Tyson Foods, Inc. Class A TSN
Q2 2011 Earnings Call Transcript
Transcript Call Date 05/09/2011

Operator: Good morning, and thank you for standing by. At this time, all lines have been placed on a listen-only mode until we open for questions and answers. Also today's conference is being recorded. If anyone has any objections, please disconnect at this time.

I would now like to turn the call over to Ruth Ann Wisener. Ma'am, you may begin.

Ruth Ann Wisener - VP, IR and Assistant Secretary: Good morning, and thank you for joining us today for Tyson Foods Conference Call for the second quarter of our 2011 fiscal year.

I need to remind you that some of the things we'll talk about today will include forward-looking statements. Those statements are based on our view of the world as we know it now, which could change. I encourage you to look at today's press release for a discussion of the risks that can affect our business.

On today's call is Donnie Smith, President and Chief Executive Officer; Jim Lochner, Chief Operating Officer; and Dennis Leatherby, Chief Financial Officer.

To ensure we get to as many of your questions as possible, please limit yourself to only one question and then get back in the queue for additional questions.

I'll now turn the call over to Donnie Smith.

Donnie Smith - President and CEO: Thanks, Ruth Ann. Good morning, everyone, and thanks for joining us for our second quarter call. In our press release this morning you saw that we reported $0.42 a share, which is the same as we reported in the second quarter last year. Sales were $8 billion, which is a record, and over a $1 billion more than the second quarter of 2010. Our overall operating margin was 3.8%.

As expected (all segments) with the exception of chicken, were in or above their normalized ranges. Chicken (was profitable). We believe it will continue to be profitable in both the third and fourth quarters. Grain hedges were a factor in chicken's profitability, but not the only factor. We continue to work on operational efficiencies which played a big role.

Jim will go into more detail about that and our efforts to increase revenue in chicken in a moment during his comments on our segment performance.

In terms of domestic demand, we usually see some falloff at the beginning of lent, but we didn't see that this year. Now on the other hand, we typically get an uptick after Easter, but demand has been slowed, probably due to the bad weather experienced in much of the country. The slow economic recovery is still a factor as well.

After fairly steady increases, consumer confidence dropped in March. Rising gas and food prices continue to reduce disposable income.

According to Nielsen, consumers are likely to remain conservative and hold on to many of the behaviors they adopted in the early stages of the recession, including eating out less, value conscious shopping, and increased used of coupons. One difference we're seeing is that consumers are now making more frequent smaller retail trips to help manage cash flow. Retail beef and pork prices are very strong, and eventually they should support chicken prices.

Our chicken prices mostly increased to cover these unprecedented grain cost increases. We are seeing more feature activity in chicken this summer in both retail and food service, and chicken is still a more affordable option for people trying to feed their families in tough economic times.

At our November call, we predicted food service sales would be flat to up 1% and volume might be up around 1%. Now based on industry data we study, we predict food service sales to increase slightly from our earlier projection in dollar sales driven primarily by menu price inflation, but volume growth to be flat. The menu mix is shifting towards value and some operators are compensating for higher prices with special deals. So in general, I was cautiously optimistic about a brighter outlook for the food service sector based on earlier unemployment figures, but as gas prices continue to rise, my optimism is waning and I believe we can expect to see an impact on traffic at both QSR and casual dining.

Our international startups are making steady progress. In China and India, we continue to improve our live and processing operations. We're also getting the management teams in place that can drive long-term volume and earnings growth in both those countries. In Brazil, we are upgrading our product mix while focusing on yields and labor cost management. This mix upgrade will allow for more profitable exports as well as growth with major domestic retailers. Our long-standing Mexico business is driving value added growth through new product innovation and a commitment to quality.

Switching gears a bit, I'd like to say a few words about the devastating storms experienced in Alabama less than two weeks ago. Our hearts go out to the victims and they've been in my prayers. Tyson Foods was very fortunate considering the destruction in the area. Two of our plants in Northern Alabama were not damaged, although both lost electricity for a while. Now while some of our growers lost a few houses and other experienced varying levels of damage, in total we lost less than 200,000 birds, which is a small fraction of our Company’s average placements of around 40 million birds a week.

Now looking forward to the rest of the fiscal year, there is concern about crop plantings and what that might do to grain prices. We’re also concerned that if $4 or even $5 gas prices linger, it could have an impact on consumer spending. We’re feeling increased pressures from these market dynamics. It will be challenging, but our business is in good shape and we still think 2011 EPS will be at or above $2 or close to our GAAP number last year.

That concludes my opening remarks. I will now turn it over to Jim for a review of our segment results followed by Dennis with the financial report.

James V. Lochner - COO: Thanks, Donnie. Pork continued to perform extremely well with a 10.5% return on sales, and operating income of $146 million. Although down from the record set last quarter, it is a substantial improvement over the strong second quarter last year. Volume was up nearly 7% with average sales prices up 18% quarter-over-quarter. We do not anticipate a major change in the hog supply, and there should be adequate supplies in the regions our clients our located. Pork segment returns should be above the normalized range in the second half of the year, although we don’t expect results at the level of the first half.

The Beef segment produced 2.8% returns on sales, and an operating income of $94 million. Although down from the previous quarter in Q2 last year, these are still very solid results and within the higher normalized range we set a year ago. Sales volume was down slightly, while average price is up about 20% quarter-over-quarter. We expect a slight decline in fed cattle compared to last year. However, we should add adequate supplies in the regions we operate our plant. Barring any major market disruptions, beef export should remain strong the remainder of the fiscal year contributing to lower domestic supplies and strong pricing. We have been anticipating some domestic demand destruction across the beef complex. However, this was potentially supportive of chicken pricing as (more) customers and consumers look for alternatives to higher-priced beef products.

As expected, the Chicken segment struggled to overcome $82 million in higher grain cost for the quarter, but managed to maintain profitability with an 1.4% return on sales and $37 million in operating income. In the second quarter, we were successful in getting our inventories to near historic lows. Our increased sales reflect higher pricing and sales from inventory but do not indicate an increase in production pounds. Over the past two years, our poultry business units have done an excellent job of improving our operations in taking cost out of the system to be an efficient provider to our customers. However, the opportunities for cost savings are not enough to fully offset escalating fee cost. Current projections for increased corn and soy costs are approaching $0.5 billion year-over-year. We have no choice but to pass along these costs to maintain profitability in the Chicken segment.

Our Prepared Foods segment posted $31 million in operating income and 4% return on sales, which is at the low end of the normalized range. As a reminder, Prepared Foods includes numerous businesses such as bacon, lunch meat, tortillas, pizza crust, pizza toppings, soups and side items. Some of these businesses continued to perform extremely well while others have room for improvement and we are working on those. All, however, are dealing with higher raw material cost, which increased $59 million for the quarter. Many of our sales contracts in Prepared Foods have shorter terms or are formula based and we were able to offset rising costs through pricing.

Tyson is facing challenging markets and rising inputs but as I've said before, it's important to put this in context of global protein supply and demand fundamentals. U.S. per capita protein supplies are forecasted by many to decline slightly in calendar 2011 versus 2010. This would be the fourth year in a row it has declined, which is unprecedented. Export volumes continued to increase for a variety of reasons and imports continued to decline. There is demand for our products, a global economy willing to pay for them, and supply is limited. This means our customers and consumers will continue to see increasing prices in general for protein products.

In closing, I would like to congratulate our business unit managers and their teams. They have taken on these challenging conditions and continue to rise to the occasion focusing on the details, being our customers' go-to supplier, and managing cost. We appreciate their effort and success.

Now we'll go to Denis for the financial report.

Dennis Leatherby - EVP and CFO: Thank you, Jim, and good morning, everyone. As Donnie said earlier, we reported Q2 earnings of $0.42 per share, which is even with the same period one year ago. Return on invested capital for the last 12 months was a solid 24%, a measure we are proud of achieving and are striving to maintain consistently over time.

Capital expenditures were $161 million for the quarter. This amount reflects numerous capital projects that will continue to enhance production and labor efficiencies, improve yields and sales mix. Our effective tax rate for Q2 was 34.9%. As a result of rising input costs from grains, live cattle, and hogs, our operating cash flow for Q2 was negative $117 million. It is important to note, however, that we were able to reduce our inventory volumes to help mitigate these rising costs. In addition we improved our days receivables to further offset rising working capital needs. Receivables and inventory were up nearly $750 million compared to a year ago and were up over $500 million since fiscal year-end. Including cash, net debt was $1.7 billion, down $466 million from a year ago, a remarkable accomplishment considering the cash flow used for working capital purposes just mentioned. Total liquidity was $1.6 billion, including availability under our credit facility and cash. Bond buybacks were just ($30 million) because bond premiums were generally above our repurchase targets.

From a debt rating standpoint, we were pleased to receive upgrades from all three rating agencies; S&P, Moody's, and Fitch. We also achieved our goal of returning to investment grade with S&P and Fitch and are now just one notch below investment grade with Moody's. In addition we amended and extended our credit facility during the quarter. Our new facility is not only lower cost, but also provides us with more operating flexibility. It also includes a collateral release provision that will take effect in August. For this we are grateful for our banking partner support and recognition of our improved financial performance over the past few years.

So here's an updated outlook for fiscal 2011. Revenues are expected to exceed $32 billion driven largely by rising raw material prices, an increase of more than $3 billion from 2010. We expect fiscal 2011 net interest expense to be approximately $230 million, down about $100 million from fiscal 2010. This is also down $15 million from our previous guidance. The refinancing of our revolving credit facility, along with recent ratings upgrades, has resulted in further savings. The effective tax rate should be about 35%.

Our diluted shares for the second quarter were 383 million. This reflects the dilutive effect of options and convertible bonds, which fluctuate depending on our stock price performance. We will continue to reinvest in our business and we still expect CapEx to be around $700 million. Our spending is focused on improving the efficiency and competitiveness of our domestic and foreign operations.

Depreciation and amortization will be approximately $525 million. We will use excess cash to repurchase notes when available at attractive rates. From the standpoint of debt maturities, we do not have any significant debt coming due until fiscal 2014. The balance on our 8.25% Notes due October 2011 was $314 million as of April 2nd. We plan to retire these notes on the last day of the fiscal year with cash on hand, which was nearly $800 million at the end of Q2 or with future operating cash flows.

In closing, I would like to thank our team for continuing to demonstrate financial and operating discipline, while dealing with volatile commodity markets which had a big impact on our costs and working capital. Team, despite these headwinds, you were able to do what you said you would, that in itself is a great accomplishment.

Overall, we have a great financial position with solid debt ratios along with a strong balance sheet and capital structure. This will enable us to continue delivering results in a challenging environment. We believe our current earnings multiple does not reflect what we’ve accomplished and the obstacles we’ve overcome. As we continue to improve operations, consistently deliver strong returns on capital, and generate solid earnings in difficult times, we believe the market should more accurately reflect the valuation worthy of our performance. That concludes our prepared remarks.

Operator, we are ready to begin Q&A.

Transcript Call Date 05/09/2011

Operator: Christina McGlone, Deutsche Bank.

Christina McGlone - Deutsche Bank Securities: Donnie, you had said on the last call that by the end of March your inventory would be on plan, and then you would start your normal production – you will go back to your original production plan, which calls for production increases, and I'm curious if that's still the case or if that's been tempered at all by the fact that the seasonal uptick in demand has been less robust than normal?

Donnie Smith - President and CEO: Christine, first of all, our inventory is at or actually slightly below what our target was at the time. So, we feel very good about that position, and yes, our production plans are in place. Let me – I just now want to add, it's important for us that we keep this supply and demand balance in check, and so far so good with our plans and we continue forward.

Operator: Heather Jones, BB&T Capital Markets.

Heather Jones - BB&T Capital Markets: Quick question Jim on the Pork business, the cutout price is down about 10% over the last six weeks, and consequently (PACA) margins have compressed significantly, I'm just wondering if you could give us a sense of what you are seeing as the primary factor driving that quick of a decline, and what your outlook is with regards to the next couple of months for that?

James V. Lochner - COO: The cutout did drop over the last four weeks about 112%, predominantly driven by a big correction in the belly prices. Even though seasonally hogs do tighten during this timeframe, which they did, and hog costs did come up, our margins held in there very well. We are very pleased with that, and I did really expect to see kind of a correction in the prices as we've seen throughout coming through this timeframe, but in that pork cutout it was predominantly the bellies.

Heather Jones - BB&T Capital Markets: Was there a correction just in the market, because they've gotten too hard, or have you seen a decline in demand?

James V. Lochner - COO: Both, the market had really over shot itself early into that 150 zone, and did correct back, so that was it.

Operator: Ken Goldman, JPMorgan.

Ken Goldman - JPMorgan: Just had a question, you guys made a point there, or an argument for an expanded multiple, which I understand and I've heard some investors who are bullish on Tyson say look these guys have earned on a pro forma basis 220 last year, they are going to earn call it 205 or so this year, maybe something similar next year. That consistency is something that's not often seen in the protein business. Is that the argument there that you would have or is there a different argument perhaps for the higher multiple as far as your seeing it?

Dennis Leatherby - EVP and CFO: Yes, definitely, Ken. This is Dennis. We believe that we're a different company now. We've basically stabilized our margins. We're on top of what we're doing, investment class in all three of our major segments, and we are just continuing to improve and drive efficiencies. Our return on capital is high; it's up there in the 20s, we plan to keep it that way. We're trading at a discount to our peers, not only in protein, but in ag, at a fairly significant discount. So all that being said, it's scratch your heads and wonder why the multiple hasn't expanded. Certainly, it's something that the Street seems to be struggling with and we keep saying that we are going to deliver and keep these earnings going.

Ken Goldman - JPMorgan: Just a follow-up then. Are you arguing for a peer multiple or a better than peer multiple in your mind?

James V. Lochner - COO: Look at our results, probably better.

Donnie Smith - President and CEO: Let me add just a little bit here Ken. First of all, we have a multi-protein model wherein all three proteins plus our prepared foods model, we also go to market in multiple channels, multinational – although our international businesses by and large are startups, that paints a picture I think for us in the future. We've got a very diverse business model within each of the proteins and those multiple business models all have a commodity and/or a value-added component. No competitor has our product diversification. We've got unparalleled resources. Our team and our Discovery Center and those type things to create value for our customers through product innovation. We've had great cash flows in the last 24 months and that's allowed us to dramatically strengthen our balance sheet. Dennis talked about our debt reduction, our liquidity, our capital structure, our return on invested capital, and it gives us the ability to invest in our future productive capability. We've done a great job of keeping our inventories in check. We had a lot of (hang) in Q1, but we corrected that in Q2 as we said we would. We've got our team focused on the drivers of our business. We've done a great job in terms of our operational efficiencies and cost competitiveness. So if you add all that up I think paints a picture of a completely different company than what we were just a (few) years ago.

Operator: Farha Aslam, Stephens, Inc.

Farha Aslam - Stephens, Inc.: First of all, Dennis, just a clarification on mark-to-market, what caused it in the Pork and Beef segment in this quarter? Then my real question is perhaps to Donnie and Jim, coming out of Easter you did see demand for proteins a little bit softer because of the high gas prices, and I was wondering how the Beef and Pork segments have reacted in terms of slaughter levels? Has there been any modification to better match supply and demand?

Dennis Leatherby - EVP and CFO: Farha, let me try to answer your first question, but you said a decline in mark-to-market, you are talking derivatives or what were you…?

Farha Aslam - Stephens, Inc.: The derivatives mark-to-market, I was just wondering what caused it and how does that reverse itself out?

Donnie Smith - President and CEO: First of all, lift at the end of the quartet we still had very high prices and with any short positions we add on to cover forward buys or any livestock positions that we had, we would have had a negative mark-to-market on those and they – as the market has corrected lately, they would have been already in that process of correcting. S on the derivatives, that’s the primary purpose on those as forward bought livestock to protect exactly what we saw as a correction. Okay? Hopefully that answers it. They were fairly clearly spelled out in the magnitude. Didn’t surprise me looking at that. Back to your second question…

Dennis Leatherby - EVP and CFO: Farha, could you repeat that again?

Donnie Smith - President and CEO: Let me make sure I get this right. The question was softness out of Easter and did livestock slaughter correct or…?

Farha Aslam - Stephens, Inc.: Exactly. Did you see a softness in demand coming out of Easter and therefore did pork and beef processors moderate slaughter levels to accommodate that.

Donnie Smith - President and CEO: Yeah. Farha, it was a bit soft coming out of Easter, but let me hasten on to add, if you go back in the last quarter and what we've said this quarter, we've not ever painted a very rosy picture of demand for the year, especially as it relates to our performance. So, with high gas prices and frankly I've got a little bit encouraged by the drop in unemployment (because it popped) back up to 9%. If you look at that environment, I don't think you should paint a very rosy picture about demand going forward. So, we had a couple of soft weeks. Probably weather had a lot to do with that, rains going through, cool wet spring, we've dealt with that in the last 30 days particularly. I'm going to let Jim cover the slaughter response to that on beef and pork.

James V. Lochner - COO: Yeah. We did see a reduction in wholesale prices and they came through (lent) very, very strong. If anything, I felt that they were extremely strong and probably overdone and have already covered the major correction in pork, which bellies were a primary driver on that, but beef what we saw was the blended cutout dropped very substantially in that four, five-week period, in fact dropped almost (11.44) on the blended cutout for a 100 (weight) carcass, and then live cattle follows that right down at about the same level. We saw about the same thing in pork, although the pork (indiscernible) corrected actually again seasonally comes but we did see demand shift, wholesale prices correct. Part of that was I think there were fairly high price coming into the spring, and then we did see with weather a combination of events, some weaker pulls across the board in that last week of April, and hopefully this last week, and we'll probably see a reversal of that. But demand is always a precarious scenario on being oversupplied and undersupplied, which will drive prices up or down depending upon the situation.

Farha Aslam - Stephens, Inc.: The response of the industry, have you seen slaughter levels pull back?

Donnie Smith - President and CEO: Well, we saw a correction two weeks ago on cattle, and we are seeing seasonally hogs. So we always try to make sure we are looking forward on that demand picture, and not making sure that we have our meat sold and we don't oversupply it. So we really pay very close attention to what we think the forward pulls are going to be and keep ours in balance.

Operator: Diane Geissler, CLSA.

Diane Geissler - CLSA: Could you just tell me, you didn't really give a number in answer to Christina's question about your production plans for the back half of the year, and I guess in light of the fact that you are not painting any rosy picture on demand, why would production be up at all?

Donnie Smith - President and CEO: I take it you're talking about chicken?

Diane Geissler - CLSA: Yup.

Donnie Smith - President and CEO: Okay. We've said that our number for the year would probably be up in the low single digits. We still think that's probably where we'll end up. We got a little (overwhelmed) in Q1. We've corrected that back into Q2. Our focus now is on driving revenue to be able to cover these very expensive input costs. I'd tell you if we are successful in our plan as it stands now, we'll be in good shape holding into that low single digit number. If as we drive revenue, it calls for a different production number, we'll adjust that. Our goal has been to always balance supply and demand, and if an increase in revenue causes a demand shift, we'll adjust our supply accordingly, but currently we've got several levers to pull to increase our revenue, and I don't see the necessity.

Diane Geissler - CLSA: Okay. So what I'm reading in your press release, where you say – this is my read of your press release, I realize it's not how you've quoted it, is that basically you're covered on grain through the end of the fiscal year at a profitable position, and then who knows what happens with grain, because right now I've got corn curve and backwardation, so obviously it's not something that you just switch off overnight, so are you telling me you have some clarity about where your feed costs will be as you move into fiscal '12 and therefore you can think about what your production levels are today, or are you completely uncovered in '12 at this point?

Donnie Smith - President and CEO: Yes, we do, and I think you've got a pretty good read on how to interpret our press release.

Operator: Kenneth Zaslow, BMO Capital Markets.

Kenneth Zaslow - BMO Capital Markets: Two questions. One is on the demand side, how much pushback are you seeing at retail, and are you seeing any switching in promotional activity among the three proteins? And then the second question is Dennis, is there any restrictions for you guys not to buy back stock on your side and not pay down debt instead, and take some of that money and actually use it to repurchase stock?

Dennis Leatherby - EVP and CFO: Let me – this is Dennis, I'll take the stock buyback, and then kick it over to Donnie and Jim. There's nothing really to stop us from buying back stock other than what's in front of us, that's quite uncertain. What if corn goes to $10? Those kinds of things where we really maintain a lot of liquidity. It’s at $1.6 billion right now. We need to maintain a lot of liquidity. We have great investments to put into our business with high returns, so our priority right now is continuing to make sure that we have plenty of liquidity, make sure that we invest heavily in our business like we are. That’s definitely an option. There are no restrictions. In fact the new revolver – the restated revolver gives us quite a bit of more flexibility, so we can do that, it’s an option but not now, sometime later probably so, but not in the immediate future.

James V. Lochner - COO: On the demand question, I think, (related) to the Memorial Day. I believe, we will see some pretty good featuring of chicken, although boneless loins in pork and the middle meats in beef are probably going to fill some feature activity as well. I do think though as we move out on into the summer, feature activity in chicken, both at retail and food service should improve. This is going to be of great value for the consumer. The back half of the (birthday) is driving revenue growth at the retail level, and obviously prices are quite a bargain, so we think you will see fairly strong retail and food service featuring into the summer.

Operator: Jeff Farmer, Jefferies & Company.

Jeff Farmer - Jefferies & Company: You touched on this, so you guided to I think about $200 million in price and mix improvements for the Chicken segment, just curious if that number is still in play for 2011? And I guess, more importantly, even if the industry sort of see their chicken pricing sort of stay where it is, if it doesn’t move materially, do you think you can still see $200 million in price and mix improvements in 2011?

Donnie Smith - President and CEO: What we've said before is that we thought we could get a couple hundred million dollars in operational efficiencies, and yes, we are on target to get that. In the beginning of the fiscal year, we also said that we would be driving towards about that same amount in revenue increases. With the market prices that's been a bit more of a struggle, but we are being able to see some improvement today, and so I think you can count on our ability to deliver positive quarters in chicken, both in three and four. There are raw material prices that are up against those operational efficiencies, but fortunately our team is focused on getting those, which is helping us to combat these higher raw materials.

Operator: Lindsay Drucker Mann, Goldman Sachs.

Lindsay Drucker Mann - Goldman Sachs: Just a quick one on the chicken feed cost. First of all, I just wanted to see if you guys were exploring or what your take was on substituting corn feeds for other types of grains, be it wheat or any other opportunities that are in your feed rations to cut out some cost? Then second just to clarify, you talked about in the first half you had I think it was $66 million of feed inflation and you expect the full-year feed inflation to be $500 million. So, am I reading it right that you think there is going to be $434 million of feed cost increase in the second half of the year?

James V. Lochner - COO: Yeah. It's certainly back-half loaded, Lindsay, and on your first question, we have a great commodity team and they are always looking for alternative ingredients. Now, in most livestock (guys) corn and frankly corn substitutes whether it be wheat, DDGs whatever that might be, are primarily the energy source for the diet, and our guys are always looking at the corn-wheat ratios at grain sorghum, for example, lots of things that we can do to help mitigate our cost. We are very experienced in doing that and have been doing that for years and I'm confident that if there's an alternative out there our team is on it – (their research and they know) how it will affect our performance.

Lindsay Drucker Mann - Goldman Sachs: Maybe just to follow up on that a bit deeper, is your expectation with the last (indiscernible) update and we'll get another one this week, there was some controversy on expectations that you would get a fair amount of substitution away from corn to help offset some of the tightness in the old crop balance sheet. In your experience, not just with your chicken operations which is looking at feed loss and other producers across the country, do you see some sort of shift of that magnitude away from corn and into substitutions that you think can alleviate some of the tightness in the balance?

Donnie Smith - President and CEO: Not, dramatically no. I would say that the bulk of that substitution has already occurred DDG utilization has – dried distillers grains' utilization is (probably) optimized throughout, and then as Donnie said, all livestock species are always looking for alternative feeds, build them into the feed ration and looking at positive impact on feed cost versus any potential negative impact on performance. Our livestock producers and chicken producers throughout the U.S. are very, very adept at utilizing a variety of different feed sources to keep the efficiency and cost of gains in line.

Operator: Tim Ramey, D.A. Davidson & Co.

Timothy Ramey - D.A. Davidson & Co.: Donnie, we've seen strong export picture and some supply disruption as a result of the tornados. Can you talk a little bit more about how you think those two factors might be influencing overall availability in supply and pricing?

Donnie Smith - President and CEO: Sure, Tim, obviously we think the one of the predominant factors in determining pricing (has to be) protein availability. With very strong exports of beef and pork and strong exports in Chicken as well, we see that domestic availability for the 2011 year should be flat, down slightly maybe, then on the other side the impact in Alabama, I am not completely sure. As I mentioned in the earlier part, we didn't sustain very much damage at all, thank God, in our businesses in Alabama, but it looks like to us industry-wise there will be some production decline because of that. I don’t sense that the impact is going to be tremendous, so I would say a stronger impact on pricing will come from continued strong exports than from the production disruption from the Alabama storms and the storms that swept through that area; North Georgia, Tennessee, and Alabama.

Timothy Ramey - D.A. Davidson & Co.: Would you say you are participating in the strong exports – Pilgrims I think had a very big number out a week or so ago?

Donnie Smith - President and CEO: In terms of participating, yes, but I'll be honest with you – well, in beef and pork, but if you look at our chicken business, honestly we’re looking at shifting more our production away from the export markets into domestic consumption. As you well know, the predominant cuts out of the U.S. in chicken going to the export are back half of the bird, and we’ve seen opportunity in a pretty tough economic climate to revenue up by moving more dark meat domestically, and that’s our focus.

Operator: Robert Moskow, Credit Suisse.

Robert Moskow - Credit Suisse: Hey, Donnie, I'm just wondering about your perspective of the chicken industry overall, and in your mind do you think that the industry is behaving rationally, and the reason I say that is everyone seems to be hedged for six months or so, but you do have the specter of much higher corn costs when those hedges rollover and you could see margins staying well below normalized levels through fiscal ‘12, so you argue that the valuation multiples in the group are probably too low and Tyson is trading at a discount, but I think in order to get those multiples higher, investors need to have some sense of comfort that the industry is behaving more rationally this time around, call it tighter lending practices, but maybe you can every marry that up with your plan which is to keep volume in positive territory. If the industry stayed at – in volume territory, do you think that margins can still recover?

Donnie Smith - President and CEO: Okay, Robert, I am not going to speak to the industry and that type of thing. I will talk about our business, and so let me talk a little bit about what happens to Tyson when let's say our hedges roll off. Our price risk management activities are important, and we have a great team that manages that, but hedging is not the ultimate solution. What we are focused on is passing along higher prices because we've really got no choice. Revenue is the solution to our business. So, if you look forward into our 2012, we don’t see any basic changes in the fundamentals of the Beef and Pork segments from what we see today, and as we look forward into the Chicken segment when we get the revenue increases that we need to cover these costs to actually carry on over into 2012. So, that's our view as we move forward. We will continue to monitor our inventories and we will continue to balance supply and demand, and as I said earlier – and are focused on revenue, as that changes the demand picture out front, our supplies will adjust accordingly, but we don't see the need to do that today.

Operator: Vincent Andrews, Morgan Stanley.

Vincent Andrews - Morgan Stanley: The one question I had was it goes back to the questions about the pork and beef prices, and has something changed in terms of the pricing at retail. The consumer, my understanding is that, in the past despite the material inflation in raw material costs, the retailer have been acting as a little bit of shock absorber relative to the consumer. So, I'm just wondering if some of the demand weakness is also related to the consumer actually seeing higher sticker prices in the last few weeks, and can you help us with that?

Donnie Smith - President and CEO: Yeah, I would say that the retail prices for beef and pork have been climbing, and climbing rather they were up about 11%, 12%, and yeah, I'm guessing that the consumer did see a shift. Again I think that's favorable over the long run to chicken prices, but the market will always do its job, is always the saying, and when the consumer does it they pass, as our customers pass along higher wholesale prices, the consumer does see it, and there potentially are shifts (indiscernible) chicken was up the least at 3% during that last 13 week period, and had the least influence negatively on pounds which are all virtually flat or down slightly compared to the pound declines that we saw at retail in beef and pork. So the market is doing its job in passing on higher prices and the consumer adjusting accordingly, and you're seeing that in a variety of other food based products as well, where you're seeing wheat based and dairy based products going up. So, even with all these changes, again, as the wholesale prices did correct, we've been able to maintain a spread throughout this correction, in particularly those spread businesses in beef and pork.

Vincent Andrews - Morgan Stanley: It just seems to me that…

Donnie Smith - President and CEO: You're seeing it right, but that dynamic didn't surprise us, and the market again makes those adjustments. I always got to emphasize in beef and pork, and I already stated that the livestock cost did correct, as the wholesale costs did correct down.

Vincent Andrews - Morgan Stanley: Fair enough. Then maybe just a follow-up on the chicken questions. One of your competitors, I guess, last week or the week before sort of was or my take on their comments was they were willing to produce as long as they were EBITDA breakeven in chicken, and it seems like that's sort of where the industry is today. How do you feel about that metric?

Dennis Leatherby - EVP and CFO: We look at trying to make money and EBITDA is not the metric we use, but we are extremely focused, as Donnie has already said, on driving revenue through a combination of mix and price and hitting all our yield parameters that we set targets for. So we fully recognize and get paid for the inflated input cost, the prices, the mechanism as well – and one of the mechanisms on driving revenue. So we are targeted and as we said, we think we'll be fine and make money in chicken on an EBIT basis, operating income basis in Q3 and Q4.

Operator: Christine McCracken, Cleveland Research Company.

Christine McCracken - Cleveland Research Company: Just on the pork volumes in the quarter, they seem to run pretty significantly ahead of the industry. I'm wondering if that was more of an industry or an inventory kind of push, or if there was something in the year ago period that I might have missed?

James V. Lochner - COO: Something – I didn't understand in the what period?

Ruth Ann Wisener - VP, IR and Assistant Secretary: Year ago?

James V. Lochner - COO: Year ago period? No, again we usually set up our whole planning process looking at what we think we have available coming in supply with the producers that supply us and staying sold and (really weren’t) any intentions, so they were up. It wasn't clearing inventory, is the answer.

Christine McCracken - Cleveland Research Company: Anything specific driving your second half outlook on pork then. You've mentioned the potential impact of higher gasoline prices, but I think it seems like there has been some trade down into pork here over the summer, as you mentioned. Wondering why you're relatively it seems like negative on the outlook here through the summer and into the fall.

James V. Lochner - COO: Well, I didn’t really mean to come across negative at all. I just said they wouldn’t be as robust as they have been, because they have been up and are well above the normalized range. I think we’ll be fine and actually above the normalized range, but not at that super high level that we just came through Q2. We’ll see some correction as we come into the Q3 period, which we normally do in May, June. You would normally see a seasonal decrease in supply and then I was concerned because our bellies were so high priced on a wholesale basis and anxiously watching to see (with clearance), and we did see bellies correct I think around $0.25 a pound from $1.50 to $1.25 at a very fast rate and we – I kind of expected to see that. I was hoping actually that they didn’t go up quite as fast because a fast up is always usually followed by a fast down, and that did drive some margin compression, but I'm certainly not negative at all on the second half. It’s just not as strong as we’ve seen in the first half.

Operator: Ryan Oksenhendler, Bank of America Merrill Lynch.

Ryan Oksenhendler - Bank of America Merrill Lynch: Hey guys, I just wanted to ask about pricing on chicken, (wondered if you could perhaps talk) about being able to change their fixed contracts during the quarter, for the rest of the year, and maybe they'll take some pricing here and your thoughts on being able to take pricing in the fall when a lot of your national accounts come up for bid. If we don’t see production cuts until then, how comfortable are you about getting pricing for fiscal ’12?

Donnie Smith - President and CEO: First of all we don’t have a very large percentage of our business that is in fixed price annual agreements. We have some but not much, and we’ve talked about this in previous quarters. We’ve tried to mitigate some risk to our business by decreasing the amount of that. So our business will respond favorably to the seasonal increases in market prices that normally happen about this time of the year. As we move into the fall, the protein domestic availability even with a increase in production in chicken I'd say I think USDA has guided at about 1% in the quarter or 1.5% or something like that, even with that the domestic availability of protein in the U.S. is going to be at or slightly below where it was a year ago, and we think going into the fall that that will be a fairly good environment for us but now a lot of our pricing is based on the value that we deliver to our customers, and so we've got great quality, we've got great service, we've got great innovative capability, and we've got the ability to get paid for that. So, that's our focus is on driving value to our business, to our business partners, to our customers, and getting paid for the value that we supply.

Operator: Stephen Share, Morgan Joseph.

Stephen Share - Morgan Joseph: I wanted to focus in on beef a little bit. It seems like I realize price was up a lot, live cattle price was up a lot, but if I look at choice and select cutout those prices were up it appears to me even more in the quarter. So I guess I was surprised that your gross margin wasn't a little bit stronger there?

Dennis Leatherby - EVP and CFO: Well, let me quickly say that you are right. The cutout on an aggregated basis quarter-over-quarter (for the) same year was up 24% - excuse me 18% (indiscernible) was up substantially, but live cattle cost were up 24% and we had some margin compression compared to the prior Q2 of fiscal '10. So, we did see that rapid run up, but live cattle followed up very much at the same point in time. So we were still very much in the normalized range, saw some that compression compared to that a year ago quarter, and then we're seeing the markets adjust right now. As I stated earlier even though the cutout came down in those last four weeks 11% live cattle cost (fell) or percent dollars per hundredweight, live cattle cost on a carcass weight basis dropped actually at the same rate or slightly above that.

Stephen Share - Morgan Joseph: So will your hedging activity – I mean, should we expect that number when we look at the operating margin kind of the 2.8%, would you say that's a pretty good number for the third quarter as well and the rest of the year, do you think you'll have an opportunity to do better than that?

Donnie Smith - President and CEO: I would expect that we probably can work on improving that quite a bit as the fundamentals (spice up) because I'm still very bullish on exports. We did see this correction and then we're coming into bigger seasonal supplies, which generally historically this May, June, July period is when (packer) margins generally expand. So we're in the situation where I'm very comfortable regarding the beef.

Stephen Share - Morgan Joseph: So there is a decent chance that, that 2.8% operating margin might mark the low margin of the fiscal year?

Donnie Smith - President and CEO: Yeah, I think, there is a reasonable chance of that, yes.

Operator: Akshay Jagdale, KeyBanc Capital Markets.

Akshay Jagdale - KeyBanc: Jim, the first question is for you Jim on Beef. Just wanted to follow-up on the margins. We've seen the spot market is somewhat different from what you are I guess implying for the rest of the year, which is that we've seen in the spot market, the beef cutout spreads come down quite a bit in the last month or so, so I mean is that just again going back to your argument about a higher valuation? I mean, do feel like you are outperforming the market, you have in the past and you're continuing to do that? Can you help me understand what I may be missing here because just looking at the USDA cutout value relative to what's happening in the live cattle market will tell you that the spread has compressed, it's not going up, so what am I missing there?

James V. Lochner - COO: Well, what you're missing is always the difficulty of taking aggregate data across a variety of regions in a variety of different cuts and trying to draw a quick conclusion, but as I said, even though the cutout dropped $11.44 in that last four weeks per hundredweight, cattle costs corrected $12 per hundredweight flat on the carcass. We maintained margins throughout this whole timeframe. Again our goal is always to beat the revenue on every individual cut. I know one thing the market won't let us buy cattle appreciably cheaper than anybody else, so our margins hold in there basically beating the revenue side having a good mix portfolio, export portfolio, a combination of real strong customer base. So it's a little difficult for you to just take the average USDA cutout numbers and look at that. They are what they are in a negotiated standpoint, but as I said, that relationship actually corrected in unison and it went up actually when I go back and cover the numbers I did earlier Q2 '11 to Q2 '10 actually you saw live cattle increase at a faster rate than the revenues, so we hold it in there and it is a spread gain. Our goal, as I've said many, many times in this call is to always beat the indexes on the revenue side and hold on to it, and then really just work constantly at being the low cost high revenue player in the region that we operate, so I mean it's a business fundamental that we go after. I know that’s fairly complicated, but that’s the basic data that’s out there.

Donnie Smith - President and CEO: Akshay, let me (on beef) just a touch, and here's the thing that I think we might be missing. We have been beating, we are beating, and we believe we will continue to beat the market spreads as you would see them today. I mean we’ve yet to have a negative week in beef in the first quarter. We’re operating above what – if you just looked at the cutout, we’re operating above that, and we believe we’re going to be able to continue to do so.

Akshay Jagdale - KeyBanc: That’s very helpful, can you by, if not now maybe as a follow-up tell us how much you generally beat the cutout by?

Donnie Smith - President and CEO: Alright. Now you're pushing me.

Akshay Jagdale - KeyBanc: Well, it would help in terms of thinking of a valuation premium, but anyway I can follow-up on that. The other question is on chicken, Donnie, so there is a view out there on the chicken side that the cycle is correcting, it's turning, and it’s – there is also some people believe that it’s going correct pretty dramatically and quickly, so my question to you is hypothetically if the rest of the industry cuts supply by 2% to 3% over the rest of the year, do you think Tyson could get to normalized earnings in chicken in 2012?

Donnie Smith - President and CEO: It’s going to be very tough for us to have a 5% or better operating income for this fiscal year. We've got a (wall of) costs coming at us. We've talked about grain prices $500 million. Plus you've got a lot of other raw inputs that we deal with, (freight), all those things that – increased cost, fuel cost, the utilities cost, etcetera, healthcare cost, etcetera, etcetera. So, it's going to be tough this year, but now looking forward, our goal this year is to be able to get revenue that (plays) that will carry next year into a position to where we could get back up into our normalized range. So, our goal this year; obviously we are going to continue to improve on operating efficiencies and we are on track and we see more runway. So, our cost structure non – call it (train) or input related will be lower in '12 than it is. Now, remember, we are also spending fairly heavily on our Chicken business to continue to improve our cost structure and our production capability as we move forward. So, in the back half of the year, our focus is on increasing revenue so that we can get paid for this higher cost structure, this market input related cost structure that's affecting our business. So, when you combine better operating efficiencies and lower overall cost structure with the ability to get paid for the inputs, then we view going forward our ability to get Chicken back into its normalized range.

Akshay Jagdale - KeyBanc: That seems all to be company-specific issues, so are you saying that you feel good about getting to a normal range even without any production cuts for the industry this year?

Donnie Smith - President and CEO: I am talking about our business and I don’t believe; number one, I am not going to speak for the industry. I am talking about what we have to do to drive our business performance. I don’t want to leave the impression that we are victims to raw material or inputs. Our job is to get paid for what we do, and we provide a great deal of value. I went through a laundry list of things earlier of things that separate us from our competitors in the industry and our job is to get paid for that and that’s what we are focused on.

Operator: Ann Gurkin, Davenport & Company.

Ann Gurkin - Davenport & Company: Just wanted to follow up after listening to the call and your comments, it seems (the turns) are little more cautious and I am just curious with the softer consumer demand after Easter, how – I guess what gives you the confidence to maintain the outlook for '11 versus 2010, what am I missing?

Donnie Smith - President and CEO: Easter was historically very late, okay, and I am not going to overreact to a couple of soft weeks. This is a long year. The fundamentals of our business are in place. So we have not had – in any of the expectations about 2011, we've not had a very rosy picture of what economic climate we were going to be flying into, so the climate that we're operating in is the climate we expected to be operating in. Despite that, we still feel like we're going to be, as I said, at or around the $2 mark. Now before we said GAAP and mainly the adjusted number, and after a comfortable $2, maybe GAAP, so yeah, slight adjustment down, but I don’t think anything dramatically, and this is going to be a very good year for Tyson Foods, and the climate that we're operating in – I think it's important to note, the climate that we're operating in is the climate we expected to be operating in, and that we build our plans to be operating in. So we're on plan and we believe we are going to deliver.

Operator: Lindsay Drucker Mann, Goldman Sachs.

Lindsay Drucker Mann - Goldman Sachs: Just quickly wanted to know if you guys had an update on whether you're seeing anything in the form of inventory restocking out of Japan?

James V. Lochner - COO: The export demand out of Japan has remained very strong. So we've certainly seen no pullback. If anything, we continue to see strong interest upfront.

Lindsay Drucker Mann - Goldman Sachs: Any indication that you're seeing accelerated interest and you had a great start to the year; post earthquake are you seeing demand above what you had seen starting the year?

James V. Lochner - COO: But the information I got from our team is that it's continued strong post earthquake, and it has continue to be replenishment and continue to be consumption, and again I always bring this back that the global supplies, protein, beef and pork are down, and we continue to see this very strong export demand, which has been very supportive of all pricing, and when you really look at the Jan-Feb numbers, in all three species, year-over-year, they're all extremely strong and I am quite certain, March, we'll print that when they're final in April and upfront. So the things we've been talking about on the domestic availability supported by strong – declining supported by strong exports is certainly materializing themselves, and again will be very supportive of pricing. That's one reason we're not as negative going forward, remember we're very positive for that real strong fundamentals that exists.

Operator: Diane Geissler, CLSA.

Diane Geissler - CLSA: Am I reading you right that the goal in fiscal ’12 in the chicken unit is to be within the normalized range on your margins?

Dennis Leatherby - EVP and CFO: Yes, ma’am.

Donnie Smith - President and CEO: Well, I hope you could tell from my answers to your questions, we feel good about where we are as a Company. During challenging times in the past, I think, we would have looked at this as weathering the storm. But we don’t think that way anymore. We’re in a strong position. We’ve improved as a Company. We see plenty of opportunities to become even better. I think, we can compete favorably with our – or compare favorably with our competition. Tyson is in all three proteins plus Prepared Foods. We have diverse business models within each of those proteins. We have commodity and value added. No competitor has our product diversification and the resources that we have to create value for our customers though innovation. Our chicken inventories are down to historic lows, and we’ve got one of the strongest balance sheets in the industry, and even with increased grain costs, we continue to invest in our business to improve our efficiency, our profitability, and our productive capability, and most importantly we did what we say we’re going to do. Fundamentals are there, and as long as we stay focused there will be more good results in the future. I want to thank you for your interest in Tyson, and hope everyone has a great day.

Operator: Thank you. That concludes today's conference. You may disconnect at this time.