泰森食品 (TSN) 2008 Q1 法說會逐字稿

(OPERATOR INSTRUCTIONS) I will now turn the call over to Ruth Ann Wisener, ma'am you may begin.

Good morning.

Thank you for your joining us today for Tyson Foods first quarter conference call.

With me are Dick Bond, our President and CEO, and Wade Miquelon, our Chief Financial Officer.

Before we begin to discuss the operating performance for the quarter, I want to remind everyone that some of the things we talk about may include forward-looking statements.

Those statements are based on our view of the world as we know it today, which means things could change.

So I would encourage you to look add today's press release for discussion of the risks that can affect our business.

I will now turn the call over to Dick Bond.

Good morning.

Welcome to our first quarter call for fiscal 2008.

As you saw in our press release earlier this morning, earnings for the quarter were $0.10.

Sales were up 3.2% compared to first quarter last year.

Our pork segment delivered its second strongest quarter in company history earning $76 million.

The prepared foods segment achieved normalized margins of nearly 5%.

Our chicken business struggled with more than $100 million in additional grain costs for the quarter.

In November, we projected an additional 300 million in grain costs for the fiscal year.

We now think this number will exceed a half billion dollars.

The run up in corn prices are a result of Government mandates for corn-based ethanol combined with the devalued dollar in hedge fund speculation.

This situation is different than we have seen previously and has caused a new dynamic in our business.

In the past, high grain prices were due to supplies and were short-term.

The pressure now is led by demand for use in ethanol, which is not short-term.

Corn-based ethanol and its effect on corn prices have caused a domino affect for other input costs, soybean meal, cooking oil and wheat-based ingredients, like breading, have all gone up as well.

On the top of that, fuel prices are way up which impacts distribution, manufacturing costs, packaging, and so-on.

Chicken prices haven't kept pace with other food staples.

Eggs are up 38%.

Milk is up 30% and whole wheat bread is up 12%.

As a percentage of input costs, grain is much higher for protein than it is for other products.

To give you some perspective, grain is almost half the cost of a live chicken.

We have no other choice but to raise prices substantially.

We are raising prices because we can't absorb these costs.

Despite concerns about the economy, people have to eat, and they will continue to eat protein.

They might shift their food dollars to buy more chicken and pork or eat at home more and go out less.

Because Tyson is in all three proteins and in both food service and consumer products channels, we think we are in a very good position.

Before I turn the call over to Wade, I would like to say a few words about our new group vice president of consumer products.

Earlier this month, I asked Donnie Smith to head up that group because he is a great experienced leader with a long history at Tyson Foods in a variety of roles.

He has a very strong sales and marketing team to work with and together they will build on our momentum of creating and innovating new products and services to meet retailer and consumer needs.

Now, Wade Miquelon will talk to you about our results for the first quarter.

Wade.

Thank you, Dick.

Overall, I am very pleased with our results in Q1 '08 as we achieved gap earnings of $0.10 per share despite a very challenging business environment.

This compares to earnings of $0.16 per share in Q1 '07 and $0.09 per share last quarter.

Our year-over-year sales improved for the quarter by 3% or $200 million on better pricing.

Volume was roughly flat when factoring out last year's sale of two chicken commodity plants and so essentially pricing per unit was up 6%.

We finished the quarter at a debt level of just over 2.7 billion, which puts our debt to capital ratio at 36.3%.

This represents $255 million debt improvement and a 330 basis point debt to capital ratio reduction year-over-year.

Capital expenditures were $100 million with $48 million of that invested in profit improvement products or projects.

Two of the four segments ended the quarter within or above their normalized ranges.

Pork performed extremely well at a 9% EBIT margin due to lower input costs and continued strong exports.

Our prepared food segment continues to perform well, and we delivered a 5% operating margin which is the center of our normalized range.

Chicken operating earnings were positive despite the 101 million year-on-year increased grain cost.

As projected, beef struggled with significant losses as industry over capacity negatively impacted live cattle cost and led to excess trade inventory which then adversely impacted the cutout pricing.

Dick will discuss the segments in more detail in a few minutes.

Moving forward, while it has been our practice to issue annual earnings guidance, which we did in conjunction with the release of our fiscal 2007 earnings, we have temporarily withdrawn our guidance due to the magnitude of input market volatility, timing of anticipated price increases and continuing uncertainty in beef.

We anticipate renewing our practice of issuing guidance as such time and clarity allows.

Now, let me give you some perspective as to why we made this decision.

For perspective, a daily corn and soybean meal joint limit move up or down as has occurred several times over the past few weeks, is nearly $100 million or plus or minus $0.17 earnings swing when excluding hedge impacts.

This is actually not the full impact of grain volatility given that other markets like wheat, flour, cooking oil and other food ingredients are now, in effect, moving to some degree in tandem with corn and soy.

As you saw in our release, chicken grain costs are predicted to be up over half a billion dollars year-on-year or almost an additional $300 million since we issued guidance.

This will have a much bigger impact in Q2 versus Q1 due to the timing of the major rise in input costs as well as the related P&L inventory flow through effect.

We expect pricing and hedging to offset some of this cost increase in Q2, but the full cost recovery via price could take a few more quarters.

For Q2, we believe pork and prepared segments will continue to perform well.

Beef will continue to improve and the dramatic rise in input cost is likely to move chicken to a loss position in the short term.

In summary, we said on our last conference call that we believed our first quarter would likely be our most challenging quarter of the fiscal.

However, as the situation stands today, Q2 will likely be a more challenging quarter for us.

It appears the input cost issue will remain with us for some time, and we are looking to longer term pricing strategies to manage this volatility and spread this risk.

Regardless, as Dick pointed out, until there's a change in U.S.

energy policy and its current emphasis on subsidizing corn-based ethanol, consumers will ultimately see substantial additional food inflation and, in particular, much higher protein pricing.

In closing, I remain very confident about the prospects for Tyson Foods.

Our core strategies are right and we are executing them with excellence.

Over time, the markets will adjust and we will continue to turn challenges into opportunities and expand our lead as the world's number one provider of protein and protein solutions.

Now, I will pass it back to Dick for review of the segments.

Thanks, Wade.

I am going to start with the chicken segment.

Taking out the two commodity plants we sold in 2007, chicken volume was essentially flat.

Operating income was 35 million and was effected by increased grain costs of more than $100 million, partially offset by pricing and operational efficiencies.

We continue to be pleased with the move to chicken raised without antibiotics.

It has allowed us to gain over 70 million incremental pounds of annualized volume with about a third of that coming from new accounts.

You might recall, the USDA had said it had mistakenly approved our raised without antibiotics label and asked us to change it.

After considerable consumer research, we proposed, and the USDA did approve, a new label stating our chicken is raised without antibiotics that impact antibiotic resistance in humans.

The label change actually turned into a positive for us because our research shows it more clearly communicates the benefits to the consumer.

Turning to our beef segment, we lost $85 million in the first quarter.

Although we continue to make improvements on the sales compared to USDA published data, the cutout didn't keep pace with what we were paying for cattle.

We anticipate, however, that the beef segments performance in the second quarter will out perform Q1.

Cattle supplies will be affected by higher grain price, higher land values, urban sprawl and, converting acreage to (inaudible) will reduce land available for pastures.

We thought the size of the herd would grow, but based on these market dynamics, cow slaughter has increased and the cattle heard has probably peaked.

Given these circumstances for cattle supplies, slaughter capacity is out of balance by 10,000 to 14,000 head per day.

This is why we think it is necessary or thought it was necessary to cease our slaughter operations in Emporia, Kansas.

We chose the Emporia plant because as cattle production has moved from eastern to western Kansas over the past 20 to 30 years, Emporia is no longer centrally located to the regions major cattle supplies.

The facility will still be used as a cold storage and distribution warehouse in addition to further processing.

The slaughter area will not be currently used; however, the equipment will be left in tact.

On the beef export front, USDA and USTR officials have made encouraging public statements about reestablishing trade with South Korea.

While we don't know when this will take place, we believe it could be within the first six months of the calendar year.

Moving to the pork segment, with live hog prices low, our pork segment is doing about as well as it ever has.

Operating income nearly doubled from 39 million in Q1of '07 to 76 million in Q1 of '08.

Operating margins nearly doubled as well from 4.7 to 9.1%.

Capacity utilization was up to 93% for the quarter and should be at or near 90% for our fiscal second quarter.

I believe that hog supply should be adequate to maintain good operating margins in the coming months.

The prepared foods segment is doing very well, and we are at capacity on a number of our product lines.

Bacons, bacon hams and pepperoni sales and margin are are strong in part due to lower pork input costs.

We are doing a much better job of internalizing our fresh pork for use in our prepared food business specifically bellies to bacon.

This has been a coordinated effort that positively impacts our food service, consumer products and fresh meat businesses and allows us to compete effectively with companies that have been in the, that have had bacon in their portfolios for a long time.

Regarding international exports, we continue to see increased global demand for chicken and pork as the standard of living improves in the developing world.

Also, the weak dollar makes us for competitive and enables us to participate in additional markets.

Tyson to Mexico is also affected by higher grain costs and we'll be working to pass along cost in those markets as well.

We continue to work on our international deals in both Asia and Brazil and should complete one this quarter.

Our are renewable diesel arrangement with ConocoPhillips started production December 18 at 100 barrels a day using fat from our Amarillo, Texas facility.

We are now up to approximately 300 barrels a day.

In November, we selected a site in Louisiana for the dynamics fuels plant, the construction time line is on plan and on budget.

Once complete, the plant will produce ultra clean renewable synthetic jet fuel made from fats provided by Tyson.

Dynamic Fuels is now producing this first of its kind fuel for testing by the U.S.

Department of Defense.

In closing, I'd like to point out that challenging times often lead to great opportunities.

For example, as inputs rise, customers often rely on us because sometimes value added means taking cost out.

Tyson has the resources to do this,.

The work we're doing in the Discovery Center, in addition to customer service, means customers can rely on us for innovation and dependable service in volatile times.

To manage through this environment, we will stay committed to our strategy.

I usually talk about the strategy in the long term, but current conditions have made me sure it's right in the short term as well.

We're doing everything we can to deal with the current market conditions and, once again, we want to thank our team members for their work in these difficult times.

And now I will turn the call back other to Laurie for your questions.

Thank you.

(OPERATOR INSTRUCTIONS).

Our first question is coming from Diane Geissler from Merrill Lynch.

Your line is open.

Yes.

Good morning.

Good morn, Diane.

I just want to sort of delve into the grain issue and cost recovery through pricing.

This is something we see across the entire food space, that you put in place price increases and then grain runs beyond that.

What are you doing to get ahead of the grain?

Maybe you could comment a little bit on food service negotiations, how those went, are they still ongoing, what kind of price increases you're capturing in your negotiations?

Any color on that would be appreciated.

Well, Diane, let me start by saying this is kind of unprecedented times and unprecedented times require unprecedented activities.

And in various segments of the business we're really looking at it in different ways.

You asked about food service.

We're about 50% of the way through our food service contracts.

And our customers realize that we are experiencing these higher grain prices.

So I think they understand, while they don't necessarily like the fact that all of this volatility in grain and higher grain costs are there, there is a better understanding this time, and I don't think necessarily we're the only ones out there in this space professing increased costs that we can't absorb.

We have been able to hedge some of these, but as we have seen the additional costs in grains, we are literally doing whatever we have to do to go back and talk to our customers about these additional costs which were unanticipated.

Okay.

But can you give us anymore detail about what kind of price increases you are seeing even at retail or in food service?

Well, I can tell you that on the distribution side of the business we announced to our customers here about ten days ago roughly a 7% increase in our price lists for all of our distribution customers, we are working on similar type things on the retail side as well.

And then I guess moving over to beef and your announcement on Friday, obviously you are doing some things internally to sort of deal with the overcapacity situation.

What is your confidence level that the rest o of the industry will follow?

What you have mentioned in your press release was I think, slaughter overcapacity between 10 and 14 head per day.

Obviously, your plant was slaughtering considerably less than that amount which would suggest that some movement needs to be made from the are rest of the industry.

What is your confidence that the industry will go along and will start to see better results in beef?

Well, Diane, the only way I can answer that is I don't know what our competition is going to do.

I mean the only thing we can do is look at our own situation.

The cattle moved away from Emporia.

If you look at the rest of our plants, they are located where the strategic supplies for cattle are necessary for that.

Emporia was a great plant, it had a great work force, but it was the outlier in terms of where cattle were located.

So to answer your original question, I don't know.

I don't know what our competition is going to do.

We just did what we felt was right for our company and what we needed to do at this particular time.

Okay.

Thank you.

I will pass it on.

Our next question comes from Eric Katzman with Deutsche Bank.

Your line is open.

Hi.

Good morning, everybody.

Good morning, Eric.

I guess first just a detailed question, Wade, can you just detail exactly where both on the consolidated and segment results, where the gain was and the also the fast charge?

Yes, let me pull through here.

I mean you're going to see, basically you're going to see the gain and the other net in terms of the investment sale.

Okay.

All right.

And then the, the charge.

You'll see the fast charge of six.

Okay.

All right.

And then, I guess, more of a big picture question, Dick.

You kind of talked in the last call about the volume that looked like you had an opportunity to generate specifically in chicken and where do you stand with that?

It sounds like now that's, that's less of a concern and pricing given what's happened with input cost is the primary motivation?

I'd say, Eric, it's a combination of both.

We continue to see good demand and I believe that's driven both on the consumer and on the food service side, but by what we're able to do through the Discovery Center, so demand is still pretty good from our customers for our products.

Pricing certainly is a very critical part of what we need to do and what we need to accomplish going forward given the volatilities that we are experiencing from an input perspective.

But pricing, it is very important, but demand from our customers remains very good as well, Eric.

When you say, just kind of looking at doing things a little bit differently unprecedented times.

It would seem to me that the problem is not so much at retail where you more or less kind of control your own pricing, but in food service, you were kind of in this position historically where we raise prices in the December quarter or we negotiate with the trade or the food service accounts.

I mean, are you thinking about trying to push through more of a kind of a cost plus model that maybe exists on a quarterly basis rather than just kind of a one time a year thing?

Is that kind of what you are thinking about?

Well, given the volatility and the changes and the rapid changes up and down in these market, it only makes sense I think for us and maybe ultimately for our customers as well to have something that is of a little bit shorter time frame nature, in terms of a fixed price.

So, the idea of either cost plus or shortening the time of fixed prices is something that we have been aggressively talking to our customers about on the retail and on the food service side.

Okay.

And then just last one and I will pass it on.

Again in chicken, do you, with the, with the feed cost where it is, obviously you and Pilgrims have roughly 50% of the market, what is your sense as to the, are the marginal, the other 50% in the industry, the smaller players, do you think at this point they're profitable?

Are you seeing any reduction in terms of their willingness to expand supply and are they kind of following on in terms of this negotiation and potential change in kind of how things are negotiated?

I mean, Eric, the only thing that I have seen publicly about changes in volume was Cook announcing roughly a 3% reduction in their volume.

I don't know quite frankly what the position of the rest of the industry is from a profitability standpoint, but when you have these unprecedented volatilities, it is kind of logical to try and shift some of that burden or at least if not shift the burden, reduce the time frame for which that burden is being felt.

I mean at some point in time these grains will go back down.

So there is some logic behind driving this thing to a shorter time frame.

Okay.

All right.

Good luck.

I will pass it on.

Thanks, Eric.

Our next question comes from Vincent Andrews, Morgan Stanley.

Your line is open.

Thank you.

Good morning, everybody.

Morning, Vincent.

Just on a price increase perspective, how should we think about this relative to, I think it was the fourth quarter where you had an issue where, from a private label chicken perspective you lost some volume because you wanted to do it at a higher price and a competitor came in and was willing to do it at a lower price.

Are you worried about that as you try and take pricing going forward?

Well, I mean I think that's always a risk.

The only thing that is evident is everybody is going to be experiencing higher grain costs.

And everybody is going to be experiencing those higher inputs and the volatility associated with those inputs.

But we can't, we can't worry or drive what we need to do based on quite frankly what our competition is doing.

We can only control and do what we think is right for us and our customers.

And do you have that you would want to share with us any sort of kind of base-case idea of what you think, corn and soybean meal are going to trade for this year?

Are there numbers or ranges of numbers you're operating with as you think about taking pricing?

Can you share any of that with us?

I think in general we would say it's never right, probably the forward curve is as good as an unbiased tool as we have, right?

So, again we continue to do projections based on that, look at our risk portfolio and the various nuances of how we hedge or don't hedge against that.

Okay.

Do you have any, are you willing to share with us percentages that you have hedged of your needs or no?

No, we don't disclose that.

All right.

I will pas it along.

Thank you very much.

Thank you.

Thank you, our next question comes from Tim Ramey with D.

A.

Davidson.

Your line is open.

Dick, what did you tell the board?

Tim, what are you referring to?

Well, their your partners and they probably want to know how you're going to do in 2008.

We're your partners, you basically just said we don't know.

Did you tell the board you don't know?

No, Tim, I told the board the same thing that I am telling you.

Because of the things that are out there, that we can't control, we quite frankly don't know whether inputs are going to go up another 300 million, another 500 million, another 50 million, down 20 million.

It is just impossible to predict based on these assumptions that keep moving around.

That's what I told the board.

It is a little difficult when you have partner remain silent out there that need to buy the stock or need to figure out what to do with the stock to just say we don't have any comment.

But that's my two cents' worth.

In beef, we had a real difficult 2006 and then in 2007 you made a lot of changes and improved that.

I got the sense that we would do everything we could not to perpetuate losses of $10 a head.

I know the situation was rough in the first quarter, but are you going to commit to your board or us or somebody that we're not going to just operate this thing all year long at these losses?

Well, Tim, I think what we did on Friday would be a sizable step towards trying to make sure that we're doing what we believe is right for us to do the best we can to get rid of those losses.

I think there's some other things that would help in that deal if our Government, USDA and USTR, can negotiate the return of Korea and ultimately the return in a meaningful way of Japan and reopen China and reopen Russia effectively.

I think these are also things that are helpful to us going forward.

Beef around the world is going to be expensive.

I mean if you look at your grains in other parts of the world they're just as expensive or more expensive as they are in the U.S.

So I think we are being diligent and we are being vigilant about what we're trying to do to manage our own business as effectively as we can.

How much of the volume for Emporia came out of Colorado?

How much of the cattle?

Yes.

Virtually none.

None.

All right.

Thanks, much.

Thanks, Tim.

Our next question comes from Farha Aslam from Stephens Incorporated.

You may ask your question.

Hi, good morning.

Morning, Farha.

Dick, could you share with us some color on the cattle supply and availability and timing because the cattle placed on feed has been quite jagged.

Could you tell us what you expect this your fiscal second, third and third r fourth quarter in terms of cattle availability?

Well, I think as I said earlier, I think that the availability of cattle in as a whole has probably peaked.

The total herd has probably peaked.

Do I mean it's totally peaked forever?

Maybe not, but it could be that it has peaked forever for all of those reasons that I talked about before.

I think we got a little bit of push back, meaning cattle not quite ready because of some harsh winter for a few weeks in the major cattle reasons.

I think cattle are starting to go recover from that.

We will see a fair amount of supply.

When I say a fair amount of supply, a reasonable supply of cattle as we get towards the end of our second quarter and into third quarter.

But then I think the supply of fed cattle will begin to decline again as we get into late third quarter and into fourth quarter.

That's helpful.

And given that you have pulled guidance, it would be really helpful for us who have to put out numbers for a little more color and detail on your businesses.

In terms of fiscal '07, so last year, if you had to quantify grain costs or feed costs as a cost of goods sold, what would that percentage be?

I don't know if we give that percentage, Farha, but let me tell you to think about it this way.

Okay.

Our prepared business and our pork business is very much on track.

While beef was very negative in the first quarter, we predicted it.

At the rate of improvement we see now, that's pretty much on track with our forecast.

What's left from our original guidance is basically the fact that the input costs, primarily against chicken, are up significantly year-on-year.

Again over half billion of which 300 was in our original guidance number, plus other input costs beyond grain are there as well and the uncertainty of how fast we get pricing.

So I guess I am saying you could get into the math that way by looking at the fact that three of four segments are basically on plan and the fourth one, chicken, has the higher input cost against the uncertainty of how much pricing comes and how fast and what the inputs might do throughout the remainder of the year.

That's fair.

I would add to that even on the other two segments that are really grain sensitive, meaning pork and beef.

Even though we, generally speaking, don't participate in the cattle or hog production in a big way, eventually those high input costs are going to effect the numbers of cattle and the numbers of hogs that will be available for us to process in the longer term.

So it did does have an effect there, the effect is a little bit farther out than on the chicken segment.

Okay.

And just a request for when you guys may file your Q, it would be helpful, since you have pulled guidance, if you would give us absolute volume numbers, that'd be really helpful for us to try and put together our numbers.

Would you guys consider doing that in the future possibly?

We will take it in consideration.

We will think about that.

Thank you very much.

Thanks, Farha.

Next question comes from Kenneth Zaslow from BMO Capital Markets.

Your line is open.

Good morning everyone.

Good morning.

If with kind of fast forward a little bit to 2009, as the pricing overcomes the feed cost and assuming that at one point feed costs level out, the beef markets open up eventually, is there a reason not to believe that things would not, the possibility of snapping back, in terms of both your chicken margins and your beef margins, would that be probable or not so probable?

Is that something that we should think about?

How do we think about that beyond '08?

It's clear '08 is going to stink.

So, after that, how do we think of '09?

I think you are exactly right.

That optimism, that we would have optimism around that as we go into '09 with, I think for a number of reasons.

One, on the beef side, I do believe that we will have a better situation as it relates to exports.

The dollar is likely to still be relatively weak.

We do see the demand for protein worldwide continuing to grow.

At some point in time the pricing will catch up to the feed, and we should be at a very good position.

If you think about what our strengths are, in terms of being able to innovate and be there from a new product perspective, that should keep us on the forefront with our customers of being there with them to create that activity going forward.

So I do, I have a lot of optimism as we look forward.

I think we've got a short-term situation here that we're going to have to get through.

As we said, we are only temporarily not going to giver you guidance because, because of this volatility.

We believe that is not a long-term situation.

And then the other two questions I have is when you are sopping your production or reducing your production in Emporia , are you increasing your capacity utilization across the other processing plants or are you cutting total production by what you are losing Emporia at?

How do you think about

Ken, it's a combination of both.

It is a combination of making sure that our other facilities run as efficiently and as full to footprint capacity as possible.

That's number one.

But do I believe that we are going to offset the total output of Emporia in the other plants?

The answer to that is no.

Again in terms of, the bigger picture, in terms of protein supply versus demand into the summer, and maybe it's a little far off, but into the summer do you think we're going to get a balance?

Do you think that the supply of general proteins will be higher or lower than the demand?

Will there be a balance?

That's a great question.

If I knew the answer to that, I would probably have been a little more matter of fact about what Q2, 3 and 4 were going to look like.

I think if you look at supplies by segment, as an example, I think overall the supply of beef will be less than what it was in 2007.

I think our pork situation at least for Q2 and into early part of Q3 are going to be in a pretty good balance, in terms of demand including export will be good.

As we get into the summertime we will probably have a few less hogs, which might keep that in reasonably good balance.

The key probably is going to be around chicken, is will we have a supply and demand balance that is appropriate for the increased demand which we usually see in the summer for chicken and that's kind of the $64,000 question going forward.

I don't have a good, I don't have a good view of that at this point.

Are you guys cutting production?

We are matching demand, we are matching the demand of what our customers believe and what we see from our customers, we're going to match our supply to that demand.

Okay.

Thank you very much.

Our next question comes from Christine McCracken from Cleveland Research.

Your line is open.

Good morning.

Good morning.

Just wanted to ask a few more questions on beef.

When you guys chose to shut down Emporia, I guess I was a little surprised.

There were other plants that seemed a little more logical.

Were the changes you made recently in the grid, I guess did they play a role in the choice of that plant specifically, in terms of shutting it down?

Christine, the answer to that is no.

It was more a macro situation of just the, the fact that the cattle-feeding industry over the last 30 years has exited eastern Kansas.

I mean that's, if you think about it rationally, that is the macro reason that took place?

Okay.

In terms of, I guess how you expect to capture those cattle, there's nothing contractually that would keep those cattle within the Tyson system.

It could be that they would choose one of the other Kansas plants technically to move them to if they're closer?

Are you talking about the cattle that we currently process in Emporia?

Correct.

I mean they would become, I mean I am sure that we're still going to, we're still going to want and need some of those cattle in western Kansas or in Texas or in Nebraska.

But those cattle are all market available cattle anyway.

We really don't have any specific long-term agreements that say that all of those cattle that were in Emporia were ours forever.

That wasn't the case.

Okay.

In terms of your Canadian business, it's our understanding that, at least that feeding business has been a little challenging.

Why not take similar actions up there to reduce your exposure to that difficult market?

Given the fact that you've already kind of taken the pain here, is it just a matter of timing?

Is there something structurally you like about that business in the long run that keeps you there, especially given the fact that you have already passion capacity up in that region, at least in Pasco?

Well, I mean if you look at basically what's happening in Canada, because again, because of the change in the exchange rates, because the high cost of feed, and even higher cost of barley, there are more feeder cattle moving south now than fed cattle.

That's probably going to continue.

Our goal in Canada is to keep the product that we process in Canada and be able to sell it effectively in Canada and not have the U.S.

market be as big a piece of that as what it is today.

So, I do believe that you're right, that there's going to be less cattle available in Canada going forward.

We think we're competitively positioned to keep operating in Canada.

While we might have some difficult times in the short term, we still believe that what we are doing in Canada is viable for the long term.

All right.

Then just one last question.

I guess I understand your desire to increase prices in chicken, but how can you go to your customers with that, I guess that intent when you guys, at least the industry, on the surface looks like it continues to increase production?

Well, because I think it is something that as we partner with our customers from a strategic perspective, this is something that we believe that our customers are going to understand and they're going be able to deal with this appropriately because they understand that we can't absorb all of these increases.

And as I said, I mean we are working with our customers.

The demand that we have from our customers is good, and we are going to continue to push in that direction.

All right.

I will leave it there.

Thanks.

Our next question comes from Ann Gurkin from Davenport.

Your line is open.

Good morning.

It is our understanding that at the end of the year you were adding hatcheries or houses to raise more birds and then had a strategy of growing bigger birds for some of your plants.

Are you changing those plans at this time, given what's happened to grain costs?

No.

The plans we put in place last fall, we are continuing with.

So you are continuing to grow bigger birds even with grain costs where they are?

We are, again, Ann, where we had looked to change bird weights in specific plants for specific reasons, we are in fact doing that.

We are not, however, building any new hatcheries.

That's not correct.

That was not part of the plan last fall either.

But in terms of shifting bird weight in various facilities, those plans that we laid out, we are still continuing to do.

Okay.

And Dick you made a statement last November also that Tyson has the right to raise production because you have good sales momentum.

Are you still standing behind that statement or do you think supply needs to come down given what's going on.

I am still standing behind that statement.

Okay.

And then thirdly, you were going on Agri Stats at the end of the year.

Have you all gone Agri Stats and is it, like where are you trending or what information are you learning from being back on that system?

We are on Agri Stats.

We just recently have got our first series of data and we're in the process of evaluating where our strengths and weaknesses are and wherefore that can help, we will target the areas that we need improvement and continue to expound and expand on the ones that we see as positives.

Can you give us an example of where you are seeing opportunities?

I think that would probably be not right for me to do at at this time, Ann.

Thank you.

Okay.

Great.

Thank you.

Our next question comes from Jonathan Feeney from Wachovia.

Your line is open.

Good morning and thank you.

Good morning, Jonathan.

Just one question, maybe I'm not thinking about this right.

But since conversion ratio big picture are greater for beef and for pork, you would think in a, if the consumer really gets strapped you would think that chicken would prove to be, A, a little bit less sensitive to pervasively high in rising corn prices and, B, a cash-strapped consumer would consider maybe chicken at the expense of beef and pork as a way to feed a family, save money.

Is this consistent with what, this kind of demand action, would that be consistent with what you've seen in prior recessions or is that just dream?

I think your logic is sound, although some times pork also holds up very well.

It depends on what part of beef you're talking.

In different cycles, sometimes the high end is stronger than other cycles.

That remains to be seen for this particular economy moving forward.

I guess --

Certainly with your conversion rates of being what they are of chicken closer to one to one and pork being in the middle at three and a half or four to one and beef being up in the six or seven to one, that does bode well for chicken.

The difference from our perspective is that we are fully integrated on the chicken side.

So we feel the full effects of that.

We don't necessarily feel the full effects of the inputs on the, on the cattle and on the hog side, but ultimately that will end up being there in terms of availability of supply.

Right.

Right.

I guess, just as a follow up, if you went back to the early 90s, which I guess the last true consumer recession we had.

Can you offer any perspective on meat demand change at all in aggregate or was there much shift between chicken, beef and pork to your recollection?

Well, my recollection of the early 90s were beef was in a similar situation to where it was today.

Yes.

There was a bit of overcapacity in the industry at that time.

The herd was probably at one of its smaller and beef was relatively expensive compared to the other proteins.

What you do have is, you will have disappearance.

It is just a question of price.

All of these animals whether they be cattle, hogs, or chicken will be consumed and it is, it is in fact whatever that disappearance price is going to be.

My recollection of the early 90s was that there was potentially some trade off and I do believe in the early 90s that chicken was probably the biggest benefactor of the recession.

Okay.

Thanks very much.

Thank you.

Thank you.

Our next question comes from Pablo Zuanic from JP Morgan.

Your line is open.

Good morning everyone.

Morning.

Pablo.

Actually a question on hogs and then, if I may, on beef.

We hear a lot from (inaudible), the CEO (inaudible) China (inaudible) COSCO, and we think that you guys also being one of the largest processors may also be in negotiations, can you comment about the opportunity there?

How big you think the (inaudible) issue is?

(inaudible) opportunity.

And related to that, you made a comment by the summer you would expect hog demand and supply to be balanced.

Should I take from that that you agree where futures are.

I think futures were at about $75 for hogs which means that prices would jump about 50% from where we are right now.

Just give us insight there, in terms of how you see the hog outlook.

I think we are, we are as well talking to COSCO and to the opportunities to export to China.

It is a tremendous opportunity.

I do believe that there was a significant loss to their number of hogs that were available in China.

Therefore, I think that there is potential export going forward.

I think there are some things that will need to be worked out there from a technical perspective that might take some time yet.

So I think that from a hog perspective and export perspective there is a great opportunity there.

How long that takes to come to fruition, I am not really sure.

Typically hog prices in the U.S.

do rise in the summertime because typically you have lesser supply available.

If you look at that forward curve, the forward curve looks a little steep to me at this point, in terms of getting into that $73, $74 range from where we are today.

But certainly, directionally, prices will be higher for hogs and for pork-related products as we get to the summer.

Great.

Thanks for that.

Just on beef, trying to understand the comment that you're making that beef will get better in the second quarter.

Is that just because you are cutting capacity in Emporia and because we have these cows slaughtered coming in towards the end of quarter?

What else is driving the improvement sequentially in beef?

I think, Pablo, the answer to that question is the first quarter was so bad that directionally, at least what we have seen thus far in the quarter would indicate that would be true.

I am not saying it is going to be good, but it will be considerably better than what it was in Q1.

One last one.

I understand you want to match chicken production with demand, but what I don't understand is that a year ago you (inaudible) by 3%, and I think by then 5% at one point.

It seems to be the conditions right now actually worse than back then, so correct me if I am wrong, and then if they are worse, why are you cutting production like you did a year ago?

Well, again, I will go back and say that it is a matter of matching supply and demand.

If, if by chance demand doesn't continue to be good, then we will alter that supply, if necessary.

All I can tell you is that as of this date, January 28, our demand is still very good.

All right.

But just, when you report flat volumes for the first quarter your original guidance was for 2 or 3% volume growth.

In effect you could say you did cut production versus plan in the December quarter.

Is that correct?

I think it was annualized 2 to 3 percentage points.

I don't think we gave clarity on Q1.

You are still thinking --

Broad industry, too, as well.

Okay, and you are sticking to 2 to 3% for the full year?

What we said in November was that we thought the industry was going to be up 3 to 4 percentage points.

I would guess possibly that won't be that high now given where we are.

Thank you.

Our next question comes from Robert Moskow from Credit Suisse.

Your line is open.

Thank you.

Good morning.

I guess my concern would be just mathematically when I look at how grain flows through your numbers in the quarter, I thought, sequentially anyway, from the prior quarter that your grain costs are actually down, you're realizing lower grain costs sequentially and despite that your chicken margin is below 2%.

So I guess then mathematically what I'm trying to figure out is how much pricing are you going to have to take in chicken to realize the strong possibility that you are going to have $4 corn flowing through your numbers instead of what I think is probably closer to 3 right now, and then it could be even above 4.

Mathematically, I think that your pricing would have to be up something along the lines of 25% in chicken in order to fully offset $4 corn from there.

Do you care to comment on that math?

Am I close?

I guess I would just say no.

Q1 is up significantly from a year ago and also it's up versus prior quarter.

You do get a broader step up affecting Q2 because of the timing of inventory, that's up again, the 25% number I'd say is overstated.

Remember, that 50% of grain is on the live animal, but when you have a lot of value add and further processing, that ratio diminishes over time.

So it's significantly south of that.

I don't know if we want to give an exact number.

Robert, you're talking about 3, 4 and 5.

We haven't had $3 corn forever.

I mean corn has moved up from, if you will two years ago in that $2.30, $2.40 range to, if you look at the forward curve today, virtually all future months out front are over $5.

So I mean we have been working with $4 plus corn for a while and now we are working with $5 plus corn.

That's just on CBOT numbers.

It takes an additional $0.40 to $0.50 a bushel to get that to the feed mills.

I am not sure what your basis of $3 is referring to.

$3 would be the average spot price for corn during calendar, and we can talk about this off line.

But what I assume is a three-month lag between spot and what you realize in your numbers.

That's how I came to a sequential decline.

But perhaps through your, you haven't talked ability your hedging position during this particular quarter but maybe that got smoothed over as a result of some hedging.

But I guess your point is also mine in a way, which is that, then again I don't, are you saying, Dick, that you have $4 corn in your numbers right now in this particular margin that you are reporting?

For Q1?

Yes.

For this quarter, are you averaging somewhere close to $4 corn right now?

We are slightly below that $4 level.

Okay.

So, any kind of up.

If you look at what is flowing through the mill today and going in as an initial input, you are really talking in the $4.89 - $4.90 range right now.

And given the corn futures where they are today, that has another $0.40 to $0.60, depending on what who you look at going forward by the time we deliver it to the mill.

Okay.

And given the energy policy, do you have any reason to believe that corn is overpriced at $4.90.

I don't necessarily know if it is overpriced.

If the demand for corn continues and we go from 7.2 billion gallons of corn-based ethanol up to a mandate of something close to 15 by 2012 or 13, no, probably not.

It just seems that it is not a prudent use of corn as it has effected food and food inflation.

Okay.

I agree with you there.

But thank you very much.

Thank you.

This does conclude the question and answer session.

I will now turn the call over to Dick Bond for closing comment.

We appreciate your taking the time this morning.

It is a difficult, it is unprecedented, it is kind of unparalleled times for us.

I quite frankly apologize for having to withdrawal the guidance, but hopefully you understand that.

You might not appreciate it.

You might not like it, but hopefully you understand that, and also that we do feel that we are still in a very good position going forward.

While 2008 is going to be difficult, I think out of all of these lemons do come some lemonade and I do believe that lemonade, with this hard work and diligence about improving our operations, improving our ability to innovate, are going to help us in the long term and we appreciate you joining us today and have a nice day.

Thank you.

That does conclude today's conference.

You may disconnect at this time.