泰森食品 (TSN) 2006 Q3 法說會逐字稿

Good morning or afternoon, everyone.

Thank you for joining us today.

At this time, we would like to inform you that you are on a listen-only until the question-and-answer session of our conference call. (OPERATOR INSTRUCTIONS).

This call will be recorded.

If you have any objections, please disconnect at this time.

Now, I'd like to turn the call over to Ms. Ruth Ann Wisener.

You may begin, ma'am.

Good morning and thank you for joining us today on Tyson Foods third-quarter conference call.

With me today are John Tyson, our Chairman;

Dick Bond, our President and CEO;

Greg Lee, our Chief Administrative Officer and International President; and Wade Miquelon, our 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.

Thanks, Ruth Ann.

Good morning; good morning to all the Tyson team members that are joining us on the call and all of our shareholders out there and our friends that join us today.

The third quarter was tough.

We're not where we need to be but we are showing steady and gradual improvement.

Although we began seeing signs of improvement in market conditions this quarter, it will take some time before it's reflected in our results.

In the meantime, we do remain focused on the key elements of our strategy.

First, we must increase the number of value-added products that provide opportunities for higher and more stable margins.

We also continue to identify and implement income producing or cost-saving projects in our business, so we operate as efficiently as possible.

Finally, we continue to look at the international opportunities.

Well, as I said earlier, I would like to thank all our team members out there.

As we know, the past few months have been difficult for all of us and I appreciate your willingness to cut costs and rethink how we do things so we can be more efficient and effective.

I do see real teamwork taking place, and it's very encouraging to me to know you all are doing everything you can to return our company to where it needs to be.

We've had some changes.

You know, Dick Bond has taken over as our CEO and Dick has been a leader in the industry and his respected with his 30-plus years in the business.

The senior management team is making progress, and I do look forward to working with them and providing the continued strategy of our three-pronged strategy.

This is our first conference call for Wade;

Wade joined us in June.

He has a strong background, I think as we all know, in international finance and consumer products, and we are excited about the experience he brings to the table.

Wade is helping us support our strategy.

He has spent the first two months getting a better understanding of where his group can help our business and understand the protein business as we execute our strategy.

He does have some interesting ideas about creating and capturing value, and we all look forward to his contributions to our organization.

Wade, welcome to your first conference call, and I will turn the call over to you.

Thank you, John, and good morning, everyone.

First of all, let me just say that it's a privilege and a pleasure to join you here on my first conference call.

In our press release this morning, we reported a GAAP loss of $0.15 per share for the third quarter of fiscal year 2006.

This compares to GAAP earnings of $0.36 per share in the third quarter of fiscal 2005 and a GAAP loss of $0.37 per share or $0.26 per share operating loss in Q2 of this year.

Another point to note -- on a net debt basis, the debt-to-capital ratio is now higher at 42.7% compared with 39% for the third quarter year ago.

Relatedly, net interest expense was $7.6 million higher in Q3 versus Q3 '05, primarily due to higher average net debt when compared to the same period a year ago, as well as from the impact of the negative difference between the interest income and interest expense for the $750 million CD we will use to pay down our 7.25% senior note on October 1 of this year.

Last week, Moody's made the decision to lower Tyson's corporate rating from BAA3 by one notch to BA1.

With this move, incremental annualized interest and the related costs associated with it will increase by approximately $5 million before tax.

Of note, we had amended our bank agreements based on updated forecasts and we are pleased to have 100% support from our banking partners.

We also mentioned in our press release the recent review of Tyson's historical tax treatment of synthetic leases.

No effect of this has been incorporated into our fiscal year '06 forecasts.

Since we're still in the process of reviewing and resolving this issue, we will not be making further comment on it beyond what is in our press release.

Now, let's review our financial outlook.

Our fiscal year 2006 GAAP loss per share is now expected to be in the range of -$0.41 to -$0.51 per share, which is below our previously announced guidance and reflects our actual Q3 results as well as our best estimates for Q4.

As a result, our guidance is as follows.

Revenues for the fiscal year are projected to be approximately $25.5 billion.

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

Tax rate for the fiscal year is expected to be approximately 35%.

Capital spending for fiscal year 2006 is estimated to be $560 million.

Our going numbers should reduce significantly in fiscal year '07 as this was a major capital investment year with our Dakota City renovation, our Sherman, Texas case-ready plant and our new Discovery Center.

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

Weighted average shares will be approximately 346 million.

This concludes my comments.

And now, I will turn it over to Greg.

Thank you, Wade.

Our total export sales were $504 million for the third quarter.

This is 8% down versus the third quarter of last year, and this is mostly due to lower average leg quarter sales prices.

Our third-quarter export volumes of commodity chicken were up 14% versus the same quarter last year and were up 12% over the second quarter of this fiscal year.

Average sales prices for leg quarters declined $0.17 per pound versus the same quarter last year and $0.04 per pound versus the second quarter of this fiscal year.

We began the third quarter with a significant level of leg quarter inventory and early on made a concerted effort to aggressively reduce inventory.

Shipments during the quarter reduced inventories by 62% from the second-quarter levels.

As the quarter progressed, spot market prices escalated, but we were not able to fully realize price improvements due to our sold-ahead position.

Our sales bookings and shipments to our primary destinations are good, and our inventories are at normalized levels.

As we look forward to the fourth quarter, we anticipate that our realized sales price will be much improved with August and September being fully reflective of current market prices.

Let's talk a bit about our fresh meat sales.

Our export sales of red meat products were 377 million for the third quarter.

This represents a 4% increase over the same period of the prior year and was primarily driven by a 17% increase in volume.

Our quarter three '06 continued the trend with strong pork exports with volumes up 7% versus the same period as last year.

Boxed pork exports were also up 7% as compared to a year ago, as demand remains strong.

Concerning continued market access issues, the U.S. government announced last Thursday that an agreement for resumption of beef trade with Japan had been finalized.

Under the 20 month (indiscernible) cattle protocol, the industry expects approximately 10% of the cattle population will be eligible for exports to Japan.

USDA negotiations with other countries that are still closed to the U.S., such as South Korea and China, continue.

In talking about our foreign operations, let's visit Tyson de Mexico.

Sales for the quarter were 2% below the same period last year, due to lower prices which offset a 7% increase in volume.

Chicken prices for the third quarter were still encumbered by supply-side imbalances.

Lower sales prices for the quarter resulted in a small loss at the operating income line.

At this time, we do not see an improvement in the profitability from our Mexican operations until fiscal '07 due to a continuation of weak market pricing.

Despite the lower-than-desired financial results, we do see improvements in our business in Mexico.

We ran our business in the third quarter with lower controllable costs than the first half of the year and saw sales of value-added products increase by more than 16% over the second quarter.

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 rose 44% against the same quarter a year ago, driven by increased volume.

Sales to both the food service and retail channels have grown to levels that are higher than those experienced before the AI outbreaks.

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

We are in ongoing discussions with a leading local poultry company for the establishment of a joint venture and do not anticipate gaining any approvals or closing the transaction before calendar of '07.

Regarding South America, we remained interested in continuing to grow our presence in the region and continued to offer our customers' poultry products sourced in the region.

We would expect that export sales from these arrangements will reach in excess of 120 million pounds for the year.

Thanks.

I will now turn the call over to Dick Bond.

Thanks, Greg.

Good morning and thanks for being with us today.

As we indicated in our press release, while we did make some progress in our Beef segment, our overall third-quarter results were disappointing, primarily strained by our Chicken segment.

The oversupply of protein in the marketplace, especially early in the quarter, affected all of our segments.

While energy and fuel costs impacted Q3 less than Q2, they were about $25.5 million higher per third quarter and $137 million higher for the first nine months of the year compared to fiscal '05.

Now, I'm going to talk briefly about each segment.

Within our Chicken segment, we had an operating loss of approximately $59 million for the third quarter.

This compared to a profit of $208 million on an adjusted basis in Q3 last year.

Pounds sold were up about 7% over third quarter a year ago, as we sold through inventory buildups from previous quarters, resulting in lower sales prices.

In fact, we were able to reduce our chicken inventories buying well over 120 million pounds from the end of Q2.

We were successful in reducing inventories, but sales were burdened by the lag effect of lower leg quarter pricing, which lowered sales margins for these items.

We sold forward longer than our typical eight to ten weeks, and the value received for those leg quarters has affected the white meat cost of goods.

This means there is a delay in recognizing the benefits of higher leg quarter prices we book within our Chicken segment.

We are still working through the higher white meat cost of goods sold, and we should begin to see the benefits of significant improvement in leg quarter pricing in the second half of Q4.

We previously announced that we would reduce our chicken production by 0.7%.

Our recently implemented cutbacks are a little over 3%, taking into account both bird weight and headcount reductions.

We intend to enact further cuts by late fall in the range of 2 to 3%.

Based on our projected needs, we can serve our growing value-added customers appropriately while making the most profitable use of our internal raw materials.

According to published reports, we also expect industry production to be down 3 to 4%.

However, like our cuts, most of the industry's cuts have only recently gone into effect.

In our Beef segment, results improved markedly over our second quarter, when we had an adjusted operating loss of $143 million.

With a profitable May and June, Q3 was close to breakeven with an operating loss of about $10 million.

Sales dollars were down about 70 million on a year-over-year basis, but volume increased 6% over Q3 last year.

However, this volume increase was offset by sales price declines from $1.26 to $1.16 per pound.

The Dakota City, Nebraska processing plant renovations, completed in the second quarter, are doing as expected and were on track on an annualized basis to meet the 40 million in pretax cost savings we projected.

Case-ready products marketed out of our new Sherman, Texas plant continues to increase, and we have serious interest in our case-ready products from several major retailers.

While some of our key export markets remain closed, typical seasonal demand and increased cattle supplies allowed us to run our beef plants at an average capacity utilization of 81% for the third quarter, compared to 71% for Q2 and 73% in the quarter -- in the third quarter of fiscal '05.

Although cattle supplies did increase, we faced a different challenge.

Demand for choice steak-type products was good and the market placed a disproportionately high premium on choice beef, causing the choice select spread to widen to a historic high of $22 per hundredweight.

There were fewer available choice-grading cattle in these months, so processors like ourselves paid more and increased live cattle prices to secure these choice-graded cattle.

This is an important factor when estimating processor margins.

While we showed much improvement domestically, in Canada, our Lakeside beef operation is experiencing the effects of the Canadian dollar's stronger value against the U.S. dollar.

Lakeside also is feeling the aftereffects of a short labor strike last fall, where we lost some 350 experienced team members in that strike.

It has been very, very difficult to replace them, and our efficiencies are suffering as a result.

As expected, cattle supplies continue to grow.

Industry reports as of July 1 showed the second-highest inventory, indicating cattle ready for slaughter should continue to be more plentiful during the late summer months.

Heavier-than-expected numbers of placements into feedlots in June should contribute to higher marketings in the fall.

In our Pork segment, volume was down 2% on a year-over-year basis while average selling prices were down 5%.

Consequently, total sales dollars declined by 7% year-over-year.

Adjusted operating margins were basically flat compared to a year ago.

On the positive side, case ready pork volumes were 26% and sales dollars were up 24%.

Pork cold storage inventories at the end of June were 14% lower than the month earlier.

Hog prices are coming down from a spike in the spring and will continue into the fall.

Supplies are increasing, which should help our Q4.

Prepared Food sales dollars and sales prices fell in the third quarter on a year-over-year basis, while volume was slightly higher.

Sales price pressure and higher pork raw material costs resulted in lower operating margins.

While margins were not where we would have liked them to be, this continues to be a growth vehicle with volume up a little over 1%.

Now, I'm going to talk briefly about our channels.

In our consumer products channel, our case-ready beef and pork volume was up nearly 5% over third quarter last year.

Fully cooked dinner meats volume was up 13%, and we continue to grow our market share in this category.

Our refrigerated strips drove category growth with the highest distribution and market share increase year-over-year.

Our national and regional branded bacon gained distribution over third quarter last year as well.

At the same time, we are internalizing more raw materials as we turn bacon into belly -- sorry, other way around -- bellies into bacon.

Within our foodservice channel, volumes were up by 4% over third quarter last year.

With national accounts, there's a lot of promotional activity planned in Q4 for poultry and Prepared Food.

We continue to expand our relationship with core customers with Prepared Food products such as deli meats, tortillas, and bacon.

I'd like to wrap up my remarks about our distribution channels by letting you know that price list increases are going into effect today for the foodservice channel and in September for many of our consumer products.

Energy, health insurance and other expenses continue to increase, and we can no longer absorb these costs.

Before I conclude, I'd like to talk a little bit about our cost management initiatives.

When I originally challenged our team members, we had a target of 110 million.

I'm very proud they surpassed this 110 million and identified 200 million in savings.

About half of that 200 million will be divided among consulting and professional fees, sales expenses, and marketing expenses.

The remaining 100 million will be divided equally between staffing costs and other expenses.

Some of these cost reductions will begin immediately with virtually all of the savings measures in-place by the end of the calendar year.

In conclusion, the Company's performance is getting better.

Q3 was better than Q2, and Q4 should be even better.

Our cost savings initiative is an integral part of returning the Company to profitability as soon as possible.

But we realize we can't save our way to prosperity.

The 200 million alone will not turn this company around.

We are developing a well-structured, deliverable plan for fiscal 2007, as we continue executing our core strategy of value-added products increases, operational efficiencies, and international expansion.

We must be laser-focused on things we can control, including pricing, product mix, improving gross margins, managing working capital, capital expenditures, and inventories.

I am extremely confident we will accomplish our goals because of our team members.

I have been astounded by their ingenuity in carrying out the cost-management initiative and encouraged by their positive attitude as we get our business back on track.

Our shareholders should be encouraged, too, in knowing that the team has rallied and is working tirelessly to return our company to profitability and create shareholder value.

I'd now like to turn the call over to Joyce for any questions that you all might have.

Thank you, sir. (OPERATOR INSTRUCTIONS).

Diane Geissler.

Merrill Lynch.

Good morning.

Just a quick question here, maybe a clarification on your further production cuts.

The 3% that you cited between bird weight and numbers -- and then in the fall an additional 2 to 3% or how -- I guess if you would just clarify that a little bit.

Yes, Diane, that is correct.

We have put in place just a hair over a 3% cut.

All of that has really just taken effect here in the last few weeks, and we do intend to take further cuts in that 2 to 3% range in the late fall.

Okay so you would say, by the end of the calendar year then, your production would be down 5% year-over-year?

That's correct.

All right.

Then I guess a question on the beef -- the additional numbers of cattle available.

What has been the impact of the drought in Texas, in terms of the number of animals that are on the lots right now?

What's the implication for that as you go into the fall and into the beginning of next year, if there has been a market increase?

Well, there has been more cattle placed into the feed yards and you saw the last on-feed report where placements were 110 or 111% of a year ago.

So in certain areas where we are short of good pasture land, there are a few more cattle coming into the feed yards maybe than what would have been anticipated.

But still the overall heard and the total cattle inventory is really at an all-time -- not an all-time but the second-highest inventory ever as of July 1.

So I mean I think you're seeing a few cattle being pulled ahead because of certain areas of drought, but also -- I mean, we are in a growth period and a growth portion of the cycle, so I do see more numbers on top of us right now, that the feed yards are relatively full; placements are good, which give us more cattle than a year ago as we get into the fall period.

Then as normal would take place, we still should have an increase in total cattle numbers in '07 compared to '06.

Okay, well, I appreciate your comments on that because I think there has been some nervousness out there regarding the drought and this idea that there seem to be a number of cattle available now but that we are kind of borrowing from the future and the thing is going to roll back over into a shortage again.

That's not your prediction at this point?

No, it isn't.

For '07?

No.

We will see more cattle in '07 than we saw in '06.

If we do have -- if we do see this pick-up in cattle availability and you say at kind of a more normal level, are you talking about -- what kind of level of profitability can you see coming from the Beef division?

Look, I understand the export markets are -- you know, it's going to take a while to get those back open, so we will continue to have a bit of a drag there, but are we talking about getting back into those levels that we saw even two and three years ago in terms of operating profits -- that quickly?

Well, Diane, it's hard to predict what is going to happen there because you still have some very key unknowns.

Will we get all of our export markets?

How much of an effect will Japan have?

That is a very, very difficult thing to predict and quite frankly, I'm not willing to predict it on an exact basis.

But I would tell you that I don't think we will return to pre-disruption in '03 levels that quickly.

I mean, I think it's a gradual climb but not a all-of-a-sudden be back in that same level.

Right but I guess the message here is it's moving in the right direction?

That would be correct.

Thank you very much.

John McMillin.

Prudential Equity Group.

Good morning, everybody.

Did you look at the ConAgra meats business that Smithfield just bought today?

John, we looked at it briefly.

We probably didn't look at it in an in-depth way, primarily because basically most of the brands seemingly were on a decline and most of the assets, at least in our opinion, hadn't had a whole lot of money put in them in recent years.

I appreciate that.

Wade, to the extent you're new here, you are kind of -- I'm sure you've done some benchmarking of Tyson with other publicly traded chicken/pork companies, usually companies that have scale, and you came from one that did, that kind of outperformed.

Is it premature to kind of ask the question, you know, can Tyson outperform and why haven't they, in your opinion?

Yes.

I guess what I will do is I won't comment on the past;

I will just comment on moving forward.

I think, moving forward, you know, we do leverage scale pretty well across three proteins (indiscernible) the Company but there are more things we can do, and we're working on those things, and many -- Dick alluded to in the area of operational efficiencies, so what more can we do to leverage scale in the back end for cost?

There are other things we can do on the top line as well; we are working those.

But I do think we have a great opportunity moving forward.

I am very confident in the Company;

I am very confident in the strategies.

But to your point, I also think that we can leverage scale across the three proteins and across our breadth.

To the extent you cut chicken production, Dick, you seem very confident that the rest of the industry is as well.

How are you so confident?

You know, I just saw the (indiscernible) numbers that last month.

Maybe that's too early.

But what makes you so confident that the rest of the industry is making similar cuts in what is a fragmented industry?

John, the only thing that I would say is, based on published reports, I mean, we have seen virtually all of our major competition have publicly announced similar cuts, most of which just are starting to take place late June and into July.

So I'm basing that on what people have said publicly.

Okay.

Just in terms of the spread between choice and select, obviously the fact that that widened was maybe a lack of discipline on the part of you and your competitors, or on the beef processing industry.

Is that a fair statement?

Well, I guess it could be a fair statement, John.

I mean, when you are trying to fulfill the needs of your customers and the demand for those choice-type products, especially in your steak items, you are trying to satisfy the demand of your customers.

Quite frankly, our choice grading dropped by almost 7 percentage points.

That's a lot of change from both normal and from earlier in the year, and that is what's going to happen.

I mean, maybe it's discipline but maybe it's trying to also take care of your customer.

Right.

Thanks a lot.

Ken Zaslow.

BMO Capital Markets.

Dick, last quarter when things were I would say probably more difficult, you gave a couple of scenarios that would help you get to the top end of your guidance, and it seems like a lot of those have come true but yet today, you are being a little bit more cautious on the outlook.

Again, you look at chicken leg prices probably went in your favor; even beef packer margins went in your favor.

What changed that you weren't able to get to the higher end of your range, given the market conditions?

I think there was probably two things, Ken.

In the Chicken segment, I think what was different in the results of Q3 versus where we thought Q3 might end up was this lingering effect of lower leg quarters lasting longer for two reasons -- one, the absolute sales price and the position that we had in leg quarters at relatively low levels; secondly is that impact on your white meat costs, because if you have a lower leg quarter value, the way we literally cost product, you end with higher breast meat costs.

So I think that was the major factor and probably represented about 65% of the miss between where we thought we were going to end up and where we ended up.

The other thing was really the month of April, in the Beef segment, was more like March and February, and we really anticipated that we would have a better April than what we did from a margin perspective.

Then you look at our energy costs and some of our other related expenses like health costs, they were also higher than what we had anticipated.

Then the second part of that, in terms of beef packer margins, coming out of the summer, are you looking for better margins throughout the early part of the year or does it kind of have to get to the May/June/July of next year before we are starting to see significantly positive margins?

Well, I think, as I have said, I think this is a slower return to good, reasonably good historic margins.

We're not going to see this flip overnight, and you know, you are probably fair in your assessment that to get back to better margins, meaning -- and I'm not even necessarily going to say that they are going to get to historical levels -- we really will need to probably to get to end of the second quarter and into the third quarter of next year.

Then just on a broader question, when you became CEO, how the press release read was that you and John are still sharing some responsibilities as Wade is still reporting to John.

How does that work?

Is there any change in -- if you could just common on that?

It just seemed like a very unique structure in which -- John, I know you are there -- in terms of Wade reports to John and then Dick, you kind of have the operations.

How does that all play out over the next couple of years?

Well, I think, you know, you have seen us all working together for the last five years.

I don't see that the activities of Dick taking on more responsibilities as we manage for succession and me lessening my activities so I can focus on the bigger picture for the Company, which is how do we grow value-added products, how do we grow the international, how do we focus on operationals?

But you all have known us long enough to know that we've all worked together as a team over the last five years, and that same concept still is in place for people trying to find the best ideals for the organization.

Dick has done a good job in the last 60 days of focusing on the cost reductions, tightening up some operations, making some adjustments, reducing staff.

My influence is there on the broader picture while Dick worries about the details on a day-to-day basis.

My last question, and I will pass it on -- the change in your credit ratings, does the change your outlook in terms of getting into the international markets?

That's been a part of your long-term view.

Does that change or deter or delay in any way?

No, we are still pressing ahead with the plans that we've been working for -- where to plan, how to win internationally.

We don't see that that's going to be a deterrent for the things we're looking at.

Great.

Thank you very much.

Pablo Zuanic.

J.P. Morgan.

Good morning, everyone.

Dick, just a question on the beef side -- again, looking at 2002 and 2003 when your margins were 2, 2.7%, what I'm trying to understand -- what's different at this point from back then?

It seems to me that, in terms of supplies and capacity utilization, overall you are slightly better right now from what I think (indiscernible) is not very different.

It seems to me that the biggest difference by far is just the lack of access to the export markets.

The reason that's an important question for me is because that -- it would make me believe that the timing of your ability to get back to normalized earnings is going to be mainly dictated by the export markets.

But is that true?

Is that how you compare the two periods right now at this point in time?

I think the export markets are certainly a factor in getting back to those pre-2003 levels.

I don't have the exact numbers in front of me, but my sense is we had a few more cattle available to us in 2002 than where we are anticipating the latter part of 2006 and even into 2007.

The other factor that I don't think we can lose sight of is our Lakeside situation, where we are really still struggling from an efficiency standpoint.

There are so many positive things going on in Alberto that it is virtually impossible to restaff that plant from local or even within the country of Canada.

So we've elected and with the Alberta government as our partner, we're going to actually four countries throughout the world -- to try and get that plant staffed.

It has increased our operating costs dramatically and it has affected our yields as well.

Secondly, the exchange rate back in 2002 was probably about 1.3 or 1.32, and now it's 1.13.

That has had a major impact on the comparison of where and what we can produce in Canada, given that we export a portion -- a good portion of that out of Canada.

So those are two factors that are different also as we look at 2002 compared to 2006/2007.

Yes, that's helpful, Dick.

Just can you break down your negative EBIT of 10 million for the third quarter, between Canada and the U.S.?

Or at least a say in terms of the delta, year-on-year, the 46 million decreasing EBIT -- how much was that caused by Canada?

Just help us out in that area.

Yes, the delta is huge mainly because, in '05, we did not have cattle and meat moving from Canada into the U.S. and we were extremely profitable in Canada in '05.

You know, it's probably 70% of that delta.

Okay, and just to follow up -- when we look at the beef cycle from 1996 pretty much through 2004, cattle inventories were declining.

Now, they've been increasing since then pretty much.

So we should expect six to eight years of increases in cattle supplies.

Is there anything that you see that could actually prevent the industry from seeing that increase in cattle supplies over the next six to eight years?

I mean, on a normalized basis, no.

Are there potentially things that -- I mean, if a drought were to be all over the country and we would be extremely short of moisture, then you know, that could affect it.

I don't think that the regional drought effect of today will have that impact.

I mean, I can't think of anything off the top of my head that would automatically shift that into fewer numbers of cattle in '07, '08, '09, and 2010.

We should see a continued increase in supply of market cattle through the end of this decade.

All right.

Just one last question -- in terms of the cost savings, the $200 million cost savings plan that you've talked about, when do you expect to realize that?

That's about $0.38 on a per-share basis.

Will all of that flow to the bottom-line?

Why is it mostly of G&A or administrative kind?

I would have expected that there will be more cost savings perhaps at the plant or the production level.

Let me answer the first part of that.

As we said, some of it will take effect immediately.

All of it will take effect by the end of the calendar year.

And some of it is -- some of that is at the plant level, especially on the staffing side and on a little bit of the professional fees/consulting fees, so some of that is operational as well.

One last one, Dick.

In terms of chicken, I understand the issue with the forward contracts on leg quarter prices, but based on your previous guidance, should I interpret this that your exports were regarded at a slower pace than you had expected back in April, that the export markets are still struggling for chicken?

Well, they were still struggling and quite frankly, we sold a little bit farther into the spring and early summer than what in retrospect or looking backward as a Monday morning quarterback than maybe what we should have.

You know, at that point in time, we were probably a little bit less pessimistic about -- or less optimistic about demand improving overseas, and it quite frankly happened faster; inventories were reduced in our major markets overseas, faster than what we anticipated.

Farha Aslam.

Good morning.

Stephens, Inc.

Dick, starting with chicken, normally chicken prices kind of peak in July.

Given your cuts and the timing of industry cuts, where would you see breast meat pricing peaking this year and about what level?

I'm not going to predict the level, but you are right.

Normally, breast meat prices typically would peak in the June/July period.

I guess I would be disappointed if breast meat prices don't go higher as we go later into the summer and into the early fall period.

Based on the cuts that we believe as well as the industry published reports -- I mean, a 3 to 4% decline in output should have a very positive effect on breast meat prices.

Okay.

At current chicken price levels, could you tell us about foodservice features and retail features and how they compare versus pork and beef?

Are more chicken features occurring and so less pork and beef, so maybe demand for pork and beef is going to down in the fourth quarter, versus normal?

On the foodservice side, I would tell you that my sense is that you've got more poultry-based features and promotions than what you do on the beef and the pork side.

So, I think we will continue to see very strong promotional activity on the foodservice side.

At retail, my sense is that you've got -- the retailer has very good choices right now for a lot of different potential features for them and they are taking advantage of all the proteins.

I don't really see beef and pork demand, because of features, maybe dropping in Q4.

I do believe that they have multiple options, and you'll see, at retail, some price pressure, probably more on beef and pork because they are coming from higher levels than what you are on poultry, which are already at what I would consider extremely low levels, especially on breast meat.

Great.

Then when you talk about pork and beef and you talked about your announced price increase, pricing in the value-added pork section has been really, really tough.

Do you expect competitors to follow your lead?

Well, I would have to say that we can't predict what our competitors will do.

We can only do what we can to show what we need to do to cover our costs and to do what we need to do to get a reasonable return out of these businesses.

Okay.

Then just going on to beef, can you talk about Canada?

Do you think the exchange rate is a structural issue or a temporary issue?

How do you view that business right now?

Let me answer the second portion of that first.

I mean, it is a tough business right now.

Our goal is to keep a lot more of our beef products in Canada.

I mean, that is the thing that we need to do is we've already got a reasonably good share of that Canadian market, but we need to keep pushing and keep trying to sell more and more products within Canada or export to countries other than the U.S.

So that's really our first and foremost objective there from a revenue perspective.

Secondly is to get these -- to get the number of team members we need to get our efficiencies back in line within the plant.

The exchange rate is troublesome.

We need a stronger dollar, stronger U.S. dollar here.

I don't -- I can't answer whether or not that's going to be something that is going to be short-lived or long-lived.

It doesn't show signs of changing.

It has probably in been in this 1.10 to 1.13, 1.14 range for at least six months or nine months now, so I'm not sure how to answer that part.

It is something that says that if our cost structure is such that that product cannot move to the U.S. on an equilibrium basis, it will be difficult to move that product to the U.S.

Hence, we've got to do whatever we can to keep more of the product in Canada.

Sounds fair.

Two questions and then I will pass it on -- first, why is more cattle or fewer cattle grading choice?

Is it because they are feeding more DDG?

Do you think it's a feed issue?

Or will it be solved quickly?

Will more choice cattle come to market soon?

Actually, that trend that took place in late April, May, and the first half of June really has almost corrected itself already.

I do not know why, for that ten-week period, our grading and the industry's grading dropped so severely.

We have not been able to ascertain exactly why that happened.

Now, our grading here in the last couple of weeks has returned to its more normal levels for the end of July and ultimately the first part of August here.

Thank you.

My final question is can you just provide us an outlook on feed with all the number of ethanol plants coming up right now?

Well, there are definitely more ethanol plants coming, which that unto itself will no doubt add demand for corn.

On the other side of that, though, it still looks like we are going to have a reasonably good crop, from everything that has been predicted.

The last condition report that I saw still showed good to excellent in that 59% range, which was about 6 percentage points better than this same time a year ago.

You know, so if we get a reasonably good crop, that will help, but certainly the demand for ethanol is going to have an effect.

We're going to do everything we can to risk-manage our programs and our fixed-price contracts and everything we can on a going-forward basis.

Christine McCracken.

I just wanted to dig a little deeper I guess on a few issues, first of all on your expectations that the drought isn't really going to impact the size of these cattle herds.

Specifically, we are looking at some cow slaughtering numbers that are up double digits here in the last couple months and (indiscernible) that is down pretty significantly.

I'm curious what leads you to think that you would actually have some growth in the beef cattle herd specifically going forward.

Christine, I would say that while yes, in certain areas and we have seen the cow slaughter increase, but recognize that cow slaughter has increased from a very low level.

So your cow slaughter has really only got back to and is barely approaching a normalized level for this time of the year.

Secondly, heifer retention is actually, from what I have seen here very recently and from really our own view of what's happening in the country is that heifer retention, based on feeder cattle prices being as strong as they are, that we are starting to see a heifer retention positive situation on a going-forward basis.

I don't know of any previous cycle, going back as many number of years as you want to go back, as after we hit that low point in the cycle, there have been very few times, if any, where that trend on a year-over-year basis isn't a positive trend on the rebuilding of the total herd.

All right.

You think that the big increase in placements that we've seen lately, that would be a function of just very high demand, I guess, for beef specifically, not a function of pulling these cattle forward?

I mean, I think it's a combination of a number of things.

I'm not saying that the drought in west Texas and Oklahoma hasn't had some effect.

It certainly has had some effect.

But if you look at where these placements are up, if you look at the 7-state or the 13-state report, you'll see that they are up in areas that are not necessarily in a drought.

So, I think that part of that is the cow/calf guy maybe is putting those cattle and is willing to sell those cattle little bit earlier, a little bit lighter, primarily because they like the price.

So I think you have that factor in there as well.

One thing that surprised us I guess, if you look at the big increase that you've seen in slaughter, specifically in beef I think up almost 6% year-to-date, is that beef prices have held up fairly well I guess through the summer.

It's been probably a little stronger than we would expect it would.

Do you attribute this to anything, specifically given the big increase in availability?

Well, the last numbers I saw would show a 4% on a year-over-year basis.

For beef?

For beef.

I'm talking about head now, not necessarily weight -- would be about 4%.

I'm talking about the big -- oh, in terms of availability you mean?

Yes, on a year-over-year basis.

I'm not sure.

Will you ask me the question one more time?

Sure.

I'm just curious.

You know, we've seen a fairly significant increase in beef production, right?

You've got weight plus head of -- at least according to the latest numbers I've seen, 6%.

Yet beef cut out is up somewhere on the order of 12% year-over-year -- year-to-date.

I mean, it held up a little better over the summer than we expected.

I'm just curious.

On that relatively sizable increase in availability, why pricing has held up so well.

I would tell you that part of it goes back to the live price of cattle being higher because of this push for the choice cattle.

You know, like I said, people who were looking and being willing to pay more for cattle, that graded choice, which hence gave you that spread, I mean I think that has probably been one of the big contributors.

Plus you still have an industry that is in an overcapacity situation and people still trying to run enough numbers to keep their cost structure in line.

All right.

Well, I will move onto, you know, the activity in South America.

There's been a lot of news between Perdigao and Sadia.

I'm just curious.

You know, you guys have been fairly mum on the subject.

Obviously, Sadia has kind of backed off but you guys have always made a point (indiscernible) I think specifically of intending to grow into international markets, and yet you've been fairly reserved I guess in your expansion into these markets.

Can you talk about where you are now?

Is this a priority for you, given the fact that some of your markets here domestically are pretty difficult and even in Canada and Mexico?

Would that be something you're still interested in -- South America -- getting into that market?

Well, I will answer it in a general term and then I'll let Greg give you some details to the quarter.

But you know international is one of our cornerstones of our business.

We've always spoke to you internationally at looking at kind of add-on acquisitions, no big acquisitions.

The one you spoke to would obviously be a big acquisition and would probably require a different look.

But if you look at the things that we've considered, the one we are considering in China and the other things -- (technical difficulty) -- they'd be in what we would call small acquisitions, you know, less than $100 million.

So the one that you are referring to has got some different thoughts on it.

Greg has had a few conversations.

I will let him kind of take it from there.

Well, Christine, I think that we understand the reality of our current business here, so you know, that's going to have a vote in how we think about things.

But kind of just to be very straightforward, you know, we were not actively involved in seeking to acquire Perdigao, and it was reported that that was the case and it simply isn't, but that fact does not change what John spoke to, is that we are interested in expanding and we are in key international markets and we continue to look for opportunities and we are going to be thoughtful but it is a central part of our long-term strategy.

All right, so we shouldn't look for anything big at least not (indiscernible) anytime soon?

There you go.

Then just one last question -- on your outlook for corn, obviously in the last couple of weeks, it seems like the outlook has been getting a bit better.

One thing that has concerned us in the markets generally is expansion, not just in chicken but in hogs specifically.

With the better outlook for corn going into the next year, do you have any concerns about increases in bird size, specifically in hogs, or do you think it did cut short this pull-back we've had in chicken?

Are you referring to the bird size in chicken -- will we see -- I think in your question, Christine, if we get cheap corn, will you go put out more chickens?

That and pigs, yes.

Well, not you specifically, but the industry, yes.

I think that's always a risk.

I think my sense is that, given where ethanol demand is and the crop outlook, where it is, I doubt that at least at this point, in my opinion, that we're going to have extremely cheap corn to incite that type of behavior.

All right, but you would agree that it certainly a lot -- it looks like it's going to be a lot cheaper than people expected earlier in the summer?

I don't know.

The crop is not out of the ground yet, Christine, and that's a little bit hard to predict this point.

(technical difficulty) -- think the indications are it has moderated, but for it to say it's going to break any more than this, I think, as Dick said, you've just got to get some more time on the crop to get clarity.

Eric Katzman.

Deutsche Bank.

I guess, John, let me ask you this first question on kind of -- I don't know, it just strikes me, given the announcement today of ConAgra selling the business to Smithfield, you know, the big players in the industry are kind of forward-integrating and trying to brand more product value-added, etc., but it seems like wouldn't that be kind of a more successful strategy -- which you yourself are pursuing -- if the core business was more consolidated and rational?

Because it seems like, as you move forward, which you apparently are doing with success and the other players like Hormel and Smithfield hopefully having success at it too, you always have to look kind of backward because the commodity nature of the business just kind kills you because some of these are rational guys.

Can you just kind of comment on how you deal with that and think about that as you take on more kind of a strategy-oriented role?

Eric, I would go back to, you know, what Dick said earlier.

An example is how do you take bellies to bacon?

How do you take your raw materials and keep pushing them into those places that allow us to take a primary commodity product and try to get more value out there, either through the foodservice channel, and/or through the consumer channel with a branding, and whether that branding is at the Tyson national brand or whether it's some of the strong regional brands where we consume more of our raw materials into -- into the marketplace.

Also, on the chicken side, as we manage our cuts and we manage that and we work towards one chicken short, it allows us to keep value and up the remaining raw material.

Then where we have a need for more raw material to fit the product mix, we can go into the marketplace and buy that particular deal.

So you know, we've just been methodical and we have been at it three or four years of raw materials just converting into something else.

You've seen us adjust plants that were old plants; we've put our products into the newer plants and filled those plants up.

You've seen us rationalize SKUs that were not probable to get to the SKUs that are probable.

As Dick alluded to in his consumer products segment, we had a 13% increase in one category.

Our dinner meats category continues to grow; our refrigerated strips continue to grow; our bacon category continues to grow, so all of those things.

We forget that our chicken value-added products continue to have double-digit increases on a year-over-year basis.

So we are just methodically out there building on the pieces that we have in place, filling the plants up that we have and building our market share from the raw materials that we have.

Okay.

Eric, I would add one thing to that.

I think, in the long run, having the raw material for these value-added products is an extremely beneficial and important part of our strategy.

You are right.

We have suffered through some unusual circumstances and some difficult circumstances on the commodity side, but in the long run, it is still something that we believe is a cornerstone to our long-term success -- is owning or having that raw material supply.

Okay, and that's a good lead into my next question.

As you kind of cut back on capacity, or I should say cut back on production in chicken, you know, you are vertically integrated there.

How does that kind of impact either the carrying value of the assets or kind of the strategy of being kind of vertically integrated in that protein?

I don't think it changes that.

I mean, if you think about the fact that we are totally vertically integrated on the chicken side and you do take, let's say, 5 percentage points out of 45 million chickens, you know you still have quite a few chickens left that are vertically integrated.

We have some areas where we believe that, where it won't dramatically increase our overall cost of growing chickens, that we believe we can take out this additional 2 to a little over 2 percentage points in a very cost-effective way that gets us to a much better balance in terms of what our customers' needs are and quite frankly at times we might end up being a net buyer of product.

=Eric Katzman: Okay.

Then the last question is kind of a follow-up I think to Farha's question on pricing.

How quickly do you think -- because it has probably been awhile since you tried to put through a price increase broadly across foodservice and consumer, ex-the general pass-through.

But how quickly do you think we should be able to measure whether those, in fact, whether those prices are in fact sticking or not?

I think we will be able to measure them fairly quickly, in terms of our price discipline and adherence to the new price lists.

We expect this to be a very positive thing for us.

It's very difficult for me to say how soon you will be able to measure it, but we believe that this is what we need to do and this is what we've got to do to get us back into a more reasonable line in terms of how our costs have gone up from an operating perspective on things like energy, healthcare.

I don't know if I've answered your question but you know, we expect to see it here pretty quickly and should be in the to measure it.

Okay, good enough.

Thank you.

Tim Ramey.

D.A. Davidson.

Good morning.

Wade, a couple of questions -- is there any unusual items in the 4Q guidance?

Would there be severance in there or anything else we should be thinking about?

No, not really.

I think we had said before there's roughly $10 million associated with severance and other items, about $0.02, but nothing substantive, and that we will begin seeing some savings already in Q4 to offset part of that.

As Dick said, we will see substantial savings in Q1 of next year and then the full 100% run-rate by January.

Okay.

The item on the synthetic leases, is that likely to result in a material weakness in financial control statement or where are you at on that?

Yes, Tim, I'm not really going to comment more than we put out in the release today, which is (inaudible) call.

Again, you can see that we're still working through the issue and hope to have it resolved here in the next few months.

Okay.

I guess I missed this in the Q2 but there were was this 760 million of short-term investment.

Can you just comment on what that is?

And it looks like it went up in value of that since the 2Q and that seems to be responsible for the bulk of your borrowing increase year-to-date.

This is just money we have in a CD that rolled over from the last borrowing, which will actually pay down a pay-down debt in October, so it's basically just on hold, waiting to pay that down.

Again, because the interest we earn on that is slightly less than the debt that we've paid, that's why I reconciled them out earlier, different than interest expense as a result.

We had this debt payment coming due in October, and back in March -- February and March, Dennis and his team realized that it was best to go ahead and try to fix the new 750 at a -- going into rising interest rates.

They did a good job of that.

We put it over at the CD and we will pay it off come the first of October.

So it's earmarked to pay that down.

Good, terrific.

Thanks very much.

Jon Feeney.

Wachovia.

Just one quick one -- when you look at just the beef side of the business, and I guess the Japanese government continually dangling the carrot here of export normalcy -- do you get the sense that your competitors are following your moves in rationalizing the domestic processing infrastructure in the U.S., taking out capacity?

Do you think that these kind of continual false starts from Japan as far as export renewal are undermining what would otherwise be a somewhat rational process?

You know, Japan is always going to be somewhat fickle.

They are going to allow -- they are allowing product to start flowing again.

I know that our USDA negotiators have said that as soon as that took place, they would be going back to Japan to get to more normalized trade there to allow a much greater percent of the cattle to be approved for export into Japan.

So I mean, I think that's a positive.

I don't think that's right around the corner, but I'm not thinking this time that, in six or eight weeks, we're going to see another disruption.

Hopefully, everything will go according to plan there and sometime over the next 6 to 12 months, our government is able to negotiate with Japan to -- it might not take effect in 6 or 12 months but at least start down that process of getting to more normalized export in Japan.

I do believe that we will see Korea also open sometime before the end of the year.

It's kind of hard to say exactly when.

You know, we took out a little bit of slaughter capacity, if you will recall, back in Q2, and did do what we felt was the right thing in terms of our own plant efficiencies through the remodel and the renovations that we did in Dakota City.

So I still contend that, over the course of the next three to four years, the supply of cattle will increase like it normally does in a rebuilding phase.

I don't know what our competitors are going to do at this point.

Okay.

Just as a follow-up to something that you said, you look at -- let's assume we get a high percentage of cattle approved for export to Japan.

What are some of the other roadblocks that are out there?

Presumably Japanese consumers are eating beef today, and they are eating it from Australia and other sources.

How are we as U.S. exporters to go about reintroducing beef?

Is it just merely competing on price?

What -- do you have a list of customers that are interested in getting beef as soon as it's -- U.S. beef as soon as it is reapproved or importation to Japan?

To the extent you don't, what does that sale process look like, I think in your review, over the next two or three years, trying to build that back?

Well, I think you're exactly right.

I mean, we do have a list of customers that are very, very interested in re-establishing trade and re-establishing beef as a larger portion of the Japanese consumers' protein intake.

When the disruption took place, the consumption in Japan dropped dramatically, and as I recall is still down 25 or 30% from what it was on a pre-2003 level.

So hopefully, we will be able to regain some of that protein market share with the Japanese consumer.

Now, that's going to take some time, and the U.S.

MEF does have a very robust program to try and, on an in-country basis in Japan, start to build that ability to gain market share back and give that confidence to the Japanese consumer that the U.S.-based product is extremely safe and is affordable, and all those positive things.

There is a fairly robust program there that we will also be part of.

Great, thank you.

Thank you, sir.

I would know like to turn the call back over to Mr. Dick Bond.

Well, thanks for joining us all this morning.

We appreciate you taking the time to be with us this morning.

With that, John, I'll ask if you have any closing comments and --

No, I think, you know, the team members are out there focused.

You've seen Dick and the senior management team focus on some things that they could control in managing costs, managing staffing, managing expenditures.

We will manage our CapEx as we move into next year.

We have turned the corner.

As Dick mentioned, Q3 is better than Q2 and Q4 looks like it will be better than Q3.

And we're going to go back to work, and everybody have a good summer.