泰森食品 (TSN) 2005 Q4 法說會逐字稿

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

All participants will be in a listen-only mode until the question-and-answer session.

This conference is being recorded.

If you have any objections you may disconnect at this time.

I would now like to turn the call over to Ms. Ruth Ann Wisener.

Ma'am, you may begin.

Good morning and thank you for joining us today for the Tyson Foods fourth-quarter and fiscal 2005 conference call.

With me today are John Tyson, our Chairman and CEO;

Greg Lee, our Chief Administrative Officer and International President;

Dennis Leatherby, our Treasurer and Interim Chief Financial Officer;

Jim Lochner, Senior Group Vice President of Margin Optimization; and Noel White, Group Vice President of Fresh Meats, who is attending today by phone.

Dick Bond, our President and CEO is ill and unable to be with us this morning.

Before we move on to discuss the operating performance for the quarter and the year, I want to remind everyone that some of the things we talk about today may include forward-looking statements.

That means those statements are going to be based on our view of the world as we know it today; and that also means things can change.

So I would encourage you to look at today's press release for a discussion of the risks that can affect our business.

Now I'm going to turn things over to John Tyson.

Thanks, Ruth Ann, and welcome to your first conference call.

Welcome to the Tyson team members and to the friends out there that are listening to our conference call that wraps up our fourth quarter and the end of our business year '05.

Now I'm proud of the way our people have stayed focused on our long-term strategy and pleased to say that I believe we're making progress in the three primary elements of our strategy.

Most of you all know that the first element of our strategy is to continue to increase that sales mix of value-added products in our portfolio.

In the past we have been stating our goals in terms of percentage, 50% value-added products over the next three to four years.

Today we're going to start talking about in terms of dollars, because I think you can see the real impact of that progress we are making, with commodity price fluctuations which can change the shift of the sales mix and conceal value-added sales momentum.

Value-added products represented 11.1 billion sales in '05, which is an increase of 500 million over the business year '04.

For the business year 2006, our goal is to increase our value-added mix $900 million or to 12 billion in sales of value-added products.

We have redefined for consistency on our value-added definition across all proteins, which would include the further process items now in Mexico, China, for consistencies as we move forward.

I think most of you also know the second element our strategy is to continue to work on operating efficiencies, because we believe we have some other best operators in the business.

In '05 we approved just under $302 million in cost savings and income-producing projects which would generate an annual savings of almost $84 million.

We are pleased with that performance against our original goal, and capital expenditures produce $90 million in savings.

I do believe that this is an excellent return on our invested capital, and we will continue to expend our capital improvement to improve our operating efficiencies; and that will give us world-class facilities.

For 2006 we are planning on spending approximately $232 million for a projected annual savings of $72 million.

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

We have been and continue to be actively looking in China, Mexico, and South America; and Greg will update you on these activities later on.

Our goal for 2006 is to increase our in-country presence in at least one foreign market.

In summary, 2005 our chicken business had a solid performance.

We did see improvement in our pork business in the fourth quarter.

Our prepared foods segment was flat year-over-year, and it simply has been a tough business year for beef.

Earlier in the year we had the Canadian border issue, and several of our export markets remain closed throughout the year and remain closed today.

We did have strong cash flows, and we did meet our goal of debt to capital of less than 40%, ahead of schedule.

In '06 we do expect our chicken business to remain solid, our prepared foods market share to improve.

We think the pork segment will generate more normal returns, as domestic hog supplies improve.

There have been some developments in the beef export markets that are encouraging, but we know it is not going to happen overnight.

It is going to take time for those markets to stabilize, and for cattle supplies to improve.

Dennis will cover our earnings overview and financial guidelines; and then I will share some comments that were Dick's previous comments.

Greg will share his perspective and discuss how we are going to execute on this strategy.

As this time I will turn the call over to Dennis.

Thanks, John.

Good morning, everyone.

In our press release this morning we reported GAAP earnings of $0.28 per share for the fourth quarter and $0.99 per share on a diluted share basis for the fiscal year.

The Company's accounting cycle resulted in a 13-week fourth quarter and a 52-week year in fiscal 2005, as compared to a 14-week fourth quarter and 53-week year in fiscal 2004.

Please note, fourth-quarter 2005 earnings include $8 million of costs associated with Hurricane Katrina, included in cost of goods sold, which reduced GAAP earnings by $0.01.

Also in the fourth quarter is a non-recurring $15 million net tax benefit.

The result of these items increased GAAP diluted earnings by $7 million or $0.03 per share for the quarter.

Fiscal-year 2005 earnings include $14 million in costs related to poultry and prepared foods plant closings; a $33 million charge in connection with the live swine legal settlement; and in addition we had gains of $8 million related to sale of the Company's remaining interest in Specialty Brands, Inc.; also a $12 million recovery under the vitamin antitrust litigation; as well as the $7 million of net benefits discussed in the fourth quarter.

Some other points to note in our financial statements.

Cash provided by operations were $78 million for the quarter and $999 million for the year, an increase of $67 million over last year.

The increase was primarily due to a net improvement of working capital.

Capital spending for the quarter was $176 million and $571 million for the fiscal year.

Debt at the end of the quarter was just slightly under $3 billion, down $367 million from the prior year.

The debt to capital ratio remains solid at 39.2%, down from 43.9% one year ago.

This means we achieved our goal of reaching 40% by fiscal year-end.

Due to our lower debt levels, interest expense was down $12 billion for the fourth quarter compared to the same period last year.

For fiscal-year 2005 interest expense was $48 million lower than in fiscal year 2004.

Our tax rate for the fourth quarter was 24.8% and 33.1% for the fiscal year, which were lower than expected primarily due to the non-recurring net benefit from taxes as mentioned earlier.

Now let's review our financial outlook.

As we discussed in our press release, our fiscal-year 2006 GAAP earnings are expected to be in the range of $0.95 to $1.25 per share.

Revenues for the fiscal quarter are projected to be approximately 26 to $27 billion.

Interest, foreign exchange, and other charges are expected to be in the range of 200 to $210 million.

Our tax rate for fiscal year 2006 is expected to be approximately 36%.

For capital spending, our fiscal year 2006 estimate is approximately 600 to $650 million.

Depreciation and amortization is expected to be approximately $540 million for the fiscal year, and weighted average shares will be approximately 357 million.

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 updating our guidance, for the benefit of all shareholders.

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

This concludes my comments, and now I will turn call back over to John Tyson.

Thanks, Dennis, and good morning once again and has always thanks again for being on the call.

Our overall results, our fourth-quarter results like the third quarter were led by our chicken segment with operating margins in the 7% range.

Our pork segment operating margins improved to 4.2% for the quarter, while the beef segment had an operating loss of $13 million.

On a year-over-year basis our prepared foods results were flat and are still not at acceptable levels.

At this time I will talk briefly about each segment in more detail as well as our customer channels.

In our chicken segment, operating income adjusted for the hurricane impact was approximately $145 million for the fourth quarter compared to $111 million in Q4 of last year on an increase of 31%.

Sales dollars were down slightly, less than 2% after adjusting Q4 of last year for the 13 versus 14-week period.

Demand for chicken continued to be very good in the retail and foodservice channels.

Supply continued to grow in the 1% range for the quarter.

Grain prices were lower than a year ago, and leg quarter prices were higher, both contributing to earnings improvements.

However fuel and energy prices were negative impacts to earnings in the quarter.

Looking forward to the '06, supplies should increase approximately 2%.

Grains at this point appeared to be favorable compared to '05, and we do believe that demand will continue to be good going into the start of the year.

In our beef segment sales dollars adjusted to equal weeks in Q4 '04 and '05 were up approximately $41 million.

Volume was up 6.2% on 165 million pounds, while sell prices declined from $1.19 to $1.13 per pound.

Operating income declined $58 million to a loss of $13 million for fourth quarter of '05.

The decline was solely from the changes in volumes and margins from our Lakeside Canadian facility.

Regarding '06, imports of live cattle from Canada to our facilities in the Northwest and Upper Midwest continue to grow.

We're currently within 1,500 head or 25% of what we traditionally imported on a weekly basis prior to the closing in the spring of '03.

We have settled our labor dispute in Canada and the facility is returning to normal operations as we speak.

We do continue to be short of domestic cattle supply; hence our capacity utilization is still not to the acceptable levels.

Demand for beef continues to be sluggish at best.

On the Asian front, it appears we could see limited access to our Japanese market by late December.

However we believe, based on the 20 months of age and verification processes required to export to Japan, sales will be limited.

More significant sales to South Korea and other Asian countries on a 30-month age basis could begin in late February or March.

Beef operating results will continue to be poor especially in the first two quarters of the year.

In the second half of the year we expect additional supply of domestic cattle and improvement in seasonal demand, and potentially a much improved international market access position.

As for our pork segment, sales dollars and pounds decreased in the pork segment by 6.5% and 1.7% respectively, adjusting for common weeks on a year-on-year basis.

However, operating income improved by $8 million as compared to the same period last year.

Operating margins as a percent of sales improved to 4.29% for the quarter.

The live cost of hogs decreased by 11%, while selling prices were only down by 5%.

The supply of live hogs for the business year '06 continues to grow slightly.

We expect an increase of 2% to 3% for '06.

Demand for pork both domestically and on an international basis continues to be good and steady.

Prepared foods.

Adjusted sales dollars for the quarter fell 6.8% and volume dropped approximately 4% on a year-on-year basis.

Adjusting operating income was flat compared to last year, but still a disappointing 2.6% on a return on sales basis.

We now have implemented or completed the implementation of exiting low-margin product lines; and while raw material prices retreated slightly, relatively high belly and ham raw materials impacted our operating margins.

We have some very exciting and positive trends in our prepared food businesses, and I will talk about these in more detail inside our consumer channel discussion.

Speaking of consumer channels, our consumer products channel we continue to grow our case-ready beef and pork with sales of $409 million, a 5.3% increase compared to Q4 of last year.

For the year we achieved sales of $1.57 billion compared to 1.3 billion in '04 on a 52-week basis, or an increase of 13%.

We continue to expand our leadership position in ready-to-eat value-added frozen poultry, where we achieved both volume and sales dollars increases of 15% for the quarter over last year.

For the fiscal year our volume grew 19%, while sales growth was up 20%.

We also increased our market share by 5 points to a 41% share.

The category grew 15% for the same time period.

We have significantly exceeded our ACV distribution and volume goals in our new meal kits as well as our country-fried steaks and steak finger product lines.

Within the value-added refrigerated side of the business, we fundamentally changed the trajectory of the dinner meats business by gaining a share of 26% and increasing our volume by 33% over last year's fourth quarter.

Moving to the foodservice channel, where we are the leader in the foodservice, within the foodservice the QSR segment continues to post slight traffic count increases.

There is no doubt that fuel costs and hurricanes were a factor in affecting the restaurant activity during our fourth quarter.

We continue to realize excellent growth in volume and sales in the school business, the K-12 channel.

Our unique go-to-market strategy yields a very attractive return as well.

Quarter-over-quarter our volume grew 23% or roughly 11 million pounds, and our sales increased $12 million in that channel.

Additionally our national account unit group delivered on a key strategic goal for '05 by completing a 30 million further processing expansion project in September, which resulted in providing a major QS segment operator a cost-plus, dedicated, vertically-integrated poultry complex.

For Tyson the benefits include 100% value-added volume growth with this customer; and decrease in market risk for approximately 1.5 million birds per week; and the opportunity for additional dedicated-value operations across our product portfolio.

This is also been beneficial to our customers because it allows them to reduce the total number suppliers and increases their assured supply long-term.

This was actually the second complex dedicated to a customer during the business year, as we committed an additional one to another customer already having multiple dedicated complexes.

This brings our total dedicated production to roughly 10% of our total.

Our foodservice group as a whole delivered excellent operating results for the quarter as well as the total year.

In summary, we did face, and continue to face, some difficult and unexpected challenges in the business year '06, and I do believe we managed through them very effectively. '06 will have some of the same challenges, especially in beef in the first two quarters of the business year.

I believe you can expect our results to be back-end loaded with approximately the same percentage of our earnings coming in Q3 and Q4 as in the business year '05.

Now I would like for Greg to share his thoughts.

Thanks, John, and good morning.

Let's talk about international.

Our export sales were 543 million for the fourth quarter.

This is up 4% versus the fourth quarter of the prior year.

This performance was achieved in spite of interrupted shipments in the last month of the quarter due to Hurricane Katrina.

Talking about chicken, during the fourth quarter demand for chicken in the export markets remained robust and was reflected in strong pricing for the quarter.

Leg quarter sales prices increased $0.097 per pound over the third quarter, which of course was an excellent quarter for pricing, and $0.157 per pound compared to the fourth quarter of last year.

This positive price variance offset the impact of logistical problems.

Fourth-quarter sales of commodity poultry were 5% higher than the third quarter of fiscal year '05.

Despite strong demand, export sales for leg quarters were down 38% versus the same quarter last year, due to logistical problems associated with Hurricane Katrina that interrupted shipments late in the quarter, primarily the last week of August and through September.

Our logistics network had to be completely reworked to accommodate the loss of major freezer capacity and shipping ports in the Gulf area.

This coupled with the scarcity of transportation assets taxed our ability to get products shipped on a timely basis.

After having successfully rematrixed our logistical plans, we are shipping at a rate greater than normal; and we expect to continue our high-volume shipments through the first quarter.

In summary we have the benefit of forward contracts and a plan for managing through these adversities.

We expect export sales volumes and price realizations to remain good through the first quarter.

Talk about export beef.

Our export sales were up 9% over the fourth quarter of last year at 347 million.

Our sales of boxed beef were up 15%, and our volume was up 4% versus fourth quarter last year.

The quarter comparisons were bolstered by strong sales to Mexico for chucks and round cuts, and to Hong Kong and Macau for high-value boxed beef cuts.

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

As John outlined in his remarks, referencing the beef sector, we would expect limited shipments of beef to Japan by late December.

The opening of the beef market in Japan should trigger the opening of other key markets in Asia including Korea, Taiwan, and Hong Kong.

Our export pork volumes were at record levels in fiscal-year 2005 and are up nearly 35% over the last two years cumulative.

Our primary markets remain in Mexico and Japan.

While Japan export volumes have remained steady over the past two years, exports to Mexico have grown nearly 60% since fiscal-year 2003.

Export sales volume of boxed pork was up 13%, and revenues up 15% as compared with the same quarter last year.

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

We look for the volume and prices to be good as we move through the first quarter of '06.

Let's talk a bit about our foreign operations.

We had an outstanding fourth quarter and full year in Tyson de Mexico.

We experienced an 18% growth in sales versus last year's fourth quarter and a 124% improvement in earnings over the same period a year ago.

Annual earnings at Tyson de Mexico were at record levels, coming at 110% higher than the prior year.

Softer market conditions during the second half of the fourth quarter in Mexico are expected to continue into the early part of quarter one fiscal 2006.

We would expect the markets in Mexico to strengthen as we approach the holiday season.

We have successfully completed our expansion plans to grow organically by increasing our production of live chickens.

Our fiscal 2006 results should reflect a full year's worth of sales related to these higher volumes.

In addition to the increase provided by more product, we have plans for significant growth in our further process production capacity and sales during the new fiscal year.

We're also actively exploring opportunities to grow our business in Mexico via both joint ventures and acquisitions.

Let's talk briefly about China.

Our retail product line has been listed with Carrefour, who is China's largest foreign retailer, in their Shanghai stores in East China and South China.

This is consistent with our strategy to focus on retail products in China's more prosperous East and Southern regions.

In October our Chinese operations began supplying customers in Japan with products from a strategic partner.

These are value-added products.

In addition we are in ongoing discussions with fully-integrated poultry producers for the establishment of joint ventures or acquisitions.

In South America we continue to explore opportunities, and we have willing, potential partners.

Now let's have a brief discussion with regard to AI.

I know all of you are aware of the AI situation, but I think it is appropriate that we take just a few moments to comment on our perspective.

First, as you know, the particular strain of avian influenza, the high-path H5N1, which has been reported in Asia and Europe has no history of being in the United States and is not here presently.

Not here now.

The United States commercial poultry industry has proven that we have a highly effective and well-coordinated biosecurity procedures in place to avoid exposures to disease.

We also have proven, effective procedures in place to identify, report, and eradicate such viruses should an outbreak be detected.

We have for some time been one of the only countries in the world that reports and eradicates low-path H5 and H7 strains as an additional precautionary measure for measure for the avoidance of the more severe high-pathogenic varieties.

While there may have been other low-path types in the past, and may be in the future, no others thus far have been known to mutate into the more severe high-path varieties.

In addition to these procedures, our housing and growing conditions are much different than those in the areas most affected by the current virus.

Virtually all U.S. commercial flocks are housed in modern, fully-enclosed facilities that provide protection for the animals from potential carriers of disease.

In our country, consumption practices are also markedly different from those in many other parts of the world, with very few people ever coming into direct contact with live birds.

Importantly, as the USDA and CDC have confirmed, there is no risk of contracting avian influenza from eating properly cooked chicken.

To date Tyson has not experienced any detectable decline in demand for chicken.

Here in the United States we're monitoring consumer awareness of the bird flu issue, as well as consumer purchase intent.

While our research indicates consumers increased awareness as a result of the media surrounding the story, we have not seen a change of any significance in purchase intent or any measurable change in our domestic sales volume.

Additionally as of this date we have not experienced any significant disruption in sales volume to our major international destination markets.

A quick update on our Powering campaign.

We celebrated our first complete year anniversary in September, and the program is clearly meeting our expectations in the areas of building overall brand awareness, awareness in protein segments beyond chicken, and in the ultimate test of increased product movement -- and John outlined some of those sales increases in his remarks.

Tyson is staking a claim to consumers' hearts and minds.

When consumers are asked if they are aware of brands, 99% are aware of Tyson as a brand of chicken; 72% are aware of Tyson as a brand of beef; and 71% are aware of Tyson as a brand of pork.

Among brands of chicken and beef, Tyson is most often the first brand that comes to mind.

Among brands of pork, Tyson is a close second to the category leader.

Our '06 campaign began in October and will continue throughout the year with a fully-integrated media plan of TV, print, radio, interactive, public relations, and brand promotions reaching our general market, our African-American customers, and Hispanic segments.

Through these media vehicles we will reach our consumers on a weekly basis with our brand's Powering message.

To continue with our award-winning Powering campaign, a new series of ads have been developed which will feature our value-added chicken, beef, and pork products as well as our fresh chicken and fresh meat products.

All the new ads will have an emphasis on communicating our variety of chicken, beef, and pork products either across a category or across the brand.

Thank you, and at this point I would like to turn the call back over to our Chairman, John Tyson.

Thanks, Greg; and thanks, Dennis, for your comment.

Dick, if you're out their listening, we hope you get better.

Thanks to all the Tyson team members for making this a successful year in a tough environment.

I think this has been the kind of year that shows you how important it is to have a sound strategy and to stay focused on it.

As we have said earlier it was not the best of years, but we're on the right path and we will get to where we need to be.

We are about six weeks into our '06 year and we're working to meet our goals, which are the following.

One, we will try to generate earnings per share in the range of $0.95 to $1.25.

Two, we're going to increase sales of value-added products by $900 million to a total of $12 billion.

Three, we're going to invest about $232 million in capital projects for a projected annual savings of $72 million.

Four, our ROIC target for the year is 14%.

And five, we want to increase our in-country presence in at least one foreign market.

To wrap up, once again, thank you to all the Tyson team members and to our shareholders.

At this time we will go to Q&A.

(OPERATOR INSTRUCTIONS) Leonard Teitelbaum with Merrill Lynch.

John, could you -- if you said it, I'm sorry I missed it.

Could you talk about what your pricing is to the QSRs in terms of beef and poultry for the upcoming year?

I think we're entering into some contracting periods.

I just wonder how that is going.

As we enter into -- we have got some contracts coming due.

We have got several contracts in place.

As we spoke in our prepared comments, we have got a new dedicated facility to a QSR customer at a cost-plus.

We have brought on another dedicated facility to another customer that has historical relationships in place.

And we are working with our customers to get some volume back that we lost last year.

Those negotiations are ongoing.

With where grain prices are and starting to get some break in energy prices, we are going to be very comfortable with where we enter into these price relationships.

You have got -- some of your colleagues out there in the industry are talking about flat pricing on poultry, even though boneless breast is down, at least by our numbers, anyway.

Are you going to see a corresponding drop in the selling price, and try and protect the margin?

Or are you going to try and hold your prices where they are?

I think every year there is just a fair negotiation.

What we're going to work on is holding our historical margins and trying to see if we can increase our margins, to recoup both some of our energy costs, and some of the increased costs in packaging, and some of the other things that are facing all the industry.

So we will try to maintain or increase our margins.

To the extent you have got beef, can you comment on what you think that is going to do, in terms of your prices to the trade?

Noel, why don't you take that question for us?

I'd be glad to, John.

Leonard, the beef prices that we are in the -- are being negotiated right now, we are actually in the process of negotiating those prices.

Typically we will conclude pricing for the following year sometime between October and December.

Pricing would be someplace between steady or 2% to 3% higher than a year ago.

Very good.

Thank you very much.

Christine McCracken with FTN Midwest Research.

I just wanted to touch base with you on the strike in Canada and to ask, is that included in your guidance, the impact of that?

Or can you address kind of what we can expect from that?

I will start with the answer; then Noel, why don't you come in behind me?

All of those disruptions and getting back to normal business are into the business plan.

Noel, you got any additional color?

Christine, we have been successful in increasing the volume fairly quickly.

We were running about 75% capacity of where we were prior to the strike.

So the numbers have come up fairly fast and we expect that to continue now.

Are you worried at all, or can you give us an outlook on cattle supplies in Canada at this point?

Clearly there has been quite a bit of movement up there.

I am just wondering in terms of your outlook for operations going forward.

Noel I think has got more information I have got.

Cattle supplies, Christine, should be slightly above a year ago.

The change that we will see is that many of those cattle are now coming to the United States.

So that has increased the number of cattle that we are slaughtering, primarily in our Pacific Northwest plant, which has taken some supply away from our Canadian operations.

But better operations clearly here in the U.S.?

Yes.

In terms of pork import, or sorry hog imports, looking at numbers down there possibly helping the producers; but possibly leading to weaker results in the processing sector.

Yet you put up very good numbers in your processing business.

Can you guys comment on kind of what you are seeing in terms of supply?

It sounds like a fairly good outlook for supplies into '06.

I think the question I heard -- you are talking about Canadian cattle coming down to the U.S. and that impact? (multiple speakers)

Canadian hogs on the processing side, and then U.S. supply as well.

Noel, why don't you?

Christine, the total supply of hogs that we expect to see in the United States, domestic production in addition to imports, we expect an increased supply of 2% to 3% through fiscal '06.

So we are expecting some expansion in supplies during the year.

Okay.

Just in terms of chicken breast prices, a little bit disappointing really.

I haven't seen any rebound there as is typical.

Can you talk about really what is pressuring prices there?

Christine, this is Greg.

As you probably noted, in the last few weeks we have been running about a 4% increase in chicken production.

We're predicting that as we go forward we're going to run about a 2%.

Demand has improved in the foodservice arena, and we would think that we would see some opportunity for breast meat to begin to move up.

We're sort of counterseasonal, as you know, right now.

But as we move on through the year, we should see some improvement.

Christine, if you think about our mix, we have got small birds, medium birds, and large birds.

A lot of that breast price pressure comes from these big bird deboners out there.

Since we're out in the marketplace having to supplement some of our needs from raw material, being out there in the marketplace buying some of that big bird breast meat that has already been deboned helps us manage our cost structure in our value-added product.

It allows us to manage our price structure in our small bird complexes.

So our overall strategy of being in all bird ranges should be an advantage to us against the historical, the big bird commodity deboner.

David Nelson with Credit Suisse.

Prepared foods, I guess, is the line item I look at in terms of the value-added strategy playing out.

But margins there were still only 2.6% and sales were down 14%.

You commented further about what you were doing there with a specific customer.

But why aren't margins getting better, and why were sales down 14?

On the 14% down, we spent the last six months taking out unprofitable pounds, taking out SKUs that just didn't have any historical or long-range, and worked through the process of rationalizing both SKUs and pounds.

The third component of that is we made a decision not to supplement some of our competitors out there.

Some of our plants were industrial packers to some of our competitors, and we have chosen to rationalize that unless it was a fair price to the organization.

So we have gone through that the last six months.

We got caught a little bit flat-footed on bellies and on hams when we made some contracts, David; and they showed up in the last two months of the quarter.

You're talking about your media campaign.

How much is media -- it sounded like media spending was going up.

What is it going up to?

How are you looking at measuring a return on that spending?

David, this is Greg.

We will be investing several more million dollars in media.

But you are talking maybe in the range of 10 incremental of what we have done this year.

$10 million?

Yes, incremental to what we did this year; if you remember, about 120 overall.

As far as increasing margins, I really believe the measures that we're trying to lay out before you are the correct ones.

We're trying to look for the development of volume and mix change, and primarily in our consumer segment and, secondarily, as a result of the advertising campaign in foodservice.

But growth in value-added products, and we certainly experienced better margins in those areas.

So we anticipate that being our better measure.

A couple other things we are doing in our Powering campaign is last year we kind of had an in-and-out strategy.

We'd be on TV, radio, or print for two or three months; and we were off for a little while.

What we found was our competitors would come in and compete against us when we were in an off cycle.

We are going to have some media ongoing all 52 weeks of the year.

It may be print somewhere; radio somewhere; and television somewhere.

The other thing is we're going to do a lot more geographical and product-specific advertising this year, as we understand where we have got nice movement on certain products and we keep the momentum going; where we have got opportunities to educate and inform the customer about the set of beef, pork, and chicken products.

So what we learned out of the first 12 months we're going to be able to refine and then reapply that money in what you might call more of a targeted approach, then, instead of a broad approach.

We think that will be more effective.

If you come back to some of the numbers that we talked about in our consumer products segment, and in particular if you think of value-added frozen poultry, I mean volume and sales dollar increases of 15% for the quarter over last year; and volume was up 19%; and dollars were up 20% year-over-year; and our market share was up 5 points to 41% share.

So that is just some of the effectiveness.

You think about the ACV and distribution in volume gains in some of our new product segments that we're going to.

Then we did make significant progress in dinner meats and solidified our number two position there, and are gaining on number one, and they know we are around.

If I could ask one last one, please.

Greg, in your comments, really in the context of AI, you talk about domestic demand hadn't really shown any effect.

Are you seeing or at least hearing in your discussions with your export customers any softness there?

I think there has been, Dave, in some markets; and there has been a lot of media about that.

Certainly after there was some outbreaks in China, there has been reports of decreased consumption in China.

We have seen that from our presence over in China; there has been a little bit of a downturn.

In fact in a couple of small countries, some downturns in Europe.

But the reality is those things seem to be coming back.

We don't anticipate that it would be any really significant lingering downturn.

And Europe of course is not a destination export market for us anyway.

The big international challenge has basically been the reordering of the distribution system here in the United States off the impacts of Katrina.

Because we basically had to rebuild the distribution pipeline; find a new set of ports, new set of ways to get our product moved on the rail lines; and truck pressure was very tight for the last 30 or 60 days as we had tried to get our product to the ports.

Now we have solved that problem.

But as we all know, when you back up a pipeline it takes a little while to get the ships moving, and get the ships in and out of.

But you can see the turn in that, and the prices have held.

John McMillin with Prudential Equity Group.

Hopefully Dick is all right.

What is bothering him?

He has got -- you know, it is flu season.

Hopefully he's not hanging around too many chickens.

That won't make him ill.

That won't make him ill.

I know it won't.

The guidance of $0.95 to $1.25, that seems to include some minor tax gains in the first quarter.

What else does it include?

Does it include stock option expense?

Can we just kind of go through what is in this GAAP guidance that might be viewed as less than GAAP?

Sure.

John, there is no minor tax gains in the guidance.

What you saw in terms of unusual tax items related only to the fourth quarter of this past year.

As far -- what was the other part of your question?

Wasn't there something in the press release that said that we might get similar gains early in the year?

Talking about taxes.

I don't believe so.

It's not in the (inaudible).

The other second part of the question was the expensing of stock options.

That is going to be in the range of 10 to $15 million, John.

And that is in the guidance?

Yes.

As far as the CFO search, John, is concerned, is there anything really new?

We are in the process.

We have been interviewing in the last six to eight weeks.

We have some second rounds with some of the individuals that have been in to visit the last two to three weeks.

My desire, John, is to have an announcement hopefully no later than the first of February, by the time I get to my annual meeting.

We're very lucky.

We have a -- you know, Dennis has done a good job helping us run the business, and we are thankful for that.

Now in the $145 million chicken operating number in the fourth quarter that you cited, John, that excludes the Katrina expenses.

But was there any Katrina benefit to pricing?

I don't know what every other chicken company has done, but I guess I was a little surprised to see that 8 million kind of categorized, since lately there has been these kinds of hurricanes every year.

So just in terms of -- was there any kind of benefit in that 145 million from pricing in chicken that seemed to go up a little bit after the hurricane?

John, this is Greg.

There was a momentary uptick in the breast market that lasted -- I've forgotten exactly how long -- but something on the order of a couple weeks.

Then it came back to the levels it had been.

I think John did a good job a few minutes ago of talking about how breast meat pricing plays into our sales mix and production mix.

So it just wasn't a meaningful event with regard to our business.

John, some of those folks that didn't have their leg quarters placed very well, you saw some of those pounds start to show back up as people tried to keep product moving.

But I think all of that is settled out now.

If there is a definition of normal in terms of how people move their products around, that is back in place now.

The question will be the price points in the first and second quarters.

Finally, Greg, I guess if you think about it your way, AI could be a positive, given the fact that other producing countries have a greater chance of being impacted, or may be being impacted.

If export demand, in your question -- in your answer to Dave Nelson, kind of holds, I guess I just -- when you give this earnings guidance, and I was very impressed with the slides on your website, and I know you don't want to give all the components of pricing.

But what kind of leg quarter prices do you think -- these $0.47 fourth-quarter number is nice.

But what kind of leg quarter pricing are you kind of thinking about that might sustain through the year? $0.47 would be way too nice.

But what do you think can be sustained?

I think, John, $0.47 would be great.

If you go back and think about last year's average, it was more on the order for the 12 months, if I'm not mistaken, of 36 or 37.

I think our hope would be that we would be trailing around somewhere along those averages as we went through the 12-month time frame.

According to your website it says the average was 33 for fiscal '04.

That's '04.

I'm talking about sort of '05-ish here.

Okay.

Yes, 37.

Okay.

Thanks a lot.

Eric Katzman with Deutsche Bank.

I guess first question, following up on John's, how much of the 8 million hit to the fourth-quarter number was operating from Katrina, as opposed to like inventory write-offs?

You mentioned a lot about the cost of higher transportation; because honestly the chicken processing operating margins were well below what I thought and certainly well below the third quarter, and I think below some of your competitors.

So I am kind of wondering how much impact there was from this transportation and other logistics issues.

The 8 million that we quoted was all an operating income number.

It was nothing to do with pricing.

Anybody else got any other color around (multiple speakers)?

The only thing I would say, Eric, is certainly there was a big uptick in logistics cost that occurred in the month of September.

That is a much higher rate than what we are experiencing now.

As John alluded to, we have gotten our sort of rematrix, our export system, logistics system.

But we experienced a real uptick in cost in the month of September in particular.

Then in terms of the CapEx number, John, I was a little bit surprised that you are once again signaling a number well above depreciation and amortization, and I guess equal to roughly what you did in '05.

Why is it so much higher again?

Is that kind of a number we should assume e is really the level that is going to continue longer term?

We have had some projects in place that we want to go ahead and accomplish in terms of making our plants more efficient in a couple of places.

We do have some spend leftover from '05 that is coming over into '06 for the year.

And then we just got some -- the projects haven't changed or the number projects, but we do have some increased costs, with the cost of steel, the cost of materials, the cost that is factored into this number.

So all of us in the business world are going to feel that impact in the '06 business year.

So that added some cost into the number.

The number of projects didn't change, I don't -- Dennis, Greg, you all got anything?

I think we certainly still have a discovery center that is one of the '05 projects that John alluded to.

There will be a significant amount of its total spend that will occur in this fiscal year.

Then we're finishing off the Sherman, which is a very significant investment.

Dakota Dunes, which was a significant investment.

But I think as we look forward, we're still going to be aggressive particularly on labor savings and further processing opportunities.

But we should in the years beyond this fiscal year begin to return more normalized.

As we think about our spend, we do have some accelerated spends in further processing capacity.

Our system is pretty full now.

We have been using a few more third-party copackers for our value-added products.

We think we are at a crossing point where we need to figure out how to bring some of that back inside.

So we are adding capacity and value-added pounds.

Then I guess the other question is in the release that you put out over the weekend, or maybe it was Friday, ADM has been selling shares into market.

You are now at a CapEx level below your long-term target.

Your guidance for '06 assumes no change in shares outstanding.

But shouldn't we assume some of the free cash flow goes towards share repurchase, now that you are -- and maybe even buying back some of this ADM stock as they put it into market?

Given that your debt to capital ratio is where you we want it to be.

I think our debt to capital ratio allows us to keep the CapEx spend at the rates we need to, to make sure that we have got the value-added capacity in place to do $900 million.

The ADM shares, the market can absorb those.

We have had no discussions with the good folks up there.

They have been a great shareholder, and we have a great business relationship with them.

As we spoke earlier we are looking for some add-ons here in the United States.

We are going to have one foreign country presence; and whether that is something in Brazil or something in South America and/or China will take some of the cash.

We will probably go ahead and pay down a little more debt and try to move towards that 36%, 35% range.

We have been thoughtful about that and we have been methodical about that; and we will probably continue down that path right now.

Farha Aslam with Stephens.

A few questions.

First, could you just talk about the supply chains of cattle coming down from Canada?

Are you seeing that number improve, accelerate, at all?

Jim, why don't you answer that, since you look at it there?

The supply of cattle in total for the country is coming down.

It is about, around 15,000 a week.

So it is approaching fairly close within about 80% of that it was pre-BSE.

Is that mix of cattle more feeder cattle versus --?

That was fed cattle numbers.

Feeder cattle numbers are also increasing and actually about the same number, at 15.

So the feeder cattle number has come up and actually is about equal to the pre-BSE level.

Is that kind of why you are confident about your back-half loaded beef margins?

That gives us the confidence, yes.

Great.

And seasonal demand in the third and fourth quarter.

Final question, just your Lakeside facility, the strike.

How much do you think it cost in the first quarter, in terms of either operating profits or EPS?

We haven't quantified that yet and haven't looked at the number, so don't have an answer for you.

Tim Ramey with Davidson.

On the beef business, do you have a sense of what your capacity utilization number stood at in '05?

And any sense of how you think that will move in '06?

Noel, why don't you give us some thoughts on that?

Okay.

Capacity utilization was far below where we would want and are expected to be for '05.

In fiscal '05 we were in the low 70s, 71, 72 type.

It did increase as we went into fourth quarter; it was back into the upper 70s.

I think as we have said before that for us to really have an efficient operation that we need to be back in the low 80s.

As cattle numbers start to expand in the second half of '06, we would expect to get back closer to those type of numbers.

So you think you'll run low 80s in the second half of '06?

I can't say it will be low 80s; but it will be moving that direction.

Do you have a sense of what to think total cattle slaughter will do in '06 versus '05?

Are you talking about an industry number?

Either industry or yours.

I assume you're not adding capacity.

I don't know if we have got a good industry number or not.

The most recent numbers would say that we will be expanding someplace approximately 2%.

2%; okay.

For the industry, right, Noel?

For the industry.

That's correct.

I'm pleased to hear you're talking about cattle movements to Japan in December.

But it doesn't sound like you have high expectations on the impact on either margins for product or for actual sales.

There was an interesting -- Swift threw out an interesting chart a couple weeks ago -- you may have seen it -- where they showed a fairly significant decline in variety mete margins pre and post-BSE.

Do you think that there is any -- does that make sense that pricing and margins are going to improve on those pieces and we should see that impact in '06?

Noel, I think you have got more color.

But there is no doubt if we can start to ship variety meats, not only to Japan but into South Korea and some other countries, it helps rebalance the whole value of the animal.

Noel, what have you got?

I would agree with that, John.

The thing to keep in mind is that the number of cattle eligible are approximately 10%; it might be a few more, it might be a few less than that.

The variety meat items, as you know, the cattle have to be certified prior to the slaughter process.

The exports we expect to resume between December and January; and we believe it will just be a gradual process throughout the year.

Terrific.

So if we had to isolate in on your chicken margins for '06, I know you don't like to forecast specific margins; but given lower grain prices, perhaps slightly lower prices overall, are you forecasting margins to be flat to up?

We expect them to be flat, Tim.

Terrific.

Thanks.

Ken Zaslow with Harris Nesbitt.

Did you say in your prepared comments that the loss in the beef business was largely attributed to the Canadian strike?

Is that what you said?

We did make those in the prepared comments.

There is no doubt that the effects of not running our plants, efficiency in the United States, didn't allow us.

But most of the struggles were Canadian.

So you probably would have broken even, is that -- if it wasn't for the Canadian strike?

That's -- Noel, do you want to agree with that statement or disagree with it?

I don't have the specific numbers.

But I think that that would probably be a stretch to say that we would've broken even in domestic operations.

We are in an environment that is very difficult and expect it to continue to be that way, at least for the first two quarters, and then improving in the third and fourth quarter.

I just wanted to get some clarity on that.

Is the weakness in the beef the supply side or the demand side or both?

The supply of the cattle, I'm sorry.

It would be both, Ken.

The demand-side has been somewhat sluggish.

The supply side really drives our capacity utilization; and it is the capacity utilization that has been detrimental to us here in the last couple of years.

In terms of, you mentioned also fuel costs.

Was the fuel cost impact on the cost aside or the demand side?

On the cost aside as we run our facilities and deliver our products, whether it is natural gas or the ability to fill the trucks up.

What percentage of your costs would be in fuel?

If we were to see a reduction in fuel -- obviously natural gas has clearly come off their highs.

Fuel, gas prices have come off their highs.

Is there -- I guess the initial question is, what part of your, how much of your cost of goods sold are from your fuel costs?

I don't have a percentage broken out the way you framed your question, Ken.

I hadn't looked at it that way.

Okay.

What type of efficiency programs are you actually going to be implementing?

Can you get a little bit more specific than -- I think you just said what you are spending and what you are saving.

What are actually doing, I guess?

You're talking about the plant operating efficiency question?

Is that where you are going to?

Please, thank you.

Most of them are a combination of labor savings, combination of automated process and equipment that takes the animal apart.

We have had an aggressive program inside our poultry plants with larger lines and more automated lines that then allows the people to manage the lines there.

Automated pack out in the back of some of our beef and pork plants, and some more automated packaging throughout the system.

Just two quick questions.

Hedges.

You guys are open to hedges? (indiscernible) Nothing locked in for next year on the grain side?

With where you see grain prices at this time, and based on the estimates from USDA and carryout numbers, our belief is staying close to market at this time.

Now, if we do some fixed-price contracting with key customers, we will have conversations with them; and we will go ahead and buy the appropriate amount of grain needs to match that contract sale.

What percentage of your sales on the chicken side will be locked in by January (multiple speakers) annual contract?

A large majority?

No; it would not be a large majority.

We are in the middle of a lot of those different conversations and don't have insight, because they will be going on for the next 60 or 90 days.

Ken, what we said in the past is that about 50% of our chicken is sold at fixed-price in those contracts.

But fixed-price is a variety of contracts, formula pricing, flat pricing, and different variations.

So when you define that 50%.

So you don't expect to be hedging that 50% is basically what you are saying?

Some of our customers will ask us, and we will match.

In some other situations, no, we won't.

Last thing is I hope Dick Bond feels better.

Take care.

Ken, just to follow up, to make sure that we have got a clear record.

With regard to fiscal '05, what we said about beef is that the decline was solely from the changes in volume and margins from our Lakeside facility.

Now, with respect to the strike, that was entirely an '06 issue.

Pablo Zuanic, JPMorgan.

Just trying to understand the guidance range from $0.95 to $1.25.

What is that assuming regarding Japan?

It sounds to me that in both cases you are assuming that the market opens in December.

If you can expand a little bit on that.

I'm just trying to understand.

If that is just for the $1.25, how long will it take you to get back to normal levels in that market?

In terms of either -- what does your research show, in terms of how long will it take to get back to normal levels in terms of consumption and in terms of shipments?

You have the issue of 20-month cattle; but there is also an issue with consumption.

You can explain that first.

And related to that, do you expect any impact on pork exports once Japan opens?

Thanks.

Pablo, let me make a few remarks.

This is Greg Lee.

And then perhaps Noel would want to fill in on that.

With regard to the range, we are assuming that we're going to get back in Japan.

We are giving ourselves a little flex as to when that would actually occur.

Then correspondingly we're also anticipating the other Asian countries that we mentioned in our prepared remarks; then there is a bit of thinking about when that would actually occur.

I think Noel opened the door in talking about Japan as long as we are on this 20 month and down, as far as the potential significance of the volume there.

We anticipate that that is going to curtail our volume potential.

Noel, you want to comment further on that?

Ken, the increase in the exports to Japan, it will be a gradual process.

We will be somewhat limited by the supply of cattle that will qualify.

We also have, as you know, a situation where Australia has been the supplier to them over the last couple of years.

We're going to have to regain some market share that we have lost.

Secondary part of your question related to pork, and if we would lose some of the pork exports.

As John and Greg mentioned earlier in their comments, the increase in our exports have been to both Mexico and Japan.

The items, the products that we have been exporting to Japan should not be affected by the increase in the beef shipments.

Mexico demand has been very strong.

We would expect that to continue.

Let me make one last comment about beef export demand.

If you will recall we had access to Taiwan here for a period of time in the third quarter.

We shipped a very significant percentage of what was historically their annual volume in about a six or eight-week time period.

Now we are not necessarily saying that Taiwan is representative of every Asian market.

But we do anticipate that, particularly when we're thinking about 30 month and down markets, if we get access to those markets that we will be able to scale up to some pretty nice volumes.

Japan with the 20 month and down is going to be a much, much slower process, as Noel I think has very capably indicated.

But in terms of any consumer pushback from Japan, we have heard about some surveys that have been reported.

Are you or the U.S.

Meat Association, Beef Association, in anyway doing campaigns there or trying to promote U.S. beef?

Or that is not happening until that market opens?

I think you have said it exactly right, that when the market opens there will be some activities around that very question.

Just one quick follow up on the pork side.

Surely there has been a significant improvement in pork carryout spreads over the last two months.

You show that in your fresh pork operations, where operating margins were around 4.5%.

But prepared foods are not improving.

I know that question was asked in that regard.

But what I am trying to understand is that there has been all this investment in value-added products, further processed foods.

We're been led to believe that those markets are supposed be more stable and higher margins on further processed.

But in a quarter where your carryout spreads improved, prepared foods don't improve.

How should I reconcile that?

How should I understand that?

Well, I think first of all we still have a certain percentage of our sales commodity based.

I mean if we achieve our goal of $900 million, we'll only have a total sales of $12 billion in value-added, which is still less than 50% of our target.

As for prepared foods I said it earlier and I will say it again;

I'm not satisfied.

We have been making some adjustments on getting out of products that don't have enough volume, products that are not carrying enough volume.

As we rationalize some plants there, that business has stabilized and is starting to turn around.

As I said earlier we made some decisions on some contract pricing on bellies and bacon in the last two quarter, and it was just dead wrong. (multiple speakers) I can't say it any clearer than that.

Thanks, John.

Just one last follow up.

Comparing the second half calendar '05 with the first half of calendar '05, are using more beef and pork features at the retail or foodservice level compared to chicken?

Or really there hasn't been a significant change, in terms of features for all three types of meats?

Comparing (multiple speakers).

We haven't seen any change in the feature pattern.

Of course as we all know, Thanksgiving is close around and a lot of activity is going to what you call traditional meats, which would be hams and/or turkeys as you head into the holiday season.

But you will see us in the first couple of weeks in December do some different promotions for our products that historically we have not done in the past, as we are trying to drive and find opportunities to sell our broad range of products, which is a little bit of adjustment for us, to sell our set of products into the marketplace.

And we're looking forward to seeing how that works.

This concludes the Q&A portion of today's call.

I will now turn the conference back over to Mr. Tyson.

We thank you all, once again, to the Tyson team members out there.

To the folks that follow our stock, we appreciate your questions.

We're working hard out there in the marketplace. '05 was a difficult year.

The first two quarters of '06 will be challenging, and our expectation is that we will see improvement in the back half of the year.

With that we wish everybody a happy holiday season, and take care.