泰森食品 (TSN) 2014 Q2 法說會逐字稿

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  • Operator

  • Welcome to the Tyson quarterly investor earnings conference.

  • (Operator Instructions)

  • Today's call is being recorded.

  • If you have any objections, please disconnect at this time.

  • I will now turn today's call over to Mr. Jon Kathol, Vice President of Investor Relations.

  • Thank you.

  • You may begin.

  • - VP of IR

  • Good morning.

  • And thank you for joining us today for Tyson Foods' conference call for the second quarter of the 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.

  • I need to remind you, 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 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.

  • - President & CEO

  • Thanks, Jon.

  • Good morning, everyone, and thanks for joining us today.

  • With $0.60 a share, Q2 was a record-setting second quarter, and we achieved it despite some significant hurdles.

  • Q2 is typically our most challenging quarter and we expected that to be the case again this year.

  • Now that it's in the books, I feel like we're in a really good position for the back half back half of the year.

  • But before we comment on the balance of the year, let's look at what went on in Q2.

  • Winter weather affected us in several ways, some positive some negative.

  • Although we saw a dip in our sales to school cafeterias from weather-related closings, we saw an increase in our retail sales because mom went to the grocery store and stocked up on chicken strips when she heard another round of bad weather was coming.

  • Our multichannel business model allows us to serve the consumers' needs wherever they are, which is one of our strengths as a company.

  • Because of road conditions, we had more issues than normal getting orders to our customers and team members to our plants.

  • Cold temperatures affected livestock productivity, and there were propane shortages that resulted in price hikes of that important fuel source for our growers.

  • We expect this sort of thing every second quarter, at least in some locations, but this season winter storms started earlier, were more widespread, and were more frequent.

  • Now switching to the consumer demand picture.

  • Increasing protein prices have indicated continued strong demand for protein, often at the expense of carbohydrates.

  • We're seeing a noticeable shift among the proteins as well.

  • Looking at Nielsen 52 week data, pounds of fresh meat sold at retail were up a little over 1% on nearly 3% higher prices.

  • However, if you look at the most recent four-week data for the period ending March 29, total pounds sold were about flat while dollars sales rose a little over 4%, driven by a 4.6% increase in pricing.

  • Fresh beef volume is down nearly 7% on a 7% price increase; pork volume is down nearly 1%, while prices have gone up 5.5%; and as expected chicken pounds were up 3.5% even though chicken pricing was up 3%, indicating a definite shift towards the relative value of chicken.

  • On the food service side, restaurant spending is up, but the gains are from higher average check prices, not additional traffic.

  • NPD is forecasting traffic growth to be only 1%, which, so far in the calendar year, we're seeing predominantly in small chains.

  • Technomic restated its forecast for the year to reflect the winter storms and is now projecting 2.5% to 3% dollars sales growth, down from 4% earlier.

  • At both retail and food service we continue to see the bifurcation of consumers.

  • Food spending is leaning towards either a value-priced product or a premium option, and the middle is getting squeezed.

  • But again, Tyson Foods is serving all of these consumers in whatever channel, price point, or type product they're looking for, and that's one of the reasons we continue to be successful.

  • I'm really pleased with the 7% growth in sales of our value added products in all of our channels and this is a key part of our strategy.

  • So the takeaway for Q2 is that, despite bad weather, high prices that affected demand, and sluggish food service traffic, our volume was up nearly 3% over Q2 last year and we had a 4% return on sales.

  • Now, let's see how that looks at the segment level and what we expect going forward.

  • The Chicken segment had an 8.2% return on sales in Q2.

  • Volume was up while pricing was off slightly as a result of lower feed ingredient costs, and we expect to be down about $500 million for the year.

  • We expect overall domestic chicken production to be up only 2% to 3% in FY14, given continued tight breeder supplies.

  • We think that strong consumer demand for chicken can easily absorb the small supply increase, and it should be a strong year for the Chicken segment.

  • The Beef segment had just under a 1% return on sales.

  • We had to deal with a considerable amount of volatility throughout the quarter, with temporary supply imbalances, due to an extreme run-up in cattle prices.

  • It was difficult to maintain the spread but we stayed positive for the quarter.

  • One of the ways we managed our spread was to run fewer head, which is why our volume was down, but we effectively maximized revenue and controlled costs through continual attention to detail and execution of the fundamentals.

  • Although we may see more of these temporary imbalances in some regions going forward, our plants are strategically located near the cattle supplies and we expect to have adequate cattle to run our plants.

  • As always we'll manage for margin and we expect beef segment results for 2014 to look similar to last year.

  • In the Pork segment we had a 7.2% return on sales in the second quarter.

  • Volume was up on strong demand.

  • Of course the big concern in pork is the PED virus and its impact on hog supplies.

  • We did begin to see a supply reduction in our Q2, although heavier weights partially offset fewer head and we were able to make up some by improving yields as part of our continuous improvement efforts.

  • The impact of PED is expected to further affect our hog supplies beginning around the 1st of June, peaking in August and then beginning to ease in October.

  • Hog weights are expected to be higher and offset some of the head reduction, so we anticipate industry pork production to be down as much as 4% for the year.

  • We'll need to adjust our operating hours accordingly but we think the Pork segment will still perform well this year despite these challenges.

  • The Prepared Foods segment had a 2.4% return on sales for the quarter.

  • We had strong sales volume, but the rapid run-up in raw materials in our formula pricing mechanisms created a pricing lag, although we expect to recoup the difference later in the year.

  • I don't want to leave you with the impression, however, that we're satisfied with these results, because we're not.

  • We're working on product innovation, maximizing the opportunities from our recent acquisitions, investing in our operations, and putting max spending towards product launches to improve the long-term profitability of the Prepared Foods segment.

  • I'd like to update you on one of these launches that we previously told you about, which is Tyson Day Starts.

  • The initial rollout went better than planned and we're exceeding all of our prelaunch objectives.

  • These products had an ACV of 60% by mid-March, which is the fastest growing ACV of any product launch in our history.

  • Bacon is another bright spot.

  • Despite value markets that pushed retails higher, we didn't see any demand erosion in Q2.

  • When you combine our three-tiered branding strategy of Wright, Tyson, and Corn King, Tyson Foods holds the number-two market share in sales dollars.

  • And when you add private-label to our three branded bacon offerings, we're the biggest seller of bacon in retail.

  • We'll continue to be aggressive with ACV goals, especially with the Wright brand, our premium offering.

  • Bacon's a strong performer, and I think there are several other businesses at varying stages of development within the Prepared Foods segment that can perform as well as our bacon business in the future.

  • Admittedly, we have room for improvement, but I think our Prepared Foods segment is better than the 2.4% return on sales we showed you this quarter and we're determined to prove it.

  • And our final segment to discuss is our new International segment.

  • I'll give you the highlights and then Dennis will give you the particulars of why we created this new segment and what it comprises.

  • International had a negative 9.1% return on sales.

  • China is still the biggest portion of the loss, due to demand destruction.

  • As I said on our Q1 call, we slowed the pace in China as we wait for demand to return.

  • We think the worst is over, and that it should get sequentially better from here, but we'll need to see demand recovery before we can predict when we'll reach profitability in China.

  • Our operations in Brazil also struggled in Q2, but we've restructured our team there to improve the operational focus.

  • And speaking of focus, back in November we announced several leadership changes for the Company and a new organizational structure focused on the key elements of our strategy to accelerate growth, reinforce our operational excellence, and create opportunities for our team members.

  • We recently completed the reorganization and now have the teams in place under Hal Carper in Strategy and M&A; Donnie King in Prepared Foods and Customer and Consumer Solutions; Steve Stover in Fresh Meats; and Noel White in Poultry.

  • Now that we have this important step behind us, we can turn people loose to do their best work in the areas that have the most impact.

  • And now let's go to Dennis for the financial update.

  • - EVP & CFO

  • Thanks, Donnie, and good morning.

  • As Donnie said earlier, we had a record-setting second quarter.

  • Our top-line revenue growth was 7.7% over the prior year, and quarterly sales surpassed $9 billion for the first time in our history.

  • We continue to execute our growth strategy as evidenced by increased sales volumes in Chicken, Prepared Foods, and International.

  • Total Company return on sales was 4% and operating income was $361 million, up 53% from Q2 2013.

  • Our earnings of $0.60 per share is a record for our second quarter and represents a 58% increase over adjusted EPS of $0.38 in Q2 2013.

  • Year-to-date EPS is $1.32, or a 52% increase, compared to last year's $0.87 adjusted EPS coming from continuing operations.

  • Our rolling four-quarter EPS is $2.71 from continuing operations on an adjusted basis.

  • This compares to $1.95 for the same period a year ago.

  • We achieved a 12-month pretax return on invested capital of just over 20%, compared to 16% for the prior-year period.

  • This 20% ROIC goal is an important metric for us and one we're proud of attaining.

  • Operating cash flow through two quarters was $265 million after funding $367 million in additional working capital as we grew our business.

  • This compares to operating cash flows of $230 million for the first two quarters of FY13.

  • We spent $153 million on capital expenditures for the second quarter and $293 million for the first six months of FY14.

  • This outpaced our depreciation and amortization by $39 million as we continued to invest in projects for both our domestic and international operations.

  • These projects will not only result in improved productive capabilities, labor efficiencies, yields, and sales mix, but will also increase our ability to innovate and introduce new products to our customers.

  • During the second quarter we repurchased 2.5 million shares for $100 million under our share repurchase program.

  • Since May 2011 we've repurchased 50.4 million shares for $1.2 billion.

  • Our effective tax rate in Q2 was 38.3%.

  • Net debt to EBITDA for the past 12 months was 0.7 times, and on a gross debt to EBITDA basis this measure was 0.9 times.

  • Including cash of $438 million, net debt was $1.5 billion.

  • Total liquidity was just under $1.4 billion, remaining above our goal of $1.2 billion.

  • And gross debt remained at just over $1.9 billion.

  • Year-to-date net interest expense was $48 million, down 30% from a year ago.

  • Average diluted shares outstanding for the quarter were 356 million.

  • This reflects the dilutive effect of options and warrants of 13 million.

  • The impact of the 2.5 million shares repurchased during the quarter will not be fully realized until subsequent quarters.

  • Now here are some thoughts on the full year for FY14.

  • We now expect revenues of approximately $37 billion, up $1 billion from our previous estimates and almost 8% over FY13.

  • Net interest expense should approximate $95 million, down $5 million from our previous estimate, and down more than $40 million from a year ago.

  • The effective tax rate should be around 35.5%.

  • CapEx is expected to be in the $650 million to $700 million range.

  • We expect diluted shares in Q3 to remain around 356 million, and because our convertible notes and warrants are behind us, there should be less volatility in our diluted shares.

  • We still think we'll generate at least $2.78 EPS for the year and at least 10% EPS growth in 2015 and beyond.

  • Our priorities for excess cash remain the same, which are: capital spending to improve and grow our existing businesses, acquisitions, either small bolt-ons or larger strategic acquisitions to fulfill our growth strategies around value-added products and International, and returning cash to shareholders through share repurchases and dividends, all while ensuring we maintain plenty of liquidity at our disposal.

  • As Donnie noted earlier, beginning with the second quarter, we are now reporting our International operations as a separate segment.

  • The International segment, which had been included in our Chicken segment, includes our chicken processing operations in Brazil, China, India, and Mexico.

  • International became a separate reportable segment as a result of changes to our internal financial reporting to align with Executive leadership changes and reorganization Donnie previously mentioned.

  • We believe this will provide better transparency into our Business to enhance understanding of our financial performance.

  • I would also note that our Beef, Pork, Prepared Foods, and other results were not impacted by this change.

  • To wrap up, we delivered solid results in a seasonally soft quarter, and adjusted earnings per share are up 52% for the first half of the year.

  • We continue to think the back half of the year should be strong and we are confident we can deliver on our targets.

  • That concludes our prepared remarks.

  • Denise, we're ready to begin Q&A.

  • - EVP & CFO

  • Thank you.

  • (Operator Instructions)

  • Ken Zaslow, Bank of Montreal.

  • - Analyst

  • Donnie, your expectation for chicken production levels up 2% to 3%.

  • It's higher than most of the industry that we're hearing from including [sutra del].

  • With lower production in the first half of the year, does that imply a fairly rapid expansion in the back half of year and what are you thinking about 2015 on that?

  • Can you just help us out with that?

  • - President & CEO

  • Sure.

  • The 2% to 3% is driven mainly on weight continuing to increase off what we think placements will be about flat to maybe up 1% or so in the back half of the year.

  • I don't see a meaningful change in poultry production until probably the back half of our 2015.

  • So I don't think there's anything that's going to get away from us.

  • But I also think, Ken, there's going to be a very strong demand pull for chicken.

  • And the industry's going to try to respond as much as it can.

  • The relative value of chicken at both retail and food service is going to make for a very, very strong chicken back half.

  • So that's kind of what we're seeing.

  • I don't think the 2% to 3% is anything that would change our margin outlook for the back half of the year.

  • - Analyst

  • Great.

  • And my follow-up question is this is more of a technicality.

  • Making sure I understand, you're now obviously excluding International from your business.

  • And you said that your chicken outlook is to be above your normalized range.

  • If I net those together, did the net of those two change to the upside, downside, or hasn't changed relative to your initial expectations?

  • - President & CEO

  • To the upside; if you look at our domestic chicken business for the first half we're just under 9% on sales.

  • And there's no reason going into the back half of this year for us not to expect our earnings in Chicken to be at least that good or better.

  • So I think in general, it edged the total range if you put the two back together to the upside.

  • - Analyst

  • Great.

  • I appreciate it.

  • Thank you.

  • Operator

  • Farha Aslam.

  • - Analyst

  • Just continuing on the chicken discussion, could you just give us a read, your pricing was down in the March quarter?

  • And we've seen spot pricing for chicken improve.

  • Your outlook for pricing and profitability and a little bit more detail on the US chicken business for the second half would helpful.

  • - President & CEO

  • Yes.

  • Certainly over the last 30, 40 days or so the chicken market has responded.

  • If you look at I think the beef cut out topped out around $2.40 or so, and pork ran up to $1.30 or so, and that provided a huge halo for chicken prices to continue an increase because chicken pricing looks relatively cheap compared to those beef and pork numbers.

  • So we expect to see another strong year of chicken pricing for the summer.

  • And think that the outlook for the back half of our year should be better than -- the earnings outlook for the back half of the year should be better than the front half.

  • - Analyst

  • Okay.

  • That's helpful.

  • And then when you look at capital allocation, clearly you have significant liquidity available to you, yet you've said that your share count should be relatively flat for the rest of the year.

  • Can you share with us your thoughts on M&A and the environment you're currently seeing?

  • - EVP & CFO

  • Sure.

  • Let me take this one by one.

  • First, as far as the share count, that's where we are as of now so we're not projecting where we're going to go from here.

  • In terms of the M&A environment, it's a very attractive environment.

  • Over the past 12 months our EBITDA was about $2.1 billion, and so we can put some pretty good leverage on that and so have the ability to both go after small bolt-on acquisitions or larger, more strategic acquisitions.

  • - Analyst

  • And just on transactions, any color on what you're seeing out there right now?

  • - EVP & CFO

  • We're seeing a variety of opportunities in value-added and International.

  • We're just looking for the right strategic fit right now.

  • - Analyst

  • Great.

  • Thank you so much.

  • Operator

  • Michael Piken.

  • - Analyst

  • Just wanted to shift over to the [negging] side of the business, and if we can start on the Pork side, I see you've taken your production down 4% to 5%; you mentioned in the prepared remarks that you think the supplies are going to be tightest from June to October.

  • But where's the industry in terms of finding a vaccine or something to stop the spread of PEDV at this point as best you can tell?

  • - President & CEO

  • I'm not aware of any vaccine that has been developed.

  • I do know in working with our pork suppliers, we have a very close, very good relationship with the farmers from which we purchase hogs, and there's been a noticeable increase in biosecurity throughout the areas where we draw our hogs from.

  • But as far as we know, there's no readily-available vaccine.

  • - Analyst

  • Okay.

  • So do you think at this point -- it seems like at least the spread of the disease has been a little bit contained.

  • How much of that is weather versus just improved biosecurity, and how confident are you now that we may -- the down 4% or so is probably what we're going to see now and that it might not get worse?

  • - President & CEO

  • Let me approach the back half of that question first.

  • Although it's difficult to be completely confident and I'll explain that in a second, we work very closely with our farmers.

  • And we know in the regions where we operate when, which farms were affected, and we work closely with them to understand how much they're affected.

  • We also work closely with them to know how much longer they're trying to hold their hogs to put a little bit more weight on them and that type thing.

  • So we stay pretty dialed in say, within a three or four week period of what the hog supply's going to look like coming into our plants.

  • Now, the things we can't tell is for example with the increased biosecurity around PED, how much improvement is that having on PRRS for example on these farms?

  • So there's a little bit of movement in that number, but in general as we just look at the case accessions and how they've affected the farmers that we draw hogs from.

  • We're pretty confident that between June and then probably dipping the deepest in that August/September period and then trying to start recovering or so in October is the right way to plan our Business.

  • And we've worked not only with of course our plants and making sure we've got a good plan dialed in to be as efficient as we can be, and move hogs around where we need to, but we've also been working with our customer base to make sure that those products that are sold by the each, for example ribs or bellies or whatever, that we understand what the dip's going to look like and how we can help them merchandise through that.

  • So we think we've got a good plan.

  • We think we're as dialed in as we can be.

  • - Analyst

  • Okay.

  • Great.

  • Just shifting over to beef, looks like the catalog feed numbers are supportive of relatively good supply availability over the next two quarters.

  • But as you think about FY15, could you talk a little bit about your outlook for beef margins; do you think we can get back to a normalized levels?

  • It looks like the cattle supplies might get a little more tight as you head into the early half of FY15.

  • Any thoughts there in terms of how we think about your beef business next year?

  • - President & CEO

  • A little more comfortable in the back half of 2014 certainly.

  • And we agree with your assessment there that there should be adequate cattle certainly around us, the drought in the South West continues and that tends to push a few more cattle up into the Midwest where the predominance of our processing base is.

  • So we feel good about having adequate cattle around us.

  • As you get out into 2015, I think you can looking at the calf crop you can already say that 2015 numbers will be down another 2% to 3% or so.

  • And it looks like the cattle are going to continue to concentrate in the Midwest, creating some of these regional disparities with cattle supply out there, but we feel very comfortable that we're going to have good cattle around us.

  • And at this point there's no reason for us not think of our Beef business at least as good as last year or better this year, and not a lot of reason to think about it very differently going into 2015 from where we stand today.

  • - Analyst

  • Okay.

  • Thank you very much.

  • Operator

  • Diane Geissler.

  • - Analyst

  • I just wanted to put together a couple of these comments that you've made about production into 2015 to get more of a holistic view on total protein production in 2015.

  • It sounds like to me you're saying that given the constraints of the hen flock, you might see a little bit more production in chicken later in 2014 but it won't really ramp until later in 2015.

  • I don't know if anybody really has a clear call on hog numbers, because until we get on top of the virus itself, I'm not sure where it's going to go, so I would look at maybe on the hog side flat to up slightly next year?

  • And then it sounds like the cattle supply should be down again because of either drought and/or retentions?

  • If you put that all together, are you looking for flat to up slightly in terms of total protein supply next year, or do you have a view on that at this point?

  • - President & CEO

  • The big if for us is what's going to happen with pork.

  • I'd like to think we're going to see a herd expansion.

  • I'd like to think with biosecurity we'll get on top of PED, but it's just too early to tell.

  • I think the rest of it, Diane, you're dialed in very well on what to expect from a supply standpoint.

  • So I don't think I'd change your outlook very much.

  • And if anything, flat to up maybe a little bit would be a pretty decent call in May.

  • Now, we'll know a little bit more as we get on into the fall but I think you're dialed in pretty good.

  • - Analyst

  • Okay.

  • And then maybe just to move to the demand side of the equation, you commented that you've seen a shift.

  • I think we've all seen the shift in terms of out of carbs and into protein.

  • I think it stems all the way back to the initial phase of the Atkins Diet back in 2014, which basically taught consumers to think about their diets in terms of percentages.

  • So I guess the question is really, given what you've seen with the Day Starts, the new line you have in breakfast, and what you're seeing from your food service and retail partners, do you think that there's sustainability in this shift or are you concerned that it's just another quote-unquote, diet fad, and people will shift back to carbs again at some point down the road?

  • Do you have -- I'm sure you must have a dialogue with your customers on this, if you could provide some detail from your conversations?

  • That would be very helpful.

  • - President & CEO

  • Great.

  • Feel very solid about the trend to more protein.

  • And also a trend to let's say at retail the perimeter of the store.

  • And that bodes very well for us.

  • So as we look forward into the future and as we listen to the consumers and take those insights and develop those into products, the things we were hearing from basically from mom about breakfast is, is breakfast is a very important part of meal of the day, but unfortunately I end up with about 18 minutes to prepare a meal.

  • And I need something that's nutritious and that has a good supply of protein to fuel my child for the day.

  • But I also need something that we can do on the run.

  • So you put all that together, Tyson's a trusted name in protein.

  • You need a handheld-type item that's got a protein base in it and thus the Day Starts.

  • As we look forward, if you just looked at the rate of meat inflation versus the inflation rate, the demand for protein is very strong.

  • And frankly I don't see that changing very much as we look out as far as we feel comfortable looking, maybe into 2015 or 2016 or that type thing.

  • So it's going to be important for us to listen to the consumers and develop the type products that meet their needs as they change and stay out in front of them a little bit.

  • But we feel very good about the prospects for protein to stay, and particularly meat protein by the way with the vitamin balance and all that it carries to stay very much in favor among consumers.

  • We just got to figure out how to produce and innovate the type products that they want to reach for.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Robert Moskow.

  • - Analyst

  • I have two questions.

  • One's kind of short, one's longer.

  • First one is I want to know if you could quantify the cost overruns in the quarter for the cold weather.

  • And then the second question is Donnie, Michael Foods, it was pretty clear that you were a bidder for that business.

  • I thought it made strategic sense to go after it.

  • And I wanted to know what do you think as you think back on it, what do you think was the limiting factor in not getting the business?

  • Were you using stock to try to finance the deal and was private equity just not interested in that?

  • And your balance sheet is so clean, you could have levered up to buy the business.

  • So I just wanted to know how you thought about it.

  • - President & CEO

  • So the first one's easy.

  • I can put my hands on about $15 million really easy on cold weather-related type stuff.

  • And it may have been more, but there's an easy number to get my hands around.

  • As far as the second part, we just never comment on acquisitions.

  • And as Dennis said before, we continue to look for targets that makes sense and have a good strategic fit for us.

  • And as he said, and you mentioned we've got a clean balance sheet and lots of opportunities.

  • So that's really all about all we'll say about that.

  • - Analyst

  • Can I ask about deals going forward?

  • What is your willingness to use your balance sheet to finance a $1 billion, $2 billion kind of deal?

  • - EVP & CFO

  • Robert, here's the way I think about it.

  • Again, we have about $2.1 billion in EBITDA over the last 12 months.

  • Investment grade rating is important to us.

  • And I think we can do upwards of 3 times leverage.

  • And maybe even a little bit more depending on the quality of the assets and the cash flows they draw off, so we have considerable -- you can do the math, but it speaks to the fact that we have considerable ability to put on leverage and still be comfortable.

  • - Analyst

  • Okay.

  • 3 times.

  • Thank you very much.

  • Operator

  • Adam Samuelson.

  • - Analyst

  • Maybe first in the chicken business wanted to talk about Cobb and your breeding operations.

  • Can you reflect on how if at all you've changed or altered how that business is managed?

  • They're obviously an important supplier to not only yourself but to the industry, and I guess given where production margins are today I think we're all surprised at how constrained the breeding supply is.

  • Maybe I'll start there.

  • - President & CEO

  • We've not changed how we operate Cobb at all.

  • It's been very consistent over the years.

  • - Analyst

  • Okay.

  • And shifting gears into Prepared Foods, volume's up nearly 6% in the quarter; it's one of the best performances for the business in some time and admittedly a relatively easy comp.

  • But maybe help decompose some of that, some of the drivers between the Day Starts and the Wright sausage, some of the recent M&A that you've done, or some of the better growth in the legacy portfolio?

  • - President & CEO

  • We have -- our Prepared Foods business is really a broad mix of different types of businesses.

  • And some are different stages of maturity.

  • We had several of our segments that responded very well this past quarter, and frankly continue to see good opportunity out in front of us.

  • We continue to invest in that business.

  • We've made some significant operational improvements in the lunch meat side of our business.

  • And we look for that to bring continual improvement as we move forward.

  • We are investing pretty heavily in our MAP spending, not only in Day Starts but also in our breakfast sausage line.

  • And we look for those businesses to respond well to that.

  • And so really, we do have some strong businesses in that portfolio that are doing very well, and we've got some others that are a bit more immature that we're investing heavily in to get that whole segment up to its normalized range.

  • And I really think looking forward, what you should expect would be for that Prepared Foods segment to be in its range next year as we see these investments come to fruition in these next two quarters.

  • - Analyst

  • Okay.

  • That's helpful.

  • Just a final quick one for me, in the prepared remarks you alluded to some poor operational execution in poultry in Brazil.

  • And you said you had restructured that business, maybe elaborate a little bit on what's going on down there?

  • - President & CEO

  • We had some folks make some poor decisions around how we handled a part of our processing that -- what we had was we had a freezer that needed some repair.

  • Our folks down there frankly did not do a very good job in that.

  • It also backed up into the field and affected our live production.

  • And so basically we've changed out our country manager in Brazil.

  • We've changed out the plant manager in that location and the live production manager and we have a firm grip on the situation from this point forward.

  • So that's behind us.

  • And we're looking forward now to two much better quarters coming ahead.

  • - Analyst

  • All right.

  • Great.

  • Thanks very much.

  • Operator

  • Akshay Jagdale.

  • - Analyst

  • My question's on chicken.

  • First on FY15, obviously chicken being your largest business, you reiterated 10% EPS growth, but at the same time you did talk a little bit about production in the sense that you think the industry's going to respond to the margins that we're seeing right now.

  • So can you help us understand in a scenario where the industry is increasing production, which I understand may not happen next year, but in a scenario where that's happening and you're coming off a year where you have above-normal margins, how can Tyson still grow earnings at 10%?

  • So first, can it?

  • And what's the strategy to execute on that?

  • - President & CEO

  • Okay.

  • So let me take the part B side of your question first on can we grow EPS 10%?

  • Absolutely.

  • You should see significant improvement in Prepared Foods next year.

  • International ought to get better.

  • This thing in China is not going to last forever.

  • I can't tell you today -- I've been wrong two quarters before on when we thought that thing would turn, so I can't tell you today.

  • But I can tell you that the current situation is not sustainable and that it will improve, and we're doubling down on our cost efforts particularly in China.

  • So you should see improvement in our International results.

  • We think Beef ought to be every bit as good next year as it is this year.

  • Same story on Pork.

  • If we get any kind of production expansion, maybe a little bit better.

  • And so then back in and then the front part of your question, it really boils back to our buy versus growth strategy, Akshay.

  • We don't have to necessarily grow the Chicken to expand our business.

  • We've got two areas in our current Chicken business where we're just about out of capacity, and that's our case-ready fresh chicken, which we are the number-one brand at retail and that's a very, very important segment to our customer and to the consumer.

  • And so we've got to expand our capacity there.

  • And don't be thinking necessarily production, just think capacity.

  • So it may mean a capacity move from one process type into another to capture a more a more value-added segment.

  • And then speaking of value-added, we are tapped out on our further processing fully-cooked capacity as well.

  • So we have two lines under construction now and we're thinking about another two or three lines, because the consumer's responding to our value-added poultry.

  • And we've grown about 7% I think so far this year in value-added, and see no reason not to believe that we won't sustain that 6% to 8% growth in FY15 as we move forward.

  • - EVP & CFO

  • Akshay, this is Dennis.

  • I would add to that we have a considerable pipeline of projects in the que around capital spending.

  • We talked about $650 million to $700 million this year.

  • We fully expect next year to be quite a bit more, and as we've talked about in the past, the aggregate MIRR of our projects over the last four years have been just shy of 25%.

  • We fully expect that to continue to be the case in FY14 and FY15, so there's every reason to believe we can add to the margin structure even through CapEx.

  • - Analyst

  • That's very helpful.

  • Good segue into the next half of my question which is, so what do you expect in terms of supply for the industry next year?

  • So this is live obviously, the live part of the industry.

  • What are you expecting for supply next year?

  • And do you expect industry margins to sustain themselves on the spot level?

  • - President & CEO

  • I would expect on the supply, 2% or 3% or so driven by primarily in the back half as we said earlier.

  • And then yes, with cattle numbers coming down, call pork flat to up a little bit, there's no reason not to expect chicken to not have another good year in terms of its demand if for no other reason than the relative price versus the other proteins.

  • So yes, I think demand for chicken will continue to be strong next year.

  • Sure.

  • - Analyst

  • Okay.

  • And then the short term -- again, sorry to ask so many questions on chicken, but you've clearly proven that in the bottom of the cycle you can outperform the industry.

  • The question I've always had is, when things are good, how good can it get for Tyson?

  • So things are pretty good.

  • They have been for the industry now for over a year.

  • You've put up a 9.5% margin last quarter, but you would expect that the next two quarters would be the best environment from a margin perspective for Tyson, for the US Tyson business in chicken.

  • Is that a fair assessment?

  • And can you give us some insight into how the quarter is shaping up one month into it?

  • - President & CEO

  • No reason to expect the back half of our year to not be at least as good or better than what the front half was from an earnings perspective.

  • But remember, Akshay, we don't respond like pure-play commodity guys.

  • Our business model is much more smoothed out through the year.

  • So we won't necessarily hit the peaks in the summer time like the commodity players will.

  • But we also won't see the dips in the lower part of the market too.

  • Consistent earnings over time is what our business model is shooting for.

  • And that's what you should expect.

  • - Analyst

  • Okay.

  • And just one last one following up on some of the questions on M&A.

  • What I've been impressed by is your discipline on M&A as it relates to the price with your ROIC metric, the 20% return that you talked about.

  • So can you just remind us again about the filter and the priorities of that filter?

  • So there's obviously the M&A environment is very good right now.

  • But the type of prices being paid I would argue are also pretty rich, especially let's say for Michael Foods to get a 20% ROIC pretax would imply I think doubling the EBITDA on that business in five years.

  • So can you just help us with your filter and the discipline and put that into context with the environment you're seeing?

  • - EVP & CFO

  • Sure.

  • Akshay, this is Dennis.

  • As far as the filter goes, first and foremost they need to be strategic and fit within our goals to grow in the value-added categories around chicken and prepared foods, and for that matter possibly even beef or pork to the extent they're available.

  • International's obviously a priority as well.

  • From a discipline standpoint, you're right.

  • Our goal is to achieve a 20% ROIC with an acquisition.

  • To the extent that the M&A environment requires higher prices to be paid for companies, that means we have to work that much harder to get there.

  • And we do that through looking at synergies, how we can expand the business within our existing distribution framework, and just be very disciplined and get there.

  • That might mean we have to push it out to three to five years to get that return, but we think ultimately those kind of acquisitions still would be very accretive from an EPS and an ROIC standpoint over time.

  • So really nothing's changed.

  • - Analyst

  • Great.

  • I'll pass it on.

  • Thank you.

  • Operator

  • Ken Goldman, JPMorgan.

  • - Analyst

  • Can you talk a little bit about what's going on in Mexico with avian influenza at the moment?

  • There's some reports it's worse than what the Mexican government and some companies that operate there have stated publicly.

  • I'm just curious to what degree you might expect Tyson to actually benefit from the virus, you might see some more industry exports of meat or [polis] to Mexico?

  • - President & CEO

  • From time to time, AI is an issue in Mexico.

  • We don't have any flocks that are affected by it right now.

  • You should know we're taking all the necessary steps and all the biosecurity measures to ensure the viability of our supply; pricing has improved in Mexico and we're reaping the benefit of that.

  • Certainly as far as eggs moving down there, we don't have any plans to move any eggs to Mexico.

  • - Analyst

  • And you talked about -- separate question -- the strength in Day Starts beyond your expectations.

  • Can you talk a little bit about to what extent your success in generating your own brand makes you less likely to buy something in prepared foods?

  • I guess to put another it another way, Day Starts has had success, so why buy something if you are finding that you can make it yourself?

  • It's an old make versus buy conundrum I guess.

  • - President & CEO

  • It is.

  • As Dennis said on the previous question, what we're really looking for is strategic fit and the ability to make an acquisition that will be accretive to our earnings.

  • And so we're always looking for opportunities to be able to use the insights we have about what the consumer needs to find a way to fill that need and grow our business.

  • We feel great about our organic opportunities.

  • We feel great about our opportunity to invest in our current business, but we're also going to be out there looking for strategic opportunities to fill in the gaps where we need to, or to create a little bit more aggressive headspace in a category where we may be able to buy as long as the purchase makes sense, and then accelerate growth in that particular category, whichever category that may be.

  • - Analyst

  • Thanks very much.

  • Operator

  • Farha Aslam.

  • - Analyst

  • Just continuing on that M&A question front, do you feel like you need more chicken capacity?

  • Would you build that with CapEx or via acquisitions?

  • And in terms of M&A, is there a geographic preference or is there a protein preference that you're looking for?

  • - President & CEO

  • The answer to your first question is yes.

  • And the answer to your second question is as long as it's a strategic fit, whether it's an international acquisition, poultry, value-added or prepared foods, those are the areas of our business where we believe our growth potential lies and where we can add the most value to the consumer and the most value to the shareholder.

  • And so our acquisition targets will be focused in those three areas.

  • - Analyst

  • Okay.

  • And then one just on the base business when you look at the Texas facility, the lunch meat plant you took down and are ramping back up, could you just give us some color on what that can do for earnings in the second half of the year now that it's starting back up?

  • - President & CEO

  • In the second half of the year, marginal improvement.

  • But sequentially in 2015 it ought to make a more meaningful difference.

  • It takes a while to get that back up.

  • Frankly, we've got two -- we've got the cost side of the equation in good shape now.

  • We've got to get some more business around us and get the revenue side moving.

  • That's going to take us at least a couple more quarters, but we think certainly as we move into 2015 we'll see sequential and meaningful improvement in that part of our business.

  • - Analyst

  • Great.

  • Thank you.

  • - President & CEO

  • That concludes the call.

  • Thank you for your interest in our Business.

  • Hope you have a great day.

  • Thanks.

  • Operator

  • Thank you for joining in for today's conference call.

  • We appreciate your participation.

  • And you may disconnect at this time.