Logo of jester cap with thought bubble with words 'Fool Transcripts' below it

Image source: The Motley Fool.

Tyson Foods Inc. (NYSE:TSN)
Q4 2017 Earnings Conference Call
Nov. 13, 2017, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Tyson Foods Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw from the question queue, please press star then Q. Please note that this event is being recorded. At this time, I would like to turn the conference over to Jon Kathol, vice president of investor relations. Please go ahead, sir.

Jon Kathol -- Vice President of Investor Relations

Good morning and welcome to the Tyson Foods Incorporated 4th Quarter Earnings Conference Call of the 2017 fiscal year. On today's call are Tom Hayes, and Chief Executive Officer, and Dennis Leatherby, Executive Vice President, and Chief Financial Officer. Also with us is Stewart Glendenning who will become our Chief Financial Officer effective February 10th, 2018. Of course, it's a little early to expect him to answer any questions. 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 release this morning which has been furnished to the SEC on Form-8K and is available on our website at ir.tyson.com.

Our remarks today include forward-looking statements as defined in the Private 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 discussion of the risks that can affect our business.

I would like to remind everyone that this call is being recorded on Monday, November 13th, 2017 at 9:00 a.m. eastern time. A replay of today's call will be available on Tyson's website approximately one hour after the conclusion of this call. This broadcast is the property of Tyson Foods, and any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Tyson Foods is strictly prohibited. I'll now turn the call over to Tom Hayes.

Thomas P. Hayes -- President & Chief Executive Officer

Alright. Thank you very much, Jon. And good morning everybody and thanks for joining us as we wrap up another record year. I wanna start by acknowledging the announcement about our CFO transition from Dennis to Stewart. We have companywide townhall meetings after these earnings call each quarter. We call those Team Talk. We're absolutely thrilled that Stewart can be here with us, so he has a chance to meet folks in person. This is Dennis' second to last earnings call, so it's bittersweet, Tyson has had the pleasure of having Dennis on the team for many years as you know. He's been the CFO since 2008, and nearly 30 years with the company, countless contributions, he's been an integral part of my first year as CEO. So, Dennis, on behalf of everybody at Tyson, let me just publicly say thank you for everything you've done for the company, we appreciate you, we thank you, and we're going to look forward to having a proper send-off in the spring. But right now, Stewart also welcome. Thanks for joining us today, as you know you have some big shoes to fill but we're happy to have you, and just thrilled you decided to join the Tyson Foods family, and we're looking forward to the massive contributions we absolutely know that you'll make.

Stewart Glendenning -- Chief Financial Officer

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

Thomas P. Hayes -- President & Chief Executive Officer

Excellent.

We have some work to do, so let's get to it. We delivered our overall goal to at least 4% operating income growth. EPS growth in the high single digits. And 3% volume growth in value-added products.

Fiscal 2017 was a year of great change. Despite some challenges our team remained focus on delivering long-term for our shareholders and driving demand to consumer products to innovation, customer growth, and through category leadership initiating to transformation to a more agile and efficient organizational structure to accelerate growth and sustainability.

Not only did we deliver central results, but we also strengthened our ability to lead change in an avid marketplace while delivering ongoing financial fitness.

In the fourth quarter adjusted EPS was up 49% over last year, and fully year adjusted EPS was up 21% to $5.31. Turning the page on a significant company milestone, we successfully the integration that synergy captured related to Hillshire with three years synergies totaling $670 million. We now pivot to our ongoing fitness program in which we expect to 200 million in savings in fiscal 2018 through a combination of synergies through the integration of AdvancePierre, and other cost savings. As I've stated before, while the majority of the Hillshire synergies were invested in growing the company, financial fitness will fall directly to the bottom line.

Looking at the top ten CBG retail manufacturers in 2017 our core line product lines in total Tyson outperformed total food and beverage in dollar growth and outperformed all but one company in volume growth. As expected, we saw volume decline related to pricing we decided to take in a few categories. I'll talk more about that later.

Now, let's move on to the operating segments and take a look back at Q4 and fiscal 2017. All operating income and operating margins that I'll make are on an adjusted basis. In the beef segment in the fourth quarter, we produced operating income to $313 million with an 8.2% operating margin. Sales volume was up 3.3% on 6% higher average price. For the fiscal year, operating income was a record $885 million with a 6% operating margin. Sales line was up 1.7% on 4/10ths of a percent higher average price. The beef segment benefited from cattle availability, strong domestic demand, and increased exports. As we begin 2018, industry cattle supply are projected to increase to 1 to 2% this year, and we expect ample supplies in the regions where our plants are located. The strong export is expected to increase global demand. We believe that beef operating margin should be above 5%.

In the pork segment, fourth quarter operating income was $124 million, with a 9.1% operating margin. Sales line declined 1.2% as average price increased 11.7%. For the fiscal year, operating income was a record $648 million with a 12.4% operating margin. Sales line for the year was up 6/10ths of a percent on 6.1% higher average price. In 2017 the pork side benefited from strong exports, and we expect this to continue into 2018. As we begin our fiscal year, we're seeing contra-seasonal compression as new capacity online. The industry is in a transition while new facilities secure their hog supplies. This is playing out as we expected, and the impact is built into our guidance assumption. With hog supplies projected to increase 3% in fiscal '18, there should be ample supply. We think our production capabilities will give us an advantage in the long-term. We anticipate our pork segment margins will be above 9% for the year, while this doesn't reach the level of performance in 2017, it's still above 6 to 8% normalized operation range.

Both our beef and pork segments despite tight labor markets. We believe our efforts in increasing wages, running chain feeds efficiently, focusing on safety and staffing have resulted in less turnover and improved efficiency now and will so in the long run. Also in the beef and pork segments, we saw record sales and volumes for our open prairie natural brand of fresh meets. Consumer demand is growing double digits for our no antibiotics ever and no added hormones added natural fresh meats. We intend to provide consumers and customers with the products they're looking for. Favorable market fundaments maximizing revenue on a per head basis, and operational excellence at the plant level contributed to our beef and pork segments record performance for this fiscal year.

In the chicken segment, in the fourth quarter income was $322 million with a 10.6% operating margin. Volume was up 4.1% on 3.7% higher price. For the fiscal year, chicken segment operating income was more than $1.1 billion with a 9.8% margin. Sales line was up 1.2% attribute to strong demand of incremental volume from AdvancePierre. Average prices were up 3.1%. Chicken demand remains strong. With our leading brand position, Tyson has an advantage, strong growth in premium and branded chicken products was a key driver in sales dollar growth. Converting our Tyson to no antibiotics ever was a significant accomplishment in 2017. We have been very successful from both a production and sales perspective. For Tyson frozen, fully cooked chicken sales have responded well to increased advertising highlighting the NAE attribute. Volume and share has been growing now for five consecutive quarters.

In FY '17 we increased dollar and volume share 1.2 points and 1.7 points respectively across channels. We're continuing the evolution of the Tyson master brand; we're in the process of modernizing our retail packaging and graphics. This will start showing up on shelves in early calendar year 2018. Additionally, we continue to increase our focus on Tyson branded innovation with 86% of our new products scoring either outstanding for ready now, to only 30% in the competitive benchmark. This gives us great confidence in our pipeline of new products.

In food service, our chicken sales volume increased more than 10% with value-added products outpacing the category due in part to our QSRs customer's successful limited-time offers featuring chicken. Within broad-line distribution, Tyson has a one-third share of total and continues to gain share driven by double-digit growth and value-added Tyson branded chicken. To wrap up the chicken segment in fiscal 2018, we expect operating margin to improve around 11%, importantly with around a 3% volume growth.

Moving on to the prepared food segment, in the fourth quarter, operating income was $152 million with a 6.7% operating margin. On our third quarter call, we said prepared foods margin would be between 7 and 8% for Q4. We came in just below projections due to our decision to buy out a raw material supply agreement which sets up well for FY '18 and beyond. Excluding the short-term impact to that change, we were in line with our expectations. Volume for the quarter was up 9 1/2 % with sales prices up 12 1/2%. Incremental volume from AdvancedPierre was the primary contributor to the volume increase in Q4 offset by some seasonal softness in overall food service volume.

For the fiscal year, prepared foods produced $675 million in operating income with an 8.6% operating margin. Volume for the year was up 3.2% with average prices of 3.6%. Based on higher food costs, we took price increases in some categories, while there's been an expected reduction in volume and share, it was necessary to position ourselves going into fiscal '18. I'll also note that some of the brand volume declines in Q4 being offset by growth in our customer brands of business. Brands are very important to us. While we're investing in our brands for long-term growth, our relationships with our customers are just important. Customers look at us for category leadership and to drive growth through our Tyson brands in addition to being a reliable supplier for their brands. This is critical to driving relevance and total category growth.

We have some smaller emerging brands we call our rapid growth brands, and we're pleased with how well they're doing. Adele's continues on its growth projection, and Hillshire snacking, and Golden Island premium jerky are gaining traction, and we expect this to continue into fiscal 2018. We're strengthening our foundation in prepared food, Sally Grimes has her team in place, and her hard work in setting up the business for long-term success through a simultaneous focus on innovation and efficiency. The first quarter in prepared foods is off to a strong start, as we expected, retail volume and share are likely to be down in Q1 for hotdogs, smoked sausage, and breakfast sausage, but for the year we expect growth. We expect the prepared food segment to grow volume around 10% and produce returns between returns between 11 and 12% for fiscal 2018.

As we closed the sale of three non-protein business and further integrated AdvancePierre, we will continue to enhance margins in this great business.

Now I'd like to turn from the segment reports to our customer channels. In the broadline distribution channel, we see both volume and dollar expansion. Total broad line volume grew 1.7%, while Tyson grew 4 1/2%, an increased share. Our focus five sales grew 10% over last year, nearly six times the rate of broad line distribution in total. The Focus Five categories represent more than half of our total foodservice volume. In the retail channel, consumer trips are up, but the units purchased are down. This is believed to be attributed, at least in part, to the impact of the hurricanes. We continue to focus on innovation and brand building, and we have increased our total points of distribution on new products by more than 1,200 points. We're also expanding our footprint in retail stores. An IRI shelf audit showed that we gained an average of 4.3 linear feet per store in the U.S. over the previous year. That's 46 miles of additional shelf space overall.

We have a strong pipeline of retail innovation with the successful of the veal kettles, more Hillshire snacking expansion, and a stronger ingredient meats portfolio coming in fiscal '18. Our innovation vitality index was 13% for the fiscal which is the best in class range. The C store channel, Convenience Store News recently recognized three of our products in its 21st annual best new products awards. Our Hillshire Farm bacon, gouda, premium chicken sausage, our western omelet from AdvancePierre, and our ham and cheese stuffed Bosco sticks. Bosco sticks are stuffed bread sticks that are primarily sold to schools, but marrying Tyson's scale and innovation expertise, with the unique manufacturing capabilities of a small acquisition, we were able to develop new products for different channels. With AdvancePierre we're looking forward to more of this type of innovation and growth.

Today, we're announcing the acquisition of Original Philly Cheese Steak Company, one of the country's leading producers of raw, and cooked Philly style cheese steak and components and advertisers. This is a great tuck-in acquisition of a company highly regarded in the food service industry, and a natural strategic fit combining our commercial and operational resources with their product portfolio. Original Philly is a strong double-digit margin business with approximately $130 million in annual sales, and the transaction will immediately be agreeative. Going forward, the majority of Regional Philly results will be reported in the prepared food segment with the remainder going to the chicken segment.

In closing, I'm extremely pleased that we delivered another record year, but even more excited about the future of Tyson Foods. We are in the early stages to become a modern food company. We have a hardworking and resilient team that is leading change in a dynamic marketplace. Our entire Tyson Foods family remains squarely focused on growing the business through differentiating capabilities, delivering on going financial fitness through continuous improvement and sustaining the world for future generations.

That wraps up my prepared remarks, and I'd like to turn it over to Dennis to take us through the financials. Dennis?

Dennis Leatherby -- Chief Financial Officer & Executive Vice President

Thanks, Tom. Good morning everyone.

We finished fiscal '17 with a strong fourth quarter as we delivered record EPS for our fifth consecutive year on a GAAP basis, and sixth straight year on an adjusted basis. We have a lot to be excited about in fiscal '18, and we expect another record year with more solid growth in both operating earnings and EPS. For fiscal '17 total adjusted return on sales was a record 8 ½%. Adjusted operating income was also a record of at $3.3 billion, representing a 15% increase compared to last year. This represents our fifth consecutive year of growth and operating income, and return on sales. Our adjusted EPS of $5.31 represents a 21% increase over $4.39 reported last year. Over a five year period, our annual growth rate is over 22%, a measure few companies in the food space can claim.

Our operating cashflow was $2.6 billion, and we invested $1.1 billion in capital expenditures. This outpaced our depreciation by $427 million as we continue to invest in projects with a focus on delivering high ROIC. In addition to significant CapEx investment, we deployed our cash in fiscal '17 by returning cash to the shareholder by repurchasing over 10 million share for more than $650 million. We paid down debt by more than $600 million since the AdvancePierre acquisition. We increased our dividend in fiscal '17 by 50% to an annual rate of $0.90 per share. As announced in the 10-K filed this morning, our board increased the annual dividend rate for fiscal '18 by $0.30, to an annual rate of $1.20 per share, representing an increase of 33%. Our fiscal '17 fiscal tax rate was 32.3%, and on an adjusted basis was 33.8%. Net debt to adjusted EBITDA was 2.4 times on a proforma basis including AdvancePierre results for a full 12 months. We are committed to investment grade ratings and the strong cash flows we expect to generate organically. Along with divestiture proceeds. We expect to bring our net debt to adjusted EBITDA ration to around two times by Q3 of fiscal '18, if we reach this goal, we plan to resume our share buy-backs at a level similar to our repurchases prior to the Pierre acquisition.

Including cash of $318 million, net debt was approximate $9.9 billion. Total liquidity was just over $1 billion. Net interest expense was $92 million in the fourth quarter and $272 million from fiscal '17. For the quarter, average diluted shares outstanding were 369 million. As announced earlier this year, we anticipate the sale of three non-protein businesses currently included in our prepared food segment by the end of calendar '17 or early calendar '18. WE expect to use the proceeds to pay down debt. The net carrying value of these businesses was $803 million, and we expect to record a pre-tax gain as a result of their sale. As noted in our press release issued this morning, these business results are excluded from our fiscal '18 outlook. In addition, during our call at the end of September, we announced our financial fitness program which is expected to contribute to the overall strategy of financial fitness through increased operational effectiveness in overhead reduction. Through a combination of synergies from integration of AdvancePierre, an additional cost optimization, the program is expected to result in net savings in $200 million in fiscal '18, $400 million in fiscal '19 including incremental net savings of $200, and $600 million in 2020 including incremental savings of another $200 million. The majority of these saving which are focused on supply chain, procurement, and overhead improvements are expected in the prepared foods and chicken segments. As Tom said earlier, these savings will fall to the bottom line.

In the fourth quarter, we incurred $150 million of restructuring and related charges as part of this program. See our 10-K for further disclosure regarding this program.

Now looking forward, here are some thoughts on fiscal '18. We expect topline sales growth of around 7% to approximately $41 billion, which excludes the revenue of the three non-protein business held for sale. The expected increase is attributed to incremental AdvancePierre sales of $1.2 billion and increases in sales volumes in each of our segments. Net interest expense showed approximately $328 million. We currently estimate our adjusted effective tax rate to be around 34 1/2%. CapEx is expected to approximate $1.4 billion as we focus on capacity expansion and operational improvements that create long-term shareholder value. Based on our average share price in Q4, we expect our average diluted shares to be around $369 million. We expect to generate a tremendous amount of cash in fiscal '18 through strong operational execution and the proceeds from the sale of three non-protein businesses.

Our balanced capital allocations priorities are governed by a disciplined focus on driving long-term shareholder value. As we plan to use our cash to reduce debt and grow our businesses organically through operation efficiency and capital expansion projects, along with investing in innovation and brand building. Also, we still have the flexibility to acquire businesses that support our strategic objectives. Along with returning cash to shareholders through share repurchases, and dividend while maintaining plenty of liquidity and investment grade credit ratings.

We have a tremendous amount momentum going into fiscal '18 as we come off a year of 21% EPS growth. Our first quarter of fiscal '18 is off to a great start which strengthens adjusted EPS growth of 7 to 10% to a range of $5.70 to $5.85. In closing, we have laid the foundation for success. We have the right strategy and the right team to deliver growth. This concludes our prepared remarks.

Denise, we're ready to begin Q&A

Questions and Answers:

Operator

Thank you, sir. We will now begin the question and answer session. To ask a question you may press star and then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If you question has been addressed, you may withdraw from the queue by pressing star then Q. We ask that you limit yourself to one question and one follow-up. If you have further questions, you may reenter the question queue.

And your first question will come from Adam Samuelson of Goldman Sachs; please go ahead.

Adam Samuelson -- Goldman Sachs -- Analyst

Ah yes, thanks. Good morning everyone. So maybe first, digging a little bit more into prepared foods in the quarter you called out in the prepared remarks, a contract buyout that impacted the quarter. Any way to quantify that image, thinking about next year, can you ride some of the details in going from the 8 1/2% to the 11 to 12 just bridging it through AdvancePierre lapping some of the inefficiencies you've had on the pepperoni side. Maybe changes in brand spend and then product innovation etc.

Thomas P. Hayes -- President & Chief Executive Officer

Hey Adam, it's Tom.

As it relates to the charge, we're not gonna get in a lot of detail it was the right thing to do for us. We have contracts with suppliers that prohibit us from maximizing the internal consumption of materials that we produce ourselves through the special meats group. It was a pill that we wanted to swallow to make sure that we're prepared for '18, and it was the right thing to do.

Let me try to give you some more information so I can bridge the '17, '18. We printed $675 million for the year in prepared foods, the base EPF earnings less what we're gonna be divesting is about $100 million debt. Incremental DNA 55is million bucks, 56. The financial fitness that is gonna hit the segment will be about $100 million. We are making improvements in the legacy business, what you talked about in terms of pepperoni and other things, so price, I would say, and cost improvements that should total about 150 million for the full year. So, you roll those up into a $970 million ally, which puts us in that 7 to 12% range, with sales being 8.3 billion for the year.

Adam Samuelson -- Goldman Sachs -- Analyst

That's very helpful color. Maybe along similar lines in chicken, as you think about the improving outlook for 2018, you obviously called that volume growth expectation. On the cost side you got pretty significant on the ground and freight expenses on the cost side, is any of the bigger variances on the chicken outlook for 2018?

Thomas P. Hayes -- President & Chief Executive Officer

Yeah, sure. Chicken will improve on the cost rush by about 150 million. There's the Tyson production system that we talked about in the past where it's taking lean to the next step across the entire system. That contributes about 150 million. The APF chicken business we don't talk about it a lot, but it is a decent sized business. And financial fitness, as we talked about 90 million of the total cost takeout. The total cost takeout and financial fitness will hit the chicken segment. There is some vol mix impact, but the total gets us to about 1.4 billion for the chicken segment.

Adam Samuelson -- Goldman Sachs -- Analyst

That's all very helpful. I'll pass it on.

Thomas P. Hayes -- President & Chief Executive Officer

You're welcome.

Operator

Your next question will come from Ken Goldman from JP Morgan. Please go ahead.

Ken Goldman -- JP Morgan -- Analyst

Hi, and Dennis congrats on your pending retirement. If any CFO started his tenure with a trial it was you in 2008, we remember.

Dennis Leatherby -- Chief Financial Officer & Executive Vice President

Thanks, Ken I appreciate it.

Ken Goldman -- JP Morgan -- Analyst

Just curious for you or whoever it's appropriate, Tyson's highlight a few new tailwinds today for fiscal '18, you're guiding now to over 200 million in synergies and saving versus the prior 200. You see 100 million less in feed costs than you did the last time you guided. And, I think that your EBITDA guidance for the other segments is about $30 million better than last time, but you're not raising total EPS guidance, you're just maintaining it. What I'm really trying to get is a sense of whether this means you're just being conservative on EPS given that it's very early in the year? Or if there are, maybe, some tangible incremental headwinds we should be thinking about too?

Thomas P. Hayes -- President & Chief Executive Officer

Ken, I'll start and then maybe Dennis can chime in here. I absolutely agree with you that Dennis did enter the equation in a trial by fire. He's done an n ice job.

It's certainly early in the year; we're just out of the box, Q1 looks good. But we have to stay where we are. Absolutely things look good. We continue to say Absolon is a shock to the system; we're gonna be in a nice positon position for '18. We are also, I just wanna make sure that we emphasize so we're gonna continue to invest and make sure we're doing the right things for growth. The objective is consistent, predictable, sustainable growth top line and bottom line. We're not gonna be getting ahead of ourselves. And certainly, we're making investments in CapEx and guide to that. The year looks good.

Dennis Leatherby -- Chief Financial Officer & Executive Vice President

Another thing I would add Ken, is remember our Q2, which ends in March, is always very erratic with weather patterns, order patterns never the same from year-to-year. That's why we always start out pretty measured in our approach.

Ken Goldman -- JP Morgan -- Analyst

Thank you for that.

A quick follow-up. You said that 1Qs off to a very good start, I'm paraphrasing a little bit there, but there's a couple of things we've noticed, and you guys talked about the pork business, and the industry margins have been, we agree that it's been along with your guidance but it's still weaker than it was sequentially, and margins for the industry as well. I know again, it may not be the same for you, but you've also seen some chicken prices drop, now you may get the offset with boneless, skinless. In general, I would have thought 1Q would have been a little, not weak at all, but maybe you wouldn't have been quite as bullish on it as what we're seeing. I'm just trying to get a sense what you're seeing in the first half of the quarter going so well, perhaps.

Thomas P. Hayes -- President & Chief Executive Officer

So Ken, what's happening with pork is just about what we expected. That's in our guidance. Yes, things are pressing a little bit, but we had expected that and that's in our full guidance. New players are coming in the market; the pie gets cut up a little bit differently based on trying to find that supply. Like I said, again, all the assumptions were built into our annual outlook of greater than 9%. What I'd say this happens the same way every time a new entrant comes into the market that's done this work for decades. So, being an established process like ourselves, we like where we are, especially given the team we have. But on pork, I would say it's playing out as expected and built into our guidance. In our chicken markets, I went through the bridge for the full year. I think that, maybe, that speaks for itself. If there's anything, haven't been clear on certainly let me know.

Dennis Leatherby -- Chief Financial Officer & Executive Vice President

In prepared made the bounce that we anticipated and we're pleased with that.

Ken Goldman -- JP Morgan -- Analyst

Okay. Thank you.

Operator

The next question will come from Heather Jones of The Vertical Growth. Please go ahead.

Heather Jones -- The Vertical Growth -- Analyst

Good morning, and Dennis congratulations on your retirement.

Both my questions are pertaining to chicken. The first for 2018, so you're guiding to 3% volume growth, it seems like 2/3 of that is AdvancePierre. Is the remainder of that, should that be in your value-added segment that you've added there.

Thomas P. Hayes -- President & Chief Executive Officer

Yeah, Heather, it is. About half and half. Half is about AdvancePierre, and about half is just organic chicken growth, and that is through the value added as you described.

Heather Jones -- The Vertical Growth -- Analyst

Then I wanna talk about how you're positioned, how your chicken business is positioned, it's a longer-term question, as we're looking over the next two, three four years, the industry's looking at increased supply including you guys adding a plant. Given the relative position of Tyson, how you are net short in some key items, and that you have a larger than average value-added business. I was wondering if it reasonable for us to assume that your relative performance should improve over the next few years as we see that capacity grow, but you guys grow more added, and you would assume some of these inputs could come under price pressure. I was wondering if you could speak to that and is that a reasonable way to be thinking about this?

Thomas P. Hayes -- President & Chief Executive Officer

It is a reasonable way to be thinking about it. What we're playing for is long-term shareholder value gradations. As it relates to this chicken supply growth, we're squarely focused on what do we need. The USDA estimates about a 2% growth, and that's in line with consumer demand, I would say roughly. Our demand has been outstanding and outpacing as it relates to serving what we need. We're not gonna change our approach; we're gonna keep supply short of demand. Because of that demand strength that's why we're adding on to the plant we talked about in Tennessee, that's why we're building another plant. We just wanna continue the approach to be net short, but we are focused on the value business.

Heather Jones -- The Vertical Growth -- Analyst

Okay. Perfect thank you.

Thomas P. Hayes -- President & Chief Executive Officer

You're welcome.

Operator

Your next question will come from Robert Masco of Credit Suisse. Please go ahead.

Robert Masco -- Credit Suisse -- Analyst

Hi. Thank you for the question. And Dennis congratulations on your retirement

Operator

Thank you, and we'll go next to Robert Masco from Credit Suisse.

Robert Masco -- Credit Suisse -- Analyst

Hi. Thank you for the question. And Dennis, congratulations on your retirement.

Dennis Leatherby -- Chief Financial Officer & Executive Vice President

Thanks, Rob.

Robert Masco -- Credit Suisse -- Analyst

AdvancePierre, it's a very complicated business, especially in food service. It seems their strategy was to do all things for all customers. I wanted to know as you're integrating the sales of your business and AdvancePierrre's, how have you managed to hold onto your customers and communicate to them what product lines you're continuing to make, maybe you're going to discontinue others. How have you executed in that regard?

Dennis Leatherby -- Chief Financial Officer & Executive Vice President

Yeah, sure Rob. What AdvancePierre did very well and continues to do well is two things. One, they handle complexity very effectively, so they know how to make money, and continue to meet the customer's demands. .And the second thing is they've taught us how we can be really efficient, and at the same time focusing on; I would say, the customer brand of business as an area to make money. That complexity is something that they're getting paid for, and that would be the expectation we would always. I would say they have done a really nice job managing that complexity. As it relates to combining the efforts, our selling group has done a really nice job pulling things together. AdvancePierre is very heavily vested in the C store space which was highly attractive to us. Since we combined efforts in Tyson and Hillshire, we've grown more than 75% in the last three years, not a huge base business, but it's in the hundreds of millions of dollars range. It's a great example of one plus one equals three. We're gonna take that to a new level with APF, they have a completely focused effort to make sure the integration is gonna go seamlessly, and really, really like how we've started the integration, our customers have given us positive feedback to that in addition to the other segments we serve through the business.

Robert Masco -- Credit Suisse -- Analyst

Okay, your customers are giving you positive feedback you haven't lost any business or anything like that?

Dennis Leatherby -- Chief Financial Officer & Executive Vice President

No. There's always a little bit here and there, they may come and go, but on balance we are gaining new business. So, that's correct.

Robert Masco -- Credit Suisse -- Analyst

Okay. Great. Thank you.

Dennis Leatherby -- Chief Financial Officer & Executive Vice President

You're welcome

Operator

The next question will come from Jeremy Scott from of Mizuho. Please go ahead.

Hey, good morning. Dennis, it's been a pleasure and congrats on the retirement.

Dennis Leatherby -- Chief Financial Officer & Executive Vice President

Thanks, Jeremy.

Jeremy Scott -- Masco -- Analyst

Just a couple questions and a follow-up here. When you say, the pork capacity impact was anticipated in your guidance. What does that mean exactly? When do expect to see market settle? And on the 9% plus how does that flow front half versus back half? Do you expect to close the year above 9% or under 9%? Maybe just a little color on how that trends over the course of the fiscal year.

Thomas P. Hayes -- President & Chief Executive Officer

So, last year, or maybe two calls ago, we talked about our front half, back half discussion. That's important for us because we continue to be focused on, there are some things that can flip between quarters, it's an annual outlook, and when we say that it's playing out as expected, demand is so strong, I'd say export demand is really strong. We're seeing that compression is about what we thought. I don't know what more I can say to that Jeremy, but other than like I said before, this is something that we've seen this play, this is not the first time it's happened. Yes, there will be a little bit of choppiness, but we feel like we'll level out to the right place. What we're guiding to is what we think will happen.

Jeremy Scott -- Masco -- Analyst

Okay. Just going through your 10-K, you recently filed. We've seen strong growth in utilization rates for beef and pork, but a bit surprised your past utilization didn't nudge back up in chicken. How do we reconcile that with your commentary that you're hitting your ceiling on your tray pack operation? Are there underperforming plants that you're simultaneously ramping down, or did you grow your breast meat purchases in you? Maybe just walk us through some of the puts and takes as to why that rate didn't nudge back up.

Thomas P. Hayes -- President & Chief Executive Officer

It's a buy versus grows. A strategy that we have. I think that will continue to play; it works to our advantage. Particularly when breast meat is very low. That's how we play that continuously.

Jeremy Scott -- Masco -- Analyst

Okay. Thank you.

Thomas P. Hayes -- President & Chief Executive Officer

You're welcome.

Operator

Your next question will come from Ashay Jagdali of Jeffries. Please go ahead.

Ashay Jagdali -- Jeffries -- Analyst

Good morning and Dennis congratulations on your retirement.

Dennis Leatherby -- Chief Financial Officer & Executive Vice President

Good morning. Thank you.

Ashay Jagdali -- Masco -- Analyst

I wanted to ask about chicken. How should we think about the margins? When we think about overall shocks to the system which you talked about, on the one hand, you have the grain shock, right? And the other hand you have any volatility in chicken commodity prices? It seems like you've already proven out that commodity swings can be absorbed without any volatility in your margins. Can you just talk just talk through the commodity price swings and how, if at all, it has any impact on your margin outlook, because there is a view that potentially commodity chicken prices might be weak next year? In that environment will you still be able to produce an 11% margin is really the question? Thanks.

Thomas P. Hayes -- President & Chief Executive Officer

Yeah. First off, I would have to say, as everybody has been congratulating Dennis, he's going to be here through April, so you'll hear him again on next quarters call.

The chicken margins, like we said, it will believe to be around 11%, and we expect our business to grow especially in value-added frozen and 3% overall. We do believe that we're expecting similar feed environments. We're looking at the fore curve at this point. It seems like it's going to be benign. So as it relates to commodity breast meat or cheaper products, we're heavily weighted toward further process breast meat sales. We tend to make more money in low commodity breast meat markets rather than high ones. Dennis has done a nice job diversifying our price type, so we don't tend to be as volatile. There are some economic benefit between the pure spread, and buy versus grow. Long-term value is selling all the parts we have to find a home for as it relates to the commodity markets being low, that's something that we see frankly as an opportunity.

Ashay Jagdali -- Masco -- Analyst

And one on prepared foods if I can. There's been a lot of choppiness right? Quarter-to-quarter, year-to-year in a way. I'm really focused on the cadence of the margin and the top line delivery especially as you sell these non-core assets. Can you talk a little bit more about first quarter, if we should be expecting prepared foods margins inflect back to the annual number in the first quarter? Just try to make sure expectations are in the right place, short-term?

Thomas P. Hayes -- President & Chief Executive Officer

Prepared foods is off to a good start. That's all I'll say. How we're gonna finish the quarter? What I would say is our innovation efforts are really kicking in and paying back. I talked in my prepared remarks about how our future innovation is scoring, and I think it's going to put us in a position where we have no just prepared, by the way, on chicken, some really strong results. We're in the right categories; we're in the right part of the store. So in the prepared business one of the things that we're also certainly benefiting from is that the perimeter certainly there's a lot of growth there. But also, the center store, if you include frozen, frozen is growing for us in the center store. Certainly, other shelf staples are having some challenges but the frozen section is performing well, and that's heavily indexed toward prepared. Certainly, synergy capture that you already know about. In terms of how flows and the cadence, I won't give you any thoughts on that, I just ask you to focus on year-end and the fact that Dennis told you that the first quarter had started really well.

Ashay Jagdali -- Masco -- Analyst

Thank you. I'll pass it on.

Thomas P. Hayes -- President & Chief Executive Officer

You're welcome.

Operator

Your next question will be from Michael Piken of Cleveland Research. Please go ahead.

Michael Piken -- Cleveland Research -- Analyst

Yeah. Hi.

I just wanted to circle back a little bit more to the pork side of the business. If you could talk a little bit about what you're doing to make sure you have enough supply procured, and also your expectations for if you think some of the new facilities are eventually gonna go double-shift, or how much the labor situation may or may not allow those new facilities to go double shift?

Thomas P. Hayes -- President & Chief Executive Officer

What I wanna say Michael is we don't have any problem getting the hogs that we need. We're in a pretty good situation there. I don't know what else to say; the outlook includes anything that is gonna happen in the pork businesses. We don't find any challenges as related to getting what we need. As you know, it's a spread business. Certainly, exports are gonna continue to be supportive, and we are a big player in export, we like that. The fact that the business is going through a margin compression right now, we thoroughly thought about that, analyzed it, that's where we wound up with our guidance.

The other thing I'll say is we are seeing some growth in e-pork. It's really a small percentage of our business; I talked about it in my prepared remarks. We have access to the hogs if we have the demands, and we're seeing demand increasing. That is something that is also a small, but a supportive piece of our equation as it related to margin.

Dennis Leatherby -- Chief Financial Officer & Executive Vice President

And Michael, we typically don't like to speculate on our competition. That's just a fruitless exercise in our opinion.

Michael Piken -- Cleveland Research -- Analyst

I guess, in general, though you guys have talked about raising wages. Maybe you could give us a little more color in terms of the competitive environment and what type of wage or cost inflation we should expect going forward.

Thomas P. Hayes -- President & Chief Executive Officer

Again, it's in the outlook, but I would say we have increased wages, and we started doing that about a year ago. It's to make sure that our turnover rates are lower, we achieved a lower turnover. It's been successful. We've done a nice job in all our plants not all our beef, prepared foods, and chicken. We are also doing things to make sure well within controls to the extent we need to modify our line speeds. We're doing that. Again, everything is in our guidance. But we have increased wages at our plants.

Michael Piken -- Cleveland Research -- Analyst

Okay, Thank you.

Thomas P. Hayes -- President & Chief Executive Officer

You're welcome.

Operator

The next question will be from Ben Stirer of Barclays Please go ahead.

Ben Stirer -- Barclays -- Analyst

Good morning gentlemen. And congratulations on the results.

I just wanna go back on the prepared foods business and your outlook into 2018. In the fourth quarter, you had a couple of one-time charges. You had the impairment the 45 million, the 82 from the restructuring, there was another part of the restricting booked into chicken. If I do the math, and I'll actually adjust for that, I end up with a margin that's closer to 13% for the quarter. I just wanna understand with your guidance into 2018 of the outlook 11 to 12% margin that would be a notch below my thought around the fourth quarter. Can you elaborate if there are any additional charges, restructuring wise that we take into consideration to get to that 11, 12% margin in 2018? Thanks.

Thomas P. Hayes -- President & Chief Executive Officer

Ben. Nothing else is not disclosed in the 10-K what it's saying as it relates to the longer term potential for prepared foods margins. I've said it before I'll say it again, we expect 12 to 14% is certainly within the horizon. Again, innovation is a big key to that. Continuing to get the synergy capture. Franky, over-delivering to the extent that we can. We have a very diversified business, and we have a business that is very focused on making sure we're growing both with customers and consumer relevance on innovation, the customer sees us a partner. We are the captain in prepared foods, everywhere that we want to be, I'd say. We are balancing our approach with customer brands, there are certain categories that make sense for us to be focused with our customers on driving their growth regardless on whether or not it's our brand, and we're going to make high margins on those businesses as well. I don't know if that scratches the itch for you, but I would say that longer term we see those margins in that 12 to 14% range at some point in time.

Ben Stirer -- Barclays -- Analyst

Okay, perfect.

And then just one follow-up on beef. Clearly, the 6% full-year margin was significantly better than what everybody would expect. Now your outlook into to 2018, again, just about 5%, is that going to be significantly above 5% or do you actually expect margins to slightly contract compared to 2017. Considering that livestock supply and so on looks pretty favorable, and even more favorable into 2018 than it looked into 2017.

Thomas P. Hayes -- President & Chief Executive Officer

It does. You use 5% of his numbers, that's where we're guiding for. I wouldn't run away with that. We're seeing more cattle next year; we like where we're located, certainly placement levels show a lot of cattle and feed. Supplies are growing in our regions that's why we're in a bullish..., But the idea of us being properly positioned in the right regions, I'd say, is what you should focus on. And 5% is the number you should level

Ben Stirer -- Barclays -- Analyst

Okay, perfect. Thank you very much.

Operator

The next question will come from David Carlson of KeyBank. Please go ahead.

David Carlson -- KeyBank -- Analyst

Thank you very much.

Tom, my question relates to the beef segment. Obviously, some very strong results there in the quarter. I think you called out increased export activity in the press release. With China recently lifting the ban on trade with the U.S. I was hoping to frame up the opportunities as it relates to export activity longer term. Also, also given the incoming CFO has with international, I guess as you look at it today, how long can export activity serve as a tailwind for the company.

Thomas P. Hayes -- President & Chief Executive Officer

We think it could be a multi-year. We like where we're positioned as a company. And especially where Tyson Foods is positioned, we were the first company to ship beef to China after the resumption of trade. We have a huge market share already in that market; our brand IDP is a very well recognized brand in China. This is great for a number of reasons, but the primary reason we think about is that it creates domestic disappearance. For us, anything that is supportive of exports is really helpful

Having access to that market allows us to be in a position to have the meat clear at a better price, there's no question. Our original assumptions and what we're including in our guidance, we are expecting strong export trade is continuing. What I say is global supplies they're relatively flat, coupled with strong demand for protein overall it makes a nice environment for us.

Yes, I'm fully counting on Stewart his full value on international with him.

David Carlson -- KeyBank -- Analyst

Thank you, guys.

Thomas P. Hayes -- President & Chief Executive Officer

You're welcome.

Operator

And the next question will come from Farrah Aslam of Stevens Inc. Please go ahead.

Farrah Ahslam-- Stevens Inc. -- Analyst

Good morning. Dennis, congratulations you're leaving the balance sheet for Stewart, you inherited it at a challenging time.

Dennis Leatherby -- Chief Financial Officer & Executive Vice President

You're right.

Thomas P. Hayes -- President & Chief Executive Officer

Stewart is smiling from ear to ear.

Farrah Aha -- Stevens Inc. -- Analyst

My question really focuses on your NAE efforts. Can you talk about what percentage of that chicken business is now NAE? The margins benefit you're getting from NAE, and how much additional cost do you incur by producing NAE?

Thomas P. Hayes -- President & Chief Executive Officer

Farrah, the benefits are economic but also consumer preference. I would say to the extent that we didn't move to NAE we'd be having a very different conversation. The consumer does expect that, and by the way, the customer expects it. Gatekeepers within the customer are asking continuously to be NAE. For us, we're fully NAE now, and we're actually buying meat on the outside that's NAE. In terms of the economics what I would say is the cost a little bit more on the upfront, and we've been able to swallow that cost and then remove that cost. I think we're in a great position today. Very few of our stocks are actually treated, and so we feel like it's a comparative advantage today whether or not it will be for long term who knows? But that has been a key to our growth. We feel, so far, it'd say a lot of our sub-teams but also moving into what we've guided for '18, a total 3%, which doesn't sound like a huge number but in our business it's meaningful

Farrah Aha -- Stevens Inc. -- Analyst

And then, Dennis perhaps you could give us just more color on that 90 million you spent in financial fitness in chicken and the 100 million in prepared foods. Could you break it down a little bit more and share with us where that 90 million will roughly will come from and where the 100 million will roughly come from?

Dennis Leatherby -- Chief Financial Officer & Executive Vice President

In both cases, it's going to be coming from the overhead reductions, supply chains efficiencies, and procurement are the largest categories. Given that they both use largely the same distribution system, it's natural that they would marginally get the benefit of those synergies.

Farrah Aha -- Stevens Inc. -- Analyst

And that procurement really stems from that buyout of the contract. I just wanted to make sure that internal sourcing contract buyout you didn't see the cost as extraordinary but rather folded them into fourth-quarter earnings?

Thomas P. Hayes -- President & Chief Executive Officer

To be clear, the procurement, the raw material buyout it was in Q4 but is not a major component of the procurement savings. I think in the procurement savings leveraging Tyson's scale with billions of pounds at some rate that's more efficient than was an added AdvancePierre.

Farrah Aha -- Stevens Inc. -- Analyst

Okay, that is helpful. Thank you.

Operator

The next question will come from John Colintioni of Morgan Stanley. Please go ahead.

John Colintioni -- Morgan Stanley -- Analyst

Good morning everyone.

Thomas P. Hayes -- President & Chief Executive Officer

Good morning.

John Colintioni --  -- Analyst

It's been about six months since Tyson completed the acquisition of AdvancePierre. Can you just walk us through some of your learnings, and any practices from the company you adopted since?

Thomas P. Hayes -- President & Chief Executive Officer

Absolutely. Let me talk about three things. One is we've talked about a few times on this call, but it's the focus on customer growth. We, as Tyson, prior to AdvancePierre very focused on customer growth. I would say AdvancePierre cranks that up a notch, they really are focused on making sure the customer gets what they need as it relates to brand products or customer brands. The second thing I would say is the level of accountability that the team has across the organization, we were highly accountable at Tyson. I would say they are extremely focused on removing non-value added cost. So things that aren't valued by the customer, and having a disciplined approach on looking at it on a weekly basis where we all are. We are adopting that across the system, there are some ideas they brought to the table that are, I think, are very exciting. The third is just the channel. The channels that they played in predominantly in convenience stores provide us some great benefits enthusiasm about what the program together can offer, overall, to customers. Because that is a space that is growing. Also, I'll throw in the retail perimeter and the products that are served either ready to heat or ready to eat; they have done a very, very nice job. Those three things I point to, and that's..., There's a lot of other learning, we could spend a lot of time talking about it but I'd highlight those three.

John Colintioni --  -- Analyst

Thanks. In the past you've mentioned considering raising your normalized targets for beef and prepared foods, maybe even at some point chicken, is there something we should still expect you to update us on in the second half.

Thomas P. Hayes -- President & Chief Executive Officer

We will update you. Like I said last quarter, and give you our then current thinking, we believe if we continue to execute taking cost out or holding costs flat while we're growing the business we will leverage the model for expanding margins. Absolutely we're talking about it again, and you should expect us to you with a receipt on that.

John Colintioni --  -- Analyst

Okay. Great. Thanks.

Operator

The final question today will come from Ken Zaslow of Bank of Montreal. Please go ahead.

Ken Zaslow -- Bank of Montreal -- Analyst

Good morning everyone.

Thomas P. Hayes -- President & Chief Executive Officer

Hey Ken.

Ken Zaslow -- Bank of Montreal -- Analyst

Dennis congratulations and we appreciate all your help through the years, and best of luck for sure.

Tom, can I just ask two questions. One is, just to be clear on 2018, you haven't even reported your first quarter, and you gave initial guidance a month or so ago. Is your confidence higher or lower relative to that month ago? And why?

Thomas P. Hayes -- President & Chief Executive Officer

You always ask that question. It's difficult for me to say how much confidence from this other than we're very confident, and it's reflected in the outlook. We have a great year ahead of us. We're continuing to grow where we want to grow, value-added versus commodity. Certain in chicken prepared food, we talk about the core nine results and our focus on food service. The balanced portfolio, regarding the customer channels, is a big deal. We like the traction we're getting at those customers where we're serving the perimeter of the store and convenience. Yeah, I don't know how to quantify Ken, because we have guidance other than saying that I am extremely enthusiastic about everything that I'm seeing, and I think the team would chime and say the same thing. The chicken should benefit from the move to NAE. We also do, by the way, have an organic offering, certainly prepared foods is well positioned. I would say one other thing it's maybe on the financial fitness, we had to lose some weight. That's the reason why we call it financial fitness, we had some weight to lose out of the box, and we have to have process discipline to keep the weight off. That's making us really confident how we continue to have varied cost structure as we grow as I mentioned a moment ago. Sure, overall, I'd say very optimistic

Ken Zaslow -- Bank of Montreal -- Analyst

My second question is, can you give us concrete synergy examples of what you're actually doing? Are you moving in-house to make the same is yet are you doing more? Actual concrete anecdotes that shows a progress, not just high level but a couple examples of what you're actually doing on the synergy level. Are you automating the chicken process yet? What are you doing physically and concretely?

Thomas P. Hayes -- President & Chief Executive Officer

I'll say two things. First is I can't name names, as you can well imagine it's not fair to the supplier, but we have negotiated costs out of our suppliers. Not small amounts, large amounts, that's number one. Number two is we are being able to look at where do we make products the least cost and maximize those plants first. That is underway and is certainly something that will continue. As well as, there will be some rationalization at some point in the future. The other thing is just the pricing side of things; it's not a cost stakeout, the pricing side of things, I think, there's a lot of proper focus on that. We need to make sure we're taking the discipline that AdvancePierre had on pricing, and maybe the final thing on cost is as we look at our products and how they are made, we are seeing some things that AdvancePierre did that was extraordinary in terms of making sure they were flexible on formulas, so that it utilized the raw materials that are the best of us at that point in time given the cost without sacrifices, and in some cases increasing the quality. That's a big deal, and we're seeing a lot of savings from that already that have been plugged into our forecast, and we're excited. Hopefully, those are helpful

Ken Zaslow -- Bank of Montreal -- Analyst

That's great thank you very much.

Thomas P. Hayes -- President & Chief Executive Officer

You're welcome.

Operator

And ladies and gentlemen this will conclude our question and answer session, I would like to turn the conference to Tom Hayes for any closing remarks

Thomas P. Hayes -- President & Chief Executive Officer

Excellent. Thank you all for the great questions, I really appreciate it. Before I go I do wanna say to Dennis and Stewart, I'm looking to you to have a great transition. I know that as we transition from one superstar to the next it's gonna be seamless and it's very exciting.

Also, as I've been prone to say the last couple of quarters here, I would like to thank the Tyson team members that are listening to the call, because they are on the call. We had another record year, which is really, really good and we're all very excited about that. But I have already seen a tremendous amount that's focused on delivering another record in 2018. I appreciate, in advance, all the work that everybody's doing, so thank you. Because we're not gonna talk to you between here and the end of the year, hopefully, everybody has a safe and happy holiday season. We're going to be kicking into holiday season shipments, which is great. But I would like to say happy holidays to everybody, and certainly please stay safe.

Thank you very much for dialing in today.

Operator

Thank you, sir, ladies and gentlemen the conference has concluded. Thank you for attending today's presentation. At this time you may disconnect your lines.

Duration: 64 minutes

Call participants:

Jon Kathtol -- Vice President of Investor Relations

Stewart Glendenning -- Chief Financial Officer

Thomas P. Hayes -- President & Chief Executive Officer

Dennis Leatherby -- Chief Financial Officer & Executive Vice President

Adam Samuelson -- Goldman Sachs -- Analyst

Ken Goldman -- JP Morgan -- Analyst

Heather Jones -- The Vertical Growth -- Analyst

Robert Masco -- Credit Suisse -- Analyst

Ashay Jagdali -- Masco -- Analyst

Michael Picken -- Cleveland Research -- Analyst

Ben Surer -- Barclays -- Analyst

David Carlson -- KeyBank -- Analyst

Farrah Aha -- Stevens Inc. -- Analyst

John Colintioni -- Morgan Stanley -- Analyst

Ken Zaslow -- Bank of Montreal -- Analyst

More TSN analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.