Tyson Foods Q3 2023 Earnings Call Transcript

Presentation

[Operator]

Good morning, everyone and welcome to the Tyson Foods Third Quarter 2023 Earnings Conference Call. [Operator instructions] Please also note, today's call is being recorded.

At this time, I'd like to turn the floor over to Sean Cornett from Investor Relations. Sir, please go ahead.

[Sean Cornett, Vice President, Investor Relations at Tyson Foods]

Good morning, and welcome to Tyson Foods fiscal third quarter 2023 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 a Q&A. Additionally, joining us today are Brady Stewart, Group President, Fresh Meats; Stewart Glendinning, Group President, Prepared Foods; Wes Morris, Group President, Poultry; and Amy Tu, President, International and Chief Administrative Officer. We've also provided a supplemental presentation, which may be referenced on today's call and is available on Tyson's Investor Relations website and via the link in our webcast.

During today's call, we will make forward-looking statements regarding our expectations for the future. These forward-looking statements made during this call are provided pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all comments reflecting our expectations, assumptions or beliefs about future events or performance that do not relate solely to historical periods. These forward-looking statements are subject to risks, uncertainties and assumptions, which may cause actual results to differ materially from our current projections. Please refer to our forward-looking statements disclaimers on Slide 2 as well as our SEC filings for additional information concerning risk factors that could cause our actual results to differ materially from our projections. We assume no obligation to update any forward-looking statements.

Please note that references to earnings per share, operating income and operating margin in our remarks are on an adjusted basis unless otherwise noted. For reconciliations of these non-GAAP measures to their corresponding GAAP measures, please refer to our earnings press release.

Now, I will turn the call over to Donnie.

[Donnie King, President and Chief Executive Officer at Tyson Foods]

Thanks, Sean, and thank you to everyone for joining us this morning. Before we review the results, I'd like to start out by discussing my vision for Tyson and the decisive actions that we're taking to successfully navigate the current market environment. We remain fully committed to our vision of delivering sustainable top line growth and margin improvement over the long-run. With our leadership team, we are executing a multi-point plan focused on efficiency and modernization, including taking a much closer look at our cost structure across the business to drive operational excellence. We are already seeing tangible benefits of our efforts. We've been through market cycles before and I'm confident that we have the right strategy, seasoned leadership and team members in place to emerge stronger from this one.

We are making good progress and saw sequential improvements in our results in Q3. We're not yet where we need to be, so we continue to focus on what we can control. Earlier today, we announced our intention to close four more of our chicken facilities demonstrating our commitment to taking bold actions to improve performance. Beyond these important actions, I remain optimistic about our future. We are a leader in our industry and we continue to innovate and take market share in most of our categories. I remain very confident in our long-term strategy and we are leaving no stone unturned to maximize value for shareholders.

Diving into our results. We continue to compare against strong performance across our segments last year. However, I am encouraged by the sequential improvements we made in Q3. Let me start with chicken. Market conditions in chicken are still challenged with commodity prices across most cuts remaining significantly lower compared to last year. However, adjusted operating income improved by more than $100 million sequentially without any material benefits of market tailwinds. The sequential increase was primarily due to internal actions we took.

For example, in our fiscal Q2, we decided to close two of our plants, convert two others to boneless and rationalize our SKUs, inventory and other assets. In Q3, the team made significant improvements in yield, spend and efficiency leading to strong improvement in profitability in just one quarter. As we become more productive with automation and team member engagement, we can further optimize our footprint and reallocate resources to more efficient plants while still having ample capacity to service and grow with our customers. This enabled us to announce today that we plan to close four additional chicken facilities bringing the total announced closures to six this year.

We also recently made the decision to transition away from the No Antibiotics Ever labeling for Tyson branded chicken to a No Antibiotics Important For Human Medicine approach. Data suggests the use of ionophores can lead to more uniform birds with consistent weight. In turn, we can more accurately forecast supply and demand helping to meet the needs of our customers and consumers. And I want to emphasize that we will continue to evaluate all options, including more actions like these across all of our businesses.

In beef, we performed better-than-expected. Our results were driven by our disciplined approach to balancing supply with customer demand while taking advantage of seasonal increases in cutout values. However, the beef industry will likely continue facing headwinds. As you may have seen in the latest USDA Cattle inventory report, herd liquidation continues to tighten supply, leading to higher cattle costs, narrowing spreads and difficult export market conditions.

Pork remains under pressure across the industry and we continue to see headwinds there with both our internal live production and our external sourced hog supply. Increased feed cost and low cutouts drove spread compression through our results. We also had incremental negative impact in Q3 from a fire at one of our processing facilities.

Finally, to prepared foods, which is a key growth pillar for the future. The business performed well in Q3. In retail, our core business line saw strong volume growth in the quarter and continued to gain pound and dollar share. In Broadline Foodservice, Tyson Focus 6 continues to outpace the industry in volume growth. This led to better-than-anticipated margins in prepared foods. In short, our results this quarter demonstrate that chicken is gaining momentum and our branded foods business remains an area of strength.

Let me add some further color on the performance of our branded business versus our top peers. As I mentioned earlier, our Tyson core business lines including the iconic retail brands, Tyson, Jimmy Dean, Hillshire Farm and BallPark continue to outpace total food and beverage and our peers and volume growth up 5% versus a year ago. We believe this points to the strength of our core brands and sets us up well for the future. We continue to show market share leadership in most of the retail categories in which we compete delivering both dollar and pound share growth in the aggregate and across day parts. Tyson, Jimmy Dean, Hillshire, Farm and BallPark all hold favorite brand status with consumers over our nearest competitor by a wide margin.

Our share performance and brand strength demonstrate the momentum we've gained with consumers and they will continue to spend on brands they know and trust. Likewise, we will continue to invest in merchandising and advertising to support our brands. While we are pleased with our brand strength and share performance, we are constantly building new innovations to expand the appeal and market opportunities for our products. Over the past few years, our innovations have generated roughly $2 billion in annual sales.

Let me highlight a few products we've launched this fiscal year that I'm most excited about. Earlier this year, we announced the Tyson Original Chicken Breast Sandwich for retail channel, which won the People Magazine Food award for Best Frozen Sandwich. Furthermore, we were excited to see that more than 70% of the buyers were new to the Tyson brand and more than 20% were new to the category. We also launched Tyson Chicken Sandwiches in food service space where our sandwiches won awards from food and beverage industry, National Agri-Marketing Association and National Association of Convenience Stores. As you can see, our innovation in chicken is able to be deployed across channels and occasions highlighting the power of our scale.

Moving to Jimmy Dean, which is already a clear leader in the breakfast meal occasion. We're expanding with differentiated capability based innovation by launching handheld breakfast items. For instance, this year, we launched the Jimmy Dean Biscuit Roll-Ups in Food Service Channel and Maple Griddle Cakes and Toaster Pop Ups in retail. We are seeing strong customer adoption of these products and promising early consumer demand. In Hillshire Farm, one area of focus in retail has been the trend toward healthy snacking. For instance, we launched Hillshire Farm snack kits with 100% real premium meats, cheeses and crackers, all ready to eat on the go.

If you haven't already, I encourage you to try our snack kits like Oven Roasted Turkey Breast, Cheddar Cheese and Wheat Crackers. We launched these products at attractive price points and have already seen strong acceptance with major retail customers. In the Food Service channel, we are now participating in the fast growing cupping pepperoni category with our very own Hillshire branded cupping pepperoni product. We are always on the lookout for how to keep our brands on trend across channels.

Now I'll turn things over to John to review our financial results for the quarter in more detail.

[John R. Tyson, Chief Financial Officer at Tyson Foods]

Thank you, Donnie. Let me start with a quick summary of our total company results and then review our individual segments. Our sales were down 2.6% year-over-year, driven by pork and chicken where we saw a reduction in price per pound. More than 90% of the decline in adjusted operating profit was driven by lower profitability in our beef and chicken segments. Higher input cost per pound was primarily due to the increase in cattle costs along with unfavorable derivative impacts and higher labor costs, but these were partially offset by lower hog costs, reduced outside purchases of meat in our Chicken segment and lower raw material costs in Prepared Foods. While profit was down substantially versus last year, it's important to note that it improved meaningfully versus last quarter and adjusted EPS increased $0.19 on a sequential basis. Challenges remain, but we continue to improve efficiencies by controlling what we can and believe we're heading in the right direction.

Now on to the individual segment results, starting with Beef. In Beef, revenue was essentially flat year-over-year with lower head throughput offset by higher pricing. Operating profit was down, primarily reflecting higher cattle costs, which increased $610 million on a like per pound basis. Operating margin of 1.6% was down from the historically strong margins of more than 10% in Q3 last year. On a sequential basis, disciplined yield and procurement benefits along with seasonal cutout improvement helped drive better-than-expected operating profits. Beef is likely to continue to face headwinds, and we don't expect the ongoing tightening of cattle supply and spread compression to abate until herd rebuilding is well underway.

Now moving to Pork. Revenue was down 18%, driven primarily by lower pricing due to softer demand. The operating loss in the quarter was $70 million as spread compression continued to pressure our margins. This was exacerbated by market pressures in our live operations, lower exports and the operational impact of the fire at our Madison facility.

Moving on to Chicken now. Sales declined 3.5% year-on-year, driven by lower pricing, partially offset by volume growth. The decrease in pricing reflects the challenging commodity market. While volume grew modestly versus last year, it decreased more than 4% on a sequential basis. This sequential decline is more than historical seasonality, reflecting steps we took to align internal production to consumer demand while also reducing finished good inventory by $70 million. Year-over-year profitability was negatively impacted by market conditions and higher feed costs and a $65 million net derivative loss in the current quarter compared to a $23 million loss in the prior year period. On a sequential basis, it's worth noting that AOI improved by more than $100 million.

In Prepared Foods, sales declined 2.6%, driven by both volume and price. The volume decline was driven by foodservice as the trajectory of this channel's recovery remains a little uneven. As Donnie mentioned, our Focus 6 categories are outpacing broadline industry and maintaining their share. Our lower foodservice volumes were partially offset by continued growth in retail highlighting the strength of our brands. Lower pricing was primarily driven by lower bacon prices reflecting the underlying cutout values for bellies.

Compared to the prior year period, operating profit was up $34 million due to lower raw material costs and productivity gains, which was partially offset by lower sales, higher packaging costs and increased MAP investments. Despite increased spending in brand building efforts, we were pleased with our operating margin of 9.2%, particularly so given the challenging retail food environment. Our Prepared Foods segment remains key to our strategy providing a high-margin, stable business with many growth opportunities ahead helping to offset the pressures and volatility in commodity prices.

Before moving on to balance sheet items, I want to provide some context on the goodwill impairment charge that impacted our reported numbers on a GAAP basis. The details of which will be provided in our 10-Q when we file it later this week. The interim impairment testing we did this quarter resulted in noncash charges in the reporting units that we have been disclosing as at risk in our filings going back to last fiscal year. The impacts of the charges are not shown in our presentation this morning as they are not reflected in our adjusted results, but all reconciliations to reported results can be found in the appendix.

Now to our financial position and capital priorities where building financial strength, investing in our business and returning cash to shareholders remain the priorities of our capital allocation strategy. Q3 operating cash flow was $660 million, in line with expectations with prudent working capital management partially offsetting lower profitability. Inventory reduction was the primary driver of improved core working capital. We still see some opportunity to improve inventory days and drive better cash flow. Year-to-date, capex is roughly $1.6 billion as we continue to moderate our pace of spending. Based on this pace, we don't expect capex to exceed $2.1 billion, below our prior guidance of $2.3 billion.

We ended the quarter with $3.7 billion of liquidity and net leverage of 3.2 times. Our balance sheet management approach remains unchanged as we are committed to building financial strength, maintaining our investment-grade credit rating and targeting net leverage of at or below 2 times net debt to EBITDA for the long-term. During Q3, we returned $167 million to shareholders via dividends and $11 million in share repurchases. We remain committed to maintaining a disciplined, yet opportunistic capital allocation strategy ensuring that we deploy resources to maximize long-term shareholder value.

Now let's review our updated outlook for fiscal 2023. We're maintaining our total company sales guidance range of $53 billion to $54 billion and we expect to be at the lower end with roughly flat sales growth for the year. Turning to AOI. In Beef, based on our year-to-date results, offset by anticipated live cattle cutout spread compression, we expect full year margins to be at the higher end of our range of between a loss of 1% and a gain of 1%. For Pork, due to ongoing market dynamics impacting our Pork segment, we now expect full year margins to be between a loss of 4% and a loss of 2%, but at the higher end of that range.

In Chicken, we're gaining momentum. But with our results year-to-date, including net derivative losses, we expect full year margins to be at the lower end of our range of between a loss of 1% and a gain of 1%. Prepared Foods has generated strong margins throughout the year. With continued investment to support our brands, we expect margins to be at the higher end of the 8% to 10% range for fiscal 2023. And as I mentioned earlier, we're reducing our expectations for capex to approximately $2.1 billion. Our expectations for net interest expense and tax rate remain unchanged at around $340 million and 22%, respectively.

So in summary, while the current operating environment is difficult in several of our businesses, we are making improvements across our operations and we are optimistic on our long-term growth opportunities. We have great teams across our segments. We've got growing demand for our products and the right portfolio mix to win in the marketplace.

So now I'll turn the call back over to Sean for Q&A instructions.

[Sean Cornett, Vice President, Investor Relations at Tyson Foods]

Thanks, John. We will now move on to your questions. Please recall 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.

Questions and Answers

[Operator]

[Operator Instructions] And our first question today comes from Alexia Howard from AllianceBernstein. Please go ahead with your question.

[Alexia Howard, Analyst at AllianceBernstein]

Good morning, everyone.

[Donnie King, President and Chief Executive Officer at Tyson Foods]

Good morning.

[John R. Tyson, Chief Financial Officer at Tyson Foods]

Good morning.

[Alexia Howard, Analyst at AllianceBernstein]

Okay. So there's obviously a lot of moving pieces here on the quarter. Could we maybe take a step back and get your overall take on the quarter and where we're at in the recovery of your commodity meat segments? Just trying to put things into context here. And then I have a follow-up.

[Donnie King, President and Chief Executive Officer at Tyson Foods]

Okay. Well, good morning, Alexia. This is Donnie King. Let me start out with thanking you for the question. And as is no surprise, markets continue to be challenging and they're challenging for everyone. I will tell you that we continue to execute our strategy. And I would tell you we've had the best execution in our Q3 that we've had since pre-pandemic times. In Q3, we saw a sequential improvement across all businesses, so led by chicken as well as -- led by chicken as we focused on our cost structure. We have aligned our supply to our demand as we pursue profitable growth.

We are controlling the controllables across all businesses. I would tell you that we're not surprised by beef and pork results. We expected it. We are happy to report that we're winning with customers and consumers and gaining volume and dollar share. We are taking decisive actions as we talked about this morning rightsizing and modernizing our footprint. We continue to invest in automation and digitalization. We continue to invest in our team members and their work experience.

We are pursuing growth in value-added and branded categories. In chicken, behind the number one brand in chicken, Tyson; in Prepared Foods behind Jimmy Dean, Hillshire Farm and BallPark. We are number one in eight of nine categories we compete in at retail. We hold number one or number two positions in most foodservice categories. And as I said this morning, we will continue to evaluate everything we do.

Tyson has been around since 1935 and I've been around since the early '80s and we've seen many cycles before. We always come out better, stronger and faster and we will this time as well. That said, we have more to do and we're excited about our future. Our leadership team and our 140,000 team members are aligned to maximizing shareholder value. That's a little bit of color. Let me flip it over to Brady and he can speak to a little bit around the pork and beef business.

[Brady Stewart, Group President of Fresh Meats at Tyson Foods]

Sure. Thanks, Donnie. First of all, on the Pork -- in our Pork business, I think it's important to break the Pork business into two different segments. First, as John and Donnie indicated in the opening remarks, we faced some challenges relative to the economics in the Pork business specific with live operations. It's well documented that the pork industry is in the midst of a liquidation cycle right now. We believe that the markets will in fact take care of themselves. But over half of our losses in the quarter were attributable to live ops and price discovery relative to live ops with some of our suppliers.

Fresh pork on the other hand, the other half of that segment was impacted by the fire we had in Madison. And outside of that, we saw strong improvement in terms of operational execution in our Pork business. We're excited about the team that we've assembled here in Springdale and believe we have a bright future in front of us as we continue to execute on those operations.

On the Beef side, we'll continue to focus on what we can control relative to moving through this beef cycle. We're going to continue to align our supply with demand and drive value-added, including case ready to make sure that we continue to be closer to our customer and try to decommoditize that business. Thanks for the question.

[Alexia Howard, Analyst at AllianceBernstein]

Great. And then if I go back to year, I mean, this time last year, you were looking for strong and speedy recovery in the Chicken margins based on improved hatch rates and capacity utilization. Obviously, there was the hiccup over the holidays with the forecasting error, but it seems as though the environment has changed materially. What has changed in the environment? And how quickly do you think you can get back on track on the Chicken side of the business? Thank you and I'll pass it on.

[Donnie King, President and Chief Executive Officer at Tyson Foods]

Thank you, Alexia. We are encouraged by the sequential improvement in 3Q and especially in June. We have much work left to do, but we're on the right path. And I think that's important to call out. We're controlling the controllables better than before, and I mentioned earlier that the best I've seen in terms of execution since pre-pandemic. But let me flip that over to Wes and let him add a little bit more color on chicken.

[Wes Morris, President of Poultry Business at Tyson Foods]

Yeah, sure. I too am encouraged by the sequential improvement. The team is focused on what they do day in and day out. And we've seen a big step change in improving yields, labor efficiency, line efficiency and spend. And at the same time, we've seen great improvement in order fill and on-time delivery.

[Alexia Howard, Analyst at AllianceBernstein]

Thank you, and I'll pass it on.

[Operator]

And ladies and gentlemen, our next question comes from Ben Bienvenu from Stephens. Please go ahead with your question.

[Ben Bienvenu, Analyst at Stephens]

Hey, good morning. Thanks for taking my questions.

[Donnie King, President and Chief Executive Officer at Tyson Foods]

Good morning, Ben.

[Ben Bienvenu, Analyst at Stephens]

So I want to start on the Chicken business. Donnie, you noted the sequential improvement in the business. You also called out the actions you took to close four facilities. I recognize not all of those are large kill harvest facilities, but I do think there's some sizable facilities in that footprint. So could you talk a little bit about what the net impact to production might look like as you layer some of that production into the rest of your facilities and then think about what the go-forward looks like?

[Donnie King, President and Chief Executive Officer at Tyson Foods]

Sure, Ben. I'll add a few comments and I'll flip it to Wes to add a little more color. In terms of the plant closings, closing plants is never easy for anyone involved. In fact, it can be gut-wrenching. But I would tell you with a great deal of gratitude and thanks to our team members, our family farmers and the communities impacted, we made those decisions. And earlier today, we announced the closure of the four plants bringing the total to six this year. The facilities that we are closing, just to give a little color about them, they're typically smaller in scale and in need of major capital to make them viable. And so that's an important detail. And I'll flip it over to Wes to give you a little color on the capacity.

[Wes Morris, President of Poultry Business at Tyson Foods]

Yeah, Ben, I would answer it simply this way. We're moving our existing sales to more efficient assets and so no material change in volume in any way, shape or form in excess of 90% once implemented.

[John R. Tyson, Chief Financial Officer at Tyson Foods]

Hey, Ben, this is John. If I can just add in a little bit, because I think you're trying to ask what's the impact on these moves. So you heard Donnie talk about adjusting the need for capital investment in some of the older facilities. We see that as a benefit with these moves. I think number two, we're talking about taking out around 10% of harvest capacity, which puts our asset utilization when all things are said and done, up closer to that 90%, out of the low 80s. And not just talking about the asset closures, but when you think about the asset closures, the NAE to NAIHM move and some other operational changes that we're making, we've talked a lot about last year around mix, etc. We would expect somewhere around a $200 million run rate uplift from those moves. And so exactly when all that comes to fruition in the end of '23 and '24, we can't pay it all to one day. But that's kind of order of magnitude what we're talking about here.

[Ben Bienvenu, Analyst at Stephens]

Okay. That's very helpful. Thanks. Maybe thinking about the Pork business. You noted the facility fire impact in the quarter. We have sort of been seeing the cutout rally pretty materially. So kind of a two-part question. One, I know despite the guide down for the balance of the year in pork, how would you expect pork packer margins to migrate as we move through the rest of this year? And then two, as you've seen some of the cutout costs prices that rally pretty materially, what impact does that have to cost of goods sold on the Prepared Foods business as well?

[Donnie King, President and Chief Executive Officer at Tyson Foods]

So Ben, if I could make a couple of comments and I'll let Brady add color too. Q3 was challenging and we expected it to be. But as Brady mentioned earlier, we are absolutely laser-focused on those things which we can control. I'll let Brady, if he would, speak to from the hog side as well as from a Pork's perspective.

[Brady Stewart, Group President of Fresh Meats at Tyson Foods]

Sure. Thanks, Donnie. I think there's a number of things at play here that we'll continue to evaluate as we learn more about these markets. And obviously, one of the biggest impacts relative to the supply demand equation that we've seen in the last several months is the Supreme Court's ruling on Proposition 12. I think as a industry, we're still learning what total impact that has from a supply demand perspective. I think it's somewhat difficult right now to totally forecast with great accuracy how that all plays out coupled with the fact that as I referenced earlier, we're in the midst of a sell liquidation cycle as well in the industry.

We're going to continue to monitor these macroeconomic factors that impact our business. But let me be clear, we have the opportunity to continue to control the controllables, continue to use our footprint with our case-ready and value-added assets to get closer to the consumer. And I feel good with the team that we have here in Springdale who'd stood up to manage the Pork business and are seeing significant operational improvements in that business.

[Operator]

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

[Peter Galbo, Analyst at Bank of America]

Hey guys. Good morning. Thanks for taking the question.

[Donnie King, President and Chief Executive Officer at Tyson Foods]

Good morning, Peter.

[Peter Galbo, Analyst at Bank of America]

Donnie, maybe we can actually start on beef. I think you said it came in better than you expected in the quarter, but again, your outlook here in 4Q maybe a bit weaker. And I just wanted to give you a chance to talk about kind of how you see that business playing out over the next 18 months. Not asking for formal guidance, but I think the last time we were in this part of the beef cycle in '14 and '15, you went through an extended period where packer margins were actually negative. And is that -- within your consideration set, is that in your outlook? Just would be helpful to hear from you.

[Donnie King, President and Chief Executive Officer at Tyson Foods]

So Peter, let me start off with -- and we did in fact have a better quarter than expected. We were not surprised necessarily by the beef results. As Brady has mentioned and John did in the opening remarks, we continue to see herd liquidation, but we are focused on what we can control. Let me flip it over to John and let him add some commentary around this.

[John R. Tyson, Chief Financial Officer at Tyson Foods]

Hey, Peter. Yeah, just regarding your question on the outlook, I think a couple of things. So you did note, right, just on what the implications are with our guidance ranges on the balance of our '23 and we base that on dynamic market conditions. We're obviously being as intentional and aggressive as possible in trying to balance that supply and demand to manage the spread. But knowing what we know today that's where things sit. As we think about '24, we expect to give you guidance in November as has been customary for us in the past kind of annual cycles.

But as it relates to making any projections or estimations about what the future looks like, as we move into the fall, we'll start to see some data around where pasture conditions were, what are the herd numbers looking like, what is the cow harvest. And I think from there, at that point in time, we might be able to make better projections about what '24 and '25 look like. And so I think that's probably as much as we can tell you on that today.

[Peter Galbo, Analyst at Bank of America]

No. That's helpful, John. Thank you for that. Just kind of as we think about watch outs. And then maybe just back on Chicken, guys, just two questions -- or a two-part question. First, with the four facilities you have today, are there any further anticipated impairments that you may have to take or kind of was that all contemplated today? And then secondly, maybe more broadly, Donnie, this mark-to-market hedging program in Chicken seems to kind of be an unexpected headwind a lot of quarters. Just curious as you're reevaluating all parts of the business, I mean, is there a thought process on just unwinding the hedging program and kind of going to a more hand and out approach? Thanks very much.

[Donnie King, President and Chief Executive Officer at Tyson Foods]

Sure. Thanks. Let me -- in terms of the plant closures, as I said earlier, we're continuing to evaluate everything as we automate and modernize these assets and so we'll continue to look. I will tell you from an execution standpoint, again, performance was much better in Q3 and a lot of momentum moving into Q4 in our Chicken business. We're still growing with customers and we still have capacity to be able to do that going forward. So -- but in terms of mark-to-market, I see it as well. We've talked about it a great deal and what the other options are for that in the business. Let me send it over to John and let him add a little color about that.

[John R. Tyson, Chief Financial Officer at Tyson Foods]

Yeah. I think there are two questions in there: one around the impairments and one around the mark-to-market program. I think on the hedging program, look, we manage that -- try to manage for margin with -- for ourselves and as part of our relationship with our customers. We're always evaluating how we can do things different and better and recognize that it can create a little bit of noise in the numbers. But at this point in time don't have any plans to change our approach on how we do that. That's number one.

And then on the impairment, I think it's just worth pointing out, there was a goodwill impairment in our Chicken business in our Q3. But as it relates to these asset closures, the details of those charges would come through in our Q4. And we'll give a little more clarity on that as it relates to the asset impairments and the one-time cash costs, which all continue to get worked through as we just work through the details of the closure.

[Peter Galbo, Analyst at Bank of America]

Great. Thanks very much John.

[Operator]

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

[Adam Samuelson, Analyst at The Goldman Sachs Group]

Yes, thank you. Good morning, everyone.

[Donnie King, President and Chief Executive Officer at Tyson Foods]

Good morning, Adam.

[Adam Samuelson, Analyst at The Goldman Sachs Group]

So maybe just continuing in Chicken. And John, you gave some helpful color on quantifying kind of the benefits from some of the plant closures and production shift on the business and you quoted a $200 million kind of profit run rate that would equate to give or take 110, 120 basis points of margin at your current revenue levels. So as we think about where you're exiting fiscal '23 with the business in a loss position, the cumulative effect of those actions would get you to functionally marginal levels of profitability. So help us think about beyond that. So these are things you can control and they get you slightly profitable. Is it really a market dependent question on chicken demand has to improve -- chicken -- commodity chicken pricing has to improve is what would actually get you to those historical 5% plus margins that the company had been previously still aiming for longer term?

[John R. Tyson, Chief Financial Officer at Tyson Foods]

Yeah, Adam, I think I would point out to a couple of things there. So first off, we're talking about the sequential improvements in operational execution. And more or less, you haven't seen market conditions materially change quarter-to-quarter. So I guess, we just do emphasize that as a proof point that we're talking about execution, but holding the external data mostly static, we're starting to see that come through. And you did pick up correctly on the $200 million as kind of a run rate number.

And again, when we talk about making the same amount of food in a smaller footprint, we do have some -- we have confidence in just what that cost elimination means from an overall profitability. We obviously are subject to where commodity markets move on both the input and the market side. So recovery there helps us as it does everyone in the industry. So we kind of focus on what's in our control. And I think beyond what I've just said, it's probably too early to issue any numbers for '24. We'll give a look at that when we get to the November call. So hopefully that's somewhat more helpful than what you're looking for.

[Adam Samuelson, Analyst at The Goldman Sachs Group]

No, it is. And I guess, though, if I think philosophically, historically, the company would always talk about profitability in chicken and less volatility than the industry as a whole and not seeing the lows that others in the industry see, not seeing the same highs. And I guess, not saying that others in the industry haven't seen real lows in last six to 12 months. It's been a real challenge for the whole industry. I guess, the historical model would have made us think that Tyson's Chicken business would be more resilient. So how do you -- how does the experience of the last year kind of inform how you would think about the Tyson's relative performance versus the industry and the margin potential of the business is currently constructed?

[John R. Tyson, Chief Financial Officer at Tyson Foods]

I'll let Donnie comment on that one.

[Donnie King, President and Chief Executive Officer at Tyson Foods]

As I said earlier, Adam, we believe in chicken, we're on the right path. I would tell you it's the right path. We've been on that path for about two years now. And we've had a number of fits and starts from the breeder side to demand -- the demand picture. We're on our way to healing from a genetics perspective on the live side. In terms of our operations, they're performing better than they have. But then the third one and it really impacted us in Q1 last year is the demand picture that we struggled with getting a really accurate view of that. I would tell you the good news is in Q2, we were able to get that done. We actually started seeing benefit of that in Q3.

And so we feel like we have a better picture of what the demand truly and consumption truly looks like. And that informs us again in terms of supply. And so we feel more balanced today than we have over the past two quarters. And the executional elements that we've talked about, we're obviously doing those a lot better than before. And then if you look at the bridge that you're trying to create a basis your question, yes, there are some asset impairments. Yes, there are some plant closures. There's the typical labor yield and all those type things that we're managing. But we are doing every one of those things. And so I feel really good about where we are in Chicken and the path that we're on. And the future looks really good to me. John?

[John R. Tyson, Chief Financial Officer at Tyson Foods]

Yeah. And Adam, I just want to add and emphasize something we already talked about, but I don't remember exactly how you asked your question, but something to the effect of, hey, what's different right now or looking backwards. And it's worth pointing out I think we've taken pretty meaningful steps to get the cost structure back in balance. That includes the two closures back in the March time frame, the NAE move that we've talked about as well as these additional ones. So I think just pointing to that as evidence. And then when you look at quarter-over-quarter, market condition is the same. We're delivering on the operational execution. There are multiple proof points in the last, call it, nine to 12 months that I think we are -- we believe are indicative of the trajectory on this business.

[Adam Samuelson, Analyst at The Goldman Sachs Group]

Okay. That's helpful color. I'll pass the line. Thanks.

[Operator]

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

[Andrew Strelzik, Analyst at BMO Capital Markets]

Hey, good morning. Thanks for taking the questions. My first one is related to the chicken facility closures that you just announced. But I'm wondering if you could kind of compare and contrast the chicken dynamics to what's going on in the beef and pork operating environment. You talked about controlling the controllables and utilization rates. And certainly, you talked about how difficult decisions are to close plants. But why does it make sense to do that in chicken and not across your beef and pork businesses given the supply contraction that you're talking about?

[Donnie King, President and Chief Executive Officer at Tyson Foods]

Sure. Let me start out and remind you that I said we were looking at everything and we are. And so I get your question around why not look at beef and pork. And again, I would tell you we are looking at everything in terms of how it works across the board. Fundamentally, we are focused on executional excellence across all businesses and functions at Tyson, including the overhead and cost structure at our corporate facilities and so we're doing that well. I'm not saying -- I'm not telling you that we're not looking at beef and pork in the same manner that we have looked at chicken. We're evaluating everything and I think that's probably the biggest takeaway from that, but there was a -- the first part of that, there was a chicken component.

[John R. Tyson, Chief Financial Officer at Tyson Foods]

Yeah. I think the specific question was comparing chicken to beef here and how do you think about that. And I think -- look, there are multiple factors that go into making decisions like this. Asset efficiency and projected capital requirements are a big driver here. And when we talk about poultry today and we just think about the older kind of slower, less efficient assets compared to where we're moving the birds, we see that as a big uplift. And we make those same kind of evaluations across the whole network. In fact, we kind of make the comparison there.

I think the other thing to point out we've talked about this on previous calls, we are in this kind of special moment of facing headwinds in chicken, pork and beef segment. The recovery time line in each of those is different. We would expect to see chicken recover most quickly. Pork is a little different and then the beef cycle and those dynamics I think are well documented. So it's just worth recalling attention to that, that we've discussed before.

[Donnie King, President and Chief Executive Officer at Tyson Foods]

I would say this, John, as one final thought. As we think about chicken and you mentioned John that chicken would recover faster and I think that's all true. But I think if you look at the chicken business today versus where we were just a quarter ago, there are more tailwinds than headwinds in the chicken business in the near to long-term here.

[Andrew Strelzik, Analyst at BMO Capital Markets]

Great. That's really helpful color. And then, I guess, for my second question, I just wanted to go back to the change to the capex guidance for the year. Can you talk about more specifically the change there? And does it have any implication for '24 capex? And I guess, just generally, as you think about the flexibility of your capex budget, is there a way given projects that are already underway, etc, to think about kind of a minimum capex budget for next year? I don't know if there's a way to frame that.

[John R. Tyson, Chief Financial Officer at Tyson Foods]

Hey, this is John. I'll take that question. Let me talk a little bit about capex and just kind of maybe some other related matters on the balance sheet and leverage. So I think first off, we have pared back the capex kind of quarter-over-quarter. We've been managing the spend throughout the year and we feel good about that. Based on our guidance today, you would expect to see about $500 million in Q4, which just worth pointing out that's still above what has been a historical annual run rate for us of about $1.5 billion. We are targeting to get to that $1.5 billion spend annually. And I think it would be pretty mature to say where the '24 number lands, but safe to say that we're trending in that direction.

I think it's also worth just taking a second to talk about where we are with leverage and -- because of capital -- obviously, capital has been -- obviously influences that. I think the headline for us is we're sitting on a sound balance sheet and that's really a product of the capital allocation choices we've made through the last few years where we're really focused on kind of preserving a good financial position, targeting at or around that 2 times leverage number for the long-term. So leverage has increased with where profitability has been on an LTM basis.

But I think overall, we feel good about where we are from being able to manage the capital spend standpoint and everything else that we've got going on. We've made a couple of moves, just tried to be tighter on working capital. We've pulled that down about $100 million in inventory this quarter just despite what's going on in the market. So I think overall, capital spend, working capital efficiency, all in line with that long-term leverage number have been. We're comfortable with where we sit today.

[Andrew Strelzik, Analyst at BMO Capital Markets]

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

[Operator]

Our next question comes from Benjamin Theurer from Barclays. Please go ahead with your question.

[Benjamin Theurer, Analyst at Barclays]

Hi, good morning. Thanks for taking my question. My question is regarding pork margins after this devaluation and you already commented on market conditions. Can you provide more light on company-specific initiatives, maybe some plant closures in chicken, maybe that could be an option? Anything else that you can provide towards improving operations there?

[John R. Tyson, Chief Financial Officer at Tyson Foods]

Hey, Ben, it's kind of hard to understand you. You're a little muffled. Do you mind repeating that question, sorry, because that was -- there was a lot in there.

[Benjamin Theurer, Analyst at Barclays]

Sure. On pork margin, you already revised this and you mentioned the market conditions pressuring resource. But can you provide more light on company-specific initiatives, maybe some plant closures? Could that be an option same as in chicken? Anything else on pork profitability to improve that? Thanks.

[Donnie King, President and Chief Executive Officer at Tyson Foods]

Brady?

[Brady Stewart, Group President of Fresh Meats at Tyson Foods]

Thanks, Benjamin. This is Brady Stewart. Appreciate the question. As Donnie just indicated, we are evaluating our business in totality. And first and foremost, really, I think we need to unpack those pork results back into the live and the actual fresh pork segments that roll up to the specific BU. I'm going to speak specifically to our plants and operations from the fresh pork perspective. Very comfortable with our strategy moving forward. Obviously, from a impact perspective, we're focused on everything from our expenses and expense structure that we have within our assets.

The efficiency of our assets, we have plans in place to make sure that we focus on better efficiency within those assets. And then obviously, traditional price, yield and mix matrices that really provide us the opportunity to maximize the margins and our opportunity to go to market. So that's the approach we take. We feel very comfortable with the team we have in place. We feel very comfortable with the strategy that we have in place. I feel very comfortable from an operational execution perspective that we're making strides and improvements in that particular segment.

[Benjamin Theurer, Analyst at Barclays]

Okay. So no plant closure then expected as in chicken, I guess?

[Brady Stewart, Group President of Fresh Meats at Tyson Foods]

As Donnie indicated earlier, we literally are evaluating everything and that's both asset utilization along with how we frame our strategy and our business moving forward and we're comfortable with our approach as we move forward.

[Benjamin Theurer, Analyst at Barclays]

Okay. Perfect. Thanks.

[Donnie King, President and Chief Executive Officer at Tyson Foods]

Thank you.

[Operator]

[Operator Instructions] Our next question comes from Michael Lavery from Piper Sandler. Please go ahead with your question.

[Michael Lavery, Analyst at Piper Sandler Companies]

Good morning, thank you.

[Donnie King, President and Chief Executive Officer at Tyson Foods]

Good morning.

[Michael Lavery, Analyst at Piper Sandler Companies]

I just wanted to come back to chicken and how you think about, I guess, capacity. It's impressive to be able to cut some facilities and maintain the volume output. This is obviously from an efficiency standpoint. But I guess, just given the industry supply and where pricing is so pressured, is there any rationalization or kind of reduction beyond that, that would make sense just given the market dynamics?

[John R. Tyson, Chief Financial Officer at Tyson Foods]

Sure. I think there's a couple of things to say on that. I mean, we've been pretty consistent going back to the -- to last year talking about capacity utilization as a driver for profitability in this business. And we were in the low 80s in '22. And so with the balance of growing our business and rationalizing some of the footprint, we feel as though we've now optimized the network and continue to push toward those utilization levels that would be in line with the historical drivers for profitability for us.

So I think that's the first thing. And then you talk about -- you asked about just where demand is or what the customer is doing or the industry dynamics. We don't mean to make any projections about what's going on in the industry and focus on what we can control. And I think that with these moves, we're going to get closer to our customers, which is a benefit with how we're moving things around. And I think we feel good about the choices on that front. I don't know if you got anything to add, Wes or Donnie?

[Wes Morris, President of Poultry Business at Tyson Foods]

Yeah, Michael, I think just as a reminder, we talk about it often that we're a demand backwards slaughter production organization. And so when you look at our customers' forward demand curve post some new business we've picked up, we're literally gaining momentum on both sides, rightsizing capacity and growing at the same time.

[Donnie King, President and Chief Executive Officer at Tyson Foods]

Yeah. And maybe I could add one additional thing to that, there's been a lot of conversation this morning about capital and what is that going to be going forward. We obviously talked about the assets that we're closing. I think that what you may not understand is how all those fit together. And so maybe I can help with that. A couple of years ago, we heavied up intentionally in capital to get ourselves in a position to have capacity, specifically more value-added branded type capacity. And so that's where a lot of the extra spending above and beyond $1.5 billion.

I think it's also important to link the plant closures that we talked about with the reduction in the capital that we're going to spend for the balance of '23 and probably what that looks like in '24. That work is done today and these assets that we're shuttering would have required significant capital in order to make them competitive. And if you look at the returns on those, it really didn't make sense to do that. But I would tell you in terms of chicken specifically and the capacity with -- even with the 10% reduction, we're just over 90% capacity and we still have room to grow with the customers and as the market grows.

[Michael Lavery, Analyst at Piper Sandler Companies]

Okay. Great. Thanks so much.

[Donnie King, President and Chief Executive Officer at Tyson Foods]

Thank you.

[Operator]

And ladies and gentlemen, in showing no additional questions, this will conclude our question-and-answer session. I'd like to turn the floor back over to Donnie King for any closing remarks.

[Donnie King, President and Chief Executive Officer at Tyson Foods]

All right. Thank you, and thanks, everyone, for being with us today. As you've heard today, we're executing in the face of macro headwinds and we're seeing early success demonstrated by the sequential improvement in Q3. I remain optimistic about our long-term outlook. Our customers and consumers are behind us. We're winning with both while we remain focused on operational excellence and we will continue to combat the current environment by focusing on what we can control, all in an effort to maximize value for shareholders.

I'm very thankful for the hard work that our team members do every day to support these efforts. As we continue to build a world-class organization positioned to take advantage of the opportunities in front of us, we remain confident that our strategy will deliver long-term growth and shareholder value. Thanks for your interest in Tyson Foods and we look forward to speaking soon.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Sean Cornett, Vice President, Investor Relations
• Donnie King, President and Chief Executive Officer
• John R. Tyson, Chief Financial Officer
• Brady Stewart, Group President of Fresh Meats
• Wes Morris, President of Poultry Business

Analysts

• Alexia Howard, AllianceBernstein
• Ben Bienvenu, Stephens
• Peter Galbo, Bank of America Co.
• Adam Samuelson, The Goldman Sachs Group, Inc.
• Andrew Strelzik, BMO Capital Markets
• Benjamin Theurer, Barclays PLC
• Michael Lavery, Piper Sandler Companies