泰森食品 (TSN) 2003 Q3 法說會逐字稿

The question and answer session of the conference.

This conference is being recorded and if you have any objections, please disconnect at this time.

I would now like to turn the conference over to Louis C. Gottsponer, Jr.

Thank you, sir.

You may begin.

Louis C. Gottsponer, Jr: Thank you and good morning and thank you for joining us today for the Tyson third quarter conference call.

With me today are John Tyson, our Chairman and CEO;

Dick Bond, our President and Chief Operating Officer;

Greg Lee, our Chief Administrative Officer and International President, and Steve Hankins, our Chief Financial Officer.

So, before we move on to talk about the results for the quarter, I want to remind everybody that some of the things we talk about today may include forward-looking statements.

That means that those statements are going to be based on our view of the world as we know it today and it also means things can change.

So I would encourage you to read our press release this morning for a list of those factors that can affect our business.

So, with that I'll turn things over to John Tyson.

Good morning, everybody and good morning to all of our friends that are listening out there this morning, those that chose to join us today.

I think you've seen my comments in the press release and I just want to maybe resupport them.

It's been an interesting two years in the history of this company and as I reflect on what has been accomplished, I can tell you I am pleased, but not satisfied.

As a group of managers, we are pleased with one, our debt reduction, two, our plant rationalization, three, our people integration and stability of our people, four, our shared services integration, and five, our progress towards one faced to the customers as we move our products up the value added chain in the short two years.

However, in those short two years there have been many economic challenges, marketplace disruption and trade challenges and I think we have managed ourselves very well through those disruptions.

But I think we will tell you -- and I will tell you -- we are not satisfied with the margins that we are getting and the amount of money that we are getting to the bottom line.

At this time Steve, Dick and Greg will share with you what has been done and what they are working on to enhance our margins as we move into the fourth quarter and as we move on towards our strategic initiatives for the future now that we have two years of this company being together.

With that, Steve?

Good morning, everyone.

I'll just cover the financials and add a little bit of color to what came out in our press release.

In the press release this morning we reported GAAP earnings of 23 cents per fully diluted share for the quarter.

As we mentioned, these earnings have three items in there of note.

First of all, the receipt of approximately $42 million pre-tax or about 8 cents a share related to the on-going vitamin litigation.

This amount is included in the cost of sales line in our income statement and it's included within the other segment for segment reporting purposes.

Second item is the cost related to the previously-announced closing of our Berlin, Maryland poultry operation of $19 million or about 3 cents a share.

This amount is shown on the other charges line of our income statement and for segment reporting purposes is included within the chicken segment.

The third item we noted is an impairment charge of about $10 million or 2 cents per share which was taken against the stake that we've held in a live swine operation.

This investment came about on the part of IVP several years ago as part of efforts to assist this operation and working out of financial difficulties.

And at the current time we've made the decision to impair that.

This amount is included in the "other" line of our income statement, and because it's below the operating line it's not included with our segment reporting.

So, adjusting for these items will take you to 20 cents a share which is down from a comparable number last year of 25 cents a share in the same quarter.

And that excludes the proceeds from the vitamin settlement that we received in the same quarter last year.

Just some other points of note in our financial statement -- cash provided by operations was $129 million for the quarter.

Accounts receivables and inventories increased during the quarter, approximately $200 million.

And this was primarily due to increased live prices on beef and pork as well as the usual seasonal uptick in our business that tends to get reflected in those two items.

Before I talk about debt and capital spending, I want to give a bit of explanation -- and this is not something we want to delve into the minute details of the transaction of at this point -- but we've had a supply agreement with Choctaw Maid and it's set to expire, and we've made the decision upon the expiration of this agreement to bring these assets formally into our company.

Choctaw Maid is a company we talked about in the past and we've had this supply agreement for over ten years in which we took 100% of their production.

So this is not an expansion of our capacity, it's just a process of closing out that agreement and bringing these assets formally onto our balance sheet.

So our debt and cash flow as well as assets section of our balance sheet was affected by this transaction.

So, with that said, capital spending was $147 million, which brings year-to-date capital spending to $329 million and of that $147 million, $74 million was related to Choctaw Maid transaction.

So, capital spending without the effect of Choctaw Maid was $73 million for the quarter, bringing us to $255 million year-to-date, again, exclusive of the Choctaw Maid transaction.

And our debt at the end of the quarter, it was $3 billion 990 million which was up $84 million during the quarter and up $3 million since the end of fiscal year '02.

Of course the Choctaw Maid transaction as well as increases in working capital that I talked about drove the increase in the debt level.

Regarding cash flow and debt, our debt to capital goal continues to remain at being at 50% or below by the end of fiscal 2003, even including the effect of the transaction I've mentioned.

Now, looking forward I'll talk about our financial outlook a bit.

We are still not providing EPS guidance, but I would offer the following.

Our revenues for the year are now projected to be between $24 and $25 billion, and of course revenues are affected by the live markets of both beef and pork as those translate on the spread basis and the selling price.

We expect our interest, foreign exchange and other charges for the fiscal year to be in the neighborhood of $300 million and that guidance is unchanged.

Our tax rate for fiscal 2003 is still expected to be in the range of 35% to 36%, and for capital spending, we're still targeting the range of between $400 and $450 million.

Depreciation and amortization is expected to be approximately $460 million for the whole year, and the weighted average shares will be approximately $352 million.

As just as a final note regarding earnings guidance, on this call we will not be giving any commentary regarding analyst consensus or any other guidance-type comments today.

And regard to questions about providing guidance in the future, we are still tabling that decision to some point out there, and when we make decisions around that certainly we will discuss that in the call or in some public forum.

So, I'd like to toss the call over to Dick Bond.

Thank you, Steve and good morning to everyone.

Couple of overall remarks before we talk about each individual segment.

Our domestic profits were significantly better in Q3 than in Q2 of this fiscal year.

We achieved greatly-enhanced beef margins and had a solid performance -- I believe -- in our pork segment in very difficult market conditions.

Our domestic chicken operating earnings, excluding the vitamin settlement dollars and Berlin closing costs, were up 44% and our prepared foods segment improved slightly, but was adversely affected by very volatile raw material prices and significant marketing and selling costs associated with the Tyson branded new product introductions in both our deli and refrigerated processed meats segments.

Now I'd like to go through each individual segment briefly and talk about them in more detail.

First, we'll talk about beef.

The beef average selling prices were up 17.8% and volume in pounds for the quarter was down 1.1% on a year-over-year basis.

Due to the Canadian border being closed from May 20th on and still is currently closed, our domestic head processed were up 10.4%.

And on a year-over-year basis 19.4% compared to second quarter of '03, while our Lakeside Canada operation was down 34% on a year-over-year basis.

Carcass weights were down 2%, which yielded an overall 1.1 decline in pounds.

Domestic beef margins were excellent in the second half of the quarter and continue thus far in the fourth quarter.

Lakeside operations incurred significant losses for the quarter, caused by lower volume, lower finished product values, and the re-evaluation of live cattle inventories.

Supplies of live cattle have begun to tighten and will remain so into the first quarter of fiscal '04, but should be more manageable than last year due to an improving economy and fewer pounds of competing proteins.

Live prices will most likely be in the mid-to upper 70s for the balance of the fiscal year.

Case-ready beef sales were up in dollars 18.3% versus a year ago and volume was up 16%.

We continue to see very strong comparisons on a year-over-year basis.

Now I'd like to move on to the Pork segment.

Our Pork sales dollars were down 6% and our volume was 4% less on a year-over-year basis.

We dropped approximately 5/10 of 1% market share for the quarter on a sequential basis.

Our efforts were primarily aimed at margin preservation during the quarter.

Case-ready pork sales dollars increased 59% and our volume increased on a pounds basis 54% on a year-over-year basis.

Prices for live hogs peaked in the mid-June period and have started to decline.

Supplies of market-ready hogs will continue to be tight for the balance of the fiscal year and also into the early part of next fiscal year.

However, live hog prices should continue to soften into late August-September periods as they seasonally do and have done every year since 1980.

On the consumer products front, first retail side of our business, we continue to execute the introduction of more than 80 new products into the retail and club arenas.

During this quarter we began shipping the deli self-serve line of Tyson Branded Products we spoke of on our last call, and we will continue to add customers throughout the fourth quarter and into next year.

We also began the sell-in of our Tyson Branded Boxed and Pillow-packed ham, turkey and chicken products for the lunch meat section.

We already have commitments that exceed our 70% ACV target.

In addition to these lunch meat categories, we are also pleased with our Tyson Branded Bacon initiative.

We have only been selling since late April and have already exceeded 40% ACV.

While the pork belly markets have squeezed significant margins out of our overall bacon business, the reception of the Tyson brand as a premium player in this category is meeting our expectations.

We expect to reach our 70% ACV target in the fourth quarter.

This, in addition to the 25% ACV on a national basis, and number three branded position we currently hold with our Wright brand bacon.

We remain very optimistic about the reception of our new products -- that our new products are receiving, and we feel we are properly positioning ourselves to be the branded leader in these segments for the future.

However, as you are aware, launching these numbers of items at one time and giving them the appropriate amount of marketing support is not without cost.

We have absorbed a significant amount of slotting and introductory expenses at an extremely high belly market -- has resulted in a reduction of our operating income of over $8 million for the quarter.

On the retail poultry side of the business we also continue to drive innovation with our second net weight facilities set for conversion in the fourth quarter.

While we are still fine-tuning the operations for our first facility, we continue to believe that the benefits of net weight to us, our customers, and consumers will lead to rapid expansion of this process to other customers.

We are scheduled to conduct tests with two new, significant accounts this fall.

The frozen value-added segment of our business continues to do very well and we again saw both share and dollar growth in both the bagged and boxed segments of our business.

Combined, Tyson currently enjoys approximately a 47% dollar a share in this category that showed 10% growth over the last 52 weeks.

We will be introducing this quarter the first beef and pork extensions to our Family Pack line with the September introduction of country-fried steaks and steaks fingers, breaded pork cutlets, meat balls and breakfast sausages.

Finally, we were notified last month of our Tyson frozen steak and chop line, which is in regional sales on the west coast, received frozen food ages award as one of the top ten best products for a regional launch.

Our plan is to roll this out nationally during fiscal '04.

Now I'd like to move over to the food service sector for a second and I'll talk first about poultry.

Our poultry food service national account volume continues to outpace last year as we have successfully sold more breast fillets, a 10% mix improvement to chain operations.

Additionally, we have continued to support trade spending at the food service distribution level in an effort to maintain share.

Recent events, such as the pilgrim's intended purchase of Con Agra's poultry division, should be favorable to Tyson, as we believe the intense level of up-front spending in an effort to gain distribution share should and will subside.

Looking forward, a slight recovery in the food service traffic, higher length quarter values, anticipated lower grain prices in the future, and a more rational, competitive set should be positives for our chicken operating profits going forward.

In the prepared food area, while our operating results were slightly better than second quarter, our year-over-year comparisons require some additional explanation.

As stated earlier, the consumer products piece of prepared foods were negatively impacted by approximately $8 million.

Additionally, on the Food Service side, the absence of speciality brands, $11 1/2 million pound decrease in existing customer business, the strike at our Jefferson, Wisconsin facility, an interruption in supply of ready-to-eat roast beef which has been corrected, and increased raw materials were negative factors.

These opportunities caused a decline in operating income of $21 million.

We continue to expand our soup and sauce business with several major casual dining customers through line extensions and new product offerings.

The strike and high raw material prices will continue to be a problem in fourth quarter.

However, we expect operating results to continue to improve sequentially in the fourth quarter.

In summary, we continue the process of establishing and growing the Tyson brand across all proteins.

We are working very hard to improve operating costs through automation, rationalization of assets, and process efficiencies in all reporting segments.

Now I would like to turn the call over to Greg Lee.

Thank you, Dick and good morning.

International had a strong third quarter with stronger export revenues and increased profitability in overseas operations.

Exports sales were $641 million in the third quarter, up 20% from the third quarter of 2002.

The increase in revenues was positively influenced by higher prices and volumes for boxed beef, together with higher prices for boxed pork, leg quarters, and beef byproducts.

Chicken export volumes were down 4% for the quarter, led by leg quarters at 7% lower than the third quarter of 2002.

Export leg quarter prices were up 1 cent per pound for the quarter, versus 2002.

Sales of Russian leg quarters were affected early in the quarter, due to uncertainty over quotas and plane inspections.

Sales of leg quarters to Russia have returned to targeted levels and sales of leg quarters to alternate export destinations are allowing us to achieve our targeted leg quarter sales volumes.

Prices for the fourth quarter are tracking approximately 25% higher versus our just-completed third quarter, and volume movement is also on target.

Our freezer inventories are in excellent shape.

Sales to China continue to recover from the low point, which was reached in the second quarter of 2002.

Sales of paws and dark meat to China are up 30% versus third quarter 2002.

Exports sales volumes of fresh meat items were flat in sales versus third quarter, 2002 but sales revenues were up 20-plus percent, due to selling a higher mix of boxed beef and boxed pork at significantly higher prices.

Sales of boxed beef to Korea and China were strong as well as sales of chilled boxed beef to Japan.

Prices have reached pre-BSE levels in Japan for key items such as short ribs, skirts, and tongues.

Chilled pork volumes to Japan are also up and our overall prices on key pork items are up 10-plus percent.

Sales of rendered products were negatively impacted due to the low kills at Lakeside in Canada that Dick alluded to earlier.

International overseas operations had a very good quarter.

Tyson to Mexico recorded good increases in sales revenue, a 6% increase, and an increase in operating income of 17% over third quarter of last year.

The growth in sales and profitability was due to stronger commodity markets and a continued shift in mix towards further processed products.

Coupled with continued improvements in operational performance.

Our Tyson Delong further processing plant in China has been partially disrupted due to the AI-related import ban that was imposed by Japan on Chinese production during the month of May.

We expect full shipments -- or shipments to return in full to Japan in October.

The Russian government implemented import quotas during the quarter and Russian veterinarians also completed plant inspections during this same quarter.

The Russian government has released a list of processing plants that passed inspections.

We believe we have sufficient approved production capabilities to maintain our sales targeted to Russia.

We will continue to work with the United States government on any remaining issues.

Trading relationship -- relations with Mexico on proteins have continued to be strained.

We expect the safe guard measures restoring poultry tariffs to 2001 levels agreed to by both the United States and Mexican industries both to be ratified -- and they have in fact been ratified.

We expect this to have a minimal impact on us, as any negative effect on U.S. exports would be off-set by the benefits to Tyson to Mexico.

In addition to the issues on poultry, Mexico has announced earlier this year that it's launching an anti-dumping investigation against U.S. port exports.

Mexico accounted for nearly 35% of our exports of boxed pork in quarter 3, so we will be monitoring this situation closely.

Mexico has also raised the possibility of a beef safeguard and/or another anti-dumping investigation against U.S. beef exports.

Despite these potential tariff and/or not-tariff barriers, it should not impact overall global export volume.

Now let me make a few comments and a brief update on some of our major company initiatives.

As John indicated in his press release comments, we are pleased with the progress made towards meeting the 24-month goals established for the new company.

Our major program initiatives in purchasing and in plant operational effectiveness are meeting our targeted goals.

In preparation for building a 5-year strategic plan, we have completed a comprehensive look at our business processes with an eye to the marketplace of the future.

We are now detailing the enabling technology needed to support our business processes and laying out an implementation time table.

We have completed a GAAP analysis designed to identify opportunities for expansion of existing products and production capabilities across all of our distribution channels.

We are nearing completion of a project designed to help us better understand the consumer of the future and as a result, the implications around what types of products they will buy, where they will buy them, and how we can more effectively reach them with our products and our brand messages.

As we undertake our strategic planning process, we will assess our corporate strategy in its entirety and affirm what it should be to help us focus our capital, our human resources to grow our sales, grow our earnings, and enhance our return on invested capital.

John, turn it over to you, sir.

As you can see from the thoughts of Steve, Dick, and Greg, we have done a lot in these short two years, and I will tell you, the folks are to be commended for that work effort.

But our expectations are that the benefits that have been put in place will start to be reflected in the next four quarters.

As we said earlier, we're pleased with what we've done, but we're not satisfied the bottom line and we have some things in place both for the fourth quarter and on into next year that we hope will enhance our responsibility to grow our shareholder value and in turn raise our stock price.

And with that, we'll take questions.

Thank you.

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

You will be announced prior to asking your question.

The first question comes from Christine McCracken.

Please state your company name.

Midwest Research.

Had a couple questions for you on chicken.

Clearly that's a business that doesn't seem to have recovered as well as the prices would indicate in the market today.

You had mentioned, I think Greg, that you have seen a mix improvement at the chain accounts.

Can you go into more detail as to where you're falling short?

Where is it that pricing is not being reflected in the results?

Actually, let's let Dick comment on that.

Christine, this is Dick Bond.

Let me make two comments on that.

I think that there's two factors that would tell me that we have not achieved maybe the results that the printed prices should indicate.

And one of those is on the food service side, is fixed price contracts and the fact that we have a fair number of fixed-price contracts.

And as the markets move up, we sometimes will suffer from that fact in the short-term.

Now, most -- in most cases those contracts are not multiple-year-type agreements or anything like that, but oftentimes they are fixed for a 12-month period.

So that's the first factor that is somewhat impacting our ability to get the printed prices that are out there, whether you look at a Georgia dock or an inaudible type process.

That's the first factor.

The second factor, on our retail fresh side of the business, we are still not satisfied and we are really doing three different programs on the fresh side of our business.

We still have our natural Chicken on a Fresh basis.

We have an enhanced Chicken and now we think a net weight.

This 3-pronged approach has created some operational factors for us that I believe we've figured most of them out in terms of what we need to do to make sure one, we're taking care of the customer, but two, to get our operational efficiencies back in line.

So, I think Christine, those are the two primary factors that have hurt us in this quarter as we try to one, continue to move more value-added products -- which we are doing -- but two, we've got some issues that we've got to work out from an operational standpoint.

And like I said, the fixed price contracts have affected us as well.

But it would be your expectation as we move through the year, one that you would roll out of these food service contracts and that two, you'd get the operational issues straightened out.

Is this a one quarter or a two-quarter issue.

When will we see improvement?

I think you'll see some improvement in fourth quarter, but we will not be totally out of these things until we get really to the November period, is probably a better time frame.

So, it is going to have a fourth quarter, and it will have a less effect in Q1 of '04, but it will still have a lingering effect into Q1.

Christine, Johnny here.

One of the things our strategy always has been is to be a value-added company, and as we work with national accounts or work with distributor chains, our pricing strategy leads us into fixed-price relationships, because that's what our customers want.

When those commodity markets move like they have in the last six, eight, ten, twelve weeks, we just don't have that many pounds that move with them.

Now, we do have some pounds that have moved with the commodity prices and those segments that are in the commodity have done exceptionally well with that move because that's a shorter-term move, but that's the nature of our mix and our balance, and so that's why maybe we don't get all the highs, but at the same time the lows either.

When you re-set the contracts, you'd set them at a much higher level.

We would work as hard as we could to see how much more money we could get, depending on what the customer's willing to pay at that time, and it depends also on what our competitors are doing.

I think Dick addressed a very valid point is now with some more consolidation within our industry, with the Pilgrim/Con Agra situation and with the Goldcrest deal getting ready to move to somebody else, that maybe there'll be more stability and rational thought on how to compete in the marketplace versus maybe some competitors in the past were just trying to buy market share with maybe not a very good marketing and/or trade marketing dollars out there in the marketplace.

We think that will effectively start to diminish.

Christine, this is Steve.

One other piece you alluded to in your question is around the mix change in food service.

We continue to expand in area of the size portion-controlled breast, and that market continues to tighten up from a supply standpoint.

And of course you see public pricing in regard to that.

And you know, our campaign from quite a while ago to internalize our own meat and move forward and get closer to being a chicken short from a breast meat standpoint, we continue to make good progress on that.

That's the mix shift Dick was referring to, as we continue to expand those sales in the food service.

And of course those sales have a more immediate market impact than the fixed-price contracts he referred to.

Great, thanks.

Thank you.

Brad Eichler, you may ask your question and state your company name.

Brad Eichler from Stevens.

Three questions.

First one's for you, Dick.

On the strike in raw material in the -- prepared foods area, what percent of the total would those two represent of the total $21 million hit in the quarter?

They would represent close to 70%.

And those will still be issues in the fourth quarter.

Ah, yes.

Would that be mitigated --. inaudible I guess what I'm saying -- 30% of the 100% is going to disappear.

The 70% as elements, is still going to be there.

They're probably not going to be as impactful as we continue to ramp up Jefferson and produce more product.

The strike effect will diminish.

The raw material piece is the one that is very hard to calculate exactly what that would mean.

On the pork side of raw materials, we do anticipate that to stabilize and drop.

The beef one, on the beef raw materials, it's probably the harder one to call at this point.

Okay.

Brad, back to a question that was talked about earlier.

In contracts with customers inside that prepared foods groups, we got a lot of 30, 60, 90-day rolling contracts and those contracts roll in a price formula, so some of that benefit of increased raw material costs will start to pass through to some of our customers, you know, not all of it, but we'll start to get some of that back.

Okay.

On the case ready side and beef, can you talk about what was the mix between ground beef and whole muscle and where did you see the growth in the quarter?

Actually, the growth came from both whole muscle and from ground beef.

Probably a little bit more of the growth came in total on the pounds side from the ground beef side, but in total, both whole muscle and ground beef had significant changes on a year-over-year basis that there were substantial increases in both.

And then I guess thanks, Dick, my final question would be -- in chicken, you quantified a little bit about how much more positive the pricing trends were in the last month of the quarter and that those were extending into this quarter.

Can you talk -- and it sounds like the same is happening in beef and pork -- is there any way to quantify for us how significant the end of the quarter trends are relative to what you saw for the entire period?

I guess I would say that -- to generally try to answer that question -- from beginning to end of the quarter beef had the most significant change.

Pork was just kind of' difficult throughout the whole quarter, but I think we did a pretty good job in terms of managing our margins there.

And our chicken operations were slightly better.

The biggest change in beginning to end was on beef.

Thanks.

Hey, Brad, Johnny here.

I think I would go back and add into you know, a lot of the work that was done on the branded side, you know, during this time 80 new products over in the deli self-service and over in the branded processed luncheon meats, the introduction of the Tyson Premium brand going retail and food service.

So the activity of our sales and marketing folks is starting to round out our overall offering of products and I think any of us would know launching 80 new products in 60 or 90 days is quite an effort.

And as we said, we hope to see the benefits show up in the fourth quarter of this year and on into next year.

So, I would make a note of the focus and great effort of what's been done in that area.

Thank you.

John McMillin, you may ask your question and please state your company name.

Prudential, good morning.

Everybody.

Good morning, John.

On July 10th when you came out with your guidance change or the 19 to 22, did you know there would be like a 3-cent -- I guess you probably knew there would be a 3 cent net capital gain or non-operating gain, but Steve, was that kind of' baked in your numbers on July 10th?

Yes, it was, John.

So these numbers maybe are slightly above your conservative guidance at that time?

I would say, John, our number improved slightly from the point that we issued that press release.

And in that press release on July 10th, of course we were far enough along in the process to have pretty good visibility, I would say really good, but yet we're not completed with our process, and we've made a decision on that date to put it out.

Yes, the numbers probably improved slightly since then.

It's somewhat scary when you can't get in the range of what your number's going to be 10 days after the quarter ends.

I don't know if you're just being conservative, but the actual number that was posted wasn't even in your range.

Well, I think if you do the fine print on the actual number, it rounds to like 22.6% or something like that.

So you know, we're dealing with a swing of maybe $2 or $3 million at best, John.

It's not a big deal.

Just on Choctaw Maid farms, I know you had the supply agreement.

Are you acquiring the company?

Is that how you're booking it all in?

In essence, John, we are bringing those assets into the company, yes.

We've had a supply agreement of course for many, many years and we've provided expertise and had a very close alliance, but at the point of the expiration of our agreements with them and being at a decision point, we've chosen to go ahead and internalize the assets as part of the balance sheet.

So did you owned the assets before?

Is there any money you're laying out to do this?

I think the certainly the $74 million in capital spending that we've referenced is laid out --

Okay, fine.

And the transaction will actually close in the fourth quarter, so there will be a little bit more to it.

At that point in time I think we can give you all the details of it.

You know, it's a 10-year relationship and we don't want to make the whole call into the depths of that, but certainly it's been complex because we've contributed to their expansion of capacity and so-on and so-forth and you know, the nice thing to say about them at this point in time is that's two brand new literally state-of-the-art plants and we've been a part of getting it that way.

So there's a complexity in this and it is two-stage and we will see it all in the fourth quarter.

And Dick, I'm trying to get a better feel for the prepared foods shortfall, at least it was a shortfall where I was.

You mentioned the 11 1/2% volume decline in the segment.

Is that right?

11 1/2 million pounds.

Oh.

What percent is that?

And is that due to the strike?

I mean, it's due to several factors --

That's what I'm looking for.

It's due to Speciality Foods.

It is due to the strike to some degree, and it is due to lower food service traffic really during the quarter on a year-over-year basis.

And that percent, 11 1/2 million -- I probably didn't let you finish, but what percent decline that is?

I'm not sure we calculated it that way, but we'll take the time and Steve and Louis will get back to you about it.

And Johnny, just on the whole food service market, I mean, you're a little bit more typical than the average food company and you've been hurt by what's been a difficult you know, actually if you look back to the last two years with 9-11 in there, it hasn't been the easiest of food service environment you know, to deal with.

Are you seeing improvement kind of' day-to-day in the food service industry?

You know, I'll let Greg or Dick pitch in with me, but you see little pockets trying to get started, sustainability I think is the question we all ask ourselves, will it sustain and keep moving?

I'll use this summer again, there was some good, little pockets that got up and running, but it didn't sustain for the whole summer.

It might have sustained for you know, looks like it's going to sustain for two out of the three months versus all three months, but there's some life out there.

There's some people trying to get out and move around.

But I would tell you, it's not anywhere where it was post 9-11 -- or pre-9-11, but you're seeing signs out there.

You're seeing people move around a little bit.

You know, you're starting to see a little of the expense account crowd get out a little bit more.

Maybe they're not going to the high-end restaurant, but they're going to the casual theme restaurant on the expense account, so I'm optimistic that people just want to get out and move around again.

And you are seeing some of the QSR people reporting higher same-store sales here just recently.

And we are starting to see -- like John said -- some more traffic.

Is it a huge rebound at this point?

No, but I think it has some sustainability to it going forward.

But it's a very slow recovering pace.

And John, that number if you exclude speciality brands, our pounds or our tonnage was down 2.6%.

Okay.

And just my last question, Johnny.

Just in terms of the Tyson's stance on this Canadian ban, which you know certainly hurts your Lakeside results, but may actually help you more than hurt you.

I don't know, you tell me.

But just in terms of where the company stands -- I mean, we've had basically one cow, one could argue where a -- we're a country that believes in free trade.

Do you think this ban should be lifted?

You know, Dick's been following that.

I think from my personal point of view and from a company point of view free trade is something we believe in.

Free trade inside the agricultural sector is quite complicated.

I think we all know we're running up against the DOA conference coming up.

That will be interesting to see what goes on inside the trade regulations, including -- particularly your stance on trading issues.

Dick's been monitoring the Canadian issue day-to-day and has more thoughts on timing on that.

John, I really don't think about it much differently from what John said.

I mean, you had one isolated incident of one animal, there was a lot of scientific testing that went on to ensure that as best that you could there was not any other animals.

The international committee also came to that conclusion.

Canada had done an excellent job from a scientific standpoint of investigating this.

Their trace-back system that they do have in Canada was very helpful in that process.

So yes, I mean, we believe from a company's perspective, that the borders should be re-opened.

I think it's very complicated between both the U.S. and then how Japan and South Korea have kind of' entered into this mix as well.

So it's a complicated thing, but in general we would agree that the border should be opened from a scientifically-based standpoint and from a practical standpoint as well.

Okay, thanks a lot.

David Nelson, you may ask your question.

Please state your company name.

Good morning.

CSFB.

Just a follow-up on John's question in clarifying prepared foods.

Dick said profits were down $21 million.

The release says $42 million.

Is the difference speciality brands in?

Not totally, David.

I didn't talk about raw material prices in all segments.

Actually the raw material prices had a greater effect in some other segments of the business as well.

So the fact that raw material prices on beef and pork were considerably higher for the quarter and these lagging sales contracts that John referred to, that's really -- I mean, it's a function of raw material price increases, but it is tied to these 60 and 30 and 90-day trailing sales contracts that eventually, when those things stabilize or start to move down, we should pick that back up.

It's not like you lose it forever.

You just lose it as they continue to go up.

And we just had very, very high and erratic raw material prices that were -- that did affect those sales contracts as well.

So that was the big issue both in Chicken and Prepared Foods?

Absolutely.

Okay.

In the export markets in beef, Japan is looking at a tariff increase, I guess it's 38 to 50% August 1, and at least as we talk today, still is asking for country of origin labeling by September 1.

Talk about what you think the political risk is to reduce U.S. beef exports to Japan?

Well, let me comment on that and Dick may also want to.

I mean, we certainly don't really agree with the fact that they're going to put in place the safeguard and kick the rate from 38% to 50%, but we've been there.

We've been there not in the too far distant past, and that in and of itself we don't think will have a material change on our sales, Dave.

You know, they have a very well-defined program in place the way they look at that, and you know, bottom line is, as you well know with the decline in sales over there, that resulted right after the BSE incidents.

We're comparing against a extremely low sales base.

Bottom line is they've kicked it in and we think we can live with the deal.

And with regard to the longer-term implications about you know, the country of origin suggestions you made, we still believe that in the end there will be a favorable resolution worked out to that question.

Okay.

Onto Russia and chicken.

Is there a danger of the U.S. running out of its quota by the end of the year?

I suspected someone might ask that question.

We have been monitoring that and watching the rate of sales.

We've competed it against the quotas and I'm not going to sit here and tell you there's no possibility of that happening, but I will tell you that we think that's relatively unlikely.

It is not imminent in any way.

Okay.

Hey, Dave, John here.

You know, Greg and his team have done a good job of moving our volume you know, way from us, we're probably one of the largest supplier now of product into Africa and some other countries.

So over the last 12, 18 months Greg and Greg Hewitt have been working hard on diminishing our dependence on Russia and moving our volume into other markets.

So if trade disruptions happen, whether they're Russia, Japan, China, and these agricultural issues pop up, we have more flexibility to move our product and also take care of our customers.

Great, thank you very much.

Thank you, Leonard Teitelbaum, you may ask your question and please state your company name.

If we take a look at our operating margins that you've been able to put up over the last several quarters in, obviously, what's been a, you know -- a series of integration problems, etc., from where you guys sit on a strategic basis, how do you see your operating margin -- you can do it on a pre-tax basis or total operating margin, however you wish -- but how do you see yourself going and what's the goal over the next one, two, or three years?

We've told ourselves we'd like to get our margins back into the historical on the average for the whole company in that 3% to 4% range with a target towards 5%.

In the future.

I think we had -- I forgot, this quarter number was what? 1.8, 1.9?

Yep.

And you know, our goals to average the 3% to 4% range.

When you take a look at all these moving parts, and Dick, let me ask the question before I get to the conclusion a different way -- if I take a look at what you're down in Canada versus what you're up in the U.S., can you make some kind of a projection that said if they get rid of the ban -- and I don't think there's a question that they would probably have been out of this thing had Japan not mixed into this thing -- but do you see a tradeoff between one and the other or will there be a much more of an impact on the U.S. margins than on the Canadian if the prices ever get back into line here?

Lenny, I would say there is a tradeoff there.

The U.S. was basically getting from Canada -- either in the form of boxed beef or in the form of live cattle -- some would say as low as 4, some would say as high as 6% of their supply.

Well, when that interruption occurred, that certainly had a positive effect on our domestic operations while having the significant negative effect on our Canadian operations.

So the two are very, very dependent upon one another.

It is really hard to predict or say in the future once that gets stabilized.

I would tell you that it will have an impact on our domestic margins.

It's just hard to say how much.

Pork is back to the levels where some of your competitors were complaining pretty loudly about, you know, can't make any money at those levels and it should have been a help to you.

Are we looking at this current quarter and next quarter for a continued strong margin growth in the pork side of the business at least from a raw material to a selling price spread here?

Lenny, I would say that generally fourth quarter, the months of July and August are not great months historically and seasonally in the pork processing business.

Typically September, October and November are historically better months from a quarterly standpoint, three months on the processing side of the business.

But it does appear that we are seeing -- at least if you look from the CME, from the futures standpoint -- you see the futures going forward are coming down.

They've definitely peaked for the year.

And typically our margins will get better the more we get into the fall period.

But July and August are not typically your great months in terms of margins.

And to the last question, I think we've beaten the prepared foods segment to death here, so let me just skip and say look, if I take a look at the operating conditions, I don't think -- it's hard to get a case where they could get much better than they are, given as you said the seasonality in July and August.

And why couldn't we -- shouldn't we expect a fourth quarter that looks pretty much like the third quarter?

Is that an outrageous look?

Are we being too conservative on that?

Well, Lenny, Johnny here.

I think we've got a lot of things that are in place and we've talked about and we've talked about you know, the brand introduction, the products we have out there in the marketplace.

We've got some other things that are working and we're going to work hard in the fourth quarter.

I think if you look at the history of the company, the fourth quarter -- usually gives us a chance to be one of the better quarters of the fourth quarters of the business year, but you know, there's a lot of strange issues in our business, whether it's a one mad cow in Canada tied in with Japan, you know, the food service sector out there kind of bumping along out there.

But fourth quarter historically has been one we've worked hard in and we've performed well in.

Would you expect a new product introduction -- I think you said before -- to come into the first quarter of next year or will we catch some in September of this year?

Lenny, it will affect fourth quarter and it will affect -- it will continue to affect but at a lesser degree Q1 of '04.

All right.

We're still settling in, still paying sliding fees.

So I mean those marketing and selling expenses will be still at higher levels than what they normalized are, and probably until we get through the first half, anyway, of Q1 of '04.

We'll call the bunker again in a few weeks.

Thank you.

Thank you.

Felipe Goosen, state your question and state your company name.

Thank you.

CSFB, Fixed Income Research.

A couple questions for Steve this morning.

Steve, you reiterated your belief that you can hit the debt to capital ratio of 50% by the end of the year.

Should we take from that that you will basically be done with the bulk of your debt reduction even if your cash flow does not recover at historical levels?

And have you been clear with the rating agencies?

At this point I think we would reiterate the same message we've been attempting to give on each call, to the question of what happens when you get to 50%, which is what you're asking, and our evaluation at this point in time is to continue paying down debt.

We haven't set a particular new target at this point in time, but we are thinking about that, but we'll continue to pay down debt even when we reach 50% -- 50%, probably is the best use.

We still have our investment rate in our business and such, but we won't stop at 50%.

We'll continue to pay down debt.

That's comforting to hear, Steve.

Then my second question was, with regard to natural gas prices, obviously they have gone up quite a bit this year.

Can you give us a better feel for how they impact your business, particularly on the chicken side and what you have done to head yourself against this?

Particularly on energy in total within our business, and we've taken measures like anyone else -- but energy year-over-year for the quarter was, call it flat, for our particular circumstance, and we're actually slightly advantages for the year-to-date.

So we've took some measures and worked that very hard.

So energy is, I would say in our financials year-over-year at this point, has really not been a major factor.

That's one of the risk areas that you know, our management team is obligated to manage and they've done a very nice job of understanding that risk and managing it into the cost structure and into the earnings strength.

And in terms of soy bean and corn -- have you help -- hedged yourself for this year?

I seem to recall you have not been active this year.

Can you maybe comment on that one more time?

Basically we have certainly decided that given our size and our position, we're not going to divulge where we are from the standpoint of our position on corn or on soy beans.

Okay, fair enough.

Thanks very much, gentlemen.

Christine McCracken, you may ask your question and please state your company name.

Yeah, Midwest Research.

Just a follow-up on an earlier question.

Steve, you had commented you have the 50% debt to cap target.

Does that on -- assume you're not going to pursue any large-scale acquisitions?

There are certainly assets that are presently available.

I'll speak to that.

Christine, there's a lot of movement going on in the industry and I think as all business people, you have to assess what your strategy wants to be on a going forward basis, and we've looked around and things that have been available, things that just closed, we could not find a geographical fit.

We did not believe adding assets just for size purpose was consistent with our strategy of being one bird short.

We believe we have plenty of capacity internally on the poultry side to expand if we need birds and/or can buy raw material from the outside to support our value-added products.

There were some pork assets out there and some beef assets.

We had the same discussion process about how does it fit, and as our strategy has been and will be to move raw material up the value-added stream, we did not see a need to add more commodity-style processing plants.

Dick and Greg might have some added thoughts on that.

My only comment on the beef and pork assets -- it would have been very difficult for us to be part of or do the beef side on the national beef aspects, and on the farmland pork assets, based on the price that was paid, it looked to me like it was closer to a seven times EBITDA rather than five.

This is Greg.

Just commenting on an international front is that we are continuing to try to understand where we ought to be and in what manner we ought to be there and we're doing a lot of work and trying to build business plans, but we're going to be very, very conservative in actually making any near-term investments.

And Christine, Johnny here.

We will continue to look for what we might call niche product opportunities that would fit into our overall distribution plan.

There might be a regional further processor of meats out there that has a particular market style or fit that we can then acquire into our company that then we can take into our national distribution system.

But those type of opportunities are regional to smaller companies that would be funded out of cash flow because the choice would be either we build it or buy in into our overall strategy that we're building.

Good to hear.

Then one last question on case ready.

It seems like you're tracking at least 20% ahead on case ready and looks like you're getting pricing.

Is that just a mixed torso muscle or are you getting new accounts?

I mean, it is a mixed towards whole muscle holding onto its percentage point.

On the pork side we have seen some new customer activity, but on the whole muscle beef side at this point, I would have to tell you we have not added new customers during the third quarter.

All right, thanks.

Thank you.

That will conclude today's question and answer segment.

I would now like to turn the call over back to the speakers.

Thank you everybody for listening to the company.

It's been an interesting two years as we spoke to at the start of the conference call.

Our folks have done a lot of nice work in two years.

We're pleased with some of the goals we put out for the 24 months.

Synergies, debt reduction, people integration, people stability -- I mean, we really didn't lose any people during the two years.

The company coming together, shared services systems, we've had a few curve balls thrown at us in terms of either animal issues, trade issues or market issues.

And I think I can tell you that Dick and Greg and folks that work with them have some plans in place and we can start to see benefits not only in the first quarter, but more so into next year and in particular into the springtime of next year as we get through the seasonal downturn of January and February.

We thank you all and look to our year-end conference call in November.

Have a good week.