泰森食品 (TSN) 2004 Q3 法說會逐字稿

At this time, I would like to thank all parties for holding.

Your lines will remain on listen-only until the question-and-answer session of today's conference.

The conference is also being recorded.

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

Thank you.

Good morning, everyone, 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 Steven Hankins, our CFO.

Before we move on to discuss the results for the quarter, let me just remind everybody that some of the things we talk about today will include forward-looking statements, and that means those statements are going to be based on our view of the world as we know it today and it also means the things can change, so I would encourage everyone to read today's press release for a discussion of those risks that can affect our business.

With that, I will turn things over to John Tyson.

Good morning, everybody.

Good morning to our shareholders and to our friends out there that are on the call today, and good morning to all the great folks that make up Tyson Foods that might be on the call with us today.

Our success for the past three years has been the result of our great people creating this new Company.

I think our results speak for themselves.

Our challenge is taking the foundation we have created and executing the plan for the future.

I know that we have the people and I know that we have the right Company and I am very optimistic about our future success.

I will let Steve talk about our numbers.

Good morning, everyone.

Our press release this morning, we reported GAAP earnings of 45 cents per diluted share.

That is up from a comparable GAAP earnings last year's quarter of 23 cents a share, and last year's quarter included $42 million received in connection with the vitamin antitrust items.

And also that was partially offset by $19 million of cost closing poultry operations, an additional $10 million of charges, which was related to an equity interest in a live swine operation.

Last year's net effect of all those charges and additions increased GAAP's fully-diluted earnings per share by 3 cents, so 45 cents versus 23 cents GAAP.

Some additional items to note that we mentioned in the press release.

Year-over-year grain costs going into our chicken business, based on the market prices of grain upon physical receipt, increased our cost of sales by approximately $90 million a quarter.

Also during the quarter, our cost of sales received the benefit of $44 million from our ongoing commodity risk management activities.

What that means is the net effect to cost of sales of grain this quarter compared to last year was an unfavorable $46 million.

In addition, we talked about our beef segment.

The operating income there benefited $44 million from mark-to-market opens positions which are related to fixed-price forward boxed beef sales.

These gains primarily resulted from an increase in market prices for live cattle and these are inversely related to the fixed-price boxed beef forward sales contracts that were entered into.

Based on current market prices for live animals, the turnaround effect from these contracts, or these mark-to-markets could have a negative impact on Q4 earnings.

Some other points to take note of in our financial statements, our cash flow was very strong for the quarter.

Cash provided by operations was $245 million.

Our net income and depreciation and amortization totaled $282 million.

During the quarter, we saw improvements in our Days Outstanding and accounts receivable, improvements in our days and (ph) payable; but our inventory days increased slightly due to the normal seasonality of our business, as well as some buildup in our leg quarter inventories.

Our capital spending for the quarter was $115 million, which brings us to $346 million for the nine months.

And we remain on target on our capital spending guidance we gave previously of 450 to $500 million a year.

Our debt at the end of the quarter was just over $3.3 million, which was down $62 million during the quarter.

Our debt-to-capital came in at 43.9 percent, and I expect us to approach the 43 percent level by the end of our fourth quarter, which is the lower end of the previously announced target that we've given.

Our tax rate came in higher than normal, and we told you this might be the situation.

This was due primarily to a couple of major things.

First of all, the expiration of some tax credits that were in place, and as well, the reduced foreign tax benefit because of the reduced export sales.

Now on our financial outlook, as we mention in our press release, we've revised our guidance for fiscal 2004 and we now expect our earnings to be in the range of $1.20 to $1.30 on a GAAP basis.

This guidance reflects our outlook for the fourth quarter regarding all of our activities and our view to the various markets.

And as is our practice, we will not be making any comments regarding quarterly earnings estimates on the street on a regular basis or within the call today.

That concludes my comments, and now I would like to give the call to Dick Bond.

Good morning.

Thank you, Steve.

Our third quarter yielded exceptional results with the chicken, beef and pork segments solid contributors, while Prepared Foods continued to suffer with rapidly rising and volatile raw material markets.

Spending to gain distribution and to promote the Tyson brand in deli and processed meats also contributed to the Prepared Foods' less than satisfactory results.

I will briefly talk about each segment and customer channel, starting with chicken.

Our chicken segment sales increased almost $243 million, or 12.9 percent, over third quarter last year, and operating earnings improved by approximately $100 million, or 210 percent.

Increased selling prices, mix enhancements, reduced operating costs, and positive risk management implementation fueled the very good performance.

Continued strong demand for chicken, both from the retail and foodservice channels, allowed us to pass through significantly higher grain costs.

Our plant rationalization program has proven to be very successful, as we have maintained our volumes while reducing our number of facilities by five.

Our return on sales for the quarter was 6.8 percent, compared to 2.5 percent, or an improvement of 4.3 percentage points over last year.

We expect margins to continue in this range for fourth quarter as well.

In the beef segment, sale dollars were down 5.6 percent for the quarter compared to last year.

Our pounds processed were down the 11.1 percent, but a 6.3 higher price per pound was achieved.

The Canadian border being closed to the U.S. for live cattle continues to exacerbate the already short supply of fed cattle in the Pacific Northwest and upper Midwest.

Capacity utilization in these regions dropped to 68 percent for the quarter, while we processed at almost 100 percent of capacity in Canada.

We continue to push the USDA to open the border as soon as possible.

Nevertheless, operating earnings improved 51 percent on a year-over-year basis.

Supplies of fed cattle will continue to be tight and operating earnings will likely be impacted in the fourth quarter without the positive hedge effect.

Within pork, sale dollars, volumes and operating income in this segment were positive on a year-over-year basis.

The demand for pork products continues to be exceptional, both domestically and internationally.

The supply of market-ready hogs should be similar to year-ago levels, and we expect to see prices begin their seasonal decline as we enter the fall period.

Demand, volume and operating margins will continue to be very good during the fourth quarter.

Within Prepared Foods, sale dollars were up $40 million, or 6.1 percent, over Q3 of fiscal '03.

Volume was flat overall, while operating income was down $2.3 million, or a 23.9 percent decline.

Our selling prices improved by 8.4 percent, but we were unable to pass along rapidly rising raw material price increases, primarily in pork belly and ham products.

Additionally, our Tyson-branded initiatives adversely impacted third-quarter earnings by $4.8 million due to the cost of distribution gains, increased selling and marketing expenses associated with lunch meat, bacon, ingredient meats and deli meats.

Raw material costs are showing signs of more stability, which should enhance our operating earnings for Q4.

Within our Consumer Products channel, the fresh, case-ready and tray-pack portion of our retail business continued to be very strong from a sale dollars standpoint.

Within beef and pork, sale dollars were up 16 percent, or $49 million, while volume improved only 2 percent on a year-over-year basis.

Beef volumes were basically flat and pork rose 14 percent compared to a year ago.

In poultry, operating earnings improved $24.6 million compared to last year, driven by higher markets, improved mix and lower conversion costs.

On the further processed poultry front, we continue to experience tremendous growth in our Tyson bagged, ready-to-eat offerings, with volume and sales both up 34 percent compared to third quarter of fiscal '03.

Our Club Store group also delivered sales and dollar volume growth in excess of 14 percent on a year-over-year basis.

Within Foodservice, the casual dining and QSR segments delivered strong traffic growth in the March/April/May period.

Our sales dollar growth for the quarter was in excess of 12 percent, and our unit growth was approximately 3 percent after exiting the frozen beef patty business, which would have been part of our volume in Q3 of last year.

Beef and pork new product development continues to be a major focus within our National Account and Foodservice Distribution businesses.

In summary, we had a great quarter.

Demand for all protein continues to be very good.

Our efforts to increase our value-added products penetration is on target.

Our programs to control operating costs and invest capital in automation and process improvements are working.

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

Thank you, Dick, and good morning.

Export sales were 485 million for the third quarter.

This is down 24 percent versus the third quarter of the prior year.

The decline in sales is directly attributable to lower export volumes resulting from the continuing bans on U.S. beef and the bans that are in place on U.S. chicken during the quarter.

Our export chicken sales revenue was up 26 percent for the quarter versus the same period a year ago, despite a decline in absolute volume of 8 percent.

Market prices for export chicken leg quarters were 13 cents per pound higher comparison.

Sales prices for the June period were approximately 5 cents per pound lower, as Tyson and the U.S. industry sales to Russia, our largest destination market, were down sharply.

Our export sales to Russia for the July and August periods have rebounded and prices have begun to move up, though still below our fiscal year-to-date average.

Freezer congestion at domestic port sites, coupled with the tight supply of both over-the-road trucks and oceangoing vessels, make inventory management challenging for the balance of our fiscal year.

This is especially true in light of strong sales volume that we expect to have in hand for the fourth quarter.

Total beef -- let's talk about total beef and pork exports.

Although our export beef and pork sales revenue was down 36 percent this quarter versus the same quarter last year, we did experience a 27 percent improvement in sales revenue versus the second quarter of this fiscal year.

This improvement was due to strong pork exports and a small contribution of new market access on beef to Mexico and Eastern Europe.

Although our export sales of boxed beef were down 56 percent versus the same quarter last year, our sales for the quarter were up 4 percent versus the second quarter of this fiscal year.

Export sales of pork continue to be strong, and were up 115 percent versus the same quarter last year.

This was led by strong volumes to Mexico and Japan.

The increase was driven by both increases in volume and pricing versus the same quarter last year.

We believe both pricing and volume will remain firm through the fourth quarter -- at least through the fourth quarter of this fiscal year.

A brief comment about our foreign operations.

Tyson to Mexico, our largest foreign-based operation, was adversely impacted by a lost volume opportunity due to the inability to get hatching eggs from the United States to Mexico during the second quarter of this fiscal year.

That was a result of the AI ban between the U.S. and Mexico that was in place at that time.

Since that time, during the third quarter, our production volumes are now back to capacity and chicken markets in Mexico are strong.

There is somewhat offset to these good news by the fact that we do have higher year-over-year grain costs in Mexico.

Closing comments with regard to market access.

We expect chicken export volume to be stronger, as we have regained access to all major markets, with the exception of China and Korea.

As to beef exports, a third round of more formal negotiations with Japan regarding the listing of their BSE-related ban on U.S. beef were concluded this past week.

Based on some movement by the Japanese, we look for the market to reopen sometime during the late fall of 2004.

We would anticipate that Korea would reopen shortly thereafter.

With that, I will turn it over to John Tyson.

Thanks, Steve, Dick and Greg.

I think I would summarize the performance of our management team in that we actively managed all the different changes that came at this year, whether it was an export ban to Japan, whether it was an export ban to China, whether it was the export issues going to Mexico, whether it was rising grain costs, whether it was moving cost of raw materials into some of our segments.

And I think that is the compliment to this management team and all the folks that make up this company, that in a market this year that had a lot of rapidly changing dynamics, we actively managed each and every one of those, I think, in a way that produced these record earnings and record sales for this quarter.

I now think it is best that we ask you all for questions to further clarify our quarter.

(OPERATOR INSTRUCTIONS) Christine McCracken.

Midwest Research.

Just a couple questions.

One on chicken.

We are looking into the fall now with much lower feed costs; it appears that the crop seems to be progressing well.

One of the things that has held chicken margins up has been the fact that the industry has been very rational and we haven't seen any real signs of expansion.

Do you think that with the decline in feed costs through the fall that we would see, let's say, some signs of expansion with the next couple months, or is it something that maybe with your programs -- or maybe you can speak from your position -- that in fact the industry might stay fairly rational this year?

Christine, this is Dick.

I would answer that by saying we will see some slight increases.

The feed costs, we're not going to get advantages of that right away, because it takes a little while for that grain to flow through the system and flow through the chicken.

But overall, yes, you are going to see some slight increases.

But we still see very, very strong demand on the chicken side, and if we are going to have still pretty high beef and pork prices, I think a little bit of expansion, reasonable expansion, we can handle without any problem as an industry and as a company.

It seems like one of the reasons that protein prices have stayed fairly firm is tied in some way to the protein diet, and yet you listen to people like Kraft and Kellogg, and they are talking about some stabilization in the trends there and maybe some plateauing, possibly even some decline over the next several months.

Is that anything that concerns you or what, in your mind, has led to the very strong protein prices?

Johnny here.

Our thoughts on the adjustments in people's diet is that they are just paying better attention to how they eat and where they eat.

And our thoughts have been that the consumption of proteins in the evening period are still at or will be good.

The consumption of the proteins at the lunch meal has probably increased some.

But I think the real increase for protein consumption, in our opinion, has been around the breakfast meal, when people added proteins back in when maybe they had switched over to breads and/or to fruits.

So our overall picture of the protein demand is that there is going to be a reasonable consumption at all three eating periods, be it the morning period, the noon period, or the evening meal, and that the snack component of having proteins around as a fourth or fifth option during the day is still there.

So, has there been a nice surge and has there been a nice activity?

There is no doubt a lot of conversation about the healthiness of protein in the diet and the permission (ph) that protein is a key component I think will continue out there.

Our challenge will be to take our movement of our commodity products into these value-added products and the next generation of the beef and pork items.

I think you saw the results that we had in our value-added poultry business, where it was up over 34 percent year-over-year.

So that is where our focus will be to, is -- taking an old quote from Dad is, not necessarily do more pounds but do more to the pounds we've got and try to get more margin to the bottom.

And that will be our focus as we move our mix to that from 35 percent to 50 percent, and that is where our opportunity is.

I'm sure you will expand on that at the meeting.

Thanks.

John McMillin.

Prudential.

Just what Christine mentioned in terms of the new marketing initiative, and I know you probably can't talk all about it, but sometimes sitting in New York, you do notice meat companies like Perdue always seem to spend money on marketing when things are good.

And then when things are bad, you never see Jim Perdue or Frank Perdue on TV anymore.

I think the thing I'm trying to get across as, is your marketing initiative of function of you got money to spend so let's spend it, or do you really feel that it is a truly value-added initiative that is worthy of spending?

This is Greg Lee.

Let me comment on that, if I might.

John may want to also comment.

But I would very much want to say to you it is the latter.

We have been pretty consistent in the amount that we have invested over the time period since we put the companies together, and it is true that you will hear more, and I will say this much, that we are going to begin to raise that level of investment.

But we really are looking to do that more around the long-term opportunity that we see to move our product up the value chain and establish the Tyson brand across the multiple-protein front.

And we realize that to accomplish the goals that we have in mind, we will have to consistently invest in that effort over the next several years and then reap the benefit of it.

So I think you can look for us to continue to invest in building the brand.

I think, John, we have always taken the position that with the consolidation going on in the protein business, that there is going to be one or two national players in the different segments and we are the only one that competes in all segments.

And there will be some regional brands and then there will be some private-label brands as we move forward.

We will be one of those number one brands, and our support of that brand is critical to communicating with the customer not only that have we moved past chicken into beef or pork; it could still also represent that the quality and the trust and the integrity of the products that we put out there, which is also part of that initiative of moving from 35 percent to 50 percent on our mix, which gets us a little more money.

Dick alluded to the challenges we had in Prepared Foods, where we have a lot of those products.

But we're spending money.

We're getting shelf space and we're getting some penetration.

And there's a few of the folks that we're competing against that now understand that Tyson's is a fair player and is a competitive player, and we understand protein and understand the dynamics of it and, I think, managed pretty well this third quarter through all the changes.

I agree.

Steve, what caused (ph) the tax rate again to go up?

Two things, John.

One is some tax credits we had, particularly job credits have expired.

Typically, those things get renewed, but during this period of time they are expired and that is all back into discussion.

We are not taking that credit in our tax rate.

And then the bigger factor is the decline in export sales limits our use of the foreign tax credit, so that plays into our tax rate also.

So both of those things are things that should correct themselves fairly quickly when the export markets open back up.

That would help us there.

And then also, we expect many of those tax credits to come back into play.

So we still expect the rate will get down to that 36 to 37 range on a more normalized basis.

But we got a blip right now.

My last question deals with this whole beef pricing mechanism and how it's -- I guess the benefit in the quarter was 55 million pretax -- is that what you said?

And that worked out to 10 cents a share.

Can you just go through -- I think I understand the way it works, but can you go through how that works in and why today's benefit won't be tomorrow's pain?

First of all, let's clarify it was $44 million -- not 55, so the correct number is 44.

And what we do, basically, is when we make forward-priced sales in beef, we at that same time put on a hedge against that that has the effect of, in essence, locking in that margin.

Now those hedges are not, from a FAS-133 standpoint, they do not have a high enough correlation in order to be classified as effective hedges.

Therefore we are in a total mark-to-market situation around those hedges.

But the first idea is we make a forward sale.

We put a hedge in.

We lock in the margin.

And then, since the hedge is really against live cattle, as those markets move, the mark-to-market value of that hedge may change prior to the physical execution of the sale.

And that is the situation that we find (ph) ourselves in at the end of the quarter, where the value of that hedge greatly improved and we hadn't executed those sales yet.

Following the end of the quarter and as we go forward, the live prices have come down, and we've made our way more back to that neutral lock-in earnings position.

But that 44 million included that boost in the live cattle market, which we won't have possibly at the end of Q4.

And so there's a little bit of money that's created by the mark-to-market situation that is not necessarily going to play into your business in Q4.

So it's the run-up in the live markets against the hedge that was primarily designed to lock in a margin.

So I probably made that as clear as mud with that explanation, but we can walk you through it more on the phone if we need to.

I'm up to three quarters now.

Congratulations.

I'll see you next week.

Leonard Teitelbaum.

Merrill Lynch.

I would like to focus in just a little bit more to make sure I understand it.

We've had some calls this morning; there's some -- seems some confusion on the fourth quarter out there.

You have raised your guidance from about an average of $1.11 to $1.25 -- or $1.15 to $1.25.

Is that what we're supposed to take away from this?

The new guidance on a GAAP basis, Len, is $1.20 to $1.30, so the midpoint of that would be $1.25.

Before, it was $1.15 on a midpoint basis, right?

Well, prior guidance was $1.05 to $1.25, so yes, approximately $1.15.

Because I was pushing some numbers here and it looks almost like you are going to have a down fourth quarter on a reported basis.

Is that also current.

That doesn't make sense.

What are you referencing down from?

Last year, you had 42 cents in the fourth quarter, right?

On that basis, if you back into the fourth-quarter guidance and applied (ph) in that $1.20 to $1.30, that would fall short of the 42 cents.

I just want to make sure we're adding this thing up the right way.

Lenny, if you recall last year, we had a tremendous beef quarter, which we're not going to have a tremendous beef quarter in the fourth quarter of this year.

Okay.

All right.

We will push our numbers out -- and I just want to make sure we looked (indiscernible).

Second point, I understand on a mark-to-market that when the market moves away from your hedge, you've got to take the differential and put it through your cost of goods sold;

I presume that's where it winds up, doesn't it?

That's correct.

All right.

That explains the fourth-quarter difference.

That's a standard hedge.

So that part of it is clear.

I guess what I'm trying to get to is a combination of what Christine had asked, I think John had followed up on, is that we're seeing eggs sets and chicks placed on numbers that -- I think 2 percent would seem to be a reasonable increase.

Now we get a pop-up of 5 percent.

I don't know if that was just timing of the July 4th holiday or exactly what it is.

What should we be looking at, from your point of view, as the potential increase in poultry supply between now and the end of the year?

I can only speak for our Company, Lenny.

And what we have done as we have closed down four to five plants.

And then what we have done is we have taken that volume that was in those four to give plants and have gone into some other plants that were not at full capacity and made sure all of those plants are full, which will give us an increase of maybe a half or 1 percent for us.

And then from there, we will be in the open market buying the raw material that meets our product mix match, because more of our products are in value-added, more of our customers are in that type of category, so we try to balance ourselves.

In the old theory, being one chicken short, we've done a pretty good job of it this year through rationalizations of plants and going back and filling up those plants that were not full for efficiencies and then being an open buyer in the market to maximize our raw material needs.

So our belief is that that is the right way to run our Company.

So for us, we are only a half to 1 percent.

And if you get a few more chickens out there, that just means the raw material that we're buying in the open market will help us lower our overall cost into our value-added products that we sell at a higher price.

I think you should be congratulated for it, because if this industry ever gets serious about rationalizing supply, this could be very good for everybody.

I'm just not sure that I am getting the feeling that some of your colleagues out there are following that philosophy.

Let me turn just quickly to beef for just a moment.

If I take a look at the volumes on beef, obviously it tells one story.

Margins tell another.

Can you go through -- let me just combine them both first of all.

It used to be that a 10-cent change in a bushel of corn was 6 cents a share.

Can you go through -- do you have those numbers handy with you now on an updated basis as to what a drop in input prices would mean as far as earnings go?

This is Louis.

You're pretty close.

From a corn standpoint, it's still this 10 cents per bushel equals 5 cents per share.

And $10 a ton is --

$10 per ton of soybean meal is the same nickel per share on earnings.

And of course, all that assumes you didn't do anything on the sales side and raised prices and all those things.

In understand we're only looking at part of the equation.

But I just wanted to make sure that was holding in there.

Okay.

I will follow up off-line with a couple of these other things.

But I just don't want to come away with this thing feeling that this thing has peaked at all, and that profitability from this point might be tough to match versus last year, because having the second-best year on record doesn't cut it for me.

Can you satisfy, in a very short, laconic way how that would be the wrong way to look at Tyson right now -- that this has not peaked, but this is -- we go up from here?

I think, Lenny, I would go back to my opening comments, which in my opening comments, I am optimistic about our future success, and I would still say that I am optimistic about our future success.

That is helpful.

Thank you.

Len, a couple things on our guidance, and when you look at the fourth quarter, don't forget that at $1.20 to $1.30, that's effectively higher guidance than at any point we have given all year, so it has been a very positive year.

And the other thing I would suggest is look back into this year and look at all the difficulties that we have faced and worked our way through and still have arrived at that number.

Because it has not exactly been smooth sailing as far as access to international markets and the effect on domestic beef by the overall (indiscernible) situation.

So I think when you address that question to yourself of have we peaked or not, I think you've got to look the environment we have played in the last year and what we have accomplished, and factor that in as well.

I'm scrubbing (ph) it to 1.43 and then we got to take a look at that figure as it goes to next year, if we pull out some of these extraordinary.

I will get back to you.

Thank you very much.

Eric Katzman.

It's actually Pen Jones from Deutsche Bank on behalf of Eric.

A couple of quick questions, if I may.

Historically, you have done 10 to 20 cents a share on a quarterly basis.

Now you're looking more like 35 to 45 cents a share on a quarterly basis.

What is going to take you to the next level?

Johnny here.

It is that plan that we started talking about six to nine months ago, which is just moving these commodity pounds where we can into value-added products and getting some higher margins.

We will run well in these 30 to 40 cent type ranges, 30 to 45 cents ranges that you alluded to.

And you get into that next incremental deal with take 18 to 24 to 36 months, because changing all of those pounds takes market dollars, takes market penetration.

There will be some competition out there that will not want us to get in a certain set of categories, and they will be competitive there.

But we are comfortable with what has been laid out, the strategic plan that our folks have put together, which is our '09 plan.

There's a lot of opportunities inside of that.

We are actively out there making sure we got the right staff and the right people and the right skill sets inside the Company to execute against that -- and just hard work.

Dick and Greg may have something to add.

I would and that I think what the other key factor that we have been working on and will continue to work on is our whole operational execution and investing capital to make sure, from an automation standpoint, that we can -- because we have to start with these commodity products and they have to be best cost produced for what we're trying to do to have those pounds to take into the value-added mix.

So we will continue to focus on our operational execution to make sure that we are the best at that area before we convert these pounds into value-added pounds.

So there is a tremendous effort there, working on quality service, controlling our controllable costs and making sure that we are doing it the best that it can be done.

Great, thank you.

Secondly, how much do you estimate your lack of access to foreign markets hurt you this quarter in terms of earnings?

I don't think you can quantify it in terms of earnings, but in managing the return back to the whole animal, some pounds that we could have sold outside the United States, we had to sell for less here.

So then had to revalue other parts of the animal into the domestic market, which caused some of the premium cuts to have to carry more value.

So we were able to move the value around, but there is no doubt the export markets allow us to take some residual products to get a little more money outside the United States than you do in the U.S., which then allows us to price maybe the premium products at a different structure, which then can drive some opportunities for better margins and demand.

This is Greg Lee.

Just one very brief add-on to that is that we take lot of pride in some of the value-adding that we have been successful in doing in international sales, where we have created some sales opportunities that perhaps were even more beneficial to our Company than competitors in like categories.

And so sacrificing some of the benefit associated with that is not much fun, as John in real terms has indicated, but certainly our belief as we look out into the future, while this has been an extremely unusual time period, where you would have a combination of chicken markets and beef markets as disruptive as they have been, I think it is not unreasonable to assume as we move forward we are going to have a better environment to work in and we will be able to capitalize on the some of the work we have done around establishing export premiums and product mix.

Every disruption that we have had has forced our sales team to find new markets, new countries and new places.

And so the upside of that is we found some new countries where we had not try to sell product before.

Are they as large a volumes as some of the current countries?

No, but it is a new door that opens, a new place, which allows us to go in with the mix of all three proteins.

So the upside of that it forces you to call on a different customer, go to a different place, and lo and behold, there's some of the first door openings there that long-term are beneficial to us in spreading our supply around more customers outside the United States.

Great, thank you very much.

Brad Eichler.

Stephens, Inc.

Two questions.

First, maybe a question for Greg on the Russia side.

You talked about a weak June and a rebounding subsequent to that.

But could you give a little bit more detail on exactly what's going on there?

As you know, we have seen late quarter prices move up very significantly through the course of the J/F/M quarter.

As we moved into our third quarter, we sustained high prices on leg quarters.

When we got to the June period -- you are well aware Russia is the largest destination market.

There was a feeling in Russia between price and inventories that were on the ground over there, there would be a little softness in the volume.

That has turned out to be the case.

The price retreated as a result of that.

We scrambled, as John indicated, placed product in some alternative markets, and now we've seen the Russian market come back with regard to volume, in particular, and we have strong bookings for the July/August period and we are starting to see the markets rebound.

We're 3 or 4 cents up from where we were in June.

So we would expect as we move -- this is typically --July, August, September are good volume time periods going into the Russian market.

That appears it's going to be the case this year.

The second question I have is on case-ready.

You mentioned that that was up 13 percent in the quarter.

But what, on an absolute dollar basis, what did you do this quarter and year-to-date, please?

Let's see.

Talking about total case-ready beef and pork?

Yes.

The revenue piece, we were up, as I recall, in that 13, 14 percent range.

Let me -- 16 (ph) percent or $49 million was the absolute rise in dollar sales of beef and pork combined.

And on a year-to-date basis, I don't have that number with me, but Louis can sure get back to you with it.

I will follow-up then.

Thanks, Dick.

David Nelson.

CSFB.

Good morning and congratulations.

Not just on the quarter, but again, for the year-to-date through these volatile markets.

Beef seemed very strong, even excluding the hedging gain, at least what I see and hear are out there in the marketplace.

Maybe Dick, could you talk about, a little more even, about how you managed through these volatile times and posted such results?

The only thing that I would add to maybe what we've already said is we as a Company probably lost a little market share this quarter in trying to manage our margins as best we could.

We ran stronger where we had cattle supplies available.

We had to deal with some issues in terms of availability, as I said, in the Pacific Northwest, especially on the negative side without having any cattle coming from Canada.

But I think it was almost kind of almost picking and choosing where you run and where you don't run and just effectively managing that spread as best we could on a day-to-day basis.

That is probably as general of an answer and as specific of an answer as I can give you -- just managing it every day and making sure that you are doing what you need to do for your customers and managing your mix as best you can.

Your outlook on the potential reopening of the U.S. border to Canadian cattle?

Our outlook would be is I want it to come as soon as it possibly can.

But realistically, I think we are probably sometime in the first quarter of next fiscal year, but hopefully prior to the end of the calendar year.

Okay.

Prepared Foods.

I can understand the impact you talked about with higher raw input cost, but the reduced capacity utilization, why is there reduced capacity utilization at Prepared Foods?

We didn't reduce any capacity utilization.

In fact, we actually increased some capacity utilization compared to a year ago, because we have basically closed two facilities and rerouted a lot of that business, with the exception of the frozen hamburger patty business, which we exited into other facilities.

When I was talking about capacity utilization, that was really on the beef side in the Pacific Northwest and then up in the Upper Midwest on the beef side.

But actually, our capacity utilization on the Prepared Foods side would have been actually a little better than a year ago.

And the reduction was old plants into new plants.

Part of what we have been doing the last three years is assessing all of our assets.

Those that are just old that don't meet our standards for producing quality, safe products without a lot of money we've moved into our newer facilities and allocated our capital that way versus trying to patch up old facilities.

And that will be part of what we do on into the future, which would probably lead us to either have to build some new facilities and/or acquire something into our system in the next 12 to 24 months.

We can follow up off-line, but the paragraph in your release that begins Prepared Foods does refer to that.

Maybe I am misunderstanding something there.

If I could move on to chicken.

Sanderson is the only company I have heard so far that has announced a material expansion.

Have you heard of any others?

No.

And we sat around and wondered why Sanderson didn't go buy a couple of deals that were for sale there (indiscernible) in the same geographical area that they are thinking about building in.

But that's Joe Frank (ph) chooses to run his business.

They are good competitors and we will see how that plays into the future.

Lastly, Greg talked about Russia being back in the market.

Would you then therefore expect the cold storage number to move back down?

Yes, Dave, we would.

However, remember the comments I made about some of the logistical issues are going to make it difficult for us to get the product moved in as orderly a fashion as really the sales demand would ask for.

But it is clearly our belief that as we move on through the next three-month time period, that would be accomplished.

Great, thank you.

(OPERATOR INSTRUCTIONS) Jonathan Feeney.

Wachovia Securities.

A couple of questions.

First, with some aggressive product launches here, can you comment a little bit on the value-added side, particularly this fall -- and I know you're going to talk about that next week.

But could you comment about the competitive landscape?

It seems like this being such a strong consumer environment, and it's over (indiscernible) in new value-added products.

There's quite a few meat companies who have a ton of launches in this area.

What makes your products different and are you seeing that in the marketplace, more and more efforts by Hormel, (indiscernible) and others?

This is Dick.

Absolutely, the competitive landscape is very strong.

We are seeing a lot of our competitors launch into new areas.

I would say what makes us different, one of the things that makes us different is our own internal sourcing of raw materials.

We have control of those raw materials from the time we process them to the time we put them into whatever that value-added product mix is.

Some of our competitors don't have that advantage.

We certainly have that advantage on both beef, pork and chicken, which would be all three proteins.

I guess the other thing I would say is we that already have a very strong consumer allegiance to our brand, and we are finding that the consumer will allow the Tyson brand, without any problem at all, to move into a multi-protein status.

And I think that is helping us as well, as we have launched these quality products across the beef and pork and new chicken items as well.

So I think those are the two primary reasons, is a very, very strong brand that has the ability to cross the multiple protein aspect; and two, to be able to source and get the right raw materials to go into these value-added products.

Excellent, thank you.

One final detail question.

You mentioned capacities on the beef side.

You mentioned Canada close to 100 percent and Pacific Northwest and Midwest at 68 percent.

Could you give us a sense of what the blended average of beef capacity utilization was for you in the quarter, and failing that, at least get a sense of what you did sequentially?

Did that improve or deteriorate?

Our blended average of the quarter would be in the 74 to 75 percent range.

Could you refresh my memory, is that an improvement over the prior quarter?

That would be a slight improvement over Q2.

Were we to get, as you commented, perhaps Japan and Korea market openings in the late fall 2004, what kind of effect would that have on your capacity utilization?

Just having those export markets available to us will not necessarily automatically affect capacity utilization, because the number of animals that's out there will help determine what our capacity utilization is going to be.

We're going to be fairly tight, at least on a domestic supply basis.

Hopefully, we will have the Canadian border open simultaneous to that.

That will help us from a capacity utilization.

The export markets will allow us, hopefully, from a revenue standpoint, to be able to take some of those products that have been historically more export-based and get more value out of some of those products, which should help our spread and then hence, hopefully help our margins as well.

But you would expect -- would you overall expect the live cattle market to anticipate -- or at least react favorably to that, and perhaps add supply in the case of reopened export markets and normal conditions?

It takes a while to change the availability of cattle, because it's such a long process.

So nothing could happen in the very short-term.

But certainly the reestablishment of export markets could very well enhance heifer retention, which over time will increase the numbers of cattle that we will have available -- certainly if the margins of the producer are enhanced through that process as well.

Our expertise is making the buy and managing the spread, and if you get the ability to gain revenue dollars in the broader market opportunities increases our chance to maintain our historical spreads or increase them.

Christine McCracken.

Midwest Research.

Just one quick follow-up.

Greg, maybe you can comment on -- pork exports have been exceptionally strong and supported the overall market.

Is it your expectation now with the safeguard triggers in Japan that that would back off?

What do you expect then for the balance of the calendar year in terms of exports and strength in pork markets?

Christine, there is no question of the safeguard, the likelihood is that we will see a safeguard kick in in Japan.

As you know, this is just part of a normal cycle.

We've experienced this since the BSE; been exposed to it before.

And it will raise the base price of U.S. pork going into Japan.

It is difficult to predict exactly what the downside of that would be, but we would certainly still continue to expect very good exports markets for pork, that Japan would still remain a very good destination markets.

And our expectation certainly is that Mexico and the balance of the markets would stay in good shape as well.

So we still feel very good about pork exports.

So you would expect generally some softness in pork prices?

It would not be a recognition of facts to know there is going to be some effect of the safeguard, but I don't believe it's anything that should raise any red flag of any real significance, if you look at it to the total picture of pork exports.

All right.

And Dick, to your earlier comments on expansion -- heifer retention.

It seems like the early data or the recent data, it appears as though we are maybe moving toward that.

Is that your view or is it maybe too soon to tell?

Christine, I would say that would be my view, but I think on the opposite side of that, with feeder cattle prices being as high as they are, where there is sure interest in terms of that (indiscernible) calf guy or gal to continue to sell feeder cattle at those types of prices.

So there is a balance there, but yes, I think we are starting to see the beginnings of a slight heifer retention.

And again, when you do, that still says you are a ways away to seeing more slaughter volume.

In fact, you see a little less slaughter volume first and then you see that change over a period of years.

So you would be looking at lower slaughter rates probably for 18 months, 24 months?

And then maybe slightly better conditions beyond that?

On a domestic basis, I think that would be true.

But assuming that we get the Canadian cattle markets to live cattle reopened, that will more than offset that.

So I don't anticipate -- if you assume we will have those live markets open, we will have less cattle to slaughter in the U.S.

And that kind of raises another question.

Maybe you can pull out your crystal ball and look and see.

Really, in terms of the balance of Canada and Japan, if Japan reopens before Canada reopens, are we going to end up in a supertight situation?

Or is it your expectation that Canada would have to reopen before Japan reopens?

One does not have to happen before the other.

Our government will have to play a major role in how that takes place.

Capacity utilization will be more benefited by the Canadian border opening than the export markets being re-established, even though they both should have a positive effect.

The bigger change will come with live cattle being open from Canada back into the U.S.

And your expectation there is still cloudy, in terms of timing?

I think they're going to be pretty close.

I believe they both will likely happen in our first fiscal quarter.

Okay, great.

Thanks.

At this time, that concludes today's question-and-answer session.

I would like to turn the call back over to John Tyson for closing comments.

Thanks, everybody, for your questions and your follow-up, and I know that Louis and his team will get back to you for clarifying answers.

We appreciate your support.

I think the only thought that I would leave with you is these two companies came together approximately three years ago.

They have created one great new Company.

The foundation is in place.

There are a lot of nice activities going on.

Our people are working hard.

And I can tell you the only thing that will be caution (ph) about this Company will be change as we move into the future.

Have a good day.