Pilgrims Pride Corp (PPC) 2008 Q3 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 third 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 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, you may begin.

Good morning, and thank you for joining us today as we review our financial results for the third fiscal quarter and the year to date. Earlier today we issued a press release that provides an overview of our financial performance for those 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 Chief Executive Officer; Bob Wright, our Chief Operating Officer1 and Rick Cogdill, Chief Financial Officer.

On today's call we will review our third-quarter financial results and the key factors of our performance during the period. We will also talk about some of the operating challenges facing our industry and the steps we are taking to return to profitability. After our prepared remarks we would be happy to take any questions that you may have.

Before I turn the call over to Clint, I will 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 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 Clint to begin our prepared remarks.

Thanks, Gary. Good morning, everyone. Pilgrim's Pride today reported a net loss from continuing operations of $48.3 million or $0.69 per share on net sales of $2.2 billion for the third fiscal quarter of 2008. These results compare to net income of $63.3 million or $0.95 per share on sales of $2.1 billion for the same quarter of fiscal 2007. Rick will go into more detail on the financials later in the call, but the year-over-year decline in profitability can be primarily attributed to two factors; dramatically higher feed ingredient costs and sales price increases that were insufficient to offset these higher costs.

A year ago industry production was reduced enough to drive a significant increase in market pricing. As a result, Pilgrim's Pride and the industry as a whole returned to profitability in the back half of fiscal 2007, and in fact posted a modest profit for the full year. However, the cutbacks introduced so far this year have not been sufficient to boost breast meat pricing to levels needed to cover soaring feed costs.

Simply put, at this time there is still too much breast meat available to drive market pricing significantly higher. Slide four shows that consumers have only just begun to see higher prices for meat and poultry in their local grocery stores. As you can see, the consumer price index in June showed a 2.9% jump in meat and poultry compared to the year earlier. This is far below the sharp increases for other items such as cereals, bakery items, dairy, fruits and vegetables.

American consumers should brace themselves for sticker shock in the meat case over the next 12 months. The supply of meat in this country is going to be adjusted to allow producers to pass along the full effect of higher feed and energy costs, which we believe are here to stay for the foreseeable future. Frankly, I believe one of two things is probably going to happen in our industry. Either industry production will be cut further like we saw last year or else the inevitable recovery will be postponed as overall demand will have to grow over time to offset these challenges.

Over the past few months we've frequently been asked at what price does breast meat need to be in order to cover those costs. Obviously this is a moving target based on several factors, including the returns from other parts of the chicken. But at this point assuming $6 corn and $350 soybean meal costs, I would say market prices for breast meat need to be in the range of $2.15 for the industry to break even, and roughly $2.25 per pound to get back to normalized levels of profitability.

On a modestly positive note the industry egg set data are beginning to look encouraging. Over the past three weeks year-over-year reductions have ranged from 2.4% to 3.9%. It appears that the industry is beginning to take a somewhat more rational, disciplined approach to production in this difficult operating environment. Nevertheless, we believe these levels of reductions point to a longer recovery period than we would have hoped for. We will be watching these data points closely as we head into the fall.

Going back to the quarterly results, feed costs once again proved a stiff headwind. Flooding in the Midwest propelled grain prices to new all-time highs before backing off a bit recently, yet many year-over-year market price indicators continue to be unfavorable. Our total feed ingredient costs in the quarter climbed $266 million or 41% when compared to the same period a year ago, prior to any risk-management offsets. Based on the actual costs incurred for the first three quarters of the fiscal year the current commodity futures markets for the remainder of the year, the Company's total feed ingredient cost for fiscal 2008 would be up an estimated $900 million from last fiscal year prior to any risk-management efforts.

We are doing everything we can to manage through this extremely difficult operating environment. Over the past six months we have made some very tough but necessary decisions to position our Company to emerge from this down cycle as a much stronger, more efficient competitor. During the third quarter as previously announced, we closed a processing plant in North Carolina and six distribution centers, eliminating a total of approximately 1100 positions.

We continue taking steps to shorten our fixed-price sales contract in prepared foods to 90-day periods in most cases down from the standard one-year terms previously. At times we have walked away from unprofitable sales or from accounts that wanted multiyear fixed pricing. We will let others assume these losing propositions. This approach may hurt a bit in the short-term, but we are more focused on the long-term health and profitability of our business. As we've said internally many times over the past year, we can make a bad sale any day we want. There is no sense committing to a long-term agreement to do so.

As you know, during the quarter we also modified our debt covenants and raised $177 million in a stock offering to gain greater financial flexibility and to provide added liquidity to manage our business in this volatile time. More recently, we announced the consolidation of our El Dorado tray-pack business into six other facilities and the closure of our distribution center in El Paso. This will position our case ready division to operate more efficiently as the El Dorado facility is converted into a low-cost supply plant that feeds chicken into our further process business. While this change will eliminate 600 positions in El Dorado, our contract growers and employees in lab operations will not be affected at this time. This conversion should be completed by mid-September.

As we said earlier this month, the consolidation in El Dorado concluded the formal review of our operations that began back in March. We have no plans to close, consolidate or sell other facilities at this time. That is not to say that unforeseen events or substantive offers couldn't arrive at some point to change these intentions since as a public company we must always be open to making decisions which we deem to be in the best long-term interest of our shareholders.

Looking ahead, there is no question that high feed costs will continue to be a significant concern for our industry. Pilgrim's Pride is part of a broad-based coalition of food companies that is urging the federal government to fix its badly flawed ethanol policy before the food versus fuel debate sends the global economy into an even greater tailspin and leads to even worse food shortages. A rapidly growing base of American consumers, their wallets pinched at the gas pump and grocery store, are joining us in this fight.

We are pleased by the EPA's announcement last week that it plans to take additional time to review the Texas governor, Rick Perry's request for a waiver of the renewable fuels standard. While we believe the correct response to Governor Perry's request is obvious to most of the US population, given the pain they are feeling from the sharply higher prices for just about everything made from corn or oil, it is important for the EPA to digest all of the facts and compelling economic data that overwhelmingly support a waiver of the fuel standards.

I want to share a few comments about production before I turn it over to Bob. As you know, we've taken steps to reduce our second half of the year production by 5% year-over-year. In the third quarter our total pounds were down 1.33%. For the fourth fiscal quarter we are projecting total pounds to be down approximately 8.7%. This will get us to the 5% overall reduction number for the back half of the fiscal year.

Going forward, we will continue to monitor our production needs and adjust our plans as our business or the cost environment dictate. As we continually monitor and optimize our production mix we may add production in some areas while decreasing it in others. Again, all this will be done with an eye toward maximizing our companywide operating performance. With that, I will turn the call over to Bob to discuss our operations.

Thank you, Clint. Good morning, everyone. As Clint said, overall market pricing clearly isn't where it needs to be for producers to cover their feed costs. If you look at prices for chicken products during the quarter on slide five, it was a mixed bag. During the third fiscal quarter breast meat declined 12%, and wings were down 26% versus the same period a year earlier. Leg quarters, on the other hand, increased 2%, and Georgia dock rose 5%. Since the end of the third fiscal quarter, breast meat prices have declined another 10% to $1.33 per pound and wing prices have dropped 1% to $0.97 per pound. Only leg quarters and the Georgia dock have shown any signs of strength increasing 6% and 13%, $0.89 and $0.52, respectively.

Leg quarters, in fact, have been one of the few bright spots this year. Our export demand remains strong, and we are having absolutely no difficulty meeting any commitments to our customers. In fact, we are currently booking leg quarters for September delivery at a significant premium to the current market. The container shortages that have posed logistical issues for exporters appear to be gradually improving.

We have seen some customers trading down to dark meat as a result of the weak economy. This has created some disproportionate retail demand for certain dark meat products. As a result, in some cases we have had to limit the quantities of dark meat we are willing to sell because it can cause a significant out of balance position to the white meat purchases. It is important to remember that in the end we have to sell the entire chicken.

One positive development in the export market is demand among Middle East countries for US whole birds. Until recently undervalued products such as leg quarters, wing tips and paws were the typical products exported by the United States. But with the strength of the Brazilian currency and the weak US dollar, our whole birds are now extremely competitive with Brazilian product. We have been creating products to meet this new demand and expect to begin shipping in August.

As Clint mentioned earlier, we've shortened the duration of sales contracts in most cases to 90 days to help us pass along rising input costs. Overall, this strategy has been effective as the most recent contracts coming due have been renegotiated at higher prices. We have also walked away from unprofitable sales or accounts that wanted multiyear fixed pricing. Remarkably, it appears that there are still some producers in our industry that are willing to take these market risks, both at a current loss and well beyond what we believe they can reasonably hedge in the open market. We are glad to let our competitors load up on contracts of this nature and pricing. We will stick to our strategy of rationalizing our product mix and exiting poor or marginal sales.

Turning now to egg sets on slide six, as Clint noted recent egg set data from the USDA gives us some signs of optimism with regard to future domestic pricing. Egg sets have been down year-over-year for the past 17 weeks with declines of 2.4% or more for the past three weeks. In addition, chick placements over the same three-week period have ranged from essentially flat to down 1.8%. These factors point to a reduction in supply in the future which hopefully will exert some positive pressure on pricing.

However, it appears that any impact from these reductions probably won't occur until the summer grilling season ends. In the end, though, there must be upward pressure on pricing given that our feed costs per pound rose by more than $0.04 or 43% in the third quarter when compared to the same quarter last year.

In addition to pricing and feed ingredient cost, we've also have seen a sharp increase in energy costs. In total, our energy costs have risen $18.7 million year-over-year for the third quarter. According to the Energy Information Administration, natural gas prices in the third quarter of fiscal 2008 are up 110%, and diesel was up 63% compared to a year ago. And as slide nine shows, there is no relief in sight. Given all the downward pressure on margins from increased input costs and lack of sufficient upward movement in pricing, it is more important than ever to find ways to operate more efficiently. Clint outlined some of the larger steps we have taken, such as converting our El Dorado facility to a supply plant. This consolidation will have a positive affect on our future results.

Our prepared foods division will benefit from a lower meat cost, our case ready operations will benefit from spreading a lower amount of fixed costs over its produced pounds. These benefits are a direct result of our increased size following our acquisition of Gold Kist. But there are plenty of other steps that we are taking to lower our cost, as well. For example, we've slashed hundreds of SKUs from our product mix so that we can focus on the faster turning, more profitable items that our customers want. We've lowered the speed limit on our fleet of 1700 commercial vehicles; with the help of our drivers we expect to save more than $3 million a year in fuel expenses.

Also taking a closer look at potential product mix changes in our plants, we found opportunities with deli WOGs that will save us $1 million by moving production closer to our customers. These are just a few examples of the cost saving opportunities identified by our employees. I am tremendously proud of the way they have responded to the challenges facing our business, and we are confident there are many more ideas to come.

Another area where we've been diligent is the maximizing of the synergies from the Gold Kist acquisition. To date we have realized $282 million of synergies, $63 million of which occurred in the third quarter bringing our annual run rate to $252 million. While we are reaping the benefits of our synergies, we are also keeping a close watch over capital expenditures. Taking a very disciplined approach to these investments by focusing primarily on those projects that have paybacks of six months or less.

As a result, looking at slide 10, we now expect our capital investment for fiscal 2008 to be in the range of $130 million to $150 million, down from our previous guidance of $170 million to $190 million. With that, I will turn it over to Rick for a financial update.

Thank you, Bob. Before I begin, I would like to remind everyone the last quarter we exited the turkey business and as such that segment is now being reported as discontinued operation. I will only be discussing the results of continuing operations to date which excludes that segment. As shown on slide 11, we realized a net loss from continuing operations of $0.69 a share for the quarter ended June 28 of this year. Versus net income of $0.95 for the same quarter last year.

For the nine months our loss from continuing operations was $2.85 per share, which compares to a net loss of $0.30 per share on a pro forma basis for the same period last year, or net income of $0.22 per share on a reported basis. During both of the periods being reported there were some nonrecurring or other infrequently occurring items. For the three and the nine months periods of fiscal 2008 we incurred asset impairment and restructuring charges totaling approximately $2.2 million and $13.2 million net of tax, respectively, or $0.03 and $0.19 per share.

These charges are related to the closing of one of our processing plants and administrative office and six distribution centers. As we noted in our press release announcing the realignment of our El Dorado processing plant and the additional closure or sale of the distribution center in El Paso, Texas we did not anticipate any material charges related to these two events.

Additionally, the results for the nine-month period of fiscal 2008 included a nonrecurring income tax charge of approximately $13 million or $0.19 per share related to an adjustment in the deferred taxes as a result of the newly enacted tax law in Mexico. And finally, included in the nine-month period 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 12, in the third quarter sales increased 4.9% or $103 million from the same period last year. Our US other segment which includes our non-chicken distribution center, rendering and commercial egg businesses is responsible for $56.3 million of this increase, with the US chicken making up $19.8 million and the remaining $26.8 million coming from our Mexico operations.

Our US other segment benefited from strong pricing in both commercial egg and rendered products which are generally tied to the soybean meal prices and biofuels. The US chicken sales increased 1.1% was driven almost entirely by sales pricing as volumes sold were essentially flat year-over-year.

Slide 13 shows our net sales for the first nine months of fiscal 2008 compared to the pro forma prior-year period increased 7.5% for $444.2 million on essentially flat volumes. This increase was due to a 4.9% increase in US chicken sales pricing, which contributed $241 million of this increase. Our US other division sales improved by $154 million due again to improved selling prices for commercial eggs and rendered products.

Slides 14 and 15 shows the EBITDA reconciliations for the quarter and for the first nine months; and in spite of the high feed costs we achieved a $16.9 million positive EBITDA for the third fiscal quarter. Net interest expense decreased $5 million to $34.9 million when compared to the third quarter of 2007, due primarily to lower average outstanding interest rates on our debt.

Slides 16 and 17 summarizes our operating results for the quarter and the first nine months of fiscal 2008. For the quarter we recorded an operating loss of $42.5 million which compares to an operating profit of $136.9 million in the same period last year. Once again, this decrease resulted primarily from the increased feed costs, which resulted in the $185.6 million decline in our US chicken operations. This was offset by a $13.5 million improvement in our US other operations.

Slides 18 and 19 summarize our current debt agreements and maturities. Our total debt declined by $111.5 million when compared to the second quarter as we used proceeds from our equity offering during the quarter to pay down debt. At the end of the quarter our total debt outstanding was just over $1.5 billion. However, as a reminder, there are no significant maturities on any of this debt until 2013. Effective interest rate on our outstanding debt is approximately 7.25%, and our net debt to capital ratio at the end of the third quarter was 56.1%, down from 60% at the end of the second quarter.

Total liquidity under our debt facilities at the end of the third quarter stood at $591.2 million, an increase of approximately $97.3 million from the end of the prior quarter. Slide 20 shows the status of the revised financial covenants that Clint mentioned earlier, and as we previously reported, these revisions are temporary for the most part and will return to their original levels in the first quarter of fiscal 2010.

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

Thanks, Rick. There is no question that our industry is enduring one of the toughest, most difficult periods in recent memory, particularly with the US economy in or near a recession. Looking ahead, we will continue to do everything in our control to position the company for a return to profitability as a stronger, more efficient competitor. I previously announced production cuts remain in place and we will continue to monitor industry conditions to determine appropriate production levels as we enter fiscal 2009.

In addition, we will redouble our efforts to pass along higher feed costs to our customers. Fortunately it is times like these when chicken can capitalize on its position as the healthiest, best value protein. These difficult economic times when inflationary pressures are hitting food products hard, consumers see chicken as a way to get more for their money without sacrificing taste and quality. This concludes our prepared remarks. Operator, please open up the call for questions.

(OPERATOR INSTRUCTIONS) Eric Katzman, Deutsche Bank.

I was a little bit surprised to see that your production was only down I guess at 1.3% in pounds, and is there a reason why that internally that it took longer to bring the number down as you indicated for the fiscal fourth quarter?

Eric, I would say you got to consider back to the quarter we are comparing against and when you compare back to the third quarter last year we had -- that was the period of time we had our deepest production cuts for the prior year. So you are comparing to a quarter where production was already down to a lower level. I think that is the primary reason for it.

Okay. I guess as you no doubt were aware yesterday Dick Bond at Tyson kind of suggested that there could be some type of let's say potential recovery in breast meat pricing in the December quarter given what is going on. Do you share that kind of cautious I guess optimism, and what would make -- what do you think would make lift US breast prices at that point?

I can't predict very well when that is going to occur, only that we have seen some more reduction in egg sets in recent weeks. And if that continues, then one would think that would have to drive some market improvement. But I would also say that demand appears to be off a little bit from what we would expect because I don't think any of us would have expected us to be at $1.33 breast market at this time of year. So I think it is hard to predict going forward, but as the industry responds with needed production cuts we should get to that point. Typically we do see production or demand fall off in the fall. So we've got to take that into account as well because we think demand is down somewhat now. It could be down further in the fall, as well, so the production cut needs to be to deeper levels than it has been obviously. So but hopefully all that will occur and we can see some strengthening in breast prices as we go into the winter.

Last question I'll pass it on. The sales figure, I guess the US chicken number was reasonable, but it seemed like a lot of the strength came, as you said, in exports. And then there is the whole kind of other part of the business, which I've never really kind of focused all that much on. How sustainable is the pricing in I guess some of these disparate products that you put through the distribution system?

The other category, that includes our rendering and our egg business, our rendering business we expect those markets to remain high and expect them to stay strong. In terms of eggs, the markets are down some there so we are seeing some slippage from where we've been on eggs in the prior quarter. So yet to be seen what will happen there as we go into the fall.

Okay, thanks. I'll pass it on.

Reza Vahabzadeh, Lehman Brothers.

You talked about the reduction, almost elimination of the longer-term prepared food contracts in this quarter from preceding quarters. How helpful was that, if any, in terms of helping your margins in this quarter? Can you talk about that?

There has not been a lot of help from that this quarter. You know, we have been able to contracts we did not have in place prior to the beginning of this calendar year, we've been able to get to shorter time frames. We still have some business for a fair amount of prepared foods business with annual contracts that will be negotiating here in the near future. So I wouldn't say that we've seen a lot of help from that in this last quarter because the costs on the feed side continued to climb so much that most of the benefit that we would've seen have been offset with that.

What would you -- would some of these contracts have had some losses for you in their March quarter that may have abated in the June quarter, because of the reduction of these kind of contracts?

There are some contracts that we've had a better position this last quarter than we would have had in the second quarter, but not substantial.

I don't know if I heard you right, Clint, but did you say you need boneless skinless breast to get up to $2.15 for the Company to break even?

I think we said $2.15 for a break even level on breast meat and $2.25 to get back to a normalized level of profitability.

You are talking about the whole company's operating income or just for that particular type of product?

For that particular type of product that is sold on commodity markets.

I see. Okay. You talked about the operating loss in the fourth quarter, given the environment, you mentioned that in the press release. Are we supposed to take that to mean that operating losses will be similar to the third quarter or materially lower in the fourth quarter than the third quarter? I do not mean to get a projection for you. I am just trying to get a little color.

I guess what I would say is it is too early to tell since we don't know what is going to be going on with markets for breast meat especially the remainder of the quarter. I would say that there is potential for the fourth quarter to be worse than the third quarter because if you look at feed ingredient pricing, although the grain markets have retracted in the last few weeks going into July, we had the absolute highest grain markets. And so those products are being fed to birds today and any retraction in the markets those birds would come out of the field weeks from now. So we actually went into the quarter with the peak grain markets.

Got it. Lastly for you, Rick, was working capital much of a use of cash in this quarter or not?

It was a similar increase again as Clint mentioned, the feed ingredient cost did go up, and we obviously had to put some of that in the inventory during the quarter. We will file our Q today but I think inventory was up -- hold on one second -- quite a bit. Inventory was up over $175 million; that is for the nine months. I don't have the quarter number there.

I will look at the 10-Q. Thank you.

Ken Zaslow, BMO Capital Markets.

A point of clarification. You said $2.15 is breakeven, $2.25 is normalized margins?

Correct, that's what I said.

Okay, so if your breast price is at $1.33 and you had not -- did not have 5% loss on your margins, why would that -- well, it looks like 15 plus 75, $0.85 differential only be a small, modest below your breakeven level? Were their hedging gains in here?

I don't follow your question, Ken.

Its a difference between breakeven and normalized margins is $0.10 on breast prices? Your margin that you put up this quarter, which was a loss, but breast prices were $1.33.

Not all of our breast meat in the company is sold on those markets, so that doesn't -- you can't equate those apples-to-apples.

That's right. That is just a small percentage really of the total mix to be sold on that commodity market.

I guess the other question is were their hedging gains in this quarter? It looks like you probably bought forward corn pretty well. Is that a fair assessment?

As we said in the past, we continue to be active in the markets and trying to mitigate all of our commodity risks, and we really don't talk about the effect of those. We are going to continue to not discuss that.

How would you rate yourself in terms of operating efficiency across the industry, and I guess you mentioned some projects and can these projects catapult you to the top quartile or how do we think about that?

We have an awful lot of plants, Ken, and many of those plants are operating at that highest level of efficiency. But we got some other operations that we continue to work on rationalizing the mix and the processes, and that is one of the things that we've announced recently with our changes in El Dorado. But in total we are operating very well. You do have, any time you are cut back you do have some increased costs on some of your fixed charges there, but with these markets it is the responsible thing to do.

Would you have a cost savings expectation for 2009? Given all the projects? It sounds like you are really making a major effort on the cost savings effort. Is there a paradigm that we could actually think about, as well?

No, we've not tried to total those up and come up with a number like that. We just continue to work on the opportunities we have and they continue to develop. And so we have not come up with an annual number on that.

Great. I appreciate it. Thanks.

Farha Aslam, Stephens Inc.

Could we get some color regarding your sales? What percentage of your volume are sold on any type of contract?

I don't think that number has really changed from what we said before. We are still in that 35% to 40% that we sold under some kind of a fixed-price type contract.

That is fixed-price.

Yes, that's right. And as Bob mentioned, we've shortened the duration of those contracts. We still have, I think it was about 17% that was carried over from the end of last calendar year that are on annual contracts. And everything beyond that, the other 20% is on the shorter term fixed contract. And beyond that everything is either some kind of market related contract proportionately on the spot basis. The bulk of that is going to be market related.

So about 17% of your volume is on fixed annual (inaudible) right?

Those were entered into last year at the end of last calendar year before we went from annual to these 90 day (multiple speakers).

Right, and so then another 17% is variable?

17% to 20%, that's about right.

17% to 20%. And then the rest of your sales are sort of market based?

Market indexed, market-based, that's right. It might be tied to Georgia dock. It might be tied to other market indexes.

We also have cost-plus agreements. We have price list agreements. So we have that 17% that is fixed through the end of the calendar year, and then we have about the same amount that is fixed usually on a 90-day duration and then it is renegotiated. And the balance would be all the rest, cost-plus, market related, some are indexed to grain cost, just a variety of other type of agreements.

So on the part that is kind of market index, market-based etc., is it breast meat that drives it? Is it whole birds? If we have to kind of get a feel for what are the key components that drive pricing in that market-based bucket, what would you say is there?

If we are selling whole birds most of those are indexed to the Georgia dock, and that has been doing well. Where we have spot sales on things like breast meat and wings, those are usually related to the (inaudible) market, which as we mentioned is down significantly year-over-year.

Okay.

And you have others that are tied to the wing market on a formula price or tender market on a formula price, and it is going to be whatever the product is might be tied to a formula based contract based on that market.

Okay, and my final question goes back to Ken's. In this quarter did you benefit at all from grain hedging and kind of going forward, because your results were surprisingly good. And going forward do you anticipate any -- could you comment at all on what type of grain hedges you might benefit from in the fourth quarter?

We are really not going to comment on our hedging activity. As we mentioned more than a year ago when we brought on a senior executive in that arena that we intended to get more active in looking at all the commodity risk exposure we had. And we said that we will use all tools to our disposal, whether they are puts or calls or hedges or what have you. And we continue to do that and have done that. Beyond that we are not going to disclose specifically where we are on hedges or what the results are because we really don't think from a competitive nature we need to be talking about that.

Okay, thank you very much.

Robert Moskow, Credit Suisse.

Actually two questions. One is have you seen the news item today about the US chicken industry negotiating lower export contracts with Russia for next year? I think it is a 20% cut import quota and then it gets lower as the years go on. Why do you think contract like that was negotiated, and what do you think it will mean to pricing for leg quarters?

And secondly, can you talk more broadly about what the benefits of scale are in this industry? By my math, Pilgrim's Pride and Tyson have actually been operating at the low end of profitability. And a lot of these small, very focused maybe low cost producers that are private, they are actually more on the high end of profitability. So how is scale helping, and why isn't it helping more?

To your first question, first we are aware that there was a group of industry participants that met with the Russian government; the letter of understanding is nonbinding. It was agreed to basically under a threat from the Russian government that if they weren't to come to agreement the Russians were going to implement some new import quality standards. Which essentially would ban most of the US production because of chlorine and no chiller water and certain other things.

And so it was really done under duress and considered to be the lesser of the two evils. In the short term I don't see that it will make any difference. One of the things this year that we've seen in exports is that a number of new countries have really come into the market place and been much bigger buyers than they have been historically as their economies improve. And their demand for protein increases at a time when the US dollar is low, creating a great value.

To the extent that that continues, that will more than offset whatever loss production comes from the Russian market. From a Pilgrim's Pride perspective, we have five of our plants that export some percentage of their production to Russia. That is five out of 33 slaughter plants, so although we have exposure there it is not a huge piece of our business.

And the scale question I had?

I think you make a good point there. On scale from the overhead category, there is definitely some benefits to scale in our production facilities. The ability to move products around and load plants with products that run more efficiently to take advantage of the strengths of each particular plant. I think we are in a better position to do that.

But on the sales side a company our size, we really are selling into all of the markets, and we can't just restrain ourselves to a particular niche market that a smaller producer might be able to do and I think that may be some of what you see.

Thank you for that. I appreciate it.

Christine McCracken, Cleveland Research.

Just wanted to follow up on your comments relative to kind of the production cuts that we've seen thus far. Certainly promising, but I don't believe that the levels we need to see to get to the $215 are kind of boneless prices that you expect for breakeven. Can you talk about what magnitude of cuts would we need to get to get back to that level of pricing?

That's a difficult question to answer, Christine. I would say if you remember a few months back when we were projecting the need for cuts into that 3 to 4% kind of range and if we had accomplished that as an industry back at that point in time we would be in a different situation today. But as we go forward, our production level as we commented on earlier is at that 8.7% level. So we think that it needs to be more in that 8 to 10% type of range to get to where we need to go in the markets.

It seems like though, you guys have taken a leadership position, clearly cutting production more aggressively than some of your peers. But without the participation of the industry it seems like it is going to be hard to get to that level. What do you think is keeping your competitors at this point from cutting more aggressively in order to get back to breakeven? It doesn't seem like this level of loss, losses for the industry kind of universally is sustainable. What is the -- I mean you can't probably speak for them but maybe you have some ideas on that.

No, I can't speak for them. The only thing I would tell you is that I think that because of coming into the summer and some announced production cuts that there are probably some in the industry that thought that the heavier demand on exports, the summer season, the production cuts that were done by others may be enough to fuel the markets and bring breast meat pricing up. But as we see that has not occurred, and I hope that that will bring some different thinking and more rationalization as people look at their business and what is good business and take a more aggressive action. I can't speak to exactly what they've done, but I hope with the situation as it continues to unfold that we will see more support there because, as you say, we have led the industry. Last year as well as this year.

And Clint, don't we ultimately really need a cut at the breeder level; in order for these cuts to be sustainable and get kind of an ongoing or sustainable price increase in order to offset this kind of feed cost escalation?

That's right. You don't necessarily have to have a cut at that level to get a reduction in slaughter, but for that to be a long-term reduction, then it would make sense for those pullet placements to be reduced so that it has a longer-term effect.

But we really haven't seen that yet?

We've seen a little bit of it, but not the magnitude that we need to see.

So it's kind of just a waiting game at this point?

That's right.

I will leave it there. Follow up later. Thanks.

Diane Geissler, Merrill Lynch.

Just working out the numbers here on the production side and given the color you have given on the third quarter and fourth quarter, when we see that 8.7% reduction in the fiscal fourth quarter, is that what we should be thinking about for your first half of '09, you will maintain that? It will be bigger in the first half of '09, it will be smaller in the first half '09? If you could just give some commentary there. I understand we have a seasonal move down in demand generally, so you generally see a pulldown anyway but that would be helpful.

It is difficult to answer that. For one reason our year-over-year comparisons as we talked about earlier, keep changing because last year was a year of cutbacks. What I can tell you is that those cuts are in place today and will remain in place until we see the industry turn around and whether we make any other adjustments to that will depend on our business and what we see that we need to supply.

So if we were looking for about 1.9 billion pounds produced in the September quarter, even if you look maybe sequentially, would you expect the December quarter to be similar to that? I am trying to factor out the function of the percentages and think about it in absolute terms.

Well, our production does change seasonably to some degree. So you would need to factor that in, as well.

Actually went up in December versus September last year, though.

Yes, but it is comparing year to year, it gets difficult as we've altered those production levels based on prior cutbacks.

All right. I'll just work through some absolute numbers and maybe talk to you off-line. The other question I had was on the food service contracts, just a little clarity there. Are the 90-day contracts, are you fixing a volume for on an annual basis and then revisiting some kind of formula every 90 days? Or are you actually renegotiating whether or not you will have the volume every 90 days?

We do both.

Is there one that is (multiple speakers) percentage of the volume or --?

It would be our preference as well as the food service customers that we really have an agreement to supply them going forward, and there may be volume, as you mentioned for a year, but that we make adjustments to the pricing on a quarterly basis. That would be the predominant of the two.

And you are finding that obviously that is what you would hope that your contracting structure would look like; but is that what you are actually finding when you are doing your negotiations?

Generally, yes. Not all the time, no, there are some that have opted that we will negotiate every 90 days as to whether we have the volume or not dependent on what the pricing needs to be.

Okay. Well, I just bring it up because I'm sure you heard on the Tyson call yesterday about the concern about the assurance of supply. I'm just trying to factor that in. Are you seeing that kind of anxiety from your customer base to that degree, that sort of came away from their call with?

No, I would say we are not seeing a high degree of that kind of anxiety. Most of our customers we have done business with for a very long time, and we have been there for them and they know we will be going forward. And the issue just becomes at what price can they afford to buy it and us afford to sell it.

Appreciate that. Thank you.

Carla Casella, JPMorgan.

My question is around the hedging. I know it has been about a year now since you brought in the new head of commodity risk management. Can you just talk about anything you are doing differently now versus then or do you think there is significant opportunity going forward, as well? Or you are likely to see your commodity risk management stay similar to how it operates today?

Carla, I would say that we operate different today than we did over a year ago, and that is the reason we brought in someone at that level. While we don't comment on our hedging strategies as volatile as these markets have been it has been difficult to figure out what type of positions to take. And I will tell you we are active on a regular basis communicating and trying to do things that we think are smart for our business. And we continue to do that on an ongoing basis.

Was the realignment of your division heads also related to commodity risk management, or was that completely unrelated?

Completely unrelated. Really our division alignments were really already in place. It was aligning personnel with sales and operations and quality assurance together under that division leadership, to just make sure that we focused on our customers and efficiencies better by having the kind of teamwork and communication we wanted to have in each one of those divisions.

Okay, so the commodity risk management is purely focused on all your purchases, and it doesn't matter as much and how well you are forecasting each of the businesses. Is that correct? So that you aren't tied in terms of the performance?

Two from an organizational structure are not tied. That is not to say that we don't have some business that we do that are tied to the markets, but we look at that on a customer by customer basis.

Okay, great. And it sounded as if you are comfortable with your debt covenants through the remainder of the year and into early next year. Is that correct?

Yes, when we realigned those debt covenants last quarter we tried to get something that would give us enough room for the 2008, 2009 year to weather these challenges that we foresaw ahead of us. Obviously debt covenants are something you got to continue to keep your eye out for, and it is not a thing that you don't actively look at and manage on a day-to-day basis. But we are going to be fairly proactive in our entire capital structure like we always have in the past.

When you set those covenants, I'm assuming they were set assuming that commodity prices at the time remain at those levels or does it take in some improvement in [commodities].

We did a range of analysis from base case to worst case and best case, and it was somewhere in those ranges is where we came up with where we thought was reasonable to go to the banks with.

Okay, great. Thanks a lot.

Chris Bledsoe, Lehman Brothers.

Just to follow-up on Carla's question, if you did have a hedge in place in the quarter, would that have had a cash benefit, or would it really just depend on the duration of the grain hedge?

Well, I mean, any hedges or grain activity can go either direction; either making money or losing money, and they generally are tied to cash, at least in terms of once there is a final resolution and settlement. And clearly if you have open positions you have margin issues that you got to deal with. So I haven't seen a whole lot of them that haven't generally had a corresponding cash effect.

And I guess on the timing it just depends on whether the position was still open at the end of the quarter is what you are saying. And that you're not going to help us with on this closing or hedge positions, obviously. So then I will ask you the next question is in the quarter, if I just think about the cash burn rate from your operations and I can certainly wait for the 10-Q to get some of this -- but I would be curious what that cash burn rate was if you have that handy. And I guess what I'm really trying to get at is at the current run rate because you already said 4Q could be really no better. So at the current run rate how many quarters of liquidity and kind of flexibility would you have before running into a bit of a problem?

I'm not going to speculate into that kind of activity, but when you get the Q you can analyze it.

Okay. And then just a quick follow-up on Rob's question; and if I think about what the path would be from here for the Russia quota situation -- and I realize it sounds like it was a bit coerced or whatever and maybe not quite -- as one industry participant and not necessarily speaking for the entire industry but what would the path be from here for the Russia quota situation to become more real? And then if it doesn't become more real should we be concerned that some kind of worst alternative is in the offing?

I don't understand what you mean by more real.

I guess the implication was that the quota or was it the agreement maybe didn't have real teeth to it.

It is a nonbinding letter of understanding, but I mean I think it would be safe to assume that the Russian government will try to enforce it starting in 2009, and that there will be some reduction to US imports going forward. I think those are probably safe assumptions.

And then separately and my final question is -- it seems like we've just started to see I don't know if I would call it a movement at this point, but we've seen some change in some municipalities -- New York, DC, California, seems to be moving in this direction to have calorie count disclosure on food-service menus. So I am wondering if you've spoken with your customers about it, if that is something they are concerned about. If they have seen any impact even on a localized basis at this point; I would be curious to get your take on what that could mean for chicken, in particular.

We do provide to many of our customers nutritional data on products that we produce for them. In food service establishments many of the products are proprietary, and depending on how those products get formulated, they could change the nutritional value of those particular products. So we have from an R&D standpoint worked with some of the customers to either take certain ingredients out, remove allergens from the product, those kind of things. And we will probably see more of that as those kind of menu practices proliferate through the country.

Are you seeing anything or are there solutions in the works to adjust portion size at all? And I guess that is kind of the key one for me because if they are adjusting portion size then I guess I would worry it would make its way back to the supply chain to the processing side.

We've seen a little bit of that, but not a lot. But I think what you see is the consumer potentially trading down to lower-priced meals on the menu. I think you would see that a lot of the QSRs are probably seeing more people go into their value menus and whatnot versus maybe eating some of the higher end sandwiches. And there is certainly some of that going on.

And chicken, on the calorie count side, chicken would stack up probably I would think more favorably relative to some other protein on the menu. Is that fair?

Yes, especially a grilled product versus a par fried product, a grilled chicken breast is extremely healthy. And whether it is measuring in sodium or whatever, it is going to be -- it is going to have superior nutritional results than most of the other things on the menu.

Thanks so much.

Bryan Hunt, Wachovia Securities.

Just a follow-up on your annual contracts. Can you tell us when you cycle through the majorities of those and when you may be down to basically zero on your sales mix.

We would look to be at zero on January 1. As Rick mentioned, there is about 17% of our volume that was contracted prior to January 1 of this year on an annual basis. But all of those will expire come the end of this calendar year; and going forward we would look to negotiate those again with some sort of quarterly adjustment.

And based on your historical experience trying to migrate customers to this 90-day contract, how many or what is your walkaway percentage? How many customers have said thanks, but no thanks?

Very few.

Very few, okay.

The reality is, although as an industry we have done a lot of annual pricing historically, most of their other ingredients are not purchased on an annual basis. The dairy prices may change weekly, the beef prices may change weekly. Their bakery prices will fluctuate, so it is really the chicken industry that is the anomaly here. It is not pricing overall, and so we are really moving more towards a model the way the other food products are sold both retail and food service.

And last question, if there is the happenstance that you need more liquidity and you said you would not consider selling any of your operations, what about rendering or eggs, do you consider those non-core when you look at your product mix?

We really don't consider them non-core. They are directly tied to, in most cases, to our processing operations. And it is a critical issue to the industry that you be able to handle and process your rendered product. So I think we actually might be a little bit unique and actually reflecting that in an other segment. I think most of our peers probably reflect that up in their chicken operations as opposed to having it even broken out. So I wouldn't think that rendering is anything that we would want to divest from our business.

All right. Thank you very much.

John Mueller, a private investor.

I'm with Morgan Stanley. I was wondering about your Mexico operation. Is that profitable?

It was profitable this quarter.

Yes, it was, it had a pretty decent quarter all in all. It had an operating income again just like our US chicken business, not as -- not up to snuff with last year but it was profitable. It made just under $7 million operating income this year.

What percentage of your business is that?

It is very small, down to about 6% of revenues.

I see. We've just had a 25% reduction in the cost of corn and about not that much in the price of meal. If we stay at this level will you attain the $2.50 cost for poultry?

I think if you listened to the comments that we prepared, the levels where we are today and where the market has retreated is kind of in line with the example that Clint gave where now at $6 corn and $3.50 soybean, we needed breast meat to be at $2.15 or $2.25. So at $2.25 to get to normalized profitability. And that is more going to be a faction of the selling prices I think at that point than anything and supply is going to have to be the driver of that.

We are looking down the line we are going to see lower reduction of cattle and hogs. Shouldn't that help immensely?

It should. That is part of what has to be rationalized through this whole time of increased costs, and still those herds have not gotten reduced to the level that they need to be to be profitable.

The '09 cattle prices are about $0.15, $0.20 a pound higher. So I mean that should be --

It is beginning to move in the right direction.

As cattle and pork prices are increased given the current economic conditions, people should migrate more to chicken, and that should help the demand.

I noticed the supermarkets are really taking advantage of the cheap chicken. When I go into the supermarket and see $1.99 or $2.29 for a whole bird per pound, that is kind of taking advantage of you guys, isn't it?

I think many of the retailers have been promoting either whole birds or drumsticks and thighs versus breast meat. It is good to hear that some of the retailers are promoting breast meat, as well.

That doesn't answer the question. They are lapping $1 on the whole bird price. That is a pretty big increase.

We know how we are selling whole birds, and I can assure you they are selling it for $2.29 a pound, then they have a pretty good profit.

And there's nothing you can do about that?

We don't control retail prices.

I know, that is part of the problem. Pricing is cheap, and their pricing is high. So you are caught in the middle.

I don't know that all retailers share that same pricing strategy, but in your example that may well be.

Okay. Thank you very much.

Ladies and gentlemen, at this time we are out of time for questions, so I would like to turn the conference call back over to Clint Rivers.

Appreciate you all joining us here today, and we look forward to talking to you again at the end of our fourth quarter. Thank you.

Thank you, ladies and gentlemen. This conference call has now concluded. You may now disconnect at this time. Have a great weekend.