泰森食品 (TSN) 2014 Q4 法說會逐字稿

Welcome to the Tyson's quarterly investors conference call.

(Operator Instructions)

Today's call is being recorded.

If you have any objections disconnect.

I'd now like to introduce Jon Kathol, Vice President Investor Relations.

Good morning and thank you for joining us today for Tyson Foods' conference call for the fourth quarter and FY14.

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, FY14 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 will 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.

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 had 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 Brands, 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 online in Q1.

We'll be adding much needed value-added capacity in the spring for fully-cooked and tray-packed chicken.

Demand for tray pack 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 FY15 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 costs should be down by about $350 million.

And an important point 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's more chicken on the market, and we do expect more supply in 2016.

But we will 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 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 plant 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 dQ4 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 cuts like pork bellies 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 keep pricing at higher levels, the structural shift for its increased global protein consumption will continue driving incremental demand for our products.

Looking at FY15 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 customers' growth there.

China remains in somewhat of a holding pattern.

We are in position to take advantage when demand improves, and we'll continue to assess the situation with an eye towards the best long-term shareholder returns.

In FY15 we expect to cut operational losses to $50 million for the International segment.

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 up 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 of it as we anticipate $140 million of incremental raw material cost in 2015, primarily from increased beef trim 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 a branded CPG business, and I can assure you we're not slowing down the Hillshire innovation pipeline.

They're 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 the last quarter of FY14, Hillshire launched a line of Jimmy Dean frozen sandwiches and bowls for lunch and dinner, taking the brand beyond breakfast.

This expansion into a new daypart has achieved very good incremental distribution of 16 premium-priced items, thanks to our retail partners.

We have a strong integrated marketing program for this launch including television, digital, and shopper marketing support.

Another big platform carrying over from 2014 is Hillshire Farms Naturals lunch meat.

It provides the cleaner label consumers are looking for without sacrificing taste and quality.

While we're in the early end of the launch, the results are extremely positive.

It's drawing incremental purchasers, and 80% of consumers who bought the product report it's even better than they expected.

In addition to those two big platforms we're extending and supporting our innovation launches from early in FY14.

In retail, we're launching new extensions to expand Ball 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 Farms American Craft line of handcrafted small-batch smoked sausage, with new products featuring authentic ingredients and bold flavors.

And in foodservice, we're extending our Chef Pierre Luxe Layer Pie.

We'll invest MAP spending to continue growth in the second year of these successful new platforms.

In the back half of the year, our focus will be around two new snacking platforms.

We know the 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 test market since Q4 and looks to have a lot of potential, delivering incremental sales and growing the category.

You'll hear a lot more about innovation at Investor Day on December 10, where you'll 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 the synergies we expect the segment to earn a 10% to 12% return on sales on a normalized basis.

After a couple of months of working together and really drilling down on the synergy targets, 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 all 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've given you our outlook for each of the segments let's take a broader look at some reasons we're so optimistic.

First, we are 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're 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 foodservice 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 addressing this shift.

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 the macro sense, Tyson has the right brands and the right products in the right places for today's consumers.

But let's take a look at some more specifics for FY15 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 FY14.

We'll gain momentum throughout the year as we integrate Hillshire and capture synergies.

High 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 fully-cooked chicken capacity will be coming 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 the depreciation throughout our business as part of our culture of continuous improvement.

And let's keep looking ahead into 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 Tyson and Hillshire.

If chicken supply allows, we'll buy more on the open market, add value to it and sell it at a higher margin.

Elevated beef and pork pricing should continue to provide an umbrella for chicken pricing and consumption.

We'll have a full year of the new tray-pack 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 of the tangible equity units will drop as the stock price goes up.

We should also be in a position to buyback stock in 2016.

We have leading brands in market share that will allow us to grow faster than our peers.

And we're not finished growing.

So, yes, we feel really good about 2015 and 2016.

It's Tyson 2.0 and we're a different company.

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've 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're 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.

There aren't any egos in the way, people aren't being territorial, they are 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.

FY14 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 month of FY14.

This morning it's important for us to demonstrate that legacy Tyson delivered on results we had previously described over the last several earnings calls to give you a good baseline.

As a result, I will be referring to our FY14 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 in FY14.

FY14 revenues were $37.6 billion, representing over 9% growth compared to prior year as we continued 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 FY13.

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 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 grew our business and absorbed higher input costs.

We spent $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 FY14 as we continued to invest in projects with a focus on delivering high ROIC.

Our effective tax rate in FY2014 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 3 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 FY13.

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 FY15.

The sale of both of these operations will result in more than $500 million of additional cash we plan to use to delever.

We moved the assets for these operations to assets held for sale in our FY14 balance sheet.

Now looking forward, here are some additional thoughts on 2015.

Please note our accounting cycle results in a 53-week year in FY15 as compared to a 52-week year in FY14.

Accordingly, this outlook is based on a 52-week year for comparative purposes.

We expect revenues of approximately $42 billion for FY15, which is 12% growth over FY14.

This is driven primarily by a 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 FY15 from the integration of Hillshire Brands and improvements in our Prepared Foods segment.

Net interest expense should approximate $285 million for FY15.

We currently estimate our adjusted effective tax rate to 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 FY15, we expect diluted shares in Q1 2015 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 expect adjusted EPS in the range of $3.30 to $3.40, representing an increase of over 12% versus FY14.

FY15 is already setting up to be another phenomenal year for sales, operating income, and EPS.

As we look beyond 2015 we expect to realize annual synergies of more than $500 million by FY17.

We are 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 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.

Finally, I want to remind you that on this call in 2012, after coming off two years of more than $1 billion in incremental feed cost, and facing another incremental $600 million in FY13, we surprised some by saying we would at least hold EPS flat in 2013 and grow EPS by around 10% or more in 2014 and 2015.

This was based on our belief that continued improvements in operating performance in many areas of our Company was accelerating and would enable these results to be achieved.

Two years later, we are pleased to look back and note that we're delevering, with 15% EPS growth in 2013 and 30% EPS is growth in 2014.

But we're not finished.

Our new EPS range calls for at least 12% growth in 2015 amidst the 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 the Hillshire business and team brings to the combined company.

As we execute our Prepared Foods 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 FY15 and highly accretive in future years.

That concludes our prepared remarks.

Robin, we're ready to begin Q&A.

(Operator Instructions)

Our first question comes from Ken Goldman with JPMorgan.

Thanks for the question.

I have one and then a follow-up.

The first one is, Donnie, I'm hoping you can detail for us some of the synergy targets, maybe if you can fill in the blanks -- yow much is expected in COGS versus SG&A, some of the pacings of the savings, anything you think is important for us to know as we model numbers out here.

Sure, Ken.

Let me start with the types and then we'll 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've been talking about so far.

There's early days, there's some low-hanging fruit, things like procurement, some of the redundant functions that are eliminated, some of the service contracts, those kind of things.

Now, longer term, things like how we optimize and improve the operational efficiencies in 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's several broad categories that we think we will find more and, as you know, increasing savings in over time.

Let me give you a quick example.

An early example we'll see this year is freight management.

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.

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.

I also want to add that this is pertaining, by and large, to the Prepared Foods segment.

If you look at our Prepared Foods segment this next year it's 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 than 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 into more efficient locations.

Now, Ken, what's not in these synergy numbers so far is any growth synergies that might come.

We've not included any raw material 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.

Moving back to one thing just for clarity, some of the things like shared service synergies, that type of thing, will be seen across all of our segments, but the majority of the synergies will reside in the Prepared Foods segment.

That's helpful.

If I can be very quick 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, with upside of that number from the extra week?

Ken, that's for 52 weeks.

Okay, thank you.

Thank you.

Our next question is from Brett Hundley with BB&T Capital Markets.

Hi, good morning.

Thank you for taking the questions.

My first question is on the Chicken segment.

You guys have, first of all, upped your normalized range.

You continue to talk to 10%-plus for next year.

And the theme seemed to be as of late 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 the things we're hearing in particular is that small bird operators are signing very favorable contracts with QSR guys, foodservice guys, for multiple years out.

Wondering if you guys are seeing that in your own business?

And, again, going back to the original question, the insulation that you see in your Chicken business going forward.

Yes, certainly we are.

We have seen good price increases in our small bird category as customers look to ensure supply there.

But as importantly, there's several things that we've been able to do to 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.

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 a 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 parts.

And so, as the small bird business improves and the tray pack grows, and you can't forget the additional value-added that we have, those are certainly things that insulate our business in the future.

Thank you much for that.

And then, Dennis, I had a follow-up question as it relates to the balance that you try to strike between looking at further M&A targets out there and then debt pay down.

I'm just curious, is there a certain level of debt pay down and then a switch gets flipped and you can say -- all right, 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 foodservice-focused target out there in packaged meat, do you think there would be any truck 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 capital raise a manner to ensure we have investment grade ratings.

Right now net debt to EBIT is around 3 times.

We're going to throw off a better part of $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 delever.

And we see net debt to EBITDA trending toward 2 times by the end of this fiscal year.

That puts us in a pretty good place to releverage, if we so choose.

We think that we're in a much better position from a 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 foodservice goes I'm not sure that I know how to comment on that.

Thank you.

Thank you.

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 in how you run that business as a driver to normalized profitability to dampen the cyclicality.

But as we think about the further process how big is that of your earnings mix at this point?

Adam, let me add a little bit of color to that, too.

We feel 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 workforce, 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'll go back -- it's been a long time, probably since 2006 or 2007 -- 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?

Fresh chicken is certainly a great component and that adds incremental margin to 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 be a frozen leg quarter internationally.

Which, by the way, favors us in terms of increased supply because we can then buy parts that we need on the outside market, add value to those through our further processing capabilities.

So, let me get to that part of the question.

Last year I noted on a couple of our calls we were completely tapped out on FP capacity.

Our two plants that we've been having issues with are completely back up into speed, and we have incremental FP capacity there, plus we have two more lines that will be coming on stream in the spring.

And, so, some of our foodservice customers would have probably inserted more chicken promotions had there been industry capacity to actually produce the product.

We're supplying that 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 reason 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.

If you look at the price comparison to boneless dark meat versus boneless skinless breast meat, there are times when boneless dark meat is almost at parity in the marketplace with boneless skinless breast meat.

So, we're chasing that new demographic shift, too.

That may have been a much more detailed answer than you were looking for but we're very optimistic about the demand in our chicken segment.

I appreciate the color.

And then just as a follow-up, you gave some good detail on the demand side.

On the supply side you do 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 2016?

I'll tell you 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 pullet placements it's going to be at least June, July, August, something like that, of next year before there's significant supply.

And you've got to remember the structural issues affecting the supply growth -- chicken houses 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 as I've seen it in a long time.

So, we think that you'll probably see somewhere on the order of magnitude of about a 3% or so growth in supply.

And I'll tell you, the demand for chicken needs that type of supply coming to the market and we're looking forward to our buy-versus-grow strategy, buying the parts we need and add value to them through our further processing capability, and continuing to drive our margins.

Thanks very much, I'll pass it along.

Thank you.

Our next question is from Diane Geissler with CLSA.

Good morning.

You had called out in your press release that there was a negative impact from purchasing product in the open market, which I think is obviously part of your buy-versus-grow strategy.

But was that a surprise to you that it just rose more rapidly than you expected it to?

And is there any way you can quantify how much that was above your expectations?

Yes, sure, Diane, I sure will.

As you know, in the back half of the year, we had some fairly significant production issues in our fully-cooked value-added retail business.

And, obviously, we were disappointing customers with our fill rate.

And, frankly, we wanted to make sure that was the only area of our business where we were disappointing customers.

So, we made the choice in our tray-pack business, and I think you've seen the growth in fresh tray pack with these really high ground beef prices at retail, really high beef prices, there's 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 conscience choice to be out on the market buying breast meat and then using internal breast meat to put it 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 fresh meat a week on average.

And you know what the market prices were.

And, typically, we would have been closer to the 50 to 55 load-a-week type range.

But that was a conscience decision.

I'm going to guess maybe it cost us, I don't know, $1.5 million, $2 million a week, something like that, for that quarter.

And you know what?

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, we'll 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.

So, it sounds like it was more of a production issue rather than you misjudging the market?

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 for the QSR channel.

But it's been such a rocky road for those companies there with quality issues one after another.

Could you talk a little bit about what you're seeing in China and what your customer base is telling you?

I would think that was what happened over the summer with one of the large suppliers there, that some of these companies would be knocking loudly on your door and 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.

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 that it's time to do so.

We saw a little bit of light in the day-old chick market, and then we saw a little bit of light in the market bird 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 from the farm all the way to the retailer or to the foodservice customer, that we're on the right track.

As you can well imagine, it's a bit frustrating when 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'll start seeing some improvement.

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

We really haven't.

Okay, great, thank you.

Our next question is from Tim Tiberio with Miller Tabak.

Good morning.

Thanks for taking my question.

Obviously your Prepared Foods long-term operating margin guidance is well above 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 the synergies that you've outlined.

But can you provide us maybe with a little more detailed 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 expands?

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, a couple of things.

Number one, if you'll 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 plant from a production standpoint and from a network optimization standpoint.

So, we'll continue to see that develop.

If you look out over time, and 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 forward, you're pretty easy in that 10% to 12% return on sales.

Plus then, with efficient MAP spending and new innovation capabilities across the business, being able to take foodservice innovation and have that cross into the retail channel, then you're able to see some good growth synergies that will happen over time.

We've not quantified that specifically yet but we will over time.

I think that's the growth algorithm forward to be able to see how we're going to get to that 10% to 12%.

Great.

And just one last follow-up question.

Looking at some of the overlap in the legacy and 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 division going forward?

I can tell you that we discontinued any investment at all-in Day Starts or any of the Bight brand sausage that we were doing.

All of that obviously will go into Jimmy Dean.

We have been fairly 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 Day Starts had.

And we appreciate our retailers working with us on that.

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've 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 want it going forward, that every team member knows what their role is, and that type of thing.

And we do intend just in the next few weeks to be transitioning into the new org structure that we talked about.

Which, by the way, that is very rapid.

That's been our overall focus at the beginning.

And once we get transitioned into the new organization, we'll certainly have our brand teams.

We've got great capabilities there to look across our business at our brands and understand how to maximize the portfolio.

Great, thanks for your time.

Thank you.

Our next question is Michael Piken with Cleveland Research.

Yes, 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 where the industry is from both the biosecurity standpoint as well as the efficacy in some of the vaccines that are being worked on.

Thanks.

Sure.

We've spent a lot of time talking to our producers.

We're sort of in a transition period here.

Typically, at sessions, if there are going to be a higher number of sessions, we'll 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 biosecurity in their locations, I feel confident through our conversations with them that sessions won't be as high in 2015 as they were in 2014.

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 this is this has been one of our better years in PRRS.

So, with the biosecurity that we've put in place, or that our producers have put in place to help handle PEDv, they've also given themselves the benefit in PRRS.

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, when you consider hog weight and our projection, our first guesses around the PED and the headcount, we're looking for about a 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 cut outs.

We're looking forward to a good year in our Pork segment.

Okay, great.

And then just as a follow-up, just thinking about Pork and really your overall business, 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 see 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 Inc.

Hi, thanks for taking the follow-up.

My question goes to consumer demand.

Throughout your call you've been very confident about the outlook for demand in your businesses.

Could you talk about just how the consumer is approaching protein and how perhaps retailers are managing inventory differently?

Because we're hearing the largest retailer in the US has been expanding meat inventories, particularly in the frozen area because they've been seeing very strong demand.

Farha, I can't comment about what individual retailers will do but I will tell you about our business.

As you know, with the really high beef prices, beef volume is down.

And as we look forward, both at retail and at foodservice, we continue to see that favoring chicken.

We think chicken demand will be up at least 3% next year and I would think again in 2016, because we already know that the 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's a generational issue that we're beginning to see in the marketplace with millennials entering the marketplace, and they index quite high versus chicken.

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 the market?

Absolutely.

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.

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 hand-held 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 insights about how to continue to drive grow 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 also have great brand-building capabilities now around our NatureRaised Farms, no antibiotic ever.

We've 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 US chicken availability?

Or have you been able to, or the industry, been able to work around that in terms of supply available in the US?

I don't see it impacting the supply available in the US.

It does at times impact the demand for export leg quarters.

There are times when demand for export leg quarters from the US 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 birds 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 US market from Mexico.

Great.

Thank you very much.

Thank you.

Our next question is from Ken Zaslow with Bank of Montreal.

Good morning, everyone.

Just a couple questions.

How much of the synergies would have been from legacy Tyson of that $225 million and the $500 million?

A bit over $100 million.

Somewhere probably between a $100 million and $150 million, something like that.

Most of those would have been in the year one, so call it $100 million to $150 million of the $225 million.

And then going forward it's more the incremental value of the Hillshire-Tyson combination.

Great.

And my second question is, 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're just using the $400 million of EBIT from last year and just rolling that forward.

I'd be surprised that you'd be buying a business that you would expect to have flat growth in a year.

Yes, we're optimistic about the growth of the business going forward.

Ken, remember our comments around the incremental $140 million or so of raw material pricing coming, and that's primarily around beef raw materials and turkey, which, frankly, the Hillshire legacy business over indexes towards the beef raw material increases versus what the legacy Tyson business would have done.

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.

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 wouldn't your turkey -- I thought turkey expansion is happening -- I'd expect that turkey prices to start to rollover the next six to nine months.

Is that not what you'd expect?

Our projection for turkey raw materials impacting our business will be up in 2015 versus 2014.

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, and we didn't really 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're expecting pork packer margins to be roughly within the normalized range.

What would make you feel more comfortable that the pork packer margin would be above the normalized range given we're going to see an expansion of hogs?

I would have thought that would be a good thing for you.

Perhaps exports would increase our confidence if we see movement 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.

And we'll have to keep watching the dollar but we feel comfortable with the export demand for our pork, China, Russia, et cetera.

And, 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 Moskow with Credit Suisse.

Good morning.

It's Rachel Nabatian in for Robert Moskow.

My question is on chicken productivity.

We like to look at the ratio of chicks placed to egg set.

And in the last month this increased over last year's level.

So, I wanted to know if there's something sustainable driving this, perhaps an increase in the supply of the hatching flock 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 is as bad as it was last year.

Obviously I'll start with your first one.

Actually our hen age is -- I'll talk about the physiological productivity first.

The hen age is probably still around 63 to 65 weeks.

Hatchability is probably down about 1% from what we've seen over the last quarter or so.

So, I don't really see the actual productivity of the flock vary very differently.

Here is what I see.

We've seen that the industry has not taken the reduction cuts, the cuts in sets in placement, that it normally would in previous years.

And, so, the reason you're seeing sets and placements above a year ago is because you can, because this quarter integrators could choose not to take the cuts that they took last year.

And, so, there's an ability to increase this quarter.

I think what you'll see once we get into the late December, early January is 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.

But remind me of your second question again, I'm sorry.

I just wanted to know if the colder than usual winter last year, if you think -- I feel like a lot of the supply was cut because a lot of the eggs were destroyed during transportation because of the colder weather.

So I just want to know if there are any learnings from that and what you expect for this year from that end.

Got it.

I could tell you we're in better shape on propane than we were a year ago.

You'll remember we actually created 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 be able to haul the loads.

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.

Those type of events very hard to predict.

I think we're in great shape going into FY15 and feel very good about demand and how we've prepared ourselves to be able to deliver it to the consumer.

Got it.

Very helpful.

Thank you.

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

Good morning.

Congratulations on the good results.

My first, I just wanted to talk a little bit about the Chicken segment and then ask you a question on Hillshire.

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 how we should think of next year being above 10% and why we should feel confident about that?

And perhaps you could talk about how the quarter is trending right now?

Obviously you have the lower grain costs, which will help you by about $0.03 a pound.

But your pricing performance the last couple quarter hasn't been really that great, or price realization.

So, with supply potentially increasing, I'm guessing you're going to give back some on pricing, your volume is going to be up a little bit.

But I want to see why you have the comfort level to say you're going to earn above a 10% margin on chicken?

So, that's 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 the chicken industry oversupplies the market?

Okay.

To your first part, our pricing has not gone down.

We feel very good about our pricing so far.

If you'll remember, we have much more whole bird equivalent exposure plus a lot more FP capacity built into the portfolio.

Now, remember, in the last couple quarters we've had some production issues that have cost us some money.

So, erase that and that picks up at least 50-plus a quarter.

If you'll remember over the last couple of quarters, I mentioned on a question earlier that we spent some incremental money, call it a couple million or so a week, in tray pack to be able to make sure we didn't disappoint our customers.

So, scratch that.

And then you can get to about a 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 good at it.

And it wants to shift towards FP, there's just not been enough capacity to fill the orders.

We're 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 savings, then that will help us.

I think that gives us a lot of confidence going forward.

We'll continue to see some operational improvements 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're absolutely correct.

Our goal is to have consistent, stable growth and earnings growth.

And, so, in the summertime when the commodity prices reach their peak, you're right, we typically don't do as well as some of our competitors, but obviously in the times, in 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 geared to do.

So, as we look forward with an increase in demand, which we've not seen now for several years, if you take the market fluctuations and our buy-versus-grow strategy, if commodity prices get fairly, let's call it, cheap, if you will, then we're 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 the lower end of your range, 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?

Akshay, that obviously -- you're getting into individual scenarios, how much money are they losing and that type thing.

And I don't know that that is as productive.

What we can tell you 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.

Okay.

And just one last one on your Prepared Foods business and the commodity outlook.

You've been behind the eight 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 costs.

And you're saying Hillshire is also going to be catching up the first half of the year.

Can you just give us a little more color as to the type of increases you're expecting in FY15 for that cost basket for your Prepared Foods business?

The incremental cost year over year will be $140 million.

If you remember, in my prepared remarks I said in the legacy Tyson business we have recovered that, but we've 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 in, 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 in efficient supply chain.

And we made corrections at the end of the last year to correct those inefficiencies because we had this new Hillshire production network that we could 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 FY15.

Okay, thank you.

You bet.

Thank you all for joining us on the call today.

We always appreciate your interest in our business.

Follow-up with Jon throughout the rest of the day.

And I want to wish you all a very happy Thanksgiving.

Thank you.

Thank you.

This does conclude today's call.

You may disconnect your lines.

And have a great day.