Pilgrims Pride Corp (PPC) 2006 Q1 法說會逐字稿

Good morning and welcome to the Pilgrim's Pride conference call to review the Company's fiscal 2006 first quarter financial results. At the request of Pilgrim's Pride, this conference is being recorded. The Company has asked me to point out that there are slides available for downloading from the conference call link on the website home page of www.pilgrimspride.com. These slides will be used during the call. After the speakers conclude their prepared remarks, I will provide you with instructions about the process necessary to ask a question. On this conference call for Pilgrim's Pride will be Mr. O.B. Goolsby, President and Chief Executive Officer, Mr. Clint Rivers, Chief Operating Officer, Mr. Rick Cogdill, Chief Financial Officer, and Ms. Kathy Costner, Vice President of Investor Relations. Beginning the conference is Mr. Rick Cogdill. Mr Cogdill, you may begin.

Good morning and thank you all for joining us today to review our fiscal 2006 first quarter financial results. Before we get started, I'm very pleased to introduce our new Vice President of Investor Relations, Kathy Costner, who joined our team at the beginning of this calendar year. Most recently Kathy managed the IR program at Chieftain International and is an experienced IR professional. We're delighted to have her on board and we look forward to introducing her to all of you over the next few weeks and months. I'd like to now turn the call over to Kathy.

Thanks, Rick. I'm very glad to be here today. As Rick said, I'm looking forward to having a chance to meet with those of you I haven't already spoken with soon. You should have received the press release we issued earlier this morning which contains some highlights from the first quarter. If you have not already seen it, you can find it on our website at www.pilgrimspride.com. On today's call we will provide you with additional details about these results. We'll also discuss our views of some of the industry trends that we expect to have an impact on our Company in the near-term. After our prepared remarks, we'll be happy to entertain any questions that you may have. When we reach that point, we'll instruct the operator to begin queueing up calls for the listeners. Before O.B. begins his discussion, I would like to remind everyone that this conference call will contain certain forward-looking statements, including our expectations of future results, sales, and cost of sales information, market dynamics, et cetera. Actual results might differ materially from those projected in these forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those forward-looking statements is contained in today's press release, as well as in our forward-looking statements' disclosures contained in our Forms 10-K, 10-Q and 8K as filed with the Securities and Exchange Commission. I'd now like to turn the call over to O.B. Goolsby.

Thank you, Kathy, good morning, everyone. As noted in our press release, we delivered a solid performance in the first quarter which resulted in the second-best first fiscal quarter in our Company's public history, dating back to 1986. This quarter reflected continual growth in our prepared foods business and stable input costs as feed ingredient costs, which have remained in prior years ranges. When compared to the same period last year, our Mexico operations, during the Christmas holiday season, did not live up to the typical patterns. Also, higher energy-related costs and lower sales prices, primarily for chicken leg quarters in our U.S. operations, negatively impacted our performance in the quarter versus the same period last year and the fourth fiscal quarter of 2005 respectively. As previously announced, we also took additional steps to streamline and reposition our turkey business by discontinuing the production of ground turkey and cooked turkey deli breast meat items at our Franconia, Pennsylvania further processing plant effective March 3rd.

These steps resulted in a charge during the quarter of approximately $2.5 million associated with the reduction in the carrying value of inventory and supply items. Going forward, we expect these actions will improve our operating performance in our turkey division by 10 to $15 million annually. Additionally, our narrow focus on our profitable refrigerated salad lines in our Franconia plant and the remaining fresh and frozen whole turkey business in New Oxford, Pennsylvania, will prove to be a positive strategic move for us. Overall, our strategy remains centered around driving strong growth in our value-added product lines. The continued expansion of our prepared foods business will better position us to capitalize on the growing demand for prepared and fresh case-ready chicken, both in the U.S. and abroad, and minimize the impact the swings in the commodity prices on our margins. As always we will continue to evaluate strategic opportunities as they arise. We believe that our strong balance sheet and financial liquidity provides us with significant flexibility as marketplace consolidation opportunities arise.

Turning to the industry information, there are several items that continue to point to improved supply and pricing trends in the year ahead. As shown on slide three, year-over-year growth in the U.S. chicken supply has been declining since 2004, when the chicken supply grew at a rate of 4%. In 2005, this number fell to 3.3% and is expected to decline by another full percentage point in 2006. And as you can see on slide four, per capita consumption is expected to increase 2.5% in 2006 and another 1.2% in 2007, according to the National Chicken Council. These trends, combined with a population growth of about 1%, should support a positive business climate. With respect to the current pricing environment, as many of you know commodity chicken prices are lower this quarter than in the recent past. However, in general, they remain at profitable levels. In fact, our actual U.S. chicken selling prices were up 2.1% when compared to the same period last year due primarily to a more favorable product mix.

While we typically see seasonal declines around this time of year, the rate of falloff in prices over the last two months has been a atypical. In regards to breast meat prices, we believe that a lot of this drop can be attributed to the continued increase in the size of chickens that are being produced by the industry, primarily the large bird deboning operations. As shown on slide six, live weights increase again in 2005 approximately 1.7% and are projected to be up in 2006 approximately 1% through September before declining and resulting in a 0.6 increase for all of 2006. This continued trend in the industry reaffirms our strategy in seeking to consistently be net buyers of commodity breast meat, as selling into this market, while it may be good at times, does not appear advantageous over the long-term. Accordingly, as we have mentioned in the past, our Company's long-term strategy is to add value through continued growth in our prepared foods division and to make sure that our production capacities always stay ahead of our customers' increasing demand for these products.

Accordingly, as in past years, Pilgrim's Pride will continue to make capital investments in our prepared foods production capacities and capabilities versus those that would simply generate incremental commodity breast meat, which we believe will remain plentiful in the market or available through consolidating acquisitions. To further illustrate this point, as shown on slide seven, if you look at the spot pricing on January 20th compared to the same period last year, breast meat prices have declined 32.3%, the largest decline of any meat [INAUDIBLE], followed by leg quarters with a decline of 17%, wings down 15, and the Georgia dock showing a decrease of 5%. Turning to slide eight, frozen inventory levels of chicken at the end of November have increased 18.2% from the end of the last quarter and are up 13.2% when compared to year earlier levels. We believe that exports will return to more normal levels over the next few months and, as that happens, we will once again see these inventory levels will decline.

At this time, we have noted that export shipments have begun to move again, basically, in line with our weekly production levels and sufficient to keep inventory levels from increasing further. But not yet to the levels necessary to decrease the total amounts being held in inventory. However, while we see no reason that these recent export interruptions will not be short-lived, we are maintaining a cautious outlook for the upcoming weeks and the second fiscal quarter as a whole. Feed ingredient costs have remained stable for the quarter as shown on slide nine. As we have pointed out in the past, there continues to be a divergence between the U.S.D.A. price projections and the commodity futures market. With current futures prices still 4.2% and 4.7% higher for corn and soybean meal respectively than U.S.D.A. is projecting.

At this time, however, we expect crop pricing for the year to be in more in line with U.S.D.A. projections as the season progresses. The U.S.D.A. projects average corn and soybean meal prices for the 2005 - '06 crop season to be 5% and 3.6% lower respectively, versus our average prices for fiscal 2005. This measures out to an average price of $1.90 per bushel of corn and $172.50 per ton of soybean meal. Although corn prices have declined, as shown on slide ten, transportation and energy costs have not allowed these reductions to be realized. Like other transportation-related expenses, the rail delivery cost for getting feed ingredients to our feed mills is higher than prior year costs due to the impact of hurricanes Katrina and Rita, keeping our delivered unit costs from decreasing as one might expect. This, coupled with a 9% increase in soybean meal, resulted in U.S.-delivered feed formulation cost increasing approximately 4%. And played a larger part in contributing to the 9% higher unit costs in our Mexico operations versus the same period last year.

Here again, we see no reason to believe that this should be anything other than a temporary condition. However, with the restricted nature of competition that exists in the U.S. railroad industry, as it currently exists, and the continued political instability that exists in the Middle East, we cannot be certain that this will be the case. On a broader basis, the increase in energy-related costs for fuel, natural gas, and electricity negatively impacted our first fiscal quarter by approximately $20 million when compared to the same period last year. In summary, while the operating environment we expect to prevail in 2006 is not currently expected to be as favorable as that which we experienced in the recent past, there is reason for cautious optimism, particularly as we continue to pursue our growth strategy centered around a higher margin product mix in our prepared foods business. And our expectation that the broader worldwide feed need for affordable meat protein will drive demand for our products in the export arena. One last comment before I turn the call over to Clint.

Pilgrim's Pride was proud to once again be named, recently, as one of the best managed companies in America by Forbes magazine. Of the seven years that this list has been published, this is the fifth time that we have appeared on this list. Our Company posted the largest earnings increase of any company in Forbes' food, drink and tobacco sector in 2005. We also placed second on Forbes' list of top ten food, drink and tobacco companies based on our five-year annualized total return of 33.1%. We are very pleased that Forbes has recognized Pilgrim's Pride for its outstanding performance over the years. And we look forward to further success in the years to come. With that, I'll now turn the call over to Clint to talk specifically about our business operations during the first quarter. Clint?

Good morning. It's a pleasure to join you all today to discuss our operational progress and successes this quarter. Before I get into those details, I would like to say a few more words about the avian influenza concerns we've all been reading about so much lately. As I mentioned last quarter, our top priority at Pilgrim's Pride continues to be providing the safest, nutritious, healthy and affordable product for consumers and to ensure the health and well-being of our flocks, employees, and contract growers. To further this committment, Pilgrim's Pride recently announced that we will be voluntarily participating in a testing program developed by the National Chicken Council to further ensure consumers that our chicken flocks and the food products made from them remain free of potentially hazardous forms of avian influenza. Under this program, which was initiated on January 15th, we are testing each flock for AI before any of our flocks are introduced into processing plants.

With this program in place, our customers can remain confident that they can count on us to provide healthy, high quality, poultry products. While there has never been any danger of acquiring the virus from eating properly cooked poultry, this additional precaution should reassure our customers that none of our chickens, should they somehow contract these potentially hazardous forms of AI, will ever enter a processing plant or the food chain. As always, we will continue to closely monitor this or any other situation that may arise and take any additional steps we deem necessary to constantly ensure the health of our flocks, employees and contract growers. The poultry industry here in the U.S. has an excellent track record of working cooperatively with federal, state and local authorities to contain and eradicate any diseases or food safety related issues that have cropped up from time to time. And you have our commitment that we will continue to do so in the future as well.

I'd now like to discuss some of the projects we are pursuing that will advance our strategic goal to continue to increase our production capacity of our prepared foods products ahead of those growing demands from our customers. As we mentioned in our last conference call, we recently purchased a further processing plant in Bossier City, Louisiana. When we purchased this facility, it was operating around 60% capacity, running basically only one shift. Since that time we have increased capacity at this location by double shifting all production lines and are currently operating at nearly 100% capacity, enhancing our ability to meet consumer demand for high quality further processed products. The integration of this facility has been very successful. Not only has this allowed us to gain overall needed capacity, but to gain synergies with product alignment and reduction of overtime in other locations as well.

I'm also pleased to report that we are taking steps to significantly improve our operating capabilities at our tray pack facility in El Dorado, Arkansas. We have just recently completed two major projects at this location, the first being the conversion of our deboning operations. The changes to this operation have already improved efficiencies and have resulted in a significant yield increase. The second project involved revamping the cutup and packaging areas. Collectively, these two initiatives are expected to result in over $7 million in annual labor savings as well as yield improvement. We also have projects underway in our fresh food service division at our Mayfield, Kentucky location. We are expanding to increase our capacity by 25% at this location with the addition of one new high-speed line to our first processing department, giving us the ability to process an additional 20.8 million birds annually.

This project includes the installation of a new spiral freezer as well as sizing equipment, allowing us to meet the growing demand for prepared foods products in this region. The close proximity of the Kentucky facility to grain sources also gives us the advantage of lower freight costs for our feed ingredients resulting in excellent feed input costs at this facility. Moving forward, plans are underway for the addition of a new IQF line in our Marshville, North Carolina facility. This line will also help meet demand for higher margin value-added products. In addition, it will allow us the opportunity to reduce transportation costs by being able to further process the product at the source of raw materials. We expect this move to generate approximately $50 million in additional business and $5.5 million of savings in the form of reduced transportation costs, gains in efficiency and raw material upgrades. Our projected completion date for these items is June 1st.

Finally, we will continue to look for ways to improve the operating efficiency at all of our facilities, as evidenced by the measures I've outlined today. I look forward to sharing with you our progress each quarter as we continue to evaluate and implement new projects that will drive long-term sustainable growth and deliver shareholder value into the new year. I'd now like to turn the call over to Rick for a discussion of our first quarter financial performance. Rick?

Thank you, Clint. Let's start with the earnings per share for the quarter. As shown on slide 11, as we reported this morning, our earning per share for the quarter ended December 31, 2005 were down 46.6% to $0.39 a share. This compares to a net income of $0.73 per share for the same period last year. And in making our per share computations for both periods, we had an average of 66,555,733 average number of shares outstanding. Turning to the income statement, our sales for the first fiscal quarter of 2006 were down 1.8% to 1.3438 billion compared to 1.3682 billion for the same period last year. Specifically as is shown on slide 12, the U.S. chicken sales were essentially flat, down only 0.1%, on a decrease of pounds sold of 2.1%, but offset by a 2.1% increase in net revenues per pound sold. Our Mexico chicken sales were down 4.7%, due to a 13.1% decrease in pricing and offset by a 9.2% increase in volume. Our turkey sales were down 22.4%, due to a 19.2% decrease in pounds sold resulting from a 1.8% decrease in pounds produced and a 3.9% decrease in sales price per pound sold.

These results are due to the changes we made in September of 2004 to exit the commodity turkey production in our Hinton, Virginia operation. However, in the first fiscal quarter of 2005, we still had a lot of sales related to the products of inventory that needed to be liquidated. Additionally, as we have already mentioned earlier in this call, we are making additional restructuring efforts during the current year to improve this division's operating margins by 10 to $15 million, which resulted in a $2.5 million reduction in the carrying value of inventory and supply items in our Franconia operations this quarter. On slide 13, our operating income for the quarter ended December 31, 2005 was down 49.2% to $46.2 million. This compared to $91 million for the same period last year, a decrease of 44.8 million. If we return back to slide 11, we see that net interest expense for the first fiscal quarter of 2006 decreased 3.7 million, or 30.3%, to$8.5 million compared to the prior year first quarter interest expense of 12.2 million. As a percentage of sales, our net interest expense decreased to 0.6% from 0.9% for the same period last year.

Our income tax expense for the quarter ended December 31 of '05 was 11 million, on net income before taxes of 36.7 million or a 30% effective tax rate. This compares to the prior year first quarter actual income tax expense of 31.4 million on net income before taxes of 79.9 million, or 39.3% effective tax rate. Turning to the balance sheet on slides 14 and 15, we show comparisons of our current debt agreements compared with those that existed at the end of the prior fiscal year. Our total debt continued to decrease during the quarter by $10.3 million. 8 million of this was attributable to an accelerated payment on our LIBOR insurance company debt and it decreased the to $517.2 million at December 31st. Our outstanding debt at this period was made up of 8.7 million in current maturities on long-term debt and 508.5 million of long-term debt. We are still currently maintaining 168 million in our revolving credit facilities, all but 32 million is available to the Company, and a 500 million secured revolving term debt facility, which is also available.

Additionally, we have full availability of 125 million under a collateralized accounts receivable securitization facility. Accordingly, when you aggregate all the availability under our credit facilities that we've previously mentioned, our total availability is approximately $761 million. Adding this to our reported cash of 170.3 million, total liquidities now stand at approximately 931.3 million. Thus, the total liquidity was up 39.9 million from where it was at the end of the prior fiscal year-end. However, approximately 67 million of this was used to pay our special dividend of $1 per share on January 13, 2006. The weighted average interest rate on our debt outstanding at the end of the quarter was 8.9%, essentially flat to where it was at the end of last quarter, and 88.5% of our debt is still on a fixed rate basis at this time. Our cash flow items, slide 11, shows, again, depreciation amortization for the first quarter was essentially flat at $30.3 million. slide 17 shows our total capital expenditures was up $19.6 million to 43.8 million, versus the same period last year.

As Clint has already mentioned, we have several projects that we will be completing this fiscal year and we anticipate spending around 180 to $200 million in total on capital expenditures for fiscal 2006. If we turn back on slide 16, we show a summary of some of our credit ratios and certain other information. Pointing out a few of these items, we show our EBITDA interest coverage remained strong at 8.86%. Our debt divided by EBITDA now stands at one times and our total debt to capitalization at 30.5. Turning now to our fiscal 2006 forecast. Before we get into our outlook for the next quarter and the rest of fiscal 2006, I need to let you all know that we're in the process of reviewing the earnings guidance information that we will be providing in the future. As was evidenced by the update we made earlier this month to our current quarter's guidance, this business can change both positively and negatively in short order, making it sometimes difficult to project quarterly earnings targets with any high degree of accuracy.

That said, because of our conservative approach to giving guidance, when we have had to update our guidance in the past fiscal years, if we look at fiscal years 2003 through today, a period spanning 13 fiscal quarters, we have increased our quarterly guidance six times and only decreased our guidance one time, which was this prior quarter. In our space today, only Pilgrim's and Tyson's are given any earnings guidance. And only Pilgrim's is currently giving quarterly projections. Accordingly, over the rest of the year we will be refining our earnings guidance position and, beginning in fiscal 2007, we will likely reduce our earnings guidance information, at least as far as to only be giving annual guidance, if not to forego all guidance entirely. Naturally, unless otherwise necessitated by unusual industry or Company-specific events.

The changes contemplated in altering earning guidance will no way alter the other information we routinely provide regarding industry trends and related economic factors. One could reasonably argue that we are today in one of those unusual times in our industry when more information is warranted and, in fact, necessary to help our shareholders understand the vast forces at play and how we see them impacting our business. Additionally, we have a history of providing quarterly earnings guidance and it would not be responsible to change that pattern after the quarter we had just completed, nor to do so without advance communication of our plans and our rationale. Accordingly, in the meantime and for the rest of this fiscal year, we intend to continue to share with you all -- not only the best information that we have available and, again, that will not change in the future, but also our projections as to what this information indicates with regard to our earnings outlook for the quarter and our subsequent earnings conference calls for fiscal 2006 as a whole.

That being said, I'll now review the second quarter and our fiscal 2006 earnings estimate. As we have already announced this morning, our U.S. chicken business continues to perform well. However, our success is not as great as what we had initially estimated last quarter, as continued uncertainty in the export markets remains a factor this quarter. Therefore, we have revised our second quarter and fiscal year estimates based on a lower price realization and lower profitability in Mexico. We are hopeful that recent directional movements seen in crude oil, natural gas and diesel fuel will continue. However, at this time, we are still projecting that our petroleum, energy-related items, including polywrap packaging items, will have year-over-year cost increases for each quarter when compared to fiscal 2005.

Additionally, please note that the following earnings guidance does not consider the tax effects, if any, that could result should the Company decide to repatriate previously untaxed earnings and profits from its Mexican operations under the American Jobs Creation Act of 2004. We currently estimate that approximately $250 million of untaxed earnings and profits exist in the Company's Mexico operations. And any decision to repatriate such earnings will be made on or before the end of fiscal 2006. Turning to the guidance. At this time we are estimating our guidance for all of fiscal 2006 will be in the range of $2.00 to $2.50 a share. For the second quarter of fiscal 2006, which is traditionally our weakest quarter, we estimate our earnings will be in the range of $0.25 to $0.35 per share.

For the year, U.S. and Mexico chicken sales are estimated to be 4.2 billion to 4.4 billion and 330 million to 340 million respectively. Our total turkey sales are estimated to be 125 to 135 million and our other sales 633 to 653 million, for a total annual estimated sales in the range of 5.163 billion to 5.393 billion. For the second fiscal quarter U.S. and Mexican chicken sales are estimated to be a 1.025 billion to 1.100 billion and 85 million to 90 million respectively. Total turkey sales are estimated to be 18 to $20 million and other sales 152 to $163 million, for total quarterly estimated sales ranging from 1.262 billion to 1.353 billion. Our U.S. chicken production volumes are estimated for the year to be at 5.6 to 5.7 billion pounds. And Mexico are estimated to be at 650 to 680 million pounds. For the second fiscal quarter of 2006, U.S. chicken production volumes are estimated to be approximately 1.4 to 1.5 billion pounds. And Mexico is estimated to be 165 to 175 million pounds.

Our cost of sales are estimated to be in the range of 89 to 90% of net sales for the entire year, and 91 to 92% of sales for the second fiscal quarter. Our SG&A for the year and the quarter is estimated to be approximately 5.4 to 5.6% of net sales. These numbers will give us a projected operating margin of 4.6 to 5.4% for the entire year, and 2.6 to 3.4% for the second fiscal quarter. Our net interest expense is estimated to be 34 to $37 million for all of 2006, and 8.8 to 9.3 million for the second fiscal quarter. Our estimated effective tax rate is expected to be in the range of 33 to 36% for the entire year, and 34 to 37% for the quarter. As I mentioned previously, our total capital expenditures will be in the range of 180 to $200 million for the year. Our depreciation expense will continue along the current path projected to be about 130 to 140 million for the year, and 30 to 32 million for the second fiscal quarter. This should give you all the components necessary to analyze our year and our second fiscal quarter. With that being said, we'll now open up the line for questions that you may have.

At this time, the lines are now open for questions. [ OPERATOR INSTRUCTIONS ] Our first question is from Farha Aslam with Stevens, Incorporated. Go ahead, please

Good morning. Thanks for all of the detail you have provided, but could you give us some color right now on the market as you see it now in terms of where your shipments are going right now in the export market? And which markets will have to improve for you to start seeing those inventory levels coming down?

Well, I mean, all of the export markets have suffered setbacks. Currently, the Russian market is one of our largest markets and it continues to improve because the backlog of inventory both in that country and in this country. But movement is starting to resume in many of those countries in the Middle East, Russia, Asia. So we're seeing some optimism based on current movements.

And if you had to estimate, how much is demand down in these international markets of Russia, the Middle East and China, in particular?

That information is so hard to come by. We've heard numbers quoted, but there's no official information out there that we can really feel comfortable with.

Okay. And --

Farha, I think it's important to note that where we have been the last, oh, three weeks or so, is pretty much in a steady state position, which means our production of dark meat, if you will, is roughly equal to what we're moving offshore and through liquidation. So, we're not seeing inventory build anymore, which is positive.

And when inventory starts to move, you think that's going to be in the springtime period or will it be more later in the year?

I think the next two to three months will clear a lot of the product out of the marketplace.

And that assumption is -- your guidance is based on kind of what level of leg quarters for the rest of the year?

Our outlook for leg quarters continues to be below that of last year. Last year we had a overall average price for the entire year of $0.36. And I think this year we're projecting somewhere in the high 20s to low 30s. So we are bringing that down.

And then moving to breast meat, the current pricing, you had commented on excess supply, some folks are talking about weakness in demand. Are you seeing weakness in demand right now in the U.S. for breast meat?

I believe that some of the leg quarters that are moving through retail today have had advertised prices considerably lower than they were able to do last year, has cannibalized some amount of breast meat consumption. But if you look outside the retail sector, we see food service gaining strength, seasonally, and I don't believe that we're seeing softness in breast demand in those other sectors.

I just noticed that McDonald's added six-piece chicken nuggets to their dollar menu. Are you seeing an increase in promotional activity around chicken with chicken pricing this low here in the U.S. in the food service segment?

I believe that we will see in calendar 2006 more of the QSR sectors promoting chicken than what we saw in 2005. 2005 we actually saw fewer chicken promotions than we did in 2004. And I believe you'll see a return in 2006 to many of these sectors advertising chicken.

Right. And then you had said you are increasing capacity by 20.3 million chickens? Is that right?

That is correct.

What does that represent in terms of your capacity and the industry capacity?

That's about 1.5% increase for us.

Increase. And then for the industry? Would you happen to know that number?

Well, we're projected to see 2 to 3.

Okay. And why would you choose to expand capacity internally in PPC when you can source right now chicken at very attractive rates in the open market and there's been growing capacity amongst the more commodity-oriented chicken companies?

The increase that we're doing in our Mayfield plant is in our small-bird sector where we've had strong demand and strong growth. Most of the growth within our industry has been in big bird. And so this is to fulfill a market niche where we see strong demand. It also has a lot of operating efficiencies associated with increasing at that location. That's one of our lowest cost operations. It is our lowest grain cost operation and we believe that it is a good strategic move for us. So small birds are not available in the marketplace today for us to outsource.

Okay. And one last question and then I'll definitely pass it on. Just could you talk about the difference in profitability in that small-bird section, the big-bird deboning retail tray pack, and just give us a feel of where profitability has been historically and where you see it looking out going forward?

Yes, Farha, we really don't break our profitability in our public statements down to that level of detail, so -- .

But just comments, not necessarily you, yourself, but maybe accrescent measures or industry kind of trends. Isn't that small bird area a growth in terms of profitability versus historical trends right now?

Again, we're not going to comment that level of detail.

Okay. Great. Thank you very much.

Your next question is from Pablo Zuanic. Go ahead, please.

Good morning, everyone. Just trying to get a sense here of your pricing [equalization], up 2% in the quarter, in a quarter where we saw the composite come down significantly, as well other parts coming down. How should I think about that for the rest of the year? You see if you can comment on -- the last time we had this call in terms of your contract at fixed price, you mentioned they were slightly down but you were still negotiating. That's supposed to account for about half of your sales. So comment on where your contracts are for the next 12 months and then remind us of your mix. I think it's 50% fixed price. You've said 35% whole birds and 15% leg quarters. Just go through that. I'm just trying to understand -- reconcile that growth of 2.5% in this quarter with what we've seen in the spot market.

For us, what's driving that growth is a couple factors. As O.B. mentioned, we did see a continued growth in our prepared food pounds sold. So, it wasn't up real strong, but it was up 5%, which is good in the quarter that we just completed. And so that's a higher value, a higher dollar value item, which drives through the mix price that you're referring to. We did see and we have seen, I guess, during the season, some erosion on the selling price of those products just like we have the others, just not to the same extent. More in the 3% range, 3 to 4% range in terms of unit decrease selling prices. So, when you factor that together, the higher volumes and a little bit lower realization, it's still a richer mix, which helped drive our total overall sales price up that 2%.

Again, just to follow-up in terms of the relationship between white meat and dark meat, I understand what all you mentioned there, because leg quarters have been at near historical lows, you're having the situation that in the retail market there's some cannibalization of white meat, but it's not all export-related, right? I'm just trying to understand in the domestic market, if you have a recovery in leg quarters, as you are expecting, apparently, to a low 30s, what does that mean for white meat prices? Should we expect that there's a bit of a one-to-one relationship or how should we think about that, even adjusting for the fact that there's more capacity or higher weights for birds?

Yes, I think that's really, it's really kind of hard to pinpoint that exact relationship. I mean, clearly, breast meat prices started to erode before leg quarter prices were eroding. So that tells us that there's ample supply of that commodity breast meat item out there, as O.B. mentioned in his comments. So, it is a tough time of year for all these commodities, though. You generally will see the market start to improve as we get into February and move forward. And we fully expect breast meat to come up along with the other items. So I can't really tell you exactly what relationship that's going to be, because they didn't happen at the same time, so I wouldn't necessarily think they're directly tied. But what O.B. said is true, that as the retailers have had the opportunity to feature dark meat at extremely low rates over the last three, four weeks, that clearly cannibalizes some of what's getting taken out of the retail channel.

Again, a couple of follow-up questions, then I'll leave the subject. The $300 million in securities from the balance sheet, can you comment on what those are? And then regarding the testing for avian flu, can you comment in terms of the cost implications that there may be?

I didn't catch the second part of the question.

The second question is more in regarding the avian flu testing. You say you are going to submit voluntarily to this testing program, what's the cost implication of that?

Sure, yes. Back on the first part, the securities. We have some of our excess funds invested in longer term assets and they're a mix of tax-free municipals and treasuries and things like that. So there's a composite in there that makes up those investments. Regarding the testing, we don't really think it's going to be a material item at all. Somewhere in the neighborhood of 1 to $2 million per year is really at most what we expect to see.

Okay, that's useful. Thank you.

Your next question is from Diane Geissler at Merrill Lynch. Go ahead, please.

Good morning.

Hi, Diane.

I have a few questions and I think Lenny may be on the line as well.

Yes.

Could we just talk a little bit about the food service prepared business? I've been looking through some of the documents post on your website prior to the call with regard to sales segments. And for the last three-quarters we've seen revenue in the food service prepared area, [found] on a year-over-year basis, I'm just wondering if you can give me some color about how we should think about that for the full year. That's an area where I think you'd have a little bit more stability because that's the contracted area, is it not?

Yes, I mean where we have the long-term contracts, they primarily are in the prepared foods arena, that's exactly right. That's what I was mentioning earlier when Pablo's question, I believe, where we have seen some erosion in those prices as well, just not to the extent of the other commodities. So they're down more in the 3% range. That's what's driving the total top-line revenue being down.

Should we assume that for all of, say, calendar 2006 or will it be -- I mean, you've just completed your -- most of your contracting. Should we look for it to be down even more than 3%?

I think what we saw this pricing season was basically the same. So we're in that 3% range is what we think we'll end up with. We still don't have them all done but we're in the mid-70s in terms of where we expected to be.

Okay. And if we could talk a little bit just touching on the 300 million in marketable securities on your balance sheet. If we're headed into an extended down period here, obviously that's a time for consolidation, assuming that you're hanging on to some of these assets to set yourself up to be prepared for that eventuality. Are you, when you think about acquisitions, and I understand you're not going to comment on specific acquisitions, but when you think of acquisitions do you think there's room for sort of large scale acquisition still, given concentration of market shares or are you more interested in kind of one-off plant acquisitions as the one you just completed in Louisiana? Could you just talk a little bit about kind of what you look at and what are some of the hurdles or parameters you look at when you do look at acquisitions?

Yes, I think every acquisition has its own dynamics, whether it's market share or whether it's strategic for a niche of production or a niche of location. And as in the past, we've been open to many different forms of acquisitions, from plants all the way to major operations. And I don't see that necessarily changing. The opportunity will dictate what our appetite will be regarding the size of an acquisition. We are still nine points or so behind Tyson in terms of market share, so there's still plenty of opportunity for us to make acquisitions in any area. And I don't think Tyson is at the limits of what they could obtain from a market share perspective in the current antitrust rules. So there's plenty of room for growth there. And I'd like to -- we talk about the year being, quote, a downturn, if you will, which obviously coming off of last year on a relative basis, that's true. But assuming we deliver where we're projecting, that will still end up being our second best year in our Company's history. And we think it will warrant a little bit better consideration than to be considered just a down year.

I guess the idea is that I think there are a lot of companies that are sort of coming out of these last few years which were, as everyone knows, phenomenal.

Yes, on a relative basis, it's definitely down.

It's definitely down. I do understand your point on the acquisitions, I'm just curious because in the past you have considered acquisitions that took down your percent. If you think about your business in terms of percentage to prepared and percentage to fresh, you have done acquisitions in the past that have been sort of more, quote, fresh oriented. I just am curious about if a large acquisition, or even a smallish acquisition, impacted that percentage prepared versus percentage fresh, is that something you would consider again, something that was a little bit more fresh-oriented and then kind of ramping that through your system, which is so much more geared toward providing prepared product?

Yes, I think O.B.'s comments were on point there, that when it comes to the commodity sector, we think that there's going to be ample opportunities to grow through acquisition or buying the meat in the open market on a commodity basis. So when you contrast that to the expansion that Clint mentioned, that's not a commodity-based expansion. So I think we'll just evaluate it as it arises. But, yes, we would take our percents down for the right opportunity. And that's really not that unusual, since there's very few companies out there, other than us and Tyson, that might have the concentration of prepared-food mix. So virtually every acquisition would tend to impact that percentage mix.

I'm obviously thinking sort of a large-scale fresh producer, as opposed to -- .

We're not going to comment about any specific targets, so -- .

Could we just talk a little bit about some of the synergies you may be seeing now that you got ConAgra rolled up into your system and you are making some of these changes on the prepared food side. I think you mentioned 7 million for one of the plants that you mentioned today. Can you just talk a little bit about some of the synergies, now that you've had ConAgra and you've moved some things around, what you're seeing from that?

We reported before on the dollar synergies that we're experiencing, it's running at about $100 million a year run rate. And we're continuing that effort and have formed groups again to look across the companies for synergies. And we're in the process of putting dollar figures to what we think those will be this year. But we're seeing improvements in the prepared foods area this last year. We gained in total about 15% capacity through synergies from plant reloading and just improving best practices across the board. And we're continuing to build on those. And these projects we have upcoming are really to continue to look at where raw materials are produced and the capacity that we need to meet the growing demand and making sure that we put these capacities where they're needed and closest to the raw material source. And that's what's going to continue to drive synergies forward.

Okay, thanks. And then on your last call, you mentioned that you were heading into the end of the year still reviewing your hedging strategy on the feed side and that you would look at it at the end of the year and moving into this year. Has there been any change on your stance regarding hedging for feed?

Our position is still the same and it is something that we're actually looking at and discussing, almost on a daily basis. Based on all of the factors that we see, based upon the outlook from various sources, such as Informa, and then based on individual consultants that we use, we continue to believe that being on the market today is our best position.

Okay. Well, thank you very much. Len, did you have a -- ?

If I could just -- I got to be getting dumber as I get older, because you take a look at the aggravation that this industry has gone through and gotten, I think, consolidated into some fairly stronger hands. And yet we see Sanderson Farms expanding their production. You guys, admittedly on a niche product basis are expanding yours. I guess I'm having trouble factoring all this in as to whether or not what I would call the commitment to profitability is still there. Now, am I reading too much into this? I know you're not going to comment on Sanderson. But what the heck do you guys see in the market that somebody on the outside looking in doesn't see? Are we seeing -- is there stronger demand than we can see or exactly what's going on here? Or is it just bad business decisions?

Well, again, we can't comment on anyone else's expansion. As we look at our operations and we look at our demand for our products and our ability to grow with certain key accounts, the ability for us to grow in certain market channels, then that drives us to make expansion decisions. And again, if you look at the overall growth that we are projecting as a Company, it is a very reasonable number. And again, this was -- this particular expansion drives a lot of synergies operationally in that particular complex. But also allows us to grow with key accounts that we believe are strategically important for us in the future.

I'm going to accept that because why wouldn't I? I guess at the end of the day, we're still looking at a price per pound that you guys can get out of the business. I think Diane hit around it, I think some of the other questioners, did, too. With the consolidation still, I think, a long way off and, Rick, your comment just now, why wouldn't you go out and buy a [Gold Castor], buy somebody that's major, get your fixed assets in to about the maxim you can get them and then start to reorganize the production base along key account lines or whatever's driving this decision? Why don't you just make one big step right now when the stocks are down, you guys certainly have the money to do it. Why wouldn't something like that appeal to you as opposed to picking off some smaller plants and then reconfiguring them, et cetera?

Well, again, we continue to evaluate all of our options, big and small, and that's the way we'll approach it.

All right. Well, let's save that for the Pilgrim's Pride day. The second thing, would you have declared your special dividend of $1.00, did you know what your earnings were going to be at the time you did that? And if you did not, would you still go ahead and do it?

Obviously, we did not know that the quarter would be what it was since we declared that before we came out with our updated earnings guidance. But in terms of returning some value to our shareholders for the gains and the liquidity that we had, we still thought that that was appropriate. And yes, I think that that was a decision that was warranted last year based on last year's results. And as you can see, the balance sheet is still extremely strong.

Oh, sure. All right. One final thing and then I'm sure there's a lot of guys standing in line here. When we take a look at the energy prices today and kind of one day doesn't a trend make, et cetera, but in the numbers that you have told us today, Rick, what is -- I want to make sure I'm getting this right. What is your anticipated cost of energy and energy-related expenses?

We, as O.B. mentioned, those items cost us year-over-year about $20 million.

And that was at the prices before last week, I'm going to guess?

That was the prices realized in the fourth quarter, yes. As the year progresses, you get into periods where you started to have some upward movement. Natural gas moved up throughout of all 2005, you'll have some lapping going on there. But overall, we're projecting pretty much in line with what you saw on slide 10 in terms of those kind of impacts.

That was really my point because there are some projections of oil certainly adding significantly from here. I presume if that's the case, all bets are off?

Yes. That's right. We have not forecast anything beyond what we currently can see in the marketplace. The instability in the world economy, specifically Iran and what we hear and fear from that region, none of that would be contemplated.

And my final observation is that I think you guys have distinguished yourself in a very positive light by giving projections. And I think you've basically shown that you guys can run your business because of been able to give projections better than some of your competitors out there. I would certainly caution not to change that paradigm. I think it helps your multiple, I think it helps the performance of the stock. Thank you very much, I appreciate your time.

On the multiple side, the facts are what the facts are, Lenny.

You got it. Thank you.

Your next question is from Ken Zaslow with Harris Nesbitt. Go ahead, please.

Good morning, everyone.

Good morning.

Just touching base on turkey, I know everybody's talking about acquisitions. But what about divestitures such as like turkey, what competitive advantage do you have by staying in this business? And is there a point in time that you kind of say this is the second restructuring. Is there something that you need to see before you either let turkey go loose or is there something you're building that we don't see?

Well, certainly we think our turkey operations today, not only are they small relative to our broiler production, but we think that we have found a small niche that we can fulfill. Our projections in that area look good. We think there's probably some amount of growth in that area and today it fits with what we're trying to do. We have some accounts that it's important for us to have both of those proteins and it's just -- we've got it structured to a point that we believe is beneficial to us.

When do you think you'll start to see a base level of earnings of which you can grow off of? Was it another year away, is it sometime in the middle of this year? How does that look?

On the turkey business?

Yes, please.

Really, when we get to the third fiscal quarter of this year we will be operating our planned base of business. And again, that operation that we have, the New Oxford operation, is primarily a whole-bird operation. And as you could see from this quarter's sales numbers and our next quarter's projected numbers, there's a lot of seasonality in that market having to do with the Thanksgiving season. So, the gauge really will have to be looked at on an annual basis but beginning the third fiscal quarter will be at that run rate.

Going a little bit to Mexico, I guess what surprised you that this [INAUDIBLE] to sell off or has there been just [INAUDIBLE] on the backyard producers?

Well, I think it was a combination. We obviously grew our production down there as well, as evidenced by our numbers. We were up 9%. And I think between us and not only the other integrators, but the seasonal producers, there was just way too much product in the marketplace.

Is there any change in the foreseeable future that things will -- I mean, going back two years ago, it seemed like we were somewhat troubled. And then last year things seemed great, now we're back to a point of troubled. How do you diagnose the rapid changes?

I think the thing about Mexico is it does tend to react fairly quickly when you see these types of movements. There's not the same liquidity sources in general in Mexico for the broad-based producers that there are for say us and Bochoco and some of the major producers. So you tend to see a lot of the smaller producers have to react very quickly to these changes and because of that, we see a lot more volatility in the marketplace. In terms of the next quarter, we don't look for the next quarter to be any better, more in the same line, possibly a little bit worse, actually. But again, those are factored into our guidance numbers. And then going out throughout the rest of the year, we do think we'll see things improve towards the last half of the fiscal year.

And my last question is on avian influenza. In the U.S., I thought we were getting a read here that food service channel was somewhat cautious about promoting chicken given the potential for avian influenza. Are you not seeing that, are you seeing that?

We're not seeing that, no.

So there's been no change on the food service outlook based on bird flu?

Not that we can see.

Okay. I appreciate it. Thank you.

Thank you.

There are no further questions at this time.

Okay. Well, we thank you all for participating in our call and we'll do this again in another quarter. Thank you.