Filed by Tyson Foods, Inc.
Pursuant to Rule 425 under the Securities Act
of 1933 and deemed filed pursuant to Rule 14a-12(b)
under the Securities Act of 1934
Subject Company: IBP, inc.
Commission File No. 1-6085
February 22, 2001
TYSON FOODS
February 21, 2001
12:15 p.m. CST
W With that, it is my pleasure to turn it over to Mr. Greg
Lee, COO of Tyson. He's been COO about a year, but
apparently he's been with the company long enough to be
wearing the beautiful gold chicken lapel pins.
G. Lee Thank you. Well good afternoon. Let me start off by saying
it's very great to be here and have an opportunity to visit
with each of you about our company. Keep in mind that some
of the things that we talk about for the rest of today's
presentations may contain forward-looking statements. For
more information about that, please refer to your handout.
Let's talk a little bit about our current environment in the
chicken industry and our strategies to deal with that. I'd
like to open my remarks by discussing that circumstance and
the impact the current marketplace is having on both our
industry and on our company.
The chicken markets we faced in fiscal 2000 and still face
today are measured as the most difficult in our industry
since the 1981/82 time period. The all industry average
return for integrated chicken processors has been a loss for
the last 18 consecutive months. In spite of these continued
losses our industry expanded production in the year of 2000
by over 2% and that followed on the heels of a 6+% expansion
in calendar 1999.
Additionally, bird sizes have continued to go up and now
exceed five pounds on a live weight basis. This expansion
in bird numbers and bird weight, coupled with an abundant
supply of competing meats, has certainly perpetuated the
difficult market conditions. In the United States, the
consumers' favorite chicken items are made from deboned
chicken breast meat. The decline in the market value of
breast meat has put tremendous pressure on the selling
prices of many of our core value added products.
That's a little bit of the background of the current
situation, so let's talk about the strategies that we have
in place that deal with these market conditions. Our key
strategies have been to manage our bird supply, to cut bird
supply, to reduce our frozen inventories, to internalize our
commodity raw materials, and to grow sales and market share
in our core item categories.
Our first strategy was to control supply and bring it closer
in line with demand. We've taken the painful step of
cutting production. The cutback in bird supply had the
effect of reducing our commodity sales; however, we have
continued to grow our sales and market share in core
categories. We cut bird production 3.5% and reduced
finished goods inventories in excess of 100 million pounds.
We are now at the point of having to carefully manage raw
materials, and that is precisely where we want to be.
In fact, our demand has risen to the point that we are now
selectively adding a few more birds into our system in order
to service our business. This will provide us the
opportunity to lower our costs without upsetting the balance
of supply and at the same time support our demand for very
specific bird sizes. So it's a strategic maneuver.
Our second major strategy was to pull back our excess
commodities from the open market, further process those
products and use them to be a full line supplier to our
customers. To facilitate this change, we have established
four additional deboning operations since mid-summer, with a
fifth location scheduled to come on late this spring. This
has had the effect of taking the seventh largest chicken
supplier out of the marketplace, internalizing that raw
material. We have demonstrated to our customers that we
want all of their business, not just a part of it.
The results of this strategy are most visible in our food
service portion control business where our sales volume has
quadrupled since last summer. This has not been completely
without some pain. We did this at a time when there
continued to be an oversupply situation and extremely
depressed commodity breast markets. However, you can see
the opportunity. Look at how quickly the situation can
improve based on the recent upturn in commodity breast
markets. By taking best market increase, by taking control
of our own raw materials and removing them from the open
market, the supply of forced control breasts has tightened
up, allowing us to increase our pricing during recent weeks.
You can see the effects of this in the top line of the graph
example.
Our near-term strategy is to leverage and strategically
manage our total product portfolio. Longer-term, our
strategy is to move our product mix up the value chain, and
I'll speak about that in some detail.
Overall, I'm pleased with our ability to reduce our
inventory position and to internalize the excess raw
materials we previously sold in the open markets. And by
the way, many of those raw materials went to what we term as
"non-integrated further processors" and then we found
ourselves competing with them in the finished goods market,
so we wanted to stop that in real term. Certainly slow it
down.
The job is not complete, but we have made substantial
progress. At the same time, we're growing our core product
sales, capturing greater customer share and improving
service levels to our customers. Our supply chain
initiatives have helped us streamline and leverage
purchasing practices to ensure lower input costs of
packaging, ingredients and equipment without sacrificing
quality.
We anticipate the centralized programs and the tracking
systems we have implemented this year will result in $35
million in savings to our company in 2001. And while that's
substantial, our expectations are to be annualizing at the
rate of $100 million by years-end. The programs are working
for us.
Our attention to capital expenditures has ensured that we
are spending our money most efficiently to ensure necessary
repairs and maintenance, while improving our capital project
mix to include greater investment in cost reduction and
income producing projects. This is evidenced by our $26.5
million investment in Chicken Quick, an expansion project
and a further process plant, as well as the addition of four
new fully cooked product lines in other locations.
Our center of operational excellence has allowed us to
benchmark our performance in key operational areas and
spread best practices across our plants. Successful results
include the development and implementation of automated oven
control systems, feed mill blending control systems and in-
plant marination practices. These types of programs allow
Tyson to continue to be the low cost producer in our
industry.
Now let's discuss what's happening in the market and how we
plan to take advantage of these trends in our future growth
strategies. Chicken consumption continues to grow. The
overall food industry continues to grow. Both consumers and
food service operators are looking for convenient foods -
fully prepared or partially prepared to address the shortage
of time, their labor in food preparation. Our customer base
is becoming more and more consolidated.
The per capita consumption of chicken continues to grow,
outpacing other proteins. Between 2000 and 2009, an
increase of 20% is expected. A slower growth rate than what
we've experienced in the previous 20 years, but certainly we
expect it to continue to grow. People are eating chicken
more often, so frequency of consumers eating chicken four or
more times a week has increased over the last eight years.
Eighteen to twenty-four year olds eat chicken most often at
home and away. At home, this group eats chicken 8.3 times
per month and they eat chicken away from home 5.1 times a
month. This is an important implication going forward
because this is the age group that will be moving into the
workforce and increasing their purchasing power. They have
already demonstrated a clear preference for eating chicken
and we expect their spending to grow.
The majority of women in this country are working and today
77% of those women have children between 6 and 17. This
demographic reality continues to drive the need for
convenience-oriented meal solutions for the homemaker.
More of the food dollar continues to be spent away from
home. With this shift, an increasing portion of the food
purchased from food service establishments is being eaten
off premise. While we see consumers desiring to eat at
home, they don't desire to spend a lot of time cooking at
home. This is what causes them to turn to convenience items
in the grocery store to assemble at home or they will
outsource meals to eat at home. Looking forward to the year
2010, food service is projected to capture over 60% or $76
billion of the $123 billion in real growth in food spending.
Retail will continue to grow by capturing $47 billion of
this new growth.
The number one problem for our food service operator
customers and our grocery retailer customers is labor. This
is true today and we believe it will be increasingly so in
the future. This reality places a heightened importance on
the ability to source value added convenience products from
manufacturers to take steps out of the back of the house,
preparation for food service operators, and it also drives
the need to provide case ready product solutions for retail
grocers. They need products that are ready to go directly
to the shelf and products that are easy to prepare and
merchandise in the growing area of the supermarket deli.
As the food industry matures consolidation of industry
players becomes increasingly more common. In the retail
trade the top five retailers control nearly half of the
dollar sales volume. The club store segment has been
consolidated and is controlled by three players: Sams, Cosco
and BJ's. In the food service industry, the top 200
commercial restaurant chains are expected to grow their
share to 64% by 2010. In the non-commercial segment, which
includes colleges and universities and other non-restaurant
locations, large contract management operators such as
Sedexo Marriott and Arimar are increasing their share in
that segment. The top 20 contractors are expected to garner
70 share of the non-commercial segment by the year 2010.
Our food service group has multi-year agreements to be the
exclusive chicken supplier with all of the top contract
management companies.
Finally, the food service distributors have been and
continue to consolidate. Just this past year we saw the
acquisition of US Food Service by Royal Dutch AHO and a
further acquisition of PYA into US Food Service. Market
leader SYSCO continues to grow in sales and share in broad
line distribution. Distributor consolidation is projected
at the low end to reach 35% by 2010.
So, chicken consumption continues to grow, albeit at a
slower rate. The food industry continues to grow, albeit at
a slower rate. Consumers and food service operators are
looking for convenience foods to address the shortage of
time and labor, and we believe there will be more of that in
the future. And the younger generation is poised to eat
more chicken. And our customer base continues to
consolidate.
Let's talk about our future. Historically we've been able
to grow at double digits thanks to a growing food industry,
particularly the restaurant industry. Tremendous growth in
per capita of chicken has helped grow our sales. And,
strategic acquisitions, both acquisitions of our own and
with our key customers, are growing.
Now, the market is more mature and although growing, at a
slower rate. To grow our business in the future we will
look to expanding our volume at a rate that exceeds the
industry growth rate and by focusing on our product mix to
enhance top line revenue growth and bottom line earnings
growth. Three key strategies to achieve our growth goals
are: organizing around our key customers, moving our
products up the value chain; and, building on the strength
of our brands.
We know to grow our business we must help our customers'
business. We have assembled dedicated customer teams and
are expanding the resources and tailoring our capabilities
to address the needs of our rapidly consolidating customer
base. Our philosophy is to impact our customers, our
relationships are based on partnering rather than one
dimensional selling. We developed an impact process that
guides our integrated customer teams to research, create,
test and implement the ideas that will truly result in
successful business growth for our customers.
Our retail division has consolidated the further process and
fresh divisions of their business and has developed customer
teams to better serve our customers' needs across the entire
store. As an example, our Kroger team has worked with
Kroger to move our business up double digits. Our
successful Big Buy/Big Sell promotional strategy combines
offers across all Tyson fresh and further processed
products. This allowed us to leverage our spend with Kroger
and improve our overall sales.
Our business in Kroger's deli is also up double digits. We
work closely with Kroger to dual brand their rotisserie
chicken with the Tyson quality endorsement and participate
in a promotion that generated a 25% lift in sales. Tyson is
the category leader for chicken in the Kroger deli.
We continue to provide the scale necessary to support Wal-
mart's aggressive store expansion. Our business with Wal-
mart is very strong. No other chicken company could begin
to handle this type of growth. Our Wal-mart team's focus is
on servicing their business so they have the confidence that
we could continue to grow with them.
Our deli business with Wal-mart is also growing strongly.
We have a initiative using the Tyson brand on their
rotisserie chicken package. Additionally, we have potential
to move this over into their self-service deli programs.
In the food service division we have account teams that are
responsible for each of the top 200 chains as well as the
top 20 contract management accounts. We have teams
dedicated to working with the top food service distributors
and buying groups. An example of successful impact
partnering with our restaurant chain customers is KFC.
Tyson hosted and facilitated a strategic new product
Pipeline Summit, which was attended by KFC and Tyson cross-
functional representatives. At the time the group agreed to
reintroduce the Twister sandwich they had had in the market
a couple of years ago. Today, it has turned out to be one
of the best all-time new launches for KFC and it really
meets consumer needs of quality, variety and great taste.
Working together it has driven the tender sales, which are a
component of the Twister, to record heights.
We also identified Wings as the strategic growth platform
for KFC. Today they are in the middle of a major wing
promotion and have had some of the most successful weeks
they have had in recent times. So KFC has grown and Tyson
has grown with them as their developmental partner.
Consumerscape is the tool that we use in the KFC Impact
program to help identify the key information we needed to
zero in on their product opportunities.
While we focus teams to work individually with top accounts,
we also strive to make an impact with the many accounts
where we can't have a one-on-one relationship. We do that
through many resources and tools we provide customers as
part of doing business with Tyson. We provide product and
recipe information to our customers on a 24 hour a day, 7
day a week basis. Our customizable point-of-purchase
program allows our field sales force and field brokers to
create customized merchandising materials for operators.
This past year we introduced madetoordertyson.com, which is
an online library of chicken recipes and menu suggestions.
Made to Order will search the database to bring back only
those recipes that fit a customers' particular operational
capability.
Our food service Web site also includes a virtual food show
where operators can always find the latest new products.
Our innovative and relevant Web site earned Tyson Foods the
industry's first award for the Best Food Service
Manufacturer Web site by the Society for the Advancement of
Research & Technology.
Training is another area where Tyson Foods has led the
industry. Tyson University was created to educate our Tyson
sales and broker teams along with our food service
distributors about chicken. For our distributor customers,
training extends beyond the Tyson University campus to TU
road shows at the distributor's location. And more
recently, we've distributed Chicken 101 CD-ROM's for
training.
We also have a Tyson University program that is dedicated to
food service operators and we had 14 classes of that
particular program last year. In this program they learn
not only about our products, but how to menu chicken and
that we are able to develop a one-on-one relationship with
key operators.
To our distributor customers providing quality chicken in
the box, at the right value and at the right time is only
the point of entry. The true point of difference is only
achieved through the value we bring before and after the
sale. We are leveraging our total company's strengths and
capabilities to support those distributors who do business
with Tyson Foods as their primary chicken supplier and we
are bundling our programs to reward those customers who buy
our full portfolio of products.
Tyson has long been recognized as having superior customer
relations and have received many rewards as a result. We
were awarded SYSCO's Top Ten Gold Supplier this year where
we were singled out for an innovation in creating for them a
unique logistics system that involved small pallets.
Additionally, we were chosen by UniPro as Supplier of the
Year. UniPro is the industry's largest marketing group of
independent food distributors. We won the overall Supplier
of the Year for Frosty Acres in 2000 and we recently learned
that we will be for 2001. Other awards include Supplier of
the Year for Fourside Partners and for Benny Keith, as other
examples.
On the restaurant operators side we were selected as
supplier of the year for Domino's Pizza.
As a result of these recognitions in services that we
provide we have been selected as the overall industry leader
by food service distributors for 12 consecutive years. That
cuts across all product categories. And we have been
recognized as the poultry category leader for 25 consecutive
years.
Let's talk a bit about our product strategy. Our second key
growth strategy revolves around products. Our product
strategy is to move products up the value chain to protect
and grow our core business, and to continue to grow the
category through new product development. One of our more
important retail product initiatives is to move Tyson's
category leading Fresh Tray Pack program up the value chain.
Recent consumer research indicates that when both marinated
and all natural chicken is available, four out of ten
consumer purchasers of fresh chicken would buy marinated
chicken. Tyson's new Tasty Marinated Fresh Chicken line
features three packaging options: chicken broth basted tray
packs and flavor seasoned tray packs and pillow packs.
Plant capacity continues to be expanded in order to meet the
rapidly growing demand. We anticipate that within two years
we will be selling approximately 50% of our fresh tray pack
chicken in a pre-marinated form.
In September of 2000, we opened our new Chicken Quick plant
in Rogers, Arkansas to support the sales of our category
leading, fully cooked line of boxed and bagged products for
retail grocery. Expanded capacity plus new capabilities
have allowed us to gain renewed momentum in this product
category by improving our products, introducing several new
items and providing greater consumer value by upsizing our
packaging. Sales results have been better than expected to
date.
In the club store segment we have developed a strong,
strategic partnership with Cosco and Sams, which centers
around a unique team of dedicated resources, with the
flexibility to meet their changing needs and rapid
expansion. We currently have the dominant position in our
core IQF, breaded and glazed frozen chicken categories. Our
growth strategies are focused on expanding our brands to
additional categories. These include canned chicken,
refrigerated, rotisserie, food courts and entree products.
We currently have 100% of the roasted/refrigerated business
with new line extensions coming on stream in quarter three.
At the same time we continue to innovate new products to
satisfy the club store customers' demand for Treasure Hunt.
Product development is an ongoing activity with an annual
churn of about 20 new items per year for the frozen meat
case.
To move trade to consumer up the value chain, we are
introducing a line of hand-held products that are more
convenient and user friendly. We believe that Tyson equity
combined with the ability to produce multiple categories
gives us the lead in all products containing chicken. With
the productive capabilities across our entire company, we
have the ability to expand anywhere our customers need to
go.
Chicken continues to gain a greater share of the food
service menu. Chicken items are being added faster than
other meat-based items. In fact, 38% of all new meat based
items added to menus in 1999 were chicken. Tyson constantly
creates new products, recipes and menu ideas to help
operators find new ways to add chicken across the menu.
Of the chicken items sold in commercial venues we've seen
the shift to boneless, hand-held items with the
nuggets/strip category increasing 134% since 1993. This
category has even surpassed bone in chicken as the most
consumed poultry product in restaurants. In the United
States, restaurant goers consumed 1.5 billion servings of
chicken strips and nuggets last year alone. In a recent
report released by MPD Food World, chicken is attributed to
driving growth in the major burger chain. Incremental
orders for chicken were higher than orders for burgers
during the period between '96 and '99.
Tyson continues to grow the chicken category in food service
through developing new products. We rolled out new products
in quarter one to capitalize on the popularity of hand-held
appetizers. On the menu, chicken represents about 25% of
total appetizers served and tenders and strips is the number
one item on appetizer menus. The Gallup Brand Study also
revealed that Tyson ranks in the top two most recognized
brands for appetizer products. New products recently
introduced include Chick Ribs which are trimmed from the
thigh to provide a meaty portion more similar to a rib.
Extreme Spice Rubbed Wings with trendy flavors like
chipolata and Seasoned Chicken Skewers. And by the way, you
can enjoy those at the beach party tonight.
Products like our fully cooked fajita strips allow operators
to simplify the number of steps in preparation and enhanced
food safety. We have a growing demand for our fully cooked
products and we're investing in value added productive
capabilities. As I mentioned before, besides the Chicken
Quick expansion to support growth for fully cooked products
in retail, we are adding four new fully cooked lines and
increasing the capacity of two other lines to support
retail, club and food service fully cooked opportunities.
When you consider the fact that 68% of the total chicken
sold in the United States is in a very basic form, you can
quickly relate to the tremendous growth in income
opportunities that can occur by moving those products up the
value chain. No one is better positioned to do this than
Tyson Foods. And with demographic trends continuing to
favor more partially or fully prepared items, this is an
achievable, long-term strategy for our company.
Internationally, we will further establish Tyson as the
dominant global brand. In addition to exporting chicken, we
will seek opportunities to grow around the world through
acquisitions, joint ventures and technical service
agreements. We have product being produced in China with
four value added products going into retail test markets.
Additionally, we're looking at a joint venture in further
processing with the products aimed at exporting to our
international customers who are expanding around the Pacific
Rim. Panama is a technical assistance agreement in further
processed production with the sales going to both food
service and retail markets in Panama and nearby Central
American countries. We are currently expanding our
operations at Tyson de Mexico. We are installing a fully
cooked line, the first of its kind, in the country of
Mexico. It is designed to be on the same scale as our lines
here in the United States, giving us the immediate
opportunity of growing fully cooked products for export from
Mexico and paving the way for burgeoning demand for further
processed products in Mexico.
In closing, let me say that we believe our company is
running well. We have a capable and committed management
team who accepts the challenge of growing our business
during tough times. They are here for the long pull because
they know we've laid the groundwork for great success and
want to recap the ultimate reward. Our people are confident
their strategies will pay off and so am I.
Now, I'd like to turn it over to John Lee, our Chief
Marketing Officer, to talk about our corporate brand
initiatives. Thank you.
J. Lea Thank you, Greg. Marinated, marinated, marinated, I wanted
to be sure I can say it since we plan on doing a lot more of
it. Hopefully you can see from the information that Greg
presented that Tyson is the undeniable leader in the poultry
industry by any measure. We process approximately one out
of every four boilers in the United States and it takes just
short of our next three competitors combined to equal our
size. Tyson is the only nationally branded company in
America. All others are regionally based and regional
brands. We sell every grocery store and membership club in
America. We sell all of the top 50 food distributors. We
sell 75% of the top 200 restaurant chains. In the food
service segment, we continue to be recognized for our
leadership, having been named the industry's overall best
supplier for the 12th consecutive year, as Greg mentioned.
In fact, if our food service division was a standalone
business, it would be number 468 on the Fortune 500 and the
largest poultry company in America.
In the retail segment, we are again recognized for the third
straight year as the Pro Grow Silver Award winner. This
award is voted on by the retail customers in Progressive
Grocer Magazine's annual survey. We were second this year
only to Oscar Mayer as the best overall meat supplier.
You can also see that we have category-leading shares in
virtually every category in which we compete. Our fresh case
ready or chill pack share is approaching 33% or 140% of our
share of industry. Clearly a business we understand and are
expanding.
We are chicken, both as a category leader and as a brand.
Eighty-five percent of the respondents when shown our brand
said, "Chicken." When asked to name a brand of chicken
Tyson was mentioned first 47% of the time, which ranks us
with the premier food and beverage brands in America and is
a full six point increase over last year.
Our other consumer brand perceptions are on the rise as
well: quality up five points; make safe food products up
four; great tasting products up a full seven points; and a
name you can trust up three points. Within food service,
our first mention was an overwhelming 63% with almost three
out of four customer mentioning Tyson on an unaided basis.
Needless to say, we are pleased with these results.
We didn't achieve them by simply having great advertising
but by coordinating all areas of our business and adhering
to one simple principle: Everything counts because
everything communicates.
Our strategy includes, yes, a strong advertising campaign,
but also programs designed to strengthen our reputation by
demonstrating our commitment to our social and environmental
responsibility, food safety and nutrition, and our community
and grower relations, which all build on our brand promise,
quality chicken you can trust.
These are a few examples of our new Tyson "It's what your
family deserves" campaign featuring real Tyson team members
and their families. Additionally, we are a member and
active supporter of the Family Friendly Programming Forum,
which not only supports but underwrites development of
family friendly TV programming for prime time viewing.
We also have a new ethnic marketing campaign that allows us
to stay in touch with the changing demographics Greg
described. In fact, we just found out yesterday that our
ethnic campaign in Houston will be awarded a silver Addy
award.
In May, we announced a $10 million partnership with Share
Our Strength, a leading hunger relief organization. We have
already donated almost three million pounds of chicken for
15 million meals in the first nine months of our
partnership.
Finally, we instituted an environmental awards program that
recognizes and rewards our growers for environmental
stewardship. We are clearly being recognized for our
efforts and we are very proud that Fortune Magazine recently
ranked Tyson number two in the food production category of
America's Most Admired Companies.
We also continue to be rewarded and recognized for great
product and concept innovation. Our joint venture with
Uncle Ben's, which we spoke to you of last year, was
recently recognized as one of the top ten new frozen
products of 2000. Our Sunset Strip branded concept is
increasingly being adopted by college and university
establishments. This is a concept where we provide them
with a turnkey, branded concept business and they in turn
agree to buy Tyson products exclusively. A true
partnership.
Clearly, the things I've just spoken to you about are our
competitive advantages. Our ability to establish and grow a
brand, our knowledge of convenience foods in the case ready
categories, our industry scale and leadership in both food
service and retail, our strong presence with customers who
are growing in a consolidating marketplace. It is these
strengths that also make us very excited about IBP. We
believe it is these fundamentals that when applied to IBP's
business model can also accelerate their progress. It is
these principles John Tyson was talking about when he said
he hoped to "chickenize the beef industry."
We believe we can establish and grow their branded beef and
pork initiative. We believe we can help them develop
further process in value added products and can
substantially move their mix up the value chain, as Greg has
alluded to. We believe we can take advantage of our frozen
market access and their industry leading refrigerated
distribution capabilities and truly add value while taking
costs out of the supply chain. It will not happen
overnight. Brand building takes time and discipline and we
recognize that, but we have the time, we have the discipline
and we have the business model. I hope the results we have
shown you today will make a believer out of you.
Thank you and I'd like to turn over the podium to Steve
Hankins.
S. Hankins Good afternoon. I'm going to take just a few minutes and
talk about our financials and talk just a bit about our
transaction with IBP. First, taking a look at our sales.
You can see the growth trend that we have up from $5.5
billion in fiscal 1995 to just under $7.2 billion in fiscal
2000. Adjusting for divestitures, our comparable sales
increased from $4.8 billion to just short of $7.2 billion, a
compound annual growth rate of 8.1%. This was fueled by our
internal growth as well as the acquisitions of Cargill,
McCarty and Hudson Foods.
A major financial strength of Tyson is our cash flow. Our
operating cash flow was $587 million in FY2000. As part of
fueling that cash flow has been a major emphasis on the
management of the cash cycle. You can see that we've
improved this almost five days since fiscal 1998. We
focused on our accounts payable days outstanding and we've
worked with each of our business units on their customer pay
habits by making accounts receivable reviews part of our
regular business reviews. We've increased our efforts in
inventory management as part of our supply chain strategic
initiative and now we've completed pilot implementations of
improved forecasting and production scheduling techniques in
two of our business units and have seen excellent results.
But beyond the pilots, we have increased our focus in each
group resulting in a decrease in inventory of 138 million
pounds during fiscal 2000.
Also, as we've talked to you before, we've increased our
efforts in the management of capital expenditures. Our
Finance Committee meets every three weeks to review major
capital expenditure proposals. We've implemented a rigorous
process for all proposed capital items and educated our
management to think financially about our capital
investments. And as you can see, in FY2000 we spent only
$196 million and we expect to spend in the range of $230 to
$250 million in FY2001.
Of course the strong emphasis on cash has given us the
capability to pay down our debt, and that's illustrated by
the red line on the chart that you see. And during fiscal
2000 we paid down $262 million in debt. And as you look
specifically at our debt to capital ratio, you can see we
brought that down from over 57% in 1995 to just over 40% at
the end of quarter one of FY2001. Our debt mix today, we're
just at over 25% flowing debt at an average rate of 7.1% at
December quarter end.
Now the effect of the low chicken markets and the difficult
industry conditions can be seen in our gross margin which
has dropped from 17.8% to 15.6%, giving us a decrease of
almost $200 million since 1999. Now FY99 is the closest
thing that we've seen lately to what I would call a normal
environment and we were just touching into that. In the
last couple of quarters that year as a reference point can
give you a view of what a normalized earnings potential of
our company could actually be.
Our earnings per share for 2000 were $0.74, which was down
from $1.20 in 1999. Of course in 2000 we took a $24 million
hit for AmeriServe that cost us $0.06 a share. Our cash
earnings were $0.89 as compared to $1.36 in 1999. And as we
look forward to the combination of Tyson and IBP, we will
focus more on cash earnings as the cash producing power of
the combined companies, just as it has been with Tyson so
far, will be a huge financial strength.
I'd like to talk a bit about the combination of Tyson and
IBP. On January 1st we signed a merger agreement to buy IBP
for $30 a share in a 50/50 cash/stock transaction. And
prior to January 1st, we had commenced a cash tender for
50.1% of the shares and the price on that tender was amended
to $30 on January 2nd. On January 27th, we received all the
needed government regulatory approvals to complete the
transaction; however, this morning, as has already been
referenced, we once again issued a press release extending
our cash tender offer and this time it is extended until
February 28th.
Now we are disappointed that we have not been able to
complete this transaction. On December 29th the legal
representatives of IBP had received a comment letter from
the SEC related to the filings made in conjunction with
their proposed acquisition by the Rawhide DLJ Group. This
comment letter was not made available to us until January
10th. As we've said publicly, we were not at all happy
about the timing of this disclosure. This comment letter
raised several accounting issues, including questions about
the pooling method of accounting for transactions that was
used in their acquisition of CBFA and questions about their
third quarter write-off of $8 million related to their DFG
subsidiary.
Now following January 10th, IBP's worked with the SEC to
resolve these issues and that process continues as we speak
today. If you've kept track in the past few weeks, you've
noted that the write-off related to DFG has increased by an
additional $47 million and that questions about impairment
of assets and overall business viability have been raised
about DFG. Now these DFG questions also raise the potential
or the issue of potential restatement of public filings by
IBP beginning with their 1999 10-K.
Now we've been asked, "Didn't you know about DFG?" and the
answer is yes, we knew of write-off issues with DFG, but not
to the extent of $47 million. Also, the discussion raised
in mid-January about the impairment and the potential
restatement of public filings was the first that we had
known about that.
We've also been asked, "Well why can't you just close the
deal anyway?" with a strong suggestion that this really is
just about price. But what you must understand is that all
the Tyson public filings related to the transaction rely on
the public filings of IBP and once those public filings were
brought into question and made subject to revision, we felt
it was only prudent to delay the process. And at this
point, the process has been delayed such that our public
filings must now be revised to include December ending
quarterly numbers which requires that we have IBP's
completed 10-K for their fiscal 2000.
Our position remains unchanged at this point. Until IBP
reaches resolution of their SEC related issues, we are
unable to complete the cash tender and as well as we are
unable to even commence the exchange offer.
And for those of you who have made a careful reading of the
merger agreement, you've noted February 28th is a special
date, because that's the date that IBP could make the
decision to back away from the merger if the cash tender has
not closed. The merger agreement when written certainly did
not anticipate the set of circumstances that we've
experienced since January 1st. We're going to continue to
work through the issues these have raised in the coming
days.
But, let's move on. Let's talk a bit about what the company
would look like following the transaction. The comments I'm
going to make about numbers has to do with the models and
the way we looked at this business early in January as we
anticipated the transaction.
Our sales would have an interesting growth effect, 233%
going up to $23.8 billion on a 2000 pro forma basis. And if
you use a conservative 3.3% compound annual growth rate,
sales would grow to just over $26 billion by the end of
fiscal 2003. Cash flow would be very, very strong as you
can see on this chart as debt to capital works its way to
just under 46% by the end of 2003. And as we've mentioned
in past press releases, we expect the transaction to be
immediately accretive by over 15% on a GAAP basis and by
well over 20% on a cash basis for the first full year.
Now we see synergy opportunities in IBP's companies, food
brands, in the areas of procurement, distribution and shared
support services. And the food brands companies are an
accumulation of several acquisitions that IBP's made over
the past few years. As you can see, they have a number of
brands, 44 processing facilities and a number of different
infrastructures in place. And Tyson's strength in food
service, supply chain management and our overall
infrastructure management capabilities will enable us to
maximize the potential of these companies while finding
significant synergies within the infrastructure and
management areas.
Also, both Tyson and IBP have commitments to procurement
initiatives and the combined companies will be able to
further leverage the activities that both companies have
going on there and find additional savings. And Tyson's
strengths in logistics and supply chain, we'll apply those
not only within food brands but we'll combine those with
existing strengths within IBP and bring more efficiencies
and cost saving opportunities to this area as well as
customer service opportunities.
And certainly within the combination of any large companies,
there are efficiencies that can be gained in the elimination
of duplicate support services and in the leveraging of
information technology assets, and we see those things
definitely in this merger.
I'd like to say just in closing we're excited about the
opportunities to create additional value that the
combination with IBP can bring to this, but we're also very
proud of our company today and we're very proud of our
balance sheet and our cash flow capabilities. And while our
income statement has been effected by difficult industry
conditions, I think when you consider how dire those
conditions are for many other companies, that Tyson has had
the capability of doing well in comparison with what's going
on with others.
So with that I'd like to say thank you and introduce John
Tyson, our Chairman, President and Chief Executive Officer.
J. Tyson Well they didn't give me the big print, so I've got to put
my glasses on to read from the prepared remarks here for a
moment. I, too, would like to say thank you to the folks
from Cagny to give us a chance to talk about our business
and talk about the fine company that we call Tyson Foods
today. And I think as you've listened to our presentation,
I think you'll be reminded about our company's strengths and
those are the strengths that we'll take over to IBP, but
those strengths we feel make us different not only from the
other poultry companies but also from the other protein
companies and from most food companies.
Our company does have scale in the chicken business. We're
nearly a quarter of the market and we have an even larger
share of the value added market, but it is not our size that
makes us different. It is the differences that allow us to
reach our size and service our customers.
You've heard today about the strength of the Tyson brand.
It stands for quality and it stands for trust. We've talked
to you about our customer relationships. Not just
relationships but value added relationships. We work with
our customers to help them grow their businesses by
providing innovative products and mill solutions that
address needs; needs of the families for quality foods that
are convenient and easy to prepare; needs of the retail and
food service industry for products that not only reduce
labor and address food safety concerns but products that
ring the cash register by targeting the consumer eating
trends. And we bring unparalleled resources to provide
service. Our production facilities and distribution network
combined with a portfolio of products unable us to now
fulfill 100% of our customers' chicken needs.
But our most important resource, more than one and I'll say
it time and time again, are the great folks of Tyson Foods.
They are the ones that bring the commitment of quality and
service to life on the day-to-day basis and I can tell you,
I'm thankful for them.
And as you think about the things we've talked about today,
I know one of the questions on your mind is, "But where's
the value? Where's the value for Tyson Foods?" In the 80s,
we were a star, we were a star in the stock market, but in
the 90s we saw one thing after another affect us - Russia,
Asia, extreme cost in grain and now the poultry industry is
over produced in 2000 and 2001 with an oversupply situation,
just as we had in '81 and '82. These things have effected
our income statement, but I would suggest to you all in this
room that the value to things we've talked about today is
evident in our performance through these rough times. Most
of the chicken industry is losing money. We've managed what
we could manage and continue to increase our industry
position with key customers and in value added products. It
has been 20 years since the chicken markets have been this
bad. We will come out of this well positioned to take
advantage of the market improvements. And financially, our
balance sheet is in good shape and our cash flow continues
to be strong.
Which leads to a question I get asked, "What are you going
to do with your cash?" It has been suggested to me that we
buy back our stock, it has been suggested to me that we
focus on paying down debt. We have done both of those. But
the way I'm looking at answering the question now is, we're
going to buy IBP. As we think about Tyson and we think
about Tyson and IBP together, you have the industry leader
in beef, you have the industry leader in chicken and you
have the industry leader in pork. And with the combined
market share of these three proteins at close to 25%, we
have the chance to provide one in four pounds of the three
basic proteins to the marketplace out there.
This is a unique point in time and opportunity to create the
world's largest marketer of these proteins. IBP is a strong
company. They have put some things in place. But our
strengths in branding, customer relationships and
partnerships, and our focus on value added products and
growing demand in retail and food service will combine with
the strengths of IBP and we will have some fun in the
marketplace. We truly will have a company that is unique in
market and product reach and strong in its capability to do
what you all will ask of us, which is to generate cash, pay
down debt, to get in the position to do something again.
I want to say thank you to everybody in this room and we
stand ready for questions and answers. Dave Nelson?
D. Nelson Thank you. You've caught a cold, the rest of the industry
has pneumonia, yet we really haven't seen a lot of
consolidation. We haven't really seen a lot of people
dropping out. Do you plan to put the chicken industry on a
death march until things get better and a little more
rational?
J. Tyson I'll try and answer it in a way that will make my lawyer
happy. Yes, we're going to keep the pressure on. We were
out there working hard. I think one of the things that Greg
alluded to was the market share. We've gone back to
servicing 100% of our customers' needs. You know, we got
away from taking care of our customers and when we've gone
back and supplied the whole basket of goods, you're seeing
pressure in the marketplace. We're getting additional
business with managing the whole basket of goods. Greg,
Johnny, you all have anything to add to that answer?
Okay. Down front there?
W I wonder if you could help us think through the issue of
materiality with respect to IBP. We all sit around trying
to figure out what does the $47 million mean, what do
further impairment charges mean, is it material if suddenly
CBFA were not a pooling. So, how are you processing that
in? And bottom line, is IBP still worth $30 a share to you?
J. Tyson On the materiality, I'm not going to be able to answer that
question until we get the answers back from the SEC, and
we're still waiting for those answers and we're still
waiting for the information. IBP has an ongoing dialogue
with the SEC, but as of now, I can't answer the question. I
can't be sure that there won't be any future changes out
there in the marketplace.
W If we asked you real sweet and nice, will you tell us what
was in the letter?
J. Tyson We've not seen all the letters. There's information we've
not been privy to yet. So, it's a little frustrating to us,
too, I can tell you.
M How did you get Supplier of the Year to Domino's Pizza? I
didn't know they served a chicken pizza, but maybe I don't
get out enough.
J. Tyson Chicken wings. And it was interesting, not only were we the
supplier, we were the supplier for the overall company.
They give rewards for proteins, for dough and other stuff
like that, but at Domino's we were the number one supplier
against all categories. It was quite a compliment to our
folks.
M I think Cagny should give an award each year to the stock
that goes up the most because that seems to be what we're
focused on. Just in terms of the whole issue of mad cow and
whether or not that has anything whatsoever to do with your
hesitation to complete this transaction, first of all, can
you address the issue what you think has changed since you
started to look at IBP and whether or not you view that as a
risk and once you do control IBP in running the business
successfully?
J. Tyson Well I'll address what changed first, and I'll address mad
cow second. What changed first is the financials and we're
still waiting on financial information.
As for mad cow, we as managers are paid to manage those
issues and that's our responsibility, and we'll manage it
like we do any situation related to food management. We'll
understand it. I think you saw in a press release that IBP
put out in the last two weeks that they have instituted new
procedures for the cows and the cattle that they buy coming
into their plants that have some certain requirements on, in
effect, backward documentation of where the feed that goes
into those animals comes from. They're the first one in the
industry to do that, to require that from the people they
buy product from.
M John, I think it's been kind of an ongoing dialogue as to
whether or not a leading branded company like yourself with
its reputation across all channels can't get the premium
they need to protect a profit margin. I think Greg has seen
and you've said that even if a customer pulls away from you
for a short period of time, when you go back to servicing
them on a service basis, they come back to you or your
market share increases with them. Given the fact that this
market is consolidating on the user side, what is it in the
process here that doesn't allow you to get that extra half
or three quarters of a cent a pound that you need to keep
the margins healthy in a very difficult period of time? Now
that's kind of contradictory to David's question about if
you keep the pressure on and just some of the people simply
cannot exist. I know it's a tough choice, I'm just
wondering what the opportunities are to get paid for what
you have said is your strength?
G. Lee Well, to tell you the truth, Lenny, I think the fact that we
have been able to remain profitable is a testimony to our
mix and the fact that we do get a premium price to the
market. The problem that we have here is we don't have a
normal, just like low market. You're talking about virtual
all time lows, so by the time you dip down into that area
and still sustain a premium, you've got a very difficult
profit picture. So, we've just got very sloppy margins.
You're sitting here, we've had in the last four weeks or so
about a $.15 increase in the base commodity breast market.
Well guess what? That's to $1.35. The same time period,
we're upside down on leg quarters say from the first quarter
by $0.11 a pound. That will cost us in this quarter in
excess of $20 million. It is a difficult pricing market.
So you've got a lot of chicken out there chasing the volume.
We're getting a premium relative to the market total, but it
just doesn't deliver the bacon.
J. Tyson I don't know, you saw the one slide Greg had up there, as
the market started to turn our premium ran off $.50 or $.60.
We were getting anywhere from $.20-.25 a pound premium over
the market. That premium's now up to $.65-.70. So it shows
you what the value of the brand does.
There was a question in the back of the room.
W I wanted to ask about the IBP transaction from the
perspective of a termination fee. Is there a scenario here
where you get paid a termination fee if this transaction
doesn't go through or would you have to pay one?
J. Tyson There would be a break up fee if somebody was to come bid
over us, but there is no termination fee. If it was not to
go through, it just would not go through. Christine?
W Let's just assume for a moment that this transaction
actually closes someday, have the events of the last couple
of months hurt the relationship between management? And is
there a risk that some of those key personnel aren't
retained in the new entity?
J. Tyson That's a good question, but I think tough times make teams
get better and I think by going through some of the
struggles that have gone on in the beef industry the first
month of January and what's gone on in the industry, you get
to find out what people are made of. And in fact, this has
probably brought people together quicker and faster to talk
about issues and how to address the opportunities that we
talk about our in synergy models. So I've seen a lot of
positives out of the situation on a go forward basis.
Right there behind you.
M You mentioned that tough times make management teams get
closer. How is it that you have not seen all the
correspondence that the SEC, can we assume as a follow up
that you've seen the restated financials? And then
separately, is there any change at all to the strategy value
of the transaction?
J. Tyson The first answer is that their lawyers won't let us see some
stuff, so you'd have to talk to IBP's lawyers and their
outside counsel on why we're not seeing some of their
information. Secondly, we have not seen restated
financials. Third, I still like the big picture idea.
M This has to do more with the strategic merits of the
transaction, but based on your own, I guess, projections
here, it kind of showed chicken consumption continuing to
increase but beef and pork either down or flat. So I'm kind
of wondering, if you're a pure play and you're expecting
your market to continue to grow then why do this? And then,
if you go ahead with it, I guess you're assuming you're
going to gain market share and offset your own projections
that those categories are going to decline, and why should
we believe that you'll gain share?
J. Tyson Well, first of all, one of the ideas we have for IBP is to
drive their basic commodity products up the value chain.
They're in a position to do that and nobody's done that with
the beef and pork industry. Greg, why don't you pitch in.
G. Lee Really, I think that is the cornerstone, that we do believe
that the value in IBP as you look down the road will be the
converging of a significant portion of their base beef and
pork products to more value added items, adding dollar
revenue and margin against the pounds. We also believe that
the company can compete vigorously within the total pounds
of beef and pork as we go forward.
J. Tyson Gentleman in the red sweater.
M I'm curious, we've seen soybeans now produced more cheaply
in Latin America than they are here, and I don't know
anything about Latin America's chicken production or sales,
but is it possible that a few years down the line you could
be getting significant competition from Latin American
chicken producers in export markets?
J. Tyson I think some of that competition exists today, but I think
those that have been aware of our company, before IBP passed
across our plate, we were aggressively looking for
production capabilities in Brazil. And in our go forward
model five and eight years out, we will find low cost points
of production and Brazil will be a low cost point of
production. Not only for poultry, but for some of the other
proteins. So it will be a question of how do you manage
your production base from around the world. When my dad got
started, it used to be Arkansas, then it was Arkansas and
North Carolina, then it was Arkansas, North Carolina and
Texas. So for us it will be the United States, Brazil and
some other countries.
Did that answer your question?
M It answered my question, but also puts in my mind that I'm
going to have to watch that there isn't going to be some
more chicken over production three and four years down the
line, possibly, from over production in Latin America, not
by you, but by your competitors, obviously. Just makes me
think about those things. It's sort of analogous to what
happened to ADM where they ended up with a lot of non-
competitive soybean processing plants in the United States
when a lot of soybean processing shifted to Latin America
because of low production costs in Latin America.
J. Tyson Okay, you've got a comment. I've got an idea, too.
G. Lee I think we need, from our perspective, we look at the
worldwide demand for chicken being excellent over the next
number of years. There will be significant growth
opportunity and we want to be a participant in all of it.
We certainly have a big play here in the United States.
We're interested in having a bigger play internationally.
We believe open markets in the end will be good for us. You
can always conjure up a particular circumstance where there
might be a negative, but if we play across the full front of
the activity, we think it will be good and we can win in
that game.
J. Tyson And if you think that one of our models is to be one chicken
short, we don't care where we buy that one chicken from in
the future, whether it's a US based production or a
worldwide base production, as we bring them into our value
added products downstream. You'll just upgrade the value of
the basic input of the raw material.
W Since '95 or '96 I think we've heard that the bulk of the
industry isn't making a lot of money and you expected
consolidation, you expected doors to shut. And yet, when I
still look at . on a USDA data, from time to time I see a
dip into the negative territory but then it comes back up
pretty quickly, the minute the prices respond into the
positive territory and that still makes me wonder what is
going to bring about, short of a three year spike in grain
prices, a material decline in the amount of capacity that's
out there in the poultry industry. And without that, can
you return to those levels of profitability that you had
before?
G. Lee Sometimes I think we think the same thing you do, but no, I
believe that we do believe things will move into a more
normal cycle. We have had an abundance of all proteins,
certainly for the last 24 months. We're moving into a
period of time, as we all know, where there's going to be a
little less beef around. We do believe that the market is
going to be able to grow to a point that it can absorb the
significant amount of expansion that occurred in '99 and to
a lesser degree but also in 2000. You alluded to the fact
that egg sets have been a little bit lower. I think we said
like on our last conference call that we expected chicken
production to be basically flat until around the June
period, then of course we'll get some additional visibility.
Our belief is the market's going to kind of grow into itself
and we're going to see an improving condition here. You
cannot deny that the difficult financial circumstances that
have been experienced by the chicken industry for the last
few years are taking a toll on some people's thought
processes from expansion, whatever. So we do believe we're
going to return to a more normal cycle and we're hard about
trying to take advantage of that and work on our product mix
to move us up in profitability kind of regardless of the
cycle.
J. Tyson I would ask some of your banker friends in the room what
they're starting to do in terms of the pressure on them, who
they have money loaned to in terms of making those calls. I
think you'll find some interesting information if you'll ask
some of your banker friends some questions.
W The second question would be, we're very appreciative of the
dinner tonight. I think we just want to make sure that none
of that 2.3 million pounds that was recalled yesterday is
going to end up there. Can you tell us if that's material
or not..
J. Tyson Erica, I can't believe you said that. I'm glad you said
that, we had a chance to go play golf this morning, Greg and
Johnny and I, and we pull up and the starter goes and he
goes, "Oh, you're the recall guy." He pointed right to
Johnny Lee. So, we'll let Johnny take the question.
J. Lee I whiffed my first swing. The recall was initiated by us
really in abundance of caution. This is not a recall
initiated because of pathogen contamination. If you read
the press release closely, what happened was we had a
situation in one of our fully cooked plants were some breast
tenderloins would roll over and when they would roll over
and touch, there was a tendency in a very minimal amount of
them for them to be undercooked. And the USDA termed them
"under processed" right in the center where those two pieces
would touch. Again, this was a minimal amount of product.
We're really only talking about two box SKU's and one bag
SKU. Of course because of our volume and wide distribution
the pound number was enormous and scary to an awful lot of
people, but it's a very minimal amount of product. And
again, I reiterate, it is not for pathogen contamination,
but under . rules today if the product states that it is
fully cooked and you believe or have evidence that it is
not, then you are obligated to notify the public and pull
that back. We did that. We did it to the scale that we did
because we wanted to ensure that there was no likelihood of
getting any subsequent recall or expansion of this recall
and we did it to minimize the cost and effect. So even
though the number was big, in an abundance of caution we
reached around and got a little bit more than possibly
should have to eliminate and control costs.
J. Tyson You don't like these things to happen, none of us do, but
you have to compliment our system. Once it was found, we
were able to reach and start calling our customers in less
than 12 hours. It was quite a compliment to the team that
when we had to trigger that mechanism, it worked and it
worked like clockwork and we're right on top of it.
G. Lee Let me make just one more comment with regard to this. Our
customers have been incredibly supportive of this. And
because we all know that these recalls unfortunately have
become more common under kind of the change in, I hate to
say regulatory approach, but I can't think of another way of
saying it right now. And the patience level out there in
the customer community is not all that high, so to speak.
But our customers have been very, very cooperative. I think
that's a testimony to our relations with our customers. We
certainly believe we can reestablish the items in the
marketplace. But it would also be foolish of us to not
suggest there will be some financial consequence associated
with this. We don't know exactly what it will be. It isn't
going to be a runaway, but it isn't going to be free. So
we'll understand that as we get to the end of this.
J. Tyson Thank you for your time.