Pilgrims Pride Corp (PPC) 2011 Q1 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 first quarter of fiscal 2011. At the Company's request this conference is being recorded. Please note that the slides reference 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 is Gary Rhodes, Vice President of Corporate Communications and Investor Relations. Please go ahead, sir.

Good morning, and thank you for joining us today as we review our financial results for the quarter ended March 27, 2011.

Earlier today we issued a press release that provides an overview of our financial performance for the quarter. A copy of the release is available on our website along with other downloadable information and the slides referenced during this call. Joining me today are Bill Lovette, President and CEO, and Gary Tucker, Principal Financial Officer. On today's call we will review our financial results for the quarter and some of the key factors affecting these results. Gary will update our financial position and capital structure. After our prepared remarks we will be happy to take any questions that you may have. I would also add that because we have our annual meeting right after this call, we must conclude be called at 10.00 a.m. Eastern.

Today's call will contain certain forward-looking statements. These may include our expectations of future results, sales and cost of sales information, and market dynamics. Our actual results might differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause actual results to differ from those forward-looking statements is outlined in today's press release. They are also contained in many of our filings with the SEC. I will now turn the call over to Bill to begin our prepared remarks.

Thanks, Gary. Good morning, everyone.

As you saw in the press release, Pilgrims reported a net loss of $120.8 million in the first quarter on sales of $1.9 billion. While this quarter is historically the weakest due to lower demand at this time of year, we encountered unusually tough circumstances do to high finished inventories combined with rapidly increasing feed prices and other costs associated with our inventory levels, severe winter storms, and depressed prices for chicken products. Let's walk through each of these factors so that you have a better understanding.

We will begin with our inventory position. On the last call I mentioned the need to manage our balance sheet more effectively. As a part of our plan to reduce working capital, we made the decision to liquidate inventories in the first quarter. All told, our sales team moved more than 100 million pounds of prepared foods product out of frozen inventory, enabling us to reduce inventory levels by 10 days. While this decision helped our balance sheet by reducing inventories and turning assets into cash, it had significant negative effect on margins and overall net revenue per pound sold in the quarter. We estimated the total impact at approximately $30 million.

That offset the benefit of higher pricing that we negotiated going into 2011. We have some additional inventory opportunities ahead of us, though not to the magnitude that we tackled in the first quarter, but I firmly believe that this was the right decision for our business. Today we are in better balance with our supply and demand, and we have adjusted head and bird weights at selected plants to match our production to forecast the demand. And we still expect to produce more pounds in 2011 than we did last year. So the inventory flush was the biggest weight around our necks in the first quarter. At the same time, we faced higher costs of corn and soy versus a year ago. Our actual feed ingredient purchases were approximately $188 million higher. In addition, our lower capacity utilization, especially on our prepared foods lines, lead to higher operating costs. The capacity utilization was directly related to our inventory reduction, as we did not want to be running the prepared foods lines with the same products that we were selling out of inventory.

Winter weather also wreaked havoc on much of our industry in retail and restaurants during the quarter. Winter storms throughout much of the Southeast in mid-January closed a large number of our plants for several days at a time. That hurt demand, as consumers stayed home rather than eating out. Once that business has gone you can't make it up.

The fourth factor in our disappointing results was generally lower commodity markets. The average price for breast meat dropped 10% compared to a year ago, while wings continued their free fall, with a 38% decline. While it is true roughly 60% of our business is tied to fixed pricing at this time, the other 40% is tied in one way or another to markets.

Overall sales and volume in fresh food service remained flat in the quarter, while sales and volume in frozen food service in retail improved, although net sales per pound were down slightly. Export and demand remained very strong during the quarter, with volume rising 90% to an all-time record for sales for the period and sales increasing by a similar amount. In fact, most of our volume growth in the quarter came through commodity and export, rather than in our targeted retail and food service channels. That also affected our revenue per pound. Exports are being driven by the lower dollar value versus other currencies as well as chicken's value proposition compared to higher-priced beef and pork in international markets. Foot and mouth disease in South Korea, along with the earthquake and tsunami in Japan, have also boosted chicken export demand as well.

Sales mix remains Pilgrims' single largest opportunity to drive revenue growth and sustained profitability. Many of you know that Pilgrims has some of the lowest live production costs in the industry, and that gives us a distinct competitive advantage over other producers. Unfortunately, once we bring those live birds into our processing plant, we lose all that advantage and more. And it is critical to the future of our business that we turn our plants into a competitive advantage by improving our yields, our throughput, efficiency, and sales mix.

I spent most of the past two months visiting nearly all of our plants and meeting with local management teams. It became apparent very early in the tours that there had been no true ownership of net dock value at each point. That's going to change immediately. Last week, we realigned our sales and operations groups, and on the new structure, we've established the following business units - commercial business, fresh food service, retail, prepared foods small bird deboning, and prepared foods for the process.

Each of our US complexes, as well as Puerto Rico, has been assigned to one of these business units. And each group is led by a general manager, who is accountable for a selected group of plants for our customer segment. The general manager directs sales and operations of this segment and is accountable for the product mix, capital needs, P&L performance of each business. Each business unit will continue to be supported by export sales, commodity risk management, supply-chain management, transportation, marketing, R&D, finance, and accounting, just as in the past. The realignment essentially builds on the changes that were made under Don Jackson last fall.

We've taken the existing line of business approach a step further by creating truly integrated units, and this realignment will fundamentally improve our business by driving responsibility and accountability deeper in the organization. Each of these teams will truly own the product mix and responsibility for achieving the best value possible. We will benchmark each unit's performance against the industry segment in which it participates, and they will be expected to operate in the top 25% of that segment.

We have a lot of work ahead of us, and it is going to take some time for us to get there. For a long time, Pilgrims was a very centralized organization where a lot of decisions were made at the corporate level. The Company really didn't push down accountability and responsibility to the local sites. We didn't have clear owners of the mix. But I promise you that today every one of our complex managers, as well as our sales and operations teams, absolutely understands what's expected of them and how they will be held accountable for producing the highest value sales mix. They are going to be responsible for every chicken that comes through those complexes.

I tell you this, the payoff is big. If we are in the top 25% of agristats, it is huge, and in February, for example, it would've been worth more than $30 million to Pilgrims. That's our motivation.

We also need to make better progress toward our target of $400 million in plant-related costs and yield improvements by the end of this year. But we are absolutely committed to that figure, and I'll tell you that we are finding opportunities of all sizes. Our conversion to hand deboning is paying off. We captured over 1% yield improvement at our Moorfield, West Virginia plant since making the conversion to hand deboning. By now many of you probably heard me say that we will save over $3 million by eliminating paper towels and moving to high-speed hand dryers in all of our sites. We believe we can save close to $17 million a year by changing the way we manage our pallets.

Here's another example. If we increase the amount of chicken paws we harvest by only 10%, it would be worth $9 million annually. Or wing tips - we only have 5% of the plants packing wing tips at this time. And the average company gets $0.34 a pound for tips. Sending them to [all fall] is only worth $0.07 a pound, and so you can see it is all little things that add up to the $400 million. These can all be captured with a little planning and a lot of execution on our part.

Looking ahead, there's a bit of a mixed outlook for the chicken industry in 2011. One thing in our favor is that chicken should be increasingly popular among value-conscious consumers with retailers and food service operators featuring chicken more frequently on the menu or in weekly ads. We've already seen that happen in promotional activity and in addition, we've recently succeeded in negotiating additional price increases with some of our retail and food service customers in response to continued increases in feed costs. On an annualized basis, those price increases are worth around $35 million. Our customers recognize that this continuing upward march of corn and soybean mills placing extreme pressure on chicken producers, and that there has to be some sharing of the cost burden in order to ensure a viable business model. To achieve this, we will continue to look at further price increases and will execute structural changes in our book of business with regard to fixed versus market-based pricing.

Looking ahead, we expect the second quarter to be challenging, although we are seeing great improvement. We had positive EBITDA for the month of April, and I have to tell you, I'm very pleased with the progress that we've made since January and where we are today in April. But at this point, we do not know what other challenges will bring -- the rest of the year will bring. But what I do know is it's absolutely critical that we strengthen our balance sheet, capture our $400 million in plant-related cost improvements, and seize the significant sales opportunity -- sales mix opportunity available across our asset base. I believe our operational realignment will dramatically improve our ability to drive those sales mix improvements. So now the real work begins.

Now I will turn the call over to Gary to discuss the quarter in greater detail.

Good morning, everyone. As shown on slide 4, we reported a net loss of $120.8 million, or $0.56 per share on net sales of $1.9 billion for the quarter. This compares to a net loss of $45.5 million, or $0.21 per share, on sales of $1.6 billion in the same quarter a year ago.

As shown on slide 5, net sales for the first quarter increased 15.2% or $250 million from the same period a year earlier. Breaking that out, our US chicken sales rose nearly $215 million, or 14.4%. An increase in unit sales volume, primarily driven by the inventory reduction efforts, contributed $259 million, or 17.4%, to the revenue increase. However, net revenue per pound sold declined as result of less favorable product mix. The impact from that amount was approximately $44 million or 3%. Net sales in our Mexico operations were $182.2 million, up nearly 24% from a year ago, driven by increased demand and favorable currency exchange rates.

Moving now to pricing. Commodity chicken prices for the quarter were mixed when compared to a year ago. As shown on slide 6, the average price for breast meat was $1.26 per pound, down about 10% from the same period a year ago. Wings continue their free fall, averaging $1 a pound, or 38% below last year. On a positive note, leg quarters average $0.37 per pound, or 7% higher, and Georgia dock prices rose $0.02 a pound, or about 2%.

Slide 7 shows that EBITDA was a negative $54.4 million for the quarter. We reported an operating loss of $106.8 million. Total gross loss was $53.1 million. SG&A totalled $53.7 million, a $5 million increase from a year ago, and roughly $4 million above the $50 million quarterly run rate we've given guidance on in our last call. The bump in SG&A was primarily from higher than expected legal fees and settlement costs related to contract grower litigation, as well as relocation expenses incurred during the quarter. SG&A is a percentage of sales was 2.8%, down from 3% a year ago. For the quarter, feed ingredient prices were dramatically higher. Market prices for corn averaged $6.70 per bushel, up 80.7% from a year ago, while soybean mill averaged nearly $370 per ton, a 32% increase from a year ago. Our actual feed ingredient purchases, which represent the largest component of Pilgrim's cost of goods sold, were $188 million higher during the quarter than a year ago. We booked a $32 million net mark-to-market gain related to changes in the fair value of our derivatives during this quarter.

At this point, we are covered 100% of our anticipated corn needs, and approximately 50% of our soybean mill usage through the end of 2011. Total debt at the end of the first quarter was approximately $1.5 billion. We have $63 million in cash and equivalents.

Turning to slide 8, capital expenditures were $64 million compared to $31 million a year ago, primarily due to the completion of the reopened Douglas plant. Net interest expense in the first quarter totaled $26.8 million, down 4% from a year ago. As a percentage of net sales, net interest expense declined from 1.7% to 1.4%. Average borrowings increased from $1.15 billion a year ago to $1.46 billion in the most recent quarter.

As Bill mentioned, to focus on improving our balance sheet, we reduced inventories by $62 million or 6%, as we sought to turn finished products into cash. Trade accounts and other receivables increased $68 million, or 21%, primarily due to the increased sales recognized toward the latter part of first quarter. We expect to be in a better position with accounts receivable in second quarter. I'll now turn the call back to Bill for a few final comments before we take questions.

Thanks, Gary. As many of you know, I spent the last two months visiting our plants and meeting with our team members and local management teams. Those plant tours and meetings have served a couple of purposes. They've given me an opportunity to get a first-hand view of what we are doing at the local level, from watching how well we capture yield on our deboning lines and harvesting paws to seeing where we are in investing our capital dollars. Those visits have also allowed me to clearly lay out my expectations for the business going forward. These have been honest and brutally candid conversations, and I can assure you that every team member on our local management teams, as well as every member of our corporate team, fully understands where we are going and what will be expected of them. As I said earlier, we will be held responsible and accountable for our performance.

Before we open it up for questions, I do want to say that our thoughts and prayers are with our employees, growers, and other residents in the Southeast this morning as they recover from deadly storms and tornadoes. A number of our complexes have been affected, including our plants in Boaz and Guntersville, Alabama, which were without power yesterday and today, and we expect power will not be restored until late this weekend. We have had reports of more than 100 broiler houses that were damaged or destroyed and approximately one dozen pullet and breeder hen houses were also damaged. We don't know how many of our team members homes were destroyed, but it is clear the storm caused a great deal of damage to the region. Our teams have been working around the clock to make contingency plans, and I want all of them to know how much we appreciate their efforts.

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

(Operator Instructions). Our first question comes from Heather Jones with BB&T Capital Markets. Please go ahead.

Good morning.

Good morning, Heather.

I have a couple of questions. I was wondering, going back to a comment you made earlier. You've made some weight in headcount changes to match demand? But yet you--

Yes.

Do you still expect pounds produced to be up this year or pounds sold?

Actually both, Heather. And the primary driver in that is the reopening of Douglas, Georgia. We had a plan to have that plant fully operational by the end of the year. And at this point we've not changed that plan, and that's the biggest driver.

Okay, so could you give us -- so it sounds as if, I think initially you were planning on about a 3% increase of pounds produced for the year. And I thought Douglas was going to be in the 1% to 1.5%, are you still -- are you cutting head and pounds on the order of about a percent or percent and a half? (multiple speakers) come out correctly?

Without getting specific in terms of quantity, what I would tell you, Heather, is we are adjusting both in head and weight. And in some cases we are actually increasing our weight on some birds in order to be more competitive in the market segments in which we participate with those birds. At the same time, we are looking at reducing some head in segments where those particular chickens and cuts from those chickens don't meet our demand forecast. So we are actually doing both in terms of reducing head and adding weight.

Okay. I'm not wanting to do belabor this point, but given your outlook for Q2, and given the results in Q1 and the feed costs, and it sounds as if it is laborious process getting these price increases in place. I'm just wondering why you wouldn't consider greater cuts?

As we've said for some time now, we are going to match our production with our forecasted demand. The one comment I would add to this is, I can assure you we are not going to put ourselves in a situation where we have to continue to liquidate inventories. We are just not going to do that. So I think you can be rest assured that we are not going to overproduce in terms of what -- we have a high degree of confidence that we've got to products sold at values with which we are comfortable.

And so is it fair to say, given the deterioration during Q1, given that feed costs continue to escalate, and giving your Q2 outlook, that you don't still expect to be profitable for the year?

What I will say, Heather, is the marketplace continues to be challenging, both in terms of ingredient pricing, although we've covered our needs for the year. And on the other side, chicken pricing, which frankly we would've expected to been higher at this point. We do expect that we will be profitable at the EBITDA level for the year. And that's really where we are right now.

Okay, and then my final question is, on the feed cost side, up almost $200 million in Q1, but yet you are saying at least $500 million for the year. I would've expected, if it is that large an increase for Q1, that it would be more substantially more than $500 million for the year. So, I'm just wondering if you could provide some clarification on that?

Remember Heather, that's Q1 of 2011 over to one of 2010. So if you remember back, especially after June, that's when corn started its real March up in terms of price.

Right.

And as I said before, it is the volatility of the price that is as big a concern or in some cases, bigger concern than the absolute price.

Okay. Thank you very much.

Thank you.

Our next question comes from Steven Share with Morgan Joseph. Please go ahead.

Good morning.

Good morning, Steven.

I wanted to talk a little bit about capacity utilization. What was that number in the quarter?

Well, we are not going to disclose capacity utilization except to say that it was relatively high coming out of the fourth quarter. And it is been decreased, end of the first quarter ,and as we make adjustments it's not going to be as large as Q4 of last year. I'll hurry on to say too, we also had low capacity utilization in our prepared foods lines, our further processing lines that impacted our cost, and that we do expect to improve because of the amount of inventory of prepared foods that we flushed out that created the margin loss. That capacity will be higher. But our slaughter capacity will not be as high as it was in quarter four of 2010.

So will capacity utilization in slighted go down 2011 over 2010?

In total, I don't think it will be significantly different, because if you remember, 2010 -- the early part of 2010 was very low to begin with. It went up significantly as the year went on, and as 2010 closed, it was at a fairly high rate.

I see. And then on the $400 million of cost cutting mix improvements you plan on realizing this year, could you maybe talk a little bit more about that? Maybe how much do you think of that $400 million is going to be in the mix side versus the cost cutting? And to date, how much of that have we achieved?

Sure. Good question. About half of that number and activities involved in reducing cost and improving efficiencies. The other half is improving yield value, and to some extent mix to the extent that yield value improves mix. The mix improvements, though, that we expect result from the realignment actually is new activity. That was not contemplated in the $400 million, although by virtue of yield value increasing, we are going to get some mix improvement just from that. So again, it is about half and half.

You know, in some areas of that activity, I'm pleased with how we've performed. On the other hand, we had some issues that occurred, like the weather in January, where we had one week, nearly all of our plants to some extent impaired or not running for a couple of days due to severe winter storms that went through the Southeast. And then the other event was the fact that we pulled off production of further processed products and lowered our prepared foods capacity. It is hard to improve a line that's not running or that's running at a lower level of capacity. As we go in through this year, that will change, as we are going to be running our further processed lines more closely to capacity, and so we expect those run rates will definitely be where we expected them to be.

Okay, so I understand the point kind of. The low utilization really hurts you on the yields side and given the cost cuts, but is that $400 million for improvements in this year, is that still a relevant number? Does that need to be haircut -- is there going to be a haircut there? Should it be more like $300 million this year, and then we will get the additional $100 million in 2012? Or how -- I mean, is $400 million in this year still realistic?

I would tell you that I for sure expected a run rate of $400 million to be in this year. Whether or not we capture every dollar of the $400 million, since we're already into the second quarter, is less clear today than we expected it to be at this time in the first quarter. But we made great progress in a lot of those areas, and we still are committed to getting the $400 million, especially at the run rate level as the year progresses.

I see. And then my last question is just on the storm, and obviously that's been an awful situation. How much -- do you have any idea how much of your flock has been impacted by that and what percentage of your processing capacity has been impacted by that storm?

We've had two plants, one in Boaz, Alabama, which is a large bird de-boning and further processing plant. It's been down a day and half this week. Our Gunnersville plant will have been down three days this week, because the tornado that struck it occurred very early in the morning, and we didn't run that plant really at all the first day. And we lost -- we haven't had electricity at Gunnersville since the storm hit. We did have at Boaz for a day, and then we lost it there. We do expect both those plants to be up early next week.

As far as chicken houses, as best we can tell it this point, we've either had 100 broiler houses either destroyed or damaged in some way. We're still in the process of counting the number of chickens that were lost through that. As I said in the remarks, we had approximately 12 pullet and breeder houses damaged in some way as well. So, we are still taking account of numerically what that means.

I will pass it on. Thanks.

Our next question comes from Ken Zaslow with BMO Capital Markets.

Good morning.

Good morning, Ken.

A couple questions. How much incremental savings of the $400 million will be this year? Just incremental 2011? Is a $400 million, or is it--? I just don't understand, is the $400 million a run rate, or how much is incremental to 2011?

Incremental over 2010?

Yes, exactly.

I would say most of it will be, because we didn't hit the run rates in 2010 until very late in the year. I believe it was -- I wasn't here, but I believe it was September, October that those run rates were being hit. I believe that was even at about half that level. So, most of that is going to be incremental 2011 over 2010.

Okay. Is the mix instrumental in that?

Part of the mix will be. As I've said, increasing yield and particularly breast meat yield, produces a better selves mix, because the relative value of breast meat over the rest of the chicken. So, part of mix improvement is in the $400 million and part of it's not.

How much is not?

We are still looking at that, Ken. We don't have a hard number for you today. So, we will continue to evaluate that as time goes on.

To Heather's question, I didn't understand the answer. You said your initial plan was a 3% increase in production this year, demand has come down, you're matching demand to supply. So, how much production are you going to increase this year? 1.5%? I didn't understand what the answer was.

What I said was, it will be higher than 2010. We didn't -- we are not going to quantify it, because we're doing a combination of both head reduction and increased weight. What I'm going to say is that our total pounds produced and sold will be in excess in 2011 of what we did in 2010.

Okay. I know this is -- Don Jackson, I thought his plan was to increase the capacity levels to close to 95% to 100% before there was expansion plans. With utilization rates falling, and the plan to potentially increase production, I'm at a loss of how that actually equates each other? I would think you would try to get 100% utilization and then think about opening a new plant, and then why would you open up a new plant as you are losing money? I guess it's a very loaded question, but I'm somewhat confused.

If you remember, the plans for Douglas, reopening Douglas, were made and began being executed mid-last year, when the industry and Pilgrim's was profitable. I think you understand what happened, both in the ingredient markets and in chicken markets, that changed the profitability for the industry and Pilgrim's. What I will say is that we opened Douglas January 17. I've been to Douglas, and I'm very impressed with what was done at that plant. I can tell you it is going to be as competitive a big bird plant as there is in the industry, and I will further tell you that I'm glad we have Douglas operating today. Because again, it will be very competitively situated in that segment which, by the way, four out of the last five years has been the most profitable segment in the business.

My last question is, price increase contribution is $35 million, your feed costs are up $500 million, and you want to match demand to supply, but would you match demand to supply as you're losing money? I'm trying to get the logic, and I'll ask other chicken companies too, so I'm not just picking on you guys for sure. Doesn't 100% seem logical to me, matching demand to supply as you are losing money? I would rather match profit to profit, I guess is how I look at it.

I understand what you are saying. Let me address the price increases, since you brought it up. It's $35 million today. We expect as time goes on in this year, that number will continue to be larger. We continue to have conversations with customers in our fixed-price portfolio explaining to them the situation, and quite frankly, we continue to have success in getting prices increased on those fixed price contracts.

I would further tell you that we've looked at our fixed price book of business, and going forward, we are not going to have as much fixed price business in our total portfolio as we've had in the past. That will change for sure as we go forward. We are not going to be able, and I don't believe other companies would be able, also, to continue to own a disproportional share of the risk of volatility that we face in our business. And that's driving us to change that part of our business.

Okay.

Ken, this is Gary Tucker. One thing to remember, this $35 million increase is renegotiation on top of the negotiations we did last fall where we said that we have increased pricing year-over-year on those contracts.

Okay. Again, I'm not trying to be difficult, but the incremental cost since that time is up $500 million still. Isn't it -- 35 to 500 still the comparison?

Yes. That's a comparison but it's-- I would tell you --

Again, I'm not try to be difficult. Just to me, I would focus more on profits than matching supply and demand. Clearly, if you cut the supply, the price will go up, and you will probably make our money, I think. Anyway, I appreciate the answers and the candor.

Thank you, Ken.

Our next question Arisa Mahabista with Barclay's Capital.

Good morning.

Good morning.

Just against be specific on the cost savings. You previously mentioned you were going to $150 million of cost savings this year from initiatives started last year, of which you got $50 million last year. So, that $150 million, I assume, is still on. And really, the question is, the other $200 million of cost savings that you expect to realize this year, do you anticipate get into that $200 million of run rate savings in the fourth quarter, third quarter or just some time in the second half? Is that something you can share with us?

The momentum of that run rate will pick up as the year goes by, and one of the primary reasons is, we are still in the process of converting several of our operations to hand de-boning. That's a big part of the yield improvement. And we are finishing up operations at one; Lufkin, Texas starts next week. We've got a couple more that we are working on and that will come on later in the quarter and in the year. And so as those come on, for example, that will be part of the yield improvement.

Right. So I mean, where does that leave us? It sounds like you're not at a $200 million run rate today, would you anticipate being there at the end of third quarter?

At the end of third quarter?

Yes.

I know we will be a lot closer than we are today. And I will just leave it at that.

Okay. But so you're not there today obviously?

No, we are not.

Right. Then as far as pricing and your intention to get more pricing, besides renegotiating prior contracts, which can be time-consuming obviously, how do you anticipate raising pricing in the spot market? Given the fact that production continues to be up in the industry and indicators suggest production will remain up at least the next 8 to 10 weeks.

One of the things we are doing is going out and establishing, what we call, regular business to the same customer as opposed to having products show up and just selling it on a spot basis. And that is primarily -- the biggest impact is going out and securing business with regular customers. Although market-based for our formula-based, as opposed to just selling on spot to whomever shows up to buy that day.

But getting real pricing power in this industry, doesn't that require lower supplies?

It sure helps.

And when would you think industry supply will decline year-over-year?

I would've told you a month ago it would've already have happened. Like probably most of you, I'm surprised that we still have year-over-year increases. I think as pressure, financial pressure on the entire industry continues, we will see in the second half of the year production being lower than it was in 2010. And some of the economic reports I've read by Informa and others share that same view that in the second half of the year, we will for sure go negative on placements and such.

Right. And then as far as your full year outlook, would you anticipate being at least break even?

What we've said and what we will continue to say is, we are comfortable saying we will be profitable at the EBITDA level. And we are going to leave it at that.

Got it. And lastly maybe a question for Gary. How do you think about your bank debt covenants as it relates to the senior secured maximum leverage covenant?

At this point we are comfortable that we are well within the covenants. We've done stress testing for the quarter like we typically do for the auditors, and we are comfortable that we will say within our covenants.

Right. And, I forget, what is the covenant?

105 on fixed charges and four on the debt coverage, senior debt coverage.

I will add one comment to that. I think it is clear from coming out of Q1 that we placed priority on managing our balance sheet. And we will continue to do that. We are going to get our balance sheet in better shape in order to handle the continued volatility that we see out of both sides of the market in which we participate.

All right. Inventories, I know they were brought down quite a bit in the first quarter from the fourth quarter. But is that still elevated versus normalized levels?

We still have some work to do in reducing our inventory, but I will tell you that it is going to be a lot easier for us to do that now having flushed out as much inventory as we did. But that's a part of getting our supply and demand in equal portions. And we've got a good plan. I'm comfortable with the plan that our management team's put together to continue to get that done.

Thank you.

Our next question comes from Farah Aslam with Stephens Incorporated. Please go ahead.

Hi, good morning.

Good morning.

Going back to the cost savings question. I'm just making sure I'm clear in understanding what is captured where. Kind of how much cost savings flowed to bottom line in fiscal 2010 for Pilgrim's? Was actually captured in 2010 numbers?

I believe that was $50 million, Farah.

Okay, so $50 million, but then at the end of the year, 2010, you were at $150 million run rate?

I believe it was around $200 million run rate.

Okay. So you are all the way up top a $200 million run rate. So this year the $400 million target, $200 million of that is going to be incremental?

On a run rate basis, that's true.

On the run rate basis. So in the first quarter we haven't really captured much of the incremental $200 million , but we've realized sort of a quarter of that $150 million run rate that we had coming out of last year. Is that the right way to understand that?

What you have to understand is, due to this inventory reduction and not running a lot of our prepared foods lines, that didn't give us the opportunity to capture the run rate in terms of total dollars that we had. So, as we start those back up and run them at full capacity, we do expect that we will reestablish that run rate and begin to capture those dollars. I think that's the way to really look at it.

Okay so the $150 million that we had -- run rate that we had coming out of last year, maybe we will capture three quarters of that $150 million? Because we didn't run at full capacity and optimal levels in the first quarter. Is that the right way to think about this last year's cost savings and how they will flow into this year's?

I wouldn't care to put a hard number on that, but I'm very confident and comfortable that we will reestablish that run rate and achieve the incremental run rate that we had planned by the-- during the second half of the year. We will be at those run rates that we expected to achieve.

And then, for you to hit those run rates that you are targeting, it is back sets required? Is it capacity utilization that's required? Is it a mix that's required? Just so we can benchmark your progress as the year progresses, can you give us milestones on what we should watch for?

It is actually all that you mentioned. Part of its capacity utilization. Part of its capital. I mentioned the de-boning projects that we still have in progress and underway. Part of that is basic blocking and tackling in our plants. I got to see a lot of that firsthand as I visited, and this realignment that we went through. I would tell you I'm more confident with this alignment than I would have been under the previous alignment, because we now have people that are accountable, responsible, people who own the mix as opposed to not clearly having mix owners. That's going to make it come to fruition a lot sooner than it otherwise would.

So your realignment helps you achieve your $400 million run rate goal? And is there incremental opportunities on top of that? I think from your previous answers, I was assuming that $400 million and plus the realignment has incremental opportunities. Am I understanding that correctly?

Absolutely it does.

Okay. And then going back to the storms. Do think it is going to have any significant impact on pricing for the industry or supply that's available?

I think it will. We don't yet know how many total chickens were lost and how much of the breeder flock was lost, which is obviously going to affect it on a more permanent basis. It will have a short-term impact just in the number of plants that are down and not running, plus the number of chickens that were taken out of production as result of the storms.

Okay. And my final question is the relating again to your outlook on the market. You are saying that there's going to be less production year-over-year in the second half of this year versus last year. Is it going to be a result of just balance sheet getting hurt, so you expect a contraction, and therefore an improvement in pricing? From what I've been hearing, there's a lot of optimism in the chicken industry that there's going to be solid demand for chicken this summer, because of potentially consumer switch out of beef and pork into chickens. So, chicken producers want to hold on and take advantage of that potential opportunity. What do you think will drive them to cut production and when do you think you'll make those production cut decisions?

I think the comment you made about balance sheet stretch is definitely going to have an impact. I think the optimism coming out of 2010, where the fourth quarter experienced the 7.5% production increase over the previous year, and then January in 2011, I believe it was over 10% more production than in 2010. So, clearly there was optimism out there. Because we've not seen pricing improved or increase as much as it actually has, I think a lot of that optimism is definitely disappeared. I think the combination of that less optimistic view and balance sheet stretch will force some production cuts.

And you expect that from smaller players? Because you're not cutting production.

I wouldn't know who is cutting and who's not, except what we are doing. Again, as we've said, we are adjusting our production to better meet what our forecasted demand is, and that's coming through a combination of adjusting size and head.

Okay. Thank you very much.

You're welcome.

Operator, this is Gary Rhodes. I know we have about only five minutes left before we have to conclude the call to get to our annual meeting. I know we've got a number of people still in the queue to ask questions. I would ask that they limit it to one question apiece so we can get through a couple more calls.

Thank you, sir. (Operator Instructions) Our next question comes from Akshay Jagdale with KeyBanc Capital Markets.

Good morning, everyone. This is Adam Josephson for Akshay. Thanks for taking my question. Just one on breast prices. You previously expressed optimism regarding breast prices because of your customers' plans to feature chicken more prominently on menus and because of a typical seasonal move up. Do you still think it's possible for breast prices to reach $1.70, $1.80 this summer, given the recent weakness in prices and given that breast meat in cold storage is up 38% over last year in March?

Still optimistic, yes, that we will get a significant increase in breast prices. It is unclear to me exactly what that top number is going to be. I think weather, the amount of heat we get this summer, like we did last summer, we'll have a vote and that. I think we will still see our seasonal increase in breast meat prices. And I still believe that we will see incremental promotions of breast meat due to pork and beef prices being significantly higher than they were last year and continuing to go up.

Great, I will leave it at that. Thank you, Bill.

Thank you.

Our next question comes from Carla Cassella with JPMorgan.

Hi. I had just a clarification on the hedging and the cost increases. The cost increases you said in the quarter were up $188 million. The hedging gains were $32-ish million. Is that the same type of relationships you would expect us to see through the years since you are hedged for the balance of the year in corn and partly in soy?

I think you may be comparing apples and oranges. Remember the increase was quarter one 2011 over quarter one 2010. That's where the $188 million came from. And $32 million came from our mark-to-market position at the end of the quarter. I will say this, that we reported I believe it was $63 million mark-to-market gain in Q4 of 2010. And because we produced inventory in 2010 that was sold in quarter one of 2011, about $20 million or so of that $63 million was really attributable to sales in 2011. So you really have to look at the $63 million in Q4 in conjunction with the $32 million in Q1 and look at it over that six-month period of time as opposed to just one quarter versus another.

Okay, great. That's exactly what I was figuring. Thanks for the clarification.

You're welcome.

Next question comes from Starkus Abrutcheon with B.Riley & Company.

Hi, guys, thanks for taking my question. The question I had was with respect to your feed hedges. So last quarter you mentioned that your feed needs were 100% hedged through August, and I think that was for corn and soy. And your current commentary suggest that 50% of your soy is hedged through the end of the year. Can you maybe reconcile the difference there?

I would tell you that we believe there's more downside risk in the soy complex than there is in the corn complex, and we've positioned ourselves accordingly. Does that answer your question?

Yes, thank you.

Our next question comes from Christina McGlone with Deutsche Bank.

Thank you. I wanted to follow-up on Ken Zaslow's line of questioning. I guess something I've always struggled with is if a market clearing price is at a certain level, when you approach your customers and you have conversations about increasing pricing, because of your cost increasing, why do they agree to increase pricing if the spot price, the price they can see is lower? How does that discussion happen?

I believe most of our customers, particularly the larger customers, place value on assured supply. And they've been through these cycles before, knowing that they can buy chicken at one price today, but that price could turn into a lot more in the future. So, from an assured supply standpoint, and then accounting for their risk mitigation strategy, that's what gets them to the point where they agree that for an assured amount of supply they would be willing to buy that at a higher price than they otherwise would have.

Is there a typical percentage of what their premium would be to pay for the assured supply?

No, I think it varies by customer and their own business model.

Okay, thank you.

You're welcome.

And that concludes the question and answer session. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

Thank you, everybody for joining us. As I said, we have our annual shareholders meeting to get to. I'd be happy to take any follow-up calls. You can either contact me by phone or e-mail, and we will do our best to provide you with follow-up information. Thank you again for joining us.

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