泰森食品 (TSN) 2006 Q4 法說會逐字稿

Good morning, and thank you for standing by. [OPERATOR INSTRUCTIONS].

Now I will turn the meeting over to Ms. Ruth Ann Wisener.

You may begin.

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

With me today are Dick Bond, our President and CEO, Wade Miquelon, our Chief Financial Officer, and Greg Lee, our Chief Administrative Officer and International President.

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

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

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

I'm now going to turn things over to Dick Bond.

Good morning and thank you for being with us for our fourth quarter conference call.

As we indicated in our press release, our financial results on a GAAP basis were in some ways disappointing, but our core business operations did make good progress.

Fiscal '06 proved to be a difficult storm to weather and the best thing I can say about it is, quite frankly, it's over.

The oversupply of protein in the marketplace early in the quarter continued to affect most of our segments.

Energy and fuel costs were about $15 million higher for the fourth quarter and $167 million higher for the full year compared to fiscal '05.

Despite the challenges, our overall business strengthened as the quarter progressed.

During the last year, we took action to immediately deal with short-term pressures facing the business.

What did we do?

We reduced our capital expenditures from a planned 600 to $650 million down to close the fiscal year at $531 million.

We announced the rationalization of our three beef plants and two prepared food plants that didn't fit into our long-term business model.

We instituted a $200 million annual cost savings initiative.

These savings are already about 90% implemented and I'm very happy to tell you we're already seeing the effects from these savings in our first quarter.

We also made progress on some longer term objectives.

We hired several key senior managers, including Wade Miquelon, our CFO;

Rob DeMartini, our Group Vice President of Consumer Products; and Rick Greubel, our Group Vice President of International.

We completed several major capital projects, including our case-ready plant in Sherman, Texas, and I'm pleased with its operations have come up to speed very, very quickly.

Our Dakota City expansion not only increased throughput, but also reduced labor needs in that plant as well.

And our Discovery Center is nearing completion and will be operational in January of '07.

But for me, the most important thing to come out of '06 was a learning as to how resilient our Tyson team are.

They are the reason that Tyson will remain the world's leading protein company.

Now I would like to turn the call over to Wade to discuss our fourth quarter financial results.

Thank you, Dick.

As we indicated in our press release this morning, in Q4 '06, we had a GAAP net loss of $0.17 per share.

Due to the charges associated with our cost reduction initiative and simplification efforts and the impact associated with the preliminary resolution of our previously disclosed tax issue, I'm going to take you some time to walk you through exactly what is embedded in this number so you can get a better feel for our true results.

Specifically, included in these results are costs associated with implementing our $200 million cost reduction initiative and related Company simplification efforts which were $0.04 per share negative in comparison to the approximate $0.02 per share negative we had estimated last quarter.

Incorporated in this $0.04 per share cost is $9 million of employee severance costs and $14 million of asset impairment, plant closing, and simplification costs.

In our Q3 call we had disclosed a then estimated $22 million tax liability, or $0.06 per share cost from synthetic lease obligations and other tax matters.

Due to the very preliminary nature of the issue at that time, the potential cost was not included in our guidance.

Over the past three months, we have undertaken an extremely comprehensive review in conjunction with an outside firm of our historic tax computations and as of this moment, we have identified a total liability of $15 million or roughly $0.04 per share.

Our $0.17 per share GAAP loss reflected this $0.04 charge.

While we have not yet fully completed this effort, we are very near completion and we should have the entire matter finalized by our 10-K filing as well as any final adjustments if appropriate.

And lastly, due to the adoption of a new accounting standard, FIN 47, regarding the asset retirement obligations, we have recorded a $5 million tax-defected accounting charge, or roughly $0.02 a share charge to adopt our accounting to this new standard.

Net to recap, our previous guidance which did not include the potential tax impact nor the FIN 47 impact was a projected GAAP earnings forecast of of zero to minus $0.10 per share, or plus 2 to minus 8 when excluding the anticipated costs associated with implementing our $200 million savings program.

This can be compared versus our current $0.17 is a share loss all in and then by adding back the $0.10 per share of reconciling items I have just outlined.

Or said another way, we had a $0.07 per share loss after factoring these three adjustments.

In net, we delivered at the low end of our range and slightly less than analyst consensus.

This was largely due to performance in a few of our segments which was slightly weaker than expected, though considerably better than Q2 and Q3.

And Dick will provide more detail on our various segment performance later in the call.

On a positive note, operating cash flow was strongly positive for the first time in three quarters and $50 million better than previously estimated.

Relatedly, our net debt position finished at $3.229 billion down $133 million from $3.362 billion at the end of Q3 and is at our lowest level since the end of Q1 '06.

This strong cash flow reflects improvement in core performance, capital and working capital, and cash versus accounting timing of such items such as leg quarters.

We believe that this improving cash flow reflects the overall improving health of our business.

In a related matter, last quarter we had disclosed that we had renegotiated our debt covenants with our banking partners.

We have successfully met our revised covenants for the fourth quarter and we are beyond these issues and towards solidifying and strengthening our ratios in a manner which we hope will receive consideration for strengthening our ratings when merited in the future.

On the outlook, our EPS guidance for 2007, which includes the current grain situation and other related assumptions, is $0.50 to $0.80 positive and we are confident that Q1 '07 will be positive.

An important short-term milestone for us and our first positive quarter since Q1 '06.

Driving our Q1 2007 outlook is a strengthening in all core businesses along with bottom line positive impact we are now seeing from our cost reduction initiative.

Cash flow should continue to be very strong, driven by earnings progress, reduced capital spending of less than $400 million compared to $536 in '06 spending, depreciation, and amortization of $535 and a continued focus on working capital.

We anticipate our debt position to further decline and be at or near $3 billion by the end of Q1 2006 -- 2007 fiscal year.

Additional details are -- we are projecting revenues for the full fiscal year to be approximately 26 to $27 billion.

Our net interest expense is expected to be in the range of 210 to $220 million.

Our tax rate for fiscal year 2007 is expected to be approximately 36% and weighted average shares will be approximately $358 million.

As far as the rest of the year is concerned, we aren't going to give specific quarterly guidance, but I do want to lay caution that we believe Q2 will be one of our most challenging quarters in fiscal 2007.

This is primarily due to seasonal challenges we always face across our proteins this time of year, as well as from an accounting point of view we'll begin to see the full affects of rising grain costs.

Having said that, I also believe we'll see a very strong back half of the fiscal year.

In summary, Q4 remained a challenging quarter, but we continue to show very good progress towards our goals of returning our business to strength and profitability.

While our financials reflect some core business progress and the costs associated with implementing our $200 million cost reduction initiative, simplifying our operations and resolving our prior year tax issues, these numbers don't fully reflect the truly tireless and in some cases heroic work of the entire organization.

As I have said many times before, I am truly proud to be part of Tyson, and I'm inspired how the organization has rallied together in what has been the most challenging fiscal years in recent company history and I'm confident you will see the financial fruits of this labor in fiscal 2007 and beyond.

And now I pass it over to Greg for his comments.

Thanks, Wade, and good morning.

Our total export sales were $541 million for the fourth quarter.

This is up 2% versus the fourth quarter of last year with a 5% volume increase helping to offset lower average sales prices.

With regard to chicken, our sales volumes for the quarter were somewhat lower coming off of heavy shipments in the third quarter, but higher than the same period last year.

Market prices for leg quarters improved significantly versus the third quarter of this year, but were lower than the fourth quarter of last year.

During the quarter, there was much speculation about disagreement between the United States and Russian governments over details of bilateral trade agreements and Russia WTO ascension.

There was concern this might result in Russia stopping imports of U.S. chicken or modifying the agreed upon quota allocation system for U.S. chicken imports.

Friday's announcement by the USTR indicate that the agricultural issues and the WTO-related negotiations have been worked through and we have no knowledge of any modifications to bilateral agreements that will adversely affect our chicken exports to Russia.

Our current sales bookings and shipments to our primary destinations are good and we expect our inventories to remain normal through the quarter.

Our business in Africa, the Middle East and the Far East continues to grow and provide diversity in destinations.

As we look forward to the first quarter, we anticipate that our realized sales price will be slightly less than we experienced during the fourth quarter, however that is in line with historical seasonality and price trends.

Let's talk about our fresh meats.

Our export sales of Beef, Pork, and related by-products were $389 million for the fourth quarter.

This represents a 13% increase over the same period of the prior year and was primarily driven by 17% increase in volume.

Our quarter 4 '06 volumes were bolstered by beef exports with boxed beef volumes up 24% from the same period a year ago.

While we are pleased with the growth in boxed beef, we need to remind ourselves that current sales levels still represent only 26% of the pre-BSE-sales volumes of the fourth quarter of 2003.

With regards to Beef exports through Japan, we continue to see limited shipments due to the 20 month and under protocol.

Despite an official reopening of the Korean market for U.S. beef in late September, trade has been fundamentally at a standstill.

The Korean protocol is unclear with regard to bone defect criteria.

The United States beef industry has been reluctant to ship to Korea for fear of rejection and possible market closure.

We are waiting for the results of further discussions between the USDA and the government of Korea and we hope to resolve these open issues.

Pork exports through our primary markets of Mexico and Japan were good throughout the fourth quarter and our export volumes to Korea continue to grow.

Talking about our foreign operations.

In Tyson de Mexico, our sales for the quarter were 4% below the same period last year due to lower pricing offsetting a 4% increase in volume.

During the months of August and September, we experienced an increase in market prices, which coupled with operational improvements resulted in a positive operating profit for the fourth quarter.

The stronger prices have continued into the first quarter and with the traditional increase in prices in the pre-Christmas season still ahead of us, we are confident we will see good margins in quarter 1.

Our focus in Mexico continues to be to move our product mix towards value-added products and to expand our retail branded business.

In China, our domestic sales rose 37% against the same quarter a year ago, driven by increased volume.

Sales above the food service and retail channels continue to grow.

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

We are in ongoing discussions with a leading local poultry company for the establishment of a joint venture and we anticipate GAining approvals and closing that transaction during fiscal '07.

With regards to South America, we continue to make good progress towards closing on a poultry operation in Brazil and a Beef operation in Argentina.

We expect to conclude both of these joint venture transactions during the early part of fiscal 2007.

And now I'll pass the call back to Dick Bond, our President and CEO.

Thanks, Greg.

Now I would like to give you a little bit more color around some of our segment performance in Q4, as well as the assumptions we're making in our earnings guidance for fiscal '07.

Let's start with the Chicken segment.

Looking back for fiscal '06, we implemented production cuts totaling about 5% over the previous year to deal with excess supplies, as did many of our competitors, according to their public statements.

We have no intention of adding this production back in 2007, but will remain silent on the potential for future cuts.

We expect ready-to-cook pounds to be down slightly in '07 due to reduced production while our ready-to-eat pounds will be up slightly.

Based on how inventory flows through our costing system, the lag affect of lower leg quarter prices in Q3 were a drag on our margins in Q4.

However, this same lag affect is expected to be a positive for Q1 margins as pricing got markedly better during the summer.

We continue to make good progress on our planned efficiencies.

We have completed the installation of a new automated line control system in one of our large poultry plants and we're already seeing better yields and lower costs.

We plan to roll it out to our other poultry facilities as well.

In both food service and consumer products channels, we implemented price increases during Q4.

The recent runup in corn prices shouldn't affect our first quarter, but we're mindful of the affects of the remainder of 2007 on our cost of goods sold.

Of course, we're keeping an eye on rising corn prices, but it's less of an issue for us than some others in the industry because of our value-added product mix.

Grain represents a much smaller percent of our cost of goods than it does in commodity chicken companies.

Ultimately, higher grain costs are going to raise the cost of protein for the consumer.

This will also be true for beef and pork as well.

Let's jump to the Beef segment.

Through the end of August, our Beef segment was profitable.

We started the quarter around an 80% capacity utilization in our domestic beef operations.

However, losses in September more than offset the profitability from earlier in the quarter.

We experience the typical post Labor Day down turn in deep demand.

At the same time, the industry processed too many cattle.

To improve efficiencies, we closed our Boise plant on October 16.

We also reduced shifts at our Pasco, Washington, facility, to improve our cost structure and to be more balanced with the supply of live cattle in the northwest.

We finished the quarter with capacity utilization around 79%.

In Canada, our Lakeside facility is preparing to train the first wave of workers as part of the Alberta government's guest worker program.

They are finishing work permits now and we expect the first 250 new team members to arrive before the end of the calendar year.

So far in fiscal '07, there has been a reasonably good balance between the available supply of cattle in the U.S. and the demand for beef, suggesting that the industry is better aligned with beef demand.

Cattle supplies should increase between 1 and 1.5% in '07, which would allow us to achieve greater operational efficiencies in our processing plants.

Our goal is to operate our beef plants in excess of 80% capacity utilization.

We will continue maximizing our revenue stream through a more profitable product mix and greater penetration of established premium programs.

An issue on everyone's mind in this business is how increasing ethanol production will affect corn available for feed.

There may be a positive side effect for our beef business.

In the corn belt, where many ethanol plants are located, there is an increased availability of DDGs, which can be used in feeding cattle, up to about a 40% ratio.

Which means potentially there may be more cattle fed in the upper Midwest, which is a positive for us because that's where many of our beef processing plants are located.

Now let's move on to pork.

While lag prices are typically lower in the fourth quarter, they were still higher than we expected and certainly higher than seasonal norms.

This pressured operating margins in the fourth quarter.

But we were still able to increase capacity utilization in our pork plants, as we do seasonally, from a starting point of about 77% up to 86% by the end of the quarter, which provided much-needed momentum going into our first quarter of fiscal '07.

We expect our pork segment to continue to move towards a more normalized operating margin range as we gain efficiencies in our pork operations.

Hog supplies should expand again for fiscal '07 in the range of 1 to 1.5%.

And Tyson is very well positioned in the key feeding zones.

In Prepared Foods, we were pleased with the 3% volume increase.

However, we were disappointed in the overall operating performance as higher raw material costs affected margins more than we anticipated.

We hope to mitigate this effect in the future by doing a better job of internalizing raw materials for our value-added products.

Using our own supply should help protect us against higher raw material costs and ensure supply as we grow market share in our Prepared Foods segment.

In closing, although we expect the usual seasonal sluggishness in the second quarter, I believe each of our segments will be significantly better in 2007 and I want to thank our team members, our customers, and our shareholders for putting their trust in our strong management team and for believing in Tyson Foods.

We faced unparalleled obstacles in 2006, but we're a stronger company for it.

We had to re-examine everything we do, we needed to be more agile, we needed to be more cost conscious and we needed to take advantage of the business models we have, both commodity and value-added.

And I'm very excited about our Company's potential, because what I've witnessed in my six months as CEO, great things happen when Tyson team members throughout the organization unleash their talent and expertise.

And I'm proud to work with each and every one of them.

And with that, I'd like to turn the call over to the operator, and we'll handle your questions, we hope.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Diane Geissler, Merrill Lynch.

Your line is open.

Good morning.

Good morning, Diane.

Obviously, we're all glad that 2006 is over with here.

Can you tell me -- the guidance that you've given for this year, how conservative or cautious do you think it is given corn prices and pricing in poultry, et cetera, and export markets on the beef side?

Give us a little detail there about some of the point estimates there behind those -- the bottom line estimates.

Diane, this is Dick.

I'll start and Wade -- anybody else wants to add on.

I think that the -- our guidance is based on what we know today in terms of where corn prices are, what affects that might have on our business going forward.

If you go back to fiscal '06, we missed guidance at least three times.

And I really don't want to miss guidance again.

I don't know if that gives you any sense, I don't know if you want to have more specifics around that, but I view it as being fairly conservative.

Okay, I appreciate that.

We've had a couple of your competitors recently say that they're cutting production again, effective January.

You have mentioned that you'll remain silent on your plans.

Are we to construe that silence means you're not contemplating it, or you would let the market know once the cut actually became effective?

Just a little bit more clarity about that comment.

Diane, I would say that it would be more of the letter.

We will always look and we will contemplate what is right for us and for our company.

I think we were, quite frankly, the aggressor in terms of the cuts in 2006.

That's really, if nothing else, probably -- we're going to do what we think is right, but for the time being, we don't really have any other comments on any future cuts.

Okay.

And if you could just comment on your hedge position right now, whatever you can give out publicly in terms of corn, et cetera?

Diane, again, we don't give our actual hedge positions and you know that.

Certainly, we have been active in terms of -- especially on our fixed price contracts where we do have exposure and I think we've done what has been appropriate.

Were there any -- was there any hedging in this quarter?

Obviously this is really an issue, it sounds like for the fiscal second quarter when you see the roll-in of the higher grade prices that are being incurred this quarter doesn't impact your quarter until next quarter.

Is that the way we should think about it?

You should think about it, there is always a lag between the corn that is in the chickens currently that are being processed in first quarter is really corn that came about prior to most of these increases and that's why we are saying that the effects of higher grain will not be material in first quarter and will really take affect as we move into second quarter.

Okay.

Just quickly on the beef side, you mentioned that you thought cattle availability would increase 1% to 1.5%.

I seem to remember at a conference earlier this year, you talked about the balance between cattle prices and output and you could really see a swing in that business on an earnings basis of 4 to $6 million a week.

How do we think about 1% to 1.5% does to your capacity, getting that where you need to be?

And the margin will have to take care of itself, I guess.

Is that enough cattle to get you to where you need to be on a capacity basis next year?

Well, I would say that 1% to 1.5% of increased capacity alone is not going to change the margin structure from what happened in '06 to what's going to happen in '07.

I think there's a lot of other factors.

I think our exports will continue to improve, albeit slightly.

I think the biggest thing is we're going to run a better business.

We have really focused on going back to the basics in our beef and our pork side, going back to really being that low cost producer, simplifying our operations, so I would tell you that the 1% to 1.5% is something that's going to help, but the driver is really us managing and running our business the way we know how to run it.

Okay.

Well, thank you.

Our next question comes from David Nelson, Credit Suisse.

Your line is open.

Hi, David.

Greg, you mentioned the deal U.S. government has now with Russia on the WTO and certainly that's good news.

From what I've seen, Russia has increased their chicken production over the last year by about 20%.

How are you thinking about the Russian market longer term?

Are you thinking about entering that market?

Are you worried that their production growths over time will displace exports?

David, I think it would be naive to not recognize that they are expanding their domestic production.

There have been several years here in succession that they've had a double digit increase.

It was from a low base.

They're now back to what was probably their 1990 production level and we do anticipate that Russia will continue level and we do anticipate that Russia will continue to grow and we recognize that that will going to -- regardless of trade agreements that will lessen the amount of chicken that will be required to sustain the consumer demand.

We're thinking about how to optimize that as well as continuing how to diversify our sales.

And if that includes some type of presence in Russia over time, we will give that due consideration.

Okay.

Energy costs should be better this year than last.

Can you talk about a little how much?

If you look at the $167 million of increase in fiscal '06, we would guess that that number should be probably about $70 million less in '07 compared to '06 based on current energy outlooks.

Less in total, not less of an increase?

Decrease, a decrease versus '06.

I just wanted to clarify.

If I could go back to chicken for my last question, please, given your production cuts and given that we really haven't seen the discipline I was looking for from others in cutting back, you've cut back in others, how do you feel about your position as a low-cost producer given how fixed cost this business can be.

Do you still think you're similar near low cost given that you've cut back and that reduces operating leverage?

And second of all, that others haven't cut back apparently or at least as was promised, why do you think that has been maybe the case, and maybe that's the answer in that their fixed costs are too high, they don't want to?

David, I would say, we don't know how much they did or didn't cut back.

You're right, from the announced cutbacks, it looks like some might not have done exactly what they said they did.

I would tell you with these higher grain costs, I don't think there's any doubt that we will see future cutbacks.

Especially on the more commodity-based type companies.

I don't think there'll be any choice there.

I think they'll have to do that.

As far as us in terms of efficiency, anytime that you reduce your output, it will have an effect on your fixed costs, but I think the way we've made our production cuts has probably minimized that and there's no doubt in my mind, from the production of a live cost of producing a chicken, we are no doubt the most efficient in the country, in my opinion.

I believe that what we need to continue to do is make sure that we have our further process and our value-added mixes and lines running at full efficiency.

That is where we're targeted for our growth in terms of our ready-to-eat type products.

We will focus on making sure that we're getting the most out of that side of the mix of our business.

Great.

Thank you very much.

Thanks, David.

Jon Feeney, Wachovia, you may ask your question.

Good morning.

Morning.

When you -- just a little bit of detail, Dick.

You talked about the severe losses you saw in September maybe more than offsetting what you've seen quarter to date through August.

Is it fair to say then, or are you at liberty to say, are we breaking even right now in Beef?

September was a very, very dismal month in terms of demand really backing off quite significantly after Labor Day and we as an industry didn't really cut the supply, so that's really what happened in September.

Looking forward in first quarter here, I'll answer your question by saying, yes.

That's a good answer, thank you.

A couple of times in the script, you mentioned expecting Q2 to be tough seasonally.

Could you give me a little bit more detail about -- I know we've seen the seasonal patterns in the past, but is that some sort of specific commentary, perhaps, about the hedge position or a forward sale position that you have that you can already see Q2 numbers coming in tough?

No, it doesn't refer to that at all.

It just means that the January through March period, generally for protein and all proteins, the demand is usually not as good.

You have some weather affects on the live production, both in chicken as well as in cattle that cold weather, snow can affect your COGS in terms of your cost and really just the demand side, it is the weakest, generally, three months of the period just in terms of our capacity utilization, of our -- all those types of things are generally the weakest in our Q2.

And if you look back over any number of years of history, Q2 is just generally the weakest quarter.

Sure, but nothing particular to this year should impact that relative to the others?

No, that's just a general statement.

We don't have anything that we're saying to try to alarm you about this Q2, it's just a statement in Q2 about that in general.

Great.

And finally, a question for Wade.

It looks like as of the 8-K you filed in July that you have a $550 million minimum consolidated last 12 months EBITDA as of December 31st.

By my calculations, it looks like you need somewhere in the respectable neighborhood of $250 million EBITDA this quarter to get to that number.

Is that a correct characterization?

And if so, have you -- is that correct and are you looking to change that or do you think you're going to get there?

The $550 is correct, the $200 and some is not.

If you look at the number for nonplant, it's closer to $100 million.

And as I said in my comments, I'm very confident that we'll be able to meet those covenants.

Oh, so you get to exclude plant charges in the $550.

For plant closings and the non-cash component.

Yes.

Okay.

But it's closer to 100 and I'm very confident.

Okay, thank you very much.

John McMillin, Prudential Equity Group.

You're saying a lot about the second quarter, can you say you're excepting the first quarter to be in the block?

Absolutely.

If we haven't said it, we've certainly indicated it.

How do you get the strong second half benefits without corn falling?

a couple things.

As Dick said, Q2 is always seasonal tough, plus you get more of the P&L grain impact in Q2, although there is potential upside as well as pricing starts to roll through and we believe supply will have to contract.

But when you get to Q3 and Q4, across all proteins they're seasonally strong and I think that's the key driver.

Wade, I know you're not on LIFO, but you're not on FIFO either, right?

You're on average cost inventory.

But if you look at the way it runs through the corn and proteins, there's a lag affect always.

You're going to get a lagging affect as it flows through.

We'll have some grain impacts, for sure in Q1, but basically the full running affect of it in Q2 as well.

You do some of these annual contracts for chicken on a calendar year, right?

Yes, we do.

So that's just kind of going on now.

A lot of these locking in of corn is kind of in front of you?

Some of them -- a number of them are yet to do, some of them have been done, so we have some of both, John, in this particular case.

I think as a percent to total, we'll probably have a little less of that fixed component in fiscal '07 than we did in fiscal '06 and if you look at our typical Q3 and Q4 where we do have better demand for protein from a grilling season on beef, on pork and on chicken, I believe that the American consumer is going to have pay more for protein.

We are at new levels on corn that are not likely going to be retrenching back to '06 levels.

There's no segment in our business, whether that be the cow-calf guy or the guy that raises chickens right through to the processor and retailer that has the kind of margin structure to absorb this.

In the long run, the consumer is going to have to pay more for protein.

And it doesn't look like you have any part of this private equity deal with Outback Steakhouse.

The company has been producing substandard results for a long period of time and I think -- I know you're going to try to address it at lunch with the value-added products, but it seems like every year, this year's corn, last year, whether it's a Russian poultry ban or Japanese ban, people can talk about what normalized earnings are, but it just seems like the industry is kind of gripped by abnormal events that seem to happen every year or two.

At what point does this kind of normalize, and do you need big industry consolidation to kind of make it happen?

I know that's a broad subject, but if you can address it, Dick.

John, I would say that -- and we'll have some more commentary around normalized earnings, but there have been a lot of one-off events that really have plagued the industry.

I would also tell you that we have not run as good a businesses in the last two to three years and I take all the hit for that in terms of taking our eye off the ball.

I think we did.

And quite frankly, I think we're refocused, we're reinvented, we're reinvigorated and I think we know what things we've got to do even in tough times to still have performance that you all would say is acceptable.

I just think going forward, that's what we have to concentrate on.

Our longer term strategies, I still think are right, and you're right, we haven't had anything that's called normal in a number of years, but I think running and focusing on what we know are the right things to do to run our business and it would be nice to have a break or two here in terms of not having to deal with BSE or not having to deal with trade barriers here and there.

We can deal with corn prices.

I'm not worried about corn prices.

We can deal with that, because quite frankly I believe that the American consumer is making a choice here.

This is either corn for feed or corn for fuel.

That's what's causing this, but in the long run, we'll be able to manage through higher priced corn.

In fact, if you look back at history, there have been a number of years in our history from a chicken perspective that higher-priced corn has actually been good.

And it's good because some people in the industry end up cutting back on their output of chicken for working capital reasons or for whatever reason because the commodity side of the business doesn't keep pace with it.

And the value-added piece will.

So probably not a bad year to be vertically integrated?

On the poultry side.

Greg, my last question, how much capital is required in these two joint ventures?

It's going to be consistent with what we've talked about all along.

All of these are $100 million and less and as far as the capital output, it's going to be modest.

Okay.

Thanks for all that.

Christine McCracken, Cleveland Research, you may ask your question.

Good morning.

Good morning, Christine.

Just wanted to follow-up on John's question relative to the food service contracting.

You mentioned you expect to go to your customers and ask for pricing to offset the corn costs.

Sounds like you're kind of in that process now, and yet we've seen a lot of softness in certain sectors of the food service market specifically.

Have you had any pushback of pricing, specifically on chicken, or do you expect to be able to push this through?

There is no doubt we've had some pushback.

And really, Christine, I would tell you that if those prices are not where we think is reasonable, we'll do a little bit less of that, that's why I said that we'll probably have a little less fixed price as a percent of total in fiscal '07, because we are not looking to take on fixed price contracts that don't make any sense to us.

So you just expect to go to the retail market with those pounds, or --?

No you still, really on the fixed price side you're talking more national accounts.

We still have the whole distribution side of the food service business, and yes we still have the retail side of the business as well.

All right.

And just on your comments relative to ready to eat, I think you said you did expect to take the production cuts or maintain the production cuts, but you expected ready to eat pounds to be flat.

Is that tied to efficiency programs or weight or can you comment further on that?

Actually, I think I said ready to cook would be slightly lower.

Oh, okay.

Ready to eat would be slightly higher.

Meaning that on the more value-added products, we'll continue to push for share and for greater sales in that segment.

Just a mix shift.

Right.

Towards those products.

But on the whole, total pounds you'd expect to be down 5% on chicken, or more?

Total pounds will not be down a full 5% on a fiscal year basis because in fiscal '06 we had --

All right.

-- these cuts in place for part of the year.

So it will be less than a 5% reduction in pounds.

You have to delink our production from sales.

So inventory reductions can fill the remaining gap.

Fair enough.

And just -- you'd mentioned that you have this $70 million energy benefit, I guess, or thereabouts, and you'd mentioned that you're looking at these $200 million run rate in annual savings tied to some of these initiatives that you've introduced, and yet I think you'd mentioned that your guidance is within this band.

I guess the question was asked earlier if this is a conservative estimate, but it seems like with those two benefits, you should be doing fairly well in the next year.

Can you comment on -- is there something that you're holding back on at this point, or do you not expect to get that full $200 million in cost savings?

No, no.

We fully do expect to get that.

If you look at a year-over-year change in our performance.

Again, you've got that $70 million coming off of $167 million increase, so on a fiscal '06 to fiscal '07 basis, even if you go to the midpoint of our guidance range, we're going to have a $1.25 EPS roughly change on a year-over-year basis.

That's pretty significant.

Granted, that's coming from an extremely low base.

And the other thing is, the unknown is the grains.

How much more are grains going to go up?

We don't know hutch much more or less grains are going to move.

As I said earlier, we missed guidance a number of times in fiscal '06 and our intent is not to do that in fiscal '07.

I'll leave it there.

Thanks.

Eric Katzman, Deutsche Bank.

You may ask your question.

Good morning, everybody.

Good morning, Eric.

A few questions.

One, to what extent does the protein industry, to the extent that you speak for that, have influence in Washington to try to kind of influence the debate over food versus fuel?

Eric, I would say, I don't know how much influence we have, but as an industry or as a company, but we will be actively involved -- I think the farm bill is the key in '07 where from a legislative perspective we need to be making sure that our legislators need to understand what affect this is having on either feed versus fuel.

We intend to be both as an industry, I think, and as a company be very involved in trying to make sure that there is enough feed for food as opposed to just feed for fuel.

Yep.

Okay.

I guess that's a little bit of a wait and see.

And then on the comment you made regarding DDG usage to feed cattle, obviously that's kind of like a derivative in terms of how it helps you, whereas putting it into the chicken vertically integrated feed processing would be with a direct benefit.

Are we far from that, is that an impossibility?

How does DDG work in terms of chicken feed?

You can utilize it.

Some say that you can utilize it up to that 10 to 12% range.

We're currently utilizing it in 19 of our 34 feed mills where it is logistically able to get there at a cost effective price.

We'll use probably somewhere in excess of 220,000 tons of DDGs this coming year, 100 pounds of DDGs would replace roughly 60 pounds of corn and about 40 pounds of soy bean meal.

So we can utilize it.

We will utilize where it make sense from a logistic perspective.

There are more ethanol plants actually opening down a little bit, if you think about -- there's one opening in Tennessee, I believe this week.

So we're going to make sure we capitalize this on DDGs wherever we can.

Okay.

I think, Dick, I heard you say that you have to do a better job in prepared foods in using internal input production.

Unless I'm -- maybe I'm misinterpreting it, but why wouldn't you be using 100% internal production there to begin with.

Isn't that the whole idea of optimizing and forward integrating and branding?

You're 100% right.

And we keep moving that percentage up of raw materials that are sourced internally.

However, you run into things like sizing and different types of products that even within our own fresh meat on the Pork side, we will actually run out of certain size, let's say pork bellies, or certain ham muscles.

All that means is what we need to do is figure out not only from a raw material, but from a finished product standpoint when that happens how can we alter the use of a different ham muscle in a finished product again to utilize more of those raw materials that we still have?

Okay.

All right.

Thank you.

Our next question comes from Kenneth Zaslow, BMO Capital Markets.

Your line is open.

Good morning, everyone.

Good morning, Ken.

A couple questions.

One is, on the $200 million savings, can you talk about where that's going to be coming from, which divisions?

Or is it all -- because if I exclude it, I kind of want to think about it in terms of what the operating margins will be for the divisions excluding that.

Can you give us some flavor for that?

Roughly a little over 50% of that is in the chicken segment.

Roughly an eighth of that is in prepared foods and the balance is in beef and pork.

Great.

In terms of the cattle supply availability throughout the year, can you talk about how the lightweight as well as the higher corn prices is going to skew all the cattle coming to market during the year.

Are we going to have it off the typical seasonality, or do you think it will be similar to the typical seasonality?

Well, Ken, I believe that cattle weights next year will come off their all-time highs of this year.

And I say that because the last 50 to 100 pounds that you put on the animal are the most expensive.

So instead of having as many giant carcasses as we've had in live cattle as we've had this year, I think what you'll see is a reduction of days on feed in terms of how long the cattle feeder will feed the cattle, which is actually very good.

As an industry, we've got these cattle in the last few years with cheap grains too heavy.

They don't really fit either the retailer or the food service customer's appetite for what they want.

The cattle are too heavy.

So I think this year, you will see those weights come down and if you take 50 pounds off of every head of cattle that's fed in the country, you will save about 260 million bushels of corn.

That is the type of thing I expect to see in this next period.

Because they will not feed these cattle to as heavy weights as they once did with cheaper grains.

In terms of how that will affect orderly marketings, I think we're going to have probably a good supply of cattle in this first three to four month period than we will likely see cattle get a little bit shorter in terms of availability and then it will get better again as we get into the May through September period.

Okay.

And on the chicken leg side, if I think about it, you said next quarter will recover because of the higher chicken legs during the summer, but then we've just seen a pretty much fall pretty hard for for chicken legs over the last month or so.

So that kind of the reason for Q2 being soft also?

It seems like there's a quarter delay on that.

In real terms, it just kind of runs on the lag affect because of how our inventory system works.

And even at the lower prices, though, remember that chicken leg quarter prices are still substantially above what they were in the second and third quarters of last fiscal year.

I think that's the key is, we've got leg quarters down in that $0.13 to $0.15 range in third quarter.

Leg quarters aren't going -- or haven't gone anywhere near and we don't anticipate them going to anywhere near those levels like what we had to do to clear inventory back in the April/May/June time frame.

And just two other quick questions.

If I exclude the cost savings programs, it seems like underlying beef packer margins would be close to zero give or take probably 50 basis points -- 0.5%, and chicken margins would still be in the 2% level.

Is that kind of how I should think about it going into '07?

I'm not sure I understand, are you --

If I exclude the $200 million of cost savings and I look at what I would consider the beef packer margin purely on a non-Tyson basis, just clearly on what the market would dictate to you without your cost savings programs, it seems like beef packer margins, beef margins for Tyson would be relatively flat to even potentially negative still and then the chicken side would be relatively -- I'd a 2% or so margin.

Is that how you guys model it?

I don't know how you did your modeling, so I'm not going to comment on your modeling.

I would tell you that in general on a composite basis we believe we'll do better than that.

Okay.

Last question.

Because of the higher corn prices, can you change the feed mix to a more soy bean meal?

You can make some slight modifications, but you cannot make huge modifications to the ration.

Great.

Thanks a lot.

Farha Aslam, Stephens Incorporated.

Your line is open.

Good morning.

Good morning.

Dick, could you provide us better color of your range in the 50 to 80?

What's factored in to that $0.50 number and what's factored in in terms of markets for that $0.80 number when you guys were doing your modeling?

I would tell you that first of all grains are certainly the biggest wild card in that range.

Grains can have a huge affect on really a lot of things.

Certainly it can have a big affect on our chicken segment, but can also have a huge affect on cattle and on hogs as well, not directly, but on an indirect basis in terms of what we might have to get for the finished product.

So grains are definitely the key driver to that.

I would say that the second level would be how much export business are we going to be able to regain on the beef side and will our pork exports stay kind of at the levels that they have been as our beef exports start to grow.

I think that's the second factor.

And the third factor is while today we are project a decrease in energy cost, that's something that is certainly subject to some volatility and variability as well.

And I'd say that the fourth factor is how well are we going to execute against our goals and our opportunities primarily on the fresh meats side?

So I think if we were to take the four factors that would affect it the most, those are going to be the four factors between the 50 and the 80.

Thanks, that's helpful.

Now when you look at where your operations are in terms of Canada versus the U.S. and beef, how long do you think it's going to be for Canada to reach U.S.-type margins?

I would tell you that if you want a point in time today, Canadian margins are back equal to domestic margins.

But is that because of an improvement in productivity in that plant?

It's a combination of productivity improvements in the plant and really the basis differential between what live cattle are bringing in Canada versus what live cattle are bringing in the U.S.

Do you think that's going to continue?

I hope so.

So do you consider Canada at this point pretty much fixed or where you want it to be?

Not from a cost perspective.

We are still short team members in Canada.

We have made some improvements but until we get the benefits of this guest worker program completed, probably in second fiscal quarter, I think that's where -- hopefully by the end of second quarter I'll be able to tell you that it is where we want it to be from a cost perspective.

Okay.

And just continuing the international operations, do you think -- right you've been focusing your efforts on international M&A, do you think the high corn environment is going to cause a shakeout in the protein industry domestically and give you opportunities to acquire firms in the U.S.?

are you talking specifically in the chicken segment?

Chicken particularly, and beyond that if there's any opportunities in beef and pork.

Certainly high grain costs can create the environment for consolidation.

We're not interested in just processing more chickens.

We are mostly interested in moving more products up the value chain.

So to process 10 million more chickens or 5 million more chickens, not really something that we are that interested in for the sake of just processing that many more chickens.

It's what we do with the product, it's how we can generate a margin off of that product that's key to what we believe is what we want to do.

Great.

That's very helpful.

My final question is, on hogs, you were looking for a 1 to 1.5% increase in supply yet there's some folks thinking of liquidations.

Could you give us some commentary as to why you think hog production would increase next year?

Well, thus far, we sure haven't seen any decrease in breeding stock and -- high grains and high corn costs could very well do that if the margin structure on hog production either goes negative -- that is typically what causes the contraction in terms of supply.

We've seen supply increase each of the last three years because for the last three years, hog production has been very profitable.

What will drive that to contraction will have to be a shift in the economics of hog production.

I believe that that possibly could happen, the but I don't think it's going to happen soon enough to where we will see an overall decline in our fiscal '07.

That's very helpful, thank you very much.

Pablo Zuanic, your line is open.

This is actually [Akshe Dijan], I'm asking a question on Pablo's behalf.

How you doing?

Good.

Can you just touch on -- discuss the pass-through of the higher grain costs you've touched on little bit and specifically talk about the distinction between your processed business, which is the commodity side, and also as a follow-up to that, what percentage of your chicken sales are on a cost-plus basis?

I understand that some of your contracts with McDonald's and Wal-Mart are done that way, so if you could touch on those two questions.

I don't know that we've given an exact percentage of cost plus.

What we have talked about the fact that somewhere in excess of 10% of our poultry is on dedicated facilities and we do have a number of other cost plus initiatives over and above the dedicated facilities, but I don't think we've ever talked specifically about everything that is quote cost plus.

So I'm not going to address an additional percentage.

We have said, though, however, that we do have around 10 or a little over 10% on a dedicated facility basis.

And in terms of passing through or moving that through to our customers and ultimately to the consumer, someone has to process this protein and at some point in time, higher input costs will have to be realized in terms of what's going to go to the consumer.

I believe that we will have enough demand and enough probable contraction and supply that we will be able to in time pass through those grain increases.

And as I said, the ultimate consumer is going to have to pay for basically the higher grain costs.

Just as a follow-up and just staying on that point, can you just talk about the distinction in the pass-through for the processed business versus the commodity side and also on the timing as to when you would see this pass-through in prices?

I'm not sure how I can address that.

If you want to contact Ruth Ann afterwards, I don't know how to address that and hopefully she'll have some more time to think about that in terms of how we might address it.

I don't know how to give you any facts around how to separate that either from a timing or a dollar perspective.

Okay, that's fair.

We'll follow-up after the call.

And the other question regarding cost savings plan, one, how quickly do you expect that to accrue?

I think you said 90% is already being realized, and then, does that bring you on par in terms of the industry, in terms of normalized levels, or are you getting ahead of the industry in terms of normalized levels with those cost cuts?

A couple things.

Number one, we'll get 90% of the savings in this fiscal year, but we're also seeing the full affect of that -- almost the full affect of that in Q1.

So those savings are real, they're coming through and will continue to come through.

In terms of versus the industry, I'm not going to comment on what's normalized for the industry or not.

I think our business model is a bit different, for instance, in poultry.

Our value-added mix, where we choose to play.

So this whole initiative is part of our getting back to where we want to be for Tyson normalized on a going basis and that's one of the core building blocks to do that.

Okay.

And the last question on your beef unit, I know you touched on this a little bit, but can you just tell us roughly the split between U.S. and Canada for this quarter in terms of profitability?

Did U.S.

EBIT get better year-over-year?

Can you give us some color on that?

Are you talking about fiscal fourth quarter of fiscal '06?

Yes, fourth quarter, correct.

In fourth quarter of fiscal '06, our domestic operations did better than our Lakeside operations.

Okay.

And can you give us any numbers on that?

No, we never -- we haven't as a normal course split out those operating margins between Canada and the U.S.

Okay, thank you.

Oliver Wood, Stifel Nicolaus, you may ask your question.

On expected hog supply growth, disease has been an big issue over the past year, primarily porcine circovirus.

Wonder if you can comment on how that's asking the hog supplies today and what your suggestions incorporate on that front?

Thank you.

Basically, the circovirus did have significant affects, primarily more in North Carolina than in the Midwest.

I believe that most of the effects of that, I believe, would be behind us at this point and we have really record number of hogs available today in terms of available supply.

The industry has been slaughtering between 2.1 and 2.2 million hogs, which is a sizable slaughter by any number.

So, I think what effects it has had has already taken effect and I believe that the disease is pretty much in check and in control at this point.

Great.

That's helpful.

And just a follow-up to that, if you could comment on the Canadian hog herd.

There's just been some speculation that the numbers will decline over the next few years there.

Just wondering what you guys are seeing, if you have any thought?

The only thing I know of for sure there is that there are still a fair number of feeder pigs moving from north to south.

But other than that, I am not equipped to answer that question probably with anymore detail than what I just gave you.

All right, thank you.

This concludes the question-and-answer session.

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

Well, thank you.

We do appreciate you taking the time to visit with us today.

You always ask great questions and we do appreciate that, and on behalf of the management team, we want to thank each and every one of you for your confidence in Tyson Foods and we look forward to a much better 2007 and we really appreciate your taking the time today.

And thank you very much.

This concludes today's conference.

Thank you for joining us.

You may disconnect at this time.