Tyson Foods Inc - Class A (TSN) — Q4 2018 Earnings Call Transcript

Good morning, and welcome to the Tyson Foods, Inc. Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. On today's call are Noel White, President and Chief Executive Officer; and Stewart Glendinning, 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 8-K 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 Tuesday, November 13, at 9:00 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 expressed 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.

Thank you, Jon. Good morning. I’m excited to be here today for my first earnings call as CEO of Tyson Foods. It’s an honor to take on this role, and I am enthusiastic about the many opportunities in store for our company. I want to start by recognizing Tom Hayes, thanking him for his leadership in fine-tuning our strategy and implementing it. I am dedicated to Tyson Foods' mission of sustainably feeding the world through our rapidly growing protein brands. As someone who helped develop this strategy, I believe it is fundamental to our ongoing growth. After 35 years with Tyson, I’ve witnessed our transformation from a commodity protein supplier to a global food company, and we will continue on this path. I have a history of achieving results across various segments of our business, and I plan to enhance our Prepared Foods, value-added chicken, and International segments to help mitigate volatility and boost earnings. We have an excellent team in place, from our executives to all employees, and this team is empowered to drive growth and achieve results while remaining committed to sustainability. Our growth plan is focused on 3% value-added sales growth and high single-digit EPS growth over time. In 2018, we achieved 4.2% value-added growth, surpassing our target. EPS reached $6.16, a 16% increase from last year, including $0.78 from tax reform. We exceeded our revised forecasts thanks to a strong finish in the Beef and Pork segments. Throughout fiscal 2018, we encountered several challenges, such as rising freight costs, trade disputes, market fluctuations, pricing pressures, and shifts in demand. However, it’s important to highlight that even with trade disruptions, U.S. beef and pork volumes increased by 12% and 7%, respectively, due to strong global demand for U.S. protein. Tyson's overall return on sales for 2018 was 8.2%, supported by our dedicated team, unique product offerings, and diversified business model. Our Beef and Prepared Foods segments excelled, reflected in both operating income and return on sales metrics. We successfully integrated AdvancePierre Foods and acquired Original Philly, Tecumseh Poultry, Smart Chicken, American Proteins, and, pending approval, Keystone Foods. With protein central to our strategy, we divested from several non-protein businesses, including Sara Lee Bakery, Kettle, Van’s, and TNT Crust. Safety remains a crucial priority for us, and we achieved a 20% reduction in OSHA recordable incidents this year. We establish a direct connection between safety and our low turnover rates, and in the current tight labor market, it is crucial to be an employer of choice in our plant communities while we continue to focus on safety and productivity improvements. In 2018, we realized $253 million in Financial Fitness savings, exceeding our $200 million target. Moving forward, these savings will be included in our core earnings and return on sales guidance rather than being reported separately. We will continue to monitor savings internally, but this change allows us to reduce costs and concentrate on growth. While 2018 presented challenges, it was also a productive year as we executed our strategy and strengthened our solid foundation. Now I will share some segment-specific details. The Beef segment achieved record operating income of $348 million and an operating margin of 8.9% in the fourth quarter. Sales volumes rose 3.4%, while the average price fell by less than 1%. For the fiscal year, Beef generated over $1 billion in operating income and maintained a margin of 6.7%. Volume increased by 3.1%, and average price rose by 1.2% year-over-year. The results in Beef exceeded expectations due to favorable cattle supplies, robust domestic demand, and heightened global demand. We continue to enhance our performance relative to USDA benchmarks, aiming to grow value-added beef through Case Ready and premium programs to devolatilize some of our business. With favorable cattle supplies anticipated next year and into 2021, we project the Beef segment to maintain an operating margin above 6% in fiscal 2019. In the Pork segment, we reported operating income of $76 million in the fourth quarter with a 6.7% margin. Revenue declined due to a 2.7% drop in volume and a 14.5% decrease in average sales price. For the year, operating income totaled $374 million with a margin of 7.7%. Revenue decreased as volume fell by 2.1% and average price decreased by 4.8%. The supply-demand imbalance for hogs that we discussed last quarter persisted in the initial weeks of the fourth quarter but improved with the seasonal rise in hog supplies. According to publicly available data, we significantly outperformed the industry based on revenue per head. Similar to Beef, we are working to enhance our value-added Pork segment through Case Ready and premium initiatives, and we will continue to shift more of our pork into Prepared Foods to manage volatility better, which is a significant benefit of our diversified business model. For fiscal 2019, we anticipate operating margins for the Pork segment to be around 6%. The Chicken segment reported an operating income of $182 million in the fourth quarter with a 5.8% operating margin. Sales volume grew by 10.4% largely due to acquisitions, while average price fell by 7% owing to changes in the product mix from acquisitions, increased domestic protein supplies, and lower export prices. For the year, Chicken's operating income reached $947 million with a margin of 7.9%. Volume rose by nearly 5%, primarily due to acquisitions, while average prices remained roughly stable. Our Chicken business is well-prepared for the challenging pricing environment that has extended into fiscal 2019, due to its diverse product mix across sales channels and bird sizes, along with a higher value-added component compared to our competition. We will keep working to improve our mix and cost structure, which are central to many of our capital initiatives. For fiscal 2019, while integrating various businesses, we predict an operating margin close to 8% in the Chicken segment. Our outlook currently does not reflect the Keystone acquisition, which we expect to close sooner than initially planned. Our Prepared Foods segment is performing exceptionally well, generating a record $235 million in operating income with an 11.2% margin in the fourth quarter. Average sale prices were relatively stable, whereas revenue and volume dipped following the sale of non-core businesses. For the year, we achieved $979 million in operating income with an 11.3% margin. Volume increased by 4.1% due to acquisitions after accounting for divestitures, with average prices rising by 6.1%. We are enthusiastic about our Prepared Foods segment as innovation continues to drive sales growth. For instance, Jimmy Dean Simple Scrambles is experiencing continued strong performance in its second year, with repeat purchases leading the industry. Hillshire Snacking saw a 32% increase in sales dollars. We have a robust pipeline of Prepared Foods innovations planned for 2019, and I encourage you to check our slide presentation to see some of these exciting new products. As we continue to grow volume through our core business alongside innovation, we anticipate that Prepared Foods operating margin will again surpass 11% in fiscal 2019. I will now hand the call over to Stewart to review the financials.

Thanks, Noel, and good morning, everyone. Fourth quarter EPS of $1.58, which includes a $0.20 tax reform benefit, was up 10% compared to Q4 last year. Revenues in the quarter were down slightly to just under $10 billion as average price was impacted by trade disputes and increased protein supplies. Sales volumes were up 2.7%, driven by acquisitions. Operating income was $831 million, down about 8% versus Q4 last year. And total company return on sales was 8.3% for the quarter. For the fiscal year, earnings were $6.16, up 16%, including $0.78 from tax reform. Sales were $40 billion with volumes up 2.5% and price up 2.1%, while operating income was approximately $3.3 billion with an operating margin of 8.2%. Operating cash flows for the year were just under $3 billion, up approximately 14% over last year. Capital expenditures were $1.2 billion as we invested in growth and efficiency projects with expected returns greater than our cost of capital. Depreciation and amortization were $943 million in fiscal 2018. We repurchased approximately 5.9 million shares for $427 million in 2018. Our adjusted effective tax rate for the fourth quarter was 23.5% and 23.6% for the year. Net debt-to-adjusted EBITDA was 2.3x. Including cash of $270 million, net debt was $9.6 billion, and total liquidity was $1.4 billion as of year-end. Net interest expense was $86 million in the fourth quarter and $343 million for the full year. We received around $275 million of incremental cash flow in fiscal '18 as a result of tax reform. Now turning to fiscal 2019. Our capital allocation priorities will continue to focus on driving shareholder value and growing the business. We are committed to our investment-grade credit rating and will work to pay down debt as we deploy cash to grow our business organically and through acquisitions. We'll continue to return cash to shareholders through share buybacks and dividend growth. In fact, the Board of Directors has increased the quarterly dividend payable on December 14 to $0.375 per share on our Class A common stock. We anticipate the annual dividend rate in fiscal 2019 will be $1.50 for Class A shareholders, a 25% increase over 2018. In fiscal '19, we expect top line sales of approximately $41 billion, an increase of about $1 billion over 2018. Cash generation should remain very strong. We're planning approximately $1.5 billion of capital expenditures in fiscal '19 with spending focused on growing our business. We expect these investments to deliver substantially more than the cost of capital. Net interest expense should approximate $350 million in fiscal '19 before any impacts from financing the Keystone acquisition. As Noel mentioned, closing of the Keystone acquisition is likely to be sooner than previously expected. We are confident in our ability to finance the transaction, and we'll be ready to focus on integrating the business. We expect liquidity to remain above our minimum target of $1 billion in 2019. Our effective tax rate is expected to be around 23.5% in fiscal 2019. Based on our average share price in Q4, we expect our average diluted shares to be around 367 million before any share repurchases. As Noel said in the news release this morning, based on current assumptions, we believe fiscal 2019 adjusted earnings will be $5.75 to $6.10 per share. That's comparable to fiscal 2018 results if you exclude the $0.13 in earnings per share generated by the businesses divested in 2018. Now some of the assumptions we're making in our guidance are that there's no further movement in the grain markets, the chicken price deterioration and that we're able to continue recovering increased freight costs through pricing and that there are no extraordinary labor pressures. Although not in our current outlook, we also expect the Keystone acquisition will have financing and integration costs in 2019 as well as recognition of intangible assets, and therefore, we anticipate Keystone's accretion on an adjusted EPS basis to begin in fiscal 2021. However, we expect Keystone, as with our other recent acquisitions, to be immediately accretive on a cash basis. 2019 is going to be another great year focused on driving growth as we integrate businesses, carry out CapEx projects, drive cost savings and generate cash to create shareholder value. That concludes my remarks. Now back to Noel.

Thank you, Stewart. 2018 was challenging, but it was a good year. Looking at publicly available data, we're outperforming the competition in all segments. We made three acquisitions and completed four divestitures to better position us for long-term growth. We're actively integrating the new businesses, and we're ready to hit the ground running with Keystone. We're excited about the platform for global growth that Keystone will provide in addition to its strong domestic operations. Based on current assumptions, our outlook for fiscal 2019 is comparable to 2018. We expect another good year but not without challenges. However, we remain confident in our ability to execute and deliver growth over time because of our diversified business model, our broad product portfolio, our strong innovation pipeline, our differentiated capabilities, our tremendous financial position and the expertise and experience of our team members. These are advantages and how we will generate growth, both organically and through acquisitions, both domestically and internationally. This concludes our prepared remarks. Phil, we're ready to begin Q&A.

One of the questions I have regarding your guidance for 2019 is whether you would characterize the outlook as somewhat conservative. The midpoint, after adjusting for the one-timers, suggests a projection of zero growth in earnings. I'd like to understand the reasoning behind your somewhat conservative guidance, and I have a follow-up question.

Yes, Ben. This is Noel. I'll take the question. The outlook is, as we see it today, Ben, so there are a lot of variables in place, and it's really consistent with the past approach that we've taken based on everything as it stands today. If, however, that changes, our outlook could change. And at this point, it looks like some of the headwinds and tailwinds that we face are in relative balance. Again, profitable growth is a key focus for this team as we look into 2019.

The only thing I'd add, Ben, is just to say if you looked at last year, of course, the first half of the year was better for Pork than the second half of the year, we're going to have to overcome that comparison as we enter the first part of the year. So I'd say, underscoring what Noel's emphasized here, this is the best estimate we have for the moment, okay?

Okay. And as you said, actually, Stewart, on Pork would be my follow-up question. So late July, early August, when you updated your guidance for 2018, the implications post and what we saw in Q3 was basically for a much worse environment on the Pork side. I mean, implicitly, it was basically guiding to a 0% margin in the fourth quarter. Now you actually reported an almost 7%. Could you elaborate a little bit on what had changed, actually, through the quarter than what you were expecting late July, early August, which triggered some sort of a meaningful reduction on that specific segment? So what has been better? And what do you think, how is this going to evolve into 2019 fiscal for you?

Yes, Ben, this is Noel. I'll take the question. In July and August, there were a large number of variables that were impacting the markets. We had a number of trade disputes that were taking place. We had some planned expansion in production capacities that didn't happen as quickly as what we anticipated. And frankly, our exports continued to be very strong, very robust in light of all of the trade disputes that you're reading about. So that's, frankly, continued as not only through Q4 but into Q1 as well. October was a little bit lighter than what we expected, but November has been a solid month for us.

Okay. So basically, the actual situation never got as bad as we initially expected?

I think when you look at the stats, Ben, you'd see, and to Noel's point, June and July, the margin was really, really compressed. We had all of the trade noise. And it just wasn't clear to us what was going to happen. And if you look with the data after that, the spread got much, much wider, and we wanted to make sure we were in a place where we gave a range that we felt was a good estimate at that time.

My first question is about chicken. You mentioned that one of your key assumptions is that the decline in chicken prices will stop. I'm not sure if this relates to my question, but given your margin for Q4 was under 6%, I'm curious about what gives you confidence in reaching close to 8% in fiscal '19.

Yes, Heather, this is Noel. I'll take the questions. A couple of things, Heather. As we came through 2018, there were a number of somewhat extraordinary events that we encountered. The freight increase that we talked about last quarter, at that point in time, we had not fully recovered the freight. We're still working on doing that. We recovered a large portion of it. That's a work in process. We had some live production issues that I think we spoke about as well as in the rest of the industry. We had a fire in one of our large complexes that we had to overcome. And frankly, we had some production-related issues that we had to address as well. We feel good about where we're at right now as we look into 2019. There are some headwinds, you've mentioned one of those, being pricing. Grain is better than what it was when we put our plan together. It's still higher than it was a year ago. But based on what we have for visibility right now, Heather, it looks like we should be someplace close to that 8% number.

The only other thing to add, Heather, is we'll have the benefit, of course, of a full year of API this year. And of course, to a lesser extent Tecumseh, but that's where we are from an estimate standpoint.

For my follow-up, I was wondering if you could share your perspective on African swine fever. Can you give us an idea of your current assessment of the severity of the outbreak in China and what potential implications it might have for Tyson and the overall business?

Yes, Heather. This is Noel again. I'd say that the effect at this point is unknown. It has the potential to be a significant event. As you're well aware, African swine fever has existed in parts of Eastern Europe for a number of years. The fact that it's now in China and appears to be fairly widespread has the potential to make a significant impact. We've not seen that at this point. So unless it would become much wider spread than what it is today or if it would move into other global markets, then it could have a significant impact.

Yes. Just wanted to touch a little bit on the Beef side. And you guys obviously had an extraordinary quarter. And just getting your outlook, normally, the first half of the year is seasonally weaker. But how sustainable are some of the improvement in margins? And then as a follow-up, how do you see the 2019 features playing out between Beef and Chicken? Seems like Beef got a lot last year. How does 2019 seem to be shaping up?

Yes, Michael, this is Noel. I'll take the question. You know, as we look at 2019, 2020, even in 2021, we frankly we don't see a lot of change. The supply appears to be relatively stable. We have a good sense of what that looks like just due to the calf crop that gives us good visibility for at least a couple of years. We're not seeing liquidation at this point of the cowherd, which is an early indicator of what can affect us three or four years from now. It looks like it's plateaued, or at least stable. Beef demand through 2018 was strong, both domestically and in the export markets. U.S. industry exports were up 12% year-over-year. Ours exceeded the 12%. So global demand for beef continues to be very strong. So it is unusual the fact that volumes go up and pricing go up at the same time. We don't see anything at this point that is going to be any different in 2019.

Can you discuss your exposure to pricing changes in the Chicken segment going forward? You operate in various segments, including processed chicken and the choice between buying and growing. It can sometimes be challenging to pinpoint. Can you elaborate on how sensitive the Chicken segment is to commodity prices and what your outlook is for the next 12 months?

Yes, Adam, it's challenging to provide a precise answer because we have numerous pricing scenarios across various customer types. The pricing pressure I mentioned isn't uniform across all products. For instance, in some channels we operate in, we don't experience that pricing pressure, and the same goes for our value-added products. However, there are certain segments of our business where we do feel pressure, as others have noted. This doesn’t occur all at once, as our pricing agreements differ throughout the year. Some are coming up now, while others are due in the spring and summer. Therefore, when I refer to pricing pressure, it's not necessarily applicable to our entire fiscal 2019 nor across all segments.

Yes, Adam, I think Noel's absolutely right on this one. It's one of the reasons we provide guidance to help clarify the impacts for you. I would suggest that the best approach is to review historical pricing and then compare that to our earnings. This will give you an idea of the sensitivity.

Okay. So maybe I'll just take this a different way. And it's again a continuation, sort of Heather's question a little bit different light. In the second half of this fiscal year, your Chicken margins were a little bit over 6%. You're expecting them to get to around 8% in fiscal '19, and in the first half, second half, breakup of the comps are very different. How much of it is simply the absence of some of the negative one-timers that you had in the last couple of quarters versus fundamental improvement in your net margin or net price realization, underlying productivity, kind of net cost recovery from some of the inflationary pressures you had? Just help give us some of the pieces that get us from where you were in the second half of this year to where you expect to be for the full year of 2019.

Yes, understood. Adam, I'm hesitant to break down our profit and loss for next year, but I can highlight some key points. Last year, freight costs significantly impacted our Chicken business, along with live costs mentioned by Noel. These are likely the two main factors that won't repeat this year, aside from pricing impacts. This offers a straightforward way to view the business. I want to clarify, Adam, since you have stepped out of the queue. Remember that it took us until the latter part of last year to implement pricing adjustments to counteract the freight increases. We anticipate some relief from those freight costs this year, especially as fuel prices have decreased. Our current situation appears much more favorable than it did in the first half of last year.

This is Jake Nivasch asking on behalf of Rob. One of my questions was partially addressed regarding freight. However, I have one quick question. In the last call, you mentioned guidance of $42 billion in sales for 2019, but now it's adjusted to $41 billion. Could you provide some insight into the reason for this decrease in guidance? I know you've touched on some of the headwinds, but any additional information would be appreciated.

I'd probably say that the biggest impact is going to be meat pricing. And what really matters for us, of course, is the margin. And you're going to see those meat prices sort of varying. We're very focused on making sure that managing the margin is where we're focused. So I'd look for the margin line, not to the top line.

This is Lubi filling in for Akshay. Just a quick follow-up on Chicken. I know your guidance assumes no further price deterioration, and you're also cycling some of those extraordinary items that you mentioned, which gives you the confidence of reaching that 8% margin target. But are you concerned at all about a possible acceleration in domestic supply growth, which could further upset the balance between supply and demand? I mean, from our perspective, it seems like there are quite a few factors like new capacity, sort of a growing breeder flock and potential improvements in bird productivity that could potentially lead to faster supply growth, so just curious to get your thoughts on that.

Yes, Lubi, this is Noel. Yes, we agree that we are, in fact, expecting increase in production over the course of the next couple of years. Our projected domestic disappearance is in the 1% to 2% range, right? And that's fairly consistent with the demand growth that we have seen in the United States over the course of the last 20 years. So yes, production's increasing. It does depend on the timing of when the plants open and when they come online. But over the course of the next two or three years, which is kind of the timeframe that these facilities are being built and coming online, we're projecting demand to grow at about the same pace as production increases.

Got it. That's helpful. If I could ask another question on M&A. So there have been a few news articles recently, and I know you can't comment on those, but that have suggested that Tyson is placing an increased focus or emphasis on international growth. Can you just comment on how you're thinking about international growth longer term? I mean, it seems to us that most companies have had some challenges in international, given the volatility in FX and geopolitical uncertainty and also your own challenges in international. So just any thoughts about how you're thinking about international growth longer term.

Yes, I can address the question. We expect that around 90% of the growth in global protein demand will occur outside the United States. We intend to take part in that demand growth as economies expand and develop. The first step in this direction is Keystone, which provides a strong foundation for us. My focus remains consistent with that of Tom and my predecessors: to grow our business in Prepared Foods, value-added products, and the international market, while also ensuring stability in the commodity segments of our Chicken, Beef, and Pork operations.

And the only add, I would say two things. One, acquisition or expansion of any business comes with risk. And I don't think if you looked at any of the large CPG companies in the world that are global that you would advocate that they shrink away from this global market. So we think we're going to pursue that growth, and we're going to do it in a sensible, a financial way. And that's my second point. This is a company that's using a very return-focused lens as we look at opportunities to expand our business, and it will be no different internationally than domestically.

This is actually Jihan on for Alexia. Just a quick question in terms of the current trade situation, in terms of how the ongoing trade negotiations are kind of affecting your outlook on the industry. So overall, it seems like the North American trade disputes have been largely resolved by now, but the U.S.-China negotiation's still going on. I know China is not a big market for you, but how do you expect the uncertainties to impact the overall supply-demand?

Yes, you cut out in the first part of your question, so I'm not sure I caught all of it. If I understand correctly the question is with NAFTA.

With NAFTA somewhat resolved, yes.

How do the trade issues with China affect us? Is that...

Exactly.

I'd say that with China, there's nothing but upside at this point. We're not currently shipping product to China, beef, pork or poultry. So if there is any change, I would say that that would provide upside export potential for us.

Got it. Just a quick follow-up on China. So understanding China is not a big market for you, but how does that affect the overall supply-demand? Is there still kind of an increased domestic protein supply because of the trade issue with China?

Yes. To answer your question, Jihan. We think that as we look into fiscal 2019, in total, domestic available protein is going to be up about 1.8%. On a per-capita base because of population growth, that's up a little over 1%. So yes, some growth in per-capita protein available. However, I mentioned the export numbers, I think, specifically on Beef, which was up right at 12%. On Pork, it was up 7% as an industry. Again, our numbers exceeded both the industry benchmarks. So despite all of the trade disputes, global protein demand, our exports continue to grow and increase. So part of the equation with domestic disappearance is exports. There is upside potential to the current forecast of what's in, plugged in for exports.

With that, what do you think your biggest contribution will be in 2019 and beyond?

Good question, Ken. It's really the continuity of what Tom had put in place. It is, in fact, to profitably grow our value-added businesses. There was a question earlier on International expansion. That's certainly a component. It's growing this business in a profitable, sensible way while containing some of the costs that have crept in as well. So we have an extraordinarily strong team. We have a really solid base. We have great cash flow. So all of the initiatives that have started with sustainability, adding and growing our business, that's my focus, Ken.

Okay. So do you think that the total promotional spending across foodservice and retail has changed? If the promotional spending had not been directed towards Chicken or Beef and Pork, would your overall possibilities have been different? In other words, does it really matter where the promotional funds are allocated, whether to Beef, Chicken, or Pork? And does it impact your overall profitability at Tyson?

No, I really don't think it does, Ken, because some of the features that we saw in 2018 where it seemingly, beef was promoted more heavily at foodservice than poultry. If the promotions would have been on poultry rather than on beef, we would've gained on the poultry side. And that's truly the advantage of the portfolio that we have between Beef, Pork, Poultry and Prepared Foods, that we play in all sectors. So it really didn't make a difference to us if Beef was promoted more heavily than Chicken. And if that would happen to switch in 2019, we'll benefit on the poultry side to the detriment of potentially on the Beef side.

Okay. And just my last follow-up is, when you think about Beef for 2019, is there any reason why you shouldn't be at the same levels as 2018, particularly given that you had one quarter that was kind of particularly weak? And given that we've had, call it, two decades of a down cycle, why would we not have at least 2 to 3 years of an up cycle? And I'll leave it there.

Yes. Ken, as we look into 2019, no, our results are not expected to be much different than they were in 2018. The fundamentals are very similar looking into 2019, as to what we just had. So now we're really not expecting any sizable changes. And in the Beef business, it can vary from month to month and quarter to quarter. Cattle can be pulled ahead, they can be pushed back. So what we may fall short in one quarter, typically, we'll make up in the next quarter or vice versa.

So you mentioned that you maintain the Financial Fitness commitment, but you're no longer reporting the synergy targets separately. I guess, how do we square that with the fact that your Prepared Foods margin outlook doesn't seem to be meaningfully different than fiscal '18? I appreciate that's an open-ended target, but given that you're removing that disclosure, maybe you can elaborate on some of the headwinds and tailwinds there. And just will you be rethinking those targets post-Keystone? Should we be waiting for that to close? I guess, I'm struggling with why it's an arduous task to track cost savings versus your targets.

Yes, Jeremy, let me address that. The main issue with reporting is that every project requires an audit, which involves significant administrative work and a lot of paperwork that, quite frankly, does not provide investors with any returns. However, I want to emphasize that our savings programs are essential to our business performance, and we are fully dedicated to continuing those savings efforts. Our teams are actively engaged in all ongoing projects. One question we frequently encounter is how much of these savings translates into profit, and as you noted, several factors influence this. For instance, in the Prepared Foods sector for the upcoming year, we anticipate facing increased meat costs. To manage these costs, we will seek price adjustments and continue to focus on driving cost savings. Therefore, our primary strategy is to maintain a strong emphasis on cost reductions and to incorporate that into our sales guidance.

All right. And just maybe a follow-up on the M&A, open to more international opportunities as a way to diversify against some of the softness domestically. So I guess, first, are you seeing that there is an oversupply of meat and meat products as a structural issue and not a cyclical one? And if so, why the step-up in growth CapEx? And then second, given some of the stops and starts that may give investors pause, what's different about your approach to driving returns in international? And is Keystone the springboard here to a new demand-led strategy? And of course, why is anything better than buying back when you're stock at 10x the low end of your guidance?

There were several questions there, so let me address some of them, and feel free to ask if I miss any. First, regarding buybacks, we've adopted a comprehensive capital allocation strategy. We recently announced a significant dividend increase that benefits shareholders. Last year, we repurchased nearly $500 million of our stock. We've also engaged in mergers and acquisitions and invested in strong capital expenditure projects. We're committed to utilizing all available levers, which I believe is a sound strategy for our business. As for international growth, it's important to note that 90% of the anticipated increase in protein consumption will occur outside the U.S. We want to be a key player in the global food market, and we currently generate nearly $5 billion from international sales. To capitalize on this growth, we must expand our platform strategically, ensuring we apply financial discipline in our expansion efforts. Keystone serves as a robust and well-managed platform that yields good margins and serves quality customers in advantageous locations, and we plan to leverage this as we grow internationally. However, we won't overlook domestic opportunities. There are plenty of prospects in the U.S., and we will apply the same M&A focus we've historically used to explore those opportunities. If there's anything I haven't covered, please let me know.

That's good. If I could just squeeze in one more. It seems like you talked about the promotional activity picking up here. And you mentioned that you're starting to see it maybe in both the foodservice and retail space. Certainly, tracking the QSR space, seems like there is momentum all of a sudden. But can you clarify where that strength is emanating? And I wonder if Chicken pulls a little margin back from the Beef segment in the upcoming quarters.

I don't think it would be appropriate to comment on whether it's coming from Beef or Chicken. We don't have sufficient visibility until, in many cases, the promotions have already been implemented. So I'm going to refrain from answering that question.

Yes, look, sorry, I'll just go back to that. We shouldn't forget, and I've been in this role now almost a year. But one of the questions I got pretty aggressively when I first joined the company was how did I see Beef, and beef was such a laggard. And actually, the point that has been made before I arrived and will continue to be made is that this is a bit of a three-legged stool, and so things work together. And so in terms of the promotions, if you're not promoting Beef, you're going to be promoting one of the others. And the good news is since we're playing in all of the areas of protein, we're going to be able to take advantage of promotions are in play.

I would like to clarify my understanding based on your response to Ken's question. I'm a bit confused because in my experience covering Tyson, the Beef business has always seemed to be more about managing spreads, which you have done effectively. However, I've noticed that when there is ongoing liquidation, it can impact that area. On the other hand, the Chicken business appears to be more about valuation rather than spreads. When there is reduced retail activity and consequently less demand, that product must compete in a more commodity-like market. From what I've gathered over the years, it seems you are better at managing spreads in the Beef business, while demand is significantly more crucial for Chicken. When demand is strong, you can achieve higher margins from Chicken than from Beef. Therefore, I would think you would prefer an environment where Chicken receives the majority of promotions. However, based on your reply to Ken, I realize I may have misunderstood this for a long time, and I'm seeking further clarification.

Historically, Beef margins have not been as strong as Chicken. We would like to see Chicken performing well. The main point is that it's not a disaster when there is a shift in product demand between the two proteins. This highlights the advantage of having a diversified portfolio. I believe that answers your question. You're not misinterpreting the business. It's important to note, as you saw in our slides today, that we are heavily focused on value-added products in our Chicken business. You will notice this in the new products we are introducing, all aimed at higher margins. Beef isn't excluded from this focus. In fact, Noel specifically noted our strong emphasis on developing our Case Ready business. We have previously mentioned our efforts to promote attribute-based products in the Beef sector as well. We're not only looking to enhance value in Chicken; we're applying the same strategies in Beef, even though the base for value-added products is smaller as we expand. Does that help?

Okay. And just my last follow-up is, when you think about Beef for 2019, is there any reason why you shouldn't be at the same levels as 2018, particularly given that you had one quarter that was kind of particularly weak? And given that we've had, call it, two decades of a down cycle, why would we not have at least 2 to 3 years of an up cycle? And I'll leave it there.

Yes. Ken, as we look into 2019, no, our results are not expected to be much different than they were in 2018. The fundamentals are very similar looking into 2019, as to what we just had. So now we're really not expecting any sizable changes. And in the Beef business, it can vary from month to month and quarter to quarter. Cattle can be pulled ahead, they can be pushed back. So what we may fall short in one quarter, typically, we'll make up in the next quarter or vice versa.

So you mentioned that you maintain the Financial Fitness commitment, but you're no longer reporting the synergy targets separately. I guess, how do we square that with the fact that your Prepared Foods margin outlook doesn't seem to be meaningfully different than fiscal '18? I appreciate that's an open-ended target, but given that you're removing that disclosure, maybe you can elaborate on some of the headwinds and tailwinds there. And just will you be rethinking those targets post-Keystone? Should we be waiting for that to close? I guess, I'm struggling with why it's an arduous task to track cost savings versus your targets.

Yes, Jeremy, let me address that. The challenge in reporting is that every project must undergo an audit, which requires significant administrative effort and a lot of paperwork that doesn’t provide any return to investors. However, our savings programs are crucial for our business performance, and we are committed to continuing to save those funds, with our teams actively working on all related projects. A common question we receive is about the impact on our bottom line, and as you correctly mentioned, several factors are involved. For the Prepared Foods segment this upcoming year, we anticipate a substantial increase in meat costs. To manage that, we will explore pricing strategies. To grow our bottom line, we need to maintain our focus on cost savings. Therefore, our priority is to keep pushing for those savings and incorporate that into our return on sales guidance.

All right. And just maybe a follow-up on the M&A, open to more international opportunities as a way to diversify against some of the softness domestically. So I guess, first, are you seeing that there is an oversupply of meat and meat products as a structural issue and not a cyclical one? And if so, why the step-up in growth CapEx? And then second, given some of the stops and starts that may give investors pause, what's different about your approach to driving returns in international? And is Keystone the springboard here to a new demand-led strategy? And of course, why is anything better than buying back when you're stock at 10x the low end of your guidance?

There were quite a few questions you raised, but let me address some of them, and feel free to follow up if I miss anything. To start with buybacks, we, as a company, have taken a comprehensive approach to capital allocation. We recently announced a significant increase in our dividend, which benefits shareholders. Last year, we repurchased nearly $500 million in stock. We've also made investments in M&A and strong capital expenditures. Our intention is to continue utilizing all our options, which I believe is a sound strategy for our business. Regarding international growth, it's important to note that 90% of the increase in protein consumption will occur outside the U.S. We aim to engage as a global food player and currently generate nearly $5 billion in product sales overseas. This is a substantial figure, and to capitalize on that growth, we need to expand our platform responsibly. This doesn’t mean we will pursue any avenue available; we will apply strong financial discipline to our expansion. Keystone represents a strong, well-managed platform that achieves good margins with reliable customers in favorable regions, and we should leverage that as we expand internationally. However, we will not overlook domestic opportunities. There are many prospects at home, and we will approach them with the same strategic focus on M&A that we’ve used in the past. If I missed any of your questions, please let me know.

That's good. If I could just squeeze in one more. It seems like you talked about the promotional activity picking up here. And you mentioned that you're starting to see it maybe in both the foodservice and retail space. Certainly, tracking the QSR space, seems like there is momentum all of a sudden. But can you clarify where that strength is emanating? And I wonder if Chicken pulls a little margin back from the Beef segment in the upcoming quarters.

I don't think it's appropriate to comment on whether it's coming from Beef or Chicken. We don't have enough visibility until the promotions are already in place, so I'll avoid addressing that question.

Yes, look, sorry, I'll just go back to that. We shouldn't forget, and I've been in this role now almost a year. But one of the questions I got pretty aggressively when I first joined the company was how did I see Beef, and beef was such a laggard. And actually, the point that has been made before I arrived and will continue to be made is that this is a bit of a three-legged stool, and so things work together. And so in terms of the promotions, if you're not promoting Beef, you're going to be promoting one of the others. And the good news is since we're playing in all of the areas of protein, we're going to be able to take advantage of promotions that are in play.

First of all, thanks for joining us this morning. Thanks for your interest in Tyson Foods. This concludes the conference call, and I wish you a very happy holiday season.