Tyson Foods F4Q07 (Qtr End 9/29/07) Earnings Call Transcript

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 |  About: Tyson Foods Inc. (TSN)
by: SA Transcripts

Operator

(Operator Instructions)  Now I'll turn the meeting over to Ms. Ruth AnnWisener.

Ruth Ann Wisener

Good morning and thank you for joining us today for TysonFoods fourth quarter conference call.  Withme today are Dick Bond, our President and CEO, and Wade Miquelon, our ChiefFinancial Officer.

Before we move on to discuss the operating performance forthe quarter and the year, I want to remind everyone that some of the things wetalk about today may include forward-looking statements.

That means those statements are going to be based on ourview of the world as we know it today and that means things can change so Iwould encourage you to look at today's press release for a discussion of therisks that the can affect our business.

Before we begin taking your questions, I want everyone to beaware that because of the presentations we'll be giving later this morning,we're going to end this call by 10:00 o’clock.  For those of you who aren't attending inperson the event will be webcast starting at 10:45Eastern Time.

I'm now going to turn things over to Dick Bond.

Dick Bond

Good morning and thank you for joining us today as we reporton our fourth quarter and wrap up our fiscal 2007.  Tyson Foods has made a great turnaround in thepast year.  Not only are we back oncourse, Tyson is a stronger, more streamline company and we've made significantprogress for the long-term.  We achievedrecord sales of $27 billion, along with nearly a $700 million operating incomeimprovement in 2007.

Including the $334 million in additional grain costs weincurred, we actually had a $1 billion dollar swing compared to 2006.  All four segments were profitable for thequarter as we anticipated and profitability improved year-over-year in eachsegment.

We exceeded $265 million in annualized savings from our CMI,or cost management initiative.  Inaddition to the financial accomplishments in 2007, it also marked a beginningof several exciting things.  In February,our new Discovery Centeropened and we are very pleased with the cutting-edge, innovative work aroundnew product development and consumer insights.

We've had approximately 500 customer visits resulting innearly 200 new products and menu concepts, many of those have launched or arein test runs.  We entered the field ofrenewable energy through a strategic alliance with ConocoPhillips andestablished Dynamic Fuels, a 50/50 joint venture with Syntroleum by producingnext generation renewable fuels from beef, pork, and chicken fat.

We are taking the first steps in leveraging Tyson's accessto animal by-products to become an important figure in the renewable energybusiness.  Before I turn the call over toWade, I'd like to say it has been a very rewarding year.

A $1 billion turnaround doesn't happen very often, and wedid it through solid execution.  I thinkthe management team and all the Tyson team members deserve the credit forreturning Tyson Foods to profitability while laying the groundwork for futuregrowth.  Wade?

Wade Miquelon

Thank you, Dick.  InQ4 '07 we achieved earnings of $0.09 per share and all four segments wereprofitable.  This compares to a loss of$0.17 per share in Q4 '06, or a $0.26 per share year-over-year improvement.

We had $122 million dollars of operating income improvementand this reflects our Q4 '07 to Q4 '06 progress in all segments.  Of particular note, Chicken's Q4 '07 to Q4 '06improvement of $71 million dollars includes the absorption of a net negative grainimpact of $118 million this quarter.  Q4'07 results include a $17 million dollar non-cash tax expense to correct ourtax basis for certain fixed assets.

This matter was discovered internally, and dates back to1999 when we converted our tax basis fixed asset data to a new accountingsystem.  This tax adjustment waspartially offset by net tax benefits from other changes as well as tax reserveadjustment changes.  In Q4 '07, cash flowof $373 million is a $116 million dollar improvement over Q4 '06's $257 milliondollar.  So let me summarize '07 results.

Our earnings for the year of $0.75 per share versus the$0.58 per share loss for fiscal year '06 represent $1.33 per share turnaround.  As I said, each segment's profitabilityimproved over fiscal year 2006 and this was driven by cost efficiencies andbetter overall pricing.

We achieved $27 billion dollars in sales, our highest ever,and this is a new milestone.  Ouroperating cash flow improved $306 million from the prior year.  Capital expenditures totaled $285 milliondollars.

Our debt balance of $2.78 billion dollars is almost $0.5billion dollars better than the year-end 2006, and we are at the lowest debtlevel since prior to the 2001 IBP acquisition.  Our debt to EBITDA ratio is now under 2.4.  Next, I feel great about the significantprogress that we are making.

Now let me talk to fiscal year '08 outlook.  Our full-year guidance is a range of $0.30 to$0.70 per share.  This $0.40 range inearnings reflects our view that we will experience significant volatility inthe beef industry and in the grain markets.  Because of the current beef dynamics webelieve that Q1 will be our most challenging quarter in fiscal year '08.

We project the following information for fiscal year '08.  Revenues for the fiscal year to beapproximately $28 billion dollars, net interest expense is expected to bearound $200 million dollars, depreciation and amortization is expected to bearound $520 million dollars.

Capital spending will go up compared to fiscal year '07 andwe expect a range of $425 to $475 million dollars.  Our tax rate for full fiscal year 2008 isexpected to be 35% to 36%.

Weighted average shares will be approximately $356 million,and we continue to believe that our debt and balance sheet will be in goodshape, but due to the uncertainty of timing around potential internationalacquisitions and joint ventures, we are not going to forecast a specific debttarget at this time.

I'm now going to turn the call back over to Dick for adiscussion on the segments.

Dick Bond

Thanks Wade.

Now, I'd like to give you some more detail about our segmentperformance starting first with Chicken.  Our Chicken segment sales for the fourthquarter increased on higher pricing despite lower volume.

Volume was lower due to fewer operations in Alabama, wherewe sold two commodity plants and chose not to rebuild another following a fire. When adjusted for these three plants,volume was actually higher for the quarter compared to a year ago.

Operating income for the year improved $227 million versusfiscal '06 despite a negative $334 million grain impact.  Operating efficiencies and pricing were theprimary drivers for the improvement.

We had two major product launches in our Chicken segment in2007.  Our retail fresh chicken convertedto a raise without antibiotics platform and it has been very successful withour customers and consumers.

We're also excited about the Any'tizer product launch, whichhas been one of Tyson's most successful initiatives.  Retailer acceptance has been outstanding.  In the first few months, we achieved 84% ACV.

This means if you go into a grocery store, there is an 84%chance you'll find Any'tizers and of the 10 varieties available, retailers arepicking up six or seven on average, which is outstanding.

The ‘Thank You, Mom’ commercials supporting Any'tizers wasone of the top 10 most recalled new TV ads.  Our ad ranked seventh out of 407 newcommercials airing that period, so, we are very pleased with the effectivenessof our advertising.

Looking ahead at 2008 for the Chicken segment, based on ourcurrent markets, we anticipate increased grain costs in excess of an additional$300 million versus 2007.  Although wewill be working to mitigate that through risk management and pricing.

We think chicken supplies industry wide will be up 3% to 4%over 2007 levels, and Tyson will be a healthy participant in that growth.  We have great sales momentum in both ourconsumer products and food service channels and will increase our productionvolume as needed to meet our customer's expectations.

Now, I'm going to move on to the Beef segment.  The Beef segment had a $35 million dollar operatingincome improvement over the fourth quarter of 2006 and a $331 million increasefor the year due to improved execution, better yields, lower operating costs,and enhanced pricing.

The Beef margin spread improved as did capacity utilization,which was in the low 80's this year, compared to the mid 70’s last year.  In 2008, I believe the herd will expand byonly 0.5% when it should be 1.5% to 2% higher in this point in the cattlecycle.

As you likely read in the press, the industry is processingtoo many cattle relative to supply and demand, severely compressing margins.  As we have entered the new fiscal year, we areseeing a very difficult and volatile environment for the beef industry.

However, the conditions we see now historically have alimited duration.  In addition, we havegreatly improved our own operational execution, which puts us in a goodposition relative to our competition.  Inthe fourth quarter, our pork segment sales were up due to higher volume,although pricing decreased slightly.

Operating income improved $88 million dollars year-to-datecompared to fiscal '06.  We significantlyimproved our execution in the pork segment as well and we benefited from abetter spread and higher capacity utilization.  In 2008, pork supply should be up 1% to 2% andwe anticipate our pork segment will perform better in 2008 than 2007.

I want to take a minute to acknowledge our Fresh MeatsGroup.  In fiscal '07 their executionalimprovements in beef and pork totaled more than $300 million over fiscal '06.  That's just a tremendous accomplishment and Iwant to recognize them for doing such a great job in strengthening ourcompetitive position.

We believe we are back to being an industry leader in cost,revenue, and yield, based on our results as compared to published industrydata.  Operating income in the Prepared Foodssegment showed a $4 million dollar improvement in the fourth quarter and $36million for the year, primarily due to higher average sales prices.

Prepared Foods had a decrease in sales dollars and volume inpart due to a very unusual situation with one QSR customer.  This situation was temporary and we don'texpect it to be an issue going forward.  Inaddition, our cold deli volume was down as we exited some low profit,non-strategic business.

However, exiting these businesses will improve operatingincome.  With an SKU rationalizationproject largely complete and lower pork raw material costs anticipated goinginto 2008, we expect the Prepared Foods segment profitability and volume toimprove over 2007.

Turning to our international business, Tyson de Mexicoimproved due to better execution and overall market conditions.  In China, we are very close to completing twopotentially integrated joint ventures and we are also nearing completion of anintegrated poultry deal in Brazil.

We expect to close two deals by the end of second quarterwith the third in third quarter.  Inclosing, I'd like to say despite the current market conditions, I am veryoptimistic about our future because Tyson is a much stronger company and is abetter positioned company for the long-term.

We are the leader in accelerating innovation and we have agreat team.  They are the primary reasonTyson Foods is and will remain one of the world's leading food companies.

Now I'd like to turn the call back over to Judy for yourquestions.

Question-and-AnswerSession

Operator

(Operator Instructions) Ken Zaslow with BMO Capital, you may ask your question.

Ken Zaslow - BMOCapital

Hi, good morning, everyone.

Dick Bond

Good morning, Ken.

Ken Zaslow - BMOCapital

I had two questions, you kind of look at your guidance fornext year of $0.30 to $0.70.

Your cost savings roughly, call it, about $0.50 on an annualbasis.  You're moving up the scale interms of higher value-added products.

The $0.30 to $0.70 kind of makes me think that it's still avery cyclical business rather than that there's really a growth outlook andDick, you said, “We have great optimism”.  It seems contrary a little bit in terms of,and I know there's no nice way of asking this question.

But it seems like on one side, you're making progress but onthe earnings side, you're still not moving in the right direction.  Can you just give a little color on that?

Dick Bond

Ken, that's a great question, and I will start and if Wadewants to add, he is more than welcome, too, but I think there's probably threedynamics there.  I mean, from aninnovation perspective, we are the leader.

We are going to increase our new products, sales pounds inPrepared Food, in Chicken, in Beef and in Pork.  I mean, there's no doubt about that.  This is a longer-term view that we have totake here.

We have two situations that we're going to have to deal within 2008.  One, on the Chicken side isanother $300 plus million dollars in grain increases that we're going to haveto work hard to raise prices where we can and to mitigate that risk through ourrisk management activities.

The second thing is that we are in a very current volatileand difficult beef situation.  So basedon our current situation, we could be well over $1 even if Beef were to breakeven for the year, but I don't know at this point that that's going to happen.

I do believe that the beef situation is short-term, butthose are the things that are really driving us to put that $0.30 to $0.70 inthere, we are doing the right things.  Wedo have a much stronger company, and we are still excited about the future.

Ken Zaslow - BMOCapital

And my other question is, in your commentary, you said thebeef losses have limited duration or you made a phrase about limited duration.  What gives you the comfort that there is sucha thing as limited duration given that one of the competitors out there seemsto be relatively aggressive in the capacity increases?  I guess that's kind of the way I look at it.

Dick Bond

Again, historically, when these types of things happen, theyare of a limited duration.  I meanthere's no doubt about that.  And I wouldalso say to you that the aggressive competitor that you referred to hasprobably already backed off from that level of aggressiveness.

Ken Zaslow - BMOCapital

Thank you.

Wade Miquelon

I would add Ken, that if you look at where our business istoday versus a year or two ago, we really do believe that now we are back tobest-in-class yield, best-in-class cost, best-in-class pricing, and so I thinkin these temporary situations, that's where you want to be positioned.

Ken Zaslow - BMOCapital

Great, thank you.

Operator

Tim Ramey with D.A. Davidson.

Tim Ramey - D.A.Davidson

Good morning.

Dick Bond

Good morning, Tim.

Tim Ramey - D.A.Davidson

This will sort of be a follow-up to Ken's question.  It wasn't obvious to me why you should have asequential grain issue as large as the one that you have.

Is that just because you had favorable hedging last yearthat you don't have this year or can you flesh that out just a little bit more?

Dick Bond

Tim, it really is nothing more than based on the forwardcurve of where the grain markets are today relative to what we paid for grainon an actual basis for 2007.

Wade Miquelon

And for perspective, about every one penny move in say,corn, with an indicative in soy is about $3 million dollars to us so that'sfiscal, if you recall.  Grain started tomove in the O&D period, there's a P&L lag of two to three months, as wepointed out, from the flow through but then it moved again in the JFM period.

If you take that the weighted average P&L effect and youlook at where it's going at that point in time in the forward curve you get toabout a $1 differential which is around that $300 million dollar mark.

Tim Ramey - D.A.Davidson

Dick, relative to your comment on Beef, should we assumethen that you are factoring in significant losses in your outlook for the Beefsegment for '08?

Dick Bond

Certainly in that range, yes.

Tim Ramey - D.A.Davidson

Okay.  Many of yourcomments this morning seem like sort of shots across the bow of competitors,the idea that you would be a "healthy participant" in a 3% to 4%increase in volume in the Chicken business sounds to me like almost reminiscentof the death march rhetoric of years gone by.

Am I interpreting that wrong or are you sort of saying no,we're not going to let market share go away here?

Dick Bond

Tim, I'm not saying we are driving for market share at all.  What I'm saying is that based on where we arefrom a sell in, whether that be on national accounts, on foodservice, or wherewe are on the retail side on consumer products, we are seeing an increase insales and we're going to take advantage of that and to increase our sales, wehave to have an increase in production.

So, this is not driven by “market share”, it's driven bywhat our business unit people are doing and our Tyson team are doing to be moreeffective sellers, take advantage of our cost positions, take advantage of ourimproved economics and work on that.

Wade Miquelon

I'd also say, Tim, over the last couple of years we've donea lot.  We've rationalized, as you know,the Beef assets, we've sold off commodity assets on the poultry side and done alot to refocus our business on our core.  And we feel now that we've done that both fromour focus point of view as well as our cost structure point of view that we'rewell positioned to grow the core strategic parts of our business and that'swhat we're going to do.

Tim Ramey - D.A.Davidson

Okay, thanks.

Operator

Diane Geissler with Merrill Lynch.

Diane Geissler -Merrill Lynch

Hi, good morning.

Dick Bond

Good morning, Diane.

Diane Geissler -Merrill Lynch

A question for you on the grain, it looks like in the fourthquarter you had a loss, a hedge loss on your grain.  Am I reading that right?

Wade Miquelon

I think in the fourth quarter we might have had somenegative but, again, remember there's an offset there.

Diane Geissler -Merrill Lynch

Okay.  I guess myquestion then is the $300 million that you put before us this morning forfiscal '08 does that include any hedge losses?

Dick Bond

No, Diane, all that is a straightforward calculation on theforward curve.  It does not include anypositive or negative potentially from mitigation or risk control.  I mean, we would hope to be able to mitigatesome of that.

Diane Geissler -Merrill Lynch

Okay.  I just wantedto clarify that.  And then I guess, justto follow-up on Tim's question, do you, in your commentary really from yourpresentation about if even you could see well in excess of $1 of earnings evenif Beef broke even, but so, does that mean you expect Beef to have a significantloss in fiscal '08?  I guess I'm justtrying to marry those two comments together.

Dick Bond

Let me clarify what I said there now.  I said based on current conditions and basedon current conditions that would be true, but recognize, again, as Wade said,we're not feeling all of this increase in grain yet.

So, because the grain popped here relatively recently, Isaid that based on current run rates, so you have to factor in the fact that weare going to have some increase in grains here later in the year.  So, what I said was true, but you have tofactor that into the balance of the year as well.

Diane Geissler -Merrill Lynch

Okay.  So I'm justtrying to get clarity on whether you think Beef will lose money in fiscal '08or not?

Dick Bond

I will answer that by saying that within the range of $0.30to $0.70, we have Beef potentially losing money in the bottom half of thatrange.

Diane Geissler -Merrill Lynch

Okay.  Well, and justmaybe this is something for later after the management presentation, but justlooking back to when Tyson acquired IBP and kind of the performance of the Beefdivision and I know you've done a lot of work to get your cost structure inline and some of these recent problems in Beef are sort of out of your controlbecause of the behavior of another participant in the industry.

But it just kind of brings back the question to me about thelevel of volatility Beef adds to your P&L and just at what point do youdetermine that the benefits of being kind of one face to the customer on allproteins, at what point is that outweighed by the level of volatility that Beefadds to your earnings stream?

Dick Bond

Diane, again, that's a very, very good question.  Let me go back to the first point and talk alittle bit about just Beef in general.  Becausewe have not been able to get our exports back to 2003 levels, I would tell youthat is the biggest contributor to not allowing us to get back to normalizedranges on Beef.

Diane Geissler -Merrill Lynch

Yes, but I guess the question is it ever going to be back to2003 levels Has there been a systemic change in beef because of the loss of theexport markets that makes beef more unattractive today than it was when Tysonacquired IBP?

Dick Bond

Well, let me finish my…

Diane Geissler -Merrill Lynch

Oh, I'm sorry.

Dick Bond

Just one second here.  So I do believe that at some point in time, wewill get trade re-established but your question is a valid one.  How long should we deal with that uncertainty?

So I would tell you that we are, in fact, doing from astrategic standpoint looking at all the different options around all of oursegments.  So, I don't think I'm going tosay anything anymore than that, but you're right.  It is something that as a management team, weowe that to our shareholders to do that.

Diane Geissler -Merrill Lynch

Okay, all right.  Well,I appreciate the comments.  Thank you.

Operator

Jonathan Feeney with Wachovia.

Jonathan Feeney -Wachovia Securities

Good morning.  Thankyou.

Dick Bond

Good morning.

Jonathan Feeney -Wachovia Securities

I guess I just wanted to, I'm sorry to keep hammering homeon this, Dick, but, I think, I know it's not your fault that the Street got outahead of expectations but the Street got with some aggressive expectations.

But, I guess, coming into the year, did you reallyanticipate if you go back to January, did you anticipate with some of thecomments you've made throughout the year about what mid-cycle earnings could possiblybe, a beef business that, not just from a short-term perspective but from along-term perspective would be in better shape than it’s right now, but, Imean, do you think there's a permanent impairment here?

Dick Bond

I don't really believe that.  Again, it comes back to getting our exportmarkets back, making sure that we're operating as good a business as wepossibly can.  And as you said, we can'tcontrol certain things in this business.

Wade Miquelon

I guess the other thing I would add is if we go back to Q3for example, I think we were about a percent, so about half a percent from thelower end of our range.  We are movingnicely towards there.

I think, some short-term disruptions have changed that a bitbut I would still say we improved $330 million year-on-year in the Beef segmentdespite overall tighter spreads.  And soI think fundamentally for the long-term, we are positioned much better versusthe relative competitive set and versus where we were to take advantage of themove.

Jonathan Feeney -Wachovia Securities

Sure. I guess, I mean, could you, I know you've made anumber of comments about the mid-cycle earnings potential of the company being,I think, of just heard in the $1.50 range.

I mean, Wade, would you still say that was, is possiblegiven what appear to be the realities in the beef business?

Wade Miquelon

I believe so.  I mean,everybody has their own view on beef, obviously, but if beef were tracking tonormalized, all other things to be considered right now based on where wecurrently are, I mean we'd be very close to that range.

Jonathan Feeney -Wachovia Securities

Thanks.  And just onefollow-up on that, could we get to, and I know this might be a tough questionto answer.  But can you envision a world,Dick, from all your experience in the beef business, where exports don't comeback to 2003 levels?

Let's say, if they stay at the 50% of 2003 approximatelylevels that they are today and get back to that normalized beef vision justthrough cost savings and, say, the gradually better utilization that willhappen just from domestic growth?

Dick Bond

I would say that probably not to the average but probably tothe low side of the range, yes.

Jonathan Feeney -Wachovia Securities

Okay.  Well thanksvery much.  Look forward to meetingtoday.

Operator

Farha Aslam with Stephens Inc.

Farha Aslam -Stephens Inc.

Hi.  Good morning.

Dick Bond

Good morning.

Farha Aslam -Stephens Inc.

Could you just share with us, what your capacity utilizationwas for beef, pork, and chicken in 2007, and kind of what your outlook is for'08?

Dick Bond

Farha, I mean, we have talked about beef was in the mid 70’s,it was about 76 and it went up to about 81, a little over 81.  Pork actually went up 2%, just about 2percentage points to 83.5, so from 81 to roughly 83.5.

Chicken's a little bit harder to do and harder to capture,but based, again, on our sales momentum.  We are looking to increase that capacityutilization on chicken by about 3 to 3.5 percentage points.

Farha Aslam -Stephens Inc.

So does that mean your volume in Chicken, do you anticipategoing up about 3 to 3.5% in 2008 or would we look for more like the 5% to fullyrestore the cuts you had put in place?

Dick Bond

Again, depending upon our sales momentum and demanding uponwhat we're getting done in terms of the sales side will dictate what we'regoing to do there.

Farha Aslam -Stephens Inc.

And when you think about Chicken pricing and kind ofoffsetting this $300 million dollar increase in grain with pricing, how muchpricing do you think the industry will be able to sustain on the food serviceside and then on the retail side?

Wade Miquelon

I think over time, we're fairly confident that it be able tosustain almost all of it.  The issuereally is one of timing.  Whether ittakes three months or six month or nine months and how the annual contractsmove and also some of the international picture and then how supply ultimatelyshakes out.

But again, I think over time history would suggest that weshould be able to recover all of that, it really is a mater of timing, though.

Farha Aslam -Stephens Inc.

So you anticipate somewhat of a lag and that's part of thereason for your guidance for next year?

Dick Bond

I sure do.

Farha Aslam -Stephens Inc.

And my last question on Beef.  Have you factored in sort of that increasingamount of cattle being available in six months or so or would that be just anadditional positive potentially?

Dick Bond

If the herd in terms of available for slaughter is betterthan that half a percent of where we think at this point, then certainly thatwould be a positive because more cattle generally yields higher potentialmargins anyway.

Farha Aslam -Stephens Inc.

Okay.  Great, thankyou very much.

Dick Bond

Thank you.

Operator

Christine McCracken with ClevelandResearch.

Christine McCracken -Cleveland Research

Good morning.

Wade Miquelon

Good morning.

Christine McCracken -Cleveland Research

Just on Beef, I wanted to touch on a few of your comments.  You said that based on history you should seekind of a return to normal conditions over a relatively short amount of time,but wouldn't you argue that the conditions today are a bit different than whatwe've seen in the past?

And we've talked about expansion in the herd now for a whileand I'm wondering if it isn't the shift in weights that's made up for some ofthat expansion that we should have seen and in fact we may never get a hugeherd expansion like we've seen in the past, that maybe this is a change in theindustry that's going to force some capacity out of the industry and why hasn'tsomeone already done this?

Dick Bond

Christine, I'm not sure that I can answer that question.  I mean, in terms of why someone hasn't donethis or that but I would still tell you that normally, when we get into thecurrent type situations that we have, they are going to be relatively shortlived, some dynamic will change either a reduction in processing, somethingwill happen that will change the current dynamics.

But I don't think anything is fundamentally different aboutthis one but I do believe, like I did say earlier, it will be very difficult toget to be anywhere near normalized without exports, without maybe a betterbalance between supply and demand, but those are the things that we're going tohave to deal with.

Christine McCracken -Cleveland Research

And when you talk about the balance between supply anddemand, though, wouldn't you argue that right now we have excess capacity inthe industry?

Wade Miquelon

There's no doubt.  Wehave excess capacity in the industry and we believe that, again, as what I havesaid earlier, we positioned ourselves I think extremely well at the currenttime.

Christine McCracken -Cleveland Research

And it's not your intention then to take kind of aleadership role as the largest beef processor and shut down some capacity atthis point?

Wade Miquelon

I think we have taken a leadership role.  Over the last couple of years we've shut downover two facilities, so….

Christine McCracken -Cleveland Research

All right, well then just on Canada, you guys obviously havea facility up there and it seems like the same type of fundamentals arenegatively impacting that facility.

Then you're also dealing with kind of the labor constraints. Has that situation improved at all or isthat kind of all in the same kind of boat as what we're seeing here in the U.S.?

Dick Bond

Well, the labor situation has definitely improved.  Still not where we want to be but it is a lotbetter than what it was, so that's been a positive.  The biggest issue in Canadaright now is the ratio of the Canadian dollar to the U.S. dollar and how thathas changed is probably the single most thing that is impacting the Canadianresults.

Christine McCracken -Cleveland Research

Okay.

Wade Miquelon

But I would say for '07 versus '06, we saw the same kind ofprogress in Canadaas we did in domestic foods.

Christine McCracken -Cleveland Research

All right, I'll talk to you more at the meeting.  Thanks.

Operator

Pablo Zuanic with JPMorgan.

Pablo Zuanic -JPMorgan

Good morning, everyone.

Dick Bond

Good morning Pablo.

Pablo Zuanic -JPMorgan

Just a question on the Beef side again, but if I think ofthe cycle, forget about Swift and what they are doing and even let's leaveaside whether export markets open or not and we just concentrate on the supplyside.

I mean, you are guiding for growth in the cattle supplies,other people that we talk to in the industry are talking about flat numbers oractually cattle declining.  The argumentthey make is drought, economics, also even generational change in some cases,so is there a risk here that the cycle could actually turn and that cattlesupplies could actually start to decrease?  What would you say about that?

Dick Bond

Well, Pablo, I would say I don't believe that.  I don't think that is true.  We should still be in an expansion mode forthe number of cattle that we should have available for slaughter through late2009 and into 2010.  And while I don'tthink it would be at a normal rate we are going, to see in my opinion, we'llsee the FIS level increase roughly half a percent in 2008.

Pablo Zuanic -JPMorgan

Okay.  And just tryingto understand the volatility of the Chicken business, I mean, obviously, youlost money during 2006.  When we'relooking at your guidance of $0.30 to $0.70 for '08, could you give us a rangeof what that assumes for Chicken, roughly?  In terms of EBIT for Chicken, what's the rangethat you're assuming there, roughly?

Dick Bond

No.  I mean, historicallywe haven’t, and I don't believe I'm going to get to that level of detail foryou today.

Wade Miquelon

And I would just say embedded in that range of guidance isthe volatility that there's an unknown of how much of that $300 million grain wecan absorb.  I mean if you do the math,$300 million dollars is $0.60 so there's a lot of volatility in there and itreally is an issue of how much of that we can recoup through pricing, cost reduction,or what not.

Pablo Zuanic -JPMorgan

Okay.  Now, I can dothe math but if you had been in the spot market for grains in fiscal year '07,how much of your increase would have been?  Your increase report is $256 and my math if ithad been in the spot market it would have been about $400 million.  I mean, can you give us some color therebecause it seems to me you already to other companies really were able to pushback the impact from grain cost through hedging, but just roughly from a spotmarket perspective where would you have been in grains in '07?

Wade Miquelon

If we hadn't done any hedging, well, that number thereeffectively is pre-hedge, that $334 million.  And we did have some hedging, of course, youcan see that in the footnotes there, but I would say that 70% of it was nothedged and was fully passed through in pricing.

Dick Bond

The number was the $256.  So it's $256 relative to $334.

Pablo Zuanic -JPMorgan

Right, okay, and just one last one, when I look at yourvalue-added business, that 70% of the business, can you just comment in termsof how those negotiations are going so far and in your case, do they reallytake place at the end of the year like they do for other companies?  Just some comments there.

Dick Bond

Well, in general, we are in the selling season for thosetypes of annual contracts that generally is an October, November, December kindof time frame that those contracts take place and we're in the midst of themright now.

Pablo Zuanic -JPMorgan

Okay, but Dick, just a last question.  Given that we have all of this grainvolatility, is there an effort to try to move more into cost plus contracts orjust a raise in the market for that?  Imean, customers are not ready to do that.

Dick Bond

We are trying to mitigate and work towards as many marketrelated contracts as we can or to have escalators in there for grain, so we areworking to do as much of that as we possibly can so that we don't necessarilyhave to bear all that risk.

Pablo Zuanic -JPMorgan

Okay.  And if I mayjust one very last one.  Regarding theRussian ban on 17 plants here in the U.S., what's your outlook there?  Do you think that's temporary for half ofthem?  When does this get resolved?  Is it as big an issue if there's stillanother, whatever, 70 plants that can export to Russia?

Dick Bond

Pablo, I don't know how long it's going to last, there willbe at the some point a government to government solution here, no doubt.  We were only affected, really, in three plantsand we still have 13 or 14 plants that we can still export to Russiaand we've developed a very good strategy around spreading that base of businessand we don't feel threatened by where that is today.

Pablo Zuanic -JPMorgan

All right, thank you.

Operator

Eric Katzman with Deutsche Bank.

Eric Katzman -Deutsche Bank

Thank you, good morning.

Dick Bond

Good morning, Eric.

Eric Katzman -Deutsche Bank

I guess first question has to do with the change in CAPEX infiscal 2008.  It's a pretty big jump.  What is the reasoning behind that?

Dick Bond

Well, $285 in'07, if you'll look back at our history was almost half of what the number ofyears were in previous years, so we really, really cut back hard in 2007.  It takes about $220 to $230 million just inmaintenance CAPEX to take care of the facilities, so we have said that we aregoing to do more profit improvement and cost reduction type of capital spendingin fiscal '08.

So, our range is that $425 to $475 and quite frankly, ifresults and we're on the lower side of that range, then we'll probably have tocut back and will cut back a little bit on that CAPEX, but I believe that thethings that we are doing, again, will enhance our business for the long-term.

Wade Miquelon

I think we've kind of always said that we believe thesustainable right number for us is in the 80% to 90% of D&A type range.

Eric Katzman -Deutsche Bank

Okay.  So, the bulk ofthe difference is really cost related projects and productivity?

Wade Miquelon

We call them profit improvements.  So, you have the base, obviously, maintenanceand required, which I think Dick alluded to was $200 to $250, beyond that arereally the MPV strategic type projects, what we call profit improvementprojects.

Eric Katzman - DeutscheBank

Okay.  And then secondquestion.  Dick, you mentioned severalpotential deals here.  Is that factoredin any way into the earnings outlook or interest expense or anything else youmentioned in terms of forward forecast?

Dick Bond

Well, like I say, we're not 100% sure when all these aregoing to close.  As I said, we do expecttwo of them to close before the end of second quarter.  We do believe all of them will be accretive;however, the results for '08 are probably not going to be very impactiveoverall for fiscal '08.

Eric Katzman -Deutsche Bank

Okay.  And then lastquestion on Chicken, I think kind of following up on Pablo's question.  The 3% to 4% industry growth number or let meclarify.  The 3% to 4% number that you talkedin about Chicken in your prepared remarks, is that what you expect the industryto be up or you to be up based on what you're doing in the marketplace?

Dick Bond

That's in industry.  Iwas doing an expectation on the industry including us with the 3% to 4%.

Eric Katzman -Deutsche Bank

Okay.  And is that,that's a volume number or a sales number?

Dick Bond

That is a pounds increase.

Eric Katzman -Deutsche Bank

Okay.  And, I guess,are you surprised given the, let's say, upward bias on feed cost that theindustry seems to be ramping up as quickly as it is?  I mean, I know we've had a bit of a breatherhere on feed cost and the pricing has been pretty good, but are you kind ofsurprised that the industry is kind of.

I guess, expanding as quickly or do you think that the 3% to4% is enough to, let's say, take share from other proteins and that pricing isnot necessarily at risk?

Dick Bond

Again, I would say that, as Wade said, it will take time torecover the grain increases that we're anticipating, so I think there is alittle bit of risk if you say we can get all of that immediately, we know wecan but over time, on the relativity of Chicken from a value perspective, atleast compared to Beef, certainly, which is very high priced on a comparisonbasis, there could be some movement between proteins there in terms of thedemand side.

Eric Katzman -Deutsche Bank

I'll let it go in a second but I guess I'm just a little bitsurprised that between you and Pilgrims you now have 50 plus percent share ofthe market, maybe not consolidated enough, but, I guess, given the bias on thefeed cost.

I'm just a little bit surprised that the supply is going togo up so much if these, if we're in the contract period and marginal guys wantto make some money, but anyway, I'll leave it there and we'll talk in a bit.

Dick Bond

Thank you.

Operator

Your last question comes from Edgar Roesch, with Banc ofAmerica Securities.

Edgar Roesch - Bancof America Securities

Hi.  Good morning.

Dick Bond

Good morning.

Edgar Roesch - Bancof America Securities

Just want to check in with you one last question remains onthe incremental benefit in fiscal '08 from renewable fuels, if you could let usknow what that benefit is versus '07?  Thanks.

Wade Miquelon

Well the benefit in '08 won't be significant, but I think aswe talked in latter years, it starts to compound and gets just for the Conocodeal on that side I think we said $0.04 to $0.16 accretive over time in thatrange and we feel that's very much on track and then I don't believe we put outa number Syntroleum.

Dick Bond

But if you remember that, those things ramp up, Syntroleumand the Dynamic Fuels joint venture really doesn't start until, really, Januaryof 2010, and the Conoco ramp up begins here in December but it ramps up over an18-month period, so for fiscal '08, there isn't, again, a huge impact fromrenewable energy in fiscal '08.

Edgar Roesch - Bancof America Securities

Okay.  Thanks verymuch.

Dick Bond

Well, if there are no other questions, we thank you forbeing with us this morning.  Lookingforward to the management presentations here shortly and have a great day.

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