Pilgrims Pride Corp (PPC) 2011 Q2 法說會逐字稿

Good morning and welcome to today's Pilgrim's Pride second quarter conference call. At the Company's request, this 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. Please go ahead, sir.

Good morning, and thank you for joining us today as we review our financial results for the quarter ended June 26th 2011. This morning 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 Fabio Sandri, our new Chief Financial Officer who joined Pilgrims last month.

On today's call, we'll review our financial performance for the quarter and our progress toward our operational goals. Fabio will share an update on our financial position and liquidity. After our prepared remarks, we'll be happy to take your questions. I want to remind everyone that today's call will contain certain forward-looking statements. 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 also are contained in many of our regular filings with the SEC. I will now turn the call over to Bill to begin our prepared remarks.

Thanks, Gary, and good morning, everyone. Pilgrim's reported a net loss of $128.1 million, or $0.60 per diluted share in the second quarter on sales of $1.9 billion. As all of you know, our industry has been facing significant challenges this year from record high feed costs, weaker than expected demand, and record amounts of breast meat on volume. Pilgrim's total ingredient purchases in the quarter were nearly $255 million higher than a year ago. At this time of year, we usually expect and enjoy stronger market prices and increased demand from both food service and retail, but neither demand nor the pricing has materialized this summer.

Let's take a look at some of the macroeconomic factors affecting our industry. We'll begin with the grain markets, which have remained extremely volatile following some recent reports on the size and status of America's corn crop. There's been a lot of debate about the USDA acreage report published June 30. USDA estimated total corn crop at 92.3 million acres which was well above the average trade estimate. The March planning intentions report and even the LAUSD report in June. Corn stocks also came in well above the previous estimate. In our opinion, the USDA overstated the crop, and we believe that's why we've seen a correction since then. I also want to point out that since the USDA report came out, China has stepped in to buy at least $2.5 million extra tons of US corn. This month is shaping up to be the third hottest July on record, which could also jeopardize the crop. We still believe there's potential up-side risk, and we're comfortable with our coverage on corn and soybean meal through the end of the year.

The latest LAUSD report from USDA leaves US ending stocks in 2011 and 2012 from 695 million bushels to 870 million bushels, due to an increase in acres planted. The carry-out stocks were well below the trade estimate of 1.029 billion bushels. Most notably, the LAUSD report predicted that, for the first time, more corn will be used in this crop year for ethanol than for animal feed. That's more than 5 billion bushels of corn going to ethanol, or roughly 37% of the total crop. And the disparity is expected to grow even larger next year. The price of corn is now roughly 3 times higher than it was just 5 years ago, when ethanol demand began impacting the market. Chicken companies have spent more than $20 billion in additional feed costs since then according to the national chicken council. This is a huge challenge to overcome. The LAUSD report also pegged US soybean ending stocks for 2011 and 2012 at 175 million bushels, down from the previous estimate of 190 million bushels, but slightly above the trade estimate. The current stocks to use ratio is slightly above 5%. I think we can expect more volatility from grain markets as we move through the rest of the summer. The next USDA crop report will be out August 11th, so we'll have a better idea of where we stand at that point.

Beef and pork supplies remain tight, which should lead to higher pricing for competing needs setting into 2012. USDA is projecting beef production to decline 0.7% this year and drop 4.3% in 2012. Meanwhile, pork, which is coming off 2 straight years of production cuts, is expected to increase production by a modest 1.1% this year, 1.6% in 2012. So, it's clear, from the last 2 months, that our industry is serious about cutting back. In recent weeks, egg sets have dropped 5% to 6% versus year-ago levels. Egg set for the month of July is running 5.5% below a year ago. I think, by the time we get into the fourth quarter, we'll see sustained cuts in the 6% to 8% range. But those cuts have not yet worked their way fully through the supply chain, and informal reports that slaughter levels are still about even with last year, while average live weights are running slightly heavier than a year ago.

Informa recently lowered its chicken production estimates for the remainder of 2011 and for 2012 because of accelerating industry cut-backs. [Registered] broiler pounds for the third quarter 2011 is now forecast to be down close to 3% year-over-year and down around 5% in Q4 from a year ago. If that prediction holds true, it would result in total annual output of nearly 36.9 billion pounds, virtually unchanged from last year. It's also important, as we enter negotiations with our customers this fall on volume commitments for 2012. Informa is forecasting ready to cook production in 2012 to decline nearly 3% which should help push prices higher next year. At Pilgrim's, we have adjusted for head and bird weights to match our production to forecasted demand. In addition, this morning we announced that we'll be closing our Dallas plant by the end of September. The production from Dallas will be consolidated into several other plants in the region, allowing them to run at closer to full capacity. In addition, we'll eliminate the costs associated with transporting live birds from northeast Texas to Dallas and shipping all fowl from Dallas back to Mount Pleasant, where we have our protein conversion plant. This will significantly reduce costs and allow us to operate more efficiently.

From an export standpoint, Pilgrim's is seeing record demand for our product. Despite shipping almost no product to Russia, our export sales volume and pricing hit all-time highs for the period on the back of strong demand from Asia, the Middle East, and Latin America. Our year-to-date export sales are up 65% and volumes have climbed 50%, far outpacing growth in the overall US chicken exports. Our partnership with JBS USA is helping us enter new markets and increase penetration in many existing markets. In fact, Pilgrim's estimated share of US export market for chicken has climbed from 17% to 24%. So, that gives you a big picture view of the industry and some of the macroeconomic factors that are affecting our results.

Now let's talk about the things that we focus on and control every day, such as sales mix, plant cost, yield improvements, and synergies. We'll start by reviewing our operational goals by 2011 and updating where we stand against those goals after 2 quarters. Our goals are the following -- achieve consistent performance in the top quartile for 25% of Agristats, an industry benchmarking service; capture $400 million in improvements on an annualized run rate in plant costs and yield by the end of 2011; and, finally, improving our balance sheet by turning assets into cash to pay down debt and minimizing capital spending.

Let's begin with our improvement in Agristats since realigning our sales and operations group by customer segment back in April. Inside Pilgrim's, we measure that through what we call yielded margin over processing. In other words, the amount of money we make over and above what it costs to process those birds. By this measure, in 3 of the last 4 weeks in June, Pilgrim's overall results were better than the average company in Agristats. Looking at it over a longer period, we started the year significantly worse than the average company on the sales mix impact and plant cost basis. We've dramatically narrowed the gap, and we intend to keep that momentum going. Being better than the average company is a new hurdle we've cleared, and now we've raised the bar through the average of the top 25% of all companies.

At the same time, we're making great progress toward our goal of $400 million in annualized improvements in plant cost and yield by the end of 2011. I like the momentum that we're carrying into the back half of the year. Our estimated improvement year to date through June is approximately $270 million on an annualized basis. That's a big improvement over where we stood at the end of the first quarter and roughly $70 million ahead of where we started the year. We still have some work to do on price and mix, but we're committed to achieving that $400 million run rate goal by the end of the year.

The operational realignment that took place in April is definitely paying off by driving responsibility and accountability deeper in the organization. And it's fundamentally changed the nature of the discussions taking place at all levels of the Company. Each one of those teams truly owns the product mix and responsibility for achieving the best value possible.

Our third goal is to improve our balance sheet by turning assets into cash and tightening our capital spending. As a part of that plan to reduce working capital, we've been taking down inventories. We took out another 18 million pounds in the second quarter. Our goal is to reduce total company inventories to approximately 3 weeks of operating supply. We've assigned a member of our inventory control team to focus on aged and old inventories across all shelves --sales channels and to drive that portion of (inaudible) inventory down. We've also introduced a weekly review of all items being shipped into inventory by line of business to eliminate unnecessary cold storage expenses. We will have some additional inventory opportunities ahead of us, but we're on the right track.

The other elements of that equation are improving our account receivable and watching our CapEx. Fabio will go into a little more detail in a few minutes, but we have tightened the reigns on capital investment, lowering our planned spending to approximately $120 million to $130 million this year, down from our previous guidance of $150 million.

The price we charge for our products is also within our control. We are making structural changes to our book of business to share the cost burden from higher grain costs. We're talking to customers about our intent to move toward a new -- a more viable business model that ties pricing per chicken closer to the market, such as through a combination of market and cost based pricing. Our customers understand the reasons for these changes and have been very open to further discussions.

It's a pleasure for me to introduce to you Fabio Sandri, our new CFO. I'm very impressed by the speed at which Fabio has become knowledgeable about our company and our industry. He's a valuable addition to our team and will help us create a stronger, more competitive company in the future. Fabio.

Thank you, Bill, and good morning, everyone. It is a pleasure to be here today as a member of the Pilgrim's management team. I believe that, although we are facing some significant challenges in our business and industry right now, we have many opportunities for improvement, and I'm looking forward to helping build our business and to capturing those opportunities.

Moving to our financial results, as shown on slide 4, we reported a net loss of $128 million or $0.60 per share on net sales of $1.9 billion for the quarter. This compares to a net earning of $33 million or $0.15 per share on sales of $1.7 billion for the same quarter a year ago. As shown on slide 5, net sales for the second quarter increased 12.6% or $250 million from the same period a year earlier.

Breaking that out, our US chicken sales rose by nearly $178 million, or 11.5%, an increase in unit sales volume, primarily due to higher export and food service demands contributed to $101 million, or 6.6% due to revenue increase. An increase in net revenue per pound sold, primarily from a more favorable product mix, contributed $76 million or 4.9%.

Net sales in our Mexico operations were $198 million, up 23% from a year ago, driven by increased demand and favorable currency exchange rates. In the US, market prices for some key chicken products were down sharply compared to a year ago. Boneless skinless breast meat in the second quarter averaged $1.34 per pound versus $1.61 a year ago, while the market price for wings was $0.77 compared to $1.25 last year. On the other hand, the average market price for leg quarters was $0.46 per pound, up $0.10 from a year ago, while Georgia dock prices stayed essential flat at $0.87 per pound.

Slide 7 shows that EBITDA was negative $47.6 million for the quarter. We reported an operating loss of $98.7 million. Total gross loss was $46.2 million. SG&A total $52.5 million, an $11 million decrease from a year ago. SG&A, as a percentage of sales, was 2.7%, down from 3.7% a year ago, reflecting the capture of the synergies with JBS and an increased focus on reducing costs.

For the quarter, feed ingredient prices were sharply higher. Market prices for corn were $6.99 a bushel, in average up 92.5% from a year ago, while soybean meal averaged $361 per pound, a 29% increase from a year ago. Our actual feed ingredient purchases, which represent the largest component of Pilgrim's cost of goods sold, were nearly $255 million higher during the quarter than the year ago period. We booked $5.7 million net market-to-market losses related to changes in the fair value of our derivatives during this quarter. The corn market was extremely volatile in June, ranging from a high $7.87 on June 10 to $6.29 at the end of the month.

Turning to slide 8, CapEx in the quarter were $39 million compared to $37 million a year ago. As Bill mentioned before, we're keeping a tight reign on capital spending and we now expect CapEx for the year to be around $120 million to $130 million, down from our previous estimate of $150 million. Our total debt at the end of the second quarter was $1.5 billion and net interest expense in the second quarter totaled $27.1 million. Our average as a percentage of net sales, net interest expense declined from 1.5% to 1.4%.

As Bill mentioned, we continue to focus on improving our balance sheet. We have a plan in place to reduce account receivable. Our collections have improved, along with our days sales outstanding. Trade accounts and other receivables net were $379 million, down from $209 million at the end of the first quarter.

Before I turn back to Bill, I want to share a few comments about the recent amendment to the financial covenants in our credit facility along with some guidance for the rest of the year. As you know, the amendment suspended the existing fixed charge coverage covenant and the senior secured debt covenant until the fourth quarter of the fiscal year 2012. It also sets covenant levels at terms that are more favorable to our Company. I want to emphasize that this covenant amendment was not speared by our liquidity issue.

We have ample liquidity with a total of nearly $350 million available under the existing credit facility and in cash. The fact that this amendment gave us plenty of runway to significantly improve our business and get through this industry down cycle. The bank group recognized, and you have heard it here today, that we are doing everything within our control to improve our business in our balance sheet. We took this proactive step to demonstrate to our stakeholders that Pilgrim's has the support of our bank group and JBS USA, as we work to improve our business and operations.

As we look over the balance of the year, we expect continued challenges for our industry. Grain markets are as volatile as ever, and demand is still weak. In light of these facts, to we no longer expect to have positive EBITDA for the year.

I will now turn the call back to Bill for a few final comments before we take questions. Bill.

Thank you, Fabio. This is an unprecedented time for our industry. We remain focused on the fundamentals of our business -- improving yields and sales mix, reducing costs and operating more efficiently. We've attracted new talent, such as Fabio, in key leadership positions, and we're showing great improvement in those areas of our business that we control. We have ample liquidity, and the amendment to our financial covenants gives us the runway to significantly improve our business and to position Pilgrim's as a much leaner and better managed company in 2012. Operator, this concludes our prepared remarks. Please open the call to questions.

Thank you. The question-and-answer session will be conducted electronically.

(Operator Instructions)

We ask that you limit yourself to one question and one follow-up question. Ken Zaslow, BMO Capital Markets.

I guess I'll start with my first question. Can you update us on your production expectations for the year? I know last time it was low single digits. Can you just give us an update on what you're thinking?

Well, with what we've done recently, in announcing the closure of our Dallas plant, and other things, we still expect our volume is going to be slightly ahead of where we were in 2010. And we've had this conversation before about the ramp-up in 2010, starting the year at a very low base and ending the year relatively full. And, that being the comparison time period, we're still seeing that we're going to be producing about the same amount of pounds this year -- slightly more than we did last year.

Okay and then my follow-up question is what would it take -- I know you said 6% to 8% production cuts, but what would it take in terms that would you expect you guys to return back to positive EBITDA? What type of production cuts and what type of breast prices would you expect that to occur for you to get to break even?

A couple of things come to my mind. If I look back as recently as 2008, 2009 time period, if we had sustained cuts in the 4% to 6% range, I think it's going to take, frankly, slightly more than that, as we go forward, due to a couple of things. I think demand is a bit weaker now. Our economy is slowing down. I think that's pretty obvious. And we have approximately -- the industry, according to USDA, has about 100 million pounds in cold storage more than we did at the leanest times of 2010. It's roughly 720 million pounds, and I think we got down in the 620 million pound range in 2010 when pricing was the strongest. So, I think clearing that inventory out of storage and getting sustained cuts in the 6% to 8% would certainly help pricing.

So, that would get you back to break even, or -- I misunderstood. You think the 6% to 8% production cuts would get you to break even early next year?

Well, I think it has a chance. I'm not going to say that definitively, but, because there's so many other variables and factors that go into a break-even calculation. But, 6% to 8% cuts, on a sustained basis, clearing that inventory and, getting a stronger economy under foot would definitely improve pricing significantly.

Great. Appreciate it.

Farha Aslam, Stephens, Inc.

Just a question, first of all, with your tax rate. It seemed to be unusual, and you didn't really get much of a break on taxes. Is there anything going on there?

Hi, this is Fabio. Thanks for your question, Farha. Our tax rate is 38% in normal time, but this year, since we no longer expect to have a profit, we booked -- at the beginning of the year we booked a tax gain or a benefit of $9 million, and we'll be reversing that over the quarter, since we no longer expect the profit. That's what you -- for 2011, for the full year we expect a 3% tax rate.

A 3% tax rate?

Yes.

Okay.

But for long term, 38%.

And, as a follow-up, could you share with us your thoughts on the various cuts and where you think pricing is and kind of where it needs to get to for you to reach normalized EPS, assuming the current high elevated grain prices?

Well, Farha, as I just said in my latest answer, if you look at the charts, we're clearly $0.40 to $0.50 under last year, last summer, on breast meat. Tenders are in the range of 60% lower -- wings in the range of 30 to 40% lower. Leg quarters, fortunately, are a bit higher this year, but, given the dynamics of all the variables, including the cost of feed and demand, it' very difficult to pin an exact number and tie that back to a percentage cut. What I can tell you again is clearing out the extra 100 million pounds in cold storage is going to help -- be beneficial. Cutting production on a sustained rate -- I think it's going to take at least 6% to 8%, perhaps more, depending on demand, to get back to market prices that give us a different picture in terms of profitability.

Okay. Thank you.

Heather Jones, BB&T Capital Markets.

I just want to clarify what you are saying. So, I realize these things won't stay equal, but if we assume that feed costs stay equal to where they are currently, and demand stays flat, are you implying that you believe 6% to 8% sustained cuts in production are required just to get to profitability, or is that your estimate of what cuts are required to get to a, quote unquote, Normalized profitability?

I don't think, if you consider normalized profitability in 6% to 8% EBITDA range, over a longer period of time, 6% to 8% may get us there. It just depends on how long those cuts were to be sustained. Again, there's too many variables to give you a clear and direct answer to that, Heather. I wish I could. But all I know is, there has to be significant pricing that is gained if feed ingredients are going to continue to range where they are today. Our industry's business model is not sustainable at these levels, and that's exactly why that we're taking a much different approach with respect to pricing with our book of business. The fixed pricing model where we get 12 months of volume committed at a fixed price is not sustainable in our business, and we're planning to move away from that model again onto a pricing model that reflects either cost-based or market-based.

Okay. And sticking with the production cut idea, egg sets have been down 5% to 6%, but chicks placed have been trailing that. This past week, egg sets would have indicated that they should be down, some where in the mid 4%s, and they were only down 3%. And this is amidst rumors of producers pulling eggs, which doesn't seem to make sense. So, I just was wondering if could you speak to what you think is going on with hatchability. When do you anticipate chicks placed to start matching egg sets figures more closely, and just any commentary you could add to that?

I think as a result of drawing down the average age of the hens, hatchability has gotten better, as you would expect it to. I think that's one contributing factor. I think that it's going to take a few more weeks for the placements to be in line with what we saw in egg sets, but over time, that will definitely be in line. I don't think hatchability is going to improve significantly more, such that it would offset what sets are today.

Okay, thank you.

Adam Josephson, KeyBanc.

Do you think demand needs to improve for the industry to get back to normal conditions, or do you think supply cuts by themselves could do it if they're large enough?

Honestly, I think it's going to take a combination of both, and certainly supply cuts are needed, but we're not seeing the fundamental seasonal demand for chicken, especially at these low prices that we would have expected to have seen, especially in the face of record high beef and pork prices at retail.

Sure. With regard to bird weights, do you expect the industry trend of producing bigger birds to abate any time soon, and if not to what extent do you think these continued weight increases will mitigate the effect of egg set reductions in the second half and perhaps beyond?

My personal opinion is the industry will continue moving to larger birds. I think with corn and soy prices such as they are, the largest of the larger birds will certainly not get any larger, and perhaps may come down some. But I think there will be a slight increase in the overall average of the flock size over time.

But you're expecting the egg set reductions in the second half to offset -- significantly much more than offset those weight increases?

I do. I mean, I think there will be weight increases on an average basis that will, to some degree, mitigate the decrease in egg sets, but I don't think it will be terribly significant.

Okay, and just last one from me, does the announced plant closure have any impact on your production plans other than shifting production from that plant to three others?

Well, essentially what we are doing is getting out of our Dallas plant, moving that production to three other plants in Texas. We are going to raise the live weight in two of those plants, and, as a result of that, we do not expect our growers to be impacted. In other words, we're not going to have less growers as a result of closing the Dallas plant. We're simply going to grow larger birds in houses for two of those plants and then shift production to another complex in that area as well.

Great.

Stephen Share, Morgan Joseph.

I want to talk a little bit about feed costs. I guess I'm scratching my head a little bit, because, last call I believe the statement was, feed costs would be at least $500 million in 2011 over 2010. I took that to kind of mean $500 million, $600 million higher feed costs, and now we're already running, we're almost at the $500 million in the first half, and, given that you had priced all your corn, I guess I'm wondering what happened there to kind of skew that number, and where you think now, if we look at '11 feed costs over '10 feed costs, what the number would be.

Good question. Actually, if you look -- go back and look at the corn charts for 2010, what will you find is corn started making its run in July 2010, so the comparisons are going to get more narrow as the year goes on. In other words, there's not going to be as big a delta in October or November as there was in February or March, as an example. Corn did rise more than I think any of us would have anticipated, even earlier in the year, and I think as important -- or perhaps more important, is the volatility that we're seeing in the corn market. And I think Fabio in his remarks gave you an example of just in June what happened, and obviously, that didn't help our results for the quarter. But, as we know, the market has corrected since the quarter closed, and we're back up to levels and pricing where we were late May and early June. So, again, it's a fair question. Obviously, we're going to be over $500 million more for the year, and depending on this new crop and whatever price that turns out to be, it is going to move that number slightly. Although, we are covered on corn on both futures and cash for the rest of the year.

Well, I guess that is my question, though. If you were covered, it seems like the price fluctuations -- is it that the futures is that where you had the variation versus what you were thinking? It seems that if you were covered on cash, why is the movement in corn still impacting your higher feed costs?

Well, again, it's a combination of futures and cash. The volatility in futures can move that number quite significantly as we saw at the end of the quarter.

So going forward, what -- would you -- what would you say the feed costs year-over-year, -- what are we looking at as range? Is it going to be $600 million to $800 million, or where would you put the range as far as feed costs 2011 over 2010?

I think we're still sort of where we started. I think $500 million to $600 million is probably a good range, not knowing what's going to transpire the rest of the year, either up or down.

Okay.

If prices continue at the level that prices are today -- if prices change, more dramatically up, that may change.

Or down, which could hurt our long positions on futures as well.

I see. And so -- just so I'm clear, you're covered on corn. Last quarter you mentioned 50% on soybean meal for the balance of the year. Where is that now? Have you covered more soybeans?

No, we have not. So we're more -- we're closer to the market on soy going forward.

I see.

Thank you. Ian Corydon, B. Riley & Company.

How much of your production will you seek to move to cost- or market-based pricing, and can you get there by the end of this year?

Well, again, as we've said publicly on calls like this and as we continue to have conversations with our customers, it's our intent to move our pricing strategy to either market-based or cost-based. As we've said before, fixed pricing for 12 months absolutely doesn't work in our model, and we don't plan for that to be a part of our portfolio. To be honest with you, I'm very optimistic with the discussions we're having with customers, and, it would appear at this point that we -- our customers understand the reason that we're going this way. Many of our customers already buy a significant amount of their inputs on a market basis anyway. If you take a burger chain, for example, Burger King and QSR, they buy beef trimmings on market every week. So it's not something that's foreign to them. They understand it, and we've had good success so far in talking to our customers.

So by the end of this year, you should have your contracts for 2012 all on a cost- or market-based pricing.

Our plan is to move to either cost-base or market-based pricing, yes.

Okay, thank you.

Reza Vahabzadeh, Barclay's Capital.

Fabio, you talked about the volume and pricing impact on the US business. Can you just go over the impact of pricing on your US sales dollars and percentages? You were going too fast for me.

Prices on breast meat?

No, just the impact of pricing on your US sales.

Just on the US sales?

Yes. I thought you said it was 4.9% higher.

Yes, the increase in net revenue per pound sold would contribute $76 million, 4.9 percentage points. The volume -- volume contributed $178 million, or 11.5%, mainly in higher exports and food service demands.

Right, but the $178 million or 11.5%, that's--.

Total.

That's a total, but that's more than your US sales growth, isn't it?

It is.

So what was -- was there a negative factor as well?

Well, when it changed exports, for internal sales, you lose some prices. If your mix changes a little bit, even if you're selling the same part of the chicken, the prices are different.

And we did have more export and commodity based sales as a percentage of the mix, which I think is a dynamic that's working in there.

And you were doing this in some part to bring down inventories, I assume.

Yes.

Yes.

Okay. And then, when you talk about cost savings, what was the actual number of cost savings in 2Q '11, and what actual cost savings number should we expect in 2011?

It was -- through June, we calculate that between primarily plant costs and yield, somewhat offset by mix and pricing, at $135 million through June so that would annualize at $270 million. As I said, we're picking up momentum, we're carrying momentum into the second half, and I expect that the annualized rate will continue to grow. And I wouldn't be surprised if it was over $300 million in actual savings by the time we get to the year. Again, we do expect, by the time we get through the fourth quarter, to be able to say our run rate is at the $400 million level.

Got it. On the cost of goods sold, if spot market prices stay where they are today, does the year-over-year increase in your cost of goods sold decline in the third quarter and fourth quarter as you are comping against higher grain costs last year?

No, it doesn't decline -- it does not decline. We'll still be paying more for our feed, even more than third and fourth quarter last year.

Right. But what I'm saying is, will the year-over-year increase stay the same or go higher or go lower?

The year-over-year will go lower. Absolute numbers will still be high.

That's right.

But the year-over-year increase will actually slow down.

That's correct.

Okay. And my last question is, on the revolver and liquidity availability, can you just go over what -- where you have availability in different lines?

We have available $315 million under the equity credit facility. It's $285 million in the exit credit and $35 million in cash.

And is the JBS line drawn already?

It's included in that credit facility -- the $60 million.

Got it, thank you.

No problem.

Heather Jones, BB&T Capital Markets.

Thanks for taking the follow-up. Going back to the feed question -- it was higher in the quarter as far as the year-on-year increase relative to our expectations as well. I was wondering, given that you have said you had priced your corn needs, had you locked in your basis as well, or was basis higher during the quarter than expected?

Basis was higher than expected. We have some of it locked, but, we're seeing record basis across the country, and, further in the south and further in the east, basis continues to remain extremely high, which is telling in terms of the USDA crop report and why we believe that it was not accurate.

Right.

Does that answer your question?

It does. Could you give us a sense of -- I mean, could you give us a sense of how much of your basis you locked in for the back half, and is that -- has that been locked in at current levels, or was it locked in earlier in the year?

Heather, we're not going to disclose that.

Okay. All right. Thank you.

Ken Zaslow.

Hey, just another follow-up question, just to figure this out. You have $350 million of available credit, and how much cash did you use up this first half of the year?

The cash change this first half of the year for the business was $247 million.

And you have $350 million left.

Yes.

So that means if you continue at this pace, you'll have nine months left before you use up the $350 million?

Well, we don't expect that, and there's also the cash margins on margin calls on our MQM calculation in that number. And we are actually getting some of those -- that cash back. We expect, if you look at the numbers, first quarter we lost more money than the second one. So expect that to be reduced for the next quarter.

So you think the losses will somewhat start getting smaller as we go through the year, at least.

That's correct. That's what we expect.

Okay. Great, thank you.

That's also the CapEx in the first quarter we spent more CapEx. We were in the running rate of $150 million for the year, and we are lowering our year expense, our CapEx for this year to $120 million to $130 million, meaning we will expend only $20 million to $25 million in the next quarters.

Two other components, obviously, are lower inventories that don't consume cash, and Fabio is doing a great job in increasing our collections from our customers and decreasing the AR so that will be positive to cash as well.

Great, thank you.

Christine McCracken, Cleveland Research.

Just on your comments relative to your inventory sales, it looked like, at least from your comments that you were selling aged inventory. Wondering what the market reaction has been to that and if it in any way affects consumer perceptions relative to Pilgrim's Pride products?

I probably should have clarified that, Christine. It's not a significant or material amount of inventory. I was simply pointing out that we have management controls in place to actually prevent our inventory from becoming aged so that we don't have to do that. That was the point that I was trying to make.

Okay. Can you give us an idea of where you are relative to your target of three weeks of inventory?

I am very encouraged that we're going to be at target in the next few weeks.

Oh, good. And then just in terms of some of the ownership changes that we've seen in the industry here lately, there's been a number of foreign buyers that have come in and acquired assets. Has there been any change that you have been able to see relative to how they operate or maybe what the expectation is around what their plans are with those assets?

No, we've not noticed a difference, nor do we -- have we heard of any changes they plan to make.

Given the magnitude of the losses right now in the industry, there's been a lot of speculation that there would be perhaps more consolidation or ownership changes. As you look at the landscape, do you think that will help, I guess make some of these production cuts faster, or do think that, in the end, it ultimately probably will keep things maybe in place longer? In other words, do you think that consolidation will speed up some of this reduction in flat size?

Well, having been in the industry a long time, and having gone through two or three decades of consolidation and finding ourselves in these cycles that we are now in versus 1980's and 1990s, I'm not sure consolidation is going to be the answer. Like I said, we're going to have to have sustained production cuts to better get supply and demand in balance before we have significant levels of pricing increases. So, I'm not sure consolidation is the answer to that.

Just one last question. I know you talked a lot about egg sets and chicks placed, but not a lot about cuts at the breeder level. I've been a little disappointed we haven't seen deeper cuts there. There's been a lot of talk -- it seems like not a lot of action. I'm wondering, have you taken internally cuts there? You kind of talked, I think, about your weekly production, but I'm not sure that you've cut into your breeding flock. Maybe you can provide some color there?

All I can tell you is we've made adjustments in our breeder flock commensurate with matching up to our needs in terms of boilers. And we'll continue to do so. It's my belief, based on what I hear from the spent hen processing world, that there has been a liquidation to some extent in the breeder flock, and I think we'll see that as the reports begin to come in, in the next few months.

But even if they're operating at full capacity at those facilities it would still take longer, I think, to liquidate than maybe the industry is talking about, wouldn't they? Isn't there a capacity issue in terms of killing those birds?

Well, hens can be slaughtered in a number of plants. It doesn't have to be a dedicated hen plant.

All right.

Brian Hunt, Wells Fargo Security.

Hey, this is Kevin McClure standing in for Brian. I have one question related to some of your contract discussions. Under what circumstances, just in broad terms, under what circumstances and how frequently will you walk away from unprofitable business?

Well, I think what I could tell you about that is, it would be foolish for us to take unprofitable business with a fixed price and a fixed amount of volume if we don't have the ability to lock in a margin on the input side. So, all I can tell you, is it wouldn't be smart for us to do it, and we don't intend to do that.

Okay. Thank you. And last question from me, and then I will hop off. How much, in dollar terms, would you say ethanol is built into the current cost of corn?

Well, as I said in the prepared remarks, over the last four or five years, the industry has spent over $20 billion in added feed costs. And I can tell you, if you look at pricing during that same period of time, it's my belief that that has not been appreciably passed on to the consumer. So, in effect, it's come out of the equity value of companies in the business. And I know it's at least $20 billion.

Great. Thank you for your time.

Carla Casella, with JPMorgan.

One quick follow-up on the pricing structure contracts, and then another question of mine -- did you say on the pricing contracts that you are trying to put in place -- is that across food service and retailer -- retail, and are you also seeing your competitors doing the same?

It is across all channels, and with regard to our competitors -- I can't speak for them, and wouldn't have any knowledge. I just know that what the discussions with our customers tell me that they're open to that. And, whether or not they're having the same discussions with other suppliers, I don't know. But I do know they're having them with us, and we're getting relatively good reception.

Okay, great. And then when you look at the new covenant on the amendment on the bank facility, can you just give us a little bit of background how that EBITDA multiplier that's in the facility works? Is that something that's calculated on a quarterly EBITDA or an LTM?

It's quarter, and, since we changed the covenant, we will have a fresh start. So starting 2012, we will use only the quarters that we already have. We will never get back to 2011. So it's a multiplier of EBITDA, and we will use only 2012 on.

And it's calculated on annualized EBITDA or on the quarter EBITDA?

It's quarter.

On a quarter, okay. And one quick -- on the excess cold storage -- the $100 million excess cold storage, how long do you think that takes to clear the market? You mentioned you expect your weeks of inventory to be back in line in this next quarter. How long do you think it takes for that $100 million to clear?

That's a great question. You know, it could be four months, six months, or longer. It totally depends on demand for chicken and general economic conditions, and so that's the best I can do.

Okay, thanks a lot.

Christina McGlone, Deutsche Bank.

I guess just getting back to the contract question -- I know a number of people have asked, but Bill you were pretty adamant saying that the fixed price 12-month contracts don't work, and I just want to know where is Pilgrim's with respect to those contracts? How much do you have? What percentage of your portfolio is under those contracts, and then just hearing in the trade that it's still happening from Pilgrim's, so who makes that decision? Is it the sales person's decision, or does it get elevated to maybe one of your direct reports before a contract like that is signed. And then is the decision based on fixed cost utilization and running products through the plant, or is it based on the profitability of that contract?

Well, I think in a nutshell what you have to understand, Christina, about those contracts, is typically those contracts are negotiated between October and January for business in the following year. So we're in late July, and we're just now beginning to have conversations with our customers about 2012. So I wouldn't have expected that pricing to have changed until the new year. So that's how they work, and again, we expect to have more of those conversations as the year goes on. And that's really all I can say about it.

So no 12-month contracts are being signed right now as of today?

No.

Okay. And then last question is, on the Dallas facility, are you saying then your production will actually go one the closure of that, because you're switching -- you're just consolidating production so no cut, but yet you're increasing weight. So net-net, the production goes up, with the closure of Dallas.

No, that's not what I said. When I referred to our production going up, I was talking about the full year, and we started -- we talked about that at our February 11, call, and what I was saying is, while it's not going to be up quite as much as we thought then, it's still going to be up over 2010. But with respect to Dallas, specifically, there's going to be a slight decrease in production that's really not material, especially over time, because of the increase in bird weights at the other two plants.

Okay. Thank you.

All right, well, thank you, everyone, for joining us for today's call, and we look forward to continuing to share information with you going forward. Thank you all.

Thank you. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect.