泰森食品 (TSN) 2005 Q3 法說會逐字稿

Hello and welcome to the third quarter Tyson Foods earnings release teleconference.

All lines will remain in a listen-only mode until the question and answer session.

At that time, if you have a question or a comment, simply press star followed by 1 on your telephone keypad.

At the request of the Company, today's conference is being recorded for instant replay purposes.

I will now turn the conference over to your host, Mr. Louis Gottsponer.

Sir, you may begin.

Thank you.

Well, good morning, everyone, and thank you for joining us for the Tyson third quarter conference call.

With me today are John Tyson, our Chairman and CEO, Dick Bond, our President, and Chief Operating Officer, Greg Lee, our Chief Administrative Officer and International President, and Dennis Leatherby, our Treasurer and Interim Chief Financial Officer.

Before we move on to discuss the operating performance for the quarter, I just want to remind everybody that some of the things we talk about today are going to include forward-looking statements.

That means those statements are based on our view of the world as we know it today and it also means that things can change, so I would encourage everyone to take a look at today's press release for a list of those factors that can affect our business.

Now, let me turn things over to John Tyson.

Thanks, Louis.

Welcome, everybody, and thanks to my family, friends and Tyson team members, and thank you for joining us today to talk about our results for the quarter and our strategy going forward.

Our chicken segment performed well for the quarter and achieved an operating margin of 10% excluding the plant closing cost.

In addition, our Beef and Prepared Foods segments performed better than the first half of the year, and our pork business has some work to do.

I want to compliment the people at Tyson Foods who make a difference on each of the three strategies; and while we continue to face short-term challenges, we will continue to execute our long-term strategy and continue to make progress on its three elements.

The first element of our strategy is to continue to increase the sales mix of value-added products in our portfolio.

In the first nine months of the year, we introduced 304 new value-added products to the marketplace, which did lead to increased market share growth in both retail and food service.

Of -- 147 of those were chicken products, 78 were pork, 61 were beef and the remaining 18 were a blend of beef and pork products.

The second element of our strategy is to improve the operating efficiencies of our plants and increase our margins.

Our goal for the year is to identify $300 million in cost savings on income-producing projects, which will generate annual savings of $92 million.

Dick will give you an update later on the great progress we are making towards that goal.

The third and final element of our strategy is to expand our presence in the ever-growing international markets.

We have been looking and continue to look for opportunities in Mexico, South America and China, and Greg will give you an update later in his presentation.

At this time, Dennis will cover our earnings overview and financial guidance, and then Dick and Greg will share their perspective on the quarter and discuss how we are executing our strategy, and then we will go to questions and answers.

Dennis?

Thanks, John.

And good morning, everyone.

In our press release this morning, we reported GAAP earnings of $0.36 per share for the third quarter on a diluted share basis.

Please note third quarter 2005 earnings include $43 million of cost related to the live swine legal settlement and poultry plant closing costs, which are included in the Other Charges line of our income statement.

These charges reduced GAAP earnings per share by $0.08.

Some other points to note in our financial statements: Cash provided by operations was $464 million for the quarter, an increase of $219 million compared to last year.

This increase is primarily due to our continued emphasis on working capital management, which resulted in strong improvements in days accounts receivable and days inventory.

Capital spending for the quarter was $163 million.

Debt at the end of the quarter was $2.9 billion, down $307 million from the prior quarter.

As a result, our debt to capital ratio is 39%, down from 42.1% last quarter and down from 43.8% one year ago.

This means we achieved our goal of reaching 40% by fiscal year end, and we were able to accomplish this goal one quarter early.

Due to our lower debt levels compared to the same period one year ago, interest expense was down $11 million from last year adding approximately $0.02 to earnings per share.

Our tax rate was 35.2%, and lower than expected, primarily due to a change in the estimated ETI benefit for the quarter as well as for the full year.

Now let's review our financial outlook.

As we discussed in our press release, we have reduced our GAAP guidance for fiscal 2005 to reflect the $0.08 in charges we incurred in the third quarter, as well as our current view of the market.

We now expect GAAP earnings for 2005 to be in the range of $0.95 to $1.05 per share.

Revenues for the year are projected to be approximately $26 billion.

Interest, foreign exchange and other charges are expected to be in the range of $235 to $240 million.

Our tax rate for fiscal 2005 is expected to be approximately 36%.

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 expenditures, we are expected to spend approximately $600 million.

Depreciation and amortization is expected to be approximately $505 million per fiscal year.

Weighted average shares will be 357 million.

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

If the Company determines during the course of the quarter that our previously issued guidance should be modified or updated, we will make a public disclosure updating 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, nor will we be giving fiscal year 2006 guidance.

This concludes my comments.

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

Thanks, Dennis.

Good morning, and thanks for joining us this morning.

Our third quarter results were led by our chicken segment, with operating margins reaching double digits, excluding the plant closings.

Beef results improved during the quarter, but currently remain very challenging.

Prepared Foods' operating margins improved as expected to 4%, and our pork segment results on an adjusted basis were a disappointing 1.7% operating margin.

I'd like to spend the next few minutes talking about each segment and our customer channels.

Our Chicken segment operating income, adjusted for plant closings, was $208 million, an increase of $62 million or 42.5% compared to third quarter of fiscal '04.

Our volume was up 1.4%, but sales dollars decreased $26 million or 1.2%, as average selling prices decreased by $0.02 per pound on a year over year comparison.

Demand for chicken, both domestically and internationally, was very good.

Supplies continued to grow in the range of 2 to 4%, which is keeping breast meat prices attractive for our customers.

We continue to work on our operating efficiencies and consolidation of facilities where appropriate without giving up market share, as evidenced by our announcement last month to close two plants in the near future.

Looking forward, supplies are adequate, demand continues to be good, grain prices have increased and remain very weather-sensitive.

We expect operating margins to be in the 7 to 9% range for Q4.

In the beef segment, sales dollars were up 4.3% or $129 million, and pounds sold were up 54 million or 2.3% compared to third quarter of last year.

Operating income was $36 million or 1.2%.

Compared to third quarter of '04, this was down $82 million, but compared to second quarter of '05, operating income was up $55 million.

The Ninth Circuit Court of Appeals did rule in favor of the USDA, and the border has been opened for Canadian cattle to come into the U.S..

Last week, we received approximately 2500 cattle or 60 loads, mostly to our Pasco, Washington facility.

This, however, represents only about 40% of our historical Canadian imported weekly volume.

Live cattle prices have continued to fall, dropping to approximately $80 per hundred weight last week, as domestic supplies of cattle increased aided by the imports of cattle from Canada.

Conversely, demand is sluggish at best; selling prices for beef have dropped marginally faster than live cattle prices.

This, coupled with our continued lack of export markets, will make for a difficult fourth quarter.

We do expect our beef segment in Q4 to be breakeven to slightly profitable.

And finally, we continue to believe our Asian export markets, mainly Japan and Korea, will reopen in the November-December period of this year.

In the pork segment, sales dollars in pounds decreased by 2.1% and 2.3%, respectively, on a year over year basis.

Adjusting operating income for the live swine legal settlement, results were down $20 million or 59% compared to Q3 last year.

Industry slaughter was up 1.2%, while we were down 4.3%.

We reduced our market share to shore up our margins but were not successful, as live hog prices fell but product prices fell faster, especially in the month of June.

Looking forward, fourth quarter, live hog supplies continued to grow slightly.

Export demand continues to be good, and domestic demand is slow.

We would expect margins to be in the 1.5 to 2% range for our fiscal fourth quarter.

The Prepared Foods segment is where we report our new value-added beef and pork products, and margins are improving.

Operating income rose $21 million and we achieved a 4% operating margin.

Sales dollars in pounds were down 1.6 and 4.2%, respectively; but the decline in pounds was a direct result of exiting unprofitable product lines which were still present in Q3 of '04.

Slightly lower raw material prices, our concentration on profitable core product lines and resulting operating efficiencies contributed to a much better third quarter performance.

Our Q4 operating margins are expected to be in the 3 to 4% range.

Within the Consumer Products channel, we continued to expand our fresh case-ready beef and pork sales, with sales of $421 million, up 16% versus a year ago, and our volume was up 9.4% to 191 million pounds for the quarter.

We are the market share leader in retail fresh chicken, and our volume there was up an impressive 15.3%, conversion costs were down and operating margins were significantly improved.

We also hold the number one position in the ready-to-eat, value-added frozen poultry segment, where we achieved volume increases of 22% and sales dollar increases of 25%.

We have many -- we have many other new frozen initiatives underway, like country fried steaks, steak fingers, enchilada and quesadilla meal kits, which are all exceeding our planned volume targets.

On the value-added refrigerated side of the business, our ready-to-cook Tyson owned brands of bacon, which include Tyson, Wright and Corn King, for the four weeks ended July 9 of '05 were up 37.7% in unit volume compared to the category growth of 7.6%.

Within the Dinner, Occasion and Ingredient meat segments, we continued to expand our distribution, and are really driving the category growth.

Within food service, the QSR and Casual Dining Segments posted slight traffic count increases for the March through May period.

Chicken-based promotions and new product introductions were the highlights in the most recent quarter.

Our national accounts and distribution groups within Food Service had an excellent quarter from an operating income perspective.

Now I'd like to update you on our efficiency initiative.

Through three-quarters, we have identified approximately $278 million of the $300 million in cost savings and income producing projects, which will generate currently $76 million in analyzed savings of the $92 million we projected.

In summary, our Chicken segment operated extremely well during the third quarter.

Prepared Foods continued to improve substantially, and our Beef and Pork segments struggled.

In the short term, especially Q4, the beef and pork dynamics will continue to be very difficult, but should improve in fiscal '06.

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

Thank you, Dick, and good morning.

Export sales were $549 million for the third quarter.

This is up 22% versus third quarter of the prior year.

The improvement in sales is primarily driven by increases in the boxed beef, chicken leg quarters and boxed pork categories.

Talking further about chicken, our export sales volume for chicken was up 11% versus the same quarter last year, with the primary driver being leg quarters.

Sales to Russia, our largest destination market, were very good for the quarter.

Additionally, we continued to experience significant growth in sales to the Middle East, principally driven by increased demand for product that is destined for Iraq.

Our Middle Eastern sales have increased to the scale that break bulk vessel shipping is economically feasible.

We are also experiencing growth in sales to Western Africa.

With South Korea opening during the third quarter, we now have access to all of our historical destination markets for chicken.

This fact, combined with the increased diversification resulting from new markets, is providing the opportunity for more balanced demand and improved pricing.

In the third quarter, our leg quarter sales prices increased $0.065 per pound as compared to our average selling price for the second quarter of this year.

Leg quarter price comparisons to the third quarter of last year were essentially flat.

In summary, export demand for chicken is very good.

Tyson's inventory of frozen finished goods targeted for export are in very good shape.

The United States chicken industry's overall frozen inventory of dark meat for export as measured by the USDA's June 30th stock report were less than half of last year's tonnage for the same period.

Comparatively speaking, there were 65,000 tons of frozen inventory versus 154,000 tons last year, same time period.

Tremendous improvement.

The outlook for late quarter pricing as we move through the fourth quarter indicates a $0.07 to $0.09 improvement over the third quarter.

We are sold up through the end of our fiscal year.

Based on the combination of demand, current freezer stocks and moderate production rate increases, we would expect export sales volumes and price realization for chicken to remain very good as we move into fiscal '06.

A few words about beef on an export basis.

There is little new news on the export sales front for beef.

While we continue to experience quarter over quarter growth in export volume, our two key markets, Japan and South Korea, remain closed.

For the quarter, our sales of boxed beef were up some 86%, an impressive percentage.

Our volume was up 42% versus the third quarter last year.

These quarter comparisons were bolstered by sales to Taiwan, which both opened and closed during our third quarter.

Very importantly, our third quarter volume run rate is still less than 20 to 25% of our historical run rate.

The demand for high value boxed beef cuts to Hong Kong and Macau, as well as variety meat sales to Mexico and Eastern Europe, were good during the quarter.

We will maintain our focus on developing sales in the available markets and continue to provide support for the US. government's activities to reopen Japan, South Korea and Taiwan.

A word about pork.

Our export sales volume of boxed pork were up 10%, and revenues were up 24% as compared to the same quarter of last year.

These increases were driven by demand for hams to Mexico and picnics to Japan.

We believe both pricing and volume will continue to remain firm through our fourth quarter of '05.

A word about our foreign operations: Tyson to Mexico had an outstanding quarter.

Overall demand in Mexico is good and market prices are strong.

If you will recall, we reported some minor disruption in production related to the low-path AI outbreak we experienced during our second quarter of this year.

Despite some residual effects on volume and cost, we experienced a 23% growth in sales versus last year's third quarter.

Our earnings were very strong, with a 54% improvement over a strong performance in this year's second quarter and a 240% improvement over the third quarter of last year.

Last year's third quarter was somewhat impaired by our inability to maximize exports of hatching eggs from the United States to support our Mexican production.

We expect these favorable market conditions to continue for the balance of the fiscal year and on into the fall of 2006.

We are on track with our plans to grow organically by increasing our production of live birds and with continued expansion of our further process production capacity.

We are actively exploring opportunities to grow our business in Mexico, via both joint ventures and/or acquisitions.

A word about China.

In China, our domestic sales volumes continued, to grow supported by increased demand in the wholesale, retail and food service markets.

Our new retail line in the Shanghai market has enjoyed favorable acceptance for both customers and consumers.

Wal-Mart opened their first supercenter in Shanghai this past week, and we have eight items in that new store.

We're adding two additional new items to our retail product line, and as well we are selling additional products into the deli sections of the moderate supermarkets in the Shanghai area.

We will begin selling our retail line into the Quanzhou area of South China during the month of September.

Our new further processing addition came on line in May, and this will double the capacity of our further processing plant.

We continue to actively explore multiple options for supporting growth in China through joint ventures, strategic partnerships and acquisitions.

And with that, I'll turn the meeting to our Chairman, John Tyson.

Thanks, Greg and Dick and Louis and Dennis for the comments, and I'd like to reemphasize, we stay focused on three elements, and our strategy is very simple: We are going to improve our sales mix of value-added products.

We are going to continue to work on our operating efficiencies for both -- in all of our plants, and work on increased margins in particular, focusing on beef and pork as we move into the fourth quarter, and we will work to expand our presence in our international markets.

With that being said, we'd like to open up the call to questions from our audience and from our friends.

Thank you.

If you have a question or a comment, simply press star followed by 1 on your telephone keypad.

To cancel, simply press star 2.

Once again, that's star 1 if you have a question or a comment, star 2 to cancel.

Our first call comes from Christine McCracken from FTN Midwest.

Good morning.

Good morning, Christine.

Just looking at chicken, obviously you had a pretty significant improvement in margins there, and you talked about some of the drivers.

You know, and I'm looking at it and wondering how much of that improvement was feed and how much of it do you think was an improvement in mix?

Christine, this is Dick.

I mean, we did have a sizeable change in our grain costs, but if you look at them as compared from second quarter to third quarter, they weren't that significant.

I would tell you that this is probably driven as much by mix and by operating efficiencies as I would tell you it was driven by feed.

You know, we did, as I said, have significant volume and dollar sales increases in our further processed frozen chicken activities as well, so it's a -- I think it's a -- really, it's a combination of all those factors -- lower feed costs, operating efficiencies and, again, working on the mix, both on the food service and on the retail side.

Looking ahead, though, you're, I guess at this point, expecting lower margins in the coming quarter.

Is that indicating that some of these improvements aren't sustainable over the long term?

No, I mean, I would say the difference between third and fourth quarter will be the somewhat higher grain costs that are already in the chickens, if you will, that are going to come out in fourth quarter.

And the other thing that I would say is we're not going to get some of the benefits that Greg talked about on leg quarters so much in fourth quarter as we will get them more so into the the first quarter of our fiscal '06.

Christine, this is Greg.

There's two points to that I think you know; one is the working through live production, and the second is as we're such a large futher processor marketer in frozen market, it has to work through our inventory.

Fair enough.

And I guess just looking at, then, your '06 -- and I know you said that you didn't want to look into the next year, but given current grain prices and it looks like kind of an expiration of your current hedges, are you looking at higher feed costs on a year over year basis into '06?

Well, there's no doubt that feed costs have crept up and, you know, I think we're all waiting to see which direction the weather's going to go, Christine.

You know, two weeks ago, it was dry and, you know, corn and soy meal was headed in the direction.

The last few days, it's moderated some.

But the increased costs will start to flow into our system there, but it's something that happens every year and we'll manage our way through it; but as Dick said, increased grain costs will be part of our cost structure.

We should not be impacted as much as other folks because we sell a value added product mix so it's a lower cost component as compared to people that sell up here in the commodity market, and then, you know, we've been able to fix some of our costs up against fixed price contracts with key customers out there in the marketplace also as we move into the fall.

Good to hear it.

Just on beef, if I could, you know, you talked about some of the increased availability there as you're getting more cattle in from Canada, but can you talk about how that might impact, I guess, total protein prices here in the U.S. as we move into the next twelve months?

Well, Christine, I think what that says is, and I think it's true on beef as well as pork, that we've had some record high, you know, live cattle and live hog prices that we've experienced during our fiscal '05.

And we thoroughly believe that we will see lower live cattle and live hog prices during '06.

Now, what that should do is make beef and pork a little bit more attractive for our customers and our consumers from a featuring perspective, and that's really what has changed in '05 is the feature activity has been more driven to the poultry side of the business, whether that be chicken and/or turkey.

So I just believe that we should be in a more attractive position as these competing proteins and our Prepared Foods business get somewhat better raw materials for our finished value-added products.

So that you should you see some improvement in some of the red meats, but it's probably going to pressure demand for chicken as people shift -- as some of those proteins become more attractive?

Well, I mean, and that is -- that's probably a fact, but if you look at it on a composite basis, since we deal, you know, largely in all three of these proteins, we do believe that on a composite basis, that will be a positive for us.

Thanks.

Thank you.

Our next question comes from David Nelson with CSFB

Good morning, David.

Just as a follow-up on beef there, just trying to think about what might be going on with the -- I guess -- I think Dick had used the word -- or phrase "very challenging" -- it does seem that packing margins have actually gone down maybe a lot since the Canadian border reopened.

The list is -- I can look at third party data.

I know last January, you shut down some plants to help industry margins, but I guess the problem was that no one else followed.

Would you expect, or are you thinking about taking a leadership position as you did then and cut back, or are you going to make Swift and Cargill pay this time?

David, I think that's a statement rather than a question.

And I don't know how to respond to that.

We're going to operate our business for our own purposes as best we can for our own company and do what we think is right as a member of the industry to do the best job we can for our shareholders

So you're not planning any plant shutdowns despite low margins?

That's correct.

USDA is forecasting beef production to be up 6% year over year in the back half.

Do you expect it to be up that much?

David, I'm sorry, who's projecting that?

USDA.

At which time frame?

I don't believe --

In the back half of this year.

Calendar year?

Calendar year?

Back half of the calendar year.

I think that's a little aggressive.

I mean, I do believe that we'll be up maybe more so in that 3 to 4%.

Cattle are heavier -- I don't think the numbers will be up -- cattle are significantly heavier than a year ago.

Front end supplies of cattle, again, are much larger than a year ago, but 6% is probably a little high in my estimation

Agreed.

Just on -- there's a lot of disease noise out there.

Siberia has had some Avian flu.

They're talking about, I guess on that one, I would think problems elsewhere would be a positive for you.

And then, obviously, we had a -- have a potential new case of Mad Cow.

Are you -- did you get any concerns from customers following that latest case of Mad Cow and could you comment on how diseases, Avian flu across Asia and maybe now Siberia, might be a positive for you?

Yes, this is Greg, Dave.

I'll comment on the chicken from an export perspective.

You know, we've been going here well in excess of a year, as you know, with cases in Asia of high-path Avian influenza, and it kind of runs, you know, hot and cold as measured by the number of incidents, but it's still there.

It's still being -- I would still term it a positive for us from an export perspective.

Lots of efforts across the world to try to figure out how to deal with this, as I'm sure you know, but the continuance of it kind of depresses -- continues to have a depressing deal on production in Asia and that's a benefit to us.

Dave, the only thing I would add, it seems that the market has really, in a way, discounted this potential third case.

I think we should see some results early this week from the lab in Ames, but if you look at what the industry paid for live cattle last week, you would have to say that the market is not really having a whole lot of interest in that third case at this point.

Got you.

Thank you very much.

Thank you.

Our next question comes from Leonard Teitelbaum from Merrill Lynch.

Morning Lenny.

Good morning.

I had a little problem, I cut out for just a minute.

I just want to make sure that I've got this right.

Now, I believe you said that there's only 40% of your usual take is coming down from Canada, and the biggest slowdown -- or let's say, why would it not be greater than that?

I mean, I guess the animals are getting their passports in order or something, but why aren't you seeing more of it coming down and when -- what kind of a sequence do you see going through between now and the end of the year in terms of supply out of Canada?

I'm sure their passports are getting in order; but there is some paperwork that is going on there which is a little bureaucratic.

Probably the biggest thing is truck availability.

Because we've gone so long without, you know, that movement of cattle into the U.S., those tractors -- and I don't know what's happened to the trailers -- but really, it is as much limited by the logistics move of being able to find enough trucks to bring cattle down.

So it's going to take some time, probably, to get back up to that full level of import that we did enjoy.

And remember now, we can only import cattle that are less than 30 months, so that is going to limit that to a little bit of a degree because historically, we were able to do more than that.

And quite frankly, as an industry, and us included, we are killing more cattle in Canada than what we were historically.

So put all those factors together, it's going to grow and it will continue to grow, but it is going to be limited by those factors.

Both from a time and probably from a long-term perspective, we might not get back to those historical levels that we did, you know, from two years ago.

Okay, now -- thank you.

We'd always been, I think, kind of linked between our opening of our border to Canada and Japan and Korea opening their borders to us.

Clearly, these -- those are not simultaneous events.

Do you see any time table that you feel comfortable with as to when the Japan and the Asian markets might open up to us?

We still are hopeful for a November-December time frame on a limited basis and then growing as we get into calendar '06.

There are still a lot of things going on between our two governments to try and achieve this, but that still seems to be the most informed time frame would be late fall, early winter.

Now, you've closed down some plants as part of the -- I guess the -- let's call it the restructuring or reprioritizing some of the assets.

Is there anything of consequence left to do this year that you can -- if this is going to be a reset year, why wouldn't you do it this year and why shouldn't we expect some additional charges in Q4?

You're talking about chicken plants there, Lenny?

Well, I don't know if it'd just be -- well, let's start with chicken, but let's assume it might be some other facilities as well, because there seems to be a realignment going on here, which I applaud; and if we're trying to get into a cost savings mode, we can see that.

And I'm just wondering why would we stretch it out?

If it can be done at all this year, why wouldn't we do it this year and just reset the base in '06?

Well, on the chicken plants, Lenny, I think you've got -- there were two different types of chicken plants.

One of them was an old plant in Bentonville that's 40 some-odd years old that we were doing kind of chicken breast-type meat products.

We're going put those in a consolidated plant in Russellville and we can get more -- we can increase our value added production by combining those plants and get 60% more value-added production.

The Mississippi consolidation was taking an old facility, an old slaughter facility and putting it in a brand-new facility down there and maintaining the same volume with automated equipment and those type of activities, and those are some of the consolidations that you'll see us doing.

We will work very hard not to lose our market share, and by these consolidations into new plants actually hopefully increase our market share is kind of our strategy.

On the prepared food plants, we did most of that work in the last six, twelve, eighteen months; and as Dick spoke to the improvement in Prepared Foods, we're starting to see some of those benefits, because we eliminated the nonprofitable lines.

We got out of nonprofitable plants and put those volumes into profitable plant activities.

Dick, you got any follow-up?

Lenny, the only thing I would say is we continue to look at this all the time.

At this point, we don't see any major -- anything major or anything of significance for fourth quarter.

I'm just going to point to one other thing and I'll let John McMillin beat you up over the dividend.

The gain of 5 million in the hedging activities compared to the 44 million last year, would we expect to see a similar type of 5 million more than -- sorry -- a $5 million swing again in Q4 the way you guys are set up now?

Well, remember last fourth quarter, Lenny, we actually had a loss in hedges compared to one year ago, so any comparison to that needs to be taken into account.

Yes.

But you probably -- I would have to guess you've reset some of your -- you know, your hedge positions and have taken out some of the negative ones.

With grain costs rising, would you not be in a more hedged position this year?

We're in a more favorable position currently, yes.

Okay, that answers that.

Okay, thank you very much.

Thank you.

Our next question comes from John McMillin with Prudential.

Good morning, John.

Well, does Lenny have access to the queue data?

If he could only predict stocks.

I'm joking, Lenny.

Or grain prices.

Just, Dick, you know, November is not too far away.

Are you just saying that because you've said that in the past and you don't want to backtrack politically?

I mean, to get business from Japan in November, the switch would almost have to be turned very quickly.

John, I just -- I'm probably not that much more informed than anyone else, but, you know, the timeline that Japan established to go through the Food Safety Commission, while we have probably slowed that down a little bit, the original timeline was supposed to be end of September, first part of October.

So, yes, I still believe that, you know, maybe December is more real than November, but giving myself a two-month time frame, I still believe that November-December will be accurate.

Now, will it be a lot of volume that early?

Probably not.

And it will grow over time, but I do believe that we as an industry and as U.S.D.A. and the government believe, that that can still take place

Great.

And then Greg, the leg quarter prices, I guess to be up 6 this quarter and then up another 7 for this fourth fiscal quarter, I mean, you're now talking about low 40s prices, correct?

That is correct, sir.

And to the extent on Russia paying low 40s prices, and I guess they have some contractual arrangement where they kind of have to buy into, what is it, 2009?

Well, what that really is, John, is there is a quota, which means the imports from anywhere in the world cannot exceed a certain number.

Now on the other hand, they're not obligated to buy that -- you know, market circumstances still will be the driver of that, to that end, but demand has been good in Russia.

We expect this year that the U.S. will have an excellent chance to fulfill that quota as we look forward, if the Russian economy still continues to move forward as whatever pace, we'd have a very good chance to be able to continue to sell that amount.

With Brazil pushing the fact that their chicken has -- what is it, less water, more nutritional content?

Can you explain what's going on there in terms of their efforts to gain share from you?

I think, you know, from our perspective, that's really more just market blustering than there is any real fact.

There is some differences in how some products are frozen and there is some stratification out in the markets with regard to price, but, you know, I think that's much ado about nothing in real terms.

And then John, your international acquisition opportunities, it would seem to me that, you know, being located in South America where grain is cheaper would make some sense.

Is that where we should look for your acquisitions or is that not where you're looking?

Well, we looking in, as we spoke earlier, Mexico.

We'd like to expand our presence in Mexico -- not just poultry base, but to see if we can find the other two proteins to round out our distribution structure in Mexico.

In China, I think we all know the excitement that's going on in China.

We believe we can bring some of our skill sets and consolidation skills and agricultural production techniques, and have been looking to enter a little bit further in the production cycle there -- not just in the value-added chains, but actual ownership of live product.

In South America, we have been looking in South America, particularly Brazil, for the last three years, and have come to the conclusion in Brazil you need to be able to sell both in country and export out of the country, not just be an export-based producer out of Brazil.

So we'll continue to look at companies that happen fit that model, that sell both in country and export.

Okay.

Well, thanks a lot.

Thanks, John.

Thank you.

Our next question comes from Eric Katzman with Deutsch Bank

Hi, good morning everybody.

Good morning, Eric.

A few questions, I guess first one more from a management perspective.

John, I think it's been oh, maybe a year now with the CFO position still on an interim basis.

Can you kind of update us as to kind of where you stand with candidates and basically why it's taking so long to find a qualified person?

Well, related to the CFO question, we have an outstanding individual that's helping us run our business, and Dennis, who's here on the conference call with us today.

We continue to look for a certain set of qualifications for the candidate to help us run our company.

I think we're blessed in the fact that we have Dennis on the interim basis and we will maintain the search based on what we believe the company is looking for at this time and be very methodical about it.

Have you -- you know, have you been close with people and it's just a question of, you know, compensation, or has it been kind of more just, you know, cultural fit?

Oh, Eric, I would tell you we've been close with a couple of folks and they chose not to leave their current company and so we keep on moving forward.

Okay.

And in terms of just kind of operations, Dennis, maybe you could explain a little bit more about the working capital swing and how much of that kind of improvement in terms of cash conversion cycle or days, however you want to clarify it, kind of how much improvement should we look at kind of year over year, just kind of going forward in general?

And then John maybe you could follow up with, you know, if you can't find acquisitions, why wouldn't you be buying back stock more aggressively at this point?

Eric, as far as the working capital cycle goes, we put in considerable efforts to tighten down our accounts receivable days.

We're down to 16.5 days year to date through the end of this past quarter.

This compares to 17.5 same time a year ago and about 19 back when first -- the companies first came together, so that's $26 billion company, that's a considerable amount of improvement.

Likewise, inventory days have improved from about 32 and a half, 33 days down to about 30, so we've really brought them in pretty well.

As far as continued improvements, there will probably be some slight improvements.

We're kind of near at the optimum range where we need to be as far as those go

As far as stock buy backs go, Dennis?

You know, we get a lot of questions about stock buy back, yet when you look at the comments that come from you peers about the effectiveness of stock buy back, the analysis done on those for a lot of companies that have spent money to buy back stock still raises a question whether that is the best use of cash.

I think for us, you've seen our debt to cap.

It's under 40% for this quarter.

We meet or exceeded that by one-quarter.

We'll have some acquisitions in the next six to twelve months.

They're not going to be big acquisitions but, you know, they'll require us to spend 50, 100 or maybe $150 million as we look to one, add a set of products into our mix; two, to get our foot on the ground in either Mexico, South America -- or expand our presence in Mexico, get our foot on the ground in Brazil, and increase our business model there in China.

So we'll be spending some money there, but I think those are the best and highest use of cash, paying down debt and then finding some right product add-ons, either domestically or expanding internationally.

I guess the last thing on earth, you know, I would -- the last thing on earth I want you to do is listen to sell side analysts in terms of running your business.

My last -- in terms --just last question, did beef processing packing margins kind of improve as the quarter progressed?

And I'm taking -- I'm trying to take out the seasonality of the barbecue season; but did you show better results, let's say, you know, in June versus April, and then why shouldn't that be kind of -- why shouldn't that improvement, if that was true, kind of continue into the September quarter, and then I'll pass it on?

Eric, the quarter was probably more characterized from a three-month perspective as April being kind of okay, May being the best of the three months, and June being the least attractive of the three months, which is why we believe we'll still have some challenging effects here in the fourth quarter.

Okay.

And is there any particular reason why June was so poor?

I mean, when did the -- I guess the cattle hadn't really started coming across at that point.

Typically, you know, Memorial Day is a very, very strong beef period as you lead up to that.

Then you've got a gap and oftentimes, again when you have relatively high priced beef, you'll see the feature activity both on the food service and on the retail side move to other proteins, so demand was sluggish at best during June, with a lot of the promotional activity being more on the chicken side of the business.

Okay, thank you.

Thank you.

Our next question comes from Tim Ramey with D.A. Davidson.

Good morning, just wanted to follow-up on that line of thinking, Dick.

The feature activity should move up, I would think, with cattle prices coming down.

Is it the case that you kind of know what the features are going to be and so that moves with the lag and we won't see it in the 4Q, or how does that work?

You're right.

I mean, typically, as cattle prices fall, we should see more featured activity; but on a relative basis, beef at $80 a hundred weight live compared to breast meat in the $1.40 to $1.50 range, you're still not in a very strong competitive situation from a beef perspective.

So while, yes, prices have come down from 90, $91, they're still on a relative basis quite higher than other sources of protein for featured activity.

And do you think that's the only component to demand?

This quarter wouldn't have been affected by any incremental news on Mad Cow, particularly.

No, I really don't believe that that's affecting the demand side of the business.

I think it's just the -- I mean, the economy and everything that -- high gas prices.

I mean, people are just watching their dollars, and beef is not the most attractive protein.

And just a point of clarification, Dennis, are there any extraordinary items or things that we might view as extraordinary in the 4Q guidance that have not currently been disclosed?

No, there's not any -- anything in our guidance for the fourth quarter.

Thank you.

Thank you.

Our next question comes from Jonathan Feeney with Wachovia.

Good morning, everybody.

Good morning.

Just to follow up on the beef and the pork demand, I guess, together, when you look at -- you know, supplies seem relatively benign there overall.

I mean, is there something -- what are we missing about -- you know, I know prices are relatively high to history, but if you think year over year, you know, it's got to be a demand-driven kind of just, you know, lower pricing here but what do you think -- if you could drill deeper, what's going on at the consumer level?

Is it -- you know, could it be that, you know, less low carb dieting creating less aggregate demand for protein?

Well, I mean, you do have certainly the low carb Atkins type, South Beach type diets, don't have the spark that they certainly did a year ago.

Remember, we are consuming a lot of protein as a country, and there are a lot of available supplies of protein, whether that be beef, pork, chicken, turkey or other sources of protein.

So it's really competing for that consumer dollar that is quite frankly making this difficult; and your two highest proteins on a comparison basis certainly have been beef and pork relative to the other major proteins and sources of proteins.

So, I mean, we're trying to manage that spread as best we can.

We're still not back to anywhere near our capacity utilizations that we historically enjoyed; and as supplies grow without these export markets -- the key export markets of Taiwan, South Korea and Japan -- plus additional meat coming from Canada, we're trying to put a lot of meat into the system here in the short term.

So again, I think this is a short-term effect.

I think longer term we'll get back to managing the spread the way we historically had.

We are converting a lot of our product into value added, you know, with 191 million pounds going into case ready beef and pork.

That continues to grow and we anticipate that's going to continue to grow.

So I think it's kind of balancing all this in the short term versus what we believe is a little bit better outlook for the medium term, anyway

Okay.

Just kind of a detailed question to follow up.

When you think about pork supply that's out there, there's a difference of opinion, you know, in -- I talked to contacts in the industry about what these huge increases in pork cold storage mean.

Some -- I think some of the smarter people are saying it's not all that meaningful because of -- you know, it's just change in the margin due to gearing up for exports; but then on the other hand, it's hard to ignore that these huge increases in pork cold storage have coincided with the pretty huge decreases in packer margins.

So what -- is there an oversupply at the wholesale level, at the cold storage level of pork out there right now?

Well, certainly there is more pork out there than there was, you know, a year ago.

So that is going to have some effect, you know, whoever those smart people are.

There is a lot of meat, though, in the freezer that is already sold.

That's a fact.

A lots of hams that are in the freezers are already sold, so there's definitely some truth to that.

The belly supplies, again, are higher; and I think you saw that effect, at least on a short-term basis, as bellies did get lower.

Now they've turned around and come back up.

So, yes, there is definitely going to be an effect whether you get that much more meat in the freezer, but there's a balancing effect, and a lot of that is just getting ready for export and for ships, so there's some truth to both sides of that.

It's probably not weighing heavily on the market, but it is having some effect

But you look at the flip side, you've got diminished supplies in the freezer on the poultry side and diminished supplies in the freezer on the beef side.

So if you look at all three proteins and you want to look at freezer stocks, you've got to look at what's in the freezers on both the other two proteins, and both of those are at lower levels

Right.

And just finally, I mean, could there be -- you had some nice momentum here in the case-ready franchise and I think it's starting to grow like a lot of people have hoped it would for a long time.

Would a -- just theoretically, would a -- assuming this lower price trend continues, would a lower overall protein prices help acceptance of case-ready meats?

I'm just thinking because that just allows the consumer to absorb a higher price.

You know, a consumer is going to look at this in terms of absolute dollars out of pocket.

You know, does that help lower protein prices?

Does it help case-ready to get going?

Probably won't hinder it.

I don't know as it will necessarily be a determining factor for a retailer to make the decision to go to case ready if they're not on case ready, but certainly it can't hurt.

How about on the value added side, then, where you're marking up, you know, both [INAUDIBLE] prime cuts.

Well, certainly our value-added products like fully cooked hams and fully cooked bacon or ready to cook bacon, if you do have lower raw materials, then again, that makes that product a lot more competitive in the consumer's mind as you get, let's say, finished bacon or even lunch meats, those types of products more competitive, that should aid in our ability to increase our penetration there.

Okay.

Thank you guys.

Thank you.

Our next question comes from Pablo Zuanic with JP Morgan.

Good morning everyone.

Good morning, Pablo.

I'm just trying to [INAUDIBLE] the math, I mean, from a -- if [import] came down, shouldn't we expected that fresh pork margins would improve and Prepared Foods margins would improve?

Fresh have not, but Prepared Foods it seems that on a like for like basis improved.

I'm just trying to understand, is that counterintuitive?

Is there something going on there?

I mean, if you're going to do as well in boxed pork, I would have assumed that Prepared Foods also would have suffered; i.e., that retail prices would have fallen more than [imports].

So what's going on there?

What's the difference on a like for like basis within Prepared Foods and the boxed beef margin logic?

Pablo, really the difference there is in the makeup of the hog is a little bit different than some of the other proteins.

You only have about 35% of that hog that ends up in retail type pork in a -- whether that be a boneless loin and a tenderloin and a rib and a shoulder.

That only represents a relatively small portion of the hog carcass.

On the other side, you have 65% of that product that ends up in prepared food type products, whether that be trimmings or bellies for bacon or hams.

So you have a different mix there.

The reason that the prepared food side did well -- or did better -- was because you had lower raw materials going in there.

On the 35% that ends up in retail, again, it was still relatively higher priced -- a boneless pork loin was still not as competitive, let's say, as a boneless chicken breast would be.

So that's kind of the difference between the two, where your value back to the live hog, 65% of it was at lower prices, which you got advantage on your Prepared Foods side, whereas you didn't get that advantage on than other 35%.

And that's why you can have better margins in Prepared Foods with lesser margins, or not as good, as anticipated margins on your fresh pork side.

Okay.

And just to follow up, over the Canadian operations, I mean, obviously, we have access to our live cattle prices for Canada, but can you just give us [INAUDIBLE] a sense of what's happening there?

I suppose your [factor] margins are going to narrow?

Just give us some color there, please.

Well, yes, as cattle have started to come down to the U.S., our Canadian operation margins have narrowed somewhat.

That's a fact.

Okay.

And the last question regarding Japan and Korea, based on what you know, is there anything new that they are asking since the second case of Mad Cow was declared by the USDA, albeit six months late?

Pablo, the only thing I know is they have asked for a little bit more information about the different testing methods that the U.S. has been using, but that's the only thing I know of where any more information has been requested.

Okay.

That's good, thanks.

Thank you.

Our next question comes from Ken Zaslow with Harris Nesbitt.

Good morning.

Good morning.

Just a quick question.

What underlying fundamentals changed to reduce your underlying outlook in 2005, and how much will carry over in the next twelve months?

Can you repeat the question?

I'm not quite sure.

Because your -- how I calculate your underlying EPS guidance for 2005 went from $1.02 to $1.17 to $1.00 to $1.10.

Maybe I'm not calculating correctly, but what were the key principles of why that outlook was reduced, and will it carry on for the next twelve months?

The fundamentals for the fourth quarter

Well, we certainly are not commenting on our 2006 guidance, but we -- we're at $1.05 to $1.20.

Adjusting for the $0.08, it's $0.97 to $1.12, given -- but then we took it down to $0.95 to $1.05 in light of what we see with the markets in beef and pork in particular.

Okay.

I guess another way of saying -- I guess -- the weak beef demand, do you expect that to carry into the next twelve months on the domestic side?

Well, no, I don't think it -- we don't think it's going to carry into the longer term.

As we said, we believe that in the short term, especially in Q4, we still see some very challenging issues with beef during fourth quarter.

Then if you couple that with -- and you believe that cattle prices due to supplies increasing will get lower -- beef will get more competitive, we should see more feature activity, both from the retail and the QSR side as we get into '06, coupled with the export markets opening, we do see improvements in beef as we get into our fiscal '06 at this point.

As our fresh meats beef business model is managing the spread between where we have the opportunity to acquire live cattle versus the ability to price boxes into the retail or into the food service sector, so it's more about managing the spread between the buy and the sell, and we think we'll be in better balance as we head into the end of the fourth quarter and as we start to move into next year.

How concerned are you about the recent expansion in Canada, and how does that affect, you know, cattle coming down and potentially the replacement of Canadian cattle for Canadian beef exports?

Wouldn't that create more beef exports rather than cattle exports from Canada?

Well, you know, I mean, the slaughter capacity has been increased in Canada, and really the Canadian producer is going to decide where he sells his livestock.

If it's more attractive for him to sell it live into the U.S., that's what he'll do.

If it's more attractive for him to sell it into Canada, he'll do that.

However, there's only about 30 million people in Canada, and they can only eat so much beef, so what additional supply gets processed in Canada literally is going to have to be exported.

So there is a balancing effect there, but marginwise, you know, there is going to be some -- or not marginwise -- volumewise, there is going to be some slaughter capacity and there will be more cattle processed in Canada going forward.

But they still produce more live cattle than they can process in Canada, and so therefore those live cattle will have to move to places where it can be processed, and processing capacity is available in the United States.

Can you give us an update labor relationships in the Alberta beef plant, what's happening there?

Well, what has happened basically is the Alberta government has kind of instituted a 60-day time frame here which ends September 15 to try and help out with reaching a settlement between us and the UFCW in Canada, and that's really where we are at this point.

So what extent, if any, has there been any change in the retail chicken environment with increased competition from some of the smaller players?

I don't -- I don't feel a sense of that anywhere.

I mean, you have had, you know, more of a commodity advantage, if you will, here for parts of the last year, year and a half, as historically that might not have been true; but I don't think we're -- we're not feeling that pressure and we believe we're running a very good chicken business at this point.

My last question is just on food service.

One of your competitors also saw a little softness in the food service side.

Is that a secular issue or is that something that's going to be cured pretty quickly?

I think we all can say that the month of June in most businesses, not just in our business, was a little uncertain because people didn't know where energy prices were going to be and people -- but once you got past past of the 4th of July, there's a lot of momentum out there in the marketplace right now, and you do see a lot of QSRs having promotions out there that are driving consumption, so.

All right, great, thanks.

Thank you.

Our last question comes from with Farha Aslam with Stephens, Inc.

Hi, good afternoon.

Good morning.

Good morning.

For your beef operations, what was capacity utilization in the third quarter and what do you anticipate it being for the fourth quarter?

It was about 73%, which again was better than Q2 by about 5 percentage points, but still not where we would like it to be; and we don't anticipate at this point it being much different from that.

Maybe slightly up, but certainly not a whole lot different from that in fourth quarter.

And when would you have anticipate getting closer to, let's say, the 80 to 90% range looking out into next year?

Will it be in your first half or will it be closer to the second half of your fiscal '06 year?

Historically, most of the time when we get to the higher end capacity utilizations really are in the months of May through September.

And then again in -- sometimes, you know, January and maybe even December sometimes are decent months, so it really -- it depends on supplies; but I would not anticipate us -- I mean, a good capacity utilization for us on an annualized basis would be in that 82, 83%, and to get to that kind of a level, it's going to take a good late second quarter and third quarter and fourth quarter of next year

Okay, great.

And in terms of processed foods, which lines do you feel that you're focusing on and which are the lines that you're more deemphasizing going forward?

On our Prepared Foods business?

Exactly.

Really focusing -- we're focusing on quite a few, but we're trying to be very, very strong on the bacon side.

We're being very, very aggressive on our Dinner Occasions, on our Ingredient Meats; and again, if we go back to our further processed and our frozen poultry initiatives, we are still very, very heavily involved in new product initiations on a lot of both beef and pork -- as I said, steak fingers and enchilada meal kits, all those types of convenience meals across all the proteins is still where our primary focuses are.

And any of the areas that you've deemphasized lately?

I would not say deemphasized, but we've cleaned up and we've tightened up the SKUs and made sure that the set of products we're running through our facilities are ones that generate the right production line time runs, and we just eliminated a lot of small SKUs, tightened our -- like in bacon, we've now got basically three brands -- the Tyson brand, which is a national brand; you've got the Wright brand, which is a strong regional brand and a premium type brand, and then you've got Corn King, which is kind of a price brand.

So that's how we're trying to go to market.

We've made good progress in our Dinner meats and then we've made nice progress in our Ingredient Meats out there and, as Dick said, double digit volume and sales dollars growth on the value-added poultry.

So it's about focus and tightening up SKUs.

And then taking that same strategy over into food service

And my final question, you've commented that you think cattle is going to be in the mid 70s out into 2006.

What are your thoughts on pork, or hog pricing in particular, for your fourth quarter and then looking out into 2006?

Let me first say that I didn't say mid 70s.

At least, I don't believe I did.

I do believe cattle will be more competitive.

I don't believe I actually gave you a number.

But I do believe cattle will be more competitive with other proteins '06.

Again, I also believe that hog prices hit unusually high prices in '05, and they're going to come down proportionately as well as they have come off their highs.

You know, there still are cycles out there in terms of hogs, which we should be on the downward side of that which should be positive, again, for our Prepared Foods business in terms of raw material prices going forward.

So would you put out -- feel comfortable putting out sort of an average price that you expect your hog procurement costs will be in the fourth quarter?

Oh, in the fourth quarter?

Mm-hmm.

We don't really have a number.

No, we -- I would just as soon not.

I mean, that would be a very high speculation on my part.

I would just as soon not give you a number.

Yes, we don't want to let Dick speculate right now.

Okay, great, thank you.

I want to thank everybody for joining us on our conference call.

I want to thank you for your questions and following our company.

There's a lot of men and women working very hard to execute our three strategies.

We've made progress on them;

I think they're showing up.

Have there been some difficult challenges in the third quarter with our Beef and Pork segments?

Yes.

Will they still be challenging in the fourth quarter?

Yes, but we see improvement there and we look forward to seeing you on our next conference call.

Thank you, and have a good day.

And that concludes today's teleconference.

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