Pilgrims Pride Corp (PPC) 2012 Q1 法說會逐字稿

Good morning and welcome to the first quarter 2012 Pilgrim's Pride earnings conference call and webcast. All participants will be in listen only mode. (Operator Instructions). At the company's request, this call is being recorded. Please note that the slides referenced during today's call are available for downloading from the Investor Relations section at the company's website at www.pilgrims.com. After today's presentation, there will be an opportunity to ask questions.

I would now like to turn the conference over to Rosemary Geelan, Investor Relations for Pilgrim's Pride. Please go ahead.

Good morning and thank you for joining us today for reviewing our operating and results for the quarter ended March 25, 2012. This morning, we issued a press release providing an overview of our financial results for the quarter, including 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 we will reference during this call. The slides are also filed with our 8-K and are available at sec.gov.

Joining me today are Bill Lovette, President and Chief Executive Officer, and Fabio Sandri, Chief Financial Officer. This call will detail the progress we have achieved towards our operational goals, discussion of macro factors impacting our industry, and the key drivers of our financial performance for the quarter. We will also share some thoughts on our financial position and recent changes in our capital structure. After we conclude 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 the 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 any of our regular filings with the SEC.

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

Thank you, Rosemary, and good morning. We appreciate everyone's attendance on the call today and are pleased to be able to record our results.

Over the course of the past year, we have spoken of the changes we are implementing and the value we saw in those efforts. Our first quarter of 2012 delivered the results that demonstrate the positive velocity and momentum these changes are creating. Our EBITDA for the quarter was $101.5 million,an improvement of $155.9 million over quarter 1 of 2011, and the best results for the first calendar quarter we have had since 2005. During the quarter we recognized net sales of $1.9 billion this was just shy of our 2011 sales for the same quarter, which included $90 million of inventory reduction efforts. The sales dollars in 2012 were generated on lower volume, and even with higher input costs our gross margin for the quarter was a positive $110.1 million, or 5.8% of our net revenue.

Net income was $39.6 million compared to a loss of $119.9 million in 2011. Our diluted earnings per share were $0.18 for the quarter. Last year we had a net loss of $0.54 per diluted share for the equivalent period.

While we are certainly encouraged by these results, but the real story is in not comparing to 2011, which was not a good year by any stretch of the imagination, but in looking at where we are against our potential. We have shown we have the ability to execute against our strategy and now we build on that progress we have made to date. For each of the past two quarters we have been talking about our strategy, with the umbrella driving accountability and ownership deep within the organization. Change in the culture is always the hardest thing to accomplish, but we have gained traction in this area and seen strong collaboration within the company. In doing so, we continue to see a new benefit supporting our underlying goals including better business decisions at every level.

In our aim to be valued part with our key customers, we have seen more of anarch within Pilgrim to providing our customers with the products they want and the support they need. Our business units are working together to provide the best solution to each customer's request. We continue to develop our competency in category management by selling smarter and communicating internally to ensure that we have the right mix of products to help our in customers merchandise chicken more effectively. The benefit of this approach is that it ultimately allows us to achieve a better mix at better pricing.

We continue to get questions on our pricing strategy. What I can say is that we continue to -- there continues to be some volatility in the market. We will at times -- we will have times when chicken prices don't behave as historically have. We will shift our mix when appropriate to channels which provide more sharing of commodity risk which translates to better returns.

We are persistent in our goal of operational excellence. While we strive to provide our customers with the products they want and need, our business model requires we be rewarded for the value we add. We are focused on ensuring the most efficient of use our assets while meeting our customers needs.

We continue to apply ideas to reduce cost and improve the value we deliver. During 2011 we converted our operations to manual deboning, resulting in significant yield improvements. In doing so, we now see more opportunities for savings. During the quarter, we achieved $61.3 million of cost savings and yield improvements, putting us ahead of our goal of $200 million on an annualized basis. We are realizing efficiencies in throughputs, yields, andeliminating unnecessary costs.

Our supervisors are being measured and rewarded based on their performance against five key performance indicators. These are safety and health, quality, yield, cost and turnover. Given the contributions our supervisors made in these areas, we paid out almost a $0.5 million during the quarter in bonuses. As our teams hit their targeted KPIs, they now share in the success of the company.

Our next goal is to strategically grow value added exports. If you recall December of 2010 redding into quarter one of 2011 showed burdensome cold storage levels resulting in imbalance of chicken supply. One of the ways Pilgrim contributed to reducing cold storage levels was through export sales. So we have had a higher than normal volume in 2011. In 2012 we focused on creating value in our exports. Our first quarter exports benefited from year over year price increases.

While global markets may dictate export volume, we view our export business as a value added proposition. We see anecdotal evidence of our competitors following suit as industry exports show revived strength. Recent exports are at record levels, even with decreased production. Cold storage levels of down to 577 million pounds, which means the product is coming out of inventory and driving domestic disappearance. Export volumes for the first two months of the year are up 17% with dollar increases of 21% over 2011. The combination of higher export volumes, lower production and lower inventory and cold storage levels is keeping the amount of chicken available for domestic consume action more consistent with domestic demand. USDA is currently forecasting that per capita supplies of broiler meat will decline 3.7%.

We also believe that potential for prepared foods globally is of key importance. There is a lot of opportunity for more technical sales with branding, sizing, packaging, and other improvements. We are growing exports by reinforcing existing relationships and asking our international customers what they want and then providing it. The US is competitive in the international marketplace, and as our exports are a pillar of our strategy, our ability to grow this business will drive our profitability beyond domestic margins.

Keeping in mind that we are always impacted by macro factors impacting the industry, market forecast indicate that chicken prices will increase as supplies continue to align with demand both domestically and globally. Boneless, skinless chicken breast prices average $1.35 per pound, up 6% from 2011. We expect breast meat prices to rally as we head into the summer grilling season. Leg quarters averaged $0.50 per pound, up 32% from 2011, and continue trading at historically high prices aided by high demand especially in emerging markets. Wings averaged $1.82 per pound,up 85% from last year. Wholesale wing prices are managed to retain value due to seasonal demand and the limited supply available. [We anticipate that a price break as demand gives glade a more seasonal taste] The whole bird markets are also strong, with GA dock averaging $0.91 per pound, up $0.105 per pound over 2011. These price increases show pretty clearly that breast meat will not be the margin driver moving forward, but the whole bird equivalent is the goal.

We believe there to be continued discipline in 2012 on the part of industry participants as we all recover from the challenges last year. Although most producers have been turning a profit since January, optimism is being tempered by the fact that balance sheets as a whole need to be rebuilt. There continues to be some inconsistency in the recovery at the QSR level. Retail looks to be strengthening, but over uncertainty over the rate of price recovery is still something we have to be cognizant of. Egg set and incubators are averaging 5% 2011 and currently laying 199 million eggs. I would suggest you take that with a word of caution, though, egg sets began to decline in May of 2011 and any comparison year over year will not show the same declines. We are comfortable that if egg sets remain around 200 million through June, supply and demand will be in adequate balance.

The breeder flock size remains encouraging, with average hatching layers of historical low levels of 51 million birds in the quarter. This was down 8% for the same quarter in 2011 and is the smallest breeder flock since 1995. Intended pullet placements indicate that projected slaughter numbers will remain constrained through the end of the year.

Cold storage levels were down 16% over March of 2011 to their lowest absolute level since 2004 with inventories at again 577 million pounds primarily due to sharply lower winter production volumes. There is more than adequate demand for this level of supplies as it represents under one week's amount of production.

Futures prices of corn and soybean meal increased in late summer of 2011, with prices moderating as we went into the fall. We had an additional $36 million of feed input costs compared to 2011. Even though the first couple of months of the quarter we were feeding expensive corn, we had improved feed conversion rates. Since January corn has gone up slightly while soybean meal has gone up significantly, primarily due to crop losses in South America. More recently, grain prices have taken a couple of dips. The key is to bridge between the old crop and the new crop. As of April 22, 28% of the corn crop had been planted early compared to the 15% on average which is positive as the new crop will be available early assuming that weather cooperates.

At this time I would like to ask Fabio, our Chief Financial Officer, to provided some color on our financial position and results in the quarter. Fabio.

Thank you, Bill. Good morning everyone. Our first quarter results reflect sales of $1.9 billion,very close to our sales for the first quarter a year ago. These sales were actually even after taking into account the prior quarter's disposal of our US distribution business and our live pork corporations,which would have added approximately $30 million to the top line of the quarter and $85 million to the top line of the year.

Our view of domestic chicken demand is it is no longer breast meat driven -- demand for all parts is supported as well, with leg quarter inventories down significantly. Both domestic and import demand continue to support prices and drive profitability. Boneless skinless breast is having less of an impact and is increasing relative to the other parts of the bird. Since 2004 boneless skinless breasts as a percentage of the total bird revenue had decreased 17%. Leg quarters and wings have an increased importance.

We have EBITDA of $101.5 million which was the result of the whole bird equivalent meat prices aligning with our input costs in addition to our operational improvement over the quarter. We also did not have any of the impacts of the inventory reduction there were included in the prior year. Many of the improvements we are seeing are direct results of us having built best budget ever. We created it from ground up and not only highlighted where we need to improve -- we know better how to measure our success.

I would like to point out how pleased we are with the strong results from our Mexican operations as well. We have a very effective business model in Mexico, and our results were even better than we expected for the first quarter. We expect a strong we year for Mexico even though we believe there will continue to be volatility in those results.

Our SG&A costs of $45.3 million is within the range we feel is optimal to managing our business, and can be expected to remain stable. We have a restructuring charge of $2.9 million included in SG&A during the quarter, primarily related to the Dallas facility and impairments on assets held for sale. Even including the restructuring charges our SG&A expenses were much lower than in 2011.

Our depreciation and amortization was $35.8 million decreased approximately $15 million over the same quarter in 2011 due to fully depreciated [OPS] assets. It is that rate we expect to continue for the year. CapEx for the quarter was $16.7 million and reflects those projects that we feel add to our quality, our safety, and our efficiency and productivity. We continue evaluate the projects that will provide a timely return on a case by case basis.

Regarding debt structure, we have net debt of $1.42 billion at the beginning of the year and $1.21 billion as of the quarter end. On top of our rights offering, this number was achieved with the help of positive operation cash flows of $29.4 million.

Our capital structure reflects the finalization of our recent rights offering. Weerased $200 million in new equity through the issuance of 44.4 million new shares during the quarter. We are very pleased with the results of this offering, which was structured to protect and benefit our shareholders while providing Pilgrim with additional equity funding. We apply the proceeds of this offering to the existing debt, opening availability in our line of credit. We had a very positive response to our offering, with greater than 94% participation rate, which we view as a strong signal of support from the market and from our shareholders.

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

Absolutely. (Operator Instructions).

We ask that you limit yourself to one question and one follow-up question. At this time we will pause momentarily to assemble our roster. Our first question, and pardon the pronunciation, comes from Sarkis Sherbetchyan of B. Riley & Company. Please go ahead.

Yes, thank you for taking my question. Nice quarter there guys.

Thank you.

So given I'm limited to two questions, it seems likes, on the last quarter's earnings call, you mentioned that one of the plants was dedicated for the export markets. I believe five plants are currently idled. Now, stepping back and looking at this from a strategic standpoint, would you dedicate some or all of those idled plants for your exports markets in the future? And I have a follow-up.

It's always a possibility, Sarkis. We don't have any plans currently for those idle plants in that regard. But as we continue to grow our export business that is always a possibility

Okay and legislation as we were aware to date, no meaningful progress has been made with respect to resolving the antidumping complaints by Mexico against US chicken. To my understanding Pilgrim's is the second large test producer and seller of chicken in Mexico. Can you share your thoughts on how this impacts Pilgrim's -- what scenario has your team forecast?

First of all our Mexican business, we have a very effective business model. We are located in central Mexico and most of the imports from the US into Mexico go into the northern part of Mexico. We don't believe that there's going do be a material effect on our business in Mexico. It could, depending on the decision and actions in the future, it could affect our US business as it does all US businesses. But we believe in the end, there will be a solution that everyone would be happy with. Mexican consumers shall enjoying the value that US chicken brings to the northern part of the country. So that's what I have to say about that.

Understood -- thank you for that clarity. If I can squeeze one more in -- can you share some insight on how management evaluates the company's capital structure? Maybe if you can share with us how rapidly you would anticipate on paying down debt given the positive operating results. Do you have some target milestones or net debt figure in mind?

Well, we've said in the past our capital structure needs to be improved with reducing our debt, and obviously the rights offering that we completed afforded us the ability to do just that. And with our capital expenditures target being under $100 million this year, that clearly indicates our focus on continuing to pay down our debt. I'm not going to disclose our targets but our focus is on improving our capital structure as we move into the next 18 to 24 months.

Fabio, if you have some additional comments, you may give them at this time.

Yes, in looking in the optimal capital structure, you need to look at the cost of incremental debt we may have and the tax shield that we can get from that debt. So it is a factor of those two factors and like Bill mentioned, I believe we will reach that optimal structure in around two years.

Thank you. I'll hop back into the queue.

Our next question comes from Bryan Hunt of Wells Fargo Securities. Please go ahead.

Good morning Bill and Fabio this is Kevin standing in for Bryan.

A couple of questions, how have bird weights been trending year to date given the relatively warm weather we have experienced?

Well, bird weights were unseasonably heavier in late January and into February, and that's one reason I believe that we saw a reduction in breast meat prices late January into February. As processors killed ahead to manage that weight though, there's been more of a balance and weights right now are pretty much equal to where they were last year and I don't expect that that will change going forward.

Okay. So should we forecast maybe an incremental improvement then in breast meat prices as the volume comes back more in line with seasonal trends?

We do expect, you know, as summer gets here, on a seasonal basis breast meat prices will improve as they normally do. I would remind you as I said in the prepared remarks, the profitability of our industry is less dependent now on breast meat prices going up. We see that instead of a huge seasonal spike in the summer, the industry doesn't have to rely on that as much as it did in the past for profitability, as other parts of the bird are carrying more of the revenue share.

Great. Okay. And regarding your outlook for corn and soy and the early corn crop would help, you experienced $37 million of feed cost inflation this quarter, should we anticipate for modeling purposes, forecast maybe the back half of the rear as you lap some of the inflation from the prior year?

Certainly we expect as the new crop comes on and given the early planting given relatively good weather forecast, we believe corn will become cheaper as we begin the new harvest. So directionally, I think you are right.

I would like to take this opportunity to remind everyone what we have been saying for the past year. The industry can be profitable at varying grain levels given the right focus on the discipline that we are seeing now. So soybean meal, it's higher than I think anyone would have anticipated primarily driven by the crop losses in South America, but we believe this will be adequate acres planted in soybeans this new crop year, as price will incent farmers to increase acreage on soybeans as well.

Great, thank you for your time.

Thank you.

Our next question comes from Heather Jones of BB&T Capital Markets. Please go ahead.

Good morning.

Good morning Heather.

I have a couple of questions. I understand that the breast meat components is not as important as it once was. But it's still a significant component of the bird, and just wondering if you could give us some commentary of why, you mentioned weights, but even more recently, why you believe request prices have been so sluggish, and do you anticipate the normal seasonal appreciation going into grilling season?

Well we do anticipate seasonal increases as I have said. I would remind you, if you look back as recently as 2004, the breast meat revenue share was about 53%. It has now fallen in the first quarter to about 36% and that's been displaced in improvement in leg quarter values and wings primarily. So again, it's more about whole bird equivalent.

I agree with you that with breast meat representing 20% of the live bird, it still significant revenue share contributor. I think the relative weakness that you mentioned is most likely due to a weakness and stale growth or the lack of growth at food service which has been a large consumer much breast meat in the past.

Okay. And so do you expect the normal, setting aside 2011, which was weird, do you expect the normal seasonality this year in boneless skinless?

We do. We expect a normal curve. I don't know a particular number that's necessarily normal, but again, weather can have an effect on that too -- as I would remind you in 2010 when we got hot weather in the southeast, it took about a half a pound per head off the large birds and that drove breast meat pricing up to $1.80 or so even then.

Right. And then on production, if you look at USDA's monthly numbers, they are saying a year to date production is only down less than 3% which is way out of line with what you would see with weekly and has intuitively in egg sets and chick placement. I'm wondering if you can give us some color on what is causing the disconnect and what you think the production numbers are out there based on what you are seeing?

There's a relatively easy explanation on that Heather and it's how NAS collects that data in terms of it days and weeks. There's I believe two extra days in January and February versus the same period a year ago. So if you look at it on a daily or weekly basis, that gets you to about 6% to 7% less ready to cook production. And that's the real number. That's the number that's important.

And you believe that if we keep egg sets at about 200 million, that the industry, even with where soybean meal is, the industry should be able to create general profitability given the demand department?

Again, I refer to -- I thought supply and demand would be in relative good balance as we continued to set around 200 million eggs per week. One reason that I pointed out that is that we began, the industry began, cutting production last summer so as we get closer to summer the percentage difference year over year is going to converge. So I just wanted to remind you that we need to start looking at the absolute number as opposed to the percentage year over year.

Right, okay. Thank you and great quarter.

Thank you.

Thank you.

Our next question comes from Akshay Jagdale of KeyBanc Capital Markets. Please go ahead.

Good morning and congratulations on a good quarter.

Thank you.

I just, you know, I wanted you to help me with just rate your US chicken segment performance relative to the industry. Your Q just came out so I may have some of these numbers wrong but I believe your revenue per pound was up 6%, industry was up, I think 20%. I believe your margins, your gross margin were around 5%, which was a sequential improvement but less than the industry.

So I mean I know you have made a tremendous amount of, you have had a tremendous amount of success changing the culture and I can certainly see the execution is a lot better, but what am I missing when I'm making that comparison and I see a little built of a lag in your US chicken performance relative to the industry? What would I be missing there?

Well, I think you have to take into account our mix and our business model versus perhaps some others, and I'm not sure if you, if you look at just a composite, maybe you can get to the 20%. I'm not sure that a company with a mix like ours would have realized that even in the first quarter.

We're pleased with our progress. We are pleased with our progress as it relates to our competitive set. I can tell you the slope of the curve continues to move up. Our rate of improvement continues to accelerate. And we're on track from a competitive point of view with where we want to be.

And again, on track is not a total goal achievement. But on track is all about the velocity of the rate of improvement, and we are encouraged by what we have done. And we will continue to, you know, keep the hammer down in that regard.

I said on the press release that there's no room for complacency here. We did have a solid quarter. But we are encouraged, we are not satisfied.

That's helpful. And just along those lines, so, you know, you've talked about breast meat and obviously, the performance in the spot market on breast meat that hasn't been that great in terms of year over year change. But sequentially, so your EBIT margins are 2.8% I believe as reported for March quarter --sequentially if they are going to see margin improvement, where is that going to come from?If you leave grain costs aside, you have to have revenue improved sequentially, right?And typically, that sequential improvement comes from better boneless skinless breast pricing which is why all of us analysts are focused on that particular metric. But can you help us understand how is Pilgrim's performance going to improve sequentially?What would be the drivers for the next two quarters to see your revenue continue to move up?

From a revenue standpoint, I would remind you that while prices is important per part, the manner in which we engineer and sell our mix actually has a bigger impact than just price on a per pound basis per part. So how we cut the bird, the form in which we sell the bird, getting the right product in the right box, is again in many cases more impactful than just price. We continue to focus on improving our mix, and we continue to work with our sales staff, you know, as it relates to price courage and making sure that we add value that our customers value in terms of meeting their needs and allowing us to get a better price.

So does that basically mean that you are planning -- your plan is such that sequentially you hope that your revenue per pound will continue to move up?

We believe our revenue per pound on all the pounds collectively will go up, yes.

And what's, can you share with us, at least you know, vaguely what your plan on production is for the remainder of the year?

Sure. Our plan our production is to make sure that we keep our supply in balance with profitable demand and that's no different than we have been saying for the past year.

Does that mean it's going to continue to be down 6%, 7% for the remainder of the year?

Well from a industry perspective, I think if you look at a couple things you can short of get there. The breeder flock size, as I indicated earlier, is the lowest since 1995. The breeder age that we have is such that there's not a significant more amount of eggs per hundred hens that we're going to realize. So from a hatching egg standpoint, I think the die is cast. The industry continues to show restraint in terms of weights and especially this summer, you wouldn't expect that weights are going to increase significantly on a per head basis. So again I think the die is cast for 2012, and we are comfortable that the industry is going to remain constrained.

Perfect. Thank you, I'll get back in line.

(Operator instructions). Our next question cams to Farha Aslam of Stephens. Please go ahead.

Hi, good morning.

Good morning.

Congratulations on a good quarter.

Thank you.

Thanks.

When you think about your production and capacity as well as your normalized EBIT margins, where would you put that at Pilgrim's today?

Farha, as I have said on the last call, and I continue to reiterate, we are pleased with our progress. We are not going to be complacent. We still have improvements to make in both our business model, our mix, our cost structure, and we're confident that we have the right team in place with the right focus to improve our margins as we have opportunities. I would remind you we have proven now that both the industry and Pilgrim's can be profitable at high and volatile input costs given that we all remain disciplined.

Okay. So your production capacity, as it stands today given you have closed some facilities, and have some open, what would you say your production capacity in terms of volume is today?

Well, it's comfortable and again, we don't have any plans to change it other than to make sure that we keep our supply in balance with our demand on a profitable level. I think we have demonstrated now that plan has resulted in better performance.

Okay and then historical you have said that you like corn at $5 and you think that soybean meal is a good price at $300 a ton. Were you able to buy and put any hedges in place to protect yourself from the recent run-up in soybean meal cost?

Well, we don't discuss the details of our hedging strategy, but we are comfortable with where we are. We think we've got the right strategy in place as it relates to risk management. And that's really all I can say about that.

Okay. And then so I'll put my final question at you have cost savings you said you have achieved last year a total or run rate at $300 million. This year you were targeting $200 million. And you were ahead of plan in the first quarter. Do where would you anticipate this year's cost savings run rate to be? How much do you think we can take to the bottom line?

Well, obviously taking to the bottom line, you know, encompasses more than just cost savings as I said last year. Last year our realization on our cost savings goal of $400 million at an annualized rate was actually $300 million. This year it's our goal to achieve $200 million in actual cost savings through yield and plant cost reduction. I'll remind you that we said that we saved $61.3 million so that put us on a run rate of about $245 million, ahead of our $200 million goal.

And so if we had to, if, when you think about it, how much do you think can fall to the bottom line or does it all fall to the bottom line?

Well, it, again, I would remind you that there are other factors that affect the bottom line like pricing mix, as an example and it certainly helped of this quarter,this helped even last year if you do the math. So that's really all I can say about it.

Okay. Thank you very much.

Our next question and pardon the pronunciation comes from Reza Vahabzadeh of Barclays please go ahead.

Good morning.

Good morning.

I know you fueled your 10Q I haven't gone through all of it. For the US business and Mexico business, excluding divested assets and so forth, can you give us the percentage of change in volume and percentage of change in price mix for the quarter?

We don't disclose that Reza, I'm sorry.

We don't disclose price and volume, but our total sales were down 0.9%. But because of the divestiture of some assets that will add $30 million to the top sales, the sales will be flat. But that is lower volume as compared to last year and higher price, but we don't disclose the details.

The contributing factor again there was the inventory liquidation of $90 million last year in the first quarter that we did not do this year. And to Fabio's point, we sold the distribution business and the pork business that we did have in our results in 2011 Q1.

Right. Can you talk about your outlook for exports for the rest of this year as well as trends in the food service and retail channels, in part because export volumes generally output generally seem to be at times bouncing around?And then as you mentioned food service channel has also been maybe improving slightly but still bouncing around.

Right. We are very bullish on exports this year and I think the first quarter was a great example of that with volumes up 17% and dollars up 21%. We continued to see demand well supported for leg quarters and other parts. We are beginning to see demand for breast meat at the export level and other cuts and our prepared foods business we plan to grow on an export basis.

So USDA forecasts 7.1 billion pounds this year which I think will be supported to domestic pricing, and I think leg quarters even on a seasonal basis have some room to improve. So again, I will continue to be bullish about the opportunities at the export level.

From a food service standpoint it's been somewhat choppy. Some of the food service operators are having good solid year over year gains and we see that in our business too. But as a whole the growth is still somewhat anemic and I believe that's why that over time breast meat share of revenue has declined.

Bill just to add on the exports, I just want to say that despite increasing our volume it's not only volume that we are targeting, we are targeting better products that would add value to the right customers like Japan, Middle East, and other parts of the world it's not only increasing volume it's increasing the value of what we are exporting.

That's right.

And then what about the retail side? Are retailers able to pass through the higher pricing to consumers are or are they still maintaining reasonable margins? Any thoughts on that would be appreciated.

Well, we are seeing more chicken featured in 2012 than 2011. So that's good news and I think that trend will continue. In some cases, I think retail prices have gone up but they haven't gone up near as much as the wholesale prices have gone up. So there has been somewhat of a margin squeeze. But with beef and pork on a relative basis continuing to be expensive, I think that's good for chicken throughout this year.

Thank you.

Our next question comes from Ken Zaslow from Bank of Montreal. Please go ahead.

Good morning, everyone.

Good morning.

The mix between (inaudible) one-third of (inaudible).

Ken, I'm sorry, but your question was cut off by some interference and I didn't hear the question.

Mr. Zaslow unfortunately your line is inaudible at this time you are breaking up pretty badly. I recommend you trying to dial back in, sir.

Next question comes from Carla Casella from JPMorgan. Please go ahead.

Hi can you hear me all right.

Yes, Carla.

I'm looking it through your 10-Q and I think you used to have break out food service sales versus retail and prepared food versus fresh. Are you no longer going to do that or is that something you may disclose on your website?

We stopped that at year end, Carla.

Okay. Great. And then were there any hedging gains in the first quarter results?

There actually was a small hedging loss.

Okay. And then the other thing I think I had seen before, you talked about what was the average price of corn for you in the quarter or is that something you also aren't going to break out?

We actually do disclose that in the Q. I don't have it in front of me, but I will, Rosemary is looking for it as we speak.

Okay. And then one business question -- have you seen any pickup this week in demand after we saw the mad cow scare in California?

We really haven't. I think that whole event demonstrates that we have good and sound testing procedures in the US across all proteins and we have not seen an effect on demand either way.

Okay. Great.

And then you talked a bit about corn prices versus soybean meal. How quickly can you change your mix of feed between corn and soy bean meal and what's your ability to change that what percentage change can you make?

Well, we have limited opportunity to change that. Although we can make slight changes on a least cost formulation basis. When wheat is an adequate discount to corn, we can feed wheat and we have and do. We also feed more synthetic amino acids when soybean meal gets to certain price levels and we look at that. But on a percentage basis it's not a great amount.

Okay. Great. Thanks a lot.

You're welcome.

Our next question comes from Mary Gilbert of Imperial Capital please go ahead.

Yes, good morning.

I wondered if you could talk about as we move through the summer, what kind of year over year declines or would it be a decline or would see flat egg sets and chicks placed?How should we look at that? As you pointed out, we are really seeing a level of somewhere around 6% to 7% right. And as we get to the summer we are going to be cycling against the declines. How should we look at that?

Well, again, we've pointed everyone to looking at the absolute number, and we believe that if we continue to see egg set number around 200 million on a weekly basis, then we believe that will be adequate for supply and demand to remain in balance.

Okay. All right. Got it.

Especially given where cold storage levels are at 577 million, that's significantly less than one week's production.

Okay. Great. And then also I might have missed this earlier, but where do exports, what percent of revenues are we at today?

I believe it was about 10%.

Okay. And where do we think that can get to?

Well, it's going to continue to grow. Now, volume and price obviously have a vote in that and it's our goal to strategically grow our value added exports. So over time, we expect that to continue to grow.

Okay. Do you have like a target in mind or a level that over time you could get to?

We haven't dosed a specific target. We are going to let margin really drive that. As we see opportunity to continue to drive margin, we will grow that business.

Okay. Great. Thank you.

Ladies and gentlemen due to today's annual shareholders meeting this morning, and the need to end on time, this will be today's last question. Next question comes from Ken Zaslow from bank of Montreal. Please go ahead.

Good morning. I guess Verizon is not as good as they say they are. Just in terms of profitability, can you talk about the sustainability of that? It was a very high margin, over 10%.

Well again, a lot of things dictate margin in our business as you well know. The relationship between chicken market prices and the prices of inputs are the obviously two biggest drivers.

And I think the key ingredient there is discipline on the part of all the industry to keep supply in balance with demand and profitable demand. And obviously that was the issue in 2011 and it caused perhaps the worst year in the industry's history in terms of profitability or lack thereof. I think the industry has taken action obviously midyear last year, and continues to be disciplined and restrained in terms of keeping those supplies in balance with demand. So that's the key, Ken.

So should we expect to see this -- is there seasonality to it, is there sequential improvement? How do we think of this margin in terms of the remainder of the year and more importantly 2013 and beyond?

Well, a couple of notes about that. As we have said, this calendar quarter has traditionally been the weakest calendar quarter on a historical basis. But one of the changes that I would point you to is that we're not as dependent on higher breast meat prices to drive profitability. So --

No, I'm talking about Mexico. I'm talking about Mexico.

I'm sorry.

I'm sorry. All my questions just revolve around Mexico, as that was the key driver of the quarter. So I'm just curious about the sustainability of this quarter. How do we think about it sequentially throughout the year, and how do we think about it --is it more in balance does something change there because we don't get as much information on the Mexican market? I just need more color on that, I'm sorry.

I'm sorry I misunderstood your question.

Relative to Mexico, let me point out we have a very effective business model in Mexico. But at the same time there's more volatility actually in pricing in Mexico as there is the US. One other difference about Mexico is that the market tends to make changes much more rapidly in terms of getting supply and demand back in balance than occurs here in the US.

We believe we are going to have a good solid year in Mexico. Our first quarter was a bit better than we expected, based on higher than expected pricing. As the quarter came to a close, that pricing went down a bit, but the industry responded by adjusting production levels and supplies and it's beginning to come back again. So given the volatility of pricing there, it's sort of hard to think about 12 to 18 months of profitability levels, but we are comfortable that we have the business model in Mexico to take advantage of the market dynamics there and we expect a good solid year.

Great, I appreciate it. Thank you very much.

Thank you.

Thank you.

Ladies and gentlemen this includes the question and answer session. I would like to turn the conference back over to Bill Lovette for any final remarks.

Thank you all for taking the time to join us today for first quarter earnings call. We have come out of challenging year, delivering first quarter results that support our vision of becoming the best-managed and most-respected company in the industry. While we are pleased with our progress, we are not satisfied and still believe we can continue to deliver more value. I would like to personally extend my thanks to all of our employees, our growers, and our shareholders for their continued support of Pilgrim's.

Thank you. The conference is now concluded and we thank you for attending today's presentation. You may now disconnect your lines.