Tyson Foods Inc - Class A (TSN) — Q1 2020 Earnings Call Transcript

Good morning and welcome to the Tyson Foods Incorporated earnings conference call for the first quarter of fiscal 2020. On today's call are Noel White, Chief Executive Officer; and Stewart Glendinning, our 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 6 at 9:00 A.M. Eastern Time. A replay of today's call will be available on our website approximately one hour after the conclusion of this call. This broadcast is the property of Tyson Foods and any redistribution, retransmission, or rebroadcast of this call in any form without the expressed written consent of Tyson Foods is strictly prohibited. Please note that our references to earnings per share, operating income, and operating margin in today's remarks are on an adjusted basis unless otherwise noted. For reconciliations to our GAAP results, please refer to this morning's press release. I'll now turn the call over to Noel White.

Thanks Jon and good morning everyone. Along with Stewart, joining us in the room today is Dean Banks who joined the company at the beginning of the month and is beginning to transition to his new role as President of our company. Welcome Dean. We're pleased to report we delivered top and bottom-line growth in our first quarter and generated record Beef results. Before I speak to these results, I'd like to talk about our focus on sustainability to meet the growing global demand for protein, that's why we recently announced at the World Economic Forum in Davos the creation of the Coalition for Global Protein. A combination of strategies and solutions including all forms of protein are needed to responsibly feed a world population expected to reach almost 10 billion in 2050 requiring an estimated doubling of the production of protein needed today. Our goal is to unite stakeholders across the food and agricultural sector to develop new and creative solutions to sustainably feed the world with affordable nutritious food. We believe this reflects positively on our strategy which is focused on sustaining our company and our world for future generations, while growing our business by delivering superior value to consumers and customers and fueling our growth and returns through commercial, operational, and financial excellence. Turning to our results, our overall first quarter was in line with expectations with adjusted earnings of $1.66 per share. Beef and Pork results were strong. Prepared Foods drove growth in retail consumption. The Chicken improved operationally, although continued to face soft pricing which weighed on results. Looking across the marketplace, consumption of our retail Prepared Food products has been outstanding. Both the Tyson core retail business lines which were up more than 5% and total Tyson retail up more than 3% outpaced volume and sales growth versus the top 10 retail food manufacturers in the 52 weeks ending December 28th. This growth contrasts with the total food and beverage category which was down 0.4% for the same period. We've now experienced six consecutive quarters of growth. Our core business lines are outpacing the categories with volume share growth of 1% and all core business lines are holding or growing share. In the Foodservice channel, our Foodservice Focus six product lines grew 3.5% and were twice the total broadline distribution channel growth of 1.6% over the last 13 weeks. The power of our Foodservice brands, innovation, and capabilities across all channels has set the stage for growth. In the last three months, Jimmy Dean Breakfast Sausage volume grew 10%; Tyson Red Label grew 17%; and the Tyson brand grew 8%. Now, let's take a look at our business segments. In Prepared Foods, growth and share performance has been outstanding, especially with our big brands. Retail innovation launched at the end of fiscal 2019 is performing well with velocities meeting or exceeding targets on the national launches of Jimmy Dean Biscuit Roll-Ups and Jimmy Dean Morning Combos with both demonstrating velocity performance in the top half of their respective categories. While still early, Biscuit Roll-Ups show potential for driving category growth. Prepared Foods profit margin in the first quarter was impacted by an $80 million increase in raw material costs driven by beef trim and hams. Some of this increase was offset by pricing though Prepared Foods may continue to experience volatile input costs. We continue to experience some operational effects from our recent ERP system implementation which impacted margins by roughly $40 million in the quarter. About half of this was discounted sales with the remainder related to inventory write-downs and donations. Although, the effects have persisted longer than anticipated, we continue to work aggressively to resolve them and we are seeing progress. In the alternative protein category, the Raised & Rooted brand is only the beginning of our plan to build the world's leading portfolio of plant protein products. In the back half of the year, we're planning multiple new launches across protein forms, brands, meal occasions and channels. Over time, we see these options as another stable protein complementing our core offerings. We're being practical and thoughtful in our approach to enable us to create better product experiences with healthier nutritious ingredients at affordable prices. Looking ahead for the Prepared Foods segment, we expect to maintain our momentum in the market. We will do this by continued investment behind our brands through marketing, promotions and innovation. And we will remain agile with pricing to offset input costs driven by the volatility of raw materials. For the fiscal year, we believe the Prepared Foods segment's adjusted operating margin will be 10% to 12%. Our Beef segment produced a record adjusted operating margin of 11.2% in the first quarter. The quality of domestic-fed cattle has been excellent. This makes every link of the beef supply chain more valuable, whether it's a producer, the packer or the retailer and results in a better product for consumers. Our premium programs continue to grow as a percentage of sales. Our customers and consumers are seeing the value in our quality and it's translating into increased revenue. Our Fresh Meats premium programs have nearly doubled over the last five years to approximately £1 billion. I'm pleased to report that our Finney County, Kansas plant damaged by fire last August is now back to full operations. Beef exports are strong with the potential to be even stronger now that trade agreements have been formalized. I'd like to remind you however that our second quarter is typically our most challenging for Beef. In addition to the challenges caused by winter weather in the Midwest, the drought in Australia has forced a herd liquidation putting more beef on the global market. Looking ahead, exports from Australia are expected to decline substantially as the ongoing drought and the tragic fires are likely to delay their herd rebuilding. With Australian beef amounting to a quarter of U.S. beef imports, this could be beneficial to our business. Our export sales continue to equal or exceed industry growth rates. For fiscal 2020, we're expecting our Beef segment's adjusted operating margin to meet the upper end of 6.5% to 7.5%. Moving to our Pork segment. Strong pork demand and solid operational execution along with ample hog supplies led to a 14% adjusted operating margin in Q1. Export markets were the primary driver for increased demand. We believe that we are at the very early stages of the global demand shifts that we've expected from African swine fever. We're filling additional orders to China and we've seen year-over-year increases nearly 600% in the first quarter and we're already benefiting from indirect shipments as we backfill in other markets. We've progressed towards a ractopamine-free hog supply. This will open up more markets to us as the need to move product globally increases. In fact, global demand for all proteins is increasing as ASF continues to reduce pork supplies in Asia. For fiscal 2020, we're expecting our Pork segment's adjusted operating margin to be 6% to 8%. Now turning to the Chicken segment. We're pleased that our execution is better and operations are on track to deliver $200 million year-over-year run rate improvement. However, pricing which has been weaker than expected was the primary driver of our return on sales in Q1, but softer pricing has persisted into the second quarter. All leading indicators point to domestic poultry supply growth and the USDA is projecting a 4% increase in chicken production. I previously indicated global protein suppliers being impacted by ASF, while demand continues to grow at about 2% per year. In light of ASF, we anticipate global demand will keep pace with U.S. supply growth as Chinese imports of U.S. chicken are expected to double. Domestically, we'll continue to innovate and drive demand in the frozen value-added space with products like Tyson Air Fried Chicken. This product launched last July with strong customer acceptance and is demonstrating dollar velocity performance in the top half of the category. Early data shows that the Tyson Air Fried Chicken is attracting new consumers and driving growth in this $2.6 billion category. Looking ahead in the Chicken segment, we expect an annual adjusted operating margin of 4% to 6% driven primarily by softer pricing and overall chicken supply. In International and Other, both our legacy and newly acquired businesses are contributing to our improved international performance. We see the potential to expand in these growth markets, which are estimated to drive 98% of global protein demand increases over the next five years with 70% of that growth coming from Asia. We have a business of scale and there are still synergies to unlock. We have high-quality assets and a strong team led by Chris Langholz who recently joined the company as President of International. Chris has an extensive background in global protein and we welcome him to the Tyson team. Our legacy International business is performing well increasing sales and earnings. The new acquisitions are providing great platforms for growth. We're committed to becoming the global leader in protein by serving emerging markets and strategic customers across channels and across segments. Across our businesses, trade deals are contributing to our optimism. We believe with improved access to global markets from recent trade deals, we are well positioned to capitalize on opportunities in the global marketplace. In addition to U.S. trade deals with Japan and South Korea, we're very pleased the Phase one trade agreement with China and the USMCA have both been signed. An important benefit of the deal with China is the inclusion of more protein eligible for shipment. We're shipping product to China and have more orders on the books. But keep in mind that tariffs that remain in place puts the U.S. at a pricing disadvantage in the Chinese market. If tariffs are lifted or reduced, we would likely see an acceleration of already increased global demand for U.S. pork, beef, and chicken. We're closely monitoring news of the coronavirus. We're actively assessing what this outbreak may mean for us for our global business and preparing for the possibility of any impact. In China, we've been working with the government and have successfully restarted some of our operations. The financial impact is unknown at this time. With that I'll now ask Stewart to take us through the financials.

Thanks Noel and good morning everyone. Our first quarter results were in line with our expectations with earnings of $1.66 per share, up 5% from Q1, 2019. Operating income was $894 million, up 6% over last year. First quarter GAAP operating income was impacted $52 million or $0.11 per share for a restructuring charge and $16 million net of insurance proceeds or $0.03 per share for costs related to a fire at our beef plant in Finney County, Kansas. Sales in Q1 were up 6% to just over $10.8 billion with an 8.3% return on sales. Sales volume was up 4.7% and average sales price was up 1.4%. Our operating cash flows were $894 million for the quarter and liquidity was $1.4 billion at quarter end. Including cash of $497 million, net debt was $11.2 billion and net debt to adjusted EBITDA was 2.7 times for the 12-month ending December 28. Net interest expense was $117 million in Q1. Capital expenditures were $312 million in the quarter and we continue to target an overall CapEx return of approximately twice our cost of capital. Our capital allocation will continue to prioritize debt reduction while reinvesting in our business for organic growth buying back stock and increasing our dividend. In the first quarter, we repurchased 1.5 million shares for $132 million. Weighted average shares outstanding were approximately $367 million in the quarter. Our effective tax rate was 22.7% in the first quarter. Depreciation and amortization was $288 million. As Noel said, our newly acquired international businesses are contributing to the improvement in our international operations. Their contributions are in line with or better than our expectations, despite the high amortization and purchase price accounting loads placed on them. Noel has articulated our segment return on sales guidance which should give you an indication of how we expect our businesses to perform. Now I'd like to provide some additional commentary on our outlook. Keep in mind that fiscal 2020 is a 53-week year. However we have adjusted our outlook to be comparable to 52 weeks. Net interest expense should approximate $450 million. We continue to project approximately $1.3 billion in CapEx for the fiscal year, as we progress with building additional processing capacity for case-ready fresh chicken, beef and pork and we plan to scale back CapEx when those projects are completed. We expect liquidity to remain above our $1 billion target. Our effective tax rate is expected to be around 23.5%. I would like to remind you that Q2 is normally a weaker quarter for us and we have seen a slower than expected start in January. For Q2 fiscal year 2020, we are expecting lower earnings than Q1 driven by continued weak market conditions in chicken, higher raw material costs and some residual ERP impacts in Prepared Foods and normal seasonal cyclicality in beef and pork. When combined with the overall availability of protein, a continuation of these factors will likely result in our earnings being lower than the same quarter last year. This is before any potential impacts to our business from coronavirus. Improvements in the back half are dependent upon achieving expected savings and pricing improvements in Chicken, managing to offset raw material cost increases in Prepared Foods and continued strong demand for beef and pork later in the year. That concludes my remarks and now we'll go back to Noel for additional commentary. Noel?

Thank you, Stewart. Supply-demand dynamics have become much more global and our diversified business model and global footprint put us where the growth is occurring and allow us to capitalize on growth opportunities. In addition, we're encouraged by potential increased export demand and the resulting reduced domestic availability of proteins. In closing, our strong brands, strong team, world-class assets, great customers and a global footprint to meet growing demand for protein leave us well positioned for future success. That concludes our prepared remarks. Operator we're ready to begin Q&A.

Good morning, everyone.

Good morning, Alexia.

Hi. I'm sure others will be focusing on the Chicken dynamics, but to start at a broader level, can you provide an update on the current status of trade agreements, particularly with China? What is happening with the tariff situation? Additionally, what are you observing regarding international shipments? I know that opportunities are opening up globally for you. How do you anticipate this will develop over time?

Yeah. Actually we are very pleased that our government has come to trade agreements just since our last conference call with Japan and Korea, Phase one agreement with China with USMCA. So we're very pleased with the progress that our government has made. Shipments continue and interest has been strong. We are currently shipping and we have more orders on the books for China. And our business in the other countries that I mentioned continue to be strong as well not only those countries but other countries around the world. So from a trade perspective, it looks very promising. And as you might have seen overnight some of the tariffs that have been in place with China were lowered by approximately 5%. So that's great progress as well.

Great. And as a follow-up we have seen the pork cutout price start to increase over here as we would expect. We haven't seen much movement in terms of the grocery on-shelf pricing, which ultimately could start to drive the overall meat on the below part. Do you anticipate that those retail prices will start to increase on the Pork side and then start to bleed out into the other parts of the business as well?

Alexia, first of all, I think pork continues to be a great value in the marketplace. And whether it's beef or chicken, chicken is also very attractively priced and whether there's room to raise prices on pork I think it really depends on what happens to cutout over the course of the next 60 days or so. I don't think retailers are going to immediately change prices because of some short-term increases in wholesale prices. I think that if they believe that that will continue to be the case then they will. I think it's too soon to call.

Great. Thank you very much. I’ll pass it on.

Very good. Thank you.

Hey, good morning everyone.

Good morning, Ken.

I have two questions. First, could you discuss your outlook for chicken operations? The industry appears to be somewhat soft, but can you differentiate between the internal issues at Tyson and the fundamental trends in the chicken industry? What direction do you foresee for it? The current quarter is nearly finished, and the second quarter is largely completed as well. Can you share your thoughts on the future outlook?

Sure Ken. First of all, our chicken operations, if you remember last quarter I said that we expected a $200 million improvement year-over-year in 2020 versus 2019 purely from a performance standpoint. And I am pleased to say that we are on track for the run rate of capturing that $200 million. So our plants continue to perform better than what they were. However, the pricing environment on poultry has been relatively weak and that's obvious in public available data, so the improvements that we've captured purely from a performance standpoint has been either offset or more than offset by the weakness in wholesale pricing.

So you think it's mostly the industry not your operations that has created a downside to your guidance?

Absolutely. Yes.

My second question, building on Alexia's inquiry, is regarding exports. Can you share your expectations for the increase in exports for chicken, beef, and pork in 2020 and more significantly in 2021? Are we anticipating double-digit increases across the board? Are we looking at 20% growth? How do you view the export landscape evolving for each of these proteins?

Ken, I can't give you an exact number as to what the expectation of the increase is going to be. I think it will certainly increase. And if we take back through 2019, there was a run-up in hog prices in the spring and exports didn't material quite as quickly as what was expected. There were heavy shipments coming out of both South America and Europe to China. And then the Chinese stepped into the U.S. market and we saw the effect of that in the fall. And a lot of the product arrived and cleared in time for the Chinese New Year. There's product that continues to ship. There continues to be interest in pork and the same thing would be true with beef and with poultry. So interest has been strong. Demand has been good. And the other thing I mentioned on the call last quarter is that we expected to backfill into other markets. And that in fact has happened. Our shipments to some of the other countries have in fact increased. So it's not just China, it's to other countries around the world as well.

Thank you.

Yeah. Thank you.

Hi. Thank you. I had some questions about the chicken guidance. You lowered the margin estimate by about 200 basis points. But also in your prepared remarks, Noel, you said that you're now including the assumption that global demand will match the supply growth, which has also been increased to 4%. I think in your prior guidance you said, you were not going to include any ASF impact on the chicken business or on the business as a whole. Are we now assuming that there's an ASF, a positive ASF impact in the back half of your year? And then I had a follow-up.

Yes, we believe there will be a positive effect on exports. We are anticipating a 4% increase in production and expect to see continued demand growth from an export perspective, not just to China but also to other regions around the globe.

Okay. But it's just not enough to drive your overall chicken pricing higher to offset the excess supply here in the U.S.?

Yes. And Rob I think we need to keep in mind that when we talk about exports into the different markets that there's strength in certain products, there's weaknesses in certain products when we talk about chicken. So the USDA data would indicate that chicken breast pricing in particular has been weak. On the other hand there has been strength in other products such as boneless skinless thighs and tenders and wings. So it's not as simple as just thinking chicken, but it's specific parts that there's strength and weaknesses.

Sure. I've spoken with industry participants about the reasons behind the excess supply, and it seems that some of it is temporary, influenced by favorable weather and grow-outs. Can you provide insight on whether you believe the 4% growth in U.S. supply will continue for another year or two? I could argue that there’s significant capacity being introduced, which might mean that 4% becomes the new standard. However, I could also see the viewpoint that we might be nearing the conclusion of a multi-year expansion in the industry.

Rob, first of all, the weather conditions during the fall were very favorable for growing. I believe the weight of the chicken industry increased year-over-year. Our weight was definitely heavier than we initially projected, and I would assume that this trend likely applies to others in the industry as well. Historically, the average growth rate in the U.S. has been around 2%, which aligns closely with the increase in demand. Over the past 12 months, it’s difficult to say, but I would estimate that over time, a 2% growth rate is likely where my thoughts are focused.

Okay. All right. Thank you.

Yeah. Thank you.

Good morning. Thanks for taking the question.

Good morning.

Good morning. I want to focus on chicken and explore this further. You mentioned you're on track to achieve the $200 million in operational improvements. As you noted, breast meat pricing has been weak. Reflecting on a few years back, Tyson consistently faced a shortfall in breast meat, but it appears that the decline in Tyson's chicken performance this quarter was more significant than the industry's. Am I correct in assuming that you currently have more breast meat than you have in the past couple of years? If that's the case, do you anticipate that this situation will change in the upcoming quarters?

Good question Heather. When Rob asked the question about production increases and I mentioned that the weights were heavier than expected that is in fact true with us and breast meat production as well. So we did use more internally. We did not buy as much on the outside market as what we had originally projected or planned to. Corrections have been made Heather that our buy versus grow strategy remains intact. However in Q1, it was not exactly as we planned.

Thank you for that. My follow-up question is regarding the strong and consistent pork exports to China, which I expect will accelerate. On the poultry side, could you give us an idea of how you anticipate those exports will progress? The coronavirus seems to have slowed down logistics somewhat, but do you expect this to improve following the February 14th agreement? How are you approaching the timing and exports of poultry specifically to China?

Every day brings something new. The news overnight was welcome. If anything, I believe we're going to experience quite a bit of volatility. As I mentioned, demand continues to be strong, or at least interest remains strong. There is certainly a need, and the coronavirus has clouded that a bit. There have been disruptions in domestic production and at the ports, which has skewed shipments and receivables. I expect that once we get past the coronavirus situation, whenever that may be, there will be very strong demand. However, estimating the timeline for that is not possible at this point.

Okay. Thank you so much.

Thank you.

Yeah. Good morning, Noel, Stewart. Thanks for taking my questions. So I guess, we've talked a lot about Chicken so I want to switch a little bit into Pork and Beef. So, clearly on Pork to start-off, I mean you've had a very strong first quarter 14% operating income margin, but nonetheless you kept the guidance unchanged at 6% to 8%. So, I mean simple arithmetic it looks like you're looking for a relative weakness on a sequential basis for the remainder of the year. And it's also curious because you've said on an earlier question that you now do take a little bit of ASF benefit into the back half of the Chicken segment so you're not taking anything into consideration for Pork, or is it just trying to be conservative, if you could give a little more clarity on the guidance in Pork.

Sure. Ben, our Q1 October, November, December is typically the strongest margin quarter for us and it's not unusual for us to drop off in Q2. So we're basically following the typical seasonal patterns that we would see. And normally we'll see things start to improve in Q2. And then through the summer it's not bad. And then in Q1, October, November, December it strengthens pretty substantially. So we're just projecting that the basic seasonal patterns that we've seen in the past.

And that is literally absent any ASF benefit though?

In this case, yes.

Okay. And then on Beef. I mean, clearly you've highlighted it within the release that you still had obviously the operational headwind but just not being able to get enough volume through because of the closing of the Kansas plant and the fire that affected it. Now you're back in. Could you elaborate a little bit? Like, if things would have been normal how would Beef turned out? So if you – I mean, you've adjusted for it to a certain degree but how would your volume at the other Beef plants during the quarter where you printed the minus 8% if we take out the one that was shut down because of the fire? Just to see the underlying fundamentals on Beef.

Yeah. Ben, that's impossible to say what volumes would have been without the fire. I think the distinction was basically that the strength in our export demand and I think it's more of a demand story than restricted supply story. So don't know what supply would have been without the fire, but I do know that demand has been extraordinarily strong both domestically and from an export standpoint in Beef.

Okay. Perfect. I'll leave it here. Thank you very much.

Thank you, Ben.

Yes. Thanks. Good morning, everyone.

Good morning.

So I was hoping to just dig a little bit more on the Chicken business and really just make sure – just thinking about the different market segments there and the pricing and market pressure that you're facing. I mean, again, I think just going back to Heather's question on the buy versus grow and breast meat seems to be bearing a disproportionate amount of some of the market pressures of late. And just trying to think about how that's translating to – into your – whether it's the tray pack the small bird your further process business I wouldn't think that that impact is equal. I mean, especially where – I would think leg quarters you should have some benefit from better pricing. And as we think about 2020, just any comments on contracting for various foodservice institutional accounts how that – how those played out?

Yeah. Adam, first of all I can't talk about pricing. It's a very sensitive subject. Most of the pricing is concluded not all of it, but most of it. And I would say that, as we came through our Q1 and as we enter Q2 breast meat pricing in particular is weaker than I would have expected it to be. However, as I mentioned earlier there has been strength in other products. Leg quarter pricing frankly has been a bit erratic as we came through Q1 January, February and don't know at this point what March, April, May is going to hold. A lot of those prices are not yet settled so that would be purely speculate on my behalf. However, with breast meat USDA's data would say it's trading something below $1 right now so it's at or near historic lows. It presents a tremendous value both at retail and at foodservice. And typically when that happens you see some type of increase in either featuring or promotions at foodservice establishments. So I think that over the course of time and whether that's one month or six months, we're going to see increased promotion on those proteins that are of greatest value. And right now that would include chicken breast.

Okay. And then just shifting gears a bit of a clarification question but maybe there's something in here. Just in the quarter in Prepared Foods your reported volume was down 3.1% yet you look at whether – the scan Nielsen data that we could track and what you reported on the slides in terms of the growth, both for retail and focus five foodservice items, there's growth. And I'm just trying to understand, kind of, the disparity between the reported segment growth on the volume side versus what you can see in the measured channels.

Yes, I think when you look at the reported volumes, those volumes reflect some shifts that we had between our segments. They don't really account for any profit on a total basis, so they are relatively insignificant. You see them in the quarter due to the type of product. However, the numbers we are providing regarding market performance are more about the organic figures that show the momentum of the business.

Okay. I appreciate the color. I'll pass it on. Thanks.

Yes. Thank you.

Hey, good morning. Thanks for taking the questions.

Good morning, Ben.

I wanted to ask about SAP. I appreciate the information regarding the impact on Prepared Foods this quarter. It's clear that you are making progress in improving margins despite challenges with raw material costs and SAP costs. The guidance for the remainder of the year indicates continued margin expansion. I'm curious if you could share your thoughts on how the SAP impact is expected to evolve. Will the magnitude decrease, and is it affecting any other segments apart from Prepared Foods?

Well, just to be clear, this was a system that was implemented for both Chicken and Prepared. We see the impact only in Prepared at the moment. We don't want to give any specific guidance on the timing for that. Know that we're working aggressively. We are managing the factors that influence the write-offs and the distressed inventory that we see. And we of course expect to see improvement as we move forward.

Okay. Great. I have a question regarding the Chicken segment. You mentioned making some adjustments related to having an excess of boneless skinless breast. Can you clarify what those adjustments are and how quickly they can be implemented? Also, regarding the Humboldt facility that you are considering opening later this year, does the current supply situation affect that decision or its timing, if you're able to share?

You're right, Ben, that is a sensitive question. Now, the production in our Q1, it was heavier than it was originally projected. And we, as always, respond to things that we don't expect, so you can fully expect that to take place. And as far as timing of the Humboldt start-up, nothing has changed with that. The project is on schedule and on budget.

I want to clarify something in response to Ben's question about when we expect to see improvement. So far this quarter, our run rates have remained consistent with those from last quarter. I want to emphasize that we do not anticipate this situation being a permanent aspect of our business. The potential for improvement is ahead of us.

Very, very helpful. Thanks and best of luck.

Thank you.

Thank you. And just wanted to touch base a little bit on some of the chicken sandwich wars, and basically, it seems like there's been a lot of talk about the success of those sandwich wars. And just wondering, like, is the dynamic within the chicken markets healthier, maybe, for like some of the smaller birds and maybe the tray pack? Or is there a spillover effect from the weakness, maybe, in some of the bigger bird breast meat markets? And can these sandwich wars maybe help the chicken market? How much?

Michael noted that in fast food, different customers favor different sizes of chicken, making it difficult to claim that one segment benefits over another. A couple of years ago, hamburgers were heavily promoted, but last year, the focus shifted to chicken burgers and sandwiches, a trend that seems likely to continue due to the current value of chicken. Prices for ground pork and beef are higher, with lean imported beef experiencing significant increases due to drought conditions and supply shortages on the import side.

Okay, yes. And then, as a follow-up, I understand that one major operator you serve is considering a significant promotion for chicken later this year. Is it possible to use larger breast meat from heavier birds if there isn't enough of the smaller birds? How feasible is that, and what are the steps involved? Thank you.

Well, okay. Michael first of all I cannot talk about what specific customers may or may not be doing. But I think that there will be sufficient supply, regardless on whatever customer that you might be referring to. So I don't see an issue from a supply standpoint but can't talk specifically about any specific customer.

Good morning. It's Tom Palmer on for Ken. Thanks for the question. I first wanted to clarify the Chicken guidance. Company is guiding to 4% to 6% EBIT margin, absent additional impacts from ASF. The prepared remarks and a lot of the answers today seem to focus on when pricing should get better this year from increased ASF-driven exports. So just given the first quarter results, which sounds like it's a slow start to the second quarter, what are the non-ASF drivers that would get the segment to 4% to 6%?

Well, first typically, as we go into Q3, Q4 – our Q3, Q4, we do see a seasonal improvement that it takes place. So as I talked about Pork, same thing is true with Chicken that once we get into a little warmer weather that people fire up their grills demand does increase. So we're projecting typical seasonal strength in Chicken as well.

Okay. I mean the quick math is if you're running at 2.5% you'd be north of 5.5% in kind of the second half I guess?

If that's what the math says, I guess that's what I would say.

Okay. And then just wanted to ask on the Beef side, I mean it's not a huge cup but you did lower supply expectations. Is this mainly related to end of the year, what you're seeing in terms of some of the cattle inventory? And do you think we would actually exit the fiscal year with year-over-year declines in supply, or flattish, just trying to get the picture there. Thanks.

Yes Simon cattle supply is basically flat year-over-year. Cattle and feeder are actually up some. But pork month-to-month, quarter-to-quarter, it does impact pricing and availability. But through the course of the year it all evens out. So as we look at the balance of 2020, basically flat if not a slight increase over 2019. Same thing would be true in 2021 that we look at the calf crop and it would say that we will have equal if not slightly greater number in 2020 and then basically flat into 2021. And then as we move into 2022, 2023 it really depends on retention rate of peppers and other factors that we closely monitor. So answer to your question would be basically flat supplies, perhaps a slight increase in 2020.

Okay. Thanks.

Thank you.

Hey, guys. Thank you for taking the question. Noel I just want to get your thoughts kind of from a much higher level as it pertains to coronavirus and maybe some of the more medium to longer-term impacts. Have you guys done anything – any work or just around, if wet markets in China are curbed here over the next several months? Just what has that meant historically in terms of the Chinese consumer turning to more of a grocery store? And does that benefit the import market more than say it would if consumers were at the wet markets?

Yes. Peter I think if anything it's just going to accelerate the efforts that the Chinese have had to decrease the number of wet markets. I think that we'll continue to see modern grocery continue to grow in China. So it's an acceleration. I think both ASF and coronavirus will contribute to that. Short term, obviously there's going to be some impact from coronavirus but that will pass. So we think on a much longer-term basis, it's how we will service modern retail in China. And over the course of relatively short period of time, we think that that will probably take place, particularly with the initiatives that the government has in place.

Got it. Okay. That's helpful. And Stewart, maybe just a quick clarification on the Prepared Foods side. With – and I know this was asked earlier but just with the volumes down and I think you mentioned some of it was kind of intersegment changes. I mean, without any profit impact, is that something we should kind of continue to expect over the course of the year that that volume might just optically look negative because of the segment change?

No. In fact, you'll only see it in this quarter. Last year – really this took place a year ago. And because of the seasonality of this product you see a little bit more impact in the quarter. As I said in total, the volume is not material. And certainly the profit is completely immaterial.

So on a go-forward basis we would expect to kind of see that Nielsen and then the data that you guys kind of kind of converge a little bit more with reported results?

Yes that's correct. I mean you also need to bear in mind that the various Nielsen numbers and the foodservice numbers that some of those represent a portion of the volume. And certainly Jon can provide a little bit of a reconciliation during the follow-up call.

Peter, the key point is that our core lines grew by just over 6%, and we gained at least 1% additional market share. The figures may appear affected due to some production shifting between segments. Overall, our retail business remains exceptionally strong.

Got it. Thank you, guys.

Thank you.

Thanks for the follow-up. Noel, I want to clarify something you mentioned earlier. Regarding the closure of live markets in some provinces of China, are you indicating that you anticipate a transition from wildlife trade in live markets to grocery channels? You mentioned this might occur in the short-term; is that your expectation?

No, what I said is that I thought that the shift moving from wet markets to modern retail that the combination of ASF and coronavirus would expedite that transition.

Okay. Okay. And my other follow-up is just going back to your comments earlier about the outlook for Beef as far as what's going on in Australia global demand. So it sounds like you have a bullish view on beef trim costs. So could you speak to what your expectations are for chicken feature at retail? Not asking about any specific customers, but just in general, is it your expectation that chicken feature will benefit from beef trim costs this year?

Yes, Heather. When we consider the value of proteins, chicken—particularly chicken breast—is currently a significant value. Pork is also competitive given the high production levels, despite increased exports. In contrast, ground beef prices are relatively high due to a rise in imported lean beef. Therefore, I anticipate that we will see more promotions for chicken as we approach spring and summer.

Okay, awesome. Thank you so much.

Thank you.

Hi. Thank you. This is Jake Nivasch on for Rob. Thanks for the follow-up. Just a quick one. Is there any reason why you didn't confirm the EPS guidance set from the last call?

Well, Jake, we didn't give any EPS guidance on the last call and we're not planning to give EPS guidance for this year.

On the press release though didn't you guys say high single-digit growth?

No, we did not. We talked about what our long-term algorithm looked like, but we did not address specifically anything for 2020.

Got it. Okay. Thank you.

Good morning again. I wanted to follow up on Prepared Foods. You clearly mentioned during the call that there were costs related to the ERP implementation, which have been accounted for. However, you also noted an $80 million headwind from beef trim and ham. I’ve observed that the current quarter still shows a significant headwind in ham costs, which likely contributes to some weakness in Prepared Foods while benefiting Pork. What are your expectations regarding internal costs of goods sold for beef and ham, and how do you anticipate this will evolve throughout the year, considering the impact of ASF? I'm trying to get a better grasp of the margin recovery dynamics in Prepared Foods and the source of these challenges.

Sure, I can address that. There was an increase in prices for both 90% lean beef and hams. We do not plan to change our pricing unless we see a significant shift in the market. As we approach fall, ham prices have shown good value but have recently decreased sharply over the last couple of weeks, unlike imported lean beef. If we determine there is a longer-term change in pricing, we would then consider adjusting our prices. Typically, we refrain from making price changes based on what we perceive to be short-term fluctuations, whether that involves hams, pork bellies for bacon, or trim. We will only act if we believe a lasting shift has occurred and is likely to continue.

If the situation were to continue or come back, you would consider raising prices, but it would take some time to balance that out. You might anticipate that your margin on Prepared Foods could be around 10% to 12%, but you should be able to compensate for that with improved margins in Beef and Pork, possibly exceeding the current guidance. Does that sound reasonable?

I think that's a fair assessment, Ben.

Well thank you for your time today. And please join us online for our Annual Meeting of Shareholders which starts at 11:00 Eastern Time. Thank you.