Pilgrims Pride Corp (PPC) 2016 Q1 法說會逐字稿

Good morning. And welcome to the first quarter 2016 Pilgrim's Pride Earnings Conference Call and web cast. (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 to Dunham Winoto, Director of Investor Relations for Pilgrim's Pride. Please go ahead, sir.

Good morning and thank you for joining us today. As we review our operating and financial results for the first quarter ended March 27, 2016. 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 8-K and are available online at www.SEC.gov.

Presenting to you today are Bill Lovette, President and CEO, and Fabio Sandri, Chief Financial Officer. Before we begin our prepared remarks we 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. Additional factors not anticipated by management may cause actual results to differ materially from those projected in these forward-looking statements. For information concerning those factors have been provided in today's press release or 10-K and our regular filings with the SEC. I would now like to turn the call over to Bill Lovette.

Thank you, Dunham, and good morning everyone. Thank you for joining us today. For the first quarter of 2016 net revenues were $1.96 billion versus $2.05 billion from a year-ago resulting in an adjusted EBITDA of $234 million or an 11.9% margin versus $364 million a year-ago or 17.8% margin. Our net income was $118 million compared to $204 million in the same period in 2015 while adjusted earnings were $0.46 per share compared to $0.82 per share in the year before. In line with our expectations Q1 results have improved meaningfully from a challenging Q4.

Both US and Mexican operations contributed to the solid results driven by gradually improving market environment which puts us in a strong position for Q2. Pricing in the spot market rose as demand picked up with a reopening of most comports markets helping to here so cold storage inventory from last fall. With export demand becoming stronger we expect further improvement in the commoditized part of the market in combination with seasonally stronger demand during the upcoming summer growing season.

It's worth reminding everyone that once again our portfolio strategy is designed for the mid to long run rather than the short-term. More specifically, it's structured to avoid the full peaks and troughs of the commodity market. The diversity of our product and customer mix will allow us to capture the strength of up markets and at the same time be cushioned from the weakness of down markets which we believe will translate to lower volatility and more consistent earnings and higher margins.

As demonstrated over an extended period of time our broad mix strategy gives us the potential to outperform the competition. Our case-ready and small-bird performance has remained strong given our unique ability to optimize our production mix to match specific customer requirements. The shift towards big birds over the past few years has left the industry with fewer small birds while demand remains strong.

Our portfolio approach gave us the ability to capture the benefits app we have profited from the strength in case ready in small birds to partially offset relatively weaker spot markets. And although we are already the leading producer in these segments, we are not complacent. Our team continues to partner closely with key customers to develop innovative solutions to satisfy their needs and enhance our abilities to diversify our customer base and further broaden our portfolio. For example, with in fresh chicken our operating teams are able to match key customers with specific plants by leveraging our well-balanced mix of bird sizes.

By optimizing product mix we're maximizing our profit opportunity while reducing the risk profile across the entire business. As discussed on our last call, we are reinvesting cash flow back into the business throughout 2016 in support of our commitment to the gross initiatives in fresh chicken and prepared foods while maximizing return on capital and shareholder value. We believe our target capital spending plan will further enhance growth prospects with key customers and our own Pierce-brand chicken.

These projects are currently on track and we will continue to seek opportunities for a better product mix and higher efficiencies that will translate into a better margin profile. In addition to these investments and to leverage our leadership and antibiotic free production we are also excited to announce today that we have begun preparation of converting one of our existing complexes to produce USDA certified organic chicken to meet the growth of key customers. We believe this is a game changer for our portfolio and signifies our commitment to satisfy all the needs of our customers and consumers.

Despite what we have achieved so far we believe there's more work to be done. Our team continues to identify opportunities in high growth categories and once identified we're willing to deploy the appropriate resources when necessary for the needs of our key customers to offset the impact from volatile commodity pricing. The organic plant conversion is a good example of the steps we're willing to take to get there. Our team recognizes the importance of not only identifying key customers who are growing but more importantly seeking creative solutions to satisfy merging consumer demand preferences such as organic NABF which will lead to a stronger long-term relationship with our key customers.

Our vision of sustained growth in prepared foods business remains intact. Our well-regarded Pierce-brand chicken will remain as the foundation in prepared foods. We're confident that it will continue to be the preferred brand by many food service operators. The previously-announced addition of a new fully cook line at Northfield, Virginia scheduled for completion late this year is supportive of this growth vision. We're on track to sustainably increase margins and meet more demand not only from existing key customers but also expanding our footprint to accounts where we did not have a prior presence.

We're constantly reviewing and updating our product offering in order to bring new products to market for the purpose of appealing to new customer channels and help drive incremental sales for our customers. As a part of that push, our team is focusing their efforts on leading regional and national chain operators, school food service, and main broad-line distributors as the major customer channels. Export demand volumes are improving as compared to Q4 due to a more favorable market environment.

At the same time accommodation of more Avian influenza cases being reported by other chicken producing countries globally, and diligent work by the US trade representatives are prompting the governments of export markets to be more open to adopting regionalization policy for US chicken. Instead of imposing a country wide ban for future out breaks which is also supportive of demand and creates more potential for upside compared to last year. And even though bulk leg quarter prices have rebounded off the bottom set in 2015 we'll still trading at a get a level that represents good value as compared to other animal proteins and therefore we expect demand from consumers in emerging economies seeking a cost-effective protein source to continue growing.

Although we have not had the same number of cases of US Avian influenza compared to last year we remain diligent in our continuing practicing extensive bio security measures at all of our production complexes. We also test every (inaudible) prior to slaughter and monitor for the presence of the virus in our breeders. Similar to the US market conditions in Mexico also improved during Q1 with the last month of the quarter being the strongest, which is a positive sign for Q2.

Favorable changes to the exchange rate and the subsequent increase in grain cost that created a challenge in Q4 have moderated contributing to a much better operating environment and financial results during Q1. As expected the market also quickly adapted to oversupply, same in Q4 with the industry adjusting to a more balanced supply and demand levels. We expect the market to grow 2% to 3% in 2016 below the 6% we saw last year in Mexico. Our team continues to be focused on improving productivity and lowering our operating costs. Integration of the newly acquired northern Mexico is on schedule and we are on track to capture $50 million in annualized synergy's. Our new complex in Veracruz has begun commercial production of live chickens and is performing above expectations. We expect that facility to be an integral part of our long-term strategic plan and it will grow from 2% to 4% of our total production in Mexico by year-end.

We're also excited about opportunities to expand our prepared foods business including the popular and fast-growing (inaudible) brand. We will continue to expand our presence in Mexico and will position us to be a much stronger player in all geographies in the country and serve the future growing needs of Mexican consumers. Turning to food ingredients for 2016 we expect corn and soybean supplies to remain more than sufficient given very healthy corn and soybean carry out levels and greater than expected US corn planting intentions. Although we could see short-term volatility we expect prices to continue to reflect the existing global supply's.

Our expectations for chicken production is to grow 2% to 3% in 2016 which is consistent with our previous outlook. US industry players have remained disciplined in terms of adding new suppliers as evidenced by the insignificant growth in the breeder plot so far this year and (inaudible) and chick placements on top of that are flat to up slightly year-to-date are reflective of the balanced supply demand scenario. We believe chicken producers are much quicker to react than in the past in adjusting supply growth to actual market conditions as seen in the larger than seasonal production cuts late last year while be being much more deliberate in adding new capacities than before.

All positives for the industry. Despite all the announced capacity additions to the industry over the next few years we remain convinced that our business will continue to outperform given the strength of our portfolio and for our relationships with customers. As we approach mid-year commodity prices for wings, breasts and leg quarters have been higher due in part to better seasonal demand and improved access to export markets which will translate to a better cutout value while cold storage inventory has come off the recent highs and will continue to normalize which will increase the market's ability to absorb supplies.

Overall we continue to believe our portfolio approach will deliver the best possible results and less volatility over time regardless of specific market conditions. With that, I would like to ask our CFO, Fabio Sandri, to discuss our financial results.

Thank you, Bill. Good morning everyone. We reported $1.96 billion in net revenue during the first quarter of 2016 resulting in an adjusted EBITDA of $234 million or an 11.9% margin. That compares to a $2.05 billion in net revenue and an adjusted EBITDA of $364 million or 17.8% margin the year before. Net income was $111 million versus $204 million in the same quarter of 2015 resulting in an adjusted earnings-per-share of $0.46 compared to $0.82 in the same quarter of last year.

For this quarter EBIT margins were 10.5% in US and 4.8% in Mexico which were mature improvements versus Q4. In Q1 both US and Mexican business reported stronger results than Q4. Our operating performance grew throughout the quarter which positioned us well for the Q2. In the US demand for our (inaudible) and small birds remains strong while environment in the commodity markets were much better compared to the second half of last year as low prices foster demand and the industry regained much of the access to export countries resulting in increasing pricing an lower levels of cold storage inventories. Within Case Ready, our team leveraged our key customer relationships and differentiated approach in product mix and market segmentation to strengthen our margin opportunities.

Like we mentioned, much of the external factors that created a challenge in Mexico during the second half of 2015 gradually moderated as we progressed through Q1. Exchange rate impact on our input costs became more favorable and producer quickly adapt to match supply and demand as we had expected. The integration of the newly acquired assets remain on track and we expect to capture $50 million in synergy's this year. Our production from the new Velacruz facility is ramping nicely and it's performance is exceeding our expectations.

We also look forward to growing our prepared food business in Mexico led by very strong demand in the (inaudible) and fast-growing (inaudible) product line by looking for new opportunities to expand all our brands in additional channels. We continue to expect SG&A expense for 2016 to be close to the target of 2.5% of net sales as we focus on adding value to our operations. We remain on track to capture close to $185 million in operational improvements this year to add to the total when we first implemented the process five years ago. As our team numbers continue to be relentless in their pursuit ever operational excellence.

As part of our target capital spending plan for 2016 we have previously-announced we are reinvesting $190 million of cash flow back into the business to ensure the sustainability and quality improvement of our operation. That value is higher than our depreciation and shows our commitment to operational efficiencies and tailored customer needs that can generate competitive advantage for (inaudible).

We are on track with investments and we continuously seek new opportunities to improve our product mix, efficiencies and our ability to better service our key customers. This amount already includes investments needed for the conversion of one of our complexes to the USDA certified organic production. Our balance sheets continue to be strong due to our relentless focus on cash flows from operating activities, continued management of working capital and disciplined investments in high return projects. During the quarter we generated $141 million in free cash flow after-taxes and capital investments. Reaching a net debt of $433 million and our leverage ratio of 0.4 times last 12-month EBITDA.

The outlook for interest expenses for 2016 should remain in the range of $30 million to $40 million. We continued our commitment to create shareholder value, our discipline and our confidence in the future. As outlined in the press release our Board has approved a new special dividend of $700 million, or $2.75 per share for the (inaudible) strong cash flow generation potential. In addition, throughout the end of the quarter we have repurchased close to $102 million, or 5 million shares while maintaining a strong balance sheet and a very low leverage.

Once again, though we are confident of our ability to retain cash to shareholders we exercise great caring ensuring that the business payments not only create shareholder value but also preserves our flexibility to pursue our growth strategy. We will continue to consider and evaluate all relevant capital allocation strategies while we match the pursuit of our growth strategy and we will continue to review each prospect accordingly to our value creating standards. Operator, this concludes our prepared remarks. Please open the call for questions.

Yes, sir. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from Farha Aslam, of Stephens. Please go ahead.

Hi. Good morning.

Morning, Farha.

Congratulations on a great quarter.

Thank you.

Now, just on your volume in the quarter it seems lower than we had expected. Could you share with us how you're managing your volume for the quarter and what you expected for the year?

Well, we had one of our big-bird plants down for a week installing a new first processing system and we also decreased our volume in the big-bird segment for this quarter due to some efficiency issues that we have that we have since gotten back in line. So that was the primary contributor to that.

Farha, on the domestic month we were flat compared to last year and in addition to what Bill mentioned we also increased the de-boned in our big-bird plants and that reduces the volume although increase the value of our product.

That's helpful. And then just as a follow-up in terms of your growth plan could you share with us how much is now kind of organic and ABF following this conversion kind of that value-added fresh. And then in fully cooked, how much is that new line going to add to your prepared volume?

We'll take the prepared first. It's going to add about 10% capacity for our fully cooked production which we're very excited about because we see continued demand for Pierce brand fully cooked chicken and it's a very profitable part of our portfolio as well. On the ABF and organic as we have previously stated in the past, we have a plan to grow our antibiotic free production to become over 25% of our total production by the end of 2018. We estimate that currently we're about 10% of all ABF production in the US. I expect that once we finish that conversion sometime in 2019 that we'll be somewhere over 20% of the ABF production in the US. On organic this will be our first experience at producing USDA certified organic. When we get the plant completely converted sometime in 2017, we'll be approximately 20%, if not slightly more, than the total organic production in the US as well.

Great. Thank you so much.

And our next question comes for Kenneth Zaslow, of BMO Capital Markets. Please go ahead.

Hi. This is Patrick Chen, filling in for Ken. Just to follow up on Farha's question in regards to your 10% growth in fully cooked production, does that mean there will be a shift in your (inaudible) strategy? I know you mentioned in the past that you intend to grow chicken production in line with industry expansion.

Could you clarify the question on our strategy? You mentioned a specific strategy and I'm sorry, I missed that.

Your fully cooked line. Does this mean you'll tend to buy more external chicken versus growing more of your own?

Yes. That depends on the value or price. If it's more advantageous for us to buy that raw material on the market and convert it, then that's what we'll do, which is consistent with what we're doing now. So as commodity prices decline if that should be the case, then absolutely we would buy that raw material on the open market.

Great. Thanks. Switching gears a little bit in terms of export markets I know you put out a favorable outlook for exports. (inaudible) in terms of increased leg quarter exports to breast prices. Does this mean it will coincide the seasonal increase in breast prices? And to top that off I know you have installed de-boned capacity in the past for leg quarters, will that kind of be a headwind going forward since pure leg quarter prices will be higher?

Yes. On the leg quarters last year the US industry diversified their export this nation due to the trade barriers and challenges on international economies and that helped maintain the inventories at the very low levels. The attractive prices fosters demand and the improvements in the international market this year created a very good environment for and supporting increasing prices. We expect demand to continue to be strong and prices should return to previous level in the next months.

And I would add on the option of selling leg quarters versus boneless leg meat, the first thing we will do is satisfy the needs of our key customers and once that's done then the option that we'll take is whatever delivers the best cutout whether that's bone-in leg quarters sold either domestic or export or boneless leg meat sold either domestic or export.

Great. Thanks. I'll pass it along.

And our next question comes from Brett Hundley of BMO Capital Markets. Please go ahead.

Good morning, gentlemen. This is actually Omar filling in for Brett.

Good morning.

Morning.

My first question is related to the US Mexican border and what would fully mean for the border to reopen over the next year and how would that impact pricing in Mexico and overall for your Company? We were just wondering if the net effect would still be positive because of the potential benefits to the US market. If you guys could provide a little bit of color there, that would be very helpful.

Sure. Well, Mexico is the largest partner of the US today Mexico accounts for more than 20% of US export. So the change that happened over the last week was just that Mexico reopened some states for exports, but the exports are up year-to-date 2016 2% in volume from the same period last year. So Mexico is a very good partner of the US and will continue to be.

And if there's an increase in leg quarter sales from those newly opened states, then that just means that there's perhaps a void in another market where they were going previously so it's sort of a net zero gain there.

That makes a lot of sense and my second question was with regards to some of the recent news from Costco and their plan to open their own chicken production facility. We were just trying to gauge what were some of the implications for Pilgrim's Pride and do you guys think this is an isolated incident and could they go forward and pursue this opportunity indifferent competing proteins such as beef, pork, et cetera?

We believe this is part of their strategy to go deeper into the supply chain of the various commodities that they purchase. What he we do know and what they continue to say is chicken is a very strategic product category to support their existing sales and their future growth. We are not at all bothered by this at all. We have a great relationship with Costco. They're definitely a key customer. Our business continues to grow with Costco and I think they have recently stated that their plans are for Pilgrim's business to grow even more with them. So we don't feel threatened by this. We think actually long-term it would be a good thing as they learn more about the business and I think they have publicly stated as well that this is not necessarily a cost reduction program as much as it is an assurance of supply. The chicken that they sell is a fairly unique sized chicken and if you look into the various categories of chickens produced in the US, that particular size chicken actually has declined in deference to larger birds and smaller birds.

That makes a lot of sense. And lastly could you guys talk about the sort of the near-term impact and also just get some color on the long-term impact of the plant conversion to organic? Especially as it relates to volume impacts and margins to the overall Company. We were just wondering if you guys could provide a little bit of color there and what were some of the decisions behind that in terms of key accounts and end markets. Thank you.

Good question. Thank you. So the consumption of organic chicken is growing very rapidly. While it's still approximately 2% of total production, the CAGR is approximately 31%, 32%, and there's very limited supply of both organically grown chickens and the feed ingredients that it takes to grow those. Our key customers in conversations with us as a key supplier have told us that their business continues to grow in organic chicken consumption and so in support of our key customers we decided that the time was right for us to enter this market. We think that we can be the best producer of USDA certified organic chicken and we're excited about the prospects of growth. If you look at the two categories of chickens that are growing, it's antibiotic free and organic. Traditional chicken has experienced fairly tepid growth over the last few years and so this is about our participation in those categories which are growing more rapidly.

I will just add that it's a further source of differentiation from our Company from PPC. We will be able to sell our customers the food portfolio that they need rather than specific products.

Would there be any impacts to volumes or margins over the near-term as you guys ramp and convert the facility?

Not really. I mean it will be a conversion of facility that's currently participating in a different category so obviously our production there will decline, but we see that as a net positive in terms of growth in margin.

Yes. Of course we expect the margins of this (inaudible) facility to be higher than they are currently.

Thank you guys. I'll pass it along.

Thank you.

And our next question comes from Adam Samuelson of Goldman Sachs. Please go ahead.

Yes. Thanks. Good morning everyone.

Morning.

Maybe first I'll start on capital allocation and just as a thought, maybe talk a little bit more about the thought process behind the special dividend if you think that is a reflection at all on the M&A pipeline as you look out over the next six, 12 months? And also I think Fabio you said no change in interest expense. So maybe just a little clarification on the financing plan there?

Sure. And that's a good question. We exercise great care ensuring that (inaudible) payment not only creates the shareholder value but preserves our flexibility to pursue the growth strategy. What we are distributing is what we call excess cash so we have that cash in our balance sheet so we don't expect an increasing interest expense because we're not creating any new lines of credit. We're just you using the ones that we already have. The bone and the terminal so our leverage after that will be around 1 times EBITDA in our commitment to pursue the right growth strategy will remain the same.

Got it. And so no change or view on, shouldn't view this as a reflection of the M&A landscape as you see it?

Yes. Correct.

Okay. And then maybe switching gears on the market on the industry outlook. Could you give a little more color on cold storage and specifically around boneless breast meat where the inventories are running pretty elevated relative to last year with the end of April and you haven't necessarily seen some of the seasonal moves in boneless breast prices that you would normally see at this time of year and I would just like to get your thoughts on how comfortable you feel about that part of the market heading into the summer?

Well, I will start out saying that if you go back approximately nine months, we began to see much more retail featuring of pork and that definitely had an effect last summer on demand for chicken and thereby it reduced the price of breast meat through the winter and into the early parts of Q1. We believe that processors and other users of breast meat bought some of what they considered cheap breast meat for use later in the year, put it in the freezer and that's why the inventories of breast meat have remained on a relative basis higher than what they had been running.

We're seeing demand pick up seasonally now for breast meat. Prices are moving up and we think that we'll experience the typical summer increase in demand as growing season approaches. It's just that if you compare breast prices in 2016 to what we saw in 2014 or 2015, we don't think we'll reach the same levels, but at the same time from a margin perspective our feed cost is lower than those two periods as well. We would always like for breast meat prices to be higher, but we don't see that as problematic significantly from a margin producing standpoint.

That's helpful. And if I could squeeze just one final one in. Of the $185 million or so of kind of cost improvement that you targeted for 2016, could you give a number how much you actually realized in the first quarter?

We are in line with the realizing $185 million. And as always we have disclosed half of that will manifest in the sales because it will be by improving yields and half of it will be in cost by lower cost of production.

Okay. All right. Thanks very much. I'll pass it along.

Thank you.

And our next question comes from Akshay Jagdale, of Jeffries. Please go ahead.

Good morning. This is Luby filling in for Akshay. First question was just related to your production this quarter. I think pounds sold were down 4% in the quarter, but I was just wondering how much your own production changed this quarter?

Yes. You're are right. In total terms but the reduction was mainly on the export volume. On the domestic sales we were flat and that is due to what Bill mentioned about the production in the big-bird plants but also the volumes will be lower because of more de-boning. So, again, it's a little bit less volume but at a better price and it's a better mix.

Okay. Thanks. And then on the organic chicken, I think you had said that by the time you're fully up and running you guys will probably represent around 20% of US production if I heard that correctly. Could you just clarify what percentage of your own production that will be? And then also if you could just comment a little bit on who are some of the other major players in that segment that you would be competing against?

Once we get fully converted the organic production will be approximately 3% to 4% of our total US production. I believe I may not be totally correct, but I believe (inaudible) naturals is one of the largest competitors which is a part of Purdue.

Aside from Purdue, I think and that's why we believe this is a game changer for Pilgrim's, we will compete with only small companies that will not have the scale and distribution company of Pilgrim's and that's why we think this is a differentiation factor for us.

We believe one of the biggest advantages as Fabio alluded to is that a large retailer can come to us or a large food service operator can come to us and buy the whole portfolio of their needs as opposed to having to do business with a lot of different companies.

Great. That's helpful. If I could just add one last question. You mentioned that you think the industry domestically has been much more disciplined than they have been in the past. I'm wondering if you could just elaborate a little bit more on what sort of drives that view and then maybe what gives you confidence that this discipline will hold? Thank you.

What drives the view is the actual numbers that we see. Ready to cook pounds are up 3.1% year-to-date. If you look at placements year-to-date, they're up 1%, egg sets up 0.7%. The hatchery utilization actually declined in Q1 to 91%. So in the face of coming off two of the most profitable years in the industry, we're not realizing a large amount of production increases. If you look at Pullets Place it's we believe, well managed, and the breeder flux size is up slightly, about 1.7% year-to-date, so it's actual numbers that provide our view.

Yes. And those numbers are for the overall industry. If you look into Q4 where we see some softening balance in the supply and demand in some specific categories maybe the big bird de-boning. We saw the industry react really fast to that imbalance and reduce the excess for that segment during Q4 leading into this position that we are in the Q1. And what drove that I believe it is that industry is more geared towards profitability rather than just market share or pure growth.

That's helpful. Thank you.

And our next question comes from Bryan Hunt, of Wells Fargo. Please go ahead.

Thanks for your time. Everybody's been talking about your pounds in the states. I was wondering if you could look at your growth in Mexico I think pounds were up 56%. How much of that was organic versus the acquisition of the Tyson assets?

Most of the growth was the acquisition. The organic growth is more related to the Veracruz complex that we just opened. So on the, let's say legacy, or the central part of Mexico, like we said the volumes were in line with last year.

Okay. That's helpful. Thanks. And then my next question is when you look at exports food service and retail exports you mentioned were down year-over-year. Could you give us an idea of the potential growth in food service and retail domestically to keep those pounds flat or was there any shift between the mix there?

Our food service demand in Q1, especially early in the quarter, was very soft. We saw the food service demand began picking up in March, particularly later in the month, and through April we're seeing nice improvement in demand at food service. Our retail demand in Q1 and it continues throughout current state has been very strong. Our case-ready plants are either sold out completely or in most weeks over sold. We have to bring in meat from other plants to put in a tray and so our retail business continues to be very strong. We believe food service demand will pick up as we move through the year, but late Q4, early Q1 food service demand was noticeably weak.

And we continue to expect the export to increase in volume as well as more destinations open to the US and the economy in the developing world is improving.

Great. And then my last question is a little bit of negative press on this recall. Can you talk about whether you're expecting any material costs associated with the recall in Q2 or is this overwhelmingly covered by insurance? Thanks.

We don't expect a material financial impact due to the recall. We're working on improving our systems and our processes and our execution. Clearly this was not acceptable to us as our culture is one of accountability and we're going to work very diligent to improve our systems and prevent this from happening again.

Very good. I appreciate your time.

Thank you, Bryan.

(Operator Instructions). Our next question comes from Michael pie kin of Cleveland Research. Please, go ahead.

Yes. Hi. Good morning I just want to talk a little bit more kind of your thoughts on the grain market. I know you said it continues to be abundance supply out there so does that mean that you're largely open on your grain positions and have you locked in (inaudible)?

We're fairly close to the market, Michael, as we believe supplies are more than adequate both in the US and around the world. We're seeing great planting progress. I think this past Monday we had about 30% of the corn planted and 30% of the soybean acres planted. We're going to get near record large acreage in both corn and soybeans given the positive weather outlook. We think we'll see another abundant crop this year on top of more than adequate supplies and so looking forward it appears to us that there's little upside risk in our feed costs.

We just experiencing some volatility in the short run, but just like Bill mentioned the supply and demand are very favorable to the crop.

We believe that volatility of late has been unrelated to the fundamental supply and demand numbers for both corn and soy.

Okay. Great. And my second question is related to Mexico. You know, I guess as we sort of look out over the remainder of the year when we take into consideration some of the synergy that you guys expect to capture. How should we think about the margins versus last year what you put up and how much of a seasonal improvement should we assume for the Mexican market over the next quarter or two? Thanks.

Just as reminder the market is much more volatile in Mexico than US and there is a seasonal pattern to supply and demand there. We believe that production supply is going to be more muted this year versus last year. We saw about a 6% increase in production last year. We think it's only 2% to 3% this year, which is absolutely in line with what we think demand will be. We see a fairly normal seasonal pattern. As an example we have 18% margins in March that were in Q1 and we have seen a sequential improvement through April and are realizing very good margins right now in Mexico. We're seeing really good demand. We are seeing a few more cases of Avian influenza in-country and we think that's having a positive effect on pricing.

Just overall Mexico as a developing economy just like the users have more available income they will depend to consume more protein. So that's why we believe the demand for chicken will continue to grow in Mexico. As an overall expectations we expect Mexico margins to be double-digit.

And, ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Bill Lovette for closing remarks.

Thank you. As we approach mid-year and the growing season we have seen market conditions in both US and Mexico continue to improve. Demand from exports is picking up, prices in the commodity markets are increasing while the environment case-ready and small birds remains robust. Our team remains committed to seek creative solutions to maintain our leadership and new consumer demand trends in chickens such as organic and antibiotic free and support the growth and needs of our key customers. We would like to thank our team members and our customers and always appreciate your interest in our Company. Thank you all for joining us today.

And, ladies and gentlemen, the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.