© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the Tyson Foods, Inc. Second Quarter 2019 Earnings Conference Call and Webcast. [Operator Instructions]. Please note, this event is being recorded.
I would now like to turn the conference call over to Mr. Jon Kathol, Vice President of Investor Relations. Mr. Kathol, the floor is yours, sir.
Good morning, and welcome to the Tyson Foods, Inc. earnings conference call for the second quarter of fiscal 2019. On today's call are Noel White, President and Chief Executive Officer; and Stewart Glendinning, Chief Financial Officer. Slides accompanying today's prepared remarks are available as a supplemental report in the resource center of the Tyson investor website at ir.tyson.com. Tyson Foods issued an earnings release this morning, which has been furnished to the SEC on Form 8-K and is available on our website at ir.tyson.com.
Our remarks today include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements reflect current views with respect to future events such as Tyson's outlook for future performance on sales, margin, earnings growth and various other aspects of its business. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. I encourage you to read the release issued earlier this morning and our filings with the SEC for a discussion of the risks that can affect our business.
I would like to remind everyone that this call is being recorded on Monday, May 6 at 9:00 a.m. Eastern time. A replay of today's call will be available on our website approximately 1 hour after the conclusion of this call. This broadcast is the property of Tyson Foods and any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Tyson Foods is strictly prohibited.
Please note that our references to earnings per share, operating income and operating margin in today's remarks are on an adjusted basis unless otherwise noted. For reconciliations to our GAAP results, please refer to this morning's press release.
I'll now turn the call over to Noel White.
Thank you, Jon, and good morning, everyone. Our earnings of $1.20 per share and a 6.3% operating margin demonstrate the strength of our diversified business model. The Prepared Foods segment's results were a Q2 record, and the Beef and Pork segments executed well despite several significant weather events. Although parts of our Chicken segment have challenges, we are past what is typically our toughest quarter, and we're driving changes to improve our results.
As we move ahead with the integration of Keystone Foods, I continue to be encouraged by the opportunities we see both domestically and internationally. The integration process has gone well, and we're leveraging the international operation and the team's expertise as they strengthen our capabilities. We're confident in our ability to achieve our announced synergies as we improve efficiencies and optimize supply chain and production resources. Pending regulatory approvals, our acquisition of BRF Thai and European poultry operations is expected to close in our fiscal third quarter, and we're looking forward to this addition to our growing international business.
Moving to our segments. In the second quarter, Prepared Foods continued to perform very well with the $249 million in operating income and a 12.3% return on sales, which is yet another record. Prepared Foods was up 16% in operating income and relatively flat on volume and average price when excluding the divestitures of several noncore businesses last year. Our year-over-year increase in MAP spending and innovations investments have resulted in volume growth and net share gains. Our Core 9 categories are up an impressive 5.3% in volume over the last 13 weeks, and all categories are showing year-over-year increases. An example of this growth is Jimmy Dean frozen breakfast foods, which continues to grow at impressive rates with volume and dollars up over 6%.
We expect our Prepared Foods input cost to increase in the third and fourth quarters as beef and pork prices rise on concerns of the African swine fever outbreak in China. Our plan is to recover these additional costs through pricing, but it will take some time. As a result, we're adjusting our annual outlook for this segment to be between 10% and 12% return on sales. A key advantage of our end-to-end supply chain is that we can supply raw materials for value-added divisions and our customers when supplies are tight.
As we previously announced, we are launching our full-scale initiative to enter the alternative proteins space. We'll be introducing products this summer and early in the next fiscal year, and we're well positioned to capture growth in this space. We have a deep understanding of how to develop new products, brands and categories, and our distribution reach will allow us to move quickly into the marketplace.
I'll move on to the Beef segment, which is performing well, having operating income of $156 million and a 4% margin in what is typically our most volatile quarter. Average price was up 2.3% and volume increased 3.2% compared to the second quarter last year on improved cattle availability and strong demand.
The herd rebuilding continues, and we see ample cattle supplies into 2021. The quality of cattle has improved with record choice and certified Angus rating indicating improved genetics, which aligns with our growing premium beef programs.
We recently announced that we'll be using DNA technology to trace beef back to the individual animal of origin for our Open Prairie Natural brand of Angus beef. The process will assure customers that their Open Prairie beef was sourced from ranches where cattle were raised to specific requirements such as No Antibiotics Ever and no added hormones. Global demand for high-quality beef continues to be strong, and we expect our international beef sales to grow in the second half of the fiscal year, contributing to the Beef segment's margins of approximately 7% for the year.
Turning to the Pork segment. Operating income was $100 million with an 8.5% margin. Average price was down 8.3%, while volume was up 1% due to the improved availability of live parts. News of African swine fever in China, along with the increased slaughter capacity in the United States and the near-term impact of driving up hog costs, initially outpaced the value of pork. We are achieving reasonable returns despite the headwinds while improving our spread to the USDA industry benchmarks versus a year ago. Our ability to execute well is due in large part to record high retention of our frontline team members, which has improved both safety and performance.
We currently project the Pork segment's operating margin for the fiscal year to exceed 6%. It is difficult to predict when ASF might positively impact our Pork business. However, we believe any financial benefit will likely occur in late 2019 or later. We are well positioned to be agile and meet customer and consumer needs internationally and domestically. In the Chicken segment, operating income was $150 million with a 4.4% margin. Volume was up 26.2%, and average price was down 11% primarily attributable to the acquisition of the American Proteins rendering business last year that added considerable volume at relatively low prices.
In the second quarter, pricing began to improve as AFS news drove incremental demand for chicken. We are in a solid position to improve pricing as we talk to customers about contracts in 2019 and into 2020. The big and small bird businesses performed well, offsetting some of the tray pack underperformance and earlier market weaknesses. In addition to the benefit of moderating grain prices, we have identified opportunities and several initiatives are underway to significantly strengthen the Chicken segment's results. Led by the iconic Tyson brand, our Chicken business has a great foundation, great products and robust pipeline of innovation. The Chicken segment is improving, and we're expecting an operating margin of around 6% for the year and continued improvement into 2020.
That concludes my commentary on the business segments. Now Stewart will take us through the financials.
Thanks, Noel, and good morning, everyone. Second quarter EPS of $1.20 was down 6% compared to Q2 2018. Revenues were up $670 million to $10.44 billion. Volume was up 11.6%, and average price was down 4.8% as acquisitions and divestitures affected sales volume and changes in product mix affected pricing in what is typically our most challenging quarter. Operating income was $654 million, down 5.4% compared to the second quarter last year. Total company return on sales was 6.3% for the quarter driven by continued headwinds in parts of our Chicken segment partially offset by growth in Beef, Pork, Prepared Foods and other.
The Keystone acquisition has performed as expected in the short time we've owned it. It is right at breakeven on a cash accretion and income basis. As a reminder, we successfully secured our permanent funding for the acquisition during the second quarter through issuance of senior notes with an average maturity of approximately 16 years.
Our operating cash flows for the quarter was $71 million, which were about what we expected due to deferred capital and hog payments and two tax payments that are typical to our second quarter. During the second quarter, we repurchased approximately 1 million shares for $63 million. We also directed $338 million toward capital expenditures as we continue investing in growth and efficiency projects with expected returns greater than the cost of capital. Our effective tax rate for the second quarter was 18.5%. Net debt-to-adjusted EBITDA was 2.9x. Including cash of $360 million, net debt was $12 billion, and total liquidity was $1.9 billion at the end of Q2. Net interest expense was $114 million. Weighted average shares outstanding in Q2 were approximately 366 million.
For the remainder of the fiscal year, our primary capital allocation priority will be our debt. We have $300 million coming due at the end of this month and $1 billion in August. We expect to address those with our cash flows as well as existing or new short-term liquidity as needed to align with the timing of the maturities. In addition, we will continue to deploy capital for organic growth through CapEx in the range of $1.3 billion to $1.4 billion for the year. We plan to scale back our spending to the $1.1 billion to $1.3 billion range in fiscal 2020 while spending at a rate higher than depreciation.
And finally, I'll update our outlook for 2019, which includes Keystone but doesn't yet include the BRF operations as that transaction has not yet closed. We expect sales to grow to approximately $43 billion with the addition of Keystone. Keystone is expected to be accretive on a cash basis for the year and breakeven on a pretax basis when excluding transaction and integration costs. The additional amortization for Keystone will be about $26 million for the 10 months of fiscal 2019 and approximately $35 million per year in fiscal 2020. Net interest expense should approximate $450 million. Liquidity is expected to remain above our $1 billion minimum target. Our effective tax rate is expected to be around 22.5% for the year. And we're maintaining our earnings guidance of $5.75 to $6.10 per share.
The potential financial impacts of ASF have not been included due to the uncertainty of the timing. Much is uncertain where ASF is concerned, but we are proactive in our preparedness as a global business and in a strong financial position that affords us the agility and opportunities that few other companies have. Broadly speaking, we expect the impact of ASF to be positive for Tyson.
Now we'll return to Noel for additional commentary. Noel?
Thank you, Stewart. This is an unusual, perhaps unprecedented time for the protein industry. In my 39 years in the business, I've never seen an event that has the potential to change global protein production and consumption patterns as African swine fever does. The situation is fluid and fast-moving, but we're working with others in the industry, government agencies and producers to prepare in the event ASF spreads to North America.
A worldwide decrease in pork supply could put pressure on our Prepared Foods business by increasing raw material costs while offering significant upside to our Pork, Chicken and Beef businesses. The power of our diversified business model and broad product portfolio across more world geographies will be even more important under these circumstances.
Thinking back to similar instance like PEBB in 2013 and BSE in 2003, we've been able to manage through difficult situation and maximize opportunities when continuity of supply becomes even more important. I believe there is no company better positioned than Tyson Foods to handle what lies ahead.
That concludes our prepared remarks, and we're ready to begin Q&A.
[Operator Instructions]. The first question we have will come from Ben Bienvenu of Stephens Inc.
Noel, I wanted to follow up on your concluding comments that you made on African swine fever. So you've decided not to update your guidance this morning with respect to ASF, which is understandable given the timing is -- of the impact is tough to gauge. But the comments you did provide were pretty constructive. So I'd love to hear any comments that you can make about what you guys are doing operationally and strategically to position yourselves for the event. And then if you could provide any more detailed thoughts on each of the major segments with respect to ASF, that would be helpful for us.
Okay. Ben, it is a matter of timing and how that impacts both 2019 as well as 2020. And I do think that Tyson Foods is uniquely positioned in all of our proteins, in our Beef business, our Pork business, our Chicken business because you don't have an incident like this where there's some place in the vicinity of 150 million to 200 million hogs that have died in China that there's not a significant impact. That correlates to about 10 million metric tons of product that has come out of the marketplace. And from a total protein global supply, that's something in the area of 5%. So it's an event that I've never seen happen before, that we are well positioned to deal with that in all 3 proteins.
There's a couple of things that we're doing, Ben, in reaction to that. First and foremost, we want to make sure that this disease doesn't reach the United States. So there has been activity with the industry and the U.S. government to ensure that we're doing everything possible to keep the disease out of the United States and then react to that if, in fact, it does hit the United States. So it is an opportunity, I would tell you, for not just our Pork business but all 3 species.
Great. That's helpful commentary. And my second question is related to the Prepared Foods business. Obviously, a strong first half with respect to operating margins. But you've maintained your full year guidance range of 10% to 12%. In light of the strong results that we've seen in the first half of the year, I think to get to the bottom end of that range, we would have to see in the ballpark of 8% margins. So I'm curious particularly given that the full year guidance doesn't yet reflect ASF, which you noted put pressure on profitability, just any commentary you can provide on the Prepared Foods business as we move through the rest of the year would be helpful.
Yes. Ben, I'll go back to my original comment on timing. Really, we have seen pork prices start to move in reaction to ASF, but the hog prices have risen faster than what product prices have. When product is in fact produced on a large scale for China, that product will come out of the U.S. market and prices are expected to escalate fairly rapidly. So it's a matter of predicting when that might take place, whether that's Q3, Q4 of our fiscal year or into calendar 2020. So the 10% to 12% range that we've given, that is down slightly from where we're at and it is an anticipation that pork prices will begin rising through Q3 and Q4.
Next, we have Alexia Howard of Bernstein.
So my first question is about the Walmart announcement of plans to backward integrate on the Angus beef supply. And I'm just wondering, this tendency for the retailers to make those kinds of backward integration moves, we've had Costco doing something in chicken as well, how do you think about that? And how do you make sure that, strategically, Tyson can continue to win even as the retailers start to think about those kinds of moves?
I think we win by continuing to service them to the greatest extent possible with great product and service. And I hate to comment on any specific customer, but Walmart has been a very strong customer of ours for many, many years. It is a segment that is extremely complex. We will work with them to the extent that we can in assisting in any way. But our business is strong with Walmart, and they've been a great partner for many years.
And then just as a follow-up. The plant-based, you talked about an upcoming launch in, I guess, a second generation of plant-based, I'm assuming, burgers or something similar. Do you have -- do you already have an idea of how quickly you'll be able to scale distribution on most products? And what's the kind of feedback that you're getting from the retailers on that front?
The product will enter the market yet this summer, Alexia, on a fairly limited basis and on a much larger scale later this fall. So we will be introducing the product this summer in a fairly limited basis and then on a much larger basis once we get into October and November.
The next question we have will come from Heather Jones of The Vertical Group.
So I had a quick question on your Pork business. I was honestly a little surprised to see you raise your guidance there. And you mentioned something about improving your spread to USDA benchmarks because Q3 to date, margins have been contracting also. Just wondering, have you reworked some of your hog contracts? Or can you help us understand how you've been able to improve your relative performance and have that confidence? Because you made a comment in your release about hog prices running faster than the cutout, but then you raised your guidance for the year. So just could you help us understand the thought process behind that?
Yes. The Pork business continues to operate extremely well, Heather, that as I mentioned, our turnover numbers are down. Our safety numbers are greatly improved. Productivity is much, much better. So operationally, we're performing exceedingly strong. However, the markets, they have risen substantially, both the hog markets as well as product markets. We saw the effect of that in Q2. We're seeing that in the beginning of Q3, that according to public information, margins are less than what we would like right now. However, we do believe that as we move through Q3 into Q4 and particularly in Q1 of next year, margins will become much, much stronger.
Yes. Heather, it's Stewart here. One other quick comment that's worth noting is that, obviously, as we project the back half of the year, we have the benefit of knowing what came in the first half of the year. We had a strong Q2. We came in at better than 8% in Q2. So that factors into our confidence for the full year despite the pressure that we're seeing in Q3.
Okay. And then my follow-up is on the Chicken business. So this is I think the second time that guidance has been tweaked. And it's also the second time that Tyson's -- second quarter that Tyson's margins have sort of moved in the opposite direction of the industry. So I was wondering if you could help us understand what is going on there and what is being done to address it. Did the demand catch you off-guard and you had to buy more product on the outside market? Or just help us understand what's going on and how that's going to reverse course into late '19 and 2020.
Yes. Heather, no, there wasn't anything specific that affected the Chicken business. I would tell you that as we came through Q2, that was seemingly the low end of the market as it often is. Prices have strengthened as we've moved through Q3 and -- for Q2 and into Q3. And I alluded to the fact that there are a couple of issues in one specific segment in our business that is in the process of being addressed. But it's purely driven by market factors primarily as well as, to a lesser degree, some performance issues.
Yes. One other thing I'd just throw in there, Heather, you saw in Q3 -- and we don't normally get into sort of our -- all of our mark-to-market. But in this quarter versus last year, last year, we had a gain in our mark-to-market hedging on grains. We had a loss this year, and the delta between those 2 had the impact of a couple of percent on our number. So that's worth noting as you consider what went on in the quarter.
A couple of percent, like on the percentage marks, is it like 200 basis points in margins or a couple of percent on the absolute dollar amount?
On the margins. But it's meaningful.
Next, we have Ben Theurer of Barclays.
So just quickly following up on Howard's question in regards to the Chicken segment. So clearly, you've done the acquisition with Keystone pending Brazil Foods. I'd say timing was very good on those acquisitions. Now looking on how things evolve, and obviously now you getting this more international footprint, could you elaborate a little bit on your expectations for that Chicken segment once you start integrating further the businesses and the opportunities you're seeing in terms of be it margin stability or just growth opportunities in the Chicken segment also in the light of most likely people or some customers switching from pork into chicken? So just a little bit of an update on what you're seeing with Keystone and then later at this stage with Brazil Foods, that will be my first question.
Yes. Ben, the integration work has gone extremely well through both the domestic as well as the international parts of our business. There have been nothing disruptive, I would say, that it is exactly on plan. Domestically, it's a very stable business for us. The margin structure is relatively stable. It complements some of the other business that we currently have. On the international basis, it solidifies the position that we have in China. It gives us a strong foothold in Thailand as well as other parts of Southeast Asia. So it's been no surprises so far and has delivered according to plan.
Okay. Perfect. And then a follow-up would be on Beef. I mean, clearly, there's been a little bit of short-term volatility in cattle pricing because of the weather disruption we had at the beginning of the year. It was just too cold and all those kind of things. So it was surprisingly strong still, the margin throughout the quarter. So what have you done in terms of securing some of the live supply? And how do you feel in terms of the third and particularly then also the fourth quarter in terms of input costs? And if you look for a route, how do you think the whole Beef business is going to turn out? Because that's been one of the very strong segments lately, so I would assume that it's going to continue to be the case. But is there anything you've been doing in terms of contract hedging and so on just in order to secure some of the supply here? And what have you done particularly in the quarter to maintain margins at that relatively strong 4% level?
Okay. From a supply standpoint, Ben, there is nothing unique that we have done most recently. Many of our source and supply are long term in nature. So either we have normal contracts or informal. So the Beef business has evolved to a large extent over the course of the last 10 years or so, where there is a greater knowledge of where the cattle are going to come from as well as, from a producer side, the fact that they know that we're looking for unique characteristics in some of the cattle. So the evolution has been that we have a number of customer agreements and we have to source the cattle that aligns with the type of product that they're looking for. So to do that, we have long-term supply agreements.
So with that, I don't see any substantial change as we look at our Beef business. Q3 and Q4 are typically strong quarters for us, and I would expect the same thing this year. So as we came through Q2, as you said, it's often the most volatile quarter. There was weather disruption. But as we look into Q3, Q4, it looks like there's both good supply of cattle in the regions in which we operate as well as strong demand going into Q3 and Q4. And I would say the same outlook for 2020, that there's nothing on the horizon at this point that would change that. If anything, it could be stronger than what 2019 has been.
And the next question we have will come from Robert Moskow of Crédit Suisse.
This is Jake Nivasch on for Rob. Just a couple of quick questions. So several years ago, I think you guys reduced your exposure to the chicken export market to reduce commodity volatility. And I guess going forward, do you guys need to operate differently in order to capitalize on the rising export demand related to ASF? And then I have a follow-up.
I think when we talk about chicken exports, historically, that's largely been chicken leg quarters. And you are correct, that we have decreased the amount of total products that we are exporting, specifically leg quarters that we are deboning many of those today and adding more value to those products. So it has been done intentionally. And no, there is no plan to switch back to producing more leg quarters and exporting them in the market. There's greater value in satisfying domestic demand than producing leg quarters for export.
Got it. That's helpful. And then just one other quick one. So how quickly can the Prepared Foods division raise prices? And I guess, specifically, are there any product lines or channels that can raise price faster than others?
I think it's going to be somewhat across the board. It's -- whether it's beef prices, pork prices, really all input prices are expected to increase. So don't think in terms of one specific type of product in prepared. With the increase in export demand, it will affect all proteins not only in the United States but on a global basis. So as you look at export information of what countries are shipping to what destinations, as an example, you'll see Australia has increased beef exports to China. With that, United States has historically been an importer of particularly lean beef firm from Australia. Prices have gone up significantly. So it's affecting not only our markets and not only the pork markets but global markets in all species.
The next question we have will come from Adam Samuelson of Goldman Sachs.
Maybe first I wanted to continue just in the Chicken business a little bit and just understand the performance in the quarter and the reduction on -- or the tempering of the margin outlook there. I'm presuming, Noel and Stewart, that you're alluding to market pressures in the tray pack segment. And just maybe can you give a little bit more color on the market pressures you're facing there and then as well just a little more color on the operational challenges that you faced?
Well, the markets are trending up, Adam. So as we came into Q2, that was probably the low end of the market. So as we came through January, February, that was the low. They've improved since then. So that's a bit of a tailwind. So I think the worst is behind us, Adam. We're seeing demand improve a year ago. We saw lot of beef features planned for grilling season. This year, there seems to be more poultry plan than what there was a year ago. So from a demand perspective, it seems to be in a very different position than we were a year ago.
On the operational side, I would tell you that there's nothing that is profound that's -- with the number of facilities that we operate. There are always some unique challenges and there just happens to be a couple of challenges in one segment of the poultry business right now.
Okay. So just to be clear then, the tempering on the margin expectations for fiscal '19, is that more a reflection of the actual first half performance? Or did your expectations on margins in the second half of the year come down at all?
No. It's really the first half.
Okay. That's helpful. And then just thinking about ASF and the impact -- the potential impact in Chicken where this is the segment you're vertically integrated in. And so one would naturally think there's the most operating leverage to an inflationary environment, but you also operate in a lot of different segments. So maybe just help us think about where -- size kind of how we should think about inflation benefiting the Chicken business given the offsets in the prepared poultry business, some of the grain -- or the cost-plus contracts that you have in different market segments as well and just frame kind of what that opportunity would be.
Yes. Adam, it's going to benefit all 3 species, beef, pork and poultry. And it will be to the detriment of prepared on a short-term basis. Now in time, those increase in costs will be passed along, but there is a timing issue. So that is the reason that we tempered the Prepared Foods earnings outlook and the reason that we are, in fact, a little more bullish than what we were on Beef, Pork and Chicken not only through the balance of 2019 but into 2020.
Next, we have Michael Piken of Cleveland Research.
Yes. Had a couple of questions. The first one is if you could provide us an update on the status of your new chicken plant. And then the second question is if you could provide us an update on the status of the financial fitness cost savings. Just I know you're not specifically tracking it, but just if things are still on track and if it's still right to put in $200 million a year in savings.
Yes. Michael, both are on track. There's the plant that we announced in Tennessee. Construction is proceeding as planned. There's -- not being delayed. It's on budget. So no change there. And then the financial fitness, that's just part of our business today, Michael, that we are not breaking that out specifically. However, I would tell you that is part of our fabric. We do track that internally. We don't talk about it externally. But yes, I think it's fair for you to build that into your model.
The only thing I'd add, Michael, is just on the cost front, I think Noel mentioned it earlier, but all of the acquisitions, as we integrate those, the synergies are coming in as planned as well so cost coming out on a number of fronts.
The next question we have will come from Ken Goldman of JPMorgan.
Two questions for me. First, regarding ASF, I'm curious, what do we know as an industry? And what is still up in the air? Obviously, we know that hundreds of millions of hogs are gone, but I'm curious what your research is telling you about, A, I guess, whether China has been able to slow down the spread of the disease at all; and B, to what extent China is maybe building out some chicken production to offset the gap in hogs.
Ken, that would be speculation on my part because there's nobody that knows the exact situation in China. I think the reports that we all read, that you have to accept those at face value. There's quite a range, as you know, that's -- it's being quoted anywhere from 20% of the herd to 30-plus percent. So on an equivalent basis, that's more than the entire hog production in the United States on an annualized basis, but there's nobody that knows exactly how many hogs are affected.
And are they increasing poultry production? I would say probably to the extent possible. However, as you know, there's been some limitations within China on the breeding flocks. So it's not as easy. It's just saying that we're going to start raising more chickens. And you have the factor that the predominant form of chicken that's consumed in China is a yellow bird. It's not the white bird that we produce here. So it's a different type of product than what we're accustomed to. So it's not as though you can turn off pork and turn on poultry. It will be multiple years before the supply balance comes back into equilibrium.
No. That's helpful. I do appreciate the candor. I don't think anyone does, though, but I figured if anyone might, it might be Tyson. But it's hard to know, I'm sure. And then my second question is I just wanted a clarification. When you are talking about pricing catching up a little bit later as a result of higher hog costs, are you talking about pricing in your Pork segment as well as your Prepared Foods segment? Because I understand the delay, the inevitable pricing on the Prepared Foods side. But in Pork, at least historically, there just hasn't been much of a lag ever in the timing on pork and hog prices. So I wanted to get a little bit of a sense of what you were forecasting there.
Yes. It would be some of each. It would be both in our Pork business as well as our prepared business. And if I move just specifically to the Pork business, as news of ASF became a little more widespread, the futures market made significant gains so futures were higher, and as a result, hog prices went up as well even though product prices didn't. So there can be periods of time that the live markets can leave product markets or vice versa. In this particular case, the live market did get ahead of the product market so there is a lag that is taking place right now.
And then on the product market, I think you clearly understand that as right -- as prices rapidly rise on the input side, the price recovery, there's a lag in capturing it. So by the end of Q3, Q4, it should be pretty well priced into the market. On the prepared side, it might change slightly lower.
Yes. It's worth noting maybe that on the prepared side, the team has already started to go out to the market with some price increases. So that team is well prepared and already taking action.
Next is Jeremy Scott of Mizuho.
Just back on the Chicken margin. I think the key thing I have been wrestling with since the Keystone acquisition or probably even before that is the weighted average duration of your chicken contracts or how your customer-centric model limits your ability to pass through pricing. So I guess, in other words, if commodity chicken prices were to rise by 10% tomorrow, say, by government decree, how long would that take to roll through your model? And to what extent would your business mix inhibit your realization of that price?
Jeremy, there's not an exact way to answer that question because we have many, many different types of pricing models. So it's not as though we have fixed-price models, that we have priceless models, that we have a model that allows immediate pass-through. We do sell some on a spot basis, but we have many different models. So it's not as though we sell one way and the lag is going to be 2 months or 12 months. So there's -- I can't give you a specific answer to that. It will take time to pass on through. But that's been done intentionally, Jeremy. That we have set up various pricing models with many different types of customers to provide stability in our earnings so we don't have the volatility that more of the commodity-oriented players have.
So we will not reach the highs in the market when commodity prices go high nor will we reach the lows. We're looking for a more stable earnings stream, and that's the way that our pricing model has been set.
And one of the reasons why I think it's best, we have the benefit obviously of pretty detailed models internally to be able to see where things are going. And it's why we -- it's one of the reasons why we prepare a detailed financial forecast for you in terms of giving you that heads up. I would also say it's worth noting that in the quarter, whilst you saw some weakness in Chicken, just reflect on where the return on sales were for all of the other businesses, and they look really good.
All right. Just on the Pork side, I think there's maybe some -- it's difficult to think that I don't know how your plants would -- how much of your plants will be able to export pork to China if it were to come to that. Would you be willing to work with your hog suppliers to remove ractopamine from your supply? And can you describe how that would impact your product from a yield and quality perspective?
The answer, yes. Yes. Definitely, Jeremy. We would be working and have worked with our supply. We do produce ractopamine-free product today, and it's an offering that we make into the market both for domestic as well as international use. And we do work with groups of producers for us to do that. We can expand that program. So the answer would be yes. We have the capability on a large-scale basis to meet those international demand. However, I would tell you, we will balance that with the domestic customer base that we've serviced for many years and plan to continue to service. So some companies might view this as opportunistic. We don't. We view this as a mobile, long-term event. And we will structure our business to service not only the international markets as though we have in the past but continue to service our domestic customers as well.
Got it. Okay. Can I just ask, to the extent that you can, can you give any update on the class action case? It seems, from your disclosure in the Q, it looks like the DOJ has issued a grand jury subpoena on discovery document. So this has been a civil matter here for three years. Was there anything that precipitated the government's involvement recently?
No. All I can say, Jeremy, is that we're disappointed that it went this far. But I'm not going to make any comments on any pending lawsuits.
Next, we have Michael Lavery of Piper Jaffray.
Could you just give a little more color, when you said that you're not factoring ASF into your outlook, but then I think you're also trying to be -- to account for some of that in a little more cautious view on costs in Prepared Foods, would it be right to characterize your guidance as trying to capture at least the cost increases you have the visibility on without the pricing benefits? Is that the right way to think about that context you're working in?
I think that would be accurate, Michael, because it is a matter of timing, right, because we have seen raw material prices that have moved higher. It has had an impact on Prepared Foods, but we've not seen the corresponding reaction in the livestock prices. So we do think that there will be an expansion that will take place in beef, pork and poultry. It's a matter of if it's in fiscal 2019 or if that moves into 2020.
Okay. That's helpful. And just back to your comments about the U.S. And obviously, if it came here, I think it's been very clear that would be a major problem. But there hasn't seem to be a lot of talk about that. Do you have any reason to believe -- that has seemed to me very unlikely. Is that a fair characterization? Or how would you quantify the risk around that?
I think there's a real risk that, that could take place. African swine fever has been -- we've been aware of circumstances globally for a number of years, 10 years, 15 years. But it has spread rapidly in the course of the last 12 months not only in China but throughout other parts of Asia as well as Europe. So I think the threat is real. And I do think there is a distinct possibility it could come to the United States, and we need to be prepared for that. We need to be prepared from a regulatory standpoint.
When we had high path AI in this country a few years ago, the industry and the government quickly mobilized. We need to take that as a lesson and use that in the case that it does come here as well as from a trade standpoint in trade -- in talking with our trade partners about regionalization and the fact that it doesn't matter if it's in the United States or within Europe or any other country, that it should be on a regionalized basis.
And we do have meetings that have and continue to take place with industry associations, with the government as well as those in the pork business. So there is a coordinated effort that has been underway for the last 60 days or so.
And next, we have Eric Larson of Buckingham Research Group.
I just want to follow up on the grain impact on your margins in the chicken sector for the second quarter, 200 basis points down. But when you now look forward, maybe it's not going -- it would not be a positive yet for your third quarter, but we're going to start anniversary-ing some of these high grain costs. They started coming down in June last year pretty sharply. I would think that grain, particularly meal, could start becoming a tailwind maybe fourth quarter. I mean that assumes the prices stay where they are on the spot market and whatever your hedging practices or purchase forward practices have been. But maybe this is more of a 2020 positive event. I mean how should we look at the forward structure of your grain input cost as opposed to what happened in Q2?
Yes. Look, so a couple of comments on Q2, and then we'll talk about the future. So looking back at Q2, just pure grain prices in Q2 were slightly higher than the same quarter last year. And then, of course, you had the impact of this timing gain in the first quarter last year and the loss this quarter -- this year. How those play out into the future, of course, will depend a little bit on the grain prices themselves. I think actually, the key answer to your question lies in your point at the end, which is the assumption around price. When we gave you the expected return on sales for the business, we're making assumptions both around our hedging, the price of grains that we expect to pay and then the commensurate prices that we're getting in the marketplace. So there's no sort of easy answer to just say, well, price of corn will be down and therefore, we'll be making a lot more money. We've sort of woven all of that price and cost of corn into the forecast that we've given you.
Okay. So if you just take the price of corn and soybeans today, which translates into the meal, et cetera, we're at really historical lows. We still got a lot of supply coming in globally. But I would suspect, at some point, there's maybe more upside risks, maybe not near term, than it is more downside. So would this be an environment where you'd get more aggressive? It seems like the market is short -- pretty short on both the commercial side as well -- we know the noncommercial is very short. So wouldn't it seem that there might be more upside risk to that pricing outlook? And then I'll pass it on.
Yes. Look, potentially, I think the real thing about grains is it's an input that we have to take. We take that into account in our pricing, and our hedging is not in any way speculative. It is designed to take the volatility out of the grains that we use in our business. And so over time, you will see our hedging in a rising market will slow that impact, and in a falling market will delay the benefits. But I don't think that you will see any sort of dramatic change in action. Otherwise, we're just entering a sort of trading game, which is not our business.
And next, we have Ken Zaslow of Bank of Montreal.
Just a couple questions, I'm sorry. First, are there any structural issues with your Chicken business that you would not be able to get back to 2016 levels if the market permitted?
No. There is not, Ken. No structural issues. We do have a few specific plants that are not performing at levels that we would want, but nothing on a structural basis. The team knows where the opportunities are, and they are after those opportunities.
Okay. And then I think you said last quarter that you would expect profit to grow in 2020. And obviously, we did not have African swine flu back then. And you didn't say exactly the number, but you said that you'd expect it to grow given all the things you're doing. Is that still a fair comment, excluding African swine flu fever?
Yes. It would. Even excluding African swine fever, Ken, I think the outlook as we look into 2020 would be positive for several reasons. One, the cattle herd is at least stable, if not still slightly growing, but the growth has leveled off. However, global demand continues to be extraordinarily strong. So exports have been good. Domestic demand has been very strong as well.
Moving over to Pork. We -- as we came through 2019, there was several new plants that came in line. So capacity increased at a greater rate than what hog production did. We are seeing growth in hog production. So I think that, that delta that we saw change in 2019 will come back in closer balance. So I think that's a positive on the Pork side.
And on poultry, as I mentioned, we started the year -- Q2 was not a particularly strong quarter for us. But for the year, we're going to end up at about 6%. And it looks like as we move into 2020, it has the possibility of being something stronger than that.
So all three businesses in addition to our prepared, which has had several record quarters, continues to perform exceedingly well. So no, all parts of our business look good at this point, the last component being our International business. Our legacy International business continues to strengthen. It's -- we are at breakeven or better at this point. And historically, that was a segment that did not make money. It cost us money. So that is a change in our business as well.
Just on International, I know it's a very small part, but I have a lot of questions. But International, you will be at a run rate of a profit by the fourth quarter. Is that a fair assessment? Or -- yes. Is that fair?
Yes. Yes, that's fair, Ken. And that is excluding Keystone. That would be our legacy business that we would be on a run rate to make money.
Okay. And my very last question is promotional spending. You have seen that change in the industry towards chicken. Is that one of the reasons that you think that the Chicken margins have improved from current levels absent any sort of African swine fever impact? Is that a fair assessment? And can you give some anecdotes? And I'll leave it there.
I think that it's because of the alternative protein. Well, proteins other than chicken. So as an example, beef prices are significantly higher than what they were a year ago. So as an alternative, I think they've chosen to promote more chicken this year than what they did a year ago simply because of the price of beef. I mean, the beef cut-out is something, let's say, $2.30. So it's extraordinarily strong. So as they look at what they want to feature, chicken is a great value right now. So I think that's the primary reason more so than the MAP spend that's going against it.
At this time, we will go ahead and conclude our question-and-answer session. I would now like to turn the conference call back over to Mr. Noel White, President and Chief Executive Officer, for any closing remarks. Sir?
Thank you for joining us today and thank you for your interest in Tyson Foods. You'll be hearing from us again at the BMO Conference next week and at our Investor Day, June 20. Thanks, everyone.
And we thank you, sir, and the rest of the management team for your time also today. Again, the conference call has now concluded. At this time, you may disconnect your lines. Thank you again, everyone. Take care, and have a wonderful day.