Pilgrims Pride Corp (PPC) 2007 Q2 法說會逐字稿

Good morning and welcome to the Pilgrim's Pride conference call to review the Company's fiscal 2007 second quarter and year-to-date financial results. At the request of Pilgrim's Pride this conference call is being recorded. Slides referenced today during today's call are available for downloading from the conference call link on the website homepage of www.pilgrimspride.com.

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

Good morning and thank you for joining us today as we review our financial results for the second quarter and year-to-date. Earlier today we issued a press release that provides an overview of our financial performance for these periods. If you have not already seen the press release, a copy is available at our website at www.pilgrimspride.com, along with other downloadable information.

Joining me today on the call is O.B. Goolsby Jr., President and Chief Executive Officer; Clint Rivers, Chief Operating Officer; and Rick Cogdill, Chief Financial Officer.

On today's call we will discuss some of the significant operating challenges faced by Pilgrim's Pride and other chicken processors this year as well as the specific actions we are taking to address those issues and position our Company for profitable long-term growth. After our prepared remarks we will be happy to take any questions that you may have.

Before I turn the call over to O.B., I need 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 our Form 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. to begin our prepared remarks.

Thanks Kathy. Good morning, everyone.

Pilgrim's Pride today reported a net loss of $40.1 million or $0.60 per share on sales of $2 billion for the second quarter of fiscal 2007. These results compared to a net loss of $65.7 million or $0.99 per share on sales of $1.8 billion for the second quarter of fiscal 2006 on a pro forma basis.

Our second fiscal quarter results for the first time reflect the acquisition of Gold Kist Inc. which was completed in late December. Rick will go into more detail on the numbers later in the call, but our financial performance in the second quarter of fiscal 2007 reflects some of the significant operating challenges faced by U.S. chicken processors during the period.

The ingredient prices remain at very high levels amid rapidly growing demand for corn-based ethanol. Over the past year the average price of a bushel of corn has increased by 87%. While we have succeeded in passing along some of these higher costs to our customers this year, most of the benefit of those price increases was not fully realized in the second quarter.

In addition we are continuing to address pricing opportunities in a number of the below-market customer contracts we acquired through the Gold Kist transaction. It has taken us a while to work through these, but we are confident that over time we will be able to pass along the cost increases to these customers too. As we have said before we have invested a lot of time and effort in helping our customers understand the challenges we are facing with grain prices. They have been supportive but we still have some work to do in this area.

I'm pleased to report however that our Company has returned to profitability in the third fiscal quarter. Our U.S. chicken division was back in the black in March and continues to be at this time. And to date in April, our Mexico operations are profitable. We are delighted with this positive trend and cautiously optimistic about the second half of the year.

Looking ahead, there are several encouraging signs. As shown on slide 3, frozen chicken inventories are currently at the lowest level seen since 2004. That's significant news given that 2004 was a very good year for our business as the popularity of the Atkins Diet and concerns about Mad Cow disease combined to make chicken a popular choice with American consumers.

Typically as cold storage inventories fall, the price of broiler products increase. This year has been no exception as shown on slide 3. Prices for most broiler products are currently above the highest we saw during last year's peak summer grilling months. In fact since the beginning of 2007 fiscal year, breast meat prices have increased more than 41% and are currently at $1.77 per pound. Leg quarters also increased more than 41.4% and currently stand at $0.44 per pound. Wings have jumped 55.2% and are currently at $1.36 per pound while the Georgia dock has increased 8.5% and is currently reported at $0.79 per pound.

The recent increases are a welcome sight given that until recently feed ingredient cost had been climbing faster than the market pricing chicken products. Our industry received good news at the end of March when the USDA reported that American farmers intended to plant 90.5 million acres of corn this season as shown on slide 4 -- the highest acreage since 1944. This report was the first official estimate of American farmers planning intentions for 2007, but we believe it is a bit early for too much celebration, given that perspective plannings report has overstated corn acreage in 13 of the last 20 years.

There are still a lot of factors that could affect this year's crop. Especially weather which can play a huge role on final yields. According to some reports, excessive rain has already put planning behind schedule.

On June 29, the USDA will release its acreage report which is based on surveys when crop acreage has been established or planting intentions are firm. At that point we should have a much more accurate snapshot of the nation's corn and soybean crop, and we would not be surprised to see a slight pullback from the March 30 report.

Nevertheless we believe high corn costs are here to stay, at least for the next several years. That makes it more important than ever to make sure that we are running our business as efficiently as possible and continue to show restraint in managing output production levels.

On the Gold Kist integration front, our employees are investing a lot of time and effort into the integration; and I'm excited about the tremendous opportunities that they have uncovered for improving our combined businesses. They are clearly focused on our common goal of delivering the best possible service and value to our customers every day and are making good progress towards achieving our previously announced estimate of $100 million in the synergy savings.

Looking ahead, we are cautiously optimistic about the second half of the fiscal year. We believe that the combination of lower industry production levels year over year should they remain in place and stronger pricing heading into the summer months will lead to a continuing improvement of our financial results for the remainder of the year.

With that I'll turn it over to Clint for an operational update. Clint.

Good morning, everyone. As O.B. said, it looks like high corn costs are going to be with us for the long haul. So it is more important than ever to make sure we are squeezing excess cost out of our business.

We are off to a good start with the integration. Our integration teams have identified more than 90 projects that will help us save money and operate more efficiently. These teams have drilled down into every aspect of our business from sales and logistics to processing and rendering. They have targeted $100 million in cost savings opportunities that range across the organization. Some of these projects such as improving our purchasing power or making better use of our huge vehicle fleet promise attractive savings that can be achieved in a relatively short time. Others will take a bit longer to flush out.

It is amazing where you can find cost savings when you look hard enough. For example, adjusting the idling time in our fleet of over 1800 trucks will help produce fuel consumption and save money. There are dozens and dozens of other opportunities just like this. Some are big, some are smaller but all will help us operate more efficiently and provide better service to our customers.

We also have realigned the (technical difficulty) within the operations groups of that we can deliver improved service to our customers and operate more efficiently. Over the past few months we have been evaluating all of the operations at Pilgrim's Pride and Gold Kist in an effort to better understand the strengths of each division and ensure a smooth integration. Having the right to organizational structure in place is critical to our success. We need to be as lean and flat as possible so we can focus on the customer. With this new structure in place we are in a position to manage our operations more efficiently.

A quick update on capital expenditures. Through the first half of fiscal 2007, our capital investment totaled just over $94 million. As you will recall, we previously projected CapEx for the full year to be in the range of $150 million to $175 million which we remain confident will be an achievable target. We are taking a very disciplined approach to capital investment in the second half of the year by carefully assessing each and every project -- both at the Pilgrim's Pride and the legacy Gold Kist operations -- to ensure they fit our strategic objectives.

As O.B. said, we believe the industry production cutbacks have helped strike a better balance between production and demand. That has led to the both necessary and stronger U.S. chicken prices than what is typical during the January through March period. We expect further improvement as demand picks up heading into the summer grilling season.

Current production is in line with our previously announced 5% reduction target when compared to year ago levels. These cuts will stay in place throughout the third quarter of fiscal 2007 before leveling off in the fourth quarter when we cycle through the first anniversary of our production cutbacks from last summer.

In summary while we are pleased that industry's fundamentals appear to have turned we can't lose sight of the job at hand. No. 1, we have to continue to pass along higher feed ingredients costs both in our previous and future contracts. No. 2, we have to profitably grow in accordance to our customers' demands and, lastly, we have to squeeze out every penny of synergies available.

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

Thank you, Clint.

As O.B. mentioned earlier this second quarter of fiscal 2007 is the first full quarter which includes the results of Gold Kist, which was acquired at the end of December. Accordingly I will at times be discussing the results of our operations compared to the pro forma amounts for the prior year periods, which included the full effect of the acquisition as if it had been included in our actual reported results for those periods. Comparisons to current year reported amounts in the prior years will also be reported at times.

As shown on slide 5, we realized a net loss per share of $0.60 for the quarter ended March 31, 2007. This compares to the pro forma net loss of $0.99 per share for the same period last year or a loss of $0.48 on a reported basis. Our results for the six-month period were a net loss per share of $0.73 on a reported basis and a loss of $1.25 on a pro forma basis. This compares to a pro forma net loss of $0.83 per share for the same period last year or a loss of $0.09 per share on a reported basis.

Included in both the second quarter and the six-month periods of fiscal 2007 were charges of $14.5 million or $0.14 a share, which was related to the early extinguishment of debt incurred by the Company in connection with (multiple speakers) financing of our Gold Kist acquisition.

Turning to sales on slide 6 and 7, you can see the effects of improved sales pricing has had both on the quarter and on the six-month periods. We believe this is a direct result of the industry production cutbacks which began last year and are continuing today.

Looking at the second quarter results first, on a pro forma basis sales increased 11.1% overall from the same period prior year and our U.S. chicken operations are responsible for nearly all of this increase, improving sales by $184.2 million or 12.3% while production in sales volumes were down 4.9 and 2.4%, respectively.

For the six-month period pro forma net sales increased 5.5% overall on a 2.8% reduction in production. This was also due primarily to the improvements in our sales in the U.S. chicken operations realized during the second fiscal quarter of the year.

Slides 8 and 9 show EBITDA reconciliations for the quarter and the first six-month periods. Highlights are a $34.6 million improvement in EBITDA generated this quarter to $31.4 million which is the same period last year on a reported basis. When adjusted to exclude the $14.5 million loss on early extinguishment of debt, adjusted EBITDA generated this quarter was $45.8 million. Second quarter depreciation expense increased $20.2 million over the prior year quarter primarily due to the added depreciation from the Gold Kist acquisition. Net interest expense increased $27.6 million to $37.6 million when compared to the second quarter of fiscal 2006, due to the financings incurred for the Gold Kist acquisition.

For the six-month periods, EBITDA was $61.5 million or $76 million on an adjusted basis versus $71.6 million in the first half of last year.

Slides 10 and 11 summarize our operating results for the quarter and for the first six months. Some highlights include our pro forma operating loss for the quarter, improving by $62.7 million to a loss of $11.7 million when compared to a loss of 74.4 in the same period last year. This improvement resulted primarily from a $70.7 million improvement in our pro forma U.S. chicken operations, offset by a $14.4 million decline in our Mexico chicken operations.

On a reported basis, our operating loss improved $26.2 million to a loss of $11.7 million when compared to $37.9 million loss for the same period last year.

Slides 12 and 13 summarize our current debt agreements and their maturities. Total debt at the end of the second fiscal quarter was $1.8 billion with no significant maturities due until 2011. The weighted average interest rate on our outstanding debt is approximately 7.0% and total debt increased significantly due to the December purchase of Gold Kist increasing our debt to capital ratio, net of cash from approximately 27% at the end of fiscal 2006 to 62% today.

Current availability under our debt agree -- debt facilities is approximately $862 million. It includes $525 million in a secured revolving term debt; $212 million in revolving credit facilities; and $125 million under an accounts receivable securitization facility. Adding our existing cash and liquid investments, which totaled approximately $93.2 million to these amounts, our total liquidity at the end of the second quarter was approximately $955 million thus achieving our goal of fully financing the Gold Kist acquisition while maintaining our financial liquidity essentially unchanged from that that existed prior there, too.

I will now turn the call over to the operator and we will key up questions.

(OPERATOR INSTRUCTIONS) Reza Vahabzadeh. Lehman Brothers.

I'm sorry, I may have missed your comments on this topic but what kind of pricing did you get year over year in your business in the second quarter?

Pricing -- are you talking about revenue recognition?

Yes.

On a pro forma basis, let's see that's year to date (multiple speakers) about just under 11% increase per pound. Chicken division.

Is that net off of mixed or is that just a gross number?

That's all in so that would be all mixed change and everything.

was that realized for the whole of the quarter or was that just a run rates at the end of the quarter?

Yes. What the number I just gave you was the average for the entire quarter. So that would be a mix of everything that rolled through the quarter.

So the run rate at the end of the quarter may have been higher than that?

That is correct, yes. As O.B. mentioned we went into the black in our U.S. chicken division in March. So the numbers that we reported today, obviously, did not have that kind of result for the whole quarter.

And then so volumes must have been down -- what? 5, 7% on a pro forma basis?

Yes. Just under 5%. 4.9.

Got it. Without getting into projections and stuff, I'm assuming that on a run rate basis in the third quarter, your pricing could be a little higher than the 11% you just mentioned and your volumes give or take, the same, maybe a little bit worse?

Yes and I think -- again the revenues accelerated throughout the quarter which was a positive. Also we saw some grain relief towards the end of the quarter. And then as Clint mentioned in his prepared remarks, our 5% year-over-year cutbacks will continue throughout the third fiscal quarter before leveling off in the fourth quarter.

Really what is happening there Rez, is, we start the cycle through the period last year where we had the cutbacks and so you are no longer able to maintain a 5% cutback once you start lapsing last year's cutback.

Right. Got it. And then as far as your cost savings, what will be the first quarter that we will start to see signs of that cost savings number in a meaningful fashion?

What we had planned on was about $25 million of that $100 million being -- running through our P&L this year.

The fiscal year?

Yes, this fiscal year. Yes. So I would say most of that will be back end loaded, but clearly there's cost running through right now that are favorable as well.

So on a run rate basis that you'll get to the $100 million by call it 1Q '08 give or take?

Yes. By January of '09, right. After one year after the acquisition we will (multiple speakers) run rate.

I appreciate it. Thank you very much.

'08. January of '08.

Farha Aslam with Stephens Inc.

Could you talk about your grain cost in the quarter? Could you share with us either how much they were up year over year or how much feed was as a percentage of your cost of goods sold?

The present of cost goods sold it was in the low to mid 30s and it was up approximately on a unit cost basis about 38%.

And on a pro forma basis, would you be able to share with us how much that is in millions of dollars?

On a pro forma basis? Year-to-date or for the quarter?

For the quarter and for the year-to-date, if you have it.

It's by different -- you know, different parts of our business, but we're running like we said in the past, we are running about 320 million bushels the year of corn. And the soybean is 3.2, (multiple speakers) 3.2 million tons.

And this is for the combined company?

That's correct. Yes.

And that takes into account your production levels for this year? Or does that take into account cuts?

That's correct.

Yes.

And could you share with us a little bit more details in terms of the food service contract? Kind of PPC contract, (inaudible) contracts, [link], how you found pricing falling through those contracts?

Yes. We, as you know, had quick service contracts that had different durations. We negotiated some of those contracts back in the early fall. Some of those were negotiated in the second quarter and so there's different degrees of pressing opportunities, depending on where those contracts were negotiated. On Gold Kist we did inherit some contracts fixed-price contracts with them that we were not aware of because, you know, inability to have due diligence. So those are some that we continue to work on.

And the PPC contract? Are you pretty happy with where they are right now?

Well, we have -- those that have been negotiated this quarter are much more favorable than those that were negotiated early in the first quarter and as those roll through, then we will make the proper adjustments to those. But I would say that pricing -- increasing prices is never easy. It has been a challenge for us and we were well into the second quarter before many of our price increases did come about.

Could you talk about the international markets? Recently the USDA that out that Russia -- Russian demand might be a little softer this year and could you talk about the recent weakness in Mexican exports?

I think on the Russian basis, we still see good demand out of Russia and many other countries. China is a strong buyer. Cuba has been strong. So we see the export market, in general, still very healthy and in terms of Mexico --

I think the Mexico factor, you are looking at the export movement? Correct?

Exactly.

All you are seeing there is as the prices in the U.S. have appreciated on the both leg quarters there's still a 20% tariff going into Mexico and it's just a matter of a price point that is not near as attractive as it was a year ago. So when leg quarters were in the low to mid 20s, they could obviously paid those tariffs and still be able to liquidate them, but at these kinds of prices, they just get squeezed out a little.

My final question is when you are looking at the (inaudible) growth in the industry are you comfortable with the recent exit (inaudible) placement data? Are you at all concerned that the most recent exit number was a +.9% increase?

Certainly, we would love to see those numbers smaller, but I do think there has been, if you look back over the last quarter, there's a lot of their ability week to week, there is a slight trend of an increase. But if you look at our numbers relative to last year and even the year prior, we believe we are still in a very manageable situation.

Certainly we will continue to monitor and watch that and that increase will certainly have an impact as we go into next pricing season.

But just do you feel pretty confident about pricing for this summer season and going into this fall, given the promotional calendar you are seeing?

Yes. As of what we are seeing today I feel very comfortable that the pricing we will see this summer especially should be very supportive of grain -- where we are with grain. Barring an increase in the industry, it should be very good for the pricing season next fall.

Kenneth Zaslow with BMO Capital Markets.

If I think about your -- you said that right now you are in the black. Are you in the black in terms of -- you know, are you making a margin similar to historical levels yet or are you just coming off -- can you give us some parameters when you talk about profitability now is this kind of as good as it gets? Is it going to get much better? Or are we going to see peaks in this summer? Can you give us a little color on that?

Yes. We didn't talk about the level. We do expect the profits as O.B. mentioned to continue to accelerate going into this summer. So, no, we wouldn't think where we are today would be in a peak level at all.

And once you get the cost synergies and, hypothetically, the margins become whatever and you historically translated into some sort of earnings base for you, should we think of that as being incremental and lo and behold, that the historical level you've hit before should be up by about $100 million? Is that the best way of thinking about it going forward?

On a combined basis between us and Gold Kist it would definitely be incremental, yes. I mean the cost that we are -- savings that we are recognizing and the costs we are taking out of the overhead structure of the acquired business is clearly a net combined bottom-line savings.

And do you think you'll be at historical levels? Is the environment shaping up at historical levels should be sustainable sometime in the summer, despite the higher corn costs? Or does the higher corn costs clip a little bit of the historical levels just because we are at a historically high corn level?

I guess it is going to depend on how much acceleration we see in all the market components going through the summer. And as O.B. mentioned, there's still contracts out there that we continue to cycle through. I think O.B. and Clint both mentioned that we have got to pass through $3 to $4 corn into our contracts going into next year. So there's still a lot of momentum that we can get on the sell side as long as the industry as a whole keeps the production in check with the ability to do that.

And in terms of exports for Russia, leg prices seem to have been over $0.40. Are you realizing that level of leg price -- of leg quarter prices?

We will be in this month, yes. There's usually a 45-, to 30- to 60-day lag in pricing due to the forward pricing mechanism. So May, we will be in those levels.

Pablo Zuanic with J.P. Morgan.

Sorry about that. I look at the Tyson numbers and I see that they have a profit margin in the last two quarters that are above your numbers and that's saying just their profit margins and that's excluding their hedging gains. So that brings up the question of do they have a more prudent policy and pardon for using that word in terms of a contract mix. Do they have more (inaudible) apparently more cost [price] contracts? Do they have the policy if you have a fixed price contracts of hedging their grains so look in the profit margin whereas you haven't been doing that. So help me understand if you benchmark yourself against your competitors why your margins have been lower?

Then, No. 2, would it be fair to say that when it comes to contracts you haven't been (inaudible) in terms of hedging -- hedging your profit margins on those contracts?

Well, I mean I can't speak to Tyson's numbers exactly because we do understand their pricing models, but I can tell you that the Gold Kist acquisition did put some pressure on the second quarter; and in terms of hedging practices, I think we have modified our philosophy. I think the whole industry probably is modifying their philosophy given the current volatility in the grain markets and what we expect to see over the next several years. So we are changing our strategy going forward.

But certainly the product mix that we have today is slightly different and the pricing strategies that the two companies combined are somewhat different than what we've had in the past.

Then just roughly for those of us who look at the tickers for the various chicken parts and try to make projections based on that for the individual companies. When I look at a blended change in prices for those parts and I tried to correlate to your realized pricing should I assume that you know on the way up you only get one-third of that increase? On the way down it's only one-third?

What would be a fair benchmark to use because, clearly, with your mix you don't get all the change in this whole market. So what would be a fair average to use if we were going to use for that?

I don't think you can come up with any kind of ratios like you are intimating. I mean they're so much determined based on what price, what the pricing environment and the supply and demand environment is at the time you negotiate every individual contract; and if you are dealing with an annual contract that is going to live with you for a year.

So I remember a few years ago when the prices were fairly strong going into the end of the calendar year, and some of those fixed-price contracts had legs on them of another 12 months when the commodity markets didn't.

So you can't really say. It's too dependent on every individual contract.

And just two follow-ups. When you talk about the Gold Kist synergies are you referring mostly to -- is that all cost type of synergies? I mean does that factor have potential for you to sell value-added products at Publix? Does it factor the potential for better pricing, average pricing at (inaudible)? Is that included in that synergy number?

No it's not. All the synergies that we identified and we really haven't updated that chart from last time so it is still out there on our web site. But those are all cost-related synergies and we didn't talk at all about the market-related effects. It's a lot tougher to really identify market-related synergies as you combine product, flow and product mix and serve a lot of the same existing customers.

One last one. Regarding Mexico, obviously a big source of volatility related to my number almost half of (inaudible) was relative to -- was because of the Mexican unit. What happened there specifically in the quarter? I know you're saying you are back into profitability. What has been going on there?

That's a business that I would equate to your turkey business that has been on and off for BBC. I think (inaudible) you had said that there is the (technical difficulty) divesting that business. How should we think about a business going forward and what happened in the quarter specifically?

This last quarter for our markets and where we sell, the cost structure of the $3.5 to $4.5 corn, relative to the supply that was in that market, was just not able to get moved at a profit. Now there have been some adjustments on the supply side and where we are today we were happy to report that we have been profitable month to date in April.

So a dramatic change in Mexico. As you saw we lost, what? $14.5 million year-over-year change and you can have that kind of movement on a weekly basis saying call it $1 million a week. You can have that happen over a matter of a couple of weeks in Mexico and we've seen it in the past and currently seeing it as well.

And if I may, just one last one? I think this has come up before but do you have any evidence that the industry, that the infrastructure has changed in terms of the cyclicalities of the industry? When people talk about, I think of the industry as being economically rational in the spot market if you are overearning relative to average -- historical average spreads, people will ramp up reaction. That's the way these cyclical entities work. Do you have any evidence to counter the argument that chicken is less cyclical than in the past?

I think there is a lot of evidence out there. I think five years ago you would not have seen the industry go through a cutback that it went through in fairly short notice in response to both the interruptions we had on exports going back 12 months ago, to the higher cost of grain six months ago. You would not have seen that. So I think that that's a direct evidence that there is more rationality and more support in the industry to take a look at the numbers and not just be a production-based company or industry.

I think you'll see more of it as we go through the summer. So as O.B. mentioned, this grain situation has not been played out. There's a lot of weather and there's a lot of risk between now and the end of this crop season; and I think you'll see the industry take that into account and not just look at the current status of affairs, not knowing really what the end cost structure is going to be. How do they (inaudible) strength in the industry.

Angelo [Sarr] with Lehman Brothers.

Based on some of, I guess, your intelligence work or anecdotal evidence following up on the industry side, what are you seeing specifically among a lot of the smaller processors? I guess Sanderson aside that'd still make up almost 50% of the industry. I mean have their production cutbacks been 5% as well? Have they been greater? Have you seen consolidation in some of the smaller players sort of underneath the radar? Have any of them just gone basically Chapter 11?

I'm trying to get a sense of if there's further forces driving some of these players in a way that haven't in the past?

Well we don't have good access to the information that you're talking about, but our feel is if you look at our cut and if you look at the cut that Tyson announced, that's basically the primary cuts in the industry. Our 5% cut represents about 1.25% for the whole industry and Tyson's would be somewhere similar to that. That suggests that the rest of the industry hadn't cutback.

We do know that there's been a few smaller operators that we have picked up on because of having operations in their area that there's been some amount of cutback. But I'm not sure there's been a lot of cuts within the smaller operators.

So is it just that pricing has been improving enough so that those players can finance $4 corn or they are just kind of holding on and hoping that they get some relief down the line, based on the cut to you and Tyson has taken?

I think the prices that increases that we have seen in the second quarter certainly should have put them in a position to be able to deal with these current corn prices. However, I think we're still out on what corn is going to be next year.

Given the ethanol demand, it is going to take another six or seven million acres the following year. There's some concern about where those acres are going to come from.

There's some structural aspects to this obviously that we haven't maybe seen in the past. Just a quick one then on the integration. I know there's some contracts on the Gold Kist side that you hadn't been able to sort of get -- get, come from around given the lack of their ability not to do the kind of due diligence you might have wanted ahead of the transaction.

Are you at this point kind of fully through that due diligence? Are there any other things you think might pop along this lines or have you kind of pretty much got the confidence now?

I don't think opaque there's any surprises left for us there and again we have to let those cycles through the system. Some of those will be cycling through late summer to next fall. But I don't anticipate any further surprises in those areas.

The very last thing for me is just in past cycles when you've been going in the industry from sort of trough towards midcycle and beyond, excluding exogenous factors like a Russian quota issue or AI or something like that is there -- has there been -- it's a little different now I know because of where corn is than maybe in the past. But is there a rule of thumb on the percentage of times where -- what has held back the industry where it's happened from going from midcycle to even better? To beyond? Getting back towards peak earnings in past times?

I mean once you are getting towards midcycle does it typically keep going or do certain things have to be in place for that to really happen that we don't see yet today?

I think you almost have to look at each cycle independently because there can be extraneous factors that have interrupted that improvement. If we look back at the export situation 12, 16 months ago things were looking pretty good for our industry. And that threw us in a tail spin and then along came ethanol.

The biggest unknown and the biggest concern to date going forward is grain. How are -- what will be our grain cost through this year and the following? That is going to determine a lot of industry profitability.

It does appear that in past times of higher or extremely higher grain costs, those are times where obviously your industry has been able to be frankly its most profitable.

That's correct. There's restraint on the supply side and we can pass those costs along.

Eric Katzman with Deutsche Bank.

Two quick ones. One, did you give any guidance on either the tax rate depreciation and amortization or interest expense? Maybe just kind of run through those, some of those?

We didn't but let me give you some. You know the tax rate there will be some variability around the tax rate as Mexico switches from basically the loss for the quarter into a profit. So you can see the effective tax rate actually move a little bit higher than what it was in the second fiscal quarter. Depreciation expense shouldn't be a whole lot of variability there. So you are in that mid $50 million number per quarter. Shouldn't be a lot of change there.

What was the last item?

Interest expense.

Interest expense. You know we are running pretty consistently where we expected going into this deal, total interest expense on everything that is on the books today. You are in that $143 million, $145 million range undepreciated -- I mean interest expense on an annualized basis.

Then another detail question. Was there any -- maybe for GAAP purposes or even on a pro forma basis you couldn't characterize certain costs in the quarter as deal related? But on a non-GAAP basis, did you have any lawyers, extraordinary lawyer fees or banker fees that stick out?

Well there's obviously a lot of activity going on. I would think as it relates to the acquisition itself, most of those would be capitalized and not affect the quarter. When we finance this, we plan on using about $100 million of our built-up liquid investments for the acquisition and that is pretty much what we did. And you'll see that really kind (technical difficulty) in a lot of the working capital change numbers.

So the reported cash flow statement numbers includes a lot of accrued expenses that we inherited through purchase accounting that we ended up paying off as part of the acquisition. So the working capital again as is reported is a worse picture than what actually happened on an operating basis. Let me give you an example here.

If I looked at my main items of working capital payor, pre paids and accounts payable and exclude expenses, on a reported basis I'm going to be consuming somewhere around $30 million, $31 million, $32 million of cash. If I adjust those items for accrued liabilities that I actually paid out that were on Gold Kist books, call them severance payments, their deal expenses, things like that, that goes from a $31 million, $32 million consumption to about a $36 million positive cash flow. Okay?

So that's the kind of dynamics you see running through the cash-flow statement. And that's really where the numbers are $100 million kind of manifesting itself in that number. If I look at my total working capital all items combined, we consumed about $100 million whereas the truth number was really closer to $30 million.

Thank you for that. And then, O.B., as kind of a follow-up to Andrew's question on the industry theme. I guess what surprised me so far is that the marginal or smaller players in the industry have kind of -- not -- it's almost as if the cycle, the down cycle wasn't long enough. Now maybe that's still to be seen with the volatility on the feed cost and you seem to be kind of suggesting well that may, in fact, force some of the smaller players to act a bit more rationally on supply.

But do you think it's kind of fair to say that at this point maybe the dip wasn't long enough or deep enough to force these other players to act a little more rationally, given the risks to the upside on feed?

I'm going to say that that certainly had an impact on their decision process. It would be hard for me to say that it wasn't deep enough because we suffered a lot of red ink because of some of those changes; but I think the factor that will have the biggest impact is next year's grain price not this year. What -- how we're going to have to deal with a growing demand for our corn from the ethanol industry and where that supply will come from.

So I think that even though historically the smaller players may not have been the ones that have led the reduction in supply as the industry needed those reductions, that could change given the volatility that we are seeing in corn and meal prices going forward.

So from like a risk reward I guess standpoint, the risk is that for whatever reason, commodity costs or feed costs come down, and the industry given that is not consolidated enough maybe supply moves back up, pricing comes back down, and we hurt our margins. But on the other side the reward is if the pricing or the commodity -- the commodity cost moves up and we kind of force even more consolidation which, ultimately, puts you in a better position given you are the leading player now. Is that a fair characterization?

Yes. I think that's fair.

Oliver Wood with Stifel Nicolaus.

Turning back to the below-market Gold Kist contracts, could you quantify the impact in the quarter? Are we talking about 5% of total sales, 20% of total sales?

Well we would adjust for the below market contract on a reported basis. I think throughout the period it's initially about $20 million of annualized sales, which would translate into a margin impact. But we are adjusting for that through our purchase accounting.

Then going back to, there's a previous question on price realization I think it was about leg quarters flowing through after about 30 to 60 days. Could you just walk us through again as we look at the other market segments and the Georgia dot price and the other parts prices how that flows through and how we should think about modeling that?

That is a very difficult thing to model because there's so many moving pieces. We have so many contracts that have different formulations to them. I mean, you may have a contract with one account that is on a 13-week rolling average of the (inaudible) markets or a four-week rolling average or it could be previous Wednesday quote. There are just so many different variations that it's difficult to say how quickly when the market moves, we capture that.

The good news is if the market moves in the right direction we eventually capture it, and I think that what we've proven through the last quarter is that we didn't keep up quite as quickly as the market was leaving, but have made a significant ground in the last 30 days in capturing those improved market conditions.

Turning to cold storage, I know you presented some of the data on page 3 of the presentation. Given supply cuts in recent months and the direction of cold storage over the past year, do you have a sense of where we hit bottom or when we hit bottom?

If you look at historical levels, I mean if you go back for the last two to three years we are getting close to historical lows on inventory. So I think we may be close to the bottom.

Final question is, as we look at SG&A is this quarter kind of a good indicator of what the run rate will look like, going forward?

I think it will fluctuate around that 5% level. Little bit lower than where we were at 5.5% (inaudible).

Diane Geissler with Merrill Lynch.

I just have a little bit more conceptual question just thinking about poultry cycles, etc. and how this one will compare with the one from 2004. And if I look back through 2004 cycle, obviously, breast meat prices went above $2 and ran all the way to $2.40 and we are seeing rapid acceleration here. And I guess in my mind the differential between now and what happened in 2004 was, that was a very short-lived cycle on the breast meat side. I guess the biggest variable here is corn. Is it -- what I'm hearing from you and just this is the basis of my question -- correct me if I am wrong, what I'm hearing from you is that obviously pricing is improving and you expect that -- you are more optimistic about the back half of the year.

But is there something beyond that as we move into the fall that the industry -- your current feeling is that the industry will remain rational in terms of production and that you could see maybe not be ramp back in pricing that you saw in 2005 because grain is so high? It may pull back on a seasonal basis because we know that it, generally, it peaks at the end of June, but that we may actually end up kind of year over year or year over quote "what you would expect to see normally" a much better position as you move into the fall. Is that what I should be taking away from your comments on that?

As I have said I believe it is not this year's grain price that is going to create the issue for us. It is the following year and I think that is the number that will keep production in check. I think, given the potential volatility and given that we do need a lot of new acreage the following year and without that we can see corn prices move significantly higher than where they are today, that's what will keep supply in restraint.

I guess (multiple speakers) questions really push back that I have gotten on the thought which is a belief that as breast meat prices move up, the little guy out there is it savvy enough or whatever and basically "can't help himself" and immediately increases production. And I guess what gives you confidence that we are looking beyond this crop year and here I'm really talking about again the marginal player. I know you are -- I know you are looking at it because you tell us you are and I know Tyson is because they tell us that they are.

But what gives you confidence that the small player is a direct (inaudible) kind of green prices year and a half out?

I have nothing that gives me that confidence. I believe that rational behavior will keep people -- I think the industry has realized that we cannot grow at 3, 4, to 5% like we have done in the last 20 years. That we are -- the consumption of poultry is not moving up as rapidly and that we have to control the supply side, regardless of what is taking place on the grain side. It's -- I believe the corn price just drives that point home and I just truly believe that we will see restraint.

Now that's my opinion. I could be wrong. But I have no assurances that we are not going to see supply move up. We watch that I'm sure like you do every week when the numbers come out the egg sets, placements, the slaughter numbers, the pullet numbers. And that's the only thing we can.

Okay and I guess just maybe to address some of the issues regarding the recent ramp up in egg sets etc., I mean, isn't this the time of year where we would build towards the peak consumption? In other words.

Yes.

Product that would be featured at the July 4th period would be an egg two weeks ago. Right? I mean is that how we should think about the timing on that?

That's correct.

Ladies and gentlemen, we apologize but that is all the time we have for our Q&A session.

The concludes our Q&A session today. As you have heard over the past hour, there is no question that the first half of fiscal 2007 has been a challenging time for our Company and much of our industry. We believe that the steps we have taken to return our business to profitability are beginning to pay off and will lead to improved financial performance in the second half of the year.

Thanks again for joining us today. We look forward to talking to you again in the third quarter. Thank you.