Tyson Foods Inc - Class A (TSN) — Q4 2022 Earnings Call Transcript

Hello, and welcome to the fourth quarter fiscal 2022 earnings conference call for Tyson Foods. Prepared remarks today will be provided by Donnie King, President and Chief Executive Officer; and John R. Tyson, EVP and Chief Financial Officer. Additionally, Shane Miller, Group President, Fresh Meats; Stewart Glendinning, Group President, Prepared Foods; David Bray, Group President, Poultry; and Amy Tu, Group President, International and CAO, 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 to our webcast. During this call, we will make forward-looking statements regarding our expectations for the future. These statements are subject to risks, uncertainties and assumptions which may cause our actual results to differ materially from our current projections. Please refer to our forward-looking statement 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, the 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. I will now turn the call over to Donnie.

Thank you, Brandon, and thank you to everyone for joining us for the call. Earlier today, we announced our fourth quarter and total fiscal year 2022 results. We showed record annual financial performance, including revenue, adjusted operating income and earnings per share. I'm grateful for the hard work and dedication of our team members. Our results would not have been possible without them. In this challenging macroeconomic environment with historically high inflation, consumer demand for protein remains relatively steady. We remain well positioned to serve this demand. We leveraged our diverse protein portfolio across multiple channels and brands to meet customer and consumer needs across a broad range of products and price points, serving an estimated one-fifth of U.S. protein consumption. As proven by our double-digit sales growth, our portfolio of value-added and branded products positions us uniquely to win. In addition to growing sales, we are also aggressively mitigating inflationary cost and SG&A expenses through disciplined revenue management and enterprise-wide productivity actions, including investments in automation to improve operational excellence and efficiency. As we progress our efforts to be the most sought-after place to work, we continue to listen to our team members' needs and invest in areas like childcare to provide a better quality of life for our team members. We're beginning to see results from these investments through improved staffing levels and reduced turnover. Before I discuss our financial performance, let me provide a bit of strategic context. We have a strong and disciplined strategic growth plan. In this past year, we continue to methodically execute against this plan as we strengthened our position as a global protein leader. Our growth strategy is built on five key pillars: 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. I'm pleased to report that we have executed on each of these imperatives and delivered what we said we would, entering the fiscal year. Our commitment to strengthening our position as a global protein leader and driving value creation for our shareholders is our most important goal. Having the right leadership team in place is also imperative as a global protein leader. To accomplish this, we recently announced changes in our executive leadership team, which we believe will drive improved results across our organization. Overall, we feel good about our performance. We saw a lot of really good things. We delivered record sales, revenue and earnings. The Chicken turnaround progressed as promised. Beef performed better than expected. Prepared Foods is seeing positive volume momentum exiting the year. With that strategic context, let's turn to our financial performance. Compared to our initial fiscal year guidance, we exceeded our total company sales and Beef margin guidance. We met guidance on Chicken and Prepared Foods margins. We managed our balance sheet and sit today at a leverage ratio comfortably below our guidance. Sales improved 7% for the fourth quarter and 13% year-over-year. We delivered record sales revenue as a company and across each of our four largest operating segments. We delivered record annual adjusted operating income of $4.4 billion, up 3% over the prior year. As expected, our fourth quarter earnings were lower compared to the prior year, but this was almost entirely due to record strength in Beef a year ago. Our operating income performance translated to adjusted earnings per share of $1.63 for the fourth quarter and a record $8.73 for the full year, up 5% from last year. Turning to our results on volume. We're continuing 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. We saw benefits of our efforts in the fourth quarter as total company volume increased 2.1%. We are building positive momentum and remain confident that our strategy will enable us to grow volumes across all segments long term. Chicken volumes increased 1.1% in the quarter compared to the prior year, driven by increased domestic production. In Prepared Foods, volumes were relatively flat in the quarter compared to the prior year. We are gaining momentum delivering sequential quarterly improvement, driven primarily by the strength of our retail brands. The categories in which we play continue to be highly consumer-relevant with the vast majority remaining elevated relative to pre-pandemic. In a few slides, we'll discuss our strong share performance. Compared to prior year, Beef volumes were up 5.1% for the quarter, driven by higher head throughput and carcass weight, improving from a full year volume deficit of 1.5% in the third quarter. We finished the year relatively flat. Pork volumes were down 1.1% for the quarter compared to prior year due to limited hog supply and reduced export demand. In International, volumes continue to grow, up 7.3% compared to the prior year quarter driven by our investments in capacity, innovation and brands that support market share growth. As we look ahead, one thing that excites me is the momentum I see in our branded retail business. It is evident that we are delivering the brands and products that consumers want. With our iconic retail brands, Tyson, Jimmy Dean, Hillshire Farm and Ball Park, Tyson core business lines outpaced total food and beverage and our peers in growth, up 18% in volume sales in the last 13 weeks compared to pre-pandemic levels per Nielsen data. According to Nielsen data, Tyson core business lines grew volume share by 2.6 points this quarter compared to pre-pandemic levels, while also growing share relative to a year ago. We continue to be the market share leader in the majority of the retail core categories in which we compete while also gaining share in 7 of these 9 core categories. We experienced the greatest share gains in frozen protein breakfast, smoked sausage and corn dog category. Our brand strength relative to our peers is undeniable as Tyson, Jimmy Dean, Hillshire Farm and Ball Park all hold favorite brand status with consumers in the categories in which we compete. Many of our retail businesses continue to outperform total food and beverage and remain highly relevant to consumers and therefore elevated in consumption. Consumers will continue to spend on relevant categories and brands they know and trust. This data shows the recovery we're seeing versus a year ago and the momentum we are gaining as we move into fiscal 2023. We have made steady progress improving fill rates and on-shelf availability as we focus on serving our current customers and attracting new customers to grow our distribution and volume. Additionally, we took various degrees of pricing in our key categories earlier this fiscal year to offset inflationary cost pressures. Recently, we have seen competitors followed by increasing their prices nearing Tyson's price gap relative to our competitors. This is supporting improved volume performance across our portfolio of prepared foods products as we are continuing to see price elasticities remain below historical levels. We're investing strategically in merchandising and advertising to support the long-term health of our brands, as their strength enables continued growth in both dollar and volume retail share. These factors, along with our strong business fundamentals, resulted in sequential quarterly share growth in many of our key retail categories, and we expect our retail share growth to continue. While the foodservice industry has yet to recover to pre-pandemic traffic levels, the Tyson Focus 6 group is outpacing both total broadline and respective categories in volume sales, up 18.9% and 0.9 share points in the last 52 weeks compared to last year according to NPD supply track data. The Tyson Focus 6 group composed of value-added chicken, breakfast sausage, dinner sausage, pepperoni pizza toppings, bacon and Philly Steak is also up 1.7 volume share points in the last 52 weeks compared to pre-pandemic levels. We believe strongly in our foodservice portfolio and are confident there is immediate and long-term growth ahead of this business as we align with key growing customers and execute our strategy across all categories to build momentum for the future. Our team members are essential to providing the products to our customers and consumers demand. Staffing levels and the impact on operational throughput were a challenge in our business. We continue to make significant investments in our team members' experience, prioritizing these three key areas of health, safety and well-being, total rewards, and team member growth and our One Tyson culture with digitalization as a key enabler. We're now seeing business results from investing in becoming the most sought-after place to work. Examples of these investments are free education, childcare solutions, citizenship support, transportation, maternity and paternity leave and expanded mental health and well-being benefits. In August, we received national recognition for our innovative ridesharing program benefiting team members across the nation. The program provides an option for team members who may have difficulty accessing reliable transportation to get to work and is improving their quality of life. Investments in enhanced benefits, digitalized processes and tools and career growth opportunities for our team members are paying off. In October, we announced our One Tyson corporate office consolidation to world headquarters in Springdale, Arkansas. The move will enable excellence and execution by bringing our corporate business unit roles together on one campus, driving a culture that optimizes collaboration, innovation, accelerates speed and facilitates career growth for our team members. The feedback we've received from our customers for this change has been well received. These investments we're making in our people are part of our broader effort to evolve our business from an environmental, social and governance perspective. Today, we are focused on 3 core pillars of our ESG framework, the formula to feed the future. Those 3 pillars are reimagining people and community impact, driving product responsibility from farm to table and working toward achieving net zero. In July, we released our sustainability report for 2021, which highlights our ambition to become the world's most sustainable and transparent protein company. In addition to the investments in people mentioned, we also highlighted in our report our efforts around animal welfare, sustainable packaging, minimizing waste, water stewardship and working within our operations and supply chain to reduce emissions. Significant progress was achieved in the past fiscal year in improving our scores and metrics within ESG rating agencies. We are particularly proud of a more than 30% increase in our Dow Jones Sustainability Index score year-over-year, and we're taking more steps to continue to improve our standing with ESG stakeholders. In the past fiscal year, our productivity program outperformed on our commitments, delivering over $700 million in savings impact across all components of our business. This performance indicates how Tyson has remained focused on optimizing our business processes, digitalizing our supply chain and increasing automation and aggressively managing SG&A across our operations. We expect the productivity program will continue to outperform our original expectations of more than $1 billion in recurring savings by the end of fiscal year 2024. The program is now on track to deliver this commitment by the end of fiscal year 2023, a year earlier than expected. As mentioned before, these recurring savings support the partial offset of inflationary pressures while at the same time, improving our competitiveness in the marketplace. Automation remains a top priority, and I'm very pleased with the aggressive rollout of automation technologies across all segments in fiscal year 2022, including continuing to scale debone automation in our poultry operations and pack-out automation across all businesses. I will now turn the call over to John to walk us through more detail on our financial results for the fourth quarter.

Thank you, Donnie. Let me turn first to a summary of our total company financial performance. We're pleased to report resilient fourth quarter and record annual performance in the fiscal year. Sales were up for both the fourth quarter and fiscal year, benefiting from our pricing initiatives to offset the increase in cost of goods. Volumes were up for the fourth quarter and relatively flat for the full year as we overcame supply constraints in an elevated inflationary environment pressuring consumer demand. Looking at our sales results by channel for the fiscal year, retail drove $1.4 billion of top-line improvement, while the ongoing recovery in the foodservice channel drove an increase of $2 billion. Fiscal year sales in international markets, including both domestically and internationally produced products, were $1.3 billion greater than the prior year as we leveraged our global scale to grow our business. Donnie covered our operating income and earnings per share results, so I won't repeat. Slide 16 bridges operating income for the fiscal year, which was $126 million greater than the fiscal 2021. We significantly improved earnings in our Chicken segment and generated higher earnings in Prepared Foods, which more than offset the expected decline in Beef earnings. Our pricing actions, which offset the higher input costs, led to higher sales during the year. We saw notable year-over-year increases of 20% to 25% across the business in cost of goods, including labor, feed ingredients, live animals and freight costs. Investment in growth is our priority. To facilitate this growth, an additional $80 million in SG&A expenses compared to last fiscal year was invested in team members, marketing, advertising and promotional spending to support our brand and digitalization initiatives, among other things. While SG&A expenses increased, SG&A as a percentage of total sales was down to 4.2% from 4.5% in the prior fiscal year, reflecting our continued focus on assessing all expenses across the business to identify non-value-added spending and continuing to build leverage across the scale of our business. As mentioned by Donnie, we significantly accelerated our productivity actions to improve efficiency across all segments during the past year, which has had a meaningful positive impact on our margin profile. Our year-to-date results clearly demonstrate that our diverse portfolio supports our growth objectives of growing faster than the overall market, improving operating margins and driving strong returns for our shareholders. Now moving to the Beef segment. Sales were approximately $4.9 billion for the fourth quarter, down 3% versus the same period last year, but up 10% for the fiscal year at nearly $20 billion. Sales in the quarter remained strong, supported by higher volume but offset by lower average sales price. Global consumer demand for beef products remains strong. We expect volumes to remain stable next year amid tightening supply of cattle, offset by improved labor participation, supporting higher plant productivity. On expenses, we incurred greater costs during the fiscal year compared to the prior year as live cattle costs increased approximately $2 billion. But we have sufficient livestock available to finish the year, and we continue to have ample supply to support our operations. We delivered segment operating income of $2.5 billion for the year, and our fiscal year operating margin of 12.5% was a very strong performance by historical standards. We still expect future beef margins to be in a normalized range of 5% to 7% over the long term. Looking next to the Pork segment. Sales were approximately $1.6 billion for the quarter and $6.4 billion for the fiscal year, down 3% and up 2%, respectively, versus the prior year. Global demand remains challenged by high domestic retail prices and the strong U.S. dollar, making U.S. pork relatively expensive compared to alternative sources globally. For the year, the average sales price increased 4.1%, offsetting the decrease in volume of 1.9%. We expect these headwinds to impact pork volumes next year to a lesser extent than the past year. Segment operating income and margins were $198 million and 3.1%, respectively, for the fiscal year. The operating income deterioration was driven by herd health issues negatively impacting hog costs and a constrained cutout compressing pork margins in the elevated inflationary environment, increasing operating costs overall. While the Q4 result was negative operating income, we do expect to flip back to positive returns in Q1. Moving now to Prepared Foods. Sales were approximately $2.5 billion for the quarter, up 12% relative to the same period last year. For the fiscal year, sales increased 9.4%, driven by the higher average sales price increase of 13.5%, partially offset by the volume decline of 4.1%, in which 0.9% of the decline was due to the sale of our pet treats business. Volume performance improved in the fourth quarter as our investments in brands and merchandising drove an increase in portfolio market share. Our fourth quarter result, which was roughly flat versus last year, was our strongest performance this year and better than the competition, which underscores the strength of our brands. We expect volume to grow sequentially next year, driven by foodservice recovery, improved supply and continued investment in our brands. Operating margin for the segment was 5.8% or $147 million for the quarter, up 4.1% compared to last year. For the fiscal year, our operating margin was 8.1%, up 0.5% compared to the prior year at $782 million. Now, on to the Chicken segment's results. Sales were $4.6 billion for the quarter, up 19%. And for the full year, sales were up 24% at $17 billion. Volumes improved both for the quarter and fiscal year as we gained momentum in the improvement of our live operations. We expect this operational improvement to continue driving sequential quarterly volume growth into next fiscal year. Average sales price increased by approximately 18% for both the quarter and the fiscal year compared to last year. Our shift in pricing mechanisms to more variable structures, allowing us to be more agile in response to market conditions, was a key decision by our management team. Chicken delivered operating income of $337 million or 7.3% for the fourth quarter and $926 million or 5.5% margin for the total fiscal year. Respectively, this represents margin improvement of 10.2% and 5.3% over the prior year comparable periods. This quarter, we surpassed our goal of processing 40 million head per week by the end of the fiscal year. We intend to continue to grow next year to 42 million head per week, enabling us to maximize our fixed cost leverage and grow market share along with our value-added business. With live operations on a positive trajectory, we will continue optimizing our plant network and portfolio mix to maximize the profitability of our Chicken segment. I am pleased with the tremendous progress we have made against our roadmap to restoring competitiveness in this business. However, there's still work to do to attain industry-leading performance, and I look forward to more great things to come from the team on this one. Now turning to slide 20. Our healthy cash flows and improved balance sheet have continued to support our disciplined capital allocation approach with a focus on total shareholder return. We remain focused on building financial strength, investing in our team members and business and returning cash to shareholders. We produced $2.7 billion of operating cash flows in fiscal year '22. This is after funding a $2.1 billion increase in working capital, which included an investment of $1 billion in inventory to better service our customers as well as the impact of cost inflation. Additionally, we had other planned working capital outflows associated with taxes paid on the divestiture of our pet treats business, payment of a portion of deferred payroll taxes from the CARES Act and the settlement of certain legal accruals. Our leverage ratio finished the year at 1.3 times net debt-to-adjusted EBITDA, demonstrating our powerful balance sheet and our continued capital allocation optionality. Investing in our business for both organic and inorganic growth and operational efficiency will continue to be an important priority as we utilize a disciplined capital allocation and balance sheet management approach to invest in desirable projects, brands, categories and geographies. We also maintain a disciplined M&A approach, investing in opportunities that fit well with our existing portfolio or our growth objectives, such as the recent acquisition in Saudi Arabia, providing access to the growing Halal market. While M&A will always be a consideration for growth, we're focused first on investing in growth in our existing footprint. This will facilitate Tyson increasing production capacity, market capabilities and profitability, providing return on capital generation above the market and at a minimum of 12% return on invested capital for our shareholders as our long-term target. To address projected demand growth over the next decade, we invested $1.9 billion in our business in the past fiscal year, focused primarily on new capacity and automation objectives. Finally, we remain committed to returning cash to shareholders through both dividends and share buybacks. For the fiscal year, we returned nearly $1.4 billion in cash to shareholders through $653 million in dividends and $702 million of share repurchases as we continue to prioritize shareholder return. Let's now discuss the fiscal 2023 financial outlook. We anticipate total company sales between $55 billion and $57 billion, and also expect volume growth compared to the prior fiscal year. Both total company sales and volume growth in fiscal '23 will largely be driven by our Chicken, Prepared Foods and International businesses as we work to run our plants full, optimizing our existing footprint and utilizing new capacity expansions. To grow volumes in our Chicken, Prepared Foods and International businesses, construction is in progress of six new plants, all to be in operation by the end of fiscal 2023. We're building a value-added chicken plant in Danville, Virginia, and we're growing our bacon business with a new location in Bowling Green, Kentucky. We're also expanding our footprint and increasing volumes outside the U.S. with three plants going live in China and one in Malaysia during 2023. These investments in the recently announced joint venture partnerships are fueling future growth, both organically and inorganically in our international business. We remain focused on growing internationally and on those fastest-growing protein consumption markets in the world. Now, as we touched on earlier, our productivity program is expected to deliver an additional $300 million to $400 million of savings during fiscal 2023 as we build upon the foundation laid across the enterprise this year with a focus on operational and functional excellence, digital solutions and programmatic automation initiatives. To continue to capitalize upon the organic growth opportunities ahead for our business, we expect to increase CapEx spending to approximately $2.5 billion during fiscal 2023 to pursue a healthy pipeline of projects with strong return profile. We currently expect our adjusted tax rate to be around 23%, and we anticipate net interest expense of approximately $320 million. Liquidity is expected to significantly exceed our minimum target and net leverage is expected to remain below 2 times net debt-to-adjusted EBITDA. We expect strong and meaningfully better operating cash flows in fiscal 2023 as we do not expect to invest as much in working capital as experienced in the past fiscal year. Now, finally, let's look at how each of our segments will contribute to our total company performance. As mentioned earlier, we continue to expect future Beef segment margins to be in a normalized range of 5% to 7% for the long term. However, based on current market dynamics, we expect fiscal 2023 to be at or below the low end of that range. In Pork, we expect return on sales between 2% and 4%. Due to normal seasonality for our Pork segment, we expect the front half of the year to outperform the back half of the year. We continue to invest behind our expanded case-ready capacity, increasing volume through organic growth with new and existing customers, underpinned by product innovation for both our Beef and Pork segments. Prepared Foods is expected to deliver margins during fiscal 2023 between 8% and 10%, driven by volume growth, productivity and disciplined revenue management. We expect volume, sales revenue and operating income to all increase through the fiscal year with stronger quarters in the second half of the year compared to the first half of the year. In Chicken, our operational turnaround progress is as forecasted, and we are now increasing our focus on optimizing our mix to maximize profitability of our value-added portfolio. We expect to deliver full year margins of 6% to 8%, driven primarily by progressively growing volume and sales revenue while at the same time realizing additional operational improvements. In international, we anticipate improved profitability from our operations in fiscal 2023 driven by volume growth from capacity expansions ramping up. Our segments individually and in aggregate have clear and compelling roles within Tyson's portfolio strategy. We make products that provide options for consumers across proteins and up and down the value chain, delivering performance that supports the Company's long-term earnings objectives and desirable returns for shareholders. To sum it up, fiscal 2022 was a record year in revenue, operating income and EPS. As a result, we are in a strong financial position as we enter fiscal 2023 to support continued investment in our existing footprint, new capacity expansion, more automation and support for our brands as we continue to grow our business. Now, before I turn the call over for your questions, I want to take a moment to address an important issue. I'm sure you've seen the news about the recent incident involving me. I'm embarrassed and I want to let you know that I take full responsibility for my actions. I also want to apologize to our investors as I have to our employees. This was an incident inconsistent with our company values as well as my personal values. I just wanted you all to hear this directly from me and to know that I'm committed to making sure this never happens again.

Thanks, John. I would like to take a moment to make one final point. Like John, the Company takes this matter seriously. Tyson Foods has a strong, robust corporate governance process. Our independent Board of Directors is overseeing a thorough review of this matter, and I'm confident in this independent process. With this said, and before I turn the call back over to Brandon for your questions, I'd like to remind you that 2022 was a record year for sales, operating income and EPS, and we look forward to a strong 2023.

Thanks, Donnie. We will now move on to your questions. Please recall that our cautions on forward-looking statements and non-GAAP measures apply to both our prepared remarks and the following Q&A. Operator, please provide the Q&A instructions.

So, I guess my first question is thinking about the outlook for fiscal 2023 in Beef and you're kind of staying at or below the low end of the normalized range. Clearly, there's been some herd liquidation that's been happening in the U.S. industry, and cattle prices have risen. I guess, I'm trying to understand if we're already at or below the low end of that normalized range and the cattle herd was going to keep shrinking. Can you help us think about how we would ever get back to that normalized range in the next few years with the smaller herd? Talk about kind of what you're doing from productivity, from a mixed, case-ready capacity that would be a balance to margins and what would seem like a more challenging kind of multiyear outlook?

Hey Adam, this is John, and thanks for the question. I think, look, first, I'd reiterate what we see as the long-term guidance for the Beef business. And we're not, at this point, going to give quarterly guidance. What I think I'd say is we're at Tyson, not necessarily immune to the cattle cycle, but there are a couple of things I'd point out that maybe make this cycle a little bit different. Number one, we see the quality, generally speaking, around the industry is stronger and better that has supported demand for beef cattle. I think secondly, the global demand is pretty strong. That's a little bit tempered by FX that we're seeing in our business. But generally speaking, I think that makes this cycle that we're heading into a slightly different. I'll let Shane maybe comment on some of the investments we're making around the business and give a little more detail as it relates to the outlook on Beef.

Thanks for the question, Adam. John touched on a couple of things that are a bit different this cycle versus previous cycles. First, the quality is generally better this time around than the last time we went through this cycle. The second component is globally, beef has remained and continues to be a strong demand product entering different channels throughout Asia. Also, we're seeing interest from different parts of the globe that historically have not been big buyers of U.S. beef. Finally, while we do have strong quality meat products, we also have specialty products like fat and oils that are significant contributors. Overall, I believe we have an opportunity here to scale and do much better than in the last cycle. All of these factors provide our team confidence that we can continue to deliver strong returns.

Okay, that's helpful. If I could just switch gears to the chicken business. If you think about the exit margins coming out of fiscal fourth quarter at 7.3%, can you just help us think about the trajectory of chicken from here? I think there was some mark-to-market derivative gains in the quarter. But how do we think about the volume scaling kind of mix contribution? Could you give some insight on what would get you to the 8% versus the 6% at the upper and lower bounds of your guidance range?

Thanks, Adam. This is Donnie. Thanks for the question. The Chicken turnaround continues. We've made a lot of progress. David and his team have got our chicken business in a better place than it's been in some time. But we haven't arrived yet. There are still things to do. We are improving sequentially each quarter and would expect that to continue. We're guiding to a 6% to 8% for '23, and we feel very good about that. We feel good about investing in our Tyson brand and continuing to use that. Let me just flip it over to David, who has been doing all the work, and let him add some additional color for you.

Thank you very much, Donnie. You said it well. We have made progress in 2022, but there's still a considerable amount of work to be done as we approach 2023. Importantly, our goals have not changed within this segment. We are aligned on ensuring that we service our customers while running our facilities and maximizing production. Our team is focused on servicing our customers, filling our plants, and taking care of our team members. We have a strong plan for 2023, and we feel confident regarding the guidance between 6% to 8% that John mentioned.

I want to ask about the Prepared Foods business, and you talked about the cadence of improvements that we should expect as we move through the year. Could you talk about the critical path to achieve that cadence of improvement through the year? And if we think about the pricing that you've taken today, is that sufficient to cover the costs to get to that 8% to 10% range, or is there additional pricing that you might need to take?

Let me just say that, and I'll pass it over to Stewart. We guided to 8% to 10% in 2023. Behind productivity, capacity utilization and mix improvements, we anticipate improved volume sales and AOI for '23. Our foodservice recovery is at a slower pace than expected, but we feel very good about this segment's performance. I'm personally very proud that we have Stewart leading this business. Stewart, why don't you add some comments?

I'd start by saying that it's great to run this business because when you look at the construct of the Prepared Foods business, on the retail side out of the 9 categories, we've got the number 1 position in 8, and on the foodservice side, we're in about 19 categories, in the majority of which we've got the number 1 position. We're starting from a position of strength just from a portfolio standpoint. As we go through the year, of course, we had continued inflation despite taking pricing earlier in the year. As we move through '23, we should be recovering from the 5.8% to get to that 8%. There are a couple of big drivers behind this—first and foremost is volume. We lost some foodservice volume, and we're working on getting that back. Our fill rates still have opportunities for improvement, and there is volume sitting in our order queue to capture. In terms of pricing, we'll see how the year goes. In this fourth quarter, we saw strong volume performance, with some stemming from increased promotions. However, our promotions were in line with our competition. The back half of the year is also looking promising as we have strong plans for cost reduction this year that will help us reach that 8% to 10%.

Okay. Great. If I could circle back to the chicken business, I believe your goal from the Investor Day in 2021 was to be at an 84% hatch rate as of around right now. Is that where you are? Are we on track? You mentioned commentary in your slides that you're on track with your hatch improvement goals. Are we now at a new cruising level and shouldn't expect further improvement from there, or could we see continued improvement?

We are well on track. We are pleased with the work our live team has done in getting this put back in a position where we're no longer having daily conversations about our hatch rates. So, we are on track and feel good.

Great. Can I ask about the productivity savings program? You obviously overdelivered in fiscal '22 relative to where you were expecting to get to. Can you talk about what it was that went better than expected? And I guess linked to that, a second question, if the automation part is going faster than expected, how quickly is total employee count coming down? And how much more is there to go on that front? Thank you.

Sure. Thanks for the question. The productivity program, as we laid it out, was a 3-year program, and we're well ahead of that in 2022. We've broken the performance into really three buckets—automation, digital, and operational and functional excellence. All of those are working together really well. We believe we will meet our commitment by the end of fiscal year '23. It seems like every time we turn over a rock, we find something new and we capture that, and we'll continue to do that. The automation specifically is progressing faster than planned. The automation is aimed at eliminating laborious and difficult, high-turnover positions. We are focusing on the debone automation project, as well as pack-out automation across all businesses and launching a digital enablement group as we utilize technology throughout Tyson. We'll keep updating you on our progress quarterly in this area.

Great. And anything on the headcount side of things?

I have nothing to report on that now. We are eliminating positions and eliminating difficult jobs, and we are reassigning people to open positions throughout the company.

Look, those of us who have followed Tyson for a long time are used to the Company putting people with a lot of brand management expertise in charge of Prepared Foods because it's a heavily branded food portfolio. Putting people into the CFO role who have 20-plus years of experience in finance track with this latest reshuffling, however, seems to be the opposite. Can you speak to how the organization is responding culturally to these decisions, especially in light of the closing down two of your headquarters, consolidating into Springdale? Donnie, what are you doing to mitigate execution risk during this high turmoil period?

Thank you. In short, we have a plan. Let's start with the office consolidation you referenced. This is something that we've talked about for several years. We made the decision to become a better version of ourselves. We're still working through the finalization of which team members are moving and which ones are not. We realize it's a difficult decision and we're committed to providing the resources. That involves about 1,100 team members. We want to help those team members to find yes in terms of moving here with their families. I would just characterize it as integration a few years later. Our succession planning process is very robust. We're working on that program, and while we did make some decisions, I'm pleased with the decisions made around our leadership, including John, Stewart, and Amy Tu. These are talented individuals with significant experience and they are leading the company in a positive direction.

I appreciate that, Donnie. Maybe a follow-up. When do you expect to give more clarity to those 1,100 people? In my experience, people want to know stuff like that sooner than later, how quickly can you move?

We've been working and meeting almost daily. We've put together a team to execute the plan we have in place. We're inviting every team member to join us here in Northwest Arkansas. We've informed them about their intentions. Today was the day we needed to know those intentions, and we've approached this in a couple of ways. We want team members to be here with us, and we've been successful in recruiting. However, some might not be able to move, so we will create an opportunity for them to stay until a suitable replacement and training can occur. This way, we ensure no business interruption.

My question is regarding your CapEx plans for the next year. You provided some color on that, but could you provide a little bit more breakdown on the different items that you're spending and what should we expect more in the medium to long term? Thanks.

You're kind of muffled on our end. I think your question was about CapEx and wondering if we could expand upon that. Is that correct?

Exactly. Yes.

I think, look, what we've talked about already this morning is our plans for heavier investment in our business compared to historical years. In part, that's driven by the inflationary environment we're in. The key takeaway is that we see a lot of opportunities in productivity improvements, automation, and some capacity expansion. Regarding priorities, our value-added segments, chicken, prepared foods and fresh meats businesses are where we see opportunities for growth and optimization. Automation is a significant part of our strategy, and we expect sustained productivity as we reallocate team members to different operations. We're confident in the programmatic investments we're making around our automation agenda.

I wanted to ask about your guidance for the sales range of $55 billion to $57 billion. I do appreciate that there are six new plants coming on and that you will have some additional pricing and mix improvements. One question investors have is if it's reasonable to expect the high end of that range, given the potential trade-down as consumers face challenges and the current chicken prices. Could you expand a bit on how much production those six new plants are expected to add cumulatively? That would help us bridge the gap to that higher end.

I mean, we feel confident in the outlook. Could we move to the higher side of guidance? Perhaps. We're guiding to have a really good year. We factored in inflation, growing share in both dollar and volume, and we've included factors like drought, the conditions in the Beef segment, and the strength of the dollar when it comes to exports. I would tell you we've considered these elements when crafting this plan. We rolled it up as a team, and we all signed off on it. I'll pass it to John to add any further insights.

Yes, Donnie, that’s a fair summary. There's a balance in our projection between volume growth and sales growth in terms of pricing. While we feel confident in the mix between the two to achieve the range we provided, the capacity coming on line with new builds depends on timing, but overall we feel confident in the range as a roll-up of multiple factors.

Okay. And then a quick follow-up. You have done really well with getting your productivity at an accelerated pace. I don't think—I may have missed this—but did you mention productivity after '23? Previously, you suggested guidance into '24. Is it fair to assume that there will still be significant productivity savings after '23 now that you've pulled those forward? If so, when might we get a little bit of color on the dollar percentage amount?

Great question. First, we had a good '22, and we feel confident in delivering a year early in '23. Our nature is to have a continuous improvement mindset, identifying further opportunities for productivity and efficiency. You can expect that another program or continuation of this program will be in the future. I don't have specifics at the moment. John, anything to add?

No, nothing to add, Donnie. Thanks.

John, I just wanted to clarify some points regarding the volume growth assumptions among segments. For Chicken, you're calling for around a 5% growth in '23, based on weekly slaughter levels. Just confirming that is accurate. For beef, I want to understand if I heard you correctly. Even with USDA expecting a decline in mid-single-digit volumes, are you suggesting stability for the year?

Sure. We have provided overall indications on volume in each segment. Several factors contribute to the sales and AOI numbers we're targeting in '23, including volume. For poultry, we feel comfortable about sequential growth as we head into FY23. For Beef, despite USDA's numbers, we are investing in the business model around supplier relationships and valu-adding the parts of the business while growing in specific channels; that will preserve our outlook for ‘23. Shane, do you want to add to that?

Yes. Peter, keep in mind that with beef, you're lapping a period a year ago with still a COVID-induced reduction in volumes. Our operations have improved to processing 5 days of animals effectively with 6 days acting as a flex day. There will be challenges like drought conditions impacting supply, but we believe we'll have ample livestock to work with.

Got it. Thanks, that is helpful. A follow-up for Donnie regarding Chicken. Since you transitioned more contracts to a variable pricing structure, can you remind us how the current commodity chicken market impacts pricing relative to history?

Yes, we feel confident. A significant portion of our portfolio is value-added, and much of it addresses the pricing variability associated with segments like fresh chicken. Historically, we haven't gotten the highs or the lows of the market; we trade within a range, deliberately aiming for predictable results.

Donnie, you covered that well, especially regarding our exposure to big bird breast meat. We maintain strong customer relationships at Tyson, and our variable pricing ensures consistent discussions with them regarding price movements. Progress continues, even through soft times and seasonality.

Hey John, Stewart, could you tell us what key actions you expect to undertake in the next 6 months? How do you foresee your role evolving and how might you contribute to the changes needed?

Hey Ken, this is John. To address the overall leadership team, I've been on the executive team for several years and involved in senior leadership for even longer. Expect continuity rather than substantial change; from a capital allocation and strategy standpoint, that is our direction. Feel free to check back with me in a quarter or so for updates.

I spent 13 years prior in the beer business, with substantial experience running branded businesses. I see huge opportunity in the Prepared Foods space; while we've seen strong share, volume could be better. My focus will be on filling orders and leveraging our capacity. We've also identified a leaner approach to our cost structures with growth goals in mind, and there's significant opportunity on the innovation side as well.

Stewart's extensive experience aligns with our goals to be more agile and deliver results as we move forward. John Randal has escalated responsibilities within Tyson that complement the transitions, and Amy's background with M&A and strategy enriches our leadership. We're confident these individuals will navigate us positively into the future.

We have a powerful and diverse portfolio across proteins, channels and geographies. We are improving operational efficiencies and have a team that is positioned to take advantage of the opportunities in front of us. For these reasons, we are confident we will grow revenue and maintain strong profitability in fiscal year 2023 and have future long-term growth ahead of us. At Tyson, we're focused on making food affordable, accessible and nutritious for customers and consumers around the world. Thanks again for your interest in Tyson Foods. We look forward to speaking again soon.