Tyson Foods Inc (TSN) Q2 2023 Earnings Call Transcript

Tyson Foods Inc (NYSE:TSN) Q2 2023 Earnings Call dated May. 08, 2023.

Corporate Participants:

Sean Cornett — Vice President, Investor Relations

Donnie King — President and Chief Executive Officer

John R. Tyson — Executive Vice President, Chief Financial Officer

Wes Morris — Group President, Poultry

Brady Stewart — Group President, Fresh Meats

Stewart F. Glendinning — Group President, Prepared Foods

Analysts:

Ben Bienvenu — Stephens Inc. — Analyst

Adam Samuelson — Goldman Sachs — Analyst

Andrew Strelzik — BMO Capital Markets — Analyst

Alexia Howard — Bernstein — Analyst

Ken Goldman — J.P. Morgan — Analyst

Peter Galbo — Bank of America — Analyst

Ben Theurer — Barclays — Analyst

Michael Lavery — Piper Sandler — Analyst

Presentation:

Operator

Good morning, and welcome to the Tyson Foods Second Quarter 2023 Earnings conference Call. [Operator Instructions] Please also note, today’s event is being recorded.

At this time, I’d like to turn the conference call over to Sean Cornett, Vice President, Investor Relations. Sir, please go ahead.

Sean Cornett — Vice President, Investor Relations

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 Meats; Stewart Glendinning, Group President, Prepared Foods; Wes Morris, Group President, Poultry; and Amy Tu, President, International & 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 will turn the call over to Donnie.

Donnie King — President and Chief Executive Officer

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 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 one 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. Cut out values across 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 right-size 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 are 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 macroenvironment. 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 ingredient cost increased $145 million. We also realized an unfavorable year-over-year derivative impact of approximately INR135 million due to volatility in commodity grain prices. Third, by 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 to 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 cost 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 foodservice. 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 yields. 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 supplier 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 foodservice 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 the 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 Ballpark, 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 to pound share about 2.4 points relative to 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 Ballpark 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 the 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 growth 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 the 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 tech 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, for our team members and for our 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 will turn things over to John to discuss our financial results for the quarter in more detail.

John R. Tyson — Executive Vice President, Chief Financial Officer

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 were 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 continued 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 cost 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 to 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 a lower cut out 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 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 heads 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 tight supply and increased competition for cattle. The margin compression resulting from reduced sales and increased capital 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 of 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 onto the chicken segment results. The sales increase in chicken of 40% 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 impact of strategic decisions we made that Donnie discussed earlier.

Other headwinds experienced in the quarter include continuing export impacts from HPAI as well as higher feed ingredient cost 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 $100 million gain in Q2 of last year. The industry operational headwinds do not change our approach though. We expect to performance as an 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 in our long-term strategy.

Now lastly to prepared foods where our retail brands like Jimmy Dean, Hillshire Farm and State Fair continued 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 foodservice 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 macroenvironment. We continue to be excited for the future in prepared foods as the segment is critical to valuing of 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 foodservice business.

Now to our financial position and capital priorities where 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 2 times 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 dividend 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 in liquidity and net leverage of 2.4 times. Last week, we entered into a new term-loan agreement for $17.5 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 2043. 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 improved profitability in fiscal 2023 with stronger quarterly performance in the back half of the year compared to Q2. As I mentioned earlier, we are 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 experience 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 and we are optimistic on 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.

So now let me turn the call back over to Sean for Q&A instructions. Thanks, Sean.

Sean Cornett — Vice President, Investor Relations

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 in the following Q&A. Operator, please provide the Q&A instructions.

Questions and Answers:

Operator

[Operator Instructions] And our first question today comes from Ben Bienvenu from Stephens Incorporated. Please go ahead with your question.

Ben Bienvenu — Stephens Inc. — Analyst

Hey, thanks. Good morning.

Donnie King — President and Chief Executive Officer

Good morning.

Ben Bienvenu — Stephens Inc. — Analyst

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 [Indecipherable] margin being flat in 3Q breakeven and then ramping into 4Q. What all is incorporated into the 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.

Donnie King — President and Chief Executive Officer

Okay, Ben, this is Donnie. I’ll start off and then for the chicken portion of this, I’ll flip it over to Wes and let him add some detail to this. But I would say this quarter was not a surprise to us. We knew Q2 was going to be challenging and it was. I’ve talked about the fact that I’ve never seen this highly unusual situation where beef, pork and chicken were all experiencing challenges at the same time, Many of these are macro in nature. But in chicken — specifically, in chicken, we have seen operational improvements and market recovery. While slower-than-expected, it will recover and of all of our businesses that are challenged right now, chicken will recover first.

In the quarter, we had of our $166 million loss, $90 million of that came from three main areas. There was about a third of it in mark-to-market. Inventory adjustments, SKU rationalization accounted for about a third of it and start up costs associated with the mix change and improvement from bone and to boneless plus a few asset impairments. So I would then go on to say chicken remains a top priority for me. We have the number one brand in chicken. Our model doesn’t give us the highs and the lows of the commodity markets. That doesn’t mean that we’re not impacted by that and variable pricing models that we have in place. There are lags that go with that.

About two years ago, I laid out for you the plan that we had with our chicken business and we’re following it. We’re growing our volume and improving our mix. We sold what we harvested and we reduced inventory by 20%. And I would tell you that we are relentless on operational execution. We continue to invest in automation and digital capabilities and we will and do compete with the very best in the industry. We’re winning in every area in which we play. We have market leadership in every category. Customers and consumers are key priorities for us and it’s clear we’re having success with them.

We’ve just recently announced that we moved up into the top 10 for Kantar for the first time ever for the most recent power rankings. We expect to win with consumers behind the number one brand in chicken and win with our customers by being their go to supplier. And I have confidence in the team that we have in our chicken business. We have the right strategy and are doing the right things for growth. We continue to implement this strategy and focus on the things that we can control and we will build up on this strong foundation that we have in place.

Now with that, let me stop, Ben, and let me flip it to Wes Morris who leads that chicken business and that team and let him add some additional color.

Wes Morris — Group President, Poultry

Good morning, Ben, and thanks for the question. No question, Q2 was tough for us and for the industry as a whole. The combination of grains and markets, some of the key parts being down as much as 50% and then the ongoing export opportunities. Simply said, versus year ago up growing 11%, price up 2% and then the $135 million change in derivatives. We did something nobody else though in the industry has done growing net sales 8.4%, volume 6.4% and improving our capacity 4%.

Based on published data, we competed actually better-than-average company in the industry and we kept investing at the same time. Donnie referenced to $90 million. I’d ask you to think of two-thirds of that as investments in our business going forward. The SKU rationalization and inventory adjustments along with packaging and ingredients makes us both more efficient and more consumer-centric at the same time.

So let me talk about four key areas that my team is focused on and give you some insight into what we got done in the quarter. Four key areas of people, service, growth and performance, our plans for staff for the entire quarter, our teams delivered the volume we needed to win with customers and consumers and we sold everything we processed plus another 100 million pounds. So demand for our products were good in Q2. Our service levels increased 20 points year-over-year. We’re back to historical levels of service.

We executed very well at the holidays at Super Bowl and March Madness gaining share in both foodservice and retail. We continued to invest in Danville fully cooked, a location which will come on this fall. We’re now filling over 99% of what we call our core eight retail products and so winning with consumers and customers at the same time. Donnie referenced the two plants we converted in the quarter from bone-in to boneless. And then we announced the closure of two facilities, which will improve our efficiency while increasing our volume and we’ve seen operational improvements every week in the last quarter and in April. So we’re well-positioned to win with customers, consumers and drive out cost at the same time going forward.

Donnie King — President and Chief Executive Officer

And Ben, I wanted to just pick up on a couple of specific parts of your question there. I think, first off, you asked are there 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 kind of some of the changing market conditions doesn’t mean continuing to pull down inventory and so that will influence the outlook, but you noted correctly from the earlier remarks on kind of the breakeven and improving through the back half of the year is what we would expect us be to in poultry.

Ben Bienvenu — Stephens Inc. — Analyst

Okay. Thanks to all. 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 implied some margin moderation and I know you guys are focused on picking up some foodservice business that you lost and I think curious from 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?

Donnie King — President and Chief Executive Officer

Got it. Let me let me pick up on that. We are pleased with the overall performance in the first half of the year and I can see that we’re making progress with both of our brands and our operations to improve margins. You’re seeing that in the results. You’re also by the way you’re seeing it in absolute dollars because I think if you looked at the first half this year versus last year, we’re up about 10%. So all of that is good news. When you’re looking forward the shape of our year on a quarterly basis, we’ll look similar to last year in the sense that we expect a stronger first half than the second half and this is because of two things.

First, because of normal seasonality in the business and second because we expect to have some higher brand investments beyond our retail brands in the back half. That’s important. Those brands are doing well. They have strong engagement with customers and I want to make sure that we have continued investment to reinforce that. There is more work to do in foodservice. And in that space, the customer decision and contract cycles are longer. So it takes a little bit to win back that business, but we have a strong platform. We have good products and I’m confident we’re going to start to see the benefits of that improvement in the future.

Ben Bienvenu — Stephens Inc. — Analyst

Okay. Thanks so much. Best of luck.

Donnie King — President and Chief Executive Officer

Thank you, Ben.

Operator

Our next question comes from Adam Samuelson from Goldman Sachs. Please go ahead with your question.

Adam Samuelson — Goldman Sachs — Analyst

Yes. Thank you. Good morning, everyone.

Donnie King — President and Chief Executive Officer

Good morning.

Adam Samuelson — Goldman Sachs — Analyst

Maybe my first question just in beef and taking kind of the revised outlook and 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 if 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?

Donnie King — President and Chief Executive Officer

Okay, Adam, let me — I’ll start-off and then I will pass it to Brady of some greater detail around that. But as expected indeed that there was tightness in cattle by — we saw increased hog cost and a softer export market. Probably the thing that is most interesting there and unfortunately I’m not going to be able to give you the answer to this, but it’s around cow and helper retention. We do have better faster growing conditions. If you look at Central Texas up to Nebraska, there still needs to be some more. We saw cow harvest towards the end of the quarter began to decline, some indication of the closure of the liquidation cycle. If you look [Indecipherable] feed numbers, we’re not in a rebuild phase just yet. More attention — more retention is needed on the efforts before we’re ready to signal that the rebuild has begun.

So with that, Brady, you add some additional color if you would.

Brady Stewart — Group President, Fresh Meats

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 exports opportunities versus domestic with some cut out runs that have occurred in specific products has actually diminished our opportunity to capture some of those results from a tightening perspective.

Number two is we’ve seen some pull back on drop credit values and again versus the previous cattle cycle, we saw drop values are strong. However, from a quarter-over quarter perspective, again, we saw some pull back as well certainly impacts some of the calculations relative to gross margin. And number three from a branded versus choice perspective, we’ve seen a pull back and USDA data indicates that the spread between branded and choice actually decreased $4.03 a 100 weight 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 the challenges from a industry perspective relative to gross margin. There’s also a reason for us to be optimistic. And number one, we will absolutely be relentless in terms of operational excellence and really it’s about Tyson and our teams 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. 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 like we’re in a very good position to weather those challenges as we move forward.

Adam Samuelson — Goldman Sachs — Analyst

Okay. I appreciate that color. And maybe a follow up for John Randall. You guys don’t give a specific EPS or EBITDA guidance. But if I kind of weld through the door via sales outlook and kind of middle the range on the different operating units, it would seem to imply that by the end of the fiscal year net debt to EBITDA could be at or above 4 times. Just wanted to get your perspective on given kind of your own earnings outlook kind of if that’s actually correct and kind of your comfort level of operating at that place for a period of time particularly if beef isn’t kind of quickly reversing.

Donnie King — President and Chief Executive Officer

Yeah. Thank you for that question and let me talk about the outlook and give little more clarity on that and then we’ll 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 can take a few different stages. A point I want to make sure that our listeners takeaway today is that when we look at the 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 in the various core proteins that’s kind of the net of it. We want to make sure it lands from an outlook perspective. And as you suggested that does have implications for what our total leverage ratio is as we move into the fact half of the year. And what I can say is we’re focused in the long run on that 2 times number. And I think just pointing to what we’ve done in the last couple of years, we were diligent and paying off $3 billion worth of debt. We’ve invested in the business from a growth standpoint. We’ve got new operations coming online in the 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 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 is volatility in our business. Rating 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 yeah, the leverage ratio will take us a little while.

Adam Samuelson — Goldman Sachs — Analyst

I appreciate that color. I’ll pass it on.

Donnie King — President and Chief Executive Officer

Thanks, Adam.

Operator

Our next question comes from Andrew Strelzik from BMO. Please go ahead with your question.

Andrew Strelzik — BMO Capital Markets — Analyst

Hey, good morning. Thanks for taking the questions. 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 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? Thanks.

Wes Morris — Group President, Poultry

Yeah, Andrew. Mr. 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.

Donnie King — President and Chief Executive Officer

If I can add to that though, I think in the U.S. specifically how do we balance 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, slightly less than what we had initially projected just because of the demand that Wes referenced.

Andrew Strelzik — BMO Capital Markets — Analyst

Got it. Okay, that’s helpful. And if I could ask one also on productivity. Obviously have achieved the targets well ahead of your original expectations. How are you thinking about the productivity opportunity from here? I know there is a continuous improvement mindset. But any way to frame kind of how you think about magnitudes of opportunity around productivity? Thanks.

Donnie King — President and Chief Executive Officer

Well, thanks for that question. It’s still as we said — I mean, we are continually focused on being the absolute best from an operations perspective. We want to be the best company, the best brand, the best protein wherever we choose to play. And what we’re doing very simply is executing those things through productivity, through efficiency to deliver that. Some of that requires adding volume, for example, in chicken. Some of that requires improved yields and labor utilization. It includes — is also looking at the assets that you have and try to make sure that we modernized those and invest in those and get the right footprint not only today, but going forward. We’ll do all those things and — or continue doing all those things, but the whole efficiency, productivity is top of mind for everyone in this organization today.

Andrew Strelzik — BMO Capital Markets — Analyst

Great. Thank you very much. I’ll pass it on.

Donnie King — President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Alexia Howard from Bernstein. Please go ahead with your question.

Alexia Howard — Bernstein — Analyst

Good morning, everyone.

Donnie King — President and Chief Executive Officer

Good morning.

Alexia Howard — Bernstein — Analyst

Donnie, sticking with chicken, can I ask about the price at the market pricing dynamics? I know, obviously last quarter that was a challenge because there was an excess of chicken — of fresh chicken flooding the markets over the holiday period. I get the point that, that sort of delayed into this quarter as well. Is there any visibility into how that might — whether that might from up in the second half of the fiscal year or where are we in that cycle? And then I have a follow-on.

Wes Morris — Group President, Poultry

Yeah, sure, this is Wes. I’ll answer that. We didn’t see a lot of movement in January and February and we started to seeing a little more strength in March, which for us will flow through the next quarter. We have seen some fluent numbers that would indicate a little stronger markets in the back half of the year.

Alexia Howard — Bernstein — Analyst

Great. Thank you. And then on top of prepared foods with the Kantar Power Ranking study, I’m just wondering what it was that’s changed in your retailer relationship because that is a big move. So I mean to get into the top 10, there’s a lot of larger more established CTG type companies that are not in the top 10. I’m just wondering what you think is changed over the last couple of years to have got you back. Thank you. And I’ll pass it on.

Donnie King — President and Chief Executive Officer

Thank you, Alexia. Well, first, I would say it was on purpose. We talked about a very simple and [Indecipherable] ramp here is winning with our team members, creating a differentiated place to work, getting happy team members, having fully staffed operations was important and then winning with customers and consumers. We’ve invested a lot and continue to support customers and consumers with our brands, with innovation, with all of those things. We want to be the best or be their go to supplier in every part of our business. And then finally and this is kind of where the rubber meets the road, but the winning with executional excellence throughout this organization and it is — that is the result — what you’re seeing in this survey is a result of the work that this team has done.

Alexia Howard — Bernstein — Analyst

Thank you. And I’ll pass it on.

Donnie King — President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Ken Goldman from JPMorgan. Please go ahead with your question.

Ken Goldman — J.P. Morgan — Analyst

Hey, thank you. I do appreciate Donnie your comments about the macro. Certainly, there’s a lot of challenges that everyone is facing. I wanted to ask it looks to me like at least for this one quarter sort of the performance gap as measured by margin did widened a little bit between the industry and Tyson in both beef packing and in chicken. I’m just looking at some of your bigger competitors in chicken and I’m just looking at sort of hedgers edge and our own model for beef margins. So I know those aren’t perfect comparisons, but I’m just trying to get a sense of A, is that how you guys see it as well or are my assumptions there wrong? And B, how quickly if there are right can we kind of reverse that and you can kind of get back to growing in line or having a margin in line with those kind of major segments?

Donnie King — President and Chief Executive Officer

So Ken. I’ll start off and then I will flip that to give a little more color from Wes around chicken and Brady on beef. But I did talk about the macro a lot and I got to tell you it pains me to talk about that because we’ve never been able to control macro or economic issues or market conditions. But what I can tell you is we are controlling what we can and we have a full court press on being the best we can be with operational excellence and winning new customers and consumers.

The other thing I would tell you, Ken, is that here at Tyson and as you know, I’ve been through a number of these cycles before, this company has in it’s 90 year history has been through a number of them. But what we have done in the past and we’re doing this time is we’re accelerating in the bottom of the cycle and we always come out better and stronger. And I see no reason to believe that we won’t do that this time as well. And let me flip it to Wes to add some chicken color.

Wes Morris — Group President, Poultry

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

Ken Goldman — J.P. Morgan — Analyst

All right. Thank you for that. If I could, actually 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?

John R. Tyson — Executive Vice President, Chief Financial Officer

Yeah, 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 50 plus years of the 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 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 month, we’re excited to bring that into the types of prepared foods business.

Stewart F. Glendinning — Group President, Prepared Foods

Yeah, Ken, let me just add a little bit here. It’s 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 self 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 DSD network that frankly we haven’t had enough portfolio before. I think we’re setting up for a very interesting deal here that is going to be a good addition to Tyson.

Operator

And our next question comes from Peter Galbo from Bank of America. Please go ahead with your question.

Peter Galbo — Bank of America — Analyst

Hey, good morning, everyone. Thanks for taking the question.

Donnie King — President and Chief Executive Officer

Good morning.

Peter Galbo — Bank of America — Analyst

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 perspectives with cattle prices basically at all time highs and speaking the 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 think the price would be enough of an incentive, but obviously a lot of their cost structure is probably changed as well. So would appreciate any color there.

Brady Stewart — Group President, Fresh Meats

Well, thanks for the question, Peter. First of all, let me address both the question that Ken posed and you posed as well around beef. And I think there’s a few important aspects of Q2 that we need to focus on. So first is relative to timing, Tyson has quarterly pricing that we use for several of our large customers. And so it’s very specific primal areas where we’ve seen some inflation from a cut off perspective in those primals quarter-over quarter. We have a timing lag relative to those specific customers and agreements.

Second is we did see some hedging losses in the quarters that impacted performance. Third would be our volume. And so as you mentioned, we did see a decrease relative to volume and certainly, we saw that volume — we lost some volume leverage relative to our cost structure in our assets. We’re working diligently from an efficiency perspective and seeing some good improvements in that area as well to help offset that as we move forward. As I mentioned earlier, export demand has been softened.

The strength of the U.S. dollar and FX has had a impact on some export demand and specifically the substitution products that we see from a domestic portfolio. We’re not seeing those large gains as we did in previous quarters that relative to drop value all go into play in terms of what our actual results are versus some of the index modeling that occurs as well. And relative to the cow, calf operator and how they look at the business, obviously, a lot has changed since the last cycle. Interest rates are up right now.

There is some incentives for the cow, calf operator to go ahead and market the heifer into a feed yard as opposed to retain just relative to the strength we’re seeing from a feeder market as well. So we’re still seeing some drought conditions from Central Texas up through Central Nebraska that’s creating some challenges, but the good news is for the cow, calf operators that are working outside of that space, we’ve seen some remedy relative to the drought conditions and moisture here within the last several months that provides some optimism as well.

Peter Galbo — Bank of America — Analyst

Great. That’s very helpful. And Donnie I just wanted to go back to one of your comments. I think you did mentioned I think 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?

Donnie King — President and Chief Executive Officer

Thanks for that question. I’ll touch on this at a high level. But in terms of your question, for the past few years, we’ve taken bold and aggressive steps to advance productivity and efficiency. We’re constantly evaluating how we can be more efficient, push down decision making and remove duplication of work. Those are all top of mind today. But we have also we have done a number of things looking at our footprint, looking for what it would take to make less efficient assets and this will be across the portfolio, how do we need to make them efficient, how do we automate them, how do we redesign them or in some cases you could look at how would you sell it or how would you close it and we look at all those different options.

But I want to remind you that, that our strategy is all about growth, growth in our base or core protein businesses, growth in our branded portfolio and growth internationally where it makes sense. So making sure that you understand clearly that we are in a growth mode and at the same time trying to right-size our footprint and our production machines to deliver those products that customers and consumers love.

Operator

And our next question comes from Ben Theurer from Barclays. Please go ahead with your question.

Ben Theurer — Barclays — Analyst

Yeah. Good morning, everyone and thanks for taking my question. Just wanted to come back to chicken and actually some of like historic context and ask about your performance particularly as it relates to hatch rates and hatch ability because it was interesting in the past, it seems like the performance itself was impacted by a 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 will be my first question. And I have a quick follow-up as well.

Donnie King — President and Chief Executive Officer

Okay. I will start off and then I’ll flip it to Wes for a even greater level of detail. But I would remind you that couple of years ago, I outlined a roadmap for us to what I would call restore our chicken business to its rightful position. Those were my exact — almost my exact words and we’re still on that roadmap. We’ve had bumps along the way in the live production and the lifecycle. The animals that we had some issues with some of the breeding stock, particularly to males and that’s been well chronicled.

Every player we had issues with hatch and we’re very competitive as it relates to that today. We’ve made lots of improvement. We were buying if you recall a significant amount of product on the outside and paying a premium in the height of the market and we began to reduce our dependence on outside meet and wanted to utilize the assets that we have in place and get the fixed cost leverage by producing those live animals and then converting those into those products that our customers and consumers love.

And we’ve done all those things and we’re still on this journey. And I would tell you that we got the right people in place to complete that mission, nothing there applied, but to continue down the road, great leadership, a great team in place now to do that. And. I am excited, I’m optimistic about the future of our chicken business and where it’s going and even in this quarter losing $166 million, I’m still excited about the future of the number one brand in chicken and the opportunity that we still have before us. Wes?

Wes Morris — Group President, Poultry

Yeah, thanks for the question, Ben. The whole industry has not seen 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 imbalance than the nearest past.

Ben Theurer — Barclays — Analyst

Perfect. Thank you very much. And then just the second question just 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 4 times? 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. Thank you.

John R. Tyson — Executive Vice President, Chief Financial Officer

Yeah, 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 — is higher than kind of 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 it 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 that will make those choices.

But yeah, I think just where we are with the profitability outlook of 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 ratio is may be a little bit elevated compared to our long-term target.

Ben Theurer — Barclays — Analyst

Okay. Thanks for that, John.

Operator

And our next question comes from Michael Lavery from Piper Sandler. Please go ahead with your question.

Michael Lavery — Piper Sandler — Analyst

Thank you. Good morning.

Donnie King — President and Chief Executive Officer

Good morning.

Michael Lavery — Piper Sandler — Analyst

I just wanted to come back to the idea of growth versus profitability and just how to think about balancing that, not just for one segment, but broadly. And I guess, just with so many of the headwinds you’re pointing to broad — in the macroenvironment and without really much change ahead in terms of it sounds like it’s going to get better very soon. Does that impact how you think about maybe different priorities to improve profitability or just to make sure the margins come through better as much as you have seen things you can control or what’s the right way to think about some of that in terms of just on the investment tradeoffs or ways to maybe improve the execution a little bit?

Donnie King — President and Chief Executive Officer

Yeah, thanks for that question. And first thing I would tell you is that just to acknowledge the macroenvironment and what has been the fact that the magnitude and the duration of the challenges, they do continue. However. If you think about this company in particular, we’ve had a 90-year history of successfully managing macroeconomic cycles and we’ve always come out stronger. We have never been able to control those cycles and what we can do to control what we can control and there’s a lot of opportunity there for us to be better. And we are obviously focused on that and across all businesses and functions. In terms of growth at any cost that’s not what we’re talking about here.

The growth that we have is in service to our customers and those consumers. And I think as Wes had mentioned this earlier that we always start with the demand plan and we work back to a supply plan. And so we wouldn’t be growing chicken, beef or pork or prepared foods for that matter if we didn’t have a demand plan that says that we have a consumer wanting this. And then the second part of that is we obviously have no intention of just growing for growth sake and — but we always balance growth with profitability and I wouldn’t expect this time to be any different than that, but we see this is — this cycle is something we’ve seen before. And we’ve always accelerated out of these type cycles and we’ve — in a growth pattern accelerating out of the curve, if you will, and that’s what we’re doing this time as well.

Wes Morris — Group President, Poultry

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 talked about. Part of that has to do a little bit with just you getting the capacity utilizations and footprint back right. And then it’s also worth pointing out that we got business outside 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 no profit engine for us and we’re excited about the investments we made there as well.

Michael Lavery — Piper Sandler — Analyst

Okay. Thanks so much.

Donnie King — President and Chief Executive Officer

Thank you.

Operator

And ladies and gentlemen, with that, we’ll be ending today’s question-and-answer session. I’d like to turn the floor back over to Donnie King for any closing remarks.

Donnie King — President and Chief Executive Officer

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 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.

Operator

[Operator Closing Remarks]