Pilgrims Pride Corp (PPC) 2007 Q1 法說會逐字稿

Good morning and welcome to the Pilgrim's Pride conference call to review the Company's financial results for the first quarter of fiscal 2007. At the request of Pilgrim's Pride, this conference call is being recorded. The slides referenced during today's call are available for downloading from the conference call link on the web site homepage of www.pilgrimspride.com.

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

Thank you and good morning. Earlier today, we issued a press release that detailed our financial results for the first fiscal quarter of 2007. If you have not yet seen the press release, a copy is available for download from our Web site at www.PilgrimsPride.com.

Before we get started, I would like to make note that we are shortening the prepared remarks part of our call in an effort to allow more time for the question and answer session. In addition, I would like to remind everyone that today's call contains certain forward-looking statements. These include our expectations, our 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 Forms 10-K, 10-Q and 8-K, as filed with the Securities and Exchange Commission.

Joining me on today's call are O.B. Goolsby Jr., President and Chief Executive Officer; Clint Rivers, Chief Operating Officer; and Rick Cogdill, Chief Financial Officer. I will now turn the call over to O.B. to begin our prepared remarks.

Thank you very much, Kathy. Good morning, ladies and gentlemen. I'm pleased that you could join us today as we review our first-quarter financial results and some of the key trends that we believe will affect our business this year.

Today's call is notable because it is our first conference call since the acquisition of Gold Kist in late December. While the impact of Gold Kist was immaterial on our income statement for the last three days of the quarter, the acquisition, which is reflected on our balance sheet through a very preliminary purchase price allocation, is more significant. We will provide more details about this later in the call, but we are off to a good start with the integration and we will be happy to answer your questions at the end of the presentation.

Let's get started. Our financial results for the first quarter of fiscal 2007 reflect the continued operating challenges facing the U.S. chicken industry. We reported a net loss of $8.7 million, or $0.13 per share on total sales of $1.3 billion as sharply higher feed ingredient prices negatively impacted our results. Toward the end of the quarter, we began to see some marginal improvement in supply and demand resulting from industrywide production cutbacks announced in the fall. However, that improvement was not enough to offset the much more rapid increase in feed ingredient cost. As we discussed in our fourth-quarter conference call, corn prices have climbed dramatically over the past few months. As a result of the surging interest in corn-based ethanol production and lowered estimates of last summer's crop yield, we believe this is a direct result of our government's policy that encourages the burning of food for fuel by subsidizing corn-based ethanol production. The adverse impacts of corn-based ethanol production and use will be felt far beyond the chicken industry as the increased cost will ultimately be passed along to the end consumers of our products. While Americans may realize some marginal benefit if any from the ethanol at the fuel pump, they will end up paying higher prices at the grocery store for just about any product made from corn.

While we firmly support the goal of independence from foreign oil, we also believe that using tax dollars to subsidize ethanol production is shortsighted. With 12.6% of the U.S. population surviving below the poverty level and over 25% of the world's children suffering from protein energy malnutrition, we believe that American policy that promotes cheap fuel over affordable food is bad public policy.

During our first fiscal quarter, we witnessed over a $1.00 increase per bushel in the price of corn. Through the first of several weeks of the second quarter, the price jumped even higher. Yesterday, the futures market showed a 2006 to '07 crop season average price of $3.72 per bushel. Speculators and hedge funds appear to be driving these increases based on the belief that the demand for corn would outpace production over the next few years. As we have said before, higher corn costs ultimately would be passed onto the consumers in the form of prices they pay at their local supermarket or favorite restaurant. We simply cannot absorb such sharp increases despite the operating efficiencies we have achieved over the past year. You can see the impact since the end of the first quarter as commodity prices for all chicken parts have been increasing as industry-wide production cutbacks take effect. We will continue to work with our customers to help them understand the significant challenges we are facing on this front, but clearly, a lot of work still remains.

As a result of these actions taken by the industry, pricing for most chicken products has strengthened in recent weeks. In fact, since the lows in November, breast meat prices have steadily increased 33% from $1.06 a pound to $1.41 a pound. Leg quarters have increased 20.7% from $0.29 to $0.35 per pound. Wings have jumped 57.6% from $0.85 a pound to $1.34 per pound and the Georgia dock has increased slightly from $0.69 to $0.72 per pound.

We are pleased to see this uptick in pricing, especially since this is the time of year when pricing is either normally flat, at low levels or is declining. The question now is whether these pricing gains will continue and reach levels sufficient not only to offset the sharp climb in the feed ingredient costs, but also to restore profit margins on our products to more normalized levels.

In looking at our combined product mix, we believe that as a result of the acquisition, we will have approximately 25% to 30% of our stable -- our salable pounds priced under fixed-price contracts which generally have a one-year duration. 5% to 10% of salable pounds priced under cost plus are a grained-based pricing contract and 60% to 70% of our salable pounds priced on market-based or spot market contracts which will move as referenced market price changes, the majority of which is leg quarter product.

Looking ahead, the USDA expects U.S. chicken production to increase only marginally in 2007 due to the very low or negative net operating margins brought on by higher feed costs. Overall, the USDA predicts broiler production for 2007 to be 36.2 billion pounds, a 1.1 increase from the estimated 2006 volumes. In the past, we have seen reductions in production industrywide that were offset by higher live weights. However, according to the Informa Economics projections, average live weights at slaughter through the first half of calendar 2007 are expected to be lower year-over-year. This should help improve market pricing too. I personally find it hard to believe that the industry will sustain any growth in 2007 as industry cutbacks take their full effect and processors struggle to cover the increased cost structure brought on by the run-up in corn prices.

While the price of corn is beyond the control of chicken producers, 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 identity with consumers or shortening the time it takes to bring new products to market. We're confident that our continued focus on higher margin prepared foods products, coupled with our production cutbacks, will help us return to normalized profitability when the markets improve.

Certainly we believe our acquisition of Gold Kist will improve our competitive position over the long-term. This acquisition marks an important also for Pilgrim's Pride and all of our employee partners. As America's largest chicken company, we will begin 2007 as a stronger, more efficient company with industry-leading market share, a broad and growing customer base and an impressive portfolio of exceptional brands. We're well positioned to meet the world's growing demand for nutritious, convenient chicken products. Together, we have an annual pro forma revenues of approximately $7.4 billion and produce nearly 25% of the chickens in the U.S. market.

The integration efforts are off to a good start. We have formed an integration steering committee which is composed of the leaders from both companies. This committee is responsible for ensuring smooth integration of the combined organization. In addition, we have re-established an integration program office which is responsible for day-to-day oversight over the integration. Just as we did for the ConAgra acquisition of a few years ago, we have appointed integration teams to drill down into every area of the business, looking for opportunities to improve the way that we operate and eliminate unnecessary costs. As you know, at the beginning of the tender offer for Gold Kist, we expected to achieve synergy savings of $50 million based on what we knew at the time with access limited to publicly available information. Now that we're beginning to dig into the details and have full access to the internal information and personnel, we believe the synergy savings will be in the range of $100 million. We anticipate that these synergies will come 20% to 30% from procurement, 20% to 25% from SG&A and 10% to 15% from logistics and transportation, and the remainder from operational improvements. Our target is to have approximately 25% of these synergies reflected in our fiscal 2007 results with the full 100% run rate being captured by January of '08.

I will now turn the call over to Clint to discuss our operating performance and more details on the integration plans for the merger with Gold Kist.

Thank you, good morning, everyone. As O.B. mentioned, sharply higher feed ingredient costs have made for a challenging start to our fiscal year. Over the past few weeks, we have seen corn futures increase nearly their 10 year highs. For a company like Pilgrim's Pride that consumes approximately 324 million bushels of corn and 3.2 million tons of soybean mill each year, this trend represents a significant operating challenge.

In response to this challenge, you will recall that in late October, we announced further plans to reduce weekly chicken processing by 5% year-over-year, or approximately 1.3 million head, beginning in January. That cutback took effect as planned and we intend to keep it in place until average industry margins return to more normalized levels.

While Gold Kist production cuts for the quarter ended December appear to have reflected a reduction of approximately 3.2% versus the same period last year, planned production levels do not reflect the same year-over-year reduction in the current quarter. Accordingly, we're implementing a reduction in placements so as to achieve the same 5% year-over-year reduction announced by Pilgrim's last quarter, which will occur beginning in the third quarter of fiscal 2007. Accordingly, on a combined basis during our second fiscal quarter of 2007, we are expecting our combined production levels to be approximately 3% to 4% lower when compared to pro forma produced pounds for the second quarter of fiscal '06.

As O.B. explained, now more than ever, it's important for us to examine every aspect of our operations to make sure we are managing our other costs as efficiently as possible. For example, the sharing of best practices across our larger operating base offers attractive opportunities. Pilgrim's Pride now operates a combined 37 processing and 12 prepared foods facilities with approximately 56,500 employees and 7300 contract growers. 35 feed mills and 49 hatcheries support these plants. We also have 20 distribution centers in the U.S. and 18 in Mexico.

Shortly after the merger agreement was announced in December, I visited all of the Gold Kist operations, including hatcheries, feed mills and processing facilities. It was an impressive tour. The sites are clean, well-run operations led by veteran poultry managers. It was apparent to me that the employees take tremendous pride in their work and share a commitment to excellence. While there are many similarities in how we run our facilities and go to market, we have identified plenty of opportunities for sharing best practices in achieving synergy savings. Some facilities are more efficient producers of specific products or product types. Other operations may have a geographic advantage by being strategically located near customers, distribution centers, or near one of our prepared foods operations. Our integration teams are working to identify and prioritize all of these opportunities so that we can develop a plan to go after them. This is the same approach that we took with the ConAgra integration a few years ago, and as you know, the end results proved more successful than anyone had expected. I'm confident that by drawing on the lessons learned from that previous integration and by providing our teams with clear direction and the tools that they need to accomplish our goals, we will be successful again. We intend to update your on our progress in key areas on future conference calls.

With that, I will turn the call over to Rick for a brief discussion of our financial results.

Thank you, Clint. Our results for the first quarter of fiscal 2007 truly reflected the challenges we're facing today in the market. As shown on slide 6, the effect of rising corn and soybean meal, coupled with a 5% lower overall selling price for our U.S. chicken products resulted in a loss of $0.13 per share versus a profit of $0.39 in the same period last year. These effects are also reflected in our operating loss of $2.9 million for the quarter versus a profit of $46.2 million for the same period last year.

As announced last quarter, in order to combat these foreseeable results, Pilgrim's cut its production volumes to achieve a 5% year-over-year reduction and as Clint mentioned will be taking similar action to achieve the same level of the year-over-year decrease on a combined company basis by the time we get to the third quarter of fiscal 2007. As O.B. mentioned, we believe that our cutbacks, combined with those of others in our industry, will have a positive impact on selling prices and will allow us to eliminate the least profitable product sales in an effort to restore profitability as the year progresses.

Positively affecting the first quarter of fiscal 2007 was a 4.9% increase in U.S. chicken sales volumes due primarily to hurricane and export disruptions that negatively impacted sales volumes in the same quarter last year. This resulted in total U.S. chicken sales dollars being essentially flat when compared to the prior year. However, the negative effects related to lower unit selling prices and higher feed ingredient costs were too much to overcome and resulted in a negative margin in our U.S. chicken business of $11.4 million, a decrease of $65.3 million when compared to last year.

In our Mexico chicken operations, sales increased by 33% when compared to the same quarter last year as better supply and demand dynamics improved our selling prices for Mexico chicken by 26.4% on 5.2% increase in sales volume. This resulted in a $8.4 million improvement in Mexico chicken operating margin to $1.3 million when compared to the same quarter last year.

In our Turkey division, sales were reduced by $10.1 million versus the prior year. This is a direct result of our decision last year to eliminate further processed turkey from our mix and from the full effects of our prior year's commodity turkey restructuring efforts. This result of this strategy in the quarter was an $8.1 million year-over-year improvement as we showed operating income of $2.5 million in the turkey division this year versus an operating loss of $5.6 million for the same period last year.

The $25.6 million decline in our U.S. other sales during the quarter was primarily a result of the sale of two distribution centers during the latter half of fiscal 2006 which had no net effect on our reported operating income. The operating results that I have discussed thus far do not include any results for the newly acquired Gold Kist operations as it was only part of our operations for three business days and determined to be immaterial to the quarter. This acquisition will, however, have a significant effect on our financial statements in the quarters to come.

Our balance sheet reflects a very preliminary purchase price allocation for the Gold Kist acquisition of approximately $1.1 billion based on the 88.87% of the outstanding shares tendered and accepted by the end of the first quarter of fiscal 2007. This resulted in the addition of approximately $634 million of property, plant and equipment and $538 million of goodwill. Assuming an estimated average life of 10 years, we estimate that the PP&E addition will result in an additional depreciation expense of approximately $63 million per year, bringing our total annualized amount to approximately $200 million. And while our normalized capital expenditures will now likely be around $250 million per year, for fiscal 2007, this amount will be managed very tightly as we both optimize the productive capacities of both sides of our Company before making any capital expenditure decisions, and as we maneuver our business through this challenging commodity cost environment. Accordingly, we would expect our fiscal 2007 capital expenditures to be relatively in line with Pilgrim's fiscal 2006 amounts in the range of approximately $150 to $175 million versus the combined $234 million incurred separately by the two companies in fiscal 2006.

In order to finance the Gold Kist acquisition, we increased our debt obligations by approximately $1.25 billion. This is currently made up of debt outstanding under this month's high-yield note offering, which was comprised of a $400 million senior unsecured note offering due May 1, 2015 with a coupon of 7-5/8 percent; $250 million of senior subordinated notes due May 1, 2017 with a coupon of 8-3/8%; and additionally, we incurred an incremental $675 million in borrowings under our revolving term credit agreement led by CoBank. The weighted average interest rate on our debt outstanding currently is approximately 8%. As a result of this financing, our debt to capital ratio net of cash has risen from approximately 27% at the end of fiscal '06 to just under 60% today.

Slides 9 and 10 show a comparison of our current and our pro forma debt agreements existing at the end of the first quarter of fiscal 2007.

Current availability existing in our debt facilities is approximately $686.6 million and includes $500 million in secured revolving term debt, $61.6 million in revolving credit facilities and $125 million under an accounts receivable securitization facility. Adding our existing cash, which is approximately $130 million to these amounts, our total liquidity today is approximately $816.6 million.

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

Thank you, Rick. Our company and industry face some tough challenges in 2007. We also have some unprecedented opportunities in front of us. The acquisition of Gold Kist is a transforming event for Pilgrim's Pride that has positioned us for the long-term growth as a stronger, more efficient company. We are off to a good start on the integration and we're confident that we will be able to achieve the synergy savings outlined earlier.

Now we will be happy to answer any questions you may have. Operator, could you please begin queuing up the call?

(OPERATOR INSTRUCTIONS). Farha Aslam.

Could you just share with us the confidence you have in that acquisition synergy number of $100 million, because you have raised it within about a month or two of taking over Gold Kist.

You have to remember, we did not have the ability to look inside Gold Kist at all prior to coming up with the $50 million number. We felt, given the information we had at the time, that was a good number. But quickly, we moved in and formed teams and we had a group of managers that just coming off of the ConAgra integration were very experienced in identifying synergy areas. And through meetings and focusing on the key areas where we knew were synergy spots in the ConAgra integration, we were able to come up with a number that we feel very good about today.

Okay, great. Thank you. And then when you look at the poultry market currently, in the first six months of '07, what do you think net production is going to be down, and do you think that is enough to offset the current corn price impact?

That's certainly a hard number to predict. We have heard of production cuts from our competitors being announced, but we have yet to see those. If you look at the slaughter numbers for the first three weeks, they are certainly on a very favorable trend. And I think if you look at the movement that we have seen in commodity chicken prices, both in December and then much more so through the month of January, I believe what that's telling us is the cuts that are in place have brought the January markets to some very strong levels. If you look back over the last 10 years, leg quarters are at a 10-year high for January. And so I think the movement we have seen tells us that the cuts are having a very positive impact. And as demand strengthens seasonally, then I think we'll continue to see these markets move. And there are cuts that are not fully implemented as of yet. But I don't know that I'm wise enough to tell you what the first six month slaughter numbers are going to be. I can tell you what ours are going to be.

And do you anticipate to be profitable, given current market conditions in the second quarter?

We are not giving guidance. I think it's still a lot of volatility and conditions are improving.

Great. I will pass it on. Thank you.

Reza Vahabzadeh.

Good morning. Rick and O.B., in terms of prepared foods pricing, can you talk about what portion of those contracts have been renegotiated, reset, and what type of pricing increased have you realized so far?

Reza, I am not sure of the exact number. I would say we are the 60% to 70% through negotiations, and we are still gathering numbers from the Gold Kist side. But I would say that those contracts that were negotiated very early in the fall, we did not get the increases that we were able to as we moved later in the quarter. And certainly those that have been negotiated this month have been even stronger. The average, I would just be guessing if I told you that number, but it is probably in the 5% range.

Okay. And as far as the pricing that you are experiencing right now versus your production cost, you mentioned in response to the prior question that the conditions are improving. Are you suggesting that the gap between pricing and volume versus cost has improved here in the second quarter versus the first quarter?

Yes, it has, especially if you look at the latter part of the first quarter when we did have higher grain cost coming into our system, but yet had not experienced increase in some of the commodity chicken prices. And there is a lag, even on some of the commodity prices, in getting those up. Our leg quarters are sold generally 45 days in advance, so as those markets move, there is a six-week lag in realizing those. Even on some of the breast prices, you have 13-week rolling averages or four-week rolling averages. But certainly, if you look at (indiscernible) breast, leg quarter and wing markets today, the margins would be better than what we were seeing at the end of December.

Given where corn is these days, as well as soy meal, where do you need the breast price and the leg price to be in order for you to get back to normalize earnings?

Well, as we have said in the past, that is a very difficult answer to come up with because of our mix. I would say that, if you happen to be a single plant operator and your entire mix was made up of leg quarters and breast meat and wings, that the market is still nowhere near profitable levels. I think if you kept wings and leg quarters at these levels, you're going to need in excess of $1.60 or more on breast meat just to get to a breakeven. And that is if you were selling 100% of your mix on those prices. Our mix is much more complicated than that, and so you cannot -- we cannot say if breast meat hits $1.80, it reflects this kind of profitability in our numbers.

Right. And then if you had reported Gold Kist's results for the first quarter versus the prior year, would their results have been, on a year-over-year basis, the same magnitude of decline as yours, or would it have been better or worse?

Reza, I think if you take a look at that, I think it would actually be worse than ours for a few reasons. One is, as O.B. mentioned, they are more of a commodity mix versus our mix that we had historically, and clearly the markets in the fourth quarter did not favor that type of an environment.

Secondly, as you know, they did make significant expansions in Live Oak, as well as Guntersville, and you've heard Mr. Beckers in the past talk about that, and there are a lot of startup inefficiencies that we see running through their numbers in the first quarter of the fiscal year. So I think on a reported basis, it would be quite a bit worse than just mathematically from our standpoint.

Got it. Thank you much.

Eric Katzman.

I have a question I guess and a follow-up. Did I understand you correctly when you said the mix impact of the combined company is now 25% to 30% of your pounds in the fixed-price?

That is correct. That is the current -- the best estimate that we have today, and again, we're still trying to get our hands around all of the different contacts and contracts and the pricing of metrics, but that is where we believe we are today.

And just in general, if I did the analyses on Gold Kist correctly, their pricing per pound was let's say $0.10 below what you were getting. So there's a negative mix shift to begin with, and then you combine the fact that a portion, or that now the combined company has a pretty big percentage fixed with the -- I assume that that was done before the run-up in corn. That is going to kind of put you in the hole a bit on just a fairly large chunk of the business. Is that a fair way to interpret what is going on?

Certainly, those contracts, like I said that were negotiated early in the quarter. I think the positive side of our mix in today's environment is the 60%-70% based on market or spot market contracts (MULTIPLE SPEAKERS) and the cost plus. If you look at a year where we believe commodity chicken prices are going to be higher than normal and potentially could be at some very profitable levels, this mix is not a bad mix if markets respond favorably. If you go back to 2004, Gold Kist actually outperformed Pilgrim's Pride because of that mix, and they were able to capture some of the higher breast prices that we saw in 2004. And so we believe that, given where markets are headed, this is not a bad mix for this year. Our strategy is still continue to focus on the prepared foods that have the higher margins and more stability and to move from out of commodity pricing.

And Eric, one other thing, to make sure we're clear. We're talking about in that projected mix, those are sellable pounds and it's not based on revenues. So where O.B. said 60% to 70% is market-based, well 50% of all chicken is dark meat. So in terms of weight.

Okay. And then more from just a financial perspective. Rick, is there any change to the ongoing tax out of the combined company? Were there any NOLs that you could use which may help the cash flow? And interest expense on kind of a run rate -- where do you think that will be?

In the tax rate, I think right now we're going to be in that mid to upper 30s. Again, a big variable we will have will come from any change in the mix coming from Mexico, which has typically been our main determining factor. But with the Gold Kist acquisition, that is less and less a percentage of our total sales now. There are NOLs both for Pilgrim's as well as for the Gold Kist operations from fiscal year '06 that will have a positive effect on the net [cashes], the cash tax aspect. And the overall interest expense like I mentioned is approximately 8%, just a little bit under 8% effective all-in rate. That will get us somewhere in the $140 to $145 million of interest expense.

Okay, thank you.

Pablo Zuanic.

A couple of questions. O.B., first just a follow-up on one comment you made. You said, if I did my notes correctly here, that '07 prices for chicken could be at very profitable levels. Are you implying that the industry would have the potential, because of these cutbacks to actually overshoot on the chicken prices, would go up more than corn, and as a result, in the next two or three quarters, your profit margins would be above mid point of the cycle levels?

I think that is possible. Certainly, that depends upon the cuts and the those cuts remaining in place. But again, when you look at the strength in the commodity chicken prices for January and compare that to historical numbers and we're starting at a very good spot, and I think that we don't know the amount of the cuts. But if the cuts are what we expect they are, I think you could see breast hitting some pretty high levels this year. (MULTIPLE SPEAKERS) demand for leg quarters very strong worldwide.

Right, but is there a reason that the other small operators see the same thing that you're seeing and that they start ramping up [with action] under these January cutbacks don't go past one month?

Well, I mean that's always a possibility. However, I think the corn situation is still up in the air in that we are planning on $4 kind of being the level today, but it could go higher. If you have any crop problems, then that number could be higher. So, I think there's going to be some restraint in the industry putting birds back down too quickly.

That's helpful. And just if I [can think] just the normalized earnings for the new company, $100 million in synergies over the base of, what, $7.4 billion, that's almost 1.3%. I think in the past, you've talked about EBIT margins normalized about 5, 5.5. Should I add 1.3% to that? [Show me] understand more color in terms of what you think the normalized earnings are for the new company from an EPS perspective and/or from an EBITDA perspective also?

I still think over a long cycle, we would look at our normalized operating -- just call it gross margin -- in the 10 to 11% range, and then EBITDA basically 200 basis points behind that. I think that is pretty consistent with what we would expect.

Alright. But are you including the synergies there, or do you find the synergies just goes to offset other cost inflation?

I think that remains to be seen. If all things remaining equal, then the synergies drop to the bottom line. But, clearly, there's other inflationary issues that we have to capture synergies just to stay ahead of the game. So hopefully, you get bumps up front, but I think over time, those become part of your normal operations.

And O.B., going back to mix between [PBC] and Gold Kist and moving away from product mix, but thinking in terms of channel mix, it seems to me that PBC in the past has been more foodservice overweighted, Gold Kist more retail overweighted. Can you comment in terms of how the channel mix works out now, and is that favorable or not? And in terms of the Gold Kist private-label program, would plan to brand that or does it make sense to just keep it as a private-label program? Just help us understand that.

Okay. I think if you look at the channel mix, the new company will still be approximately 60% foodservice, and I believe about 24% retail and, the balance export. And that is richer retail mix than what we have had in the past and we believe that's a positive for us. It opens up some new markets and also allows us the opportunity to expand our prepared foods line in those new retail outlets. We have a broad line of other processed frozen products that we have in our retail business that Gold Kist was primarily not selling in to their retail. Most of their retail was fresh, so I think it opens the door there. And I believe the mix is a very well-balanced mix for us as a Company, still heavily weighted to the foodservice where we believe a lot of growth and consumption will still come from, but it also gives us a very strong presence. We don't anticipate making any quick changes to their non-branded trade back product. We think that is a good business and we will continue to operate that. Do we bring more of our brand into place over time? Probably, but that will not be a quick transition.

One last one, Rick. In terms of a more specific one on corn, I am surprised when you talk about corn having made an impact in the December quarter, I've always assumed that we saw corn started to go up in October, you have two to four weeks of inventory, six to eight weeks to feed those birds. I would have expected more on impact in the March quarter. Show me, understand, what was your corn cost in the December quarter, if you can comment on that? And I assume it has to be much worse in the March quarter, right?

Clearly, I think January, we had the full effects of the raising corn prices go into our operations. But clearly, that started in early December coming through our feed costs and continued to accelerate as we went through the month of December. I think when you talked about inventory, we don't maintain four weeks of inventory corn. It's more like -- two days is probably a luxury, two to three days. If you are looking at a flock that's in the field on average six to seven weeks, as those flocks are slaughtered, you're going to start recognizing that higher feed cost. So at the end of December, your corn costs going through the slaughtered flock would have been initiated mid-November, and so you can just kind of accelerate it through there.

And just one last one. In the last conference call, you said that you had no hedges really on grains, and I suppose that's still the case. Are you still in the spot market pretty much?

Today, where we are, there has been no change to our positions.

Thank you. That is it.

Diane Geissler.

Just a clarification on the hedge position. Did you inherit any hedges from Gold Kist?

No.

Not to any magnitude, no.

Okay, perfect. And can I ask -- I appreciate the detail in terms of the percentage of tonnage in each of the three major areas. Could you just comment a little bit on the longer-term in terms of where you see that mix shaking out over the next 12 to 24 months as you really integrate this and decide what businesses you want to be in?

Are you talking about the retail and foodservice?

Well, 25% to 30% of tonnage under fixed price, 5% to 10% under cost plus, 60% to 70% under market-based -- is that kind of where you want it to be, or is there --?

No. I think -- that pricing is a direct result of a lot of the mix that we inherited with Gold Kist, and I think our strategy has always been to try to move that into less volatile mix and pricing arrangements. I would love to have more cost-plus arrangements. I think, given current volatility in corn, that's a safer pricing strategy going forward for us. And we have seen a lot of interest from our customers in willing to look at that. As we pass these costs along, they want to be sure that if the market on corn comes down, that there is a mechanism for that coming back. So I think that will be a pricing mechanism that will grow in favor. But we want to reduce our exposure over time to commodity products and commodity price. Given what we inherited with this and given the environment that this year is shaping up to be, I don't think that is a big negative for us this year.

I guess the question is -- do you have a goal in mind? Is it (technical difficulty) percent plus commodity base?

I think given our mix and our desire where we would like to be, probably 50% or less on commodity would be a goal for us. And then on the cost plus, we would like to see that go as high as we can.

Just a question, I appreciate your comments on the production cuts. It's a little bit of a moving target for me though, because obviously, there were production cuts taken on the Gold Kist side early in 2006, and then you had a production cut. Do you have a pro forma tonnage for calendar 2006 that we could -- you know, total production, and then we can kind of think about how to benchmark off some totals? Because just a lot of different moving parts.

We are still pulling those numbers together. We can talk to you about the possibility of that information, but I'm not sure that's information we want to make public at this time.

Even if you could help me understand -- I know they took a production cut, I think it was in January of 2006, and then your 5% reduction is on top of what number from last year, is I guess my question?

We made two cuts. We made a cut that actually took place this past summer, and that cut was from our planned and current operating levels. The cut we announced this fall was a cut that would be based on year-over-year numbers, and that is the cut we put into place that is to be fully implemented this month. Gold Kist made a cut that resulted in the 3.2 in the first fiscal quarter. But when we looked at those numbers for the next quarter, they did not turn out to be quite that dramatic of a cut. So that is why we made the statement, we're further reducing some placements. And the quarter we are in, the new company will be somewhere between 3% and 4% year-over-year less, and then when we reach the third quarter, we will be a full 5% year-over-year.

Okay, well that is fairly significant.

Yes, and we believe that it has had an impact on the market. We know our cuts. We don't know everyone else's.

I think that is it for me. Thank you very much.

Christine McCracken.

I am trying to follow up on the costs that you absorb when you reduce the [slaughtering] facilities. Is that significant on a per-unit basis, or how might I look at that? (MULTIPLE SPEAKERS) efficiencies.

We've tried to arrange the cuts to help us offset as much of that as we can, but generally, when you're reducing those pounds going through an operation by 5%, those fixed costs are staying the same, but you're increasing your per-pound cost on that portion of the cost.

So in terms of Gold Kist, do you feel comfortable with how they have adjusted production on slaughter as well, or are there some changes you can make there?

They've done a little different approach than we took in some of our plants where they actually reduced some staffing and continued operating four or five days, whereas some operations, we actually took a day down every other week to accomplish the cuts. So a little different approach there, but it depends on where you're trying to go with the end result and what's your product mix in trying to take care of customers -- what you need to do to make that happen. And in some lines of business where you are shipping fresh products and needing to get it out on a daily basis, it's difficult to take a day down. So you just try to take the approach and minimize cost the best you can, and we may make some minor changes there to accomplish our goal.

But the cuts for the new company will be fully in place in the third quarter, third fiscal quarter.

Just on a combined basis, are you now going to the buying breast meat on the open market, or do you anticipate doing that let's say over the summer months on a full company basis?

When we look at our projected sales, we have the option of either buying on the outside or looking at our worst sales and making some adjustments there. And so that will determine whether we will be a net buyer. Just based on the 5% reduction for the new Company, it certainly looks like we are short of breast meat.

And so, at least looking at breast meat today and your comments earlier on how strong pricing might get over the summer, assuming production cuts hold, it seems like you would be maybe exposed to significantly higher breast meat prices by spring/summer. Is that fair to say?

If we are purchasing, yes, but the amount we purchase relative to what we sell is much different. And also, we do have the option of rationalizing out of some sales that -- as opposed to buying on the spot market and filling those.

Fair enough. In terms of passing along some of the pricing in some of your higher valued products, and with the Gold Kist sales coming in to some extent, how do you feel about your ability or at least retailers' willingness to accept price increases at this point?

Well, I do believe that our customers understand the severity of this problem. There has been a lot of attention on corn prices and the ethanol usage, and I think they certainly understand that this is an increase that we cannot live with long-term. Neither can they. They ultimately have to pass that cost along. That said, I don't know that it's ever easy raising prices, but I think this is a situation where as a company in this industry, we don't have an option. Supply and demand being in better balance today than it was 30 days ago makes those increases much easier also.

Alright. And then just in terms of, on a combined basis, your exposure to feed obviously is more significant now, and historically, you have not been maybe as proactive as some others rightly or wrongly in maybe locking in your exposure. Do you anticipate any change to your strategy there, or are you still evaluating that?

I would say, you will probably see a change, not only in our strategy but everyone in our industry. I think if you look at the last three to four years, most of the industry has been on the spot market. And I think, given the new paradigm that we're operating in with ethanol demand and -- I think you will see different strategies start to develop.

One last question. Since you didn't mention it, I assume it's not a big deal, but I heard that there was a fire at a Gold Kist plant. Is that a big deal?

Very small situation, damage appears to be less than $1 million and I believe they lost two day's production.

Ken Zaslow.

If I look back at your core strategy and your core competencies over the last three to five years, you guys have always said, one of the things that separates us is that we have a foodservice business that's more stable, the pricing is more stable. Now you seem like you're changing your tune and saying we like the volatility or the spot market. Can you comment on that?

That is not a change in strategy. We have the mix we have today because of the acquisition that we made, and our strategy is still to continue to move those products out of the commodity into a value-added. What I said was that, given our position today with the amount of commodity-based products that we have and given where we think commodity markets are headed this summer, it is not necessarily a bad position to be in. I think it gives us time to move that mix more to more stable pricing. But that's not a change in our strategy.

Okay. Are you profitable in January? Because I think last time on the call, you said that you were profitable in October, so just following up, are you profitable today in January?

Ken, I think at the last call, O.B. actually mentioned we were not profitable when we met in November, if you'd check the record on that.

October was (indiscernible).

October you were I thought, and then November and December, you weren't.

And then as mentioned earlier, we're not giving guidance, but he did say that the current operating environment is not conducive to being profitable. And if you look in our 10-Q that was filed today, it basically mentions that these negative trends have continued as pricing has not gotten to the level it needs to get to in order to offset the higher costs.

If I look at again your last transcript, the comment that you said is, we will keep our cuts until we reach normalized margins. My sense is that you don't think that you're going to reach normalized margins until at least after this year if you're going to keep the cuts in the third quarter and go more drastic. Is that a fair assessment, or am I just drawing too much conclusion here?

I think we have to wait and see what the other players in the industry cut and see how the markets respond to that. We certainly don't feel at this point and time there is any reason for us to put those birds back down. There is still supply and demand situations that are not balanced for $4.00 corn.

Again, if you listen to Clint's comments, the production we inherited from the Gold Kist acquisition at the current level was not in the same level of 5% year-over-year cutback that we had done in our business. And we have decided we're going to get to that same point on a combined basis. But just like last time when we announced the cuts at the end of October, it takes several weeks before that actually runs through your slaughter cycle. So by making that decision with the Gold Kist and Pilgrim's combined business before we could actually get there is going to put you into the third quarter, and I think that is why the timing is what it is.

Do you think the industry overall -- there's a question of permanency in terms of the production cuts outside of you and probably Tyson in terms of -- after Mother's Day, there tends to be a seasonal increase in production, as well as the cuts have not been -- it does not look like they're coming from the pullets, but from the heavy layers. Is that a concern to you, and can you just comment on that?

It's always a concern, and I think we just have to wait and see how the slaughter numbers look over the next few weeks. But it is normal for our industry to process more birds in the summer months than we do the rest of the year. But when you look at it on a year-over-year, it shouldn't be a big increase because that happens every year. And so our slaughter numbers will actually go up in the latter part of the third quarter, but there will still be year-over-year reductions of 5%.

And Ken, I think the different dynamic that you're dealing with currently regarding where people are in terms of making these decisions is $4.00 corn going into a summer season, which everybody expects plantings to be up. I mean, let's be honest -- we expect plantings to be up. How many millions acres, we're not certain. But we still don't know the net effect that will have on the price of corn, and you don't know what kind of growing environments you're going into. You don't know if we're going to have a dry summer or a wet summer and what the crop yield is going to be. And so with those uncertainties in front of you with $4.00 corn today, I think people will have a hard time getting real bold.

I think also, if you look at -- a lot of the companies' balance sheets have deteriorated over the last 12 months, and so that puts pressure on them to make sure that we can pass these costs along.

My last question is, I did not fully understand your answer about the $100 million cost savings. Is it incremental, or is it to get to no (indiscernible) -- I just misunderstood that.

It's clearly incremental, okay, but you also have competing -- in this business, we always have to offset the incremental cost rises with efficiency savings from one source or another. And so it's hard to, two or three years down the road, to actually see that your profit margin went from 10% to 11%, to 11% to 12%. We truly hope that that is the case and that is what happens. But I think if you look in the review mirror and you look at the $125 million to $130 million we have with ConAgra, which has continued, it's kind of hard to say that none of those get eroded with other cost increases.

Okay, that's what I thought. That makes better sense. Thank you very much.

Oliver Wood.

Good morning. I will keep it short here, just looking at the time. Looking at the balance sheet and thinking about uses of free cash flow, can you just give us a sense, given debt to cap, where priorities lie?

Yes. When we put together the financing to acquire Gold Kist, what we wanted to make sure we had was a significant portion of prepayable debt without the appearance of penalties. And so we have a lot of LIBOR-based variable rate loans by one of our major lenders, CoBank, and that is where you will see all of the free cash flow going most immediately. We hope we're in the situation to work our way through that to the point that when we get to the call period at par on our 9-5/8 notes in September of '09, that we will be able to either pay those off or refinance those under our existing bank lines. So Oliver, what you will see is free cash flow going immediately to deleverage, just like we did when we made the ConAgra acquisition, and you will see the same results here.

That's it. Thank you.

This concludes the question and answer session of today's call. I will now turn the call over to Mr. Goolsby for some final comments.

Before we close the call, I want to personally thank all the Pilgrim's Pride employees, including our folks from Gold Kist, who are listening to the call today. Your hard work and dedication to serving customers over the past two months have helped us to get off to a good start with the integration. The year ahead promises to be a challenging one, but with your continued support and commitment, I believe we will enjoy a bright future together as we strive to make Pilgrim's Pride a world-class food Company better than the best. Thank you all for what you do every day to serve our customers.

Thank each of you.