Highlights From TSN's Q4 Conference Call: Opportunities In High Margin Category

November 23, 2009 1:47 PM EST

Tyson Foods (NYSE: TSN) reports Q4 EPS of $0.28, 2 cents better than the analyst estimate of $0.26. Revenue for the quarter was $7.21 million, which compares to the estimate of $6.89 billion.

Highlights From TSN's Q4 Conference Call:

• (CFO) While total revenue was down in Beef and Pork, we successfully managed the spread and they've been very profitable. Prepared Foods is also doing very well with toppings, tortilla, crust, bacon and lunch meats all meeting expectations. Parts of the Chicken segment are doing well now and we're working to improve the rest of it.
  
• We did get our EPA registration completed which is a big milestone for us. We're happy with the rollout of Freshpet, our launch for refrigerated pet food.
  
• Pet treat is another exciting area for us as well. It's a $3.4 billion category in the U.S. and it's growing about 8% a year. We see opportunities for Tyson to participate in this high margin category.
  
• Now, for details on the Chicken segment, which in Q4 posted on operating income of 32 million with an operating margin of 1.2%. This is an improvement over Q4 of 2008 when we had a loss of $91 million and a negative 3.8% operating margin.
  
• And 2010 will be better, but we're still facing some challenges, we know what needs to be fixed and we know how to fix it. The issues vary from location to location, but we have specific plans in place to tackle. In general, we've got to grow our volume, improve our return on sales, protect our cash and keep inventory on target. We need to fill up our plants and get better yield, lot efficiencies and labor efficiencies.
  
• So we still got work to do and a lot to accomplish in our Chicken business, but I know we can do it, because we've already done it in our Prepared Food segment.
  
• Prepared Foods had operating income of 133 million with 4.7% operating margin compared to 63 million and 2.3% in fiscal 2008.
  
• Average sales prices were down 8.4% for the quarter and 0.6% for the year on increased volume of 11.7% and 5.2% respectively. Now adjusted for the extra week, quarterly volume was up 4% and annual was up 3.3%.
  
• Our bakery business is well with top line revenue of 33% in the last 12 to 18 months.
  
• The Beef segment made 120 million or about 4% this quarter after adjusting for the goodwill. This compares to Q4, '08 5.1% margin which benefited from the large mark-to-market adjustment from Q3 of '08.
  
• There were no substantial mark-to-market adjustments between Q3 and Q4,'09. In Q4, '09 Beef revenues per 100 weight and cattle prices were substantially lower than a year ago about 15%.
  
• Our weekly capacity utilization was just over five days to 2% higher than a year ago. We continue our focus on efficiency to improve daily capacity, operating cost and maximizing our revenue. Our total fiscal '09 Beef earnings were 2% or 214 million roughly double the results from the fiscal '08 after adjusting for the goodwill impairment. Beef demand and consequently revenue continues under pressure on both the cut out and the drop credit. Year end slaughter volumes for fed steer and heifers were down 1.4 million head or about 5.15%. Our cow slaughter increased slightly from a year ago.
  
• Looking forward in the Beef segment, my view of the fundamentals has not changed depreciably. We will continue to see soft demand for metals and portions of the drop credit items limiting significant product price appreciation. There will be a gradual decline in available head as the beef herd continues to shrink about 1 to 2% and the dairy herd reduces its size.
  
• However, the placement of feeder cattle later into the summer and fall this year will provide adequate fed cattle supplies throughout the majority of our iscal '10.
  
• Moving on to our Pork business, the Pork segment had a respectable quarter coming in at 48 million or 5.5% operating margin. This compares to a strong Q4 '08 of 7.5%. Capacity utilization for the quarter came in at just over 90% compared to about 86% for Q4 '08. Revenues were down substantially compared to a year ago nearly 25% per 100 weight. Even though hog cost decreased during the quarter they did not decrease equal to the revenue decline. For the fiscal year, Pork retuned $160 million or 4.7% return on sales. Year-over-year total revenues declined dramatically largely due to decreased exports versus last year's records and a lower drop credit.
  
• Looking forward in the Pork segment we will see a gradual decline in hog's supplies to the first of our fiscal year with additional year-over-year declines into Q3 and Q4.
  
• We expect to see fiscal 2010 hogs available for slaughter to be slightly higher than 2007 or around 107 to 108 million head.
  
• Our Beef team did an excellent job with performance well above our normalized EBIT range of 1.5 to 3%. It also had a solid year in fiscal '09 with a 2% EBIT margin before the goodwill charge and is well positioned for solid earnings in the years ahead as Jim described in his remarks earlier.
  
• Total cash at the end of fiscal '09 including restricted cash was approximately $1.2 billion, an increase of over $930 million from fiscal '08. Total liquidity including restricted cash increased to $1.9 billion. Total debt to capitalization was about 45% versus 37% at the end of fiscal '08 on a net debt to cap basis, it's about 35%.
  
• Total liquidity including restricted cash increased to $1.9 billion.
  
• Total debt to capitalization was about 45% versus 37% at the end of fiscal '08 on a net debt to cap basis, it's about 35%.
  
• Working capital improvements continue to be a good highlight. We benefited from a strong 6.8 day reduction in inventory days, or just over $500 million compared to year ago. Also our accounts receivable improved by 1.9 days and it's worth about $170 million.
  
• Capital expenditures for '09 were $368 million compared to 425 million for '08. Diluted average shares outstanding for the quarter were 372 million.
  
• While we continue our policy of not giving guidance for 2010, here are few items of fiscal 2010 to help you with your financial models. We expect revenues for the fiscal year to be approximately $27 billion. Weighted average shares will be approximately $378 million, 378 million shares. Debt interest expense is expected to be around 320 million. Our interest expense expectation for 2010 has been impacted by a new accounting change. As a reminder last September, we issued $458 million, a three and quarter percent convertible senior notes due in 2013. Due to a new accounting pronouncement, which we will adopt in Q1 2010
  
• (Q&A) Just want to ask you a question here about the grain for 2010, and I appreciate the increased closure. But if I look at between the derivative contract at a negative year-to-date for 2009, 250 million and the pick up that you saw in the fourth quarter. I guess what I can see in there is that you kind of move to cash prices in the fourth quarter? So, you started realizing the improvement on a year-over-year basis. Is that 109 million that we saw in the fourth quarter, is that good run rate to you for the 2010 in terms of what you're going to pickup year-on-year or how should we think about what the actual improvement in grain cost will be in the poultry division in 2010?(A)It's going to be a little hard to predict what grain prices are going to do. I can't tell you though about our philosophy. We're going to play it pretty close to the best on grain. If we have and we've said this before, we've got fixed price contracts and have the appropriate margin in those. We'll book grain against that but other than that we're going to stay on the market and play this thing pretty close to the best. So, as you can look at the forward curve on the futures markets and kind of predict what the grain prices are going to look like. In course, I don't have any way to predict what the volatility or way through the year end and that type of thing.
  
• I want to dig a little further, I think Donnie you mentioned that you expected to see I guess the same volumes I guess in chicken or to increase production I think that was kind of what you're hinting at by your comments on where inventories stood currently?
  
• (A)Donnie Smith, President and Chief Executive Officer: Yeah, here is what it boils down to Christine. In 2009 in our Chicken segment, we took quite a bit of inventory out and so if we just sold in 2010 what we sold in 2009 we're going to have to produce that much more, frankly just able to fill the orders so that puts us in a position to do a much better job about running our plants full and getting our line efficiencies and the type of things we've been looking for.
  
• It seems that where breast meat prices are today it's not exceptionally supportive. Are you suggesting that there is going tobe a rebound I guess in demand, is that why you're so optimistic on kind of rebuilding total volumes?
  (A - Donnie Smith, President and Chief Executive Officer: Well I look for, thinks to react seasonally as they should. I mean, we'll rebound a bit in Q2 after our Q1 is over and then we think there is a pretty decent chance in three and four based on the pork numbers and I'll let Jim, comment on that a little bit for, demand to increase there for poultry. So I think that answers it. Jim any color on that.
  I'll just add a little bit color to this that we're very surprised on the October export numbers in both Beef and Pork and the interest that we're starting to see which is going to - with decreasing production and increasing exports and probably in the case of beef limiting imports because of the strength of the dollar, we'll see domestic availability of protein and those two species drop going forward, unless we see a major trend change there. So that's one reason lower capital or supply, supplies and look at the domestic availability shrinking throughout and even through per capita consumption will come down, I think it will be favorable to push pricing.

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