Tyson Foods : Second Quarter 2023 Transcript

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Tyson Foods

Second Quarter 2023 Earnings Call

Monday, May 8, 2023 - 9 a.m.

CORPORATE PARTICIPANTS

Sean Cornett - VP Finance, Head of Investor Relations

Donnie King - President & Chief Executive Officer

John R. Tyson - Executive Vice President & Chief Financial Officer

Brady Stewart - Group President, Fresh Meats

Stewart Glendinning - Group president, Prepared Foods

West Morris - Group President, Poultry

Amy Tu - President, International Chief Administrative Officer

Tyson Foods Monday, May 8, 2023 - 9 a.m.

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PRESENTATION

Operator

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 a conference specialist by pressing the * key, followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press * and then 1 on your touchtone telephone. To withdraw your question, you may press * and then 2. 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.

Sean Cornett

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 R. Tyson, Executive Vice President and Chief Financial Officer. Additionally, Brady Stewart, Group President, Fresh Meats; Stewart Glendinning, Group President, Prepared Foods; Wes Morris, Group President, Poultry; and Amy Tu, 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 Tyson website and through the 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 belief 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 2, 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 Donnie.

Donnie King

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 in our release earlier this morning, results were weaker than expected and top line 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 continue to gain pound and dollar share in our retail core business lines.

As I also said last quarter, I can't remember a time when our business faced the 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

Tyson Foods

Monday, May 8, 2023 - 9 a.m.

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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 were seen throughout most of fiscal 2021 and '22. Cutout values across protein complex are much lower than a year ago. Inflation has also remained elevated and persistent, which 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 a 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 executional 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 that serve as proof points that our strategy is working. As you know, our branded foods business is 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 Hillshire 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. It's clear we are winning with consumers. We also continue to win with our customers. We're proud to have been moved up into the top ten, for the first time ever, in the most recent Kantar power rankings. In fact, Tyson finished in the top ten, in six of the nine categories they measure, as we continue to focus on meeting customer needs and planning the future together with them.

While strong performance continued in our branded foods business, I 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, market 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. Some might expect these dynamics to impact our results immediately. But in fact, they work through on a lag. As chicken commodity prices declined in Q1, the impact continued into our Q2, while 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, while high-path avian influenza has not had a significant impact on our live operations, key export markets remain closed. While we can't control markets, we are 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.

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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 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 in value-added retail and 60 basis points in food service. 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 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've given 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.

Second, we plan to grow our value-added business focusing on fully cooked in retail and food service channels and by innovating and differentiating our offerings. And third, we expect to win with consumers behind the #1 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, Hillshire Farm, and Ball Park, 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%, respectively, compared to a year ago, per Nielsen. Our brands continue to perform well, as Tyson core business lines grew pound share by 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 dayparts. 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, Hillshire Farm and Ball Park, all hold favorite brand status with consumers by a large margin over our nearest competitor. It is evident that we're delivering the brands and products that consumers desire.

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As I mentioned earlier, our move into the Kantar 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, top line 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 and 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 food, namely Tyson, Jimmy Dean and Hillshire 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 win 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 costs, 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 tech for decision-making.

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, for our team members, and for our shareholders.

We've 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.

John Tyson

Thank you, Donnie. 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 benefit from significant volume growth in chicken were offset by the reduction in price per pound in beef and in 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.

Tyson Foods

Monday, May 8, 2023 - 9 a.m.