Tyson Foods, Inc.

Tyson Foods, Inc.

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Agricultural Farm Products

Tyson Foods, Inc. (TSN) Q2 2009 Earnings Call Transcript

Published at 2009-05-04 13:31:12
Executives
Ruth Ann Wisener – IR Leland Tollett – Interim President & CEO Dennis Leatherby – CFO Donnie Smith – Sr. Grp. VP Poultry & Prepared Foods Jim Lochner – Sr. Grp. VP Fresh Meats Rick Greubel – Grp. VP & International President Jeff Webster – Grp. VP Renewable Products
Analysts
Heather Jones - BB&T Capital Markets Farha Aslam - Stephens, Inc. Ken Goldman - JPMorgan Ann Gurkin - Davenport & Company Christine McCracken - Cleveland Research Company Kenneth Zaslow - BMO Capital Markets Timothy Ramey - D.A. Davidson & Co. Robert Moskow - Credit Suisse Christina McGlone - Deutsche Bank Securities Christopher Bledsoe – Barclays Capital Vincent Andrews - Morgan Stanley
Operator
Good morning. (Operator Instructions) Now I’ll turn the meeting over to your host for today, Ms. Ruth Ann Wisener, Vice President of Investor Relations; you may begin.
Ruth Ann Wisener
Good morning and thank you for joining us today for Tyson Foods’s conference call for the second quarter of our 2009 fiscal year. I want to remind everyone that some of the things we talk about today will include forward-looking statements. Those statements are based on our view of the world as we know it today which could change. I encourage you to look at today’s press release for a discussion of the risks that can affect our business. First we will hear opening remarks from our interim President and CEO Leland Tollett, followed by the financial report from CFO Dennis Leatherby. Reporting on our chicken and prepared foods segments will be Donnie Smith, our Senior Group Vice President of Poultry and Prepared Foods. Reporting on our beef and pork segments will be Jim Lochner, Senior Group Vice President of Tyson Fresh Meats. Also joining us on the today are Rick Greubel, Group Vice President and International President and Jeff Webster, Group Vice President of our Renewable Products Group. I’ll now turn the call over to interim CEO Leland Tollett.
Leland Tollett
Thank you Ruth Ann and good morning everyone. First I want to say that it really feels good to be making money in our chicken segment again. We may not be exactly where we want to be, but we are on the right track and we have made significant progress. The second quarter was somewhat disappointing from an earnings standpoint but I can say that our negative grain positions are mostly behind us. We’ve reduced inventory to targeted comfortable levels and we are expecting a normalized tax rate for the rest of the year. With shorter-term contracts with our customers we’ll be closer to the market, therefore our exposure to the volatile market swings will be less then in previous years. So we will just stick to our plan of being a short-term buyer of input items, corn and soy, and we’ll concentrate on being a very competitive producer and marketer of protein products. In the second quarter we announced two important milestones in our core strategy of valuing up our byproducts and by the way, that is the reason that we’re participating in these businesses. We have large volumes of relatively low valued product that we want to move up the value chain. So we have formed an alliance with FreshPet to market and distribute high quality refrigerated pet foods. We believe entering this $17 billion pet food market is a natural extension of Tyson’s experience in making innovative protein products which will lead to significant value creation for our company in the future. Also our alliance with Kemin Industries is moving forward and a new manufacturing operation opened in March to produce flavor enhancers called palatants, for pet foods. On the renewable energy front, the construction of our Dynamic Fuels plant outside Baton Rouge, that uses rendered grease and [talent] to make diesel fuel contains its own budget and own schedule for a December completion. The renewable products group will have additional opportunities to participate in projects that include pet products, renewable energy, [nutricudical] and biotech products and you will probably hear more about these in months to come. On the international front, export markets are stronger then in previous months. Our projects in Brazil and China and India are progressing as planned. However we expect no material impact on the next couple of quarters for these three ventures. Of course the H1N1 flu outbreak has been on top of our mind. Its important to remember that pork is still safe to eat but Jim Lochner will give you an update and a little more color on this subject and he and Rick Greubel will be available to answer in the Q&A segment, to answer any questions you might have. I’ll now turn the call over Dennis for a financial update. Then Donnie will report on the chicken and prepared foods segment. Jim will do a segment report for beef and pork.
Dennis Leatherby
Thank you Leland and good morning everyone. As stated in our press release for 2Q09 we lost $0.28 per share compared to a $0.02 per share loss in Q208. On a continuing operations basis quarterly results were a loss of $0.24 and include the following items; a one-time pretax charge of $15 million or $0.02 per share for closure of Ponca City, Oklahoma processed meats plant. These results also include income tax expense of $62 million or $0.17 per share resulting from a change in the method we use to recognize interim income taxes. While recognizing a tax expense against a pretax loss may appear unusual, let me try to explain. Due to the volatile economy and operating environment in our industry we have experienced rapidly changing operating conditions and earnings this fiscal year. This has resulted in a large range in the estimate of the annual effective tax rate. As a result we are required to switch from the annual method of estimating interim period taxes to the year to date method. The most important takeaway is that the change in method of recognizing interim taxes does not impact the full year tax expense. Additionally this quarter we sold Lakeside, our Canadian beef operation, and recorded a pretax loss of the sale of this discontinued operation. This $10 million loss included goodwill of $59 million as well as a currency translation adjustment gain of $37 million. At closing we received another, received cash proceeds of $43 million and expect to receive another $50 million over the remainder of the fiscal year from the liquidation of Lakeside working capital. In addition we will receive another $64 million over the course of the next five years from various notes receivable and redeemable preferred stock, $40 million of this will be received over the next two years and the balance within five years. The chicken segment reported an operating loss of $46 million and it is important to note that $63 million of the loss came from hedging activities, $16 million of this hedging loss is related to cost plus customers which we will recover through product pricing in future quarters. Donnie will go into more detail about these activities and future plans in his review of the chicken segment. As for our other key financial measures, we had over $1.1 billion of cash at the end of Q209 including just over $300 million of restricted cash. Total debt was approximately $3,750 billion, more importantly though, net debt was $2,625 billion. This $2,625 billion is the lowest net debt balance we’ve had in the past seven years and is largely the result of working capital improvements led by our inventory reductions. Since our last quarter inventories are down $169 million and more then 150 million pounds, mostly from chicken. Not only did this inventory reduction free up a considerable amount of cash, it also positions us well for the future. Our total debt to cap at the end of Q2 was 44.7%. On a net debt basis, its 36.2%. Capital expenditures for Q209 were $76 million compared to $110 million for Q208. Accordingly we have reduced our outlook for fiscal 2009 capital expenditures to under $450 million. At this time it should also be noted that we do not have any plans for any significant acquisitions beyond what has been previously announced. Q2 net interest expense increased $16 million compared to the same quarter last year and totaled $69 million. Interest expense increased due to the recent capital raise and related amortization of debt issuance fees. We anticipate full year interest expense of approximately $290 million to $300 million. As you know during the quarter we successfully completed two important transactions for our capital structure. Our new three-year $1 billion ABL facility replaces the previous $1 billion revolving credit facility. This new credit facility is secured by the company’s cash, accounts receivable, and inventory and also guaranteed by substantially all of the company’s domestic subsidiaries. Based on our current and future expected cash balances, we do not expect any usage under this facility except for letters of credit and as a result, we will not be subject to its fixed charge coverage [ratios]. In addition we closed an offering of $810 million of senior notes due in 2014. We used the proceeds from the notes offering to repay borrowings and to terminate commitments under our $600 million accounts receivable facility. The notes offering and new credit facility accomplished three important goals for our capital structure. The first is ample liquidity, between unused capacity under the ABL facility and all cash our liquidity at the end of Q209 was more then $1.7 billion. Second we achieved even more financial flexibility. As mentioned previously we are not subject to financial covenants and the considerable amount of excess cash gives us the option to pay off some existing debt early as well as provide funds for future financing needs. And third, we were able to address more then $1.8 billion near-term debt maturities and our cash position allows us to get off to a great start addressing another $1 billion due in late 2011. While the overall economic environment continues to present many challenges, my confidence in Tyson Foods continues to grow due to not only the great leadership of the team with me on this call, but to the many other leaders and team members who are making a big difference for our company. We are addressing these challenges well and getting stronger every day which positions us for great success in the future. With that I’d like to turn it over to Donnie Smith, to report on the chicken and prepared foods segments.
Donnie Smith
Thanks Dennis, good morning everyone. The chicken segment posted an operating loss of $46 million in the second quarter, however there was significant improvement in our operations driven by improvements in operational efficiencies, product mix, and lower [live] cost. Our back to basics approach is working and our chicken business continues to improve and actually began turning a profit in late February. On our last call we mentioned there would be some residual effect to Q2 from last year’s hedging activities. The $63 million negative impact for the quarter result included $16 million related to hedges for cost plus customers which we will recover through product pricing over the next 12 months. Approximately $8 million is for fixed price contracts, the remainder or approximately $39 million resulted from the unexpected drop in grain and energy prices last fall. Finally as we mentioned last quarter with the exception of those hedges we have on the books for cost plus type arrangements, the overwhelming majority of the hedging losses are now behind us and because we now have more short-term contracts with customers, we don’t need to take as many large positions as we have in the past. We think this is the right approach going forward and we’ll reduce these big swings in hedging losses and gain. Now moving on, sales were up 9% and volume was up almost 15% over Q208. The bulk of the volume increase came from our international acquisitions, the acquisition of a rendering operation to support our renewable products strategy, and a sizable reduction in inventory. Remember we no longer consider the freezer as a customer. Average sales prices were down versus Q208 due to lower export and rendered product prices and SG&A for the company improved $22 million over Q208 with the majority of it coming from poultry operations. This is simply because our people had been running leaner and running smarter. Turning to demand, consumer attitudes show a glimmer of hope in the retail channel although the types of products they’re buying continue to shift around a bit as they look for value. We understand the economic issues facing consumers and retailers and we have the resources to manufacture products they want at a good value. In the food service channel monthly traffic trends point to January 2009 as a potential bob when traffic fell 6% before rebounding slightly in February to a smaller 4% decline. We’ll be keeping an eye on this for further insights on the likelihood for improvement. Our research for the remainder of 2009 indicates consumers will continue favoring quick service restaurants over full service and casual dining, for price and perceived value. International liquidity improved which is related to better export demand for chicken. Global inventories are down significantly as well and when you consider the most recent domestic cold storage numbers and production data, its apparent that chicken supply is tight. So pricing should improve through the summer although how much will be dictated by the economy’s effect on demand. Let me shift now to the prepared foods segment which had another good quarter, volume was up 5%, pricing was up almost 3% over Q208. Now adjusted for the $15 million charge for the process meats plant we’ll be closing in Oklahoma, our operating margin was 5%, right in the middle of our targeted range. You know its always hard to close a plant because it effects so many people’s lives, but this change will help us significantly in the long run by improving operational efficiencies as we align our capacity with current and appropriate demand for lunch meats, bacon, and ham products, and then redistribute production to other facilities. Our bacon business performed very well in the second quarter. Year to date our bacon volume across the enterprise is 18% above a year ago. The bacon business is good in food service and across all retail channels. Our business on Wright Brand bacon is improving and we’ve grown the distribution to 35% ACB in traditional retail. Our Mexican original tortilla business is also very strong in Q2 with record profits driven by record volume. We continue growing our private label lunchmeat business and we picked up share in our pizza topping business and crust businesses too, although the category has slipped a little. Before I turn the call over to Jim, I know a lot of the team members in poultry prepared foods are listening today, and I want to thank you all for all you’ve done to lead this resurgence. Your hard work, and just as importantly your ideas have fueled our improvement. I know you’re pleased with our progress, but you’re not satisfied [inaudible], that’s the attitude we need to succeed.
Jim Lochner
Thanks Donnie, good morning everybody. The beef segment made $28 million or 1.2% this quarter with late January and early February strength partially offset by weaker results in the second half of the quarter. Our 76% capacity utilization for the quarter was lower then Q2’s 77% but we were able to manage the spread accordingly in a difficult environment. Our improvements in execution continue to drive results. Revenues were lower in the quarter but live cattle values generally reflected the revenue decline which was primarily driven by three factors. One, a weak [drop] credit. Hide markets remained weak on continued lower leather demand and tallow prices reflected lower fat and oil commodity values. Two, demand for more expensive cuts of meat, some channels of food service demand remained soft through the quarter as the casual and upscale dining segments continued to experience reduced business. Three, pressure from excess trim supply. While ground beef and trim demand continued to be strong throughout the quarter excess trim supplies from dairy cow processing and heavy steer and heifer weights pressured pricing. Finally as Dennis explained we completed the sale of Lakeside this quarter. Looking forward into the beef segment we expect to see adequate supplies of fed cattle for the summer and fall. Dressed weights continued to average record highs above a year ago and above the five-year average reflecting the slow pace of marketing. In Q2 fed steer and heifer slaughter was down over 4% or around 20,000 head per week compared to last year. These market dynamics suggest fed supplies are being pushed into the summer and fall and we expect a seasonal upswing in the weekly steer and heifer supplies. However because demand does not appear to support last year’s volumes, we predict weekly slaughter rates will remain below year ago levels. Domestic demand for beef will largely depend upon the overall economy but with middle meat prices at multi year lows we expect to see significant retail featuring. International demand for variety meats has firmed and pricing has improved. Also other value beef cuts such as plate and thin meats have been moving well internationally. We expect to see continued demand challenges on hides related to the overall worldwide economy. As we said last quarter it will likely take some time for hide and leather values to recover. As for the potential effects of the dairy herd buyout several pieces of information are needed before we can make any meaningful projections. First we don’t know the total dollar amount available nor the expected average bid per cow. This will give us an idea of the total number of cattle in the program. Also the timeframe of the buyout remains unclear. This will be critical in determining beef demands ability to absorb these increased supplies. Moving on to our pork business, pork segment had a decent quarter coming in at 3.4% operating margin or $29 million versus last year’s record 8.4%. Despite adequate hog supplies, hog prices increased year over year while the cutout was flat and the drop credit lower. These positive results illustrate our continued focus on managing a spread business. Year over year we processed fewer head therefore produced fewer pounds. Capacity utilization for the quarter came in at 87% versus 90% of Q208. Q1 to Q2 worldwide demand for pork and pork variety meats recovered very quickly. In 2008 US sow liquidation, while less then many anticipated coupled with a reduction in Canadian imports has resulted in fewer hogs available in 2009 compared to 2008’s record supplies but they still should exceed 2007 levels. We’ll continue to watch forward hog supplies, monitor demand especially in light of the developments around H1N1 and we will make appropriate adjustments. Export restrictions have and are evolving quickly as states have confirmed cases. Product values declined sharply throughout the week with the initial labeled of the H1N1 flu. Additionally the live hog prices and CME lean hog futures markets declined sharply. We are monitoring this situation closely and making adjustments where needed. Hopefully demand for pork products will recover quickly as health officials disassociate the H1N1 flu with pork products. In closing I simply can’t say enough about our fresh meat management team and their ongoing efforts to maximize revenue, control costs, and manage gross margins. They continue to focus on the important day-to-day details and are doing an excellent job of managing the business and I appreciate their focus every day. With that I’ll turn it back over to Leland for closing comments.
Leland Tollett
Thanks Jim, like most companies we’re facing some uncertainties in the economy and we’re watching this H1N1 issue unfold. But even with these challenges, I like our position. I feel really good about where we are right now. Overall we’ve made great progress in the last few months. I’m proud of the work going on here and I want to thank all of our Tyson team members for their effort and for their contributions. I see an attitude around here I have not seen in a long time. So with that I’ll turn the call over for questions.
Operator
(Operator Instructions) Your first question comes from the line of Heather Jones - BB&T Capital Markets Heather Jones - BB&T Capital Markets: I had a quick question on chicken, going back I think it was December or January, so you all have made comments regarding taking down your weight there as you work through inventory, and given that you returned a profitability in late February and I would presume a profitable now, are you intending to bring those weights back up or are you going to maintain lower weights for a while.
Donnie Smith
Our weight really hasn’t changed meaningfully in Q2 versus Q1. We did draw down significantly our inventory. I don’t expect a meaningful change in our, the mix in other words, of our current weight distribution among plants. Heather Jones - BB&T Capital Markets: In your mix, but what the average weights in Q3 versus Q2.
Donnie Smith
I would not expect a meaningful change in our average live weight from Q2 to Q3.
Operator
Your next question comes from the line of Farha Aslam - Stephens, Inc. Farha Aslam - Stephens, Inc.: Going back to chicken, you had mentioned that international demand has been strong, could you highlight more on how the swine flu or the H1N1 virus is impacting international demand for chicken and what that’s doing for leg quarter pricing.
Rick Greubel
Yes, you’re asking really about H1N1 and potentially the impact on chicken and I think its really too early to say if there’s been any impact at all on chicken demand internationally and leg quarter pricing specifically. What I will tell you that is impacting late quarter demand is increased liquidity into the major markets that we export our leg quarters too, and more importantly the reduction in inventory that occurred during the last quarter and both of those effects as well as maybe a third effect that some of the export markets, their economies are starting to recover a little bit, are having a positive impact on pricing. Farha Aslam - Stephens, Inc.: And where are leg quarter pricing right now in the international markets.
Rick Greubel
Well if you look at just kind of the industry reported numbers, we have seen about an average increase that has gone from somewhere in the low 20’s at the beginning of Q2 to something right now that is in the low 40’s.
Operator
Your next question comes from the line of Ken Goldman - JPMorgan Ken Goldman - JPMorgan: You referred to beef, pork, and prepared foods generating financial returns at or near normalized ranges, I’m wondering if you could add a little color about what you mean by normalized, is that excluding your hedging, what are those ranges, what time periods are those built on and so forth.
Jim Lochner
Let me start with basic pork as we reported Q2 beef at the 1.2 and pork at 3.4 and then going forward the indication normally Q3 and Q4 are the stronger beef months of the year and I expect the beef results to continue to follow their seasonal norm. Pork on the other hand, we did very well in Q2 considering the environment we walked into and right now because the H1N1 situation is really only a week old and it has had some profound influences on pork demand particularly in pricing, as well as lean hog cost and keep in mind we manage a spread business so if revenues drop and the price of livestock drops hopefully we’ll be able to be pretty much norm compared to prior Q3’s which is always the challenging month in the pork segment. And in that regard we’re going to hope and work very hard to drive the revenues up and hopefully get the pricing back up fairly quickly in that segment. But again we are a spread business and the lean hog costs or live hog costs follow the product downer, in this case actually preceded the product declines. Ken Goldman - JPMorgan: I just wanted to follow-up and get a little more color quantitatively on what you meant by normalized though, just sort of back to the last five years, back to the last couple of years, just so we can sort of go back to our models and say, alright these guys are about to go back and do x percent.
Jim Lochner
Well typically we talk about beef being 1.5 to 3 and pork being in the 3 to 5% zone, and if you look back over time particularly over a 20 year period, they’re going to hit that high/low and in that zone with the exception of beef having some much lower years in that 2004, 2005 and part of 2006 time frame. Ken Goldman - JPMorgan: I guess my question is more on chicken, just because you look back over time, corn and soybean meal were a lot lower then they are now so I’m just wondering what your expectations are for normalized margins there.
Donnie Smith
We’ve made quite a bit of progress in our chicken business and we certainly think we’ve got the ship turned into the wind and we are picking up a little wind in our sails there, and I’m not sure, corn was up $0.50 last week and we’ve got some demand issues kind of hovering over us, so I’m not sure we would hardly peak into our normalized range in Q3, we like to think a normalized in chicken at 5% to 7% to turn on sales provided we get, keep markets about where they are and our forecast stays the same. We feel good about our opportunity to get into that range in Q4 but there’s still quite a few things going on around us and we’re going to say we’re cautiously optimistic, how about that.
Leland Tollett
We’re not pessimistic by any stretch of the imagination from the standpoint of the progress that we’ve made from about the third week in February this a-way. We’ve been pretty pleased with where we are and we’re making good progress without some real surprises in the grain markets, or some aberration in the market itself, Donnie has it pegged about right.
Operator
Your next question comes from the line of Ann Gurkin - Davenport & Company Ann Gurkin - Davenport & Company: I believe in your comments you mentioned or highlighted that you believed maybe January was the bottom, potential bottom in the food service segment, can you comment on what you all are now looking for that business for the second half of the calendar year and then as related to consumer demand as we move into summer particularly on the retail side, can we get an update as to where that’s tracking versus expectations.
Donnie Smith
Its still a bit murky, we are hoping that the beginning of Q2 was, it was the bottom, but I’ll tell you as we look at the unemployment numbers and just whatever economic factors you want to look at, I think the market in general is just trying to find out of we’ve found a bottom. So before I would get too carried away about how to predict the upswing, I’m really wanting to see if we’ve put a bottom in this thing. We’d like to think we have. Its probably going to take a few more weeks of data though before we feel comfortable about that. So our forecast, our sales growth for our business not dramatic, [technomic] data would indicate that the food service industry is still going to be down versus the prior year so we’ve got that in mind and we’re just hoping that in food service the decline has stopped. Now on the retail side we have seen some demand shift from food service into retail. Honestly I think we’re looking for a pretty good Memorial Day and summer grilling season in retail. We’ve geared up for that. We’re prepared for that, if in deed that customer demand does come our way. So I would look for a pretty solid season this summer in our chicken side.
Operator
Your next question comes from the line of Christine McCracken - Cleveland Research Company Christine McCracken - Cleveland Research Company: I wanted to delve into the Canadian and Mexican situation specific to the country of origin labeling [inaudible] and as I understand it Tyson is currently taking those Canadian hogs and the Mexican cattle at a nice discount to the current market price, I’m wondering has that had any impact on your margins in your beef and your pork business and if so, or is it that you’re selling that meat at a discount so you’re not really maybe seeing the same magnitude of benefit relative to what you’re paying for those animals.
Jim Lochner
Let me start with a little bit of an overview, country of origin labeling definitely has added more complexity to both businesses simply because we have a lot of moving parts yet relative to customer demand on categories A versus B and C and therefore are watching the meat values of those items and then obviously the relative livestock available compared to the shift in demand for Canadian and Mexican based livestock has created some market challenges basically a basis for those. And we watch those every week and right now its too early for me to really say what the long-term trend would be but we definitely are watching them as an individual gross margin play and I won’t comment exactly on what the pricing differences on the meat and the livestock. Early on Mexican based feeder cattle came in the country with a considerable discount and that’s been evolving very rapidly as well. So its really boiling down to how many plants are accepting category B livestock and category C livestock against the offerings and that will drive the basis in exactly the same thing on the meat prices. Its how many customers are shifting away from or back to categories B and C and there’s been a plethora of differences of opinion on what the meat values will be and they evolve every week. So I apologize for not giving you specific numbers but that’s the general theme that’s happening. Christine McCracken - Cleveland Research Company: Can you say whether or not it had any beneficial impact on the quarter.
Jim Lochner
I would say that it added to our costs and we’re trying to make sure because we do have more segregations and at this point my best number on that would be it was neutral. It was not necessarily beneficial because we had higher operating costs in beef and again that depends upon the plant and the volume of category B and C livestock that we’ve received, and as I said earlier it’s a very fluid event even at this stage depending upon what’s going on in the demand. The demand for the meat in those categories is what’s going to drive the differential but we will have higher operating cost depending upon the plan. Christine McCracken - Cleveland Research Company: In terms of this discovery I guess of H1N1 and the Canadian herd, is your policy on Canadian hogs going to change.
Jim Lochner
Well since I just found out about that Saturday night and its now Monday morning, we haven’t had a chance really to discuss it. I doubt it simply because I don’t think that we’ll have any restriction on flow. That herd was quarantined and its really not an uncommon situation for pork to come down with a respiratory flu so I don’t know that there’ll be any policy change. Who knows as the day and the week goes on. The only thing we can do is adjust for it, if the market conditions warrants that.
Operator
Your next question comes from the line of Kenneth Zaslow - BMO Capital Markets Kenneth Zaslow - BMO Capital Markets: How quickly can you get your chicken margins up to the normalized levels, do you think you’re going to be able to see some of those levels in the summer, how does that look going forward.
Donnie Smith
We’re anticipating, well I’m going to rephrase what I said a little bit earlier, we’re not too sure that, but we feel comfortable we’ll get close to that range in Q3. We like our chances going into Q4 but remember corn was up $0.50 last week on late planning, we’ve got this economic cloud laying over top of us so there’s still some things around us that we’ve got to be mindful of but we have made significant improvements in our business and like our chances going forward. We feel cautiously optimistic about our chicken business.
Leland Tollett
We’ve had some product lines that have lagged quite a bit, we’ve got those much better then they’ve been. To say that we’ve got all of them, that we even have a majority of them up to the normalized range would be a little stretch, but as Donnie said we’ve got things headed in the right direction. Kenneth Zaslow - BMO Capital Markets: From your commentary it seems like you’re making money in all your businesses now, is that the understanding I’m getting from the commentary and is that expected to go through to the end of the year.
Leland Tollett
As of today we’re making money in all of our businesses. Kenneth Zaslow - BMO Capital Markets: And then if you’re not spending on CapEx, you’re not spending on acquisitions, what are you going to use your cash flow for given that you have, excluding the restricted cash about $800 million, it seems like a lot of cash to just kind of hang out in the balance sheet.
Dennis Leatherby
We’re going to de lever, our plan is to drive cash through this business and use cash to fund any CapEx we need, any future acquisitions we need, and to be opportunistic and buyback debt when we can too. Kenneth Zaslow - BMO Capital Markets: So what did you expect in terms of the end of the year in terms of debt to capital or do you have any sort of targets for paying down debt.
Dennis Leatherby
Aggressive pay down of debt is our plan but we’re not going to give guidance in that regard.
Operator
Your next question comes from the line of Timothy Ramey - D.A. Davidson & Co. Timothy Ramey - D.A. Davidson & Co.: Donnie’s comments on chicken were very helpful but I wonder if Mr. Lochner would give us some similar color on his view of the chances of getting to or sustaining normalized margins in beef and pork in the latter half of the year.
Jim Lochner
Beef, we came through Q2 a little better then I thought with the tougher part being in March and then into early April but again the spread’s kind of corrected, we ran the cut out up fairly strong and even though it kind of topped and gave back a little bit, supplies are seasonally coming on and I do expect to see as I said in my comments, the fact that the industry probably isn’t going to run, the demand doesn’t seem to warrant over running the demand with excess supply which will work favorable from our regard simply because we could see we’ve pushed cattle forward. I think its interesting when you look at cattle, feed numbers that are perpetual inventory that compared to January 1, we’ve made up over 350,000 of that deficit and we’re in the 532 zone and that’s a combination predominantly of less marketings and so I think the balance of offerings relative to the demand seems to be in reasonable harmony and so I’m fairly optimistic on beef. I’m not concerned that in the next two quarters we’re going to run into a major supply deficit. Pork I would come back and would have one week ago had a considerably different view simply because I saw so much price pressure throughout the week on products as this hysteria over H1N1 was evolving and particularly on items, hams most notably, but even boneless loins and bone in loins and butts. Every category of the animal took some pricing pressure and we’ll have to just see how fast this will come up. But again, the lean hog index and the western Corn Belt prices dropped. We are going into a seasonally tighter supply. Normally our Q3 is our most challenging quarter and our job is going to be to try to maximize the revenue, try to get as much back on the live hog cost and keep our spread. But I am, as it stands right now, my hope is that the H1N1 situation blows over. I think it might because of just all the commentary on the CBC this weekend and we’ll just have to see if Mexico’s consumption on hams comes back up. And that’s where the major price pressure was. We didn’t see a lot of run away from export particularly on loins but we have seen weaker demand domestically as well over this confusion. So that’s thrown a wild card into this Q3 and Q3 is always usually our challenging quarter. Again even with the supplies coming down, with the herds coming down particularly in the US and Canada, you always have to look at one component and that is productivity efficiency is still gaining which is offsetting some of that decline. And worldwide supplies of pork are still down. So I’m expecting really a fairly quick rebound in pricing and again optimistic that we can get into that zone. Our pork division is run very well, our plants are running very well, our overall maximizing our mix and revenues within that mix has been very well throughout the last several quarters and certainly nothing in the performance area has shifted. Timothy Ramey - D.A. Davidson & Co.: And just as we think through maybe beyond the fourth quarter, I know you alluded to kind of a hole in the cattle supply, does your optimism on supplies or capacity utilization extend beyond the fourth quarter.
Jim Lochner
Yes, I really, the herd, the beef cow herd dropped to 31.67 and then we’ll see the dairy cow herd come down from the 9.33 so that will take some supply out but we’re not going to be really looking at those supply shifts until probably about 18 months and I don’t see a real radical drop. And the other thing that’s encouraging is I have seen the rebound of Mexican imported feeder cattle that have come back the last three months and we’re watching just how the economics of the Canadian imports work as well which is very much driven by a function of the dollar and then overall as cool, if there are any major changes related to country of origin labeling. But I don’t see a real radical drop off, I see maybe a slow steady erosion of supply and the industry’s has felt in reasonably balance to me.
Operator
Your next question comes from the line of Robert Moskow - Credit Suisse Robert Moskow - Credit Suisse: Two questions on chicken, I guess the first one is, is the 14% increase in volume in the quarter, when you strip out the acquisitions and maybe some inventory liquidation, I wanted to know was there any sign of Tyson taking market share given Pilgrim’s Pride’s bankruptcy, I wanted to know if that was continuing at all. And then secondly, I was pleasantly surprised on the leg quarter prices being as high as they were, you mentioned that liquidity issues were kind of fading maybe its less of a problem then it was before, can you give us a little more color internationally about the export markets and the ability of say Russia for example to be a better credit and buy I suppose.
Donnie Smith
I’ll let Rick handle the last one, on the first one, we did pull quite a bit of inventory out during Q2. As far as us gaining share I would say there’s a chance but I wouldn’t attribute it necessarily to any particular other company. As we go out in the marketplace and we talk to our customers and some of our customers are growing and we’re growing with them and we’re winning some bids and that type of thing. So yes, I think there’s categories where we’re gaining share. Now you’ve got to be careful about that particularly in food service because we may be holding or gaining a little bit of share in our declining categories as well too so maybe a little bit is your answer. But I wouldn’t attribute it to any other company.
Rick Greubel
Let me just take you back and maybe the way you should think about this is as we moved through Q1 inventories built here in the US as a result of the lack of liquidity in the global markets, the uncertainty around the economic crisis as well as what was happening in the currency markets. As we started moving into Q2 and call it the middle of Q2, what we saw was liquidity started to improve and currency also stabilized and both of these drivers had the, then the opposite effect because as our inventories built domestically, what you were having was international inventories being drawn down in our major export markets, so the channel inventories were being reduced at the same time. So when liquidity started coming back in, currency started stabilizing, you saw an increase of demand and that allowed us to reduce our inventories throughout the second part of Q2 and into Q3 and that’s had a positive impact on the pricing. Is that helpful? Robert Moskow - Credit Suisse: Yes it is, just with respect to Russia, can you be more specific there, is our chicken a very good deal still compared to their ability to make it domestically.
Rick Greubel
Yes, I would say our, it really is still a good deal but I also want you to think about it in the terms that there is a couple of different market segments there. There’s fresh chicken produced in Russia that largely goes into retail offerings. Most of the imported chicken that comes from the US or other places in the world into Russia, moves into more food service items, sometimes sausages, etc. so there’s a couple of different market segments and there’s also separate distribution channels but we do track the pricing of the local produced chicken in Russia versus the imported product and we’re still what I would call a good value.
Operator
Your next question comes from the line of Christina McGlone - Deutsche Bank Securities Christina McGlone - Deutsche Bank Securities: I just wanted to get kind of a bigger picture view, we have a very cloudy demand outlook, we have the economic weakness globally, dairy herd reduction, and now we have the impact of H1N1, and I wanted to get your idea if we’re going to run into a protein [glut] or if you see consumers shifting their preferences among different proteins and how does that effect Tyson in particular.
Leland Tollett
I would assume that there will be a certain amount of shifting going on but I think all of that is fairly temporary. I do not expect the protein glut, no. Christina McGlone - Deutsche Bank Securities: Still this summer because of the liquidation and maybe lower pork values depending on how long this H1N1 impacts, you don’t see that adversely hurting [fresh] meat prices or certain beef cuts.
Leland Tollett
Not particularly, no.
Operator
Your next question comes from the line of Christopher Bledsoe – Barclays Capital Christopher Bledsoe – Barclays Capital: If I were to kind of put together all the comments on normalized earnings on the various segments, and I were to assume that if on a kind of consolidated basis that normalizers maybe kind of a 3.5% to 4% type of range, what I’m hearing you saying and tell me if this is wrong, but what I’m hearing is that its not out of the question for the back half.
Dennis Leatherby
That is possible but it’s the lower end of that probably. Christopher Bledsoe – Barclays Capital: And then just to follow-up on H1N1, I realize that kind of impacts on consumption behavior maybe temporary and what not, but I just want to, what I’m a bit more concerned about is the trade impact with some of the key export partners and that’s not just, doesn’t seem to just be influencing movement of pork product but also the location of some of the states bans, and the critical role that ports in those states plays in moving product out of the country. I’m just wondering if you’re seeing across any of the proteins, a bit of inventory building in just the last few days in response to some of those major ports being shut off or product movement into some of the key export countries.
Jim Lochner
I’ll start with yes, over that course of last week and you saw it reflected in prices which would imply that disappearance both domestically and internationally was putting pressure and then we’ll just have to wait and see pretty much country by country what happens some with and some without any export restrictions. I’ll let Rick commented on kind of country by country what’s going on.
Rick Greubel
It really does depend a little bit on a market-by-market analysis here. Just to give you some color around that, our major export markets in order of priority are Japan, this is for pork, Japan, Mexico, Canada, then I would call it kind of Taiwan, Hong Kong, South Korea and then way down the list Russia. So we continue to see pretty good demand from all of those markets with Mexico being the big question mark because without a doubt pork consumption in Mexico is the result of H1N1 has impacted pork demand and sales there and its really going to be a function of how fast that market turns around as the media continues to get probably more accurate information into the public. Christopher Bledsoe – Barclays Capital: And if the export bans, if the duration of those bans are not necessarily short lived, what’s the resolution for the industry, is it kind of a rewiring of how product gets allocated into whom and then how that moves across from one border to another outside of the US or are there contingencies in place that allow for pretty effective clearance of that product out of the US.
Rick Greubel
I don’t think that the bans as they have occurred to date, and let’s be real clear on this point, are going to have a big impact on our ability to clear volume. Russia is the only country that’s been of any of our significant export markets and I’ll just tell you that year to date, Russia’s pork exports would be less then 2% of our total so it’s a small volume. Christopher Bledsoe – Barclays Capital: I was wondering for chicken in particular.
Rick Greubel
In chicken what Russia did was, they implemented some bans on some states where the H1N1 virus has been reported in humans so Texas and New York, etc., and there’s a list of states. None of our major export producing locations have been effected by that and we don’t see any impact on our ability to export chicken.
Operator
Your next question comes from the line of Vincent Andrews - Morgan Stanley Vincent Andrews - Morgan Stanley: I guess on just these normalized chicken margins, I guess if you’re moving more towards cash raising costs, which we can try to calculate and then also looking at what the cash prices for the different chicken parts and I recognize that you’ve got a value added mix and so forth, but we are not calculating anything close to normalized margins at current cash prices and raising costs and cash prices or selling prices, have kind of hit a ceiling for a while now, so I’m just, what am I missing here in terms of your ability to get to normalized chicken margins in the next couple of quarters.
Leland Tollett
I don’t know what you’re missing. I really don’t know what to tell you. Vincent Andrews - Morgan Stanley: So is it that you’re just achieving excellent short-term contract prices with your customers. Is my math wrong.
Leland Tollett
I don’t know what kind of math, I don’t know exactly what kind of pricing you’re using in there, I can tell you that we’ve very competitive from a production standpoint both field and through the plant. We have paid particular attention to the product mix and maximizing the value of every single chicken we got and every part of that chicken. Now are we getting more then the next guy, I can’t tell you. Vincent Andrews - Morgan Stanley: And so do you, you’re not sure whether your margin, if you’re going to get normalized margins, whether the whole industry would be any where near that level because I guess the next question would be if everyone is going to get back to normalized margins so quickly, what’s going to happen from a production perspective, in other words are these kind of 5% to 6% egg set reductions that we’ve been seeing, would you expect those to continue.
Leland Tollett
I don’t know that I would have a real hard opinion on that other then to tell you that the breeder flock, the potential breeder flock as its coming on, that is pull its place for egg production has been down for what now, seven months. Vincent Andrews - Morgan Stanley: Right and the majority of that seven months everybody was losing a lot of money, so I guess my point is is that now that profitability is coming back I’m just trying to understand what would your expectations be for your own level of production, have you started to add anything back yet.
Leland Tollett
We will add back when our market demands it and not before. We will not put chicken’s down on the [inaudible]. Vincent Andrews - Morgan Stanley: So normalized margins you would not necessarily add anything back unless you felt you could continue those margins unequivocally.
Leland Tollett
That would probably be a fair statement.
Operator
There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.
Ruth Ann Wisener
Thank you very much for your interest in the company and for your attendance on the call today. We look forward to speaking with you next quarter.