tyson foods (tsn) earnings report: q4 2014 …s.t.st/media/xtranscript/2014/q4/12957238.pdfto...
TRANSCRIPT
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
CompanyName:TysonFoodsIncCompanyTicker:TSNSector:ConsumerGoods
Industry:Food&BeverageEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page2of 21
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.
CompanyName:TysonFoodsIncCompanyTicker:TSNSector:ConsumerGoods
Industry:Food&BeverageEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page3of 21
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.
CompanyName:TysonFoodsIncCompanyTicker:TSNSector:ConsumerGoods
Industry:Food&BeverageEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page4of 21
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.
CompanyName:TysonFoodsIncCompanyTicker:TSNSector:ConsumerGoods
Industry:Food&BeverageEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page5of 21
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
CompanyName:TysonFoodsIncCompanyTicker:TSNSector:ConsumerGoods
Industry:Food&BeverageEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page6of 21
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
CompanyName:TysonFoodsIncCompanyTicker:TSNSector:ConsumerGoods
Industry:Food&BeverageEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page7of 21
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.
DonnieSmith(PresidentandCEO):
CompanyName:TysonFoodsIncCompanyTicker:TSNSector:ConsumerGoods
Industry:Food&BeverageEventDescription:Q4 2014 EarningsCall
©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.
KenGoldman(Analyst-JPMorgan):
That'shelpful.IfIcanbeveryquickonthefollow-up.Youmentionedeventhoughnextyearhasanextraweek,itemsinyouroutlookarebasedona52-weekyear.Butjusttobeclear,whenyoutalkaboutthat$3.30to$3.40inEPSisitfairtoassumethatrangeis53weeks,oristhatalso52,withupsideofthatnumberfromtheextraweek?
DennisLeatherby(EVPandCFO):
Ken,that'sfor52weeks.
KenGoldman(Analyst-JPMorgan):
Okay,thankyou.
CompanyName:TysonFoodsIncCompanyTicker:TSNSector:ConsumerGoods
Industry:Food&BeverageEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page9of 21
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.
DonnieSmith(PresidentandCEO):
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.
Bret t Hundley(Analyst-BB&TCapitalMarkets):
Thankyoumuchforthat.Andthen,Dennis,Ihadafollow-upquestionasitrelatestothebalancethatyoutrytostrikebetweenlookingatfurtherM&Atargetsoutthereandthendebtpaydown.I'mjustcurious,isthereacertainlevelofdebtpaydownandthenaswitchgetsflippedandyoucansay--allright,wecanstartlookingatM&Aagain?CanyoulookatM&Arightnow?
Andasafollowontothatquestion,iftherewasafoodservice-focusedtargetoutthereinpackagedmeat,doyouthinktherewouldbeanytruckissuesforyouguysgoingaheadandacquiringsomethinglikethat?
DennisLeatherby(EVPandCFO):
Okay,greatseriesofquestions.ThewaywelookatM&Ainourcapitalstructureisthatweputtogetherthisfinancingandcapitalraiseamannertoensurewehaveinvestmentgraderatings.RightnownetdebttoEBITisaround3times.
We'regoingtothrowoffabetterpartof$1billioninfreecashflow.We'regoingtoraiseanother$500millionthroughthesaleofMexicoandBrazil.Sothatwillbeusedtodelever.
AndweseenetdebttoEBITDAtrendingtoward2timesbytheendofthisfiscalyear.Thatputsusinapretty
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goodplacetoreleverage,ifwesochoose.Wethinkthatwe'reinamuchbetterpositionfromastabilitystandpoint,fromanearningsandcashflowstandpoint.
So,we'reinareallygoodpositionandwe'recertainlyreadyandwillingtolookatM&Atotheextentitmakessenseforusanditfulfillsourgrowthstrategies.AsfarasfoodservicegoesI'mnotsurethatIknowhowtocommentonthat.
Bret t Hundley(Analyst-BB&TCapitalMarkets):
Thankyou.
Operator:
Thankyou.AdamSamuelson,GoldmanSachs,yourlineisopen.
AdamSamuelson(Analyst-GoldmanSachs):
Yes,thankyou,goodmorning,everyone.MaybealittlemoredetailontheChickenoutlookandasyouthinkaboutthe7%to9%normalizedrange,howshouldwethinkaboutthefurtherprocessingpercentofthemixonanormalizedbasisgoingforward?Clearlythat'ssomethingthat'schangedinhowyourunthatbusinessasadrivertonormalizedprofitabilitytodampenthecyclicality.Butaswethinkaboutthefurtherprocesshowbigisthatofyourearningsmixatthispoint?
DonnieSmith(PresidentandCEO):
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
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withbonelessskinlessbreastmeat.
So,we'rechasingthatnewdemographicshift,too.Thatmayhavebeenamuchmoredetailedanswerthanyouwerelookingforbutwe'reveryoptimisticaboutthedemandinourchickensegment.
AdamSamuelson(Analyst-GoldmanSachs):
Iappreciatethecolor.Andthenjustasafollow-up,yougavesomegooddetailonthedemandside.Onthesupplysideyoudoownoneofthemainprimarybreedersintheindustry.CanyoutalkaboutwhattheCobb-Vantressorderbooklookslikeasyouevaluatetheoutlookforsupplygrowthinparticularly2016?
DonnieSmith(PresidentandCEO):
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.
AdamSamuelson(Analyst-GoldmanSachs):
Thanksverymuch,I' llpassitalong.
Operator:
Thankyou.OurnextquestionisfromDianeGeisslerwithCLSA.
DianeGeissler(Analyst-CLSALimited):
Goodmorning.Youhadcalledoutinyourpressreleasethattherewasanegativeimpactfrompurchasingproductintheopenmarket,whichIthinkisobviouslypartofyourbuy-versus-growstrategy.Butwasthatasurprisetoyouthatitjustrosemorerapidlythanyouexpecteditto?Andisthereanywayyoucanquantifyhowmuchthatwasaboveyourexpectations?
DonnieSmith(PresidentandCEO):
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
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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.
DianeGeissler(Analyst-CLSALimited):
Okay.So,itsoundslikeitwasmoreofaproductionissueratherthanyoumisjudgingthemarket?Isthatafairstatement?
DonnieSmith(PresidentandCEO):
Byandlarge,Ibelievethat'scorrect,yes.
DianeGeissler(Analyst-CLSALimited):
Okay.AndthenIwantedtoaskaboutChinawhereobviouslythehopesarethatbusinesswillgetsometractionandreallystartpullinginsomeearnings,especiallywithwhatwe'veseenintermsofgrowthfortheQSRchannel.Butit'sbeensucharockyroadforthosecompaniestherewithqualityissuesoneafteranother.
Couldyoutalkalittlebitaboutwhatyou'reseeinginChinaandwhatyourcustomerbaseistellingyou?Iwouldthinkthatwaswhathappenedoverthesummerwithoneofthelargesuppliersthere,thatsomeofthesecompanieswouldbeknockingloudlyonyourdoorandlookingforsupply.Butthatdoesn'tseemtobethecasesojusttalkalittlebitaboutwhatyourcustomerbaseissayingthereabouttheirproclivitytouseyouasasupplier.
DonnieSmith(PresidentandCEO):
Withoutbeingtoospecificaboutanyindividualcustomer,theissueiswiththeseback-to-backfoodscares,demandforpoultryisdown.Imentionedinourpreparedremarksthatweremaininabitofaholdingpattern.Andwhatthatmeansisthatwehaveacquiredlanduserights,andwehavethecapabilitiestobeabletobuildonthoseparcelsoflandwheneverwestartgettingsomedemandsignalsthatwouldindicatethatit'stimetodoso.
Wesawalittlebitoflightintheday-oldchickmarket,andthenwesawalittlebitoflightinthemarketbirdpricing,butthenthislastmarketscareitonceagaindecreasedthedemandfortheproductSo,Idothinkitvalidatesourmodelthat,withthissafetyfromthefarmallthewaytotheretailerortothefoodservicecustomer,thatwe'reontherighttrack.
Asyoucanwellimagine,it'sabitfrustratingwhendemanddropslikeithas.AndcertainlyIthinkourcustomersunderstandwhatwehavetodeliverinourmodelandwhatthatcandotohelptheirbusiness.Andwefeelifwegetanylightatallinthedemandforpoultrythatwe'llstartseeingsomeimprovement.
DianeGeissler(Analyst-CLSALimited):
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Haveyourcustomersgivenyouanyindicationofwhentheyexpecttoseedemandsnapback?
DonnieSmith(PresidentandCEO):
Wereallyhaven't.
DianeGeissler(Analyst-CLSALimited):
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?
DonnieSmith(PresidentandCEO):
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%.
TimTiberio (Analyst-MillerTabak):
Great.Andjustonelastfollow-upquestion.LookingatsomeoftheoverlapinthelegacyandHillshireBrands,hastherebeenanyfinaldecisionsofwhichbrandsarestaying,particularlyinthebreakfastcategory?Howshouldwebethinkingaboutthataswemodeloutthatdivisiongoingforward?
DonnieSmith(PresidentandCEO):
Icantellyouthatwediscontinuedanyinvestmentatall-inDayStartsoranyoftheBightbrandsausagethatweweredoing.AllofthatobviouslywillgointoJimmyDean.
Wehavebeenfairlysuccessful,though,aboutnotlosingthoseslots.Andwe'vebeenabletoworkwithourretailerstobeabletoslotJimmyDeanbrandedproductsintotheslotsthatpreviouslyDayStartshad.Andwe
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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.
TimTiberio (Analyst-MillerTabak):
Great,thanksforyourtime.
Operator:
Thankyou.OurnextquestionisMichaelPikenwithClevelandResearch.
MichaelPiken(Analyst-ClevelandResearchCompany):
Yes,goodmorning.IjustwantedtogetalittlebitmoreofanupdateforyourexpectationsforhowbigofanissuePEDvmightbethiswinter,andwheretheindustryisfromboththebiosecuritystandpointaswellastheefficacyinsomeofthevaccinesthatarebeingworkedon.Thanks.
DonnieSmith(PresidentandCEO):
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.
MichaelPiken(Analyst-ClevelandResearchCompany):
Okay,great.Andthenjustasafollow-up,justthinkingaboutPorkandreallyyouroverallbusiness,withtheacquisitionofHillshire,whatshouldwebethinkingaboutasexportsinthefutureasapercentageofyouroverallsalesforbothporkandbeef,andchicken,aswell.Thanks.
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DonnieSmith(PresidentandCEO):
Roughlythesame.Idon'tseeasignificantshiftonewayortheother.TheindividualpartmaychangebutIdon'tseeasignificantshiftinexports.
MichaelPiken(Analyst-ClevelandResearchCompany):
Okay,thankyou.
Operator:
Thankyou.OurnextquestionisfromFarhaAslamwithStephensInc.
FarhaAslam(Analyst-StephensInc.):
Hi,thanksfortakingthefollow-up.Myquestiongoestoconsumerdemand.Throughoutyourcallyou'vebeenveryconfidentabouttheoutlookfordemandinyourbusinesses.
Couldyoutalkaboutjusthowtheconsumerisapproachingproteinandhowperhapsretailersaremanaginginventorydifferently?Becausewe'rehearingthelargestretailerintheUShasbeenexpandingmeatinventories,particularlyinthefrozenareabecausethey'vebeenseeingverystrongdemand.
DonnieSmith(PresidentandCEO):
Farha,Ican'tcommentaboutwhatindividualretailerswilldobutIwilltellyouaboutourbusiness.Asyouknow,withthereallyhighbeefprices,beefvolumeisdown.Andaswelookforward,bothatretailandatfoodservice,wecontinuetoseethatfavoringchicken.
Wethinkchickendemandwillbeupatleast3%nextyearandIwouldthinkagainin2016,becausewealreadyknowthatthebeefsupply,thebeefherdisgoingtobedownanother4%,whichportendsprettyhighbeefpricesagainintothefuture.Sowethinkthatisastrongdemandsignalforchicken.
Andalsothere'sagenerationalissuethatwe'rebeginningtoseeinthemarketplacewithmillennialsenteringthemarketplace,andtheyindexquitehighversuschicken.So,wethinkthatisalsogoingtobedrivingconsumerdemandforchickenoutfront.Doesthathelp?
FarhaAslam(Analyst-StephensInc.):
Yes,that'shelpful.Andthenjustasafollow-up,asyouseethecombinedTyson-Hillshirebusiness,couldyoujustcommentongoingtomarketasacombinedcompany?Haveyouidentifiedyetanyadvantagesthatyoucanpointtoaboutthatcombinedentityversuseachcompanyindividuallygoingtothemarket?
DonnieSmith(PresidentandCEO):
Absolutely.Bringingtogetherthesegreaticonicbrandsthathaveverystrongmeaningfulpositionsintheircategories,andourabilitytotakethisnewinnovativeandinsights-driveninnovationandbrand-buildingcapabilitiesthatarecomingintothebusinesswiththeHillshireteam,andbeingabletoworkwithourcustomerstobeabletodrivethecategoriesthatdrivetheirgrowth,that'saverymeaningfulchangegoingforward.
Asyoulookatthecategories,particularlyatretail,thataregrowing,say,justforexample,infrozen,ofcoursebreakfastisgrowingacrossrefrigeratedandfrozen,butfrozenbreakfast,particularlyfrozenhand-heldbreakfast,isagreatcategory.Frozenfully-cookedchickenisagreatcategory.Andwecertainlyhaveleadingpositionsinbothofthosecategoriesandgreatinsightsabouthowtocontinuetodrivegrowforward.
Imentionedinmypreparedremarksthesnackingplatformandwelookforwardtothegrowththatwe'llseein
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thatsnackingplatform.Wealsohavegreatbrand-buildingcapabilitiesnowaroundourNatureRaisedFarms,noantibioticever.
We'veseendouble-digitgrowth.Andwe'rejustputtingtogetheraphenomenalteamofinsights-driveninnovatorsandbrandbuilderswhocancontinuetotakethisportfolioofproductsandgrowourcustomers'businessesandmeettheseconsumerneedsastheychange.So,we'reveryoptimisticabouthowthatwilldriveourfuture.
FarhaAslam(Analyst-StephensInc.):
Fantastic.Andjustonelastquestion.AboutMexico,wecontinuetoheardiseaseissuesimpactingMexicanchickensupplies.IsthatimpactingUSchickenavailability?Orhaveyoubeenableto,ortheindustry,beenabletoworkaroundthatintermsofsupplyavailableintheUS?
DonnieSmith(PresidentandCEO):
Idon'tseeitimpactingthesupplyavailableintheUS.Itdoesattimesimpactthedemandforexportlegquarters.
TherearetimeswhendemandforexportlegquartersfromtheUSintoMexicoisratherstrong.Andthenmaybeinresponsetosomeofthediseaseissuesthemarketdowntherebecomessaturatedasmorepeoplebringbirdstothemarketanditchangesalittlebitthedemandfortheexports,thelegquartersgoingdownthere.Butthat'sreallyabouttheonlyimpactweseetotheUSmarketfromMexico.
FarhaAslam(Analyst-StephensInc.):
Great.Thankyouverymuch.
Operator:
Thankyou.OurnextquestionisfromKenZaslowwithBankofMontreal.
KenZaslow(Analyst-BMOCapitalMarkets):
Goodmorning,everyone.Justacouplequestions.HowmuchofthesynergieswouldhavebeenfromlegacyTysonofthat$225millionandthe$500million?
DonnieSmith(PresidentandCEO):
Abitover$100million.Somewhereprobablybetweena$100millionand$150million,somethinglikethat.Mostofthosewouldhavebeenintheyearone,socallit$100millionto$150millionofthe$225million.Andthengoingforwardit'smoretheincrementalvalueoftheHillshire-Tysoncombination.
KenZaslow(Analyst-BMOCapitalMarkets):
Great.Andmysecondquestionis,whatistheunderlyinggrowthoutlookforHillshire?Itseemslikefromyour--exsynergiesandexobviouslylegacyTysonbusiness--becauseitseemslikeyou'rejustusingthe$400millionofEBITfromlastyearandjustrollingthatforward.I'dbesurprisedthatyou'dbebuyingabusinessthatyouwouldexpecttohaveflatgrowthinayear.
DonnieSmith(PresidentandCEO):
Yes,we'reoptimisticaboutthegrowthofthebusinessgoingforward.Ken,rememberourcommentsaroundtheincremental$140millionorsoofrawmaterialpricingcoming,andthat'sprimarilyaroundbeefrawmaterialsandturkey,which,frankly,theHillshirelegacybusinessoverindexestowardsthebeefrawmaterialincreasesversuswhatthelegacyTysonbusinesswouldhavedone.Thinkthebeefandsausageandhot
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dogsandthatkindofthing.
So,we'repricingtorecoverthat.Andwewill,particularlyaswe--theearningscadencewillbeback-halfdriven.So,inyearonewe'repricingtorecoverthoserawmaterials.
Certainlyaswemoveforwardandwegetbeyondthatthenwe'llbeabletodrive,Ithink,fairlysignificantincrementalgrowthwithsomeeffectiveMAPspending.So,we'reveryconfidentinthegrowthofthosebrands.
KenZaslow(Analyst-BMOCapitalMarkets):
Butwouldn'tyourturkey--Ithoughtturkeyexpansionishappening--I'dexpectthatturkeypricestostarttorolloverthenextsixtoninemonths.Isthatnotwhatyou'dexpect?
DonnieSmith(PresidentandCEO):
Ourprojectionforturkeyrawmaterialsimpactingourbusinesswillbeupin2015versus2014.
DennisLeatherby(EVPandCFO):
Ithink,Ken,itbearsrepeatingthatthisisgoingtobeabigfront-half/back-halfstoryasweovercometherawmaterialinputprices.So,you'llseequiteabitofliftinPreparedFoods,bothinovercomingtherawmaterialpriceincreasesandthesynergiesastheybuildon,andthegrowthinlegacyHillshire.
KenZaslow(Analyst-BMOCapitalMarkets):
Andmyfinalquestionis,whenyoutalkabouttheoutlookforpork,andwedidn'treallytouchonitthatmuch,butitseemstomethatporksuppliesaregoingtobeupanywherefrom3%to6%orso,andyetyou'reexpectingporkpackermarginstoberoughlywithinthenormalizedrange.Whatwouldmakeyoufeelmorecomfortablethattheporkpackermarginwouldbeabovethenormalizedrangegivenwe'regoingtoseeanexpansionofhogs?Iwouldhavethoughtthatwouldbeagoodthingforyou.
DonnieSmith(PresidentandCEO):
Perhapsexportswouldincreaseourconfidenceifweseemovementalongthatline.We'reprettycomfortablewitha3%orsoincreaseinsupply.Andwethinkthemarketwilleasilyabsorbthattypeofsupplyincrease,particularlywiththisreallyhighhalothatbeefpricesareproviding.
Andwe'llhavetokeepwatchingthedollarbutwefeelcomfortablewiththeexportdemandforourpork,China,Russia,etcetera.And,so,Ireallydon'tview--Ifeelverycomfortableinourrange.Mightseeaboveitdependingonifthatdevelops,andwehopeitwould.
KenZaslow(Analyst-BMOCapitalMarkets):
Great,Iappreciateit.
Operator:
Thankyou.OurnextquestionisfromRobertMoskowwithCreditSuisse.
RachelNabat ian(Analyst-CreditSuisse):
Goodmorning.It'sRachelNabatianinforRobertMoskow.
Myquestionisonchickenproductivity.Weliketolookattheratioofchicksplacedtoeggset.Andinthelastmonththisincreasedoverlastyear'slevel.So,Iwantedtoknowifthere'ssomethingsustainabledrivingthis,perhapsanincreaseinthesupplyofthehatchingflockthat'sdrivingayoungeraverageage,whichismore
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productive.
Andthenasasecondpart,fromwhatIrecalllastyear,agoodnumberofeggsweredestroyedduringtransportationbecauseofthecolderthanusualwinterweather.So,IwantedtoknowifthereareanylearningsfromthisandhowyourCompanyispreparediftheweatherthisyearisasbadasitwaslastyear.
DonnieSmith(PresidentandCEO):
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.
RachelNabat ian(Analyst-CreditSuisse):
Ijustwantedtoknowifthecolderthanusualwinterlastyear,ifyouthink--Ifeellikealotofthesupplywascutbecausealotoftheeggsweredestroyedduringtransportationbecauseofthecolderweather.SoIjustwanttoknowifthereareanylearningsfromthatandwhatyouexpectforthisyearfromthatend.
DonnieSmith(PresidentandCEO):
Gotit.Icouldtellyouwe'reinbettershapeonpropanethanwewereayearago.You'llrememberweactuallycreatedasmallpropanedeliverycompanytokeepalotofourgrowersinpropane.
We'remuchbetterpreparedforthat.Wehavelookedforwardandwedothinkwehaveadequatetransportationcapacitytobeabletohaultheloads.
Thebigthinglastyearwasjusttheweatherandroadclosuresandthosetypesofthings.Wecanpositioninventoryalittlebitdifferentlybutiftheroadisclosedtheroadisclosed.
Thosetypeofeventsveryhardtopredict.Ithinkwe'reingreatshapegoingintoFY15andfeelverygoodaboutdemandandhowwe'vepreparedourselvestobeabletodeliverittotheconsumer.
RachelNabat ian(Analyst-CreditSuisse):
Gotit.Veryhelpful.Thankyou.
Operator:
OurlastquestionisfromAkshayJagdalewithKeyBancCapitalMarkets.
AkshayJagdale (Analyst-KeyBancCapitalMarkets):
Goodmorning.Congratulationsonthegoodresults.Myfirst,IjustwantedtotalkalittlebitabouttheChickensegmentandthenaskyouaquestiononHillshire.
OnChicken,it'sreallytwoparts.One,youhaven'treallydelivereda10%orabovemarginevenona
CompanyName:TysonFoodsIncCompanyTicker:TSNSector:ConsumerGoods
Industry:Food&BeverageEventDescription:Q4 2014 EarningsCall
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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?
DonnieSmith(PresidentandCEO):
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
CompanyName:TysonFoodsIncCompanyTicker:TSNSector:ConsumerGoods
Industry:Food&BeverageEventDescription:Q4 2014 EarningsCall
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ourrange.
AkshayJagdale (Analyst-KeyBancCapitalMarkets):
Andisthelowerendofyourrange,doyouexpecttohitthatwhenthemarketisoversupplied?--meaning,whencommoditycompaniesarelosingmoney,wouldyouexpecttobeatthelowerendorcouldyoubebelowthelowerend?
DonnieSmith(PresidentandCEO):
Akshay,thatobviously--you'regettingintoindividualscenarios,howmuchmoneyaretheylosingandthattypething.AndIdon'tknowthatthatisasproductive.
Whatwecantellyouiswefeelverycomfortablewiththerangemovingup.Andwe'llcontinuetolookattherangeandifweneedtotakeithigherinthefuturewewill.
Butwefeelveryconfidentaboutourabilitytodeliver.Andwethinktherearestructuralchangesinourbusinessthatgiveustheopportunitytocontinuetodeliveragainstthat.
AkshayJagdale (Analyst-KeyBancCapitalMarkets):
Okay.AndjustonelastoneonyourPreparedFoodsbusinessandthecommodityoutlook.You'vebeenbehindtheeightballonyourlegacybusiness,itseemslike,foralmosttwoyearsorsomething.It'sbeenalongtime.
You'realwayscatchinguponthecosts.Andyou'resayingHillshireisalsogoingtobecatchingupthefirsthalfoftheyear.Canyoujustgiveusalittlemorecolorastothetypeofincreasesyou'reexpectinginFY15forthatcostbasketforyourPreparedFoodsbusiness?
DonnieSmith(PresidentandCEO):
Theincrementalcostyearoveryearwillbe$140million.Ifyouremember,inmypreparedremarksIsaidinthelegacyTysonbusinesswehaverecoveredthat,butwe'vegottostaydiligenttokeepworkingonourpricingaswemoveforwardtogetontopoftheincrementalrawmaterialinputsthatarecoming.Again,prettyheavilydrivenbybeefandbyturkeypricing.
So,weknowwhatwehavetodoandweknowwhatpartsofthebusinesswehavetocontinuetodrivethatpricingin,andfeelcomfortablethatthisyearwillbeasignificantimprovementtoourpreviousyears.AndmightInote,too,thatthelegacyTysonbusinesswasnotjustplaguedbythepricinglag.Itwasalsoplaguedbyaninefficientsupplychain.
AndwemadecorrectionsattheendofthelastyeartocorrectthoseinefficienciesbecausewehadthisnewHillshireproductionnetworkthatwecouldmovealotofthoseproductsinandoptimizethatnetwork.Sothatwillbringincrementalbenefit.We'llseealotofthatinFY15.
AkshayJagdale (Analyst-KeyBancCapitalMarkets):
Okay,thankyou.
DonnieSmith(PresidentandCEO):
Youbet.Thankyouallforjoiningusonthecalltoday.Wealwaysappreciateyourinterestinourbusiness.Follow-upwithJonthroughouttherestoftheday.AndIwanttowishyouallaveryhappyThanksgiving.Thankyou.
Operator:
CompanyName:TysonFoodsIncCompanyTicker:TSNSector:ConsumerGoods
Industry:Food&BeverageEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page21of 21
Thankyou.Thisdoesconcludetoday'scall.Youmaydisconnectyourlines.Andhaveagreatday.
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