Tyson Foods, Inc. (NYSE:TSN) Barclays Global Consumer Staples Conference Call September 5, 2024 12:45 PM ET
Company Participants
Curt Calaway – Chief Financial Officer
Brady Stewart – President, Beef and Pork & Chief Supply Chain Officer
Conference Call Participants
Benjamin Theurer – Barclays
Benjamin Theurer
All right. Well, good afternoon. Hope lunch was good. Next on stage, we’ve got Tyson Foods with us, one of the world’s largest protein companies with major operations here in the US. Very pleased to have with us on stage Curt Calaway, recently named CFO of Tyson Foods, as well as Brady Stewart, the company’s Group President of Beef, Pork and Chief Supply Chain Officer. So we’re going to ask a couple of supply chain questions as well, if you don’t mind.
Question-and-Answer Session
Q – Benjamin Theurer
Anyway, maybe, first of all, thanks for joining us today and coming over to Boston. As we know, you have a lot of like different dynamics currently to deal with. So maybe, Curt, can you just give us overall thoughts, recent results and how you’re set up for the rest of the year? So just like a little bit of an intro before we dig deep.
Curt Calaway
Thank you. Maybe start out with just a touch on Q3, certainly, very pleased with our Q3 results. That really demonstrated the focus on the multi-protein, multichannel strategy. And specifically, we’re in an environment where the benefits of our Chicken, Prepared Foods and Pork business can offset the headwinds that we’re experiencing in our Beef business. We’ve been very much focused on control the controllables and that very much is focused on operational execution, but really across the entire business as we’ve managed very diligently our cash flows, working capital, CapEx across the board and ultimately, enabled us to have a great result. We finished Q3 on a year-to-date basis with about $1.1 billion of free cash flow as we’ve been very diligent, again, across all of the cash flow levers that we have. And we’re excited about the momentum that, that brings for us as we look not only to finish ’24, but leading into 2025.
Benjamin Theurer
All right. Good stuff. So as you kind of look through the different segments and one of the things I just wanted to follow up is like just what you’re seeing in terms of like consumer behavior, just general consumer health. So how have you seen that also differentiated maybe between retail, foodservice and within the different segments?
Curt Calaway
Yes, thanks. Continue to see segments of consumers search for value, whether that’s in retail or in foodservice. As we look at certainly and see the same data that you probably look and analyze, we see private label continuing to pick up a little bit of share and within the foodservice arena, some shifting around of the channels in which the segments within foodservice. So you may have some shift to QSR and you’ll have some dynamic shifting from a value standpoint. As it relates to us, right, as I said at the beginning, the benefit of our strategy is being multi-protein, where we can play across all the different protein channels, we can play across the different foodservice and retail environments and we can also participate in all the dayparts, which gives us the optionality to work with our customers to really develop innovative products for the end consumers and meet them where they choose to buy our products, whatever level of spend that they choose to have.
Benjamin Theurer
Okay. So one of the other things, just like to kind of what usually happens and obviously, there’s a lot of like promotional activity trying to draw customers. What have you seem like with your key customers in terms of like the willingness to do promotion or what are they looking for? Is it predominantly within the Chicken segment I suspect or is other — are other things as well picking up?
Curt Calaway
I may comment real quick just on Prepared Foods and Brady may add a little bit more to Chicken, Beef or Pork. As we think about Prepared Foods, certainly and the dynamic of each of the types of products that we offer, it’s managing like we normally do, right, and managing for volume and margin and working with our customers to be able to manage that map spend, trade spend across the board to maximize our value and the customer’s value. But Brady, you got anything to add on Chicken?
Brady Stewart
Yes. Certainly, from a retail perspective, we have seen some promotional activity really strengthening the Chicken business. But beyond that, it’s maybe a little outsized. In terms of surprises, would be some promotional activity on Beef. Even though now we have some high-priced Beef and Beef primals, we’ve seen retailers have promos in the Beef space to really drive those consumers to them as a value play as well and really increase their total ring from a basket perspective once they get Beef in the basket.
Benjamin Theurer
Okay. Maybe staying along the lines of Beef, Brady, the big issue, obviously, is like just the supply of cattle and the shortages we’re seeing. I mean we haven’t seen real data maybe yet as it points to like heifer retention. Any signs you’re seeing or how do you feel about like the challenges in the cattle supply for the next couple of quarters?
Brady Stewart
And that’s a great question. And certainly, we’re setting the table for us to move into this part of the cycle where we would start to see some heifer retention. But we’re looking at the same data that everyone else is as well and so really a slow recovery to date and we’re not seeing anything meaningful. But when I talk about setting the stage, I think, it’s important to understand a few different points. And first and foremost, better pasture conditions in the last couple of years that’s helping provide at least an opportunity to retain some heifers, continue to focus on interest rates and potential some reprieve relative to those rates that goes into that economic decision making of the rancher. And then we have seen a retraction over the last 45 to 60 days on feeder calf prices from a futures implied price perspective. And so you put all those things together and certainly provides a different suite of calculus for those decisions to be made. Here’s what we know. Cow liquidation is basically ceased. And so we’re not liquidating cows, that provides some stability. And after every cycle we’ve seen in the past, the next step is certainly to have heifer retention. That’s what we continue to look for.
Benjamin Theurer
Okay. I mean if we look at it, I mean, right now, it seems like a cycle that’s even more in the negative than maybe some 10 years ago when the last time it was challenging. What’s so different this time versus maybe back in the days? And what can you do to kind of prepare yourself for the next one up to come in 10 years?
Brady Stewart
You bet. So I think first of all, when you look back a decade, different weather patterns in terms of getting reprieve relative to some of the drought conditions a decade ago. It certainly provided a quick recovery, if you will, back in the 2014, ’15 cycle. And we didn’t time that the same this time in this current cycle as well. And so really the slope of change that we saw over time and the quick rebound, a lot slower relative to the rebuild this time around. But we’re seeing great demand perspective. Grinds have been fantastic in the demand as well. And so really optimistic that we’ll hold the cutout in.
Benjamin Theurer
Okay. And then lastly on Beef. I mean, we’ve obviously seen a little bit of capacity reductions with, first, the Saturday shifts go out and then a little bit further reductions. Are you considering any plant closures?
Brady Stewart
We really like our asset base. It’s a well-invested asset base. We took care of those assets during the better times relative to the opposite side of the Beef cycle as well and continue to have opportunities for us to improve within our business relative to mix, relative to efficiencies, relative to making sure we understand where the customer is going to be in terms of primal and mix and really like our path forward with our current asset base.
Benjamin Theurer
Okay. Got it. As we switch around the proteins and maybe looking a little more into the Chicken business, which is quite the opposite story to Beef right now, how do you, I mean it’s been very profitable already for a couple of quarters now. We’ve seen consistently how you also revised your estimates and guidance up in the segment. As you think about your business in specific, right, and you’ve talked about like operational issues you had in the past, but you’re getting some of those resolved. So if you think about it where you’re at right now, how much is really just like the very good market fundamentals that has helped you boost the profitability up versus how much comes from these efficiency gains that you have within your own facilities?
Brady Stewart
It’s a really good balance right now. And obviously, we’ve seen benefit and tailwinds relative to lower feed stuffs in the form of corn and soybean meal. And we’ve seen some benefits relative to the demand for Chicken has been very, very strong as well. When you balance that against our operational improvements, we laid out a strategy about 1.5 years ago that Wes Morris and the team has executed against in our poultry business that we’re extremely proud of. It starts with our live production and so we’ve seen sizable improvements relative to our hatch rate. We commented on it during our last earnings call where we’ve seen 360 basis points of improvement. And we’ve seen improvements in our livability by more than 50 basis points. We’re really proud of that. We believe it’s sustainable because we’ve put the right processes in place, franchised those, and we’ve got the discipline to continue to execute those. In our plants, we’re operating better than we have in the past as well. So we’ve got good capacity utilization that lays right into our strategy. And our plants are operating really well. And then lastly, which is really important to note, is from a supply-demand perspective, we’ve got processes that are in place that we’ll continue to execute to make sure we understand where our customers are going to be, where we meet them in terms of the different channels and make sure that we have the appropriate supply matched up with that demand and demand signals we see.
Benjamin Theurer
Okay. And then remind us, you shut down a couple of facilities over the last couple of quarters to like bring down just your nominal capacity. Where are you right now? And like what’s like your production rates? And where do you want to be in like the medium term?
Brady Stewart
Yes. So from a capacity realization standpoint, those assets have all been shuttered. And a lot of that was asset realization strategy that, number one is, we just weren’t going to continue to invest in some of these older assets we had. And so there’s a play relative to capacity utilization across our network that we have already realized. I mentioned the operational improvements we have both in the live part of our business and our plant operations as well. There’s still plenty of runway ahead of us, but the team has done a fantastic job of taking advantage of strategy that was laid out in executing towards it in a sustainable manner.
Benjamin Theurer
Okay. I remember a few years back, you hosted like kind of like a medium-term Capital Markets Day outlook piece. And one of the things was like really the margin structure of the different businesses. If I remember right, Chicken was around about like that 7% to 9% range. So we’re getting to the lower end of that. Is that a level that you think still is going to hold throughout the cycle? Is that realistic or do you see opportunity to actually drive that higher, given all the initiatives you’ve taken on the plants to be more efficient?
Curt Calaway
Yes. I think we — it’s been a few years since we’ve updated that. But certainly, as we look to focus on our operational excellence, not only controlling what’s in the plant, but also thinking across our entire network, our sales mix, the channels in which we sell, right, there’s a lot of opportunity for us. But we’re not at a stage currently to go through and reupdate those. We’re very focused on sequential improvement, controlling the controllables and getting our network fixed, right? Just as Brady started talking about, we’re about 1.5 years or so into that journey. And we think we’ve got opportunity from what’s in our control to continue to make improvements.
Benjamin Theurer
Okay. And then I mean, obviously, the fact of the vertical integration and the grain cost has come down, I mean, that’s obviously been the tailwind, and you’ve said that, Brady. How much of that do you have flexibility to walk in to take advantage of that? And have you done maybe some of like opportunistic changes to maybe your feed structure, just given that there is obviously ample supply of soybean meal right now because of all that crush that’s come out? Is that something you’re looking at or you prefer like sticking to your standardized formula and just get the quality right with your customers?
Brady Stewart
Yes. Definitely, tailwinds relative to those feed stuffs as we look forward as well. So I would just say that from a US crop perspective, we’re dialed into the fact that basically the crop is done, just yet to be harvested. We’ll continue to monitor any risk we would see out front and take a relatively conservative risk management strategy towards that. And on the backside of that, we do have strategic customers that are coming to us and asking us to really use a different model relative to pricing and incorporating grains as well. And we actively work with those strategic customers to come up with those right solutions for both us and the customer.
Benjamin Theurer
Okay. Got it. All right. Maybe going into one of the other ones that’s improving, Pork, another business, obviously, it’s been very challenged over the last couple of years, but it’s gotten some good momentum. It’s still, I guess, more at the lower end of what you would like it to be from a profitability perspective. Actually, one of your peers seems to be a little bit ahead of that on like the recovery side. I mean, some of them are working with like more vertical integration, which you’re not. So maybe just to understand a little bit like how you think about the Pork business? Would you consider making any changes here? And what you can do to kind of continue to grow that business and to grow the margin here?
Brady Stewart
That’s a great question. And I think it’s important to note that we’ve made some network design changes recently with our Perry, Iowa plant closure that was a very difficult decision for us, but ultimately closed at the end of June to really get our network right. And so it gives us better capacity utilization and efficiencies in our existing assets. We feel good about the way our assets are running today. We’ve seen sizable improvements over the last 12 months just relative to efficiencies, relative to conversion rates as well. Having said that, there’s still a great opportunity that sits in front of us to improve. And there’s an improvement plan for us to continue to improve those operations, make sure we’re managing the mix appropriately as well. And then lastly, I think from an enterprise standpoint, we’ll continue to prioritize capital that provides us the greatest amount of return within the business from an enterprise strategy perspective. And that’s how we look at any of the decisions we would make relative to investing additional capital into vertical integration. But having said that, we’ve got great producer partners that continue to supply us. And it’s on a multitude of different price discovery methods that includes cost of production and different other formula basis as well.
Benjamin Theurer
What are you seeing on like in terms of like that trade? I mean everybody usually talks about like Beef versus Chicken, but if we look at Beef and to Pork, how much of consumer or if your customers are looking into making maybe a Pork feature versus the Beef feature to try to pronounce a little bit the sales here? Are there opportunities there? And how is like, Pork, in general, I mean, obviously, it’s an export business as well. So maybe you can talk about a little bit about like the export dynamics of the Pork business.
Brady Stewart
That’s a great question. And I would just say from an export perspective, Mexico has been a fantastic trade partner for the US and has held up the ham cutout significantly this year. South Korea continues to be a great customer for us as well on some of the other cuts, including the butts and the middle meats. And then Colombia has come on as an emerging customer as well. So from a trade perspective, in export, really good support from those trade partners. When we get back and step back into the confines of the US, I would just say this, the belly has really held the cutout together from a Pork perspective over the last five years. We didn’t get near the runup this summer in belly prices as we have in the past. But that was offset largely in fact, a really good and really strong demand pull on loin meats and retail cuts from the pork perspective. So definitely, have seen some trade down into Pork, seeing significant trade into Chicken. And I would just say that the value of ground beef relative to some of the primal beef as well is really where we’ve seen the customers gravitate towards.
Benjamin Theurer
Okay. Good stuff. Switching over to Prepared Foods, which is like where a lot of the other products end up anyway, so it’s been very stable. You’ve done a couple of investments into capacity, et cetera. How do you — just update us a little bit on like the growth projects you have and like the strategy within Prepared Foods.
Curt Calaway
Yes, thanks. So, certainly, to start off with, I think it has been certainly a stable year as we provided guidance and we’re able to narrow that as we went through the year and really [Technical Difficulty] get in line with our expectations. I’m very pleased with the delivery of Prepared Foods results. Relative to our investments that we’ve made, one particular one to call out would be in Bowling Green, Kentucky. We’ve brought online a new vacant plant for us. Very important investment for us to make and I’d say it’s performing very well. It’s helping us drive that category and our performance in that category and enhance our profitability profile and opportunities as we move forward. But I think about what we have from a Prepared Foods network, we’ve not only done that, but we’ve done capacity expansions and improvements within our facilities. So we’ve talked a lot about operational efficiency and controlling the controllables, and that extends through to our Prepared Foods business as well as we’re in the process of making those modifications and updates to streamline. They’re starting to generate some benefits for us, but we have opportunities to continue that operational excellence.
Benjamin Theurer
Okay. One of the things that was interesting to see over the last couple of quarters is that you actually managed to have volume growth in Prepared Foods, which is kind of an outlier versus what the broader industry we’ve been doing. What makes the difference? What are you doing different or what is it that helps you to actually keep volume growing?
Curt Calaway
Great question. So we have seen growth overall in Prepared Foods. That has come from our foodservice part of our business. We generally, in many of our businesses, right, have a split, we’re usually a little heavyweight over to retail versus foodservice, but that extends through certainly in our Prepared Foods business as well. We had made a real effort to gain back some market share in foodservice that we had lost kind of through the pandemic time period. And we’ve started to generate — we started to realize the benefits of those improvements. And that’s really being driven by the core elements of where we needed to focus. And that’s bringing a pipeline to our foodservice operators that will bring a solution for them within those Prepared Foods products. And really gaining new distribution through that has been a real key in returning and continuing to expand our foodservice growth opportunities.
Benjamin Theurer
Okay. And then, within that, I think you also launched like certain initiatives within like digital and just better understanding. I mean that’s a supply chain question. So how has that helped you with the Prepared Foods story? Any examples you can potentially share like how some of these investments also from digitalization and just like better solutions to your customers that helped you to like gain maybe market share back?
Curt Calaway
Yes. Certainly, I generally will characterize that as digital and data and the investments that we have made across the business. And that’s enabled us to better identify and better get in tune with our consumers and help us with our innovation pipeline, where we need to go. An example of that would be in Jimmy Dean. So across Prepared Foods network, certainly, a lot of great brands in number one and number two positions that we should be bringing innovation to our customers. But one specifically, Jimmy Dean product for breakfast would be Maple Griddle Cakes that’s performed very well, a definite need that we identified through our investment in data and digital and been able to bring that to the consumers and had great success.
Benjamin Theurer
Okay. Another just on the segments, I mean, International has finally seen some good growth, and results have started to improve. There was always like a little bit of an underperformer here. Can you maybe talk about the growth opportunities that you’re seeing? Because obviously, you always talk about International is like the market to be, right? That’s the Beef consumption is going to grow, Chicken consumption is going to grow. But your footprint is predominantly in the US. So it’s a lot of like export opportunities, et cetera. So as you think about the growth potential and the opportunity to be part of that story of International growth, what are you doing in order to take part of that?
Curt Calaway
Yes. Maybe start back with the first part of the question, which is we definitely continue to see, no different than our message in the past, protein growth, its greatest opportunity continues to be outside the United States. And we’ve made a number of investments over the last several years, not only through M&A lens, but also through organic opportunities. We have invested in a number of new facilities over the last three years. And that is certainly a part of the generation of starting to show up a bit more at the bottom line. But our opportunity, going forward, is going to be continue to fill up those plants with value-added opportunities for our customers and really maximize the investment that we have made, both through inorganic and organic opportunities.
Benjamin Theurer
Okay. And then you just named Devin Cole as Head of your International Business was introduced during the last call. And he obviously had like a lot to do with the global McDonald’s relationship. But we know you’re a key supplier to them and work together with them in many places. So do you see something like that like a key customer relationship like the one with McDonald’s, as a good engine of growth opportunity internationally, aside from the domestic opportunities?
Curt Calaway
Yes. I certainly can’t comment on specific customers, but the type of partnership that we strive, whether it’s domestic or international, is to grow with key customers. And as we look to our International capacity, filling up the capacity that we’ve added, certainly, that will be through strong international partners that look to continue to grow in those arenas. And certainly, Devin and his track record have demonstrated the ability to generate those really great partnerships for both of us to win.
Benjamin Theurer
Okay. Got it. And I guess sneak in one on the supply chain, so how do you feel about the quality of your supply chain right now? Because we’ve seen the industry overall during the times of COVID, there was obviously certain struggle, certain issues. There was a lot of like talk about automation and streamlining, et cetera. So as you look at the portfolio across the different segments, be it on the commodity side versus the Prepared Food side, are you good with what you’re having on the supply chain or do you raise your hands and asking him for more money to invest?
Brady Stewart
So I think, first and foremost, back to the question on digital as part of this as well. And so we can operate better as an entire supply chain enterprise when we have better data and we’re able to use that data in a better manner. The key example Curt referenced is important. On the poultry side, our poultry team is using data very, very well to help forecast specific locations, regionality that we service with our distribution center network to make sure we get the right product in the right spot while maintaining inventory at lower levels with appropriate working capital targets as well. And so just the use of data has allowed us to be more efficient within our existing footprint to service the customer with high fill rates, and it all lays back into how we manage the supply and demand dynamics, specifically in the poultry business, which has really been a highlight of Tyson over the last 18 months and really getting processes in place that are sustainable as well allows us to be efficient and make sure we don’t have an oversupply situation. So everything comes back to data and information decision-making for me. And in the infrastructure, we’re able to be adaptive and move where the customers move and grow as well.
Benjamin Theurer
Got it. On the investment side, you had an elevated CapEx level over the last couple of years. So maybe Curt just remind us initially, what were some of these projects that drove CapEx higher? And what are the benefits that you’ve seen from these investments?
Curt Calaway
Yes. So I spoke about one, Bowling Green, Kentucky, a new bacon facility. But we also continue to invest in value-added chicken. We built a new fully-cooked chicken plant in Danville, Virginia. And we’ve also invested in a number of new international plants as well that I spoke about previously. But there’s a lot of spend that’s occurred within our existing facilities to continue to streamline and automate and bring forward our operational excellence agenda that have really enabled that. And that has been one of the catalysts that has enabled us to transform from ’23 to ’24’s performance. And I think just to touch on from an overall perspective, the level of CapEx, we have come off two years of $1.9 billion, so our ’22 and ’23 year of $1.9 billion of CapEx per year. And that was very much driven by capacity expansion and profit improvement. But as we settle back down into a more normalize level, and we’ve provided guidance, which would be $1.2 billion to $1.3 billion for this year it’s a good expectation for us. But I’ll hurry on to add that, that does consider not just the maintenance piece, but a portfolio of profit improvement and capacity expansion that we expect to generate a return on the total coming off of a much higher years, pushing almost $2 billion.
Benjamin Theurer
How much of that $1.2 billion, $1.3 billon is actually maintenance right now?
Curt Calaway
We don’t break that out separately, but it has been relatively constant, steady for us. But the total composite when you put that together at a $1.25 billion portfolio, still expect to generate a return on that.
Benjamin Theurer
Got it. All right. Staying within like capital allocation in general, cash flow has been much higher than probably you also expected at the beginning of the fiscal year. So that came in. We just talked about the CapEx needs, et cetera. How should we think about just the balance of the cash flow? I mean the dividend, you did a minor increase for the year, share buybacks also from time to time and opportunities. As you balance that, where do you see the priorities right now between those two, first?
Curt Calaway
Yes. Maybe address just the capital allocation priorities first, if that’s okay. We’re still the same approach from a capital allocation priorities, right? It starts with building and maintaining our financial strength. It includes investing in our businesses as well as returning cash to shareholders through dividends and share repos, but is still on the backbone of commitment to investment grade and a long-term target, leverage target ratio of at or below two times. Relative to your question, yes, it’s been a great cash flow year for us. We gave guidance for the first time, talking about specifically expectations of free cash flow. And we have had a good cash flow year. We’re at one point through the third quarter, we are at $1.1 billion of free cash flow. That is with a good level on kind of on pace relative to the CapEx guidance that we’ve provided and a modest increase in dividends for this year. But we remain committed to our dividend policy. And we’ve had a track record of increasing annually our dividend here for well in excess of a decade.
Benjamin Theurer
Okay. So as you kind of maybe to round it up, as you think about where the company was 1 year, 1.5 years ago with the struggles, the journey we’ve gone through like where do you think you stand within that journey? How much more room do you have to improve across the different businesses? I mean certain markets put aside, we know Beef is not going to go turn around anytime soon. But I mean, the ones that, as you say, to control the controllables, what can you continue to control to be better?
Curt Calaway
Yes. Maybe I’ll start a couple of things, Brady will probably add. But, as I think about from the overall standpoint, right, this is a tremendous year to reinforce the multi-protein, multichannel strategy, right? Certainly, coming through the challenges of last year revalidated the approach of having that varied exposure that we have and being able to participate in both retail and foodservice channels and to participate across the entire protein spectrum. We’ve got opportunities ahead. Each of the businesses are going to be very dynamic. But the one thing I would add before I turn it over to Brady for anything else is our communication with our investor base and being very specific in what we’re doing to manage not only the business and control the controllables from an operational standpoint, but control the controllables relative to working capital management, working with the businesses much closer in those — in inventory levels, it goes back to what Brady talked about, from data and digital and making better decisions and managing tighter across the entire business to enable us to be very focused on operational cash, operating cash flows, managing CapEx in a much more tight and disciplined manner to produce the level of free cash flow that we expect of ourselves.
Brady Stewart
Yes. We’ve done a really nice job of laying a solid foundation over the last 18 months and getting appropriate improvements. There’s still runway in front of us. And specifically on the Pork side, in our operations, there’s still runway there. Beef, there’s runway there. Curt mentioned on our Prepared Foods, really, we’re laying in management operating systems and doing business a little bit differently than we have within our four walls before that allows a sustainment and the discipline to make sure that we continue to deliver to the expectations of the leadership team.
Benjamin Theurer
All right. Well, good stuff. I guess it’s good wrap. Thank you very much. Curt, Brady, thank you very much.
Brady Stewart
Thank you.
Curt Calaway
Thank you.
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