Q1 2020 Earnings Call

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Good morning, and welcome to the Tyson Foods first quarter 2020 earnings conference call. All participants will be in a listen-only mode. Should you need assistance with signal a conference specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask a question. You may press * then 1 month on your touch tone phone to withdraw your question, please press star and then to please note this event is being recorded. I would now like to turn the conference over to John Cottle wage president of investor relations, please go ahead.

Good morning, and welcome to the Tyson Foods Incorporated earnings conference call for the first quarter of fiscal 2020 on today's call are no light chief executive officer and Stuart glendenning. Our Chief Financial Officer slides accompanying. Today's prepared remarks are available as the supplemental report in the resource center of the Tyson investor website at home price includes issued an earnings release this morning, which has been furnished to the SEC on form 8-k and is available on our website at 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 discussion of the risk that can affect our business. I would like to remind everyone that this call is being recorded on Thursday February 6th at 9 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 or retransmission or rebroadcast of this call in any form without the express written consent of Tyson Foods is strictly prohibited.

Please note that our reference.

Is 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 No Light.

Thanks, John and good morning. Everyone along with Stewart joining us in the room. Today is Dean Banks who joined the company 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 deliver top and bottom line growth and our first quarter and generated record beef results before I speak to these results. I'd like to talk about our phone not on sustainability to meet the growing Global demand Protein. That's why I 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 reach almost ten billion and 2050 requiring an engine doubling. The production of protein needed today. Our goal is to night stakeholders across the food and agricultural sector to develop new and Creative Solutions to sustainable wage.

Read the world with a portable nutritious food. We believe this reflects positively on a strategy.

Which is focused on sustaining our company in our world for future Generations while growing our business by delivering Superior value to Consumers and customers and fueling are grown now returns through commercial operational and financial actual excellence.

Turn to our results. Our overall first quarter was in line with expectations with adjusted earnings of a dollar sixty six per share beef and pork results were strong prepared foods wage growth and Retail consumption the chicken improved operationally, although continue to Face Off pricing Which Way Down results.

Looking across the marketplace consumption of a retail prepared food products has been outstanding well with the Tyson core retail business lines, which were up more than 5% and told her I said tail up more than 3% outpaced volume and sales growth versus the top ten retail food manufacturers in the fifty two weeks ending December 28th. This brought us with the total food and beverage category, which was down 4% for the same.

we've now

Six consecutive quarters of growth our Core Business lines are outpacing the categories volume share growth of 1% in all Core Business lines are holding or growing share of the Food Service Channel our food service focused six product lines group 3.5% at more than twice the total Broadline distribution Channel growth of 1.6% for the last thirteen weeks.

The power of food service Brands Innovation and capabilities across all channels is set the stage for growth in the last three months Jimmy Dean breakfast sausage volume grew 10% off Tyson Red Label grew 17% and the Tyson brand group 8% Now, let's take a look at our business segments.

And 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 philosophies meeting or exceeding targets International launches, Jimmy Dean biscuit Roll-Ups and Jimmy Dean Martin combos with both demonstrating velocity performance in the top half of the respective categories while still early fiscal Roll Up Show potential for driving category growth prepared foods profit. Margin. The first quarter was impacted by an a million dollar increase in raw material cost driven by beef trim and hams some of this increase was offset by pricing over prepared foods may continue to experience volatile input costs. We continue to experience some operational effects from a recent Erp system implementation, which impacted margins by roughly forty million dollars and a quarter.

about half of this

Just kind of 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. We are seeing progress.

The alternative protein category the race and running brand is only the beginning of our plan to build the world's leading portfolio of plant protein products and the back half of the Year wage earning multiple new launches across protean forms Brands meal occasions and channels over time. We see these options at the as another stable protein complementing our 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 food 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 with pricing to offset input cost driven by the volatility of raw materials for the fiscal year. We believe that prepared food segments adjusted operating be 10 to 12%

Our beef segment producer 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 the supply chain more valuable whether it's a producer the Packer for the retailer and results in a better product for consumers.

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 a freshman premium programs have nearly doubled over the last five years to approximately 1 billion pounds and please report that are Finney County Kansas plan damaged by fire. Last August is now back and pull operations.

Beef exports are strong with the potential to be even stronger. Now. The trade agreements have been formalized. I'd like to remind you. However that our second quarter is typically our most challenging for B.

Addition to the challenges caused by winter weather in the midwest the drought in Australia has forced to herd liquidation putting more beef on the global market looking ahead exports from us. Thursday are expected to decline substantially as the ongoing drought and the tragic fires are like a delay there heard rebuilding

Australian beef amounted to a quarter of us beef Imports. This could be beneficial to our business or export sales continue to equal or exceed industry growth rates wage 2020. We're expecting our beef segments adjusted operating margin to beat the upper end of 6.5 to 7.5%

Moving to our pork segment strong Port demand and solid operational execution along with ample supplies led to a 14% adjusted operating margin in q1.

Export markets were the primary driver for increased demand. We believe we are at the very early stages of the global demand shifts that we've expected from African swine fever filling additional orders to China and we've seen year-over-year increases of nearly 600% in the first quarter and we're already benefiting from indirect shipments as we backfill in other markets dead.

we progressed towards the

I mean free hard Supply this will open up more markets to us at the need to move product globally increases. In fact Global demand for all proteins is increasing as she continues to reduce Port supplies in Asia for fiscal 2020. We're expecting our ports segments adjusted operating margin to be 6 to 80%

Now turning to the chicken segment. We're pleased that our execution is better and operations are on track to deliver $200 year-over-year run-rate Improvement. However, pricing package which has been weaker-than-expected was a primary driver of a return on sales in q1.

Softer pricing has persisted into the second quarter.

All leading indicators point to domestic poultry Supply growth in the USDA is projecting a 4% increase in chicken production. I previously indicated Global pro team suppliers being impacted by a s f or demand continues to grow at about 2% per year in light of ASF. We anticipate Global demand will keep Pace with U.S. Supply wage is Chinese Imports If U S chicken are expected to double the magically will continue to innovate and drive demand in the pros and value-added space with products like Choice an air fried chicken. This product launched last July was strong customer acceptance is demonstrating dollar velocity performance in the top half of the category of data shows that the Tyson are fried chicken is attracting new consumers and driving growth in this two point six billion dollar category.

looking ahead and

Consignment we expect an annual adjusted operating margin of 46% driven primarily by software pricing and overall chicken Supply.

An international other both our Legacy and newly acquired businesses are contributing to improved International performance. We see the potential to expand in these growth markets which took it 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's still synergies to unlock.

We have high-quality assets and a strong team led by Chris langholz recently joined the company as president of international. Chris has an extensive background in a global protein and we walk them into the Tyson team.

Our Legacy international business are performing. Well increasing sales and earnings their new acquisitions are providing great platforms for growth for committed becoming the global protein by serving emerging markets and strategic customers across channels and across segments.

across our bill

It says trade deals are contributing to our optimism We Believe with the improve access to global markets from recent trade deals. We are well positioned to capitalize on opportunities in the global market choice. In addition to us trade deals with Japan and South Korea were very pleased the phase one trade agreement with China and the US MCA have both been signed.

An important benefit of the deal with China is inclusion of more protein eligible for shipment for shipping product to China and have more orders on the books. But keep in mind the terrorists remain in place, but puts us in a pricing disadvantage and the Chinese market if terrorists are lifted a reduced would likely see an acceleration of already increased Global demand for you, pork beef and chicken.

We're closely monitoring news of the coronavirus were actively assessing with this outbreak May mean fourth or a global business preparing for the possibility of any impact in China. We've been working with the government and it successfully restarted some of our operations. The financial impact is unknown at this time with that now as Stewart took us through the financial

Thanks, Nolan good.

Good morning, everyone. Our first quarter results were in line with our expectations with earnings of a dollar sixty six per share up 5% from q1. Nineteen operating income was 894000 and up 6% of the last year first quarter gaap. Operating income was impacted $52 or $0.11 per share for a restructuring charge and $16 insurance proceeds or 3 cents 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 ten point eight billion dollars with an 8.3% return on sales.

Sales volume is up, 4.7% and average sales price was up 1.4% Our operating cash flows were $894 for the Porsche and liquidity was 134 billion at quarter-end.

Putting cash of $497 net that was 11.2 billion and net debt to adjusted. Ebitda was 2.7 times for the 12 months ending December 28tg interest expense was $117 in q1.

capital

Bandages with $312 in the quarter and we continue to Target an overall capex return of approximately twice our cost of capital.

A 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 dollars weighted average shares outstanding were approximately $367 million in the quarter.

Our effective tax rate was 22.7% in the first quarter appreciation and amortization was $288 Million has not said our newly-acquired national businesses are contributing to the improvement in our International operations. Their contributions are in line with or better than our expectations despite the higher amortization and purchase price accounting loads of Life on them know 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 page. Keep in mind that fiscal 2020 is a 53-week year. However, we have adjusted our Outlook to be comparable to fifty two weeks.

net interest expense

Should approximate $450 we continue to project approximately 1.3 billion in capex for the fiscal year as we progress with building additional processing capacity is ready fresh chicken beef and pork and we plan to scale back capex from those projects are completed.

We expect liquidity to remain above are 1 billion dollar Target. Our effective tax rate is expected to be around 23.5%

I would like to remind you that Q2 is normally a week or quarter for us and we have seen a slower-than-expected start in January the queue to fiscal year 20. We are expecting lower earnings than Q was driven by continued weak market conditions and chicken higher raw material costs and some residual Erp impacts and prepared foods and normal seasonal six locality in beef and pork when combined with the overall availability of protein it 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 Corona virus.

improvements in the back

A dependent upon achieving expected savings and pricing improvements and 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 will go back to normal for additional commentary. No.

Thank you Stuart. Supply-demand Dynamics have become much more Global in our Diversified business model and Global footprint put us where the growth is occurring and allow us to capitalize on growth opportunities in addition or encouraged by potential increased export demand and the resulting reduce 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 future success that concludes our prepared remarks operator ready to begin the Q&A.

Thank you. We will now begin.

The question and answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to answer your question, please press * then two. Please limit yourself to one question and one follow-up if you have further questions, you may re-enter the question queue.

Our first question will come from Alexia Howard with Bernstein, please go ahead. Good morning, everyone.

Good morning, Alexa. Hi that I'm sure others will be focusing on the the chicken Dynamics. But just to kick things off at a higher level. Can you give us an update on where things stand with the trade agreements particularly with China what's going on with the Tariff situation? And what are you seeing in terms of international shipments? Cuz I know that it's them things opening up around the world for you. How do you expect that to evolve over time? Thank you. Yeah, actually we're very pleased that you know, our government has come to trade agreements. Just since our last conference call with with Japan and Korea agreement with China with usmca. So we're very pleased with the progress that our government has made shipments continue in in interest has been strong. We are currently shipping and and we have more orders on on the books for China and our business and the other countries that I mentioned dead.

Continue to be strong as well. Not only those countries, but but other

The countries around the world. So my trade perspective that it looks very promising. And as you might have seen overnight some of the tariffs that have been in a place with with China were were lowered by approximately 5% So that's that's great progress as well.

Great, and there's a follow-up. We have seen the pork cut off price. To increase over here as we would expect. We haven't seen much movement in terms of the grocery on the Shelf pricing which ultimately could start to drive the the overall meet envelope Park. Do you anticipate that those retail prices will start to increase on the port side and then start to bleed out into the other parts of the business as well.

Alexa first of all, I think Port continues to be a great value in the marketplace and and whether it's beef or chicken chicken is also very attractively Prime and whether there's room to raise prices on 4K, I think it really depends on what happens. Is it cut out over the course of the next 60 days or so, I don't think retailers are going to immediately am going to change prices because of you know, some short-term increases in wholesale prices. I think that if they believe that that will continue to be the case then they will often it's too soon to call.

Great. Thanks.

You very much. I'll pass it on very good. Thank you.

Our next question will come from Kansas with the Bank of Montreal please go ahead.

Hey, good morning. Everyone morning Kim two questions. What is can you talk about your chicken operations Outlook. The industry is clearly going, you know is kind of soft. But can you check us out the difference between what happened? Tyson internally issues and underlying fundamentals for the chicken industry. And and where is that going to go? You know again wage, you know, the quarters done second quarters largely kind of in in the books as well. But can you talk about where the Outlook will go and how you kind of think about that? Sure. Can the first of all are taken operations. If you remember last quarter, I I said that, you know, we expected a $200 Improvement year-over-year and 20 versus 2019 purely from a performance standpoint and I am pleased to say that that we are on track we run rate of capturing at at two hundred million dollars so our plants continued to perform better than than what they were how else

the pricing environment

On on poultry hasn't been relatively weak and and that's that's obvious and publicly available data. So the the improvements that we've captured purely from a performance standpoint of been either offset or more than offset by the weakness in in wholesale price.

So you think it's mostly the industry, not your operations that is created it down side to to your guidance. Absolutely. Yes it my second question is just building on the left off when I think about the exports. Can you tell me what you think the

Which will increase for chicken beef and pork in 2020 and more importantly 2021. Are we looking at double-digit increases across the board are we looking at? You know 20% like how do you think about this in terms of how the export picture will build over the next, you know each of the proteins?

Can I 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 encouraging and you know, if we think back through 2019 there was a run up and in hog prices in in the spring and and exported material quite as long as quickly as what was expected there were heavy shipments coming out of a South America and Europe to to China and then and then the Chinese stepped in into the job market and we saw the effect of that in in the fall and I a lot of the product arrived in in cleared in time for the Chinese New Year. There's there's product that continues to shift the continues to be interest in pork in the same thing would be true with with beef and and with poultry so interesting.

Has been strong demand has been good.

And the other thing I mentioned on the call last quarter is it we expected to to backfill into other markets and and that in fact has happened. It's our shipments to em 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. Thank you. Our next question will come from please. Go ahead.

All right. Thank you. I was had some questions about the chicken guidance. You know, you you lowered the margin estimate by about two hundred basis points, but but also in Europe are remarks and all you said that you're now including the assumption that Global demand will match the supply growth which is also been increased two to four person that I think in your prior guidance you you said you were not going to include any impact on the chicken business or on the business as a whole Are We Now assuming that there's an ASF a positive impact in the back half of your year, and then I had a follow-up

yes, we we we

Do you think that there will be a positive impact on on exports? We we are expecting the the for production 4% production increase we are expecting continued to to see growth in demand from an export standpoint. Not only to China but but other places in the world as well.

Okay, but it's just not enough to to drive your overall chicken pricing higher to to offset the excess Supply here in the US. Yes, and I think we need to keep in mind that you shall we talk about exports and into the different markets that that there's strength in certain products that are weaknesses in in certain products when we talk about chicken so off the USDA would would indicate that you know, chicken breasts pricing in particular has been has been wait on the other hand. There's there's been strength in other products such as long as getting the size tenders and wings. So it's it's not as simple as just thinking chicken, but but it's specific parts that there's a strengths and weaknesses sure income and and here's the follow-up the I've talked to two industry participants about what's causing the excess Supply. It looks like some of its transitory related to favorable weather and gross.

Can you give us a sense as to whether you think this this 4% us Supply growth?

Names for another year for another two years. I mean I can make the case that there's a lot of capacity coming online. So, you know, maybe 4% is the new number but but I could also see that maybe we're coming to the end of a multi-year expansion in the industry. First of all, there was there was you know, a favorable weather conditions as we came through fall for growing conditions. Um, I think the the weight of the chicken is an industry was was up year-over-year. I know that ours was was certainly ever heavier than what we originally projected and I just have to assume that that's probably the case with with others and Industry as well, you know historically, you know, the increase over the course of time is the average, you know it about a 2% growth rate and that's pretty well-kept based off. What

With the increase in demand has been so over the course of twelve months. It's hard for me to say but I think over the course of time and if we think in in terms of about 2% that that's going to where my mindset would be. Okay. All right. Thank you. Our next question will come from Heather Jones with Heather Jones research, please go ahead.

Good morning. Thanks for taking the questions. Good morning. Good morning. So I want to stick with stick with chicken and just dive a little deeper. You make sure that you're on Pace to generate the two hundred million and operational improvements and like you said trust me pricing has been week. Now if we could rewind a few years ago Tyson was always well pretty consistently short breast meat but it seems like cuz a year-on-year deterioration Palm Tysons chicken performance for this quarter was worse than the industry. So am I right in thinking that you guys are long more breast me that you've been and the last couple of years and if so, is there any expectation that that should shift in coming quarters?

Good question Heather.

You know when when Rob asked the question about, you know production increases in and I mentioned that that the weights were heavier than expected that that is in fact through with us in breast milk production as well. So we we did use more internally we did not buy as much on the outside Market as what we had originally projected or or planning to Corrections have been made whether that's you know, our buy versus growth strategy remains intact however in q1 it it was off exactly as we plan.

Okay, thank you for that. And my follow-up is as far as how should we think about. I mean pork exports to China have been pretty strong consistently and I would expect those to accelerate but on the poultry side it just wondering if you could give us a sense of how you expect the Cadence of those exports to be off the coronavirus seems to slow down the logistics some but do you expect this to build as that February 14th agreement takes place or I mean, how how are you guys thinking about the Cadence and exports to China a poultry specifically Heather every every day brings something new, you know, the news overnight was was was welcome.

If anything I'd say that we're going to have quite a bit of volatility as I mentioned demand continues to be your interest at least continues to be strong. There is certainly the need and coronaviruses. It's just clouded that a bit frankly other, you know, there has been disruptions. There's been disruptions in Georgia production has been disruption at the ports. So that has used shipments receivables. I would expect that wage. You know, we get once we we get past the coronavirus internet whenever that might be it. I do think that there's there's going to be very strong demand coming out of that. I'm trying to estimate what that time. Is is going to be is not possible at this point.

Okay. Thank you so much. Thank you.

Our next question will come from been firm with Barclays, please go ahead. Yeah. Good morning Earl Stuart. Thanks for taking my question. So I guess we've talked a lot about chickens. I want to switch a little bit into into Pork and Beef securely on Park to start off. I mean, you've had a very strong first-quarter 14% operating income margin, but nonetheless, you kept the guidance office and changed and fixed to Aid 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 back. If you set on an earlier question that you now do take a little bit of ASF benefit into the back half of a chicken segment. So you're not taking anything into consideration for pulled pork or is it just trying to be conservative if you could give a little more clarity on the guidance and pork sure, you know our q1 October November dead.

number, you know is typically

You know the the strongest margin quarter for us and and it's not unusual for us to to to drop off in in Q2. So we're basically calling the typical seasonal patterns that we would see in normally we'll see things start to improve in in Q2 and then through the summer it's not often and then you know in in q1 October November December it strengthens pretty pretty substantially. So we're just projecting that the basic seasonal patterns that we took in the past.

And that is literally absent any benefit though in this case. Yes.

Okay, and then on be from in clearly, you've highlighted it within the release that you still had obviously the the operation I had when purchased not being able to get enough volume through because of the closing of the camps plan and the the fire that affected it now you're back in could you elaborate a little bit like if things wouldn't be normal how would be turned out? So if you I mean you've adjusted to bring it to a certain degree, but how would your volume how was your volume at the other beef plan during the corner where you printed the mind as 8% if we take out the one that was shut down because of the fire just to see the underlying fundamentals on these. Yeah, that's impossible to say, you know, what volumes would have been uh, you know with without the fire. I think I think the distinction was basically the the strength in in our export demand and and

I think it's it's more of a

Demand store then restricted supply stores. So don't know what Supply would have been without the prior, but I do know that demand has been extraordinary strong automatically in from an expert standpoint of view.

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

Our next question will come from Adam Samuelsson with Goldman Sachs, please go ahead. Yes. Thanks morning everyone morning. So I was hoping to just take a little bit more money on the chicken business and really just make sure just think about the different market segments there and the pricing and Market pressure that you're you're facing. I mean again I think is 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 long that's translating to into your whether it's the trade pact the small bird you're further processed business. I wouldn't think that that impact is equal mean especially where I would think life is you should have some benefit from better pricing and is we think about 20 20 just any comments on on Contracting for various food service dog?

all accounts

How that how those played up?

Yeah, first of all, I I can't talk about pricing. It's a very sensitive subject. Most of the pricing is concluded not all of it. But but most of it I would say that that you know, as we came through our q1 and as we enter cute to trust me pricing in particular is weaker than than why would have expected it to be however, however, as I mentioned earlier, you know, there has been strengthened in other products Lake water pricing frankly has been a bit of money, you know, as we came through q1 January February and and don't know at this point what March April May is going to hold a lot of money prices are not yet settled so that would be purely speculative on my behalf. However with with breast meat, you know,

Free data would say it's trading something below a dollar right now. So it's at or near historic lows it it it prevent. It presents a tremendous value both at retail and and at Food Service at home. And typically when that happens, you know, you see some type of increase in in either featuring or promotions that at

Food Service establishments, so I think that that over the course of time and and whether that's that's a month or six months we're going to see increased promotion on those proteins that have a great value and right now that 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 and prepared foods of your reported volume was down 0.1% Yeah, you look at whether the scan Nielsen do that we could track and what you report in the slides in terms of the growth both our retail and the focus by Food Service 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 in the measured Channel. Yeah, I think that's when you look at the the system when you look at the reported volumes those buttons reflect some channels shifts that we had between our our segments. They don't account page or any profit on the total basis are pretty immaterial. You see them in the quarter because of the kind of product but the numbers we're giving you in terms of the performance. Uh, yep.

Okay. I'm more of the organic numbers that reflect the momentum of the business.

This question comes from Ben Bienvenu with Stevenson, please go ahead.

Hey, good morning. Thanks for taking the question. Good morning been I wanted to ask about it says I appreciate the color on the call out to the impact of prepared food in the quarter. Obviously you guys are are making strides on improving the the margins net raw material costs and net of sap cost challenges and the guidance for the balance of the Year suggest that that should continue margin expansion. So I'm just curious if you could provide any color on how you expect the KDE impact to linger if at all should we see the magnitude diminish? And is it impacting any any of the other segments Beyond 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 in prepared at the moment. We don't need any specific guidance on on the timing for that know that we're working aggressively. We are managing the factors that influence the the the right office has distressed inventory that we see and we of course expect to see Improvement as we move forward.

Okay, great. And then one question for me on on the chicken segment, you talked about know making some corrections to wage being a bit longer on boneless skinless breath is that can you help us think about what those adjustments are how quickly you can make them and and if this off to the question, I understand but I think on the the facility front you guys had looking had been looking at opening the Humboldt facility later this year just the current Supply environmental impact that decision or the timing of that at all to the extent you can comment

Okay. All right. I appreciate that color. I'll pass it on. Thanks. Thank you.

You're right. It is a sensitive question. No, I the production in our q1 it was heavier than it was originally projected. And you know, we as always respond to you know things that we we don't expect. Um, so you can fully expect that that to take place and as far as timing of the humble startup known that's nothing has is changed with that. The the project is on schedule and on budget and one I'm sorry know if I can just go back to the previous question. I just want to make sure that I'm I'm very clear then your question on on when are we expect to see Improvement we have so far this quarter seen run rates that have been consistent with lost quarter and just so it's just for clarity as we as we're working on this. Of course, we expect this enough to be a permanent part of our business. I want one of you.

Near that, uh that Improvement lives in front of us.

Thank you.

Our next question will come from Michael hiking with Cleveland research, please go ahead.

Thank you. Just wanted to touch base a little bit on some of the chicken sandwich Wars and you know, basically, you know, it seems like there's been a lot of talk about the success of those sandwiches Wars and I'm just wondering like is the dynamic within the chicken markets healthy or maybe for like some of the smaller birds, you know and and maybe the trade back and or or is there a spillover effect from the weakness maybe in some of the bigger bird wrestling markets like in can these sandwich floors? Maybe help a chicken Market how much?

Michael, you know the with fast food different different customers use different size Birds. It's it's not possible to say that it's Advantage in one one segment versus another, you know, if we go back a couple of years ago, you know, we saw hamburgers being heavily promoted and obviously this last year off and switch to chicken burgers and or chicken sandwiches and it looks like this year. It's we're going to see the same thing and and off early because of the value, you know, the chicken is right now and ground beef prices are are higher lean beef particularly imported beef is is up to chance to bring your reasons. I talked about in in the script with, you know, drought conditions and and shortage of Supply coming on on the import side.

Okay. Yeah, and then I guess you know just as a follow-up here, you know.

One, you know particularly large operator you guys service pretty heavily, you know talking about potentially doing pretty big promotion for checking later this year. Like is it possible or what steps to take place? Like if there's not enough of like the smaller birds like can you guys chop up some of the bigger recipe that something heavier Birds to accommodate that product or how easy is it to do it? What steps does that entail? Thank you. Well, okay my first of all I I cannot talk about what's on a specific customers may or may not be doing but I I think that that there will be sufficient Supply regardless on you know, whatever customer that God might be referring to so I don't see an issue from a supply standpoint but can't talk specifically about any specific customer.

Very very helpful. Thanks.

Okay. Thank you.

Our next question will come from Ken Goldman with JPMorgan, please go ahead.

Good morning, it's Tom Palmer on for Ken. Thanks for the question. I first wanted to clarify the chicken guidance companies got into Ford a 6% ebitda margin absent additional impact from SF the prepared remarks and and a lot of the answers today seem to focus on why pricing should get better this year from increased ASF driven exports. So just given birth first quarter results would sounds like the slow start to the second quarter. What are the non ASF drivers that would get the segment to 46%

Well first typically, you know as we go into Q3 to Q4 r q 3 to 4, we do see Dead Season 1 in improvements that it take place. So, you know as I talked about four same thing is true with with with it, you know, once we get into a little one the weather the people fireproof grills demand does increase so we're we're projecting typical seasonal strength on in checking as well.

Okay, I mean the quick math is if you're running it 2 and 1/2 you'd be north of five and half and kind of the second half I guess.

That's what the mass says. It's it's that's what it would say. Okay, and then just wanted to ask on the on the beach side. I mean, it's not a huge cut but you did lower supplies expectations. Is this mainly related to end of the year what what you're seeing in terms of some of the cattle inventory and do you think we would actually exit the fiscal year with with year-over-year at the club and Supply or flattish? Just trying to get the picture there. Thanks. So basically flat year-over-year Cadillac heater are actually up in a month-to-month quarter-to-quarter. It does impact, you know, pricing and availability but through the course of the year it all evening. So as we look at the balance of twenty-twenty basically flat if not slight increase over 2019.

Same thing would be true.

When in 2021 it's uh, you know, we we look at the calf crop and it would say that we will have equal if not slightly greater number and Thursday 1:20, and then basically plug into twenty Twenty-One. And then as we move in 20 22 23, it really depends on retention rate of peppers and and other factors that we close to monitor. So answer your question be basically flat twice perhaps slight increase in in 2020.

Okay. Thanks. Thank you. Our next question will come from Peter elbow with Bank of America. Please give ahead.

Hey guys. Thank you for taking the question. No, I just want to get your thoughts kind of from a much higher level as pertains to coronavirus and maybe some of the more medium to longer-term impacts, you know, 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 is that meant history? And in terms of the Chinese consumer turning to more of a grocery store and does that benefit, you know the import market, you know more than than say it would if if consumers were, you know, I got the wet markets. Yes be right. I think I think if if anything is it's just going to accelerate, you know, the efforts that the Chinese have had to wage decrease the number of of wet markets. I think that will continue to see modern grocery continue to grow in China. So

celebration I think both in Corona

Virus will will contribute to that short-term. They're obviously there's going to be some impacts from coronavirus, but that that will pass so we we think on a longer-term basis that uh,

How we will serve as modern retail in China and over the course of you know, relatively short period of time. We think that that will probably take take place typically with the initial that the government hasn't placed.

Got it. Okay, that that's helpful and Stuart maybe just a quick clarification on the prepared food side with I know this is a stroller but just with the volumes down think you mentioned it. Some of it was kind of intersegment, uh changes. I mean without any profit impact but it is not something we should kind of continue to expect over the course of the year that that volume might just be look negative because of the segment change know that you'll only see it in this quarter last year really the stuff like a year ago and down 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 the the the profit is completely immaterial. So I want to go on a go-forward basis. We would expect the kind of see that you know Nielsen and then the data that you guys kind of converge a little bit more with with reported results. Yeah, that's correct.

I mean, you'll you'll also need to bear in mind that the various needs some numbers and the foods.

Service numbers the the some of those represent a portion of of the volume and certainly John can provide a little bit of a Reconciliation during the follow-up call.

Peter I I think they take away needs to be I mentioned that are Coraline's grew something a little greater than 6% we captured, you know, at least 1% emotional share points and the numbers are just clouded by by this production that moved from one segment to the others.