Pilgrims Pride Corp (PPC) 2012 Q4 法說會逐字稿

Good morning, and welcome to the fiscal 2012 Pilgrim's Pride year-end 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 download 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 would now like to turn the conference over to Rosemary Geelan, Investor Relations for Pilgrims Pride. Please go ahead.

Good morning. Thank you for joining us today as we review our operating and financial results for the year ended December 30, 2012. Yesterday afternoon, we issued a press release providing an overview of our financial performance for the year and 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 we will reference during this call. These items have also been filed as 8-Ks and are available online at www.sec.gov.

Presenting to you today are Bill Lovette, President and Chief Executive Officer, and Fabio Sandri, our Chief Financial Officer. Today's call will focus on our full year and fourth quarter results. Now before we begin, I would like to remind everyone of our Safe Harbor disclaimer. Today's call may contain certain forward-looking statements that represent our outlook and current expectations as of the date of this release. Other factors not anticipated by management may cause the actual result to differ materially from those projected in these forward-looking statements. Additional information concerning these factors has been provided in yesterday's press release, as well as in our 10-K filing with the SEC. I will now turn the call over to Bill Lovette to begin our prepared remarks.

Thank you, and good morning. 2012 was the first full year of our strategy implementation. Our net sales for 2012 exceeded $8.1 billion, resulting in the second consecutive year of revenue growth. Net income was $174 million or $0.70 per share, a significant improvement over 2011. These results include a positive operating cash flow of $200 million in 2012. The improvements in our 2012 results were driven largely by operational efficiency. We initially set a goal of $200 million of improvements. We exceeded that, and attained $210 million through yield and plant cost improvements. This helped us offset a $260 million feed cost increase over 2011. These improvements were pivotal in overcoming increased feed costs and allowed us to participate more fully in the margins from higher chicken markets.

In 2013, we will continue to improve and have an efficiency improvement plan to be $125 million better than 2012, resulting in a cumulative improvement over 2010 of $635 million. Our pricing strategy for 2013 is similar to 2012. We continue to structure our contracts to be market-related or tied to input costs. We are engaging in 12 month fixed price contracts only, when there is minimal margin risk and with a key customer. Currently, we have less than 5% of our committed business in these agreements. We do intend to grow our business, but it is with margin in mind, not market share. When we have the opportunity to gain incremental business from customers we will make a grow or buy decision, meaning we will do whatever is most accretive to margins with respect to growing a live chicken or purchasing meat on the open market.

Product mix is vital component of our sales strategy. We have sales managers who own mix and price for each of our plants, and they are accountable for creating more value through mix improvements. As an example, we have changed how we manage our boneless breast portioning operations. We have been successful in eliminating the production of a significant amount of breast trim from portioning, thereby improving our overall sales mix. As a result, we have seen the market price for breast trim increase, which allows us to increase pricing for products made from breast trim. We are also producing more value-added products using leg meat, thereby valuing up the back half of the bird to enhance the margin contribution on a whole bird equivalent basis. These are just two examples of giving our sales management team ownership and accountability for improving margins. As we continue to drive this accountability deeper into the organization, our team members have become owners of each process, creating value and making us better operators. Our broad portfolio of products allows us to service all key customers' unique demands. We have made a difference by clearly defining our target customers, understanding their needs, and offering solutions to help them grow their business.

We continue to measure our progress by improving our competitive position. Our operational goal in 2012 was to improve sales and operations, to achieve rankings at least the average company status using industry benchmarks such as Agri Stats and Bank of America Profitability Survey. We achieved this, and now our sights are set for 2013 on becoming a top third Company. We are confident we have the right strategy and team in place to achieve this goal. We have evaluated and refined our incentive plan to align management and our shareholders' interests as closely as possible.

The next pillar of our strategy is value-added exports, where we see a tremendous potential to drive profitable growth. We expect global population growth and higher dietary protein inclusion rates to provide opportunities for US chicken. The US is among the most cost-efficient producers of meat, and the USDA predicts that chicken exports will continue to exceed 7 billion pounds annually. We are pleased with our value-added export sales, and have a goal for 2013 to grow these sales by 30% in value.

To achieve this, we are creating new product formulations that satisfy growing market needs and price targets. For example, in March we will launch a line of chicken franks with sales already in place for these products. We also are utilizing our resources within the JBS Global network to identify untapped opportunities for our value-added products. This strategy involves leveraging the Pilgrim's brand to established committed sales of value-added products. On the commodity side, we formed alliances with major distributors in developing markets. Our strategy is to sell our products through direct channels creating a better margin.

Another component of our growth strategy relates to our Mexico operations. We are convinced that we have the right strategy in place for our Mexican operation, and our team is executing at a very high level. As we see this business as a sustainable competitive advantage, it is our intention to continue to grow commensurate with the needs of the local market. Beginning this January, we appointed Charles von der Heyde as head of our Mexican business unit, and we expect him to use his valuable experience and understanding of global markets to grow our revenue and profits in Mexico. Previously, Charles was head of commodity risk management and export sales.

Let's talk a little more broadly about industry data. 2013 has begun with strong chicken market pricing on a relative basis, as domestic margins have been pressured due to record high feed costs. Looking at current industry production, weekly slaughter pounds for the past couple of weeks have reported higher than 2012, primarily due to increased weights. During the fall, we saw record live weights due to good feed conversions and better growing conditions, which contributed to higher production levels. For 2013, the USDA is forecasting a 1% production increase. We are already seeing increased egg sets at 196.7 million. We expect that due to seasonal demand, we may see egg sets in the range of 200 to 205 million. Chick placements were virtually unchanged from a year ago, at a 162.4 million. Overall, because of strong demand in the chicken market, we are still confident in the balance between supply and demand.

Urner Barry breast meat is quoted at $0.18 or 14% higher than the same time last year. Leg quarters remains well-supported and continue to trade within a very narrow range. Wings are reflecting some seasonal volatility, while at much higher values than in the past. Whole bird markets continue to be strong with Georgia Dock reaching historic highs over $1 per pound,10% higher than the prior year. From a feed perspective, our corn and soy purchases will be kept close in until the market identifies the size and value of the new crop both in North and South America. We continually monitor the price of feed ingredients in various markets, and we will buy as we see opportunities to do so at a benefit for the Company.

As previously stated, with Charles moving to Mexico, we are pleased to have Aron Wiegand join our team as head of commodity risk management including ingredient purchasing. Erin comes to us from Bunge, where he was most recently Director of corn product line based in Geneva, Switzerland. Aron has extensive global experience in managing commodity risks, as well as fiscal origination and transportation of feed ingredients. We are excited to have his talent onboard at Pilgrim's. At this time I would like to ask our CFO, Fabio Sandri to share some details on our financial results.

Thank you, Bill and good morning, everyone. We reported net sales of $2.2 billion for the fourth quarter, compared to $1.8 billion in the fourth quarter of 2011. The 19.6% growth is also a reflection of the extra week in 2012 compared to 2011. Adjusting for that extra week, the growth was driven by price and mix, not volume increases. Our net income of $22.8 million, compared to a loss of $85.4 million in 2011, and EBITDA for the quarter improved to $64.4 million against 2011's $8.4 million. Our net income includes a $29 million tax benefit related to the settlement of earlier tax returns. Profit before tax of $2 million will work out to about $0.01 per share.

We continue to strengthen our balance sheet. We generated positive cash flow of $44 million during the fourth quarter, while incurring $144 million more in feed ingredient costs when compared to the same period last year. Our ability to effectively manage our working capital has contributed to the progress we have made on our debt reduction of $328 million year-to-date, reducing our leverage ratio to 2.8 times EBITDA. Looking forward, we are determined to make additional headway on our capital structure and reduce net debt to our target of $600 million to $800 million. With continued discipline, we believe that this is achievable within the next couple of years.

Mexico continues to be a positive contribution to the Company. Margins remain strong, and we see potential for growth on both the revenue and margin side. 2013 has started off strong as well, and we expect those levels to be sustainable for the foreseeable future. As we approach our target debt levels, we will continue to analyze our CapEx and pursue those projects with the best return, or that impact safety, regulatory, and product quality. Our return on the $90 million we invested this year demonstrated the effectiveness of that strategy. For 2013, our management team has already identified over $100 million in projects with excellent returns. While these projects will be a priority, we will maintain our discipline and ensure our spending supports our strategy to grow the business in the most effective way possible.

Our debt covenants were restated at the fourth quarter, and we are in full compliance. Our exit credit facility matures in December of 2014, and we have ample liquidity. We will continue to monitor the financial markets for the best opportunity to reduce our financing costs. In the next couple of years, we also expect our cash levels to benefit from our tax position and our reduced leverage. While we have started to reduce our net operating losses carryforwards, we currently have about $595 million of federal NOLs left to apply before we expect to become a cash tax taxpayer in the US. Operator, this concludes our prepared remarks. Please open the call for questions.

(Operator Instructions)

And our first question will come from Heather Jones of BB&T Capital Markets. Please go ahead.

Good morning. Great quarter.

Thank you, Heather.

My first question is just some detail data. I wondering if you could -- first of all, you said adjusted for the extra week, pounds were flat. Is that both -- is that a comment for both US and Mexico?

It is primarily directed at US.

Okay. And can you tell us what pricing did in the US and Mexico on a year-on-year basis for the quarter?

I don't have that in front of me, Heather. Do you have that, Fabio?

Yes, for the quarter, price was up by 12% -- in the US.

Okay.

In Mexico, it was up 24%.

Wow. Okay. My second question, Bill, going back to your comments, you talked about evaluating things on a buy or grow. And was wondering, are you talking about just if you -- say evaluating potential increases in production, are you going through even existing production and determining whether it makes sense to keep that production or just buy it?

Yes. Good question. So you start with the fact that we want to grow our business. We have a desire to grow. And we think we can, based on relationships with current customers and inquiries from customers or potential customers we don't do business with today. When facing the prospect of increasing that business, then we will go back to whether or not it is more accretive from a margin standpoint, to either grow that whole chicken, keeping in mind that that takes working capital, and we have to get a return. Not only on perhaps the component of product that the target customer is purchasing, but on that whole chicken. And if we can do that, then fine. That meets our criteria. If it is better for us on the other hand to buy the component that, that particular customer may need, more efficiently than growing that whole bird, again keeping in mind working capital and other needs, then we will buy that component on the open market. So it is a grow or buy decision on any of our growth going forward.

Okay. Okay. That makes sense. All right. Thank you.

And our next question comes from Reza Vahabzadeh of Barclays Capital. Please go ahead.

Good morning.

Good morning.

On the supply side, and really supply demand outlook, you touched on the higher excess, but then you talked about placements as well. So how do you think about the supply outlook and how do you think about supply demand balance for 2013? And along with those questions, how should we think about EBITDA margin for 2013? Is this a year that you can potentially approach a normalized EBITDA margin, or at least be in the neighborhood? Thank you.

So to address the first part of your question, we believe that supply and demand is well in balance now, and will continue to be in the future. We see retail demand very strong at this point, especially on boneless thigh meat, whole birds and rotisserie birds. We see food service flat, although we do expect more feature activity in food service, especially at the QSR level and fast casual segments. So we see that current supply and our expected supply to be well-supported by demand, as noted by the price increases that we see starting out in 2013. We do expect that on a seasonal basis, egg sets may continue to increase, up to around 205 million perhaps. And even if that occurs, we believe the supply will still be supported by adequate demand.

Now -- and I will let Fabio give his point of view on the normalized margins that you asked about. But obviously, we have to think about the year in two parts. At the current time, we are dealing with the old crop corn and soybean meal and prices thereof. We don't yet know what the new crop may bring, although we have a little more clarity on the South American crop than we do the North American crop. It is anticipated that we are going to again have record acres planted for corn, and perhaps even soybeans. And if we get adequate moisture, then we could have actually a surplus in corn and soybean meal at least for the short term. That would bode very well for margins. And I do in fact think that we could, if all of that plays out like I just described, we could approach or perhaps even exceed a normalized margin environment.

Got it. Thank you.

You're welcome.

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

My two questions, first on growth and then on savings. First looking at growth, you talked about growing export value by over 30% in 2013. Can you give us an idea what exports were as a percent of sales in 2013, and maybe a little bit more of detail behind your growth strategy?

I believe they were 13% year-over-year --

For 2012 --

And 13% -- in 2012. And we don't necessarily just look at the percentage in either pounds or dollars. But we really look at the value that we create from growing exports, both back to the domestic margin on a whole bird equivalent basis and in growing value-added products in -- within our portfolio. And we have some target markets like Mexico where we are taking further processed products from the US to Mexico, and producing value-added products in Mexico to fit consumer needs there. We also have targeted some markets in Africa and the Middle East for products tailored to consumer tastes and needs in those markets. I mentioned as an example, the franks that we are going to launch in March, those products are targeted for Africa and the Middle East. And we have formulated those franks specifically for the taste and the value needs of consumers in those markets.

Okay. And next, if I look at cost savings initiatives that are planned for next year, how much of that bucket is driven by incremental CapEx versus operational changes? And maybe could you give us an idea what some of the bigger slices at that savings pie are?

Good question. So it is largely not connected to incremental CapEx. While we will spend CapEx dollars when we identify a return project that has a fast return, we will do that. But the goal is set with virtually no incremental CapEx involved. It is strictly looking at our labor efficiency, our throughputs, our yields, squeezing more out of the turnip if you will, with respect to our ingredient costs, our packaging costs. We created what I call matrix management in some of our key cost areas like packaging and ingredients and utilities, where we have people who look across the enterprise at all of our operations with respect to each of those categories, and identify ways to create cost savings within those categories at our plants.

Thanks for your comments, Bill. I will get back in the queue.

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

Hi, good morning.

Good morning.

Bill, you have talked a lot about your focus on mix and mix improvement at Pilgrim's. Could you just highlight as you have gone through the food service contracting season, how that mix effort worked out and what were some notable wins?

Sure. I actually gave an example in the prepared remarks, with respect to decreasing our production of breast trim, which obviously values up boneless breast values. So that is one example. Another example is identifying the value of key customers based on how they buy the entire portfolio. Or in fact, do they buy the whole bird? And where we are able to match up a customer with a whole bird equivalent sale, and we are able to give that customer better value, and we are able to increase efficiencies, by doing so within our plants. So that is how we are looking at it.

Okay. Perhaps a follow-up on that, wings were particularly tight this contracting season. Could you just talk about how that played into your contracts, and notably your outlook for wing prices going forward?

We think wing prices will continue to be well-supported. We are seeing a normal seasonal drop post-super Bowl at this time. But that happens virtually every year, and we are comfortable with the trajectory of the market at this time. I think the industry is going to continue to keep the number of head restraints, in terms of production. And obviously, with each chicken having only two wings, that is going to help us manage supply. On the other hand, we continue to see strong demand at the food service operator level with wings, and you see the wing-only concepts continuing to grow. I think that has been reported a lot in the press recently. And we don't think that's going to change in the near-term, nor in fact the long-term. So we still see wings as a valuable component of the whole bird equivalent mix. For example, in the last year wings, or year and half, wings have gone up about $1 a pound. And if you consider the percentage of mix of the whole bird, that contributes about $0.10 on a whole bird equivalent. So it has been very important, and we think it will continue to be.

Thank you. And just one quick -- if I can sneak it in is, Mexico avian influenza, we are hearing that it is in five breeder facilities at Bachcoco. Is that -- are you experiencing any avian influenza issues in Mexico? And if not, is that impacting pricing or your outlook for Mexico at all?

Well, we have obviously been concerned about avian influenza in Mexico since last year, when it broke into the table egg producing industry. We have stepped up our monitoring of our farms, increased our biosecurity measures. And right at this moment, we don't know of any confirmed cases of AI in any of the broader breeders. I have heard the rumors like you, but I have not confirmed that.

Okay. Thank you.

And our next question comes from Karru Martinson of Deutsche Bank. Please go ahead.

Good morning. As you have been emphasizing -- or deemphasizing the fixed price contracts, how is the overall competitive market react --? I mean, are you seeing people follow your lead?

We are. I think other companies have reported that their strategy has followed what we have done. And I think our customers understand, with the volatile feed ingredient markets it -- in order to sustain our industry, we are going to have to connect the prices of chicken to either market components or those underlying cost input components. And they have been very understanding about that. And as I have said before, I feel like our industry is going to become more of a spread business, due to the volatility that we continue to see in feed ingredient costs.

All right. And you have had certainly, an impressive turnaround this year in the capital markets, especially the term loan side have been open. I guess I am a little puzzled in terms of your -- what is it that you want to see out there in the market, for you to come out and address your capital structure?

Yes. We are [constantly] looking in the market for pricing. The term loan matures in December '14. So we think we have ample time to decide when is the best moment. In the term loan, we have a Make Whole. So to refinance the term loan we will need to pay for that Make Whole. And that is the calculation that we do every quarter, looking to the market and see opportunities that we have, if it makes sense on a [MPV].

Thank you very much. Appreciate it.

No problem.

Our next question comes from Carla Casella of JPMorgan. Please go ahead. And Ms. Casella, your line is open. Perhaps it is muted on your end?

Hi, sorry about that. Can you hear me?

Yes.

You mentioned that -- about less than 5% of your business is on long-term contracts today. Can you just remind us where that stood as of last year, so we can see how much progress you have made there?

Last year, we -- or at the end of 2011 when we began negotiating contracts for 2012, we actually pulled that number down to -- I believe 10% or less, and we have continued to decrease those. Historically, for -- not only Pilgrim's, but I believe most of the value-added producers in the chicken business, it has been 50% to 60% of a portfolio. And as I continue to stress, unless all the margin risk is taken out through an extremely high price, that is just not a sustainable business practice in our industry due to volatile feed ingredient prices. And I believe that environment will continue in the foreseeable future.

Okay. That's great. And then any impact of the recent weather across the -- I guess, the Southwest, Midwest the tornadoes, the rain?

We have not seen a significant impact on our business. It is good news to get moisture in the Western corn belt, which is likely to help the crops this next growing season.

Okay. Great. That's all I had. My others have been answered. Thanks.

Our next question is from Akshay Jagdale of KeyBanc. Please go ahead.

Good morning. My first question is a follow-up to what Farha asked on avian influenza. So, Bachoco, I think put out a press release last night saying they actually have detected avian flu in 5 of I think -- their 100 farms. What -- you said that -- can you -- I don't know if you knew that already, but potentially how do you think of that risk? I mean, is it a non-factor until it reaches sort of the human consumption level, which it hasn't at all? Or how should we think of the risk? I mean, how are you thinking of the risk? It is being contained, but can you help me understand how you are thinking of the whole avian influenza issue in Mexico?

Sure. Good question. So while I had heard that there could be some avian influenza in some breeder flocks, I had not read of the confirmation. As I have said before, we are always concerned with any biosecurity issue or disease issue, both in the US and Mexico or any part of the world. Since we have been dealing with avian influenza across the globe primarily since 2005, 2006, I think consumers are more informed today. There is less a scare from a food safety standpoint about the whole issue. But it is more of a production issue and a cost issue that we are concerned with. We continue to increase our biosecurity in our farms and we will be diligent in that respect. If there continues to be avian influenza spread into the table leg industry or even the broiler industry in Mexico, then the effect that is going to have obviously, is decreased supply and will likely increase price for those products.

Right. But at what stage -- I concur with your thoughts, right? But I am thinking of it more from the perspective of what happened in '06. I mean, so at what stage does this trigger a consumption response? Like what caused -- back in '06 or whenever it happened, consumption for chicken to go down? Right? I mean, I think it was -- (Multiple Speakers)

Yes. I think --

But --

I get your question. I think what happened in 2006 was the jump from chickens to humans. We have not seen that occur in Mexico for sure, in the last 12, 18 months or ever as far as I know. We have really -- there have not been that many cases reported in any country in the last 12 to 24 months. So that is the difference in 2006 and what we see currently.

Actually, just in the supply of eggs -- I will remind that we have the operation in US, that is in fact, is very close to Mexico. Even if you have some [interaction] -- interruption or problem in our breeding flocks in Mexico, we can supply eggs from US to Mexico.

That's an important point. I thought of one other thing that I should note here. If you remember back in 2006, it was a different strain of avian influenza. It was H5N1, which has gone across from bird to human. The strain in Mexico is H7N3, which I don't believe has crossed from bird to human. So it is a different strain of influenza.

That's helpful. I mean from -- we have talked to the Mexican authorities. And I mean -- the key in what you highlighted is that it hasn't gone from chicken to human. Would you also say -- I mean I think this is important -- would you also say -- I mean since '06 the level of security in the industry -- I mean I don't know -- has increased exponentially, right? So the likelihood of it going from chicken to human is considerably lower? Would that be a true statement?

I believe that to be a true statement. You are right in stating biosecurity measures have gone up immensely since the mid-2000s. And we remain diligent in that respect.

Okay. And just one on the volume side. I mean, honestly, I would really appreciate it if you have made these volume comments, if it was possible in your press releases -- we did not know there was an extra week, so shame on us. But can you just give us the impact of the extra week in -- on dollars sales? Because I am unable to sort of back into what the volume was? I believe you said US volumes are flat, excluding the extra week. And then I think you also said, price per pound was up 12%? But I am -- I couldn't reconcile that in my model. So is it possible to give us the impact of the extra week on sales and volume?

The impact in volume is 7%. It is 1 week over 13 weeks.

Yes.

Our increase in total sales was 19%, and our increase in price was 12%. So volume and price were 7%, because of this extra week.

Perfect. And what -- can you -- just one last question on pricing, and then your comments on demand? So you obviously don't have that many fixed price contracts anymore. And it looks like overall the industry and further process companies like yourself and Tyson, have moved to more of a cost-plus margin management type of business. So can you help me understand, relative to the spot price movements how we should think of your margin going forward? I mean, is it more a function of the grain costs and your pricing being flexible above that? So or -- I mean what is the variability in terms of your margin going forward? It looks like it is reduced significantly. But is the big variable still -- supply in the industry goes up, and that is going to impact you -- could impact you negatively or is it more grain costs?

Great question, and I appreciate you asking it. It is a -- we have a diverse portfolio of pricing strategy. We do tie more and more to the chicken market components. And we do so, with that thought in mind that supplies will be managed and the industry will be disciplined. At the same time, we are also cognizant of the time periods that we have these contracts tied to, and our ability to change the pricing structure and the book of business as the market dictates. So I think one of the key components in our strategy is agility, and being able to move as the market dynamics move. And -- so it is going to be hard to make a one-to-one correlation with any particular chicken component market or underlying commodity market, because our portfolio is so diverse. And we have constructed it that way on purpose. So that we are not absolutely dependent on only one way of pricing.

So in other words, in 2013 -- if you look at '13 as it stands right now, is there more risk to the margin on grains or on pricing, given what demand is doing?

I would say it's equally balanced.

Okay. Great. I will pass it on. Thank you very much.

You're welcome.

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

Good morning.

Morning.

Just -- most of my questions have been answered. So one question that I have is, can you disclose how much feed the Company is purchasing from South America currently? You kind of mentioned it on last quarter's call that you were setting up to import some feed from there?

That is correct. We did address it on the last call. But to remind you, we said that about 10% of our needs from December through June of this year would come from South America, and that we would continue to look for opportunities to increase that. I will tell you while we continue to look for opportunities, it is still about at the 10% level of our needs.

Okay. And curious, why is it still at the 10% level? Do you just see that the pricing opportunity is not there? Or is it an infrastructure issue?

No. I think as more companies began buying South American ingredients, the basis in South America responded and sort of came to equilibrium such that it hasn't made a significant change since we bought those cargoes. And I think the advantage for us, is we got in early in the process, and were able to secure that volume at favorable prices.

Okay. Understood. So just to clarify, you think that that volume at favorable prices could continue through June, and within that time period you will also probably have a better understanding of what the North American crop would look like? Is that the correct understanding?

That is the correct understanding. But I would remind you that we will begin to experience the harvest in South America soon, which may begin to change those dynamics. And could -- I won't say it will -- could again make South American ingredients favorable to US basis in given geographic region.

Okay. Appreciate the color. Good luck.

(Operator Instructions)

And the next question is a follow-up from Heather Jones of BB&T Capital Markets. Please go ahead.

Thanks for taking the follow-up. I had a question on demand. If you look at price trends, the year-on-year gains are pretty solid across the different cuts. The only cut we see is they are really accelerating on is breast, which is boneless skinless breast which is interesting, given the higher weights. That is where the higher weights would show up. So arguably greater supply increases in breast, but yet accelerating year-on-year price gains. And so I was wondering, should we infer from that, that the acceleration in demand while it is at retail and food service, is more pronounced at food service? I mean, how should we be thinking about this?

I believe that particular component -- the big bird commodity breast is affected more at food service. And we believe that part of this is, we are seeing substitution now beginning to occur by using the big bird breast in place of trim. Because the trim supply has been reduced dramatically as I said earlier, and customers are continuing to call for trim, not finding it, and then having to substitute that big bird breast meat. That is why we believe that, the clean trim as we call it, is trading about equal to the big bird breast meat today. And we don't see that that is going to change anytime in the near future.

I mean what products are you talking about, referring to specifically, that they would be swapping out trim for breast -- for boneless skinless?

Products such as chopped and formed patties and nuggets.

Okay.

Fully cooked diced meat is another that is used in ingredient, in either casseroles or soups or other dishes.

So you think that shift is what is triggering this? Or do you think there has been any shift in customers trying to shift more of their product to -- like in the wings side, to boneless wings from bone-in wings? Or do you think it is all this trim component?

I don't think trim is the only reason. I think you make a good point, that we are seeing more retail features actually for breast meat, due to higher prices of beef and pork at retail. We see more feature activity, in both retail and food service from that component as well.

Okay. And going back to your comments earlier, and you may have given a specific number but I didn't catch it. As far you are now -- for 2013 you are targeting reaching the top third in the Agri Stats, Bank of America benchmarks. Where are you at currently?

Well, you measure it month after month, and one month may be different than the other. I would tell you directionally we are solidly above average, and we are tracking toward the top third. So we are comfortable at our trajectory, and we are very confident that we will be in the top third as we move into this year.

And are you -- is that pretty much fair to say, across all your weight classes, or are you performing better in certain weight classes than others?

Heather, it is really across all of our weight classes. There is no particular weight class that is necessarily ahead of others. We have more improvement to make up in some of our market segment-related business, such as our retail trade pack and some of our prepared foods segments. But it's not related to bird size at all.

Okay. Perfect. Thank you very much.

And our next question is a follow-up from Bryan Hunt of Wells Fargo Securities. Please go ahead.

Thank you for the follow-up. Bill, when you look at -- you quoted short-term trends in your presentation, with egg placements and [broiler] placements, but when you look at pullets and layers, what is really the outlook in your opinion for maybe the intermediate term on the supply? How much could supply grow if the industry pushed it?

If you go back for the past six months and measure pullet placements and overall size of the breeder flock, there is marginal ability to increase sets and placements based on the size of the breeder flock, which now stands about 50.5 million, which from a historical basis is very low. You have to go back to I believe, the mid-90s to see a number that is under that. So what that tells us is, for six months or perhaps even a little bit longer, we are going to see supply restrained, because the breeder flock size is relatively low.

We have also seen in the last -- I would say couple of months, the productivity of the breeder flock has gone down. And we believe that that is due to companies laying breeders longer to get more eggs that have supported that increase in egg sets. And when that happens obviously, the hatchability tends to go down, and egg production tends to go down at the end of the life of those flocks. So again, we believe there is minimal growth opportunity from the current breeder flock size. Now, six months out, eight months out, even a year out, that could change. But we have not seen a sustainable indication of that at this point.

And then my next question -- and thanks for that color -- is when you look at retail, a notable acceleration in consumption of poultry at retail, do -- what do you think the driver is of this? Do you believe consumers are trading out of other more expensive proteins into poultry, or are you seeing increased features by the retailers? What do you think is behind the growth in consumption?

We believe it is a combination of both of those things you mentioned. We are seeing more feature activity and more demand for whole birds. As -- if you go back and look at the last couple of years -- as wing prices have increased, as leg quarter prices have increased, as other component prices have increased, processors have been incented to cut up more whole birds, and that has drawn down the supply of whole birds. And we think that is what has caused the dislocation, and thereby the price increase. At the same time, we see consumers increasing their consumption of whole birds, especially the fully-cooked whole birds purchased at supermarket delis. So it is a combination of those things, and we believe that that change is sustainable, at least for the foreseeable future.

Thanks for your input. I appreciate it.

And our next question comes from Carla Casella of JPMorgan. Please go ahead.

Hi, this is Paul Simenauer for Carla Casella. Our question has already been answered. Thank you so much.

(Operator Instructions)

And our next question will come from Akshay Jagdale with KeyBanc. Please go ahead.

Thank you for taking the follow-up. Bill, just -- I may have missed this. I was jumping on and off a couple calls, but remind me about your view on supply? I did see something about 200 to 205 million egg sets that you talked about, but USDA is saying 1% increase? I mean, what do you think supply is going to end up at? I mean, the USDA number seems reasonable to you? And more importantly, would love to get your view on demand. I mean, prices have been much stronger than I had expected, and every day they are stronger than I expect. So I am wondering if that is just supply being tight? Or if you are actually seeing more demand? And if you could give us some color on what kind of customers that are driving that, that would be great?

Right. So we do see increased demand at retail, especially as it relates to whole birds. And I just covered that with responding to a question from the previous caller. We also see increased demand for boneless thighs meat at retail, and we see increasing feature activity for boneless breast, perhaps as a substitution due to the high prices of beef. At food service, overall demand is virtually flat. But in some key segments like QSR and fast casual, we know that there is going to be increased feature activity, especially using breast meat as a component. So we think that the current supply is well-supported by a growing demand. I don't believe or we don't believe that that is going to change in the foreseeable future. Again, I just finished talking about the breeder flock size. If you go back over the past year, the industry drawn down the breeder flock size to a level, that you would have to go back to the mid-90s to find a lower number. And as companies are laying breeders longer, the productivity of those flocks are going down, so hatchability is falling somewhat. Egg production at the end-of-life is falling somewhat. So we believe that that is also going to be a constraint, at least in the next 6 to 8, perhaps 12 months to supply.

Just on a specific part, wing prices, they obviously have been on a tear. And we are seeing some feature or some -- a large quick serve restaurant -- probably is going to launch another wing product. And I am assuming that is going to have a positive impact on wing prices. I mean, what are you seeing from your customers on wing demand, and do you think wing prices are sustainable here or they could go even higher?

We think wing prices in the range that they have traded this past year are sustainable. And the reason that we think that is, the supply constraint that I just talked about, plus increasing demand from the wing-centered restaurant operators. For example, it was reported within the last month that one of those operators is building 17 new stores. We calculated those 17 new stores would need eight loads of wings per week that are currently not being purchased. So as that segment grows, as you see other operators who have traditionally not served wings bring that onto the menu, we think that demand is going to continue to be very, very strong. We also see that supporting breast meat prices, because we see more and more even of those wing-centric operators put boneless wings on the menu, made from breast meat.

Okay. Great. I will pass it on. Thanks for taking the follow-ups.

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

Thank you, and I am proud of our team and the value they bring to the table. Our management and team members continue to execute our strategy, and the results validate that we are on the right track for continued success. Thank you all for joining us this morning. We appreciate your continued support of Pilgrim's.

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