Pilgrims Pride Corp (PPC) 2013 Q4 法說會逐字稿

Good morning and welcome to the year end 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 year ended December 29, 2013. Yesterday afternoon, we issued a press release about an overview of our financial performance of the quarter, including a reconciliation of any non-GAAP measures we may discuss.

A copy of the press 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 its 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 these factors have been provided in today's press release, our 10-K, and many of our regular filings with the SEC.

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

Good morning, everyone, and thank you for joining us today.

We are pleased to be here today to share our successes during 2013 fiscal year. Pilgrim's net revenue for the quarter would reflect one less week in FY13 compared to FY12 were $2.05 billion as compared to $2.19 billion for -- in 2012.

We generated EBITDA for the quarter of $196.5 million, an increase of $132 million over our 2012 results. Our EBITDA margin improved to 9.6% over the prior year's 2.9% for the same quarter. We reported net income of $143 million, or $0.55 per share, compared to $23 million, or $0.09 per share in the fourth quarter of 2012.

Three years ago, we introduced a new strategy to transform Pilgrim's into the best managed and most respected Company in our industry. We said we were going to hold our teams accountable for being a valued partner with our key customers for the relentless pursuit of operational excellence and for growing value-added exports. Our results continue to validate the effectiveness of this approach, from our solid financial outcomes to our improved standing in the major benchmarking services.

We have made it our passion to provide our key customers with dedicated resources needed to address the challenges they encounter in their businesses. For example, during 2013, we worked with a key regional retailer and developed a unique brand of antibiotic-free chicken. We are already one of the nation's largest producers and marketers of ABF chicken and we stand ready to support our customers as they grow this category.

We are committed to driving innovation in this category to help our customers adapt to changing consumer interest. This dedication to providing thoughtful solutions is a part of why we had such a successful contract negotiating season. We continued our approach of creating pricing models specific to our customers' needs to ensure they have the committed volumes and quality essential to their success.

Our persistence and determination to achieve operational excellence continues to be a key factor in our performance. Our progress in yields and efficiency provided $132 million of incremental improvements this year, resulting in cumulative improvements of $642 million over our baseline of 2010. We have an additional $220 million of improvements already targeted for 2014.

Mix management continues to be an area of competitive advantage for us, driving what we like to refer to as the portfolio effect. Additionally, our ability to operate a value-added business with a best-in-class commodity cost orientation creates a unique advantage in the marketplace.

During 2013, we continued to divest ourselves of operations outside our core competencies. Better product selection and management improved the efficiency at our plants, allowing us to focus on sales mix and consistent EBITDA margin generation. These accomplishments enabled us to reach our goal of consistently being a top third performer.

We are pleased with the innovations our team has made today, innovating new products in the growing categories such as ABF, our Savoro line and new products we introduced for key customers. Now it's time for us to take the next step and invest in our brands, regions and segments where we have room to expand.

To lead that effort, we recently hired Chad Baker, formally of Smithfield Foods, to head our Prepared Foods business unit. Chad has more than 20 years experience in the food industry and brings a heightened strategic focus to our growing branded products line. He has a track record of impressive success in this area and we look forward to him joining us on March 1.

Our value-added exports demonstrated steady growth throughout the year. We believe 2014 is going to present us with the opportunity to aggressively grow this category and we remain committed to that portion of our business. Across the business, there is good possibility that 2014 could be as strong or even stronger than 2013.

Now why do I say that? Well, let's look at protein supply fundamentals. Pork, which recently has been producing more than last year, is going to see some significant PED virus-driven supply challenges for the summer months during what is already traditionally a tight supply period.

Beef is also facing supply pressures, as producers balance the high prices of feeder cattle against retention needs. What this means for chicken is that even with potentially higher supplies, which, by the way, we have not seen at this time, there should be a price strength as competing proteins reach even higher levels.

On the cost side, the most recent WASDE Report implied increased export demand for grains. Our risk management approach to feed ingredients continues to be centered around sourcing ingredients from the most efficient priced regions. Recent spikes in propane prices have impacted live operations across the industry, while fuel costs are grower-managed expenses, we are aware of the burden, the volatility and the unusually cold conditions nationwide have placed on our growers. To address this, we have structured a supplemental allowance for our growers who have been impacted by the increase in the price of propane.

We're pleased with our Mexican operation's results during the quarter. After a weak Q3, we saw improvement in market demand and pricing. We've identified a project in Veracruz, which will enable us to expand first with live sales and work toward a new processing facility in the near future. This is a new geographic market with a growing economy, making it an ideal area for us to expand, using a grower model similar to our US operations.

So before I turn the call over to Fabio, I want to emphasize that we are both excited and pleased with our continued results. And our drive and passion to further improve our results remains high. At this time, I'd like to ask our CFO, Fabio Sandri, to share some thoughts on our financial results. Fabio?

Thank you, Bill, and good morning, everyone.

We report the net revenue for the fourth quarter of $2 billion compared to $2.2 billion in 2012. I want to remind you, again, that the fourth quarter 2012 included an extra week when compared to this fourth quarter 2013. We generated net income of only $143 million during the quarter, achieving total net income of $550 million for the full year, or $2.12 per share.

Our EBITDA margins of 9.6% for the quarter and 9.5% for the year clearly demonstrated the benefit of our pricing strategy and the portfolio brand and the mitigation effect against volatility in the chicken market. SG&A for the whole year was 2.15% of our net revenues, a reduction over 2012, even with the significant increase in incentives pay, recognizing our team members' strong performance during 2013.

While we accrue our incentive bonus every quarter, the year total reflects the year-end true-up phase in our financial results. Throughout the year, we have demonstrated effective management of our cash flows. In 2013, we reduced our working capital by more than $180 million by managing our inventory, accounts receivable and our accounts payable to maintain the most efficient levels for our business.

That, together with the strong cash flow from our operations, led us to generate $273 million in free cash flow during the fourth quarter, adding to $788 million during 2013. Over the past three years, we have substantially improved our debt profile and that didn't occur by accident. We have responsibly applied our resources in a disciplined manner and utilized our free cash flow generation to pay off our most expensive debt.

Our December 30 -- on December 30, immediately after our year end, we made a $205 million payment in full of the Term B-1 loan. We made a -- we have a mandatory cash flow sweep that will occur in April and we will retire the Term Loan B-2 as well. We will still have the $500 million in outstanding notes that matures in 2018, and we are looking to our options on how to benefit from the strong capital market and our reduced risk.

Our anticipated interest expense for 2014 should be under $60 million, based on our current projections. We ended the fiscal year with a leverage of less than 0.4 times our trailing 12-month EBITDA. Today, we have one of the strongest balance sheets in the industry, with liquidity of more than $1.3 billion.

Going forward, we have an opportunity to grow our top line and capture the incremental benefits to improve shareholder value. We will continue to grow our business and efficiency to focus capital expenditure. During 2013, we spent $150 million in capital projects.

We expect to spend about $150 million during 2014, with approximately $80 million dedicated to maintenance, safety, and quality projects and the remainder driving profit improvement with projects having significant returns. We already achieved a significant advantage to the average company in the industry benchmarks. We believe that our management teams and our strategic investments will lead us to the top of the list.

One of the opportunities we see is in regards to expanding our presence in Mexico, where our bulk, MMA and greenfield opportunities complement our existing portfolio that we'll consider under the right conditions and our liquidity positions provides us with plenty of flexibility and while awaiting those opportunities.

Like Bill mention, we already started the greenfield project in Veracruz that will generate growth in regions where we are not present today. Investment in this project is included in the $150 million CapEx for 2014.

We estimated that going forward, our effective tax rate will be in line with the industry norms as we have visualized the bulk of our NOLs. This should put us in the middle 30% range for 2014.

Over the last three years, we grew our sales by 22% while increasing our profitability. Our results, both financial and operational, clearly illustrate the impact of a disciplined execution of our strategy at every level of our organization.

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

We will now begin the question-and-answer session. In the interest of allowing equal access, we request that you limit your questions to two, then rejoin the queue for any follow up.

(Operator Instructions)

At this time, we'll pause momentarily to assemble our roster. Our first question is from Farha Aslam of Stephens. Please go ahead.

Hi. Good morning.

Good morning, Farha.

Congratulations on a great quarter.

Thank you.

Then just starting with US contracts, now that the contract season is pretty much closed, could you give us some color on how the contracting season went and how you anticipate pricing in those contracts flowing through the P&L?

Yes, so we -- from our perspective, contracting season went very well. We stayed with the same strategy that we had for 2013, going into that year in late 2012 by not focusing on fixed price, 12-month fixed price contracts. The percentage of those is about the same as 2013, which was less than 5%.

Rather, as we've said before, Farha, we created a spread business. I think the fourth quarter was a great demonstration for that, the fourth quarter of 2013, that is. And I would remind you to look at what feed cost did. Feed cost was down in a significant way, but also pricing was down as well.

So we kept our margin improving as a result of that spread that we created. We think that's the right strategy for our business and we'll continue to focus our pricing strategy in that way.

So we feel like flowing through the P&L this year, if feed costs remain about where they are today. And pricing, actually, I think has a chance to be even stronger than it is today, then I think that sets up a good environment for margin creation through that spread.

Then just, if you look at the outlook for your US and Mexico business, I know it's hard to kind of read a full-year profitability, but are you thinking that you can match this year? Or do you -- for 2015 in the US and in Mexico, how would you think of normal or the outlook for earnings for 2014 versus 2013 in your two major businesses?

Well, as I've said in the prepared remarks, I think that 2014, if you look at the fundamentals of the chicken supply, we think the die is cast from a breeder's standpoint, pork's place for the whole year of 2013 over 2012 was only up 0.75%. If you look at the second semester of 2013, they were up 2.3%.

We're already seeing through week seven that we're not placing any more chickens than we did last year. Weights, average weights are maintaining about where they were last year and so total RTC production is basically the same.

We don't see any reason for that supply situation to change. Perhaps late in fourth quarter of 2014, I think would be the earliest that we would see a material amount of hatching egg supply different than 2013. So on the supply side, we don't see a significant amount of growth.

When you couple that with the supply economics of the competing proteins, I mentioned the PED virus issue in pork, the cattle supply issue, we think that 2014 is setting up for a relatively strong pricing year relative to where it is today and relative to where it was in the fourth quarter. Feed costs look to be significantly lower at this moment.

While we don't know about the 2014/2015 crop, there's indications that we're going to plant 92 million acres of corn, perhaps just under 80 million acres of soybeans. If we get the weather, which is the big unknown at this moment, then feed costs could continue to be muted relative to 2013. So again, that's a factor in leading us to believe that 2014 could be as good or perhaps even better year than 2013.

Farha, I just want to remind you that in terms of earnings, early 2012 -- or 2012 and 2013, we consume all of our NOLs, so in 2014, we'll see the impact of being a taxpayer. So that will have an impact on the earnings.

Okay. That's very helpful. Thank you.

Our next question is from Brett Hundley of BB&T Capital. Please go ahead.

Thank you and good morning, everyone.

Good morning.

Bill, I had an industry question for you to lead off with. Your margins in the US continue to impress us coming in above our expectations, and certainly I want to congratulate you guys for that. My question is how overall industry pricing fits into that going forward? And pricing year to date has been somewhat lackluster, from our view, and maybe if you disagree with that, I'd love to hear your comments.

But I -- if you do agree that pricing has been some what lackluster to start the year, what do you think that this is due to? It certainly sounds like you expect things to pick up due to PED, beef, et cetera, but I just want to get your overall commentary on that.

Good question, Brett.

So I take it to mean -- or you think lackluster means 2014 lower than the previous year, and I would agree that it is through the first seven weeks, composite cut-out pricing's down about 15%. But as I look forward, I think that composite cut-out pricing is actually going to go higher as we move into grilling season and throughout the year because the competing protein supply pressures are going to get greater as we move into the year.

Let me back up and talk about our observations during the contracting season. We noticed that our competitors were apparently taking more fixed pricing than they did the previous year. That was just an anecdotal observation that we made.

We did not go with that strategy. We stayed with the same pricing strategy as we had going into 2013, as I mentioned, because again, we believe that pricing is going get stronger as we move into the summertime. We think it will be solid even in the back half of the year. And so again, keeping with the idea that we run more of a spread business today, we kept our pricing strategy such that we could follow the chicken markets.

I still believe that the profitability of the chicken industry is based on the supply and demand of chicken as opposed necessarily to the cost of feed. I think 2013 was a great testament of that as we paid the highest prices for feed ingredients as we have in a long time, yet the profitability of the industry was as good or better than it's been in a long time.

Some of our competitors apparently may not see it that way. And so they may have been willing to take lower pricing based on the fact that feed costs appeared to be going lower. And I can understand why some might think that as the profitability was strong in 2013 and some may have thought that the supply of chicken was going to grow more rapidly as it is actually turning out to be.

As we said late last year, we don't believe that the breeder stock or the parent stock supply chain is -- exists today to grow significantly the number of breeders, and therefore the number of hatching eggs that it would take to grow in 2014 over 2013 in a significant way. And so, that's why we believe that the supply side of chicken will be conducive to relatively strong pricing as we go through the year.

So I trust that answers your question. If you have a follow up, we'd be glad to address it more.

It does and I have another follow up, but just very quickly. That's an interesting point. So you're saying that comps taking more fixed pricing year on year is more a function of their decision making as opposed to retail-led or retail-forced?

Absolutely.

Okay. And then on the ABF product, I would love to get some commentary on really three main questions that I have related to that. Clearly, I think there's a bigger push for ABF from the consumer and we expect that going forward. Can you just describe the process for Pilgrim's of moving over to ABF?

Can you talk about maybe what that does to Company production levels? Does it actually hurt production in the process? And then can you talk about the pricing that, that gives you on that product?

I appreciate it.

Sure.

Well, that -- the move in us growing in that category is strictly tied on our strategy of being a more valuable partner to our key customers. We stay close with our key customers' needs. Their needs are driven by their customers who are the ultimate consumer and the consumer is clearly calling for an increase of supply in ABF chicken and as such, we have a plan to grow in that category.

As I said, we're already one of the largest and we expect that we're going to convert more complexes in the next couple of years to ABF chicken. It does have an effect on the growout side and the cost. And again, there's a lot of moving parts that go into the cost increases in ABF versus conventional.

Depending on the size of bird that one is growing, depending on the type of housing that those birds are grown in, depending on the type of feed ingredients available in and around that location, it could be as much as 10% to 15% higher in cost, or even greater. Again, there is not just one component that drives that increase in cost. But again, the consumer has clearly spoken and voted with their wallets and as such, in order to remain relevant to the marketplace, we're going to grow in that category.

Thank you.

Brett, I just want to remind another thing, is that the ABF is growing in some segments in some specific parts of the bird, while all parts of the bird will be ABF, right? So even feathers, blood, guts and everything will be ABF, so the 10% to 15% that Bill mentioned is on the whole bird. But some of the parts will not capture the premium end cost, or the premium that will capture the increase in cost of being ABF.

That's helpful. Thank you.

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

Thanks for taking my questions. I was wondering if you could explore with us a little bit more, the project in Mexico, the relative cost and the timing in which that facility will come online?

Sure, Brian.

We've been looking at ways to diversify our business in Mexico, especially geographically, for a lot of reasons. One, the consumption of chicken continues to grow robustly throughout the entire country. Our operations are fairly close together north of Mexico City and so as we were looking at other areas to grow, Veracruz turned out to be one of the areas that we liked.

We like it for the following reasons. There is a large population area close to the state of Veracruz. It's growing and chicken consumption among that population continues to grow robustly. It's also near a port where a lot of feed grains, feed stuffs are imported in the country so that was another factor that weighed in our decision.

And it's -- while it is geographically diverse, it's not so far away from our main base of operations there that management -- we can get to that region fairly soon and stay pretty close to it. So for all those reasons, we chose the state of Veracruz to grow. We're looking for land as we speak.

We have identified some different options for that. As I -- as Fabio, I think, stated, we're going to start with live chicken sales first. We'll build our feed mill and a hatchery, import hatching eggs and then build out our breeder supply there. Then the next step is we'll build a processing plant as the needs tell us to.

Bryan, just in terms of, like Bill mentioned, the modular project, we expect that to be operational early next year and investments for this first phase is already included in the $150 million CapEx for 2014 that I mentioned.

When you say operational, it sounds like just these first phases will be operational. You won't be doing any processing in probably until maybe 2016. Is that, say, maybe a fair assessment?

Probably 2015 or 2016 --

We will start selling live chickens in early next year and then the processing plant will be probably one to two years or after that.

All right. Great.

And then my next question is, and Bill, you mentioned diversity. If I look at your sales of -- for the processed chicken in your 10-K as percent of total, it looks like they've come down pretty consistently. So one, the hiring of the individual from Smithfield is interesting.

But two, do you think there's an opportunity to diversify your protein base through acquisition and/or greenfield, given how strong the balance sheet is today? I mean, you've talked a lot about growing into a next phase. One, does that mean just diversity of geography, additional further processed proteins, or could it possibly mean additional proteins?

I'll address the last part of your question first and then work back towards the first part. We absolutely are and will be interested in diversifying, not only geographically, but also in protein.

As you well know, 75% of our stock is owned by JBS, the largest meat company in the world. We think our core competencies include selling a value-added portfolio and so we don't necessarily intend to limit that to just chicken. If there are some compelling interests out there in terms of a multi-protein play, then we're certain we would be interested in considering that so that answers the first part -- or the last part of your question.

To address the first part, so our Prepared Foods, which is our value-added or further processed chicken business, we did decrease over the last three years about 10%. So it's about 30% now of our total portfolio in the US. And we did that on purpose. We did that for a reason. We believed, based on our analysis, that we had some of that business that was just simply not adding value.

As a matter of fact if you use market basis as the value of the raw material, then in many cases, we were destroying value. So in order to make that business more impactful from a margin perspective, we set a strategy a couple of years ago to make that business smaller, and focusing on the margin creation of the business that we had left. And now we're going to bring on the resources to grow that business in the right way, and right implying more profitable. So I do expect that you'll see that 30% grow, over time to a larger number but it will grow because it's more profitable as opposed just for growing for growth sake.

We're very excited to bring Chad Baker to our team. Chad has, like I said, a 20-year track record of brand building and selling further processed, primarily pork, and so we're glad that Chad has decided to join our team.

And maybe one last question. If you look at your balance sheet, and the leverage below half a turn on a net basis, it sounds like it's going to be another good year of profitability, what's the plan for after you pay off the Term Loan B-2? What's the plan for distribution of crash amongst growth opportunities, shareholders and potentially further debt reduction or -- and include in that discussion, your optimal capital structure?

Okay, Bryan. [I'll be quite honest], priority is to create the shareholder value, right? So then looking to add stability to do so. It includes dividends, it includes share buybacks and the growth of our Company through acquisitions or greenfields. To your point, we are also looking our opportunities on the market to refinance the existing notes that matures 2018. We paying 7 7/8%, which we believe is much higher than our risk profile would suggest.

So the notes will be callable in 2014 and we believe that we can significantly reduce our yields and our interest cost with renegotiation of those notes. Talking about the optimal capital structure, the optimal capital structure is the one that provides good tax shelter and reduce our cost of capital, while not compromising the flexibility and without increasing our risk profile, right? So we believe that's the sweet spot to, so to speak, is to maintain our leverage between 2 times EBITDA.

Okay. Very good. Thanks for your time.

Our next question is from Karru Martinson of Deutsche Bank. Please go ahead.

Good morning. When you guys talked about additional targeted savings, I think I heard $120 million. Where are those savings going to come from and what's the timeline that you think that those can be realized?

Sure. That target actually is $220 million --

Okay, sorry about that.

Over -- yes, $220 million in 2014 above 2013. And again, the same two categories we look at in generating those economic benefits are yield improvements and processing plant cost improvements, primarily. Those are the two major buckets that we look at and we believe we still have a lot of runway left to go in those two categories.

For the first time, effectively, we used a zero-based budgeting approach in 2014. Our team did very well with that approach, and we take every budget line item down to the absolute zero base and then build it up from there. What we found that when one takes that approach, we find opportunities for generating value that you wouldn't ordinarily find if you just constructed your budget based on history or what you might have done last year or based on experience.

So we think zero-based budgeting is going to play a big part in aiding us to generate future value in the Company. We're also taking a much more scientific approach to decision-making across our management team, driving that all the way down to the people who work on the line.

We've also constructed some incentive schemes for our hourly paid workforce where they get to share in value creation as it relates to yields, processing costs, live production costs, all the different cost buckets. So it's an entire team approach and we're excited about the possibilities that exist from it.

I just want to add some color in this and say that we already reached this $220 million; it was not a target set on the prime management. I think it was through this process, every level of the organization identified and we rolled out those improvements into our budget. So that gives me a confidence that we will reach those targets, because we have every level of our organization involved in that process.

And I would add improving efficiencies, improving yields, improving everything is part of our DNA. It's just how we operate as a Company and so it will be a $220 million target this year. I'm very confident that we'll achieve that target as we have beat the other targets we've set and then we'll go into 2015 with another aggressive and impressive target as well.

Also, just in terms of where you're going to see this $220 million; it's part yields, part operational improvements. So you're going to see, I'll say 50% in revenues, 50% in cost. So if it's yields, it means more salable pounds, so more price, so it's going to show in revenues and in cost.

I think one more thing I would add to this. If you look at our SG&A over the last four to five years, three to four years specifically, we've done, I think -- our team has done an impressive job of reducing our SG&A cost. Fabio mentioned it was 2.15% for the year and we've actually, if you go back to 2007, we've cut our SG&A by more than half of what it was, in dollar terms for that year.

At the same time, Fabio mentioned we've have grown ourselves by 22%. So again, that's just part of our DNA. It's part of who we are. We'll continue to work very effectively in reducing all of our costs.

Well, I certainly remember those old days of SG&A spending. I'm happy to see you're at these levels. When you look at the cash balance here certainly, I hear you that you're going to be paying off some debt here. But how should we think about what you guys want to keep in cash on the balance sheet?

Well, again, we are looking into our balance sheet and using as a leverage to our growth, right? So our priority is to create the shareholder value. There are visible opportunities, there are share buyback opportunities, but mainly acquisitions and greenfields.

I would add, too, our business, the chicken business per se is a commodity business. In the last four or five years, we've seen much more volatility associated with that business and the more volatility that you have in a company or an industry calls for the need for more cash on hand. And as we look forward, we're going to keep that in mind.

But also in mind, I would tell you that just as efficiency and cost savings is part of our DNA, so is growth going to be a part of our DNA. One of the things that we'll look toward when thinking about ways to grow our Company is, how do we change the dynamic of that volatility? Is there a way to grow and at the same time, decrease the earnings volatility that are inherent with our existing business model?

So that will be a consideration as we look forward. The other thing I would point out is, if you go back and look at 2012 into 2013, one of the things that we've improved is the consistency of our earnings, even in a volatile marketplace. And I think that also weighs on the decision of how much cash on hand to keep is our confidence in our business model to create cash flow on a forward-looking basis.

Thank you very much, guys. Appreciate it.

As a reminder, In the interest of time, we do request that you limit your questions to two, and then rejoin the queue for any follow up.

Our next question is from Hale Holden of Barclays. Please go ahead.

Good morning. This is Jamie Robins on for Hale.

Good morning.

My first question, I was wondering if you could just provide a little more color on Chad Baker's background and what specifically his mandate is with you guys bringing him in?

Sure.

So Chad began his career at Hormel, spent a few years with Hormel in regional sales roles. Then he moved to Smithfield and basically moved into a marketing role. I think he was a product manager for the bacon category. And then he's moved on up in the Smithfield organization and his most recent role was Senior Vice President of Sales/Marketing for Smithfield Foods, both Retail and Food Service and also their Speciality business.

The mandate for Chad coming on board is to help us build out -- better our brand building capabilities, our value-added capabilities. And as I alluded to before, on purpose, we shrank our Further Processed Chicken business in difference to margin creation. And now that we have it, what we would consider rightsized. Now we desire to grow that in the right way and Chad's mandate will be to grow our Further Processed and Branded Chicken business.

I would just add some color on how we changed and managed our Company over the last few years. In the past, we used to have integrated Complex where we would used to just produce cooked products just because we have the availability of raw material. Today, we believe that the prepared foods operation is an option. We don't need to cook just because we have the raw materials.

We have the sales team. We have the customers so we can place that chicken outside in the market. We only cook or produce products, share the [products' profit] if they are profitable. I think that's Chad's mandate is to add and create more value out of that.

Okay. Great. That's very helpful.

Then Fabio, if I could just ask you a little bit more. I know you gave some clarity around your thoughts on the capital structure and you mentioned you're evaluating options on the 2018 notes. Do you think you would have a plan in place on that within the first half or is that more of a second half event?

I think the call date is in December; it's more for the second half. The 7 7/8%, like I said, the notes, you can call them only after December 2014. So we'll have a plan on that either to renegotiate or take them out.

Okay. That's all for me. Thank you very much.

Thank you.

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

Good morning.

Good morning.

Just a few quick ones here. I recall that you had a couple of idled US facilities. I'm just wondering if you guys are planning to use that as a source of capital in order to embark on your growth projects, if maybe we could start with that one?

No. We are thinking those are held [defensive] so we don't plan to sell them in this short term or in the near future.

Okay. And then I think you did mention that the capital project in Venezuela -- or sorry, Veracruz, you had budgeted that inside that $150 million for 2014. Do you have a ballpark as to what it would cost for 2015 to build out phase 2 of that project?

Phase 2 would be close to $20 million to $30 million.

Okay. That's helpful. Thank you very much.

But not all that will be consumed in 2015. As we mentioned, it is going to be built in phases, so it's not going to be all in 2015.

That's helpful. Thank you.

Our next question is from Ken Zaslow of Bank of Montreal.

Good morning, everyone.

Good morning.

When I look a little bit further out in the distance, you used to put out your normal margin structure for the US. I have to believe that margin structure is vastly different now, given all the changes. Can you give us an update on what you think the right operating margin would be for -- what your target of, quote, unquote, normal is or what you're targeting?

Ken, that's always an interesting question to talk about normal operating ranges given the volatility of our business. We've said in the past couple of years that you look back over, I think, a 10-year period, 6% to 8% EBITDA margins were, quote, unquote, normal in our business. That got blown up, if you will, during the 2008 through 2011, 2012 period due to the volatility.

We have gone back though; if you take 2012 and 2013 as an example, it's more of that range. I would tell you going forward, based on the operational improvements and the sustainable competitive advantage we have today, we would certainly move toward the upper end, if not somewhat over that range, looking forward. Again, what we don't know is what the weather is going to do this summer after we get the next year's crop planted.

That's going to weigh on profitability and then we also -- while we believe the numbers highly suggest that we're not going to see a significant growth in chicken supply until sometime in maybe 2015, we don't know what the price of chicken is going to be either. But I think it would be a reasonable estimation to think about margin creation, EBITDA margin creation in certainly in the 6% to maybe 9% range going forward.

We are a better operator than the average company, obviously. We are a top-third Company and even moving better than a top-third company so I think we expect, at least of ourselves, to be in the upper part of whatever that normalized range will be.

My second question is and I will leave it here is, it -- you talk around on two sides. One is the volatility, but the other side is that it's a spread business and you're doing better with that. To me, I'm almost getting a sense that it -- I guess my question is is what drives the spread if you're focusing more on the spread side of it and you are taking out the volatility of the chicken prices and the volatility of the corn prices?

It just seems like, if you kind of maintain that spread and you can keep it, maybe it's not as volatile as outside of some random event of a Biblical event of the drought two years ago. I mean, I'm not talking about that but it seems like what drives the margin? It almost seems like you have actually stabilized it. So you keep on talking about volatility; maybe it is more stable. Can you just address that?

Sure.

I think the one thing that creates -- has created that stability is the discipline of the industry to not allow profitability in the past to drive supplies in the future. I think we all have an understanding that our industry is mature, especially in the US. Consumption of total meat in the last five years has not grown.

And our growth in the future is going to come from markets outside the US, and so we have a different model today than we had 15 -- 10 or 15 years ago in that consumption in this country is not growing as robustly as it used to. And I think that discipline really, Ken, is the one ingredient that has made for more stable earnings that we've seen.

We've certainly seen a lot of volatility in feed ingredient cost even as recent as this past year. And I don't know what -- I mean, you can make a solid argument for corn and soybean meal being much cheaper in 2014 and 2015 given the rebuilding of world inventories of corn and growing inventories of soybeans. But we just don't know what the next weather event in either South America, North America or even Eastern Europe may present in terms of the supplies of those feed ingredients.

I would just add that there is also a lot of -- to do with our approach to risk management. So we try to reduce the volatility on the input so it can be more of a spread business that -- if we don't have it.

Great. I appreciate it. Keep going. You guys are doing a good job. Take care.

Thank you, Ken.

(Operator Instructions)

Our next question is from Akshay Jagdale of KeyBanc.

Good morning and congratulations on a good quarter.

Thank you.

So just one quick one for Fabio, just to set up the question. What was your revenue per pound down by in the US this quarter?

It was revenue per pound was close to $1.25.

So it was down something like mid-single digits?

It was down, yes, mid-single digits; no, it was down close to 2% compared to the same quarter last year -- close to 2%.

Okay, so not much at all. So Bill, I just -- I'm trying to understand the variables for 2014. So corn costs are -- what are corn costs for you guys going to be down by if you were hedged across futures curve right now? How much per pound or in million dollars would they be down by roughly?

That would be a great piece of information for us to have. But the truth is, Akshay, we don't know. We know what the futures markets imply. But like I said, even though we believe that we're going to plant 92 million acres of corn and just under 80 million acres of soybeans, we don't know what the weather is going to be.

So past June or July, it's really very, very difficult to know what feed costs are likely to be past that. We believe net-net, feed cost will be lower in 2014. It's just almost impossible at this moment to tell you exactly by how much.

Okay. So maybe I'll ask in a different way because it looks like some feed costs are going to be down, your productivity savings are stepping up significantly. So you have a lot of savings and productivity that if you wanted to, you could invest back into pricing to gain share.

But I'm just trying to understand the dynamics of the mark -- spot market, the cut-out price which is, like you said, down about 15%, yet for the quarter, your price is down 2% or 3%. So what price decrease in the spot market or in the cut-out would it take for 2014 to be lower than this year at the EBIT level?

So if you -- do we need the cut -- if the cut-out is down by 20% for the whole year, it would be safe to say, I think, that 2014 results might not be the same as 2013, but can you just give us a sense? Because I agree with everything you are saying in that supply is constrained, but I'm just trying to understand what kind of pricing you would think is for the cut-out is a good outcome.

I -- well, it's hard to say. You can look at composite cut-out values and think about it, if it were more than 20% to 25% lower, then that would certainly weigh on earnings. But I would remind you, too, that you can't look just at price, because mix and how we manage mix, as I said in the prepared remarks, has become a competitive advantage for us.

That's why I haven't -- but you've not seen our total value in terms of total pricing go down as much as the market has gone down, is the way that we manage mix. And that's one of the competitive advantages that we'll continue to have, I think, versus other companies. And while we may not be as opposed to just that sheer market decline, but again to answer your questions, 25% or more, yes, that would be probably significant enough to impact earnings.

Okay. I'll leave it there. Thank you.

Thank you.

In the interest of time, this concludes our question-and-answer session. I'd like to turn the conference back over to Bill Lovette for closing remarks.

Thank you. We've had a strong year and we've seen consistent performance across the Company, as we hold everyone to the highest standards. I want to thank our team members, shareholders and customers for their continued support.

These past three years have been a defining period in changing the culture and results for Pilgrim's. I'd like to take this opportunity to invite you to join us as we host an open Investor Day in New York on March 13. Thank you all for joining us this morning.

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