Tyson Foods Earnings Call Insights: Beef Margins, Slaughter Volumes

On Monday, Tyson Foods, Inc. (NYSE:TSN) reported its second quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with investors and analysts.

Beef Margins

Timothy Ramey – D.A. Davidson & Co.: Congratulations. Jim, also I missed it, you gave a little bit of an outlook on how you expected margins to look on every segment, but Beef, did I miss something there or was that an intentional omission?

James V. Lochner – COO: Donnie had actually had it in his remarks, but beef margins in the last couple of weeks turned nicely and if I replay it back into Q2, we have those beef margins turn where the relationship with revenue and the cattle costs is back in line kind of through February or mid part of February, in early March and then they really corrected after the LFT beef controversial, a result of that really rapid decline in beef wholesale prices. Again I said that was probably steeper than I can ever recall at $120 a hit. Now if we look forward – they have come back in the last couple weeks, took a while for that correction, and we do see adequate supplies because you have to look back, the industry has really processed dramatically fewer animals in January through March and that also happened in April and we also look back in October through December we processed considerably fewer. Against my calculation in that first six months, we are seeing $700,000 fewer head processed, which tells me that the supply should be very adequate or balance of this year. Now the key will be in margins that we expect to be able to hold on to this revenue to cattle cost relationship going forward.

A Closer Look: Tyson Foods Earnings Cheat Sheet>>

Timothy Ramey – D.A. Davidson & Co.: Again as a quick housekeeping, shouldn’t – I am surprised that the earnings presentation doesn’t say $0.45, it looks like we were really $0.415 for the first quarter. Anyway the bottom line is we rounded down for two quarters in a row, sorry to nitpick on that but…

Donnie Smith – President and CEO: You are right, Tim, we are being conservative on that.

Slaughter Volumes

Christine McCracken – Cleveland Research Company: Nice job on the quarter, especially given everything that keeps throwing at you. In any case, Jim, you mentioned on the beef side that your slaughter volumes were down more than the industry, and it’s obviously already at pretty low levels. I am just wondering, as you look into maybe a little beyond the end of your fiscal year and looking at the retention that we’re seeing on the heifer side, are you expecting to be able to manage through that continued kind of decline in slaughter volumes as things maybe tighter up with heifers and then maybe tighter fed cattle supplies as you head into fiscal ’13?

James V. Lochner – COO: Well, fiscal ’13, as you know, fed, steer and heifer supply will really – the base number on that was 2011 calf crop which was still 35.7, we didn’t see that decline will be this year’s calf crop in 2012, and typically roundabout a two-year lag, so about 73%. If heifer retention – since we usually process about 9.5 million to 10 million heifers, we could see 400,000 to 500,000 come out of the 2013 number, but again, you have to look at the fact that feeder cattle imports are also running more than they were a year ago, and what we have seen is the shift in because basically the crush has been very negative, so you’ve seen less cattle being placed in the smaller feedlots, which again is favorable to most of our locations (that sit) where there is very dense feedlots. So, the supply will tighten and then we’ll have to see as this calf crop of 2012 how much heifer retention is there. You have seen fewer beef cows processed and you got a little bit of a conflicting message on the heifer retention when you look at the April feed number which actually shows 4% over. So, I would expect though that we’ll heifer retention start to rebound, as we go through the year, if we have adequate (moisture) in those cow states.

Christine McCracken – Cleveland Research Company: So, is it your expectation then that feeder cattle imports will continue to be at these levels, because it looks like the cattle surplus in Mexico and Canada are getting a little tighter?

Donnie Smith – President and CEO: Well, I am looking at the year-over-year number, which is roughly in the last six months running about 100,000 and so, as their cows herds would decline obviously we’d see less but the feeder cattle price in the U.S. has been very supportive to pull those cows out of Canada and Mexico.