Pilgrims Pride Corp (PPC) 2005 Q3 法說會逐字稿

Good morning, and welcome to Pilgrim's Pride conference call to review the Company's fiscal 2005 third 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 call, linked on the website home page of www.PilgrimsPride.com. These slides will be used during the call.

[OPERATOR INSTRUCTIONS] On this conference call will be Mr. OB 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. Thank you for joining us today on this conference call to discuss the fiscal 2005 third quarter results and for the nine-months ended July 2nd, 2005. The press release we issued earlier this morning contains some of the highlights for this period. We will provide you with additional details about these results in today's call and we’ll also discuss our views on the industry trends that we expect to have an impact on our operation and our Company in the near term. After our prepared remarks, we’ll be happy to take any questions that you may have.

And before OB begins, I’d like to remind everybody that this conference call will contain certain forward-looking statements, including our expectation of future results, sales, cost of sales information, market dynamics, etc. Actual results might differ materially from those projected in these forward-looking statements. Additional information containing 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 OB Goolsby.

Thank you, Rick. Good morning, everyone. It's a pleasure to be here to discuss our fiscal 2005 third quarter results. As we noted in our press release, our record performance reflects favorable industry fundamentals, including low grain costs, relatively strong market prices, increasing domestic demand and a strong export market.

Looking forward, we expect many of these positive conditions to continue for the remainder of the fiscal year. As projected, US whole bird and market prices are expected to remain at relatively high levels, while feed costs are projected to remain at relatively low levels.

In looking at slide 3, chicken producers are expected to increase production for the remainder of 2005, due to a combination of both head processed and weight gains in the range of 4% from 2004, to 35.5 billion pounds.

These increases have been supported by consistent domestic demand growth for chicken and higher export demand. With the exception of leg quarters, this increase in broiler production has caused prices for most chicken products to retract from the prior year's unusually high levels for the first half of 2005.

As you can see on slide 4, broiler breeder flocks have seen minimal variation since plateauing in 1999, and should remain fairly consistent through 2006.

Moving on, slide 5 shows that broiler hatching flock size is expected to remain essentially the same as 2004 levels for the remainder of the calendar year. After increasing 2.6% in 2004, broiler slaughter for processing days is expected to increase 2.5% and 2% in 2005 and 2006 respectively, as displayed in slide 6.

And slide 7 points out that as the industry slaughters more broilers per processing day, the birds are also increasing in size. The average live weight of broilers increased 1.5% in 2004, and is expected to increase an additional 1.5% in 2005, but only 0.5% in 2006.

As shown on slide 8, according to the National Chicken Council, per capita consumption is expected to increase approximately 3.7% in 2005, 1.7% in 2006 and another 1.4% in 2007. In total, the per capita consumption of red meat is projected to decrease 2% by 2007, from the projected 2005 levels. This results in projected total meat consumption in 2007 being essentially flat with 2005 projected levels, at approximately 223 pounds.

Turning to slide 9, as we mentioned in our press release this morning, export demand for the US chicken products continues to gain strength, with volumes exported projected to be up 14% in 2005, due to the return of exports following last year's interruption caused by regional outbreaks of avian influenza.

Exports of US chicken has also been aided by a weakened dollar, helping to make US products more attractive to overseas consumers and the continuation of avian influenza challenges throughout Asia.

Russia continues to be the number one volume market for US chicken exports, with broiler exports last year accounting for 32% of total exports, and has averaged 27% through May of this year. A real excitement in the export market has been the increase in exports to both Mainland China and Hong Kong, along with Mexico, as duties for exports to those countries decrease.

Total chicken exports to China are expected to be 173 million pounds, which is a 381% increase, or 137 million pounds over 2004.

Turning to slide 10, looking at the benchmark commodity chicken selling prices, dark meat prices remain as the only bright spot for the current quarter. They're up 7.4%, to $0.38, versus the same quarter last year, driven by increased export demand. Whole wings were down 22.9%, averaging $0.85 per pound.

Boneless-skinless breast meat was down 36.5%, averaging $1.45 a pound. Georgia Dock prices, while still trading at good levels, were down 2.4%, averaging $0.74 per pound. However, has averaged up 2.3% for our fiscal year to date.

As we have stated in the past, the chicken industry remains in a favorable competitive meat environment, as the price of chicken is a well-priced alternative to beef and pork. This past week, the US, again started importing live cattle from Canada, slightly two years after the border closed due to BSE in Canada.

We anticipate that the opening of the Canadian border will reduce beef prices much more than chicken, as the price of choice beef rose 26.3% since the closing of the border, while chicken prices rose only 8.1%.

Moving on to slide 12, cold storage inventory levels have remained relatively flat in 2005, and are projected to continue around current levels in 2006. There exists a lot of speculation over the outlook in feed ingredient costs for our fiscal year 2006. Currently, there is a large divergence in the US pricing outlook and the traded futures market.

Looking at slide 13, you can see the nearby futures cost have declined greatly when compared to last year, both for our third fiscal quarter and the fiscal year to date. Relative to this year's trading ranges, the USDA's midpoint outlook is currently projecting price decreases of 13.9% and 2.6% for corn and soybean meal respectively.

You will notice that the futures market suggests that the prices for the coming crop year will actually increase approximately 12.5% for both of these items, relative to the average nearby futures prices for the past nine months.

If we look back a year at USDA's crop projections of July the 12th, 2004, we see that the USDA was a that time projecting prices for the 2004-2005 crop year to range from $2.30 to $2.70 per bushel for corn, and $185 to $215 per ton for soybean meal, both of which are fairly accurate to what we have actually seen this year.

We believe that this divergence in outlook is being driven primarily by financial market speculation, versus underlying crop availability. And accordingly, at this time we believe that the actual prices for the 2005 and 2006 crop, will tend to be more in line with USDA's projections than what the commodities futures are currently indicating.

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

Thanks, OB. Good morning. It is a pleasure to be here today. Let me begin today by saying that I am excited to announce that based on the most recent rankings, we're back in the Fortune 500 at number 364. I am also pleased to announce that on June 22nd, Pilgrim's Pride was honored for its outstanding service by Darden Restaurants, the world's largest casual dining restaurant company. This achievement reinforces our commitment to quality and highlights our Company's mission of outstanding customer service every day.

Pilgrim's Pride, one of only nine of Darden's 2,000 suppliers to win the award, was recognized by Darden for helping develop new marinated jerk flavored chicken breasts.

In addition, we are proud to announce that Pilgrim's Pride is sponsoring interactive software program to help school children have fun learning about nutrition. This program helps support the USDA's efforts to promote more healthful choices through its child nutrition programs and encourages children to eat more low-fat proteins, as recommended in the USDA's food guide pyramid. Pilgrim's, along with three other sponsors have made thousands of interactive CDs on health and nutrition available to public schools for the coming school year.

These CDs use interactive games as part of a computer-based curriculum for nutrition and provide activity instruction for both students and parents. We believe that it is important that our children develop lifestyle habits at an early age to help them choose healthy foods. These interactive learning CDs, in combination with exercise and other healthy lifestyle choices, will help fight child obesity, juvenile diabetes and other serious public health issues. We are proud to be a part of this vital education program.

Moving on to some of the operational successes we saw in the quarter, the transition of our Chill Pack operation from our Broadway, Virginia plant has been completed. This transition affected two areas of our Company's business. In the Prepared Foods area of our business, we saw volume sales growth of 4% this quarter, versus the same period last year.

Our Broadway, Virginia plant now operations as a feeder supply plant to our operations. This improves our ability to meet the ever increasing raw material needs of our Prepared Foods operation, while reducing the cost of meat produced by this operation.

Our Chill Pack operations, which is part of our Total Fresh Chicken operations, which saw sales growth this quarter of 10% versus the same period last year, were also positively impacted, as Chill Pack production was moved to other existing Chill Pack plants, with our El Dorado, Arkansas plant receiving the largest portion of the production.

By applying the fixed costs of these plants over a larger volume of product, we reduced the per-pound cost of our products, increasing our bottom line. This is a very good example of our dedication to improving efficiencies to maintain competitive costs and to improve our capacity to meet our future sales needs.

As we mentioned in this morning's press release, this quarter also saw strong performance in our Mexico operations. Our volume this quarter grew by 6.5% versus the same quarter last year. However, the big news is that our revenue per pound grew by 18.4%. While for the year, our volumes in Mexico were actually down 2.2%, year-to-date revenue per pound produced has increased 15%.

We attribute a lot of these gains in Mexico to the market absorbing the supply growth that was put on the market last year by some of our competitors there. However, beyond that, there appears to be decreased live production efficiencies throughout Mexico, which is further altering the demand/supply balance. Additionally, we have made substantial improvements in our operating performance and supply chain management and delivery of products to our customers in Mexico, which has improved our operations beyond the purely supply/demand equations.

While we continue to be encouraged by the performance of our Mexico operations, we do look for our margins in this business to seasonally retract in the fourth fiscal quarter and are looking for operating income in the range of $9 to $11 million, versus what we saw this quarter at $35.4 million.

In summary, we are very enthusiastic about the near-term initiatives that are underway at Pilgrim's Pride, which we believe will have a positive impact on our operational results going forward. We're encouraged by the favorable industry conditions we are seeing and believe we are well positioned to capitalize on the exciting growth opportunities ahead for poultry. 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 third quarter financials.

Thank you, Clint. Before I get started on the financial discussion, I'd like to point out the first nine-months of last year included 40 weeks of operations, or 2.5% more time than this year's typical 39 weeks. Accordingly, at times I will be making comments reflecting the effect, by referencing this as an adjusted period. This extra week occurred in the first quarter of fiscal year 2004, so it does not affect the third fiscal quarter comparisons.

Also, at times I will be referring to the pro forma results, which reflect our November 23 acquisition of the ConAgra Chicken Division on a pro forma basis, which again, only affected the nine-month period, as that was a first quarter of fiscal '04 event.

Turning to slide 14, our earnings per share as we reported this morning, our earnings per share for the quarter ended July 2nd, 2005, were up 753%, to $1.28. This compares to net income of $0.15 per share for the same period last year. Included in the net income last year for this period was a turkey restructuring and other nonrecurring item charge of $39.6 million net of tax, or $0.60 per share.

For the nine-months ended July 2nd, 2005, earnings per share were up 232.6%, to $2.86 per share, period, compared to $0.86 per share for the same period last year, or $1.01 a share on a pro forma basis.

Again, included in the results for the nine months ended July 2nd, of '05, 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 during our second fiscal quarter, along with $3.2 million net of tax, or $0.06 in additional proceeds we received from final resolution of our 2004 turkey restructuring activities.

And again, included in the results for the nine-months is the turkey restructuring and the nonrecurring item charge of $31.6 million, net of tax, or $0.84 per share. In making the per share computations for the nine-months, we had 66,555,733 shares outstanding, versus last year for the nine-months was 61,376,254 shares.

Moving to the income statement, slides 16 and 17, shows our sales for the third fiscal quarter of 2005 were essentially flat, at $1,440,000,000. This compares to $1,448,000,000 for the same period last year. Specifically, our US chicken sales were up 1.1% on an increased pounds sold of 8.5%. Mexico chicken sales, as Clint mentioned, were up 26.1% due to an 18.4% increase in selling price per pound, and 6.5% decrease in pounds produced.

Turkey sales were up 43.4%, due to a 38.6% decrease in pounds sold, resulting from a 60.1% decrease in pounds produced, and partially offset by a 41.8% increase in sales price per pound sold. These changes are the result of last year's turkey division restructuring and the product asset dispositions.

As shown on slide 17, sales for the nine-months ended July 2nd, were $4,183,000,000.6, compared to a reported pro forma 4,338,000,000.1 for the same period of last year. Or an adjusted pro forma amount of 4,230,000,000.6. This is an effective decrease of 1.1% once the prior year's first quarter has been adjusted to a comparable 39-week basis.

Some of the specifics are that the adjusted pro forma US chicken sales were up 0.9%, with US chicken pounds produced up 5.8%. Adjusted Mexico chicken sales were up 15.2%, due to a 14.8% increase in selling price and a 0.4% increase in pounds produced.

And adjusted pro forma turkey sales were down 25.4%, due to a 30.6% decrease in pounds sold, resulting from 61% decrease in pounds produced, and partially offset again by a 7.6% increase in sales price per pound sold. Again, the majority of these changes are a result of last year's turkey restructuring operations in the turkey division and production asset dispositions related thereto.

Slide 20 shows our operating income for the quarter ended July 2nd, 2005. It was up 266.6%, to $136 million, compared to 37.1 million for the same period last year, an increase of $98.9 million. After moving the effects of the nonrecurring times, operating income increased 34.2 million, or 33.9%, to $135.2 million. For the nine-months ended July 2nd, 2005, operating income was up 144.2% or 186.6 million, to $316 million, compared to $129 million for the same period last year.

After removing the effects of the turkey restructuring and other nonrecurring items, operating income increased $99.3 million, or 46.8%, to $310.7 million. On adjusted pro forma basis as shown on slide 21, our operating income for the nine-months ended July 2nd of '05, was up 109.4%, compared to $316 million for the same period last year.

After removing the effects of the turkey restructuring and other nonrecurring items again, operating income increased 64.2 million, or 27.3 million, to $299 million. Slides 22 and 24 have some summary information on interest expense, income taxes and depreciation. Some of those specifics are; net interest expense for the third fiscal quarter of '05, decreased 2.5 million, or 16.3%, to $12.3 million. Compared to the prior year third quarter interest of $14.7 million. As a percentage of sales, interest expense decreased to 0.9%, from 1% for the same period last year, of sales.

Net interest for the nine-months ended July 2nd was down 11.1 million, or 24.7%, to 33.9 million, when compared to a pro forma interest expense of 45 million to the same period last year. As a percentage of sales, interest expense for the first nine-months decreased to 0.8%, from 1.1% last year.

Our income tax for the quarter ended July 2nd, of '05, was 38.3 million, on net income before income taxes of $123.7 million, or 31% effective tax rate. This compares to a prior year third quarter actual income tax of 12.3 million on net income before tax of 22.1 million.

Income tax expense for the nine-months ended July 2nd of '05 was 103.9 million on net income before tax of 294.2 million, or a 35.3% effective rate, compared to a pro forma income tax expense of 43.1 million on net income before tax of 110.5 million for the same period last year.

Turning to the balance sheet, looking at some of the highlights there, slides 26 and 27 shows comparison of our current debt agreements that were in existence at the end of last fiscal year and at the end of this quarter. Our total debt continued to decrease slightly during the quarter by $2.3 million, to 529.6 million. And the current outstandings is made up of 8.5 million current maturities and 521.1 million in long-term debt. We currently maintain 168 million in revolving credit facilities, all but 34.5 million is available to the Company, 500 million in secured revolving term debt, all of which is available for borrowing.

Additionally, we have a 125 million capacity available under an accounts receivable securitization facility, all of which is available. Accordingly, in aggregate, with the availability in our credit facilities previously mentioned, the total availability of all these agreements is approximately $758.5 million. Adding that to our reported cash, of 287.8 million, total liquidity at the end of the quarter was $1,046,000,000.3. Thus, it was up 330.5 million from where we were at the end of the prior fiscal year.

The weighted average interest rate on our debt outstanding at the July 2nd was unchanged, at 8.6%, when compared to last quarter of 8.5. And at the end of this quarter, 86.7% of the debt is on a fixed rate basis.

Looking at slide 28, you can see our net worth for the quarter increased to 187.6 million, from the end of fiscal '04, to $1,110,000,000.6. All of this due to the results of operations.

If we turn to the statement of cash flows, I had previously referenced some information on slide 22 and 24 showing depreciation and amortization. For the third quarter, we had increased $30.4 million, compared to $29.1 million for the same period last year. For the nine-months ended July 2nd, depreciation and amortization was 94.2 million, compared to the prior year amount of 95.1 million, or 88.1 million on a reported basis.

Slide 30 shows our total CapEx was up 18 million, to 37.9 million for the same quarter versus the prior year. And for the nine months, capital expenditures was 90.1 million, compared to 63.9 million, or 59.9 million on a reported basis.

Slide 28 on our website shows some of our credit ratios and other certain information. Just pointing out a few of these, we show our EBITDA interest coverage for the current quarter was 13.5 times. Our debt divided by EBITDA now stands at 0.92 times and total debt to capitalization is at 32.3%. Debt net of cash, the ratios are 0.4 times net debt to EBITDA and 17.3% of net debt to total capitalization.

Our stock has continued to perform well. It closed at $36.85 on last Friday, up 24.7% from the end of the third quarter of '04. And up 34.5% from the end of fiscal '04.

Turning to our fourth quarter of fiscal '05 forecast, as we announced this morning, our chicken business continues to shows signs of strength. And accordingly we are pleased to increase our earnings estimate for all of fiscal '05 to a range a $3.76 to $3.86, resulting in a fourth quarter earnings estimate of $0.90 to $1.00 per share.

For the quarter, our US sales are projected to $1,285 billion to $1,315 billion, with approximately 35 to 45 million coming from our turkey operations. Mexico sales are estimated year to be 100 to 110 million. And total sales for the fourth fiscal quarter are projected at $1,385 billion to $1,425 billion.

Our US chicken production volumes remain at about 1.4 to 1.5 billion pounds for the quarter. Mexico pounds will remain at approximately 160 to 170 million pounds.

Our cost of sales for the next quarter will be in the range of 86 to 87%, we project. We also estimate our SG&A expenses after a reclassification entry that was made at the beginning of the third fiscal quarter, is now expected to range about 5.4 to 5.7% of net sales. And we will project an operating margin of 7.3 to 8%.

Our net interest expense for the fourth quarter will average about 800 million a week. And our estimated effective tax rate for the fourth quarter will be in the range of 33 to 36%. Capital expenditures continue to trail behind our previously issued guidance of $150 to $170 million for the year. Now it looks like it will be in the $130 to $145 million range. And depreciation expense will remain consistent with where it's currently been, in the 2.3 to 2.5 million per week range.

That being said, that concludes our prepared remarks. We'll now turn it over for any questions that you may have.

[OPERATOR INSTRUCTIONS] [Farah Aslam].

Hi, congratulations on a good quarter. And just looking out into the Mexican operations, could we focus on what exactly drove the results this quarter? And looking out for the next six to 12 months, what you look for trends in that market?

I think as Clint mentioned, Mexico this quarter was driven by a few factors. One is the continued absorption of last year's supply increases that were placed on the market. Seeing a little growth this year, just more of a catching up.

Secondly, it does appear that there is production performance issues in Mexico on a broad sense, which are actually restricting supply somewhat. So thereby increasing the supply/demand equation favorably.

Now, looking into next year, do you think those production issues will be solved and do you think pricing is going to go down?

Again, all we are projecting at this time is the fourth quarter. And as Clint mentioned, yes, we are projecting that there'll be some recovery in the market from the production side, resulting in margins coming down, in addition to seasonal returns. So, yes.

Okay. And looking at your tax rate in 2005, how much do you think strong results in Mexico reduced your tax rate? Because don't you have favorable tax benefits in Mexico?

The main difference between the guidance we issued two weeks ago and the final result was actually a change in our effective rate for the quarter, driven primarily by the profitability coming from Mexico. So, that was something we didn't accurately adjust for when we made the prior estimate for the quarter.

Ken Zaslow.

If I look out going out more forward, not just the next quarter, would you say this was an aberrational year or you can actually continue to grow off of this base and continue to get earnings growth '06-'07?

Again, right now all we're commenting on is the fourth quarter. And as OB mentioned, there's a lot of variability out there that has to have a little bit more clarity before we can really go out and give you our projection of 2006. The divergence that we see currently in the commodity features market versus the USDA projections based on the crop itself, has to be ironed out.

I think the production statistics that OB went over in terms of the supply of the flocks and the year-over-year growth are all in line with what we would typically expect and favorable to continued profitability in our industry. But right now we're not going out to 2006. And we'll cover that in our November guidance.

And based on your comment I'm assuming you're not hedging on your corn cost at this point then? Is that a fair point, given that your view of that corn costs--the futures do not indicate where they'll actually be in six to 12 months?

There's been no change in our current positions regarding taking positions.

A little more detailed question. If I look at your Food Service trends, it seems like they're coming down a little bit. Was there some weakness? Is there a secular issue at all in the Food Service business?

I think what we did see in general, more challenges in the food service market channels this quarter than what we saw last year, but again, last year was driven by just an exorbitant demand, if you will, caused by a lot of factors that we've talked about in the past, having to do with the beef issues as well as just the marketing that was taking place at the restaurant.

So, yes, I would say that that's true and we did have a better growth this quarter in our retail side of our Prepared Food business. But a lot of what you see is also pricing related too, as it relates to some of the mix prices that we've seen.

And then my last question, and you just touched on it. In the Retail business it seems like you've had a lot more growth than I would have expected. And there seems to be a mix shift going on where you're going more towards the higher margin Prepared Food. Is there a big customer that you've gotten more traction with? Is there something that we should know about?

No, there's no customer information that we're needing to report on. But, as we mentioned in the past, we do believe that the Retail segment of Prepared Foods is a good growth opportunity for us. But that will not happen by us turning our back on the other Food Service channels and the national accounts either. So, it is a good growth opportunity, from a relative low starting point from where we were, for our Company.

So you're taking share from others? Is that a fair point?

I really can't say whether or not we're taking share or whether share is just moving around. But obviously, we're having some good growth in that arena.

Diane Geysler.

Congratulations on a strong quarter for you guys. I wanted to talk a little bit about two issues and they're linked. If I look at your slides that you've presented, and thank you again for all of the data. If I look at slide 11 in the projections for Georgia Docks '06 and I sort of contrast it with some of the seed data on slide 13, and again, given that we're not really sure where this crop year's going to come out, these two slides sort of taken together suggest that--kind of going back on Ken's question, that '06 looks like it's going to be a little bit tougher in the US chicken arena, just given the pricing scenario that you present here. Is that--I know you're not giving--?

Again, I think a lot of it's going to hinge on that feed chart that OB went over. A 13% decrease in corn, obviously, is a significant year-over-year change for us, just like a 12.5% increase would be going the other direction. So, a lot's going to hinge on that factor.

The company that puts out this forward-looking number, this is what they're showing right now. It's the best information that we've seen. But as you can see, relative to 2001 and 2003, those are still good levels.

Diane, I think the other piece of information you need to factor in there is that the export demand also is extremely strong, relative to what we've seen over the past 18-months. And that is taking a lot of pounds out of the country.

Well, I guess my concern is really, when I look back at sort of what the average feed costs have been for the last 9 to 12 months, you're really moving into that period now where we saw seed cost come down pretty rapidly last year. And so, going forward, the pick-up on a year-over-year basis won't be--depending on where it falls out, obviously, won't be to the same magnitude that we've seen over the last three quarters. So I guess if I'm looking at your slide 11 and seeing pricing down, not expecting much on feed one way or the other, whether it's $2.20 or $2.00, that's really the point of my question.

I think a good--and I didn't present it here. I think a good check would be to go back and take a look at this same source USDA and Informix last year, and kind of see what they were projecting for 2005 for Georgia Dock. You know, obviously, a lot of these forward-looking this long tend to be more historic averages than anything else.

So, I didn't do that for here, but obviously, we did it for the feed, because we thought that was an important number that needed to be flushed out. Where OB went back and looked at the USDA's forecast a year ago for grain, for example. You might want to do that and see what you see.

Okay. That's a fair comment. I guess on some of the plant shifting that you've done recently, what can we expect in terms of bottom line impact or even impact on EBIT? Is that 50 basis points, less than 50 basis points, in terms of improvement of your gross margin?

Obviously, the movements that we're making are positive and profitable to our business or we wouldn't be doing it. But we specifically aren't releasing that detailed of information.

Okay. And I guess the other question I had was really, Mexico, is there anything on the tariff front that we should be aware of? If I remember correctly, the tariffs come off at the end of this year. Is that still?

They continue their decrease. They're at just shy of 60% today and January they'll go down to just shy of 40%.

And what can we expect in--I know these things get delayed and negotiated all the time, so is that realistic that we'll see the tariff come down this time?

I think you will see it. We're on the downward track and I think the negotiations that took place two years ago to reestablish that tariff schedule, I don't think will reoccur as we get to the end of this tariff schedule. So, you know, anything is possible. A lot depends on economic events of the two countries at that point in time. But absent any kind of macro change, I would say that the schedule is going to take place.

If you look at the export chart that OB showed, we're showing good growth of product moving into Mexico even today, as these export tariffs have begun to come down. Again, it's a different product than what is consumed in Mexico by the production that is produced there. We produce more of a local cut, a local type product, versus leg quarters. But clearly, there is a demand for both.

Thank you. I have Glen on the line.

You know, I'll tell you something. I've got to be getting dumber as I get older, because you did a hell of a lot better than I thought you would. Congratulations to you.

Let me try and get something straight in my mind here, and hopefully it won't take too long. If we take a look at the increase in supply as you kind of indicated here both on slide 6 and slide 8, we've got increase of about 4% for '05, against a potential increase of 3.7% in poultry and that kind of stands it off.

I'm trying to interpolate here the percentage that you all are presuming in 2006, in terms of growth in supply, and I'm not sure I've done it right. Can you tell me what you think the supply growth is going to be in poultry in pounds for '06 versus '05? You've got a chart here and I can't tell if it's going to [inaudible] a plan or it's going to be up or--?

I think the numbers are retracting a little bit in '06, in the 2 to 3% range on supply and as OB mentioned, in the 0.5% range on weight. It looks like the weight gain is projected to slow down a little bit.

But it looks like it's about a 3% or so increase. And what I'm looking at here is you're projecting an increase in chicken of about 1.7%.

That's per capital consumption.

Yes, sir, I appreciate that, but it seems to me right now, with the exception of the export market, to tell you what my demand is going to grow. Are you saying that this does not include--does this exclude the restaurant chains?

Oh, no.

I thought is was figured in. So, I've got US supply, it looks like to me--demand, excuse me, growing at about 1.7% against maybe a 3-plus percent growth in supply, and you're showing me that exports might not be quite as strong as they were in the past. So I'm just wondering, doesn't that portend to be a squeeze on margins or am I looking at this thing wrong?

Again, right now we are looking out to the fourth quarter and not looking out to '06 and '07 in terms of our outlook on margin. But a lot's going to depend on the cost side.

I absolutely understand. That point--I understand your point. How about commenting then just on my logic, that if we get a growth of 3-plus percent in terms of supply and a growth of about 1.7% in terms of per capita consumption, that that could have a--?

Don't forget about the population growth. A 1.7% per capital consumption would require approximately a 2.7% increase in production. Because the US population grows, on average, about 1%. So, I think that's a fairly balanced number.

Okay. Thanks for that. Now, you're giving guidance for the fourth quarter of $0.90 at the bottom and $1 or so at the top, which I understand. You did $0.94 last year. Are you signaling it could be a potential down fourth quarter?

Yes, if you looked at last year's fourth quarter, I think that was when we were at the peak of a lot of these commodity markets. And those have continued to retract. So, we've never really, in our estimates for the entire year, had contemplated a year like we had last year, fourth quarter, which at that time was our all-time best quarter. So, that still stands as our second best quarter of all time in our Company's history.

So, I don't think it's unreasonable to have a range that includes last year's numbers, but the range could be plus or minus 5 cents around that quarter.

Okay. And Rick, sorry. Just if you would remind me again that I believe Cinco de Mayo and other things happened in Mexico that were very favorable in Mexico. Supply got all balled up and what have you. So, we've had a very, very good year in Mexico. I think you've answered this question before. But why would it not be unreasonable to assume that Mexico could be down and turkey could be up? And would one necessarily offset the other if we had a return to normality?

Mexico could be down and what could be up?

Well, turkey, for the restructuring. If we take a look at a total amount of revenue turkey produced this year, and let's assume we get a return to normality in both Mexico and in terms of turkey, would we--could we presume whether one would offset the other, an increase in one and against a decrease in other, or would Mexico returning to normality still show a net negative?

Well, in the fourth quarter we don't see those two offsetting.

I'm sorry, I was referring to '06, which you [inaudible] avoided talking about.

I have avoided '06.

I've got to congratulate you on doing it.

But once we get into '06, clearly, the turkey operations will be re-projected. What we're not seeing today is any substantial change in the operating performance of the turkey division. It's fairly flat for the last three quarters. That's not to say that we're not actively working on issues, but again, the first quarter of the fiscal year is the best movement of turkey. And so, I think that Q1 of '06, obviously will be different than Q3 and Q4 of '05, as it relates to the turkey business. And then how that's going to play out for the whole year we still have to reassess.

Okay. And the worst--the comparison of the extra week you said was in the March quarter? I just want to make sure I heard that right.

December of '04, yes.

In the future we won't be burdened by all that stuff.

David Nelson.

Good morning and congratulations. You've given us a little bit of a window, looking forward, with your Q4. I wonder if I could ask you about a couple of factors within that. One, I think it was OB that mentioned you see a continuation of very strong export demand. I'd be interested in your comments on the domestic market, what Food Service or maybe specifically Quick Serve restaurant, do you see offering promotions that are driving the demand?

And then also, you had mentioned--I believe you mentioned some competition for beef. Beef production in the US was down 1.4% in the first half. USDA is right now projecting a 6% increase in beef production in the back half of calendar '05. What might you be hearing from Food Service providers or even retailers about the plans to feature chicken versus beef, please?

Well, certainly we do project to see lower beef prices going forward. I think if you look in the Food Service sector, a lot of what drives consumption of chicken in that is preference, not price. I mean, at any level, a chicken sandwich is much more expensive than your hamburgers within that category. And I feel that the promotions on the chicken side will continue. The higher dollar cash register ring that that chicken sandwich or strip brings is favorable into those sectors. And so I think we'll continue to see good support in that sector.

Retail, certainly hamburger is a strong compete meat item, versus say our dark meat. But again, we still have a tremendous advantage, just due to the pricing differentials within that category.

So, one thing that we didn't mention that I think had some impact on the Food Service sector was price of gasoline. And I think the consumer has gotten used to that, adapted their budget accordingly and I think we're starting to see more traffic back into especially the QSRs where that may have been disrupted when we first started seeing the high-price gas.

So, I think we're going to continue to see good support and growth in the Food Service sector. Still where people are eating a lot of their meals.

Pablo Zuanick.

Just a quick, specific question about your fourth quarter guidance. What are you assuming in sequential terms of a feed cost and about chicken prices?

On the chicken prices, as the Georgia Dock chart that OB showed, we don't see a lot of movement in the whole bird pricing. Which again, is where we price a lot of our retail, along with our Fresh Food service off of.

On the dark meat side, we actually will see quarter-over-quarter gains in the late quarter complex, compared to the average we saw in Q3. So overall, we think the mix will hold together well into Q4.

In US on grains, on the grain side, we do have factored in a quarter-over-quarter increase in feed ingredient cost.

Okay. And just another general question. Would it be fair to say that given the [unintelligible] are [unintelligible] pretty much one-year long-term contract basis and those are mostly Prepared Foods, that when those negotiations are taking place in January or February, you really have a good sense of what the feed costs are going to be for the year, that to some extent in those negotiations the feed cost is incorporated and then hence you have a natural hedge in about half of your sales?

Yes.

That's a quick answer, I guess.

The way you described it is fairly accurate. You have a natural hedge sales dollars relative to revenues if you hit 50%, but not in terms of consumption of grain, because the breast meat doesn't take as much grain, if you will, as 50% of revenues. Does that make sense?

Okay. And then just one last question. When you think in terms of normalized earnings for the chicken division, US chicken division in terms of margins, in terms of just chicken prices for the Georgia Dock, the five-year average at [$0.67], we're now at about $0.74, would you say that when one is calculating normalized earnings, should we use $0.67 or should we use something closer to $0.74? And besides the price, what would be the normalized EBIT margins for a chicken business right now, for the US business? Just some comments on that would be helpful.

Our EBIT margins, if you look at our last history, right now, for example, last quarter after you adjusted, and looked at it, we're about 9.44%, which was the best quarter we've ever recorded combined. It's not the best we've ever seen in the US, nor is it the best we've ever seen in Mexico. Mexico has had several quarters where they've had higher operating margins than what they had last quarter. But on a combined basis, that was the best operating margin we've had.

And I think there's also been strength in the operating margins as industry consolidation has occurred and production stability--the chart that OB showed about really going back to '99, the supply stocks has been fairly constant. Some variation going up and down, but nothing material. So, I think that's kind of changed the dynamics of what normal is as well. So, I don't have an outlook to tell you what it is, but I'd say it's in that 6%-plus range, would be a normal going forward target.

And just one last question. When I look at your Prepared Foods as a percentage of chicken sales for the first nine-months, we haven't really seen much change year-on-year. What's going on there?

I think there's been some formula change in some of the pricing. Volume's gone up. But, I think overall there's a little bit of net mix price change. So I think that's the main driver. Again, coming off of exceptional pricing levels last year.

There's no more questions in queue.

Well, we thank everybody for their attendance and we'll have our conference call the first part of November, 2005, to discuss our annual results.