泰森食品 (TSN) 2004 Q2 法說會逐字稿

Good morning and thank you for holding.

All participants will be able to listen only until the question and answer session of this conference.

This conference is being recorded.

If you have any objections you may disconnect at this time.

At this time I would like to turn the call over to Louis Gottsponer.

Thank you and morning and thank you for joining us today for the Tyson Foods second-quarter conference call.

With me today as usual 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 operating performance for the quarter I just 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 that things can change so I want to encourage you to look at today's press release for a discussion of those risks that can affect our business.

Also before we get into the financial results for the quarter I want to remind everyone that we will not address any questions in regards to the SEC investigation which we disclosed on March 29th simply because we have no new information to share with you on that matter at this time.

Now I am going to turn things over to John Tyson.

Thanks to our friends and our shareholders for joining us once again.

We had a nice second-quarter as compared to our past second quarters because this is always our most challenging quarter.

Our company did well in this quarter.

If you remember when we put these companies together we suggested that being in all three proteins with an ever-increasing value added mix will be the true strength of this company.

I think this quarter is a result of that strategy.

We still are working on moving to a 50-50 mix in the next three to five years, and we did make nice progress the last six months.

We will continue to enhance our operations, increase our market share and pay down debt.

On another note, the judge ruled as a matter of law in our favor on the Pickett case in Alabama.

This was the right ruling for the cattle producers and for the American consumer.

Before I turn the call over to Steve I want to thank all of our team members for their effort in making us successful this past quarter.

Good morning, everyone.

Just to recap some things from the press release we reported GAAP earnings of 33 cents per diluted share for the second-quarter.

That is up from the comparable GAAP earnings of 20 cents a share last year.

Of course last year's second quarter included $94 million which was received in connection with our ongoing Donovan antitrust litigation items.

We -- to head off a question -- we don't expect any more money from that at this point in time so the word ongoing should be scratched from that.

But that's what we had last year.

This year the 33 cents includes plant closing costs of about $14 million, which is approximately 2 cents per share.

Also you probably noted in our press release that we've increased our disclosure around our ongoing commodity risk management hedging efforts, and I will take a minute and talk about this.

Our statement in the Chicken segment of our press release reads as follows.

Operating income from the quarter benefited from our ongoing commodity risk management hedging activities, which provided approximately $90 million of benefit to offset an estimated $40 million of increased grain cost which was based on year-over-year increases in grain markets.

So let me go through this a bit.

Let me be sure first that you understand what we mean by ongoing commodity risk management hedging activities.

So for sometime we have been talking with all of you about our increased focus in this area.

Some time ago we added a new head of commodity risk management, and we've been increasing our staff and our expertise in this area.

And our approach is to tie our hedging activities to our physical activities.

For example, with consumption of feed grains we are one of the largest consumers for in use of feed grain in the United States, and so we tie our hedging activities to that physical consumption.

And then hedging is also tied somewhat to our sales activities.

But again, all about our physical usage or our physical activities.

Our purpose in our commodity risk management area is not to be speculative beyond our physical needs.

And typically as we look at this our view that we take is longer than one financial reporting quarter, and for instance, when we look at grain markets and our view to the grain markets and our physical activity we are thinking in terms of crop cycle timing usually.

And if we are thinking about a sales activity we typically think in the duration of a fixed-price sales contract.

So that's an overview of how we think of it, and now let me talk specifically about what we meant by what we said in the press release.

So if you look at it year-over-year our grain cost into our Chicken business, if you had based it on market prices of grain last year versus market prices of grain this year, the market prices this year increased the cost of sales in the Chicken business by about $40 million.

So year-over-year grain markets just taking in and of themselves our costs would have went up about $40 million.

During the quarter from our risk management activities, our cost of sales benefited by about $90 million.

What this really means is that our effective cost of sales is a favorable $50 million during the quarter.

So effectively our grain cost was lower than a year ago.

And that is because over the course of time we were able to take advantage of lower grain markets before the big run-up in the grain markets.

So that's the explanation of what we meant, and as we go through the call we don't want to talk about or we are not going to discuss anything such as what is our percentage of the grain uses hedge what is the number of contracts or anything like that.

In short-term we really told you about all that we can tell you about the grain situation.

You may have a couple more questions, but I'll warn you in advance there's not a lot more detail that we can go into and perhaps if you need more color from an explanation standpoint that would be a better use of everyone's time, perhaps to do that with myself or with Lewis as we talk later.

But we will be willing to take a couple questions of clarity.

But beyond that we don't want to tie up the call with all of this.

This goes to illustrate what we've been telling you all along, that we've been taking prudent steps around the increased grain markets and that this quarter the benefits have reached a point that levels a merit of increased disclosure.

Okay.

So we will continue on through the financial statements.

We had a strong quarter; cash provided by operations was $284 million.

Net income, depreciation and amortization totaled 238 or 84 percent of that total.

We saw improvements in the quarter in both days outstanding and accounts receivables and we saw improvements in our inventories.

And as we've talked for a long time, we continue to work hard on managing our working capital.

On a forward-looking note, our investment in working capital will probably increase a bit during the next two quarters as these are typically the strongest part of our business from a sales standpoint.

Capital spending for the quarter was $107 million, which brings the six months total to $231 million.

Our debt at the end of the quarter was at 3.4 billion, and during the quarter we paid down 105 million.

Our debt to capital came in right at 45 percent.

So we now reached our last announced target a couple quarters early.

And with the expected bump in working capital and the timing of tax and interest payments in the last two quarters of the year, I expect that at the end of September we will see debt to capital somewhere in the range of 43 to 45 percent.

Our interest expense was slightly higher than the same quarter last year, and what this does is reflects our efforts to buy bonds back when we have that opportunity and also during the quarter we purchased all the outstanding preferred stock that we had in Tyson to Mexico, and because that was an accelerated transaction from our original plans we booked interest expense regarding to that.

Now when you look inside our segment margins I want to tell you the plant closing charges and how they affect them.

Our Chicken segment operating margin was 9.2 percent for the quarter, and that includes a charge of $8 million for plant closing.

If you exclude the plant closing charge the operating margin would have been 9.6 percent.

Our Prepared Food segment had an operating margin of 3 percent for the quarter, and that includes a charge of $6 million for plant closing; excluding that the operating margin would have been 3.9 percent.

And our fee segment you will remember in the first quarter we took a charge of $61 million against the BSE activity, and I want to report on that.

During the second quarter we didn't make any change to that charge.

We don't anticipate in the third or fourth quarter that any change will be required and our estimation was pretty tight on that.

So that book on that is really basically closed and with no change.

Now, the financial outlook.

You noted probably in our press release we raised our guidance for the year; what we expect now our earnings to be in the range of $1.05 to $1.25 on a GAAP basis.

And of course when we talk about guidance that reflects our outlook for the next two quarters, including our views of all the various markets and also includes our view to any benefits that we might get from ongoing and commodity risk management hedging activities.

So everything that we know about our business is baked into that guidance.

We've also taken the view within this guidance that export markets that are closed now due to the BSE situation within the guidance our view is they will stay closed.

So we are not banking on any particular date for markets opening or there is no contingencies on that that is baked into the guidance.

However, if those markets were to open prior to year end, and we will have more conversation about that as the call goes, that does not necessarily mean we will change the guidance.

Guidance is always to take an overall view of everything pertaining to our business and at that point in time markets occur we will certainly do that and make any change if necessary but there are none guaranteed.

We are going to continue not giving quarterly guidance.

We're going to maintain the annual guidance practice.

And we are not going to be making any comments on the call today regarding any earnings estimates from any particular sell site analyst or consensus in general.

Our revenues for the year we project to be between 25 and 26 billion.

We expect our interest, foreign exchange and other charges to be around $270 million.

Our tax rate, and this is a change, we now expect to be in the range of 36 to 37 percent.

That is due to two or three things, but primarily due to the slowdown in international activity and how that affects our tax credits.

Capital spending we continue to target a range of 450 to $500 million.

Depreciation continues to be around 460 million, and the weighted average shares for your calculations will be about $356 million.

So that's my report, and I'll now turn the call over to Dick Bond.

Thanks, Steve.

And good morning.

Our second fiscal quarter fueled by very good demand for chicken and pork yielded outstanding results.

Sales in operating earnings increases in the chicken, pork and prepared food segments were positive contributors while the beef segment results suffered from a shortness of supply of market ready cattle, the absence of export markets and reductions in volume resulting in increased operating costs.

I will talk in more detail concerning each segment and customer channel starting with the chicken segment.

Our chicken segment operating income excluding plant closings were higher by $152 million or 338 percent compared to last year and showed a 64.2 percent increase on the same basis from first quarter.

The increased selling prices, improved mix, conversion cost improvements and an extensive risk management program were the primary contributors to the much improved operating results.

Foodservice and retail demand were very strong for the quarter while the chicken supply dynamics were up only slightly, driven by higher and rising feed and ingredient costs.

Our operating income excluding plant closings reached 9.6 percent return on sales.

For the quarter we certainly achieved the higher end of the range of the historical Tyson chicken segment results.

We expect strong demand for chicken to continue, supply to grow but minimally, and our operating margins to remain very good in the third quarter.

Our risk management initiatives designed to reduce volatility and mitigate risk based on the current market prices will have a positive impact on our third-quarter results, as well.

Indeed operating margins for the quarter were very poor for the reasons stated earlier for the only bright spot being our Canadian operations which had both volume and margin increases over a year ago.

Looking forward, the supply of market ready cattle is slowly beginning to improve.

Demand for beef domestically is strong.

The reopening of the Canadian border for live cattle appears to be eminent, and negotiations for the resumption of trade in Japan and other countries have resumed.

These factors should enable us to return our domestic beef operations to a reasonable profit picture during this quarter.

In the pork segment for the first six months of our fiscal year operating margins are up 72.9 percent, indicating very strong demand for pork products both domestically and on an international basis due to supply issues for beef and chicken.

The supply of hogs will be adequate.

Our operating results should continue to outpace last year and overall demand for pork products appears to be structurally sound for the foreseeable future.

Within prepared foods our sales dollars were up 7.1 percent over Q2 of fiscal '03, while operating income adjusted for plant closings were up $19 million on the same basis or 271 percent improvement.

Operating income improvements primarily came from selling price increases, mix improvements and operating cost reductions.

Raw material price increases were a negative contributor to the quarter.

On a sequential quarter basis we continued to show improvement on a return on sales basis excluding plant closings.

We settled the labor dispute in Jefferson, Wisconsin during the quarter and are improving the efficiencies of this facility, and we are now back to approximately 85 percent capacity utilization.

We have also completed the renovation of our Chicago, Illinois culinary soups and sauces plant.

We are adding profitable volume to this facility on a weekly basis.

On a year-to-date basis, sales dollars were up 5.4 percent, and operating earnings adjusted for plant closings are up 47.5 percent compared to the first two quarters of fiscal '03.

Just a couple of notes about our two primary channels.

On the consumer product side our Tyson branded initiatives continued to gain distribution fueled by raw and fully cooked bacon.

We also expanded distribution on our Tyson lunchmeat line and expect to see significant volume increases in the third quarter which is the peak consumption period of the year for these products.

Within our fresh taste ready and tray pact portion of our retail business we continue to experience double-digit growth both in dollars and pounds within the red meat portion of this group.

And on the poultry side we were down slightly in volume and sales dollars, but operating earnings improved by $26.1 million compared to a year ago due to improved markets, plant efficiencies through automation and instilling best cost practices.

In fiscal '03 we closed our Jacksonville fresh facility and starting with our fiscal third quarter of this year we will have absorbed that volume fully in our remaining plants.

Our retail further process product lines as well, as our club store group, delivered double-digit sales dollar and unit growth.

Within our foodservice channel that marketplace again showed very good comp store sales, driven by the QSR and casual dining segments.

Our national account and distribution sales performed very well from a sales and margin perspective.

We continue to concentrate on innovation from a product and service standpoint.

In summary, we had a very good second quarter led by outstanding chicken segment results and very good pork segment results.

Prepared foods continues to perform better, but not where we want it to be.

The beef segment suffered, but the negative factors affecting that business are improving looking forward.

The domestic demand for all proteins continues to be very good, and the supply picture appears to be in reasonably good balance with the strong demand.

Our focus will be to continue on creating value for all of our stakeholders by expanding the Tyson branded initiatives where appropriate, enhancing our best cost programs and reducing our earnings volatility through the hedging programs to mitigate our market risks across all segments, poultry, prepared foods and fresh meats.

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

Thanks Dick and good morning.

Export sales were $435 million for the second quarter.

This is down 29 percent versus the second quarter last year.

The decline in sales is directly attributable to lower export volumes resulting from the continuing bans on U.S. beef due to the December BSE occurrence and the bans on U.S. chicken due to the AI outbreaks in January and February and March of this calendar year.

Our chicken export revenues increased 12 percent despite a 24 percent decline in sales volume.

Overall prices for product were substantially higher for the quarter.

As an example, export leg quarter market prices were 16 cents per pound higher than during the same time period last year.

Prices for chicken products targeted for export remained strong as compared to this period last year.

Even though we have built some additional frozen inventory during this quarter, we expect to bring those inventories back to normal operating levels based on known future shipments, as well as re-establishing volumes to markets as the AI bans are lifted in the next two to three months.

Tyson to Mexico, our largest foreign-based operation had a significantly better quarter relative to our first quarter.

The chicken fundamentals in Mexico are in fact much improved.

Sales prices have recovered to historical levels.

The continued improvement in further processed sales and operational execution we have experienced also provided offsets to the increases in grain costs.

Our Tyson Delong operation in China was adversely affected due to the Asian AI outbreaks.

Some comments regarding the AI bans on U.S. chicken.

While the bans put in place by Japan, China, Hong Kong, Mexico and a number of other small markets have gone on longer than we would have expected, progress is being made on seeing them reopen.

An agreement has been reached with Mexico and shipments have resumed.

The protocols for managing trade with Mexico are more favorable than those that were in place prior to the recent AI outbreaks.

We expect Hong Kong, China and Japan to lift their bans in the next 60 days, if for no other reason than the time duration from the last AI outbreak that occurred in the United States.

Dick spoke to the fact that negotiations have reopened with Japan and other key Asian markets in an effort to re-establish beef trade.

A USDA team is in Japan now and our hope is that this will lead to further technical discussions and to an agreement to resume trade.

The USDA has also recently met with officials in China, Hong Kong and Taiwan and believe that trade will likely resume with them in the next 90 days.

Mexico reopened in March for boneless beef from less than 30-month-old cattle and has announced that it resumed, allowing the import of variety meats from the United States in the next couple of weeks.

Mexico has historically been our largest market for variety meat exports.

As we move through the third quarter and into our fourth quarter, we fully expect our export opportunities to improve as markets become available to us.

With that I will turn the program over to John Tyson, our Chairman.

Thanks Steve, Dick and Greg.

As you can see from their reports, the strategy of three proteins for this new company is truly our strength.

I can tell you we will work hard the next quarter to improve on our earnings from this quarter.

With no other comments, it is now time for the question and answer.

(OPERATOR INSTRUCTIONS) Christine McCracken.

Just going back to your comments on Japan, there are a number of reports out this morning that they have come to some agreement essentially saying that beef and pork can start within the next couple months, and yet you still remain very cautious in your outlook.

Is that really just because you have seen these things kind of go both ways in the past and you're trying to keep kind of a more conservative view, or is there something more that you know isn't being reported in the press?

I think in all trade issues to get excited until a country makes its decision, we are just being cautious and we will be prepared to move our product once the borders start to open, not unlike we were prepared to start moving product back into Mexico, both beef and chicken when that border opened up.

But it's more on the cautious side by the nature of government agricultural policies.

And then just with regard to Canada, how closely is -- I guess reopening the border to live cattle trade tied to the Japanese agreement, and is it possible that Canada could reopen the live cattle trade prior to a Japanese agreement?

Or could you just give us some update there?

Certainly if Canada reopens and you're looking at much lower cattle costs in your operation.

I guess I would answer that by saying I don't think the two are tied together.

The Canadian reopening for live cattle, I don't believe is predicated on any type of a Japanese settlement.

The comment period is over, and I believe from everything that I can understand here is that we should have the live cattle opening of the border with Canada sometime in the next couple of weeks.

And I don't think it is tied to anything that has anything to do with Japan.

Just one last question in this area on Japan, I know that they have been pushing for 100 percent testing and the industry has been pushing back.

Can you just give us a little perspective on why they are fighting so hard, or you are fighting so hard to, I guess from testing at least a percentage of your cattle that could be shipped to Japan?

Primarily because as has been stated there is really no scientific justification for that.

The OIE doesn't recognize that;

Japan is the only country that does test 100 percent of their cattle, and its a very costly and logistically difficult thing to do.

So we have stood by, as well as the AMI and most of the other major processors saying that we don't think it is necessary and believe that science should survive and science should tell you what to do here.

And that's why we have been pretty emphatic on following that process.

Fair enough.

Backing up to your chicken margins, backing out your hedging gains certainly you're looking at better margins but certainly nowhere near maybe as strong as some people have been looking for.

Can you talk to that?

Why contracting didn't come in with slightly better margins after backing out those hedging gains?

Christine if you look at the chicken margins, I'm not sure how you're talking about the hedging gains but if you take the net $50 million we would have been at 6.8 percent, which that would've been comparable to 2.5 percent last year.

So we made a very nice improvement in the business.

The contract pricing which you're referring to we've had excellent success and working our way through batch.

And we've had some benefits from the markets but we continue to make improvements in the business.

So we think market improvement from the year ago and remember that when you compare our chicken business to a number of others, that ours is much more based on the contract prices and the fixed pricing than in some of the others which are more truly based on the market.

So we don't tend to see the huge run-up in markets as others do but then because of the fixed-price components we come up a little slower, but we also have a tendency to stay there a lot longer as market pricing changes.

So we've made significant improvement in our fixed-price portfolio and we still have opportunity to continue to do so.

But on the international side of the business as a relative percent, it sounds like that business is actually up, that was a make huge drag on your operations but it could have been higher had it been -- the markets been opened due to AI.

Christine you would have had a trade-off between price and volume.

So volume goes down, prices go up and nature of product, which is the leg quarters are a commodity trading type product.

So I think to speculate would be unreasonable.

Fair enough.

Thanks.

Brad Eichler.

Brad Eichler from Stephens, Inc.

Three quick questions, the first is for Dick.

I know you mentioned a little bit about more favorable cattle supply in the balance of the year but could you give a little bit more detail on your view there?

Second is on the hedging.

Are those all realized gains, or is it a combination of realized and unrealized gains?

And third in your case ready area could you give a progress update on the whole muscle progress you're making please?

Brad, this is Dick.

I'll start with the cattle supply.

We have had reasonably good placements up until here this last month placements were down about 10 percent.

But prior to that we have seen good placements of cattle.

Our total cattle on feed is still slightly over 100 percent compared to a year ago.

These cattle are out there, and quite frankly from a slaughter level because margins have been so ugly, so to speak, the cattle are out there and they're going to have to come to market at some point in time.

So it would appear that as we get into the middle of May and towards the end of May we should start to continue to see more cattle in June and July and August look to be very good supply period months.

We should see continued strong demand especially from the grilling season and again if exports do open in the latter part of the quarter or in the beginning of fourth quarter to Asia, that should be a positive factor, as well.

We should get back up to more historic volume levels, which again should take our operating costs down 10 to $12 from where we operated on a per head basis during this second quarter.

On case ready, what we saw in Q2 was extremely strong pork results.

Our beef results on a whole muscle basis were up or not up nearly as much as they were during Q1.

But overall we continue to see again double-digit growth on a composite basis.

Most of that growth, a lot of that growth was fueled more by pork than by beef during the second quarter.

On the hedging gain, is that all -- are those all realized gains, or do you have to count unrealized gains in that calculation as well?

When you look at on the $90 million of benefit, that includes all the benefit that we closed out during the quarter, as well as whatever your mark-to-market positions would have been as of the end of the quarter.

And so to break that down a bit more, of the $90 million about one third of that was based on mark-to-market positions at the end of the quarter.

Great.

Thank you.

John McMillin.

Prudential Equity Group.

Congratulations, guys.

Thank you for the increased disclosure.

My question just deals with the guidance, which I know in your guidance range you are including the first quarter items, and then these 2 cents here.

Are you assuming anymore charges in the second half?

John, we don't have anymore charges planned as of this point in time in the second half, so the guidance doesn't assume any charges.

You would assume the tax rate would go back down once these international markets open?

I think that is a fair assumption, John.

The tax rate has been a basket of items.

But the primary thing was international, but yes, is should drop back down probably into the previous guidance range once international sloughs back out.

John, in terms of the earnings quality, clearly you were heard in this quarter by export bans.

I don't necessarily hold this view but people have come to me and said, well earnings quality here is very low because they were lucky enough to have favorable commodity hedges and dark meat which as you know goes up and down, was up.

So they point out that earnings quality here was low.

How would you respond to that in a way that would talk about your business balance and the sustaining nature of these results?

I would tell you that the strategy of being up all three proteins is a cornerstone of the quality of earnings.

I think we all know out there that the beef segment did not have a good quality of earnings in the second quarter.

We see that improving in the third quarter and on into the fourth quarter.

We do believe as we move into the third and fourth quarter with the historical increase in seasonal sales and seasonal profit margins that we will have a good third and fourth quarter.

I think the thing that we always would remind you of is the second quarter is our toughest quarter.

When these companies came together we always told you January, February and March would be the toughest quarters.

We had an outstanding quarter compared to historical second quarters.

And we managed our way through that by changing our strategy, by improving our management against volatility, by taking and tying our commodity risk into fixed price contracts so we could manage the margins that exist in those contracts to reduce volatility when we go out six to nine months on contracts.

And overall the fundamentals are continuing to improve.

The fundamentals have improved in chicken and I think the industry has some discipline.

I believe the fundamentals have improved in pork and the fundamentals will get better in beef and if we happen to get a break sooner rather than later on the export markets where we can start to move some of the cuts of beef overseas and some of the variety meats overseas, then the overall mix and the return on our beef segment will go up.

So the quality of our earnings is there.

The disclosure in our commodity risk deal was something we chose to do; we believe it is the appropriate thing to give more visibility into how we're managing that, and I can't speak as to how other folks might disclose their hedge positions into increasing grain costs.

I think Steve pointed out grain costs were up $40 million in the quarter, and we managed our way through that increase and managed to get more money to the bottom line.

Dick, I like the table on volume changes and selling price changes and you did manage to get your overall chicken selling prices up nearly 15 percent.

One, how much of that came from dark meat or leg quarters?

And two, you've obviously gotten the white meat side up despite the fact that you are not yet experiencing higher cost.

How does all that work?

John, I would answer that by saying that in general we have taken significant price increases, and we've gotten higher prices certainly for our leg quarters.

But on a domestic basis we have renegotiated quite a few of our fixed price contracts.

Some of them were done, as you recall, back in the November, December, January period when the market prices were not nearly as high as they are now.

And that is where Steve refers to sometimes we still have a tendency to get behind the eight ball a little bit when if those markets continue to go up.

We've done it through our distributor side on foodservice.

We've raised our price lists.

We've just had more discipline around our pricing proposals of what we're doing in the marketplace day in and day out, coupled with really some good, fundamental operating improvements both on the live side and in the production and manufacturing side in our chicken segments.

I believe that we are operating an extremely good business now on the chicken side and will continue to improve and we will do that through more appropriate pricing disciplines as you have a pretty good balance between supply and demand, unlike where we've been in excess chicken for four or five years.

We are in a pretty good position now to try and manage that as effectively as we possibly can.

David Nelson.

Good morning and congratulations.

Chicken sounds like McDonald's, Wendy's, Burger King all have a lot of new product news in chicken coming out over the next six to nine months.

If you can comment, how much of that is part of your prognosis for the next six months?

There's no doubt that when you have three major chains that you announced doing increased promotions on the consumption of chicken, not only does it benefit those chains but it benefits not only our company but the overall industry and awareness of chicken consumption.

I think the second thing that Dick pointed to is that we have taken the opportunity to go out and take price increases in our general business, whether it's at the retail level on our value added products or whether it's in our distribution street level business, starting the first of April we are in the marketplace with increased price increases.

So you get three major chains out there saying we're going to promote chicken, we're going to talk about the benefits of chicken and then you couple that with our discipline and price increases, the chicken segment is looking good for the third quarter.

If I can ask you about demand a little bit, to at least I think about the supply side is easier to analyze anyway than the demand side of the equation.

And the ups and downs of meat demand and within each individual protein has been pretty dynamic the last year or so.

One of the things we saw last year was beef demand was through the roof even after until (ph) we had mad cow, but pork demand for most of last year was very weak but seems to have recovered this year.

Can you comment at all on why you think pork demand at least seemed to be weak last year and has recovered so much in '04?

David, I would respond in two ways.

One, I think this year we have seen because of some of the problems in beef and chicken from an international perspective, we've seen much better demand on more products being exported, our exports to both Mexico and Japan are up significantly.

We've also seen on the bacon side a tremendous increase in the use of bacon not only on salads but in sandwiches.

From the foodservice perspective, we have seen tremendous increases in the use of some of the pork products because your pork loin which might be a substitute for a steak item and because steak items have been extremely expensive, we have seen higher than normal pork loin prices, as well.

And I just think we've just had good, solid fundamental demand for the whole pork productline, which has helped us dramatically.

I mean, hog prices are up significantly on a year-over-year basis, and we continue to be able to price the product appropriately to still have reasonably good margin.

I would say if you go to the American consumer they eat about X number of pounds of protein a year.

They just kind of move their buying pattern around between the three proteins but they still eat north of 200 pounds plus of protein on an annualized consumption basis.

That comes back to the strength of this company, which is we are in all three proteins, and as they make subtle adjustments in how they want to allocate their dollars towards their protein spend, we have a chance to take care of that customer in any one of those three segments whether with a raw type product or whether with a value added product or whether a fully cooked product and I think that is the underlying strength of this company is being in all three proteins.

As a customer moves their spend around we're going to be there with the product.

In the end, I guess, all proteins seem to have benefited some from the Atkins diet.

Some of us were on the call with Kellogg's last week and the (indiscernible) at Kellogg’s talked about at least his perception that interest in the Atkins diet had peaked.

Are you seeing any signs of change in meat demands maybe relative to Atkins?

No, because I think whether it's the Atkins diet or the South Beach diet or whether people are just paying attention to their carb count anyway, we were there with a set of products that they needed.

People are paying attention; there has been a lot of discussion in the news about managing your health; the country has been talking about health issues related to diet questions for the last five or ten years.

The American consumer seems to have made some adjustments in understanding that and we believe that will be ongoing and we will have the right type of product to take advantage of those decisions by the American consumer.

Thank you very much.

Leonard Teitelbaum.

Merrill Lynch.

I don't know exactly whether you've answered this question in a different way or not.

So let me try it like this.

Our indications are that since the end of the quarter beef margins have turned positive.

Is that correct?

(inaudible) talking about in the month of April?

We do it on a weekly basis.

At the end of March -- it's been running negative for quite a while and now it's turned positive and has since about the second week in April.

Significantly positive.

Does that conform with your data?

I would tell you that it has turned positive, yes.

And if we presume that I know a lot of farmers in soybeans were pricing off the September contract and they get the dollar premiums, they get the beans in early, I've got a guess they are planting beans in their closets, but the point being here that are you seeing at least when you're dealing in the commodities market that you are seeing more of a plateauing in here?

Still an upward bias but plateauing, am I reading too much into that?

Are you talking about the grain commodity?

Basically soybeans.

Our judgment on soybeans is a day-to-day basis.

We're still waiting on some clarity out of South America.

We're still waiting on some clarity on planting intentions.

We haven't made a call yet as to which way it may move.

Its going to be volatile (multiple speakers) in the short-term is you got some volatility probably there.

But if the beef margin turns positive in spite of that and that is the point I was going to lead up to, why wouldn't we look because of some of the hedging and other things a fairly stable poultry margin around this level and a huge increase in pork, as well?

And a huge increase in beef for the coming quarter?

I am talking market conditions, why wouldn't you see a hell of a lift in the June quarter?

If beef is positive and it should be, you have hedged in by your own admission, you add some mark-to-markets in there, so I still got some profits laid out on the hedge contract and pork that is pretty stable.

Why would we expect a pretty good lift in the June quarter?

I think we always believe that our third and fourth quarter are our strongest quarters.

We made some decisions.

We believe we're going to have strong pricing improvement into the third quarter.

We think the customer demand is going to be there as gas prices mitigate going into the summer.

We believe people are going to be out and moving around; beef margins have turned positive.

And we believe conditions are ripe for us to have the historical lift that we always see in the third quarter year-over-year.

(inaudible) a number there, John?

I figured I would give it a shot.

Okay, last thing, (multiple speakers) Hormel has raised prices. you guys are sitting there looking at some compatible product lines.

Are you going to see a price increase in your refrigerated areas?

Yes.

And when is that or was that effective?

Most of the price increases started around the first of April, between now and the first of May which means it will roll in in April, May and June.

So the May, June period is when we ought to see the increase in the recent refrigerated area from price.

Yes.

If our execution is done right.

And one final question.

And if, I think it was Christine was hinting around, if we do a full open at Mexico and who the hell knows about Japan, but if we do a full open in Mexico considering your current structure now, why wouldn't we look for Mexico to add as much as -- I got 7 to 10 cents -- is that way over bidding the hand?

Yes.

It is for Mexico only.

I am talking between now and the end of the year, three cents to four cents a quarter for the next two quarters.

Mexico does not have that degree of positive impact on our sales mix.

I think when you try to analyze that you got several moving parts as the markets open up in Canada.

You got live animal coming down adjusting the live side of the market; as export markets open up your going to adjust the price side of the market to some degree.

And again when you look particularly at beef or even at pork on the box side these are spread situations.

And so you really have to wait and see how all the moving parts are going to react to determine what the effect might be.

You can't simply take the cost side or the sales side and arrive at a number.

It is how the parts work together.

So as we've said in our guidance, we've not tried to outguess all of that looking forward and just simply assumed that they would not open.

The fact is we believe they will open in the near-term and we will just have to assess that as we get there so we can't say specifically what it might add or not.

And if you think about when Steve speaks to the moving parts we were shipping a lot of product out of Canada to Mexico.

So now that Mexico has opened up for U.S. product we run into a situation how now we manage product out of -- so I think Steve's answer on moving parts, by us being in all three proteins, having operations in Mexico, having operations in Canada and stuff, our parts move a little bit differently than just a U.S.-based domestic Company.

Thank you very much.

Ken Zazlo.

Morgan Stanley.

What steps do you guys take to improve the prepared foods division, and how much longer will it take for you to reach a point where it will reach your expectations?

And will it be a slow progress or will we like all of a sudden figure out that all of a sudden it will pop in one quarter?

I think it is a slow, a slower process than all of a sudden popping in one quarter.

More consistent raw material prices definitely help that.

But on the execution side as we continue to work on distribution and authorization of these value added products on the consumer product side, it is a longer game than one quarter because in some of those categories there is not a whole lot of growth.

I mean we have every right to compete in those categories, but it's not something that in one quarter you're going to see it necessarily go from 4 percent to 6 percent as a return on sales basis.

So it's executionally based.

It's authorization, and ACV increase related, as well as trying to make sure we manage as best we can our raw material flow going into prepared foods.

I think you alluded to the idea that it could be a 6 percent margin.

Is that something that is a long-term basis, so that 6 percent is the expectation?

We have said historically in that 5 to 7 kind of percentage point return on sales is where we expect that business to be.

I know you guys don't want to talk too much about the hedging, the only thing I -- I just want to make sure I understood from Steve's comments was that you are hedging through the crop season so you think through like August so this $50 million swing as long as commodity prices stay in your favorite that is the type of swing we should see for the rest of the year.

Is that a fair statement?

I don't know that I would go quite that far but my answer on that simply is what we think we would see as well as our view to a number of other things is all baked into our guidance.

So I think a little bit to Lenny's question we are at 49 cents, and I think the top side of the guidance is $1.25 at this point.

So whatever we see or think about that very simply it's just baked into the guidance and we really do not want to parse it down much beyond that.

Okay.

Great.

Thank you.

(OPERATOR INSTRUCTIONS) Eric Katzman.

Deutsche Bank.

I guess one question is if you exclude the hedging gain of 50 million your year-over-year change in operating income was about 137.

How much of that would you say is tied to productivity?

As opposed to improving markets?

How much on a year-over-year cost savings are you getting at this point?

You are talking on a year-to-date basis?

I am talking year-over-year, quarter-over-quarter.

You had 277 million versus 90 million excluding items.

Right? 50 million was tied to the hedging so let's say 227 versus 90, so its like 137 million year-over-year change.

I am just kind of wondering how much of that -- you don't have to necessarily give a dollar amount -- but like percentage wise, how much do you think is due -- because you highlighted I think almost in every division.

Productivity improvements, better manufacturing efficiencies and I am just kind of wondering how much of year-over-year change you would tie to better manufacturing and productivity.

I am not going to give you an exact number.

If you think about it in rank order improving markets, improving selling prices and conversion cost increases would rank order those three components, three of the components.

However, I would tell you that in my mind the conversion cost improvements are significant.

Okay, so maybe 20 percent of the change could be due to better manufacturing?

Eric, we are just not going to give you a percentage of a dollar.

Okay, and then second obviously with the trends going the way they are, you are significantly free cash flow positive.

You said you are at your debt to capital ratios faster than you thought you would be.

Where do you think the cash goes at this point?

Where are your priorities?

Eric, I think when you look at that, we have a bond payment that is due in the last week of the year which would be approximately $350 million, so certainly we're going to look toward that as a use of cash.

That would put us back in the short-term borrowing position.

So that is a major thing, number one, and of course beyond that we will continue to take our cash flow and look at the portfolio of options we have before us which includes paying down debt, any M&A type activity that we might put on the table.

Today we really don't have anything that we are looking at.

And of course, there is all always the option somewhere downstream around dividends and stock buybacks and that sort of thing, but today our focus is on that bond payments and really continuing to pay down debts for a bit more.

And the last thing is it gives us a little bit more flexibility to look at investments in our company maybe in a different way than we have been in managing our cash the last two years.

So it might allow us to accelerate some opportunities, consider some different opportunities and continuously improving our operating efficiencies.

Last question is I think we have all been kind of asking around this but I get a sense from your comments about the outlook versus what you said in the prepared remarks as kind of being somewhat different in that on the one hand you are saying the markets, we are not assuming any markets open up, and yet in your text it is well, this market is very close to opening.

This one is very likely to open.

So I guess I'm wondering why you feel the need to be so cautious on the projections even though it seems like so many markets are close to opening up and therefore helping you improve returns.

Before Steve has some follow up comments, agricultural policy both domestically and internationally can go either way so quickly.

To speculate on when the Japanese and the Americans are going to get an agreement, speculate when other countries are going to get an agreement, because agricultural issues are just a part of the broader policy relationships.

And we don't have insight into the other policy relationships until they all get sorted out behind closed doors between the different governments.

We just believe it's prudent to take a cautious statement on those activities based on the information we have today and the information we have today says that if everything goes right those borders could open up 30 days, 60 days or 90 days.

But you know one disagreement, and they could stay frozen for another 90 to 180 days.

Eric, I think what we've tried to do is be very clear that the guidance that we have offered is not contingent on some future event.

And that is really the simple point that we want to make about our guidance.

In our other discussion do we think there is high potential of those events possibly taking place, and at the point they do, we will reevaluate what changes if anything we might need in the guidance.

But we don't want -- we don't want people to think that we put forth a guidance statement that is contingent on something falling on our way on a particular date.

Our guidance is based on our operations as we know them today and is not betting on some market opening or some other event.

So that is the distinction in the two thoughts.

Okay, fair enough, thank you.

We will take one more question, and then we will close up the conference call.

(indiscernible).

Credit Suisse First Boston fixed income research.

Congratulations on the ongoing deleveraging and also the confirmation of your ratings by Moody's; let's hope that S&P follows suit very quickly here, as well.

A couple of questions this morning.

Steve, you have a $200 million tranche of your bank line coming due in June.

Do you plan to renew that one?

Yes.

Then just a follow-up on the cash flow question.

Can we expect perhaps down the road if even further reduction your official (inaudible) from the 45 percent today or do you feel relatively comfortable with the 45 percent level?

I think the comments were shared that based on a need for increased working capital as we go into our increased selling season that our target should be in the 43 to 45 percent range for the close of September.

Then, John, over the last year let's say we have seen great discipline, returning to the supply-side on the chicken segment.

Based on your read of the market, can we expect that discipline to stay with us for the foreseeable future?

I would answer that by saying I think we will see some slight increases in supply on the chicken side.

We are seeing some minimal increases, and I think that will continue.

At this point, given where grains are, though, I think that will stay in check, and I do not believe we are going to see any runaway increase on the supply side.

Thank you so much.

We will take another question and go from there.

John McMillin.

I am trying to kind of gauge how much this export ban hurt in the quarter.

And I know it is harder to put numbers to, on like the hedges and the tax rate.

But I'm just trying to gauge what extent you think the export ban hurt you in the quarter.

It is really, really difficult to say.

Let me try to give you a couple of examples.

If you look at the drop credit side on the beef side, not having those export markets probably impacted us somewhere in the 30 to $35 per head range.

But that doesn't necessarily mean you can drop all that to the bottom line.

So that is one fact I would give you.

The other thing I would say is we've probably had operating costs increases in that 10 to $12 range, which certainly were a negative impact.

Would we have all had normal volume?

No, I think we probably would have had a little bit less than normal but we might have had maybe only a 3 or a 4 dollar effect.

So those are a couple of the things that just off the top of my head -- if you want to attempt to make some judgment around that -- I mean, it is a significant impact not being able to export.

But it is hard to take that to the bottom line and know exactly how much of that would have gone to earnings.

And Greg on the international side, you said that I think sales were down --.

49 percent I believe.

(multiple speakers)

Overall sales were down 29 percent.

That's the blend of all proteins to put us in a at 435 but go ahead, John, finish your question.

I am just trying to get an idea and basically in terms of tonnage you do about 200 million pounds per quarter of leg quarters?

Yes, actually we will actually do more than that.

But we were off in tonnage on leg quarters just as an item about 20 percent, John.

And so what happens to you there as I alluded to and you are going to have some operating cost impacts are really handling type costs of carries of inventory.

So much like Dick was just trying to outline, on the one hand we benefited from the increased sales price -- on the other hand we pay a bit of a penalty of having to handle a little more inventory.

But net out obviously it was a positive to our chicken business to have the improved pricing quarter-over-quarter.

And as I indicated we do expect those volumes to go ahead and move on out and get back to historical inventory levels.

But it clearly has been a problem for us having some of these markets closed for much longer than we would have originally anticipated.

But we should be nearing the end of that.

But as volumes increase in leg quarters if the markets open into the summertime selling price year-over-year should still be ahead.

We are certainly looking to the future with good, solid -- believe we have strong leg quarter prices out into the foreseeable future.

Thanks again.

We appreciate everybody taking time to listen to the second-quarter call.

We appreciate your questions.

We appreciate your support in the company.

Our folks are working hard and as we move into the third and fourth quarter which is our stronger quarters historically, we look to deliver good earnings for the third quarter.

Thank you.

Thank you, and that does conclude the Tyson Foods conference call.

At this time you may disconnect your lines.