Jon Kathol - Vice President of Investor Relations and Assistant Secretary Donnie Smith - Chief Executive Officer and President Dennis Leatherby - Chief Financial Officer and Executive Vice President James V. Lochner - Chief Operating Officer.

Brett M. Hundley - BB&T Capital Markets, Research Division Kenneth Goldman - JP Morgan Chase & Co, Research Division Farha Aslam - Stephens Inc., Research Division Rachel Nabatian Michael Piken - Cleveland Research Company Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division Tim J.

Tiberio - Miller Tabak + Co., LLC, Research Division Adam Samuelson - Goldman Sachs Group Inc., Research Division Jeremy Scott - CLSA Limited, Research Division Kenneth B. Zaslow - BMO Capital Markets U.S..

Welcome to the Tyson quarterly investor earnings call. [Operator Instructions] Today's call is being recorded. And at this time, I'll turn the call over to Jon Kathol, Vice President of Investor Relations. You may begin, sir..

Good morning, and thank you for joining us today for Tyson Foods conference call for the first quarter of the 2014 fiscal year. On today's call is Donnie Smith, President and Chief Executive Officer; Dennis Leatherby, Chief Financial Officer; and Jim Lochner, Chief Operating Officer.

I need to remind you, our remarks today include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.

I encourage you to read today's press release and our filings with the Securities and Exchange Commission for a discussion of the risks that can affect our business.[Operator Instructions] As you are probably aware, our Annual Meeting of Shareholders is this morning, and we will need to stay on schedule.

I hope we get to all of your questions, but we'll have to put a hard stop on this call to get over to the shareholders' meeting on time. I'll now turn the call over to Donnie Smith..

Thanks, Jon. Good morning, everyone. Thanks for joining us today. Fiscal '14 is off to a strong start with earnings of $0.72 a share in the first quarter, which is a 47% improvement over Q1 of last year. Operating income grew 36% quarter-over-quarter, and our overall operating margin was 4.7%.

Sales were $8.8 billion, the highest Q1 sales we've ever reported, up 4.7% over Q1 of FY '13. Chicken, Beef and Prepared Foods all had record Q1 sales, and Pork had its second-largest Q1 sales. I'm really pleased with those results, but I'm even more pleased with what I'm seeing from the team to manage for the long term and invest in future growth.

As an example, last week, we acquired Bosco's in Michigan, which was our third Prepared Foods acquisition in less than 1 year and another step in our effort to grow sales in our Prepared Foods segment. Bosco's is a great fit with our pizza toppings and crusts, and it aligns nicely with our K-12 school foodservice business.

We have to look at a variety of options and avenues for growth. It goes back to being nimble and responsive to consumers and their changing needs. One of the first places consumers adjust their spending is on food purchases, not just what they buy, but where they buy it.

As you know, our business model is to offer a broad portfolio of products spread over multiple distribution channels, so we're able to shift with the consumer and give them what they want, where they want it.

Consumers today are expanding their food purchases beyond the traditional foodservice and retail channels, creating opportunities for us in dollar, convenience, drugstores and even online. In spite of historical high prices, Nielsen data for the 52-week period ended December 28 indicates that total fresh meat volume at retail was up 1.3%.

Pork, chicken and ground beef pounds-sold increased, while whole-muscle beef held steady. Fresh chicken was the leader, with dollar sales up 8% versus the previous year. And once again, Tyson was the #1 brand of fresh chicken in the country. Record high beef prices should continue through 2014, meaning fewer beef promotions in retail and foodservice.

Pork prices will also remain high due to lower supply. Chicken should continue to be the winner. As consumer confidence rebounds, people are becoming less defensive in their spending, but I don't know of anyone who thinks that consumers will go back to their pre-2008 spending habits anytime soon. Expectations are different.

The definition of value is different, and it isn't limited to price. The consumer is asking, what am I getting for my dollar? What are the ingredients? Is it fresh? Is it good for me? All those factors are part of the consumer's new value equation.

They're willing to pay for convenience, but the product must legitimately fill an unmet need or solve a problem in a unique way. Our insights-driven approach to new product development is focused on those unmet needs. Better For You foods are becoming mainstream. People want clean labels and transparency in ingredients.

They want to know where their food comes from and that we're being responsible in how we produce it. They're uncompromising about food safety, and rightly so. But they also want only a few ingredients on the label. So that's our challenge and an area of focus for our R&D and innovation.

Another challenge is the cut to the government's Supplemental Nutritional Assistance Program. This could reduce total food sales growth by 1%. Shopper card data shows that SNAP shoppers' spending has dropped 4 points more than other shoppers since their benefits were cut.

We're developing consumer insights into those shoppers to retain them as consumers, even though they have less money to spend. So that's how we're thinking about the market dynamics domestically. And now let's turn to our international business. It was a disappointing quarter with a $28 million loss.

While China certainly wasn't the only source of the negative returns, it was the largest, and we've been making significant investments to build a fully integrated poultry business. I said on our Q4 call that I thought our China operations would reach breakeven by the end of the fiscal year. But I don't think -- I think it will take longer.

There's been a change in the market dynamics in China over the past year, following widespread food safety concerns an avian influenza outbreak and economic slowdown. Previously, I told you that demand would return about 3 months after the initial AI problem was over, but I was wrong.

Demand hasn't recovered, which has led to a substantial oversupply of chicken. And now there are new concerns about avian influenza. Because of these factors, we've decided to slow down on building more chicken farms beyond those currently planned for this fiscal year until market conditions improve.

Now I want to be clear, we're not changing our path, just our pace. We are not backing off our long-term commitment to produce quality chicken from a controlled supply in China. We're simply slowing down until the supply-and-demand dynamics get back in balance, in order to protect our margins.

We'll move forward with our planning processes, and when the markets improve, we'll be able to resume construction of company-owned chicken housing. I think one of the characteristics that makes Tyson Foods a great company is our ability to be flexible and to reassess, and that's what we're doing to grow our business and optimize shareholder returns.

I remain confident about 2014. I think it's going to be another great year for us. There's still a certain amount of seasonality to our business and Q2 is typically our softest quarter and the hardest to predict. It was last year, and it certainly appears that this quarter won't be an exception.

We still feel confident that the back half of our year will be strong and that this will be a very good year for us. Overall, we've got a lot of momentum, and we're anticipating healthy growth this year, next year and beyond. We feel really good about where we are as a company.

There are always challenges in this business, but we don't see anything on the horizon that we can't overcome. And now I'll hand it off to Dennis for the financial update, and then Jim will talk about the segments..

Thank you, Donnie, and good morning, everyone. As Donnie mentioned, this morning we reported first quarter earnings from continuing operations of $0.72 per share. This represents a 47% increase over the $0.49 we reported a year ago.

I would also like to note that on an adjusted basis, our rolling 4-quarter continuing EPS is $2.49 as compared to $2.26 for fiscal '13. Pretax return on invested capital for the past 12 months was just under 20%. Operating cash flow was strong in the first quarter at $361 million.

Capital expenditures were $140 million for the quarter, as we continue to invest in projects for both our domestic and foreign operations that result in improved productive capabilities, labor efficiencies, yields and sales mix. During the first quarter, we acquired 4.6 million shares for $150 million under our share repurchase program.

Since May 2011, we have repurchased 47.9 million shares for $1.1 billion. I'm also pleased to announce, yesterday our Board of Directors increased the authorized shares under this program by 25 million, and we now have 34.6 million shares available for repurchase. Our effective tax rate for continuing operations in Q1 was 34.3%.

Net debt to EBITDA for the last 12 months was 0.6x and on a gross-debt-to-EBITDA basis, this measure was 1x. Including cash of $825 million, net debt was $1.1 billion. Total liquidity was $1.8 billion, remaining well above the targeted range of $1.2 billion to $1.5 billion.

Gross debt was nearly -- was down nearly $0.5 billion from Q4 '13, coming in at $1.9 billion. As we reported in the last call, we paid off our $458 million convertible notes in October with cash on hand. Additionally, we issued 12 million shares at maturity for the conversion feature.

And at the same time, we received 12 million shares under our bond hedge. This had the impact of finally canceling out the negative dilution impact we have been experiencing the last few years associated with convertible notes.

However, we still have warrants outstanding related to this transaction that we'll exercise from January through April, which are already included in our diluted share count. For the quarter, our diluted shares outstanding were 354 million, which included dilution from warrants of 8 million shares and stock options of 5 million shares.

Now here are some thoughts on the remainder of fiscal '14. We expect revenues of approximately $36 billion for fiscal '14, up 5% over fiscal '13. Net interest expense should be about $100 million, down $37 million from fiscal '13. The effective tax rate for continuing operations should be around 35.5%.

And our CapEx plan remains at $700 million, up $140 million from fiscal '13 and $180 million greater than our depreciation and amortization expense.

Based on our average share price in Q1, we expect our diluted shares in Q2 to remain around 354 million prior to considering any changes in our stock price, which would impact the dilution from warrants and stock options. This also does not reflect the impact of any additional stock buybacks.

Our priorities for excess cash remain the same, which include additional capital spending to improve and grow our existing businesses, acquisitions to fulfill our growth strategies around value-added products in our international footprint and returning cash to shareholders through share repurchases and dividends, all while ensuring we maintain plenty of liquidity at our disposal.

As Donnie mentioned earlier, we have a lot of momentum going, and we feel great about where we are as a company. Fiscal '14 is off to a fabulous start with a 47% EPS improvement over prior year in Q1. And Q2, while softer and seasonally more challenging, should beat last year, and the third and fourth quarter should be really strong.

Although we don't normally provide guidance, the last couple of quarters, we referenced the back half of fiscal '13 times 2, which implied about $2.78 earnings per share for fiscal '14.

While it is still early in the year, we are confident we can deliver at least that number, which would be in excess of 23% EPS growth for the year, and we are poised for at least 10% EPS growth in 2015 and beyond. I'll now turn it over to Jim for a closer look into our operating segments..

Thank you, Dennis, and good morning. Starting with the Pork segment, in the first quarter, we reported $121 million in operating income and an 8.5% return on sales. Volume decreased 2.1% compared to Q1 '13. The available supplies of hogs were lower year-over-year, and we adjusted our weekly volumes accordingly.

Sales prices are up 6.7% due to mix changes and price increases associated with the lower total pork supplies. This helped to offset the lower U.S. total exports.

We're now 1/3 of the way into our second fiscal quarter, and we're about where we thought we'd be, meaning we're performing well and on track managing revenue drivers such as mix, yields and pricing. This fiscal year, we expect the PED virus to impact domestic hog supplies by 2% to 4%.

In our plant locations, we'll see the effects in the summer months. Heavier weights will offset some of the headcount reductions, but we do expect to see wholesale price increases. We do not anticipate any issues running our plants.

In the Chicken segment, we generated a record $225 million in operating income with 7.5% return on sales for the first quarter. Excluding international losses, Chicken margins were 9.5%. Volume was up 3.6% compared to the first quarter of fiscal '13 due to increased international production, outside buy and rendered product sales.

In aggregate, pricing was down 1.4% year-over-year, predominantly from export sales, rendered products and international operations. Q2 is off to a good start, but this is typically our most challenging quarter.

Looking further out, Chicken supplies for the last 3 quarters of our fiscal year are projected to increase around 2% over last year, reflecting the production cuts in 2013. We will continue our buy versus grow strategy in Chicken to make opportunistic open market purchases and value-up those sales.

Currently, we project lower feed cost for the fiscal year to be around $600 million. As we discussed in previous calls, less than 10% of our contracts are annual fixed price and our focus is on helping our customers drive their businesses and generate category growth.

So our pricing conversations lean more toward what our portfolio of products are worth to the customer and to the consumer. Turning to the Beef segment. In Q1, we generated $58 million in operating income and a 1.6% return on sales. Volume was up 4.1% over Q1 '13.

Price was up 2.9%, reflecting higher beef wholesale cut pricing from reduced supplies and stronger overall exports. So far in Q2, we've seen historically high wholesale beef prices and the cutout has set records each week.

Low production volumes relative to demand, particularly in ground beef, trim and the chuck and round cuts have driven the rapid rise in the overall cutout and Beef revenue. As a result, consumers will see higher retail beef prices. And as Donnie mentioned, we'll likely see fewer beef features at retail and foodservice this summer.

We expect to have adequate supplies for our Beef operations as our plants are located close to the fed cattle supplies. In the Prepared Foods segment, operating income for the first quarter was $16 million with a 1.8% return on sales.

Sales volume increased 3.5% versus the same quarter last year due to an improved demand and the additional volume associated with the Don Julio and Circle Foods acquisitions. Sales prices were up 4.2% as a result of mix improvements and price increases associated with higher input costs.

Pricing gains, however, were not sufficient to fully offset increased inputs and additional cost associated with the investment in our lunchmeat business and the other Prepared Foods growth platforms in the quarter.

In our Q4 earnings call, we talked about a couple of those growth opportunities, including Tyson DAY STARTS in the Frozen Breakfast category and Wright Brand Breakfast Sausage. And although they started shipping only a few weeks ago, we're already pleased with the customer acceptance and the volumes for both product lines.

We'll continue to put MAP spending behind them and other Prepared Foods as we look for growth in the long term from this segment. In closing, I'd like to say thank you to our team members for their commitment to continuous improvement. Tyson Foods has made tremendous strides in recent years, and I still see a lot of runway ahead.

As we announced in November, I've begun transitioning into retirement. And as a result, this will be my last earnings call. It's been a great experience getting to interact with investors and analysts over the years. And I've appreciated your willingness to learn about our business. That's the end of our prepared remarks.

Shirley, we're ready to begin the Q&A..

[Operator Instructions] The first question comes from Brett Hundley with BB&T Capital Markets..

Donnie, I just have a question for you. I'd love for you to give some just further overall color on the balance of fiscal '14 and then the outlook into fiscal '15. I think you made some -- or you guys made some interesting comments on both years.

And Donnie, I think one of the things that has really helped to kind of re-rate your stock and support your stock is you guys coming out on the last call and on this call and reiterating segment guidance in the face of a number of challenges.

And certainly, there's a lot of factors impacting you guys, PED, tight cattle supplies, cold weather, propane issues, oncoming chicken supply, now we have a resurgent bird flu in China and your slowdown there.

And so I'm just kind of wondering how all of these plays out and affects earnings potential going forward, particularly as you guys mentioned at least 10% earnings growth in 2015..

Sure, Brett. So let me start with kind of reiterating what Dennis said in his comments. We're off to a very solid start in this year, great Q1. Our Q2 is typically softer, and it's certainly harder to predict. But it looks like to us that the back half of the year ought to be really strong.

And so we're going to have a really good year and take a lot of momentum, by the way, into FY '15. So from where we sit today, we're confident in our ability to deliver at least that $2.78 or so. So let me talk about each segment just a little bit. Obviously, the Chicken segment is off to a strong start.

We're headed into a lower cost environment with a little higher supply, 2% to 3%. But we're also going to see, I think, a halo effect from high-priced beef and pork. So it feels like to me that the Chicken segment is just going to have a really super year.

Most of the issues in international for the year are behind us, and we'll be getting continually better there and taking more positive momentum into FY '15 there. Beef and Pork looked to be very similar to last year. So be thinking of that equal, too. And if either one, maybe a little better.

In Prepared Foods, obviously, we're investing in our growth platforms, and it looks like that we're going to be about like where we were 1 year ago and could possibly do better there as well. So feel good there. When you look at the overall balance sheet, debt's low, we're at a point -- our net debt is 0.6x EBITDA.

So we've got a lot of dry powder, we're going to throw off a lot of cash this year. Plenty to do the CapEx we need to do, we'll be well above depreciation and amortization again this year. So we've got opportunity for more value-added acquisitions that fit. And we'll continue to return cash to shareholders.

So if you take the new acquisitions that we've made in Prepared Foods, they'll start contributing in -- well, they're contributing now, and good opportunities for growth in those businesses, and they'll be contributing in FY '15 and beyond. Like I said, we're taking our foot off the gas a little bit in China, but we're still on the road.

And when the market dynamics give us an opportunity, we'll certainly continue to press forward there and we'll gain more momentum in our international business in '15. So feels real solid, we've got a great future.

Obviously, with that laundry list of stuff you mentioned, we always have challenges to our business, but we really don't see anything that we're not going to be able to overcome now..

All right. That's very helpful. And then I just have a follow-up on Chicken. You guys did very well during the quarter. And I would expect, given your business make-up there, for you guys to continue to do well. I just wanted to ask you about this polar vortex that's gripping the nation, in predominantly the Midwest and Southeast.

And as it relates to your Chicken business, a, do you guys hedge forward on natural gas? And then b, if your growers are having -- and of course, that natural gas is at the plant level.

But, b, if your growers are having issues with propane, would the company step in or be able to step in, and would that affect margins at all?.

Yes, great question. We stay fairly close in natural gas. We might have natural gas purchased a couple of months out in front of us, that kind of thing. So as we do in grain, we take a fairly conservative but sensible approach to how we manage our commodity purchases.

On the propane issue for the growers, I'll tell you, we have a great team of people that came together, and we've actually been buying propane down in Houston and transporting it into the areas where our growers had need.

So I'm not aware of any grower that's growing for Tyson Foods that doesn't have the propane they need to be able to take care of those chickens. And I'd tell you, it's just been a heroic effort by a large group of people. I'm really proud of them for jumping in there and, frankly, coming to the rescue for some of our growers.

And yes, we will be making some adjustments in our grower pay to make sure that we take care of our growers during all of this. So we've got a great live production team. And by the way, we have great growers. And so they've worked together to make sure that we've mitigated the risk of this to our business..

Our next question comes from Ken Goldman with JPMC..

Can you talk a little bit about what you're seeing in PEDv right now? I assume it's not very constructive since you just took your expectation down for hog availability so dramatically. And also, you did take your estimate for chicken supply for the industry down this year as well.

If I'm not mistaken, it was 3% or 4% last quarter, now it's officially 3%, and on the call, you're talking a little more like 2%.

Can you just add a little color, what you're seeing there to maybe drive that decline in your forecast?.

Sure. Jim, you take that one..

Yes. When I referenced that Chicken supply, as I said, the last 3 quarters annualized would be the same. And I just took the first quarter, which was behind us. So I said going forward, all the analysts I looked at and the data we looked at, implies around 2% for the last 3 quarters. And now referencing the PED, that's a very fluid situation.

It seems like either at least weekly, but sometimes even daily, new evidence comes out. And we do expect that it might be influencing up to 30% of the sow herd, with 10% or so impact on the available pigs impacted. So there is where the 3% comes from.

Now if that increases to 40% or decreases, because a lot of that data is still flowing in, that will have some influence.

So that offset -- that would offset any of the productivity gains of the balance, let's say it is 30%, the 70% would have some productivity gains, and we probably are likely to see some increase in carcass weight to offset at least some of the pounds lost from the head loss.

But I do want to emphasize, information does come out fairly regularly and it's being assimilated. And we're just staying very on top of it, region to region, producer to producer..

Best guess, Jim, is PED better in terms of less spread, or worse than what most media reports have come out with?.

I'm not sure -- is it spread to a greater degree or lesser degree?.

Yes, I didn't ask that very deftly.

But is it -- I guess, is it spread to a greater degree or a less degree -- lesser degree than what most people think?.

how many sows are impacted, when. Because it impacts the baby pig mortality. So then 5 to 6 months out, there would be fewer pigs available. So that's how we're tracking it. But some people believe it's -- well, it has spread into more states. So it's the extent in the number of sows impacted that we're really monitoring..

Our next question comes from Farha Aslam with Stephens..

National Beef announced the closure of the Brawley, California plant this morning.

How do you anticipate that impacts service supply-demand in the beef market? And will that impact or benefit Tyson's facilities in particular?.

Well, we just found that out this morning, and we're familiar with their daily head capacity. That plant's in California and there's generally a feedlot supply around. So it will take daily capacity out. Our best guess is around 2,000 head per day.

So that obviously means those cattle will have to be marketed somewhere else, so they'll flow, I guess, east and potentially north, to different packers.

And it is consistent, I guess, with what we've been saying all along, as the calf crop declines and the noncompetitive feedlot areas or noncompetitive plants or the combination thereof, we'll probably have to curtail production. So we were a bit surprised to see it this morning.

But I guess, to some extent, we've always felt that -- and anticipated something like that would happen..

Okay. And then just as a follow-up on Prepared Foods. You've done 3 sort of tack-on acquisitions in that space. Could you just share with us, combined, what the sales of those 3 acquisitions are and kind of your vision for Prepared Foods longer term into 2015? Because clearly, you're taking hits in terms of the plant, et cetera.

What's the potential and outlook in 2015 for that division?.

So no particular specifics on the 3 acquisitions. But our Prepared Foods business is really a broad mix of different types of businesses that are frankly at different stages of maturity.

We've got some businesses that are mature and have -- generate great results, and then we've got some that we're building, and we talked about lunchmeat before and continuing to fix that business. And we're investing a lot in those businesses, as Jim referenced, a couple of new product rollouts.

And Farha, if we just -- I don't want to get too specific here, but if we took off the MAP spending that -- which we won't, but if we just kind of adjusted back the MAP spending, our Prepared Foods segment would be above 4%. So we're spending a lot, we're investing a lot in this business.

I view Prepared Foods a lot like where we were in Chicken 4, 5 years ago, where we just had to -- getting the basics and build a strong foundation under that business. And you can see kind of the results 2, 3, 4 years later about doing all of that work. We're working on our footprint.

So anyway, if you just look forward into our vision in Prepared Foods, continue to think about a broad portfolio of items that meet changing consumer requirements. We've got very broad capabilities. We've got access to raw materials.

Obviously, we've got a great, sound capital structure and the ability to invest in those businesses, and we'll continue to do that. And you should expect to see strong growth in Prepared Foods..

In 2015?.

Right. I mean, and again, think of this year at least equal to last year, maybe a tad better. But as we go forward, that segment should continue to improve as we see the benefit from the investments that we're making today..

The next question comes from Robert Moskow with Credit Suisse..

This is Rachel Nabatian, in for Rob. So I just wanted to get an update on the annual negotiations with foodservice customers that you recently had, and pricing.

With the benefit of lower grain at $600 million now, do you think that you would be able to maybe hang on to half of that benefit in pricing and then pass the rest of it onto your customers?.

So very pleased with how, let's call it contracting season, went. Our customers recognize that we grow their categories and we grow their businesses and we spur their demand. So we're being recognized for the quality and the service and the insights-driven innovation.

And as Jim mentioned in his comments, that keeps our conversations with customers much more focused on what our products and our offering and our service to their business is worth than rather just what it costs. Again, let me remind you, our fixed annual price exposure is less than 10%.

Now getting to the how much of the grain, question, we'll hang on to. I don't want to answer that specifically, but let me answer it this way. Remember that we've talked about our pricing profile, as today, is much more reflective of the inputs, and we've made that change over the last 2, 3 years.

Over half of our pricing contracts today either adjust for grain cost or market value. So that helps us protect our dollar margins and gives us a lot more stability in up or down grain markets. Remember, chicken is still the best valued protein relative to all the other competing proteins.

I guess, third thing is, again, our quality, our service, our innovative capabilities make us a go-to supplier for our customers, and we're getting paid for the value that we add to their business.

Again, we mentioned this, too, our buy versus grow strategy, we continue to keep our supply short of demand and we'll capitalize on buying less expensive raw materials as we continue to supply more breast meat per capita. So we'll continue to buy those cheaper raw materials.

And then the last thing I'd say is we're going to continue to grow our value-added mix and, of course, that provides us some protection from the underlying commodity markets. So if you tie all those things together, that gives us a great opportunity to hold on, if you want to call it that, to the grain benefit..

Our next question comes from Michael Piken with Cleveland Research..

Just wanted to circle back on a couple of things. With respect to your outlook for exports in the upcoming year, if you could kind of break it down sort of protein by protein, what your expectations are for the U.S.

exports for beef, chicken and pork?.

Let me start with beef, I think we'll continue to see an increase, probably not at the same rate that we saw last year because Japan's entrance, and expanded to 30 months and down, certainly was a boost. But again, we continue -- we think we'll see U.S.

beef exports continue to grow, probably in that 2% to 3%, and that's aligned with most people's expectations. Pork this year is down, '13 versus '12 it was down about, let's see, I think around 7% or 8%. But I don't think we'll see that same decline this year. In fact, I'm one who thinks it will probably increase.

Although I can tell you there's a big divergence of opinions on most analysts to what they think pork exports are going to do this year. And then chicken exports, I consider -- I expect it will continue to grow at the 2% to 3% year-over-year.

So -- and overall, again, domestic availability of protein's probably going to come down, which should be supportive of the wholesale pricing as a whole. Obviously, we'll see less beef, right now, the way PED is going to impact pork, we should see less pork than anticipated. Prior to that, most people were thinking it would be up.

But I think that will be down. And then if chicken exports continued to improve and we don't think -- and we think we're beyond the year-over-year major increase, so again, I think we're going to see very supportive prices for all the wholesale meat cuts and poultry cuts this year..

Okay, great. And just as a follow-up on the Chicken side, if you can break it down a little bit more in terms of which markets you see growing. Because obviously, last year, we the Mexico AI outbreak in the second quarter.

Just if you could sort of break it out market by market, and kind of is it your belief that commodity, like order [ph] prices could start to rebound off of the declines we saw in the first quarter?.

Actually, we'd say that there won't be any market that's probably going to go down. We don't see any softness in Mexico, we see Russia having to come back in, Angola, Canada, et cetera. We don't really see any market that's acutely going to go down. In fact, some of them, we don't see where that supply is going to come from.

So that's where the modest increase. And I think potentially, it could be stronger than what I just said. But really, we don't see any country at this point as a threat..

Our next question comes from Akshay Jagdale with KeyBanc..

So my first question is on Chicken. And Donnie, you mentioned, it's shaping up to be a good year and thanks for breaking out the U.S. margin. So my question is really how good can it get? The way I'm thinking about it, so help me if I'm thinking about it correctly, your cost came down sequentially, it seems like $0.07 or $0.08 a pound.

I would expect those to be sort of stable sequentially for the rest of the year, unless grain prices change. And I would expect revenue per pound to continue to increase as the fiscal year progresses. So I would think that your U.S. margin, at 9.5%, is biased upward sequentially unless I'm thinking about that incorrectly.

And then you mentioned on the international side, things should continue to get better.

So am I thinking about that generally correctly where your margins should improve from where we've seen them in 1Q?.

I think you're a tad strong on your revenue growth for the balance of the year. We don't see it -- I guess the right way to put it, we don't see it deteriorating markedly. But I think continued growth in price per pound through the rest of the year is probably a little bit unrealistic.

But still, hey, don't let that mean that we don't think this is going to be a really great year in Chicken. And I think you're right on our international business, it will -- the worst seems to be behind us and it's getting better. And it will continue to improve some through the year..

So the price per pound, my comment was sequentially.

Did you mean that sequentially as well or you meant year-over-year?.

Got it. Yes, yes, yes. Yes, sequentially, it will be better. Yes. I thought you meant from Q1 getting better into Q2, getting better into Q3, getting better into Q4. So yes, but sequentially, yes, you're correct..

Okay. And then just a follow-up would be on the comment you made about 2Q being the most unpredictable. I would think that relates more to Pork and Beef and less so to Chicken.

It just seem -- can you give us a little bit more on what you meant by that? Should it be higher or lower than $0.70? And what were you really trying to indicate by the comment on 2Q being a little bit difficult to anticipate?.

Well, so I'm not going to give quarterly guidance. We struggle enough an annual. But our Q2 is not generally as strong as our Q1, I started -- that's what we mean by that. And in our Beef and Pork markets, coming out of the holidays, there's just typically a bit more volatility.

It's a little harder to predict how things are going to turn out than when you get into high-demand seasons post-Memorial Day, right? So it's just a difficult quarter. I guess, it's a more difficult quarter to predict. But I'd say, our guys are on top of it. They're doing a great job managing our supply, they're doing a great job on our pricing.

I feel really good about where we are. I didn't mean to over-imply anything scary about our Q2 comments, it's just Q2 is generally a little softer than Q1 and it will be this year and it's a little harder to predict. So -- but still going to have a great back half of the year and this will be a good year for us.

Jim, do you want to add anything about Beef and Pork?.

Beef is -- the Jan, Feb, March period is always very difficult. And this year's really extreme with record cutouts and they topped out at a choice cutout of 240. But in 2 weeks, they gave $10 of it back up. So it tends to be extremely volatile. And I feel really good about how we're navigating through this January period, particularly in Beef and Pork.

So -- but the general statement is historically, this is usually our most challenging quarter and typically less than Q1 and Q3. But I personally have a lot of optimism 4 weeks into it..

The next question comes from Tim Tiberio with Miller Tabak..

Just a very brief question around some of the trends that we're seeing on the natural organic side. We've been seeing some of the national foodservice companies talking about sourcing more non-GMO ingredients. I know that you've launched a line in the last 2 years.

But looking forward, I wanted to get a sense of whether you think that your current investment level is sufficient there? Or whether this is a segment that we should expect you investing in going forward over the next year or 2?.

Yes, so last summer, or I guess late spring, we launched our no-antibiotic-ever line, NatureRaised Farms. As a total -- as a percent of the total meat sold, let's lump things into natural, I'm going to call it that. It's a pretty small percentage versus our traditional lines, but it's growing at a pretty healthy pace.

And so it's something that we can't ignore. The category's big enough that a national player can make some difference in. So yes, we will continue to focus on the category. In terms of our investments, we've got a lot of things that we can invest in, in our business to continue to grow. That would be one of them.

Feel good about our opportunity in that category. And so expect it -- expect to hear more of this in the future. But I don't look for any disproportional investment over the next year or 2, I would say, in our no-antibiotic-ever line..

Great. And just one follow-up question for Jim.

With some of the supply constraints with the Australian drought, how are you thinking as far as imports of 90- or 50-CL trim? And how is Tyson positioning for potentially lower trim imports during 2014?.

Lower trim imports are generally favorable to wholesale -- to domestic prices. But as always, the market likes to do its job.

And we've seen very low cow kills, so therefore, low 90 beef manufacturing supplies in October, or in this -- particularly, October, November and December, more acute in December, which is extremely supportive to the trim and ground beef and chuck and round pricing coming into January.

So the question will be how fast can they get it in the pipeline and will it neutralize some of this rapid price increase we've seen. But generally speaking, if you have lower imports, it's favorable to wholesale prices. And I think as we've seen these record-high ground beef prices, et cetera, that's part of that whole complex.

So that's part of the big contributor to the beef cutout right there. So -- and it's a nice number, you can watch when it's coming in and look at it and its contribution to total domestic availability..

Our next question comes from Adam Samuelson with Goldman Sachs..

Question on Chicken. Clearly, the performance this quarter was a record. The outlook for the rest of the fiscal year is good. Supply's pretty contained, and the pricing environment, pretty healthy.

And I guess, a little bit of thinking about 2015, as you start to see kind of maybe some more pressure on supplies, the breeder flock kind of gets rebuilt and one of your competitors has a new plant coming on stream.

How confident are you in the 10% EPS growth in '15 if you start to see some cyclical pressures in Chicken?.

Well, very. We manage the supply and the commodity risks through a variety of approaches. One is growing our value-added sales. Our value-added sales in Q1 grew by 6%. I think the total sales for the company was close to -- right at 5%, right? So we're going to make sure that we focus on growing our value-added sales in that 6% to 8% range.

And then when you combine some of the other pricing things that we talked about a little bit earlier, plus our buy versus grow strategy, we have the opportunity to continue to grow our sales at a very good pace, whether we increase our production or not.

So I feel great about our continued opportunities in 2015 to expand really our Prepared Foods business, our Chicken business, getting better in exports. So yes, feel very good about that..

Okay. That's very helpful. And then maybe just one more for me. In the quarter, SG&A, about 15% year-on-year, it's the highest level both on absolute basis and as a percent of sales since 2010.

Is that just really accelerated MAP spending in Prepared Foods? Or anything else there that you could comment on?.

No, it's predominantly MAP spending in our growth categories. So we're intent on growing that business and we needed to increase our MAP spending to be able to get to the category growth levels that we have to have to meet our objective. So that's what it is..

Our next question comes from Jeremy Scott with CLSA..

Just a follow-up on China.

When you say that you'll continue to plan for expansion, do you mean that you'll continue to get permits from the China government and just not build the chicken houses? Or do you mean that you're going to hold off on everything?.

No, you're exactly right. We intend to continue to get our land-use permits and to have all of that in place so that when we get the demand signal that we're looking for, that we can begin construction on our houses. We will be -- at the end of this year, we will have both of our processing plants in China, 1 shift full of company-controlled birds.

Now we were planning on being -- in the last half of this fiscal year, continuing the house build to be able to grow past that early in the first half of the year on company-controlled birds. But we're going to back off buying market birds and be at a single shift full at both plants with company-controlled birds at the end of this year.

And our planning and everything we're doing is focused on that, with continuing to acquire the land to grow in the future. And if we get a demand signal that something is changing, we'll be able to put our foot back on the accelerator and go again because we fully intend to fill those plants out with company-controlled birds..

And our final question comes from Ken Zaslow with Bank of Montréal..

I have a couple of questions. Your 2014 outlook was always back half of 2000 run rate -- back half of 2013 run rate. But this quarter -- and then also that it was going to be more back-end loaded this year as well. But this quarter you, obviously, kept the run rate actually a little bit above the run rate.

So my question is what exceeded your expectations? I mean, is there any change to the back half outlook for 2014?.

Yes. I think for me, Beef probably outperformed a little more than what I was expecting it to. Prepared Foods was right where we thought it would be. Chicken is right where we thought it would be. Pork was pretty close. So it was probably Beef is what surprised us a little bit -- well, maybe not surprised us, but we're pleased with the performance.

I'd tell you, Ken, coming in, I would have never predicted a 240 cutout in beef, right? So this is just an unpredictable quarter that we're in today. But yes, we feel very good about the rest of our year and carrying a lot of good momentum into '15..

So just to go back, so you don't have a change to your back half look. Because you basically said, all you said was we're going to be at least at what we thought. But you, and I'll use your own words, it was a fabulous start. So I'm assuming that, that fabulous start should be incremental to the full year when we think about the full year..

Hey, it could be. The door is open for us to do better. I'll tell you what, if we -- we will not miss an opportunity, if one presents itself, to increase our earnings, I promise. So -- but, hey, it's January and there's a few things that make it a little hard for us to predict.

But I feel very comfortable about where we have been with the opportunity to get better, and we're certainly looking for every chance we get to do that..

I apologize for laughing, but we never miss an opportunity to do better..

But -- and then also I don't even talk to the beef packer margin, this -- the Jan to March period of time is usually a pretty rough period for beef packer margins.

Obviously, you have the closure, and then on top of that, you've had beef packer margins that -- I mean, look, in 25 years of history, we've never seen a $200 change per head in beef packer margins. Again, granted it's what we see. But again, beef packer margins seem pretty solid.

So this quarter, you keep on saying, hey look, obviously, we don't know the predictability. But clearly, the beef packer environment seems better.

Can you talk to why it's better and the duration to which that should stay better?.

I always remind everybody that it's the relationship of revenue to cattle cost that's where we make our money. So I always go back and say, we do make our money in the slope of change.

And prior to that run-up to the cutout, cattle ran up, and the cutout, clearly, there was insufficient supply relative to demand, the pipeline, or the cupboard was bare. And to replenish the pipeline, prices really inflated very rapidly. So we've had more volatility, and we've navigated through that slope of change very well.

And that's -- and we're coming through January much better than we did 1 year ago. So that's -- but what we really watch is, again, trying to make sure that we manage our mix, our price relative to fair market value and keep our cost in line, work on saving everything we can.

And the only thing I know we have no influence over is what the live cattle are going to do. So I mean, if they're tight, they're going to go up and beef will follow it up or precede it up depending upon what the circumstances are doing, and that's the nature of the market.

So again, a very volatile January, unprecedented both in incline and probably will be in decline. So it's an interesting time. But you can probably tell, we feel pretty good about how we came through it..

And then my final question is you're slowing down -- this is probably more for Dennis, you're slowing down the CapEx spending on China but you maintained your CapEx spending at $700 million.

What are you spending more on?.

That's a great question, and we have still many great opportunities, both in Prepared Foods and even in our Chicken segment. So we're just moving it to a domestic bucket, high return projects that we feel really good about..

So your pipeline of CapEx projects, obviously, China being a big one to slowdown, the pipeline must be pretty substantial.

Is that a fair statement?.

It sure is..

Well, thanks for your time, everyone, and certainly, your interest in our company. I'm sorry to wrap this up so quickly, but we really do need to head off to our Shareholders' Meeting. So I want to ask you all to have a great weekend. Thanks..

Thank you. And this does conclude today's conference. We thank you for your participation. At this time, you may disconnect your line..