. This allows us to meet consumers where they are. Look, we remain focused on what we can control in foodservice, including improving our product pipeline with innovation to drive operator value and new customer acquisition. We're also focused on leveraging the diversity and flexibility of our broad manufacturing base to better serve our partners. And finally, we're focused on shifting the mix to advantaged channels. So, because of these actions, we're building momentum going into fiscal year 2025, and are positioned well for continued growth.

So, Ken, thank you for the question. Let me start by saying I'm going to take this opportunity to pass this question over to our Chief Architect in poultry at Westmore. He's been the person responsible, he and his team, for the chicken turnaround that we have seen. So, Wes.

Yeah, thanks, Donnie. Overall, I'd say I'm very pleased with the improvement in our cost fundamentals, and we're well poised for growth. Nothing's really changed. The big three areas that we've talked about the last few quarters around our live plant and SNOP, our live results continue to improve. Our hatch was up 360 basis points versus a year ago, just short of 83. Our livability improved 50 points to 93.71 in a pretty tough grow out environment. And then our Cobb500 on the MX mail [Phonetic], and then a very deliberate focus on our live fundamentals are paying big dividends. The network changes that are paying off. Our capacity utilization, as Donnie said, continues to improve sequentially, and we still have room to grow. And then our SNOP process continues to add value. Service was up 100 basis points on order fill while reducing our working capital around $260 million. We have a really highly functioning demand planning and supply planning team, and our total poultry group is engaged in that area. Now we invested some of that operational improvements back into the business. As you know, we have the number one chair in retail and food service, and we're focused on investing there. So, our Danville fully cooked plant is well started up. That location is about a year ahead of schedule from what we originally anticipated.

We've got a strong innovation pipeline. We've invested in quality and consumer promotions. And so, I think our range is good. We've raised our guidance to $850 million to $950 million historically Q1 and Q3 as our best quarters, with two and four being a little softer, and then the ongoing investments. So, I feel well balanced at the midpoint.

Well, thanks, Adam, for the question, and I'll just start with saying this. It's going to be very challenging to continue to really forecast the outcomes relative to this beef cycle. Every beef cycle has some differences embedded within it, and one of the key indicators relative to the cycle is drought and monitoring drought in specific areas. So, as you alluded to, we haven't seen really any notable retention to date. We've seen some differences relative to specific regions, and I would say that correlates really well relative to what those specific regions have from a climate and drought perspective. So, when you definitely really evaluate as we move forward, what we do know is we're not expecting any incremental supply here in the short term, which is consistent with these beef cycles. However, we're really focused on what we can control, and the highlights for our beef team have been decreased cost year-over-year relative to our manufacturing, and our efficiencies have improved in our assets. We continue to see improvements in our yields in our plants. We're doing a better job of balancing our supply and demand of cattle to beef, and what our consumers and customers are demanding as well. So, when you parlay all of those things together, we'll continue to manage what we can control and focus on really indications in the future on this rebuild.

So, if I could add one thing to that. Thank you, Brady. Our asset base is we're well invested, and we are capable of running with the very best in the industry. I remind you, Adam and others, that the benefits of our multi-protein portfolio, which is driving our momentum with the strengthened chicken and prepared foods and pork, and we see that offsetting challenges in beef. We see that continuing for the balance of the year.

Yeah, this is Wes. You know, I would say that we continue to focus on the fundamentals. We got a little different business mix and business volatility than some of the commodity players, as we don't sell a lot of outside raw materials where price is immediate. We've got several pricing models; some are grain based. And so, as grain has come off, we pass that on to the customers and that's fair. And then we have a high percentage of packaged goods. And so, we're going to stay focused on stabilization of earnings over time, strong relationships with key customers and sustainable value creation. So regardless of what markets are doing, I expect us to deliver best in class results over time and stay focused on the controllables.

Sure. Andrew, let me just say this. In terms of '25 outlook, it's a little bit early for us. We'll be happy to discuss that at length in Q4. So, look forward to that. Just a reminder, there is no, data doesn't support herd rebuild at this point. But on a positive note, pasture conditions and feed costs are supportive of a herd rebuild. Interest rates, for example, might be a headwind, but there's no clear sign ahead for retention. Brady, why don't you go deeper into that?

Sure. And thanks for the question, Andrew. And specifically on our beef performance, we are completely dialed in to making sure that we have cost effective operations. And so everything from our harvest efficiencies and our assets to our yields to making sure that we are dialed in with our customers and consumers and balancing that to the type and kind of cattle that we're procuring and making sure that we understand those value equations is where we've seen improvements in our operations. And the real callout for us again is the significant year-over-year decrease in our manufacturing cost and our assets. We're running a much better operation today than we were a year ago, and we're certainly proud of that, and thank the team for their continued improvements in these areas.

Yeah, sure, Heather, thank you for the question. You know, we see the USDA data and no question the industry exits and weights are well up, but the birds simply aren't making it to the plant. And so, our genetics and strategic focus are just the opposite. I did say our hats is up 360 basis points. I do believe it is sustainable. I think we've got the right programs in place. We're seeing intense focus on the execution, our grower partners are buying into the performance, and our livability is up 50 points, even in a tough grow-out environment. So, we're obviously outperforming in life. And yes, I believe it to be not only sustainable when we hit the fall or cooler weather, I expect it to improve.

Thanks for the question, Heather. Again, I just go back to that drought monitor, the USDA and NOAA publish and produce. So, through the last cycle, obviously we saw drought in that 2012, 2013, and then relatively good rebound in '14, '15 and '16, and then really from a grow up perspective in beef cow country, really, really low persistence relative to droughts into '19 that led into some really good numbers here within the last three to five years. And so, we'll continue to evaluate and understand and focus on that. That's really a prerequisite to this rebuild. Donnie outlined some of the other factors that are in play relative to the rebuild as well. But just to reiterate what Donnie said as well, we've made really good investments in our beef operations, and we like our asset base, we like our team, we like the supply partnerships we have both on the cattle supply and the partnerships we have with our customers as well, and really have laid out a variety of range of outcomes and understanding where the cycle will really go and win, most importantly, and we'll continue to evaluate that as we move forward.

And if I could, I would add this to Brady's comments, once again, Heather, the benefits of our multi-protein portfolio and the momentum and the strength which we have there where chicken prepared foods, pork, and even our international business, offsetting those, you know, this cattle cycle that we're in. So, we've been able to do that, did that well in Q3, and I would expect that for the balance of the year. And we think we will have a good overall fiscal '25. It's too early to talk about that in great detail, but we're very optimistic about '25.

Yeah. So, thanks, Michael. Let me give you first an overview of our Q3 performance, and then I'll dive a little bit deeper into kind of the promotional environment that we're seeing. So overall, our prepared foods third quarter performance, as you know, was in line with our expectations, and we're pleased with the results as we delivered both volume and sales growth. But as you know, we made a number of investments in our plan to add new capacity and capabilities. That's important to remember as our profit was roughly flat a year ago when you adjust for the incremental expenses associated with the ramp up of those additions. Also important to note is that our results were accomplished despite lapping a period of higher merchandising levels and lower input costs. And there's really three key factors that drove our performance in the quarter. First, our operational excellence has improved dramatically. We've had tremendous commercial success. And then, as you noted, our food service volume growth was strong. Now, as I think about our promotional environment, please know that our teams closely monitor in market pricing dynamics, elasticities and promotional performance at a granular level. We have a disciplined approach to pricing and promotions, and we make changes to our strategies as the consumer landscape evolves. Now, this doesn't mean that we're just reactive. The strength of our brands, our customer relationships, our data driven consumer insights, you know, and our leadership position across multiple categories affords us the opportunity to act fast when the marketplace changes. And now, pricing and promotion, there are a couple of the key levers, but we're also focused on ensuring that our items are in the right package and in the right channel to meet consumers' needs. I would say it's also important, you know, to remember what Donnie highlighted that protein, which consumers see as an essential staple, enjoy lower elasticities than other food categories. Therefore, we believe consumers will continue to prioritize protein. I point to all these factors as the reason that Tyson's retail volume grew in the quarter.

Yeah, thanks, thanks, Ben. This is Curt. I'll kick it over to Wes in just a minute, but principally speaking, right, we talked about the back half of the year and a little bit of seasonality challenges that we perhaps could have, but to be specific in your question, before turning over to Wes, it was really some stronger chicken performance than we had anticipated when we talked three months ago. But overall, kind of the construct that we thought about the back half of the year, relatively in line, but certainly, as we said earlier, increase the overall midpoint of our guidance by $100 million, really with the strength of Q3. And I'll turn it over to Wes to talk a little bit about chicken's performance.

Yeah, I'll take a big part of that change, and it's pretty simple. Our poultry team is improving faster than I expected, or that we modeled in a lot of different areas, like live, for instance, that we just talked about, or our supply demand planning group. And so, we haven't called a different play. We've just executed it faster than I expected.

Sure, our international business does continue to grow. And if you'll recall, over the last couple of years, we've invested heavily behind a number of assets in China and in Southeast Asia. I would tell you, in those marketplaces, there are a number of macroeconomic and geopolitical headwinds. We have seen a little better improvement in raw materials. But to go any deeper into that, let me introduce Devin Cole, who is new to this call, but not new to Tyson. And he's just returned to our company in March. He's been the Head of our global McDonald's business, and now we've added the international business onto him. And so, with that, Devin, welcome and please go ahead.

Thank you, Donnie. Of course, it's pretty early in the process of evaluating this business from my standpoint, but I would tell you I'm encouraged by the quality of our team assets that I've had the chance to see around the world. We really focused on some very key metrics, and that's just keep our team members safe, make sure we've got the best food safety, the best product quality innovation for all of our customers around the world. And also focused highly on operational excellence, as we bring these new facilities up to speed. I'm convinced that we have the assets and the team to deliver the portfolio of products to meet both customer consumer needs around the world. And really what this will allow us to do is to provide the growth and results that we expect, and that we need to drive the operational efficiencies and capacity utilization in these assets.

So, if I may just add one other thing to that, Devin, and thank you. Many of you will recall, Amy too, was the leader of our international business. Since we were together last, Amy has decided to retire. And I know she is probably listening today. And I just want to say that we miss her, and thank her for her many contributions to the company. We wish Amy and her husband Christian well, but we have Devin in the seat now and look forward to many, many exceptional things as it relates to international.

Yeah. Thanks for the question, Peter. As I've said, we had solid improvement in our fundamentals, and we partially offset those by investments. If I had to call the year today, I'd call it 40% performance based, 60% market based. But if I adjust for the investments, I'd call it around 50:50. But it's important that my team stay focused on sustainable performance and driving value over time, regardless of what those market conditions are.

Thanks, Peter. Yeah, you're right. Maybe the best way to handle that is think about our liquidity. And we finished the quarter, right with about $4.8 billion of liquidity. And that was partially driven by a bond offering that we did earlier this year to effectively pre-fund that, if you will. So, yeah, the bond maturity is coming up here in August of $1.25 billion, and we'll look to pay that off this month.

Yeah. So, again, Alexia, thank you for the question. You know, we're laser focused on the fundamentals of our business. Certainly, grains have an impact. Our commercial relationships, we continue to work with some key customers to help stabilize earnings and create win-win solutions with those key customers. So, for me, it's about staying focused on what we do and getting better at it every day.

So, if I could add one thing to that that Wes has mentioned two or three times, but just to make sure it's clear that from a mix perspective, Wes and his team are continuing to value up the mix from, let's call it, more commodity-oriented products to more value added, branded across retail and food service.

Sure. If I look at the team that's sitting around the table here this morning, we have some of the best people in the industry in their specific discipline. They have a great deal of experience and they are very passionate and competitive in everything they do. But the mantra that we have here at Tyson is one team, one Tyson, all behind our mission, feeding the world like family and at the same time making sure that there's high-quality protein on every table in the world. But the collaboration component of that is a team coming together and really being united around this one Tyson approach.

Hey, Tom, this is Curt. I'll add a couple things and then let Melanie add to it. But we were hopefully very clear last quarter where we talked about a midpoint of the guidance of $900 million and implying obviously $400 million in the back half, and it would be split relatively even. I'll add to that, right. While we've tightened the guidance range throughout the year, our midpoint has been consistent across the whole year. And specifically, as well, our thoughts around Q4 and the profitability outlook also were very unchanged and consistent as we thought about it. But I'll let Melanie add a couple of elements from her perspective.

Yeah, so thanks for the question. And, you know, as I think about the future seasonality and Q4, we expect to have a strong Q4 compared to prior years. First, the costs associated with the new capacity and capabilities I touched on earlier will be significantly reduced as those assets ramp up. This is true both sequentially and versus year ago. Second, the operational excellence initiatives we're driving are accretive or additive, I should say, meaning the total dollar impact will grow each quarter as we reduce costs and drive out inefficiencies. We also expect to continue strong commercial performance behind our food service business. And then finally, I'd also point to our growth in bacon, which is enabled by the successful startup of our bowling green facility. And because of the new capacity and capabilities that we brought online, we're growing and gaining share in bacon. So, you know, as I think about Q4 as well as the momentum going into 2025, we're confident in our path forward, and a lot of this is obviously driven by our team that has been working really, really hard and is focused on delivering our goals.

Just a couple of comments from me. I think we've had a fairly disciplined approach over this last year relative to our SG&A management. It will feel a little lumpy in a couple of quarters because we've got some higher performance-based compensation impacting each of the quarters. But overall, very disciplined focus on our cost control spending this year.

Thank you for your continued interest in Tyson Foods, and we look forward to speaking with you again soon.