Q3 2019 Earnings Call
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Chorus call, which goes right.
But Tyson foods earnings call.
Your name please.
Evan Laflam K.
Hi, Andy.
L.A.F.L.A.M.M.E.
[noise].
And your company.
Era AI era.
Yeah.
Will be in listen only mode, because they're recorded today. Thank you.
Yes, the territory tariffs are removed the U.S. pork industry will likely benefit directly.
If they are not we will benefit from backfill and real asset allocation opportunities.
Regardless of the market dynamics, we are prepared to capitalize on all opportunities through great execution cost control and most importantly by meeting our customers' needs and expectations.
We're excited about the direction of our company.
We are leveraging our $7 billion international business.
We are matching priority supply markets with priority demand markets across multiple proteins to deliver what we believe will be a very effective model to reach key markets and customers.
Domestically, our core retail and food service product lines continue to experience growth.
Tyson is aligned with customers and channels that are growing.
We also continued to innovate, creating new products, including some outside our traditional media offerings and more are in the pipeline.
That concludes our remarks, and we're ready to begin kuni.
Thank you we will now begin the question and answer session.
To ask a question on press Star one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
To answer your question. Please press Star then too.
Please limit yourselves to one question and one follow up if you have further questions you may reenter the question queue.
At this time, we will pause momentarily to assemble our roster.
And today's first question comes from Ben Theurer of Barclays. Please go ahead.
Yes, good morning, Ulster. Thank you very much for taking my question.
I have my question Sir.
Around your assumptions for next year and the in my view relatively cautious 2020 outlook considering all the.
Potential benefits from African swine fever could you lay out a little bit what do you think the direct benefit to park. The in your segment reporting considering that maybe trade restrictions might be lifted and how thats. How does this compare to the indirect opportunity from market's tightening in general and the backfill as it just to understand a little bit the drivers pork specific and then obviously like the second third derivative. So in your other businesses in the US as it comes to a is half that will be Mike My question. Thank you.
Yes sure Ben.
I think that it's not only going to be port this benefit of that so I think that the all of the proteins will benefit.
In total that somewhere around.
5% of global protein.
Disappeared, so whether its a.
Direct benefit or indirect benefit regardless.
It will be beneficiary to a sub.
I think that.
Both pork beef chicken all three primary proteins could could.
The benefit from that the degree Ben it really depends on the timing of when the shipments might begin whether it's from the United States or from other countries in a much more significant ways. So.
I mean, the guidance that we provided is that we think that the earnings that we've generated so far and.
In 2019 that there's there's upward potential and in some cases I believe a sizable upward potential and in some of our segment. The other thing that I would like to point out.
Is it that if we if we assume that asset if we completely discount assets.
But the six to seven topline growth.
We are projecting for next year, which will take this from the 43 to $46 billion to $47 billion.
With current return on sales that generates an incremental $200 million.
Additionally, I've talked about the fact that.
We are not happy with where our pull through group is that and we think that theres somewhere around 200 basis points yet to improve.
So there is another $200 million.
So some of that.
We will give up by a higher tax rate.
But we still are in position to two.
To gain significantly.
All right very clear and then just as a follow up and you have it nicely actually laid out and your supplementary information with all the opportunities now to not only source from the us to basically ship, but you also having now access to South America, Australia, Europe to the different markets.
Any way you could quantify or trial at least have some qualitative commentary on what you think that could keep you as an advantage compared to where you've been prior to the acquisitions just considering the global spectrum off animal based protein.
Right well then it really provides a platform for us we have.
Regional supply base and we also have operations now in the primary demand markets that we've identified.
So both from a supply standpoint demand standpoint, we feel good about where we're at right now, but that's that's not to say that we're done we would continue to look at other opportunities.
The present themselves so over the course of time, we'll continue to.
To build out that space, just as we intend to do in our prepared foods and value added.
Space So.
Continued growth, but not in one specific market.
Okay perfect. Thank you very much or leave it here and congrats.
Thank you Ben.
And our next question today comes from Alexia Howard of Bernstein. Please go ahead.
Good morning, everyone.
Good morning.
So.
There is obviously a lot of.
Anticipation as the FX impact as we get into fiscal 20.
All those things that you can be doing to ramp up your chicken.
Our business in terms of the amount of processing capacity the breeding cycle.
If if meat prices are going up next year, that's the one area that could actually be b.
Acceleration potentially at the other preparations that you're doing in that part of the business to take advantage of the situation.
We do not plan on incremental production coming online. However, we have as you're aware.
Acquire some assets from Keystone just recently, so that will allow us to expand our numbers and our volume as we report them.
As far as actually increasing chicken production itself.
Right now like so we're more focused on getting our business to run as we would expect it to which is it's not where we want right now and it's fairly isolated it's within.
A handful of plants that are not performing at the levels that they need to so we need to get our business running as we would expect before we think about growing and expanding our our current volumes.
Right and then a super quick follow up and then leading indicators, we should be looking at to assess when the U.S.P. Wolf pack is I'm going to start benefiting from asset.
Yes, obviously nobody knows my expectations. It does look like there is.
At least has been some sizeable proves inventories in China.
They will work through the inventories that are on hand.
And it it appears like that could be some place in fourth quarter of the calendar year.
So you would expect shipments and production to start sometime later this year, whether that's October November December and nobody knows the pest. That's it's my expectation Alex if I go back to your Chicken question I was I was talking in terms of just raw chicken being produced however, we have added capacities capabilities on the further processing side.
So we do have lines that weve increased some capacities, we have a new plant that we opened a little over a year ago.
A new processing plant and Green forces, Arkansas.
So it's not as though we don't have production capacities, we have capacities to take the chicken that we used to produce or buy and add more value to it.
Great. Thank you very much I will pass it on.
Great. Thank you.
And our next question today comes from Ted go Ken Goldman of Jpmorgan. Please go ahead.
Hi, good morning, Thank you.
Good morning.
No no it's Stuart I wanted to ask.
You still have a relatively wide range of EPS expectations for this year, there's only one quarter left can you walk us through when you think what the key factors are that would drive that EPS in the fourth quarter toward the higher or maybe toward the lower end of the range what are those that come to mind.
Yes look I. Thanks for that Ken clearly there are there are probably two things there that will influence the quarter number one.
We'll be meat prices that always has a large impact on our results.
The other will be the movement in grain prices and as you've seen in the last few weeks a lot of movement in corn.
We came in through the fourth quarter through the third quarter, we had a pretty big.
Mark to market.
In chicken that was about 40 million Bucks and as you can see in the last couple of weeks a lot of that has reversed. So those are the two big items I'd point to.
Okay. Thank you and then can I am.
Just ask.
As a housekeeping question I, just want to make sure the 6% to 7% sales outlook for next year.
That does not include the extra week, right, which would add I guess from a couple of percent.
Yes, that's correct, it's 52 to 52.
Great. Thank you very much.
Thank you Ken.
And our next question today comes from Ben Bienvenu of Stephens, Inc. Please go ahead.
Yes, thanks, so much good morning.
Good morning.
So I wanted to follow up on your comments on the chicken business you talked about the 200 basis points of segment margin underperformance and you touched on that at the Investor Day sounds like the issue is isolated to a few different facilities, but I'd just be curious to hear a little bit more about the critical path to unlocking that 200 basis points and then it also sounds like in your comments that.
A realistic expectation is for that to occur in 2020, but I just want to clarify our expectation on the timing of that.
Recoup of 200 basis points.
Ben you're right that is about the number that we're expecting to come through and we do we do expect that to occur in 2020.
We know specifically, which plants are opportunities for us we know what the causes are and they are in the process of being addressed.
We have a.
Some terminal turnover numbers that are higher than what we expect which generates yields lizard Watson, we expect productivity and throughputs not where we expect it to be so we know specifically where the opportunities are at.
We know the root cause and we have a team that is fully dedicated to get them corrected as quickly as possible.
Okay, Great and then.
Switching to the prepared foods business, just given the volatility in prices that weve seen in pork and beef over the last.
Several months.
Can you just help us think about how you all think about managing or list price on that business.
Are you looking for a sustained cost increases before you raise prices.
And has the volatility in prices change your thought process process on the timing of pricing increases you might take as you look to 2020.
Sure well if I go back to last spring Ben that's one.
A lot of the rumors and discussion about shipments.
Yes to Asia started to.
In fact, the futures markets few hog futures.
Escalated rapidly.
And with that.
Some of the the pork prices started to go up now as we got into May and June as that subsided.
So as we were having conversation with customers back in the March.
April time period.
We were talking about price increases.
And said that this is an unprecedented event and we've been selective on where we have taken price increases in other cases, we have not it's really dependent on the product and the product category.
But all of our customers are fully aware of what's in front of us with.
African swine fever, and what the potential price impacts could be.
So as we start to see prices escalate all of the conversations have already taken place and I think it's at that point in time, where you see products.
Move up because of the increased disappearance and.
That you'll see the prepared foods.
Price.
Changes implemented.
Thanks, very much good luck for the rest of the year.
Yep. Thank you ma'am.
And our next question today comes from Adam Samuelson of Goldman Sachs. Please go ahead.
Yes, thanks, good morning, everyone.
Good morning, Adam.
So I guess I want I can handle that maybe in the in the prepared foods business.
And here I mean going back to some of the raw material volatility, which.
Maybe was less pronounced than you might have thought three months ago and cause you to bring back up.
The guidance for the full year, a little bit maybe just as we.
Think about margins here.
For the next quarter and then into next year just.
Yes, a little bit more color on pricing kind of the underlying volume traction you're seeing by by some of the different categories that you participate in.
And just to operate just visibility I know there's been some challenges in some of the food legacy foodservice businesses that you've kind of been overcoming just how are those progressing as we think about the margin progression prospectively, yeah, Yeah sure. Adam first of all we are pleased with our volume that we are significantly.
Outpacing.
The industry in our volume growth, we've we have.
Over the course of the last 12 to 18 months invested in that business and were seeing the dividends from from those investments. So some of the product categories that I mentioned in our prepared remarks. Those are just a few examples of.
Where we're seeing the type of growth in the marketplace. So we expect that to continue the growth in our prepared food space. We continue to invest in the category both from a map standpoint, as well as from an innovation standpoint, So we have a very robust.
Pipeline of products that we'll be introducing in 2020. So we're very positive very optimistic on the outlook for prepared foods.
The ability to manage the raw material price increases.
That's our business. That's that's what we get paid to do we know that that is likely to occur at some point in time, we've done a lot of preparation and.
With the expectation that prices will at some point in time start to go up so we feel good about our position in the marketplace our volumes of strong and we we believe that we can generate.
You know the 12 plus percent margins that we're expecting for this year.
Great and then just on the follow up on the forward outlook and on chicken specifically.
The kind of improve resulting you expect next year.
Especially relative to the 200 basis points of margin kind of opportunity that you see kind of from internal initiatives.
What is your thought about chicken margins in excess of 6% is that just assuming kind of the current strip kind of where it sits today and and or how much of that.
Margin improvement, especially on the tray pack side do you think you can capture and 2020 versus 21 or 22.
Yes, the most resuming green prices are expected to be higher.
As we go into 2020.
Adam So we are expecting some price increases to the tune of a couple hundred million dollars at this point in time, obviously it changes on day to day basis, but that's basically where it's at right now so the numbers that I talked about that the.
Thanks, Adam.
And our next question today comes from Rob Moskow of Credit Suisse. Please go ahead.
Hi, Thank you.
No I I was a bit surprised about the that the guidance for the prepared foods division margin to be as high as it was in raised and then into fiscal 20 as well.
You say it assumes current expectations for raw material costs. What are those expectations are you expecting a lot of inflation or we're not.
In most categories I'd say, yes, Rob that we are expecting inflation on the raw material costs, whether its beef raw material inputs or whether its port.
And or or poultry for that matter. So we are expecting.
Raw material costs to go up for next year, and we do expect to capture that back through pricing.
As always there is some lag thats involved but as I mentioned earlier that those conversations have taken place and I think that there's a.
Keen awareness throughout the industry the industry is likely going to be faced with the next six months or so.
Hi, guys. So so unlike in prior years the customers are fully aware of what's coming so it should be easier to get the pricing through than it and the lag might be shorter than it has in the past.
I think that'd be fair, yes.
Those conversations are taking place it looks like prices were going to go up.
Across the board late spring early summer.
To a large extent that didnt happen, we backed away from loans not entirely but for the most part.
But those conversations have taken place in the pack that once we do see raw material costs start to go up in price is going to have to change.
Yes, maybe Rob one other thing to just keep in mind and that is that on the in the foodservice business is a large chunk of business that is.
Where pricing is tied to the cost of the materials that benefits our customers when prices go down and of course, it customer when prices go up Thats automatic right.
Okay.
In the retail data for the quarter I noticed that your market shares went up and a lot of prepared foods segments like Bacon and sliced meats and it looked like your competition raised prices faster than you did in some of these segments is that a fair way to characterize the quarter.
No I don't think Thats, one reason that we captured.
Incremental volume Rob It might have played a part but for the most part we've we've been executing very well.
In the prepared food space that.
I talked about the innovation the product launches the support that we provide at the retail level. So no I don't think it was it was primarily attributable to price at all.
Okay. Thank you.
Yes, Thank you Rob.
And our next question today comes from Heather Jones is Heather Jones Research LLC. Please go ahead.
Good morning.
Good morning Heather.
Hi.
I have a couple of questions first was on poultry business. So you said that there is about 200 bips of.
Margin improvement that left to get related to Tyson operations.
And we will look at your on where your margins are relative to say 2015 2016.
The Delta is bigger so I'm just wondering would you.
Attribute the remainder of that delta to industry specific issues like market dynamics and then the 200 Bips is the types of specific issue yes.
Heather I think you're exactly right I think that the margin structure. If we go back.
Several years ago, I think that as an industry. The we were all enjoying some some higher margins than what we currently have.
And then.
Our performance relative that is not where we expect to be so yes, I think first of all I think the margin structure is somewhat lower than than what it was but secondly.
There's money on the table for us to capture.
Okay. Thank you.
And then I wanted to go back to yourself. So you your commentary regarding the likelihood of benefiting us export sound it.
Fairly confident.
I'm sure you've seen headlines out today about the escalation you asked John attentions and so I was just wondering if you could.
Flush out what about the supply disruption.
Gives you comfort that the U.S. is going to benefit either way, whether its China comes to us directly or you mentioned backfilling just.
Like I said, you sounded confident and was wondering if you could flesh out your thinking on that why you have such confidence.
Sure because through the course of time, another and whether it's with the current dispute with.
With China side or.
The other historic disputes that we've had with different countries.
The product ends up finding its way to other markets.
And whether it's to China or whether its two markets that.
Whether it's South America, or Australia, or others that theyve been servicing.
The supply is somewhat.
Fix outside of were.
SFS has occurred so it's not that all of a sudden there's going to be a rapid escalation in production globally that those production numbers are primarily fixed.
Demand is is growing over the course of time.
Which means that it may not shipped directly to China, but it will ship to market that somebody has been buying from another country.
In the past so.
The reason I am optimistic is because over the course of time.
It has always worked out that way.
And there is always going to be noise in the market about trade disputes in and non tariff trade barriers and over the course of time at all sorts itself out.
Thank you for that very helpful.
Great. Thank you Heather.
Our next question comes from Michael Piken of Cleveland Research. Please go ahead.
Okay.
Yes. Good morning, just wanted to ask a little bit about how you're thinking.
About your pork business and specifically are you guys shifting any more of your pork production too.
Product it doesn't contain tailing, so that you're able to export to try and if that does open up.
Sure Michael Yes, we have we have the capability to do that that we've we have.
Supply lines currently.
It does and can produce but took mean free products and we produce a lot more.
It's a matter of demand in the marketplace. So we have the option of.
Flipping fairly quickly to rectify from improved so bad that is not a primary concern of ours no.
Okay, Great and then.
Yeah as a follow up I guess just in prepared food I know you guys for fiscal 20 said that it is the potential for margins to go even higher than the 12%.
What gets you there is a combination of like next new products like maybe you could just walk us through what type of margin upside and not only really for 20, but just looking at a couple of years what is the opportunity there.
Sure.
A lot of it is in mix Michael that.
Keep in mind that that 12% Thats, a composite number of all of our prepared foods numbers so within that.
There is.
Multiple businesses that generate many different types of margin structures. So it's in fact, taking those businesses that have a lower margin structure.
And getting them to to improve based on where they have been they might be through volumes that might be distribution. It might be it through new product introduction. There is a multitude of ways for us to do that and secondly to take our higher margin product categories and expand and grow those businesses, which is what we fully intend to do so it would be both it would be.
The innovation new product categories that come in as well as upgrading some of the mix of some of our lower margin structure businesses.
And our next question today comes from Jeremy Scott of Mizuho. Please go ahead.
Hey, Thank you just just following along on the prepared foods questioning I think this wasn't explicitly said at the Investor day, but was implied by the cautiousness on the parents foods margin outlook at the time that because this app would be so beneficial to your chicken and fresh meat segments.
That it may present, an opportunity for you to take market share in some of the key prepared food category. So in other words.
You are able to leverage the balance and the vertical integration of your model to win business from others that are less balanced and less integrated by not taking price at the same magnitude or working with your customers. The vulnerable time and so what what is your prepared foods margin guidance on 2020 imply about your competitive strategy. If it's changed and know how do you think about the balance of profit between segments, particularly volatile times like these I asked that because just looking at your 2020 guidance I don't think I remember a time in the past decade, we're all segments moved in unison.
No you're right.
It it doesn't happen very often but that is in fact.
The the value of the diversified portfolio of products and categories that we have and I think thats one of the primary factors it's misunderstood.
It's not very often were all beef or poultry and prepared all delivered at the same time because it does help stabilize earnings throughout the course of time.
And I think that it's that value that we provide in the marketplace with that diversified portfolio a lot of investors are missing.
So as we look at our prepared foods space.
Jeremy it's not that we're going to we're going to make.
A decision to advantage one business or another.
Because our prepared foods business has been growing with with product thats been transferred internally at market. So it's not the fact that we're giving an advantage to one business or to another it's because we're earning in the marketplace and they're doing it through.
Diligent work.
How we innovate how we go to market, how we service our customers and Thats the expectation for 2020.
Is that we're not going to gain share specific lead through some mechanism pricing that's going to disadvantage won an advantage. Another it's it's we are going to earn it with our innovation our.
Our marketing and how we service our customers.
Got it.
And then on that on the chicken side some of your larger customers appear to be exploring and expanded and upgraded chicken sandwich lineup and let's just say that's true can you talk a little bit about the potential implications here and if you need to make any production adjustments and then can you update us on that becomes the plant where are you on the opening timeline there.
Yes.
First of all the first part of the question Jerry on the.
Food service side about chicken sandwiches, and I do think that chicken is attractively priced right down there does seem to be a fair amount of interest in.
In the.
Featuring more chicken products as opposed to a year ago, where we saw a much more beef in the marketplace and what would we do right now so I do think that thats a realistic expectation that.
With.
Chicken breast meat prices in particular as low as they are it is attractive to us.
To feature.
The second part of the humble of the question was.
I think you mentioned to comp. So I think you mentioned I don't know sorry, I meant the humble plan, yes. It construction remains.
On schedule and I would say on budget as well.
Equally as important.
So no no no surprises no delays.
Nothing sooner than what we originally projected so on schedule with humble.
Got it thank you.
Yes. Thank you.
And our next question today comes from Michael Robbery, Oh Piper Jaffray. Please go ahead.
Good morning.
Good morning.
You touched on how there should be some benefit from what's likely shorter lags in passing on pricing.
With customers can you can you talk a little bit about your thinking on the consumer side and what some of your assumptions are for elasticity is obviously I know you said the timing in some of how it plays out, especially all the way into to fiscal 20 is unclear but.
When you expect the pricing in some of those actions to take place would what's your expectations for the volume impact and how that.
Trajectory that evolves over the course of the year.
Yes, certainly Michael the elasticity it really depends on the price level that these products are good too and that's the unknown and that's that's a difficulty in.
In forecast, what the impact might be entering into 2020.
Which is the reason it makes it so difficult to quantify EPS expectations for next year. It will continue to be a challenge even as we finish out this fiscal year and our fourth quarter earnings call just because it does make a significant difference on what type of price levels of these products move to.
Because at some price point consumers will look for different alternative and doesn't matter, if it's beef pork poultry or if it's if it's prepared foods.
We'll look for those alternatives in the marketplace. So we there is an expectation that at some price point that there will be some demand destruction.
However, there is room in the marketplace for some price increase without seeing significant demand destruction.
So would it be fair to say that if you.
We've already identified a margin expectation for prepared foods.
And it's based on your current inflation expectations that you don't expect yet for the inflation level to be beyond what the consumer to bear.
No I think that's that's fair Michael I think that with current expectations that we're not expecting to see the demand destruction the market those type of price levels.
Okay. That's helpful and just one quick one on deals can you talk about where that's shelved or some of how.
You.
Communicate to the consumer just what the product is and how to think about its value proposition. It's obviously got some elements that are that are unique in new it's maybe a little bit to explain how do you approach just connecting to the consumer with that proposition.
Yes, the go to market with Adele's, a slightly different Michael than some of our other products, but it is a product that we use a fair amount of demos in stores as opposed to advertising and promotion.
Social media, but much more to sample in store for consumers have the opportunity to sell case, the product and understand how true how good. It truly is so the go to market strategy is slightly different unveiled and some of our other products.
Okay. Thank you very much.
Thank you.
And our next question today comes from Eric Larson of Buckingham Research Group. Please go ahead.
Yes, well thank you everyone.
Just a just a quick question on kind of capital allocation year to 2.9% or excuse me 2.9 times leverage ratio and I guess, the one piece of the 2020 guidance. It caught me a little bit by surprise was that your.
Your your interest expense is going to be Oh flat year over year, which.
It was kind of flat rates, maybe maybe declining a little bit who knows what happens with that I would have thought that maybe some of your capital allocation would have gone toward debt reduction maybe had a lower interest expense number for next year.
Can you just give us a quick.
Walk through of how the capital allocation is looking for the next 12 months.
Yes, so certainly.
Focus as the as you rightly point out it's going to be on on.
Debt reduction.
The answer to your question around.
Why.
Why no change in the total interest is just because of the timing that we took on for the debt of Keystone.
The mix of some of that debt the relative interest rates I actually just looked at that on Friday and can confirm that.
Fifth we feel confident in our number.
Now the other thing I would say is that.
What we are focused on debt reduction lets also be.
Well aware of the fact that we are pulling all of the other capital leaders at the same time.
We have had a 38% CAGR on our on our dividend rate and that is paying out at a at a good level now.
We have had a couple of successful years of higher than than average capex investment as we invested behind new plants, new capabilities in our business and we've also as I pointed out in the call today I spent $4 billion in the last year buying businesses, which on a cumulative basis now.
Outperforming in excess of their cost of capital.
On an after tax basis, so I would say our capital allocation strategy is broad and effective.
Okay and then just one final question on US I think assets has kind of been beaten to death, but.
We know that China is going everywhere around the world on clarifying protein.
And a number or several of the U.S. protein.
Companies have said that China has contacted them directly about.
Abolish job.
Ill muscle meat.
Exports or imports to China, which we don't really do will never have would never have.
With primary muscle meat products have gone directly to China have you guys actually have received inquiries from China and are you doing anything to prepare to to ship to them.
Yeah.
Certainly, yes, we have.
We I mean weve had relationships.
We head office in China for a number of years. So we are very familiar with with the marketplace. We have regular interaction.
Daily interaction with.
Lars large number of the primary users within within China. So we know the market and we have had discussions.
Particularly over the course of the less of three or four months.
I can't get too specific on.
What and who but yes. There is there is discussions taking place.
Okay. Thank you very much.
Thank you.
Our next question today comes from Ken Zaslow of Bank of Montreal. Please go ahead.
Hi, good morning, everyone.
Good morning, Ken.
Just a couple questions one is.
After all these years, we've had this discussion about prepared foods and how the margins can go up.
And you guys have always tried to temper the expectations keeping in that 10 to 12. It seems like you're kind of let the little loose here with with prepared foods going up what changed to give you the confidence to change.
Almost the prepared foods margin structure, almost like moving up and they're not that you moved it all the way up to 13, 14%, but you moved it definitely up from that like lower 10 to 12 to now at least 12 were around 12, what changed in are you not spending as much do not need to spend as much do you feel like there's more synergies what was the pessimists for changing.
Yeah sure Ken well first of all our spending has not gone down that we continue to invest in that business amazing we're investing more in 2019 and we did in 2018.
So really the confidence is just based on the gross if they have demonstrated.
And the fact that they have generated fairly strong returns.
And we we could probably margin is up some more however, I would much rather have a business that's growing at three or four or 5% with 12% margin than not growing at a 14, 15% margin.
So we still intend to grow the business and believe that we can do that with with margins that are similar to where they are at today.
Okay. Then my next question is just for clarification.
On the chicken business, what are you implying that if market conditions do exactly the same for 2019 2020.
Operational improvements you, just and literally 200 basis points year over year based on you guys just fixing things is that the.
I just want to make sure that was a clarification.
Well if you assume.
If you exclude all the factors that we've talked about Ken so the mark to market, we talked about.
Grain costs increase there was a question earlier, we just we expect to capture that over the course of time, but it's purely just operational performance. Yes is answered that we would expect to capture approximately $200 million or or 200 basis points.
And then my last question is.
Shorter term so I know, there's a mismatch in the pork side between capacity and hogs can you talk about how that would change in August September October going forward and.
What is your lever.
On Saturday Hills to just ensure that the margins. So even if you don't get a benefit from African swine fever.
Is there a change in the more the pork packer margin structure going forward and what are your levers that you can pull on that.
Yeah, Ken that's a rather complicated question because I do think that.
The capacities are going to be somewhat tested this fall we are expecting.
You know, it's a typical increase in numbers as we come into.
Late September October November and.
And Thats on a six day basis, and I would tell you Ken that theres been somewhat of a change within the industry with the.
Labour supply being as tight as it is most plants would prefer to only run five days rather than six days that when you run six days week after week after week.
There's there's a price that you pay in doing that from a team member standpoint, where people simply don't want to work six days on an ongoing basis.
So, but even at six days if the industry did run six days I think that we're going to be somewhat stretched and what the capacity is.
Current capacities are despite the fact, the capacities are greater today than they were a year ago.
So your hands will be enough to supply the pork. So you would expect to see a reversal of the pork packet margins just make sure I understood what you're saying.
I think well typically as we go into.
Fourth quarter calendar year margins typically do expand and.
I do believe there has been some contraction in margin everything else being held equal because slaughter capacity has gone up and hard.
Production rates have not at the same rate so.
If as is we see hog production numbers continue to increase which we do over the course of the next two to three years and numbers grow to two for 2% to 3% rate year over year.
Good.
By the end of 2021, or so we will be back in closer equilibrium to what we saw two years ago was slaughter capacity relative to our production numbers. So I do think there has been some contraction and over the course of the next couple of years.
It will equip liberate back where it was couple of years ago.
Hey, really appreciate it thank guys.
Yes, Thank you Ken.
And our next question today is a follow up from Robert Moskow Credit Suisse. Please go ahead.
Hi, Thanks.
Just a couple of clarifications the mark to market benefit you had in third quarter and chicken from the corn does that rollover in for us like how should we think about your.
That positioning.
Commodities on on that.
And then one just general follow up like why not give kind of an EPS range for 2020 at this point, you've given us growth for each of the segments why not give a twin EPS range too.
Okay. Let me give you that give you the answer to both of those questions. So first of all on the mark to market on corn.
$40 million benefit in the fourth quarter for chicken, Yes, you should expect that to come back it depends a little bit of course on the prices of where.
You know the futures futures market goes, but I think youve seen in the last couple of weeks.
Some of the benefit we ended up with in the third quarter as.
A lot of its unwound.
But either way it took the benefit in last quarter and you need to you need to buy the corn in this quarter. So you will see an impact that's they want so your first question the.
The second piece on the guidance for next year is we'd prefer to get closer to the end of our year. So we've got a better perspective on next year before giving you that.
That guidance, it's consistent with what we did last year. There are a lot of factors that that are moving around no pointed to the fact that we're sitting on sort of $150 million of $200 million again grain a year over year, just where we are at the moment, so as that and that moves around a we'd rather be at the year end give you that guidance. We've given you. The percentages. So that you can start to shape the year.
Yourself and we've given you the topline I think that at least give you a head start.
Robert Let me know.
Rob Let me, let me add that our hedging policy has not changed from awarded but it's always been we in fact to edge.
Products, we do not speculate so the numbers that you are hearing coming from US we mentioned that last quarter you've heard it this quarter.
The only reason we're talking about it because the numbers are meaningful enough that it has impacted earnings but otherwise it's a normal course of business for us and in us hedging products for our customer sales.
So I just want to make sure there's clear understanding theres nothing that has changed from past practices.
Gotcha. Thank you.
Yes, Thank you Rob.
And today's final question is also a follow from Heather Jones Southern zones Research LLC. Please go ahead.
Hi, Thanks for taking the follow up.
Going back to an earlier question about the kind of.
Cost inflation, we could anticipate in prepared foods.
Do you think we could see a move and those raw material prices to the.
Levels, we saw.
Briefly for PD, but yet on a sustained basis, just trying to get a sense of what you're anticipating there.
Great, whether that's that's difficult to forecast because.
It's not only.
Why China or Asia might be buying for materials.
But the type of products and then that has an impact on our specific product. So as an example.
Historically, there's not been a lot of Belize as an example ship to China valleys.
Therefore in the United States, obviously would impact our our bacon prices on the other hand, if they would take if they would end up buying.
Carcasses as an example, we will then everything disappears.
So purely be speculation Heather for me to try and quantify what that might be by specific products.
Okay. That's helpful. Thank you so much okay. Thank you Evan.
And ladies and gentlemen, closer question and answer session I'd like to turn the conference back over my voice for any closing remarks.
Thank you for your time today and your interest in Tyson Foods, we're looking forward to finishing 2019 strong and deliver substantial growth across all segments of our fiscal 2020.
Okay.
Thank you. This concludes todays conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.