Tyson Foods : First Quarter 2023 Transcript

Tyson Foods

First Quarter 2023 Conference Call

February 6, 2023 at 9:00 a.m. Eastern

CORPORATE PARTICIPANTS

Sean Cornett - Vice President, Investor Relations Donnie King - President, Chief Executive Officer

John Tyson - Executive Vice President, Chief Financial Officer Brady Stewart - Group President, Fresh Meats

Stewart Glendinning - Group President, Prepared Foods Wes Morris - Group President, Poultry

Amy Tu - President, International & Chief Administrative Officer

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PRESENTATION

Operator

Good morning and welcome to the Tyson Foods First Quarter 2023 Earnings Conference Call. All participants will be in 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 your touchtone phone. To withdraw your question, please press star then two. Please note today's event is being recorded.

I would now like to turn the conference over to Sean Cornett, Vice President, Investor Relations. Please go ahead, sir.

Sean Cornett

Good morning and welcome to Tyson Foods' Fiscal First Quarter 2023 Earnings Conference call. Prepared remarks today will be provided by Donnie King, President and Chief Executive Officer and John R. Tyson, Executive Vice President and Chief Financial Officer. Additionally, Brady Stewart, Group President, Fresh Meats; Stewart Glendinning, Group President, Prepared Foods; Wes Morris, Group President, Poultry; and Amy Tu, President, International and Chief Administrative Officer, will join the live Q&A session. We have prepared presentation slides to supplement our comments, which are available on the Investor Relations section of the Tyson website and through the link on our webcast.

During today's call, we will make forward-looking statements regarding our expectations for the future. These forward-looking statements made during this call are provided pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include comments reflecting our expectations, assumptions or beliefs about future events or performance but 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 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 will turn the call over to Donnie.

Donnie King

Thank you, Sean and thank you to everyone on the call for joining.

Earlier today, we announced our first quarter 2023 results. We delivered solid top line results with year- over-year revenue and volume growth and continued strength in our share position, providing momentum for the remainder of the fiscal year. Compared to record performance in the prior year, first quarter earnings decline was driven by weaker results in chicken, pork and beef, which more than offset strong performance in Prepared Foods.

It's important for you to know that we are uniquely positioned to win in an attractive global protein market. We have market leading brands across diverse portfolio that resonate with consumers as

Tyson Foods February 6, 2023 at 9:00 a.m. Eastern

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proven by our year-over-year sales and volume growth. We serve an estimated one-fifth of US protein consumption and we are well positioned to meet consumer demand, which remains steady despite a challenging macroeconomic environment with ongoing elevated levels of inflation. As we navigate a complex and dynamic operating environment, I am grateful for our team members whose hard work and dedication make our business operations possible.

Five key pillars of our strategy are: transforming our team member experience, growing with our customers to service demand, investing in digital and automation to drive operational excellence, restoring competitiveness in our chicken segment and leveraging our financial strength to invest in the business and return cash to shareholders. In service of these long-term strategic imperatives, I'd like to emphasize that we continue to deliver on our commitments of growing volume by filling up our footprint, solving labor problems, investing in automation, and building inventory to meet customer demand with improved fill rates all while maintaining a focus on liquidity and financial health. We are confident these investments will pay dividends over the long run and we remain committed to methodically executing our growth strategy driving long-term value creation for our shareholders.

Now, let me take a moment to discuss our results and shed some light on some of the challenges and outlook. We went into Q1 with a good plan, but our overall results were impacted by a confluence of factors, including consumer and customer demand dynamics and the curve of the beef cycle, among other things. Allow me to touch on each segment.

As we have previously mentioned to you, we have been expecting beef to come under pressure for some time. With higher cattle prices, we expected overall harvest to slow down, but that hasn't happened yet. As such, we continue to draw on the herd, which continues to decline. This is putting pressure on spread margin in the business. We tightened our outlook range for the year.

For pork, when you account for mark-to-market derivatives in the number, we flip back to breakeven as expected, but given continued supply and demand dynamics, we lowered our outlook for the year by 200 basis points.

For chicken, when compared to expectations from last quarter, a few different things didn't go as planned. Most notably, demand didn't appear in the parts of the market where we had expected. As a result, we had to move things around and we experienced higher cost, a lower price environment and knock-on effects from a network standpoint.

And last, it's worth emphasizing our Prepared Foods segment, which delivered a great result for the quarter. We said we were going to grow dollar share and volume share with the strongest portfolio of brands in the categories where we compete and we have done just that. We are feeling good about the outlook for the balance of the year.

And our international business continues to build momentum in terms of volume and sales growth. With the end of COVID lockdowns, particularly in China, we expect good year-over-year comps. We will dive deeper into this during the discussion of segment results and the Q&A portion of the call.

Now, let's turn to our growth numbers. Sales improved 2.5% year-over-year. And as we delivered record first quarter revenue for a total company and individually in chicken, Prepared Foods and International Other, we are focused on driving growth in these segments, which will enhance our margin profile over time. We continue to see benefits of our efforts to optimize our existing footprint, add new capacity, adjust our product mix by plant, and match our portfolio more closely with customer and consumer needs.

Tyson Foods February 6, 2023 at 9:00 a.m. Eastern

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Prepared Foods revenues increased 8.8% for the quarter driven by both volume growth and pricing actions implemented in the prior year. Positive momentum continues to build in Prepared Foods, as it delivered sequential quarterly improvement in revenue since the fiscal fourth quarter of 2021, driven primarily by the strength of our retail brands.

Beef revenue was down 5.6% compared to prior year. Lower average sales price driven by the decreased value of beef cutout more than offset the increased volume from higher headcount throughput.

Compared to prior year, pork revenue was down 6% for the quarter. This was driven by decreased volume due to balancing supply with customer demand, partly offset by an increase in average sales price.

Chicken revenue increased 9.6% compared to prior year driven by volume growth from increased domestic production and pricing initiatives and an elevated inflationary cost environment.

In international, revenue growth remained strong, up 11.3% compared to prior year quarter. This was driven by our investment in capacity, innovation and brand to support market share growth.

In the next few slides, we will detail our success winning in retail marketplace with our advantaged brands in advantaged categories. The retail categories in which we participate are highly consumer relevant with the vast majority remaining elevated relative to pre-pandemic and demonstrating growth over the prior year. With our iconic retail brands, Tyson, Jimmy Dean, Hillshire Farm, and BallPark, Tyson Core business lines outpaced total food and beverage and our peers in volume growth, up 9% relative to a year ago per Nielsen.

Tyson Core business lines also grew pound share by 2 points this quarter relative to year ago per Nielsen, continued to be market share leader in most of the retail core categories in which we compete. We delivered both dollar and pound share growth in both the aggregate and across day parts compared to a year ago, most notably in the morning meal occasion. Our brands continue to perform well as we see elasticities below historical levels. Additionally, Tyson, Jimmy Dean, Hillshire Farm, and BallPark, all hold favorite brand status with consumers in the categories in which we compete, highlighting our brand strength relative to our peers.

Consumers spend on relevant categories and brands they know and trust. The trajectory of our Tyson Core business lines volume share growth shows the recovery we have seen since April and the momentum we now have. We have improved fill rates and on-shelf availability. Price gaps relative to competitors have narrowed while we continue to invest in merchandising and advertising to support our brands. These factors, along with other strong business fundamentals, resulted in sequential quarterly share growth in Tyson Core business lines commanding a 5-year record high market share of nearly 28%. It is evident we are delivering the brands and products that consumers desire.

While the foodservice industry is yet to recover to pre-pandemic traffic levels, the Tyson Focus 6 Group is outperforming pre-pandemic volume sales, up 2.7 and 1.7 share points in the latest 52 weeks according to NPD SupplyTrack data. The Tyson Focus 6 Group is also outpacing both total broadline and its respective categories, up 11.7% in volume sales and 0.6 share points in the latest 52 weeks compared to last year per NPD. We believe strongly in our foodservice portfolio and are confident in the path to continue to grow this business as we align with key growing customers to build momentum for the future.

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Our team members are essential to providing the products our customers and consumers demand. We are seeing business results from making significant investments to become the most sought after place to work by investing in our team members' experience. Recent highlights include expanding access to benefits with Day 1 eligibility, enhanced parental leave policies, expanding mental health benefits and citizenship support at no cost to our U.S. team members. In November, as recognition for our Tyson immigration program's commitment to improving the lives of immigrant team members, we received the prestigious Keeper of the American Dream award from the National Immigration Forum. We also just completed what we have been calling Project Next Frontier. We are setting the foundation for an HR shared service model focused on process and system efficacy and better overall HR service delivery for our team members, setting us up for savings in the future.

I am pleased to report we are also progressing as expected with our North American headquarters consolidation focused on building our OneTyson culture. In addition to realizing savings, we are collaborating, innovating and working with greater speed and agility to serve our customers. I would also like to thank our team members for their dedication that led to Tyson Foods number one ranking on Fortune Magazine's list of the world's most admired companies in food production category for the seventh consecutive year.

Following the strong outperformance of expectation in fiscal 2022, the productivity program is on track to meet expectations this fiscal year and to deliver the $1 billion of recurring savings commitment a year earlier than originally promised. We expect this program to translate from a onetime initiative to sustained year-on-year productivity improvements, supporting our bottom line on a continued basis.

Examples of initiatives in our productivity program include leveraging data analytics to improve inventory visibility, mitigating distressed pounds; a direct plant shipment program, which continues to bring on new customers and categories; removing miles from the roads and driving efficiency in our distribution network. This is an example of how our scale drives competitive advantage.

Investing heavily in automation, we recently rolled out automated sandwich hand wrap and burrito assembly capabilities as well as an automated line to serve snacking production. We have also continued to scale our chicken debone automation across multiple facilities and we are piloting a robotic tray pack machine that is showing promising results, expanding our smart factory program to digitize our plants to new sites as well as exploring opportunities to digitize our processes. Our progress displays how Tyson remains focused on optimizing our business processes, digitalizing the supply chain, increasing automation and aggressively managing SG&A across our operations.

Before I turn the call over to John to walk us through more detail on our financial results for the quarter some final comments. Our segments individually and in aggregate have clear and compelling roles within Tyson's portfolio strategy to deliver sustainable, high-quality growth at good value. We have a powerful and diverse portfolio across proteins and channels around the world. We have products for consumers across proteins and price points, delivering performance that supports the company's long- term earnings objectives and desirable return for shareholders. We are modernizing our operations with our productivity program and are building a team positioned to take advantage of the opportunities in front of us. Again, we entered Q1 with a good plan to execute our strategy. That led to solid top line growth and strong performance in Prepared Foods.

Market dynamics and some operational inefficiencies impacted our profitability. We see opportunities to become more agile and efficient, which will further improve our operational execution. We remain committed to executing our growth strategy and are confident we will grow volume, revenue and operating income in the back half of fiscal year 2023 and have a long runway of growth ahead of us.

Tyson Foods February 6, 2023 at 9:00 a.m. Eastern