泰森食品 (TSN) 2006 Q1 法說會逐字稿

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  • Operator

  • Good morning and welcome to the first quarter Tyson Foods earnings release conference call.

  • 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'd now like to turn the conference over to Ms. Ruth Ann Wisener.

  • Ma'am, you may begin.

  • - VP IR

  • Good morning and thank you for joining us today for Tyson Foods' first quarter conference call.

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

  • Before we move on to discuss the operating performance for the quarter, 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 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.

  • - Chairman & CEO

  • Well, thanks, Ruth Ann, and good morning to my friends, our shareholders and our team members out there.

  • We want to welcome everyone and thank you for joining us to talk about our first quarter results.

  • As the press release indicates, the chicken segment produced good results within our historical margin ranges, supported by our value-added strategy.

  • Prepared foods did improve but not to the margin levels we expect from that segment.

  • Pork underperformed relative to our expected margins.

  • And beef was ugly.

  • While more stable margins from our value-added products mitigate against market extremes, the short-term will be difficult.

  • Due to international demand and domestic supply issues, chicken will be tough going forward.

  • Beef will continue to struggle because of limited supplies and export market disruptions.

  • Prepared foods is trending up and pork should be okay but will likely fall short of expected returns in those segments.

  • We believe the combination of those circumstances will cause a net loss in the second quarter.

  • We now believe our 2006 earnings will range from $0.50 to $0.80 per share.

  • We're now going to turn the call over to others to share their thoughts and their insights.

  • First, Dennis will cover the earnings overview, then Dick and Greg will discuss the Company's performance from their perspective.

  • Dennis?

  • - Treasurer & Interim CFO

  • Thanks, John.

  • Good morning everyone.

  • In our press release this morning we reported GAAP earnings of $0.11 per share for the first quarter of fiscal year 2006.

  • This compares to GAAP earnings of $0.14 per share in the first quarter of fiscal year 2005.

  • Please note first quarter of 2005 GAAP results included 3 million of plant closing costs as well as approximately 12 million received from vitamin antitrust litigation and 8 million received from the sale of the Company's remaining interest in Specialty Brands, Inc.

  • The result of these items increased first quarter 2005 GAAP earnings by $0.03 per share.

  • Some other points to note in our financial statement.

  • Cash provided by operations came in at $183 million for the quarter, which was a decrease of $239 million from the first quarter last year.

  • This decrease is primarily due to a reduction in working capital, mainly from increases in accounts receivable and inventory.

  • Capital spending for the quarter was $189 million.

  • Debt at the end of the quarter was slightly under $3 billion, which was $82 million lower than the first quarter of last year.

  • The debt-to-capital ratio remains solid at 38.8%, down from 41.4% one year ago.

  • Due to lower average total debt and lower average interest rates throughout the quarter, interest expense was $6.5 million lower for the first quarter of this year versus the same period last year.

  • Our effective tax rate was 34.9%, which was down from the prior year's rate of 36.6%.

  • This is primarily due to the effect of larger ETI benefit relative to the first quarter of 2006 compared to one year ago.

  • In addition, as you saw in our press release this morning, our announced restatement will result in a $19 million increase to our net income for fiscal year 2005, or $0.05 per share.

  • Now, let's review our financial outlook.

  • As we discussed in our press release, and as just mentioned by John, our fiscal year 2006 GAAP earnings are now expected to be in the range of $0.50 to $0.80 per share.

  • The rest of our guidance remains unchanged.

  • Revenues for the fiscal year 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.

  • Weighted average shares will be approximately 357 million.

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

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

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

  • This concludes my comments.

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

  • - President & COO

  • Thanks, Dennis.

  • Good morning and thanks for being with us this morning.

  • Our first quarter results, like our previous quarter, were led by our strong chicken segment, which had operating margins of approximately 6%.

  • Our pork segment operating margins of 1.4% for the quarter were slightly below the same quarter last year.

  • The beef segment returned dismal results with an operating loss of $64 million.

  • On a year-over-year basis, our prepared foods results improved to a margin level of 3.5%, which reiterates that our value-added strategy is working.

  • All of our segments were negatively impacted by higher fuel and energy costs, amounting to approximately $68 million when compared to Q1 of fiscal '05.

  • Now, I'd like to talk briefly about each of the segments in more detail as well as our customer channels.

  • Our chicken segment had an operating income of approximately $123 million for the first quarter this year compared to 104 million in Q1 of last year, an increase of 18.3%.

  • Sales dollars were down slightly, demand for chicken continued to be good, especially in the food-service channel.

  • The supply of chicken grew in the 2% range for the quarter.

  • Incremental value-added sales, lower grain costs and higher year-over-year leg quarter prices, contributed to these higher earnings.

  • Looking forward, supply is anticipated to increase approximately 1 to 2%, based primarily on weight for the balance of our fiscal year.

  • Commodity chicken prices have continued to soften.

  • Grain costs at this point still appear to be in good shape.

  • Demand will be the key factor going forward, both domestically and internationally.

  • In our beef segment, sales dollars in Q1 were up approximately $123 million on a year-over-year basis.

  • A volume increase of about 10 million pounds was a very slight improvement over Q1 of '05 and sales prices increased from $1.17 to $1.22 per pound.

  • We still continue to be short of domestic cattle.

  • Hence, our capacity utilization is well below acceptable levels and operating income was down $38 million compared to Q1 of '05, after adjusting the '05 numbers for the vitamin litigation proceeds.

  • For the first quarter of fiscal '06, the beef segment had an operating loss of $64 million.

  • As we mentioned to you in our year-end conference call, we settled the labor dispute that interrupted our Canadian operations during this quarter.

  • The facility is slowly returning to near-normal operations.

  • This facility accounted for the majority of the increase in the beef segment losses.

  • Lakeside live cattle cost advantage over the U.S. market diminished and the cost of the strike, in terms of margin and expense, amounted to approximately $9 million.

  • Cattle supplies will get better for the longer term run, but continue to be very tight in the near term, making it extremely difficult for us and other beef processors to operating at a profitable capacity.

  • Beef operating results will likely be worse in the second fiscal quarter.

  • Results should improve in the second half of our fiscal year as we expect to see additional supply of domestic cattle, an improvement in seasonal demand, and a potentially much-improved international market access position.

  • In our pork segment, sales dollars decreased by 6.3%, but pounds increased 1.5% on a year-over-year basis.

  • Operating income was slightly lower when compared to the same period last year and not where we want it to be.

  • Operating margins, as a percent of sales, declined to 1.4% for the first quarter versus 1.5 for Q1 of '05, after adjusting, again, '05 numbers for the proceeds received in connection with the vitamin antitrust litigation.

  • Live hog costs decreased by 15%, indicating the supply of hogs is growing and we expect an increase of 3 to 4% for the balance of fiscal '06.

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

  • In prepared foods, total sales dollars for the quarter fell 5.5% and volume dropped 2.4% on a year-over-year basis.

  • The sales dollar decline was due primarily to lower average selling prices.

  • However, prices for raw material inputs declined as well, easing some of the pressure on operating margins.

  • Operating income improved to a 3.5% return on sales.

  • This is more than a 50% improvement over the same quarter a year ago, when adjusted operating margins were 2.2%.

  • While still not as high as we'd like them to be, margins are moving in the right direction.

  • Our prepared foods business continues to be a growth vehicle for us, especially within the bacon categories of our consumer products and food service channels.

  • Now, I'd like to talk a minute or two about our channels.

  • First, in consumer products, we continue to grow our case-ready beef and pork sales, with sales reaching $399 million or a 16% increase compared to Q1 of last year.

  • Our third dedicated case-ready plant in Sherman, Texas is expected to start up the third week in February, in order to meet the needs of this growing business.

  • We also continue to expand our leadership position in the ready-to-eat value-added frozen poultry where we achieved sales dollar increases of 13% for the quarter over last year.

  • This increase was driven in part by the Tyson boxed and bag product lines.

  • While the overall category growth was around 10%, Tyson was able to outpace the category across grocery and mass channels, resulting in a 15% growth for the quarter over the same quarter a year ago.

  • Within the value-added refrigerated side of the business, we continue to grow in the ingredient meat category by gaining a 22% unit share, which is a 10.8% increase over the same period last year.

  • Within food service, volumes were up 4% over the first quarter of last year, fuel costs and hurricanes pressured restaurant activity during our fourth fiscal quarter, but consumer confidence, the index climbed to finish the calendar year very strong.

  • Restaurants posted slight increases in both traffic count and average check sizes.

  • The QSR segment remained the strongest performer.

  • A good success story for us in our year-over-year growth within food service is bacon.

  • Volumes were up 59% amongst national accounts and 26% in our broad-line distribution channels.

  • We will continue to add value by concentrating on growing our fully cooked line of bacon.

  • Another good story is our steady growth in volume and sales in the school, which is kindergarten through K-12 channel.

  • Year-over-year our volume growth grew 7% or roughly 4 million pounds, and our sales increased by 11%.

  • Our food service group as a whole delivered very good operating results for the quarter, especially in a challenging business environment.

  • We will continue to focus on top-line sales and margin growth throughout the coming quarters.

  • In summary, our first quarter continued to be challenging, especially in the beef segment.

  • Events and issues beyond our control will continue to influence our results, both in beef and in the chicken segments, especially in Q2.

  • I believe you can expect our results to improve in the third and fourth quarters.

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

  • - Chief Administrative Officer & Int'l President

  • Thanks, Dick, and good morning.

  • Export sales were 554 million for the first quarter, this is up 18% versus the first quarter of the prior year.

  • Talking about chicken, our first quarter sales of commodity chicken were 30% higher than quarter one '05 and 8% higher than fourth quarter of fiscal year '05.

  • Export sales volumes for leg quarters were down 12% versus the same quarter last year.

  • Both pricing and volume for chicken in the export markets remained very good through the months of October and November.

  • In December, we began to experience some slowdown in volume and a significant deterioration in forward sales prices.

  • This was a direct result of lower demand in key destination export markets, specifically, Russia, other former Soviet Union countries, as well as the Middle East.

  • In each of these situations, demand has been negatively affected by public concern over avian influenza.

  • Our average realized sales price for the first quarter was $0.005 per pound better than the fourth quarter of our fiscal '05 year.

  • And $0.157 per pound better than the first quarter of '05, same period last year.

  • This price realization was a result of our forward sales contracts.

  • Spot prices moved down from the mid-40s to the mid-20s as the month of December unfolded.

  • Current prices for January and February shipments of export leg quarters range from the low to mid-20s per pound.

  • Looking into the second quarter, we do not expect any real recovery in export sales prices as a result of industry frozen inventory levels.

  • Talking about beef, our export sales volume of beef was up 9% over quarter one '05, representing 206 million in sales.

  • Our sales of boxed beef were up 12% versus first quarter of last year.

  • The quarter comparisons were bolstered by strong sales to Mexico for Chuck and round cuts, as well as strong demand for short plates to Hong Kong and Macao.

  • On the export front, as expected, Japan opened its borders on a limited basis in late December.

  • But as you all are aware, it closed again last week when a small shipment containing a prohibited item was exported from the United States by a small veal producer.

  • The product in question is not considered specific risk material here in the United States but it was still an unfortunate violation of the agreed upon trade terms between the U.S. and Japan.

  • We are disappoint that Japan imposed a universal ban on U.S. beef.

  • But we're hopeful that this matter can be resolved quickly.

  • That being said, based on the limited supply of cattle that would have qualified under the 20 months and under restriction from Japan, our export sales to Japan were very limited during the first quarter.

  • We are pleased to announce that South Korea, Hong Kong, and Taiwan have agreed to allow us exports of boneless beef from cattle 30 months of age and under.

  • While no specific time frame has been given for the resumption of shipments to South Korea, we are hopeful that they will begin during the April or May period.

  • The Hong Kong and Taiwan markets opened immediately after the announcement of the lifting of the ban.

  • Tyson pork export volumes were at record levels in fiscal year 2005.

  • Quarter one'06 continued this trend, as overall pork export volumes were up 28% versus the same quarter last year.

  • Export sales volume of boxed pork was up 35% and revenues up 20% as compared with the same quarter last year.

  • Mexico and Japan remain our primary markets.

  • Strong demand for hams to Mexico continued in quarter one, with volumes up 32%, although at slightly lower price realizations.

  • Sales volume to Japan was up 12% versus last year on strong demand for boneless loins and picnics.

  • Talk about our foreign operations, beginning with ties to Mexico, sales for the quarter were down 9% below the same period last year, due to the lower market prices and resulted in a loss for the period.

  • As we reported in last quarter's conference call, commodity chicken prices in Mexico began to weaken in the second half of quarter four '05.

  • During quarter one '06 we continued to experience extremely low commodity prices.

  • The typical seasonal price increase that we have seen over the December holiday season did not occur this past quarter.

  • The market conditions are driven by excess supply in the market, coupled with consumer concerns resulting from media reports about bird flu.

  • As we look into quarter two '06, we continue to experience poor commodity prices.

  • Current prices do show some improvement over last quarter's.

  • We believe that they will continue to improve as we move through the quarter and into the back half of the fiscal year, as a result of improved demand and a better balance in supply.

  • We do not see the current market conditions as evidence of a structural change in the Mexican chicken industry and expect to grow there over the coming years.

  • We continue to work on expanding our sales channels in China, but we have been temporarily set back by lower consumption due to the AI outbreaks.

  • This has negatively impacted our large customers and, therefore, impacted our sales volume.

  • Exports from China to Japan have continued to grow.

  • Despite the present challenges that we're experiencing in China, we continue to believe in that market's potential.

  • In fact, we continue to move ahead with our expansion plans and are engaged in due diligence with Chinese poultry company.

  • With regard to South America, we have two specific targets in the beef and poultry sector and are engaged in due diligence with these parties.

  • And with that, I'll turn it back to our Chairman, John Tyson.

  • - Chairman & CEO

  • Thanks, Dennis and Dick and Greg, appreciate the comments.

  • And also, I would be remiss if I didn't thank all the Tyson team members who are working hard to execute our business plan in this continued tough environment.

  • This morning we've talked about several of the increasingly difficult factors we have been facing in the industry that we are in.

  • And we have lowered our guidance in response.

  • While we confront these challenges, I want to be clear that we will not lose our focus on the principles that guide this great Company.

  • We will strive to live up to our core values.

  • And we will continue to invest in our people, our products, and our processes.

  • For example, we're providing capital to complete our new case-ready plant in Sherman, Texas, which should be online by the end of February.

  • We will provide capital to finish our discovery center, which will allow us to invest in our value-added products in this state-of-the-art R&D facility.

  • And we will have classroom space which will allow us to develop our leaders of the future and invest in our people.

  • We will be providing capital to improve our existing facilities' ability to produce those value-added products, whether it be a beef value-added product, a pork value-added product or a chicken value-added product.

  • We will continue to support our Powered by Tyson campaign, to leverage the strength of the Tyson brand across all three of the proteins.

  • In the past there have been several questions presented to me about our uses of cash.

  • I think the reasons for our decisions are more clearer now than ever.

  • Paying down our debt, investing in the business, and supporting our branding campaign have been the best uses of cash.

  • This discipline, even during adversity, positions us to execute against our strategy.

  • We will not lose sight of our long-term vision in face of the short-term difficulties that we face at this time.

  • And the corner stones are: we will concentrate on developing value-added products that provide opportunities for higher, more stable margins; we will seek out and implement operational improvements that generate savings and/or income; and we will focus on expanding our international presence.

  • At this time, we look forward to your questions.

  • Operator

  • Thank you, we will now begin the question-and-answer session. [OPERATOR INSTRUCTIONS ] John McMillin from Prudential, please ask your question.

  • - Chairman & CEO

  • Good morning, John.

  • - Analyst

  • Good morning, John.

  • Dick, when you said that beef would be worse in the March quarter, were you talking sequentially or were you talking about versus a year ago?

  • - President & COO

  • I was just making a statement about second quarter.

  • - Analyst

  • And can you repeat the statement, you said beef would be worse --

  • - President & COO

  • I'm making a statement about second quarter relative to first quarter.

  • - Analyst

  • So you expect beef to lose more than $64 million as you look at the March quarter?

  • - President & COO

  • Yes.

  • - Analyst

  • Oh.

  • I guess I knew it was tough, I just didn't think it was this tough.

  • - Chairman & CEO

  • That's why you heard us use the word, "Beef is ugly."

  • - Analyst

  • Yes.

  • John, it does kind of beg the question, why you do this.

  • If you have got a lower earnings guidance, I don't know, how many times has it been, four, five time in the last 18 months?

  • Companies like Gillette don't give earnings guidance.

  • To some extent, why do you give yearly guidance in a business that is just proving to be unpredictable?

  • - Chairman & CEO

  • Well, we believe it's appropriate to give our estimates based on what we view into the world when we start our business year.

  • There was no expectation that beef would continue to deteriorate like it did and to put itself in a position to not correct itself now until maybe June or July.

  • The chicken business, by the nature of where it was, fundamentals just changed dramatically in about four or five weeks.

  • The leg quarter situation, the backup, the industry is putting out a little more supply out there.

  • So the overall protein supply, beef, pork and chicken, has got to higher levels.

  • But we just feel like it's our responsibility to start the year with our best look into the world at that time, and things changed, and that's why we had to make the adjustments today to give you our best look into a future that's still very, very cloudy.

  • And it is cloudy but we're trying to make our best effort.

  • - Analyst

  • Just one question for Greg.

  • I know Russia is in the early stages of kind of negotiating on a formal contracts or agreements going forward.

  • Do you think you might lose, the U.S. might lose a little share to Brazil in the upcoming -- can you just kind of refresh us, what's the current contract?

  • Is it something like 75% of volume?

  • And what do you think it might change going forward?

  • - Chief Administrative Officer & Int'l President

  • Well, John, you're correct.

  • You've essentially hit the number right on the head, it's just short of 75%.

  • But if you -- let me refresh your memory, that is actually -- that agreement is designed to go through 2009.

  • So there's not an eminent change with regard to that number in the offing.

  • - Analyst

  • Okay.

  • Good.

  • Glad to hear that.

  • - Chief Administrative Officer & Int'l President

  • Yes, sir.

  • - Analyst

  • Okay, good luck.

  • - Chief Administrative Officer & Int'l President

  • Thank you.

  • - Analyst

  • Thanks.

  • Operator

  • Thank you.

  • Our next question comes from Leonard Teitelbaum with Merrill Lynch.

  • Please go ahead.

  • - Analyst

  • Good morning.

  • - Chairman & CEO

  • Good morning, Lenny.

  • - Analyst

  • Just a little bit of a housekeeping thing.

  • I guess I'm more glad that I got out of accounting now than I've ever been, Dennis, but regarding your reversal of accrual on the medical expense, obviously that's a one and gone deal, but I'm a little bothered by the statement here, the reporting of a -- this restatement will result in a reporting of material weakness in internal controls.

  • Isn't that just a phrase that you have to use in a situation like this?

  • - Treasurer & Interim CFO

  • Yes, that's correct.

  • Restatements generally result in material weakness findings.

  • - Analyst

  • And this is -- again, I want to make sure this is a forced statement by the -- that the accountants make you put in as opposed to any word smithing on your part?

  • - Treasurer & Interim CFO

  • It's a requirement with respect to Sarbanes.

  • Remember, we have to go through the process of testing our controls.

  • - Analyst

  • Okay.

  • Now, what did you do, change your medical plan?

  • Or just simply over accrue or what?

  • - Treasurer & Interim CFO

  • Basically, Lenny, there's a subsidy that we get for this Medicare Part D. Our customary practice, with respect to subsidies, has been to book it in the period in which it occurs.

  • What we did do that we shouldn't have done is we applied tax to it, because this is a nontaxable subsidy.

  • - Analyst

  • Oh, all right.

  • I was going to say, almost every corporation I know has the same subsidy.

  • So I was just -- it really kind of confused me as to why would -- all right, I'll follow-up off-line, because it doesn't make sense why you would do it one way and the rest of the world do it something else, but I guess that's just the way it is.

  • Let me move on to two things.

  • I'd asked you last quarter, John, about -- you had mentioned that for a variety of circumstances, you'd lost some market share in the quick-serve business and you had intended to get that back.

  • Did you get that back with price or how did you regain share, if indeed you did?

  • - Chairman & CEO

  • Well, I don't know what statement you're referring to on market share.

  • What we did speak to was top-line growth.

  • But as for market share we have maintained our market share and have just finished out a period of negotiations within the food-service segment, where we retained and/or increased volume.

  • There is no doubt that the price point's moved around because of the pricing environment that is in the poultry industry today, but our volumes are steady, they're solid.

  • So it was probably more of a top-line statement than it was a volume statement.

  • And one of the things that Dick spoke to is the focus that we've asked our folks, is to grow volume, and to grow top-line that's going to exist in a difficult pricing environment over the next three, six, nine months.

  • - Analyst

  • You had said at the last chance, we're working with our customer to get some volume back that we lost last year.

  • I interpret that to mean that you were going to get aggressive on pricing.

  • - Chairman & CEO

  • We lost a little volume in one of our club store accounts.

  • It's account-specific, it's not for the overall industry.

  • There were a couple of places where customers traded us for somebody else, which goes on in our industry.

  • And as a matter of fact, we're at the table and we think we'll get some of that volume back in those accounts-specific, so to clarify.

  • - President & COO

  • All right.

  • What's your outlook for grain prices for the, let's say, for the next couple quarters once -- as the Brazilian harvest comes out of the field?

  • Are you looking -- do you think it's priced in or are you looking for weaker soy and corn pricing?

  • Lenny, this is Dick.

  • I would just say that in general, it looks like everything would say that the Brazilian and the South American harvest are going to be decent.

  • We had very good size crops domestically.

  • We don't see any runaways on the upside.

  • But by the same token, on corn, I would tell you, we probably don't see a whole lot of weakness occurring there either.

  • So, grains are always a major factor in our chicken business, but at this point we don't see any runaways, one way or the other.

  • - Analyst

  • All right, just two more questions, if you could.

  • You talk about adjusting guidance and, notwithstanding John's opening comments there, but as things occur, when did you realize this quarter was going to be pretty poor and the year as well?

  • Did you know sometime ago or was this just as you were closing the books, Dennis or John?

  • When did this fact become apparent?

  • I'm just trying to get some feel for as we go forward from here.

  • - Chairman & CEO

  • Well, clarity became apparent about a week or ten days ago, once we got through the holiday period.

  • The holiday period from about the middle of December all the way until about the first or second week in January is always convoluted.

  • And as we went through the holiday period and we started to come out on the back side, what became seasonal issues and what became trend issues, the seasonal issues disappeared and the trends became very clear.

  • And that's when we saw that we needed to make our adjustment.

  • - Analyst

  • All right.

  • One last comment.

  • With China consuming almost 50% of the pork in the world, if the numbers that I've been reading are right.

  • I know you're going in there with poultry, but, Dick, why wouldn't you go in there with pork, in China?

  • Just too hard to do business over there?

  • Or is it better attacked in a different manner, from a strategic point of view?

  • - Chief Administrative Officer & Int'l President

  • Lenny, this is Greg.

  • - Analyst

  • Hi, Greg.

  • - Chief Administrative Officer & Int'l President

  • We're certainly not turning our back on opportunities in pork.

  • As a matter of fact, we are actually an owner of, a minority owner, in a pork-processing plant that has expanded to slaughter significantly and expanded value-added.

  • We are aware of activities in China and keeping our eye on it with regard to pork.

  • - Analyst

  • Okay.

  • Diane, do you have any questions?

  • All right, that's it.

  • Well, good luck the rest of the way.

  • We'll see you guys later.

  • Operator

  • Thank you.

  • Our next question comes from Christine McCracken from FTN Midwest.

  • - Analyst

  • Good morning.

  • - Chairman & CEO

  • Christine.

  • - Analyst

  • Just on cattle, you guys talked in the press release about obviously how difficult things are.

  • And actually, that you're disappointed, I think, with the cattle inventories.

  • In some respects, it seems to me like that might actually help you out in some respects, maybe accelerating the improvement in the oversupply situation.

  • Can you talk about when you expect to see the bottom in the cattle markets and things starting to get better?

  • - President & COO

  • Well, Christine, this is Dick.

  • If you saw the most recent cattle inventories, the total cattle on feed is up about a little over 2%, which is good, which says that there is heifer retention underway.

  • Last week was kind of a pivotal change, maybe, in the market, with both the cash kind of retreating a little bit and the futures retreating a little bit late in the week.

  • Now, that's about the first good sign we have seen.

  • But we still have extremely high cattle prices relative to the other protein categories.

  • What's difficult is not only is the supply-side difficult because of the competing proteins, it's very difficult, one, to get your capacity utilization because of supply; but, two, to get prices up high enough relative to these cattle markets.

  • So we just believe that for the balance of this winter, through the end of March, we don't see a whole lot of improvement in supply.

  • Once you get into third quarter and there have been others have said that it would appear that we might even have a record supply of cattle once we get into the mid, late third quarter.

  • Some predicting as high as 6 to 8% more cattle than a year ago.

  • So I think there are some positive things on the horizon.

  • We've just got to get through this balance of this second quarter before we start to see them help us as we get into the third quarter.

  • - Analyst

  • Would you consider temporarily shutting some of your capacity in order to kind of right that supply imbalance?

  • You've done that in the past, but we haven't seen anything in the industry thus far.

  • - President & COO

  • Yes, we tried to take that leadership role, I believe, last year, maybe it was two years ago.

  • I guess it was last year, in February.

  • - Chairman & CEO

  • And nobody followed.

  • - President & COO

  • And everybody else just seemed to run a little bit more.

  • So it was one of those things that didn't seem to do any good, but we are always looking and evaluating what we're doing, how we're doing it.

  • In fact, we've got some major initiatives looking at all of our facilities from a chain-speed standpoint, from an SKU standpoint, from a complexity standpoint, in terms of what can we do to make them more efficient.

  • There's a lot of work going on, I can tell you, to make sure that we're doing the right things within our facilities.

  • And looking at capacity and looking at what are the alternatives that we have there.

  • - Analyst

  • Well, it seems like beef, specifically, is doing a little bit better than chicken and pork from a demand perspective, which seems a little maybe counter intuitive.

  • Can you talk about maybe why beef demand might be a little better at being able to support that price?

  • I mean, it's not great but relative to chicken and pork it seems a little bit better.

  • Can you talk about that?

  • - President & COO

  • Again, I think it comes down to price and pounds and supply.

  • We're on the lowest side of our availability of livestock.

  • We're down in that 31 million range, whereas when you're at 34 or 35 million and your prices go down, it's a all price-sensitive.

  • So I would tell you that demand is not that good.

  • Prices are high, but supply is what's driving that.

  • Not necessarily demand.

  • - Analyst

  • Okay.

  • Can you talk about Japan?

  • You obviously are shut out of that market for now, but I guess there's rumors that they're considering reopening to some 10 or 11 plants.

  • Can you talk about whether or not you're in consideration for that and what that might mean for your business?

  • - President & COO

  • Christine, I'm not aware of the 10 or 11 plant situation.

  • Maybe Greg is.

  • - Chief Administrative Officer & Int'l President

  • No, not in detail.

  • But as we continue to reiterate that based on the current regiment that's required for Japan, this is a very, very, very small situation for our Company.

  • - Analyst

  • And you're readying -- ?

  • - Chief Administrative Officer & Int'l President

  • It's more phycological to the over arching market than any real meaningful sales to us.

  • - Analyst

  • But South Korea, I assume, is helping you out some, or should help you?

  • - Chief Administrative Officer & Int'l President

  • It will be when the market does officially open.

  • But we, again, we don't expect that until we get to around that mid-April to May period before we can actually ship pounds.

  • But then based on the agreement, it should be a benefit to us, yes.

  • - Chairman & CEO

  • But the ability to regain market share will take time because I think we all have to remind ourselves we've been out of those market for two years.

  • Those traders and those buyers over there have built a different set of relationships, whether taking beef out of Australia, Brazil, whatever.

  • The ramp-up to get our market share back will come with challenges.

  • And we'll have to go over there and earn our market share back.

  • It just won't happen overnight because of being gone for two years.

  • - Analyst

  • And in terms of Canada, you guys, I assume, you're up over 50%.

  • Can you talk to us about kind of where you are in terms of utilization up there?

  • Since the strike?

  • - President & COO

  • The plant is back to about 90% of its stated chain-speed, so to speak.

  • So we're getting back there.

  • We lost almost 300 people in that short two and a half weeks or three weeks that we were down.

  • There was a significant loss that does take some time.

  • When you're out in the middle of nowhere in Alberta and you lose team members, it takes a little time to get them back.

  • - Chairman & CEO

  • And particularly the skilled jobs that make a difference in the plant.

  • Dick alluded to what he's trying to do both domestically and in Canada, is to make sure his chain time is efficient and maximized to make sure that we're getting the capacity utilization as efficient as we can based on the number of head of cattle that are available to us to come through the plant.

  • As he said, they're going back through and looking at things to make sure that where we have been historically, the best beef, box player, and the best pork boxed player, that our fundamentals are in place.

  • I think we'll see some decisions and some fine-tuning that will make a difference in those plants as we head into a improving cattle supply that should start to show up come springtime as the grass gets greener.

  • - Analyst

  • Okay.

  • And just one final question.

  • You talked about your expectations for 2% increases in chicken supplies for this year.

  • But if I look at the flock size and the productivity improvements that we've seen along with the shift toward big birds, I'm looking for total increases much greater.

  • Can you explain why you and others in the industry continue to talk about these very small increases despite what we've seen in the data?

  • - Chairman & CEO

  • Well, I think you've got a combination, I mean, the 2 to 3% is based on number of birds.

  • You alluded to weights will create some more pounds out there in the marketplace.

  • And then I think the other thing that's happened to the industry a little bit is we had outstanding weather in November and December and January, so we didn't lose any weight that we historically lose.

  • And historical seasonal cuts were not as big this year as they were last year.

  • You take the combination of 2 to 3% more birds, you add some more weight, you eliminate the seasonal cuts and you have a good growing season, the range of pounds and out there is moving.

  • Dick's got some other -- .

  • - President & COO

  • Christine, the only thing I would add to what John said, is margin structures for the commodity players are going to have an influence on how much additional supply are going to be out there.

  • - Analyst

  • Except for the fact that you've had two big increases in production announced in the last two weeks.

  • - Chief Administrative Officer & Int'l President

  • Let's think about -- Christine, this is Greg.

  • Just go back and think about how pricing has developed here.

  • You have seen a significant tail off in leg quarter values that occurred just a handful of days ago in the grand scheme of things.

  • The realities of the demand and the inventory are there and we believe that that will have an economic vote in expansion.

  • - Analyst

  • From your perspective, then, that's probably all you can talk to, it's your policy still to stay one bird short?

  • - Chairman & CEO

  • It is still our policy to stay one bird short.

  • - Analyst

  • Any thoughts of cutting back production more and leading again in the industry?

  • - Chairman & CEO

  • We need to run our plants about 40 to 44 hours a week.

  • That's the most efficient use of our plants.

  • It's also the most -- and then we want to try to get a little more volume and a few more hours through our value-added lines.

  • So we want to have enough capacity to run our slaughter plants in that 40-44 hours a week, but we want to be able to run our value-added lines around 44 to 50 hours a week.

  • That's why we're one bird short and we're out there in the marketplace supplementing our raw material needs by acquiring raw material in the marketplace.

  • And we have taken plants out over the last two or three years to put ourselves where do we think it's best in balance.

  • And I would tell you at this time that I don't see that happening in the future.

  • - Analyst

  • All right, thanks.

  • Operator

  • Thank you.

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

  • - Analyst

  • Good morning.

  • We can start on beef, please.

  • Is the big part of the issue lower capacity utilization across the industry due to some slaughter capacity in Canada?

  • - President & COO

  • Yes, Dave, I would say that there is more meat coming down from Canada into the U.S.

  • There's no doubt that that is a factor.

  • What has changed in Canada is the live cattle markets in Canada have kind of gone back to a more normal basis compared to the U.S. markets, which has impacted, if you will, the margin structure in Canada.

  • So at some point in time that will balance itself out as well.

  • There is additional slaughter capacity up there, but I'm not so sure utilization is going to stay as good as it once did, just based on the pure margin structure of what's going on in Canada.

  • - Analyst

  • The Lakeside margins are now more in line with what they've been long-term rather than, say, the extra high levels when the border was closed?

  • - President & COO

  • They're actually -- beef is ugly domestically, beef is almost as ugly in Canada.

  • - Analyst

  • Got you.

  • And the following-on on on beef, when you talked about higher cattle supplies maybe spring and summer and you used a figure 6 to 8%, whatever higher number, wouldn't any surge in cattle supplies be mainly related to the drought in southern plains is moving some cattle to market rather than a structural effect of any breeding herd expansion?

  • - President & COO

  • No.

  • I think there is heifer retention -- just historically, you always get a few more cattle in the spring anyway.

  • That's going to happen every year.

  • Everything that I can glean, both internally and externally, from reasonably informed sources would indicate that there will be a supply of cattle that is in that anywhere from 4 to 8% more than a year ago.

  • Part of that is also driven by the fact that the weather -- the cattle in the feed yards themselves, especially in the South, in Texas and Kansas, have been, just like for chicken, have been great growing seasons.

  • Cattle have been gaining at rates this winter much higher than the last two winters, which is going to say we should have more front-end supplies of cattle coming to us in that April, May, June period.

  • - Analyst

  • I'm going to move on to prepared foods, the margins are obviously better there.

  • How much of that might be a function of lower pork input costs?

  • - President & COO

  • I mean, it is a factor in that.

  • I would tell you that our mix -- we finally finished evaluating our portfolio of products.

  • So I think it's two things.

  • One, we've rationalized what we're doing in terms of our prepared foods mix of products, which from a value-added standpoint has helped us.

  • But I would be wrong if I didn't say some of your lower pork input prices didn't help as well.

  • - Analyst

  • Right.

  • Thank you very much.

  • Operator

  • Thank you.

  • Our next question comes from Farha Aslam with Stephens, Inc.

  • - Analyst

  • Hi, good morning.

  • I know it's tough out there right now, but just trying to get a feel for where these markets are going longer term.

  • Do you think you're going to fill your Russian quota this year in 2006 for poultry?

  • - Chief Administrative Officer & Int'l President

  • Well, this is Greg.

  • I would suspect that we've still got a good chance.

  • There's a lot of months left here, we've got some consumer demand concerns right now.

  • We'll be a part of trying to make efforts, help in restoration there, and one would certainly hope, as we move through the year, that consumer confidence would turn up for us and that we'd be aggressive to sell product into the market.

  • - Analyst

  • Great.

  • And do you think cold storage inventories for chicken have peaked or do you think they're going to go up further as the year progresses?

  • - Chief Administrative Officer & Int'l President

  • I hope they have peaked.

  • I do believe that we're going be -- work hard to clear inventories in the second quarter as we move into the third quarter.

  • - Analyst

  • Okay.

  • And then just thinking about Brazil versus the U.S., do you anticipate Brazilian chicken being allowed back here into the U.S. any time soon?

  • - Chief Administrative Officer & Int'l President

  • Not anytime soon, there is a very well-defined regiment that you have to go through and approval process.

  • And it would suggest several years, even if you were working diligently on it today.

  • - Analyst

  • Three-plus years, would you say?

  • - Chief Administrative Officer & Int'l President

  • The total elapsed time would be that as minimally, yes.

  • I'd hate to put a date on it, but directionally it would take several years.

  • - Analyst

  • Okay, great.

  • Then looking at pork, your margins were below our expectations.

  • Was it most of the losses came in October and improved in November/December or was pork weak throughout the quarter?

  • - President & COO

  • You're right, October was not a good month when it traditionally is, and it got better a little bit in November and got a little bit better in December.

  • - Analyst

  • Was the issue just standard pork cut out margins or was it something particular with a hedge or a sales contract that impacted margins and would continue to impact margins going forward into the second quarter?

  • - President & COO

  • No, I mean, I would tell you it was a situation more driven by, as an industry, we were probably slaughtering or processing too many hogs.

  • And the hog price, if you recall, was still relatively high in October.

  • And I think we were, as an industry, probably putting too much product into the marketplace.

  • And that's what narrowed our margins.

  • - Analyst

  • In the second quarter you would anticipate that improving significantly?

  • - President & COO

  • We would anticipate that improving in the second quarter.

  • Yes.

  • - Analyst

  • Okay.

  • And then there was a big swing in this first quarter in your other income going from 6 million to 20 million.

  • Could you just comment a bit on what caused that swing?

  • - Treasurer & Interim CFO

  • Farha, you said other income?

  • - Analyst

  • I'm sorry, your other division.

  • - Chairman & CEO

  • Oh, other division, that's supply chain

  • - Treasurer & Interim CFO

  • Oh, our other segment, that's our supply chain and then there's other charges in there as well.

  • - Analyst

  • Okay.

  • So it's more accounting rather than sort of profitability?

  • - Treasurer & Interim CFO

  • The supply chain is pretty steady, it was the accounting issues that would make up the difference.

  • - Analyst

  • Okay, great.

  • And then my last question is, you've had some easy comps in the back half in poultry, especially with hurricane Katrina in the fourth quarter.

  • Can you just provide us outlook kind of -- are you thinking, still, that sales could be flat year-over-year with that or with the current pricing environment you're thinking sales will be weaker and margins.

  • Kind of give us a profile of margins compared to last year?

  • - Chairman & CEO

  • Well, I think we're going to be able to drive some volume increases.

  • There's no doubt that when you think about the historical ranges of chicken, we think we can make the lower end of those ranges as we move forward into the second and third quarter.

  • As we spoke earlier, we were able to hold onto the volumes we had with significant customers and actually increase some volumes, even though we had to have some different price points because of competing competitors out there.

  • But our focus will be on volume and market share in a pricing environment that will be a little more difficult.

  • - Analyst

  • Okay, great.

  • Thanks.

  • That's very helpful.

  • Operator

  • Thank you.

  • Our next question comes from Ken Zaslow with Harris Nesbitt.

  • - Analyst

  • Good morning, everyone.

  • - Chief Administrative Officer & Int'l President

  • Good morning, Ken.

  • - Analyst

  • A couple of questions.

  • Are you concerned at all on the beef side if South Korea is going to follow Japan's action and delay a little bit the opening or what is your read on that?

  • - President & COO

  • This is Dick.

  • My sense is it's just going to take time to go through all the technical ramifications of them deciding exactly how they want this done.

  • It just takes time, both between the U.S., our two governments, and also there are some things that Korea has to do within Korea to get this approved.

  • There's a public comment period.

  • So it just takes time to get all that stuff done.

  • - Analyst

  • In terms of Canada, cattle coming in, are you surprised at the slow pace at which it's coming and is there any reason to believe that pace will increase?

  • - President & COO

  • Are you talking about the movement of live cattle?

  • The movement of product?

  • - Analyst

  • The movement of live cattle.

  • - President & COO

  • For us, we are back to our kind of pre-BSE levels of cattle moving to our facilities, especially in the northwest.

  • We're back up to where we were.

  • So I'm not sure what numbers you're referring to.

  • But from our perspective, we are back to our normal levels of where we were in 2002 and 2003.

  • - Analyst

  • Okay.

  • And then in terms of Mexico, it sounded like this quarter was a little weak but your more optimistic going into the rest of the year.

  • Is that true, Greg?

  • - Chief Administrative Officer & Int'l President

  • That would be true.

  • I think we've seen some improvement in the pricing in particular in the last week or two, and we would expect to see continued improvement.

  • This quarter is going to be difficult, unquestionably, but we would look much more favorably on the back half of the year.

  • - Chairman & CEO

  • And of course we continue to expand our value-added product share down there and that helps mitigate some down there.

  • - Analyst

  • Is the rebound somewhat linked to Mother's Day and the increased demand in the two quarters or is that -- I guess that's my issue.

  • Are you relying on Mother's Day as the increase in demand or do you think that the supply issue will get resolved?

  • - Chief Administrative Officer & Int'l President

  • I don't think we're trying to hook this on any one particular holiday.

  • It's just simply looking at the marketplace would evolve to a better balance of supply and demand and that, we believe, you're seeing some preliminary evidence now in the movement of the price.

  • - Analyst

  • And my last question is, is there any thought on share repurchase?

  • Your stock's down pretty significantly over the last couple quarters.

  • What would it take for you to become more active in repurchases?

  • - Chairman & CEO

  • Well, as we spoke to uses of cash and we still focus in paying down debt and investing in our value-added strategy, that's why you saw us commit the money to Sherman, Texas, which comes on here at the end of February.

  • We're investing in our bacon and our precooked and in our fully cooked bacon out there for market share gains.

  • We continue to expand our value-added fully cooked capacities.

  • And we'll keep down that path.

  • You read articles out there that some say share repurchases are good.

  • There's a recent article in the last couple of weeks that said share repurchases are not a good use of cash.

  • We believe that investing in our debt paydown, investing in our ability to improve our operational efficiencies and income streams, and then to allocate some of that cash for the right acquisition, be it a domestic or international are the better uses of cash.

  • - Analyst

  • All right, thank you very much.

  • Operator

  • Thank you.

  • Our next question comes from Tim Ramey with DA Davidson.

  • - Analyst

  • Good morning.

  • Dick, do you expect the Sherman plant to be a drag on margins or positive to margins in 2Q?

  • - President & COO

  • Well, actually, probably in second quarter they are going to be a little bit of a drag on margins.

  • But, Tim, we really have had a very good beginning in terms of getting team members ready for that facility.

  • We've been sending, for the last six weeks, people over to our big plant in Goodlettsville, Tennessee and to Council Bluffs.

  • Our whole maintenance structure looks very good.

  • I think it's going to be a very good start up.

  • But you're right, second quarter, as you bring the volumes up, it is going to have an impact.

  • But we are going to move volume into that plant, both quickly and efficiently.

  • So I think it will have an impact in Q2, but it's going to come onstream probably faster and better than most plant start-ups.

  • - Analyst

  • How do we think about it in -- relative to the 16% rate of gain you had in case-ready here in the current quarter?

  • Does this move up to a 25% rate of gain for a period of time or what's it going to look like?

  • - President & COO

  • We will still be in that double-digit, probably between 15 and 20% increase.

  • We anticipate on a year-over-year basis to still be in that range.

  • We will have a little bit of an impact, this won't all be totally incremental.

  • We'll drop back a little bit in Goodlettsville, as we are moving a little bit of volume from one plant to the other initially.

  • But we already know where a lot of this volume is going to go and see it really coming up very quickly.

  • - Analyst

  • Just a comment on your earlier comment on the attempt to close production last year.

  • Might be a whole lot more productive this year than last year, given the increased level of pain that's out there.

  • So I wouldn't discourage you from taking a look at that approach again.

  • - President & COO

  • Duly noted.

  • - Analyst

  • Thank you.

  • Operator

  • Thank you.

  • Our next question comes from Eric Katzman with Deutsche Bank.

  • - Analyst

  • Hi, good morning, everybody.

  • - Chairman & CEO

  • Good morning.

  • - Analyst

  • I guess just first some details so I'm clear, Dick, that Canada, the swing of 38 million from the first quarter last year to this quarter, how much of that was due to the strike?

  • - President & COO

  • About 9 to 10 million of it were due to -- a little over 9 million was due to the strike.

  • The swing is significant, though.

  • If you look at the swing from Q1 last year to Q1 this year, that swing was about 31 of that 38 million.

  • And that went from a positive 5 million to a negative 26.

  • That's a pretty significant change on a year-over-year basis.

  • And out of that 31, almost a third of that, roughly, is from the strike.

  • - Analyst

  • Okay.

  • But you feel now that the Canadian plant is kind of getting back close to where it was, so that isn't the factor going forward, it's just the state of the industry as opposed to something internal?

  • - President & COO

  • Right.

  • The plant is getting back to its levels of efficiency.

  • We still have the industry structure and the beef structure between the U.S. and Canada both that we have to deal with.

  • But, no, we don't have -- we won't have nearly the effects from an internal perspective, it will be more external.

  • - Analyst

  • Okay.

  • And then, John, to what extent do you see that the industry -- I guess this is -- other than last year's kind of hedging hit to earnings, your margins now are at the lowest point they've been in at least two years on an operating basis.

  • When the industry has kind of gone into a down cycle, there certainly have been a number of other players in the industry who have been rewarded by kind of doubling down.

  • So I'm kind of wondering in terms of having so much money put into CapEx, how are you weighing the difference between CapEx versus M&A opportunities that may come up?

  • - Chairman & CEO

  • I think your question is one that has entered into our mind-set.

  • I think there's a distinction between M&A opportunities and CapEx.

  • The CapEx is a combination of the ongoing repair and maintenance that's required to keep the facilities going.

  • And then the other components of CapEx are both income producing and cost savings.

  • And to make sure we're getting the right utilization in our plants.

  • Also, our product mix sometimes moves around from fully cooked to par fry, which means we have to make some adjustments in those existing plants and those existing lines that we have.

  • Now, as related to the ability to think about closing the gap on maybe some of our prepared food items categories, I would tell you that we probably need to and have been discussing what that would look like so we can maybe accelerate our bacon expansion or maybe some of the needs that we have in the fully cooked products that are in the beef and pork category out there.

  • But, you know, doubling down has been a pattern within the industry when things change or dynamics change.

  • And we have been a player in the past when we thought that opportunity fit our needs.

  • Growth for growth's sake within segments will not be an option.

  • But the ability to give us market share penetrations or to expand our value-added opportunities will be part of our thought process.

  • - Analyst

  • Okay.

  • And then just kind of a follow-on, I think I asked this last quarter, with all respect to Dennis, you're spending a lot of money on capital, it sounds like you're looking at acquisitions in Brazil, if I heard Greg correctly.

  • The industry is, again, kind of in its trough or close to it.

  • And I just -- I kind of wonder with so much money being spent, the possibility for acquisitions probably higher than they've been recently, you don't have a full-time CFO.

  • How much confidence should we have on the outside that the Company is making the right capital allocation decisions when there are probably some critical numbers that need to be analyzed?

  • - Chairman & CEO

  • First of all, I have all the confidence in the world in Dennis.

  • Dennis has been part of our management team for over 20 years.

  • And when we did our acquisitions and we did our capital allocations, it was Dennis and his team that were always running the numbers on uses of cash and proper allocations of cash.

  • So that skill set is here.

  • We are in the marketplace.

  • We have ongoing active discussions right now with several candidates and those discussions are moving forward and hope to have something that we could announce in the second quarter.

  • - Analyst

  • Okay.

  • And then last thing, I guess your stock now -- you guys probably in a conference room so you may not see it, but your stock now is getting close to book value.

  • I mean, let's say EDM holds a big chunk of your shares, let's say they were to decide to get out.

  • Even under those circumstances, you still see share repo as kind of the last use of capital, even if your stock's trading at basically book?

  • - Chairman & CEO

  • It's a question that's that gets presented each and every quarter.

  • Our debt-to-cap's now under 40%, as Dennis re-emphasized, it's under 39%.

  • I think clarity into the third quarter will give us chances to consider different uses of cash.

  • But I would be hard-pressed that -- for me to make the decision to convert our use of cash away from debt pay-down, investing in our plants, investing in our people, and the right acquisition, whether it's a double-down opportunity or whether it's an international situation.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Thank you.

  • Our next question comes from Jonathan Feeney with Wachovia.

  • - Analyst

  • Good morning, guys.

  • - Chairman & CEO

  • Good morning, John.

  • - Analyst

  • First, real quick on the pork segment.

  • Here we have, by my reckoning, 13% lower live hog prices and yet lower profits and this coinciding with declining chicken prices over the course of the quarter.

  • Is this a clear spillover effect here where you're seeing a relationship between the two white meats, maybe not to the same magnitude, but like it was in '02?

  • - President & COO

  • I think there is some truth to that.

  • Again, the quarter was kind of made up of varying segments.

  • October was not all that good, it got better as the quarter progressed.

  • So I think there was other factors in there.

  • But certainly when you have cheap alternative proteins, it does have an impact.

  • Has an impact on beef, has an impact on pork, has an impact on chicken.

  • - Analyst

  • Secondly, for -- thank you.

  • And secondly for John, from what we're hearing, competitors, particularly some privately held competitors in the beef slaughtering commodity business, aren't cutting back on slaughtering right now.

  • And despite the fact that cattle prices are high, margins are low.

  • And I know you tried to take industry leadership last year.

  • Have you given any thought to maybe we have a structural overcapacity here and that this is a poor use of your capital and maybe you're suppose to structurally reduce some of your slaughter capacity and focus on some value-add on the beef side?

  • - President & COO

  • I think the question's a fair question.

  • And Dick and I, as he spoke earlier, we've been looking at some things to make sure that we have our fundamentals in place on our boxed beef and our boxed pork plants.

  • We did allocate capital, I think, if you all will remember, to Dakota City, to bring that plant into a position that has newer technology, newer lines.

  • So that gives us the option to think about what's the best use of Dakota City to make sure we take advantage of that capital spend.

  • I can tell you that we continue to look at what is the right use of capacity utilization.

  • We know the value of capacity utilization and we're trying to find our way to get that capacity up in the plants that we have today.

  • - Analyst

  • So I guess after all that kind of calculation, John, you guys are coming to the conclusion that you think beef margins, even the commodity beef side, will kind of normalize at some point in the next five years here?

  • - Chairman & CEO

  • Well, we would think that you'll see your first signs come that May, June, July period, when you get some more live cattle capacity back in the industry.

  • You'll then run again into November and December again, but you'll have your seasonal issues.

  • And that the '07 will be more in historical balance than '06.

  • - Analyst

  • Great.

  • And then finally, for Greg, a longer term question.

  • Last time we kind of went through the exercise, it looked like production costs in Brazil were something like 25% cheaper for chicken on a per-pound basis.

  • With the vagaries and price competitiveness of export markets where Brazilians can ship, I guess why not think about investing or moving a little bit more heavily there, seeing as it looks like that's an ongoing trait.

  • If I'm wrong about the production cost differential, please enlighten me.

  • - Chief Administrative Officer & Int'l President

  • There is a, clearly a significant percentage benefit to producing chicken in Brazil versus the United States for several cost driven reasons, labor is certainly one.

  • But the simple fact is that Brazil is an agricultural juggernaut.

  • It's a good place to process chickens, with the costs, the climatic conditions, the grain, so on.

  • It is an industry down there that has really grown significantly in the last few years on the back of exports.

  • We believe there's a place for us to be down there.

  • We think there's good money to be made down there.

  • We think that can be a part exports as well as in-country participation.

  • So, yes, we are interested in Brazil.

  • - Analyst

  • Would you be more interested from this point on, Greg, in greenfield type operations or would you consider buying companies down there?

  • - Chief Administrative Officer & Int'l President

  • I think the thought process would be to get established and then greenfields would be certainly not out of the question.

  • - Analyst

  • Okay.

  • Thank you very much, guys.

  • Operator

  • Thank you.

  • Our last question comes from Pablo Zuanic from JP Morgan.

  • - Analyst

  • Good morning, everyone.

  • Just a couple of questions out of left field and then one on fundamentals.

  • First, in regarding Brazil, if you ever buy one of the largest operators there, would you actually lobby to open the U.S. market to Brazilian chicken?

  • - Chief Administrative Officer & Int'l President

  • I think that's probably -- Pablo, this is Greg.

  • I think our belief is we are actively involved in the international trade side.

  • We believe over time the U.S. is going to have chicken coming in from other markets.

  • We believe Brazil is likely to be one of those.

  • So it would be prudent for us to think in longer term to be properly positioned on all ends to take advantage of that.

  • - Chairman & CEO

  • And historically, Pablo, the Company's been a proponent of free-trade issues.

  • - Analyst

  • Okay, I understand.

  • And just regarding dark meat, let's assume that for the next two or three years, the market remains relatively closed, would there be a way to reduce the volatility by finding other uses for dark meat in the U.S. market, like, I don't know, dark meat chicken sausages or ham or there's really just no demand for that?

  • - Chairman & CEO

  • The challenge with the dark meat is the ability to get the meat off the bone.

  • We've not been able to find a machine that can do it by automatic.

  • The hand labor to take meat off of a leg quarter is expensive compared to automating the deboning on breasts.

  • The industry and our Company, too, have been looking, how do you strip the meat off for alternative uses out there.

  • By the time you start to strip off the meat, you get into some cost structures as you roll it in.

  • But those things are active out there, they are ongoing out there, and rest assured that we have what we call a leg-quarter team or a dark-meat team.

  • But the American consumer continues to vote with their wallet towards products that are breast meat or white meat-based time and time again, even though there have been some good products developed.

  • And the consumer does shape our behavior.

  • - Analyst

  • Right.

  • - Chief Administrative Officer & Int'l President

  • Pablo, let me make just a fine point, though, because if I heard you correctly, you sort of suggested that something to the extent about market access and it may be being compromised for a few years.

  • Really, you don't have a market access issue in real terms here, you have some international demand that's been compromised, and we believe, by AI concerns.

  • And we believe there's a tremendous amount of effort being brought forth worldwide to try to deal with this.

  • And, in fact, we will see an improving climate over time.

  • There will be restoration of export volume flows.

  • And I think it's also important to recognize that the U.S. is exporting dark meat at prices that, on a historical basis, can be -- match up good with our historical white meat prices and still provide a very competitive protein product in international markets.

  • So even competing against Brazil, we will be shipping dark meats at worldwide competitive prices and can move our volumes.

  • And we would look at Brazil to be something that would provide an additional growth opportunity for our Company.

  • - Analyst

  • Okay, I understand that.

  • Just to follow-up on fundamentals, when I look at the guidance for the second quarter, you're saying negative EPS, so let's say minus $0.02.

  • Sequentially, you would be going from $0.11 to minus $0.02, [intense] of a pre-tax EBIT, that would mean a decline of about $70 million.

  • From all I've heard today in terms of Canadian beef improving, U.S. beef, it's difficult to think it would get much worse in the second quarter.

  • Maybe I'm stating the obvious, but most of that sequential decline has to be coming from chicken, right, although at the beginning of the call you made it sound it was mostly beef related.

  • The reason that's important to me is if we have to feel more comfortable with your second half guidance, we have to take a view whether we expect a faster recovery in chicken prices and/or in beef economics.

  • I mean, on my end I am more positive on the improvement in chicken.

  • Can you comment on that?

  • - President & COO

  • That's a good question.

  • This is Dick.

  • I believe that it's a combination of both beef -- if you recall, I did say that beef would likely be worse than first quarter.

  • Then if you take into account we also said that prepared foods and pork would have been kind of similar or maybe about the same, that only leaves the chicken segment.

  • And based -- the leg quarter situation and the relative high supply, at least in the short-term, again, until -- demand will get better as we get into the springtime on chicken as well domestically, that it's a combination of both beef and chicken that are going to impact Q2.

  • - Analyst

  • That's fine, that's good.

  • Thank you.

  • - Chairman & CEO

  • You know, Pablo, you put out a number related to possible estimates for the quarter, make sure you understand, we don't endorse, we don't give guidance, all we do is give guidance for the year.

  • Anything else?

  • Operator

  • I show no further questions at this time.

  • - Chairman & CEO

  • We want to thank everybody for taking time to listen to our conference call.

  • We tried to be straightforward, we tried to give you the facts of where our business is.

  • I want to thank the Tyson team members who have worked diligently through this process.

  • And rest assured that there's a lot of hard work going on and we'll see you on the second quarter conference call.

  • Thank you all.

  • Operator

  • Thank you.

  • That concludes today's conference.

  • You may disconnect at this time.