Tyson Foods - Q2 2024

Transcript

Operator (participant)

Good day and welcome to the Tyson Foods second quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Sean Cornett, Investor Relations. Please go ahead.

Sean Cornett (Head of Investor Relations)

Good morning and welcome to Tyson Foods fiscal second quarter 2024 earnings conference call. On today's call, Tyson's President and Chief Executive Officer, Donnie King, and Chief Financial Officer, John R. Tyson, will provide some prepared remarks followed by Q&A. Additionally, joining us today are Brady Stewart, Group President, Beef, Pork, and Chief Supply Chain Officer; Melanie Boulden, Group President, Prepared Foods, and Chief Growth Officer; Wes Morris, Group President, Poultry; and Amy Tu, President, International. We also have provided a supplemental presentation which may be referenced on today's call and is available on Tyson's Investor Relations website 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 rely solely on historical periods. These forward-looking statements are subject to risk, 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 reconciliation 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.

Donnie King (CEO)

Thanks, Sean, and thank you to everyone for joining us this morning. I'm pleased with our performance in Q2, and I want to thank our team members for their ongoing commitment to driving operational excellence. We've certainly come a long way from where we were a year ago and wouldn't be where we are today without their hard work. Our momentum continues to strengthen, and all of our businesses are running better today than they were last year. Our results this quarter are part of a solid performance in the first half of fiscal 2024 compared to the first half of last year. Adjusted EPS and adjusted operating income are both up nearly 60% while operating cash flow increased by more than 50% and CapEx decreased by more than 40%. This performance gives us confidence in our improved outlook for the fiscal year and in our long-term future.

As you saw in our results, tailwinds in chicken again offset headwinds in beef as we benefit from our multi-protein portfolio. While we're not immune to the macro environment, we're taking steps to reduce our exposure to commodity markets. We are expanding our offerings in seasoned and marinated meats to value up our portfolio across beef, pork, and chicken to provide consumers convenience and new flavor options. Across our brands, we're focusing on meeting the consumers where they are by offering convenient, restaurant-quality food options at home. We are leader in protein with some of the most iconic brands in food, with offerings that span the value spectrum. This is why our share remains healthy despite a more challenging environment for consumers. We continue to support our brands through efficient marketing, effective innovation, and strong partnerships with our customers.

We continue to build financial strength by being disciplined in our capital deployment to improve cash flow and position us well to tackle challenges and capture opportunities. We also continue to take bold actions to improve performance and drive long-term value for shareholders, and I remain highly confident in our strategy and optimistic about our future. Now, let's delve into an update on market share. At Tyson Foods, we have a broad portfolio of offerings across foodservice and retail at a range of price points to meet consumers where they are, even as they manage through a challenging macro environment. We also have some of the strongest and most iconic brands across food and beverage behind the Tyson, Jimmy Dean, and Hillshire Farm names, which allows us to make efficient choices to maintain margin while strengthening our shelf position.

We see this in the strength of our dollar share in our core business lines, which we believe reflects the quality of our share position. Since Q2 of fiscal 2019, we've added 400 basis points of dollar share in our core business lines. While our share is down modestly versus last year as we lapped some record performance, we have gained dollar share over each of the past three quarters. Our core bacon brands, Wright and Jimmy Dean, have contributed to this recent growth. In fact, our dollar share in bacon for Q2 was at a record high level over the past five years, and we were the fastest growing in the category during the quarter. I'm excited about our opportunities in bacon and expect our share to continue improving as our new bacon facility that opened in January ramps up.

The value proposition of our iconic brands resonates strongly with our consumers, and our market share and household penetration rates remain healthy. We continue to have opportunity to expand the household penetration of our great brands, leaving room for continued share growth over the long run. Moving on to the segment performance, starting with prepared foods, consumers' focus on value continues to impact our retail volumes. However, our share remains healthy, and as I mentioned, we are gaining dollar share in bacon. Our volumes outside of retail continue gaining traction as we strive to grow this business with a focus on customer diversification and margin accretive channels. Operational efficiencies and lower raw material costs drove solid profitability both in Q2 and the first half of fiscal 2024. In chicken, the momentum established in the second half of fiscal 2023 continued in Q2.

In fact, versus the second quarter of last year, AOI increased more than $325 million. While we are benefiting from better market conditions, including lower grain costs, our bold actions and focus on the fundamentals are also evident in our results. We have made progress across the value chain. Our live operations are substantially better. We've improved yield, labor efficiencies, and utilization in our plants. Our demand planning and customer service have also taken significant steps forward. When our live operations are running well and our demand plan is more accurate, we can operate more efficiently and better service our customers. In summary, our focus on getting back to the basics in chicken is working. As you all know, in beef, limited cattle supplies led to spread compression. Despite some quarterly volatility reflecting market conditions, our results for the first half of fiscal year have come in as we expected.

Our goal remains to offset some of the challenges of a tight cattle supply environment by focusing on the controllables such as labor utilization and managing mix to meet customer and consumer demand. Turning to pork, better spreads and ongoing operational execution led to improved profitability in the quarter and the first half of the year. As you may have seen, we made the difficult decision to close one of our pork facilities. This is part of our efforts to optimize our footprint and improve performance by reallocating resources to nearby, more efficient plants while improving mix and better serving our customers. Now, let me take a step back and talk about our recent corporate rebranding initiative. We launched a new corporate logo earlier this year that captures our One Team, One Tyson spirit.

It encompasses our differentiated capabilities in scale and our diverse portfolio across channels, categories, and eating occasions. Our Tyson Foods corporate logo represents our company's legacy and our team's purpose, which is to feed the world like family. Our approach to driving long-term value hasn't changed and is built on a core of three key pillars. First, we are fortifying our foundation of core proteins. We strive to be best-in-class operators while continuing to look for ways to value up our portfolio. Second, we are building our brands by delivering innovation for new occasions, categories, and channels to better serve consumers. Today, we have three of the top 10 protein brands with room to expand our household penetration. Brands are our best opportunity to drive faster growth, higher margin, and stronger returns. Third, we're growing globally.

Our international business grew revenue eight-fold to $2.5 billion over the five years through fiscal 2023. We expect to drive profitable growth over time by capturing expanding consumer markets, particularly in Asia, and we believe we are well-positioned to win. These strategic pillars are supported by key enablers of operational excellence, customer and consumer obsession, along with data and digital. A key element of operational excellence is to gain enterprise scale and unlock savings in our controllables by modernizing our operations and driving performance to standards. We win with our customers by building long-term partnerships and delivering top-tier experiences. We enrich consumers' lives by creating best-in-class marketing and innovation. Finally, we continue to build our digital capabilities utilizing data, automation, and AI tech for better decision-making and outcomes.

Before I hand it over to John to review our financial performance, let me remind you of our priorities this year, where we focused on controlling the controllables. Our results for the first half of the year clearly show that we're controlling our CapEx and working capital to drive strong cash flow. Another priority is to optimize our footprint and network. We've closed the last of the six chicken facilities that we announced in 2023, along with the two case-ready beef facilities, and as mentioned earlier, we are closing one of our pork plants. We're also focused on operational excellence by restoring performance in chicken, strengthening prepared foods, managing beef through a difficult cattle cycle, and driving efficiencies in pork. As you have seen in our results so far this year, we're making tangible progress in all these areas. With that, I'll turn the call over to John.

John Tyson (CFO)

Thanks, Donnie. I'll start with an overview of our total company results before moving on to our individual segments. Sales in Q2 were essentially in line YoY at $13.1 billion, as a decrease in chicken was nearly offset by an increase in beef. Adjusted operating income increased $341 million YoY to $406 million, driven primarily by significant improvement in chicken profitability. Operational performance and substantially higher AOI led to a $0.66 increase in adjusted EPS, which came in at $0.62 in Q2. Now, let's review our segment results, starting with Prepared Foods. In Prepared Foods, Q2 revenue was down slightly YoY. Volume growth was led by benefits from the Williams acquisition. The pricing decline reflects the mixed impact of the lower contribution from retail. AOI in Q2 was down modestly versus last year.

Lower raw material costs and operational efficiencies were more than offset by startup costs and mix. Despite the decline in AOI, our margin for the first half of the fiscal year remained in the low double digits. Moving to Chicken. Sales in Q2 declined 8.2% YoY, primarily due to lower volume. Volume declined 6.1%, driven by lower production as we better aligned our supply to customer demand, while the 2.1% reduction in pricing was due in part to the pass-through of lower input costs. Despite the decline in sales, AOI increased $326 million YoY to $160 million. The benefits of our strategic actions and the substantial operational improvements we've executed since last year are clear. Market conditions, including lower input costs, net of pass-through pricing, and a better supply-demand balance, were also key contributors to improved profitability.

The current quarter results include a $55 million derivative loss compared to a $35 million loss in the year-ago quarter. As a reminder, our grain hedging program is part of an overarching risk management strategy and not a speculative tool. In our beef segment, revenue was up 7.3% YoY in Q2, with both volume and pricing increasing. The 2.8% increase in volume was primarily driven by higher average carcass weights, while pricing increased 4.5%. While revenue increased, AOI decreased versus last year, primarily reflecting compressed spreads as expected. This more than offset continued progress on our operational efficiencies, including better labor utilization and better management of product mix to meet customer and consumer demand. Moving to pork, Q2 revenue increased 4.6%, driven by volume growth and higher pricing. Volume growth of 2.9% was led by more plentiful hog supply. Pricing improved due to healthy global demand.

AOI also increased YoY, going from a loss of $31 million last year to a profit of $33 million this year in Q2, benefiting primarily from improved spreads and better operational execution. Year to date, pork AOI has improved $151 million. Finally, our international business continues to make progress toward stronger profitability. AOI increased versus last year as we begin to lap some of the startup costs of our newer facilities and continue to focus on operational execution. Shifting to our financial position and capital allocation, year to date showcased strong operating cash flow of approximately $1.2 billion as we continue to manage working capital. We remain very disciplined with CapEx, which came in at $621 million for the first half.

The $267 million in CapEx for Q2 was the lowest quarterly spend in several years and represents the fifth quarter in a row of sequential decline as we lap our elevated CapEx from the previous two fiscal years and focus on controlling where and when we deploy capital. Year to date, free cash flow of $556 million increased nearly $900 million versus the first half of last year and was more than $200 million ahead of our year-to-date dividend payments. Our balance sheet management approach remains unchanged as we're committed to building financial strength, investing in our business, and returning cash to shareholders while maintaining our investment-grade credit rating and returning net leverage to at or below 2x net debt to EBITDA.

Our net leverage again declined sequentially, coming in at 3.6x in Q2, driven by improving last 12 months' EBITDA, and we expect it to continue to improve for the balance of the year. We ended Q2 with $4.4 billion of liquidity. As you may have seen from our press release in March, we successfully raised $1.5 billion in new senior notes, and we paid down a portion of our term loans. We plan to use the remaining proceeds to retire our outstanding notes coming due this August. 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 take a look at our updated outlook for fiscal 2024. We are reiterating our overall sales guidance to be roughly flat YoY.

However, given our strong year-to-date results, we are raising our AOI guidance driven primarily by an improved outlook for Chicken. For the total company, we now expect between $1.4 billion and $1.8 billion of operating income. Moving to the segments. In Chicken, given the strong start in the first half of the year, we continue to believe that there are more tailwinds than headwinds. We are raising our AOI guidance range to be between $700 million and $900 million. Prepared Foods also had a solid first half. In this segment, we are tightening our AOI outlook to be between $850 million and $950 million, indicating a weaker second half of the year, which reflects typical seasonality. In Beef, the first half of fiscal 2024 has progressed in line with our expectations.

However, uncertainties remain, including the progression of the cattle cycle, and we now expect our full-year AOI to be between a loss of $400-$100 million. In pork, we've seen solid first-half performance and are raising our guidance to be between $50-$150 million. To add some color to the shape of the rest of the year, uncertainties remain around consumer strength and behavior, the progression of the cattle cycle, and key commodity costs. When we factor in these variables with pork and prepared foods' seasonality, there are reasons to believe that Q3 could be weaker than Q4. To round out the key P&L items, we anticipate interest expense to be roughly $400 million and our tax rate to now be approximately 24%.

Turning to CapEx, we're maintaining tight controls on spending in line with profitability and cash flow, and we are narrowing our CapEx range to be between $1.2 billion and $1.4 billion this year. Finally, on free cash flow, we're committed to managing working capital and CapEx, and we're even more confident now that we can fully fund our dividend this year through our free cash flow generation. Now, I'll turn the call back over to Donnie to wrap up before we move to Q&A.

Donnie King (CEO)

Thanks, John. Before we get to your questions, I'd like to thank our 139,000 team members who work tirelessly to feed the world like family and fulfill our mission to bring high-quality food to every table in the world. It is the strength of our team that secures our position as a world-class food company and a recognized leader in protein. Together, we delivered a solid first half. We still have more work to do and believe we have the strategy in place to continue our progress and deliver long-term shareholder value. Now, I'll turn the call back over to Sean for Q&A instructions.

Sean Cornett (Head of Investor Relations)

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

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Peter Galbo with Bank of America. Please go ahead.

Peter Galbo (Analyst)

Hey, guys. Good morning.

Donnie King (CEO)

Morning, Peter.

John Tyson (CFO)

Good morning, Peter.

Peter Galbo (Analyst)

Donnie, maybe just to start, you typically give, I think, kind of an update on this state of the business and things have improved here sequentially, at least pretty dramatically. I guess just curious a little bit on two things. One, kind of are you happy now with kind of the state of the portfolio and the state of plant closures and asset rationalization? And then secondly, just trying to understand the commentary around Q3 weaker than Q4 seasonally in light of what you've been saying, that that would run kind of counter to what has been the case seasonally for the past, I don't know, five or six years. So maybe if you can just unpack those two areas would be helpful.

Donnie King (CEO)

Thanks, Peter, and appreciate everyone for being on this morning. Your first part of your question is essentially, am I satisfied? I'm encouraged. I'd stop short of saying satisfied in terms of the results. I'm proud of the results that we delivered in Q2, and we're seeing the benefits of our diverse portfolio across proteins, channels, categories, and eating occasions. Where we saw chicken and pork, chicken and pork are offsetting the headwinds in beef. In our Q2, our momentum continues to strengthen on all of our businesses, and they're running better today than they were last year. We've come a long way from where we were a year ago, and my thanks to all of our team members for continued improvement and execution. We're executing against the priorities we laid out for fiscal 2024. We're controlling the controllables. We're optimizing our network. We remain focused on operational excellence.

We've taken bold actions to drive performance and to build financial strength. We're delivering meaningful results compared to the first half of last year in profitability, cash flow, CapEx in line with historical rates. Our performance has given us confidence to raise our guidance while acknowledging uncertainties remain, and we have much work to do. But in terms of your specific question around prepared, let me make a few comments, and then I'll pass it over to Melanie to add some detail. Our results were in line with our expectations. Our brands are strong, and our share remains healthy. Persistent inflation is weighing on our bifurcated consumer. Our strategy is to meet the consumer where they are with offerings at various price points. In terms of more details, let me flip it over to Melanie to add a little color to your question.

Melanie Boulden (Group President, Prepared Foods and Chief Growth Officer)

So, Peter, I think you were asking specifically about our projections for Q3 as well as the rest of the full year. So I'll just talk specifically about Prepared Foods and let any of the other leaders chime in. So you know the first half of the year, Prepared Foods delivered $500 million in AOI. And you also know that profit delivery in the second half of the year has historically been lower than the first half, and we expect this year to be the same. So therefore, the midpoint of our second half guidance is $400 million. And I also want to point out that historically, Q3 has performed better than Q4, but we're seeing higher commodity costs in Q3, so we expect a pretty even split between the two quarters.

Peter Galbo (Analyst)

Great, Melanie. That's very helpful. Yeah, we've gotten certainly a number of questions on that, so thank you for the context. And then, Donnie, maybe just as a follow-up, look, we've had a number of companies this quarter, both in the CPG industry and in restaurants, just kind of comment on the state of the consumer and low-income consumer. I know that was in some of your prepared remarks, but curious if you could dive a little bit deeper on just your view on foodservice and some of the channels that you service there. Just any commentary around quick service, casual dining, and non-commercial would be helpful. Thanks very much.

Donnie King (CEO)

Melanie, why don't you answer that?

Melanie Boulden (Group President, Prepared Foods and Chief Growth Officer)

Yeah, happy to. So, Peter, in both retail and foodservice, as you know, the consumer is under pressure, especially the lower-income households. And in retail, we're seeing roughly 20% cumulative inflation over the last three years. Now, the inflation impact, coupled with historically low savings rates, has created a more cautious, price-sensitive consumer. And we're also seeing a cautious consumer prioritize essential staples over discretionary categories. Now, that said, we're advantaged in that our protein categories enjoy lower levels of elasticity compared to the broader consumer landscape. And in retail, we're experiencing well, I should say. But in retail, we are experiencing a little slippage to private label with lower-income households. However, our share remains strong with growth in bacon, snacking, and sausage. Now, in foodservice, where you specifically noted, we continue to deliver solid performance, but we are seeing shifts from fine dining into QSR.

We're also seeing QSR slippage to more meals being consumed at home. But for Tyson, we're advantaged as we serve both in-home and away-from-home consumers. The key point, I guess I'd like you to take away from all of this is that we've intentionally built a portfolio diversified across strong brands spanning multiple protein offerings and value tiers. And our scale allows consumers to find our products in multiple places throughout retail and foodservice channels. And this allows us to deliver on our goal of meeting our consumers where they're at across a variety of value spectrum.

Operator (participant)

The next question comes from Ben Theurer with Barclays. Please go ahead.

Benjamin Theurer (Analyst)

Yeah, good morning. Thank you very much for taking my questions. Congrats on those very outstanding results. Just wanted to dig a little bit into the dynamics in chicken that you've seen and kind of unpack a little bit the volume performance on the production side. Can you help us to kind of frame it a little bit more? Is it lower heads? Is it lower weights? Is it a combination of it? What have you done differently in terms of adjusting your operations to kind of have those sales down, but at the same time, this very nice profit swing? And that would be my first question, and then I have a quick follow-up. Thank you.

Donnie King (CEO)

I think I caught all the questions. Let me start out, and if I heard correctly, it was kind of a supply question. Then let me talk about that, and I will flip to Wes to add some very specific details. But in terms of chicken supply, if you look at the publicly available data, USDA has projected chicken supply to increase about 1% in 2024. But if you look at the data underneath it, there are some things that you need to get from this. This is a livability and hatchability story for the industry. If you look, pullet and hen mortality continues to be elevated. Broiler mortality continues to be elevated. Hatchability continues to be 3%-5% below historical rates. So the net of all that is this: there'll be fewer live pounds delivered to the processing plant than forecast.

So if I look at that, I believe the supply will be lower than 1% projected by USDA. The other thing I would say with that is this is not a short-term fix. If you remember, we have a genetics company as well, and we've seen some of this activity as well. So this can be a little bit longer-term issue. So you asked you didn't ask, but I will tell you, at least from our perspective, why. Genetic selection over the last several years has been skewed toward breeder characteristics like yield and feed conversion. There's been some impact, or cumulative impact, from No Antibiotics Ever across the supply chain. And there's some, I won't say new disease, but disease persists, creating mortality in the breeder. There's a new one, or new to me, called avian metapneumovirus that's out there. Laryngotracheitis, or LT, is out there today.

And there are other things, but I think the supply will be less than 1% based on the data points I'm looking at, and from flat to 0.5% to something along that order. Let me flip it to Wes and let him talk about our supply and see if that answers your question. Yeah, Ben, we certainly see the USDA numbers projecting up 1%, but we're seeing the egg sets up, weight up, but slaughter pounds relatively flat. The good news is I'm very proud of our live performance. We hatched 82.34 in the quarter. Our livability is up 50 points YoY. And so looking at our live performance and then our S&OP process, our supply-demand group, we're in a good position for the back half of the year to stay balanced, to take care of our customers.

I'm very pleased with our live and supply-demand planning group. Specifically to Q2 volume, our volume is solid. It's consistent with Q1 and our expectations. Just as a reminder, 2023 is a challenging comparison period. Our pricing is solid. Just as a reminder, we lag a quarter to a quarter plus. And then the other dynamic unique to us is we have quite a few grain-based models that pull pricing down, but it does stabilize our margin.

Benjamin Theurer (Analyst)

Okay, perfect. And then just a quick follow-up on beef in terms of what you're seeing on the industry. Have you seen any signs of heifer retention to just what you would like getting on the ground to get a better feel on how bad it is still going to get until it might get better? A little bit of a preview maybe into 2025.

Brady Stewart (Group President, Beef, Pork and Chief Supply Chain Officer)

Sure, Ben. This is Brady, and thanks for the question. And first of all, I guess really at a high level, we haven't seen anything relative to any of the industry numbers that have been published that would really indicate that true meaningful heifer retention has begun. And so at this point, we can potentially anticipate retention beginning end of fall, but there's some caveats to that. And certainly, as we shift from an El Niño weather pattern to a La Niña, the pasture conditions are extremely important to heifer retention, and there's a potential we could see some drier conditions as well persist. We'll continue to monitor that along with additional metrics around heifer retention and the percentage of heifers that move into slaughter.

Then lastly, one of the promising signs would be we have seen meaningful decline of the number of cows that are going to slaughter, down double digits from 2022 and 2023 both. So really, we find ourselves what looks like in the midst of a transition pattern, and we'll continue to monitor to understand the timing of that as we move forward.

Benjamin Theurer (Analyst)

Perfect. Thank you very much.

Operator (participant)

The next question comes from Tom Palmer with Citi. Please go ahead.

Thomas Palmer (Analyst)

Good morning. Thanks for the question. Start off on the chicken side. At least relative to consensus estimates, the guidance boost would seem to indicate more than just upside in the quarter. So maybe talk on the components that are driving that increased outlook for the second half of the year. I mean, it does seem, obviously, like feed is favorable. Seems like the pricing environment is getting better. And then you've had positive commentary on productivity. So just any help on kind of how much those items are helping, if there are other items to consider, and any quantification, of course, would be appreciated. Thanks.

Donnie King (CEO)

Sure. Let me start off, and I will, Wes, add a little color to this as well. But one of the things I got to point out is that the focus on the fundamentals that Wes and our chicken team have had over the past year, actually, is quite impressive, and that's a result of some of this. I would point out this, that there have been some market tailwinds as far as chicken is concerned. But of the $325 million that were better YoY, more than half of that came from execution-type things such as the footprint and network, as well as some of the other tougher decisions that we made. And with that, Wes, why don't you cover some of the more specifics around your program?

Wes Morris (Group President of Poultry)

Yeah, sure. We're certainly focused on controlling the controllables.

Donnie talked about live operational performance, which includes our network changes. Then probably the biggest change is making sure that we match our supply and demand. We've talked about the live being better. Our plant performance and network optimization is right on target. Our capacity utilization continues to improve sequentially. We've improved our order fill rate by actually lowering our working capital over $400 million, driven almost exclusively by inventory. Demand is solid, and 2023 is not a very good comp. Let me add a little more color to valuing up and our path forward. So we have our new startup plant in Danville. It is currently single-shifted, and I expect due to demand, it will be double-shifted by the beginning of 2025. So we are running a fundamentally stronger chicken business. We got strong BU leadership in place and strong future growth plans.

Specific to your question, Q1 and Q3 are typically our strongest quarters. Good balance front half and back half. Grains are moderated, but are still higher than pre-COVID levels. We continue to watch the total protein availability, obviously, spring and summer, our better growing conditions. That should increase some volumes in the industry. We're also paying real close attention to the consumer behavior and how that may shift our mix. But we will be doing quite a bit of investing in the back half of the year in our value-added business, where we have a number one share in both retail and foodservice. As I said earlier, we're ramping up Danville well ahead of schedule. If I could, I'd like to just reiterate something to make it really clear in our chicken business. Our strategy is very simple. It's live performance, excellence in live performance.

It's operational execution and matching supply and demand. It's that simple.

Thomas Palmer (Analyst)

Great. Thanks for that. And then maybe a quicker one on pork. Just with feed costs falling, are you seeing any signs that the industry, in terms of hog supply, is making better profits and might start ramping up supply at all, or still a bit too early?

Brady Stewart (Group President, Beef, Pork and Chief Supply Chain Officer)

Thanks for the question, Tom. Certainly, the compression we've seen on some of the feed stuff has helped move some numbers back to profitability within the industry from a pork production standpoint, which is certainly good news for our producer partners as well. What we've seen consistently for the last year, which is of importance, is we've seen genetic improvement across the entire industry, leading to additional pigs per litter. And when you compound that with the fact that we've seen, over the last 10 years, probably the best year relative to true industry herd health, we're seeing ample supply as we move forward as well. So I'd be speculating if we commented on any potential expansion, but certainly, the environment is set up in a much better position versus last year. But let me be clear. When we look at our business, we really focus on the controllables.

I've seen good improvements from our pork business through the first half of the year relative to operational excellence, relative to yields within our assets, and relative to our mixed management conversions as well. That's really coupled with the fact that we have plenty of runway ahead of us to continue to improve and get better, and that's the expectation as we move forward.

Thomas Palmer (Analyst)

Thank you.

Operator (participant)

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

Adam Samuelson (Analyst)

Yes, thank you. Good morning, everyone. Maybe continuing on the discussion on controlling the controllables. Donnie, in response to that last question, you talked about kind of improvements in live operations, operational efficiency, kind of matching supply-demand. I would just love to get your view on where the company is today and certainly notably improved versus where you were 12, 18 months ago. But how much more where can you get it to? How much kind of cost reduction on a per pound or millions of EBIT dollars do you think is still kind of attainable, excluding changes in the external market environment in the chicken business?

Donnie King (CEO)

Sure. Chicken specifically, but let me start across the portfolio. Just managing working capital and CapEx, driving cash flow, and really in support of the dividend, that's still a priority for us and part of controlling the controllables. Optimizing the footprint and network, still a huge priority for us. Restoring Chicken performance is right there at the top and also strengthening our Prepared Foods business, really important to us. And then managing Beef through the cattle cycle. The unknown around that is once we do see heifer retention, obviously, you're not going to be processing those animals. So what does that do? And we've still got that coming our way. And then continue to drive efficiencies in Pork. As you stated, versus last year, every business is performing better. We raised the guidance primarily this quarter based on strong Chicken performance.

But let me acknowledge that there's still some uncertainties out there relative to the consumer and their strength and behavior, and that's still out there. I mentioned the cattle cycle already. Key commodity markets, what they are tailwinds today, but what do they look like beyond our horizon? Pork and prepared foods seasonally could be seasonally weaker or will be seasonally weaker. And then Q3 could be, I say, weaker than Q4, driven by prepared and pork. Chicken, we're seeing better execution in our chicken business, and we've seen in some time, better capacity utilization than we've seen in some time. We're very optimistic in terms of where we are. And we've gone slow in our chicken business. We've built this thing from the ground up, and we're excited about the momentum that we're seeing relative to that. Wes, anything about chicken specifically that I haven't said?

Wes Morris (Group President of Poultry)

Yeah, I think I'd say it this way, Adam. In the long term, Tyson is the market leader in the industry, and I would fully expect us to deliver best-in-class results over time, regardless of the market conditions. But we've still got work to do.

John Tyson (CFO)

Adam, I think, this is John, just with one final clarifying point. You had a specific question around, "Can you quantify the operational performance opportunity?" I would just say that we've got a range of guidance out there. I think that reflects a balanced take. The midpoint of that is probably a reasonable place to be for the total company. But we've left things open a little bit on the top side. The high end of all the estimates for the various segments would reflect at least what we believe to be achievable in our fiscal 2024 from an operational improvement opportunity. So I think that's about as much detail as we're intending to provide here. But safe to say, I think we see a lot of opportunity throughout the portfolio.

The guidance reflects what we can get in 2024, and we're optimistic about 2025 and beyond too.

Adam Samuelson (Analyst)

Okay. No, that's all a very helpful color. And if I could just ask a follow-up on beef and taking, Brady, some of your comments about kind of uncertainty on if heifer retention has actually begun in earnest across the industry. But if it did, that would further reduce slaughter utilization for a period while those cattle don't come to market. Again, under the spirit of controlling the controllables, if we actually are entering a heifer retention cycle and herd rebuild cycle, can you help quantify the magnitude of controllables in beef that you actually have to mitigate kind of what would be a further drop in volume and throughput? I mean, the business is already operating at a loss today. Presumably, that would be a meaningful incremental challenge. So is there a path for the beef business to make money through the worst of the heifer retention period?

Brady Stewart (Group President, Beef, Pork and Chief Supply Chain Officer)

Thanks for the follow-up question there. We've been pretty consistent with our message over the last few quarters, whereas there is absolutely a variety of expected outcomes here and how we move through relative to supply and pounds. One of the good signs we've seen is we have seen additional weight per carcass. So that has provided some dilutive effect relative to cost structure, which is one of the concerns as you move through lower supplies. How that translates itself into potentially higher grading cattle is of interest as well, and we'll be monitoring that. As we looked at the cycle and the potential outcomes of the cycle, we created a strategy that was completely focused on understanding a range of outcomes and how we can provide deliverables within those outcomes as well.

And I'd just say we really appreciate and we like the strategy that we have developed, regardless of the range of outcomes on the supply side. We like the progress we have made year to date relative to controlling the controllables, which for us is operational excellence and efficiency within our assets, managing our mix, and delivering to our customer. And we like the runway in front of us relative to improvements that we can continue to make as we move through what is going to be a range of outcomes through the cycle as well.

Adam Samuelson (Analyst)

Okay. I appreciate the call. I'll pass it on. Thank you.

Donnie King (CEO)

Thank you.

Operator (participant)

The next question comes from Heather Jones with Heather Jones Research. Please go ahead.

Heather Jones (Analyst)

Good morning. Congratulations on the quarter.

Donnie King (CEO)

Thank you, Heather.

Heather Jones (Analyst)

Yeah. I have a couple of questions, one on chicken and one on beef. And I just want to start on chicken and want to go back to the volume question. So I understand that Q2 was a more difficult compare than Q1, but it was a pretty substantial volume decline. And y'all had closed those facilities, but I think I remember those were going to be consolidated into other plants. So just wondering, is this production decline going to continue going forward? And was it lower outside meat purchases or lower internal production? Just wonder if you could help us how to think about the rest of the year going into 2025.

Donnie King (CEO)

Sure, Heather. Let me start out and just maybe remind us of last year. In 2023, at least the first half of 2023, is not a real good comparator. If you look at Q1 of last year, we absolutely missed the demand signal in Q1 of last year. And that carried on into Q2 of last year. And so if you look at volume in Q2 of last year versus Q2 of this year, you're going to see that it is down. But last year was really overstated. Volume growth was, in fact, there, but there was also issues with profitable sales as it relates to Q1 and Q2 last year. So we're beyond that. We've cleaned all of that up, and we're moving forward. We're running a much better business today in our chicken business. And Wes, you want to speak to the volume? Yeah, Heather.

Thank you for the question and asking for clarity. Our volume is in line with our expectations. We are well-positioned in supply-demand balance, and we have strong growth plans put in place. You'll start to see that in the second half.

Heather Jones (Analyst)

Okay. And then my follow-up was on beef. More recently, beef demand seems to have been more challenged, and I don't know if it's related to the HPAI or what. But anyway, just wondering if you could give us a sense of how your margins are tracking relative to where they were in Q2?

Brady Stewart (Group President, Beef, Pork and Chief Supply Chain Officer)

Yeah, Heather. Thanks for the question. I would say relative to demand, we've seen fantastic demand on both the chicken side and the pork side relative to retail promotional activity as well. While we've seen fantastic demand being driven by that retail and promotional activity, beef really has not received much promotional activity at all. And so in the past, as we move into the summer months, you've seen that activity. We'll be watching for that as we move into Q3 to see if we see additional promos or where retail specifically is going to drive the consumer relative to any of the proteins. Luckily for us, we're in good shape on the pork side, good shape on the chicken side in terms of meeting that customer in those channels as well.

Donnie King (CEO)

Just to maybe clean up or for clarity, I think you may have misspoken. It is pork and chicken where we are seeing the greater activity right now.

Brady Stewart (Group President, Beef, Pork and Chief Supply Chain Officer)

Correct.

Donnie King (CEO)

That's correct.

Heather Jones (Analyst)

So have you seen any? I know you narrowed your guidance, and you took down the high end for beef. Just wondering, has there been any deterioration in margins relative to Q2, given that you haven't gotten the feeder activity you normally would have gotten at this time of year for beef?

Brady Stewart (Group President, Beef, Pork and Chief Supply Chain Officer)

Yeah. The beef promotion, that's really been a calendar 2024 story. And again, we'll continue to monitor that as we move through the remainder of the quarter. But we won't provide any additional guidance on Q3 other than what we've provided already.

Heather Jones (Analyst)

Okay. All right. Thank you so much.

Donnie King (CEO)

Thank you.

Operator (participant)

The next question comes from Ben Bienvenu with Stephens. Please go ahead.

Ben Bienvenu (Analyst)

Hey. Good morning.

Donnie King (CEO)

Morning, Ben.

Ben Bienvenu (Analyst)

You noted in the chicken business fairly equal contribution in the first half of the fiscal year of the improvement to what we saw last year between operational improvements and market improvements. As you look to the balance of the year, 3Q, 4Q, is it similarly equally split, or should we see a diminished operational improvement contribution and more of the improvement is predicated on the market having strengthened?

Donnie King (CEO)

Well, let me say this in short, Ben, and then Wes can give you the details. As I mentioned in my opening statements, we have made great progress. But I would also make sure that you understand that we believe there's still a lot of work to do. Good progress, but much work to do. And so you can define that financially if you'd like, but we're not where we need to be yet in our chicken business. But Wes?

Sean Cornett (Head of Investor Relations)

Yeah, Ben, I'd say we certainly got more tailwinds than headwinds. And it's really a function of the volatility of the grain market, what ultimately happens in the supply and chicken markets, and then the consumer mindset. And then, as I've said a couple of times, we do have some go-forward investments in our value-added business in the back half of the year.

Ben Bienvenu (Analyst)

Okay. Very good. My second question is related to total company. In particular, in years past, you all have gone through the exercise of articulating what you think kind of normalized earnings power is for the business. You've provided some clarity by segment. Not asking today what that earnings power is, but maybe when you think you all might be at a place where you can provide that level of clarity at the total enterprise and across the segments, given all the changes that you've made and the operational improvements that you've made progress against?

John Tyson (CFO)

Hey, Ben. This is John R. Tyson. Let me try to answer that question. So short version, yeah, we're not making any adjustments to a long-term outlook on normalized ranges today. We would plan to do that maybe as we go through the balance of this year and start to look to 2025 and kind of give some color around that potentially. But let me take the opportunity just to talk about the shape of the rest of the year for the total company and build on some things that have already been said today. So I just want to point out that from a total range standpoint, guidance has come up from midpoint to midpoint, $350 million. We think that is reflective of the results year to date and some of our optimism for the balance of the year. And there's also a range of outcomes in there.

I think that despite some of the potential signals we see in chicken around supply and demand, I think there's more tailwinds and headwinds there. I think going to our prepared segment, although we are experiencing some of the consumer behaviors that we've heard so many other companies talk about, I think we feel really good about our portfolio. And we've gotten questions about food away from home, food at home. We're in a pretty good position to win no matter where consumers are shopping. And I think that you kind of heard us say, "Hey, Q3 could be softer than Q4." I think I want to just put a point on that, that we see the rest of the year as being fairly balanced. But just with all of the various factors at play and some seasonality in pork especially, there could be a tweak there.

But don't want anyone to overread into that. We don't mean to get so overly precise. There's a lot of factors at play. And I would just emphasize that we're confident about the balance of the year and the midpoint to the guidance we've given.

Ben Bienvenu (Analyst)

Great. Thanks very much.

Operator (participant)

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

Alexia Howard (Analyst)

Good morning, everyone.

John Tyson (CFO)

Hello, Alexia.

Alexia Howard (Analyst)

Hi, there. So can I start with chicken? I seem to remember that the cold snap in January hit production operations somewhat this quarter. Are you able to quantify any of that, how much it hit volumes and profitability for the segment overall?

John Tyson (CFO)

Hey, Alexia. Yeah, this is John again. I would say that we typically plan for a little bit of that weather in the quarter. When we talked to you in February, we were pretty early on and had experienced some significant events just at that point, kind of one month in. I would say overall, though, the impacts in the quarter were not so significant that it had a disproportionate impact on earnings. So I think nothing to read into there.

Alexia Howard (Analyst)

Okay. And then two quick things. How much longer do you expect the startup costs in Prepared Foods to remain a headwind? When does that go away? And then finally, do you have a forecast for where you expect your leverage to end up by fiscal year-end?

Melanie Boulden (Group President, Prepared Foods and Chief Growth Officer)

Hi, Alexia. This is Melanie. In terms of our startup costs, we may experience a little bit bleeding over into Q3, but we think the majority of them have hit in Q2.

John Tyson (CFO)

To your second question, Alexia, on leverage, not placing a specific number of where we expect to exit the year, but safe to say we're definitely trending toward lower leverage. 2x or below is the long-term target. Yeah, that's as much as we can give right now.

Alexia Howard (Analyst)

Okay. Thank you very much. I'll pass it on.

Operator (participant)

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

Andrew Strelzik (Analyst)

Hey, good morning. Thanks for taking the questions. I wanted to go back to the beef segment outlook. You've mentioned some uncertainty and ranges of outcomes. I guess I'm just curious, what is the environment that would get you to the top end of the beef profit range versus the bottom end? Is it primarily around whether or not we get heifer retention and herd rebuilding efforts in the fall? And that's kind of the biggest piece of it? Or the demand side, I guess, what are the range of outcomes that would get you to the top or bottom end of the range?

Brady Stewart (Group President, Beef, Pork and Chief Supply Chain Officer)

Thanks for the question, Andrew. Specifically, we talk a lot about beef demand. We talk a lot about beef cutout pricing as well. We also need to factor in the fact that drop is a significant amount of value that falls within the beef supply chain. Our largest cost is relative to live cattle cost as well. So when you really balance the two revenue streams, the cutout pricing and the drop pricing, and you take that into account with live cattle and where potentially we could see some live cattle pricing going, that really creates the range of outcomes. It's trying to balance those three, the two revenue and the one supply cost perspectives when we look at particular guidance and the range of outcomes. Again, we still have plenty to control within Tyson.

We really focus on making sure that we balance the grade of cattle with the demands of the consumer as we move through the cycle as well. We're continuing to see improvements relative to efficiencies and yields. Really, we'll just continue to look at value streams that we can continue to generate to help offset some of these headwinds we have from a margin perspective.

Andrew Strelzik (Analyst)

Okay. Okay. That's helpful. Then my second question is on the CapEx outlook. I know last quarter, when it was reduced, you were kind of matching CapEx and the operating profit outlook. So I guess I'm curious just how we should think about CapEx on a go-forward basis as the profit environment is better since that hasn't really kept up. Maybe there's timing dynamics, and you've already mentioned controlling that tightly. Just as the profit dynamics get better, how should we think about the rate at which you might add back to CapEx? Where are the priorities at, where you might want to add back? Just any color around that on a go-forward would be great. Thank you.

John Tyson (CFO)

Hey, this is John. Let me take that question. So you are right in that we had talked in the past about being responsive to the operating environment and managing cash flows. I would tell you that, first off, we feel good about our free cash flow projections for the year in terms of being in excess of covering our dividends. So just pointing that out. But I would also tell you that the tighter range on our CapEx today, $1.2 billion-$1.4 billion, that's really reflective of us determining what are the needs for the business and where are there opportunities for good investment. What I want you to take away from that is we're not turning on and off this figure. It's kind of based on our outlook on profitability, but rather trying to return to a normalized level of spend.

You asked where would be the best opportunities for investment. I think the short answer is that our prepared portfolio and components of our chicken portfolio, where we see the best opportunity for growing our value-added business, is where we want to continue to invest. And then, of course, we have our ongoing maintenance and repair that's needed. I think that will probably paint the picture for you on how we think about capital allocation.

Adam Samuelson (Analyst)

Great. Thank you very much.

Operator (participant)

The next question comes from Michael Lavery with Piper Sandler. Please go ahead.

Michael Lavery (Analyst)

Thank you. Good morning.

Melanie Boulden (Group President, Prepared Foods and Chief Growth Officer)

Good morning.

Michael Lavery (Analyst)

You had mentioned that you still have some work to do in chicken, and then you've touched on that a few ways. But can you just be clear how that does or doesn't apply to your footprint there? Is the supply-demand balance pretty well set, or is that another piece of the equation that could evolve as well?

John Tyson (CFO)

Hey, yeah, thanks for this. Thanks for this question. So let me answer it in two ways. I think, first off, on the network moves that we've made up until this point, we anticipate that we have either recovered all or should recover nearly all of that, all of the volume in chicken and nearly all of the volume related to our pork moves and the other moves. So I think I just want to be clear that when we talk about that rationalization, we're talking about being more efficient, taking cost out, and losing none of the business. So I think that that is a point worth emphasizing. The other part of your question was about chicken specifically. And I think that we even talked last year or a couple of quarters ago about the overall capacity utilization.

Safe to say we still got some headroom in our current footprint and would expect to grow with demand in the more profitable parts of our business. And so I think have a positive outlook based on all of the network moves.

Donnie King (CEO)

If I might add one more thing relative to chicken. The back half of the year for chicken, if you look, grains have moderated. The demand for chicken is very strong. We've built a fundamentally stronger chicken business. We're excited about that. We're executing better, and demand is certainly working in our favor.

Michael Lavery (Analyst)

Okay. That's helpful. Just on international, you've touched on it a couple of times earlier in the prepared remarks. Just how should we think about its margin runway? And what does it take for that to get a ramp-up in profitability?

Donnie King (CEO)

Well, thanks for the question on international. I think it's important to remind this came up a little bit in the CapEx question. But I think we should remember, over the last 2+ years, we've built 12 processing plants around the world. That was part of the driver as it relates to the capital spend. And we're beyond that, and we're moving into filling up those capacities. But we're also lapping if you look at the international, we're lapping a ramp-up cost for the 7 facilities outside the United States. And our execution should continue to improve. Our focus short-term is operational excellence and capacity utilization as it relates to our international business. Amy, would you like to speak to anything?

Amy Tu (President of International)

Thanks for the question, Michael. As Donnie said, we are absolutely focused on delivering the results that is expected of us. So we're focusing on driving operational efficiencies across our plants. We are focused on improving our conversion costs. We're identifying available and open capacity. We're reviewing our SKUs and delivering the more profitable mix of products. And we're also tightening our spending. So all of these actions, we're beginning to see the results and improve gross margins and AOI delivery.

Michael Lavery (Analyst)

Okay. Great. Thanks so much.

John Tyson (CFO)

Thank you.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to the company for any closing remarks.

Donnie King (CEO)

Thanks for your continued interest in Tyson Foods. We look forward to speaking with you again soon.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now.