All right. First of all, good afternoon. Welcome back to the almost final presentation. I think there's one over there, a little afterwards. And we have now next on stage, Tyson Foods, one of the world's largest protein producer across major proteins: chicken, pork, beef, sizable branded prepared foods operation as well. The company produces most of its product in the U.S., but actually we export sales in 130 countries globally. Representing today, we have John Randal Tyson, the company's CFO, as well as Brady Stewart, Group Vice—Group President for Beef, Pork, and Chief Supply Chain. How did they make the title so long? Anyway, never mind.
First of all, before we kick it off, first question, you published an 8-K earlier this morning about Stewart, former President for Prepared Foods, departing. Maybe, John, just an opening comment on the reasonings here.
Yeah. Stewart shared with us earlier this week that he was departing for another opportunity. We wish him well in his endeavors. I think it's a great opportunity. That news should be out, I think, later today or tomorrow, or something like that, and we plan to announce our plans about leadership and prepared foods in due course.
Okay, perfect. With that, so thanks for joining us. Obviously, it's been very dynamic across your businesses, right now. So maybe let's just take a step back and, if you could give us just an overall take on recent results and help us put things into context, and how we should think about the puts and takes in the short term.
Sure thing. Well, first off, it's a pleasure to be here, and, I wanna compliment the three-day warriors that are here at the end of the long week, and so we appreciate you being with us. If it's your first day here, we'll just assume you're here to listen to us, so we thank you for that, as well. To talk about the business and what's going on at Tyson, I think that the story in our business right now is, you know, we've seen this year in our fiscal 2023 some market headwinds that have been challenging.
We've talked a lot about beef, pork, and chicken, for really the first time in recent memory, facing some challenges that are not unexpected, but to see them all go on at once, I think has been unique. But despite all that, we're really happy… Not to say we're happy, but we're seeing sequential improvement as we go back through our Q2 into Q3, and as we go into the balance of this year and the next year. I think that we're happy with the direction that we're going. We're not satisfied with where we are yet. But you know, in that backdrop, we have, in the last year also, I think, made some pretty tough moves that we expect to yield results for our business, especially in the poultry segment.
If I just go back to a year ago, we started by consolidating three of our North American headquarters into one. We announced some plant closures back in March. We made some choices in our poultry supply chain related to ionophores and the NAE part of our live operations. We announced more plant closures. So I point all that out to say, what we have done this year has really, I think been, it's been a challenging year, but one where we have made some, some choices to try to come out on the other side. I think we feel like we're well positioned as we go into the remaining part of this year. As we start to get into 2024, I think we feel confident about the, the, the moves that we're seeing.
Okay. Well, we'll come back and talk about chicken in a bit. Just one thing, from a more strategic point of view. You've always talked about in the past, and particularly during last Investor Day as well, about all the growth potential that's coming from international markets. Obviously, I said in my opening remarks, you produce primarily in the United States and serve the market through exports. But if there would be no constraints on cash, do you think there's something missing in the Tyson portfolio where you wanna maybe be from an international footprint perspective, rather being on the ground?
I think it's important to note that 90% of the growth in protein consumption in the world is gonna come outside the United States in the next decade, and the majority of that is gonna come in Asia. Your specific question is: Is there something missing in the portfolio? I think the answer to that is, I would point to the investments we've made in the last, call it, five years. We made the Keystone acquisition, which was kind of a two-part deal where we got some business in the U.S. with a value-added chicken segment, and we got some scale in China specifically. We also made an acquisition where we got some business in Thailand.
So I think when you take those, plus the investments we've made in new facilities in China that are ramping up now, a new facility in Malaysia that's coming on later, coming online later this year, I think the story for our international business right now is to get that set up, given the footprint that we've established, and to grow it. If I think that there are opportunities in our business where we wanna keep growing, I really point to the value-added part of our chicken portfolio, as well as our prepared foods business, which has been a bright spot for us in 2023.
Okay. Now, let's come back to chicken, which has obviously been one of the pain points recently. You've highlighted and you've mentioned a few of the announcements around plant closures, obviously, the headquarters was prior to that. So if you think about the steps you've taken so far and aligned with the announcements, is there anything missing? Where do you stand today on, like, these more recent announcements of shutdowns? When is there going to be an actual closure happening? So how are you going to balance your supply chain here as it relates to having certain plants closed, but still keeping up production levels?
Yeah, I think, I think there's probably three things I would want people to take away as it relates to our chicken business. So number one, talking about the moves that we made, I kinda outlined a second ago. We would project, once we work through all of those changes, shutting down the facilities, reapportioning, the birds elsewhere in the network, plus the, NAE move, that that's probably a $200 million run rate number that we'd get to sometime in 2024. It's hard to peg exactly the timing, but we feel confident in that. That's the first thing.
The second thing is, we have demonstrated some operational results improvement quarter-over-quarter, and I think if you were just to compare our, Q2 and Q3, by and large, the market conditions, I think, were inside and the market probably were the same, and we showed some, quarter-over-quarter improvement. So I think we expect to continue to, to go get, that, and I would expect that when we get to November and start making, calls about 2024, we may, quantify what we think that headroom is to go get from just an operational standpoint.
I think the last thing that I would want people to take away about our business, specifically, as well as the chicken industry in North America, is there are some, you know, positive fundamentals shaping up that I think should support chicken market and margins as we move in the balance of this year and into 2024. Just think about input costs, and I think how markets are moving. We've seen some recovery in chicken prices, and we've seen some of the, you know, consumer prices start to level off a little bit. What I can say is we probably would have expected that to take place sooner. If I go back into 2022, 2023, just with what we were expecting from a beef standpoint, I think beef probably held on a lot longer than expected.
There's been a lot of more pork in the marketplace. As we start to see that level out, we would expect chicken to be a beneficiary of those changing market dynamics.
Okay. One hour on chicken before we move over to the other proteins. You just mentioned the No Antibiotics Ever change, and you've also had, obviously, a couple of, like, hatch issues so more recently. Can you give us an update why the decision—first of all, an explanation why the decision on No Antibiotics Ever, like, moving away from that, and then at the same time, how you think you can go forward, recover a little bit, for the hatchability?
Yeah, I think when we make any decision about our business, we're trying to figure out how to service the demand from our customers in the direction that they're headed. And when we made the choices related to No Antibiotics Ever in 2017 or 2018, we felt confident in that choice. I think what we have learned in the past few years, a couple of things. Number one, that the demand not as much of the industry moved maybe as was expected. I think the second thing is what we saw from a performance standpoint in our live operations and what that did for health and livability, as you referenced, as well as the uniformity and consistency we would see coming in the back door, perhaps, was not as consistent.
Ultimately became a conversation with our customer, who were representing to us, you know, what they felt like the end consumer wanted to do, and ultimately, we made the choice to No Antibiotics Important to Human Medicine, aligned to what we, where we thought our customers and consumers were going.
Okay, perfect. Now, over to you, Brady, just to talk a little bit about beef, maybe to begin with. From your point of view, what are you seeing in the markets, and how do you think the, the cattle supply is just gonna kinda walk through us, walk us through for the next, whatever, one, two years, it's a long cycle, and how you think this is going to impact your profitability, also in light of what, John just said, where beef was holding on a little longer than initially expected. So does that mean the recovery is gonna come a little later?
Sure. So that's a relatively important question in terms of the cycle we're in from the beef perspective. So good news is, relative to true cow and cow liquidation from our partners and the cow-calf operators and ranches is we're not seeing, that continuation relative to cow liquidation, which is a good sign in terms of continuity of supply, into the fed cattle, segment here as we move forward. More of the challenging news here is we have not yet seen, a meaningful heifer retention.
So that's really the trigger point we're looking at, is when we start to see the cow-calf operators go ahead and start to lay those heifers back into their herds, and that will really start to allow us to pinpoint out into the future two years and beyond, when we see some meaningful recovery to the fed cattle supply that will ultimately impact our supply chain. So those are really the triggers we're looking for. And as we model out, obviously, we're looking at a variety of different outcomes, depending on the timing and the impact of that heifer retention. But we're really optimistic that we're set up to manage through all those different scenarios.
Just quickly follow up on that, on the heifer retention, because economics right now would be really good, so why is it not happening? Is the pasture condition just not yet good enough in key areas, or what, what's the driver behind that?
... Sure. So we're seeing a financial motivation relative to what a heifer is worth into the cattle market. That is definitely impacting that decision from a cow-calf operator standpoint. We're seeing a different set of metrics relative to the cost of capital for them to invest into those heifers, to retain them as well. And we're seeing really a variety of different pasture conditions. And so we've got some spots that have really turned over and look like they're prime for retention of heifers. And we have some spots that are still a little bit too dry as well, so a lot of different aspects at play in that.
Okay. I mean, obviously, the cost of capital and carrying those out is different maybe to the last cycle. Now, I remember when cow prices were very low, you were obviously out there supporting the cattle supply with some help here. So in light of that, is there anything you could do to, like, kind of support profits or to support some of your suppliers to maybe help you manage through the pasture?
Sure. So, obviously, we look internally first, and make sure that within our two operating systems and our supply chain, we're operating as efficiently as possible. And by efficiency, I'm not only referring to the assets that we operate, so our plants and our team members, on how we perform our business, but also looking in terms of making sure we really marry our supply base in terms of the yields that are and the grades that were expected, with alignment with the demand from our consumers. And we obviously focus on our case-ready and value-added business too, to get as close to the consumer as possible. And so just by providing that signaling to our supply base, what our expectation is, so that we can generate the most value through our system, is very, very important.
We work with our supply partners to make sure that we are really aligned from that supply perspective.
Okay. And then just, one quick follow-up on that. On, like, the level of profitability, how do you feel about the near-term profitability, that's, like, implied in your guidance, and how that compares to the more mid-cycle, maybe 5%-7% margin?
Sure. So obviously, we're seeing diminished margins relative to that mid-cycle number. You know, it's been interesting here as we've moved and navigated through 2023, with the inflation rate seeming to be cut out, provided some optimism in terms of the real demand of beef domestically, and how we model that out from a spread perspective. We're continuing to focus on that and work on that and provide additional guidance later in terms of our expectations with 2024.
Okay, got it. Now, staying within the fresh meats, and I know it's in charge of pork as well, another category that has been under pressure, there's been challenges right now, but not only for you, but for the entire industry. There are some signs of some stabilization, at least, short term, for the broader market. Tell us how you think it's gonna play out, and do you believe that there is a big export market or not? Like what has been built to supply China, but then ultimately China, you could build with a snip of a finger, and if that's a major cause of these current headwinds.
Yeah, it's, it's been nearly half a decade until we've seen a real clear picture relative to the fact that we saw ASF in 2018 and 2019. There was some expansion that occurred at relatively the same time, and then obviously we went through really two major pandemic cycles, the initial in 2020, and then the blip relative to Omicron in 2021, that gave us varying supply pictures. And that's from an end-to-end perspective. So, while we may have had availability of supply from a live perspective, how we actually manufactured those products via some labor shortages also provided mixed signals relative to true gross margins in the business. So, I really feel like we're set up for a reset.
We've seen some liquidation that's occurred relative to the sow harvest numbers that we're seeing from an industry perspective. We're still seeing some wean pig prices that are a little bit too low relative to cash flows on independent producers that have sow farms, and expect that may drive additional liquidation. And then we are still seeing what I would call as promising demand, specifically from Mexico and Southeast Asia, on the pork products. Relative to China, I don't think we're gonna see a lot of red meat exports. However, still a very, very strong market for the U.S. on a lot of the products that we don't need domestically, so a lot of the offal items, as well. So expect that to continue.
I think the factor relative to the strength of the U.S. dollar is gonna be somewhat of an impact in terms of the total drop value we see, but are optimistic that we'll still be able to export our fair share of pork.
Okay. And then just in light of that, talked about chicken and the decision to close down some facilities. On headquarters, you reunified. Within beef and pork, is that something you would also consider if there is a need to kind of support profitability going forward, particularly in pork?
We really put everything on the table and evaluate every single asset we have, every process we have, every channel, every category. So we're evaluating our entire business. We have some operational opportunities that we've been focused on. We're optimistic that we have the right plan in place, from a manufacturing standpoint and a management perspective, to continue to develop those. And we're really excited about the team we have in Springdale to manage through what is a relatively challenging time in the red meats. So we're excited about that. And again, we're evaluating every aspect of our business.
Okay, perfect. Now let's switch gears... Talk something positive, back to you, John. Prepared foods, that's actually the one business that has been holding up really well. You're very much at the high single-digit mark on operating income margins. You shared, I think, if I recall, the way you gain market share, profit market share set, holding up very nicely, just about $1 billion per annum in operating income. Do you have any plans to grow the business further, maybe through M&A or through investments? And how can you further leverage the prepared foods business model by just taking product from the more commoditized piece into prepared foods? Is there investments needed? Is it M&A? What can be done to maybe grow that business to be even more supportive than what it is right now?
Yeah, I saw a couple questions in there. Maybe let me comment on just the prepared foods business, and then you asked about, you know, how we grow it. I may see if Brady's got anything to add in. But, I think for us, this business has been... It's kind of the whole story of Tyson's history, has been how do we take these commodity businesses and, you know, move them up the value chain into the more value-added space. That was what we've done in our poultry business. Our prepared business, we really know it was a product of the Hillshire deal we did, you know, almost 10 years ago at this point. And I think that, in 2023, we've been really pleased with the results of that business. High single-digit return on sales.
We've continued to grow share in both volume and dollars in an environment where I think we've seen some of our competitive set, as well as other CPG players, taking price, and maybe losing some share and some volume. We feel like we've struck a really great balance with that business. And, I think that that's just a testament to the strength of our Tyson brand, which really sits in our poultry segment. But, our Hillshire brand, Ball Park and Jimmy Dean, have been successful for us. I think that, you know, we expect the strength of those brands to continue to carry that portfolio.
I think as we think about growing the business, we're always looking to figure out how can we find those things that are near in, to our existing suite of capabilities, or products, or, or integrate with the proteins that we do have. I think for us at Tyson, we always are trying to figure out how can we be better at going to market as one portfolio, and how can we extract value through the chain, especially if you think about our pork business as inputs into, like, our, our Jimmy Dean brands or, our lunch meat, for example. On the M&A front, I think that we've, you know, we've been disciplined. It's just worth commenting on. You know, the one deal we did, recently was a Williams Sausage acquisition.
We're really proud to have the Williams family be part of the Tyson family now, and I think there are some characteristics of that, that you, you might expect in terms of as we evaluate what the, the market is like out there in terms of kind of fitting into the portfolio that we've got, in terms of a good, better, best strategy and having some, some great regional brand strength. As well as providing some redundancy for us on the supply side with our Jimmy Dean brand, which of course, we want to invest, invest in to protect.
Okay. Now, anything to add?
We're just really excited to be able to truly capitalize on the power of Tyson. And so, when we consolidated the office locations to Springdale and the talent we have in Springdale, we can really define what the Tyson way is for us moving forward. And it's not necessarily a poultry, not necessarily a prepared foods or pork and beef. It's really how we attack the challenges within our business, how we decide we're going to run our systems from a management operating system perspective, and then how we truly deliver the expectations of the customer. So I think our prepared foods and the strength of those brands truly allow us-
Mm-hmm.
the opportunity for growth that we have from a capacity perspective to really meet those needs.
Now, that's obviously a very, retail exposed, business, on the prepared foods side, finally. Have you seen any sensitivities in some of the more recent pricing actions you have taken? How, how's the consumer been? I think you've mentioned a level of more advertising spend to maintain visibility of the brand. How should we think about the, the need to invest further in the brand in order to retain volumes at the levels?
We've invested behind the brands. I think that's been, you know, that's what we've as an outcome with the growth that we've achieved. We're paying attention to where the consumer is going, and I think that thus far, we've seen good health in the performance of that business. We have talked about just to reference where we are in the year, some seasonality that we typically expect, you know, in the winter months compared to where we are in the summer. So as we move into the balance of the year, you know, we wouldn't have expected it to look like what we were doing at the beginning, but still confident in meeting those, those results in terms of the high, high end of our guidance, just to be clear.
So, I think that as we move into 2024, we'll try to be pretty deliberate and focused kind of on a category by category and channel by channel basis, to make sure that we're doing what's right for the whole portfolio in a way that allows us to keep managing and expanding margins of the business.
Okay. And then maybe one more for Brady, just to, like, kind of conceptually, have you seen on the demand side, within beef or within pork, and then maybe down to chicken, some sort of a downtrading as it relates to, like, the, the type of demand of customers on different levels of the cuts?
Absolutely, uh-
... really saw when we saw the inflation occur on the beef cutout this, this summer. And, maybe saw, maybe unexpected, demand movement specific to some of our case-ready, pork, products, and certainly saw some downtrending as well into, chicken. So it's going to be really interesting as we move into the latter part of, 2023 and into 2024, how this plays out. I'm really excited about our complete portfolio of proteins.
Okay. Now, we touched a little bit on capital allocation already, but I want to give a little more focus. More recently, you had a relatively high CapEx, about $2 billion, I think, still part of the guidance. Obviously, we're used to more like a run rate, maybe $1.5 billion-ish, something like that. You've done a lot of investments. Maybe, John, just quickly recap what were, like, the bigger ticket items on that higher CapEx recently, and how we should think about the run rate CapEx going forward.
Sure. So let's talk about CapEx and then kind of put that in the picture of the broader capital allocation. So, the last couple of years have been an uptick in terms of what we would see from a normalized standpoint. That includes investments in a value-added chicken facility in Virginia. We're talking about building a bacon facility in Kentucky. We've also built multiple plants in China, another one in Malaysia. So it's really been a lot going on at the same time, and we would expect that to all roll off at the end of calendar 2023. But I think just to put in context of broader capital allocation priorities, we always talk about, number one, building financial strength, number two, investing in our business, and number three, returning cash to shareholders.
And at that same time, in 2021 and 2022, that we were initiating the builds on these new facilities, we were also making some moves. We paid down a lot of debt in that time frame. And now we find ourselves in just a better financial position to endure, you know, what we project that is coming. I think it's probably fair to say, and we've talked about this a little bit in the past, from our initial projections around timing, I think that the drop-off, if you will, in beef operating margins was probably quicker and sooner than expected, I think, and we would have expected that to be, you know, a smoother glide path, which would have, you know, had a little bit smaller dislocation in terms of cash flow in the business.
I think also we didn't make the predictions about what was going to happen in chicken across the whole industry last year. But having said all that, we—again, in the good times when beef was making a lot of money and we were making some money in chicken, we were taking that and paying down debt. I think that we plan for a lot of different scenarios, as we think about 2024 and 2025 and beyond. I think in all scenarios, you know, we feel confident about continuing to return cash to shareholders and the levers that we have to pull in order to keep generating cash in the business.
Just following up on the leverage. Obviously, it's a bit elevated right now. The rating agencies, they tend to look through that, knowing about the cyclicality of the business.
Mm-hmm.
But how fast do you believe you can bring down leverage up to a more healthy level?
Yeah, I think that two things I would say on that. Number one, if you just look at where consensus projections are and what we've guided to for the end of this year, we're starting to get close to or at that 4x number. I think it would be premature to try to give a point in time as to when we think we should peak, just thinking about the LTM number, and we go into 2024. But I think it's safe to say that, again, maybe repeating myself a little bit, we feel comfortable with where we are. The conversations with our rating agencies account for and they're appreciative of the cyclical nature of the business. That just, I think, reaffirms the stable outlook.
We're constantly in communication there, and I think we're satisfied with where we are from a leverage standpoint. I mean, we don't want to run for an extended period of time, you know, at the level that we're seeing now even. Obviously, we want to look at that two times number, but I think we feel like the moves that we've made put us in a good position.
One of the things we've also talked a lot about in the past was the drive for more automation, which obviously in the industry is fairly complicated, particularly on the larger animals. Some of your CapEx has been dedicated to that, also in order to balance the higher labor costs. So if you think about urban need and maybe even just the possibility to really automate this business that is very manual, where do you see the right space opportunities, particularly in the larger animal category?
Sure. I'd say, probably speak more to Tyson in general, and, we still have plenty of runway relative to automation. It's an ongoing initiative that we have, and we're executing towards. We've got a great team that works on that, and really, it's a focus on everything in terms of where do we franchise specific automation efforts across our entire poultry portfolio, entire prepared portfolio. And then obviously, you pointed out the fact that there's some challenges relative to automation in, the red meat segment as well. So we've got a team that's focused on it. We've got some really good wins that are in place.
Obviously, we're going to franchise those and continue to scale that, and use our learnings and the opportunities in front of us to continue to kind of knock down those hurdles that are in front of us. And Brady's talking about automation. He uses the term franchising a lot. We also say, like, how do we go from projects to programs in terms of finding one you know isolated application and deploying that?...
I think, automation is one example of technology in the manufacturing floor, but, we've also made some interesting investments that we expect to help us be, you know, better decision makers around using digital tools, in our supply chain for business decision makers so that we can-- And that tends to be maybe, it's sometimes more universal and easy to roll out once you build the platform across the system, and I think that, we're excited about those investments as well.
And then one of the last topics that I wanted to bring up, just mostly you've been in the role in the past: sustainability. There's always, like, the negative news still about the beef's footprint on carbon and the environment. You obviously have a target to get net zero by 2050. Has anything changed on that? Where do you stand on that, and what are, like, the type of investments you're doing in order to reach those goals?
So I think there's a couple things to think about. When you think about our carbon footprint, you know, 70%+ is sitting, or excuse me, 80%-90% is sitting in Scope 3 in the supply chain. Significant majority of that is in beef. The next best, the next biggest group is in, our feed supply chain, which is part of our poultry business. So, but also indirectly, what happens in row crops influences our pork and beef business as well. I think that, when we look at what the marketplace is doing, I think there's a couple of things.
First off, we expect it to be a group effort, and what I mean by that is, it's gonna require consumers, our customers, academics, and NGOs, companies like Tyson, farmers, and producers to all work together to try to come up with solutions. What is great about the position that we're in is we sometimes like to say we're one of the biggest farm-to-table companies in the country, in the world. And so we're in this really special place to try to matchmake where the demand is, to drive through the solutions to pull through the solutions in the marketplace. To that end, we're really proud of and pleased that we were recognized by the USDA for a large grant to invest in climate smart agricultural commodities in our beef supply chain and row crop supply chain.
So I think we're feeling some validation out there with what's going on. I think that for us, we just wanna make sure that we're investing at the right level to be in a position so when that demand begins to materialize, we're in a place where we can serve our customers and consumers, you know, with the adequate solutions related to this stuff. I think the other component of the issue that we talked about is all around. There's, I think, a building thread around biodiversity, and I think we'll start to see some interesting and exciting developments in terms of how we manage that as a food company.
Perfect. John, Brady, just about a minute out, so we'll cut it down. Thank you very much. Gonna head over to the breakouts if there are more questions. And, thank you very much for joining us this afternoon.
Thank you.
Thank you.