Pilgrims Pride Corp (PPC) 2014 Q4 法說會逐字稿

Good morning and welcome to the fourth quarter and year end 2014 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 Dunham Winoto, Director of 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 fourth quarter and year end of December 28, 2014. Yesterday afternoon, we issued a press release 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 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-K's and are available online at www.SEC.gov.

Presenting to you today are Bill Lovette, President and Chief Executive Officer; and Fabio Sandri, Chief Financial Officer.

Before we begin our prepared remarks, I would like to remind everyone of our Safe Harbor statement. Today's call may contain certain forward-looking statements that represent our outlook and current expectations as of the day of this release. Unintentional factors not anticipated by management and contractual results could differ materially from those projected in this forward-looking statements. Information concerning those factors has been provided in today's press release, our 10-K and 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 generated $2.1 billion in net revenue during the fourth quarter of 2014, resulting in adjusted EBITDA of $368 million, or 17.4% margins to account for the early retirement of debt and foreign currency translations. Our net income of $167 million compared favorably to the same quarter of 2013 with a 17% year-over-year increase.

Adjusted earnings per share was $0.83, compared to $0.55 in the same quarter of last year. For the full year of 2014, net revenues were $8.6 billion versus $8.4 billion from a year ago, while earnings were $2.74 per share, compared to $2.12 in the year before.

Q4 is a strong close to a year of what we believe is another step forward in our goal of becoming the top operator in the poultry industry. Critical enablers are our portfolio strategy and management model, which yield a diversified sales mix, ensuring we can adapt quickly to changes in market supply, as well as endure volatile environments, while being relentless on operational efficiency.

It is important to take a few minutes to remind everyone that we do not expect to follow the full peaks and troughs of the broader industry pricing trends. Rather, our portfolio strategy means that we will benefit from strong markets, and at the same time, be buffered from some of the impacts of lower pricing, given our lower overall volatility.

The net benefit is, we believe that we will have a better margin structure relative to our peers, over an extended period of time. In line with the strategy, we are continuing to increase our leg-meat de-boning capacity in order to diminish much of the negative impact of pure commodity sales, and demand uncertainties in export markets, while at the same time taking advantage of evolving consumer demographics and tastes within the US market.

Also, by increasing leg-meat de-boning, we will be able to offer a more complete mix, and become a more viable partner to our key customers. Yet another example of our diversification strategy is in our large bird de-boning, where in a period of four years, we have transformed from a minor player to the leader, which contributes to our superior blended margin profile.

More important though, we have created a strategy to diversify, both geographically and in product mix within this category, to take advantage of emerging trends in demand. We are also continuing to strengthen our key customer relationships by providing them the ability to source a greater variety of products from us than ever before, in order to make your Company a valued partner.

We believe this sort of partnership, many of which tend to be longer-term in nature, is important as we think both sides will benefit in an up, as well as a down market environment. Although we have won multiple awards from our customers, we are not satisfied with where we are now, and always striving to improve our ability to better service these accounts.

We are continuing to find ways to grow our broad-line food service business by looking for greater innovation, and in our ability to provide the industry's best mix of quality, product, reliability and support.

We are building on what we believe is a competitive advantage to our Company, and that is our culture and our people. We're seeing a lot of excitement as we roll out new tools and methods to improve our sales mix and operational efficiency. We finished 2014 in line with our target for yield and plant cost improvements, and proved successful execution and feedback loop is the foundation of zero-based budgeting. We've identified another $200 million in costs savings for 2015 over 2014.

While we recognize the value of efficient plants and equipment, we believe the opportunities we have identified are a direct result of our people. Our team has only just begun to create value with zero-based budgeting method through the continuous cycle of identifying gaps, and then closing them through our management method. We believe we will set new standards for the industry.

Turning to prepare food, our strategy is gaining momentum. First, we believe we are doing a much better job of matching our raw material costs and revenue structure, as a way to deliver more consistent earnings. For example, we are aligning the way we sell our products with the way we procure our raw materials, thus limiting our exposure to fluctuating commodity markets.

We are now very diligent in requiring our sales teams to ensure that, within each of our contracts, cost and revenue are matched accordingly. In addition, we are also layering in extra deliverables, such as SKU rationalization, exiting unprofitable business, diversifying customer base, and maximizing product mix. We are doing all of this as we strive to be the best in class in every category we compete.

As a part of that initiative, this year, we are planning significant investments in our fully-cooked operations to capitalize on increased demand for these products. Such a level of discipline and commitment to growth will allow our prepared foods business to provide more consistency in our earnings over time.

Internationally, we are also continuing to refine our value added strategy by diversifying our product mix further, developing access to new markets and pursuing opportunities to enter new channels abroad. This diversification is proving especially relevant today as we encounter some headwinds in some of our traditional export markets, including recently imposed trade restrictions due to isolated cases of avian influenza on the West Coast, and more tempered demand from oil dependent markets as these economies are impacted by currency devaluations and general macro instability.

Despite this short-term volatility abroad, we continue to believe our diversification investments we have been making, will help us to ride out the near-term market conditions by maintaining a more balanced level of inventories, and also developing sufficient demand for our products elsewhere. Our affiliation with JBS is, of course, a competitive advantage, as it strengthens our insights in the export market, relative to our peers, by providing us with a more effective overall market access, as well as superior market intelligence.

We believe that for the long-term, chicken produced in the US will fill a key demand function for strong growth and protein consumption around the globe, especially in developing economies. As an example, even with the challenges faced in 2014 with the closing of the Russian market, price barrier [fewed up] avian influenza found in wild birds in Washington and Oregon. Exports of total US poultry set a total record for volume shift, at more than [4.1] million metric tons. More exports, excluding chicken [palls] accounted for the largest component of this at 3.1 million metric tons.

So in summary, despite near-term challenges of a strengthening US dollar and trade restrictions, the future growth of our exports is very bright. We saw much improved Q4 results in Mexico compared to a year ago, despite some weakness in pricing at the beginning of the quarter, which was in part, due to low seasonality.

That said, prices rebounded strongly by the end of Q4, while inventories have remained quite low at the beginning of this year. Both of which are positives. With this as a backdrop, even with the effects of a stronger dollar, we started the year on a positive note and we expect Pilgrim's Mexico to be a strong contributor for 2015.

At this time I would like to share with you a few updates regarding our projects in Mexico. The construction at Veracruz is progressing well. And although we faced delays due to higher than normal rainfall in the past five months, we are scheduled to begin production this summer. On the price on the Mexico front, we are progressing well and we expect a final outcome from the Mexican antitrust authorities during Q1.

We expect no change to our prior outlook for stable corn and soybean mill in 2015, due to near-record yields in stocks in the US and South America. And as such, we do not anticipate input costs will present a barrier to our ability to deliver results this year.

In addition, a stronger US dollar should encourage more planting of corn and soybeans while farmers a abroad will ultimately be beneficial for us. We see industry supply growing roughly 3%, in line with current accepts and our expectations.

We continue to see demand more than outpacing supply, even if there is a slight moderation in some export markets. We would like to point out that on the supply side, recent pullet placement data is not fully reflected of domestic growth, as some eggs have been diverted to Mexico in far greater number than historically, given the strong bio-security environment of the US.

Also indicative of a fairly robust demand environment, inventory has remained relatively low levels, with cold storage at 6% below a year ago. Note that this represents less than one week of production, a metric that we consider quite healthy for our industry, as a whole. As we begin the year, pricing has held up with breast meat and tenders at higher levels than last year. And despite temporary uncertainties in the export markets, cutouts have also remained higher than last year.

We continue to see positive signs for demand, and chicken continues to be the best value protein available through retail and food service. Having just closed our January monthly results, we are pleased at our strong financial performance and cash flow generation continues, and we are very delighted that we are off to a strong start for 2015. With that, I would like to ask our CFO, Fabio Sandri, to address our financial results.

Thank you Bill, and good morning everyone. We recorded $2.1 billion in net revenue during the fourth quarter 2014, resulting in adjusted EBITDA of $368 million, or 17.4% margins. That compares to $2 billion in net revenue and an adjusted EBITDA for $197 million, or 9.6% margins, the year before.

Net income of $167 million compared favorably to the same quarter of 2013, with a 17% year-over-year increase, even after the impact of $25 million in the early retirement of the 2018 notes, and $23 million in non-cash foreign exchange translation, due to the variety of the dollar against the Mexican peso at the end of the year.

Adjusted for these extraordinary items, earnings per share reached $0.83 per share compared to $0.55 in the same quarter of last year. For the full year 2014, net revenues were $8.6 billion versus $8.4 billion a year ago, with an adjusted EBITDA of $1.4 billion compared to $810 million. Earnings per share was $2.74 compared to $2.12 in the year before.

Our results were commendable for both the US and Mexican operating units throughout the entire year. Our SG&A expense has continued at 2.2% of net sales, despite the increasing incentive accruals for the level of performance our team members have delivered. The level of competitiveness of our SG&A, focusing on adding value to our operations, shows our commitment to operational excellence. Not only in the industrial standpoint, but also from our sales and support teams.

The strength of our balance sheet is due to our relentless focus on cash flow from operating expenses, continuous management of working capital, and disciplined investment and higher return projects.

During the quarter, we generated $206 million in free cash flow. After taxes, [not there] $41 million in capital investments, leading us to a net cash position of $572 million at the end of the year. Our strong cash generation leaves us plenty of room to continue to seek the right investment opportunities. It also provides us with the ability to increase our plans for captive projects in 2015, similar to what we did in 2014.

We will continue to focus on opportunities with a rapid return on our investment, and projects that includes our efficiency, quality and safety. For 2015, we've dedicated funds to a waste water facility upgrade, leg meat de-boning and fully-cooked expansions, infrastructure and various cold chain projects. Each of these projects improves our ability to provide the best quality product to our customers, while returning value to our business. In total, we expect to invest $175 million in 2015.

Given our strong cash flow generation, last month we announced a special dividend payment of $5.77 per share for a total of about $1.5 billion, base on the existing number of shares outstanding. We believe this special dividend is proof-positive of a promise we made three years when we implemented our strategy to optimize our capital structure, and a testament to our financial disciple and our confidence in the future.

True we are confident of our ability to return cash to shareholders. We exercise great care in ensuring the dividend payments not only create shareholder value, but also preserves our flexibility to pursue our growth strategy.

Our leverage is below one point EBITDA, and our commitment to pursue the right growth strategy remains intact. We will continue to review each prospect according to our value-creating standards. We are also pleased with the support from our bank group for the new facility we just executed, where we were able to secure funding for the Company at a very competitive terms. With this new facility, we expect the interest expense for 2015 to be in the range of $35 million.

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

Thank you, we will now begin the question and answer session.

(Operator Instructions)

Our first question is from Farha Aslam of Stephens Inc, please go ahead.

Good morning.

Good morning, Farha.

Congratulations on the good quarter.

Thank you.

Let's talk about the supply, demand outlook for the full year of 2015, as well as into 2016. Kind of what you see in terms of supply growth and your confidence around that 3% number? What you see supply growing in 2016 and how you expect demand, in relation to that supply?

Okay. So, we see demand currently, and for the rest of the year, strong actually. As I have mentioned in the prepared remarks, chickens still represents the best value in protein, although we have seen some movement in pork prices, we do not see that as an imminent threat to chicken.

Demand is very solid at retail, tray packed chicken now, and we believe that will continue to grow. Rotisserie chicken sold at retail deli. Demand continues to outpace supply. And our pricing, and the industry pricing, is reflective of that.

Food service fresh cut up chicken demand is very strong, and we are growing our business in this segment by double-digit percents. And in prepared foods, we see fully-cooked parts in school food service demand continue to outpace industry capacity. So, on the demand side, it looks very favorable for this year.

On the supply side, one of the leading indicators that we always look at is our breeder supply. And if you look at the size of the current breeder flock, it is about 53 million. I think the change that we began to recognize last year, is the increase of exports of fertile hatching-eggs to Mexico. If you look at September, October, and November, fertile hatching-egg exports in Mexico were up over 200% for those months, on average, versus the same period a year ago.

So if you take 53 million birds, that represents the current flock, and then you set aside, if you will, about 5% of that flock, or 2.65 million of those, then you have a breeder's flock supply for the US market of 50.35. And if you go back and compare that number to the last couple of years, it fundamentally has not grown. So, we still see that hatching-egg supply is not going to be burdensome, in terms of increased production.

And then, I looked at some numbers supplied by Agri Stats earlier in the week, and found some interesting facts. If you go back to 2008, the industry slaughtered 8.35 billion head, and by 2011 that slaughtered head had declined by approximately 8% to 7.7 billion. And it's actually remained about that same level through 2014, at about 7.7 billion.

If you look at live-weight pounds produced, it was 47.1 in 2008. It declined to 45.06 billion in 2011. And in 2014, for the first time since 2008, it reached 47.3 billion. So only 200 million more pounds above 2008 levels. And then on the average weight side, the average weight in 2008 was 5.64, and it's averaged just above six from 2011 through 2014. So with all of that data in mind, what it tells me is, the industry remains fairly disciplined on the supply side, and demand has been increasing for chicken against a backdrop of increasing beef and pork supplies.

Farha, I will just add onto the demand. We're still evaluating the impact of the lower gas prices. The American consumer is experiencing more available income, and that could be a potential improvement, especially in the food service sector.

That is very helpful. And just as a follow-up on the pork issue that we are seeing on the West Coast. Do you anticipate any near-term impacts to your business, in terms of both chicken, as well as potentially more competition from pork and beef?

Great question. So far, Farha, we have not been affected by the West Coast slowdown, as most of our exports are shipped off the East Coast. One of the things we are keeping our eye on though is, as other producers and exporters divert product to the East Coast ports, that's causing more product to roll through East Coast ports, and thereby creating competition for shipments off the East Coast. So, it's certainly in our interest to have that issue resolved as soon as we can, so that we can keep all product flowing for the export market.

Thank you very much.

You're welcome.

Our next question is from Brett Hundley of BB&T Capital Markets, please go ahead

Good morning guys.

Good morning, Brett.

Bill, very respectfully, I will admit I kind of chuckled at how you guys won't ride the peaks and troughs of the industry, because I'm pretty sure your riding the peaks right now. Your performance pays very good in the US compared to the spot margins that we calculate.

So maybe you can give investors more color as to how your business is insulated, if and when the market does eventually come off? And maybe as a part of that, you can talk about the cost saving. You guys have called out a substantial number of cost savings over the past few years. I would be curious to see how you guys think about the level of those cost savings, that the Company can continue to hold onto going forward, even as market conditions eventually come off?

Okay. I will start somewhere in there, with those questions. Thank you Brett. I would tell you that, during the peak times of pricing for spot commodity chicken, we absolutely did not realize the peak from a competitive standpoint. We saw other producers realize much more from that period, than we did. But I think it's a testament to our portfolio strategy that, in periods like Q4, we still performed at a very high level, despite a decline in pricing.

It is really not very complicated, Brett. We have a very balanced portfolio of businesses. From retail tray pack, from fresh food service, the smaller birds that go into the bone-in fried chicken QSR segment, to the retail rotisserie deli.

And then, as I've said, we've become the leading producer now, in large bird de-boning. But, it's been our strategy, even within those segments, that also is a huge contributor to our consistency of earnings. For example, in the large bird segment, we have eight plants. But yet, we have different strategies, whether it's in certain geographies, or even in product mix, amongst the large bird de-boning segment. And we crafted it that way because, we think that we will continue to see demand change over time, for different parts, prepared in different ways. We want to remain relevant to the market place in that respect. So again, it's really our portfolio strategy that creates that consistency of earnings, and insulates us from the severe peaks and troughs that we see.

Just wrapping up about the operation improvement. I think it's part of a greater management model, that they're implementing, that is based on a culture that is result-orientated, data-driven and autocratic.

And I think the key fundamental thing is to integrate all levels of your organization into the process of fitting in to find the opportunities, and setting the action plans to capture it. So we believe it is a continuous effort, and it continues to be something that will drive value for us.

Okay. Thank you. And my second question is on your prepared foods business. I was just hoping to get a little bit of an update here, just about how you feel that this business is trending? If you can kind of reiterate what percentage of mix, I think it was up to, potentially up to a quarter of your business. If you can just touch on that.

And also where you guys have bigger exposure? Are you bigger in food service there? Or retail? Thank you.

Yes so, in our prepared foods business, I would remind you that, over the past four years, we have actually decreased that business, as a percentage of our total company. We have it now at a level, or size, I think it is roughly 20% of our total sales, and we think that is the right size for now. But, we are interested in growing that business. Because we think we can do so with better performance than historical, at Pilgrim's. And we want to capture growth trends and demand for those products.

And a couple of examples of that I mentioned, we see school food service demand growing, and there is not enough industry capacity to keep up with that growth. And also, we see certain fully-cooked parts, notably wings, increasing demand. We have a great brand for food service, and deli, with our Pierce brand. And we are able to capture a premium from the marketplace, because of the innovation within that brand. The reliability of the service, the quality, and it has been, continues to be a great brand for us.

So as I said in the prepared remarks, we have some aggressive investment plans for increasing our fully-cooked capacity there, in order to keep up with increasing demand. I will tell you that business, from a food service versus retail standpoint, is more food service. But it is growing at retail and deli, as opposed to the branded offering in the frozen section for us.

I'll just add that, as the (inaudible) of our portfolio the prepared foods will also provide some consistent earnings to us. And we have the opportunity to grow our business by outsourcing meat outside [governance] in our buy versus growth strategy.

You source boneless, skinless outside the Company for that business, correct?

We do.

Okay. Thank you so much guys.

You're welcome.

Our next question is from Adam Samuelson of Goldman Sachs, please go ahead.

Thanks, good morning everyone. So a couple of questions, then maybe first Bill, touching on some of the market volume and growth expectations on the supply side, that you alluded to, and touching on Brett's question just now.

Can you talk about what your own internal sales volume expectation would be for 2015? And, if you actually intend to raise more chicken internally? Or would any volume growth on the sales side really come from externally sourced meat?

From a production side Adam, I think we will be roughly in line with our market expectations of growth. And then as we grow our prepared foods business, over time we will see more of that product sourced on the outside. In other words, from chickens, not produced by Pilgrim's or slaughtered by Pilgrim's. So, that's yet another way that we can continue to grow our Company, is by adding prepared foods capacity, and using meat purchase on the outside.

And also on the prepared, if we try to match the prices that we sell the product, in a fixed price, it only makes sense to buy a fixed price from external. Because otherwise, we will not be hedging anything, if we source from internal.

Right. So, can you just tell me things around how much of your sales volume today, or the actual, is sourced externally? How much, really, are you short chicken, fundamentally?

We don't disclose that specifically, but I would tell you that we've been increasing the amount of product purchased on the outside for prepared foods, and that will continue to grow in the future.

Okay. That is all very helpful. And then, maybe a little bit more color on the cost-saving initiatives, and help us think through some of those key buckets there, for 2015 on the $200 million. Can you quantify the impact of lower gasoline and diesel prices on your live production costs? And how much of that would be included in the $200 million target?

The $200 million is much like last year, equally balanced between plant cost reduction and yield improvements. Those are the primary sources of that value creation. It has been for the last three to four years.

An increasing share of that has come from plant cost reduction, as opposed to yield improvements, over the last probably 18 months, and we think that will continue to be the trend. What was the second part of your question?

The impact of lower gasoline and diesel prices on your live production costs, and if that is included in the $200 million value creation number?

Actually, we did not include that because we had wrapped up our budgeting process, before we saw the dramatic decline of gasoline prices. So that is not in there.

We would expect that to have not a great amount of cost reduction to live production, as more of the live production cost is influenced by corn and soybean mill, which also tracks to the decreasing level of all commodities over time. And so, again, I don't see that being all that much related.

Just in terms of the opportunities, especially in labor management, we are implementing a new system where we take every single operation, we identify the motions and we understand the most effective way of de-boning a chicken. So that is very important to us, it is a good tool to manage our labor.

Just a few more points on than. What Fabio is referring to is, we actually videotaped each individual job. And we run the video through a software program that engineers each job to be as efficient, from a motion standpoint, as possible.

So it does a couple of things. One, it points us toward having the right amount of people per job, and it also makes those jobs more efficient, and it helps on our employee safety as well. So it has been a great program that we actually discovered from JBS in the beef business. And we are applying it to our chicken business, and it is having a great effect, both from a safety standpoint, and an economic standpoint.

Okay great. That is very helpful, I will pass along. Thanks.

Our next question is from Kenneth Zaslow - BMO Capital Markets, please go ahead.

Good morning everyone.

Good morning, Kenneth.

I liked how you phrased the whole demand side. What I was hoping for, do you have any anecdotal stories within the Company that have shown a change of demand function? Or either you are seeing more, a shift within the portfolio, a certain anecdotal evidence? It's just outrageous, and you guys actually accompanies specific example, that would be great.

Yes, alluded to a couple, Ken. School food service, fully-cooked products, a lot of patties, nuggets, strips, that go in to the school lunch program, where the government purchases commodity chicken. And then, we take those chickens, de-bone them and turn them into value added product, process products for school lunch. If you look at all the government programs combined, there's something like 50 million meals served, everyday.

And we're one of the largest participants in producing those new components that the government purchases. And, that part of the market is growing. At the same time, some industry capacity has been taken out by our competitors. And so, we're enjoying actually, more demand than we have capacity. And so, that's one way that we're addressing investments in our fully-cooked capacity.

On another side of the market, one of the fastest growing categories in the past few years has been the rotisserie deli wand, sold by retailers. It's been a very popular item. It represents a great value for consumers. We've actually tracked some consumer research that suggests, consumers are going into retailers for the sole purpose of buying those rotisserie chickens.

Where, they would buy two of those chickens, or three of those chickens. Take them home, have multiple meal occasions from those chickens, in various forms. And that would be the primary point of purchase for that store visit. And, just like in school food service, supply in that category has not kept pace with demand. And we're the largest participant in that category. So, the net result of that has been, we've increased our revenue per unit quite handsomely, for that category.

My question is, on the Mexico side, do plan on pricing through some of the FX? And, how quickly can you do that?

I think that Mexico will adapt to their own supply and demand. And, rather than passing through the FX, I think that will come into prices, through the increase in cost of grain. Most of the grain that Mexico uses is imported from the US. So that will be an impact for them, so we expect the prices in Mexico to adapt to that reality. Of course, there is always a lag in the changing of prices.

And I think the most important evidence of what Fabio said is, through the recent devaluation of the peso to the dollar, we've not seen a chicken demand go lower. It actually continues to be very strong. In Mexico, that's one of the export markets where demand for leg quarters, for example, has remained very strong. So that's what gives us confidence about 2015, for our mexican business.

Mexico is one of the economies we have been developing. And there is a lot of growth, and demand for growth things, in those vital economies. And they are, in a way, not being able to grow in line with the demand, the supply. Because of division in the country, and because of the lack of capacity.

I was just trying to figure out why you excluded the FX from your results, how you said it. I'm assuming that you think it's a temporary [anti video recover], I guess, is kind of what I thought that you were implying.

That impact off the FX is just the transmission of the assets that we have in Mexico, into US dollars. So it's a non-cash translation exchange. Great, thank you.

Our next question is from Akshay Jagdale of Keybanc, please go ahead.

Hi, this is actually [Lou Bee] on for Akshay. Congratulations on a great quarter and year. I just wanted to ask quickly about M&A. Could you maybe give us a sense of your level of interest in doing a deal? Also, whether you're seeing anything out there that interests you, and maybe, what the valuations look like?

Our interest in growing through acquisition remains very high, very strong. The issue is, making sure that we find the right target at the appropriate value. And I think we've demonstrated that in 2014. We laid out our strategy in March, at our investor day. And that same strategy remains today. We see chicken track where, either through geographic voids or brand voids. We may find something compelling. And then, we have a branded processed foods track that we're also looking that. If and when we find the right value in that space, we remain interested there, as well

Thanks, that's helpful. And then, I just wanted to follow up quickly, on the topic of your margins. Your US chicken business margins versus the industry. At it's investor day in December, Tyson said that they think, when the industry is at breakeven levels, they expect their US chicken business to earn around 5% margins. I'm just wondering if you cold give us a sense of what you think is, sort of, where you would expect your business to be at the trough of the chicken cycle.

I think that you can compare for yourself, our margins to those margins that are publicly available. And I think that tells part of the story as to why we're confident in our portfolio strategy. We're now in the top third, the top quartile of profitability in the industry. And, as I've said before, we're not satisfied with that. Our strategy and our vision calls for us to be the best operator. We're going to work very diligently in pursuing that.

And literally, we benchmark our profit from operations with all the other companies. And, like Bill mentioned, being the top player. And our target is to be the best. We will always a premium over the average company. So if you're benchmarking the average company, as of the reference, we will always be above that.

Okay, that's helpful. Thanks, I'll pass it on.

(Operator Instructions)

Our next question is from [Ian Kessler] of IKK Holdings, please go ahead

Hi Bill, Fabio. Congratulations, how are you guys doing?

Good, thank you.

Hi Ian, how are you?

So, I want to clear something up here. I have two questions. The first question is, it seems like everybody's asking questions about you being at peak of the cycle. But, as I see it, and I see where spot margins are, and I see grain, and the outlook. And I see what's been weighing on the back half of the bird, and some temporary issues, in terms of export bans, and the West Coast port situation.

Why -- when I'm modelling out your company, I'm getting to closer to $3.50 than $3.00 in earnings for 2015. And I'm getting to a pretty good year in 2016. So, why are we at peak, which is what everybody seems to think? That's part of question one. Part two of question one is, bird supply. Everybody seems to think that the back half of the year is going to be up 7% to 9%, based on pullets of 5 and weights of 4. I think we've got a clearer [fire5 app] for some people, in terms of egg-sets and weights.

Weights are currently running up 4, if I'm correct. But the back half has material comparisons, versus right now. So, maybe if you could speak to that? Because I'm kind of thinking about weights in the back half kind of flat to up 2, max. So, those two questions would be my part of question one.

Okay, thanks [Ian]. We've never said that we're at peak. So, that's not something that we focus on. What we have talked a lot about, and continue to talk about is, our portfolio and the consistency of earnings that that's going to provide, no matter where we are in the cycle. And we did that very deliberately, early on, when we arrived and created the vision and the strategy with that in mind.

In terms of the weight, I went through and answered Farha's question. Sort of where we've been the last four or five years, in the industry. I think those numbers demonstrate that there has been structural change on the part of the chicken industry. And the fact that, since 2011, we've remained roughly, on an average weight per head basis, at about 6 to 6.1 pounds per head.

I would also remind you that, from a breeder supply standpoint, if you back out the amount of breeders that it requires to ship 3.5 million to 4 million dozen hatching-eggs to Mexico, which is now the levels that we're seeing, then you get back to a breeder flock size that's really no larger, at this moment, than we've had the last couple of years.

So, even though we've seen an increase in pullet placements, going back as far as almost a year ago. Those eggs are not finding their way back to the US supply. So, I don't think that -- certainly for the current environment, the first half, and even into the back half, of 2015, that we have a huge runaway in supply risk out there. Then, as you get into 2016, until we see that change in the breeder flock, in a large way, then I think the supply situation remains approximately what it looks like today.

And also, I would add that, in terms of peaks and valleys, between 2008 and 2011, a lot of capacity has taken out of our industry. And you don't see a lot of capacity coming back on line. So, what we see is, supply not growing at the same pace as the demand. So, what we see is, a continuous time where supply and demand is in balance.

Got it. Thanks guys. So, just taking that all and trying to understand, relative to where pricing is, and where supply is, 2015 seems to be shaping up as a better year than 2014. And indications are that 2016, I know it's early, should be a pretty good year.

I can't argue with your assertion there.

Okay, got it. And then, the second question is, you're going to be throwing off a ton of free cash flow. You mentioned about doing a value of accretive M&A. Can you talk about other priorities of cash, in terms of, you just paid out a large special dividend. But let's just say, you're unable to do any large accretive M&A, just because nothing comes your way this year. What your uses of cash will be?

As we mentioned before, we will continue to invest in our Company. So, we expect to invest $175 million in CapEx this year, in our operations. And, on the other expenses, we are looking to all the other expenses. Like dividends, like share repurchases and all the other expenses do great, shareholder value.

Got it, thank you. And just lastly, on the demand side, is there anything that's temporary that you're seeing in nature? Or is everything that you're seeing kind of structural, in that, this demand should outpace supply for not only the current quarter, but for the upcoming future, this year and next?

I don't see anything, necessarily, temporary that we're seeing. What we've been seeing the last couple of years, continues to be the trends, as I mentioned in some of the categories of demand growth. I don't see that changing

I think the only thing that can be temporary, but was not included in our projections and we haven't felt the full impact, is the reduction in gasoline prices. That will create more favorable income for the consumers. I don't know how temporary is the low gas prices, but that could give a boost, especially to food sales.

Got it. So, wrapping it up, 2015 is off to a better start than 2014. And 2016 looks to be a good year, as well.

Sounds great to us.

Okay, thanks guys.

Thank you.

(Operator Instructions)

I'm showing no additional questions. 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, and though we're pleased with our 2014 results, we will not be complacent. We will continue to drive ownership and accountability at every level in our company, even as we develop new tools and methods to further improve our sales mix, operational efficiency and margins. We see 2015 as another great opportunity as fundamental, so far, for stepping up to provide another positive economic environment for poultry suppliers

As we begin the year, demand for chicken has remained strong, outpacing supply. And with these improvements we've implemented, Pilgrim's is well positioned to reap the benefits. Thank you all for joining us today.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. EventID. [Event Concluded]