Q4 2019 Earnings Call
Well put a chicken in every five every evan.
Grill.
Slow cooker.
And skills.
Well aware there from.
Everyone deserves to serve up a good meal.
To get farm raised chicken is the highest quality.
Real chicken.
That's how I assume we remain committed to this simple promise to always keep it real to always keep the Tyson.
Back in 1935, John Tysons motto wise, when better chickens are hedged we will hatch them.
It's why today all of the Tyson chicken that bears his name will be raised with no antibiotics ever.
Every nugget.
Every strip.
And every drumstick.
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And correctly pronouncing Hawaii's official state fish, the whom of whom will not go no go up for what.
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I would now but to turn the conference over to John console.
Tyson Foods, Vice President of Investor Relations. Please go ahead.
Good morning, and welcome to the Tyson Foods incorporated earnings conference call for the fourth quarter fiscal 2019 on todays call or no white, President and Chief Executive Officer, and Stewart Glendinning, Chief Financial Officer.
Slides accompanying today's prepared remarks are available as a supplemental report and the resource center of the Tyson Investor website at <unk> IR Dot Tyson dotcom.
Some foods issued an earnings release this morning, which has been furnished to the FCC on form 8-K and is available on our website that IR dot Tyson dotcom.
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 Tysons 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 FCC for a discussion of the risks that can affect our business.
I would like to remind everyone that this call is being recorded on Tuesday November 12 at nine am Eastern time, a replay of todays call will be available on our website approximately one hour. After the conclusion of this call.
This broadcast as the property of Tyson foods, and any redistribution retransmission or rebroadcast of this call in any form without the express written consent of Tyson foods is strictly prohibited.
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.
Reconciliations to our GAAP results. Please refer referred to this mornings press release I'll now turn the call over to know white.
Thank you John and good morning, everyone first I'd like to walk from Dean banks as President of Tyson Foods delighted Dean is joining our team. He brings extensive experience as a leader and entrepreneur.
His background on innovation technology.
Im sort of served on the board would team since I became CEO enormous a thoughtful leader respects and truly values Tyson Foods heritage is an excellent cultural fit with our company.
We remained CEO and Dean will report directly to me and will be is here to be based here in springdale.
Now onto a review our fiscal 2019, which was year highlighted by record sales significant progress and delivering our strategy for long term growth.
We remain focused on ways to grow deliver and sustain our business.
This includes growing our prepared foods and value added chicken business.
Secondly, growing our international business and reducing earnings volatility across our business.
There are some examples of our fiscal 2019 accomplishments.
We expanded our global business with operations in Asia and Europe .
We continue to innovate our iconic brands, which outpaced the industry.
We launched alternative protein products into the marketplace, we're improving efficiencies by opening new distribution centers, we're positioning ourselves for the future by integrating our business through a new enterprise technology platform.
We continue to invest and advanced analytics as well as the development automation and robotics with the New Technology Center here in northwest Arkansas.
We're making strides in our sustainability initiatives for example earlier this year, we announced a new partnership with environmental depends fun. We've also partnered with pro for US help conducted deforestation risk assessment across our supply chain, we're leading innovation in animal welfare research and we also continue.
First to expand the progressive B program, which certifies cattle feedlot feedlot operators.
Following best practices.
Here are some additional highlights as we've backed look back on fiscal 2019.
Sales dollars grew 6% to a record 42.4 billion driven mostly by chicken related acquisitions and increased pricing in the beef and prepared foods segments.
We achieved record beef operating income.
It is retail core business lines outpace the top 10 retail food manufacturers in the 52 week period.
Core volume was up 4.1% and told Tyson retail volume was up 2.7%.
The core business clients and told Tyson retail have posted five consecutive quarters of growth.
Total tysons, showing its highest retail growth in the last two years.
In the fourth quarter, Isis core business lines outpace category growth with overall share up almost a full share point.
Turning to foodservice Tysons focus six product lines continue to double the broad line sector with a 2.5% volume increase over the prior year.
In addition, we see growth opportunities in other areas the foodservice beyond broad line.
Digital marketing and mobile ordering accelerating growth in major QSR and convenience store chains with from surface traffic from digital ordering up 25%.
Pricing is leveraging new digital and social platforms within the K 12, convenience and broadline distribution channels, and we're investing and building new digital capabilities in fiscal 2020.
We also continue to move forward with plans to grow our value added fresh meats business to better meet consumer demands in the western United States.
Two weeks ago, we broke ground on a new facility in Eagle Mountains City, Utah.
It will convert fresh beef and pork into stakes chops roast and ground beef for grocery meet cases.
This additional production will allow us to increase our already growing value added fresh meat sales.
Our growth is enabled by an ongoing financial fitness mindset, we are more focused than ever to drive costs across the enterprise to enable future investments.
I'd like to highlight some of our progress our operations team made in fiscal 2019 toward making Tyson the employer of choice.
We experienced record low turnover and many of our operations over the past year. In addition, we improved our safety record again, this year or reducing osha recordable incidents by 18% versus our goal 10%. This is on top of the 20% reduction we experience in fiscal 2018.
And we continue to expand our program that offers onsite lives skill training classes for frontline team members.
A significant part of our focus in fiscal 2019 was on building for the future.
As a result, we're optimistic about fiscal 20 results as we drive for constant improvement.
Currently we expect to meet or exceed our long term target up high single digit adjusted earnings per share growth.
We also continue to drive innovation deliver on our customer promise and make global consumer expectations will do this while controlling costs and increasing efficiencies.
As I transition to the segments I want to remind everyone in our press release. This morning, we provided guidance for segments. So it will provide more clarity on other guidance items in his remarks.
Now turning to our segments prepared foods continues perform well at retail.
With strong growth supported by increased map spending volumes of Jimmy Dean frozen breakfast were up 6.6% in the most recent 52 week Nielsen data on the strength of new product launches, including simple scrambled egg, which has breakfast falls.
We continue to innovate and will build on the success of these breakfast on the go products like standing Jimmy Dean line into biscuit roll ups and morning condos.
We drove volume across retail with sales of Hillshire farm smoked sausage and lunch meat both up 5%.
While sales of ballpark hotdogs increased nearly 3% and Hillshire snacking was up 15% over the last 52 weeks.
We're excited about the momentum were seeing in our new alternative protein products and the power the Tyson sales culinary and supply chain bring to this category.
We introduced adele's whole blends as our first offering earlier this year.
Since our last earnings call, we've nearly doubled our retail distribution of Razen rooted nuggets to more than 7000 stores and expanded into food service.
This month, we began shipping our new rates and wrote a blended Berger made with Angus beef and plant protein.
We haven't deliver it go to market strategy for our alternative protein products. They must taste, good and they must be healthier alternative to other products already in the marketplace.
In 2020, we continue to expand with new products in both retail frozen and fresh space as well as in foodservice alternative protein projections remain strong.
We're well positioned to lead in this growing space.
Last year, a sale of our non protein foodservice businesses improved our product mix and pricing, while reducing sales volume for the prepared foods segment.
Operating income for the year was relatively flat as strong demand and improved mix was offset by increased raw material and operating costs.
Looking ahead to 2020 for prepared foods, we expect continued growth in retail consumption as well as food service channels like convenience K 12, and non commercial.
As African swine fever reduces global pork supplies, we could see in Greece raw material costs, but keep in mind, a large portion of our business is priceless and direct pass through pricing. This allows us to react quickly to recover costs when we see a sustained raw material price movement.
Moving onto the beef segment, we experienced strong demand and favorable domestic market conditions in the fourth quarter offset by increased costs associated with fire at or Penny County, Kansas plant in August .
We recorded 31 million dollar fire related expenses in Q4.
Net of primary insurance recoveries for a portion of the claim.
Im pleased to say our team members, who jobs were affected by the fire still being paid.
There have been tremendous steps taken by the entire beef team our contractors in the community to rebuild the plant and get us back to full operations as quickly as possible and we currently believe the plant will be up and running in the next 60 days.
The beef segment's operating income for the year was a record 1.1 billion, despite logistical challenge and loss volume, resulting from the fire.
Premium be programs contribute to the overall success with a record year for sales volume and value added margin.
Looking ahead, we expect market fundamentals to be similar to fiscal 2019.
Now turning to the Port segment, our revenue enhancement strategy continued to boost our performance driving wider spreads were all to the industry benchmarks. This includes our premium programs, which experienced 27% category growth year over year as well as increases in exports and foodservice penetration.
Our workspace initiatives are helping our port plants built employer of choice and keeping them fully staffed with record low turnover.
Exports to Mexico, Japan, and China are picking up and we've seen started seeing the improved pricing because of supply shortages in China. The other Asian countries affected by AZA.
We'll be in a better positioned to compete for these export opportunities as we move to buying only rectal coming pretty hard.
Overall, we expect industry hog supplies to increase about 3% year over year. We also expect increased livestock costs record export volumes and pricing improvement.
Now turning the chicken segment as I said in September we have a solid chicken business and we fully expect to see operational improvement in 2020.
We are doing so by streamlining processes, improving operations and lowering costs.
Sales volume for the year increase with your incremental volume from acquisitions.
The additional rendering volume from these acquisitions lowered our average sales price.
Operating income decreased due to higher costs and the challenging pricing environment.
Additionally, operating income was impacted by net feed ingredient and derivative losses of approximately $55 million in the quarter.
On a run rate basis. This is nearly $100 million more than Q3.
We now have the right people and the REIT rules and we're seeing improvement.
Although we're not satisfied with the pace.
In addition to achieving operational improvements, we also expect improved pricing and select products and categories continued performance gains and synergy capture from our Keystone in American proteins.
We continue growing our flagship Tyson brand.
Our core retail frozen value added poultry sales volume was up 1.2% in fiscal year. According to Nielsen.
We plan continued branded growth with new products like ties in air fried chicken and Tyson smokehouse case ready chicken.
And we're accelerating food service growth through innovation and limited time offers.
In international and the other the acquisitions of Keystone, our new tight and European operations led to increased sales along with Keystone in China were closing the gap for a better performance by our legacy Tyson operations in fact legacy China, China business had a record fourth quarter.
And was profitable after breaking even through the first three quarters of the year.
And our China retail business continues to see strong volume growth.
Our international operations, along with exports.
Important part of our growth strategy. That's why we continue to advocate for trade agreements that will benefit our industry and farm and farmers.
For example, we're working with lawmakers on both the side of the I'll ratify the U.S., Mexico, Canada agreement.
The U.S. in Japan recently signed a trade deal that will benefit our beef and pork businesses by putting them on equal basis with other export countries.
Two weeks ago. It was reported that China is fine to lifted for your ban on US poultry. We welcome these positive developments and the more stable operating environment. They provide I'll now ask Stuart to take us through the financials.
Thanks, knowing good morning, everyone fourth quarter in fiscal year results were in line with our revised expectations with earnings of $1.21 $5 and 46% per share respectively.
Operating income was $696 million for the 6.3% return on sales in the fourth quarter and just under $3 billion with a 7% return on sales for the fiscal year.
Revenues for a record 42.4 billion volume was up nearly 9% for both the fourth quarter ended fiscal year, primarily due to acquisitions.
Average sales price was flat in the fourth quarter down 3% for the year, primarily due to the product mix from the acquisition of the American proteins rendering business.
We have very diligent with our capital allocation strategies and last quarter. I mentioned, we were focused on debt reduction we paid off the $1 billion of senior notes that matured in the fourth quarter, mostly with cash generated in the quarter.
We also are able to repurchase 300000 shares for $27 million fiscal 2019 in total, we repurchased 3.7 million shares but $252 million.
Operating cash flows at year end with 2.5 billion and liquidity was 1.2 billion.
Including cash of $484 million net debt was 11.4 billion net debt to adjusted EBITDA was 2.8 times for the 12 months ending September 28.
Net debt coming down in cash up we are well positioned to have all of our capital leave is available in 2020.
Net interest expense was $121 million in Q4, and 451 million for the full year.
Capital expenditures were $288 million in the quarter and 1.3 billion in the fiscal year and we continue to see strong returns on these investments.
And 29 keen to new distribution centers were brought online and we invested in new processing capacity for chicken and value added fresh meats.
We also invested an additional enterprise technology as well as our new Tyson manufacturing automation center.
These investments will provide long term benefits and support our growth strategy.
We continue to target an overall capex return of approximately twice our cost of capital.
Our effective tax rate was 20.5% in the fourth quarter and 20.7% for the fiscal year.
Depreciation and amortization was $289 million in the fourth quarter and approximately $1.1 billion for the full yet.
Rated average shares outstanding in Q4 were approximately 367 million.
As I mentioned on our last call, we face turtles, integrating new information technology that resulted in short term increases to our working capital.
Within the fourth quarter. We also had increased distressed inventory sales in parts of our prepared foods and chicken segments.
This negatively impacted operating income by approximately $40 million.
Our metrics are improving each month and our on time customer service is nearing our historical targets, but some amounts may carry into our first quarter.
Now I'd like to provide our thoughts on the 2020 fiscal year.
As I'm sure you noticed in our release. This morning, we did not provide specific EPS was sales guidance.
The timing and magnitude of potential impacts, resulting from African swine fever still hard to quantify.
Additionally, there are continuing developments in trade negotiations, which can create uncertainty in our external environment.
While these back to the loan did not drive our decision they do significantly compound the difficulty of accurately forecasting EPS and sales to be clear, we believe that position to deliver our long terms ending algorithm of high single digit adjusted EPS growth and there's potential for profound upside depending on how events materialize.
There's a number of additional metrics I will provide on 2020, which will be a 50 Threerd week. However, take note we've adjusted our outlook to be comparable to 52 weeks.
Net interest expense should approximate $450 million, we plan for capital expenditures of approximately $1.3 billion as we continue construction on the Tennessee chicken plant and begin construction on the Utah case ready plant.
We expect liquidity to remain above our 1 billion dollar target.
Our effective tax rate is expected to be around 23.5%.
And you've seen our segment return on sales guidance in our press release this morning.
Our capital allocation in 2020 will continue to prioritize debt reduction while reinvesting in our business for organic growth buying back stock and increasing our dividend.
In the case of inorganic opportunities, we will be very disciplined and return focused in our approach to any acquisition.
Our track record on acquisitions continues to be very encouraging.
Consistent with my comments last quarter, we are already exceeding our cost of capital on an after tax basis in 2019 for our most recent for acquisitions.
Smart Chicken American protein Keystone and the poultry operations in Europe and Thailand.
As we start to realize the full benefit of synergies while driving further growth. We expect strong returns on these acquisitions.
And finally yesterday the board of directors increased the previously declared quarterly dividend to 42 cents per share on costs a stock.
We anticipate the remaining quarterly dividends in fiscal 2020 will be 42 cents.
Resulting in an annual dividend rate of $1.68 per class a share.
That concludes my remarks, and now we'll go back to note for additional commentary now.
As Stuart said the positive impacts, we anticipate from African swine fever, or still hard to quantify but here's what we do know it's likely to improve export markets and change protein consumption dynamics for a number of years.
You also saw return on sales expectations for the segments in our press release.
We're well positioned to benefit from asset, but our long term success is not dependent on airsep or any other onetime events Tyson foods has a strong company with a sound strategy and a unique diversified business model and.
In summary, we're optimistic about fiscal 2020, our outlook is based on our diverse portfolio the strength of our brands our willingness to enter adjacent categories partnerships with customers and ongoing focus on financial fitness, we have opportunities not only grow but to thrive while creating long term.
Shareholder value.
We will now begin the question and answer session to ask a question. He May press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraws.
Jason Please press Star then to at this time, we will pause momentarily to assemble our roster.
The first question comes from Peter Galbo of Bank of America. Please go ahead.
Hey, guys. Good morning, Thanks for taking the question.
Morning warning.
I guess.
Taking into account that you didnt put out a range for the EPS guidance.
Even if we just kind of take the midpoint of each of your segment guide you kind of come up with a number.
That means more of that exceed the end of end of the guidance that you did give you know something in kind of low double digits to low teen Dps growth.
And I guess, just can you help us reconcile that in terms of how you're thinking about each of those margins, whether we should be thinking about that the lower end of that range at least coming out of the gate or if it's really maybe just some conservatism on your part.
And I can follow as well, yes, we'll create 11, let me say we are very optimistic about to about 2020, and what we can deliver through the through the fiscal year no. Each segment, so a little bit different I would say that as we enter 2020.
Beef piece off to a very strong start.
And you.
We view 2020 is another exceedingly strong year pork.
Started little slow however is come on very strong as in the month November as you can probably see in.
Public reports chicken was off to a bit of a slow start.
But it's improving as well so the reason that we didnt give the guidance is that we have a a very good outlook of what we think we would earn in 2020 without the impact of asset.
The difficulty was actually in predicting what the top could be do we have a good sense of the base. It's the top it becomes the problem. That's the reason that we didnt give the guidance.
Got it okay. That's that's helpful.
And then maybe just on prepared foods I think that's kind of what caught investors by surprise in in terms of the raw material inflation being I think you called out $60 million year over year.
In in Fourq, you just what is the timing lag look like in terms of the price increases when might we actually start to see that.
Roll through and just how should we think about demand deterioration. If there is kind of a large double been pricing.
Well the impact in Q4, Peter wasn't wasn't necessarily on the increase in price and raw materials. It was with some other factors as Stuart mentioned the inventory levels. The write offs that we occurred.
That situation is largely under control, there's going to be a little bit rolling into Q1, but it was basically the issues that we've talked about in the end of our Q3 call on an S&P installations from inventory levels, and we did take a pretty sizable adjustment.
In fourth quarter.
So much much improvement not quite where we want the here is we enter Q1.
Got it okay. Thanks, guys Yep. Thank you. The next question comes from Michael Piken of Cleveland Research. Please go ahead.
Yeah. Good morning, I'm, just wanted to get a little bit of an update on where you are on some of the chicken plants that were struggling operationally our you back to the normal wind speed and.
How much of the impact or had when might we see Q1 fiscal 20 from any operational issues that took place last quarter.
Sure Michael we have we have made progress and you know as I mentioned, we're we're not satisfied with the pace.
Over the course of last couple of months I would say operationally we are improved improved in the in performance.
Still not at the standard that we would expect.
However, there has been some other pressures within the poultry segment, you can see public reports that.
Margins have been compressed just to market dynamics. So operationally, we are performing better still not where we need to be but there have been some other pressures it affected poultry as well as as we enter Q1 now from a pricing perspective, it's still early in.
The pricing season, there's been no surprises and as I said in my remarks, there there there are pricing opportunities on specific products. So we are optimistic is we.
Entered 2020, and we do think that the range that we provided in poultry is achievable throughout the year.
Okay, Great and it's a follow up I am I know you mentioned that the contracting is.
Sort of underway and no surprises I mean, how do you sort of think about the contracting season, knowing there's potential opportunity for me I staff like that changing the duration of the contracts or how they're structured in terms of how much you would have is like a fixed price versus cost plus versus index any kind of color that would be helpful.
Yes, my call him I'm, sorry, I can't talk about pricing scenarios.
Just just from a antitrust standpoint, so I can't go there.
Okay.
Okay was there a follow up Mr. Piken.
Sure Dan yen in that case, I mean I guess.
Maybe we could just within the Chicken segment, then I guess, if you could just sort of provide any sort of color in terms of yeah. The mix maybe of your business kind of going forward I mean in terms of can you always provide some color in terms of you know how much is spot sales versus more index anything that kind of help us saw model things that would be.
Paul.
Michael the the pricing really doesn't change that much year to year with us it's fairly consistent and as I mentioned before we have a a wide variety of pricing mechanisms, which does in fact helped stabilize earnings to to a certain extent.
There is not the sizable shifts that take place with.
Most of our customers are there on a variety of different.
Pricing mechanisms so those customers as we enter pricing season, you don't necessarily changed from.
A a fixed price to a grain based or or vice versa. Most of the pricing scenarios are pretty consistent as we move from year to year, obviously, the markets will move but.
No no surprises yet this year.
Hi, Thank you very much.
The next question comes from Ken Goldman of JP Morgan. Please go ahead.
Hey.
Good morning, and thank you I wanted to just follow up on the distressed inventory sales is probably not that big a deal because if you said, it's mostly behind you, but when you hinting that that is sep related I just didn't quite understand exactly what the dynamics, where there I wanted to get a little bit of color Guy, Yes can talk to a large extent it was.
Safety related we had some issues if you remember we talked about last quarter in Q3 with.
Accurate inventory levels and ultimately that ended up with some increase in distress product as we closed out the year. So it was related to S&P inventory levels in the visibility that we head into.
The accuracy of art of our inventories, so largely corrected not completely but feeling much better about where we're at today than than where we were even 30 days ago.
And that stuff to me next time I'll take it.
Uh huh.
And I just wanted to clarification for another one from something that was said in the in the press release, our written in the press release, you said that the pork segment operating margin or income rather decreased because of compressed margins.
And that was in part driven by increased livestock supplies I wasn't quite sure how increased or higher logs livestock supplies hurt. Your margin you may have mentioned this or clarify this but I didn't quite pickup on that.
[laughter] tend to be honest with you will need to get to look back as well because that to into it really doesn't make sense to me either.
If that was the case, it's not completely accurate let me let me tell you what the scenario has been those throughout calendar 2019, I think I think that that by and large most people were expecting.
An increase in exports.
Whether it's the China or other countries now with that both the futures market and the cash price of hogs has moved higher and it's moved higher.
In anticipation of those exports.
Now as we as we finish calendar 2019, those exports have materialized.
So we saw the run up in hog prices, we didnt necessarily see the corresponding increase.
In the import prices, which led to the compression in 2019.
Now since the the product is being produced for export today, we are seeing product prices move higher as publicly reported.
And it's extremely unusual that's counter seasonal for us as an industry to reduce to be reprocessing 2.7, plus million hogs per week and seeing product move higher. So we we are seeing the impact, particularly over the course of the last several weeks.
Great. That's very helpful. Thank you.
The next question comes from Heather Jones of Heather Jones Research LLC. Please go ahead.
Good morning, Thanks for the questions.
Morning.
So quickly on a trade question so.
Late Friday I think it was there was a final rule published in the Federal Register about.
The U.S. setting up terms for us to be able to start the importation of.
Tony poultry.
I was wondering if.
It is it your reading that that is Don and there is there we will be no way to undo that and what are your thoughts about the implications of that for.
China open lifting the ban on us culture.
Yes, other sense a was published in the Federal Federal Register we do think that.
It is in fact on and it would take a congressional acted to change at this point so.
We thought we understood it we somewhat anticipated that and.
The comment I would make Heather is that we are pro trade and weather.
Other countries allow export export access to their country or two hours were approach right.
So it was actually encouraging to see the agreement that was made and we would fully expect that there'll be some type of trade agreement reset pricy with access to China from us poultry so.
No surprise.
And the fact that there has been seemingly some type of an agreement I've been made completely public yet, but we view it as encouraging.
Okay. Thank you for that and then my follow up is on chicken. So you mentioned operational improvements you mentioned select price increases in certain segments.
So you are still not where you want to be operationally, but.
Basically from our Q Q4 run rate.
You're projecting a pretty sizable job and EBIT margins.
You said, excluding any benefit from asset. So just wondering if you could.
Flush that out som to give us comfort as to how you go from the Q4 run rate to 6% to 8%.
Without it yourself and just help us think I understand more how you're thinking about that.
Well, it's a it's not going to happen overnight other that it will be a process and we are in the middle of that process and the plan that was laid out as we came into fiscal 2020, our team is executing on.
So the the operational improvements in whether its labor efficiency costs yields we are on track with where we expected to be.
Now I did talk about some some of the pricing pressure on some specific items and that's that's in U.S.J. data.
It's visible on the other hand, there are a select items that are in strong demand and im not going to necessarily talk about specific items, but.
That creates pricing opportunities for us so in some cases or is there is a surplus products in the mark in other cases, there's there's somewhat of a shortage. So you take the pricing opportunity were in fact, there is strong demand and in the case where there's.
Excess supply then there is some pricing pressure so the market does its job.
I had a one one additional item just feed a note that in the quarter. If you adjusted for the.
Hedging that we saw at the end of the quarter, there was up $55 million last day in chicken.
If you adjust for that you pick up about one and a half extra.
Descendants points on the operating margin and that think that'll help you reconcile when you add Nols comments that how we get to the year end.
Excellent. Thank you so much that gather the next question comes from Rob Moskow of Credit Suisse. Please go ahead.
Hi. Thank you this is actually Jamie weisz on for Rob just one quick one.
Hey, it's about pricing, which I know, we kind of spoke about but second asking another way in the persistent pro problems that your plants is that a risk going forward in terms of losing customers or any sort of negotiation I guess lost some negotiating power.
And then well, but no again no no don't don't view it that way it all Jacob.
Now through the course of 2019 with some of the with a new platform that we installed there were challenges now that's that's largely behind us, but it it has nothing to do with the operational challenges there was more so the visibility that we had of inventories timely.
Yep months shipments in full.
But as Stuart said in his script that is largely behind US we are back.
Very close to the historical standards that we would expect so no two completely unrelated topics.
Got it thank you.
Thank you.
The next question comes from Adam Samuelson of Goldman Sachs. Please go ahead.
Yes. Thank you good morning, everyone.
Morning.
So I was hoping and all of you could help maybe just frame it within the individual segments kind of whats driving what would drive you margin wise to the low end versus the high end and I know that you framed the guidance kind of excluding and any asaph it impacts but it seems.
Like it's hard to separate that out from the state of the world. Today. So just maybe help us understand kind of prepared foods whats to what gets you to 10 versus 12% margin chicken six versus eight.
And.
Maybe a any comments around how you would see the bigger asset have access to the businesses.
Right right.
Okay.
Thats difficult to answer out I'm because.
We don't view it as being at the low under those ranges.
In prepared it would not yet I would say the risk would be if.
If.
There was a rapid rise and raw material prices and we didnt.
Finally.
Reflect that in the pricing of our products now you've heard me say before that we've already had conversations with many of our customers about the.
Potential of prices rapidly increasing and you also heard me say that.
There's a large portion of our business. It is in fact somewhat of a it's a pass through.
So I'd say, that's probably the risk on on the prepared side, but I can tell you are prepared foods segment isn't really strong shape, we're capturing share gain our volumes are strong. So we're very encouraged where our prepared foods businesses that.
In the other segments.
Okay.
I'd say, the only risk would be and as we've stated the ranges that was absent.
Yes, Jeff.
The only risk I can see is if we had a similar occurrence in 2020.
That people were anticipating exports prior hog prices stayed high in exports don't develop.
Other than that I think beef is.
Headed for very similar year, if not better in 2020 than what the delivered in 2019, So obviously in.
The industries in which we compete there's always risk we deal with that every single year, but there's nothing stands out the particular concern right now.
Okay. That's helpful. Color, then specifically in the chicken business I would wonder if you're writing comments on the demand environment domestically.
You are seeing Emmett seems like especially on the foodservice side, just increased promotional activity on poultry could be a nice opportunity for you moving forward, but just how you're seeing that demand environment on your poultry on the poultry side would be helpful.
Thank you.
I think poultry is a great value right now Adam.
You look at at the price spreads it exists between each one of the proteins in the course of the last three or four weeks.
To is continue to widen and so I think poultry presents a great opportunity for stronger promotion, both both that Foodservices was.
Retail levels through through 2020 and.
And it I don't think we've seen the full impact of that we've seen some of the chicken sandwich.
Promotions that had been rolled out it's a QSR level. That's that's been helpful. I would say, but as we go as we move through 2020, I think chicken will continue to be a great value and as I mentioned earlier, it's extremely unusual to see the port cut out moving higher at this time of the year.
Sure grief, it's not that unusual but as it has been extraordinarily strong so.
Net disappearance domestic disappearance, we're encouraged by.
We're actually projecting.
Per capita consumption to be down.
This year.
And that's that's despite the fact that total production is going to be up so, obviously exports or or or a significant help to us.
I appreciate that color I'll pass it on thanks. Thank you.
The next question comes from Alexia Howard of Bernstein. Please go ahead.
Good morning, everyone.
Good morning.
So I know that you'll note given guidance on numerically around the impact of aspect, but could you, possibly will trend on the segment and just talk about the risks and opportunities.
Relating to I ask that I imagine that in in pull gets really the question of what happens with the lean hog prices.
That may be a big opportunity in checking because.
Backward integrated in Darrin demand might might come up probably not much wiggle room on supply and beef.
Could you just give us an idea qualitatively how youre thinking about the puts and takes around day attack, because obviously being within the company you probably have a better insight into our model. The moving pieces are all here than we do on the outside and then I have a follow up.
Okay, Alexey well, let me speak in terms of what's happening from a global perspective, rather than talking about.
Each one of the proteins.
So from a global perspective, if we take just China and the public reports would say that they're somewhere around half so hogs that theyve died and in China.
Maybe a little more might be little less nobody knows the actual number and China produces half of the hogs and the entire world.
So there is somewhere around 25% reduction.
Thats, taking place on on a global basis.
Which translates to a total protein supply globally of someplace between five and 6% decrease in global protein supplies.
And thats everything else being equal.
Not the same time, we have trade that.
Trade patterns that are shifting as well so with those shortages as an example.
We see increase in exports from Australia from New Zealand countries like that it's moving into China, we're seeing less imports into United States, We're seeing more.
Beef and pork moved from South America into China, and Southeast Asia. So the global dynamics are changing their evolving and any time that the world loses that amount of protein supply and demand growing prices are impacted.
And that's the difficulty in forecasting what that impact is going to be for us in 2020.
Because of those market dynamics that continue to to shift.
There are all favorable theyre all positive and we can all run different economic models of what we think the impact is going to be and that's one of the reasons I think you see the range that is.
Yes on our stock and there's basically at $2 range as we look in ended 2020.
I don't think.
I don't think is responsible for Stuart and I have to put forth a number.
Were the visibility that we have we're very encouraged.
But we don't want put forth a number that we think put in fact the low.
Okay.
Great. Thank you I met and then as a quick follow up into a very different topic on one to welcome Dean banks on board.
Just curious I can understand that his experience in innovation and technology brings something that's very timely and and very needed what does that mean for on the CEO role and how is your personal agenda changing here now is that as that transition occurs.
Thank you and I'll pass it on sure well didn't didn't provide we've worked together you know in the past I have a tremendous amount of respect for Dean is capabilities. He is going to be a great addition to the Tyson team.
As you saw he's been on our board.
For several years, so we've had the opportunity to work together.
Hi.
Technology is a growth platform for us as you saw in my statement that we have.
Put in place several initiatives and we have we have a lot more to go.
Pete and Dean has a great cultural fit with with the company and with the leadership team so as far as my role.
David I will be working very very closely together.
Over the course of of time.
So it to its it's an opportunity for Dean just so to have a much deeper understanding of of our business and that same time I can tell you I'll be learning from him as well.
Thank you very much I'll pass it on okay. Thank you. The next question comes from Ken Zaslow of Bank of Montreal. Please go ahead.
Morning, everyone.
Morning, Ken.
Couple of follow up how much of the chicken margin improvement is operational versus environmental.
I guess, that's my first question and then I have follow up on that.
Okay.
Again, the operational improvements, there's a minimum of 200 basis points, that's built into that from an operational improvement standpoint, you heard us talk about that at the end of our third quarter.
So there's a minimum of 200, that's that's built into this.
So you're not looking for a material improvement in the chicken environment.
A year on year, if you take your full year numbers.
This is.
2020 outlook, and then so and im assuming that doesn't it.
Also include the potential of China actually a trade agreement with China. You. This whole reciprocity you discussed the reciprocity between us us accepting Chinese chicken, but you, but do you have potential potentially being able to export to China that does not include that as well and what products can actually move to chime.
Do you think.
The answer to do both questions were were yes.
As I as I.
Spoke out earlier talked about earlier there is some pricing improvements was built in on specific items and that is in fact independent of Esa. So regardless, if we had this effort where we did not we would expect to see some pricing improvement. So there is some that's built in.
No the significant impact of as if it's not built into it so.
So.
Grew in both cases that there is some pricing improvement there there's operational improvements, but we're not taking into consideration. If there was significant quantities of pull through that moved to China.
The other specifically that would move to China.
Can't really answers since we've had not had excess for quite some time, however is likely going to be some form of.
Dark meat.
And then including wing, so wings or as you know and strong demand in China as well as the dark meat from from poultry. So those are probably the two most the two specific items as well as.
As you know the pause at our also in very strong demand.
Great and then just on deep.
Your outlook does not include the insurance proceeds I'm, assuming that the insurance proceeds or what loss prop profitability, you'll have so when you give that six and have to 75% margin for beef.
How much does that exclude for the potential recovery of lost profits lost.
Trent logistic costs, how do we think about that because it takes and have to 75% is probably not.
The real margin right understated by whatever you would have earned.
Prior to the fire is that not the way to think about any can you put some parameters to that yeah. I mean, let's let's keep it simple Ken I mean, we've we said it looked at the yeah. We've looked at when the plant is come online our cost et cetera, and we've we've estimated that given that and giving you that number I know that on the insurance side, we've adjusted the.
<unk> out and when we get those proceeds so we'll adjust those out as well. So that said we are holding that to the side.
So it does not include the insurance.
So.
Does not take any benefit from the insurance proceeds so thats real cash in real margins right, you'll actually be able to take that to the bank right.
We will be able to take that to the bank, but remember of course that we took a 31 million dollar hit in this past quarter on so.
Well that's great I appreciate it guys. Thank you. Thank you Ken. The next question comes from Michael Lavery of Piper Jaffray. Please go ahead.
Good morning, Thank you.
Morning.
On the prepared food on the prepared foods guidance you didn't qualify it with excluding an asset impact. If you mentioned how most of the pricing passes through is that really the biggest factor is that just that you've got some range there to allow for cost pressures. If it comes obviously there.
Could be NSF impact have you factored that in what offsets it and just how should we think about maybe risks are sensitivities on that segment.
Yeah that's.
The the prepared foods is probably the most difficult to forecast, what we think the impact might be.
Our other segments, obviously, there's there's a positive impact potentially significantly positive in the case of prepared you know it's on the rest side.
So it it is a matter of how quickly those increase in costs are captured.
And the mean, we're very confident that we'll continue to grow our business as as we have looking over the course of the last several years. So the team that's in place running our prepared foods business are very focused on delivering growth and volume and.
I can tell you if it comes down to the choice of selling a lot more 10% or not much more at 12% I'll take the money on the bottom line, that's that's growing our business at 10%.
Okay. That's helpful. Thank you and just on the alternative proteins can you give us a since you mentioned you prefer to launch the ones that are positioned us healthier how do you define that and how incremental do you expect some of those products to be what kind of sourcing assumptions do you make around those.
Yes, it is incremental Michael the so its a.
We we don't see cannibalism of any of our other products. So it is in fact.
Incremental and one is when we say healthier.
That's the reason that we've been a little bit slower launches that we we view the alternative protein when we go to market those products not only need to taste, great, but they have to be healthier than whatever the alternative is and that's that's where we think we can't compete and win in the marketplace.
And do you measure that on things like sodium or calories or what's what's how you define what healthier means all the above all the both Michael.
Okay. Thank you very much.
The next question comes from Ben Tour of Barclays. Please go ahead.
Yeah. Good morning, everyone and thanks, just just two follow ups actually on what's being discussed so Juan.
So we take a look at the operating income bridging the adjusted operating income so basically the increase on the adjusted one is because of loss that was related to the plant fire and Thats. How we should have to think about it going into next year, it's little bit the follow up to understand what once you adjust and you got the insurance you're going to take it out, but then you get reported.
Operating income might be higher just because you get recovering back down is that fair to assume.
Yeah, that's the right way to look at it if you look in our press release, you'll see a reconciliation that shows you the amount back and that's exactly the way you should think about it going forward.
Okay, perfect and then.
We've talked about it and I remember we've talked about at dollar during the third quarter conference call. The the improvement you think you can achieve both roughly 200 basis points of the chicken segment once you've accomplished all the initiatives shipping aiming core so if we take that roughly 5%.
Operating income margin for full year, and then you'll see we do get the 200 basis points into next year would bring us to that said the sandwiches right. The midpoint of guidance anyway. So the question is how advanced are you currently going into FY and already in the first fiscal quarter and how much of that.
Good thing will be did that occurred in the first half versus the second half of your fiscal year, just to get along with a sense of how the ramp up those operational improvements is kind of looked like.
Yeah, Ben I would say that it's going to be just a gradual steady improvement.
It's difficult to exactly quantify that for you by quarter, but there will be a gradual improvement throughout the year, Yes, Ben and we don't as you know, we don't break those numbers out quarter by quarter each quarter, we'll we'll update our full cost as we go so you'll you'll see that.
But as Neal mentioned earlier I, you've got the right people in the right place, we're starting to see some of those metrics improving.
Okay Perfect and then just maybe one last fall when do you think the.
Plant that was impacted by the fire is going to be back on how much of that time leads me Tom do you still need to be basically back operational there.
It did to it will be within the next.
60 days spend so we think that's probably.
Probably on on the long end, we think it could be potentially quicker than that so.
Theres still some contractors that are finishing up.
The teams done a remarkable job to get back where it where it needs to be.
Perfect well surprisingly possible. Thank you very much for giving the chance to asking questions at the one thanks.
And are last question today will be a follow up from Heather Jones of how the Jones Research LLC. Please go ahead.
Hi, Thanks for taking the follow up.
Just wanted to delve then you said made the comment the right people on the right place a few times I think on the chicken business I was wondering if.
You could just elaborate on that any.
Management changes there have been or whatever just was curious about that.
AH Yes, there has been other some management changes, we Oh, we changed the leadership for poultry.
At the end of January of this past year, there's been a number of changes that have taken place over the course of.
Have a two Q2 019, so Chad Martin leads or poultry business and then within the business segments Theres been changes that have taken place as well as at the plant level. So there are a number of change has been made and we have complete confidence and the team that's in place today.
Okay. So besides the one that we knew about at the end of January the changes since then have been more at the plant level.
No that it's been throughout the organization and others. So not just at the plant level, but theres been a number of changes directly on the new Chad and keep in mind.
It has a fairly sizable team so.
He chose his team we put them in place and we think we have the right team.
Okay perfect. Thank you so much.
Thank you have there.
This concludes our question and answer session I would like to turn the conference back over to know white for any closing remarks, okay. Thank you for joining us today and from all of US a Tyson we wish you a happy holiday season. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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