Pilgrims Pride Corp (PPC) 2010 Q3 法說會逐字稿

Good morning and welcome to the Pilgrim's Pride third quarter earnings call to review the Company's financial results for the third quarter, ended September 26, 2010. At the Company's request this conference call is being recorded. Please note that the slides referenced during today's call are available for downloading from the Investor Relations section of the Company's website www.pilgrimspride.com. At this time I'd like to turn the call over to Gary Rhodes. Please go ahead, Sir.

Good morning. Thank you for joining us today as we review our financial results for the third quarter, ended September 26, 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 with 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 the prepared remarks, we'll be happy to take any questions. 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 and cost of sales information and market dynamics. Actual results might differ materially from those projected in the 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 10K, 10Q, and 8K as filed with the SEC. I will now turn the call over to Don to begin our prepared remarks.

Thank you, Gary. Good morning, everyone. In the third quarter, we recorded a net profit of $57.9 million or $0.27 per share. Our net sales of $1.7 billion for the third quarter. Our adjusted EBITDA was $170 million, a margin of 9.9%. Our results reflect continued improvement in operating efficiencies and cost control. Our overall live costs ranks among the best in the industry, and we remain focused on sales mix and price improvement.

Sales were slightly less than the same quarter a year ago, however, remember that we were still operating some of the now idle plants in the third quarter of last year. We have made absolute sales improvement since the beginning of the year, and [inaudible] so far in October, our fourth quarter sales to date are running more than 10% ahead of a year ago. In Mexico, our sales rose nearly 25% while volume was up 5.5%. Our Mexico operations are on pace for a very strong year. Gary will provide more details on both US and Mexico segments in a few minutes. Overall, we're seeing improving demand.

Sales volumes rose across our retail and food service segments when compared to a year ago, and we succeeded in bringing in new higher margin business during the quarter. When compared to the second quarter of 2010, gross margin as a percentage of sales in the third quarter improved from 7.8% to 9.1%. Our average selling price rose $0.02 per pound when compared to the second quarter, even as the commodity market declined. As we approached the end of the year, we are engaged in negotiations to renew existing sales agreements and capture new business. We're just now getting into the heart of these negotiations with our food service and retail customers. Clearly, higher grain prices and chicken supply have been key topics in these discussions. We've been working hard to help customers better understand the current industry environment and our outlook for the coming year.

To date, those discussions have been constructive, and I am optimistic about our ability to both retain current accounts and win new volume for the coming year. We continue to make good progress on cost control as part of our plan to drive operating efficiencies, we have intensified our benchmarking of light and plant costs, as well as sales against the industry using Agri Stats. Performance and action plans are reviewed with the management team on a monthly basis. That focus is paying off. When compared to the industry average, our mix adjusted plant costs and yield value improve $1.7 million per week in the third quarter. P & L accountability has been assigned to three business segments, case ready, fresh food service and prepared foods.

Our goal is to improve plant-related costs and product mix by $200 million on an annualized basis. Based on the progress we have made to date, especially in our prepared food plants, we have already achieved that run rate. We are making fundamental process improvements across the organization, and I'll give a few examples. We are replacing automated deboning equipment with individual comb lines in which the meat is deboned by hand to improve yield. Please remember that labor issues in 2008 and 2009 pushed the company to automation and some yield was lost, as a result. We are reducing by two-thirds the number of outside cold storage warehouses that we use. This will improve our supply chain and reduce distribution costs.

We had improved throughput in our cooking operations by upgrading ovens and spiral freezers to higher capacity units. We remain optimistic about the outlook for chicken headed into 2011, although we are facing higher grain prices in 2011 and economic recovery remains uncertain, there are several encouraging signs heading into next year. The latest chicken supply data from USDA indicates some moderation in year-over-year growth. Given the reduction in beef supply and the higher prices that are expected for beef and pork, chicken should be attractively positioned with consumers who are looking for the best value. By some estimates, beef prices could rise to their highest levels in 25 years. As a result, many of our customers are planning to feature chicken more prominently on their menus or in their stores this next year. We are seeing increased food service demand for next year, and I believe that we could see an increase of up to 3% year-over-year.

We will restart deboning operation at our idle processing plant in Douglas, Georgia in mid-November with slaughter operations to begin in January. We continue to target further expansion later in 2011 and again in 2012. Export demand remain strong following the reopening of Russia last month. We have three plants that are currently approved and shipping to Russia. Douglas will be approved for Russia when it reopens in January. Although prices for Russian leg quarters have retreated over the past few weeks, they remained in the $0.50 range, historically a high level for export.

Overall, I am positive on industry exports in 2011 and on Pilgrim's long-term export position in particular. We have succeeded in expanding our international distribution network to more than 90 countries and our partnership with JDS has improved our access to growing markets in Africa and the Middle East. I like where we are as a company with commodity exports, and I do not regard the reported decline in Russian demand in the years ahead as a threat to our success as the leading exporter to the world. Now I'll turn the call over to Gary Tucker to discuss our financial performance in more detail.

Good morning, everyone. As Don said, our third quarter results reflect tangible improvement in a number of areas. Clear evidence that the operational changes we have made over the last 18 months are showing results. As shown in slide four, we reported net profit of $57.9 million or $0.27 per share on net sales of $1.7 billion for the quarter. This compares to a net profit of $82.7 million or $1.07 per diluted share on sales of $1.7 billion for the same quarter a year ago. Remember, we now have approximately 214 million shares outstanding compared to 77.1 million diluted shares in the previous year period. If you strip out all of the nonrecurring gains and expenses from the third quarter of 2010 and the third quarter of 2009, our adjusted income before tax was $27 million higher than a year ago.

As shown in slide five, net sales for the third quarter declined less than 1% or $16.3 million from the same period a year earlier. Breaking that down, our US sales declined 2.9%. Volume compared to a year ago was down 5.4%. Net revenue per pound sold increase 1.6% from the prior year, primarily because of higher prices on export sales. When you compare our results to second quarter, however, sales and volume in the third quarter increase across our retail and food service segment. Our related note, Mexico has another strong quarter. Sales for the quarter increased nearly 25%, as volume rose 5.5% because of increased demands.

Moving now to pricing. Commodity chicken prices generally improved throughout the third quarter, but remained a mixed bag while compared to the same period a year ago. As shown on slide six, breast meat was the biggest gainer, climbing as high as $1.87 per pound during the quarter. The highest level since 2004. For the full quarter, breast meat averaged $1.71 per pound or 22% higher than a year ago. Georgia dock prices held strong at $0.88 per pound during the quarter reflecting a slight improvement when compared to the same time last year.

It's been little movement in late quarter pricing for most of 2010. Although, pricing did inch higher over the quarter, the average of $0.37 per pound was 10% lower versus the same period a year ago. Wings dropped 13% to an average of $1.19 per pound in the quarter. It is important to note that since approximately 60% of our business is fixed, we do not fully participate in any uptick or decline in commodity chicken prices. Slide seven shows that EBITDA when adjusted for reorganization and restructuring items was $170 million for the quarter. We recorded operating profit of $113.2 million, total gross profit of $157.3 million dollars. SG&A totaled $45.1 million at 2.1% decrease from a year ago primarily related to our head count reductions and other restructuring actions. SG&A as a percentage of sales was 2.6% down from 2.7% a year ago. As we said in our second quarter call, we anticipate our quarterly SG&A run rate going forward to be in the range of $53 million.

For the quarter, feed ingredient prices were mixed. Corn averaged $4.23 per bushel, up 29% from a year ago, while soybean mill averaged nearly $305 per ton, a 10% decline from a year ago. We recognize $15.4 million dollars in net mark to market gains related to changes and the fair value of our derivatives during the third quarter. As a reminder, gains or losses related to these derivatives are included in the line item cost of sales and the consolidated statement of operations.

In the third quarter, we had long derivative positions in place covering approximately 16% and 2% of our anticipated corn and soybean mill needs through September 2011. Since the end of the third quarter, we have accumulated a larger grain position. At this point, we have a futures position equal to approximately 40% of our anticipated grain needs through next September. Based upon today's grain prices, we under a positive financial position on that coverage. Total debt at the end of the third quarter was approximately $1.2 billion and we had $46 million in cash and cash equivalence.

Turning to slide eight, capital expenditures were $41.6 million compared to $22.6 million a year ago. Through the first nine months of the year, Cap Ex stood $109 million. For the full fiscal year, we now expect Cap Ex to be in the range of $160 million, a slight increase from our previous guidance. Interest expense in the third quarter declined 29% to $26.5 million, primarily due to lower average borrowings of the lower weighted average interest rate. Year-to-date interest expense totaled $81 million. We expect interest expense for the full year to be in the $100 to $110 million range, a decrease of $10 million from our previous guidance. I'll now turn the call back to Don for a few final comments before we open it up for questions.

Thanks, Gary. Before we open it up for questions, I want to take a minute to recognize all of our plant and operations employees for a tremendous achievement. All of our plants have achieved an A-grade in the British retailers consortium audit, one of our -- one of the four audits recognized by the global food safety initiative. These audits, which today are required by most of our retail customers, are used to evaluate a plants food safety and quality programs. With some 326 requirements that must be met before a final certification grade can be given, the audit is among the toughest in the industry. Earning a clean sweep of A's, an unprecedented achievement, and I am extremely proud of each of our plants for their dedication and commitment to food safety and quality standards. This concludes our prepared remarks. Operator please open the call for questions.

(Operator Instructions)

Our first question is from Farha Aslam, Stevens Incorporated.

Hi, good morning.

Good morning, Farha.

Two questions. The first being, Don, you had mentioned on your press release some good demand coming in from the food service side. Could you just highlight for us which channel that's coming from and kind of what level of interest you're seeing in your food service customers?

Our strongest performance as a company, in terms of increase, has been within our food service distribution group. We've shown significant growth continuously over the last year in that particular segment. We still see good, positive signs in terms of quick service restaurant uptick. There are some segments within that, that still [inaudible] in terms of the food service group. We're still anticipating that year-over-year we'll see about a 3% increase in demand on the food service side.

That's very helpful. And then on the export side, we're hearing some mixed news out of Russia, in that there's some talk, about prices declining from the $0.60 to $0.65 closer to the $0.50 to $0.55. Have you seen repricing? Could you just speak to your Russian exports?

Pricing has declined. I think it has predictably declined from what it was in the high $0.60s. And I think now more representative something on the order of $0.50 a pound is the current pricing. Again on a historic basis, that's consistent with where that market has been in the past. I would comment that given some of the things reported, coming out of Russia today about no imports in 2011, I still expect there to be import going into Russia this coming year. I do think that they, obviously, have the intent of developing further their own internal chicken production, and we're positioning ourselves for that possibility. And, I'm greatly encouraged by our ability to access other markets and achieve the kinds of margins that historically have been achieved in Russia.

I'm sorry, just a clarification on the Russian news, is that for -- I saw that article as well about no exports to Russia. Is that -- does that include leg quarters or is that more in the further process like ground items?

They made two comments or there have been two comment as tributed to the Russian authorities. One has been no imports in 2011, and the other has been that no further process items will be allowed in Russia. And I can't sort out absolutely the case, but my view as far as will continue to ship leg quarters into Russia in 2011, and I can't say that I fully understand the ramifications on these further process items.

Ok. And my final question would be in terms of your relationship with JBS, have you been able to leverage JBS's international network on the export side and expand Pilgrim's' distribution in the international segment?

I think because of existing relationships within JBS, we have gotten, I would say, better access to markets that we may not have been represented in the past. And at the same time, you know, we continue to grow our base of business and direct ourselves on a more direct sale as opposed to going through other third parties. So, JBS has allowed us to do both, better access and more direct access.

Great, thank you very much.

Thank you.

Your next question is from Christine McCracken, Cleveland Research.

Good morning.

Good morning.

Just wanted to go back, I guess, to the food service negotiations. You talked about that these discussions are -- you're making them aware of the grain cost situations. Wondering, what are those -- or can you talk a little bit more about the nature of the discussions? Are you getting any grain cost escalators built into your contract? Are they fairly open to price increases for next year, high prices for competing proteins? Just a little more color there?

I would love to tell you, Christine, that they're open to price increases, but I think our customer base is understanding, if you will, of the situation involving grain, especially. So, we are trying to incorporate what we see as the commodity market in terms of our fixed pricing and where we can. Obviously, we're trying to have some opportunity to move pricing as commodity grain prices might move as well. So, we are trying to explore that possibility.

And, when you say you've got 40%, of your needs for next year, I guess blacked in, is that a function of the contract as you sign them, you cover your grain needs? Or are you taking a more aggressive approach given the possibility of grain costs moving even higher?

Today, I could not term that to be totally as a result of trying to lock in margin against new contracts for 2011. Basically, was more a function of trying to just deal with purchasing of corn in particular and soybean mill.

Are there any limitations, I guess, or restrictions in your current lending agreements relative to hedging, or can you give us an update on that?

We have had some restrictions, in that regard. So, we can go up to two-thirds of our commodity grain, can be purchased.

And then just one final question, I guess the boneless markets have been weak here lately. Not normally as strong a seasonal period for chicken in any case. Is there anything outside the norm, driving prices lower? You've had a lot of product on the market. It might be a function of waste, but is it a demand issue or is it just a normal seasonal dropoff?

Well, I think, it's a normal seasonal dropoff. I don't think there's declining demand any more than it would be on a seasonal basis.

And you're not at all concerned about the amount of product in the market on this point?

Again, as I've said in the past, we're going to continue to try to balance our supply to our demand. And, again, we'll continue on a short-term basis to make whatever adjustments necessary such that we're not on the market with commodity breasting.

Alright, thanks.

Thank you.

Your next question is from Ian Corydon with B. Riley and Company.

Thank you. Maybe to follow-up on the hedging question. I think you said you're on a follow-up position on the hedges. Does that mean you're hedged below where December futures are right now?

Not all of our position is in December, but the answer would be yes.

Okay. And onto the fixed price contracts, what percentage of your business for next year do you expect that you will lock up for 2011, and when will that be complete?

In terms of fixed pricing?

Yes.

I would still anticipate that, you know, 50% to 60% of our pricing would be fixed in nature. I do think that we're going to explore the possibility of some of those agreements to, also, have grain related modifiers.

Last question is on the Douglas plant. Have you secured business for that plant? How long will it take to ramp up and are there any margin implications as you ramp that facility up?

Again, Douglas although it will begin operationally with doing some deboning for us that we now have that outside co-packers, it'll start up as a slaughter facility in January. It'll take three to six months before that plant is double shifted. So, I would anticipate the latest at which it would double shift would probably be May or June. And yes, we have not all, today. But we're in the process of negotiating the sale of, particularly, the boneless to come out of that plant. But yes, some of that volume is already committed.

All right. Thank you.

Your next question is from Christina McGlone with Deutsche Bank.

Good Morning.

Good Morning.

Following up on Christine McCracken's question, when you said, Don, that you'll balance supply and demand, you've been saying that, but you'll make adjustments so not to have too much commodity breast meat on the market. Is that new for you or you've been adjusting your production this whole time to manage your commodity breast meat?

Again, at least, is it new for -- since I've been at Pilgrim's. Again, we've tried, obviously, the changes we made earlier in my arrival, were very much directed at that. Since then, especially over the course of this year, we have generally been increasing production. And as we have approached kind of this seasonal change in demand that you would typically see. Yes, we've made plant adjustments in our production to make sure we stay in balance.

Okay. And then, could you talk a little bit about Mexico. That market was stronger, was very strong. And I'm just curious, what's driving that? And if it's still going strong because I understand there's a lot of -- we've shipped. The US has shipped a lot of leg quarters there, and I'm curious if there's saturation or if we're seeing the supplies being used?

Again, there has been strong demand in Mexico throughout the year. The Mexican operation will have a very outstanding year in that regard. Again, seasonally, there typically is some decline this time of year in Mexico, but our Mexican results, even today, remain very strong.

Okay. Thank you. And then, I was curious going back to the Russian leg quarters, and you were saying about $0.50. Have you priced any of your shipments for November yet? And do you think it'll stay in the $0.50 range or will it drop below there?

We're currently pricing, have priced some product and continue to price product in November. Our current pricing is right at $0.50.

Okay. And then I noticed that your chicken inventories jumped a bunch year-over-year, almost 50%. I just wanted to get an understanding of your inventory position. Breast meat wings and also leg quarters versus last year.

Well again, if you recall, last year at this time, we were -- the situation in Russia was entirely different. In this third quarter, we had begun to build significant leg quarter inventories in anticipation of the Russian market opening. It was delayed at least a month beyond what we had anticipated. So, we ended the third quarter with more inventory, in that regard, than we expected. Today, obviously, we worked that inventory back down and we're on more normal terms. Also in the third quarter, typically as it relates to wings. This is the time of year we would build wing inventory in anticipation of stronger demand in the fourth quarter and first quarter of next year.

So, in terms of inventory, I would tell you that our inventories, again, are at normal levels. We typically do not accumulate significant commodity of breast inventory and have not to date.

Okay. Thank you. This last question, in terms of your comfort with the export sales receivables, given that we're hearing that money's tight in Russia and central Asia, is that a concern for you? Through our arrangements or financial arrangements, our customers in that market, we're not going expose ourselves to a lot of risks on receivables in that market. Okay. Thank you.

Thank you.

Your next question is from Ken Zaslow with BMO Capital Markets.

Hello. Good morning, everyone.

Hello, Ken.

If I take a look at you with the food service side and retail side. Are there particular channels that your actually gaining share that gives you greater comfort in what your seeing in terms of food service or retail demand? Or would you say it's just industry wide? Or both?

In terms of gaining share, we're surely holding our share. We're probably making some inroads on the food service distribution side, may be greater than the others. Again, in terms of what we term our corporate sales, maybe we gain some share in that regard.

Okay. In terms of the two plants that are coming on after Douglas. Are there measures that you look at to assess, if you're going to do it? If you are going to postpone it? How do you decide if they are exactly on track with where you thought they were going to be when you first announce it? Can you just give us an update on those? And the other part of that question is, if it takes six to nine months, would you not be seeing actual increase in production, if you start later in 2011? Is it really going to be in 2012 that you'll actually see the production? I know there's a lot of questions there. But, whatever color you can give will be great.

I'll just give some general comment. One, in the restarting of Douglas, and I think we've made the statement in the past. We'll stand about $35 million in capital at least starting Douglas. That is about $5 million more than we had anticipated so not totally out of line. When we look at the start-up of other idle facilities, that cost would be expected to be greater than that. To the point that we are looking at other internal expansions because they are more cost effective.

So, if we look at restarting one of those facilities versus making the same kind of increase internally, by increasing the capacity at some existing facilities. We do find that the expansions of the existing facilities is going to be more cost effective and have better return. Long story short, Ken, we still intend to go forward with the expansion, but the fact that it may not be a reopening. Yes, we are looking at that simply from the cost side. We still expect to go forward sometime later in 2011 with that expansion.

And, if you were to go in the expansion of a facility, would that be less expansion than if you opened up Athens or El Dorado or another facility? Is it the same magnitude?

It'll be the same order of magnitude.

Okay. And then my last question is, in terms of with the higher feed costs as an industry. Would you expect to see, I think last time we had such a spike, you started seeing weights come down-- obviously production cuts, but first you saw weights coming down. Is there any inclination for either you or you think the industry to actually start taking down some of the weights to ensure pricing for breasts particularly, will actually increase more than the recent feed cost increase? Is there a way to think about that?

I wouldn't predict what the industry would do. On our part, and again I go back to statements we've made in the past that as a company, we definitely have room to increase our weight. Simply as a matter of kind of optimizing our own operations. So generally, you'll see that our weights will tend to be heavier. I do expect that, there's the possibility given the market conditions both on the commodity grain side and even on the chicken side that at some point there may be rationalization. At this point, no, we are not anticipating any reduction and production on our part.

So, your optimism is assuming current levels of feed costs and current levels of production and 2011 pricing should offset that given the tight supply?

Ken, I am very optimistic about chicken prices. I still believe that 2011 will be a strong year for chicken prices. Now, am I cautious about the grain market? Yes, I definitely am. But, at the same time, I do think the grain market's at a point when you may begin to see some rationing, if you will, by way of use in the US.

I appreciate it. Thank you.

Thanks, Ken.

Your next question is from Stephen Share with Morgan Joseph.

Good morning.

Good morning.

Great quarter, you guys.

Thank you.

I want to talk a little about SG&A. You mentioned that going forward, we kind of modeled that around $53 million, however, you were pretty low this quarter just at $45 million. Anything unique there? Why was this quarter at such a low run rate, and what's going to make the pop?

We are still, I guess to say it the easiest way, we are still cleaning up the balance sheet and income statement from the bankruptcy, the reorganization, all of the restructuring we're doing. So, the actual run rate for the quarter was about $53, $53.5 million, and there was just several offsetting adjustments made. Mostly pushing things around between the P & L line items.

Okay. So, we should model $53? Is that a good number or just the fourth quarter? Would that be a decent number just to start 2011 or does that bump up with the new facility?

At this point, we see it as our run rate going forward quarter to quarter.

Okay, good. Then the second question, I had was just on volume. The fourth quarter of 2009 seemed to be the bottom, as far as volume goes. Should we see some growth off that in these upcoming quarters? I mean, do you expect volume to go up year-over-year but down sequentially?

Our volume will be up in the fourth quarter about 10%.

10% year-over-year?

Yes.

Okay. Okay, good. Then the final thing, I just wanted to ask you about is the Mexican business. Is currency helping you quite a bit there? I noticed that the sales volume was up about 5.5%. You had almost 25% on the revenue line, so, of that 19% that's left over, is most of that currency or is some of that price?

I don't know exactly, maybe Gary does. I don't know exactly what the currency effect is, but the results, overwhelmingly reflect actual operating performance in Mexico. Gary, I don't know if you have a better number.

We are actually seeing increased pricing in Mexico. Small change, but very little.

Okay. So, it's probably a combination of both it sounds like.

It's very little currency. It's mostly pricing.

Oh, okay. Okay. I'll pass it along.

Your next question is from Akshay Jagdale with KeyBanc Capital Markets.

Good morning and congratulations on much improved results, Don.

Thank you.

First question is on supply. What is your expectation for supply for Pilgrim's Pride's volumes in 2011?

Well, again, in the third quarter, we ran at about 96% utilization. We will, in the fourth quarter run higher than that , and if you then, layer the increase that will occur with Douglas, I mean, basically, that'll represent the increase. If we look at the expansion that we talked about earlier. Again, that would occur later in the year. Probably would not materially affect our numbers on an annual basis very much, but it would represent some small increase.

Okay. And I'm just trying to put into context your expectation for food service demand to be up 3%. What I'm trying to do is just say, okay, grain prices are up. Roughly increasing costs of production by $0.04 to $0.05 a pound. If production for the industry, and for Pilgrim's, is going to be up in the 3% range, you would expect demand to be up more than that. For pricing to offset the grain impact as well as -- just for pricing to be up year-over-year. That's how I'm thinking about it. Can you shed light on that, in terms of how your discussions on the food service side have been? Are you talking about a percentage change in pricing? Can you help me understand that?

Again, as I said earlier. In all negotiations, food service and retail, as well, we're continuing to try to recognize in our pricing what's going on in the commodity grain market. And in many cases, trying to incorporate escalators within our pricing structure that will allow price to move, as grain prices move. At the same time, in terms of margin, realizing we continue to work on the cost side to reduce costs, increase margin and not solely rely on price increases as a way to improve our results in a more difficult environment given that commodity situation.

Just as a follow-up, your 3% expectation for food service demand, is that a Pilgrim's Pride specific or for the industry? And follow-up to that, has it changed in the last three months?

My comment, which I also made this comment at the National Chicken Council Annual Conference in Washington the other day. My comment was a general industry comment, that I saw that food service demand would be up about 3%.

That's based on, sort of -- if I may, chicken gaining share on restaurant menus. Right? It's not because you think there's going to be more people eating out at restaurants. It's more about feature activity. Is that correct?

I would have to think that the bigger increase will come as a matter of share, as opposed to absolute increase. But again, I'm not putting myself out in the expert in that regard. Since I've made the statement, I've seen other analysts that have made similar statements about increase, in terms of food service demand of about 3%.

Okay. Great. Thanks, Don. I'll pass it along.

Thank you.

Your next question is from Gabriel Lima with Santander.

Hi, good morning, Don and good morning, Gary. Thanks for taking my question. It's a pretty simple question. I just would like to better understand, the working capital you should spend to start and ramp up operations in Douglass, Georgia. How much have you done -- have you spent? And how much expect, spending and working capital, in the coming quarters related to the ramp up, please?

We have probably spent about $10 million right now, of the total.

I'm sorry?

We spent about $10 million.

Okay, okay. Do you have expectations on the fourth and probably the first Q next year?

Plant has to be fully operational by January 15. We'll have spent the rest of the $35 million, by that point in time.

Okay, fair enough. Thanks.

Your next question is from Adam Ritzer with CRC capital.

Hi. Can you give me an idea of how much corn you guys use per quarter?

We use about 4 million bushes a week.

4 million a week. Okay. And you also said that you additionally hedged up to 40% of your needs through September of 2011. Can you share what price you've hedged that at?

No, I don't think that we want to provide that information.

Okay. I understand. Going back to a previous callers question about your increase in supply. I don't know if you specifically answered that, but maybe I can ask it again. How much are you increasing supply with the Douglas reopening for 2011?

The total increase for us, I'm doing this in my head, I wasn't trying to avoid the question but the Douglas plant is $1.3 million birds a week. So based on our increase, that would represent about a $0.03 increase in our output.

3%, is that what you said, I'm sorry?

I think about 3% increase.

Okay. So that's about equal to what you think food service demand's going to be up next year?

Yes. All of that increase obviously does not come on in January. It would be spread out with the first shift coming into operation in January and then the second shift sometime, probably near the end of the second quarter of the year.

Great. What about your increase in supply for 2012? Can you give us the same metrics for that?

That plant size will be anticipated to be comparable to Douglas, about $1.3 million birds.

Okay. Perfect. And I guess, could you talk a little bit more about your free cash usage? If you guys continue the performance in Q3 going forward, you should generate a decent amount of free cash. What are your needs there and what are you going to do with that?

We have two things that we have to deal with. Our bank debt is -- we will be ramping up our payments. We'll have to pay $100 million minimum against our bank lines next year. In the first quarter of next year, we'll have a mandatory cash sweep from the bank to pay down on term A. We don't know what that number is yet. So, if you look at that, if you look at $100 million of cash interest to spend. If our CapEx spending is in line, and probably even could be a little higher than this year. That'll be the major portions of it.

So, most of it after CapEx is going to be used to pay down debt then?

That's correct.

Okay. One final question, going back to your, I guess, agreement with JBS. If JBS USA does not do their IPO next year, what happens going forward and does anything prevent JBS from buying in the stock that they don't own currently?

Well, if JBS does not go forward with the IPO and as such the mandatory exchange did not occur, there's no particular consequence of that per say.

Okay, but is there anything that excluded them from just going into the open market. And saying, hey, we're going to start buying stock and buying shares they don't own?

During this time frame, there is a restriction without the approval of -- to go back to the existing shareholders and equity. You have to go back to the people that were in the bankruptcy and get permission to do that.

Okay. So, during the period of, let's call it till the end of 2011, with the exchange offer if they go public, they have to get permission or have certain exclusions of buying back stock. After 2011, there any exclusions for them buying back stock? Do they have to get any approvals or anything like that?

Start with -- in the agreement, if they go public after both of us have filed a quarterly report with the FCC, they can trigger it without anybody's permission.

Exactly. I understand that. What about after 2011?

After 2011, it's all off the board and JBS can determine what's best for them.

Just to clarify, it's actually January 27, 2012 when the mandatory exchange provision would expire.

Okay. So, after that it's jump below, they can do whatever they want and nobody can stop them?

No, no. They cannot take out the existing Pilgrim's shareholders without their permission, after that.

Right. I understand. Okay. I appreciate the help. Thanks very much.

Thank you.

(Operator Instructions)

And we'll take our next question from Reza Ridzuan with Barclays Capital.

Good morning.

Good morning.

The hedging game, was that in the gross margin line?

Yes. Yes. We take all hedging into costs of goods sold.

Right, right. What portion of your growing needs are hedged?

At the end of the quarter, it was about 15%. As of now, we're about 40%. For the year looking forward through September 2011.

But you are 15% as of the end of third quarter?

15%, yes.

And then, your debt amortization and the amount of debt that you have to pay back, was how much going forward?

We'll have to pay $50 million against our Tranche A and $50 million against Tranche B. Plus there's a mandatory sweep after this year is finished, there will be a mandatory sweep from the first quarter. The calculation was determined by how much cash is generated. We don't know what the exact number's going to be, at this point. As will there be another mandatory sweep at the first of 2012.

The $50 million that you mentioned for each Tranche, is that per quarter, or per year?

That's for the year. It's $12.5 million a quarter. Per each one.

Got it. Thank you.

And we'll take our next question from with Akshay Jagdale with KeyBanc Capital Markets.

Hey, Don. Thank you for taking the follow-up. I just wanted to clarify ton the supply side. You said $1.3 million added the capacity for Douglas, but that's not the only production increase you're going to have, correct? You're also increasing utilization of your current capacity, which is at, like you said, 96%, right? So we'd have to add that to the Douglas number. Is that correct?

Yes. And again we've been increasing that number throughout the year from, I think, our utilization low was probably on the order of 85% going back to last year. And, we've steadily increased that with demand as demand has increased. Where by we ended the third quarter at 96% and we'll end the fourth quarter somewhere in the order of 98%, 99%.

Okay. And I'm not trying to sort of push you on this food service item in a negative manner, but just from our perspective, we hear from other publicly traded companies like Sanderson, who also deal with food service quite a bit. They haven't seen the kind of indications, positive indications that you guys are seeing. And hence, I'm asking this question a different way. From your perspective, what might be different that they're not seeing that you are. Such that, you are a bit more positive on the food service side?

Again, I can't contrast our perception relative to Sanderson's. I will say, because it's public information, that our participation includes services by way of product mix and customer's quite a bit different than Sanderson's.

Right. Okay. That's helpful. And the last one just on exports. Can you be a bit more specific on what you expect the Russian quota to be and when that will be announced? As you said there's some press releases that's saying no import --

I would prefer not to speculate what the quota will be. We hear numbers between 200 and 400, but, I don't know that I want to venture a guess in that regard. Our bigger focus, relative to Russia, is to prepare ourselves for what they're signaling. That is that, long term that their not going to be an importer of chicken. So, we're going to focus on growing our export markets elsewhere that can offset that in the very near term. And we think we can do that at or better than the margins that we have received over the long term from Russia.

And one last one. Are you managing your business today such that your revenue per pound, you think, will be up next year?

Yes.

Can you give me an order of magnitude?

That will be dependant upon a lot of -- on the commodity chicken market. We still have exposure, obviously, to the commodity chicken market. As I said earlier, I still expect it to be a pretty strong pricing, as we get into the year. And I realize that, a lot of people don't have that perspective given the circumstance today. But, yes, again, I hesitate to put a number on them. But yes, I expect revenues to -- on per pound price, to increase in 2011.

Okay. Thanks a lot, Don.

And, with no further questions in queue at this time, I'd like to turn the conference back over to Mr. Gary Rhodes for any additional or closing remarks.

Thank you everyone, for joining us today. If there are any follow-up questions, you can certainly reach out to me and we'll help you any way we can. Thank you again for joining us today.

Thank you.

Thanks.

That concludes today's conference. Thank you for your participation.