Pilgrims Pride Corp (PPC) 2010 Q4 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 fourth quarter ended December 26, 2010. 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.pilgrims.com. Beginning today's call will be Gary Rhodes, Vice President of Corporate Communications and Investor Relations for Pilgrim's Pride. Mr Rhodes?

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

Joining me today are Bill Lovette, President and CEO, Gary Tucker, Principal Financial Officer, and Don Jackson, former President and CEO of Pilgrim's who is now CEO of JBS USA, our parent company.

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

Before we begin, I'll remind everyone that today's call contains certain forward-looking statements. These may 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 Bill to begin our prepared remarks.

Well, thanks, Gary, and good morning, everyone. I'm excited to be here and serve our team members, our family farmers, who help us produce our chickens, our customer shareholders and investors. Our Company, I believe, is in great position to capitalize on our strengths and our affiliation with JBS to reach consumers of chicken worldwide.

I want to thank our board and all our stake holders I just mentioned for their support, both past and future. We also should take the opportunity to thank Don Jackson and recognize his leadership in bringing our Company to a great place so we can continue to capitalize on a solid foundation and great momentum.

Turning now to our performance in the fourth quarter, we were pleased with the progress in our results, given the challenging market environment. Net income rose 24% to $41.8 million, or $0.20 per share on net sales of $1.8 billion. Adjusted EBITDA was $124.8 million, a margin of 6.9%. Sales were up 13% from the same quarter a year ago. Overall, we saw improved demand in the quarter.

Volumes rose both our retail and food service segment with double-digit increases in parts of food service. In addition, gross margins improved across all segments when compared to a year ago and our net revenue per pound sold rose 0.7%. We continue to focus on our plant costs, yield, price improvement, and sales mix. These are the fundamental drivers of performance, the biggest opportunity for improvement.

Our Mexico operations capped off a very impressive year with a strong fourth quarter. Sales rose 36%, while volume was up more than 8%. Gary will provide details on both the US and Mexico segments in a few minutes.

We have completed all but a few of the contract negotiations that were taking place in the fourth quarter. We succeeded in gaining higher pricing in the vast majority of those customer negotiations. We didn't succeed on every contract, but for the most part, we were able to gain higher pricing. Overall, our pricing will be improved year over year.

We're making great progress on cost control and we must in light of higher grain costs this year. In the first four weeks, I've met with all of our complex managers, sales and marketing team and support people, toured numerous facilities, and met with over a dozen key customers. And I could not be more impressed with the very lean, agile, and focused group of leaders, and we're excited about the response and support from our customers.

Last year, we intensified our benchmarking of live 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 and we carried some good momentum into the end of the year, but we'll continue to focus on the fundamentals of our business.

On our third quarter call, we talked about improving plant-related costs and product mix by $200 million on an annualized basis. Based on our progress in 2010 and additional improvements we've targeted in 2011, we intend to achieve a total of $400 million in plant-related costs and mix improvements by the end of 2011.

We are making fundamental process improvements across the organization. For example, our conversion to hand deboning should be completed by late Spring. We are in the process of converting to hand deboning at two of our Texas plants and one plant in West Virginia. By replacing automated deboning equipment with individual cone lines, we should be able to improve yield by at least 1%.

In addition, we have reduced the number of outside cold storage warehouses from 51 to 29. We expect to be down to 17 warehouses by late Summer. This will improve our supply chain and reduce distribution costs.

We remain cautiously optimistic about the outlook for chicken headed into 2011. While all of us are concerned about sharply higher grain prices and the uncertain economy, there are a number of positive signs as we enter 2011. Given the reduction in beef supply and the higher prices that are expected for beef and pork in 2011, chicken should be attractively positioned for budget conscious consumers.

We are seeing increased demand from food service accounts and exports should strengthen this year, particularly as we pursued new market opportunities through our partnership with JBS. Overall, I believe we could see up to an increase of as much as 3% in industry food service sales.

On the retail side, I've seen estimates of up to 1.5% industry sales growth. Of course the biggest factor will be the economy. If we can see some improvement in unemployment and in consumer confidence, I believe that will translate into more demand for chicken.

This year will be challenging with regard to being able to match increasing chicken pricing with escalating feed costs. While we expect the front end of the year to be relatively soft in terms of chicken prices, we also believe that with the onset of grilling season and a reduction in the overall meat supply, that will create much improved pricing environment.

For the entire year, we believe chicken supplies will increase maybe 1%. Beef is projected to be down 1.5% and pork will be up slightly when compared to 2010. We expect exports from beef and pork to be relatively strong, thereby creating a healthy price environment for chicken into the Summer and early Fall.

We began deboning operations at our idled processing plant in Douglas, Georgia last November, and restarted slaughter operations in mid-January. The plant is expected to reach full capacity later this year. We are committed to balancing our production with forecasted demand from our customers and we'll target further expansion based on that demand. We are encouraged about industry exports in 2011 and on Pilgrim's long-term export position in particular.With current high prices for beef and pork, chicken is very attractive in the export markets and that should hold up in 2011.

We've done a good job of expanding our distribution network to 95 countries and our partnership with JBS has improved our access to growing markets, such as Africa and the Middle East. We talk with our JBS counterparts on the beef and pork side on a daily basis, exchanging information and perspective pricing trends, et cetera. We introduced customers to each other and we share a sales office in Dubai. Overall, I like where Pilgrim's is positioned with regard to export.

Now I'll turn the call over to Gary to discuss our financial performance in more detail.

Good morning, everyone. As shown on slide four, we reported net profit of $41.8 million, or $0.20 per share on net sales of $1.8 billion for the quarter. This compares to net profit of $33.6 million, or $0.44 diluted on sales of $1.6 billion for the same quarter a year ago. Remember, we now have approximately 214 million in shares outstanding compared to 77.1 million shares on a diluted basis in the year-ago period.

If you strip out all of the non-recurring gains or expenses from the fourth quarter of 2010 and the fourth calendar quarter of 2009, our adjusted income before tax was $41 million higher than a year ago.

As shown on slide five, net sales for the fourth quarter increased 13%, or $209 million from the same period a year earlier. Breaking that down, our US chicken sales rose nearly $163 million, or slightly over 10%. Volume compared to a year ago was up 13%. Net revenue per pound sold declined by 2.4% from the prior year.

Mexico had another strong quarter. Sales rose nearly 36%, while volume was up more than 8% because of increased demand.

Moving now to pricing, commodity chicken prices generally improved in the fourth quarter when compared to a year ago. As shown on slide six, the average price for breast meat was $1.30 per pound, up 6.9% from the same period a year ago. Leg quarters averaged $0.37 per pound, or 8.4% higher. Georgia dock prices rose $0.04 per pound, or slightly more than 4%, while wings fell 20% to $1.21. As a reminder, with roughly 60% of our business at fixed price, we do not fully participate in any uptick or decline in commodity chicken pricing.

Slide seven shows that EBITDA, when adjusted for reorganization and restructuring items, was $124.8 million for the quarter. We reported an operating profit of $52.7 million. Total gross profit was $119.2 million.

SG&A totaled $52.1 million, a $10 million decrease from a year ago, primarily related to our head count reductions and other restructuring activities. SG&A as a percentage of sales was 3%, down from 3.9% a year ago. Going forward, we expect our quarterly SG&A run rate to be in the range of $50 million, down from our previous guidance of $53 million.

For the quarter, feed ingredient prices were notably higher. Corn averaged $5.61 per bushel, up 45% from a year ago, while soybean meal averaged nearly $340 per ton, a 10% increase from a year ago. We recognized $62.8 million in net marked to market gains related to changes in the fair value of our derivatives during the fourth quarter.

At this point, we are covered 100% of our anticipated grain needs through early August. Based on today's grain prices, we are in a positive financial position on that coverage. Total debt at the end of the fourth quarter was approximately $1.3 billion and we had $106 million in cash and equivalents.

Turning to slide eight, capital expenditures were $70.3 million, compared to $30.5 million a year ago. For the full year, CapEx was $179.3 million, slightly above our previous guidance due to the reopening of Douglas and some efficiency projects that we moved up.

Interest expense for the fourth quarter totaled $24.5 million, a reduction of $20 million from a year ago, primarily due to lower average borrowings and a lower weighted average interest rate. For the full year, interest expense totaled $105.6 million.

To help you with your financial models for 2011, here's what we expect in the following items this year. CapEx should be in the range of $150 million. We will continue to focus on investments that improve efficiency and generally have a payback of less than 12 months. Interest expense should be approximately $110 million. Total depreciation and amortization should be in the range of $210 million, and our effective tax rate should be approximately 31%.

I'll now turn the call back to Bill for a few final comments before we open up for questions.

Thanks, Gary.

During my first month, I have been able to visit many of our plants and gain a good feel for the performance and culture throughout the organization. I am most impressed by our team members' accountability and sense of ownership, especially by their passion for Pilgrim's, as they talk about their business. Yet, as far as we've come over the past year, it's clear to me that significant opportunities for continued growth and improvement remain. I believe that 2011 will be a challenging year, both for our industry and our Company, but that Pilgrim's will be profitable for the year.

Given sharply higher feed costs, it's absolutely critical that we continue taking out unnecessary costs and capturing efficiencies through yield improvements, labor productivity, and mix. As I've said before, we intend to capture $400 million in annualized plant-related costs and mix improvements by the end of 2011. At the same time, we must find new ways to help our customers grow their business. I've challenged our sales team to improve our penetration with existing customers and to gain new business in selected channels where we are currently underrepresented.

Finally, I see opportunities to strengthen our balance sheet by improving our inventory levels and reducing accounts receivables. We have a lot of work in front of us, but there's no doubt in my mind that this team will build Pilgrim into the most respected and best managed chicken company in the world.

Operator, this concludes our prepared remarks. Please open the call for questions.

Thank you sir.(Operator Instructions)And we'll go to our first question from Ken Zaslow with BMO Capital Markets.

Good morning, everyone.

Good morning.

Good morning, Ken.

Congratulations on your appointment, Bill.

Thank you.

Well, I guess very straight forward, do you plan on making any changes to, as the new CEO, any changes you're thinking about doing?

Well, not immediately for sure. I will tell you, Don and the team did a great job of bringing together a very lean and agile team, as I said in the remarks. I see a lot of excitement. I see a lot of passion, as I said, for the Company, and that's a great place for me to start.

Obviously we have some work to do, as I said, and continuing to carry out the strategy of improving our operational efficiencies and improving our mix. We also have some work to do in our branding efforts that were started last year. We're pleased with where we are in that regard, but we know we have more work to do. So, the bottom line, Ken, is we're going to continue on the track that we've been on and we think that's the right formula for success in the future.

Couple of other questions. What happened with the tax rate this quarter? Because it seems like I couldn't really figure out from the foot notes or anything why there was such a tax advantage, and it sounds like that's where your EPS was largely helped.

It's primarily due to changes in tax laws in Mexico. They changed the laws going into the year after we -- took us literally the whole year to decide how it affected Pilgrim's, and what it boils down to is that we have now deconsolidated for tax purposes in Mexico and had a very significant benefit by doing that.

But that's not ongoing. You said your tax rate going forward will be in the 30s?

Yes. Well, on a deconsolidated basis, approximately, I don't know, half that business at least is under what they call simplified regime, which is in a lower tax rate. So, it's going to be blended probably less than 30 in Mexico, 31 for the whole consolidated group.

Okay, but we wouldn't -- this is -- what would happen in the quarter is mostly one-time in nature?

That's correct.

Okay. The next question, Bill, you said that you are hedged through August. What happens after August?

Well, we're going to pay market prices. We just think the risk past August, not knowing how many acres are going to be planted, not knowing what the weather's going to be, the risk is just too great to go much beyond that. But I'll tell you, we have -- we continue to look at the market and we'll take opportunities to take more positions as we see the opportunity.

So, you're 100% unhedged after August though?

I wouldn't say quite 100%. I think we've got some coverage on, but we're not nearly as covered as we are through August, or into August.

Okay, and then you said that in 2012, you'll be basically -- I'm sorry, 2011, you'll be profitable the whole year. Can you talk about, will your outlook be better than 2010, or is it -- I mean, how do you kind of rank it relative to 2010?

Well, we put a plan together late last year and we're operating according to that plan. As I said before, we do expect 2011 for the year to be profitable, but it's going to be a challenging year. We know that.

And then my last question would be in terms of your production plans, can you give us an update on where you stand on the second plant and your expansion plans and how much increase you expect to have in 2011 and beyond?

Well, as I said in the prepared remarks, we started up Douglas, Georgia. I can tell you that start up has gone really well. Start ups are challenging any time you do it, but actually we've only been slaughtering chickens for a few weeks now and we're going to be running at full capacity at least on one shift as we speak.

We'll continue to balance our supply and demand based on what we know from our forecast and we'll adjust our plan accordingly. We do not expect to open any new plants or any of our idle plants in 2011 and we'll let the market and demand tell us what to do beyond that.

So, you're delaying the second plant, is that what you're saying?

Well, I think Don addressed that in the last call and he was quite clear about our balancing supply and demand, and we want to make sure that the capacity that we have on the ground with the current footprint is running full before we open any more plants that are not currently producing and so we'll continue down that track.

Okay. I thought -- I must have misunderstood. I thought last time -- quarter he said, we may not open the second plant, but we are going to try and expand our existing plants to make up for the lost volume of that second plant. Is that still the--

Well, yes, that's essentially what I just got through saying. Is we'll operate our existing footprint at full capacity and then we'll let the forecasted demand tell us what to do with regard to any additional plants. I think that's consistent with what he said and what you just played back.

Okay, and then my last, is there a certain level of operating losses from the industry that you would think would change the trajectory of the production for the chicken industry?

Well, I'm not sure, Ken. In December, we think two-thirds of the complexes were operating in the red. Don't think that's improved much through January. We've heard both anecdotal and published remarks that some production has been cut already, and with ingredient markets doing what they are doing, the industry, I believe, will seek to get supply and demand in better order as a result of that.

Great. Thank you very much.

Thank you.

And we'll move to our next question from Farha Aslam.

Hi, good morning. Welcome, and congratulations, Bill.

Thanks, Farha.

First question is, you mentioned your cost savings. Could you just clarify, you had $200 million that you've realized already that you're going to benefit from for all of 2011 and then throughout the year, you're going to get an incremental $200 million. Is that the right way to understand it?

That's essentially the right way to understand it. We, we realized a run rate or an annualized rate of $200 million and we've identified an additional $200 million on top of that. So, yes, the annualized rate that we're looking at now is $400 million.

Okay, and is there any timing to the $200 million that you plan to achieve this year? Is there a certain time you're probably going to realize that?

Well, we expect to realize $400 million in 2011.

Okay.

That's built into our plan.

Okay. And then when you look at your grain hedges, you had a mark to market. So, how do we think about how grains flow through your P&L going forward? Is that -- should we -- are your positions marked to market at the current grain levels, so we should flow in current grain prices, or will you have your hedge levels flowing through the P&L?

Well, the -- we did take a marked to market, as Gary mentioned earlier, but we still have positions on and those positions will flow through cost of goods sold as we report each quarter.

Okay, and going back to kind of Ken's question a little bit, you talked about the potential production cuts. How much do you think the industry needs to cut production to offset the current grain environment and return to healthy profitability?

Well, there's a lot of moving parts in that you have to look at to analyze that. I would go back to 2009 coming off of an over supply situation in 2008. There were times where the industry was cut back anywhere from 4 to 6% and I think you saw the response in supply and demand in terms of pricing.

What's different about today, though, is we, we don't have as much beef and pork on the market and export markets are a lot stronger today than they were then. So, it's hard to tell. You could pick any number, but I can tell you we're focused on our supply and demand situation and what we are hearing from our customers, and we're going to take care of Pilgrim's and let the rest of the industry worry about themselves.

And, Bill, you had some very positive comments on the export front. Do you believe that Mexico's recent anti dumping case is having any impact on pricing or will have an impact on the level of leg quarters?

Well, I don't think it has yet, obviously, because it's -- it just was filed this week. I'm very bullish on exports this year for the reasons that we talked about already, with the beef and pork situation.

I think unique to Pilgrim, though, is our partnership with JBS and the distribution network that we have worldwide. And that's definitely opened up some opportunities that would otherwise not have been available. And from my perspective, having experience in international business before, I see some unique opportunities and I see that we're going to take, take full advantage of those as we already are.

And my final question before I pass it along, Bill, you mentioned a potential of 3% increase in food service demand due to the tight situation in beef and pork. Is that comment based on kind of what your customers are relaying to you right now in terms of promotional activity for the Summer?

Yes, it is, for the most part. Plus, we read industry analysis as well and I think National Restaurant Association came out recently with approximately the same number. But, most of what we're thinking is our own experience.

I would go back and comment back to the previous question that you asked about exports. We're seeing strength in leg quarter pricing as we speak. In January, the market was still trying to absorb a lot of product that was shipped in Q4 of last year. We believe that's starting to clear now, as we're seeing pricing improve dramatically. We believe that there will be leg quarter shipped by March in the mid to high 40s.

Okay, great. Thank you so much for your comments.

You're welcome.

And we'll hear next from Reza Vahabzadeh with Barclays Capital.

Good morning.

Good morning.

Just a couple of house keeping items first.As far as volume is concerned in 2011, just in ballpark terms, what type of volume growth could we expect just based on your current capacity and what you know?

We believe that with opening of Douglas added to our current footprint, we'll see about a 3% increase in our volume.

Got it. And in mix improvement, have been part of the progression of Pilgrim's last few quarters, you anticipate additional mix improvements in 2011?

Absolutely. That's a big opportunity for us, as we spend capital to add technology, and automation, and equipment in our plants. We're definitely focused on improving our mix.

Got it. So, you have the input costs that you are obviously hedged on through August, but are probably higher than last year, and you have the cost savings and you have the volume growth and mix improvement growth. What else do you need to be able to offset the higher input costs in 2011 versus 2010? Is there -- higher pricing?

Yes. Higher pricing for chicken will definitely help. And we believe that there's evidence that strongly suggests that's going to be the case. But I would tell you that while we're concerned about both ingredient pricing and chicken pricing, we are absolutely focused on getting our operational efficiencies, yield improvements, and value from mix, the things that we can control and we'll have to respond to whatever pricing is there.

Now, I will hurry on to say, as I mentioned in the prepared remarks, that as a result of our negotiations with our fixed pricing contracts, we are assured that, that pricing is going to be higher year over year. So, we -- that's a given. That's something we know.

Got it. So, on the retail side, the non-food service side, is there an idea of how much pricing you need to be able to offset the remainder of the input cost inflation?

Well, that's a hard question to answer in the most simplified form, because our mix is so diverse and we sell product in so many forms, you can't really pin it down to one level. But we're comfortable that as we go forward, we're going to benefit from our negotiations, as I've just said, and we believe that the market pricing will give us some help as well.

Okay. Couple of housekeeping questions for Gary. Gary, what kind of a free cash flow do you anticipate being able to generate in 2011?

We will, we will probably end the year about the same point we ended this year, just simply because we have a cash flow sweep that we have to pay in April. Calculate that number at like $46 million. If you take that, take CapEx, take our anticipated interest expense along with our other debt reduction, we think overall, we'll be about the same point. We're looking, we're looking at our revolver being down by the end of the year.

So, in terms of net leverage on a debt to EBITDA basis, would you anticipate staying around where you are today or actually improving?

We should improve some.

Okay, and will working capital be a use again in 2011, or will that come off?

No, we, we ended the year with a significant uptick in inventory. We have, we have already gotten late quarter sales that will bring late quarters in line by the end of this quarter and we have a program to bring our frozen inventory back to normalized levels by the end of the quarter. As well as, we have some receivables that we've identified that we need to push our customers on to collect. So, we should be bearing the balance sheet back into more focused level by the end of March.

Okay, and my last question is for Bill, when you mention the, there's evidence that there will be production cuts of moderation, anything you can share with us, anything that stands out for you?

Sure. If you look back just a ways to fourth quarter of 2010, December in particular, there was a 7 and December increase in production year over year and 7.4 for the quarter. That definitely had an impact on pricing in January, but since January, we've seen placements moderate and we've seen demand improve and therefore we've seen pricing improve.

Just recently in commodity breast meat, we've seen as much as $0.08 to $0.10 a pound improvement in what breast meat is trading. So, definitely we think we're clearing that big increase that we came out of 2010 with and supply and demand are getting back better in balance.

Thank you.

And we'll move on to our next question from Ian Corydon with B. Riley and Company.

Thank you. Most of my questions have been answered. Just was wondering if you could give us a sense for how much better your contract pricing for 2011 is versus 2010?

Yes, it is definitely better. We, we wouldn't quantify it, of course, but I think the team did a really good job of convincing customers that pricing needed to increase and it will.

Got it, thanks.

And our next question comes from Stephen Share with Morgan Joseph.

Hi, good morning.

Good morning.

Good quarter.

Thank you.

What I was curious about, on the 100% of feed costs that have been hedged through August, when you look at that price compared to what you got in 2010 through August, can you give us kind of a percentage idea of how much higher feed will be this year versus last?

I haven't looked at it on a percentage basis. Gary, do you have that? It's going to be significantly higher. I would say.

I guess the easiest way to say is we plan on feed costs to be $500 million higher than 2010.

Okay. So, that was kind of the number Tyson gave as well, $500 million higher in the fiscal 2011, and you would say the same $500 million applies to you?

I think at least $500 million, not knowing where corn is going to continue to trade.

Sure. Okay, great. Ant then on the -- we have the $200 million annualized cost savings that we've already achieved. What I'm curious about on that is what amount of that $200 million did you actually get in 2010?

I know it ended the year at the $200 million run rate, but when we look at the actual year, what was achieved in cost savings? Obviously you didn't get all of the $200 million. How much did you get?

Well, I think you can look back for the various quarters in 2010 and realize that the third quarter was really a lot better than the previous year and then the fourth quarter we kept that momentum going. I wouldn't want to quantify that exactly, but we're comfortable that we in fact achieved the $200 million annualized run rate and then again, we have found another $200 million on top of that we're confident we can achieve during 2011.

I see. And then just the last one is I believe there was a number out there of $150 million of synergy cost savings annualized to go to both Pilgrim's Pride and JBS USA. Could you maybe help me understand, is that -- how's the breakdown of that $150 million cost save, does most of that go to JBS USA? How much will go to Pilgrim's? How much will go to JBS?

I'll comment and then I'll let Gary. Actually the number that we believe that we have is about $170 million, increasing to $220 million in 2011. It is shared between the two companies. Gary, if you want to give more color.

I would say probably actually weighed higher at the Pilgrim's. We've never disclosed how it's actually broken out, but you can look at it, as it's weighed more to Pilgrim's than JBS.

Okay, and so you've got 170 annualized in 2010 and now we'll get that up to $220 million in 2011?

Yes, we reached 170 by the end of -- on a run rate basis by the end of 210. We see more -- we've seen more that's already been identified.

Okay. Okay, great. That's all I have. Thanks a lot.

And we will hear next from Akshay Jagdale with KeyBanc Capital Markets.

Good morning. Welcome, Bill.

Thank you.

First, I just wanted to ask you about your production. Can you tell us how much your production is going to be up next year, percentage wise?

I answered that question previously and we think it will be somewhere 3% or slightly higher.

So, in other words, you'll still be in the utilization of your assets, you'll still be somewhere 95% or so. You won't improve your utilization meaningfully if you increase by only 3%, correct? Am I reading that correctly?

Well, remember, we finished 2010 at around 99% and as a result of bringing on Douglas, it's probably going to fall back to 96% or so, and then we'll continue to adjust our utilization and footprint based on the demand we see coming at us.

And if I just use the number that you just gave on grain costs, $500 million, that's roughly I think 6% of sales. So, if you're expecting a 3% volume increase, the remaining 3% or more, which is implied I guess by your guidance, is going to come from pricing, right? Am I missing anything magnitude wise there?

On the revenue side, no, I think that's fairly accurate.

Okay, and then just going back to your projection or your expectation for food service demand.I wanted to clarify if you meant sales or volume that you said food service, chicken was going to be up 3%. Was that a sales or volume number?

Well, most of what we've read externally has dealt with sales, but I would tell you that based on what we're hearing from our customers and what we're seeing, I think we're going to see some volume, too. It's hard to say how much, but we believe volume in food service will be up in 2011 versus 2010.

Sure. In theory, you're saying that there's going to be more feature activity, et cetera. So, in theory, does that mean that pork and beef sales to food service will be up less than 3%, correct?

Well, the way I would address that is I believe, and we believe chicken will take more share of menu in 2011, simply because chicken is better positioned from a competitive standpoint and there's so much export demand for beef and pork. So, that's, that's why we believe that not only will we see a sales increase in food service, we'll also see a volume increase as well.

And what channels generally do you expect, within food service, if you think of casual dining versus fast food and other, where would you think there will be more demand growth?

Well, we continue to see good velocity at the QSR segment and full service dining is also picked up. So, I would say those two categories would be the leaders.

And last question is on exports. You seem to be pretty positive about the export picture as well for chicken. I mean, are -- and you also made, I think, a general comment that chicken consumption will increase in the US and I don't know if you meant globally or at least you said in the US I think, but I'm just trying to get my arms around that to think about, okay, chicken is cheaper.

Does that mean that people are going to eat it more? I mean, I -- that's -- to me doesn't sort of pass the smell test, but I'm wondering if there's more to it than just price.

Well, I think price is a big part. You have to remember that there have been some animal health issues in South Korea and other parts of Asia. I think that's going to give us some help. I think that's one reason we're seeing higher export demand for beef and pork and I think the same can be said for chicken.

And, obviously, with the world economy such as it is, we believe that because of the value of chicken relative to beef and pork, it's going to be more affordable for consumers and therefore that's going to be the driver of more demand for chicken.

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

You're welcome.

And we'll hear next from Christine McCracken with Cleveland Research.

Good morning.

Good morning, Christine.

Just on your food service contracts, can you remind me, are those typically one year contracts? And is it a fixed volume contract when you set those, or can you talk a little bit more about whether there was any change to the type of contracts you signed this year relative to prior years, given the grain outlook?

Well, typically fixed price contracts, at least in food service, are for one year and typically they do have a volume target attached to them now. You have to keep in mind that volume is related to whatever customer we are talking about and their volume and their velocity. While we have a target, that's not always assured.

But I would tell you the contracts for 2011 are not substantially different than the ones that we had in 2010. We continue to have conversations, though, with customers about grain cost escalators being built into contracts. We continue to have interest from customers on that and we'll continue to talk about that.

And when you know your costs with these contracts, why wouldn't you hedge off that risk of the feed when you sign that contract, knowing volume and price?

Well, because typically, and this year may prove to be different, but typically, once you get into the July and into the new harvest year, the risk of volatility is too great. Now, this year may be different and I can tell you that even though the most of our coverage is through mid-August, we have taken some opportunities to protect ourselves beyond that, but I'm not in a position to quantify how much that is.

Fair enough. And then just on the weights, we've seen weights above year ago, I think tied to some of the shifts in production by yourself perhaps and others. I'm just wondering, typically when we get feed cost increasing we get a drop in weights. Do you expect that this year or do you see any material change, or are there structural limitations that would prevent that?

Well, I don't know that there are structural limitations that will prevent that. I think with feed ingredient costs escalating at the rate they are, we may not see as much of a gain in average weights this year versus the last few that we've seen. I think, again, the cost escalation may be a moderator there.

Fair enough. Then, just quickly shifting gears on exports, you mentioned, and this may be a small part of your business today, but the potential of shipments into the Middle East and Africa, wondering kind of what you're thinking about in terms of long-term potential there.

As I understood, that was primarily small bird market, with relatively tight specs around the shipments. I'm just wondering, is that something that's going to force a change in the way you produce the birds, or would you have to dedicate facilities? Any, any kind of color you could provide around what that potential might be?

Well, good question, Christine. If you look at the globe and you look at per capita consumption of chicken, you'll find that the Middle East is among the highest in all markets, and so definitely that would be a market that would catch our interest.

And we have a sales office in Dubai. JBS has had a presence there for a while, and we believe that's going to provide us some real opportunities to provide product for that marketplace and others around the world. You're right, it is a small bird market and we're the largest producer in the US of small birds. So, I think that fits into our strategy very well.

Great. One final question and I'll let you go. Just in terms of the Mexican business, remind me, I think that's further processing, is it not?

No, we're in large part a commodity producer down there.

And are you seeing the same kind of feed cost escalation there that would maybe limit margins?

Yes, we are. Lot of the corn that's fed in Mexico comes out of the US, so we believe that we'll have cost escalations there. The market has been very strong, as we've said in 2010, and so far this year, we're seeing relative strength in that marketplace as well.

All right, thanks.

And we'll move next to Brett Hundley with BB&T Capital Markets.

Good morning. It's actually Heather Jones.

Good morning, Heather.

Congratulations on your appointment, Bill.

Thank you.

Just wanted to clarify something. I believe earlier you had said that you intended to fully utilize your existing footprint. So, should we assume you will be bringing on the second shift at Douglas later this year?

That's our plan, Heather, it sure is.

Okay. And do you still have limitations with your covenants that you can only hedge, I believe it's two-thirds of your feed in one year, or given your lower debt levels, does that no longer apply?

No, that no longer applies. We're free to do as we please.

Okay, and on your fixed price contracts, your pricing commentary seems a little more favorable than what we've heard out of some others and just was wondering, is that due to maybe easier comparisons as PPC exited? Was it preparing to exit bankruptcy, maybe it struck some relatively low price contracts? Just wondering if you could give us some color on that.

Heather, I was not really taking that into consideration. I was more focused on what we're hearing from our customers, what we see in the greater supply situation as it relates to the total meat complex. So, it had more to do with that as opposed to a look back internally.

So, your pricing commentary is not related to the prices that you've been able to sign in your fixed price business?

Well, yes, that's certainly part of it, because we did get increases, but I don't think it had necessarily a lot to do with bankruptcy or anything like that.

Okay, and my final question, when you said that your feed costs would be up $500 million, is that inclusive of the benefit of your hedges, or is that sort of a marked to market type number?

Based on the market.

It's just based on the market.

Okay, all right. Thank you so much.

You're welcome.

And we'll move on to a follow-up question from Reza Vahabzadeh with Barclays Capital.

Yes, just following up on your comments around mixed improvements in 2011. It's a hard one to quantify. Is there any color you can give us around the dollar impact or the percentage impact of mix on your results in 2011 versus 2010?

I wouldn't care to quantify that, but let me say this. Our mix improvement will be related to really two distinct activities. One, just improvement in yield itself is going to give us a positive mix impact.

And then the other activity is more deliberate in nature in terms of the choices we make in selling our mix and deciding in what form we're going to sell the various parts. So, it's really a two-prong strategy with yield improvements being a driver and then decisions about the form that we sell our product in being another driver.

Right. And then as far as the pricing gains that you have experienced on the food service side, is there any way you can quantify what degree of pricing gains you have experienced there in terms of ball park? Is it low single digits, better, worse?

We can't, we can't quantify that. Suffice it to say, year over year, we're confident that our pricing is going to improve.

Got it. Thank you.

You're welcome.

And at this time, we'll take our final question. This is a follow-up from Ken Zaslow with BMO Capital Markets.

Thanks for taking the follow-up. Just on the wing pricing outlook, can you talk about how the wings are? I know they kind of dropped pretty precipitously. Can you talk about how or if the wing pricing should start to improve and what would be the catalyst to get it moving?

Good question. If you go back and remember wing pricing last year reached the highest levels ever. And we believe that high prices cure high prices, as they say, and it kicked, it kicked some volume off of the promotional calendars with food service operators. So, we missed this year, given certain volume in promotional activity.

I'm not sure how high wings are going to go this year. We're not counting on a lot of help from the wing segment as much as other parts from the bird. So, I think this is not going to be -- if you compare the last three years, it's not going to be as good. If you look at where wing prices are today relative to a 10 to 15-year look back, they are still really pretty good.

I think we'll probably go back to where wings were maybe five years ago, but wings are a popular item at both food service and retail and we expect to see good demand in the future.

And my final just point of clarification, when you said you are going to be profitable for 2011, that implies every quarter or just as a net of the full year? I just didn't understand the clarification of that.

I was speaking for the full year and, again, I stated that we have a business plan we put together and in our plan, we don't believe the first quarter will be profitable. But, again, that was built into our plan.

Oh, you don't think 1Q 2011 is going to be profitable?

I don't think so. Not according to our plan, it's not.

Even with your hedges?

I'll stick to what I said.

What about after hedges? Are things going to get better after August? I might be misunderstanding something.

No, I would just stand on the fact that our plan calls for 2011 fiscal year being profitable. But again, built into that plan in the first quarter, we didn't expect it to be profitable.

Okay, but in terms of one-time costs, anything in there, or just literally operational issues?

No, I wouldn't specify where or when or anything like that, other than to say that we, we believe 2011 fiscal year will be profitable.

Okay, great. I appreciate it.

You're welcome.

And, at this time, I will turn the conference back over to the speakers for any additional or closing remarks.

Well, we want to thank everyone for joining our call today. As I've said before, we're excited about our business. We're excited about the future. And we have a lot of passion for Pilgrim's Pride and look forward to talking in future quarters.

Thank you all.

And that does conclude today's conference. We do thank you for your participation.