Tyson Foods, Inc. (NYSE:TSN) Q1 2024 Earnings Call Transcript
Tyson Foods, Inc. (NYSE:TSN) Q1 2024 Earnings Call Transcript February 5, 2024
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Operator: Good morning, and welcome to the Tyson Foods First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Sean Cornett, Vice President, Investor Relations. Please go ahead.
Sean Cornett: Good morning, and welcome to Tyson Foods' fiscal first 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 and 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 have also provided a supplemental presentation, which may be referenced on today's call and is available on Tyson's Investor Relations website and 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's not related 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 disclaimers 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. As you may have seen in our press release this morning, fiscal 2024 is off to a good start with solid performance in Q1 giving us confidence in our full-year outlook. The momentum we established in the back half of last year continued in Q1, highlighted by a $175 million improvement in adjusted operating income, a 130 basis points of AOI margin expansion and near doubling of adjusted EPS, all on a sequential basis. As we begin fiscal '24, we're witnessing the benefits of our core multi-protein portfolio. Chicken and Pork are offsetting Beef headwinds, while Prepared Foods continues to generate strong profit dollars and margins. While we can't control the macro environment, our focus on what we can control has been evident in Q1.
Our performance reflects a commitment to operational excellence, we are more agile, collaborative, and disciplined business than a year ago, and we have a long runway of opportunities in front of us. I'm proud of our team members' continued efforts to enhance operational performance and want to thank all of them for their high level of engagement and their part in delivering our results in this quarter. We're controlling what we can to drive cash flow as well. Our disciplined approach to CapEx and working capital helped generate strong cash flow in the quarter. Prudent cash deployment is part of our strategy to build financial strength and will position us well when market dynamics turn in our favor. You've seen us take bold actions to improve performance, and everything remains on the table to drive operational excellence and address inefficiencies.
Our plan is working, and we're seeing tangible benefits of our efforts as evidenced by improvements in Chicken and Pork. While I'm pleased by the performance in Q1, we still have more work ahead of us, and we're cautiously optimistic and laser-focused on achieving what we set out to do this year. Our brands resonate with consumers, and we're maintaining strong market share despite comparing to our record position last year and some overall category consumption softness in Q1. We will continue to support our brands through innovation, marketing, and strong customer partnerships while meeting consumers where they are. I remain highly confident in our long-term strategy based on a broad portfolio of core proteins and strong brands and I'm optimistic about our future.
We're leaving no stone unturned to drive long-term value for our shareholders. Now, let's delve into an update on share position of our branded portfolio. Our Q1 pound share in our core business lines, which include product lines from our iconic brands, Tyson, Jimmy Dean, Hillshire Farm, State Fair, Aidells, and Ball Park, remains at historically high levels despite a modest decline compared to record share in Q1 last year. In fact, our core business lines have grown pound share by more than 400 basis points since Q1 of 2019. While inflation is easing, consumers are still facing high prices compared to two years ago. However, they are still willing to purchase brands they know and trust, and this is reflected in our share. We're also focused on customer elasticity and balancing with our own cost.
We believe our approach is working. The value proposition of our iconic brands resonate strongly with consumers. Over the past year, nearly three out of four US households purchased a Tyson core business line product, and this penetration rate is growing. What gets me even more excited is that our product line with the highest penetration rate is only in about a third of households, leaving us plenty of room for continued growth over the long run. Moving on to segment performance, starting with Prepared Foods. Our foodservice volumes continue gaining traction as we strive to grow this business with a focus on customer diversification and margin accretive channels. Operational efficiencies and lower raw material costs drove strong adjusted operating profits and margins.
Our Branded Foods business remains a strategic growth pillar, and we are committed to supporting and growing our brands through innovation, price pack architecture, high ROI marketing support and strong customer partnerships. This is critically important in an economic environment where consumers remain more discerning with their purchasing decisions. In Chicken, the momentum established in the second half of fiscal '23 continued in Q1 with a third consecutive quarter of over $100 million in sequential AOI increase. Operational improvements, including the bold actions we've taken along with improvements in live operations, yield, labor efficiency, and customer service, as well as improving market conditions, were the primary drivers in Q1. In Beef, limited cattle supply led to spread compression as we expected.
Roughly half the loss in Q1 was related to an inventory valuation adjustment, which was primarily driven by highly volatile cattle futures. While spreads are expected to remain tight, our goal remains to be best-in-class operators so that we can manage the business as efficiently as possible. We have identified incremental opportunities to improve our execution and help offset some of the challenges from the current cattle cycle. Turning to Pork, better supply drove lower hog cost leading to improving spreads. Our team's focus on operational execution allowed us to capture the benefits of these favorable market dynamics, which resulted in improved profits both on a year-over-year and sequential basis. Before I hand it over to John for a financial review, let's reiterate our priorities for the year.
First, we're committed to improving our financial strength and driving cash flow to support our dividend, as demonstrated in Q1. Over the past year, we announced the closure of six of our older, less-efficient plants in chicken and two of our smaller beef case-ready value-added facilities. We're already seeing the benefits of these actions and we'll continue to evaluate opportunities to drive efficiency across our segments. In Chicken, our focus on enhancing our competitiveness continues. In Prepared Foods, we want to build growth momentum behind capacity additions coming online, increase our brand household penetration, and diversify and grow our foodservice business. In Beef, we acknowledge the challenges and will be prepared for multiple outcomes during the current cattle cycle.
In Pork, we're gaining momentum in operational execution and are excited for continued improvements. With that, I'll turn the call over to John to discuss our financial results and outlook.
John R. Tyson: Thanks, Donnie. I'll start with an overview of our total company results before moving on to our individual segments. Sales in Q1 grew slightly year-over-year as an increase in Beef revenue was nearly offset by a decrease in Chicken. The decline in adjusted operating profit was driven by lower profitability in Beef, which was partially offset by growth in Chicken and Pork. It's important to note that AOI improved significantly on a sequential basis despite the modest decline versus last year. Adjusted EPS nearly doubled compared to last quarter, highlighting the ongoing improvement in our operational performance. Now, let's review our segment results starting with Prepared Foods. In Prepared Foods, Q1 revenue was flat year-over-year.
Volume growth was led by benefits from the Williams acquisition and continued recovery in our foodservice business. Lower pricing primarily reflects the mix impact of the lower contribution from retail. AOI in Q1 was also in-line with last year. Lower raw material costs and operational efficiencies were offset by increased brand support expenses, start-up costs associated with new capacity additions and mix. AOI dollars and margin both increased significantly on a sequential basis due to strong operational performance and great seasonal execution by the team. Moving on to Chicken. Sales in Q1 declined 5.4% year-over-year, primarily driven by the impact of lower commodity protein prices. Volume declined 1.5% due to lower production, which was partially offset by continued sell-through of finished goods inventory.
Despite the decline in sales versus last year, AOI more than doubled in Q1, primarily driven by the benefits of our strategic actions and other operational efficiencies. These include lower plant spend, improved yield and better live performance. While input costs were a clear tailwind, these were largely offset by the impact of lower pricing. As Donnie mentioned, this is the third consecutive quarter of more than $100 million of AOI improvement as we were able to pull forward the benefits of closures of inefficient plants in improvements in our live operations. Now moving to Beef. In Beef, revenue increased 6.4% year-over-year in Q1, with lower head throughput more than offset by higher prices per pound. While revenue increased, AOI decreased versus last year, primarily reflecting compressed spreads, as was expected.
As Donnie mentioned, in Q1, nearly half of the operating loss was driven by an unfavorable inventory valuation adjustment, which was primarily due to the rapid and significant decline in cattle futures. Moving to Pork, Q1 revenue was down modestly as volume growth was offset by lower pricing. However, AOI increased year-over-year, benefiting primarily from improved spreads driven by lower hog cost as well as better execution. And finally, a brief comment on our International business. AOI improved as we begin to lap some of the start-up cost of our newer facilities and continue to focus on improving execution despite a decline in sales, driven by macroeconomic challenges. Shifting to our financial position and capital allocation. Our commitment to building financial strength, investing in our business and returning cash to shareholders, primarily via our dividend, remains unwavering.
While market conditions remain challenging, we are laser-focused on disciplined management and deployment our capital resources to drive cash flow. Q1 showcased robust operating cash flow of $1.3 billion, above our expectations, and working capital was a solid source of cash as we continued to manage inventory levels. We were also disciplined with CapEx, which came in at just over $350 million in the quarter, below last year's exit rate. During the quarter, we returned $171 million to shareholders via dividends. Our net leverage declined sequentially, coming below 4 times, driven by our improved profitability and strong cash generation. We ended Q1 with more than $3.7 billion of liquidity. Our balance sheet management approach remains unchanged.
We are committed to building financial strength and maintaining our investment-grade credit rating, and returning net leverage to at or below 2 times net debt to EBITDA. 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. Given the solid results in Q1, we have confidence that our financial performance in 2024 will improve versus last year. However, as it's still early in the new fiscal year and uncertainties remain, especially in our Beef segment, we have made only modest changes to our outlook. Our focus for fiscal 2024 remains to manage the business for profit and cash dollar generation, reflected in our guidance presented in dollar terms rather than margin percentages.
With that in mind, we are reiterating our overall sales guidance to be roughly flat year-over-year. Moving to each of the segments. Prepared Foods had a solid start in a seasonally strong period. For the remainder of the year, we expect strong volume results as we continue our momentum in foodservice and see the benefits of our capacity additions. We remain focused on operational efficiencies while we support our brands and anticipate continued start-up costs. Taking all this into account, we're maintaining our AOI guidance to be in the range of $800 million to $1 billion. In Chicken, our operational turnaround is progressing as anticipated. For the remainder of the year, we expect to return to normal seasonality where Q2 is typically a weaker quarter.
Given the strong start in Q1 and that we believe that there were more tailwinds than headwinds, we are tightening our AOI guidance range to be between $500 million and $700 million. In Beef, spreads are compressing as expected. However, uncertainty remains around how the cattle cycle will progress. Therefore, we are maintaining our full-year guidance at a loss of $400 million to breakeven. In Pork, on the back of our strong Q1 results, we're now raising our guidance to be between breakeven and $100 million. For the total company AOI, we're maintaining our guidance of between $1 billion and $1.5 billion, reflecting the portfolio nature of our segments. To round out the key P&L items, we anticipate interest expense to be roughly $400 million, and a tax rate to now be between 23% and 24%.
Turning to CapEx, we're maintaining tight controls on spending in-line with profitability and cash flow, and we expect CapEx to remain between $1 billion and $1.5 billion this year. Finally, on free cash flow, we're committed to managing working capital and CapEx, and we're even more confident now than we were last quarter that we will generate positive free cash flow for the year. To further help model the shape of the rest of the year, we anticipate more typical seasonality across our business. As a reminder, Q2 is seasonally our weakest quarter for AOI and cash flow, driven by Beef and Chicken. As you may be aware, this January has already been impacted by severe winter weather disrupting operations. And again, we expect start-up costs in Prepared Foods to impact Q2 as well.
So, in summary, 2024 is off to a promising start and we're cautiously optimistic on our prospects for the remainder of the year as well as for the long term. Tyson is a leader in the global protein industry. We have strong brands, a broad portfolio of products and a great team, all of which uniquely position us to win in the market. With that, I'll turn the call back over to Sean for Q&A instructions.
Sean Cornett: Thanks, John. We will now move on to your questions. Please recall that our cautions on forward-looking statements and non-GAAP measures apply both to our prepared remarks and the following Q&A. Operator, please provide the Q&A instructions.
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