Tyson Foods Inc - Class A (TSN) — Q2 2023 Earnings Call Transcript

Good morning, and welcome to Tyson Foods' Fiscal Second Quarter 2023 Earnings Conference Call and Webcast. 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 Meat; 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 all comments reflecting our expectations, assumptions or beliefs about future events or performance that do not relate solely to historical periods. These forward-looking statements are subject to certain risks, uncertainties and assumptions, which may cause actual results to differ materially from our current projections. Please refer to our forward-looking statements disclaimer on Slide 2 as well as our SEC filings for additional information concerning risk factors that could cause our actual results to differ materially from our projections. We assume no obligation to update any forward-looking statements. Please note that references to earnings per share, operating income and operating margin in our remarks are on an adjusted basis unless otherwise noted. For reconciliations of these non-GAAP measures to their corresponding GAAP measures, please refer to our earnings press release. Now I'll turn the call over to Donnie.

Thanks, Sean, and thank you to everyone for joining us this morning. Last quarter, we said that we expected Q2 to be tougher than Q1, and this quarter was definitely a tough one. As you will have seen in our release earlier this morning, results were weaker than expected, and top line performance was mixed, particularly when compared to our strong performance last year. At the same time, we outperformed our large branded-food peers in volume and dollar sales and continue to gain pound and dollar share in our retail core business lines. As I also said last quarter, I can't remember a time when our business faced the highly unusual situation that we're currently seeing, where all three of our core protein categories, Beef, Pork, and Chicken are experiencing market challenges at the same time. This unusual confluence of issues continued in Q2 and directly impacted our results. I know that you watch the protein markets closely and, like us, know that there are many factors at play here that are macro in nature. For example, Beef is cycling out of historically strong margins that were seen throughout most of fiscal 2021 and '22. Cutout values across the protein complex are much lower than a year ago. Inflation has also remained elevated and persistent, which has dramatically impacted our cost. The current macro backdrop is clearly tough. We have a strong growth strategy and are bullish on our long-term outlook. We continue to implement our strategy, focus on the things that we can control and build upon the strong foundation we have in place. Late last month, we announced important initiatives to simplify our structure and rightsize our team. These are a logical next step in our ongoing efforts to drive operational and functional excellence as we strive to be best-in-class in our industry. Last quarter, we talked about executional issues that we needed to improve, and operational performance did get better. We set a high bar to execute with excellence and are making progress. Despite our overall results, there were strong positive highlights in the quarter that serve as proof points that our strategy is working. As you know, our branded foods business is the key growth pillar for the future, and in Q2, the business performed well. These results were driven by the strength of our share position, especially for our core brands, including Jimmy Dean, Tyson, and Hillshire Farm, which helped deliver strong margins compared to the same 13-week period last year. We continue to grow both pound and dollar share and to outperform our large food peers in volume based on Nielsen data. It's clear we are winning with consumers. We also continue to win with our customers. We're proud to have been moved up into the top 10 for the first time ever in the most recent Kantar power rankings. In fact, Tyson finished in the top 10 in six of the nine categories they measure. As we continue to focus on meeting customer needs and planning the future together with them. While strong performance continued in our branded foods business, I know that our results in Chicken are top of mind for many of you. So I want to spend a few minutes walking through our Chicken business in detail. I want to point you to three important things on the macro environment. First, marketing conditions remain very challenging. Commodity prices for most fresh chicken cuts are much lower than last year, with boneless breast meat, tenders, and wings down more than 50%. While we're not fully exposed to commodity markets, we are not immune to their dynamics. Some might expect these dynamics to impact our results immediately. But in fact, they work through on a lag. As chicken commodity prices declined in Q1, the impact continued into our Q2, while price increases we saw during the quarter are expected to affect Q3. Second, input costs were higher compared to last year as our feed and ingredient cost increased $145 million. We also realized an unfavorable year-over-year derivative impact of approximately $135 million due to volatility in commodity grain prices. Third, while high-path avian influenza has not had a significant impact on our live operations, key export markets remain closed. While we can't control markets, we are focused on the things we can control. We made a series of strategic decisions to better position us for the future. For example, we converted two of our plants from bone-in to boneless specifically to add new business and continue growing with an important customer. We further rationalized assets, SKUs, and inventory. In fact, we reduced our finished inventory pounds by nearly 20% during the quarter. We also made the difficult choice earlier this quarter to close two of our less productive chicken plants. These strategic actions are expected to generate significant efficiencies going forward, although some of them generate incremental costs in our current results. Despite challenging market conditions, we continue to execute our strategy and have significant opportunities in front of us. We increased our internal production, gaining 130 basis points of harvest share compared to last year. This led to pound share gains of 250 basis points in value-added retail and 60 basis points in food service. As you can see, we are well positioned to keep growing. We continue to invest in automation and digital capabilities with opportunities to improve our yield. We now have 50 debone lines that are fully automated. We have room to optimize our cost structure, and a portion of the actions we took last month are focused on this. Importantly, we are working more closely than ever with our customers to create value jointly. We're building long-term supply partnerships that have clear benefits for both sides. We improved order fill rates by more than 20%. This was no accident, and I'm proud of our team for accomplishing this. We're winning in the marketplace by winning with our customers. Now I've given you specific details on the business, I want to step back and remind you of our overall strategy. Our approach to building and growing Chicken is based on three key elements: first, we strive to be the best-in-class operator by executing with excellence. This includes filling our plants to continue increasing our capacity utilization. Second, we plan to grow our value-added business focusing on fully cooked in retail and food service channels and by innovating and differentiating our offerings. And third, we expect to win with consumers behind the number one brand in Chicken and win with our customers by being their go-to supplier. I want to underscore that we are focused on improving our results in Chicken. We can do that by implementing our strategy, leading to continued growth and improved margins, and I'm confident that we have the right leadership team in place to get us there. Now turning to the continued strong performance of our retail branded business. With our iconic retail brands, Tyson, Jimmy Dean, Hillshire Farm, and Ball Park, Tyson core business lines continue to outpace total food and beverage and our peers in both sales dollars and volume growth, up 13% and 7%, respectively, compared to a year ago per Nielsen. Our brands continue to perform well as Tyson core business lines grew pound share by 2.4 points relative to the prior year quarter. We continue to show market share leadership in most of the retail categories in which we compete, delivering both dollar and pound share growth in the aggregate by more than 2 points and also across all dayparts. As proven by our growth compared to last year, we know that consumers will spend on categories and brands they know and trust. The trajectory of our Tyson core business lines volume share growth shows the momentum we have gained with consumers. We remain focused on maintaining our improved fill rates and on-shelf availability while investing in merchandising and advertising to support our brands, which, along with our strong business fundamentals, resulted in pound share growth increasing sequentially over the past four quarters. Tyson, Jimmy Dean, Hillshire Farm, and Ball Park all hold favorite brand status with consumers by a large margin over our nearest competitor. It is evident that we're delivering the brands and products that consumers desire. As I mentioned earlier, our move into the Kantar top 10 demonstrates that we continue to gain the confidence of our customers. Winning with customers and consumers is a key priority, and it's clear we're having success with both. Now let me tell you why I'm so optimistic about our future. Tyson is an iconic company with a broad portfolio of products and powerful brands that has been a recognized leader in protein for nearly 90 years. We've been through market cycles before. I've been through them before myself, and we've always come out stronger on the other side. We have the right strategy, seasoned leadership, and team members in place to do it once again. Our vision is to deliver sustainable top line growth and margin improvement. Our strategy to drive growth is built on the foundation of three key pillars: first, we will drive growth in our core protein platform where we harvest and process fresh meat across a diverse portfolio. We expect global demand for protein to continue to grow in the years ahead, driven by population growth and per capita income expansion. Tyson is well positioned with the capacity in place to meet demand. Second, we will drive growth through our branded food portfolio. We have over 30 prepared food and snacking brands, including some of the strongest brands in all of food, namely Tyson, Jimmy Dean, and Hillshire Farm. Branded food is our best opportunity to drive faster growth, higher margins, and stronger results. Third, we will expand internationally where it makes sense. Most of the growth in protein consumption is expected to take place outside the U.S. We can capture this significant opportunity by scaling our existing business, expanding our customer base, and exploring new markets. These pillars are enabled by our relentless focus on customers and consumers, operational excellence, and digital capabilities to drive margin improvement. We win with customers and consumers by building growth partnerships, delivering top-tier customer service and fill rates, and product innovation. We expect to realize our operational excellence goals as we modernize our operations, driving efficiencies, saving on costs, and increasing throughput. And we continue to build our digital capabilities, operating at scale with digitally enabled standard operating procedures and utilizing data, automation, and AI technology for decision-making. With the combination of our growth strategies and focus on margin improvement, we can deliver the food that consumers love and create long-term value for our customers, team members, and shareholders. We've put a strong proven leadership team in place here at Tyson. I've never been more confident in the talent that we have, and I know that we have the right people to capture the opportunities in front of us. Now I'll turn things over to John to discuss our financial results for the quarter in more detail.

Thank you, Donnie. First, for a quick touch on our total company financial performance and then a review of the individual segments. Total company revenue was up slightly compared to last year's previous record Q2 performance as the benefit from significant volume growth in Chicken was offset by the reduction in price per pound in Beef and in Pork. For the total company and individually in Chicken and Prepared Foods, we continue to deliver record high sales performance now for a fifth consecutive quarter. We remain focused on driving growth in these businesses to enhance our margin profile over time. Now turning to profitability. More than 90% of the decline in adjusted operating income was driven by lower earnings in Beef and Chicken. Higher input costs per pound in all segments except Pork increased our cost of goods sold. The majority was driven by inflationary impacts on raw material and labor costs. The remainder of the increase was due to a few things: inventory value adjustments, unfavorable derivative impacts, and a shift producing more value-added mix, and this was partially offset by savings from our productivity program, reduced outside meat purchases in Chicken, and decreased supply chain costs. Our pricing decreased led by lower cutout values in Beef and Pork. This was partially offset by volume growth in Chicken. Now let me go to the individual segment results, starting with Beef. Sales in our Beef segment decreased 8.3% compared to record high sales in the second quarter of last year. Price was down 5.4% due to reduced domestic demand and softer export markets, and volume was down 2.9% due to fewer head processed. Live cattle costs increased approximately $305 million on a like-for-like volume in the quarter as the reduction in the beef cattle herd continues to tighten supply and increase competition for cattle. The margin compression resulting from reduced sales and increased cattle costs led to a segment operating income of $8 million and an operating margin of 0.2%, down from the historically high second-quarter margin of 12.7% last year. Looking next at the Pork segment, the volume gain of 1.1%, driven by improved hog availability, was more than offset by the 10.3% decline in average sales price due to the soft global demand environment, leading to a decrease in overall sales of 9.2% versus the second quarter last year. The Pork segment posted an operating loss of $31 million for the quarter, which was driven by the industry headwinds compressing pork packing margins and inflationary pressures on operating costs. Moving on to the Chicken segment results. The sales increase in Chicken of 8.4% over the prior year quarter was driven by a 6.4% uptick in volume due to increased internal production. Benefits of prior period pricing actions drove 2% growth in sales despite a challenging commodity market. At a loss of $166 million, second quarter operating income was impacted adversely by market conditions and near-term impacts of strategic decisions we made that Donnie discussed earlier. Other headwinds experienced in the quarter included continuing export impacts from HPAI, as well as higher feed ingredient costs of $145 million and an unfavorable year-over-year derivative impact of approximately $135 million, including a $35 million loss in this current quarter and a $100 million gain in Q2 of last year. The industry operational headwinds do not change our approach, though. We expect to perform as the industry best-in-class operator while growing our internal production with our customer demand, enabling us to improve our fixed cost leverage, grow volume, and gain market share. In addition to the continuous improvement of our operations, growing the market share of our portfolio of value-added products is imperative to maximizing our profitability and our long-term strategy. Now lastly, to Prepared Foods, where our retail brands like Jimmy Dean, Hillshire Farm, and State Fair continue to deliver industry-leading performance, outpacing all peers in both revenue and volume growth in the quarter. Total sales revenue grew 1.2%, primarily driven by pricing gains. The slight volume decline of 0.4% was driven by softness in food service volumes as the trajectory of this channel's recovery remains uneven. This was almost all offset, though, by the strong performance of our retail brands, driven by their category-leading position, improved supply, and our MAP investments. Compared to the prior year period, segment operating income decreased modestly due to increased raw material costs and brand building investments. This was partially offset by productivity gains and price increases. While down slightly against the historically strong comp, we are pleased with the operating margin performance of 10.4% in this challenging macro environment. We continue to be excited for the future in Prepared Foods as the segment is critical to valuing up Beef, Pork, and Chicken commodity meat products and delivering strong earnings at a time when the commodity protein segment's profitability is under pressure. We will continue to unlock value by increasing plant utilization, implementing productivity initiatives, and we will grow through innovation of new offerings, expansion of our existing product portfolio, and the recovery of our food service business. Now to our financial position and capital priorities, we're building financial strength, investing in our business, and returning cash to shareholders remain the priorities of our capital allocation strategy. First, let me spend a minute talking about our financial policy and long-term capital allocation and provide a bit more color around our approach to CapEx deployment. Our financial policy remains unchanged. We are committed to building financial strength, maintaining our investment-grade credit rating, and targeting net leverage of at or below 2x net debt to EBITDA for the long term. Our capital allocation prioritizes investing in our business through CapEx, as well as strategic and disciplined M&A while also returning cash to shareholders through dividends and share repurchases. As owner-operators, our approach to CapEx is simple and effective: we support our maintenance CapEx needs and then we focus on growth and profit optimization, investing in opportunities that generate the greatest returns while maintaining a strong balance sheet. We don't expect our total CapEx this year to exceed $2.3 billion, which is down from our prior guidance of at or around $2.5 billion. Now moving on from CapEx, during Q2, we returned $167 million to shareholders through dividends and $19 million in share repurchases. We have increased our dividend for 11 consecutive years and remain committed to supporting our dividend. We ended the quarter with $2.2 billion of liquidity and net leverage of 2.4x. Last week, we entered into a new term loan agreement for $1.75 billion to further enhance our liquidity. These funds will be used to pay off our existing commercial paper that's outstanding and some upcoming bond maturities and also to fund our investments in the business, including the pending acquisition of Williams Sausage, which will support our strategic focus on branded retail growth. We remain committed to maintaining a disciplined yet opportunistic capital allocation strategy, ensuring that we deploy resources to maximize long-term shareholder value. Now let's review our updated outlook for fiscal 2023. Based on performance year-to-date and a moderating outlook for revenue growth, we are lowering our total company sales guidance to $53 billion to $54 billion or flat to 1% growth for the year. In our Beef segment, based on the deterioration in current market dynamics, we now expect margins to be between a loss of 1% and a gain of 1% for the fiscal year. Also, due to challenging market dynamics this time in our Pork segment, we are lowering margin guidance for the year to be between a loss of 2% and breakeven. In Chicken, we now expect full year margins to be between a loss of 1% and a gain of 1%. Based on our results so far in April, we anticipate Q3 margins to be roughly breakeven as we gain momentum and exit the fourth quarter at or above the high end of the full year range. In the second quarter, Prepared Foods continued its strong performance, resulting in a first half margin above the guided range for the fiscal year. So we are maintaining that at 8% to 10%, driven by historical seasonality and continued brand support. And in our International business, we remain committed to expanding globally in the fastest-growing protein consumption markets in the world. Driven by continued year-over-year volume and revenue growth from new facilities ramping up, we are confident of our improved profitability in fiscal 2023, with stronger quarterly performance in the back half of the year compared to Q2. As I mentioned earlier, we're reducing our expectations for CapEx to approximately $2.3 billion. And our net interest expense and tax rate are now expected to be around $340 million and 22%, respectively. In summary, the first half was challenging, and many of the headwinds experienced are likely to persist for the remainder of the fiscal year. Although the current operating environment has proven to be difficult, we view this as an opportunity to grow and improve our business operations. We are optimistic about our long-term value driver prospects. We have great leadership and operational teams, growing demand for our products, robust portfolio diversity, and the differentiated asset footprint needed to win in the marketplace as we continue to grow our business and provide desirable returns for our shareholders.

Thanks, John. Now we will move on to your questions. Please recall 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 instruction.

So my first question is a two-part question on the Chicken segment. So first part of the question, in the quarter, results obviously were weak and considerably weaker than we saw, I think, in the broader market. Could you talk to a few of the things that might have contributed to company-specific weakness in the segment? And then as you look going forward, you talked about Chicken margins being flat in 3Q, breakeven, and then ramping into what all is incorporated into that assumption? Is it what we've seen already in terms of improvement in quality fundamentals? Do you need to take further actions around closing underperforming facilities or reducing inventory? And maybe just help us understand what's embedded in that expectation going forward.

Okay, this is Donnie. I'll begin, and then I'll hand it over to Wes for more details on Chicken. This quarter was not a surprise for us; we anticipated that Q2 would be challenging, and it was. I've mentioned that it's unusual for Beef, Pork, and Chicken to face difficulties simultaneously. Many of these challenges are macroeconomic. Specifically regarding Chicken, we have observed operational improvements and a market recovery. Although it is slower than expected, there will be recovery, and of all our current challenges, Chicken will recover first. In this quarter, from our $166 million loss, $90 million was attributed to three main areas: one-third was due to mark-to-market issues, another third from inventory adjustments and SKU rationalization, and the remaining portion to start-up costs related to our shift from bone-in to boneless products, along with a few asset impairments. Chicken remains a top priority for me. We hold the number one brand in Chicken. Our business model doesn’t expose us to the extreme fluctuations of commodity markets; however, we are still affected by them, and our variable pricing structure does have time lags. About two years ago, I outlined our strategy for the Chicken business, and we're adhering to it. We're increasing our volume and enhancing our product mix, having reduced inventory by 20%. We are committed to operational excellence and continue investing in automation and digital innovations. We compete at the highest levels and are succeeding across all areas where we operate. We lead the market in every category, and prioritizing our customers and consumers remains crucial; it's evident that we are succeeding with both. We have recently moved into the top 10 of Kantar's power rankings for the first time. We plan to win over consumers with our leading Chicken brand and meet our customers' needs as their preferred supplier. I have confidence in our Chicken team. Our strategy is sound, and we are taking the right steps to achieve growth. We are implementing this strategy diligently, focusing on what we can control, and will build upon our solid foundation. Now, I'll hand it over to Wes Morris, who leads the Chicken team, for additional insights.

Thanks for the question, Ben. Q2 was challenging for us and the industry overall. Various grains and market conditions saw some key areas drop by as much as 50%, alongside ongoing export opportunities. Compared to last year, grain prices increased by 11%, with a 2% rise in prices, and a $135 million shift in derivatives. Unlike others in the industry, we achieved a growth in net sales by 8.4%, a volume increase of 6.4%, and a 4% enhancement in our capacity. According to published data, our competitive performance outpaced the average company in the sector, all while continuing to invest. Donnie mentioned the $90 million investment; consider two-thirds of that as future investments for our business. The SKU rationalization and inventory adjustments, along with improvements in packaging and ingredients, make us more efficient and consumer-focused. Now, let me highlight four main areas my team is concentrating on and provide some insights into our achievements for the quarter: people, service, growth, and performance. Our plants were fully staffed throughout the quarter, enabling our teams to deliver the necessary volume to satisfy our customers and consumers. We sold everything we processed, plus an additional 100 million pounds, indicating positive demand for our products in Q2. Our service levels improved by 20 points year-over-year, returning to historical service levels. We performed exceptionally well during the holiday season, capturing market share in both food service and retail sectors. Our investment in the fully-cooked facility in Danville will launch this fall, and we are now meeting over 99% of the demand for our core eight retail products. This ensures we are succeeding with both consumers and customers. Donnie also mentioned the conversion of two plants from bone-in to boneless, alongside the announced closure of two facilities, which will enhance our efficiency and increase our volume. We have seen weekly operational improvements throughout the last quarter and into April, positioning us well to succeed with customers and consumers while simultaneously reducing costs moving forward.

And Ben, I want to just pick up on a couple of specific parts of your question there. I think, first off, you're asking if there are further actions that we're contemplating, and just to address that directly, we're always looking at the footprint, but everything that we're doing is focused on growing our business today. And I would note that with the two announcements we made earlier in the quarter, we're still growing the business. You mentioned inventory too; part of working through some of the changing market conditions does mean continuing to pull down inventory. And so that will influence the outlook. But you noted correctly from the earlier remarks on moving to breakeven and improving through the back half of the year is what we expect to see in poultry.

Okay. That's helpful color. Maybe shifting gears a little bit to the Prepared Foods segment. That's been a bright spot certainly for the first half of the fiscal year. The guidance for the balance of the year implies some margin moderation. I know you guys are focused on picking up some food service business that you lost, and I think carries some lower margins. Is that key to what's embedded in the operating margin guidance for the balance of the year? And what are the potential sources of upside or downside to that expectation?

We're happy with our overall performance in the first half of the year. We're making progress with both of our brands and operations to improve margins, which is reflected in our results. When comparing the first half of this year to last year, we've seen an increase of about 10%. Looking ahead, we anticipate that the shape of our year will follow a similar pattern to last year, with a stronger first half and a weaker second half. This is due to typical seasonal trends and our plans for increased brand investments in the second half. Our brands are performing well with strong customer engagement, and we intend to continue investing to strengthen that. However, we still have work to do in the food service area, where customer decisions and contract cycles are longer, which means it takes time to regain that business. Nevertheless, we have a solid platform and quality products, and I'm optimistic that we'll begin to see improvements soon.

Maybe my first question, just in Beef and taking kind of the revised outlook, it would seem to imply the business is operating kind of breakeven or a loss for the next couple of quarters. And I just want to make sure I'm thinking about that properly in the context of kind of industry packer margins, which, while certainly off their highs, are not negative. And just how do we then think about the implications of that into fiscal '24 and '25 candidly? And is cattle availability is just going to get worse progressively over the next couple of years, given kind of what we know about the cattle herd right now?

Okay, Adam. I’ll begin and then I’ll hand it over to Brady for more details. As anticipated in the Beef sector, we experienced tightness in cattle spots, leading to higher live costs and a weaker export market. The most notable aspect, which I unfortunately can't provide a definitive answer to, revolves around cow and heifer retention, where we do have improved and faster growth conditions. However, from Central Texas to Nebraska, more moisture is still needed. We observed a decline in cow harvest towards the end of the quarter, suggesting a possible end to the liquidation cycle. However, with heifer feed numbers, we are not in a rebuilding phase yet. We need to focus on retaining more heifers before we can indicate that the rebuilding process has started. So, with that, Brady, could you provide some additional insights?

Thanks, Donnie, and thanks, Adam, for the question. I think there's a few specific call-outs relative to standard industry gross margin calculations that we need to take into account during this specific timeframe here in '23. And number one is while we still see export demand being relatively strong from a quarter-over-quarter perspective and versus prior periods, the opportunity for us to arbitrage our export opportunities versus domestic with some cutout runs that have occurred in specific products has actually diminished our opportunity to capture some of those results from a Tyson perspective. Number two is we've seen some pullback on drought credit values, and again, versus the previous cattle cycle, we saw drought values are strong. However, from a quarter-over-quarter perspective, again, we saw some pullback as well that certainly impacts some of the calculations relative to gross margin. And number three, from a brand versus choice perspective, we've seen a pullback in USDA data indicating that the spread between branded and choice actually decreased $4.3 hundredweight quarter-over-quarter from a sequential standpoint. So those are certainly some of the factors that are in our mind as we continue to look at the remainder of '23. As we move into 2024 and beyond, in addition to the comments that Donnie made relative to the cycle that we're in, there's reasons for both challenges from an industry perspective relative to gross margin. There's also a reason for us to be optimistic. And number one, we'll absolutely be relentless in terms of operational excellence. And really, it's about Tyson and our team, controlling what we can control. The markets will do their job over time, but we have a world-class Beef business, and the expectation is we'll continue to perform at a very high level as we move through the cycle. Number two is we have the opportunity to get closer to our customers and our consumers. We have capacity within our case-ready and value-added business, and we've been working diligently to fill that capacity and feel very good and comfortable in terms of the future of that business to get closer to the consumer as well. So while there are challenges ahead relative to the markets, I feel we're in a very good position to weather those challenges as we move forward.

I appreciate the information. I have a follow-up question for John Randal. Although you don't provide specific EPS or EBITDA guidance, reviewing the revised sales outlook and the mid-range of your various operating units suggests that by the end of the fiscal year, net debt to EBITDA might be at or above 4 times. I would like to hear your thoughts on this, considering your earnings outlook, and whether you are comfortable operating at that level for an extended period, especially if the Beef market doesn't see a quick turnaround.

Yes. Thank you for that question. And let me talk about the outlook and get a little more clarity on that when we talk about leverage. I'm glad you asked this question. So if you look at the return on sales guidance that we've given kind of on a segment-by-segment basis, it could take a few different shapes. So a point I want to make sure that our listeners take away today is that when we look at a total operating income number for the second half of the year, we expect that to be in aggregate similar to or maybe slightly down compared to the first half of the year. So depending on the different movements within the various core proteins, that's kind of the net of it. We want to make sure lands from an outlook perspective. And as you suggested, that does have implications for what our total leverage ratio will look like as we move into the back half of the year. And what I can say is we're focused in the long run on that 2x number, and I think just pointing to what we've done in the last couple of years, we were diligent in paying off $3 billion worth of debt. We've invested in the business from a growth standpoint, we've got new operations coming online and retail branded chicken, bacon, and a lot of growth outside the U.S. aligned with our strategy. So I think while the timing on some of the capital expenditures, for example, kind of puts a pressure on the operating cash flows. I think we're comfortable with where we are and feel good about the outlook. I think that we know there's volatility in our business. Ratings agencies keep up with that. I mean, I can't speak for them this morning, but we're in constant communication, providing them outlooks about the business. So overall, we feel good, but yes, the leverage ratio will pick up for a little while.

I guess I wanted to start on the Chicken side, and I'm curious, kind of philosophically how you're thinking about growth and which is clearly the focus on growing the volumes versus balancing that with kind of the medium-term margin outlook. Have you changed at all your expectations on the back half Chicken volumes that you would expect to realize and just kind of philosophically how you think about that?

Andrew, this is Wes. Thanks for the question. First and foremost, we got to stay focused on our business and our customer expectations. And so we will, in fact, improve our capacity utilization over time. I think it's important to understand that our supply plan is actually our demand plan; that we start with the demand plan and work backwards. And as we see more demand for our products, we improve our capacity utilization. So hopefully, that answers your question.

Yes. If I can add to that, though, I think you asked specifically about how do we balance the profitability versus the growth. And what I want to point out is that we've pulled down the total sales outlook for the business, but we're still projecting to grow from a volume standpoint. So I think the Chicken call compared to a quarter ago is still up, but slightly less than what we had initially projected just because of the demand that was referenced.

Thank you for that question. As we have mentioned, we are consistently focused on being the best in operations. Our goal is to be the leading company, the top brand, and the preferred protein in our markets. We aim to achieve this through productivity and efficiency. This involves increasing volume, particularly in Chicken, and enhancing yield and labor utilization. Additionally, we are committed to modernizing and investing in our assets to ensure we have the appropriate footprint both now and in the future. We will continue to pursue these objectives, with a strong emphasis on efficiency and productivity being a priority for everyone in the organization.

Can you provide insights on the market pricing dynamics for chicken? Last quarter, we faced a challenge with an oversupply of fresh chicken during the holiday season, which seems to have continued into this quarter. Do we have any visibility on whether this situation might improve in the second half of the fiscal year? Additionally, where do we stand in that cycle? I also have a follow-up question.

Yes. Sure. This is Wes. We didn't see a lot of movement in January and February, and we started seeing a little more strength in March, which for us will flow through the next quarter. We have seen some pullet numbers that would indicate a little stronger markets in the back half of the year.

Great. And then on to the Prepared Foods, with the Kantar PowerRanking study, I'm just wondering what it was that's changed in your retailer relationships because that is a big move, I mean, to get into the top 10. There's a lot of larger, more established, CPG-type companies that are not in the top 10. I'm just wondering what you think has changed over the last couple of years to have got you there.

Thank you, Alexia. First, I want to emphasize that this was intentional. We have consistently focused on succeeding with our team members, creating a unique workplace, ensuring team member satisfaction, and maintaining fully staffed operations. This foundation is critical for winning with our customers and consumers. We have made significant investments to support them through our brands and innovations. Our goal is to be the best and the preferred supplier in every aspect of our business. Finally, the key to our success lies in achieving operational excellence throughout the organization. The positive results reflected in this survey are a testament to the hard work of our team.

I appreciate your comments about the macro environment, Donnie. There's certainly a lot of challenges that everyone is facing. I wanted to ask if it seems to you that for this particular quarter, the performance gap, as indicated by margin, has widened slightly between the industry and Tyson in both Beef packing and Chicken. I'm reviewing some of your larger competitors in Chicken, as well as HedgersEdge and our own model for Beef margins. I understand those may not be perfect comparisons, but I'm trying to grasp whether you see it the same way and if my assumptions are incorrect. If my observations are correct, how quickly do you think we could reverse that trend and align our margins more closely with those significant segments?

So Ken, I'll begin and then hand it over to Wes for more insights on Chicken and Brady for Beef. I discussed the macroeconomic situation earlier, and I must admit it’s difficult for me to talk about this since we can't influence these broader issues or market conditions. However, I can assure you that we are focused on what we can manage. We are fully committed to achieving operational excellence and succeeding with our customers and consumers. Additionally, Ken, I want to emphasize that at Tyson, and as you know, I've experienced several cycles over the years; this company, in its 90-year history, has faced many challenges before. What we have done in the past, and what we're doing now, is to accelerate during the downturn, and we always emerge from these cycles in a better and stronger position. I see no reason to think that won’t happen this time as well. Now, let me turn it over to Wes for insights on Chicken.

Yes, Ken. I think take into consideration the timing of how our pricing flows through is different than others. We have a further lag. Number two, the $135 million year-over-year derivative change and then the $60 million of the $90 million Donnie talked about in efficiency investment, I believe we competed better than the average in the industry.

All right. If I could ask another quick question. The Williams Sausage acquisition, I think we got a price today in the 10-Q of $200 million to $250 million. Could you give us a little bit of detail on what the expected revenues are, the last 12-month revenues? And sort of why now is the right time to do a deal, given some of the challenges you have in the balance sheet?

Yes. This is John. Let me say a couple of things on that. First off, let me just make a shout-out and thanks to the Williams family, who we've got this transaction with, and we're grateful to them for entrusting 60-plus years of a family business to be part of the Tyson family. As it relates to the kind of contours of the transaction, let me answer the question of why now. We're always being diligent and thoughtful about the M&A opportunities that we're pursuing. And I think this was a transaction that we got across the finish line based on the characteristics of the branded portfolio and the return profile. So when we close that in the coming months, we're excited to bring that into the Tyson Prepared Foods business.

Yes. Ken, let me just add a little bit here, this is Stewart. Look, this is a company with some great brands and some really great facilities; and two things are going to come out of this. First, there are capabilities we're going to have because right now, most of our stock harvest goes through a single facility; this is going to provide some redundancy that makes sense for our business, particularly because Jimmy Dean is so important to the portfolio. And then second, when you look at the brands that are going to be complementary to our brands, along with a DSG network that, frankly, we haven't had in our portfolio before, I think we're setting up for a very interesting deal here that is going to be a good addition to Tyson.

Maybe we can just start going back off of Ken's question, particularly around Beef. First, I think there's probably been some noise out there in the market that just shifts are being cut across kind of the entire Beef network, and some of that maybe is due to the lower kind of harvest levels. But if you can kind of comment there. And then secondly, Brady, I'd just be curious for your perspective, with cattle prices basically at all-time highs, in speaking to cow-calf operators, like what are the unit economics looking for them like in real time? How does that kind of change their decision-making process around retention or not? Because again, looking at the spreadsheet math, you'd think the price would be enough of an incentive, but obviously, a lot of their cost structure has probably changed as well. So I would appreciate any color there.

Thank you for the question, Peter. Let me address both the questions from Ken and you regarding Beef. There are a few important aspects of Q2 that we should focus on. First, in terms of timing, Tyson has quarterly pricing for several large customers. We are experiencing a timing lag with specific primal areas where there has been some inflation in cutout prices. Additionally, we encountered some hedging losses this quarter that affected our performance. Regarding volume, there has been a decrease, leading us to lose some leverage concerning our cost structure and assets. We are actively working on efficiency improvements to help offset this as we progress. Export demand has softened due to the strength of the U.S. dollar and foreign exchange effects, impacting our domestic portfolio's substitution products, which have not shown the large gains we observed in previous quarters. This, along with the drop in value, plays a role in our actual results compared to the index modeling. Concerning cow-calf operators, much has changed since the last cycle. Interest rates are currently high, providing incentives for operators to market heifers into feed yards rather than retain them, given the strength we see in the feeder market. There are still drought conditions from Central Texas to Central Nebraska that present challenges. However, for cow-calf operators outside of those areas, there has been some relief concerning drought conditions and moisture in recent months, which brings some optimism.

Great. That's very helpful. And Donnie, I just wanted to go back to one of your comments; I think you did mention around Chicken that you took some asset impairments in the quarter. I'm not sure that I saw those in the Q. But just maybe thinking on a longer-term basis; look, Chicken has been a business where you've been quite acquisitive. I think the margin profile, self-admittedly, has probably been a little bit weaker than you would have thought. Just as we kind of sit here today and go through the balance of the year, like how do we think about further impairment risk in that business particularly as the margin improvement even coming out of this year isn't expected to be kind of at your long-term average?

Thank you for your question. I'll provide a general overview. Over the past few years, we have made significant efforts to enhance productivity and efficiency. We are always assessing ways to improve our efficiency, streamline decision-making, and eliminate redundant efforts. These considerations are currently very important to us. Additionally, we have been examining our operational footprint to determine what it takes to improve our less efficient assets across the board. We explore various options, such as enhancing efficiency, automating processes, redesigning assets, or, in some cases, considering their sale or closure. However, I want to emphasize that our primary strategy focuses on growth. This entails expanding our core protein businesses, increasing our branded portfolio, and pursuing international growth where it makes sense. It's important to understand that we are in a growth phase while also working to optimize our footprint and production capabilities to meet the demands of our customers and consumers.

Just wanted to come back to Chicken in actually some of the historic context and ask about your performance particularly as it relates to hatch rates and hatchability because it was interesting in the past; it seems like the performance itself was impacted by the very specific issues you were facing. We saw the industry relatively soft, I would say, in the last couple of weeks, but it feels like that your performance, at least from a volume perspective, has done better. So any comment you can share as to your own initiatives and improving that supply and then ultimately less need to buy outside. How do you feel about this? How was it in the last quarter? And how do you feel about it going forward? That would be my first question. I have a quick follow-up as well.

I will begin and then turn it over to Wes for more detailed insights. A few years ago, I shared a plan to restore our Chicken business to its proper place, and we are still following that plan. We have encountered challenges in live production and the lifecycle of the animals. We've had some well-documented issues with breeding stock, particularly the males, as well as hatch problems, but we are highly competitive in those areas now. We have made significant improvements. At one point, we were purchasing a large quantity of external products at a premium during peak market conditions, but we started reducing our reliance on outside meat. We aimed to utilize our existing assets and achieve cost efficiency by producing our own live animals and converting them into the products that our customers enjoy. We have accomplished those goals and are continuing on this path. I want to emphasize that we have the right team in place to complete this journey. I am enthusiastic and optimistic about the future of our Chicken business, even in this quarter where we faced a loss of $166 million. I remain excited about the prospects for our leading Chicken brand and the opportunities that lie ahead of us. Wes?

Yes. Thanks for the question, Ben. The whole industry is not seeing the kind of hatch rates we saw four or five years ago. Ours, in particular, is down a few points from Q1, but not near the volatility that we're seeing in the industry as a whole. And so we have a more stable, predictable supply chain to include our hatch rate that makes it easier to manage going forward. As for outside buy, we'll continue to buy and grow as we have fluctuations in our demand, but much more imbalanced than in years past.

Perfect. And then just a second question around capital allocation. Obviously, you've reduced the CapEx a little bit, but at the same time, because of the loan, you got a little higher interest. You did some share repurchases throughout the quarter. How should we think about for the balance of the year also in light of what Adam pointed out as leverage could go somewhere north of 4x? How should we think about share purchases, dividends, further CapEx, and ultimately, M&A, which is also something that kind of popped up during the quarter? So just to understand the priorities here.

Yes. Sure thing, and thanks for the question. Let me just talk about the priorities and then talk about where we are in the year and what the outlook is. So first and foremost, we're always looking to invest in our business. And I think it's important to recognize that the CapEx deployment wave that we're in right now is typically higher than our historical average. Over the long run, something more like $1.5 billion is what we would target on an annual CapEx number. So I think that as we go into the coming years, we'll trend in that direction. And then we look at strategic M&A where we can. We've been pretty, I think, thoughtful in that approach. We're really pleased about the Williams deal and see that as a valuable part of investing in our business. And then on the returning cash to shareholders, we remain committed to the dividend and share repurchases; I think we'll continue to be conservative and look at something that's in line with historical norms. Obviously, there are a lot of different variables that go into that on a quarterly or annual basis as we make those choices. But yes, I think just where we are with the profitability outlook in the business, kind of the CapEx cycle and the borrowing, we're conscious of and aware that our leverage ratio will tick up. But again, we're kind of making choices and decisions around investments for the long term of this business. So we're comfortable; although we don't like the tick up, we're comfortable with these cycles where leverage ratios may be a little bit elevated compared to our longer-term target.

I wanted to revisit the concept of balancing growth and profitability across the board. Considering the various macroeconomic challenges you've mentioned and the lack of immediate improvements, does this influence your approach to prioritizing profitability? How do you plan to enhance margins while managing the factors within your control? What is the best way to think about potential investment trade-offs or strategies for improving execution?

Thank you for your question. First, I want to recognize the ongoing macro environment and the persistent challenges we face. However, this company has a long history of effectively navigating economic cycles, and we have always emerged stronger. While we can't control these cycles, we focus on what we can influence, and there are many opportunities for improvement. Our growth is primarily aimed at serving our customers and consumers. As Wes mentioned earlier, we begin with the demand plan and work backward to develop our supply plan. We wouldn't expand our Chicken, Beef, Pork, or Prepared Foods lines without clear consumer demand. Additionally, our goal is not to grow for the sake of growth; we always prioritize balancing growth and profitability, and I expect this situation to be no different. We've seen cycles like this before and typically emerge from them in a growth pattern. This time is no exception, and we are committed to accelerating our growth as we move forward.

And I think if I can add on to what Donnie is saying, just to emphasize growth and the focus on high-quality growth. We've just completed a fifth consecutive quarter of record sales growth. The same is true for the Chicken segment and the Prepared Foods segment. And we're growing in the parts of those businesses that we see as attractive from a margin standpoint. And of course, in poultry, as we've talked about, part of that has to do a little bit with just you getting the capacity utilization footprint back, right? And then it's also worth pointing out that we got a business outside of the U.S. that is trending towards tripling in about five years. And so I think as we think about the long term, that becomes a profit engine for us, and we're excited about the investments we've made there as well.

Thank you. And as you've heard today, this is a challenging moment, but my optimism about the future has not changed. Our customers and consumers are behind us. We're winning with both. This is not an accident, but is a result of the hard work our team members do every day. And I thank them for it. As we continue to build a world-class organization positioned to take advantage of the opportunities in front of us, we remain confident that our strategy will deliver long-term growth and shareholder value. Thanks for your interest in Tyson Foods, and we look forward to speaking soon.