Pilgrims Pride Corp (PPC) 2011 Q3 法說會逐字稿

Good morning and welcome to the third quarter 2011 Pilgrim's Pride Corporation earnings conference call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity for you to ask questions. Please also note that today's event is being recorded.

At this time, I would like to turn the conference call over to Ms. Rosemary Geelan, Investor Relations. Ms. Geelan, please go ahead.

Good morning. Thank you for joining us today as we review our operating and financial results for the quarter ended September 25, 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 the Investor Relations section of our website, along with other downloadable information and the slides we will reference during this call. Joining me today are Bill Lovette, President and Chief Executive Officer; Fabio Sandri, Chief Financial Officer. On today's call we'll review our progress toward our operational goals, our financial performance for the quarter and our liquidity position. After our prepared remarks, we will be happy to take your questions.

I would like to remind everyone that today's call will contain certain forward-looking statements. Our actual results might differ materially from those projected in those forward-looking statements. Additional information concerning factors that could cause actual results to differ from those forward-looking statements are outlined in today's press release. They are, also, contained in many of our regular filings with the SEC. I will now turn the call over to Bill to begin our prepared remarks.

Thank you, Rosemary, and good morning, everyone. It shouldn't come as a surprise to anyone who knows our industry that we continue to face daunting challenges. Pilgrim's reported a net loss of $162.5 million or $0.76 per share, in the third quarter, on sales of $1.9 billion. Although we anticipated continued losses through 2011, the losses were higher this quarter due to several non-recurring charges. These are accounting losses of $53 million and our strategy to make tough decisions now, in order to position Pilgrim's as a much stronger company in the future, is the primary driver of this. At the same time, we generated a positive operating cash flow of $11 million, during the quarter.

So, what are we doing differently at Pilgrim's to sustain our business going forward? Let me be clear. The strategy we've been talking about has not changed all year. We are driving ownership, responsibility and accountability at every level. This is a fundamental shift in how we operate our business. And although it's taking time for those changes to flow into the results, we're encouraged that we will realize a positive financial impact. In our MD&A, we discuss some specific non-recurring charges that Fabio will talk about in detail. Outside of non-recurring events, though, we are currently at $221 million in yield, mix and cost containment and improvements, which equate to an annualized run rate of approximately $300 million toward our goal of $400 million.

I want to share with you some details of how we progressed against that. First, let me clarify that $400 million is a run rate. You will not see a pure $400 million reduction in our cost of goods sold. Rather you will see a combination of yield, mix improvements, in addition to cost reductions. The net impact to our gross margin is the same, but it's important to understand how these benefits are generated. To date we've seen significant changes in our big bird deboning yields. We have achieved 1.7% boneless to live improvement, enabling us to produce 400,000 pounds per week, in additional breast and tenders, resulting in a $0.012 per pound better cost. This gain was achieved without increasing our labor pool.

All facilities have made log yield improvements and freight costs have improved by approximately $20,000 per week, based solely on improved efficiencies. Although we expect to reflect some of the costs associated with our Dallas closure from Q4, (inaudible) will be realized or recognized over an extended period. The cost savings resulting from this closure will begin to be reflected in Q4. Additionally, we recently made the decision to close our Staley, North Carolina feed mill, which currently supplies Sanford, North Carolina. We will shift this production over to the Wingate feed mill, which will mill both feed for Marshville, North Carolina and Sanford going forward. This is another example of how we are being smart with our assets and logistics of our business and will result in further cost savings and efficiencies. We anticipate this to generate $10 million of transportation savings over 5 years.

Next, we have our inventories at more optimal level now. We are closer to our goal of 3 weeks operating supply of chicken and our efforts will now be directed toward managing these levels. We believe that sustaining this level of an achievable goal and do not anticipate further significant reduction efforts at Pilgrim's. In previous quarters, we've talked about our contracts in pricing structure. We continue to stress that we are not entering into long term fixed price contracts. We're in the midst of our annual contract renewal period and our customers have heard us and understand the need for change. We have been successful in negotiating new contracts that are both fair to our customers and supportive of our business model.

The new contract structure we are entering is based on a band pricing model, that adjusts according to grains and/or chicken market fluctuations or aligns to the spot market. These agreements are designed to share the risk, but at the same time, provide our customers with assured supply, while not resulting in our inability to manage cost risk. These are big changes in how we've handled our book of business and we appreciate the flexibility that our customers are showing in helping us develop a sustainable model. Along with revising our pricing strategy, we've actively rebalanced our production, so that our supply is more consistent with demand levels that our industry is experiencing. As our feed costs are the most significant component of our cost of goods sold, we recognize that our derivatives positions are a topic of interest. We do not want to put ourselves at a competitive disadvantage by disclosing our detailed derivative strategy. We purchase certain commodities, such as corn and soybean meal, for use in our feed that we consume in our live operations.

As a result, our earnings are affected by changes in the price and availability of these ingredients. In the past, we've attempted to minimize our exposure to these fluctuations by using various techniques; including forward contracts for future fiscal delivery at set prices, as well as, participating in derivative financial instruments such as futures and options. We do not designate these instruments as cash flow hedges. So the mark-to-market impacts are reflected immediately in earnings. Currently, we're comfortable with our positions and we track the market daily looking for opportunities.

From an export standpoint, we're 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 backing of strong demand from Asia, the Middle East and Latin America. Our year-to-date export sales are up 62.9% and volumes have climbed 45.6%, far outpacing growth and overall chicken exports. Our growth in the export market is largely driven by a change in strategy. Our vision is to add more value to exports selling more high value products rather than just leg quarters. Our approach now is much more measured. We are analyzing the demand in the international markets and producing to those requirements. This results in a better return for our efforts and reduces our reliance on the US market to absorb breast meat. Growth in exports is helping balance supply and demand in the domestic market and we see this as a future trend with great financial benefits.

We are working toward operational excellence on a daily basis. And what this means is that we are performing consistently-- when we're performing consistently at the optimum levels, our margins will reflect us among the best in the industry. We're still improving, but our progress to date is impressive. The operational realignments, over the year, continue to drive responsibility and accountability deeper in the organization. That has fundamentally changed the nature of the discussions taking place in all levels of the Company. Each of our teams truly owns the product mix and the responsibility for achieving the best margin possible. We had a positive cash flow from operations of $11 million, this quarter and since the beginning of the year, we've reduced total payroll by 2,400 positions, while we continue to drive efficiencies and reduced costs going forward. The other elements of that equation are improving our accounts receivable, maintaining a reduced inventory levels and monitoring our CapEx.

Fabio will go into a little more detail in a few minutes, but we've tightened the reins on our capital investment. Lowering our planned spending to approximately $130 million this year, which we believe is achievable. The investments in capital improvements we've made over the past couple of years have put us in a good position. Our plants are in good shape and our efforts are now in managing more effectively the assets we already have rather than spending money on new ones. As an industry, we continue to see the depressed chicken prices and they remain below levels sufficient to offset the higher cost of feed ingredients. Improvements have recently shown through in leg quarters and wings, but even with that boost, wings and breast meat are lower than 2010 prices by about 25%. We see an up side on the horizon as tightening supplies begin to align with current demand levels. Cold storage inventory levels are already at levels below 2010.

Through the first week of October, USDA reported [ex sets] down more than 7% year-over-year. Pullet placements in September declined 7% from 2010, suggesting further reductions in US breeder supply. Chicks placed were down 8% thus far, during October, which set a new low for 2011. Further cuts are still anticipated this Fall and broiler slaughter levels continue to reflect a decline relative to 2010. And during the third quarter, the high live weights were no longer enough to offset the declines in slaughter numbers. These declines in leading indicators are encouraging. It's going to take a few months still to see supply more closely aligned with demand sufficient to create positive margins. Although the latest WASDE report reduced USDA estimates for 2012 broiler production by 470 million pounds, it still puts 2012 projections at 36.6 billion pounds. We believe these levels are too high to reflect profitable industry model, especially with live weights averaging 5.77 pounds, as of August, 2011 versus 5.57 pounds, a year ago.

Additionally, the grain markets have not yet stabilized, even though prices have come down from recent highs. We are cautiously optimistic about the direction we're seeing chicken cold storage stores headed. It's encouraging to see the October USDA Cold Storage report reflect levels down 3% over the previous month at 674 million pounds, but we'd still like to see those volumes closer to 620 million pounds or lower. I'd like to ask Fabio, our CFO, to share some thoughts on our financial results. Fabio?

Thank you, Bill, and good morning, everyone. Looking at our financial results that's shown on slide 4, we reported a net loss of $162.5 million or $0.76 per share, on net sales of $1.9 billion for the quarter. This compares to a net earnings of $57.9 million or $0.27 per share, on sales of $1.7 billion for the same quarter a year ago. Our EBITDA is negative $84.1 million for the quarter, compared to a positive $170 million, for the same quarter a year ago. As Bill mentioned, our results this quarter reflect the impact of several non-recurring expenses. I'll enter into more details about the non-recurring events in the next few slides, but adjusting for these non-recurring events, our recurring EBIDA for the quarter was a negative $31.4 million.

Net sales for the third quarter increased 10% or $171.4 million, for the same period a year earlier. Breaking that out, you see on slide 5, the domestic US chicken sales slows, by nearly $155 million or 3.8%, on higher volume mainly because of the Douglas complex that we reopened this year and a better mix. Despite lower market prices while exports rose $78 million or 65.6%, on higher volume and higher prices. Net sales in our Mexico operations were $193 million, up 24.8% from the same period a year ago with higher unit sales driven by increased customer demand.

As Bill mentioned, you can see on slide 6 that US market prices for key chicken products continue to lag pricing from a year ago. Although we saw leg quarters increase $0.08 per pound from $0.37 in 2010 to $0.46 per pound in 2011, especially due to strengthening exports market, boneless skinless breast meat, in the third quarter, only averaged $1.27 per pound. This compared to $1.71 in 2010, an average $0.44 per pound less than year-over-year. While we saw an improvement in wing prices towards the end of the third quarter, the average market prices of $0.89 compared to $1.19 last year. Overall, Georgia dock prices remain stable at $0.88 for the comparative quarter.

Going to page 7, within cost of goods sold, besides the impact of record feed prices, we recorded $11.5 million loss related to the destruction of eggs and pullets, in addition to $6 million for a cost of a lower market adjustment. We, also, have $8 million in inventory recall costs. Included in the SG&A is a charge of $9 million on the difference of book and sales annual assets being held for sale, mainly on our old corporate office in Atlanta. SG&A non-recurring costs, also include $2.6 million, related to the Dallas closure costs. Below the line, we have $14 million of negative foreign currency impact arising from the fluctuations of the Mexican peso, during the quarter reflected in our net income. The result of our Mexican operations have on the US dollar has remained a functional currency.

Feed ingredient prices have remained high during the quarter, although we started to see some relief subsequent to our quarter end. Market prices for corn averaged $6.92 per bushel, up 65% from a year ago. While soybean yield averaged $352 per pound, a 15.4% increase from a year ago. Our actual feed ingredient purchases, which represents the largest component of Pilgrim's cost of goods sold, were approximately $102 million higher during the quarter than the year-ago period. The corn market continues to demonstrate volatility ranging from a high of $7.65 to a low of $6.17 during the quarter. So, I show huge (inaudible) as well, ranging from $326 to $382 per ton. Overall this year, we have sold approximately 5 billion pounds of product, at an average $0.038 less than the prior year. This equates to almost $200 million less in revenue year-over-year.

We've also incurred grain costs year-to-date that are $545 million higher than 2010. We've worked to offset this $740 million of higher costs in several ways, including decreasing our overall payroll costs, like Bill mentioned. We have reduced nearly 100 management roles, 64 administrative and over 2,200 hourly positions. The strides we're making in our operation improvements will continue to benefit us as we see market price improvement. These changes are occurring without a material amount of CapEx being necessary. Slide 9 shows our reported loss of $162.5 million or $0.76 per share. Adjusting for the non-recurring event, our recurring net income would be a net loss of $109 million or $0.52 per share.

Turning to slide 10, CapEx in the quarter was $18.7 million, compared to $41.6 million a year ago. We're keeping a fine rein on capital spending and we continue to expect our CapEx for the year to be around $130 million. We have invested a lot in our plants in previous years, so all of our plants are state of the art operations. Although we do not see the need for additional spending, efficiency projects that can provide a demonstrable immediate return will still be approved as part of our ongoing improvement plan. All capital expenditures are reviewed at the senior management level to ensure that they are supportive of the goals we have set for both the growth and return standpoint.

As we have mentioned previously, our focus is on improving our balance sheet. We have actively reducing our day sales outstanding, as well as, our inventory levels. Given in such a tough environment, we are managing our cash effectively and despite our accounting losses we generated $11 million of positive operating cash flows on the quarter. Total debt at the end of the third quarter was approximately $1.5 billion. Net interest expense in the third quarter totaled $27.9 million, up 6.8% from a year ago, primarily due to interest recognized on higher outstanding balances on our revolving facility. Average borrowing increased from $1.2 billion a year ago to $1.5 billion in the most recent quarter.

Before I turn back to Bill, I want to address our liquidity. We are aware that this has been the topic of conversation. We want to be clear that we monitor our liquidity on daily basis. We review several months' projections and adjust our activities as necessary to accommodate anticipated changes in our cash flow. We are also looking at every asset to ensure that they are creating value for our shareholders. Although there may be accounting impacts to those decisions, we believe that they are the right stance to take in making us a leaner and more competitive company. Again in spite of our accounting losses, we generated $11 million of positive operating cash flows for the quarter and our availability remains solid at $363 million.

As we look out over the balance of the year, we continued to see challenge for the industry. Grain markets are volatile as ever and supply is still too high. Although we are seeing good signs in process production and in improvements of our operation, we say that we do not expect to have positive EBITDA during this year. For the first time this year, we are seeing that everything is in place for the industry to improve; cold storage is down, excess are down, price has been holding in a counter cyclical model. We see these trends as positive for the future although not necessarily in the next quarter. It is reasonable to assume that the industry will be entering into a stage of normal profitability next year.

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

Thank you, Fabio. This year has been and continues to be challenging for us. We are making the difficult decisions that we must make -- be made to generate a positive impact in future quarters. We remain committed to becoming the best managed and most respected company in our industry and although we have a long way to go, we know we have the right talent in place to make that happen. We appreciate all the efforts of our team members who continue to make improvements in our business and position us to be successful as we move forward. Operator, this concludes our prepared remarks. Please open the call for questions.

Our first question comes from Heather Jones from BB&T Capital Markets. Please go ahead with your question.

Good morning.

Morning, Heather.

Hi. First question, just a pretty straight ahead question. Given the environment is still difficult, but is it a fair assumption that your Q4 should be better, meaningfully better than Q3?

I would answer it this way, Heather. You know, prices have stabilized as a result of supply and demand for chicken coming in better balance. I would also tell you as I said in the prepared remarks, our inventories are now at a more optimal level and so we don't have that overhang.

I would, also, point out that our operational improvements that we talked about all year continue to increase in velocity and I would expect that not to change in Q4. As a matter of fact, I'm encouraged that, that rate of improvement will continue to pick up and we continue to identify more and more operational improvements that we will be making. So, I think with all that said, all indications are that Q4 is encouraging in terms of the operational improvements that we're making, the supply and demand dynamics, our inventory position and I'll leave it at that.

Okay. Thank you.

Moving on to volumes, on your Q2 call you had said that you were close to your optimal level of inventory and on this call you said you were there. I was surprised by the magnitude of the increase in volume sold in the US. I think, it was 11.5% or something like that.

I guess some of it is due to the better yields on breast meat, but just wondering if you could give us a sense of when those kind of increases are going to abate given you talked about slaughtering breeders and basically reducing volumes and all. So when should we start seeing that come through in the results?

Well, I would go back and point out that we really continue to see much more increase in growth in our export volume and I think we detailed our strategy relative to that. We did reduce some additional 14 million pounds of inventory in Q3 and that again is what I think brings us back more toward an optimal inventory. So that accounted for most of the increase that you alluded to. Fabio, do you have any --

Yes. When compared 2011 to 2010, what we can see is an increase of 66% on exports and 25% in Mexico. Sales increases in domestic markets was only 3.8%.

Right, but your total production, I mean, so you mentioned the inventory right now, but if you're cutting production regardless of the end market that it's going to, shouldn't we start to see those year-on-year increases not only abate, but actually reverse somewhat?

I would say that Q4, for example, because the company was increasing production in Q4 of 2010, then your statement is directionally correct that we will see that rate of growth become smaller year-over-year.

Okay. And my final questions, then, on the contracts, you mentioned I think you called them banded contracts. When you say they're related to the feed market and the chicken market, if you have an instance, for whatever reason, where pricing in the chicken market doesn't improve as much as required, is a contract set up that you should at least still be profitable because at least you'll have something in there tied to the cost of feed? Or do you need both the chicken market to work, as well for you to do well in these contracts?

Well, first of all, we do not have one size fits all strategy as it relates to those contracts. In other words, we have varying degrees of those bands related to both feed ingredients and chicken market pricing and not all the contracts include both. What I would tell you is that we're positioning our book of business to take advantage of the supply and demand of chicken becoming more in line. And we're also positioning our book and business to better reflect the risk that exist in the cost of corn and soy meal.

Okay. All right. Thank you very much.

Thank you.

And our next question comes from Reza Vahabzadeh from Barclays Capital.

Good morning.

Morning.

Just given the volatility in grain costs, I guess it's hard to know what the outlook is for live costs inflation next year, but can you share with us your base case today to the extent that you can share?

And I assume you mean base case, in terms of feed ingredient costs going forward?

Yes. For 2012.

Well, we think right at this moment, as it relates to corn, that there's more down side risk to the price of corn primarily based on US corn values relative to either corn or substitutes around the world. We, also, think there's down side risk in soy meal costs as well for the same reasons. You know, we're comfortable with our position going forward and I really don't have much more to add to that.

But would you anticipate facing modest grain costs inflation in 2012 or significant one and how much visibility do you have?

Relative to 2010 prices, Reza, we don't think there's significant risk to price inflation as it relates to corn and soy. We think that year-over-year the prices will be somewhat more comparable, obviously than they were in 2011 versus the previous year.

Okay. And so what price do you need for, let's just say boneless breast as an example or for that matter, wings to achieve, normalized or just decent EBITDA margins by 2Q 2012?

Well, we talked about that in the past and I think other integrators have talked about it as well. And we believe that to get to a positive margin breast meat prices are going to have to, based on corn and soy today, that is, going to have to be in the $1.60 to $1.70 range.

And the same thing for -- what about wings?

Wings, with that range I would tell you that wings above, between $1.10 and $1.20 would be comfortable.

Right. And then a couple of housekeeping questions for you. You had positive price mix in the second quarter, Fabio, but negative price mix here in the third quarter and you had inventory liquidation losses in both quarters. What accounts for the difference in price mix picture for you in the US business?

Well, if we look at the prices in Q3 compare to Q2, price are lower in Q3 when compared to Q2. So boneless breast meat especially went down. That was, sort of, being counted by the increased prices on leg meat and leg exports.

Right. But, did you have positive mix in 3Q 2011 like you did in 2Q 2011?

Yes. We had better mix in 3Q 2011 despite lower market prices. The mix is mostly about the mix that we are selling.

Right. Exactly. And then as far as cost savings and productivity, I know the annualized number is $270 million. What was the actual number achieved in the third quarter?

Well, through Q3 I believe it was $221 million, which annualizes at just about $300 million, I believe.

Okay. And so by 4Q, that number is going to get to $300 million?

I think -- I'm comfortable saying that it will and I think there's a chance that based on our trajectory of improvements it could be even higher.

Thank you.

And our next question comes from Stephen Share from Morgan Joseph. Please go ahead with your question.

Hi, good morning.

Good morning.

I want to talk a little bit about your move way from fixed price contracting. You know, you've been talking to customers for a while now. Are you getting much pushback? And one of the things we heard from Sanderson Farm sales for us was that big guys tend to be more rational on the price, but you're still getting smaller companies that will offer fixed price, same price in 2012, as 2011. So, I wanted to get your feedback on how well it's going to move way from fixed price.

Well, I can't speak for our competitors. I will tell you that our conversations with our customers has been very encouraging.

We've not gotten a significant amount of pushback from our customers. I think they understand. The business model has to be sustainable to ensure them supply in the future and they've been very supportive of our discussions.

And I will tell you it's been a strategic discussion rather than us dictating one way or the other. And again based on the discussions so far, we're very encouraged about 2012 book of business and our ability to change our pricing strategy.

I see. And as we look into 2012, I wanted to get a handle on volume a little bit. Capacity utilization, do you see that staying kind of at the same level, up or down next year? And then how will Dallas impact the closing of the Dallas plant impact volume, as we compare 2012 versus 2011?

I'll touch on Dallas first. The Dallas closure will not significantly change the volume, in terms of pounds, even though we did take those head out. It enabled us to better utilize some of our other facilities in that same geographic area.

We're not planning big changes, at this point, in our production for 2012. We'll continue to monitor supply and demand and change our production volumes, as needed, to fill the demand from our customers.

Okay. So at least as a starting point, it's probably not a bad assumption to assume flat volumes 2012 over 2011. That's what I hear you saying.

And then the last question I have is on weight. It seems like it's been a pretty ideal weather conditions to grow birds. Have you pulled forward some slottage as to manage the weight issue or how are you dealing with weights?

Well, we did have optimal growing conditions this fall and many of our market segments are very size sensitive. And so we, in fact did, in some cases, have to pull birds ahead to maintain those weights, as did other integrators and I think that's why you didn't see production volume, in terms of pounds, in September and October change as significantly as we're going to see in future months.

I see. Thanks a lot. I'll pass it along.

Thank you.

And our next question comes from Farha Aslam from Stevens Incorporated. Please go ahead with your question.

Hi. Good morning.

Good morning.

A question about grain, could you share with us the length of your coverage? You said you're comfortable with your grain positions and you've taken some. Could you just share with us kind of the length of your coverage?

Well, again, as we stated in the prepared comments, we're not going to talk about our detailed strategy going forward either on derivatives or cash. I will tell you we're comfortable with our cash position through March and leave it at that.

And in your release, you said you've purchased -- feed ingredients purchased were $545 million higher versus 2010. Is that just kind of used? Can we assume that the first three quarters of the year your feed costs total have been up $545 million? I just don't understand purchased versus consumed.

That was what we purchased, in other words, ordered and had POs and checks cut against, from the beginning of the year through Q3 versus same period year ago.

And would you say there is there usually a 1 or 3 month lag or can we just assume that's what your 2010 feed costs are going to be at?

Well, the lag is going to be the same year-over-year. So it shouldn't make a significant difference.

Okay. And then you were very specific and you said your production volume in 2012 will not change significantly right now versus your production in 2011. But, how much of your sales volume in 2011 was due to your inventory liquidation that probably won't occur again in terms of volume or pounds? How much inventory liquidations do you have to do that you won't repeat?

It was approximately 100 million pounds that we put in that inventory liquidated category so far. And obviously we're not going to go into 2012 with that much inventory above, which we consider optimal. So does that answer your question?

That's very helpful. And then my final question is really around your production schedule. You've said that you're anticipating not having to cut production in 2012, but 2011, I mean the industry pricing was really weak because there was too much chicken on the market. Why don't you think you would have to cut production in 2012 versus this year because clearly for things to get better, production has to get down. So how would prices go up if you don't cut production because demand seems to be weaker than the volume that's being produced right now?

Well, a couple of things. One, I think we began to see, as did everyone, about in July, egg sets and chick placements begin to go down year-over-year. The one thing that was different, this summer versus the summer of 2010, was weights, especially on the big birds, were not as negatively impacted and so that's why we saw that the pounds produced year-over-year did not equal the same rate of production as either egg set or chicks placed. Now that we're in Q4, we will see that come back into line as Q4, if you remember, of 2010, I believe 7.5% more volume was produced by the industry versus 2009.

So, that's why I think you'll see that rate of reduction increase -- or decrease actually in terms of pounds and we believe that will stay in place, at least, through Q1 of 2012 and perhaps even longer. I would just finish the comment by saying that we are going to be agile. We're going to be flexible and we're going to manage our supply to fit our demand going forward.

Farha, just adding on that also we are seeing a very strong export market for next year. So, we expect to maintain the same production and export a lot more.

Okay. That's helpful. Thank you.

You're welcome.

And our next question comes from Bryan Hunt from Wells Fargo Please go ahead with your question.

Hi, this is Kevin McClure standing in for Bryan. A couple of questions related to your book of business. What percentage would you say you've successfully converted to this new pricing band format?

Kevin, while we're not disclosing the quantity of contracts we've committed in 2012, again I'll reiterate we're pleased with the progress that we continue to make in moving away from those long term price deals. At this time, we're encouraged that pricing for the volume, which is traditionally been fixed priced for 12 months, will move to that model based on the movement of corn, soy meal and chicken markets. And we're not going to disclose, again, the quantity or percentage, but suffice it to say we're encouraged at this point.

Fair enough. And with the closure of the Dallas facility, what would you say your utilization rates will be going forward and if you care to disclose what they were this quarter?

No, we haven't disclosed or don't plan to disclose our capacity utilization rates. Again, suffice it to say, that we're comfortable with our inventory levels and we're comfortable with our production levels relative to our demand. And as we are aggressive in creating more demand then we'll adjust our supply to fit that demand.

Okay. And lastly, for us, with the supply reductions in the industry, what are you seeing for your rendered products, in terms of sales prices and margins? Have those benefited from these reductions, and, if so, can you quantify for us?

Absolutely. The offal values have been relatively high all year and continue to increase in value. And I think that's driven by protein markets worldwide and fat markets worldwide and we don't think that's going to change. As a matter of fact, I will tell you going into next year, I think, there's a case to be made with the current reduction that those values will continue to increase.

Great. Well, thank you for your time.

You're welcome.

Our next question comes from Asha Johndale from KeyBanc Capital Markets.

Good morning. Thanks for taking the question.

Bill, my first question is I'm still confused on the production versus pounds sold. Can you tell me how many -- what was the increase in pounds produced this quarter?

I don't think we disclosed that, Asha and I don't think we intend to on a quarterly basis.

Okay. So I mean let me do some math that you gave, then, I mean in terms of numbers you gave. You said your inventory liquidation was 100 million pounds and I'm calculating based on data you've disclosed, your pounds sold are up roughly 500 million pounds year-to-date. Pounds sold up 11%, inventory represented 2% of that. So, your production seems to be up 7%.

Am I missing something there? Am I at least directionally correct?

Directionally you're close.

And so, similarly, you're saying for 4Q it doesn't seem like there's any more inventory liquidation or anything at least meaningful or significant. What should we -- how should we think of the production side? You did say that the comp obviously last year you produced in the fourth quarter I think 6% more pounds, but how should we think of what you're going to produce in 4Q this year?

Well, I will remind you first of all, the increase in production in Q4 that I referenced was industry, not Pilgrim's specific. And then secondly, I'll go back to our Q2 call where we talked about rebalancing supply and demand and again we're comfortable with our inventories. We're comfortable with the production that we have in place now relative to our demand and I'll leave it at that.

Okay. And just in terms of, I saw when I was reading through a 10-Q I thought it was interesting that you decided not to sell the facility that you were closing. Can you help me understand that? I mean, I'm just trying to understand the big picture. It's a strategic thing or if we shouldn't read into it too much.

Well, it is a strategic thing. It's Fabio, actually, and also we have some frozen capacity in there that we still intend to use. So it's not only the killing part, but also the freezing part.

And strategically is it just that you thought if you put it up for sale, that's almost like subsidizing the assets for other companies to use your capacity? Is that sort of the strategic rationale or can you just help me with how you think of it strategically?

We don't intend to sell our facility to any other poultry operation and we still have -- intend to use the freezing capacity. That's all. That's the best explanation we have.

Okay. And, Bill, this one just for you, longer term no time frame associated because I think you're trying your hardest not to be too specific here, but looking at your -- if we were to measure your success as a CEO in 2 -3 years out, what's 1 metric that you'd want to us look at and where would you like to see that go? I mean, my guess is you're going to say revenue per pound, but I'm interested in hearing if there's 1 or 2 things that analysts should look at 2 years out for a company that you're managing and you're the rate you want it. What would that be and where would you like to see that number go?

That's a good question and I appreciate you asking and by the way, I do plan to be successful here, as our team will be successful. We're excited about the future. We know we have a good plan in place to execute that will result in -- or we intend to result in success.

I would tell you that from the first conference call that I participated in that hasn't changed. We have a lot of work to do, in terms of optimizing our sales mix. That was a big opportunity that I took note of, when I got here and it's still a very strategic point for us is optimizing sales mix. Now, you'll see that reflected in revenue per pound for sure, but it's not just cost.

The other thing I would point to is, we will be a low cost producer in the industry. Our goal has not changed since I arrived and that's to be top quartile operator, as it relates to costs and efficiency.

So, I think those 2 things are 2 that come to mind and then we want to be a valued and irreplaceable partner with our customer. As I've told our team recently and continue to emphasize that, nothing happens until something is sold. And we rely on our service, our quality and meeting our customers' expectations to run our business model. And so that would be a third tenet in I think our team's success going forward.

Thank you and just one follow-up on that. The one issue that comes to mind with you bridging the gap between what your performance has been as a company, relative to the industry is your constraint on capital spending, right?

So usually I mean if you had a blank check, I'm sure you could get to whatever point you're trying to get to much faster. So can you help us with that aspect? I mean, even if we think you're a competent guy, for people to invest in your company, given the fact that your CapEx budget is shrinking, how should we think of that handicap for you?

Well, I'll go back and remind you the company did spend capital in 2009 and 2010 and we'll spend $130 million this year. So, I would reiterate that, while there's always going to be opportunities to improve efficiencies and decrease costs and improve yields, we're comfortable with it our current footprint. We plan to spend enough capital next year to keep our operations in good shape. And as we improve our balance sheet and improve our business model, then I think that will afford us the ability to continue to invest appropriately back in our assets.

I'll pass it along. Thanks, Bill.

Thank you.

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

Hey, good morning, everyone.

Good morning, Ken.

I just have actually a couple follow-up questions from the other questions. Going to Heather's questions, you kind of didn't answer it exactly.

What would actually make fourth quarter not better than third quarter? You gave all reasons-- very high level that it should be, but you weren't really all the way there and I don't know if I just misunderstood you. I just want to make sure that I understood the answer.

Well, I mean, we're into the fourth quarter now and other than a significant decrease in pricing, which I don't think is going to be the case, we're comfortable with the fundamentals as we expected them to be in 2004. It's not that again I'd reiterate the current chicken pricing and current corn and soy pricing is not such to create significant margin or even normalized margin at this point. But, I think it's enough of a known quantity to say that we expect to see an improvement.

Okay. Then I misunderstood you. I thought your answer was -- I didn't think you confirmed that. That's better. I appreciate that. I didn't understand the answer, then.

So, there will be improvement. That's what I thought. In terms of-- what are you actually selling different in the export markets in leg quarters?

Well, we're not going to disclose the details of our strategy. We're selling more whole birds. We're selling more parts, other than leg quarters. And then instead of as a percentage of our sales just putting bulk leg quarters on a boat, we're adding value to the back half of the bird, as well, in terms of different cuts, different sizes, different forms and we'll continue to do that.

We're I want to be sure and make the point that we're looking at international markets very strategically. We think chicken, in the future, is definitely going to grow globally and we think given our affiliation with JBS and our connections to world markets as a result, we're in a better position than most companies to take advantage of that. And while, for example, breast meat has not been exported for the most part from the US in the past, we see that changing in the future as well and we plan to be a participant.

Great. You also said that to get to positive margins you would need $1.60 to $1.70 breast prices. Is that positive or normal? It's positive?

I'd say positive.

That's positive, okay. And then another question I have is, in terms of the production levels, it almost seems like you believe that the production -- the cycle is going to be deeper, but shorter than maybe people initially expected. Like the cuts seem to be coming a lot harder and sharper now, but by spring or summer we actually could see year-over-year increases in the industry? Is that the implications?

Again I may have misunderstood that. I was just trying to get clarity on it.

No, I didn't say that. What I did talk about relative to that is, more about 2010 than 2011. If you remember in the third and fourth quarter of 2010, the industry increased production by much more than normal. And so those are the periods now with which we're comparing and that's one reason that I think we'll see the comparisons in terms of decrease become more deep. Now, I think the industry margin situation will dictate production levels in the future and that's what I said.

Okay. And then the Dallas plant idling it, does that mean that you're thinking one day that you might actually bring it back online?

No. To Fabio's earlier point, we are using a freezer there and we'll continue to use that freezer. And we don't expect that we'll slaughter chickens again in Dallas.

Okay. And last question is, Bachoco buying a US OK Foods, what's your take on that? Does that change any of the dynamics? Do you think there's a major consolidation coming on? How do you think about that in terms of how do you operate day-to-day and probably more strategically probably over the next year to 2 years?

I don't think it changes our view or our position either way, Ken.

Great. I really appreciate it. Thanks a lot.

You're welcome.

Thank you.

Our next question comes from Carla Casella from JPMorgan.

Hi. A couple questions. On the export side, how much of what you're selling today is white meat? Is it anything, at this point?

I would tell you, Carla, it's not a significant amount, but I would characterize it as a growing amount. And I think in the future as populations in Asia and other parts of the world move into the middle class, I think we'll see more white meat being consumed in those markets. Which, I think will increase demand for breast meat from the US and other markets.

Just adding on that, also, when we export more whole birds, you're exporting more white meat as well.

That's correct.

Right, of course. Okay, great. And then you didn't comment that quarter that I noticed yet in the Q about foods. What percentage of your business now is food service versus retail and what percent is prepared versus fresh chicken?

Our mix, in terms of retail and food service, has not changed significantly. Our domestic sales, it's evenly split.

Okay. And then on the hedging front, given that this quarter we saw hedge gain, similar to what we saw back in first quarter, should we see a reversal in 4th quarter like we did in the second quarter with a hedging loss just from the timing of when those worked through the system?

We're not expecting that in Q4, no.

Okay. And then the non-recurring breakout, the charges that you detailed in your presentation, that was very helpful. Were there any breakouts like that for the 9 month period or for the 6 month or is this a first quarter where you've had those nonrecurring charges?

Those nonrecurring charges were all from this quarter.

Okay. Would there be any in the 9 months, then, or the exact same amount?

It's the exact same amount, yes.

Okay. And then one final one, since you've gone to not doing as many longer term contracts, have you lost any customers or contracts because of that?

We have not lost any significant piece of business, nor do we expect to.

Okay, great. Thanks for all the answers.

Thank you and, Operator, that's all the time we have today. I would like to thank all of you for taking the time to join us on our third quarter earnings call today. We're proud of our people and the efforts they continue to make. We appreciate your support of Pilgrim's and look forward to continuing this open dialogue in the future.

And that concludes today's conference call. We do thank you for attending. You may now disconnect your telephone lines.