Tyson Foods Inc - Class A (TSN) — Q1 2015 Earnings Call Transcript

Good morning. And thank you for joining us today for Tyson Foods conference call for the First Quarter of the 2015 Fiscal Year. On today's call are Donnie Smith, President and Chief Executive Officer; and Dennis Leatherby, Executive Vice President and Chief Financial Officer. Our remarks today include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. I encourage you to read today's press release and our filings with the Securities and Exchange Commission for a discussion of the risks that can affect our business. Following our prepared remarks we’ll go to Q&A. To ensure we get to as many of you as possible, please limit yourself to one question and one follow-up, and then get back in the queue for any additional questions. Because our Annual Meeting of Shareholders takes place this morning, we will need to stay on schedule by ending Q&A at the top of the hour. We hope to get to all of your questions, but we will have to put a hard stop on the call to get to the Shareholders Meeting on time. I'll now turn the call over to Donnie Smith.

Thanks Jon. Thanks to all of you for joining us today. Q1 was another great quarter with adjusted earnings of $0.77 a share. Sales were a record $10.8 billion, up 23% from last year. Adjusted operating income was a record $564 million, which is a 37% improvement year-over-year. Our overall adjusted operating margin was 5.2% and we reduced debt by $650 million in the quarter. We realized $60 million of synergies in Q1 and we are on pace to exceed $225 million in synergies for the fiscal year in operational improvements, procurements, manufacturing and logistics, and organizational change. We are off to a fast start and we are confident in our ability to achieve at least the $500 million target set for the end of fiscal 2017. Let’s take a look at the operating segment. In Q1, the Chicken segment reported a record 12.6% return on sales with volume up 3.1% and average pricing up 1.5%. Industry dollar growth for retail fresh chicken was up 8% and our growth was in step with the overall strong industry growth. We maintained the number one branded share in fresh, individually frozen and Cornish chicken, and demand is very strong especially for fresh tray pack. In fact, we are still short of supply in tray pack. Now the food service industry saw much needed growth in our fiscal Q1 and I am pleased to say that, Tyson’s chicken sales growth in food service was more than double that of the restaurant industry on a sale dollar basis. The production issues in two of our value added chicken plants last year are resolved and all of our lines are operational. We are now working to build the pipeline and fulfill the pent-up demand. By the end of Q1 we had regained a little over 2 share points and we will continue to expand our distribution and regain the lost share in Tyson’s frozen cooked chicken. USDA indicates an increase in production of 3% this fiscal year. Although, other more recent data might indicate a greater increase in supply, we believe demand will more than keep pace with strong demand, a shift to a more profitable mix, strong pricing and increased further processing capacity, we now think our return on sales will be above 11% for the remainder of the year. There looks to be more chicken supply coming in 2016 as well and we are working on plans to capitalize on it. We created our buy versus growth strategy for this scenario and we see it as an opportunity to add value. The Beef segment was just under breakeven for the quarter. Volume was down 3.7% with average pricing up nearly 21%, continued record high beef prices at retail have caused a shift in consumption away from beef towards other proteins leading to margin compression in our Beef business. Despite marginal losses, we improved our position relative to industry indexes. We have adjusted our slaughter to recover margins and have already seen improvement in Q2. However, the segment will continue to be challenged in the quarter. I’ll hurry on to say that the pressure in our Beef segment has been more than offset by benefits we see from the balance of our portfolio. Our Pork segment had a 7.9% return on sales in the first quarter. Volume was up 1%, while average pricing increased 7%, indicating strong demand. We expect further recovery from the PED virus and expect industry hog supplies to increase around 2% to 3% in fiscal ‘15. It should be another good year for the pork segment and we expect results similar to last year's. The international segment had an operating loss of $14 million, which was half of the loss compared to Q1 of ’14. The sale of our business in Brazil was finalized in Q1 and we expect the sale of our Mexico assets to be completed by the end of March. There is still a tough demand environment in China. Port pricing has been pressured which also affects chicken. Wholesale poultry prices are down 10% since September and are now only about 2% above the trough we saw back in January of ’14. We will continue in a holding pattern with our operations in China as we await for the demand to improve. Regarding our International export, lower pricing has essentially offset the appreciation in the U.S. dollar allowing us to maintain our volume so far this year. Our primary concern about exports is coming from ongoing interruptions at West Coast ports, which is pressuring logistics that could eventually affect livestock producers if the situation isn’t resolved soon. Now moving on to Prepared Foods, the segment had an adjusted 5.2% return on sales for the first quarter. With the Hillshire Brands integration, volume was up nearly 90% and average pricing was up 24%. On a pro forma basis, we had an unfavorable input cost impact of $83 million, largely offset by synergy capture in pricing. We have streamlined our operation in Prepared Foods by closing plants, improving capacity utilization, as we continued to tightly manage costs, invest in our brands and drive our growth agenda. The integration is going very well and it didn’t take us long to realize that we are much stronger together. Let’s use category captaincies as an example, strategic retail customers see the benefit of leveraging our products, capabilities and expertise to grow their business and since combining Tyson and Hillshire, we have added 11 category captaincies for a total of 76, indicating our customers trust our insights and partnership in leading category growth decisions. So in terms of macro trends affecting the industry, I would like to address our perspective on the consumer marketplace and how we are capitalizing on shifting demand to grow our business and our customers' businesses. In the past quarter, consumer confidence, lower gas prices and unemployment data were tailwinds that we expect will continue to favor food spending in the New Year. But pressures like long-term unemployment and limited wage growth still weigh on a lot of people. We will talk about this situation before as the bifurcated consumer or the barbell economy and it factors into consumer spending habits, which in part drive our innovation agenda. We continue to see consumers moving from red meat to poultry and 68% say the cost of red meat is the reason they are making the shift. However, beef prices have remained at record levels because demand has been so strong among people who can afford it. Chicken is the only protein to grow annual consumption during the past four years. Lower fuel prices appear to have benefited food purchases, both at grocery and food service mainly at QSR and casual dining, which saw traffic growth in our Q1 for the first time since the recession. There are also positive growths in on-site food service such as lodging, deli, and healthcare, where we have a strong presence. If oil and gas prices continue into the summer, food service could see even more recovery. Our innovation pipeline is grounded in a strong understanding of these market dynamics coupled with deep consumer insights. As you heard at Investor Day, we are gearing up for two new product platform launches for the back half of the year, Hillshire Snacking and Ballpark jerky. This is in addition to our ongoing new product news that happens throughout the year. We grew dollar sales in eight of nine tracked categories in Q1 behind pricing, but also supported by strong distribution and new products. We will continue to build on this momentum with our advantage portfolio through brand building and innovation. We have a lot to be excited about Tyson Foods, Q1 was a great quarter. While I don’t expect the second quarter to be as good as Q1, because it’s typically our most difficult, I do expect it to be better than Q2 of last year. We are reiterating our guidance of adjusted earnings in the range of $3.30 to $3.40 a share with results weighted towards the back half of the year. We have a balanced, diversified business model and a focused growth agenda that gives me confidence that not only can we handle whatever challenges are ahead, we are going to thrive. And now, let’s go to Dennis for the financial updates.

Thanks, Donnie, and good morning, everyone. This morning I will be referring to our first quarter adjusted operating income and EPS. Please refer to our press release issued earlier this morning for a full reconciliation of our GAAP to adjusted results. Fiscal 2015 is off to a great start. With record sales, operating income and operating cash flows, we were able to reduce debt by $650 million. First quarter revenues were $10.8 billion, representing over 23% growth compared to a year ago as we continue to execute our growth strategy, as evidenced by increased sales of Chicken, Beef, Pork and Prepared Foods. Total company adjusted return on sales for the quarter was 5.2% and adjusted operating income was $534 million, representing a 37% increase over Q1 of ’14. Our adjusted earnings of $0.77 per share represent a 7% increase over a strong comparative period a year ago. We had record operating cash flow for the first quarter at $812 million and we spent $231 million on capital expenditures. This outpaced our depreciation by $83 million, as we continue to invest in projects with a focus on delivering high ROIC. Our effective tax rate for the first quarter was 28.8%. On an adjusted basis, this rate was 34.8%. Net debt to EBITDA for the past 12 months was 3.5 times and on a gross debt to EBITDA basis, this measure was 3.7 times. On a pro forma basis, including Hillshire's results for the past 12 months, net debt to EBITDA was 2.7 times on an adjusted basis. Including cash of $381 million, net debt was $7.1 billion. Total liquidity was just over $1.6 billion, remaining above our goal of $1.2 billion. Net interest expense was $75 million during the first quarter. For the quarter, our diluted shares outstanding were $416 million. As Donnie pointed out, we closed on the sale of our Brazil Chicken operations during the first quarter. As a result of the sale, we received proceeds of $130 million, with additional proceeds expected in the second quarter relating to the working capital adjustment. The sale of our Mexico operations is expected to close in the second quarter. Now looking forward, here are some additional thoughts on 2015. Please note our accounting cycle results in a 53-week year in fiscal ’15, as compared to a 52-week year in fiscal 2014. Accordingly, this outlook is based on a 52-week year to make a better year-over-year comparisons. We expect revenues of approximately $42 billion for fiscal 2015, which is 12% growth over fiscal 2014. This was driven primarily by a full year of Hillshire brands’ results, offset by a reduction from the sale of our Brazil and Mexico Chicken operations. We expect to capture more than $225 million in fiscal ‘15 from our Prepared Foods’ profit improvement initiatives and Hillshire brand synergies. Net interest expense should approximate $280 million for fiscal 2015. We currently estimate our adjusted effective tax rate to be around 35.5%. 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 average share price in Q1, we expect our diluted shares in Q2 to remain around $416 million, prior to considering any further changes in our stock price, which would impact the dilution from our tangible equity units. 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 focus on disciplined capital allocation to drive long-term shareholder value and debt capacity to fund acquisitions to fulfill our growth strategies and to return cash to shareholders through share repurchases and dividends, all while ensuring we maintain plenty of liquidity. We have a lot of momentum going in fiscal ’15, with the addition of the Hillshire business team. We are pleased with our first quarter results, delivering 7% EPS growth over Q1 of fiscal ’14. Our Q2 should beat last year but likely will be less than Q1, due to typical seasonality and the third and fourth quarters are expected to be really strong. As we continue to capture synergies from combining two great businesses, we are confident we will deliver adjusted EPS within our range of $3.30 to $3.40 for fiscal 15, which represents an increase of over 12% compared to fiscal 2014. This concludes our prepared remarks. Jane we are ready to begin Q&A.

Good morning, guys.

Good morning.

Good morning.

You noted that chicken margins are expected to be above 11% for the remainder of the year and we've seen what's going on with supply growth. It seems to be inching up a little bit. What gives you confidence in that Chicken segment guidance?

So, David, we forecasted our 2015 chicken performance using various models and I am very confident in our ability to meet our goals for 2015. If you examine our brand leadership in fully cooked and fresh chicken, as well as Cornish categories at retail, along with our strong position in food service, we have a well-balanced portfolio. Additionally, we've made significant improvements in our sales mix. I mentioned earlier that we are experiencing great growth in tray pack. We will have the necessary capacity to capitalize on the food processing business that we expect to grow in food service. Our innovation pipeline is strong, and we've implemented many operational enhancements. We will continue to reap benefits from our capital investments. Considering this balanced portfolio, our pricing structure, and other factors, we are poised to deliver in 2015.

One question regarding the food service sector. We're noticing significant demand, not only for protein but also from companies looking to enhance the protein offerings and reassure consumers about their all-natural ingredients. It's possible that antibiotic-free chicken will grow in importance in the future. Is there a potential opportunity for Tyson in this area? How significant could this shift to more natural products be, and could it potentially impose a margin constraint as demand evolves? Thank you.

That’s a great question. It appeals frankly both our food service and retail to a different consumer segment than what is broadly addressed by most of our portfolio today, which is great news for us. We’ve got a tremendous innovation engine and I think with our capabilities in our discovery center and our ability to drive innovation, I think we are advantaged in the ability to capture that. I would also add that our live production team is about as good as there is in the industry, when you look at benchmarking, they are actually. When you look at benchmarking, they are best in the industry, which I think gives us an advantage in what might be considered a little bit more challenging live production environment. So, I feel good about our opportunity to continue to capture that in the future. Our NAE line, which we launched around May last year or a little further, we doubled it since the launch and our growth continues. We are adding more and we are adding about 100,000 birds a week to that business next month. So we continue to see growth and we continue to use our supply chain to fill those needs.

Thank you.

Sure.

Good morning.

Good morning.

Congratulations on the chicken margins, I think as far as I can tell the best I can remember in history. Is that accurate?

Yes.

I want to start with a question related to Hillshire and the acquisition, focusing on the outlook for pork. It seems that supply is expected to increase for pork and hog prices have decreased, which likely lowers retail values. This should benefit a value-added pork business. Am I understanding this correctly? Additionally, what does this mean for your segment margins in prepared foods, considering you have maintained your guidance? That's my first question, and I have a follow-up.

You can expect two things. First, with the increase in supply, there should be improvements, especially in our Pork segment, which we anticipate will be stronger in the second half of the year. This adds a beneficial aspect to our portfolio. Additionally, we are focusing on enhancing our Prepared Foods business by leveraging our marketing support effectively in the retail brands to capitalize on these developments.

But how should we interpret your guidance in relation to that?

Okay. Got it. So as we mentioned on the call, Q2 is always a bit challenging and we kind of made the right comments about that. We will see the improvements back-half loaded. You will see the run rate in Prepared Foods accelerating through the year and taking that momentum into '16. And so it’s still early in the year, so we are maintaining our current guidance at $3.30 to $3.40, but there are some things at play that could certainly advantage that.

Okay. And then on chicken, this quarter obviously very good, especially given that the spot margin sequentially declined yours expanded, so your advantage relative to spot expanded as well. So in light of that, you’ve obviously commented on the Analyst Day that if and when the cycle turns, you will be 500 basis points above on margins. So can you just conceptually help us understand why your business today is in a position to deliver those types of margins even if the industry is not making money?

As we discussed in New York, we have a well-balanced portfolio across different bird classes, tray pack sizes, small birds, large birds, and other sizes. This, combined with the pricing structures we've established with our customers over the past couple of years, gives us a balanced approach. We maintain a strong balance between pricing strategies, some of which are market-related and others that are not. It’s important to note that our values are much more closely tied to the whole bird market rather than breast meat values. Additionally, I should mention that a portion of our portfolio is linked to market pricing, while another portion is very balanced with outside market factors. When prices drop, only the section of our portfolio based on market prices is affected. We also benefit in other areas of our portfolio from the reduced costs of raw materials. Moreover, we have a strong brand presence, holding the top position in retail food, which we are revitalizing. We are also leading in fresh tray pack and Cornish categories and have a prominent presence in foodservice. All of these factors combined, along with our buy versus grow strategy, position us favorably to capitalize on these circumstances.

Great. I will pass it on.

Hi. Thanks, Donnie. I think you’ve covered what happens when supply expands, but is it fair to say that the access that came out and the industry data were above your expectations, because I seem to remember at the Analyst Day you saying that you don’t think the 3% growth would continue. Is that fair to say?

That is fair to say, yes.

Okay.

What I was expecting was we had that gap because people took us last season that they didn’t take this season and I expected that to level off after January and that has not happened. So that 3% type number has continued.

Whole bird prices have consistently increased. There has been some fluctuation in the prices of commodity fresh meat parts. What might prevent whole bird prices from continuing to rise? I am concerned about the growth in supply. You believe that demand will be strong enough to counterbalance this, but is a 3% increase in supply not sufficient to halt the upward trend in whole bird prices?

Frankly, we’ve modeled past that and still with our pricing structures and the balance of how we go to market, we are still in good shape as supply increases above what a 3% access might indicate. Our buy versus grow strategy is we care a lot more about how much chicken we sell than how much we grow. And if you look at the last three weeks, we are over a billion slaughter pounds. So since the beginning of the year, slaughter has increased something on the order of 7%. And if you look at particularly front half, I think wing standards and breast meat, that’s up 15%. So there is every indication that demand is more going to offset the supply increases.

Okay. We are all ended is on corn prices, obviously very benign and your cost structure is getting better because of that. Let’s say, corn, I am sure you’ve been asked this question before, but let’s say if we get another increase in corn and it goes up to $6 instead of $4, how much of that is contracted with your customers as a pass-through? I seem to remember it being a pretty large number now.

Yes. We have what we call those fixed margin contracts and we have and I won’t necessarily mention the bird types, but we are having particularly two of our classes of business. We have extended those types of contracts fairly dramatically so that that raw material cost doesn’t impact our margins. Now in super high commodity price margins like maybe we saw last summer, we gave up a little bit we know that, but we want to have stable consistent earnings growth which we are displaying now and using our buy versus grow strategy, our pricing models and certainly our innovative capability to continue to perform well for our customers. That’s how we are going to continue to stable earnings growth.

So that commodity benefit that you are talking about this year, that’s gross, isn’t it, that’s not net of what you have passed back to customers, or is it net?

Yes, that’s correct. It’s the changing like $400 million I think. We originally when we went into the year thought we would have about $450 million plus maybe benefit. And so far, it’s only about $400 million, but that is in our cost of goods. And frankly, some of that does weaken pricing.

Can you say how much?

No.

Okay. I will make my own judgment. All right. Thank you.

Yes, good morning everyone.

Hey, Adam.

I'm trying to evaluate how we can assess the combined performance now that we have completed four quarters with Hillshire. Last year, the Prepared Foods segment generated $60 million in profit, while Hillshire reported $116 million on a GAAP basis. You mentioned $60 million in synergy capture. Is that figure a run rate or was it realized in the quarter? I'm considering the $132 million pro forma compared to the $111 million realized, and how the synergy, along with the impact of inflation, can help us understand the performance relative to the pro forma value.

Good question. In the Prepared Foods segment, the raw material impact was $83 million. The synergy capture was accounted for in Q1 and is not a run rate. I believe $55 million of the $60 million was in the Prepared Foods segment. To put it into perspective, we typically lock in raw material supply for about six months at Hillshire. In Q1, we experienced high raw material costs that will have approximately a $140 million impact in the first half of our fiscal year, but we expect some relief in the second half. Additionally, we closed some plants, allowing us to consolidate production and improve capacity utilization. Demand has been strong across all our brands, with sales growth in eight of nine categories and market share gains in five of nine categories. I feel very optimistic about our momentum moving forward.

Okay.

Does that help?

It does. Regarding the synergies, considering where we stand today, we realized $60 million in the December quarter. What is your current annualized run rate? Within the total of over $225 million, which areas are contributing to the positive outlook in the 2015 plan compared to a few months ago? Also, as we move forward, you mentioned some factors that are not included in the $500 million plus target, such as internal raw material procurement and faster organic growth. Do you have any updates on those areas?

So I’ll start at the back and work my way to the front. It’s a bit too early although we have teams now that are beginning to action projects that will affect us in ‘16 and ‘17. So we’re coming into a bit more clarity but we’ve still got open projects. We’re still building projects that will affect us in ‘16 and ‘17. So it’s just a little bit too early for us to comment on that. On ‘15, the operational improvements in the legacy Prepared Foods business were a bit more than we were expecting. They came a little earlier. And frankly we’ve got some purchasing synergies in Q1 that we were expecting to see a little bit to see until probably Q2 or Q3. So I feel comfortable we’ll be better than the $225 million. It’s a little too early to call because the over delivery in Q1 which really pulled in forward some benefit that we had originally expected to get in Q2. So I hope that helps.

Very helpful. I will pass it along. Thanks very much.

Thank you.

Thanks.

Thank you for the question. I wanted to elaborate on what Adam mentioned regarding year-on-year comparisons. Last year, Hillshire generated $1 billion in revenue with $139 million in EBIT. This year, after excluding synergies and the $83 million in costs, we still see EBIT at $139 million, while revenues have significantly increased. Whether you consider it as Tyson expanding Hillshire or Hillshire contributing to Tyson, I find it difficult to understand how we could add $1.2 billion in revenues without a corresponding rise in EBIT, even when excluding those costs and synergies. If this isn’t clear, I can explain further after the call. I’m struggling to see why the margin wasn’t higher.

Ken, let me give you one point to bear in mind. Incremental depreciation and amortization year-over-year for Hillshire because of the step-up around purchase price accounting is more than $40 million. So part of it is in that story.

Yeah.

Even though I think you're right, it's probably going to take a long time. Let's discuss this separately.

Okay. We’ll do it offline. I appreciate D&A’s part of it.

Prepared Foods has incurred raw material costs upfront that we anticipate recovering in the latter half of the year. We expect margin improvements to increase sequentially each quarter throughout the year, which should carry momentum into 2016. Therefore, we are very optimistic about our performance and see the potential for some positive trends that could exceed our current expectations.

Good morning and thank you for the opportunity. Donnie, reflecting on the past several years, I've noticed a lot of discussion about high gas prices and weak consumer outlook in the quick-service restaurant (QSR) sector, which you mentioned. However, I expected perhaps a bit more enthusiasm regarding the QSR outlook. I believe that there will be a significant amount of spending that will transition from gas expenses into breakfast and various QSR revenues. What are your thoughts on this?

Seeing casual dining actually grow traffic for the first time since the recession is a very positive indication. You are correct that quick service restaurants are at the forefront of this growth. If we exclude one large quick service restaurant, the sector has experienced a 3.6% increase. This presents significant potential. It's noteworthy that in food service, younger brands are outperforming their more established counterparts, which is an interesting trend we can leverage. Additionally, I mentioned our strong off-site presence; our deli and retail business is performing exceptionally well, showing a 3.5% growth. Other off-site categories, including lodging, are also growing by 3.5%, and we have a strong presence there as well. We remain optimistic about this area. While we currently do not have a quick service restaurant promotional order in place, we are engaged in numerous discussions. We anticipate that ground beef prices will remain relatively high, leading food services to promote chicken this year, which bodes well for us. This situation also aligns with our buy versus grow strategy. We will have four additional food processing lines in production by late spring, so we are prepared. Last year, we missed out on some promotional opportunities due to capacity constraints, but this year we are ready to take advantage of them.

Okay. Just a quick follow-up on beef. It seems like you adjusted slaughter rates down a bit. Did this catch you off guard in the first quarter? Were you operating at too high of a rate? Normally, I would expect the second quarter to be worse than the first, so I was surprised that you actually lost money in the first quarter.

I wouldn't say we are out of position. Cattle availability in our area remains decent, although they are still moving to the Midwest for feeding due to freight rates affecting corn transport outside the corn belt. Cattle are continuing to head toward us. We did put some cattle forward, and when I observed how quickly cattle prices responded to market signals in Q1, it indicated strong demand. The latest cattle on feed report suggests that some cattle were pushed forward, which should benefit us in the latter half of Q2 and definitely into the spring. Historically, the first half is weaker than the second half, and we evaluate our cattle business seasonally rather than quarterly. It may have shifted by a month or two from our initial expectations, but we are well-positioned to capitalize on it. Our performance index against USDA numbers has improved, and that's what I'm focusing on.

Hi. Good morning.

Good morning.

Good morning.

On two questions, the first, Donnie, you had highlighted that tight supplies of pork and beef are supporting demand for chicken? Kind of going forward as pork becomes more available? How much pressure do you think that will put on chicken and is there any particular sector it will have more of an impact versus the last?

For expense reason it will put some. But typically, if you look at the per capita consumption data, per capita consumption of pork is relatively flat and we export about 25% of the pork that we produce. That’s a little bit of concern on the West Coast now. But in general, the global demand for proteins, for pork particularly continues to grow and so we'll export more. And like I said, the prices have dropped to offset the increase in the value of the dollar. So it's not so much a pork versus chicken story as it is a beef versus chicken story and beef prices are going to remain relatively high. Plus don't forget, as pork prices drop, in our portfolio, we get an offsetting benefit or an additional benefit in Prepared Foods that might offset any softness in chicken prices, for example, that type of thing.

That’s helpful. And going on to Prepared Food, you’ve said that at this year you expect $225 million or so in synergies and over three years $500 million. Could you just help bridge the $225 million to $500 million? Kind of key buckets that you’re looking for in terms of where those cost savings are going to come from?

There are four buckets, operational improvements in Prepared Foods that largely come in fiscal ‘15. Procurement, frankly, we would get some benefit in ‘15 but more benefit as we get out into ‘16 and ‘17 and then we’ll also begin to pick up additional synergies in manufacturing and logistics as we get the network built out and that type of thing. For this year, and I think we said this in New York that we’re looking for about a $140 million in the operational improvement bucket in ‘15, $40 million in procurement, $25 million in plans and in logistics and then $20 million from kind of G&A savings if you will. If you move forward, you get more and more savings in procurement, you get more savings in manufacturing and logistics and network optimization. And then into ‘16 and ‘17, those buckets begin taking the majority of the synergy versus the initial legacy Prepared Food changes in ‘15. Does that help?

That’s very helpful. Thank you.

You bet.

Hi. Good morning, gentlemen.

Good morning.

I had a question, Donnie, on Prepared Foods. I just want to understand more of the competitive dynamic within packaged meat right now, what you are seeing and hearing? And really what I'm getting at here is as some of these laws come off, I want to try and understand Tyson's ability to drive margin alongside its innovation schedule, if that makes sense? So just wanted to see what you're hearing and seeing on the competitive dynamic front within packaged meat?

We will continue to enhance our profitability, primarily through ongoing support for the innovation currently in the marketplace. We're also planning to expand our innovations into new categories in the latter half of the year, which will provide additional support. So far this year, we are right on track with our expectations. We will make some adjustments to our marketing support for our anytime launch, as the velocity isn't where we hoped. Although distribution is strong, we need to improve velocity, which we plan to address in the second half of the year. We are in good shape within our categories, which are performing well. By strategically adjusting our spending throughout the year to balance volume and profit, and with a solid understanding of raw material trends, we aim to maintain and accelerate margin growth through this quarter and into the second half of the year.

Okay. And you just offered me a segue, over to back to chicken rather. It's nice to hear you guys that we are seeing here recently and your confidence in being able to not only perform, but take your expectations higher. And you talk about the strong demand. I’ve seen you quoted in an article, where you said that higher beef prices were maybe driving a 3% improvement in chicken demand. We understand there is a very large QSR out there buying chicken for an H1 Promo. And I suppose that this demand step up can help eat its way through these extra supplies that we are seeing. But you're going to continue to see that supply growth with where we see smooth pork data. That portends a 3% or higher headcount, you have weights that had been running higher. And so as we get past summer, when maybe some of this demand comes off a little bit, we worry a little bit about that supply-demand pricing dynamic. And so I’d love for you to just address as we move ‘15 into ‘16 here, what protects you again better than the rest. I know you said some things regarding that. But also more so, I don't want to put you on the spot with 2016. But your confidence alongside chicken with the rest of your business in this company being able to drive earnings growth in years ahead, not just 2015, but beyond that I appreciate it?

Let's discuss four components. I agree that recent data suggests supply will be higher this year. However, our focus is not on growth alone, but rather on our sales performance. We'll adjust our production in line with our projected demand. We aim to balance our operations and have a buy versus grow strategy that allows us to purchase raw materials when there's an imbalance, ensuring we’re not left with surplus. Additionally, there is significant growth in the tray pack segment, where we excel as a supplier. We're expanding our capacity in this area, benefiting from high retail beef prices. We're also enhancing our further processing capabilities to capitalize on opportunities in retail and food services. We offer a well-rounded portfolio, with a good mix of bird sizes and tray packs, which helps us maintain flexibility. Our pricing strategy is tailored based on market conditions and raw material costs, allowing us to protect our margins while supporting our customers' growth. Our commitment to strong service and innovation stands out, as customers value what we provide. We have also been investing significantly in our chicken business and improving our efficiency. For example, when we faced production issues in our fully cooked segment, we were able to increase capacity by an additional million pounds a week at one location. Ultimately, our ability to leverage consumer benefits through our portfolio, combined with our customers’ reliance on us for innovation and quality, along with our balanced strategy, creates a successful formula for stability and growth in our earnings. This is why we are optimistic about 2015 and confident in the prospects for 2016, as we foresee similar favorable dynamics continuing.

All right. Thanks Donnie.

Good morning. And thanks for taking my question. My first question is around your buy versus grow strategy. Now that supply growth seems to be a little bit ahead of your initial expectations. Can you give us an update of what percentage you are buying in the second quarter and how much you see that growing year-over-year in fiscal 2015?

I’ll give a general answer. I don’t want to be very specific. The amount we buy will be balanced against the amount that of our other pricing that has market exposure. So we are very balanced there, kind of gives us an internal hedge, plus there are some parts of our business where I try to act a smaller bird. We have to grow the bird. In other parts of the business, we don’t. And so the way we are set up, we think we have a very good demand picture and we see demand very strong out in front. And we have built our supply chain to be able to buy raw material to fill that demand. We’ll buy, put it in our further processing plants and fill the demand.

Great. My second question, I may have missed this earlier. Have you set a target for full year debt reduction in 2015? It seems like that’s a key component of potentially driving accretive earnings power from ‘15 into ‘16?

Sure, Tim. We are expecting, at least $1.2 billion, maybe a little bit more.

Perfect. Thanks for your time.

Good morning.

Good morning.

Congratulations on your quarter.

Thanks.

I wanted to ask about the outlook for 2015 and my conversations with clients suggest that things might decline in 2016. Specifically, regarding the quick-service restaurant sector, while chicken purchases tend to be stable, I wonder if gas prices remain low and wage rates continue to rise, as many states are increasing their minimum wages again next year. With no additional beef supply expected for at least two to three years, I'm curious if you're hearing anything from the quick-service restaurant sector that indicates demand might simply be temporary or if there is a genuine interest in chicken that could sustain into the future. Additionally, I noticed the positive adjustments in your outlook across major segments, particularly with lower interest expenses and improved chicken margins, yet the earnings guidance remains unchanged at $330 million to $340 million. Is there a specific reason you're not updating your earnings range today? These two inquiries are interconnected. Thank you.

Sure. Sp, I agree with you. I am not hearing anything that would indicate to me that there is a cliff in demand, frankly, quite the opposite. And here is how I think about, let's say '16. And, hey, it is early to your point on guidance, it’s early in our year. And so you are right, the outlook is positive when you balance all of the factors, but it's just early for us. So here is how I think about it. Number one, we've got advantage brands and advantage categories. We've got leading brands with leading share and categories that are very meaningful to consumers. And we will continue to see growth, not just based on categories, but also and more importantly based on our brand building capabilities and our innovation pipeline. In 2016, obviously we will have an accelerated, an incremental year in capturing the synergies. As I mentioned earlier, we are setting our supply up to be able to take advantage of whatever industry supply we see to meet that demand. I believe we will continue because of the shortness in cattle supply, we will continue to see red meat pricing high and that will provide an umbrella for the alternative proteins because the relative value of chicken to beef, I think remains largely unchanged over the next couple three years. We're going to have new tray pack capacity, we will have new fully cooked capacity, and that will be in our results. I think cattle frankly and hogs are moving closer to us, so that advantages us there. As you mentioned, we're going to generate a lot of cash and we will continue to improve the balance sheet and create optionality for us. We've got a strong CapEx agenda to continue to grow the business and add to our profitability. If you just look at the lower interest costs in the future and the stock price goes up, the change in tangible equity units will help bps. Again, so there is just a lot of reasons to be optimistic now about our 2015 guidance, it’s just early.

Yeah. Thanks for the question. Just wanted to circle back and sort of take sort of a multiple year view and maybe you can talk a little bit specifically first on beef. When you think we might be able to get back to normalized margins or if cow’s supplies are going to remain tight through 2016 and maybe even the beginning of '17, when we might expect to return to normalized margins? And then the second follow-up question would be on Prepared Foods. It definitely sounds like there is a headwind from the raw material cost that will continue into Q2. But what is the pathway to 10% to 12% margins and should we expect sort of straight-line growth from this point forward? Thanks.

So in terms of beef, the supply will probably be flat to down 1% again next year. And I think it may take four or five years to rebuild the herd back to the 2013 levels. But I think over time the margins in our beef business will improve. In Prepared Foods, you're right. We've got some front-end headwinds on raw materials. We talked about that. It will dramatically improve in the back half and we will continue to grow our margin potential, one, as we gain the synergies in the out years. Plus we continue to grow the brands.

Hey, good morning, everyone.

Good morning.

Let me just go back to this business. It seems like, again the supply of hog is far greater than anybody expected. It seems like we might actually be swimming in hogs in the next year or two. When you are thinking about your forecast on the 10% to 12% longer-term as well as the nearer-term, how much of this recent movement in the hog price as well as the lower pork costs were really incorporated in your expectations, both on the pork packer site as well as the input cost to the Hillshire?

Frankly, none, Ken. As you look out front, what we did is we took, let's say five-year average pork prices and then layered in the synergy capture and then what we felt like we could do by organic growth in those categories, that's how we came to the 10% to 12% number. So any benefit that frankly our Pork segment and our Prepared Foods segment would see from an increased hog supply has now been factored in.

Okay. Let me see if I understand it. So you took up your chicken margins to 11%. You had more synergies than the $225 million because you are on the run rate of $240 million. You’re seeing more hog supply, you started buying back stock and you lowered your interest expense and yet you think your expectations are still $330 million to $340 million?

I think it's early, but I like your story.

I was just making sure I wasn’t confused.

No, you got it. You absolutely have it.

Okay. And then my last question is cash flow. Just to make sure I understand this. You actually started buying stock, although it’s little off to the conversation earlier than I think you expected. So I think your cash flow is better than you expected. What is that attributable to?

Seasonally in the first quarter, we typically have our cattle and hog producers. They don't want to be paid in December for cash tax reasons. Typically that deferral that carries over at the end of December is in the neighborhood of $200 million and $250 million. This year it was more than $400 million. So there was a little bit of extra cash that we would redeploy in the quarter.

Maybe you guys will stop buying stock today. Anyway, thanks a lot.

Thanks, Ken. Thank you, everyone. So we are off to a great start towards another record setting year for our company and we’ll continue to accelerate our growth, but as an insight-driven, consumer-centric branded food company. And as always, we appreciate your interest in our company and I hope you have a great weekend.