Jon Kathol - Vice President-Investor Relations Donald J. Smith - President & Chief Executive Officer Dennis Leatherby - Chief Financial Officer & Executive Vice President.

Kenneth B. Goldman - JPMorgan Securities LLC Kenneth B. Zaslow - BMO Capital Markets (United States) Farha Aslam - Stephens, Inc. Adam Samuelson - Goldman Sachs & Co. Michael L. Piken - Cleveland Research Co. LLC Robert B. Moskow - Credit Suisse Securities (USA) LLC (Broker) Akshay S. Jagdale - KeyBanc Capital Markets, Inc.

Brett Michael Hundley - BB&T Capital Markets Diane R. Geissler - CLSA Americas LLC David S. Palmer - RBC Capital Markets LLC Tim Tiberio - Miller Tabak + Co. LLC Timothy S. Ramey - Pivotal Research Group LLC.

Welcome to the Tyson Quarterly Investor Earnings Call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. This call is being recorded. If you have any objections, you may disconnect at this point. Now, I would like to hand the call over to your host, Mr.

Jon Kathol, Vice President of Investor Relations. Sir, you may begin..

Good morning and thank you for joining us today for Tyson Foods' conference call for the second quarter of the 2015 fiscal year. On today's call are Donnie Smith, President and Chief Executive Officer; and Dennis Leatherby, Executive Vice President and Chief Financial Officer.

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

I encourage you to read the news release issued earlier this morning and our filings with the Securities and Exchange Commission for a discussion of the risks that can affect our business. This morning, we will be referring to our second quarter adjusted operating income and EPS.

The company uses non-GAAP results such as adjusted EPS, adjusted operating margin and adjusted operating income to provide investors with the better understanding of the company's operating performance by excluding the impact of certain nonrecurring items affecting comparability.

Please refer to today's news release for a full reconciliation of our GAAP to adjusted results. As always we'll have a Q&A session following our prepared remarks. To ensure we get to as many of you as possible, please limit yourself to one question and one follow-up, and then get back in the queue for any additional questions.

I'll now turn the call over to Donnie Smith..

Thanks, Jon. Good morning, everyone, and thanks for joining us today. I'm pleased with our second quarter results. EPS was $0.75 on both an adjusted and a GAAP basis, and adjusting operating margin was 5.5%. Adjusted operating income was a Q2 record and up 53% over the same period last year.

We captured $77 million in total synergies during the quarter, bringing the total to a $137 million so far this year. We initially set annual synergy targets of more than $225 million for this year and an excess of $500 million for 2017.

Our progress is ahead of schedule and we're optimistic about the synergy opportunity, so we're increasing those targets to more than $250 million this fiscal year, $400 million in 2016, and $600 million in 2017. Now, let's discuss the operating segments, and then I'll come back to the overall outlook.

The Prepared Foods segment posted a record adjusting operating margin of 8.4% and record operating income of $157 in the second quarter. Sales volume was up 70.6% with the acquired Hillshire Brands showing increased momentum through strategic pricing, brand building and innovation.

These expanded capabilities, our consumer-preferred brand portfolio and a strong growing innovation pipeline will allow us to drive continued growth. We expect to maintain our current earnings trajectory and quickly move towards the new 10% to 12% normalized range indicating the strength and the relevance of the new Tyson 2.0.

I'd also like to point out that $70 million of the $77 million of synergy capture in the quarter came in the Prepared Foods segment. Through synergies, we are re-rating the cost structure of our Prepare Foods business and growing the top and the bottom lines.

In the Chicken segment for the second quarter, volumes and price were roughly flat compared to Q2 of 2014. The operating margin was 11.7%, and I'd like to point out that segment operating income for the last 12 months exceeded $1 billion. We feel really good about how we've managed our Chicken business, and I think we've positioned ourselves well.

We've put our retail value-added poultry business back on track and maintained our position as the number one brand in the country. In fact, IRI four-week data indicate that our market share for frozen breaded chicken is 53.7% which is only a 1 point or 2 point below where we were when the operational challenges occurred last year.

Also within the Chicken segment, we've rightsized our small bird and the big bird business is running well. Tyson Fresh Chicken, which is still the number one brand, is outperforming its peers and the volume that will be coming from the plant in South Georgia that we're converting to tray pack is already fully committed.

As you're aware, avian influenza in the upper Midwest has affected mostly turkey and table egg flocks. At this point, the primary impact on our business is not from bird health concerns but rather from the loss of export markets for certain states and the resulting excess leg quarters in the domestic market.

We've positioned ourselves well over the past several years by reducing our dependency on export leg quarters which now represent only a small percentage of our total portfolio.

We have a very good whole bird mix, especially beneficial in times of depressed leg quarter pricing and our buy-versus-growth strategy means that we're not producing leg quarters that aren't sold. We're also fast-tracking innovation to get more dark meat into value-added form at both retail and foodservice.

So, we've got plenty of positives to offset the negatives. Our Chicken business is having a great year. Adjusted for the lower leg quarter prices, we're now expecting, in the back half, we expect operating income for the full fiscal year of approximately 11%. In the Beef segment, volume was down slightly with pricing up 9%.

Operating margin was negative 0.5%. We knew it'd be a tough quarter for Beef but it was more disappointing than expected. Higher fed cattle cost and lower export volumes due to the West Coast ports slow down made it difficult to pass along increased input cost.

The product is moving again out of the West Coast, albeit slower than we hoped and it could take another two to three months to clear. Orders have continued to flow in, which is encouraging for export demand.

And also on the second quarter, the start-up of our Dakota City, Nebraska plant following a significant renovation project increased operating cost, but we now have the largest most modern beef facility in the United States. For fiscal 2015, we expect fed cattle supply to be down 5% to 6% from last year.

And we think we've experienced the bottom of the beef supply cycle. After this year, we believe we'll see slow incremental improvement in supply. Our Beef segment results should improve in the back half of the year, and while profitable for the year, fiscal 2015 results are expected to be below fiscal 2014.

It is important to remember that we'll continue to run our Beef business for margin not market share. In the Pork segment, volume was down 4.4% and sales price was down over 15%; operating margin was 8.2%. Our volume decrease was due to the sale of our Heinold business, and excluding the impact of the divestiture, our sales volume grew 3.2%.

Demand for pork has been a little softer than expected as wholesale price declines have not been realized in the retail channel. We expect future activity to improve soon, which should improve pork consumption because a higher percentage of pork is exported than beef, the West Coast port issue had a greater effect on domestic pork supplies.

In addition, there are more hogs coming on to the market and coupled with increased weight, pork supply could be up 8% to 10% in the near term. However, we don't think it'll stay at those levels for long because that scenario isn't sustainable.

For the rest of the year, we'll continue to maximize revenue relative to the live hog markets through operational efficiencies and mix optimization, and we think the Pork segment will be in the range for the year.

In the International segment, volume was down just over 30% due to the sale of our operations in Brazil and continued weak demand in China. Pricing was down 2.7% also due to demand in China as well as currency devaluation in Mexico. Operating margin was a negative 6.8%.

Segment operating losses improved following the sale of our Brazilian operations and improved market conditions in Mexico. The sale of our Mexico operations is pending the necessary government approvals and we expect to receive a decision during fiscal 2015.

Chicken pricing weakness in China persists although we're starting to see some improvement based on stronger pork pricing. We expect the International segment's adjusted operating loss to improve by about $25 million for the fiscal year. Now, let's take a look at the sales channel information.

At retail, Tyson was up 3% in the latest 52 weeks, which is on track with all food and beverage retail sales through the end of March. Not only did eight out of our nine core businesses have positive dollar sales growth in both the latest year and the latest quarter, six of nine had positive dollar share growth.

In the total fresh meat and deli universe, dollar sales were up 6% for all fresh meats for the 52 weeks ended March 28. Retail prices were up 19% for ground beef and 16% for whole-muscle cuts, while pork retails were up 14%, and fresh chicken was up 4% indicating continued strong domestic demand for protein.

At foodservice, dollar sales were up 3% for all commercial restaurants. The largest growth came in QSR Mexican with dollar sales up 11% in the March-ending year and QSR chicken has the second highest growth rate. Economic conditions for spending are the most favorable in seven years.

Unemployment is down, wages are growing, consumer confidence is up, and inflation is in check. Consumers are spending less on fuel, and more on food.

Although value consciousness appears to be here to stay, the consumer's ability and willingness to pay for value-added benefit is moving in a direction to afford and support protein innovation in the marketplace.

We'll leverage this direction as we continue to deliver relevant innovation with new varieties for Park's Finest hot dogs by Ball Park and Hillshire Farm natural lunchmeat.

We'll also be introducing three disruptive innovation platforms in Q4, capitalizing on the snacking and freshness consumer trends with the launches of Hillshire Snacking, Ball Park jerky and Jimmy Dean's simple scrambles.

We'll break into new sections of the store with these launches and while still continuing to expand our convenient meal and snacking offerings in frozen chicken. Our Hillshire Snacking launch continues to show success in test market.

Within the test, category growth is up 17% with Hillshire responsible for nearly half the growth and especially important to our retail partners, over a third of Hillshire's Snacking dollars are incremental to the category.

We're also seeing successful foodservice innovation behind Chef Pierre, Layer Luxe pies, and we're looking forward to launches coming this month within foodservice brands such as Tyson Red Label Chicken, and our expansion of Bistro Collection Desserts. All this puts Tyson Foods in a solid position. Cash flow is strong, giving us options for 2016.

If there aren't any strategic acquisitions of interest, we'll invest in our business and buy back stock.

Our balanced portfolio, increased synergy capture, and strong momentum in Prepared Foods, coupled with favorable pork raw material costs, give us confidence that we'll achieve our annual guidance of $3.30 to $3.40 adjusted EPS despite near-term challenges. We're very well positioned with sound fundamentals and a solid growth story.

Synergy capture is going very well. We're gaining momentum in retail brand as we make rapid progress with the integration. We have advantaged brands in advantaged categories, protein is extremely relevant to today's consumers. According to IRI, 99% of our refrigerated product sales are in categories that are showing positive year-over-year growth.

In frozen food, 92% of our products are in categories that are showing growth over last year. We are currently number two among all other major food and beverage companies in terms of dollar sales growth for the 52 weeks ended March 19.

And let's not forget foodservice where restaurant traffic is showing growth as consumers benefit from lower gas prices and improved economic conditions. We have a lot going for us and we're comfortable projecting at least 10% adjusted EPS growth in fiscal 2016 which is in keeping with our stated goal.

And now let's go to Dennis for the financial update..

Thanks, Donnie, and good morning, everyone. Q2 was another record quarter as we delivered strong financial results, demonstrating the value of the diversity of our portfolio. Our revenues grew by 10.5% compared to the same period a year ago as we produced our third consecutive $10 billion quarter.

Adjusted return on sales for the quarter was 5.5% and adjusted operating income was $553 million, representing a 53% increase over Q2 of 2014. Our adjusted earnings per share of $0.75 this quarter was a record for a second quarter and represents a 25% increase from $0.60 in the comparative period last year.

Our rolling four quarter adjusted EPS of $3.14 reached another milestone by surpassing $3 per share and has been consistently growing over the past eight quarters.

Operating cash flow through two quarters was $808 million, and we spent $435 million on capital expenditures, which was $139 million greater than depreciation, as we continue to invest in projects with a focus on delivering high ROIC. Our effective tax rate in the second quarter was 35.6%. Net debt to EBITDA for the past 12 months was 3.3 times.

On a pro forma basis, including Hillshire's results for the past 12 months, net-debt-to-adjusted EBITDA was 2.7 times. Net interest expense was $70 million during the second quarter. Including cash of $223 million, net debt was $7.4 billion. Total liquidity was $1.3 billion, remaining above our goal of $1.2 billion.

For the quarter, our diluted shares outstanding were 415 million. The sale of our Mexican operation is pending the necessary government approvals and we expect to receive a decision during fiscal 2015. Subject to completion of the sale, we will use the proceeds to pay down debt. Now here are some thoughts on the remainder of fiscal 2015.

Please note our accounting cycle results in a 53-week year in fiscal 2015 as compared to a 52-week year in fiscal 2014. Accordingly, this outlook is based on a 52-week year to make a better year-over-year comparison. We expect revenues of approximately $41 billion for fiscal 2015, which is over 9% growth compared to fiscal 2014.

This is driven primarily by a full year of Hillshire Brands offset by a reduction in our International operations. In fiscal 2015, we expect to capture more than $250 million from our Prepared Foods profit improvement initiatives and Hillshire Brands synergies. Net interest expense should approximate $275 million for fiscal 2015.

We currently estimate our adjusted effective tax rate to be around 35.5%. CapEx is expected to be $900 million, which is approximately $300 million or 50% more than our depreciation as we continue to focus on projects that create long-term shareholder value. By the end of fiscal 2015, we expect net debt to adjusted EBITDA of approximately 2 times.

Based on our average share price in Q2, we expect our diluted shares in Q3 to be around 415 million, prior to considering any changes in our stock price, which would impact the dilution from our tangible equity units.

Our priorities for the significant cash flows that our operations will generate are for continued rapid deleveraging and strengthening of our balance sheet, a sustained focus on disciplined capital allocation to drive long-term shareholder value, creating incremental debt capacity to fund acquisitions to fulfill our growth strategies and return cash to shareholders through share repurchases and dividends, all while maintaining plenty of liquidity.

In closing, our Q2 results continue to demonstrate the value of our diversified business model. With the addition of Hillshire valuing up our portfolio along with the synergies we expect to capture, Prepared Foods is expected to finish strong with margins above 8% for the remainder of fiscal 2015.

Our Chicken segment has delivered more than $1 billion in operating income over the past 12 months and should produce an operating margin of approximately 11% for fiscal 2015. Although our Beef segment has faced volatile market conditions this year, we believe the worst is behind us.

We expect our Beef segment to be profitable in fiscal 2015 but below 2014 results, while our Pork segment is projected to operate in its normalized range for the year.

Despite a number of headwinds coming at us, we have a great team which gives me confidence we will deliver strong results in the second half of the year to not only meet our guidance of $3.30 to $3.40 adjusted earnings per share, but also grow EPS by at least 10% in fiscal 2016. That concludes our prepared remarks. Operator, we're ready to begin Q&A..

Thank you, sir. We will now begin the question-and-answer session. Okay. Our first question is from Ken Goldman [JPMorgan Securities]. Your line is now open. Please proceed..

Hey. Good morning, everybody.

I know these are difficult to sort of put into numbers, but you had two headwinds in the quarter, right, avian flu and the West Coast port strike that you said didn't help, right? So, is there any way for us to quantify how much these headwinds maybe hurt margins or EPS in the quarter?.

Ken, as we look at – I'm going to combine the both, probably around $20 million for Q2. And as you know, they're continuing to linger, so we're going to have to continue dealing with them over the next quarter or two. But we're hoping that the West Coast port issue should clear up in the next two to three months.

There are some ebb and flows that kind of keep us from having all the confidence we'd like to have in that, but figure Q2 at $20 million, and some of that gets pushed into Q3 and on forward..

And that's $20 million to the operating line?.

Right..

Okay..

Call it, round numbers, $0.03 a share or something like that..

Yeah, yeah. Okay. Perfect. No, I just wanted to make sure it wasn't on the net line. And then I realize not everything is going as well as initially forecast this year, namely beef, but most of the business is doing pretty well and you keep beating consensus estimates, raising synergy targets.

So, I guess my question is this, if you had to focus on one reason why you didn't raise guidance today, would beef be the primary reason or is there something else we should be looking at?.

So, yeah, as we look at Prepared Foods, we'll continue to deliver over 8% in Prepared Foods.

Now, there's a couple of categories – by the way, the categories that are showing really good growth where we've given up a little bit of share and we're going to need to reinvest some of the raw materials savings in the back half to regain that share and protect those businesses for the long term. The other categories, it's probably export-related.

With the West Coast port slowdown, if we're two to three months from seeing that, then that's going to linger a little bit into Q4, and we're just uncertain as to whether or not our estimate on that is correct.

And then, these AI bans we've seen – even as late as last week, we saw a couple of other outbreaks or few more outbreaks of AI up in the upper Midwest in turkey and table egg flocks. And as those outbreaks continue, it continues to push out the time when those AI bans would be lifted.

And so, we're predicting a little bit more export leg quarter pricing softness in the back half than what we had thought before. So, hopefully, that sums it up..

It does. Thank you very much..

By the way, Ken, if we're overly conservative on these issues, then certainly our back half could improve further..

Great. Thank you very much..

Sure..

Thank you. Our next question is from Kenneth Zaslow [BMO Capital Markets]. Your line is now open. Please proceed..

Hey. Good morning, everyone..

Good morning..

So, I just wanted to explore the Prepared Foods a little bit more. So, you're hitting 8.4% this quarter in margins and I guess the point that you're going to be having to reinvest some of the lower input costs.

But how does it not sequentially improve throughout the year as your synergy targets go up? The at least or in excess of 8% seems like it should be in excess of 9% or in excess of 10%, can you help us understand that?.

Well, certainly as we get into 2016, Ken, our expectation is to be rapidly approaching our new projected normalized range of 10% to 12%. And what we're talking about is just the flow of operating income improvement to get to that point.

So, with the favorability in raw materials plus what we're going to need to reinvest back in some of these categories, we're going to be over 8% in the back half. If raw materials are a little more favorable than we thought, then certainly that number will improve.

But you will see a sequential increase in operating income in our Prepared Foods segment through this fiscal year and then into next..

Okay.

And then going into 2016, the idea that you could get at least 10% growth, can you talk about what are your key assumptions to get you there because it seems again, not that it's a layup but it seems a little bit easier maybe than what you're saying, so I'm just trying to figure out exactly how you're getting to that at least 10% growth in 2016?.

Sure. So, we'll be in the second year of our synergy capture and as we said a little earlier that's got a little better. So, we see improvements there as we continue to reset the cost structure in Prepared Foods.

For the first time in 18 months, we've now got the capacity to increase fully-cooked chicken sales, and this – and next year, 2016, will be the first year where we have an incremental year-over-year ability to have a full-year sale growth in fully-cooked chicken.

If we're right, and we're at the – we've seen the trough in the beef supply cycle, then our beef numbers should improve sequentially next year over this. Oh, by the way, back on chicken, we're starting up the trade back plan in South Georgia this month, so we'll have a full year of those results in our number next year.

I would think that pork is set up to have a pretty good year next year, and we think that's going to provide good raw material price discourse in our Prepared Foods business.

Not to mention the fact we're going to be generating a lot of cash, so we'll get to pay down debt, we'll have opportunities to continue to invest in our business, that type of thing.

And again, we've got great brands, and we've got them in great categories that are growing and we'll be using our brand growth to continue to drive this expectation of having stable consistent earnings growth over time..

So, is the be at least 10% just a stab to just start there? It sounds like that's – because you got to lap all of these – the $20 million this quarter probably, there's probably going to be $15 million to $20 million next quarter as well, and then you have all of these things.

If you let at least 10% just as a starting point and say, hey look, this is in line with our long-term growth targets, it's not really a true projection of where we're going to go, it could be higher than that.

Is that a fair statement?.

I can tell you, for us Ken, it's early. But I'm not – no, I wouldn't go so far as to say I'm taking a stab. I mean, we feel comfortable about our ability to deliver 10% EPS growth next year with a lot of reasons to do so but it's hard to get anymore granular than what we've said this early in 2015..

All right. Great. I appreciate it..

Sure. Thanks, Ken..

Thank you. Our next question is from Farha Aslam [Stephens, Inc.]. Your line is now open, please proceed..

Hi. Good morning..

Good morning..

Good morning..

Just kind of building on Ken's discussion about next year and 10% EPS growth. I think why Ken is focusing in on that because you'll have probably $150 million of incremental synergies next year. So, that's 7% of EPS growth right there. So, perhaps you could just share with us your outlook in to 2016 about the performance of the core business.

And clearly, there is concern that, is it only 10% EPS growth because you think that poultry is going to feel pressure from increased pork and beef on the market.

Could you just kind of address your 10% EPS growth targets with relation to how your various divisions – how you are expecting them to flow into next year?.

Okay. So, yeah, I'll just break down through segments. So, we would certainly see the opportunity in our Prepared Foods segment to approach our normalized range. In Chicken, at this point, if we project the current soft leg quarter prices into next year, we're still at or above the top end of our normalized range in Chicken.

Again, beef should get a little bit better than this year. We think pork will improve next year over this year. So, there's good – we feel comfortable that 2016 is set out to be a very good year for us..

That's very helpful. And then just focusing on operations within particularly chicken and Prepared Foods, this quarter your volume in chicken was flat year-over-year, and the market was growing.

If you look out into the second half of the year and into 2016, what do you expect Tyson's volume growth to be in chicken? And particularly in your cooked divisions, are all your plants up online?.

So, I'll start at the back and go up. Yes, we have full capacity to produce fully cooked items now. So, we're all up and online.

In terms of next year's growth, I'm going to – hey, Farha, it is really, really early, okay?.

Understood..

But I would say somewhere 1% to 2% sales volume growth, don't know that I would predict any production volume growth.

Next year, my guess is we'll do a lot more of buy versus grow, which, by the way, there's some impact in that in the flat volume of this year, because this year we bought about 50% more loads a week as part of buy versus grow program than we did last year.

So, we don't have the sales or the volume of the back half those birds, but that's a good thing. So, yes, we will have sales growth next year, and I would predict the revenue growth to outpace the sales growth. But in terms of production, we currently wouldn't see our production up..

That's very helpful. Thank you..

Thank you. Our next question is from Adam Samuelson [Goldman Sachs & Co.]. Your line is now open. Please proceed..

Yes. Thanks. Good morning, everyone. Maybe shifting a little bit more into the Hillshire pieces, the 20% increase to the 2017 targets.

Can you walk through the buckets, the synergy upside, you think it would come from? And along the same lines, if you think about $600 million of synergies, an incremental $350 million off of what you're expecting to realize in 2015, wouldn't you be at that, call it the high end of your 10% to 12% normalized Prepared Foods margin range? (29:56-30:02)..

Okay, Adam, you were cutting out just a little bit. I think I got the gist of your question, so if I miss it, please ask a follow-up. But a reminder, our synergies number is all of Prepared Foods.

And so, we talked about four primary categories, that being operational improvements, procurement, let's call it logistics, and then some organizational and fiduciary type stuff. But the big three categories where in operational improvements, procurement and manufacturing, and logistics.

So, the over delivery so far in the first two quarters has been in the operational improvement, as we've been able – and this by the way primarily, but not exclusively impacted the legacy Prepared Foods Tyson business.

We've seen some improvement as we've been able to move some of our product mix between plant to streamline our cost structure, streamline our operational efficiencies, and by the way, get on top with some service issues that we had in Q1. So, we feel great about our ability from this point forward to service our customer.

As we go forward, what you'll really see is some improvement in the operations category, more improvement in the logistics and in the purchasing categories over time. And those will – a lot of that becomes what we're calling a reset of our Prepared Foods cost structure.

So, as we take that improved cost structure and what we believe will be improved raw materials in Prepared Foods into 2016 along with the great capabilities we have to launch new innovation and multiple levers to adjust our pricing and volume, and trade and MAP spend, we see a great opportunity to have that business up into its normalized range as we move forward..

And Donnie, just on that point, doesn't the incremental $250 million (32:20) from synergies beyond 2015, wouldn't that get you north of 12% or what do you think the new normalized range could actually prove to be conservative?.

Adam, it's too early to tell because of what – of some of those types of synergy that we would use to spin back to grow volume in those categories. Remember we've got advantaged brands and advantaged categories.

And as these categories are growing, we want to make sure that we maintain strong market share in them to capture the growth as we move forward. So, we'll manage that carefully.

And certainly, if there's a way to improve margins, we'll do that, but we feel comfortable now saying that a normalized range of that business should be in the 10% to 12% range..

But it seems like (33:22-33:28) like you're implying about 10% for the chicken in the second half of the fiscal year? A, is that accurate? And B, is it (33:35)?.

Adam, I'm sorry. I didn't catch 10% – I caught 10% of your message which was the word ten percent, I'm not sure..

The second half chicken margins, it seems (33:51-34:00)?.

I'm sorry, Adam. Operator, we'll follow-up Adam – I'm sorry, we just can't – we just can't get the question..

Yes, sir. Thank you. Our next question is from Michael Piken [Cleveland Research Co.]. Your line is now open, please proceed..

Yeah, good morning.

Just wanted to touch base with you on the chicken and just sort of get your view on kind of how we should be interpreting some of the recent pullet data? And specifically, your thoughts on how much of the boiler eggs are going to Mexico versus in the past and how much you think is staying here?.

Sure, Michael. So, we're seeing about around number 7% growth in pullets. We think about 3% of that's going to Mexico, probably 8% of that is getting spent back to lower the hen age which leaves about 3% as the growth in the actual breeder flock.

And by the way, so far year-to-date – I'm just look at fresh retail but obviously we've got great opportunities in foodservice. You're seeing growth there as well. But demand for chicken at – fresh chicken at retail just using a category that we can get numbers around is up about 3%, 3.5% versus a year ago.

So, there is good, strong demand growth, and we think that will continue because we don't really see beef pricing halo changing. There's ample opportunities particularly at retail to drive a lot more pork volume and not hurt chicken volume at all. So, we see a very favorable environment coming out of this year and going into 2016 in terms of demand..

Terrific. That's really helpful. And then, I guess kind of following up on that. I mean, I know you talked a little bit about some of the issues with the ports and pork's reliance on exports.

But it seems like with all these lower-cost hogs available, it would seem like maybe projecting into 2016 that there might be some incremental margin opportunities in pork with all that excess supply in your plants (36:08) higher utilization rates.

So, how should we sort of think net-net about kind of the increase in pork supplies over your entire business? It sounds like you think there's enough demand out there to support the increased pork and chicken?.

Certainly that is a favorable environment for our business. I would probably be a lot more comfortable talking about the impact to our pork margins overall a quarter from now, when we've seen some of this export West Coast port issue get resolved.

And you'll start seeing freight flow more traditionally than what it has over the last 90 days to 120 days of course. So, we'll feel better about having a lot better commentary, more specific commentary about that on our next quarter but certainly the environment is set up well for our Pork business.

And again, on the chicken demand, we see strong chicken demand at least through next year and I think carrying on because – and a good reason for that is as the millennials enter the marketplace, they over-index to chicken.

And so, we think you're going to see good strong chicken growth and we also think you're going to see that beef halo continue; all that sets up very well for our business..

Terrific. And then lastly, if you could give us any sort of quantification on how much of a raw material benefit you might expect in the back half of the year in Prepared Foods from lower commodity prices, recognizing that you are investing more into the brands. Thanks..

Yeah. Well, let me quantify that this way. The pork cutout is down about 40% versus a year ago and the items within the cutout that are showing the most weakness are the further processing items. So, if you look at those hams, bellies, trim, those are the items that have shown the most weakness.

And certainly, that's favorable for our Prepared Foods business. So, hopefully, that gives you enough color around – now, one thing to add, we do over-index a little bit versus our competitors on beef because – our hotdog business and others, a couple of other businesses in our portfolio.

But still, this weakness in the pork cutout, particularly among the grinding meat, is very favorable for our business..

Thank you..

Thank you. Our next question is from Robert Moskow [Credit Suisse]. Your line is now open, please proceed..

Hi, Thanks. Donnie, I was wondering if I could ask you just to go a little bit deeper on the incremental step up next year on the synergies in Prepared Foods. You said it's logistic savings and a reset of the cost structure in Prepared Foods. But I guess I'm still a little unclear as to what that really means.

I mean is it a function of procuring raw materials from your internal supplies that is something that you're not doing now but you plan to do next year? Is there something else happening in terms of new processes, or are you taking more steps in your supply chain footprint? Can you go a level deeper for us?.

as we've been able to combine the footprint – if you'll think back, we had a lot of latent capacity in the Tyson Prepared Foods footprint, and when we bought Hillshire we had a perfect opportunity to then take all of that latent capacity out of the system and run more volume – by the way, more branded not private label volume, through a smaller footprint and lower our cost structure.

There're still some opportunities now to go through those facilities and increase efficiencies. Remember, some of them are running new products they've not run before, so we'll see incremental benefits as we continue to work on continuous improvement and operational efficiencies in those plants.

And that will re-rate our cost structure, and then that lower cost structure, obviously, will be selling a lot more branded items than it was before, which is the big move in the Prepared Foods' normalized range from where we were up into that 10% to 12% range..

Okay. I think I get it. And as far as new products, you mentioned the snacking platform. Hillshire also introduced a frozen platform. Are those platforms going to be running through legacy Tyson plants, and if so, can you give us a little update on how well the frozen one is doing? I saw it on shelf.

Is it doing okay?.

So, overall, very well. The sandwich items probably didn't have the pull that we wanted them to. So, what we're doing is focusing that launch on the – there was a 16-item launch that might have been a little much, so we're concentrating that launch down to those items that are going to give us the best growth opportunities forward.

The bowls – if you remember, we had sandwiches and we had bowls, the bowls are doing great. We still think, by the way, that that will be one of the best launches of the year. So, we feel good about it. It's not exactly like what we thought it would be, but still, we've been able to manage it to a point it's going to do very well.

And we're very optimistic about the platform launches that we have. By the way, back to the Hillshire platform, both the Naturals and the Classics are going very, very well, driving great incremental growth to the categories. We feel super about all of the innovation that we've launched and then what we will be launching in new categories in Q4..

Great. Thank you..

Sure..

Thank you. Our next question is from Akshay Jagdale [KeyBanc Capital Markets]. Your line is now open. Please proceed..

Good morning..

Good morning..

So, I wanted to continue on the Prepared Foods. You're doing really well obviously on the cost side. I wanted to focus on the revenue side.

Can you tell us what the organic growth was this quarter in Prepared Foods if you exclude the acquisition impact? What was, like, organic growth?.

I can tell you that both the legacy Prepared Foods business and let's call it the legacy Hillshire business, just for clarity, both were over plan on both volume and on operating income. So, we feel very good about how the Prepared Foods business is performing..

Okay. And just on innovation and more so broadly on reinvesting these cost savings into future growth, can you give us a little bit more color on the innovation pipeline? It was helpful that you'd talked about the lunch – launch into lunch, if I may, sandwiches, and that it didn't go as well as planned.

Can you give us some more sort of broader and longer-term view on innovation because from what I remember one of the best parts about this acquisition was the R&D innovation team at Hillshire feeling much better about their prospects as part of Tyson.

So, can you give us an update on that?.

Sure. It's been exciting to see both of the R&D teams come together combined with all of the innovation and business unit/teams come together and find a lot of opportunities between foodservice and retail to be able to grow our business through innovation.

One of the primary tools that we use to measure whether or not we've got enough innovation in the pipeline is what we call a vitality index. What we do is we look at products that were created over the last three years and we determine our percentage of revenue that comes from these new products.

So for 2015, we're expecting retail to be at about 14% vitality index. And, by the way, that's in the best in class range. And for food service, we're currently expecting more than 20%.

So, these are very aggressive goals but we have a great team that continues to focus on looking at insights and create innovative solutions to fill the consumer gap so that we're always relevant. We know we're in relevant categories. In this way we know we've got relevant innovation inside those categories..

Okay. And then just one last one on chicken, just broadly speaking, longer term, is it your contention that the industry is not cyclical anymore? I mean, obviously, historically, the industry would over supply the market and margins would flip around within a year. It's not been the case this time around.

It looks like that process might be starting now but you're saying it's not going to impact you in 2016.

So, can you just talk a little bit broadly about do you think the industry is not cyclical anymore? If so, why? And if it is cyclical, when the cycle does turn, when the industry will overproduce which, I guess, none of us really know when that'll happen. Do you still believe you can grow EPS 10% when that happens? Thank you..

Okay, Akshay. So, we're certainly working very hard not to be cyclical. That's our whole path forward.

So, if you look at our business and you look at, over the last two or three years, our improvement in our sales mix – by the way, even with the operational issues we had in our fully cooked retail chicken business, our branded chicken business, we're back to within a share point or two of where we were before that happened, so that the Tyson brand at retail is very meaningful, is very resilient, and we think it's got lots of opportunities to continue to grow.

We've got a great, broad portfolio. We've got a great innovation pipeline, and by the way, new and improved innovative capability for the future. We've seen a lot of operational improvements.

We've got plenty of cash flow to do whatever CapEx we need to do as illustrated by taking a South Georgia plant, and taking it from an unprofitable product mix into one of our most profitable categories, our fresh tray pack business.

So, those are all – those are some of the things that we're doing to decrease our cyclicality to give our investors a consistent, stable earnings growth over time. And, yes, we do believe we can see 10% growth..

Well, what about the industry? What's your view on the industry?.

We spend all of our time, Akshay, focusing on what we're going to do. And if you'll remember, we put a forward demand picture out 12 months to 15 months. And then we built a production plan based on that demand curve so that we know how we can manage our business and our production. That keeps us in a position to buy versus grow.

So, in a period of increased industry supply, then we'll simply buy that raw material, add value to it, and as long as we're focusing on the customer and growing our value-added sales, we've got a great footprint to do that within. By the way, we have plenty of value-added capacity over the next year too.

So, we're very comfortable that in the scenarios that we can paint forward, we've got a great outlook..

Okay. Thank you..

Thank you. Our next question is from Brett Hundley [BB&T Capital Markets]. Your line is now open, please proceed..

Hey, good morning, everyone..

Good morning..

Donnie, I want to stay on the topic actually and maybe ask Akshay's question a different way as well.

When you think about your strategy in chicken, specifically buy versus grow, can you discuss the level that you're comfortable taking your portfolio as far as buy versus grow as a percentage of your portfolio? And as the chicken cycle potentially slides off here in coming periods, I think there's more of a view today that we could see a slide instead of that sharp fall-off that we've traditionally seen across the industry.

As the chicken cycle potentially slides off or in that type of scenario, is Tyson's Chicken business equipped to return margin in line with kind of what you're looking for today, 11% or so?.

So, if I understood the question right on the front-end, we think we've got the opportunity depending on the part that we're buying. To buy up to as much as 10% of our sales, so – or the product that would go into our sales. So, we feel very good about the flexibility that we have within our network to manage buy versus grow.

If you remember a couple of quarters ago, I think, Dennis, when we raised our normalized range in chicken....

Yes..

...and certainly we've had great favorability in the marketplace for this year, it's certainly our intention to continue raising our margin expectations. And with the work we've done, to balance our portfolio across the various bird classes, increasing our value-added sales, right-sizing our small bird business.

We under-indexed big bird, but that's fine for us because there's a lot of that product available on the marketplace to buy. We have great Tyson brands. We're number one at frozen retail, number one in frozen snack and chicken, we're number one in fresh tray pack, number in IQF, number one in Cornish.

So, we've got a great brand presence in categories that are very meaningful to consumers. So, that gives us the confidence to be able to look at our business forward and feel very good about our ability to deliver..

one near term; and one longer term, higher level. First, starting with the question on your Beef business, you mentioned at the outset that results were softer than expected in a tough environment.

And surely, when we look at your outperformance relative to beef industry margin that we calculate, your outperformance that we've traditionally seen has come in a little bit during the quarter. And you mentioned a couple of different things with the West Coast port and then your plant in Dakota.

Can you give us a sense of what percentage of the impact was from Dakota and maybe how long that would be expected to last? You gave some assumptions on the port clearance but can you talk a little bit more about your beef plant there? And then longer term and somewhat related, how important and necessary is it for you, Donnie, and your team to remain a multi-protein company, offering everything that you do today? Thank you..

So, if I look at the impact of our Dakota City start-up to the rest of – well, to our Q2 results, let's see, if I think about our index, it may have been about, I don't know, 40% to 45% of the change in how our index performed versus where we had been performing in the previous couple of quarters.

And remember, in that quarter, cattle supplies were very, very tight, so that – well, we had a huge capital investment. We needed to start the plan-up. So, we did it. But we started to plan up in the quarter when we probably had the lowest cattle supply, so that didn't help matters any. But the good news is the plant started up fine.

We're working through the start-up issues on Q3, and it will help give us access to bigger cattle, which was what the whole process was all about. So, yes, that had an impact.

As we look forward, we think it's very important that we have a presence in the whole broad array of meat protein and as you know in our portfolio, some non-protein items that are very complementary to protein. So, yeah, you should expect us to continue to have that in the portfolio..

Thanks, Donnie..

Thank you. Our next question is Diane Geissler [CLSA]. Your line is now open. Please proceed..

Good morning..

Good morning..

Good morning..

Yeah, I had a question about your comments on buy versus grow and just wanted to make sure I understood them. So, you said you had the capability of buying up to 10% of your sales on the outside market..

For that part, I'm sorry. For that part. So, if it's breast meat, we can buy about 10% of the breast meat that we sell and run it through our plants..

Okay. So, just thinking forward, I mean, obviously, I think it's pretty clear to everybody that we're moving through a period where there's going to be significantly more production, whether or not you think 3% of the eggs are going to Mexico, or whatever that percentage is.

You raised your expectations for total poultry availability this year from the time you reported your last quarter.

So I guess, the question that I think the investors are often asking me, so how should we think about buy versus grow? Pretty clear you've probably been raising most of your own sales here recently, but as you look into the second half of 2015 and into 2016, can you talk about what your production plans are versus the industry to help give us a better idea about how exposed you're going to be to leg quarter prices here going forward, and how exposed you will be to the boneless, skinless breast meat price as we move to the summer and into 2016?.

Sure. For the year, our production this year versus last will be flat. We've been up a little bit in the front half of the year. And after July 4, our production will be declining versus year-over-year.

So, for the total fiscal year, our production volume will be flat, which, by the way, to your point, does reduce risk of export vulnerability and that type of thing. Of course, let me hasten on to add, because I don't think I've mentioned this before, and I think it's really important.

Over the last three years, we've reduced the amount of export leg quarters we sell every bit of 30%. And if you go back to probably fiscal 2010, sometime in right 2009, fiscal 2010 we're probably down in half. So, we feel very good about – and these are the things that we're doing to provide a more consistent, stable return that grows over time.

And so, we feel very good about our ability to maintain production flexibility and to improve our mix..

And then in 2016?.

I think – hey, I think our production will be basically flat in 2016. We think we'll be buying more raw material in 2016 than we do this year. And by the way, we're up 50% this year over last year. We think our sales volume will be up. I think I mentioned earlier about 1% or 2%. Our dollar sales will be up a little bit higher than that.

But feel very comfortable that we can buy the raw material we need and add value to it – sorry, add value to it and be able to maintain our margin structure..

Okay. And then I wanted to ask about the cash priorities which are pretty consistent period to period in terms of your list of items that you're spending your cash on. But I wanted to ask about share repo which – I'm generally not a big fan of share repo.

But I think there's a big disconnect between the sell side recommending your stock and you seeming very confident in your ability to generate 10%-plus EPS growth. And the buy side, just if you look at kind of the fact that the stock has not done much over the last 12 months.

Given your level of confidence in your ability to increase earnings 10% from here on out, why is share repo not sort of higher on that list of priorities if you really feel that your shares are kind of undervalued?.

Great question, Diane. But remember, it's important for us to maintain an investment-grade rating. And so, what we're trying to do is get down below a net-to-debt-to-EBITDA of about 2 times, and we think kind of the sweet spot for us would be in that 1.5 times to 2 times area.

So, when we get there, then, drawing off $1 billion and growing in free cash flow, that opens up the door for returning cash to shareholders in the absence of major growth opportunities. Now, I would hurry on to say that growing is, first and foremost, most important to us. But that being said, certainly we can start buying back stock at that time.

I would see that as an opportunity at the start of 2016, which should be a good time to get started at the rate we're running..

Okay.

So, you think you'd be sub 2 times by the end of this fiscal year?.

Yes..

Okay, terrific. Thank you..

Great. Thanks..

Thank you. Our next question is from David Palmer [RBC Capital Markets]. Your line is now open. Please proceed..

Thanks. Good morning. At your Analyst Day, you mentioned that you believe Tyson's Chicken segment margin would be 5% if the industry margin were to go to zero. Were you implying that 5% would be your best thinking for a worst-case margin for that segment? How did you arrive at those numbers? Thanks..

So, what we did is we just looked at our incremental improvement over the last four or five years in relative benchmarking services. The real point I think looking forward is we feel great about where our business is.

Yes, we benchmark ourselves consistently, but for next year, we think we'll be at or above the upper end of our range, and our guys are running a great chicken business..

When you think about the export bans, typically – I don't know how many case studies there are or similar situations.

How fast do those bans lift typically after an avian flu issue subsides?.

Typically, and I'm emphasizing typically, 60 days, probably more likely 90 days. And so, for us Arkansas has been hit a little bit more than the other states because of our production footprint. And we saw a AI event in Arkansas early in the first week of March.

But as we continue – those countries that banned the United States and not on a state-by-state basis, as you continue to see AI accessions in turkey and table egg flocks in the northern Midwest, you can pretty well figure a timeline no sooner than 60 days to 90 days out front before the ban will be lifted..

And then one last one – removing human antibiotics seems to be a restaurant industry move, at least, that will play out probably through the end of 2016 if you're using McDonald's as an indicator.

What does this mean? Will this be the new price to play for the foodservice side and perhaps increasingly in the supermarket side? What ultimately will this mean for your Chicken segment margins over the next couple of years? Thank you..

David, it really won't have a margin impact.

Our view is that by eliminating non – by eliminating the human-used antibiotics out of our poultry production by September of 2017, that is the most reasonable and responsible approach to balancing a global health concern about antibiotic resistance with our core value of taking care of the welfare of the animals that are entrusted to us.

So, that was the impetus about what we're doing. It wasn't necessarily in reaction to anything any customers were doing. It was a matter of, we've been working on this effort for several years. We've reduced human-used antibiotics in our supply chain by over 80% in the last four years.

And we now think we can see a point in the future, a couple of years from now, when we can not have to use human-used antibiotics in the poultry production. But I don't think – but back to the original point, it will not have a material impact on our cost..

Thank you..

Thanks..

Thank you. Our next question is from Tim Tiberio [Miller Tabak]. Your line is now open, please proceed..

Good morning and thanks for taking my question. I guess, moving beyond some of the near-term export challenges, I wanted to get your thinking about, I guess, your medium-term global poultry or chicken demand growth.

One of your global peers in Brazil recently stated that they felt that supply growth within Brazil, unlike the U.S., was still fairly benign.

And I guess looking out in just 2016, if we're not seeing the supply growth come back as quickly from one of your global export competitors, do you think that this could actually create maybe a release valve or a window of opportunity if we can get past some of these export bans?.

So, certainly that would be a favorable development. As we look forward, we think protein demand globally is going to continue to grow at about 2% year, maybe just a tad under that. We think chicken probably outpaces the other proteins just because it's the most efficient converter of feed into meat.

That could be a headwind – so, there's still time for that dynamic to change so it's a little bit too early for us to call it, but certainly that being the case, that would be helpful to the back half of our 2016 year..

Great. And just lastly, USDA mentioned that they're starting, I guess, testing within animals for the potential vaccine for the AI strain.

I know it's very difficult to handicap at this point, but I guess, have you had initial conversations with USDA and FDA? I would assume, and do you have a high confidence level that we could get that into production potentially before we start seeing the southern migratory path of some of the wild waterfowls which I guess has really been the issue with the spread of AI this year?.

It's really too soon to say, Tim. We've got lots of contacts in what I will call animal pharma that we work with and it's just too early to say whether or not we'll have an effective vaccine..

Okay. Thanks..

Thank you. Our last question is from Tim Ramey [Pivotal Research Group]. Your line is now open, please proceed..

Thanks so much. Just a little bit of a follow-up on the last question, but Donnie, it's been a spectacular couple of years, but it wasn't spectacular for some of the reasons we thought it would be, which kind of relates back to the feeding the world, growing middle class where we are going to see more protein demand globally.

I mean, do you kind of think that's just demand deferred or is that demand denied? Is that still part of the long-term story here?.

Yeah. I really think it is. As we look across the globe, you've got economies in some of the key growth areas that have slowed down maybe more than we hear about.

And so I think that demand growth is temporary, as we continue to look, and we've spent a lot of time over the last several months looking at population growth, income growth, those regions of the countries where that will happen, how much of the growth in food consumption, and how much of the growth in value-added food consumption is going to happen outside of the U.S., and it is significant over the next several years.

So, yeah, I think maybe near-term, we've seen a little unexpected softness. But I think as we look out about three or four or five years from now, we'll look back on this time as a small dip in a period of time where we still saw about 2% consumption growth in protein worldwide..

Great. And then just on food service, wondering if you're seeing any mix change in reaction to perhaps limited supply of liquid eggs, or the beef supply being so difficult.

QSRs, is there incremental shift in kind of what the menu looks like?.

We think that, of course, 50s have been pretty soft, but 90s have remained very, very high. So, we think as we – and it seems to us that the cutout is shifting a bit, and you've seen 50s prices firm back up. So, as we look at that, what we think that's going to do is drive incremental growth particularly at QSR in chicken.

We also are seeing, fortunately, and because the QSR Mexican category is growing the most – so, QSR Chicken's probably up 8%, QSR Mexican is up 11%. And QSR Mexican favors our portfolio in a couple of ways. It uses dark meat, and it also is a pretty heavy user of protease, so that's good for our business, too.

So, as we look at the trend going through the summer, we feel very good about it being favorable to our business..

Excellent. Thanks..

You bet..

So, before we go, I'd like to say again that we are building momentum at Prepared Foods. We're capturing synergies, and we're transitioning to a less volatile, higher-return business that gives us the confidence that we'll achieve our annual guidance of $3.30 to $3.40 adjusted EPS this year and at least 10% EPS growth next year.

Thanks for your time today and have a great week..

Thank you, speakers. That concludes today's conference. Thank you for participating. You may now disconnect..