泰森食品 (TSN) 2005 Q1 法說會逐字稿

Good morning and welcome to Tyson Foods' first-quarter 2005 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 any objections, you may disconnect at this time.

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

Thank you, sir.

You may begin.

Thank you and good morning, everyone, and thank you for joining us today for the Tyson first-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 Dennis Leatherby, our Treasurer and Interim Chief Financial Officer.

Before we go to talk about the financial performance for the quarter, let me just remind everybody that some of things we talk about today will include forward-looking statements.

That means that those statements will be based on our view of the world as we know it today and also it means that things can change, so I would encourage everyone to 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.

Good morning, everybody, and welcome.

Welcome to our team members out there, our friends and our shareholders.

You know, sometimes in life things get more difficult than you expect, but you know you can succeed because you have the right people and the right fundamentals.

Our fundamentals are still in place, as you can see from our release.

When you look into the release, you can see that our debt-to-cap went from 44 to 41 percent, or a debt reduction of $292 million.

Our cash flow from operations increased by $161 million in an extremely difficult quarter.

Execution is our focus for the rest of the year, because we know our company fundamentals are right.

We can tell you that our fundamentals in our chicken business are solid and will continue to improve into the second half.

Our pork fundamentals are solid and are improving as we speak.

Our beef fundamentals are correct, but there are industry issues.

The industry still struggles with supply and export issues.

Our prepared-food model is sound; we believe it will improve as we go forward.

I can tell you, you will see from Dennis, Dick and Greg's comments we did a lot of things right in an extremely difficult first-quarter conditions (sic).

Dennis?

Good morning.

In our press release this morning, we reported GAAP earnings per share of 14 cents for the first quarter on a diluted share basis.

Please note first-quarter earnings include 12 million received in connection with Vitamin antitrust litigation included in cost of goods sold on the income statement, an $8 million gain from the sale of our remaining interest in specialty brands included in Other Income, and 3 million of costs related to a prepared foods plant closing included in Other Charges.

The net effect of these items increased GAAP diluted earnings per share by 3 cents for the quarter.

Also, please note first-quarter of 2004 earnings include 25 million of costs related to plant closing included in Other Charges in the income statement and 61 million of costs related to BSE charges included in cost of sales.

The net effect of these items decreased GAAP diluted earnings per share by 16 cents for the quarter.

Some other points to take note of in our financial statements -- as John said a minute ago, cash provided by operations was 422 million for the quarter, an increase of 160 million over last year.

We continue to improve our cash cycle, as was evident in this quarter with strong improvements in days Accounts Receivable, although this is partially due to a lighter mix of international sales.

Capital spending for the quarter was $110 million.

Debt at the end of the quarter was 3.070 billion, down 292 million from the prior quarter, which resulted in debt to capital of 41.4 percent, down from 43.9 percent last quarter and 46.5 percent 1 year ago.

Our SG&A expense was up 23 million over last year, primarily due to accelerating the spend on our new "Powered By Tyson" campaign.

Now, let's review our financial outlook.

As we discussed in our press release, our guidance for fiscal 2005 is for GAAP earnings to be in the range of $1.05 to $1.30 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 around 250 million.

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

Please note, this rate continues to be slightly higher than in prior years as we anticipate international earnings will continue to be lower than historically.

For capital spending, our range is 600 to $650 million.

As we discussed last quarter, this reflects increased spending for our third case-ready plant, our new R&D center and a variety of project to increase automation to support our value-added product growth.

Depreciation and amortization is expected to be approximately $515 million for the fiscal year.

Weighted average shares will be approximately 356 million.

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

This concludes my comments and I will turn the call over to Dick Bond.

Thanks, Dennis.

Good morning and thanks for joining us this morning.

Our first quarter was extremely challenging on many fronts.

Access to international markets in beef, availability of market-ready cattle in North America and high live hog prices impacted our red meat results.

Our chicken segment performed well despite higher energy costs and the financial hedge losses associated with fixed-price contract sales.

I will talk briefly about each segment and customer channel.

Our chicken segment sales increased by $166 million or 8.7 percent over the first quarter of last year, while reported operating earnings decreased by $16 million.

Hedge results from fixed-price sales contracts for the quarter were negative to earnings by $23 million.

After adjusting this quarter for the hedging impact, our operating return on sales improves from 5 percent to 6.1 percent.

Volume was up 2.3 percent, sales price increased 6.2 percent, and improved operating efficiencies contributed to a strong first quarter in our chicken segment.

We would expect operating margins to be in the 6 to 7 percent range in Q2 and continue to improve in the second half of the year due to better than previously expected demand, both domestically and internationally, along with lower grain costs.

Sales dollars in the beef segment were down 340 million, or 10.8 percent, while pounds processed were up 1 percent and live cattle prices decreased by approximately 10 percent.

Operating income, adjusting for the vitamin settlement of 9.4 million in this quarter and the -60.9 million for BSE in Q1 of last year, our operating results were $58 million less than last year's first-quarter results.

On a positive note, as of today, it appears USDA is still on track to open the Canadian border for live cattle on March 7, as planned, which we wholeheartedly support.

The resumption of trade with our Asian trading partners, as to timing and potential quantities, is still up in the air.

Margins for second quarter will continue to be a severe problem based on current market conditions.

However, assuming the Canadian border opens for live cattle as scheduled and the supply of domestic cattle increase as expected, our margins should improve in the second half of the year.

Within the pork segment, sales dollars increased 109 million, or 14.8 percent versus last year, and operating income declined 34 million or 70 percent.

Live hog prices increased about 50 percent over last year and we were unable to pass along all of these increases to our customers.

Our volume was down in pounds by about 5.5 percent while the industry was only down about 2 percent, indicating a slight drop in market share as we tried unsuccessfully to maintain our normal margins.

Currently, margins have improved and looking forward, we anticipate margins to be in a more normalized historic range and volumes to be similar to last year.

Within prepared foods, our sales dollars were up 12 million or 1.7 percent on a year-over-year basis, and our volume declined 31 million pounds or 5.5 percent.

About half of this decline was due to exiting the frozen ground-beef patty business since first quarter of last year.

Adjusted operating income declined 10.8 percent, factoring the plant closings out of both periods.

We continue to have difficulty passing on the very high beef and especially pork raw material costs in our deli and processed meats portions of our prepared food businesses.

The rollout of the new products, primarily in the Tyson-branded initiatives, have performed as expected.

Higher than normal sales and marketing expenses did impact operating earnings for the quarter.

Margins for Q2 will probably not change appreciably, but we do expect improvements in the second half of the year.

Within our consumer products channel, our Tyson-branded frozen, ready-to-eat and ready-to-cook categories within poultry achieved a 25-plus percent growth in sales dollars and a 12.5 percent volume increase on a year-over-year basis.

Our "Powered By Tyson" campaign has helped us to continue to gain distribution, as we are on plan for the expansion of the Tyson-branded initiatives in refrigerated dinner meats, ingredient meats and bacon.

For example, in Tyson fully-cooked bacon, we made significant gains as of the end of the calendar year according to Nielsen data.

In the Louisville market, we are now enjoying a 33 share and are the number one brand.

Within our fresh case-ready beef and pork business, we achieved sales of $344 million, up 6.5 percent and a 3.6 increase in volume versus a year ago.

In the very near future, we will announce the construction of our third large case-ready beef and pork facility.

Within the foodservice channel, the QSR and casual dining segments demonstrated a 1 to 2 percent positive traffic growth while the mid-scale declined slightly.

We have completed the majority of our fixed-priced sales agreements for this year and expect our operating results to improve and volumes to be up as well.

In summary, it was a very difficult quarter with many challenges, and we continue to believe the second half of the year still looks very promising.

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

Thank you, Dick, and good morning.

Talking about international, our export sales were 437 million for the first quarter.

This is down 33 percent versus the first quarter of the prior year.

The decline in sales is directly attributable to lower export volumes resulting from the continuing bans of U.S. beef due to the BSE occurrence in December of 2003.

Let's talk about our chicken.

Our export chicken sales volume was up 8 percent from the same quarter last year.

This was driven by a 15 percent increase in export leg quarter volume.

We continue to experience good movement of chicken into export channels, including Russia and the Middle East.

Our frozen inventory targeted for exports is in very good shape as we go into our second quarter.

Now that the Chinese market has been reopened, we expect sales to resume as import licenses begin to flow during the second quarter.

Let's talk a bit about beef.

Our boxed beef exports continue to be impacted by the market access restrictions that began in late December of '03.

Our sales volumes declined by 76 percent versus the same quarter last year, and our sales revenues were down 83 percent.

As a result of a loss of export markets, we lost the ability to sell beef products in 65 countries.

To date, we've gained access to -- we gained access to 26 of those countries, although our primary markets, specifically Japan and Korea, remain closed.

In fiscal year 2003, our beef exports to those 2 countries represented 58 percent of our export volume and 73 percent of our export revenues.

Our sales to Mexico through our Lakeside Canada beef operations remains strong.

In talking about pork, our export sales of boxed pork continued to be strong as revenues were up 38 percent versus the same quarter last year.

This increase was driven by a solid volume and price realizations on hams to Mexico, as well as picnics to Japan.

We believe both pricing and volume will remain firm through the balance of the year.

In addition, the Japanese gate price safeguard on U.S. pork exports will be lifted on or around the first of April.

This will have the effect of making our pork products an even better value to the Japanese marketplace.

The demand for pork variety meats to Mexico and Asia continues to be strong.

Let's talk a bit about our foreign operations.

Tyson de Mexico -- in Tyson de Mexico, first-quarter revenues increased more than 16 percent over the same period a year ago.

This was due to a combination of improved product mix and stronger underlying commodity markets.

Overall volumes grew by 5 percent; this was facilitated by an increase in live bird production and overall improved its sales demand and inventory reduction.

We experienced a significant improvement in operating income for the quarter.

The Mexican market remains solid and we are on track with our plans to increase the production of live birds and to expand our further processing capabilities.

We are expecting improved financial performance through the balance of the fiscal year.

In Mexico, we continue to evaluate opportunities that would allow us to leverage the skills of our management team, as well as our infrastructure, to both expand our presence in Mexico's domestic chicken market and to potentially expand into other meat protein-based businesses.

Let's talk a bit about China.

Tyson continues to show strong growth in domestic sales with volumes at near plant capacity.

The ongoing plant expansion to meet the increased demand for value added products is expected to come online in May and it is back on schedule.

We are pleased with the consumer acceptance, the trade and consumer acceptance, of our 10-item Tyson brand retail product launch for the Shanghai marketplace.

This product line was developed in China and tailored to meet the Chinese customers' tastes and item preferences.

Tyson continues to evaluate offices in China to build our business across all distribution channels.

In addition to the activities outlined above, we continue to evaluate opportunities in South America that would allow us to service our global account base, participate in the developing domestic markets there, and allow us to further diversify our export base.

In closing, let me speak a bit about strategic planning.

We've talked in the past -- our strategy is tied to our company vision and company goals, both of which are out to drive shareholder value.

In short, our fundamental strategy is to increase the proportion of value-added products in our portfolio.

As you are aware, we have a goal of 40 percent for 2005 and a goal of 50 percent by 2009.

How will we accomplish this?

Whether the business is foodservice, retail or international, all of our strategies are constructed from 3 fundamental building blocks -- first, to leverage our strong customer base and distribution systems to achieve superior market access; second, through innovation to enhance current products, expand our categories, create new categories and drive our business into the future; and finally, by leveraging our brand and market leadership to drive consumer demand.

It is these building blocks that uniquely position Tyson to achieve our long-range goals.

All the while, our ongoing cost-reduction initiatives also improve our earning power across all of our businesses.

To further support our growth plans, we recently completed an extensive review of where and how these building blocks can be leveraged externally.

This external growth process will allow us to make targeted acquisitions to further strengthen our portfolio.

Thanks, and now I will turn the call over to our Chairman, John Tyson.

Thanks, Greg and Dick and Dennis for your comments.

Thanks to all the Tyson team members that help manage this company in this extremely difficult first quarter.

We knew, when we started this year, we had some residual issues left over from last year.

Those issues that we could control, we made the decisions to correct them.

Those issues outside our control, I can tell you our folks manage their business as well as they could.

We need the border to open in Canada for supply issues.

We need export markets to open to increase the value of our beef export products to Japan.

If we can get those issues resolved and keep executing on the fundamentals that I spoke to earlier, we believe we will have a much better second half.

With that, we will turn it over to questions and answers.

If the operator is still there, we will take questions at this time.

(OPERATOR INSTRUCTIONS).

Eric Katzman.

Deutsche Bank.

I guess the first question that comes to mind, John, is how -- on January 6, when you updated us about fiscal second-quarter outlook, could you not have known that the situation was as weak as it is and not given investors some kind of clue as to what was going on?

You read this kind of legal statement that all the companies read about updating investors as to what you know.

I mean, how could you not know that things were this bad and not give us some kind of clue at that point?

Eric, I think, as we've gotten information and each and every time we've gotten information, the philosophy of how I choose to run this company is to give you that information at that time.

We knew we had an extremely difficult quarter going.

I can understand your use of the word 'weak' as applied to the first quarter.

We're still very optimistic about what happens in the second half of our business, and that's why we made the adjustments as we had further insight, and that's why we shared the information with you today.

Just then looking at the fundamentals, I think, in the last conference call, you talked about how the second half should be better and that did not assume an improvement out of Canada or an opening of the export market.

But now, it seems like you are including improvement in beef coming out of Canada as a reason the second half is going to get better.

I mean obviously things change, but I'm kind of wondering if you could comment on the difference between the initial forecast and now.

Well, I think, if you go back to the comments that I had, what I said was we need the border to open for supply issues and we need export markets to increase the value.

I said, if we get those issues resolved and execute on the (indiscernible), we will have a better second half.

We're planning on running our business as if those issues do not get resolved for the second half but if they do get resolved, we have a chance at a much better second half.

Dick might have or Greg might have some further insight.

The only thing I would add is I think, if you look at all the various segments, I think we have commented on chicken, on pork, and on prepared foods, for sure, all -- with all likelihood being better in that second half.

Beef certainly does remain the biggest issue of uncertainty, and I feel very strongly that it will be better if we can get more supply associated with the Canadian border opening.

That is something that will enhance operating earnings in March, assuming that it does open on March 7 and for the second half of the year.

Okay.

Then just as I guess the last kind of follow-up, you know, the one thing that has gone very well is your debt to capital kind of coming down with the cash flow.

You know if you are that confident about the business and some of these factors that are kind of out of your control coming your way, why wouldn't you use the cash flow to buy back some stock, given that -- you know, again the debt to capital ratio is in relatively decent shape at this point?

I think as we spoke to our CapEx for year is going to be about 600 to $650 million, and we've chosen to take some of the excess cash, accelerate our automation programs in our plants.

We are going to, in the near future, probably announce our third case-ready plant in Sherman, Texas.

We are in the process of updating our R&D facilities here at the main campus so we can make sure we are getting that next generation of products -- because, as we've stated to you, one of our goals is to move our value-added mix to 50 percent here in the next 3 or 4 years.

So we've chosen to take some of the excess cash and to spend above our depreciation and amortization rates to put us in a position to improve our margins to get more money to the bottom line, and that's our direction at this time.

It's not to say the consideration won't be there, but alternative uses of cash are on those items that can help us grow and enhance the bottom line of our business.

Okay.

Good luck.

Christine McCracken.

Good morning.

Yes, just a few key assumptions that look like you are making regarding your guidance, and I'd like a little more color around, first, on the chicken side of the business, a lot has been made of the potential for expansion here later in the year.

It doesn't look like we're there yet, but it looks like, at least in your guidance, that you are assuming there isn't any significant I guess more than 4 to 5 percent growth in the chicken industry.

Can you comment on your expectations there and how that plays into your guidance for the rest of the year?

Christine, this is Dick.

We do anticipate some expansion but we believe it's going to be manageable and it's going to be roughly in that 3 percent range.

Not the 4 to 5.

What is it in this cycle that makes you I guess more optimistic relative to what we've seen in the past in this kind of grain environment?

Christine, this is Greg.

Part of it is knowledge of the amount of pullets in the flow, and then also I think the fact that, as far as disappearance for the product, we've got good, solid demand, both domestically and internationally, and we believe the overall meet supply is in relatively good balance, so there is room for it.

I guess my question was really referring to what is it that is keeping the industry and Tyson specifically I guess a little bit more disciplined this cycle, relative to historical kind of periods of low grain prices?

Christine, this is Dick.

I would say that there have been, as you have well noted, some changes in the industry structure.

There has been more consolidation; there has been more discipline; there has been the view of some of the large agricultural banks, in terms of their willingness to land, so I mean I think all of those factors combined have a tendency sometimes to lead towards a little bit more of a disciplined approach.

Excellent.

Then just one of the other assumptions that looks like you're making with regard to second half is on the availability of hogs to possibly improve.

You know, I guess looking at where we are today in terms of production and capacity, it doesn't look like there's a lot of room for expansion.

Can you make some comments as to your outlook there?

Christine, I didn't indicate we were going to more supply.

I said basically that my sense is that the numbers will be very similar to a year ago in terms of quantity of hogs available.

I believe that to be the case.

Typically, where we have been and given the live hog margins, oftentimes you will see an expansion in the herd, given where the margin structure has been, and we really don't see a huge change there.

I do view that, for the balance of this fiscal year, that the numbers are going to be very similar to a year ago.

In this environment of very strong demand that you refer to in your press release, on the same quantity or roughly the same number of hogs, wouldn't you expect slightly weaker results in the hog processing business, going forward?

When you say that, Christine, do you mean versus the first quarter, or versus the same time last year?

The same time last year.

No, not necessarily.

I think we will see hog prices, at least initially, that might be higher than a year ago, but overall, I think we should expect to see margins and the structure of margins be more of a historic nature and similar to last year.

Okay.

Then just finally, I guess with regard to your outlook on beef markets, obviously you know there has been a lot of pressure to reopen Canada; it looks like that might actually come through.

But it seems like Japan is still stalling here, and it seems like there are a number of issues that they are having some difficulty overcoming, including traceability.

I'm wondering, is this a realistic assumption that we get access to this market, or is it going to be delayed for some extended period of time?

What's your current view on that?

I would view that, Christine, as that we eventually will have access back to the Asian markets.

The quantity and the timing of that I think will probably not help our fiscal '05 very much.

There are a lot of things that have to happen, even once there is a true agreement put in place in Japan, so I don't -- we are not factoring a whole lot of help from the international markets in the balance of this fiscal year or -- (multiple speakers).

(Multiple Speakers) -- exports, but are anticipating Canada opening.

With regard to Canada, are you expecting that to immediately benefit your operations or will it take some time to kind of get access to those cheaper cattle? (multiple speakers).

I think the opening of the border will help immediately, in terms of supply.

There are cattle available in Canada that I believe will move south.

Plus, we will see feeder cattle probably move south as well, so yes, I think it has both a short-term and then a medium term effect that are both positive for us.

We're finally I think -- you all read the same numbers.

We are finally starting to see retention of heifers and the U.S. herd starting to expand and rebuild, too.

So that should help you into '06?

Yes.

Leonard Teitelbaum.

Merrill Lynch.

Good morning.

You know we're going to have a tough call when the best thing you can highlight is your debt to capital ratio reduced from 44 to 41.

But for that, you should be commended.

I think, however, if I look at this, I'm trying to figure out when this cycle changes, from your perspective.

Let me start first with the poultry side.

Do you see this -- the margins in poultry -- I think you said should the operating margin 6 to 7 percent in Q1 and then getting stronger throughout the year -- is that correct?

Did I hear that right?

Yes, you heard that exactly right, Lenny.

That would imply to me that you think the poultry cycle is going to bottom in the first quarter in terms of operations.

Is that the conclusion we can draw from that?

I think I would say I don't think it's the bottom of the poultry cycle, but the cost structure dynamics are in better shape.

You've got grain, March corn sitting under $2 and you've got soybean meal sitting down around 1.55, so we would apply a different word (indiscernible) cost structure, your fundamentals underneath the support of cost structure is in the good shape.

And the demand for poultry is steady as the consumer adjusts some of the spending of their dollars.

You know, if they've got to spend more money on gasoline or they've got to spend more money on other items out there, chicken has a tendency to get some of that benefit as they reallocate the remaining dollars in their wallet towards best-value protein.

Now, when I take a look at -- from the remarks that you made, I think it was to Christine's question, but basically we think the pork cycle has got a lot longer to go, and you are looking for the beef cycle -- I think, John, you had said that you're planning your business as though the border doesn't open?

I'm just saying, if it does not open, do you feel you can make the bottom end of your range?

Is that -- (multiple speakers)?

We made our decisions based on the assumption that Canada opens on March the 7.

We made our assumptions that Japan could open in the fourth quarter but the ability to have any value out of Japan opening the fourth quarter will be minimal; it will be more psychological than maybe it will be real.

Therefore, the numbers that we put in the range today -- we're comfortable based on the outlook that we have today and the totality of our overall business.

I think we have taken the position that it's the depth and the breadth of this company and the uniquenesses of this company that allows us to generate that cash to pay down the debt that you alluded to at the start of your questions.

What trying to get here, John, is I'm trying to reconcile the statement you made as though you are planning basically planning for the worst and hoping for better.

I just wondered, if the border does -- obviously there's -- we all have a -- I think coalesce around the opinion that the border is going to open to Canada but depending on who you talk to, maybe it gets deferred, maybe it doesn't.

Obviously, I'm just trying to figure out whether or not if the border let's say -- the border opening gets deferred, are we going to have another adjustment to earnings?

That's -- and I think you've answered that but I just wanted to make sure that was the import to my question.

Let's make sure we understand how I've answered that question so there is no misunderstanding in the marketplace.

We've taken all factors into our earnings guidance.

All of those factors take into place a range of options.

Those range of options can be anywhere from both Canada and Japan opening in the next 30 to 60 days to both Canada and Japan not opening well into the next business year.

That's why you have a range, the current range that we left with you in the marketplace today.

So we have provided guidance to the marketplace in a range based on both scenarios -- (technical difficulty) -- Canada and Japan opening in 30 days, and Canada and Japan not opening into the next business year primarily.

I appreciate that.

Now, if we get the pork cycle, from your standpoint not turning at all, are we in the market to see lower prices in the pork unit throughout the year -- Lower profits, excuse me -- in the pork division throughout the year than we're seeing now, or do you think you can hold them at about this level?

Lenny, I believe if you go back and kind of break apart first quarter a little bit, we had really 4 or 5 weeks in that quarter that were not good weeks from an operating-results standpoint.

As I said, we kind of have got our pork results back to where they normally would be this time of the year as we end January.

So I don't see anything on the horizon that would tell me that we should not be able to continue to again have normalized earnings.

I don't think we are saying we're going to have above-normalized earnings, but we believe we can hold normalized earnings in our pork group for the balance of the fiscal year.

Okay.

One final question, please.

Back to poultry for a moment.

Obviously, the margins that you've given, the 6, 7 percent are I find to be fairly good.

However, I don't know what your selling price assumptions are.

Are you looking at poultry to hold in this level or are you looking for poultry, at least in the first half of the year, to be down in terms of selling prices?

Your selling prices?

Are you comparing that to second quarter a year ago or from where we are now?

What do you want to use as a -- (multiple speakers)?

Let's take it from now, going forward?

Again, if you look at where our grain outputs are and what we have done on the foodservice side, in terms of our fixed-price contracts which we have pretty well completed them now, the inputs are going to be lower.

We've already probably experienced the bottom end of the breast market; we've seen it go back up a little bit, so from where we sit right now and what we've come through in the fall in terms of the lower breast markets, we don't look for any deterioration in our composite selling prices because we've already probably been through, at least for the time being, the worst part of the breast market of the year.

Thank you very much.

John McMillin.

Prudential.

Hello, everybody.

Just to follow onto Eric Katzman, perhaps in a little nicer way but just in terms of what -- to give 2 lower earnings guidance in a month, I know it's somewhat the nature of your business, but in terms of what changed from early January to now, specifically?

What changed, in our opinion, was the understanding of what the supply side was going to be into the beef industry.

You saw us have to make the adjustments -- (technical difficulty) -- suspend operations in 5 plants.

Those plants are now are still suspended and we have to go through that decision-making process here in the next two or three weeks to understand what that timeframe looks like.

We do have better visibility on understanding our pork business.

I think if you think -- if we remember what the adjustments -- we adjusted only the top side and we didn't have a good understanding of whether at that time we needed to adjust the bottom side.

Once we got better clarity and we got through the holiday period and had our quarter numbers in hand and looked into the information and the knowledgebase we had, we thought it was appropriate to adjust both our top end and our bottom end range at this conference call.

Okay.

Now, when you gave initial earnings guidance, you said that 60 percent of earnings was expected to be in the second half, which you know is an implied range of 69 cents to 87, based on your early guidance or roughly you were assuming somewhere 35 to 40 cent quarters in the third and fourth quarter, give or take.

Now, I believe that initial assumption was based on some trade issues settling down, or hopefully Japan was opening, so you can correct me if I'm wrong, but just in terms of how your second half assumptions have changed, if they have changed at all.

Do you follow me?

Yes, I follow you and it's a fair question and an anticipated question by the management team.

Based on what we believe is we still believe we have a chance to have a majority of our earnings in the second half for our business year.

We understand that Canadian issue and we do believe the border will open still in March.

We still believe Japan will be more in the fourth quarter, but we see some positives in our prepared food business; we see tremendous positives in our poultry business.

Our historical run rates on the spread in our pork business will get back to those historical run rates, and rightly or wrongly, the beef is still a little bit of a wild-card.

We closed 5 plants to try to get supply and demand in balance and there seems to be some progress there, so even though we haven't corrected all of the problems in the beef, we have improved our margins there in the right direction.

Dick, you might have some color on the second half.

John, the only thing I would maybe add to that is I think, as we look at our poultry business first, as I think I tried to infer was if you go back to our original look at the year, we believe now our poultry business and our chicken business is going to be better than what we anticipated when we gave the initial guidance.

I guess to add one other factor, if you do the math, we probably do believe that that 60 percent number is probably going to be higher than 60 percent based on the fact that the poultry business is going to be stronger during the second half of the fiscal year as well.

We're going to need good barbecue weather;

I hope we get it, too!

We will have it.

Just a question for Greg, if I can?

If I heard correctly, I think you said that, in the international chicken export side, that sales were up 8 percent and volumes were up 15 percent.

I guess you'd get some currency benefit, but that implies lower prices.

Could you just give me some clarification on that?

Well, our leg quarter prices were, let's call it relatively the same.

One thing we didn't have, because of the Chinese market, is we didn't have some of the pall (ph) volume, which is a premium-priced item on average, to leg quarters, so that took some dollars away from us.

Okay, so that's like a 7 -- so you had like 7 negative pricing on a 0 currency, so I guess these palls (ph) sell for a lot?

Yes, I don't know if this is a detail, but it may be an important one.

They now have to have USDA-inspected palls (ph).

If you have USDA inspected pall volume, that commands a higher price on average than palls that were not USDA-inspected.

Well, you learn something every day!

Thanks a lot.

David Nelson.

CSFB, good morning.

Your beef plant shutdowns were made on January 6, and they start rolling off here I would believe or presume pretty quickly.

Are you going to still reopen those, given these conditions?

Do you consider it a success even though Swift and cargo certainly didn't follow you?

Where do you go with that, given I think some people on the call kind of presuming Canada reopens but the National Cattleman's Beef Association last Thursday said they would oppose that.

Where do we go with these plant shutdowns in the near and medium term?

We basically said 3 to 5 weeks.

This happens to be the beginning of week 4.

We will make some decisions later on this week as to what we will do.

Quite frankly, I would tell you that all options are still being considered.

Market conditions overall haven't improved as much as maybe I would've hoped, maybe not expected but hoped, and we're just going to have to come to some tough decisions later on this week in terms of what we're going to do or not do.

Quite frankly, it might be on a plant-by-plant basis.

We've got to look at it regionally and see what impact we believe the regional aspects of this have.

Okay.

On chicken, you talk about 6 percent margins this quarter and probably even 6 percent last year if you exclude some one-time issues, moving toward 7 percent in the balance of year.

Would you consider the 6 to 7 percent range kind of the normalized range for chicken markets?

I would say, based on our model which is our model has been to do more value-added and we don't get all the commodity highs like some of our competitors do, we have done a better job of placing our product and making sure we're being paid for our mix of product.

You know, we're one of the few people that still remain in the small bird industry.

We've priced those appropriately, so we get a fair return on those.

We've priced our other product appropriately into the marketplace and are, on an ongoing basis in the market, buying raw materials supply to support our supply needs into the marketplace.

So, based on our model, 6, 7, 7.5 percent we are comfortable with but it would be factual to say that if commodity prices go real high, we won't get all the advantages of commodity prices.

Just we run a little different model than some of our competitors.

The one bird short strategy certainly has worked.

On the pork rebound, I can understand a normalization but we do have a new slaughter facility coming on in St. Joe, Missouri.

So how much do you -- is or if it is at all factored into your presumption that pork margins come back in the latter part of the year?

Dave, my understanding is I don't believe that plant is scheduled to start in this fiscal year.

Certainly, when you add slaughter capacity to an industry that is in -- has been in relatively good balance, I mean, that's not a positive effect for margins, generally, but have not factored that negatively into this year's activity at all.

Okay.

Then the tax rate going up, because international is down, you had talked about chicken exports improving with Asia in particular, so am I to presume that that's mainly beef to Japan that is the cause of the tax rate?

That is correct, Dave.

Brad Eichler.

Stephens, Inc.

Most of my questions have been asked but I have a couple.

On the guidance, how much branding are you assuming over and above the "Powered By Tyson" branding campaign for the balance of the year?

You're talking about spin rate or impact?

The impact, what do you expect to flow through the P&L for the balance of the year?

I think you'd given 75 million of incremental spend as guidance going into this quarter.

It is a spend question, then!

Actually, Brad, just to remind everybody what we said originally, on an annual basis historically, we've spent $100 million on our marketing campaign and when we went to the "Powered By Tyson", we said in '05 we're going to spend $120 million, so in reality, only up 20.

I would answer that on the impact side saying we are getting the additional distribution, we're getting additional consumer take-away, and we're basically on plan as to what we expected from our branded initiatives.

Okay.

The value-added product -- where did that -- where were you at the end of the quarter as a percent of total?

Brad, this is Louis again.

At the end of the quarter, we ended up at 39 percent, and we ended the end of last year at 38, so I would say, on that percentage, it's probably better to look at that at the end of the fiscal year because, as you know, it can move around some between quarters and it can look artificially high if commodity sales go down, so it's probably better to look at that as an end of fiscal year timeframe.

But we are comfortable we've got a good chance to make our target, which was 40 percent for the year.

Dick, on the prepared food side, you were talking about difficulty in passing through higher commodity costs.

Can you quantify how difficult it is, like what percent maybe you are unable to pass through?

I can tell you that the effect in Q1 was in that 8 to $10 million range.

But I think it's not only the cost impact (indiscernible) the ability to get prices to the right point out -- limiting or a demand and we've seen some of our competitors who have tried to pass on their costs who ran into prices getting too high and demand starting to be diminished.

I think you all know some of those visible competitors out there, so we all face kind of the same balancing act, high-wire act between passing on costs without causing demand to go down because you are pushing the price too high on some of those products.

Now, the nice thing about it is we are in all proteins in all segments and so people reallocate their dollars.

We have a product available as they reallocate their dollars into different proteins segments.

Okay.

The final question is, if grain prices stay where they are, will there be any impact on the chicken side from hedging in the second quarter?

There's a little residual left in the second quarter but after that -- and they are all tied to fixed-price hedge contracts, and all of our hedging impact now were based on decisions when we locked in a price (indiscernible) prices that we put in place 6, 9 months ago.

We chose to accept that margin and put the cost component underneath of that, but it starts to diminish pretty significantly as we move second, third quarter.

Kenneth Zaslow.

Harris Nesbitt.

Good morning, everybody.

Believe it or not, I still have some questions!

Let me ask you, on the beef packer side, what is the catalyst to change the negative beef packer margins to become positive if Japan is not opening up?

It seems like -- and correct me if I'm wrong -- in the beef demand in the U.S. might be slowing a little bit.

I would answer that by saying it is more supply-based.

Again, we are expecting to see more cattle domestically available as we go through the balance of this calendar year.

Again, if Canada opens and we see a flow of both market-ready and feeder cattle, that will assist us in gaining our margins back again as we go through the year.

It is more supply-based and then again, typically in the spring and summer with the grilling season, we do get some appreciation in some portions of the animal which we don't generally have during the winter, the late fall and the winter months.

Just to build on that a little bit, what do you consider the relative importance of Canada opening up versus Japan opening up?

In the short term, Canada, from the supply picture in the short term, is probably more critical .

In the long term, we need to get our markets internationally re-established because there are some items within the overall process that are very critical in terms of getting more dollars.

As an example, the tongue -- the skin tongue that we might do for export has a tendency to add quite a few dollars to the overall value.

So things like that that are somewhat unique for export will have a longer-term impact as well if and when we get those markets re-established.

Just to make clarifications, your last call, you thought the Japanese border was going to open up in the June timeframe.

Now it sounds like you are saying December in terms of having beef actually move to Japan.

Is that a fair way of characterizing your new thoughts?

I think it's fair to say that we might see some product begin to move towards the very end of our fiscal year, but it probably is not going to be in significant or substantial volumes.

It will have a huge effect on this fiscal year.

I think one of the things that we need to remind ourselves -- other countries have done a good job of stepping in there and filling the pipeline into Japan, and so even if the border does open to Japan, we will have to spend some time and effort getting some of that supply chain back.

I think that's something our politicians and our USDA folks need to acknowledge and need to help the industry.

Not only will it help the packers, it will help the cattle guys so we can have more demand for the overall value of the cutout values.

In terms of hedging going forward, what are your new thoughts on hedging?

I'm assuming, on the chicken side that is, on grain costs, you did say that by the second quarter most will roll off.

Is there any thought on starting to try and lock in lower corn and soybean meal costs going forward, or where are you at with that?

Well, we will look at it on a case-by-case basis, but when we do have the ability to sell a product forward into a fixed-price contract, we will probably match a corresponding acquisition of cost into that to preserve that margin based on the price we sell product at that time, and we will discipline ourselves that way.

As for the rest of the market, we will just have to look at it as we move on into the summer.

Just the last question, just for -- on a technicality -- the guidance of $1.05 to 1.30, if I exclude the 3 cents, it's $1.02 to $1.27.

Is that fair?

Taking the 3 cents --.

Just taking it out.

Okay, I remember.

I'm assuming that $1.05 to -- (Multiple Speakers).

(multiple speakers).

$1.05 to $1.30 is clearly a GAAP number.

So I just take out the 3 cents and I get a $1.02 to $1.27 on an ongoing basis?

6.

Is the operator still there?

Yes.

Your final question comes from Timothy Ramey.

Good morning.

Can you hear me on this line?

Dick, I was wondering.

You mentioned that the case-ready volume was up I think about 3 percent.

Was there any incremental stores that were opened in that number or was that sort of like-store for like-store performance?

Do you know?

There was a few more stores that were incorporated in that, and I can't tell you exactly how many.

There were a few more stores located in that volume.

Have you done an analysis of what the lower grain costs might do to your rest of the year performance?

I know most of your forward hedges on grain have rolled off, those that relate to fixed-price contracts.

Not all of them have rolled off; some of them will be in the second quarter, and there might be a few residuals in the third quarter, but not many.

Those estimates are what we think future grain prices are -- are in our thought process for the range of guidance that we've given today.

Okay, but you don't have a specific kind of number as to what grain prices might do to operating income or (inaudible).

Well, they are in our guidance.

We've taken our estimates based on the knowledge that we've gathered from both inside and outside experts, and we factor those into our guidance range that's in our press release today.

Right.

On the case-ready plant that you said you're about to announce in Sherman, Texas, how long will it take that to become operational?

What does that tell us about what you see in terms of incremental demand for this product?

Is this a 6 to 9-month buildout?

Is it a 12 to 24-month buildout?

It's basically a 12-month buildout and should be operational about this time a year from now.

Okay, thank you.

That does conclude our question-and-answer session for today's conference.

Most of all, thank you all for your questions.

We appreciate them.

We knew it would be a difficult call.

We've had an extremely difficult quarter.

Our folks have made those adjustments within what they can control.

Those things outside our control, I think we've done a very good job of managing into them.

We told to that, when these companies came together 3 years ago, we would manage our cash flows and we would manage our debt.

We continue to make tremendous progress and we're down to 41 percent debt to capital, and we're going to spend a little more money in our plants and our facilities to make sure we have the right products in the right plants ready to run and compete in our marketplace out there.

I'm very thankful for the team members that help me manage this company and we look forward to seeing you on our next conference call.

Everybody have a good day!