泰森食品 (TSN) 2017 Q2 法說會逐字稿

Good morning, and welcome to the Tyson Foods Second Quarter Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Jon Kathol, Vice President of Investor Relations.

Please go ahead, sir.

Good morning, and welcome to the Tyson Foods, Inc.

Second Quarter Earnings Call for 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.

Slides accompanying today's prepared remarks are available as a quarterly supplemental report on the Investor Relations section of our website at ir.tyson.com.

Tyson Foods issued an earnings news release this morning, which has been filed with the SEC on Form 8-K and also 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 Monday, May 8, 2017, at 9 a.m.

Eastern time.

A replay of today's call will be available on Tyson's website approximately 1 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.

I'll now turn the call over to Tom Hayes.

Thank you very much, Jon.

Good morning, everybody, and thanks for joining us today.

We concluded a record first half in fiscal 2017, and we're off to a strong start in the second half.

Because the seasonality of our business can distort our earnings from quarter to quarter, we get a better indication of performance trends if we look at the fiscal year in terms of front half and back half rather than 4 quarters.

Q1 was very strong, our best quarter in company history.

We knew that Q2 would be a challenge and it was due to typical seasonality and a late Easter.

There were also some unexpected challenges, which I'll explain as I dive into the segments.

But combined, Q1 and Q2 made for a record first half that saw a 17% improvement year-over-year.

This gives us confidence in reiterating our adjusted EPS guidance of between $4.90 and $5.05 for the current year.

Integration synergies for the second quarter were $173 million or $29 million incremental to Q2 of '16.

Total synergies through Q2 were $649 million and are allowing us to increase compensation for team members in our plants, invest in innovation and build our brands to lay the groundwork for a long future of growth.

So now let's move to our operating results.

In the Beef segment, operating income for the second quarter was $126 million with an operating margin of 3.6%.

Sales volume was down 1.1% as we ran our plants for margin not for market share, as price was down 3.1%, reflecting the continued lower cut-out due to improved cattle availability.

Consumer demand for Beef, both domestically and internationally, has remained strong, and we're seeing especially strong pull for our Open Prairie Natural and Chairman's Reserve premium beef and pork programs, which are showing double-digit growth.

With continued robust exports, strong U.S. demand from consumers, increased cattle supplies, we're expecting Beef segment's operating margin to come in around 5% for fiscal '17, and we believe the operating environment for '18 will be just as strong.

We intend to capitalize on the favorable market conditions and invest the considerable cash generated to fund the growth of our value-added Chicken and Prepared Foods businesses.

The Pork segment's operating income in the second quarter was $141 million with a 10.8% operating margin.

Volume was down 1.3%, while average price was up nearly 11% due to tighter domestic availability resulting from heavy export demand.

With hog supplies increasing 3% to 4% and continued strong export demand, we think the Pork segment's operating margin for the full year will come in around 12% and looks to stay strong into fiscal '18.

Like Beef, Pork is performing well above its normalized range of 6% to 8%.

These commodity businesses are great contributors because of the cash they generate, the raw materials they supply for our Prepared Foods businesses and the total protein portfolio we're able to offer our customers.

So now let's turn to our value-added businesses, beginning with Chicken.

In the Chicken segment, Q2 operating income was $233 million with an 8.3% operating margin.

Average price was up 4.3% on 2% lower volume due to operational disruptions as well as ongoing mix changes away from commodities towards higher-margin products.

Value-added Chicken volume was up more than 4%.

While the Chicken segment fell below its normalized operating margin range of 9% to 11%, it would have been within the normalized range had it not been for the fires we experienced in 2 of our plants.

These unforeseen events cost about $0.04 in EPS and reduced volumes.

Operating margin for the Chicken segment was 9% in the first half of the year, and we expect it to be in the 9% to 11% range for the full year and similar to that again next year.

Demand for chicken looks strong enough to absorb the 1% to 2% additional supply projected by the USDA.

However, we'll continue to balance our supply with our demand.

In the Prepared Foods segment, adjusted operating income was $139 million in the second quarter with a 7.9% adjusted operating margin.

Operating income was adjusted by $52 million for an impairment related to our operation in San Diego.

Average price was down less than 1%, while volume decreased 2.1%, mostly due to lower volume in the foodservice channel.

Synergies for the Prepared Foods segment were $139 million for the second quarter with $28 million incremental to Q2 of '16.

Within Prepared Foods, we continue to see strong growth in some areas and others that need work.

We'll accelerate profitable growth with a very focused fix-and-grow approach.

We're investing in improving our foodservice Prepared Foods businesses, including pizza toppings and ingredient meats.

And as I explained on our Q1 call, this will take about 18 months, and we're progressing as planned.

Additionally, we're looking across the Prepared Foods portfolio to reduce costs by restructuring our manufacturing network.

As we reshape the portfolio through the acquisition of AdvancePierre, divest nonprotein businesses and focus on growth categories in growth channels, we are confident we'll drive long-term profitability.

That said, we are still in the fix-it phase.

And due to volume declines and increased cost in the foodservice Prepared Foods business, we're lowering our expectations for the year to 9% return on sales for the segment.

We expect it to return to normalized range within fiscal '18.

The challenges I've referred to are specific to the foodservice channel within Prepared Foods.

The retail business continues to perform very well, growing both volume and share while delivering strong financial performance.

As we reap the benefits of the investments in our retail branded business, improve the performance in the foodservice prepared business and see the effects of focused M&A and divestiture of noncore assets, we should realize our long-term goal of improving margins while outpacing industry growth.

As I mentioned, we continue to optimize our footprint to support our protein-packed strategy and shape our product portfolio.

2 weeks ago, we announced the intention to sell the Sara Lee Frozen Bakery, Kettle and Van’s nonprotein businesses to acquire AdvancePierre Foods.

With the acquisition, we expect to realize cost synergies of more than $200 million within 3 years.

And it's important to understand that the synergies will come from the combination of the 2 businesses regardless of whether it's Tyson or AdvancePierre.

We see the acquisition increasing the scale of our Prepared Foods offerings with ready-to-eat sandwiches, sandwich components, entrées and snacks.

AdvancePierre brings strong branded presence in the foodservice channel in addition to capabilities that will enhance our innovation pipeline in retail packaged brands and our ability to drive profitable growth at the store perimeter.

So now let's move on to what we're seeing in the sales channels.

Overall, foodservice growth has been driven by chick size as traffic has been flat to declining for 4 consecutive quarters.

QSR chicken, where we're very strong, continues to be a bright spot, with traffic growing in the mid-single digits.

Within broadline distributors, our focus 5 businesses continued to grow in the second quarter, driven by value-added Chicken, Breakfast Sausage and dinner sausage.

At retail, total food and beverage sales line was down 0.5%, while dollar sales were up only 0.4%.

Tyson once again went against the trend, and we were the only top 10 CPG retail food manufacturer to grow both volume and dollar sales.

According to IRI, for the 13 weeks ended April 16, we grew total Tyson volume 5.3%, and Tyson Core 9 posted 5% growth.

In sales dollars, total Tyson and Core 9 were both up around 4%.

We also grew share in 7 of 9 categories.

We continue our proven track record of innovation in retail and foodservice behind successful launches of Jimmy Dean Frittatas and Stuffed Hash Browns, Tyson foodservice fully cooked drumsticks and Buffalo Chicken Crispitos.

We're on schedule to transition all of Tyson retail branded chicken production to no-antibiotics-ever in June, and innovation consumers and customers are demanding.

And we'll be launching organic chicken under our NatureRaised Farms brand in July.

Additionally, we've expanded our Tyson Tastemakers platform beyond e-commerce to include an introductory group of retailers in the Texas region.

So before I turn it over to Dennis, I'd like to say a few words about sustainability.

First, Justin Whitmore joined our leadership team on May 1 as Tyson Foods' first Chief Sustainability Officer, and we're excited to have his leadership as sustainability comes to the forefront of the company.

We recently unveiled our strategic intent to sustainably feed the world with the fastest-growing portfolio of protein packed brands.

As a part of our focus on sustainable food production at scale, we've committed to expanding our efforts to create a better workplace for our team members in our production facilities.

We've always been committed to safety, sound workplace practices and supporting our team members, but we want to do better.

We announced last month, we're taking steps to expand training, improve workplace safety, improve compensation and increase transparency.

We've announced ambitious goals, and we'll be sharing the results of third-party social compliance audits of our plants.

As we raise the world's expectations for how much good food can do, we are raising the bar for ourselves.

By investing in sustainability, we'll create a beneficial cycle that pays for itself over time.

To be successful, we must step up our focus on continuous improvement to reduce waste and costs.

And with the addition of AdvancePierre, we'll be even more aggressive in utilizing Lean Six Sigma practices throughout the organization.

That wraps up my remarks for the quarter.

And now Dennis will take us through the financials.

Thanks, Tom, and good morning, everyone.

We delivered record EPS and operating income for the first half of fiscal '17 as record results in our Beef and Pork segments are providing fuel for growth in our value-added Chicken and Prepared Foods segments.

We remain on track for our fifth straight record year as our diversified portfolio of protein-packed brands and ongoing investments in our businesses continue to provide strong, stable growth.

Revenues for the first half of fiscal '17 were flat compared to prior year and were slightly down in our second quarter to $9.1 billion as lower beef prices were partially offset by higher pork and chicken prices.

Adjusted operating income for the first half of fiscal '17 was a record $1.6 billion, up 8% over a strong comparable period last year.

Adjusted operating income for Q2 was $623 million, which includes $23 million of costs associated with 2 chicken plant fires and $14 million of incremental cost from standardizing our benefits and compensation structure.

Total company adjusted return on sales was a record 8.8% for the first half of the year, with our Beef, Pork and Chicken segments all within or above their normalized ranges.

Our record adjusted EPS of $2.60 for the first half of fiscal '17 represents a 17% increase over $2.22 last year.

Our operating cash flow through the first 2 quarters were just shy of $1 billion, and we spent $467 million on capital expenditures.

This outpaced our depreciation by $153 million as we continue to invest in projects with a focus on delivering high ROIC.

During the first half of the year, we repurchased 10.2 million shares for $653 million, which includes 2.1 million shares for $133 million in Q2.

Our effective tax rate in the second quarter was 34.5% on an adjusted basis.

Net debt to adjusted EBITDA for the past 12 months was 1.7x.

Including cash of $243 million, net debt was $6.2 billion, and total liquidity was approximately $1 billion.

Net interest expense was $55 million during Q2.

For the quarter, our diluted shares outstanding were 370 million.

Pretax ROIC for the past 12 months was just under 19%.

2 weeks ago, we announced our agreement to acquire the tremendous business of AdvancePierre.

We expect this acquisition will close this year in our fiscal third quarter pursuant to completion of the necessary closing conditions.

Our Prepared Foods segment will benefit significantly with its complementary portfolio of products and market-leading convenience food capabilities.

The addition of AdvancePierre is expected to be immediately accretive to EPS and cash flow and is expected to create approximately $200 million in cost synergies within the next 3 years.

These synergies are expected to come from manufacturing, procurement and distribution efficiencies as well as addressing duplicative corporate overhead of the combined companies.

Upon closing, our last 12 months pro forma adjusted net debt-to-EBITDA is expected to be around 2.7x.

We are committed to investment-grade ratings.

And with the strong cash flows we expect to generate organically, along with divestiture proceeds and the incremental cash flows from this acquisition, we anticipate to quickly delever to bring our net debt to adjusted EBITDA down to around 2x by the end of fiscal '18.

In addition, as Tom pointed out, we announced our plan to sell 3 nonprotein businesses currently included in our Prepared Foods segment as we continue to sharpen our focus on our core businesses and expand our protein leadership in retail and foodservice.

We expect to record a net gain as a result of the sale and use the proceeds to delever following the AdvancePierre acquisition.

Now, here are some additional thoughts on fiscal '17.

Please note that because of the timing of the planned divestitures is fluid and could fall into fiscal '18, the following outlook does not reflect the impact of these divestitures.

In addition, this outlook assumes the closing of AdvancePierre in our third quarter.

We expect revenues of around $37 billion as we grow volume across each segment, offset by the impact of lower beef prices.

Adjusted net interest expense should approximate $275 million as a result of the incremental borrowings in our third quarter to fund the AdvancePierre acquisition.

We currently estimate our adjusted effective tax rate to be around 34.1%.

CapEx is expected to approximate $1 billion as we focus on capacity expansion and operational improvements that create long-term shareholder value.

Based on our average share price in Q2, we expect our average diluted shares to be around 370 million.

During the first half of fiscal '17, we produced record financial results while making significant investments in CapEx, network optimization, talent, safety and animal well-being that will lay the foundation for sustainable, long-term growth.

Despite $23 million of incremental costs related to 2 chicken plant fires as well as an incremental $72 million investment in our team related to standardizing our benefits and compensation plans, our record results in the first half of fiscal '17 gives us guidance to reaffirm our annual adjusted EPS guidance range of $4.90 to $5.05.

This range is approximately 12% to 15% over a record fiscal '16 adjusted EPS and represents a 5-year compounded annual growth rate of approximately 20%.

In closing, the back half of the year is expected to be strong, and we're excited about the growth opportunities we see in the AdvancePierre acquisition as we remain focused on investing for the future to deliver shareholder value.

This concludes our prepared remarks.

Denise, we're ready to begin Q&A.

(Operator Instructions) And your first question will come from David Palmer of RBC Capital Markets.

The Prepared Foods profit was lighter than we had expected.

You cite the foodservice sales declines in that segment.

Could you talk a little bit more about the nature of those declines and the outlook for a potential improvement?

And I have a follow-up.

Sure, David.

Yes, the sales were certainly not what we expected, for sure.

Foodservice channel has been a little bit lighter than retail, particularly for us, I would say.

And so we do have some challenges also, and it's predominantly the legacy Tyson Prepared Foods foodservice business.

In order to get our portfolio back to where it needs to be, profitable growth and the ROS we expect, we're doing a number of things: shifting channel mix and customers, to a certain degree, to capture growth; leaning out SG&A; doing some manufacturing work on costs.

And we feel good about where we're headed, but we do still have some challenges.

And certainly, in Q2, the volume didn't help the situation as we had some underabsorbed overhead in some of those plants.

And from the guidance -- or in that specific guidance, you say 9% margin, which, I guess, implies a similar margin for the second half.

Is this going to be a multi-quarter turn in the business?

It is.

The retail -- like I said, the retail business continues to do very well.

It's the foodservice Prepared business, and we do see that's going to take some time to get that back to where it needs to be.

As I also said, in '18, we believe it will be back within the range of the Prepared Foods that we have set up.

And speaking of '18, I know it's a little early, but what is your early thinking about the earnings outlook for that year?

Sure, yes.

We think '18, at least this is the way that I see it right now, that we are going to continue to grow, certainly, where we want to grow, value-added versus commodity, both on Chicken and Prepared Foods.

The Core 9, as you see, continues to do really well.

The premiere of the grocery store is doing fantastic.

We benefit from that.

And certainly, the products that we're focused on in foodservice, the focus 5 products, are doing very well in broadline distribution.

So we just talked about prepared beef looks to be good next year as it is this year.

The spot is good.

5% is where we're saying we're going to wind up.

Supply is looking very strong.

Pork, I'd say, will benefit from livestock supply, very strong export markets.

And we'll deal with more slaughter capacity, which we talked about in the past, coming out in the industry, still above the normalized range is where we see it.

So Pork feels good.

Chicken will benefit from the move to NAE.

Just announced today moving towards organic in July.

And we'll have a better mix.

So Chicken will be within the range is the way that we see it today.

And then just as we continue to drive the acquisition synergies, I feel great about where we're going to wind up longer term with Prepared Foods.

So not necessarily coming on '18, but that normalized range, I think, will become something for us to take a look at because the synergies, I think, are going to be exceptional, also revenue synergies beyond cost.

So I hope that answers your question.

The next question will be from Adam Samuelson of Goldman Sachs.

Maybe digging a little bit more into the Chicken performance in the quarter.

The profit in the segment was down $114 million year-on-year.

I think based on all those things that were disclosed in the 10-Q, I can isolate about $80 million of that between the plant fires, feed, compensation.

You alluded to higher grow-out and outside meat purchases.

But you also had a pretty nice benefit from price mix year-on-year.

So I'm hoping if you could just talk about the Chicken business and maybe the part of that bridge that we're missing and maybe the impact of that as you think about the balance of the year.

Sure.

Yes, as you said, I think we had a really good quarter, but for the fires, which we don't look past.

We are certainly focused on the root cause of those to make sure that's not, to the extent that we can control it, part of our future.

But Q3, we ended up -- sorry, Q2 ended up at 8.3%.

This is as the effect of the fires, really, put us in a situation where we felt like we had a great quarter running.

And then it's not just the cost of the fires, but also the volume that it cost us, that certainly impacted us.

The other thing we haven't talked about much is that there was AI events during the quarter, which we just came in and out of, I think with a very strong approach.

So for the balance of the year, I think we feel great about it, in the middle of the normalized range between 9% to 11%.

We expect our value-added to continue to grow, and that's both frozen and fresh, taking advantage of low-cost raw material, add equipment capacity.

The capacity we just added this last year is almost full, and we're in the process of adding more.

Our mix is improving, focused on reducing the cost structure.

As I mentioned, the CI plan is continuing to drive continuous improvement, continuing to drive more and more focus on the right costs and getting waste out.

And our Chicken business continues to improve.

We're growing in the right areas, and I think we're going to see that continue to strengthen.

Okay, that's some helpful color.

And then maybe a longer-term question.

And, Tom, I want to go back to something you said on the AdvancePierre call a couple weeks ago, that there's a new CEO, new management team and a new strategy for Tyson.

And I appreciative some of the discussions at CAGNY and more recently about the sustainability efforts.

But maybe talk about how investors could actually perceive that change in strategy as an impact to the financial results.

And I mean, AdvancePierre, I mean, I think investors could have imagined Tyson doing that acquisition a year ago.

So it's not clear that AdvancePierre isn't still evidence of a new strategy, but maybe talk a little bit about how -- what's really changed within the organization outside of the leadership team to -- and how investors can take -- can look at that.

Sure.

Yes.

I'll address that, Adam.

We finished our strategic planning process as a company the end of February, beginning of March time period.

And part of that was to make sure that we had a razor-sharp execution of where we want to play, in addition to where we don't want to play and getting a better understanding of the role of our businesses in the portfolio, whether they're value-add or commodity.

The discussion about AdvancePierre has been going on for some time.

And as it relates to us being in a position after closing out our strategic focus work, it was clear to us that the perimeter of the store, convenience channel, being in proteins, was something we wanted to continue to sharpen and play at, at a higher level.

So for us, that acquisition certainly plays in all those spaces.

So for us, it's about growth, growth continually.

We certainly know that packaged food has had its challenges.

And as we look to continue to invest in areas that consumers want, this became absolutely crystal to us that it was going to be a fantastic acquisition for Tyson.

So the way to think about why now versus then -- also, I mentioned this on the call when we talked about the AdvancePierre acquisition, their team has done an amazing job of putting that company in a place where they have taken a lot of cost out.

They've refocused on growth.

They have continued to excel at practically everything that they're doing through a very disciplined approach.

I'm really looking forward to having them join the team and help us in the areas that we don't have the prowess that they do.

So for all the reasons that I mentioned and, hopefully, the timing is explained there, I think this is going to be excellent for our shareholders.

The next question will come from Ken Goldman of JP Morgan.

Could you just help me clarify, I'm a little confused, and I think some investors are, too, exactly what's included in guidance and what's not from AdvancePierre?

I understand interest expense guidance includes it.

The -- it seemed from the press release like sales exclude it, but I wasn't 100% sure on what you were saying earlier about earnings.

If you could just walk me through that, I would appreciate it.

Ken, this is Dennis.

We are including AdvancePierre, but the way we think about it is more like 1 full quarter in our fourth quarter.

We're not exactly sure in June when it closes.

So it has a little bit of an impact there.

But to be clear, it is in our forecast.

For every line item?

Just to be sure.

Yes.

One thing I would call out, Ken, real quickly, though, is we will have merger and integration costs.

And so we will separate those out.

No, sure.

I understand that.

And then my follow-up is I wanted to ask a little bit about going fully antibiotic-free in chicken, which, I think, long term is clearly the way the market's going.

Some of your peers we've talked to, though, have talked about maybe some margin struggles initially when this happens because your costs go up faster than your pricing can necessarily be taken.

So first, I'm curious, is this something that you expect in your -- to happen in your business as well?

And is that in guidance?

And secondly, if not, I'm just curious, what would be different for you than maybe some of your smaller peers out there that have sort of expressed this concern?

Sure.

So, Ken, of course, I won't talk about our peers, but what I will say is that this is not a brand-new thing for us.

We've talked about how NAE has been something that we've been working on.

And as we continue to improve operations, it puts us in a position where we were able to go the final step.

The cost structure is anything that would be impacting the cost structure certainly in our guidance.

But I would say that Noel White and Doug Ramsey and the entire team has been pushing progressively just to get us in a position where we can execute NAE and make sure the cost structure is as good, if not better.

So that is -- what we learned through the process is that it continues to make us better as we push ourselves.

So I can't speak to peers necessarily in our industry, but I can tell you that for us, we feel great about our cost structure and great that we're going to be NAE across the retail brand engine.

The next question will be from Farha Aslam of Stephens Inc.

A question about acquisitions.

Could you just remind us exactly how much in terms of synergies you expect from the Hillshire transaction now and the $200 million from AdvancePierre?

If we think about generally, is there a target that you have of how much needs to be reinvested back into the business and how much you anticipate letting fall to the bottom line?

Sure, yes.

As it relates to the Hillshire mill, I'll have Dennis just talk about that real quickly.

And then let me start by saying the 2 are very different.

We invested a lot, as you well know, in innovation, brand building and setting ourselves up for continued growth on the Hillshire acquisition.

So certainly, there was a lot of reinvestment.

We don't anticipate the same for AdvancePierre.

I think those -- what we'll see is that revenue synergies will come with time, and we will be focused on getting the redundant costs out.

And it's both teams.

I was with the AdvancePierre team couple of weeks ago, and we talked about it.

This is a team event for all Tyson team members, when they become Tyson team members, for us to focus on cost because it's there.

But I would say, as it relates to investing that back, that was more of a Hillshire phenomenon.

Dennis?

As far as the synergies go on Hillshire, we initially started at $500 million, took it up to $700 million cumulatively.

We backed it down to $675 million simply because there is going to be some more carryover into 2018.

So again, think about $675 million on a cumulative basis and more than $700 million in '18 and beyond.

That's helpful.

And then if -- could we go back to Chicken?

You'd said very specifically that you expect margins to be in the normalized range into next year as well.

Is there something with the plant fires that will continue?

Is there a level of investment that we need to think about that will keep those margins in the normalized range, whereas before, given the low feed costs and very good pricing for commodity chicken, there was an opportunity for it to be ahead of your long-term, normalized range?

Yes.

So a couple of things, Farha.

One is we're not giving specific guidance as it relates to '18 yet.

What we're doing is telling you how we're feeling about how it's setting up.

As it relates to '17, the second half of our year looks to be within that range.

And based on everything that we see now, we have improved our mix.

We're continuing to do all the things that we want to do.

But as it relates to the plant fires, that's going to be something that will be behind us.

It's not any continuing expense.

The team has done an amazing job of putting us back in the right footing.

But as we see it today, improving our mix, focused on reducing the cost structure, taking advantage of the low-cost raw material environment, look at -- talk about our equipped capacity, all those give us the full confidence that between 9% to 11% is where we wind up for '17.

The next question will come from Heather Jones of The Vertical Group.

I had a quick question on Beef.

Your outperformance jumped dramatically during the quarter, and just was wondering if you could give us a sense of the cause.

Because if we look at beef prices during the quarter, they were up less than live cattle costs were, particularly in the northern regions, which I know you all tend to be more exposed to the northern regions.

So I was wondering if you could help us understand how that -- what drove that outperformance.

And the second part of that question is, your confidence with 5% margins for the year, given what we've seen in beef margins over the last few weeks, given the rally in live cattle costs, just it seems like maybe you all are doing something different in that business.

And just help us understand what's going on there.

Sure, Heather.

Like we said when we were talking at the CAGNY and otherwise, Q2 is always a little bit choppy, and you never know what's going to come at you, certainly as it pertains to beef, that's true.

I would say that our team has done an incredible job.

Steve Stouffer and the team in our Fresh Meats group continue to execute against the fundamentals.

And without commenting against our competition, I feel good about what our team does.

'17 continues to look strong for us.

As we are in the Midwest, there should be more cattle coming to market for us.

We believe the margins for this year, as we said, will be at an exceptional level.

Q1 was very strong.

Q2 came back a little bit.

But as it looks like Q3 and Q4, they have the potential to be very good.

We certainly didn't have -- it wasn't without some challenges, certainly, in Q2.

It's been up and down from both a supply and demand standpoint.

But what I'd say is, for us, just focusing on the fundamentals and making sure that we're driving the right thing, that's what continues to set us apart from our view.

And then on Pork, a similar -- sort of a similar question.

I noticed your volumes were down.

And I mean, weights were down a little bit during the quarter, but it seems like more that your head had to have been down despite head for the industry being up.

So I was wondering if this was a margin versus market share decision and if that's going to be your strategy going forward with the new slaughter capacity; if you're going to just choose margins over market share and possibly kill less just to be able to maintain that.

And just give -- if you could give us some color on that.

Yes.

I'd say that, that is the case, Heather, but we'll manage our business the best that we can for Tyson.

And certainly, there seems to be a large supply of hogs coming, 3% to 4% more head or so.

What's nice is the demand for U.S. pork continues to be extremely strong.

None of us see any signs of that slowing down.

And exports have been incredible.

So that's -- that, for us, as long as that continues, that's going to put us in a good position.

So sustained demand, great hog supplies.

We remain in balance, and our thoughts for this year are we're feeling good.

And like I said on my prepared remarks, '18 is looking to be very strong, above the normalized range.

Not as good as -- probably as high as '17, but above the normalized range.

And so that's the way that we see it.

The next question will come from Akshay Jagdale of Jefferies.

This is actually Lubi filling in for Akshay.

Wanted to ask a question on your Chicken segment.

So if I just look at Chicken segment margins over the last maybe 1 year, 1.5 years, it does seem like they've trended down somewhat, although that's been primarily related to -- looks like some execution issues maybe on this mix shift strategy towards value-added, which is, obviously, a key element of the future growth prospects for that business.

So can you just talk maybe a little bit about what's driving?

There seems to have been, I guess, a little bit more in terms of execution issues over the last couple quarters.

And then does this have any impact potentially, in your view, on the long-term growth prospects for this segment?

And then I have a follow-up.

Yes.

So Lubi, I would say that execution issue -- the plant fires, certainly, are an execution issue, I guess, you could say, something that we don't certainly plan for.

Tyson has been much less volatile, I would say, than the typical commodity player.

Diversification of our product types, pricing models, reduced export closure really helps us stabilize margins.

So as we said, ex the fire costs, $0.04 EPS would have been added back.

I think that would put us in a great spot, right within our normalized range.

So the continued strong execution against our business is going to give us long-term EBIT growth.

Where we will see some differences is the lack of volatility.

And certainly, as it pertains to our business, that's what we play for.

Okay.

And then the second question, also on Chicken.

So at CAGNY, you spoke about some new products that you have planned in the Chicken segment.

And you also mentioned in your prepared remarks today about ongoing mix changes in the Chicken business.

Could you just talk a little bit about the progress that you've made on some of these initiatives, maybe where we are in terms of timing and rollout and just generally, how you're thinking about the potential contribution from these new items into fiscal '17 and '18?

Yes, certainly.

We continue to be very focused on conversion of dark meat into, what I call, first-run products.

That's something that the team has made tremendous progress against.

And so those are a number of different forms to speak to your question directly.

The 100% NAE on the Tyson retail brand will be up and running by next month.

So we love that because it's making a lot of progress in a very consumer-relevant area.

It's a bit of a hot-button issue for, certainly, consumers, but we feel that, that is going to set us apart as the world's largest NAE producer of chicken.

Also, we talked about NatureRaised Organic.

So that comes in July, but that is also going to be -- it's a growing space.

It's much smaller, for sure, but it's a growing space for us.

And we feel like that's going to be an important development for Tyson.

And I'll just wrap up with ground chicken.

Ground poultry, predominantly, turkey, is a $1 billion space.

For us, we feel like we can play there and play effectively.

And so we're extremely excited about that launch as well, and that's -- all those things that we talked about at CAGNY are on track.

(Operator Instructions) The next question will be from Michael Piken of Cleveland Research.

I just wanted to talk recently about some of the recent storms in Colorado and the impact that might have on cattle supplies and weights this year and how much of an impact you think that's having on packer margins over the last couple weeks.

And is there any sustainable impact from that?

Certainly.

Certainly, Michael, there's been an impact.

First off, I'd say our hearts go out to those cattlemen, for sure, because by some estimates, there were thousands of cattle lost in the storm.

So we are very sensitive to that, and so we certainly want to make sure that we express that.

Our plants typically have enough breadth and scale to adjust, and it looks like there's going to be -- certainly, some of -- there has been some effect.

There is some effect.

Anything that we see today is built into our outlook.

So again, tragic loss for the producers there.

But for us, we feel like we're going to be in a fine position going forward.

And hopefully, something like that doesn't happen again.

Okay, great.

And then switching over to Prepared Foods.

Just trying to understand, by the time, I guess, fiscal '18 rolls around, I mean, would you expect AdvancePierre Foods to be accretive to your Prepared Foods margin?

You talked about getting back to a normalized range.

Or is that something that you would expect initially because of increased brand spending, that it might be a little below your normalized margin on a stand-alone basis?

And as you invest in the business that, over time, it would reach your normalized range?

You're welcome.

Two things.

Absolutely accretive.

Second thing is it's going to put us in a position, as we look long term, to look again at what our normalized range is for Prepared Foods because that's going to be a tremendous margin business for us.

But more so, just continue to come back to growth.

We are acquiring a company that has been growing, is going to support our growth, not just in the convenience channel and in the retail store perimeter, but there are capabilities that we're going to leverage for our Tyson brands that we already have in the portfolio.

So as we continue to make the most out of this, it will not be reinvestment in the brands per se that AdvancePierre has, although we're going to support those the way that they've been supporting them.

So it's going to be really focusing on the capabilities this brings to excite consumers against where they're headed.

This is the reason why we did it.

But thank you.

The next question will come from Ken Zaslow of BMO Capital Markets.

Just a couple of questions.

As you evaluate the AdvancePierre acquisition, can you talk about -- you did say that the $200 million of synergies is both combined as well as individual.

Did I hear that right?

And can you talk about the buckets to which the synergies will come from?

That's my first question.

The second question is, so as you evaluate the Prepared Foods margins, what will go into the determination of where you think that will go?

Because again, you started off with Hillshire as 9% to 11%.

We're kind of now in that 9% region.

Is there a potential where we could see 13%, 14%, 15% margins?

How do you think about that?

Nothing's off the table in terms of margin upside.

What I would say is we are not going to sacrifice growth.

We're going to continue to grow.

So we want to make the right margins.

We want to have affordable food, and we want it to be -- continue to be growing is what we're focused on, Ken.

So as it relates to the question around the synergy buckets, you got it right.

Absolutely, it's going to come from both sides.

We feel like as we get through the integration process, we're going to find that AdvancePierre is going to make Tyson -- legacy Tyson better.

The whole company is going to benefit.

In terms of the specific areas, clearly, procurement, we see manufacturing.

Like I talked about, logistics, for sure.

So warehousing and transportation, clearly, redundant overhead with 2 publicly-traded companies.

It's too soon to close -- disclose the exact size of that, but the synergies are coming from both businesses.

And we are going to, on top of cost synergies, grow.

So we feel very comfortable with the overall target.

It's going to put us into a position of great confidence to improve the margin structure over time.

And again, just to emphasize, not to sacrifice growth.

Okay.

And just, Dennis, just one housekeeping question.

What is the costs that are in 2017 that won't recur in 2018 aside from the fire?

I just wanted to kind of aggregate them up because you're including in your underlying performance, but I think there are some costs that may not be recurring.

So just (inaudible).

That's a great question, right.

As a reminder, last quarter, we talked about vacation and holiday pay and those kinds of things to true up both companies.

And the cumulative number was about $58 million.

And about 80% of that was more or less a onetime event, so, call it, $50 million or so.

And then you're right, the plant fires would be in there as well.

The next question will be from Brett Andress of KeyBanc Capital Markets.

I just wanted to go back to Chicken because relative to 90 days ago, really, the segment guidance range, I think, has been stepped down somewhat even when you exclude the cost.

And at the same time, I think the outlook for the industry, we would argue, has improved pretty meaningfully.

So I was hoping you could kind of square those 2 and maybe provide a little bit more color as to why we shouldn't see the improvement and maybe some would have expected in Chicken as we go through the balance of the year.

So I'll come back to just kind of, Brett, tagging on to the question that Ken asked is that our margin's going to be also indicative of where we are planning to grow.

So we are not going to have a margin structure that does not allow us to continue to grow and provide our products at the right prices.

So for the range, I think 9% to 11% is the range we feel comfortable about with having a growth profile.

So delivering within that for the year, we feel very strong about.

And I will say that we are very bullish about what Chicken looks like for '17 and for '18, frankly.

So continuing to improve our mix.

We're off to a very strong start in Chicken for Q3.

May is traditionally the start of the grilling season.

Margins tend to follow that.

Inventories are in a good position.

We're operating in a range that really puts us in line with our targets and the ability to continue to drive growth at those margins rates -- margin rates.

So that's what I'd say.

The next question will be a follow-up from Heather Jones of The Vertical Group.

I wanted to go back to guidance.

And I know to -- in answer to someone's question, you've said that AdvancePierre is implied in all lines of guidance.

So I was just curious when the outlook language for Prepared for the full year, when you talk about it being margins approximating 9%, my gut is that comment excludes AdvancePierre, but I wanted to double check on that.

No, it includes AdvancePierre.

If anything, we might be modestly conservative on that.

Can you help me understand?

Is there some -- what's the word I'm looking for, some seasonality to Advance's?

Because I mean, their margin structure is robust.

And I know you're only talking about them being in there for 1 quarter.

But still, you would think that would bring up the total pretty substantially.

So can help you understand?

Is there some major seasonality that Q4 is not a big margin quarter for them or something?

Certainly, they have a very seasonal business as it relates to schools.

And so some of that product will certainly flow through at the beginning of the school season, but then sort into what would be our Q1.

So the -- we want to make sure that what we're doing is integrating this in the right way.

And to be clear, Heather, we're not giving guidance right now.

What we're talking about is how we feel about the business, and we feel like the margins are going to be certainly strong.

But we have to learn more.

So we'll be prepared in Q3 to talk more specifically about '18 guidance.

But the feeling right now is that because their business does start to pick up during the school year, we got to see what that looks like as we get the 2 businesses together.

Okay.

And then I just -- and one more follow-up quickly.

So sitting back and listening to this call, my take is you're intending to grow Prepared and Chicken on the top line pretty substantially.

And so those margins may be restrained as you invest, whereas for -- it sounds like your Beef and your Pork businesses, you intended for those to be essentially cash cows to fund that growth.

So we talked about earlier, in the Pork side, there is significant slaughter capacity coming on.

My estimate is somewhere in the 10% to 15% range over the next 1.5 years, which is going to outpace hog supply growth.

So going back to that whole margin versus market share comment.

In order to retain the cash cow nature of that business, I mean, should we think that you all would be willing to even close a plant if that's required to maintain the strong margins that we've -- that, that segment has enjoyed over the last couple of years?

Heather, we're not going to talk about those sorts of things here, but what I can say is that there is going to be some level of equilibration in the industry.

We see that the segment, the Pork segment, will still be above its normalized range for '18.

But the other thing we just haven't talked a lot about is the export demand.

Export demand remains very strong, and that should benefit us.

We see we are a preferred pork supplier, particularly to the Pacific Rim markets.

There is a lot of questions, but I would say that, for us, we feel good.

We feel good about, certainly, '17 and '18 setting up a little lighter based on some of this capacity coming on, but we still think '18 sets up well.

And the next question will be a follow-up from Ken Goldman of JP Morgan.

I know you're hesitant, I understand why, to give details on AdvancePierre's impact on this year, and I realize it's impossible to know.

But most of the questions I'm getting from investors this morning, and I imagine most of the questions my peers in this call are getting, too, are just trying to figure some of this out.

So if you can indulge me for a moment, I think of it this way.

AdvancePierre generates maybe $55 million, $60 million a quarter.

That's the benefit you're getting in the fourth quarter.

Interest expense guidance went up by $45 million.

That's the cost.

You're talking a net benefit of maybe $10 million to $15 million in added, I guess, net income from the deal before any synergies.

Is that reasonable for us to look at it that way?

Or am I missing something important in that analysis?

It's pretty close, Ken.

The one thing you're missing is incremental depreciation and amortization.

We haven't had that valuation work done.

So we don't know what that number is, so that would take a lower bit off.

On the interest expense side, it really depends entirely upon when we close.

So is it early June?

Is it late June?

That's the swing there.

And, ladies and gentlemen, this will conclude our question-and-answer session.

I would like to hand the conference back over to Tom Hayes for his closing remarks.

Thank you very much, gang.

Great questions.

And I'll just say, again, we wrapped up an excellent first half at Tyson.

We feel the second half is off to a solid start.

We feel great about where we are now, and we're well positioned for fiscal '18.

And we'll continue to be as transparent as we can be on all the things that are going to help you value our company.

And we're really looking forward to this acquisition and making it a great thing for you as investors and Tyson Foods family.

Thank you for your interest.

Appreciate it, and have a great day.

Thank you, sir.

Ladies and gentlemen, the conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect your lines.