Pilgrims Pride Corp (PPC) 2004 Q4 法說會逐字稿

Good morning. And welcome to the Pilgrim's Pride Conference Call to review the Company's fiscal 2004 year-end and fourth-quarter results. At the request of Pilgrim's Pride the conference is being recorded. The Company has asked me to point out that there are slides available for downloading from the Conference Call link on the website home page of www.pilgrimspride.com. These slides will be used during the call. 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 a question.

On this Conference Call will be Mr. O. B. Goolsby, President and Chief Executive Officer of Pilgrim's, and Mr. Rick Gogdill, Executive Vice President and Chief Financial Officer of Pilgrim's Pride. Beginning the conference is Mr. Rick Cogdill. Mr. Cogdill, you may begin

Good morning. Thank you all for joining us today to review Pilgrim's Pride fiscal 2004 fourth-quarter and annual financial results. The press release we issued earlier this morning contains some highlights from the quarter and the year. On today's call we will provide you with additional details about these results. We will also discuss our views on some of the industry trends that we expect to impact our company in the near term. After our prepared marks, we will be happy to entertain questions that you may have, and when we reach that point in the call we will instruct the operator to begin queueing up listeners so that we may address your question.

Before O.B. begins I would like to remind everyone that today's conference call will contain certain forward-looking statements, including our expectation of future results, sales, cost of sales, market dynamics, et cetera. Actual results might differ materially from those projected in these forward-looking statements. Additional information concerning the factors that could cause actual results to differ materially from those forward-looking statements is contained in today's press release as well as in our forward-looking statement disclosures contained on Forms 10-K, 10-Q and 8-K as filed with the SEC.

With that being said, I will now turn it over to O.B. Goolsby.

Thank you, Rick. Good morning, everyone. It is a pleasure to be here today to discuss our fourth-quarter and full-fiscal 2004 results. As we noted in our press release, our outstanding performance was driven primarily by the strong operating results in our domestic chicken business and the successful integration of our ConAgra Chicken Division acquisition. Additionally, our performance continues to improve due to our focus on our growth strategy centered around our prepared foods business, which grew over 25% on a pro forma basis over the past fiscal year.

Favorable consumption, supply and pricing trends also had a positive impact on our results, both in the quarter and for the year. We expect many of these positive trends to continue into 2005.

Before I go into more details about some of the factors that contributed to our strong performance, I would like to say a few words about our recent management changes. I believe our competitive position, which is considerably stronger today than it was a year ago, is further strengthened by the appointment last month of Clint Rivers as our Chief Operating Officer. Clint, who is not with us today, has been instrumental in driving Company-wide improvements in both customer focus and operating efficiency in his nearly 16-year tenure with Pilgrim's Pride. His new leadership role enhances the bench strength of an already solid management team, and I know he will help us extend the gains that we have made in our prepared foods business and leverage that success across our other market channels. We are very glad to be working with him in this new capacity and believe he is an outstanding addition to or executive management.

During this quarter, the news media has focused on recent decreases in the price of commodity boneless skinless breast meat. This information is on Slide 3. As previously noted, our strategy is to capitalize on our current market trends for value-added products through our prepared foods division to fully market our internal supply of breast meat in these products. We are, in fact, typically a net purchaser of commodity breast meat. Currently the U.S. poultry market remains 14.6%, 16.2% and 17.7% higher than market levels in 2003, 2002 and 2001 respectively, based on yearly average of the Georgia dock (ph) comparison January through December of 2001, 2002, 2003 and January through September of 2004. When analyzed, commodity prices for chicken parts were higher in comparison to the markets for the fourth quarter and the fiscal year 2003 as follows: For the quarter, leg quarters were up 8.63% averaging 29 cents a pound for the year. Leg quarters were up 48.4%, averaging 31 point -- 31 cents per pound. For the quarter, whole wings were up 59.43%, averaging $1.04 per pound. For the year, whole wings were up 70.23%, averaging $1.05 per pound. For the quarter, boneless skinless breast meat was up 5.61%, averaging $1.88. For the year boneless skinless breast meat was up 26.3%, averaging $1.91 a pound. As noted above, while commodity prices have softened recently, we do not expect this decline to have a significant impact on our profitability for two reasons: one, our focus and emphasis on the prepared foods business; and two, a significant projected decrease in our feed ingredient costs due to an abundant harvest. I will say more about the feed costs later.

Moving to Slide 4, on October 19 of 2004, the National Chicken Council reported that the per person consumption of chicken increased 6% to 87.1 pounds in 2004, and forecasted in an increase of an additional 2% to 88.6 pounds in 2005. We believe this growth in domestic demand will not be materially different from projected U.S. supply growth and that we will continue to see a positive margin environment for the next 6 to 12 months. Further, we expect our operating margins to be bolstered somewhat by a decline in major ingredient prices, increased international demand, and the absence of turkey restructuring charges and improved performance in this business segment in fiscal 2005 when compared with 2004.

Pullet placements, which are the primary driver of broiler production, are slightly higher in 2004 after declining a quarter of a percent in 2003. However, total supply growth in the calendar 2004 is still anticipated only to be in the 1.5 to 2.4% range. In 2005, pullet placements are expected to increase only a half a percent over 2004. Further, it is important to point out that due to the time period required for pullets to reach productive maturity changes in pullet placements do not affect market quantities for approximately three-quarters of a year.

For fiscal 2005, our business strategy will remain consistent with our communications over the past several years. Our resources will be focused on positioning the Company to meet the ever changing and growing consumer demand for high quality convenient meat proteins. Our stature in the foodservice industry gives us a uniquely privileged advantage point from which to identify emerging consumer trends, significantly enhancing our ability to respond quickly to new developments as they begin to materialize. We expect to maintain our double-digit growth in our prepared foods business in the year ahead driven by favorable consumer and demographic trends, our improved product portfolio, and enhanced operating efficiencies. Additionally, we continue to expand our retail presence throughout the U.S. as our product availability is now truly coast-to-coast. Recently, we have redesigned our packaging giving our products a fresh up-to-date look and creating a billboard effect that heightens their visibility in the retail case. Let me emphasize that we are excited about the growth opportunities that exist for us in the retail sector and expect to pursue them aggressively in the coming months just as we have done in the foodservice sector. I'm glad to announce that our integration of the former ConAgra Chicken Division has continued to be better than expected. During fiscal 2004, we achieved in excess of $55 million in synergies, an amount we expected to obtain after three years. We were able to reach this level in a single year because of the teamwork and dedication of our employees. As I referenced previously, I'm also pleased to report that our turkey restructuring efforts announced in April were completed on schedule during the fourth quarter. Today, we are beginning to see the results of this restructuring, and we have high expectations for our premium turkey product line. This new line is getting good trade response from some of our largest customers and will get its first large-scale consumer exposure during the holiday season. We have seen particularly strong interest in our new petite Butter Basted turkey product, which weighs in at 7 to 9 pounds. This portion size offers the consumer greater preparation versatility. Yesterday, more than 30 million households received a $1-off coupon in their Sunday newspaper for Pilgrim's Pride turkey products. We believe this offers significant consumer incentive to purchase our products around the Thanksgiving holiday.

As I mentioned previously, grain prices are down significantly as a result of this summer's record crop. With the production of corn and soybeans exceeding storage capacity, markets are projected to fall further as these supplies are forced into the market. To further drive down our landed (ph) grain costs, we are working to improve our grain handling and procurement operations by strategically dedicating capital investments where significant paybacks exist. As we noted in the past, when looking at annual average cost changes, every penny per bushel of corn or dollar per ton of soybean meal results in cost of sales impact of approximately $2 million.

Looking at Slide 5, export demand for U.S. poultry products is rising and is projected to be strong into next year as the U.S. continues to backfill world markets that were affected by Avian Influenza that occurred in Asia this year. According to the National Chicken Council, export demand is rising with export volume projected to have year-over-year increases of 7.9% and 8.5% in 2005 and 2006 respectively. Reinspections of U.S. plants by Russian officials are continuing. Three of our facilities were recently inspected, and we look forward to a favorable decision soon by the Russian authorities. Russian markets are currently trading leg quarters at a noticeable premium over other export markets. Russia's market continues to be the number one volume market for U.S. chicken exports. In the fourth quarter of fiscal 2004, the export/import restrictions on Texas chicken were lifted by almost all countries with the exception of Russia which has given a December 23, 2004 date for lifting the ban in accordance with the 1996 U.S.-Russian poultry agreement.

Looking ahead to 2005, as summed up on Slide 6, we believe our company is well positioned to take advantage of favorable industry and Company-specific trends to positively impact our performance and overall profitability. Additionally, we expect to continue to make gains in efficiencies, production capacity and product mix as we maximize the use of assets acquired from ConAgra.

In closing, I am pleased with our achievements in the fourth quarter and the fiscal 2004. I want to emphasize that as we pursue our strategic objects for the coming year, we are doing so from a strong market position that reflects the enormous growth realized over the past year.

With that I would like to turn the call over to Rick. Rick?

Thank you, O.B. Before I get started on the financial discussion, I would like to make a few general comments. First, I would like to remind everyone that I will be referring to several numbers and at times providing net amounts; and as I have mentioned in the past, when I refer to these net amounts, they represent certain adjustments related to both taxes as well as variable employee incentive plan and retirement accruals. But for simplicity sake, I will simply refer to these as just net amounts. Secondly, the fourth quarter of the fiscal year 2004 is the third full quarter which the includes the results of the former ConAgra Chicken Division which we acquired on November 23, 2003. Accordingly, I will be discussing at times the results of operations compared to pro forma amounts for the prior year periods which includes the full effect of the acquisition as if it had been included for the entire periods reported. Comparisons of the current period amounts to the prior period's actual results will also be discussed. However, if they are not available in the slides or the website they will be filed later today with the SEC.

If we turn to Slide 7 we go over our earnings per share. As reported this morning, we realized earnings per share of $1.09 for the quarter ended October 2, 2004. This compares to pro forma net income of 39 cents per share for the same period last year or 61 cents per share on a reported basis last year. In making the per-share computations for the quarter, we had 66,555,733 average daily number of shares outstanding in the current period as well as the pro forma comparative period. On an actual basis last year, we had 41,112,679 shares.

Included in the fourth quarter of 2004 and the fiscal 2004 results as a whole are a number of nonrecurring items. Slides 9 and 10 of the presentation summarizes these. If we look at Slide 9, it indicates that in the fiscal 2004 fourth fiscal quarter we had two such item. First, we had a charge of 8.2 million or 5.1 million net, 8 cents per share, related to additional turkey restructuring costs. And secondly, we received recoveries of $23.8 million or 14.8 million net, for 22 cents a share, related to the October 2002 recall of certain deli meats by the Company. This was insurance proceeds we received during the quarter on our business interruption policy.

Included in last year's fourth quarter are three such items. First, there was a $10.5 million or 5.9 million net for 14 cents per share gain attributable to prior period Avian Influenza recoveries. Secondly, the company had a .7 million or .4 million net for a penny a share gain attributable to partial settlements under vitamin methionine lawsuits. And then finally, we had a one-time noncash benefit of 16.9 million or 41 cents per share related to changes in our valuation allowance on net operating losses in our Mexico operations.

Turning back to Slide 7 again for the entire fiscal year. As we reported last night, we earned $2. This compares to $1.36 per share for the same period last year; and on a pro forma basis, we would have earned $2.08 per share for 2004 compared to 52 cents per share for the same period last year.

Included in the 2004 and the 2003 results are a number of nonrecurring items again. On Slide 10 it shows that in fiscal 2004 we had four such items. First, the entire turkey restructuring amounts are reflected in the fiscal year of $72.1 million or $44.3 million net for a 71 cents per share charge. Secondly, the same collections we received under the insurance policy related to our recall of certain deli meats of 23.8 million or 14.8 million net with an annual per-share impact of 24 cents. There was, as we reported in our second fiscal quarter, there were nonrecurring recoveries this year as well from vitamin methionine antitrust lawsuits of $1 million or 6.6 million net for a penny a share. And then finally this slide also shows our estimate of the continuing negative effects that we had in the first 6 months of the fiscal year related to the October 2002 turkey meat recall of $20 million, which was 11.2 million net or an 18 cents per share charge.

If we compare this year's results to 2003, 2003 similarly had five such items of nonrecurring nature. First, the cumulative payments from the federal government to turkey producers for the Avian Influenza losses previously mentioned we received 26.6 million, 15 million net or 36 cents per share. The total recoveries, nonrecurring recoveries from vitamin methionine antitrust lawsuits totaled 56 million or 31.6 net for a 77 cents per share gain. Third, there was approximately 7.3 million or 4.1 million net for a 10 cents per share negative charge related to the effects of the Avian Influenza outbreak in 2002. And fourth the slide also shows the same estimated negative effects related to the turkey meat recall of 37.5 million for the entire period, 21 million net or 51 cents per share in 2003. And then finally as noted on this slide, like the quarter, there was a one-time noncash benefit of 16.9 million related to the valuation allowance adjustment for our net operating losses in Mexico or 41 cents a share.

Moving to the top of the income statement, Slide 11 shows that our sales for the fourth fiscal quarter were 1 billion 486.5 million compared to pro forma sales of 1 billion 317.6 million for the same period. This an increase of 160.9 million or 12.2%.

As shown on Slides 11 and 12, sales for the fiscal 2004 as a whole were 5 billion 363.7 million compared to 2 billion 619.3 million for the same period. However, on a pro forma basis, sales increased 856.2 million or 17.2 percent to 5 billion 824.5 million from 4 billion 968.4.

Slides 11 through 14 summarize our operating income information along with certain other information. On Slide 11, operating income for the quarter ended October 2nd, 2004 was up 105.5 million to 131.2 million compared with operating income of 25.7 million in the same period last year. Excluding the effect of this quarter's turkey restructuring and related charges and the recoveries from the recall insurance claim and nonrecurring recoveries from the same period last year, our operating income increased 113.7 million to 139.4 million. Operating income for fiscal year 2004 was up 197 million to 260.6 million compared to 63.6 million for the same period last year. Excluding the effects of this year's turkey restructuring and related charges, the recoveries from the recall related to the insurance claim and nonrecurring recoveries from the same periods last year, operating income for fiscal year increased 269 million to 332.6 million.

On Slide 12 we show the pro forma basis for the fourth quarter where operating income was up 105.3 million from the prior year amount of 32.1 million to 131.2 million for the quarter ended October 2nd, 2004. Again if we exclude the effects of the related charges and recoveries from the insurance claim to nonrecurring recovery from the same period, our pro forma operating income increased 113.5 million to 139.4 million. If we look at the pro forma operating income for fiscal year 2004 as a whole, it was up 232.9 million to 285.9 million compared to a 60.6 million for the same period last year; and again when excluding the effects of this quarter's turkey restructuring and related charges and the recoveries from the insurance claim, and other nonrecurring recoveries, our pro forma operating income increased 304.9 million to 357.9.

On Slides 13 and 14 of our presentation, we show detail behind the turkey restructuring and the related charge and how they impacted our income statements for the fourth fiscal quarter and the fiscal year ended October 2nd 2004.

Moving on to Slides 15 to 18 of our presentation, which contains summary information for our interest expense and income tax expense. Our interest expense as shown on Slide 15 for the fourth quarter increased 11.5 million compared to 9.1 million last year. This is primarily due to higher average level of the debt outstanding during the quarter; and as a percentage of sales, our interest expense dropped to .8 of 1% compared to 1.3% from the same period last year. On a pro forma basis, interest expense for the quarter was down 5.8 million versus the prior-year amount of 17.3 million.

Slide 17 slows interest expense for the entire fiscal year 2004 was up 14.1 million to 52.1 million from 38 million for the same period last year. Again, due to a higher average level of debt outstanding during the quarter. As a percentage of sales, interest expense decreased to 1% from 1.5% last year. Looking at pro forma interest expense for fiscal '04, it decreased 14.3 million to 56.5 million from 70.8 million for the same period last year. And as a percentage of sales pro forma -- percentage of sales, pro forma interest would have been 1% compared to 1.4% for the same period last year.

Our income tax expense for the quarter ended October 2nd, 2004 was 44.3 million on net income before taxes of 116.6 million, for an effective tax rate of 38%. This compares to income tax benefit of 8.1 million or 8.8 million expense when you exclude the one-time noncash benefit of 16.9 million previously referred to on net income of 16.9 million for a 52% effective rate in the same period last year. On a pro-forma basis, Income tax expense in the prior year's quarter ended September 27, '03 was a benefit 11.2 million on net income before tax of 15.1. Income tax expense for the entire fiscal year 2004 was 78.4 million on net income before tax of 203.8 million for a 38.5% effective rate. This compares to 7.2 million, again, or adjusted to a 24.1 million number when excluding the one-time noncash benefit of 16.9 million for -- on net income before tax of 63.2 million for a 38.1% effective rate in the prior year. On a pro-forma basis, income tax expense for the year of 2004 was 87.2 million, on pro forma net income before tax of 226.9 million for a 38.4% effective rate. This compares to a benefit last year of 6 million on pro forma net income before tax of 28.8 million or a 38.1% effective rate.

Turning to the balance sheet highlights. Our debt during the quarter decreased $55.2 million and 125.7 million for the year, to 544.3 million at the end of the period and from 599.5 million at the end of the prior fiscal quarter. At October 2nd of '04, the total outstanding debt was made up of 8.4 million in current maturities and 535.9 million in long-term debt. We currently maintain is 180 million in revolving credit facilities, 30 million of which relates to our Mexico operations and 518 million in secured revolving term facilities. The debt side of our capital structure has significantly changed as a result of the ConAgra Chicken Division acquisition and with certain debt amendments and extensions.

Slides 19 and 20 shows a comparison of the current debt agreements compared to those existing at the end of the prior fiscal year. Currently we have the full 518 million available under our secured term borrowing facilities, and 131 million of capacity on our revolving facilities, for a total of 649 million in availability. Reported cash was 38.2 million, bringing our total liquidity to 687.2 million. This is an amount that is in excess of the 474.5 million liquidity we had immediately before the ConAgra acquisition. The weighted average rate on our interest outstanding at the end of 2004 was 8.2% compared to 7.9% last quarter. At the end of this quarter, 87.7% of all debt outstanding is on a fixed-rate basis. Our net worth increased 70.1 million in the quarter and 471.4 million in the year to $920 million, due primarily as a result of the issuance of equity in connection with the ConAgra acquisition and the earnings activity this year.

Our cash flow highlights are shown on pages 15 to 18 as well. Also shown on these is a summary of our depreciation expense. Depreciation and amortization for the quarter increased 5.6 million to 25.5 million compared to 19.9 million for the same period last year. For the fiscal year 2004, depreciation and amortization was 113.8 million compared to 74.2 million for the same period in the prior year. On a pro forma basis, depreciation and amortization would have decreased 5.1 million in the quarter from 30.6 million for the same period last year; and during the year, 2004 pro forma depreciation was 120.8 million compared to 116.9 million for the same period last year.

Slide 21 shows our comparative -- our Capital Expenditures for 2003 and 2004, which increased 6.4 million to 23.8 million for the quarter compared to 17.4 million in the same period last year. For fiscal year 2004, CapEx was up 26 million to 79.6 million compared to 53.6 million in the prior year. On a pro forma basis, CapEx was actually down $6 million for the quarter compared to 25.8 million in the same period last year; and similarly for the year as a whole, CapEx was down 6.3 million to 83.6 million compared to 89.9 million for the same period last year.

One other significant cash flow item to note is that during the fourth fiscal quarter of 2004 we repaid all of the 125 million outstanding at the end of our third fiscal quarter under our accounts receivable securitization facility. Accordingly, when you add to the 55.2 million of debt reductions during the quarter that I previously mentioned, our total repayments during the quarter under our debt and liquidity facilities totaled $180.2 million. As shown on Slide 20, the full 125 million of the securitization facility remains available to the Company today and should be noted that the repayment under this securitization facility will actually show up as a use of funds and an increase to our reported accounts receivable in our statement of cash flow in our balance sheet when we file our annual Form 10-K.

The last slide on the website is Slide 22, and it shows a summary of certain credit ratios and other information. And as you can see pointing out a few items, our EBITDA interest coverage improved to 7.06 times for the entire fiscal year. And our debt divided by EBITDA now stands at only 1.48 times with a debt-to-cap of 37.2%.

That completes the fiscal year results, and I will now move forward and discuss our outlook for our earnings for 2005. As O.B. mentioned, we're pleased that the ConAgra Chicken Division has continued to be accretive to earnings in the fourth quarter as well as fiscal year 2004. He also announced this morning that our U.S. chicken business continues to show signs of strength; and the rapid realization of the synergies in connection with the ConAgra acquisition has allowed our financial performance to be stronger than we had previously projected. Accordingly, we are pleased to announce our earnings estimate for fiscal year 2005 will be in the range of $2.60 to $2.90 per share for the entire year. For the first fiscal quarter ended January 1st, '05, we estimate our earnings to be in the range of 50 to 60 cents per share, both of these earnings-per-share amounts are on the full outstanding shares today of 66,555,733 shares. This is an improvement over our fiscal 2004 first quarter and annual pro forma earnings per share last year of 37 cents and $2.08, respectively. So both on a quarter-over-quarter basis and over year-over-year basis, we are projecting an increase in earnings. The breakdown of the income statement that will result in our projected earnings, we are estimating our U.S. and Mexico sales to be increased. The U.S. will be in the range of 5 billion 375 to 5 billion 455 million. Mexico will be in the range of 375 to 395 million. Projecting our total sales in the range of $5 billion 750 to $5 billion 850 million. Our U.S. chicken volumes will be in the 5.4 to 5.6 billion range. Mexico pounds are estimated to be approximately 650 to 660 million pounds.

Cost of sales will vary by quarter in the 87 to 89% range. SG&A is expected to be up in whole dollars but down as a percentage. Should be in the 4.5 to 4.7% of net sales, giving us operating margin projection range of 6.3 to 8.5%. Interest expense will be in the $1 million per week range. That includes cash interest as well as amortization and financing costs. And our estimated effective tax rate will be similar to what we have seen recently in the 34 to 39% range. CapEx as noted on the CapEx slide in the presentation is projected to be 175 to 200 million this year and 30 to 50 million in the first fiscal quarter. Our depreciation expense currently running about $2.4 million per week will continue. And that should give all the components necessary to analyze the financial projections and cash flow for our business for next year. That being said, that concludes our prepared remarks and we will now return it back to the operator to address any questions you may have.

(OPERATOR INSTRUCTIONS.)

David Nelson with CSFB.

Good morning and congratulations.

Thank you, David.

Are you hedged on feed costs now? Are you doing any of that? I know you didn't do it last year.

We currently, David, are on the market. We are evaluating that on a weekly basis. As we lock in more of our contracts during the year, we will continue to analyze that option but currently we are on the market.

Your earnings guidance for next year, what does that assume in terms of chicken pricing, which has been quite volatile lately?

We looked at all the available information out there; and on the commodities side, we stayed in line with what we were seeing from the forecast. On average, if you look at all the different pieces, I think they are looking at giving back some where around 50% of the gains from last year, about a 10% overall reduction. We have taken that into account in our projections.

You're assuming chicken prices decline about 10% over the next year?

On the commodity side.

Not the prepared?

Yeah. And as O.B. mentioned, a lot of our product mix is not sold on the commodity side. The major item that we do have that floats on the commodity is our leg quarter, primarily; and that is not projected to be off much at all next year. In fact, we have expectations that it will continue to do well with the export markets returning. So you do see a lot of boneless skinless breast decrease in those numbers I mentioned driving that 10%. As O.B. mentioned, we are a net buyer of commodity breast meat; and when it was $2.55 this summer, we were out there in the market buying at that price, selling that against our contracts that we had already negotiated. So that market is not a market that we generally have a lot of sales off of, but we do have more purchases on.

The export markets, you talked about them coming back, and the Texas situation with A.I. But are you -- is the U.S. chicken industry benefiting lately from Russia's ban on imports of Brazilian product, both chicken and pork?

Certainly I think that would be a factor as that plays out. We have seen demand pick up. Since Texas has been banned, we have not been as big a player in that market; but we continue to see the surrounding countries increase demand, so that will be a factor.

And the jump in CapEx next year what is that for?

Well, you might recall, when we originally acquired the ConAgra divisions, we looked at the combined Cap Ex that we had at that time, and we estimated 160, I think 140 to 160. We managed it very tight this year as we got to be more familiar with the operations, and where we would best deploy our CapEx. And basically, we have got a lot of projects that have been on the table that we will get around to. We believe this next year now that we are through a lot of the integration, as O.B. mentioned, there is some enhancements in some of the feed milling operations. There is quite a bit of CapEx dedicated to our continued growth to sustain our continued growth of our prepared food division. But in terms of actual chicken capacity itself, we are not growing that more than, I think, about 4 to 5% next year, which is in line with our typical growth operations.

To go back to that, you talked about the pullet placements only being up maybe .5% in '04. You know, some of the egg set and chicks place numbers are running higher than that, and we are seeing a buildup in cold storage. I guess, but you are basically calling for relative balance in the chicken markets?

Yeah, I mean, if you look at the forecasts that are out there, I mean, you're going to have month variability in the placements; and we are not entirely certain based on information that we have that the number reported last month will maintain as the reported number as better information comes in. But as we mentioned, if you look at the year 2004 as a whole, with the -- there was quite a few months of period-over-period declines; the total projected growth for the entire year 2004 is projected to be 1.5 to 2.4%, so well within our projected demand growth of in that 3 to 5% range. And then with the exports coming on, we think that will be a very manageable.

And then the outlook, I mean, when you look at outlook into 2005, we look at the information that is available. USDA puts some information, Sparks and some others. Granted I don't think anybody has a perfect crystal ball on that. But the outlook is not for a lot of growth on a year-over-year 2004 to 2005 basis currently anyway.

You mentioned the freezer stocks. I think if you look at the reported information of ending cold-storage stocks to ready-to-cook production, you were correct in your analysis early in the month that that has been growing some; but if you look at it as a ratio basis where we are currently and what is currently forecast by the USDA, in ratios of the 23.5 to 24.5 range, that is down very manageable compared to where we were the last year to 18 months and down quite a bit from the 28 to 30% numbers that we saw in the years 1998 to 2002. I think it is some seasonal growing that happened. As O.B. mentioned, a lot of people looking at putting product up and going into the exports. If you look at the breakdown as to what that we understand is out there in cold storage, it is primarily driven to the export market. It's 50, 60% of that is leg quarters or leg products and paws; product that basically, when it goes out on to the freezer market, it's not coming back on the United States. The boneless skinless product is very small, 14% on a relative basis. So we don't see what is in cold storage as being an overriding concern in terms of the U.S market.

If I could ask one last thing. Is there anything you could comment on regarding ConAgra exercising their shares to sell of you?

Well, as you know, their first third of the option that they have comes due on November 24th. We have been in discussions with them, as well as with a lot of various investment banks around the United States, in terms of what we can do to help them live up to our commitment, which was to effectively manage that process and manage that execution of that stock out into the market. So, you know, this is nothing set in stone today but there has been active discussions.

Diane Geissler with Merrill Lynch.

Good morning. Congratulations. Can we just talk a little bit about the quarter, particularly with regard to -- the numbers came in much better than where you had preannounced, even though you preannounced after the actual quarter closed. And I guess the question is sort of what happened there? And what if it had gone the other -- I mean what -- what was the factor that led to earnings being better than what you had originally anticipated when you preannounced?

I think if you look at the quarter as whole, we ended up with $1.09; and if you take out the 22 cents, we were at 87 cents. We estimated a range of 80 to 85 on a -- taking out those nonrecurring recoveries. So on a net basis, on 66 million shares for the quarter, that is about $1.3 million net difference; and that is just the closing process and going through the audit and shoring up your various income statement and balance sheet items, and it's just part of the normal process. We don't have perfect visibility until we go through that as to exactly what the numbers are. We were still in the middle of converting a lot of the ConAgra locations onto our information system during the quarter, as well as the year as a whole. I am proud to announce that as of October 3rd we have converted all of the former ConAgra operating divisions and locations on to our information system platform. Today, we only have, I think, five or six distribution center outlets that have not been converted to our information system. And that is an important process in getting more perfect information on a more timely basis.

So it would be better if we looked at it on an operating basis as 87 versus 95, which is the add-back of the restructuring in the turkey division?

Yes.

Okay. I guess the other question I had was on the foodservice contracts you had indicated that that is kind of an ongoing process. Do you have any idea about kind of where you are in terms of what percentage of the contracts you successfully negotiated for next year at this point?

I think some where in the 40 to 50% range. Those contracts generally start coming due in summer through the end of the year. So we are probably 40 to 50% through that process.

And just look, you're obviously going to have a big pickup next year on the grain side. If we assume that grain just flatlines from here, in absolute dollar terms, what is the magnitude of where grain pricing would be this year versus where it was last year?

Flat lined. Volumes change a little bit here and there, but it is in the $250 to $300 million range, year-over-year reduction.

And did you have any questions?

Leonard Teitelbaum. Just a very, very good quarter, and I'm trying to reconcile two things. Number one, some of your competitors out there in the poultry industry are seeing, let's say, an environment not quite as robust as you in that they think the supply of poultry could be up, if I got your numbers right in answer to David's questions, you were looking for about a 3% increase, if I'm not mistaken, in total supply of poultry?

Yes, I think that confirms with what the USDA is showing , 3 to (multiple speakers) percent, yeah.

I guess the question is for some people that are looking at maybe 3.5 to 4, now, that is an outlook that you would reject is that, correct?

Well, I mean, 3 to 4 versus 3.5 to 4.5, I think that is all within reason. I think what is more important is where people see their excesses coming from; and if I was selling commodity breast meat day in and day out on the market, I would have a different outlook on the market. Compare (ph) the investment we got in our prepared food businesses where we use that meat internally and we tend to be a net buyer of commodity breast meat, it is not the same driver as it might be for a more commodity player.

So obviously mix is key. Now, the second thing is -- and again, I want to just clarify what I thought I heard you say today, and that is that there is ongoing discussions on the ConAgra situation. Does that mean you do not expect -- let me just make sure I have got this right. You have filed a registration statement, and it has not yet become effective. The first question then would be, does that registration cover all of the shares or only the part that would come due on November 24th.

First of all, the registration is effective. It has gone effective about, I don't know, 30 days or so ago, maybe 45. So it is effective, and it did cover all of the ConAgra shares; so we registered the entire 25-plus million shares that they have in that filing.

All right. Now, back to my question again. Do you expect the 24 -- well, do you expect on the 24th for ConAgra to say, okay, we have stock ready for sale? Are you still trying to negotiate to settle up some administrative things regarding that? And if you had your druthers, would you rather see it in, let's say, a third of it coming out on November 24 and then the balance later or just one fell swoop, let's get it off the marked?

No, what I tried to indicate in response to David's question was that we have been in discussions with ConAgra as well as with other investment banks regarding what the monetization options are with regard to those securities. And we committed, if you go back and look at the registration rights agreement, we committed that we would help them effectively market these securities. And especially, I think as we said in the past, we think the first traunch (ph) and the second traunch, it is important that it be handled in a responsible manner. And we are committed to doing that. Now, obviously, they are not my securities in total so -- they are ConAgra's, but all discussions we've had with them I think that they likewise would like to make sure there is an effective marketing; and we are having discussions regarding the appropriate nature of getting that done and the timing.

I hear you. I'm trying to get a little bit more clarification. There is certainly no demand that they sell them on the 24th. I just trying to figure out if we should look for the next couple of weeks to see a missile come across that said, okay, guys, they got a third for sale, what is the bid?.

Well, again, I can't speak affirmatively for ConAgra. All I can tell you is that we have been discussing how best to market and to get those shares out into the market. And I'm willing and our management team is willing to facilitate that process, I think that that is a big commitment on our side as opposed to, just like you indicated, just an overnight order to try and move the stock. I mean ConAgra does have a nice gain built up in those securities; but I think they have also got two traunches that they have a concern over what happens to the marketing of these. We need to make sure that they get into the right hands, that they are effectively handled, and that they are not just irresponsibly put on the market; and that was our commitment from the very first day.

Good quarter.

Thank you.

Reza Vahabzadeh with Lehman brothers.

Rick, I appreciate the guidance. Did you mention the expected growth in volume on the value-added side?

All we mentioned was in O.B.'s comments that we expect to continue to have double-digit growth.

You have not moved your volume growth expectation on the value-added side considering your, I guess, increased improved positioning in that segment by any chance?

We manage that growth based on the opportunities we see in the market. And the opportunities we have got in our own facilities. What we can say is right now we can see that double-digit growth next year is the appropriate outlook for that line of business.

Do you expect to pick up any additional customers or just increase market share within existing customers?

It is always a mix of both, of new customers and new mix from old customers, and you're always going to lose a few customers. It's part of the process.

Got it. And then on the cost-saving side on ConAgra, the chicken operations, have you reached your full run-rate cost savings or is there more to go in 2005?

Well, the way I'm going to answer that is we have reached our fully announced expectations of $50 million, as O.B. mentioned. All of that savings that we have captured have not all been recognized through earnings. So the actual book number would be in excess of that. Some of it has not rolled through earnings.

Right.

So there is more year-over-year on the table that will roll through the operations. And then, no, I would say just like all of our businesses, we continually improve our operating performance every year. And we continue to see opportunities in ConAgra and our existing business to improve the efficiencies. Some of it requires capital investments, which we'll be making.

I guess that is what my point is, that the integration has gone perhaps more smoothly than previously expected and just wondering if the cost savings target could be increased over time just because things have gone as well as they have?

We will probably continue to give information on those, but there are more and more opportunities than what we had originally forecast.

Okay. And O.B., you mentioned that 40 to 50% of the foodservice or value-added contracts have been already addressed. Can you sort of talk about at all on pricing, how you think pricing has gone versus your expectations or versus last year at least so far?

Reza, I think that so far these negotiations have gone as expected. Certainly, we continue to be in negotiations for the balance, but we feel that they're going to be as we had anticipated. And probably do not need to comment further on that.

I appreciate it. Congrats.

Pen Jones with Deutsche Banc.

Nice quarter. Following up on Reza's questions if I may just real quickly. Can you provide some more specific components for the topline in terms of price mix and volume? I don't have that information in front of me, so I was wondering how much this quarter in U.S. chicken was derived from price versus mix improvement versus volume?

Actually, where we are on the sales mix tables that we generally put out, we are still finishing those up as we speak; and those will be coming out later. So until I get all that done, I really need to hold off on that.

But I guess maybe can you talk a little bit more about your expectation for mix improvement? You talked about commodity pricing being down 10% but an improvement in your branded value-added sales due to mix improvement. Can you quantify what you expect that to be up?

Well, I mean our total supply, if you look at the numbers we gave, will be up about in the 4% range of raw material supply; and then our prepared food business, as we mentioned, will be double digit, so in that, say, 10 to 12, 13% range. You are obviously moving some of your mix from -- continually moving some of your mix from your fresh business to the prepared food business as you have those kind of numbers. That is not to say that we are exiting any of the lines of business on the fresh side. In fact, we continue to see growth opportunities, as O.B. mentioned, in the retail sector. And a lot of times we supplement our needs with outside meat purchases of commodity breast meat.

And, indeed, maybe filling that gap for you, it appeared that someone made a bid for Goldkist before their IPO was listed in one of their S1s; and I was wondering, do you see further consolidation within the industry these days, and what is your appetite for acquisitions at the moment?

Well, I mean, generally we do not comment on acquisitions or divestitures until there is something to announce on a public issue. So we just don't go there. Regarding the industry as a whole, we do continue to believe that the industry will continue its consolidation path over the next 3 to 5 years, as it has the past 3 to 5 years. And I think Goldkist with their current public platform has a great opportunity just like anybody else in this space to be an acquirer as well as a seller. So they have got a good public vehicle now.

Great. And then one final question, if I may. Turkey was actually a bit worse than I had expected for the year and for the quarter. What is the -- is the outlook for fiscal '05 to be breakeven in turkey? I realize it is a very small portion of the business now, but it has been a drag so can you provide some details on that?

It -- I think if you look at the commodity prices on the turkey side, we are seeing some strength there, which is good. They are up more so quarter-over-quarter than what we have seen on the other sides. You know, you have got hens up 20.6% for the quarter and toms up 22.2. Now, the problem with that is that is primarily what is going out in terms of a fresh-booked product today as opposed to what was put up six months ago in frozen inventories and basically committed by the retail outlets. So those are kind of lag prices more so than they are current realization prices unless you are dealing with the fresh markets, and fresh market is now just starting to move for us anyway. So I think next year in turkey is still in the balance. I will think we have continued hope and belief that the changes we have made allows that business to get back to a breakeven situation; regarding whether or not it will for the entire year still remains to be seen.

Ken Zaslow with Harris Nesbitt.

Most of my questions have been answered, but I just wanted to touch a little bit on your grain origination. You said that you were going to improve your grain origination. What does that entail? Is that upfront costs? Is that savings? What is the story with that?

I can't tell you that. Just teasing. It's all different kind of things, from the logistics, the storage capacity, the unloading capacity, the investments in moving facilities. We have got some older facilities that need updating and/or replacing, so it's -- there is more to the cost of grain than just the board price. There is also the landed cost, getting it there and moving it through your system. And so we see some opportunities for improvement in that in some of our operations.

So is that part of your CapEx, expending, and then it's just going to come out of the savings; is that --

Yeah, it's all in our CapEx.

The other question -- you kind of were a little evasive with the turkey outlook. Is there any more detail that you can give -- I mean you were kind of saying that you may or may not break even. What is it contingent on that it may break even versus it won't break even?

Well, I mean it is -- obviously, selling price is always important. But for us, we have completely desegmented our Franconia operation from a supply source. We strategically did that thinking that long-term that is going be the best option for that business to be able to buy breast meat as it needs it on the open market and transform that into further processed items. So a lot of it would have to do on the price of inputs into that business.

And then it won't be any restructuring charges in this year -- in 2005 or to what level will there be?

We've completed the restructuring of the turkey operation. So as you noted in the quarter, it did come in higher than what we thought last quarter. I think we originally said 70 to 75. When we announced in April, 70 to 75; when we put together our numbers last quarter, we were down about 65, 66 and we ended up with the balance coming through, a balance of another 8 million. So in the end, our first guess was more accurate than what we actually booked in the third fiscal quarter, so we had a little bit more coming through. But that operation was completely disposed of and is being run by a Virginia co-op now, out in Virginia.

Todd Dubeck (ph) with Bank of America.

Quick question for you. As I look at your credit metrics, specifically on the leverage side, you're looking a lot like an investment-grade company these days. And I'm wanting to know, I guess one of two things. First of all, are you considering adding some debt possibly to buy back some of the ConAgra shares? And if not, are you having discussions with the rating agencies about your credit rating, and do you actually have a target of becoming investment grade in the near future?

We annually, at least annually, pay a visit to the rating agencies after our annual report numbers are out; and we do have that on our agenda this year as well. There is currently no plans to do anything with the ConAgra stock other than to get that out into the market. We think our shareholders will benefit long term the most by having that incremental float available. You know, our market cap has taken a nice increase. Our average daily trade has gone up nicely. But the float as a percent of total still needs to be worked on, and we're going to take the opportunity to do that with the ConAgra shares and help market those as is appropriate.

And in terms of, I guess, any credit-rating targets, do you actually have a target or just kind of some give and take between the credit agencies and really no intention nor goal of becoming investment grade?

Yeah. I mean, we kind of let our results speak for themselves. What we challenge the rating agencies to do is exactly what you are referencing; and that is, take a look at us or take a look at our credit statistics relative to people in our peer group or in our industry group and see how we stack up; and, you know, we think we need to be rated accordingly as they are. And so that will be part of our discussions that we have with them. But in terms of a goal to become investment grade, if it happens that will be great. That is not our top priority at this point.

I have no further questions.

Okay. Well, we thank you all for joining us and look forward to discussing with you again next quarter.

Thank you.