Pilgrims Pride Corp (PPC) 2013 Q3 法說會逐字稿

Good morning and welcome to the third quarter 2013 Pilgrim's Pride earnings conference call and webcast. All participants will be in listen-only mode.

(Operator Instructions)

At the company's request this call is being recorded. Please note that the slides referenced during today's call are available for 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. Thanks for joining us today as we review our operating and financial results for the quarter ended September 29, 2013. Yesterday afternoon we issued a corrected press release, which was the second one issued yesterday, providing an overview of our financial performance for the quarter, including a reconciliation of any non-GAAP measures we may discuss. A copy of the corrected 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 and current expectations as of the day of this release. Other additional factors not anticipated by management may cause the actual results to differ materially from those projected in these forward-looking statements. Further information regarding those factors have been provided in today's press release and many of our regular filings with the SEC.

I would now like to turn the call over to Bill Lovette.

Good morning everyone. Thank you for joining us today.

I am pleased to report Pilgrim's had net sales of $2.14 billion this quarter, 3.6% higher than previous year's revenue of $2.07 billion. Our EBITDA for the quarter was $222.5 million verses $103 million in 2012, an increase of 116% over the prior year. Our EBITDA margin was 10.4% for Q3, up from 5% in the third quarter of 2012. Our net income totaled $161 million, an increase of 275% from the $42.9 million reported a year ago. Our earnings per share also increased to $0.62 from $0.17 in the same quarter.

The successful execution of our strategy continues to be reflected in our results. Based on the benchmarking tools we utilize we are clearly now a top-third performer and we are determined to continue this improvement trend. Through our engagement with key customers we are making progress in providing high-quality meal solutions to expand their business and have demonstrated our understanding of the market data that drives their success. We are currently in the contract season for 2014, are incorporating feedback from our key customers into our discussions. As we are currently negotiating next year's commitments, our transparency and customer-centric approach has resulted in similar success rates as we experienced in 2011 and 2012. Our key customers value the consistent service and quality products that we provide which helps us to agree on a fair and reasonable price. We continually balance our portfolio to keep a variety of pricing and contract options available to meet our customers' needs while managing our own risk.

For fiscal years 2012 and 2013, we decreased our 12 month fixed pricing to between 10% and 5% respectively. But as we view 2014, if we can obtain prices which provide adequate margin and [credit] risk then we are open to increasing this option as a greater percent of our portfolio. Our relentless pursuit of operational excellence has resulted in significant operational improvements over the past two and a half years. But, there is still substantial runway ahead of us. We are already significantly and consistently better than average benchmarking against the best in the industry.

We have shown steady improvement and continue to see opportunities to optimize our live performance, our facilities, and our sales mix. In fact by the current year using 2010 as a base, we will have generated a cumulative $630 million in operational improvements over the last three years. As we have been able to fund more revenue and margin-enhancing capital projects we expect to raise our year over year operational improvement goal from $125 million this year to over $200 million for 2014. Our export strategy has generated the results we anticipated. Previously, we had stated our goal for value-added export growth was 30% for the year. We have seen strong demand in breaded and marinated products within the value-added category driving growth of 39% year over year.

In Q4, we will continue to expand our value-added segment with the new Savora line of products shipping in November. Recently there has been a lot of discussion about supply and demand dynamics. The industry started making fall production cuts in late September and early October in line with traditional seasonal demand patterns. The warm weather in key growing regions resulted in better growing conditions thus higher average weights. While it's true as an industry we are not cutting production levels to that of 2012, we are also not in the midst of the worst drought in history. Prices and production levels are balanced compared to the five-year average and the constrained availability of pork and beef will continue to support those levels.

Lower pricing reflects traditional patterns although the UB quotes are still higher than five year trend on most parts. This is consistent with what we have said in previous calls. As of last week, trading levels were down on certain parts. Wing prices were trending downward at a time when we would expect seasonal strength but supply is still at a profitable level. While we anticipate price pressure on certain key chicken parts, we believe we are well-positioned to compete effectively in this space.

We don't see the potential for a significant increase in the amount of pounds produced in 2014 over 2013. We believe our diversified portfolio will provide a competitive advantage in 2014. We are still seeing around 52 million as the breeder inventory level and this won't grow significantly. USDA expectations are for 2% increase in production pounds in 2013 over 2012, and another 2.6% increase in 2014 over 2013. Add to that, exports growing at least at the same rate and these concerns we have heard about production seemed a little inflated.

Turning to Mexico, as we mentioned in our second quarter call there was a fairly dramatic shift in market conditions during the quarter. After a considerable drop in supply during the first half of the year due to disease outbreaks, production recovered and imports increased leading to over supply situation. However we anticipate demand to come more in line with seasonal patterns later in the fourth quarter. Feed ingredient prices for the third quarter still reflected expensive corn. As we mentioned in our last call, July had a basis as high as $2 per bushel while normal premiums would have been closer to $0.70.

While the future's market may have shown corn prices under $6 per bushel farmers were able to ask a premium for physical delivery as the new the new crop wasn't yet harvested. This situation is especially prevalent between crops when large size variances exists amid the old and new crops. Basis has already leveled off as we progress through harvest and we should recognize lower cost of goods sold as less expensive feed flows through the supply chain. With the government shut down, there is no WASDE to report for October, however generally the market expectation is that yields are reporting better than previously anticipated. This is supportive of what we have said earlier in the year and confirms our expectation of a crop significantly larger than a year ago.

Current prices should remain stable through the start of South American growing season although we still need South America to grow a good soybean crop. Planning progress in Brazil is at a good pace for a solid bean crop and weather conditions look good. Overall, there are really no problem spots anywhere globally and feed ingredient balance sheets have been growing on a global basis. In addition, we shouldn't see much growth in domestic demand as the livestock sector is expected to be fairly stable. Even without USDA reports, the indications are that cattle on feed is down and hog supplies will be stable to slightly down heading into 2014. Additionally, we shouldn't see much upside in ethanol demand for corn, meaning that despite lower corn prices there won't be a spike in demand.

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

Thank you, Bill. Good morning everyone.

Our net sales were $2.14 billion with EBITDA of $222.5 million, and an EBITDA margin of 10.4%. We achieved earnings per share of $0.62 and reflect solid results in the period from transition from old crop to new crop. US net sales were higher than the same quarter last year due to 9% higher prices while over 4.6% lower volume. Feed ingredients were $19 million higher than the same quarter last year. As Bill mentioned the transition period reflected much higher premiums than usual. Usually there is a lag between the timing of the actual purchase of the corn and the point in which it flows through the P&L. Since it takes close to 60 days for the cycle of producing the feed to the time the birds are processed most of the birds processed in Q3 were fed corn purchased in Q2.

Our SG&A was in line with the previous year, after we take into account impairments on assets held for sale during the quarter, resulting from the acceptance on offers on the Franconia plant, the old Atlanta office and other small buildings. Also included in the quarter are all expenses related to the selling of our Batesville operation our smallest plant to Ozark Mountain Poultry, who operate the facility in a niche segment. Our operating cash flow of $286 million during the quarter reflects our strong operations and continued focus on working capital management. We continue to manage our receivables and payables to sustainable levels and with a reduction in prices and more domestic availability of the grains, we are already reaping the benefits of lower live inventories and better accounts payable. Our capital spending for the quarter was consistent with our planned spending and we are on track to stay within our budget for the year. We are very pleased with our team's focus on finding the right projects and continue to spend on areas where we have a rapid return or investments related to safety, quality or regulatory requirements.

As we announced early this quarter, we finalized the amendment to our credit facility in early August. Our net debt position has improved by 47% since 2012. We have total liquidity of over $1 billion, resulting in a net debt of $580 million and a leverage of 0.87 times EBITDA. We continue to evaluate the best uses of our available balances, including looking at options to reinvest in our plants. We already announced $25 million in investments in Alabama to improve our operations in the region, and we have several other efficiency products underway and we are expecting to come online in the first and second quarters of 2014. Also we have investment opportunity to build an international brand, the Sabor brand, allowing us to create new solutions to respond to our customers' changing needs.

To further strengthen our balance sheet and reduce our interest costs, we are prepared for cash flow sweep in April 2014. And we are looking into best options regarding our 2018 bonds which will be callable at the end of 2014. Beyond these options, we are also in a good place to evaluate possibilities to grow our presence in Mexico. We operate in a concentrated region of the country, and while this quarter was a challenging one, we feel strongly that there are good long-term growth opportunities to diversify throughout the country, and we are watching for the right time to take advantage of that potential. Concerning our tax position, given our strong results for 2013, we are utilizing our US tax [annuals] at a rapid pace. While we don't anticipate to be cash tax payers for the next couple of quarters, this quarter we have started to record tax expense which offsets the prior benefits recognized in our prior year losses.

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

We will now begin the question and answer session.

(Operator Instructions)

The first question comes from Brett Hundley with BB&T Capital Markets.

Good morning everyone.

Good morning.

Bill, I wanted to ask a general question just on supply as you alluded to in your prepared comments. You know, some of the commentary that we've heard is that there is a small bird breeder out there that not only might have supplies available at the start of 2014, but has supplies available currently. And the reason I wanted to get your opinion on if you think that's the case and how it could affect the market -- is really related to what we saw in Mexico. Where, when things were really humming in Q1 and Q2 and margins were great, there was commentary coming out of Mexico that hey, this is going to stay in place for a while. It's going to take time to rebuild supply. You are probably not going to see that effect until February, March of 2014 et cetera.

And Mexican supply has come back, I think, more quickly than people had anticipated. So I think that in part makes people uneasy. So I very much appreciate your commentary. But I just wanted to get you to respond to maybe that small bird breeder question as it relates to supply going forward.

Sure, Brett. I'll address the breeder question and then move into Mexican supply for context to your question.

We only know what we hear directly from the primary breeders with whom we deal, and there is basically three primary breeders that supply the broader breeders for the global market place. And based on the conversations that we have with them and even an e-mail that I read as recent as last night, regarding what I believe to be the largest hatching egg, independent hatching egg supplier in the US, the primary breeders continue to be constrained in their supply chain going all the way back to the multiplier flocks and the great grandparent flocks. I do know that as we have moved around some of our breed choices, especially into the large bird de-boning segment, and as we tried to make changes we could not get new supply of those until August of 2014.

And regarding the e-mail last night that I read, the hatching egg supplier was having trouble with their late 2014 supply and even into early 2015. So all of this tells me that the reduction that was made between 2008, 2012, and into 2013 from the primary breeders, that situation still exists. That supply chain is still very tight. As we said on last quarter's call and continue to say today, we don't believe that's going to change any time soon as it takes a significant amount of time to increase that supply chain.

Now with respect to the Mexican supply, we have to remember that Mexico has supplanted Russia as the largest export market for US exports and the data will indicate that the US sent an enormous supply of product into Mexico the last 6 months as was demanded by the market. And we believe that there has been a temporary over-supply situation from that and with the local industry recovering at a fairly rapid rate. I don't know if it was any faster than we expected, but the local industry did respond and recover the supply chain there, too.

So while we believe there has been an over supply in Mexico, we think that will be temporary and demand in the fourth quarter, especially later in the quarter, will come back and clear that supply and prices will increase as a result.

Very helpful. I appreciate it. Then my second question is on contracts. Bill I thought your comment was very interesting this morning. You know, this week we saw a large win concept that talked about more of a longer term contract out into 2015. And I was just wondering if you can flesh that comment out a little bit more, if you are seeing customers, you know, proactively try to extend contract terms on the industry and what that could mean for you guys going forward.

I will tell you what, what we are seeing from our customers is a concern for supply, an assurance of supply, given the tightness the last couple of years. We have not necessarily seen a lot of activity toward extension, although we have seen some. We are very pleased as I said in the comments, about the progress of our contract negotiations.

And to clarify, and I think this may be helpful to your pricing question, we have four basic methodologies as it relates to pricing. And all of them represent what makes up pricing in our portfolio. The first one is the cost plus pass-through -- cost pass-through plus the margin, rather. The second is fixed quarterly to 6 months pricing. Two conditions have to be met in that case. One, we have to have an acceptable margin. And two, we have to have an acceptable risk profile with that book of business.

The third one is basically a chicken market-based formula of some type, whether it's priced weekly, monthly, or quarterly. Then finally, is the fixed 12-month contract, but again two conditions we look for that have to be met. One, there has to be an acceptable margin. And, two, we intend to purchase on a flat price basis, the raw material from the market so that we mitigate any risk from especially the second half of that time period. So that's how we're looking at pricing methodology as we move into 2014.

Got it. Thank you, Bill.

The next question comes from Sarkis with B. Riley & Company.

Good morning.

Good morning.

Just to follow up on some of the contract questions that were floating around. Did you indicate in your prepared comments that if you can get fixed contracts as a greater part of your portfolio, you would? And can you maybe give us some color as to why?

Sure. I did say that, that we are open to including more of that as a percentage, a greater percentage of our portfolio verses what we did last year. Last year -- actually this year 2013, that 12-month fixed price arrangement represented less than 5% of our total book of business.

If two conditions are met, one, we have an acceptable margin and, two, we have an acceptable risk. As I just described, we are going to mitigate that risk by purchasing flat-price raw material from the market, so that we know there is no unknowns with regard to both price and raw material cost, then we're comfortable increasing that because obviously we have laid off that risk and we are dealing with knowns.

What we still continue to dislike and probably won't do is a 12-month fixed price contract where the last half all the risk on inputs is open. That's what's not acceptable to us.

Okay. And so is the hope that when you engage with your customers that these would be additive contracts or these would be simply customers maybe modifying their existing contract?

It could be a combination of both, both additive and existing business that we have today.

Okay, that's helpful. My last question here, you did mention that Mexico is a good place to evaluate growth despite what we have recently seen. Can you maybe just talk about what types of options you have in Mexico and maybe just what the uses of capital and potential outlays you're thinking about there?

Sure. I would be glad to. As we have seen the last couple years, Mexico represents great opportunity for growth and profitability for chicken. That's primarily due to a growing economy and more and more people, consumers that is, moving into the middle class and thereby increasing their consumption of protein and specifically chicken. We don't think that's going to change any time soon. We have a great business model there as we have demonstrated.

One of the things that we're looking do, though, is to add geographic diversification. So we're looking for opportunities in geographic areas where we don't have a large presence. Most of our business is contained to the central part of the country, and so we're evaluating other geographies and moving our business model to those geographies.

In terms of targets, Sarkis, the Mexican industry is very fragmented. So we don't see big targets out there. So we're contemplating M&As or greenfield projects.

Okay. And I am not sure if you have a chance to maybe talk about the size of the capital outlay that you are potentially going do?

It depends on the opportunity at a given place at a given time. We have not put any necessarily constraints or limits on that at this moment.

Okay. Thank you.

The next question comes from Farha Aslam with Stephens Inc.

Hello. Good morning.

Good morning.

A question about leg quarters. Pricing's declined about 8% to 10% in the last month. Could you just share with us some color on why pricing has fallen so quickly, kind of when and where you expect it to bottom, and what would be your outlook for leg quarters for 2014?

If we look back at history, Farha, this is not totally abnormal. At times after Labor Day, we do see a weakness in the leg quarter market and it begins to increase in demand and price later in the year, specifically closer to December. And that's typically when we see a decline in inventories. There were some markets that have purchased a lot of US leg quarters in the past few years that had not purchased as many leg quarters, and that resulted in some inventory build up and obviously when we see inventory build up, that puts pressure on prices.

So you are right, we have seen a decline in the last few weeks in the value of leg quarters. I think looking into next year, with what we believe will be continued minimal growth in chicken production in the US and from what we hear in South America, production is being reduced there as well. We believe we'll see leg quarter prices that have been substantially similar to what we have seen the last 2 years. I would say a range of perhaps the [high-$0.30s] to the [mid-$0.50s] on an FAS basis. That would be my guess at this time.

I will just add, Farha, that if you look at the break down of our exports lately, Mexico has been more and more important. And as we have the slow down in Mexico, I think that plays a little bit of a role in the pressure on the leg quarters. So as Mexico resumes their growth and their demand, now at the end of the year, we believe that leg quarters can stabilize and can go up again.

That's very helpful. And you had a great chart in your packet this morning on page 17 that really breaks out the parts and the revenue driver by part in the business. But when we kind of look at you know leg quarters down 10%, wing prices down about 27% year-over-year and basically breast meat and tenders only up about 2%. When we just kind of weighted and calculated that, we saw that pricing in the fourth quarter for you guys might be down as much as 6% to 7%.

Is there anything in your contracts that will help mitigate that hit that we should be thinking about as we model Pilgrim's?

Sure. Good question. I think the main mitigating factor, Farha, is just the breadth of our portfolio and the different channels that we do business in. And, you know, that allows us to have varied pricing methodologies and schemes, as I covered in response to the first question. We think that's going to be a competitive advantage in 2014.

And while revenue has declined, we also have to remember that feed ingredient costs have also declined and will continue do so. The one thing that I think is important to note is while we do have some commodity exposure, and we do get a lift when commodity prices go up, because of the balance of our portfolio, when prices go down, we also don't get the complete hit, if you will, from those prices due to that diversification in our portfolio.

One final question, Fabio, on modeling. Your outlook for interest expense and tax rate, given that some of your taxes sound like it's changing a bit for next year.

What we expect is that by next year we will be a taxpayer, so we don't expect the full year to be a taxpayer, but the tax rate that we are expecting is between 34% to 37% in US. And while in Mexico this year, we were in the 20% tax bracket, in Mexico there is a tax reform in process. So we expect the next year tax rate to be closer to the US. But not for the full year 2014 because, again, we don't expect to be a taxpayer for the full year of 2014.

On the interest, we just renegotiated our term loan so we expect that to be lower next year. We will reset the interest next year on the term loan from LIBOR plus 2.25% which is current tax rate to plus LIBOR plus 1.75%. That's what we expect. And the 2018 bonds, like we said, is 7.78% yield, and we'll expect to continue to have them up to the end of the year in 2014.

Thank you.

The next question comes from Bryan Hunt with Wells Fargo.

Thank you. Bill, one of your other mitigants are going to be your cost savings targets, hopefully. And I was wondering if you can explore with us your cost savings goals for 2014. And how much of those goals are going to come from you know new capital investments verses mix improvements, as well as maybe Fabio you can give us an idea of what CapEx may be for 2014. Then I've got a follow up.

We can comfortably say that more of our savings in the future will come from CapEx projects as we have a greater amount of liquidity and cash on our balance sheet. So we're able to do more with that cash in our operations. There is basically two major components of those operational improvements. Yield improvements, which is an ongoing strategy in our company, to improve yields at all levels and then processing cost. The biggest component of processing cost obviously is labor. We're doing a lot of things with respect to our labor cost in terms of engineering our jobs, making sure that we have consistency and standardization across our entire production footprint and better managing our labor cost.

The same with packaging and ingredients. You know we look with some of the CapEx projects that are available to us now we look to be able to create more savings in packaging and ingredient costs. So we believe -- as I have said in the prepared remarks that our goal is going to move up from $125 million improvement year-over-year this year to something well over $200 million next year.

Just in terms of the CapEx targets, if you look into our history, in 2012 we spent $90 million, in 2013 we have a target, and we are at target, to reach $110 million for next year, 2014 we are thinking between $130 million to $150 million in CapEx.

Okay. Great. Last question is when you look at you know the balance sheet, you have a cash flow sweep that will, needless to say, eat a big chunk of cash, and there may be some greenfield projects or M&A in Mexico, but you should still be a substantial free cash flow generator in 2014 and beyond those uses of cash.

I was wondering if you could evaluate what you might do with excess cash flow in the future, as well as, as the leverage has improved, what do you think the right level of leverage is for the company going forward?

Well, we were looking to the opportunities that we have. The right leverage it is something that will provide good tax shield from our tax payments and will not put a burden in our operations. So we continue to evaluate the best uses of our available balances. We are thinking about dividends, share buybacks, they are all possible options.

Like you mentioned, our primary objective was to prepare for the cash flow sweep that will happen in April next year. It's going to be around $400 million so we have the cash and availability to face it. Now we are focusing efforts on the more long term projects with strong pay-backs and we already announced the $25 million investment in Alabama and we have several other projects that are being detailed and the Mexico options.

So the right leverage we believe that is the one that will provide a good tax shield for operations while not increase the risk of our operations.

I would add to that, that as we look at the opportunities for global chicken consumption growth that's the most exciting part of our business. We believe that -- or I actually read reports that -- due to population growth and more consumers moving into the middle class and developing countries, chicken consumption demand may grow by as much as 30% in the next 10 years.

I can tell you that we're going to be a big part of that growth. We look far beyond the borders of the US in terms of supplying our product. That's been a big part of our strategy the last 2 years and will continue to be. So we look forward to taking our excess cash flow and investing it in projects that will allow us to take advantage of that global growth in poultry consumption.

The only thing I will add is that we believe that the demand -- the growing demand, would be supplied by most competitive places to produce meat, and we believe that those places are not in South America. So if, we are going concentrate our geographic expansion into those regions.

Thank you for your time.

Thank you.

The next question comes from Ken Zaslow with Bank of Montreal.

Good morning everyone.

Good morning.

My two questions are -- first, what do you think the cadence of the supply changes will be for each of the next four quarters? My sense is that it might actually ebb and flow throughout the quarters. Can you just talk about what you think the production levels for the industry would be like for each of the next four quarters?

Sure. I think if you look at the information we've supplied on our website, you can see that the supply curve basically takes the same slope as what we've seen normally the last 5 years. What's a bit different than the last 2 is in 2011, I would remind you that due to the dire economic conditions in the chicken business, the industry cut back severely in the summer heading into fall, and then last year, when it became apparent that we were facing one of the worst droughts in history, the industry also reduced production going in the fall.

This year was different from those 2 in that we've had a relatively good year financially in the industry, and then two, we saw a larger corn and soybean crop coming at us. And so the industry went back to more of a normalized reduction pattern. If you look at the absolute numbers, they're not really a lot different than what we have seen on a normal basis. They're different from those 2 years for the reasons that I just mentioned, but I don't see it being much different from what we normally see as the industry reduces supply going into December and then begins to ramp up again in January and through the spring and summer.

Great. And my next question is if I assume that a substantial portion of your cost savings go through to the bottom line, plus the corn and soybean meal prices -- particularly corn obviously, going lower, can you come up with a reasonable case that why your margins should actually either hold from these? Maybe not this quarter, but hold from the last two quarters into next year given that you have substantially lower corn prices in the cost savings, or is that too ambitious of an assumption?

Well, I believe, Ken, that margins in the next couple of quarters will be fairly good for the reasons that you mentioned. Whether we'll take advantage of the ultra-high prices that we saw this past summer, you know, I don't know. Time will tell.

But, you know, we do know that we're going to pay substantial less for our feed ingredients so we'll get margin help on that side of the equation, which again leads me to believe that margins will be relatively healthy going into the next couple of quarters and even through the summer and fall of 2014. And I think that a lot of that confidence also comes from the fact that, as we've stated the last couple quarters, the breeder supply chain continues to be somewhat constrained and whatever increase that we have in production will largely be due to the average weight gains.

Great. I appreciate it.

Next question comes from Carla Casella with JPMorgan.

Hello, one question. I may have missed this. You may have said -- the value-added business, have you said what percentage that is now of your total US and Mexican business and where you can see that ramping to in the near term?

We've not stated that, Carla. I will tell you that as we've changed our mix last couple of years we did exit some business that we didn't feel was long term profitable for us. So it's been reduced the last couple of years.

But I would also tell you that we're very interested in growing that business on an absolute basis and will grow it in areas where we feel like our core competencies line up with our customers' needs and we're able to create a very good margin business. So it has reduced the last couple of years, but I will tell you that we're planning and prepared to grow that business on an absolute basis going forward.

And again, especially on the export front, where we are developing a specific brand to target new markets, with the Savoro brand.

The timing of the roll out of Savoro, at what point will it be fully rolled out?

We begin shipping product in November, and I expect by early spring we'll be in full roll-out mode.

Okay. Great. And then, do you see any plant consolidation in the US -- or industry consolidation just given what we're seeing in the current trends, from any of the smaller players I am thinking?

Well there is always that possibility. There is not anything that I know of on a concrete basis that leads me to believe there will be in the near future but it's always a possibility.

Are there any opportunities for you to buy or move into with your CapEx plans over the next years, does that include any potential acquisitions to move to better locations?

That's definitely an option that would be appealing to us in geographies where we're not as strong. We're always looking for opportunities to strengthen our business that way. I think our key customers see us as a global supplier and in the US certainly a nationwide supplier, so where we can bolster business or brands in an area that traditionally we had not been as strong. We're always looking for that as an option.

Okay. Great. Thank you.

The next question comes from Akshay Jagdale with KeyBanc Capital Markets.

Good morning.

Good morning.

I have a couple questions short term, and then a couple long term. The first short term really is regarding 4Q. I think last quarter just generally, you had said that 4Q margins directionally could be better than what they were in the June quarter. Since then, you know, grain prices about where they were I would say and maybe down slightly, but obviously pricing in the marketplace on chicken has been much weaker. I know you said relatively strong. But, I am expecting margins in the fourth quarter to be weaker than the third quarter. Is that your expectation?

Am I thinking about that correctly? Like, the revenue will be softer than let's say what we were expecting back in June, because you know there has been soft trends on leg quarters and wings specifically.

Akshay, I can understand how you would come to that conclusion, if really all you are looking at is the market prices and feed ingredients. But, again, I'll go back to the diversification of our portfolio. I think that's going to be a bigger benefit to us as opposed to perhaps some companies that are more exposed to commodity markets.

And as we've gone through the year, we've continued to improve our mix and our price impact of that mix as we have moved through the year. So I believe we'll gain benefit from that verses other companies on a competitive basis and in Q4 specifically. And again, I can understand why you would come to that conclusion. Revenue or markets -- market pricing, has declined perhaps a bit more than we or anyone else would have expected, but again, that's where the portfolio effect of our business I think becomes an advantage.

Sure. So you're saying you are going to do better than perhaps I am saying, but relative to this quarter, the feed costs I am guessing are going to be down. I mean, feed costs in my estimate were actually up sequentially a couple of pennies per pound. So they'll be down significantly in my estimates around $0.07. But in the market place revenue per pound is down $0.10, $0.11, $0.12 this quarter so far verses what we saw in the September quarter. So I understand what you're saying.

What you're saying is your revenue won't fall sequentially as much as the market will, right, but help me understand that in the context of US margins -- EBIT or gross margins, is there a possibility that 4Q margins in the US could be similar or higher than 3Q?

I assume you are talking about Pilgrim's specifically.

Yes.

As opposed to regular market. I think I would leave it as I believe Q4 is going to be a very solid quarter for Pilgrim's due to the portfolio pricing effect of our business and the fact that we're not going to be as exposed to the market as compared to companies that are purely market-based.

Okay. Then just to follow up a little bit related but not entirely, leg quarters. So, Farha asked you this question and I interpreted your response as being the price softness, if I may, has been because of inventories backing up in some countries. Now our research is telling us, actually, that a couple cold storage facilities in the Southeast closed and that's causing product to back up there.

So it's actually not, in our estimates, not a demand issue. It's more logistics, which takes a few months to rectify. That's what we're hearing. If you can just comment, have you heard of that? If not, can you give us some specifics on countries where you have seen in-country inventories up?

I've not heard of that specific instance to which you referred. As by way of example of a country that may not take as many US leg quarters as they have in recent years, Kazakhstan is one where they issued their quota much later in the year than is typical. And so just the absolute timing with where we are in the year will not allow for us many leg quarters to move into that country, as an example.

Okay. But it is -- so, there is one or two -- so you are just saying there is one or two sort of, one-off situations where this has happened, but in aggregate your expectations for leg quarter prices still seem to be implying good demand, that, combined with what you said about exports in your presentation, says that exports are not going to be a drag, if I may, correct? If anything you think they'll continue to be a positive? Is that fair?

Sure. Moving into next year, I believe so. Have leg quarters declined a bit more than we expected? Perhaps they have. But I think that's a short term situation that will begin to clear out as we move closer into December and into next year. I don't think there has been any structural issue necessarily with leg quarter demand on a global basis.

Okay. That's helpful. And just before I ask the longer-term question, just point of clarification, in your charts, I think it's page 17, or slide 17, you have a revenue mix chart. Is that specific to Pilgrim's or is that an industry number? The revenue drivers where you have broken out the mix of revenue by part? Is that --

That's an industry number, Akshay, not specific to Pilgrim's.

So, in that context, I mean, you said your mix is advantageous, meaning less commodity. I was under the impression that since you came on, you know, you are doing a lot more big bird de-boning and things of that sort and that has actually increased your exposure to breast meat and commodity meat. But can you help me with that because clearly you are saying that may not be the case.

Sure. Good question. So, let's look at the big bird de-boning business. For example, when you de-bone the front half of a big bird, you always have the back half that you have a lot of options with. And, you can sell those as bulk frozen leg quarters. That's one option. You can also de-bone those legs that, in many cases, give you a better return back to a fresh leg quarter.

So we have, in fact, and continue to increase our share in boneless leg meat. That's provided us an advantage over those who only have the option of selling leg quarters just as an example.

Actually, I will remind you that what we have said is we increased the big bird de-boning in our operation, compared to where we used to be in the past, but by no means we are as exposed as some of our competitors to this market. So we have a more balanced portfolio of products.

That's even in the large bird de-boning sector. We have several plants deployed against that market segment, and we don't do the same thing in each one of those plants. We have a variety of options and mix opportunities in each of those plants, and again, we believe that gives us an advantage over strictly a commodity supplier.

Okay. Great. And just on longer term, I know there is a lot of concerns, and valid ones, regarding whether the supply in the industry will increase at a rapid rate next year. But help me in my thinking. I think the biggest evidence of more rational behavior, if I may, is what we're seeing from the two largest publicly traded companies. Case in point, I mean, I believe if I saw these numbers correctly, your pounds sold were down 4.5% or 4.6% this quarter, when I believe industry production was up. And generally speaking, your production's been down and obviously you have some plants that are idle.

So, it's clear to me that you, along with Tyson, are focused way more on margins than you have ever been. I think Tyson said publicly that they're short chicken, generally speaking, in their operations. So isn't that pretty solid evidence that -- maybe you can just speak to Pilgrim's -- that the focus still remains on margins ahead of let's say market share.

I have no reason to disagree with what you just said. We are absolutely focused on margin. We are focused on pre cash flow generation.

I think the track record we've established the last 2 years is a testament to that, and we'll continue to have that focus.

And the last question comes from Wesley Brooks with Morgan Stanley.

Good morning guys.

Good morning.

I just wanted to get your thoughts, if I may, on the Middle East markets, please, as an export market, just looking at the USDA data. It seems there was a pretty meaningful increase in exports into the region during Q2, and a pull back in Q3 and now the Brazilian producers are talking about an over supply there. I was just wondering what you're seeing in the region and how you expect exports to progress there in the coming quarters and years?

As you look on a globe at chicken consumption per capita, the Middle East represents the market where there is the most chicken consumed per capita on the planet. We don't believe that's going to change. We believe that continued population growth and continued economic benefits and more people moving into the middle class is going to continue to move that number forward. We believe the Middle East is a great market for US and Brazilian chicken.

Like any market, there are times when the supply is less than demand and there are other times when supply is more than demand. We don't think that's going to change. And because of the high demand and high prices that you referenced in the second quarter, more product moved into a market and has created what I believe -- or we believe -- is a temporary imbalance in more supply to demand, but that should balance itself out in the very near future. And we believe that just like in the US, the producers in Brazil will look at that as that is a key market to Brazilian producers and attempt to balance that supply with demand to create a margin.

Okay. Thank you. And going forward, this -- is it going to be an increased focus for yourselves and other US producers to try and put more product in there? And if so, how do you feel your cost position compares at getting product in there, you know, to the Brazilian guys?

Well I can only speak for Pilgrim's. But I can tell you that we do have key customers in the Middle East and we'll continue to view that market as a great opportunity to grow our business. We believe our cost position, relative to Brazil, is competitive, is good. You know, what we can't control are currency valuation fluctuations. That has a vote in competitiveness and value from time to time. But we believe the base business is very competitive US verses Brazil and don't see any reason that, that will change any time soon.

Excellent. Thank you very much.

Thank you.

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

Thank you. As we are now approaching the end of what will be a great year financially for Pilgrim's, I want to thank our team members, shareholders and customers for their support. These past 3 years have been a defining period in changing the culture and the results for us. We believe the next 2 to 3 years can have an even greater impact as we deploy our talent and resources with more confident and velocity. Thank you all for joining us this morning.

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