泰森食品 (TSN) 2007 Q1 法說會逐字稿

[OPERATOR INSTRUCTIONS].

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

You may begin.

Good morning and thank you for joining us today for Tyson Foods first 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, 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.

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

Good morning and thanks for being with us on our first quarter conference call.

As indicated in our press release, financial results were greatly improved over both the same period last year and the previous quarter, and we delivered our first positive earnings in several quarters.

Net income in Q1 of '07 exceeded Q1 of '06 by more than 46%, an outstanding achievement by our Tyson team members.

We made great strides in improving our results, and each segment delivered margin improvements over the fourth quarter.

I want to thank our Tyson team members who have worked extremely hard to return this Company to profitability.

I'm proud of their efforts and the progress they've made.

Both our sales and volume increased compared to fourth quarter of 2006, but the real difference has been within our operations.

We've made a number of operational efficiency improvements, the most notable being our cost management Initiative.

We are tracking this savings and are on target to meet our goal.

Wade will provide more color on this subject a little bit later.

Our team members responded when I asked them to make some short-term individual sacrifices for the longer-term success of the Company.

We have to manage our costs with a commodity mindset, but I want to reiterate our strong commitment to innovation and top-line growth.

As part of this commitment, I'm pleased to announce we began operations in our new discovery center last week.

I know our sales, marketing, and especially our R&D team members are extremely excited about the opportunities that this will give us to enhance our innovation efforts even more quickly than in the past.

Now I'm going to turn the call over to Wade Miquelon to discuss our first quarter financial results.

Thank you, Dick.

In Q1 '07, we achieved GAAP earnings of $0.16 per share.

This compares to earnings of $0.11 per share in Q1 '06.

As Dick said earlier, this was the best quarter we've had since our fiscal '05 fourth quarter.

Our earnings progress was driven by a combination of focus on improving our cost efficiencies, as well as an overall strengthening in all of our core businesses versus the previous quarter and three out of four core businesses generating positive operating income.

We finished the quarter at a debt level of $2.96 billion, which puts our debt-to-capital ratio within our target range at 39.6%.

Progress in our debt reduction was a result of stronger earnings, capital spending discipline, and focused improvements in the area of working capital management.

Our capital expenditure was well below year ago and within our targets for the quarter and, we reduced our day sales and AR by almost two days versus Q1 '06.

And our overall improvement in cash cycle increased by 2.5 days.

In working capital, we also make good progress on inventory management, as we've been able to bring into balance our demand and supply, particularly in poultry.

This was achieved primarily by executing on the previously-announced production cuts.

Dick will talk a little bit more about this in his remarks in just a minute.

Our cost management initiatives are on track to meet or beat our $200 million goal.

As a requirement, these cost savings will show up as reductions in cost of goods, selling expenses, and G&A.

About half of the savings are coming from our Chicken segment, 10% to 15% will come from Prepared Foods, and the balance will come from the fresh meat businesses.

Now let's talk about the year moving forward.

We reiterate that our previous full-year guidance is still valid.

We said on our last earnings call that we believed our second quarter would likely be our most challenging, and this was primarily for two reasons.

First, because of the timing of the major rise in grains, as well as the related P&L inventory flow-through affect.

In Q2, we also began to see a major step up in our cost of goods sold as it related to that.

We expect pricing to offset much of this cost increase, but not completely.

Second, Q2 can be seasonally challenging from a fresh meat perspective to the extent weather interrupts the steady flow of cattle and hogs in the live markets.

While it is not our convention to give quarterly guidance, per our press release today, despite these challenges, we believe we'll continue to show positive earnings in Q2.

Beyond that, surges in the price of grains, like the one we saw in early January, can also have a ripple effect in Q3 and beyond, as the impact moves through the inventory cycle.

But we remain confident the market supply and prices will adjust to reflect the new reality of the market.

Net, our specific outlook is as follows.

Our EPS guidance for the full fiscal year of 2007 remains $0.50 to $0.80 positive.

We continue to project revenues for the fiscal year to be between $26 and $27 billion.

Depreciation and amortization is expected to be at $520 million.

With continued discipline, we fully expect capital spending to come in below $400 million.

Net interest expense is expected to be around $225 million.

Our tax rate for the full fiscal year of 2007 is expected to be approximately 36%, and weighted average shares will be approximately $353 million.

Now I want to pass it over to Greg Lee for his comments on our international business.

Thank you, Wade, and good morning.

Our total export sales were $593 million for the first quarter.

This is up 7% versus the first quarter of last year, with a 19% volume increase helping to offset lower average sales prices.

Our export sales of chicken were $133 million for the first quarter.

Market prices for leg quarters were significantly lower than during the first quarter of last year.

Our sales volume was substantially higher when compared to both last year's first quarter and the fourth quarter of fiscal 2006.

With regard to inventories, we ended the quarter at targeted levels.

Our export sales to Africa, Middle East, and the Far East continue to grow and to provide us some market diversity.

Our ongoing sales to Russia fully support the volume that we have targeted for that particular market.

For the second quarter, we will see our realized sales price average well above our first quarter.

Based upon our sales volume book for the second quarter shipments, we expect to close the quarter with our inventories on target.

Now let's talk a bit about beef and pork.

Our export sales of beef and pork products were $430 million for the first quarter.

This represents a 24% increase over the same period of the prior year and was primarily driven by a 20% increase in volume.

Our first quarter volumes were bolstered by beef exports, with boxed beef volumes up substantially from the same period a year ago.

This volume growth was driven primarily by increased sales to Mexico, Taiwan, and Hong Kong.

While we are pleased with this growth in the boxed beef category, we should continue to remind you that the current sales level still represent only 32% of the pre-BSE sales volumes, and that's specifically for the comparison against the first -- fourth quarter of 2003.

Sales opportunities to Japan continue to be constrained by the 20 month and under age requirement.

We do not anticipate this situation to change in the near term.

Korea continues to be a disappointment, and until there is resolution to the U.S.-Korean beef protocol details, we do not anticipate any shipments to Korea.

Boxed pork export sales were up versus the fourth quarter of '06 driven by a 31% increase in volume.

Sales to Japan were the primary driver of this increase.

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

In Mexico, our sales for the quarter were up 27% compared to the same period last year.

This was driven primarily by higher market prices resulting in a marked improvement in operating profit for the quarter.

We continue to focus on developing our value-added products.

Our sales of these items were up double digit versus the same period a year ago.

During the quarter, we were successful in raising pricing on our value-added, refrigerated, and frozen product lines.

We currently have expansion products -- projects that are well underway to support our further process growth initiatives.

In China, our domestic sales rose substantially against the same quarter a year ago driven by an increase in both food service and retail.

We continue to make progress towards establishing a joint venture with a leading, local poultry company and anticipate closing the transaction during fiscal 2007.

Additionally, we're exploring other JV and our acquisition opportunities in China.

Talk about South America.

As we announced earlier this month, Tyson has teamed up with Cactus Feeders and Cresud to enter into a joint venture in Argentina.

This will create the first vertically-integrated beef operation in Argentina.

The venture is expected to produce both products for the domestic Argentine consumer and give Tyson access to European and other high-value beef export markets.

The joint venture will use an existing feed lot operated by Cactus and Cresud to supply most of the beef for a beef slaughter and processing plant, which was recently purchased by the joint venture.

Both the feed lot and the plant are located in central Argentina.

Sales for the joint venture are expected to be in the range of $30 million to $35 million in calendar 2007.

Within days of closing the operation, we have already secured our first export sale to Europe.

With regard to Brazil, we continue to evaluate several opportunities that would establish our presence in integrated poultry production in 2007.

With that, I'll turn it back to Dick.

Thanks, Greg.

Now I would like to give you just a little bit more color around some of our segment performance during Q1.

Let's start with our Chicken segment, which delivered operating margins of 3.7%, a substantial improvement over the previous three quarters.

We put in place our stated production cuts, and those cuts have had an impact on reducing the excess supplies of poultry flooding the market in 2006.

And in our first quarter, we saw a counter-seasonal increase in commodity chicken pricing.

Boneless skinless breast meat pricing increased from a low of $1.06 in the month of October and the first half of November up to the current level of $1.41 a pound.

It is much improved over what we experienced last year, and an indicator of our production cuts are working.

We continue to make good progress in our plan efficiencies and in the production side of our business, as we focus on activities such as improving feed conversion and yields.

But increasingly, operational efficiencies alone will not offset rise in grain costs.

According to the latest USDA report, the stocks-to-use ratio for corn is at an all-time low, as the continued demand for corn used in ethanol production has increased the usage of corn.

Quite simply, this is an issue that's not going to go away anytime soon.

We need to decide as a country what the proper balance is in using corn for food or corn for fuel.

And by food, I mean food for humans, as well as food for the animals that provide protein for humans.

Because of the way grain input costs flow through our inventory, we didn't experience the full effect of the run-up in grain costs in our first quarter, though we did realize higher corn prices in some of our more commodity-based items.

The spike in corn prices will increasingly impact cost of goods for the balance of our fiscal year.

As we indicated in our Q4 call, ultimately these increases will be passed along in the form of increased pricing.

We have implemented price increases in both our Food Service and Consumer Products channels.

Our major customers understand our need to increase pricing.

Neither the retailer nor the restaurant operator nor the protein producer can absorb these higher grain costs.

They will be passed along to the consumer, who will pay higher prices for protein and other grain-dependent products.

I need to remind everyone the use of DDGs does not provide a long-term solution, because the practical applications are limited, especially in chicken.

DDGs can be used primarily as a protein substitute, but are in no way a one-for-one substitute for corn.

Let's talk a little bit about beef.

In November, we told you about the work we're doing in our fresh meats group to improve sales revenue and production efficiencies.

This group has done an excellent job of rationalizing SKUs and improving our approach to pricing.

They also have improved line productivity and yields, while controlling costs.

We had remarkable progress in our Beef segment, and virtually all the improvements has been driven by our own internal efforts.

Tactical decisions are paying off with lower operating costs and increased capacity utilization.

Live cattle availability has been in pretty good balance with the demand for beef.

The increases in cattle supplies allowed us to run our beef plants at an improved utilization rate during the quarter.

In 2006, we spent much of the year in the mid to high 70s.

I'm pleased to report we averaged 82% in the first quarter of fiscal '07.

Looking at near-term cattle supplies, we believe there will be ample supplies to meet consumer demand.

We will continue to focus on maximizing revenue stream, along with giving careful attention to our operational costs in our plants, to maintain the momentum we've captured in our Beef segment.

Our Pork segment delivered a 4.7% operating margin, which is on the high end of normalized earnings.

As Greg mentioned a few minutes ago, we continue to enjoy good export demand for Pork, which has contributed to our success.

We made progress in better aligning our procurement and selling activities, as well as improving yields in our processing plants.

Lower operating costs, combined with higher volumes, allowed us to improve our operating efficiency.

We also had good progress in Tyson-branded case-ready pork.

Sales growth has been excellent, and we finished the second week of January with an all-time sales volume record.

This record volume was driven by growth with new and existing customers, plus new product initiatives and great execution from our production and scheduling teams.

Good availability of live hogs and good demand for pork allowed us to operate our pork plants during the first quarter with capacity utilization in the mid to upper 80s, which is right where we need to be.

Hog supplies should expand at the rate of 1% to 1.5% for the balance of this fiscal year.

There are questions about higher grain prices will affect hog producers and processors.

I believe the biggest impact will be on producers, who are directly exposed to the grain input.

Pork processors will not feel the direct cost of higher grains as immediately as hog producers.

The live hog market will still drive hog prices, and currently the supply of live hogs is ample versus the demand.

However, like other proteins, any longer-term affect of higher hog feeding costs will likely result in higher live prices, which will lead to higher pork prices passed on to consumers.

Let's talk for a second about Prepared Foods.

Our efforts in SKU rationalization, product mix improvements, and the utilization of our internal supply of raw materials, as well as lower input costs, have helped the Prepared Food segment deliver their results within normalized margin range.

We continue to build on our success in the pizza toppings business.

Sales for Q1 exceeded our estimates.

We also continue to gain traction in the fully-cooked bacon business.

Last week, Tyson dinner meats was awarded the Chef's Best Taste Award, besting all other brands in the refrigerated dinner meats category.

In closing, I want to say how proud I am of our team members who have worked so diligently over the last six months.

Their hard work, focus on cost management, innovation and efforts to maximize revenue have returned Tyson to profitability.

Of course, we still have three quarters left in the year and a lot of work to do in all areas of our business, but -- our progress thus far has been excellent.

I believe we will continue on this trajectory for the remainder of the fiscal year.

Despite the normal seasonal challenges we typically face in Q2, we fully expect our second quarter earnings to be positive, and we feel very good about delivering fiscal year results with our previously-announced guidance of $0.50 to $0.80 per share.

To all of our stakeholders, I want to thank you for supporting us through 2006.

The tough times have made us stronger, and you're seeing the results of that now.

Thanks for joining us on the call this morning, and we will now take your questions.

Operator?

Operator?

[OPERATOR INSTRUCTIONS] Our first question comes from Tim Ramey from D.A. Davidson.

You may ask your question.

Good morning.

Congratulations on a great recovery there.

The average pricing change down 2.7% was still a little less than I might have hoped for, and I understand we were coming off some pretty decent prices a year ago.

But in light of some of the commentary that you've made on pricing courage and going to the retailers and telling them your story about input costs, how should we think about that number and what might we see in terms of your year-over-year changes in the coming quarters?

Tim, good morning.

I would say that we -- what you have to remember is Q1 of last year we had very, very high leg quarter prices.

And what we have this year is lower leg quarter prices, which more than, basically, offset the increase in breast meat, and most of that increase in breast meat didn't occur until very late in the quarter and into January.

So it's the effect of the lag on breast meat going up in the quarter and the much higher leg quarter prices from Q1 of '06.

And on the commodity hedging gain, did you have that number in your pocket when you were in New York in November, and how do you feel about -- we presumably should just assume no gains or losses and we'll be surprised when it happens?

I think, one thing is that you don't -- you shouldn't look as that grain as completely incremental.

In fact, much of our grain, actually, is mark-to-market treatment, but we do have an underlying risk.

It's just that the way the accounting flushes out, it's pulled out as a separate mark-to-market gain.

But to some extent this moves at the volatility of grain, but we have, for a large part, an offset going the other way.

Great.

Nice job, guys.

Thanks, Tim.

Our next question is from Diane Geissler from Merrill Lynch.

You may ask your question.

Thank you, good morning.

Congratulations.

Thank you, Diane.

Can I just ask, when you originally gave the guidance range in November and you came to New York, did this -- is this kind of in-line with the quarter you were looking for at the time, or is this a little bit better than what you thought?

Well, if you recall, we did say that we felt that minimally we'd have $100 million of EBIT.

You can see we did a little bit better than that.

But I really believe that was more so around the performance -- like I said, from an operational perspective, I really think that we continued to improve as the quarter went on.

Honestly, I'd say maybe it was a little bit better than what we would have thought it was going to be in mid-November.

Well, just a natural question that stems from that is, if the quarter is a little bit better, why not take up your estimate range for the year?

I know grain has obviously accelerated, but we've also seen some pretty good pricing if you're talking primarily about the poultry area.

But is it just the overshadow of grain that prevents you from making an adjustment to your annual number, or is there something more we should be looking at?

Diane, I would say, it really will be -- I think the volatility in grains is one thing.

The price increases that we've put in place do take some time to take affect, and I think you still have -- as Wade and I both said, second quarter sometimes does have some seasonal issues, especially both from the demand and the weather perspective still that you face in Q2.

So -- and we only have one quarter.

There's still three quarters left to go.

We thought about it, but said that the most prudent thing to do was leave the guidance where it was.

Right, I hear you on that.

I guess the other question I had, then, was just maybe on consolidation.

Obviously we've seen PPC closed on [gold tips], now the Swift assets in play, is there any piece of that that -- most of your discussion about acquisitions has really been more internationally focused.

Is there any area on the domestic side that you think you would like to expand or would there be any interest there?

I would say, Diane, that there's always an interest, and we will look at whatever assets may come up for sale.

And I think I'm just going to stop at that point.

Okay, I appreciate that.

And then I guess finally, you had kind of mentioned in your prepared commentary the cost savings were online to come in to the $200 million mark or maybe a little bit more.

Presumably, you have some levers to pull here if grain continues even from these levels to get you where you need to be.

Maybe just a little commentary on what's going on with the cost program and is it energy that's a little bit better?

What else would be in that basket that we should think about in terms of things that you could do in order to offset any further acceleration in grain?

Well, I guess we would say we're not going to cost save our way to glory.

I think we did a lot in the cost savings to really get our structure right and right to ship, but at the end of day to the extent grains continue to go up, we will need to pass it through in pricing, and that is what we're doing.

Energy is a little bit better, but we're still not anywhere near the levels we were a couple years ago, so that's provided some seasonal offset, in particular with some helps in natural gas in the winter here.

The key thing is going to be pushing it through in pricing ultimately, and there are always some cost levers.

But I think that rather than to move from here with big one-time cost savings events we're just trying to create the culture of discipline and the culture of focus every day on spend, while we drive innovation, as well.

Would a price increase take the form of a list price increase in addition to what you did in the fall, or would it be more from let's cut production again and see what happens in the commodity market?

No, we don't -- it would be list price increases.

We believe the production cuts that we took last July and then again in October, which, as I've said, are still in effect.

And we've done our share here and we believe that where we are is where we need to be from a production standpoint, and that's kind of what we intend to do.

Okay.

Thank you very much.

Thanks, Diane.

Our next question from Ann Gurkin of Davenport.

Good morning.

Good morning.

Just wanted to delve a little more into the pricing you talked about in terms of poultry.

Can you give us an average price increase?

It varied -- it actually varied by segment, but roughly on a composite average, between 7% and 8%.

And are you getting -- can you comment at all kind of consumer or customer push back, or how the negotiations are going?

And then what kind of -- are you going to take this pricing over to the pork side of the business?

I would tell you that our customers understand this time.

They don't always understand, but this time I think it was apparent that, with the rises in grain being close to 100% to a year ago, they recognized that we have to do something there.

So I think our customers, whether that be on the Food Service or the Consumer products side, have a better understanding and a better appreciation for the situation.

On the pork side, basically we have not seen hog prices in general move very much.

And as I said, that's probably because there is a pretty good supply of hogs right now pretty well equal to demand.

So we haven't seen a run-up in hog prices yet, and we're going to -- we'll do that when it's necessary, but thus far, that hasn't been the case.

Switching to beef, can you talk about what you forecast in terms of beef production in the U.S.?

Supply and demand outlook?

I still believe that, from a cattle supply standpoint for the balance of our fiscal year, we'll see a 1% to a 1.5% increase.

The latest cattle on feed report from last Friday did show really marketings at an all-time low for the month of December.

We still have large numbers of front-end cattle meaning cattle that are ready for processing.

What I found quite unusual is if you look at the weights of cattle, cattle weights haven't declined, which to me would say that even though grains are costing a lot more, the orderly marketings of cattle haven't really kept pace with supply.

I think we're going to see a fair number of cattle still available here for us over the next weeks and months.

Okay, great.

Thank you.

Our next question, Eric Katzman of Deutsche Bank.

Hi, good morning, everybody.

Morning, Eric.

I have a question that goes back, Dick and Wade, to the normalized earnings comment that was made at the meetings here in New York, where I think, excluding the benefits of your bio-diesel effort, you had said it would be around $1.50.

And I'm wondering how that -- because that was made, I guess, before feed costs really moved up as dramatically as they did.

So maybe you could walk through how that number jives with the run-up in feed cost versus the pricing that you need.

I guess I would say it this way, that $1.50 that was -- if you took the normalized for all four of our business segments -- Prepared, Pork, Beef, Poultry -- that $1.50 at next year's debt level is the mathematics of the thing.

But to the second part of your question, the run-up in grains we believe over time is going to be compensated for by incremental pricing.

So I don't think that normalized changes either way de facto just as a result of the grain per se.

Right, so you're basically assuming that the industry returns to a normalized margin even with the higher feed costs?

Yes.

Eventually, yes.

And I guess, Dick, to what extent -- I guess the last time we saw such a run-up in feed cost was during the drought in '96, and I'm kind of wondering did -- at the end of the day, did the rising feed costs, you think, help the bigger players in the industry and allow you to get to that "normalized margin?"

Or was it really more of a challenge in getting back there?

To the extent that the higher feed cost squeezes the marginal producer to behave more rationally or even end up forcing them out of the business.

I'm going to let Greg comment on that, because he lived through 1996 in the poultry business, I didn't.

Okay.

Well, Eric, remember, that was really a result of poor crop production.

You saw a very rapid escalation in price and then you came back around to plant again and, really, the industry didn't get -- wasn't able, really, to see prices push up in that short cycle that occurred there, and it was very punitive to the chicken industry.

Our belief is here you have probably a step change in grain prices that has a little longer shelf life, so to speak, and that we will see prices sequentially move up and return to those normalized earnings spreads.

And what kind of -- let's assume that corn remains at $4 a bushel and soybean meal remains where it is today, what kind of average pricing do you think, given the cost savings, do you need to achieve to get back to a normalized margin level?

Is that a 5% increase in pricing or a 10%?

I mean --

Eric, that depends a little bit on what you're talking about.

If you're talking about commodity prices, yes, you're probably in that five -- five to six percentage point range.

On the value-added side, you maybe don't have to go up quite so much because your grains then are not as great as a percent of your revenue stream.

Okay, that's helpful.

And then last question, Greg, to what extent do you think that the U.S. policy of favoring ethanol is going to force more production outside of the U.S. or give competitors in Brazil and other places an advantage versus the U.S. farmer -- or protein farmer?

And when is there a political backlash when that starts getting realized that the rancher, or whatever, is going to be under stress?

Let's let Wade comment on that.

I think it will be interesting to see how the whole grain thing unfolds in that light, but obviously, I think grains are going to become even more of a global dollarized or whatever currency-ized thing -- input that you want to talk about.

So I don't think that just rising grains in the U.S. is only going to be a U.S. phenomenon.

I think this is going to have ripple affects throughout the world, and that will reset costing throughout the world accordingly, as well.

Okay, thank you.

Thanks, Eric.

Our next question from Jonathan Feeney from Wachovia Securities.

Good morning, guys.

Congratulations.

Morning.

Dick, I wanted to dig in a little bit more about beef.

Can you give us a sense -- just doing the math, it looks like beef -- for Q1, this quarter's beef sales were about 2.7% off Q1 2004, which I guess was a peak year before -- you know, pre-Mad Cow.

Can you give me a sense what volumes are as a percent of that P-Q1 level?

Are you talking about cattle volumes for --

Just total beef pounds produced in the Tyson system.

Would it be like down five or something that?

Compared to what, Jonathan?

Compared to your best quarter ever as far as pounds produced, before Mad Cow maybe changed some export opportunities a little bit?

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

I will make sure that Ruth Ann gets you that number, but -- because I can't relate just off the top of my head back to 2004 or three or two, whenever that best quarter would have been.

But certainly I would say that, while weights are probably at an all-time high in terms of weights of cattle, in this year they would have been a lot higher, probably, than what they were two and three and four years ago.

But my guess is that we, as an industry and as a Company, probably didn't run as much volume.

I'm just not sure how that would work out from a plus and a minus standpoint, but we'll get you that information.

Okay, let me maybe ask you another way.

You talked about 82% capacity utilization in Q1.

What I'm trying to figure out is where that leverage kick point is, where we start getting back to historical levels of profitability?

Is it mid-80s, high 80s, and how can I compare, maybe going back and looking at good quarters you guys have put up in the past in beef, what kind of cap utilization you were doing then?

Typically when you get to the mid 80s, mid -- you know, 85, 86, you're in a pretty good range.

Now remember, also, we still don't have anywhere near the exports that we did, so it's a combination of several things.

Capacity utilization is important.

Supplies of cattle are important.

But as I've said, to get to the mid and upper range of our normalized earnings on beef, it sure would be helpful if we had a better export market to view, especially to Japan and to South Korea.

Right.

And the issue is that Japan exports are a heck of a lot more profitable than maybe some other exports, right?

And Korea, again, because of different products, different values for different products over there compared to values for those same products in the U.S.

So it's a combination of both volume being exported and the mix of product and the realization of price on the different mix of products that's very important to that overall -- how you look at that on an overall basis.

Just one other question, Dick, if you wouldn't mind.

When you look at -- if you adjust for -- I know it's just the accounting and it's hard to call it out exactly, but if you adjust for, say, the $36 million gain that you had in hedging yourself wisely on the chicken side, these would be worse chicken margins than we saw in the bottom of the last cycle, after the Russian chick market closing in early 2003.

And I guess, at that time we saw sort of broiler and egg sets down 5%, 6%, and I know there's some supply coming out of the industry, but does it surprise you at all that given -- first of all, you guys have a better value-added mix than most other players.

And second of all, I'm going to go ahead and guess you guys have hedged more smartly than some other players.

Does it surprise you that some of these more smaller, commodity-oriented folks that are more sensitive to spot margins aren't cutting production more aggressively?

I guess my answer to that would be we can't judge how they want to run their business, but I am a little surprised that we haven't seen a little bit lower production cuts.

Now I will say that I just looked at a report this morning and for the month of January -- thus far in the month of January, chicken production on a year-to-date basis is down 5.7% in slaughter and 4.5% in pounds, so I would tell you that production cuts are underway.

Okay.

All right, thanks very much.

Thank you.

Our next question from Oliver Wood with Stifel Nicholas.

Your line is open.

Great.

Thanks a lot, nice quarter.

Morning, Oliver.

Good morning.

I first wanted to ask about the pork business and specifically exports.

It seems like volume has been growing in the 20% to 30% range.

At some point, do we hit a ceiling there, or can those growth levels continue through calendar '07?

Well, it may be difficult to continue to put those kind of high double-digit increases, but we fully expect to have continuing strong pork exports.

Okay.

And from a hog supply standpoint, have you seen any sort of initial signs of liquidation at this point, or are they just sort of not reacting to the grain markets at this point?

I would say thus far we have seen very little reaction, up until this point.

Okay.

Then regarding the chicken business, it seems like live weights are beginning to level off a little bit.

Is that a trend that you expect to continue in '07, with maybe production growth starting to look a little bit more like growth of egg set?

I would say that, yes, that historically what's been going on for the last number of years is year over year we continue to have heavier chickens on average and I think that this year might be at least a lesser growth or no growth probably in terms of average live weight.

And is that more a matter of people feeding the chickens less, or is it a mix shift away from big bird?

I think it's more, really, the diminishing returns on feeding animals.

Okay.

And I think that's what Dick alluded to, could be the same phenomenon you may see in cattle and hog weights over time, as well.

Okay.

Final question and then I'll pass it on.

Regarding the Chicken segment in the second quarter, given the timing of the run-up in feed costs, can we look for profitability out of that segment in the second quarter?

At this point, I'm going to say yes.

All right, great.

Thank you very much.

Our next question from Pablo Zuanic from JPMorgan.

Good morning, everyone.

Good morning, Pablo.

Dick, if I may, I just want to go back to a couple of questions that were asked before, but maybe I'm stating the obvious.

You said that in terms of price increases, you would realize 7% to 8% and at the same time, you said that you needed 5% to 7% increase to offset corn.

So pretty much now by end of January you fully recovered corn at $4.

Is that a fair characterization?

No, I don't think that is a fair characterization.

I think what we have seen is price increases from a list price standpoint going up seven to eight percentage points, but that isn't on our whole business of mix.

So you have -- you still have some products that are market based, so you can't make that correlation on a 100% correlation basis.

Right.

As you know, we have not -- $4 corn, we have not offset $4 corn at this point.

Okay.

So just in terms of trying to model your revenue per pound, how should we think of it, the mix, then, of your business?

How much is list, how much is fresh meats, commodity, how much is, say, Food Service contracts?

How should we think of that, roughly?

We have not given those numbers.

We just haven't given any kind of detail around that.

We have talked at times about various and sundry percentages, but we haven't given any clear detail around all those different segments and all those different levels of activity.

Okay.

If I may, just to follow-up here, if I think back in November in the last conference that you guys had, you talked about a lot of push back from your customers in terms of increasing prices.

It sounds like right now -- you sound a little more positive, and in a way, that's a bit contradictory from what I'm hearing from the restaurants.

Listening to their conference calls, a lot of them have made the argument that they won't feel the increase until late calendar '07.

Some of them have said even early '08.

Have things changed?

Is there really -- in terms of sentiment, would you say from your perspective that there is a much better potential for pass-through in the very near term, in terms of the Food Service industry?

I would believe the answer to that is yes.

Now, there are certain customers and certain restaurant operators who might have contracted well in advance and maybe they won't feel some of those effects until late '07 or into '08, and there certainly probably are some of them.

But in general, I would say that our customers have been understanding is probably the best way to say that.

All right.

Just one last one.

In terms of the SG&A cuts you talk about making short-term sacrifices, how sustainable are those SG&A cuts?

Does it mean cutting marketing support for a while and then having to ramp up a year from now?

Just give us a sense of how sustainable are those $200 million that you've talked about, and remind us of all the sources of those $200 million?

Not so much by division, but by the type of costs that you're actually cutting.

We believe they're totally sustainable, and that's why we've said that they're ongoing cuts.

We don't believe that we've hit bone.

In terms of the overall profile, about 50% of that is employee cost, consulting cost and the like.

Maybe 30% of the total is, I would say, eliminating inefficient sales and marketing spend, but not eliminating anything that we believe is efficient spend.

Then the balance is really just a sundry list of all others.

But again, we believe it's totally sustainable and that's the break down.

Okay, thank you very much.

Our next question from Kenneth Zaslow with BMO Capital Markets.

Good morning, everyone.

Good morning.

A couple quick questions.

Looking at the post plays, I know egg sets and chicks play seem to have been coming down, but pullets plays seem to still be leveling off a little bit.

How permanent -- given that -- how permanent do you think the chicken cuts are and is there any risk that we'll start to see production increases actually after Mother's Day?

I think that will largely depend -- if you're a commodity guy, it will largely depend upon where the commodity markets are at the time.

I think it really depends upon how much do breast meats move up?

How much do leg quarters move up, tenders, wings?

It really depends upon that as to whether or not the commodity chicken processor is going to add back.

Are you worried or concerned that it's really not the pullets plays that are being cut, but really the heavy layers that are being cut?

Or maybe that's not even the case, but that's what I'm seeing.

You've got to look at -- this is Greg.

Remember, you have to look at pullets placements over a cycle of time, not any one or two months.

Pullet placements have remained largely flat for the last couple of years and there's a little indication of an uptick in the last couple of months.

I believe the industry -- while any of us that would want fewer chickens would want for smaller numbers, but the fact of the matter is it's been reasonably well managed, seemingly, based on the public data and we don't see any dramatic change there.

You are seeing the decreases that Dick alluded to and economics ought to drive how that goes forward.

And what breast price and leg prices would offset the $4 corn price?

I think you alluded to the idea, but I just kind of -- if we can get that, that'd be kind of good.

It really depends upon -- you can't just look at breast meat and leg quarters, you've got to look at tenders and wings and all those things.

But if you had a leg quarter value that was in the low to mid 30s, you're still going to need breast meat that's going to get close to the $2 level.

High $1.80 to $2 is what it's going to take, or very close to that.

So a lot of the commodity guys are going to get hurt a lot more than you guys?

That's the bottom line.

Yes, that's the math -- as Dick said earlier, the more commodity products you have now the more pricing you would need -- just to the math, the more value added you are, the less pricing you need.

So, de facto, the more -- again, the more the commodity item is, the higher price increase you'll have to have to offset it.

Moving to cattle -- and I know you've said there's enough cattle out there for the supply -- the severe weather in the cattle feeding areas, is that going to create at all lower cattle supply this year, year over year?

I know historically you've said 1%, 1.5% increase, is that the factor that actually could create lower cattle, and does that really matter to you guys if you implement the cost savings programs?

Remember, now, that the areas where -- that had the really severe weather were primarily a small section of Kansas and southeastern Colorado.

And while, yes, there are cattle and that was devastating for that region, that's a very small portion of the overall cattle feeding area.

So I don't believe -- while what that did was slow down the marketings for that area, overall I don't think we lost that many cattle due to the severe weather.

So, no, I don't think that the severe weather in that part of the region of the country will affect the overall supply in any material way.

Do you still believe there's going to be 1 to 1.5% increase in cattle supply this year?

I absolutely do.

Great.

Thank you very much.

Thank you.

Our next question from David Nelson with Credit Suisse.

Good morning.

Morning, David.

You've been talking about higher feed costs, but energy ought to be a tailwind here.

How much might lower natural gas and crude oil prices help?

Well, they are helping.

I don't know as I can give you an exact number, but it definitely had a positive affect on Q1.

Now, certainly, it didn't have as much of an affect as grains did, but our overall utility costs and our conservation programs that we put in place were part of some of our lower operating costs in all of our segments.

Okay.

If I could go back to beef for a second -- we're talking about cattle supplies in a number of ways -- but I guess give me your opinion, I guess I would think cattle weights might decline as we move through the year given corn prices.

Would you expect that?

And if so, if carcass weights are 20, 30 pounds per head lower, what's that do to your margins and how might you manage through and around that?

Well, what's a little bit surprising to me is we have not seen carcass weights drop yet.

Now I do believe that you're exactly right, that over the course of the year we will see carcass weights drop -- I don't know whether they'll drop much more than 15 or 20 pounds.

Maybe they'll drop a little bit more than that.

So, I do think that phenomenon will occur with the higher level of grain cost.

In terms of -- we sell pounds, but we process head, so as long as our capacity utilization from a head standpoint stays up, yes, you have some effect on a per pound absorption of overhead, but the key thing is to keep the number of head processed up.

And that's what really drives your capacity utilization and is the primary driver for operating cost control.

Okay.

Great.

Thank you very much.

Thanks, David.

Our next question from John McMillan, Prudential Equity Group.

Good morning, everybody.

Morning, John.

Wade, the tax rate was a little lower than we've seen in the past.

Is that sustainable or is that part of your cost-cutting savings plan?

No, no.

We always have a -- obviously have a few adjustments in tax, but we anticipate the year to be 36%, so you, again, just see slight changes by quarter due to some of the internals.

But I think over time, 36% is probably the right number to use.

Then just a follow-up on Diane's questions earlier, Dick, on -- Swift came out with an announcement last week and you might be reluctant to talk about your interest in Swift, but what do you think it means for Tyson as a Company?

Just what color can you give us just on that announcement, what it means to Tyson, if anything?

I think the if anything is probably the right answer at this point, John.

It is hard for us to say anything at this point what effect that may or may not have on us.

Because it appears like Smithfield is still saying that they're going to build this plant in Oklahoma, which I don't know if it makes sense, but are you still hearing that?

As I recall from the last published statement was that, yes, they anticipated they were going to build a plant.

That's the last thing I've seen published, John.

It's nice to have a conference call where people aren't asking you why you aren't vertically integrated.

But it does seem like you're singing a little different tune than you did in November.

Don't take that negatively.

But you're now calling corn a major issue for Tyson, and it just seemed to me in November you were kind of downplaying it, that it was a simple pass-on.

Is there -- I know a lot's happened since November -- corn's gone up another couple ratchets -- but am I reading you wrong?

No, I really think the difference is -- and I don't remember the exact corn price on November -- whatever day that was -- but corn has gone up significantly since that time.

The real two big run-ups in corn occurred in December and then again in January, when we got the final crop report on January the 12th.

So in November, the corn was not as big of an issue as what it is today.

There's no doubt about that.

I probably would have been one who was not anticipating $4 corn on early November.

Now it's there and now we've got to live with it and now we've got to deal with it, so it is a greater issue in my mind than what it was in early November.

And ironically, it does kind of help your earnings with these mark-to-market hedges.

Any chicken company's going to have some hedges, so to the extent you had to mark these to market, that got you $0.06 or $0.07.

Is that the reason first quarter earnings kind of came in above where you were expecting in November?

I don't mean to downplay it, it's nice to be in the black one way or the other.

I'm just trying to gauge how much to applaud these numbers.

No, I think as the largest buyer of grains for animals, we had extraordinary underlying exposure, so again, the mark-to-market piece is going to have -- there's going to be many offsets inherent in the cost of goods.

I don't think you should take that as the reason for these numbers.

And, again, we cannot -- it wouldn't be feasible to hedge all of our exposures away.

So, really, all it's doing is buying us a little bit of time as we move toward the future.

Great.

Thanks for all that.

John, I would add to that that I really believe that, as an example, our pork segment came in probably a little bit better.

Even though I thought it would be good, it came in a little bit better than what I thought and I was glad to see that Prepared Foods finally got into at least the range of normalized earnings.

Well, I keep waiting for normal.

Thanks a lot.

Thanks, John.

Our last question of the day comes from Christine McCracken, Cleveland Research.

Good morning.

Good morning, Christine.

Just to follow-up on a few of the earlier questions.

First, when you were looking at corn this fall -- and I don't think anyone thought it would get to $4 plus quite so quickly -- how did you anticipate, or how did you evaluate your options around locking in some of that corn?

And then going forward, looking at what's been talked about for us in all capacity, regardless of what actually gets built, how do you evaluate whether or not you need to be more proactive in securing your corn needs, given some of the regional demands that are being put on corn?

I would just say -- as far as proactive, I would say we're always proactive.

Our CTR risk management group, that's really the bulk of what they do, is focus on procuring physical corn.

So, just doing the math, it seems like you still have pretty significant exposure, though, on corn.

I'm just wondering -- assuming there's any kind of crop shortfall this summer, what's your exposure?

Not specifically to the penny, but how would you manage through a period of crop disaster?

We always had exposure, and not hedging is taking a risk and hedging is taking a risk, just depending how you look it.

While we don't talk a lot about our hedging policies, we obviously look at where do we have fixed-cost contracts and how do we think about those different versus variable?

And how do we think about what we have in inventory and how do we think about flow through.

So, again, we don't articulate our specific strategy, but it's really very, very different by different part of business, and we have to look at it that way accordingly.

Christine, is your concern that if ethanol production uses a lot more corn and there's a bad crop, is it an availability question?

To some extent.

I guess I'm trying to understand with the changes in the corn market, how have you changed or how have you adjusted your risk management practices?

Because it seems to me that the corn availability is going to be much tighter going forward, so it -- and maybe very volatile, and it's maybe changed the nature of your feed cost exposure.

So I'm just wondering does that force you, then, to go back and reevaluate your policies?

I think what it does, it makes us be a lot more cognizant of it.

And if you go back for the last five years -- or four years prior to this year, you really haven't had any types of significant changes in corn, so this is something that does require us to be much more conscious of and much more forward-thinking and be a lot more attuned to other uses of corn.

What's going to happen from an export standpoint.

So I think you're right.

I think it does require us to be a lot more cognizant of what's going on as it relates to corn and to soybeans -- soybean meal and shifts in acres of what could happen this year.

And we are spending a lot more time and energy around grains, probably, than what we have for the last five years.

Fair enough.

And then, just doing the math on chicken margins today, looking at $4 corn and the big improvement we're seeing in chicken prices, it seems like the industry is still profitable at current levels, even with the $4 corn.

So I'm wondering, now we're in a period of maybe weaker seasonal demand for chicken.

Why wouldn't the industry increase production heading into the high-demand season?

Christine, I would answer that by saying I don't think the typical commodity chicken processor would be very happy with his business right now.

Because if you have $4 corn flowing through, you've got to be close to $2 breast meat, and breast meat is nowhere near $2.

All right, there must be some difference between our calculations.

But just on a composite basis -- and again everybody's business would be different -- but it does seem like chicken processors just on a commodity basis would be fairly profitable at current levels?

I don't think so.

Just -- then looking at leg quarter prices relative to historic prices, they've have been, obviously, a lot stronger than maybe -- at least in years past.

And last year, we got into a bit of -- some trouble tied to the big run-up in leg quarter prices and then the closure of certain -- or the short-term closure of certain export markets.

Do you expect any trouble, as these leg quarter prices stay at this new level, or do you think this is the new floor for leg quarter prices going forward?

Well, we've actually had quite a bit of swing in just the last two quarters.

Leg quarters are trading now, let's say, a range of the early to mid 30s, something of that nature, which, over time, has been a fairly average price.

But barring some renewed consumer concern worldwide, you've probably got a reasonable chance of sustaining that.

Is that what your question is?

Yes.

I guess what I'm wondering -- and I've been following the industry for quite a while and I can remember back several years ago it was kind of that mid-$0.20 range for leg quarters for some period of time.

It seems like -- at least in the last few years, it's been quite a bit stronger than that and, obviously, taking out the highs and lows, I'm just wondering, is the mid-$0.30 range a better level for leg quarters going forward relative to the $0.20 average, mid $0.20s that we saw historically?

I'm not completely confident of that.

And that's right, the longer term numbers in the $0.27 or so area -- and we seem to of maybe had a chance to move to a $0.30 area -- but we will have to see.

We're certainly there now.

But I think it is safe to say that higher grain costs --

Yes.

-- are going to impact proteins all over the world and I think to some extent that could change the supply and pricing dynamics, as well.

So in term --

I would expect that -- just like breast meat needs to go to a new level, I would say that, if grains are going to go to a new level, then leg quarters need to go to a new level within reason, as well.

It seems like leg quarters would still be very competitive even at those levels.

I'm wondering, though, globally if you see any demand shifts relative to the proteins, assumingly move to a new level, especially in some of the developing economies where we've developed maybe some new markets for exports?

Leg quarters at -- let's just hypothetically use $0.35 for the purposes of this answer -- that remains still the best protein value in the world.

Do you see any trading down, even domestically, assuming pork and beef all move to new levels, although beef has an advantage in using distillers?

Can you talk about the relative dynamics between the three proteins, assuming we move to a new level?

Is there much income elasticity tied to that?

We have for the last couple of years had very high beef prices, domestically, just compared to pork and poultry have been considerably higher already.

And as I said earlier, I think if grain prices are going to stay where they are, pork prices eventually are going to have to move higher as well, as will the chicken prices.

I think from a relative standpoint, you still have chicken and pork probably a better value -- not a better value -- maybe a lower absolute price than beef, and I'm not sure that will change.

All right.

Just one last question, then, on Lakeside.

You guys have been getting a few workers in there.

That had been a tough area for you.

If you could just give us an update on the outlook for that facility or how your Canadian operations are shaping up?

It is getting better, Christine.

We do have some of our, if you will, guest workers into Canada on site.

We're probably six weeks or so behind where we expected to be in terms of the number of people that we would be adding.

Our efficiencies are starting to get better, but they are still lagging where we want them to be, but it is improving.

Great, good to hear.

Thanks a lot.

Thank you.

One final question from Farha Aslam from Stephens.

Great.

Thanks for getting me in.

First of all, congratulations, Dick.

Thank you.

And thank you for providing the details in terms of pricing and volume in your press release.

That's really helpful to us.

What really surprised me about your results this quarter was pork, and the fact that you haven't mentioned [trias] volume coming online and that depressing industry volumes overall.

Could you talk about your pork business in a little bit more detail and share with us what allowed it to be so successful in the quarter?

I think it's a couple of things.

One, we were able to run from a capacity utilization in that 85-plus range.

I think secondly, I'll give a lot of credit to our fresh meats team in terms of what they've been able to do to take non-value-added costs out of our pork plants and our pork facilities.

And then I would also say that our very strong export volumes and good results by our case-ready pork, if you put all those three together -- and good availability of hogs led us to that 4.7 operating margin.

And would you see better than normal -- or more normalized margins for the pork division going forward?

So these don't sound like a quarter-specific event.

It really looks like it's more sustainable than that.

I think it's a lot like Dick mentioned about the progress, but also O&D is typically a pretty strong quarter for pork, so I would not say one quarter should the summer make yet.

Okay.

My final question is your $0.55 -- or $0.50 to $0.80 guidance, does that include $4 corn at this point today?

That includes the grain forward curve as it is today.

Okay.

That's my last question.

Thank you very much.

Thanks, Farha.

I'd like to turn the call back over to Ruth Ann Wisener for closing comments.

That's all.

We appreciate your interest and we'll be ending the call at this time.

Thank you.

Today's conference has concluded.

All parties may disconnect.