泰森食品 (TSN) 2006 Q2 法說會逐字稿

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  • Operator

  • Good morning.

  • Welcome to the second-quarter Tyson Foods earnings release conference call.

  • All participants will be on 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.

  • Ruth Ann Wisener - VP IR

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

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

  • Before we 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.

  • John Tyson - Chairman, CEO

  • Good morning, everybody.

  • Thanks, Ruth Ann.

  • I'd like to thank everyone for joining our call again today, and I'm looking forward to discussing our business with you.

  • I want to especially thank our Tyson team members who are making a difference out there and running our business and working in the communities where we live and work -- to all our shareholders, our friends out there who support our company.

  • As we've said, our second quarter was extremely difficult.

  • Our beef, chicken and pork segments were all negatively impacted by excess protein.

  • Our beef segment also struggled against the very tight cattle markets and continued interruptions in access to export markets.

  • Those factors prohibited us from profiting on what we call the spread due to higher live cattle prices versus lower boxed beef prices.

  • The chicken segment had increased sales volume and generated slightly positive results, even though the average sales prices were lower due to price mix -- basically, leg quarter values coming down and breast meat values.

  • Our value-added strategy with inside our chicken segment allowed us to stay in positive territory.

  • Our pork segment suffered from lower average sales prices and higher per-head operating costs, and our prepared foods business continues to improve on an adjusted basis, but I can tell you, it still remains behind what we expect from that business but it is headed in the right direction and we are thankful for that.

  • It was a difficult quarter.

  • I can tell you we're glad to have it behind us.

  • We can now focus on the future and continued execution of our strategy, the three-pronged strategy of expanding our value-added products, maintaining the best operational efficiencies and operational costs in the business, and then continue to look at our international opportunities.

  • As we always do, you will hear from Dennis and you'll hear from Dick and Greg and they will give you more detail about our decisions that we're making to better manage our business.

  • In our operations, we've been focused on running efficiently in all our segments.

  • During this quarter, we completed the closure and/or consolidation of chicken, prepared foods and beef facilities and we continue to upgrade operations where appropriate.

  • We have adjusted production plans in our poultry operations to align with current customer requirements and our own internal needs, and we're also managing our inventory as well.

  • We are being ever more disciplined as we go forward in managing our cash.

  • We have reduced our CapEx for the year from a range of 600/650 to approximately $550 million.

  • Capital spending for the first half of the year was 357 and included the completion of several large projects that you have heard us talk about in the past -- in Dakota City, Nebraska, which is a beef slaughter plant, Sherman, Texas, which is our third case-ready plant.

  • We also are about to complete the Discovery Center addition at our world headquarters, which allow us to keep focusing in our R&D and our pilot plant and have all our people on one campus to take care of our customers.

  • Then the Forest, Mississippi poultry plant projects, which was a consolidation of several plants into one complex.

  • We will direct capital on a go-forward basis toward those regulatory obligations, those customer-mandated and the maintenance projects as we continue to be the best low-cost operator.

  • This will continue to focus on driving cash flow, paying down debt, and focusing on those debt ratios.

  • Going forward, I can tell you we will continue to evaluate opportunities to drive those efficiencies, because we believe that is the best way to manage our company.

  • We will continue to aggressively seek share; we're going after share and it's reflected in some of our volume growth, especially in those value-added categories which we believe is the right long-term benefit for the Company.

  • As we speak, in our three-pronged strategy, we will continue our efforts on international expansion, which will be a foundation for future success.

  • At this time, Dennis is going to visit with you, and then we will have Dick and Greg summarize the results and give you their views of the areas that they manage.

  • Dennis?

  • Dennis Leatherby - Treasurer, Interim CFO

  • Good morning, everyone.

  • Thank you, John.

  • In our press release this morning, we reported a GAAP loss of $0.37 per share for the second quarter of fiscal 2006.

  • Please note, 2006 second-quarter GAAP results include $14 million of plant closing costs related to the closing of two prepared foods plants in Iowa, 45 million of plant closing costs related to the closing of two Nebraska feed plants.

  • The combined impact of these two items increased the GAAP loss by $0.11 per share.

  • This compares to GAAP earnings of $0.21 per share in the second quarter of fiscal year 2005.

  • Some other points to note -- in our second quarter, we issued $1 billion in new, ten-year notes at a coupon of 6.6% to be used for general corporate purposes and for repayment of $750 million of 7.25% Notes coming due in October of this year. $750 million of these proceeds were deposited in an interest-bearing account with a trustee for the repayment of these Notes due in October and are included in the short-term investments section of the balance sheet.

  • Our decision to issue bonds earlier than the October 1 maturity was an effort to take advantage of the favorable bond market and interest-rate conditions.

  • While there will be a temporary negative carry effect from issuing the bonds prior to the October 1 maturity, the additional interest expense incurred prior to the maturities should be more than offset by the interest savings we should receive going forward.

  • As a result of this note issuance, our total debt at the end of the quarter increased slightly to slightly under $4 billion.

  • However, when adjusted for the $750 million of proceeds on deposit with the trustee, our net debt is actually $3.24 billion.

  • This net debt is 34 million higher than the second quarter of last year and on a net basis, the debt-to-capital ratio is down slightly to 41.4% compared to 42.1% a year ago.

  • Net interest expense was just slightly lower for the second quarter of this year versus the same period last year, as average debt and average interest rates were basically flat.

  • Now, let's review our financial outlook.

  • Our fiscal year 2006 GAAP earnings are now expected to be in the range of a loss of $0.25 to a profit of $0.10 per share.

  • As a result of the changes just noted above and in our earnings guidance, we have a few more changes to point out.

  • Revenues for the fiscal year are now projected to be between 25 and $26 billion, primarily as a result of lower average selling prices presently being experienced in all three of our major proteins.

  • Interest, foreign exchange and other charges are now expected to be approximately $230 million, which is up from our previous range of 200 to $210 million.

  • This increase is due to higher average borrowings than originally forecast, along with the temporary effect of the incremental interest expense associated with our recent bond offering.

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

  • As John mentioned earlier, our capital spending for fiscal year 2006 is now expected to be approximately $560 million, down from our previous range of 600 to $650 million.

  • Depreciation and amortization is expected to be approximately $520 million for the fiscal year.

  • Weighted average shares will be approximately 346 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.

  • Now, I will turn the call over to Dick.

  • Dick Bond - President, COO

  • Thanks, Dennis.

  • Good morning to you all and thanks for being with us today.

  • As we indicated in our press release as well as in the release a week and a half ago, our second-quarter results were very disappointing.

  • All of our segments were affected by the oversupply of protein in the market place.

  • In addition, our segments were also impacted by considerably higher fuel and energy costs, which were approximately $44 million higher for the second quarter and $112 million higher for the first six months of this year compared to fiscal '05.

  • Now, I'm going to take a quick look at each of these segments and talk about our customer channels as well.

  • Our chicken segment had an operating income of approximately $9 million for the second quarter this year, compared with $143 million in Q2 last year.

  • Pounds sold were up about 7% over second quarter a year ago, but sales dollars were down slightly.

  • Demand continues to be good domestically.

  • Our consumer products and foodservice channels have shown volume increases in our chicken sales.

  • However, protein supplies and international concerns related to the avian influenza have negatively impacted pricing, particularly for leg quarters and breast meat.

  • Lower sales prices and slightly higher grain costs contributed to markedly lower earnings.

  • Based on the most recent USDA reports, overall supplies appear to be getting more in line with present demand.

  • Our own expectations are that the overall production will be flat to slightly down in the coming months.

  • Commodity chicken prices appear to have bottomed.

  • In the aggregate, we expect grain costs to be similar to a year ago levels with corn forecasted to be slightly higher and soybean meal slightly lower.

  • Demand will continue to be the key going forward for both domestic and international sales.

  • Tyson has taken a very disciplined approach over the last few years to manage our base chicken production.

  • In fact, going back over the last five or six years, our total ready-to-cook pounds have been generally flat.

  • However, we continue to optimize the use of our internal bird supply.

  • We have reduced bird weights in a number of our complexes in order to right-size them for better use across our channels and to better align our production to meet the demands of our foodservice and consumer products groups.

  • In addition, we've decided not to increase production as we normally do for the summer holiday promotions.

  • In our beef segment, sales were up about $80 million on a year-over-year basis, primarily as a result of volume increases of 137 million pounds over Q2 of '05.

  • However, this volume increase was offset by sales price declines from $1.23 to $1.19 per pound.

  • Due to the abundant oversupply of protein in the market, we made a conscious decision not to run as many cattle through our production facilities as we did in the first quarter.

  • We also continue to be short of domestic cattle during the second quarter of '06.

  • These factors impacted our domestic capacity utilization, which averaged 71% for the quarter, but did show signs of improvement to approximately 75% at the end of March.

  • Today, we're running a little higher than that but still not at the levels we would like.

  • For the second quarter of fiscal '06, when adjusted for charges of $45 million related to the closure of two Nebraska beef plants, the beef segment had an operating loss of 143 million.

  • In Canada, our Lakeside beef operation is still feeling effects from the labor strike back in the fall, as well as the effects of increasing number of cattle that have been moving from Canada to the U.S., causing higher live cattle prices in Canada.

  • As we told you earlier, our third case-ready facility opened in the Sherman, Texas during the month of February.

  • That start-up increased our beef operating costs for the quarter by about $8 million.

  • However, we should be able to recoup these costs and be operating at a breakeven to slightly profitable during the month of May.

  • This is an exceptional compliment in such a short period of time.

  • As expected, cattle supplies are showing signs of improvement.

  • Cattle on feed reports as of April 1 showed record numbers, indicating that cattle ready for slaughter should be more plentiful during the late spring and summer months.

  • This should help our overall capacity utilization.

  • In addition, we have seen, as expected, our normal grilling season related price improvements on several of our popular steak cuts of beef.

  • These factors should drive a much improved back half of the year in beef.

  • In pork, the second quarter was disappointing as well.

  • While volume increased slightly over Q2 of '05, an overabundance of protein again pressured selling prices.

  • Average selling prices in total sales dollars declined by 12% on year-over-year basis.

  • Operating margins were just over 1% compared with 2% for the same period last year, not where we want them to be.

  • Capacity utilization was lower by about 5 percentage points than in the first quarter of this year.

  • Additionally, higher energy costs negatively impacted our operating costs as well.

  • Our Sherman, Texas case-ready plant also reduced our pork operating earnings by about $2 million.

  • While total sales dollars in our prepared foods segment for the quarter fell 7.1%, volume was basically flat on a year-over-year basis.

  • Sales prices for the quarter were 6.5% less for the second quarter a year ago.

  • However, decreases in input costs, combined with shifting our focus to our core of profitable products, generated higher operating margins.

  • After adjusting for the 14 million in plant closing costs during the second quarter, margins improved from 2.9% from Q2 last year to 3.6% in the second quarter of '06.

  • This upward trend in margin improvement reinforces our belief that value-added prepared foods segment is moving in the right direction.

  • This business continues to be a growth vehicle for us, especially within pizza toppings, bacon, and refrigerated meat categories within our consumer products and foodservice channels, which I'm going to talk to briefly now.

  • Within consumer products, we continue to grow our case-ready beef and pork business.

  • Sales improved by almost $20 million over the same period a year ago to generate total sales dollars of $414 billion in the quarter.

  • This increase was led by our case-ready pork, which actually had double-digit volume growth compared to last year.

  • As I said before, the start-up in Sherman, Texas has been a great success with production volumes already leading our planned forecast.

  • In a category that has recently experienced very little innovation, Tyson has set a course to reinvent case-ready chicken.

  • We are in the process of presenting three major initiatives on Tyson fresh chicken to our retail partners, supporting a commitment to drive margin enhancements by leveraging consumer insights and driving innovation.

  • Through a proprietary process, all Tyson fresh chicken will qualify and be marketed as 100% all natural, including marinated and non-marinated products, starting in June.

  • In addition to this conversion, two new lines will be introduced, Tyson Trimmed and Ready, and Tyson individually wrapped fresh chicken.

  • We believe these new items will increase Tyson's brand presence within the case-ready chicken category, as well as give us a companion lift to the overall Tyson branded fresh and frozen chicken offerings.

  • We will have a lot more details on these initiatives in the coming weeks.

  • Branded bacon continues to be a great growth vehicle for us.

  • Tyson markets branded bacon under well-known names such as Tyson Ready to Cook and Tyson fully-cooked bacon, as well as Right Brand and Corn King, and we now have a 10.8% volume share of the total bacon category.

  • Tyson's branded share is up 1.2 share points versus the same period last year.

  • Within our value-added deli side of our business, consumers validated the relaunching of our Russer brand of deli products.

  • The relaunch is going extremely well in the early stages, where there has been universal acceptance by our retailers and the brand is tracking ahead of prior-year volume by more than 15%.

  • Within foodservice, volumes were up by 3% over second quarter last year.

  • Our prepared foods segment had impressive gains within the foodservice channel by leveraging our ability to provide an array of complementary products such as taco meat, tortillas, and sauces.

  • Within national accounts, we have expanded our relationship with core customers, as well as brought on new business, especially in categories like taco meat, tortillas, toppings and sauces.

  • Sales growth remained good within the school channel as well, which has had year-over-year volume growth of approximately 6%.

  • We continue to gain share in bacon, specifically in distribution and national accounts, with the overall category up 20%.

  • We will continue to focus on topline sales and share growth in core categories and new channels as we move through the second half of the year.

  • In summary, while we knew that our second quarter would be extremely difficult, it was even more challenging than expected, especially in the beef and chicken segments.

  • Looking forward, cattle supplies are increasing; pricing is showing signs of improvement.

  • We expect that, over the near-term, we will still battle an overabundance of protein supplies.

  • 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.

  • Greg Lee - Chief Admin Officer & International Pres.

  • Thank you, Dick, and good morning.

  • Our total export sales were $487 million for the second quarter.

  • This is up 1% versus the second quarter of last year.

  • Our second-quarter export volumes of commodity chicken were up 8% versus the same quarter of last year and were up 9% over the first quarter of this fiscal year.

  • Our average sales prices for leg quarters declined $0.07 per pound versus the same quarter last year and $0.24 per pound versus the first quarter of this fiscal year.

  • As a result, our sales revenue declined 10% versus the same quarter last year and 40% when compared to the first quarter of this year.

  • During the second quarter, we continued to work to diversify both our product mix and our destination markets.

  • The combination of these efforts allowed us to reduce our inventories by almost 25% from the period high point.

  • An examination of USDA cold-storage data points to an improving picture in the overall industry's frozen inventories with total dark meat inventories down 14% from December 2005 to March 2006.

  • As you are aware, the Russian Veterinary Service is now changing all veterinary poultry permits.

  • Russian Agricultural, Alexei Gordeyev, said it is a technical issue and that new permits will be issued in 10 to 14 days.

  • We are loading vessels to Russia with our original permits that were approved through May 8.

  • At this juncture, we believe this to be a short-lived situation.

  • I do not expected this to have a material effect on our third-quarter sales.

  • Should we experience a delay in obtaining the revised permits, we are prepared to accommodate our Russian customers through altering our shipping schedules and to facilitate our sales by shipping product to alternative markets.

  • Based on our current sales velocity and bookings, we expect to continue to reduce the inventories as we go through the balance of the third quarter.

  • In addition, we expect pricing to improve as we move into the latter part of the third quarter and on into the fourth quarter.

  • Our export sales of beef products were $221 million for the second quarter.

  • This represents an 11% increase over the second quarter of the prior year.

  • Our sales volume of boxed beef was up 6% versus second quarter of last year.

  • The quarter comparisons were bolstered by both sales to Mexico for chuck and round cuts and overall demand for from Taiwan.

  • Taiwan reopened its borders to U.S. beef during the second quarter and was our largest trading partner for the period.

  • Concerning continued market access issue, the United States government continues to negotiate with our Japanese, Chinese, and South Korean counterparts in an effort to regain those markets.

  • Our second quarter '06 continued the trend of strong boxed pork sales with volumes up 17% versus the same period last year.

  • The increase in sales were led by sales of hams.

  • Mexico and Japan remain our primary markets, representing 78% of our pork export volumes and 70% of our total revenues.

  • While significantly smaller, our boxed pork sales to South Korea continue to grow rapidly as South Korea now represents our third largest export destination.

  • Talk about Tyson de Mexico -- sales for the quarter were 7% above the same period last year due to higher volume offsetting comparative prices.

  • Chicken prices for the second quarter, while better than those realized during our first quarter of this fiscal year, were still encumbered by supply-side imbalances.

  • The net effect of these impacts was that operating income for the quarter came in at virtually breakeven versus the losses that we suffered in the first quarter of this fiscal year.

  • We expect prices to further improve as we move through the balance of the third quarter and into the fourth quarter, and we are anticipating much better results in the back half of the year.

  • We continue to look for other opportunities to further enhance our position as the leader in value-added poultry products in Mexico and to diversify our geographic presence.

  • In China, our domestic sales volumes to both the foodservice and retail channels returned to levels that are equal to those experienced before China's winter AI outbreaks.

  • We continue to work to expand our presence in the retail channel by adding more outlets in the modern grocery industry.

  • We are in advanced discussions with a leading local poultry company for the establishment of a joint venture.

  • With regards to South America, we have put into place two sales agreements that are allowing us to supply our global customers with alternative sourcing options and to sell them a broader array of poultry items.

  • We remain interested in growing our presence in the region and continue to pursue opportunities to facilitate that objective.

  • Thank you.

  • With that, I will pass it to our Chairman, John Tyson.

  • John Tyson - Chairman, CEO

  • Well, thanks, Dennis and Dick and Greg.

  • I appreciate the comments.

  • We thank you, those that have joined us on the conference call today.

  • As always has been our responsibility, we will work very hard to manage our cash, and we will continue that balanced against our business opportunities.

  • We will continue our three-part strategy -- (technical difficulty) -- value-added growth, operational efficiencies to be the best cost producer and international expansion.

  • We will continue to develop our folks and enhance their abilities to expand our leadership role in the protein sector.

  • That wraps up our prepared remarks about our second quarter.

  • It's been a tough quarter; we told you that all along.

  • It's now your turn to ask us a few questions.

  • Operator

  • (OPERATOR INSTRUCTIONS).

  • Ruth Ann Wisener - VP IR

  • The first question should come from Dave Nelson.

  • Operator

  • Okay, he has not cued up.

  • Ruth Ann Wisener - VP IR

  • Farha Aslam should be second.

  • Operator

  • Farha Aslam, you line is open.

  • Farha Aslam - Analyst

  • Thanks for all the details on the call; it was very helpful.

  • Where are you selling your chickens in the international market?

  • Who are your major customers right now?

  • Greg Lee - Chief Admin Officer & International Pres.

  • We continue to still flow a lot of product into Russia.

  • Shipments continue on an uninterrupted basis.

  • But we are also selling product really throughout the Middle East, through the sort of Central Asian markets.

  • We continue to sell product into -- Cuba as an example -- a pretty broad array of countries.

  • Farha Aslam - Analyst

  • Are you feeling strong demand out of China at all?

  • Greg Lee - Chief Admin Officer & International Pres.

  • Are we selling product to China?

  • Yes ma'am, we are selling product to China.

  • That is not a primary destination for leg quarters, but we have in fact been selling leg quarters into China, as well as other cuts like wing tips and chicken paws and a few other items.

  • Farha Aslam - Analyst

  • (technical difficulty) -- declines in your production for the summer, just if you were to annualize it, would it be sort of a 0.5% cut, 1% cut versus your volumes last year?

  • Dick Bond - President, COO

  • This is Dick.

  • It's about 0.7%.

  • Between the holiday cuts and the bird weight reductions, it represents about between 0.7 and 0.8% output reduction.

  • Farha Aslam - Analyst

  • Do you think that's all that's going to be needed by each layer in the industry?

  • About how much do you think the industry needs to rationalize to get pricing, particularly for breast meat, back to its sort of normal levels?

  • Dick Bond - President, COO

  • Miss, we don't know the answer to that question.

  • It's just going to take time.

  • Everybody, including us, is doing our best to make sure that chicken is a highly promoted item.

  • You know, we're just going to do our best and do what we need to do to take care of our customer and get those prices back up just as quickly as we possibly can.

  • John Tyson - Chairman, CEO

  • What I would add to Dick's observation is that, you know, we have a range of bird weights to match up against the different customer needs, whether it's QSR needs, fast food needs, retail needs, whereas a lot of our competitors out there are basically the big bird, breast deboning, “kick the leg quarter out overseas” model.

  • So, we still have the obligations to meet the needs of our customers through the range of weights, and where we had the chance to modify, adjust weights and trim production, we did that.

  • I can't speak for the big bird breast deboner leg quarter person or what they need to do, but they are the ones that it's really biting right now.

  • Farha Aslam - Analyst

  • Okay, in terms of foodservice promotional activity for the summer, do you see any interruptions with AI fears amongst your customers?

  • Or are they planning to promote chicken ahead of last year still?

  • John Tyson - Chairman, CEO

  • Well, there will be promotions of chicken headed into the summer.

  • There is a desire on the consumer side to promote beef because beef hasn't been promoted for two years.

  • So I think you'll see both the combination of beef promotion and poultry promotion out there in the marketplace, which will be good for those two segments.

  • Dick Bond - President, COO

  • But specifically on the foodservice side, from what we know, the planned promotions are still very strong on the poultry side.

  • John Tyson - Chairman, CEO

  • If we saw one large customer in another part of the region -- did note that their volumes have now come back and are headed in the right direction, too.

  • Farha Aslam - Analyst

  • Okay.

  • My final question and I'll pass it on is pork -- just trying to get a better understanding of hog price trends versus cut-out values.

  • They seem to be improving in March.

  • How are they looking in April and kind of going forward in the summer months for you guys?

  • Dick Bond - President, COO

  • Are you talking about --?

  • Farha Aslam - Analyst

  • Hog prices and cut-out values for pork.

  • Dick Bond - President, COO

  • If you look at the hog prices, actually here in the last ten days or so, live hog prices have gone up, actually on a lean hog basis, 6 or $7 a hundred weight, which is normal.

  • It's a normal seasonal rise as we usually hit this late April/May/June period, so I think they're doing what they normally have done.

  • If it there is any laggard in the pricing, it has really been on the retail side, on the pork loins and on the pork buttes -- really haven't kept pace.

  • Again, I think this is because a little bit of the overabundant supply and the pressure on selling prices -- and I think that's likely to continue here in the short-term.

  • I do believe that hog prices have gone up seasonally.

  • They might go up a little bit more, but there are still quite a few hogs out there and I think that, again, hog prices will turn around and come back down as we get into the middle and the latter part of the summer.

  • Farha Aslam - Analyst

  • Okay, thanks for the color.

  • I appreciate it.

  • Operator

  • David Nelson.

  • David Nelson - Analyst

  • Can you hear me now?

  • I punched in;

  • I must have done something wrong.

  • Chicken was actually positive in the quarter, which I thought was a nifty accomplishment.

  • I guess the question is, was there any unusual positives in the quarter that would make the comparison for the current or June quarter difficult, or do you expect June to be better than March in chicken?

  • Dick Bond - President, COO

  • Well, Dave, I would tell you that no, there wasn't anything in Q2 that was unusual.

  • I will tell you this.

  • You know, leg quarter prices, if you recall, in January, were considerably higher than what they are now.

  • David Nelson - Analyst

  • Right.

  • Dick Bond - President, COO

  • I think that, coupled with our value-added strategy, really was good for us in Q2.

  • Actually, Q3 is probably going to be more difficult than Q2 because we will have the lowest effect of leg quarters hitting us during the third quarter.

  • David Nelson - Analyst

  • Got you.

  • Any thoughts, given the decline in your share price, about taking on some debt and buying back stock?

  • John Tyson - Chairman, CEO

  • Well, as we've always been disciplined around here, we are going to make sure our cash is in the right position, make sure that we manage the positive cash flows as we manage our business.

  • Dennis and his team did a good job out there putting us in a position to reduce our interest cost with the $1 billion bonds, that we have the 750 in the trustee account, which will pay off the higher debt.

  • Dave, for right now and for the rest of the folks on the call, we are going to manage costs, manage our debt -- before we look at that option.

  • We still have the desire to allocate some of our capital to either small acquisitions in the United States or small acquisitions outside the United States.

  • David Nelson - Analyst

  • Okay.

  • Then lastly, it seems like you and the rest of the industry is always going to be vulnerable to export customer cut-offs or variability due to the Avian Flu concerns.

  • Could you talk more about -- I know we've talked in the past over the years about trying to do more with the dark meat for the domestic market, but it seems like U.S. restaurants are training the U.S. consumer to only want the white meat.

  • Big picture and longer-term, how are you thinking about trying to do more to add value to dark and white meats for the domestic market so you're not so vulnerable to these export markets' volatility?

  • Dick Bond - President, COO

  • Dave, I would say two things.

  • One, just an export comment -- we will continue to work hard to spread that base throughout the world, and there are other areas of the world that do have an interest in a very good, high-quality lean protein.

  • So, I mean that's the first thing; we are going to continue to work on spreading that base.

  • But I would tell you that, domestically, we have quite a few resources now, from an R&D perspective, again looking at different things that we can put together, not only for schools but within both the retail and the normal foodservice channels.

  • We do believe that a dark meat-based chicken patty -- we've tried that before but I don't think we had everything around that.

  • My only point is that it is something that we're going to continue to look at, something that we are working hard to try and look at different alternatives and different uses, whether they be for human consumption or whether they be for pet food consumption.

  • We're looking at a lot of different alternatives right now.

  • Greg Lee - Chief Admin Officer & International Pres.

  • David, let me just say one thing.

  • I think we have, over the years, consistently tried to develop domestic uses for chicken or for dark-meat chicken beyond just its commodity form and had relatively modest success.

  • I think the thing we feel better about is the fact that we now have such a substantial multi-protein presence and we have the R&D skills that are kind of cut across all of those proteins and we have such a much broader array of items and manufacturing process types that we believe that, with sustained effort, we can do a better job of successfully selling some dark meat products domestically.

  • John Tyson - Chairman, CEO

  • I think it's more about taking a certain percentage of those pounds and converting them into other products.

  • To say you'll ever get 100% of your leg quarters converted into downstream products, I would not want to leave you that impression.

  • But if we can take some percentage of those off the market and then in other forms, that's what we are working on.

  • Operator

  • Leonard Teitelbaum.

  • Leonard Teitelbaum - Analyst

  • Good morning.

  • Merrill Lynch.

  • Just a couple of questions here -- the reduction in your CapEx, Dennis, is that deferred CapEx or is it going to be canceled?

  • From the 650 to 550?

  • Dennis Leatherby - Treasurer, Interim CFO

  • It's a little bit of both, Lenny.

  • It's largely the big projects are behind us with a couple of more big ones to finish, and then we will push them on into the future.

  • We're going to focus, as John said, on the maintenance, the customer-mandated and regulatory type spending.

  • John Tyson - Chairman, CEO

  • But what it allowed us to do, Lenny, was to just kind of rethink the allocation of capital spend.

  • You know, some projects will be delayed, but some will be canceled.

  • It will allow us the chance to manage as we move into the third and fourth and the first and second quarter of next year.

  • Leonard Teitelbaum - Analyst

  • Sure.

  • You know, when I take a look at the range that you've given, which considering what's going on out there, is probably the best we can hope for but a lot has to go right for you to get the $0.10, because your share-based changes pretty dramatically when you move from a loss to a gain, so it's more than just the swing in operating income.

  • Because you've got to pick up that share base as well, which I think it's about $0.01 a share.

  • What has to work right to get to that $0.10?

  • Dick Bond - President, COO

  • Well, Lenny, I would tell you that there's two things.

  • One, we have to see this overabundance of protein subside somewhat.

  • We do need to see our chicken segment in the fourth quarter pick up, meaning fresh meat prices, tender prices improve, leg quarter prices improve like we should see them.

  • In addition, I would tell you that the beef segment needs to have good, positive margins, especially as we get into the late May/June and the months of July, August and September.

  • Leonard Teitelbaum - Analyst

  • I guess I'm not trying to be overly negative here.

  • It just seems to me (indiscernible) I'm pushing some numbers around here, a lot has to go right to get to the $0.10.

  • I think it's a long shot, and I don't want -- I just want to know whether or not I'm just being too negative.

  • John Tyson - Chairman, CEO

  • Well, I think you are being realistic.

  • I mean, I think Dick did a good job of explaining some things that have to move in the right direction and they need to move sooner, and then they need to be able to be sustained all the way into September and October.

  • So you know, the beef segment has a chance to go positive here in the next week or two, which we've been fighting at for 18 or 20 months.

  • You know, the chicken supply needs to be cleaned up, and that can be cleaned up by promotions and pricing of products.

  • You know, cattle supplies need to stay in balance.

  • The industry doesn't need to get excited about going positive and starting to pull cattle forward again.

  • That balance of supply into the plants needs to be able to stretch all the way until September and October.

  • And then we're just going to have to use price to price protein into people's product and into people's stomach.

  • Then the competition for dollars with the energy prices out there will be a factor as we move through the next 60, 90, 120 days.

  • Leonard Teitelbaum - Analyst

  • That brings me to my last question, John, because I think you guys do a real good job of controlling what you can control, but it just seems to me that if the competitive landscape doesn't follow somebody's lead more than just talking about it, it always becomes a target out there that it's going to be hard to hit.

  • You had made a -- look, you're going after share.

  • What you said, I believe on that.

  • Now, is there any way to get a beside price?

  • If so, if you're going to go out there in already a pretty low market -- and I mean you can kill them with kindness and service, but at some point, it gets down to what do you charge for the product.

  • I guess what I am trying to do is figure out what your pricing mechanism is going forward, if indeed you're trying to get share.

  • That indicates to me you're going to start cutting some prices to do it.

  • Am I reading that wrong?

  • Greg Lee - Chief Admin Officer & International Pres.

  • Yes, you're reading it wrong in the context -- (technical difficulty) -- prices.

  • We're just going to take advantage of the current low prices with the excess supply out there to go out there and put ourselves in the position to have some market share gains, so that when the price does turn, we are there, inside, have the customer relationships, and we will get the benefit of the increased prices.

  • We're not going to be cutting price, but we will take advantage of the lower price structure right now and the excess supply that's currently in the industry, both using internal supplies and buying raw material on the outside, where we can buy it cheaper than our own internal cost and go out there and have an opportunity to get some big -- (technical difficulty) -- have some color on top of mind.

  • Dick Bond - President, COO

  • The only thing I would add to that, Lenny, is just, I mean, when we talk about that, we talk about that much more in the value-added arena than we do in "the commodity arena."

  • This is where we're going to take advantage of this time frame to again try and build that share, get over that or up or over that $12 billion mark in value-added.

  • So, I mean, it is share, but it's share of the right kind of products in the right channels.

  • Leonard Teitelbaum - Analyst

  • Good answer.

  • Thank you very much.

  • Operator

  • John McMillin.

  • John McMillin - Analyst

  • Prudential.

  • Good morning, everybody.

  • So the only reason shares outstanding went down is because of the loss in the quarter?

  • Dennis Leatherby - Treasurer, Interim CFO

  • That's correct.

  • John McMillin - Analyst

  • How would characterize -- I mean, you might not have all the numbers for April, but how would you characterize April vis-à-vis the other three months of the quarter?

  • John Tyson - Chairman, CEO

  • You are talking about the previous three months -- (multiple speakers) -- forward three months?

  • John McMillin - Analyst

  • No, how would you characterize the months that were just ended compared with the quarter that just got reported?

  • John Tyson - Chairman, CEO

  • I would tell you that it is in line with what our expectations that we talked about publicly.

  • Easter was a little bit later, but you're starting to see the seasonal trends that we anticipated.

  • You know, we told you we would expect some improvement as you headed into the third and fourth quarter, and the indicators are that some improvement is headed our way but I would use the keyword "some" and wouldn't want to leave you the expectation that it's great improvement.

  • But the seasonal trends, the seasonal activities are starting to show up and you can see some improvement.

  • John McMillin - Analyst

  • Well, certainly, the numbers in pork looked better than maybe what Smithfield had in pork processing (indiscernible) in the quarter.

  • So some of your relative numbers look better outside of beef.

  • You don't seem too worried, Dick, about corn or soybean costs.

  • I know you're not going to give us hedges, but to what extent could that be a fly in the ointment in terms of your business plan -- or you hedge through the year?

  • Dick Bond - President, COO

  • Well, I mean, now, you are probably in the most volatile time of the year in terms of planning and between now and the middle to the end of May.

  • Do we see what kind of acres get planted, what kind of rates they get planted at.

  • I mean, you're right, John; right now is a time when there's a little bit of uncertainty in the markets but -- –from a world supply standpoint and what it looks like, the planning season looks decent.

  • We just don't see a big runaway coming here and like I said, I think corn will be a little bit higher and I think soybean meal will be a little bit lower.

  • The net effect of that looks to be similar on a year-over-year basis.

  • John Tyson - Chairman, CEO

  • We do have those historical hedges where we have key customer contracts in place, some of the value-added things, and we do have some of those hedges in place.

  • But that has been historical and you are all aware that we do that year-to-year as we do some fixed-price contracting with key customers.

  • John McMillin - Analyst

  • The fact that chicken volumes were up 7, a lot of that reflects selling of inventory; it's not that you are producing anywhere near 7% more chicken.

  • Greg Lee - Chief Admin Officer & International Pres.

  • That's exactly correct, John.

  • That comes from the fact that you will recall that, at the end of the third quarter, we had a slowdown in some export sales -- or excuse me, end of the first quarter, and we picked up some of that incremental volume during the second quarter on inventory.

  • John McMillin - Analyst

  • Greg, before Russia put this temporary ban into place, you know, there was some at least bounce off the bottom in leg quarter prices from whatever it is, 15 to 17.

  • I don't know how accurate these spot prices we monitor are anyway.

  • Could that have been Russia kind of prebuying or adding to inventories before announcing this ban?

  • Or is that too --! (LAUGHTER)

  • John Tyson - Chairman, CEO

  • Well, you are a suspicious sort, John!

  • John McMillin - Analyst

  • Yes, that's me. (LAUGHTER)

  • Greg Lee - Chief Admin Officer & International Pres.

  • You know, the sales volume on the street in Russia actually was picking up.

  • There's no question I think it was fueled by the lower prices, more of a consumer benefit.

  • We were seeing the inventories on the ground in Russia actually improving, so we do believe that a part of it is just simply the improved circumstances in Russia.

  • We will have to watch this little certificate-related interruption, but it was seemingly improving, as were pricing improving.

  • John Tyson - Chairman, CEO

  • I think the response from the Ministry over in Russia was a quick response to tell you what their intent was.

  • John McMillin - Analyst

  • My last question -- what do you think -- you know, I was thrilled to see a Procter [&Gamble] executives, having known a few of them in my day, all of them seem to be extremely well-qualified.

  • But if there's one or two things you think Wade could add to Tyson, what do you think it would be?

  • John Tyson - Chairman, CEO

  • I think our financial group and what Dennis and his team have done have been more than outstanding.

  • I think that if you look at the areas that we've talked about trying to make progress in, he's been overseas for eight to ten years; he has a great understanding of the complexities of financing and bringing business.

  • Consumer insights -- how do you take the data that you have -- (technical difficulty) -- bit harder so you understand some things a little bit deeper?

  • Then, we hope to maybe use some of the expertise in some systems that can be brought in to better use the knowledge that exists in this company and figure out how to mine it better than that.

  • So I would say the international and the mining of the current data we've got -- a little bit harder, a little bit deeper, a little bit faster.

  • Operator

  • Christine McCracken.

  • Christine McCracken - Analyst

  • FTN Midwest.

  • Good morning.

  • Just looking, then, at current production of chicken and beef for the industry, we're looking at I think total production of chicken up 5% currently; beef year-to-date I think is up 8 to 9%.

  • Is it still your expectation to gain share if you are holding chicken production somewhat flat?

  • How would you maneuver around that?

  • John Tyson - Chairman, CEO

  • On the chicken one, one of the things we've always worked hard at is what we call being one chicken short, so that as we need raw material out there in the marketplace, we go out and buy from other producers.

  • As Dick shared earlier, our focus is on increasing market share in the value-added products and the right products.

  • So as we have the opportunity, we can be in the market buying other people's access raw material, bringing it into our value-added mix, and it allows us to go after market share.

  • Dick, on the beef number, do you want to --?

  • Dick Bond - President, COO

  • Well, Christine, as generally happens when you get into May, June and July, those are generally three of your higher capacity utilization, higher output-type months.

  • If you saw the head processed or slaughtered from last week, it grew substantially over the week before.

  • So I mean, we are having record cattle, so it is a function of what is going to come to market, so supplies are going to be higher and all we're going to do is get our fair share on the beef side.

  • If I go back to the chicken side, your 5% number I believe is a historic number, meaning that there are changes in the works that have been announced by several of our competitors that, in the coming months, those numbers are not going to be anywhere near as high as what has historically taken place over the course of the last couple of months.

  • It takes time to make those cuts effective, so I personally believe that by the time we get through May and June, as an example, that there won't be an increase; they will be a slight decline in output, whether that be through weight and/or head.

  • John Tyson - Chairman, CEO

  • The sets at the USDA numbers have been under 100% for the last three weeks.

  • Christine McCracken - Analyst

  • Right.

  • At the same time, they are expanding the breeding herd, or the flock, and we're getting rather significant productivity improvements, and the new genetics that they are introducing in the chicken industry seem to be I guess growing the supply of white meat.

  • So I guess, you know, even if you keep the flock size flat, which it doesn't appear to be happening at this point -- if you make some cuts I guess temporary, you are still getting huge productivity improvements.

  • Is that not fair?

  • I mean, even if you cut back weights?

  • Greg Lee - Chief Admin Officer & International Pres.

  • Let me just comment just a little bit on the breeding stock.

  • This is Greg.

  • I think we're going to start seeing some moderation on the breeding stock placements as well.

  • The economics being what they are, the discipline that you're seeing in the numbers we believe will go forward.

  • You are right; you have a very productive industry, and the breeding stock on the ground, if fully utilized, could suggest bigger numbers, but you've got that now, too, and you're not seeing them.

  • Christine McCracken - Analyst

  • All right.

  • Just in terms of your expectations, I guess, in your comments, your press release out today, you say that the impact of the oversupply of protein is expected to diminish in the second half of the year, and yet you're looking for rather sizable increases in beef, I think, to your comments, Dick, at least over the summer.

  • How is it that we're going to get an improvement in price if we get such big increases in beef supplies over the summer?

  • Dick Bond - President, COO

  • Well, you're going to have increase in supplies -- (technical difficulty) -- I am referring -- I mean, we have seen the seasonal rise like we generally do for Mother's Day and for Memorial Day, on the tenders and the strips and the rib-eyes and all of those items that are basically steak-based.

  • We are already at relatively high levels and they have gone up substantially in the last ten days or so.

  • The retailer and the foodservice operators felt it was time to start buying those items.

  • So that's where the price increase is coming from.

  • The big advantage for us is going to be in the spread.

  • I mean, we've seen cattle decline from 94 to a $79 this past week.

  • Typically, when that happens, we are able to hold onto a little bit more of those spread dollars, which we are already seeing that effect.

  • So the beef, while we will have more supply, don't forget we've been at a record low supply of beef all through '05, and the herd is rebuilding.

  • So, you are going to see a little bit more beef, but beef hasn't been -- (technical difficulty) -- where the majority of overabundance has been; it's been more in chicken, turkey and pork.

  • Christine McCracken - Analyst

  • Right.

  • I guess, in terms of your export demand that could take some of that increase, it sounds like South Korea might open sometime this summer and Japan possibly even later in the year.

  • But at the same time, it sounds like this morning, of your plants -- (technical difficulty) -- Taiwan, which apparently is now your largest market for exports.

  • Could you talk about kind of what you're seeing on the export side?

  • Greg Lee - Chief Admin Officer & International Pres.

  • Well, we're not seeing anything that we can absolutely point to that tells us a date when we're going to see either South Korea or Japan open.

  • I think all of us that follow the industry see these ongoing discussions; we see a certain amount of progress perhaps evidenced -- maybe more evident in the South Korea.

  • We think potentially it will open even before Japan, but it's -- trying to forecast when that's going to happen, we don't have a very good track record. (multiple speakers).

  • They're coming to visit the locations, so yes, we're hopeful that, before the end of the year, those markets will reopen, but again, we are not doing very good at forecasting that.

  • Dick Bond - President, COO

  • Christine, we did -- you're right.

  • Our Lexington plant did get delisted (indiscernible) part of the -- (technical difficulty) -- with some of the negotiations that have been going on.

  • When you have a zero tolerance and they find one little bone fragment, they delist the plant.

  • Cargill had one;

  • Swift had one.

  • I mean, this is part of the things that we as an industry are trying to get our negotiators from the USDA -- when dealing and trying to set up these programs; there's got to be some reasonableness in them.

  • So really quite frankly, as an industry, we are probably slowing down some of these negotiations a little, trying to end up with a more reasonable outcome so that we can continue to ship, whether that be to South Korea or to mainland China or to Hong Kong or Taiwan.

  • John Tyson - Chairman, CEO

  • The theory of putting common sense into these negotiations escapes some of our trading partners.

  • Christine McCracken - Analyst

  • Fair enough.

  • So 9% more beef or something less, maybe over the balance of the year, but no real movement on the export side?

  • Is that kind of what you're looking at?

  • You think the market should be able to absorb all of that increase?

  • Dick Bond - President, COO

  • The market is going to have to absorb it, because I don't personally see any major impact coming from exports any time in the very, very near term.

  • John Tyson - Chairman, CEO

  • Even if those doors opened up, the ability to get back market share will probably take a little bit longer, just because we've been out of the market for two-plus years, so the ability to rebuild the pipeline and the channels will take time and effort.

  • Operator

  • Tim Ramey.

  • Tim Ramey - Analyst

  • D.A. Davidson.

  • Just back to the chicken volume subject for a moment, did you actually -- did you buy any product in the quarter to sort of take advantage of the market share opportunities, or were you pretty neutral on --?

  • Greg Lee - Chief Admin Officer & International Pres.

  • That's ongoing.

  • I mean, some weeks we buy; some weeks we don't.

  • As we move into the seasonal opportunities, we are usually buying more product than we are, so.

  • Dick Bond - President, COO

  • Some, Tim, but not a whole lot.

  • It really is more around sizing of certain items that we might be short of for certain key customers, but by and large, we did not buy a tremendous amount of raw material on the outside during Q2.

  • Tim Ramey - Analyst

  • Got it.

  • Will the current mayday issues, can you give us a bottom-line on whether you think that's a negative or a positive for the current quarter?

  • I assume you're shut down in a lot of plants as of today.

  • John Tyson - Chairman, CEO

  • Well, as the -- (technical difficulty) -- some of our pork and beef plants, we've adjusted production for the week, so instead of running Monday through Friday, we will run Tuesday through Saturday.

  • Those are the adjustments we have made. (multiple speakers)

  • Tim Ramey - Analyst

  • So, fairly neutral for the quarter?

  • Dick Bond - President, COO

  • Yes.

  • I mean, we will make up Monday in the beef and pork plants that were out today.

  • We will work Saturday this week.

  • Actually, I think, if anything, it's a slight positive because we don't expect the slaughter today to be much over 50,000 on the beef and 170,000 on the pork.

  • Tim Ramey - Analyst

  • Yes.

  • As we look at the business shift into longer-term foodservice fixed-price type contracts, should we worry about a risk of you sort of locking things with low prices now, or you continue to fix a margin on those products?

  • Dick Bond - President, COO

  • We are taking a very disciplined approach, Tim, to make sure that doesn't happen.

  • Tim Ramey - Analyst

  • Okay, glad to hear it.

  • Thank you.

  • Operator

  • Jonathan Feeney.

  • Jonathan Feeney - Analyst

  • Good morning.

  • It's Wachovia.

  • You made some nice closings in the beef industry and have showed some leadership here, but we are not seeing too many examples of folks following.

  • Can you just give us a sense, from your experience?

  • You know, do you think folks are going to follow as far as taking some capacity out of the beef industry, and are you hearing rumblings of that competitively?

  • John Tyson - Chairman, CEO

  • Well, there has been a few closings as I recall.

  • I think there's actually nine, including our two, that have taken place.

  • You know, one of our major competitors, Swift, if you will recall about a year ago now, went to one shift out in Greeley, Colorado.

  • You know, I can't tell you if there is going to be any more.

  • It would appear that we've probably weathered the worst part of the storm in that the herd is starting to rebuild, so I mean I can't tell you that I see a whole lot more plant closures taking place here.

  • The advantage that we got from our consolidation -- because it was kind of timed with our Dakota City new processing floor -- we're going to gain some tremendous efficiencies from doing what we did.

  • Jonathan Feeney - Analyst

  • Thanks.

  • Greg -- I mean Dick, I'm sorry.

  • You've been great about giving us detail on cap utilization.

  • Could you give us a -- you said you mentioned 71 in the quarter 75 coming out towards the end of the quarter in beef.

  • Could you give us a ballpark of after the cost reductions you've taken out -- (technical difficulty) -- we need to see that number to be making money?

  • Dick Bond - President, COO

  • Well -- (technical difficulty) -- we've always felt that as long as we got to that 80-plus mark -- and this time or sometime this summer and for a good chunk of the summer, we ought to be well above that 80% mark.

  • That's kind of a mark that we really need to be at, is above 80% from a capacity utilization standpoint.

  • Jonathan Feeney - Analyst

  • Thanks, and just one follow-up -- John, you mentioned, in response to a question, about the competitive marketplace that would exist in Japan should the United States be able to reintroduce beef there.

  • Could you talk a little bit more about that?

  • Do you still think there's a major place for U.S. beef, despite the logistical and public relations challenges, and how quickly could we get a major share that Japanese market back, having been out of the Japanese marketplace?

  • John Tyson - Chairman, CEO

  • Oh, I think trade relations come and go and disruptions are part of the game.

  • There is a desire for U.S. beef; there's a customer base that has always preferred U.S. beef whether it's in the bowl type industry or just in your cuts.

  • You know, Australia is starting to be tight on beef over there and Brazil has got some health issues.

  • So it's just a matter of getting the channels open.

  • We have relationships with key customers.

  • Those key customers are buying some of our chicken products and some of our pork products today, so getting beef back into that flow would be just a matter of the country of Japan saying yes to us.

  • But yes --

  • Dick Bond - President, COO

  • That will be easier in South Korea because, hopefully, the restrictions on age at 30 months in South Korea will be a lot better than Japan at 20 months.

  • You still have very few cattle that qualify in Japan, so Japan is going to be harder I think not so much from a customer prospective because I think we can regain it faster there from a customer perspective; it's just qualifying the right kind of cattle to be able to export to Japan.

  • Jonathan Feeney - Analyst

  • Thanks.

  • Greg, finally, we saw some more substantial closure of the Russian chicken market back in 2002 to start with.

  • It is kind of an administrative, at least ostensibly administrative move.

  • You know, I know it's early and I know you are not a trade official, but can you give us a sense what's different this time that gives you -- it seems like you as a group feel pretty confident that this is going to blow over much more quickly than it did back in '02.

  • Greg Lee - Chief Admin Officer & International Pres.

  • Well, I think about all you can deal with is that the official information that you have at hand.

  • I think the Minister of Agriculture -- (technical difficulty) -- very straight forward in what he said, so at this juncture, that plus the fact that there continues to -- (technical difficulty) -- announced that they are going to begin to reissue import certificates, you know we are operating on the information that we have at hand, both officially and from we hear back from the street.

  • And as in any other situation, we will simply have to monitor it but that's the knowledge that we have at this juncture.

  • Jonathan Feeney - Analyst

  • Okay, thanks very much.

  • Operator

  • Eric Katzman.

  • Eric Katzman - Analyst

  • Deutsche Bank.

  • I didn't follow-up IBP before Tyson acquired the Company.

  • What was the worst margin you saw during your years there?

  • Operating margins?

  • Dick Bond - President, COO

  • 1991 -- $0.03 a share.

  • Eric Katzman - Analyst

  • I meant more like -- you guys reported a 5% negative margin in the quarter.

  • How does that $0.03 a share translate?

  • Do you know?

  • Dick Bond - President, COO

  • This quarter just ended --

  • Eric Katzman - Analyst

  • You lost 143 million with a negative 5% operating margin.

  • I'm kind of wondering.

  • During the worst of the trough that you've seen over various cycles, was it a negative 7% operating margin, negative 3%, or just kind of give me a sense.

  • Maybe this work kind of another way of looking at it like loss per head or something, but -- (technical difficulty) -- the worst parts of the trough?

  • Dick Bond - President, COO

  • That was -- Q2 was without a doubt the worst part of any trough that I can remember.

  • Eric Katzman - Analyst

  • All right.

  • Second question is I think, John, at a public conference or a competitor's conference, you had to mentioned that you were starting to see a rebound in demand for chicken out of Russia, post AI.

  • I think some other companies made comments about recovery in places like Turkey.

  • Can you kind of update us on at least internationally what improvements we may be seeing, particularly as you kind of move towards the West of Europe?

  • Because that seems to have been I guess more of a difficulty.

  • Greg Lee - Chief Admin Officer & International Pres.

  • Eric, this is Greg.

  • What we've seen in Russia, since you mentioned Russia first, is as we've moved into the second quarter, we saw demand increasing, we saw sales on the street improve volumetrically.

  • We saw the inventories in Russia -- you know, owned by the Russian businessman -- we saw improvements in those inventories and interest in acquiring replacement product expand.

  • We saw the price on the street move out of its trough and begin to improve.

  • So that's fundamentally just from a kind of general numbers perspective, the Russian perspective.

  • If you look at countries or areas of the world like the Middle East, where we've basically had very, very little demand whatsoever over there as a result of the AI, very minimal AI outbreak that they had in the general region.

  • There was a consumer scare, they had inventories, demand plummeted and they've had to work through their inventories.

  • Now what we're seeing is demand improving.

  • They are not having repeated outbreaks; they have not had any human health issues of any per scale whatsoever.

  • So the information that we are being given that demand is improving and that's manifested itself in the fact that we are receiving orders, have orders on hand and shipments headed in that direction.

  • With regard to Western Europe, very quickly, simply say that we believe you've seen the troughs in the consumer demand for chicken in Western Europe, and it appears to be improving.

  • Most of this AI deal, if you watch it very, very closely, it is not really moving in any evidence that we can see; the outbreaks seemed to have slowed down.

  • Granted, you -- (technical difficulty) -- seeing anything moving towards the human health (indiscernible) scale.

  • Eric Katzman - Analyst

  • Okay.

  • Dennis, I think you'd said in the outlook that shares outstanding, you -- (technical difficulty) -- 346 million.

  • But in answer or -- (technical difficulty) -- McMillin's question earlier, I think you said that 346 was caused by a loss in the quarter.

  • So, does that mean that we should assume that we should use 346, because you're going to produce a loss for the rest of year?

  • I don't see how that makes sense.

  • Dennis Leatherby - Treasurer, Interim CFO

  • GAAP requires us to take out any antidiluted shares when we have a year-to-date loss, so that's why we've changed our number.

  • John Tyson - Chairman, CEO

  • For this quarter.

  • Dennis Leatherby - Treasurer, Interim CFO

  • For this quarter.

  • John Tyson - Chairman, CEO

  • When we get to the third quarter, we will see what that number is.

  • Eric Katzman - Analyst

  • Okay.

  • Then I guess last question -- when you set up these I guess contracted foodservice pricing accounts on chicken, and it's generally kind of -- it has been a cost-plus, how frequently do those kind of get repriced?

  • Is it -- during a period where there's such oversupply as today, do you tend to try to back off some of these kinds of contracts, or really you are just ambivalent it is just really cost-plus?

  • Dick Bond - President, COO

  • Eric, some of them -- (technical difficulty) -- cost-plus; some of them are fixed-price, and generally those contracts if you recall are kind of late fall, late October and November, early December types of timing on most of them.

  • Most of them generally are for a year in duration.

  • A lot of them oftentimes don't take effect until a couple of months after they've been negotiated.

  • But we are kind of in the middle of those fixed contracts now -- not in the middle of negotiating, but by and large, they will come up again next late October, early of November and December.

  • We're really not trying to necessarily add -- certainly not add any more -- (technical difficulty) -- low breast meat levels, so I mean we're just dealing with those fixed contracts as a normal course of business, not really trying to do more or less, just managing what we have.

  • Operator

  • Ken Zaslow.

  • Ken Zaslow - Analyst

  • Harris Nesbitt.

  • Believe it or not, I still have some questions.

  • Can you talk about the promotional activity at retail areas and how it's going to swap this summer between chicken and beef?

  • John Tyson - Chairman, CEO

  • I don't think there will be a swap between chicken and beef, but you will just see an addition of beef, and so you will see more protein promotion and the continuous promotion, so one week chicken, maybe the next week beef.

  • So, it's not a swap as much as it is an addition of getting beef back into the rotation.

  • Ken Zaslow - Analyst

  • Okay.

  • Dick, I think you said that the third quarter for chicken is going to get worse than what we're in now -- (technical difficulty) -- positive there's probably some or downside in the third quarter.

  • Is that the right interpretation?

  • Dick Bond - President, COO

  • That's correct.

  • Ken Zaslow - Analyst

  • Okay.

  • In terms of the overabundance, I know you touched on it a little bit in terms of the demand side.

  • Has there been any rebound in the Russian market in terms of demand?

  • Can you talk to how bird flu has actually affected demand, and if there's been any rebound or has it been localized? (technical difficulty).

  • Can you adjust touch on that for chicken?

  • Greg Lee - Chief Admin Officer & International Pres.

  • Okay, we must have some trouble on what we are saying getting out to everybody.

  • The Russian market place, based on the evidence we had in hand through the quarter and the most recent is volume, was beginning to improve, inventories on the ground in Russia were beginning to improve, and the street price in Russia was beginning to improve.

  • That was manifesting itself with order flow from here to there improving.

  • We also were seeing improvement in China.

  • In fact, I think I mentioned in my prepared remarks that our volumes of sales in-country in China had responded to historical levels as I think -- one thing in talking about kind of the macro chicken supply, you know we've talked about the numbers that we're seeing in the U.S. showing somewhat more discipline, and we are pleased to see that.

  • I think many of you that follow closely know that our biggest competitor in the international environment for exports to Brazil -- (technical difficulty) -- cuts that take some chicken off the international marketplace, and we hope that will help the aggregate world price over time.

  • Ken Zaslow - Analyst

  • What did (indiscernible) Brazil has cut chicken production?

  • Greg Lee - Chief Admin Officer & International Pres.

  • Well, they have talked, based on the numbers that we've seen on the total numbers of chickens placed, this is about a 15% number.

  • Ken Zaslow - Analyst

  • The entire Brazilian industry, or is that just for the export side?

  • Greg Lee - Chief Admin Officer & International Pres.

  • Their published data on live chickens produced.

  • Ken Zaslow - Analyst

  • Great.

  • Thank you very much.

  • Operator

  • Pablo Zuanic.

  • Pablo Zuanic - Analyst

  • Good morning everyone. (technical difficulty) -- a last question on beef.

  • I'm just trying to understand here, you know the second quarter '06 -- (technical difficulty) -- '05 -- and correct me if I'm wrong.

  • There's more cattle over there year-on-year.

  • Live cattle prices are lower so you have better capacity utilization.

  • So the main reason for the March worse economics has to be lower boxed beef prices.

  • I'm probably stating the obvious, but if that's the case, that's being caused mainly by the chicken side.

  • So, is it fair to say that has been the main route of the problem in beef, and as chicken prices begin to recover, you should get back more into what was the first half '05 levels in beef?

  • Because -- (technical difficulty) -- (indiscernible) or maybe even slightly better year-on-year, cattle supplies better year-on-year and capacity utilization is probably better.

  • Dick Bond - President, COO

  • Well, all you -- what you've said is true.

  • Just remember that Q2 is January, February and March, and we really still had very, very tight cattle supplies and also a relatively high cattle price during those three months.

  • The decline in cattle prices is really beginning in the third quarter; most of the decline has taken place in April.

  • So, we still had short supply, high prices by and large for most of that second-quarter period.

  • Pablo Zuanic - Analyst

  • I understand.

  • If I'm comparing with the second quarter last year, for example, Canada, I mean how much of the delta was caused by Canada?

  • Obviously the EBIT in Canada fell.

  • How much was that?

  • Dick Bond - President, COO

  • I don't have that number right off the top of my head.

  • Pablo Zuanic - Analyst

  • Okay but again, I'm just (indiscernible) if I had to choose one factor that was the biggest difference between second quarter '06 and second quarter '05 would have been that boxed beef prices were a lot lower and everything else actually moved in your favor?

  • Dick Bond - President, COO

  • Boxed beef prices, compared to live cattle prices, our spread was reduced in second quarter and if you want to say what the main reason for that was, it was probably an overabundance of supply of chicken and pork.

  • Pablo Zuanic - Analyst

  • Right.

  • So bottom line, I mean you're expecting an improvement there -- (technical difficulty) -- the second half.

  • So in that regard, beef should be getting better than what we (indiscernible) in the second half of '05 even?

  • Is that fair?

  • Dick Bond - President, COO

  • Probably.

  • I can't remember exactly what our results were -- (technical difficulty) -- 3 and 4 for '05.

  • But yes, supplies will be greater; results should be better; spreads should be more positive.

  • Pablo Zuanic - Analyst

  • Okay, the last question -- when we're looking at cattle and feed numbers year-to-year up 7, 8% but at the end of the day cattle inventories are increasing only about 1% base, essentially eventually cattle and feed has to be drawn in line with cattle inventories, right?

  • So, you're going to get a good summer because of seasonality and because of increase in cattle and feed, but by the latter part of the calendar year, cattle inventories -- (technical difficulty) -- is not going to (indiscernible) much.

  • Is that -- I mean, it is positive but it's not the same as 8% growth.

  • Is that a concern?

  • Dick Bond - President, COO

  • It's always a concern, but 1% change in cattle inventories -- you know, you are only going to get a 1 to 2% change in cattle inventories as we go from the low point back up to the high point.

  • That's why it takes four or five years of continued growth in the heard to go from that 31.5 up to 35 million head.

  • So while, yes, it is a concern, you are still going to see that number increase 1 to 2%.

  • The 7 to 9% is a more short-term effect based on the summertime months, and you're exactly right.

  • The numbers will come back down but historically, that is what happens.

  • As you get out of the summer and into the late fall, the demand and supply do seem to get a little bit more in line.

  • The supply will drop back.

  • But it will still be 1 to 2% higher -- (technical difficulty) -- year.

  • Pablo Zuanic - Analyst

  • Okay and just one last question -- if I look at chicken prices having gone from $0.50 per pound to $0.15, you've got to do a postmortem -- (technical difficulty) -- I relate it, at the end of the day, than really export-market related?

  • I mean, is there a way to try to quantify that?

  • Greg Lee - Chief Admin Officer & International Pres.

  • I think you can't completely segregate all of those factors.

  • Clearly, your international demand hit a very rough spot, and that backed product up into the domestic market, a domestic market that already had to much protein.

  • So you're right.

  • Pablo Zuanic - Analyst

  • Okay, that's good.

  • Thanks.

  • Operator

  • We have no further questions.

  • John Tyson - Chairman, CEO

  • Once again, thank you all.

  • Thank you all for your questions, trying to understand our company better, and taking the information and sharing it in the marketplace.

  • To the Tyson team members who have been on the call, we appreciate what you've done for us; we appreciate your hard work and we thank you that.

  • And to our shareholders and to our friends that support our company, have a great summer.