Tyson Foods, Inc. (NYSE:TSN) Q2 2024 Earnings Call Transcript May 6, 2024
Tyson Foods, Inc. misses on earnings expectations. Reported EPS is $ EPS, expectations were $0.35. Tyson Foods, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and welcome to the Tyson Foods second quarter 2024 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Sean Cornett, Investor Relations. Please go ahead.
Sean Cornett: Good morning and welcome to Tyson Foods’ fiscal second quarter 2024 earnings conference call. On today’s call, Tyson’s President and Chief Executive Officer, Donnie King and Chief Financial Officer, John R. Tyson will provide some prepared remarks, followed by Q&A. Additionally, joining us today are Brady Stewart, Group President – Beef, Pork, and Chief Supply Chain Officer; Melanie Boulden, Group President – Prepared Foods and Chief Growth Officer; Wes Morris, Group President – Poultry, and Amy Tu, President – International. We also have provided a supplemental presentation which may be referenced on today’s call and is available on Tyson’s Investor Relations website via the link in 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 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 a reconciliation of these non-GAAP measures to the 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. I’m pleased with our performance in Q2 and I want to thank our team members for their ongoing commitment to driving operational excellence. We’ve certainly come a long way from where we were a year ago and wouldn’t be where we are today without their hard work. Our momentum continues to strengthen and all of our businesses are running better today than they were last year. Our results this quarter are part of a solid performance in the first half of fiscal 2024 compared to the first half of last year. Adjusted EPS and adjusted operating income are both up nearly 60%, while operating cash flow increased by more than 50% and capex decreased by more than 40%.
This performance gives us confidence in our improved outlook for the fiscal year and in our long term future. As you saw in our results, tailwinds in chicken again offset headwinds in beef as we benefit from our multi-protein portfolio. While we are not immune to the macro environment, we are taking steps to reduce our exposure to commodity markets. We are expanding our offerings in seasoned and marinated meats to value up our portfolio across beef, pork and chicken to provide consumers convenience and new flavor options. Across our brands, we are focusing on meeting the consumers where they are by offering convenient restaurant-quality food options at home. We are a leader in protein with some of the most iconic brands in food with offerings that span the value spectrum.
This is why our share remains healthy despite a more challenging environment for consumers. We continue to support our brands through efficient marketing, effective innovation and strong partnerships with our customers. We continue to build financial strength by being disciplined in our capital deployment to improve cash flow and position us well to tackle challenges and capture opportunities. We also continue to take bold actions to improve performance and drive long term value for shareholders, and I remain highly confident in our strategy and optimistic about our future. Now let’s delve into an update on market share. At Tyson Foods, we have a broad portfolio of offerings across food service and retail at a range of price points to meet consumers where they are, even as they manage through a challenging macro environment.
We also have some of the strongest and most iconic brands across food and beverage behind the Tyson, Jimmy Dean, and Hillshire Farm names, which allows us to make efficient choices to maintain margin while strengthening our shelf position. We see this in the strength of our dollar share in our core business lines, which we believe reflects the quality of our share position. Since Q2 of fiscal 2019, we’ve added 400 basis points of dollar share in our core business lines. While our share is down modestly versus last year as we lapped some record performance, we have gained dollar share over each of the past three quarters. Our core bacon brands, Wright and Jimmy Dean have contributed to this recent growth; in fact, our dollar share in bacon for Q2 was at a record high level over the past five years, and we were the fastest growing in the category during the quarter.
I’m excited about our opportunities in bacon and expect our share to continue improving as our new bacon facility that opened in January ramps up. The value proposition of our iconic brands resonates strongly with our consumers, and our market share and household penetration rates remain healthy. We continue to have opportunity to expand the household penetration of our great brands, leaving room for continued share growth over the long run. Moving onto the segment performance, starting with prepared foods, consumers’ focus on value continues to impact our retail volumes; however, our share remains healthy and, as I mentioned, we are gaining dollar share in bacon. Our volumes outside of retail continue gaining traction as we strive to grow this business with a focus on customer diversification in margin accretive channels.
Operational efficiencies and lower raw material costs drove solid profitability, both in Q2 and the first half of fiscal ’24. In chicken, the momentum established in the second half of fiscal ’23 continued in Q2; in fact, versus the second quarter of last year, AOI increased more than $325 million. While we are benefiting from better market conditions, including lower grain costs, our bold actions and focus on the fundamentals are also evident in our results. We have made progress across the value chain. Our live operations are substantially better. We’ve improved yield, labor efficiencies and utilization in our plants. Our demand planning and customer service have also taken significant steps forward. When our live operations are running well and our demand plan is more accurate, we can operate more efficiently and better service our customers.
In summary, our focus on getting back to the basics in chicken is working. As you all know, in beef, limited cattle supplies led to spread compression. Despite some quarterly volatility reflecting market conditions, our results for the first half of the fiscal year have come in as we expected. Our goal remains to offset some of the challenges of a tight cattle supply environment by focusing on the controllables, such as labor utilization and managing mix to meet customer and consumer demand. Turning to pork, better spreads and ongoing operational execution led to improved profitability in the quarter and the first half of the year. As you may have seen, we made the difficult decision to close one of our pork facilities. This is part of our efforts to optimize our footprint and improve performance by reallocating resources to nearby, more efficient plants while improving mix and better serving our customers.
Now let me take a step back and talk about our recent corporate rebranding initiative. We launched a new corporate logo earlier this year that captures our One Team, One Tyson spirit. It encompasses our differentiated capabilities and scale and our diverse portfolio across channels, categories and eating occasions. Our Tyson Foods corporate logo represents our company’s legacy and our team’s purpose, which is to feed the world like family. Our approach to driving long term value hasn’t changed and is built on a core of three key pillars. First, we are fortifying our foundation of core proteins. We strive to be best-in-class operators while continuing to look for ways to value-up our portfolio. Second, we are building our brands by delivering innovation for new occasions, categories and channels to better serve consumers.
Today, we have three of the top 10 protein brands, with room to expand our household penetration. Brands are our best opportunity to drive faster growth, higher margins, and stronger returns. Third, we are growing globally. Our international business grew revenue eightfold to $2.5 billion over the five years through fiscal ’23. We expect to drive profitable growth over time by capturing expanding consumer markets, particularly in Asia, and we believe we are well positioned to win. These strategic pillars are supported by key enablers of operational excellence, customer and consumer obsession, along with data and digital. A key element of operational excellence is to gain enterprise scale and unlock savings in our controllables by modernizing our operations and driving performance to standards.
We win with our customers by building long term partnerships and delivering top tier experiences. We enrich consumers’ lives by creating best-in-class marketing and innovation. Finally, we continue to build our digital capabilities utilizing data, automation and AI tech for better decision-making and outcomes. Before I hand it over to John to review our financial performance, let me remind you of our priorities this year, where we focused on controlling the controllables. Our results for the first half of the year currently show that we are controlling our capex and working capital to drive strong cash flow. Another priority is to optimize our footprint and network. We closed the last of the six chicken facilities that we announced in 2023 along with the two case-ready beef facilities, and as mentioned earlier, we are closing one of our pork plants.
We are also focused on operational excellence by restoring performance in chicken, strengthening prepared foods, managing beef through a difficult cattle cycle, and driving efficiencies in pork. As you have seen in our results so far this year, we are making tangible progress in all these areas. With that, I’ll turn the call over to John.
John Tyson: Thanks Donnie. I’ll start with an overview of our total company results before moving onto our individual segments. Sales in Q2 were essentially in line year-over-year at $13.1 billion as the decrease in chicken was nearly offset by an increase in beef. Adjusted operating income increased $341 million year-over-year to $406 million, driven primarily by significant improvement in chicken profitability. Operational performance and substantially higher AOI led to a 66% increase in adjusted EPS, which came in at $0.62 in Q2. Now let’s review our segment results, starting with prepared foods. In prepared foods, Q2 revenue was down slightly year-over-year. Volume growth was led by benefits from the Williams acquisition.
The pricing decline reflects the mix impact of the lower contribution from retail. AOI in Q2 was down modestly versus last year. Lower raw material costs and operational efficiencies were more than offset by start-up costs and mix. Despite the decline in AOI, our margin for the first half of the fiscal year remained in the low double digits. Moving to chicken, sales in Q2 declined 8.2% year-over-year, primarily due to lower volume. Volume declined 6.1%, driven by lower production as we better aligned our supply to customer demand, while the 2.1% reduction in pricing was due in part to the pass-through of lower input costs. Despite the decline in sales, AOI increased $326 million year-over-year to $160 million. The benefits of our strategic actions and the substantial operational improvements we’ve executed since last year are clear.
Market conditions, including lower input costs net of pass-through pricing and a better supply-demand balance, were also key contributors to improved profitability. The current quarter results include a $55 million derivative loss compared to a $35 million loss in the year-ago quarter. As a reminder, our grain hedging program is part of an overarching risk management strategy and not a speculative tool. In our beef segment, revenue was up 7.3% year-over-year in Q2, with both volume and pricing increasing. The 2.8% increase in volume was primarily driven by higher average carcass weight, while pricing increased 4.5%. While revenue increased, AOI decreased versus last year, primarily reflecting compressed spreads, as expected. This more than offset continued progress on our operational efficiencies, including better labor utilization and better management of product mix to meet customer and consumer demand.
Moving to pork, Q2 revenue increased 4.6%, driven by volume growth and higher pricing. Volume growth of 2.9% was led by a more plentiful hog supply. Pricing improved due to healthy global demand. AOI also increased year-over-year, going from a loss of $31 million last year to a profit of $33 million this year in Q2, benefiting primarily from improved spreads and better operational execution. Year to date, pork AOI has improved $151 million. Finally, our international business continues to make progress towards stronger profitability. AOI increased versus last year as we begin to lap some of the start-up costs of our newer facilities and continue to focus on operational execution. Shifting to our financial position and capital allocation, year-to-date showcased strong operating cash flow of approximately $1.2 billion as we continued to manage working capital.
We remain very disciplined with capex, which came in at $621 million for the first half. The $267 million in capex for Q2 was the lowest quarterly spend in several years and represents the fifth quarter in a row of sequential decline as we lap our elevated capex from the previous two fiscal years and focus on controlling where and when we deploy capital. Year to date, free cash flow of $556 million increased nearly $900 million versus the first half of last year and was more than $200 million ahead of our year-to-date dividend payments. Our balance sheet management approach remains unchanged as we are committed to building financial strength, investing in our business, and returning cash to shareholders while maintaining our investment-grade credit rating and returning net leverage to at or below two times net debt to EBITDA.
Our net leverage again declined sequentially, coming in at 3.6 times in Q2, driven by improving last 12-months EBITDA, and we expect it to continue to improve for the balance of the year. We ended Q2 with $4.4 billion of liquidity. As you may have seen from our press release in March, we successfully raised $1.5 billion in new senior notes and we paid down a portion of our term loans. We plan to use the remaining proceeds to retire our outstanding notes coming due this August. We remain committed to maintaining a disciplined yet opportunistic capital allocation strategy, ensuring that we deploy resources to maximize long term shareholder value. Now let’s take a look at our updated outlook for fiscal 2024. We are reiterating our overall sales guidance to be roughly flat year-over-year; however, given our strong year-to-date results, we are raising our AOI guidance, driven primarily by an improved outlook for chicken.
For the total company, we now expect between $1.4 billion and $1.8 billion of operating income. Moving to the segments, in chicken, given the strong start in the first half of the year, we continue to believe that there are more tailwinds than headwinds. We are raising our AOI guidance range to be between $700 million and $900 million. Prepared foods also had a solid first half. In this segment, we are tightening our AOI outlook to be between $850 million and $950 million, indicating a weaker second half of the year which reflects typical seasonality. In beef, the first half of fiscal 2024 has progressed in line with our expectations; however, uncertainties remain, including the progression of the cattle cycle, and we now expect our full year AOI to be between a loss of $400 million and a loss of $100 million.
In pork, we’ve seen solid first half performance and are raising our guidance to be between $50 million and $150 million. To add some color to the shape of the rest of the year, uncertainties remain around consumer strength and behavior, the progression of the cattle cycle, and key commodity costs. When we factor in these variables with pork and prepared foods’ seasonality, there are reasons to believe that Q3 could be weaker than Q4. To round out the key P&L items, we anticipate interest expense to be roughly $400 million and our tax rate to now be approximately 24%. Turning to capex, we’re maintaining tight controls on spending in line with profitability and cash flow, and we are narrowing our capex range to be between $1.2 billion and $1.4 billion this year.
Finally on free cash flow, we’re committed to managing working capital and capex and we’re even more confident now that we can fully fund our dividend this year through our free cash flow generation. Now I’ll turn the call back over to Donnie to wrap up before we move to Q&A.
Donnie King: Thanks John. Before we get to your questions, I’d like to thank our 139,000 team members who work tirelessly to feed the world like family and fulfill our mission to bring high quality food to every table in the world. It is the strength of our team that secures our position as a world-class food company and a recognized leader in protein. Together, we delivered a solid first half. We still have more work to do and believe we have the strategy in place to continue our progress and deliver long term shareholder value. Now I’ll turn the call back over to Sean for Q&A instructions.
Sean Cornett: Thanks Donnie. We will now move to your questions. Please recall that out caution on forward-looking statements and non-GAAP measures applies to both our prepared remarks and the following Q&A. Operator, please provide the Q&A instructions.
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