Pilgrims Pride Corp (PPC) 2008 Q2 法說會逐字稿

Good morning and welcome to the Pilgrim's Pride conference call to review the company's financial results for the second quarter of fiscal 2008. 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's section of the company's website at www.pilgrimspride.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 second fiscal quarter and the 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 this release, a copy is available on our website along with other downloadable information. Joining me on today's call are Clint Rivers, President and CEO; Bob Wright, Chief Operating Officer; and Rick Cogdill, our Chief Financial Officer. On today's call we will review our second quarter financial results and the key factors of our performance during the period. We'll also talk about some of the operating challenges facing our industry and the steps we're taking to return to profitability. After our prepared remarks, we will be happy to take any questions that you may have.

Before I turn the call over to Clint, I'll remind everyone that today's call contains certain forward-looking statements. These include our expectations of future results, sales and cost of sales information and market dynamics. Actual results might differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from these 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. Additionally, I would like to remind everyone that the second quarter of fiscal year 2007 was the first full quarter which included the results of Gold Kist. Accordingly, at times we will be discussing the results of our operations compared to the pro forma amounts for the prior six-month period which includes the full effect of that acquisition as if it had been included in our actual reported results for the entire period. I will now turn the call over to Clint to begin our prepared remarks.

Thanks, Gary. Good morning, everyone. Pilgrim's Pride today reported a net loss of $111.4 million, or $1.67 per share, on sales of $2.1 billion for the second quarter of fiscal 2008. Of this loss, $0.17 per share was related to restructuring and asset impairment charges which will be discussed in greater detail later. These results compared to a net loss of $40.1 million or $0.60 per share on sales of $2 billion for the second fiscal quarter fiscal 2007. Rick will go into more detail on the numbers later in the call, but our financial results in the second quarter of fiscal 2008 reflect the significant unprecedented challenges facing our company and industry from record high feed costs and an oversupply of chicken in the United States. Our cost for corn and soybean meal in the quarter climbed $200 million when compared to the same period a year ago. As the average price for a bushel of corn increased 29% and soybean meal gained more than 63%.

Based on the actual costs incurred during the first half of this fiscal year and the current commodity futures markets for the remainder, the company's total feed ingredient costs for fiscal 2008 would be more than $800 million higher than last fiscal year. To help us respond more quickly to these increasing costs, we have taken aggressive steps to shorten our fixed price sales contracts to 90 day periods in most cases, down from the standard one-year term previously. Bob will talk about this in a little more detail in a few minutes. In addition, as we announced previously, we are closing our chicken processing plant in Siler City, North Carolina and six distribution centers located throughout the United States. Three weeks ago we announced that we had taken (inaudible - audio cut out) by 5% year-over-year for the second half of fiscal 2008. This reduction, which already includes the closing of Siler City, will remain in effect until average industry margins return to more normalized levels.

While soaring feed costs were the biggest factor in our disappointing performance during the second quarter, there were other dynamics at work, too. The amount of chicken in U.S. cold storage may have been dampening commodity prices as inventories for March were 31% higher than year-ago levels. While much of this inventory increase is related to leg quarters, international demand for these products is not an issue. Rather, there has been some amount of backup at U.S. ports due to a severe shortage of containers necessary to ship product to export markets. This is a concern because although there is plenty of demand for U.S. chicken in foreign markets, there simply are not enough containers to move the product in a timely fashion. This reduces the volume of product that can be exported, slowing our leg quarter sales. The container issue is one that affects a wide range of industries and that has received considerable media coverage over the past few weeks. Unfortunately there is not much that can be done to fix the problem in the near future.

The timing of the corn crop is also a topic of some concern. Typically at this point in time, about 35% of the U.S. crop would have been planted. This year, however, only 10% of the crop is in the ground as weather has not yet been conducive to planting. While we still believe that farmers will have ample time to get the crop planted and still have a sufficient growing season, this delay has given rise to fears that late planting could result in an immature crop facing July temperatures which could potentially have a negative impact on yields. On June 30, 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 active snapshot of the nation's corn and soybean crop. While there are clearly significant issues facing our industry, there are some encouraging signs as well. The most positive is related to recent industry production levels. To date, six chicken producers, including Pilgrim's Pride, have public announced production cutbacks this year. These cuts are beginning to flow through the egg set data reported by the USDA and shown on Slide 4. The latest weekly data showed that egg sets declined 2.4% year-over-year. Egg sets have now been down year-over-year for five straight weeks. On top of that, the latest weekly data showed chip placements were down 1.15% year-over-year, that was the first year-over-year decline in 2008.

While all of this is positive news for our industry, it's clear that more must be done. At this point, it has been producers representing only about one-third of the total industry volume that has stepped up to the plate with production cuts. We believe additional cutbacks will be required in order to balance supply and demand and move market prices to the levels necessary for industry profitability. When you factor in all of these industry cutbacks, we estimate that by the end of the year, the industry will have underutilized capacity of at least 5 million head per week. Additionally, with the approved available technology to run higher speed lines, there are many plants that could increase their throughput from 70 to 91 or 140 birds per minute. Based on recent industry data, we estimate that a systematic conversion of current slower speed plants to the new higher standards could result in relatively low cost capacity expansions totaling approximately 20.4 million head per week.

As can be seen on Slide 5, comparing these two factors to the recent five-year average demand growth rate of 1.53 million head per week, this production capacity would be enough to fully supply the industry's future demand for additional production for approximately 16.6 years. This pent-up production capacity will be the first cheapest and easiest source to supply future industry growth, demand as it is needed. Clearly, this is true of the recent production cutbacks which alone are enough to supply the industry's needs for more than three years. This will require greater industry discipline than we have seen in the recent past to put these boom-to-bust cycles firmly behind us. Accordingly, unless we see a sufficient number of corresponding plant closures throughout this industry, this fact coupled with recent reports of greenfield plant expansions calls into question whether or not the industry will be able to achieve a consistent pattern of supply growth at sustained levels of profitability in the near future.

Looking at the second quarter versus the prior year, prices for broiler products were still mixed with some above year levels and some below. During the second quarter, breast meat prices declined more than 4%, leg quarters increased 10%, wings declined 8% while the Georgia dock increased 7%. Although breast meat pricing for the quarter was down year-over-year, there's been positive movement over the past two weeks, as you can see on Slide 6. Boneless, skinless breast meat is now at $1.54 per pound, leg quarters at 45 per pound, and Georgia dock is now at $0.82 per pound. However, given tremendous increase in feed ingredient costs, market pricing will need to improve substantially from the current levels in order for the industry as a whole to return to normal profitability.

Month of May is historically a strong period for market pricing, as Mother's Day and Memorial Day weekend mark the beginning of the summer grilling season. We anticipate a steady strengthening of market pricing throughout the month and into June with the production cuts providing good support for upward movement. Looking ahead, we believe that high grain costs will continue to exert pressure on our operating results during the second half of fiscal 2008. Accordingly, we continue to evaluate our production facilities for potential mix changes, closure, sale and/or consolidation in an effort to position the company for a return to profitability. With that, I'll turn the call over to Bob for an operational update. Bob.

Thank you, Clint. Good morning, everyone. There is no question that we are facing one of the toughest operating environments in our company's history this year. As Clint mentioned, we have taken a number of proactive steps to manage through significant headwinds and position our company as a stronger competitor. A couple of quick comments on those actions. The closing of our Siler City plant and six distribution centers will be completed by June, eliminating approximately 1100 positions. The sale of the turkey business and the closings will enable us to focus on our core chicken business while also having a positive effect of increasing our net cash position as inventories are sold and not replaced. Our production cutback began in early April and will accelerate through the third fiscal quarter. In addition, we continue to review our production facilities for potential mix changes, closure, sale and/or consolidation.

As you know, the ability to pass along price increases to our customers is the key element of our strategic plan. Clearly, in the end, the consumers will have to pay the full cost it takes to produce a pound of chicken plus a normal operating margin. Clint mentioned that since January in our fixed price contract business, we have been moving to 90-day contracts in most instances, so that we are not locked into unfavorable prices as input costs escalate. This shift away from the typical one-year contract and toward shorter terms has been successful primarily because of our steadfast commitment to getting it done. In fact, we have not negotiated a fixed price contract of more than 180 days since January. Fixed price contracts of a year or longer now compromise just 17% of our overall contract volume compared to approximately 40% at the end of the first fiscal quarter.

Slide 7 shows you just how corn and soybean market prices have surged as a result of the battle of acres and demand. It is a sobering chart. The increasing cost of feed ingredients has made our focus on live production that much more important. With the renewed emphasis on performance in this area and an intentional decline in live weights, we are improving feed conversion rates which, in turn, reduces the impact of higher grain costs on our finished products.

Turning now to our capital expenditure plans, we are reducing our budget guidance for fiscal fiscal 2008. Our new estimate for capital spending for the current fiscal year is $170 to $190 million, a reduction of approximately $50 to $60 million from our prior guidance. We have been taking a very disciplined approach to capital investment throughout the year by successfully assessing each and every project to ensure it fits our strategic objectives. As a result, as shown on Slide 8, our capital expenditures over the last 12 months have declined approximately $28 million to $148.1 million at the end of the second fiscal quarter, versus $175.7 million at the end of our previous fiscal quarter.

Last but not least, we continue our focus on maximizing synergies from the Gold Kist acquisition. To date, we have realized $210 million of synergies, $55 million of which occurred in the second quarter. This brings us to an annual run rate of $219.7 million and we're not going to stop there. Our teams are still evaluating potential process improvements that can raise that number even further. With that, I'll turn the call over to Rick for a discussion of our financial results.

Thank you, Bob. Before I begin, I'd like to point out that since we have exited the turkey business, which is now being treated as a discontinued operation, I will be discussing the results of our -- only of our continuing operations which exclude that segment. Turning to Slide 9. As it shows, we realized net loss from continuing operations of $1.67 per share for the quarter ended March 29, 2008, versus a net loss of $0.60 per share for the same quarter last year. For the six months, our loss from continuing operations was $2.16, which compares to a loss of $1.25 per share on a pro forma basis for the same period or $0.73 per share on a reported basis.

During both of these periods, our reported -- our results include some non-recurring or other infrequently occurring items. First, included in both the second quarter and the six-month periods of fiscal 2008 our asset impairment and restructuring charges totaling approximately 17.7 million or $0.17 a share. Additionally, the results of our six-month period and fiscal 2008 include a non-recurring income tax charge of approximately 13 million, or $0.20 a share, related to an adjustment in deferred taxes as a result of newly enacted tax law in Mexico. And finally, 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, related to the early extinguishment of debt incurred by the company in connection with the financing of the Gold Kist acquisition.

Turning to sales, as shown on Slide 10 and 11, in the second quarter sales increased 5.7% or $113.6 million from the same period last year. Our U.S. other segment, which includes non-chicken distribution center, rendering and commercial egg businesses, is responsible for 55.2 million of this increase with the U.S. chickens making up 39.5 million the remaining 18.9 from our Mexico operations. Our U.S. other segment benefit from strong pricing for both commercial eggs and rendered products which are generally tied to soybean meal prices and biofuels effects. The U.S. chicken sales increased 2.4% which was driven entirely by sales pricing as volume sold were flat year-over-year. For the first six months of fiscal 2008, compared to the pro forma prior year period, our net sales increased 9%, or $341.7 million, again on essentially flat volumes. This increase was due primarily to a 7.1% improvement in the U.S. chicken sales pricing which contributed 221.8 million to this increase. Our U.S. other division sales improved 97.8 million due again to improved selling prices in commercial eggs and rendered products.

Slides 12 and 13 show EBITDA reconciliations for the quarter and for the first six month periods. You'll notice that EBITDA for both of these periods was negative, reflecting the negative cash flow resulting primarily from high feed costs. Net interest expense decreased 3.7 million to 33.3 million when compared to the second quarter of 2007, primarily due to lower average interest rate on our outstanding debt. Slides 14 and 15 summarizes our operating results for the quarter and for the first six months of 2008. For the quarter, we recorded an operating loss of 143.6 million which compares to a loss of 10.7 million in the same period last year. This resulted from an increased feed cost which primarily was responsible for 153.7 million of the decline in the U.S. chicken operations. This was offset by a 29.2 million improvement in our U.S. other operations.

Slides 16 and 17 comprise our current debt agreements and maturities. Our net loss for the quarter, combined with higher feed ingredient costs, resulted in a $225 million increase in our total outstanding to debt when compared to the first fiscal quarter. Total debt outstanding today is now approximately 1.6 billion;p however, there is no significant maturities due until 2011. The weighted average interest rate on our outstanding debt at the end of the quarter was approximately 6-1/2% and our debt-to-capital ratio at the end of the second quarter was just under 60%, up from 53.6% at the end of the first quarter. Total liquidity under our debt facilities was approximately 476.4 million at the end of the second quarter. This morning we also reported that we had taken proactive steps to add greater flexibility to our existing covenants under our credit facilities. These steps also will provide substantial room to grow our business under normal practices as we seek to put the challenging industry's conditions behind us.

As you'll see on Slide 18, these revised financial covenants are temporary, for the most part, and will return to their original levels in the first quarter of fiscal 2010. As we have stated in the past, we have a good group of lenders who have faith in our management team and understand the cyclical nature of the chicken industry and the challenges facing us today. They appreciate the proactive steps we have taken to improve our competitive position and our focus on generating long-term value for our shareholders. With these amendments, they have shown their support by relaxing certain of our covenants to afford our business the room we would need under all but the most dire of circumstances through the end of fiscal 2009.

Before I close, let me just say that for the past few quarters the challenges facing our business have exceeded what either the management team or our equity analysts as a group have been able to accurately forecast. While these are trying times where we would not feel comfortable again attempting to provide earnings guidance, nor do we have intention of doing so, I will say that if you look at the remainder of 2008 we continue to see many challenges and unknowns, yet are cautiously optimistic by the recent events taking place in the industry to right production towards a profitable level of demand. Clearly, as Clint noted, there is more that can be done and we hope that it will be. If you look at the actions that have been taken to date and compare them to fiscal 2007, it's apparent that the industry is about two months behind where it was last year in taking corrective measures.

Accordingly, while we are encouraged by the recent moves in the commodity markets, we believe that our U.S. business will continue to be unprofitable for much if not all of the third fiscal quarter. Mexico, however, is already a bright spot and has returned to profitability in March. As we reported today in the second fiscal quarter, our U.S. chicken business had negative operating margins of over $0.08 a pound sold. While we clearly believe that we will outperform these levels in the third fiscal quarter, it is likely to be back end loaded with the quarter as a whole still being a loss. As for the fourth fiscal quarterly, the range of possibilities is wide and highly dependent on industry cutbacks staying in place and feed ingredient costs achieving some measure of stability at or below the current levels. Assuming this occurs, a modest profitable quarter is possible, clearly not to the levels I've in the past called normalized which was 5.5 to 6.5% for the entire quarter. At this time, the earliest I could foresee achieving a normalized operating margin would be the third fiscal quarter of 2009. I'll now turn the call back over to Clint for a few final comments before we open up for questions.

Thanks, Rick. As all you know, the ethanol issue is having an increasingly polarizing effect on the world's economies. Growing worldwide food crisis by mandating corn based ethanol production at the expense of affordable food. American consumers are only just beginning to feel the impact of sharply higher food prices. There will be much more to come as food producers fully pass along these higher input costs. Meanwhile, the government is using tax dollars to provide generous subsidies to big oil companies for blending ethanol while stiff duties on imported ethanol help protect domestic ethanol producers at the expense of end consumers. As a direct result of these soaring grain costs, a growing number of food companies are shutting down plants and eliminating thousands of jobs in rural America.

As you can see on Slide 19, there has been a dramatic shift in corn use over the past two years. Ethanol is stealing away more and more of America's corn crop as a whopping 30% of U.S. corn acres will go for ethanol this year. This dramatic shift in corn use is pitting food against fuel and contributing to global hunger, food riots and other serious issues. As you can see in the index chart on Slide 20, it's clear that energy isn't driving the increase in our overall commodity costs as some would have you believe. The culprit is ethanol, pure and simple. There are signs that perhaps some of our policy makers in Washington are finally beginning to listen to the growing chorus of concerns about America's energy policy. Energy Secretary, Samuel Bodman, recently acknowledged that nation -- that the nation should begin moving away gradually from corn-based ethanol. In addition, two dozen senators have asked the EPA to ease ethanol requirements under the government mandate and the USDA's chief economist recently testified that it not subsidies were having an important impact on corn prices, directly pushing up the cost of corn-based food. Late last month Texas Governor, Rick Perry, asked the EPA for a 50% waiver of the renewable food standard. We applaud Governor Perry for his leadership on this critical issue and encourage other leaders in the public and private sectors to join in sport. I'll now ask the operator to open up the call for questions. Operator.

Thank you. (OPERATOR INSTRUCTIONS). Our first question will come from [Reza Zudia] from Lehman Brothers.

Good morning. This is [Reza] from Lehman.

Good morning.

Hey, [Reza].

Good morning. Rick, you went through a bunch of useful information, but I am not sure if I made it all. For the March quarter, the U.S. chicken volumes were roughly flat?

That's correct.

Okay.

They were.

So if -- sorry, go ahead.

No, that's correct our pounds sold are roughly flat.

So would that translate into net price increase realized of 2 or 3%?

2.5%.

2.5%.

Yes.

Okay. And then would it be fair to assume that industry margins in April were not much better than March quarter and actually possibly weaker?

April would be a lot like the month of March for us.

Okay.

Breast meat prices this April compared to a year ago were about $0.40 a pound below where they were a year ago and pretty flat to where they were this past March, so it would be similar.

Right. And so to get to a break-even margin on a per pound basis, would that imply that from the end of March you really need an $0.08 per pound kind of an increase, just to get back to break-even?

Yes, like I reported, our operating margin for the quarter was a little over $0.08 a pound loss, so that is the kind of numbers that we need on overall.

Right. And so to get back to normalized margin, however, that is described, I mean we're talking about a selling price increase of $0.11 to $0.13?

That sounds correct, yes.

Okay. And then CapEx, I know it's very early, but CapEx for '09, is it going to be comparable to what you're talking about in '08?

We really -- yes, it is early. We really haven't looked at anything for '09 yet, so.

Okay. I appreciate it. Thank you.

Thank you. Our next question will come from Eric Katzman, Deutsche Bank.

Hi, good morning, everybody.

Good morning.

Again, Rick, you -- or Clint, you went through some numbers quickly at the beginning on the technology and the potential changes going on with the industry in terms of I guess ability to increase production significantly off of the existing base, if that technology is put in. How does that jive with, Rick, your comments about seeing some kind of possible recovery to I guess normalized return in the fiscal third quarter of '09 with the understanding that the situation is brutally difficult to predict?

Yes, again, I say that that's the earliest I see that we could get there and it's highly dependent on capacity expansion being in line with demand growth and that's the whole point of Slide 5 is to show really the pent-up industry demand that's out there, not only from the cutbacks but there's still 19% of the industry that's using a lot slower line speeds than what's approved today and it's not all that difficult to run your plants at these higher line speeds, as long as you can get the back end side of the business to handle it. Clearly, it's a lot cheaper to do that and that's the point. It's a lot cheaper to do that than for us to go out and never consider a new greenfield plant.

I see. And then I guess on the contract change, I mean, that sounds like a positive move for the industry and yourselves. I guess is what you're saying that the QSRs and the food service operators out there are kind of recognizing that a much quicker kind of -- a much quicker change in pricing is necessary, given the input cost environment?

We believe that the shorter contract duration will allow us to stay closer to the input costs and it may require adjustments on either the retail or the food service side and them also taking pricing increases. I think it's going to become more of business as usual as some of our competitors also start going to these shorter term contracts and it will become much more the norm.

Okay. And then I guess just the last question on the covenant change, Rick. What are you -- I guess what are you suggesting that we use for a new kind of annualized kind of interest expense level, given the changes that you put through today?

Yes, the -- the total interest expense itself is not going to be materially different, at least at this point. What we did is we wanted -- basically coming out of last earnings release it was clear that there was a lot more focus and attention being levied on the covenants than what we appreciated and we wanted to get out ahead of that and make sure people understood that to the extent there was going do be stress, we could get our banks to go along with us and some kind of a reasonable transition. And that's what you see reported today as well as on Slide 18. But the exchange was basically we took the variable portion up 50 basis points from the grids that we were using before. But, again, as you know, what's happened to LIBOR since the beginning of the year, net-net I think we're still down relative to the forecasted cost at the beginning of the year. LIBOR, it's going to be highly dependent on what happens with LIBOR and what the fed does with interest rates between now and the end of fiscal '09, but I wouldn't forecast a significant change.

Okay. I'll pass it on. Thank you.

Thank you. Our next questions will come from Farha Aslam from Stephens, Incorporated.

Hi, good morning.

Hi, Farha.

Hi, Farha.

Couple questions. Clint, could you share with us how your plants are operating post those [ice raids] and update us on the new equipment that's going in for compensating for the short labor?

Okay. Well, the [ice] actions were disruptive for a few days at those operations, but not significantly disruptive. It did cause us to move some products to some outside contract deboning, which we were already doing to some extent. So we've been able to deal with those disruptions pretty well. The biggest issue we probably have on labor is just the lack of available labor in some of our plants where we continue to struggle to be fully staffed, and that's at a few of our locations and we continue to try to get those operations staffed and those are the plants that we've utilized the technology. So two of the facilities we have implemented the automatic deboning that we were doing there and that is going well. That's going according to plan. Our yields have not been impacted too greatly and the payback on the labor side of it has more than justified putting that equipment in. So we'll continue to look to do that as we go forward where we're having difficulty staffing operations.

But you didn't find the [ice raids] caused a material impairment in kind of how you're able to attract employees and for those plants to function?

No, we did not. It was spread over several plants. Of course, we cooperated through the entire situation there and we were able to handle it without significant disruption.

Okay. And then when you look at egg sets, you said more production cuts are needed but some of your competitors are thinking that 215 egg sets are kind of where the industry needs to be right now given that you're about to go into your seasonally strongest period. What kind of number would you say is required for you to recapture that breast meat price to where you would get to normalized profits?

Well, I'd say it has a lot to do with the depth of the cut and the duration of the cut. And certainly I would rather see us in the 3 to 4% range and we need to see that continue for an extended period of time. So I think that's what needs to happen.

Okay. And then when you look at the leg quarter issue, with containers, do you think that's going to eventually pressure leg prices lower or do you think it just kind of stays in this range? Can you give us some outlook on that?

Yes. The leg quarter price we anticipate will move higher. Some of the container shortage is a seasonal issue where containers are being sent to the southern hemisphere for crops that are being produced down there. Some of it is also a result of less imports coming into the United States due to the weaker currency. But, in all, we think there's good leg quarter demand and our expectation is for higher leg quarter prices.

Thank you very much.

Thank you. Our next question will come from Ken Zaslow, BMO Capital Markets.

Hey, good morning everyone.

Hey, Ken.

Good morning. You guys talked about 3Q '09 normalized margins potentially by then. Is that assuming that in the next two years we get a decent corn crop and that feed costs come down? Is it that the pricing of chicken, because of the production cuts, just kind of offset the higher corn prices? How does your thinking on that actually work out? I just trying to figure that out.

It's awful hard to predict what's going to happen with grain prices, but aside from the government taking some responsible action there, we're probably going to be seeing corn in the $5.50 to $6 range for an extended period of time. So obviously production cutbacks and restraining supply is going to have to continue for us to be able to pass those prices along and for the industry to be able to do that.

Okay. And then in July I think you hired a new risk manager. Can you talk about what has changed in Pilgrim's Pride's risk management processes?

Yes, I'll tell you that we're actively looking at positions that we need to be taking. We don't comment on positions that we do take but we are certainly working hard to monitor what's going on in the grain situations and take actions that we think are appropriate for us.

Have you been starting to -- I know historically Pilgrim's Pride has been of the mindset we don't really take positions on the corn that aggressively. Has that changed? Are you starting to take positions? Are you hedged X percentage? Can you just give us a percentage of how you guys have changed your processes?

We don't want to comment on the positions we have taken except that we are trying to benefit from Edwin being here and the work that he is doing.

Okay. And then in your commentary you kind of came out saying that where there's some closure, maybe sale, and/or consolidation in an effort to position the company for a return of profitability. How do you assess which assets you are going to be able to sell, which ones you may close? Can you give us a framework from which we can work from?

Well, in trying to identify what kind of actions need to be taken, we're looking at facilities where we have either surplus product that we don't have good sales for or this excess and operations that might have a cost structure that we're not satisfied with.

And my last question. In changing the contracts or any other competitive pricing environment, have you guys lost any market share to certain supermarket chains or anything like that or is the market share in each of the regions kind of stabilized?

I think generally it's stable. There have been some books of business that have opted not to go with the shorter duration contracts but we've been steadfast in our approach to this and we've been able to offset it with other business that we've been able to attain. So in total, I think we're in balance.

Great. Appreciate it.

Thank you. Our next question will come from Robert Moskow, Credit Suisse.

Hi, thank you. You mentioned I think you said six companies have made public announcements for industry cut backs but yours was the only one I actually remember had a shutdown of a facility, the others seem to be more like slow downs. Are any of the announced cutbacks you've seen actually closing facilities and, therefore, taking capacity out?

Not slaughter facilities.

Not slaughter facilities. Okay. I'll end it there. Thank you.

Thank you. Our next question will come from Pablo Zuanic from JP Morgan.

Good morning, everyone.

Good morning.

Just a couple questions. Rick, when you said negative $0.08 per pound, could you distinguish there between your value added products and what I would call your fresh business? I mean, is value added worse than that and fresh better or the other way around?

No, we really don't go into that level of detail.

Okay. But if you might want to try to continue with the line of question but I guess what I'm trying to understand on your fixed price contracts, remind me, in the past you talked after Gold Kist that was about 25 to 30% of your sales. Remind me if that's dollar sales or volume. Related to that, when I hear some of the other restaurants, I think [Buffalo Wild Wings] has gone on record saying that their chicken prices up about 5 to 6%, 5 to 6% in '08. My math, a company like yourselves if you are doing business with them, would have needed about a 20% increase. So it seems on the food service side pricing has not been able to recover for two years in a row. I'm trying to get an understanding how much is exposure there? Am I right in saying those contracts are worse off than say they were a year ago?

I think the number, first of all, was when we said the 40% or the less, mid-30s to 40s, that was in dollar revenue and, as Bob pointed out in his comments, that today that number really because the change didn't happen until really January that we went to shorter contracts, that today we're at 17%, right, Bob?

Correct.

So hopefully a year from now we'll be able to report that number continue to dwindle, assuming nothing changes between now and the end of the calendar year. But obviously, I think what you're hearing from the food service industry is part of the problem and that's -- that was -- goes into Clint's comments that not enough has been done to fully pass along these costs yet. It's going to have to happen and it's just a matter of time until it does. Right now the producer has been the one that's been squeezed. The corn producer is doing fine and tend consumer is not paying the full cost yet. That has to rectify itself.

Right. Just to be clear, so 17% of dollar sales that are one year fixed price contracts now, that's what the 17% number means?

Correct.

Last, when you mentioned normalized earnings by third quarter of '09, is that for PPC or is that for the industry or both?

I was talking about for PPC, based on what we see, that's as early as I can see it happening. If you just take a look at my comments for the third quarter and fourth quarter, you know, and then you're into next fiscal year and very rarely do we have what I would call normalized operating margins in Q1 or Q2 and so assuming the industry right-sizes production that corn stabilizes and we don't end up continuing to chase this I think up to $7 and $8 a bushel, I think that's the next period that we could see normalized profitability returning to us and I think we would be a proxy for the industry as well given some companies might get there a little bit differently than us but, overall, I would say that's about how far you need to look to see significant stability.

Just a couple of quick follow-ups. Would you call your $0.94 EPS last year in June as normalized or above normalized or below normalized?

I'd have to take a look here on my margin sheet, actually. Let me see what that is. I don't have that handy, Pablo.

I guess in chicken your margin was about 6.3%. I guess within the average of 5.5 to 6.5 that you mentioned before, so --

Yes, yes, so I think that's the key.

Okay. That's fine, Rick. I'll just follow up with another question, the last one. So when I try to compare versus a year ago, besides the market issues what's happening with corn and chicken prices, I'm just trying to understand at the company level what's different from a year ago? In my view, one area is worse off, it's some of these contracts where you haven't been able to recover the corn increase over the last 12 months. Then you have these labor issues. I'm trying to understand what else is worse from a year ago at the company level, not macro level, or what is better off? Are you getting better synergies from Gold Kist than you were a year ago? That's my last question.

Pablo, I'd say yes, we are getting, as Bob reported, over $200 million in synergies so that's running ahead of what we had anticipated initially. Other negatives, I would say fuel prices are definitely higher. Grower pay is also higher. In this last quarter we incurred fuel supplemental pay to growers that is now off the current quarter that we're in, but those are the only other exceptional things I would mention.

Okay.

Clearly the breast meat being so far behind the same period last year is a key driver and that is strictly a function of the supply side being late to react really to this cost structure. Unlike last year, it started towards the end of the calendar year. This year it didn't start until almost through the end of the first quarter.

If you remember, in '06 we had concerns over bird flu and market prices came down and initial production cuts were made in the latter half of '06 due to the bird flu issues. And as grain prices that fall began to escalate, then there were production cuts put in place because of escalating grain prices. But we were in better position then because of the cuts that had been done already in the latter part of '06. So we're lagging behind last year for those reasons. So we're later getting cuts in places and industry, still don't think that we've done enough. If you look at prices this year due to grain, they've actually -- we were looking at $600 million in '07. We're looking at potentially $800 million in '08. So we've seen more of an impact this year than even last year and it's happened in a very short period of time.

Okay. Thank you. That's useful.

Thank you. Our next question will come from Carla Casella, JP Morgan.

Hi, two questions. One, on the 800 million of additional cost this year, did you say how much you're estimating corn is on average in that figure?

No, that was just taking where we are so far this year and the future's market going out.

It does use the future's market?

Yes.

Okay. And then on the fixed price contracts you mentioned that it's down significant, 17% contracts versus 40%. When was the period for the 40%?

At the end of the calendar year.

Okay. And are the fixed price contracts more -- are they concentrated in a certain type of meat or is it pretty much across the board? Is it legs? Is it breasts?

It's primarily in white meat items, although not totally.

And how low do you think you could get the contract portion down to or is your goal to get that down to zero or is that something that will always be a small percentage?

We want to continue to make it a lower percentage of our business.

Okay. And where would you say you stand against your major competitors or maybe some of the smaller ones that we don't hear from in terms of that? Do most have a portion fixed or a greater portion fixed?

We have had some of our competition also move to shorter duration contracts, but not all of them have. But we would anticipate that over time they would have a similar need to stay closer to their input costs and would move to a shorter term contract.

Okay. Great. And are all of yours 90 day now?

We have some that are longer than that, but by and large we are moving to 90 day agreements.

Okay. Great. And where would the pushback come? Would it be restaurant? Supermarket? Is there a certain space where they typically want longer contracts? I'm sure everybody wants a longer contracts, but I mean where you get the most pushback.

Well, everybody pushes back, especially in the face of these rising costs. They're seeing it not only in their protein products, but they're seeing it in dairy products, bakery products, so they're looking to fix as much of their costs as they can.

Okay. Great. Thank you.

Thank you. Our next question will come from Christine McCracken, Cleveland Research.

Good morning.

Good morning.

Good morning, Christine.

Just wanted to touch on the recent move in breast meat and your comments relative to these production cuts not really having maybe as much of an impact just yet. Curious if you think accounts are actually buying ahead, anticipating the increase in breast meat prices and to what degree would that kind of mute the impact later?

No, I don't think by and large people are buying ahead. Chicken, in general, is generally consumed fresh, so there really isn't the ability to pantry load as you would in some other of the consumer good industry. I think we're just seeing the normal seasonal increase that you would expect to see coming out of the Easter season and starting of the grilling season, with Mother's Day and Memorial Day.

If you look at the recent ad activity, it doesn't seem like chicken has really been getting its share relative to some of the other proteins. I guess I'm a little bit confused by your earlier comments relative to pricing and now with what you're saying seasonal being a big driver of breast meat prices. Maybe you can reconcile that for me.

Well, you have seen a lot more pork activity, feature activity, because pork has been very cheap as they've liquidated some of the sow herds. I think also you're seeing some trading down from maybe some higher cost proteins to chicken, which is still a relative value versus the other alternatives. And so chicken still has all of the health attributes and the versatility attributes that it's always had and I think additionally you're getting that tradedown and just more seasonal consumption.

All right. Just switching gears, on exports and what you're talking about from a container shortage standpoint, what percentage of exports actually go out in containers versus --

For us, it's more than 50%.

Okay. And is it that the containers are a growing percentage of maybe the higher growth markets and that's why it's limiting you're ability to export or maybe can you address if there is a market -- a difference between markets in terms of where the shortage might be impacting you.

There are some markets that are -- use more containers than full ships or full vessels. The issue is really a global issue of supply and demand. On a worldwide basis, the U.S. is currently importing less so there are fewer full containers being shipped into the U.S. and they're going to other countries, such as Brazil and Argentina this time of year because their crops are being shipped to places like China. You take China who historically has been a big exporter and, therefore, they've been shipping containers out, they are now doing much more imports and so the full containers are going in. And so it's just a worldwide balance of where the empty containers are.

All right. And just one final question then on exports, we've recently seen Russia push back and put these kind of random barriers on pork imports from both the U.S. and Europe and it looks to be price driven. I'm wondering as we look forward and leg quarter prices and what should happen technically if we want to get back to restored levels of profitability, do you anticipate kind of hitting a ceiling on leg quarter prices and what impact could that have on limiting your ability to kind of get back to normal?

Well, I think we're always just one geo political action away from having a problem with a particular country, but barring that, leg quarter prices have always had a ceiling of what Brazil could sell whole birds for. But with Brazilian chicken costs being considerably higher than they've ever been before, there's not the economic alternative that there has been in the past. So barring that geo political action, I think there's still room for leg quarter prices to go up.

Any guesstimate on how high they could go?

No, I really don't know how high they could go, but I think there's still some significant room for them to increase, especially in light of a cheaper U.S. dollar. Quite frankly, they're paying in local currency, they're paying less this year than they did at this time last year.

Fair enough. I'll leave it there. Thanks.

Thank you. Our next question will come from Diane Geissler from Merrill Lynch.

Good morning.

Good morning.

Hi, Diane.

Just a question on the timing. You noted last year that the industry responded sooner so we saw production cuts in late winter, early spring that led to improved pricing. I guess my question is really more about as we should expect to see some pricing improvements here as we move through May and June, would you expect the tail -- basically we had three to four months of quickly ramping prices last year and then sort of loss of discipline August, September, October. Would you expect to see that push back later this year? I guess I'm just trying to see what we're going to get at the end of the calendar year and into early next year if we get a little bit more discipline later in the season which is normally the time of year when you have all of the issues with pricing.

Well, we are starting later this year for the reasons I described earlier. And so you would think that we would have to continue these cutbacks on longer into the year. And I think part of what went on last year, we actually saw grain prices come down as the crop came in last year. We had a record crop of corn and in November we saw corn prices at 350 a bushel. And I think that we as an industry fell into the trap of thinking that we were going to be managing corn prices at under $4 a bushel and that turned out not to be the case and I think that's what created a lot of the supply to be put back down last year sooner than it should have been. And so this year I think that the industry is going to need to be more disciplined for a longer period of time in order to get to a profitable level with the kind of grain prices we're looking at today and the uncertainty we're looking at today. I mean, with what's going on with the crop year already this year, if there's more complications with it, we could see corn potentially $7 a bushel or higher. So I think it's important that the industry exert some control and restraint now because we don't know what we might be dealing with as the crop year materializes.

Do you think, based on what you've seen this spring from some of your smaller competitors and some of your larger competitors in terms of public statements to the market, that the industry has come to that conclusion that we are in a different environment now because it just seems with sort of some of your statements, and I understand why you make them vis-a-vis ethanol and some of the other statements made by Tyson, your largest competitor, isn't the reality we're sort of in a new environment and we need to learn how to operate in this environment? Have the rules changed and this is what we're dealing with now, $6 corn and in that kind of environment this is the amount of production we need in order to offset higher grain prices?

That's right. I think that is what we're starting to see. But as I mentioned in my comments, we still only have about a third of the industry that's publicly making comments about any kind of cutbacks. I don't know that we are all there but certainly I think that opinion is beginning to materialize.

Okay. And then I guess just to clarify or make sure I understand Rick's comments about the normalized margin and some of his comments later about seasonally generally December and March quarter if you'll just look back historically, you weren't normally seeing those types of margin. Is that -- am I reading too much into it? Trying to get to the point that those will be --

That is the point. That is the point that we'll see how the summer progresses and, like we said, the fourth quarter we would not expect the quarter as a whole to be "normalized margins." That doesn't mean towards the end of that period you couldn't be around those levels. But then, again, then you go right back to Q1 and Q2 which is really starting in the soft demand time of the year. So --

But you're not necessarily signaling large loss in the December or March quarter at this point?

No, I'm not trying to signal that at all. I'm just trying to say there's so much dependent on the future actions and what's going to happen and the cost structure and, again, this pent-up capacity. I mean we've got more pent-up capacity than we've ever had just on the shelf ready to take advantage of any move in the prices and to the extent that comes flooding in, it won't be good for the profitability of the industry as a whole. To the extent we can show constraint and keep some of this capacity in line with the demand growth, that 1.5 million head a year demand growth, I think we'll be better off.

To that point, would you consider a sale of the plant that you just closed or are you just taking it offline and that's it? You don't want to see it come back, nine months down the road you're not looking to sell it?

Our position has been that that -- we want that capacity to be withdrawn from the market and we think that the industry as a whole, as you can see on Slide 5, has got to face this reality, especially if we add new production to the mix.

Okay. Thank you very much.

Thank you. Our last question will come from Robert Moskow, Credit Suisse.

Just a follow-up. I saw a slide from a presentation a few weeks ago that said that U.S. chicken and U.S. pork had become the low cost protein option for consumers in China mostly because of the U.S. dollar and I guess supply disruptions over there. Are you seeing any data to confirm that and do you follow that?

I haven't seen that. I mean, pork is -- pork consumption in China is higher than chicken consumption. It historically has been. There have been a number of problems domestically with their pork production in China, but I don't know about the cost structure there for imports. What percent of your mix gets shipped to China currently, if any? I don't have that number in front of me.

All right. Well, thank you.

Thank you. Gentlemen, at this time we have no further questions in the queue.

All right. Thank you. There's no question that the first half of fiscal 2008 has been a challenging time for our company and most of our industry. The current operating environment is among the most difficult I've seen in my 27 years in this business. Clearly we have a lot of work to do ahead of us, but I believe we are making the tough decisions necessary to position Pilgrim's Pride for profitable, long-term growth and I thank you again for joining us today and we look forward to talking to you again in third quarter. Thank you.

Thank you. Ladies and gentlemen, this call is now concluded. You may now disconnect at this time. Thank you and have a wonderful day.