tyson foods (tsn) earnings report: q4 2014 …s.t.st/media/xtranscript/2014/q4/12957238.pdfto...

CompanyName:TysonFoodsIncCompanyTicker:TSNSector:ConsumerGoods

Industry:Food&BeverageEventDescription:Q4 2014 EarningsCall

©2014TheStreet,Inc.AllRightsReserved Page1of 21

TysonFoods(TSN)EarningsReport:Q42014ConferenceCallTranscriptThefollowingTysonFoodsconferencecalltookplaceonNovember17,2014,09:00AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

JonKathol;TysonFoodsInc.;VPofIRDonnieSmith;TysonFoodsInc.;PresidentandCEODennisLeatherby;TysonFoodsInc.;EVPandCFO

OtherPart icipants

KenGoldman;JPMorgan;AnalystBrettHundley;BB&TCapitalMarkets;AnalystAdamSamuelson;GoldmanSachs;AnalystDianeGeissler;CLSALimited;AnalystTimTiberio;MillerTabak;AnalystMichaelPiken;ClevelandResearchCompany;AnalystFarhaAslam;StephensInc.;AnalystKenZaslow;BMOCapitalMarkets;AnalystRachelNabatian;CreditSuisse;AnalystAkshayJagdale;KeyBancCapitalMarkets;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator:

WelcometotheTyson'squarterlyinvestorsconferencecall.

(OperatorInstructions)

Today'scallisbeingrecorded.Ifyouhaveanyobjectionsdisconnect.

I'dnowliketointroduceJonKathol,VicePresidentInvestorRelations.

JonKathol(VPofIR):

GoodmorningandthankyouforjoiningustodayforTysonFoods'conferencecallforthefourthquarterandFY14.Ontoday'scallareDonnieSmith,PresidentandChiefExecutiveOfficer,andDennisLeatherby,ExecutiveVicePresidentandChiefFinancialOfficer.

Ourremarkstodayincludeforward-lookingstatementsasdefinedinthePrivateSecuritiesLitigationReformActof1995.Thesestatementsaresubjecttorisksanduncertaintiesthatcouldcauseactualresultstodiffermateriallyfromourexpectationsandprojections.Iencourageyoutoreadtoday'spressreleaseandourfilingswiththeSecuritiesandExchangeCommissionforadiscussionoftherisksthatcanaffectourBusiness.

Toprovideaframeworkforourcommentary,FY14includedonemonthofHillshireresults,butforthepurposesoflookingbackontheyearwewillspeaktoadjustedresultsthatexcludeHillshire.ForGAAPresultsand




adjustmentreconciliationspleaserefertothismorning'spressrelease.I'dalsoliketopointoutthatouraccountingcyclewillresultina53-weekyearin2015.Tomakecomparisonseasiertheprojectionsinouroutlookhavebeenadjustedtoa52-weekyear,unlessotherwisenoted.

FollowingourpreparedremarkswewillgotoQ&A.Toensurewegettoasmanyofyouaspossible,pleaselimityourselftoonequestionandonefollow-upandthengetbackinthequeueforanyadditionalquestions.

I' llnowturnthecallovertoDonnieSmith.

DonnieSmith(PresidentandCEO):

Thanks,Jon.Goodmorning,everyone,andthanksforjoiningustoday.

Q4wasarecordquarterwithadjustedearningsof$0.87ashare,whichisa24%year-over-yearimprovement.2014wasanoutstandingyear,solet'slookatsomeofthehighlights.WehadrecordadjustedEPSof$2.94,a30%improvementoverlastyear.Saleswerearecord$37.6billion.Adjustedoperatingincomewasalsoarecordat$1.65billion,a20%increaseoverlastyear.Ouroveralladjustedoperatingmarginwas4.4%.Andmostimportantin2014,wecompletedtheacquisitionofHillshireBrands,awatershedeventthatwilltakeTysontoanewlevelasabrandedfoodcompany.

Itwasagreatyear,oneinwhichwestructurallyimprovedtheearningspowerandreducedthevolatilityofthebusiness.ButIdon'twanttospendalotoftimelookingback,becausewehavesomuchmoretobeexcitedaboutin2015and2016andforyearstocome.Solet'stakealookatthesegmentsandseehowtheeventsofQ4leadusinto2015.

InQ4,theChickensegmentreportedonanadjustedbasisa7.4%returnonsales,withvolumeup2.3%andaveragepricingdown4%.You'llrememberonourlastcallthatItoldyouabouttemporarydisruptionsintwoplantsthatwouldaffectourreturnonsalesinthethirdandfourthquarters.WehavecorrectedthoseissuesandbeganbringingproductionbackonlineinQ1.

We'llbeaddingmuchneededvalue-addedcapacityinthespringforfully-cookedandtray-packedchicken.Demandfortraypackisgrowingasretailconsumersseekfresh,healthyoptions.It'simportanttounderstandthatwe'renotincreasingsupply,butrathershiftingcapacitytoamorevalue-addedproductmix.

Also,tosupportgrowthinfreshchicken,weveryefficientlyusedasmallamountofMAPspendingtogenerateover800millionconsumerimpressions,andit'shelpedwidenthegapoverourcompetitorsasthenumberonebrandinthecountry.We'realsoexperiencingdouble-digitgrowthinourNatureRaisedFarmsbrandofnoantibioticseverchicken.Althoughit'sonlyasmallpieceofourbrandedChickenbusiness,we'repleasedwiththedemandfortheseproductsandthepremiumconsumersarewillingtopayforthem.

Asyouprobablysawinourpressreleasethismorning,wehaveraisedthenormalizedoperatingmarginrangefortheChickensegmentto7%to9%,butweexpecttoexceedthatinFY15withmorethana10%returnonsales.Withconsumptionshiftingawayfromhigh-pricedbeef,weexpectchickendemandtoincreasebyatleast3%in2015,whichshouldsupportourpricingexpectationsgiventhatchickensuppliesareprojectedtobeupabout3%fortheyear.Additionally,ourdomesticfeedcostsshouldbedownbyabout$350million.

Andanimportantpointtorememberaboutourchickenbusinessisthatwehaveadiversified,value-addedportfolio,andwedon'trequirerecordchickenpricesandcheapcorntodowell.Weuseourbuy-versus-growstrategytotakeadvantageofpricingwhenthere'smorechickenonthemarket,andwedoexpectmoresupplyin2016.Butwewillneedittomeetdemand.

Ourstrategyissteadygrowth,notacommodityrollercoasterride.Withourbusinessmodelwedon'tviewincreasedsupplyasaproblem.




I' llmoveontotheBeefsegmentwhichhada3.5%returnonsalesforthequarter.Volumewasdownonly2.6%.AndIsayonlybecausepricingwasup21.5%.Ourteamdidagreatjobofmanagingthespreadintimesofrecordhighcattlecosts.

Weanticipatefedcattlesuppliestobedownabout4%in2015,butthatshouldbetheworstofit.Thereareindicationsofheiferretentiontorebuildtheherd.Suppliesareexpectedtobeflattodownabout1%in2016.AndasapositiveforTyson,thecattlepopulationcontinuestomoveclosertoourplantintheMidwest.

Withgoodexportdemand,domesticpricingin2015willtesthowmuchpeoplereallywantbeef.Butit'sclearthatdemandforbeefisverystrongandwillprovidesupportforchickenandporkpricing.

Oneofthethingsthat'sreallyimpressedmeoverthepastfewyearsisourabilitytomanagethroughalow-volumeenvironment.Wecontinuetofindwaystobecomethehigh-revenue,low-costplayerintheregionswecompete.Howwerunacommoditybusinessismoreimportantthanthecommodityvolatility.Agoodexampleofourmarginmentalityisourcontinuingsuccessinproducingmorecase-readybeef,whichdrivesincrementalsales,margins,andconsumeroccasions.

TurningtothePorksegment,whichhada6.1%returnonsalesinthefourthquarter,volumewasaboutflattodQ4lastyearona16.5%increaseinpricing.ThePEDvirusreducedhogavailability.AndourPorkteamdidagoodjobofhogprocurementinatimeoftightsupply,whichkeptourcapacityutilizationwellaboveindustryaverages.Asthesupplyofhogstightenedthispastyear,itdemonstratedtherelativeinelasticityofcertaincutslikeporkbelliesforbacon.

Fromanend-to-endperspectivewefindwaystoreducevolatilityandimproveourmargins.WhileIexpectglobalbeefandporksuppliestoremaintightandkeeppricingathigherlevels,thestructuralshiftforitsincreasedglobalproteinconsumptionwillcontinuedrivingincrementaldemandforourproducts.

LookingatFY15weexpecta2%to3%expansioninhogsupplies.AnditappearstherewillbefewerinstancesofPEDV.Comingoffofreducednumberslastyearinadditiontoconstrainedbeefproduction,wethinkconsumerdemandwillsupporta2%to3%porksupplyincrease.So2015shouldbeanothergoodyearforPorksegmentmargins.

InourInternationalsegment,aspreviouslyannounced,we'llusetheproceedsfromthesaleofourLatinAmericanbusinesses,oneofwhichisexpectedtoclosebytheendofthismonth,topaydowndebt.Wemadethesedecisionstogeneratebetterlong-termROIC.Iwanttoemphasizethatwe'recommittedtodoingbusinessinMexicoandsupportingourcustomers'growththere.

Chinaremainsinsomewhatofaholdingpattern.Weareinpositiontotakeadvantagewhendemandimproves,andwe'llcontinuetoassessthesituationwithaneyetowardsthebestlong-termshareholderreturns.InFY15weexpecttocutoperationallossesto$50millionfortheInternationalsegment.

Finally,inthePreparedFoodssegment,ourlegacyTysonbusinessreportedanadjusted1.8%returnonsalesforthefourthquarter.Volumewasbasicallyflatwithaveragepricingup5.5%.We'vetakenmeasurestoright-sizeouroperationsbyclosingthreeplantsandwe'regettingourSG&Ainline.WecontinuetobeROIC-focusedinourdecision-makingandgoodallocatorsofcapitalforourshareholders.

Lookingforward,thenewPreparedFoodssegment,includingHillshire,isstarting2015inagoodposition.Withtheplantclosures,ourcapacityutilizationisimprovingtothedesiredlevelsandouroperationsarebecomingmoreefficient.Werecoveredporkandbeefinputpricing,butwe'llhavetostayontopofitasweanticipate$140millionofincrementalrawmaterialcostin2015,primarilyfromincreasedbeeftrimandturkeypricing.Withthepriceincreaseswe'veimplementedsofar,proformavolumehasbeenaboutflattoayearago.




InvestinginbrandbuildingandinnovationarevitallyimportanttoabrandedCPGbusiness,andIcanassureyouwe'renotslowingdowntheHillshireinnovationpipeline.They'respeedingusup.We'renotonlylaunchingon-trendconsumerdriveninnovationthisyear,we'resupportingourpastinnovationlaunches,acriticalpartofensuringlong-termsuccess.

InthelastquarterofFY14,HillshirelaunchedalineofJimmyDeanfrozensandwichesandbowlsforlunchanddinner,takingthebrandbeyondbreakfast.Thisexpansionintoanewdayparthasachievedverygoodincrementaldistributionof16premium-priceditems,thankstoourretailpartners.Wehaveastrongintegratedmarketingprogramforthislaunchincludingtelevision,digital,andshoppermarketingsupport.

Anotherbigplatformcarryingoverfrom2014isHillshireFarmsNaturalslunchmeat.Itprovidesthecleanerlabelconsumersarelookingforwithoutsacrificingtasteandquality.Whilewe'reintheearlyendofthelaunch,theresultsareextremelypositive.It'sdrawingincrementalpurchasers,and80%ofconsumerswhoboughttheproductreportit'sevenbetterthantheyexpected.

Inadditiontothosetwobigplatformswe'reextendingandsupportingourinnovationlaunchesfromearlyinFY14.Inretail,we'relaunchingnewextensionstoexpandBallPark'sFinestFranks.Thesepremiumhotdogsdeliveraflavoradventureandnothingartificial.Andtheyareagrowingcategory.

We'realsoextendingourHillshireFarmsAmericanCraftlineofhandcraftedsmall-batchsmokedsausage,withnewproductsfeaturingauthenticingredientsandboldflavors.Andinfoodservice,we'reextendingourChefPierreLuxeLayerPie.We'llinvestMAPspendingtocontinuegrowthinthesecondyearofthesesuccessfulnewplatforms.

Inthebackhalfoftheyear,ourfocuswillbearoundtwonewsnackingplatforms.Weknowtheshifttosnackingisheretostayandbelievethatwehavetherighttowinwithourbrandsinproteinsnacking.

Oneofthoselaunches,HillshireSnacking,hasbeenintestmarketsinceQ4andlookstohavealotofpotential,deliveringincrementalsalesandgrowingthecategory.You'llhearalotmoreaboutinnovationatInvestorDayonDecember10,whereyou'llgettotrysomeoftheseproducts.

TowrapupmythoughtsonthePreparedFoodssegment,althoughit'sgoingtotakethreeyearstofullyrealizeallthesynergiesweexpectthesegmenttoearna10%to12%returnonsalesonanormalizedbasis.Afteracoupleofmonthsofworkingtogetherandreallydrillingdownonthesynergytargets,we'remoreconfidentthaneverthatwe'llcapturemorethan$225millioninthefirstyearandmorethan$500millionbytheendofyearthree.

IneedtoclarifythatnotallthesynergieswillfallwithinthePreparedfoodssegment.Synergieswithinsharedservices,forexample,wouldbeallocatedacrossallthesegments.ButthemajoritywillbeinPreparedFoods.

So,nowthatI'vegivenyououroutlookforeachofthesegmentslet'stakeabroaderlookatsomereasonswe'resooptimistic.First,wearedisciplinedinourapproachtowardsmanagingourbusiness.Theunderstandingoftheconsumer-centricdemandandoverallsupplyfundamentalsallowsustomakedecisionsthatareROIC-basedandprovidetheleastvolatilityandbestprospectsforlong-termgrowth.

Whenweassessthedemandpicturewe'reuniquelypositionedtodeliveragainstchangingconsumerneedswithaportfoliothatdeliversagainsteverymealoccasionthroughoutthestoreandacrossthemenu.It'snotjustthebreadthofourportfoliothat'sexciting,it'sthedepth,alongwithourinnovationthatdeliversagainstincreasingconsumerdemandfornaturallyoccurringhigh-qualityproteinsnacksandmeals.

Consumerbehavioratbothretailandfoodservicereflectthischange.Atretail,growthisoccurringattheperimeterofthestoreandinafewfrozencategories,withtwoofthebiggestbeingchickenandproteinbreakfast,whichfavorourportfolio.




We'realsoentrenchedwiththeleadingquick-service,full-serviceandfast-casualrestaurantsaddressingthisshift.Ifpastconsumerbehaviorremainsthesame,andwebelieveitwill,therecentdropingaspriceswillputmoremoneybackintoconsumerwallets,whichwillresultinincreasedmealsawayfromhome.So,inthemacrosense,Tysonhastherightbrandsandtherightproductsintherightplacesfortoday'sconsumers.

Butlet'stakealookatsomemorespecificsforFY15andwhywefeelsogoodaboutit.Withsixweeksunderourbelt,it'salreadyofftoagreatstart.Weexpectadjustedearningsintherangeof$3.30to$3.40ashare.That'smorethan12%growthoverFY14.We'llgainmomentumthroughouttheyearasweintegrateHillshireandcapturesynergies.

Highbeefandporkpriceswillbesupportiveofpricingthroughoutallofoursegments.We'llgrowourvalue-addedchicken.Muchneededfreshtray-packandfully-cookedchickencapacitywillbecomingonlineinthespring.

Wehaveaseriesofnewproductlaunchesinthepipeline.We'reinvestinginbrandbuildingandinnovation.Andwe'reinvestingdisproportionatelyoverthedepreciationthroughoutourbusinessaspartofourcultureofcontinuousimprovement.

Andlet'skeeplookingaheadinto2016.It'sunusualforustotalkaboutourbusinessmorethanayearout,butweseealottobeconfidentabout.We'llbeinoursecondyearofcapturingsynergiesandimprovementsaswemaximizethebenefitsofcombiningTysonandHillshire.

Ifchickensupplyallows,we'llbuymoreontheopenmarket,addvaluetoitandsellitatahighermargin.Elevatedbeefandporkpricingshouldcontinuetoprovideanumbrellaforchickenpricingandconsumption.We'llhaveafullyearofthenewtray-packandfully-cookedcapacityinourresults.

Thereshouldbeadequatesupplyofcattleandhogs,withgrowthcomingintheregionswhereourplantsarelocated.We'llbegeneratingalotofcash,whichwe'llusetopaydowndebt,therebyreducinginterestexpense.We'llcontinuetospendCapExwellabovemaintenancelevelswithhighvaluereturnprojectsthatwillcontinuetosetusupwellforthefuture.

Thesharecountofthetangibleequityunitswilldropasthestockpricegoesup.Weshouldalsobeinapositiontobuybackstockin2016.Wehaveleadingbrandsinmarketsharethatwillallowustogrowfasterthanourpeers.Andwe'renotfinishedgrowing.

So,yes,wefeelreallygoodabout2015and2016.It'sTyson2.0andwe'readifferentcompany.

Finally,I'djustliketosayhowpleasedIamwiththeprogressoftheintegration.TysonhasintegratedalotofcompaniesinitshistoryandI'vebeeninvolvedinmanyofthem.AndthishasbeenthesmoothestI'veeverexperienced.

WelovehavinganofficeinChicago.Andwe'rekeepingkeymembersoftheteamthereand,inmanycases,expandingtheirroles.Wehavetwolike-mindedgroupscomingtogethertounlockthevaluethatweknowexists.Therearen'tanyegosintheway,peoplearen'tbeingterritorial,theyarejustgettingitdone.

We'vebeenusingtheexpression--oneplusoneequalsthree--alotbecauseweseeTysonandHillshiretogetherasmorethanthesumoftheparts.So,thankyoutotheteamforworkingsowelltogether.

Andnowlet'sgotoDennisforthefinancialupdate.

DennisLeatherby(EVPandCFO):

Thanks,Donnie.Andgoodmorning,everyone.

FY14wasanotherrecordyear.Wedeliveredstrongoveralloperatingresultsandusedourcashflowand




balancesheettomakeasignificantacquisitioninHillshireBrandstofurtherdeliverandexecuteourvalue-addedstrategyforyearstocome.Asareminder,weacquiredHillshireBrandsinourfinalmonthofFY14.

Thismorningit'simportantforustodemonstratethatlegacyTysondeliveredonresultswehadpreviouslydescribedoverthelastseveralearningscallstogiveyouagoodbaseline.Asaresult,IwillbereferringtoourFY14adjustedoperatingincomeandEPSforlegacyTysononly,whichexcludeonemonthofHillshireBrands'results,theequityanddebtfinancingimpacts,aswellasafewotherunrelateditems.PleaserefertoourpressreleaseissuedearlierthismorningforafullreconciliationofourGAAPtoadjustedresults.

Wehadarecord-settingfourthquarterinFY14.FY14revenueswere$37.6billion,representingover9%growthcomparedtoprioryearaswecontinuedtoexecuteourgrowthstrategy,asevidencedbyincreasedsalesinChicken,PorkandPreparedFoods.TotalCompanyreturnonsalesfor2014was4.4%.Andadjustedoperatingincomewasmorethan$1.6billion,representinga20%increaseoverFY13.

Ouradjustedearningsof$2.94persharerepresentsa30%increaseoverourpreviousrecordof$2.26lastyear.Weachievedanadjustedpretaxreturnoninvestedcapitalofjustover21%comparedto18.5%fortheprioryear.Operatingcashflowfor2014was$1.2billion,whichisconsistentwithourfive-yearaverage.Wehaveshowntheabilitytosustainhighlevelsofcashgenerationwhilestillfundingsignificantinvestmentsinworkingcapitalaswegrewourbusinessandabsorbedhigherinputcosts.

Wespent$195milliononcapitalexpendituresforthefourthquarterand$632millionforthefullfiscalyear.Thisoutpacedourdepreciationby$138millioninFY14aswecontinuedtoinvestinprojectswithafocusondeliveringhighROIC.

OureffectivetaxrateinFY2014was31.6%.Onanadjustedbasisthisratewas33.4%.NetdebttoEBITDAforthepast12monthswas4.1times,andonagrossdebttoEBITDAbasisthismeasurewas4.3times.OnaproformabasisincludingHillshire'sresultsofthepast12months,netdebttoEBITDAwasapproximately3times.

Includingcashof$438million,netdebtwas$7.7billion.Totalliquiditywasjustover$1.6billion,remainingaboveourgoalof$1.2billion.Year-to-datenetinterestexpensewas$125million,down9%fromayearago.Adjustednetinterestexpensewas$98million,representinga29%decreasefromFY13.

OuradjustedEPSreflectsdilutedsharesoutstandingof356million,similartolastquarter,whichexcludestheimpactoftheissuanceinAugustofCommonStockandtangibleequityunits.AsDonniepointedout,wewillcloseonthesaleofourBrazilchickenoperationslaterthisquarter.AndweexpecttoclosethesaleofourMexicochickenoperationsinthesecondquarterofFY15.

Thesaleofbothoftheseoperationswillresultinmorethan$500millionofadditionalcashweplantousetodelever.WemovedtheassetsfortheseoperationstoassetsheldforsaleinourFY14balancesheet.

Nowlookingforward,herearesomeadditionalthoughtson2015.Pleasenoteouraccountingcycleresultsina53-weekyearinFY15ascomparedtoa52-weekyearinFY14.Accordingly,thisoutlookisbasedona52-weekyearforcomparativepurposes.

Weexpectrevenuesofapproximately$42billionforFY15,whichis12%growthoverFY14.ThisisdrivenprimarilybyafullyearofHillshireBrandsoffsetbyareductionfromthesaleofourBrazilandMexicochickenoperations.Weexpecttocapturemorethan$225millioninsynergiesinFY15fromtheintegrationofHillshireBrandsandimprovementsinourPreparedFoodssegment.Netinterestexpenseshouldapproximate$285millionforFY15.

Wecurrentlyestimateouradjustedeffectivetaxratetobearound35.75%.CapExisexpectedtobe$900million,whichrepresentsapproximately$300millionor50%morethanourdepreciationexpenseaswecontinuetofocusonprojectsthatwillcreatelong-termshareholdervalue.Basedonoursharepriceatthe




startofFY15,weexpectdilutedsharesinQ12015tobearound416million.ThisincludestheAugust2014issuanceofcommonstockandtangibleequityunits.

ThismorningwereportedourBoardofDirectorsincreasedourregularquarterlydividendfrom$0.075to$0.10pershareonourClassAcommonstock,payableonDecember15.WeexpectadjustedEPSintherangeof$3.30to$3.40,representinganincreaseofover12%versusFY14.

FY15isalreadysettinguptobeanotherphenomenalyearforsales,operatingincome,andEPS.Aswelookbeyond2015weexpecttorealizeannualsynergiesofmorethan$500millionbyFY17.Weareexcitedaboutthetremendousvaluewewillrealizefromourcollectionoficonicbrandsandlookforwardtogrowingthemevenfurther.

Webelievereturnfocusedcapitalallocationandourdiversifiedandbalancedportfoliowillbetheenginetodeliverconstantgrowthyearoveryear.Andweareraisingthelong-termprofitabilityexpectationsforourChickensegmentto7%to9%,andforourPreparedFoodssegmentto10%to12%.

Ourprioritiesforthesignificantcashflowsthatouroperationswillcontinuetogenerateareforrapiddeleveragingandstrengtheningourbalancesheet,acontinuedreturnfocusoncapitalallocationtodrivelong-termshareholdervalue,fundingacquisitionstofulfillourgrowthstrategies,andreturningcashtoshareholdersthroughsharerepurchasesanddividends,allwhileensuringwemaintainplentyofliquidity.

Finally,Iwanttoremindyouthatonthiscallin2012,aftercomingofftwoyearsofmorethan$1billioninincrementalfeedcost,andfacinganotherincremental$600millioninFY13,wesurprisedsomebysayingwewouldatleastholdEPSflatin2013andgrowEPSbyaround10%ormorein2014and2015.ThiswasbasedonourbeliefthatcontinuedimprovementsinoperatingperformanceinmanyareasofourCompanywasacceleratingandwouldenabletheseresultstobeachieved.Twoyearslater,wearepleasedtolookbackandnotethatwe'redelevering,with15%EPSgrowthin2013and30%EPSisgrowthin2014.

Butwe'renotfinished.OurnewEPSrangecallsforatleast12%growthin2015amidstthegame-changingacquisitionofHillshireBrands.Whenachieved,thismeansourthree-yearcompoundedannualgrowthratesincethe2012callwouldbealmost19%,reflectingtheeffortsofagreatteamthatjustkeepsgettingbetter.

AswecontinuetheintegrationprocessweseethetremendousopportunitytheHillshirebusinessandteambringstothecombinedcompany.AsweexecuteourPreparedFoodsstrategywe'reevenmoreexcitedaboutourfutureaswelooktocreatestrongshareholdervaluealongwiththisacquisitionthatwillbeaccretiveinFY15andhighlyaccretiveinfutureyears.

Thatconcludesourpreparedremarks.Robin,we'rereadytobeginQ&A.

QUESTIONS&ANSWERS

Operator:

(OperatorInstructions)

OurfirstquestioncomesfromKenGoldmanwithJPMorgan.

KenGoldman(Analyst-JPMorgan):

Thanksforthequestion.Ihaveoneandthenafollow-up.Thefirstoneis,Donnie,I'mhopingyoucandetailforussomeofthesynergytargets,maybeifyoucanfillintheblanks--yowmuchisexpectedinCOGSversusSG&A,someofthepacingsofthesavings,anythingyouthinkisimportantforustoknowaswemodelnumbersouthere.




©2014TheStreet,Inc.AllRightsReserved Page8 of 21

Sure,Ken.Letmestartwiththetypesandthenwe'llfillinthegapalittlebitaroundmaybesomeoftheamountsandwhentheywillcome.AndIalsowanttoclearupalittlebitaboutwhat'snotinthesynergiesthatwe'vebeentalkingaboutsofar.

There'searlydays,there'ssomelow-hangingfruit,thingslikeprocurement,someoftheredundantfunctionsthatareeliminated,someoftheservicecontracts,thosekindofthings.Now,longerterm,thingslikehowweoptimizeandimprovetheoperationalefficienciesinthemanufacturingplants,howwecontinuetooptimizethenetwork,someofthelogisticsavings.

Therewillalsobesomesavings,wethink,intradespend.So,there'sseveralbroadcategoriesthatwethinkwewillfindmoreand,asyouknow,increasingsavingsinovertime.

Letmegiveyouaquickexample.Anearlyexamplewe'llseethisyearisfreightmanagement.

We'vebeenabletoreducetheratestructurebyloweringtheratesonsomeoftheHillshirelegacybusinessandthencapturingadditionaldiscountsfromhavingamuchlargerfreightbase.Weexpectthatalonetobesomewhereinthe$15millionto$25millionthisfiscalyear.

Atthispoint,Ifeelreallygoodaboutthe$225millionnumberthisyear,atleastthatnumber,andatleast$500millionaswegoforwardoverthethreeyeartarget.Ialsowanttoaddthatthisispertaining,byandlarge,tothePreparedFoodssegment.

IfyoulookatourPreparedFoodssegmentthisnextyearit'sroughlyan$8billionbusiness.Andifyoulookatthatoutoverthethree-yearsynergynumberthat'sabout$500millionwhichisabout6%orsoofthat.

Now,it'salittlemorefront-endloadedthanyouwouldtypicallyseewithjustastraightM&Adeal.Butyou'llrememberwewereabletoseesignificantsynergycaptureinthelegacybusinessbecauseofthisacquisitionbyclosingthreeplantsandthenmovingthatproductmixaroundintomoreefficientlocations.

Now,Ken,what'snotinthesesynergynumberssofarisanygrowthsynergiesthatmightcome.We'venotincludedanyrawmaterialsynergies.Andwhatwewanttodoistoaddabitofclarityaboutthataswegetmoredeeplyintohavingthosediscussions.

We'vebeenabouttwomonthsnowworkingtogetherasateam.We'vebuiltverydetailedbusinesscasesthatwecanmonitortodeliverthesesynergies.And,ofcourse,we'llbereportingthoseouttoourinvestorsquarterly.

Movingbacktoonethingjustforclarity,someofthethingslikesharedservicesynergies,thattypeofthing,willbeseenacrossallofoursegments,butthemajorityofthesynergieswillresideinthePreparedFoodssegment.


That'shelpful.IfIcanbeveryquickonthefollow-up.Youmentionedeventhoughnextyearhasanextraweek,itemsinyouroutlookarebasedona52-weekyear.Butjusttobeclear,whenyoutalkaboutthat$3.30to$3.40inEPSisitfairtoassumethatrangeis53weeks,oristhatalso52,withupsideofthatnumberfromtheextraweek?


Ken,that'sfor52weeks.


Okay,thankyou.




Operator:

Thankyou.OurnextquestionisfromBrettHundleywithBB&TCapitalMarkets.

Bret t Hundley(Analyst-BB&TCapitalMarkets):

Hi,goodmorning.Thankyoufortakingthequestions.MyfirstquestionisontheChickensegment.Youguyshave,firstofall,uppedyournormalizedrange.Youcontinuetotalkto10%-plusfornextyear.

Andthethemeseemedtobeasoflatewaysthatcompaniescaninsulatethemselvesin2015andbeyond.Youtouchedonthatalittlebitinyourpreparedremarks.ButI'mwonderingifwecandelvebackintoit.

Oneofthethingswe'rehearinginparticularisthatsmallbirdoperatorsaresigningveryfavorablecontractswithQSRguys,foodserviceguys,formultipleyearsout.Wonderingifyouguysareseeingthatinyourownbusiness?And,again,goingbacktotheoriginalquestion,theinsulationthatyouseeinyourChickenbusinessgoingforward.


Yes,certainlyweare.Wehaveseengoodpriceincreasesinoursmallbirdcategoryascustomerslooktoensuresupplythere.Butasimportantly,there'sseveralthingsthatwe'vebeenabletodotoinsulateourbusinessabit.

Numberone,we'recertainlyamuchmorefundamentallysoundcompanythanwehavebeeninthepast,andwecontinuetoimprovethere.Wecontinuetoinvestinourbusiness.

We'veimprovedourrevenuebypricingandmix,bytheway.WhatImeanbythatiswe'vereducedourrisktograinmarketfluctuationsandwe'vegottenamuchbetterunderstandingofhowtheconsumerischanging.

Ourfreshchickenbusinessisdoingverywell.That'saverygoodbusinessforusandwecanseecontinuedgrowththere.

Asyouknow,ourbusinessmodeltendstodobetteragainstthewholebirdmodelthanitdoesagainstjusttheUBparts.Andso,asthesmallbirdbusinessimprovesandthetraypackgrows,andyoucan'tforgettheadditionalvalue-addedthatwehave,thosearecertainlythingsthatinsulateourbusinessinthefuture.


Thankyoumuchforthat.Andthen,Dennis,Ihadafollow-upquestionasitrelatestothebalancethatyoutrytostrikebetweenlookingatfurtherM&Atargetsoutthereandthendebtpaydown.I'mjustcurious,isthereacertainlevelofdebtpaydownandthenaswitchgetsflippedandyoucansay--allright,wecanstartlookingatM&Aagain?CanyoulookatM&Arightnow?

Andasafollowontothatquestion,iftherewasafoodservice-focusedtargetoutthereinpackagedmeat,doyouthinktherewouldbeanytruckissuesforyouguysgoingaheadandacquiringsomethinglikethat?


Okay,greatseriesofquestions.ThewaywelookatM&Ainourcapitalstructureisthatweputtogetherthisfinancingandcapitalraiseamannertoensurewehaveinvestmentgraderatings.RightnownetdebttoEBITisaround3times.

We'regoingtothrowoffabetterpartof$1billioninfreecashflow.We'regoingtoraiseanother$500millionthroughthesaleofMexicoandBrazil.Sothatwillbeusedtodelever.

AndweseenetdebttoEBITDAtrendingtoward2timesbytheendofthisfiscalyear.Thatputsusinapretty




goodplacetoreleverage,ifwesochoose.Wethinkthatwe'reinamuchbetterpositionfromastabilitystandpoint,fromanearningsandcashflowstandpoint.

So,we'reinareallygoodpositionandwe'recertainlyreadyandwillingtolookatM&Atotheextentitmakessenseforusanditfulfillsourgrowthstrategies.AsfarasfoodservicegoesI'mnotsurethatIknowhowtocommentonthat.


Thankyou.

Operator:

Thankyou.AdamSamuelson,GoldmanSachs,yourlineisopen.

AdamSamuelson(Analyst-GoldmanSachs):

Yes,thankyou,goodmorning,everyone.MaybealittlemoredetailontheChickenoutlookandasyouthinkaboutthe7%to9%normalizedrange,howshouldwethinkaboutthefurtherprocessingpercentofthemixonanormalizedbasisgoingforward?Clearlythat'ssomethingthat'schangedinhowyourunthatbusinessasadrivertonormalizedprofitabilitytodampenthecyclicality.Butaswethinkaboutthefurtherprocesshowbigisthatofyourearningsmixatthispoint?


Adam,letmeaddalittlebitofcolortothat,too.Wefeeloverthenexttwo,three,fouryears,somethinglikethat,highbeefandporkprices,relativelyspeaking,aregoingtocontinuetodrivedemandtowardschicken.Also,asthemillennialsentertheworkforce,theyindexveryheavytowardschicken.

So,wefeellikethat'sameaningfulconsumershiftthatwillallowustocontinuetogrowourbusinesswellintothefuture.So,wepredictoverthenextcoupleofyears,atleast,a3%increaseindemandforchicken.

Andifyou'llgoback--it'sbeenalongtime,probablysince2006or2007--sincewe'vebeenabletotalkaboutastructuralshiftinconsumptionthatwoulddrivethatdemand.So,then,ifyoulookatfoundationallya3%orsodemandincrease,drivenbothbyhighcompetingpricesaswellaspreferencetochickenfromthemillennialsthenhowdowegotomarketagainstthat?Freshchickeniscertainlyagreatcomponentandthataddsincrementalmargintoanythingwewoulddoonjustpurecommoditybasis.

Bytheway,abouttheonlycommoditypart,justpurecommoditypart,thatwewouldsellwouldbeafrozenlegquarterinternationally.Which,bytheway,favorsusintermsofincreasedsupplybecausewecanthenbuypartsthatweneedontheoutsidemarket,addvaluetothosethroughourfurtherprocessingcapabilities.So,letmegettothatpartofthequestion.

LastyearInotedonacoupleofourcallswewerecompletelytappedoutonFPcapacity.Ourtwoplantsthatwe'vebeenhavingissueswitharecompletelybackupintospeed,andwehaveincrementalFPcapacitythere,pluswehavetwomorelinesthatwillbecomingonstreaminthespring.

And,so,someofourfoodservicecustomerswouldhaveprobablyinsertedmorechickenpromotionshadtherebeenindustrycapacitytoactuallyproducetheproduct.We'resupplyingthatindustrycapacitythisyearsowefeellikethatwillgiveusanincrementalimprovement.

AnotherthingthatIcanaddisthateventhoughthroughtheyearsourlegquartervolumeisdown,thereasonit'sdownisbecausewe'vebeenabletotakeadvantageofabitofanincrementalshifttomorebonelessdarkmeatinourbusiness.Ifyoulookatthepricecomparisontobonelessdarkmeatversusbonelessskinlessbreastmeat,therearetimeswhenbonelessdarkmeatisalmostatparityinthemarketplace




withbonelessskinlessbreastmeat.

So,we'rechasingthatnewdemographicshift,too.Thatmayhavebeenamuchmoredetailedanswerthanyouwerelookingforbutwe'reveryoptimisticaboutthedemandinourchickensegment.


Iappreciatethecolor.Andthenjustasafollow-up,yougavesomegooddetailonthedemandside.Onthesupplysideyoudoownoneofthemainprimarybreedersintheindustry.CanyoutalkaboutwhattheCobb-Vantressorderbooklookslikeasyouevaluatetheoutlookforsupplygrowthinparticularly2016?


I' lltellyouthis.Overthelastcoupleofyearsorso,mostoftheprimarybreedershaveexperiencedsomeproductionissues.Itappearsthatmostofthoseproductionissuesarenowcorrectingthemselvesandthattherewillbesomeincrementalsupplycapability.Now,ifyoulookatthepulletplacementsit'sgoingtobeatleastJune,July,August,somethinglikethat,ofnextyearbeforethere'ssignificantsupply.

Andyou'vegottorememberthestructuralissuesaffectingthesupplygrowth--chickenhousesgettingbuilt,hatcheriesneedingtobebuilt,thosetypesofthings.Ourhatcherycapacityisaboutashigh--asanindustryourpercentcapacityisaboutashighasI'veseenitinalongtime.

So,wethinkthatyou'llprobablyseesomewhereontheorderofmagnitudeofabouta3%orsogrowthinsupply.AndI' lltellyou,thedemandforchickenneedsthattypeofsupplycomingtothemarketandwe'relookingforwardtoourbuy-versus-growstrategy,buyingthepartsweneedandaddvaluetothemthroughourfurtherprocessingcapability,andcontinuingtodriveourmargins.


Thanksverymuch,I' llpassitalong.

Operator:

Thankyou.OurnextquestionisfromDianeGeisslerwithCLSA.

DianeGeissler(Analyst-CLSALimited):

Goodmorning.Youhadcalledoutinyourpressreleasethattherewasanegativeimpactfrompurchasingproductintheopenmarket,whichIthinkisobviouslypartofyourbuy-versus-growstrategy.Butwasthatasurprisetoyouthatitjustrosemorerapidlythanyouexpecteditto?Andisthereanywayyoucanquantifyhowmuchthatwasaboveyourexpectations?


Yes,sure,Diane,Isurewill.Asyouknow,inthebackhalfoftheyear,wehadsomefairlysignificantproductionissuesinourfully-cookedvalue-addedretailbusiness.And,obviously,weweredisappointingcustomerswithourfillrate.And,frankly,wewantedtomakesurethatwastheonlyareaofourbusinesswhereweweredisappointingcustomers.

So,wemadethechoiceinourtray-packbusiness,andIthinkyou'veseenthegrowthinfreshtraypackwiththesereallyhighgroundbeefpricesatretail,reallyhighbeefprices,there'sbeenashiftintofreshtraypack.Andwejustdidn'twanttodisappointourcustomersinthatpartofourbusiness,too.

So,wemadetheconsciencechoicetobeoutonthemarketbuyingbreastmeatandthenusinginternalbreastmeattoputitinatrayandmakesurethatwedidnotdisappointourcustomers,particularlyaroundthe




holidays.AndI' lltellyou,wedidagreatjoboforderfill.

Itcostusalittlebitofmoney.Wewereoutthereprobablybuying,Ithinkforthequarterweboughtabout100loadsoffreshmeataweekonaverage.Andyouknowwhatthemarketpriceswere.

And,typically,wewouldhavebeenclosertothe50to55load-a-weektyperange.Butthatwasaconsciencedecision.

I'mgoingtoguessmaybeitcostus,Idon'tknow,$1.5million,$2millionaweek,somethinglikethat,forthatquarter.Andyouknowwhat?Itwastherightthingtodobecausewekeptthosevaluablecustomerrelationships.

Andaswebringthisnewtray-packcapacityandthisnewfurtherprocessingcapacityonstream,we'llbeabletocapturethatmarketshareback.So,we'repositivewedidtherightthingalthoughitdidcostusalittlebitofmoneyinthequarter.


Okay.So,itsoundslikeitwasmoreofaproductionissueratherthanyoumisjudgingthemarket?Isthatafairstatement?


Byandlarge,Ibelievethat'scorrect,yes.


Okay.AndthenIwantedtoaskaboutChinawhereobviouslythehopesarethatbusinesswillgetsometractionandreallystartpullinginsomeearnings,especiallywithwhatwe'veseenintermsofgrowthfortheQSRchannel.Butit'sbeensucharockyroadforthosecompaniestherewithqualityissuesoneafteranother.

Couldyoutalkalittlebitaboutwhatyou'reseeinginChinaandwhatyourcustomerbaseistellingyou?Iwouldthinkthatwaswhathappenedoverthesummerwithoneofthelargesuppliersthere,thatsomeofthesecompanieswouldbeknockingloudlyonyourdoorandlookingforsupply.Butthatdoesn'tseemtobethecasesojusttalkalittlebitaboutwhatyourcustomerbaseissayingthereabouttheirproclivitytouseyouasasupplier.


Withoutbeingtoospecificaboutanyindividualcustomer,theissueiswiththeseback-to-backfoodscares,demandforpoultryisdown.Imentionedinourpreparedremarksthatweremaininabitofaholdingpattern.Andwhatthatmeansisthatwehaveacquiredlanduserights,andwehavethecapabilitiestobeabletobuildonthoseparcelsoflandwheneverwestartgettingsomedemandsignalsthatwouldindicatethatit'stimetodoso.

Wesawalittlebitoflightintheday-oldchickmarket,andthenwesawalittlebitoflightinthemarketbirdpricing,butthenthislastmarketscareitonceagaindecreasedthedemandfortheproductSo,Idothinkitvalidatesourmodelthat,withthissafetyfromthefarmallthewaytotheretailerortothefoodservicecustomer,thatwe'reontherighttrack.

Asyoucanwellimagine,it'sabitfrustratingwhendemanddropslikeithas.AndcertainlyIthinkourcustomersunderstandwhatwehavetodeliverinourmodelandwhatthatcandotohelptheirbusiness.Andwefeelifwegetanylightatallinthedemandforpoultrythatwe'llstartseeingsomeimprovement.





Haveyourcustomersgivenyouanyindicationofwhentheyexpecttoseedemandsnapback?


Wereallyhaven't.


Okay,great,thankyou.

Operator:

OurnextquestionisfromTimTiberiowithMillerTabak.

TimTiberio (Analyst-MillerTabak):

Goodmorning.Thanksfortakingmyquestion.ObviouslyyourPreparedFoodslong-termoperatingmarginguidanceiswellabovewhatyou'veeverrealizedinlegacyTysonbusiness,andobviouslyisalsoabithigherthanevenwhatHillshirehasseeninrecentyears.Iwouldassumethatmostofthisstepupiscomingfromthesynergiesthatyou'veoutlined.

Butcanyouprovideusmaybewithalittlemoredetailedframeupofthesensitivityofgettingtothat10%to12%operatingprofitmarginrange?Howmuchiscomingfromsynergiesversusthepotentialforimprovedinputcostsasthehogherdexpands?Andthen,finally,howmuchsensitivityiscomingfromsomeofthesenewproductsthatyou'velaunched,particularlyinthelunchcategoryandalsointhesnackcategories?


Okay,Tim,acoupleofthings.Numberone,ifyou'llremember,whenweclosedthethreefacilitiesinourPreparedFoodsbusiness,thatbeganourabilitytotakeourproductmixandputitintothemostefficientplantfromaproductionstandpointandfromanetworkoptimizationstandpoint.So,we'llcontinuetoseethatdevelop.

Ifyoulookoutovertime,andthesynergycapture,ifyoutakethetraditional,callit,legacyTysonbusinessandputitinitsnormalizedrange,andthenyoubringtheHillshirebusinessintothat,andthentakethepreponderanceofthe$500millioninsynergyanddothatmathforward,you'reprettyeasyinthat10%to12%returnonsales.Plusthen,withefficientMAPspendingandnewinnovationcapabilitiesacrossthebusiness,beingabletotakefoodserviceinnovationandhavethatcrossintotheretailchannel,thenyou'reabletoseesomegoodgrowthsynergiesthatwillhappenovertime.

We'venotquantifiedthatspecificallyyetbutwewillovertime.Ithinkthat'sthegrowthalgorithmforwardtobeabletoseehowwe'regoingtogettothat10%to12%.


Great.Andjustonelastfollow-upquestion.LookingatsomeoftheoverlapinthelegacyandHillshireBrands,hastherebeenanyfinaldecisionsofwhichbrandsarestaying,particularlyinthebreakfastcategory?Howshouldwebethinkingaboutthataswemodeloutthatdivisiongoingforward?


Icantellyouthatwediscontinuedanyinvestmentatall-inDayStartsoranyoftheBightbrandsausagethatweweredoing.AllofthatobviouslywillgointoJimmyDean.

Wehavebeenfairlysuccessful,though,aboutnotlosingthoseslots.Andwe'vebeenabletoworkwithourretailerstobeabletoslotJimmyDeanbrandedproductsintotheslotsthatpreviouslyDayStartshad.Andwe




appreciateourretailersworkingwithusonthat.

Wedohaveagreatportfoliooficonicbrandsandwe'llcontinuethegrowthtrajectorythatthey'vebeenon.Wehaven'thadachanceyettogothroughadetailofeverybrandoreverylabelthatwehave.Thatworkwillbedone.

We'vereallyspentthelastthreemonthsmakingsure,throughtheintegration,thatwe'vegotourteamsinplace,thatwe'vegottheorganizationalstructurelikewewantitgoingforward,thateveryteammemberknowswhattheirroleis,andthattypeofthing.Andwedointendjustinthenextfewweekstobetransitioningintotheneworgstructurethatwetalkedabout.Which,bytheway,thatisveryrapid.

That'sbeenouroverallfocusatthebeginning.Andoncewegettransitionedintotheneworganization,we'llcertainlyhaveourbrandteams.We'vegotgreatcapabilitiestheretolookacrossourbusinessatourbrandsandunderstandhowtomaximizetheportfolio.


Great,thanksforyourtime.

Operator:

Thankyou.OurnextquestionisMichaelPikenwithClevelandResearch.

MichaelPiken(Analyst-ClevelandResearchCompany):

Yes,goodmorning.IjustwantedtogetalittlebitmoreofanupdateforyourexpectationsforhowbigofanissuePEDvmightbethiswinter,andwheretheindustryisfromboththebiosecuritystandpointaswellastheefficacyinsomeofthevaccinesthatarebeingworkedon.Thanks.


Sure.We'vespentalotoftimetalkingtoourproducers.We'resortofinatransitionperiodhere.

Typically,atsessions,iftherearegoingtobeahighernumberofsessions,we'llbeginoccurringalittlebitlaterinthefallandwinter.Butwhatwecanseesofarintalkingtoourproducers,whoIthinkhavedoneatremendousjobaboutincreasingbiosecurityintheirlocations,Ifeelconfidentthroughourconversationswiththemthatsessionswon'tbeashighin2015astheywerein2014.

Now,whatkindofspread,Ithinkit'salittleearlyforustobeabletocallthekindofspreadversusayearago.ButIwillsaythatthereasonIfeelsoconfidentaboutthisisthishasbeenoneofourbetteryearsinPRRS.So,withthebiosecuritythatwe'veputinplace,orthatourproducershaveputinplacetohelphandlePEDv,they'vealsogiventhemselvesthebenefitinPRRS.

We'reconfidentthatnextyearshouldn'tbeasbad.It'salittletooearlytocallwhatwethinkitwillbe.

Aswerounditout,whenyouconsiderhogweightandourprojection,ourfirstguessesaroundthePEDandtheheadcount,we'relookingforabouta2%,maybe3%increaseinoverallproduction.Andcertainlybeefpriceswillbeabletosustainthatinthemarketplaceandwethinkholdtogetherprettygoodcutouts.We'relookingforwardtoagoodyearinourPorksegment.


Okay,great.Andthenjustasafollow-up,justthinkingaboutPorkandreallyyouroverallbusiness,withtheacquisitionofHillshire,whatshouldwebethinkingaboutasexportsinthefutureasapercentageofyouroverallsalesforbothporkandbeef,andchicken,aswell.Thanks.





Roughlythesame.Idon'tseeasignificantshiftonewayortheother.TheindividualpartmaychangebutIdon'tseeasignificantshiftinexports.


Okay,thankyou.

Operator:

Thankyou.OurnextquestionisfromFarhaAslamwithStephensInc.

FarhaAslam(Analyst-StephensInc.):

Hi,thanksfortakingthefollow-up.Myquestiongoestoconsumerdemand.Throughoutyourcallyou'vebeenveryconfidentabouttheoutlookfordemandinyourbusinesses.

Couldyoutalkaboutjusthowtheconsumerisapproachingproteinandhowperhapsretailersaremanaginginventorydifferently?Becausewe'rehearingthelargestretailerintheUShasbeenexpandingmeatinventories,particularlyinthefrozenareabecausethey'vebeenseeingverystrongdemand.


Farha,Ican'tcommentaboutwhatindividualretailerswilldobutIwilltellyouaboutourbusiness.Asyouknow,withthereallyhighbeefprices,beefvolumeisdown.Andaswelookforward,bothatretailandatfoodservice,wecontinuetoseethatfavoringchicken.

Wethinkchickendemandwillbeupatleast3%nextyearandIwouldthinkagainin2016,becausewealreadyknowthatthebeefsupply,thebeefherdisgoingtobedownanother4%,whichportendsprettyhighbeefpricesagainintothefuture.Sowethinkthatisastrongdemandsignalforchicken.

Andalsothere'sagenerationalissuethatwe'rebeginningtoseeinthemarketplacewithmillennialsenteringthemarketplace,andtheyindexquitehighversuschicken.So,wethinkthatisalsogoingtobedrivingconsumerdemandforchickenoutfront.Doesthathelp?


Yes,that'shelpful.Andthenjustasafollow-up,asyouseethecombinedTyson-Hillshirebusiness,couldyoujustcommentongoingtomarketasacombinedcompany?Haveyouidentifiedyetanyadvantagesthatyoucanpointtoaboutthatcombinedentityversuseachcompanyindividuallygoingtothemarket?


Absolutely.Bringingtogetherthesegreaticonicbrandsthathaveverystrongmeaningfulpositionsintheircategories,andourabilitytotakethisnewinnovativeandinsights-driveninnovationandbrand-buildingcapabilitiesthatarecomingintothebusinesswiththeHillshireteam,andbeingabletoworkwithourcustomerstobeabletodrivethecategoriesthatdrivetheirgrowth,that'saverymeaningfulchangegoingforward.

Asyoulookatthecategories,particularlyatretail,thataregrowing,say,justforexample,infrozen,ofcoursebreakfastisgrowingacrossrefrigeratedandfrozen,butfrozenbreakfast,particularlyfrozenhand-heldbreakfast,isagreatcategory.Frozenfully-cookedchickenisagreatcategory.Andwecertainlyhaveleadingpositionsinbothofthosecategoriesandgreatinsightsabouthowtocontinuetodrivegrowforward.

Imentionedinmypreparedremarksthesnackingplatformandwelookforwardtothegrowththatwe'llseein




thatsnackingplatform.Wealsohavegreatbrand-buildingcapabilitiesnowaroundourNatureRaisedFarms,noantibioticever.

We'veseendouble-digitgrowth.Andwe'rejustputtingtogetheraphenomenalteamofinsights-driveninnovatorsandbrandbuilderswhocancontinuetotakethisportfolioofproductsandgrowourcustomers'businessesandmeettheseconsumerneedsastheychange.So,we'reveryoptimisticabouthowthatwilldriveourfuture.


Fantastic.Andjustonelastquestion.AboutMexico,wecontinuetoheardiseaseissuesimpactingMexicanchickensupplies.IsthatimpactingUSchickenavailability?Orhaveyoubeenableto,ortheindustry,beenabletoworkaroundthatintermsofsupplyavailableintheUS?


Idon'tseeitimpactingthesupplyavailableintheUS.Itdoesattimesimpactthedemandforexportlegquarters.

TherearetimeswhendemandforexportlegquartersfromtheUSintoMexicoisratherstrong.Andthenmaybeinresponsetosomeofthediseaseissuesthemarketdowntherebecomessaturatedasmorepeoplebringbirdstothemarketanditchangesalittlebitthedemandfortheexports,thelegquartersgoingdownthere.Butthat'sreallyabouttheonlyimpactweseetotheUSmarketfromMexico.


Great.Thankyouverymuch.

Operator:

Thankyou.OurnextquestionisfromKenZaslowwithBankofMontreal.

KenZaslow(Analyst-BMOCapitalMarkets):

Goodmorning,everyone.Justacouplequestions.HowmuchofthesynergieswouldhavebeenfromlegacyTysonofthat$225millionandthe$500million?


Abitover$100million.Somewhereprobablybetweena$100millionand$150million,somethinglikethat.Mostofthosewouldhavebeenintheyearone,socallit$100millionto$150millionofthe$225million.Andthengoingforwardit'smoretheincrementalvalueoftheHillshire-Tysoncombination.


Great.Andmysecondquestionis,whatistheunderlyinggrowthoutlookforHillshire?Itseemslikefromyour--exsynergiesandexobviouslylegacyTysonbusiness--becauseitseemslikeyou'rejustusingthe$400millionofEBITfromlastyearandjustrollingthatforward.I'dbesurprisedthatyou'dbebuyingabusinessthatyouwouldexpecttohaveflatgrowthinayear.


Yes,we'reoptimisticaboutthegrowthofthebusinessgoingforward.Ken,rememberourcommentsaroundtheincremental$140millionorsoofrawmaterialpricingcoming,andthat'sprimarilyaroundbeefrawmaterialsandturkey,which,frankly,theHillshirelegacybusinessoverindexestowardsthebeefrawmaterialincreasesversuswhatthelegacyTysonbusinesswouldhavedone.Thinkthebeefandsausageandhot




dogsandthatkindofthing.

So,we'repricingtorecoverthat.Andwewill,particularlyaswe--theearningscadencewillbeback-halfdriven.So,inyearonewe'repricingtorecoverthoserawmaterials.

Certainlyaswemoveforwardandwegetbeyondthatthenwe'llbeabletodrive,Ithink,fairlysignificantincrementalgrowthwithsomeeffectiveMAPspending.So,we'reveryconfidentinthegrowthofthosebrands.


Butwouldn'tyourturkey--Ithoughtturkeyexpansionishappening--I'dexpectthatturkeypricestostarttorolloverthenextsixtoninemonths.Isthatnotwhatyou'dexpect?


Ourprojectionforturkeyrawmaterialsimpactingourbusinesswillbeupin2015versus2014.


Ithink,Ken,itbearsrepeatingthatthisisgoingtobeabigfront-half/back-halfstoryasweovercometherawmaterialinputprices.So,you'llseequiteabitofliftinPreparedFoods,bothinovercomingtherawmaterialpriceincreasesandthesynergiesastheybuildon,andthegrowthinlegacyHillshire.


Andmyfinalquestionis,whenyoutalkabouttheoutlookforpork,andwedidn'treallytouchonitthatmuch,butitseemstomethatporksuppliesaregoingtobeupanywherefrom3%to6%orso,andyetyou'reexpectingporkpackermarginstoberoughlywithinthenormalizedrange.Whatwouldmakeyoufeelmorecomfortablethattheporkpackermarginwouldbeabovethenormalizedrangegivenwe'regoingtoseeanexpansionofhogs?Iwouldhavethoughtthatwouldbeagoodthingforyou.


Perhapsexportswouldincreaseourconfidenceifweseemovementalongthatline.We'reprettycomfortablewitha3%orsoincreaseinsupply.Andwethinkthemarketwilleasilyabsorbthattypeofsupplyincrease,particularlywiththisreallyhighhalothatbeefpricesareproviding.

Andwe'llhavetokeepwatchingthedollarbutwefeelcomfortablewiththeexportdemandforourpork,China,Russia,etcetera.And,so,Ireallydon'tview--Ifeelverycomfortableinourrange.Mightseeaboveitdependingonifthatdevelops,andwehopeitwould.


Great,Iappreciateit.

Operator:

Thankyou.OurnextquestionisfromRobertMoskowwithCreditSuisse.

RachelNabat ian(Analyst-CreditSuisse):

Goodmorning.It'sRachelNabatianinforRobertMoskow.

Myquestionisonchickenproductivity.Weliketolookattheratioofchicksplacedtoeggset.Andinthelastmonththisincreasedoverlastyear'slevel.So,Iwantedtoknowifthere'ssomethingsustainabledrivingthis,perhapsanincreaseinthesupplyofthehatchingflockthat'sdrivingayoungeraverageage,whichismore



©2014TheStreet,Inc.AllRightsReserved Page18 of 21

productive.

Andthenasasecondpart,fromwhatIrecalllastyear,agoodnumberofeggsweredestroyedduringtransportationbecauseofthecolderthanusualwinterweather.So,IwantedtoknowifthereareanylearningsfromthisandhowyourCompanyispreparediftheweatherthisyearisasbadasitwaslastyear.


ObviouslyI' llstartwithyourfirstone.Actuallyourhenageis--I' lltalkaboutthephysiologicalproductivityfirst.Thehenageisprobablystillaround63to65weeks.Hatchabilityisprobablydownabout1%fromwhatwe'veseenoverthelastquarterorso.So,Idon'treallyseetheactualproductivityoftheflockvaryverydifferently.

HereiswhatIsee.We'veseenthattheindustryhasnottakenthereductioncuts,thecutsinsetsinplacement,thatitnormallywouldinpreviousyears.And,so,thereasonyou'reseeingsetsandplacementsaboveayearagoisbecauseyoucan,becausethisquarterintegratorscouldchoosenottotakethecutsthattheytooklastyear.And,so,there'sanabilitytoincreasethisquarter.

Ithinkwhatyou'llseeoncewegetintothelateDecember,earlyJanuaryiswegetbacktoabouta1%orsochangeversusayearagobecauseyoudon'thavethisabilitytogrowversusayearagoduetotheholidaycuts.Butremindmeofyoursecondquestionagain,I'msorry.


Ijustwantedtoknowifthecolderthanusualwinterlastyear,ifyouthink--Ifeellikealotofthesupplywascutbecausealotoftheeggsweredestroyedduringtransportationbecauseofthecolderweather.SoIjustwanttoknowifthereareanylearningsfromthatandwhatyouexpectforthisyearfromthatend.


Gotit.Icouldtellyouwe'reinbettershapeonpropanethanwewereayearago.You'llrememberweactuallycreatedasmallpropanedeliverycompanytokeepalotofourgrowersinpropane.

We'remuchbetterpreparedforthat.Wehavelookedforwardandwedothinkwehaveadequatetransportationcapacitytobeabletohaultheloads.

Thebigthinglastyearwasjusttheweatherandroadclosuresandthosetypesofthings.Wecanpositioninventoryalittlebitdifferentlybutiftheroadisclosedtheroadisclosed.

Thosetypeofeventsveryhardtopredict.Ithinkwe'reingreatshapegoingintoFY15andfeelverygoodaboutdemandandhowwe'vepreparedourselvestobeabletodeliverittotheconsumer.


Gotit.Veryhelpful.Thankyou.

Operator:

OurlastquestionisfromAkshayJagdalewithKeyBancCapitalMarkets.

AkshayJagdale (Analyst-KeyBancCapitalMarkets):

Goodmorning.Congratulationsonthegoodresults.Myfirst,IjustwantedtotalkalittlebitabouttheChickensegmentandthenaskyouaquestiononHillshire.

OnChicken,it'sreallytwoparts.One,youhaven'treallydelivereda10%orabovemarginevenona




quarterlybasis,justtopushback.So,canyoutellmehowweshouldthinkofnextyearbeingabove10%andwhyweshouldfeelconfidentaboutthat?

Andperhapsyoucouldtalkabouthowthequarteristrendingrightnow?Obviouslyyouhavethelowergraincosts,whichwillhelpyoubyabout$0.03apound.Butyourpricingperformancethelastcouplequarterhasn'tbeenreallythatgreat,orpricerealization.

So,withsupplypotentiallyincreasing,I'mguessingyou'regoingtogivebacksomeonpricing,yourvolumeisgoingtobeupalittlebit.ButIwanttoseewhyyouhavethecomfortleveltosayyou'regoingtoearnabovea10%marginonchicken?So,that'smyfirstquestion.

Andthenthesecondoneis,youraisedyournormalizedmarginrange.Andwhatwe'veseenisinthebottomofthecycle,whentheindustryislosingmoney,youtendtodoalotbetter,andatthetopofthecycleclearlycompanieslikePilgrim'saredoingmuchbetterthanyou.So,canyoutalkaboutthebottomendofyourrangeandthecomfortlevelyouhavewiththatifandwhenthechickenindustryoversuppliesthemarket?


Okay.Toyourfirstpart,ourpricinghasnotgonedown.Wefeelverygoodaboutourpricingsofar.Ifyou'llremember,wehavemuchmorewholebirdequivalentexposureplusalotmoreFPcapacitybuiltintotheportfolio.

Now,remember,inthelastcouplequarterswe'vehadsomeproductionissuesthathavecostussomemoney.So,erasethatandthatpicksupatleast50-plusaquarter.

Ifyou'llrememberoverthelastcoupleofquarters,Imentionedonaquestionearlierthatwespentsomeincrementalmoney,callitacouplemillionorsoaweek,intraypacktobeabletomakesurewedidn'tdisappointourcustomers.So,scratchthat.Andthenyoucangettoabouta10%onthelastquarterthere.

Nowlet'smoveforward.Demandupabout3%.Wefeelverygoodaboutthat.Whereisthedemandshifting?

Thedemandisshiftingtowardstraypack,whichisagreatbusinessforus,andwe'reverygoodatit.AnditwantstoshifttowardsFP,there'sjustnotbeenenoughcapacitytofilltheorders.We'rechangingthatdynamicthisquarter.

Wenowhavefullproductivecapabilityofallofourexistinglines.Andwe'regoingtobebringingtwomorelinesonstreaminthespring.So,ontopofallofthat,ifyouincludethe$350millionthatwe'llseeinincrementalgrainsavings,thenthatwillhelpus.

Ithinkthatgivesusalotofconfidencegoingforward.We'llcontinuetoseesomeoperationalimprovementsthroughouttheyearaswecontinuetoadvanceourselvesinourLeanandLeanSixSigma.So,wefeelgood.AndasImentionedinthepreparedremarkswe'reofftoagreatstartsofeelreallygoodaboutit.

Nowastotherange,you'reabsolutelycorrect.Ourgoalistohaveconsistent,stablegrowthandearningsgrowth.

And,so,inthesummertimewhenthecommoditypricesreachtheirpeak,you'reright,wetypicallydon'tdoaswellassomeofourcompetitors,butobviouslyinthetimes,inotherpartsoftheyearwedomuchbetter.Whatwewanttoprovideisstableearningsgrowthforourinvestorsandthat'swhatourmodelisgearedtodo.

So,aswelookforwardwithanincreaseindemand,whichwe'venotseennowforseveralyears,ifyoutakethemarketfluctuationsandourbuy-versus-growstrategy,ifcommoditypricesgetfairly,let'scallit,cheap,ifyouwill,thenwe'reabletobuythatrawmaterialandputitintothisfurtherprocessingvalue-addedproductionmodelandcreateincrementalmarginonthat,whichgivesustheconfidenceinthelowerendof




ourrange.


Andisthelowerendofyourrange,doyouexpecttohitthatwhenthemarketisoversupplied?--meaning,whencommoditycompaniesarelosingmoney,wouldyouexpecttobeatthelowerendorcouldyoubebelowthelowerend?


Akshay,thatobviously--you'regettingintoindividualscenarios,howmuchmoneyaretheylosingandthattypething.AndIdon'tknowthatthatisasproductive.

Whatwecantellyouiswefeelverycomfortablewiththerangemovingup.Andwe'llcontinuetolookattherangeandifweneedtotakeithigherinthefuturewewill.

Butwefeelveryconfidentaboutourabilitytodeliver.Andwethinktherearestructuralchangesinourbusinessthatgiveustheopportunitytocontinuetodeliveragainstthat.


Okay.AndjustonelastoneonyourPreparedFoodsbusinessandthecommodityoutlook.You'vebeenbehindtheeightballonyourlegacybusiness,itseemslike,foralmosttwoyearsorsomething.It'sbeenalongtime.

You'realwayscatchinguponthecosts.Andyou'resayingHillshireisalsogoingtobecatchingupthefirsthalfoftheyear.Canyoujustgiveusalittlemorecolorastothetypeofincreasesyou'reexpectinginFY15forthatcostbasketforyourPreparedFoodsbusiness?


Theincrementalcostyearoveryearwillbe$140million.Ifyouremember,inmypreparedremarksIsaidinthelegacyTysonbusinesswehaverecoveredthat,butwe'vegottostaydiligenttokeepworkingonourpricingaswemoveforwardtogetontopoftheincrementalrawmaterialinputsthatarecoming.Again,prettyheavilydrivenbybeefandbyturkeypricing.

So,weknowwhatwehavetodoandweknowwhatpartsofthebusinesswehavetocontinuetodrivethatpricingin,andfeelcomfortablethatthisyearwillbeasignificantimprovementtoourpreviousyears.AndmightInote,too,thatthelegacyTysonbusinesswasnotjustplaguedbythepricinglag.Itwasalsoplaguedbyaninefficientsupplychain.

AndwemadecorrectionsattheendofthelastyeartocorrectthoseinefficienciesbecausewehadthisnewHillshireproductionnetworkthatwecouldmovealotofthoseproductsinandoptimizethatnetwork.Sothatwillbringincrementalbenefit.We'llseealotofthatinFY15.


Okay,thankyou.


Youbet.Thankyouallforjoiningusonthecalltoday.Wealwaysappreciateyourinterestinourbusiness.Follow-upwithJonthroughouttherestoftheday.AndIwanttowishyouallaveryhappyThanksgiving.Thankyou.

Operator:




Thankyou.Thisdoesconcludetoday'scall.Youmaydisconnectyourlines.Andhaveagreatday.

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