泰森食品 (TSN) 2004 Q4 法說會逐字稿

Good morning.

Welcome to Tyson Foods fourth quarter 2004 earnings release conference call.

I would like to inform all parties that you will be on listen-only until the question and answer portion of today's conference.

I would like to also inform all parties that the call is being recorded.

If you have objections you may disconnect at this time.

I would now like to turn the conference over to Mr. Louis Gottsponer.

Thank you, sir.

You may begin.

Louis Gottsponer, Jr.: Good morning, everyone.

Thank you for joining us today for the Tyson fourth quarter conference call.

With me today's 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 Dennis Leatherby our Treasurer and interim CEO.

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

Now, I will turn things over to John Tyson.

Thanks, Louis.

Good morning and thanks everybody for listening.

Welcome out there to my friends and others on the call.

I would like to welcome everybody to the year end conference call and just kind of give a quick history of really what's happened to this great Company since we have been together 3 years and, if you think about it, we are a 3 year new $25 billion plus company.

And during those 3 years we have paid off $1.5 billion of debt.

We have reduced our debt to capital from 59% to 44%.

We have increased our mix of value added products to 38%.

We have improved our ROIC and we have out-performed the S&P 500 in return to shareholders.

I can tell you the integration process is complete and we are moving into the future.

We do have the organization and structure to support that and we have developed a 5 year strategic plan.

And if you think about what we faced in the year '04 we faced BSE, we faced AI, we faced higher grain costs and we had higher raw material costs in our Prepared Food business.

Nonetheless, '04 was a very, very good year when you take it in the whole.

We did achieve record sales in earnings, both before and after adjustments.

We did increase our cash flow from operations by $112 million, $220 million excluding last year's vitamin settlements.

We did pay off $237 million in debt.

We did reduce our debt to capital from 38% to 44%.

We did increase our sales of value added products to 38%.

We did improve our ROIC and we have launched our new marketing campaign "Powered By Tyson," which will drive our future and drive our 5 year strategic plan.

I will now let Dennis share some more financial comments.

Good morning, everyone.

In our press release this morning we reported GAAP earnings of 19 cents per share for the fourth quarter and record earnings of $1.13 per share for fiscal 2004.

Both of these calculations referred to here are on a diluted share basis.

Please note fourth quarter earnings include $21 million of costs for asset write-downs.

In fiscal 2004 the Company implemented a control whereby all plant facilities would conduct fixed asset reviews on a recurring basis and, as a result, we wrote down fixed assets in several locations.

Also included is the $25 million charge for impairment of trademarks and other intangible assets, primarily due to the Tyson branding strategy resulting in lower sales of products under some of our regional brands, as they are converted to the Tyson brand name.

Both of these items impact the income statement on the other charges line and both are non-cash charges.

The net effect of these two items items is $46 million, which decreased GAAP diluted earnings per share by 8 cents per share for the quarter.

Please note the fiscal 2004 earnings include $40 million of plant related closing costs, $61 million of costs related to BSE charges, as well as the $46 million of costs just mentioned pertaining to the fourth quarter.

The net effect of all these items is $147 million, which decreased GAAP diluted earnings per share by 26 cents for the full fiscal year.

Some other points to take note of in our financial statements.

Cash provided by operations was $142 million for the quarter and $932 million for the year, an increase of $112 million over last year.

Although working capital increased over a year ago, we made significant improvements in all areas of the cash cycle in 2004, with strong improvements in both days accounts receivable and days inventory.

Capital spending for the quarter was $140 million and the fiscal year total was 486 million.

Debt at the end of the quarter was just over $3.3 billion, up $39 million from the prior quarter, primarily due to the timing of our $80 million semi-annual interest payment occurring in this quarter due to the extra or 14th week.

For the fiscal year we paid down just over $240 million in debt.

The debt to capital ratio is now just under 44%, down from 48% last year.

And our fourth quarter tax rate came in lower than expected, primarily due to higher than anticipated international income, primarily in Canada, which has a lower tax rate.

Some additional items to note pertaining to earnings include -- first, our chicken segments showed solid gains over fiscal 2003.

Our full year operating margin improved to 6.5% as compared to 2.1%, more than triple last year.

This improvement was despite the negative impact of approximately $239 million of increased grain cost over the previous year.

However, this negative impact was partially offset by $127 million in gains from our ongoing commodity risk management activities related to gain purchases.

Therefore, the net increase in the grains for the year was approximately $112 million compared to last year.

Second, our pork segment had a strong year as well.

Its operating margin was 4.4%, up from 3.0% one year ago.

Third the Prepared Foods segment operating margin was 2.9%, up from 2.1% last year, excluding the impairment of trade market intangibles, fixed asset write-downs, and plant closing costs.

Finally, despite lower operating margins in the beef segment, overall Company margins improved from 3.5% compared to 3.4% one year ago.

Adjusted for the $147 million of items described earlier, adjusted operating margins for the entire Company were just over 4% compared to an adjusted operating margin of 3.1% one year ago.

Now, let's review our financial outlook.

As discussed in our press release, our guidance for fiscal 2004 is for GAAP earnings to be in the range of $1.15 to $1.45 per share.

Our revenues for the year are projected to be between 27 and $28 billion.

We expect interest foreign exchange and other charges for the fiscal year to be approximately $250 million.

Our tax rate for fiscal 2005 is expected to be in the range of 36 to 37%.

Please note this rate continues to be slightly higher than normal as we anticipate international earnings will continue to be lower than prior periods.

Capital expenditures are expected to be in the range of 600 to $650 million.

This reflects increased spending for our third case-ready plant, our new R&D center, and a variety of projections which will increase automation and support our value added product growth.

Depreciation and amortization is expected to be approximately $490 million for the quarter, return on our -- our return on invested capital target is 14%.

Our debt to capital ratio target is 40%.

Weighted average shares will be approximately 356 million.

And as is our customary practice, we will not be making any comments regarding our quarterly earnings.

Now, I will turn the call over to Dick Bond, our President and Chief Operating Officer.

Thanks, Dennis.

Good morning and thanks for joining us this morning.

Just a couple of overall remarks.

First, sales dollars and operating income, after adjusting for the fixed asset write-down and intangible asset impairment, improved significantly in the chicken, pork and Prepared Foods segments compared to fourth quarter of last year, but were overshadowed by a reduction in operating income in beef of 143.5 million for the quarter.

Our fiscal 2004 yielded very positive results overall, despite significant challenges in the beef segment.

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

Our chicken segment sales increased by almost $390 million, or 20.2% over fourth quarter last year, and adjusted operating earnings improved by approximately $48 million or 75%.

Strong volume improvement of 12.7% increased selling prices of 6.7%.

Mix enhancements and reduced operating costs yielded positive impacts.

On the negative side, grains were up $106 million, and we did incur a decline in operating income of $20 million due to a grain -- due to the grain hedging impact.

The commodity breast market reached a high of $2.56 a pound during fourth quarter.

But unlike some of our competitors, we sell a very low percentage of our breast meat in a pure commodity form.

We did, however, raise prices where possible, on our value added products.

Currently the commodity breast market has retreated to the $1.30-$1.40 level which, based on our value added business model, should be an advantage for Tyson going forward.

In the beef segment, sales dollars were down almost $135 million or 4.1%, while our pounds processed were down 12% and live cattle prices increased over $4 a hundred weight or 5%, compared to fourth quarter of fiscal '03.

The Canadian border continues to be closed for live cattle.

While there is a framework of an agreement for the resumption of trade with Japan, it appears to be several months away for trade to resume.

We incurred a drop in operating earnings of $148 million for the quarter on a year-over-year basis.

Approximately $41 million of that swing was due to market to market boxed beef hedges recording a $29 million loss in fourth quarter of '04, compared to a $12 million gain in fiscal '03.

Currently live weights of cattle being slaughtered are considerably higher than last year, indicating supplies of cattle in the near term are more abundant.

Margins will continue to be difficult in beef until international market access is restored and live cattle are permitted to come from Canada.

In the pork segment, sales dollars increased $241 million or 37.2% for the quarter versus last year, and operating income increased by almost 22%.

Our pounds processed were up 14% and live hog prices increased $13 per hundred weight or 29%.

Demand for pork products was very good both domestically and on an international basis.

Seasonally we expect live hog prices to fall during November and December, but probably not to the degree as normal.

Further processed products like hams, bellies, and trimmings continue to be very strong from a price perspective, as demand is exceptional for this time of the year.

In Prepared Foods, sales dollars were up 85 million or 12.1% on a year-over-year basis.

Volume was up 3.5% and we achieved an 8.3% increase in selling prices.

Adjusted operating income improved by $10.7 million or 94.8% compared to fourth quarter of fiscal '03.

Pork raw material prices continue to be very high, but we were able to pass along the increases effectively, which allowed operating earnings to improve, but not to a satisfactory level as of yet.

We incurred additional selling, marketing, and advertising expenses associated with our Tyson branded initiatives.

In the consumer products channel, our Tyson branded ready to eat frozen product lines continued excellent growth with sales dollars up 37% and volume up 32% compared to fourth quarter of fiscal '03.

Within our fresh case-ready beef and pork business, we saw a 20 plus percent increase in both volume and sales dollars on pork, and beef sales up 18.9% and up 7.4% in volume for the comparable period last year.

The introduction of our refrigerated ingredient meat line and the relaunch of our dinner meats lines were successfully implemented during fourth quarter, meeting all of distribution targets for the period.

In food service both casual dining and the QSR segments continued to show about a 2% positive traffic growth for the June through August quarter.

Our food service revenues from our chicken and Prepared Foods segments increased 19.4% and our unit growth was up 8.8% compared to fourth quarter of fiscal '03.

Product innovation and development, as well as renegotiating a number of fixed price agreements within our national accounts group, are major priorities at this time.

In summary, adjusting for the fixed asset write-downs and intangible asset impairments, our operating EPS would have been 27 cents for the quarter and was higher than we were anticipating.

Our chicken segment results were better and our grain hedge losses were less than expected.

Given the challenges in the beef segment, I believe we did an excellent job of improving our sales dollars, volumes, mix and operating earnings on an adjusted basis in our chicken, pork, and Prepared Foods segments.

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

Thank you, Dick.

Good morning.

Let's talk a bit about international.

Our international export sales were $491 million for the fourth quarter.

This is down 28% versus the same time period last year.

The decline in sales is, once again, directly attributable to lower export volumes resulting from the continuing bans of U.S. beef due to the BSE occurrence last December, and the remnants of the bans on the U.S. chicken due to the AI outbreaks that occurred last spring.

In talking about our chicken export business, in particular, our sales volume was up 16% for the quarter, while our leg quarter volume increased 33% for the quarter.

Our sales of leg quarters were very strong to all of our historical target markets including Russia.

In addition, we enjoyed good volume sales to middle-eastern markets.

Our inventories of frozen chicken for export finished the year at targeted levels.

In spite of these overall increases, we continue to experience lost sales opportunities in Asian countries, particularly China and Japan.

These lost sales, due to the continued AI bans, provided some offset to the gains that we experienced in our other international market destinations.

As to beef and pork, although our export beef and pork sales revenue was down 42% for the quarter versus the same quarter last year, we did experience a 7% improvement in sales revenue versus the third quarter of this past fiscal year.

This fiscal year I should say.

This improvement was due to strong pork sales realizations primarily, once again, hams shipped to Mexico.

Specifically to our beef business, although our export sales of boxed beef were down 84% versus the same quarter last year, our sales for the quarter were up 27% versus the third quarter, due to improved market access in Mexico and Canada.

Likewise, variety meats down 50% against the fourth quarter of fiscal '03, experienced an increase of 84% in revenues compared to the third quarter of our current year.

Variety meat pricing was pushed up by the strong demand for beef variety meats sold in Mexico and eastern Europe.

Our export sales of pork continue to be strong and were up 43% versus the same quarter last year.

And ham sales to Mexico, once again, lead the sales revenue.

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

We believe that both pricing and volume will continue to remain firm, particularly through the first quarter of fiscal '05.

A brief talk about foreign operations.

Tyson to Mexico, our fourth quarter revenues increased more than 10% over the same period a year ago as a result of stronger pricing across the broad base of our product offerings and the continued growth of our further processed product sales, coupled with a small increase in our live production.

We enjoyed an increase in operating income as compare to the fourth quarter of last year, even though we experienced substantially higher grain owning costs for the same time period.

Talk about China.

The Tyson Dalain further processing operation is enjoying record sales of products into the domestic Chinese marketplace, with shipments now approaching our installed manufacturing capacity.

The Company has works in progress to grow our poultry further processing capabilities in China, as we anticipate continued favorable trends and demands across all market channels.

We are currently in the process of launching a new ten item retail line of consumer package branded chicken products in the Shanghai metropolitan area.

This activity, coupled with our growth in food service demand, is allowing us to double the capacity of our current facility and we are anticipating the need for a second facility to begin within the next 12 months.

A note about market access.

In closing, some good news on market access.

With the opening of Japan on August 10th and China on November 8th, plus the liberalization of the Taiwanese market, we expect to see recovery in our Asian chicken sales.

This, added to the continuing emergence of the middle-eastern and African markets, give us reason to anticipate a stronger export demand for chicken in fiscal 2005.

I'll close with some remarks about marketing.

After extensive consumer testing, the "Powered By Tyson" campaign was introduced in August 2004.

The largest, fully integrated market campaign in Tyson history includes TV, radio, online and print ads that use numerous situations showing how Tyson's chicken, beef, and pork products can help people do things just a little better than others.

This campaign uses audience specific executions for the general market, and those ads targeted the African American and Hispanic consumer.

In addition to our advertising, our new campaign includes grass roots marketing and high visibility sponsorships that enable our brand to build strong relationships with consumers, continually inviting them to bring the power of Tyson into their lives.

Early feedback, from both our customers and consumers, has been extremely favorable.

Both believe that Tyson has taken a leadership role in the world of protein and that the advertising is working to increase sales.

While it is still too early to put hard numbers to the success of the campaign, we are confident that this is the right direction for our Company and for the Tyson brand.

Thank you.

Now, I'll turn it back to our Chairman and CEO, John Tyson.

Thanks, Greg, and Dick and Dennis for your comments.

I think you can see that we have made significant progress.

We've made great progress in the first 3 years of this Company.

We've made significant progress in '04, but I think we would all tell you that we still have room to improve.

Our goals for '05 are the following.

One, we are going to try to generate earnings in the per share range of $1.15 to $1.45.

We believe our chicken, pork and Prepared Foods segments will be very solid, but recognize that the beef segment will be tough.

We are going to reduce our debt to capital to 40%.

We will improve our value added mix to 40% of our sales, which is in line with our target of 50% over 3 to 5 years.

And we have a target to achieve an ROIC of 14%.

I would like to say thanks to all the Tyson team members who worked hard to achieve record results in '04.

And, if we remind ourselves, for a full year our GAAP earnings per share increased 18%, while our adjusted base earnings increased 72%.

Those are pretty good numbers. 18% on a GAAP basis, 72% on an adjusted basis earnings.

We are looking forward to another good year in 2005 and, at this time, we'll take questions.

Thank you.

We will now begin the question and answer session.

If you would like to ask a question, please press star, 1 on your touchtone phone.

You will be prompted to record your name.

To withdraw your question press star, 2.

One moment for the first question.

Brad Eichler with Stephens Inc.

You may ask your question.

Good morning, guys.

Great quarter.

Thank you.

Three questions.

First, how much are you spending in the current quarter on new branding initiative?

The current quarter being the first quarter of this year?

I'm sorry, John, the fourth quarter.

Fourth quarter of '04?

Yes, sir.

It just, kind of, got started.

Most of the money is going to be in the first, second and third quarter of '05.

Okay.

And what should we expect in the first quarter?

Brad, this is Dick Bond.

We will -- as we said before, this campaign is in the roughly $75 million campaign, and it is probably a little bit more heavily weighted in the first and then in the third quarters of the year, so you can probably get about 30% of that number will be in Q1.

Okay.

The -- what type of assumptions are you all making as respect to Canada and Japan for your guidance for '05?

Basically, Brad, we are looking at, hopefully, middle to the end of second quarter for Canada.

And probably more like sometime in third quarter, hopefully, for Japan.

Okay.

Then my final question is on hedging.

If I read the press release correctly, you had about $20 million of realized hedging losses in chicken.

Is that correct?

That's correct.

And then if you were to -- if grain prices were to say where they are and your existing hedges would roll off, would that be at a net loss, do you anticipate or a profit from where we are today?

I think I would answer it this way, Brad.

Those hedges that are in place are against fixed price sale contracts, so when we made the decision to put those hedges in places, we had products sold at a profit.

And it is already locked in.

Okay, thanks, guys.

Um-h'm.

Our next question comes from John McMillin with Prudential Equity Group.

Good morning and congratulations.

Thanks, John.

The $20 million was for the entire company, in terms of the hedging losses in the quarter?

For grain.

That's on grains.

Great.

And when you lowered guidance in late August, what were you assuming for hedging losses?

Well, significantly higher than the $20 million.

And we just didn't think we would be able to maintain some pricing on chicken, and we didn't think we would get the lower grain prices into our system as quick and it got in a little bit quicker, and pork stayed a little bit stronger than what we thought.

Okay and your hedging activity this year, has it been as active as last year or can you just talk about, you know, um.

Our hedging activity to date has been against fixed price contracts into the future.

Contracts that are 6 months out and 9 months out.

We haven't done much past that.

We have tried to keep a relationship between selling our product for a profit and managing our costs and being -- telling ourselves those are acceptable returns on those sales.

You certainly did a good job earning $40 million in beef in this quarter, even though it looks bad compared to last year.

But is that why you expect more earnings in the second half of this year, because you anticipate beef getting better as export markets open?

John, this is Dick.

I would say several things.

We are not necessarily counting on, you know, market access and Canada to, you know, if you will, be a, such a significant factor that if they don't happen, you know, all bets are off.

Tha's not the case at all.

But typically, what we are looking at this year is the last two quarters just being better quarters.

That certainly would be -- would have one impact.

But we are also looking at stronger margins from the standpoint of our chicken business in Q3 and Q4.

And we also see some more positives, I think from our international businesses as well in Q3 and Q4.

Do you think chicken will be stronger in 3Q and 4Q than in the first half, despite these recent pullet placement numbers?

Well, let's talk a little bit about those "pullet numbers".

Those numbers, as far as we are concerned, where you saw a 17 or 16% number for September are wrong.

They are just not correct at this point.

We don't believe those numbers are accurate.

There have been several other companies, I believe, that have said this doesn't look right for September.

Everything that we see looks like more like 2.5 or 3% growth is what we are looking at for our fiscal '05 and, based on our numbers, we believe that to be much more accurate going forward.

The other thing I would say, in looking at our chicken model and what we are doing there, we are just working hard to increase our value added mix there as well, and we are really seeing some very positives there that, over the course of the year, they are just going to improve, and we just look for a better back half of the year than a front half of the year.

Dick, if I could just ask you one more question because there has been a pretty big run up in hog prices, which I guess can hurt you in two ways -- Not only the pork segment, but the Prepared Foods segment.

How are you positioned to kind of buffer these upfront hits?

Well, John, I would answer that by saying that demand on the revenue side has been very good.

If you look at our margins on our pork processing for fourth quarter, while they probably weren't the best quarter we have ever had for a fourth quarter, but they were still reasonably good, and we look for that to continue on the pork processing side.

On the Prepared Foods side, we have been able to pass through some of these higher prices, and demand again, still seems to be fairly good for hams and some of your pork-related prepared foods items.

So we are weathering that as best as we possibly can.

Is our -- do we expect our Prepared Foods businesses in the first quarter and in the second quarter to be in that, you know, 5 to 6%?

No, probably not.

But we would expect to see some relief on some of these pork prices as we get into next year and looking again for more positive results in Q3 and Q4.

Okay, thanks a lot.

Thank you.

Our next question comes from Eric Katzman with Deutsche Bank

Good morning, everybody.

Some of my questions have been asked, but on the -- I guess, one of the problems that you mentioned last quarter, in the preannouncement, was problems in terms of elasticity and demand, because beef prices are so high at retail and the consumer, kind of, trading away.

Could you make a few comments about that, in terms of -- has there seen any improvement with, uh, maybe with beef prices coming down a bit?

Eric, I would answer that by saying beef prices have retreated slightly but I think that the dynamics of the domestic beef market are really not much different from what we did in that preannouncement.

You know, it is still difficult to pass along, in this environment, the current beef prices and this is still adversely affecting our typical beef margins at this time.

Okay.

And in terms of food service, I think that that was also an area that you mentioned had slowed down, either because of new product efforts at -- among some of the QSRs.

Can you, kind of, comment as to -- you know, it sounded like, you know, in the prepared remarks that, you know, distribution outlet had actually picked up a bit.

That would be true, Eric.

If you look at the two previous quarters, meaning June, July and August, being the most recent one to be announced, it did definitely show positive traffic trends across more segments than the previous quarters.

So, in general, yes, your food service business has picked up and is a little bit more of a positive, as looking at compared to the March-April-May quarter which was definitely a quarter that was a little bit more lax.

Yes, I would answer that by saying we are seeing some more positives in that food service channel.

And I would echo what Dick has said, and just to give some recognition to the food service, in one of the surveys, we are were selected the number one food service company again for the second year in a row and number one in all categories.

And then last week, in the Cognito Report, we had 8 of the top 10 or 10 of the top 10 new product introductions into the food service industry.

That still confirms to us we understand food service and how to participate in the food service market.

Dick and his team have worked hard in the last 4 or 5 months to make sure our pricing for those type of products is fair for the value and fair for the amount of work that we do.

And we understand that it takes time for those benefits to show up, but we believe those benefits will start to accrue to us and, some in the first quarter, but really as we start to move into the second and third quarter.

Okay.

And then last follow-up.

John, maybe you can -- you know, a number of investors, kind of, I guess bailed out on your stock when it was, you know, a few dollars a share ago, downside.

And doesn't look like you bought back much stock, if any, in the quarter.

And I'm kind of wondering given that, you know, the free cash flow is pretty strong and your debt to capital ratio is already at a pretty manageable level for most food companies, do you see, I guess you go through '05, putting maybe more of a priority on share repurchases than debt paydown?

I think the first thing in the notes will as the increase in capital spent.

You know, we're going to go from about a 450-460 run rate, which is equal to depreciation and amortizations of about a 650-680, so that's where some of our free cash flow.

But that's in anticipation that we will get benefits in our operations by more automation, by the third case-ready plant, and by developing our R&D.

We spent a little money on stock buyback in this fourth quarter.

Not much, but we allocated some cash and we will keep looking at that on a case-by-case basis.

We think we have a chance to accelerate our capital spending, to accelerate our competitive edge against our competition, and be ready to compete in the marketplace, and then our competitors will be catching up with us, as they have to spend Cap Ex.

Okay.

Congrats.

Thank you.

Our next question is from Christine McCracken with Midwest Research.

Good morning.

Good morning, Christine.

Just a follow up on an earlier comment relative to the chicken markets.

I think, Dick, you were talking about at 3% expansion on the year, but, looking ahead at the next couple of months, it looks, at least from the numbers that were reported in the year ago period, that, in fact, there could be some expansion based on some very easy comparisons in the year-ago period for chicken.

Do you see that?

Is it possible that, near term, we could see at least expansion over and above that 2.5 to 3% rate?

Christine, in the short-term you are absolutely right.

We could see some expansion that is, you know, probably a little bit more than that composite 2.5 to 3%.

But if you look where the markets are today, again, in terms of your commodity breasts markets, and being where they are, and some of these other items, we are probably not going to see a whole lot more weakness from that standpoint, and we still have very good demand for, at least from our perspective, for our value added chicken products.

So I -- I see our chicken segment continuing to be extremely good.

Christine, let me add on to that.

This is Greg.

Obviously, leg quarters are -- the export helps move a lot of product out of the domestic market and we do anticipate solid sales as we go through the next 4 to 5 months.

We always have a little bit of a turndown.

I should say next 3 months or so, before we hit a little bit of a turn down that we normally experience around, you know, January and February, but again that is seasonally predictable.

Our inventories are in pretty good shape.

I would go back and emphasize, we have gotten a lot of calls about these pullet places and I think Dick did a good job of discussing that.

You have to think about that on a composite basis.

At any one time, you've got about 8 months worth of data that you can look, that you know for sure with regard to pullet placements and look out in front of you, and there is -- you know, the industry has on a -- just looking on a normal production rate basis, has the ability to bring forth about 2 to 2.5% worth of live birds, and you always have the potential for the influence on weight that we have seen, but we should be slowing that down as we go forward because we made such a large move on weight over the last number of years.

You are right, in the near term, we probably will see a few more on a comp production basis, but it should even out as we go through the year.

Greg, just touching on the trade outlook, it sounds like Russia might actually open up to Brazil.

How does that affect our competitiveness?

Will that impact chicken sales at all?

And then secondly, you know, with the outbreaks of avian influenza that we saw this year, it sounds like, at least, it going to be a continuing issue for the U.S.

Have you built that into your outlook for chicken exports?

Number one, Brazil has had -- as far as amount of tonnage that the Brazilians are quoted that they have to ship to Russia, that's really not changed, Christine, so we won't have any reason to believe, in real terms, to see them any more active in any measurable way.

We've preserved our quota there.

Even the most recent remarks coming out of Russia are really all about who is going to do quota administration and not any change in the quota.

So we would anticipate things being, kind of, steady as she goes there.

As far as the AI -- first of all, trying to predict that is an impossibility, but the one thing the industry continues to work very, very diligently on is improved biosecurity.

And then I think also, as the world learns more about AI, and starts thinking more about how to manage this, and think about things like regionalization and compartmentalization, we hope that we would have fewer of these just shutdowns that are related to low path AI.

Okay.

And just one final thing.

I think, Greg, you talked about Mexico.

At least export demand to Mexico for pork products is very strong.

But it sounds like Mexico has some plans underway to file a dumping case against the U.S.

How would that affect the pork markets and is that something you built into your guidance?

That is -- there is conjecture that the Mexican government might look at doing a pork dumping case.

Of course, that would be based on activities of a couple of years ago.

You know, everybody has been a party of a certain amount of discussion on that.

There is no certainty about that.

So, you know, as far as we're concerned, there is not any real validity, so we would hope to be able to work through that.

All right, thanks.

Thank you.

Our next question comes from Leonard Teitelbaum with Merrill Lynch.

Good morning.

Good morning, Lenny.

Just a couple of observations here, I guess.

You're spending some -- you're increasing your expenditures on case-ready.

What has been the growth in that because we know it slowed down somewhat?

I'm just trying to get why you would be putting more money into that area unless the growth is a lot better than I have seen.

Lenny, this is Dick Bond.

I mean our growth, if you look at the last 3 years, we do have compound growth that's probably at or over that 20% level, even on a volume basis.

Up until this year -- this year we won't make a composite 20% growth on a unit basis on both beef and pork, but we certainly have in the previous 2 years.

And we are basically out of -- we're going to be out of capacity by the time we get to the January to April of '06, so in order to have that third facility ready, we are going to have to spend significant CapEx in '05.

And it has done what we expected it to do, both from a volume and from a margin perspective.

All right.

Well, you know, I obviously I read some data wrong and -- 20%, you are obviously moving in the right direction.

And Lenny, I think you know what Dick and his team are doing -- it is about where your relationships are and who the people are that believe in case-ready and the overall industry might be a different issue, but as it relates to Tyson Food, it is a very good segment, it's a growing segment.

Alright.

Now I'm not asking for a specific number but, just directionally, would you expect the first quarter to be below last year, considering the industry trend right now?

Lenny, we are not going to give any direction on first quarter.

We only talk about our year number.

Our year number is $1.15 to $1.45.

We have told you that 60% of our earnings will be in the last third to fourth quarter.

Alright.

Not to push the point but, if your operating margins were in poultry -- we know what your historic margins are -- did the fourth -- did the extra week this year -- how much did that boost margins, on an overall basis?

Well, it certainly didn't boost the margin from the standpoint as a percent of sales.

It was just one extra week.

One extra week of sale.

That's it?

Just one extra week of sales.

It did not boost margins.

What I'm trying to get here is -- figure out if we're trying to use an average operating margin you've had over the last few years and -- I mean, are we going to sit here and look for margin as an accretion or are we going to start out in pretty good shape?

From what you've said -- I'm talking poultry only now.

Sounds like your poultry situation is, frankly, a bit stronger than -- obviously, I guess it was one of the earlier questions -- than you had expected from what you had seen we you lowered guidance.

I'm just trying to figure out, from a margin perspective here, are you looking for this thing to start out in pretty good shape at the beginning of the year and hold level or are you expecting to start out low and work up?

Lenny, I think I would answer it this way.

If you go back to when the industry -- those that were in the commodity business that were making good money in June and July when you had 2.50 plus breast meat -- at that time, Dick and his team started putting into place new prices on contracts, new prices in the distribution, and new prices around our value added segment.

As costs start to come down of raw materials going into those segments, it should give us a chance for our model to work, which is value added poultry-based products.

And we do believe demand will stay pretty good in the first quarter.

Thank you very much.

Thank you.

Our next question comes from David Nelson with CSFB.

Congratulations on a good quarter and a great year.

Thank you.

Thank you.

I think Dick mentioned how, you know, the skinless boneless breast market has gone down quite a bit and that was a positive.

I understand your strategic of one bird short.

Could you walk through the mechanics of why this is a positive?

Is it because you're buying spot against contracts you priced 6 months ago, or is it more a margin management situation on a day to day basis?

David, let me respond to that.

If you recall, I said that going -- on a going forward basis, that would be advantageous to our value added model, and the only thing I was referring to there is really more -- it was a statement on a comparison to our competition.

We, through that value added process, will not get whip-sawed maybe as much as what a commodity guy might when that breast market fell from 2.56 to $1.31.

So that -- you just have to take that in that context.

On a relative basis, great.

Yes.

And then, I guess, back to the point on beating here in this past quarter by so much relative to your preannouncement.

And I guess that was because the negative of the hedging wasn't as big as expected.

But certainly corn and soybean markets have fallen quite a bit since the preannouncement.

Why was -- maybe it was in October and November instead of September, but was it the hedging -- that hedging was less bad than was thought and was it because markets then went up in September?

I think we -- we really -- I tried to characterize that as several things.

One, the hedging losses were less than what we anticipated.

That is a fact.

And the second thing, I would say, is that our operating margins in chicken -- the month of September was a considerably better month for us than what we anticipated and, I would say, that that dealt with both volume -- I mean our volume in that 5 week period was considerably higher and our price and our mix was also considerably better than what we anticipated when we made that preannouncement back on August 30th.

And then why was hedging less than anticipated -- less bad than anticipated?

On the hedging deal, we did two things.

Those situations that were matched against contract sales stayed in place, but we tried to trade around it and did an okay job of trading around it.

Okay.

And then lastly, any update on the CFO situation?

David, we are in the process of recruiting.

I can tell you Dennis has done an outstanding job of helping us work and manage the situation now but the -- an outside search firm is engaged.

We are in the first phases of those and all of y'all have seen how searches work and they take anywhere from 90 to 150 days and we are 30 plus days into it.

Great, thank you very much.

Our next question comes from Ken Zaslow with Harris Nesbitt.

Good morning.

Good morning.

A couple of questions.

Can you discuss the capacity utilization rates in the beef operation right now given, you know.

Have you closed down enough facilities?

Where are you operating capacity?

On beef, we are in the low 70s in terms of capacity utilization at the current time.

Regionally, we still have some issues, but at this point, are not anticipating closing any facilities.

Okay.

How long would it take to get the export facilities back up to running if, you know, Japan opens up its border?

Do you anticipate that and you build up to it or do you have to wait for the announcement and then you can react?

How does that work?

You really have to wait for the -- basically the way this framework has been established, you can't do anything in advance.

You would have to wait and then, if it is the way they are talking about it, you basically have to certify the cattle as they are being processed, so there is no way you could, if you will, build up an inventory which you really wouldn't want to do anyway.

To answer you your question is, you have to wait and react to it, once it has been approved and, whatever it is, and put in place.

And how long will it take for you to react?

If it's like, you know, tomorrow they say the border is open.

How long does it take for you to say we can start shipping beef?

Based on the knowledge of what the framework looks like it would not take us long to react?

Less than 30 days?

Just kind of ballpark.

Less than 30 days.

Okay.

And not to over emphasize this other point, but -- how did you actually get lower feed costs into the system earlier than expected?

I'm just trying to figure out, if you lock in -- how do you go about changing that?

Because the prices just dropped quicker and faster and we were able then to start putting physical grain costs into the system and then, from there, we started rolling on in through our cost structure.

And my last question is, on your variance in terms of your EPS is $1.15 to $1.45.

What are the main -- let's say 3 swing factors that get you to $1.15 to $1.45?

I guess I would say that beef is -- the beef and the whole beef segment is one major factor that would be cause for that $1.15 to $1.45 swing.

And that is not just dependent upon, you know, when export markets opened and when Canada opens.

We do need, as a company and an industry, to get back to higher capacity utilization, you know, in order to get back to a reasonable cost structure.

That certainly is one factor.

The second factor, I would say, is just input prices and, when I say input prices, that would include grains, and then raw materials, as to how it would expect or how it would impact our Prepared Foods segment.

And thirdly, it is just, you know, pure, you know, economy.

What -- what is the economy going to be like after the first of the year?

You know that's still a wild card, as well.

So I would say those are the 3 primary factors that would deal with that swing.

Great, thank you very much.

Thank you.

Our next question comes from John Feeney with Wachovia Securities.

Good morning, guys.

Congratulations.

Thank you.

One question I had was on -- if you look at, you know, a lot of companies, a lot of consumer research is out there saying low carb trends are fading.

And I wanted your sense as to, first of all, at the retailer level, if that is affecting the way that, you know, they are dealing with you in terms of their, you know, willingness to push ahead with something like case-ready programs.

And secondly, do you feel you benefited a lot from that in say the first calendar half -- more or less, the first half of your fiscal year last year and could that be a headwind this year, if in fact, low carb dieting has some what slowed down?

Well, as related to case-ready the low carb situation would have nothing to do.

People are going to eat the set of products.

I think like all diets, they come and go.

But I think the one residual factor out of the low carb situation is, where it has given the consumer permission to eat protein.

It has now given the consumer permission to eat protein around the lunch period where maybe they were paying attention to what they ate, and still do pay attention.

At the breakfast meal, you got a lot more permission that it's okay to go ahead and have ham or bacon or chicken sausage or something.

Where, before, at breakfast, you were supposed to have your yogurt and your fruit plate.

So, the permission that is left from the low carb diet will still be a positive for the protein industry and a positive for us, because we have those set of products out there.

And that will be the residual effect of the low carb diet phase is, it's allowed more people to say it is okay to eat protein and keep eating protein and that is why you see our "Powered By Tyson" campaign will tie right into the fact that protein needs to be a key component of your daily meal plan in the pyramid.

Okay.

Historically speaking, have you -- you know, these precipitous declines in chicken breast prices.

Has that eventually tended to affect your food service business particularly, at all?

I know you have a value added -- certainly value add there but, I would think, after awhile, on the food service side they are facing the same cost pressures that everyone else are.

You would think with declining, you know, fresh chicken breast prices, your pricing situation would start to deteriorate.

Is that accurate?

Well, I mean, I think it will have some effect over that period but, if you look at when we had the highest breast prices, that was back before the grains fell so, while, yes, you have a decline in your commodity breast prices, we have also had a significant decline in the input prices of both corn and soybeans as well.

So I mean it certainly has an impact, but we have been able to deal with that, quite frankly, through lower input prices.

I think you got to go to what is happening in the industry.

If you think about changes in the industry, you know, the number of people that produce small birds has been diminished.

There have been 6 or 8 complexes that have moved from a small bird to a big bird, where you get a lot of your deboned breast meat.

So if you think about the Tyson model that participates both in small bird, medium bird, large birds and value added mix, up against where the industry has changed to, it allows us to take care of the range of demands from the range of customers.

Whereas, our competitors have moved to what you call big bird deboning model and they only have one place to go with their product, which is, they've go to kick leg quarters out to Russia and they've got to sell the deboned meat, either back to us or back into the marketplace, and they can't compete in some other segments, where in the past, if they were in small birds, they could have competed in the small birds segment.

There is less competitors there, which allows us to raise the price points there and the overall model becomes our advantage.

I would add one other thing.

In the foodservice channel, we have seen a tremendous increase in the amount of chicken being used for either various sandwiches or for toppings on salads or just new items in the chicken segment that are being added in the foodservice channel, both in QSR and in midscale and in casuals.

So chicken, as a percent of the mix of the food dollar at foodservice, has increased substantially over the last 2 years and it looks like that trend is going continue in this next period.

Interesting.

And finally, hypothetically speaking, if you were able or say, not you particularly, but the U.S. industry were able to restore, you know, export volumes in beef to Japan, you know, to its historical level, you know, at some point in the next 6 months, which I know it is very unlikely to happen.

But just hypothetically speaking, if that happened without Canada being reopened, so very seriously challenged in the cattle supply side -- is it your sense that you would be able to make a lot more money in beef under those circumstances?

I would answer that by saying it would certainly help.

Would I say that that that alone would be the answer?

Probably not because we need more supply in addition to that.

So I think it is a combination of the two.

Yes, our revenue stream would probably go up because of, you know, more access to more markets, which is only logical.

But if you are really, really short of cattle, from a supply standpoint, you know, quite frankly, you might give all that away when we buy the cattle.

Right.

It is hard to say that, that alone, will create margins or create earnings that would be significantly higher.

Excellent.

Thank you, guys.

Thank you.

Our next question is from Tim Ramey (ph) with D.A. Davidson.

Good morning.

As we think about the "Powered By Tyson" campaign and also the new case-ready facility and the continued growth of that business, is there any way to sort of quantify what percentage of the business will go out as branded versus unbranded?

Can you give us some guidance on how you're transforming the business that way?

Well, we really -- this is Greg, Lee.

We really don't publish the exact percent of our sales that are branded.

You know, we work to cover the amount of product that we move up the value chains into Prepared Foods.

We do track that ourselves, but we have not made public acknowledgement of that number, but we would clearly anticipate, based upon our marketing programs and the focus on the Tyson brand, that a significant share of our Prepared Foods growth is going to be built around the Tyson brand.

It'll be built across all fronts of our product mix, including case-ready, which, as you probably recognize, our lead item there is our prepackaged pork, but we anticipate having other items that would be under the Tyson brand as that program continues to evolve.

On the new case-ready plant, is there any change in your approach to that business?

Either through a, you know, a change in packaging or a change in geography or just an incremental, you know, change in rollout?

Tim, it is -- I mean it is our third plant.

It will be a state of the art plant from an automation perspective.

Quite frankly, we are still looking at technology from a packaging standpoint, as we always would, to make sure that we stay current with what is out there and look to innovate from a technology standpoint, as far as packaging goes.

So we -- that really that piece of it hasn't been finalized and we will wait as long as we can, to make sure that we are as current as we possibly can on technology, from a packaging standpoint.

But certainly infrastructure, like refrigeration, electrical, and all those types of things, we're going to have to get started here relatively soon if we are going to make a -- you know, 16 to 18 months from now being ready to go.

Thanks a lot, Dick.

Thank you.

Our last question comes from John McMillin with Prudential Equity Group.

Hi again.

Just in terms of why cap spending is going up so much this year.

If you have answered that already, I just -- I guess I'm taken back by the magnitude of the increase.

John, I mean it is substantial.

But again, a case-ready facility is expensive.

I mean we are building this R&D facility -- the discovery center as we have talked about.

In addition to that, we are still going to spend a fair amount of money on automation in all of our facilities, whether that be in Prepared Foods.

We still have quite a bit of automation to complete in our poultry segment.

And we really look for substantial returns on these investments, you know, to drop to the bottom line.

So while, yes, it is a significant increase in capital, over time, we expect to see substantial benefits from these CapEx expenditures that we plan on doing.

And we are completing some major projects also in '05 that we started in '04, like the complete redo of our Dakota City beef facility.

That will finish up and we will still spend a fair amount of dollars in fiscal '05 to complete that project as well.

And you have money being spent on the project one, which is the business process automation.

And John as you kind of look to '06, '07, that's not -- the 600, 650 is not like the run rate?

I would be surprised if it's the run rate.

Okay.

Should come back down a little bit in '06.

Okay, thank you.

Thank you.

That concludes the question and answer session.

I will turn the conference back over to Louis Gottsponer for any closing comments.

This is Johnny, here.

I would want to say, first of all, thank you to all the Tyson team members that on the conference call.

You have done an outstanding job this year with a lot of curve balls thrown at us.

I think we have worked very hard and, I think the two numbers that say it best, is 18% up in GAAP earnings and 70% plus up in adjusted earnings for the year.

And we are going to go hard to work on '05 and everybody have a good day.

Thank you.

That concludes today's conference.

You may disconnect at this time.