TSN
#Sure, <UNK>.
On the prepared foods part, we'll take that first.
Typically we spend 5% of sales in MAP.
We're going to be spending a little over that this year as we focus on the Hillshire Snacking and Jimmy Dean launch and the new Jimmy Dean marketing campaign.
We're also investing in price gaps versus the competition.
We've got some room in Jimmy Dean roll sausage.
We've got price gaps in Hillshire Farms smoked sausage.
And we need to get our lunch meat business ---+ we've just moved back the line pricing there as now we've got the turkey raw materials coming back to us from the AI.
It's very important for us that we regain our volume growth in these categories.
So we're going to be investing in trade and investing in MAP spending to drive our growth in those categories.
Switching over to chicken, you have a pretty cheap environment now with fresh meat trading pretty regularly below $0.90 a pound delivered.
You've got leg quarter markets trading sub $0.20.
And depending on how disjointed your logistics are, you're probably FOB the plant somewhere in the $0.12 to $0.13 range.
That's a pretty soft environment for pricing.
We've got a lot of volume that is in RFP now.
So, we feel very comfortable that we'll be better than 10% but we want to be cautiously optimistic until we get through this RFP season on our chicken business.
But let me hasten on to say that our brands give us a good bit of insulation from our competition, plus our quality service and innovation helps set us apart.
And we've done a lot in the last four years to optimize our poultry portfolio and to structure the pricing models within each part of that portfolio to deliver stable results.
And that's what we think will happen again this year.
In chicken, we've actually forecasted sub $0.20 leg quarters for the rest of the fiscal year inside of our projections.
If we get a few of these AI closed markets to open up, that could be a little upside for us but we don't have that baked into the plan.
As we look at pork and beef, we're going to continue to see, based on our strong dollar competition from other regions around the world, you might think that we'll have maybe a little bit of growth in the beef export volume for the year, probably not expecting very much in pork, and then maybe you see chicken exports improve.
One thing to note, though, I think we mentioned in the last call or two that we were taking a lot of our beef items, like short plates and those kind of things, and rolling those into the trim stream.
Those are now going back out into the export markets.
They are going back into the markets at much lower pricing than they were before but it is better than the trim stream.
And one thing that ---+ I say one thing, there's been about three things, sorry ---+ one last thing I'd like investors to think about is we have not projected any impact for MCOOL.
Depending on whether or not Congress fails to act or acts, and there are retaliatory tariffs, those would provide some cautionary note in our export sales.
But we don't have anything forecasted for that And we also don't have any AI impact built into our projections.
So, that's the view.
Difficult to answer with a lot of specificity, but let me say this.
As far as what we would have booked today that have pricing set and has perhaps the cost in commodity futures underneath it, you're talking sub 20% of the portfolio.
But we have a lot of our portfolio that is line priced, we have a lot of portfolio that has very short volume windows.
So, if you ask me what is my expectation about how well we will do through pricing season and how well we'll be able to maintain at least 10% margins or better, I feel very good about that.
A couple of reasons.
We've got the largest branded presence out there in the US in chicken.
Our value-added portfolio, now we've got capacity around this to where we can continue to grow that.
And, by the way, our buy versus growth strategy in a year like this is a competitive advantage because we're able to buy very cheap raw materials and then further process that into value-added items for predominantly foodservice but also some at retail.
We've got best-in-class quality.
We've got best-in-class service.
And I think that drives our customers to us to ask us to help them grow their categories.
And we've got the innovation capabilities that they're looking for to continue to grow their business.
That sets up very well for us and I'm very positive about our chicken business for 2016.
No, it will take us about another 60 days or so to get through it.
I can tell you that the early read is it's going pretty good.
Historically it's been around six to nine months, although I can tell you we haven't very many.
We're about nine months past March 5 now and we haven't had very many regions open the doors yet.
There's a lot of trade negotiations going on.
TPP is up in the air, you've got M-COOL up in the air.
There's just a lot going on around trade.
I don't know how much that's impacting whether or not these countries open up.
We feel very safe about our supply chain.
I don't see any reason there for there to be any reason not to want to take great product from the US.
I'd really hesitate to try to guess on when these things will open up.
So, what we did, <UNK>, is we just put the current pricing in our year for the whole year and if anything breaks loose then it will benefit us.
First, let me explain why we took the action we did.
We really do feel it's important for our investor base to have a really solid understanding of what we feel the margin environment is going to be that we face out over the next few years.
The relatively low cattle supply, you've got too much ---+ well, I should not say too much, that's probably not the right way to say it ---+ but you've got excess industry capacity and that limits our ability to drive margins above the 1.5% to 3%, we think.
I would say this, though, is that are there likely to be quarters out in those future years where we would see margins in the previous.
Yes, I think you should expect that.
But overall, for annual guidance, as we look forward for the next few years, this is the environment we think we'll be operating in.
As you look at the prepared foods business ---+ and I'm going to be painting with a fairly broad brush ---+ it's relatively evenly split between retail and foodservice.
So, if you think about our foodservice prepared foods business, let's look at that first, you've got predominantly a pizza toppings business and other ingredient meat combined with the portfolio of breaded products ---+ tortillas, flatbreads, that kind of thing ---+ and the former, if you will, bakery and sweet goods business from Hillshire Brands.
A lot of the meat in that portfolio is priced on a trailing basis to the market.
So, as the markets go down, and we do expect cheaper pork raw materials, typically our pricing in prepared foods would go down, as well, but we would hang on to the margin and it would recover in some period of time.
We've tried to shorten that window from 90-plus days to 45 to 60 days or so, and that should help stabilize the margin regardless of which way the market is moving.
The bakery and sweet goods business has a very stable low double-digit margin.
So, again, there's opportunities for us to grow a bit in that category, although we do think that the largest potential is to continue to grow the meat business inside of prepared foods on the foodservice side.
Now, let's switch over to retail.
We talked about the core nine on the script.
And what we're seeing is ---+ let's take it apart just a little bit ---+ Jimmy Dean breakfast sausage, Hillshire Brands smoked sausage and our Hillshire Brands lunch meat have been the three categories where we need to drive volume.
Let's go from the bottom up.
Hillshire farm lunch meat ---+ obviously our shortage of raw material in turkey has hurt our volume in that business.
Now, frankly, we've been able to replace some SKUs with some additional ham skews.
We've been able to replace some of those SKUs with chicken lunch meat SKUs.
But, overall, the absence of turkey has hurt our volume.
We're now in a position to where, after the first of the year, say, late January, something like that, we'll be back to full production in our turkey operation after the AI problems, and we'll have the raw material around us we need to reset our pricing in our turkey lunch meat to line pricing, and then drive promotional volume from there.
So, feel great about our ability to get our price gaps right and grow that business.
In breakfast, Jimmy Dean breakfast sausage, the issue there is really around reestablishing price gaps to the competition to drive volume.
We have a lot of promotional activity going on during this holiday season and we feel very good about our ability to drive our volume by getting these price gaps right.
Frankly, some of our retail partners were a little bit slow in reflecting our pricing gaps at that level, so that has slowed our volume a bit, but we'll get there.
And then on rope, frankly, we're seeing unprecedented rope competitive pricing.
We lowered our pricing gaps but probably need to do that again.
And, fortunately, we've got lower raw materials and we've got increased synergies that gives us a lot of power to fuel the growth in these categories.
I feel very comfortable that Andy and the team have a great focus on how to get the volume back and regain the share that we've given up.
And I could not be more optimistic about our prepared foods business.
Sure, <UNK>.
Operational improvements through FY15 were more than we thought, and we see increased opportunity as we get into 2016 there in the operational improvement.
We're just getting started on some of the network stuff.
That's probably going to be more of a 2017 answer for us.
The purchasing synergies, as we've worked with a lot of our great supply partners we've worked on several packaging innovations, just rethinking a lot of the categories.
And together with our supply partners, we're finding ways to lower our cost in a lot of these purchasing categories.
And that has really been the increase that we see the most of in 2016.
It is really a good story and it provides a lot of fuel to fuel our growth.
No not yet, <UNK>.
We're still under contract with other suppliers with our former Hillshire Brands raw materials until those contracts run out.
And that could be anywhere from 12 to 24 months we'll still be buying raw materials for that business from other folks.
I'll take a break and get a cup of coffee.
(laughter)
<UNK>, this is <UNK>.
Our longer-term goal would be to be at 20% ROIC overall.
And just to give you a little bit of perspective around beef, even at a 2% return on sales, we would have about a 15% ROIC.
So, 2.5% gets you pretty close to 20%.
And we see no reason why we can't work our way toward it.
No, <UNK>, you'd be high there.
Obviously it depends on the fundamentals in that region about the cattle that come to market and that kind of thing, but 30 is too high.
As I think through this it's hard for me to put a number on it but you're high at 30, I promise.
Quite a bit of that's tied up in the export markets not being able to ship.
Obviously, I don't know the break out of the $139 million and how much is the chicken export number versus how much is the actual turkey problems but the Turkey part of that should rebound as we get the plant full and we have the raw materials and we regain those sales.
You should see that start flowing in.
We've got it modeled in Q2 so you should see that flowing in then.
You hit the nail on the head, <UNK>.
We feel very good about pork.
There's going to be good hog availability.
Which, by the way, provides good, cheap raw materials for our prepared foods business.
But this is just a cautionary note on exports and the high dollar and competition from other regions in the world for some primary markets.
So, that's the cautionary note there.
If some of that changes then obviously there's upside in our pork segment.
It's hard to say, <UNK>.
My guess is, of the volume that is RFP'd, maybe 10%, 15% at most, something like that ---+ now, you've got to remember, there's a lot of different pricing models that we have, some where we have guaranteed volume and we relook at the price every 30, 60 or 90 days.
We've got a good bit of our chicken business that's just line priced.
But of that volume that will go through RFPs, I'm guessing you're in the low double digits.
There's a lot yet to come there.
Our reaction is to ramp up our buy versus grow strategy.
We're buying a lot of raw material these days.
We're buying breast meat sub $0.90 delivered to our plants.
So, we've got the opportunity to take advantage of this outside raw material in an oversupplied situation to supply our value-added businesses.
As we said in the script, about 90% or so of our volume is really consumer pull and only about 10% is pushed out.
We don't sell very much CDP breast meat.
We're working hard every day to value up our leg quarters and not have any leg quarters to sell.
It's a time like this when our buy versus grow strategy really helps us maintain our stable margins.
I think I'd rather you think about the 15% of our sales that are CDP breast meat, leg quarters and our rendering products, those are the ones that have the most commodity exposure.
Now, there's also a minority portion, for example, of our fresh tray pack business that gets priced off the Georgia dock.
So, there are some market influences in those businesses.
But in terms of just commodity exposure, probably think of the 15% of our portfolio and not the larger percent.
Two great questions.
Yes, this year is about like every other.
So, we're going through about the same amount of RFP that we went through last year.
Again, let me reiterate that it's going pretty good so far.
Still got some room to go but going pretty good.
The second part of your question, remind me of that again.
Oh, yes, the grain.
One thing that we always do is look at opportunities to lock in margins when we do get pricing contracts established.
So, we'll look at that.
So, it's hard to say this early about how much of the impact of that $100 million will drop to the bottom line until we get through this big RFP season because if we can get the chance to lock in our margins underneath that, we will.
But ---+ that's probably enough.
Probably able to do that in pork.
I'd be cautious about doing that in beef.
We had a pretty good October but here in the middle part of November, beef cut out has dropped quite dramatically.
I don't know what Friday's close was but it's probably going to be around 2.05 or something like that and dependent on where cattle are North versus South.
Sometimes it takes you a little while to get that change reflected in the cost of the cattle.
Beef, my guess is that you're probably more back-end loaded.
Cattle, we saw the cattle and feed numbers Friday, our estimates would be that the increase in fed cattle coming to market this year would be in Q3 or Q4.
So, you're probably a little front-end loaded, maybe, in pork, and a little back-end loaded in beef, is the way I'm thinking about it.
No, I can't answer that.
No.
Sure.
That wasn't such a technical term was it, <UNK>.
We're in the process now ---+ you saw our announcement last Friday ---+ of optimizing the production footprint.
We'll be moving lines of products within that footprint to optimize the logistics around the raw material and optimize the cost of the production.
From that point, then, the next move is to really look out into the distribution network and make sure that we have the right nodes of distribution, both from a hub-and-spoke and from a forward positioning basis, to optimize our transportation cost and our service offering.
Once we get the production footprint established ---+ largely, it won't be perfect ---+ then we will begin working on the distribution network.
There's a couple things that we're starting to focus on now around rationalizing some of the SKUs.
We've got some end-to-end opportunities between primarily our pork business but, to some small extent, our beef business and our prepared foods business to continue to work to optimize cost inside that network.
All of that, we will begin working on that in 2016 but largely the effect of those changes will happen in 2017.
Let me hasten on to say, too, that we've got work inside our chicken business, as well.
We've just completed the conversion in South Georgia to tray pack.
We've got a lot of FP capacity around us now, so we're able to go out and bid on business that we weren't able to bid before.
Our antibiotic-free business continues to grow.
As those grow, that will help us optimize the production and the distribution network, as well.
Hope that clears it up a little bit.
Yes, I would spread that cost throughout the FY16 year.
We sell boxed beef out front and buy cattle futures against it to lock in the margin.
Some of those contracts are fairly well out through the year, so just spread that cost on through the rest of the fiscal year.
It's going well.
We did have a problem which, <UNK>, you know my background, it would be hard for me to think about a sweet potato problem, but the flooding that we had in South Carolina actually disrupted our supply chain a little bit on sweet potatoes.
We had a great team around that, worked through it very well, and I think did as good as we could to get as much of our volume into the marketplace as we can.
We just had some heroic efforts on the part of that business and our supply chain.
So, yes, it's going pretty well.
We're a little bit shy of the 10% now.
It's pretty easy for us, frankly, to buy about 100 loads a week.
Most of that will be breast meat.
Some will be breast meat portions.
And then if wings were to soften up and we had good promotional volume for next spring's wing season we will always be out there buying wings and a few tenders when they're available.
Typically the size tenders that we need aren't very readily available.
So, mostly think breast meat.
But, yes, we do spread that around to the other raw materials when we can use them.
<UNK>, honestly, we spend all of our time just focusing on our customers and our margins.
We don't spend a whole lot of time trying to figure out what the industry is doing.
Very much so, removal of a negative.
And I would say that today the dollar impact is probably having more of an impact on pork and beef exports than it would chicken.
I feel comfortable that if the export restrictions based on AI were relieved then we could increase our exports in chicken pretty readily.
So, the dollar wouldn't necessarily impact the chicken as much, but on pork and beef, yes.
Thanks, everyone, for joining us today and certainly for your interest in Tyson Foods.
We wish you all a very happy Thanksgiving.
Have a good day.
