Tyson Foods Inc - Class A (TSN) — Q4 2017 Earnings Call Transcript

Good morning, and welcome to the Tyson Foods, Incorporated fourth quarter earnings conference call of the 2017 fiscal year. On today's call are Tom Hayes, President and Chief Executive Officer, and Dennis Leatherby, Executive Vice President and Chief Financial Officer. Also with us is Stewart Glendinning, who will become our Chief Financial Officer effective February 10, 2018. Of course, it's a little early to expect him to answer any questions. 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 Monday, November 13, 2017, at 9:00 a.m. Eastern Time. I'll now turn the call over to Tom Hayes.

All right. Thank you very much, Jon, and good morning, everybody. Thanks for joining us as we wrap up another record year. I want to start by acknowledging the announcement that we made last Wednesday about our CFO transition from Dennis to Stewart. We have company-wide town hall meetings after these earnings calls each quarter that we call Team Talk. So, we're just absolutely thrilled that Stewart can be here with us, so he has a chance to meet folks in person. This is Dennis’s second to last earnings call, and it's bittersweet, but Tyson has had the pleasure of having Dennis on the team for many years. As you know, he's been the CFO since 2008 and nearly 30 years with the company, countless contributions. He's been an integral part of my first year as CEO. So, Dennis, on behalf of everybody at Tyson, let me just publicly say thank you for everything you've done for the company. We appreciate you, and we're going to be looking forward to having a proper sendoff in the spring. But right now – Stewart, also welcome. Thanks for joining us today.

Thanks, Tom, and good morning, everyone. I'm really happy I could be here today, and very excited about starting officially in December.

So we delivered our overall goal of at least 4% operating income growth, EPS growth in the high single digits, and 3% volume growth in value-added products. Fiscal 2017 was a year of great change, and despite some challenges, our team remained focused on delivering for the long term for our shareholders, and driving demand for consumer relevant products through innovation, customer growth and through category leadership. Not only did we deliver exceptional results, we also strengthened our ability to lead change and grow in a dynamic marketplace, while delivering ongoing financial fitness. In the fourth quarter, adjusted EPS was up 49% over last year, and full year adjusted EPS was up 21%, to $5.31. Turning the page on a significant company milestone, we successfully completed the integration of synergy capture related to Hillshire with three-year synergies totaling $670 million. We now pivot to our ongoing Financial Fitness program in which we expect to achieve $200 million in savings in fiscal 2018 through a combination of synergies from the integration of AdvancePierre and other cost savings. Looking at the top 10 CPG retail food manufacturers in our fiscal 2017, our Core 9 product lines and total Tyson outperformed total food and beverage in dollar growth, and outperformed all but one company in volume growth. As we begin fiscal 2018, industry cattle supplies are projected to increase 1% to 2% this year, and we expect ample supplies in the regions where our plants are located. With strong export demand expected to continue due to increased global protein demand, we believe the Beef segment's operating margin should be above 5%. In the Pork segment, fourth quarter operating income was $124 million with a 9.1% operating margin. For the fiscal year, operating income was a record $648 million with a 12.4% operating margin. In the Chicken segment in the fourth quarter, operating income was $322 million with a 10.6% operating margin. Volume was up 4.1% on 3.7% higher price. Core Tyson frozen fully cooked chicken sales have responded well to increased advertising, highlighting the no antibiotics ever attribute. And volume and share have been growing now for five consecutive quarters. We're continuing the evolution of the Tyson master brand, and we're in the process of modernizing our retail packaging and graphics. This will start showing up on shelves in early calendar year 2018. To wrap up the Chicken segment, in fiscal 2018, we expect operating margin to improve to around 11%, importantly, with around a 3% volume growth. Moving forward to Prepared Foods segment, in the fourth quarter, operating income was $152 million with a 6.7% operating margin. Excluding the short-term impact of that change, we were in line with our expectations. Volume for the quarter was up 9.5% with sales price up 12.5%. Brands are very important to us, and while we're investing in our brands for long-term growth, our relationships with our customers are just as important. But for the year, we expect growth. We expect the Prepared Foods segment to grow volume around 10% and produce returns between 11% and 12% for fiscal 2018.

Thanks, Tom, and good morning, everyone. We finished fiscal 2017 with a strong fourth quarter, as we delivered record EPS for our fifth consecutive year on a GAAP basis and sixth straight year on an adjusted basis. For fiscal 2017, total company adjusted return on sales was a record 8.5%. Adjusted operating income was also a record at $3.3 billion, representing a 15% increase compared to last year. We have a tremendous amount of momentum going into fiscal 2018 as we come off a year of 21% EPS growth. Our first quarter in fiscal 2018 is off to a great start, which strengthens our confidence in achieving adjusted EPS growth of 7% to 10%, to a range of $5.70 to $5.85.

So, maybe first digging a little bit more into Prepared Foods in the quarter, and you called out in the prepared remarks a contract buyout that impacted the quarter. Any way to quantify that?

As it relates to the charge, I'm not going to get into a lot of detail. It was the right thing to do for us. We have contracts with suppliers that prohibit us from maximizing the internal consumption of materials that we produce ourselves through the Fresh Meats group. So, if you roll those up, it's about a $970 million OI, which puts us in that 11% to 12% range, with sales being about $8.3 billion for the year.

Just curious for you, or whoever it's appropriate, Tyson's highlighting a few new tailwinds today for fiscal 2018.

Yeah, it was certainly early in the year. I mean, we're just out of the box, Q1 looks good, but we have to sort of stay where we are. The idea of us being properly positioned in the right regions, I'd say, is what you should focus on. And 5% is the number you should model.

Both my questions are pertaining to Chicken. So, first, for 2018, so you're guiding to 3% volume growth.

It's about half-and-half. So, half is AdvancePierre, and about half is just organic chicken growth and that is through the value-added, as you described.

I wanted to know, as you're integrating the sales forces of your business and AdvancePierre's, how have you managed to hold on to your customers?

They handle complexity very effectively, so they know how to make money and continue to meet the customers' demands.

Just when you say the pork capacity impact was anticipated in your guidance, what does that mean exactly?

So, last year or maybe two calls ago, we talked about our front half, back half sort of discussion. That's important for us because we continue to be focused on there are some things that can flip between quarters.

When we think about overall shocks to the system, which you talked about, on the one hand, you have the grain shock, right? And on the other hand, you have any volatility in chicken commodity prices.

We've done a nice job, as you know, diversifying our price type. So, we don't tend to be as volatile.

Could you talk about what percentage of that Chicken business is now NAE? Kind of the margin benefit you're getting from NAE, and how much additional cost do you incur by producing NAE?

The consumer does expect it, and by the way, the customer expects it.

Can you just walk us through some of your learnings and any practices from the company you've adopted since?

One is the focus on customer growth. And we, as Tyson, prior to AdvancePierre, were very focused on customer growth.

Is your confidence higher or lower relative to that month ago and why?

We like the traction we're getting at those customers that we serve. So, also, as I've been prone to say in the last couple of quarters here, I'd like to thank the Tyson team members that are listening to the call because they are on the call and we had another record year, which is really, really good and we're all very excited about that.