TSN’s chicken segment reported operating losses of $91 million and $118 million for 4Q and FY08, respectively. These results were hurt primarily by higher grain costs, which increased $231 million in the fourth quarter and $593 million for the full year. Chicken prices moved in the right direction in Q4, up 5.5% YOY, but not enough to offset the magnitude of cost increases. And, the outlook for the first half of 2009 does not look much better.
Management has limited visibility on input costs going forward and supply issues remain a concern, but given current leg quarter and breast prices 6 weeks into the quarter, TSN expects to lose significant dollars in Q1 and could potentially lose money again in Q2. Egg sets have come down 10%, which is an indicator of future supply levels, but given the current pressures on demand, TSN does not think this reduction will be enough to return to profitability. Management stated that a lot depends on demand. Given the strength of the U.S. dollar, there will be increased pressure on export demand and there continues to be weakened demand from casual dining companies within the food service segment. Not surprising relative to the recent October same-store sales numbers we have been seeing from casual dining operators, TSN said casual dining demand has gotten significantly more discouraging in the October/November timeframe relative even to what it was seeing in August and September. All of these issues are industry issues so the challenges TSN is facing will also impact its chicken competitors.
TSN said it may take a quarter or two before the supply/price relationship comes into balance, but relative to its current environment, “ultimately this will not go on. It cannot go on forever. So there will be a time when these prices will materially rise, and that time frame is not years away. It's months away. Whether it's this quarter or next quarter or whether it has to wait till April or May, it is going to happen.” However, due to the volume of questions/concerns around the chicken segment, investors did not seem comforted by this statement. Management alluded to these concerns at the close of its earnings call when it said, “Let me just conclude by saying it's evident that on the chicken side, you all think we should be cutting production. I will tell you we will continue to monitor that, but I still believe that the improvements that we've put in place and what we are doing to match demand with supply is the right thing for Tyson Foods.”