Pilgrims Pride Corp (PPC) 2003 Q3 法說會逐字稿

Good morning and welcome to the Pilgrim's Pride Conference call to review its Fiscal Third Quarter 2003 Results. At the request of Pilgrim's Pride, the conference is being recorded. At the end of the call, you will be instructed by the operator of the process necessary to let her know that you would like to ask questions.

On this conference call will be Mr. O.B. Goolsby, COO and President and Mr. Rick Cogdill Executive Vice President and Chief Financial Officer. Beginning the conference is Mr. Rick Cogdill. Mr. Cogdill, you may begin.

Okay. Good morning. Thank you all for joining us today to review Pilgrim's Pride Third Quarter Financial Results. Last night we released our earnings in our press release, along with related financial information. Also, this morning we filed our Form 10-Q for the third fiscal quarter, so that will be available today as well.

On this morning's call we will discuss in more detail our third quarter results and some factors contributing to our performance. We'll also update you on some progress we've made at Pilgrim's Pride and the industry trends that we see impacting the company in the near term.

Before I review the financial results, O.B. Goolsby, our President and COO will give a brief overview of the quarter and following that -- our prepared remarks, we'll be happy to entertain any questions that any of you might have that O.B. and I had not previously address. When we reach that point in the call, we'll instruct the operator to begin queuing up the listeners so that we may address the questions.

Before we get going, I need to remind everybody that this conference call will contain certain forward-looking statements including our expectations with future results, sales and cost of sales information, market dynamics etc. Actual results might differ materially from those projected in these forward-looking statements. Additional information considered factors -- considering factors that could cause actual results to materially differ from those in these forward-looking statements is contained in yesterday's press release as well as in our forward-looking statement disclosures filed on our Forms 10-K, Q and 8-K, as filed with the Securities and Exchange Commission.

With that being said, I'll turn it over O.B. to get started.

Thank you Rick. Good morning everyone. Let me begin by saying that I'm very pleased with the financial and operating results for the quarter. Our stronger than expected performance in the third quarter reflects an improvement in pricing and better operating efficiencies over what we had previously forecasted. Over the last few months, chicken prices have increased margin levels and we expect that lower domestic supplies of meat proteins in the marketplace will continue to favorably impact our bottom line.

As you are aware, on June 9th we announced that we would acquire Con Agra (ph) chicken division. As a result of this combination, Pilgrim's Pride will become the nation's second largest chicken company with Pro Forma annual net sales of approximately $5b.

On a Pro Forma basis, the value added component of our US Chicken business will be approximately 50%. Con Agra’s (ph) well known brands will significantly expand and enhance our already sizable prepared foods chicken business. The complementary (Indiscernible) of our prospective prepared foods businesses and the fact that there is very little overlap between our market focus, distributor relationships and geographic locations are just a few of the many benefits we expect to realize from this transaction.

Combined with our direct distribution channels to retail, restaurants and foodservice customers throughout the US, Con Agra’s (ph) established relationship with broad lines to distributors will allow us to expand our customer base and provide all of our customers with access to a broader range of standard and specialty chicken products from a single source.

After this acquisition, we will have nationwide distributors' capabilities of all of our product lines. This combination will better position us to capitalize on the growing demand for our prepared and fresh case-ready chicken and will give us the capacity to enhance the technological leadership and cost efficiency for which we are known. As the supermarket and foodservice industries continue to consolidate, we will have the ability to better meet the need of the country's largest regional and national customers.

Now, on to a few comments about the quarter.

Net sales for the third fiscal quarter of 2003 were $651.9m an increase of $14.8m compared with the same period last year. Net income for the third quarter was $17.4m or 42 cents per share, an increase of $14.1m or 34 cents per share compared to the third fiscal quarter of 2002.

Sales in the quarter were helped by an increase in the commodity prices. Commodity prices for chicken parts were up substantially from the June quarter last year. Leg quarters were up 18.6% for the quarter; the year to -- to date remain under prior year averages by approximately 16.5%. Our wings were up 31.3% for the quarter, but year to date, wings were off by 14.2% compared to prior averages. Boneless skinless breast meat was up 14.6% for the quarter and up 11.1% year to date. On a total fresh mix basis, the average sales price of fresh chicken was up by 3 cents a pound from the same quarter last year. Although overall Pilgrim's Pride had a very successful third quarter, some of the positives contributing to our results were offset by lower sales in our turkey business and an increase in energy costs.

Going forward, we expect sales in our prepared foods turkey business to continue to recover, capturing previously held market positions by mid 2004. Our total energy costs in the third quarter of 2003 were up approximately 13.2% or $2.4m compared to the same quarter of 2002, and for the nine months year to date, were up approximately 7.9% or $4.25m in the previous year. Electricity and natural gas accounted for the majority of the increase. In addition to delivering strong financial performance, Pilgrim's Pride accomplished a number of the objectives, which advanced and solidified our position in the industry as a leading supplier of value-added chicken products.

During the quarter we successfully completed our conversion of the Lufkin (ph) facility to fixed weight packaging and currently, approximately 50% of the tray packs being shipped from this facility is packaged on a fixed rate basis. Currently Lufkin (ph) is one of the only five plants in the US, capable of producing fixed weight tray packs, and recently beginning mid July Con Agra (ph) converted one of its facilities to a fixed weight packaging as well. Accordingly, after we complete the Con Agra (ph) chicken division acquisition, we will own two of the US's five, fixed weight packaging facilities.

Our core prepared foods chicken business continues to meet expectations; we see this business continuing to grow in the 10 to 15% per year range for the next few years. We believe that there will continue to be strong demand for prepared chicken products as consumers continue to prefer the health and convenience of chicken over red meat and as the prices for both beef and pork continue to rise. Our Mexico operations have continued their solid performance in the third fiscal quarter. Sales and volume growth were both approximately 10% year-over-year and resulting operating profit increased over 51% to $8.8m.

Our turkey business however, continues to be a subtraction from our chicken successes. We continue to suffer from the effects of last October's recall. Further, the excess of turkey in the marketplace since the beginning of 2003, has prolonged our projected recovery of the business lost during this recall. Recently we have taken steps to reduce our production of turkey by approximately 15% to help mitigate these losses, and to understand - and we understand that several of our competitors have done the same. Let there be no misunderstanding, however. We remain committed to the turkey business. We believe that we have a strong brand franchise that can be promoted and are optimistic that conditions will continue to improve in 2004.

As for overall poultry industry profitability, we believe the US chicken industry is positioned well to take advantage of several factors that should continue to increase market prices and overall industry profitability. The US chicken industry exports are rebounding from last year's declines. Currently, US producers are projected to export more products internationally due to the decrease in the Economic Union's current chicken production caused by poultry disease issues in Holland and Belgium, and exports to Russia are headed in the right direction after a year of uncertainty.

As an industry we have been making good progress with our export business into Russia and have been -- begun booking orders. Several US processing plants have been approved for export and products are moving again. The "quota by country" system, while less than total volume than we were exporting in 2001, does remain in place and favors U.S. suppliers. According to the U.S.D.A the total meat availability for domestic consumption in 2003 will shrink by approximately 1% from 2002 levels. U.S. chicken production remains stable. Hatching eggs have been on the decline since October of 2002. Baby chicks placed on U.S. farms for grow-out are continuing at less than a 100 % of prior year numbers, as they have been since February of 2003 and weekly slaughter numbers have similarly been reduced level since February of 2003. Commodity grain (ph) prices are expected to be lower than last year. The U.S. row crop farmers are off to a good start. The U.S.D.A. is projecting the 2003 to 2004 corn price to be in the range of a $1.90 to $2.30 a bushel, compared to the 2002 to 2003 price of $2.25 to $2.35. Every one cent per bushel change in the average corn price, results in an annualized benefit or cost of approximately $1.1m to Pilgrim's Pride Corporation.

The U.S.DA. is projecting soybean mill pricing to remain relatively stable to down slightly. The demand for chicken in the U.S. remains strong. This demand highly favors the white meat components of the chicken. Production available for consumption in the U.S. is expected to decrease moderately as exports increase to meet worldwide demand. In fact, the National Chicken Council estimates that exports will increase to 16.1% of the total production in 2004 from the 15.2% in 2003. At the same time the National Chicken Council also estimates that the total U.S. production for chicken during this period will increase by only 9/10th of a percent; essentially flat with the U.S. population growth. These supply and demand factors are already reflecting our chicken prices and we expect this trend to continue to create a positive pricing environment.

Before I turn the call over to Rick, to discuss the results in more detail, let me say that Pilgrim's Pride is well positioned, heading into the end of this year and fiscal 2004. As we plan for the future, our objectives remain consistent; to increase sales of our higher margin, prepared food products and to improve fresh chicken and turkey profit margins as the industry dynamics improve. Our commitment has never been stronger to providing our valued customers with the highest quality poultry products as we remain focused on the company's continued growth and driving share holder value. With that, I would like to turn the call over to Rick Cogdill. Rick.

Okay thank you O.B. Before I get started on the financial numbers, I will be referring to several numbers and at times provide net of tax amount. As I have done in the past, I want to caution you all to note that these net of tax amounts also include adjustments from a computational aspect related to resulting employee incentive plan and retirement accrual computations that are also depending on profitability just like taxes are. But for simplicity, instead of expanding on that every time I say net of tax, I'll simply say just net of tax, but just keep in mind that it does include those variable-based formulas as well.

Let's start with earnings per share for the quarter. As O.B. mentioned and as we reported last night, we realized earnings per share of 42 cents, for the quarter ended June 28 of 2003. This compares to net income of 8 cents per share for the same period last year. Included in this year's quarter is $17.7m gain or $10.3m net of tax or 25 cents a share, which is attributable to partial payments from settlements of vitamin and methylamine anti-trust law suits as we reported in previous quarters. This compares to a $4.2m gain or $2.4m net of tax or 6 cents a share recorded in the same period last year. Included in last year's quarterly results also, was approximately $14.9m of negative effects related to the March 2002 Avian influenza outbreak in our Eastern turkey division. Last year's numbers also included this amount on a net of tax basis, which would have been $8.4m or 21 cents per share negative effects.

Moving to nine months -- for the nine months ended June of 2003, we earned 75 cents a share, compared to 43 cents for the same period last year. And again, included in these nine-month numbers are various special charges and recoveries related to avian influenza, vitamin and methylamine antitrust law suits and changes in the Mexico income tax laws.

Let me cover some of these amounts by category first. If I look at avian influenza for this year's results, in the nine-month period we receive proceeds from the federal government to reimburse turkey producers for these losses amounting to approximately $16.1m, which is $10.1m net of tax or 24 cents a share. Also included in this year's nine-month results are approximately $7.3m of negative effects related to the avian influenza outbreak affecting our first two quarters through March of 2003. This amount on a net of tax basis was approximately $4.6m or 11 cents per share. Accordingly, when we look at this year's nine-month numbers on a combined basis, these total AI effects for the nine month period would be a positive $5.5m net of tax or 13 cents a share.

Avian influenza for last year on a nine month basis had negative effects of approximately $20.4m. On a net of tax basis, this was approximately $11.5m or 28 cents a share.

The next category of special items is the antitrust recoveries from vitamin and the methyanine lawsuits. Included in this year's nine-month result is $55.2m or $33m net of tax, 82 cents a share of these recoveries. That compares to last year's nine month numbers of $4.2m or $2.4m net of tax at 6 cents a share. Last year in the second fiscal quarter, which we'd include in the nine-month ended June 29th 2002, we had a one time tax benefit of $9.7m or 24 cents a share that arrose from a change in the Mexican tax law as was previously recorded.

Moving on to the income statement. Our sales for the third fiscal quarter as O.B. mentioned, were $651.9m, compared to $637.1m for the same period last year. This is an increase of $14.8m or 2.3%. The increase in the sales for this quarter were primarily attributable to the increased sales of our prepared food chicken products, increased production volumes and higher sales prices in the US for our fresh chicken products, offset partially by lower sale prices in our turkey segment.

Sales in our Mexico operation increased 10.3% on a volume increase of 10.4% and our turkey sales decreased 5.7%. This was due to a 9.4% decrease in revenue per pound, offset by a 4.1% increase in production volume. And these production volume increases on the turkey is primarily related to a replenishment of the supply stock, that was previously affected by the Avian influenza.

For the nine months ended June of '03, sales were $1,909,900,000 compared to $1,893,900,000 for the same period last year. Again, our core prepared foods chicken division was a primary factor, resulting in these increase in sales. It increased 14.7% in volume and 9.5% in dollars. Additionally, sales in our Mexico operations were up 10.1% on volume and 9.9% -- excuse me, 10.1% in sales and 9.9% in volume. These sale’s gains again were offset in part by a $59m decrease in our turkey prepared food sales as a result of last October's product recall.

Moving to operating income, operating income for the quarter ended June of '03 was up 86.4% to $26.1m compared to an operating income of $14m in the same period last year and for the nine-month period, it was up 14.8% to $37.9m, compared to $33m in the sane period last year.

Our interest expense for the quarter ended June increased slightly $0.4m to $9.4m. This was due primarily to higher average levels of outstanding debt during the quarter. As a percentage of sales, our interest expense was relatively stable at 1.4% for each of these two quarters. On a nine-month basis, interest was up $4m to $28.8m, again due to higher average level of outstanding debt during the period and as a percentage of sales interest expense grew to 1.5% from 1.3% last year.

Turning to the income tax expense. Our income tax for the quarter ended June of '03, was $7.7m on a net income before income taxes of $25.2m, for an effective rate of 30.7%. This compares to an income tax expense of $3.3m, on net income before tax which was at $6.5m, for the prior year.

For the nine-month period ended June of '03, our income tax expense was $15.3m, on net income before tax of $46.3m, for an effective rate of 33.1% and this compares to the tax benefit of $7.5m on net income before tax of $10.1m for the prior year. Again, this tax benefit results primarily from the $9.7m benefit relating to the change in the Mexican tax law, recorded in the second quarter of our previous year.

Let's turn to the balance sheet. We look at our total assets. Our assets increased $19.8m from the end of our prior quarter to $1,278,900,000. This was due primarily to increases in inventories and I'll cover that a little more specifically on our cash flow statement. Our debt decreased during the quarter, $13.3m to $482.8m, from $496m at the end of the prior quarter. On June 28, 2003, our total debt was made up of current maturities of $2.6m and a balance in long-term debt at $480.2m.

At the end of this quarter, we had approximately $180m in available borrowing capacity under our secured term borrowing facility and $113.6m in capacity in our revolving credit facilities, for a total of approximately $293.6m of financing availability. If you add that to our reported cash of $16.7m, our total balance sheet liquidity is approximately $310.3m.

The weighted average interest rate on our debt outstanding at the end of June was basically unchanged from the end of our prior quarter at 7%. At the end of this quarter, 54% of this debt is on a fixed rate basis, with the remainder being on floating rate instruments.

One financing - - refinancing occurred subsequent to the end of the quarter and is discussed in our 10Q. On July 18th, we extended and amended an existing asset sale agreement that we have covering our accounts receivable. The amended agreement increases our availability to $125m from $60m under the current facility and is extended and expires on June of 2008. It is a five year facility. That was put in place primarily as a liquidity enhancement vehicle as we enter into the Con Agra [ph] acquisition.

Our shareholders equity increased $16.9m from the prior quarter to $422.2m. If we turn the statement to cash flows, starting with depreciation and amortization for the quarter ended June of '03, it was relatively stable but up $0.9m to $18.8m, compared to $17.8m for the same period last year and for the nine months ended June, it was up $1.3m to $54.2m compared to $52.9m in the same period last year.

Our capital expenditures for the quarter were down 54% to $11.1m, compared to $24.2m in the same period last year and for the nine months ended June of '03, capital expenditures were down 36% to $36.1m, compared to $56.4m in the same period last year. These reductions reflect not only our aggressive management of our capital expenditures during you know, industry difficult times, but also the completion of several capital projects that were on - - in process during 2002 and completed in early parts of 2003. Some of these projects included a consolidation distribution center in north east Texas, completion of a new hatchery in our Arkansas operation, several prepared food plant expansion and improvement and then fresh plant improvements and consolidation in our eastern division.

Other changes on the statement of cash flow for the nine months ended June of '03, included increases in the inventories, as I mentioned. Part of those increases were due to turkey meat inventories, as they decrease seasonally in preparation for the annual holiday season.

Also receivables increased $33.3m to $118.6m. The bulk of this, $22.1m is increased --related to increases in receivables from our insurance company related to the turkey meat recall of last October and I'll have more comments on the turkey recall in a few minutes as well.

On the decreasing side, accounts payable and accrued expenses were down $23m and this is primarily seasonal changes in our working capital consumptions.

A few comments about the Con Agra acquisition - - the pending Con Agra acquisition of their poultry division. As O.B. mentioned in June we agreed to acquire the chicken division through a purchase from Con Agra of all of its issued and outstanding capital stock of four wholly owned subsidiaries, in accordance with a stock purchase agreement, that was dated June 7th of '03. As we previously announced the purchase price is currently anticipated to approximate $590m plus transaction cost. This acquisition will be funded by $100m in secured borrowing with our existing lenders. Those are incremental secured borrowing over and above what we had in place prior to this acquisition being arranged.

Approximately $265m of class A common stock will be issued as an equity component and the balance approximately $225m will be payable in subordinated notes, bearing an interest rate at 10 1/2% with a maturity due March of 2011.

These are the current numbers based on the market price of the stock and the formula that are contained in our disclosures regarding how the transaction will be funded. If you just look at the debt component specifically for example, the original announcement indicated subordinated notes to be issued would be $255m and under the current condition and the current pricing of the equity that would decrease to $225m so we've seen a $30m decrease in the debt requirement of the acquisition. Again because the numbers here is actually issued in this transaction could fluctuate based on the components of the purchase price where it represented between the debt and the equity, it might differ even further from these amounts previously stated.

The weighted average trading price in the Class "A" stock used in this computation is currently $7.27 cents and that's basically the weighted average trading range from June 10th of '03 to yesterday's close of July 22nd 2003. Again using this average price we would expect the equity to be in a $265m range that will result in additional shares outstanding of 36.4 million shares of class A common stock in connection with an assumed $590m purchase price.

As I mentioned the company has received commitments from existing lenders for financing of $100m cash portion of the purchase price. The companies, our other company lenders have issued consent as is necessary to allow for the confirmation of that financing and of this acquisition. This allows us to maintain the current liquidity availability amount that I've previously mentioned without those deteriorating our financial equity.

On June 11th 2003 the 30 day waiting period had, required by the Heart Scout Redemo (ph) Act for anti-trust regulatory clearance from the federal government had expired and accordingly at this time we continue to anticipate that this transaction will close in the third calendar quarter of 2003.

As we've previously mentioned we expect to realize cost savings in excess of $50m resulting from this acquisition. These cost savings are expected to be achieved through the optimization of production and distribution facilities, the implementation of best practices between Pilgrim's Pride and Con Agra businesses including purchasing areas, production and logistics. Again we expect transaction to be accretive (ph) when including the anticipated synergy effects in the second full year after completion of the transaction.

As I mentioned I'll give you an update on the recall and as we previously stated we continue to suffer from the effects of that recall and that has been exasperated by basically the excess amount of turkey in the market, since the beginning of 2003 has prolonged their projected recovery of the business lost during that recall.

As of June 28th '03 we had recorded $22.1m as a net receivable on our balance sheet. That's made up of $26.6m gross, less the half a million dollar deductible, less a $4m advanced payment that was received from our insurance provider as of June 28.

We estimate that the sales at the Frinconia (ph) Pennsylvania plant had been negatively affected by approximately $19m for the quarter and $73m, excuse me $19m and $73m for the quarter and the nine months and that operating margins had been negatively affected from between $10m to $15m for the third fiscal quarter of this year and $35m to $40m for the entire nine months of fiscal 03 respectively.

As a result of these losses the company is in the process of filing a claim for both business interruption and certain product reestablishment cost, which is expected to be in excess of $40m as incurred through June of '03. If we aggregate the business interruption part of this loss along with the balance sheet recorded recovery item, the total claim is now expected to be in excess of $66m and again this relates to policy amendment of $50m, of which we've recovered only $4m of this --- $46m yet to be recovered on this $50m policy.

Therefore what that means is the continuing effects of the recall on our business after the end of June will no longer be covered by insurance and that they will have a direct impact on our operation as we have been reporting in the past, however there will be prospect of recovery in the future.

Our current estimate is that these losses will continue in the range of $10m, excuse me $5m to $10m per quarter and that this is estimated to continue until the prepared foods, products from our Frinconia plant has been reestablished to pre-market recall levels which we currently anticipate to happen on or after in or on, in or after excuse me the second fiscal quarter of 2004. So basically through the first half of 2004 is what we're thinking it'll take to get there.

As O.B. previously mentioned the company has recently taken steps to reduce our turkey production level by approximately 15%. This will also take effect in early fiscal 2004 and was taken in an effort to mitigate these future losses. There's more disclosure on that in the 10Q that you can read if you have an interest.

Turning to our fourth quarter forecast of earnings and what that would mean for the year as a whole. A few comments first. Please note that these amounts that I'm about to discuss are inclusive of additional positive effects that the company anticipates receiving in the remainder of the year, from the federal government for the AI related losses that we previously sustained. Accordingly our computations include what we were currently anticipating which was another $7m to $9m of federal compensation and we anticipate that this amount will be received before the end of fiscal 2003.

Including those amounts our projected earnings for the year will be 85 cents to 95 cents per share. For the fourth quarter specifically, that would give us a projection range of 10 to 20 cents per share. Ten cents of this would be related to these projected recoveries on a net to tax basis.

Our SG&A is projected to remain relatively flat at 5.4% from a component perspective. Interest expenses continue to remain in the $700,000 to $800,000 per week range for the fourth fiscal quarter. Our projected effective tax range rate is expected to be in the range of recently it's been recently in the 30% to 35% area. On a capital expenditure basis we're revising downward our projected consumption to $45m to $65m range at this time And that should give you all the components you would need from an analysis of the fourth fiscal quarter and for the fiscal 2003, as to what we're expecting at this point. That being said, that does conclude the prepared remarks portion of this conference call and now we will be happy to answer any specific questions that you may have, I'll ask the operator to come back on and start queuing up your calls.

Very good, at this time we will be taking questions from participants, if you have a question please press 1 on your telephone keypad, if you would like to cancel your question at any time you can press the pound sign, to ask a question please press 1. One moment while we pole for questions.

Our first question comes from John Beerbosy (ph) of AG Edward's please go ahead.

Gentlemen good morning.

Morning John.

First a spreadsheet item, on the non-recurring items reported in the quarter, your 10.3 was shown separately as pre-tax item, the remaining 7.4 is in other income I'm guessing.

Miscellaneous net, yeah. I didn't specifically address that like as in previous quarters but it's broken out in 10-Q, but if it related to the WLR - - the former WLR operations prior to their consolidation in our financials it went under miscellaneous net. If it related to prior Pilgrim's operation it is recorded under than non-recurring recoveries line.

Okay thank you. A couple questions on the (inaudible) question here. I'm reading the contingency section Rick, of the 10-Q, and as you talk about an impact of 5 - 10m per quarter, that's operating or pre-tax?

That is operating, yeah pre-tax.

Okay. Perhaps O.B. can help me with this too, given that you're taking the production of the division down, how do you get the sales back to a pre-recall level.

We're converting the commodity (inaudible) into prepared foods, what - - the reduction in production will actually come out of the surplus that we have in commodity breast meat. We will continue to push and drive more products back into the prepared foods items, and if we get to a point where we're short of raw materials then of course we could buy those raw components and continue to grow that business. This is just to better balance our sales division.

Okay. And, I'm reading this as a revision of the company's previous statement that the listeria (ph) question would not have a meaningful financial impact on the company, is that an accurate read?

Yes that is correct.

Just one last question quickly, your capital expenditure range that you're using of 45 to 65, why is that so broad when we've got 60 days left to go in the quarter?

Well it might be a little bit broader than it needs to, but you know, at this point, you know, we just left the range in a broader context in the event something comes up related to infrastructure or things like that we might have to get ready for relating to the pending acquisition of ConAgra (ph).

Okay, fair enough thank you.

And the next question comes from Dianne Dicler (ph) with Merrill Lynch, please go ahead.

Good morning

Good morning Dianne.

I've been reading through the 10-Q and I'm just trying to square up a few of my numbers. On the turkey again, you indicate here that the EBIT or the operating profit impact in the quarter was $10m - $15m due to Franconia (ph), but the loss was 19.7 for the entire division. So I guess what I'm trying to come to is, if you say that Franconia (ph) is going to cost you $5m - $10m for the next three quarters, is it safe to assume that the rest of the turkey division will also be a negative? Or is that $5m -$10m the total turkey operating profit loss?

No, the $5m-$10m is really BI related on a quarterly basis over the - - basically what we said three quarters, and you know, you might have more in some periods versus others, obviously we don't expect the first calendar quarter - - excuse me, the fourth calendar quarter, the first fiscal quarter because of the turkey season to be as impacted as the two balancing quarters on either side.

Right.

But on average, that's kind of an average run rate for the period and - - yeah, I mean if you looked at the core business, you know why has this extended and as O.B. mentioned, it's been prolonged by the excess amount of meat out there, in turkey complex as a whole, which has impacted profitability to the turkey industry in general, beyond - - over and above the recall related items.

Okay, fair enough. The other question I had was I guess - - I guess I was looking for a little bit stronger result in the prepared chicken segment. I might actually have been looking for revenue to be up, sort of in double digit range given what you had done in the second quarter, partly this may be the result of, you know, you had a little bit tougher comp from last year, but I guess I was surprised that, you know revenue has been only up on a consolidated basis looks like a little bit over 1%, given what you had been discussing in terms of better pricing and sort of a better overall environment. Am I missing something there of could you maybe - -

Yeah, I mean, you know again it's a - - you know, any given quarter is going to have it's ebbs and flows on a macro basis, we continued to look at our 10% to 15% growth as what our expectations are, but then you do have the contract pricing issues that affect - - prepared to differently than say commodity businesses. So annual contract pricings get no benefit from run up in commodity prices.

How long does it take to - - is that like a 60 day, 90 day before you - -

Well most of those are annual contracts on a calendar year basis.

Okay, so we shouldn't expect anything between now and the end of the calendar year?

Not necessarily on the pricing side no. You know, I mean on the volume side we continue to move volume, and you know have good volume push, but - -we do continue to see the demand side, you know, as we've indicated but in terms of the pricing components - - (inaudible) is the significant change in mix, which we don't see, you know, that the revenue side is going to be fairly consistent till we get to the rest of the calendar year.

And in terms of the ConAgra(ph) purchase, I may have missed this when you went over this, why the change in the debt versus equity for the $30m swing, could you just - -

Yeah, the - -

- - explain that to me a little bit.

Yeah, I sure can, it's not intuitive, I understand that. You know the original press release that was put out was based on where our stock was prior to announcements, the class-A common stock, and it was trading in the - - somewhere around $6.10 - $6.15, something like that, per share. And what we pointed out to people was that the equity component was derived at a formula of 45% of the purchase price, and then the number of shares would be based on the weighted average trading price from the day after close until five days before close, the day after announcing five days before close. However we would not issue more than 39.4m shares, and so basically at the date of announcement we were camped up against that limitation of 39.4m shares, which threw some additional amount into the sub-debt basket, okay.

Okay.

the weighted average trading price has moved nicely in the correct direction in which, you know, obviously we echo the sentiment in terms of movement related to this acquisition. And at $7.27 average trading price we're now down below the 39.4m shares to make us 36 point - -

36

Yeah. And so basically at that point, what you've got is you're above the baseline threshold number and the (technical difficulty) will substantially change now would be the purchase price - - The $590m to the extent of that changes plus or minus based on working capital components and things like that come out of the final proposed balance sheet, would be the only factors affecting the mix.

Okay. Well thank you.

And our next question comes from Resiva Hoffina (ph) with Lehman Brothers. Please go ahead.

Good morning.

Hi Resiva.

I guess- have you started on the turkey business to re-brand your products into Pilgrim's Pride from (indiscernible)?

Yes we have converted most brands- most labels over to the Pilgrim Pride label. There are a few that we have not yet transferred. They are in the process of making that transition.

Okay. And you said that you expect the operating losses to go away or fade after the second fiscal quarter of 2004. What drives the timing. What makes you think that, well it would last that long or that it would start to diminish from that date on?

Well there is a number of factors. One, we have been in the process of reorganizing our sales force, changing some of our marketing strategies. We have changed our brand which takes some time for reintroduction and feel like that based upon the length of time that it takes to secure accounts, to just rebuild that business in face of market conditions that currently have been unfavorable, that this is a time frame that our sales force has projected that they will be at pre-recall volume levels.

And also Resiva, the 15% cutback- the way that actually gets implemented is through a reduction in placements going out to the field, and so turkeys have on average a twenty-six week grow-out cycle so where we initiated that mid to late June, right, it takes basically 26 weeks before you actually have a reduction in supply coming through the profit (indiscernible).

So the timing is a function of both lower cost as well as it's time to re-enter some of the retail chains that you were in for?

That is correct.

And then on the chicken business, sales per pound were below your second quarter numbers, although flat with the prior year. Is that a function of mix?

Yes. That's it. A mix change. That's right.

In favor of what, higher priced chicken.

Well we- you know as O.B. mentioned on the fresh side of the complex, we had an improvement over what we originally forecast.

Right

That was not all there for the entire quarter. Some of it happened the last 6 -8 weeks, and then on the prepared food complex, not getting the bump in the market prices that would accompany increase in the market price.

Right. I assume on the volume side of the prepared business, you were going to go back to your 12%-13%- 14% growth rate beginning even in the fourth quarter?

Yes, we tend to look at things in annual perspectives and 10% - 15% on annual basis. Now a lot of these increases will tend to come in chunks, where as the counts are moving- changing their mix or changing their product offerings and/or changing their contracts period. Again since a lot of contracts periods are based on annual basis, it doesn't always happen on an even keel quarter-by-quarter basis.

Right. Mexico, apparently pricing was strong as was volumes. Any particular factors are making the market so much stronger.

Mexico has had, as a country, cause if we look at the country of Mexico, they have had challenges with higher temperatures that have been historically normal during this quarter and that has affected industry-wide production, I think amount, which has really helped the supply and demand balance, and really kept that quarter and the pricing in that- the quarter, at the level it was at.

We don't- in our forecasted numbers that we developed for the next quarter, we look at our traditional quarterly variation that we expect in Mexico and are not necessarily expecting the same kind of quarter out of Mexico in the fourth quarter that we realized this quarter.

But it's nice to have something telling you your direction every so often.

It doesn't happen so often in the last year and a half and that's pretty darn good.

Right. Okay and then last question, inventories year-over-year was up quite a bit, almost $27m. Is that all turkey?

No. That's not all turkey. But remember, year prior, we were impacted by the AI on the turkey side.

Yes

We did not have the turkey production a year ago that we did and so -

And the rest of it was just the growth in the base business.

Richard Cogdill. Yes. If you look at the note deed and the financials in the Q, it kind of breaks out the inventories that have - say a $6m, roughly, increase in inventories the rest was actually in the chicken division, combined where those are increased and a lot of that is just the intrinsic cost of feed, which gets built up into the inventories. So we're still operating at a year-over-year feed cost, an increase compared to the prior year of approximately 20%. As O.B. mentioned that something that looks awful to be headed in our direction going into the next crop year but you add 20% cost of the product and 30% of your cost of goods sold and it really shows up in there.

Right. I go it. And then last question. As far as your ConAgra (ph) acquisition, they have a higher mix in favor of fresh than you do. Does that mean that they are benefiting from pricing more then you do?

Well, actually their mix is only flatly higher in fresh than ours.

Okay.

And, with the more fresh-base they should be responding favorably to the entire markets.

Got it. Thanks much.

And the next question comes from Kristine Franklin (ph) with Midwest Research. Please go ahead.

Good morning.

Good morning Kristine.

First I want to I guess commend you for finally cutting back production of turkey that really should help returns in that business. Can you tell me may be you know what finally drove the decision and how you can be certain that others in the industry have also cut back production?

Well I mean certainly what drove the production was the extended difficulty that we had in re-building that business and the weakness in the commodity (indiscernible) section of turkey just due to oversupply. And you know reached a point that felt like that this was the best alternative for us going forward to reduce that supply. And we have no assurances and I have not seen any published numbers from USDA on turkey placements. But rumors throughout the industry continue to circulate that a lot of the other producers are doing the same thing that they're reducing their placements going forward. But again going forward and we're looking at November, December before you see any results of those reductions.

So how much of your Turkey business is actually pre-sold for the holidays? And how much might that delay the rebound at least in your results?

Well there is a relatively large portion of the turkeys that are already produced or in the process of being produced that haven't been sold. However, the fresh markets that we anticipate will be strengthening as we enter that season we'll be well position to move probably more product into those market channels than we have in the past. 'Cause we have filled or in the process of filling most of the frozen orders that we have for the fall.

Given the amount of turkey I guess in storage or in frozen inventory, do you anticipate working through those inventories fairly quickly and then seeing kind of a gradual rebound? Or do you think it will actually rebound pretty quickly?

I anticipate it will be more of a gradual rebound due to the inventories in general those will have to be cleaned up prior to feeling the impact of any reduction. So that rebound we project will be gradual.

And in chicken you know we've seen a drop in production now for I think about 43 weeks or something? To what degree do you see lower feed cost possible enticing these producers to ramp production back up? Are you looking for you know - we're starting to look at tougher comparison in terms of production to client do you expect you know production to back half to actually increase modestly? What does that imply for pricing?

Well that's certainly something that we can't forecast with the (inaudible) of others. We do think that the difficulty that the industry in general has experienced over the last couple of years will hopefully restrain the desire to increase production. Corn prices is being more attractive certainly. Goes against that but we do feel that there is restraint. There is - you know we're seeing some seasonal increases. And we feel like there will be very modest increases even if corn does come down to the level that aids profitability significantly.

That's also a benefit of the pending acquisition of ConAgra and graze as we get more and more of the industries capacity you know in the hands of not so many players so to speak. You know I think you get a little bit more rational reaction to some of the ebbs and flows of things like you mentioned just the cost of grain you know. And hopefully that would be a positive effect on the industry.

Do you see what the acquisition of Conagra (ph) that you're now basically at your optimum --- I guess the optimum size operation? Do you expect to make further acquisition or is this - do you think after digesting the Conagra acquisition that you'll actually look to bring in some of these smaller, less efficient players?

Yes you know as a matter of policy we don't comment on pending acquisition or divestitures until there is some thing appropriate to be announced to the general public. So -.

I guess just to - approaching it from a different perspective do you think there will be more industry consolidations? Do you see some weak players out there that still need to possible look for other partners?

You know I guess we would think that the industry continues to be in a position where further consolidation could occur. The question that arises is where that consolidation will come from. A lot of times there can be willing sellers but not necessarily enough willing buyers. And you know obviously with the recent acquisition that we're in the middle of we'll have our plate full temporarily. So you know I think that the industry conditions continues to be favorable. It's just a matter of seeing whether or not there is the appropriate level of buyers either from within the industry or from outside the industry that show an interest in getting into the chicken business and consolidate.

Great I'll look forward to a better outlook here, thanks.

Thanks.

And as a reminder if you do have a question please press 1 on your telephone key pad. Our next question comes from Amer (ph) Shakid (ph) with Cobalt Capital. Please go ahead.

Hi I have several questions my first on the liquidity in trading liquidity in your shares. Do you have any plans to merge the two classes of shares together to improve liquidity or any other measures?

You know we continue to look at the options available to us regarding our capital structure and you know at this time there is really nothing we can say about that. There is - you know all that I can tell you is we continue to look at all of our capital structures including our class A and class B common stock.

Okay secondly and related can you please comment on Conagra's restrictions with respect to the shares that are going to be issued to them?

Yes the restrictions are basically in general two fold. One is during the first 12 months after the acquisition they will not be permitted to sell any of the securities with out our permission. After that they would generally be restricted to no more than 1/3 of the number of shares issued in connection with the acquisition in each of the subsequent three year period.

Again that's subject to without our approval. So you know we're trying - we've set up a process for an orderly transition of those securities out from their hands into the public market to make sure that we all feel that it will be done in a responsible manner. And I think the vehicle we set up will achieve that.

Okay is there any reason to believe that you wouldn't support some sort of a secondary where they have an orderly exit?

Well again you know depending on the timing. In the first 12 months we will have to evaluate our assessment as to whether or not it was an appropriate time to do that. In the subsequent 3 years you know we've agreed to allow them to market up to 1/3 and you know most likely that would be done through some kind of a secondary offering at least for the few first one or two transactions assuming that the block size is anything significant.

Okay and secondly can you give us any color on the pro-forma company combination of your company and the business you're purchasing from Conagra. The only color that I've heard thus far is sales of approximately $5b. Perhaps EBIT, G&A, CapEx any thing that you could provide would be helpful?

Yes I think you know in connection with the announcement of the transaction there were some slide that we put out there on the web and they are still available out on our internet you can look at those. Beyond that you know we're in the process of completing the auditor I should say Conagra is in the process of completing the audit of that operating division. And you know within the next you know hopefully 2 weeks, 3 weeks that proxy will be solicited and everybody will have an opportunity to review the audited number. So right now I think other than what's out on the web we really don't want to get in the specifics. And I think if you look at what will be coming out shortly you will be able to get answers to all those questions.

Okay thank you.

You bet.

And at this time I'm showing no further questions.

Okay well we appreciate everybody's participation in our call. And we look forward to visiting with you again at the end of our next quarter which will be the end of our fiscal year 2003. Thank you very much.

Thank you.