Pilgrim's Pride Corporation (PPC)

PPC 
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Pilgrims Pride Corporation (PPC)
Q4 FY07 Earnings Call
November 13, 2007, 11:00 AM ET

Executives

Gary Rhodes - VP of Corporate Communications and IR
O.B. Goolsby, Jr. - President and CEO
J. Clinton Rivers - COO
Richard A. Cogdill - EVP and CFO

Analysts

Unidentified Analyst - Lehman Brothers
Farha Aslam - Stephens Incorporated
Diane Geissler - Merrill Lynch
Robert Moskow - Credit Suisse
Oliver Wood - Stifel Nicolaus & Co.
Kenneth Zaslow - BMO Capital Markets
Eric Katzman - Deutsche Bank
Unidentified Analyst - Lehman Brothers
Bryan Hunt - Wachovia Securities
Pablo Zuanic - J.P. Morgan

Presentation

Operator

Good morning and welcome to the Pilgrims Pride conference call to review the company’s Financial Results for the Fourth Quarter and Full 2007 Fiscal Year. At the Company’s request, this conference call is being recorded. Please note that slides references during today’s call are available for downloading from the investor relations section of the Company’s website at www.pilgrimspride.com.

Beginning today’s call will be Gary Rhodes, Vice President of Corporate Communications and Investor Relations for Pilgrims Pride. Mr. Rhode?

Gary Rhodes - Vice President of Corporate Communications and Investor Relations

Good morning and thank you for joining us today as we review our financial results for the fourth fiscal quarter and a full fiscal year. Earlier today, we issued a press release that provides an overview of our financial performance for these periods. If you have already have not seen this press release, a copy is available on our website along with other downloadable information.

Joining me on today’s call are O.B. Junior, President and Chief Executive Officer; Clint Rivers, Chief Operating Officer; and Rick Cogdill, Chief Financial Officer.

Before we get started, I would like to remind everyone that today’s call contains certain forward-looking statements. These include our expectations and future results, sales and cost of sales information, pricing and market dynamics. Actual results might differ materially from those projected and these forward-looking statements. Additional, information concerning factors that could cause actual results to differ materially from those forward-looking statements is contained in today’s press release as well as in our in our forward-looking statement and risk factored disclosures contained in our Forms 10-K, 10-Q, and 8-K as filled with the SEC.

I will now turn the call over to O.B to begin our prepared remarks.

O.B. Goolsby, Jr. - President and Chief Executive Officer

Thank you Gary and good morning everyone. Earlier today, we recorded net income of $33.2 million or $0.50 per share on record sales of $2.15 billion for the fourth quarter of fiscal 2007. This compares to net loss for the same period last year. Rick, will go into more detail on the financials in a few minutes, but our improvement from the year ago can be traced to a couple of areas. First of all, industry fundamentals remain solid in the fourth quarter as strong export demand and low cold storage inventories helped sustain positive market pricing trends. Late quarters and wings posted the largest gains raising more than 30% over the same quarter last year, while breast meat in Georgia Dock posted healthy gains up 16% and 18% respectively. That favorable market pricing help to offset $189 million year-over-year increase in feed ingredient cost. Our product mix during the quarter also improved. We were able to upgrade some of our commodity type meat into higher margin value added products. This is a key part of our growth strategy and an area which we have enjoyed good success over the years, particularly after buying other companies.

In addition, our consumer retail segment continue to post solid growth, thanks to increase penetration of super market need indelicacies and our growing role as a category management partner. Our consumer sales team did a fantastic job this year and they deserve a lot of credit for expanding our business and building our brand among retailers. Despite favorable industry fundamentals and year-over-year improvement and profitability, our net earnings for the fourth quarter came in below our own expectations. Operational inefficiencies, labor shortages at several facilities, and higher fuel cost resulted in higher production in freight cost during the quarter.

Automation will be key focus of our capital investment program in fiscal 2008. We believe this investment which includes labor reducing technology will enable us to move more products to our plats efficiently and help to levitate some of the recent issues related to tight labor market and higher input cost. Clint will provide some additional details in a few minutes.

Returning now to industry pricing for a moment, lag quarters and breast meats today are at 41% and 26% respectively compared to a year ago. This is a favorable position versus last year this time as we approach our heavy annual contract renewal period. With exception of breast meat the major market industries today remain above their respective five year moving averages. You can see these trends on slide three.

Looking forward, we anticipate breast meat during this seasonally low demand period to remain just about at or slightly below the five year average. There has been very little if any downward pressure on demand or pricing from Russia’s delisting of nine chicken plans on October, none of which with Pilgrim Pride facilities. We anticipate wings to continue to be strong in a first quarter due to the growing popularity of standalone wing paying restaurants and strong line of sporting events this year. Whole bird pricing is posted strong gains throughout 2007 and at this point, we did not see any reason on a prices we decline any more than they usually do during this part of the season. We are pleased with the positive pricing trends throughout the fourth quarter, especially in a lot of increase feed ingredient and commodity cost that we faced throughout fiscal 2007.

As you can see on slide four, our index of commodity exposure has climbed all time high as this year, led by corn, soybean meal, and wheat, but well supported by energy prices. When compared to the previous fiscal year average prices for corn and soybean meal increase 62% and 22% respectively, which create a strain on profitability for most of the year. Looking ahead, current projections call boiler feed cost increases above I’ve seen this past year. This underscores the importance of this being able to pass along this price increases.

On that note, we have begun the process renegotiating our annual food service contracts. There are number of factors working in our favor this year, including higher market pricing compared to a year ago and lower inventories. At the same time, our customers are facing higher cost in their own businesses also. Not all of those can realistically to be passed along to consumers. To date, I would say that we have gently have been successful in passing along price increases, although, at times not enough to cover all of our increases in our in put cost. Every contract is different and every negotiation is different. In some cases, we’ve added escalator clauses, which the contracts pricing moves up or down and same for feed ingredient cost. That way we have protected our cost increases and the customers protected when our cost decline. Overall, we still have a lot of negotiations and a lot of works to look ahead of us. We will continue to make effort to pass along our additional cost on the remaining contracts.

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