泰森食品 (TSN) 2008 Q3 法說會逐字稿

Welcome.

Thank you for standing by.

(OPERATOR INSTRUCTIONS.) I would now like to introduce Ms.

Ruth Ann Wisener.

Ms.

Wisener, you may begin.

Good morning.

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

With me today are Dick Bond, our President and CEO, and Dennis Leatherby, 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 will include forward-looking statements.

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

We encourage you to look at today's press release for a discussion of the risks that can effect our business.

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

Thank you, Ruth Ann, and good morning.

Thank you for joining us today.

I think the third quarter really demonstrates why Tyson Foods has the right business model and continued confidence in our strategy.

Having beef and pork in our portfolio, as well as prepared foods mitigated the losses we had in our chicken business, which is experiencing very difficult market dynamics.

And although market forces frame how we make our day-to-day decisions, our focus remains on executing our strategy, including building our international business and renewable products' platform.

It is what we will build long-term shareholder value and help us overcome external factors.

Our beef business did better than expected this quarter, although the results are really masked by a negative $75 million mark-to-market accounting treatment related to our forward cattle purchases and forward box beef sales.

Dennis will give you more details in his remarks.

The insured supply of cattle is to our benefit, but it's unfortunate it disguised an otherwise solid performance by the team members in our beef operations.

The economy is affecting our business, although it doesn't appear to be hurting our overall demand for our products.

According to research, our consumer intentions conducted last month, almost 85% of consumers believe we are in a recession, and it is changing what foods they buy and whether they go out or eat at home.

Fortunately, we are well-positioned to address changes in consumer behavior across all channels, all categories, and all customers to help them with their challenges while benefiting our business.

Now I'm going to turn the call over to Dennis Leatherby, who I am pleased to say is our new CFO.

Dennis has been with Tyson for 18 years, and I'm grateful for the knowledge and experience he brings to his new role.

Dennis?

Thank you, Dick.

It's great to be here.

As stated in our press release in Q3 '08, we achieved GAAP earnings of $0.03 despite ongoing challenges in the business environment.

This compares to earnings of $0.31 per share in Q3 '07.

Q3 '08 results include shares -- include charges of $0.02 per share for flood damage at our Jefferson, Wisconsin prepared foods plant and other asset impairments, implying an adjusted EPS of $0.05 per share.

As announced in June, we signed a letter of intent with XL Foods, Inc.

to sell our beef processing assets, cattle feed yard and fertilizer assets of Lakeside Farm Industries in Canada for $106 million, plus approximately $85 million related to the cattle and fertilizer inventory.

We hope this transaction will close by the end of fiscal 2008.

Including the working capital of Lakeside initially retained by us at closing, we expect to receive cash of $56 million at closing, approximately $130 million within 60 days of closing, $20 million in calendar 2009, and $49 million in notes, plus interest to be paid over a two-year period.

We'll also receive approximately $30 million of XL preferred stocks -- preferred stock, redeemable over five years.

Many of you are probably surprised beef did not show better earnings.

During the first quarter of 2008, our beef segment had a $75 million mark-to-market GAAP loss, as Dick just said.

The largest part of this loss was due to our forward cattle program.

Let me explain this a little better.

As a benefit to the cattle producers, at times we agree to purchase their cattle in the future for a fixed price.

We then in turn swap this fixed purchase price back to a market price by entering into a separate short futures position on live cattle.

For accounting purposes, we mark the short futures position to market through the P&L each quarter.

However, the fixed price cattle purchase is not recorded until we physically receive the cattle.

In the long run, the gain or loss on the short future position is offset by the impact of the fixed cattle purchase price.

However, in the short run, this can cause mark-to-market P&L volatility.

To put it more simply, cattle futures ran up in the third quarter and our short positions lost value.

The offsetting gain in value from our forward cattle positions couldn't be recognized in our P&L this quarter, causing the majority of the $75 million mark-to-market GAAP loss.

Due to changes in our beef market strategies, and business conditions, we now have more forward cattle purchase derivatives relative to fixed forward box beef sales derivatives.

Therefore, beginning in the fourth quarter, we will qualify these forward cattle derivatives as fair value hedges.

This will allow the short position and physical cattle purchase to be recognized in the income statement in the same period which should reduce beef segment mark-to-market volatility.

Now turning to a brief review of our segments.

Volume in all segments except beef was higher.

Beef volume was primarily lower due to the Emporia plant closure.

Beef had a very good quarter, as we said, reporting $3 million of operating income, which was masked by the $75 million mark-to-market impact.

We expect more than 50% of this mark-to-market will reverse in Q4 and will be reflected in operating income with the remainder reflected in fiscal '09.

Export sales continue to be very good, especially to several Asian destinations.

And capacity relative to available cattle remains well-balanced.

Our year-over-year chicken segment sales for the quarter increased almost 9%, or $183 million on volume and price.

This was up roughly 11.2% when netting out the effect of divesting two commodity chicken plants in fiscal '07.

Chicken operating earnings continue to be negative, as prices have yet to catch up with higher input costs.

Year to date, the negative grain impact was $349 million, as compared to the same period a year ago.

For the fiscal year, we estimate our corn and soy costs alone will be approximately $550 million higher than last fiscal year prior to some risk management offsets.

Our efforts to increase prices will continue over the next several quarters.

Pork continues to perform well, with an operating margin of around 6% which is above our normalized range.

We continue to see strong export sales and ample hog supplies.

Our prepared food segment was below our normalized range, primarily due to the $7 million charge for flood damage at Jefferson and the timing of input costs increases versus related price increases.

Overall, I think our team has done a really good job of managing our diverse multi-- portfolio, especially given some of the challenges we have been facing, such as higher grain and other input costs.

We finished the quarter at a debt level of just under $3.1 billion, with which our debt to capital ratio at 39.2%.

This represents a $124 million increase compared to the end of Q2.

Capital expenditures for Q3 were $120 million compared to $70 million for Q3 '07.

Much of this capital was allocated to profit improvement projects.

In closing, I would just like to say that I remain very confident about the prospects for Tyson Foods.

Our strategy for product innovation is proving to be valuable to our customers, especially in this current economy.

Beef and pork have done a great job optimizing their commodity business models and chicken is on its way.

We've made good progress on our strategy to build a multinational enterprise, with a few acquisitions under our belt and more are in the pipeline.

And we continue to develop opportunities and build value in renewable products.

I believe these efforts are positioning our company for a strong long-term future.

Now I'll pass it over to dick for his review of segments.

Thanks, Dennis.

I'm going to start with the chicken segment.

As you know, this has been a very difficult quarter for chicken.

In Q3, chicken continued to struggle with escalating input costs.

Grains were up $140 million, while energy, natural gas, cooking ingredients and freight were up an additional $60 million over last year.

Conventional wisdom is that chicken is more resistant to recession and rebounds more quickly than other proteins.

This is holding true for us because we're seeing good demand.

We have continued executing our strategy to develop, innovate and insight-driven products.

Now many of our food service customers are coming to us to reformulate or reengineer their menus, and their products to improve value, drive traffic, and mitigate costs.

They're concerned about value and price, but the most significant issue we've seen is ensuring they will have enough chicken to serve their customers.

In the past few weeks, a number of large customers have asked us to take on more of their business if we can ensure they will have a steady long-term supply.

Because of our size, locations, and flexibility, we're typically able to do that, but we simply cannot lock in long-term prices.

Fixed price contracts will be limited to a minimum timeframe, with adjusters for input fluctuations.

In other words, long-term supply with short-term pricing.

Turning to the consumer products channel, one year ago we launched the Tyson Anytizers line of frozen snack products, which unified all of our fully-cooked frozen snack items under one subbrand.

We exceeded our trial and distribution objectives and achieved a 46% share of the frozen meat snack category and gained 10 share points in the first year.

International sales dollars were up 21% over the same quarter last year.

To meet the strong demand from around the world, we've dedicated an incremental 5% of our production for various export markets.

The US dollar's value is working in our favor for exports and improving our ability to execute our global strategy.

We know these market conditions won't last forever, so we're making the most of them while we can.

In chicken production, we have made improvements in efficiencies and will continue this work as part of our long-term strategy to optimize commodity business models.

Several profit improvement projects have been implemented and several more are planned or are in-process.

Some reduced the amount of chicken we move between plants.

Others focus on right-sizing birds and minimizing trim.

These and other projects will help us reach our goal of reducing poultry production costs, which is key to the chicken segment's success.

We said it would be near the end of the fiscal year before we had a positive run rate in chicken.

But now we think it will be longer because pricing, quite frankly, hasn't seen its normal seasonal improvement.

In addition, we will incur about $200 million in additional grain costs over the same quarter last year.

And although we are working to offset some of this through risk management activities, chicken will be difficult until these economics improve.

On the positive side, our beef segment had a really strong quarter.

The team has worked hard to improve operations by optimizing yield, staffing and capacity utilization, which was up to 87.3% for the quarter as compared to 84.4% in Q3 of '07.

We resumed shipping beef to South Korea on July 15 and our products should be reaching the country any day now if they haven't already.

Despite the public protests we all saw in the news, demand is very strong and our customers are pleased they will be getting our beef.

The initial shipments for the next 30 to 60 days are outstanding.

Last month, we announced the sale of our Canadian beef processing business.

Lakeside is one of the premier processors in Canada and it was a successful part of our operations for many years.

However, Lakeside no longer fits Tyson's long-term strategy, as our current international strategy is focused primarily in Asia, Mexico and South America.

The outlook for our beef business is good.

Cattle supply will experience its typical seasonal decline.

The herd is getting smaller, but in the fall and into our first quarter, there should be ample cattle available for our plants to be able to run efficiently.

Our pork segment performed very well in the third quarter, with a spread significantly better than the industry's average.

Capacity utilization for the quarter was good at 84% compared to 80.5% in Q3.

Pork exports are very strong, especially to Japan and Mexico.

Looking ahead, sow liquidation is likely to accelerate, but there will be a 10 to 11-month lag in its effect on hog supplies.

We expect to have plenty of hogs to run our plants very efficiently in the fall and early winter.

Our prepared foods segment margin was below normalized range, mostly because of a lag between input costs increases and pricing.

Q3 was a record quarter for our consumer bacon business, both in volume and in EBIT over the last four years.

One of the key drivers was the expansion of our Wright brand, regional bacon to national distribution with some top customers and it has demonstrated strong growth in pounds sold.

Third quarter sales volumes of tortillas to our food service national accounts was up 28% over Q3 of '07 and up 14% from last quarter.

We expect growth to continue into next year because many of our QSR customers are using tortillas in more applications such as breakfast burritos and wraps.

We're using more tortillas internally as well for our new deli wraps.

These are being sold in the self-service area of retail groceries.

We achieved national distribution by gaining 100% of one retailer's distribution centers.

This is a great product for us because we are producing them using our own Mexican original tortillas, Tyson meats and sauces from our kettle-cooked operations.

It's also a great example of strategic innovation.

We've taken steps to streamline operations within our prepared foods by closing our York, Nebraska facility and shifting production to the meat processing operation in Emporia, Kansas.

It's always a difficult decision to close a plant, but it was necessary to improve efficiency and long-term profitability.

The fourth quarter should be good for our pepperoni business.

We are maxing out capacity and improving prices.

Supply is tight because of lost production at our Jefferson, Wisconsin plant, due to the June floods in the Midwest.

We incurred a $7 million charge related to the flood damage.

However, damage to the facility was kept to a minimum, due to the efforts of many Jefferson team members.

Since the flood waters have subsided, they have been getting the plant cleaned up and ready for production.

We plan to resume operations next Monday and by mid-August, should be in business-as-usual.

I want to say thank you to all those team members in Jefferson.

Because of you, other team members can get back to their jobs and get on with their lives.

There has been a lot of work around our strategy to build a multinational enterprise.

So far this year, we've announced two joint ventures for chicken production, [Janisu] Tyson Foods near Shanghai and [Godrich] Tyson Foods in India.

We're also in due diligence in gaining government approval for the partial acquisition of a chicken processor in eastern China.

We'll be making more announcements soon.

And we'll be making expenditures in the fourth quarter and into Q1 of fiscal '09 to fund these acquisitions and joint ventures.

There's been a lot of activity in our renewable products group as well.

The increased value of by-products, both domestically and internationally, has improved drop credit revenues to all-time highs and continues to bolster our strategy to focus on margining up by-products.

In the past month, we've reached two significant milestones for dynamic fuels, which is the joint venture we've formed with Syntroleum to convert low-grade inedible fats and greases into renewable fuel for the military and civilian markets.

Three weeks ago, we sanctioned construction of a production facility in Louisiana.

Last week, we selected a contractor.

Construction is expected to begin in October and be completed by the end of calendar year 2009.

The project is on budget and on schedule to begin production in January of 2010.

Whether it's alternative fuels or new products, innovation is an important part of our overall strategy.

We want to be innovative in our marketing efforts as well, which is why Tyson Foods is the proud sponsor of the 2008 and 2010 US Olympic teams and creator of the Gold Medal Mom Contest.

The Olympics begin next week and Tyson is providing approximately 25,000 pounds of protein to the US Olympic teams training center in Beijing.

We're looking forward to watching these athletes compete on the world stage and we are very pleased to play a small role in helping them get there.

To coincide with our Olympic team sponsorship and our Thank You Mom marketing campaign, we have created the Gold Medal Mom Contest.

We invited people to tell us why their moms deserve a medal.

A team of judges, including Olympic gold medalist, Mary Lou Retton selected 25 finalists who were then voted on at our Gold Medal Mom website with the winner receiving a trip for two to the Beijing Olympics.

The Gold Medal Mom program and events have been successful in promoting the Tyson brand and encouraging product trial.

I should wrap this up so we can get on to your questions.

In closing, I would say our outlook for Q4 is positive, but market volatility will continue to be an issue.

Input costs, especially corn and soybean meal, are a serious concern.

There seems to be some movement towards reviewing the government mandates for corn ethanol, but I'm really doubtful that there will be any action taken that will effect our fourth quarter.

As I said earlier, our chicken segment won't be positive in Q4 and its losses likely will be greater than Q3.

Fortunately, we have a diversified business model and earnings from the rest of our businesses should more than offset any losses in chicken and generate a more profitable quarter than Q3.

If grains stabilize, Q4 could be the worst quarter in this cycle for our chicken segment.

Now I'm going to turn the call over to Stacy and we'll take your questions.

Thank you.

We are now ready to begin the question-and-answer session.

(OPERATOR INSTRUCTIONS.) Our first question comes from Jonathan Feeney of Wachovia.

Good morning.

Thank you.

Good morning, Jonathan.

I wanted to ask you about -- well, first I wanted to ask about your retail to food service split.

I'm sorry if I missed it in the call.

Was there a wide divergence in terms of volume across all three in meats in retail versus food service performance?

Is there a margin mix there from your perspective that we have to worry about at all?

Well, the -- for Q3 was split was actually no different than most quarters.

In other words, we saw increases in volume in both -- the QSR segment was very good, but our retail segment was good as well.

Jonathan, historically, we really haven't talked about the margin structures between retail and food service.

As you know, we have had some national account contracts that we are still living with that were negotiated last fall, which is certainly adversely effecting that somewhat.

But other than that, we haven't given any a major breakdown between the operating income between food service and retail.

Okay, and thank you.

And just ask a quick one on the capital expenditure side.

Here we're seeing some tough things going on in the industry; presumably there's cutting back a little bit.

And I know primarily your CapEx is going against some cost savings, productivity initiatives.

But I would just think, geez, we're a chicken, meat, and pork company, there should be a lot of opportunity right now to stop spending on capital and realize some cash flow harvest at a time when others by necessity have to be doing that.

Do you see CapEx shrinking over the next couple of quarters.

Or how would you comment about that?

Jonathan, I would say that we've developed some very, very definitive strategies around what we want to do.

We need to keep spending on our domestic businesses, one, just for maintenance CapEx.

But also to make sure that we are optimizing revenue and optimizing our cost structures.

We did have a significant expenditures in Q3 from a CapEx standpoint.

But we still believe that we're going to be in that $400 million to $425 million range for the year, which is adjusted down really from a little bit of what we had said earlier in the year.

One, we are trying to manage our CapEx accordingly.

But secondly, I think to make sure that we continue on our renewable platforms and on our international platforms, we will continue to do that.

Now, recognize we are going to get some significant capital back from Lakeside.

If you look into both the purchase price and the working capital, that's almost $200 million that we're going to be getting back towards the end of fourth quarter and in the very first part of Q1 of fiscal '09.

Yes.

That's great.

I -- when you look across others, I guess -- and maybe you haven't given this number in the past or aren't prepared to.

But if you look at that $400 million to $425 million in CapEx, if you just segmented the part that is US meat production and processing, would you say that would have trended up, down or flat year-over-year?

It's a little bit higher than '07 as I recall, because we had cut back pretty significantly in '07.

With the number of facilities that we have, you're going to spend maintenance CapEx in that 225 range no matter what you do, just to keep world class facilities up and running.

We've identified a lot of things that we believe make sense to spend money on that have very good returns domestically.

Most all, all but probably $20 million of that anticipated number of CapEx for this year would be domestic.

Thank you very much.

Our next question comes from Farha Aslam of Stephens, Inc.

Hi, good morning.

Good morning, Farha.

Couple of details.

First of all, Dick, you had mentioned that you're working to improve your chicken operations.

How much cost savings do you anticipate that program to yield?

Well, if you recall at the end of Q2, we talked about spending $130 million in CapEx and believe that in fiscal '09, we would see close to $250 million of benefit from that $130 million.

We still believe that to be the case.

Okay.

You had given us color about the fourth quarter for chicken being a greater loss in the third quarter.

Is that because of less benefit from grain hedges, higher grain prices, weaker pricing?

Could you just provide some color around that?

Farha, I would say it's a combination of three things.

Remember, we said we were going to have a grain impact, meaning corn and soy, of about $550 million for the year.

Through three quarters, we've only had about $350 million, so we've got a $200 million grain impact year-over-year that's going to affect Q4.

We have not seen the normally more vibrant breast meat market yet this summer that we normally do.

I would tell you pricing is still lagging.

Those are the two primary reasons why Q4 is not going to be as good as what we might have expected it to be.

One, more grain costs than what we thought; and two, lagging prices on product.

Okay.

My final question is on prepared foods.

You had noted that pricing is lagging input cost increases.

Do you anticipate that to catch up in the fourth quarter?

Or how much of a lag do you anticipate going forward?

A lot of our sales agreements there are based on average prices, in some cases from a month back and in some cases a quarter back.

And what that is, is we had some significant increases in some of our pork raw materials primarily in Q3.

And, yes, we do anticipate that we should catch up on some of them.

There as well, on the prepared foods side, we are working to shorten that lag time to where there isn't a quarter gap.

I'm trying to get that down to more of a monthly gap or a weekly gap instead of a quarter.

Just trying to reduce and mitigate our exposure to these inputs and get them to catch up in sales price faster where they are formulated.

That makes sense.

Thank you very much.

Thanks, Farha.

Our next question comes from Diane Geissler of Merrill Lynch.

Good morning.

Good morning, Diane.

How are you?

I'm good.

I'm going to ask you the same question I asked you last quarter, which is really regarding the supply and demand and chicken.

I know your long-standing stance has been, we're going to match our supply to quality demand.

But in light of what has happened this quarter in poultry and your expectations for the fourth quarter, my question really gets back to how high is the quality of the demand if it doesn't allow you to turn an operating profit?

Looking forward, what do you see in terms of matching production to a level where you can actually recoup the higher grain prices?

Well, I've got three thoughts there.

One, if you go back over the course of the last few years, we were the ones that took the industry lead and did make quite frankly, over 5% production cuts ourselves.

It isn't like we haven't made production cuts in the past.

We are going to continue to match supply and demand from a customer perspective.

You do note that we did say that we were going to -- I don't want to use the word "divert" or work on an export basis to take an additional 5% of our output to go into the export markets.

That's not just dark meat.

I believe from a disappearance perspective, we are doing what we said we were going to do.

We're going to match supply and demand, and we are working hard to make sure that that is the case.

We alone are not going to be the ones that are going to be able to get breast meat up to $1.90 or $2.

This is something that demand is going to have to be decent.

We have a lot of things that are coming on in the fourth quarter in terms of redoing some pricing, some new business.

I think it's taking a little bit longer, but I think it speaks to the strength of the diversified business model.

The beef and the pork and the prepared foods are mitigating the chicken losses.

Again, I think we're at the end of this.

We're coming close to the end of the really, really hard times, in my opinion.

That's what -- that's how we're going to continue to operate.

Okay.

Just on your comments on your food service contracting, where you're looking to fix in terms of volume and then have cost escalators built in.

How have your negotiations -- how have the retailers -- not the retailers, but the food service operators.

How does that sit with them?

Have they been accepting it?

Do they understand it?

Have they been pushing back?

What's your feeling on when you will actually get to a position to where you will be allowed to pass along the higher grain prices?

Well, Diane, they certainly understand it.

There's no doubt about that.

We haven't really gotten heavily into the season of renegotiating those contracts yet.

But we certainly have been talking to all of our food service national account and other customers about where we want to go and how we intend to deal with this.

Remember, as I said, assured supply has become -- this is the first time I have heard the word "assured supply" being an issue probably since I've been in the chicken business since 2001.

And your aim is to have those 90-day contracts.

Something shorter?

Something longer?

Yes.

Actually, we didn't give a time, but 90 days or less is really what we're expecting to accomplish here when we get into the major renegotiation season.

Okay.

All right.

Appreciate that.

Thank you.

Thanks, Diane.

Our next question comes from Christine McCracken of Cleveland Research.

Good morning.

Good morning.

Just in terms of these accounts that are worried about assured supply, is there any specific channel that seems more worried than another?

Is there any particular commentary, that -- is it that they are worried about profits that are completely going away?

Because we're not seeing cuts significant enough at this point to suggest that there wouldn't be enough chicken on the market.

Is it a question of financial viability at this point?

Can you give us any more color around that commentary?

Well I think part of that is -- it is pretty common knowledge that in the long run, the industry cannot continue the level of losses that are being incurred.

There is a concern just purely about the viability of the industry.

I think that's a concern, number one.

But I think more importantly is making sure -- because chicken is such a critical part of the menu across all channels in food service, it is something that they feel that they have to have.

And I can't tell you specifically whether it's more in mid-scale, more in casual or more in QSR, because we have heard it from all three channels.

I think it's just a concern.

I think it's a concern that most of us as competitors in the industry are talking to our customers about.

Eventually these cuts, -- you have seen the egg sets are finally down over 4%.

These cuts are going to come to pass.

All right.

And that's what's giving you the confidence that Q4 is really going to be the bottom in breast meat -- or in chicken, in the chicken cycle?

Again, given grains and given some grain stability, which is something you can never count on, yes.

All right.

Then just on beef, obviously that's been unbelievably strong here this summer, despite relatively high prices.

What do you attribute that to?

Is that a function of consumer demand?

Is it strong retail sales?

Maybe you can talk to that a little and whether or not you expect that to continue into the fall.

I do think it will continue into the fall, Christine.

If you look at the volumes in Q3, which typically is some of your highest volume weeks, we only had a slaughter level that reached 700,000 one week this whole summer.

I would tell you -- and we've got weights on a year-over-year basis are down a little bit.

I just think that the supply-and-the-demand balance there has been pretty good.

We know that the herd is going to get a little bit smaller, but I don't think it's going to get small enough that we can't stay above an 82%, 83% cap utilization through most of Q4.

Korea's starting here in July has really, really been great.

Our initial shipment orders are really outstanding.

I think given the export demand as well as the balance that's taken place between supply and demand, I look for Q4 to be very good in beef.

I'm having a hard time reconciling, though, why beef continues to be so strong, despite relatively high prices and chicken, at which -- presumably is at low prices for this part of the year, why we can't move more chicken.

Is there a demand issue with chicken at this point?

Do you believe that that has played a role in this lack of improvement that we've seen here this summer?

Or is it a complete supply issue?

I don't think it's a demand issue.

As I said earlier, we are still seeing very good demand from all sectors, as well as our customers really wanting to reengineer products and working on that.

I think it quite frankly, relates a lot more to supply as a pinpoint issue than anything else.

All right.

I'll leave it there.

Thanks.

Thanks, Christine.

Our next question comes from Ken Zaslow of BMO Capital Markets.

Hi, good morning, everyone.

Good morning, Ken.

Had a couple quick questions.

One is on the beef side staying strong, is it partially because of the export demand?

How is that playing out in terms of keeping the beef pricing and beef cutout prices higher than maybe if it was just a domestic issue?

Yes.

I think it is in the process of helping a lot.

Now, we have had good exports, in addition to South Korea starting.

Not so much from Japan, but from other parts of Asia, from Russia, from Mexico.

There has been a good demand from various parts around the world on beef.

I think, like I said, that's going to help increasingly more as we work our way through fourth quarter here.

South Korea looks to be over the major issues and hurdles that it faced.

Again, I think that things look very good on the beef side for fourth quarter.

If I think about the beef side for the fourth quarter and going to what you're saying is the beef margins look like they are actually getting stronger than the quarter we're in.

If we were to look at it going forward, do we just simply add the $50 million to whatever we think the beef margins are and that's the recovery from the hedges?

Is that how I think about it?

I don't know as I would tell you that margins are going to be incrementally stronger than third quarter.

But I do believe, like you say, you can add that $45 million to $50 million back to Q4's performance that we took in Q3.

Just my final question, on the chicken side, you've gone through a pretty strong restructuring and a cost savings program.

When do you expect your margins to be able to be ahead of the industry margins, given your cost savings programs?

Is this something that's going to start working, -- say the cycle does bottom out in the fourth quarter, but should you get a bigger rebound into '09 than, say, if it was just a chicken cycle?

How does that work out?

I think you have a couple of factors there.

I think the $130 million of CapEx that we're spending this year, it is going to take -- on an annualized basis, we will get that $250 million.

But it isn't all going to come right away in first quarter.

I think it -- throughout '09, you will see our chicken business incrementally get better as we go through the year.

I'm not sure that I could pinpoint for you a point in time that says, here's where that occurs.

But it is going to occur throughout '09 and will get increasingly better as we go through the year.

All right.

I'll get back in queue.

Thank you.

Thank you.

Our next question comes from Eric Katzman of Deutsche Bank.

Hi, good morning, everybody.

Good morning, Eric.

Good morning.

I guess just a quick question on the various sort of JVs.

And, Dick, you alluded to something in China coming soon.

How much CapEx is this, or I shouldn't say CapEx, but investment in total coming to end?

How do you placate the rating agencies on the idea that you are stepping up these investments at a time where the base business is basically break-even?

Eric, I would answer that by saying, first of all, the amount of investment on an individual JV or acquisition basis are not huge investments.

The numbers of them are significant and over time they do add up.

If you think about the money that we're going to return from Lakeside, it has a significant offset to what we're going to anticipate spending in Q4 and the very early part of Q1 of '09.

Got you.

Okay.

That's helpful.

And then second, I guess regarding the -- just you made some political comments or comments regarding what's going on in Washington.

It seems like the industry is getting it from both ends to the extent that the Homeland Security is enforcing labor issues and that's a problem for the industry.

And then obviously, you have some of the feed costs related to ethanol.

And yet you are very cautious as to what can happen politically as an adjustment to the RFS.

At what point do you think Washington gets that, if things keep going this way, one, the protein industry in the US is on sale, which is why the Brazilians are coming in.

And maybe we don't produce as much domestic protein in the future and it's provided internationally?

I think all those things are great points that we continually make, Eric.

I just -- I'm not saying we can't get anything done this fall.

I think you see continued activity.

There is more talk around mandates and tariffs now than there ever has been.

It's just a matter of generating enough by partisan support to get anything done prior to an election.

I really do believe that in time that these mandates will be altered.

I firmly believe that will take place.

The when is the big factor.

I think you have that and then I think you also have the index and the hedge fund situation.

Like in energy, you have the same situation in commodities where there is a huge amount of increased activity in investing if you will, or speculating if you will, in the commodities markets.

And I think both ethanol and the index/hedge funds have increased the grain prices significantly.

The $1.40, $1.35 reduction we've seen in corn over the month of July, I think is large -- some of it's due to the fundamentals of better weather and increasing yield in the corn crop.

But I think a chunk of that is we saw some exiting from those commodities on the hedge fund and index side.

All those things have factors that we need to bear in mind here.

But I am very hopeful that we will see congress act -- hopefully the EPA will act on Governor Perry's request on the petition.

They were supposed to do that as of last week, but have moved that into August.

I'm still hopeful that we will see some changes here.

Okay.

Thank you for that.

Then my last question, somewhat more obscure.

Your fleet of trucks -- you've done a lot of back hauling and I think that's generated, depending upon the year, $70 million, $80 million of EBIT as you fill those trucks I guess with third party shipments and stuff.

But with higher fuel, is that line item a lower number now?

Actually, Eric, it's pretty much held its as own.

As you probably do know, fuel surcharges is something that has been part of the transportation industry for sometime.

In our other segment, which is where that historically has shown up, those numbers haven't really changed significantly.

Now, that's not the only thing that's in other, but that's been fairly consistent and actually has grown a little bit.

But, again, that's not all due to trucks.

Okay.

All right.

I'll pass it on.

Thank you.

Thanks, Eric.

Our next question comes from Vincent Andrews of Morgan Stanley.

Good morning, everybody.

Good morning.

I guess just a couple of questions.

The first would be what is it going to take to really get a material reduction in egg sets?

Dick, as you pointed out, egg sets were down 4%, but that was three Wednesdays ago.

As corn prices came down, egg sets deceleration decelerated itself and it was 3% last week and 2% this week.

Has something changed to the cost structure of the smaller manufacturer relative to you in terms of -- as grain costs are a larger percent of total costs, is it -- you have less fixed cost operating leverage?

Is the playing field an even slightly?

Is that way egg sets aren't coming down so much?

I'm not sure that I know the answer as to why egg sets -- I mean egg sets, you look at them on a week-to-week basis.

Sometimes, can not really tell the whole story.

I still think that while they jump around from 4% to 3% to 2% and back to 4%, and I still think that you are in the process of seeing a reduction in supply.

As to who has an advantage or doesn't have an advantage, everybody has to let the grain costs flow through inventories.

I think everybody has to -- all the chicken industry has to deal with that fundamentally and matter-of-factually as we go.

I'm not sure that I can give you any more definitive color, rational or reasoning around why necessarily egg sets do what they do.

And Vincent, I think the other thing that we're looking at is that the pound production being slaughtered through these plants has come down from a year-over-year 7%, down to closer to the 100% level.

We're expecting that to continue to come down.

We have had an extraordinary growing season from a weather standpoint, so the weights have been up quite a bit.

We feel like there is of a killing forward going on that we would see the numbers come down further.

Okay.

Then another question I would ask would be, Dick, you said if grain prices stabilize, you're talking about Q4 maybe being the bottom in chicken.

What happens if corn goes back to's $7?

How much further does that push out the bottom, would you estimate?

Basically we already have all the grain -- if you think about what we're going to sell in Q4, the grain is already primarily in the chicken.

It's a matter of if it goes back to $7, it will be impacting the mid-late Q1 and into Q2.

It really then depends upon what happens to supply -- how much are we going to be able to pass through.

How much are we going to be able to align inputs with pricing?

How important does assured supply really come into play at the time when we do have to make these contracts?

I believe that's going to be a big factor going forward.

The consumer really hasn't felt the $6 and $7 grain markets yet, either on beef, pork or chicken.

We are going to see the effects of that coming through at some point in time.

I believe that we're going to see better yields on corn than what USDA is currently predicting.

I'm hopeful that we won't see a huge jump back up in corn here in the short-term.

Okay, and then my last question's a follow-up on all the mandate discussion.

What do you think happens if there's some alteration to the mandate?

It seems to me that with wholesale gasoline anywhere between 50$ to 80% -- $0.50 to $0.80, excuse me, premium to ethanol .

And I'm just going to forget about the tax credit and so forth.

It seems to me that ethanol's being used and is probably going to be blended above the existing mandate simply because there's a huge economic arbitrage to the blender.

What do you think happens or changes if there's some alteration to the

I think that largely depends upon what the cost of grains are.

If you think back to the month of June when grains were where they were, the ethanol producer really wasn't making any money.

It largely is dependent to some degree on the price of grains and the relative price of gasoline.

If you drop back the mandates, it's hard to say what will happen.

You could very well be right.

If the economic signals are there for ethanol to continue at where the mandates are now, we could very well continue to use just as much corn.

I somehow don't think that will be the case, but you could be right.

If the economic drivers say that there's enough profitability there, especially with the tax credit in there which really accounts for over a dollar a bushel right there, you could very well see the number of gallons going into ethanol continue.

Okay.

I'll leave it there.

Thank you very much for your thoughts.

Thank you.

Our next question comes from Robert Moskow of Credit Suisse.

Hi, thank you.

Just looking at your numbers on beef.

Even if I give you credit for that $75 million mark-to-market loss, it looks like your margins were below industry averages and also below National Beef that reported some numbers in their 10-Q.

Can you give me a reason for that?

There's only one reason that I can give you and that is during this quarter, our case-ready business which is part of the beef segment, we went through a substantial change in our packaging.

We really didn't have any contribution at all from case-ready in Q3 which overall did impact negatively what we would have normally had for our Q3 margins on beef.

Other than that, running at 87.3% cap utilization, we are running a very, very good beef business.

Well, Dick, doesn't that mean that Q4 -- fiscal Q4 should be setting up to be just a blockbuster number by that -- by those figures.

Just because July industry margins are so good and then you have another $50 million coming in the mark-to-market hedge.

And then -- is case-ready going to be a positive impact in Q4?

What should we be thinking about for Q4?

Q4 case-ready will not get back to its normal margin structure, but we do believe it will be positive.

Rob, I don't -- Q4 is setting up to be a blockbuster quarter.

I mean it truly is.

Okay.

I can't always -- I always hate to do that, the first of August, because we've got nine weeks left in the quarter.

Often times, things can change that you don't anticipate.

Okay.

Finally on chicken, you said that if grain stabilizes, you think that Q4 would be a weaker margin than Q3.

Did I hear that right in your prepared comments?

And why is it -- does that mean if grain gets more expensive, it would get even worse?

I think what I was trying to convey there, that Q4 was more or less could be the low point of the cycle on chicken as much as anything, assuming grains were to stabilize in this range where they are today.

I really wasn't trying to isolate that to anything more than that.

And remember, he was emphasizing that grain would be incremental $200 million over a year ago.

Right.

Okay.

Right.

Are you hearing any reports of more ethanol plants firing up facilities in the Midwest?

I'm reading these letters that indicate that, that they bought cheap corn months and months ago.

If so, doesn't that maybe make you a little bit worried that some smaller chicken players might be increasing production as well?

I really haven't -- I don't know the answer to the first part of your question there that says that there are either more ethanol plants and/or a higher level of efficiency or utilization.

I don't know the answer to that question.

I would say though given $200 million more in grain in Q4, I --

Not worried about the chicken?

Right.

Okay.

Thank you.

Thank you.

Our final question comes from Tim Ramey of D.A.

Davidson and Company.

Sneaking in under the wire here.

Good morning, Tim.

Good morning.

Dick, with the substantial move in grain in the month of July, should we be -- and your pessimistic remarks about chicken, should we be assuming that you are expecting a mark-to-market hedging loss in that outlook?

How do we think about that?

In chicken?

Yes.

Well, in corn related to chicken.

No.

You should not be necessarily anticipating a mark-to-market loss in chicken.

Okay.

Why no?

If you're long, prices came down, what am I missing here?

I don't know exactly what you're missing or not missing, but we don't really talk about our actual hedge positions.

But from a hedge position standpoint, not everything is going to about mark-to-market.

We don't anticipate a significant mark-to-market quarter-end adjustment in chicken in Q4.

Okay.

With regard to just what equilibrium demand would be right now in chicken, you mentioned that -- or maybe Dennis did, that pound slaughtered is roughly flat year-over-year.

Where would you put equilibrium for the market given what's happened in exports and the domestic?

In other words, below that, prices should rise above it, pressures should fall?

Tim, I think there's been a lot of external prognostication and guessing as to what that may or may not do.

I've seen a number of different reports that would indicate that if you were slightly over the 5% to 6% range, that that would have a -- in total, that would have a significant impact on prices.

Okay.

Terrific.

Thanks.

Thanks, Tim.

This concludes the question-and-answer session of today's conference.

I would now like to turn the call back to Mr.

Dick Bond.

Well, thank you for joining us today.

Third quarter was -- had some really good things to it.

It had some things that continued volatility and continued input costs that we had to deal with.

I would just tell you that we believe in our strategies.

We believe in what we are doing.

We believe in our team members.

We believe in the long-term increase in shareholder value for Tyson Foods.

Again, thanks for joining us and have a great day.

This concludes today's presentation.

Thank you for your participation.

You may now disconnect.