Pilgrims Pride Corp (PPC) 2011 Q4 法說會逐字稿

Good morning, and welcome to the fourth-quarter 2011 Pilgrim's Pride earnings conference call. All participants will be in listen-only mode. (Operator Instructions) At the Company's request, today's Company conference is being recorded. Please note that the slides referenced during today's call are available for downloading from the investor relations section of the Company's website at www.pilgrims.com. After the presentation, there will be an opportunity for you to ask questions.

At this time, I would like to turn the conference call over to Ms. Rosemary Geelan, Investor Relations for Pilgrim's Pride.

Good morning, and thank you for joining us today as we review our operating and financial results for the quarter ended December 25, 2011. This morning we issued a press release providing a review of our financial performance for the quarter, including a reconciliation of any non-GAAP measures we may discuss. A copy of the release is available on the Investor Relations section of our website, along with the slides will reference during this call.

Joining me today are Bill Lovett, President and Chief Executive Officer; and Fabio Sandri, Chief Financial Officer.

On today's call, Bill will speak to progress we have made towards our operational goals, the macro factors impacting our industry, and some of the key drivers of our financial performance for the quarter. Fabio will then provide an update regarding our financial position and our capital structure. After our prepared remarks, we will be happy to take your questions.

Before we begin, 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 these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those forward-looking statements is outlined in today's press release, as well as in the risk factors disclosed in our Form 10-K and in many of our regular filings with the SEC.

I will now turn the call over to Bill Lovett to begin our prepared remarks.

Thank you, Rosemary, and good morning, everyone. I am pleased to share our progress with you today. The fourth quarter was our best quarter in an extremely challenging year, with positive adjusted EBITDA of $22.6 million. This encourages us, given our internal improvement and efficiency and achievements, as well as external contributing factors signaling a turning point in the industry.

We ended 2011 with our fourth-quarter sales totaling $1.83 billion versus $1.81 billion in quarter four of 2010. Our bottom line was impacted by $14.6 million of SG&A restructuring costs, causing our final net income to reflect the loss of $85.4 million, or $0.40 per share.

As a management team, we've made a lot of decisions this year to align our operations with the strategy we have developed. We have confidence in this plan because we created it from the ground up and committed ourselves to effectively executing and communicating with the entire organization. Our strategy has four major components, and I'm going to share those with you in terms of our approach and results to date for each aspect of that strategy.

First, we aim to be a valued partner with our key customers. For example, we are employing greater use of category management to support our retail customers with growing the chicken segment by driving sales, mix and margins at the retail store level. Also, we are executing a new food service operator strategy which creates unique value for Pilgrim's and our customers.

Our efforts are devoted to helping our customers reach their end consumer, and help them grow their business profitably. Chicken provides great value to both the retailer and consumer, especially compared with competing proteins.

The results of our contract negotiations have concluded. And now have an insignificant number of our sales contracts for 2012, and fixed-price arrangements for periods greater than six months.

Almost all of our sales have either market-based pricing or give us the ability to reset pricing, consistent with the underlying commodity markets. We have demonstrated that we know our market, and we have the courage to stand firm in our pricing strategy. What made these negotiations successful was, to us, was threefold. One, the strength of our relationship with our key customers. Two, the fact that everyone understands the industry solely can't sustain bearing the volatility of commodity markets long-term. And three, we provide high levels of service and a quality product. We see a more fluid and diverse pricing model necessary to sustain profitability. And I think it's fair to say that our results going forward will reflect the strength of the chicken market.

The next aspect of our strategy has been relentless pursuit of operational excellence. Our complexes have shown great progress in each of the areas we stressed all year. Resulting in approximately $300 million of cost and yield improvements over 2010. Our goal for 2012 is to achieve an additional $200 million in cost of yield improvements.

Although our purchase feed costs were $690 million higher for the full year over 2010, and market prices resulted in $112 million less of revenue equivalent, our cost and process improvements reduced the impact that that had on our business.

During the year we completed the conversion of our operations to manual de-boning, resulting in significant yield improvements. Next, our sales mix is now reflecting a whole-bird equivalent return tied to the chicken markets. The mixed management accountability process enables us to realize a return on whole-bird equivalent, which is more reflective of component market values providing more market related margins.

Our next goal is to strategically grow value-added exports. We have dedicated a plant to export production, focusing on markets where we see long-term growth opportunities. We're producing value-added products tailored to the local consumer preference. And these changes we've made enable us to produce specific products for Japan and the Middle Eastern markets, both of which emphasize very high quality standards.

We are seeing foreign markets for chicken growing a much faster pace than US demand. We believe US is very cost-competitive on a global scale, and will benefit from these trends.

Export sales accounted for 13.3% of our US chicken sales in 2011, exhibiting a year-over-year growth of 40%.

In 2012, our goal is to, again, see double-digit growth in export sales. And finally, we have been cultivating a culture of accountability and ownership within Pilgrim's. One of the opportunities we had this year was in de-layering and downsizing management. We had to make some difficult decisions on our corporate structure in how to best drive our new culture. Not only did the changes we implemented remove some of the layers that were not optimal for decision-making, they also resulted in lower SG&A costs as well. It enabled us to focus on talent development within the organization and, over the past year, we brought in some excellent outside talent. They brought experience and fresh viewpoints into the Company. And we are excited to be creating opportunities to grow our future management teams from the current talent pool. We have a management process that is specific to each plant's P&L. We've created an environment where local management has ownership, and knows their results. Variable compensation is now linked directly to those results, and this emphasis on results-oriented culture is what you can expect to see as our standard as we move forward.

We have gone through our strategy. Now let's talk about some of the macro issues impacting our industry. Market forecast on chicken price expectations indicate that chicken prices will increase as supply continues to align with demand, both domestically and globally. Boneless skinless chicken breast meat started 2012 sharply higher than in 2011. Whole-bird markets have climbed since September, and remain well above historical price levels. Leg quarters continue trading at historically high prices, aided by high demand, especially in emerging markets. Additionally, wholesale wing prices have traded higher in recent weeks, as industry cuts have adequately balanced the supply.

We continue to see discipline on the part of industry, with eggs sales averaging 6% below the start of 2011 and chick placements averaging 4% less. December production was 11% lower than in 2010. The breeder flock size remains relatively low, and cold storage levels were down 21% over January 2010, with current levels at 629 million pounds. You may recall back in Q3, I said that we needed to have cold storage levels around 620 million pounds, and the recent levels are encouraging.

Our commodity risk management strategy continues to be of high importance to us. If we believe prices have an upside risk, we will mitigate that risk through derivative positions. Given our limited fixed pricing exposure, we have more flexibility than in the past to respond to shifts in the grain markets.

Feed costs will continue to be volatile, and we have built that into our expectations. The input that we can control is our behavior to drive the best live performance, quality, yields, and processing costs. Although we believe there is continued volatility in the corn markets, we also believe it is possible to be profitable, regardless of the price of grain. The industry needs to adjust to generating positive margins and not depend on weak corn prices to drive profitability.

I'd now like to ask Fabio, our Chief Financial Officer, to provide some color on our financial position and results for the quarter.

Thank you Bill. Good morning, everyone. Our fourth-quarter results show sales of $1.83 billion compared to $1.81 billion for the third quarter 2010. We had an adjusted EBITDA of $22.6 million, which was a result of weak prices more in line with the input costs, and a number of operational improvements over the year. As Bill mentioned, we achieved $300 million in annualized operation improvements in 2011. We also achieve a 7% reduction of SG&A expenses over the prior year. As we have completed the integration of our shared services with JBS, we continue to look for ways to improve our SG&A spending.

This quarter, we also recognize SG&A restructuring costs of $14.6 million, which includes $3.6 million related to the closure of the Dallas facility. In addition to fair value impairments of excess land and other known operational assets.

On page 5 of our presentations, we show that prices on whole broilers, boneless breasts, wings, and leg quarters were all higher than the same quarter last year. And we have been able to maintain the prices at an adequate level. We were able to achieve profitability in December, and with the industry fundamental information available today, it appears the first quarter of 2012 will be profitable as well.

It's too early to say anything beyond that timeframe. But 2012 started off with strong pricing and encouraging demand.

We are also seeing encouraging demand from the global market. During 2011, Pilgrim's increased its exports by 24% in volume, which combined with increasing strength in global demand for protein, pushed out export sales to an increase of 40%. Given that the US industry as a whole grew its exports by only 4% in volume, Pilgrim's accounted for the majority of the growth of the US exports.

On page 8, we see that this year we've shown the discipline necessary to keep up our capital spending in check with what -- and we do not foresee a material amount of CapEx required beyond the base level of repairs and maintenance, which we expect to be below the current year's budget.

Our plans are in solid condition. And although we will spend as necessary for efficiency improvements, we'll continue to be vigilant in improving only those projects that have a clear and timely benefit to the Company.

In reviewing our cash flows, we had a positive operating cash flow. This was generated through careful management of our expenditures and current accounts. We also generated a positive cash flow from investing activities in the amount of $46 million, due to the sale of certain properties and non-core business.

Going forward, we expect the depreciation and amortization should be lower than we had for the past years, as the assets acquired with Gold Kist are now fully depreciated. Although there will be no impact on EBITDA, we anticipate the cost is $60 million annual impact on net income.

Looking at our debt structure, we have just under $1.5 billion of borrowings outstanding, and a liquidity of $381 million at year end, and which continues to strengthen. We are committed to reducing our leverage to more comfortable levels, primarily to improve our balance sheet and reduce the external noise that can distract from our core operations.

This is where we should expect our free cash flows directed as we move forward.

I will now turn the call back to Bill for his final thoughts, before we take questions. Okay, Bill?

Thank you, Fabio. We're pleased to see the benefits of our strategy implementation starting to show. We know that things will likely occur that we didn't anticipate, but we are focused on our overall strategy in a culture that knows how to adapt and overcome obstacles as they arise.

We are committed to effectively managing every aspect of our business.

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

(Operator Instructions) Mary Gilbert, Imperial Capital.

Wanted to look at how we should consider corn -- if we look at where corn future and spot prices are today, factoring in your hedged position and then also considering the fact that you have altered substantially most of your fixed-price contracts, correct? Just wanted to understand how we factor those various pieces in, in looking at 2012 versus 2011.

Well, Mary, you made a very good point in that with the lack of fixed-price contracts in our portfolio, we're less dependent on protecting the upside risk, although we are vigilant in paying attention to that.

You know, with where corn is trading today on the March contract, we see much less -- much more downside risk than we do upside risk. Perhaps in $0.40 to $0.50 per bushel upside. But perhaps over $1 in downside risk as we get into the new crop year. And if you read the estimates of planting intentions, and thinking about trend line yields, and think about what is happening with ethanol production at this point, we see a much more downside risk of corn than upside.

On the other hand, soybean meal, we do see downside risk more than upside, but to a less degree. So we think about it soybean meal being a fairly good buy, at something around $300 per ton or under. We think about corn perhaps being in the low-$5 range depending on acres planted, depending on weather for the new crop year.

Okay, and so it sounds like from a hedging perspective, you are well-positioned, plus the absence of fixed-price contracts. But I wanted to make sure I understood what level of exposure you still have left. Did you say something about you still had six months left on certain contracts, or how it should look at that?

No, what we said, Mary, was -- we don't have any sales contracts that expand in price beyond six months. And we have the ability to reset those pricings based on what the underlying commodity markets do. So we don't have long-term exposure as it relates to pricing. And that's what we said.

Okay great, that's helpful. And how should we look at changes in working capital this year, based on growth in the export market and any efforts that you're making on the plant side?

Hi, Mary, it's Fabio. Thanks for the question. We made some significant improvements this year. We don't expect a lot of changes from working capital next year. Even as we increase exports, we don't see a lot of improvements or some usage of capital in the working capital. We are at adequate levels for inventory and our accounts receivable.

I can assure you, Mary, we have processes in place that allow us to effectively manage our working capital going forward.

Okay, perfect. Great. Thank you.

Farha Aslam, Stephens Incorporated.

Hi, good morning. A question about the pricing you achieved in your contracts. I understand that they are variable. But are you pleased with the pricing levels, or are they kind of in line with your targets? Could you just give us some more color around -- not only just the duration of your contracts, but kind of the level they are set up?

Well, are pleased with how our strategy played out through the end of the year and going in to 2012. What we like most about it is, it allows us to reflect the value of our portfolio based on what the market will give us in terms of available price. And we think it's fair to our customers as well. And I think, again, that speaks to the strength of our relationship with our customers, the quality of product and service that we provide, and also it allows us to share the risk of the underlying commodities going forward. And as I stated in the prepared remarks, we see this pricing model and strategy as essential going forward, to sustain profits with a blend of diversity, in terms of how the pricing is made up and also allowing us to take advantage of strength in the chicken market as we see it.

And so given where your contracts are and where the grain markets are, when do you anticipate hitting your normalized earnings? And I'm assuming you're normalized earnings are still around 5% to 7% EBITDA margin?

Farha, thanks for the question. You know, we don't necessarily think in terms of normalized margin. I think the better question to really address is, are we going to accomplish the objectives that we laid out in our strategy? And I can tell you emphatically that we will meet or exceed those objectives. I think, in addition to that, with the data and information we have available to us right now, we think the chicken industry will enjoy a profitable year in 2012. And it is our intent to be better than the average company.

Okay. And you said you were profitable in the first quarter. Is that on the EBITDA line, net income line? Where would you focus that?

Both net income and EBITDA.

And I would remind you, we said we were profitable in December. And we believe that the fundamentals are in place to create a profitable first quarter.

Okay. That's very helpful. And Fabio -- three key, just, data points for our modeling needs -- G&A, interest expense, and tax expense -- or, and tax rate for 2012?

We expect -- it will depend on the results of, course. But we expect the tax expense for 2012 to be below 5%. It depends on the results in Mexico and the US, but below 5% is a good expectation.

And then your depreciation and amortization?

Depreciation and amortization will be $60 million below this year, which will be a total of $150 million to $160 million from the total Company.

And then your interest expense, assuming the rights offering?

I expect interest expense not to be reduced a lot, because we are going to use all the proceeds to improve our balance sheet -- but around $25 million to $29 million every quarter.

Heather Jones, BB&T Capital Markets.

Good morning, a few questions. First, going just real quick on the tax rate -- did you say it's going to be 5% for 2012?

Below 5%. It will depend on the results, and depend on how the results will be split between Mexico and the US, but below 5%. We have $613 million in NOLs that we used offset that. So the effective tax rate should be below 5%.

So when you say you are profitable in December, and you are profitable in Q1, you're using less than 5% tax rate on that?

Yes.

Okay. As far wondering -- talking about your contracts -- wondering if you could help me more with this. Because you talk about, you're exposed more to the market and -- wondering, when you're setting up these contracts, are you defining the market as the chicken market? Or you're setting a price based on where your feed costs are? And then those can be adjusted based upon where the feed market moves?

Yes, Heather, we are going to have all of the above. If you think about pricing, we play in many different market segments. For example, in chain restaurant business we play -- and that has traditionally been long-term fixed contracts. And what we have done in some of those is give shorter-term pricing, but also having the ability to change that pricing, relative to the underlying commodity markets.

In other segments, we are truly on the chicken market, either on a current or trailing basis. And then in other segments, we have shifted our mix such that we have more control of pricing, for example, on our branded products. So it is both reworking the contracts, shifting our mix, and creating a portfolio that allows us to make changes quicker, based on changes in underlying commodity markets.

Okay. So when you all say that you are going to be -- the industry will enjoy a profitable year in 2012, and PPC will be better than that. Do you think that is going to be a function of the fact that your realized pricing will be up more year-on-year than the industry? Or do you believe that the cost you've taken out in 2011, in addition to what you plan on taking out 2012, will make your costs better than the industry? What is going to drive that outperformance?

Good question. You know -- and I would remind you, we said with the data and information we have available at this moment relative to 2012. We are in February. So it's early. From a cost standpoint, I can tell you that we have made a lot of improvements last year relative to industry benchmarks. We think we'll continue to make more improvements. And we think, you know, on the same mix -- if you compare us to the average company, we'll be better than the average company in live costs, yields and plant costs.

We also think, to your point, that if the chicken market gets strong, which it appears it's going to be, relatively -- we've set up our pricing portfolio to take much better advantage of that Pilgrim's has in the past. And, again, with more effectively managing our mix, we think that is going to be a contributor as well.

And then my final question is, just going to the industry as far as -- and you talked about pricing being relatively stronger, and that's being propelled, really, by wings. And then the Georgia Dock has moved up. Breast has been pretty disappointing. It started out the year fairly strong, but it's been disappointing of late.

Wondering if, first of all, what you think is driving that? I know we weights have moved up over the last few weeks, so it has increased amount of breast meat on the market. But it seems like the market just can't absorb any incremental pound. So, wondering what you think is driving that market weakness? And if we don't get a bump, and breast meat pricing -- due to demand, do you think the industry will cut more?

That is a multifaceted question, but thank you for it. A couple of things to note there, Heather. First of all, with strong component pricing on virtually all parts, I think going forward, we are less dependent -- we, the industry -- are less dependent on relatively strong year-over-year breast pricing than we ever have been. If you look at the cut out, to your point, other component parts are really carrying much more of the increase than just breast meat.

And even though breast meat is roughly one-fifth of the cut out, again, we don't depend on breast meat pricing as much as we have in the past. I will tell you that short-term, yes, we didn't want to see a decline from mid-January forward. But, again, we think that was much more supply-driven. We have had excellent growing conditions in the southeast, where most of the chickens are grown. And that has added a couple of days of growth rate onto the chickens. And we think processors have killed ahead to maintain weights or to manage weights, and that's what has put more breast meat on the market.

Just in the last couple of weeks, though, we've seen stabilization of that effect. And we believe breast meat prices will continue to go up in the near-term and longer-term throughout the year. I would tell you, that, also -- and this is great for us, because we've called it out many times in our strategy in the past and going forward -- is we believe value-added exports will continue to grow. We see more and more breast meat being exported out of the US, which is a relatively new phenomenon. And we are participating in that business. And as emerging countries' middle-class continue to grow in affluence, we think that we will continue to see more breast meat demand come from outside the US than we have in the past.

Can you just give us a sense of what percentage, on a run rate basis, of exports this breast meat now is representing?

Well, right now, it's a very low percent. But again, my point is that it's growing at an impressive rate. And I think it will continue to grow at an impressive rate.

Okay. All right, thank you very much.

Reza Vahabzadeh, Barclays Capital.

Good morning. Just one housekeeping item to take care of first -- Fabio, what is the CapEx outlook for 2012, and maybe even 2013 if you have that?

This year we have 136. We expect next year to be below 100.

Next year being --

Next year being 2012. So for 2013, we will be in the same level, I believe. Like I mentioned, our plants are in great condition. We don't see foresee any major need for CapEx, other than maintenance and regular.

So, when you say next year, we're talking for 2012, you're talking --

2012, sorry. 2012, sorry. 2012, below $100 million.

Below 100. And so, when you talk about the food service contracts that you have, Bill -- on that book of business, did you realize material price increase as you go into 2012 on that book of business, regardless of whether they are fixed or not?

Yes, we did realize an increase.

Okay. And on the total business, whether it's retail or food service, what portion of your overall book is fixed pricing? Even if it's on a short-term basis?

We're not going to disclose percentages of our portfolio. I would tell you that it's less in 2012 than it ever has been in Pilgrim's in recent history.

Right. So I mean, is there a way to determine what portion of your business pricing moves with the market?

Most of it.

Most of it. Okay. And then on the lien costs, your comment suggests that you are largely on the market?

Well, we are comfortable with where we are. Again, I mentioned that we see much more downside risk than upside. And I'll just leave it at that.

Okay. And what about non-grain costs? Do you foresee a material inflation in non-grain costs that would partially offset your cost savings and pricing?

Not in a material way. If you look at the crude oil complex, we think there there's downside risk there, too. Not as much upside risk on packaging; we don't see a material risk of increase there, either, so I don't think so.

Bryan Hunt, Wells Fargo Securities.

Thank you. Bill, I was wondering if you could just talk about -- with all the contract negotiations you all made throughout last year, and especially in the Q4 -- how much volume did you all lose, or how many customers walked away from the changes in your contract terms?

I would tell you that, in total, we didn't lose a material amount of business. We are comfortable where -- either we walked away from the opportunity or otherwise, we were able to replace that business in a better position. So, net-net, we were very pleased with the outcome of that activity.

So, with no contracts losses driving volume changes in production, are we to expect that, looking at the market placements of birds -- are you all matching that type of change in production for 2012?

Well, we -- beginning mid last year, we began to do a better job of matching our supply and demand. And we will continue to do that. If we see demand growing, we will make a decision as to whether we place more birds or not. If there are alternatives to placing birds, we'll look at that, too. But we will continue, as I said, to do a good job of managing our working capital, and a big component thereof is our inventories.

So, when we look at spot prices on bird composite -- if you look at a mix of 15% whole bird and the rest parts -- the Georgia Docks implying roughly a 20% price increase in Q1. Is that a fair way to look at your business, now that is variable pricing, relative to a year ago? Is your cut out price about 20% higher?

Well, I'm not a comment on that, specifically. What I would tell you is, if you look at all the forecasting numbers, you know, we believed before the year started that the cut out had room to grow by 20%. The encouraging news is, we are already sort of at that growth already, early in the year. So, with seasonality coming into effect, we believe that industry will achieve that 20%-or-so cut out increase that you mentioned. Again, if you go back to the comments that we've made, we think our portfolio is reflective of the strength of the chicken market.

And Fabio, two questions for you. Last year, your D&A expense was $209 million. And I believe you said earlier, you are looking at potentially $150 million to $160 million. Is that correct?

Yes, we have the Gold Kist acquisition. All the assets are completely depreciated, so our depreciation will go down by $60 million. So, from $210 million to $150 million to $160 million.

Okay, And then when I look at your 5% tax rate, are you implying that's a cash tax rate? Or is that a book tax rate?

Well, depending on -- again on the -- split between Mexico and the US, it could be small cash. But mainly will be non-cash, because of the NOLs that we already have in the US and also in Mexico. It will depend on the size of the profit in Mexico.

Gotcha. And then, lastly -- Bill, when I look at the export market -- and we are just starting to do some work on this internally -- but generally, your export margins, are those more stable and greater than what you are experiencing domestically?

It depends on the product, obviously. We have some products that absolutely are more profitable than domestic. Especially when you think about understanding the local preferences in the market, and add value to take advantage of that. And that's the primary reason that, when we talk about exports, we also include the word value-added. Because we're not growing end products that are just commodity in nature. We're growing end products that allow us to make a better margin because the value that we add to them. And we think that those opportunities will continue to grow. And, as a result, you will continue to see our Company grow our value-added exports.

And my last question, and I will get back in the queue. When you look at the $200 million cost savings target for the year -- one, is that a run rate number you have to achieve by the end of the year, is my first question. And then, second, could you give us some idea of where the buckets are in terms of those savings? Are they mostly out of SG&A? Or are they out of manufacturing efficiencies? Can you give us an idea of where those are coming from?

Good question. That's not a run rate that's absolute. And we feel like that, coming out of 2010, we had the goal of $400 million, and that was a run rate from the last quarter of 2010. As we said, we achieved about $300 million of that on 350 absolute. And with the momentum that we have in operations currently, we believe we that can achieve the $200 million on an absolute basis. From a component standpoint, a lot of that is in conversion costs in our processing plants. Some of that is in mix and in yield, but those are the three main drivers of the $200 million.

Carla Casella, JPMorgan.

Hi, on the export business, did I miss it? Did you say what percentage of your export is whole bird versus parts? And then, what percentage is value-added at this point?

No, we did not break out whole bird from parts. I would tell you that most of it is parts related, in some form. But our whole-bird export business will grow this year. We have dedicated one plant, as I have said, to that part of the business. So we will experience a lot of growth in whole-bird exports this year.

Okay, great. And then on the food-service side, are you starting to see -- can you talk about the environment and what you're seeing or hearing? Any pickup on the food-service, or are you adding any new key accounts on the food-service side?

Our plan for 2012 does not contemplate real growth in total food-service. That's not to say that we are not going to grow in food-service. We, in fact, are going to grow our share in food-service. And we are shifting our mix toward the areas in food-service where we have the ability to take advantage of better pricing. And so that's what we think about food-service.

Okay. Any more specifics on where you want to gain share in terms of either type of food-service or type of product?

Well, we have a very valuable brand. , our Pierce brand, in food-service. And we will continue to grow the Pierce brand. It's a very, very good brand. And that's really all I will say

Okay. And then do you have any additional facilities that are up for potential closure or that you're closing in 2012?

We don't have any at this time, no.

Okay. And then just one last question on the corn side. You commented that the results go forward to reflect more the strength in the chicken market. Did 1Q -- or, I'm sorry, did this fourth quarter have any hedges in it that kind of held you back from benefiting from the market improvement?

No.

Okay. And when you see dips in corn, do you opportunistically buy? Were you able to pick up corn on this late November/early December dip?

We have taken advantage, in some cases, on buying dips.

Okay. That's all I had. Thank you.

Ken Zaslow, BMO Capital Markets.

Hey, good morning, everyone. Just a theoretical or a big-picture question. You held off on the date of the rights offering so people can get a better grip of your quarter. Can you talk about what you want investors to get from this quarter that makes them feel more comfortable with the rights offering? Obviously, you guys thought there was something. I just wanted to make sure that we see the same thing you guys are seeing.

No, I mean, I think investors will make up their own mind based on the information that is available to all investors. We just wanted to make sure that there was adequate time for either an investor or a potential investor to make a decision. In the case of the rights offering, it would be already an investor. So we just, again, wanted to make sure that they had adequate time to do that.

Okay, so there's nothing specific that you wanted investors to take away. I was just curious.

In terms of -- I think you said earlier that you're not as much concerned or focused on normalized numbers for this year, or I don't know if that was the phrase. But when you do the compensation, what is the compensation based on? Is it based on just achieving the goals rather than actual operating profit? Can you talk about that?

Did you say compensation or incentive (multiple speakers)?

Yes, your compensation. I think you said in the earlier part of the call that compensation is now tied to performance and not as a philosophical change?

Yes. What --

Maybe I misunderstood it.

What I was referring to, Ken, was we now have a P&L for each of our operations. And a big part of their incentive plan is tied to what they do in their own operation. And that is different from what it has been in the past. And it is based on the plan that we have.

So in terms of executing a plan, not so much of reaching a certain level of profitability based on the market conditions? I'm just trying to figure out why you're less concerned about, and if employers would be less concerned about normalized numbers than maybe the market might be. I was just trying to figure out if there was a disconnect there.

Well, obviously, our plan includes the P&L at each complex. And so it is based on that, for sure. But, again, when Farha asked the question about normalized earnings, there's so much volatility on each side of the equation in our business anymore, it's really hard to think about what is normal. And so, we constructed our plan as we know it. We're going to execute it. And that's what we're going to hold ourselves accountable to.

And then on the tax rate, just to clarify, so this year it will be somewhere between 3% and 5% or whatever. Going forward in 2013, what is the ongoing tax rate? Have you structurally taken it down even after the NOLs, or is it something that -- does it go right back to 30% or 35%? How does it work going forward?

After we use all the NOLs, it will go back to the normal -- if that is the word -- 35% tax rate, yes.

Is that after this year, or is it -- how long do you have the NOLs for?

Well, we have $600 million in NOLs. I hope we can use them all this year, but I don't think -- it's normal, but so it will depend on the profitability of the year, of course. I believe two years it will take to use all. Two good years is all it takes. Two to three years is all it takes, if they are good years.

And then you also said that you're now focusing your CapEx projects on more projects that have a certain material investment capital. Can you talk about certain projects you guys are actually taking? And I'm assuming they're more internal projects. Can you talk about certain of them, to kind of give us a better flavor for the level of certainty that is around the returns on your projects?

Well, if you look back for the last three years, the Company has invested a lot of money in capital projects, both in infrastructure spending and in projects that create a return. As an example, last year we spent money converting our deboning back to a manual process. So, again, if we can -- if we have a project that returns that money in less than a year, we are for sure going to be looking hard at it. Otherwise, we're going to spend on maintenance. And, again, our priority for cash flow, as Fabio stated earlier, was toward our capital structure and paying down debt.

In terms of -- I mean are there, like, heaters and basic things that may need to be improved that could (inaudible) livability of the chickens? Is that what you are focusing on? Is it more on higher-end, value-added products that you're shifting your portfolio towards? What is gross CapEx moving towards?

Well, obviously --

(multiple speakers) a greater degree of certainty, that gives you that level of certainty. That's just what I'm trying to figure out.

Yes, obviously, if it is a safety issue or an issue that determines whether the operation will run, obviously were going to spend it. But our focus is on the normal repair and maintenance. And in some occasion, if it's a customer need or a really high-return project, we'll consider it. Otherwise, we're going to focus our cash flows back toward paying down debt.

In my last question is, Tyson and you guys have both now said that you guys are going to be above the average for the industry. And, obviously, the two of you guys together add up almost 50% of the industry. Does that mean that the rest of the industry is just below you guys, and you have structurally improved your business to a point where even the big bird processors and the little guys are now less efficient than the two larger guys? Can you just talk to that? And I'm asking Tyson the same question. I'm just curious. It seems like now, both you guys are now above the average. It's just seems like an interesting point.

You know, I can only speak for Pilgrim's. And I would point out that we participate in most all segments of the business, whether it's big bird deboning, retail tray pack, or fresh food service. And we measure each of those segments against the live segment from a benchmarking standpoint. And we hold accountable the management for those segments to be, at least, at the very least, better than average and growing toward the top quartile. So I will just leave it at that.

Akshay Jagdale, KeyBanc Capital Markets.

Good morning. Thanks for taking the questions. Can you hear me?

Yes.

Okay, great. So, Bill, just -- am I interpreting -- I just want to make sure I'm interpreting your comments correctly. By moving more of your revenue mix more in line with the market, you're expecting the market to move up. And you have participated in that, right? So, in other words, your outlook for the cut out is pretty positive. But that's obviously dependent on industry supply, which you play a role in. So, am I interpreting that correctly? You do believe the fundamentals on the cut out side are positive, which is why having the mix that you have is a good idea or a good strategy? That is the first question.

That is correct. I think you have a good understanding of what we're trying to communicate.

Okay. So, then, the second obvious question would be, what is your expectation for industry supply? And where does -- can you just give me a sense of what Pilgrim's is going to do with their supply, as well, in relation to that estimate?

I guess most forecasting services have said that chicken production in 2012 versus '11 will be in the range of 2% to 3% lower. I think that is a fair estimate. You know, a lot of it depends on the weather. If we have a really hot summer, I think that will pull, perhaps, more pounds off the market. If we have a mild summer, it could add some of that production back. If you look at her breeder flock size, it is the lowest it has been in a number of years. So, while the industry has the capacity to ramp up production, it is going to be muted somewhat by the size of the breeder flock inventory. And, you know, I think that we all remember what the last 12 to 14 months have given us in terms of the balance sheet effects. So I believe the industry will continue to be disciplined through this year.

Another way to ask the question is -- so for Pilgrim's, there is a lot more risk now to not be disciplined, right? So, in other words, if you do decide to increase supply and profitability, it gets better because you do have plant capacity. I understand that will take time. But, given that your mix is now towards the market, flooding the market with supply is definitely not in the interest of Pilgrim's more so than it was in years past, correct?

Well, I understand why you would say that. But you have to think about -- fixed pricing is not necessarily a bad word, in our vernacular; unprofitable fixed-pricing is. So that is to say that, if we had the opportunity to fix prices for period of time wherein we had a great deal of confidence that it was profitable business, then we would not be opposed to doing that. We just felt like, for this time period, we were better off having our portfolio reflected of the strength of the chicken market, because the fundamental sales is going to be stronger. So we're going to have a -- I believe in my prepared remarks, I used the terms fluid and agile pricing strategies, such that we are not dependent on [cute] corn to make a profit.

Okay. And then just on your revenue realization -- I don't have all the numbers; I may have this wrong. But I believe your price per pound was up 2% or 3% for the quarter. Is that correct? Or, if not, what was your price realization per pound in the quarter?

Compared to Q3 or Q4 2010?

Both. Year-over-year and sequentially, if you have those.

Compared to Q4 last year, it was 1% lower on the domestic and 9% higher on the exports. Compared to Q3, I think it was little but higher.

Right. So the point I'm making there, Bill, is just -- I am assuming you are not happy with the price realization, even though you had $300 million in yield improvements, which probably translated somewhat into mix. This year was not satisfactory, correct? From a revenue realization standpoint?

From 2011, that is correct.

Right, so if the industry cut out increases 20%, which is roughly around $0.15 a pound for the industry, I mean, you are not expecting a 20% increase in your price realization, right? It will be less, because you have a higher price per pound. But it will still be quite meaningful, relative to the Company's historical performance, especially over the last couple of years when price realization has not been that good, correct?

Well, depending on the year you are comparing to, in this case 2011, I think that is correct.

Right, so another way to put it -- just order of magnitude. So if the cut out does increase 15% to 20% at spot prices composite, what is roughly -- what will be the impact on Pilgrim's revenue per pound? Will it be 5%, 10%, or even close to 15%? Just ballpark?

I am not going to quantify that, you know, at this time. Again, I'm going to leave it to more reflective of the market.

Okay and then one -- just one last one, actually two questions. One on cost -- if you were to lock in all your grain needs today, would your grain cost per pound be relatively stable?

Compared to 2011?

Yes.

You know, I don't know the answer to that question. But we don't believe that today's prices are a true reflection of the value of corn or soybean meal for the next 12 to 18 months.

I understand that, which is why you are not -- it seems as though, on corn, you're closer to the market then you are on soybeans, although we don't know exactly how long. I was just trying to get a sense of, if you were to lock prices in today -- because we have to model it that way -- where you would end up. And my guess is, it's going to be pretty close to where you ended up for '11, but maybe (multiple speakers) --

You have to remember, corn had a -- in 2011, took a $2-per-bushel swing, $5.80 to $7.80, back to $5.80 couple of times. And it was very, very volatile in 2011.

And just the last one -- this is on volume. So what should we expect from Pilgrim's in terms of volumes on the chicken business? The industry is going to be down 2% to 3%, it looks like. Should we expect something similar from Pilgrim's at this point?

You know, I don't think we're going to disclose our production volumes going forward, other than to say that we are going to manage it to the most benefit of our Company and pricing and working capital. We're not going to disclose our production levels.

Okay and one -- why are breast prices relatively weak? I mean the cut out is up 20%, mainly because of the easy comps on leg quarters. I don't think I understood, exactly. I don't know why breast prices have been this weak. I think you addressed that earlier on the call, but I'm not still not clear on why they're so weak, and why we should expect perhaps breast prices to go closer to $2 by the end of the summer.

Well, I think a couple of things -- remember, breast meat pricing started out the year in January very strong relative to the previous year, and they are still stronger than they were this time last year. They have just weakened relative to where they started out. And that was a function of good growing conditions in the Southeast and, I think, a temporary increase in supply. Because I think processors pull birds ahead to manage weight. I think that's going to be mitigated as we go into the year. And I think we're going to see more featuring and promotional activity at retail, because of extremely high beef and pork prices again. And I think demand is going to be adequate per the supply that the industry has on the market for the whole year.

Okay, great. Thank you, I will pass it along.

Heather Jones, BB&T Capital Markets.

Thanks for taking the follow-up. Just real quickly, Bill, are you saying that the cut out is going to be up 20% on average for the year? I missed the timeframe you were referring to.

Yes, I was talking about 2012. If you look at the forecasting agency estimates, the composite cut out is about 20% more for 2012 than it was 2011.

Okay. And then, does your $200 million in cost savings for 2012 -- is the depreciation figure included in that?

It is not included in that, no.

Okay. So, including that -- am I thinking about it correctly? You should be down like another $260 million?

Yes, if there is $60 million (inaudible) (multiple speakers) Yes, you're right.

(multiple speakers) apples to apples.

We're talking about real gains in improvements, not on depreciation.

Okay, good. Thank you.

And at this time, we would like to turn the conference call back over to management for any closing remarks.

Well, we want to thank everyone today for your participation and interest in our stock. We are extremely pleased with how our team has responded to a very challenging and extremely difficult year. And we believe we have the right strategy and the right team in place to take advantage of the stronger year in 2012. Thank you.

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