Tyson Foods' CEO Discusses Q1 2012 Results - Earnings Call Transcript

Tyson Foods (TSN)

Q1 2012 Earnings Call

February 03, 2012 9:00 am ET

Executives

Jon Kathol - Vice President of Investor Relations and Assistant Secretary

Donnie Smith - Chief Executive Officer and President

James V. Lochner - Chief Operating Officer

Dennis Leatherby - Chief Financial Officer and Executive Vice President

Analysts

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Christina McGlone - Deutsche Bank AG, Research Division

Vincent Andrews - Morgan Stanley, Research Division

Farha Aslam - Stephens Inc., Research Division

Christine McCracken - Cleveland Research Company

Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division

Ryan Oksenhendler - BofA Merrill Lynch, Research Division

Timothy S. Ramey - D.A. Davidson & Co., Research Division

Heather L. Jones - BB&T Capital Markets, Research Division

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Lindsay Mann - Goldman Sachs Group Inc., Research Division

Kenneth B. Zaslow - BMO Capital Markets U.S.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Robert Moskow - Crédit Suisse AG, Research Division

Farooq Hamed - Barclays Capital, Research Division

Presentation

Operator

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Welcome, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the conference over to Mr. Jon Kathol. You may begin.

Jon Kathol

Good morning, and thank you for joining us today for Tyson Foods' Conference Call for the first 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. Because our shareholders' meeting is this morning, we have to end the call by 9:15 Central. [Operator Instructions] I'll now turn the call over to Donnie Smith.

Donnie Smith

Thanks, Jon. Good morning, everyone, and thanks for joining us today. Our first quarter earnings were $0.42 a share compared to $0.78 for the first quarter of 2011. Now keep in mind that our Q1 last year was the best quarter in company history. And although the comparison is unfavorable, Q1 of '12 is still equal to our second best Q1 ever.

Our biggest challenge in Q1 came in our Beef segment, which had an operating margin of only 0.9%. There are a lot of moving parts to what's happening there, and we'll have Jim get into those details in his remarks.

The Chicken segment's improving with a 1.2% return on sales. And although that's still well below the normalized operating margin range, we're pleased with the progress from Q4, as lower supplies have supported pricing. Supply and demand appear to be in balance, and we have positioned ourselves well from that perspective. So we're staying cautiously optimistic for now, but we need to keep a careful eye on the impact price increases may have on demand, and remain flexible so as not to overproduce consumer demand for our products.

Our Pork segment continues to do exceptionally well and had an 11.2% return on sales in Q1. Our outlook remains favorable for our Pork segment to continue to perform very well.

Prepared Foods has made a lot of progress, even while facing high raw material pricing, and earned a 5.9% return on sales for the quarter, which is at the top end of our normalized range.

Now taking a look at the macro environment, consumer confidence and spending improved in the last part of calendar 2011 as expected. According to the Conference Board Consumer Research Center, consumers are more optimistic that business conditions, employment prospects and their financial situations will continue to get better. But it's still too soon to tell if this is a rebound from earlier declines or a sustainable shift in attitudes.

According to the Perishable Group data, while dollar sales of fresh meat at retail were up 3% versus last year, volume was down a little over 5%, led by beef and pork, down 8% and 7%, respectfully [ph], while chicken pounds were about flat. Our view is that this trend will continue. Bacon and lunchmeat sales were stronger in Q1 versus last year, again driven by price improvement. And the frozen breaded category showed a slight decline. Industry indicators show that modest improvement and potential for food service in 2012, however.

Real sales growth has been consistently positive for the last 2 years. Forecasts for 2012 call for a 0.7% growth in commercial traffic. Major QSR change, supermarket delis, education and hospitals are the sources of growth and are expected to continue to grow faster than the rest of the industry.

Operators are leveraging dayparts, including snacks and breakfast. And we have been and will continue helping our customers develop products to fit into those meal locations. The ideal proposition is offering better food at a better price. Consumers seem to be moving away from the dollar menu to more moderately priced items such as nuggets, strips, breaded chicken sandwiches and pizza, and the industry is providing the quality cues that justify paying a little more. Our product development opportunity is to deliver good and better for an acceptable value, and we've positioned ourselves to be on a leading edge as we see changes in the marketplace.

Now turning to international. We're excited about the progress we're making, especially in China. As we mentioned last time, our CapEx plan in 2012 is larger than previous years, in part to build company-owned live production in China. We began operations in Jiangsu in November, and the start-up is on schedule. We're very optimistic about the prospects for our China operations. We have a great customer base there, and we're building the team to execute our operating and selling strategies.

Another part of our CapEx plan includes adding a second shift to our Brazilian plants, and we're executing that plan. We're very pleased with the progress of our operations in Brazil. In addition, good economic conditions are supporting domestic prices, as well as increasing demand for more value-added products. And with a favorable foreign exchange rate, export sales from Brazil are becoming more cost competitive.

As for U.S. domestic protein availability, our view is largely unchanged as the global demand for protein continues to grow, and U.S. exports remain strong. The production cuts in the poach industry made in the past year, along with the decline in beef supplies, will be partially offset by an increase in pork and turkey availability, leading to what we think will be a 1% to 2% decline in domestic availability of protein in 2012.

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