Tyson Foods, Inc. (TSN) Q2 2011 Earnings Report, Transcript and Summary

Good morning, and thank you for standing by. [Operator Instructions] 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.

Good morning, and thank you for joining 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. [Operator Instructions] I'll now turn the call over to Donnie Smith.

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 $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, we're in or above their normalized ranges. Chicken [indiscernible]. 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 continued 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 fall off at the beginning of Lent, but we didn't see that this year. And on the other hand, we typically get an uptick after Easter, but demand has been slow, probably due to the bad weather experienced in much of the country. The slow economic recovery is still a factor as well. After a fairly steady increases, consumer confidence dropped in March. Rising gas and food prices continued to reduce disposable income. According to Nielsen, consumers are likely to remain conservative and hold on to many of the behaviors they adopted during in the early stages of the recession, including eating out less, value-conscious shopping and increased use 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, this should support chicken prices. Our chicken prices mostly increased to cover this unprecedented grain costs increases. We are seeing more future 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. In our November call, we predicted foodservice sales would be flat to up 1% and volume might be up around 1%. Now based on the industry data we studied, we predict foodservice 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 our brighter outlook for the foodservice 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're 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 2 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 others 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 pressure from these market dynamics. It'll 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'll now turn it over to Jim for a review of our segment results, followed by Dennis with the financial report.

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 a 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 plants are 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% return 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 was up about 20% quarter-over-quarter. We expect a slight decline in fed cattle compared to last year. However, we should have adequate supplies in the regions we operate our plants. Barring any major market disruptions, beef exports should remain strong in 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 is 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 costs for the quarter, but managed to maintain profitability with a 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 2 years, our poultry business units have done an excellent job of improving our operations and taking costs 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 feed costs. 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, lunchmeat, tortillas, pizza crust, pizza toppings, soups and side item. 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 costs, 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 continue to increase for a variety of reasons and imports continue 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 costs. We appreciate their effort and success. And now we'll go to Dennis for the financial report.

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's important to note, however, that we were able to reduce our inventory volumes to help mitigate these rising costs. In addition, we improved our base 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 ratings standpoint, we were pleased to receive upgrades from all 3 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 partners' support and recognition of our improved financial performance over the past 3 years. So here's an updated outlook for fiscal 2011. Revenues are expected to be -- 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 2. 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 have 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 a valuation worthy of our performance. That concludes our prepared remarks. Operator, we're ready to begin Q&A.

[Operator Instructions] Our first question comes from Christina McGlone. [Deutsche Bank]

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.

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 hasten on 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.

The next question comes from Heather Jones. Heather Jones - BB&T Capital Markets: BB&T Capital Markets. Quick question, Jim, on the Pork business. The cutout price is down about 10% over the last 6 weeks and, consequently, packer margins have compressed significantly. And I was just wondering if you could give us a sense of what you're 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.

Yes, the cutout did drop over the last 4 weeks, about 112%, predominantly driven by big a correction in the belly price. And even though seasonally hogs do tighten during this time frame, which they did and hog costs did come up, our margins held in there very well. We were very pleased with that. And I did really expect to see kind of a correction in the prices, as we've seen throughout, come in through this time frame. But in that pork cutout, it was predominately the bellies, so. Heather Jones - BB&T Capital Markets: Was it a correction just in the markets because they've gotten too high? Or have you seen a decline in demand?

Both. The market had really overshot itself early, into that 150 zone, and then did correct back. So that was it.

Our next question comes from Ken Goldman. Kenneth Goldman - JP Morgan Chase & Co: 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's say, "Look, these guys have earned, on a pro forma basis, 220 last year. They're 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 you're seeing it?

Yes, definitely. Ken, this is Dennis. We believe that we're a different company now. We have basically stabilized our margins. We're on top of what we're doing, best in class in all 3 of our major segments. And we're 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 are trading at a discount to our peers, not only in protein, but in ag, at a fairly significant discount. So all that being said, we scratch our heads and wonder why the multiple hasn't expanded. Certainly, something that the Street seems to be struggling with and we keep saying that we're going to deliver and keep these earnings going. Kenneth Goldman - JP Morgan Chase & Co: So just to follow-up then, are you arguing for a peer multiple or a better-than-peer multiple in your mind?

Looking at our results, probably better.

Let me just add a little bit here, Ken. First of all, we have a multi-protein model. We are in all 3 proteins, plus our Prepared Foods model. We also go to market in multiple channels. Multinational, although our international business is by and large our 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 a 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've got -- we had a lot on hand in Q1, but we corrected that in Q2 like we said we would. And yes, 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 you add all that up, I think that paints a picture of a completely different company than what we were 2 or 3 years ago.

Our next question comes from 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? And then my real question is, perhaps 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?

Farha, let me try to answer your first question, but you said a decline in mark-to-market? Are you talking derivatives? Or what are you...

Yes, the derivatives, mark-to-market, I was just wondering what caused it. And how does that reverse itself out?

Well, first of all, it -- at the end of the quarter, we still had very high prices and with any short positions we had on to cover forward buys or any livestock positions that we had, we would have a negative mark-to-market on those. And they -- as the market has corrected lately, they would have been already in the process of correcting. So on the derivatives, that's -- the primary purpose on those is forward-bought livestock to protect exactly what we saw as a correction. Okay? Hopefully that answers that. They were fairly, clearly spelled out in the magnitude. It didn't surprise me, looking at that. Back to your second question. Farha, could you repeat that?

The question -- let me make sure I get this right. The question was, softness out of Easter and dead livestock slaughter. Correct or...?

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?

Okay, yes. 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 got a little bit encouraged by the drop in unemployment. Of course, it popped back up to 9%. And if you look at that environment, I don't think you should paint a very rosy picture about demand going forward. So had a couple of soft weeks. Probably weather had a lot to do with that: rains going through, cool, wet spring. We 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.

Yes, 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 I've already covered the major correction in pork, which bellies were a primary driver on that. But beef, what we saw was the cutout -- the blended cutout dropped very substantially in that 4, 5 week period. In fact, it dropped at almost $11.44 on the blended cutout per hundredweight carcass. And then live cattle followed it right down at about the same levels. So we saw about the same thing in pork, although the pork live didn't correct. It actually, again, seasonally comes up. But we did see demand shift, wholesale prices correct. Part of that was, I think, they were fairly high-priced coming into the spring and then we did see, with the weather, a combination of events, some weaker pulls across the board in that last week of April. And hopefully, this last weekend we'll probably see a reversal of that. And demand is always a precarious scenario on being oversupplied and undersupplied, which will drive our prices up or down depending upon the situation.

And the response of the industry, have you seen slaughter levels pull back?

Well, we saw a correction 2 weeks ago in cattle and we're seeing seasonally in hogs, so. We always try to make sure we're 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.

Our next question comes from Diane Geissler.

It's CLSA. Could you just tell me -- you didn't really give a number in the 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 a rosy picture on demand, why would production be up at all?

And I take it you're talking about chicken?

Yes.

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 over-revved 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. And hey, I tell you, if we're 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, hey, 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.

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 grains 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 in backward H [ph]. 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?

Yes, we do, and I think you've got a pretty good read on how to interpret our press release.

Our next question comes from Ken Zaslow.

Bank of Montreal. 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 3 proteins?" And then the second question is, "Dennis, is there any restrictions to you guys not -- to buy back stock on your side and not pay down debt, and instead take some of the money and actually use it to repurchase stock?"

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 -- we really maintain a lot of liquidity. It's $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 immediate future.

And on the demand question, I think we'll answer: the Memorial Day, I believe we will see some pretty good featuring of chicken, although bonus loins in pork and the middle meats in beef are probably going to feel 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 foodservice, should improve. It's going to be a great value for the consumer. The back half of the bird today is driving revenue growth at the retail level and, obviously, breast meat prices are quite a bargain. So we think you will see fairly strong retail and foodservice featuring into the summer.

Our next question comes from Jeff Farmer. Jeffrey Farmer - Jefferies & Company, Inc.: Jefferies. 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 sees their chicken pricing sort of stay where it is, if it doesn't move materially, do you think you can still see a $200 million in price and mix improvements in 2011?

What we've said before is that we thought we would get a couple of 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 a month -- 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 3 and 4. 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 high raw materials.

Our next question comes from Lindsay Drucker Mann.

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

Yes, it's certainly back half loaded, Lindsay. And on your first question, we have a great commodity team and they're always looking for alternative ingredients. Now in most livestock dives, corn and, frankly, corn substitutes whether it be wheat, DDGs, whatever that might that 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 costs. We're very experienced in doing that. We've been doing that for years and I'm confident that if there's an alternative out there, our team is on it. They're researching it and they know how it will affect our performance.

Maybe just to follow-up on that a bit deeper. Is your expectation -- with the last wazzy [ph] 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 yield-crop balance sheet. In your experience, not just with your chicken operations, but just looking at feed lots 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?

Not dramatically, no. I would say that the bulk of that substitution's already occurred, DDG utilization is -- dried distiller 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 costs versus any potential negative impact on performance. And 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.

Our next question comes from Tim Ramey. Timothy Ramey - D.A. Davidson & Co.: It's D.A. Davidson. Donnie, we've seen a strong export picture and some supply disruption as a result of the tornadoes. Can you talk a little bit more about how you think those 2 factors might be influencing overall availability in supply and pricing?

Sure. Tim, obviously, we think one of the predominant factors in determining pricing is domestic protein availability. With very strong exports in beef and pork and strong exports in chicken as well, we see that domestic availability for the 2011 year should be about flat, down slightly maybe. And then on the other side, the impact in Alabama, I'm 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 -- well, the storms that swept through that area: North Georgia, Tennessee and Alabama. Timothy Ramey - D.A. Davidson & Co.: And would you say you're participating in the strong exports? Pilgrim's, I think, had a very big number out a week or so ago.

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 are looking at shifting more of 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 into export are the back half of the bird, and we see an opportunity, in a pretty tough economic decline -- climate, to revenue up by moving more dark meat domestically and that's our focus.

Our next question comes from Robert Moskow. Robert Moskow - Crédit Suisse AG: Crédit 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 6 months or so, but you do have the specter of much higher corn cost when those hedges roll over 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 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 even marry that up with your plan, which is to keep volume in positive territory. If the industry stayed in volume territory, do you think that margins can still recover?

Okay, Robert, I'm 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 and 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're focused on is passing along higher prices because we 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, well, as we look forward into the Chicken segment, when we get the revenue increases that we need to cover these costs, that should 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, in our focus on revenue, if that changes the demand picture out front, our suppliers will adjust accordingly. But we don't see the need to do that today.

Our next question comes from Vincent Andrews.

It's Morgan Stanley. The one question I had was -- and it goes back to the questions about the pork and beef prices. 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 had been acting as a little bit of a 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. Can you help us with that?

I would say that those -- the retail prices for beef and pork had been climbing -- inclining, rather. They were up about 11%, 12%. And yes, 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 see it as they pass -- as our customers pass along higher wholesale prices, the consumer does see it and there potentially are shifts. Now interestingly, chicken was the least -- up the least at 3% during that last 13-week period, and had the least influence negatively on pounds, which are off 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, and particularly those spread businesses in beef and pork.

Okay. It just seems to me that...

And you're seeing it right, but that dynamic didn't surprise us. And only in the market, again, makes those adjustments. And I always got to emphasize, in beef and pork, and I already stated that the livestock costs did correct as the wholesale cuts did correct out.

Sure. No, fair enough. And 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 that 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?

Well, we look at trying to make money and EBITDA is not the metric we use. But we are extremely focused, as Donnie's 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 costs, that price is a mechanism as well, and one of the mechanisms on driving revenue. So we're 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.

Our next question comes from Christine McCracken.

Cleveland Research. 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've missed.

Something -- I didn't understand -- in the what period?

Year-ago.

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, it wasn't any intentions. They were up. "It wasn't clearing inventory," is the answer.

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

I didn't really mean to come across negative at all. I just said they wouldn't be as robust as they've been, because they've been up and very 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 with. We'll see some correction as we come into the Q3 period, which we normally do in May, June. You'd normally see a seasonal decrease in supply. And then I was concerned because bellies were so high-priced, on a wholesale basis, and anxiously watching to see what clearance. And we did see bellies correct $0.25 a pound from $1.50 to $1.25 at a very fast rate. And I'd 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.

Our next question comes from Ryan Oksenhendler.

Yes, it's Bank of America Merrill Lynch. I just wanted to ask about pricing on chicken. One of your competitors talked 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?

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 talked about this in previous quarters. We try 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 an increase in production in chicken of, say -- I think USDA's got it 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 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.

Our next question comes from Stephen Share.

Morgan Joseph. Say, I wanted to focus in on beef a little bit. It seems like -- I realize price was up a lot -- live cattle was 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 you're gross margin wasn't a little bit stronger there.

Well, let me quickly say that you're right. The cutout, on an aggregated basis, quarter-over-quarter same year, was up 24% -- or excuse me, 18%. Drop credit was up substantially, but live cattle costs 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 we saw live cattle follow it up very much at the same point in time. So we were still very much in the normalized range, saw some of 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 these last 4 weeks 11%, live cattle costs fell -- not percent, dollars per hundredweight -- our live cattle costs on a carcass-weight basis dropped actually at the same rate or slightly above that.

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?

I would expect that we probably can work on improving that quite a bit as the fundamental sets up because I'm still very bullish on exports. We did see this correction and then we're coming in to bigger seasonal supplies which -- generally, historically, this May, June, July period is when packer margins generally expand. So we're in a situation where I'm very comfortable yet in beef.

Okay. So there's a decent chance that, that 2.8% operating margin might mark the low margin of the fiscal year.

Yes, I think there's a reasonable chance of that, yes.

Our next question comes from Akshay Jagdale.

KeyBanc Capital Markets. Jim, the first question is for you, Jim. On beef, just wanted to follow up on the margins. What we see in the spot market is somewhat different from what you're, 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 you 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?

Well, what you're missing is always the difficulty of taking aggregate data across a variety of regions and 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 4 weeks per hundredweight, cattle cost corrected $12 per hundredweight flat on the carcass. We maintained margins throughout this whole time frame. 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 on basically beating the revenue side, having a good mix portfolio, export portfolio, a combination of a 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 revenue. So we hold it in there and it is a spread game. Our goal, as I've said many, many times on this call, is to always beat the index on the revenue side and hold onto it, and then really just work constantly at being the low-cost, high-revenue player in the regions 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.

Akshay, let me -- I'm going to add 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 fiscal quarter. We are 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.

That's very helpful. Can you buy -- if not now maybe as a follow-up, tell us how much you generally beat the cutout buy? Well, it would help in terms thinking of evaluation premium, but anyway, I can follow up on that. The other question is on chicken, Donnie. So there's a view out there on the chicken side that the cycle is correcting, it's turning. And there's also -- some people believe that it's going to 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?"

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 of those things that increased costs: fuel costs, utilities costs, et cetera, healthcare costs, et cetera, et cetera, et cetera. So it's going to be tough this year. But -- now looking forward, our goal this year is to be able to get revenue in place 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're going to continue to improve on operating efficiencies and we see -- we're on track and we see more runway. So our cost structure, non-, call it, grain- or input-related, will be lower in '12 than it is. Now remember, we're also spending fairly heavily on our Chicken business to continue to improve our cost structure and our productive 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 high cost structure, this market-input-related cost structure that's affecting our business. So when you combine low -- better operating efficiencies and a 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.

But 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?

What I'm -- I am talking about our business and I don't believe -- number one, I'm not going to speak for the industry. I'm talking about what we have to do to drive our business performance. I don't want to leave the impression that we're victims to raw material or inputs. Our job is to get paid for what we do. And we provide a great deal of value and 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're focused on.

Our next question comes from Ann Gurkin. Ann Gurkin - Davenport & Company, LLC: Davenport. Just wanted to follow-up. After listening to the call and your comments, it seems the tone's a little more cautious. And I'm 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?

First of all, I'm not -- Easter was historically very late, okay? And I'm 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 maybe the adjusted number, and I feel comfortable at $2 maybe GAAP. So yes, slight adjustment down, but I don't think anything dramatically. And, hey, 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 are operating in is the climate we expected to be operating in, and that we built our plans to be operating in. So we're on plan and we believe we're going to deliver.

Our next question comes from 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.

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 up front.

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?

The information I got from our team is that it's continued strong post-earthquake and there will continue to be a replenishment and continue to be consumption. And again, I always brings this back to, "The global supplies of 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 3 species, year-over-year, they're all extremely strong and I'm quite certain March will print that when they're final and April and out front. 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 that negative going forward. We're very positive for that real strong fundamental that exists.

Our last question comes from Diane Geissler.

It's CLSA still. So 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?

Yes, ma'am. Well, I hope you can tell from our answers to your questions, we feel good about where we are as a company. During challenging times in the past, I think we would've looked at this as weathering the storm. 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's in all 3 proteins, plus Prepared Foods. We have a 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 through innovation. Our chicken inventories are down to historical 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 said we were going to do. The fundamentals are there. 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.

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