Tyson Foods (TSN) Q3 2012 Earnings Call August 06, 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 Heather L. Jones - BB&T Capital Markets, Research Division Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division Farha Aslam - Stephens Inc., Research Division Gregory A. Van Winkle - Morgan Stanley, Research Division Christine McCracken - Cleveland Research Company Kenneth Goldman - JP Morgan Chase & Co, Research Division Kenneth B. Zaslow - BMO Capital Markets U.S. Ryan Oksenhendler - BofA Merrill Lynch, Research Division Timothy S. Ramey - D.A. Davidson & Co., Research Division Robert Moskow - Crédit Suisse AG, Research Division Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division Colin Guheen - Cowen and Company, LLC, Research Division Presentation Operator
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.Donnie Smith Thanks, Jon. 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. Now 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'm very pleased we were able to pay off 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 3 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 a 14% decrease in volume. Both Pork and Prepared Foods 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 Foods segment was above its normalized range, with a 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 start-up-related losses, our Chicken segment had a 6.7% return on sales.
The Pork segment came in just below its range for the first time in 10 quarters, with a 5.1% return on sales. Beef was just under its range, with a 2% return. Considering the challenges Beef and Pork faced in the third quarter, I'm 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 we'd 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 3 quarters. That's why we have this strategy in the business model we have: to manage through volatility. We have a 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 pull back some on our CapEx and be a little conservative with our cash in order to keep a good supply of 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 pledge to grow 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 4 months of moderate decline, consumer confidence was up in July, according to the Conference Board Consumer Research Center. Unemployment, however, was virtually unchanged, which weighs on the pace of economic recovery.
In the retail channel, according to the Perishable 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 a 0.6% increase in price. Beef and pork volume were down 7% and 1.7%, respectively. Chicken was the only category that saw pounds sold increase versus a year ago, but the increase was very slight at 0.2% and demand feels sluggish to us.The USDA forecast food prices will continue to rise in 2013, led by meat, eggs and dairy, as a result of the drought. Beef prices are expected to be up 4% to 5%; pork, up 2.5% to 3.5%; and poultry, up 3% to 4%. In the foodservice 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's Performance Index was stable for June. And while we still feel sluggish demand in foodservice 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 independents finally showing a slight increase for the first time since 2009, another hopeful sign. Read the rest of this transcript for free on seekingalpha.com