泰森食品 (TSN) 2003 Q1 法說會逐字稿

Good morning and thank you for holding.

All participants will be on listen only until the question and answer of today's conference.

Today's conference is being recorded.

If you have any objections come please disconnect at this time.

I would now like to turn the conference over to Mr. Louis Gottsponer, Director of Investor Relations, thank you sir, you may begin.

Thank you, good morning, everyone and thank you for joining us for the Tyson first quarter conference call.

With me today are John Tyson our chairman and CEO, Greg Lee, our co COO and group president of food service and international.

Dick Bond our co-chief operating officer and group president of fresh meats and retail, and Steven Hankins our chief financial officer.

Before we move on to discuss the operating results let me remind you that some of the things we talk about today are going to include forward-looking statements and that means those statements are going to be based on our view of things today, and also means that things can change.

So I would encourage everyone to read our press release for the list of those things that can affect our business.

I also want to remind everyone of our policy not to comment on ongoing litigation.

So we won't be taking questions on those topics today.

Now, I'm going to turn things over to John Tyson.

Thanks, Louis.

Good morning, everyone and good morning to my friends and my shareholders out there that are listening to the first quarter conference call of the new year.

I think most of have you had a chance to read our earlier announcement that you understand that we've had a challenging quarter.

Our economy was sluggish as far as our business was concerned in many sectors.

The international markets have not been helpful either.

That adds up to a lot of protein moving around in the different markets.

But we have been making our decisions for the long term.

Every one of our decisions the last four quarters, whether it was to rationalize a plant, shut down a poultry complex as a leader in the poultry industry, or to do the right things to mitigate our SG&A costs have all been with the long term view.

I can tell you I feel good about the positioning of our company and if we get a little help in the U.S. economy and the world economy we will be able to take advantage of that.

Some of the things we are doing to put ourselves in that position is the announcement of a $100 million plus spend on our new branding and new product initiative which is part of our steps of improving our product portfolio.

One of the things that we shared with you when we put these companies together is that we were going to move beef and pork up the value change back to something we used to call segment concentrate and dominate and we are going to work very hard at that.

Dick and Greg will share progress in the areas they are responsible for and some of their particular challenges be it retail food service, and Steve will share with us the financials and the strength of our balance sheet, and with that we'll turn it over to Steve.

Good morning, everyone.

Just some brief comments around our financial statements.

Our press release this morning we reported GAAP earnings of 11 cents a share for the quarter.

And as we stated these earnings include a charge of approximately $47 million or about 9 cents a share which is related to the closing of two of our poultry operations.

On our income statement this charge is included on the other charges line.

It's also included within the chicken segment for segment reporting purposes.

During the quarter we received approximately $28 million or about 5 cents a share, resulting from another partial settlement of the ongoing vitamin litigation.

This amount is included within cost of sales for total income statements and offset to expense, and is shown on the other segment for segment reporting purposes.

The net effect of these two items is about 4 cents a share, to GAAP earnings, so you could say pro forma earnings were 11 plus 4 which gets us to about 15 cents which is in line with our latest guidance we've given for the quarter of 14 to 18 cents.

Also as you look at our income statements you'll notice interest expense is flat year-over-year for this particular quarter.

Wanted to let you know the reason during this quarter we were in the market, we were buying back some of our debt and within that interest expense line just over $6 million of expense was related to these purchases of our bonds.

As you look at the SG&A line you see it's down year-over-year by about $29 million.

A significant portion of this is related to the acquisition synergies that we've talked about before, our synergy targets that we've given, we are staying with, and continue to feel positive about those.

And also, I'm sure everyone saw the press release recently about our marketing campaign under the Tyson brand, and I wanted to let you know that the numbers you are seeing in our guidance that we've given, both in the past and today, reflect the spending related to that marketing campaign that we discussed in the press release.

Now, typically I make a few comments regarding our segments.

Today I'm just going to let the press release speak for itself and of course Dick and Greg will be speaking and making comments about various portions of our business.

As we look at our balance sheet and the cash flow statement the most significant item which was related to cash flow for the quarter was the increase in our accounts receivable balance from September year end, and just a couple of points on that.

Accounts receivable at September was a bit below normalized levels.

I would say in part due to the West coast port closings that were going on at that time.

So we had a bit of a reduced balance because of that.

Also, as you look at the end of this quarter, our first quarter, the timing of Christmas which was on Wednesday, in relation to our quarter-end, which was the following Saturday, we had a really slow period for cash receipts.

So those two things were major items, as far as the increase in accounts receivable.

During the quarter our debt increased $86 million and primarily associated with this accounts receivable balance increase.

Cash provided by operations on a cash flow statement was $45 million.

As John says, it was a more difficult environment than some of our previous quarters.

Capital spending for the quarter was $100 million which was in line with what we expected.

And one other note, regarding the balance sheet and the cash flow, during the quarter we had a share repurchase going on.

And we bought back approximately $10.5 million of stock.

Besides that, which we normally purchase on an ongoing basis for our employee benefit plans, total stock purchases during the quarter were approximately $15 million, but $10.5 was simply us being out buying stock.

When I look at our outlook for the year, we revised our guidance for the year.

It's now in a range of 90 cents to a dollar from ongoing operations.

That 90 cents to a dollar excludes the vitamin settlements and plant closing costs and anything, "unusual" that we might have for the second quarter, our outlook is a range of 10 to 14 cents from ongoing operations.

Our weighted average shares will continue to be in the $355 million range.

The remainder of the outlook for the full year we're still projecting around $24 billion in revenue, interest, foreign exchanges and other charges in the neighborhood of $300 million.

The tax rate will be between 35% and 36%.

You'll see we were at 35.5 on this particular income statement.

Capital spending is still targeted around $450 million, approximately depreciation and amortization which is about $460 million.

So pretty much the same from the outlook for the full year.

So that's what I wanted to talk about financially.

And now I'll pass it over to Dick Bond.

Thanks, Steve and good morning to you all.

Results in the consumer products and fresh meats group were less than our expectations.

But given the overall market conditions that existed in the first quarter, the fact that we were a significant participant in all three major proteins and prepared foods worked to our advantage.

Rising input costs like grain, cattle and pork bellies impacted our ability to pass along these increases in the October through December period.

Now, I'd like to talk briefly about each of the segments.

I'll start with beef, within fresh meats, operating results for the first quarter were approximately half of what they were in the fourth quarter of fiscal 02, and were $2 million less on a year-over-year comparison basis for first quarter.

Federally inspected slaughter volumes were up less than 1% for the quarter on a year-over-year basis, while our volume was up 3.5% and compared to fourth quarter of '02, industry volume was down 4%, and we were down 2.5% indicating a slight increase in market share.

Industry live prices increased both on a year-over-year and previous-quarter basis by approximately 8%.

Live weights were also similar to a year-ago levels and up less than 1% from the previous quarter.

Live cattle prices have increased at an unprecedented rate during the December and January periods, peaking at $80 per hundred weight live during the third week of January.

Supplies of market-ready cattle will likely be the tightest during the February-March period but our expectation of slaughter for second quarter will be only down around 2% on a year-over-year basis and down almost 5% on a sequential quarter comparison.

A more typical sequential decline would be in the 3% range.

Demand for beef this January has been very good.

But our expectations for February and March will be diminished slightly, which is both a seasonal trend and will be impacted by significantly higher prices.

In the pork segment, the live swine and pork processing combined reported operating earnings of $24 million for the quarter.

Pork processing contributed about $34 million, offset by a loss in the live swine of approximately $10 million.

Our restructuring of the live swine group is complete, and we are anticipating a break-even or better operating result for second quarter.

Federally inspected slaughter for first quarter compared to a year ago was flat, and our volume was down slightly less than 2% indicating a minuscule decline in market share, but still in the 19% range.

Live prices were down 16% on a year-over-year for the quarter, and down 8% from the prior quarter.

We expect the slaughter volume in second quarter to be flat with with a year ago, but live prices to be higher than a year ago.

Our second quarter operating results will be better than last year.

Now, let me start into the case-ready arena and start first with beef and pork.

Our case-ready sales for the quarter were $242 million, a 19% increase over Q1 of '02.

Our volume was up about 31% to 147 million pounds.

Beef sales in pounds were 123 million, or 83% of the total.

While the volume of irradiated ground beef is still relatively small, we continue to add stores, and are now well over 2,000 stores on a national basis concentrated more so in the Northeast.

Case ready pork tonnage sales for the last 11 weeks of the first quarter, this was after the change to the Tyson brand of case-ready pork was completed, compared to the 11 weeks prior to the change, were up 4.7%, and compared to those same 11 weeks in the previous year, were up 11.6% on a comparable basis.

We are very confident we will achieve and probably exceed our sales plan dollars of over $1 billion in volume exceeding 525 million pounds for our fiscal year '03.

In the chicken case-ready arena, fresh poultry and the tray-pack business continue to experience the market effects of abundant supplies of chicken as well as the overall protein supply domestically.

While volume has been very good as measured in pounds, the overall value was down considerably, due to increased leg quarter domestic sales and lower than anticipated external markets.

We do, however, feel very good about our market and share positions.

Through the combination of our plant improvements, marinating capabilities and the opening of our first fully integrated net weight facility, we have been awarded significant new volumes that should exceed 60 million pounds on an annualized basis.

We are also in the final stages of closing our Jacksonville, Florida facility as we announced in December.

Everything continues to be on schedule, and on budget, for this closure.

We anticipate we will be completely closed by the third week of February.

We are continuing to work with our producers in the area, as they transition out of live production.

Now I'm going to switch to the consumer products and the value-added side of the business on a fully cooked and prepared basis.

As we discussed in the last quarterly call, the major activities on the value-added side of our business continues to be new product initiatives, under way in all protein segments.

To refresh your memory briefly, we have new products being launched under the Tyson brand in the refrigerated processed meats category with an all new poultry based product line in the deli arena with a multi protein true deli quality line of self serve branded meats in the shelf stable arena with our canned chicken and broth initiative, and the frozen meats with our first line of Tyson IQF steaks and chops.

We are extremely pleased with our sell in all of these categories and are well ahead of our targeted distribution goals for our first quarter.

I'll give you a few more specifics as I quickly review each of these segments.

Our retail deli group as does the industry in general, continues to experience some [inaudible] problems during the fall of last year.

Additionally we experienced some service issues out of our own facility in Buffalo, New York.

These two events combined resulted in a volume decline of approximately 13% for the first quarter, versus the same quarter a year ago.

We are however starting to see a return to more normal business and an increase in ad activity by our retailers.

We expect we should see closer to budgeted volumes by the end of second quarter.

The good news here is the sell of the true deli quality line of self serve meats is going very well, with virtually 100% success rate in conversion from fresh cuts brand to the new Tyson branded product.

Additionally we are well ahead of our targeted 17% ACV goal for the first quarter.

At this point we anticipate we will be more than double our ACV goal by the end of this second quarter.

We are very pleased and excited by the retailer acceptance of the Tyson brand in the deli arena.

Our retail process meats group also experienced a difficult first quarter with the unexpected rise in the pork belly market.

This sudden increase was due primarily to a change in supply by some integrated operators in the short-term market over reaction to these events.

We are now seeing a settling out in the belly market.

The good news here is also in our new product arena, we have already reached our first quarter goal of a 70% ACV and still have several significant retailers pending.

We believe these Tyson branded chicken and turkey based products will be the springboard for future multi protein expansion in this category.

We have also successfully launched our first markets on the new Tyson branded IQF line of steaks and chops on the West coast.

The reception has been exceptionally good and our initial launch with virtually every retailer showing enthusiasm about this significant category.

The products will actually hit the shelves early next month.

Tyson's fully cooked box products continue to post strong results with sales up 13% and a 39.9% market share.

Additionally, we continue to lead the fast-growing value-added bag meat segment with a dominant 62.3% share.

Our family pack bagged line was up 79% in sales dollars over a year ago.

Last Monday, we announced our multi protein branding initiative as John had mentioned.

Including our $100 million marketing program to support our new product introductions and enhanced growth in existing product categories.

Supported by the trade, extensive consumer research, a strong advertising campaign, and the history of the consumer trusted Tyson brand, we will continue to extend our number one position in the value-added meat and poultry industry.

An with that I'd like to turn the call over to Mr. Greg Lee.

Thank you, Dick did and good morning.

I will give you a brief overview of our first quarter highlights for our food service and international business groups.

Results for the quarter were mixed with earnings not reaching our expectations and reflective of difficult market conditions.

The quarter was highlighted by solid gains in value-added product sales in our domestic food service group and our internationally based operations.

Our international export sales continue to be adversely impacted by market access problems.

Let's talk about our food service group.

Finish the quarter with sales growth in excess of 11%.

This growth cut across our sales to food service broad line distributors, chain restaurant customers, and supermarket Delis.

Earnings for food service poultry were down for the quarter as a result of higher grain cost, lower leg quarter values and lower residual product values.

Our net earnings were positively impacted by very strong sales gains in value-added products including such items as breaded tenderloins, fully cooked wings and a variety of cooked and value added breast products.

Sales to chain restaurants continue to be impacted by soft sales with major QSR restaurants.

Strong sales of value added products to a broad array of chain accounts across all segments provided overall chain segment sales growth.

We have secured incremental sales with a number of chains that will be positive to our business over the balance of the fiscal year.

Our finished goods inventory were reduced during the quarter, as a result of sales growth and management of primary production.

Our food service prepared foods group experienced positive volume growth for the quarter, with growth in sales to both food service broad line distributors and chain restaurant accounts.

Our dollar sales were negatively impacted by lower market prices, particularly for pork ingredient products.

While sales to leading QSR pizza chains continues to be soft we have offset this with solid growth with other customers in categories such as mid-scale dining that have contributed to overall growth in volume for the group.

Sales to broad-line distributors also contributed to growth in prepared foods for the quarter.

Overall margins for the group were in line with our plan.

We expect hire market prices for ingredients to begin to push up sales prices in late quarter '02 and the balance of the fiscal year.

We are pleased with the results of our team selling efforts and are experiencing success in placing prepared items with food service poultry customers and vice versa.

Let's talk about our one face to the customer activities in food service.

In January, a new ad campaign hit the food service publications with our one face to the customer brand promise.

Beginning in March our taste like Tyson multi protein ad campaign will kick off with Tyson branded beef and pork product introductions to the marketplace.

Food shows are lined with a taste like Tyson multi protein theme and are kicking off now through March to give us an opportunity to show customers our unified portfolio and to sample the new Tyson brand beef and pork product.

New recipes and culinary solutions to help operators maximize their menu opportunities with meat are accompanying this rollout to provide services beyond the box resources that separate Tyson from its competitors.

In May, our first multiple protein promotion will kick off with sales incentives to our brokers and sales agents for bundling the proteins.

And a new themed recipe collection featuring all three major meats will be introduced.

Let's talk about international.

Evolving trade issues still dominate international results.

Export sales were $550 million in the first quarter, down 10% from first quarter 2002, despite volumes being flat year-over-year.

The major reason for the decline in sales revenue was chicken leg quarter prices being 10 cents per pound or 34% lower than last year.

Poultry export volumes were down 13%.

Sales of Russian leg quarters were flat year-over-year but all other categories track down.

Paws and giblet volumes to China were down 75% from last year as chronic trade restraints continue to plague U.S. exports of these items to China.

In addition to the trade issues, the West Coast port problems had a bigger impact on shipments to China than other markets because of the timing of the Chinese new year.

Finally, demand for Japanese boneless leg meat was greatly depressed due to a saturated marketplace.

Boneless leg pricing was down 50% compared to 2002 while bone in leg prices declined 30%.

We believe that the global supply of boneless leg meat will continue to depress prices in Japan for a significant time period.

And this was a major reason behind the decision to close our de-boning facility in Stilwell, Oklahoma.

Fresh meat showed a recovery in sales from first quarter 2002, with volumes increasing by 9%.

Although West Coast ports are not operating at Pre closing levels, shipments to Asia of fresh and frozen meats rebounded enough to show growth over the previous year.

Boxed beef sales improved nearly 13% from the first quarter 2002, due to strong demand from Korea and some product going to greater China.

Sale to Japan have been slowly recovering from the BSE scare of a year ago.

Sales of boxed pork declined by 6% due to a reduction of shipments to Japan.

We expect a decline in this business due to the safeguard measures imposed by the Japanese government.

Our operations outside the United States enjoyed a good quarter.

Tyson to Mexico recorded good increases in both volume and pricing.

However the effect of the weaker Peso and the increase in grain cost resulted in the contribution of U.S. dollar [inaudible] to being lower than last year by 11% at the income before tax level.

Our Tyson [inaudible] further process plant in China showed a significant increase in volume over the previous quarter and a second shift was added in December to support our customers.

Our Tushinski processed meats plant in Moscow Russia operated at capacity and had sales volumes up over 134% versus the first quarter last year.

Regarding trade with Mexico the safeguard measures restoring poultry tariffs to 2001 levels were agreed to by both the United States and Mexican governments.

We expect this to have a minimal impact on us.

In addition to the issues on poultry, Mexico announced earlier this month that it's launching an antidumping investigation against U.S. port exports.

We expect this to have minimal impact on near term sales and to be resolved in a favorable manner.

A few closing comments on the overall chicken market.

Broader egg sets and chick placements continue to track down 3% versus the same period last year.

We expect slaughter rates to continue negative year-over-year as we move through quarter 2.

This will be positive to the most heavily demanded domestic cuts including breast items, breast tenders and wing products.

Tyson chicken production plants call for continued restraints in numbers in view of markets, meat supplies and demand.

John.

Thanks, Steve, Greg and Dick for your thoughts about our business.

You know, when I think about what makes our company different than where it was a year ago, it's the mix.

The mix is what makes our company different, and a stronger company.

A strong company with plenty of cash to pay down debt, buy back some stock, and to change our product mix, and then brand that mix in the marketplace.

That is what's going to separate us into the future, as we spoke earlier, all of our decisions for the last four quarters have been with the long term view in mind.

And we've had to make tough decisions, whether it is to rationalize assets, close down a poultry complex which was the first in the company history, and to do the things that will position us to take care of our people, take care of our customers, and be the leader that you all expect us to be in the expectations of this management team.

Before we go to question and answers, I want to Thank all the folks at Tyson foods who have worked hard the last four quarters and into this first quarter in difficult and trying times and I can tell you that dedication and effort will separate us from our competitors.

With that, we'll go to questions.

Thank you.

At this time, if you would like to ask a question, please press star 1 on your touch tone phone.

You will be announced prior to asking your question.

Once again if you'd like to ask a question, please press star 1.

Christine McCracken from Midwest research.

You may ask your question.

Good morning.

Good morning, Christine.

You guys went over a number of trade issues and obviously, this is kind of a constantly changing fluid situation.

Wondering if you could touch on two things specifically.

One, you'd mentioned exports to Japan for beef has been impacted by mad cow, and I guess in the next few weeks we've come out with two new cases apparently.

Wondering then if you expect the situation to maybe get worse, or if it should stay about at the same levels.

If you could comment on that and then I have a follow-up.

Christine, this is Greg.

And I would say that you know, this has been going on now for quite some time, and I think, you know, at any particular BSE case is put in a more logical perspective.

They're rare, there's not a real issue here, sales have been improving and we don't expect any significant impact.

All right.

And then secondly, just on the quotas that were announced I guess over the weekend or late last week, I'm wondering if in Russia, wondering if you could bring us up to date on where that stands?

Are we back to normalized levels to Russia, do you expect to get there here in the second quarter, if you could give us some outlook on that.

The Russian quotas have only just now been announced.

We are trying to learn more about that.

Volumes have been pretty good as far as shipments to Russia but we will be looking at these quotas and trying to provide input to our government and there may well be some further negotiations with regard to the quota.

All right.

And then I guess just on one final question.

Obviously you've lowered guidance here for the second quarter, it appears as though it is going to be substantially below year ago levels despite the pretty dramatic cut backs in chicken and you're starting to see in pork and beef.

Wondering if you could just comment on why are we not starting to see the pickup in earnings, I guess, tied to, you know, what we'd expect to see in terms of better pricing here in the second quarter?

And at what point are these production cuts going to start to impact, you know, your overall market picture?

Christine, Johnny here.

I would tell you that January and February are just slow, sluggish months.

We are coming out of slow sluggish economy.

The war effect is sitting on the economy right now, we're looking at what happens to that factor.

The springtime doesn't get here to March or April.

And so the impacts of all the decisions, people starting to move around and eat, people starting to spend money don't come into our mix until March, which is actually the third month of this quarter, that's why we believe the third and fourth quarter are going to see the true impact of all the decision making.

And it takes a little bit longer to get through the system than we all hope it does.

And so January and February, tough months.

March it starts to pick up and April, May and June and things will be in better shape.

So you're comfortable that it's back half loaded.

You're comfortable that you will actually start to see an improvements as we move into the spring?

I would tell you Christine if we don't start to see an improvement we've got some other major issues in this country that are out of my control and that start in Washington, D.C.

By the mix of the products and strength of the company we'll be able to manage through it and have stronger cash than maybe some of our other competitors in the situation.

But there are some dynamics that are not in our hand and we'll manage through them.

Thanks.

John McMillan from Prudential Securities.

You may ask your question.

Good morning gentlemen.

Good morning John.

When you came out on December 5th with lower quarterly guidance, you kept your full year the same at $1.00 to $1.10.

What's specifically changed, Johnny, between then and now, if you could pin it to one or two things, is it just on the beef side?

I wouldn't pin it to anything John except for the overall economy out there.

We thought we might see some positive lifts through the Christmas holiday period, that that might push all into January and we had the same impact that a lot of our customers had, everything is just sluggish and flat.

And the price increases that we had hoped with cut backs in poultry are taking a little longer to get into the mix.

You can add in the beef component that came to the situation and it just all came together.

We knew we would face this question at the conference call and now we have clarity to help you understand where our business is headed.

But it doesn't look, Greg, like this 99 cent hamburger is killing your food service chicken business.

It doesn't look like some of the -- the food service side doesn't look that bad.

Can you talk about that environment, is that hurting your food service chicken business?

I think you've seen as we mentioned earlier, if you look at the food service industry overall, it continues to have very, very sluggish sales.

And many of the largest restaurant groups are certainly experiencing sluggish sales.

We did have a good sales quarter, there seems to be a certain amount of kind of heavy year-end activity.

We did pick up some new business, you know, the sustainability of that double-digit sales increase, we have a little level of concern about.

But our food service business has been good.

But I think a lot of that has to do, we've gained some share.

Maybe at some -- at some expense, but just to go back to what Christine is saying, just because the magnitude of the back-end load here, John, it just kind of begs the question, are you -- you know, this is the third time you've really lowered quarterly guidance in the last six months.

Are you just kind of setting yourself up to do it again, and can you just talk about what kind of leg quarter pricing you're assuming in this 90 cents to a dollar range?

Well, John, I'll let Greg speak to the leg quarter issue because he watches a little bit, but setting ourselves up is not what we try to do.

We try to look at the best judgment of our business.

I will tell you that if we have some things that are out of our control, a war or something like that, we'll probably have to make an adjustment in the third and fourth quarter deal.

But we have enough confidence in the American system that there is positive attitudes, everybody is getting their heads up off the mat, everybody is going to be traveling in cars, start going to Florida, start going to Texas, start going on vacation, start moving around and with that they start to spend a lot more money and we get the benefit of that.

If that doesn't happen, you all will watch the same sectors that we do we'll have to address that at that time.

Those are the dynamics we're up against and we're going to manage ourselves through them.

John, this is Steve.

Specifically around the leg quarter pricing, we're looking very soft, and perhaps softer than they are right now.

Where are they now, about 17 cents, were they?

You're in the ballpark, yes, sir.

And you're assuming what kind of numbers for the rest of the year?

About the same, and maybe, you know, a penny or so in the last quarter to the positive side.

But we're assuming, you know, pretty soft markets as this plays on out.

I think John, of course John Tyson has really covered it well, is just the sluggishness of what's going on, and you know, right now, and then trying to look out with a little bit of a negative eye.

But yeah, we are expecting still expecting some markets to pick up and things to pick up.

But again, you know, the news is changing absolutely daily around a lot of these things.

And --

But you can get to 90 cents to a dollar with leg quarter pricing only improving a penny or something or a penny or two?

Well, John, I mean, it's just a part of the new company.

And I think, you know, we talk about the mix, and the mix that drives different components when one piece is not working as well as the others.

We have a chance to get to the numbers that we think we've put into our guidance.

We have run our guidance with a 17 cent to a little bit higher leg quarter in the fourth quarter of the year.

But you know, leg quarters don't dominate this company like it used to in the past.

Has an impact, yes.

But it does not have the impact because of the mix of the new company with our beef and with our pork and with our prepared foods.

And you know, in our prepared foods margins that have higher margins than some of the other components.

And the efforts of moving the raw material and beef and pork up the value-added chains in the new set of products that we discussed about.

That's what the new company's about.

Leg quarters still exist but their impact into the company is not as great as it used to be.

But hey, you know.

This was an unusual decline for sure.

Just Dick, my final question, the 31% case-ready volume gain, that was for both beef and pork, correct?

That's correct.

That's an acceleration from previous quarters, I believe, in terms of you used to give quarterly growth rates, and I think it was -- is that partly tied to the change in brand, or can you just explain why the case-ready trends actually accelerated, while other companies have actually seen a pretty good drop?

You're obviously gaining share.

John, I'd say we're gaining share.

I think the market is expanding as well.

Now, maybe other people aren't getting the benefit of that like -- like we are.

Certainly, our largest customer in case-ready continues to grow fairly substantially.

And we've seen -- you notice that the beef percentage on a volume basis went up a little bit more.

Part of that is due to ground beef and a greater acceleration in the ground beef case-ready market, as well as some of those irradiated sales has really helped build more of the beef, as well as on the case-ready pork, at least on comparables, on comparable store basis, we've seen some good increases there as well.

So I think the marketplace for case-ready continues to grow, and I think we are probably, you know, doing a little bit better job from a share standpoint, and really holding our margins where we expected to there as well.

So when you dropped the Wilson name, on the beef products, you know, I guess Wal-Mart was more receptive, gave you more business, is that essentially correct?

No, not -- not necessarily more, but their growth and their opening of stores and their opening of VC's is pretty significant unto itself.

So you'll get growth there generally speaking that's probably a little bit better than what we would have anticipated anyway.

Thanks for answering all those questions.

Thanks, John, appreciate you.

Thank you.

Leonard Teitelbaum from Merrill Lynch.

You may ask your questions.

I've got something along the line that both John and Christine asked because I'm having trouble putting this together at least the way I'm comfortable with it.

One housekeeping question I guess first.

On the case ready production, what percentage of your capacity in this area is being utilized now, what's your operating rates?

On a composite basis, about 68%, 69%.

Do you expect any significant capital expenditures in this area over the balance of this year?

At this point, no.

Okay.

You know, one of the things that I thought I understood, and I guess maybe I didn't, was that as the supplies shrink, the cutout value you get some demand pull on the price.

And apparently, I'm not seeing it happen, you're the third company I've spoken to that's had problems with the finished goods pricing as it gets into the supermarket.

When do you see that turning?

Whether or not your margins improve or not is secondary to this question.

I'm just trying to see when you think you can pass on.

You'd made the statement earlier that you'd been pricing on some price increases.

I'm not exactly sure where that's coming from in your sales numbers.

But could you expand on that a little bit?

From a food service standpoint, first just a Macro chicken.

We are in the month of December, we certainly started seeing some of the commodity marker prices on certain subsets of the white meat complex move up.

A certain amount of that was raw material for further processing.

It's going to take some time beyond that to see that work its way through into the finished goods out into the marketplace.

But as I said in my comments, we do believe that the white-meat market is going to be stronger for the balance of the fiscal year.

And as far as your cutouts as you know Lenny, that's relative to the whole product, the whole bird, and your leg quarter dollar contribution is impacting that negatively.

Lenny, I'd add one thing to that.

We have seen industry- wide, as well as ourselves seen a decline in frozen inventories.

And that's usually one of the first signs, but it takes a little while for that to get back to an equilibrium point to where we will be able to see some substantial rises especially on the white meat side.

Two other questions.

It seems like leg quarters, Johnny, you've said, if you look at the total mix, it is a word that kind of keys this quarter for you at least from what you've talked about here but it seems like every time we have a damn problem it is the leg quarters that are causing the problem.

It is not all that important.

I'm having trouble reconciling those two statements, and if you could help me with that statement.

What is the percentage of the mix between what one would call the basic commodity part of the business to the value-added part of the business?

If you want us to key in on that maybe you could kind of break that down for us.

Well, the leg quarter issue has been an industry issue for ten years.

I'll hurry along to say we've tried as a leader to take and compete, and change that mix of the leg quarter.

And we tried to get into boneless leg meat, built a plant over in Stilwell, Oklahoma to go compete in Japan for that market share, and basically the U.S. has lost that market share to Brazil and Thailand and some of that comes with trade issues so the industry is kind of back in the same place as to what to do with leg quarters.

As for the impact issue Lenny, I make that in the context of the whole new company, you know with us having beef, pork and chicken in the total.

Leg quarters inside the poultry industry still has their same amount of impact and the relationship to the business.

As for the value-added commodity mix number I don't know if you are asking that as a totality of the company within one of the segments so if you could clarify that for me.

We'll take it however you give it to me but obviously we'd like it by segment to see how you're moving along on the value-added side.

If you could do it by beef, pork and poultry.

Lenny, I think that is a number by segment we'd probably want to develop how we talk to you a little bit more about that.

I think it helps, so we could find out through the chain how you're moving and give us some degree of what we can expect.

Because I have John's concern as well that the numbers look like they've got to get awfully damn big in the third and fourth quarter to hit the target.

If you hit the target I think it's going to work out well for everyone but if you have to bring it down one more time you've got a problem and I'll make that as an observation not a question, thank you very much.

Bringing it down is certainly a concern of ours, I think John has talked to you about how a lot of other things could potentially affect that.

You know as you look forward into the guidance from an ongoing operations, you know, simply put, you know, 30 cent quarters are not out of the question at all for this company and you've already seen them out of us.

Now, a lot of things have to come together to do that.

And I guess, you know, in the leg quarters context, you know, you guys know the numbers on leg quarters and can do the math on the difference in market prices as well as we can.

But the company's made up of a whole lot of other things and a lot of moving parts when you look across the beef and pork and prepared foods business and as Greg and Dick have referred to we've improved market share and improved product mix around a lot of those and are looking at a lot of the pricing dynamics there.

We can come back to you I think, come back to the group in general with a little bit more a view of value added depending on different people's definition, that does vary, but there are a lot of moving parts to what we're doing and a lot of those get more and more independent from the market as we do exactly what we've talked about which is moving things up the value chain.

So just a few things turning from more the market standpoint and a lot of goodness which gets hidden by some of these markets starts jumping to the forefront pretty quickly.

We are looking at the back half being bigger but it's not some place that we haven't seen this company already be before when the conditions are right certainly.

Thank you.

Thank you.

David Nelson from Credit Suisse First Boston.

You may ask your first question.

Good morning.

Good morning, Dave.

Previously you had thought about an assumption of $3 per bushel on corn.

Can you tell us about your thinking on that and perhaps also soybean meal, please.

In essence looking at our modeling going forward, we remodel or when we redo our model we typically just look at the futures contracts going out in front of us and we model based on that.

So you take a look at those and you see basically our underlying assumptions.

That's a big help.

And we'll remodel that every quarter.

Okay.

On the $100 million in marketing, SG&A was way down obviously for the quarter, congratulations on the synergies there.

How should we -- but I would think that with that $100 million that that number might be going up as we move through the year.

Could you provide any guidance or outlook on that?

Dave, the $100 million in many respects is a different way of expressing expenditures that we've already had.

For instance we are no longer spending against the Thomas E. Wilson brand name but investing in the Tyson brand name.

That is just moving dollars around.

It is not an incremental $100 million?

It is definitely not a incremental $100 million.

Is it incremental at all?

Incremental to the tune of $10 to $15 million.

The rest of it is money that is just simply, we're talking about how we redirect that money.

Of course we talked about in our press release a number of new products and initiatives, and hopefully, you know, our plans are that those are going to go very well, which will increase some marketing money against that.

But as well as sales and profitability.

So the $10 to $15 million in new money is what I think you should put around that $100 million.

And I think if you saw the number, $40 million was allocated to advertising and $60 million was available into trade and publication, which means as we go through the business year you have a greater chance to manage that $60 million up against how your trade and promotional spending is going.

Those are the budgeted numbers.

On prepared foods the sales numbers were down quite a bit.

Is that related to accounting with EITF or what was going on with that?

It was not Dave.

It was the reasons we talked about in the press release.

The specialty brands is no longer a part of it, is a big section of it.

We have pricing that is still driven off of market-based spreads, and so when raw material pricing is down, that decreases the sales amount.

Okay.

You know product mix was actually better.

We also have rationalized the plants over the course of the last year, and in doing so, let's just use the phrase we culled through certain amounts of business that was not profitable yet had top line sales dollars associated with it.

So it's a combination of all of those things put together that's driven that down.

A year ago this time we were closing down the Michigan facilities that had X number of dollar sales in those plants and when we moved those products to our other plants we chose not to carry some products that were not profitable and did some rationalization especially brands had X sales dollars into it and then just the rolling cost of ingredients into formula pricing was a little bit softer.

Okay, one last question, maybe a tertiary issue, maybe because it's been in the press in New York.

We had a judge decision last week on McDonald's throw out a case regarding some young women who had an obesity issue.

The judge seemed to leave the door open on a further processed item like McNuggets.

What are your thoughts on that and what might you be doing as a company to address, you know, headlines on fat and obesity becoming potentially a liability or litigation issue?

Well, Dave, I think you know our company well enough that we have a range of products, a range of products from grilled chicken to, you know, pork loins to steaks, all of our products have nutritional labeling, about the quality of our products.

We produce a lot of products that meet the government's child nutritional labeling guidelines that come out of Washington, D.C.

Our product choices are available for the customer to make the right choices.

And we will continue to meet the demands that our customers ask for based on the purchasing decisions of our customers.

We produce healthy nutritional product, and produce a range of products that allow our customers to make their individual choices.

Great, thank you very much.

Thank you.

This will conclude today's question and answer session.

At this time I'd like to turn the call back over to Mr. John Tyson for any closing remarks.

We just thank people for taking the time to hear about our company.

We know we've been operating in a difficult environment.

I can tell you there is not anybody working harder than the group of folks and the men and women of Tyson foods to make a difference.

To produce products that customers have come to expect and to get shareholder price up and that will be our commitment to you.

Every one of our decisions is towards the long view and we'll stay with that philosophy.

Thank you and everybody have a good week.