Pilgrims Pride Corp (PPC) 2007 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Pilgrim's Pride financial call to review the company's financial results for the fourth quarter and full 2007 fiscal year. At the company's request, this conference call is being recorded. Please note that slides referenced during today's call are available for downloading from the Investor Relations section of the company's website at www.pilgrim'sPride.com. Beginning today's call will be Gary Rhodes, Vice President of Corporate Communications and Investor Relations for Pilgrim's Pride. Mr. Rhodes.

Good morning, and thank you for joining us today as we review our financial results for the fourth fiscal quarter and the full fiscal year. Earlier today, we issued a press release that provides an overview of our financial performance for these periods. If you have not already seen this press release, a copy is available on our website, along with other downloadable information. 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. Before we get started, I would like to remind everyone that today's call contains certain forward-looking statements. These include our expectations of future results, sales and cost of sales information, pricing 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 and risk factor disclosures contained in our forms 10-K, 10-Q and 8-K as filed with the SEC. I will now turn the call over to O.B. to begin our prepared remarks.

Thank you, Gary and good morning, everyone. Earlier today, we reported net income of $33.2 million, or $0.50 per share on record sales of $2.15 billion for the fourth quarter of fiscal 2007. This compares to a net loss for the same period last year. Rick will go into more detail on the financials in a few minutes. But our improvement from a year ago can be traced to a couple of areas. First of all, industry fundamentals remained solid in the fourth quarter as strong export demand and local storage inventories helped sustain positive market pricing trends. Leg quarters and wings posted the largest gains, rising more than 30% over the same quarter last year, while breast meet and Georgia dock posted healthy gains of 16 and 18% respectively. Net favorable market pricing helped offset $189 million year-over-year increase in feed ingredient costs.

Our product mix during the quarter also improved. We were able to upgrade some of of our commodity type meat into higher margin value added products. This is a key part of our growth strategy and an area which we have enjoyed good success over the years, particularly after buying other companies.

In addition, our consumer retail segment continued to post solid growth, thanks to increased penetration of supermarket meat and delicatessen and our growing role as a category management partner. Our consumer sales team did a fantastic job this year and they deserve a lot of credit for expanding our business and building our brand among retailers. Despite favorable industry fundamentals and year-over-year improvement in profitability, our net earnings for the fourth quarter came in below our own expectations. Operationally inefficiencies, labor shortages and several facilities and higher fuel costs resulted in higher production and freight cost during the quarter. Automation will be a key focus of our capital investment program in fiscal 2008. We believe this investment, which includes labor reducing technology, will enable us to move more products through our plants efficiently and help alleviate some of the recent issues related to a tight labor market and higher input costs. Clint will provide some additional details in a few minutes.

Returning now to industry pricing, for a moment, leg quarters and breast meat today are up 41% and 26% respectively, compared to a year ago. This is a favorable position versus last year this time as we approach our heavy annual contract renewal period. With the exception of breast meat, the major market indices today remain above their respective five year moving averages. You can see these trends on Slide 3. Looking forward, we anticipate breast meat during the seasonally low-demand period to remain just about at or slightly below the five-year average. There has been very little, if any downward pressure on demand or pricing from Russia's delisting of nine chicken plants in October, none of which where Pilgrim's Pride facilities. We anticipate wings to continue to be strong in the first quarter, due to the growing popularity of stand-alone wing themed restaurants and strong lineup of sporting events this year. Whole bird pricing has posted strong gains throughout 2007 and at this point we do not see any reason why prices would decline any more than they usually do during this part of the season.

We are pleased with the positive pricing trends throughout the fourth quarter, especially in light of increased feed ingredient and commodity cost that we face throughout fiscal 2007. As you can see on Slide 4, our index of commodity exposure has climbed to all-time highs this year, led by corn, soybean meal and wheat, but well-supported by energy prices. When compared to the previous fiscal year, average prices for corn and soybean meal increased 62 and 22% respectively, which create a strain on profitability for much of the year. Looking ahead, current projections call for broiler feed cost increases above highs seen this past year. This underscores the importance of being able to pass along these price increases.

On that note, we have begun the process of renegotiating our annual food service contracts. There are a number of factors working in our favor this year, including higher market pricing, compared to a year ago, and lower inventories. At the same time, our customers are facing higher cost in their own businesses also. Not all of those can realistically be passed along to consumers. To date, I'd say that we generally have been successful in passing along price increases, although at times not enough to cover all of our increases in our input cost. Every contract is different and every negotiation is different. Some cases we have added escalator clauses, which the contract's pricing moves up or down in sync with the ingredient cost. In that way, we were protected by cost increases and the customer is protected when our costs decline.

Overall, we still have a lot of negotiations and a lot of work still ahead of us. We will continue to make every effort to pass along our additional cost on the remaining contracts.

Moving now to the integration, we continue to make very good progress with the former Gold Kist organization. We completed the roll-out of SAP to all Gold Kist facilities in just seven months. This was a huge accomplishment in a very short period of time. The project integrated 89 former Gold Kist sites including processing plants, lab operation offices, feed mills, hatcheries, truck shops, third party cold storage facilities and warehouses. Also, during the quarter, we completed the conversion of the Gold Kist payroll system.

Overall, it was a very busy quarter. Our IT and HR teams really rose to the challenge. Synergy savings from the integration totaled approximately 43 million in the fourth quarter. Based on that performance, we believe that we have now achieved our annualized run rate of 150 million in cost savings three months ahead of schedule. Our synergy teams will continue to focus on synergy savings and we will continue to strive for efficiency in every aspect of our business. With that, I will turn it over to Clint for some discussion of our operations. Clint.

Good morning, everyone. As O.B. pointed out, our fourth quarter results were negatively affected by increased production and freight cost related to operational inefficiencies, labor shortages in several facilities and higher fuel costs. A large part of the operating inefficiencies can be attributed to lower bird weights due to the record summer heat in some parts of the south. This hampered to some extent our ability to cover the cost increases with higher production. We also recorded a slight increase in grain cost compared to the third quarter. EMI Analytics, a publisher of agricultural analysis recently reported on growing labor shortages throughout the protein industry. The report noted that several broiler producers are dealing with a shortage of workers and that as a result, they have been unable to keep up with orders for deboned meat and other products. The report noted that there has been tremendous competition for workers among the poultry, agriculture and produce industries. And that the failure of meaningful immigration reform this year has hurt the poultry industry's ability to attract and retain workers. While turnover is not uncommon in our industry, we encountered above average turnover and labor shortages in several facilities during the fourth quarter.

As O.B. said, we are in the process of installing automated equipment in selected plants that will help alleviate the worker shortage and increase product through-put. We believe this investment in technology also will enable us to move product through our plants more efficiently and reduce the need to use outside processes. Let me give you an example. By the end of this month, we will have completed the install his of new automated deboning equipment in one of our larger plants. This will eliminate the need for approximately 250 positions and reduce overtime. We will be making similar capital investments at other plants over the balance of fiscal 2008 that should ultimately eliminate the need for hundreds of positions, most of which are unfilled today.

We simply must find ways to operate more efficiently. As nearly all of our costs are rising. For example, projected feed costs in our industry next year are expected to be even higher than what we have seen in 2007. At current market prices, our feed ingredient costs for fiscal 2008 would be approximately 345 million higher than this past year. To address the increased cost that we'll be facing, we will re-double our efforts to achieve the best possible live performance from our flocks and increase efficiency in our of plants. This will require continued focus on best practices in the management and care of our birds, as well as additional capital projects in our plants to streamline operations through automation.

Before I pass the call on to Rick for financial update, I want to share a few brief comments on our production plans for the first quarter. You'll recall that back in July, we said that production levels for the fourth fiscal quarter should be basically flat with a year ago and they were. For the first quarter of fiscal 2008, we expect once again, to remain essentially flat with year ago levels. For the remainder of the year, we currently anticipate that our year-over-year growth will be in line with USDA's growth estimate of approximately 3% in 2008. Given the uncertainty in feed ingredient costs and market pricing for our products, however, we will closely monitor industry fundamentals and the actions of our competitors and be ready to alter our plant production levels if conditions warrant. I'll now turn the call over to Rick who will provide additional details to our financial results.

Thank you, Clint. The fourth quarter of fiscal 2007 is a third full quarter to include the results of Gold Kist. Accordingly, at times, I'll be discussing the results of our operations compared to the pro forma amounts for the prior year periods. These pro forma amounts attempt to include the full effect of the acquisition as if it had existed for the entire comparable periods. Comparison of current period amounts to prior year previously reported results will also be discussed at times. As shown on Slide 5 and as O.B. reported, we reported net income last night of $0.50 per share for the fourth fiscal quarter. This compares to a loss of $0.11 per share on a reported basis, or a loss of $0.25 per share on a pro forma basis for the same period last year.

Included in the fourth quarter of fiscal 2007 were charges of $12 million or $0.11 per share related to the early extinguishment of debt incurred by the company in connection with the calling of our 9 5/8 bonds, which were scheduled to mature in 2011. Also, included in the net income for the fourth quarter of fiscal 2006 are non recurring U.S. and foreign tax expenses of 25.8 million, or $0.39 per share, related to our repatriation of $155 million of foreign earnings last year pursuant to the American Jobs Creation Act of 2004. Excluding in these are not items, the net income for the fourth quarter of fiscal 2007 would have been $0.61 per share, versus $0.28 per share last year on a reported basis or $0.13 per share on a pro forma basis. For the full year of fiscal 2007, we reported net income of $0.71 per share, compared to a net loss of $0.51 per share for the same period last year.

On a pro forma basis for fiscal 2007, the results would have been net income of $0.17 per share compared to a loss of $1.71 for the same period last year. Included in the full year results for 2007 were 26.5 million or $0.24 per share of non recurring charges related to the early extinguishment of debt incurred by the company in connection with the financing of both the Gold Kist acquisition and the calling of our 9 5/8 bonds previously mentioned. And again, included in the fiscal 2006 results was the same one-time foreign tax expense of 25.8 million previously mentioned in the fourth quarter. Excluding these items, our net income for fiscal 2007 would have been $0.95 per share, versus a loss of $0.12 a share last year on a reported basis. On a pro forma basis, our fiscal 2007 results would have been a net income of $0.41 per share, compared to a loss of $1.33 for the same period last year.

Moving now to the sales results, as shown on Slide 6, our pro forma sales for the fourth quarter increased 14.3% from year-ago period. These results were primarily driven by improvements in the market pricing and the product mix of our U.S. chicken operations, which increased its sales by $206.1 million or 12.9%. On a pro forma basis, our revenue per pound of U.S. chicken sold increased 10.4% versus the same period last year. Market pricing for leg quarters were up 31%, wing prices were up 33%, boneless, skinless breast up 18% and Georgia dock up 15%. In Mexico, our chicken sales increased by 6.6%, as a 26.3% increase in pricing was largely offset by a 15.6% decline in sales volumes.

Turning to Slide 7 for the full year of 2007, we see that net sales increased 10.5% on a pro forma basis, despite a 3.2% reduction in our U.S. chicken production volumes. This increase was primarily due to improvements in the U.S. and the Mexico chicken sales beginning near the end of the second fiscal quarter.

Slides 8 and 9 show our EBITDA reconciliations for the fourth quarter and for the 12-month periods for fiscal 2007. Highlights in are in 89.6 million improvement in EBITDA this quarter to 146.8 million, versus the same period last year on a reported basis. On an adjusted basis, EBITDA was 158.8 million in the fourth quarter of fiscal 2007. Fourth quarter depreciation expense increased 17.8 million over the prior year quarter, primarily due to the added depreciation expense from the Gold Kist acquisition. For the full year, our EBITDA was 404.8 million, versus 136.8 million for fiscal 2006. Depreciation expense for fiscal 2007 was 198.6 million on the reported periods, and 228.2 million on pro forma basis for fiscal 2007.

For fiscal 2008 we expect depreciation expense to be approximately $225 million. Our net interest expense increased 19.6 million to 30.2 million in the fourth fiscal quarter when compared to the same period last year, due primarily to the debt financing of the Gold Kist acquisition and reduced investment earnings as excess cash was fully committed to such acquisition. For the full year, net interest expense increased $80.5 million to 121.1 million, when compared to the same period last year, due to the same reasons mentioned for the quarter.

Moving on to Slides 10 and 11, we summarize our operating results for the quarter and for the fiscal year. Our operating income in the fourth quarter improved to $110.4 million from a pro forma amount of 27.8 million for the same period last year. This result was primarily from a $52.9 million improvement in our pro forma U.S. chicken operations, an increase of 17.7 million in our Mexico chicken operations and 17.3 million increase in our other U.S. operations with 11.3 million of these operating improvements coming from a reduction in our SG&A expense. Our SG&A expense for the quarter decreased to 4.5% of net sales from a pro forma amount of 5.7% in the same period last year.

Looking at fiscal 2007 on a reported basis, our operating income improved $229.5 million, to 232.5 million. On a pro forma basis again, these I'm improvements resulted from improved operations in our U.S. chicken business of 181.9 million, 131.1 million improvement in our Mexico chick en operations and 21.1 million increase from our U.S. other operations. With 16.7 million of these operating improvements again coming from a reduction in SG&A. For the year, our SG&A expense decreased to 4.8% of net sales on a pro forma basis versus 5.5% for fiscal 2006. If we look at our income tax expense for the fourth quarter of fiscal 2007, it was abnormally high at 50.7%. Of net income before taxes, and this was due primarily to an increase in our contingency reserves and the effect of raising our estimate of tax rates that will be in effect when these deferred items are ultimately taxed. This also resulted in a higher than normal tax rate of 48.7% for the full year of fiscal 2007.

For fiscal 2008, we would anticipate that our effective income tax rate will be in the range of 39 to 41% of net income before taxes, depending on the mix of our earnings between the U.S. and our Mexico operations. And again, this rate is absent any effects, if any, that might be associated with recent changes in the tax laws in Mexico, which will become effective on January 1st, 2008.

As we mentioned during the previous earnings call, our first priority with excess cash flows generated by the business will be focused on paying down debt. You'll recall that during the third quarter , we used positive cash flow to reduce debt by $79 million. In the fourth quarter, we reduced debt by an additional $400 million, 300 million of which was funded through the sales of our asset securitization facility. This facility which runs through August 2012 allows us to sell up to 300 million of certain trade receivables on a revolving basis. The remaining 100 million of debt reduction funding came from operating cash flows in the fourth fiscal quarter. These reductions brought our total debt down to 1.32 billion at the end of fiscal 2007 with no significant maturities due until 2015.

Slides 12 and 13 summarize our current debt agreements. The redemption of our bonds on September 21st helped reduce our interest carrying cost by approximately $11 million on a going forward basis and reduced the weighted average interest rate on our outstanding debt to approximately 7.4%. Our annual interest expense going forward is now expected to be approximately $125 million. Our current availability on our debt facilities is approximately $789 million.

Slide 14 shows a comparison of our credit ratios and one thing that stands out on the page is the significant decline in our net debt to total capital ratio, which now stands at 51.7%, down from just under 60% at the end of the previous quarter. Additionally, our fiscal 2007 adjusted EBITDA interest coverage was a healthy 3.6 times, and our net debt to EBITDA was down to just over three times versus 5.3 at the end of the preceding quarter.

Turning to capital expenditures on Slide 15, our capital expenditures for the fourth quarter and the full year of fiscal 2007 was 36.2 million and 172.3 million respectively. Looking ahead for fiscal 2008, we expect our capital expenditures to be in the range of 225 to $250 million or roughly in line with our annual depreciation expense. I'll now turn the call back to O.B. for a few comments before our

Thanks, Rick. All in all, fiscal 2007 was a tremendous challenging year for our company. The acquisition and immigration of Gold Kist has commanded a great deal of time, attention and resources over the past 11 months. But we believe it is positioned us for stronger growth in the years ahead. It has broadened our geographic reach, expanded our customer base and strengthened our product lineup. We tripled our original synergy target and delivered $150 million in annualized synergies ahead of schedule. While we still have a lot of work ahead of us, our employees deserve a lot of credit for achieving so much, so quickly. For that, we sincerely thank them. Pilgrim's Pride faces a lot of opportunities and challenges in the year ahead.

There are a number of factors working in our favor. Current market conditions are much higher than they were a year ago. That should lead to price increases in the majority of Pilgrim's annual contracts, which will be negotiated before the end of December. In addition, the export market remains strong as the weak dollar continues to make U.S. poultry attractive to other countries, particularly Russia and China. Yet, we also see a number of significant operating challenges. The biggest question mark may be the considerable uncertainty over the feed ingredient and other commodity costs which have spark shortly over the past six weeks. Now, more than ever, it is important for us to make sure we are running our business as efficiently as possible and capturing every dollar of our cost savings so we can position our company for sustained profitable growth in the future. Now, I'll ask the operator to open up the call for questions. Operator.

Thank you. Our first question comes from Reza Hatefi from Lehman Brothers.

Good morning.

Good morning, Reza.

Just as far as the supply and demand outlook, do you think that the supply and demand outlook that you outlined per USDA would allow you to get your pricing to offset these higher input costs?

Certainly we would like to see the growth on the lower side of that projected number. In fact, there are a number of companies projecting ranges lower than the 3% growth for next year. Some as low as 2%. So I think the feed costs will continue to determine the placement of birds going forward. Certainly, this coming export markets are going to help, handle Indiana courts.

I see. Now, for the kind of cost increase that you outline in your comments, what type of a price increase do you need along with any cost savings, to offset that kind of a cost increase?

Well, we're talking about 350 million, approximately, in feed cost increases as we look today, on 9 billion pounds. Rick, what is that on --

About $0.04 on all pounds.

About $0.04 on all pounds. Of course, there are certain pounds you're not going to get increases on. So your primary products have to carry a larger share of that.

I see. And I know it's early days right now, but the negotiation for annual contracts, is it going in line with your expectations?

I would think for the most part, yes. We're probably about 25% through and I would say there has not been major surprises. There's been some disappointments, but all in all, I think it's going well.

Got it. Thank you much.

Thank you. Our next question comes from Farha Aslam from Stephens Incorporated.

Hi, good morning.

Good morning, Farha.

Just some detailed questions. On your feed cost, what percentage of your cost of goods sold for the full year were feed costs?

I believe it was right around 36%, wasn't it?

36% of cost of goods sold?

Yes.

And as you look forward, looking at wheat costs and soy oil costs, have you included that in that 350 million or that would be on top of that?

The 350 is primarily corn and soybean meal.

Yes.

And then the wheat and soil is also significant for you. How are those being factored into your food service contract?

You know, I mean, Farha, what we do is any time we go out to bid, we take a look at what our expectations are on replacement cost of all those items, whether it's batter, breading, soy oil, our total unit cost of production and then that's how we take a pricing proposal to market. So clearly, as the feed ingredient costs that are driving it, that's the lion's share of our commodity exposure. But the others are notable as well.

Okay. And when you look at the kind of industry capacity in the further processed area, do you feel like we are at overcapacity situation? Is there a lot of price competition for those further processed items and do you see any rationalizing of that capacity going forward?

I mean, I think that capacity is close to balanced. Certainly, it's a competitive arena still and there were several companies that added further processing lines over the last several years and so I think that we have challenges pushing that cost through, just as we do in each of our market channels.

And my final question is where was Mexican volume down?

A lot of that, Farha, had to do on the sales volume, had to do with last year, because of the economic conditions here in the U.S., a lot of product was moving from the U.S. to our Mexico operations and they were distributing it. So it's really more on the sales volume side than anything else. If you look strictly at the quarter-over-quarter on a produced volumes, you know, they were down slightly as well, 11%, but not as much as total sales volumes.

Okay. Great. I'll pass it along. Thank you.

Thank you. Our next question comes from Diane Geissler from Merrill Lynch.

Good morning.

Good morning, Diane.

Could you just comment, quantify how short the quarter was, versus your expectations?

You know, Diane, I think what we thought is going into this quarter, all things being equal, we would have expected the quarter to come out more in line with the third quarter as pricing -- if pricing would have held up. Pricing was off slightly, as you see in our reported numbers. I think we were off about a half cent a pound on our U.S. chicken revenue. Clearly, Mexico was off a little bit as well. They were off about $0.03 a pound on chicken revenue versus the same quarter last year. So, revenue didn't quite live up to the expectation. But that only accounted for call it 11 to $12 million of the short fall. So, the balance was the cost structure and the efficiencies that Clint mentioned.

Okay. So were you looking for something around $0.90 to $1.

Yes. I think, again, if revenue would have gone as we had expected, we thought we could have possibly done better than the third quarter. But all in all, I thought the third quarter is what we try to tell people that was kind of our benchmark. We thought it would be more of a revenue play as opposed to a cost play that it ended up being.

Okay. In terms of some of the challenges you had on the operational side and some of the CapEx you're planning to spend over the course of the next fiscal year, can you give us an idea about how long you thing it will take to get things the way you need to have them in terms of the labor savings,organization et cetera?

This is Clint. I'll answer that. I would say that in terms of some of the difficulties we've been facing, we probably seen the worst of it is and are pulling out of that so things are improving there. The automation we've got going in our first plant where we will be automating deboning will be occurring in January. We've got additional equipment coming in in April. Then we'll have a couple of additional plants done by that point in time. So, to be totally where we want to be, I would say it's going to be sometime in the late spring.

Certainly by the end of your fiscal year, you feel you'll be in a position -- you'll have that optimized, is that the message?

Yes.

Okay. And then just a little bit more detail on the tax rates and you talked about increasing some of your contingencies. Could you just explain that a little bit more?

Not with a lot of detail, I can't. Basically, obviously through acquisitions and different restructurings and various items that you just encounter day-to-day in business, you have positions that sometimes you find it necessary to maybe put up a reserve or a contingency reserve in the event the IRS might not see eye to eye with positions that you take. So those generally find their way on the income statement as what's called contingency reserves and you'll see that in just about every tax footnote you look at for public accounting. So, there was just a few that we felt going into next year that we needed to shore up and that really drew the effective rate above the rate I said the normalized rate should be.

Okay. The normalized rate going forward is higher than we have seen for you historically. Is that, again --

I think what we're seeing is a little bit higher state effective rates with the expansion of our operations into more geographic areas that Gold Kist operated versus where we were. It's mainly -- it's more of a state tax issue more than anything else.

Okay. On your contracting, your food service contracting, you've commented in the past about in general, you're pleased with the Gold Kist acquisition, but one of the things that was a bit of a surprise was some of the longevity of some of the Gold Kist food service contracts. Can you give us a feeling for now that you're kind of lapping some of those contracts that maybe they signed this time last fall, sort of what percentage of your contracts are extend longer than a year, kind of are left over, underwater contracts?

Most of those will be expiring this year. I can only think of two and they are relatively small volumes that extend one more year. But most of those will expire this December.

From here on in, you'll be kind of basing it on current market conditions as opposed to -- ?

That is correct. That's right.

End of 2006. Those are my questions. Thank you.

Thank you.

Thank you. Our next question comes from Robert Moskow from Credit Suisse.

Thank you.

Good morning.

Could you explain, you know, why not give guidance for fiscal '08? You've got the cost savings done. This is an inherently volatile business but you've given fiscal year guidance in the past. Why not?

Well, you know, I think we got away from giving guidance maybe six, seven quarters ago. We just felt that we had good analyst coverage out there in general, that were developing appropriate views of the industry and how our performance should be and it is extremely valuable and it didn't seem to be a whole lot of benefit of us going out and giving our guidance on top of the analysts coverage. And as you can see from some of the people in this space that do give guidance, you know, they find it necessary to repetitively change the numbers that they put out because of the volatility or give extremely wide ranges.

Although the advantage,if part of the logic is that the coverage has gotten better, how do you feel about the consensus estimates for fiscal '08?

Excuse me?

Well, how do you feel about the consensus estimates for fiscal '08? The consensus is now at 357 on an EPS basis. Sounds from the body language that you're maybe not as comfortable with that as what analysts might have thought.

Fine. I think what we'll have to see is how all the analysts absorb the full year of our results and take into account a lot of the information that they've picked up recently on the last couple of calls, between Tyson yesterday and us today. The market condition continually changes. I don't know what the date of those consensus estimates are that are out there. I think they're probably a little bit dated.

Okay. And then regarding your competition, Tyson made some -- I thought some rather aggressive statements about what it's willing to do to grow market share. It sounded like it had a terrible quarter in terms of chicken volume and loss in business. Do you feel like they or anyone else is aggressively trying to get business right now in the food service contracts that you're undergoing?

Well, I'm not sure there is not a quarter that all of the competition is not aggressively trying to gain market share, especially with key strategic accounts and it is very competitive today.

And then one last thing. You know, there are industry studies out that I imagine that you get to look at that show efficiencies in terms of yield in chicken processing. This recent quarter, I would imagine your yield efficiencies are down. Where do you think you can get to in terms of the rest of the industry? Can you get above average in terms of capacity utilization and yield optimization. And do you have any goals that you could give us?

Traditionally, we've always been a low cost producer. We've had a strong live cost and we have operated well above average and you know, I would expect to do that this next year.

And does that require a lot of extra effort on the Gold Kist facility that you're acquiring?

I think as Clint mentioned, I think the worst is behind us. We have some capital investments that we think will help resolve several labor issues at various locations and I think that we will be improving from this point going forward in those efficiencies. Our live cost continues to be one of our strengths and that's an area that is currently performing very well.

Okay. Well, thank you.

Thank you. Our next question comes from Oliver Wood from Stifel Nicolaus and Company Incorporated.

Thanks a lot.

Good morning.

Just a follow-up as far as efficiencies, looking at automated production, does that have a positive or negative impact on yield?

In general, the automated equipment we have seen in the past has had a negative impact on yield and that's why for a large part we stayed away from that. But the equipment that we're looking at -- are putting in is new equipment. We think that there might be some slippage in yield there. Until we have it up and running, we won't really know the final answer to that. But we think there's potential to come close to what we're doing in manual operation.

Okay. We'll look forward to feedback in the spring on that. I wanted to ask about turkey, looked like it had a pretty decent loss in the quarter. I know you guys have been paring down that business. Could you expect to further reduce the size and exposure duet to turkey or is trying to sense of what are you doing there..

I think in terms of where we are today in turkey is probably -- is flat as we can get and I think that traditionally, turkey has one or two quarters that they perform well, just through the seasonality of the sales, given our product mix. So, generally the fall quarter is the best quarter your for turkeys.

Quarter ended December.

Yes.

And then final question is just on sort of thinking around production and really how that ties into margins. Is there a certain bogie in terms of is it a 5% margin or 6% margin where you may kind of rethink that 3% number for '08?

Well, you know, I think as we said, we're going to continue to look at market conditions but Pilgrim's has had a history, if you go back, we've had a history of growing organically in excess of what the industry has grown. Now, that was a lot easier to do when we were a smaller company. But I guess at our current size, we anticipate that we will grow in line with the industry. So you know, I think as the market has need for additional product through domestic or export needs, you can expect Pilgrim's to be one of the leaders in pushing that production in line with what the industry growth is.

Also, I think if you look at the production cuts that we made in 2007, we were one of the leaders in reducing production and the numbers that we're talking about for '08 really are just getting us back close to our 2006 numbers.

That's right. Our pro forma production ended up combined Pilgrim's Gold Kist, we were down 3.3% in produced pounds for the entire year and so the current target rate with the industry growth at 3% would basically get us back to about where we were for fiscal 2006.

Got you. All right. Thank you much.

Thank you. Our next question comes from Ken Zaslow from BMO Capital Markets.

Good morning, everyone.

Good morning, Ken.

I guess my first question is, I don't know if you hinted at is or not, I'm trying to figure out, historically or last year, you said that for '08 the margin structure of the low end of 5 to 7% is the right number. You kind of give implication that that might be the right number. Given the new conditions out there, is that still the right way to think about your margin structure? Again, outside the tax rate and the interest expense.

Yes, you know, I think next year it's a little bit early to tell. I mean, we have to really see what's going to happen as these contracts come up for renewal and whether or not we'll be successful in passing along that $345 million of incremental cost. You know, that's $345 million is a substantial part of our current gross margin this last year. So, it's too early to say if we'll be able to get to those margins.

Not to try to pin you down a little bit harder, on the 25% of the contracts that you did sign, would you say that it is optimistic or less optimistic on that?

I mean, I would say that it's certainly possible, based on was we have seen through the first 25%.

Okay.

And I don't think -- Ken, I don't think this is a -- it's not like Pilgrim's Pride is the only company that's got to cover these costs.

Definitely not.

So, I think everybody is out there with the same challenge in mind. So nobody's got a competitive advantage when it comes to buying the corn and the soybean meal. The price is what the price is. We've got to get it passed along. I don't care who they are. They're not in business to lose money at these kind of levels that would be necessary if we can't get these costs passed along.

And on that answer, which is -- I agree 100%, would you suspect that -- the excessive been going on piling a little higher than I would have expected, but can you start to see that egg sets and chicks place will start to come down? Will there be rational behavior, 3 to 4% or 3% or 2%, seems like that needs to be cut and do you think there's a timing out there that would you expect the higher feed costs would pressure other chicken companies to say you know what, you know, let's cut production?

Well, I mean I think everybody is watching the grain markets as closely as we are and I think probably the industry was a little surprised with the run-up. I think there were some people that expected around harvest time for the grain to weaken a little. But certainly all of the commodities have been very, very strong and I think people are watching that closely and I think that as an industry, we can cut back. We demonstrated that a year ago. If conditions dictated and certainly, looking at corn and soybean meal today, it's hard to imagine somebody wanting to put down, you know, more than 3%.

And my last question is in terms of sensitivity to wheat and soybean oil, I know you give it out for corn and soybean meal, is there a possibility you can give us some range of sensitivity for wheat and soybean oil, just because things have -- it's climbed a little bit more and just give us an idea on that?

We can consider doing that, Ken. We'll take a look at it. We don't have that information available.

That's fine. I just, again, just trying to get a sense of that, because I know the chicken has a breading and all that and just kind of an idea. It doesn't have to be exact. If you could, that would be fantastic. Thank you very much.

Thank you. Our next question comes from Eric Katzman from Deutsche Bank.

Hi, good morning, everybody.

Good morning.

A few questions. I guess on the operating manufacturing inefficiencies, is it -- was that kind of across the board or was it more on the Gold Kist pieces or on the core Pilgrim's Pride pieces?

It was -- we had some plants that particularly had some issues with our staffing efficiencies, where those inefficiencies were. But in terms of the yield loss that we had due to the heat during the summer, that was a little more across the board and maybe more in the Southeast, especially, and we figure that impact from weight loss alone was about $11 million impact to us this quarter.

There's no read-through on some kind of problem in terms of the acquisition, is there?

No, no. Mix between legacy Pilgrim and legacy Gold Kist plants.

Okay. And then how much of the fact that the COLA agreements on the contracts with food service accounts? How much of the lagged impact or negative lagged impact -- how much of a problem is that? Like are these going to reset every month? Do they reset every quarter? Or is it just kind of an annual thing and therefore you -- if the slope of the inflation curve is up, you never kind of catch up with the rise in the underlying input?

Yes, I mean, the main contracts that we've been talking about are what we call annual food service contracts and it's a -- you know, it's a large portion of that business but it's pretty much the environment at that point in time that you're able to deal with. And so we can take into account what we know today and what we convince the customer needs to be passed along today. But if costs go up in February or March, that's just going to be outside the scope.

I mean, wouldn't it make sense as the industry leader to start renegotiating these contracts in terms of having escalator clauses in them more frequently?

We have tried to do that and we continue to try to push -- I think as O.B. mentioned, those kind of plus and minus contracts so as costs go up, you know, there's an escalator and as cost goes down, there's a de-escalator. But really, it's the customer and their buying decisions that dictate a lot of that, no matter what we try to suggest. So yes, we do try to push that, but we don't have perfect success in trying to get that done.

Okay. And then next question on the -- are you seeing any mix impact, negative, from consumers trading down?

I mean, at this point we have not. You know, we see continued growth in the deboning of our industry, which does put more breast meat on the market. The strength in the export markets have kept the dark meat extremely strong, compared to historical levels. But I think if you look at retail adds, if you look at food service promotions in the QSRs, they're still promoting a lot of breast meat sandwiches and high end products, at least at this point in time. Do still have strong beef prices which favor any cut of chicken, so that's to our advantage.

Last question, I'll pass it on. As you kind of -- Rick, as you noted, you've done a good job in bringing down debt. Your book debt-to-capital and coverage ratios are pretty good. You know, to the extent, where does the free cash flow go as the stock weakens? I mean, is it -- is there more acquisition activity, given the pressures? Is it continued debt pay down or at this point does it make more sense to buy back stock?

Yes, I mean, I think right now where we are in our debt-to-cap, we're still not where we would like to be in the target. We would like to get that down to below 45%. That will still be our primary focus. I guess it depends on how weak a stock price were to get. Where it is today at under $24, it's obviously getting beat pretty hard the last couple days, so we'll have to continue to watch it.

Okay. So it's not set in stone that it's just -- it's all debt pay down?

No, it's not -- nothing is set in stone. We can take any recommendation to our board. We haven't been active in the past in buying back our stock but again, you know, I mean, that's not to say that that's off the table either.

Okay. Thank you.

Our next question comes from Chris from Lehman Brothers.

Good morning.

Good morning.

I realize a lot has changed since probably last year this time. But in a lot of respect what we're seeing today is really not that similar from last November in it, feed costs are pointing higher. There is some concern may be about production in the industry. In the year ago, it was really you and Tyson that took the lead and shouldered the burden for production discipline. It seems like in retrospect the bottom 50% of the industry took advantage of that, increasing production and maybe a 3% rate or so. So first of all, I was just wondering if that's a fair statement. Secondly for '08, the tone seems to be a little bit different. You and Tyson are both participating in industry growth. So my question is, you know, also today do you believe the smaller processors are hearing the message that this year you're not going to be subsidizing their profitability.

I think your first statement was very accurate. If you look at the unannounced production cuts, what was then was Gold Kist, ourselves and Tyson that accounted for most of the cut and you did see a lot of the rest of the industry increase production. And we are addressing higher production numbers, based upon our sales and sales demand. We also have to look at our fixed cost in our plants. We reduced production in some plants significantly. We still have plants today that are running four days every other week. And so we have to get back to a more normalized basis so that our cost structure is competitive.

And then to follow up on that as well, you know, kind of in thinking about the dynamic of a larger processor versus a smaller processor, some labor shortage concerns, just curious if the country's laws, if you find them structure in a way that larger corporations are at a disadvantage than some of the mom and pop, whether it be a function of closer monitoring or stricter code, and what to be coming more of an issue that gets help and how you're thinking about that.

There's definitely advantages with some non-public companies, some smaller companies out there. You know, there are pros and cons of being public. We have access to capital, but we also come under a very strict set of rules and regulations and at times, that can be a disadvantage.

And I know Sanderson has the new make up plant coming on line. Are you seeing --I know you have a prepared food plant in Wacco, fairly good sized. Are you experiencing any difficulties in that particular plant from the general plant at this point?

From a labor standpoint?

Yes.

That has not been a major problem area for us.

Okay. Thank you.

Thank you. Our next question comes from Bryan Hunt from Wachovia securities.

Thank you. I was wondering if you could talk about your automation investment a little bit more. One, what type of ROI do you expect on those investments or pay back period. Based on your automation plans through the end of the fiscal year, where do you feel like you'll stack up relative to your peer group as a percent of pounds that are flowing through automated processes. Then I have a follow-up question.

Well, in terms of the ROI on the equipment that we're putting in, we're looking at less than two year type of paybacks to occur there. In terms of what percentage we have going through compared to our peers, I wouldn't be able to guess at that. We could try and get you some information on it but today, I would not want to speculate.

Okay. And then my other question is based on your contracting for food service so far, I know you're only 25% of the processor through the process so far, but based on what you've done, do you believe you've gained some share over and above the acquired volumes from Gold Kist?

It's probably too early to tell. Some cases, we've lost some share. In some others we've gained. I think it's still too early for us to know that for certain.

And what do you feel like the biggest sticking point is in losing a contract? I mean, I imagine it's not service. It's just purely price driven?

I mean, generally it's price driven. I mean, you know, depending upon the amount of overlap that we might have when we acquired Gold Kist with a certain account. I can think of one account where we had about 70% of the business, Gold Kist had 30%, so we ended up with 100% and the account wasn't comfortable with that. So we lost some market share there. But there were very, very few of those and but generally it's a price issue.

I think if you look overall on a pro forma basis, our prepared food volumes were actually up about 10%. So, that included Gold Kist for all of last year '06 and Pilgrim's for last year. So, there might be some make share in there, between some accounts are not that successful. But overall, that line of business continued to grow.

Okay. Thank you

Our final question comes from Pablo Zuanic from JP Morgan.

Good morning, everyone. I'll have to say it again only that I had planned to focus my questions more about the industry outlook. But the results really raise some serious questions at the micro level. Obviously, you touched on them. But from my point of view, I'm looking at an 11% gross margin in the third quarter, and today you report 9.5. Staffing issues, yield loss due to the summer, I believe those were issues that were also an issue in the June quarter. Then I look at the industry data, average pricing when I look at -- when I try to look at posted revenue per pound in the September quarter versus June was up about half a penny. My numbers of course were actually down about half a penny. So, the gross margin that you reported, the decline sequentially, was a total disconnect from industry trends. And again, you know, I'm hearing that you've been very efficient and quick in terms of reaping the synergies from Gold Kist. On the other hand, you had these other issues at the operating level. So I'm just wondering, I mean, the question is more general here, but I was looking for recovering the industry trends to help PPC and now based on what you reported today, I'm wondering whether you will lag the recovery because of some issues at the micro level. One clarification is that staffing issues and yield loss due to a hot summer, that's something that's beyond your control, obviously. What are the things that are within your control that damaged the quarter and that could improve it down the road?

Well, I mean, certainly the staffing issues created a lot of extra cost. We had to use outside processors to debone some of our product that we could not debone internally and that created a lot of freight and yield loss in moving that product around. Even in terms of staffing for the processing plants, we had to use outside co-packers to produce product and so that was a major problem for us in the quarter, which was somewhat shared by the rest of the industry. But maybe due to our locations, we had a bigger piece of it.

And there was not an issue in the June quarter?

It primarily was, the September quarter.

On the revenue --

And Pablo, as Clint mentioned, he thinks that we've been through the worst of it but I would say that the quarter that we're in, you know, will probably be on par in terms of operating efficiencies with the last quarter. And we're on the way out of it, so by the time, like Diane asked earlier, by the time you get to the end of the year, we think we'll be out of this situation. But it's -- you know, it's more of getting out of it the next two quarters to the point of where we want to be.

I understand. Although at the industry level, as you know, spreads in the December quarter look lower than in the September quarter. But that's at the industry level. In terms of portion of the revenue per pound level, your revenue per pound was down sequentially in September and again, looking at the spot pricing data, my composite shows that revenue per pound should have been up half a penny to a penny. Thats made a big difference in your numbers. Why would revenue per pound have been down sequentially for PPC in September?

Yes, I mean, we were down, like I said, about a half cent a pound.

Which is about, you know, $0.08 of EPS.

You know, I guess I'm trying to look at what you're looking at when you mention that. Clearly, we had some decreases. We had wings that were down about 5% quarter-over-quarter. We had boneless, skinless breast which was down about 2%. Leg quarters were up, a penny and-a-half and Georgia dock was up about the same, about a penny and-a-half. So, overall, the market mix was a mix between some products being down as much as 5% and other being up 2 to 3%. So net, net, I think the whole mix of the commodity side was not as favorable as what your math might be showing.

But net in terms of revenue per pound, you're saying that you were not -- your trend was not very different from the rest of the industry, then? That's what you're arguing?

I can't really tell for certain. I don't believe so. It seems to have fallen in line with the market prices primarily. I mean, clearly there's the fixed price contracts, which we can do nothing about really But again, you know, wings down $0.7 a pound, on boneless skinless breasts down $0.04. I would say to the extent you were selling any products into those markets, your prices were down.

Okay. That's useful. On the industry level, I understand that you and Tyson are increasing production 2 or 3%. At the end of the day, last year when the two leaders decided to cut production, it was because of high feed costs. And because well spreads were negative. Right now, spreads are not negative yet. You have big pressure on the feed side. I had a hard time understanding why the large companies would not want to announce operation cutbacks right now.

I think each company has to look at their own numbers and make that decision. But you know, as I said, we are -- we will monitor that as the year progresses. Our growth is back-end loaded. This first quarter, we will be flat with a year ago. And as I said, I think we have to get our costs back in line by getting to a more normalized level. I think that the export markets will continue to help the industry, to handle the growth that is projected. And the growth may come in less than the 3%.

Just one last one, if I may. On the export market in the past, you've given us some idea of where contracts are right now. Can you comment on that? What's the impact from the Russian band on 17 plants. Where are the leg quarters right now, in terms of contracts one or two months out.

We see leg quarters, the export market is in the low 40s, which is for this time of year very good. We are booking product anywhere from 60 to 90 days out. The Russian delisting has not had any impact that we can see on that market. That market is still -- there's still plenty of plants to supply their needs and we have many plants that we can supply that product, China, the rest of the country is still moving well. But seasonally, you know, even for the export market this quarter is not one of the strongest quarters.

All right.

We do have a question from Robert Moskow from Credit Suisse.

Just a quick follow-up. I think you just said that you expected this quarter to be flat versus year ago. Did you mean that on a sales basis or were you also commenting on a profit basis, too?

What I thought we said was we expect this do you remember quarter to be flat with the third quarter.

You're talking about production.

The current quarter, our pounds produced will be flat with year ago numbers on a pro forma basis.

Okay. Thank you.

Thank you. Sir, there are no further questions in the queue at this time.

Thank you very much.

Thank you. This does conclude our teleconference for the day. You may now disconnect.