Jon Kathol - Vice President, Investor Relations Donnie Smith - President and CEO Dennis Leatherby - Executive Vice President and CFO

David Palmer - RBC Capital Markets Akshay Jagdale - KeyBanc Robert Moskow - Credit Suisse Adam Samuelson - Goldman Sachs Ken Goldman - JP Morgan Tim Ramey - Pivotal Research Farha Aslam - Stephens Brett Hundley - BB&T Tim Tiberio - Miller Tabak Diane Geissler - CLSA Michael Piken - Cleveland Research Ken Zaslow - Bank of Montreal

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

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

Thanks, Donnie, and good morning, everyone. This morning I will be referring to our first quarter adjusted operating income and EPS. Please refer to our press release issued earlier this morning for a full reconciliation of our GAAP to adjusted results. Fiscal 2015 is off to a great start. With record sales, operating income and operating cash flows, we were able to reduced debt by $650 million. First quarter revenues were $10.8 billion, representing over 23% growth compared to a year ago as we continue to execute our growth strategy, as evidenced by increased sales of Chicken, Beef, Pork and Prepared Foods. Total company adjusted return on sales for the quarter was 5.2% and adjusted operating income was $534 million, representing a 37% increase over Q1 of ’14. Our adjusted earnings of $0.77 per share, represents a 7% increase over a strong comparative period a year ago. We had record operating cash flow for the first quarter at $812 million and we spend $231 million on capital expenditures. This outpaced our depreciation by $83 million, as we continue to invest in projects with a focus on delivering high ROIC. Our effective tax rate for the first quarter was 28.8%. On an adjusted basis, this rate was 34.8%. Net debt to EBITDA for the past 12 months was 3.5 times and on a gross debt to EBITDA basis, this measure was 3.7 times. On a pro forma basis, including Hillshire's results for the past 12 months, net debt to EBITDA was 2.7 times on an adjusted basis. Including cash of $381 million, net debt was $7.1 billion. Total liquidity was just over $1.6 billion, remaining above our goal of $1.2 billion. Net interest expense was $75 million during the first quarter. For the quarter, our diluted shares outstanding were $416 million. As Donnie pointed out, we closed on the sale of our Brazil Chicken operations during the first quarter. As a result of the sale, we received proceeds of $130 million, with additional proceeds expected in the second quarter relating to the working capital adjustment. The sale of our Mexico operations is expected to close in the second quarter. Now looking forward, here are some additional thoughts on 2015. Please note our accounting cycle results in a 53-week year in fiscal ’15, as compared to a 52-week year in fiscal 2014. Accordingly, this outlook is based on a 52-week year to make a better year-over-year comparisons. We expect revenues of approximately $42 billion for fiscal 2015, which is 12% growth over fiscal 2014. This was driven primarily by a full year of Hillshire brands’ results, offset by a reduction from the sale of our Brazil and Mexico Chicken operations. We expect to capture more than $225 million in fiscal ‘15 from our Prepared Foods’ profit improvement initiatives and Hillshire brand synergies. Net interest expense should approximate $280 million for fiscal 2015. We currently estimate our adjusted effective tax rate to be around 35.5%. CapEx is expected to be $900 million, which represents approximately $300 million or 50% more than our depreciation expense, as we continue to focus on projects that will create long-term shareholder value. Based on our average share price in Q1, we expect our diluted shares in Q2 to remain around $416 million, prior to considering any further changes in our stock price, which would impact the dilution from our tangible equity units. Our priorities for the significant cash flows that our operations will continue to generate are for rapid deleveraging and strengthening our balance sheet, a continued focus on disciplined capital allocation to drive long-term shareholder value and debt capacity to fund acquisitions to fulfill our growth strategies and to return cash to shareholders through share repurchases and dividends, all while ensuring we maintain plenty of liquidity. We have a lot of momentum going in fiscal ’15, with the addition of the Hillshire business team. We are pleased with our first quarter results, delivering 7% EPS growth over Q1 of fiscal ’14. Our Q2 should beat last year but likely will be less than Q1, due to a typical seasonality and the third and fourth quarters are expected to be really strong. As we continue to capture synergies from combining two great businesses, we are confident we will deliver adjusted EPS within our range of $3.30 to $3.40 for fiscal 15, which represents an increase of over 12%, compared to fiscal 2014. This concludes our prepared remarks. Jane we are ready to begin Q&A.

Thank you. [Operator Instructions] Our first question comes from David Palmer with RBC Capital Markets. Sir, your line is open.

Good morning, guys.

Good morning.

Good morning.

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

So, David, so we modeled our ’15, Chicken performance using several models and I’m very confident in our ability to deliver’15. So if you take advantage -- if you look at not only our brand leadership in fully cooked and in the fresh, I have and Cornish categories at retail, plus our leadership in food service. We’ve got a great broad balance portfolio. On top of that, we’ve made a lot of improvements in our sales mix. I mentioned in our prepared remarks that we’ve got great growth in tray pack. We are going to have the FT capacity in place to be able to take advantage of food processing business that we think will come our way in food service. We’ve got a great innovation pipeline. We’ve made a lot of operational improvements and we will continue to see benefit from our capital and investment. So if you look at that balanced portfolio, our pricing structure and these other factors, we’ll deliver ’15.

One question on the food service side. We're seeing a lot of demand, not just for protein but increasingly, there are players out there that want to upgrade the protein in some ways, assure consumers that it's all-natural. Maybe down the road, antibiotic-free chicken will be a bigger thing. But is there an opportunity for Tyson with that? How big of a deal could that evolution or perhaps even a margin constraint -- could that be having to shift to perhaps a more natural product as demand shifts? Thanks.

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

Thank you.

Sure.

I’m sorry. You ready for the next question?

Yes, we are.

I apologize. We have a question from Akshay Jagdale with KeyBanc. Sir, your line is open.

Good morning.

Good morning.

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

Yes.

So my question, I am going to start with to -- I will start with, it’s Hillshire-related, say acquisition-related, but it’s more of an sort of outlook on pork, right. So supply expected to increase on pork or the hog prices have come down. The retail values have come down. Presumably that should help a value-added pork business. So one, am I thinking of that generally correctly? And two, what are the implications of that on your segment margins for prepared foods, which you maintained your guidance as far as I can tell? So that’s my first question. I have a follow-up.

Okay. So two things you should expect. Number one, with increased supply that will likely also improve, besides the prepared foods piece which would come later maybe Q4, Q1, Q2, that’s -- Q1, Q2 of '16, that I think you should expect improvement in the back half in our Pork segment. So I think there we will have a double advantage if you will inside of our portfolio. But I would say you are absolutely thinking about it right about in improvement in the raw material structure underneath our Prepared Foods business. And at the retail brands, we are using our marketing support to position ourselves very well to take advantage of that.

But does it mean for your -- I mean, so how should we think of your guidance in relation to that?

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

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

So as we talked about in New York, we have a very balanced portfolio between the bird classes, the tray pack size, small bird, big bird, and the other sizes. So that tells coupled with the pricing structures that we’ve worked with our customers on in the last couple of years. So now we have this balanced portfolio. We’ve got a very good balance of pricing structures and mechanism, some that are tied to the market, some that aren’t. And remember we correlate a lot closer to the whole bird market values than we do to breast meat values. Now one other thing that might help is we do have and I am going to say X percent of our portfolio that is subject to, I will call it market pricing. But we also have X percent of our portfolio, that’s very balanced to that that we found on the outside market. So when the price goes down, only the portion of our portfolio that we sell based on market prices. We did a commensurate benefit in the different part of the portfolio from the lower cost of buying that raw material. And, hey, add on top of that, we have a great brand presence, number one at retail food -- which we are rebuilding that category and we are number one is fresh tray pack, we are number one is [indiscernible], we are number one in Cornish. We have a leading brand in foodservice. So you add all of that together and our buy versus grow strategy positions us well to take advantage of this.

Great. I will pass it on.

Our next question comes from Robert Moskow with Credit Suisse. Your line is open.

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

That is fair to say, yes.

Okay.

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

Okay. And whole bird prices to your point have done nothing but go up. You’ve seen some fluctuation in commodity fresh meat parts. Is there -- what would stop that forward movement in whole bird prices? I always get concerned about the supply growing. You seem to think that the demand is going to be strong enough to offset all of it. But, is 3% access just not enough to offset that forward momentum in whole bird?

Frankly, we’ve model past that and still with our pricing structures and the balance of how we go to market, we are still in good shape as supply increases above what a 3% access might indicate. Our buy versus grow strategy is we care a lot more about how much chicken we sell than how much we grow. And if you look at the last three weeks, we are over a 1 billion slaughter pounds. So since the beginning of the year, slaughter has increased something on the order of 7%. And if you look at particularly front half, I think wing standards and breast meat, that’s up 15%. So there is every indication that demand is more going to offset the supply increases.

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

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

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

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

Can you say how much?

No.

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

Your next question comes from Adam Samuelson with Goldman Sachs. Your line is open.

Yes, good morning everyone.

Hey, Adam.

So question in Prepared Foods, I'm just trying to think about how -- now that we have a four quarter of Hillshire under our belt, how we can evaluate that kind of combined pro forma performance. Last year, your Prepared Foods segmented $60 million of profit. Hillshire on a GAAP basis did $116 million. And you talk about $60 million of synergy capture. Is that synergy capture number a run rate or realize in the quarter? And so I’m just trying to think about that, $132 million pro forma versus the $111 million realized and synergy is less, the fire and other material inflation, help us bridge some of the performance for the pro forma value?

Good question. So in the Prepared Foods segment, the raw material impact was $83 million. The synergy capture was captured in Q1. It's not a run rate. It's captured in Q1. And I think $55 million of the $60 million was in the Prepared Foods segment. So think about it this way, in the first half -- I think we mentioned this at Investor Day that we typically in Hillshire locked in supply -- raw material supply for about six months. So we've got -- call it in our Q1, we've got that pretty high cost raw material in the summertime in the cost of goods. It's going to be about $140 million or so impact in the front half of our fiscal year, but then we get relief in the back half of the fiscal year. So another part of the improvement that we saw some in Q1, it will get more prevalent in subsequent quarters, is we closed these plants and we've taken back production and put it into other plants to increase our capacity utilization. Demand is up. Demand has been strong. All of our brands -- I mentioned we grew sales in eight of nine categories and share in five of nine categories. We connect -- we need to look at so. I feel very good about our building momentum out forward.

Okay.

Does that help?

It does. And maybe as a follow-on on the synergies, I mean, as you’re kind of think about where you’re today. $60 million is realized in the December quarter. What annualized run rate are you at today? Where in the $220 million -- in excess of $225 million, what areas are driving the upside in the ‘15 plan relative to what you thought a few months ago? And any thoughts moving forward, I know you talked about things that are still not in the $500 million plus number internal raw material procurement and higher faster organic growth. Any thoughts on putting a final point on those buckets at this point?

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

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

Thank you.

Thanks.

Our next question comes from Ken Goldman with JP Morgan. Your line is open.

Hey, thanks for the question. I just wanted to follow up on what Adam was asking because -- let's say you kind of want to normalize year-on-year. Last year, you had -- just for Hillshire $1 billion in revenue -- $1.1 billion and $139 million in EBIT. This year if you take out the synergies and you take out the $83 million in cost, you are at exactly the same EBIT, $139 million and you’ve added a significant number of revenues, right, whether you want to look at it as Tyson adding onto Hillshire or Hillshire adding on to Tyson. I know there is D&A and there are some moving pieces but I just don't see how you can add that many revenues of $1.2 billion and not have EBIT go up a little more even if you exclude all those costs in synergies. You understand what I am saying? If not, I can clear it up after the call. I’m just having a hard time seeing why this margin wasn’t higher?

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

Yeah.

Even though I think you’re right. It's probably going to take a long time -- why don't we just take this one off-line.

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

Prepared Foods is front-loaded raw material cost that we’ll recover in the back half and we’ll take. The margin improvement will improve sequentially quarter-over-quarter through our year and take that momentum then into ‘16. So we’re very optimistic about start -- how we started and have some possible tailwinds to make and maybe even a little better than we’re calling it today.

Okay. So 1Q didn't really act different than your expectations. Is that fair?

No, no, no. Actually our Q1 was slightly over planned, not by much, but it was slightly over planned.

Okay. And then let me shift subjects and Donnie, how are you thinking about export dynamics today given where the dollar is trading. I might have expected some additional pressure on the back half of the bird by now. Are you surprised leg quarters are hanging in there? Are you modeling in some weakness going forward? I’m just curious what you guys are looking for down the road?

Sure. So two things I’m concerned about -- no, hey not -- don't be taken when I use the word concern that it changes our guidance in anyway. But this West Coast port slowdown is now starting to back up a little bit in meat. We’re starting to see some cuts like plates and that type of thing going into grinding meat. We’re not there yet but we’re starting to see ground beef products has dropped a little bit. Now, we’re getting some fairly encouraging news release we did in the front end of the week about a possible resolution. But that is going to be a little bit of a logistics of evil probably for the next one to six weeks, two months, something like that. Now I don’t see that frankly impacting our margins because as the cutout drops, that will give -- those are spread businesses, beef, pork or spread businesses and that will frankly move into livestock. So now if you look at chicken, that kind of picture on beef and pork. If you look at chicken, we are starting to see softness in jumbo leg quarters. We’ve got the banned -- China has banned now because they have problems on the West Coast. We have had in Europe. Russia is not taking any U.S. leg quarters. And so there has been a repositioning of leg quarter movement. The small and medium prices really haven’t changed very much. They are still hanging around this 40-ish stock number but recent trade has been jumbo leg quarters for that plus down period, probably slightly below $0.30 a pound. So we have all that factored into what we’re talking about. And we dramatically reduced our exposure to leg quarters. And there are some internal offsets in -- like the fuel prices that we experienced in our live production area and feed hall that kind of thing. First, we dramatically increased our production in boneless dark meat. And that’s the category that’s growing both at food service and retail. So we continue to shift our leg quarter mix into boneless category. Hope that’s a pretty good color.

It is. Thank you very much gentlemen.

You bet.

Our next question comes from Tim Ramey with Pivotal Research. Your line is open.

Good morning and thanks for the opportunity. Donnie, thinking back at -- over the last several years, I remember lots of commentary on high gas prices and weak consumer picture on QSR demand and you touched on that? But I expected a little more enthusiasm maybe for the outlook on QSR's? I know, I sure think that there's a lot of incremental spending that's going to shift out of gas tanks and into breakfast, various QSR revenues? What are your thoughts on that?

So seeing casual actually grow traffic for the first time since the recession is a very good sign. You are right. QSR is leading the growth. Frankly, if you take out one large QSR, QSR grew by 3.6%. So there's a lot in that. It's interesting to note in food service that you're seeing the younger brands outperform the more mature brands. So that's an interesting dynamic that we'll be able to take advantage of. So one other thing, I mentioned off-site. We have a very strong presence in deli and retail and that business is very, very strong. We are seeing like 3.5% growth in deli. You are seeing lodging and these other off-site categories grow by 3.5%, so where we have, by the way, a very strong presence. So we’re very optimistic about that -- we don't have that QSR promotional order today but we're in a lot of conversations. And we still think that ground beef prices are going to be relatively high and food services going to want to promote chicken this year, so we feel really good. By the way, that also plays a bit to our advantage in our buy versus grow strategy. And we've got -- we'll have four incremental FP lines in production by late spring. So we're ready. Last year we gave up some promotions because we just didn't have the capacity to do them. This year we can do them.

Okay. And then just a quick follow-up on beef, it sounds like you had adjusted slaughter rates down a little bit. Did these catch you off guard in the first quarter, was that -- were you a little out of position operating at too high of an operating rate or and in other words, again, I would normally expect 2Q to be worse than Q1 and I was surprise that you actually loss money in the Q1?

Yeah. I wouldn’t say, we’re out of position, I would say that cattle availability while it was in our area. Cattle continues to move to the Midwest to be fade, just because of the freight rates that it takes to get the corn outside of the corn belt. So cattle continue to move toward us. I think, probably, we put some cattle forward. When I look it and the reason I say that, when I look at how quickly cattle prices responded to market signals in Q1, it told me they were in pretty strong demand. And now when you look at this last cattle on a feed report, it indicates to me that some cattle did get pushed forward, which is probably going to help us in the latter part of Q2 and certainly, going into the spring. And the front half is always weaker than the back half, and we tend to look at our cattle business not quarter-to-quarter but throughout the season. So it may have moved a month or two versus what we would have thought, but we are well -- we were well-positioned to take advantage of it. I mentioned, our index has improved versus we keep a index of our performance versus the USDA numbers and we did improve. So that’s what I’m looking for.

Thanks so much.

You bet.

Our next question comes from Farha Aslam with Stephens. Your line is open.

Hi. Good morning.

Good morning.

Good morning.

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

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

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

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

That’s very helpful. Thank you.

You bet.

Our next question comes from Brett Hundley with BB&T. Your line is open.

Hi. Good morning, gentlemen.

Good morning.

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

Sure. So you're right. We will be able to continue to drive our profitability. And the real reason behind that is we’re continuing to support the innovation that we have in the marketplace today. We’re building for more innovation in the back half of our year and kind of extending into some other categories, so that's going to continue to help. And I believe what we have seen and as we have entered the year, we're exactly on plan with where we thought we would be. And by the way, we're going to adjust the marketing support a little bit for our anytime launch. Velocity is not exactly where we wanted to be. Their distribution is great but we need to tune up velocity there, which will happen in the back half of the year. And we’re in -- I think, great shape in our categories and the categories are very strong. So if you add our positioning, how we will adjust math spending throughout the year to keep a good balance between volume and profit, and then we're positioning ourselves, because we have a pretty good feel for what the raw material will do. We're positioning ourselves to maintain that margin growth and accelerate, through this quarter and then accelerate it in the back half of the year.

Your point about the categories being in such good shape as they are….

We have advantaged brands and advantaged categories and that is very good for the long-term potential. Both are Prepared Foods and our chicken business.

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

Sure. So let's talk about four components. And I don't disagree that recent data -- I agree with you, recent data would indicate that supply will be higher in the year. And remember, we don't really care how much we grow, we care how much we sell. And so we will manage our production based on our forecasted demand. We balance to the nearest whole bird increment in whatever size that is and then our buy versus grow strategy puts us in a position to buy raw materials that are out of balance, which doesn't leave us stranded with parts who maybe having -- maybe an excess that type thing. So that's kind of the general framework, but on top of that think about this, explosive growth in tray pack. And we are a tremendous tray pack supplier. We're adding capacity and we're going to be unencumbered in our growth in tray pack. And tray pack -- fresh tray pack at retail is really benefiting from high retail beef prices. So that -- plus we are increasing our further processing capability to be able to take advantage of growth, both in retail, frozen, fully cooked, as we take this great innovation engine and grow that category with new news plus at food services, the food-service operators want to grow there. We have a very balanced and broad portfolio. We have a good balance between the bird sizes, the tray packs and small bird, and all those things. Plus you take our pricing structures, which we have a blend in summer, based on the markets. Some are based on raw materials. But what we've done is established a way to protect our margins and grow our customers business using our great service and our great innovative capability, which is very valuable to them. And they frankly don't get anything like it from anyone else. Add on top of that, we've continue to spend pretty strong against our chicken business, and we continue to be more and more efficient. One quick case in point, when we saw our production issue in our fully cooked business, we actually added an incremental million pounds a week of capacity to that -- to one of those locations and created an even more efficient operation. So that will pay off in the future. So if you take a blend of the consumer benefits that we can take advantage of with our portfolio. And then the customer who depends on us for innovation, quality, service and those components and the balance of our portfolio, on top of our buy versus grow strategy, it's a winning combination. And it stabilizes our earnings and that's why we took ‘15 up. And we feel very strong about ‘16 because the same dynamics will be in play.

All right. Thanks Donnie.

Our next question is from Tim Tiberio with Miller Tabak. Your line is open. Tim Tiberio, your line is open.

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

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

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

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

Perfect. Thanks for your time.

Our next question comes from Diane Geissler with CLSA. Your line is open.

Good morning.

Good morning.

Congratulations on your quarter.

Thanks.

I just wanted to ask about -- I think it's pretty widely observed that ‘15 is going to be a good year, but I am sort of getting the sense from clients that I talked to that it all falls apart in ‘16. And so I just wanted to get to this point about the QSR, a nice idea, go ahead. Chicken purchases are durable goods. I mean to me, I look at it and say, well if gas prices are down and still low, I mean maybe they move a little bit higher. But I don't think anybody is predicting that they go back to where they were 12 months ago. And wage rates we know are up this year and most of the states that raised their minimum wages are raising them again next year. We know we don't have any supply on the beef side coming for at least two to three years. So, I guess I looked at ’16 and just say, is there anything you are hearing from QSR? Any of your major channels that would suggest you that demand is just going to -- it’s just kind of pent-up demand for Chicken over the summer and then it just evaporates because I really can't believe that? And then my follow-up, which I will ask just now, is based on that answer. I looked at your changes to your outlook in your major segments. And all of them are positive like lower interest expense, better margins in Chicken, et cetera, et cetera. And so I look at the guidance range of $330 million to $340 and there has been movement there yet. You have guided to mostly positive changes in the outlook on a segment basis. Is there any reason why you're not putting your earnings range out today? I mean, there are two questions that are sort of linked. Thanks.

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

Okay. Great. Thank you.

Our next question comes from Michael Piken with Cleveland Research. Your line is open.

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

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

Our final question comes from Ken Zaslow with Bank of Montreal. Your line is open.

Hey, good morning, everyone.

Good morning.

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

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

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

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

I was just making sure I wasn’t confused.

No, you got it. You absolutely have it.

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

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

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

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

That does conclude today’s conference. Thank you for participating. You may disconnect at this time.