Pilgrims Pride Corp (PPC) 2010 Q2 法說會逐字稿

Good morning and welcome to the Pilgrim's Pride second quarter 2010 conference call. At the Company's request, this conference is being recorded. Please note that slides for reference during today's call are available for downloading from the Investor Relations section of the Company's website at www.PilgrimsPride.com. Currently, all sites are in a listen-only mode, but later you will have an opportunity to ask questions during our question-and-answer session.

(Operator Instructions)

Beginning today's call will be Gary Rhodes, Vice President of Corporate Communications and Investor Relations for Pilgrim's Pride. Mr. Rhodes?

Thank you. Good morning, and thank you for joining us today as we review our financial results for the second quarter ended June 27th, 2010. Earlier today, we issued a press release that provides an overview of our financial performance for the period. If you have not already seen the release, a copy is available on our website, along other downloadable information, and the slides referenced during this call.

Joining me today are Don Jackson, President and CEO, and Gary Tucker, Principal Financial Officer.

On today's call, we'll review our financial results for the quarter and some of the key factors affecting our performance. Gary will provide an update on our financial position and capital structure. After our prepared remarks, we'll be happy to take any questions you may have.

Before I turn the call over to Don, I'll remind everyone that today's call contains certain forward-looking statements. These include our expectations of future results, sales, 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 Don to begin our prepared remarks.

Good morning, and thanks for being with us this morning.

Our results for the second quarter reflect significant improvement from the first quarter, a sign that the operational and structural changes we have made over the past 18 months are beginning to pay off. We reported a net profit of $32.9 million or $0.15 per share, on net sales of $1.7 billion for the second quarter. Our adjusted EBITDA was $127 million or 7.5%. In the quarter, total sales declined 3.9% from a year ago. Our US chicken sales declined 5.9% and volume was down 5.6%, mostly from our prior year production cutbacks. However, net sales in the second quarter grew 3.9% versus the first quarter, and volume increased 6.6%. In Mexico, our sales rose nearly 21%, while volume was up more than 24% versus 2009. Gary will provide more details in a few minutes. But overall, pricing and product continue to be our primary focus. Our average price for boneless skinless breast made in the quarter increased by $0.07 per pound versus the first quarter; however, that improvement was somewhat dampened by lower price leg quarters.

Overall, we're seeing improved demand across all over our segments. Retail demand remains solid. Volume was up 2.7% in of quarter, and food service increased 3.1% in the quarter versus Q1. Net sales rose 6.4% in food service, and was slightly up at 0.4% in retail. We continue to address costs; our live costs improved $42 million versus the first quarter. We rank among the best in the industry when it comes to live costs. We are continuing to push for better performance. At the plant level we still have opportunity for improvement, but we are making progress. Our yield improved by $3 million in the quarter.

As part of our plan to drive further operating efficiencies, we have intensified our benchmarking of live and plant costs against the industry in Agri Stats, and reviewing performance and action plans with plant management teams on a monthly basis. In the last month we have hired three senior operations managers from our most respected competitors.

Heading into the back half of summer, we're cautiously optimistic on the outlook for the US chicken industry. Production is increasing, with the USDA projecting a 2.7% increase for 2010. However, that is still below the pre-cut back levels of 2008. Egg sets are up 1.8% year-to-date, although supplies remain fairly tight.

With regard to our own production, we are moving forward with plans to reopen free idle plants over the next two years. We will reopen our plant in Douglas, Georgia in January, although we expect to begin deboning operations there some time this coming November. The meat for that deboning will come from some of our other plants that are currently sending product to co-packers to be deboned, and this will then reduce our costs. Douglas will be a big bird deboning facility; when it reaches full capacity by late Spring, it should be processing approximately 1.3 million birds per week.

We also plan to reopen two other idle facilities, one by mid-2011 and the other by Spring 2012; the sites that are under consideration are El Dorado, Arkansas; Clinton, Arkansas; Athens, Alabama; and Athens Georgia. No decision has been made at this point, as we continue evaluating our production needs and exploring various state and local incentives that might be available to us. We are considering potential expansions of some existing plants in lieu of reopening the third plant; that approach may be more cost-effective and providing a faster payback. But regardless of how we go about it, the end result remains the same, a production increase of 10% or approximately 3.5 million birds per week over the next two years; that equates to about 1% growth per year for the industry.

Moving now to exports, we have resumed packing product for Russia at our plants in Boaz and Russellville, Alabama, and in Dallas, Texas. Both of the Alabama plants have been converted -- were converted to using peroxyacetic acid earlier this year, so the transition to meeting the new Russian requirements was fairly straightforward. Within a few days we have sold out our entire August production volume for our Russian-approved plants, with prices quickly moving to the $0.60 range. We're now booking orders for September at prices above August. Prices for non-Russian leg quarters have also moved upward. We expect to have three more plants approved and packing for Russia within the next 60 to 90 days, and Douglas will also be approved for Russian exports.

We are hopeful that an agreement will soon be in place for China. MOFCOM, the Ministry of Commerce, recently announced revised tariffs subject to final action for US chicken producers exporting to China. Pilgrim's tariff was reduced from approximately 87% to 58%, and in line with the other companies required to provide data in the case.

Now I'll turn the call over to Gary Tucker to discuss our financial performance and capital structure.

Good morning, everyone.

As Don said, our second quarter results reflected a big improvement over the first quarter. We are on the right track, and expect continued progress going forward. As shown on slide four, we reported a net profit of $32.9 million or $0.15 per share on net sales of $1.7 billion for the quarter. This compares to a net profit of $53.2 million or $0.72 per share on sales of nearly $1.8 billion for the same quarter a year ago. Remember, we now have approximately 214 million shares outstanding, compared to 74 million a year ago.

Our second quarter results included $16.9 million pretax or $10.5 million after tax in administrative restructuring charges. Approximately $14.8 million of this was a noncash charge related to writing down the net book value for former headquarters building in east Texas, and a satellite corporate office building in Atlanta, Georgia. These offices were closed recently as part of our corporate relocation to Greeley, Colorado, where JBS USA is based.

If you strip out all of the nonrecurring gains and expenses from the second quarter of this year, 2010, and the second quarter of 2009, our adjusted net income before tax for the most recent quarter would be $56.9 million, almost $6 million higher than a year ago. As shown on slide five, net sales for the second quarter declined 3.9% or $69.2 million from the same period a year earlier. Breaking that down, our US sales declined 5.9%, and volume compared to a year ago was down 5.6%, primarily due to production cutbacks.

Net revenue per pound sold declined [1.5%] from the prior year, primarily because of lower sales prices on our fresh chicken product. This was partially offset by higher prices for our prepared chicken items, exported products and other items. When you compare results to the first quarter, however, sales and volume in the second quarter increased across our retail and food service segments. Going forward, we should see quarterly volume begin to increase year-over-year, as we've now recycled through the plant closings that took place in May and June of 2009.

Mexico sales for the quarter increased nearly 21%, with volume rising 24% because of the increased demand. Net revenue per pound sold dropped slightly from the prior year. As shown in slide six, with exception of boneless skinless fresh meat, commodity chicken prices were generally lower during the quarter versus the same time a year ago. Year-over-year breast meat increased 9.2%, to an average of $1.61; but wings dropped nearly 9.5% to an average of $1.23. Leg quarters declined by more than 17% to $0.36. Georgia Dock averaged $0.86 per pound, down less than 1% year-over-year.

For the quarter, feed ingredient prices were lower than a year ago. Corn averaged $3.55 per bushel, down more than 12% from last year. Soybean meal averaged $281 per ton, nearly a 23% decline.

Slide seven shows that EBITDA, when adjusted for reorganization and restructuring items, was $127.6 million for the quarter. We reported an operating profit of $51.9 million; total gross profit was $132.5 million. SG&A totaled $63.7 million, an increase of approximately $7 million or 12%, as a result of costs incurred relocating employees from our Texas and Atlanta offices to our Greeley office. Going forward, we anticipate our quarterly SG&A run rate to be in the range of $56 million or approximately 3% to 3.3% of net sales.

A quick note on commodity grain derivatives; we recognized a $2.4 million net gain during the quarter, related to the fair value of those derivatives during the end of the second quarter. At this time, we're buying close to the market on corn and soybean mills.

Total debt at the end of the second quarter was $1.2 billion. We had $36 million in cash and cash equivalents. Capital expenditures were $36 million for the quarter, compared to $17 million a year ago. For the full fiscal year, we still expect CapEx to be in the range of $150 million. Interest expense for the second quarter declined 33% to $26.1 million, primarily due to lower average borrowings and a lower weighted average interest rate. We still expect interest expense for the full year to be in the $110 million to $120 million range.

We are seeing continued savings from our integration with JBS USA, and we expect to see the impact from our synergies ramp up as we move through the year.

I'll now turn the back over to Don for a few final comments.

Thanks, Gary.

As we move into the second half of 2010, we're on the right track with our business. The operational instructional changes that we have made over the past 18 months are beginning to pay off. I'm absolutely confident that we have the right team and strategy in place to get there; as our 41,000 employees recognize, only the results matter.

This concludes our prepared remarks. Operator, please open the call for questions.

(Operator Instructions)

We'll take our first question from the line of Ken Zaslow from BMO Capital Markets. Please go ahead.

Good morning, everyone. Did you say you were actually selling legs at $0.60? Is that what I heard?

We booked leg quarters in August for actually on average about $0.60.

On average, okay. And can you just give me the relative relationship between a -- call it a 10% or 5% move or a move in corn relative to a move in leg prices? How much do you need in leg prices to offset the move in corn prices?

We're buying approximately 4 million bushels of corn a week. You know, so a $0.10 move in corn is $400,000 for us. If you look at our volume of exported leg quarters, that's a pretty small move relative to leg quarters. We're exporting in excess of 10 million pounds of leg quarters a week.

Okay. So my calculation is that it's almost a 4 to 1 relationship, but it even seems more extreme than that; which is good news not bad news, right? Okay, my next question is how much cost savings was actually realized during the quarter?

Well, again, our live costs -- I think we said in the remarks we moved live costs about $42 million. If you look at -- on the plant side, our quarter-over-quarter change in plant costs was basically nominal. I mean, we did not show any significant improvements. We had some areas of improvement in plant costs. I mentioned yield in the call, about $3 million. But overall, a relatively small move in the quarter in plant costs. So to answer your question, you know, $42 million-plus.

What do you expect that to be growing to?

We expect the movement, you know, in the -- on a run rate basis at year end to approach $100 million.

And then in the last quarter you said that your production over the next couple of years is going to match demand, and your production obviously seems to be on track; does that mean you continue to think that demand is as you expected? Can you just give an update on how you think food service demand and retail demand will play out?

Again, we continue to see from our perspective, Ken, an improvement in demand; demand in food service in the quarter actually increase more than did retail, so it had pretty good increase in food service demand. Now, you know, some categories within food service have been slow to recover, but overall it's showing good strength.

Okay. And my last question is, oh, the customers. What is your status of regaining your customers that you lost? I know last quarter you said it was like a 3-month delay. Are you completely back to where you need to be? Can you just give us an update on that?

Ken, you're never back to where you need to be.

Fair enough.

But I had made reference before to 100 million pounds of prepared food business that had been lost, as Pilgrim's entered bankruptcy, and immediately thereafter. We have regained 100 million pounds in terms of prepared foods. In the third quarter already, we've had some significant gains. We've gained about 60 million pounds of retail and prepared foods business just since the beginning of this quarter, having regained 30 million pounds with one of our significant retail customers in case ready that had been lost immediately prior to filing for bankruptcy. So we've regained the 100 million pounds, and at the same time we've regained another 60 million pounds here just in the third quarter.

Okay. Thank you very much.

We'll take our next question from the line of Christine McCracken from Cleveland Research. Please go ahead.

Good morning. Congratulations on the great progress you guys have made this quarter. Just to follow up I guess on the cost side, you in the past have talked a little bit, I think, about some grain-based contracts; did you have any of those in the quarter that could maybe, at least going forward, reduce your exposure there, if grain prices do continue to escalate?

Well, Christine in the quarter I would say our grain base -- I mean, we have some contracts that are -- the pricing is subject to some impact on grain. I would say in the quarter that's been insignificant.

And then just on leg quarters, you know, obviously prices have gone up pretty significantly there. Is it your impression that the pipeline is pretty bare, that they're working to refill that pretty quickly, and do you expect then these prices to be sustainable for at least maybe through year end? Or is it just hard to say at this point kind of what the supply/demand relationship looks like?

You know, I think it's obvious that the pipeline is -- needs to be filled, and so that has in a sense increased demand maybe more than you would expect on a run rate basis. Prices are exceptionally strong right now. Might they come down going forward? I would hate to predict that. That could be the case, but I think prices are going to stay relatively strong through year end, because I think just as a practical matter, to your point on the pipeline, it's going to take that long to get there.

Yes. Good point. But removal, I guess, of all that dark meat off the US market should be fairly supportive to the other parts, I would think, at least through the second?

I think it will. I think domestic dark meat prices will benefit from that, without a doubt. So I think at the end of the quarter you saw the industry beginning to build some inventory, probably reflecting somewhat of the burden, if you will, of leg quarters backing up on the markets. So we'll pull that product out of the market, and get it back into exports, and yes, I would expect that to help domestic dark meat prices fairly quickly.

Just in terms of the cost saves that you're getting now on the live cost side specifically, and I guess relative to your synergy targets with JBS, I am wondering are you still comfortable with your outlook for -- I think you had down margins of 6% to 8%, kind of what you've gone out there with, or do you think you can come in maybe above that now with some of these cost saves, on a consistent basis?

I'm not going to project our earnings going forward, but I think that we are absolutely on target relative to synergies, no question about that. And realize again that those synergies are shared by both JBS and Pilgrim's; they don't all accrue to Pilgrim's. So we're on target with what we expected to do relative to synergies.

In terms of cost reductions, again, we have a very strong position in terms of live costs as a Company. As we change mix, as we've begun to reinvest by way of CapEx in the business, there's some associated costs. So even though I've made a comment that our plant costs have been relatively stable quarter-to-quarter, if you take into account the -- what we're doing to the plans for the mix, we're going to produce a higher valued mix, we're doing a good job to hold our costs consistent, although long term, absolutely, I expect to take more costs out of our plants' operations.

And just lastly, you talked about the 100 million pounds you've now regained. I think part of the issue this year was that in order to get some of that business back, prior to this you had to maybe price it at some -- provide some incentive to get those sales back. Was there any kind of deal making or, you know, did you have to maybe lower your price below market to get some of that business back? Is this something that will stay with you then for a while, or is it that now you're in a much stronger position to argue for better pricing, and are getting it back another way?

When you go to the negotiating table in those agreements, typically the incumbents always -- I shouldn't say always, but oftentimes get the last say in the ability to capture that business. So I think just by way of the process, yes, you are always at some kind of pricing disadvantage if you are not the incumbent. Now, being the incumbent in many of those same cases, yes, I would expect to be able to be in a better pricing position, if you will.

Thanks and congratulations, again.

Thank you.

Thank you. And we'll take our next question from the line of Christina McGlone from Deutsche Bank. Please go ahead.

Good morning.

Good morning.

Don, when you were answering Ken's line of questioning, when you talked about better food service, is that something that you're seeing in terms share gains, or are you seeing growth in certain segments of that category?

Well, if we look at it overall, and some -- some of that number surely would reflect some share gain, but the vast majority of that was in fact real growth within our existing customer base.

Okay. And then I guess as we look into the fall, you know, like you were saying production is coming up, some people at NCC were talking about a lot of white meat on the market in the Fall. What do you think about contracting this Fall, in materials of food service? Do you think this industry is in a better position than last year, and do you think pricing will increase?

Well, the industry and Pilgrim's is in a better position for those negotiations this Fall. If you go back to again this period September, October, November of last year, and you look at breast meat prices at that time, they actually were very depressed. If you look at what we would anticipate this Fall, you're going to have stronger breast meat prices, stronger dark meat prices as well. Yes, they have gone through some seasonal decline but, again, if you go back and look over the last two years, after the 4th of July breast meat prices dropped precipitously, and that's not been the case to this point this year. So, short answer is yes, I expect us to be in a better negotiating position, because pricing, commodity breast meat pricing, and dark meat, will be stronger when we're there at the table.

Okay. Thank you. I guess another question, with the wheat situation in Russia, and of course grain, it looks like they're very short in terms of production, they're selling out of their reserves; how do you think that impacts their domestic chicken production? And do you think that sends more demand here, or do you think that their domestic industry is just going to complain louder, and they may take protectionist measures?

I'm aware of the wheat situation relative to weather, but I can't comment how that might affect their domestic production. But, you know, I will think obviously it's somewhat burdensome in terms of their grain pricing, but I can't speculate on how that might affect their position relative to imports, or what their domestic producers might react to in that regard.

Okay, thanks. Last question, I just wanted to know the driver for the drop in live costs this quarter, what was it and is it sustainable?

More than half of it was just sheer efficiencies, both in terms of feed efficiency and feed costs, and we have some good improvements in -- on the breeder side in terms of egg production as well. So that was the efficiency driver. We did have some gains in absolute feed costs as well, just in terms of feed ingredient costs. So it was a split between the two.

Okay. Great. Thank you very much.

Thank you.

Thank you. We'll take our next question from the line from Akshay Jagdale from Keybanc Capital Markets. Please go ahead.

Good morning everyone, this is Adam Josephson in for Akshay. Thanks for taking my question. In light of your plans to reopen two of your plants next year, in light of your competitors to reopen a new plant, and based on the fact that (inaudible) placements have been up in each of the past two months, both on a year-over-year basis and on a historical monthly average basis, what are you thoughts regarding how much chicken production could potentially be up in 2011?

I think in 2011 you're still looking at something on the order of 2%; it may be slightly more than that, but I think it's about 2%.

And Don you touched on this earlier, but what do you expect your volume to be up this year and next, based on your expected utilization rates and your -- based on your plans to reopen the two plants next year?

By year end, we'll be operating our plants basically at the industry's utilization, so 98%, 99% utilization by year end. If you look what we're -- where we're going next year, we're going to bring on another 1.3 million a week. I'm not sure if that answers your question, but we will be at -- you know, in the quarter we were about a 94% utilization; by year end we'll be at 98%-plus capacity utilization, then we'll add the Douglas production in January.

And just to clarify, you said earlier that the plants would contribute 1% to industry production growth next year; is that accurate?

Correct.

Okay. Thank you.

Thank you. We'll take our next question from the line of Farha Aslam from Stephens Inc. Please go ahead.

Don?

Yes.

Could you just share with us the schedule you have in terms of ramping up production of Douglas?

In November, the plant will begin deboning operations; now that production will originate from other facilities. We currently are sending breast fronts to outside processors, who are processing that meat, deboning that meat for us; so just merely as a practical matter, we will keep those fronts inside and send them to Douglas, and they will be deboned in Douglas. The actual increase in production -- so the increase in processing at Douglas will not occur until January, and at that point we'll bring one shift up in January of next year.

And then, when do you plan to have the plant running at the full 1.3 million bird capacity?

Within the ensuing 3 to 6 months.

So 3 to 6 months, you'll have it full capacity. What are you plans of trying to sell that production into the market, just so that you're not competing on price?

We're currently in those negotiations; actually, today.

And just one of the concerns we've been hearing is that you're bringing three plants on line, and that would just increase the competitive dynamic in the industry. Is there actions you're taking as you're trying to go into the food service and retail markets, so that you're not only competing on price? Is there sort of a -- could you just share with us your strategy of how you're going to your customers?

Well, again, if you look at Douglas as the example, we would like to believe that by the time we open the plant in Douglas that we're going to be fully committed on the breast meat side for what we produce at Douglas. We have significant internal use for wings in that production, but, you know, we believe we're going to be committed by way of sale and price at the time we reopen the Douglas facility. At the same time, again, we've already begun discussions with our customers as we bring on the other production over the course of the next 18 months after Douglas opens. We do not intend to open any of these facilities, and just dump the production on the commodity market.

That's helpful. Following on to Christina's question, going into the food service season, what do you think you're going to be highlighting about Pilgrim's, because this time you're not in bankruptcy, a much stronger financial position? How will you approach those negotiations differently than you did last year, and kind of what are the opportunities that you see this contracting season that perhaps you didn't have last season?

Well, in some cases where we had new business, obviously we have our -- what we have provided by way of product quality and service, and to the customers, so we come to the table as an incumbent in many of those cases. We obviously will be seeking some new business as well. One of the strengths that we've been able to bring to the table that really wasn't there a year ago is we've added a very world-class R&D staff in Greeley, and re-opened JDS's R&D facility there in Greeley. That's very significant; in many of these negotiations, our ability to support the customer and bring innovation to the customer is something that we bring to the table. But I think as much as anything, we bring to the table how we've performed for those customers over the course of the last year.

Great, thank you very much.

Thank you. We'll take our next question from the line of Carla Casella from JPMorgan. Please go ahead.

My questions have been answered.

All right. We'll take our next question from the line of Stephen Share from Wisco Research.

Good morning. I wanted to talk a little bit about inventory, and specifically the finished chicken inventory, it looks like that went up about 10% sequentially; is that kind of normal seasonal practice, or is there something unique there, that you had that inventory build?

I think there's a couple things, perhaps, in terms of finished goods inventory. One, we were probably below what we would consider to be our operating level of inventory going into the quarter, so we needed to rebuild some inventory. And at the same time, you're right, there is some seasonal build in the inventory this time, especially as it relates to something like wings, as we would head back into the wing season later in the fall and into the early part of the year next year.

Would you say that now this is pretty much kind of a normalized level, kind of where we should see it going forward? Or, you know, will we have another kind of seasonal build this next quarter?

We'll continue to build some inventory seasonally on some products. But I would say what you saw and what you see now, we're not accumulating inventory, if you will, other than what we need to service our customers. So we're operating today, in terms of finished goods, on a normalized level. Now, I'd make some distinction between that and our export inventories, which did build in the quarter as well, in anticipation of opening the Russian market.

And then kind on the other side of inventory, we'll probably see some build as you, you know, ramp up for Douglas; is that correct?

There will be. I mean, as we begin to -- on the inventory side, as we begin to place chickens, so we'll have, you know, we'll have eight weeks of chickens in the field as inventory before we ever process one, come January, so there'll be associated inventory build with the reopening of Douglas.

Any idea on the magnitude of that, or will that be pretty small?

I think the -- I should have Gary comment on that. Gary, you have a comment?

Well, it won't be a lot. Probably we might bring in another $10 million worth of inventory related to the Douglas facility.

Okay. That's fair. And then just one more housekeeping item. As far as restructuring charges, you know, obviously something can always come out of left field, but are we through the vast majority of that now? Is there any charge that you know we'll have here in the second half of the year, or are we kind of through that stage?

We think we've identified almost everything. There's always one loose end left out there, but we really wanted to address the buildings that we vacated, so we did that in the quarter. You know, there's -- still on the books remains about $3.5 million of costs that we've booked, but we'll have to pay the cash out related to the bankruptcy. You know, there's one or two lawsuits that are out there that we feel like we're accrued for, but, you know, there's a possibility we might have to up that accrual. But I think you've seen the majority of it.

Okay. Great, thanks a lot.

Thank you. We'll take our next question from the line of Robert Moskow from Credit Suisse. Please go ahead.

I was wondering if you could maybe help us a little bit understand the relationship with JBS. There was a news article that may or may not have any truth to it, but it seemed to indicate that their -- I guess their borrowing from the Brazilian Agricultural Bank puts them in a situation where they might have to spin you off, and it had something to do with a convertible that was owned by the bank. Can you comment at all about what their lending with the BNDES looks like, and does it -- is it relevant to your situation at all?

Well, for one I'm not going to comment for JBS, but relative to the article that showed up here a couple days ago, JBS issued a press release, and I think the press release speaks for itself in that regard. The use of the term "spin-off" in the article was -- absolutely has no basis, and JBS's press release indicated such.

Okay. So there's no -- there's nothing in their lending arrangements with that bank that has an influence on you, or forces their hand in any way?

You know, again it's really not for me to comment on that. BNDES has -- is a lender, and is an equity holder within JBS.

Okay. All right. The other question I had was, you know, about a month ago Marfrig bought Keystone Poultry's business in the US, it has a few slaughter facilities. Their intention, I think, is to access more global markets. Where are you in your relationship with global markets? Has anything changed with your ability to access export markets, because of JBS's ownership of you?

There's no question that one of the operating synergies that we have with JBS is JBS's global presence. So we'll -- and their -- so we'll have more access to markets than we previously had access to, and we'll also have more direct access to those markets, whereby JBS is selling directly into a market that we may be only going indirectly into that market. So yes, JBS represents a significant synergy for us in terms of our access to global markets.

And where -- how far along are you in capturing that synergy, what's been accomplished so far?

We have some integration in that regard today. We're more actually -- this is more operational in nature, not so much in terms of sales, but we're coordinating our export activities, and documentation activities in support of that, through JBS today. We do that jointly today.

Okay. One other question. I calculated your operating margin about 4% ex-charges; where do you think you are in relation to your industry peers right now? Do you think you're still a little bit below, and catching up?

We're not at -- where we should be relative to our peers in the industry, and yes, we are catching up.

Got it. Okay, thank you very much.

Thank you. And we'll take our next question from the line of Daniel Chandra from DW Investment Management. Please go ahead.

Good morning.

Daniel --

I'm sorry, I was on mute. Good morning, guys. Can you quantify the synergies that you've realized thus far as a result of the JBS transaction for us here, and what should we be expecting?

At this point we really are just seeing the synergies starting. I think we reported in the past where we think the synergies will create value for both us and JBS. I think, you know, everybody is still confident that the numbers that JBS has talked about in the past are still relevant, and we will start seeing the majority of that, I think, in our third quarter, or start in our third quarter and ramp up through the year.

And do you still expect to get about $200 million in synergies. And then can you comment on how it gets apportioned between yourselves and JBS USA?

It's really a case that whoever the synergy applies to gets the benefit. I mean, it's not a 50/50 or anything like that. It's -- you know, if Pilgrim's Pride uses JBS's transportation abilities to our benefit, we get to reduce transportation costs. Same thing with -- you know, we've signed a joint contract with a large software provider, and that has a lot benefits to both companies, and actually has more benefit to Pilgrim's Pride. It's literally a -- you know, who benefited from the savings, they get to book it on their side.

If you look at the projected synergies, we're probably about 60% down the road capturing those synergies, even though they only begun to benefit either party at this point. If you take, for example, purchasing, where we have joint purchasing between JBS USA and Pilgrim's Pride, so we have a common agreement, if you will, for instance on some packaging materials. Well, we benefit by way of price at whatever our use level is.

The same thing relative to what Gary just referenced on computer software. We benefit based on our use of that particular software at that rate. If you look at our insurance for Pilgrim's Pride, again, we jointly -- JBS and Pilgrim's Pride jointly negotiated insurance rates, and of course we benefited proportionately based on what that meant to Pilgrim's Pride.

But you haven't started seeing that in the numbers yet?

There are some synergies that have -- for instance, relative to purchasing of packaging materials, those -- the cost of materials is already in our cost of goods.

Okay. So then can you comment, like last quarter -- I'm sorry, I was on and off in the beginning of the call, but last quarter you guys were talking about how there were certain food service contracts that you were supposed to start up, and they were just delayed; can you comment on how that has fared? Are those coming online now, or is it only half of them online?

I mean, again the reference was that the Company had lost some 100 million pounds of business, and I did say earlier in the call that we have recaptured volume of that 100 million pounds of prepared foods business.

Was that all on throughout the quarter, or did that start coming on the quarter -- in the middle or at the end of the quarter?

It came on during the quarter. I mean, we -- by the end of the quarter, on a run rate business we recaptured all of the 100 million pounds.

So what percentage of that would you say --

I can't even give you a good answer. I would if I had one at the top of my head, but I don't. But by quarter end we had recaptured -- but, again, realize even at the beginning of the quarter, we were 80%-plus there.

Okay. So from your commentary, would it be a fair comment to say that you guys expect your production increases for the next two years, even though they're I guess large relative to yourself, given that they're small for the entire industry, and if demand is going up, you expect it to be absorbed pretty well, with no impact on price?

We do expect it to be absorbed based on our own demand. Realize even for us, I mean we're increasing production about 10% over what amounts to about a two-year period; so for us, you know, we're going to increase our production on average over that two-year period 5%.

Great. What would you expect normal demand increase to be for the industry, per year?

It would appear -- again, realize the industry took out 6% of its production at its -- at the highest point, or lowest point, I suppose better stated, and the industry is in the process of adding back based on the numbers something, 4% to 5%, of that 6%. So, again, the industry is heading back, it's obvious; but even at this point, production is not going to increase beyond where it was at its peak in 2008.

Where would you say demand is relative to its peak in 2008?

Based on our own internal demand, our demand is increasing at a rate that we can fully absorb the production increases that we have planned.

Okay. Thank you very much.

Thank you.

Thank you. And we'll take our next question from the line of Adam Ritzer from CRT Capital. Please go ahead.

Hi. How are you? Appreciate you taking my call. In regards to the Russian volumes, is it fair to say that Russia has been zero for the first two quarters, because of the issues over there?

I think that's correct.

Can you give me an idea of how much Russian volume there has been historically or -- in the past?

I think the quota number for -- the most recent quota number, I believe, was 600,000 tons, metric tons, I believe. You can verify that number, I think that's it.

Okay. Not being an industry expert, can you give me an idea of how much it has been for you guys historically?

Again, we'll move something in excess of 10 million pounds weekly.

10 million pounds weekly. Okay. And are you at that rate currently, or expect to be there soon?

We will absorb all of our -- and we have, actually, even prior to reopening of the Russian market, we were still moving consistently that volume of dark meat into the export markets, other than Russia.

Okay. So that's going to be moved back to Russia. What about China? How much potential upside could there be in China going forward?

Obviously, product has to begin to move to China; that issue has not yet been resolved. So, you know, there's tremendous opportunity for the industry and for us for that market to get beyond this anti-dumping issue, and that market to open back up.

Okay. And right now that market is also at zero?

That market today, China, specifically is -- you can move product, there, but there's a tariff in place that would have to be covered.

Okay. So does it make economic sense right now to do that? Is that fair to say?

Effectively, product is not moving to mainland China today.

Okay. My other question, going back to the JBS question, initially you and them had an agreement for two years after the bankruptcy had expired, at the end of 2011, where they had a mandatory exchange if they did their US IPO; if they do not do the US IPO, I guess now it's another year and-a-half roughly, what happens then?

Well, nothing has to happen. Obviously, any other transaction could occur between JBS and Pilgrim's Pride, just like it could between any other company. So there is a -- within the [stock] purchasing agreement, there is a mechanism by which JBS can totally acquire Pilgrim's Pride; but in no way does that limit other possibilities that might occur before or after the two years expire.

Okay. So the two-year exchange is, again, if they happen to do their US IPO, then they can offer that exchange; if they do not do that, they can simply make an offer to buy-in their interest whenever they want, is that correct?

All the other possibilities that, you know, the law provides would be open to JBS.

Right. So nothing -- the exchange offer doesn't exclude anything else?

No.

It's just another vehicle to take in their interest if they want?

It's just an agreed-upon mechanism that would provide for the merger of the two companies, that's all. It doesn't preclude anything else.

Excellent. Okay. Thank you very much.

Thank you.

Thank you. We'll take our next question from the line of Julia Rizzo from GAP Prudential. Please go ahead.

Hi. Good morning. Thank you very much for taking my question. First of all, congratulations on the impressive improvement on results. I am a JBS follower, so I know very little about Pilgrim's Pride yet. Having said that, could you please give me more color on the outlook for sales and marketing going forward? Is there any specific reason or (inaudible) that margins could be lower than the 7.5% quoted this quarter, or any reason why the sales -- part of the sales would be lower than the one from (inaudible)?

As we already have in our production plans, our product through the end of the year will continue to increase, and as such we would expect net sales quarter-over-quarter to continue to increase. And then with the reopening of the Douglas plant, to continue to have increase in sales through 2011. Relative to margins we would expect, again, continuing to improve our operations, and with the -- our ability to move prices a quarter -- yes, our expectation is to continue to increase margins in 2011.

Thank you very much. I have one more question. What do you consider is your major competitive advantage in the market today to gain market share and without losing [flexibility]?

I think our ability to gain for share, for one we do have a good cost position relative to our competition, so we can -- by way of price and margin we can be competitive, so we have a good cost structure in the Company. Our cost structure is improving relative to the industry. As we've stated, even in the quarter live costs improved in the quarter by way of efficiency. We can -- we'll recapture more improvement on our plant processing side in terms of costs, and in so doing that will improve margins as well. I think what we bring to our customers is high-quality product and good service for our customer base, and I think it's significant that our ability to innovate products for both our retail and food service customers will become more and more significant for us as we go forward.

And this is a better margin [climb], isn't it?

Yes. Any time you provide innovation, the margins generally are going to be superior. Another thing that we provide as a company, we have a breath of products that not all companies can provide. There surely are others that can, but we can provide a whole breadth of products by way -- whether it's a retail customer or food service customer, across the entire product line for those customers.

Okay. That's great. Final question would be for you, what's the major challenge this year, running the Company?

Our major opportunity the rest of this year, obviously, is continue to improve our costs, especially on the plant side of our business, and to go to the negotiating table here at the end of the year with our customers and capture some price improvement relative to where we are today.

Okay. Thank you very much.

Thank you.

And we'll take our last question from the line of Todd [Ammons] from Global Capital Partners. Please go ahead.

Hi, Don, a couple quick questions. What percent of your volumes are up for renewal in the August/September timeframe?

Well, it's -- the vast majority of our volume will over the course of the next, you know, maybe six months. I mean, almost all of our volume will be up for some kind of renewal of contract or new business probably over the course of the next six months. Again, we move about 85% of our total volume to retail and food service customers. We do have a -- very few agreements that extend beyond one year, but there are very few. So at the end of the day, we'll be having discussions in the next six months that covers, you know, again, the vast majority of our business. That's really not unusual in -- you know, in the industry for any of our competitors.

Got you. Could you just break down your mix between food service, retail, export and commodity for me?

Again, we're about 43% in both retail and food service, and the remainder is split between the commodity and export, so that's --

That's about 50/50?

A little more export than commodity. In fact, about 50% more export than commodity.

Okay. And then lastly, you've previously spoken about trying to improve your frozen for the processed volumes, and you're way under-represented on that front. Can you give us an update on where you are on that?

Well, it's not just frozen for the processed, on the food service side we're well represented in terms of frozen for the processed, but on the retail side we're under represented. That was the reference. Again, we haven't made tremendous progress. We gained some new business in that regard very recently, but, you know, we've just begun to scratch the surface. We would expect that we'll gain some of that through the end of the year, and have even more opportunity beyond that.

We've not made tremendous progress, but we have made progress. We took on one relatively large account just recently in that regard. But the opportunity is retail for the processed, and we -- again, that's going to be a focus for us going forward.

And last one, I've got to throw it in; what's your grain outlook for the back half of this year, Don?

My outlook is we're going to buy about 4 million bushels of corn weekly and -- no, I think that the market has behaved much like we anticipated. Definitely when the market hit its slow, $3.34 a bushel on corn, and then the June report came out from the USDA and shot up, I don't think anybody anticipated that, or we did not admittedly anticipate that. We had good coverage during that period of time, so we were not totally exposed to that.

The market, we expected it to come down after that; it had, although I think yesterday it was back up some. You know, we think the trading range is going to be in this $3.50 to $4.10 range. We still think there's some -- that the market may soften some as we approach the end of the harvest.

I appreciate it. Thank you.

That concludes our Q&A session.

Thank you.

This concludes today's conference. You may disconnect at this time.