Tyson Foods - Earnings Call - Q2 2025

Executive Summary

• Tyson delivered its fourth consecutive quarter of year-over-year improvement in sales, adjusted operating income, and adjusted EPS; adjusted EPS beat consensus while revenue was slightly below consensus (see tables). Management kept full‑year guidance unchanged, citing a dynamic macro, tariff risk and beef headwinds offset by Chicken strength and Prepared Foods execution.
• Mix was the story: strong Chicken (best Q2 AOI in 9 years), resilient Prepared Foods margins, improving International, and Pork AOI up year over year, offset by compressed Beef spreads; a $343M legal contingency accrual (primarily Pork) reduced reported sales by 2.6% and boosted non‑GAAP adjustments materially this quarter.
• Balance sheet/cash: liquidity $3.2B, net leverage ~2.3x (after paying off $750M term loan post-Q1 and reducing total debt $738M in Q2), YTD free cash flow $382M with FY25 FCF guidance maintained at $1.0–$1.6B.
• Catalysts: sustained Chicken AOI momentum and network/logistics optimization (targeting ~$200M annual savings over 3–5 years), plus unchanged FY25 AOI guidance despite an EPS beat, frame the near‑term setup; continuing Beef pressure and tariff/trade dynamics remain key watch‑items for the stock narrative.

What Went Well and What Went Wrong

• What Went Well

  • Chicken outperformance: “best second quarter adjusted operating income in 9 years,” driven by operational execution, lower grain costs, and >98% fill rates; segment adjusted AOI up 95% YoY with margin expansion (see segment tables).
  • Prepared Foods resiliency: delivered double‑digit margins with ~50 bps YoY expansion; efficiency in SG&A/MAP and ops improvements offset raw material inflation; management targets structural margin uplift over time.
  • International/Other improvement: strongest on record with better operational fundamentals and commercial execution; management still flags macro sensitivity but expects performance to remain favorable vs prior year.

• What Went Wrong

  • Beef spread compression: limited cattle availability pressured spreads; Beef reported an adjusted operating loss and margin contraction despite resilient demand, with management continuing to navigate the cycle.
  • Legal contingency accrual: $343M reduced reported sales by 2.6% (primarily Pork), depressed GAAP optics (GAAP EPS $0.02) and required significant non‑GAAP adjustments (e.g., ~$0.73 EPS impact).
  • Macro/tariff uncertainty: management kept FY25 guidance unchanged, explicitly embedding tariff and consumer headwinds; reiterated dynamic environment and the need for back‑half brand investments in Chicken.

Transcript

Operator (participant)

Good morning and welcome to the Tyson Foods Second Quarter 2025 Earnings Conference Call. All participants will be in 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 your touch-tone phone. To withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Sean Cornett, Vice President, Investor Relations. Please go ahead.

Sean Cornett (VP of Investor Relations)

Good morning and welcome to Tyson Foods Second Quarter Fiscal Year 2025 Earnings Conference Call. On today's call, Tyson's President and Chief Executive Officer Donnie King and Chief Financial Officer Curt Calaway will provide prepared remarks followed by Q&A. Additionally, joining us today are Brady Stewart, Group President, Prepared Foods, Beef and Pork, and Chief Supply Chain Officer; Devin Cole, Group President, Poultry and Global Business Unit; and Kristina Lambert, Chief Growth Officer. We have also provided a supplemental presentation which may be referenced in today's call and is available on Tyson's Investor Relations website and via the link in our webcast. During today's call, we will make forward-looking statements regarding our expectations for the future. These forward-looking statements made during this call are provided pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

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

Donnie King (President and CEO)

Thanks, Sean. You've heard me say before that operational excellence never gets old or goes out of style, and this quarter is another proof point. Our strong results underscore the consistent execution of our strategic priorities. Our teams remain focused on execution and proactively navigating an evolving environment. This marks our fourth consecutive quarter of year-over-year growth across sales, adjusted operating income, and adjusted earnings per share. Second quarter adjusted operating income is better by more than $100 million, or 27% versus last year, and our margin expanded by 70 basis points. Our chicken, pork, and prepared food segments, along with international and other, all delivered year-over-year adjusted operating income growth. We achieved 48% growth in adjusted earnings per share, reflecting improved operating performance and strategic execution.

We improved our net leverage ratio versus last year through deliberate actions and are maintaining a healthy balance sheet underpinned by our disciplined capital allocation. This reflects our resilience, even as beef remains under pressure. Now let's talk about demand. As we mentioned last quarter, 71% of U.S. consumers sought to increase their protein consumption in 2024, according to an International Food Information Council study. The latest Power of Meat report from the Food Industry Association shows that U.S. meat sales at retail hit an all-time high in 2024, with consumers making purchases more than once per week. According to the study, meat had 98% household reach and was included in nearly 90% of home-cooked dinners. Meat is the clear protein choice recognized for nutritional value, convenience, and versatility.

Even with a dynamic backdrop, it is evident that consumers continue to prioritize protein, especially from animal sources, underscoring robust sustained demand across the category. As a world-class food company and recognized leader in protein, Tyson is well positioned. Our multi-protein, multi-channel portfolio allows us to serve a wide range of consumer protein needs across eating occasions and value tiers. Our broad portfolio of strong brands—Tyson, Jimmy Dean, Ballpark, and Hillshire Farm—remain key differentiators in a competitive marketplace, allowing us to drive long-term value. Now let's walk through segment performance: prepared foods. Prepared foods continues to be a high-performing and dependable driver of profitability. In the second quarter, we delivered double-digit margins, expanding by 50 basis points versus the prior year. The team continues to execute with excellence on the factors within their control. We see meaningful runway to expand margins over time.

Our multi-year plan, focused on optimizing operations, launching winning innovations, and expanding distribution, is on track. As a tangible example of how we are driving operational improvement, we have developed and implemented new tools that provide line and process-level visibility of performance versus equipment capabilities. We have achieved measurable gains over the past year with line and labor efficiencies, increasing by 250 basis points and 280 basis points, respectively. These tools, coupled with the improved sales and operations planning process, enable smarter decisions around product scheduling and labor staffing, which in turn are improving productivity, reducing costs, and supporting stronger service levels. As we continue to utilize these tools and improvements across the business, we'll continue to reduce inefficiencies and drive out waste. Innovation also continues to be an area of focus where we are making progress.

Our Jimmy Dean Chicken Biscuits recently won the 2024 Circana Taste Editor Award for New Product of the Year. We are continuing to build on that success with new line extensions like the Chicken, Egg, and Cheese Biscuit that newly launched this spring. Wright Brand continues to resonate with consumers as a leading premium bacon brand. We're now leveraging that equity to expand into smoked sausage, bringing the same trusted quality to a new category. We are also unlocking growth in our Hillshire Farm snacking portfolio as consumers, especially adults, continue to seek convenient, protein-rich options. In chicken, we delivered our best second quarter adjusted operating income in nine years and our second consecutive quarter of volume growth.

This quarter adjusted operating income nearly doubled compared to the same quarter last year, driven by strong operational execution across the business, including the best order fill rates we've seen in many years and lower grain costs. We continue to prioritize building long-term winning relationships with our customers, allowing us to partner in growing the category while stabilizing our earnings profile. In beef, we're navigating a challenging environment with discipline. We're managing costs and enhancing mix toward more value-added offerings. While limited cattle availability is pressuring spreads, consumer demand has remained resilient. Our teams are executing well across procurement, production, and distribution to meet customer needs and stay on track. Turning to pork, we delivered our best second quarter adjusted operating income in three years. This reflects the strength of the improvements we have made in building a fundamentally better pork business.

Operational advancements and momentum in value-added mix contributed to our results, offsetting tighter spreads. While haul costs remain a factor, we're encouraged by a healthy demand outlook. Across all segments, we're actively monitoring the evolving macro landscape, and while we're not immune, our experience in navigating past cycles gives us confidence to respond effectively and proactively to scenario plans. Our strategic priorities—operational excellence, customer and consumer obsession, data and digital delivery, capital allocation, and team member development—remain unchanged, and our teams are executing them with excellence. Over the past several quarters, we have shared our actions to optimize our plant network, and those efforts are continuing to generate efficiencies while also reducing CapEx requirements. In this next phase of our optimization journey, we're taking deliberate, measured steps to evolve our logistics and distribution infrastructure.

These efforts are early stage but are critically important as we work toward greater long-term efficiency. We will sell multiple smaller conventional cold storage warehouses, unlocking gross proceeds in a range of $250 million-$300 million, and then transition as a new anchor partner into several large-scale, fully automated next-generation cold storage facilities. These facilities will reduce network complexity, streamline inventory flow, and simplify processes in ways that will better position us to serve our customers smarter and faster now and into the future. This transition will be a multi-year journey, but we believe this will generate around $200 million of annual savings at full completion, which is currently anticipated in 2030. We are confident that these actions will lead to meaningful operational improvements, greater agility, allow future growth, and reduce future capital requirements.

Before I turn things over to Curt, I'd like to take a moment to talk about the thoughtful steps we're taking across our portfolio to align with evolving opportunities around product ingredients and quality standards. As a recognized leader in protein, none of the products Tyson Foods offers through our school nutrition programs include petroleum-based synthetic dyes as ingredients. Today, the vast majority of our retail-branded Tyson products, including our Tyson Dino Nuggets, Tyson Chicken Nuggets, Tyson Chicken Bites, and Jimmy Dean Maple Griddle Cakes, do not contain any of these types of dyes, and we have been proactively reformulating those few products that do. We expect that our work to eliminate the use of petroleum-based synthetic dyes in production will be completed by the end of May, much sooner than the timeline provided by the U.S. Department of Health and Human Services.

With that, I'll turn it over to Curt to walk through our financial results in more detail.

Curt Calaway (CFO)

Thanks, Donnie. Second quarter enterprise sales were $13.1 billion, but that includes a reduction of $343 million, or 2.6%, related to a legal contingency accrual primarily reflected in pork. Excluding this, sales would have grown as expected year over year. Adjusted operating income increased by 27% to $515 million, driven by another strong quarter of performance in chicken and solid contributions from international and other pork and prepared foods, all of which helped offset the decline in beef. Adjusted earnings per share grew more than 48%. As Donnie mentioned, this is the fourth consecutive quarter of year-over-year growth across sales, AOI, and adjusted EPS. Our multi-protein, multi-channel portfolio, combined with our team's continued execution in a changing macro environment, is delivering results. Turning to second quarter segment performance, in prepared foods, sales were in line versus last year as higher pricing was offset by softer volume.

It's worth noting that pricing was up across retail and food away from home channels, a reflection of our effective brand portfolio and pass-through pricing. Adjusted operating income increased nearly 5%, and margin improved 50 basis points versus last year. We continue to be more efficient with our marketing, advertising, and promotional support costs, as well as broader SG&A expenses. We also continue to make progress with our operational execution initiatives. These improvements, along with pricing and lapping of startup costs last year, more than offset the impact of the ongoing raw material cost increases. In chicken, we delivered our second consecutive quarter of year-over-year volume growth, contributing to a 2% increase in sales. Adjusted operating income increased 95% versus last year, highlighting our best second quarter performance since fiscal 2016. Year-over-year profit growth was driven by ongoing operational improvements and the net benefit of lower grain costs.

Sales in beef increased primarily due to a higher average price per pound, reflecting ongoing healthy demand. Adjusted operating income declined, driven by spread compression, emphasizing higher year-over-year cattle costs. In pork, sales were roughly in line versus last year, excluding the impact of the legal contingency accrual. Adjusted operating income increased 67%, reflecting the strongest second quarter result in the past three years. Cost discipline and improvements in utilization and value-added mix more than offset tighter spreads. Turning to our financial position, our capital allocation strategy is consistent and deliberate. We remain focused on maintaining financial strength, investing in the business, and returning cash to shareholders. Year-to-date operating cash flow was $846 million, and capital expenditures came in at $464 million, resulting in free cash flow of $382 million. Year-to-date dividends were $349 million. We remain committed to the dividend as our primary way of returning cash to shareholders.

We ended the quarter with net leverage at 2.3x and $3.2 billion in liquidity after paying off our $750 million term loan that was due in 2026. Our balance sheet remains healthy as we prioritize financial strength, our investment-grade credit rating, and cash management to drive long-term shareholder value. Now let's take a moment to review our outlook for fiscal 2025. Our total company guidance is unchanged. We anticipate sales to be between flat to up 1% year-over-year. Adjusted operating income is expected to be between $1.9 billion and $2.3 billion, representing growth across the entire range. We still anticipate interest expense of approximately $375 million and a tax rate of around 25%. We remain focused on disciplined cash management, with CapEx expected to be between $1 billion and $1.2 billion, and free cash flow in the range of $1 billion-$1.6 billion.

The macro environment is dynamic, affecting each of our businesses to varying degrees. As you can see from our supplemental materials and in our press release, our segment-level adjusted operating income guidance remains unchanged as well. With that, I'll turn the call over to Donnie.

Donnie King (President and CEO)

Thanks, Curt. In closing, I'm proud of the results our team delivered this quarter and encouraged by the momentum we're building. Despite a complex and evolving macro environment, we're focused on what we can control and executing with excellence. With sustained consumer demand for protein, the strength of our iconic brand, and a continued commitment to operational excellence, we believe we are well-positioned to drive long-term value for our shareholders. To our 138,000 team members, from the front lines of our facilities to our offices around the world, thank you. Your hard work, resilience, and commitment are what make our success possible. To our customers and suppliers, thank you for your continued partnership and support. Before moving to Q&A, I'd like to introduce Kristina Lambert, Tyson Foods' new Chief Growth Officer.

Kristina was named Executive Vice President of Strategic Initiatives and joined the Tyson Foods Enterprise Leadership Team earlier this year. Kristina has more than 28 years of experience in the protein industry. Prior to her most recent role, Kristina led our retail frozen value-added business within the poultry organization, where she maintained full P&L responsibility, expanded our innovation pipeline, and managed the relaunch of the iconic Tyson brand. Melanie Bolden, our Chief Growth Officer and former Group President of Prepared Foods, is retiring from Tyson Foods. I want to thank her for the results she has delivered and the team she has built. We're sad to see her go, but we wish her the best in the future. Melanie will remain a consultant for Tyson Foods, ensuring a seamless transition with Kristina. With that, I'll turn it over to Sean as we open the line for your questions.

Sean Cornett (VP of Investor Relations)

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

Operator (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchstone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Please limit yourself to one question and one follow-up. If you have further questions, you may re-enter the question queue. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Alexia Howard at Bernstein. Please go ahead.

Alexia Howard (Analyst)

Thank you. Good morning, everybody. You beat consensus expectations this quarter on the profit line, but you did not raise guidance for the full year. How did the results come through versus your internal expectations, and what is coming through better or worse than expected? I have a follow-up.

Donnie King (President and CEO)

Thank you, Alexis. Donnie, before jumping into that, let me share a couple of additional thoughts on Q2. I think this quarter clearly demonstrates the importance of our multi-protein, multi-channel portfolio. We are best positioned intentionally to provide affordable, accessible, and nutritious protein that the consumer continues to demand in this very dynamic environment. While beef is experiencing the most challenging market conditions we've ever seen, we increased total adjusted operating income by 27%, and every segment grew other than beef. Chicken has standout performance, our best Q2 AOI in nine years. Prepared Foods has continued steady margin performance. I am pleased with our efficiency improvements through better yields, reducing waste, and a continuing push for best-in-class execution in our plants. We've made significant strides in maximizing the efficiency of trade and MAP spending, and our innovation pipeline is the largest that we've ever had.

We are committed to growing our prepared foods business, both volume and bottom line. We remain agile and work with pace to optimize our operations and distribution network. I am excited about the next step on our journey as we transform our logistics network. This will unlock annual savings of approximately $200 million over time and will support our growth into the future. The dynamic environment we and others have referenced includes uncertainty from tariff impacts and pressure on the consumer. Our guidance considers those risks, and we are growing at the bottom line across the entire range. Now, in terms of guidance, I will add a little, and then I will let Curt add some colors to it as well. Overall, we remain excited about our FY 2025.

We expect to generate profitability growth over the last year, last part of the year, the entire range of our earnings guidance while managing through the most challenging beef environment we have ever seen. We feel good about that overall. Our overall view of the business has not materially changed since we spoke last, and we are reaffirming the $1.9-$2.3. I would tell you that we consider all the things such as the chicken business and what that looks like for the balance of the year. We think prepared foods will be more balanced across the year. As you see what happened in the first half of the year in beef, we lost $181 million. You stack on tariffs and consumer pressure and inflation that we are seeing in the marketplace.

We feel good about where we are at this point based on what we know at this point. Curt.

Curt Calaway (CFO)

Yeah, just maybe a couple of comments. I think overall, your question included, did it come in line with our expectations or what were the differences? I think it came in line with our expectations, kind of reiterating our overall stance on the full year. Certainly, in the prepared comments, we made reference to our guidance does include the outlook for the remainder of the year with an assumption for tariffs and consumer dynamics. I think we're pleased with where we are and very proud of the improvement we made on a year-over-year basis. We are growing across all parts of the range that we've provided for the full year.

Alexia Howard (Analyst)

Can I follow up on chicken? Because I think the guidance, you've obviously come through very strongly in the first half of the year, but keeping the guidance the same implies, I think, a fairly big decline year-over-year in operating income. Is there something changing there in terms of the industry dynamics? What should we be aware of? Thank you, and I'll pass it on.

Donnie King (President and CEO)

Thanks, Alexia. We still feel like we had a great—we obviously had a great first half of the year. If you look at the numbers, there's just some uncertainty as you look at the back half of the year. If we look and compare it against our adjusted operating income, it looks pretty good. We also look at what consensus looks like as it relates to chicken. I think chicken will be a clear winner for the balance of 2025. Let me stop with that level of detail, and I'll kick it over to Devin Cole, and Devin can give us more detail around the chicken business.

Devin Cole (Group President, Poultry and Global Business Unit)

Yeah. Thanks, Donnie. Again, we did deliver a very strong quarter, I'd say largely due to the strength and execution of our team. I want to thank everyone for their focus and execution around those efforts. Generally, our strategy, it will remain unchanged, but we do need to stay flexible with our tactics in this environment. I think things that we delivered in the quarter that will continue to be a priority and continue to deliver excellence moving forward is we have outperformed the industry in live. We extended our improvements related to plant performance, and the intense focus on the customer continued. As mentioned, we've now had two consecutive quarters with fill rates over 98% and our innovation pipelines resonating very well. If you look ahead, we did reaffirm our guidance in the range of $1 billion-$1.3 billion.

I think that takes into consideration, one, the confidence that we have in the operating environment, but also the sustainable progress we've made in the first half of the year. I think we also have to layer in, as a consideration, investments that we'll be making in the back half of the year primarily to strengthen and extend our number one share in value-added retail food service. We also have to consider our diversified pricing models. It's worth recalling that we utilize those models with our customers, many of which are linked to grain markets to build stable margins over time, and two, just factoring in the overall macroeconomic environment.

Operator (participant)

Thank you. Our next question today comes from Peter Galbo at Bank of America. Please go ahead.

Peter Galbo (Analyst)

Hey, guys. Good morning. Thank you for taking the question. Donnie, I actually wanted to start on the changes in the cold storage facilities that came out. I think you mentioned $200 million of annual savings, and that's maybe over a five-year period. As I dug through the 10-Q, it looks like that'll mostly be split between chicken and prepared foods. Maybe just two things. One, if we could get a little bit more detail on kind of that breakout that you're anticipating, again, realizing it's over the long term. B, obviously, this has been an ongoing discussion probably for quite a bit of time, but just what kind of led finally to pulling the trigger on this? Is it part of the broader, again, restructuring as we think about the margin profile and sustainability of higher margins for chicken and prepared going forward?

Donnie King (President and CEO)

Yeah. Thanks, Peter. I think you largely answered the question in some of your comments, but just let me reaffirm those things for you. We've talked now for a couple of years about assessing every facet of our business. I'll tell you, when we looked at our logistics network, we identified some things that we didn't like. We identified opportunities for improvement. Brady Stewart and that team that works on this have been working on this for well over a year in terms of trying to get to this point. Since Brady and his team did all the work, let me ask him to deliver some details behind the project.

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

Thanks, Donnie. As you mentioned, specifically, I want to call out the team for laying out a really appropriate strategy. Today, our network is too complex and too costly. We saw an opportunity to really right-size our network that allows us to continue to grow into the future, but also bring cash into the enterprise as well. We mentioned the length of time associated with this transition and transformation. It is really important to understand that there are new cold storages that will be built that will get our products closer to customers, which reduces the total number of miles, reduces our carbon footprint in delivering our products to our customers, and ultimately, will deliver that over $200 million in annual savings as we move out three to five years from now.

Peter Galbo (Analyst)

Brady, just before I move on to my next question, just a rough split on that $200 million between the two?

Curt Calaway (CFO)

This is Curt. I don't know that we have that for today. I think go back to the statement that think about, right, this network is principally for our poultry and prepared business, very little utilization of the network that Brady's speaking to for beef and pork. It would follow kind of the normal or a relative share split, if you will, based on the volumes that are moving through the poultry and prepared foods items.

Peter Galbo (Analyst)

Got it. Okay. That's helpful. Maybe this one, I don't know, it's probably a bit of a jump ball in terms of the question. In prepared foods specifically, I think, again, in the Q, you called out kind of higher raw material costs. Maybe you kind of got to the margin you did based on SG&A. I'm just curious kind of how we should think about the go forward there, listening to some of your peers. They're obviously baking in higher raw materials. Are we getting to the numbers really just kind of on lower SG&A going forward? That obviously has implications for the top line, so just wanted to understand that. Thanks.

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

Sure. Thanks for the question, Peter. This is Brady again. Number one, I think it's really important to understand that we're very excited about our prepared foods business. This comes in a multitude of different areas. Number one is we're excited about the team we have in place and the true management operating system that that team is placing. We're excited about our brands. We have leading brands that will continue to play a part with our customers and our consumers as well. When you really look out in front, it's important to understand, I think, really in three different buckets that create the excitement. Number one is from an innovation perspective. Donnie in his prepared remarks commented on our innovation coming with Wright Brand premium sausage.

He commented on the amazing growth we've had from the Hillshire Farms snacking platform, and he commented on the innovation we brought forth with the success with our Jimmy Dean chicken biscuit as well. On top of that, we have one of the most robust innovation pipelines in the history of Tyson Foods. We're extremely excited that we have innovation coming within the next year in every single one of our core categories for prepared foods. That is going to drive us from a growth perspective into the future. Second is from a distribution perspective, we continue to see distribution gains and getting our products in the right place for our consumers to continue to have access to them. Lastly, we're really supporting innovation and distribution with core fundamentals. Donnie mentioned in his opening remarks as well that we have strengthened our foundation through operational improvements.

That comes in the form of both distribution that comes in the future relative to our supply chain announcement. It also comes relative to the improvements we've seen from an operations perspective in our manufacturing assets. I think when you parlay all three of those items on top of each other, again, we're very excited about our prepared foods business.

Donnie King (President and CEO)

If I could add just one thing too, or a couple of things to what Brady has said. If you think about our prepared foods business since we made the major acquisition of Hillshire in 2014, this business today, we're literally putting it together from end-to-end, from operations through supply chain to trade and map efficiency management, growing with strategic customers, investing behind the brands. We're doing a lot of things. This has been a, let's call it a 9-10% business. We think it's better than that. We believe the unlocks that we have before us will actually be our proof points for the delivery of something north of a 10% return on sales as it relates to our prepared business. I wouldn't say we're in early innings, but maybe mid innings as it relates to prepared foods.

There is going to be a better day in prepared foods than even what we see today.

Peter Galbo (Analyst)

Great. Thanks very much, guys.

Operator (participant)

Thank you. Our next question today comes from Ken Goldman at JPMorgan. Please go ahead.

Ken Goldman (Analyst)

Hi. To follow up on that last question, I really do appreciate all the efforts that are being made in prepared foods. Certainly, it seems just optically from an external angle that there's upside to margin. I think what the question that I get sometimes and that I wanted to put to you a little bit is, A, when do we start to see a real uptick, meaningful uptick right above 10% on a sustainable basis? Obviously, not perfectly above 10% every quarter. A little bit on the timing. Secondly, sort of what's different this time, I guess, is one of the questions I get also, right? We've heard from Tyson a level of optimism for many years right now about prepared foods getting above 10%. Hasn't really stuck at that level.

I just kind of wanted to get a sense for those two, if it makes sense.

Donnie King (President and CEO)

Sure, Ken. Good morning. Fair question as it relates to prepared foods. If I look at prepared foods and let's call it earlier days, prior days, prepared foods, depending on the quarter and the timing, you would see one element of the business performing well, and that was typically large enough to get us into 9% to 10%. What we're describing to you today, and Brady can speak in greater detail to this, is that we have process in place for every phase of the game from end to end to improve the performance of this business. We believe there is tremendous upside to this prepared foods business.

I would tell you, I do not know how to correct the fact that we have not done what you thought we would do in the past other than to be able to show you that we are going to deliver what we said we are going to do. This prepared foods business operationally, supply chain, from a trade and map perspective, from a customer relationship, growing across multiple channels, is doing all the right things today. It is on purpose and led by Kyle, Marc, and Brady and that team. Brady, you want to add anything to that that I have not?

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

Thanks, Donnie. Really, really well said. Number one is just to get back to the foundation. The team has really laid in a management operating system that is truly sustainable. To be able to continue to improve on our manufacturing costs and supply chain costs, really highlighting our line and labor efficiency, our yield improvements we have seen as well, and then benchmarking against engineered standards across our entire network really lays the foundation for us to continue to build on. Lastly is this innovation pipeline that we have. I am extremely proud of the team to put this together with our growth team, the R&D team, and our business management team as well. This really provides us a huge platform to leapfrog into the future.

Ken Goldman (Analyst)

Okay. Thank you. I appreciate that. Just a quick question on chicken demand. It feels like within quick service, more items are being added to menus every week. There are articles increasingly about that topic. It is becoming, I think, apparent to some observers that maybe chicken demand at QSR will be a little bit better than what people had initially hoped. At the same time, the QSR channel maybe has some of its own challenges. I just want to get a sense for what is in your guidance for QSR chicken demand now as opposed to a few months ago in light of some of those puts and takes.

Donnie King (President and CEO)

Sure. I mean, I will give you my short answer to that. If you look at the macro environment, when food will be consumed away from home, typically in an environment like this, you would see QSR growth. Particularly within the QSR business, you are going to see chicken perform. I think that it would be reasonable to think that that will occur again. I think that we see signs of that going on today. The demand there for our business, even in food service, is still quite strong. Let me flip it over, Ken, to Devin and let him add some color around that.

Devin Cole (Group President, Poultry and Global Business Unit)

Yeah. Maybe just a couple of points there. I mean, I think relative to the QSR arena, we did see strong growth within the quarter. We had double-digit growth within that portfolio. I mean, we see the same thing you do with continued promotional activity throughout the spring and summer. We are encouraged by that. I'll also tell you that it's bigger than that for us. We have a broad portfolio across all of our food service categories as well as retail. We did see growth within retail at our value-added and deli offerings. I would just say that as we look across all of our customer base, we do continue to partner with them. We are able to provide options that consumers are going to be increasingly looking for convenience and value. We feel good about our overall volume outlook.

Ken Goldman (Analyst)

Great. Thank you.

Operator (participant)

Thank you. Our next question today comes from Benjamin Theurer with Barclays. Please go ahead.

Benjamin Theurer (Analyst)

Hi. Yeah, good morning, Donnie and Curt. Just a first question maybe on beef and just the general environment. It feels like you only had a small volume drop in the quarter that could almost be explained by just the leap year and some of the calendar effects. I just wanted to understand a little bit better what you're seeing in terms of supply of cattle and the cost of that into your operations and how you think about the earlier signs maybe as to some of the heft of retention. Is that building or not? How should we think about just beef throughout the cycle? Are we at the bottom, or is it just still too early to tell? That would be my first question.

Donnie King (President and CEO)

Sure, Ben. Let me add a little bit to the demand softness that you talked about in our Q2. That happens every year with us. It is not unusual to see a seasonal demand softness in Q2. We did not see that as anything notable really other than the fact that it was that time of year. I will give it to Brady to talk about the supply, heft of retention, and volumes.

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

Thanks, Donnie. Ben, I think it's important to note that cattle on feed from a weight perspective are extremely heavy. We're at record weights throughout the business as well. We're seeing some weight that is offsetting from a volume perspective. Some of the lower head counts we're seeing as the supply has been obviously lower than a year ago. Relative to heft of retention, and I would just say this, and Curt has mentioned this before, if we're not at the bottom relative to cow inventories, we can definitely see it from here as well. I think a couple of reference points behind that certainly would be we've seen an extreme drop, almost 18% in beef cow harvest numbers.

Secondary to that is we have seen a drop relative to heifers on feed, which means if the heifers are not on feed, they're being retained by farmers and ranchers as well. We're seeing a 4% drop in heifers year over year as well. I think the signs are really aligning to a rebuild to start to occur. From a liquidation standpoint, really seeing the bottom at this point as well.

Benjamin Theurer (Analyst)

Okay. Perfect. Thank you very much for that. My second question really is just about the international business. Clearly, there was a pretty significant improvement on a year-over-year basis. When we're looking at it on a six-month basis, I mean, it's a massive difference versus last year. Help us maybe understand, and I know in the past you've talked a lot about international being an important part of the growth journey. What have you done different and actually executed on to start to see the fruits and the benefits of all these investments that you had in years past to drive international? What's kind of the level you think about international could contribute on an annual basis beyond maybe what is your fiscal guidance for 2025?

Devin Cole (Group President, Poultry and Global Business Unit)

Yeah. Sure. This is Devin. I appreciate you bringing that up. I'll make this perhaps sound simpler than it really is, meaning that it's really about the work that our team has accomplished. It's one thing to have a strategy, and it's a completely different thing to have execution against the strategy. We have both in this area. We have simply improved our operational fundamentals, and we've also executed a very good commercial growth strategy. You can see that in the results. In fact, it's our strongest quarter on record. Looking ahead, there were some overall benefits in the quarter related to one-time impacts. However, we expect to continue on this path that will be favorable certainly to the prior year and in line with our expectations.

I do expect the performance in the back half year could be affected by the macroeconomic environment because certainly the consumer around the world is not immune to some of the economic challenges that we see. Listen, overall, we feel great about the team. We feel great about the strategy. The future of the global business and our portfolio remains important to us.

Donnie King (President and CEO)

Thank you very much.

Operator (participant)

Thank you. Our next question today comes from Thomas Palmer at Citi. Please go ahead.

Thomas Palmer (Analyst)

Good morning. Thanks for the question. Maybe just to start out, any help as we think about third-quarter expectations? I mean, if I look at industry trends and general seasonality, it would seem like chicken typically is better in the third quarter than the second quarter from a profit standpoint. Maybe pork a little bit weaker. Just any help is kind of thinking through what we just saw this past quarter and kind of what you're anticipating as we roll into the third quarter. Thank you.

Curt Calaway (CFO)

Thanks. This is Curt. Maybe to start off with how we're thinking about the year. Obviously, we don't give individual quarter guidance. I think the basis of your question was, look, from a chicken standpoint, the first half of the year generating about $680 million. Obviously, as Devin had said earlier, still a range of $1 billion-$1.3 billion. We acknowledge it definitely is a constructive operating environment that we're in. I want to repeat Devin's comment that we'll continue to make some investments, but a little heavier weight in the back half of the year. For the overall year, we would still expect to be at or above the midpoint in the upper half of the range for chicken. Certainly, pork delivering well so far, $114 million on a year-to-date basis with a range of $100 million-$200 million.

We'll leave it to you to kind of imply where that will be. Certainly, it is a business that generally has a positive, strong Q1 and a strong first half of the year relative to normal historical cycles. Acknowledging at 114 over the low end of the range thus far.

Donnie King (President and CEO)

Maybe I add a couple of comments to the guidance. Just speaking very generally about the business, if you look at our beef business, and I realize it's losing money today, but our beef business, the team that lead our beef business, are operating at a very, very high level. The execution from what I've seen has never been better than what we see today from our beef business. From a pork perspective, our pork business is performing very, very well. You saw it in the numbers.

Just the management operating systems that we have in place in both beef and pork, some technology that we've deployed against those businesses is certainly helping with that. You saw in chicken a very constructive Q1, got a lot of momentum, and there will be some investments in brands on the Tyson brand in the back half of the year. That is kind of the 1-1.3 kind of conversation. If I think about prepared, laid out earlier today that there is a lot of upside to prepared. We are in kind of mid-innings, if you will, in terms of performance in prepared. There is a lot of upside for us as a company. Our international business, it is a smaller business that we have, but their strategy they have in place and their execution against that strategy is really, really good.

Maybe finally, as it relates to consumers and customers, we're aligned with strategic customers and feel good about those relationships. We're growing their business and thereby growing our business. From a consumer perspective, in this environment, wherever that consumer is, we're intersecting with that consumer. We provide high-end or value-tier propositions for those consumers. We feel good about all of those and the business in general.

Thomas Palmer (Analyst)

Thanks for that walkthrough. Maybe I could just follow up quickly on international. Why has it been so strong the past couple of quarters? I guess how persistent do you think the drivers of that might be?

Donnie King (President and CEO)

Yeah. Maybe just to repeat, I mean, it really is as simple as we set out, call it a year ago, with a very defined strategy, knowing that we needed to be better at our operational fundamentals. I think the result of that is, one, we run more efficient operations, more profitable operations. What it's really done is allowed us to go to our customers with a case that's equal to or better than what we see from our competitors, meaning we have innovation pipelines, we have competitive costs, we have talent, we have everybody aligned against that strategy. Again, it is around the operational fundamentals and getting our facilities where they need to be from a commercial growth strategy. I do not see that changing. Those things are very well-defined.

We have a great leadership team in place, and everybody is working towards the same strategy.

Thomas Palmer (Analyst)

Thank you.

Operator (participant)

Thank you. Our next question today comes from Andrew Strelzik at BMO. Please go ahead.

Andrew Strelzik (Analyst)

Hey, good morning. Thanks for taking the questions. My first one is back on the outlook for chicken. You mentioned some uncertainty and also the investments. I was just hoping you'd collaborate a little bit on both of those factors. Can you maybe compare or quantify the investments in chicken in the back half of the year versus the front half of the year? Has that expectation changed at all over the last several months? On the uncertainties, are those really trade-related, or is there something else? I guess I would have thought with some of your lags on pricing, you'd have visibility through the third quarter at this point.

Donnie King (President and CEO)

Yeah. Maybe let me break that up just a little bit. The investment itself, we've talked about an incremental $100 million year over year in FY25, and that's going to be weighted more towards the back half. We do have some new product launches, and we've also got some work going on with our strategic customers. I would say too that it's not just about trade and marketing spend necessarily. We've also made some significant investments to make sure that we've got the right quality, particularly with our retail products, branded retail products. We've also made sure that we've got the right packaging in place, made sure that we're meeting the needs of the shopper, including those that are increasingly utilizing delivery and pickup. I think too about the innovation piece of our business will be not only critical in the quarter, in the year, but beyond.

Everything that we're doing starts with the consumer insights. We are reaching our consumers through digital platforms, and that's part of the spend that we've talked about. We use data to make sure that we're getting a return on those investments. Across all those things, that's really where that spend is occurring. We feel very good about what that will mean for the future of the business. You mentioned pricing, just to touch on that. Overall, pricing is very healthy. We did see a slight decline on average sales price in the quarter primarily due to some cost-plus pricing models that we have. Think about it this way. As mentioned before, we utilize a very diverse set of pricing models by design. That's everything from negotiated to fixed price. We have grain-based cost-plus formulas. We've even got some market-based pricing.

Ultimately, those are all designed to evolve our commercial relationships, build these long-term relationships, and allow us to focus on growing the category and really stabilize our earnings.

Curt Calaway (CFO)

Maybe just add a couple of things really quick. I think your question touched on consumer or customer uncertainty or the impact of trade flows. I think what we intended to talk about there is, right, the consumer will continue to move around in what they're choosing to buy, and elements of the population will see value. I think we're set up to be able to position our offerings to the customers and consumers to meet those needs. That investment in the back half that we've talked about will be a little more incremental in the back half than the front half. Reiterate what we said, right?

We're still expecting to be at or above the midpoint of the range that we gave, which with a $680 million first half of the year, even at the high end of the range, $1.3 billion, that's $620 million in the back half of the year. That's the context we want you to make sure you understand from that.

Andrew Strelzik (Analyst)

Got it. Okay. That's helpful. My other question was just more specifically on tariffs. Have you seen any changes in export trade flows related to that or any impacts on your business so far, either pull forward on demand, ships away from the U.S. to other countries? I'm just curious how you're seeing that so far and how you're handicapping that in your outlook. Thanks.

Donnie King (President and CEO)

Sure. Let me give you the punchline first. We do not expect global protein consumption to change. That is our top line view as it relates to that. There could be temporary short-term disruptions as global trade flows adjust. We anticipate that. As we talked about last quarter, we have been contingency planning to minimize disruptions to both trade and supply chain. Frankly, we have been doing this for 90 years. There have been tariffs. There have been non-trade tariff barriers. There have been all those things. We are confident in our ability to adapt and succeed. We are certainly interested in working with the administration and Congress to try to resolve this sooner rather than later. We feel good about where we are and what we have done. We have factored everything as it relates to tariffs and consumer pressure and so forth into our guidance.

Michael Lavery (Analyst)

Great. Thank you very much.

Operator (participant)

Thank you. Our next question comes from Michael Lavery with Piper Sandler. Please go ahead.

Michael Lavery (Analyst)

Thank you. Good morning. I just want to come back to beef. Obviously, there's a lot of challenges there. One thing that's proven to be better than we expected or feared is the consumer demand. Even as pricing has been sticky and going up, the revenues continue to have been growing nicely. Maybe any sense of just what you're seeing there? Is it driven by more of a higher-end consumer? Help us maybe understand just what's helping keep that sales growth momentum going.

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

Yeah. It's a great question, Michael. Obviously, the consumer has been extremely resilient relative to beef. We've seen appropriate strength on middle meats. I think what's really held this cutout up at such a high level has been some of the values that are being derived through the grinds complex as well. Regardless of format, if it's in the format of a patty, if it's in ground beef and chubs, we've really seen a lot of resiliency. That provides us some benefits all the way from the chuck to the round as well. I would highlight the resiliency and opportunity for a consumer to potentially move from middle meats down into ground beef. Consumers are going to continue to eat beef.

I think that's really the highlight is they still have the opportunity to move into these grinds complexes from some of the middle meats as well.

Michael Lavery (Analyst)

Okay. That's great. That's helpful. Just a follow-up on the regulatory environment. Is there a sense for what your exposure is to SNAP recipient households and if there's some cutback or dial back in what those benefits look like? Have you been able to quantify what, if any, risk you think that might give?

Donnie King (President and CEO)

I mean, this is Donnie. This is a little bit across the board or all over the board, I should say. Interestingly enough, here in Arkansas, about a month ago, our governor sought a waiver from USDA to substitute rotisserie chicken into the SNAP program as opposed to some candy and sweet goods and so forth. We see that catching on across the country. We see protein, as we talked about or I talked about in the earlier comments, we're seeing U.S. meat sales at all-time high in 2024, 98% of household penetration. Protein is clearly a winner in the marketplace, whether that's chicken, beef, pork, or turkey. We feel good about that. I have no specifics as it relates to what the economic value is in terms of SNAP and how that may trade and how the administration may do it.

Once we know, we will certainly make you aware of that.

Curt Calaway (CFO)

Okay. Thanks so much.

Operator (participant)

Thank you. Our next question today comes from Pooran Sharma with Stephen Zink. Please go ahead.

Pooran Sharma (Analyst)

Great. Thanks for the question. Just wanted to ask about operationally, we had a pretty cold winter across many parts of the U.S. Just want to understand if you could help us qualitatively or if you could quantify any cold weather impacts. I will say I was impressed, continued to be impressed by chicken, but I get the sense that maybe you were impacted with the cold weather and you could have done a little bit better. I will stop there and see what color you have to share.

Sure. I would tell you that early Q2, we certainly had weather disruptions across in the center part of the country, up and down the East Coast. We often see snow, ice, tornadoes, hurricanes. I mean, honestly, you get to see it all. We manage our business to be able to deliver in spite of those things. We try to keep our team members safe through those processes and our animals safe and alive during those processes. I think we fared very well early in the quarter, but it did cost us some money.

Curt Calaway (CFO)

Yeah. This is Curt. I think I wouldn't call it anything where it was materially different than historical norms. I think to add to what Donnie said, right, the benefit of our network and portfolio was as we prepare for winter storms, specifically as you referenced, moving within the network and optimizing as best we can. It was certainly a challenging Q2 given the weather, we are accustomed to dealing with that.

Pooran Sharma (Analyst)

Great. Great. Appreciate the color there. I guess my follow-up will just be just pork-related. Just hog supplies have been coming a little bit lighter than expected. Wanted to get a sense if you think the industry is continuing to rationalize production or supplies, or if this is just temporary disruptions, i.e., weather disease-related. How do you expect supply availability to trend through the back half of the year?

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

Yeah. Great question. I think the real reference point is the fact that if you look at a lot of the models that are published, the pork producer is able to be profitable, which is a great reversal from a couple of years ago as well. That certainly provides some financial continuity and stability to continue to keep the sows productive. The second part of that is we continue to see opportunity relative to genetic improvement and herd health from a sow perspective. Those productivities in terms of pigs per litter continue to be on an upward trajectory, which is positive relative to supply as well. Lastly, as we come out of our fiscal Q2, I think it's important to note that we kind of move out of disease season relative to pork production.

You see some of those impacts that certainly flow through. From a supply perspective, we do not see any large disruptions. Our outlook for the rest of the year is really to continue to layer into our operational improvements that we have seen year to date. We have plenty of runway left that the team is executing to that we would expect to offset any supply disruptions.

Donnie King (President and CEO)

Thank you for the color.

Operator (participant)

Thank you. Our next question today comes from Heather Jones with Heather Jones Research. Please go ahead.

Good morning. Thanks for the question. I'll try to be quick. My first one's on beef, and then my follow-up will be on chicken. The first one, beef and pork. If I remember correctly, I don't think your initial guidance included an impact from tariffs, and it now does. Is it fair to assume that if those are resolved relatively quickly, there's potential upside to guidance?

Curt Calaway (CFO)

This is Curt. I think I'll start out really quick. In the last quarter, we did reference that our ranges included our outlook and impact associated with tariffs. Certainly, it was early days when we were on the call last quarter. We did consider that in the prior quarter.

Okay. On the chicken front, I hate to belabor this, but it's obviously a very constructive setup, and y'all tend to be long dark meat, which has been on fire. I was just wondering, you've referenced the $100 million investment, which I've talked about all along. I was wondering, given your move to feeder plants and just the inherent advantage that gives you relative to your peers, are you also planning on investing more in the pricing side to protect and gain share? I'm still having trouble reconciling your second-half guide, implied guide with the backdrop we have. It doesn't seem to add to just $100 million. Just trying to figure that out. Thank you.

Donnie King (President and CEO)

Sure. I'm not sure I can help you, but let me give you some of the components of this. If you think about from a dark meat, I'm not clear about what you're meaning with that. What I can tell you is that 95% of the dark meat we produce is sold domestically. That's one proof point. If you look at where or what we've done relative to adding value to dark meat, whether that be boneless, skinless, retail, or more value-added products as it relates to dark meat, we've been on a journey to convert more of the commodity into value-added or premium than. We haven't stopped that journey. We feel good about that. We also said from a guidance standpoint that we thought we'd be middle range to upper range. The factors we considered, there were really two.

One was the year-to-date momentum would push you to the top of the range and the investment back in the brand and plus any consumer pressure or tariff unknowns or activity. We have built that into this model. So we are comfortable with the one to one three. But Devin, do you want to?

Curt Calaway (CFO)

This is Curt. Let me add just for a second. I think just to go back, Heather, on the reference I made on an earlier question, right? We made $680 million in the front half of the year at the high end of our range. That would imply a back half of $620 million or down $60 million versus the front half. Again, we said we'd be at or above the upper half. Hopefully, that gives you a little bit of context relative to the spend of $100 million. To reiterate the dark meat comment, from an overall perspective, overall chicken, about 95% of the total revenue in chicken gets sold domestically.

Okay. Thank you so much.

Operator (participant)

Thank you. Our next question comes from Manav Gupta with UBS. Please go ahead.

Manav Gupta (Analyst)

Thank you for squeezing me in. I'll ask two questions very quickly. You continue to generate a significant amount of free cash flow. What could be the policy for better shareholder returns given the amount of free cash flow you're generating? My second question here is, given the downturn we are generally seeing in an economy and your strong balance sheet, any opportunities for small bolt-on acquisitions that you see out there? In which business segments could you target for small bolt-on deals? Thank you.

Curt Calaway (CFO)

All right. This is Curt. Thanks for the question. From a free cash flow standpoint, in the first half of the year, we were just a little shy of $400 million. We still provided a guidance range for the full year of free cash flow between $1 billion and $1.6 billion. At our run rate of dividends, we'd spend about $700 million on dividends for the full year. Our leverage, certainly acknowledging we've made significant improvement over the last six quarters, going from 4.1x to 2.3x. Our long-term goal is still at 2x. We have a little bit of ways to go before we get to our ultimate goal. With respect to M&A, our stance remains the same. We look at opportunities, but we're very selective in what we choose to look at.

Overall context, still looking at opportunities more in the value-added parts of our portfolio.

Operator (participant)

Thank you. That concludes our question and answer session. I'd like to turn the conference back over to Donnie King for any closing remarks.

Donnie King (President and CEO)

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

Operator (participant)

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.