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Tyson Foods Inc (TSN) Q2 2019 Earnings Call Transcript

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Tyson Foods Inc  (NYSE: TSN)
Q2 2019 Earnings Call
May. 06, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Tyson Foods Inc. Second Quarter 2019 Earnings Conference Call and Webcast. All participants will be in listen-only mode.

(Operator Instruction) Please note this event is being recorded. I would now like turn the conference call over to Mr. Jon Kathol, Vice President of Investor Relations. Mr. Kathol, the floor is yours, sir.

Jon Kathol -- Vice President of Investor Relations

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 6th at 9 AM Eastern Time. A replay of today's call will be available on our Website, approximately one hour after the conclusion of this call. This broadcast is the property of Tyson Foods and any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Tyson Foods is strictly prohibited.

Please note that our references to earnings per share, operating income and operating margin in today's remarks are on an adjusted basis unless otherwise noted. Reconciliations to our GAAP results, please refer to this morning's press release. I'll now turn the call over to Noel White.

Noel White -- President and Chief Executive Officer

Thank you, Jon, and good morning everyone. Our earnings of $1.20 per share, and a 6.3% operating margin demonstrate the strength of diversified business model. The prepared foods segments results were a Q2 record, and the Beef and Pork segments executed well despite several significant weather events. Although parts of our Chicken segment had 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 we 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's 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 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 non-core businesses last year. Our year-over-year increase in MAP spending and innovation investments have resulted in volume growth and net share gains. Our core nine 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 costs 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 are 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 protein 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 grading indicating improved genetics, which aligns with our growing premium beef programs.

We recently announced that we would be using DNA technology to trace beef back to the individual animal of origin for 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 hogs. News of African Swine Fever in China along with the increased slaughter capacity United States had a near-term impact of driving up hog costs that initially outpaced the value of pork. We're achieving reasonable returns despite the headwinds while improving our spread to USDA industry benchmarks versus a year ago. Our ability to execute well is due in large part to record-high retention of our front line 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, where 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 14.4% 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 (ph) 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 trade pact under performance in earlier market weaknesses.

In addition to the benefit of moderating grain prices, we have identified opportunities and several initiatives are under way to significantly strengthen the Chicken segment's results. Led by the iconic Tyson brand, our chicken business has a great foundation, great products and a 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 financial.

Stewart F. Glendinning -- Chief Financial Office

Thanks, Noel. Good morning everyone. Second quarter EPS of a $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 break even 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 2.9 times. 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 break even on a pre-tax 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?

Noel White -- President and Chief Executive Officer

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 multiple geographies will be even more important under these circumstances.

Thinking back to similar incidents like PEDV 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 are ready to begin Q&A.

Questions and Answers:

Operator

Thank you, sir. We will now begin the question-and-answer session.

(Operator Instruction)

The first question we have will come from Ben Bienvenu of Stephens Inc. Please go ahead, sir.

Ben Bienvenu -- Stephens Inc. -- Analyst

Thanks, good morning.

Noel White -- President and Chief Executive Officer

Good morning.

Ben Bienvenu -- Stephens Inc. -- Analyst

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 giving that timing is -- 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 yourself for the event.

And then if you could provide any more detailed thoughts on each of the major segments with respect to ASF, that'd be helpful for us.

Noel White -- President and Chief Executive Officer

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, pork business, our chicken business, because you don't have an incident like this where there is 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 from a total protein global supply that's something in the area of 5%. But it's an event that I've never seen happen before. But we are well positioned to deal with that in all three 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 US 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 three species.

Ben Bienvenu -- Stephens Inc. -- Analyst

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 pressure profitability, just any commentary you can provide on the prepared foods business as we move through the rest of the year would be helpful.

Noel White -- President and Chief Executive Officer

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 hog prices have risen faster than what product prices have. When product is in fact produce on a large scale for China, that product will come out of the US 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 in anticipation of pork prices will begin rising through Q3 and Q4.

Ben Bienvenu -- Stephens Inc. -- Analyst

Understood, thanks. Best of luck.

Operator

Next we have a Alexia Howard of Bernstein.

Alexia Jane Burland Howard -- Sanford C. Bernstein -- Analyst

Good morning. 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?

Noel White -- President and Chief Executive Officer

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. Part of our business is strong with Walmart and they've been a great partner for many years.

Alexia Jane Burland Howard -- Sanford C. Bernstein -- Analyst

And then just as a follow up. The plant base, you talked about an upcoming launch of I guess a second generation of plant-based. I'm assuming burgers or something similar. Do you -- do you already have an idea of how quickly you'll be able to scale distribution on those products? And what's the kind of feedback that you're getting from the retailers on that front?

Noel White -- President and Chief Executive Officer

The product will enter the market yet this summer, Alexia, but 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.

Alexia Jane Burland Howard -- Sanford C. Bernstein -- Analyst

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

Noel White -- President and Chief Executive Officer

Thank you.

Operator

The next question we'll have will come from Heather Jones of The Vertical Group.

Heather Jones -- The Vertical Group -- Analyst

Good morning.

Noel White -- President and Chief Executive Officer

Good morning, Heather.

Heather Jones -- The Vertical Group -- Analyst

I have 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 also -- 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 the comment in your release about hog prices running faster than the cut out, but then you raised your guidance for the year. So just could you help us understand the thought process behind that?

Noel White -- President and Chief Executive Officer

Yeah. The pork business continues to operate extremely well, Heather. As I mentioned our turnover numbers are down. Our safety numbers are greatly improved. Productivity is 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 you Q3 into Q4 and particularly in Q1 of next year, margins will become much, much stronger.

Stewart F. Glendinning -- Chief Financial Office

Yeah. Heather, Stewart here. One other quick comment that's worth noticing 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.

Heather Jones -- The Vertical Group -- Analyst

Okay. Thank you. 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.

Noel White -- President and Chief Executive Officer

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 the low in 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.

Stewart F. Glendinning -- Chief Financial Office

One other thing I'll just throw in there, Heather. You saw in Q3, and we don't normally get into sort of 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 two had the impact of a couple of percent on our numbers. So that's worth noting as you consider what went on in the quarter.

Heather Jones -- The Vertical Group -- Analyst

A couple of percent, like on the percentage of margin, like 200 basis points in margins or a couple of percent on the absolute dollar amount?

Stewart F. Glendinning -- Chief Financial Office

On the margins.

Heather Jones -- The Vertical Group -- Analyst

Okay. Thank you so much.

Stewart F. Glendinning -- Chief Financial Office

It's meaningful

Heather Jones -- The Vertical Group -- Analyst

Okay. Thanks.

Operator

Next we have Ben Theurer of Barclays.

Benjamin M. Theurer -- Barclays Capital -- Analyst

Hi good morning, Noel, Stewart. Thank you very much for the call. So just quickly following up on Heather'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 some of 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 -- some customers switching from pork into chickens. Just a little bit, an update on what you're seeing with Keystone and then later at a stage will Brazil Foods. That will be my first question.

Noel White -- President and Chief Executive Officer

Yeah. 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 is a very stable business for us. Margin structure is relatively stable. It complements some of the other businesses 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.

Benjamin M. Theurer -- Barclays Capital -- Analyst

Okay Perfect. Thanks for that. And then a follow up would be on 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 life supply and how do you how do you feel in terms of the third and particularly then also the fourth quarter in terms of input cost? And if you look further out, 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 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 relatively strong 4% level?

Noel White -- President and Chief Executive Officer

From a supply standpoint, Ben, there is nothing unique that we have done most recently. Many of our source of supply are long term in nature. So either we have formal 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 is both a good supply of cattle in the regions in which we operate as well as 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.

Benjamin M. Theurer -- Barclays Capital -- Analyst

Okay, perfect. Well, thank you very much.

Noel White -- President and Chief Executive Officer

Thank you.

Operator

And the next question we have will come from Robert Moskow of Credit Suisse.

Jacob Nivasch -- Credit Suisse Securities -- Analyst

Hi, thank you. This is Jacob 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.

Noel White -- President and Chief Executive Officer

I think -- when we're talking 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 de-boning many of those today and adding more value to those 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 is greater value in satisfying domestic demand in producing leg quarters for export.

Jacob Nivasch -- Credit Suisse Securities -- Analyst

Got it, thank you, that's helpful. And then just one other quick one. So how quickly can the prepared food division raise prices? And I guess specifically are there any product lines or channels that can raise price faster than others? Thank you.

Noel White -- President and Chief Executive Officer

I think it's going to be somewhat across the board. 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, the United States has historically been an importer of particularly lean beef trim 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.

Jacob Nivasch -- Credit Suisse Securities -- Analyst

Got it, thank you.

Operator

The next question we have will come from Adam Samuelson of Goldman Sachs. Please go ahead.

Adam L. Samuelson -- Goldman Sachs -- Analyst

Thank you. Good morning, everyone. 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 or the tempering of the margin outlook there. I'm presuming, Noel and Stewart, that you're alluding to market pressures in the tripack segments. And just maybe can give a little bit more color on the market pressures you're facing there and then as well as just a little more color on the operational challenges that you faced?

Noel White -- President and Chief Executive Officer

Well, the markets are trending up, Adam. So, as we came into Q2, that was probably the low end of market. So as we came through January and 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, that we're seeing demand improve a year ago. We saw a lot of beef features planned for grilling season. This year, there seems to be more poultry planned and 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 is nothing that is profound, that 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.

Adam L. Samuelson -- Goldman Sachs -- Analyst

Okay. So just to be clear then, the tempering on the margin expectations for fiscal '19 is that more reflection of the actual first half performance or did your expectations on margins in the second half of the year come down at all?

Noel White -- President and Chief Executive Officer

No, it's really the first half.

Adam L. Samuelson -- Goldman Sachs -- Analyst

Okay that's helpful. And then just thinking about ASF and 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 the size kind of how we should think about inflation and 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.

Noel White -- President and Chief Executive Officer

Adam, it's going to benefit all three species, beef, pork and poultry. And it will be to the detriment of prepared on a short-term basis. Now in time, those increasing 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 more bullish than what we were on beef, pork and chicken, not only through the balance 2019 but into 2020.

Adam L. Samuelson -- Goldman Sachs -- Analyst

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

Operator

Next we have Michael Piken of Cleveland Research.

Michael Piken -- Cleveland Research. -- Analyst

Hi, I had a couple 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. Thanks.

Noel White -- President and Chief Executive Officer

Michael, both are on track but there's -- the plant that we announced in Tennessee, construction is proceeding as planned. There's not been delays. 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 it 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 I think it's fair for you to build that into your model.

Stewart F. Glendinning -- Chief Financial Office

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.

Michael Piken -- Cleveland Research. -- Analyst

Great. Thank you.

Operator

Next question we have will come from Ken Goldman of JP Morgan.

Ken Goldman -- J.P. Morgan -- Analyst

Hi, thanks. Two questions from 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?

Noel White -- President and Chief Executive Officer

Ken, that'd be speculation on my part, because there's nobody that knows the exact situation in China. I think the reports that we all read, you have to accept those at face value. There's quite a range as you know that's being quoted, anywhere from 20% of their herd to 30% to 30-plus-percent. So, on equivalent basis, that's more than the entire hog production in 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 has been some limitations within China on the breeding flocks. So it's not as easy as 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 or can turn on poultry. It will be multiple years before the supply balance comes back into equilibrium.

Ken Goldman -- J.P. Morgan -- Analyst

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 a timing on pork and hog prices. So I wanted to get a little bit of the sense of what you were forecasting there.

Noel White -- President and Chief Executive Officer

Yeah, 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 prices rapidly rise on the input side, the price recovery, there is 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 take slightly longer.

Stewart F. Glendinning -- Chief Financial Office

It's worth noting maybe that on the on the prepared side, there is a team that has already started to go out to the market with some price increases. So now that team is well prepared and already taking action.

Ken Goldman -- J.P. Morgan -- Analyst

Great. Thank you, Stewart.

Operator

Next is Jeremy Scott of Mizuho.

Jeremy Scott -- Mizuho -- Analyst

Hey, good morning.

Noel White -- President and Chief Executive Officer

Good morning.

Jeremy Scott -- Mizuho -- Analyst

Just back on the chicken margin, I think the key thing I've been wrestling with since the Keystone acquisition and 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, then how long would that take to roll through your model and to what extent would your business mix inhibit your realization of that price?

Noel White -- President and Chief Executive Officer

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 two months or 12 months. So there's -- I can't give you a specific answer 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, 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 more stable earnings stream. And that's the way that our pricing model has been set.

Stewart F. Glendinning -- Chief Financial Office

This is one of the reasons why I think it's best. We have the benefit obviously. It's pretty detailed model internally to be able to see where things are going. 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, while we saw some weakness in chicken, just reflect on where the return on sales were for all of the other businesses, they looked really good.

Jeremy Scott -- Mizuho -- Analyst

All right. Just on the pork side, I think there's maybe some -- there's different things. I don't know how your plants would -- how much of your plants would be able to export core 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?

Noel White -- President and Chief Executive Officer

The answer, yes. Yes definitely, Jeremy, that we would be working and have worked with 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. 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 demands. 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.

Jeremy Scott -- Mizuho -- Analyst

Got it. Okay. Can I just ask, to the extent that you can, can you give any updates on the class action case? It seems to be in your disclosure in the queue, looks like the DOJ has issued a grand jury subpoena on discovery documents. So this has been a civil matter here for three years. Was there anything that precipitated the government's involvement recently?

Noel White -- President and Chief Executive Officer

No. All I can say, Jeremy, is that we're disappointed that that went this far, but I'm not gonna make any comments on any pending lawsuits.

Jeremy Scott -- Mizuho -- Analyst

Got it. Thank you.

Operator

Next we have Michael Lavery of Piper Jaffray.

Michael Lavery -- Piper Jaffray -- Analyst

Good morning.

Noel White -- President and Chief Executive Officer

Morning.

Michael Lavery -- Piper Jaffray -- Analyst

Could you just give a little more color when you said that you're not factoring ASF into 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 the context you're working in?

Noel White -- President and Chief Executive Officer

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 livestock prices. So, we do think that there will be an expansion place in beef, pork and poultry. It's a matter of it's in fiscal 2019 or if that moves into 2020.

Michael Lavery -- Piper Jaffray -- Analyst

Okay. That's helpful. And just back to your comments about the US and obviously if it came here and I think it's been very clear that would be a major problem but there hasn't seemed to be a lot of talk about that? Do you have any reason to believe that -- that has seemed to me very unlikely. Is that a fair characterization or how would you quantify the risk around that?

Noel White -- President and Chief Executive Officer

I think, there is a real risk that that could take place. African Swine Fever has been -- we've been aware of the 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 a 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 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 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 as those of us in the pork business. So there is a coordinated effort that has been under way for the last 60 days or so.

Michael Lavery -- Piper Jaffray -- Analyst

Thank you, that's helpful.

Operator

Next we have Eric Larson of Buckingham Research Group.

Eric Larson -- Buckingham Research Group -- Analyst

Thanks for the question. 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 to -- it would not be a positive yet for your third quarter, but we're going to start anniversarying some of these high grain costs. It 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?

Stewart F. Glendinning -- Chief Financial Office

Look, so couple of comments on Q2 and then we'll talk about the future. So looking back at Q2, just pure grain prices, Q2 was slightly higher than the same quarter last year. And then of course you had the impact of this timing and the gain in the first quarter last year and a loss this quarter, this year. How those pay 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.

And when we give 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. There's no easy answer to just say well pricing of corn will be down and therefore we'll be making a lot more money. We sort of woven all of that price and cost of corn into the forecast that we've given you.

Eric Larson -- Buckingham Research Group -- Analyst

Okay. So if you if you just take the price of the corn and and soybeans today, which translates into the meal, et cetera, we're at really historical lows. We've still got a lot of supply coming in globally. But I would suspect at some point, there's maybe more upside risk, maybe not near-term than it is more downside. So would just be an environment where you get more aggressive?

It seems like the market is pretty short on both the commercial side as well as -- we know the non-commercial 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 up.

Stewart F. Glendinning -- Chief Financial Office

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 the sort of trading game, which is this is not our business.

Eric Larson -- Buckingham Research Group -- Analyst

I understand. Okay. Thank you.

Operator

Next we have Ken Zaslow of Bank of Montreal.

Ken Zaslow -- Bank of Montreal -- Analyst

Hey, good morning, guys.

Noel White -- President and Chief Executive Officer

Good morning, Ken.

Ken Zaslow -- Bank of Montreal -- Analyst

Just a couple of 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?

Noel White -- President and Chief Executive Officer

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. Team knows where the opportunities are and they are after those opportunities.

Ken Zaslow -- Bank of Montreal -- Analyst

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 Fever?

Noel White -- President and Chief Executive Officer

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, 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 the 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 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, continue to perform exceedingly well. So all parts of our business work good at this point. The last component being our international business, our legacy international business continues to strengthen. We are at break even or better at this point. And historically, that was a segment that did not make money. It cost us money. So that is the change in our business as well.

Ken Zaslow -- Bank of Montreal -- Analyst

And just on the international, I know it's a very small part, everybody asked 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 -- is that fair?

Noel White -- President and Chief Executive Officer

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.

Ken Zaslow -- Bank of Montreal -- Analyst

Okay. And my very last question is promotional spending. You have seen that change in the industry toward chicken. Is that one of the reasons that you would 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.

Noel White -- President and Chief Executive Officer

Ken, I think that it's because of the alternative approach. 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 ramp more chicken this year than what they did a year ago, simply because of the price of beef. 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. I think that's the primary reason more so than the MAP spend that is going against it.

Ken Zaslow -- Bank of Montreal -- Analyst

Great. I really appreciate it. Thank you, guys.

Noel White -- President and Chief Executive Officer

Thank you.

Operator

At this time, we will then 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?

Noel White -- President and Chief Executive Officer

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 20th. Thanks, everyone.

Operator

And we thank you, sir and the rest the management team, for your time also today. Again the conference call is now concluded. At this time, you may disconnect your lines. Thank you again, everyone. Take care and have a wonderful day.

Duration: 60 minutes

Call participants:

Jon Kathol -- Vice President of Investor Relations

Noel White -- President and Chief Executive Officer

Stewart F. Glendinning -- Chief Financial Office

Ben Bienvenu -- Stephens Inc. -- Analyst

Alexia Jane Burland Howard -- Sanford C. Bernstein -- Analyst

Heather Jones -- The Vertical Group -- Analyst

Benjamin M. Theurer -- Barclays Capital -- Analyst

Jacob Nivasch -- Credit Suisse Securities -- Analyst

Adam L. Samuelson -- Goldman Sachs -- Analyst

Michael Piken -- Cleveland Research. -- Analyst

Ken Goldman -- J.P. Morgan -- Analyst

Jeremy Scott -- Mizuho -- Analyst

Michael Lavery -- Piper Jaffray -- Analyst

Eric Larson -- Buckingham Research Group -- Analyst

Ken Zaslow -- Bank of Montreal -- Analyst

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