Tyson Foods Inc - Class A (TSN) — Q3 2025 Earnings Call Transcript

Good morning, and welcome to Tyson Foods' Third Quarter Fiscal Year 2025 Earnings Conference Call. On today's call, Tyson's President and Chief Executive Officer, Donnie King; and Chief Financial Officer, Curt Calaway, will provide prepared remarks followed by Q&A. Additionally, joining us today are Brady Stewart, Group President, Prepared Foods; Beef and Pork and Chief Supply Chain Officer; Devin Cole, Group President, Poultry and Global Business Unit; and Kristina Lambert, Chief Growth Officer. We have also provided a supplemental presentation, which may be referenced on today's call and is available on Tyson's Investor Relations website and via the link in our webcast. During today's call, we will make forward-looking statements regarding our expectations for the future. These forward-looking statements made during this call are provided pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all comments reflecting our expectations, assumptions or beliefs about future events or performance that do not relate solely to historical periods. These forward-looking statements are subject to risks, uncertainties and assumptions, which may cause actual results to differ materially from our current projections. Please refer to our forward-looking statements disclaimers on Slide 2 as well as our SEC filings for additional information concerning risk factors that could cause our actual results to differ materially from our projections. We assume no obligation to update any forward-looking statements. Please note that references to earnings per share, operating income and operating margin in our remarks are on an adjusted basis for our fiscal periods 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 those joining us on the call. Let me begin by saying that I'm pleased with our performance this quarter, and we've driven results in line with my expectations. Sales, adjusted operating income and adjusted earnings per share all grew year-over-year, marking our fifth consecutive quarter of year-over-year growth across each of these key metrics. This was no accident. We're driving efficiencies across all businesses while delivering growth with world-class service and value for our customers and with innovation for our consumers. Our total volume was roughly flat to last year, while Nielsen data shows that we grew retail branded volumes across Prepared Foods and Chicken. We also grew volume and dollar share in aggregate across our top 10 categories, including Tyson branded frozen chicken, Hillshire Farms snacking and lunch meat as well as Jimmy Dean breakfast products. Growth in profitability versus last year was driven by our Prepared Foods, Chicken and Pork segments, each delivering double-digit growth in adjusted operating income. The only soft spot in our business is the Beef segment. With cattle availability at record lows, we continue to experience industry market headwinds. But even in this difficult environment, we are improving our fundamentals with increased prioritization on efficiencies, reducing costs and bringing innovative new products to market. We're poised to capitalize on tremendous opportunity ahead of us as we believe heifer retention has likely now begun and cattle availability should improve in coming years. We continue to take meaningful steps forward in building our financial strength with net leverage improving year-over-year and sequentially, a direct result of deliberate actions and disciplined capital allocation. Simply put, our strategy is working, and we are finding ways to win in today's market. As you know, consumers generally remain cautious and more selective in how they spend. Nielsen data shows food and beverage retail volume remained steady versus last year during the 13 weeks ending in June. However, protein continues to be the right place to play and beef, pork and chicken are all clear winners with consumers. Now let's take a closer look at our branded retail performance in Q3. Volume across these products grew 1.5%, far outpacing total food and beverage. Dollar sales grew 2%. This growth was led primarily by Tyson branded frozen value-added chicken, which saw a 10% increase in volume sales driven by our brand relaunch and strong performance. We are meeting consumers where they are. And you can see that in new innovations like our Tyson Simple ingredient nuggets developed for those seeking high protein and simple ingredients with chicken, cheese and seasoning, a great taste without compromise. We also launched fun, family-friendly products like Mega Dino nuggets that are driving engagement and incremental eating occasions. Our volume share increased 130 basis points, and we're growing off a base where we are the market share leader. We're especially pleased with the momentum in our snacking portfolio, where volume grew 20% and share increased 110 basis points, led by strong performance from Hillshire brand snacks. Our Jimmy Dean breakfast lines and Hillshire Farm lunch meat also delivered solid volume growth in the 13-week period ending in June. Innovation, distribution gains and efficient marketing and promotional support are strengthening our brands and keeping us competitive in the marketplace. And importantly, as consumers look to the perimeter of the store, we are also offering high-quality fresh options, where our Tyson branded fresh chicken volume grew 2.3%. As a world-class food company and recognized leader in protein, Tyson Foods is well positioned to meet the robust consumer demand for protein. Now let's walk through segment performance. Prepared Foods delivered a strong third quarter with adjusted operating income up more than 21% and margins expanding by 150 basis points, reflecting continued progress on our multiyear plan to enhance profitability in this business. Importantly, the segment returned to top line growth in the quarter, successfully navigating higher raw material costs and improved product mix within and across channels. Innovation and expanded distribution remain key pillars of our strategy, driving both top and bottom line growth. And as mentioned earlier, our Hillshire snacking dips and spreads are contributing to volume and share gains at retail. We're also leveraging our brand equity to thoughtfully expand into new spaces. We're launching new Hillshire Farm handhelds featuring Ham & Cheese, Buffalo Style Chicken and Philly cheesesteak, all designed to meet growing consumer demand for convenient high-protein options. This marks an exciting step into a new platform for the Hillshire brand and reinforces that we have the most robust innovation pipeline ever as well as our commitment to innovation across the company. Our operational execution initiatives contributed to profit growth in Q3 and helped offset continued cost pressure from raw material inflation. We have strengthened our S&OP process and unlocked efficiencies in our plants, driving fill rates above 98% in the third quarter, the highest since 2019. This has enabled us to better serve our customers with greater consistency and reliability. These improvements have also been helped by ensuring that we have the right product in the right place at the right time. We are working to culturize within Prepared Foods, the operational discipline that's critical in our other businesses while adding new tools and analytics to eliminate inefficiencies and reduce waste. There's still more work to do, but we are encouraged by the progress and excited about the long runway for growth and profit improvement in Prepared Foods. Chicken delivered another quarter of solid top and bottom line growth, including our third consecutive quarter of year-over-year volume growth. Value-added volume grew at more than 3.5 times the rate of total segment volume, driving a favorable mix shift that is positively impacting both sales and earnings. Adjusted operating income rose more than 12%, building on a very strong base from Q3 last year. With grain costs roughly in line with last year, profit growth this quarter came mainly from incremental efficiencies we've unlocked across our plant network. We have made significant strides in transforming our Chicken business over the past 2 years and haven't taken our eye off the ball in driving operational excellence. In Beef, as you know, we continue to navigate the cattle cycle. Cattle supply is noticeably tighter than a year ago, which significantly compressed spreads in the quarter despite resilient consumer demand. We are managing this market environment with discipline, controlling what we can across the supply chain to meet customer needs. We're also seeing benefits from the network optimization efforts that shifted further processing volumes back into our harvest facilities. At the same time, we're enhancing our value-added mix with the help of new data and analytics capabilities that support smarter, faster decision-making. These steps are helping to fortify the foundation for a more resilient and agile beef business, both today and over the long term. In pork, we delivered our strongest third quarter adjusted operating income in 4 years, reflecting the purposeful actions we've taken to improve our operations. Like beef, we increased our capacity utilization by optimizing our network and enhancing our value-added mix. We have improved labor and asset efficiency through operational excellence. We have built a fundamentally better pork business, and this quarter's results reflect that progress. In closing, we are executing our strategy, controlling the controllables and finding ways to win in today's market. With that, I'll turn it over to Curt to walk through our financial results in more detail.

Thanks, Donnie. Third quarter enterprise sales grew 4% to $13.9 billion, led by beef with solid contributions from Chicken and Prepared Foods, reflecting the healthy demand environment for protein. Adjusted operating income was $505 million, up 2.9%, driven by strong growth in Chicken, Prepared Foods and pork, all of which helped offset the decline in beef. Adjusted earnings per share grew 4.6% to $0.91. And as Donnie mentioned, this is the fifth consecutive quarter of year-over-year growth across sales, adjusted operating income and adjusted earnings per share. Our multi-protein multichannel portfolio, combined with our team's attention on operational execution in a dynamic macro environment continues to deliver results. Turning to the third quarter segment performance. In Prepared Foods, sales were up 3.4% versus last year, primarily driven by progress on raw material cost recovery while continuing to enhance our product mix. Adjusted operating income increased 21% and margin improved by 150 basis points versus last year. Benefits from mix as well as continued progress on our operational execution initiatives drove the increase in profitability and more than offset ongoing net raw material cost increases. In Chicken, we delivered another quarter of solid top line performance with sales up 3.5% year-over-year. Volume contributed two-thirds of the increase, including a notable contribution from value-added product sales, which also drove a favorable mix reflected in price. Adjusted operating income increased 12% as we continue to drive efficiencies in our plants and capture the benefits of top line growth. As we discussed last quarter, we increased our brand support investment both year-over-year and sequentially to continue growing our value-added product sales. Sales in beef increased primarily due to a higher average price per pound, reflecting ongoing healthy demand. This offset lower harvest volume from an increasingly tight cattle supply. Adjusted operating income declined as spreads compressed noticeably versus last year, driven primarily by higher cattle costs. In pork, sales were roughly flat, excluding the impact of a legal contingency accrual taken in the third quarter last year. Adjusted operating income increased 64%, highlighting the benefits from network optimization and operational efficiencies, leading to the strongest third quarter results since 2021. Turning to our financial position. Our approach to capital allocation remains disciplined and deliberate. We are focused on maintaining financial strength, investing in the business and returning cash to shareholders. Year-to-date operating cash flow was $1.6 billion, and capital expenditures were $691 million, resulting in free cash flow of $929 million, well ahead of year-to-date dividends, which were $524 million. We ended the quarter with $4 billion in liquidity and net leverage at 2.1x. We have successfully reduced net leverage by nearly a full turn over the past year. With leverage continuing to decline and cash flows remaining strong, we restarted open market share repurchases under our share repurchase program late in the quarter, the first since Q1 of 2023. In fact, we returned $201 million to shareholders through dividends and repurchases this quarter. While dividends remain our primary way of returning cash to shareholders, at current valuation, we believe share repurchases represent a very attractive opportunity. Our balance sheet remains healthy as we prioritize financial strength, our investment-grade credit rating and cash management to drive long-term shareholder value. Now let's take a moment to review our updated outlook for 2025. We are raising our overall guidance based on our year-to-date performance and a solid outlook for the fourth quarter. We now anticipate full year sales to be up 2% to 3% year-over-year. We are raising the midpoint and narrowing the range for total company adjusted operating income, which we expect to be between $2.1 billion to $2.3 billion, delivering significant growth versus last year across the entire range. We still anticipate interest expense of approximately $375 million and a tax rate of around 25%. We remain disciplined in managing cash with CapEx expected to be at or below $1 billion and free cash flow in the range of $1 billion to $1.3 billion. Now to provide more color on our segment outlook. In Prepared Foods, we expect adjusted operating income in the range of $925 million to $1 billion. Our improvement plan is delivering results and offsetting significantly higher raw material costs. We are raising our adjusted operating income guidance for Chicken to $1.3 billion to $1.4 billion, highlighting significant year-over-year growth of 33% at the midpoint. Based on year-to-date performance and the tight cattle supply conditions, we now expect adjusted operating income in Beef to be between a loss of $475 million and $375 million. We are tightening the guidance for pork to the high end of the range, anticipating $175 million to $200 million. Our international business has performed well this year, driven by effectively managing controllable costs, maximizing efficiencies and lowering conversion costs. We now expect adjusted operating income in International Other to be roughly $125 million. That covers our segment performance and financial highlights. Now I'll turn the call back over to Donnie.

Thanks, Curt. I'm pleased with what we have accomplished, driven by the dedication of our team and encouraged about our future. Our diverse protein portfolio, commitment to innovation, focus on operational excellence and a healthy balance sheet continue to position us as a leader, meeting the growing market demand for protein while delivering value to our customers, consumers and shareholders. Thank you to our team members for all you do and of course, to those on the call for your ongoing support of Tyson Foods. Now I'll hand things back to Sean as we move to Q&A.

Thanks, Donnie. We will now move forward 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 instruction.

Great job on the quarter. Given the lowered AOI guidance for beef and your earlier comments indicating that heifer retention has begun, could you provide more detail on your thoughts about cattle supply and costs for that segment in the near term as we progress through this herd rebuilding phase?

Thank you, Leah, for the question. I'll start with a few comments, and then I'll let Brady add some additional insights. Cattle supplies are tightening, which is leading to a compression spread, as mentioned earlier. We anticipate this trend. We believe heifer retention has started. For instance, beef cow slaughter declined by 16% from January to June, indicating the beginning of heifer retention. Looking ahead, we expect herd rebuilding to gain momentum in 2026, and we project that by 2028 we will begin to see the benefits of this rebuild and the retention of heifers for breeding. Brady, do you have anything to add?

Thanks, Donnie. And I would just indicate that we're confident in our ability to manage through competitively through this challenging economic time. The beef business continues to manage through this tightened supply with the record high cutout values as well. Teams really dialed into a strategy where we continue to use data and digital to make the best decisions, understanding the market dynamics that are in place today. We made some pivots here in the last several months relative to how we manage our business. We've reduced some of our light speeds to allow us to capitalize on the highest possible yield performance in our plants, and we like that strategy moving forward. And then we'll continue to add value to our products and go to market where we see consumers going in the future, which is convenience and protein. And so by using those three strategic pillars, we remain confident that we'll continue to manage through this cycle in a very competitive structure.

That's very helpful. And then for my follow-up, I wanted to switch to Prepared Foods. You had a nice profit improvement in the quarter, but you did narrow your AOI guidance for that segment and the midpoint is kind of slightly lower than it was before. Just see if you could provide more detail on the input cost pressure you're seeing in that business and how we should think about the flow-through of further pricing from here?

Yes, let me begin with that. We have observed significant increases in raw material throughout the year. We have discussed the recapturing of some of these raw material increases, as contracts with a lag to the market are starting to yield some benefits. We are managing this situation effectively. There was about $60 million in unplanned raw material increases in the quarter, but the team managed to offset that through various strategies. From an operational execution perspective, our Prepared Foods business is performing exceptionally well, perhaps better than ever before in my experience here. The fundamentals of the business are strong, and our innovation pipeline is very robust, leading to successful product launches. We mentioned previously that we are on a multi-year journey to improve the profitability of our Prepared Foods business, and we are making progress. This quarter marked the best Q3 we've ever had. Looking ahead to 2025, we anticipate it will be the best year for Prepared Foods that we have seen as a company. There are many positive developments related to Prepared Foods. Brady, do you have anything to add?

No, I think you covered it really well, Donnie. I would just reiterate what you said. We're extremely excited about Prepared Foods within the quarter with having our best quarter ever. We're really excited about the future as well and the foundation we're setting. Just relative to maybe adding some context to your question specifically, Leah, I would just assert that at the end of our fiscal Q3 is when typically we will see seasonally high raw material costs. When you think about pork trimmings, beef trim that goes into some of our Prepared Foods products, hams and bellies is really where we peak from a year. So that rolls into our COGS from an inventory build perspective and it certainly is part of how we guide into Q4 as well.

Leah, just to add really quickly. I think at the midpoint of what we shared for Prepared Foods, that would indicate a very nice performance in Q4 versus prior year. And as Donnie said on the year, a very attractive improvement on year-over-year for all the reasons that Donnie and Brady both pointed out.

Brady, I wanted to actually touch back on beef. Look, in the context of heifer retention beginning, that's obviously a positive, but it was pretty notable, I think, the relatively large impairment taken in the quarter on the beef business and potentially that's a pushout relative to prior expectations on recovery. So maybe you can just compare and contrast what you're seeing, again, in the market today on retention relative to the elongation of recovery that kind of triggered the impairment on the business?

Sure. Thanks for the question, Peter. First and foremost, I think it's important to understand that this cycle has been different than cycles of the past and has created some dynamics that have been more challenging to forecast as we roll through it. So obviously, relative to the fact that we had a prolonged drought period at the midst of the beef cycle, we have moved into a period that has been more prolonged than the previous cycles over the last several decades as well. Relative to what we're seeing from a data perspective, that supports Donnie referenced the beef cow harvest being down year-over-year significantly as well, which provides stability from a cow production perspective. The other real data point that we're looking at is feeder calf receipts into feed yards as well and seeing some change and some pivot relative to the amount of heifers versus steers that are going into those feed yards as well. So that certainly sets the base for us to move forward and have increased supplies into the future as well. I'll kick it over to Curt here to reference the impairment.

Yes. Thanks, Pete. Maybe just a couple of other things to think about relative to taking the beef impairment this quarter. We had shared in previous 10-Ks and 10-Qs that our cushion for the fair value exceeding carrying value was less than 10% for that business. And we also detailed in addition to what you talked about in our 10-Q this quarter, we detailed that as cattle costs have continued to rise, that also caused the carrying value of the beef reporting unit to increase as well. And all those were contributing factors in the ultimate recognition of the impairment this quarter.

Great. And maybe as a follow-up as well on prepared, and I'm not sure if Kyle is on as well, maybe it would be helpful to hear from him. But 2 questions. One, just the elasticity that you're seeing so far as you put through some of the pricing on some of those items? And maybe secondly, just it's a category that sometimes has odd competitive behavior. So just what are you seeing out of the competitive set across kind of prepared foods and are folks kind of all behaving rationally?

You bet. Thanks for the question, Peter. And I would just say this. Number one is our ability to manage through these cost pressures that we see from a raw material, we're highly confident in our ability to do that. We're leveraging our strong brands. We have a fantastic innovation pipeline that continues to deliver for us, everything from Jimmy Dean Griddle Cakes to our Jimmy Dean Chicken Biscuit. Our Hillshire Farm snacking portfolio continues to see significant growth. And then on bacon, we're seeing growth as well. So our ability to manage through, we have an extreme amount of confidence on it. From an elasticity perspective, we continue to track closely. We have a significant amount of data and great expertise sitting behind our ability to understand how consumers are behaving with any price increases that they certainly see at point of sale. And so no real material changes in '25 so far. We do see consumers continuing to prioritize protein, which we believe is pro Tyson. And protein typically has lower elasticity than other categories within the food space as well. So we'll continue to leverage that multi-protein and multi-value-added portfolio and believe it's advantageous as we roll forward.

One quick on the Chicken segment. So clearly, you've called out in the last call that you're doing a couple of investments into the business, and that's why you were initially hesitant on raising the guidance despite already as of the first 6 months, having had a very strong performance. Now looking into what you've been able to accomplish in the third quarter and what the implied guidance for the fourth quarter, it really looks solid here. So I just wanted to understand, of these investments, are they still coming together as expected? Are you basically able to offset these costs right away? Just if you could share a little bit more thoughts and ideas around the investments and what you expect from them then as we move into 2026.

Ben, I'll begin and then hand it over to Devin for additional insights. Our Chicken business is operating efficiently and consistently showing strong growth in both revenue and profit. Looking at our inputs, particularly grain, it's relatively stable year-over-year, which we expect to continue. Regarding the $100 million investment we've previously mentioned, we plan to complete that in the fourth quarter. We're focused on improving operational efficiencies and driving innovation. We've previously discussed the successful relaunch of the Tyson brand and our new product, the cheesy nugget, made with simple ingredients like cheese, chicken, and seasoning, which has been performing well. Strategic partnerships are vital to our strategy, and we've seen positive outcomes from those decisions. Our business is performing better than I have ever seen, ranking among the top performances in my years of experience. To put it simply, we're fully engaged in the chicken business and executing at a high level. We have strong momentum, evident in both Q3 and Q4, and we believe this will continue moving forward. Devin, would you like to add anything?

Yes. Thanks. Maybe just a couple of comments. We are continuing to reinvest in this business, and we will continue to do so. I think we're seeing that we're doing a better job of managing, making sure that, that investment is driving the volume and the sort of returns that we want across the business. Just maybe recap a couple of points that prove that. Branded chicken did grow 10%. But in total, value-added grew 8.8% for us in the quarter. And that's really across all of our channels and categories. And so going forward, I think you see very similar strategy from us relative to innovation and how we support that in the marketplace. But maybe I'll just ask Kristina to talk a little bit about the innovation pipeline and how we're thinking about that.

Yes. Thanks, Devin. I'm really thrilled with how the Tyson retail value-added poultry business is performing under the Tyson brand, right? That double-digit volume growth is really coming from increased household penetration, which was led by our innovation. We had over 20 new items that we have been launching over the past year. A lot of those coming into marketplace now. So we'll start seeing that expanded distribution and velocity continue our momentum, along with the product quality improvements and renovations that we've already made in our products and our packaging, the innovation and the marketing support behind that will help us continue to grow. Really proud of the business.

Perfect. And then one real quick one for Curt, I guess. As we look into other parts of the guidance, you've significantly lowered the CapEx number versus what was previous out there. But at the same time, you also brought down the free cash flow guidance. Can you help us reconcile how despite lower CapEx, free cash flow got kind of like narrowed at the lower end and also considering you're already at almost $1 billion anyway as a 9-month period. So what are your expectations here for the last quarter?

Yes. Thanks. So I would start by the run rate that we're on for CapEx is a little under $700 million. That's really on a pace of where we were through the first half of the year. So while we had a range of $1 billion to $1.2 billion, I think we shared as well with you that we were probably at the lower end of the range for a CapEx perspective. So I would characterize that as not really much of a change in expectations of where we were supposed to be. Recognizing on a year-to-date basis, we're a little over $900 million in free cash flow, and we narrowed the range from $1 billion to $1.3 billion. The real delta in that, I think, is the level of working capital investment as we continue to see top line growth as well as some investments in working capital for things such as higher cattle costs running through.

Congratulations on the quarter. I want to start with the Beef segment. In the last couple of quarters, I have noticed a significant increase in the amount of cattle you have hedged. I'm curious if that was due to your guidance being better than I expected, considering the current situation. How much of that means you had a substantial portion of your Q4 covered? Is this a new strategy? And if so, will you be consistently hedging a larger percentage of your needs going forward?

Thanks for the question, Heather. I would just say this, we continue to manage our entire supply chain, whether it be hedging or whether it be live cattle purchases along with forward pricing, export sales and then aligning with our strategic customers in an integrated fashion. So none of these pieces work independent of the other, and it's part of a holistic strategy that we have deployed.

Okay. And then my follow-up is with on beef too. So given the tariffs that's been imposed on Brazilian beef and those flows slowed in anticipation of this, I've been a little surprised that we haven't seen more of a reaction in pricing because it's a pretty significant piece of the beef market. So just wondering your thoughts on that and how you expect that impact to evolve in the markets going forward?

That's a great question, Heather, and I appreciate you giving us the opportunity to talk to it. Tariff, tariff impacts, both on the export side and the import side, obviously have a significant amount of timing associated with it. So when the tariffs actually are imposed relative to the time the product actually hits shelf, there is a significant delay, especially with supply chain challenges from some of our imports on lean beef coming from the Southern Hemisphere as well. So I'm not sure we've actually seen the opportunity for that to hit retail yet. And then we are in a dynamic market where we've seen significant inflation in trim prices, specifically on fat trim within beef as well that's creating some changes in the dynamics from that beef complex as well. So we'll continue to monitor that and watch that as timing really hits the point where we'll hit really POS.

Two questions. Can I start with the beef side of things and how significant the threat from New World screwworms is? I know that the border has been shut down with Mexico, but could this deter farmers from wanting to rebuild the herd? And maybe what happens practically? I mean, if dehorning and castration can't happen in certain regions, does that meaningfully reduce productivity? Is it just infected animals that have to be culled? I'm just curious about how you're thinking about what that could mean if it continues to progress onwards.

Sure. And that's a great question, Alexia, and one that we continue to monitor. And first and foremost, I think it's really important to indicate our support of the USDA and the actions that have been taken to protect livestock in the United States from New World screwworm. So I appreciate all of the efforts and forward-looking thoughts that the USDA has taken to protect the U.S. herd. Impacts to our business in general, I'm referring to the U.S. industry from a beef business perspective, we've had around 500,000 less head imported from Mexico this year so far. And so there has been a supply impact that's been caused by the border closure. And I expect some of that tightening to occur basis those feeder cattle placement losses here into the quarter as well. From an actual producer decision-making standpoint, we certainly have not heard any decisions that have been made from a U.S. producer standpoint that indicates they're making a decision to retain heifers or retain cows relative to a threat of New World screwworm. I think there is good confidence that the actions that are being taken by the USDA and working with Mexico will curtail any additional Northern movement.

And then as a follow-up, can I move on to the proposed renewable fuel standard that I think is due to be voted on at the end of October. It's around biodiesel and sustainable aviation fuel could be fairly meaningful. If that is approved and it leads to increased corn prices, but fairly a decrease in soybean meal prices, on the chicken side of the business, are you able to significantly shift the mix of feed into soybean meal to take advantage of that over the next couple of years? Or is it a fairly fixed ratio?

The ratio of carbohydrates to protein in our chicken feed is relatively consistent, primarily consisting of corn and soybean meal along with a few vitamins. While we've occasionally used different carbohydrate sources depending on the situation, we assess the total caloric intake per ton. I do not anticipate significant changes in this area. Currently, grain prices appear stable, and we expect a high U.S. corn crop this year. Therefore, I don't believe any considerations for substitutions will be necessary at this time.

Just wanted to ask about pork here. Noted strong performance, but just wanted to get a better understanding of the backdrop. I think if you look at the last couple of hogs and pigs reports, a little bit disappointing when it comes to the forward look on supply, except for the most recent one, I think we've got a little bit of green shoots. And so I just wanted to get your thoughts on when you expect to kind of see a supply recovery. I think in the past, we had said that we expected to see something in the back half of the year, but I think this has just gotten shifted out a tad bit. So just love to hear your thoughts on pork.

Let me remind you of this. If you examine our performance in Q3, which is reflective of the entire year, our strong execution is what is driving profitability. In Q3, you will notice some tightening of spreads, but we managed to counter that with operational efficiencies and improvements in our product mix. We observed higher carcass weights and a reduction in intercompany sales. According to USDA, we are anticipating a 0.9% increase in pork production for 2025, and for 2026, we expect a 1.6% increase. So Brady, do you have anything to add?

No, I'm just thankful we got a question on pork because we're really excited about all of the progress that has been made in that business over the last 2.5 years. I really want to thank the team for all of their work in moving that business forward in a very sustainable manner. Just relative to the supply question, I think there's a few points that are really important. Number one is, if you use the Iowa State University profitability model, we've reached a point here where the last 13 months have been positive. And the expectation basis some futures implied pricing would indicate the next year is also profitable. And so that really sets the foundation for some expansion. Now the opportunity relative to a headwind for pork expansion just rides simply in the fact that to build additional pork housing in the future for live production housing, there's been some inflationary costs. And so I think the producers are really looking for plenty of sunshine ahead before they make those investments, but continue to feel very comfortable with adequate supply, with continued improvements from a genetics and productivity standpoint we see from the industry.

Appreciate the color there. I guess my follow-up would just kind of be on chicken. Obviously, you've made a ton of improvement over the past couple of years in the business. As we look ahead, how should investors view kind of what a normalized operating margin should be? Do you think we've reached somewhat near peak? Or do you think there's a lot of room to go further in terms of operating margin improvement?

What I want to highlight this morning is that, from a profitability perspective, our chicken business is performing well. The results we observed in Q3 were significantly influenced by our improved execution, including better fill rates, yield enhancements, effective labor management, and a refined S&OP process. We have strategically aligned ourselves with key customers and partners in a more impactful way than previously, which has been a focus for the past two years. Our Chicken division is running smoothly, and we're positioned to increase the production of value-added branded products within our portfolio. The improvements we have made are noteworthy, and I believe the current supply outlook for 2025 is appropriate. It's important to remember that meat is considered essential by customers and consumers, and high-protein options are their priority. Consumers are increasingly choosing protein options. Regarding chicken, I don’t think we have hit our peak. This year has seen a generally favorable operating environment, although there are cyclical variations, such as higher-priced breast meat and lower-priced wings. Overall, we are executing well and will maintain our focus on manufacturing efficiencies, growing our business, and continuing to innovate in ways that resonate with our customers and consumers. We will further develop the strategic partnerships mentioned earlier, shift our focus toward more value-added and branded products within the poultry sector, and elevate our offerings. We are optimistic about our current position, and we believe our chicken foundation is solid. Looking ahead to the remainder of 2025 and into 2026, we feel confident in our business's capacity to perform well not just through the end of 2025 but into 2026 and beyond.

Just wanted to come back to Prepared Foods. You got a strong price lift or I guess, price mix, maybe it's just a lot more robust than what we're seeing with a lot of other packaged food companies having to give back on price in many cases. Can you just maybe talk to how much is mix driven? And what's behind it? Is it really just the protein demand? Is there just a mix lift that's a big part of that? How do we think about the momentum there?

Yes, Michael, thanks for the question. Again, we're really excited about our progress in Prepared Foods. And we laid out a strategy last year relative to how we're going to move forward and make sure that we were focused and executed on our value-added platforms within Prepared Foods as well, which tailors very, very nicely into your question on mix. And so you're exactly right. The price lift is really a combination of a favorable channel mix and it is also driven by the strength of our retail business and the strength of the brands that we have within these specific categories in the portfolio as well. Now compounding on top of that is the fact that we have seen some raw material inflation, and we have formulas with a lot of our customers and customer base. And so that certainly flows through from a pricing perspective as well. Last point is we do continue to lag pricing. As I mentioned, we walked out of Q3 with really the highest raw material pricing of the year, but we'll continue to operate the business in a very rational manner and understand where those elasticities are and use data to drive the right decision for the business, but continue to expect to grow both top line and bottom line as we move forward well into the future on Prepared Foods.

I want to add a couple of points to that, Brady. As I mentioned earlier, meat is considered essential due to its nutrient-rich qualities. Consumers are still prioritizing protein. For instance, when a consumer visits a grocery store, they are not focused on nonessential items; they are looking for protein-rich food, and we provide chicken, beef, pork, and prepared options. We believe that protein is the right area to focus on, and we are definitely doing that. I also want to highlight how proud I am of our Prepared Foods team. They have been on the journey that both you and I referenced earlier, and they are performing exceptionally well in every aspect, from innovation to successfully shifting their product mix to more valuable offerings. Regarding pricing, while we have seen some recovery, the operational execution across this business has reached an unprecedented level. There is so much more we can and will accomplish during this multiyear journey. There is significant potential in Prepared Foods, not only for the remainder of the year but as we keep progressing in the future.

So your leverage continues to drop now at around 2.1. So could you elaborate on how we should expect to see that going forward? Should we expect more excess cash going to shareholders? Or how is management thinking about capital allocation going ahead?

Thank you for the question. You can expect us to maintain our capital allocation priorities. It's important to highlight the significant improvement we've made over the past couple of years, as our leverage peaked at 4.1 times. The team has executed exceptionally well and has been disciplined in adhering to our capital allocation strategy, which will remain the same. We will continue to prioritize our financial strength, invest in the business, and return cash to shareholders. I also mentioned earlier that we have restarted our share repurchase program, although at a modest pace, marking the first time since the first quarter of 2023.

Yes. This is Devin. Thank you for that question. I would like to point out that much of the strategy we've discussed for our domestic business has also been applied to our international operations over the past year. The results you are observing are primarily due to factors we can control. Operational excellence has been a key focus for us. We have implemented specific initiatives that have improved efficiencies and reduced conversion costs, and we are actively managing the controllable expenses in that segment. It is indeed a dynamic environment, influenced by geopolitical issues and various global economies. However, our team is collaborating effectively. We anticipate a strong year ahead, and we believe that the strategies we've implemented and the momentum we're experiencing will carry into fiscal year '26 as well.

I wanted to go back to the beef side to start now that we are seeing the start of the heifer retention and maybe have a time line to think about on profit recovery. Can you talk about your expectations for the magnitude of the herd recovery or maybe compare what your expectations are for this herd recovery versus prior cycles? And how does that inform your view of the beef profit potential in 2028 and beyond?

Thanks for the question, Andrew. I think you probably highlighted when we really see that turnaround into the future as well. And so it's been challenging to really get a forecasted read here as we've moved through the last 2 years just because what we've seen from a supply perspective has not necessarily matched what we've seen from a demand perspective on the packer side as well. So we've moved into more of a prolonged period of time. The good part is, as we move forward, we definitely have a tailwind relative to drought that we probably haven't focused enough on relative to some of the commentary as well. And so that has certainly provided a great opportunity for us to get some rebuild momentum across the industry as well. Outside of that, again, it's been a very dynamic environment. We're seeing historic highs relative to beef and beef demand. The consumer has been extremely resilient in their demand for beef and how we rationalize the entire supply chain of beef from feeding and cow production into feeding into packers, we'll continue to monitor that as we move through the next couple of years as well.

I want to add a comment regarding our beef team, which has faced significant challenges. As we've discussed, we've focused on what we can control, and I'm pleased to say that our beef assets are performing better than ever. This isn't just my opinion; it's the feedback from long-term members of our beef business. They've successfully eliminated over $100 million in controllable costs from our Beef segment this year, and we're proud of that achievement. We're doing our best with our current resources and look forward to rebuilding the herd and improving our beef business in the future.

I guess what I'm trying to get at there, and I appreciate those comments very much. But is there anything that you're seeing that would lead you to believe your normalized or mid-cycle or what have you, beef profits are different in this cycle than in prior cycles?

I'd just say that we continue to analyze where we walk out of the cycle and gauge where we'll end up from a mid-cycle profitability perspective. So if you looked at the last 6 beef cycles, inclusive of this current cycle, there are some differences in it. Again, the prolonged drought that we saw right at the bottom of the cycle created this elongated bottom of the cycle. And that has created some challenges just relative to forecasting a very dynamic environment relative to the supply of cattle. Traditionally, we've seen more changes or pivots from a demand perspective than we have the cycle as well. So those two pieces will come together and really shape where we end up as we move into the midpoint in the years to come.

Got it. Okay. If I could just squeeze one other quick one. In the past couple of quarters, I think you've quantified the efficiencies that you've gotten in Prepared Foods. So I was hoping you could maybe give us an update there. And then maybe if we could think about the size or you could help us think about the size of some of the incremental efficiencies you're talking about in chicken, that would be helpful as well.

Thanks for the question. Just relative to Prepared, Donnie did a great job earlier of framing up all of the advancements we've made from a Prepared operations perspective. And there are certainly a number of dynamics that go into these calculations, raw material increase, packaging and ingredient increases as well, labor inflation, how you monetize that with and without these particular inflationary factors. Here's what I'll tell you today is there's a sustained process with audits in place to make sure that the advancements we're making from a manufacturing efficiency perspective in Prepared Foods is here to stay, and we're seeing those advancements really hit the bottom line significantly from a Prepared Foods standpoint.

Yes, Andrew, let me add this. This applies to chicken, beef, pork, and our international business. At Tyson Foods, we are focused on operational excellence in every function and activity. This means scaling the enterprise, leveraging all the assets and capabilities of our multi-protein business, driving cost savings across the organization, addressing and eliminating inefficiencies, and aligning with our customers through strong partnerships. We have more partnerships today than ever before. From a consumer perspective, we are constantly innovating and have the most extensive pipeline we've ever had. Additionally, we are utilizing data and digital delivery tools that enable us to make better, smarter decisions across the enterprise. Our disciplined approach to capital allocation and prioritizing cash flow has been significant in managing capital expenditures and working capital. This discipline has been applied throughout our entire enterprise. I'll leave you with that.

Thank you for your time and continued interest in Tyson Foods. We look forward to sharing our progress with you next quarter.