Tyson Foods, Inc.

Good morning, and welcome to the Tyson Foods first quarter 2020 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your touchtone phone. To withdraw your question, please press star, then 2. Please note this event is being recorded. I would now like to turn the conference over to John Cottle, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to the Tyson Foods Incorporated Earnings Conference call for the first quarter of fiscal 2020. On today's call are Noel White, Chief Executive Officer, and Stuart Glenn Denning, our Chief Financial Officer. Slides accompanying today's prepared remarks are available as a supplemental report in the Resource Center of the Tyson Investor website at ir.tyson.com. Tyson Foods issued an earnings release this morning, which has been furnished to the SEC on Form 8K and is available on our website at ir.tyson.com. Our remarks today include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements reflect current views with respect to future events, such as Tyson's outlook for future performance on sales, margin, earnings growth, and various other aspects of its business. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. I encourage you to read the release issued earlier this morning and our filings with the SEC for a discussion of the risks that can affect our business. I would like to remind everyone that this call is being recorded on Thursday, February 6th at 9 a.m. Eastern Time. A replay of today's call will be available on our website approximately one hour after the conclusion of this call. This broadcast is the property of Tyson Foods and any redistribution retransmission, or rebroadcast of this call in any form without the express written consent of Tyson Foods is strictly prohibited. Please note that our references to earnings per share, operating income, and operating margin in today's remarks are on an adjusted basis unless otherwise noted. For reconciliations to our GAAP results, please refer to this morning's press release. I'll now turn the call over to Noel White.

Thanks, John, and good morning, everyone. Along with Stuart, joining us in the room today is Dean Banks, who joined the company at the beginning of the month and is beginning to transition to his new role as president of our company. Welcome, Dean. We're pleased to report we delivered top and bottom line growth in our first quarter and generated record beef results. Before I speak to these results, I'd like to talk about our focus on sustainability to meet the growing global demand for proteins. That's why we recently announced at the World Economic Forum in Davos the creation of the Coalition for Global Protein. A combination of strategies and solutions, including all forms of protein, are needed to responsibly feed a world population expected to reach almost 10 billion in 2050. requiring an estimated doubling of the production of protein needed today. Our goal is to unite stakeholders across the food and agricultural sector to develop new and creative solutions to sustainably feed the world with affordable, nutritious food. We believe this reflects positively on a strategy which is focused on sustaining our company and our world for future generations. while growing our business by delivering superior value to consumers and customers and fueling our growth and returns through commercial, operational, and financial excellence. Turning to our results, our overall first quarter was in line with expectations with adjusted earnings of $1.66 per share. Beef and pork results were strong. Prepared foods drove growth in retail consumption. The chicken improved operationally, although it continued to face soft pricing, which weighed on results. Looking across the marketplace, consumption of our retail prepared food products has been outstanding. Both the Tyson Core Retail Business Alliance, which were up more than 5%, and Total Tyson Retail, up more than 3%, outpaced volume and sales growth versus the top 10 retail food manufacturers in 52 weeks ending December 28th. This growth contrasts with the Total Food and Beverage category, which was down 0.4% for the same period. We've now experienced six consecutive quarters of growth. Our core business lines are outpacing their categories with volume share growth of 1%, and all core business lines are holding or growing share. In the food service channel, our food service focus six product lines grew 3.5% at more than twice the total broad line distribution channel growth of 1.6% over the last 13 weeks. The power of our food service brands, innovation, and capabilities across all channels has set the stage for growth. In the last three months, Jimmy Dean breakfast sausage volume grew 10%, Tyson Red Label grew 17%, and the Tyson brand grew 8%. Now let's take a look at our business segments. In prepared foods, growth and share performance has been outstanding, especially with our big brands. Retail innovation launched at the end of fiscal 2019 is performing well, with velocities meeting or exceeding targets are national launches of Jimmy Dean biscuit roll-ups and Jimmy Dean morning combos, with both demonstrating velocity performance in the top half of the respective categories. While still early, biscuit roll-ups show potential for driving category growth. Prepared foods' profit margin in the first quarter was impacted by an $80 million increase in raw material costs driven by beef trim and hams. Some of this increase was offset by pricing. However, prepared foods may continue to experience volatile input costs. We continue to experience some operational effects from our recent ERP system implementation, which impacted margins by roughly $40 million in the quarter. About half of this was discounted sales, with the remainder related to inventory write-downs and donations. Although the effects have persisted longer than anticipated, we continue to work aggressively to resolve them, and we are seeing progress. In the alternative protein category, the Raised and Rooted brand is only the beginning of our plan to build the world's leading portfolio of plant protein products. In the back half of the year, we're planning multiple new launches across protein forms, brands, meal occasions, and channels. Over time, we see these options as another stable protein complementing our core offerings. We're being practical and thoughtful in our approach to enable us to create better product experiences with healthier, nutritious ingredients at affordable prices. Looking ahead for the prepared food segment, we expect to maintain our momentum in the market. We will do this by continued investment behind our brands through marketing, promotions, and innovation. And we will remain agile with pricing to offset input costs driven by the volatility of raw materials. For the fiscal year, we believe that prepared food segments adjusted to operating margin will be 10% to 12%. Our beef segment produced a record adjusted operating margin of 11.2% in the first quarter. The quality of domestic fed cattle has been excellent. This makes every link of the beef supply chain more valuable, whether it's the producer, the packer, or the retailer, and results in a better product for consumers. Premium programs continue to grow as a percentage of sales. Our customers and consumers are seeing the value in our quality, and it's translating into increased revenue. Our fresh meats premium programs have nearly doubled over the last five years to approximately 1 billion pounds. I'm pleased to report that our Finney County, Kansas plan, damaged by fire last August, is now back in full operations. Beef exports are strong, with the potential to be even stronger now that trade agreements have been formalized. I'd like to remind you, Heather, that our second quarter is typically our most challenging for beef. In addition to the challenges caused by winter weather in the Midwest, the drought in Australia has forced herd liquidation, putting more beef on the global market. Looking ahead, exports from Australia are expected to decline substantially, as the ongoing drought and the tragic fires are likely to delay their herd rebuilding. With Australian beef amounting to a quarter of U.S. beef imports, This could be beneficial to our business. Our export sales continue to equal or exceed industry growth rates. For fiscal 2020, we're expecting our beef segments adjusted operating margin to be at the upper end of 6.5% to 7.5%. Moving to our pork segment, strong pork demand and solid operational execution along with ample hog supplies led to a 14% adjusted operating margin in Q1. Export markets were the primary driver for increased demand. We believe we are at the very early stages of the global demand shifts that we've expected from African swine fever. We're filling additional orders to China, and we've seen year-over-year increases of nearly 600% in the first quarter, and we're already benefiting from indirect shipments as we backfill in other markets. we've progressed towards a ractopamine-free hog supply. This will open up more markets to us as the need to move product globally increases. In fact, global demand for all proteins is increasing as ASF continues to reduce pork supplies in Asia. For fiscal 2020, we're expecting our pork segments adjusted operating margin to be 6% to 8%. Now turning to the chicken segments. We're pleased that our execution is better and operations are on track to deliver a $200 million year-over-year run rate improvement. However, pricing, which has been weaker than expected, was a primary driver of a return on sales in Q1. The softer pricing has persisted into the second quarter. All leading indicators point to domestic poultry supply growth, and the USDA is projecting a 4% increase in chicken production. I previously indicated global protein supply is being impacted by ASF, while demand continues to grow at about 2% per year. In light of ASF, we anticipate global demand will keep pace with U.S. supply growth, as Chinese imports of U.S. chicken are expected to double. Domestically, we'll continue to innovate and drive demand, and the frozen value-added space with products like Tyson Air Fried Chicken. This product launched last July with strong customer acceptance and is demonstrating dollar-velocity performance in the top half of the category. Early data shows that the Tyson Air Fried Chicken is attracting new consumers and driving growth in this $2.6 billion category. Looking ahead in the chicken segment, we expect an annual adjusted operating margin of 4% to 6%, driven primarily by softer pricing and overall chicken supply. In international and other, both our legacy and newly acquired businesses are contributing to our improved international performance. We see the potential to expand in these growth markets, which are estimated to drive 98% of global protein demand increases over the next five years, with 70% of that growth coming from Asia. We have a business of scale, and there are still synergies to unlock. We have high-quality assets and a strong team, led by Chris Langholz, who recently joined the company as president of International. Chris has an extensive background at Global Protein, and we welcome him to the Tyson team. Our legacy international business are performing well, increasing sales and earnings. Our new acquisitions are providing great platforms for growth. We're committed to becoming a global leader in protein by serving emerging markets and strategic customers across channels and across sectors. Across our businesses, trade deals are contributing to our optimism. We believe with improved access to global markets from recent trade deals, we are well positioned to capitalize on opportunities in the global marketplace. In addition to U.S. trade deals with Japan and South Korea, we're very pleased the Phase I trade agreement with China and the USMCA have both been signed. An important benefit of the deal with China is the inclusion of more protein eligible for shipment. We're shipping product to China and have more orders on the books, but keep in mind the tariffs that remain in place puts the US at a pricing disadvantage in the Chinese market. If tariffs are lifted or reduced, we would likely see an acceleration of already increased global demand for US pork, beef, and chicken. We're closely monitoring news of the coronavirus. We're actively assessing what this outbreak may mean for our global business and preparing for the possibility of any impact. In China, we've been working with the government and have successfully restarted some of our operations. The financial impact is unknown at this time. With that, I'll now ask Stuart to take us through the financials.