Tyson Foods Inc Class A TSN
Q4 2012 Earnings Call Transcript
Transcript Call Date 11/19/2012

Operator: Good morning, and welcome to the Tyson Quarterly Investor Earnings Conference Call. All participants have been placed in listen-only mode until the question-and-answer session. Today's conference is being recorded. If you have any objections, please disconnect at this time.

Now, I'd like to turn the call over to Jon Kathol, Vice President of Investor Relations. Sir, you may begin.

Jon Kathol - IR: Good morning and thank you for joining us today for Tyson Foods Conference Call for the fourth quarter and 2012 fiscal year. I need to remind you that some of the things we'll talk about today will include forward-looking statements. Those statements are based on our view of the world as we know it now, which could change. I encourage you to look at today's press release for a discussion of the risks that can affect our business.

On today's call is Donnie Smith, President and Chief Executive Officer; Dennis Leatherby, Chief Financial Officer; and Jim Lochner, Chief Operating Officer.

To ensure we get to you as many of you as possible, please limit yourself to one question and one follow-up, then get back in the queue if you have additional questions.

I will now turn the call over to Donnie Smith.

Donnie Smith - President and CEO: Thanks, John. Good morning everyone, and thanks for joining us today. Before we get to our results I want to say that our hearts go out to everyone in the Northeast affected by super storm Sandy and I'd like to thank the Tyson team members who traveled from nine different locations, some as far away as Oklahoma, Arkansas, Virginia and Tennessee to prepare and serve meals that are meals that matter beating size and beyond New Jersey and Staten Island. Our teams have worked with local volunteers to feed more than 60,000 meals to first responders and storm victims. These team members had it in their hearts to make a difference and I'm proud to be associated with them.

As you saw in our press release this morning, we had a strong fourth quarter and another very good year. In the past three years our EPS has averaged around the $2 mark on an adjusted basis. That's a new base level of performance when you look at this Company's EPS over time. I'm very proud of our management team and all of our team members. Thinking about what we've accomplished over the last three years in a sluggish economy with unfavorable market dynamics, staggering input cost increases, it really is impressive. So I'm going to take a minute and list what I see as many of the important accomplishments.

We produced consecutive record sales three years in a row with an 8% compound and annual growth rate. We generated $3.7 billion in operating cash flows and this is after funding $600 million in working capital increases. We invested nearly $2 billion back in our Company through CapEx. We paid down debt by $1.1 billion. We reduced net debt to cap from 34% to 18.4%, that's the lowest levels since the IBP acquisition.

We reduced net debt to EBITDA from 2.8 times to 0.8 times. We got our debt rating back to investment grade with all three rating agencies. We improved our liquidity position to over $2 billion at the end of fiscal '12. We bought back $400 million of our stock or over 22 million shares. We improved production efficiencies throughout our operations and achieved $750 million in operating efficiencies in our Poultry segment alone in the past three years and over $1 billion in total in that segment.

We developed a cohesive strategy and a plan for growth around our multi-protein, multichannel, multinational business model. We stepped up our international growth efforts, especially in China. We diversified export sales so that we aren't overly dependent on any one country or region and as I've said earlier and I think it bears repeating, we averaged around $2 a share in adjusted EPS over the last two years and we did all this with nearly a $1 billion in additional feed ingredient costs in the past two years.

We're establishing a culture of lean thinking, operational excellence and continuous improvement. We're better, safer, more dependable Company. While it's good to look back and remind ourselves of how far we've come, our destiny is not to become a low-cost, commodity and protein Company. Our customers and our stakeholders need us to grow into a solution providing Food Company. We've laid the foundation and we can never forget what got us to this point, but what got us here won't get us there.

So, today, we'd like to share with you where we will be taking the Company. Let's start with sales growth. Over the next three years Tyson will accelerate our growth in value-added poultry and prepared foods and in our international business. And as a result, you should expect to see our top line sales grow between 3% and 4% annually. Our value-added sales should grow at twice that rate or at 6% to 8% and the sales from international production should grow at twice that rate of 12% to 16% a year.

We will grow our existing domestic businesses as our customers go to supplier by providing quality, service and innovation. We will make headway into other channels like convenience stores. We'll focus on developing new value-added products and of course will grow our international business. Our intention is to grow that business aggressively.

Now, let's look at our earnings expectations. We're anticipating and incremental $600 million in feed ingredient cost in fiscal '13 and we'll need to offset that through pricing and other measures. I should hurry on to say that I think fiscal '13 EPS will be similar to the last couple of years and it's encouraging to note that we're off to a great start in Q1.

So, how will we accomplish that? Well for perspective, our startup operations in Brazil and China lost a little over $100 million in FY '12. In China, as we bring on more company-owned housing in 2013, allowing us to move more of our mix away from wholesale and into more desirable channels, we will reduce our losses substantially.

We're also executing better in Brazil and will benefit from the profits we're making there and moving our mix to include more value-added offerings. And frankly, in FY '12 we made some missteps in part of our domestic business that cost us too, but even with these missteps, we still had very strong results in 2012. We learn from our mistakes. We won't be making them again which gives us a head start on 2013. We're planning to gain another $100 million in our poultry prepared foods business in this year. We also expect earn price increases based on our quality of service and innovation. We're going to upgrade our product mix with more value-added items throughout our segment and we're poised to make significant strides in growing our Prepared Foods business. Jim will add a few more details about this in his remarks.

There is a lot to be excited about because we've positioned ourselves well for fiscal '13. Yes, there will be challenging fundamentals, but that's always the case in our industry. It's our job to manage them and we think we're proven we can do that. Our team figures it out and finds way to get it done, therefore we expect EPS in FY '13 to be flat to the previous two years and fiscal '14 and '15 should grow at a rate of around 10%.

Our cash flow will continue to be strong and combined with our strong balance sheet we'll have several options to deliver value to our shareholders. We'll continue repurchasing our shares, investing in our business, and seeking the right acquisition to fill gas in unmet consumer needs.

That concludes my remarks. Dennis will now give you the financial update, followed by Jim who will talk about our operating segments. Dennis?

Dennis Leatherby - EVP and CFO: Thank you, Donnie and good morning everyone. We reported fourth quarter earnings of $0.51 per share or $0.55 after adjusting for our $15 million impairment charge on non-core assets, this compares to $0.26 per share a year ago. Reported fiscal 2012 earnings was a $1.58 per share or $1.91 after adjusting for the fourth quarter impairment and the third quarter charge of $167 million related to the early extinguishment of our 2014 notes. The $1.91 adjusted EPS compares to $1.89 adjusted EPS in fiscal 2011.

Pre-tax return on invested capital for the past 12 months was 17.1%. Over the past three years, pre-tax ROIC has averaged just over 19%. Capital expenditures were $160 million for the quarter bringing the fiscal 2012 total to a record $690 million. These investments reflect numerous capital projects for both our domestic and foreign operations that result in improved productive capabilities, labor efficiencies, yields and sales mix.

Our operating cash flow for fiscal 2012 was above $1 billion for a third consecutive year at $1.2 billion. Our effective tax rate for the fourth quarter was 39.9% or 38% excluding the impairment of non-core assets, which had no tax benefit. For fiscal 2012, our effective tax rate was 37.9% from 36.7% on an adjusted basis. Including cash of more than $1 billion net debt was just under $1.4 billion. Total liquidity was $2 billion well above our targeted range of $1.2 billion to $1.5 billion. Gross debt was just over $2.4 billion in line with the end of last quarter.

As Donnie mentioned, net debt to EBITDA for the last 12 months was 0.8 times. On a gross debt to EBITDA basis this measure was 1.4 times. During the fourth quarter, we acquired 3.2 million shares for $50 million under our share repurchase program. On our last call we said that we expected to reduce share repurchases until we had better visibility into our cash needs and market conditions. Due to the strong earnings in the latter part of the fourth quarter, we were able to purchase near previous levels while continuing to maintain our leverage and liquidity targets.

Our average diluted shares outstanding for the fourth quarter was 363 million and 370 million for fiscal 2012. This reflects the dilutive share effective options and convertible notes of $5 million for the fourth quarter and $7 million for fiscal 2012.

Before moving on to fiscal 2013, I would also like to take a brief moment to discuss the improvements, we've made to our balance sheet over the past few years. On this call four years ago, we discussed the convertible notes and follow-on equity offerings that we did in September 2008, to shore up our balance sheet. Then, four months later in March 2009, we issued $810 million of 10.5% five-year high yield notes and converted our revolver to a secured asset-backed loan facility. Following three years of considerable improvements in the operating results and deleveraging, we have returned to investment grade with all three rating agencies.

With these improved ratings, we have been able to replace the asset-backed facility with an unsecured revolver and issue $1 billion of 4.5% 10-year investment-grade notes to replace the high yield notes. Additionally, we have repurchased nearly all of the 22.4 million shares we issued in 2008, and we have cash in excess of our liquidity target, already on the balance sheet to retire to converts when they mature in 11 months. In summary, we have put the expense of capital raises of 2008 and 2009 behind us, and that feels great.

Now, looking forward, here are some thoughts on fiscal 2013. We expect revenues of approximately $35 billion, up 5% over 2012. Debt interest expense should approximate $140 million, down approximately $37 million from 2012, when adjusting for the premiums paid to extinguish the high-yield notes early. The effective tax rate should be around 36%. Our preliminary CapEx plan is around $550 million which may increase as we gain further visibility into the year ahead.

The improvements that we've made over the past three years have provided us with a balance sheet that is a competitive advantage and a solid foundation for our strategic plan. This morning, we reported our Board of Directors declared a special dividend of $0.10 per share for our Class A stock and $0.09 per share for our CLASS B stock. The Board also increased our regular dividend by 25%. Our sustained new level of performance combined with the strength of our balance sheet and liquidity has given us the opportunity to increase our dividends to return cash to shareholders.

Our priorities for excess cash in the coming year include additional capital spending to improve and grow our existing businesses, acquisitions to fulfill our growth strategies around value-added products and our international footprint and returning cash to share shareholders through share repurchases and dividends all while ensuring we will maintain plenty of liquidity at our disposal. Accomplishing these priorities will position us well to meet our objective of at least 10% annual EPS growth beyond 2013.

With that I will turn it over to Jim for a closer look into our operating segments.

James V. Lochner - COO: Thanks, Dennis, and good morning, everyone. I will begin with the Prepared Foods segment which produced $39 million in operating income in the fourth quarter and a 4.8% return on sales. For the year Prepared Foods had $181 million in operating income and a 5.6% return on sales. Average sales price was up 1.6% on 0.9% lower volume. We are focused on growing this segment and we recently launched several new products including frozen hand held snack items, Tyson brand lunch and meats, chicken lunch and meat and hotdogs.

We have invested in our Houston plant to improve the efficiencies and increase our flexibility for lunchmeat production which will allow us to grow that business. In addition we are following the success of Wright Brand bacon with Wright Brand fully cooked ribs and Sliced Beef Brisket. Wright as a premium brand in these products are exceptional quality and flavor. Our R&D, culinary, consumer insights, sales and marketing teams are working closely with our customer base to provide new products and category solutions. In the Deli channel, Tyson continues to solidify our position as a leader in consumer and shopper research. For the second year in a row Progressive Grocer magazine recognized Tyson Deli as a Category Captain for Deli prepared foods. This award is a validation that Tyson Deli excels in the tools and knowledge that grow our customer businesses.

Looking ahead in 2013 fiscal year for Prepared Foods segment, we expect our growth to include building on our position as the country's leading food service pepperoni producer and earlier this year, we completed the state-of-the-art expansion of our Council Bluffs, Iowa pepperoni plant. We're also exploring growth opportunities in tortillas and ethnic foods and developing greater presence in the convenience store channel in addition to our improvements in luncheon meats.

Now turning to Pork, the segment posted $68 million in operating income and a 5.2% return on sales in the fourth quarter. Margins were squeezed early in the quarter carrying over from the supply demand imbalanced experienced in our fiscal third quarter. In the fourth quarter, we continue to perform well against our internal index goal using the reported USDA prices for the cutout, drop credit and regional hog cost. We have continuously improved against this index every year and we achieved this by managing mix, yields, value added premium programs and pricing analytics.

For the fiscal year, Pork had $417 million in operating income and a 7.6% return on sales. Average sales price was down 1.5% on 2.4% higher volumes. In fiscal '13, we expect industry hog supplies to be relatively flat. We expect Pork exports in 2013 to remain similar to 2012 and overall margin should be strong.

Turning to our Chicken segment, in the fourth quarter we had $160 million in operating income and a 3.8% return on sales or a 4.3% return excluding the impairment of our non-core China assets. Excluding losses from our international startup operations, Q4 return on sales was 5.7%.

For the year the Chicken segment produced $446 million in operating income and a 3.8% return on sales. Excluding the international startup losses return on sales in fiscal '12 was 5.1%. Average sales price was up 9.2% on 3.6% lower volume.

I think we should be pleased with these results considering we overcame $320 million in year-over-year an additional feed cost, aided in large part by the $115 million in operating efficiencies we achieved, which was short of our $125 million target. This proves we have the pricing and operational levers that allow us to deliver strong results in periods of high input cost. Sales volume decreases in the quarter were due to our buy versus grow strategy, which resulted in fewer parts we didn't have to sell at reduced prices. Growth in our international operations offset some of the domestic volume decreases in our Chicken segment.

We will continue to focus on aggressive growth of value-added domestic retail and international chicken sales and we anticipate heavy chicken features food service national accounts throughout the year. We have maintained the production cuts we put place in 2011 and we'll supplement our needs with the purchases on the open market. We would be pushing for price increases for our chicken products across the board and we expect our international startup operations to improve substantially as we continue building Company-owned chicken products, reducing our exposure to the market birds and benefiting from strong customer acceptance in the retail and foodservice channels.

Our overall outlook for the Chicken segment is positive. We believe we can adjust to the current grand forecast with our focus on value-added price, overall mix and operational improvements.

The Beef segment produced $117 million operating income in the fourth quarter and a 3.4% return on sales. For the fiscal year operating income was $280 million with 1.6% margin. Average sales price was up 14.4% on 11.3% lower volumes. Our Beef business has been profitable through this point in Q1 and while the reported USDA drop credit versus cattle costs has been showing a negative margin for quite some time, we consistently outperformed this reported relationship with our focus on merchandising premium programs, (indiscernible) mix and ground beef operating yields.

Currently we're optimistic that fiscal '13 beef earnings should be similar to fiscal '12 with upside for more emphasis on value-added beef in the overall mix and pure market issues like LFTB that we experienced in '12. We anticipate a reduction of fed cow supply of 2% to 3% in fiscal '13 with the largest decline beginning in Q3 however we expect to have adequate cattle supplies in all our plant locations. The last Cattle on Feed Report showed increased placements in Iowa, Nebraska, Idaho, and Washington. Also keep in mind there have been several structural changes over time in the beef complex.

Carcass weights are up requiring fewer head to produce the same number of pounds and we focus on our selling strategy to maximize the cutout and optimize premium programs. Our beef business is extremely efficient where we maximize revenue through numerous value-added programs like retail case-ready, especially trends in portion sub-primal and food service steak cutting operations. We're able to differentiate from the commodity categories through multiple value-added offerings

To wrap up my thoughts, I'd say that we have some near term challenges, but I'm not worried. We have demonstrated the ability to deliver results in adverse grain or supply demand conditions as that has become the norm for our businesses. I have confidence in our team's ability to understand these conditions, adjust their plans and stay committed to adding value to our products with customer and consumer needs in mind.

Our business units clearly understand the market fundamentals and what they need to do to continue to be successful. We are all dedicated to accelerating growth, stepping up innovation of products and services and cultivating talent to prepare for the future. That concludes our prepared remarks. Operator, we're ready for Q&A.

Transcript Call Date 11/19/2012

Operator: Kenneth Zaslow, BMO Capital Markets.

Kenneth Zaslow - BMO Capital Markets: I'm just kind of curious, when you guys laid out your plan of 10% growth for the next two years and kind of 2013 numbers, can you talk about how much of the industry specific fundamentals matter, particularly on the chicken side versus how much clarity do you have on those 2013 to 2015?

Donnie Smith - President and CEO: The underlying fundamentals that would go into our plan would basically be the number you see USDA put now and we look at various analyst and then kind of average all that. So, we just use the average of what those analysts were and it's really for us Ken, about pulling the levers that we know we can pull in our business. We mentioned an increase in operating efficiencies but, growing our value added, we are being successful in price increases. Our customers seem to understand that these higher grain prices are going to require higher prices. We continue to change the structure of a lot of our pricing agreements, our fixed priced exposure – annual fixed priced exposure's going to be single digits after the 1st of the year. So, you combine those kind of things and Ken, that's how we can be so confident about getting better in 2013.

Kenneth Zaslow - BMO Capital Markets: So, if the chicken production levels kind of are modestly lower, I'm assuming – call it 0% to 1%, you see that your ability to get to normalized numbers over a two year period is high or low, I guess, my question is, it doesn't seem like the chicken guys are cutting and if we stay in this higher feed environment like, what gets you to the normal level over the next, call it, 12 months to 18 months?

Dennis Leatherby - EVP and CFO: First of all, if you look at the last couple of quarters, you've had corn in excess of $7 delivered, you had soybean 450 plus close to 500 delivered in our domestic chicken business at a 5.7% return on sales in Q4, and a 5.1% for the year. So yeah, I think if you look at our 1%, 1.5% down in production, whatever the USDA number is on the 2013 and our current view of grain prices sure, we should be very comfortable, very high of confidence level in our ability to deliver these results.

Operator: Ken Goldman, JPMorgan.

Ken Goldman - JPMorgan: So thanks for giving the 2014 guidance and now you get everyone asking about 2014 and I will do the same. But I had a little bit of a different tack. I'm curious because you have a situation where corn futures are suggesting much lower corn prices for your fiscal '14. I can't see a situation where chicken production really goes up a huge amount in that time. So I'm having a very difficult time modeling – your chicken margin in a year like that where chicken production doesn't go up and corn goes down, modeling anything below your normalized range at all, I'm getting above it and I know everyone's numbers are different. I'm not asking for guidance on my model but why should we expect only 10% in it? Why shouldn't 2014 be a pretty darn good year when it comes to your chicken margin?

Donnie Smith - President and CEO: It should bake in. For us 2014 is a long time – free fall out there. If you are talking about that – yes, I mean I think at least 10% ought to be in everyone's mind across all of our business. Remember, we got to keep remembering, we are $33 billion-dollar multi-protein Company, not a $33 billion chicken Company. But yes, I can’t argue with you.

Ken Goldman - JPMorgan: Then one question just on when I hear Tyson talking about focusing more on value-added, focusing more on international. I go back to hearing Tyson talk about this five or 10 years ago, and obviously there were some good things that came out of that push, but there were some not so good things also right, where the Company arguably took its eye off the ball in terms of efficiency in its commodity chicken, beef and pork. I'm just curious how we as outsiders gain comfort, obviously you're a different company now and Donnie you've done a great job bringing cost efficiency back to the Company, but how do we get comfort that as you start to focus on value-added and international again that perhaps you don't take your eye off the ball elsewhere?

Donnie Smith - President and CEO: That's a great question and frankly it's one we spend a lot of time talking about around here. I think the difference is the foundation that's been build. When we talk about our strategy as Accelerate, Innovate, Cultivate, we always do so based on a platform of fundamental execution, fundamental executional excellence, operating efficiencies, lean thinking, the continuous improvement that type of thing and leveraging a strong balance sheet. It's taken three long hard years to get our balance sheet back in order. During those three years, we knew that we needed to build a strong platform of functional excellence and we've done that. I mean there is always room to improve and we embrace lean thinking and continuous improvement. So, we will never say we're there. But I can tell you that every person at Tyson Foods understands that we cannot ever take our eye off the ball and we've got to keep that firm foundation in place as we know build on it new platforms, new product offerings and the thing that gives us is an idea of the proper cost structure of that new platform because now we know what good looks like. So, great question and all I could draw you to is notice the difference in the last three years and then layer upon that good cost structure growth in value-added, not only in poultry, but also in our Prepared Foods business and I think we can start seeing a pretty bright future.

Ken Goldman - JPMorgan: One very quick one, I assume when you talk about 2013 EPS looking similar to 2012, you're talking about a 191 base, not the 158 GAAP base right?

Donnie Smith - President and CEO: Yes.

Operator: Farha Aslam, Stephens, Inc.

Farha Aslam - Stephens, Inc.: Just cut it closer in, in terms of your beef business, your results were surprisingly good in this quarter and your guidance is quite strong despite the fact that you've lowered your cattle number outlook. Could you share with us maybe some things that you are doing differently in your beef business that's allowing you to deliver very solid earnings and provide a very solid outlook despite a contracting cattle supply?

Donnie Smith - President and CEO: Jim.

James V. Lochner - COO: The key is I have in my prepared remarks, we put a tremendous amount of effort focused behind trying to beat the wholesale price through added value, so it's a combination of the especially trim sub-primal that's in steak cutting, it's in case-ready, it's in pricing analytics and we spend a lot of time focused on what that forward short-term supplies so that we keep ourselves in balance and then we also really put a tremendous amount of effort on the lot of metrics driven towards revenue to efficiency metrics. So, the combination is just running what I'd call a very smart business knowing that the supply has come down. Ironically if you look over the last five year, the last five year average by the way is almost like 1.8%. There's only been one year it's been up in five years. So that 2% to 3% is about what we've been experiencing over the last five years. So, it's a tremendous amount of detail on our whole bunch of issues and continuing to have that value-added above the wholesale market prices.

Farha Aslam - Stephens, Inc.: That's helpful and then Donnie, when you think about your CapEx investments versus acquisitions what kind of ROIC are you using on CapEx versus acquisitions and where do you see the most attractive acquisition strategies and what size of acquisitions are in your target range now?

Donnie Smith - President and CEO: So, we have a very similar outlook for CapEx as acquisition because we kind of look at our capital the same way in both. Typically and it depends on the project Farha internally. We're going to have couple hundred 250 or so that's going to be in basic M&R so above that in order to keep our capital inline – once you factor in your average cost of capital we need to be in that 20% to 25% range on income producing or cost savings CapEx. Let me give you a quick example, down in Houston we've got a couple of important customers that depend on us our plan for that lunchmeat business so we're putting about $30 million into that plant now to increase our cooking and slicing technology in order to take care of that business. So that project has a very good return on capital, but then on the acquisition side, I'd tell you that our sweet spot is probably today in an acquisition that would be $50 million or less, it would be somebody that makes great food in maybe a regional area, that we can capitalize on our strengths as we build that business out. Now that's not to say that an acquisition sub $500 million, $200 million plus whatever might not be in the mix, but the sweet spot for us right now would probably be in that $50 million range. Does that help?

Farha Aslam - Stephens, Inc.: Yeah. So you're not looking for kind of larger kind of transformational, kind of maybe – let me take a look, to more like $4 billion to $5 billion type transactions, kind of larger big move?

Donnie Smith - President and CEO: No.

Operator: Heather Jones, BB&T Capital Markets.

Heather Jones - BB&T Capital Markets: Is it a fair assumption that your fiscal '14 and '15 commentary assumes for at least fiscal '14 another challenging year in Beef given that you're expecting the tight supplies to become more pronounced in Q3 of '13?

James V. Lochner - COO: We think that we can continue to navigate through the margins that we do expect the supply the cap drop projection for '12 continues to tell us that we'll continue to see that supply reduction and again as I answered earlier, that's the continued emphasis on trying to add value across the board and we did drop our market share. We really worked hard at adding the value and working on overall gross margin. I can't project what will happen across the board in the industry but our plants do sit where the better feed lots appear to be and we've seen the last cattle on feed flow back kind of into that Nebraska-Iowa region.

Heather Jones - BB&T Capital Markets: But, when I'm looking at '14 and you all are talking about 10% growth, I guess first of all, Donnie said previously, it does seem like Chicken should be better. You're cutting interest expense and your international business is improving. So you're not assuming any meaningful improvement in Beef in '14 versus '13 to get to that 10% growth?

Dennis Leatherby - EVP and CFO: That's right.

James V. Lochner - COO: Correct.

Heather Jones - BB&T Capital Markets: On Chicken, you all talked about your national breadth, your value added offering, your customer service. Just wondering though if you could give us some sense of specifics, because if you listened to commentary out there from some large end users, there is also some commentary from some competitors, it's been fairly subdued on the amount of pricing that people have been able to get on fixed contract that seems like, whereas yours sounds fairly confident. So, was wondering if you could give us some more specifics as to why you're confident and why you may have fared better than others in securing price increases?

James V. Lochner - COO: A couple of things. We think, we have three things to leverage, raw materials, resources and very importantly relationships. Over the last three years we've rebuilt a lot of customer relationships that were suffering and frankly we've done that by providing the kind of quality, service and the innovative capability that our customers need to grow their business. One thing to that we've not done is we've not cut our R&D expense. So we've been working on new packaging, new cooking technologies, new ingredient technologies and these kind of things as our customers see them, they see us as a supply partner that they definitely need to keep in the mix. Based on the fact we are not giving them any excuses not to do business with us we are – we like the fact that we are getting the kind of price that we need commensurate to the value that we are adding to their business. In terms of new platforms as we move forward, we will be adding products in our better for you line, some of those maybe using whole grain breading, gluten-free type products. I think you'll also see us making some strides in our ethnic offerings in Mexican food and Asian. Jim mentioned in his call or in his script, our hand held category and we are adding some innovation into our hand held category. So several different lines of products that we will be introducing this year or upgrading our product mix or adding some incremental innovation to that will continue to drive value and our focus is on adding value to our customers business and as we do that they pay us for the value we add. So, we stay focused on that. So, I think those are few of the reasons that might gave us some confidence in our ability to cover that incremental cost of say round number $600 million that's coming out this year.

Operator: Ryan Oksenhendler, Bank of America.

Ryan Oksenhendler - Bank of America: I guess, just a follow-up on to Heather's question. It seems like protein per capita consumption has been declining in the U.S. over the last several years. So, in order to grow your value-added business, it seems like you'd have to take some market share. So, I guess what gives you confidence that you can do that and continue to take the pricing and it seems like over the last few decades that every time you've seen incremental margins in this industry have always been priced away by competitors and what gives you the confidence over the next few years your value-added business, you won't see that margin erosion from competitor's pricing?

Donnie Smith - President and CEO: Sure. It comes down to the customer's choice and customers typically choose those who can bring the type of innovation into their business that that they need in order to grow their business. So, like I mentioned before, we've not cut our R&D expenses, matter of fact, we've added to it a little bit. We've added to the ranks of our marketing teams and so we're in front of customers helping them with solutions that will grow their business and so when there is a choice of who to use as your supply partner, as long as you don't have quality and service issues, you know most will choose that innovative partner that can help them grow their business. That seems to be the case with us. Also let's not minimize the value of our buy versus grow strategy, because in a pricing discussion we're not selling any excess on the market today and frankly there has been a few opportunities where in and RFP although we would have liked to continue to be that customer supply partner, we've walked out of the RFP just because the pricing got too cheap and as long as you are buying, your raw material in our case primarily breast meat although not exclusively breast meat, as long as you are buying that raw material and you are not excess product, then you are able to hold on to your price strength, so I think the value of our buy versus growth strategy also allows us to be more effective in a pricing discussion.

Ryan Oksenhendler - Bank of America: Could you just, quick follow-up, then can you give us an idea of how much of your business is currently evaluated versus commodity and what the difference in margins are looks like?

Donnie Smith - President and CEO: So, what we have done in Donnie King's business primarily I will focus on Prepared Foods business. We’ve actually – as we look at our segments, we have some business units inside those segments and we've gone across certain business units to (Marty) business units because a lot of their mix is commodity, not all, but a lot and then other business units are in the more value added category and I'd say today in Donnie King's business and that's probably around a $15 billion or so, here 60, low 60s percent is the value added piece of that. Now our task over time is to have more and more of the sales in his business as being value-added. Now let me hasten on to say that we also have value-added categories in beef and pork as well and then our international business will continue to grow and as we get those – more and more company-owned barge and away from these wholesale markets that we're so dependent on today our margins will improve substantially in our international business too. So, when you put all that together I think that's how you get to that call it 3.5% growth for the total is that you're really growing your value-added segments and your international segment a lot faster.

Operator: Timothy Ramey, D.A. Davidson.

Timothy Ramey - D.A. Davidson: Donnie I was interested in the comment where you talked about the spread between your domestic margin and your consolidated poultry margin. If I did the math right and that's always suspect it looks like you might have lost somewhere in the range of $40 million in the quarter and maybe in the $120 million plus for the year and they are in the startup operations in China and Brazil. Am I getting to that correctly?

Donnie Smith - President and CEO: Durationally you're right it was about $105 million for the year and about $15 million of that was the write-off that we mentioned. So, call it right at $90 million on an operating basis.

Timothy Ramey - D.A. Davidson: So, that's bullish from the standpoint of hopefully we can minimize those losses over time. Do you have a – give us a sense of how that looks in fiscal '13 and also I assume that would be bullish for your tax rate over time as you perhaps get to utilize some of those losses down the road, can you comment on that?

Donnie Smith - President and CEO: Tim you're dead on. Our current plan calls for us to reduce in those losses by 80% in FY '13 and then for the business to continue at that growth rate and be positive in '14 and beyond. As we look at our international business about 25% of the chicken that's going to market today is out of company-owned housing and so the product offering we have and the price for it between that part of the offering and the wholesale offering which our wholesale offering is based on market birds that spread is at or above what our pro forma was when we began our international approach. So, the bottom line is we just can't get there fast enough and it's all about getting chicken houses built. We've got a great quality offering. The food safety is there that we're looking for. So, all the pieces are in place is. It really is just a matter of getting as much of that production into company-owned housing as we can -- as fast as we can. So take 80% of that $90 million this year and add that and then keep that growth rate going into '14 and '15 and the math you'll probably see out there that you might question is, wait a minute that kind of looks like you are in maybe low double-digit earnings in your poultry business in China and that's right. Brazil is a little bit more material and frankly, we got more work to do to get into more of a value-added mix in Brazil, but we have added a new sales leader in our Brazilian poultry business and we continue to back them up with great R&D resources there and out of the U.S. So, we feel comfortable we're going to get there but our margin expectations would be a little better – would be better in China than in Brazil.

Donnie Smith - President and CEO: Tim, on your tax rate question. You're right. Our effective tax rate will go down over time because of the jurisdictions that we're in and the foreign markets have substantially lower tax rates. So, that would favorably affect our overall effective tax rate.

Timothy Ramey - D.A. Davidson: That all is terrific and I can see that making positive momentum in '13, but it is a big step function from $330 million to $600 million of incremental costs. Can you break down kind of how you see that flowing through the P&L in terms of you would recover X percent of that through pricing and X percent through cost reductions and X percent through mix or is there a way to kind of help us think about how you could recover some or all of that?

Donnie Smith - President and CEO: Yeah sure. Let me give you an idea of the categories first and so, number one, we mentioned another incremental $100 million in poultry and prepared foods operational improvements. We got – was it $113 million or $115 million this year?

Dennis Leatherby - EVP and CFO: $115 million.

Donnie Smith - President and CEO: $115 million, this year, which was short of our $125 million target but our team worked hard and so we see another $100 million coming there. The international improvements, that's going to be about $70 million, $80 million, something like that. That's a big number. Reduced interest expense is going to help on the EPS basis. We are getting price and mix improvements. We've got lunchmeat that we will be fixing this year and I mentioned a little earlier in the call, some CapEx going into an important part of that business. We will probably see we think less market disruption issues this year for example, I don't have in the plan another LFTB issue and that costs just the money and also we had probably could have done a better job in Q1 and the very, very early stages of Q2 last year on our managing the Choice Select spread. I mentioned some other missteps in our domestic business frankly in Q1 and Q2. We left quite a bit of money on the table in our Wing business and followed by the way an (encore) presentation in Q3 with messing up on our buy versus grow and being a little too dependent on the outside markets which got us above the law of diminishing returns on our breast meat trim and that cost us quite bit of money. Then again coming to the market with these new platforms, so there is quite a few levers to pull there Tim and you add all that up and we bridge the gap. So that's how we are seeing the year.

Operator: Akshay Jagdale, KeyBanc Capital Markets.

Akshay Jagdale - KeyBanc Capital Markets: Thank you for all the details on your outlook, it’s very helpful. So starting with chicken, just wanted to focus on the short-term first. So can you give us your latest thoughts on what your view is on production levels and the industry's ability to pass on higher feed costs?

Donnie Smith - President and CEO: So, for our planned years, we have like a 1%, 1.5% decrease in production, whatever the USDA is showing, that's what we're using. Now on our ability to be able to pass along that increased cost our buy versus grow strategy really does reduce our exposure to the volatility and the commodity pricing, the commodity pieces of this business. So, when you take that and you combine that with our mix changes and our ability to take price increases, I don't – we're not going to be dependent on the market necessarily for our future. It really is about reducing our exposure to commodity side with our buy versus grow strategy and improving our value-added mix.

Akshay Jagdale - KeyBanc Capital Markets: If I was to – I'm interpreting a commentary on fiscal '13 as being – previously you just said you were going to be profitable. Now, you're saying profitable, but could be below normalized range. So, I'm viewing that as previously. You're saying zero to 1% and now you're saying maybe zero to 7%. I don't – is that the right way to think about it?

Dennis Leatherby - EVP and CFO: Yeah. You're thinking about it, right, absolutely.

Akshay Jagdale - KeyBanc Capital Markets: Then just longer-term again I appreciate all the color. So, first of all, when you talked about a new base, is the right way to think about it as Tyson is going to earn $1.90 despite any challenges thrown their way. So, is that sort of a bottom EPS number because you did have some significant challenges that you dealt with in the last two years, higher grain cost, LFTB, I mean I could go on and on. So, is that a better way to think about it, is that sort of a base line that you feel comfortable you can do in any environment?

Donnie Smith - President and CEO: Yes.

Akshay Jagdale - KeyBanc Capital Markets: Then in terms of growth, you talked about two major levers on your top line, and I'm just looking at 10% growth off of whatever EBIT you had this year and its 120 million-ish I think for fiscal '14. I could get that number just out of your China business and so it seems like the growth that you are modeling is going to come, even if the rest of your business, other than international and value added doesn't grow at all, that sort of a good way to think about it as well?

Donnie Smith - President and CEO: Yes. There is always a few things that happen that are unexpected in any given year and as said here today, it's hard to tell what unexpected things are going to hit us in '14, but we feel comfortable that with the foundation we've laid and the balance sheet we've got and the team we have in place that we're going to be able to not just overcome the thrills and the challenges that come, but also be able to grow our business and grow our EPS with all the levers we have to pull and with the innovation that we can bring to the market. So, yeah I think you're thinking about it right.

Akshay Jagdale - KeyBanc Capital Markets: Just on China, I think previously, I may be wrong, but previously you had said China should be within sort of a normal range of earnings by fiscal '14, is that now pushed back to '15, if I'm reading it correctly or still…?

Donnie Smith - President and CEO: Yeah. I'm sorry, we meant by the end of '14 which you would see fully in the 15 year. Akshay that is dependent on us staying on track with our current housing plans but I see no reason to believe we won't do that so, yes.

Akshay Jagdale - KeyBanc Capital Markets: One last one, why did you – again I appreciate you giving us this guidance and I'm just trying to get into your head here, why did you feel there was a need to make these positive long term comments now, like why now and what's the biggest risk to Tyson not being able to grow from here on from earnings perspective in your opinion?

Donnie Smith - President and CEO: Good question. So, number one is we felt like that we needed to build some creditability because as we go out and talk to investors '08 and '09 continues to come up. I think three years of slid results in the face of in the last two year $1 billion of incremental grain costs and all other things that we mentioned on our list in the script prove that we have laid a solid foundation. But it's not about just having the solid foundation, it's about building a half stride and so the way what we got to do is we got to accelerate our growth and we've talked about doing that in value-added, we've talked about doing that Prepared Food segment and in our international and a big component of that is to having the right innovative capability not just in new products, but also in processes and analytics in packaging and ingredients and those kind of things. We have those resources and now it's time to put them to use. So, we think we have the creditability because we've build three year foundation and part of our culture says we're going to do what we're going to do. You got to say you're going to do something in order to do what you said you're going to do. So, now we've said what we're going to do and over the next three years in this horizon then we'll do what we said we're going to do. So, that's really what it's been about, Akshay.

Operator: Christine McCracken, Cleveland Research.

Christine McCracken - Cleveland Research: Jim, you mentioned that that we're going to see these tighter beef supplies over the next year and that doesn't come as a huge shock I don't think to anyone, but where we seem to be hitting a bit of a wall is on prices both here in the U.S. and in export markets from a demand perspective. It seems to be some pushback by consumers and I'm wondering as it relates to your strategy as you sell into the market, you have a strong premium program here in the U.S. for example, and now you've got expanded access to Japan coming, it seems like, can you talk about how you think about recouping some of that pricing with cattle cost moving higher in the next year?

James V. Lochner - COO: Well, first of all generally if you look back in history cattle cost and revenue are very highly related. So as we cut out and drop credit moves up and down the cattle cost over time, we'll get fairly correlated back to that. So, I always remind people that we make money in the spread business like beef (backing) and the slow per change and then on top of that and that USDA reported cut out is the strongest relationship plus our whole (thrust) to always try to beat that relationship through value-added pricing, timing, et cetera. I don't know that the price – we've heard repeated years that we're going to hit the ceiling and we seem to break through it into higher overall cut out every year, which simply says to me that even though we've had some demand destruction, what we're seeing is that the supply reduction really is at a slightly faster rate than the demand destruction, because we keep moving to higher prices. At what point that hits a true ceiling, I don't know. My theory is simply that people who want to buy beef, buy beef and the price point isn't the major deterrent and ground beef is a staple and ground beef pricing has continued to grow up year-over-year. So, the short answer is, I don't know that we're going to see a true price ceiling and our job is to navigate through that in the spread business.

Christine McCracken - Cleveland Research: Is expanded access to Japan and better export pricing – is that in your outlook for '13?

Donnie Smith - President and CEO: Actually we do think that, that will be supportive to pricing but it's not necessarily built into our – and how we look at fiscal '13s operating income.

Christine McCracken - Cleveland Research: How do you…?

Donnie Smith - President and CEO: (Also access) we don't really look at that as anything other than it affects the slope of the change.

Christine McCracken - Cleveland Research: Any impact from plant closures anticipated over the next year?

Donnie Smith - President and CEO: No, other than we continue to see and we continue to operate our plants at fewer hours. So, we're just focused on really what our immediate supply base is and we're trying to make sure that we plan our work according to what that forward supply looks like it's going to be out in the four to eight week zone.

Operator: Diane Geissler, CLSA.

Diane Geissler - CLSA: I wanted to ask about the open market purchases of product and what you think that provided in terms of earnings this year and then to the extent that you're looking at next year being productive, total industry production flat to down slightly, what do you think the availability will be next year on the open market? Then I also, kind of part two of that question is, you cited in your release that there were incremental grow out operating costs of $50 million for the full year, I just wanted to know what those were? Also what’s the outlook on – are you just going to see those reverse or is that higher labor or higher energy or what really that encompassed?

Donnie Smith - President and CEO: I think I got it. So first of all on outside purchases, we are running around 60 loads week or so give or take of something like that. It's hard to say what the true dollar value of that is other than this. We don't have excess to sell which always sells a whole – well frankly it sells at what we buy this outside (indiscernible) for and are not really be buying it because we are buying it below cost and selling it. Then number two is, you get incremental price courage because you have adjusted your plant cost footprint to a couple of complexes of breast meat below where you are and we thought the way we have a good cost structure even though we run it at well below slated capacity. So that's how we look at the outside purchases. As far as going forward I see no reason to believe that the meat won’t be out there and again it's a buy versus grow strategy. If meat starts drying up and we need more we can adjust but I see no reason to believe that the amount of meat that we will be looking for on the outside market won’t still be there. As to the other costs in our – grow out cost, it's primarily two things, grower cost, which went up and our chick cost which went up. Now, hasten to say there were barley good improvements in a lot of other costs like feed conversion and are some of the other aspects of our live production. Our live production team of poultry has done a fabulous job, but those two cost factors did go up. So, hope that helps.

Diane Geissler - CLSA: Then I wanted to ask one question on the balance sheet. To the extent that I think you're fairly well termed out in kind of where you want to be. So, I know, you've got incremental working capital needs this year, but to the extent that you are sort of done with the debt pay down, what is your priority in terms of cash usage, is it – I know you increased your dividend, you have a special dividend, you bought in shares, but can you just prioritize?

Dennis Leatherby - EVP and CFO: Sure. It's Dennis. It's always its growth focused. So, that's going to be for CapEx around our existing businesses and that's going to be acquisitions potentially around value-added and international and then it would be around returning cash to shareholders in the form of stock buybacks and dividends.

Diane Geissler - CLSA: What's left on your share authorization?

Dennis Leatherby - EVP and CFO: Over 30 million shares.

Operator: Robert Moskow, Credit Suisse.

Robert Moskow - Credit Suisse: I wanted to ask about the definition of value-added as you extend more and more into it or grow value-added more. I think that there is a risk that you get distracted from your core mission of being a low cost or a very efficient commodity processor. Can you give us a bit more clarity on how much of that value-added is what I would describe as like consumer packaged goods type of product. You mentioned lunchmeat and hotdogs and even frozen hand held items. Can you give us a sense of like what are the sales of those types of items that are maybe, that maybe require a different skill set like a consumer marketing skill set versus the rest of value-add that might be more of – more commoditized?

Donnie Smith - President and CEO: Sure in poultry, you need to be thinking of further process, value added cooked whether it's breaded or not or power fried whether it's breaded or not type items. In the other prepared foods segment, certainly our lunchmeat offerings, pizza topping, soups, sausage and side dishes, items that either have contained bread or in a tortilla for example, you know we're the nation's second-largest tortilla manufacturer, so those type of items. Sandwich meats, movement in all of those type of areas and the thinking to of meat as an ingredient not necessarily just a meat item. So, it's really a lot more around a package food type offering and let me hasten on to say, we have added compliment in our marketing ranks, in our poultry and prepared foods business and we've got a great talented group that understands the value they need to add and how they need to position it in the market place under multiple brands. We do have the Tyson brand, Jim mentioned the Wright Brand in his script and we have several other brands that we use in our value-added offering. So, Jim you want to add anything to that?

James V. Lochner - COO: The only thing I'd add is we're very attentive to not losing the focus on the basics and we really preach very hard about the 40-60 rule you got to be looking forward, but you can't spend all your time looking forward not take care of our basics, but on the contrary you can't spend all your time in your basics and not look forward, so we'd call it the management balance rule which is the 40-60 rule because I think your point is well taken and we certainly have read enough history and now our own history that you can never lose sight of that basic balance. So, we will keep our focus on the basics, you can be assured to that.

Diane Geissler - CLSA: Donnie can you help me understand like with Hormel and Oscar and Hillshire all kind of slugging it out in sandwich meats and hot dogs what's the role of the Tyson brand for the retailer like what gap is that filling in the merchandising set?

Donnie Smith - President and CEO: We typically in the Tyson brand have a mid-tier offering. By the way five, six lines of chicken lunchmeat which are doing very well whether offer today and then we complement of course with other traditional lunchmeat items. So our mid-tier offering, typically ion the Tyson brands and we're also a large private label lunchmeat supplier. So, as you hear a bit about the share battle between the brands and private label we've had a lot of private label of lunchmeat.

Dennis Leatherby - EVP and CFO: The only thing I would add to that is the raw material inflation we've seen over time has been our opportunity to diversify that portfolio with chicken as the base material and to add more value to our raw materials.

Operator: Tim Tiberioc, Miller Tabak.

Tim Tiberioc - Miller Tabak: If I could go back to the comments around acquisitions are you currently seeing more attractive opportunities in the international versus domestic markets? Then my second question, going back to your comments on the value-added growth in the international markets do you think that you will need to make more acquisitions, especially on the distribution side to really make a real dent in those markets over the next few years?

James V. Lochner - COO: Tim those are great questions, but I tell you I'm a little uncomfortable talking very much about the opportunities. I can tell you this. We do have a bit of activity in both international and domestic markets, but as far as getting very specific about those I just don't feel comfortable commenting about that.

Donnie Smith - President and CEO: I want to thank everyone for joining us today and hope everybody has a very happy Thanksgiving. We'll see you later.

Operator: Thank you. This does conclude today's conference. You may disconnect at this time. Thank you for your participation.