Tyson Foods, Inc. (TSN) Q3 2012 Earnings Report, Transcript and Summary

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

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

Welcome to the Tyson Quarterly Investor Earnings Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, please disconnect at this time. I will now turn the call over to Mr. Jon Kathol, Vice President, Investor Relations. You may begin.

Good morning, and thank you for joining us today for Tyson Foods' conference call for the third quarter of our 2012 fiscal year. I need to remind you that some of the things we'll talk about today will include forward-looking statements. Those statements are based on our view of the world as we know it now, which could change. I encourage you to look at today's press release for a discussion of the risks that can affect our business. 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.

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…

Thanks, Donnie, and good morning, everyone. With $47 million in operating income and a 6.2% return on sales in the fiscal third quarter, the Prepared Foods segment performed above its normalized operating range of 4% to 6%. I'm pleased with the continued improvement, and I see real opportunity for this segment. Prepared Foods is a key part of our company's overall growth strategy, and we are actively seeking ways to expand this business into other categories and grow existing categories in 2013 and beyond. The Chicken segment posted $153 million in operating income and a 5.3% return on sales for the quarter, which is within the normalized range of 5% to 7%. We were able to offset the slightly higher grain cost in the quarter through price and mix improvement. In China, our Chicken operations were negatively impacted by start-up challenges, compounded by economic and market issues. While we were pleased with the performance of our new company-owned farms, at this point, they represent less than 20% of the birds we process weekly. We are building new biosecurity-controlled broiler farms and plan to phase out the use of uncontrolled market birds over the next 2 years. This will allow us to value up into a premium mix of branded, fresh retail trade packs and foodservice sales. But in the interim, we will have some dependency on market birds and wholesale market conditions. In addition to normal start-up issues, our Brazilian Chicken operations saw significant market deterioration in the fiscal third quarter, stemming from a very soft market for boneless leg meat in Japan. We're in the process of bringing out second shifts at 2 of our plants, which should improve our cost structure. We will continue increasing value-added capabilities to move beyond dependency on commodity export and domestic wholesale markets.…

Thank you, Jim, and good morning, everyone. As Donnie mentioned in his remarks, we reported Q3 earnings of $0.21 per share, or $0.50 per share after adjusting for a charge of $167 million, or $0.29 per share, related to the extinguishment of our 2014 notes, which I will address in a moment. Return on invested capital for the last 12 months was 14.7%. Capital expenditures were $186 million for the quarter and totaled $530 million through 3 quarters of fiscal 2012. We've continued to invest in numerous capital projects for both our domestic and foreign operations that will result in improved productive capabilities and drive labor efficiencies, improve yields and sales mix. Our operating cash flow through the 3 quarters of fiscal 2012 remains strong at $719 million. Including cash of more than $800 million, net debt was $1.6 billion. Total liquidity was $1.8 billion, well above our targeted range of $1.2 billion to $1.5 billion. Gross debt increased to $2.5 billion. The increase in gross debt was due to a successful 4.5% $1-billion note offering, which we then used the note proceeds to extinguish our 10.5% 2014 notes. We were able to tender and purchase $790 million of the $810 million principal on the 2014 notes prior to June 30. Subsequent to the settlement of the tender offer, we called for redemption of the remaining $20 million, and we can now say the high-yield 2014 notes are fully extinguished. As a result, we incurred a charge of $167 million during the third quarter related to this early extinguishment. Going forward, this refinancing will reduce our annualized interest expense approximately $55 million, which equates to about $0.09 per share. At the same time as we issued the new bonds, we also received an upgrade from Moody's, which means we are…

[Operator Instructions] Our first question today is from Heather Jones with BB&T Capital Markets. Heather L. Jones - BB&T Capital Markets, Research Division: First question is on your poultry business. I was wondering if you could give us a sense of what your poultry profitability looks like if you take today's spot grain and market prices, as well as what you think it will look like in the September-October time frame if we get the typical seasonal decline in chicken prices.

Okay. So, Heather, let me make sure I've got the question right. So you are asking, what if our cost of goods were to immediately reflect the cost of what spot ingredient purchases would cost and there was no impact on revenue, right? Heather L. Jones - BB&T Capital Markets, Research Division: Yes.

Okay. So first of all, let me say we don't have that scenario. Our grain group has done a good job, and they've got us coverage out a couple of months in front of us well below the market. So this scenario is purely hypothetical, but let's think about it. At current values, spot corn is probably going to deliver something like $9 a bushel. Meal, you're probably going to be something like 5 50 delivered. So that's probably going to count to a live cost in the low 50s. Let's call that, say, $0.52 a pound. So today, our live cost is probably just a tick under $0.45 a pound, so our live cost would go up immediately $0.07 a pound. Now yielded, that's probably going to be like $0.10 on a finished pound. So we're not making $0.10 a finished pound today in chicken, so no -- in that hypothetical scenario, and I'm really glad it is hypothetical, we would not make money. Now thinking back, if I look at June, we've just baked in benchmarking services, a couple. And so looking back at June, we were top quartile in one, top tertile in the other, so we're operating across all of our businesses fairly well. And if I think back to the top spots in those surveys, probably the #1, #2 spots were around that $0.10-a-pound mark. I'd say pricing has probably softened up a little bit now versus June. We've seen breast meat prices come down and such, and obviously the live cost is probably going to be a little higher. So in your scenario, no, we wouldn't be profitable, and I don't think anybody would be, just based on what we see in those benchmarking services. Now going forward into the fall, fortunately, our cost of goods in Q4 is going to be fairly well contained. I do anticipate, and we've seen a little bit of softness in the last couple of weeks, that with the current supply, pricing is likely to soften a little bit going into Q4, as it typically does, and then into the Q1, on end of the fall, that typically is not a very strong pricing period, too. So that's kind of our view going forward. Heather L. Jones - BB&T Capital Markets, Research Division: Okay. And on a follow-up, let's just -- you talk about probably being below your normalized range for Beef in 2013. But if we put you at like the 1% to 1.5% range for fiscal '13, most of the industry would be losing money. And further, even if without the drought, from a long-term structural perspective, some of your peers are poorly positioned. So I guess I'm just wondering, do you think that this drought will hasten what probably needed to happen anyway and it could have some of your competitors shutter some capacity? And I just wanted to get your thoughts on that.

This is Jim. The drought definitely will have a long-term impact to the overall beef supply because I do believe that it's done a little bit what it did last year. And obviously, if it starts to make cattle come to the feedlots earlier, it changes some of the geography of where they're fed. But more importantly, this year, what it's doing, as well as the price of corn going up, caused a radical correction to the feeder cattle pricing, with that revenue dropping as much as $200 a head over that time frame. So it wasn't short run. That -- what that did is probably stopped any heifer retention that was going on or anticipated to go on. And you have to remember that those calves -- those heifer calves now won't be probably staying in the herd, will go into the feedlot. So over the next 6 months to 1 year, they would be into the feedlot numbers. But over the long run, we will have to see capacity adjust, likely either through plant closing or capacity utilization reductions. And we've always got to remind everybody that our plants have always been situated where the cost-competitive feedlots exist. And peripheral feedlots generally have a higher operating cost. And then on top of that, they have a higher freight cost to get cattle to the plant when they get outside their region. So I think that's a key component. So I agree that we'll probably have to see and we'll likely see some capacity utilization reduction. The timing of that is difficult to look at and nail down, but in general, that's correct. And then I think one other thing on cattle. We've seen dramatically a shift in the length and time cattle are fed, which has reduced those feedlot turns, probably in combination of higher grain costs and the accelerated movement, particularly last year from the drought, with cattle being in the feedlots longer. So it's a lot more difficult than it's been in prior year's to predict exactly what we think is going to happen on a timing basis for availability. So that's a fairly long answer to that question, but that's what we see.

Our next question is from Akshay Jagdale with KeyBanc Capital Markets.

My first question is on Chicken, just to follow up on the previous question. So you said the hypothetical is not what you are dealing with in '13. So I just wanted to be clear. So are you hedged through 2013? My guess is no. And so at some point in 2013 -- fiscal '13, you are going to see higher grain cost if they stay where they are today. So the fact that you're saying you still remain profitable tells me that 85% of your revenue base that's flexible, you believe will adjust. Is that the right way to think about it?

Yes, you're reading it correctly. We're a couple of months out in front on our grain cost, which pretty much covers us through Q4. And that's -- what we really wanted to do in our grain strategy was to get us into new crop. Frankly, I would have liked to have seen a better new crop to get into, but be that as it may, it is what it is, so -- and we are -- we're covered through the end of September. So as we get into new crop, our grain costs will likely go up, looking at today's markets. But you're exactly right. A few things are giving us the optimism about being profitable. Number one is the pricing and the opportunities there. But also we've spent a lot of money on our Chicken business in the last couple of years. We still think there's some room for operating efficiency gains, probably on the order of about another $100 million. Jim mentioned, and I think I did too, about our international operations having a really tough quarter. And we think those will improve. The environment will improve there coming into 2013. That will help some. We are going to continue to sell more value-added, and as we do, that will improve the revenue side of our business. And two, our buy-versus-grow strategy is giving us a cost advantage because we're not saddled with parts of the chicken that don't carry very high revenue, and we're able to buy the parts we need at generally below our cost and convert those into value-added items. So you add all that stuff up, and that's what gives us the optimism going into 2013. And by the way, going into 2013, our estimate as of about a week ago, and hey, this corn market is bouncing around like a yoyo, so -- but as of a week ago, we were anticipating an incremental $700 million in grain cost in 2013, just to kind of...

That is impressive if you're able to achieve that. So the next question is, so what's the supply scenario that you're assuming as being probable for next year for the industry? And what could change that? So I mean, like, most people expect like a 2% to 3% cutback could get the commodity prices up 10% or more and offset these higher grain costs. But what are you -- I'm assuming you'll be profitable even if there is no further cutback. Please correct me if I'm wrong there. And what do you think the industry is going to do? When will it happen? And what might that do to your EBIT margins in Chicken?

Okay, I think I understood your question. So we are predicting, or in our model for 2013, we do have current slaughter pounds in the forecast. Now let me talk about what we think we're going to happen. Let's look back -- well, about a year ago, this time or so, we were talking about this. We looked back at a couple of periods now when our Chicken business has been in that 6% or so range, one, that April, May, June period of '09. And during that time, we had a 6% return on sales, and slaughter pounds were running around $8.60 a week for the industry, and that gave us the environment we needed to be able to get the pricing we needed up on top of our cost structure. Now let me hasten on to say, during that year, corn was around $5 and meal was somewhere between $325 and $350-ish. So then fast forward now, up into 2012, the third quarter just ended 2012, you've got about 800 and 80-ish million or so slaughter pounds, and you've got probably $7 corn and $360 meal. So what made the difference there? It was all those things we mentioned before: the operating efficiencies, more value-added, our buy-versus-grow strategy, all those things. And so if you look at now the impact of this $0.07-a-pound live production increase, it would just make sense to us that something south of that 860 million slaughter pounds, which by the way I think is pretty close to your math of 2% to 3%, is probably the minimum to provide the environment that we're going to need to be able to get our pricing structure up on top of this cost structure that's coming our way.

And when might that happen relative to historical norms? As you know, it usually takes 6 months of losses before the industry starts cutting back. Do you think it might happen sooner?

Yes. I can't comment on that, but I can tell you that the current situation is untenable.

I think the key is we've have a rapid run-up in grain, and with the drought and the overall supplies of grain worldwide, we don't look like we're going to see a radical correction downwards. So the optimism waiting for the grain market to correct down isn't there. So that to me shortened the potential time frames.

One last one for Jim, on Beef. Are you assuming -- you're on, I think, around $50 a head in Beef. And my guess is April was negative. I'm assuming you're above normal range today.

Today, meaning last week or...

Yes, last week, or in the month of June, I'm assuming you're above normal and that's continued.

Yes. The month of June was -- May and June corrected. We got the relationship, with the revenue increasing above the cattle cost. And our effort is always to try to run for gross margin as best as we can, and that means maximize the revenue of the beef, maximize the mix, watch our costs and really look at the forward supplies of cattle and the forward demand and try to keep those in harmony.

Our next question is from Farha Aslam with Stephens.

Do you think that there would be chicken producers who would choose not to cut production and, just because of a good balance sheet, keep their production flat and kind of power through this current negative grain environment?

Farha, I just couldn't say. I mean for us, we -- last year, we cut production 6% to 8% and we have held solid with those cuts all year long. That allows us to buy meat on the outside market. And I'll tell you, through Q3, we probably bought 60 loads of meat on the low side and over 100, maybe between 115 and 120, loads of meat a week on the upside, and then brought that -- bought it below our cost in most cases and then brought that in to further process it, which meant we didn't have parts of the bird that would be in oversupply, that would have hurt our sales revenues. So I can't speak for what somebody else may be thinking about with their balance sheet. I'm really proud of our team for doing a great job. If I look at our Chicken business, Donnie King and his group have taken over $900 million out of our cost structure since, call it, mid-'08. That's significant. They've done a great job. They've been very, very prudent in how they've spent their capital, and they've got these plants running great. And so all of those things, put together, give us the optimism. But I can tell you, we don't have any plans to increase our production at all. We don't have any plans to cut anything further. If demand erodes, we might buy a few less loads on the outside. But we're continuing with our production cutbacks. That's -- I can talk about us. That's -- I can't speak for the rest of the industry.

That's helpful. And then just as a follow-up, on Pork, could you just share with us kind of the timing of how you see animals coming to market. Do you expect a huge fall rush of hogs? And we're hearing that potentially there might not be enough shackle space. And then do you expect to tighten up going into next year as higher grain costs hit the hog producers?

Typically, you do start to see an increase in numbers coming off of the summer heat, and usually that kind of a June time frame is from the prior year's summer heat as it affects fertility rates. So we would expect that coming into the back half of August into September, October, we'll see kind of what we used to call the normal fall run, and we'd expect numbers at this point to be in the 1% to 2%. I don't think they'll be anywhere close to pushing the maximum slaughter capacity of the industry. And then you always have to -- or just look at the whole cycle approach here and say that high-priced grain will impact production, but you still have a pipeline of about 10 months in production that's coming at you. So I'd say that the impact to producer profitability will start to feel 10 months from now. And then the summer -- this summer's heat also will have probably some issues as we get into kind of next summer's processing.

Our next question is from Vincent Andrews with Morgan Stanley.

This is Greg Van Winkle from Vincent's team. My question's related to pork. Wondering if you've seen any increase recently in hog supply as a result of breeder sows being sent to slaughter. And I guess, you addressed a little of this with the last question, but what do you expect in terms of hog reductions going forward after the runoff we've seen in feed cost?

We're not in the sow processing end of the business, but I am hearing that there are more sows being offered. And you would expect to see some early liquidation as a result of the run-up in grain prices. But that's what we're hearing, and I'll just have to monitor it week over week and month over month to look at what the projected long-range supplies are going to be.

Okay. And then what assumptions go into your outlook for Pork margins? You seem to be pretty optimistic about fiscal 2013 even though it seems to me like we're going to need higher hog prices to make producers profitable. And it seems like maybe the domestic demand environment is still a little weak. So I was just wondering what's driving your optimism there despite what seems like kind of a challenging environment.

Oh, what drives my optimism is you've still seen really strong export demand. You've seen an industry that can flex on the live production side. It's also put down a lot of efficiencies. We'll have to just watch and see what will happen as overall protein prices increase, whether or not -- how much demand destruction there may be or won't be. One interesting thing that's going on this year with the drought, there's been so much communication out in the popular press about expecting higher prices because of a reduced corn crop. And so I do think that at least we'll start to see some acceptance and maybe a little less demand destruction. And we'll definitely have ample supplies through the majority of our fiscal '13. So the other key component that I think one always has to look at is that the high grain prices in the U.S. are affecting worldwide grain prices, and we're still the most efficient producer of pork and chicken throughout the world. So again, the U.S. should be favorably impacted from our overall efficiency in export. So those are a lot of different reasons why I don't see anything real detrimental on the horizon in Pork.

Our next question is from Christine McCracken with Cleveland Research.

Jim, you talked a little bit about liquidation maybe not happening as quickly here. But we're seeing quite a bit of liquidation, it seems, in some of the other countries that we export into, specifically into Mexico. And that's been mentioned by some of your peers. I'm wondering, could you see a slowdown in exports, you think, in the near term as some of that liquidates and then it's setting up for a really strong export outlook, maybe into 2013?

Which -- I'm not sure what species you're referencing.

Well, really, we've seen it...

Mexico is not a big pork-producing country but...

Yes, we've heard quite a bit about pork, specifically. You've seen some liquidation in the cattle side in Oceania and then -- and in the Pork side, it's primarily the hogs in Europe which maybe create some export opportunities for us. Mexico. I'm going to think Canada is also bringing quite a few sows to slaughter. So I'm just curious, kind of universally on the red meat side, obviously, the AI situation in Mexico is also perhaps creating a near-term pull.

Well, I just -- that's -- let me just -- off my last answer, I do think that we'll continue to see demand for -- in the countries we export to, which hopefully will persist. If there are that degree of liquidation against a small base, I don't look at their liquidation putting extra pounds on the market that have to be -- that are going to materially impact their need to import product. Clearly, the AI scenario in Mexico has some issue relative to overall just chicken movement within the country, which appeared to strengthen pricing here in the last several weeks. And then in the EU, we continue to hear about pig production being curtailed from a variety of different reasons. But again, as I mentioned in the previous answer, worldwide grain prices are going up as well, so the world's protein producers are going to feel this impact, and the U.S. is the most efficient place to grow pork and chicken. So I would expect that we'll see that long-term ramification from that.

All right. And then just, Donnie, you mentioned what sounded like an improving foodservice environment. Just curious what your customer conversations are looking like in light of this increase in protein prices and possibly higher fuel on the back of lower ethanol production. Kind of also with wing prices so high this year, how much higher can they go relatively in order to offset some of the seed [ph]? Might some of that increase have to come on the back of boneless?

Yes, I guess, the best way I would characterize foodservice demand is it's a little bit -- it's sluggish. But finally there's a little bit of optimism, so, hey, maybe this thing's quite going down as -- that's not a very -- there's a little bit of optimism there, but not a lot. So as far as the conversations are going, I think people understand. There's nobody confused about the drought and its impact on the meat industry and meat producers. Also though, they're well aware of the current supply situation, and so there's not an immediate need to make a pricing adjustment. And so the conversations are largely around, "We understand it's coming and when it gets here, we'll participate because you guys do a great job taking care of us and service and quality and you're the innovation leader," and that kind of thing. So did that answer your question?

Yes. Just on the wings, I mean I'm a little bit worried, given how high they got this year, that they'd be able to take on much more of the...

It's interesting. If you go back in just about every year, regardless of where the wing price starts, when you go into the winter wing season, wing prices escalate. So we may test that this year, but so far, every year, wing prices go up during wing season, so...

I want to add one other thing. We spend -- do spend a lot of time with customers, showing them the supply/demand fundamentals, what's out in front of them, what the moves are. And that does help them immensely. The dialogue gives them some anticipation of what they think the supply will be relative to demand forward and their thinking about prices, so...

Our next question is from Ken Goldman with JPMorgan. Kenneth Goldman - JP Morgan Chase & Co, Research Division: Can you elaborate a bit -- and forgive me if you talked about this already -- on the soft domestic demand you highlighted? Is it primarily in a certain species or across the board? To what degree are consumers are trading down? Where are you seeing it? Just a little more color there would be appreciated, if you can.

Okay. Let's talk about retail first. Overall, fresh meat sales are down. Hey, as pricing increases, it does hurt volume. Sales dollars are there, but volume is down. Beef and pork are down more than chicken. Fresh chicken sales are about flat. Beef's down; pork's down. At foodservice, really, chicken has had a pretty good summer at foodservice. Demand for the other items is fair at best. Pork has actually probably been the softest between beef and pork. As we look at -- we tend to look at holiday seasons as kind of an indicator for things to come, and Memorial Day was just average at best. And then when we went into Fourth of July, chicken demand was just fair. Pork was a little bit soft. Beef did okay. Beef got a lot of feature activity in retail during the Fourth of July holiday. As we look at it now, as prices edge higher, it's probably going to hurt demand. We haven't really seen -- well, hey, you might call 4%, 5% volume down in beef and pork and flat chicken, meaning some shift into chicken. You might -- could interpret that. But really, we haven't seen what I would call wholesale movement between the proteins. They are trading down within the category from more expensive muscle cut, maybe down into grind and that kind of thing. But really haven't seen wholesale movement between the proteins.

I'd add one other thing, and that is even with the Perishable data showing down 3% in 4 weeks and 13 weeks down 1%, and the volume is down 8%, the wholesale prices of beef have been high. They've been higher than a year ago. So the balance of the cutout has still been high. Kenneth Goldman - JP Morgan Chase & Co, Research Division: Okay. And then just generally, as you think about how to approach a year when input costs could be a headwind and obviously, it looks like it will be, I realize you're going to stay on target with your long-term strategies. But are there tactical moves you perhaps might make this time rather than at a time when inflation is a little bit less onerous? It sounds like some of what you're doing with capital spending and share repurchases is that. But I'm just trying to get a sense for maybe what other adjustments you can make in running your business now versus what kind of it looked like a few months ago.

Yes. I think you've mentioned the primary 2. We want to keep a little more dry powder around this and just be cautionary. And then as we get into the year and we get more visibility into what our working capital needs are going to be, I have absolutely no problem continuing to invest in the business. Obviously, there are acquisitions that are out there that may interest us in the future, buying our stock back. I think we're a great value. So all of those things are there. Other than that, no, we really don't want to change our strategy. We're on point, growing our value-added businesses, doing those things we need to do to take care of our customers and lead with quality, our service and innovation. Our guys have done a great job. Noel White and his group have done a super job with their premium programs in Beef and Pork and continue to operate their business better than the indexes that they compare themselves to. So no. That's the whole point. It was to weather the storm and get to a point like this to where we could continue down our path and have a balance sheet that would support that.

Our next question is from Ken Zaslow with BMO.

I know you kind of touched on it. I'm just trying to get a little bit more hard-core answers to this. How much production cuts do you expect for the industry? And what will be your participation be?

Let me go to the latter. What we did was kind of look back into environments that happened before, when we got into an environment where we could add pricing. But in our business, we have remained cut back, the 6% or 8% or so we did back a year ago, and we're going to continue with our current production plans, is the plan now. Now, things may change depending on what grain does or something like that. But currently, we don't have any plans to change our production because we're producing well below our demand today, thus buying all the parts we're buying. So we like our production model being well short of our demand.

And what about the -- because I guess, your comment on the press release is changing crop conditions and pricing could reduce or change the USDA outlook. So I'm assuming you guys think that there is going to be some production cut. I'm just trying to figure out what extent do you think it is and how confident you are in that.

Go ahead, Jim.

Well, I think -- we look back a lot and do a lot of work looking at history, correlating live pounds and overproduction against demand. The data basically says to increase price, you've got to pull back production, and the market will have to do its job. How fast that happens under what environment is difficult for anybody to predict. And then I think as we look across the board, and we just -- again, history tells us that will happen. Who, how fast, when is virtually impossible to tell. We have thoughts, but we're certainly not going to talk about anybody specifically. We really try -- as Donnie keeps saying, we manage our own business with a lot of focus on demand forecast by part, what our production runs are going to have to be, and manage it out 13, 14 weeks in advance. And we do know what we have ahead of us with increased live production costs. So we're going to work on pricing and all the dialogue associated therein.

And my other question is if you guys are pretty updating your -- at least breakeven, if not positive, what would that be for the industry? So I'm assuming you're outperforming the industry. Can you give us a metric to which you guys are outperforming the industry?

Well, I mentioned in an earlier question that we're top quartile in one of our benchmarking services and top third in the other. So that's about as much as I could say about how we compare.

Our next question is from Ryan Oksenhendler with Bank of America Merrill Lynch.

Jim, I just want to follow up, I guess, on -- I guess, Ken's previous question and your answer and some of the previous questions in terms of, is this time different, where -- historically, you said when you cut supply, pricing will go up. But is demand weak such that you actually can't pass it through this time? And looking at -- going back to Christine's question in terms of wing prices at all -- really high levels, wing or leg quarter and breast meat prices didn't really move that much higher this year in relation to where they are relative to their cold storage levels and where production levels were in general for the industry. So I guess in terms of your optimism for pricing next year, I mean, leg quarter cold storage inventories are at the lowest level in 3 years since they've changed the data, and breast meat is at the lowest level in several years. So could you comment about that and your ability to take pricing next year?

Well, you're making a good point for us, Ryan, because inventories are low and that's certainly an advantage to us. But think, I mean, we're facing today, not knowing what's in front of us, $9 corn delivered and $550 million -- I mean, $550 soybean meal, which is going to have your live cost above $0.50 a pound -- I would -- somewhere in the neighborhood of $0.52 a pound. That frankly is just untenable. So we talked about earlier, as we went back into earlier periods when there was 860 million slaughter pounds, that -- and in those environments, we had the pricing structure that we needed to get on top of our current cost. By the way, we've improved our business since then. But if you just look at that, it stands to reason to us that with this wave of feed cost coming at us, you certainly -- we need to be below that level in order to have a favorable pricing environment. Now our forecast for the year is to operate profitably in this environment, so anything that -- any time the environment improves, that should be additive to our business.

The only thing I'd add is -- in my comments previously that I'd add now would be you've seen different parts of the bird particularly carry different percentage of the overall, with breast meat being soft, wing's high, leg quarters running pretty strong prices all year. And again, we really try to manage through total revenue component and look at where the opportunity to maximize that, be it in-country, be it export. So I think the market there -- will there be demand destruction with higher prices? Generally that's normal activity and the supply generally coming down. We'll have to offset it until equilibrium again occurs. So the timing of that is very difficult to call. But I do believe people will eat protein. The world will still have the same overall demand for protein. There will be adjustments on the parts. And we'll just have to see how fast that comes up to cover increased live costs.

Got it. And then can you just talk about -- have you guys been importing any corn from Brazil at all or are contracted to do so?

No, not that we wouldn't if the math worked. But we've got a lot of truck corn bought from local farmers close to our feed mills. And right now the value -- imported values out of Brazil wouldn't compete with the cost that we've got local truck grain bought for, so -- but we run the math constantly. And when it works, that's an avenue for us.

Got it. And then just one last quick one. Jim, if you could talk about the volumes down 14% in Beef. How much of that -- is it lower towel [ph] purchases? Could you talk about what drove that or break down that 14% decline?

In that 14%, we did process fewer head. Carcass weight was up. Then our outside cattle purchases really related to the impact of the relationship we have with BPI, with their volume down, where we basically captured some of that towel [ph] and sold. So it was the combination of those 3 things on the line.

Our next question is from Tim Ramey with D.A. Davidson. Timothy S. Ramey - D.A. Davidson & Co., Research Division: First on the Brazil, China losses of $30 million. Is there any more color that you can kind of give us on that? And what did that relate to? What's the likelihood of that continuing, and so on?

Yes, we're definitely seeing the softness that you hear a little bit about in the China economy, and that's affecting the wholesale value. So basically, what the story there is, Tim, we have a young start-up business that we run today largely dependent on market birds. The premiums we will get will come when we have these biosecured company-owned houses, which that part makes up only 20% of the 2 million head that we're slaughtering today. So when you combine -- let me hasten on to say, the cost structure we see in those live production assets is great. The premiums that we see over the wholesale markets, both at retail and foodservice, is what we expected. So our business model looks right. It feels good. We're very optimistic about what we're doing there. It's just we're a young start-up, fledgling business, and today we're way too dependent on wholesale markets. And it's been soft. Pretty much the same story in Brazil as we move towards a more value-added mix. This boneless leg meat deal in Japan, when that market closed, it kind of backed up through and affected -- of course, and the problems -- economic problems in Europe have slowed down breast meat prices there. So if you take the boneless leg meat market closing in Japan and the softness in the breast meat market in Europe, a lot of that had ripple effects into other markets and ended up backing up a lot of meat into the domestic business. And again, we don't have our value-added mix sold out like we want to yet, so we were very dependent on the wholesale markets and that was just not a good place to be in Q3. We see some improvement now, and we do predict kind of steady improvement. It's liable to be a couple more quarters out, though, before we're feeling a whole lot better about that. And, hey, the story is in Brazil, get your plants double-shifted and get into that value-added mix like our business model says we have to do. And in China, we can't build chicken houses fast enough. So the model is good. We'll get there. It's just we're too dependent on export and wholesale markets today. Timothy S. Ramey - D.A. Davidson & Co., Research Division: Got you. And just a quick one for Dennis. If we were bridging to the $0.50, Dennis, what would we plug in for the tax component of the refunding of the bonds?

If we're going back to $0.50, if we didn't have the extinguishment of the bonds, it would have been 37.9%. Timothy S. Ramey - D.A. Davidson & Co., Research Division: Okay. But do you know the dollar amount for the tax impact of the bond?

We can get you that, Tim.

Our next question is from Robert Moskow with Crédit Suisse. Robert Moskow - Crédit Suisse AG, Research Division: I wanted to know what your capacity utilization levels are in Beef now, Jim. I mean, your volume was down 14% in the quarter. You still had pretty decent margins, but you're going to be down double-digit this year. You'll probably be down again next year. At what point this capacity utilization become an issue in Beef?

The issue really gets critical when you are going to average -- I've got to get my math right here, but I'll make it simple. When you think you're going to average less than $36, it's critical. We were well north of that. We always do our capacity utilization on a 6-day week, and I don't think there's -- we're not going to see volumes out there that are going to warrant much Saturday operation. But we were still in the high 70s on capacity utilization on a 6-day capacity. But you've also got to kind of look at that number because when you're adding value on your cut floors and going to more value-added mixes, you have to watch how you really run your plant. So sometimes you'll sacrifice throughput for revenue. And that's part of that overall game of trying to maximize revenue against cost, against the supply. So sometimes you'll take a capacity reduction simply to maximize your revenue to get a higher mix. That's why it's a lot less dependent than a pure number of just saying what's the capacity utilization, and we're always making those adjustments. That's why I'm a bit vague with the answer. Robert Moskow - Crédit Suisse AG, Research Division: I remember years ago, capacity utilization was the most important thing to follow. Has your business philosophy changed since then? It's more revenue management?

Yes, let me -- I just apologize for jumping in there, but it was not only the most important thing to follow. Maximizing revenue has always been a key driver. It's just that people like to look at that relative to the supply and the adjustments. So, yes, the key is really maximizing the revenue through mix and sales and then looking forward to what that type of cattle supplies are out in front and really trying to match those. And we're not hesitant to try to drop a little bit of the daily capacity or the daily run rates to try to maximize those revenues. Robert Moskow - Crédit Suisse AG, Research Division: Okay. And a follow-up for Donnie. Chicken pricing, looks like yours is going to be up about 9% this year. Your volume will be down pretty much in line with the industry, maybe in line. Is 9% pricing disappointing? Were you expecting a higher pickup in pricing?

Good question. No, I think at the cost level, so far for the run rate, feels okay, not -- it's going to be woefully inadequate to cover the cost structure that's coming at us, so we will definitely need to take more. But I'm proud of our guys. We won some price based on the things we'd like to win our price increase on, which is having a great quality product in the box or in the tray. Our service on time and order fill has just been phenomenal. And two, we lead with innovative capability. We've had a lot of our customers in the Discovery Center working on ways to grow their business, and so for that, we get rewarded for adding that value to their business with a pricing structure that makes sense. So no, I wouldn't say we're disappointed in where we are. I think our folks have done a good job. They do know they've got another hill to climb, and we're headed that way.

Our next question is from Tim Tiberio with Miller Tabak. Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division: My question is on the Prepared Food segment. Can you just give us some highlights within the quarter? What actual product categories performed well versus the other categories?

Yes, sure. Our lunchmeat business, we've talked about that a little bit before, continues to make improvement. Proud of that team. I'll tell you our Wright brand bacon has well outpaced category growth there. We've extended the Wright brand beyond bacon now, into dinner sausages, and are very pleased with that. We are seeing some movement and pretty optimistic around chicken lunchmeat. We've got some smoked meat offerings coming out. We've actually done very well in our franks business. And two, we've got a new offering coming very soon into the marketplace in the next 2 or 3 months, which -- well, it is back to a chicken offering, which will be gluten-free strips and nuggets. So adding value to the red meat items, whether it's pizza topping. Our tortilla business has done well as well. So it's really been a fairly broad-based growth in all of those Prepared Foods segments, and we see a continued bright future and a lot of growth opportunities in that segment.

The only thing I'd add is we also had a plant start-up, which actually hurt us in this, which we started our Council Bluffs pepperoni plant, which will be a very efficient process there. They're much more competitive than some of our existing pepperoni. And we'll continue to really put a lot of focus in our overall Prepared Foods, particularly the sausage and pizza topping businesses, as well as the lunchmeat. So we're very encouraged with the activity and the project list that we have on incremental improvements throughout the whole category we call prepared...

Our next question is from Diane Geissler with CLSA. Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division: Donnie, it wasn't clear from your comments if you thought you would actually fall into a position of unprofitability in the Chicken segment. I think earlier in the call, you talked about the incremental cost of grain and that pricing was actually coming down on a seasonal basis. We always see it. And that suggested to me that maybe the December and March periods, you would be negative. But then later you said, we're managing our business; however, we kind of remain profitable. So I guess I'm just wondering, for your commentary regarding fiscal '13, is it built on we know where we are to the extent that we know where grain is today and we think we'll be profitable? Or is there a little bit of sort of optimism built into your back half of your fiscal '13, because at some point the market will start pricing and presumably that we'll have a crop in 2013?

A little bit of -- the answer to both of those questions is yes. Our optimism is based around where grains are today because that's really the only visibility we have. And we do see improvements in the back end, not so much in our costing model, but on the revenue side of the model. It's a little bit back-half loaded. But to your question, we are using current grain prices, current soybean meal, however the spot market is plus the basis freight delivered to our feed mills, in the cost structure.

And we see more operating efficiencies coming.

Yes. About $100 million, yes. Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division: Okay. Well, I guess I -- somebody touched on it earlier about the revenue side and the fact that obviously the industry is really sort of a supply-driven industry and sort of the pricing follows how much we're either short or in excess. But if you look at even the breeder flock today is now 10% below what it was in 2007, and yet pricing wasn't all that robust this year. So I guess, I'm just a little nervous that even if we get another cut next year, call it 2% to 3%, that the consumer environment is so difficult that you really won't see it. And when I talk to the restaurant companies that are following QSR, they're looking to maintain their pricing structure to their customers, which means they're going to pressure back on their supply chain. So is it the conversations you're having with your customers today that they're now giving you an idea that okay, yes, they're going to be willing to accept these price increases that you're going to need to take to cover this? Or I guess, what's making you so optimistic about pricing in 2013?

Number one, yes, we are -- as we talk to customers today, they do see that this is an unprecedented movement in grain that is likely to have an impact on the supply of meat in all 3 proteins, maybe all 4 proteins, including turkey, I guess, on the market as we move forward. Now the exact timing of when which segment will cut back and supply will decrease, we have our ideas, but I won't speculate on that. But I think everyone that we talk to realizes that the meat situation in America is going to tighten up and that's going to have an impact on pricing. USDA has got their figures. We kind of pencil in ours. But hey, our Chicken business has done -- the domestic Chicken business did very well, I think, in Q3. We continue to add not only operating efficiencies, but we continue to grow our value-added. And we're getting paid for the value that we're adding to our customers' businesses. And so that's what keeps us optimistic, is the fact that this situation is untenable. It's going to change. And we're in a position because we've so dramatically reduced the amount of fixed cost -- fixed price -- long-term annual fixed-price agreements that we have to be able to take advantage of helping a customer ensure supply by being in an arrangement with a great supplier. Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division: Okay. And then just one follow-up question, if I have a minute. I realize you're over schedule here. On the international business, you had talked about pulling in all of that production internally and building out farms, et cetera, in China. Is that -- what's the timeline on that again? Is that 2 years?

A couple of years, 2014, yes. We should grow steadily in company-controlled biosecure houses between now and 2014. Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division: Okay. And at that time, you don't expect to take any meat from the outside market.

Correct. Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division: Okay. And what would your run rate be in 2014 in terms of total production?

In China, about 3 million head.

Per week, yes.

Our final question today is from Colin Guheen with Cowen and Company.

Just real quickly, I guess, bigger picture and playing off of some of the Diane's questions. There's been such demand destruction over the last couple of years in beef. Are we getting to a level of more latent demand here where people become more agnostic on price? Or do we see more species substitution if we continue to have above your forecasted pricing in beef and continued demand destruction?

When I hear that, and I tend to think that until I go look at the numbers, and then I see that the cutout has ran a very high level, and currently is running a much higher number relative to last year. When I look at the Perishable data, you'll see the volumes being down and the prices being down. But the reality is the market's absorbing. It did absorb a choice cutout in the 190s through the bulk of May. It came off after the Fourth of July. It's a very difficult thing to answer other than looking at history, but we do know that the supplies will continue to come down. The prices probably will continue to rise. And the export demand, I think even though it's down year-over-year, January through May, about 11%, now we expect to see probably exports continue -- or will strengthen in the back half and potentially into '13. Again, that overall available worldwide supply keeps dropping, and so I think there are a number of consumers that are really -- the price isn't the primary driver. So it's a long answer to say, I'm not sure. I can't predict the future very well. But I can look at the supply dynamic going down. And history tells me that as supplies come down, prices will continue to inflate.

Okay. Well, that wraps up our call for today. We obviously have some challenging months ahead, but we've got the right team in place and the right plan to handle what comes our way. So thanks for joining us today, and have a great day.

Thank you. This does conclude today's conference. Thank you for joining. You may disconnect at this time.