Pilgrims Pride Corp (PPC) 2012 Q2 法說會逐字稿

Good morning, and welcome to the second quarter 2012 Pilgrim's Pride earnings conference call and webcast. All participants will be in a 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 of the Company's website at www.pilgrims.com. After today's presentation, there will be an opportunity to ask questions. I will now like to conference over to Rosemary Geelan, Investor Relations for Pilgrim's Pride, please go ahead.

Good morning. Thank you for joining us today as we review our operating and financial results for the quarter ended June 24, 2012. This morning we issued a press release providing and overview 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 in the investor relations section of our website along with the slides we will reference during this call. These slides are also filed as an 8K and are available for download at SEC.gov. Presenting to you today are Bill Lovette, President and Chief Executive Officer, Fabio Sandri, our Chief Financial Officer and Charles von der Heyde, our Head of Commodity Risk Management and Export.

Today's call will focus on the progress we achieved towards our operational goals, a discussion of the macro factors impacting our industry and the key drivers of our financial performance for the quarter. As 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 material from those projected in these forward-looking statements. Additional information concerning factors that could cause these actual results to differ materially from forward-looking statements are outlined in today's press release, as well as in many of our regular filings with the SEC. I will now turn the call over to Bill Lovette to begin our prepared remarks.

Thank you, and good morning. We appreciate your joining us to discuss our second quarter results. EBITDA for the quarter was $125.1 million compared to a negative $47.4 million in the same quarter of 2011. Our net sales totaled almost $2 billion, up slightly over our 2011 sales of $1.9 billion. We recognized a higher margin on reduced volumes year-over-year, consistent with the margin levels we stated were achievable. We generated a positive net income of $69.4 million for the quarter for diluted earnings per share of $0.27. In the second quarter of 2011, we recognized the net loss of $128.1 million on adjusted $0.57 per share.

Heading into the second half of the year, we see a more challenging environment. Market prices have been lackluster while simultaneously, feed costs have been rising. This is something our industry needs to solve. The price of feed ingredients will continue to be volatile and we will not be able to rely on cheap -- relatively cheap corn and soy meal to drive profitability. It's up to producers to ensure that the supply does not exceed existing demand by maintaining discipline. If corn is to be rationed, all proteins in grain-based foods will participate in the rationing process. The chicken industry will not be the only ones impacted. America and the rest of the world will face the consequences of the drought and the ethanol mandate through food inflation.

Each quarter for the past year, I have talked about our strategy as we developed and began executing against it. I would like to share an update of how we are progressing and where we still see opportunities. In pursuit of operational excellence, we established a goal of $200 million of cost-savings and mix improvements for 2012. We have realized $115.7 million year-to-date, which puts us at an annualized run rate of $232 million this year.

As I've mentioned before, this target gets tougher over the course of the year as we are benchmarking against the higher standard. Even though the bar is set -- being set higher, we are still ahead of our goal heading into the back half of the year. Keep in mind, this goal is not dependent on feed prices but on our own operational improvements and our ability to realize efficiencies. One approach we have taken has been to optimize our plant utilization. Besides improving yields and reducing plant costs, we're also optimizing our sales mix across our production platform. For example, we have moved products to plants closer to their end markets and where we already have like processes and core competencies in place. There's still opportunity in both labor and plant costs, and we will aggressively pursue those savings.

Our focus on being a value-added partner enabled us recently to acquire a significant new piece of business of approximately 160 million pounds per year. This will upgrade our sales mix across the entire enterprise. We earned this business through a combination of quality and production attributes this customer was looking for. We have the versatility inherent in a total solution provider to meet a wide range of our customers' needs. Additionally, we have tailored several of our capital spending projects to add more value to our products and help our customers succeed. One project enabled us to increase our capacity for one customer while reducing freight associated with their contract. We also invested for a key QSR customer who asked us to redesign one of their core menu items. Our R&D and operations teams have been successful with this project, and it will be rolling out the new product in early fall.

In terms of strategically growing value-added exports, we're seeing positive results from our focus on exporting the whole bird rather than just the back half. We identified specific international markets and have invested in projects giving us the capacity -- the capability to develop products for our customers' specifications. Our strategy here is simple. We don't want to be faced with selling breast meat at lower prices domestically when we have the opportunity to value up the whole bird equivalent by selling more parts internationally. We have a diverse marketing process and are building a strong geographical influence resulting in improved mix in pricing. We are seeing the results in the value of our exports, even more so than in volumes.

Additionally, we have recently entered into an agreement with JBS [ovays] to license the Pilgrim's brand internationally. We see this partnership as a way to expand our brand's main strength on a global scale, further supporting our export efforts. In this way, we have the option to reach more markets with the Pilgrim's brand from both the US and Brazil. We continue to look at every process in the Company to ensure accountability in an ownership culture. Our incentive programs have been revisited to ensure they are designed to drive individual and team performance while achieving our potential as a Company. We recently filed registered an essay to register shares of our stock that will be included as a part of our long-term incentive plan moving forward, helping to align shareholder and management incentives.

Before moving into a discussion of the macroeconomic trends impacting our industry, I want to touch on some of the questions that may have arisen regarding our Mexican operations. There has recently been an outbreak of high pathogen avian influenza in Mexico resulting in over 3.8 million birds being destroyed to date. The outbreak was confined to the state of Jalisco, and the authorities are following all appropriate procedures to keep it contained. Pilgrim's does not have any operations in the affected state, and our operations are continuing as normal.

Our second quarter results in Mexico reflects the volatility of the local marketplace and currency. We saw a couple of months of softening prices, but have since seen the market recover. Mexico's market is much more responsive to demand. When prices are great, production ramps up rapidly and the cycle is much shorter than in the US. The benefit to that is also it works the other way around and adjusts much more quickly for oversupply. We have a very good business model in Mexico. It's a well-run operation and we expect a positive outlook for the remainder of the year.

Regarding the chicken market, cold storage levels are at 647 million pounds, which is level than a comfortable range just under one week's industry production. Egg sets remain constrained at 195 million, within our comfort level of 200 million per week. The breeder flock is currently at 52.2 million birds, or down 4% in 2011. In June, intended pullet placements were down approximately 6%, which should keep pullet supply better in line with current feed economics. It is likely that production discipline would be reinforced by grain prices. The chicken industry needs to maintain production levels that can be sustained profitability in the current cost of environment. Supply needs to be -- needs to remain balanced with real demand in such a way that we aren't seeing products discounted into a weak market.

This year's earner varied breast meat average in Q2 was $1.46, up $0.12 over the same quarter last year. We saw leg quarters up by $0.05, wings $1.07 higher and the Georgia duck $0.07 higher over last year's pricing for the same quarter. Keep in mind that even though wings are only 8% of the bird by weight, $1 increase at $0.08 to the composite pricing. Demand has been relatively tepid overall at both food service and retail levels, despite promotional push for chicken. I would now like to turn the call over to Charles to give us some color on the current grain situation. Charles?

Thank you, Bill, and good morning, everybody. We are well aware of the dramatic changes in the corn and soybean supply/demand figures that occurred in the last 30-plus days, caused by what is now called one of the worst weather disasters in decades From the USDA June report to what most non-market users potential yields, the size of the corn crop has been trimmed by more than 2.5 billion bushels. While the soybean crop has been trimmed by more than 250 million bushels. The weather still holds key importance in the coming weeks to determine what the final views are going to be, and we are watching it very closely. Carry outs do look extremely tight now, and there is no doubt that worldwide demand rationing will have to occur. As a matter of fact, the negative USDA weekly corn export sales released this week might be the first time that demand rationing has already started. That is absolutely needed, and that's what I would call the market's function.

It's also important to remember that against most currencies, the US dollar's on an average 15% stronger than the same time last year. That means that corn that importers around the world are paying about 15% more in their local currency on top of what the market has [read it]. Alleviating some of the US-type corn situation in the coming four or five months it is a fact that Brazil's winter corn crop production hit a surprisingly record high through passing initial estimate by almost 250 million bushels. In fact, current Brazilian FOB corn prices are about $1.30 per bushel cheaper than US corn FOB prices. That has figured US corn purchases from Brazil over the last four weeks. Although no official figures are published yet, our estimated close to 50 million bushels has already been contracted.

Pilgrim's Pride has bought some Brazilian corn for its Puerto Rican operations. While we are in negotiations to bring Brazilian corn to US as well where it makes economic and logistical sense to do so. Because under the current conditions, it does make financial sense, we are only waiting for these charge capabilities adjustments to be completed. It is clear that Brazilian corn is competitive to imports into the US, our exports should be limited to a very low level, at least for the coming months. Also worth mentioning, the next [consignum] crop came out to be much larger than initial expectations. Our local Mexican operations will not meet import US corn until at least early 2013 when normally these imports would start in the month of November. The cost benefit is highly positive, actually cheaper than US corn by more than $1 per bushel.

Moving to the soybean situation and consequence soybean meal also look extremely tight. And for the first time on record, we have weather-related production losses in both South and North America. For the coming six months, the US is the cheapest available origin. Here again, demand rationing is absolutely needed, and although no clear signals have been given yet, we expect them to hit in the coming weeks and months. But again, same as in corn. Rationing demand is the market's functions.

Not yet knowing what the final yields are going to be, we would expect corn and soybean meal prices to be volatile and higher than previously anticipated for the coming six months. Until we know better what upcoming South American crops will look like. Given the high grain prices and stronger US dollar, a large increase in South American acreage is to be expected. I would expect double-digit growth to be happening. As far as our current position, we have both corn and soybean meal purchased forward as better than current market prices, covering the cost of goods sold for substantially all of our third quarter. The market was originally anticipating the new corn and soybean crop being a lot cheaper than the old crop and conditions have changed. At this time, I am going to let share Fabio share some thoughts of our financial positions and results for the quarter. Fabio?

Thank you, Charles, and good morning, everyone. Our second quarter net sales of $2 billion affect an increase over the $1.9 billion reported in the same quarter of 2011. The increase would be higher after taking into account disposal of our US distribution business and [Lifebor Corporation], which will have added $30 million to this portion. Despite the $23 million impact in feeding [greatly] when compared to last year and a 1% lower volume in the US, we have seen a margin increase in the quarter, driven by better sales [meat] and better sales prices. And they achieved many of our roles improving $200 million in savings and plant and cost view. Our EBITDA of 1. -- $125.1 million show a significant improvement over the prior year's loss of $47.4 million. The EBITDA margins in US reached 6.6%, while in Mexico it achieves 3.9%. Included in these numbers are a non-cash loss of $8 million in Mexico due to the impact of exchange rate fluctuation in the Mexico balance sheet. And in current losses of $5 million and the international market due to the changing regulation in China. Adjusting for these non-recurring events, EBITDA margins in the US and Mexico would be 6.9% and 8% respectively. Our net income of $69.4 million resulted in earnings per diluted share of $0.27 compared with the loss of $128 million, or an adjusted $0.57 per share in 2011.

This quarter we generated operating cash flows of $51 million despite an increase in inventory due to a slowdown on the capital markets and the changing regulation in China during June and the increasing live cost due to the increase in feed ingredients cost. Consistent with our bad [redemption] goals, almost all free cash flow was applied (inaudible). We have improved our net debt position from $1.4 billion at year end to $1.18 billion at the end of this second quarter.

We have the $21 million on CapEx projects this quarter, well within our target spending range. Like Bill mentioned, this project included efficiency improvement such as refrigeration and cold chain management, upgrades to more efficiently service our customers as well as safety and maintenance projects. Our liquidity at the end of the quarter was $566 million. As we near end, we also are preparing for our debt covenants to come back into play. Our senior secured average ratio and fixed charge cover ratio both provided the ability to look back using a multiplier at our discretion. For example, we can select only Q4 results and multiply that by four to come to a leverage target ratio or else we can look back into as many quarters as we choose, up to the multiplier. In the case of the fixed charge cover ratio, we can look back up to eight quarters.

Given the good results we recognized in Q1 and Q2, combined with our forecast for the second half of the year, we are confident that we will be in compliance when the covenants are reinstated in Q4. Also, in line with our strategy of focusing on our core business, we dive after the small ag business to calming. We are under a confidentiality agreement, so we can't disclose the details of the transaction, but the business was immaterial to our results and account for annual sales of around $30 million. This asset has been classified as held for sale since December last year, and we did not anticipate any significant gain or loss associated with the sale. Operator, this concludes our prepared remarks. Please open the call for questions.

We will now begin the question/answer session.

(Operator Instructions)

At this point, we will pause to assemble our roster. Our first question will come from Heather Jones of BB&T Capital Markets. Please go ahead.

Good morning. My math shows that it looks like you narrowed your performance in US relative to the industry during Q2, and was wondering if you could give us an update on where you believe you stack up relative to the industry right now on your US operations.

Well, we're pleased, Heather, with our progress. We're not where we want to be, but I think in terms of growing chickens, processing chickens, and selling chickens, we're as good as the average company thereabouts. That's not our goal. We want to be far better than the average company and we have a plan in place to get that done.

And in your prepared remarks, you kept on talking about matching supply and demand, but then you talked about there need to be demand rationalization on the corn side or feed side. I was wondering if you could give us a sense of how much you think the industry needs to cut, given the future strip for corn and soybean meal.

And then on a Company-specific basis, your volumes in the US were down just -- were less than 3%, and some of that was due to discontinued ops. Trying to wrap my brain around how much your volumes were down in the US, and just if you could give us forward-looking color on Pilgrim's specifically, as far as production cuts in the US.

I'll start with the first question about how much we think the industry has to cut to overcome the rapid increase in corn and soy. The truth is, I don't really know the answer to that question, but I'll go back to as recent as about a year ago, when the industry was in the process of cutting production and the industry got down to between 180 million and 185 million egg sets per week. And as a result, through January, February and on into late Spring, the industry realized a double-digit, approaching 20%, composite price increase.

If you look at the current situation, we believe there is going to have to be almost half of that same type of percentage increase to overcome the cost of corn and soy this time. And as Charles said, the prices may change as we finish this calendar year. But I think it's reasonable to conclude that if the industry were to get back to the 180 million to 185 million egg set on a weekly basis, then we could see another round of price increases as a result of that, moving into late in the year and early in 2013.

And as far as Pilgrim's specifically, Heather, I think you know well we don't disclose exactly our production levels. But I would remind you that it's been our strategy for the better part of two years to insure that we have our supply in balance with profitable demand, and we will continue to be very disciplined with regard to that.

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

Thank you, and good morning.

Good morning.

Actually, your comments there make a great segue into my question. If you go back to 2011, the Company strained with oversupply and the industry did as well, and the Company still had a significant amount of fixed price contracts with higher feed and oversupply in the industry. I was wondering, could you discuss your contract types today? I know the Company worked hard to develop a variable-price contracting strategy. With corn moving up or feed costs moving up overall, do you believe you're better suited with your contract mix today than you were two years ago to handle this type of environment?

Good question, Bryan, and I will answer that by saying, absolutely. We are better positioned as a result of the great work our team did last year in changing our pricing strategy. And I would remind you, back to comments in previous quarters, that we fundamentally don't have 12-month fixed pricing contracts any longer. We shortened up the time periods. We put portfolios of business on market-related matrices. We also tied some of our contracts to changes in the underlying commodity markets. We have done a number of things to improve our pricing impact and our mix impact, and I think that's borne out in our results. We will continue to keep that as a strategy and price our products such that we're able to share market risks.

And then my next question is with regards to export sales as well as working capital. I know exports -- you showed us in your presentation, you are running up about 3%. That is one of the Company's big strategies. Could you talk about what you saw in terms of export growth on a pounds basis in this quarter; what your outlook is? And how that may tie into the higher inventory number that you saw in Q2.

Well, it's Charles here. The exports for our Q2 volumes have been basically in line with same time last year, but the value has been up by more than 21%. So we have maintained our volumes and increased price through market price itself, and through a better mix as well. We are selling more, what we call value added products. Not necessarily only fully cooked, which we basically doubled the volume from where we were last year; but we also [made] some of our products, in a package -- packaged in a better way or size and stuff like that. So volumes more or less in line with last year, which was already very high compared to 2010, but values definitely -- price per pound definitely higher, like more than 20%.

Both our dollar revenue and our unit price per pound are up double-digit, to Charles point. To your other question, what was your follow-up for that, Brian?

On the working capital.

On the working capital, I'll let Fabio comment. But I'll hurry on to say that we noticed that in June demand dropped from where it was in May, and we had a commensurate small build in inventory, in finished products, as a result. But our team has put a process in place that those finished goods inventories will be back down to our target levels by the end of this current quarter.

And Bryan, also an effect on our inventories is the cost of life. As we feed more expensive corn and soy into our birds, our live inventory goes up and it was a factor in this quarter as well.

Our next question comes from Farha Aslam of Stephens. Please go head.

Good morning.

Good morning.

If you have your grain hedged through the fiscal third quarter, wouldn't you expect the higher grain prices would actually hit your P&L, given your inventories, et cetera?

As the corn and soy -- and it was earlier for soy as opposed to corn -- as Fabio just reminded everyone, our costs have been increasing through the second quarter of the year. We did have physical corn bought and some futures positions that is going to help us in the third quarter, as we said, relative to current market prices. And then as we go further into Q4, our cost of goods sold will be more reflective of the market at that time. Although we continue to use all of our tools available to mitigate that risk and manage our risk, I think our team has been very effective in doing that both in physical buys on forward corn and soy and in use of derivatives.

And then if you look at the industry and their need to rationalize, are you seeing any signs of the industry beginning to rationalize, and getting back to that 180 million to 185 million egg sets? What were the signs that we need to watch in terms in of hen slaughter, et cetera, that will point us that the industry is headed that direction?

Well, I would tell you that throughout this entire year, the industry has been relatively well-disciplined, staying underneath 2011 production levels. And I believe that the industry recognizes what happened in 2011 as a result of overproduction, coupled with far more than expected cost increases and volatility in corn and soy market. And I believe that will help us be more disciplined, as we know that our cost is going to be to be higher.

As far as the hen flock goes, our hen flock size is as low as it's been since 1996, albeit more productive. But we have not as an industry been placing more pullets in the field than we had a year ago, so that again will then help us to be constrained and disciplined.

Our next question comes from Reza Vahabzadeh, of Bank of Montreal. Please go ahead.

Actually it is [Ed Varklees]. Good morning, Bill.

Good morning.

As far as price realization and industry pricing trends -- how did price realization for you trend in the second quarter as compared with your expectations in the beginning of the quarter? And then, how would you anticipate industry pricing move forward on the next quarter or two, just given your comments around lackluster demands, albeit production levels are restrained compared to last year? Thanks.

As we have been reminding everyone, we changed our pricing strategy to a portfolio more reflective of the chicken market. And prices were increasing at a healthy rate in April and May, but began to fall off in June. And as I have said, we saw demand softening and therefore prices softened as well. We have seen prices stabilize somewhat in July.

We saw some strengthening in some components in July, and we expect, especially on wings and tenders and leg quarters, to see some more strength as we go forward through Labor Day and perhaps beyond. As far as breast meat goes, breast meat is fairly well-supported at today's current market. Should we get heat as we typically do in summertime, we will see breast meat market strengthen commensurate with that. And I think that about covers it.

Got it. Thank you very much.

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

Good morning, everyone.

Good morning.

My first question is -- in the 10-Q, you said market prices for chicken prices are currently at levels sufficient to offset the higher cost of feed ingredients? Can you talk about -- is that because of your hedges? Is that on an operating level, gross profit level, EPS level? Can you talk about that? It is a pretty strong statement.

Well, that was for Q2, and we believe that we mentioned that we have our grain covering Q3, that will be also true. For the new crop and Q4 prices, there is still some uncertainty, and the industry needs to be disciplined to again match supply and demand, for that to be true.

Okay. But it's for Pilgrim's Pride and not for the industry.

Yes.

And as Bill said, we are in the average of the industry, so we believe that we are also talking about the industry. But, yes, it is true.

So, if that's the case, what would be the process to which we would actually see production cuts? Why would there be a rationing if there is a -- given the current curve, and given what you are saying about the current pricing environment, why would there be a rationing if, basically, the average company is operating on a profit side?

Ken, it basically comes down to the old crop price verses the new crop price. And as you are feeding birds with old crop corn at levels that, that crop was purchased; and then as you move into the new crop which is significant higher in price, then you have a different ballgame. And if you pencil out or break even using the futures curve, then you realize that prices have to go up. And I think recent history has told us that the only way that prices are going to go up in this business is if the industry remains disciplined in its supply and keeps supply and demand balanced. And that is why we have the position that we have.

The next question is from Carla Casella of JPMorgan. Please go ahead.

Hello. I have just one question -- can you talk about sequential food service demand versus retail? And if -- you mentioned you gained one new big customer, was that in food service or in retail?

It was in food service. We've seen food service demand very choppy; some food service operators have had great results; others have had very different results. And so it really comes down to the specific portfolio that we or any other company may have. But on the whole, food service demand has been relatively flat. We don't see going forward a reason to be enthusiastic about growth in food service, despite chicken having probably more of it's fair share in promotional activity versus the last 18 months or so.

From a retail standpoint, we have seen features of breast meat up double digits in the neighborhood of 12% in 2012 versus '11. Boneless thigh meat, as an example, feature activities up about 24%, year-over-year. So we have had a lot of feature activity, but that hasn't translated into a very high percentage of demand growth even at retail.

Do you have a sense for why? Is it more features on other meats, or do you think we have saturated those markets?

I think consumer confidence is a big reason. Consumers are still nervous and unsure about the future. Unemployment remaining at a very high level historically has also played a part, and the economic situation globally has played a part as well. There are just a lot of uncertainty with consumers right now.

Okay. And then on the hedging side, can you give a sense for when do you hedge in third quarter, and if you are hedged at all for fourth quarter, or what you're thinking at the current levels we are seeing in the market?

While we don't disclose our current positions, we employ a combination of both physical buying forward and use of derivatives. And we thought, as the market thought, we were going to have the cheaper corn price in the new crop. That turned out not to be the case with the drought that Charles mentioned earlier, and that is really all we can say about our strategy going forward.

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

Hello. This is [Daniel Bonds] in for Mary Gilbert. I was wondering that, given the speed with which grain prices have risen, and what current levels may mean for where we are and the demand that you speak of, what that means in terms of your sensitivities to corn? Is it still roughly $2 million in EBITDA for every $0.01 change in corn price?

Well, we purchase approximately 4.5 million bushels of corn per week. So that gives you the math on that. And about 40,000 tons of soybean meal.

But I mean, for every $0.01 change that I see in either corn or soy, what should I think about that impacting your EBITDA?

We haven't given that guidance, and it's really a hard question to answer because chicken prices have a huge vote in that, too. And that is why we continue to talk about the need for supply discipline, and making sure that we operate in an environment where we are able to realize increased chicken prices to offset the rise in corn and soybean meal.

I realize it's a difficult question. That's why I had alluded to trying to get a sense for where you are, in terms of the demand elasticity that you are seeing. I think that previously you had mentioned that in more normal times, the $0.01 change had forced a $2 million impact to EBITDA. And so I suppose then, just directionally, could you say whether it's the same or worse?

If you think about all of our purchases in the year, that is directionally right, and the $0.01 would be $2 million for the year. If you multiply the amount that Bill said, that we buy by weeks, then multiply by the number of weeks, and multiply month and change, $2 million is directionally right number.

But that -- again, that relates to the cost side, and not knowing what the prices of chicken are going to be 90 to 120 days forward. That is why that makes that a very difficult question to answer.

Our next question comes from [Roan Petcare] of KeyBanc Capitol Markets. Please go ahead.

Hello. This is [Achshed Igba]. Good morning.

Good morning.

My question, Bill, is regarding the timing of the supply discipline that you were talking about. The empirical evidence shows that six months after chicken companies start losing money, they start to cut back supply. Do you feel that this time around perhaps it will be faster or slower than usual given the unprecedented rise in grain prices? I mean, just in terms of the timing, can you help us there? How does it feel this time around?

Well, I believe -- and the market has indicated this until mid-June -- that most users of corn and soy believe that the new crop was going to be significantly cheaper, as we realized the benefits of many more acres being planted. I think one could assume that, realizing that, you would not have seen companies go very far out in their purchases. And so with replacement costs of inventory changing so rapidly, I think that there's a great potential and great possibility for that cycle to shorten up significantly. And that is also supported by the fact that we have been well-disciplined, I think, through the whole year. We did not ramp up our breeder supply flock, as has been done in the past.

And for all those reasons, I believe that there is a strong potential for it not to take six months before we see a price response, and a production cut response, as a result. And I would remind you also going into the period after Labor Day and before the first of the year, it's typically, from a seasonal perspective, lower than normal pricing though the year. So for that reason, if you are in the business of growing chickens and processing and selling chickens, then I think it's reasonable to assume that you would want to make sure that you didn't have a lot of extra product to sell in a traditionally weakening time of the year as far as market prices go.

That's helpful. And just on the demand side -- so you talked about the promotional activity being there at retail, but the pricing not getting to where you need to. You have also talked about adjusting your own supply and inventory levels to be more in line with where demand is today. So what is the bullish case now for boneless/skinless breast prices? What needs to happen?

Because clearly supply is down, and all other part prices has really exceeded expectations year-to-date. But boneless/skinless breast prices really have not done as well as everyone thought. So can you help us there? What needs to happen for the boneless/skinless breast market to get to levels that you were expecting earlier in the year?

Further to your point, if you look back as recent as 2004, about 53% of the revenue share from birds came from the breast meat. If you look at 2012, that has fallen to 36%. So, we have seen a huge revenue shift from the front half of the bird to the back half of the bird and wings. So, I think that is helpful.

There are really two indicators that are going to determine what the price of breast meat is going to be. The first one is restraint in the number of head that we place. So that you can follow the number of egg sets chickens placed for that one. And then the second indicator is the average weight per head.

The other good thing that the industry has done this year has been remain constrained on that average weight, and with higher corn and soy prices, I believe that the industry will continue to not allow that weight to go up on a per head basis. So it's really those two indicators, the number of head and the average weight per head, that will be major determinants in breast meat prices. I will also remind you -- and I said it just a few minutes ago -- it's typical during this time of year that we see the average weight impacted by heat. And if that develops through the summer, then that is likely also to be a driver in breast meat pricing.

Our next question comes from Karen Eltrich of Goldman Sachs, and we do ask that you stick to the one question and one follow-up.

(Inaudible) I am allowed to do a has to do with a multi-part question, which is my specialty, so thank you. Just to be clear -- so what percentage of corn do you have contracted in at what level? And what percentage of chicken sales do you have into food service that is also contracted, so that we can get a sense in terms of future profitability?

We don't disclose the amount of corn and soy that we have either forward-bought or have derivatives against. And the second part of your question is, our food service business is about half of our domestic business, so we split half retail, half food service domestically And our domestic production represents about 90% of our total sales. And as we have been saying throughout this year, we do not employ pricing that involves fixed pricing for 12 months.

And I will remind you what we have said before is, we have pricing in food service done multiple ways, including some prices tied directly to costs, some prices tied to underlying commodity markets, some prices tied to chicken markets; and then some prices that are fixed but for much shorter periods of time, where we have the ability to go back in and change that pricing.

Okay. Could you maybe also give some commentary in terms of what you are seeing on a global nation, in terms of supply, demand and how your JBS partnership is maybe accelerating some of these processes?

Good question. Our affiliation with JBS is absolutely helping us reach markets that would otherwise be much more difficult to reach. Using their network of sales offices and personnel and relationships helps us tremendously. And I think our success is in large part owed to that very fact, when you see our export numbers grow like they have grown the last two years. That is why that is a key part of our strategy going forward.

As I just mentioned, with that revenue share shift around the bird, that owes to stronger demand for the back half of the bird in foreign markets, and we don't see any reason that, that is not going to continue. We have also continued to see demand growth for parts other than the back half. So as we sell more whole birds, and even more breast meat and fully cooked items that have breast meat as a component, we're seeing that growth around the world, and that is why we have that as a major component in our strategy.

Our next question comes from Sarkis Sherbetchyan of B. Riley and Company. Please go ahead.

Good morning. Thanks for taking my questions. So, given your chicken contracts structure, would you be profitable with the grain and chicken prices at current spot levels?

At current spot levels, we would be close, yes.

So that is close to profitability, right?

Yes.

Okay. And so, also related to your contracts, my follow-up relates to -- when you go back to your customers and reset your contracts, is it on a weekly basis, a monthly basis, or is that just automatic with your negotiated band levels?

It's varied. We have in our portfolio pieces of business that go from weekly to quarterly and a few more slightly beyond quarterly. Let me qualify on the first part of your question, though. You can't just look at one particular market component in terms of, is that bird profitable? You have to look at the mix. And so mix impact has in many respects more impact than just pure price. So how we construct our portfolio has a lot to do with whether or not we're profitable.

Okay, that's helpful. And so, just to recap -- for 2, 3, did I hear correctly that you hedged all your feeds needs substantially below market levels?

Well, what we said was we had forward-bought corn and soy, and used derivatives in such a way that substantially our cost of goods sold was bought at better than current market prices.

Our next question comes from Michael Bailey of Par-Four Capital. Please go ahead.

Most of my questions have been answered. But I wondered if you could talk about your ability to access the foreign markets for corn and soybeans.

(multiple speakers) Yes, right now we are working on importing some Brazilian corn for the period starting as soon as next month, going forward. Actually, we heard yesterday that corn has been contracted into the US as far as July of next year, at very competitive levels, coming from South America. So we are working on still on details on discharge capabilities of some ports that we have been working; because right now, we are close to a deal on that.

But we still, as we said in our remarks earlier, we need some of the ports that have the discharge capabilities of that, because they are export-oriented ports, and didn't have any imports coming to those places in the past. So they are working on that, and we are confident that in the next few days or the next few weeks, we are going to be able to finalize some of those deals.

Great, thanks.

Our next question is a follow-up from Reza Vahabzeh of Barclays. Please go ahead.

Yes. Just to wrap up some prior questions and your answers. I mean, as higher grain costs eventually flow through your P&L, the two levers that you have to offset that is essentially your productivity improvements, including mix, as well as the pricing power, and pricing power comes primarily to pulling back on production. Are there other levers that I'm missing?

I think you pretty much covered the bases there.

Right. And so again, just going back on another question -- as far as timing of pulling on these levers, obviously productivity, you have been hitting on those. Perhaps you can accelerate that lever. But as far as pulling back in production, how much lead time do you need to be able to make those kinds of production adjustments?

Well, it takes roughly 45 to 60 days, in terms of the production cycle from egg set all the way through to slaughter and sale. So it can be done as soon as 45 days in some cases, and 65 days in other cases, depending on the final weight of the birds that are processed.

Our next question is a follow-up from Ken Zaslow of Bank of Montreal. Please go ahead.

Just a follow-up question. In terms of when we actually see the production cuts, what do you think the process will be, in terms of if you think that the production will be accelerated to lighten the weights? Then the cracking of the eggs, and the slaughtering of the hatchery hen? Or how do you think that this round will go? And on top of that, do you see utilization rates at levels that would let the industry make another substantial cut?

The first part of your question, Ken, was -- I think, given the time of year we are in, summer, that is typically when you have to think about if you want to maintain bird weight, adding 1 day to a 1.5 day to growth weight rate to maintain that. So that is helpful from a timing perspective.

And what was the second part of your question?

Well, the first part was really -- what part of the process do you think it will be? Do you think it will be accelerating the production, cracking the eggs, or selling the pullets? And then the next part of that is, is the industry in a position of capacity utilization rates? And I understand the capacity utilization rate might be 75%, 80% right now. Can it go down to 60%, and is this still be viable? I guess that is the other part of the question.

I think so, for the period of time that we're going in. When demand is typically the lowest between Labor Day and the first of the year. And given where we have been the last year, I believe it's entirely possible for the industry to make those kinds of cuts.

As a reminder, we will need to end at the top of the hour, and our next question comes from Brett Hundley of BB&T Capital Markets. Please go ahead.

All right, thank you.

Bill, I just want to go back to the comment you made earlier about 180 million to 185 million egg sets possibly leading to pricing that would come in line with feed costs. And if you look at those types of numbers against where egg sets are now, it gives you maybe a 6% to 7% cut from current levels. So, I guess I have two questions surrounding that. Do grower contracts hinder any ability to reach those kinds of cuts? And then, secondly, how much do you think weight would contribute to such a cut?

Well, as I have said previously, I think the industry has been well-disciplined, in terms of the average weight per head, and I don't see that, that is going to change. I also believe that there is really nothing about the grower contracts per se, that would inhibit the industry from making those kinds of cuts. The cuts that I am talking about in production are not largely different than what we realized last year. So I don't see that things have changed to the extent that, that is not possible again.

Thank you.

This will conclude our question and answer session. I would like to turn the conference back over to Bill Lovette for any closing remarks.

Well, thank you for participating today. We don't see room to rest during the second half of the year, and our challenge is to continue to deliver positive results in the changing marketplace. We look forward to the continued opportunities. And I would like to thank our team members, our growers, our investors, and the rest of our stakeholders for their continued support of Pilgrim's.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.