Pilgrims Pride Corp (PPC) 2013 Q1 法說會逐字稿

Good morning, and welcome to the First Quarter 2013 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 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 Pilgrim's Pride. Please go ahead.

Good morning, and thank you for joining us today as we review our operating and financial results for the quarter ended March 31, 2013.

Yesterday afternoon, we issued a press release to provide an 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 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.

Before we begin our prepared remarks, I would like to remind everyone of our Safe Harbor disclaimer. Today's call may contain certain forward-looking statements that represent our outlook (inaudible) expectations as of the day of this release. Other additional factors not anticipated by management that could cause the actual results to differ materially from those projected in these forward-looking statements. Additional information concerning these factors have been provided in today's press release and many of our regular filings with the SEC.

Now, I'll turn the call over to Bill Lovette.

Thank you, and good morning. We are very pleased this morning to share our first quarter results for the 2013 fiscal year.

We generated sales of over $2 billion, with EBITDA of $116.9 million, or a 5.7% EBITDA margin. Our net income was $54.6 million, an improvement of 39% over 2012. To put in that perspective, the first quarter of 2012 was one of our best first quarters ever. And yet, even with $141 million of higher feed ingredient costs, we once again improved our results. The execution of our strategy to become value creating partner to key customers is paying dividends and optimizing our mix, pricing impact, and plant efficiencies. We have identified our key customers and brought to them innovation, category management, and breadth of product assortment.

For Pilgrim's, this has delivered a more profitable sales mix, less price risk, and volume growth in desirable channels. With this part of our overall strategy, we are seeing even more new business in the pipeline, which will be beneficial for our key customers and the Company. Our relentless pursuit of operational excellence continues to move us forward financially. We are standardizing many of the manufacturing processes to ensure sustainable improvement in our yields, line efficiencies, and plant operating costs. We are becoming more innovative in our processes, and challenging our teams to create higher standards across the organization.

For example, it only takes an improvement of one half of 1% in boneless breast yield to realize a value in excess of $20 million on an annualized basis. The result of our efforts has been an improvement in workmanship and a developed training standard based on industry & Company best practices. Key among our operational excellence imperatives is a continued focus on worker safety. We are extremely proud of having among the best DART rates, a key indicator of plant safety in the industry.

Our supervisors' first key performance indicator is directed to worker safety, and reinforced through safety leadership and accountability program. We also employ the use of professional ergonomics experts to continuously improve productivity, while reducing the incidents of repetitive motion disorders. Another KPI related to our focus on operational excellence is workforce turnover. We've made improvements every year the past three years, and we are determined to be among the best when it comes to being the choice place for a career in our industry.

The impact of these changes is contributing towards our target of $125 million of improvements this year. This isn't to say that our progress has been without its challenges. In January and February specifically in Georgia and Alabama, our plant efficiencies were adversely impacted by live performance. In March, we saw significant improvements, and don't expect this to be an issue going forward. We believe our efforts toward value added exports have altered the dynamics of the export market. Because of our partnership with JBS, we have access to markets before the rest of the industry can get there. In the value added arena, we have been increasing volumes of breaded products with emphasis in the Mexican market where we saw growth in both volumes and the number of clients.

We've made strides in finalizing agreements that will allow us to strengthen our retail presence in important markets in Latin America. And we've established promising partnerships, and expect to be able to grow volumes quickly with a diversified line of products. We are working on innovative products tailoring our products to specific clients in various countries. We are developing customized products that will allow us broader access in markets such as the Middle East and Africa. We believe we have great potential in developing markets. And while much of our growth will come from these regions, we continue to strengthen our retail positions in other export markets.

There's been a lot of media focus surrounding the H7N9 virus in China. At this point, we know of no evidence of human to human transmission. There are still a lot of unknowns, but the risk to US chicken industry is low at this point. We are not currently seeing any contagion effect to global demand, and remain confident that consumers are more informed than they were in past episodes. Our own sales to China consist of wing tips and pullets. So while we've seen a small decline in Chinese demand, we are talking about total sales of less than three-tenths of 1% of our revenue. The price risk is limited due to the product types, and there have been no impact to our operations.

Demand for US chicken continues to be strong elsewhere in the world. Our Mexican operations continue to deliver impressive results this quarter. We've been asked over the past year if Mexico's margins are sustainable, and I think we've shown they certainly are. We've developed a strong feed sourcing strategy, including an increase in locally produced grains. Mexican chicken prices have seen some strength over 2012, due the reduction in chicken production. Overall demand growth has out-paced supply. The imports traditionally have been supplemented to the northern part of the country. And throughout the challenges that we've encountered, our US operations have stepped up to support the needs of our Mexican business.

Whether through hatching eggs or processed meat, the relationship between our US and Mexican operations has served to mitigate the impact of the Avian flu outbreak. While H7N3 virus has been under control as of the past few weeks, it has not yet been eradicated. While we only had one farm affected back in February, we are working with the authorities to control the virus, and we recognize and appreciate their efforts and prompt response. We continued to maintain bio security measures as top priority, including having fully vaccinated all of our grandparent and breeder stock in that region against the H7N3 virus.

In the US, we are comfortable that through 2013 the chicken supply dye is already cast. The breeder flock cannot be increased quickly enough to significantly alter production for the remainder of the year. The drought condition across the majority of the Midwest has improved significantly over a year ago, which should benefit yields this summer. The market is already priced in a risk of delayed planning, due to a wet Spring. With normal yields, we believe new crop stocks will return to more historic levels, and feed costs should moderate. Even if corn becomes significantly cheaper due to a much larger harvest than in the past two years, the price of chicken is going to be driven by the balance of supply and demand for chicken, and not necessarily the price of corn. At Pilgrim's, we continue to make the decisions as to whether to buy or grow depending on how those dynamics play out.

At this point, the industry has adapted by becoming profitable even with high grain costs. During May and June, egg sets should be comparable to last year's $200 million to $205 million level, and we're confident in US profitability at these levels. Pullet placements in March were $6.3 million, down over 6% from 2012, indicating US producers are extending the age of the flock rather than expanding through new pullets. The total breeding supply in March was reported at $52.4 million, up 1.8% from last year. Total storage levels still below one week's production, a good sign that inventory levels are stable.

We've been saying this for a while, and I'd like to reiterate, that volatility is more of an issue than high grain prices. Our first quarter included the cost of impact of corn and soy that reached peaks of $8.46 per bushel and $518 per ton respectively in the fourth quarter. We expect our feed costs will decline with the harvest of the new crop, and we will continue to source from the most cost efficient source and we will continue to evaluate imports from South America for both corn and soybean milled. We will continue to import corn as long as it is economically feasible.

As for chicken market pricing, wings have had some seasonal adjustment, but our focus on the whole bird enables to us continue to profitably produce and sell without focusing our energies on one part. Pricing for most of the bird remains very strong, with Georgia Dock at $1.03 in th quarter. Boneless skinless breast has received a bump in pricing ahead of the normal grilling season as well, and all indications point towards a strong Summer. Domestic demand for chicken in both retail and food service is showing signs of continued strength. We are optimistic that this could be one of the best pricing environments in recent years.

At this time, I'd like to ask our CFO, Fabio Sandri to share some thoughts on our financial results.

Thank you Bill, and good morning, everyone.

We are very pleased to report that both our US and Mexican operations delivered solid results, achieving consolidated net sales of over $2 billion, and EBITDA of $116.9 million, resulting in margins of 5.07% compared to sales of $1.9 billion and EBITDA of $101.5 million for the first quarter of 2012. Our net income improved by 39% over the same quarter of the prior year to $54.6 million, or $0.$0.21 per share. Like Bill mentioned, for the second year in a row, we presented the best first quarter result in recent history, remembering that the first quarter is typically not a strong quarter.

This year demonstrating the strength of our strategy, we overcame increasing feed ingredient costs of $141 million, also due to a proven balance sheet strategy reduce our interest expenses year-over-year by $3.4 million. We continued to optimize our SG&A. This quarter, we reduced our expense by 7% when compared to the same quarter last year. While we don't expect any significant reduction in this expense going forward, we expect to continue to dilute our SG&A through better sales and better mix.

Mexico continues to operate at a higher level, despite the challenges posed by the slightly lower volume of production due to the health environment. We continued to support the operations in Mexico, with hatching eggs from our operations to help offset the breeder loss. In addition to the solid operation, the strengthening in the peso, when compared to the dollar during the quarter resulted in an additional $7.2 million exchange rate gain. The first quarter improved every month, and we had one of the best net income results for the month of April in our Company's history. We expect that trend to continue.

For the past year, our capital projects have been evenly split between maintenance and efficiency projects. As we free up more cash flow, we have plans to increase our spending on projects that generate a high rate of return. We believe these investments will continue to support our strategy, and enable us to meet our overall goals while we're still under a goal of $110 million in total CapEx.

Continuing with our strategy to reduce leverage and supported by our strength in the liquidity of $667 million, we just made a $141 million payment towards our high interest term B loans. With this transaction, we will lower our interest costs by about $6 million in 2013, while we continue to evaluate for the best time to renegotiate our debt. As our term loan matures in December 2014, we feel comfortable with the time we have to find the best long-term capital structure for our Company.

Our effective tax rate was 4.8% in this recent quarter, mainly due to taxes in our Mexican operation. In the US, we maintain approximately $600 million in federal tax and NOLs that will be a significant contributor to our strategy of optimizing our capital structure and reducing our leverage and interest cost.

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

We will now begin the question-and-answer session.

(Operator Instructions)

Farha Aslam of Stephens.

Hello. Good morning. My first question is on Mexico. Bill, could you just share with us kind of the degree that AI is impacting your production in Mexico, and probably the length of time it will take for you to recover and the industry to recover Mexican production.

Well as far as Pilgrim's Mexico, our volume has not been significantly impacted as we were able to supplement with hatching eggs from the US. The loss of the one farm that we had back in February. So while a slightly higher mortality rate has taken some volume out of our production, it's not been significant, and we've been able to weather the storm, if will you will. With regard to the greater industry, we believe that a significant number of breeders were lost due to the virus by other companies. And it's going to take a minimum of six to nine months to recover that breeder supply, and likely even longer as we go forward.

Great. And then perhaps for a follow-up, the wing cold storage number has been incredibly high compared to historical levels. Could you just share with us what's happening in terms of the dynamics of the wing market? Why you think there's such a huge inventory? And why pricing is currently so weak on wings?

Sure. Good question. I think that if you go back and look at the last two years, wing prices have been extremely high as compared to history. And as we know, high prices tend to cure high prices. While we still see really a good demand for wings, we do believe that some food service operators have moved to boneless breast products in substitute for wings, bone-in wings, because they were high. And we had the seasonal effect of post-Super Bowl and post-Final Four Tournament that we see every year. While the wing price has dipped below what we expected in an absolute basis, we believe that good demand will return late Summer and we'll have another good wing season next year. I would remind you that due to continued pressure on chicken supply numbers in terms of head, that will help to control the number of wings on the market as well going into 2014.

Okay. Thank you very much.

You're welcome.

Bryan Hunt of Wells Fargo Securities.

Good morning Bill and Fabio. This is Kevin, standing in for Bryan. One quick housekeeping question for Fabio, and then I'll ask my other questions. Fabio, how much did you guys draw down under the revolver to fund the excess cash flow payment in Q2? And what was your cash position after the payment?

On the revolver, at the end of the quarter we have $577 million of the total availability of $667 million. We used the $141 million from the revolver to pay down the term loan B1 and B2. So we still have availability of more than $450 million.

Got it. thank you. I'm following on Farha's question about wings. Breast meat prices have moved significantly higher lately, and you guys have issued a very upbeat outlook for demand as we enter the Summer selling season. I would say, what are some of the big risks that you see to pricing or inventories that could moderate your outlook?

Well, continued unemployment and tepid consumer spending is always a concern. But I think the one thing that's really helping us is the retail prices and wholesale prices of competing meats. I think the market is discovering now for sure, that chicken represents a great value to consumers. And we've seen both food service operators and retailers feature chicken much more this year than they have in the past couple of years.

Got it. And lastly for us, McDonald's is running a chicken wrap promotion, and I know they're going to run a wing promotion later in the year. Do you think that that promotion could cause a competitive response from other food service operators. And how does that affect the shift towards the featuring of more poultry products by food service operators?

Well, like I said, we've already seen great responses in QSR and casual dining to featuring new chicken items and promoting existing chicken items on the menu. And again, I think that's in deference to high retail and wholesale prices of beef, and I don't think that's going to wane during the Summer. As a matter of fact, I believe as we move into grilling season the demand will actually strengthen. Now we've not seen breast meat prices this strong this early in the year, since probably 2004. And I think that, again, we have a chance to have another 2004-type year in terms of pricing.

Great. Well, I appreciate the time. Looks like you have a lot of great things ahead. Thanks.

Thank you.

Thank you.

Heather Jones of BB&T Capital Markets.

Good morning. A quick question on your buy versus produce model. Given the surge we've seen in breast meat pricing, wondering how much of a benefit we should anticipate you're going to receive from that? Like are you buying on the -- are you short breast meat right now?

No, we're in relatively good balance on all of the parts. I would say that we've shipped some parts and whole birds and hatching eggs to Mexico, and that's made our inventories tight. And that's made our supply chain relatively tight. But we're keeping that in proper balance. And at this point, not on the market. But as we see opportunities to grow our business and those opportunities exist to either buy or grow those chickens, we'll do what's best economically for Pilgrim's.

And going further and as far as your business model, sequentially from your Q4, your US operations obviously improved pretty significantly. But it wasn't as much as improvement as I would have seen in the respect to the seed and given like spot profitability trends that we track. And I guess I'm wondering, I know that you've shifted some of your business away from a fixed price contract of being closer to the market.

But wondering, given the mix of your business in the US, is it one of these things that when the market is stable, et cetera, you're going to perform more in line with spot profitability trends? But when the market really takes off, does your -- should we anticipate your improvement sort of lagging? Not that there's not improvement, but if there's a delta of, say, $0.05, given more fixed price contracts will your delta be more say $0.03? I wonder if you could help me think about that.

Well I would remind you Heather, our portfolio of business if very diversified, and that helps us in virtually any kind of market condition. When we do see prices rise rapidly, while we have components of our business that do take advantage of that, our whole portfolio, perhaps, does lag a pure large bird to bone player, if you will. But on the back side, that also gives us great protection from downed markets as well.

So I would tell you that -- or remind you that we had some live performance issues in January that improved through February and into March. And again, I'll tell you, I think those issues are behind us. Our March was really strong. And April, as Fabio mentioned, was even stronger. So we're picking up momentum each and every month as we go forward into 2013. (multiple speaker)

Heather, I will just add to what Bill just mentioned. Is that in any portfolio our objective is to reduce volatility in our returns. So that's why when we have seen a very strong market, we will not go as high. And to Bill's point, when the market softens a little bit, we will continue to perform.

Right. And we've seen lately -- let's call it the last couple of weeks, our profitability metrics would show that a pure play big bird guy is making anywhere from $0.09 to $0.10 a pound, roughly, and that's up about $0.05 from four or five weeks ago. Can you give us a sense of -- because you've put these live bird issues behind you, can you give us a sense of what kind of sequential improvement you've seen over the past month on a per pound basis in your US operations?

Well, it's been significant. And as I just stated, it's picking up momentum each week and each month as we go into 2013. We've seen, to your point, very strong results in our large bird to bone-in business. And we continue to grow that sector of our business, and have been very successful in doing so.

Okay. Awesome. Thank you.

Christine McCracken of Cleveland Research.

Good morning. Just wanted to make -- or ask a quick question on feed cost. You mentioned obviously that feed costs are still a headwind in the quarter, but that you're comfortable essentially through new crop and looking forward obviously a lower cost next year. Just curious in terms of your current availability, given some of the issues in getting the crop out of South America, are you comfortable? Do you have it in house essentially in inventory already, or are you still waiting on shipments if in fact you're sourcing out of South America between now and new crop?

Well it's a combination of both, Christine. We've been receiving corn from Brazil for three or four months now. We do have some inventory in our feed mills today. We have some inventory on the water headed this way today. And as I stated in the prepared remarks, we'll continue to source South American corn as long as it's economically feasible for us to do so.

And then remind me, when do you think you'll you lap the higher feed costs, given the current outlook?

Excuse me? Could you repeat the question?

Yes. When do you think you'll you have essentially lower feed costs year on year? Looking at when you started to take the hit on feed cost, we should be getting close to kind of year-ago prices soon, no?

I think the closer we get to Summer. And if you remember, feed prices really went up, I would say late Summer last year. So as we approach Summer to late Summer of this year, we'll see that gap narrow.

Okay. And then just in terms of this pretty tough start to the Spring and Summer here, it snowed in large parts of the Midwest. And I'm curious, I hear a lot from retailers that they're not moving the beef because it's been a late start to the grilling season. As I think about chicken, do you think there's been any net benefit because of the lack of grilling season? Or do you think, in fact, that it's maybe even depressed sales some as you just haven't seen the movement maybe into the grilling channel?

I've talked to several customers -- several retailers lately, and they confirm our belief that consumers are choosing chicken over beef this Spring. So with regard to grilling season, I think the grilling season has been fine. I think there have been more chicken put on grills perhaps early as opposed to other proteins. And we continue to see great strength in chicken demand at retail, and I think you probably noticed too, a lot of the TV promotions for chicken features on both new products and existing products on QSR and casual dining menus.

All right. And then one final question. You mentioned for the new business that's in the pipeline. Any color around that? I assume it's another shift in value toward for the process. But any color there?

Well we continue to shift our business to channels that we believe we -- that are better for us economically. That give us more ability to stay closer to the market, and realize price sooner. And we picked up a nice piece of business last fall, and we talked about that. And we've got a similarly sized piece of business that we're confident in perhaps attaining this Summer. So I think our strategy of identifying key customers and figuring out how to provide more value to those customers is definitely paying off, and we'll continue to do it.

Thanks Bill.

Carla Casella of JPMorgan.

Hello. I saw the charts that you gave on corn. I'm just wondering if your outlook -- I feel like there's more risk to the corn prices going up now with the snows we've seen across the Midwest. Have you heard anything there, and have a view where on hedging for the year?

Well, I would tell that you we've definitely seen markets price in later planting already. But I would remind you, that we have the technology in this country to rapidly plant our crop in a very, very short period of time. And I still believe there's more than adequate time to get the acres planted that we expected to get planted. The good news is, the subsoil moisture that we lost last year has been replenished. And once we do get the crop into the ground, we're optimistic that we're going to have a really good corn crop this year.

Okay. So can you say how your hedging compares this year versus last?

Well, we don't disclose our strategy and the specifics thereof, of course. But in an inverse market, I think any user would be smart to stay close to the market.

Right. Okay. Great. Thank you very much.

You're welcome.

Ken Zaslow of Bank of Montreal.

Hello, good morning everyone. I had just two questions. One is, what are you guys actually have done? Can you talk a little bit more about the Mexican operation? I know you actually alluded to the idea that you have improved it and how you structured it. We hear a lot about the US, but it sounds like what you guys are doing in Mexico is actually pretty interesting as well. Can you talk about that? And as separately from the AI side.

Okay. We have a very commodity oriented business model in Mexico. And the fact of the matter is, it's really nothing fancy. It's all about the basic blocking and tackling. And we've improved the fundamentals of our business down there over the past three to four years, and continue to improve those fundamentals, both on the sales side and on the production side. And we've brought in some new talent in the last couple of years to our team.

Charles Vonderheide moved from the US as Head of Risk Management beginning of this year, and Charles has done a wonderful job of continuing that improvement. And I'm very optimistic and bullish on the continued success of our Mexican business. And to the extent that we want to continue to grow that business, because we believe the demand for chicken continued to grow in Mexico, and we want to grow our footprint in Mexico to benefit from that growth.

Another factor that may play a role in Mexico is that they're reducing their dependency on imported corn, so they're developing local corn and sorghum for their meat. So, in the past they relied heavily on the imports for the US that we the prices of. Not competitive.

That's a good point, Fabio. I don't believe we've imported corn into Mexico since early last Fall, late last Summer. So we're essentially operating on all local ingredients, or at least corn in Mexico.

Would you be able to give us a range of -- just like for the US, any sort of ranges that we should be looking for, for the next couple of years? And what the operating margin structure should be? Just because it does seem like, you know to your point, it is more sustainable than quite honestly we thought. And it's been staying there. And I think this quarter was actually at a record. So what do look for in the next -- and again I'm not looking for next quarter, just in general, how do you frame it for us?

Well, the results obviously are tied to market pricing, and market pricing in Mexico is very much tied to supply and demand for chicken. And it responds much more quickly, price sensitivity that is, to supply in Mexico. And with the supply having been constrained, actually the last couple of years, one, due to the AI situation and the egg business last year. And two, the AI issue in the broiler business this year, the supply has been constrained, and prices have gone up rather dramatically. Again, that's not a short-term problem.

It's going to take awhile to replenish the supply of breeders first in Mexico, and then broilers, and then we don't see any reason at this point that fundamental demand growth will do anything but continue in Mexico. The economy continues to improve. The peso continues to strengthen, and Mexico is a great place to be right now. And I don't think that's going to change in the foreseeable future.

Great. I appreciate it. Thanks.

Hal Holden of Barclays.

Hello, thanks for taking the question. Fabio, I had a question on why wouldn't you refinance the term loan sooner? You're paying 9% of term loan B. It's very high versus the market. And the second question I had was just if could you just reconfirm that the longer term $600 million to $800 million debt target that you provided last quarter. That would be helpful. Thanks.

Sure, thank you. Yes, on the $600 million to $800 million, that's the goal we have for now. That he we want to reduce our leverage and reduce the interest payments. On the why I don't refinance sooner, I think the use from the market that are all-time lows, and we are looking for the best opportunity for us. I'll just remind that you we have a make whole penalty in that term loan. So even if I refinance now, I'll pay the whole curve. So the make whole today is around $25 million. So what we're seeking for is the best timing for make that payment and looking to the use market. So we do the NPV calculation almost every month to see what is the best timing for that.

Great. Thank you.

Akshay Jagdale of KeyBanc.

Hello. Can you hear me?

We can.

Okay, great, thank you for taking the questions. And so first of all, looking at your results, I'm very impressed by the revenue performance. Really outstanding. But I wanted to ask you about how you think of revenue in the context of volumes. My belief is that somehow the industry has shown a lot of discipline on the volume side, and it looks like your volumes are down 1% in the US. Do you think there's a relationship there? Obviously the reason I'm asking that is because you're the largest chicken processor in the US, and with margins or the outlook for margin is looking pretty good. The key question is, how quickly will the industry ramp up? So can you help me understand how you think about revenue in relationship to your volumes?

Well obviously, revenue is going to be a function of price in part. And in this case, a big part. And obviously, price is going to strengthen as supply continues to be disciplined and constrained. I think that the first indication to look at is replacement, pullet placements. And again if you go back even as far back as December of last year and move forward, you can see that we're not placing pullets to grow the industry in terms of heads. And then if you look at our breeder supply flock, and look at it relative to history, that's obviously been constrained. And it takes six to nine months before the first incremental breeder put on the ground can become productive.

So it being May, that's why I said the dye is cast already for 2013. And even into early 2014, as March pullet placements were down 6%. So, I think the industry is doing an admirable job in being disciplined on the supply side. And I think we've got a combination where we combine that discipline with strong demand for product, and that's why you've seen the pricing environment that we're now enjoying. I don't think that's going to relent much this year. We'll certainly get seasonal dips and seasonal increases, as we always do. But we're starting from a very, very strong base. As I said earlier, we haven't seen the type of strength in pricing and demand probably in the last nine to ten years.

That's helpful. And just going to demand, a perfect segueway, you talked about boneless, skinless, and where it is. I believe in '04 you had a major innovation on the food service side that drove the price above $2. And you're starting to see some innovation from McDonald's again. But we've heard over the last three years that there's more feature activity. So when you say feature activity is driving up the price, it doesn't make a lot of sense to me because we've been saying that now for three years. So can you just maybe delve into that a little bit deeper? Do you agree that for the last few years the view was, always was, your view and everyone else in the chicken industry, that chicken would see more features. And they were, but yet the price wasn't going up. So I don't quite think that that's the reason, but what could I be missing there?

Well, with respect to retail feature activity, I'm not giving you my opinion. I'm merely restating what the data shows. USDA publishes every week retail feature activity at supermarkets, and the numbers are what they are. And they're higher than last year. And we see in our own business our retail demand is very strong, very brisk, and continues to grow. So that's the source of my commentary there. In addition to that, I think you've seen many more TV promotions from food service on chicken this year, as compared to the last two or three. That's more qualitative. But, we see that in our business as well. So, those two things really are the source of my comments.

Sure. Okay. And then last question on supply, so do you have a view on -- basically what you're saying is we see the poor replacement numbers and the flock numbers, et cetera. Is it your view that next year it's going to be hard for the industry to -- even if they wanted to, to increase supply meaningfully? Is that the way to think about it? And what do you think the maximum amount of supply could be up next year if current trends continued?

Well, it's hard to have a complete view of 2014 at this point. But I think we can have a view of probably the first three to six months because here it is May. We've seen what pullet placements are already in March, and that it's actually declining as opposed to staying the same or growing. And the data is what I go back to in terms of my comments about supply. If you look at average weight per head, it's also staying relatively flat. Slightly up, but relatively flat to last year.

So I believe the industry has learned over the past three to five years that chicken economics is going to be driven by the supply and demand of chicken, and not necessarily what corn or soybean mill costs. I think -- I'm confident to say we've figured that out, and we're doing a good job of balancing supply and demand. The other factor that I would remind you of, export demand is extremely strong for US chicken the past two years. And I don't think that's going to wane, either. As a matter of fact, I think we can make a great argument that export demand for US chicken is going to continue to strengthen. And we've exported about 20% of our production last year, and I don't think that's going to change this year either. So chicken availability in the US continues to decline.

Just a follow-up on that. do you -- and I don't want to put words into your mouth, but are you basically saying that chicken supply in the US through the first six months of 2014 couldn't be up more than 4% or 5%? I'm just trying to get a sense, because it's -- the year is setting up to be very good, 2013 and '14. If corn prices come down, the cost per pound could be down significantly for the industry. And if supply is constrained, which is what I think you're pointing to, it looks like margins are going to continue to expand and stay there for a period of time. So can you help us just with some year over year change in supply for the first half of '14? What's possible with today's breeder flock?

Well I only know what we've seen happen in the past. Now certainly this Summer if the industry chooses to grow the breeder supply significantly, that's definitely going to impact 2014. What I'm saying is so far, we've seen no indication that the industry plans to grow the breeder supply. And as a matter of fact, it's actually shrunk. So that's the source of my comments.

Do I know what's going to happen in June or July or August this year with respect to breeder placements? I don't know that. I would tell you that based on the last three to five years though, again I'll reiterate, that I think the industry has learned that the economics of our business is tied very closely to the supply of chickens. And we've done a good job so far of maintaining discipline, such that even paying nearly $8.50 for corn, we've been able to be profitable as an industry.

Perfect. Thank you very much.

(Operator Instructions)

Bryan Hunt and Kevin McClure's location of Wells Fargo Security.

Hello, thanks for taking the follow-up. Two brief questions. Bill, you mentioned that the Georgia facilities in January, February experienced some plant inefficiencies. And I just wanted to confirm that that was weather related and there weren't any other factors that may have contributed to the inefficiencies?

It was part weather related and part disease challenged, normal disease that the industry sees in the chicken business as long as it's been here. I would equate it to the common cold in humans, chickens raised in these environments sometime are subject to get sick, and we treat them. And like I say, it happens from time to time in certain regions. I don't believe we're the only chicken company affected by this. And we've gotten beyond it, and don't think it's going to be an issue going forward.

Got it. Okay. And then as I'm reviewing my notes, I just wanted to confirm one thing with Fabio. Fabio, you mentioned that you believe the industry could achieve profitability levels similar to those achieved in 2004, 2005. Is that true?

I think we are -- to everything that Bill said on supply and demand, we're poised to a very good year in 2013, if it's the same as 2004 or 2009, that has to be seen yet. But I think so.

Okay. Thank you for your time.

Heather Jones of BB&T Capital Markets.

Thanks for taking the follow-up. Just on the foreign exchange gain, I think I'm correct, but wanted to double-check, that's all related to balance sheet translation of your Mexican assets?

Yes, it is. As we translate the assets we have in pesos in Mexico, the difference between what you have in assets and liabilities creates a translation gain to us. And that looks like $6 million and change.

And so as we continue to see the peso appreciate recently, assuming that continues, we should expect another gain in Q2?

Yes. Well, I don't know where the peso is going, but if it does, you are absolutely right.

Okay. All right, thank you very much.

Thank you.

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

Thank you. I want to take this opportunity to thank our shareholders, team members, customers, and other stakeholders for your support going into 2013. It's our expectation to serve well your interest for a successful and prosperous year and beyond. Thank you.

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