泰森食品 (TSN) 2008 Q2 法說會逐字稿

Welcome and thank you for standing by.

At this time all participants are in a listen-only mode.

(OPERATOR INSTRUCTIONS).

Today's conference is being recorded.

If you have any objections, you may disconnect at this time.

And now I'd like to turn the call over to your host, Ms.

Ruth Ann Wisener.

Ma'am, you may begin.

Good morning and thank you for joining us today for Tyson Foods' second quarter conference call.

With me today 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 today 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 at today's press release for a discussion of the risks that can affect our business.

I'll now turn the call over to Dick Bond.

Thank you, Ruth Ann.

Good morning, and welcome to Tyson Foods' second quarter conference call.

As you saw in our release this morning, GAAP earnings for the quarter were minus $0.02 a share.

However, this result included plant closings and asset impairment charges of $0.08 a share.

If you adjust for those, we would have made $0.06 a share in Q2.

Pork delivered its best January through March quarter ever.

The beef segment showed significant improvement over Q1 as well, despite difficulties with our Canadian subsidiary.

Beef improved $74 million over the first quarter of this fiscal year, including charges of $25 million for plant closings and asset impairments.

The chicken segment still suffers from higher and more volatile grain prices, due to increased demand from ethanol producers and international markets, driven in part by the weak dollar.

On our first quarter call, we predicted grain costs for the fiscal year would exceed a $0.5 billion and it's now looking like more than $600 million, including the rising cost of wheat, cooking oil and other feed ingredients, additional input costs for the fiscal year could approach as much as $1 billion more than in fiscal '07.

I'll give you more color around the segments later.

But I think our second quarter performance demonstrates how our multi-protein business model can position us relative to our competition.

One of our primary competitive advantages is our expertise in the food industry, whether it's in retail or food service.

Our customers rely on us, especially in the current economy.

Consumers have altered their approach to where they eat and how much they spend, although restaurant traffic overall hasn't changed significantly, consumer spending is down, especially in the casual and mid-scale dining.

We have been inundated with customer requests to reformulate existing products or develop new ones to drive more value.

But whether people eat at home or away from home or whether they want chicken, beef or pork, Tyson has the depth and breadth of products to meet consumers' changing needs.

Now I'm going to turn the call over to Wade to talk to you about our financial results for Q2.

Wade?

Thank you, Dick.

Overall I'm very pleased with our results.

As stated in Q2 '08, we achieved GAAP earnings of minus $0.02 a share despite ongoing challenges in the business environment.

This compares to earnings of $0.19 per share in Q2 '07 and $0.10 per share last quarter.

Q2 '08 results include charges of $0.08 per share for plant closings and asset impairments, using a 39% marginal tax rate.

Given some of the short-term challenges we've been facing, particularly in higher grain and other input costs, these results illustrate the benefit of having a very diverse multiprotein portfolio.

Volume was roughly flat and pricing per unit was up 2.4%.

While we have seen some price increases in chicken and beef, pork pricing was weaker year-over-year, primarily as a result of ample short-term supply.

Our year-over-year sales improved for the quarter by 2% or $111 million on better pricing, and was up roughly 3% when netting out the effect of divesting two commodity chicken plants in fiscal year '07.

We finished the quarter at a debt level of around $2.95 billion which puts our debt-to-capital ratio at 38.3%.

This represents a $248 million increase versus the end of Q1.

And this debt increase is due to deferral payment timing of the end of Q1 for hogs and cattle, as well as an increase in inventory balance, primarily as a result of preparing for major customer promotions and the timing of shipments to major international locations.

Capital expenditures for Q2 '08 were $110 million, compared to $50 million for Q2 '07, and importantly, for the fiscal year to date, we have invested around $100 million in profit improvement projects.

That is projects that go beyond our normal requirements of maintenance of facilities.

It should be noted that we are revising our fiscal year '08 capital budget downward to approximately $400 million from our previous estimate $425 million to $475 million.

Pork performed extremely well and above our normalized target range, at almost an 8% operating margin, due to continued strong export sales and ample hog supplies in an environment of higher operating costs.

Our prepared food segment performed reasonably well, but was slightly below our normalized range, with the primary cause being timing of input cost increases versus price, formula and ongoing related price increases.

Beef started the quarter with significant losses and improved dramatically midway through the quarter as a result of our moves to improve efficiencies via plant restructuring, and also a better overall balance of capacity versus available cattle.

As predicted, chicken operating earnings were negative as chicken price increases lagged the substantial grain price increases we have seen over the past several months.

Specifically for the quarter, the negative grain impact was $102 million versus Q2 '07.

For the fiscal year, as Dick has said, we estimate our corn and soy costs alone will be approximately $600 million higher than year ago, prior to some risk management offsets, and when adding other cost increases and other inputs, our year-over-year cost base is approaching $1 billion.

While some of these costs increases can be offset via internal cost efficiencies, the vast majority of these will need to be covered via price increases, which we have initiated and will continue to work over the next several quarters.

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

Last quarter, we temporarily withdrew our guidance due to the magnitude of input market volatility, timing of anticipated price increases and continued uncertainty in beef.

While some issues, for example beef markets and price increase timing, may be clearer now than three months ago, grain and other inputs remain very volatile so we have chosen not to reissue guidance at this time.

I know you're all aware of the unprecedented volatility we are seeing in grain and other commodities and you're all aware of the causes such as increased risk management positions, significant moves in energy and the like.

This volatility could ultimately lead to more quarterly volatility in earnings.

In particular, to fairly sizable mark-to-market positions that we may be carrying at any particular point in time.

Ironically, while downward price movements in grain is positive for the long-term health and earnings of the business, short-term downward moves in grain could lead to sizable negative quarterly earnings due to mark-to-market changes in some of our outstanding positions.

Further compounding future short term (inaudible) volatility, certain commodity daily price movement limits have recently been increased.

For perspective, if we were to have only 10,000 outstanding corn contracts at any particular point in time, four days of consecutive limit up or limit down moves would generate $110 million in absolute P&L swing from mark-to-market accounting.

This equates to roughly plus or minus $0.19 per share over those four days, and those theoretical number of positions.

Last quarter we mentioned grain would have a much bigger impact in Q2 than Q1 due to timing of major rising input costs, as well as related P&L inventory flow-through FX.

We will continue to see this cost step up in FX in Q3 and Q4 as well, as more impact from the price increases continue to mitigate this effect.

In summary, we said in our last conference call that we believe our second quarter would likely be our most challenging and we still believe that to be true.

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

Our core strategies are right and we continue to execute them with excellence.

The markets are adjusting and 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'll pass it on to Dick for the review of the segments.

Thanks, Wade.

Now I'll give you more detail on our segments and our other groups within our business.

The chicken segment has been difficult, but we've managed it reasonably well under the circumstances.

We are getting pricing but it isn't keeping pace with inputs.

We need some help from the underlying markets.

For example, breast meat and leg quarters.

We believe this will happen, but it could be near the end of the fiscal year before we have a positive run rate in chicken.

We are seeing the emergence of chicken as a breakfast trend in quick service restaurants.

This is very promising from a consumption standpoint, because it doesn't cannibalize lunch and dinner consumption.

National chains are promoting chicken heavily, which is certainly beneficial for Tyson.

In consumer products chicken, according to Nielsen data, we have had a 28% dollar volume increase in our boxed chicken products as a result of Anytizers, and nearly 13% in bagged products.

We also have had very successful deli promotions around football and college basketball games in February and March.

On the production side of the chicken business, the past several months, we've been working diligently to improve our cost structure.

We're doing this primarily through three avenues.

Bird weight mix, improving yield, and increasing flexibility within our plants.

Our goal by the end of the year is to have 10% of our mix in big birds, and we are accomplishing this by converting three poultry complexes to bigger birds, with plans for more next year.

There are dozens of exciting, innovative profit improvement projects under way around yield improvement and plant flexibility to reduce the amount of chicken moved among our plants.

We're spending about $130 million in capital improvements over the course of this fiscal year, with a projected annualized savings double our investment, and we expect to continue investing in 2009 as we optimize poultry plants throughout the company.

As we've gone through the process of evaluating our plants and improving our cost structure, we've had to make some changes.

As we announced in February, we're closing a plant in Wilkesboro , North Carolina, that produced our roasted chicken products.

This was a further processing plant, therefore, it didn't affect our overall chicken output.

And that brings me to the issue of chicken supply.

Many of you have been asking about our production plans.

Our plan is the same.

It's to balance our production to meet the needs of our customers.

And right now, our demand is good and in some channels it's just plain outstanding.

Therefore, we currently don't have any plans to reduce production.

Moving to the beef segment, I'm really believed with the turnaround we've had.

Beef improved $74 million over the first quarter of this year, excluding charges of $25 million for plant closings and asset impairments, beef would have had almost $100 million quarter-to-quarter improvement.

This is even more significant, considering Q2 is usually our most difficult for beef.

Capacity utilization was approximately 77%, and according to USDA data, our spread was notably better than the industry average.

We're pleased South Korea will be opening up to our exports.

The USTR negotiating team did a great job in achieving acceptance of all ages of cattle.

I'm confident the team will move quickly to reach a comparable agreement with Japan, hopefully over the next six months.

Restructuring our operations in Emporia, Kansas, was very difficult for our team members and the community, but it was definitely the right thing to do.

We're now seeing the improved efficiencies we expected.

Overall, supply and demand have been in reasonably good balance for the past several weeks.

I think beef will continue to improve and our capacity utilization should move into the 80s.

We're resuming exports to South Korea, and we're heading into the grilling season.

Now on to pork.

I mentioned this earlier, but I want to reiterate how well our pork segment has performed for the first half of fiscal '08.

We had unusually good margins due to favorable market conditions, in addition to our own internal focus on efficiency.

Our capacity utilization was 90%, and our spread for hogs was significantly better than the industry average.

I want to acknowledge the great work our fresh meats group has done with the pork business.

I am pleased to say Tyson Foods will be the exclusive pork supplier for the U.S.

military commissaries in the U.S.

and Puerto Rico.

This is the first time one supplier will have all the business and that's a testament to our product quality and service.

As an aside, although related to government contracts, Tyson's ethics and compliance program was ranked 21st out of 1,000 of the largest Federal Government contractor programs by Ethisphere Institute, a national organization dedicated to ethics in business.

Coming back to the pork segment, I think going forward pork will continue its great performance, although it probably won't be as strong as the first half of the year.

In the prepared foods segment, price and volume had a negative impact.

Overall input costs remain relatively flat.

Grain prices affected our tortilla and pizza crust businesses, but were partially offset by lower pork prices for pizza toppings, bacon and other pork products.

We have two big success stories coming out of prepared foods.

One is for a national quick service restaurant chain that challenged us to develop a range of new burger ideas.

Test marketing went so well, the new burger, using a sauce and concept we developed, launched at the end of March.

Another national account customer is using our sauce in one of its new pasta offerings currently in heavy promotion.

These are excellent examples of our culinary and customer development teams working with our customers in the Discovery Center to come up with interesting new products and build incremental sales.

In the third quarter, I expect prepared foods will have results similar to second quarter performance, due to rising input costs and volatility.

In our international business, second quarter boxed beef volume was up 46.5%, granted from a small base, compared to the same period last year, while boxed pork was up nearly 25%.

The weak U.S.

dollar is making protein a good value and is opening potential new export markets for chicken.

This is helping our geographic diversification of leg quarters and reducing our reliance on the Russian market.

In February, we announced the creation of the Jiangsu Tyson Foods, a joint venture with a Chinese poultry company.

We are working on two additional integrated poultry opportunities in Asia as well as two in Brazil.

Looking ahead, total international sales are projected at $3.7 billion for the year, which is 23% above fiscal '07.

And finally, our renewable products group delivered a record quarter in operating income, primarily from rendering operations.

I'd like to give you an update on where we are with renewable fuels.

As you might know, our strategic alliance with ConocoPhillips began producing next generation renewable diesel in December.

We've been averaging around 300 barrels a day, and have tested up to 1,000 barrels per day, and now we are jointly developing scale-up plans for more output.

On the construction of our Dynamic Fuels plant, the site environmental work is nearly complete.

Final engineering is nearing completion, and equipment requiring a long lead time has been ordered.

In addition, we have applied for a tax advantaged Gulf opportunity zone financing for the state of Louisiana, which would offer favorable interest terms for the project.

Before we take your questions, I want to say a few more things about the grain markets.

Our annual cost of corn and soybean meal expenditures have doubled from $1 billion to $2 billion since 2006.

We can't raise prices fast enough to keep up with the rising cost of our inputs.

Consumers are concerned about the prices they're paying now, but the cost we and other producers in all proteins are currently incurring are only beginning to be passed on to the consumer.

It's going to get much worse if we continue down this path of diverting corn to ethanol production.

Higher food costs is one of the many unintended consequences of the corn-based ethanol mandates and subsidies the U.S.

Government put in place in 2007.

The intentions were good: Reduce our dependence on petroleum and encourage the use of environmentally beneficial fuel.

Unfortunately, that isn't what's happening.

2007 ethanol production will replace only 3% of the U.S.

oil imports.

The fact is, we can't grow enough corn in this country to make a dent in our petroleum dependency.

It takes a bushel of corn to produce 2.75 gallons of ethanol.

The government mandates the use of nine billion gallons of ethanol in 2008.

That will take 3.2 billion bushels of corn or close to 30% of the expected crop.

The entire world's grain crops could replace only 5% of global oil products.

Diverting corn to ethanol doesn't make economic sense.

The cost to produce a gallon of ethanol is twice what it costs to produce a gallon of gas.

Ethanol has created over $12 billion in U.S.

household income, but it costs the rest of the economy $24.5 billion, a two-to-one cost for only $1 gained.

I read a report last month that explained how U.S.

biofuel policy has failed on two major criteria of public policy, efficiency and equity.

It is inefficient because it raises the price on feed stocks to artificially high levels, which increases costs for other uses, such as food.

It is inequitable because higher food costs disproportionately affect the people who can least afford it.

Essentially, it's a regressive tax on the poor, and not only the poor in America.

Ethanol mandates and subsidies along with tariffs on ethanol imports are causing a world food crisis.

Shortages and higher prices mean many people around the world are spending the majority or all of their income on food.

Those who can't are starving.

The number of people suffering from hunger had been predicted to decline from 800 to 625 million by 2025.

But because of our current ethanol policy, it is now expected to climb to 1.2 billion.

Hunger relief is a cause near and dear to us at Tyson.

It has been the primary focus of our company's public service and charitable giving.

It is terribly discouraging to see hunger suddenly get worse when we've been working years to combat this problem.

As for the environment, the land, energy, water and fertilizer needed to make ethanol more than offset any environmental gains.

Ethanol production is having a negative impact on the environment in many ways, and I'm sure you've seen this in the news over the past few months.

To stop this snowball effect on unintended consequences, Congress must put an end to our misguided ethanol policy now.

I'll get down off my soap box now and wrap this up.

Every day I come to work and see smart, talented, dedicated people, striving to do the best-in-class in innovation, customer service, efficiency, and profitability.

Considering the economy and the volatile markets, I think they're doing a great job.

You may not be able to see the results at this time, but I believe we continue to lay the groundwork for impressive things to come.

So I give my thanks to all the Tyson team members for their work, and to all our shareholders who continue to see the long-term potential for Tyson Foods.

And now I'll turn the call over to Marcella for

Thank you, sir.

We can now begin the question-and-answer session.

(OPERATOR INSTRUCTIONS).

One moment, please, for the first question.

Our first question comes from Farha Aslam.

Your line is open.

Thank you.

Good morning.

Good morning.

Congratulations on a great quarter, considering the environment.

Just some questions first on chicken.

Dick, you had mentioned you were spending $130 million to improve your chicken operations.

Yes.

And is that all this year?

Yes, that will be spent this year, approved and spent in this fiscal year.

So then -- and you said that you expect 2X benefits, so kind of going into next year, we could double that and say cut events would be the cost savings your chicken division would realize?

We would expect the benefits, unless other things change, we would expect the benefits of these expenditures to be twice what we expect -- we're not going to get them all at once, Farha, but over time, that $130 million will breed $260 million in potential savings.

And so when you think about normalized margins in chicken, you've historically said they're kind of around 5 to 7%, would that change it or help you meet that given the current grain environment?

I would tell you that doesn't necessarily change it.

It will help us meet it, maybe help us get to the higher end of the range, but I would not want to say that that should change our chicken segment earnings to a different level.

Okay.

And --

Are you there?

One moment, please.

Go ahead, Ms.

Farha -- Ms.

Aslam.

Hi, Dick?

I'm here.

Okay.

Great.

Just kind of when you think about pricing for chicken going into the summer, how much of that almost $1 billion hit that you will probably take for this year do you think you can offset with pricing?

You know, that's a great question and one that we really don't have an answer for because as I said, part of this is going to rely on the underlying markets, like the quoted commodity markets for breast meat and leg quarters and wings and tenders, and we don't really know at this point how quickly or how much those underlying markets are going to go up.

We know they're going to go up.

We just don't know the rate.

So I'm reluctant to tell you that, we're going to recover X percent, but I would tell you through efficiencies, through risk management efforts and through pricing, our goal is to try and offset this as much as we can, and as I said, I think by -- towards the end of Q4, we will be in a positive run rate.

My final question is, with the farm bill, did you get any clarity on country of origin labeling, particularly as it relates to beef and pork.

We don't have any clarity yet.

As far as I know, they're still negotiating even as we speak on the final of what a farm bill might look like.

So no, there has not been anything definitive as of yet, at least to the best of my knowledge.

Great.

Thank you very much.

Thank you.

Our next question comes from Tim Ramey of DA Davidson.

Your line is open.

Good morning, Dick and Wade.

Good morning.

Hey, I'm trying to figure out how to think about this and as I think you've essentially told us that pork supplies will decline and we see that and we see hog prices rising and pork prices rising and probably the same scenario for beef.

So that sort of drags along your biggest segment.

And I think this is what you were just saying, Dick, but I'm trying to get to you maybe elaborate on it.

So there's the impact of pricing but there's also the impact of competing proteins and what that will do to chicken prices.

Am I getting that right?

Well, I mean, I think you're right.

I mean, these grain inputs are hitting everybody.

The producers, whether you're in chicken, beef or pork, right now are taking, a huge, huge loss.

Eventually that's going to have to change and all boats are going to come to a new level of tidewater because all prices have to go up, so I think that chicken typically is one of your better values from the standpoint of protein and generally speaking if there are tradeoffs, oftentimes you will trade to chicken.

I'm not sure if I've answered your question, though.

I think that's right.

I mean, it's obviously you're not backward integrated in any meaningful way in beef and pork so you don't directly bear those costs.

But there is a lot of leverage in beef and pork prices given what's happening with the liquidation, it seems.

I concur with you.

I think the international markets too, just the continued opening and the fact that U.S.

protein is a great value is going to -- you're going to see more and more of the supply move overseas which will provide some pricing support at home.

Great.

Wade, did you say if there was any mark-to-market hedge impact in the Q2.

We did not say specifically.

You can see the overall hedge positions, but lots of time the offset ends up in COGS so you can't tell the true balance of it.

You're not going to tell us?

Not going to.

Obviously, as you know, we're always hedged some, not ever hedged fully.

We don't like to disclose the exact position.

Dick, you talked a bit about the fuels.

What might -- 300 to 1,000 barrels a day is pretty meaningless.

But what might that be, say, a year from now?

Well, I mean, if the economies continue to make sense, I mean, our goal was to get up to about 12,000 barrels.

In order to do that, we need to go to three different Conoco refineries to get that done.

I'm not sure at the pace of that.

I do believe that we will see some substantial changes.

Do I think we'll be at 12,000 in a year?

Probably not.

But I would say we've got a good chance of being well over 50% of the way within a year.

Thanks very much.

Thanks, Tim.

The next question comes from Ken Zaslow, BMO Capital Markets.

Hey, good morning everyone.

Good morning.

Dick, your tone has changed rather dramatically since February at Cagney.

Can you just give us a little idea -- your tone has really changed from kind of being very subdued to seemingly a lot more positive.

What are you seeing that's making you that positive?

I think there's a number of things.

One, I think beef really has an opportunity to do well here going forward.

I think that was a big drain.

If you think about Q1, I mean, Q1 beef lost $85 million, so the $100 million change-around from Q1 to Q2 will make anybody a little bit more rosy.

Secondly, I think I was very surprised or happily surprised at how well our pork group did, pork division, pork segment did as well.

So I think those two are very, very positive and I think they'll both do well going forward here for the balance of the year.

Chicken is something that we're going to have to deal with.

We knew we were going to have to deal with the grains and the volatility in grains and I think that we're managing that well and I'm really very pleased with the progress that we're making from an operational efficiency standpoint as well as our sales and marketing people both innovating and working on getting prices up where appropriate.

Two points you kind of mentioned in that.

In your cost structure side of it, how do you assess or how could we assess how much better you're doing relative to your industry and where have you been and where are you going in terms of your cost structure relative to the industry?

Because I think you said that on your beef side as well as your chicken side, you outperformed the industry.

How can we get a better sense of that?

Actually, I said on beef and on pork we were better than the industry spreads, which would really be a gross margin type of a statement.

And you can't do that because -- you can look at our results.

You can look at the spreads, for beef and pork that are printed.

You can come to that same conclusion yourselves.

On chicken, as I said last quarter, we have gone back to utilizing agra stats and I think that's been a big help to us, to identify where our strengths and weaknesses are and allows us to focus on those weaknesses of where we need to improve.

So yeah, I go back and say I am a lot more optimistic, probably not as somber, feel good, feel better about going forward.

Okay.

And then in terms of South Korea, I know there's a lot of factors around it, but if you take this in isolation, purely as an event, excluding the change in cattle supplies, change in beef prices, how much would that impact your beef packer margins or your beef margins, if we just take that in isolation?

If you --

Just the impact of South Korea opening up on the offal products, you know, obviously you get a lot more money on your offal, you get a lot more money on certain meat that go to South Korea specifically.

How much would that enhance your margin structure if you were to take it in isolation?

The answer to that is, one, it will vary, but I'm going to give you a range.

And this will be revenue.

It might be there's some costs that might offset this, but we would expect somewhere between 12 and $18 a head, in additional revenue from South Korea on all hits.

Okay.

That won't be day one.

That will be when we get back up to 2003 pre-BSC levels, that will -- that should be the expected impact.

And my last question is, in the quarter your beef packer margins seem to be much stronger in February than January and March.

How is the run rate running right now?

Is it above or below the quarter at this point?

Well, right now I would tell you that the first week or so of April we're a little bit not as good as parts of February and March but here recently they've probably gotten back, closer to those kinds of levels that we saw.

I appreciate it.

Thanks, Ken.

Next question comes from Diane Geissler of Merrill Lynch.

Good morning.

Good morning.

Just a question on your comments on the production side for chicken.

I kind of look at -- I hear what you're saying about matching your supply with demand.

You obviously have a good book of business, especially with what you've done on the R&D side and product development.

But also just taking your comments about we're looking for pricing coming from the industry, et cetera, and I -- I'm having -- struggling a little bit, trying to bring those two together because obviously you're a large player within the industry.

Wouldn't it seem wise at this point, given we're moving into the peak demand side where you you generally see the best pricing, to kind of tighten up supply a little bit, particularly with what your competitors have said, PPC and some of the smaller players, so that you can see that burst in the acceleration in pricing that you normally get in the summer, rather than just kind of taking demand?

I'm just getting concerned that it's kind of demand at any price which is obviously not a position of strength.

Could you comment on that a little bit?

Well, Diane I look back and I just say over the course of the last three or four, five years, when margins got difficult, we were the ones that did some adjusting.

And when we adjusted, the rest of the industry just filled right back in behind us and there were no changes, except by us.

And I guess at some point in time, you say we've closed a number of facilities, we've done what we can over time to contribute and we're done contributing.

We believe we've got a good book of business, as you said, and we believe that where we are is where we want to stay.

Do you think it would be fair to say that because you have other -- you're not a sole protein company, and that you have other businesses that seems to be performing well, I mean obviously beef much better than what I was looking for, given the industry conditions we saw at the end of '07 and obviously pork, exceptional quarter in pork, that you're willing to kind of use the position of strength in those two divisions to sort of push that chicken a little bit harder to see if you can get a little bit more discipline from the smaller players?

Is that's what's going on?

I think what we've said all along is we're going to match our supply and demand.

We're not going to cut beyond that and go out and buy open market meat to subsidize other people's growth.

We're not going to be stupid either and outproduce what we have a good quality demand for.

I think that's just as simple as it is.

Just making sure that we supply with our own product, good quality demand, nothing more, nothing less.

Would you expect --

I'd add to that and say that, you know, we are in a diversified protein state.

I mean, we participate in all three proteins and I think it only makes sense for us to optimize each particular protein as we go forward.

So being in multi-protein as I said in my earlier comments, is a good thing at this point in time.

Okay.

Would you say you think production -- your production this year, when we look back for fiscal '08, would be up 2%?

Up 3%?

Flat?

I don't think we've disclosed what that number is.

I can tell you, it won't be down.

Well, just in the past you said we expect to be up with the industry and we think the industry is going to be up whatever, 3%.

I think at Cagney you walked back from that a little bit, but --

You're right.

I think the industry has changed, Diane.

I don't think the industry will be up that much any more.

We've seen some sizable declines here lately in egg sets and placements.

So, we're going to be up a little bit but probably not a significant amount.

Not as much as we might have once anticipated.

Okay.

All right.

And I guess on the -- Wade, some of your comments about the mark-to-market and just dealing with a large hedge position and what that can do to you, especially if you have changes in prices at the end of the quarter and kind of setting guidance, et cetera, could you just -- could you walk us through kind of $0.19 swing on a hedged position that you -- I think you said 10,000 contracts, would that be a typical position for you?

I realize you're giving it to us to illustrate.

I'm trying to get my hands around kind of what is the true level of volatility from your mark-to-markets?

I would say that in general it would be at least that much.

At least that much.

Yes, I mean, as I said, we're never going to be fully hedged and we're never going to be fully empty as well.

But that would be in general a mild position, especially when you add in the impact Other items we might hedge such as soy, wheat, et cetera.

Do you think that sort of given the way accounting is, and you're not the only company that I've heard this from who deals with hedges, do you think that we should just go forward, expecting you're not going to reinstate guidance at any point?

No, I mean, I wouldn't say that necessarily.

I just think you know, right now, again this volatility is something that this market has never seen.

If you look at the number of limit up, limit down days over the past quarter or two, it's fairly unprecedented.

The bands have widened here.

But I wouldn't say that de facto.

I think we're working our way through it and figuring out how to drive more and more of our pricing agreements to push more and more of the risk downstream.

That could also change it as well.

So I think we'll see.

But I just want to give that perspective because really, we need to do first and foremost what's right for the business and we do have these huge exposures so hedging to some degree, especially where we have fixed agreements, is the right thing to do.

And the accounting matter is something separate.

Right.

But wouldn't you say it's fair to say that we're going to see this level of volatility for the -- for the next I don't know how many quarters but it doesn't seem like it's going to abate any time soon based on what we see in the markets today in terms of grain volatility.

I think you're right.

Grain volatility is going to continue.

I think what will make me more comfortable about giving guidance is if that's the only huge variable we have to deal with, I mean, this whole idea of when we can get pricing, how many more bushels of corn are going to go into ethanol.

I mean, there are some other factors, I think if we can get some better vision around some of these other things, I think just volatility in grains alone, I'm not sure that will keep us from giving guidance.

My goal would be is to give guidance again.

We said we were going to temporarily suspend it and once we have a clearer view and can knock out some of these variables, we will work to do that again.

Okay.

All right.

Well, I appreciate your commentary on that.

Thank you.

Thanks, Diane.

Next question comes from Christine McCracken, Cleveland Research.

Good morning.

Good morning.

Hey, Dick, I was a little surprised with your comments in beef.

You know, clearly in the near term with the Emporia plant closure you're doing a lot better there.

There's plentiful supplies in the near term.

But as you look forward, given the losses in the feeding industry that they're seeing and the big drop in placements last month and probably an even bigger, most certainly a bigger drop in the next month, how are you so positive on the outlook for beef into later this year, maybe into '09?

Well, Christine, my original comments were really around Q3 and into more into the balance of this fiscal year.

I never really did speak of fiscal '09.

However, I will tell you that I think that from the standpoint of efficiency and being as good an operator as we can possibly be, we're going to be in that position for fiscal '09.

Now, what's going to happen with the underlying gross margin spreads and how much will supply decline, nobody really knows the answer to that question yet at this point.

But if you do expect a contraction, further contraction in the, imbalance in the industry with packing capacity specifically, wouldn't this make the situation worse and get us back right where we were before you guys took the proactive step of shutting Emporia?

I don't think so.

If you look at some of the other positives, yes, I think overall in the long run, prices are going to have to be higher.

There's no two ways about it.

But I think if you take South Korea, you add in the fact that I feel very confident that we'll see Japan hopefully follow suit here, like I said, within the next four to six months, I mean, I think there's some positive things out there that can offset a slight decline in volume.

I mean, whenever you see a decline in volume, you don't see multiple percentage points decline.

It's usually a rather guarded and small decline that occurs.

So I think the industry can live with that and I think we can live with that.

All right.

Just in chicken, then, you talked about your push toward big bird deboning and clearly the economics there makes sense in the long run, but in terms of the breast meat market as it stands today is in my view below where it's historically been seasonally and from kind of a supply, demand balance.

I'm wondering, did you look at the breast meat market and think that you're going to see again a nice resurgence on production cuts or is it that the economics there for you kind of justify that move into big bird deboning?

I think it's a combination of a number of things.

One, it's improved technology and what you can do with bigger bird breast meat and how you can portion it.

Two, it's what we can do from a customer perspective.

Three, there's no doubt that the cost economics of the larger bird are better than that of a smaller bird.

So I think it's a combination of efficiencies, plant efficiencies, customer demand, technology, all those things are what contributes to moving at least in our case to that 10% by the end of the year and probably no doubt moving up a little bit more in fiscal '09.

Do you think, though, that you're going to get the breast meat pricing back up or is it that you expect to see kind of offsets?

Because you're clearly adding more pounds of breast meat to the market during an already weak period.

So I'm wondering, when you look forward, do you expect to see pricing in other parts offsetting breast meat or do you really expect breast meat prices to rebound?

I do expect breast meat prices to rebound significantly from where they are today.

I mean, breast meat prices are in the mid-$1.40s and they're going to have to rebound -- they will rebound.

They always are higher during the summer.

They are starting from a lower level but I do believe that breast meat prices will go up substantially during this year's busiest demand season.

All right.

One final question.

You're looking at the sizable losses that you guys talked about in several parts of the industry tied to these high feed costs.

When you look at your supply, as a packer, do you -- how do you -- do you expect to step up, I guess, in terms of guaranteeing that your producers stay in business or is it that you think you're going to be the packer, the first choice or the -- the packer that's still going to be around, basically?

I'm just curious how you expect to see that unfold specifically in hogs and cattle, as supplies contract.

First of all, how do you guarantee supply?

Because a lot of the small producers that supply your plant are the ones that are going to be under the most pressure.

Christine, I would say, number one, we do have a lot of agreements, with our hog producers in terms of committed supply.

I don't believe -- I mean, we're probably going to process somewhere between 110 and 115 million hogs this year, which will be an all-time record even though the back half of the year might be on the downward side, which I believe it will.

But, I don't foresee us having a problem getting the hogs for our facility, nor do I see us have a problem getting cattle to our facility any time in the future or -- we'll always be able to source cattle and hogs.

All right.

I'll leave it there.

Thanks.

The next question is from Pablo Zuanic of JPMorgan.

Good morning, everyone.

Good morning, Pablo.

Can you expand on the Canadian situation?

I mean, you are saying that your beef spreads in the U.S.

were above the market spreads.

But I had calculated spreads to be around $24 per head for the quarter and if I take your EBIT, based on my volume assumption, you're only about $8.

So how bad are things in Canada, if you can give us some color there.

And is there any sign of improvement?

If you can give some color in terms of what your U.S.

spreads were, that would be useful also.

Talking a second about Canada.

There is a declining number of cattle that are going to be available for slaughter in Canada.

I mean, that is a problem.

It's going to be a continuing problem.

The other problem that we are having in Canada is labor.

We are still short labor to run the plant on an efficient basis, so we really have two problems.

One, a short supply of cattle.

And two, a very short supply of labor.

As I've talked before, we have had a number of different countries help in supplying labor into Canada.

But it is still a very, very difficult time, not so much keeping the people, but just getting the number of people that we need to operate that plant efficiently.

So our operating costs were a lot higher than what I would have hoped they would be.

Now, we're working on these problems and we're working to resolve these problems in a number of different ways, but it's going to be a slow process to bring our operating costs back in line in Canada.

Canada was a major detractor to our overall beef segment.

I'm not going to quantify that, but they were a major detractor to our earnings.

You want to give us a sense of what, according to you were market spreads, I calculated $24 spreads for the quarter, for the market.

You don't have to give us your spreads.

I can't give you that number off the top of my head.

I do know that I'm a little surprised that that number would be that high for the whole quarter, given the early first two or three weeks of January being what they were.

But I can't comment on -- I don't have that number in front of me.

That's fine.

Just a follow-up, there's another view out there regarding beef.

You have said that the industry needs to cut down capacity by another 10,000 to 14,000 heads per day.

Other people argue that perhaps it's not so much about shutting down plants but more about running more five day week shifts, as opposed to six day shifts, which I think were very prevalent in the second half of '07.

What do you think about that?

And would we say that the improvements in beef spreads are not just because we shut down Emporia but also because other companies have moved to five day shifts and have remained at five day shifts, even in April?

I can't comment on what other people are doing, whether they're running five or six days.

I mean, I think we're here to try and provide good quality products and service and make some money in the process.

And that's what our goal is, and that's how we need to react in the marketplace and Pablo, I really don't want to comment on what our competition is or isn't doing.

But you still believe the industry needs to cut down capacity by 10,000 to 14,000 heads per day?

Remember, I said 10 to 14 and that was before Emporia.

So you really ought to be -- like it to be 6 to 10 at this point.

Couple of follow-ups.

Great news regarding Korea, but in a market of tight cattle supply, doesn't the cattle rancher or the feedlot operators benefit a little more than the packer?

Well, I think that depends.

If you are in a very, very, very short supply situation, which we're certainly not, yes, typically the feed lot operator and/or the rancher, both those segments will have a tendency to do that because there is a a shortage of cattle and all the processors want to keep their plants running at least at minimum hours.

So yes, in a period of extreme shortage, which again, I don't believe we are in today, nor do I believe we're going to be in an extreme short position any time soon, that would be true.

Okay.

And just last follow-ups.

Regarding chicken, the numbers there were a little weaker than I expected.

We all know about grains but I'm trying to figure out in the past you talked about 70% value added products, 50% being commodity.

But correct me if I'm wrong, the way I understand your value added model, either cost plus or fixed price and the fixed price portion you hedged the grains pretty much for the duration of the contract.

So when we see these volatility quarter-to-quarter, obviously would have to be on the commodity side which is only 30%.

Is that analysis correct or is there some risk on the fixed price contracts?

I would say 70/30 is right but in terms of the 70% being cost plus or fixed as hedged, that's not right.

We have literally dozens of permutations in terms of how we price, many times its dependant upon either the channel specifically or who you're bidding against to get the business and therefore what the rules of engagement are on that particular bid.

We would in general have probably a higher percent of things like cost plus and value add, but by no means does that mean that there's not spot based or market pricing in that component.

There's a number of products, value added products in chicken, like our boxed and bagged products, that's basically sold off of a price list and you can only raise your price list so much.

So, there's a lot of other, as Wade said, ways that we have to go to market here.

It's not as simplistic and just cost plus and fixed price.

Just related to that, to finish off, when I hear restaurants like Buffalo Wild Wings, they give guidance on their cost for chicken, and they say -- at least one of them have said up 5% in chicken '07 and 5% in '08.

If I take corn going from $2 to $6 in percentage terms, I calculate you guys would need about a 16, 18% increase and what the restaurant out there is saying, cost is only up 10%.

Would it be fair to say on the restaurant trade, the chicken industry is still way lagging the cost increase?

Is that a fair characterization or not really?

The first thing I would say, needing price increases in the teens in total is probably not a bad guess.

But I would also say that I don't know which restaurants and how to predict but thus far it's being lagging.

Where it's going is really going to be a function of how much supply tightens up here to some extent.

I don't think anybody can fully predict that.

One last question on pork and hogs.

I'm confused by the way this pork market in hogs and futures are moving.

Supposedly the data from the USDA shows that exports to China are increasing, growing, accounting for the bulk of the export growth in pork.

On the other happened, the hog spot prices haven't really moved up.

So we have that demand, hasn't really had an effect on prices.

I suppose it's because of the oversupply.

But on the other hand, so bottom line is the exports are not really pulling the spot price market.

Futures six months out, pointing to $30 higher lean prices, about 80 compared to 50 right now, roughly, and that historically should be only about $10 higher, so what am I missing there?

My conclusion would be that okay, exports are up, but not moving spot prices, will not make an impact for another 18 months.

Future price probably just too high, only about $10 higher as opposed to 13.

Thanks.

I would answer that by saying, one, that the spot market for hogs in the last two to three weeks has gone up at least $10 on a lean hog basis.

So the spot price for hogs has increased in the last two to three weeks, rather significantly.

And I think going forward, I can't say that the futures are overpriced or underpriced.

But they are what they are and either the market will come up or the futures will come down.

One or the other is going to happen.

That gap will close as we get to those current months but as we see the number of hogs decline, at some point in time, the hog prices will continue to go up.

How high they're going to go, I think is a function of supply and demand and if we continue to see very good export and good demand domestically and -- I don't know whether it's too high or not too high, but definitely hog prices are going to continue to go up.

Thank you.

Robert Moskow of Credit Suisse, you may ask your question.

Hi, thank you.

Most have been answered.

But have you quantified approximately what you think the ongoing benefit to your margins is as a result of the closure to Emporia?

Aside from the headcount reductions, from a personnel standpoint.

Rob, we have not done anything externally with that.

We're still moving things around.

As you saw here recently, last Friday or the Friday before, we announced we were closing a little further processing plant in York, Nebraska.

We're incorporating a lot of what we were doing there in Emporia.

So I mean, it's hard to say at this point exactly what that is.

I know that we've gained some operational efficiencies and I know it was the right decision for us to do.

But I'm not ready to try to quantify that for you at this point in time.

Has it influenced the price of cattle in that region?

I don't know the answer to that.

I mean, I really don't.

I mean, cattle prices have moved around a lot since we did that.

They went down.

They've come back up.

Certainly there's less capacity.

Now, whether that has had a significant impact or not, I don't know.

Okay.

And then lastly, on the chicken side, a lot of the contracts you were negotiating in the fall kind of got pushed back into 2008.

Are those all completely done?

And as a result of them being pushed back a little, were you able to get higher pricing or not?

We're always renegotiating and negotiating contracts.

Most of those ones that were done back in the December, January period were basically having to live and deal with them.

But I guess I would answer the question by no, I don't think anything that we did or our customers did has radically changed from what a normal year is in terms of how that works.

Okay.

Thank you very much.

Thank you.

The next question is from Ann Gurkin of Davenport and Company.

Good morning.

Good morning.

Want to find out how beef margins have done in April so far.

I think as I said earlier, we're fairly comparable with some of the the kind of mid-February to March kind of levels.

Okay.

Which have been reasonable.

Any change to your commitment to the beef business?

Any change?

Yes.

No, absolutely no change.

We're committed to the beef business.

Great.

And the pork business.

Can we get a tax rate for the year?

I think can you use, I mean, I'd say there is some moving parts so it's too early to give a definitive, use 36, 37 for now as a proxy.

That's all I have left.

Thanks.

Thank you.

Vincent Andrews of Morgan Stanley, you may ask your question.

That was an easy one.

That's it.

Mr.

Andrews, can you check your mute button please?

Sorry about that.

How should we think about the dollar as it relates to grain prices and exports.

In other words, the weaker dollar is helping you export demand, but is obviously hurting you from corn and soybean price demand, if you believe that that's also part of the reason why those prices are higher.

My question is if the dollar reverts to the mean or starts to do something like, what do you think happens to export demand?

I think the first thing you said is right.

Things like fuel and grains and other things are becoming increasingly more global currency based and they do go up on the weak dollar.

Apples-to-apples they've got the same cost.

We've got the domestic things like labor which end up being cheaper.

I still think there's lots of room to run.

We're seeing unprecedented demand for protein out of the U.S.

and even moderate moves in currency aren't going to change that dramatically.

I agree.

The weak dollar has helped, a reversal of some sense would probably not impact greatly.

Because it has helped, definitely.

The weak dollar is definitely helping from an export perspective on protein.

Okay.

And Wade, was there -- I know the grain costs went from 5 to $600 million, also put out $1 billion r number of total costs, that implies $400 million of non grain related cost.

Was there a comparable number you gave before?

I think we had said, I recall we had said before when we were saying 500, we were saying a total of 800, wheat and vitamins and a variety of things.

Soil and a lot of different things.

I don't know if can you answer this, it might imply some guidance, do you think you'll be free cash flow positive for the full year?

Yeah, I would -- well, I would hesitate to say, I don't want to imply guidance.

And then the decline in CapEx, is that a -- what is that exactly a function of?

That's a function of our earnings.

Just trying to say that yeah, we were going to spend 425 to 475 but we elected to cut that back to 400 to -- based on our earnings profile that where we are today.

So I think it's conservative.

I think it's what we need to do is make sure that we manage our investment properly and that's what we're going to do.

I don't think we feel that we've cut any projects that were really right to do for the long-term as a result.

Okay.

Thank you.

I'll pass it on.

Thank you.

There are no further questions in the queue.

Well, we all thank you for listening and participating this morning.

I think that from a company perspective, again, I want to thank the Tyson team members who are doing a great job, very dedicated, hard-working group and we will see you all soon and thanks for your interest in Tyson Foods.

This will conclude today's conference call.

Thank you for your participation.

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