Pilgrim's Pride Corporation (PPC) Q3 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to the Third Quarter 2012 Pilgrim's Pride Earnings Conference Call and Webcast. [Operator Instructions] At the company's request, this call is being recorded. Please note that the slides referenced during today's call are available for download from the Investor Relations section of the company's website at www.pilgrims.com. After today's presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Rosemary Geelan, Investor Relations for Pilgrim's Pride. Please go ahead.

Good morning, and thank you for joining us today as we review our operating and financial results for the quarter ended September 23, 2012. This morning, we issued a press release providing an overview of our financial performance for the quarter, including the 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 will also be filed as 8-Ks and will be available online at sec.gov. Presenting to you today are Bill Lovette, President Chief Executive Officer; and Fabio Sandri, our Chief Financial Officer. Today's call will focus on the measures we've implemented to enhance the volatility inherent in our industry, a discussion of the macro factors impacting our industry and the key drivers of our financial performance for this quarter. After we conclude our prepared remarks, we will be happy to take your questions. Before we begin, I would like to remind everyone of our Safe Harbor disclaimer. Today's call may contain certain forward-looking statements that represent our outlook and our current expectations as of the date of this release. Other additional factors not anticipated by management may cause the actual results to differ materially from those projected in these forward-looking statements. Any additional information concerning those factors have been provided in today's press release 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 and good morning. I'm pleased to share with you the results of our operations for our third quarter. We achieved EBITDA of $103 million, an improvement of $187 million over the same quarter in 2011. Our net revenues in Q3 increased over $177 million from the prior year, reaching $2.1 billion. While 2012 has presented the chicken industry with many of the same challenges as 2011, our results clearly tell the story of the progress we've made in managing those challenges. Our strategy of improving our capital structure has resulted in our lowest net debt and best liquidity position in 5 years at $1.1 billion and $671.5 million, respectively. We have improved our financial position and it gives us more flexibility in managing our business and decreasing the cost of our leverage. As we continue to refine and execute the strategy we laid out last year, our performance has improved even as the market environment has proven more uncertain and volatile. We believe this type of environment is providing an opportunity for the stronger performers to distinguish themselves in the future. We believe we have the right strategy and team to use this environment to our advantage. Our strategy to improve our business model continues to pay dividends. Our progress on both cost savings and yield enhancements in all business units, resulting in $179 million improvement year-to-date translating to a run rate of $243 million and well ahead of our $200 million goal. This is a reflection of the ownership and accountability our management team has taken over the past 18 months. Keep in mind that as we make these improvements, the bar we measure ourselves against is raised higher. Each round means we have to make more finely tuned decisions. We've had a material improvement in managing our sales mix and the related pricing impact resulting in 7.6% higher than last year. This has made a significant difference in overcoming $109 million year-over-year increase in feed ingredient cost. As an example, in our Prepared Foods business, which had traditionally been sold at a fixed price for one year, we have realized from January until now approximately a 10% price increase on that total book of business by changing our pricing strategy to more accurately reflect either chicken markets or feed ingredient markets. From an operational perspective, we achieved a significant yield improvement. We still see room to improve plant cost and are continuing to find ways to improve throughput and efficiency. That being said, sales mix is also a key driver of our strategy. One tactic of our sales mix strategy has been in making more detailed production decisions to improve our mix. In the past, we've moved excess product in the form of prepared foods. As the economics have changed, we are now analyzing market conditions to determine when it's more feasible to buy raw materials versus grow more chickens. And we rationalized the value-added component of our portfolio to only include that business, which truly contributes beyond the margin we are achieving in other forms. Our Further Processing adds value to our customer's business and we provide innovative new products to expand those relationships. Our breadth of market segmenting is a differentiating advantage that we apply. We are the -- one of the only companies able to consistently service multiple categories of a customer's needs with the capability to offer all ranges of products from whole birds to prepared foods. This platform enabled us to recently acquire 160 million pounds of new business from a key customer and now other customers are looking to achieve the same benefit from this strategy. One focal point of our approach has been to address a proportion of our portfolio that was sold on a spot basis. We've been able to secure much more of our volume in a committed basis to limit our exposure to volatility and market pricing. We are performing more detailed analytics over the operational aspects that we can influence. This has enabled us to identify ways we can adapt to a constantly changing environment. Our mindset is to understand the underlying commodity markets in various options in feed formulation, consider the cutout and adjust production to optimize our mix. We've made wholesale changes to fine tune those areas where we can reap the most benefit. Our export strategy continues to be a driver in delivering an improvement to our overall sales mix. We are progressing with fully equipped exports and have seen positive response from markets in the Middle East, Africa and Asia. Demand also remained strong for Mexico. Our export sales mix is helping our domestic sales mix value. For example, we are selling products beyond just dark meat, where we realize a better value than on the domestic market. We are finalizing the full conversion of one of our plants into a vegetative[ph] griller production facility for Saudi Arabia and other Middle Eastern countries. Our branded product has been extremely well-received abroad and is gaining market share because of its high quality, and we're obtaining the same the value as top branded global producers. We also continue to have good access to the Japanese markets, especially with sized legs. Our third quarter exports were solid, and we expect that trend to continue in the future. In the end, we see chicken as the best value, the most convenient and most versatile protein. Chicken is more adaptable to being used as an ingredient, in addition to being the main feature of a meal. This is even more prevalent in international markets. As most of you know, we are currently in the midst of our contract pricing negotiations for 2013. We are firm on our stand that long-term fixed pricing without a locked-in margin creates risk we're not willing to take, and our current contract discussions reflect that view. For our producers who had long-term fixed price contracts in 2012, the impact has been significant. Our decision to be closer to the market will remain firm even if the market believes there's downside risk to feed prices. Moving on to the impact of feed ingredient prices. Corn and soy inputs have been a regular topic of conversation. During our second quarter earnings call, we mentioned that we were committed to importing South American corn when the cost made sense. We followed through on this and invested an infrastructure to make that happen. We expect our first U.S. import of South American corn during this current quarter. We have secured approximately 10% of our corn needs for the December through July period from South America at competitive pricing. And we are confident we will be able to secure an additional 10%. In previous quarters, we commented on the outlook for both corn and soybean meal prices and our assumptions have been supported by the markets. Corn hit $8.49 per bushel during the third quarter, with soybean meal peaking at almost $542 per ton. We continue to expect that prices will hold at high levels in the coming months despite ongoing corn imports and good planting prospects in South America. There have been underlying concerns that there's not enough rationing in total worldwide usage to bridge the gap for the new crop. With regards to production indicators, egg sets were very encouraging at 177 million last week, declining below 2011 levels and hitting the lower range of our expectations. In fact, last week's number is the lowest of egg sets since 2001 and we remain comfortable with egg sets anywhere below 190 million for the next couple of months. Hatching layers declined further in September to 49 million, maintaining historically low levels, which will restrain egg production in the first half of 2013. Cold storage was also well within comfortable levels at 652 million pounds or approximately one week's worth of industry production. White medium inventories have declined 23% from 2011 levels. Market pricing for chicken has remained strong, leg quarters were 3% higher compared to the same quarter in 2011, breast meat was $0.20 higher and wings were a full $0.96 per pound higher. Georgia Dock increased about $0.07 over the third quarter of 2011 and stands at a historic high. At Pilgrim's, we continue to plan our production based on our forecasted demand. We communicate with our customers regularly to ensure that we are producing the right amount of the right product at the right time to meet their needs at a profitable level. Although we plan our production in advance, that doesn't mean we won't adjust to changing market conditions. We can and do take immediate steps to optimize our results. At this time, I'd like to hand the call over to our CFO, Fabio Sandri, to share some thoughts on our financial results.

Thank you, Bill, and good morning, everyone. Our third quarter EBITDA of $103 million was an improvement of $187 million over 2011's results. Even with an increase of $56 million in feed ingredients in this quarter, we generated a positive net income of $42.9 million, resulting in a positive earnings per share of $0.17 comparing with a loss of $162 million for the same quarter in 2011. Sales increased due to improved revenue per pound sold driven in large part by an improvement in our sales mix. We continue to effectively manage our working capital, especially in light of the volatile market conditions our industry has experienced. Even with increased live inventory and high cost grains in our balance sheet, as sales volume increased of 1.4% and strong exports result in lower finished goods inventory, optimizing our working capital position. This was part of our commitment to reducing debt and ensuring we have the optimal inventory levels. Our capital spending this quarter of $24.5 million continue to be direct towards quality, safety, regulatory and investments in projects to upgrade our sales mix and generating immediate returns. We had strong cash flows, resulting in a significant decline of net debt. Consistent with our comments throughout the past year, we continue to apply our free cash flow against our revolver reducing our interest cost and allowing us to pay off more debt incrementally. We are focusing on ways to decrease our financing cost by looking into options, which are now available due to our stronger financial position. We continue to strengthen our balance sheet. Our liquidity is $671.5 million and our net debt is $1.1 billion, both of which are our strongest position in over 5 years. Our debt covenants will be restated during the fourth quarter, and we expect to be in full compliance. Considering our strong results, our projections indicate that we will remain in compliance until the term loan maturity at the end of 2014. Mexico has continued to deliver strong results. We have a robust business model in our Mexican operations, and we expect these results to carry forward, at least through year end. We were able to make some of U.S. feed ingredient cost with -- off the table by substituting with more competitive local soybean and corn and with South American corn. We don't expect Mexico to be based -- to be exposed to high U.S. corn prices until sometime next year. October, will remain a profitable month for us, even as we have fully absorbed the impacts of higher grain prices. The remainder of the year will be a continued challenge on grain costs. Our results depend on our management, our response to consumer demand for chicken and the industry remaining rational to balance supply and demand. Operator, this concludes our prepared remarks, please open the call for questions.

[Operator Instructions] Our first question comes from Farha Aslam from Stephens, Inc.

First question is, Bill, on your buy-versus-produced strategy, that's a change in Pilgrim's historical norms. Could you share with us how -- what percentage you were intending to buy from the open market? And how that's going to change your production plans?

Well, Farha, to clarify, what I said was we would make the calculations as to whether or not it's more profitable for us to buy versus sell a whole bird at a return. And I think it's this whole idea is reflective of our being able to improve our sales mix, have much more of our sales committed as opposed to being on the spot market and getting ourselves in a position where we do get to make that decision, again figuring everything on the whole bird return basis and then if it's more advantageous from a profitability standpoint, to buy one component versus growing a whole bird, then that will lead us down that decision tree.

Great. And then you have a changed kind of your target egg sets for the industry. Before, it was 180 to 185 now you're happy with anything below 190. Could you just share with us the calculations and thought process behind that change?

Sure. That change merely reflects seasonality of our business. So we're in the time period at this moment where egg sets for last week and this week are producing chickens that will be slaughtered during the holiday season and then historically, we move into January where there's a lot of breast meat that is featured at retail, and typically if you look back at historical curves, egg sets traditionally go up during that time, and we expect the same will happen this year to provide that need for those retail features. And what we're saying is we are comfortable with egg sets going up and staying at the 190 million egg set level, a little bit below last year. I think last year they reached approximately 195 million. So somewhere in that range, I think, is going to be a comfortable place for the market.

And just as a follow-up, what -- perhaps to take seasonality out, what percentage do you need to see production come down to achieve maybe profitability in the U.S. or normalized running?

Well, I think as we've said during our last call and I've heard others say this that the recent run-up since the drought of corn and soybean meal, it would take $0.10 to $0.12 a pound to cover that cost. And during the last call, we said we were comfortable if egg sets, this season, reached 180 million to 185 million and it's been in that level with some weeks slightly above that range and for example, last week being somewhat below that range. So I have not changed my view on that since that time.

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

When you look at Mexico you obviously had a fantastic quarter and you made some comments about fundamentals continuing into Q4. How long until you believe it takes the market to rebalance from the 5% of the market that was called due to the avian flu?

Well, Bryan, I would go back and remind you that the current quarter or the past quarter, Quarter 3, results in Mexico were not all that much different from what we experienced during in Quarter 1. And you can go back even to 2010 and see where our Mexico business, again had a very robust profitability level and we expect that to continue. Irrespective of the issue with avian influenza, which did support egg prices, and I'm not sure to what extent it did support chicken prices because chicken demand even before the A outbreak in the state of Jalisco and remained strong throughout that event and I believe it will continue to remain strong. So I'm not sure how much correlation there is to the strong pricing environment there and the situation in the state of Jalisco.

But it sounds like the strong pricing situation has continued.

It has continued. Now there's seasonality to the Mexican market also, and we expect that seasonality basically to continue. But at this time, prices, do remain relatively strong. Demand is well supported also in Mexico.

All right. And I'd like to shift gears into the -- you all won obviously a contract. Could you talk about, I think, it was -- you quoted 160 million pounds -- or excuse me, is it -- yes, 160 million pounds. Can you talk about, one, do you feel like that is -- you are gaining share with a particular customer? Or is that both that situation as well a reflection of the overall food service market adding more poultry to the menu? And maybe you'd talk to both of those.

Yes, sure. I think it's -- in that instance, it's more about us gaining share. The food service market, we don't believe the past quarter or so has weakened substantially nor has it gained a lot of strength either. We see the food service business as fairly steady right now, at least our food service business is steady. And that was all about gaining share. I would hurry on to tell you, as I alluded to in our prepared remarks, that we are also working with other key customers with the same model where we can provide a full line of products that other companies can't provide, and that's really coupled with the quality and the service that we provide those customers what helped us gain that market share.

And last question. I believe you are or the industry is going through its normal measurement of plant efficiencies and where you all stack up relative to the industry overall. Could you talk about whether those results have come out where you all stack up relative to expectations in what your goals may be?

Sure. Well, I can tell you that we're not satisfied where we are but we've improved our competitive position significantly in the past couple of years and we have a strategy to continue that. I know from being in this industry, as long as I have been, you can't be satisfied with your current position ever because the industry has a way of continual improvement in terms of all of the key performance indicators and cost metrics. And so we're going to continue on the track of improving with the idea of improving our relative position.

Our next question comes from Heather Jones of BB&T Capital Markets. Heather L. Jones - BB&T Capital Markets, Research Division: Real quickly going to your egg set comment about 190 million or lower. If you look at the average to-date for 2012, that would imply roughly a 2% cut in head, while at the same time, rates are running up 1% plus or minus year-on-year. So you're -- it sounds like you're comfortable with a pretty minor cut in production then, and just wondering if you could share with us your thought process on why such a some minor cut in production is acceptable to you?

Well, what I was really referring to the January time period where, again, retailers typically feature a lot of chicken. I was not necessarily commenting on periods beyond that. Based on the numbers that I see and the forecast that I read, we believe that chicken production in 2013 will drop below 2012 levels, somewhere in the 2% to 3% level, reflective of the high price of corn and soybean meal related to the drought. And we don't think that's going to change. I was again referring to the January and early February time period. Heather L. Jones - BB&T Capital Markets, Research Division: So this is -- in a related question. What is your outlook on feed because there's many out there. Warba Bank was out this morning, in fact, saying that corn and soybean meal is going to possibly move materially higher. So I'm wondering what your view is on that? And if so, do you think 2% to 3% is enough -- a 2% to 3% cut is enough to -- for the industry to generate acceptable profits?

Good question, Heather. And there's -- I would remind you that there's a lot of moving parts to what the price of corn and soybean meal and other commodities are going to be in the future. If we look at USDA's October WASDE report, they're showing a stocks-to-use ratio of around 5.5% or 619 million bushels. I believe that to be minimal pipeline stocks and if you go back and look at the usage categories, it's really hard to figure out if those numbers that they have laid in there are achievable and that's why we made the comment that there seems to be a lot of concern around rationing and the different types of usage for both corn and soybean meal. On soybean meal, the October WASDE reflected about a 4.5% stocks-to-use ratio. And again, what we consider minimal pipelines. While there is some concern that corn and soy prices will go higher and I think that will dampen any type of ideas of growth of chicken production in the future. But on the other hand, South America, we believe, is going to be incented to plant huge crops of soy and corn. Analyst reports that I read confirm that. It will be all about the weather in South America and then U.S. farmers will also be incented to put a lot of acres, probably more than we've ever seen in both corn and soybean production. And so as we move into late spring, pricing of those commodities may be reflective of that and reflective of the weather forecast at that time. So there's just too many unanswered questions right now to really know what the price of corn and soybean meal are going to be. And I think as we've seen chicken producers in the recent past adjust to those pricing environments, I think that the near-term future will be no different. Heather L. Jones - BB&T Capital Markets, Research Division: Okay. My final question. If you go back 10 years and look at seasonal, sequential moves in price month-to-month, pricing this fall has been holding up a lot better and it's not just wings, it's across the complex, it's holding up a lot better than it normally does during October. And just wondering and this is at the same time that pork is getting a lot of feature activity at retail. So just is food service demand much better for chicken specifically? I mean, what could be causing pricing to hold up, as well as it has?

I think, Heather, there are several things at play. After it was apparent that we were going to have the worst drought in over 50 years, we saw chicken production being cut similar to the cuts that were made last year. So I think that has an influence. We also saw producers pulling inventory, live inventory, ahead and getting birds out of the field quicker, so we saw a reduction in age slaughtered. Now whether it's been conducive to growth, and I think we've seen a slight increase in some of average weight, but I don't think it's been so much that it's overly burdened the market. And we see even this week, well supported demand even for breast meat as prices have steadied. Leg quarters have been well supported. Obviously wings have been well supported. Tenders have also had a nice run until just recently. So we think that there's good demand, solid demand for chicken. But we also know that the key to margin and profitability in our business is managing, effectively managing, that supply, and we're cautious about that as we look into the future.

Our next question comes from Reza Vahabzadeh of Barclays.

Can you just bring us up-to-date on your productivity improvements, sales mix improvements, how much of a contribution that you have made year-to-date and in the third quarter, if you can be specific. And then what can we expect on a look-forward basis?

Okay. So from our yield improvement and plant cost reduction, we've been fairly steady at a run rate of somewhere between $230 million to $245 million on an annualized basis and that's been quarter-over-quarter about the same rate. We don't expect that's going to stop. We still see that momentum picking up. We believe more of the share over a period of time will come from plant cost reduction as opposed to the yield improvement, but we're aggressively going after both. Also you noticed that we achieved pricing improvements. I alluded to the fact in our Prepared Foods business, we had double-digit pricing improvements and mix improvements from January till now. We don't expect that, slope of that curve is going to change either and we're aggressively getting more of our products committed on a week-to-week basis so that we minimize the amount of product that we have to sell on the spot market.

Got it. And would we expect a similar type of improvement in the next year, broadly speaking?

Well, broadly speaking, we're in the process of completing our 2013 plan. I can assure you that we're going to have an improvement strategy in place for yield processing costs, sales mix improvement, price improvement, all the above and we're going to continue to go after all that we can to continue to improve our competitive position in the industry. And while I'm absolutely excited and in some ways thrilled about our progress, we're not satisfied with where we are, and we're going to keep asking our team to take ownership, be accountable as they have in the last year, and we expect them to do so.

Got it. You mentioned you're going to be -- you mentioned you were profitable in October. I don't know if that was on an EBIT basis or EBITDA but would you anticipate somewhat more challenging months in the coming months just because of seasonality before a rebound, or how should we think about that?

Well, October will be profitable and there will be more challenges as we'll continue to see pricing from feed ingredient go into our cost and take them higher. The idea though is to offset that with higher revenue as that is afforded to us and we'll continue to do that.

Our next question comes from Akshay of KeyBanc Capital Markets.

First question on your volume. I know there's a lot of moving parts. But it looks like U.S. volume up 1.4%, could be up even higher if you strip out the business that you sold. So help me put that number, first of all, what is it on a comparable like industry basis this quarter and help me put that into context with the 1.6% decline we've seen for the industry in the September quarter in terms of production, so if you can help me with that and then I have a follow-up.

Sure. A couple of things to note. We did reduce our inventories during the quarter. So that accounts for part of that growth. We also began the big piece of business, 160 million pounds annually with that key customer during the quarter so that was also reflective. And we're not changing our outlook for the future. We're going to continue to grow our share, continue to take market share, and we're going to do it where it's -- in levels that are profitable to us. We're not going to grow market share just for the sake of growing share but only when it's profitable to do so.

Actually we also increased our exports. We completed the full conversion of our one of our brands to, specifically grillers to the meat that it helped a lot also in our volumes.

So how much, I mean just give me a sense of how much -- what was the production increase because it looks like the -- you had a lot of stuff coming out of inventory, per se, gaining share. But I'm just trying to get a sense of, okay, if the industry is cutting, you're saying you expect the industry to cut and it looks like all your comments I'm interpreting them as we're being cautious on production, especially more so than in the past. So I'm just trying to make sure that that's consistent even though you are gaining share on certain accounts, overall on production, is it fair to say that if you're expecting industry to cut back 2% to 3% next year, you're going to do your fair share of that?

Well, to clarify what you said, we've not changed our view in terms of caution about supply levels and making sure that our supply is balanced with our demand at a profitable level. So that's not changed. We're not any more or less cautious than we've been in the past few years, actually. And again, what I can tell you is repeating what I just said, we're going to be focused on taking market share but only that share which proves profitable for us to do so. And if it's not profitable, then I can assure you, we're not interested in producing the chicken that can't be sold at a profitable level.

But you have a little bit actually. If you take out the inventory reduction and the increase x, our production was in line or slightly down compared to the same quarter last year.

Okay, and just one follow-up this -- just generally speaking, right? There's 2 camps that people are in right now. One is that the industry will take its time and perhaps not even cut as much as is needed to get the price recovery to get margins to recover. And then there's the other camp, which I believe you're in, because you're saying egg sets are going to be down and prices are going to recover early next year. That's, in my -- I'm also in that camp. But I'm just trying to understand from your perspective the industry, why is it, in your opinion, that the industry today has to be more cautious on supply than in years past because that's what's implied because typically, it takes 6 months of losses for the industry to start cutting supply. The estimates that are out there in terms of egg sets right now imply that the cut backs will happen a lot faster. I just love to get your perspective on why you think that's actually possible.

Well, again, to clarify what I'm saying. I don't remember saying that I thought the industry was going to necessarily beyond the January time period in slaughter, the industry was going to do one thing or the other. Now one thing I will hurry on to say that, if you look at the cost of goods sold and chickens being slaughtered, we do not yet, as an industry, reach the peak of the higher priced corn and soy going into those birds that are slaughtered. So I think as we reach that pinnacle of cost, I don't believe producers are going to be necessarily in a hurry to go out to put more production on the ground until we understand that spread between chicken prices and what we will see in corn and soy meal prices. And coupled with the uncertainty of what the next crop year prices are going to bring, that's really what gives us more caution than anything.

Actually, I'll also add that -- you allude to this 6 months in the past and I think it was 6 months because the companies we're in a good, positive realm before. And that was not true this year. I think we came out of 2011 with a balance sheet and the industry pretty damaged. So I don't think that the smaller companies are past the 6-months time to face the losses. So I think that's playing a big role. Also if you think about increasing production with the cost of feed that we have today, that will be very -- repeat hard in your inventory and that will consume cash that I think the companies don't have today. So I think that is helping also the company's to be more conservative on increasing production.

Our next question comes from Carla Casella of JPMorgan.

This is Paul Simenauer for Paula Casella. Just a couple of questions. First, your casual dining business, what did the month-to-month improvement or deterioration look like through the quarter?

Well, casual dining has been one of the food service segments that was hit the hardest during the recession and has been the slowest to come out. I'm not at liberty to talk about a specific segment in food service, other than to say, our food service business has been fairly steady.

Great. And then what did your -- in your inventory, what did your -- what did the cost versus units look like if you can talk about that?

Well, the cost since we have lowered our inventory, it's pretty much in line with the feed cost that we have. So there is no significant difference between the cost that we have today and the actual replenished cost for inventory. So it's fairly close to market prices.

Our next question and pardon the pronunciation comes from Sarkis Sherbetchyan of B. Riley & Co. Sarkis Sherbetchyan - B. Riley & Co., LLC, Research Division: So for Q4, are you paying market prices for meal so -- soy meal, as well as corn?

Well, we don't disclose our positions, either cash or futures. But at some point in time, every company is going to end up paying market prices at some point. Sarkis Sherbetchyan - B. Riley & Co., LLC, Research Division: Okay, and you did mention of that you've invested in infrastructure to import feed from South America? And I've notice that South America has a pretty nice spread between what we have out in Chicago versus what we can buy there. So given that you've invested in infrastructure, do you see -- or taking enough to move for quite a bit of time, in the future as well?

Well, that investment gives us stability to do so when those prices are advantageous, which is precisely why we did it. So as long as there is a competitive spread that we can realize then we intend to do that.

The thing, Sarkis, in the future, we believe U.S. will still be a net exporter of corn. We don't expect this situation to continue and this was, let's say, an aberration caused by the extreme drought that we have. So we made investment and the investment will be paid in the first month to be honest, but I don't think that, that is the situation that we will go on in the future. Sarkis Sherbetchyan - B. Riley & Co., LLC, Research Division: Okay. And also were your exports growing at a faster rate versus the U.S. exports for chicken in the past quarter?

Yes. Yes and our exports growth actually the last 1.5 years has been growing at a pace beyond the target.

I will just add another. Is that we focus on value not on pounds, so sometimes when you look at the industry numbers, it's more pound-like. And what we are doing is trying to capture value by selling more value-added foods. That's why Bill mentioned that we have made very good progress on prepared -- selling prepared or value-added foods into Africa and Middle East and also our griller program. So we don't focus on pounds, we focus on value service. Sarkis Sherbetchyan - B. Riley & Co., LLC, Research Division: Understood. And I believe it was last quarter or 2 quarters ago, you dedicated a plant to export for the Asian markets. Is this plant that you're dedicating to the Middle East market a new plant or is it the same plant for the Asian?

I think you're confusing the 2 end markets. This actually was dedicated for the Middle East. And that's the plant to which we are referring.

Our next question comes from Kenneth Zaslow of BMO Capital Markets.

In terms of the Mexican operation, can you talk about the sustainability of it versus the FX? Is this a margin structure that we should start to think a little bit more longer-term? Is there some structural stuff that you can talk about to help us model it going a little bit longer-term?

The Mexican business is a bit more volatile. In other words, we're closer to the market. It's a commodity business for us. We just happen, I think, to do a really good job of managing that spread in pricing over cost of feed. And we have a large component of that business that's -- where we sell live chickens. And again, it's going to be reflective of the volatility of feed ingredient inputs. Now one of the things I think our team has done a really good job of is figuring out how to source ingredients closer to our chickens down there. And that's why we're not going to be exposed to U.S. corn prices until sometime probably in the second quarter on a cost of goods sold basis.

So this margin structure, we should kind of be able to get comfortable with for the next 2 quarters, this level?

Well, I would say the structure that we've had throughout this year, I think is going to be reflective. But I would remind you that Q1 and Q2 were different. Q3 was different than Q2. So there is seasonality as I spoke of earlier in that market. But it's truly more of a spread business and I just happen to think we did a great job of managing that spread.

And then next year, when you say the egg production -- you expect production in the U.S. to be down 2% to 3%. I think somebody asked the question, will you be participating in that 2% to 3%? And if not, does that mean that the industry has cut more and how do you get confidence in the idea that the industry will cut 2% to 3%?

Well, the way we look at our production levels is the first thing we look at is what level of profitability can we sell that whole bird and not just one part. We don't grow a chicken for only the breast meat or only the wing or tender. We look at all of our sales on the chickens we grow on a whole bird return basis and then we balance our production with that supply, which we believe we can sell profitably. And as the market demand is growing or not, then we adjust our production reflective of what we believe the market is going to do.

So that means you will participate or you won't participate?

Well, again, I would leave it as we're going to balance our supply and demand with the profit levels that we desire to achieve.

Okay. I guess, kind of one -- if I take a step back, look, Tyson has said clearly that they don't want to cut production. You guys seem like you're less inclined to do it unless the industry does it. So that's 40% of the market, that's maybe not cutting and then that's requiring the 60% of the market to cut, say, 5% to 7% or something like that you get to your 3% to -- 2% to 3%. I'm just trying how to get how the math -- how do you guys see it? And again I'm not trying to push it. I'm just trying to figure out how this all kind of ends up to be to get to your -- I'm assuming by 2014 you expect to get your earnings power. I'm just trying to figure out the path to get there?

Well, again, I can't say more beyond that, which I said related to our plans for production. I can't speak for any other company either. So we're just going to do that, which is beneficial to our business and our plan. One thing I did mention in the prepared remarks was if we can't grow a whole live chicken and make a profit on that whole chicken and we see an opportunity to grow a part that we can purchase on the outside, then we will do that. That's really not different than it's been in the past and now talking about it, I guess the first time since I've been at Pilgrim's but again, we're going to balance our supply and demand with what we think are our needs for making a profit.

Our next question comes from Christina Ronac of Gleacher & Company. Christina Ronac - Gleacher & Company Securities, Inc.: I just want to try to understand your business better, if you don't mind. Corn and soy pretty much spiked right at the end of June. And I know corn in Brazil didn't spike as much a little bit. But just trying to understand, is there a 60- to 90-day lag? And if so, then should we see some pressure in the fourth quarter and I think what you've been saying is you expect prices to offset that. But just want to be clear that you haven't really felt the price increase yet and you're going to see that in the fourth quarter, is that fair?

Well, there is a lag between prices of corn and soy going up. Obviously, it takes, depending on size of the bird, anywhere from 5 to 8 weeks to grow that chicken and you're feeding that bird that whole time. So the cost of goods sold being reflective of what ingredient pricing is doing at that time. And what was your other question? Christina Ronac - Gleacher & Company Securities, Inc.: I wasn't sure if then we expect a little bit of that. I mean I don't know if you can give us some outlook into 4Q, so you don't expect any margin pressure for 4Q then?

I didn't say that at all. Last pricing for corn and soy has gone up since late June, early July, we're absolutely challenged with higher cost. Now the idea obviously as supply and demand works for the price of chicken, we would want to get as much price to offset that as we could. But we're-- our book of business is much more reflective of the market than it was in the past. So we're going to be reflective -- our returns are going to be reflective of chicken market prices as well. So while I don't know what chicken prices are going to do in the future, in order to continue at profitable levels, obviously, we have the need to increase the pricing of a product.

Christina, I would just add you're right. Despite the cost taking 2 months to hit P&L, the cost hit the cash flow immediately. So if the price and corn and soy increases, it hits the cash flow. And something that we have been very careful in managing very carefully, it is our cash flow. And that is what's helping, I think, the industry. Convincing the industry to increase production is the increasing costs or the increasing consumption of cash into the live inventory. Christina Ronac - Gleacher & Company Securities, Inc.: I got it. And if you don't mind, I've been -- I've just been noticing that the price differential between chicken and beef is continuing to increase. So I would think, to get your opinion, if you will, that this would give you more room to increase your prices given that beef continues to get more expensive.

Well, we believe that the price of beef, based on placements in the feedlots in the recent weeks and months are going to move prices of beef up. Now, we found out in the last couple years that the price of chicken really is more reflective of the supply and demand of chicken and not necessarily related to beef and pork. Although, high beef prices and high pork prices certainly don't hurt the price of chicken. But I think the price of chicken, again, is more reflective of supply and demand for chicken.

And then, Christina, one other thing is that while we don't see a lot of substitutions between beef and chicken in the West, that is not so true in the international markets. International markets where the economies are growing and people or demand for protein is growing much faster, we see a much faster substitution between high prices of beef and chicken. And we continue to believe that chicken will outgrow beef in the world. Not so much in U.S., but in the world that's pretty much true.

And one last thing I would remind you of that I think is related to the recent question is. I mean, it's late October and we've been buying corn and soybean meal in the chickens that we are now selling during the high prices related to the drought and, as we've said, we remain profitable in October. So I think that the real message in there is we've been able to effectively deal with higher corn and soy prices and remain at a profitable level and again, I think that's a testament to the strategy that we have been executed, the ownership and accountability that our management team has taken and we'll continue to operate in a way that just because corn is $8 or whatever the price, doesn't necessarily preclude us from being profitable.

Our next question comes from John Malcolm from Citi.

I might've misunderstood. But did I hear you say that you expect to be in compliance with the maintenance test in your bank agreement through maturity?

Yes. We expect to be in compliance when they are reinstated here in Q4. And based on our projections and given the strong results that we are showing so far, we expect to be in compliance up to the maturity of the term loan, which is actually where the covenants are.

This concludes our question-and-answer session. I would like to turn the conference back over to Bill Lovette for any closing remarks.

Well, thank you all for your questions and interest in Pilgrim's. We see this challenging market as an opportunity for stronger performance to differentiate from others, and we believe that this is where our strategy and strength of our team truly manifest. I do want to thank the Pilgrim's team, our shareholders, growers and customers for their continued support. Thank you.

The conference has now concluded, and we thank you for attending today's presentation. You may now disconnect.