Tyson Foods (TSN) Q1 2024 Earnings Call Transcript

Tyson Foods (TSN -0.43%)
Q1 2024 Earnings Call
Feb 05, 2024, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Tyson Foods first quarter 2024 earnings conference call. All participants will be in listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Please note, this 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 -- Vice President, Investor Relations

Good morning and welcome to Tyson Foods' fiscal first quarter 2024 earnings conference call. On today's call, Tyson's president and chief executive officer, Donnie King; and chief financial officer, John R. Tyson, will provide some prepared remarks, followed by Q&A. Additionally, joining us today are Brady Stewart, group president, beef and pork and chief supply chain officer; Melanie Boulden, group president, prepared foods and chief growth officer; Wes Morris, group president, poultry; and Amy Tu, president, international.

We'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'll turn the call over to Donnie.

Donnie King -- President and Chief Executive Officer

Thanks, Sean, and thank you to everyone for joining us this morning. As you may have seen in our press release this morning, fiscal 2024 is off to a good start, with solid performance in Q1 giving us confidence in our full year outlook. The momentum we established in the back half of last year continued in Q1, highlighted by a $175 million improvement in adjusted operating income, 130 basis points of AOI margin expansion, and near doubling of adjusted EPS, all on a sequential basis. As we begin fiscal '24, we're witnessing the benefits of our core multiprotein portfolio.

Chicken and pork are offsetting beef headwinds, while prepared foods continued to generate strong profit dollars and margins. While we can't control the macro environment, our focus on what we can control has been evident in Q1. Our performance reflects a commitment to operational excellence. We are more agile, collaborative, and disciplined business than a year ago.

And we have a long runway of opportunities in front of us. I'm proud of our team members' continued efforts to enhance operational performance and want to thank all of them for their high level of engagement and their part in delivering our results in this quarter. We're controlling what we can to drive cash flow as well. Our disciplined approach to capex and working capital helped generate strong cash flow in the quarter.

Prudent cash deployment is part of our strategy to build financial strength and will position us well when market dynamics turn in our favor. You've seen us take bold actions to improve performance, and everything remains on the table to drive operational excellence and address inefficiencies. Our plan is working, and we're seeing tangible benefits of our efforts, as evidenced by improvements in chicken and pork. While I'm pleased by the performance in Q1, we still have more work ahead of us and we're cautiously optimistic and laser-focused on achieving what we set out to do this year.

Our brands resonate with consumers, and we're maintaining a strong market share despite comparing to our record position last year and some overall category consumption softness in Q1. We will continue to support our brands through innovation, marketing, and strong customer partnerships while meeting consumers where they are. I remain highly confident in our long-term strategy, based on a broad portfolio of core proteins and strong brands, and I'm optimistic about our future. We're leaving no stone unturned to drive long-term value for our shareholders.

Now, let's delve into an update on share position of our branded portfolio. Our Q1 pound share in our core business lines, which include product lines from our iconic brands Tyson, Jimmy Dean, Hillshire Farm, State Fair, Aidells, and Ball Park, remains at historically high levels despite a modest decline compared to record share in Q1 last year. In fact, our core business lines have grown pound share by more than 400 basis points since Q1 of 2019. While inflation is easing, consumers are still facing high prices compared to two years ago.

However, they are still willing to purchase brands they know and trust, and this is reflected in our share. We're also focused on customer elasticity and balancing with our own costs. We believe our approach is working. The value proposition of our iconic brands resonates strongly with consumers.

Over the past year, nearly three out of four U.S. households purchased a Tyson core business line product, and this penetration rate is growing. What gets me even more excited is that our product line with the highest penetration rate is only in about a third of households, leaving us plenty of room for continued growth over the long run. Moving on to segment performance, starting with prepared foods.

Our food service volumes continue gaining traction as we strive to grow this business with a focus on customer diversification and margin accretive channels. Operational efficiencies and lower raw material costs drove strong adjusted operating profits and margins. Our branded foods business remains a strategic growth pillar, and we are committed to supporting and growing our brands through innovation, price pack architecture, high ROI, marketing support, and strong customer partnerships. This is critically important in an economic environment where consumers remain more discerning with their purchasing decisions.

In chicken, the momentum established in the second half of fiscal '23 continued in Q1, with a third consecutive quarter of over $100 million in sequential AOI increase. Operational improvements, including the bold actions we've taken, along with improvements in live operations, yield labor efficiency and customer service, as well as improving market conditions, were the primary drivers in Q1. In beef, limited cattle supply led to spread compression, as we expected. Roughly half the loss in Q1 was related to an inventory valuation adjustment, which was primarily driven by highly volatile cattle futures.

While spreads are expected to remain tight, our goal remains to be best-in-class operators so that we can manage the business as efficiently as possible. We have identified incremental opportunities to improve our execution and help offset some of the challenges from this current cattle cycle. Turning to pork. Better supply drove lower hog costs, leading to improving spreads.

Our team's focus on operational execution allowed us to capture the benefits of these favorable market dynamics, which resulted in improved profits both on a year-over-year and sequential basis. Before I hand it over to John for a financial review, let's reiterate our priorities for the year. First, we're committed to improving our financial strength and driving cash flow to support our dividend, as demonstrated in Q1. Over the past year, we announced the closure of six of our older, less efficient plants in chicken and two of our smaller beef case-ready value-added facilities.

We are already seeing the benefits of these actions, and we'll continue to evaluate opportunities to drive efficiency across our segments. In chicken, our focus on enhancing our competitiveness continues. In prepared foods, we want to build growth momentum behind capacity additions coming online, increase our brand household penetration, and diversify and grow our food service business. In beef, we acknowledge the challenges, and we'll be prepared for multiple outcomes during the current cattle cycle.

In pork, we're gaining momentum and operational execution and are excited for continued improvements. With that, I'll turn the call over to John to discuss our financial results and outlook.

John R. Tyson -- Chief Financial Officer

Thanks, Donnie. I'll start with an overview of our total company results before moving on to our individual segments. Sales in Q1 grew slightly year over year, as an increase in beef revenue was nearly offset by a decrease in chicken. The decline in adjusted operating profit was driven by lower profitability in beef, which was partially offset by growth in chicken and pork.

It's important to note that AOI improved significantly on a sequential basis despite the modest decline versus last year. Adjusted EPS nearly doubled compared to last quarter, highlighting the ongoing improvement in our operational performance. Now, let's review our segment results, starting with prepared foods. In prepared foods, Q1 revenue was flat year over year.

Volume growth was led by benefits from the Williams acquisition and continued recovery in our food service business. Lower pricing primarily reflects the mix impact of the lower contribution from retail. AOI in Q1 was also in line with last year. Lower raw material cost and operational efficiencies were offset by increased brand support expenses, start-up costs associated with new capacity additions, and mix.

AOI dollars and margin both increased significantly on a sequential basis due to strong operational performance and great seasonal execution by the team. Moving on to chicken. Sales in Q1 declined 5.4% year over year, primarily driven by the impact of lower commodity protein prices. Volume declined 1.5% due to lower production, which was partially offset by continued sell-through of finished goods inventory.

Despite the decline in sales versus last year, AOI more than doubled in Q1, primarily driven by the benefits of our strategic actions and other operational efficiencies. These include lower plant spend, improved yield, and better live performance. While input costs were a clear tailwind, these were largely offset by the impact of lower pricing. As Donnie mentioned, this is the third consecutive quarter of more than $100 million of AOI improvement as we were able to pull forward the benefits of closures of inefficient plants and improvements in our live operations.

Now, moving to beef. In beef, revenue increased 6.4% year over year in Q1, with lower head throughput more than offset by higher prices per pound. While revenue increased, AOI decreased versus last year, primarily reflecting compressed spreads, as was expected. As Donnie mentioned, in Q1, nearly half of the operating loss was driven by an unfavorable inventory valuation adjustment, which was primarily due to the rapid and significant decline in cattle futures.

Moving to pork. Q1 revenue was down modestly as volume growth was offset by lower pricing. However, AOI increased year over year, benefiting primarily from improved spreads, driven by lower hog costs, as well as better execution. And finally, a brief comment on our international business.

AOI improved as we begin to lap some of the start-up cost of our newer facilities and continue to focus on improving execution despite a decline in sales driven by macroeconomic challenges. Shifting to our financial position and capital allocation. Our commitment to building financial strength, investing in our business, and returning cash to shareholders primarily via our dividend remains unwavering. While market conditions remain challenging, we are laser-focused on disciplined management and deployment of our capital resources to drive cash flow.

Q1 showcased robust operating cash flow of $1.3 billion, above our expectations, and working capital was a solid source of cash as we continued to manage inventory levels. We were also disciplined with capex, which came in at just over $350 million in the quarter, below last year's exit rate. During the quarter, we returned $171 million to shareholders via dividends. Our net leverage declined sequentially, coming below four times, driven by our improved profitability and strong cash generation.

We ended Q1 with more than $3.7 billion of liquidity. Our balance sheet management approach remains unchanged. We are committed to building financial strength and maintaining our investment-grade credit rating and returning net leverage to at or below two times net debt to EBITDA. We remain committed to maintaining a disciplined yet opportunistic capital allocation strategy, ensuring that we deploy resources to maximize long-term shareholder value.

Now, let's take a look at our updated outlook for fiscal 2024. Given the solid results in Q1, we have confidence that our financial performance in 2024 will improve versus last year. However, as it's still early in the new fiscal year and uncertainties remain, especially in our beef segment, we have made only modest changes to our outlook. Our focus for fiscal 2024 remains to manage the business for profit and cash dollar generation, reflected in our guidance presented in dollar terms, rather than margin percentages.

With that in mind, we are reiterating our overall sales guidance to be roughly flat year over year. Moving to each of the segments. Prepared foods had a solid start and a seasonally strong period. For the remainder of the year, we expect strong volume results as we continue our momentum in food service and see the benefits of our capacity additions.

We remain focused on operational efficiencies while we support our brands and anticipate continued start-up costs. Taking all this into account, we're maintaining our AOI guidance to be in the range of $800 million to $1 billion. In chicken, our operational turnaround is progressing as anticipated. For the remainder of the year, we expect a return to normal seasonality, where Q2 is typically a weaker quarter.

Given the strong start in Q1 and that we believe that there were more tailwinds than headwinds, we are tightening our AOI guidance range to be between $500 million and $700 million. In beef, spreads are compressing as expected. However, uncertainty remains around how the cattle cycle will progress. Therefore, we are maintaining our full year guidance at a loss of $400 million to breakeven.

In pork, on the back of our strong Q1 results, we're now raising our guidance to be between breakeven and $100 million. For the total company AOI, we're maintaining our guidance of between 1 billion and 1.5 billion, reflecting the portfolio nature of our segments. To round out the key P&L items, we anticipate interest expense to be roughly $400 million and a tax rate to now be between 23% and 24%. Turning to capex.

We're maintaining tight controls on spending, in line with profitability and cash flow, and we expect capex to remain between $1 billion and $1.5 billion this year. Finally, on free cash flow, we're committed to managing working capital and capex, and we're even more confident now than we were last quarter that we will generate positive free cash flow for the year. To further help model the shape of the rest of the year, we anticipate more typical seasonality across our business. As a reminder, Q2 is seasonally our weakest quarter for AOI and cash flow, driven by beef and chicken.

And as you may be aware, this January has already been impacted by severe winter weather disrupting operations. And again, we expect start-up costs in prepared foods to impact Q2 as well. So, in summary, 2024 is off to a promising start, and we're cautiously optimistic on our prospects for the remainder of the year, as well as for the long term. Tyson is a leader in the global protein industry.

We have strong brands, a broad portfolio of products, and a great team, all of which uniquely position us to win in the market. With that, I'll turn the call back over to Sean for Q&A instructions.

Sean Cornett -- Vice President, Investor Relations

Thanks, John. We will now move on to your question. 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.

Questions & Answers:

Operator

We will now begin the question-and-answer session. [Operator instructions] The first question comes from Peter Galbo with Bank of America. Please go ahead.

Peter Galbo -- Bank of America Merrill Lynch -- Analyst

Hey, guys. Good morning. Thanks for taking the questions.

John R. Tyson -- Chief Financial Officer

Good morning.

Donnie King -- President and Chief Executive Officer

Good morning, Peter.

Peter Galbo -- Bank of America Merrill Lynch -- Analyst

Donnie, I was just wondering if you could give kind of maybe a brief state of the union. You know, I know you gave some in your prepared remarks, but across the segments, and then maybe specifically if you could start on prepared foods where, you know, unlike a lot of CPG peers, you're showing actual volume growth. Some of that may be acquired. But just some of the dynamics around food service there seemed to be a pretty important driver.

So, if you can unpack that for us would be great.

Donnie King -- President and Chief Executive Officer

Sure. Thanks, Peter. I'll start off and maybe I'll have others to weigh in. Let me start off just kind of the state of the union.

We had a solid first quarter, and we continue to build on the momentum of the back half of 2023. We are seeing the benefits of our portfolio. For chicken and pork, improvements are offsetting challenges in beef, and where our prepared foods continues to deliver strong results. We continue to restore performance in our chicken business.

As I said earlier, this was our third consecutive quarter of $100 million of AOI improvement. And this -- our chicken business remains a top priority of mine. We're managing beef through the volatility and spread tightening of the cycle. We're making great progress in driving out inefficiencies all across the supply chain in pork.

Prepared foods is performing to plan. While we have seen softness in the retail channel, our brands have performed well. Core brand share remains near record levels, and we're gaining share in our food service business. And I'll talk more about that in a moment.

We're cautiously optimistic about FY '24. We have considered our better-than-expected results in this quarter. We've considered our initiatives to improve performance while also still accounting for the ongoing macro uncertainty. As John said in his opening statements, Q2 is seasonally weaker and our Q2 started off with -- has started off with several significant weather events.

But having said all that, taken together, it's still early in the year, and we don't want to get ahead of ourselves. We have a lot of work ahead of us, and we're leaving no stone unturned. We're focused on capex and working capital to drive cash flow and support our dividend. We are controlling the controllables and taking necessary action, including rightsizing and modernizing our footprint and network design to drive efficiencies.

We are pleased with the quarter and believe we're taking the right steps. We are excited about our future and are focused on creating value for our shareholders. Specifically -- or a little bit more specifically, in terms of prepared foods, to your question, Peter, we had -- in the quarter, we had strong top- and bottom-line performance in the quarter, with meaningful sequential improvement versus Q4 of '23. If you look at the makeup of the volume, it was driven by a balanced portfolio between retail and food service.

We're regaining some share lost in the middle of the pandemic that we couldn't support, and we also had the acquisition from a volume standpoint of Williams Sausage. Our branded core business line remained a key focus, and we have a competitive advantage with volume share near record levels and 400 basis points above Q1 '19. Let me stop with that. Melanie, anything you would add to what I've said?

Melanie Boulden -- Group President, Prepared Foods and Chief Growth Officer

Yeah, Donnie. I think you did a great job hitting the highlights. The only thing I'll add for you, Peter, is, as Donnie said, our food service performance was strong. And I believe you asked about this question.

Our growth this quarter was up 3%, and that was due to customer expansion. Look, as this channel is rebounding, it continues to be an important part of our portfolio that we are focused on because we want to be where our consumers are at. And so, we're diversifying our customer base. We're building digital capabilities to drive demand, and we are focused on profitable growth.

Peter Galbo -- Bank of America Merrill Lynch -- Analyst

Great. Thanks for all that. And then, just maybe quickly, as a follow-up on beef, Donnie, you know, look, the cattle inventory report out last week. Seems like, you know, maybe we're nearing a bottom or seeing potentially some improvement.

But just what's the conversation like with ranchers at this point? Like, what's it going to take to get them to actually start the heifer retention process because I think that remains kind of the biggest linchpin in the whole chain and it doesn't seem like we have a lot of clarity there yet? Thanks very much.

Donnie King -- President and Chief Executive Officer

Sure. I mean, I'll tell you, we look at the same information that I'm sure you've seen, and we saw the Cattle on Feed report that you referenced. You know, unfortunately, Peter, the data doesn't indicate that heifer retention is taking place. And that's obviously one of the signposts we're looking for.

In the quarter, we continue to see volatility and spread tightening. We expected that. As we think about our outlook, we continue to project tight cattle supplies for the balance of '24 and even beyond. And let me pause.

Brady, do you want to add anything to that?

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

Yeah. Thanks, Donnie. And, Peter, that's a great question and one that we continually are studying. And I think when you unpack that Cattle on Feed report, there's a few comments that obviously are lending itself to the numbers that we're seeing, and part of it's relative to some slower turnover that we've seen.

We've seen placements for Cattle on Feed from some of the drought areas as well from a geographical perspective. And as you indicated, which is the spotlight of the conversation is, we have not seen significant heifer retention to date and continue to see those heifers move into the Cattle on Feed report. So, continuing to focus on a few factors relative to heifer retention. Obviously, how these interest rates that we see today relative to the difference or the delta today versus some of the cycles in the pack -- in the past is a highlight for us to continue to watch.

And then we'll continue to evaluate and understand how weather conditions are changed and lend themselves into a more favorable heifer retention strategy for these ranchers.

Peter Galbo -- Bank of America Merrill Lynch -- Analyst

Thanks very much.

Donnie King -- President and Chief Executive Officer

Thanks, Peter.

Operator

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

Adam Samuelson -- Goldman Sachs -- Analyst

Yes. Thank you. Good morning, everyone.

Donnie King -- President and Chief Executive Officer

Good morning, Adam.

Adam Samuelson -- Goldman Sachs -- Analyst

Good morning. So, maybe, coming back to chicken, and, John, you gave some color in your prepared remarks but hoping to expand on a little bit on just the profit drivers in the business in the quarter. There was 170 million of feed tailwind year on year, some offset with price. But can you maybe walk through the year-on-year profit bridge in chicken a little bit more closely? And I guess apart from seasonality in the fiscal first quarter, the -- or fiscal second quarter, excuse me, the first quarter would imply kind of tracking to at or above the high end of the segment profit guidance for the year.

So, I just want to make sure we're understanding kind of some of the moving pieces you're looking at for the balance of fiscal '24.

John R. Tyson -- Chief Financial Officer

Yeah, Adam. Thanks for the question, and maybe let me give a few points that will help you shape, you know, our '24 outlook compared to '23. I think the first thing to point out is we talked about the network moves, operational performance improvement. We started to realize that.

And the adjustment in our guidance range of taking the bottom end up by $100 million, roughly equivalent in line with where, you know, we were ahead of expectations for the balance of the year. Or excuse me, where we were compared to expectations. Then when I moved through the balance of the year, I know one question that is sometimes on investors' minds is, hey, where is your return on sales guidance? You know, how does that peaking or not peaking? We've heard some questions about that. We're not going to return on sales guidance, but there's reasons to believe that our Quarter 3 and Quarter 4 could be around where we delivered the result in Q1.

But frankly, it's probably premature to make any strong assertions around that. And then again, Q2, we had weather impacts across all of our segments. Chicken was not immune to that. And so, that's kind of the overall picture that we can give today based on the shape of the year.

A couple other things we're saying. We did talk about a couple hundred million dollars in improvements on some previous earnings calls. Thinking about the benefits we realized from the network moves, we believe that we have achieved that. We have one facility still going core in Indiana.

And when we, you know, close out that process, then we'll be nearly finished there. And then there are some tailwinds from a market standpoint. I think last quarter, Donnie was the one who said more tailwinds than headwinds. I think that sentiment prevails.

But as you know, it's not just grain prices, but it's kind of the interplay between that and what chicken markets are doing and what's going on from a supply demand standpoint that influence things. So, I think, overall, you know, the 500 to 700 range, for a lot of those reasons, is our best estimate today of where we think the year will be. And yeah, hopefully, that gives you a little extra color. Wes, maybe you got something to add in there for Adam.

Wes Morris -- Group President, Poultry

Yeah, I'd add a couple of comments, Adam. We expect to realize our strategic change in fundings throughout the year. And specifically to your question, on year over year, both grains and markets were both lower. And so, we stayed focused on improving our fundamentals.

Year over year did have a little tailwind, but it's mostly the material change we made in our fundamentals. We improved our live performance, specifically hatch and livability. We have a very disciplined S&OP process that got really tied in Q1. And our sales are not only sold out position, but our forecast accuracy has allowed us to do a better job filling orders with material less working capital.

Adam Samuelson -- Goldman Sachs -- Analyst

And now, that's very helpful color. Then just as a follow-up, especially in chicken and prepared foods, just wondering if you have any views on changes in consumer behavior and how consumer demand elasticity has been evolving as you kind of enter -- as the calendar is flipped and how you're thinking about the state of the U.S. consumer over the balance of calendar '24.

Melanie Boulden -- Group President, Prepared Foods and Chief Growth Officer

Thanks, Adam. So, I'll start first to talk about how we're looking at it from a prepared foods perspective and our branded portfolio. So, generally, we're seeing elasticities returning to pre-COVID levels. And as you know, we seek to balance both price and volume growth to maximize the value of our branded portfolio.

But, you know, at the end of the day, we do understand the financial uncertainty that our consumers are faced with as inflation remains elevated, which is why we continue to leverage, you know, our strong revenue growth management capabilities in support of our brands and we're prioritizing their health and their profitability when determining our pricing strategy. And additionally, across the board for any of our branded business, you know, we remain focused on understanding our category dynamics, assessing our competition, and, of course, you know, meeting our consumer needs when making pricing decisions.

Wes Morris -- Group President, Poultry

Yeah, Adam. Melanie said that we're seeing really good dark meat demand. We've seen a reemergence of our waned demand, and we're seeing a slight shift toward food service.

Adam Samuelson -- Goldman Sachs -- Analyst

All right. That's all really helpful. I'll pass it on. Thank you.

Donnie King -- President and Chief Executive Officer

Thanks, Adam.

Operator

The next question comes from Ken Goldman with J.P. Morgan. Please go ahead.

Ken Goldman -- JPMorgan Chase and Company -- Analyst

Hi. Thanks so much. I wanted to ask a little bit about competition on the prepared foods side. Are there any of your more important categories that you're starting to feel, you know, maybe a little incremental pressure in terms of competition, whether it's on the pricing side or however you want to frame it? And I guess, how comfortable are you with your price gaps versus these competitors today, just in a general sense?

Donnie King -- President and Chief Executive Officer

So, in terms of competition, I mean, regardless of the business, I mean, there's -- we have some very strong competitors in every space that we play. And so, I'll leave that there, but I'll give Melanie the opportunity to talk about more specifics in categories. For example, I would just simply say that we saw strong performance in breakfast sausage and cocktails, and we had some headwinds in our lunch meat and our frozen protein breakfast area. Melanie, you want to add to that?

Melanie Boulden -- Group President, Prepared Foods and Chief Growth Officer

Yeah. I would just say, you know, Ken, at the end of the day, this is a challenging consumer environment. And, boy, competition is stepping up. We're not only seeing, you know, competition setup -- step up from branded players, but also private label is a factor.

And I think, you know, overall, we're doing very well and holding our position. But at the end of the day, we are just focused on our own retail business, in particular, and making sure that we're doing what we have to to drive consumption, to address any price gaps, and make sure that we are, you know, maintaining our leadership position in -- which, as you know, in eight of our 10 categories. So, right now, we are focused on making sure, you know, that we grow through high ROI merchandising with a strong feature and display at shelf. We're increasing our map investment to continue to grow.

You know, our household penetration. We've got strong innovation on shelf now and also coming, which is going to offer, you know, a strong engagement with consumers. And very importantly, to address pricing, we're making sure that we're enhancing our price pack architecture offerings so we can ensure that we are maximizing our distribution footprint. And we think all these steps, you know, together, we're starting to see actions in the marketplace and, you know, are confident in our full year outlook.

Ken Goldman -- JPMorgan Chase and Company -- Analyst

Thank you for that. And then a follow-up is on chicken. You know, as we look at some of the export data, and I realize, you know, some of the monthly data is a couple of months in arrears usually. But, you know, the export data, in general, in terms of pounds for chicken, you know, they've been a little bit weaker as 2023 anyway progressed.

And yet, as we start into 2024, you know, at least according to Urner Barry, leg quarter prices have done pretty well, which, you know, might be, you know, not what one might expect at first glance, just seeing the trade numbers. So, just curious for a little bit of your thoughts on, you know, how to think about like demand for leg quarters, export demand in general. Any color there would be helpful. Thank you.

Wes Morris -- Group President, Poultry

Yeah. I'll take that, Ken. Thanks. You know, we've seen a lot of disruption in the part export side.

Specific to leg quarters, freezer stocks are at a really low level, and demand seems to be robust enough to clear it at very attractive prices.

Ken Goldman -- JPMorgan Chase and Company -- Analyst

Thank you.

Operator

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

Ben Bienvenu -- Stephens, Inc. -- Analyst

Hi. Thanks. Good morning.

Donnie King -- President and Chief Executive Officer

Good morning, Ben.

Ben Bienvenu -- Stephens, Inc. -- Analyst

I want to ask -- I know chicken's gotten a lot of focus. Congrats on the quarterly results. John, I wanted to drill down on the 2Q commentary that you provided, recognizing that it sounds like there are some operational headwinds and disruptions from weather early in the year. What I'm curious on is if fundamental -- commodity fundamentals continue to improve and grain prices stay low, supply demand comes into better balance, is that enough positives to offset the, you know, temporal operational dynamics that we saw in the second quarter?

John R. Tyson -- Chief Financial Officer

I think there are reasons to believe why some of that could offset it, but I think it would be -- I think, you know, to quantify exactly what that offset is, we're not totally ready to do that. But let's zoom out and talk about the broader year because I think I just want to hone in on some factors that are at play about why we remain cautious on the chicken outlook. And it has to do with what's going on in the total protein markets. Beef continues to be volatile.

I think, you know, we've had predictions about where beef prices and beef markets were going to go that have, you know, some have held true or some have not. There is projections for more pork to be on the market this year. We've already talked about the consumer today. So, I just want to make sure that we land the message today.

While there -- we're cautiously optimistic about chicken, there remains a lot of uncertainty and a lot of time left in the year. So, Ben, I think I addressed at least parts of your question. Hopefully, that's helpful.

Donnie King -- President and Chief Executive Officer

And, John --

Ben Bienvenu -- Stephens, Inc. -- Analyst

That's great. Sure.

Donnie King -- President and Chief Executive Officer

If I could add one thing or a couple of things to that as it relates to chicken, those operational improvements that all of us have talked about in chicken, those continue. And those fundamentals, while we are improved, there's still a lot of work left to do there, and we got a really good team working against those things. But keep that in mind as you are looking at Q2 and the balance of the year as well.

Ben Bienvenu -- Stephens, Inc. -- Analyst

OK. Very good. Thinking about the cash flow statement, John Randal, you guys came into fiscal '24 bringing down your capex budget materially. You've sustained the range again this quarter.

Is there yet still room to tighten that budget as we move through the year or do you think that number is more set in stone with potentially improvements coming into 2025?

John R. Tyson -- Chief Financial Officer

Those are great questions. I think there's probably a room to tighten it a little bit, but let me kind of talk about the total picture. When we gave guidance in the first quarter, we talked about striving to be free cash flow positive, that we would pay attention to our ability to manage the business and working capital, as well as our operational results, and that would influence our thinking in terms of the total spend. If you just extrapolate where we are in Q1, that would take you toward a higher end to that 1.5 range.

But that's really just a product of a lot of good projects in flight that we have, our efforts to slow down from the spend that was, you know, projected in north of $2 billion in recent years. And I would just say, we're not trending to that higher end because, hey, we've made some adjustment in our -- you know, opening up the capital floodgates. Again, we remain very committed to getting that spend down to the midpoint of our range or below as we move through the balance of this year and next year. So, that's what I want you to take away from a capex guidance standpoint.

Ben Bienvenu -- Stephens, Inc. -- Analyst

Great. Thanks so much.

John R. Tyson -- Chief Financial Officer

Sure, Ben.

Donnie King -- President and Chief Executive Officer

Thanks, Ben.

Operator

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

Andrew Strelzik -- BMO Capital Markets -- Analyst

Hey. Good morning. Thanks for taking the questions. My first one is actually on the pork segment and the outlook there.

If I look at the performance in the quarter, and it seems like, you know, some solid performance is probably continuing into the second quarter, it doesn't seem like there's much baked into the back part of the year. So, I guess, how are you thinking about pork margins from here evolving through the year and kind of the puts and takes as we get into the back part of the year?

Donnie King -- President and Chief Executive Officer

Let me start off, and then I will flip it to Brady to talk about pork. Hog supply drove lower hog costs, leading to improved spreads. We're seeing a number of benefits of better execution in pork, and we have assembled a really, really strong team in our pork business, led by Kyle Narron. And he and his team have really taken out inefficiencies, from procurement, all the way to the customer and consumer.

And I'm very proud of that work. But I would also tell you, there's still room for more. And you will probably continue to hear that from us is there's -- every time we -- excuse me, every time we turn over a rock, we find something else, but where our mode is, is one of continual improvement. And, Brady, any big nuggets that I have not talked about?

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

No. Thanks, Donnie. And Q1, obviously, is seasonally the strongest quarter of the year, and we'd expect to see some typical seasonality as we move through specifically the latter part of this year as well. The team understands it's their responsibility to control the controllables and, as Donnie indicated, done a really good job of being able to take advantage of some of the spreads we have seen in Q1, and certainly expect those improvements to continue through the course of the year as well.

Really seeing some increased operational efficiencies. And the team has done a great job increasing the true business performance through the data and analytics platforms that they've stood up that allows for better decision-making and, really, adaptation of some of these market trends in the current conditions.

Andrew Strelzik -- BMO Capital Markets -- Analyst

OK. Great. That's helpful. And then on the beef side, you know, I guess, when I look at the typical seasonality and I look at kind of the performance in the first quarter and then the commentary on the second quarter, it seems like you would need to have a pretty solid improvement in the back part of the year, you know, not to be kind of toward the lower end of that range.

And I know there's seasonality involved there as well. I guess I'm just curious, can you talk about maybe, you know, what would get you to the high end and low end of that range? I understand certainly that there's a lot of uncertainty as we move through the year. And then maybe can you clarify also, when we think about the second quarter, are you thinking about sequentially lower of the number that you reported adjusted operating income in the first quarter, or is that kind of once you back out the inventory adjustment? Thanks.

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

Well, thanks for the question. And as you pointed out there, I think it's really important to emphasize what both John and Donnie indicated in the opening remarks, which was in Q1, we saw that rapid decline in cattle futures, and that was the driver for that inventory valuation adjustment. That was roughly $56 million in the first quarter. And really, as we look at the first quarter, obviously, we saw some headwinds relative to some decreased value in the drop.

We saw the spread compression. And obviously, with lower supply, not only in Q1, but as we move through the rest of the year, we see that lower opportunity for cost dilution of our overhead structure relative to these volumes. But let me be really clear. We see a path to improvement as well.

And from an operational excellence perspective, how we manage the business today versus the past and a different economic cycle is very important. Focus on efficiency, yield, and really balancing supply and demand, not only by a cut-by-cut basis and through our grinds complex, but also in terms of yield and efficiency is going to be paramount and important to the team. And they're dialed in on that as well. We've made changes that certainly provide us opportunity in the future as well.

As we mentioned last quarter, we've rightsized our beef value-added business really to match our customer needs. And what we're seeing from a supply perspective as we move through this, and again, as I mentioned before, we have a well-capitalized asset base and believe we're really able to manage through a variety of headwinds and market conditions that we expect to see as we move through this cattle cycle.

Andrew Strelzik -- BMO Capital Markets -- Analyst

Great. Thank you very much.

Donnie King -- President and Chief Executive Officer

Thank you.

Operator

The next question comes from Ben Theurer with the Bank of America -- excuse me, with Barclays. Please go ahead.

Ben Theurer -- Barclays -- Analyst

Hey. Good morning, Donnie and John. Thanks for taking my question.

Donnie King -- President and Chief Executive Officer

Good morning.

Ben Theurer -- Barclays -- Analyst

So, just wanted to kind of understand a little bit some of the dynamics as it relates to the export business because if I remember right, that used to be some sort of a headwind also in beef. So, if we look into the details on sales into the international channels, particularly beef, it was kind of contrary to the rest of it. It was actually even down on sales. Could you elaborate a little bit on the dynamics in the export markets as it relates to beef in particular? But also, if you could just mention briefly what you're seeing on exports for chicken and pork? That would be my first question.

Thank you.

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

Sure. Well, thank you for the question. And I think it's really important to understand we've really been working within historically high rates from a beef product or cut-out perspective. And when we talk about the arbitrage opportunity between a domestic sale and an export sale, it really puts the domestic beef business and industry at a disadvantage right now.

We're seeing large supplies from some of our competing countries that are in the Southern hemisphere, and they're really on the opposite side of the cycle from we are -- from where we are. And so, that's really led to increased opportunity for some of those competing countries and a decreased opportunity for us here in the U.S. However, we have seen strong domestic beef demand. It has led the -- held these cut-out values at a historically high level as well.

Wes Morris -- Group President, Poultry

Yeah. And, Ben, this is Wes. I saw the -- I'll touch briefly on chicken. As I said earlier, you know, parts have been interrupted due to [Inaudible] And on leg quarters, we're seeing frozen inventory in the U.S.

at almost record lows. Our inventory continues to be in check, and the pricing has been very good going forward.

Ben Theurer -- Barclays -- Analyst

OK. Perfect. Thank you very much. And then just quickly following up, as it relates to the prepared foods business, can you quantify what the Williams Sausage volume contribution was because I didn't find that? I know it was positive, but if you could quantify that, that would be helpful.

John R. Tyson -- Chief Financial Officer

Yeah. We haven't broken that out, but, you know, it's -- we haven't broken that out specifically, Ben.

Ben Theurer -- Barclays -- Analyst

OK. That's OK. Thank you.

Operator

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

Tom Palmer -- Citi -- Analyst

Good morning and thanks for the question. Maybe -- could ask on feed costs. Just how locked in is your exposure this year? And then when we look at the downward moves over the past few months, does this benefit your current fiscal year; or if it continues, is this more of a 2025 flow-through because it does seem like there's some incremental favorability?

Wes Morris -- Group President, Poultry

Yeah, Tom. This is Wes. I'll touch on that. We have a very diverse commodity risk management group.

We also have different pricing mechanisms with customers, in which some of the grains flow through through pricing. I would tell you, it's moderate and in the back half of the year.

Tom Palmer -- Citi -- Analyst

OK. Thank you. And then I wanted to follow up on the prepared foods side, maybe going back to Peter Galbo's question, just on the new customer wins. Are there particular products that you're seeing these wins greatest in or particular channels within food service? Thanks.

Donnie King -- President and Chief Executive Officer

Melanie.

Melanie Boulden -- Group President, Prepared Foods and Chief Growth Officer

So, Tom, your question was -- or I just want to make sure I'm clear. Are we -- are there particular products where we are seeing more success? Can you just repeat your question for me?

Tom Palmer -- Citi -- Analyst

Yes. Sorry. Exactly. Just you noted some -- your growth was driven by some new customer wins and was just curious what products were really driving that for you right now and within prepared foods.

Thanks.

Melanie Boulden -- Group President, Prepared Foods and Chief Growth Officer

Yeah. So, I'd say that when I was talking about the customer expansion, we are making great strides in that area -- on the -- in that area on the food service side of the business. And then I would say, on the retail side of the business, we're seeing strong growth in distribution with our existing customers behind our core business lines, but we're also seeing excitement behind some of our -- a lot of our new innovation. And in particular, I want to highlight our Jimmy Dean Maple Griddle Cake that we launched last year to success.

And we are planning in a couple of months to launch an extension of that product item. Does that help, Tom?

Donnie King -- President and Chief Executive Officer

Tom, let me add --

Tom Palmer -- Citi -- Analyst

Yes. Thank you.

Donnie King -- President and Chief Executive Officer

Let me add a little more color as it relates to food service there. As a reminder to everyone, in the middle of the pandemic, we had some operational issues being able to produce enough product for our customers and we essentially had to give up some business. And we've been, since the pandemic, trying to go and regain that. But we have a nice diversification between what are the traditionally quick service restaurants and as well as broad line distribution.

Tom Palmer -- Citi -- Analyst

OK. Thank you.

Operator

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

Michael Lavery -- Piper Sandler -- Analyst

Thank you. Good morning.

Donnie King -- President and Chief Executive Officer

Good morning.

Michael Lavery -- Piper Sandler -- Analyst

I want to come back to check in and just try to understand, you know, obviously, the lift in the quarter was cost- and margin-driven. But when you pointed to the strategic actions and those benefits, can you help us understand maybe how to think of them kind of longer term, and would this put you at the higher end or above, you know, kind of a 5% to 7% margin range? I know you're not wanting to think about margins as how you, you know, guide for the year. You gave a little bit of breadcrumbs for the second half. That's all really helpful.

But maybe just looking a little further out, is the business structurally different enough that, under normalized conditions, you would rethink what it's capable of, you know, what its earnings power is longer term?

Donnie King -- President and Chief Executive Officer

So, let me start. This is Donnie. Let me start with a couple of points. And then I think John probably has a couple to add.

But, you know, in terms of being prepared to give guidance, we're not prepared to do that today and talk about that. But what I can tell you is what we're doing as a company. We talked about the third consecutive quarter of over $100 million of AOI improvement. In the midst of that, what I can also tell you is marketing, whether that's for grain or the meat side, those are largely offsetting one another.

So, the improvements are coming from operational improvements, operational excellence, both in plants and in live production, and really driving out waste from the business. But we also -- as we said earlier, we're realizing the benefits from plant closures that -- in terms of modernizing and rightsizing our footprint. So, we're seeing all of those. But this plan doesn't really -- is -- I mean, we've modeled the markets as they are today for the balance of the year, but this is all about operational excellence and then being more competitive and being better at what we do, at the same time, driving up raw material to more value-added and branded within the chicken segment.

John.

John R. Tyson -- Chief Financial Officer

Yeah, Donnie, it's a nice summary. I think, again, without touching on what the long-term outlook is like, the things I would point out about how the strategic moves we made have a sustaining impact in our business is a couple of things. First, you know, we're just taking cost out of the system while still keeping the same amount of volume with our customers. Over the long run, that means not putting capital into older and more tired assets, rather investing in those assets where we think we can, you know, achieve our target ROIC numbers.

And then I think the other thing, too, is we have really, in the last year, refocused our growth to be demand-backed and to be in those subcategories within the chicken segment where we see favorable trends from a growth and margin standpoint. So, I think, with that, over the long run, you know, we project to be competing and performing as a best-in-class chicken company from a margin standpoint. And that's how we realize that. I think the other big move that we made, we've seen it in our live performance results this year, is the switch from NAE to NAIHM.

And that's provided us for a lot more consistency in order to meet customer demands and expectations from a live standpoint.

Michael Lavery -- Piper Sandler -- Analyst

OK. That's helpful. Great. And just a follow-up on prepared foods.

I understand it's obviously always competitive, and you touched on some of those dynamics, but can you give a sense on promotional levels? Would you say they're normalized again? Do you see increasing activity there? You know, you called out some of the mix headwinds was priced otherwise flat. Or, you know, I guess maybe could you dissect the price and mix pieces of that and just a sense of how the environment looks from a promotional perspective? Is it getting more intense or does it seem to have stabilized? What's your sense of how that looks?

Melanie Boulden -- Group President, Prepared Foods and Chief Growth Officer

Yeah. So, this is Melanie. I would say that promotional activity is continuing. You know, we are continuing to see intense promotional activity.

In terms of how we are operating, we have, you know, our highest performing or highest ROI merchandising initiatives, you know, in place to drive our feature and display and choice at shelf, and we are seeing it working. But to your point, competitive activity in this area is strong, and we're just, you know, focused on controlling our controllables. And in addition to our promotional activity, we're focused on, as I said before, increasing our map investment to engage consumers. You know, again, we've got strong innovation in place and we're enhancing -- when you asked about price, we're making sure that we enhance our price pack architecture structure to address competitive pricing as well.

Michael Lavery -- Piper Sandler -- Analyst

OK. Great. Thanks so much.

Donnie King -- President and Chief Executive Officer

Thank you.

Operator

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

Alexia Howard -- AllianceBernstein -- Analyst

Good morning, everyone.

John R. Tyson -- Chief Financial Officer

Good morning, Alexia.

Alexia Howard -- AllianceBernstein -- Analyst

OK. So, two ones. Firstly, on the financial side, your leverage has obviously come down, but it sounds as though the -- whether there'll be more sequential improvement in operating income next quarter is TBD given the weather issues. Do you expect leverage to continue to come down from here or could next week -- next quarter be the high point?

John R. Tyson -- Chief Financial Officer

Yeah. Thanks, Alexia. So, I think two questions in there. The first off is just independent of whether -- I want to make sure we're tracking.

Independent of whether, you know, we expect our Q2 to typically be one of the softer quarters from a -- from an operating income standpoint. And so, then that's exacerbated by weather a little bit. In the long run, we are projecting for leverage to continue to come down. That's driven by a couple of things.

One, we're getting more efficient with working capital. We've talked about some inventory clearing in our -- around our segments. Exactly kind of where things happen in the first half of the year, we can say that we would expect to end our fiscal 2024 in a better net leverage position from a ratio standpoint than last year. That's evident, also, in, you know, our pull down on capex and what we projected, which is to be a better year from an operating income and EBITDA standpoint than '23.

So, that's -- we're trending in the right direction. Aggressively pursuing that at or around two times net leverage ratio. And we would project that we'll get to do that, continue to invest in our business, and also support our dividend from a capital allocation standpoint.

Alexia Howard -- AllianceBernstein -- Analyst

Thank you. And then just as a follow-up on -- sticking with prepared foods, it sounds as though this mix shift into food service is obviously a good thing overall, but it is pushing the pricing down and potentially there might be a negative mix shift with margins. Are you able to clarify whether that price pressure will continue in future quarters, and are you able to talk about the margin differential between branded retail and food service and private label, which I assume is lower?

Donnie King -- President and Chief Executive Officer

OK. Alexia, this is Donnie. There are a lot of questions in there. Here's what I can tell you relative to food service, and keep this in mind.

We've talked about it today because you have seen some volume improvement relative to food service. I would remind you that we had given up some business in the middle of the pandemic and the nature of those contracts can be quite lengthy. And we're starting to get back in when those open up and get some volume. We have maintained in prepared foods to the capacity which produces those products.

So, if you think about it from that perspective, this overhead and these assets have been a drag on our business to some degree. We've got new volume to put into those assets. So, that's one piece of it. We're probably not going to talk about the differential and the margin structure between food service and retail, but it's important that we regain that volume in food service.

But our retail -- our iconic brands in retail, continuing to support those and grow those and innovate and do merchandising like Melanie has talked about before. Those are all still critical -- mission-critical for us.

Melanie Boulden -- Group President, Prepared Foods and Chief Growth Officer

Yeah. And the only thing, Alexia, I would like to add, because I think Donnie did a nice job of highlighting more of the top line, but also, as we think about our business and, you know, our performance, one of the reasons that we were able to deliver a solid quarter and what we plan on continuing to do is focus on our controllables, the things we can control, especially from an operational efficiency standpoint. So, you know, we're really, you know, focused on improving our service levels, maximizing our asset utilization by driving down our overhead, and increasing our yield and labor efficiencies. And importantly, we're driving automation to improve our supply chain execution.

So, from a top-line perspective, yes, your question was about mix, but I just wanted to reiterate that we're also working all levers of the P&L to ensure that we drive a strong bottom line as well.

Alexia Howard -- AllianceBernstein -- Analyst

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

Operator

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

John R. Tyson -- Chief Financial Officer

Hey, before Donnie wraps this up, I just want to make sure we land one final point related to our outlook for 2024. And we've had a lot of great discussions this morning about our various segments. We obviously moved the range on chicken and on pork. But I just want to highlight our reaffirmation of the total company guidance from $1 billion to $1.5 billion.

Based on a lot of various macro factors and the interplay between all of our segments, I think we have reasons to believe while we could achieve a range of outcomes in that window, the midpoint, you know, plus or minus, we designed it that way for a reason and feels like a way to think about the total look. And then obviously, as we move through Q2 and through the balance of the year, we'll give any revisions as necessary. But cautiously optimistic, promising start to the year, but still a lot of factors at play around total protein availability, consumer sentiment, and other unpredictable factors that would get us to where we are. So, Donnie, I think with that, I'll hand it over to you.

Donnie King -- President and Chief Executive Officer

OK. I want to say -- once again, say thank you to all 139,000 of our team members. We're here today and have a good story to tell because of those 139,000 team members who contribute to us each and every day. Their efforts are what makes and what drives this business forward.

Our strategy is working. We have the right leadership team in place to deliver, and we're poised to drive long-term opportunity and shareholder value. We've taken some steps in the right direction, but we have a lot of work to do. Thanks for your continued interest in Tyson Foods, and we look forward to speaking with you again soon.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Sean Cornett -- Vice President, Investor Relations

Donnie King -- President and Chief Executive Officer

John R. Tyson -- Chief Financial Officer

Peter Galbo -- Bank of America Merrill Lynch -- Analyst

Melanie Boulden -- Group President, Prepared Foods and Chief Growth Officer

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

Adam Samuelson -- Goldman Sachs -- Analyst

Wes Morris -- Group President, Poultry

Ken Goldman -- JPMorgan Chase and Company -- Analyst

Ben Bienvenu -- Stephens, Inc. -- Analyst

Andrew Strelzik -- BMO Capital Markets -- Analyst

Ben Theurer -- Barclays -- Analyst

Tom Palmer -- Citi -- Analyst

Michael Lavery -- Piper Sandler -- Analyst

Alexia Howard -- AllianceBernstein -- Analyst

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