泰森食品 (TSN) 2005 Q2 法說會逐字稿

Good morning and welcome to the second quarter 2005 earnings conference call.

At this time all parties will be on on a listen-only mode until today's question and answer session.

Also the conference is being recorded, so if anyone that has objections to please disconnect at this time.

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

Sir, you may begin.

Thank you.

Good morning, everyone, and thank you for joining us for the Tyson's second 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 talk about the financials let me just remind everybody that some of the things we talk about today are going to include forward-looking statements and that means those statements are going to be based on the business as we know it today.

And it also means that those 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, with that, I'll turn it over to John Tyson.

Good morning everybody.

Once again, welcome to our quarterly call and we thank you for your time.

I want to welcome our shareholders, our team members and our friends out there that are listening to the call today.

We're excited to give you our up date about the financial results and move on and talk about what we have challenged ourselves here in the second quarter.

We did face some short-term challenges with respect to borders, but I can tell you that we're very comfortable with our strategy, we know our strategy is sound and we continue to make progress on the three elements of our strategy.

I think, as most of you all know, the first element of our strategy has simply been to increase the mix of our value-added products in our portfolio.

In the first half of the year we were very active in R&D with over 400 type projects that reflected increased product development dedicated to beef and pork.

We introduced to the market 203 new value-added products.

Of those 203, 120 of those were in the beef and the pork area and 83 were in chicken.

The second element of our strategy is to increase our margins by doing better at running our operations.

We told you at the start of the year that we were going to spend about $300 million in cost savings that will generate annual savings of $92 million and Dick will expand on that later.

The third and final element of our strategy has been to expand our presence in our international markets.

At this time we are actively looking at opportunities in Mexico, South America and China and Greg will expand on that in his presentation.

If you think about the three elements of our business, which is to move products up the value-added chain, we made nice progress on that.

The second element of our strategy, which is to manage our operational costs and we're allocating our capital in a way that allows for analyzed savings that do come to the bottom-line.

And three, how do we expand international business?

We have been executing on those strategies in the second quarter and will continue to execute on those strategies as we move into the third and fourth quarter.

Dennis, as always, will cover our earnings overview, and then Dick and Greg will cover some highlights from their areas of responsibility.

So at this time, Dennis.

Thanks John.

Good morning, everyone.

In our press release this morning we reported GAAP earnings of $0.21 per share for the second quarter on a diluted share basis.

Please note second quarter 2005 earnings include 2 million of costs related to poultry and prepared foods plant closings, which are included in other charges and affected earnings per share by less than $0.01.

Please note second quarter 2004 earnings include 14 million of costs related to poultry and prepared foods plant closings included in other charges in the income statement.

The net effect of these items in seconds quarter 2004 decreased GAAP diluted earnings per share by $0.02 for the quarter.

Some other points to note in our financial statements.

Cash provided by operations came in a little lower for the quarter at 35 million, resulting primarily from the normal seasonal build and working capital.

Nevertheless, we continue our strong improvement in days accounts receivable, although this is partially due to a lighter mix of international sales.

Capital spending for the quarter was $122 million.

Debt at the end of the quarter was just over 3.2 billion, up $132 million from the prior quarter resulting from the normal season build in working capital.

As a result, debt to capital ratio is 42.1%, up from 41.4% last quarter, but down from 45% one year ago.

Due to our lower debt levels compared to the same period one year ago, interest expense was down $14.7 million from last year adding approximately $0.03 to earnings per share.

Additionally, we remain confident we will achieve our debt to capital ratio goal of 40% by the end of our fiscal year.

Our SG&A expense was flat compared to the first quarter, but up $29 million over last year, primarily due to the timing of the planned spend on our new Powered by Tyson marketing campaign as well as the receipt of $9 million in the second quarter of 2004 related to a legal settlement from one of the company's insurance providers.

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 $1.50 to $1.20 per share.

Revenues for the year are projected to be between $26 and $27 billion, down slightly from our previous financial outlook primarily as a result of lower volumes than originally expected from our beef segment.

Interest, foreign exchange and other charges are expected to be in the range of $240 to $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.

For capital spending our range continues to be $600 to $650 million.

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

Weighted average shares will be approximately 356 million.

And just as a reminder, let me restate our corporate policy regarding earnings guidance.

If the company determines during the course of a quarter that our previously issued guidance should be modified or updated, we will make a public disclosure up dating our guidance for the benefit of all shareholders.

Also, 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.

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

Thanks, Dennis.

Good morning and thanks for taking the time to join us today.

Our second quarter results, led by continued improvements in our chicken segment, improved substantially from first quarter, but adverse beef segment access and supply conditions were still present during second quarter.

I believe we executed very well given the circumstances and I will talk briefly about each segment and customer channel.

Our chicken segment sales increased by six-tenths of 1% or $13 million on a year-over-year basis.

Our operating earnings declined by $46 million or 24.3%.

This reduction in operating earnings was driven by a $10 million loss, primarily from our hedging of our fixed price agreements in Q2 of this year versus a $90 million gain last year from our mark-to-market long positions on grains.

The fundamentals of our chicken business remain very strong.

Demand, both domestically and internationally, continues to be very good.

Supply continues to grow in a range of 3 to 4%, so we will not likely see the run up in breast meat prices we experienced last year.

But lower grain costs, greater operating efficiencies and continued strong demand should keep breast meat prices in an acceptable range.

We expect operating margins to be in the 7% to 8% range for both Q3 and Q4.

In the beef segment, sales dollars are up 2.9% or $79 million, while pounds sold were down 1.8% and live cattle prices were up 11% compared to second quarter of last year.

The operating loss increased by approximately $17 million on a year-over-year basis.

The January, February periods were extremely difficult.

March results improved and produced positive operating earnings.

During the quarter the Canadian border for live cattle was expected to open on March 7th, but did not.

The USDA is actively pursuing an appeal process in the 9th Circuit Court of Appeals, but there will be additional judicial proceedings in Montana later this summer.

We remain confident the USDA will ultimately prevail and the flow of live cattle will be restored.

Exports to Japan and South Korea will probably not start until November or December of this year.

We do expect the beef segment to be profitable during the third and fourth quarters due to increased seasonal demand and more domestic cattle available for processing.

Sales dollars in the pork segment increased $96 million or 13.1% versus last year and operating income declined $15 million or 44%.

The months of January and February yielded more historic operating margins while March saw closer to breakeven results.

In March demand soften and we were unable to pass along the product prices needed to make a reasonable return.

Going forward for the balance of the fiscal year, operating margins should be in the 2.5 to 3.5 percentage range with the supply of hogs, overall continuing to grow slightly.

In prepared foods, sales dollars were up 21 million or 3.1% on a year-over-year basis.

Our volume was down 4.9% on a comparable year basis, mainly due to us exiting some unprofitable product lines and some SKU rationalization.

During the quarter we closed our Portland, Maine, facility and redirected those products to other plants.

This will lead to more efficient utilization of our remaining assets.

Operating income for the quarter declined $6 million, if you factor out plant closings from both periods.

High red meat and turkey raw material prices adversely impacted earnings within our deli business specifically.

We expect our volumes to increase in Q3 and Q4, providing greater cost efficiencies and would expect operating margins to be in the 3% to 4% range for Q3 and continue to improve slightly in Q4.

Now I would like to spend a minute just talking about our two primary channels.

On the refrigerated side of our consumer products channel, we continue to make great strides in Tyson fully cooked bacon.

In March we became the number two brand nationally of fully cooked bacon and compared to a year ago our volume is up 167%.

Increasing customer awareness and trial through more shopper displays will be our emphasis for third and fourth quarter.

Our Tyson dinner meats also provided excellent results, achieving an ACV of 66, up 15%, and unit share of 27.4, up 45% versus a year ago.

We will continue to grow our share and strive for double-digit category growth.

Within Tyson branded frozen poultry ready to eat categories we again achieved a 25% increase in both sales dollars and volume driven velocity increases in both our boxed and bagged segments.

Within our fresh case ready beef and pork business we achieved sales of $395 million, up 18% and a volume increase of 6.3%.

During the quarter we did announce the construction of our third dedicated case ready beef and pork facility in Sherman, Texas.

It should be operational by the first calendar quarter of '06.

Within our food service channel the QSR and major casual dining chains posted solid gains in traffic growth, fueled by take-out promotions and new product offerings for the December through February quarter.

In March comp store sales were positive in virtually all of the chains.

Our national accounts business within chicken and prepared foods remain very strong during the quarter.

We expect our results to continue to improve with many new product introductions and promotional activities planned for the second half of the year.

Before I turn the call over to Greg, I would like to give you an up date on our operating efficiency initiatives that John mentioned earlier.

As he said, our goal for the fiscal year was to identify $300 million of capital dedicated to income and cost saving projects, which were expected to generate $92 million.

I'm happy to report that through Q2 we have authorized approximately $255 million for these types of projects with annual savings of $65.5 million and we are on track to meet our savings goal by the end of the fiscal year.

In summary for the quarter, I believe we executed well given the circumstances we faced.

Looking forward, we are confident that second half of the year results will continue to improve significantly in both Q3 and Q4.

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

Thanks, Dick, and good morning.

Export sales were 481 million for the second quarter.

This is up 10% versus second quarter of the prior year.

The increase in sales is directly attributable to an increase in sales of leg quarters and variety meats.

Export sales for chicken were very good during our second quarter.

Our sales volume was up 8% versus the same quarter last year with the primary driver being our chicken leg quarters.

Our sales to Russia, our largest destination market, were good for the quarter.

Additionally, we continue to experience significant growth in sales to the middle east.

The Chinese market opened in the second quarter and sales have begun.

During the third quarter we would anticipate even higher sales as more import permits are issued.

One of the last markets to be reopened will be South Korea.

We currently expect shipments to resume during the month of June.

This increasing diversification in markets that we serve is providing balanced demand at pricing opportunities for our chicken exports.

Export prices for leg quarters to all destinations have strengthened as we move through the month of March and into our third quarter .

We expect price realization to improve between $0.04 and $0.06 per pound for the third quarter versus the just completed second quarter.

Current expectation based on demand, coupled with our good inventory position supports the good prices through the fourth quarter of our fiscal year.

Let's talk about our beef exports.

Export sales revenues of boxed beef were up 9.5% versus the same quarter last year.

This was driven by some increased demand for higher value cuts to Hong Kong and to Macao.

Beef variety meats revenues were up 162% against the same quarter last year, as volumes and realizations continued to recover.

Demand remained strong for beef variety meats sold to Mexico and eastern Europe.

Since December of 2003, 28 of the 65 countries that we exported to have lifted their bans.

In the second quarter, Taiwan and Egypt announced opening of their markets for beef 30 months and under.

We have already made some air freight shipments into these markets to meet early customer demands.

Although these developments have been positive, primary markets, such as South Korea and Japan, remain closed and, as Dick indicated, we do not expect sales to resume until November or December, at the earliest, of this year.

With regard to pork, our export sales of boxed pork continue to be strong as revenues were up 27% versus the same quarter last year and 38% for the same quarter two years ago.

This increase was driven by price realizations and continued strong demand for hams to Mexico, as well as for picnics to Japan.

We believe that both pricing and volume will remain firm through the third quarter of our fiscal '05.

For variety meats demand is strong to Mexico and Asia as well.

Comments about our foreign operations.

Let's talk about Tyson de Mexico.

During the quarter we reported that there was a minor outbreak of low pathogenic avian influenza in our grow out area.

Eradication cost and the reduced volumes marginally affected our earnings capability for the second quarter.

In spite of this, we experienced double-digit operating earnings growth in Mexico.

Our second quarter EBIT was double-digit higher than the same quarter last year.

The demand for chicken in Mexico remains very good and the sales prices remain at attractive levels.

We expect these favorable circumstances to continue through the second half of our fiscal year.

We anticipate earnings results to exceed our fiscal 2005 plan.

We are on track with our plans to continue to grow our business organically by increasing our production of live chickens, as well as continued investment expansion of our further processing capabilities in Mexico.

Additionally we are actively exploring opportunities to grow our business in Mexico via joint ventures or acquisition.

A few comments about China.

Our domestic sales volume in China continues to grow, supported by increased demand in both the wholesale and retail market channels.

We also expect food service growth to continue as new and unique products are launched catering to the Chinese consumer taste preferences.

Our new retail line, that was introduced into the Shanghai market, has enjoyed favorable acceptance from customers and consumers.

It is presently being carried in more than 700 retail outlets in the Shanghai area.

We have in construction progress, new further processing capability that will be coming on-stream in May.

We continue to actively explore multiple options for supporting growth in China.

We are visiting opportunities through joint ventures, through acquisitions or continued investment in greenfield expansion.

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

Now a word about marketing and update on our powering campaign.

As you are all aware, last August we launched our Powered by Tyson marketing and communications campaign.

Building on our brand equities of quality and trust, the campaign is designed to increase awareness, increase purchase intent and bill sales for the Tyson brand of chicken, beef and pork products.

Feedback from our consumers and customers to date has been very positive and indicates that our Powered by Tyson campaign is delivering against our stated objectives.

Consumers are telling us they believe that our core brand equities of quality and trust do positively impact their purchase decisions for our beef and pork products.

To date our tracking studies show that these attribute scores for beef and pork are now almost on a par with those for our chicken brand.

Our awareness scores of the Tyson brand of chicken continue to remain strong with a high percentage of consumers naming Tyson as the first brand of chicken they think of with almost 60% top-of-mind awareness and 95% total awareness.

Our purchase intent scores continue to be almost double that of our nearest competitor.

Overall awareness and purchase intent scores for Tyson brand of beef products are now at similar levels of awareness to our branded competition and growing.

For pork we are now second in terms of brand awareness and purchase intent with only one other national brand ahead.

The Powered by Tyson campaign is contributing to building sales, as evidenced by Dick's reporting of significant sales or market share increases in ready to eat boxed and bagged poultry, our fully cooked bacon, our dinner meats and continued progress in case ready beef and pork.

As we move into the second half of the year and into next year, we will continue to leverage our strong core brand equities to introduce and advertise new chicken, beef and pork value-added products.

From a branding perspective, our goal is for the Tyson brand to stand for chicken, beef and pork and to build brand preference with our consumers.

With that, I will give it back to our Chairman, John Tyson.

Dick, Greg and Dennis, thank you for your comments.

Once again, thank you to our shareholders, our team members, our friends and my friend for supporting us during the challenging second quarter.

Now let's go to your questions.

+++ q-and-a

Thank you and at this time if you do have a question, please press star, one on your touch-tone phone.

Again please press star, one on your touch-tone phone.

First question today comes from Christine McCracken with FTN Midwest, your line is open.

Good morning.

Morning, Christine.

Your quarter came in a lot better than expected, at least relative to my outlook.

And a lot of that, it seems, is driven by better than expected results in beef.

Now, I assume most of that upside, while still posting losses, was a result of your Canadian facility.

Can you give us some indication as to how profitable that facility is?

And then how, I guess, that facility will adjust assuming Canada does reopen.

Christine, this is Dick, let me try to address that without really answering your question.

I appreciate it.

We did experience in the second quarter probably better results than what we anticipated in beef and that was, I would say, more largely due to March being better than what we anticipated and, as I said, having positive margins in the month of March.

At the beginning of the quarter we probably didn't anticipate that.

And secondly, I would say that our chicken results were also better than what we had anticipated in the early part of the quarter.

And as far as breaking down earnings between different areas of the segment, we're not going to do that for you today.

But it's fair to say that your Canadian beef operations are operating at a fairly nice margin at this point.

The Canadian operations are doing fine.

Okay.

And then just looking ahead, we have seen some expansion now with some of the rain here in the U.S. on the beef side, wondering do you see -- when would you expect better supplies of cattle to start helping margins in the beef side of the business and what's your outlook there.

My sense, again, is that we are starting to see a few more cattle show up.

That will continue to expand as we get into the middle and the latter parts of third quarter and, quite frankly, into most of fourth quarter we will see some continued expansion while not huge numbers, that coupled with -- really the seasonal demand picture for beef always picks up as we get into the May, June, July grilling season and I don't see any reason why that won't be any different than what it normally is.

Those are the two factors that primarily drive us to believe that we will see better operating results from beef in Q3 and Q4.

Fair enough.

Then just on your pork business, looking at the hog supplies in the U.S. still fairly tight, though it seems like your outlook for pork is fairly good.

I'm wondering what gives you the optimism that pork margins are going to get better?

Then secondly, talk just on bacon, specifically.

You'd increased production there yet we see belly inventories rising pretty substantially.

It seems like bacon demand might be a little weak.

Could you address those two areas for me?

Sure.

Let me start with the bacon piece first.

Bacon demand on the fully cooked side is increasing substantially.

We are seeing double-digit category growth on the fully cooked side of the bacon.

On ready to cook bacon, you're right, the category hasn't been growing here recently as much as it was, but we really haven't seen the category decline.

What we have been seeing is a much more brisk fully cooked side to our bacon business and we are doing everything we can to increase, as I said, our consumer and our customer awareness and making sure that we're getting trial and repeat activity on our fully cooked bacon, which in fact, like I said, we are the number two nationally now in March and we continue to see a tremendous increase in share there and continue to see that business going very, very well.

Your first part of the question, Christine, oh, dealt with pork.

Pork supplies, we still believe that there are going to be more hogs as we get into the third and into the fourth quarter.

The 2.5 to 3.5% that I talked about in terms of operating margins, that's kind of an average range for us in terms of where we typically should be.

And I don't see any reason why we won't be in that range again for third and fourth quarters given the fact that there should be ample supplies.

You're right, there is increasing belly supplies and some additional product in the freezers, but I don't think that's going to adversely affect our margins at this point.

And quite frankly, if you look at our prepared foods margins, if you see these bellies fall a little bit more, that will help our prepared foods profits.

Fair enough, thanks.

Thank you.

Our next question comes from David Nelson with Credit Suisse First Boston.

Sir, your line is open.

Good morning.

You did lower the top end of your guidance range.

What were the reason or reasons for that, please.

The question was the top end, yes, we did lower it to a $1.20, our top end.

And the reasons for it.

Was that because while cattle supplies are improving, they may be not improving as much, chicken breast prices, what might be the reason for that please?

Dave, this is Louis, I'll take the first shot at it.

If you recall, our original guidance included a best case and worst case scenario on beef and the borders reopening, so the top end included Canada and Japan reopening at some point.

Our current guidance assumes that neither one of those are going to open this fiscal year and as a result we lowered the top end of the range.

Okay, great.

On chicken, we are looking at skinless, boneless breast commodity prices substantially below year ago, but you would be on, say, food service contracts protected on that through the end of the year, the only issue would be pricing maybe for next year.

Would that be a correct assumption?

Because Dick talked about chicken margins being 7% to 8% for the next couple quarters.

Dave, this is Dick.

Yes.

We feel very confident of where we are in terms of our value-added contracts.

Most of those, as you know, do come up for renegotiation in the latter part of the calendar year, right around that late November, December period.

And yes, breast prices are probably going to be lower than what they were a year ago.

But if you recall, breast prices dropped off substantially last year in the September, October period and really weren't that much higher when we entered our negotiations last year than what we anticipate them to be at that same time this coming year.

Okay.

Just thinking about swing factors in pork, we have a new packing plant coming on, I guess late summer, but we do have the lifting of the duties on Canadian hog imports, so you would see those roughly balancing out in terms of positive and negative?

Yes, I mean the Canadian supply of hogs coming back in is a positive for the supply availability.

If you look at a new plant coming on-stream, I don't think that's going to adversely affect anything because, at least in the short term, because typically a plant startup is certainly going to have a four to six month at least startup curve to get your numbers and get those types of things going.

So I don't see that hurting the balance of this fiscal year or into the first part of next year till that plant gets up.

Then it's just a matter of who is going to do the best job and where the hogs are going to go.

Great, thank you very much.

Thank you, the next question comes from Leonard Teitelbaum with Merrill Lynch.

Sir, your line is open.

Good morning.

Are there any hedges lingering that may be at higher than current market prices or have they all expired?

Lennie, this is Dennis.

Not meaningfully so.

As always, there are some contracts tied to some fixed price contracts with some of our key customers, but there's nothing significant at this time.

Okay.

And second, Louis, I just want to make sure I understand that the drop from the high-end of 130 to 120 was a change in assumptions that the Canadian border would not open, as well as Japan.

I kind of thought that you're - were somewhat -- were not putting Japan in there.

But,I guess the point is, I thought that the opening or closing of the Canadian border would have greater than a $0.10 impact.

Did I draw the right conclusion there?

Well, Lennie, I would say a dime is a pretty substantial impact.

I'm not arguing that.

Basis the movement of cattle coming from Canada.

So, I'd say that is a substantial impact.

All right.

Well, I didn't mean that it was not, I was just somewhat -- I thought it would have been greater, I guess is my point.

So you're saying that because we have now change because some of the Canadian border will not open in this fiscal year the range still is 105 to 120.

That's correct.

And Japan not opening.

Yes, sir, and Japan not opening.

Now, these 28 countries that did open their borders, how big a market share did they have?

Well, Lennie, if you will remember some of our earlier conversations, South Korea and Japan they still represent 65% plus of the market.

So do your reverse math.

It's a help, but it's just not providing the type of volume that we have experienced.

You still got $1 billion worth of sales out there that we can't get at.

And the case ready CapEx that you're going through, can you give us some parameters, number one, on how much of your CapEx this year's going to be devoted to case ready and how fast is that segment of the market growing?

On a spend basis for this year from a CapEx standpoint, that's going to be probably less than $50 million of the 6 to 650 that Dennis talked about in terms of our spend rate for this fiscal year.

We will also spend about that same amount next year to complete the construction and the refurbishing in Sherman, Texas.

The growth of the category in terms of case ready continues to be very good.

You're seeing it more in ground beef.

You're seeing it more in pork than you are in beef, necessarily, from a muscle meat standpoint.

But we are seeing continued growth, not only from our one very large customer, but also from other customers, again, more so on ground beef and on pork than on beef.

Now, Dick, one final question relating to, at least online here, on beef.

I thought you sounded more positive than I would have thought at least under the circumstances that I see.

Do you expect beef to breakeven any quarter this year?

I expect it to be profitable in both Q3 and Q4 on an operating earnings basis.

Thank you very much.

Thank you.

Thank you.

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

Good morning, everybody.

Morning John.

Dick, did you give the -- I know you gave the beef pounds down 1.8%, but did you give the pork pounds?

I don't think you did.

I don't believe I did, John.

I can see sales up 13%, you didn't give live price, something just to kind of get me to -- .

I think approximately 1% is what I believe in terms of pounds processed, we were down about 1% on a year-over-year basis.

Our head would probably have been down a little bit more than that, I believe weights might have been up a little bit.

But pretty close to a year ago, just down slightly.

Okay.

And just can you just refresh me, I look at this other segment with sales of 11 million and operating profits of 12 million -- 20 million, I think you should expand that other segment pretty quickly, whatever it is, can you just tell me what it is that you're doing to make so much money?

That's primarily, John, in our supply chain activities where we actually have a separate P&L for our fleet and things like that and some of our warehouse operations.

You should get Lennie to take you public on that little other segment, make you rich.

Johnny, it only took a couple days to pick a Pope and you have been looking for a CFO for like six months.

What's going on?

John, we have been in the marketplace, we made an offer about three weeks ago and that offer was turned down by a candidate from a leading company here in the United States.

And we're going back through and working in the process.

We're not going to just fill the job, John, we're going to find somebody that can make a difference in our company and help lead division of this company into the future.

I was just curious, thanks for your -- .

And the Pope had a whole lot more Cardinals in the pipeline than maybe we did.

Limited choices, I guess.

Greg, the $0.04 to $0.06 increase in leg quarter prices that you assume, just could you just give me the exact -- where are price levels now?

Where do you assume they will go or they already captured some of this $0.04 to $0.06.

Well, let's break that into two parts, John.

The conversation about the third quarter is based upon booking, so we have a high degree of certainty about those.

You might have a little bit of the end of the quarter movement in vessels and that's why we give a little bit of that range, if you will.

The price has been improving, we have some visibility out beyond the third quarter, but as far as the share of total sales it's lower to be booked out that far.

But you are looking at prices that are moving on up into the -- beyond the mid 30s up into that next stage of 37.5 type ranges, just to use a single number marker.

That's great.

Good Okay, well, thanks a lot.

Thank you.

The next question comes from Eric Katzman with Deutsche Bank.

Sir, your line is open.

Hi, good morning everybody.

Morning, Eric.

John, I guess I have a strategic question for you to start with.

I don't think it's any kind of secret out there that Smithfield is interested in vertically integrating in beef.

They're already that way in pork.

And do you think that there is some risk at Tyson if the need for traceability and vertical integration in some of the segments, like beef and pork, where you have chosen not to be, if that comes about and how do you think you would address it if the market moves that way?

Well, first of all, we already have the capability for traceability today based on our system.

Secondly, I think we see a concept of what you call virtual integration, where we have a certain set of relationships with key producers whether they are in the hogs or whether they're in the cattle.

Maybe at some time in the future we might want to have some greater say-so over some of our supply chain, but our vision has been to take the set of raw materials that we have today on the beef and pork side and drive them up that value-added chain and have chosen to commit our money on that side of the equation.

We have a great set of relationships with key cattle producers and key hog producers out there, so we do have some form of virtual integration today.

But we do have the capacity for traceability at this time already.

Eric, let me add one more thing to that.

Traceability on the pork side, we do not have that same level of traceability on the cattle side.

So you feel you have very good traceability in pork, but not as much on beef, is that what you said?

Yes, and that's true in the industry.

Unless, you -- no one has that kind of level of traceability on the -- 100% or even anywhere near a high percentage of traceability on the cattle side.

In time that will come, probably more so through an animal identification system, which will be of a national basis and that will be on both beef and pork.

So, from a traceability standpoint down the road, that's not going to be a competitive advantage, it's going to be a requirement.

Okay.

Next question, let's, I guess, talk about the chicken business a bit.

Pilgrim's announced their results recently and I believe that in their conference call they felt that the growth rate in supply was actually between 4 and 5 and you said 3 to 4.

Are you looking at it a bit differently, maybe one is including exports or domestic.

Maybe you can kind of explain the difference.

Well, I would say that I'm not sure because I didn't hear what they had to say, but the difference could be as our 3 to 4 is what we're looking at over a period of 12 months.

I'm not sure if theirs was looking forward only or looking back only, but there have been other similar thoughts in that 3 to 4 range that I have seen as late as even this morning in terms of releases.

So I'm not sure whether 3 to 4 or 4 to 5 is that huge of a difference, but that's where we believe -- that's where we see it on a 12 month basis.

Okay.

And then I guess following up on Dave and Lennie's question with regard to the outlook for the full year.

You did indicate that that's a GAAP number and I don't have my numbers and data in front of me, unfortunately, but Dennis, maybe you can kind of clarify what are the GAAP charges net that you have taken over the first six months and do you anticipate in the $1.05 to $1.20 GAAP range that there are additional charges expected in the second half?

Eric, the charges are about $0.02 and at this point we don't expect any more.

All right, thank you very much.

Thank you, next question comes from Tim Ramey of DA Davidson.

Your line is open.

Good morning, congratulations.

Just wanted to get some elaboration on the 206 new products, which is a big number by any standard.

Can you tell me is that lots of flanker products within one brand umbrella?

I know it's within the Tyson umbrella, but can you just give us a little elaboration on that?

And is this primarily through Wal-Mart alone or is this broader than Wal-Mart?

This is Greg Lee, I'll start out and give a little color around that.

First of all, that is distributed across our food service and our retail consumer products businesses.

Numerically it would be more in food service.

That's a very active area for us, that I know you are aware of, and we are very active in the product customization basis and very active in the value-added arena there.

So a number of the products have been directed towards food service.

However, there is a very significant representation towards retail and that's, once again, balanced across chicken, beef and pork.

And I believe one, certainly one of the messages that John wanted to indicate to you all was the percentage of activity that is being centered against red meat, given the fact that that was certainly one of our strong motivations of thinking about making a three protein business here, was to be able to move product up the value chain on the red meat side.

So we have a lot of activity going in that end.

You have -- when you say adjacencies I am thinking -- the way I'm interpreting that is you are thinking a bit about are some of these line extension type products.

And of course, the reality is that is true.

Where we have lots of opportunity for convenience food, sometimes it is simply changing the flavor profile, the configuration in some way that expands a line of products to give more consumer choice.

So, it's a bit of all of that.

We're very pleased with progress, want more momentum, yes.

And quick question for Dennis if I could.

As we think about the impact of lower grain prices year-over-year for the second half, is that going to be a positive in both quarters or just fourth quarter or can you help us at all on that?

It will be in both quarters.

But bigger order of magnitude in the 4Q, Dennis?

Probably bigger order of magnitude in Q3 than Q4.

Okay, terrific, thank you.

Thank you, next question comes from Jonathan Feeney of Wachovia.

Sir, your line is open.

Good morning.

Morning.

The first question would be, you talk about whether it's 3 or 4% or 4 or 5%, others are saying growth in chicken supply, supply discipline overall has been pretty remarkable for the first six months of the year, whether it's the government numbers or consultant numbers that we have looked at.

That appears to be a, I guess, a back end loaded supply growth number.

What factors do you think are explaining, I guess, a little bit more discipline on the supplier side at least to date?

The way I would go at it is most folks out there in the poultry industry have their facilities pretty full now and the ability to expand is pretty limited because people are running at 94, 95, 96% capacity.

So really, the only way to get some expansion would be more on weight than number of head.

We've rationalized some assets and some other folks have streamlined some things, so its more about the industry being up against capacity with no new construction or expansion going on.

John, versus historical cycles, what's holding up -- would you have expected more construction by this point, if so what's holding it up?

I think there's more discipline.

There's folks that have been around in the poultry industry now 20 or 30 years.

They have been through enough booms and busts within the poultry industry, so that knowledge and maybe wisdom gain after being in the industry for 30 or -- .

And then just the cost of construction of new complexes.

The ability to locate a new complex with the inherent challenges of agriculture expansion in the United States.

It has to be very, very thoughtful.

People talk about it, but when they start to run into the complexities of the expansion, they usually settle back and see if they can get maybe a few more birds in their existing capacities and accept good a returns on their assets today.

Thanks.

And I just wanted to follow-up on something you said -- a follow-up to Lennie's question about hedging policy.

I can't help but notice when you -- this quarter you reported a $10 million loss, which is, to me, a paltry loss versus a $90 million gain in the quarter last year.

It seems like you absolutely hit it right on the barrel as far as your hedging policy.

You were very aggressive when you should have been.

And then all of a sudden you kind of, apparently anyway, let it float when it was time to let it float.

Can we take your kind of, I guess, statement about forward hedging, how there's a minimal amount of forward hedging contract in place right now, to mean that you pretty much expect grain prices to stay flat to down for the remainder of the year?

Our belief is grain prices are in a trading range at this time as we head into the planting season and look forward to summertime.

Our thoughts are aligned with that thought.

Excellent.

Just finally, you mentioned the case ready business, a huge growth opportunity for you guys long term and probably the main driver to get that beef operating margin up over the long run.

Do you think high beef prices right now, due to a lot of these I guess I would view it the industry is not to blame issues, Canadian border, tight supply, et cetera, are holding up the works as far as the implementation of case ready by making beef more expensive or making retailers less willing to take price increases?

Or do you think that case ready is just moving at its own pace regardless of what pricing is doing.

I think it's more the latter.

It's moving at its own pace.

As I said, the ground beef and the pork expansions are still moving at a brisk pace.

Beef is just taking a little bit longer for a multitude of reasons.

One minor one might be price, but there still is some concern on the beef side in terms of a lot of our customers, the retailers, wanting to make sure that's a customized process and just a little bit slower to react there as compared to ground beef and pork.

Okay.

Thank you, guys, and congratulations.

Thank you.

Thank you.

Next question comes from Pablo Zuanic with JP Morgan.

Sir, your line is open.

Good morning, everyone.

Just want to double-check a couple of points here.

You say that on prepared foods your normalized EBIT margins of 3% to 4%.

I had thought that those were much higher on a normalized basis, can you clarify that, please?

I said that our margins for third quarter would be in the 3% to 4% range and getting slightly better during the fourth quarter.

Normalized margins would be a little bit higher than that.

We are still --

How much higher?

suffering somewhat there from high raw material costs and actually some additional cost deficiencies that we believe we'll still get and we have historically talked more in that 5 plus range, 5 to 7 kind of range on prepared foods.

Okay.

And the second question, last year, if I recall, in the, at least in the first half, you were a net buyer of breast meat and I think that affected your chicken margins.

Is that going to be different this year and could that have an affect on margins or we should expect you also to be a net buyer on breast meats?

Is there any difference there in terms of that delta year on year?

It is going to be different this year compared to last year, yes.

We were more of a net buyer last year than we will be this year.

We will buy considerably less in the open market.

But if you go back to our philosophy within our poultry is we always want to be one chicken short.

So by the nature of how we choose to run the business, we will always be active in the market buying the supplemental raw material to match the needs for our production.

Okay.

Just a follow-up, you said that on the chicken side it's about 70% value-added products.

Just ballpark, what percentage of chicken sales would be on a fixed price contract, i.e. not floating to any formula but just fixed.

We historically haven't given those percentages out.

I don't have a number right off the top of my head, even if I did --

Pablo, this is Louis.

All we have said publicly on that topic is that we have 50% of our chicken business that is fixed price in nature, meaning that it could have anywhere from a -- it could be a price list that's sometimes good for up to 90 days and it could go out to one year contracts.

So it's 50% that is fixed price in nature.

And just one last question.

Strategically in the case of [Inaudible], you're talking acquisitions there, are you talking mainly about chicken or are you also looking at hogs?

At this time we are looking primarily at chicken.

However, as I'm sure you are aware, many of the participants in the chicken market in Brazil also have pork operations.

All right.

Thank you very much.

Thank you.

Next question comes from Ken Zaslow of Harris Nesbitt.

Sir, your line is open.

Just one, first, housekeeping question.

To Eric's question, is it charges or gains for the first six months is $0.02 to $0.03?

I thought it was $0.03 of gains total.

No, it's charges.

First quarter?

Yes, first quarter was 14 GAAP that included

$12 million and --

$3 million worth of gains.

Right, okay.

That would get you to 11 on an operating basis.

Then we had a small amount of charges in the second quarter.

Okay.

So it sounds like it's total -- so if I was to look at your numbers on an ongoing basis it sounds like the new number is a $1.03 to $1.18.

We can just comment on GAAP it's $1.05 to $1.20.

I'm sorry.

Again, our range is $1.05 to $1.20 on a GAAP basis and you can make your own adjustments from that.

Not even if I was to make the adjustment, the adjustment below the line would be $0.02 to $0.03, is that fair?

That's fair.

Okay, I'll make the adjustment, I just want to make sure I got the right number to start with.

The other question I have is looking at beef on a longer term picture, the rapid expansion in Canadian cattle just expanding the capacity, does that change the trade flow after the border opens?

Well, my answer to that will be when the border opens it will be on the basis of where the producer in Canada can get the most money for his cattle.

So if it's more advantageous for him to ship them to the states, that's what he will do.

If it's more advantageous for him to sell in Canada, that's what he will do.

Really economics are going to drive that.

There is some additional expansion that is going to be coming on stream this summer.

We will have that -- we have a level of that that will hit probably in July or maybe August at this point.

So I really think it will be economic driven will decide where the Canadian cattle producer will, in fact, sell his cattle.

And does that rapid -- that expansion in Canada, does that change the supply/demand dynamic in North America overall in the beef packing industry over the next two to three years?

No, I don't believe it does on a North American basis.

Okay.

And then in chicken, what is your perspective on Brazil and China eventually having export come into the U.S. of breast meat?

Is that six months away, twelve months away or is that just something we don't have to worry about right now?

Well, this is Greg Lee.

In the context that you finished up there that's probably the best way to think about it.

There is a very specific process that a country has to go through to gain approval to bring product into the United States.

The countries that you have mentioned are -- have a significant amount of work that they would have to do to be able to export breast meat, frozen breast meat, just using that as a product, to the United States.

It will probably at some point be out there, though.

But not in the next year or so?

Not raw breast meat, no, sir, you're right.

And that has no indication of why you're internationally expanding into China and Brazil in the chicken industry, that's not at all a reason why you're doing that?

That would not be a near-term objective.

Over time we would have to take advantage of what the total world supply and movement of product was to optimize our business model.

If you think that we're one chicken short here in the United States and we're a net buyer on an ongoing basis as part of our strategy, that in time if that situation became available we would have to add it into our thought process as we make sure we have enough raw material to take care of the products for our customers.

But China has a lot of opportunity in country and we need to take care of supplying, like Greg said, 700 plus units today in Shanghai and there's other major cities that we need to get our products into plus those food service customers that are over there.

And Brazil and South America has some opportunities to take care of internal customers plus take care of customers around the world as they look to us to be a global supplier to them.

Great, thank you very much.

Thank you.

Next question comes from Farha Aslam, your line is open.

Hi, good morning.

We're just wondering, the 65 to 66 million in savings that you expect to generate from your CapEx program and eventually 92, which segment are most of those savings going to be concentrated in and what are the types of projects you are pursuing to achieve those savings?

Actually, they cut across all segments.

If I just hit the highlights.

On the beef and pork side, that would primarily be on the case ready side and the case ready expansion there on prepared foods.

A good example might be we are putting in two additional fully cooked bacon lines in our facility in Omaha.

We are expanding a lot of our freezing capabilities to get more further processed product through our poultry segment.

We are still doing a fair amount of automation on our poultry sector as well on both visceration and on deboning in our first and second processing on the chicken side.

And we are also adding additional oven capacity which would be both for prepared foods and for chicken.

Is there a particular hurdle rate you use for your CapEx projects?

Internal hurdle rate, we have a couple different ones we use for the cost savings type projects.

We typically like 20% or higher.

Then the income producing ones we go as high as 30% on those.

Great.

And you mentioned international acquisitions, do you have any appetite for domestic acquisitions at this time?

I didn't -- on the domestic side, as we've spoke in the past, it's more about finding a regional player that can fill in some of our product gaps and/or maybe find some plant capacity that it's better to acquire the capacity versus build internally because it can get us there quicker.

We have publicly said that if Kraft makes a decision on Oscar Meyer we would have the obligation to view that and see if it could make a difference in our company, but we will have to wait until they make their decision first.

Okay, great, thank you.

Thank you and that was our final question.

I would like to turn the conference call back over to Mr. Louis Gottsponer for final remarks.

Actually, that's to John Tyson, our chairman.

Once again, from the folks around the table we want to say thank you for being on the call.

For the team members that make up this great company, we thank you for your time and efforts during the second quarter that was challenging.

We know that the third and fourth quarter will see the results that we expect from managing our business.

And to our friends and my friend out there in the marketplace we say thank you today.

Good day.