Pilgrims Pride Corp (PPC) 2006 Q4 法說會逐字稿

Good morning and welcome to the Pilgrim's Pride's conference call to review the Company's financial results for the fourth quarter and full 2006 fiscal year. At the request of Pilgrim's Pride, this conference call is being recorded. Slides referenced during today's call are available for downloading from the conference call link on the website home page of www.pilgrimspride.com.

Kathy Costner, Vice President of Investor Relations for Pilgrim's Pride, will now begin the call. Ms. Costner?

Thank you and good morning, everyone. We are pleased that you could join us today. Earlier this morning, we issued a press release that details our financial performance for the fourth quarter and full 2006 fiscal year. If you have not yet seen this press release, a copy is available for download from our website at www.pilgrimspride.com.

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

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 as filed with the Securities and Exchange Commission.

I will now turn the call over to O.B.

Thanks, Kathy. Good morning, everyone. There's no question that 2006 has been a very challenging year for the U.S. chicken industry. Weak export demand and higher inventory levels have contributed to lower overall market pricing for much of the year. At the same time, industry production levels during the first half of the year led to an oversupply situation, further weakening prices. In response to these challenges, most of the major chicken companies announced production cutbacks in the late spring or early summer. Pilgrim's Pride was one of those companies. In May, we announced a multi-point plan designed to improve the Company's financial results and competitive position. This plan included a 3% reduction in weekly chicken processing, which had been fully implemented by the end of July, as well as a reduction in capital investment and a sharpened focus on cost reductions and improved efficiencies. Clint will provide additional details about the plan in a few minutes. But clearly our employees deserve a lot of credit for the progress we have made toward lowering our cost and operating more efficiently.

While we believe those industry cutbacks help boost chicken prices over the summer and into the first part of the fall, unfortunately, these price improvements were short-lived. Over the past two months, market conditions have weakened, as evidenced by a decrease in the prices for boneless breast meat and leg quarters, as well as a sharp increase in the price of corn and soybean meal. In October, as corn and soybean meal prices escalated, it became clear to us that immediate action was necessary on our part to strike a better balance between supply and demand. As you can see on slide 5, on October the 29th, we announced further plans to reduce weekly chicken processing by 5% year-over-year or approximately 1.3 million head per week beginning January 1st, 2007. This latest cutback began with egg set reductions on October 30th and will take full effect with weekly processing beginning January 1. We intend to keep that 5% year-over-year reduction in place until the average industry margins return to more normalized levels.

Looking ahead, we believe that these cutbacks will help us strike a better balance between production and demand while strengthening our competitive position. We also should see an improvement in our product mix since the reduction in weekly processing will eliminate the majority of our commodity business, which was what hurt us in fiscal 2006.

Looking ahead, we see two significant challenges that must be addressed. One is market pricing for our products. Simply put, market prices for our products are not at the levels they need to be.

The second challenge is feed ingredient pricing. The price of corn, in particular, has risen dramatically in a very short period of time. We believe surging demand for ethanol is the -- is driving the sky-rocketing corn prices. This is a direct result of government policy that encourages the burning of food for fuel by subsidizing ethanol production. Consider this. We believe ethanol production has resulted in futures pricing of corn that could potentially add at least 1.3 billion in costs to the U.S. chicken industry alone. In order to compensate for the increased cost of corn, our industry will have no other choice but to pass along these cost increases to our customers. How long this will take remains uncertain. At Pilgrim's Pride, we are spending a lot of time with our customers to help them understand the significant impact on our business from higher feed costs. While we are always working to become an even more efficient producer of poultry meat protein, industry producers simply will not be able to absorb these costs on their own. In fact, this fact is an important issue we are currently addressing in contract negotiations with our customers and will continue to be so throughout the remainder of fiscal year.

But the adverse impacts of ethanol production and use will go far beyond the chicken industry. Ultimately, these costs will be passed along to the end consumer of our products. While Americans may realize some marginal benefit, if any, from ethanol at the fuel pump, they will end up paying higher prices at the grocery store. While we firmly support the goal of independence from foreign oil, we also believe that using tax dollars to subsidize ethanol production and, in effect, take much needed supplies of corn and literally send them up in smoke is bad public policy.

As noted previously, wheat pricing has negatively affected industry profit margins for almost a year. In order to help you assess market conditions, you can look at a group of primary pricing metrics, which include leg quarters and Georgia dock, as well as commodity pricing for wings and boneless skinless breast meat. Doing a quick recap, as you can see on slide 7, the Georgia dock was down approximately 6% year-over-year for both the fourth quarter and the fiscal year. Today, this market is down an additional 1.8% from the end of our 2006 fiscal year and is trading at $0.69 per pound.

Leg quarter prices for the majority of 2006 were negatively affected by overseas concerns about avian influenza. Weak export demand pushed down quoted prices to a record low of $0.16 per pound with many sales being made well back of these levels before climbing back to $0.38 per pound during the fourth quarter. For the 2006 fiscal year, leg quarter pricing was down 19.7% to $0.36 per pound and down 21.1% for the fourth quarter to an average price of $0.29 per pound. Today, this market is quoted flat with the fourth quarter of fiscal 2006 average at $0.29 per pound. However, again, many sales are being made back of these levels.

Boneless skinless breast meat for the fourth quarter was down 1.6%, averaging $1.39 per pound, and for fiscal year was down 15.8% averaging $1.21 per pound. Today, this market is down an additional 12.4% from the end of our 2006 fiscal year and is trading at $1.06 per pound. But again, many sales are being made back of these levels.

Whole wings, despite showing a healthy year-over-year increase of 14.2% for the fourth quarter, were down 7.3% for an average price of $0.89 per pound for the year. Today, this market is down an additional 14.1% from the end of our 2006 fiscal year and is trading at $0.85 per pound.

Since pricing is not where it needs to be for the industry to be profitable, particularly in light of corn and soybean meal costs, we sincerely hope that the production cutbacks will have a positive influence on product pricing so as to help restore margins to more normalized levels. Other factors that could negatively affect our business in fiscal 2007 include an increase supply of other proteins and uncertainty over feed ingredient transportation costs as the transportation network is further strained as a result of moving raw materials and finished goods in and out of ethanol plants.

At the same time, there are some encouraging signs for our industry in 2007. These signs include the continuation of production cuts in both domestic and international markets, which over time should lead to a more normalized levels for market pricing, less volatility in the energy markets thanks to a relatively mild hurricane season in 2006, potential industry consolidation, which could improve the efficiency on the part of chicken companies, and the resiliency of the U.S. economy. Now, more than ever, it is important for us to execute on our strategic plan and seize opportunities to build our business, whether by adjusting our product mix, strengthening our brand integrity with customers, or shortening the time it takes to bring new products to market. We are confident that our continued focus on higher margin prepared foods products, coupled with our production cutbacks, will help return us to normalized profitability when markets improve.

On a separate note, Pilgrim's Pride recently celebrated its 60th anniversary in the poultry industry. Looking back, it's truly amazing to see how far we've come since Bo and Aubrey Pilgrim opened the first feed and seed store in east Texas. Working together, we've achieved a lot of great things. We have a strong and growing customer base, a tremendous network of 5,000 contract growers, and modern facilities that enable us to produce 6 billion pounds of poultry products each year. Our 40,000 employees are the best in the business and our most important asset. A lot has changed in our industry over the years. At one time, there were more than 1,000 chicken companies in the U.S. Today, there are just a handful of larger producers and a few dozen smaller players. These survivors are those that have been able to respond quickly and decisively to the ever changing taste of our customers and consumers. Over the past 12 months, we have been reminded just how quickly our business can change. But we're confident that we have the right strategy and team in place to emerge as a stronger, more formidable competitor.

Now I will ask Clint to review some operating highlights from the fourth quarter and share a few thoughts on the year ahead.

Thanks, O.B. Good morning. As O.B. mentioned, we have made some difficult decisions over the past 12 months, but these actions were absolutely necessary for the long-term health of our business. In a challenging operating environment like this, it's more important than ever to make decisions quickly and operate as efficiently as possible. Our multi-point plan was designed to help us do just that. This plan initially included a 3% production cutback as well as a reduction in capital investment and a sharpened focus on reducing costs and improving operating efficiencies.

Here's a brief update. The 3% reduction in weekly processing that we announced last May and which took full effect in July remains in effect. We believe this cutback when coupled with reductions initiated by some of our competitors helped bolster chicken prices leading up to Labor Day. However, as O.B. previously mentioned, these price increases did not hold for very long. Accordingly, we took further action in October with the announcement of a 5% year-over-year reduction in weekly processing. This cutback, which will take full effect January 1, is equivalent to a reduction of approximately 1.3 million head per week. Most of the 5% cutback will be focussed on our big bird deboning operations since the market continues to have an excess of meat.

Our second step was to delay the planned expansion in our fresh food service division at our Mayfield, Kentucky facility. This first half of our previously announced fresh food service expansion in Mayfield was completed in September as scheduled. The balance of this expansion is scheduled for completion next June.

The third element of our strategic plan was the decision to reduce our capital investment for the year by 25 to $40 million. Originally, our capital investment projection for the year had been in the range of 180 to $200 million, but later in the year, we lowered that to 140 to $150 million. We finished fiscal 2006 at 144 million. Given the state of the industry, we will initially keep our fiscal 2007 capital budget in the range of 140 to $160 million.

The last part of our plan was a sharpened focus on reducing costs and operating more efficiently. Earlier this year, we challenged our employees to do everything possible to help improve processes, cut waste, and reduce unnecessary expenses. Our live operations group is an excellent example of the response we received from our employees. By nearly any measurement, our live operations performance has improved year-over-year. With the price of feed ingredients rising, this becomes even more important as we move into the new fiscal year. It's the little things that add up to big dollars and we know that we can count on everyone throughout our Company to continue to improve our results as we move into the new fiscal year.

Looking ahead, there are a number of operating challenges for our business in 2007. As you know, corn prices have increased dramatically in the past few weeks. In fact, we've seen one-day price gains of over $0.10 per bushel in multiple occasions. Typically during the fall harvest season, we benefit from the lowest feed ingredient cost of the year. However, this year is shaping up to be an anomaly as December corn futures are booking for $3.43 per bushel. This is a 75% increase versus the same period last year. Although the USDA predicts a season average price of $3.00 per bushel as shown on slide 8, current future prices indicate that commodity funds are betting heavily on the price to rise higher. In fact, you can see on slide 9, since the end of September, funds have invested much more heavily in corn futures, increasing their holding 60.1% from the previous month.

In addition, speculation surrounding the impact of increased ethanol production on corn prices as well as attempts by funds to reallocate their investments to cover losses from other sectors such as energy and other commodities are the primary drivers behind the increase in volatility. We've said this several times in the past, but it bears repeating. We believe the USDA is a much better predictor of corn future prices than speculators on the commodities market. However, make no mistake about it. The futures prices do directly impact our cost of feed ingredients and as long as the speculative premium remains in these contracts, our cost will be affected. As O.B. mentioned, we will make every attempt to pass along these costs to customers, but as long as industry-wide chicken production levels exceed real demand, this will be challenging. Accordingly, our approach has been to reduce our production to a level that should all but eliminate our excess commodity position and allow us to let others compete for these bottom-tiered sales.

Soybean meal markets are also being subjected to the effects of increased speculation by funds. While pricing was favorable year-over-year, futures pricing in recent weeks has increased significantly. However, not to the same degree as in the corn markets. The USDA currently projects soybean meal to increase 1.1% to $177.50 a ton for the 2006-2007 season compared to the prior year. The Chicago Board of Trade futures market, on the other hand, indicates a much higher season price of roughly $195.22 per ton, 11.2% higher than fiscal 2006.

Energy is also a major cost component in the chicken production. Over the past year, we have seen a wide range of pricing for electricity, natural gas, and diesel due to the 2005 hurricane season and geopolitical instability in overseas markets. In response to such uncertainty, commodity funds entered the futures market betting heavily that the price of energy would go higher. These funds, much like those in the corn markets, pushed futures pricings above what government agencies projected. However, the recent decline in energy pricing exposed some of the inherent flaws in the futures market especially during times of uncertainty.

Turning to slide 10, according to the Energy Information Administration, the Henry Hub natural gas price is expected to average about $7.06 per thousand cubic feet in 2006 and $7.79 per thousand cubic feet in 2007. Looking at the quarter versus quarter comparisons, the fourth calendar quarter in 2006 is projected to be 42.4% lower than the same time last year due in large part to hurricane damage in 2005. Moving on into 2007, the first calendar quarter is expected to show a 6.2% increase in pricing year-over-year due to anticipated colder weather this season. In response to the higher expected pricing in energy costs, we once again will give our contract growers an additional supplemental fuel payment this winter. This incremental supplement will cost us approximately $6 million in fiscal 2007.

To sum it all up, it's been a tough year for Pilgrim's Pride and the U.S. chicken industry but we believe the actions we have taken to address these challenges are the right approach at the right time for our Company. Someone once said that the only thing certain in this world is change. Well, we've seen plenty of changes, sometimes volatile, over the past 12 months. But we've made it through with a stronger, more focused and efficient Company and I believe that bodes well for our future as industry fundamentals improve.

I'll now turn over the call to Rick who will provide additional details about our financial results. Rick?

Thank you, Clint. As shown on slide 11, we reported a net loss of $ 7.5 million or $0.11 per share on total sales of $1.338.4 billion for the fourth quarter ended September 30th, 2006. Included in net income for the fourth quarter of fiscal 2006, our nonrecurring U.S. and foreign tax expenses of $25.8 million or $0.39 a share related to our repatriation of $155 million of foreign earnings pursuant to the American Jobs Creation Act of 2004. Excluding this one-time effect, net income for the fourth fiscal quarter would have been 18., a loss, excuse me, would have been 18.3 million or $0.28 per share, exceeding consensus estimates of $0.14 per share. This amount compares to net earnings of 74.7 million or $1.12 per share on total sales of $1.482.7 billion in the fourth quarter of fiscal 2005. For the full fiscal year 2006, we reported a net loss of 34.2 million or $0.51 per share on total sales of 5.235.6 billion. This amount compares to net earnings of 265 million or $3.98 per share on sales of 5.666.3 billion for fiscal 2005. Included in the net income for fiscal 2006 is the same one-time tax effect previously mentioned for the fourth fiscal quarter. And also included in the net income for fiscal 2005 was a non-recurring gain of 7.5 million net of tax associated with a litigation settlement and 3.3 million net of tax of recoveries on prior year turkey restructuring charges for a combined $0.16 per share. Accordingly, excluding these one-time effects for fiscal 2006 and 2005, our net loss for fiscal 2006 would have been 8.4 million or $0.12 a share, exceeding consensus analysts estimates for a loss of $0.26 per share. This would compare to adjusted earnings in 2005 of 254.2 million or $3.82 per share.

In computing the per share amounts for both 2004 as well as the fourth quarter in 2005, the number was 66,555,733 shares.

Turning to the income statement, our fourth quarter sales were heavily impacted by lower market pricing for leg quarters, which declined 21% compared to the same period last year as well as lower sales volumes in general. Sales revenue for the fourth fiscal quarter of 2006 was down 9.7% to 1.338.4 billion compared to 1.482.7 billion for the same period last year. Specifically as shown on slide 16, our U.S. chicken sales were most heavily impacted with sales declining 103.4 million or 8.9%. This was the result of a 3.8% decline in the revenue per pound sold and a 5.3% decline in our sales volumes. Our U.S. sales volume decline was a result of a 0.4% reduction in pounds produced and increased transfers of product to our Mexico operations, which resulted primarily from lower domestic demand for U.S. chicken.

Our sales volume in Mexico increased 30.5%, however at pricing levels which declined 12.6%. Combining the volume gains and the pricing decline, our net chicken sales in Mexico increased 14% to $115.3 million.

Our turkey sales were down 28% due to a 20.1% decline in sales volumes. This decrease is a direct result of our decision earlier this year to eliminate further process turkey from our product mix and from the full effects of our prior year commodity turkey restructuring efforts. For fiscal 2006 in its entirety, our sales were also heavily impacted by declines in both pricing for leg quarters and breast meat which declined 15% compared to the previous year.

Our total sales declined by approximately 7.6% to 5.235.6 billion compared to 5.666.3 billion for fiscal 2005. More specifically, our U.S. chicken sales were down 7.1% on a decrease of pounds sold of 2.3% and a 4.9% decline in revenue per pound sold. Our U.S. sales volumes declined as a result of a 2.8% increase in pound produced offset by increased transfers of product to our Mexico operation, again resulting primarily from lower demand for U.S. chicken products.

Sales volumes in Mexico increased 3.8% for the year, however, again at lower pricing levels which declined 9.1%. Combining the volume gains and the pricing declines, net sales in Mexico increased 3.8% to $418.7 million.

Our turkey sales were down 36.1% due to a 29.9% decline in sales volumes, and again this decline, this is a direct result of our decisions earlier this year to eliminate further processed turkey products from our sales mix and from the full effects of our prior year's commodity turkey restructuring efforts.

If we turn to slide 17, we can turn to our operating income and for the fourth quarter of fiscal 2006, we reported $21.5 million compared to operating income of $119.8 million for the same period last year. This decrease of 98.3 million was primarily due to declines in sales revenue per pound sold, both domestically and in Mexico, and due to declines in both our revenue per pound sold and sales volumes in our turkey operations.

Our cost of sales declined during the quarter by approximately 3.3%, due primarily to lower sales volumes and lower feed ingredient pricing when compared to the previous year. Excluding a $6.4 million accounting adjustment made for certain defined benefit plans, primarily government mandated employee benefit plans in Mexico, which were identified recently due to a regulatory change in Mexico, you can see on slide 18 that our operating income for the fourth quarter of 2006 would have been $27.9 million.

For the fiscal year ended September 30th, 2006, our operating income was down 99.3% or $432.8 million to $3 million compared to $435.8 million for the same period last year. This decrease in operating income, when compared to the fiscal 2005, is due primarily to declines in sales revenue per pound sold, both domestically and in Mexico, and due to declines in both revenue per pound and sales volumes in our turkey operations. As mentioned previously, included in operating income for fiscal 2006 was a $6.4 million one-time accounting adjustment for these certain defined benefit plans, primarily government plans in Mexico, and included in fiscal 2005 was a $5.3 million proceed on asset sales and turkey restructuring revenues. Excluding these one-time effects, slide 18 shows that operating income would have been 9.4 million for fiscal 2006 and 430.5 million for 2005.

As shown on slide 12, our net interest expense for the fourth quarter was essentially flat at $10.6 million compared to expense of 10.1 million a year ago. Our net interest for all of fiscal 2006, as shown on slide 14, was down 3.3 million to 40.6 million from 43.9 million for the same period last year. This decrease is primarily due to increased interest income from investment purchases offset pri -- partially by generally higher interest rates. As a percentage of sales, our net interest expense for both the quarter and year-to-date periods remain essentially flat at 0.7% of sales.

Income tax expense was $19.6 million for the fourth quarter of 2006 on net income before taxes of 12.1 million. Excluding the tax effects on the repatriation of our Mexican earnings, our tax expense would have been a benefit of 1.7 million with an effective tax rate of negative 8%. This negative tax rate on earnings is primarily due to the recognition of tax benefits during the quarter for the reversal of previously established contingency reserves for uncertain tax positions. This compares to a prior year fourth quarter income tax expense of 34.6 million on net income of 109.3 million or 31.7% effective tax rate.

Turning to 2006 in its entirety, our income tax expense was a benefit of 2.1 million on a net loss before taxes of 36.3 million. Excluding the tax effects on the repatriation of Mexico earnings and the one-time adjustment related to the Mexico defined benefit plans, we would have had a tax benefit of 23.4 million or 84.9% effective tax rate. Again this highly -- high effective tax rate is primarily due to a 10.6 million tax benefit that was recognized this year for the reversal of previously established contingency reserves for uncertain tax positions. This compares to income tax expense of 138.5 million on net income before tax of 403.5 million or 34.3% in the prior year.

Turning to some of the highlights on the balance sheet, slides 19 and 20 show comparisons of our current debt obligations at the end of our prior fiscal year. The debt increased $72.5 million during the quarter to 565.2 million due to borrowings under a new credit facility in Mexico, which was used in part to fund the $155 million dividend repatriation on foreign earnings pursuant to the American Jobs Creation Act of 2004. At September 30th, 2006, our total outstanding debt was made up of 10.3 million in current maturities on long-term debt and $554.9 million in long-term debt. We currently maintain 150 million in domestic credit facilities, of a revolving credit facilities, of which 126.6 million is available to the Company. We have a 75 million revolving credit facility in Mexico which is all fully drawn. On September 25th, 2006, we entered into credit agreements that provides for an aggregate commitment of $1.225 billion consisting of $795 million revolving term loan commitment and a 430 million term loan commitment. 535 million of this amount is currently available to the Company.

We also obtained the commitment letter of making available to the Company 450 million of senior unsecured bridge loan facility with an investment bank. Additionally, we have a 125 million available under an accounts receivable securitization facility. Accordingly, when you aggregate the availability under all of our credit facilities previously mentioned and you exclude the 430 million term loan, which will be available when it's fully collateralized, our total availability today is approximately $1.110 billion. The weighted average interest rate on our debt outstanding at September 30th was essentially flat at 9.1%. And at the end of the quarter, 88.5% of our debt was on a fixed rate basis.

Moving on to the highlights of the cash flow statement. As previously referenced on slide 12, our depreciation and amortization for the fourth quarter was down 5.6 million to 35.1 million compared to 40.7 million for the same period last year. For all of 2006, as shown on slide 4, our depreciation and amortization was essentially flat at 135.1 million compared to 134.9 million last year.

Slide 21 reflects the execution of our multi-point strategy previously covered by Clint showing that our total capital expenditures for the fourth quarter was 42.6 million and our total 2006 capital expenditures was $143.9 million. In the second quarter, we lowered our CapEx forecast to include only those items that we deemed critically necessary or those items investments that were currently in the best long-term interest of our shareholders. As Clint previously mentioned, we will initially be keeping our fiscal 2007 capital budget in the 140 to $160 million range.

Slide 22 on the web shows a summary of our credit ratios and certain other information. Pointing out a few items on the ratio page. As is expected, we show that our EBITDA interest coverage for the current fiscal quarter strengthened to 5.4% or 6.01% when adjusted for the nonrecurring items versus the 0.7% we realized last quarter. However, these amounts are down from the 15.8% for the same period last year. For all of fiscal 2006, our EBITDA interest coverage was 3.37% versus 13.2 times last year. Our total debt divided by EBITDA for fiscal year, while manageable, increased to 4.13 times compared to 0.9 times for the same period last year. And despite the challenges we faced in fiscal 2006, our total debt to total capitalization remains strong at 33.6%.

I'll now turn the call back over to O.B. for a few final comments before we open it up for questions.

Thank you, Rick. Before I turn the call over to the operator for questions and answers, I'd like to provide an update on our tender offer for Gold Kist. As you all know, on September the 29th, 2006, we commenced a tender offer to purchase all of the outstanding shares of Gold Kist common stock for $20 per share in cash, a transaction valued at $1 billion plus the assumption of approximately $144 million of Gold Kist debt. At that time, we again emphasized to the Gold Kist board of directors that we would have preferred to work together to reach a mutually beneficial agreement.

However, after consistently communicating this message since our first letter nearly nine months ago to no avail, we determined it was necessary to move the process forward through a direct appeal to their shareholders. As we have said all along, we believe the combination of Pilgrim's Pride and Gold Kist will generate substantial benefits for the employees, customers, business partners, and stockholders of both companies. By combining the two companies, we will be able to expand our geographic reach and customer base allowing us to compete more efficiently and provide even better service to our customers. Moreover, considering our offer represents a premium of 55% over Gold Kist's closing stock price on August the 18th of 2006, we believe this is a unique opportunity for Gold Kist stockholders to realize immediate and certain value for their shares.

As most of you know, stocks in our industry are subject to significant volatility. In fact, in the current industry environment, the fundamental metrics of rising corn prices and lower chicken prices graphically illustrate this reality. Prior to our intentions being made public on August the 18th, 2006, Gold Kist stock price on average traded in an amount approximately equal to 50% of Pilgrim's Pride stock price since Gold Kist's initial public offering in 2004. Applying our average relative trading value of 50% to our closing stock price yesterday of $23.90, implies a Gold Kist stock price of approximately $11.95 per share or an implied premium under today's environment of 67.4%. Clearly this is a very compelling offer for Gold Kist stockholders.

Even without the involvement of Gold Kist's board of directors and senior management, Pilgrim's Pride has made tangible progress towards consummating this transaction. As we announced on October the 16th, 2006, we have received the requisite consents from approximately 99% of the holders of Gold Kist outstanding debt. On October the 27th, when the first tender offer period expired, a significant percentage of Gold Kist shareholders expressed their support for a transaction with Pilgrim's Pride. They tendered a total of approximately 16.84 million shares, or 33% of the Company's outstanding shares of common stock, into our $20 per share in-cash offer. The tender offer has been extended to November the 29th.

In addition, the Justice Department has reviewed the transaction and granted approval under anti-trust laws. We believe it is important that all Gold Kist stockholders understand we have made genuine attempts to reach a mutually beneficial transaction with the Gold Kist board. Nevertheless, now the shareholders themselves must determine which course of action is in their own best interest.

Regarding our offer, I'd like to reiterate, as we have stated in the past and communicated in our presentation to investors, that we believe our offer of $20 per share represents full value for Gold Kist stock and reflects a significant premium where the stock would otherwise trade on a normalized earnings basis. With these comments being made, as is customary in these situations, we will not be taking questions about Gold Kist or making further comments on the proposed transactions during the remainder of this conference call.

I'd now like to turn the call over to the operator for any questions regarding our financial and operations results. Operator, could you please begin queueing up the calls?

[OPERATOR INSTRUCTIONS] Your first question is from Farha Aslam. Go ahead, please.

Hi, good morning.

Good morning.

Couple questions. Regarding energy prices, you had mentioned that you're going to increase your payments to growers by about 7 million. But your total energy costs, what would you anticipate that to be year-over-year, '07 versus '06?

Farha, this is Clint. Take a look at that. We expect our energy costs to be down somewhere around the 18 to $22 million range, '07 versus '06.

Great. That's helpful. And looking at grain prices where they are, let's assume that the USDA is correct and corn averages about $3. How much would that increase your feed cost year-over-year?

That would be, that would be about a $0.40, $0.40 to $0.45 increase roughly.

Per share increase.

At the $3 level. Yes, so that would be about 80 to $90 million versus where the futures are today as Clint pointed out, quite a bit higher than that.

Great. And you shared with us current pricing in chicken. Could you just give us some color on your outlook for leg quarter pricing and breast meat pricing going into next year? And if you can share with us some seasonality, that would be helpful, as well.

This is O.B. Certainly, the first quarter of our fiscal year and the second quarter seasonally have issues with breast meat pricing in particular. And if you look at today's levels, they are at very near historic lows. I think the challenge and the unknown going forward is how much production will be cut and how much is that going to impact the supply and demand situation. As we commented, the price we saw breast meat and leg quarters relative to what was happening in the grain markets forced us to make a 5% production cut. And what the rest of the industry does will depend upon how the breast meat and leg quarter pricing end up, and at this point we don't know the answer to that.

So what do you -- would we be fair to assume that you anticipate negative earnings at least in the first quarter and possibly into the second quarter, as well?

Farha, you know that we don't give guidance. And I can say that October was a very good month for us, but currently we're operating as a deficit.

Okay. And my final question, then I'll pass it on, could you just give us some color on what your customers are saying as you're going to them to try and increase pricing?

Well, as you can expect, they're not excited about us raising prices and again I think depending upon how the supply and demand situation shakes out, will be, determines how we'll be able to pass along these increases. Certainly we're -- we cannot absorb these increased costs as an industry on our own and we have to pass those along. How quickly we can do that depends on supply and demand.

Great. That's very helpful. Thank you.

Thank you.

Next question is from Pablo Zuanic with JP Morgan.

Everyone.

Good morning.

Just before I ask you about operating trends, just in terms of your ability to raise debt. I know you don't want to answer about Gold Kist, but back in August, you were planning to raise debt to about $1 billion and you've told us how much you have available right now. But are those [inaudible] still there with current industry conditions so how do the bankers feel about that? And secondly, how do you guys feel about that, taking on that type of leverage with current industry conditions? You're breaking a deficit in November, what if that continues for the full year? Can you comment on that please?

I can comment. This is Rick, I can comment on the debt agreements. The debt agreements that we do have in place are firm commitments and available to the Company. And we did take on enough facilities that basically if you look at what we did, we raised enough credit facilities to allow us to make the Gold Kist acquisition and end up with essentially the same financial liquidity that we had going into it. So fully drawn on those facilities, we would still end up with approximately 600 million to 700 million of financial liquidity. That was our goal.

The other part of your question is, how do we feel about taking on that debt under these kind of environments? And clearly that is something that we study and we look at day in and day out. Where we are today, we have a tender offer that's open. So at this point, we are committed to continuing forward this transaction at the current price levels, but as the industry evolves, we'll have to make a redetermination at every tender period should there be more tender extensions.

Okay. That's helpful. Now just in terms of industry trends. When I hear you talk about the production cutbacks, it supposedly will help chicken prices. And clearly from August through October, with prices came down at a time the production was decelerating so those production cutbacks did not help. One question would be what happened? Why those don't help? and the second question looking forward, how much do you think the industry really has to cut production by to see a recovery in pricing? Is there a calculation you can do there?

Pablo, this is O.B. Certainly in late August and September, the production cuts that were in place were not enough. They did help because it would have been much worse had those cuts not come into the market. It's just -- it required more cut than the industry actually produced. And why that wasn't enough? I can't fully answer that question. Certainly, I believe that there was a lot of pressure on the market from some inventory liquidation and I think that people were probably not wanting to put breast meat in inventory going into the fall. So they were selling breast meat and putting pressure on the market and driving the price down. In terms of what's the right cut to balance supply and demand going forward. Our number was 5% and that balance is our product mix and we believe is a substantial number. And I believe that the industry cut was in the 3 to 5% range that we could handle the price of corn, but that's yet to be seen.

Again, just a when we talk about a pass-through, I find that we have to differentiate between process meats and the contracts initiated once a year and then the commodity market. The commodity market, clearly, is going to be determined by supply/demand and let's see how quickly that supply can change. But on the further process meats, to a previous question, you said there was some push back. And from outside, I'd be worried that most of your contracts are normally set November through February. Those applied cutbacks will not come in right away. Does that mean that you delay in negotiating those contracts? Or you just fix prices for a year, but you can't really pass it on on the further processed meats? Can you differentiate between those two?

Well, we're looking at a lot of different options. And certainly, we are not going to commit on contracts that would be of a long-term nature that we could not live with given the price of our feed cost. And so, many of those contracts as you said are either in negotiation or starting shortly. But I think that the tone of the market today with some of the announced cuts that are in place are -- is changing and so we're still confident that we're going to be able to pass some of these costs along. Can we cover them all? I don't know.

All right. Then one last question. Regarding your comments on corn, I mean, you mentioned that the high futures market were really distorted by speculation but has that really has an effect in real terms in your cost structure. So if I want take that argument further, could this mean that back in August when you the users, Sugar Street and users, when they began to see the gap between futures north of $3, market at $2, that all of you in the industry loaded up on corn, pushing market up, but as those inventories began to unwind, we would see corn come down or that's just not realistic we'll probably stay where we are right now in terms of [inaudible]? What do you think about that?

Pablo, this is Rick. I don't necessarily think what you saw on the spot cash prices is something that in general is a pricing point for the industry. Where you've got local buying opportunities, clearly that's a more relative metric. But generally that's a metric that's there for the farmer selling end of the mill more so than for the consumers. The general consumers like us, for the most part, are buying, buying off of the nearby futures markets if we're not long and it's relative to freight and basis would make the adjustments based on the supply and demand that needed to get moved. And we can tell you that freight costs are actually very high and the basis today is higher than normal, as well. So all the cost components, whether you're looking at the nearby future basing point, the freight and the basis are all high in relative terms today. So that's why we, Clint made the comment that these are real impacts to our business at the levels they are today despite the fact that the USDA is projecting $3 a bushel, that's not what we're seeing.

Okay. And just one very last one, if I may. In terms of CapEx, I know you're giving guidance of 140 to 160. But what's a real bare-boned minimum, assuming that industry conditions remain apparently below breakeven for, say, the next 12 months. What's the minimum that you can grant on CapEx?

Our maintenance is probably in the 80 million range. But we do have some major projects in the works that are in progress already. We've got a feed mill being constructed in Louisiana, for example. You got some of these projects that are more than what I would call maintenance CapEx that are already in the works that you really wouldn't throttle back on at this point. And that's why our number will be higher. It'll be that 140 to 160 range.

Okay. Thank you.

Your next question is from Oliver Wood with Stifel Nicolaus.

Hi, Oliver.

Is it something that you guys are looking at today -- ?

Oliver, this is Rick, if I could interrupt. Whatever you were kind of cutting out there. If you could kind of start over.

Hey, is this better?

Yes.

Okay, using the hand set now. Looking at DDGs and just wondering if DDGs are something that you guys are using today in your feed mix and how you're thinking about that going forward given the rising corn prices?

We are not using very much DDG in what we're doing today. We have looked at it in a couple of operations and thought we had some mixed results there on performance. And one of the issues there is that they're not always dried and we are not equipped to handle them wet and being in a right area to make sense from a transportation standpoint. So we don't see a whole lot of opportunity for us to utilize DDGs.

Okay. Next question is on export market, specifically Russia. There's obviously been a lot of news around preliminary announcements. Just wondering how you guys are thinking about that and kind of the outlook for Russia and for exports going into '07?

I think that the outlook with Russia is good, and I believe that demand today is normal to maybe slightly better than normal on the export front in general. Pricing is not where we would like for it to be, but I believe the outlook there continues to be good. I mean, the fact remains that U.S. leg quarters, best protein value in the world. And so I think that will long-term keep demand for leg quarters in the world strong barring all of the external influences that can come in at the drop of a hat.

Okay. Fair enough. Attempting to approach the question on pricing in another way. Clint mentioned in his comments that USDA is a better predictor in the futures markets for corn prices. Wondering if you see the USDA as a good predictor of broiler prices? It's a number that they've published in the Wasner Report, and just wondering kind of how you view their estimates?

Well, I think anyone giving estimates in a volatile market like we have today is taking a huge risk. I think traditionally the USDA has done a good job of forecasting and certainly they have access to the data to allow that to happen, but given the volatility that we're seeing the last couple of years, forecasting anything, you need some divine guidance.

All right. Fair enough. Appreciate it. Thank you.

Your next question is from Kenneth Zaslow with BMO Capital Markets.

Good afternoon, guys.

Good morning.

Hey.

I cut out on the beginning so I may be asking a question that was asked earlier, so I apologize for that. For some reason, my line cut out. In terms of the outlook for 2007, Rick, you tend, you guys are not giving guidance it sounds like. The consensus out there is $1.55, I think. You tend not to give guidance when you think consensus is in the right neighborhood, is that a fair assessment?

I wouldn't go into our non-guidance reading that far, no. I would say that, as we've said last year, we were pulling the process of giving guidance due to the volatile nature and frankly our inability to provide the accuracy level that I think we expected. We also had a good group of analysts out there today following us that have a wide divergence of opinions. Ken, I think if you take a look at the last quarter or even the outlook for next year, you'll see a wide range of views as to what the outlook would be. So it's not so much that we think that the consensus number is or is not right as much as we think that there's adequate analyst coverage out there today expressing all of the different views as to what it -- what the range of possibilities most likely are.

Well, what will it take for you guys to start operating at a profit and how long have you been operating at a loss? I guess is the question.

Yes, as O.B. mentioned, the month of October, we were still operating at a profit. Currently we are in loss territory. And I think O.B.'s comments basically indicated what's going to need to occur. We don't see any real relief on the feed ingredients site now looking out several months. But we were surprised with the run up. Maybe we'll get surprised with a run down. I mean, who's to say? But absent that, we've got to get recovery through the pricing from our sales and our sales mix and that's our main mission and objective is to communicate to our customers that they're in the same boat that we are that for whatever reason government policy is promoting cheaper fuel at the expense of higher food and they're in that same value chain that we are and they're going to have to pay for it.

One thing that surprised me during the quarter was your low tax rate, or tax benefit, I guess. Is that sustainable? What are we looking -- I know you're not giving guidance, but what are they, the right tax rate to look for in '07? Actually it's not sustainable. That seems to be you guys made a pretty big clear statement that you guys need consensus, but it seems like that was a contributor, if not the primary driver.

Yes. No, if you looked at normalized basis, you still need to be in that mid 30s number, okay? You might have missed the earlier part of the comments. We had some tax accruals that were reversed during the year that amounted to $10.6 million. And that was really the driver between the unusual tax amounts other than the amount we quoted having to do as a dividend repatriation. If you looked at the quarter itself, Ken, and you took the pension plan accrual out of period items and you took a normalized tax rate at that 34.5%, the quarter would have been more in line with like an $0.18 a share number taking all of those factors and looking at a normalized tax rate. So still in excess of consensus earnings, but if you look again, you go back to the range of earnings that were out there, some had in the high to mid 20s, others had losses. So quite a bit of divergence, but higher than consensus.

And then two other quick questions. Are you concerned at all that with, it seems like Tyson and Pilgrim's Pride have been disciplined and the other chicken companies may be cheating a little bit in terms of their discipline and taking advantage of Pilgrim's Pride and Tyson's discipline. What concerns do you have with that and is that something that you may stop telling the public that you're cutting production?

I think as a general policy, you should not always count on us to tell people when we're going to cut or when we're going to increase production. I think that that is true. We felt that it was such a material change with what had happened that we wanted to get the announcement out there a month ago. Regarding what other competitors do, that's really up to each individual company to make the best decisions for themselves. Clearly there's a lot of pent up capacity. So no one should infer by Tyson's reductions or our reductions that in any way we're going to forego good quality sales at the expense of production. So our competitors should not take any gratitude in our cutback because clearly we've got the capacity to reestablish that if the sales are warranted at a proper value.

And then last question. Mexico, what is -- Tyson yesterday said that the outlook for Mexico seemed more favorable going forward as it was negative for them also. Is that the same read that you have?

I don't -- I don't echo the same level of confidence in Mexico that they might have indicated. Mexico corn is substantially higher than U.S. corn. So whereas in the U.S., you're in the upper $3 in terms of delivered today. Mexico is probably about $1 a bushel higher than that, and Mexico cannot sustain that kind of cost structure. So our formulation of Mexico is very tenuous at this point given this current cost structure.

Great, thank you.

Our time has expired for the question and answer session. I will now turn the call over to Mr. Goolsby.

Again, I want to thank each of you for joining us today on our call and we look forward to hearing from you on our next call. Thank you.