Operator: Welcome to the Tyson Quarterly Investor Earnings Call. All participants are in a listen-only mode until the question-and-answer session. Today's conference is being recorded. If you have objections, please disconnect at this time.
I would now turn the call over to Mr. Jon Kathol, Vice President, Investor Relations. You may begin.
Jon Kathol - IR: Good morning and thank you for joining us today for Tyson Foods Conference Call for the third quarter of our 2012 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 you as many of you as possible, please limit yourself to one question and one follow-up, then get back in the queue if you have additional questions.
I will now turn the call over to Donnie Smith.
Donnie Smith - President and CEO: Thanks, John. Good morning everyone, and thanks for joining us today. Earnings for our fiscal third quarter were $0.21 a share compared to $0.51 in Q3 of last year. Keep in mind earnings were impacted by $167 million or $0.29 a share for the early extinguishment of the 2014 notes. Adjusted EPS was $0.50 for the quarter.
I am very pleased we were able to payoff that debt early, which strengthened an already strong balance sheet, lowered our interest expense in upcoming quarters and helped us get back to investment grade with all three rating agencies, this was an important milestone for our team and I’m proud of them for accomplishing this goal. Sales rose slightly to $8.3 billion compared to $8.2 billion in Q3 of '11.
For the quarter, Chicken sales were up 3.6% in large part due to an 8% increase in pricing. Even though Beef pricing was up over 15% versus a year ago, sales dollars were down slightly due to 14% decrease in volume. Both Pork and Prepared Food sales were down by about 4.5% to 5%, driven largely by softer pricing, although let me hasten on to add that year-to-date our pricing is higher in all segments driving sales growth of 4.4% across the entire portfolio.
Operating income for the quarter was $336 million compared to $312 million in the same quarter last year. The Prepared Food segment was above its normalized range with the 6.2% operating margin. The Chicken segment was within its range at 5.3%. Our international chicken operations faced significant headwinds in Q3, including start up issues in China and Brazil. Excluding these startup related losses, our Chicken segment had 6.7% return on sales.
The Pork segment came in just below its range for the first time in ten quarters with the 5.1% return on sales. Beef was just under its range with the 2% return. Considering the challenges, beef and pork faced in the third quarter I am pleased they were able to produce as well as they did, and due to those challenges along with softer demand and economic conditions earnings for the year will come in lower than previously projected.
But I'll hurry on to say that 2012 will still be a strong year and fourth quarter earnings should be within the range of results reported in the first three quarters. That's why we have the strategy in the business model we have to manage through volatility. We have few businesses that are having record years and all of our businesses have plans in place to deal with the headwinds that we know are coming.
Looking into 2013, we believe it's prudent to enter the year with plans to pullback some on our CapEx and build that are conservative with our cash in order to keep a good supply spot dry powder, that's not to say, we won't buy back stock or we won't make an opportunistic acquisition, we just want to be prudent in how we handle our cash. We worked hard to get our balance sheet back in order and to get back to investment grade ratings and we don't want to jeopardize that.
Our plan is to go Prepared Foods, value-added poultry and international are the best hedge against volatility providing value and getting paid for the value we create for our customers by being their go-to-supplier is the key to stability and long-term growth.
Now, moving on to the macro environment; after four months of moderate decline, consumer confidence was up in July according to the Conference Board Consumer Research Center, unemployment however, was virtually unchanged with ways on the pace of the economic recovery.
In the retail channel, according to the Perishables Group; for the 13-week period ended June 30, overall fresh sales – overall sales of fresh meat were down 3.3% in volume versus the same period a year ago, driven by 0.6% increase in price. Beef and pork volume were down 7% and 1.7%, respectively. Chicken was the only category that saw pound sold increase versus a year ago, but the increase was very slight at 0.2% and demand feel sluggish to us.
The USDA forecast food prices will continue to arise in 2013, led by meat, eggs and dairy as a result of the drought. Beef prices are expected to be up 4% to 5%; Poke up 2.5% to 3.5%; and poultry up 3% to 4%. In the food service channel, Technomic revised its 2012, 2013 forecast upward to 1.7% real annual growth, up 1.1% from its previous forecast.
The National Restaurant Association performance index was stable for gene, and while we still feel sluggish demand in food service and the outlook is far from robust, these indexes might indicate that perhaps the worst is over. The NPD Group's consensus of commercial restaurant locations finds that numbers of both independent and chain restaurants have risen with independence finally showing a slight increase for the first time since 2009, another hopeful sign.
There are specific high growth opportunities in an overall low growth market. According to Mint Hill, chicken focus concepts have done well through the post-recession economy and despite the heavy presence of discounting, many change have been focusing on premium menu items like bacon and steak and will most likely continue to do so. Premium meats on burgers, chicken sandwiches and salads and other items are helping operators increase menu prices with an enhanced value perception.
That concludes my remarks, and now Jim will give you the specifics around our segments, followed by Dennis with the financial report, and after that, we'll try to get into more detail with your questions.
James V. Lochner - COO: Thanks, Donnie, and good morning, everyone. With $47 million in operating income and a 6.2% return on sales in the fiscal third quarter, the Prepared Foods segment performed above its normalized operating range of 4% to 6%. I'm pleased with the continued improvement, and I see real opportunity for this segment. Prepared Foods is a key part of our Company's overall growth strategy, and we are actively seeking ways to expand this business into other categories and grow existing categories in 2013 and beyond.
The Chicken segment posted $153 million in operating income and a 5.3% return on sales for the quarter, which is within the normalized range of 5% to 7%. We're able to offset the slightly higher grain cost in the quarter to price the mix improvement. In China, our Chicken operations were negatively impacted by startup challenges and compounded by economic and market issues, while we were pleased with the performance of our new company-owned farms, at this point, they represent less than 20% of the birds we process weekly.
We are building new biosecurity control broiler farms and plan to phase out the use of uncontrolled market birds over the next two years. This will allow us to value up into a premium mix of branded fresh retail trade pack and food service sales. But in the interim, we will have some dependency on market birds and wholesale market conditions. In addition to normal startup issues, our Brazilian chicken operations saw significant market deterioration in the fiscal third quarter, stemming from a very soft market for boneless leg meat in Japan.
We're in the process of bringing up second shifts at two of our plants, which should improve our cost structure. We will continue increasing value-added capabilities to move beyond dependency on commodity export and domestic wholesale markets. To help you understand our expectations for the level and pace of our international expansion, I'd give you numbers around our plans for growth over the next two years.
In China, we currently produce about 2 million birds per week and plan to reach 3 million a week in 2014. In Brazil, we're at 1.3 million birds, with plans for 2 million. In India, we grow from 280,000 to 450,000, and in Mexico, we intend to maintain production at around 2.7 million birds per week.
Turning back to domestic chicken, obviously because of the drought we expect higher grain cost in 2013. Over the past couple of years, we have substantially reduced the number of fixed price contracts we have with customers and currently have less than 15% of our poultry volume in annual fixed price contracts. The vast majority of our contracts are tied to specific markets or allow for conversations about adjusting prices to move prices to offset higher inputs, and we will continue to push for even more of these types of contracts.
I believe supply will begin to rationalize as well, making it easier for us to have those pricing conversations. The capital investments and operational improvements we made in the recent years have put us in good position to handle higher inputs through efficiencies. Based on current grain futures, we believe our Chicken segment will remain profitable in 2013.
In our Pork segment, we've produced $69 million in operating income and 5.1% return on sales, which is below the normalized range of 6% to 8%. Unfortunately, supply and demand got out of balance, but it wasn't due to a shortage of hogs, as some may think, increased domestic availability partially due to heavier hogs, along with pricing pressure caused the industry to get out the balance and packer margins were compressed more than prior quarters. Our Pork margins are starting to come back to normalized levels now, while supply hog should be 1% to 2% higher in the first three quarters of fiscal '13 and we do not see any material demand shifts on the horizon that would be detrimental to our Pork segments performance next fiscal year.
Moving on to the Beef segment, we had $71 million in operating income and the 2% return on sales in the third quarter. This was just below our normalized range of 2.5 to 4.5. Considering how difficult the month of April was for us, I'm pleased we're able to make up so much ground in May and June and I'll go on to add to that we've focused on maximizing revenue through price and mix to enhance
margins, not market share.
Looking to cattle supply, cap drop was down as expected, which will impact the late calendar 2013 and calendar 2004 fed beef supplies. Based on the last inventory report, we currently aren't seeing any definitive signs of half a retention. Additionally more feeder cattle were imported into the country than anticipated in the past six months to have partially offset last year's reduced cap drop. We expect close to the same supplies for the rest of fiscal '12 and into the first half of fiscal 2013 that we experienced this year.
Similar to last year feeder cattle are coming into feed lots earlier as a reaction to the drop. We do see a supply drop off in the back half of '13 as a result of lower 2012 cap drop and slider capacity will likely adjust to lower volumes. I'll remind you that Tyson Beef plants are located in traditionally cost effective cattle feeding areas, and we expect to have adequate supplies to run our plants at a profitable level. We believe the Beef segment will remain profitable in fiscal 2013, but will have challenges similar to what we experienced in 2012.
In conclusion, I'll say that we are proud of the operational and sales improvements, our business units have delivered over the last couple of years. This has positioned us well to deal with increased feed cost in the Chicken segment. We have strong balance sheet, diversified protein product portfolio, and we've been investing in our plants to make them extremely efficient with mix improvements. So, we are in very good shape to get to the near-term challenges ahead.
With that, Dennis?
Dennis Leatherby - EVP and CFO: Thank you, Jim, and good morning, everyone. As Donnie mentioned in his remarks, we reported Q3 earnings of $0.21 per share or $0.50 per share after adjusting for a charge of $167 million or $0.29 per share related to the extinguishment of our 2014 notes, which I will address in a moment.
Return on invested capital for the last 12 months was 14.7%. Capital expenditures were $186 million for the quarter and totaled $530 million through three quarters of fiscal 2012. We continue to invest in numerous capital projects for both our domestic and foreign operations. That will result in improved productive capabilities and drive labor efficiencies, improved yields and sales mix.
Our operating cash flow through three quarters of fiscal 2012 remain strong at $719 million, including cash of more than $800 million, net debt was $1.6 billion. Total liquidity was $1.8 billion, well above our targeted range of $1.2 billion to $1.5 billion. Gross debt increased to $2.5 billion. The increase in gross debt was due to a successful 4.5%, $1 billion note offering, which we then used the note proceeds to extinguish our 10.5% 2014 notes.
We were able to tender and purchase $790 million of the $810 million principle on the 2014 notes prior to June 30th. Subsequent to the settlement of the tender offer, we called for redemption of the remaining $20 million and we can now say the high yield 2014 notes are fully extinguished. As a result, we incurred a charge of $167 million during the third quarter related to this early extinguishment.
Going forward, this refinancing will reduce our annualized interest expense approximately $55 million, which equates to about $0.09 per share. At the same time, as we issued the new bonds, we also received an upgrade from Moody's, which means we're now back to investment grade with all three rating agencies. Personally, it feels really good to have a debt maturity profile and interest costs that are reflective of being an investment grade company again.
Gross debt to EBITDA for the last 12 months was 1.6 times. On a net debt to EBITDA basis, this measure was 1 time. During the third quarter, we acquired 3.9 million shares for $75 million under our share repurchase program. Since reactivating this program in 2011, we have repurchased 19 million shares for $350 million, representing a reduction of about 5% of our outstanding shares. At this time, we believe it is prudent for us to reduce our share repurchases under this program until we have better visibility into our working capital needs.
Return to investment grade was very important to us and we're going to be disciplined concerning our balance sheet, which we believe to be a source of competitive advantage. Our average diluted shares outstanding for the third quarter was 369 million. This reflects the diluted share effect totaling $5 million for options and $3 million for convertible bonds, which will fluctuate depending on our stock price performance. Our effective tax rate for Q3 was 42.4% or 37.9% without the charge related to the early extinguishment of 2014 notes.
Now, here is an update on the outlook for the remainder fiscal 2012 and a few items pertaining to fiscal 2013. Revenues for fiscal 2012 are expected to approximate $33 billion, down $1 billion as previously estimated due to weaken domestic protein demand. Revenues for fiscal 2013 are expected approximate $35 billion, mostly resulting from price increases associated with increased raw material costs and expected decreases in overall domestic availability of protein.
We expect 2012 net interest expense to be approximately $340 million, including the $167 million charge related to the early extinguishment of the 2014 notes. For fiscal 2013, we expect net interest expense to be in $130 million to $140 million range. The effective tax rate for fiscal ’12 should be around 37%. CapEx should be around $700 million. Although down from our previous estimate the anticipated projects are moving along, but will not be completed in fiscal 2012.
This amount still well exceeds our depreciation and amortization levels. Our preliminary capital expenditures plan for fiscal 2013 is in the $500 million to $550 million range, down from fiscal 2012 until we have better visibility into our working capital needs. However, as was share repurchases if forecasted conditions change we may increased our planned capital expenditures.
In closing, we are pleased with our Q3 results and are confident in our ability to end fiscal 2012 with another strong quarter despite the ongoing challenges with soft protein domestic demand and high grain prices that appear to be in place for the foreseeable future. The moves we have made to strengthen our balance sheet over the past few years and recent capital restructuring will allow us to face those challenges head on and continue executing our strategy as we head into fiscal 2013.
This concludes our prepared remarks and I'll ask Wendy to begin Q&A.
Operator: Heather Jones, BB&T Capital Markets.
Heather Jones - BB&T Capital Markets: First question is on our poultry business I was wondering if you could give us a sense of what your poultry profitability looks like if you take today's spot grain and market prices as well as what you think it will look like in the September October timeframe, if we get the typical seasonal decline in Chicken prices?
Donnie Smith - President and CEO: So, Heather, let me make sure I've got the question right. You're asking what if our cost of goods were to immediately reflect the cost of what spot ingredient purchases would cost and there was no impact on revenue, right?
Heather Jones - BB&T Capital Markets: Yes.
Donnie Smith - President and CEO: Okay. So, first of all let me say, we don't have that scenario. Our grain group has done a good job and they've got us coverage out in a couple months in front of us well below the market. So this scenario is purely hypothetical, but let's think about it at current values spot corn is probably going to deliver something like $9 a bushel. Meal you're probably going to be something like 550 deliver so that's probably going to calc to live a cost in the low 50s, let's call that say $0.52 a pound. So, today, our live cost is probably just a tick under $0.45 a pound so our live cost would go up immediately $0.07 a pound now yielded that's probably going to be like $0.10 so on a finished pound. So we're not making $0.10 a finished pound today on Chicken, so no, in that hypothetical scenario and I'm really glad it is hypothetical. We would not make money. Now, thinking back, if I look at June, we participate in benchmarking services a couple. So, looking back at June, we were top quartile in one top quartile in the other. So, we're operating across all of our businesses fairly well. If I think back to the top spots in those surveys, probably the number one, number two spots were around that $0.10 a pound mark. I'd said pricing is probably softened up a little bit now versus June. We've seen breast meat prices come down in such, and obviously, the live cost is probably going to be a little higher. So, in your scenario, now we wouldn't be possible and I don't think anybody would be, just based on what we see in those benchmarking services. Now, going forward into the fall; fortunately our cost of goods in Q4 is going to be fairly well contained. I do anticipate and we've seen a little bit of softness in the last couple of weeks that with the current supply, pricing is likely to soften a little bit going into Q4 as it typically does, and then into the Q1 on into the fall, that typically is not a very strong pricing period too. So, it's kind of our view going forward.
Heather Jones - BB&T Capital Markets: On the follow-up, you talked about probably being below your normalized range for beef in 2013. But if we put you like the 1% to 1.5% range for fiscal '13, most of the industry would be losing money. Further even if without the drought from a long-term structural perspective, some of your peers are poorly positioned. So, I guess I'm just wondering do you think that this drought will hasten would probably needed to happen anyway and have some your competitors shutter some capacity and just wanted to get your thoughts on that?
James V. Lochner - COO: It’s Jim. The drought definitely will have a long-term impact on the overall base supply because I do believe that it's done little bit what it did last year and obviously start to make cattle come to the feedlots earlier. It changes some of the geography or weather fed, but more importantly this year what it's doing as well as the price of corn going up caused a radical correction to the feeder cattle pricing, with that revenue dropping as much as $200 ahead over that time frame. So, one short run what that did is probably stopped any heifer retention that was going on or anticipated to go on and you have to remember that those heifer calves now won't be probably staying in the herd will go into the feedlot, but over the next six months to year, they would be into the feedlot numbers, but over the long run, we'll have to see capacity adjust likely either through plant closing or capacity utilization reductions. We always got to remind everybody that our plants have always been situated where the cost competitive feedlots exist and the peripheral feedlots generally have a higher operating cost and then on top of that, they have a higher freight cost to get cattle to the plant when they get outside their region. So, I think that's a key component. So, I agree that we'll probably have to see and we'll likely see some capacity utilization, reduction. Timing of that is difficult, to look at and nail down, but in general that's correct, and then I think one other thing on cattle, we have seen dramatically a shift in the length and time cattle or fed, which has reduced those feedlot turns probably in combination of higher grain costs and the accelerated movement particularly last year from the drought with cattle being in the feedlots longer. So, it’s a lot more difficult than it’s been in prior years to predict exactly what we think is going to happen on a timing basis for availability. So, that’s a fairly long answer to that question, but that’s what we see.
Operator: Akshay Jagdale, KeyBanc.
Akshay Jagdale - KeyBanc: My first question is on Chicken, just to follow-up on the previous question, so you said the hypothetical is not what you are dealing with in ’13, so I just wanted to be clear, so are you hedged through 2013, my guess is no and so at some point in 2013 -- fiscal ’13, you are going to see higher grain cost if they stay where they are today, so the fact that you are saying say you would still remain profitable tells me that, that 85% of your revenue base that’s flexible you believe will adjust, is that the right way to think about it?
Donnie Smith - President and CEO: You're reading it correctly. We’re couple of months out in front on our grain cost, which pretty much covers us through Q4 and that’s – what we really wanted to do in our grain strategy was to get us into new crop, frankly I would have liked to seeing a better new crop to get into, but be that as it may, it is what it is, so and we are – we are covered through the end of September, so as we get into new crop our grain cost will likely go up looking at today's markets, but you're exactly right few things have given us the optimism about being profitable. Number one, is the pricing and the opportunities there, but also we've spent a lot of money on our Chicken business in the last couple of years. We still think there's some room for operating efficiency gains probably in the order of about another $100. Jim mentioned and I think I did too about our international operations of having a really tough quarter and we think those will improve. The environment will improve their coming into 2013 that will help some. We're going to continue to sell more value-added and as we do that would improve the revenue side of our business. Two, our buy versus grow strategy is giving us a cost advantage because we're not saddled with parts of the Chicken that don't carry very high revenue and we're able to buy the parts we need at generally below our costs and convert those into value-added items. So, you add all that stuff up, that's what gives us the optimism going into 2013. By the way going into 2013 our estimate as of about a week ago and hey, this corn markets bouncing around like a yoyo so. But as of the week ago we were anticipating incremental $700 million in grain cost in 2013 just to kind of…
Akshay Jagdale - KeyBanc: That is impressive if you're able to achieve that. So, the next question is so what's the supply scenario that you are assuming as being probable for next year for the industry and what could change that? So, I mean like, most people expect like a 2% to 3% cutback could get the commodity prices up 10% or more and offset these higher grain costs. I am assuming you'll be profitable even if there is no further cutback. Please correct me if I am wrong there. What do you think the industry is going to do, when will it happen and what might that do to your EBIT margins in chicken?
Donnie Smith - President and CEO: I think I understood your question. So, we are predicting or in our model for 2012, we do have current slaughter pounds in the forecast. Now, let me talk about what we think we're going to happen. Let's look back or about a year ago this time or so, we were talking about this. We look back at a couple of periods now when our chicken business has been in that 6% or so range, one at that April, May, June period of '09, and during that time, we had a 6% return on sales and slaughter pounds were running around 860 a week for the industry and that gave us the environment we needed to be able to get the pricing we needed up on top of our cost structure. Now, let me hasten on to say, during that year, corn was around five bucks and meal was somewhere between $325 and $350-ish. So then, fast forward now up into 2012, the third quarter just ended 2012, you got about $880-ish million or so slaughter pound, and you've got probably $7 corn and $360 meal. So, what made the difference there was all those things we mentioned before, the operating efficiency is more value added, or buy versus grow strategy, all those things, and so if you look at now the impact of this $0.07 a pound live production increased, it would just make sense to us that something south of that $860 million slaughter pounds, which by the way I think is pretty close to your math of 2% to 3% is probably the minimum to provide the environment that, that we're going to need to be able to get our pricing structure up on top of this cost structure that's coming our way.
Akshay Jagdale - KeyBanc: When might that happen relative to historical norms as you know usually takes six months of losses before the industry starts cutting back. Do you think it might happen sooner?
John Tyson - Chairman: I can tell you that the current situation is untenable. I think the key is we've had rapid run-up in grain and the drought and overall supplies of grain worldwide don't look like we're going to see a radical correction downward, so the optimism waiting for grain market to crackdown isn't there, so that to me shorten the potential time frames.
Akshay Jagdale - KeyBanc: One last one for Jim on Beef, are you assuming you are I think around $50 ahead in beef and my guess is April was negative. I'm assuming you're above normal range today?
James V. Lochner - COO: Today meaning last week or?
Akshay Jagdale - KeyBanc: Yeah. Last week or in the month of June, I'm assuming you're above normal and that's continued.
James V. Lochner - COO: Yeah. Month of June was – May and June correctly we got the relationship with the revenue increasing above the cattle cost and our effort is always to try to run for gross margin as best we can and that needs maximize the revenue of the Beef, maximize the mix, watch our costs and really look at the forward supply of the cattle and the forward demand and try to keep those in harmony.
Operator: Farha Aslam, Stephens, Inc.
Farha Aslam - Stephens, Inc.: Do you think that there would be chicken producers who would choose not to cut production and just because of a good balance sheet keep their production flat and kind of power through this current negative grain environment?
Dennis Leatherby - EVP and CFO: Farha, just could say, I mean for us we -- last year we cut production 6% to 8% and we have held solid with those cuts, all year long. That allows us to buy meat on outside market and I’d tell you through Q3 we probably bought 60 loads of meat on the low side and over 100, maybe between 150 and 120 loads of meat a week on the upside, and then bought it below our cost in most cases and then brought that into further process, which we didn't have parts of the bird that would be an oversupply, that would've hurt our sales revenue. So, I can't speak for what somebody else may be thinking about with their balance sheet, I'm really proud of our team for doing a great job. If I look at our Chicken business, Donnie King and his group have taken over $900 million out of our cost structure let's call it mid '08 that's significant they've done a great job, they've been very, very prudent in how they spend their capital and they've got these plants running great. So, all those things put together give us the optimism, but I can tell you, we don't have any plans to increase our production at all, don't have any plans to cut anything further. If demand erodes we might buy few less loads on the outside, but we are continuing with our production cutbacks. I'm talking about us, that's – I can't speak for the rest of the industry.
Farha Aslam - Stephens, Inc.: That's helpful and then just as a follow-up on Pork. Could you just share with us kind of the timing of how you see animals coming to market do you expect a huge fall rush of hogs I mean we're hearing that potentially there might not be enough shackle space? Then do you expect to tighten up going into next year as higher grain cost hit the hog producers?
Donnie Smith - President and CEO: Typically, you do start to see an increased number coming off of the summer heat and usually they are coming June timeframe is from the prior year's summer heat as it expect fertility rates. So, we would expect that coming into the back half of August and to September, October we will see kind of what we use to see call the normal fall run and we'd expect numbers at this point to be to 1% to 2%. I don't think they'll be anywhere close to pushing the maximum slaughter capacity of the industry. So, then you always have to just look at the whole cycle approach here and say that high priced grain will impact production, but you still have a pipeline of about 10 months in production that's coming out. So, I'd say that the impact of producer profitability will start to feel 10 months from now, and then this summer season also will have probably some issues as we get in to then on next summer's processing.
Operator: Vincent Andrews, Morgan Stanley.
Greg Van Winkle - Morgan Stanley: This is Greg Van Winkle from Vincent's team. My question relates to Pork, wondering if you've seen any increase recently in hog supplies as a result of breeder sales being sent to slaughter, and I guess you address a little bit with those in the last question, but what do you expect in terms of hog reduction going forward after the run up we've seen in feed cost?
James V. Lochner - COO: We are not in the (sols) processing into the business, but I am hearing that there are more sola being offered and you would expect to see some early liquidation as a result of the run up in grain prices, but that's what we are hearing. I'll just have to monitor it week-over-week and month-over-month to look at what the projected long range supplies are going to be.
Greg Van Winkle - Morgan Stanley: Then what assumptions go into your outlook for Pork margin. You seem to be pretty optimistic about fiscal 2013, even though it seems to me like we are going to need higher hog prices to make producers profitable and it seems like maybe the domestic demand environment is still a little week. So I'm just wondering what's driving your optimism there despite what seems like kind of a challenging environment.
James V. Lochner - COO: What drives my optimism is you've still seen really a strong export demand. You've seen an industry that can flex on the live production side. It's also put down a lot of efficiencies. We'll have to just watch and see what will happen as overall propane prices increase whether or not how much demand, the structuring there may be or won't be. One interesting thing that's going on this year with the drought, there has been so much communication out in the popular press about expecting higher prices because of reduced corn crop, and so I do think that at least we'll start to see some acceptance and maybe a little less demand destruction, and we'll definitely have ample supplies through the majority of our fiscal '13. So, the other key component that I think one always has to look at is that the high grain prices in the U.S. are affecting worldwide grain prices, and we are still the most efficient producer of pork and chicken throughout the world. So, again the U.S. should be favorably impacted from overall efficiency in export. So, those are a lot of different reasons why I don't see anything real detrimental on the horizon import.
Operator: Christine McCracken, Cleveland Research.
Christine McCracken - Cleveland Research: Jim, you talked a little bit about liquidation, maybe not happening as quickly here, but we're seeing quite a bit of liquidation. It seems in some of the other countries that we export into, specifically into Mexico, and that's been mentioned by some of your peers. I'm wondering could you see a slowdown in exports you think, in the near term is some of that liquidates and then it's setting up for a really strong export outlook maybe into 2013?
James V. Lochner - COO: I'm not sure which species you're referencing?
Christine McCracken - Cleveland Research: Well, really we’ve seen.
James V. Lochner - COO: Producing country, but.
Christine McCracken - Cleveland Research: Yeah. We’ve heard quite a bit about Pork specifically, you’ve seen some liquidation on the cattle side in (Ocean) and the Pork side it’s primarily the hard in Europe, which maybe create some export opportunities, whereas Mexico and I think Canada also brings quite a (piece hours to slaughter). So I’m just curious kind of universally on the red meat side obviously the AI situation in Mexico is also perhaps creating a near term pull?
Donnie Smith - President and CEO: Let me just – off my last answer, I do think that we'll continue to see demand in countries we export to, which hopefully will persist – if our – that degree of liquidation against a small base I don't look at their liquidation putting extra pounds on the market that have to be – that are going to materially impact their need to import product. Clearly, the AI scenario in Mexico has some issue relative to overall, just chicken movement within the country, which appeared to strengthen pricing here in the last several weeks. Then in the EU, you continue to hear about pig production being curtailed from a variety of different reasons, but again as I mentioned in the previous answer, worldwide grain prices are going up as well, so the world’s protein producers are going to feel this impact and the U.S. is the most efficient place to grow pork and chicken, so I would expect that we’ll see that long-term ramification from that.
Christine McCracken - Cleveland Research: The just Donnie you mentioned, which sounded like an improving foodservice environment, just curious what your customer conversations are looking like in light of this increase in protein prices and possible higher fuel on the back of lower ethanol production. Kind of also with wing prices so high this year how much higher can they go relatively in order to offset some of the feed might some of that increase have to come on the back of boneless?
Donnie Smith - President and CEO: I guess the best way I would characterize food service demand is it's sluggish, but finally there is a little bit optimism, maybe this things quick going down. There is a little bit of optimism there, but not a lot. So, as far as the conversations are going I think people understand this, there is nobody confused about the drought and its impact on the meat industry and meat producers also though they are well aware of the current supply situation and so there's not an immediate need to make a pricing adjustment. So the conversations are largely around we understand it's coming and when it gets here we'll participate because you guys do a great job of taking care of us in service and quality and you're the innovation leader and that kind of thing. Did that answer your question?
Christine McCracken - Cleveland Research: Just on the wings I mean I'm a little bit worried given how higher they got this year that they'd be able to take on much more of the…?
Donnie Smith - President and CEO: It's interesting, if you go back and just about every year regardless of where the wing price starts, when you go in the winter wing season, wing prices escalate, so we may test that this year but so far every year wing prices go up during wing season.
Dennis Leatherby - EVP and CFO: I want to add one other thing we do spend a lot of time with customers showing them the supply demand fundamentals, what's up in front of them, what the moves are and that does help immensely the dialog give them some anticipation what they think the supply will be relative to demand in forward, and they're thinking about prices.
Operator: Ken Goldman, JPMorgan.
Ken Goldman - JPMorgan: Can you elaborate a bit and forgive me if you've talked about this already. On the soft domestic demand you highlighted, is it primarily in a certain species or across the board, to what degree are consumers trading down, where are you seeing it, just a little more color there we'll be appreciated if you can?
Donnie Smith - President and CEO: Let's talk about retail first, overall fresh meat sales are down. As pricing increases, it does hurt volume. Sales dollars are there, but volumes down. Beef and Pork are down more than Chicken. Breast chicken sales are about flat, Beefs down and Pork's down. At food service, really Chicken has had a pretty good summer at food service. Demand for the other items is fair at best, Pork's actually probably been the softest between Beef and Pork. We tend to look at holiday season, as kind of an indicator for things to come and Memorial Day was just average at best. Then when we went into 4th of July Chicken demand was just fair; Pork was a little bit soft, Beef did okay. Beef got a lot of feature activity in retail during the 4th of July holiday. As we look at it now as prices edge higher, it's probably going to hurt demand. We haven't really seen, well, you might call 4%, 5% volume down in beef import and flat chicken meaning some shift into chicken you might could interpret that, but really we haven't seen what I would call wholesale movement between the proteins. They are trading down within the category from more expensive muscle cut maybe down into grains and that kind of thing, but really haven't seen wholesale movement between the proteins.
Dennis Leatherby - EVP and CFO: I'd add one other thing and that is even with the perishable data showing down 3% four weeks, 13 weeks down 1% and the volume is down 8%, the wholesale prices of beef have been high. They have been higher than a year ago. Balance of the cut out is still being high.
Ken Goldman - JPMorgan: Then just generally as you think about how to approach the year when input cost could be a headwind and obviously it looks like it will be. I realized you're going to stay on target with your long-term strategies, but are there tactical moves you perhaps might make this time rather than at a time when inflation is a little bit less onerous. It looks like some of what you're doing with capital spending and share repurchase, is that, but I was trying to get a sense for maybe what other adjustments you can make in running your business now versus what kind of it looked like a few months ago?
John Tyson - Chairman: Yeah. I think you've mentioned the primary too. We want to keep a little more drop out around this and just be caution, and then as we get into the year, and we get more visibility and what our working capital needs are going to be, I have absolutely no problem continuing to invest in the business. Obviously, there are acquisitions that are out there, it may interest us in the future. Buying our stock back, I think we are at quite value. So all those things are there, other than that we really don't want to change our strategy. We're on point growing our value-added businesses, doing those things we need to do to take care of customers and lead with quality, our service, innovation, our guys have done a great job, Noel White and his group have done a super job with their programs in Beef and Pork and continue to operate their business better than the indexes that they compare themselves to, so no that's the whole point was to weather the storm and get to a point like this to where we could continue down our path and have a balance sheet that would support that.
Operator: Ken Zaslow, BMO.
Kenneth Zaslow - BMO: I know you kind of touched on, I'm just trying to get a little bit more hardcore answers to this, how much production cost do you expect for the industry and what will your participation be?
Donnie Smith - President and CEO: Let me go to the latter, what we did was kind of look back into environments that happened before when we got into a environment where we could add pricing, but in our business, we have remained cut back to 6% or 8% or so, we did back a year ago and we're going to continue with our current production plans, is the plan now and things may change depending on what grain does or something like that, but currently we don't have any plans to change our production because we're producing well below our demand today, thus buying all the parts we're buying, so we like our production model being well short of our demand.
Kenneth Zaslow - BMO: What about the – because I guess your comment in the press release is changing crop conditions and pricing could reduce or change the USDA outlook, so I'm assuming that you guys think that there can be some production cut I'm just trying to figure what extent do you think it is and how confident you are in that?
James V. Lochner - COO: (indiscernible) and do a lot of work looking at history correlating live pounds and other production against demand and the data that basically says the increased price, you got to pullback production and the market will have to do its job how fast that happens under environment is difficult for anybody to predict and then we think as we look across the board we just – again history tells that will happen, who, how fast, when is virtually impossible to tell, we have lots, but we're certainly not going to talk about anybody specifically. We really try as direct you say we manage our own business but a lot of focus on demand forecast by part what our production runs will going to have to be and manage it out 13-14 weeks in advance and we do know what we have ahead of us, with increased live production cost. So we got to work on pricing and all the dialogs associated there in.
Kenneth Zaslow - BMO: Anyway the other question is, if you guys are projecting at least price if it's not positive what would that be for the industry? So, I'm assuming you're outperforming the industry can you give us some metric to which you guys are outperforming the industry?
Donnie Smith - President and CEO: Well I mentioned in an earlier question that we're to quartile in one of our benchmarking services in the top third and the other, so that's about as much as I could say about how we compare.
Operator: Ryan Oksenhendler, Bank of America Merrill Lynch.
Ryan Oksenhendler - Bank of America/Merrill Lynch: Jim, I just want to follow-up, I guess on Ken's previous question and your answer and some of the previous questions. Is this time different where historically you've said when you cut supply, pricing will go up, but is demand weak such that you actually can't pass it through this time. Going back to Christine's question in terms of wing prices not really high levels, wing or leg quarter and breast meat prices didn't really move that much higher this year in relation to where they are relative to their cold storage levels and where production levels were in general for the industry. So, I guess in terms of your optimism for pricing next year, I mean leg quarter cold storage inventories are the lowest level in three year since they've changed the data and breast meats at the lowest level in several years. So, could you comment about that in your ability to take pricing next year?
Dennis Leatherby - EVP and CFO: Well, you are making a good point for us, Ryan. Because inventories are low and that's certainly an advantage to us, but think, I mean we're facing today, not knowing what's in front of us. $9 corn delivered and $550 million – I mean $550 soybean meal, which is going to have your live cost above $0.50 a pound. I would somewhere in the neighborhood of $0.52 a pound. That's frankly just untenable. So, we talked about earlier, as we went back into earlier periods when there was $860 million slaughter pounds that – and in those environments we had the pricing structure that we needed to get on top of our current cost. By the way, we've improved our business since then. But if you just look at that, it stands to reason to us that with this wave of feed cost coming at us, you certainly would need to be below that level in order to have a favorable pricing environment. Now, our forecast for the year is to operate profitably in this environment, so anything that – anytime the environment improves that should be additive to our business.
James V. Lochner - COO: The only think I would add is, on my comments previously, but I'd add now would be you've seen different parts of the bird particularly carry a different percentage of the overall with breast meat being soft, wings high, leg quarter is running pretty strong prices all year, and again we really try to manage through a total revenue component and look at where the opportunity to maximize that be it in country, be it export. So, I think the market where there will be demand, structuring with higher prices generally that's a normal activity and the supply generally coming down to offset till equilibrium again occurs. So, the timing of that is very difficult to call, but I do believe people will eat protein, the world will still have the same overall demand for protein, there will be adjustments on the parts, and we'll just have to see how fast it comes up to cover the increased live cost.
Ryan Oksenhendler - Bank of America/Merrill Lynch: I think you should talk about – have you guys been importing any corn from Brazil at all or contracted to do so?
John Tyson - Chairman: No, we wouldn't if the math worked, but we've got a lot of truck corn bought from local farmers close to our feed mills and right now are the value -- imported values out of Brazil would compete with the cost that we've got local truck grain bought for. So, but we run the math constantly and when it works that’s an avenue for us.
Ryan Oksenhendler - Bank of America/Merrill Lynch: Then just one last quick one, Jimmy you talked about the volumes down 14% in Beef, how much of that it is -- is it lower cattle purchases, could you talk about what drove that or break down of that 14% decline?
James V. Lochner - COO: In that 14% we did process fewer heads, (indiscernible) was up, then our outside cattle purchases really related to the impact of the relationship we have with BPI with their volume down we basically captured some of that talent. So it was a combination of those three things on the line.
Operator: Tim Ramey, D.A. Davidson.
Timothy Ramey - D.A. Davidson: First on the Brazil-China losses of 30 million, is there any more color that you can kind of give us on that and what it that relate to, what’s likelihood of that continuing and so on?
Donnie Smith - President and CEO: We’re definitely seeing the softness that you hear a little bit about in the China economy and that's effecting the wholesale value, so basically what the story there is Tim, we have a young startup business that we run today largely dependent on market birds, the premiums we will get will come when we have these bow secured company-owned houses that part makes up only about 20% of the 2 million head that we're slaughtering today. So when you combine, let me hasten on to say the cost structure we see in those live production assets is great. The premiums that we see over the wholesale markets, both at retail and food service is what we expected. So, our business model looks right. It feels good. We're very optimistic about what we're doing there. It's just that we are a young startup fledgling business and today we're way to dependent on wholesale markets and it's been soft. Pretty much the same story in Brazil as we move towards the more value-added mix, this boneless leg meat deal in Japan when that market closed it kind of backed up through in effective course and the economic problems in your Europe slowdown, breast meat prices there. So, if you take the boneless leg meat market closing in Japan and the softness in the breast meat market in Europe a lot of that had ripple effects into other markets and ended up backing up a lot of meat into the domestic business and again we don't have our value-added meat sold out like we want to yet. So we were very dependent on the wholesale markets and that was just not a good place to be in Q3. We see some improvement now and we do predict a steady movement. It's liable to be a couple more quarters out though before we're feeling a whole lot better about that. The story is in Brazil it's plans double shifted and get into that value-added mix like our business model says we have to do and in China we can't build chicken houses fast enough. So, the models good, we'll get there, it's just we're too dependent on export and wholesale markets today.
Timothy Ramey - D.A. Davidson: Just a quick one for Dennis. If we were bridging to the $0.50 Dennis what would we plug-in for the tax component of the fee refunding of the bonds?
Dennis Leatherby - EVP and CFO: If we're going back to the $0.50 if we didn't have the extinguishment of the bonds that would have been 37.9%.
Timothy Ramey - D.A. Davidson: Do you know the dollar amount for the tax impact of the bond?
Donnie Smith - President and CEO: We can get to that, Tim.
Operator: Robert Moskow, Credit Suisse.
Robert Moskow - Credit Suisse: I wanted to know what your capacity utilization levels are in Beef now, Jim. I mean your volume was down 14% in the quarter, you still had pretty decent margins, but you're going to be down double-digit this year, you'll probably be down again next year. At what point this capacity utilization become an issue in Beef?
James V. Lochner - COO: The issue really gets critical when you are going to average, I got to get my math right here, but I'll make is simple. When you think you're going to average less than 36 hours, it's critical. We were well north of that. We always do our capacity utilization on a six day week and I don't think there is – we're not going to see volumes out there that are going to warrant much Saturday operation. But we're still in the high 70s on capacity utilization on a six-day capacity. You also got to kind of look at that number is when you are adding value on your cut floors and going to more value-added mixes, you have to watch how do you really run your plan. So, sometimes you'll sacrifice throughput for revenue and that's part of that overall game of trying to maximize revenue against cost, against the supply. So, sometimes you'll take a capacity reduction simply to maximize your revenue to get a higher mix. That's why it's a lot list dependent, we've done a pure number of just saying what's capacity utilization and we are always making those adjustments. That's why we I'm a bit (pegged) with the answer.
Robert Moskow - Credit Suisse: I remember years ago capacity utilization was the most important thing to follow has your business philosophy changed since then it's more revenue management?
Dennis Leatherby - EVP and CFO: Yeah. Let me -- I apologize for jumping in there, but it was not only the most important thing to follow, maximizing revenue has always been a key driver just that people like to look at that relative to the supply and the adjustments. So, yeah, the key is really maximizing the revenue through mix and sales, and then looking forward to what that type of cattle supplies are out in front and really trying to match those, and we're not hesitant to try to drop a little bit of the daily capacity or the daily run rates to try to maximize those revenues.
Robert Moskow - Credit Suisse: Then follow-up for Donnie, chicken pricing looks like yours is going to be up about 9% this year, your volume will be down pretty much in line with the industry maybe in line, is 9% pricing disappointing, were you expecting a higher pickup in pricing?
Donnie Smith - President and CEO: Good question. No, I think the cost level at so far for the run rate feels okay. It's going to be woefully inadequate to cover the cost structure that's coming at us. So, we will definitely need to take more, but I'm proud of our guys. We want some price based on the things we like to win a price increase on, which is having a great quality product in the box or in the tray; our service on time and order has just been phenomenal. Two, we lead with innovative capabilities, we’ve had a lot of our customers in the discovery center working on ways to grow their business and so for that we get rewarded for adding that value to their business with the pricing structure that makes sense. So, no I wouldn’t say we’re disappointed and where we are, I think our folks have done a good job, they do know they have another hill to climb and we’re headed that way.
Operator: Tim Tiberioc, Miller Tabak.
Tim Tiberioc - Miller Tabak & Co.: My question is on the Prepared Food segment, can you just give us some highlights within the quarter what actual product categories performed well versus the other categories?
Donnie Smith - President and CEO: Lunch meat business we’ve talked about that a little bit before continues to make important, prior to that team, Wright Brand, bacon has well outpaced category growth there. We've extended the Wright Brand beyond bacon now into dinner sausages and are very pleased with that. We are seeing some movement and pretty optimistic around chicken lunch meat. We’ve got some smoked meat offerings coming out; we've actually done very well in our Frank's business and two, we’ve got new offering coming very soon into the marketplace in the next two or three months, which well is expected with chicken offering, which will be a gluten-free strips and nuggets, so adding value to the red meat items, whether it’s pizza topping, our tortilla business has done as well. So, it's really been a fairly broad-based growth in all of those Prepared Food segments and we see a continued live feeds opportunities in that segment.
James V. Lochner - COO: The only thing I'd add is we also had a plant startup, which actually hurt us in this, which we started our.
John Tyson - Chairman: Council Bluffs, pepperoni plant, which will be very efficient process there. They are much more competitive than some of our existing pepperoni and we will continue to really put a lot of focus in our overall Prepared Foods, particularly the sausage and pizza topping businesses as well as the lunch meal. So, we're really encouraged with the activity and the project list that we have on the incremental improvements throughout the whole category we call prepared.
Operator: Diane Geissler, CLSA.
Diane Geissler - CLSA: Donnie, it wasn't clear from your comments if you thought you would actually fall into a position of unprofitability in the Chicken segment. I think earlier in the call, you talked about the incremental cost of grain and the pricing was actually coming down on a seasonal basis, we always see it and that suggested to me that maybe the December and March periods, you would be negative, but then later you said managing our business, however, we can remain profitable. So, I guess I'm just wondering for your commentary regarding fiscal '13 is it built on we know where we are to the extent that we know where grain is today, and we think we'll be profitable or is there a little bit of sort of optimism built into your back half of your fiscal '13 because at some point the market will start pricing and presumably that will have a crop in 2013?
Donnie Smith - President and CEO: A little bit of – the answer to both of those questions is yes. Our optimism is based around where grains are today because that's really the only visibility we have and we do see improvements in the back end, not so much in our costing model, but on revenue side of the model. It's a little bit back half loaded. But to your question, we are using current grain prices, current soybean meal, however the spot market is, plus the basis price delivered to our feed meal at cost structure.
Dennis Leatherby - EVP and CFO: We see more operating efficiencies coming.
Donnie Smith - President and CEO: Yeah, about $100 million.
Diane Geissler - CLSA: Well, I guess somebody touched on it earlier about the revenue side and the fact that, obviously the industry, it's really sort of a supply driven industry and sort of the pricing follows how much were either shorter or in access. But if you look at even the breeder flock today is now 10% below what it was in 2007, and yet pricing wasn't all that robust this year. So I guess I am just a little nervous that even if we get another cut next year, call it 2% to 3% that the consumer environment is so difficult that you really won't see it. When I talk to the restaurant companies are following the (QSR), they are looking to maintain their pricing structure to their customers, which means they're going to pressure back on their supply chain. So, is it that conversations you're having with your customers today that they are now giving you an idea that, okay, yes, they're going to be willing to except these price increases that you're going to need to take to cover this or I guess what's making this optimistic about pricing in 2013?
Donnie Smith - President and CEO: Number one, yes, we are. As we talked to customers today, they do see that this is a unprecedented movement in grain that is likely to have an impact on the supply of meat in all three proteins, maybe all four proteins, including turkey I guess on the market, as we move forward. Now, the exact timing of when -- which segment will cut back and supply will decrease, we have our ideas, but I won't speculate on that, but I think everyone that we talk to realize this that the meat situation in America is going to tighten up and that's going to have an impact on pricing. USDA has got their figures. We (indiscernible) hours, but hey, our Chicken business has done -- Domestic Chicken business did very well I think in Q3. We continue to add not only operating efficiencies, but we continue to grow our value added, and we're getting paid for the value that we're adding to our customers businesses and so that's what keeps us optimistic is the fact that this situation is untenable, it's going to change and we're in a position because we so dramatically reduced the amount of fixed priced long-term annual fixed price agreements that we have to be able to take advantage of helping our customer, ensure supply by being an arrangement with a great supplier.
Diane Geissler - CLSA: Then just one follow-up question if I have a minute I realize you're over scheduled here. On the International business, you had talked about pulling in all of that production internally and building out farms et cetera in China, is that -- what's the timeline on that again, is that two years?
John Tyson - Chairman: Several years, 2014, yes where we should grow steadily and company controlled biosecure houses between now and 2014?
Diane Geissler - CLSA: At that time, you don't expect to take any meat from the outside market?
John Tyson - Chairman: Correct.
Diane Geissler - CLSA: What will your run rate be in 2014 in terms of total production?
Donnie Smith - President and CEO: In China about 3 million hit.
Operator: Colin Guheen, Cowen & Co.
Colin Guheen - Cowen & Co.: Just real quickly I guess bigger picture, playing off with some of Diane’s questions, there has been such demand destruction over the last couple of years in Beef, are we – came into a level more late in demand where people become more agnostic on price or do we see more species substitution if we continue to have above your forecasted pricing in beef and continued demand destruction.
Dennis Leatherby - EVP and CFO: When I hear that and I tend to think that until I go look at the numbers and then I see that the cut out has ran a high-level and currently is running a much higher level relative to last year when I look at the perishable data you see the volumes being down and the prices being down, but the route is the markets absorbing, did absorb a choice cut out in the 190s through the bulk of May, it came off out after the 4th of July. It’s a very difficult thing to answer other than looking at history, but we do know that that supplies will continue to come down, the prices probably will continue to rise and the export demand I think even though it’s down year-over-year, January through May about 11%, we expect to see probably exports continue or will strengthen in the back half and potentially in the ’13. Again, that overall available worldwide supply keeps dropping, and so I think there are a number of consumers that are really -- prices – the primary driver. So, while I answer this I am not sure I can't predict the future very well, but I can look at the supply dynamic going down and history tells me that as supplies come down prices will continue to inflate.
Colin Guheen - Cowen & Co.: Great. Thanks, a lot.
Donnie Smith - President and CEO: Okay. Well, that wraps up our call for today. We obviously have some challenging months ahead, but we've got the right team in place and right plan to handle what comes our way. So, thanks for joining us today and have a great day.
Operator: Thank you. This does conclude today's conference. Thank you for joining. You may disconnect at this time.