Pilgrims Pride Corp (PPC) 2006 Q2 法說會逐字稿

Good morning and welcome to the Pilgrim's Pride Conference Call to review the Company's Fiscal 2006 Second Quarter and Year-to-Date Financial Results. At the request of Pilgrim's Pride, this conference call is being recorded. [Live] reference for today’s calls are available for downloading from the conference call link on the website home page of www.pilgrimspride.com. [OPERATOR INSTRUCTIONS] On today’s conference call we Mr. O.B. Goolsby, President and CEO, Mr. Clint Rivers, COO, Mr. Rick Cogdill, CFO, and Ms. Kathy Costner, VP of Investor Relations. Beginning the conference is Ms. Kathy Costner. Ms. Costner you may begin.

Good morning and thank you all for joining us today to review our financial results for the second quarter and year-to-date. Earlier today we issued a press release that provides an overview of our financial performance for these periods. A copy of this press release is available on our website at www.pilgrimspride.com. Also on today’s call we’ll share our views on some of the broader industry trends, that are affecting our business this year. We’ll also discuss some of the specific challenges to our business and the actions we are taking to address these issues.

After our prepared remarks, we will be happy to take any questions that you have. Before O.B. begins his discussion, I would like to remind everyone I would like to remind everyone that this conference call contains certain forward-looking statements. These include our expectations of future results, sales, and cost of sales information and market dynamics. 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 8-K as filed with the Securities and Exchange Commission. I will now turn the call over to O.B. Goolsby.

Thanks Kathy. Good morning everyone. As we noted in our press release, our results in the second quarter reflect a challenging operating environment for US chicken companies. The spread of H5N1 avian influenza in parts of Europe and Asia has significantly reduced export demand, leading to higher inventory levels and contributing to lower overall market pricing. At the same time industry production levels have continued to increase. Creating an over supply situation and further weakening prices.

In our US operations during the second quarter market pricing for both breasts and leg quarters declined approximately 30% from a year ago. Additionally US chicken sales volumes declined approximately 4% because of lower demand versus a year ago. Due primarily of the affects of avian influenza concerns in the international markets.

That is not to say that all moves on the sales front is disappointing. In January we launched our 100% natural enhanced case ready fresh chicken product with original TV and radio campaign. We were the first to market with the 100% natural enhanced product, which gives our brand a unique selling proposition to the higher volume case-ready category. Today these products are in over 2000 retail stores nationwide and have helped propel the Pilgrim’s Pride brand to the top of the list in sales growth of frozen valued added chicken, according to IRI Market data. Innovation in this area is part of our plan to put further emphasis on the prepared foods retail sector. I look forward to updating you on our progress in the arena in the future.

While the industry needs to look for ways to adjust production levels to match demand, we believe that many producers are remaining unduly hopeful that chicken consumption will quickly rebound this summer. We are not as optimistic. While export markets have shown some recent improvement, we believe the continuing excess production of commodity breast meat in the US, will take longer to resolve. Further if high-path H5N1 AI were detected in the US we would anticipate a short-term decline in domestic consumption and further disruptions to our industry’s ability to export product. However, given the strict bio-security measures and production controls that we have in place, both in terms of current industry practices and government oversight, we feel that the American consumers would quickly regain their confidence in US poultry products, more so than what we have seen overseas.

Industry organizations, such as the National Chicken Council and the USA. Poultry and Ag Export Counsel have taken the initiative to educate consumers about the facts of AI. As we have said many times before, avian influenza is not a food safety issue. Properly prepared and cooked chicken is absolutely safe to eat. We believe that heightened consumer awareness in the US about the safety procedures that are in place and the fact that AI cannot be transmitted through the consumption of cooked poultry will help mitigate the impact on consumption, if a high path AI outbreak occurs in our country. Again, education is the key. We have been working closely with our customers, employees and consumers to help them understand the facts about AI.

Getting back to the export markets, of the 6 billion pounds of US chicken products that Pilgrim Pride sells annually, approximately 20% is exported. So any weakness in overseas markets directly affects approximately 1.2 billion pounds of our product. We do however, diversify our exports across several countries to minimize this risk. This is especially important today because as you had heard, as of last Thursday, Russia has temporarily canceled all poultry import permits for products shipped after May 8th. While Russia represents approximately 30%, this is shown on slide 5, of exports from the US chicken industry that market represents only 14 to 15% of our company’s total exports. Although the Russian Agricultural Minister said that the permits would be reissued within 10 days to two weeks, a short period of time, this shut-down could put negative pricing pressure on leg quarters, which has just recently begun to show signs of improvement. If this issue remains unresolved for a longer period of time, even more downward pressure would likely be applied to pricing.

In the second half of fiscal 2005 leg quarters represents 2/3 of our total exports or approximately 360 million pounds. In total, including domestic we sold approximately 585 million pounds of leg quarters during this time period, at an average price of approximately $0.39 a pound. The current spot leg quarter for us is $0.21 per pound. This is on slide 7, and if we assume that our volume over the next 6 months will be similar to the second have of 2005, and that there is no change in current spot market pricing, we would estimate that our net sales in the second half of 2006 would be negatively effected by approximately $105 million versus the last 6 months of 2005.

As you can, see prices of leg quarters and export demand have a significant effect on our company. This is particularly true for positively and negatively during times of rapid transition in dark meat liquidation pricing.

In a more balanced production environment we would typically see breast meat prices moving higher to compensate for lower values being realized on the dark meat side. However, at the current moment, there is an over supply of commodity breast meat, thus preventing this normal price shift from occurring.

The export demand for US chicken affects not only sales pricing, but also inventory levels for the industry. Since last fall since when AI first spread beyond Asia, cold storage inventories have increased 22.9%.

As shown on slides 6 and 7, recent inventory levels have been less volatile. However, the price points necessary to keep this product moving had been affected significantly. Total March inventories were down 6.1% from prior month levels. Industry wide inventories of leg quarters were up 2.1% for the same period after declining 17.2% during February of this year. We are hopeful that these developments will prove to be leading indicators of a rebound in international demand, but regardless of whether that proves to be the case, we are taking steps to control our production so as to reduce our excess inventories over the summer. Clint will provide some details about these steps in a few minutes.

Slide 7, even though the broiler meat production increases are expected to slow, boiler our prices are not expected to strengthen substantially this year due to high stock levels and uncertainty over future export and demand.

Here are some of the highlights from the second quarter. Georgia Dock prices averaged $0.69.1 per pound. This is down 6.2% from the same period last year. Boneless skinless breast meat prices averaged $1.09 per pound. This is down 29.2% from a year ago. Dark meat prices continue to suffer as leg quarter prices dropped to $0.20.9 per pound, a 30.8% decline from the same period a year ago, and a 12.9% decline since our first quarter conference call.

Turning now to feed ingredients, slide 8. The USDA continues to project average corn and soybean meal prices at $1.95 a bushel and $172.50 a ton respectively for the 2005-2006 crop season. However, we continue to see the futures markets heading in a different direction. While the USDA estimates are 4.9% and 1.9% lower than last year’s average prices for corn and soybean meal, our actual costs this year have been higher than last year.

Our cost for corn has been 1% higher and for soybean meal, 9.2% higher. The product futures markets indicate pricing for the season to be $2.36 per bushel for corn and $182 per ton for soybean meal. This is approximately 21% and 6% higher than USDA's expectation for corn and soybean meal respectively.

While feel that these future prices are artificially inflated because of funds that are purchasing forward contracts, these markets are negatively affecting our costs for feed ingredients when compared to the prior year, and our previous expectations.

With that, I’ll ask Clint to provide some addition perspective on the quarter and explain some of the specific steps that we are taking in response to the current operating environment. Clint.

Good morning everyone. As O.B. mentioned, H5N1 high-path avian influenza has led to decreased consumption in many export markets resulting in higher frozen inventories and lower prices for US poultry producers.

Looking at items that affected this quarters results, slide 8 shows corn and soybean meal prices were 8.3%, and 10% higher than a year ago. Increased feed transportation costs magnified this effect on our delivery feed costs. Rail costs, and other feed transportation expenses, were higher than the prior year due to the lingering effects from last year's hurricanes. As a result, we have experienced a 7.9% increase in total unit cost of delivered feed, rather than a decrease that we had originally projected.

Higher energy related costs also negatively affected our performance in the second quarter of 2006 versus a year ago. Slide 9 showed these higher costs included approximately $7.4 million in additional fuel supplement segments to our US contract growers. As a result of the higher energy costs, we determined it necessary to pay our contract growers an addition $11.7 million for the winter months, which is above and beyond our normal fuel supplement payments. Of this amount, approximately $2.7 million remains and will be paid in the third quarter.

As we noted earlier in the quarter, our Mexico operations have returned to profitability sooner than we had anticipated. During the second quarter of fiscal 2006, we saw both revenue per pound appreciation, and sales volume growth of 3.9 % and 10.1% respectively. However, operating margins did suffer at higher costs of production and feed ingredient input costs were realized during the quarter.

Touching briefly on our turkey division; the fruits of our restructuring efforts are materializing. While our second fiscal quarter gap operating income results are relatively similar to last year with a $6.7 million loss versus $5.5 million in the prior year. When we adjust these reported amounts by the asset impairment and severance expense incurred during this last fiscal quarter, and by the recoveries from prior turkey restructuring charges realized last year, our results actually improved on a comparative basis by $7.2 million to an adjusted second quarter operating loss of 2.7 versus 9.9 million in the prior year.

Turning back to our chicken business, clearly this is a difficult time for the US chicken industry. The combination of high inventory levels, low pricing, declines in international demand, rising energy costs, and extremely high rail costs present a tremendous challenge to our business.

As O.B. noted earlier, the effects of dark meat pricing can have a material impact on our operating performance, both positively and negatively, especially in those times of rapid transition. At the end of our first quarter of fiscal 2006, we were carrying approximately 82 million pounds of leg quarter inventory, compared to approximately 57 million pounds at the end of the same quarter in the prior year.

During the second quarter of fiscal 2006, our inventory of these items peaked at approximately 91 million pounds and remained basically at that level through the end of the second quarter. Since then, they have been reduced by 22% to a current level of approximately 71 million pounds. Accordingly, while there has been some progress, there remains much more to be done to return to acceptable levels of profitability.

In response to the current business environment, we are executing a multi-point plan designed to improve our competitive position. First, we have decided to reduce our weekly slaughter by approximately 3%, which is equivalent to approximately 830,000 head per week. The reduction in egg sets are already being taken so that the decrease in slaughter will be realized beginning in July.

Second, we have delayed one half of our planned expansion in the fresh food service division of our Mayfield, Kentucky plant from early July until mid August of this year and the other half of this expansion until April of 2007. As you will recall from our last call, this project includes the addition of one new high speed line to our first processing department and the installation of the new trial freezer and sizing equipment.

Third, we are reducing our capital investment for the year by $25 to $40 million. Our original capital investment projection for the year had been in the range of $180 to $200 million. Our new range for the year is $140 to $175 million. We are focusing only on those projects deemed critically necessary to our business or those in which our medium investment is judged to be in the best long term interests of our company.

Fourth, we have sharpened our focus on reducing costs and operating more efficiently. For example, in order to eliminate holiday and overtime premiums, we have cut egg placements from Memorial Day and the Fourth of July, as well as other previously planned Saturday productions.

We believe that by taking these actions at a time of year when chicken consumption normally increases, we will better balance our production with demand for the remainder of the year. We will continue to monitor the market to evaluate if and when additional reductions may be needed. Producing overall supply to better match demand is an important component in helping return the industry to profitability.

We are hopeful that the steps we have outlined today will help reduce inventories to a level where we can exert some positive pressure on pricing, while at the same time looking for opportunities to expand our market presence, however, given continued uncertainties related to AI, we are being especially prudent with our expenditures and positioning ourselves to ride out what may be a difficult second half of our fiscal year.

Before I turn the call over to Rick, I want to reiterate some important facts about H5N1 avian influenza. First, we voluntarily test all of our flocks for AI. This amounts to thousands of tests every week conducted under procedures approved by the National Chicken Council. Under this enhanced testing program, any flock found to have H5 or H7 AI would be promptly and humanely euthanized on the farm and disposed of in an environmentally acceptable manner. None of these birds would ever enter the food chain.

Pilgrim’s Pride has comprehensive bio-security measures in place aimed at protecting our flocks and preventing viruses from being inadvertently carried on to the farms where birds are raised. These policies include routine cleaning and disinfecting of equipment and vehicles, providing clean and protective clothing for all personnel, permitting only essential personnel and vehicles to enter the farm, limiting or avoiding visits to other bird farms and sheltering our flocks in secure housing structures to provide maximum protection from inadvertent contact with wild or migratory birds.

In addition, we have run mock tests at all of our complexes to assure that these protocols are being followed throughout the company. All of this is aimed at providing our customers with safe, wholesome and nutritious poultry products while insuring the health and well-being of our flock, employees and contract growers.

I will now turn over the call to Rick, who will provide additional details about our second quarter financial results. Rick.

Thank you, Clint. As shown on slide 10, we realized a net loss per share of $0.48 for the quarter ended April 1, 2006. This compares to the net income of $0.85 per share for the same period last year and in both these periods, our average daily number of shares out of stock outstanding was 66,555,733 shares.

For the 6 months ended April 1 of ’06, we realized net loss of $0.09 per share, compared to net income of $1.58 for the same period last year. The average number of share for the six month period was the same as for the two quarters.

Turning to the income statement. Sales were equally effected by market conditions resulting from the international concerns over the avian influenza. Our sales for the second fiscal quarter were down 8% to a 1,265.7 million, compared to 1,375.3 million for the same period last year.

Specifically, as shown on slide 10, our US chicken sales were most heavily impacted with sales declining 105.6 million or 9.7%. This was a result of both declines in our sales volumes as well as in our sales pricing. Pounds sold declined 53 million pounds or approximately 4.2%, while pricing declined 5.8% on the net revenue per pound sold basis.

Our Mexico chicken sales, however, moved in the opposite direction and sales were up 14.5% and this was primarily due to a 10.1% increase in our volumes and a 3.9% increase in our revenue per pound.

Turkey sales were down 54.2% due to the 51.7% decrease in pounds sold and it’s important to out that during this -- the prior year we were liquidating excess inventories in our turkey division, which remained as part of our restructuring efforts to exit the commodity turkey production in our Hinton, Virginia operations.

Turning to the 6 months, ended April 1 of ’06, they show much smaller effects for the market conditions as the first quarter of fiscal ’06 was not as impacted to the same degree as the current quarter. Still, however, sales declined 4.9% when compared to the same time last year.

Our total sales were 2.6, excuse me, 2 billion, 609.5 million compared to 2 billion, 743.6 million for the first 6 months of ’05. Our US chicken sales were down 5% on a decrease of pounds sold of 3.1% and a 1.9% decrease in revenue per pounds sold. And again, our Mexican chicken sales showed improvements in total sales dollars with a 4.6% increase in net sales due to a 9.9% increase in volumes and offset by a 4.8% decrease in pricing.

Turkey sales were down 32.5% due to a 28.6% decrease in pounds sold and a 5.6% decline in revenue per pound. These comparisons are also impacted by our restructuring efforts to exit the commodity turkey operation in our Hinton, Virginia plant. Turning to slide 13 it shows that our operating loss for the second quarter was 37.9 million compared to operating income of $89 million for the same period last year. This decrease of 126.9 million was primarily due to the declines in sales, both in terms of pricing and volumes and for the 6 month end April 1st, 2006 our operating income was down 171.7 million to 8.3 million compared to 180 million for the same period last year.

If we were to look back slide 10 we would see that net interest expense for the second quarter increased 0.8 million or 8.6% to 10.1 million compared to interest expense of 9.3 million in the same period last year. This increase was primarily due to short-term borrowings during the quarter and increased short-term rates which were impacted certain amounts of our variable debt. As percentage of sales our interest expense increased 0.8% from 0.7% last year in the same period last year. For the 6 month period our earned interest expense was down $3 million to 18.6 million from 21.6 million last year primarily due to increased interest income on excess investments.

Our income tax benefit for the quarter ended April 1st, 2006 was a $15.1 million benefit on the net loss before income taxes of 47.1 million or 32.1% effected taxes. This compares to our prior year second quarter income tax expense of 34.2 million on net income before taxes of 90.6 million or a 37.7 effective tax rate.

The income tax benefit for the 6 months ending April 1st of’06 was 4.2 million on a net loss before taxes of 10.5 million or a 40% effective tax rate comparing to an income tax expense of 65.6 million on net income before tax of 170.5 million or a 38% effective tax rate in the prior year.

Turning to the balance sheets slides 14 and 15 show a comparison of our current debt agreements compared to those that existed at the end of our prior fiscal year. Total debt decreased more during this quarter than was indicated by our scheduled maturities as we took advantage of opportunities to purchase approximately $20 million of our publicly traded debt securities in open market transactions at attractive rates. As a result our total debt decreased during the quarter by $22.1 million to 495.1 million and at April 1st , 2006 our total outstanding debt is made up of 8.2 million in current maturities on long-term debt and 486.9 million of long-term debt.

Currently maintained 168 million of revolving credit facilities, 136 million of which is available to the company and 500 million in secured revolving debt all of which is available to the company. We continue to maintain 125 million of capacity under an accounts receivable securitization facility and accordingly, if we aggregate our available amounts under these credit facilities it totals to approximately $761 million. Adding to this our reported cash of $67.7 million, our total liquidated at the end of the quarter excluding our investments and available secured for-sale securities was approximately $828.7 million. Thus, total liquidity excluding our investments in available for-sale securities is down approximately [62.7] million from the 891.4 million at the end of the prior fiscal year.

It is important to note that approximately 67 million of this was used to pay our special dividend of $1.00 per share by January 13th, 2006. Our weighted average interest rate on debt outstanding as of April 1st, 2006 is stable at 8.9% compared to the previous quarter. At the end of this quarter 88.2% of our debt was on a fixed-rate basis.

Looking at slide 16 we showed our net worth remains strong at over a billion dollars at 1,127.4 million and this represents a decline of 76.2 million since the end of the prior fiscal year. If we look at our statement of cash flows, slide 10 showed the depreciation and amortization for the second quarter was up 0.9 million to 34.7 million compared to 33.8 million for the same period last year and for the 6 months end on April of 2006 our appreciation and amortization was 65.1 million, up 1.3 million compared to the 63.8 million in the same period last year.

Slide 18 shows total capital expenditures were up 0.7 million so 30.7 million versus the same period last year and for the 6 months end in April of 2006 our capital investments were 74.5 million compared to 52.2 million in the same period last year.

As Clint has already mentioned, we are scaling back on our CapEx forecast for the remainder of fiscal 2006 by approximately $25 to $40 million and it will include only those items that are being critically necessary for which investing in is currently in the best long-term interest in our company. As you noticed in the quarter, we actually already began this scale back in Q2 versus what we expended in quarter one of fiscal 2006.

Therefore, our projected CapEx spending in fiscal 2006 will be in the range of $140 to $175 million. Turning back to slide 16 on the website it shows a summary of our credit ratios and certain other information. Pointing out a few of these items, we showed our current quarter showed a negative EBIDTA of 3.3 million and a result our interest coverage is not meaningful during the current quarter; however, on a LPM basis, our cash flow coverage is 9.7 times our debt divided by EBIDTA now stands at 1.25 times and our total debt to capital to capitalization is at 30.1%.

On a debt net of cash available basis, these ratios are 1.0 times net debt to cash flow and 27.1 times net debt to capitalization. Before I turn back to O.B., I want to share with you a few thoughts about the earnings guidance for the remainder of the year.

Since the fourth quarter of fiscal 2005, we have expressed concern that our financial results might be negatively affected by the results of the H5N1 high path Avian Influenza in Europe and Asian. As both O.B. and Clint have both noted those concerns were realized during the second quarter.

Normally during this part of the call I would discuss our guidance for the remainder of the year; however, due to the volatile nature of the current operating environment we believe it remains extremely difficult for us to project quarterly financial results with any degree of accuracy.

That is why last January we withdrew through our previously issued guidance for the second quarter and full year of fiscal 2006. Simply stated there currently exist too many unpredictable market forces for us to estimate with any level of comfort what our financial results will be for the second half of 2006. With that being said, I will now pass the call back to O.B. for some final thoughts.

I’d like to conclude today's call by acknowledging that while the current operating environment remains difficult, we believe we are taking the appropriate steps to respond to the challenges we are facing. While the short-term operating environment may remain challenging, we are confident that continued projected growth in long-term demand for high quality convenient and low-fat meat proteins will enable us to resume our profitable growth when conditions in the poultry markets begin to improve.

I’ll now be happy to answer any specific questions that you may have. I will ask the operator to come back on and start queuing up the calls. Operator?

[OPERATOR INSTRUCTIONS] Our first question is from Reza Vahabzadeh, Lehman Brothers.

Is the sales mix in the third quarter or fourth quarter for the North American business, typically any different than the second quarter as far as value added, non-value added food service/non food service?

You have a history of QSRs promoting chicken throughout the summer months into the early fall, and this generally helps in the movement of value-added products. These traditionally have been stronger quarters for us in the past because of that history.

Is that value-added component meaningfully higher, or is it just marginally higher than the second quarter.

I would say that it is a significant increase traditionally over the second quarter.

Okay.

Second quarter is typically, obviously, the worst we have any fiscal year, and then not only do you have the food service on the prepared side that would expand in the third and fourth quarters, but the retail will pick up as well, as well as the fresh food service. So, all those lines of business tend to pick up in the summer months.

Right, and you typically also have fixed costs absorption that is, I guess, better in the third and fourth quarter and worse in the second quarter.

That is true.

And then as far as, as far as dividends or share repurchases, any thoughts on that?

Right now we are going to continue to maintain our dividend at the rate it is, and as we mentioned in the past, we continue to look at all of our options for our cash and our available cash, including strategic investments so, that’s really what we are going to continue to do at this time.

Okay, and then lastly on corn. I know you mentioned that there are certain funds involved in corn futures, but I do not know if that is something that may change in the future. In the meantime, I think USDA talks a lot about corn being diverted or allocated to ethanol. So, are you concerned about corn going forward, whether it is higher as much as the futures, or otherwise, and whether you are willing to entertain any kind of hedging?

We constantly look at the dynamics in the corn market, and try to make decisions based upon the best information at hand. Going forward, certainly the demand with ethanol is a concern. What that does to the available supply left for the feed ingredients, but if you continue to look at history, USDA has been a better projector of price than the futures markets. If you look at the carrying costs and the volatility there, we have a long history where USDA is a better projector. We are constantly evaluating that option of hedging versus staying on the market.

Our next question is from Farha Aslam with Stephens, Inc.

Historically in down cycles, Pilgrim's Pride has emerged with stronger player. Are you activity looking and M & A activity now in this point in the cycle?

Again, we do not comment specifically about any of our acquisition or expenditures until there is something to announce to the public market, but we have mentioned in the past that we continue to be on the look out at all times, whether it is up markets or down markets.

We have only just had one announcement of a bankruptcy in the chicken industry. Do you anticipate that balance sheets at this point are strong enough to avoid further bankruptcies, or do you anticipate with this current down cycle, and the tough summer ahead, that it will expect more?

That is really hard to say. I would think in general, most of the balance sheets are going to be fairly strong, but again, it depends on how the returns of the last year and one-half are utilized by the companies and whether or not they were put into shoring up their balance sheet, or they were put into expansion activities where maybe they do not have the strength that you might assume. So, it is really hard for us to tell because there are so many companies out there that are not publicly traded.

And, as far as those Georgia Block numbers in your presentation. I was hoping that you could give us just some more color on how leg quarter pricing progressed in the quarter, kind of how it started the quarter, what low point it hit, and where is it now. What are you actually exporting?

During the quarter, leg quarters ran the gambit. I think officially they got as low, O.B., as $0.16.

Market base, certainly there were sales in the low teens.

-- and to netting back sometimes below a $0.10 even at that. There were very low sales that would happen to move excess inventory on the spot basis. Well back of the quoted market.

And now do you think when you are exporting them, the pricing that are being quoted in the industry, where are they now?

We are hearing and experiencing some numbers in the low 20's, so there has been significant improvement, now again, those are sales that are forward anywhere from 30 to 60 days.

And recently, have you noticed a pick up in exports, particularly, to Russia, Mexico, or China?

We would say, in the last 30 days, we have been able to reduce our inventories significantly. We see good demand in many places, and we feel that many of our competitors are able to reduce their inventory levels also in the last 30 days. It is not reflected in any public numbers yet.

Okay and are you still loading ships for Russia? And when will you stop if, what is the absolute cut off date, if the import quotas are not reissued by Russian government? What kind of date are you looking for?

I believe that date is May 8th. Any vessel loaded by May 8th will be allowed to travel over under the old permits. And yes we are still loading vessels. As we mentioned, Russia is not one of our larger export destinations, but we have product that is both in the process of loading and on the water headed in that direction. And we feel confident that those will continue to move in the right direction.

And do you anticipate now given the supplies you see in Russia, given the pork and beef situation in Russia that those permits will be reissued?

Certainly that is our belief. If you just look at the value of leg quarters versus any other meat protein that is filling a need in Russia that is very important, especially with some of the interruptions under beef/pork side. So we feel very good that this will be resolved very quickly.

And the inventory that you have in cold storage, is there any fear that you or the industry that the product is getting so old that you will not be able to sell it and you have to take extraordinary charges for that inventory?

That is certainly not the case with our situation and I do not believe that would be the case with anyone else. This inventory has reached a peak, I believe as Clint mentioned, with us in the 90 million range, you know we’ve been able to drop that significantly and with the rotation practices and these freezers today. We do not anticipate any issue there.

In looking at grain, could you just kind of quantify grain right now in the quarter as a percentage of your cost of goods sold? And kind of going forward, could you just clarify exactly what you think your grain costs are going to be in the second half up, year-over-year?

Yes, I think for the first six months anyway, the grain was 27% of our cost-of goods. Not a whole lot different in the two periods. You know, where grain has been I think it is obviously higher, currently than what it started out the year at. So you know, we might see that getting back to the levels it was last year, which I think approached in the 30% range of cost-of-goods sold.

And my final question is just sort of, AI, and now that we have had a couple more countries that have experienced AI, you had France, where demand dropped almost 30% versus the U.K. where you only saw maybe a two week demand at less than 5%, could you just give us your thoughts of how you expect and when you are planning the most realistic scenario of when possibly H5N1 would hit? And if it would, what do you see the impact being in terms of demand drop in the US and what you expect our international trading partners tourist-bound?

Well I think it would be impossible to predict when and if AI would hit. Certainly migratory patterns of birds, currently you have some changes that makes us a little more susceptible. But, I think the American consumer would react differently than what we’ve seen overseas. I believe the confidence that we have in our food supply, even if a migratory bird was found to have AI, the chances of it getting into our flocks is much more remote. If you look at our history of being able to quickly contain and eradicate, but the bottom line is poultry that is fully cooked is completely safe to eat, irregardless of AI or Salmonella or any other issue. And I think the education of our consumers is extremely important. There is many initiatives going on currently to help increase that and our anticipation is that we would not, we would see a very short-term interruption, but it would not be major and it would certainly be short-lived.

And in the international front, how do you anticipate our international partners --?

Well you know physically they have ban states where that has occurred. I think that also see as an industry we have been able to contain and control any disease in the past. So if we were to have an outbreak in a commercial flock, or even in the state on a wild bird, you may see that state ban for some period of time, until our government could do the proper testing. And demonstrate that it did not pass to other flocks.

And our next question is from David Nelson with Credit Suisse.

You mentioned that your inventories have been moving down fairly rapidly or 71 million pounds. What is it typically this time of year?

We typically would hold this on our normal production, somewhere in the 50 to 60 million pounds.

Okay.

I am talking about dark meat inventories.

And the 71 was a dark meat number?

Yes that was dark meat.

Yes, just so they are comparable. I think it was O.B. that said that other producers were unduly hopeful and that you’re cutting back. I guess your comment on other producers on being unduly hopeful that is because you are not seeing others cut back?

Well we have seen some cutbacks but not too the extent, that I think that if you look at market conditions would dictate and we feel like as an industry leader that we need to be proactive and helping too reduce the over-supply situation.

Our next question is from Pablo Zuanic with JPMorgan.

Just wondering, just on that question, on the production front. You know you were saying [indiscernible] by about 3%, and going to start in July – if you had to get an average of what other companies have announced, what is your best estimate of where the interest is actually going to be in about six months [anticipated] action? And where do you think it should be in terms of production in your concerns of all the outlook?

Well we have not seen any official announcements to my knowledge, there is rumors of cutbacks, we’ve heard others in the 3% range. It is hard to forecast what the industry is going to do. We think for our situation a 3% cutback is a good fit. And if we were to have 3% less chickens in this country than a year ago, certainly that would have a positive impact on our market.

No, I understand the logic of what you are doing but aren’t you concerned about, for example, Tyson on yesterday talking about you want to focus on gaining share volumes in chicken. I’m looking at the numbers from yesterday, I think they were volumes where you have about -- for the quarter you have volumes were down 4%. How do you reconcile the two? I know you guys are being, I guess, a responsible player, but you have your largest competitor in the industry, yesterday at least taking volume share from you. How do you reconcile the two and how do you see that?

Yes, I wouldn’t look at it that way at all. What I read into their comments was that with the cheap supply of product out there, because they are a significant value added producer like Pilgrim’s Pride, that they can buy commodities readily on the open market and convert them and actually be a share gainer, even if they don’t do anything with their production. They don’t have to increase production to necessarily increase market share and we would echo that as well. Like we’ve said in the past, cheap commodity breast meat, basically, is an advantage for our prepared food product mix to the extent you can buy product on the outside cheaper than production. It does allow you to gain market share.

Yes, and just a couple of follow-up questions. In terms of Russia, I understand that these may just a technicality to your 14 days only, but there have been a proposal, I think a few months back, over cutting the quarter by about 30% and we had the Russian farmers there, I think they’ve been complaining about very low prices and about some form of restrictions being imposed. How do you see that evolving? Does Russia really have room to become more strict in terms of bans or extra bans or they just don’t have enough collection capacity that at the end of a day they won’t be able to do much in terms of restrictions?

Well, I mean that’s certainly very difficult for us to fully understand and predict but I think if you look at the fact that they don’t have a lot of potential to expand their industry very quickly and like I said, it would be reduction in some of the red meat items coming to that country. The demand for a valued protein, such as leg quarters, it’s hard for them to not be an importer of products of this value.

So, we feel that it will be worked out, that there will be, if not the full quota, very close to that number that ends up in that country.

And just a couple of follow-ups. You’re saying your presentation that your leg quarter price average for the quarter was $0.21. Right now, I think you said that in April you have been averaging about $0.21, so, assuming that leg quarters remain stable or improve, your third quarter number should be better than the second quarter. I know you don’t want to make any guidance but given the guidance where all is equal, is that a fair analysis? Or is there something else more against you in the quarter?

Yes, really what we tried to show on the slides was the quoted market rate as opposed to our actual selling rate on dark meat. So that’s really the UB market average during the quarter was that $0.20.

Right, okay, but I mean, so you look at your average April prices, have they been on average below what you’re experiencing in the March quarter?

The commodity exports were always selling back to the market in general, yes.

And just a couple of -- okay, and just the last question. I was looking at your working capital sequentially from December to March, it jumped about $19 million. Is there any seasonal reason for that? You know, we’ve lowered prices, you would have thought that inventory should be lower but how do you explain that jump in working capital? [inaudible]

Yes, that ties back to our sales being off, the build up of the inventory in leg quarters as well as products in general. So, you’re right, I mean if you look at our working capital we actually built about $47 million of inventory during the quarter so, that’s – it is somewhat seasonal. I think you would typically see a working capital build during this period, but clearly this was exasperated by the market conditions.

And the very last question, if you compare this with 21 right now we have the last crisis, ’02, early ’03, is everything right now going pretty much worse than back then or is there a variable that was actually worse then? I mean the one I can think of is of drains where it was actually worse then or much higher than right now, but again, if you compare the 2 crises, what would be worse then than now?

Yes, I don’t think that if you look at our public history, you would not find a worse quarter. So I think this kind of sets the standard for the low point.

You have a lower breast meat price today than you did in that prior period.

Right.

You have both dark meat at historical lows and white meat.

Right. I think you are thinking the only differences that back then, I think that drain costs were much higher, right?

Right. So, that’s right but you know, in terms of gross margins, operating margins, the wholesales mix was able to compensate for that where at this time it did not.

Our next question from Diane Geissler with Merrill Lynch.

I have a question about your level of production cut that you expect to see in July and just looking at the slide 6 that you provided with the estimates about inventory levels, where they will be, and I guess my question is, as you move into the fall and you start the negotiation process on the food service contracts, given the cut you’ve announced and the schedule here, would you expect to be in the position where pricing will be better this fall as you move into that contracting phase?

That is dependent upon many factors that we’re not able to forecast, Diane. I certainly, we believe that the seasonal improvements that we should see, the cuts taking off some of the commodity breast meat that’s putting pressure on the market, that we should greatly improve from where we are today, but will that be better than where we were in the fall a year ago? I’m not sure. I would hope that we could return to it when these negotiations come about, that we would be similar to a year ago.

And you’ve given us the number on the inventories for the leg quarters, do you have inventories in the breast meat side or have you been moving through that?

Yes, we don’t have any commodity breast meat that we generally store, so we did have a lot of prepared food value added inventory that we routinely keep 30 days or so stock on hand, but --

That’s in line with --

Yes, that was in line with our typical norms.

So for you, the problem area really is the leg, in terms of inventories, it’s really a leg quarter only?

Right. And today, I really wouldn’t categorize that as a problem. We are -- we’re not greatly ahead of what would be our normal leg quarter inventory capacity, we look at our orders for the next 30 days out, we are not concerned about inventory of leg quarters today.

Alright, and what percentage of your food service contracts are longer than one year? Is that something you can talk about? In other words, I get the idea that sort of this fall there will be a lot of negations going on, but I believe we do have some contacts in your portfolio that are actually longer than one year, is that true?

We do have a few that are multiyear, but generally they are multiyear commitments then pricing is renegotiated, but some of them have longer terms pricing as well but that was less than 10% for last year.

Okay so—

For all practical purposes it will be, just about the whole portfolio tends to come up.

Okay, so just kind of touching on Pablo’s question about the quarter, I don’t see anything in April that suggested that it was better than March and given that your production cuts are not going to be fully effective until July, can we just assume that the third quarter you’ll continue to see some of these negative trends, and --

Again, we didn’t give guidance for a reason but you are correct. I think, in part, and that April is not a whole lot different than February or March, but that’s not to say that the environment today does not have better trends working in favor than the trends we had going into the first quarter. You know leg quarters are up 30% in the last 10 days is significant compared to leg quarters decreasing by the same percentage last quarter, so there are trends working in the right direction. We would without giving guidance, we would clearly hope and anticipate our quarter would not be as bad as this quarter.

Our next question is from Ken Zaslow with Harris Nesbitt.

Can you take us through the process by which you deal with the contract growers and when you cut down production do you – to any extent do you lose then, can you just take us through the process of any repercussions that may come about?

Well I can touch in selected locations as to where we think it best fits our product mix. We are spreading that out so it will not be too painful at any location, so we do not anticipate having a major effect on our contract growers and we are spreading it out purposely so that we do not lose any partners where we will be working a shorter workweek and, yes, we do not expect that the really be too much of an effect. It will increase the out time between batches of chicken and may increase that by as much as a couple of days.

Okay, and so you do not expect any repercussions, say 2 years, 3 years from now you want to start reexamining there is no fall out from them, they don’t go anywhere else?

No we do not expect that.

Yes but we do not expect that, but clearly the growers, they have the right and the opportunity to negotiate their contract with any of the producers so, yes, they always have the option to go to other companies, but generally I think that we treat them equal and as fair as any other grower so I do not thing you would look at an event like this as something that would drive them to go to grow for another competitor. Like Clint said, I mean, a normal out time might be 14 days and this might stretch the out time to call it 15 or 16 days so it is not a material change from a grower’s perspective.

We also had some complexes where we would like the out time to be a little longer so this will help in those situations. So we do not expect it to be a real issue.

Just something to be clear, you say your cut in production is 3%, does that include also the holiday cuts, everything is all 3% or do you aggregate each piece on top of each other?

Well it would aggregate a little bit, the 3% cut was based on what our full schedule looks like on a five day week, and we are 3% of that number. Some of the holiday cuts could be slightly aggregated but a good portion of it would be included in the 3%

And then the Mayfield Kentucky expansion is over and above what we plan to add, the delays there so we take half of that about 225,000 head and we delayed it six months and we took the other half and delayed it a month and a half.

--and that is not part of the 3%.

It is not part of current production either.

Just, no that is good, thank you very much.

Our next question is from Andrew Lazar.

Just a quick one, I know you mentioned that back in’02 when you had kind of a similar situation with lower leg prices, whole chicken prices remain higher year-over-year, I am sorry if I missed this or if something basic, but point I am understanding is what is different this time in terms of why pricing for both forms are down when that wasn’t the case last time.

Well I think that if you look at the trend over the last 10 years in our industry, most of the growth that has occurred each year has been either the in whole bird, big bird de-boning sector, you’ve seen an increase in weights year-over-year and I think we’ve reached a point where the supply of commodity big bird de-boned meat is in great excess of demand. So that’s been occurring over the last 10 years and in 2006 is kind of a separate issue other than the leg quarter issue.

And I think if you also look at commodity breast meat in the US, it has been under pressure, oh in excess of a year.

It goes back to September of’04 above a $1.50 3 months.

It was just being supported by higher dark meat prices going in the opposite direction really at the time that the breast meat was going down and then now when we’ve had the bottom fall out of the dark meat, it leaves breast meat totally exposed.

All right, then your point that you make often around how lower breast meat to an extent obviously as you’re a net buyer can sort of help you, but I was saying that is only to a point and when you have got the whole bird pricing going down with this expense as well obviously it gets tough to sort of have that make up in the ground.

That is correct.

Yes, that is correct and obviously, I mean it is our goal to always be in that buyer, obviously that is not exactly where we are today or we would set back but clearly historically that has been our strategy to be a net buyer of commodity breast meat, and when you see circumstances like this that cause the dynamics to change so much that that gets out of balance, that is when we have to readjust.

Then the last thing is this – I know you already answered a question around this is one of the toughest quarters you have seen in a long time. Also, in terms of the speed with which some of these things conspired all together, you know relative to literally in terms of where you were and what you were hoping the outlook might be. Is this as quickly as some of these transitions have taken place in your recent memory?

Yes. There is no question the pace has changed, and I think that is what O.B. and Clint both mentioned in their comment that the swift changes of any of these markets components, and for us is the commodities dark meat. They can move positively and negatively. Obviously we have been seeing the negative that, but we are still hoping for the positive, and when they switch, they switch fast.

And then, truly last thing. Is there anything you can reasonably do to reduce your exposure to dark meat in some of the export markets? Are that uses and/or things that can be done even in the domestic market around how you supply dark meat or convert it into different forms, or are there programs underway to sort of explore that? Just too kind of try and reduce, ultimately, your exposure to the volatility that comes with some of these markets.

We are, I guess, two-fold looking, constantly, for diversity in our export markets, and also for new products other than just the commodity leg quarter in those domestic markets -- in those international markets. Domestically we have a continued, but renewed, focus on looking at how to add value to dark meat, and I believe today, we have some QSR chains that are more open to looking at new product innovation. Certainly we are putting a lot of time and energy in trying to develop an alternative to commodity leg quarters. I think as an industry, our competitors are doing the same thing. I do believe that over the next 3 to 5 years, we are going to see more dark meat consumed in the US than what we have in the past. That is an opinion.

Our next question is from Regina [Berahmbo] of Morgan Stanley.

I was wondering if you could give more details concerning the softness in sales on your food service in the prepared food side.

Well, the second quarter, as we said, is traditionally a weak quarter for us in the food service sector. And again, I think that there has been a little bit of reluctance for some of the QSR chains to jump too early on chicken promotions, but I think today, we are seeing those calendars start to be filled and I believe we will see more promotion of chicken this summer in the QSR sector than we saw last year.

Was their reluctance; was that just because of – there was a media focus?

Yes. Look at the media attention over the last quarter around AI, especially at the beginning of this quarter. I think that what you are seeing in the media today is a much more balanced approach. You are having a lot of government officials talk about it is safe to eat poultry that is properly cooked. And so I think until that was changed that there was some reluctance, but I think both retail and food service promotional activity [inaudible] chicken this summer will be better than a year ago.

So is it -- do they usually start in May, or have they started [inaudible].

We are starting to see ads as of now. May is a good month leading up to Mother's Day, and then I think throughout the rest of the summer.

We also, we did experience some deterioration in net revenue per pound that we mentioned last quarter with some of the contracts that were negotiated this year. So you’ve got a compounding event that is happening there. You have got the actual prepared food pounds that were sold were actually up slightly but our revenue per pound was down. So,

Is that for the whole year the negotiated price?

Yes. Clearly the first quarter ended December would have primarily been priced off of contracts negotiated a year prior where the new contracts would have taken effect in January.

And what’s your outlook for the coming contract. When do you negotiate that for the next --?

Most of them are fairly well set until we get to the fall of this year. So, sometime again in October through December.

What goes into the pricing when you go into those contracts?

Well we tell them we want a raise, and they tell us they want a cut and we meet in the middle.

Our next question from John Macmillan with Prudential Equities.

In talking about [inaudible] package or all natural, Tyson was going thorough yesterday. Is there a package similar? Or what is proprietary about this? I am just ignorant to it.

I do not know if there is anything proprietary. This is a labeling that we pursued with the government on how -- what did we have to do to be able to label all natural. We followed those guidelines and we launched our fresh chicken line all natural starting in January and so they’re doing something similar as far as I know.

Okay. Our next question is from Pen Jones with Deutsche Bank.

I know a lot of questions have been asked already so just a couple of quick ones if I may. Can you elaborate on what is going on in Mexico right now? It’s typically geography that can fairly quickly once things start to get better production can ramp up and can come back down again. What -- things seem to be improving right now. What is the outlook for Mexico and how long can that be sustained do you think?

Yes. I think Mexico, it did improve during this quarter. It can have a whole year worth of a cycle and the quarter. If you look at Mexico, and so it went anywhere from loosing money, to making money to breakeven. I mean it has been through complete cycles in the quarter and I think our outlook for the rest of the year is a continuing challenge, probably not a whole lot different than this quarter, give or take. You know a little bit of movement on both sides, that it is a challenging environment in Mexico. Mexico is importing a lot of product from the United States because of the low values for dark meat, as well as whole birds. So that does have an impact on the domestic prices as well.

But as the leg quarter pricing strengthens this will help our Mexico operations.

Okay, great. Thank you. And then just regarding the – your $300 million bond issue, rather than, that is callable in September - I am just curious if things improve seasonally for you, and the industry and the M&A landscape doesn’t turn out to be that attractive, you all still have plenty of cash in marketable securities, on your books, what’s your thinking to take out those 9 and 5/8 bonds?

Yes, we clearly are poised to take the amount if and the events transpire to make that the best thing to do for our company. So you know there are lots of variables in there from what our capital requirements and needs are for strategic investments, as well as what we see going down the road and what the interest rate environment is at the time. So interest rates have changed a lot over the two months.

Our next question is from [John Mueller], Individual Investor.

Hello?

Our next question is from Pablo Zuanic with JPMorgan.

Just a follow up. I am just trying to understand here O.B., if I were to try to model this over the last few months in terms of what commodities say, this is more a supply problem than a demand overseas problem, and am I sure, by the way that is possible, but what is your take on that? Because we have all these antidotes about Russia, about China demand fronts and the U.K., and to me honestly they are old antidotes. In service scenario service consumption is – really actually did not suffer much. And all this stuff with Katrina and you go in export and had to [indiscernible] over bringing the market and bringing prices down, of course storage inventories would be up, and then the industry continue to over-produce and prices remain down and now the interest is just working through inventory process? And do you have a sense of what to blame one or the other? You know how we would proportionally do that? And if demand overseas really did fall at the end consumer level, what is your best sense of how much it fell?

Yes, that is a tough question, to get your answer out, but I will tell you that the roll off and demand internationally was real. It wasn’t just as a result of Katrina. So we had a lot of export customers that were caught with inventory at higher prices than what they could liquidate it for. They were caught with surplus inventory amounts that they could not move timely. So we had to work with and through them with a lot of those issues and you know it wasn’t just a Katrina event, it was an actual on the ground event, that they had product they were having difficulty moving because of demand changes.

And as a poultry industry we don’t have the ability to stop the supply side very quickly and it doesn’t take much interruption and consumption to build those inventories to significant numbers which we saw. And then even though getting accurate consumption numbers out of the countries was extremely difficult, even if it ramped back up normal, it takes quite a while to work through those inventories so I think the consumption numbers are getting back to close to normal in most of those countries, at least that is the sense we have from the demand for our products. But until both inventories overseas in this country you know, get back to normal levels, then you have pressure on pricing. But the upward move we have seen on pricing over the last 30 days is the pretty good key indicator that inventories are closer to manageable than they were at the beginning of the quarter.

That is very helpful. And the last follow up, could you give export volumes in terms of change for the quarter – what happened there on duration, was much, much better in January. Could you comment on April?

Are you talking about ours?

Yes, I mean you give the broader numbers in your press release and your slides, I do not think you give the volume number for exports, can you give us a sense what happened to your exports in March?

I certainly know our shipments in March were much greater than the beginning of the quarter and April shipments were much approved over that, but I do not have the absolute number.

In total we dropped our inventory about 20 million pounds, which occurred over March and April, that reduction.

Our last question is from [Neil Glorihan with Enfo].

Hi, I just wanted to clarify some numbers. And I know you’re not giving guidance, but if I look at what you did or put out in March, you said you were loosing $0.23 to the end of February. So that means you lost $0.25 in March to make the quarter a minus 48 and I if I look at where chicken prices are, and where grain prices are it looks as though April is at or around where March is. And just assuming that there is no improvement from here, that means that you’re probably run rating, assuming you are cutting production down about 3%, somewhere around a $0.70 to $0.75 loss for the next quarter. And that could clearly go up if you have seasonality or improvement in exports in the domestic markets, but are those numbers kind of the right way to think about it.

I think there were some – if you look in the footnotes – to the 10-Q you will also note that we took approximately $4 million of impairment and restructuring I guess related charges for our turkey division, that you are adding into your March numbers.

Okay.

So you have to make adjustments for things like that. And then again there is lots of volatility. As we mentioned when we withdrew guidance, that we went through Mexico we went from loosing money in on the first quarter, to reversing that trend and actually going into a positive territory. So you had those trends changing as well.

And then just finally if the Russian border does stay closed, or does reopen when do you think you would see pricing for leg quarters? Do you see that in the next few days or do you actually have to wait a week or two?

Well the markets on leg quarters has moved significantly in the last 10 days. And I think the next couple of weeks will be a pretty good indicator as to things develop in that country and --.

Okay, oh great, thank you for clarification.

There are no more questions, thank you.

Thank you all.