Pilgrim's Pride Corporation (PPC) Q4 2011 Earnings Report, Transcript and Summary

Good morning, and welcome to the fourth quarter 2011 Pilgrim's Pride Earnings Conference Call. [Operator Instructions] At the company's request, today's conference is being recorded. Please note that the slides referenced during today's call are available for downloading from the Investor Relations section of the company's website at www.pilgrims.com. [Operator Instructions] This time, I would like to turn the conference call over to Ms. 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 quarter ended December 25, 2011. This morning, 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 on the Investor Relations section of our website along with the slides we will reference this call. Joining me today are Bill Lovette, President and Chief Executive Officer; and Fabio Sandri, Chief Financial Officer. On today's call, Bill will speak to the progress we've made towards our operational goals, the macro factors impacting our industry and some of the key drivers of our financial performance for the quarter. Fabio will then provide an update regarding our financial position and our capital structure. After our prepared remarks, we will be happy to take your questions. Before we begin, I would like to remind everyone that today's call will contain certain forward-looking statements. Our actual results might differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those forward-looking statements is outlined in today's press release, as well as in the risk factors we spoke in our Form 10-K and in many of our regular filings with the SEC. I will now turn the call over to Bill Lovette to begin our prepared remarks.

Thank you, Rosemary. And good morning, everyone. I'm pleased to share our progress with you today. The fourth quarter was our best quarter in an extremely challenging year with positive adjusted EBITDA of $22.6 million. This encourages us given our internal improvement and efficiency in achievements, as well as external contributing factors signaling a turning point in the industry. We ended 2011 with our fourth quarter sales totaling $1.83 billion versus $1.81 billion in quarter 4 of 2010. Our bottom line was impacted by $14.6 million of SG&A restructuring costs, causing our final net income to reflect a loss of $85.4 million or $0.40 per share. As a management team, we've made a lot of decisions this year to align our operations with the strategy we've developed. We have confidence in this plan because we created it from the ground up and committed ourselves to effectively executing and communicating within the entire organization. Our strategy has 4 major components and I'm going to share this with you in terms of our approach and results to date for each aspect of that strategy. First, we aim to be a valued partner with our key customers. For example, we are employing greater use of category management to support our Retail customers with growing the chicken segment by driving sales, mix and margins at the Retail store level. Also we are executing a new foodservice operator strategy, which creates unique value for Pilgrim's and our customers. Our efforts are devoted to helping our customers reach their end consumer and help them grow their business profitably. Chicken provides great value to both the retailer and consumer especially compared with competing proteins. The results of our contract negotiations have concluded and we now have an insignificant number of our sales contracts for 2012 and fixed-price arrangements for periods greater than 6 months. Almost all of our sales have either market-based pricing or give us the ability to reset pricing consistent with the underlying commodity markets. We have demonstrated that we know our market and we have the courage to stand firm in our pricing strategy. What made these negotiations successful to us was threefold. One, the strength of our relationship with our key customers; two, the fact that everyone understands the industry solely can't sustain bearing the volatility of commodity markets long-term; and three, we provide high levels of service and a quality product. We see more fluid and diverse pricing model necessary to sustain profitability and I think it's fair to say that our results, going forward, will reflect the strength of the chicken market. The next aspect of our strategy has been relentless pursuit of operational excellence. Our complexes have shown great progress in each of the areas we stressed all year, resulting in approximately $300 million of cost and yield improvements over 2010. Our goal for 2012 is to achieve an additional $200 million in cost and yield improvements. Although our purchased feed costs were $690 million higher for the full year over 2010 and market prices resulted in $112 million less of revenue equivalent, our cost and process improvements reduced the impact that, that had on our business. During the year we completed the conversion of our operations to manual deboning resulting in significant yield improvements. Next, our sales mix is now reflecting a whole bird equivalent return tied to the chicken markets. The mixed management accountability process enables us to realize a return on whole bird equivalent, which is more reflective of component market values providing more market related margins. Our next goal is to strategically grow value-added exports. We have dedicated a plant to export production focusing on markets where we see long-term growth opportunities. We're producing value-added products tailored to the local consumer preference and these changes we've made enable us to produce specific products for Japan and the Middle Eastern markets both of which emphasize very high quality standards. We're seeing foreign markets for chicken growing at a much faster pace than U.S. demand. We believe U.S. is very cost competitive on a global scale and will benefit from these trends. Export sales accounted for 13.3% of our U.S. chicken sales in 2011 exhibiting a year-over-year growth of 40%. In 2012, our goal is to, again, see double-digit growth in export sales. And finally, we've been cultivating a culture of accountability and ownership within Pilgrim's. One of the opportunities that we had this year was in delayering and downsizing management. We had to make some difficult decisions on our corporate structure and how to best drive our new culture. Not only did the changes we implemented removed some of the layers that weren't optimal for decision-making, they also resulted in lower SG&A cost as well. It enabled us to focus on talent development within the organization and over the past year, we brought in some excellent outside talent. They brought experience and fresh viewpoints into the company. And we're excited to be creating opportunities to grow our future management teams from their current talent pool. We have a management process that is specific to each plant P&L. We create an environment where local management has ownership and knows their results. Variable compensation is now linked directly to those results and this emphasis on results-oriented culture is what you can expect to see as our standard as we move forward. We've gone through our strategy. Now let's talk about some of the macro issues impacting our industry. Market forecasts on chicken price expectations indicate that chicken prices will increase as supply continue to align with demand both domestically and globally. Boneless, skinless chicken breast meat started 2012 sharply higher than in 2011. Whole bird markets have climbed since September and remained well above historical price levels. Leg quarters continue trading at historically high prices aided by high demand especially in emerging markets. Additionally, wholesale wing prices have traded higher in recent weeks as industry cuts have adequately balanced the supply. We continue to see discipline on the part of the industry with egg set averaging 6% below the start of 2011 and chick placements averaging 4% less. December production was 11% lower than in 2010. The breeder flock size remains relatively low and cold storage levels were down 21% over January 2010 with current levels at 629 million pounds. You may recall, back in quarter 3, I said that we needed to have cold storage levels around 620 million pounds and the recent levels are encouraging. Our commodity risk management strategy continues to be of high importance to us. If we believe prices have an upside risk, we will mitigate that risk through derivative positions given our limited fixed pricing exposure, we have more flexibility than in the past to respond to shifts in the grain markets. Feed cost will continue to be volatile and we've built that into our expectations. The input that we can control is our behavior to drive the best live performance quality yields and processing costs. Although we believe there's continued volatility in the corn markets, we also believe it is possible to be profitable regardless of the price of grain. The industry needs to adjust to generating positive margins and not depend on the weak corn prices to drive profitability. I'd now like to ask Fabio, our Chief Financial Officer, to provide some color on our financial position and results for the quarter.

Thank you, Bill. Good morning, everyone. Our fourth quarter results show sales of $1.83 billion compared to $1.81 billion for the same quarter in 2010. We had an adjusted EBITDA of $22.6 million, which was the result of meat prices more in line with the input cost and a number of operational improvements over the year. As Bill mentioned, we achieved $300 million in annualized operation improvement in 2011. We also achieved a 7% reduction in SG&A expenses over the prior year. As we have completed the integration of our shared services with JBS, we continue to look for ways to improve our SG&A spending. This quarter, we also recognized SG&A restructuring cost of $14.6 million, which includes $3.6 million related to the closure of the Dallas facility, in addition to fair value impairments of excess land and other nonoperational assets. On Page 5 of our presentations, we show the prices on whole broilers, boneless breast, wings and leg quarters were all higher than the same quarter last year and we have been able to maintain the prices at an adequate level. We were able to achieve profitability in December and with the industry fundamental information available today, it appears the first quarter of 2012 will be profitable as well. It's too early to say anything beyond that timeframe but 2012 started off with strong pricing and encouraging demand. We are also seeing encouraging demand from the global markets. During 2011, business increased its' exports by 24% in volume, which combined with increasing strength in global demand from protein pushed out export sales to an increase of 40%. Given that the U.S. industry as a whole grew its exports by only 4% in volume, Pilgrim's accounted for the majority of the growth of the U.S. exports. On Page 8, we see that this year we have shown the discipline necessary to keep up our capital spending in check with what -- and we do not foresee a material amount of CapEx required beyond the base level of repairs and maintenance, which we expect to be below the current year's budget. Our plans are in solid condition, although we will spend as necessary for efficiency improvement, we will continue to be vigilant in approving only those projects that have a clear and timely benefit to the company. In reviewing our cash flows, we have a positive operating cash flow. This was generated through careful management of our expenditures and current accounts. We also generated a positive cash flow from investing activities in the amount of $46 million through the sale of certain properties and non-core business. Going forward, we expect the depreciation and amortization should be lower than we have for the past years as the asset acquired with Gold Kist are now fully depreciated. Although there will be no impact on EBITDA, we anticipate a positive $60 million annual impact on net income. Looking at our debt structure, we have just under $1.5 billion of borrowing outstanding and a liquidity of $381 million at year end, which continues to strengthen. We are committed to reducing our leverage to more comfortable levels primarily to improve our balance sheet and reduce the external noise that can distract from our core operations. This is where you should expect our free cash flow directed as we move forward. I will now turn the call back to Bill for his final thoughts before we take questions. Okay, Bill.

Thank you, Fabio. We're pleased to see the benefits of our strategy implementation starting to show. We know that things will likely occur that we didn't anticipate but we're focused on our overall strategy and a culture that knows how to adapt and overcome obstacles as they arise. We are committed to effectively managing every aspect of our business. Operator, this concludes our prepared remarks. Please open the call for questions.

[Operator Instructions] And your first question comes from Mary Gilbert from Imperial Capital.

Wanted to look at how we should consider corn -- if we look at where corn future and spot prices are today, factoring in your hedged position and then also considering the fact that you've altered substantially most of your fixed-price contracts, correct? Just wanted to understand how we factor those various pieces in and in looking at 2012 versus 2011.

Mary, you made a very good point in that with the lack of fixed-price contracts in our portfolio, we're less dependent on protecting the upside risk, although we're vigilant in paying attention to that. With where corn is trading today on the March corn -- contract, we see much less down -- or much more downside risk than we do upside risk. Perhaps in the range of $0.40 to $0.50 per bushel upside but perhaps over $1 in downside risk as we get into the new crop year. And if you read the estimates of planting intentions and thinking about trend line yields and think about what's happening with ethanol production at this point, we see much more downside risk to corn than upside. On the other hand, soybean meal, we do see downside risk more than upside but to a less degree. So we think about soybean meal being a fairly good buy at something around $300 per ton or under. We think about corn perhaps being in the low $5 range depending on acres planted, depending on the weather for the new crop year.

Okay. And so it sounds like from a hedging perspective, you're well-positioned plus the absence of fixed-price contracts. But I wanted to make sure I understood what level of exposure you still have left. Did you say something about you still have 6 months left on certain contracts, or how should I look at that?

No, what we said, Mary, was we don't have any sales contracts that extend in price beyond 6 months. And we have the ability to reset those pricings based on what the underlying commodity markets do. So we don't have long-term exposure as it relates to pricing and that's what we said.

Okay, great, that's helpful. And how should we look at changes in working capital this year? Based on growth in the export market and any efforts that you're making on the plant side.

Mary, it's Fabio. We've made some significant improvements this year. We don't expect a lot of changes from working capital next year. Even as we increase exports, we don't see a lot of improvements or some usage of capital in the working capital. We are at adequate levels of inventory in our accounts receivable.

I can assure you, Mary, we have processes in place that allow us to effectively manage our working capital going forward.

Our next question comes from Farha Aslam from Stephens Inc.

Question about the pricing you achieved in your contracts. I understand that they're variable, but are you pleased with the pricing levels? Were they kind of in line with your targets? Could you just give us some more color around, not only just the duration of your contracts but kind of the level they're set up?

Farha, we are pleased with how our strategy played out through the end of the year going into 2012. What we like most about it is it allows us to reflect the value of our portfolio based on what the market will give us in terms of available price and we think it's fair to our customers as well and I think, again, it speaks to the strength of our relationship with our customers, the quality of product and service that we provide, and also it allows us to share the risk of the underlying commodities going forward. And as I stated in the prepared remarks, we see this pricing model and strategy as essential going forward to sustain profits with a blend of diversity in terms of how the pricing is made up and also allowing us to take advantage of strength in the chicken market as we see it.

And so given where your contracts are and where the grain markets are, when do you anticipate hitting your normalized earnings, and I'm assuming your normalized earnings are still around 5% to 7% EBITDA margins?

We don't necessarily think in terms of normalized margin. I think the better question to really address is, are we going to accomplish the objectives that we laid out in our strategy? And I can tell you, emphatically, that we will meet or exceed those objectives. I think in addition to that, with the data and information that we have available to us right now, we think the chicken industry will enjoy a profitable year in 2012 and it's our intent to be better than the average company.

Okay and then you said you were profitable in the first quarter. Is that on the EBITDA line, net income line? Where would you focus on?

Both, Farha. Net income and EBITDA.

And I would remind you, we said we were profitable in December and we believe that the fundamentals are in place to create a profitable first quarter.

Okay, that's very helpful. And just Fabio, 3 key data points for our modeling needs. D&A, interest expense and tax expense -- and tax rate for 2012?

We expect -- it will depend on the results, of course, but we expect the tax expense for 2012 to be below 5%. It depends on the results on Mexico and U.S. but below 5% is a good expectation.

And then your depreciation and...

Depreciation and amortization will be $60 million below this year, which will be a total of $150 million to $160 million for the total company.

Right. And then your interest expense assuming the rights offering?

I expect interest expense not to be reduced a lot because we're going to use all the proceeds to improve our balance sheet. But around $25 million to $29 million every quarter.

Our next question comes from Heather Jones from BB&T Capital Markets.

A few questions. First, going just real quick on the tax rate. Did you say it's going to be 5% for 2012?

Below 5%. It will depend on the result and depend on how the results will be split between Mexico and the U.S. but below 5%. We have $613 million in NOLs that we used to offset taxes so the effective tax rate should be below 5%.

So when you say you're profitable in December and you believe you're profitable in Q1, you're using less than 5% tax rate on that?

Yes.

Okay. I'm wondering, talking about your contracts, wonder if you could help me more with this, because you talk about you're exposed more to the market and wondering when you're setting up these contracts, are you defining the market as the chicken market or you're setting a price based on where your feed costs are and then those can be adjusted based upon where the feed market moves?

Heather, we're going to have all of the above. If you think about pricing, we play in many different market segments, for example, in the chain restaurant business, we play -- and that's traditionally been long-term fixed contracts and what we've done in some of those is give shorter-term pricing but also having the ability to change that pricing relative to the underlying commodity markets. In other segments, we're truly on the chicken market either on a current or trailing basis. And then in other segments, we shifted our mix such that we have more control of pricing, for example, on our branded products. So it's both reworking the contracts, shifting our mix and creating a portfolio that allows us to make changes quicker based on changes in underlying commodity markets.

Okay. So when you all say that you're going to be -- that the industry will enjoy a profitable year in 2012 and PPC will be better than that, do you think that it's going to be a function of the fact that your realized pricing will be up more year-on-year than the industry? Or do you believe that the cost you've taken out in 2011, in addition to what you planning on taking on in 2012, will make your cost better than the industry. What's going to drive that out performance?

Good question and I would remind you we said, with the data and information that we have available at this moment relative to 2012, and we're in February so it's early. From a cost standpoint, I can tell you that we made a lot of improvements last year relative to the industry benchmarks. We think we'll continue to make more improvements and we think on the same mix, if you compare us to the average company, we'll be better than the average company in live calls, yields and plant costs. We also think, to your point, that if the chicken market is strong, which it appears it is going to be, relatively, we've set up our pricing portfolio to take much better advantage of that than Pilgrim's has in the past. And again with more effectively managing our mix, we think that's going to be a contributor as well.

And then my final question is just going to the industry, as far as -- and you talked about pricing being relatively stronger and that's being propelled really by wings and then the Georgia Dock has moved up. Breast has been pretty disappointing. It started out the year fairly strong but it's been disappointing of late. Wondering if, first of all, what do you think is driving that. I mean, I know weights have moved up over the last few weeks, so it's increased amount of the breast meat on the market, but it seems like the market can't absorb any incremental pounds. So I'm wondering what you think is driving that market weakness and if we don't get a bump in breast meat pricing due to demand, do you think the industry will cut more?

That's a multi-faceted question. A couple of things to note there Heather. First of all, with strong component pricing on virtually all parts, I think going forward, we're less dependent. We, the industry, are less dependent on relatively strong year-over-year breast pricing than we ever have been. If you look at the cut out to your point other component parts are really carrying much more of the increase than just breast meat. And even though breast meat is roughly 1/5 of the cutout, again, we don't depend on breast meat pricing as much as we have in the past. I would tell you that short term, yes, we didn't want to see a decline from mid-January forward. But again, we think that was much more supply driven. We've had excellent growing conditions in the Southeast where most of the chickens are grown and that's added a couple of days of growth rate onto the chickens and we think processors have killed ahead to maintain weights or to manage weights and that's what's put breast meat on the market. Just in the last couple of weeks, we've seen stabilization of that effect and we believe breast meat prices will continue to go up in the near term and longer-term throughout the year. I would tell you that also and this is great for us, because we called it out many times in our strategy in the past and going forward is, we believe value-added exports will continue to grow. We see more and more breast meat being exported out of the U.S., which is a relatively new phenomenon and we're participating in that business. And as emerging countries, middle class, continued to grow in affluence, we think that we'll continue to see more breast meat demand come from outside the U.S. than we have in the past.

Can you just give us a sense of like what percentage, like on a run-rate basis, of exports this breast meat now is representing?

Well, right now it's a very low percent. But again, my point is that it's growing at an impressive rate and I think will continue to grow at an impressive rate.

Our next question comes from Reza Vahabzadeh from Barclays Capital.

Just one housekeeping item to take care of first. Fabio, what's the CapEx outlook for 2012 and maybe even 2013, if you have that?

This year, we have $136 million. We expect next year to be below $100 million. Next year being 2012. For 2013, we will be in the same level I believe. Like I mentioned, our plants are in great condition. We don't foresee any major need for CapEx other than maintenance and regular.

So when you say next year, we're talking for 2012, you're talking...

2012, sorry. Yes, 2012, below $100 million.

So when you talk about the foodservice contracts that you have, Bill, on that book of business, did you realize the material price increase as you go into 2012 on that book of business regardless of whether they are fixed or not?

Yes, we did realize an increase.

Okay. And on the total business whether it's Retail or foodservice, what portion of your overall book is fixed pricing even if it's on a short-term basis?

We're not going to disclose percentages of our portfolio. I would tell you that it's less in 2012 than it ever has been in Pilgrim's in recent history.

Right. So, I mean, is there a way to determine what portion of your business pricing moves with the market?

Most of it.

Most of it. okay. And then on the grain cost, your comment suggests that you are largely on the market?

Well, we're comfortable with where we are. Again, I mentioned that we see much more downside risk than upside and I'll just leave it at that.

Okay. And then what about non-grain costs. Do you foresee the material inflation in non-grain cost that would partially offset your cost savings and pricing?

Not in a material way. If you look at the crude oil complex, we think there's downside risks there too, not as much upside risk. On packaging, we don't see a material risk of increase there either. So I don't think so.

Our next question comes from Bryan Hunt from Wells Fargo Securities.

Bill, I was wondering if you could just talk about with all the contract negotiations you all made throughout last year and especially in the Q4, how much volume did you all lose? Or how many customers walked away from the changes in your contract terms?

Yes, I would tell you that, in total, we didn't lose a material amount of business. We're comfortable, where either we walked away from the opportunity or, otherwise, we were able to replace that business in a better position. So net-net, we were very pleased with the outcome of that activity.

So with no contract losses driving volume changes in production, now, are we to expect that looking at the market placements of birds, are you all matching that type of change in production for 2012?

Well, beginning mid last year, we began to do a better job of matching our supply and demand. And we'll continue to do that if we see demand growing, we'll make a decision as to whether we place more birds or not, if there are alternatives to placing birds, we'll look at that, too. And we'll continue, as I said, to do a good job of managing our working capital and a big component thereof is our inventories.

So when we look at spot prices on bird composite -- if you look at a mix of, call it, 15% whole bird and the rest parts, the Georgia Dock's implying roughly a 20% price increase in Q1. Is that a fair way to look at your business now that it is variable pricing relative to a year ago? Is your cutout price about 20% higher?

Well, I'm not going to comment on that specifically. What I would tell you is if you look at all the forecasting numbers, we believe before the year started that the cutout had room to grow by 20% and the encouraging news is we're already sort of at that growth already early in the year. So with seasonality coming into effect, we believe that the industry will achieve that 20% or so cutout in increase that you mentioned. And again if you go back to the comments that we made, we think our portfolio is reflective of the strength of the chicken market.

And Fabio, 2 questions for you. Last year, your D&A expense was $209 million and I believe you said earlier you're looking at potentially $150 million to $160 million. Is that correct?

Yes we have the Gold Kist acquisition. All the assets are completely depreciated. So our depreciation will go down by $60 million. So from $210 million to $150 million to $160 million.

Okay. And then when I look at your 5% tax rate, are you implying that's a cash tax rate or is that a book tax rate?

Well, depending again on the split between Mexico and the U.S., it could be small cash but mainly would be non-cash because of the NOLs that we already have in the U.S. and also in Mexico. But it will depend on the size of the profit in Mexico.

And then lastly, Bill, when I look at the export market and we're just trying to do some work on this internally. But generally, your export margins, are those more stable and greater than what you're experiencing domestically?

It depends on the product, obviously. We have some products that absolutely are more profitable than domestic especially when you think about understanding the local preferences in the market and add value to take advantage of that. That's the primary reason that when we talk about exports, we also include the word value added because we're not growing in products that are just commodity in nature. We're growing in products that allow us to make a better margin because of the value that we add to them. And we think that those opportunities will continue to grow and as a result, you'll continue to see our company grow our value-added exports.

And then my last question then I'll be back in the queue. When you look at the $200 million cost savings target for the year, one, is that a run rate number you would hope to achieve by the end of the year, is my first question. And then second, could you give us some idea where the buckets are in terms of those savings, are they mostly out of SG&A or are the out of manufacturing efficiencies? Can you give us an idea of where those coming from?

Good question. That's not a run rate that's absolute and we feel like that coming out of 2010, we had the goal of $400 million and that was a run rate from the last quarter of 2010. As we said, we achieved about $300 million of that on $350 million absolute. And with the momentum that we have in operations, currently, we believe that we can achieve the $200 million on an absolute basis. From a component standpoint, a lot of that is in conversion costs in our processing plants. Some of that is in mix and in yield but those are the 3 main drivers of the $200 million.

Our next question comes from Carla Casella from JPMorgan.

On the export business, did I miss it, did you say what percentage of your export is whole bird versus parts and then what percentage is value added at this point?

No, we did not break out whole bird from parts. I would tell you that most of it is parts related and some form, but our whole bird export business will grow this year. We've dedicated one plant, as I said, to that part of the business, so we'll experience a lot of growth in whole bird exports this year.

Okay, great. And then on the foodservice side, are you starting to see -- can you just talk about the environment, what you're seeing? Are you hearing any pick up on the foodservice or are you adding any new key accounts on the foodservice side?

Our plan for 2012 does not contemplate real growth in total foodservice. That's not to say that we're not going to grow in foodservice. We in fact are going to grow our share in foodservice. And we're shifting our mix toward the areas in foodservice where we have the ability to take advantage of better pricing. And so that's what we think about foodservice.

Okay. Any more specifics on where you want to take gain share in terms to the type of foodservice or type of products?

Well, we have a very valuable brand our Pierce brand in foodservice and we'll continue to grow the Pierce brand, a very, very good brand and that's really all I'll say about it.

Okay. And then do you have any additional facilities that are up for potential closure or that you're closing in 2012?

We don't have any at this time, no.

Okay. And then just one last question on the corn side. You commented that the results go forward should reflect more the strength in the chicken market. Did 1Q -- or I'm sorry, did this fourth quarter has any hedges in it that kind of held you back from benefiting from the market improvement?

No.

Okay. And when you see dips in corn, do you opportunistically buy? Were you able to pick up corn on this late November, early December dip?

We have taken advantage in some cases on buying dips.

Our next question comes from Ken Zaslow with BMO Capital Markets.

Just a theoretical or a big picture question, you held off on the date of the rights offering, so people can get a better grip of your quarter. Can you talk about what you want investors to get from this quarter that makes them feel more comfortable with the rights offering. Obviously, you guys thought there was something, I just want to make sure that we see the same thing you guys are seeing.

No, I mean, I think investors will make up their own mind based on the information that is available to all investors. We just wanted to make sure that there was adequate time for either an investor or potential investor to make a decision. In the case of the rights offering, it would be already an investor. So we just, again, wanted to make sure that they had an adequate time to do that.

Okay. So there's nothing specific that you wanted investors to go away -- I'm just curious. In terms of, I think, you said earlier that you're not as much concerned or focused on normalized numbers for this year or I don't really [indiscernible] the phrase, but when you did the compensation, what is the compensation based on, is it based on just achieving the goal rather than actual operating profit, can you talk about that?

Did you say compensation? Our incentive...

Your compensation. It says that I think you said in an earlier part of the call that compensation is now tied to performance and not as a philosophical change. Maybe I'm just...

Yes. What I was referring to, Ken, was, we now have a P&L for each of our operations and a big part of their incentive plan is tied to what they do in their own operation and that is different from what it's been in the past and it is based on the plan that we have.

So in terms of executing a plan, not so much of reaching a certain level of profitability based on the market conditions? I'm just trying to figure out why you're less concerned about, and if employers will be less concerned about normalized numbers than maybe the market might be. I was just trying to figure out if there's a disconnect there.

Obviously, our plan includes the P&L at each complex and so it is based on that, for sure. But again, when Farha asked the question about normalized earnings, that there's so much volatility on each side of the equation in our business anymore, it's really hard to think about what is normal. And so we constructed our plan as we know it, we're going to execute it and that's what we're going to hold ourselves accountable to.

On the tax rate, just to clarify. So this year it'll be somewhere between 25% or whatever. Going forward in 2013, what is the ongoing tax rate, have you structurally taken it down even after the NOLs or it is something -- does it go right back to 30%, 35%, how does it work, going forward?

After we use all the NOLs, it'll go back to the normal, if that is the word, 35% tax rate.

Is that after this year or is it -- how long do you have the NOLs for?

Well, we have $600 million in NOLs. I hope we can use them all this year, but I don't -- it's normal. So it will depend on the profitability of the year, of course. It will take, I believe 2 years, it will take 2 years off, 2 good years is all it takes.

And then you got 3 years?

Two to 3 years is all it takes. If they're good years.

And then you also said that you're now focusing your CapEx projects on more projects that have a certain return on investment capital, could you talk about certain projects that you guys are actually taking. I'm assuming they are more internal projects. Can you talk about certain of them to try to give us a better flavor for the level of certainty that is around the returns on your projects.

Well, if you look back to the last 3 years, the company has invested a lot of money in capital projects both in infrastructure spending and in projects that create a return. As an example, last year we spent money converting our deboning back to a manual process. So again, if we have a project that returns that money in less than a year, we're for sure going to be looking hard at it. Otherwise, we're going to spend on maintenance. And again, our priority for cash flow, as Fabio stated earlier, was toward our capital structure and paying down debt.

In terms of, I mean, are there like heaters and basic things that may need to be improved, the deliverability of the chickens, is that where your focusing on, is it more on higher end, value-added products and you shift your portfolio towards that. What is the gross CapEx moving towards? That gives you a degree of certainty, that gives you that the level of certainty? That's what I'm trying to figure out.

Obviously, if it's a safety issue, or an issue that determines whether the operation will run, obviously, we're going to spend it but our focus is on the normal repair and maintenance and, in some occasion, if it's a customer need or a really high return project, we'll consider it. Otherwise, we're going to focus our cash flows back towards paying down debt.

And my last question, Tyson and you guys have both now said that you guys are going to be above the average for the industry and, obviously, 2 of you guys together add up to almost 50% of the industry. Does that mean that the rest of the industry is just below and you guys have structurally improved your businesses to a point where even the big bird processors and the little guys are now less efficient than the 2 larger guys. Can you just talk to that and I'll ask Tyson the same question. I'm just curious, it just seems like now, both of you guys are now above the average, it just seems like an interesting point.

I can only speak for Pilgrim's and I would point out that we participate in most all segments of the business whether it's big bird deboning, Retail tray pack or fresh foodservice. And we measure each of those segments against the like segment from a benchmarking standpoint and we hold accountable the management for those segments to be at least, at the very least, better-than-average and growing toward the top quartile. So I'll just leave it at that.

Our next question comes from Akshay Jagdale from KeyBanc Capital Markets.

So Bill, am I interpreting, I just want to make sure I'm interpreting your comments correctly. So by moving more, your revenue mix, more in line with the market, you're expecting the market to move up and you participate in that, right? So in other words, your outlook for the cutout is pretty positive but that is obviously dependent on industry supply, which you play a role in. So am I interpreting that correctly like you do believe the fundamentals on the cutout side are positive, which is why having the mix that you have is a good idea or a good strategy? That's the first question.

That's correct. I think you have a good understanding of what we're trying to communicate.

Okay so then the second obvious question would be what is your expectation for industry supply and where does -- can you just give me a sense of what Pilgrim's is going to do with their supply as well in relation to that estimate?

I guess, most forecasting services have said that chicken production in 2012 versus '11 will be in the range of 2% to 3% lower. I think that's a fair estimate. A lot of it depends on the weather. If we have a really hot summer, I think that will pull perhaps, more pounds off of the market. If we have a mild summer, it could add some of that production back. If you look at our breeder flock size, it's the lowest it's been in a number of years. So while the industry has the capacity to ramp up production, it's going to be muted somewhat by the size of the breeder flock inventory. I think that we all remember what the last 12 to 14 months have given us in terms of the balance sheet effect. So I believe the industry will continue to be disciplined through this year.

So another way to ask the question is, so for Pilgrim's, there is a lot more risk now to not be disciplined, right? So in other words, if you did decide to increase supply, profitability gets better because you do have the plant capacity. I understand that will take time but given that your mix is now towards the market, flooding the market with supply is definitely not in the interest of Pilgrim's, more so than it was in the years past, correct?

Well, I mean I understand why you would say that but you have to think about, fixed pricing is not necessarily a bad word in our vernacular, unprofitable fixed pricing is. So that is to say that if we had the opportunity to fix prices for a period of time, wherein we had a great deal of confidence that it was profitable business then we would not be opposed to doing that. We just felt like, for this time period, we were better off having our portfolio reflective of the strength of the chicken market because the fundamentals tell us is going to be stronger. So we're going to have, I believe in the prepared remarks, I used the terms fluid and agile pricing strategies such that we're not dependent on cheap corn to make a profit.

Okay. And then just on your revenue realization. I didn't have all the numbers, so I may have this wrong, but I believe your price per pound was up 2% or 3% for the quarter, is that correct? And if not, what was your price realization per pound in the quarter.

Compared to Q3 or compared to Q4 2010?

Both, year-over-year and sequentially, if you have those.

Compared to Q4 last year was 1% lower on the domestic and 9% higher on the exports. Compared to Q3, I think was a little bit higher.

Right. So the point I'm making there, Bill, is I'm assuming you are not happy with the price realization even though you had $300 million in yield improvements, which probably translated somewhat into mix. This year was not satisfactory, correct, from a revenue realization standpoint?

For 2011, that's correct.

Right. So if the industry cutout increases 20%, which is roughly around $0.15 a pound for the industry, I mean you're not expecting a 20% increase in your price realization, right? It will be less because you have a higher price per pound, but it will still be quite meaningful relative to the company's historical performance especially over the last couple of years when price realization hasn't been that good, correct?

Well, depending on the year you're comparing to, in this case 2011, I think that's correct.

Right. So just another way to put it, just order of magnitude, if the cutout does increase 15% to 20% at spot prices composite, what's roughly, what will be the impact on Pilgrim's revenue per pound, will it be 5%, 10% or even close to 15%, just ballpark?

I'm not going to quantify that at this time. Again I'm going to leave it to more reflective of the market.

Okay. And then just one last one -- actually 2 questions, one on cost. If you were to lock in all your grain needs today, would your cost, grain cost, per pound be relatively stable?

Compared to 2011?

Yes.

I don't know the answer to that question, but we don't believe that base prices are a true reflection of the value of the corn or soybean meal for the next 12 to 18 months.

Right. I understand that, which is why you're not -- it seems as though on corn you're closer to the market than you were on soybeans, although we don't know exactly how long. But I was just trying to get a sense if you were to lock prices in today, because we have to model it that way, where you would end up and my guess is it's going to be pretty close to where we are, where you ended up for '11 but maybe...

You have to remember corn had -- in 2011, took a $2 per bushel swing, $5.80 to $7.80 back to $5.80 a couple of times and it was very, very volatile in 2011.

Right. And just the last one is just on volumes, so what should we expect from Pilgrim's in terms of volumes on the chicken business. I mean the industry is going to be down 2% to 3%, it looks like, should we expect something similar from Pilgrim's at this point?

I don't think we're going to disclose our production volumes going forward other than to say that we're going to manage it to the most benefit of our company in pricing and working capital. We're not going to disclose our production levels.

Why are breast prices relatively weak, I mean the cutouts have 20% mainly because of the easy comps on leg quarters. I don't think I understood exactly, I don't know why breast prices have been this weak. I think you addressed that earlier in the call, but I'm still not clear on why they're so weak and why we should expect, perhaps, breast prices to go closer to $2 by the end of the summer.

Well, I think a couple of things, remember, breast meat pricing started out the year January, very strong relative to the previous year and they're still stronger than they were this time last year. They've just weakened relative to where they started out and that was a function of good growing conditions in the Southeast and I think a temporary increase in supply because, I think, processors pull birds ahead to manage weight. I think that's going to be mitigated as we go into the year. I think we're going to see more featuring and promotional activity at Retail because of extremely high beef and pork prices again and I think demand is going to be adequate per the supply that the industry has on the market for the whole year.

And our final question comes from Heather Jones from BB&T Capital Markets.

Just real quickly, Bill, are you saying that the cutout is going to be up 20% on average for the year? I missed the timeframe you're referring to.

Yes. I was talking about 2012. If you look at the forecast in agency estimates the composite cutout is about 20% more for 2012 than it was 2011.

Okay, and then does your $200 million in cost savings for 2012, is the depreciation figure included in that?

It's not included in that, no.

Okay. So including that, am I thinking about it correctly, you should be down like another $260 million?

Yes, if the $60 million...

Apples-to apples.

Yes, you're right. We're talking about real gains on improvements not on depreciation.

And at this time, we would like to turn the conference call back over to management for any closing remarks.

Well, we want to thank everyone today for your participation and interest in our stock. We're extremely pleased with how our team has responded to a very challenging and extremely difficult year. We believe we have the right strategy and the right team in place to take advantage of a stronger year in 2012. Thank you.

That concludes today's conference call. We thank you for attending. You may now disconnect your telephone lines.