Tyson Foods Inc - Class A (TSN) — Q1 2019 Earnings Call Transcript

Good morning, and welcome to the Tyson Foods, Inc. earnings conference call for the first quarter of fiscal 2019. On today's call are Noel White, President and Chief Executive Officer; and Stewart Glendinning, Chief Financial Officer. Slides accompanying today's prepared remarks are available as a supplemental report in the Resource Center of the Tyson Investor website at ir.tyson.com. Tyson Foods issued an earnings release this morning, which has been furnished to the SEC on Form 8-K and is available on our website at ir.tyson.com. Our remarks today include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements reflect current views with respect to future events such as Tyson's outlook for future performance on sales, margin, earnings growth and various other aspects of its business. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. I encourage you to read the release issued earlier this morning and our filings with the SEC for a discussion of the risks that can affect our business. I would like to remind everyone that this call is being recorded on Thursday, February 7, at 9:00 a.m. Eastern Time. A replay of today's call will be available on our website approximately one hour after the conclusion of this call. This broadcast is the property of Tyson Foods, and any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Tyson Foods is strictly prohibited. Please note that our references to earnings per share, operating income and operating margin in today's remarks are on an adjusted basis unless otherwise noted. For reconciliations to our GAAP results, please refer to this morning's press release. Because our annual meeting of shareholders takes place this morning, we need to limit the call to an hour so we can get to the meeting on time. I ask that you honor the operator's one question, one follow-up instructions, and get back in the queue if you have additional questions. We want to get to as many of you as possible, so we will be moving quickly through Q&A while answering questions as fully as possible. I'll now turn the call over to Noel White.

Thank you, Jon, and good morning, everyone. Fiscal 2019 is off to a solid start with earnings of $1.58 per share and 8.3% operating margin. As we evolve from a protein producer to a modern food company, we are reaping the benefits of our established diversified business model. Yesterday, we reached a definitive agreement to acquire the Thai and European operations of BRF. The purchase includes four poultry processing facilities in Thailand, one in the United Kingdom, and one in the Netherlands. This deal furthers our growth strategy by expanding our offerings of value-added protein in global markets. We completed the Keystone acquisition on November 30th, which has provided us with a scalable platform in the Asian poultry market. The acquisition of the BRF facilities will help strengthen our presence in the Thai poultry industry and serve the high-growth markets in that region. The BRF assets in the United Kingdom and in the Netherlands give us a stronger foothold in Europe, where we are currently under-penetrated. I am confident in our ability to integrate the BRF operations, in part due to the pace and level of teamwork taking place with the Keystone integration. Keystone is already playing an important role in our growth strategy, and we look forward to maximizing the opportunities inherent in the combined business that benefits our customers as we strive to meet their needs and grow together. As part of the integration process for Keystone, a few weeks ago, we announced several organizational changes. This refinement of our team will help us make the most of our biggest growth opportunities, which are value-added foods in the international markets. I am glad to have everyone on board, and the team is eager and motivated to deliver results. I'd also like to mention that Fortune magazine recently included us on the list of the world's most admired companies, ranking Tyson Foods number one in the food production category for the third straight year. The rankings are based on key attributes that are important to us as we execute our strategy to grow our business through differentiated capabilities and ongoing financial discipline through continuous improvement, while sustaining our company in the world for future generations. I am committed to our strategy, and our team members are committed to delivering results based on that strategy. Moving to our segment performance in the first quarter. In short, strong organic growth in prepared foods and strong beef fundamentals led the performance, while pork and chicken performed well given market conditions. The dynamics across the different businesses highlight the advantage of Tyson's diversified business model, which works together to provide balance and opportunities for long-term growth. In the Prepared Food segment, it was a record first quarter with $268 million in operating income and a 12.5% return on sales, building on the momentum of the record year in 2018. However, the quarterly performance of Prepared Foods is obscured by divestitures of several non-core businesses last year. When those are excluded, Prepared Foods delivered over 3% revenue growth, double-digit profit growth in the first quarter, and modest volume increases. This demonstrates the effectiveness of the branded value-added multi-channel Prepared Foods model. Looking back to Prepared Foods, we've grown the business from $4 billion in sales with basically a 1% return in 2014. The business, as projected for fiscal 2019, is projected to produce over $8 billion in sales and an 11% to 12% return, with approximately $1 billion in operating income. We've grown this business organically and through M&A and operational improvement, and we are building on our strong portfolio brand. This is best evidenced by the performance of Jimmy Dean, a $1 billion brand with strong historical growth and high market share. We've increased our brand investment and partnered with strategic customers to drive growth. As a result, in the latest 52-week period, Jimmy Dean frozen protein breakfast volume was up 7%, and sales dollars were up nearly 8%. While we continue investing in our traditional meat protein businesses, we are also committed to incremental growth in alternative protein. We are combining our creativity, scale, and resources to make great taste in protein alternatives more accessible for everyone, both domestically and internationally. We will be leveraging all the resources we have at our disposal, including our insights, innovation, manufacturing, sales, distribution, and a global platform. In the weeks ahead, you'll be hearing more from us as we announce new products in the alternative protein space. We've also invested in our operations network. We've completed the turnaround of our pepperoni business, which is now fully contributing to Prepared Foods growth and positively impacting our food service business. With capacity utilization percentages in the high 90s and margins strengthening in Q1, we expect the improvement in the pepperoni business to carry us through the balance of the year. We will build on the momentum of the profitable growth for prepared foods, and we are increasing our projection for operating margins to be in the 11% to 12% range in fiscal 2019. Rising input costs for pork bellies, beef, pork trim, and turkey breast are expected to present year-over-year cost increases. However, we designed this business to manage headwinds, and I am confident in our prospects. We have a great team and the right plan for Prepared Foods to continue driving earnings growth and stability for the enterprise. In the Beef segment, our largest segment by revenue, we produced operating income of $305 million with a 7.8% margin. Average price was up 1.9% compared to the first quarter last year, as both exports and domestic demand remain strong. Volumes were down slightly due to typical occasional winter weather disruptions, which have continued into the second quarter. Demand for beef remains strong globally. With visibility in the cattle supplies for 2021, there appear to be plenty of cattle available for the next few years, and there are ample cattle supplies projected for the regions where we operate. This gives us confidence in our expectation of operating margin near 7% for the year, which is somewhat higher than our previous guidance. The prolonged period of strong global beef demand combined with relatively constant global supplies is expected to analyze and quantify the apparent structural shifts in the beef industry. This is in addition to the margin expansion we've created through value-added and premium programs. We intend to understand the dynamics of these two factors to better predict the enhanced margin structure that our beef business could generate in the coming years. Moving on to the Pork segment, operating income was $95 million with an 8.1% margin. Average price was down 4.6% versus Q1 last year, associated with lower livestock costs. Volume was down 3.6% as we remain focused on margin management. We are working to enhance revenue per head through premium programs as well as growing our export business. With hog supplies expected to increase at least 2% for the fiscal year, we are maintaining our guidance for a margin of around 6% for the year. Meanwhile, across the company, we are benefiting from record high retention or keeping team members safer than ever, as a result of proactive measures to promote a culture of safety and caring in our plants. Work schedules are changing and provide a more balanced work-life balance, which not only results in improved attendance but also makes our operations more efficient. This practice has made Tyson the employer of choice in a number of labor markets and has improved our performance relative to industry benchmarks. Turning to the Chicken segment, operating income was $173 million with a 5.6% margin. Volume was up 17%, and average price was down 13.1%, mostly due to incremental volume from acquisitions. As a reminder, we acquired American Proteins last year, which is a rendering business and added considerable volumes that impacted pricing within the segment. However, we did face some pricing pressure in some categories, along with cost pressures from tight labor markets in some locations and more expensive feed ingredients. Unfortunately, these pressures are offsetting the benefits from acquisitions and new product innovation. For the year, we expect the operating margin for our Chicken segment to exceed 6%. This is lower than we anticipated in November but I want to be clear, our Chicken business is fundamentally strong, with a highly value-added product mix that is diversified across bird sizes and sales channels. Our Chicken business is well positioned and our continuous improvement efforts and efficiencies, product mix, and cost will keep us well positioned. And while there has been pressure on tray pack pricing, our business model is sound and our operations are solid. Despite the pressure in tray pack, I'd like to point to a new piece of that business that is doing exceptionally well, and that's the Smart Chicken brand we acquired last year. Distribution is growing and demand remains strong for this higher-margin product. And one final point I'd like to make on our operations is that we are expecting substantial improvement in our legacy international business, which is reported in other. As a result of adjusting our business model and increasing sales of value-added products, we're expecting the legacy business to be breakeven by fiscal year-end on a run rate basis, before the positive impact from Keystone's international operations. South Korea is a great example of the shifting dynamics. Our business with them is up nearly 50% year-over-year and now totals nearly $600 million per year. This is an example of what a competitive trade agreement can do for both parties. This concludes my commentary on the business segments, now Stewart, if you could take us through the financials.

Thanks, Noel, and good morning everyone. First quarter EPS of $1.58 was down 13% compared to the record Q1 in 2018. Revenues were roughly flat at just over $10 billion. Volume was up 3.3% and average price was down 3.7% as acquisitions and divestitures affected sales volume and changes in product mix affected pricing. Operating income was $841 million, down 11%. Total company return on sales was 8.3% in the first quarter. So overall, it was a good quarter, but we were up against last year's strong comparisons. The Keystone acquisition performed as expected for the one month we owned it in Q1, and it was right at breakeven on a cash accretion basis. Operating cash flows were $868 million, and our ability to generate large amounts of cash gives us the flexibility to make opportunistic choices. In the first quarter, we repurchased approximately 1.4 million shares for $83 million. We also directed $318 million toward capital expenditures, as we continue to invest in growth and efficiency projects with expected returns greater than the cost of capital. Our adjusted effective tax rate for the first quarter was 22.7%, net debt to adjusted EBITDA was 2.8 times, including cash of $400 million, net debt was $11.6 billion and total liquidity was $1.4 billion at the end of Q1. Net interest expense was $97 million. Weighted average shares outstanding in Q1 were approximately $366 million. Looking at the remainder of the fiscal year, we will maintain our capital allocation priorities to drive shareholder value and to grow the business. We'll be paying down debt from the Keystone acquisition and deploying cash to grow organically. Now that we've announced the agreement to purchase BRF Thai and European operations, we're ready to go to the bond market to secure permanent funding for both the BRF and the Keystone deals. Interest rates have been more favorable since year-end. We feel confident in the quality of these assets and we're happy with the purchase price of a little less than 10 times. And finally, I'll give an update on our outlook for 2019, which includes Keystone, but doesn't yet include the BRF operations. In fiscal 2019, we expect sales to grow to approximately $43 billion with the addition of Keystone. Keystone is expected to be accretive on a cash basis and breakeven on a pre-tax basis for the year. The additional amortization for Keystone will be about $26 million for the 10 months of fiscal 2019 and approximately $35 million per year in fiscal 2020 and beyond. CapEx should be about $1.5 billion in fiscal 2019, however, our planned spending for 2020 is expected to decline to the $1.1 billion to $1.3 billion range. Although we are scaling back on CapEx, it will remain higher than depreciation. Net interest expense should approximate $450 million. Liquidity is expected to remain in line with our $1 billion minimum target. Our effective tax rate is expected to be around 23.5% for the year. We are reaffirming our earnings guidance of $5.75 to $6.10 per share as we grow our business, drive out costs and create shareholder value. Now we'll return to Noel for additional commentary. Noel?

Thank you, Stewart. In summary, we remain focused on stabilizing volatility and growing earnings in Prepared Foods, as well as our value-added and international businesses. We are facing several challenges this year, as we do every year. And we have successfully managed them while continuing to thrive and grow the company. We're also aware of circumstances that could provide upward potential, and we will maximize those opportunities. For the long term, our growth prospects are intact. Our Chicken, Prepared Foods, and Fresh Meat businesses are now each earning approximately $1 billion a year. We have the mindset of continuous improvement and continuous innovation. We have a strategy focused on protein, whether that's animal protein or plant protein. We have the products and the brands consumers demand. We have plenty to be excited about, as we continue to grow this Company. Our fiscal second quarter is typically our most challenging. The pork and chicken environment is very different than a year ago and we won't have the earnings benefit from the divested businesses. So we have a tougher comparison versus Q2 of last year, though we haven't encountered anything unexpected so far in the quarter. We're looking forward to a strong second half of the year, and we're confident in our ability to deliver on projections of $5.75 to $6.10 per share. Stewart and I regret that we won't be attending the CAGNY Conference. We apologize for canceling on late notice, but we will be handling the BRF Thailand-European acquisition and the upcoming bond offering. That concludes our prepared remarks, and we're ready to begin the Q&A.

Yes, thanks. Good morning, everyone. So maybe first, I was hoping I could dig in a little bit on the updated guidance in the Chicken segment. You've changed the margin outlook by something on the order of 150 basis points to 175 basis points from kind of near 8 to above 6. And I'm trying to just understand how much of that is the increments of Keystone layering into the business versus a change in the outlook for the legacy or existing business that you were guiding to in November? And so far, as the legacy business guidance change, can you help us understand what has changed from a pricing-cost perspective that has caused you to revise your forecast?

Yes, sure, Adam. The change was, in fact, almost entirely to our legacy business. In the November call, there was a lot of pricing that was not complete, particularly on the tray pack side. That business is largely complete, and that is by far the best reason that we've revised the guidance for the corporate segment. So Keystone had little to no effect on the change.

Okay, that's very helpful. And just maybe then digging in on the tray pack pricing, is it purely tray pack pricing? I think on the prepared, for the process pricing and maybe just a little bit more color around the tray pack pricing environment that led to a more tempered outlook?

Yes, sure. It is the tray pack pricing, Adam. So within the businesses that we operate, whether it's our value-add businesses, small bird business, or big bird business, pricing outside of tray pack was almost exactly as we expected. There was some pressure on the tray pack pricing that was greater than what we expected, and that is what has led to the revision in expectation.

Hey, good morning. When you stack up all the acquisitions you've made in the Chicken industry in the last 12 months or so, can you give us a sense of what's a reasonable synergy capture as you start to roll these businesses in, and when can we expect to see that in the coming years?

Well, Stewart here. I'll pick that up. I think really, we've sort of announced that acquisition by acquisition, as you know, in Keystone, we announced $50 million worth of expected synergies. That’s been our biggest acquisition. We're off to a strong start there, and I can say that we feel confident about delivering those synergies. So to get through each of the following acquisitions, we're happy to talk about those. Specifically on BRF, that's both Chicken and International. Synergies will be smaller there because of the size of the business, but we think that's a great opportunity for our Company.

Great. And just wondering if you could maybe assess the impact of African swine fever on each component of your business. Obviously, there are some puts and takes that you might see if things are really bad, maybe just give some color there?

Yes, sure, Jeremy. The African swine fever, I mean, different analysts have different outlooks as to how it could potentially impact your business. I think the general consensus would be that it's probably a little worse than what's reported. And that would certainly provide upward potential. We do not have built into our forecast the effects from African swine fever. But if we see, particularly the Chinese back in the market, there could be sizable upside benefits to our pork business. But aside from that, with that increase in exports, we consider the domestic disappearance of protein in total. So if there is more import, it’s exported, it also helps both our Beef and Poultry business as well.

Hi, thank you. I had a question about all the international activity that's going on here, in terms of acquisitions, and then Donnie King coming back to the business. It's just in my experience that Tyson has never done a particularly good job of leveraging its domestic experience to buy and operate international businesses. There have been some false starts along the way. And now you've made two acquisitions in the past 12 months, and Donnie is going to be running international. Can you explain why Donnie wanted to come back to run that business segment? How his expertise carries over from domestic to international markets? And I guess, why the change in strategy, why now in terms of all this international growth?

Yes, sure. So Rob, first of all, we are extremely happy to have Donnie back with us. He's been a talented performer for us in many different parts of our Company. We are always looking to deepen our bench, and that's exactly what Donnie brings, is a much deeper bench. Doug Ramsey, who is running our poultry business, now running our McDonald's business, did a great job, and that is a growing segment for us. So we look forward to Doug's contributions in the McDonald's. And then we have Chad Martin, who just recently relocated from our Beef business, did a great job in managing our Beef business as well as Poultry. So we have three extremely strong individuals in running those businesses. On the International side, Rob, you mentioned that we may not have done a great job historically. That's not to say that we cannot do a great job moving forward. In the last quarterly report, I mentioned that 90% of the growth in protein demand is expected to occur outside the United States. That is the reason we are establishing a presence in those markets. We are one of the companies in the world, and we can deliver the expected results both domestically and internationally.

And maybe you could help me understand the Brazil Foods assets that you are buying. What's the synergy between those assets and the Keystone Asian export assets, or just the Asian assets in general?

A couple of things, Rob. We talked about the European business that gives us not only a manufacturing base in Europe but also sales and a distribution and licensing platform to bring products from Southeast Asia, Thailand in particular, to Europe. The facilities are also complementary to the Keystone assets that we owned, in addition to four facilities that come with BRF. They are also complementary to each other. And let me go back, Rob, and make one other point. In your question, you asked about a change in strategies. There has been no change in strategy. In the last call, I said that the strategy that was in place was based on value-added products and international. And that's exactly what we are executing, which is what I told you in November.

Good morning. Quick question on your domestic chicken business. So you mentioned that tray pack pricing came in, the contracting came in lower than expected. I was wondering when those contracts would be renewed, and given that contracting, how much exposure do you have in your domestic chicken business to benefit if pricing does come in better than expected for 2019? The markets rallied; you mentioned the potential positive impact ASF could have on domestic protein availability. So how are you positioned to benefit now if pricing does improve as we move through 2019?

Sure, Heather. Tray pack pricing, there is not one common date that pricing becomes effective for all customers. It’s over roughly a six-month period of time that would start away from late fall and winter through spring. Each customer’s pricing begins to have an effect at a different time. As far as the strengthening in pricing, we have in fact seen some strength in pricing over the course of the last 30 days or so. We were at historic lows in the month of December; we've seen some strengthening since then. So that is in fact a benefit to us. We have put some volume back around us that I talked about in November that needs to be done. So our sales organization has done a very nice job in putting that volume back around us, which does help us in our buy-versus-growth strategies. So that's been helpful. And then on the pricing side, with what we are in the market buying, we are back in the markets looking to buy product as well. Demand through the month of January was extraordinarily strong due to what we believe are a number of factors, and whether that continues into February is yet to be seen, but demand in total was very strong.

Okay, thank you. My follow-up is on just thinking about your Chicken business. So you've done two international acquisitions. Just when you're looking at that business holistically on a global basis, do you believe there are any deficiencies in the domestic platform that need to be solved, or is your focus solely on building out the international piece of that business?

No, Heather, we'll always look to stabilize our earnings within poultry itself. So if opportunities become available, we will certainly look at them, but the primary focus is not either poultry or international, it's value-added foods to a lesser degree international. We've made, obviously, most recently a number of acquisitions on the international side on poultry-based, but the primary focus is going to be in value-added foods in growing that sector. So we will be opportunistic in looking for those opportunities, but it's focused on prepared and, to a lesser degree, on the international side.

Yes, hi. I know you guys had mentioned last quarter that you weren't going to specifically call out the Financial Fitness savings, but are you guys still overall on track, and is the $200 million per year still the right run rate to use?

The short answer is yes, Michael. We don't have the depth and detail of the tracking. Stewart mentioned on the last call that we do follow, but not in significant detail like we were doing before. But yes, all the initiatives, all the efforts, and all the tracking is still there, and we are in fact delivering.

Yes, just a couple of things to add, Michael. Basically, what we did is we took all those run rates and we baked them into our budgets this year. So we know that the teams are still accountable to deliver the results. We're making sure that at the bottom line they're showing up, and of course they're tracking the projects to make sure that they're delivering the savings.

Okay, great. And then my follow-up is, if you could talk a little bit about kind of the margin stability of Keystone, and some of your recent acquisitions, in rendering and even BRF. Are these going to be a little bit more margin stable and more volatile relative to the rest of your Chicken portfolio? Thanks.

Okay. Yes, Michael, the margins would be more stable than other parts of our poultry business, just by the types of businesses, whether it's domestic or international with Keystone. We have a number of large customers that we work very closely with them, and we won't see the highs; we won't see the lows. So in general, I would say, the margin structure is much more stable. And the same thing would be true with some of the other acquisitions that we've made, such as API or the rendering business – relatively stable margins. And then in my prepared remarks, I talked about Smart Chicken, which is also more stable in their earnings profile as well.

Yes. Hi, good morning and thank you very much for that. So just to understand quickly on the segment reporting, is it right to assume that Keystone is going to be fully, basically reflected within the Chicken segment? But it did not impact the level of profitability, the downward revision. Just to confirm that.

Yes. So two things. First of all, Keystone is split; the US portion you will find in Chicken, the international portion will be baked into other, along with our existing international operations. What we said in the guidance is that, for the year, we expected profit would be about flat, after adjusting for some of the integration expenses.

Okay, thanks for that. And then on the financing needs, you mentioned you're going to go out now with two acquisitions done, Keystone, Brazil Foods to do a proper bond market financing. So you've said something about the $100 million and then obviously you have some maturities this year, they're going to be paid down; you're going to refinance them within the bond. Just to get a little bit of a sense about your outlook on debt capital markets, what we should assume for that in terms of that's going to be raised and how interest expense is going to look for next year then.

You got it, okay. Well, a couple of things. So first of all, of course, as you'll notice from the past years, we have been focused on ensuring we get the right deleverage and that you will see that continue. In terms of the upcoming financing, we wanted to get through this BRF deal so we could go to the market in a clean way to raise funds, both for Keystone and for BRF at the same time. So you should think about amounts that sort of approximate that as we go to market. We do have some tranches coming to maturity later this year, and we haven't taken a specific choice on how we will refinance those, but you can expect that they will be refinanced and not all paid off.

Good morning, everyone. Coming back to the BRF deal. Can you characterize that in terms of what proportion of that is more value-added products versus how much of it is more commodity poultry operations? And given that, what's that likely to do to the margin structure of the Chicken segment. Thank you, and I'll pass it along.

Yes. Sure, Alexia. The mix of the BRF business is almost entirely all value-added; very little raw commodity type products. So, almost all of that is value-added product.

And in terms of the impact on Chicken overall, remember this actually will sit in the international segment. So it won't affect Chicken at all relative to, yes relative to International, it will be a nice addition to that business and will help drive both synergy growth internationally along with growing profitability. You refer to Noel's remarks in which he talked about our existing business in which that business is profitable, is improving; you layer on Keystone, and then you layer on top, this acquisition, we start to have a good-looking international business.

Good morning. Thank you for taking my question. So I was wondering if you could share what the organic volume and price dynamic look like within the Chicken segment?

Rebecca, we will need to get back with you, and the reason that I hesitate is because we made an acquisition with API, which has a sizable volume impact, which also affects the overall pricing, I noted. So I think what you're looking for some specifics of the businesses outside some of these other areas of required. I suggest Jon Kathol can follow-up with you and give you more detail on that.

Okay, that would be great. And then my follow-up would be just on the margin impact. On the API business as well, I assume that, although I know it's more stable, that it would also be a lower margin business, and that would be another hurdle for that segment to overcome in 2019?

No, not necessarily, Rebecca. We do have some, you know, a bit of depreciation we will be paying for a while. But now it is - it is not dilutive to their return on sales. The rendering businesses have been good for us. API was a very good company, and now it should not be expected to be dilutive to their return on sales.

Particularly once we consider the synergies that are going to be coming from that business.

Hey, good morning everyone. Just one quick one. I know in your opening remarks you said that you look to optimize some of the opportunities that might come your way and create upside. I think that was the implication. What opportunities were you looking or thinking about that would create more upside or that you would be able to capitalize on? I don't remember the exact wording, but that would seem like the implication.

Yes, I think, Ken there are a couple of them. One would be, and the question was asked earlier about African swine fever and/or other trade opportunities. I would say that from a trade standpoint in the last couple of years it's been difficult, whether it's with Canada, or with Mexico or current disadvantages that we have with Japan, within Asia. So I would say anything that is beneficial on the trade side could provide substantial upside. Our exports continue to grow year-over-year, but they can grow a lot more than that. So it's those specific areas that will enhance global disappearance that can provide upside to us. At this point, we're not building anything in on the grain side; it's our assumptions; we use a forward grain curve of what the futures market looks like. So that can be an advantage or it can be a disadvantage. But right now, we're not assuming any benefit at all.

Okay. And then might my second question is, can you talk about your resource allocation to integrate for acquisitions? That is usually not an easy recipe, so can you talk about how your resources are allocating to ensure that you have these four acquisitions integrated without any execution issues? And does this leave any opportunity to do further acquisitions that we kind of like - let me digest this, and how do you think about that?

Right. Ken, we put together a very strong Integration Management Office that we have fully dedicated resources and everything is following the plan. So we fortunately have some experience now behind us in doing it well. The team that we have in place is delivering exactly what we expected to deliver, both from an integration standpoint and synergy standpoint. So there have been no surprises. As far as continuing to make acquisitions, as I mentioned, we do look for going to the bond market; we will be very disciplined in what we would take a look at. Next, it would have to deliver a strong financial return, being a geographic area that might be attractive. But we are fully committed to integrating what we have bought, there is financing in place and then take a very structured, disciplined approach on anything else we might consider.

So one other thing, Ken is that when you look at the kind of acquisitions that we've done, there is a strong overlap with the kind of business that those companies are performing and our existing business, and that frankly just makes integration a lot easier.

Good morning. Thanks for the question. So first question just on Chicken, to take a step back as you assess the business in its current form. How would you say investors should think about the linkage between your margins and the commodity margins that everyone looks at? I know in the past there was some talk about, okay we will do 600 basis points, 700 basis points better than the market, etc. But what's a good way for us? There is so many moving parts; it's very complicated, but how would you say we should think about the business? Because you started at 10% margins a year ago, and now we're guiding to 6%, so there is clearly a step down. Trying to understand how much of that is just the market being really, really weak versus your operations? So please help us understand that. And do you think maybe that relationship is going to get better over the next 3 to 5 years?

Yes, I'd talk about the way that I think about it, Akshay, and it's been several years since we've talked about the spread that you referred to in your question. And what we said at that point in time is that we were not going to hit the high of the highs when the markets are very strong and very high. And we're not going to be at the low of the lows when the markets are down, around breakeven. The numbers are very close to what you just described. I think what we said is that our expected spread was between 500 and 600 basis points when markets are down or around breakeven. A couple of years ago, when the markets were very strong, commodity companies that we were generating a 15 plus percent return. At that point in time, we were generating around a 12% return. So we weren't hitting the highs and we were not hitting the lows. The fact that we're around six right now and from what we can tell, many others in the industry and in the commodity space are around breakeven, it's very close to that historical spread that you describe. So it's not much different than the expectation I think the Stewart has a comment. I think before we go on I think that this is the part of the story that's being missed is what the performance of Prepared Foods has been. They had a record 2018. They had a record first quarter. You go back four years ago it was a $4 billion business at about a 1% return. Today it's an $8 billion business that's generating a $1 billion right. So I understand all the questions on poultry. However, the stories that you should be taking away from this is the remarkable performance of what our Prepared Foods Group has done.

And just if I can follow up, you know the opportunity – is there an opportunity to make the chicken business more like the Prepared Foods business long term, and how are you addressing that?

I'd say that that's what we do every day, Akshay, is to try and increase margin, increase the mix, stabilize those earnings so that that is a process. I wouldn't tell you that that's something that you should expect to see over the course of the next 12 to 24 months, but that is what we do every single day, is to try and grow the earnings within our poultry business as well as provide more stability within that business.

Thanks for taking the follow-up. Noel, you mentioned that it looks as if ASF could be a little worse than reported. We've received things we've read and people we've spoken to with feet on the ground, and all the numbers are now moving closer to 15% to 20% of the herd. Would that not shock you or do you think that could be close to reality?

Heather, to be honest with you, I can't answer that. And even within the analyst group, within two days I saw two different reports that said it is this worse than what's expected on the other hand it's not as bad as what's been reported. So I think, Heather, it's speculation on my behalf to say it's either better or worse. And I'm just, I'm not comfortable speculating exactly what the situation might be.

Yes, thank you very much for giving the opportunity just on Brazil Foods, just quickly following up with. I remember right, in your prepared remarks, you said something like the transaction price is something like a little under 10 times. So does that mean you assume something like whatever $30 million, $40 million of EBITDA? Just checking to the results of the company used to report in the assets, it looks more like $50 million to $60 million. So just to understand what the base of your assumption is, is that normalized EBITDA? Is that something that is trailing EBITDA? Just to understand where that number came from.

Yes, you've actually hit the nail on the head. It is a normalized EBITDA. If we use the trailing number, the multiple would look much, much lower, but that would include periods before the ban on shipments from Brazil. So we normalized the number. I'll tell you that we feel really good about the price that we paid; we feel great about the overlap with our operations in Thailand and our ability to drive Foods that are value-added. This goes right along with the comments that Noel has already made around Prepared Foods as we are looking at taking the margins up, and this is not only part of an international strategy but also part of that value-added approach.

Okay. So, if I may, just on that, so Brazil Foods used to run the European operations for shipments from Thailand to Europe, but also from Brazil into Europe and then basically for processing and selling and using the distribution network, they had in Europe. So now, you obviously have the footprint in Asia, acquired through the Brazil Foods transaction, you have the Keystone assets prior to that is there a pure way of thinking order certain of your plants from the US. That could also kind of feed into the European distribution networks, which is using what you can potentially export from the US into Europe, or is that not an option?

At this point, it's not an option. There is very little, if no poultry being exported from the United States to Europe. At some point in time, could that be the case? Certainly. What we were looking for is not only the manufacturing capabilities within Europe but also sales and distribution platforms to bring products from Southeast Asia, Thailand in particular, to Europe. This provides both from a manufacturing standpoint, as well as the sales and distribution standpoint. Any opportunities that we see would simply be additive to that, which could, at some point, include the United States, but that's not currently the case.

Thanks, I appreciate the follow-up. I'm just looking for clarification on M&A and to make sure I understand the messaging. You are going to the bond market to finance Keystone and Brazil Foods. Can you talk about what you view as your incremental kind of acquisition capacity, or dry powder after these acquisitions are completed? And is this signal that you're going to the bond market that you're not actively pursuing additional M&A right now? I just want to make sure I understand how that ties together.

Well, I mean I'd say that first of all, we never comment on any prospective acquisitions as you know, but clearly we want to go through the bond market in a clean way for our investors.

And just as you look at the dry powder that you would think you have after the pending bond, how much capacity do you think you could take on?

Look, I don't want to pin down to a specific number because it's going to be a little dependent on rating agencies, the kind of acquisition, etc. but it would be measured in the several billions.

Thank you for joining us today and thank you for your interest in Tyson Foods. I know there are a lot of team members who are also listening. I would like to thank each of you for what you do every day to make our company successful. Thanks everyone.