Tyson Foods, Inc. (TSN) Q4 2014 Earnings Report, Transcript and Summary

Welcome to the Tyson’s Quarterly Investor Earnings Call. All lines will be on listen-only mode until the question-and-answer session. [Operator Instructions]. Today's call is being recorded. If you have any objections, disconnect. I’d now like to introduce Jon Kathol, Vice President of Investor Relations.

Good morning and thank you for joining us today for Tyson Foods conference call for the fourth quarter and 2014 fiscal year. On today's call are Donnie Smith, President and Chief Executive Officer; and Dennis Leatherby, Executive Vice President and Chief Financial Officer. Our remarks today include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. 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 today's press release and our filings with the Securities and Exchange Commission for a discussion of the risks that can affect our business. To provide a framework for our commentary fiscal 2014 included one month of Hillshire results but for the purposes of looking back on the year we will speak to adjusted results that exclude Hillshire. For GAAP results and adjustment reconciliations please refer to this morning’s press release. I’d also like to point out that our accounting cycle will result in a 53-week year in 2015. To make comparisons easier the projections in our outlook have been adjusted to a 52-week year unless otherwise noted. Following our prepared remarks we’ll go to Q&A. To ensure we get to as many of you as possible please limit yourself to one question and one follow-up and then get back in the queue for any additional questions. I'll now turn the call over to Donnie Smith.

Thanks Jon. Good morning everyone and thanks for joining us today. Well Q4 was a record quarter with adjusted earnings of $0.87 a share, which is a 24% year-over-year improvement. 2014 was an outstanding year. So let’s look at some of the highlights. We have record adjusted EPS of $2.94, a 30% improvement over last year. Sales were a record $37.6 billion. Adjusted operating income was also a record at $1.65 billion, a 20% increase over last year. Our overall adjusted operating margin was 4.4% and most important in 2014 we completed the acquisition of Hillshire brand, a watershed event that will take Tyson to a new level as a branded food company. It was a great year, one in which we structurally improved the earnings power and reduced the volatility of the business. But I don’t want to spend a lot of time looking back because we have so much more to be excited about in 2015 and 2016 and for years to come. So let’s take a look at the segments and see how the events of Q4 lead us into 2015. In Q4 the Chicken segment reported, on an adjusted basis, a 7.4% return on sales, with volume up 2.3% and average pricing down 4%. You’ll remember on our last call that I told you about temporary disruptions in two plants that would affect our return on sales in the third and fourth quarters. We have corrected those issues and began bringing production back on line in Q1. We’ll be adding much needed value added capacity in the spring for fully cooked and tray-packed chicken. Demand for tray-packed is growing as retail consumers seek fresh healthy options. It’s important to understand that we’re not increasing supply but rather shifting capacity to a more value-added product mix. Also to support growth in fresh chicken we very efficiently used a small amount of MAP spending to generate over 800 million consumer impressions and it's helped widen the gap over our competitors as the number one brand in the country. We're also experiencing double-digit growth in our NatureRaised Farms brand of no-antibiotics-ever chicken. Although it's only a small piece of our branded chicken business, we're pleased with the demand for these products and the premium consumers are willing to pay for them. As you probably saw in our press release this morning we have raised the normalized operating margin range for the chicken segment to 7% to 9% but we expect to exceed that in fiscal ‘15 with more than a 10% return on sales. With consumption shifting away from high priced beef we expect chicken demand to increase by at least 3% in 2015 which should support our pricing expectations given that chicken supplies are projected to be up about 3% for the year. Additionally, our domestic feed cost should be down by about $350 million. An important report to remember about our chicken business is that we have a diversified value-added portfolio and we don't require record chicken prices and cheap corn to do well. We use our buy versus grow strategy to take advantage of pricing when there is more chicken on the market and we do expect more supply in 2016 but we'll need it to meet demand. Our strategy is steady growth, not a commodity roller coaster ride. With our business model we don't view increased supply as a problem. I'll move on to the beef segment which had a 3.5% return on sales for the quarter. Volume was down only 2.6% and I say only because pricing was up 21.5%. Our team did a great job of managing the spread in times of record high cattle costs. We anticipate fed [ph] cattle supplies to be down about 4% in 2015, but that should be the worst of it. There are indications of heifer retention to rebuild the herd. Supplies are expected to be flat to down about 1% in 2016 and as a positive for Tyson the cattle population continues to move closer to our plants in the Midwest. With good export demand, domestic pricing in 2015 will test how much people really want beef, but it's clear that demand for beef is very strong and will provide support for chicken and pork pricing. One of the things that’s really impressed me over the past few years is our ability to manage through a low volume environment. We continue to find ways to become the high revenue low cost player in the regions we compete. How we run a commodity business is more important than the commodity volatility. A good example of our margin mentality is our continuing success in producing more case-ready beef which drives incremental sales, margins and consumer occasions. Turning to the pork segment, which had a 6.1% return on sales in the fourth quarter, volume was about flat to Q4 last year on a 16.5% increase in pricing. The PED virus reduced hog availability and our pork team did a good job of hog procurement in a time of tight supply which kept our capacity utilization well above industry averages. As the supply of hogs tightened this past year it demonstrated the relative inelasticity of certain type of our pork bellies [ph] for bacon. From an end-to-end perspective we find ways to reduce volatility and improve our margins. While I expect global beef and pork supplies to remain tight and to keep pricing at higher levels the structural shift towards increased global protein consumption will continue to driving incremental demand for our products. Looking at fiscal '15 we expect a 2% to 3% expansion in hog supplies and it appears there will be fewer instances of PEDv coming off of reduced numbers last year. In addition to constrained beef production we think consumer demand will support a 2% to 3% pork supply increase. So 2015 should be another good year for Pork segment margins. In our International segment as previously announced we’ll use the proceeds from the sale of our Latin American businesses, one of which is expected to close by the end of this month to pay down debt. We made these decisions to generate better long term ROIC. I want to emphasize that we're committed to doing business in Mexico and supporting our customer’s growth there. China remains in somewhat of a holding pattern. We are in position to take advantage when demand improves and will continue to assess the situation with an eye towards the best long-term shareholder return. In fiscal '15 we expect to cut operational losses to $50 million for the International segment. And finally in the Prepared Foods segment, our legacy Tyson business reported an adjusted 1.8% return on sales for the fourth quarter. Volume was basically flat with average pricing of 5.5%. We’ve taken measures to right-size our operations by closing three plants and we're getting our SG&A in line. We continue to be ROIC focused in our decision making and good allocators of capital for our shareholders. Looking forward, the new Prepared Foods segment, including Hillshire is starting 2015 in a good position with the plant closures, our capacity utilization is improving to the desired levels and our operations are becoming more efficient. We recovered pork and beef input pricing but we’ll have to stay on top it as we anticipate a $140 million of incremental raw material cost in 2015 primarily from increased beef prime [ph] and turkey pricing. With the price increases we’ve implemented so far pro forma volume has been about flat to a year ago. Investing in brand building and innovation are vitally important to our branded CPG business and I can assure you that we are not slowing down the Hillshire innovation pipeline. They are speeding us up. We’re not only launching on-trend consumer driven innovation this year we’re supporting our past innovation launches, a critical part of ensuring long-term success. In our last quarter of fiscal ‘14 Hillshire launched the line of Jimmy Dean frozen sandwiches and bowls for lunch and dinner taking the brand beyond breakfast. This expansion into a new day part has achieved very good incremental distribution of 16 premium priced items thanks to our retail partners. We have a strong innovative marketing program for this launch including television, digital and shopper marketing support. Another big platform carrying over from 2014 is Hillshire Farm Naturals lunch meat. It provides the cleaner label consumers are looking for without sacrificing taste and quality. While we are in the early end of the launch the results are extremely positive. It’s growing incremental purchasers and 80% of consumers who bought the product reported it’s even better than they expected. In addition to those two big platforms we are extending and supporting our innovation launches from early in fiscal ’14. In retail we’re launching new extensions to expand Ball Park, Park's Finest franks. These premium hot dogs deliver a flavor adventure and nothing artificial and they are a growing category. We’re also extending our Hillshire Farm American Craft line of handcrafted, small batch smoked sausage with new products featuring authentic ingredients in bold flavors. And at food service we are extending our Chef Pierre Luxe Layer pies. We’ll invest in MAP spending to continue growth in the second year of these success new platforms. In the back half of the year our focus will be around two new snacking platforms. We know that shift to snacking is here to stay and believe that we have the right to win with our brands in protein snacking. One of those launches Hillshire Snacking has been in the test market since Q4 and looks to have a lot of potential, delivering incremental sales and growing the category. You will hear a lot more about innovation at Investor Day on December 10th where you will get to try some of these products. To wrap up my thoughts on the Prepared Foods segment, although it’s going to take three years to fully realize all of the synergies we expect the segment to earn a 10% to 12% return on sales on a normalized basis after couple of months of working together and really drilling down on the synergy target we’re more confident than ever that we’ll capture more than $225 million in the first year and more than $500 million by the end of year three. I need to clarify that not of the synergies will fall within the Prepared Foods segment. Synergies within shared services for example would be allocated across all the segments but the majority will be in Prepared Foods. So now that I have given you our outlook for each of the segments let’s take a broader look at some reasons we are so optimistic. First, we’re disciplined in our approach towards managing our business. The understanding of the consumer-centric demand and overall supply fundamentals allows us to make decisions that are ROIC-based and provide the least volatility and best prospects for long-term growth. When we assess the demand picture we are uniquely positioned to deliver against changing consumer needs with a portfolio that delivers against every meal occasion throughout the store and across the menu. It’s not just the breadth of our portfolio that’s exciting it’s the depth, along with our innovation that delivers against increasing consumer demand for naturally occurring high quality protein snacks and meals. Consumer behavior at both retail and food service reflect this change. At retail growth is occurring at the perimeter of the store and in a few frozen categories with two of the biggest being chicken and protein breakfast which favor our portfolio. We’re also entrenched with the leading quick service, full service, and fast casual restaurants at dressing [ph] this year. If past consumer behavior remains the same and we believe it will, the recent drop in gas prices will put more money back into consumer wallets which will result in increased meals away from home. So in a macro sense Tyson has the right brand and the right products in the right places for today’s consumers. But let’s take a look at some more specifics for fiscal ‘15 and why we feel so good about it. With six weeks under our belt it’s already off to a great start. We expect adjusted earnings in the range of $3.30 to $3.40 a share. That's more than 12% growth over fiscal '14. We'll gain momentum throughout the year as we integrate Hillshire and cash the synergies. Our beef and pork prices will be supportive of pricing throughout all of our segments. We'll grow our value added chicken, much needed fresh tray pack and full through the fully cooked chicken capacity will be becoming online in the spring. We have a series of new product launches in the pipeline. We're investing in brand building and innovation and we're investing disproportionately over depreciation throughout our business as part of our culture of continues improvement. And let’s keep looking ahead in 2016, it's unusual for us to talk about our business more than a year out, but we see a lot to be confident about. We'll be in our second year of capturing synergies and improvements as we maximize the benefits of combining of Tyson and Hillshire. If chicken supply allows we'll buy more that in the open market add value to it and sell it at a higher margin. Elevated beef and pork prices should continue to provide an umbrella for chicken pricing and consumption. We'll have a full year of the new tray-packed and fully cooked capacity in our results. There should be adequate supply of cattle and hogs with growth coming in the regions where our plants are located. We'll be generating a lot of cash which we’ll use to pay down debt, thereby reducing interest expense. We'll continue to spend CapEx well above maintenance levels with high value return projects that will continue to set us up well for the future. The share count at the tangible equity units will drop as the stock price goes up. We should all be in a position to buy back stock in 2016. We have leading brands at market share that will allow us to grow faster than our peers and we're not finished growing. There is more to come. So yeah we feel really good about 2015 and 2016. It's Tyson 2.0 and we're a different company. And finally I’d just like to say how pleased I am with the progress of the integration. Tyson has integrated a lot of companies in its history and I have been involved in many of them and this has been the smoothest I've ever experienced. We love having an office in Chicago and we are keeping key members of the team there and in many cases expanding their roles. We have two like-minded groups coming together to unlock the value that we know exists. [indiscernible] goes in the way people aren't being territorial, they're just getting it done. We've been using the expression one plus one equals three a lot, because we see Tyson and Hillshire together as more than the sum of the parts. So thank you to the team for working so well together. And now let's go to Dennis for the financial update.

Thanks Donnie and good morning everyone. Fiscal 2014 was another record year. We delivered strong overall operating results and used our cash flow and balance sheet to make a significant acquisition in Hillshire Brands to further deliver and execute our value added strategy for years to come. As a reminder we acquired Hillshire brands in our final months of fiscal 2014. This morning it's important for us to demonstrate that legacy Tyson delivered on results we had previously described over the last several earnings call to give you a good base line. As a result I will be referring to our fiscal '14 adjusted operating income and EPS for legacy Tyson only, which exclude one month of Hillshire brands results, the equity and debt financing impacts as well as a few other unrelated items. Please refer to our press release issued earlier this morning for a full reconciliation of our GAAP to adjusted results. We had a record setting fourth quarter and fiscal 2014. Fiscal '14 revenues were $37.6 billion, representing over 9% growth compared to prior year as we continue to execute our growth strategy as evidenced by increased sales in chicken, pork and prepared foods. Total company return on sales for 2014 was 4.4% and adjusted operating income was more than $1.6 billion, representing a 20% increase over fiscal '13. Our adjusted earnings of $2.94 per share represents a 30% increase over our previous record of $2.26 last year. We achieved an adjusted pretax return on invested capital of just over 21% compared to the 18.5% for the prior year. Operating cash flow for 2014 was $1.2 billion which is consistent with our five year average. We have shown the ability to sustain high levels of cash generation while still funding significant investments in working capital as we grow our business and absorb higher input costs. We spend $195 million on capital expenditures for the fourth quarter and $632 million for the full fiscal year. This outpaced our depreciation by $138 million in fiscal '14 as we continued to invest in projects with a focus on delivering high ROIC. Our effective tax rate in fiscal 2014 was 31.6%. On an adjusted basis this rate was 33.4%. Net debt-to-EBITDA for the past 12 months was 4.1 times. And on a gross debt-to-EBITDA basis this measure was 4.3 times. On a pro forma basis, including Hillshire’s results of the past 12 months net debt-to-EBITDA was approximately three times. Including cash of $438 million, net debt was $7.7 billion. Total liquidity was just over $1.6 billion, remaining above our goal of $1.2 billion. Year-to-date net interest expense was $125 million, down 9% from a year ago. Adjusted net interest expense was $98 million, representing a 29% decrease from fiscal 2013. Our adjusted EPS reflects diluted shares outstanding of 356 million, similar to last quarter which excludes the impact of the issuance in August of common stock and tangible equity units. As Donnie pointed out we will close on the sale of our Brazil chicken operations later this quarter and we expect to close the sale of our Mexico chicken operations in the second quarter of fiscal ’15. The sale of both of these operations will result in more than $500 million of additional cash we planned to use to de-lever. We moved the assets for these operations to assets held for sale in our fiscal 2014 balance sheet. Now looking forward here are some additional thoughts on 2015. Please note our accounting cycle results in a 53-week year in fiscal ’15 as compared to a 52-week year in fiscal ’14. Accordingly this outlook is based on a 52-week year for comparative purposes. We expect revenues of approximately $42 billion for fiscal ’15 which is 12% growth over fiscal ’14. This is driven primarily by full year of Hillshire brands offset by a reduction from the sale of our Brazil and Mexico chicken operations. We expect to capture more than $225 million in synergies in fiscal ’15 from the integration of Hillshire brands and improvements in our Prepared Foods segment. Net interest expense should approximate $285 million for fiscal 2015. We currently estimate our adjusted effective tax rate should be around 35.75%. CapEx is expected to be $900 million which represents approximately $300 million or 50% more than our depreciation expense as we continue to focus on projects that will create long-term shareholder value. Based on our share price at the start of fiscal ’15 we expect diluted shares Q1 ’15 to be around 416 million. This includes the August 2014 issuance of common stock and tangible equity units. This morning we reported our Board of Directors increased our regular quarterly dividend from $0.075 to $0.10 per share on our Class A common stock payable on December 15. We expected adjusted EPS in the range of $3.30 to $3.40 representing an increase of over 12% versus fiscal ’14. FY’15 is already setting up to be another phenomenal year for sales, operating income and EPS. As we look beyond ’15 we expect to realize annual synergies of more than $500 million by fiscal ’17. We’re excited about the tremendous value we will realize from our collection of iconic brands and look forward to growing them even further. We believe return-focused capital allocation and our diversified and balanced portfolio will be the engine to deliver a constant growth year-over-year and we are raising the long-term profitability expectations for our chicken segment to 7% to 9% and for our Prepared Foods segment to 10% to 12%. Our priorities for the significant cash flows that our operations will continue to generate are for rapid deleveraging and strengthening our balance sheet, a continued return-focus on capital allocation to drive long-term shareholder value, funding acquisitions to fulfill our growth strategies and returning cash to shareholders through share repurchases and dividends all while ensuring we maintain plenty of liquidity. And finally I want to remind you that on this call in 2012 after coming off two years of more than $1 billion in incremental fee cost and facing another incremental $600 million of fiscal ’13 we surprised some by saying we would at least hold EPS flat in ’13 and grow EPS by around 10% or more in ’14 and ’15. This was based on our belief that continued improvements in operating performance in many areas of our company was accelerating and would enable these goals ought to be achieved. Two years later we are pleased to look back and note that we're delivering with 15% EPS growth in '13 and 30% EPS growth in '14. But we're not finished, our new EPS range calls for at least 12% growth in '15 amidst a game changing acquisition of Hillshire brands. When achieved this means our three year compounded annual growth rate since the 2012 call would be almost 19% reflecting the efforts of a great team that just keeps getting better. As we continue the integration process, we see the tremendous opportunity that Hillshire business and team brings to the combined company. As we execute our prepared food strategy, we're even more excited about our future as we look to create strong shareholder value along with this acquisition that will be accretive in fiscal '15 and highly accretive in future years. That concludes our prepared remarks. Robin we're ready to begin Q&A.

Thank you. [Operator Instructions]. And our first question comes from Ken Goldman with JPMorgan. Your line is open.

Thanks for the question. I have one and then a follow-up. The first one is Donnie; I am hoping you can detail for us some of the synergy targets, maybe if you can fill in the blanks how much is expected in COGS versus SG&A, some of the pacings of savings, anything you think is important for us to know as we model numbers out here?

Okay. Sure Ken. So let me start with the types and then we will fill in the gap a little bit around maybe some of the amounts and when they will come. And I also want to clear up a little bit about what's not in the synergies that we have been talking about so far. So there is early days, there are some low-hanging fruit; things like procurement, some of the redundant functions that are eliminated, some of the service contracts, those kind of things; and longer term things like how we optimize and improve the operational efficiencies and the manufacturing plants, how we continue to optimize the network, some of the logistic savings. There will also be some savings we think in trade spend. So there is several broad categories that we think we will find more and as you know kind of increasing savings in overtime. Let me give you quick example. An early example that we'll see this year is freight management. So we've been able to reduce the rate structure by lowering the rates on some of the Hillshire legacy business and then capturing additional discounts from having a much larger freight base. We expect that alone to be somewhere in the $15 million to $25 million this fiscal year. So at this point I feel really good about the $225 million number this year, at least that number and at least $500 million as we go forward over the three year target. So I also want to add that this is pertaining by and large to the Prepared Foods segment. So if you look at our Prepared Foods segment, this next year is roughly an $8 billion business and if you look at that out over the three year synergy number that's about $500 million which is about 6% or so of that. Now it’s a little more front-end loaded, then you would typically see with just a straight M&A deal but you'll remember we were able to see significant synergy capture in the legacy business because of this acquisition by closing three plants and then moving that product mix around in to more efficient locations. Now and what's not in these synergy numbers so far is any growth synergies that might come. We've not included any raw materials synergies. And what we want to do is to add a bit of clarity about that as we get more deeply into having those discussions. We've been about two months now working together as a team. We've built very detailed business cases that we can monitor to deliver these synergies and of course we'll be reporting those out to our investors quarterly. So going back to one thing just for clarity. Some of the things like shared service synergies, that type of thing will be seeing across all of our segments but the majority of the synergies will reside in the prepared food segment.

That's helpful. If I can be very quick here on the follow-up. You mentioned even though next year has an extra week, items in your outlook are based on a 52-week year but just to be clear when you talk about that $3.30 to $3.40 in EPS, is it fair to assume that range is 53-weeks or is that also 52 and upside of that number from the extra week.

Yeah and that's for 52 weeks.

Okay, thank you.

Thank you. Our next question is from Brett Hundley with BB&T Capital Markets. Brett Hundley - BB&T Capital Markets: Hi good morning. Can you hear me gentlemen?

We can.

Brett hi. Brett Hundley - BB&T Capital Markets: Thank you for taking the question. And my first question is on the chicken segment. You guys have -- did -- you first of all you've upped your normalized range and you continue to talk to 10% plus for next year and the theme seems to be as of ways that companies can insulate themselves in 2015 and beyond. You touched on that a little bit in your prepared remarks but I'm wondering if we can delve back into it. One of those things that we're hearing in particular is that small bird operators are signing very favorable contracts with QSR guys, food service guys for multiple years now. Wondering if you guys are seeing that in your own business and again going back to the original question, the insulation you see in your chicken business going forward.

Yeah, certainly we have seen a good price increases in our small bird categories. As customers looks to ensure supply there, but as importantly there are several things that we've been able to do insulate our business a bit number one we're certainly a much more fundamentally sound company than we have been in the past and we continue to improve there. We continue to invest in our business. We've improved our revenue by pricing and mix, by the way. So what I mean by that is we've reduced our risk to grain market fluctuations and we've gotten a much better understanding of how the consumer is changing. Our fresh chicken business is doing very well that's the very good business for us and we can see continued growth there. As you know our business model tends to do better against the whole bird model than it does against just the UB [ph] parts and so as the small bird business improves and the tray-packed grows and you can't forget the additional value added that we have those are certainly things that insulate our business in the future. Brett Hundley - BB&T Capital Markets: Thank you very much for that. And then Dennis, just I had a follow-up question as it relates to the way that you rather the balance that you try to strike between looking at further M&A targets out there and then debt pay down. And I guess I'm just curious is there a certain level of debt pay down and then switch [indiscernible] and we can start looking at M&A again. Can you look at M&A right now? And as a follow on to that question if there was a food service focused target out there in packaged meat, do you think there will be any trust issues for you guys going ahead and acquiring something like that.

Okay, great series of questions. The way we look at M&A in our capital structure is that we put together this financing and a capital raise in a manner to ensure that we have investment grade ratings. Right now net debt-to-EBITDA is around three times. We're going to throw off better part of a $1 billion in free cash flow, we're going to raise another $500 million through the sale of Mexico and Brazil so that will be used to de-lever. And we see net debt-to-EBITDA trending towards two times by the end of this fiscal year. That puts us in a pretty good place to re-leverage if we so choose. We think that we're in a much better position from a step stability standpoint from an earnings and cash flow standpoint. So we're in a really good position and we're certainly ready and willing to look at M&A to the extent it makes sense for us and it fulfills our growth strategies. As far as food service goes I'm not sure that I know how to comment on that. Brett Hundley - BB&T Capital Markets: Thank you.

Thank you. Our next question is from Farha Aslam with Stephens. Your line is open. You want to check your mute button your line is open for your question Farha. I'll move onto the next question, Adam

I move on to the next question Adam Samuelson, Goldman Sachs. Your line is open.

Yes, thank you. Good morning, everyone. Maybe a little more detail on the chicken outlook and as you think about the 7% to 9% normalized range; how should we think about the further processing percent of the mix on a normalized basis going forward. Clearly that’s something that’s changed and how you run that business and as a driver to normalized profitability to dampen the cyclicality but as we think about the further process how big of that is that of your earnings mix at this point?

Adam let me add a little bit of color to that too. I mean we feel that over the next two, three, four years something like that, high beef and pork prices relatively speaking are going to continue to drive demand towards chicken. Also as the Millennials enter the work force they index very heavy towards chicken. So we feel like that’s a meaningful consumer shift that will allow us to continue to grow our business well into the future so we predict over the next couple of years at least a 3% increase in demand for chicken and if you will go back it’s been a long time, probably since ‘06 or ‘07 since we’ve been able to talk about a structural shift in consumption that would drive that demand. So then if you look at foundationally a 3% or so demand increase driven both by high competing prices as well as preference to chicken from the Millennials then how do we go to market against that? Well fresh chicken is certainly a great component and that adds incremental margins, anything we would do on just pure commodity basis. By the way about the only commodity part just pure commodity part that we would sell would a frozen leg order internationally, and so -- which by the way favors us in terms of increase supply because we can then buy parts that we need on the outside market, add value to those through our further processing capabilities. Let me get to that part of the question last year I noted on a couple of our calls that we were completely tapped out on FD capacity. Well our two plants that we have been having issues with are completely back up into speed and we have incremental FD capacity there plus we have two more lines that will be coming on-stream in the spring. And so some of our food service customers would have probably inserted more chicken promotions had there been industry capacity to actually produce the product where we’re supplying in industry capacity this year so we feel like that will give us an incremental improvement. Another thing that I can add is that even though through the years our leg quarter volume is down the reasons it’s down is because we’ve been able to take advantage of a bit of an incremental shift to more boneless dark meat in our business. So if you look at the price comparison to boneless dark meat versus boneless skinless fresh meat, there are times when boneless dark meat is almost at parity in the marketplace with boneless skinless fresh meat. So we’re chasing that new demographic shift too. So that may have been a much more detail option but we -- answer then you were looking for, but we are very optimistic about the demand in our chicken segment.

I appreciate the color. And then just as a follow up I guess you have got good detail on the demand side. On the supply side you do kind of own one of the main primary breeders in the industry. Can you talk about what the Cobb-Vantress order book looks like as you evaluate the outlook for supply growth in particularly ‘15?

I will tell this. Over the last couple of years or so most of the primary breeders have experienced some production issues. It appears that most of those production issues are now correcting themselves and that there will be some incremental supply capability. Now if you look at the Board placements it’s going to be at least June, July, August something like that of next year before there is significant supply and you got to remember the structural issues affecting the supply growth, Chicken house is getting built, hatcheries needing to be built, those types of things. Our hatchery capacity is about as high -- as an industry our percent capacity is about as high, I've seen it a long, long time. So we think that you'll probably see somewhere on the -- in an order of magnitude of about three or so percent growth in supply and I'll tell you the demand for chicken meat that type of supply come into the market and we're looking forward to our buy versus gross strategy, define the parts we need and add value to them through our further processing capabilities and continuing to drive our margins.

All right. Thanks very much. I'll pass along.

Thank you. Our next question is from Diane Geissler with CLSA. Your line is open.

Good morning.

Good morning.

So you had called out in your press release that there was a negative impact from purchasing product I guess in the open market which I think obviously part of your buy versus grow strategy but could you was that a surprise to you that it just rose more rapidly than you expected it to and is there any way you can sort of quantify how much that was above your expectations?

Sure Diane, sure will. As you know in the back half of the year we had some fairly significant production issues in our fully value added retail business. And obviously we were disappointing customers with our build rate and frankly we wanted to make sure that that was the only area of our business where we were disappointing customers and so we made the choice in our tray pack business and I think you are seeing the growth in fresh tray pack with these really high beef 90s, ground beef prices at retail really have high beef price. There has been a shift into fresh tray pack and we just didn't want to disappoint our customers in that part of our business too. So we made the conscious choice to be out on the market buying breast meat and then using internal breast meat to put in a tray and make sure that we did not disappoint our customers particularly around the Holidays, and I'll tell you we did a great job of order fill. It cost us a little bit of money. We were out there probably buying, I think for the quarter we bought about 100 loads of breast meat, a week on average and you know what the market prices were and typically we would have been closer to the 50, 55 load a week type range but that was a constant, -- a conscious decision. I am going to guess, maybe it cost us $1.5 million, $2 million a week something like that for that quarter and it was the right thing to do because we kept those valuable customer relationships and as we bring this new tray pack capacity and this new further processing capacity on-stream will be able to capture that market share back. So we're positive we did the right thing although it did cost us a little bit of money in the quarter.

Okay. It sounds like it was more of a production issue rather than you misjudging the market which, is that a fair statement.

By and large I believe, that's correct, yes.

Okay, and then I wanted to ask about China where obviously the hopes are that business will get some traction and really start pulling in some earnings, especially with what we've seen in terms of growth of the QSR channel but it just -- it's been such a rocky road for those companies there with sort of quality issues, sort of one after another. I guess could you talk a little bit about what you're seeing in China and what your customer base is telling you. I would think about with what happened over the summer with one of the large suppliers there that some of these companies would be knocking loudly on your door looking for supply but that doesn't seem to be the case. So just talk a little bit about what your customer base is saying there about their proclivity to use you as a supplier?

Without being too specific about any individual customer the issue is with these back-to-back food scares, demand for poultry is down. Now I mentioned in our prepared remarks that we remain in a bit of a holding pattern and what that means is that we have acquired land use rights and we have the capabilities to be able to build on those parcels of land whenever we start getting some demand signals that would indicate it's time to do so. We saw a little bit of light in the [indiscernible] market and then we saw a little bit of light in the market for our pricing but then this last market scare it once again decreased the demand for the product. So I do think it validates our model that with this safety front from the farm all the way to the retailer or to the food service customer that we’re on the right track. As you can well imagine it’s a bit frustrating when the demand drops like it has and certainly I think our customers understand what we have to deliver in our model and what that can do to help their business and we feel if we get any light at all in the demand for poultry that we will start seeing some improvement.

Have your customers given you any indication of when they expect to see demand snap back?

We really haven’t.

Haven’t, okay. All right, great, thank you.

Thank you. Our next question is from Tim Tiberio with Miller Tabak. Your line is open. Tim Tiberio - Miller Tabak & Co.: Good morning. Thanks for taking my question. Obviously your prepared food long-term operating margin guidance is well above your -- what you’ve ever realized in legacy Tyson business and obviously is also a bit higher than even what Hillshire has seen in recent years. I would assume that most of this step up is coming from synergies that you outlined but can you provide us maybe with a little bit more detail frame up of the sensitivity of getting to that 10% to 12% operating profit margin range, how much is coming from synergies versus the potential for improved input costs as the hog herd expense and then finally how much sensitivity is coming from some of these new products that you’ve launched, particularly in the lunch category and also in the snack categories?

Okay, Tim, so a couple of things. Number one if you remember when we closed the three facilities in our prepared foods business that began our ability to take our product mix and put it into the most efficient plan from a production standpoint and from a network optimization standpoint. So we’ll continue to see that develop. So if you look out overtime in the synergy capture, if you take the traditional, call it legacy Tyson business and put it in its normalized range and then you bring the Hillshire business into that and then take the preponderance of the $500 million in synergy and do that math over you’re pretty easy in that 10% to 12% return on sales. Plus then with the efficient MAP spending and new innovation capabilities across the business, being able to take food service innovation and have that cross into the retail channel then you’re able to see some good growth synergies that will happen overtime and we’ve not quantified that specifically yet but we will overtime. And so I think that’s kind of the growth algorithm forward to be able to see how we’re going to get to that 10% to 12%. Tim Tiberio - Miller Tabak & Co.: Great and just one last follow-up question, looking at some of the overlaps in the legacy, in Hillshire brands has there been any final decisions of which brands are staying particularly in the breakfast category, how should we be thinking about that as we model out that tradition going forward?

Yeah well I can tell you that we discontinued any investment at all in day starts or any of the Wright Brand sausage kind of, any of the Wright Brand sausage that we were doing all of that obviously will go into Jimmy Dean. We have been apparently successful though about not losing those slots and we’ve been able to work with our retailers to be able to slot Jimmy Dean branded products into the slots that previously days starts had and we appreciate our retailers working with us on that. So we do have a great portfolio of iconic brands and we’ll continue the growth trajectory that they’ve been on. We haven’t had a chance yet to go through a detail of every brand or every label that we have, that work will be done. We really spent the last three months making sure, through the integration that we’ve got our teams in place, that we've got the organizational structure like we wanted going forward, that every team member knows what their role and is and that's my thing and we intend just in the next few weeks to be transitioning into the new work structure that we talked about which, by the way that is very rapid. So that's been our overall focus at the beginning and now that we've -- once we get transitioned into the new organization we'll certainly have our brand teams and we've got great capabilities there, to look across our business, at our brands and understand how to maximize the portfolio. Tim Tiberio - Miller Tabak & Co.: Great thanks for your time.

Thank you. Our next question is from the line of Michael Piken. Your line is open, with Cleveland Research.

Yeah, hi good morning. I just wanted to get a little bit more of an update for your expectations for how big of an issue PEDv might be this winter and kind of where the industry is from a Bio-security standpoint as well as the efficacy in some of the vaccines that are being worked on. Thanks.

Sure we spend a lot of time talking to our producers. We're sort of in a transition period here. Typically instances, if there are going to be a higher number of the session will begin occurring a little bit later in the fall and winter. But what we can see so far in talking to our producers, who I think, have done a tremendous job about increasing Bio-security in their locations, I feel confident through our conversations with them that the instances won't be as high in 2015 as they were in '14. Now what kind of spread, I think it's a little early for us to be able to call the kind of spread versus a year ago. But I will say that the reason I feel so confident about that is this has been one of our better years in pork and so with the Bio-security that we put in place or that our producers have put in place around the PEDv they've also given themselves the benefit in part. So we're confident that next year shouldn't be as bad. It's a little too early to call what we think it will be. As we round it out where you consider hog weights and our projection around sort of our first guess is around the PED and the headcount, we're looking for about 2% maybe 3% increase in overall production and certainly beef prices will be able to sustain that in the marketplace and we think hold together pretty good cuts [ph] we're looking forward to a good year in our pork segment.

Okay great. And then just sort of as a follow-up, just kind thinking about pork and really your overall business, I mean with the acquisition of Hillshire what should we be thinking about as exports in the future as a percentage of your overall sales for both pork and beef and chicken as well. Thanks.

Roughly the same. I don't a significant shift one way or the other. The individual part may change, but I don't see a significant shift in exports.

Okay. Thank you.

Thank you. Our next question is from Farha Aslam with Stephens Incorporated. Your line is open.

Hi, thanks for taking the follow-up.

Hi Farha.

My question goes to consumer demand, you, throughout your call you've been very, very confident about the outlook for demand in your businesses. Can you talk about just how the consumer’s approaching protein and how perhaps retailers are managing inventory differently because we're hearing the largest retailer in the U.S. has been expanding meat inventories particularly in the frozen areas because they have been seeing very strong demand.

Farha, I can't comment about what individual retailers will do but I will say about our business. So as you know with the real hot beef prices, beef volume is down and as we look forward both at retail and at through service we continue to see that flavor in chicken. We think chicken demand will be up at least 3% next year and I would think again in '16 because we already know that beef supply, the beef herd is going to be down another 4% which portends pretty high beef prices again into the future. So we think that is a strong demand signal for chicken. And also there is the generational issue that we are beginning to see in the marketplace with Millennials entering the marketplace and they index quite high versus chicken and so we think that is also going to be driving consumer demand for chicken out front. Does that help?

Yes, that’s helpful. And then just as a follow-up as you see the combined Tyson-Hillshire business, could you just comment on going to market as a combined company have you identified yet any advantages that you can point to about that combined entity versus each company individually going to market?

Absolutely, I mean bringing together these great iconic brands that have very strong meaningful positions in their categories and our ability to take this new innovative and insights-driven innovation and brand building capabilities that are coming into the business with the Hillshire team and being able to work with our customers to be able to drive the categories that drive their growth, that’s a very meaningful change going forward. And as you look at the categories, particularly at retail that are growing, say just for example in frozen -- of course breakfast is growing across refrigerated and frozen, but frozen breakfast particularly frozen handheld breakfast is a great category. Frozen fully cooked chicken is a great category and we certainly have leading positions in both of those categories and great insides about how to continue to drive the growth forward. I mentioned in my prepared remarks the snacking platform and we look forward to the growth that we’ll see in that snacking platform. We’ll also have great brand building capabilities now around our NatureRaised Farms, no-antibiotic-ever. We have seen double digit growth and we’re just putting together a phenomenal team of insights-driven innovators and brand builders who can continue to take this portfolio of products and grow our customers businesses and meet these consumer needs as they change. So we’re very optimistic about how that will drive our future.

Fantastic and just one last question. About Mexico we continue to hear disease issues impacting Mexican chicken supplies. Is that impacting U.S. chicken availability or have you been able to, or the industry have been able to work around that in terms of supply available in the U.S.?

I don’t see it impacting the supply available in the U.S. It does at times impact the demand for export leg quarters. There are times when demand for export leg quarters from the U.S. into Mexico is rather strong and then maybe in response to some of the disease issues the market down there becomes saturated as more people bring market -- ducks to the market and it changes a little bit the demand for the exports, the leg quarters going down there but that’s really about the only impact we see to the U.S. market for Mexico.

Great, thank you very much.

And thank you our next question is from Ken Zaslow with Bank of Montreal. Your line is open.

Hey good morning everyone.

Good morning.

So I guess couple of questions, how much of the synergies would have taken that legacy Tyson of that 225 into 500?

A bit over 100, somewhere probably between 100 and 150, something like that. Most of those would have been in the year one. So let’s call it 100 to 150 of the 225 and then going forward it’s more of the incremental value of the Hillshire Tyson combination.

Great and my second question what is the underlying growth outlook for Hillshire? It seems like from your ex-synergies and ex-obviously legacy Tyson business because it seems like you are just using the $400 million of EBIT from last year and just kind of rolling that forward. I would be surprising you would, planning your business, you would expect to have flat growth in the year?

We’re optimistic about the growth of the business going forward as we -- so Ken remember our comments around the incremental $140 million or so of raw material pricing comment and that’s primarily around beef raw materials in Turkey which frankly the Hillshire Legacy business over indexes towards the beef raw material increase as far as is what the legacy Tyson business would have done. I think the beef and sausage and hot dogs and that kind of thing. So we're pricing to recover that and we will, particularly as we -- the earnings cadence will be back half driven and so in year one we’re pricing to recover those raw materials certainly as we move forward and we get beyond that, then we'll be able to drive I think fairly significant incremental growth with some effective MAP spending. So we're very confident in the growth of those brands.

But when your turkey, I thought turkey expansion is happening. I expect that turkey prices to start to roll over the six to nine months, is that not what you expect?

Our projection for turkey raw material impacting our business will be up in '15 versus '14.

I think Ken, it bears repeating that, this is going to be a big front half, back half story as we overcome the raw material input prices. So you'll see quite a bit of lift in prepared foods, both in overcoming the raw material price increases and the synergies as they build on and the growth in legacy Hillshire.

And my final question is when you talk about the outlook for pork, you really didn't touch on it that much but it seems to me that pork supplies are going to be up anywhere from 3% to 6% or so and yet you are expecting pork packet margins to be roughly within those range. What would make you feel more comfortable that the pork packet margins would be above those ranges given we do have not an expansion of hogs, I would have thought that would have been a good thing to you.

So perhaps exports would increase our confidence if we see some movements along that line. We're pretty comfortable with a 3% or so increase in supply and we think the market will easily absorb that type of supply increase particularly with this really high halo that beef prices are providing but we'll have keep to watching the dollar but we feel comfortable with the export demand for our pork, China, Russia et cetera. So I really don't view -- I feel very comfortable in our range, might see above it depending on if that develops and we hope it would.

Great. I appreciate it.

Thank you. Our next question is from Robert Moscow with Credit Suisse. Your line is open.

Good morning. It's Rachel Nabatian in for Robert Moskow. So my question is…

Hi Rachel.

Hey, so my question is on chicken productivity. We like to look at the ratio of chicks placed to egg sit and in the last month this increased over last year's level. And so I wanted to know if there is something sustainable driving this, perhaps an increase in the supply of the hatching spot, that’s driving a younger average age which is more productive and then as a second part from what I recall last year a good number of eggs were destroyed during transportation because of the colder than usual winter weather. So I wanted to know if there are any learnings from this and how your company is prepared if the weather this year as bad as it was last year.

Okay. Let me, obviously I’ll start with your first one. Actually our hen age is sub, so I'll talk about the physiological productivity first. The hen age is probably still around 63, 65 weeks, hatch ability is probably down about a percent from what we've seen over the last quarter or so. So I don't really see the actually productivity of the flock very differently. Here's what I see. We've seen that the industry has not taken the production cuts, the cuts in sits replacement that it normally would in previous years and so the reason you are seeing sits in placements above a year ago is because you can't, because this quarter integrators could chose not to take the cut that they took last year and so there is an ability to increase this quarter. I think what you'll see once we get into like December-early January as we get back to about a 1% or so change versus a year ago because you don't have this ability to grow versus a year ago due to the holiday cuts. Remind me of your second question again I'm sorry.

I just wanted to know if the colder than usual winter last year do you think, I feel like a lot of the supply was kind of cut because a lot of the eggs were destroyed during transportation because of the colder weather so just wondering if there are any learning’s from that and what do you expect for this year from that end?

Got it. I can tell you we’re in better shape on propane than we were a year ago. You’ll remember we actually created a kind of a small propane delivery company to keep a lot of our growers in propane. We’re much better prepared for that. We have looked forward and we do think we have adequate transportation capacity to build all the loads that -- the big thing last year was just the weather and road closures and those types of things. We can position inventory a little bit differently but if the road is closed, the road is closed. So those types of events are very hard to predict. I think we’re in great shape going in to FY’15 and feel very good about demand and how we’ve prepared ourselves to be able to deliver to the consumer.

Got it, very helpful. Thank you.

Thank you. Our last question is from Akshay Jagdale with KeyBanc Capital Markets.

Good morning.

Good morning Akshay.

Hey congratulations on the good results. So my first, I just wanted to talk a little bit about the chicken segment and then ask you a question on Hillshire. So on chicken, it’s really two parts one, you haven’t really delivered a 10% or above margin even on a quarterly basis just to push back. So can you tell me what’s -- how we should think of next year being above 10% and why we should feel confident about that. Perhaps you can talk about how the quarter is trending right now. I mean obviously you have the lower grain cost which will help you by about $0.03 a pound. But your pricing performance in the last couple of quarters hasn’t been really that great or price realization, so in supply potentially increasing, I'm guessing you’re going to get back some on pricing, your volumes are going to be up a little bit but I just I wanted to see why you have the comfort level to say you’re going to earn above a 10% margin on chicken side? My first question and then the second one is you raised your normalized margin range and what we’ve seen is in the bottom of the cycle when the industry is losing money you tend to do a lot better and at the top of the cycle clearly companies like Pilgrim’s are doing much better than you. So can you talk about the bottom end of your range and the comfort level you have with that if and when chicken supply, the chicken industry sort of oversupplies the market?

Okay so to your first part, our pricing has not gone down. We feel very good about our pricing so far. If you remember we have a much more vertical like [ph] exposure plus a lot more FC capacity built into the portfolio. Now remember in the last couple of quarters we had some production issues that have cost us some money so kind of erase that and that we expect least our 50 plus a quarter. If you remember over the last couple of quarters I mentioned on a call or on a question earlier that we spent some incremental money, a couple millions or so a week in tray pack, to be able to make sure we didn’t disappoint our customers. So kind of scratch that and then you can get to about 10% on the last quarter there. Now let’s move forward, demand, up about 3%. We feel very good about that, where is the demand shifting? The demand is shifting towards tray pack, which is a great business for us and we’re very, very good at it, and if it was to shift towards FC there’s just not been enough capacity to fill the order. We are changing that dynamic this quarter. We now have full productive capability of all of our existing lines and we’re going to be bringing two more lines on-stream in the spring. So on top of all of that if you include the $350 million that we’ll see in incremental grain cost or grain savings than that will help us. So I think that gives us a lot of confidence. Going forward we’ll continue to see some operational improvement throughout the year as we continue to advance ourselves in our Lean and Lean Six Sigma. So we feel good and as I mentioned in the prepared remarks we’re off to a great start. So feel really good about it. Now as to the range you are absolutely correct. Our goal is to have consistent, stable growth and earnings growth. And so in the summer time when the commodity prices reach their peak you are right we typically don’t do as well as some of our competitors but obviously in times when other parts of the year we do much better. What we want to provide is stable earnings growth for our investors and that’s what our model is here to do. So as we look forward with an increase in demand which we have not seen now for several years, if you take the market fluctuations in our buy versus grow strategy if commodity prices get fairly, let’s call it cheap, if you will than we are able to buy that raw material and put it into this further processing value added production model and create incremental margin on that which gives us the confidence in the lower end of our range.

And is that lower end of your range, I mean do you expect to hit that when the market is over supplied, meaning when commodity companies are losing money would you expect to be at the lower end or could you be below the lower end?

I would say that obviously you are getting into individual scenarios how much money are they losing and that type thing and that I don’t know that that is as productive. So what we can say is we feel very comfortable with the range moving up and we’ll continue to look at the range and if we need to take it higher in the future we will. But we feel very confident about our ability to deliver and we think there are structural changes in our business that give us the opportunity to continue to deliver against that.

And just one last one on your Prepared Foods business and the commodity outlook you have been behind the 8 ball on your legacy business it seems like for almost two years or something, it’s been a long time you’re always catching up on the cost and you are saying Hillshire is also going to be catching up the first half of the year. Can you just give us little bit more color as to the type of increases you are expecting in fiscal ‘15 for that cost basket for your Prepared Foods business?

Well the incremental cost year-over-year will be $140 million. Now if you remember in my prepared remarks I said that in the legacy Tyson business we’ve recovered that but we got to stay diligent to keep working on our pricing as we move forward to get on top of the incremental raw material inputs that are coming, again pretty heavily driven by beef and by turkey pricing. So we know what we have to do and we know what parts of the business we have to continue to drive that pricing and feel comfortable that this year will be a significant improvement to our previous years. And might I note too that the legacy Tyson business was not just plagued by the pricing lag, it was also plagued by an inefficient supply chain. And we made corrections at the end of last year to correct those inefficiencies because we had this new Hillshire production network that we can move a lot of those products in and optimize that network. So that will bring incremental benefit we’ll see a lot of that in fiscal ‘15.

Okay, thank you.

You bet. So thank you all for joining us on the call today. We always appreciate your interest in our business. Follow up with John throughout the rest of the day. And I want to wish you all a very happy Thanksgiving. Thank you.

And thank you. This does conclude today’s call. You may disconnect your lines. And have a great day.