Pilgrims Pride Corp (PPC) 2005 Q1 法說會逐字稿

Beginning the conference is Mr. Rick Cogdill. Mr. Cogdill, you may begin.

Thank you. Good morning. Thanks for joining us today on our conference call to discuss the fiscal 2005 first quarter financial results. The press release we issued earlier this morning contains some of the highlights of the quarter. On today’s call we will provide you with additional details about these results. We’ll also discuss our views on the industry trends that we expect to have an impact on our company in the near term, and after our prepared remarks, we’ll be happy to entertain questions that you may have. When we reach that point we’ll instruct the operator to being queuing up calls from the listeners.

Before O.B. begins I’d like to remind everyone that this conference call will contain certain forward-looking statements including our expectation of 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 concerning the factors that could cause the actual results to differ materially from those forward-looking statements is contained in today’s press release, as well as on the forward-looking statement disclosures contained in our forms 10-K, 10-Q, and 8-K, as filed with the Security and Exchange Commission.

I would now like to turn the call over to O.B. Goolsby.

Thank you, Rick. Good morning, everyone. It’s a pleasure to be here today to discuss our fiscal 2005 first quarter results. As we noted in our press release, our outstanding performance was driven primarily by the strong operator results in both our domestic and Mexico chicken businesses, and the reduction of input cost as feed ingredient cost has continued to climb due to record harvest in the U.S. this last fall.

Additionally, our performance continues to improve. Our growth strategy centered around our prepared foods business, increases by the process of product sales while reducing commodity-based product sales. Salable export, consumption, supply and price and trends, as well as the turn around that is underway in our turkey division, also had a positive impact on this quarter. We expect many of these positive trends to continue for the remainder of the fiscal year 2005. The data supporting these statements is located on slides three though six.

As we noted on our fiscal year-end conference call, our business strategy for fiscal year 2005 remains focused on positioning the company to meet the growing consumer demands for high-quality, convenient poultry meat proteins. Our stature in the food service industry gives us the ability to move quickly, capitalize on favorable consumer and demographic trends such as a steady growth in two-income households and the growing awareness of the benefits of a healthy, low-fat diet. We are committed to building on our success in anticipating and satisfying the needs of our customers.

Before I turn it over to Clint and Rick, I’d like to touch briefly on some of the industry and commodity trends that we saw during the quarter. As we anticipated and communicated in our last conference call, U.S. chicken markets pulled back during the fourth calendar quarter in line with seasonal expectations. However, we continue to see a strong demand from the food service sector and increased exports keeping prices buoyant. Currently, the U.S. chicken market is looking at the Georgia Dock selling prices, is 5% higher than it was a year earlier. Frozen inventory levels of chicken are down 1.2% from the end of the last quarter but are up 26.2% when compared to the same quarter the prior year. However, we believe the majority of this inventory will not show up in this U.S. marketplace, but rather a strategic builder of primarily dark-meat items necessary to supply the growing demand for U.S. [inaudible].

As shown on slide six, commodity prices for the chicken parts are generally up from the first quarter prior a year later. Leg quarters were up 3.57% averaging 29 cents a pound. Whole wings were up 13.03% averaging 99 cents a pound. As we mentioned in our last conference call, boneless, skinless breast meat, with the exception of the up trend, was down 11.9%, averaging $1.34 per pound. Today, however, this price is $1.58 per pound, down 7.1% from where it was at this same time last year. As we mentioned in the past, we generally do not sell a bunch of our breast meat in the fresh markets. In fact, we continue to be a buyer of commodity breast meat to fully meet the needs of our prepared foods division. As a result, we saw top-line revenue per pound sold gains in all of our sales channels, and market expansion exceeding these top-line gains as our cost of inputs declined during the quarter, versus the same period last year.

As you can see on slide four, the National Chicken Council reported that per capita consumption of chicken increased 4% to 86.1 pounds in 2004, and is forecasted to increase an additional 2% to 87.5 pounds in 2005. We believe this growth in domestic demand will not be materially different from the projected U.S. supply growth, and that we will continue to see a positive margin environment for the rest of our fiscal year.

Pullet Placement, which are the primary drive over all our production, were 2.5% higher in 2004 after declining a quarter of a percent from 2003. In 2005, the Pullet Placements are expected to increase by 3% over 2004 levels in line with the forecasted demand increase. Further, it is important to emphasize 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 the year.

Turning to our strategic achievements for the quarter, I’m pleased to report that we are continuing to make progress and expanding our retail prepared foods presence throughout the U.S. As a result, I can now say that we truly are a coast-to-coast supplier. We still see tremendous potential to expand this side of our business, which is less penetrated to us, than our national account prepared foods business. We are working hard to leverage our success at national account prepared foods across our retail market channels under the leadership of our Executive Vice President of Sales and Marketing, Bob Wright.

In our turkey division, we are beginning to see the positive results from last year’s major restructuring of these operations. This quarter our operating loss in this segment improved by approximately 11 million dollars versus the same quarter last year. Specifically, our premium turkey product line, which made its debut over the 2004 holiday season, showed good market movement and is getting a positive response from many of our customers. Going forward, we intend to better leverage the marketing opportunities that are available to us by introducing our turkey products into our existing chicken sales channels. Primarily our food service distributor relationships, which I’ve already mentioned.

Now I’ll touch briefly on some industry trends that are likely to affect our performance and the overall possibilities of the poultry industry in the quarters ahead.

First, the ongoing decrease in feed costs should continue to sustain industry practibility in the coming months. Feed ingredients which accounted for approximately 31% for our fiscal year 2004 cost of goods sold, was down approximately 15% versus the same quarter in the prior year, which will be compared to an even high relative fiscal year 2004 cost as the year progresses. Last fall, record corn and soybean crop has continued to improve with each update that USDA. Currently, the USDA is projecting that market prices of corn and soybean meal, the two main ingredients in chicken feed, will decrease by 19% and 37% respectively through the remainder of 2005, which would reduce our average feed ingredient cost by approximately 20% versus last year, assuming that non-corn and non-soybean meal feed ingredients remain constant.

Second, as shown on slide five, export demand for U.S. poultry products, is gaining strength as expected. We believe we’ll continue to show increased movements over the next several months with the reopening of the Hong Kong channel markets of U.S. poultry products and to the decline of the dollar relative to the number of other currencies. Accordingly, the National Chicken Council export demand is projected to increase on a year-over-year basis by approximately 8% in 2005 and 9% in 2006 and 2007. Russia continues to be the number one volume market for U.S. chicken export. Import permits from Russia are being issued unless the additionally improved U.S. plants are expected to come out in early February. Additionally, new export markets are opening up in Iraq, West Africa and Central Asia. Looking ahead, we believe Pilgrim’s Pride is well positioned to make take advantage of favorable industry in company-specific trends that will possibly impact our performance and overall profitability.

Additionally, we expect to continue to make gains in efficiency, production capacity and product mix as we bring new products that we believe will create value for both our ends, customers and consumers.

In closing, I’m excited about the fact that we are off to a very healthy start in fiscal 2005, and would like to emphasize that as we pursue our strategic objectives for the year, we are doing so from a strong market position that reflects the enormous growth that we have realized over the past year.

With that I would like to turn over the call to Clint to talk specifically about our business operations during the first quarter.

Good morning. It is a pleasure to join you all today to discuss our operational progress and successes this quarter that have driven our outstanding financial results. I want to briefly review three major areas of our operations that we have been focusing on lately and how they’re impacting our businesses.

First, as always, is our prepared foods division. As you know, prepared foods products are our most value-added lines for a simple reason. They are the areas of greatest customer demand and require the highest amount of production expertise. The assets we acquired in last years acquisition of ConAgra chicken division and the efficiencies we have been able to gain in realigning our production between all of our facilities, has allowed us to continue our growth of this business and improve our costs.

Over the last 12 months, for the most part, we’ve been able to continue this growth without additional equipment, and in most cases, with very few additional people. Looking forward to the rest of this fiscal year and into the fiscal year 2006, we see further opportunities for growth of our prepared foods division, along a similar basis. However, even beyond our current facilities abilities, we will continue to make investments in and increase the volume and capacity of our prepared food production facilities as required to meet our customer’s demand for these high-quality products.

We are devoting time, attention and resources to our inventory supply chain and develop tools and business processes to help us continue to improve the management of our inventory, and to assure we have the right products available in the right places to meet our customer’s needs and expectations.

During this last quarter, we strategically built up certain inventories of products. Particularly cooked wing items to prepare for the heavy demand period that we experience with these foods early each year, which is driven by major spectator events such as the professional football playoffs, super bowl, and March madness.

Secondly, with our now broader and much more diverse marketing channel penetration, we are substantially stronger in the food service distribution sector, and accordingly, are focusing dedicated teams and resources to this area as well. We believe this will not only provide us with greater presence in this dynamic channel, but that it will further fuel the growth of our prepared foods division and products.

The third area we are focusing is in the retail sector. Again, primarily with our prepared foods products. Since we have a major distribution presence now, the combined company gives us locations near our customers, helping us to further improve our service levels and delivery times. We’ve recently made major investments in packaging equipment that will allow us to better serve our retail customers. We are excited about getting these and other improvements that we’ll use to grow our retail presence.

In terms of new retail offerings, we are in the process of introducing a family of products that are fully cooked and individually frozen, which will be sold under the Pilgrim’s Pride brand. We are gratified by the market recession these products are receiving by some our largest retail customers.

In the live production area, we continue to take steps to optimize our poultry breeds based on what’s best for each market channel. We believe that our ability to not be tied to one particular breed of chicken, gives us a strategic advantage over certain competitors who are less breed flexible. This allows us to match the right breed of chicken, in terms of size and yield, to the proper product mix required by various customers. Most significantly, our new size and added facilities allow us to raise more of our chickens nearer to where they will ultimately by processed, giving us transportation savings and other added efficiencies. Overall, our U.S. chicken operations continue to benefit from the implementation of best business practice methods across the company’s expanded production facilities.

In Mexico, our operations also performed well in the first quarter, in line with our expectations and more consistent with what we generally see during this quarter. This resulted in an improvement of 11 million dollars versus the prior year’s abnormally poor first quarter performance.

In summing up, I believe that we have only begun to realize the full benefits of our new size and scope, because every area of our company is in better shape to create profitable growth today than a year ago. Each of our key segments is substantial in its own right and recognized by both our peers and our customers as having a major national presence. We are excited about what the future holds for us, and, therefore, I look forward to sharing our progress with you in the coming months.

Thank you, Clint. Before I get started on the financial discussion, I’d like to point out that the first quarter of fiscal 2005 is the fourth full quarter, which includes the results of the former ConAgra chicken division, which was acquired on November 23, 2003. Accordingly, I will be discussing at times the results of our operations compared to pro forma amounts for the prior year period, which include the full effect of the acquisition as if it had been included in our operation results for the entire period of fiscal ’04.

Comparison of certain period amounts to the prior period’s actual results will also be discussed. However, if I fail to do so, they are available on the slides and included on our website as separately filed with the FCC today.

Additionally, I need to point out that last year’s first fiscal quarter included 14 weeks of operations versus 13 weeks this quarter, or 7.1% more time than this year’s first quarter. Accordingly, at times I’ll be making comments reflecting the [inaudible] effect where failure to make such an adjustment would otherwise be potentially misleading.

Turning to slide 10, our earnings per share, as reported this morning, we realize our earnings per share of 73 cents for the quarter, and as you can see on slide 10, this is a 97.3% increase or 265% increase when compared to the prior year, first quarter for pro forma, that income amount of 37 cents per share, or 20 cents per share on a reported basis. As shown on slide 10 and making these first share computations, we had 66,555,733 shares outstanding for this quarter versus 51,757,222 for the same period last year.

Turning to the income statement on slides 11 and 12, we show our sales for the first fiscal quarter were 1 billion 368.2 million compared to the prior year pro forma sales of a billion 505.2 million or 1 billion 44.4 million on a reported basis. This is a decrease of 137 million, or 9.1% versus the prior year pro forma amount. However, this is an effective decrease of only 2% once the prior year’s 14-week quarter is adjusted to a comparable 13-week basis, and an increase of 323.8 million, or 31%, versus the prior year reported numbers.

If you will direct your attention to slide 11, you’ll see a few categories of our next sales to discuss. Our pro forma U.S. chicken sales were down 7.6% with U.S. chicken pounds produced down 2.3%. However, again, when adjusting last year to a 13-week period, U.S. chicken sales were essentially unchanged—down half of 1% and U.S. chicken pounds actually increased 5.2%.

Turkey sales were down 14.5% due to a 62.7% decrease in pounds produced, partially offset by 16.1% increase in sales price per pound sold, as our commodity product mix has been significantly decreased by last quarter’s restructuring efforts. When adjusting last year to a 13-week period, our top-line turkey sales decreased by only 8%.

Sales in Mexico were up 8.9% due to a 20.1% increase in selling price per pound. This was offset by a 9.3% decrease in pounds produced. When adjusting last year to a 13-week period, Mexico chicken sales were up 17.3% and pounds produced decreased by 2.3%.

Turning to slide 13, our operating income for the quarter ended January 1, 2005 with 91million. This compares to a prior year first quarter pro forma operating income of 56.3 million, or 34.8 million on a reported basis. This is an increase of 34.7 million, or 61.6%, versus the prior year pro forma operating income, and an increase of 60.2 million, or 195.5% versus the prior year reported amount.

Our interest expense for the first fiscal quarter of 2005 decreased 4.6 million to 12.2 million, or 27.4%, compared to the prior year first quarter pro forma interest expense of 16.8 million. This is due primarily to a lower average level of debt outstanding during the quarter. When comparing this interest expense to the prior year actual amount of 12.4 million, it’s essentially unchanged. As a percentage of sales, our interest expense decreased to 0.9% of the sales from 1.2% for the same period last year.

Our income tax expense for the quarter ended January 1, 2005 was 31.4 million, a net income before tax of 79.9 million, or a 39.3% effective tax rate. This compares to prior year first quarter pro forma income tax expense of 17.2 million, a net income before tax of 41.9 million, or 41.1% effective rate. On a reported basis, our income tax expense for the prior year’s first quarter was 8.3 million, a net income before tax of 18.6 or 44.6% effective rate.

Turning to our balance sheet, our total debt continues to decrease during the quarter by 10.2 million dollars to 534.1 million. This is down from 544.3 million at the end of the prior fiscal year. At January 1, 2005 our total debt outstanding was made up of 8.5 million in current maturities on long-term debt, 525.6 million in long-term debt.

We currently maintain 168 million in revolving credit facilities and a 500 million in secured revolving term, all but 332.4 million of which is available to the company today.

If we turn to slide 16 and 17, it shows a comparison of our current debt agreements compared to those existing at the end of the prior fiscal year. Addition to this, we have 125 million of capacity available under our accounts receivable securitization facility, and, accordingly, when you aggregate the availability under these credit facilities, as previously mentioned, and our total availability agreement is approximately 760.6 million dollars. If we add our report in cash of 170.1 million to those numbers, our total equity is just shy of a billion dollars at 931.7 million dollars. This compares to a total equity of 463.6 million and 812.2 million at the end of the first quarter of ’04 and the end of fiscal year ’04, respectively.

The weighted average interest rate on our debt outstanding at the end of the quarter was 8.5% compared to 8.2% at the end of the previous quarter, and 86.4% of this debt is fixed.

Looking at slide 19, our net worth has increased 47.4 million from the end of 2004 to 970.4 million due to the strong operating results.

On our statement of cash flow, slide 15 shows that our depreciation amortization for the first quarter actually decreased 2.9 million to 30.1 million compared to the prior year pro forma of 33.0 million or 25.9 million on a reported basis last year.

Slide 18 shows our total capital expenditures were down 2.4 million to 24.2 million for the quarter compared to the prior year pro forma of 26.6 million or 20.6 million on a reported basis last year.

Slide 19 shows a summary of our credit ratios and certain other information. To point out a few informations on the ratio page, we show that our EBITDA interest coverage improved to just under 10 times at 9.95 times in the current fiscal quarter. If we take our total debt divided by EBITDA, it now stands at 1.22 times and our total debt capitalization at 35.5%. If we recompute these ratios on a net of cash basis, the ratios of net debt EBITDA decreases to 0.83 times and debts capitalization to 27.2%.

Our stock, which closed at 34.16 on January 21, last Friday, was up 101.2% from the end of the first quarter of fiscal 2004 and up 24.7% from the end of fiscal 2004.

Turning now to our financial forecast, we’ll update some of our numbers for the rest of the year. As we’ve now done this morning’s call, our business continues to show signs of strength. Accordingly, we are pleased to increase our earnings estimate for all of us for 2005 to a range of $2.80 to $3.10 a share. That’s up from $2.60 to $2.90 that was released last quarter. For the second quarter of fiscal ’05, our estimate for earnings will be 52 cents to 62 cents. Second fiscal quarter is traditionally one of our most challenging quarters, and that’s why you see the decrease from this year’s report this quarter reported numbers. But this is still an improvement over last year’s second quarter and annual pro forma earnings of 50 cents and $2.15 respectively, by from 2 to 7 cents for the quarter and 65 to 95 cents for all of fiscal year ’05 versus ’04.

Our U.S. and Mexico sales are now estimated, for the year, to be about 5 billion 550 to 5 billion 650. That range for the U.S. is 5 billion 175 to 5 billion 255 and Mexico at 375 million to 395 million. U.S. chicken volumes remain at what we have previously estimated in the 5.4 to 5.6 billion pound range. Mexico pounds have been revised to an estimate of approximately 630 to 650 million pounds. Cost of sales is going to remain in the range we quoted last quarter in the 87 to 89% range. SGA also remain in the same range of 4.5 to 4.7%. Our interest expense will be in line with what we’re apparently seeing, possibly increasing slightly on some of the variable debt as the quarter—the year progresses, but it should be in the range of 900,000 to 1 million dollars per week. Our effective tax rate will stay in the 36 to 40% range. Our capital expenditures for the year still are remaining at the 175 to 200 million dollars. We expect next quarter to be in the 30 to 50 million-dollar range on those CapEx. Depreciation will stay in line with where it currently is, about 2.3 to 2.5 million a week.

I believe that would give all of the information necessary for updating your analysis of our second quarter projections and fiscal year results.

That being said, we’ll turn it over to the operator to begin queuing up calls and we’ll answer any questions that we might have missed.

Our first question is from David Nelson with CSFB.

Good morning and congratulations. Turkey—still a little negative in the quarter, I guess. Are you still looking in the black for the year?

I think our forecast does not anticipate that we’ll actually be in the black for the year. No, it does not.

I guess as we see the Hormel results, the markets seem to be fairly favorable. The reason you wouldn’t be in the black would just be internal turnaround issues?

Continuing to try to build back market share for the process sector has been one of our biggest challenges. Even though we’re making progress, it’s been a little slower than we anticipated. That is a big factor.

Just structurally, is there any reason that business couldn’t generate high single-digit operating margins in ’06 or ’07?

It should be competitive in ’06 and ’07, relative to where it is currently. We’ve taken a lot of the commodity exposure out, obviously with the close of the Hinton operation last quarter, our prepared foods products line is completely dependant upon buying meat on the outside. So as you’ve seen, boneless, skinless breasts for turkey actually increasing, that tends to work against you in the short-term, but long-term we still think it’s the right strategic decision for our prepared foods business in the turkey business.

I’m sure this would be embedded in your ’05 guidance. What more synergies are you able to ring out from the ConAgra acquisition now that we’re one year into the process?

I think our total synergies that we anticipate will be in the range of 90 to 110 million dollars—probably more likely right at that 100 million dollar range.

For fiscal ’05?

No, that would be a total run rate, and about 55 million of that was reflected in last year, so you could look for an incremental roughly 45 million year-over-year improvement, but the total run rate would still be in that 100 million range.

One last thing, but in just thinking about the overall markets. More news about some [inaudible] in Asia—it was Vietnam, maybe Thailand—is that helping your exports into—you are looking for exports to improve into China and into Hong Kong. Could you just talk about the export market a little bit, please? Where the competition is coming from and what, if anything, that these recent cases of AI in Asia mean to you.

Well, certainly, we are projecting export markets to improve. We are seeing that today. And I think part of that is induced to the fact that product out of Asia, out of Thailand, out of Vietnam, is—they have drastically reduced their flocks over the last couple of years. Our primary competitor in export market continues to be Brazil. We are expecting to continue to see the demand for dark meat, leg quarters, strong. Brazil is primarily exporting whole birds where the U.S. is in a position to export dark meats, that we think we have a good competitive position going forward. The AI situation in Southeast Asia should help U.S. exports go up full.

Is there anything new with Russia?

Nothing other than—you saw the quota numbers there relatively similar to last year. We expect U.S. dark meat to be a significant portion of that, and we see that being a strong market return.

Right. Thank you very much.

Our next question is from Diane [Geysler] with Merrill-Lynch.

Good morning. Congratulations. Can you just talk a little bit about—in more detail about the feed costs—what’s the pick up in dollar terms in the second quarter? And then also relating to the increase in guidance, would you say it’s driven more by better pricing in the market, or feed being—you’re going to have a little better pickup on feed, or is it just operations? If you could just give us some idea about what’s driving that increase.

Overall, I think the markets, in general, have been in line with our original forecast, so it’s mainly we have seen a more downward trend on the feed ingredient cost than what we had originally in our forecast when we first put it out last November. So I would say that, primarily, it’s going to be updated because of the feed ingredients cost more so than a change in the outlook for the market.

Okay. And can you give us an idea about, in the quarter, what the benefit was for feed? And are you still open to the market, or have you begun to set some hedges?

We are primarily still on the market. We still evaluate the market as we can. Yes, it was 15%, roughly, cost savings in the feed ingredient arena, so if you look at our cost of goods sold, it’s in that 30 to 31% range, which is feed ingredient, and we saw about a 15% improvement in those costs during the quarter.

Sure. And the outlook for production is still less than 4% for chicken as an industry? What are you looking for for PPC in terms of your internal production?

We’re still in the same range that we were before, and that—

Are you above 4%?

Yes, we’re in that 3 to 5% range.

Yes, I have a couple of questions. Good morning, it’s Tony [Titlebach]. A couple of questions—number one, when I take a look at your slide, and if I wrote this down correctly, you’re looking for basically consumption. If I measured by your sales they’d be up about 1.6%. Yet you’re talking about production if we look at Pullet Placements, etc. I think you just got done telling Diane somewhere in the 3 to 5%, I assume it includes heavy bird as well. I’m having trouble reconciling the discrepancy between that and coming out with a scenario that says poultry pricing won’t be anticipating the market and starting to head down. Is that too gloomy an outlook?

Yes, I think you’ve got to factor in the additional product that’s going to be exported. I think the per capita consumption numbers take all that into account. You basically end up with the production in the meat supply, in the chicken business, in the 4% range, a total poultry of about 3%, but then as O.B. mentioned, you’ve got about 8% pickup in product that will be moving off shore. And that’s what’s driving the per capita consumption change being very moderated. Overall production of all meats—you’ve got beef—according to the current outlook, looking to up 80%, pork to beat that. So total red meat and poultry—actually, poultry is on the little bit lighter side relative to red meat and poultry, currently for ’05.

So you’re basically suggesting that from a modeling point of view, we shouldn’t be that concerned about pricing. Is that your point on product?

I think if you look at our mixed price that we reported today, our overall mix revenue was actually up 2.7% compared to the same period a year ago. All the markets tended to be up except for boneless, skinless breast. I think it’s a sorry seller, but as a commodity of boneless, skinless breasts you might have a different outlook than Pilgrim’s Pride.

Sure. All right. There’s no question you guys are taking full advantage with the way you’re buying grain, and I think you’re to be congratulated on it. I would suggest that probably after the March period, if not slightly before, I think some of the competitors are going to be in the same position you are. They run out a hedge. Do you expect this thing—the price—to start having more competition after that period, or in light of what you just said, the market’s going to take care of it, and that’s not a concern as far as you guys are concerned?

I think the supply is fairly well balanced compared to what we’re seeing on the demand side. So I think the supply and demand is going to have more of an impact then necessarily the cost of input.

Now are you on the market as far as your selling prices to the meat—let’s just take the fresh side of the business, because I’m sort of getting the feeling you guys can actually be a little bit tighter on price than some of your competitors and still have a margin advantage. Is that what’s happening, or not really?

Again, our prepared food product is primarily all fixed-price contracts, and most of those have been completed. There’s still a few that are open. On the fresh side, most of them tend to be tied to Georgia Dock, which we referenced [inaudible] that’s showing a good strength, in general, as supply is not really negatively affecting that. That and it’s in line with demand. So, no, some of our fresh product, yes, it is fixed priced, but there is a fair amount of the fresh product that floats to the Georgia Dock market, or some of the other markets that, generally, we’re not selling commodity breast meat, because we consume so much of that internally in our prepared food system. Where on an occasional spot sale, yes, that would be one thing. But if you look at it throughout the year, we’re going to be short of our needs for boneless, skinless breast, which means we’re going to be the net buyer of that product.

Good. Now, final question, if you could answer, Rick. I know at one point that I believe you had an interest in [Gold Kit], stock prices were remarkably different than they are today on both sides of the coin. Would that complete a missing piece, as far as you are concerned, and are you in the acquisition mood—or mode, let’s say—since now you can do a stock for stock instead of a cash for stock transaction?

As we’ve always said in the past, we don’t comment about acquisitions or the vestitures until there is something to announce to the public.

Step up, Rick. Come on.

We have said that we will continue to evaluate any and all acquisition opportunities that we think might strategically benefit our business. But other than that, there’s really nothing new to say.

Okay, fine. Thank you very much, Rick.

Our next question is from Ken Zaslow with Harris Nesbitt.

Good morning, guys. At what point would you be interested in starting to hedge your corn costs and your feed costs and the like? What does it take?

We continue, even on a daily basis, to evaluate that decision. We look at all of the information that’s available from the public, forecasting agencies, we also employ [gravit economists]—it still continues to suggest that there’s more down side in both grain and meal. Until that number starts to look differently, we want to be on the mark to carry some of those slower months is just still too high.

I’m not saying that we won’t take some positions, but we won’t announce it until it’s completed. That’s for sure. But in general, we would have to marry out some of our pricing commitments on our prepared foods arena. That would be a consideration and is always a consideration.

Okay. What does your guidance actually assume in terms of feed costs? Are you looking at this to continue to go down from here, or flatten out, or go up?

Based on what O.B. said earlier was the outlook for feed ingredients year-over-year appears to be in the 20% range on our feed formulation.

Okay.

I know we had 15% in the quarter, so as we start lapsing some higher quarters—you saw soybean meal, in particular, and corn kind of tracks along with it—last year, going through the summer actually didn’t hold up. So as we get into those quarters, the 15% should expand.

Okay. In terms of your food service contracts, are you now all locked in for the year for ’05, or where are you?

We’re substantially completed, but, no, we’re not 100%.

What percentage?

It’s probably in the high 80’s.

Can you go through a little bit of your performance in Mexico? What is the outlook for Mexico, and is it possible that you guys can have actual profits every quarter?

It’s always possible, but—

Probable?

I think our outlook for Mexico is probably more in line with what we have traditionally seen as going back, say, two and three years, as opposed to what you saw last year. It was a more traditional first quarter, and we expect the rest of the year to be more traditional as well.

Was there less over supply of the chicken, or did you see a pickup in demand down because of the holiday season?

I think primarily it was an absorption of the supply that had been put on that market over the last 12 months had worked it’s way through.

All right. Thank you very much.

Our next question is from Todd [Zalvig], with Bank of America.

Yes, good morning. Quick question for you on cash flow. It looks like according to your guidance, that you’re going to have significant cash flow this year, and even with the capital expenditures of 175 to 200 million dollars, according to my projections, you’re going to be generating some pretty significant free cash flow, and I’m wanting to know if you’re in agreement with that, and if you have plans for a debt reduction or—obviously you’ve got some flexibility with respect to acquisitions, but just what you’re planning to do with free cash flow, if, indeed, you do project that you’re going to be having some.

You are correct. Our free cash flow is fairly strong for the year. And we obviously continue to look at all of our availability to pay down debt—that’s our primary emphasis—but where we are today, it’s fairly fixed, not a lot of variable debt, but we’ll be looking for other opportunities in that fixed-debt arena to see what we could do, and to the extent that we can’t do that, then we’ll just manage the cash positions we do.

Okay, and one other question with respect to the shares that ConAgra continues to hold—as I understand it, they can’t sell their remaining shares until this coming fall unless it’s authorized by the Pilgrim’s Pride board. Have you disclosed—or are you planning to disclose—whether or not you will agree for them to sell those shares early?

No, we haven’t disclosed anything in regards to that. But your understanding is correct, that—actually we sold a little bit more than the one-third. They’ve got about 7 million of shares that they would have eligible for sale December 14, roughly, of next year. And then the remaining 8.5 million shares a year thereafter.

Okay, very good. Thank you.

Our next question if from [inaudible] with Neiman Brothers.

Good morning. Actually most of my questions have been answered, but just—there’s somewhat of a pressure recently, O.B. and Rick, on beef prices. There is the potential for some order openings, or maybe not, but to the extent that beef prices come under pressure, would that change your expectations one way or another, or have you already taken that into account?

We believe we factored that into our equation as we go forward. Certainly some of the information that the government has put out relative to that and beef consumption we think will help poultry going forward, and we think we’re still well positioned to compete well against the beef industry not only in 2005, but going forward.

Okay. And then on the food service side, Rick, I’m assuming your 2005 food service contracts are generally an improvement over 2004 contracts from a pricing standpoint?

I don’t think that’s an overall statement. I think there’s a mix. I think there’s some that are improvements that are negotiated in different markets and they were substantially lower than where they should have been, there were others that there might have been some top-line compression, as we indicated in our last call. But I think, in general, what we saw were our margins on our products being maintained on some of the really underwater contracts. I think it’s a mix.

Then on the pricing, you mentioned both the food—or the prepared food contracts are fixed-price contracts. Are they also fixed-margin contracts in that your margin is tied to a floating rate [inaudible], or do you take the risk on the relative side?

Generally they are not fixed relative to margin. There are some that have cost plus characteristics that take into account grain markets. But, in general, the answer is, no. They tend to be more fixed on the revenue side and the margin management is really our job.

And then the 175 to 200 million-dollar CapEx budget—what does that really entail? Does that entail a capacity expansion, is this all upgrades? Can you comment on that? That’s my last question. Thank you.

It’s a complete basket of items. We’ve got some infrastructure things that are in need of upgrading and maintenance from feed mills to basic processing. We’ve got prepared foods operations that we continue to invest heavily in, which are driving a lot of our CapEx. So it’s a mix between infrastructure, automation and prepared food capacity. We try to keep a pretty good mix in there between those three.

Our next question is from Steve [inaudible] with [Enso Capital].

Thanks for taking my call. I just had a question on these food service contracts. I’m just trying to understand the nature of the profitability, and I think it would help me substantially if you could talk about the duration of the contract. So even if a contract is signed for a year, how is the revenue, in general—how does that change, given the change in prices for chicken? I’m just trying to understand the lag [inaudible] when contracts are signed.

There again, they’re primarily fixed. So if you’re dealing a fixed-price contract, we take into account our cost of production, we take into account our required margin returns, and then based on that, we quote for business and some of it we get, and some of it we don’t get. When we get it, the revenue side is fairly consistent based on the movement of the product. There are very few of the—in fact, none of the contracts, in general, have any required commitment in terms of that they’ve got to pull a certain amount. Now there’s an expectation based on the percentages that we have in the contract, and how much is committed to. But other than changes in the demand pull, the revenue is going to flow pretty consistent.

Do you disclose what percentage is fixed price and what is average duration of the contract?

No, we don’t disclose that, but, again, as we mentioned in the past, the average duration of a contract from pricing tends to be on an annual basis.

Okay, that’s helpful. And then one last thing. Can you talk about the actual pounds sold in food service versus fresh?

We don’t talk about that either.

There’s no way to get profitability by—

Right.

Okay. Thank you.

Our next question is from Pablo [Spanek] with JP Morgan.

Good morning everyone. Could you remind me first on the prepared food strategy, what’s the target in percentage terms? I calculate it right now to be prepared foods at about 12 or 13% of your total chicken sales. How much do you assume that ratio’s going to increase, say over the next few years? And related to that, what’s the margin gap that we should be assuming and between your fresh chicken business and the prepared food business. Is it 200 basis points, 400 basis points--? Thank you.

I’m not sure where you get the prepared foods—we got last quarter about 46% of the U.S. chicken sales were prepared foods sales. Yes, you might be—

Looking at other—

Yeah. Just look at the sales tables that are put out there on the web and it was 46% of U.S. chicken sales with the majority of that in our food service arena.

Right. So what should we assume that’s going to change over, say, the two or three years?

If you look at where it was last quarter, what we put out there, we were at 42.4%, this quarter we’re up to 46.4%, but it does fluxuate versus lots of things. Last year it was 46.8. But as a percentage, we didn’t get as much movement versus a year ago as we have versus the last three quarters, where we were in the 42 to 44% range. But our goal is to push that north of 50% to hopefully getting back to the mid-50 numbers.

Okay. Is there a margin gap that we should be assuming between fresh and prepared foods?

Yes, that’s information we don’t release publicly as well.

And the last question deals with the turkey business. I understand that you’re saying that for ’05, apparently the guidance still assumes there will be a negative EBIT, but should we assume that a negative EBIT of 10 million, a negative EBIT of 14 million—just ballpark.

I think we’d probably be north of the 10 million—probably in the 15 to 20 million. A lot of it’s going to depend on the movement we got out of the prepared foods arena over the next 3 to 6 months.

All right. That’s good. Thank you very much.

I have no further questions.

Okay. Thank you all for attending.