Tyson Foods Class A Earnings Call Insights: Chicken Outlook and Grades of Beef

Tyson Foods Class A (NYSE:TSN) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Chicken Outlook

Ryan Oksenhendler – Bank of America: I just wanted to ask regarding the outlook for Chicken, as you look out for the back half of year, can you see pricing accelerate as you have seen breast meat move here, and I know some of your contracts didn’t really get priced until February, March, so we didn’t see as much of an increase in the second quarter. And then is there any reason if that can continue with the fiscal ’14 given the supply seem to be disciplined here given the recent pull – placement trends?

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Donnie Smith – President and CEO: Yes, couple of parts. Let me take the first. Yes, we do expect to see pricing improved in Q3 versus Q2 and forward into Q4 certainly market has given us good help there. Looking on into ’14, if you look at (poultry) numbers and by the way the amount of eggs that go into Mexico, we really don’t see that supply is going to change much until timing we tell you sometime around late Oct, Nov and of course then you are going into the Thanksgiving and Christmas market slowdown. So, it wouldn’t make sense for us to do anything on supply going into that period. So, really feels like you carry a lot of momentum into ’14 and on into the front half of the calendar part of the year.

Ryan Oksenhendler – Bank of America: And then just one follow-up on the international regarding bird flu in China. In terms of impacting your business, I know consumption is slowed, you originally had planned to be breakeven. I think in the fourth quarter – fiscal fourth quarter of this year does that changed and I guess can you give us an outlook for fiscal ’14 and how that will impact that earnings for next year?

Donnie Smith – President and CEO: Sure, Ryan, I’d say it probably pushes out that breakeven mark for a quarter or two, still in our sights though – in terms of the business operations, we’re getting our houses built on time just like we thought we would. By the end of the year, we’ll have about half of our production in company-owned housing. That will feel really good going into the plants. So whereas I thought maybe we’d be there in Q4. It’s likely to be maybe Q1 or Q2 now, ’14, but you should expect sequential year-over-year continued improvements in international. This year, our international results minus the impairment in China, so let’s call it an adjusted international results number will be markedly better than last year, and then you’ll see another improvement we believe going into ’14.

Grades of Beef

Heather Jones – BB&T Capital Markets: My first question is on beef. Hedgers Edge as a proxy. You guys’ sequential and year-on-year performance on beef deteriorated pretty dramatically and some of the things that you discussed in your prepared remarks were company specific, but some were issue that the whole industry struggled with. So I was wondering if you could give us a sense of magnitude of the company-specific issues you referenced and how soon those will be resolved, so we could expect you to get back to your typical spread to the industry?

James V. Lochner – COO: Let me address that. First of all, the north-south does make the Hedgers Edge which is one number a little bit more difficult to interpret, but yeah, we did have some specific particularly related to our normal premium for what we call the premium grades, and we saw the softness in demand, which put pricing pressure on that and we usually lag how we pay for cattle, based on what the lagging premium grades warrant, and we weren’t rapid enough to correct that and push that premium for the higher-end grades, (indiscernible) approaches even the prime are all soft. And so we didn’t adjust that fast enough and that was particularly as well in the northern tier where the cattle did trade higher. So we really got hit specifically in our northern tier plants with higher price beef relative to what the beef warranted as well as paying more than we should have for the premium grade. So we’ve had that corrected and then we’re working through getting our operational cost issue that I referenced in a couple plants. I’m comfortable that we’ll get our arms around that and push forward to get ourselves back to where we normally are in beef.

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Heather Jones – BB&T Capital Markets: And as a follow-up, you talk about beginning your normalized range for chicken in the back-half and I understand given the structure of your business model that your magnitude of improvement is not going to track like when the industry is improving as quickly as it is now, but given what we’re seeing with breast meat, given what we’re seeing just with demand and seems to be an acceleration in demand, should we anticipate you guys being at the high-end of normalized in the back-half or how are you thinking about that?

Donnie Smith – President and CEO: We’re expecting to be in the high-end and we expect domestic chicken to do very, very well in this back half of the fiscal year. Again, we’re saying the pricing where we wanted, our operational efficiencies, we’re set up very well on understanding our demand and supply so we’re in very good balance, at least we anticipate to be in very good balance with what we know today. We’re seeing a tremendous amount of features at foodservice on chicken products and we are also seeing the same follow-through so far into early Q3 here with chicken at retail continuing to show demand shift away from beef. So we are very encouraged with the back half on chicken in fiscal ’13, and I do believe it will carry right on into ’14 the way the supply structure is set up currently.

A Closer Look: Tyson Foods Earnings Cheat Sheet>>