Pilgrims Pride Corp (PPC) 2005 Q2 法說會逐字稿

Good morning and welcome to the Pilgrim's Pride conference call to review the Company's financial 2005 second quarter financial 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 link on the website homepage, www.pilgrimspride.com. These slides will be during the call. After the speakers' conclude their prepared remarks, I will provide you with instructions about the process necessary to take a question.

On this conference call, will be Mr. O.B. Goolsby, President and Chief Executive Officer; Mr. Clint Rivers, Chief Operating Officer; and Mr. Rick Cogdill, 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, ladies and gentlemen. Thank you for joining us today on this call to discuss our fiscal 2005 second quarter and first six months financial results. The press release we issued earlier this morning contains some of the highlights for these periods and we will provide you with additional details about how the results on today's call transpired as well as discuss our views of the industry and trends that we expect over the near term. After our prepared remarks, we will be happy to take any questions you have.

Before I turn it over to O.B., I would like to remind everybody that this call will contain certain forward-looking statements including our expectations of future financial results, sales, cost of sales information, market dynamics, etc. Our actual results may differ materially from these projected in our forward-looking statements. Additional information concerning the factors that could cause these results to differ materially are contained in our forward-looking statements disclosure contained in today's press release as well as in the forward-looking statements disclosures contained in our Forms 10-K, 10-Q, and 8-K as filed with the Securities and Exchange Commission. Also this morning we did file our second quarter 10-Q, which contains these forward-looking statements for the second quarter.

At this point, I will turn it over to O.B. Goolsby.

Thank you, Rick. Good morning, everyone. It is a pleasure to be here to discuss our fiscal 2005 second-quarter results. As we noted in our press release, we had an outstanding quarter driven by solid poultry market trends coupled with the continued strong growth of our chicken business, lower average feed costs when compared to the prior year, and excellent results from our Mexico operations.

In Mexico specifically, the oversupply problem that negatively impacted our results there in fiscal 2004 has improved significantly and we were able to realize price increases at the same time our cost of production was decreasing.

In the U.S., we continued our focus this year on product mix improvements more so than unit volume growth and the penetration of our prepared foods business into an ever-widening customer base throughout the foodservice, retail, and quick service categories. Accordingly our chicken unit sales volume increased only 1.6% during the quarter; however, our revenue per pound of sold was basically unchanged.

Looking forward to the rest of this fiscal year, we expect many of these positive developments both in the U.S. and Mexico to continue for the remainder of the fiscal year 2005 as projected U.S. whole bird market prices are expected to remain above $0.73 per pound for most of the year. Feed costs are projected continue to compare favorably through September of 2005, when the effect of this year's abundant crops will lapse and export demand is expected to reach a four-year high.

Our solid performance last quarter reflects our continued success in executing on our long-established business strategy. In our core prepared foods business, when compared to last year's second fiscal quarter, we realized a 5.6% increase in unit volumes sold, with our sales prices per pound sold remaining essentially flat. As we have noted on earlier calls, positioning the Company to meet the growing consumer demand for high-quality, convenient poultry meat proteins both in the U.S. and abroad, remain our primary focus. We are doing this on a number of fronts; from new product development and packaging to improved sales channel integration and the buildout of our already strong customer relationships, particularly in the foodservice distribution sector.

Clint will provide additional details about some of the exciting initiatives we have underway a little later on the call. First however, I would like to provide a brief overview of some of the industry and commodity trends that we saw during the quarter and what we expect in the quarters ahead.

The operating environment in the second fiscal quarter resulted in an overall improvement of our results both versus the previous quarter and year-over-year, driven primarily by stable product pricing in the U.S. and lower feed ingredient input costs with improved operating efficiencies.

In looking at slide 3, chicken producers are expected to increase production in 2005 due to a combination of a relatively strong domestic economic growth and higher export demand. The overall broiler production estimate for 2005 is 35.7 billion pounds, which is up approximately 5% from 2004. Even with the higher broiler production forecast, broiler prices are expected to remain steady and gradually strengthen into the summer but remain below their year earlier levels during the first half of 2005.

As shown on slide 4, according to the National Chicken Council, per capita consumption is expected to increase approximately 1.5% in 2005 and 1.9% in 2006.

Turning to slide 5, export demand for U.S. poultry products continue to gain strength with volumes exported projected to be up almost 10% in 2005 due to the return of export following last year's interruption caused by regional outbreaks of avian influenza aided by the weakened dollar helping to make U.S. products even more attractive to overseas consumers. Additionally, according to the National Chicken Council, export volumes are projected to further increase on a year-over-year basis by approximately 9% in 2006 and 7% in 2007.

Russia continues to be the number one volume market for U.S. chicken exports, with broiler exports last year accounting for 32% of total exports. That represents 42% of all the U.S. leg quarter shipments. With lower-priced forecasts for the first half of 2005 and a weaker dollar relative to a number of currencies, broiler exports are expected to reach just over 5.2 billion pounds. That would be the second-highest yearly total with 2001 representing 5.6 billion pounds.

Turning to page 6, looking at the benchmark commodity chicken selling prices, Georgia Dock prices were a bright spot for the current quarter, up 2.9% to $0.75 versus the same quarter last year. Whole wings were down 2.3%, averaging $1.15 per pound. Leg quarters were down 10.3%, averaging $0.30 a pound and currently leg quarters are trading at $0.35 a pound. Boneless, skinless breast meat was down 17.7%, averaging $1.54 per pound.

Grain prices, while still down from 2004, are up from where they were at the end of our prior quarter by approximately 5.2%. And recent forecasts suggest that prices are beginning to stabilize. Even though ending corn stocks are expected to be higher at the end of this crop year, recent prices suggest that farmers previously entered into forward contracts at last year's higher prices, contributing to a higher current price than was previously anticipated.

Additionally U.S. soybean meal prices rose by more than $25 per short ton due to dry crop conditions in Brazil. Looking forward, the USDA is projecting that market prices for corn and soybean meal, the two main ingredients in chicken feed, will be approximately 15 to 36% lower respectively for the remaining 2004 and 2005 crop year when compared to prior seasons which would reduce our average feed ingredient cost by approximately 20% versus 2004.

I would now like to turn the call over to Clint, who will provide some additional color about our business operations achievements in the first quarter and some of the exciting initiatives we will be rolling out through the remainder of the year.

Thanks, O.B. Good morning. It is a pleasure to be here today to discuss some of the operational successes that contributed to our outstanding quarterly results. After I touch briefly on a few key developments in the quarter, I would like to provide some additional details about the new strategic initiatives.

As O.B. previously mentioned, we have continued to focus our attention this year on sales mix improvements and rationalization of what we produced and wear. We are proud that this process has resulted in an increased capacity in our prepared foods operations of over 20% versus the combined capacities we had at the date of last year's acquisition. These increases were obtained with minimal capital outlay and resulted primarily from the alignment of where best to run products combining the production runs for similar products and efficiencies gained in product throughput based on past experiences.

Turning to some of the near-term initiatives that are underway, which we believe will have a positive impact on our operational results going forward, we will be transforming our Broadway, Virginia chicken processing complex over the next few months from a fresh retail tray pack operation to a feeder supply plant for the Company's prepared foods division.

As you know, the most significant contributor to our Company's success has been the rapid growth of our prepared foods division and in line with Pilgrim's Pride's long-term strategy, we continually look for opportunities to upgrade our fresh product mix into more and more higher valued prepared foods products and the Broadway plant conversion is one of these examples.

Further the tray pack volume currently being produced in Broadway will be absorbed in the Company's four other tray pack operations, making them more efficient in reducing fixed costs while retaining our existing product sales.

Also in the prepared foods arena we are also pleased to announce the debut of our new line of American Heart Association certified products which are aimed at making it easy for customers to enjoy poultry products they can feel good about without sacrificing great taste. We call it our Eat Well, Stay Healthy line. This productline is low in carbs, fat, calories and sugar, contains no trans fats, and is highly nutritious. You can read more about this line of products which includes precooked boneless, skinless grilled chicken breasts fillets and breast strips on the website at www.eachwellstayhealthy.com.

Also just in time for the summer barbecues, we have introduced a new fresh product called Gaucho Grills (ph), which we think will be very well-received by consumers. Gaucho Grills are a no touch, no mess alternative to do-it-yourself kebabs featuring several generously sized pieces of boneless skinless chicken fillets already skewered for the grill.

In summary, there is a lot of exciting activity taking place at Pilgrim's Pride that we believe will put us in an even better position to capitalize on the opportunities we see to satisfy our customers and create value for our shareholders. I look forward to sharing our progress with you in the coming months.

I would now like to turn the call over to Rick for a discussion of the second-quarter financials.

Thank you, Clint. Before I get started on the financial discussion, I'd like to point out the first six months of fiscal year -- last year, 2004, included 27 weeks of operations or 3.7% more time than this year's fiscal 26 weeks. Accordingly, at times I will be making comments that reflect the effect of this referenced by the phrase adjusted. This extra week occurred in the first quarter of fiscal year 2004, so it does not affect the second-quarter comparisons.

Also at times I will be referring to the pro forma results, which will reflect our November 23 acquisition of the ConAgra Chicken Division. And again these pro forma results primarily affected the first quarter, whereas last year we did not have ConAgra in our operations for the first full quarter.

Turning to slide 7, our earnings per share as we reported this morning, our earnings per share for the quarter ended April 2 of '05 were up 71% to $0.85 a share. This compares to net income of $0.50 per share for the same period last year. And for the six-month period, they were up 142.6% to a $1.58 a share compared to $0.73 per share for the same period last year or $0.87 a share on a pro forma basis.

Now included in both of these results for the quarter and the year-to-date is a non-recurring gain of 6.5 million net of tax or $0.10 a share associated with the prior year breach of contract litigation claim which was settled by the Company during the quarter through mediation. In making the per share computations for the six-month period, we had 66.5 million shares outstanding on average this year versus 58.8 million shares in the same period last year. And obviously 66.5 million on a pro forma basis.

Turning to the income statement on slides 8 and 9, it shows our sales for the second fiscal quarter of '05 were essentially flat as 1.375.3 billion compared to a 1.384.9 billion in the same period of last year. Specifically our U.S. chicken sales were up 2.1% on an increased pound sold of 1.6%. Mexico chicken sales were up 2.1% due to a 5.3% increase in selling price per pound, offset partially by a 3% decrease in pounds produced.

Our turkey sales were down 31.1% due to a 40% decrease in pounds sold resulting from a 63% decrease in our pounds produced. This was partially offset by a 14.2% increase in our sales price per pound sold. These changes are the result of last year's turkey division restructuring and our product asset dispositions and in line with our expectations.

As shown on slide 9, sales for the six months ended April 2, '05 were $2. 743.6 billion compared to a reported pro forma amount of 2.890.1 billion for the same period of last year. Or an adjusted pro forma amount of 2.782.6 billion. This is an effective decrease of 1.4% once the prior year's first quarter is adjusted to a comparable 13 weeks (technical difficulty). Specifically the adjusted pro forma U.S. chicken sales were up approximately 1% with U.S. chicken pounds produced up 4.3%. Adjusted Mexico chicken sales were up 9.4% due to a 12.4% -- excuse me -- increase in selling price per pound offset by a 2.6% decrease in pounds produced.

And the adjusted pro forma turkey sales were down 16.8% due to a 27% decrease in pounds sold which resulted from a 61% decrease in pounds produced offset again by a 14.4% increase in sales price per pound. And again, these changes were a result of last year's turkey division restructuring and production asset dispositions.

Turning to slide 12, we show our operating income for the quarter ended April 2 of '05 was up 44.6% to 89 million, compared to 61.5 million for the same period last year, an increase of $27.4 million. For the six-month period, operating income was up 95% or 87.7 million to $180 million compared to 92.3 million for the same period last year.

On adjusted pro forma basis as slide 13 shows, operating income for the six months ended April 2 of '05 was up 58% to a 113.8 million for the same period last year.

Slides 14 and 15 have our summary information related to interest expense, income tax expense and depreciation expense. Touching on interest expense for the second quarter of '05, it decreased 4.2 million or 31.1% to 9.3 million when compared to the prior year quarter interest expense of 13.5 million and as a percentage of sales, our interest expense decreased to 0.7% down from 1% of sales in the same period last year.

Net interest for the six months ended April 2 of '05 was down 8.8 million or 29% to 21.5 million when compared to pro forma interest expense of 30.3 million in the same period last year. And as a percentage of sales for the first six months, decreased to 0.8% from 1.1% last year.

Our income tax expense for the quarter ended April 2 was 34.2 million on net income before taxes of 90.6 million or a 37.7% effective rate, and this compares to prior years second quarter actual income tax expense of 13.6 million on net income before taxes of 46.6 million or a 29.2% effective rate.

For the six-month period April 2 of '05, our income tax expense was 65.6 million. On net income before tax of 170.5 million or a 38.5% effective rate, this compares to a pro forma income tax expense of 30.8 million on net income before tax of 88.5 million or 34.8% effective rate in the prior year.

Turning to the balance sheet, some of the highlights are shown on slide 16 and 17. It shows the comparison of our current debt agreements compared to those that existed at the end of our prior fiscal year. Our total debt continues to decrease during the quarter by 2.2 million to 531.9 million and at April 2 of '05, our total outstanding debt was made up of 8.5 million in current maturities and 523.4 million in long-term debt. We currently maintain 168 million in revolving credit facilities, all but 42.5 million is payable to the Company today and 500 million in secured revolving term debt, all of which is available.

Additionally we have a full 125 million in capacity available under our accounts receivable securitization facility. And accordingly when you aggregate this with our available cash on our balance sheet of $147.8 million, our total liquidity is just under $900 million at $898.3 million. This is up $182.5 million from where it was at the end of the prior fiscal year end.

The weighted average interest rate on our debt outstanding at the end of the quarter was unchanged from last quarter at 8.5% and this is made up of 86.6% fixed and the remainder is floating.

Slide 18 shows that our net worth has reached a milestone this quarter of over $1 billion and increased 103.1 million from the end of fiscal '04. And now it stands at $1.26.1 billion due primarily to the results of our operations.

On the statement of cash flows, slide 14 shows again that our depreciation and amortization for the second quarter was basically flat at 33.8 million compared to 33.1 million for the same period last year. For the six months ended April 2, depreciation and amortization was 63.8 million compared to a prior year pro forma amount of 66 million or 59 million on a reported basis.

Slide 20 shows that our total capital expenditures was up 8.6 million to 28 million for the quarter versus the prior-year period and for the six months ended April 2, our total capital expenditures was 52.2 million compared to prior year pro forma of 46.2 million or 40 million on a reported basis.

Slide 18 on the web slide also shows the summary of our credit ratios as they stand today and pointing out a few of them, we show that our EBITDA interest coverage is 14.3 times coverage during the quarter. Our debt divided by EBITDA now stands at 1.1 times and our debt to capitalization is 34.1%. And on a net of cash basis, the debt to capitalization is 0.8 times debt to EBITDA and 27.2% net debt to capitalization.

Our stock closed at $33.95 on last Friday, April 22. That was up 47.9% from the end of the second quarter of fiscal year '05 when the stock closed at $22.95. And that was up 24% since the end of fiscal 24, when our stock closed at $27.39.

Turning to our forecast, I will now review our remaining fiscal 2005 earnings estimate. As we announced this morning, our chicken business continues to shows signs of strength. Accordingly we are pleased to increase our earnings estimate for all of fiscal 2005 to arrange a $3.20 to $3.40 per share. For the second half of fiscal 2005, we estimate our earnings to be from $1.62 to $1.82 with 50 to 55% of that occurring in the third fiscal quarter and the remainder would be in the fourth quarter.

Our U.S. and Mexican sales are estimated year to be 5.185 billion to 5.290 billion in the U.S. and 390 to 410 million in Mexico for total estimated sales to be 5.575 billion to 5.700 billion.

U.S. chicken production volumes will remain at our estimated -- and are estimated about 5.4 to 5.6 billion pounds for 2005 and Mexico remains in our estimate at 650 to 660 million pounds.

Cost of sales will remain in the 87 to 89% of net sale range. Our SG&A will increase slightly from what we said in the past about 4.7 to 5% of net sales. This gives us a projected operating margin in a range of 6 to 8.3%.

Net interest expense is being decreased to 700,000 to $800,000 per week range for the remainder of fiscal '05 and our estimated effective tax rates will stay in the same range of 36 to 40%.

As noted on our statement of cash flows, we are running a lot lower in our capital expenditures, expenditures than what we had previously forecast. We are thereby reducing our estimate for the year to 150 to 175 million from the previous announced guidance of 175 to 200 million.

Depreciation expense will stay in the same range it currently is in that 2.4 to $2.6 million per week. And I think that basically gives all the components necessary to analyze our outlook for the remainder of fiscal year and for the third and fourth fiscal quarters.

And that being done, we will turn it over to the operator to queue up any questions that you might have.

(OPERATOR INSTRUCTIONS) David Nelson.

I would like to dive into feed costs first. Today and as well as on the last call you talk about feed costs being about 20% lower than a year ago. Over the last several months, feed at least on the markets -- on the futures markets and the spot markets have gone up, especially soybean meal. On the last call you said you had not hedged at that time. To keep feed costs low, did you hedge to protect yourself?

David, we have not taken any major position at this point in time. If you look at corn, corn is very similar to what we were looking at at the beginning of the year. The meal price has jumped up but projections are with a decent planting and crop in the U.S. that we should see some retreat in the meal price going forward.

I guess I still don't understand if meal prices are up roughly 20% over the last three months and you didn't protect yourself, how this is the case?

Again, what we are saying is the outlook for the remainder of the year relative to the same period last year.

So you're basing it off of USDA's projections of soybean prices or the Board of Trade?

USDA's projections.

Thank you and then I guess you gave us a million numbers and thank you very much for modeling for the balance of the year, but you do provide a chicken price per pound realized and that was $0.82 in the last quarter versus $0.83 a year ago, not down hardly at all. And in the third and fourth quarters it was $0.84 and $0.81. And then you referred to a Georgia Dock price as $0.73. Are you assuming that you are roughly flat with year ago in terms of chicken price realizations?

As you noted, our mix price has been relatively flat despite what you have seen in the different commodity markets that O.B. mentioned. And I think that just goes to our strategy of prepared foods with about 50% of our sales being fixed-price at different market points relative to those commodity markets. I think year-over-year we do expect our revenues to be in line with last year on a total mix price basis.

Okay, and then lastly, I guess that answers my question because as you price forward on contracts with value-added products looking at just for instance the skinless boneless breast prices today being $1.50 versus $2.30 a year ago, I guess what you are saying is you're doing enough incremental value adding that that is being offsetting roughly the 30% decline in underlying commodity prices?

I think what we tried to make clear in the past and if not let me clarify, the boneless skinless breast commodity market is not the beginning benchmark that you start with when you price prepared food products. So it is more built on internal costs and margin requirements than it is on what the commodity fluctuation of that spot market is. That is really a supplier's market so when we're out buying excess breast meat or selling excess breast that we might run into, that is really the commodity market that you're referring to there as proposed to a prepared food benchmark.

I understand that. It's just a big difference. I appreciate that. Thank you.

Diane Geister (ph).

Good morning. I have a couple of questions and then I think Leonard would like to jump on with a couple of questions. Can you just talk a little bit about your volume figures? Because if I think about what you plan to produce this year versus what you did last year and I know that they are not completely comparable because of ConAgra -- it looked like volumes should be up pretty significantly this year versus last. Yet, I think you said your volume in the quarter was up 1.5%. I understand you're focusing on mix but should we take that to mean if you do increase your production above the industry average which is now on your slides at 5%, that we should see pretty significant volume increases for the last two quarters?

We will still stay in the same range of that 3 to 5% total growth. We do have seasonal demand increases that we do have more chickens typically coming on in the summer than what we have in the first two quarters but we will be in line with what we mentioned. (multiple speakers).

If we look of the pro forma numbers where we are year-to-date, we are up 4.3% on pounds produced but our pounds sold are essentially flat. And I think that what you see there is last year we were buying more product on the outside and today we're sourcing that internally as opposed to buying it. I don't think that's necessarily uncommon with some of the major producers in the industry. And therefore, I think that is where some of the weakness you're seeing in some of the commodity markets, primarily breast meat, is coming from. We are not out there supporting that market.

Okay, I guess what's behind my question really is a concern that your ramp up in production is more than what you need on a seasonal basis. That is the quandary with the poultry industry so --.

I don't see that. Again we are -- total growth in our production pro forma has been 4.3%. Our total sales pound sold has been basically flat. So we're trying to keep it in line with our growth.

Okay and the other question I had was is there a dollar value for what your pickup on the grain cost was?

Pick up over -- year-to-year?

Right, just for the quarter.

Let's see. It was -- I don't have that broken out. In the U.S., it was approximately 23 to 24% feed cost per pound decrease.

Can you talk a little bit about your outlook for Mexico? Obviously it had a very robust quarter. Can you talk about maybe about what is going on in that market and what you look for in the third and fourth quarter? And what you think of as sort of a sustainable EBIT from that business?

I think Mexico as we mentioned had a good quarter. Typically the second fiscal quarter is not their best quarter. You typically see a downturn in that market coming out of the Christmas season and then not recovering until towards the end of the quarter. This quarter, there was a better balance of supply and demand. Last year some of the industry producers down there were growing the market substantially. Some of them grew as much as 9%.

And as you can see, our numbers year-over-year actually moderated to down in terms of our production, so we don't see the same kind of growth. We see the demand catching up and has been more in balance and that is what resulted in the quarter being what it was.

Looking forward we continue to see the remainder of the year to be a positive year and good on a relative basis. In fact, part of the earnings increase that we are reflecting has to do with a better outlook for Mexico than what we previously forecasted at the end of last quarter. Not all of the increase, but that is a portion of the increase.

I think operating margins in Mexico where we are this quarter; we had a good operating margin of 13.9% compared to last year of 4.25%. So again, I think somewhere in between those points is really the expected margin that we should have.

That's a fairly wide range. Lenny, did you have any questions?

Just a couple. Rick, first I think you are to be commended for providing the industry data at the beginning of this. I think it at least provides a framework from which we can all deal with since I know we source from different areas. Let me pick up a little bit where Diane left off. And when did you know Mexico was going to be substantially better than historically it would have been or than you might have put into your plan originally? Was it from the get-go or did it all come in at the end of the year?

It was not from the get-go, but I think as the quarter developed, it became clearer and clearer that was going to not only be profitable but not have a traditional downturn, to where they might actually lose money. At times, they will vacillate back and forth and as things change quickly in Mexico, so I think when everything became clear, we put out the updated (multiple speakers).

Sure. Second, with you buying less on the outside and with let's assume some of your competitors may not have hedged out and they are sort of making it to the market like you are bringing everybody into the same cost basis, would you expect any competition for certain -- let's say -- supply contracts to start to heat up as we get into the second and third calendar quarters of this year?

I think you had the lowest cost of goods of anybody out there at least if my numbers are right and Diane's I know are -- and you get to the point to where you certainly have benefited by your buying strategies. But now I sort of suspect everybody is sort of on top of the market here. That means technically everybody should have very similar costs of production, which did not exist in the last maybe three or four quarters. So I am just wondering what the competitive situation is going to start to look like?

I guess what we have seen on the competitive side, I don't really think has been any different. I think the entire year has been as competitive as any other year. I have not seen a dramatic change.

Nor do you expect any?

No, not really.

Now you're showing up about 5% in meat produced and then you've got exports up about 9%. Is that why you're not really concerned about pricing is because you're going to look for the total demand curve to keep it up or is there something more to it than that?

I think that's a good point, Lenny. I think if you take a look at one of the earlier charts we showed, the per capita consumption change in the United States is less than 2%. So you're not putting that 5% that the industry is producing out on the market that has got to go into somebody's stomach. So I think that is the key element.

So what we should be monitoring here to judge at least what we think is going to happen to poultry prices, it is going to be in the export side and if that slows up, we would start to see prices weaken dramatically? That's what the numbers would suggest, wouldn't it? (multiple speakers)

The export markets and the history shows that out. The export markets and the period of radical change has a lot of effect on the profitability and we've seen interruptions in the past in Russia. It real quickly turns into an adverse situation. Like O.B. mentioned, the leg quarters today at $0.34 to $0.35 a pound, that is up from where it was during the quarter. But if you were to have an adverse situation, we have seen leg quarters fluctuate greatly. But the export demand is very important to the industry and especially when the industry has grown at 5% this last year, export demand is critical.

Have you added any significant new customers over the last -- let's say quarter that we wouldn't be aware of?

We are always adding customers. I guess in terms of significant to the point of having to make a disclosure about who and the whats, the answer is no. Most of our growth obviously as most people tends to be with the people who they've got long-term relationships with. Our customers go back 20, 30 years.

Okay, thank you very much.

Ken Zazlow (ph).

Can you discuss the progress and outlook for the turkey division? It seems like turkey industry fundamentals have turned the corner but you really have not talked about potentially Pilgrim's Pride turning a corner.

Yes, obviously we continue to struggle in that side of our business. We are making good year-over-year improvements. The main part of that business I guess that still has the most amount of work to do is our Frankonia operation where we are a cooking operation. That operation continues to run at about 50% capacity. It is running a single shift, fairly full for a single shift but obviously in this industry you would like to see it double shift. I think where we are on the other operation, the new Oxford operation is dramatically ahead of where it was in the past and it is a whole bird operation. You don't really see a lot of that until you get into the whole bird cycle, which is primarily a Thanksgiving and Christmas cycle. So a lot of what is going on there today is production for inventory and for sales that will occur next fall.

Okay, so your outlook is still I think you said still a profit loss of about 25 million if I recall correctly?

Yes, for the year, that range. We are -- because like we mentioned last quarter, we don't have the commodity breast meat that we've got to absorb and push through that Franconia operation, so we have taken quite a few strong pricing stands over the last 30 to 60 days where we either get decent margins on the product or we just don't buy the meat on the outside to produce it.

Okay, with your focus on prepared foods, it seemed like the sales number to the prepared foods division was a little light particularly in the foodservice. Can you discuss it? Is there a marketshare issue going on between you and Tyson or is it just an industry issue?

Actually, our prepared foods sales in total were up about 6%. You've got to make sure you are looking I guess at the right comparison and you are adjusting that for the 52-53 week period.

On the quarter-over-quarter?

On the quarter-over-quarter, no. You are correct. On the quarter-over-quarter, there is no issues there in terms of adjustment.

But if I look at the foodservice and again, I may be missing the numbers, but it looks like it was only up 1.1%. Is that not --?

I think again like Clint and O.B. mentioned, this year we have been spending a lot of our time and effort on mix improvements and the fact that we were able to get additional volume through, maintain our pricing per pound in fact actually increased slightly is a positive for the quarter with the environment that we have.

Is there any marketshare movement in prepared foods that we should know about like in foodservice or is it just more of an industry issue?

I don't think there is any marketshare issue.

There hasn't been any swap in between any of the top players of who has gotten new business or anything like that that we should be aware of?

Nothing out of the ordinary, no.

For the chicken production in '06, I know that it might be a little far out already but if you are looking for production increases of 5% in '05, what is a level in '06 that we could think about is reasonable for the chicken companies to absorb without any real change in dynamics? That you can sustain your margin?

Again, the industry has had history of growing in that 3 to 4% range without any adverse effects. The USDA as was mentioned is currently projecting exports next year to be up again close to double digit range. So if we grow within a moderate level of history, we should be okay.

And my last question is have you heard anything about Brazil and China starting to import into the U.S. on chicken breasts over the next 12 months? And does that concern you at all?

No, we have read some of the same things you have. I guess our take on that is we know the quality and the service that we have got to stand and live up to behind the products we sell and I just think again, if it is a commodity product going into a commodity producer to turn into a value added, that is one thing. But in terms of a value-added product, I think there is a long way to go before that would happen.

Great, I appreciate it.

(indiscernible)

This is Pasha (ph) from Nicholas Applegate. You pretty much answered all the questions that I head. Just on the second half guidance that you gave of $1.62 to $1.82 and then I think you mentioned 50 to 55% of that is going to be in Q3. SO are we looking at $0.81 to $1.00 for the third quarter? Is that pretty much the guidance?

Yes, that is the right range depending on where it fell in that bandwidth, that is correct.

Okay and then the other question is looking ahead maybe 12 months -- 12 to 18 months I guess, will you be still focused on the chicken and turkey business or are you thinking of adding another leg to the business, maybe getting into beef or --?

We have also made this comment before in the past that we continue to be focused on the chicken and the turkey proteins, again primarily the chicken and primarily in the prepared foods arena as our growth avenue. At this time, the Company really has no interest or expectations that it will be getting into any of those other meat proteins other than we could always consider those meat proteins in our cooking operation, but not in terms of the slaughter side.

Okay, thanks. Congratulations for a great quarter.

Pablo Ziwanik (ph).

Can you just remind here in terms of the price contracts? On prepared foods I think you said in the past that it is fixed-priced pretty much for the full year, January to December so it is not even based on a formula, but just fixed number. So I wanted to confirm that that is correct.

And I guess on the fresh chicken side, I suppose mostly it is sport, but you have also said in the past that we should assume that most of that is linked to the Georgia Dock whole bird for the whole chicken price. Can you confirm that please on both fronts?

Basically both those are confirmed. Our prepared food contracts are generally fixed. Obviously there is some in there that would have a formula base, but not the majority by any stretch. In fact a very, very small portion.

On the fresh side almost all of that is either fixed price, some of that might be fixed price but the majority of that is going to be floating on the Georgia Dock.

Okay and now regarding feed, I am sure it is on your 10-Q. I haven't seen it yet but what percentage of the total cost of sales was feed? And then I have a follow-up question on that.

Do a follow-up question. Let me check that real quick.

The follow-up would be that I understand what you are saying our projections for feed out to September, and for your fiscal year, but let me look at the December futures and that is pointing to about a 23% increase in feed. Is that concern or in your view, December futures don't mean much until we really have a better sense of what the harvest is going to look like in the U.S.?

That is exactly correct. Right now you've got too much speculation in the market. You take a look at the corn and the reason O.B. said corn really hadn't changed much at the end of last quarter if you could have looked at the futures market and gone out and locked in corn at the period, your carry cost -- carrying it up to today would basically be about where we are today in terms of our cash price.

So you've got to look at the forward carry as well. And right now you've got a lot of risk premium built in to anything past this summer relative to what the weather is going to be and you're going to see that jump around with every rain cloud that goes through and every seven or eight days that there is not rain. So it is not a time to really be looking into post July in terms of the futures market.

Okay and just regarding Mexico, in the past you had said that on EBIT margin guidance for the year for fiscal '05 would've been around 4.5%, so now based on your answer before to a prior question that you are saying that it should be about 9 to 10% for the full year, or did I misunderstand that?

We're going to have Mexico earnings. Operating income, our forecast takes into account somewhere in the low 20s operating income, low $20 million. So that kind of tells you where we are for the quarter. I think what we have said the past is that typically that business has returned for between 15 and 18 million in operating income. So we are slightly above that this year.

And do you have a number for the cost of sales?

25% in the first six months.

Thanks very much.

There are no further questions.

Okay, we appreciate everybody's attendance and look forward to talking to you next quarter.