Pilgrims Pride Corp (PPC) 2006 Q3 法說會逐字稿

Good morning. And welcome to the Pilgrim's Pride Conference Call to review the Company's fiscal 2006 third quarter and year-to-date financial results.

At the request of Pilgrim's Pride, this Conference Call is being recorded. Slide reference during today's call are available for downloading from the Conference Call link on the website's home page of www.pilgrimspride.com.

Beginning today's call will be Ms. Kathy Costner, Vice President of Investor Relations.

Ms. Costner, you may begin.

Good morning. Thank you all for joining us today as we review our [fiscal] third quarter and year-to-date results.

Earlier this morning, we issued a press release that provides an overview of our financial performance for these periods. If you have not already seen this release, a copy is available for download on our website, at www.pilgrimspride.com.

Joining me on today's call are O.B. Goolsby, President and Chief Executive Officer; Clint Rivers, Chief Operating Officer; and Rick Cogdill, Chief Financial Officer of Pilgrim's Pride.

Before we get started, 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 statement disclosures contained in our Forms 10-K, 10-Q and 8-K that's filed with the Securities and Exchange Commission.

I'll now turn the call over to O.B.

Thanks, Kathy. Good morning, everyone.

We'll begin by providing a brief overview of our top-line results and a discussion of some of the broad industry trends that affected our performance during the quarter. Then Clint will share an operations update, and Rick will walk you through a more detailed look at our financial results for the quarter and year to date. After we have completed our prepared remarks, we would be happy to answer your questions.

Despite recent up-trends in pricing for breast meat and leg quarters, our third quarter results continue to reflect the challenging protein environment seen in the first half of the fiscal year. For the third quarter, our Company posted a net loss of $0.31 per share on total sales of $1.29 billion. This loss was largely due to weak pricing caused by the lingering effects of lower export demand and higher inventory levels from last winter and early spring.

We are hopeful that the recent increases in leg quarter and breast meat prices will continue, as international demand for U.S. chicken products improves and the full effect of the recently announced industry production cutbacks are realized in the marketplace.

For the full third quarter, pricing for leg quarters and breast meat increased 118.8% and 36.2% respectively, when compared to the second quarter, but were an average of 34.2% and 16.6% lower than the same period last year. Unfortunately, our U.S. operations were unable to reap the full benefits of the price improvements during the quarter because of delays in order lead times associated with routine customer replenishment of stocks, especially in the case of exports and other frozen products.

Looking at the fundamentals -- profitability was affected by the basic principles of supply and demand. You may recall that on our second quarter Conference Call, we expressed our concern that industry supply and demand were out of balance. And to address this situation, Pilgrim's Pride, along with several of our competitors, announced plans to reduce production.

The impact of these cuts is reflected on slide 4 of our presentation. As you can see, up until May, heads slaughtered per processing day was well above year-ago levels. Yesterday, the USDA reported June head counts 1.1% below the prior year. Although figures for July aren't available yet, Informa Economics projects a head-count decline of 1.8% for the third calendar quarter as a result of the production cutbacks.

Another indication that the industry needed to better align supply and demand was evident in cold-storage inventories, which began to rise last September and peaked in January. Since then, they have decreased 15.1%, as shown on slide 5. As a result of the production cutbacks, Informa Economics expects cold-storage inventory levels to decline another 11.4% by the end of December.

As shown on slide 6, we believe the 1.3 increase in this year's per-capita consumption, combined with a projected population growth of 1% and the overall decrease in ready-to-cook production, should help sustain levels for the balance of 2006.

As I mentioned earlier, pricing for leg quarters and breast meat improved significantly in the third quarter versus the second quarter, while wing prices remained relatively flat. Based on Informa Economics projections, we believe we will see continued pricing improvements for these products through the remainder of the summer grilling season.

Comparing these same products on a year-over-year basis -- as you can see on slide 7, pricing for the first half of the year for each of these products has been well below prior-year levels. With the exception of wings, we have yet to see any favorable year-over-year comparisons on these meat proteins. However, Informa Economics currently expects favorable comparisons on market prices for breast meat beginning in October and expects Georgia Dock comparisons to remain unfavorable until April of 2007. We are working hard to partially mitigate these pricing improvements by constantly upgrading our product mix and by generating gains in operating efficiencies.

Despite the challenges we faced as the result of weak commodity markets, there are some bright spots in our third quarter sales. In our core prepared foods business, we achieved a mid-single-digit volume increase compared to a year ago. However, revenue per pound sold for these items was off by a similar amount. These volume gains came from growth in our national accounts, foodservice distributor and frozen retail businesses.

And for the third consecutive quarter, [IRI] ranked Pilgrim's Pride as the fastest-growing brand in the frozen retail case. That's a testament to the broad-based acceptance of our high-quality frozen chicken products, as well as our successful EatWellStayHealthy brand. These items can be found in more than 3,300 retail stores across the country. EatWellStayHealthy appeals to consumers who prefer convenient, wholesome, great-tasting chicken products.

During the fourth quarter, we will be introducing our EatWellStayHealthy [Kids] line of products. To help fight the obesity challenge, Pilgrim's Pride has taken two favorite kid items, popcorn chicken and nuggets, and reformulated them. These items now meet the same USDA and American Heart Association standards as our existing EatWellStayHealthy items. Additionally, all Pilgrim's Pride and EatWellStayHealthy retail products are totally free of trans fat. We look forward to the debut of these items and are confident that they will be successful with consumers.

Turning back to industry trends -- the USDA projects broiler exports for each of the next three calendar quarters to be above prior-year levels. In fact, as shown on slide 8, USDA projects an increase of 7% for 2006 and 1.7% for 2007.

Turning now to feed ingredient pricing, which is also subject to the fundamentals of supply and demand -- the USDA 2006 corn production estimate was increased 2% this past month as a result of a 1.4 million-acre increase in corn [plantings] over the reported March intentions. The crop progress report issued yesterday by the USDA showed that 56% of the corn crop was rated in good or excellent condition, up from 53% in the previous year.

Non-feed corn usage is expected to increase 19% in the 2006-'07 year, due mainly to a 34% increase in ethanol production. As a result of these factors, USDA is projecting a 2006-2007 season-average price of $2.25 to $2.65 per bushel.

As I mentioned in the past, we continue to focus on spot pricing rather than forward contracting. Currently, as shown on slide 9, pricing based on the futures market would be $2.68 per bushel for the 2006-'07 crop, which is 9.4% above the USDA projections.

Soybean meal is trending more favorably, as production in May set a record, at 146.2 million bushels. Despite some reversal of crop intentions, national soybean acreage in 2006 is expected to be the second highest on record, behind only 2004. That being said, the USDA is expecting an average price in the range of $155 to $185 per ton for 2006 and '07.

Future pricing for soybean meal also exceeds USDA projections; however, only marginally so. Based on current figures -- current futures market pricing, the average price of soybean meal would be approximately $178 per ton, or 4.5% above the USDA projections for the 2006-'07 season.

As you can see, the industry is always subject to the basic laws of supply and demand. The recent improvements in pricing and export demands have been positive factors affecting the industry over the past few months. However, we remain cautiously optimistic, as there is still unknown elements that may affect the industry in the near future. These include variables such as changes in feed, energy and other costs.

For example, consider recent changes in breast meat prices. Despite initial increases this summer, breast meat prices have tapered off significantly over the past few weeks. We are concerned about this trend, and we believe it is a strong indication that the industry does not need any further increases in commodity breast meat production at this time.

With that, I'll ask Clint to provide some additional perspective on the quarter and give you a progress report on the multipoint plan that we announced last quarter. Clint?

Thank you, O.B. Good morning, everyone.

In early May, Pilgrim's Pride laid out a multipoint strategy aimed squarely at improving our competitive position in the face of a weak export market oversupply and depressed pricing.

Before I go into some of the factors affecting our operations in the third quarter, I would like to review each point of our strategic plans and highlight some of the progress we have made over the past three months.

First, we announced plans to reduce our weekly slaughter by approximately 3%, or the equivalent of 830,000 head. This change began in May with the reduction in egg sets and had taken full effect by the end of July. At this time, we fully expect the reduction to remain in effect through the end of December. However, we will continue to evaluate the effects of this reduction and respond appropriately.

Our second step was to delay the planned expansion in our fresh food service division at our Mayfield, Kentucky operation. We had originally intended to complete the expansion in early July. We have now decided to delay the first half of this expansion until mid-September, with the balance to be completed next April.

The third part of our strategic plan was the decision to reduce our capital investment for the year by $25 million to $40 million. Originally, our capital investment projection for the year had been in the range of $180 million to $200 million. In May, we lowered that to $140 million to $175 million. As of today, our committed expenditures are well in line with previous projection, and in fact are being reduced further to a projected total of $140 million to $150 million.

Last but not least, we announced plans to sharpen our already-strong focus on reducing costs and operating more efficiently. In this regard, we initiated a companywide hiring freeze requiring our senior executives to approve any staff additions or replacements until further notice, and instructed all operating divisions to implement austerity measures on all discretionary spending.

Those of you who have followed us for awhile probably know that improving operating efficiencies is nothing new for Pilgrim's Pride. We have had a companywide focus on process-improvement teams since 1992. These teams are on a constant and relentless search for ways to operate more efficiently and take costs out of our business. Every process, every expenditure, is scrutinized.

For example this year, at one location, we invested in labor-saving equipment that has helped us reduce our processing costs by more than 30% since last fall and to eliminate 300 positions. Additionally, to help reduce feed ingredient costs, we've put additional storage in strategic locations where we can purchase local grain at lower prices. That allows us to reduce freight costs in ingredients while reinvesting in our local communities.

These are just a few examples of what we've accomplished through the efficient use of our capital expenditures and the success of our process-improvement teams, the main point of this being that each and every day, these teams bring value to our business and motivate other locations to work toward cost reductions to generate significant savings for the Company.

Finding new ways to reduce our expenses and operate more efficiently has never been more important than it is today. Given the continued increases in rail transportation and feed ingredient costs for the nine-month period ending July 1, 2006, corn and soybean meal prices have averaged approximately 5% and 1% higher than year-ago levels. Since feed-ingredient costs represent approximately 26 [to] 30% of our cost of sales, these increases represent a significant challenge.

It's worth noting that improvements we've made in our live production operations this year have enabled us to offset nearly all of these increased corn and soybean meal costs. In fact, we continually focus our attention on our live operations as its fundamental area where we always need to excel. And we've generally been very successful in this area, as evidenced by our improved hatchability, livability and feed conversions, which are among the best in the United States.

Since every penny saved per live pound equates to approximately 1.3 cents per pound in total meat cost, we will always focus a great deal of attention and effort on improving flock management. The combined threat of higher corn and energy costs makes this a very high priority for our Company.

Energy costs also continue to rise in the quarter. Retail diesel prices have increased 25.7% year-over-year and are expected to average $2.87 per gallon for July through September, 12.1% over the same period last year.

According to the Energy Information Administration, natural gas prices, on the other hand, were down 5.6% for the quarter when compared to the same period last year. Additionally, the July-through-September period is expected by the EIA to have even more favorable comparisons, with a decline of over 25%. However, recent turmoil in the Middle East may challenge these projections.

As shown on slide 10, the EIA is predicting higher natural gas prices for the remainder of the year, although they are not currently expected to reach the levels seen last winter. Our energy-related costs in the third quarter also included approximately $2.7 million in additional supplemental fuel payments to our U.S. contract growers. This is the last of the $11.7 million in total supplemental payments made to our contract growers over the past winter to help them offset these higher energy costs.

In summary, we're committed to our multipoint plan and continue to believe that by taking these actions at this time of the year, when chicken consumption normally increases, we will be able to better balance production with demand. We've been able to reduce inventories to a level where we can begin to exert some positive pressure on pricing, as evidenced by the recent improvement in leg quarter and other prices, and again find ourselves back in the more comfortable position of being a net buyer of commodity breast meat. I'll now turn the call over to Rick, who will provide additional details about our third quarter financial results. Rick?

Thank you, Clint.

As shown on slide 11, we realized a net loss of $0.31 per share for our third fiscal quarter ended July 1st, 2006; compared to net income of $1.28 per share for the same period last year.

Slide 12 shows that for the nine months ended July 1st, 2006, we realized a net loss of $0.40 per share, compared to net income of $2.86 for the same period last year. Our average number of daily shares outstanding for both the third quarters and the year-to-date periods for each year were stable, at 66,555,733 shares.

Included in the prior-year results for the nine months ended July 2nd, 2005 are unusual items totaling $10.8 million net of tax, or $0.16 a share. These items comprised, first, a $7.5 million net-of-tax or $0.11 per-share gain associated with litigation settlements; and secondly, a nonrecurring gain of $3.3 million net of tax or $0.05 a share from the proceeds received related to our 2004 turkey restructuring efforts.

Turning to the income statement -- lower pricing continued to impact our sales for the third fiscal quarter. However, we did see year-over-year improvements in sales volumes. Our sales revenue for the third fiscal quarter of 2006 was down 10.6%, to 1 billion 287.6 million; compared to 1 billion 440 million for the same period last year.

Specifically, as shown on slide 13, our U.S. chicken sales were most heavily impacted, with sales declining $103.2 million, or 9.2%. This was the result of 11.3% decline in our revenue per pound sold, offset by a 2.4% increase in sales volumes. The 30.6 million-pound increase in sales volumes was primarily driven by a 24.7% increase in export volumes resulting from the liquidation of inventory buildup that existed at the end of our second fiscal quarter.

As O.B. mentioned earlier, we saw a 6.3% increase in our core prepared food sales volumes. However, revenue per pound sold was off by a similar amount, and thus resulting in essentially flat prepared food sales revenues for the quarter when compared to the prior year.

Mexico chicken sales were also impacted by lower pricing when compared to the previous years. Sales pricing for the three-month period was down 13% on a 7.6% increase in sales volumes, resulting in an overall decline in Mexico net chicken sales revenue by 6.5%.

Our turkey sales were down 58% due to a 47.6% decrease in pounds sold. This decrease is a direct result of our decision to eliminate further processed turkey products from our mix and from the full effects of our prior-year commodity turkey restructuring efforts.

Our sales for the nine-month period ended July 1st, 2006 were also heavily impacted by declines in pricing, as both leg quarters and breast meat prices declined by approximately 20%. Total sales declined by approximately 6.9% to 3 billion 897.2 million; compared to 4 billion 183.6 million for the first months of fiscal 2005.

Looking again at slide 13, our U.S. chicken sales were down 6.5% on a decrease of pounds sold of 1.3% due to a 5.3% decrease in revenues per pound sold. Our Mexico chicken sales showed slight improvement in total sales dollars, with a .4% increase in net sales. And this was due to a 9.1% increase in volumes, offset by an 8% decrease in pricing.

Again, due to the turkey restructuring efforts, our sales for the nine-month ended were down significantly, with sales down 38.7%, due to a 33.6% decline in sales volume and a 7.7% overall decline in revenue per pound sold. This overall decline in turkey selling price is a direct result of our decision to eliminate further processed turkey from our sales mix, which generally carry a higher revenue per pound sold than does our fresh turkey products.

If we turn to slide 14, we can see that our operating loss for the third quarter of fiscal 2006 was $26.7 million, compared to an operating income of $136 million for the same period last year. This decrease of $162.7 million was primarily due to the declines in sales revenue per pound sold, both domestically and in Mexico, and due to the declines in both revenue per pound sold and sales volumes in our turkey operations.

Additionally, cost of sales increased during the quarter by approximately 1.9%. This was due to higher freight delivery costs, as well as costs of fuel and other areas, when compared to the same period last year.

For the nine months ended July 1st of '06, operating income was down $334.4 million, to an operating loss of $18.5 million; compared to an operating income of $316 million for the same period last year, due primarily to the same reasons as noted previously for the quarter plus higher feed ingredient costs over the nine-month period.

As shown previously on slide 11, our net interest expense for the third quarter of 2006 decreased $0.9 million, or 6.9%, to $11.5 million; when compared to the interest expense of $12.3 million a year ago. This decrease was due primarily to the repurchase of approximately $20 million of the Company's publicly traded senior and senior subordinated unsecured notes during the second quarter of fiscal 2006.

Our net interest expense for the nine months ended July 1st of '06, as shown on slide 12, was down $3.9 million to $30 million, from $33.9 million in the same period last year. This was primarily due to increased interest income from investments purchased with excess cash flows generated from fiscal 2005, partially offset by generally higher interest rates this year. As a percentage of sales, our net interest expense for both the quarter and year to date remain essentially flat, at approximately .8% of sales, when compared to the same prior-year periods.

Our income tax expense was a benefit for the third quarter of 2006, in the amount of $17.5 million on a net loss before income taxes of $38 million, or 46.1% effective tax rate. This compares to a prior-year third quarter income tax expense of $38.3 million on net income before tax of $123.7 million, or a 31% effective tax rate.

The income tax benefit for the nine months ended July 1st of '06 was $21.7 million on a net loss before tax of $48.4 million, or a 44.8% effective tax rate. Again, this compares to an income tax expense of $103.9 million on net income before tax of $294.2 million, or a 35.3% effective tax rate in the prior year.

Turning to some of our highlights from our balance sheet -- slides 15 and 16 show a comparison of our current debt agreements compared to those existing at the end of our prior fiscal year. Our total debt decreased $2.2 million during the quarter, to $492.7 million. And our outstanding debt is made up of $7.8 million in current maturities on long-term debt and $485 million in long-term debt.

We currently maintain $168 million in revolving credit facilities. And all but $28.7 million of this is available for the Company, and $500 million in secured revolving debt, all of which is currently available.

Additionally, during the third quarter of fiscal 2006, we sold $50 million in accounts receivable, leaving us with a capacity under the accounts receivable securitization facility in the amount of $75 million. Accordingly, when you aggregate the availability under all of our credit facilities previously mentioned, our total availability is approximately $714.3 million. Adding our reported cash of $54.3 million to these amounts at the end of the third quarter and excluding our $202.4 million of investment in available-for-sale securities, our overall liquidity is approximately $768.6 million.

The weighted-average interest rate on our debt outstanding at July 1st of '06 was stable, at approximately 9%, compared with the previous quarter. And at the end of the quarter, 88.5% of all of our debt outstanding was on a fixed-rate basis.

Moving on to highlights from the statement of cash flows -- as previously referenced on slide 11, our depreciation and amortization for the third quarter was up $4.5 million, to $35 million. This compared to $30.4 million for the same period last year. And for the nine months ended July 1st of '06, our depreciation and amortization was $100 million, up $5.7 million, compared to the same period last year.

These increases for [the] period are due to increased amounts of capital expenditures incurred for the last 12 months ended July 1st, 2006, versus the same period last year.

Slide 17 reflects the restraint in the execution of our multipoint strategy, previously covered by Clint, showing that are total capital expenditures for the third quarter of fiscal '06 were down $11.2 million, to $26.8 million, versus the same period last year. And for the nine months ended July 1st, our capital investment was $101.3 million, compared to $90.1 million for the same period last year.

Last quarter, we lowered our cap ex forecast to include only those items we've deemed critically necessary or those that investing in would be in the best long-term interest of our shareholders. Currently, our projected cap ex for the year has again been reduced, as Clint previously mentioned, to a range of $140 million to $150 million.

Slide 18 on our slide show shows that our credit ratios and certain other information -- pointing out a few of these items on the ratio page -- as is expected, we show our EBITDA interest coverage for the current fiscal quarter to decrease to .7% from 13.5 times for the same period last year. However, our LTM EBITDA interest coverage remains strong, at approximately 6 times. Similarly, our debt divided by EBITDA for the LTM period, while decreasing, still remains strong, at 2.06 times; compared to .9 times for the same period last year. And lastly, our total debt to capitalization has remained healthy, at approximately 30.5%.

This wraps up our prepared remarks. We'll now ask the operator to instruct you in the process necessary to ask questions and begin queuing up the operator column.

[Operator Instructions] Reza Vahabzadeh, with Lehman Brothers.

Good morning.

Good morning.

You got a decent amount of cash right now on the balance sheet. Can you touch on the potential uses of cash?

As we've said in the past, the cash that we've got available is there for strategic opportunities, as well as refinancing or paying down our existing debt obligations. And while we've made no decisions yet, we do have the First Call period coming up on our 300 million 9 and five eighths notes, coming up this September 15th. So that's an item that we'll be taking a close look at.

Got it.

And then, you have a guidance out there for cap ex for this fiscal year. Do you have an early read for next fiscal year?

We're in the process of doing that right now, putting together our budget. What we have said in the past, though, is we believe on an ongoing basis, somewhere in that upper $175 million to $200 million will be pretty close to what we'll be running for the next several years.

Okay.

And then, as far as how far advanced you sell to your customers, is it typically in the four-weeks range, and it may have been a bit longer in the June quarter? What's the normal kind of, I guess, lead time that you have in terms of selling to your customers?

Generally, we are in that four-week range. I guess some of that depends upon the inventory position, the market conditions. But generally, four weeks is forward pricing on the export.

And for domestic?

Well, we have a lot of fixed-price contracts that --

I see.

-- would be negotiated in the fall. We have formula-based pricing that is related to the market, that's changing weekly or monthly. So there's a large combination when you start to look at domestic pricing situations.

Got it.

Thank you much.

[Pablo Zuanic, with JP Morgan].

Good morning, everyone.

Pablo.

Just trying to understand, in case of leg quarters prices -- can you comment in terms of what would have been your average realized price in the June quarter in terms of leg quarters?

And related to that, assuming the leg quarters were to stay around the $0.40 that we see right now, when would you start to realize that -- by the September quarter or by the December quarter? Because it seems that you liquidated a lot of your cold-storage inventories. So you may realize export prices of $0.40 faster than other companies. Can you comment on that?

Yes, Pablo, this is Rick.

I mean, we generally don't talk about specific prices of things in general. But it's fair to say that with the quarter that we just completed on leg quarters, I think the averages shown by O.B. on one of the slides was $0.25; whereas the price realized during the quarter was back of that. So it was not up to the UB average.

Typically, as O.B. mentioned earlier, our export products are generally going to be somewhere around 30 to 45 days forward price. So that can give you some indication of how that would roll through our sales cycle.

Now, in terms of just the export markets, can you comment in terms of what the USDA's projecting? But what are you hearing from your traders, from your importers in those countries? Because the export [they definitely] USDA has been very volatile from month to month. But [essentially] has been because some companies like yourselves have been liquidating inventories. So what's really happening with demand in those countries? What's your best read?

Pablo, this is O.B.

We see demand greatly improved and strong in almost every country. Now there's been some countries that have backed off their purchases as the price went up. But if you look at the major importing countries, we see demand still very, very good -- and we think will continue to stay good through the fall, barring any other AI implications.

Okay.

And just [one other] accounting question for Rick. I mean, the tax rate -- [initially] numbers [were strong] for the third quarter was around 45 or 46%. Was there a reason for that?

Well, yes. I mean, the reason is it's really the mix of where the profits are coming from, or the losses, if you will. And with Mexico this quarter having the proportion that it did, it ended up pulling our effective rate down. So -- or higher, I guess I should say.

If you look at for the rest of the year, we do expect our effective rate for all of fiscal '06 to be in that mid-40s range. So that's pretty much where we'll continue this year.

Okay.

And just one last question -- in the past, you've said that your fixed-price contracts are normally negotiated from November through February, and that pretty much [should] stay stable for the rest of the year. Because the industry conditions have hurt some of those contracts -- they had to be renegotiated in the past few months -- it just seems to me, based on your commentary at the start of the year, you were seeing fixed-price contracts down 2 to 3%. Now, all your prepared food sales are down 5%, and that's my best proxy for fixed-priced. It seems that just on the fixed-price contracts, things have been worsening, and they haven't really been that fixed.

Yes. I think as we mentioned -- this is Rick again -- I think as we mentioned even last quarter, that we did see the adverse effects of the protein market in general causing some stress on even our fixed-price contracts. And so a lot of those did have to be re-looked at, if you will, in order to meet the current competitive environment.

So I think that's an unusual event, Pablo, because we were in extremely unusual times. As a matter of general course, that's not the case. I mean, generally, the fixed-term contracts are not going to be so substantially out of market that it's going to be a problem for either the buyer or the seller.

Thank you.

[Ken Zaslow, with BMO Capital Markets].

Morning, everyone.

Hey, Ken.

Morning, Ken.

Morning.

Just a couple quick questions -- one of the comments during your prepared remarks was that you would respond to competition based on your capital spending, or your expansion projects. Does that mean that you would think about actually expanding capacity early next year? Or would you cut production again? I just misunderstood what you were saying in the prepared remarks.

Ken, this is O.B.

I think what we said is that we'll continue to evaluate, based upon economic conditions, what we do with our capacity or our production next year. As we stated earlier, when we made our production announcement cut, that we would put that in place through the end of this calendar year, and then we would evaluate that ongoing. At this point in time, it certainly wouldn't look like we would want to increase production --

Okay, that's [how] I would look at it, [I should say]. I thought you were saying that there is a possibility that early next year, your plans would accelerate. So, okay.

If I take a step back and just look at this broadly, at what point will the chicken companies begin to enjoy the prices in breast prices, and the leg prices? I know we touched on a little bit. Because with all this seemingly improving environment, everybody -- all the chicken companies are still talking about really hard cost reductions, hard production cuts and reduction in capital spending. So are we still quarters away from enjoying the rebound in the chicken prices?

This is O.B.

I would say that if you look at the dark meat markets over the last 30 days, we're -- since we are forward pricing approximately 30 days, what we're selling today is what the market was 30 days ago, which was a pretty decent number [at]. I would say that we're real close to, as an industry, realizing, for dark meat exports, very close to market conditions.

Breast meat, on the other hand, was a little disappointing. It moved up prior to July the 4th, and then it has backed off. But I think also, we have not seen all the production cuts come into place. Our production cuts did not hit until the last week of July. I believe Tyson announced that some of theirs were currently hitting. And I believe that maybe Sanderson may have been a little behind ours.

So I think there's some production cuts, that are just starting to come into place, that will hopefully strengthen the breast pricing. That's the missing component today. We have very good dark meat pricing, but breast meat is seasonally weak.

Okay.

And in terms of -- I know you're -- sounds like you're not giving guidance going forward. Can I ask broadly, is the next quarter a breakeven type [of] quarter? Or when will we start to see breakeven levels, at the very least?

Well, I think if you look at industry information, the industry is close to profitability, given these conditions. And if these conditions continue, then I believe you will see the industry in general be profitable in the next quarter.

And can you just discuss -- last question, I'll pass it on -- is Mexico -- to what degree are we still seeing a supply-demand imbalance? And what would be the drivers to re-balance this?

Yes, Ken, this is Rick.

I think Mexico, as we said previously, was going to have an up-and-down year. And that's proven to be the case, not only quarter to quarter but also within a quarter. We've seen wide swings of profitability week to week, let alone quarter to quarter. So we don't really see anything different going on the rest of this year -- when I say this year, I mean this fiscal year -- other than what we've seen the last two quarters.

So I think it'll be somewhere in those neighborhoods of what we've seen. We had operating profit of about, just under $2 million in Q3 and operating loss just under $5 million here. So somewhere in that range is probably where it's going to hover again this quarter.

It is a supply-related issue. There's a lot of supply down in Mexico. Hopefully, it'll get rectified there, as it's being addressed here in the States. And then we'll get into the Christmas season, which is our first quarter of fiscal '07. And hopefully we'll see better markets by the time we get there.

[Great]. Thank you.

[Diane Geissler, with Merrill Lynch].

Good morning.

Morning, Diane.

Morning, Diane.

Hey, I think I missed -- you had given some pricing expectations that you have from your outside source, the Informa. And you went through them fairly quickly, and I think I missed some of them. So would it be possible to sort of go back to that part of the call and run through those -- the Georgia Dock and leg quarters, and whatever they were saying about the breast meat?

Hold on one second; let's get to that spot.

Okay, thank you.

Diane, I think what we had was all related to -- if you looked at slide 7, we talked about the current markets and where things are. And the Georgia Dock -- for example, it averaged $0.68 in the third quarter. This month of July, it's averaged approximately $0.70, so it's up a little bit. Leg quarters, as we've talked about, have averaged $0.25 last quarter. But today, they're at $0.38. The average for the month of July has actually been close to that number, at $0.37. So it's up $0.17.

But didn't you give some prognostications about where [inaudible] be going over the course of, say, the next three to six months, as provided by your outside source? I thought there --

I think we've mainly talked about the volume cuts. They're projecting a 1.8% head decline next year, more so than anything else. We did talk about exports projected to increase. And we talked about the supply side. But I don't really think we talked about -- well, you're right, we did say that the forecast was for breast meat prices to be up, and Georgia Dock to not really recover until April of '07. That is correct; we did say that.

And do they have a quantification on the breast meat side? Did you get that?

Yes, we did. Hold on, I'm --

I'm sorry.

That's all right.

You went through them very quickly. I just missed it.

Diane, how about if we just call you back with that number? We can't seem to find it right now in our [prepared] --

Okay. I appreciate it, that's fine.

And then, I guess on the energy -- do you have the impact of higher energy in the quarter, year-over-year?

We didn't accumulate that and put it out. I mean, we think it would be in line with what we said last quarter, somewhere in the mid-$5 million type of range --

Okay, but presumably --

-- operating income.

Presumably, at some point, the comp gets to be easier as we move later in the summer. Is that it?

Well, yes. I mean, we actually received a favorable comp this quarter on natural gas. But it was substantially offset by all the negative comps on diesel. Diesel's up quite a bit. And so all of our transportation costs, whether they're direct or embedded -- the rail transportation costs are up quite a bit compared to prior-year periods, mainly due to the transportation costs.

Okay. All right, that's all I had. Thanks.

Okay.

[Pat Duzek, of Banc of America].

Yes, good morning.

Good morning, Pat.

Hi, Pat.

Quick question for you on kind of the big picture -- it's been a tough protein environment for the entire industry for the first half of 2006. And as I look at a couple of your competitors, specifically Tyson, their response has been to kind of batten down the hatches, cut back on cap ex, look for ways to save costs and everything. And then Smithfield -- they're not necessarily a direct competitor, but it seems like they've gone on a bit of a buying spree here, on the acquisition front. And they had a difficult quarter last quarter as well.

And so I'm just wanting to know, I guess from your standpoint -- you said one of your priorities for cash flow would be to look opportunistically at some opportunities that may be out in the marketplace. First of all, am I understanding that correct? And second of all, can you tell me just what you might be looking at on the acquisition front?

I'll take the second part of that first -- this is Rick Cogdill.

And specifically now, we don't comment on acquisitions until there's something to announce to the marketplace. But if you took the first part of the question -- I think it's a matter of what might be available, and whether or not we would have any interest. I mean, there was a company recently that went through bankruptcy. And we had an opportunity to take a look at that in our industry, and chose not to. So it's just a matter of seeing what's available as opportunities are presented, and taking a look.

You're right about Smithfield doing something a little bit more aggressive. But I think Tyson also mentioned that they were still looking at some smaller international acquisitions that they were looking at. So I think they're doing the same thing and just being opportunistic as things come available.

Okay.

And then, from a strategic standpoint, as you mentioned, Tyson is looking at international opportunities. And recently, [Saudia] tried to take a run at Perdigal, and was rebuffed. Is Brazil an area, from a geographic standpoint, that is of interest to you?

Well, I think we've stated in the past that we continue to look at those markets with a lot of interest. Both Brazil and China have a lot of potential. And we continue to look for the right timing for us to make any type of move into those markets.

Okay.

And then just finally, Smithfield agreed to acquire ConAgra's packaged meat business yesterday, and part of that was Butterball. And it just seems like there's been a lot that's been going on in the turkey industry. And as you have scaled back in that industry, can you give me a sense for if you compete directly with Carolina Turkeys and Butterball, and how you see the industry developing going forward?

Well, I mean, I would say that we did compete with both of those players. But I think if you look at what we have tried to accomplish in our turkey business has carved out a niche. And that is a premium line of turkeys, very similar to Butterball, that gives the retailer an option. And that line was received very well last season. It is pre-sold into this season very, very well. And it is performing to our expectations.

Okay.

And then finally, on that front, as you look to expand, both organically and then potentially through acquisitions, would it be fair to say that probably chicken would have a higher priority than turkey?

I think that would be a fair statement, yes.

Okay.

Thank you very much.

Thank you.

[Robert Moskow, from Credit Suisse].

Thank you.

In your prepared remarks, you said that you believe that the commodity breast environment requires more production cutbacks, or at least no further expansion. I know what you guys are doing. But do you feel like your competitors are cutting back enough, or delaying projects long enough, in order for the pricing to improve in this area?

Well, I think with the announcement yesterday of Tyson's cutback, that was very well-received. And I believe if you look at the cut that Sanderson announced a few months back -- many of those cuts we've not seen the impact on breast meat pricing. So it's real hard to say is that enough cut. I think it's pretty obvious that we don't need more breast meat at this point in time. But I do believe that the cuts that have been announced have not reached the marketplace. So we really don't know the impact.

Our expectations are that breast meat would move up significantly as we go through the summer and into the early fall, which is a little bit counter-seasonal. But I believe that the reduction in production should cause that to happen.

Okay.

And on the demand side here in the U.S. -- and my understanding is that there's a couple of major customers of yours that are experiencing maybe a weaker volume environment. Maybe it's a sign of the consumer declining on a macro basis. Are you seeing -- what are you seeing in terms of your major customers, in terms of unit volume, for chicken demand?

Well, I think, without revealing any specific information in general, if you look at the food-service sector, the last 30 days, we've probably seen some good pulls from our major accounts. And I believe that what we believe we're seeing is due to high gasoline prices. Lot of the consumers may be trading down from fine dining, casual dining; into more of the fast-food environment. And so I believe that there's been several promotions that have performed very successfully. And I think that demand in those sectors are starting to improve.

So if there is trading down, is it a neutral impact to you? Or is it actually a benefit to you because of the QSRs getting more volume, and that's where more of your business is?

Well, I think if you looked at our business, because of our high percentage QSR, we would view that as a positive.

So you think the macro environment is pretty favorable for you right now; you haven't seen any kind of a decline?

I believe it is favorable. I mean, if you look at the values out there, chicken still is the best value.

Thank you very much.

[Oliver Wood, with Stifel Nicolaus].

Great, thanks -- Stifel Nicolaus.

Morning.

Good morning.

Just a follow-up to the last question -- you touched on Tyson's production cuts that were announced yesterday. Sort of wanted to reconcile that with the Informa outlook -- looks like the date stamp here is July 19th -- on those numbers. I just want to make sure the assumption that supply actually comes down a little bit more -- maybe pricing's a little bit better than was discussed on the call.

Well, I'm not sure if Informa had Tyson's information on their production cuts when those projections were made in [June]. We tend to believe that many of the projections are higher than what we think is going to take place. But again, we're not 100% sure of all the cuts that are in place, and exactly when those take place. So --

This is Rick.

I think when O.B. says higher, he means that the projected decreases are not as high as what we think will take place. I don't think we have any doubt that when companies are announcing a cutback of 3 to 5% that they're going to execute that. It's just -- we don't think those numbers are factored in the external reporting services yet.

Okay. Fair enough. My other question is regarding the turkey segment. You mentioned that there's some pre-selling there, maybe providing some visibility into that. So I mean, without providing necessarily specific guidance, could [you] just give us a sense of where breakeven might be? In looking through the Q, it looks like finished-goods inventories were about where they were a year ago, which is a little confusing, given the production cuts. If you could just kind of give us a sense of what's going on there?

Well, again, that's getting awful close to an area we don't want to get to -- this is Rick -- in terms of forward-looking. I will say that I think with the forward bookings that we have had, that they have been somewhat favorable to last year.

I think the key in the whole turkey season tends to be the fresh market, and what happens in the fresh market as it develops the three or four weeks before Thanksgiving. And we're still a little bit early to get any real visibility on that.

But you build frozen inventory to meet the frozen market all year long. And that has been favorable relative to a year ago. And then, it remains to be seen how the turkey markets will hold up to the fresh season of Thanksgiving.

Okay, great. Thank you very much.

Thank you.

[Eric Katzman, with Deutsche Bank].

Hi, good morning.

Morning, Eric.

I guess one quick question to O.B. -- how much -- kind of looking back -- how much of this environment that we're in do you think was due to industry kind of irrationality in building supply, versus how much was due to kind of like an exogenous event, like AI?

Well, I think you have to separate those two events. I think they are two separate events. The AI and the export disruption really had nothing to do with supply and demand. The demand for leg quarters was very strong. Movement was very good. And AI -- breaks, and the way the media handled that, cause loss of consumption in international markets, which resulted in huge inventory builds in this country during that period.

The breast meat side of the equation is an oversupply in the U.S. that has actually been building for the last 18 months. And so you've seen pressure on breast meat developing ever since, in 2004, it peaked. And so I think the cutbacks that have been made by our industry is to address the breast meat side, not the dark meat side. We believe the international markets will fully absorb the leg quarters that are being generated in this country. It is the breast side of the equation that we have to make sure that we stay in balance on.

And there, we don't fully understand the production cuts -- what impact it'll have on breast meat. It may be very adequate to return breast meat to more normalized levels.

And I guess what you're signaling today is that we're already kind of seeing the recovery on the AI fear and the export market. And we're hopeful, given the production cuts, that the breast meat business is on more solid ground, as people kind of behave a little more rationally and focus on profitability.

That's our expectation, yes.

Okay.

And then, on a completely different subject, in terms of the feed costs, to what extent is the corn feed potentially okay, if you can find a way to use DVGs? Is that even possible?

Well, we've been experimenting with that. I would say [this] -- those work better, from what we understand, in cattle feed than they do in chicken feed. We're still looking at various formulations to see how they could be utilized. But if it's a better fit in the cattle feed, it still displaces corn, and works the same in terms of market conditions. So we're continuing to look for ways to utilize those ourselves, so --

Okay. So it could still be a silver lining, even if ethanol takes up a bigger portion of the corn crop?

Yes. They definitely can be used in some feed application. It just may not be chicken.

Yes, this is Clint.

About a third of that can return back into DVGs and used in the feed consumption. And our growth time in chicken is so short that the quality of those feed ingredients needs to be consistent and good. And that's why we think that there's more use from the DVGs in the hog operations or cattle operations.

Understood.

Okay, thank you.

[Farha Aslam, with Stephens, Incorporated].

Hi, good morning.

Good morning, Farha.

-- morning, Farha.

Just one quick question -- production cuts that have been announced by the public companies we know. But can you just talk about your conversations with the private players? Do you think the level of discipline exists there as well?

Well, I would say we haven't had many conversations with the private players about their production plans. But from what I have heard them make comments and other meetings -- that I believe it is similar. To what degree across those private players -- I mean, if you look at -- what do we have, 36, 37, 38 private players -- it's tough to know what each of those are doing. I think the real key is, you've seen the top five to 10 of the industry players announce some significant cuts. And I believe the top eight players control 70% of the market. So that's where you need the cuts.

Okay.

And we're seeing production cuts in terms of excess from broilers. Is the industry also taking out capacity in their breeder flocks or in their [fullets] placements to really cut back and make these cuts more permanent? Or is it a situation that, if market pricing starts to improve, there's ample room in the system to quickly bring on supply in the spring?

Well, if you look at when our problems began, we are, what, seven months into the exports really starting to fall apart. And if you look at your planning process for your breeder flocks, they extend much further out. So you have a lot of plans in place. And I believe that people are going to continue to look at the economics. I think there's going to be no mad rush to put out a lot of chickens. Because this thing still has some volatility potential out there.

So my belief and hope is that the industry will use constraint going forward when they look at when and how we increase production numbers.

Okay, thank you.

Thank you.

[Andrew Lazar, from Lehman Brothers].

Good morning.

Good morning --

Hey, Andrew.

Just a quick one -- on the production cuts, how far will some of those cuts go for PPC specifically, in getting back to being kind of in that net-buyer position around kind of breast meat?

And I guess, what's the harm in going further or being a larger net buyer, maybe, than you have been in the past? In other words, maybe you can help me understand what the tradeoff is between those two positions.

I guess, as our history has stated, we do not mind being a net buyer of breast meat. Fact, that's somewhat been our strategy. And if you look at this year, we were actually a net buyer prior to our production cuts coming into place. So we're just starting to see our production cuts. We anticipate being a buyer.

And like I said, we're not in a hurry to put down the chickens that we cut out of our production schedule. We're going to continue to look at the environment and make sure that we have the need for those chickens, prior to those going down.

All right. So even having been in a net-buyer position before a lot of this, it's just the weakening breast meat prices, on kind of the overall complex of whole chicken prices and whatnot, that impacts your business, even though you've been a net buyer of breast meat specifically?

Yes.

Okay.

Thanks very much.

Thank you.

Thank you.

I will now turn the call over to Mr. O.B. Goolsby for some final comments.

Once again, I'd like to thank you all for joining us today to review our third quarter results.

I would like to conclude today's call by saying that while we are not happy with the results we posted this quarter, or thus far year to date, we are pleased with the progress we have achieved on our strategic plan, despite today's challenging business environment.

These have been unusual times. And our industry has been severely challenged. We have responded with swift and decisive action, so that we can not only weather this storm but also right this ship, and our position in our Company, as an even stronger and more efficient competitor.

To our employees, I'd like to say how much I appreciate your commitment and dedication to making Pilgrim's Pride Corporation a world-class food company. Your focus on delivering outstanding service, quality and value to our customers and to the consumers of our products truly sets us apart from our competitors.

Operating efficiently has never been more important than it is right now. And I know that I can trust each of you to turn over every stone for savings and improvement opportunities and to manage your business units accordingly, while always meeting our customers' needs and expectations.

Looking ahead, I believe the combination of stronger domestic and export selling prices, resumption of demand for our products in the export markets, and improved operating efficiencies should position Pilgrim's Pride for a return to profitability and help us deliver the value that our shareholders have rightfully grown to expect.

Thank you again for joining us today. And we hope to talk to you all again on November the 14th, when we report our fourth fiscal quarter and 2006 annual results.

Thank you.