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Pilgrim’s Pride Corporation (NASDAQ:PPC)

Q4 2012 Results Earnings Call

February 15, 2013 9:00 AM ET

Executives

Rosemary Geelan - Investor Relations

Bill Lovette - President and CEO

Fabio Sandri - Chief Financial Officer

Analysts

Heather Jones - BB&T Capital Markets

Reza Vahabzadeh - Barclays Capital

Bryan Hunt - Wells Fargo Securities

Farha Aslam - Stephens

Karru Martinson - Deutsche Bank

Carla Casella - JP Morgan

Akshay Jagdale - KeyBanc

Sarkis Sherbetchyan - B. Riley & Company

Paul Simenauer - JP Morgan

Operator

Good morning. And welcome to the Fiscal 2012 Pilgrim’s Pride Year End Earnings Conference Call and Webcast. All participants will be in a listen-only mode. (Operator Instructions)

At the company’s request, this call is being recorded. Please note that the slides referenced during today’s call are available for download from the Investor Relations section of the company’s website at www.pilgrims.com. After today’s presentation, there will be an opportunity to ask questions.

I would now like to turn the conference over to Rosemary Geelan, Investor Relations for Pilgrim’s Pride. Please go ahead.

Rosemary Geelan

Good morning. Thank you for joining us today as we review our operating and financial results for the year ended December 30, 2012. Yesterday afternoon, we issued a press release providing an overview of our financial performance for the year and 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 have also been filed as 8-K’s and are available online at www.sec.gov.

Presenting to you today are Bill Lovette, President and Chief Executive Officer; and Fabio Sandri, our Chief Financial Officer. Today’s call will focus on our full year and fourth quarter results.

Now before we begin, I’d 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 day of its release.

Other factors not anticipated by management may cause the actual results to differ materially from those projected in these forward-looking statements. Additional information concerning these factors has been provided in yesterday’s press release, as well as in our 10-K filing with the SEC.

I will now turn the call over to Bill Lovette to begin our prepared remarks.

Bill Lovette

Thank you and good morning. 2012 was first full year of our strategy implementation. Our net sales for 2012 exceeded $8.1 billion, resulting in the second consecutive year of revenue growth. Net income was $174 million or $0.70 per share, a significant improvement over 2011. These results include a positive operating cash flow of $200 million in 2012.

The improvements in our 2012 results were driven largely by operational efficiency. We initially set a goal of $200 million of improvements. We exceeded that and obtained $210 million through yield and plant cost improvement.

This let us offset a $260 million feed cost increase over 2011. These improvements were pivotal in overcoming increase feed costs and allowed us to participate more fully in the margins from higher chicken markets.

In 2013, we will continue to improve and have an efficiency improvement plan to be $125 million better than 2012, resulting in a cumulative improvement over 2010 of $635 million.

Our pricing strategy for 2013 is similar to 2012. We continue to structure our contracts to be market related or tied to input costs. We are engaging in 12-month fixed price contracts only when there is minimal margin risk and with a key customer. Currently, we have less than 5% of our committed business in these agreements.

We do intend to grow our business but it is with margin in mind not market share. When we have the opportunity to gain incremental business from customers, we will make a grow or buy decision, meaning we will do whatever is most accretive to margins with respect to growing a live chicken or purchasing meat on the open market.

Product mix is vital component of our sale strategy. We have sales managers who own mix and price for each of our plants and they are accountable for creating more value through mix improvements.

As an example, we changed how we manage our boneless breast portioning operations. We have been successful in limiting the production of the significant amount of breast trim from portioning thereby improving our overall sales mix. As a result, we’ve seen the market price for breast trim increase which allows us to increase pricing for products made from breast trim.

We are also producing more value-added products using leg meat, thereby valuing up the back half of the bird to enhance the margin contribution on whole bird equivalent basis. These are just two examples of giving our sales management team ownership and accountability for improving margins.

As we continue to drive this accountability deeper into the organization, our team members have become owners of each process, creating value and making us better operators.

Our broad portfolio of products allows us to service all key customers unique demands. We have made a difference by clearly defining our target customers, understanding their needs and offering solutions to help them grow their business.

We continue to measure our progress by improving our competitive position. Our operational goal in 2012 was to improve sales and operations to achieve rankings at least the average company status using industry benchmarks such as Agri Stats and Bank of America Profitability Survey.

We achieved this and now our sights are set for 2013 on becoming a top third company. We are confident we have the right strategy and team in place to achieve this goal. We have evaluated and refined our incentive plan to allow management and our shareholders interest as closely as possible.

The next color of our strategy is value-added exports, where we see a tremendous potential to drive profitable growth. We expect global population growth and higher doctor reporting inclusion rates to provide opportunities for U.S. chicken. The U.S. is among the most cost efficient producers of meat and USDA predicts that chicken exports will continue to exceed 7 billion pounds annually.

We are pleased with our value-added export sales and have a goal for 2013 to grow these sales by 30% in value. To achieve this we are creating new product formulations that satisfy growing market needs and price targets.

For example, in March, we will launch a line of chicken franks with sales already in place for these products. We also are utilizing our resources within the JBS global network to identify untapped opportunities for our value-added products. This strategy involves leveraging the Pilgrim’s brand to establish committed sales of value-added products.

On the commodity side we formed alliances with major distributors in developing markets. Our strategy is to sell our products through direct channels creating a better margin.

Another component of our growth strategy relates to our Mexico operations. We are convinced we have the right strategy in place for our Mexican operation and our team is executing at a very high level. As we see this business as a sustainable competitive advantage it is our intention to continue to grow commensurate with the needs of a local market.

Beginning this January we appointed Charles Vanderhyde as head of our Mexican business unit and we expect him to use his valuable experience in understanding of global markets to grow our revenue and profits in Mexico. Previously, Charles was head of commodity risk management and export sales.

Let’s talk a little more broadly about industry data. 2013 has begun with strong chicken market pricing on a relative basis as the domestic margins have been pressured due to record higher feed costs. Looking at current industry production, weekly slaughter pounds for the past couple of weeks have reported higher than 2012 primarily due to increased weights.

During the fall, we saw record live weights due to good feed conversions and better growing conditions which contributed to higher production levels. For 2013, the USDA is forecasting a 1% production increase. We’re already seeing increased egg sets at $196.7 million.

We expect that due to seasonal demand, we might see egg sets in the range of $200 million to $205 million. Chick placements were virtually unchanged from a year ago at a $162.4 million. Overall, because of strong demand in the chicken market, we are still confident in the balance between supply and demand.

Urner Barry breast meat has recorded $0.18 or 14% higher than the same time last year. Leg quarters remained well supported and continued to trade within a very narrow range. Wings are reflecting some seasonal volatility while at much higher values than in the past.

Whole bird markets continue to be strong with Georgia Dock reaching historic high over a dollar per pound, 10% higher than the prior year. From a feed perspective, our corn and soy purchases will be kept closed then until the market identifies the size and value of the new crop both in North and South America.

We continually the monitor the price of feed ingredients in various markets and we buy as we see opportunities to do so at a benefit to the company. As previously stated, with Charles moving to Mexico, we are pleased to have [Aaron Wiegand] join our team as head of commodity risk management in feed ingredient and purchasing.

Aaron comes to us from Bunge where he was most recently Director of Corn product line based in Geneva, Switzerland. Aaron has extensive global experience in managing commodity risk as well as fiscal origination and transportation of feed ingredients. We’re excited to have his talent onboard at Pilgrim’s.

This time, I’d like to ask our CFO, Fabio Sandri to share some details on our financial results.

Fabio Sandri

Thank you, Bill, and good morning, everyone. We reported net sales of $2.2 billion for the fourth quarter compared to $1.8 billion in the fourth quarter of 2011. The 19.6% growth is also a reflection of the extra week in 2012 compared to 2011.

Adjusting for that extra week, the growth was driven by price and mix, not volume increases. Our net income of $22.8 million compared to a loss of $85.4 million in 2011. An EBITDA for the quarter improved to $64.4 million against 2011 of $8.4 million.

Our net income includes $29 million tax benefit related to the settlement of earlier tax returns. Profit before tax of $2 million will work out to about $0.01 per share. We continue to strengthen our balance sheet. We generated positive cash flow of $44 million during the fourth quarter while incurring a $144 million more in feed ingredient cost when compared to the same period last year.

Our ability to effectively manage our working capital has contributed to the progress we have made on our debt reduction of $328 million year-to-date reducing our leverage ratio to 2.8 times EBITDA. Looking forward, we are determined to make additional headway in our capital structure and reduce net debt to our target of $600 million to $800 million.

With continued discipline, we believe this is achievable within the next couple of years. Mexico continues to be a positive contribution to the company. Margins remain strong and we see potential for growth in both the revenue and margin side.

2013 started off strong as well and we expect those levers to be sustainable for the foreseeable future. As we approach our target debt levels, we will continue to analyze our CapEx and pursue those projects with the best we can, or that, impact safety, regulatory and product quality.

Our return on the $90 million we invested this year demonstrated the effectiveness of that strategy. For 2013, our management team has already identified over $100 million in projects with excellent returns. While these projects will be a priority, we will maintain our discipline and ensure our spending support of strategy to grow the business in the most effective way possible.

Our debt covenants were restated at the fourth quarter and we are in full compliance. Our exit credit facility matures in December of 2014 and we have ample liquidity. We will continue to monitor the financial markets for the best of our opportunity to reduce our financing costs.

In the next couple of years, we also expect our cash levels to benefit from our tax position and our reduced leverage. While we have started to reduce our net operating losses carryforwards, we currently have about $595 million of the federal NOLs left to apply before we expect to become a cash tax payer in the U.S.

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

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from Heather Jones of BB&T Capital Markets. Please go ahead.

Heather Jones - BB&T Capital Markets

Good morning. Great quarter.

Bill Lovette

Thank you, Heather.

Heather Jones - BB&T Capital Markets

My first question is just on detail-ish data. I was wondering if you could -- first of all you said adjusted for the extra week pound for flat. Is that a common for both U.S. and Mexico?

Bill Lovette

It’s primarily directed at U.S.

Heather Jones - BB&T Capital Markets

Okay. And can you talk about pricing deed in the U.S. and Mexico on a year-on-year basis for the quarter?

Bill Lovette

I don’t have that. Fabio -- do you have that, Fabio?

Fabio Sandri

For the quarter, price by 12% in U.S. In Mexico…

Heather Jones - BB&T Capital Markets

In U.S. -- okay.

Fabio Sandri

In U.S. And Mexico was up 24%.

Heather Jones - BB&T Capital Markets

Okay. My second question, Bill, going back to your comments, you talked about evaluating things on a buy or grow and was wondering are you talking about just if, say, evaluating potential increases in production. Are you going through even existing production and determining whether it makes sense to keep that production or just buy it?

Bill Lovette

Yeah. Good question. So you start with the fact that we want to grow our business, we have a desire to grow and we think we can based on relationships with current customers and enquiries from customers or potential customers we don’t do business with today.

When facing the prospect of increasing that business then we’ll go back to whether or not it’s more accretive from a margin standpoint to either grow that whole chicken, keeping in mind that, that takes working capital and we have to get a return not only on perhaps the component of product that the target customer is purchasing but on that whole chicken.

And if we can do that then fine that meets our criteria. If it’s better for us, on the other hand to buy the component that, that particular customer may need more efficiently than growing that whole bird, again keeping in mind working capital and other needs then we will buy that component in the open market. So, it’s a grow-or-buy decision on any of our growth going forward.

Heather Jones - BB&T Capital Markets

Okay. Okay. That makes sense. All right. Thank you.

Operator

And our next question comes from Reza Vahabzadeh of Barclays Capital. Please go ahead.

Reza Vahabzadeh - Barclays Capital

Good morning.

Bill Lovette

Good morning.

Reza Vahabzadeh - Barclays Capital

On the supply side and really supply-demand outlook, you touched on the higher excess but then you talk about placements as well. So, how do you think about the supply outlook and how do you think about supply demand balance for 2013? And along with those questions, how should we think about EBITDA margins for 2013? Is this the year that you can potentially approach a normalized EBITDA margin or at least be in the neighborhood? Thank you.

Bill Lovette

So to address the first part of your question, we believe that supply and demand is well and balanced now and will continue to be in the future. We see retail demand very strong at this point, especially on boneless thighs meat, whole birds and rotisserie birds. We see food service flat, although we do expect more feature activity in food services, especially after the QSR level and pack casual segments.

So we see that current supply and our expected supply to be well supported by demand as noted by the price increases that we see starting out in 2013. We do expect that on a seasonal basis, exits may continue to increase up to around $205 million perhaps and even if that occurs we believe the supply will still be supported by adequate demand.

Now, and I will let, Fabio give his point of view on the normalized margins that you ask about, but obviously we have to think about the year in two parts. At the current time, we are dealing with the old crop -- corn and soybean meal and prices thereof. We don’t yet know what the new crop may bring, although we have a little more clarity on the South American crop than we do the North America crop. It is anticipated that we are going to, again have record acres planted for corn and perhaps even soybeans and if we get adequate moisture then we could have actually a surplus in corn and soybean meal at least for the short-term that would bode very well for margins. And I do in fact think that we could if all of that plays out like I just described, we could approach or perhaps even exceed normalized market environment.

Reza Vahabzadeh - Barclays Capital

Got it. Thank you.

Bill Lovette

You are welcome.

Operator

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

Bryan Hunt - Wells Fargo Securities

My two questions. First on growth and then on savings. First, looking at growth you talked about growing export value by over 30% in 2013. Can you give us an idea what exports were as a percent of sales in 2013 and maybe a little bit more of detail behind your growth strategy?

Bill Lovette

I believe that were 13% year-over-year in 2012 and 13% in 2012. And we don’t necessarily just look at the percentage in either pounds or dollars but we really look at the value that we create from growing exports, both back to the domestic margin on the whole bird equivalent basis and in growing value-added products within our portfolio. We have some target markets like Mexico where we are taking further process -- products from the U.S. to Mexico and producing value-added products in Mexico to fit consumer needs there.

We also have targeted some markets in Africa and the Middle East for products tailored to consumer taste and needs in those markets. So, I mentioned as an example, the franks that we are going to launch in March. Those products are targeted for Africa and the Middle East and we formulated those franks specifically for the taste and the value needs of consumer in those markets.

Bryan Hunt - Wells Fargo Securities

Okay. And next, if I look at cost savings initiatives that are planned for next year, how much of that bucket is driven by incremental CapEx versus operational changes and maybe could you give us an idea, what some of the bigger slices of that savings pile are?

Bill Lovette

Good question. So it’s largely not connected to incremental CapEx. While we will spend CapEx dollars when we identify a return project that has a fast return, we will do that. But the goal is that with virtually no incremental CapEx involved, it’s strictly looking at our labor efficiency, our throughputs, our yields, squeezing more out of the return if you will with perspective to our ingredient cost, our packaging cost.

We created what I call matrix management in some of our key cost areas like packaging and ingredients and utilities where we have people who look across the enterprise at all of our operations with respect to each of those categories and identify ways to create cost savings within those categories at our plants.

Bryan Hunt - Wells Fargo Securities

Thank you for your comments, Bill. I will get back in the queue.

Operator

Our next question comes from Farha Aslam from Stephens. Please go ahead.

Farha Aslam - Stephens

Hi. Good morning.

Bill Lovette

Good morning.

Farha Aslam - Stephens

Bill, you’ve talked a lot about your focus on mix and mix improvement at Pilgram’s. Could you just highlight as you’ve gone through the food service contracting seasons, how that mix effort worked out and what were the notable wins?

Bill Lovette

Sure. I actually gave an example in the prepared remarks with respect to decreasing our production of Breast Trim, which obviously values up boneless breast values. So that’s one example. Another example is identifying the value of key customers based on how they buy the entire portfolio or in fact, did they buy the whole bird and we are able to match up a customer with a whole bird equivalent sale and we are able to give that customer better value and we are able to increase efficiencies by doing so within our plants. So that’s how we are looking at it.

Farha Aslam - Stephens

Okay. And perhaps the follow-up on that, wings were particularly tight this contracting season. Could you just talk about how that played into our contracts and notably your outlook for when prices going forward.

Bill Lovette

We think when prices will continue to be well supported, we are seeing a normal season drop post-Super Bowl at this time but that happens virtually every year and we are comfortable with the trajectory of the market at this time. I think the industry is going to continue to keep the number of head restrained in terms of production and obviously with each chicken having only two wings, that’s going to help us manage supply.

On the other hand, we continued to see strong demand at the food service operator level with wings. You see the wing only concepts continuing to grow. I think that’s been reported a lot in the press recently and we don’t thing that’s going to change in the near-term nor in fact the long-term.

So still see wings as a valuable component of the whole bird equivalent mix. For example, in the last year wings -- year and half wings have grown up about $1 a pound and if you consider the percentage of mix of the whole bird that contributes about $0.10 on the whole bird equivalents. So it’s been very important and we think it will continue to be.

Farha Aslam - Stephens

Thank you. And just one quick if I could sneak it, is Mexico avian influenza, we are hearing that its in five breeder facilities of Pacheco is that -- are you experiencing any avian influenza issues in Mexico and if not does that impacting pricing or your outlook for Mexico at all?

Bill Lovette

Well, we’ve obviously been concerned about avian influenza in Mexico since last year when it broke into the table egg producing industry. We have stepped up our monitoring of our farms, increased our biosecurity measures and at -- right at this moment, we don’t know of any confirm cases of i.e. any of the broader breeders, I have heard rumors like you, but I’ve not confirmed that.

Farha Aslam - Stephens

Okay. Thank you.

Operator

And our next question comes from Karru Martinson of Deutsche Bank. Please go ahead.

Karru Martinson - Deutsche Bank

Good morning. As you guys have been emphasized, deemphasizing the fixed price contracts? How is the overall competitive market reaction, I mean, are you seeing people follow your lead?

Bill Lovette

We are, I think, other companies that reported that their strategy has followed what we have done and I’ll make our customers understand with volatile feed ingredient markets. In order to sustain our industry we are going to have to connect the prices of chicken to either market components or those underlying cost input components, and they’ve very understanding about that. And as I’ve said before, I feel like our industry is going to become more of a spread business due to the volatility that we continue to see in feed ingredient costs.

Karru Martinson - Deutsche Bank

All right. And you guys have had certainly an impressive turnaround this year in the capital market especially in the term loan side have been open. I guess, I’m a little positive in terms of your comp? What is it that you want to see out there in the market, if you guys due to come out and address your capital structure?

Fabio Sandri

Yeah. We are constantly looking at the market for pricing, the term loan matures in December ‘14, we think we have ample time to decide what is the best moment. In the term loan we have a make whole, so to refinance the term loan we will need to pay for that make whole and that’s the calculation that we do every quarter, looking to the market and see the opportunities that we have, it make sense on MPV.

Karru Martinson - Deutsche Bank

Thank you very much guys. Appreciate it.

Bill Lovette

You’re welcome.

Operator

Your next question comes from Carla Casella of JP Morgan. Please go ahead. Ms. Casella, your line open perhaps it’s muted on your end.

Carla Casella - JP Morgan

Hi. Sorry about that. Can you hear me?

Bill Lovette

Yes.

Carla Casella - JP Morgan

You mentioned that about less than 5% of your business is on long-term contracts today. Can you just remind us where that stood as of last year so we can see how much progress you have made there?

Bill Lovette

Last year we, at the end up 2011 when we began negotiating contracts for 2012, we actually pull back number down to believe 10% or less and we continue to decrease those historically for not only Pilgrim’s but I believe most of the value-added producers, in the chicken business, its been 50% to 60% of a portfolio.

And as I continue to stress unless all of the margin risk is taken out through an extremely high price that just not a sustainable business practice in our industry due to volatility feed ingredient prices. And I believe that environment will continue in the foreseeable future.

Carla Casella - JP Morgan

Okay. That’s great. And then, any impact of the recent weather across this, I guess, Southwest, Midwest, the tornados, rain?

Bill Lovette

We have not seen a significant impact on our business. It is good news to get moisture in western Corn Belt which is likely to help the crops this next growing season.

Carla Casella - JP Morgan

Okay. Great. That’s all I had. My others have been answered. Thanks.

Bill Lovette

You’re welcome.

Operator

Your next question is from Akshay Jagdale of KeyBanc. Please go ahead.

Akshay Jagdale - KeyBanc

Good morning. My first question is a follow-up to what Farha asked on avian influenza. So but [Choco] I think put out a press release last night saying, they actually have detected avian flu in five or I think their 100 farms.

What -- you said that -- can I don’t know if you knew that already, but what potentially -- how do you think of that risk, I mean, is it a non-factor until it reaches sort of the human consumption level which it hasn’t at all or how should we think of the risk? I mean, how are you thinking of the risk? It’s being contained, but can you help me understand how you are thinking of the whole avian influenza issue in Mexico?

Bill Lovette

Sure. Good question. So while I had heard that there could be some avian influenza in some breeder flocks I had not read a confirmation. As I’ve said before, we are always concern with any biosecurity issue or disease issue both in the U.S. and Mexico or any part of the world.

Since we’ve been dealing with avian influenza across the globe primarily since 2005, 2006, and consumers are more informed today, there is less scare from a food safety standpoint about the whole issue, but its more of production issue and a cost issue that we are concern with.

We continue to increase our biosecurity in our farms and we’ll be diligent in that respect, if there continues to be avian influenza spread into the table leg industry or even the boiler industry in Mexico then the effect that’s going to have obviously is decrease supply and we’ll likely increase price for those products.

Akshay Jagdale - KeyBanc

Right. But what -- at what stage I concur with your thoughts, right, but I’m thinking of it more from the perspective of what happen in ‘06? I mean, so at what stage does this trigger a consumption response, like what cause back in ‘06 or whenever it happen, consumption for chicken go down, right, I mean, I think it was…

Bill Lovette

Right. I think the, yes, I get your question. I think what happened in 2006 was the jump from chickens to humans. We’ve not seen that occur in Mexico for sure in the last 12, 18 months or ever as far as I know. We really -- there hasn’t been that many cases reported in any country in the last 12 to 24 months. So that’s the difference in 2006 and what we see currently.

Fabio Sandri

So just in the supply of egg, I’ll remind that we have the operation in U.S. that is -- in Texas, it’s very close to Mexico. Even if we have some interruption or problem in our breeding flocks in Mexico, we can supply eggs from U.S. to Mexico.

Bill Lovette

That’s an important point and I thought of one other thing that I should note here. If you remember back in 2006, it was a different strain of avian influenza. It was H5N1 which has gone across from bird to human. The strain in Mexico is H7N3 which I don’t believe has crossed from bird to human. So it is a different strain of influenza.

Akshay Jagdale - KeyBanc

That’s helpful. I mean, from -- we’ve talked to the Mexican authority, I mean, the key what you highlighted is that it hasn’t gone from chicken to human. Would you also say, I mean, I think this is important, would you also say I mean, since ‘06, the level of security in the industry, I mean, I don’t know, has increased exponentially, right. So the likelihood of it going from chicken to human is considerably lower. Would that be a true statement?

Bill Lovette

I believe that to be a true statement. You’re right in stating now security measures have gone up immensely since the mid 2000 and we remain diligent in that aspect.

Akshay Jagdale - KeyBanc

Okay. And just one on the volume side, I mean, honestly, I would really appreciate it if you made these volume comments -- if it was possible in your press releases. We did not know there was an extra week, so shame on us. But can you just give us the impact of the extra week in -- on dollar sales because I’m unable to sort of back into what the volume was.

I believe you said U.S. volumes are flat excluding the extra week. And then I think you also said price per pound was up 12% but I couldn’t reconcile that in my model. So is it possible to give us that impact of the extra week on sales and volume?

Fabio Sandri

The impact in volume is 7%. It’s one week over 13 weeks.

Akshay Jagdale - KeyBanc

Yeah.

Fabio Sandri

Our increase in total sales was 19% and our increase in price was 12%. So volume and price was 7% because of this extra week.

Akshay Jagdale - KeyBanc

Perfect. And what -- can you -- just one last question on pricing and then your comments on demand. So you obviously don’t have that many fixed price contracts any more and it looks like overall the industry and further process companies like yourself and Tyson has moved to more of a cost plus margin management type of business.

So, can you help me understand relative to the spot price movement, how we should think of your margin going forward. I mean, is it more a function of grain cost and your pricing being flexible above that. So -- I mean what’s the variability in terms of your margin going forward. It looks like its reduced significantly but is the big variable still supply in the industry goes up and that’s going to impact you -- could impact you negatively or is it more grain cost?

Bill Lovette

Great question. And I appreciate you asking it. It’s -- we have a diverse portfolio of pricing strategy. We do tie more and more chicken market components and we do so with the thought in mind that supplies will be managed and the industry will be disciplined. At the same time, we’re also cognizant of the time periods that we have these contracts tied to and our ability to change the pricing structure and the book of business as the market dictates.

So, one of the key components in our strategy is agility in being able to move as the market dynamics move. And -- so it’s going to be hard to make a one-to-one correlation with any particular on a chicken component market or underlying commodity market because our portfolio is so diverse and we’ve constructed it that way on purpose. So that we’re not absolutely dependent on only one way of pricing.

Akshay Jagdale - KeyBanc

So in other words in 2013, if you look at ‘13 as it stands right now, is there more risk to the margin on grains or on pricing given what demand is doing?

Bill Lovette

I would say it’s equally balanced.

Akshay Jagdale - KeyBanc

Okay. Great. I’ll pass it on. Thank you very much.

Bill Lovette

Your welcome.

Operator

Our next question comes from Sarkis Sherbetchyan of B. Riley & Company. Please go ahead.

Sarkis Sherbetchyan - B. Riley & Company

Good morning.

Bill Lovette

Good morning.

Fabio Sandri

Good morning.

Sarkis Sherbetchyan - B. Riley & Company

Most of my questions have been answered, so one question that I have is can you disclose how much deep the company is purchasing from South America currently. I know you kind of mentioned it on last quarter’s call that you guys were setting up to import some feed from there?

Bill Lovette

That’s correct. We did address it on the last call but to remind you we said that about 10% of our needs from December through June of this year would come from South America. And we would continue to look for opportunities to increase that. I will tell you why we continue to look for opportunities, it’s still about at the 10% level on our needs.

Sarkis Sherbetchyan - B. Riley & Company

Okay. And curious, why is still at the 10% level, do you just see that the pricing opportunity is not there or is it infrastructure issue?

Bill Lovette

No. I think as more companies begin buying South American ingredients, the basis in South America responded and sort of, came to equilibrium such that it hasn’t made a significant change since we bought those cargos. And I think the advantage for us is we got in early in the process and we’re able to secure that volume at favorable prices.

Sarkis Sherbetchyan - B. Riley & Company

Okay. Understood. So just to clarify, you think that, that volume had favorable prices that continued through June and within that time period, you also probably have a better understanding of what the North American comp was like. Is that the correct understanding?

Bill Lovette

That is the correct understanding but I would remind you that we will begin to experience the harvest in South America soon which may begin to change those dynamics and could, I won’t say it will but could again make South American ingredients favorable to U.S. prices in a given geographic region.

Sarkis Sherbetchyan - B. Riley & Company

Okay. Appreciate the color. Good luck.

Operator

(Operator Instructions) And our next question is a follow-up from Heather Jones of BB&T Capital Markets. Please go ahead.

Heather Jones - BB&T Capital Markets

Thanks for taking the follow-up. I have a question on demand. If you look at price trends, the year-on-year gains are pretty solid across the different cuts. The only cut we see is they’re really accelerating on is breast, which is boneless, skinless breast which is interesting given the higher weights, that’s where the higher weight would show up.

So arguably greater supply increases in breasts but yet accelerating year-on-year price gains. And so I was wondering should we infer from that, that the acceleration in demand while it’s at retail and food services, it’s more pronounced at food service? I mean, how should we be thinking about this?

Bill Lovette

I believe that particular component -- the big bird’s commodity breast is affected more at food service and we believe that part of this is -- we are seeing substitution now beginning to occur by using the big bird breast in place of trim, because the trim supply has been reduced dramatically as I’ve said earlier and customers are continuing to call for trim, not finding it and then having to substitute that big bird breast meat, that’s why we believe that the claim trim as we call it is trading about equal to that big bird breast meat today and we don’t see that that’s going to change anytime in the near future.

Heather Jones - BB&T Capital Markets

I mean, what products are you talking about or referring to specifically that they would be swapping out trim for boneless/skinless?

Bill Lovette

Products such as chopped and formed patties and nuggets, wholly cooked diced meat is another that’s used in an ingredient in casseroles or soups or other dishes.

Heather Jones - BB&T Capital Markets

So you think that shift is what’s triggering this or do you think there has been any shift in customers trying to shift more their product, like on the wing side to boneless wings from bone and wings or do you think it’s all those trim components?

Bill Lovette

Yeah. I don’t think trim is the only reason. I think you make a good point that we are seeing more retail features actually for breast meat due to higher prices of meat and pork. We see more feature activity in both retail and food service from that component as well.

Heather Jones - BB&T Capital Markets

Okay. And going back to your comments earlier and you may have given us specific number but I didn’t catch it. As far as you’ve now -- for 2013, you are targeting reaching the top third and the Agri Stats, Bank of America benchmarks. Where are you at currently?

Bill Lovette

Well, you measure it month after months and one month maybe different than the other. I would tell you, directionally, we are solidly above average and we are tracking towards the top third. So we are comfortable at our trajectory and we are very confident that we will be in the top third as we move into this year.

Heather Jones - BB&T Capital Markets

And are you -- is that pretty much fair to say across all your weight classes, are you performing better and certainly cautious than others?

Bill Lovette

Heather, it’s really across all of our weight classes. There is no particular weight class that’s necessarily ahead of others. We have more improvement to make up in some of our market segment related business such as our retail tray pack in some of our prepared foods segment, but it is not related to birds at all.

Heather Jones - BB&T Capital Markets

Okay. Perfect. Thank you very much.

Operator

And our next question is a follow-up from Bryan Hunt of Wells Fargo Securities. Please go ahead.

Bryan Hunt - Wells Fargo Securities

Thank you for the follow-up. Bill, when you look at -- you quoted short-term trends in your presentation with egg placements and boiler placements. But when you look at pullets and layers, what’s really the outlook in your opinion for maybe the intermediate term on the supply? How much could supply grow with, if the industry pushed it?

Bill Lovette

If you go back for the past six months and measure pullets placements in overall size of the breeder flock, there is marginal ability to increase sets and placements based on the size of the breeder flock, which now stands at about 50.5 million, which from a historical basis is very low. We have to go back to -- I believe the mid 90s to see a number that’s under that.

So that what tells us is for six months or perhaps even a little bit longer, we are going to see supply restrained because the greater flock size is relatively low. We’ve also seen in the last, I would say a couple of months, the productivity of the breeder flock has gone and we believe that that’s due to company’s laying breeders longer to get more eggs that has supported that increase in excess. And when that happens, obviously hedgeability tends to go down and egg production tends to go down at the end of the lock of those flocks. So, again, we believe there’s minimal growth opportunity from the current breeder flock size. Now, six months our, eight months out or even a year out, that could change but we’ve not seen a sustainable indication of that at this point.

Bryan Hunt - Wells Fargo Securities

And then my next question in terms of that color, is when you look at retail, a notable acceleration and consumption of poultry of retail, what do you think the driver is of this? Do you believe consumers are trading out of other more expensive proteins in the poultry, or are you seeing increased features by the retailers? What do you think is behind the growth in consumption?

Bill Lovette

We believe it’s a combination of both these things you mentioned. We are seeing more feature activity and more demand for whole birds. If you go back and look in the last couple of years as wing prices have increased, as leg quarter prices have increased, as other component prices have increased, processes have been intended to cut out more whole birds.

And that’s bringing down the supply of whole birds. And we think that’s what caused a dislocation in there and brought the price increase. At the same time, we see consumers increasing their consumption of whole birds, especially the fully cooked whole birds purchased at supermarket delis. So it’s a combination of those things and we believe that changes sustainable, at least for the foreseeable future.

Bryan Hunt - Wells Fargo Securities

Thanks for your input. I appreciate.

Operator

And our next question comes from Carla Casella of JP Morgan. Please go ahead.

Paul Simenauer - JP Morgan

Hi. This is Paul Simenauer for Carla Casella. My questions actually already been answered. Thank you so much.

Operator

(Operator Instructions) And our next question will come from Akshay Jagdale of KeyBanc. Please go ahead.

Akshay Jagdale - KeyBanc

Thank you for taking the follow-up. Bill, just I may have missed this. I was jumping on and off, couple of calls. But remind me about your view on supply. I did see something about $200 million to $205 million excess that you talked about, but USDA is saying 1% increase.

I mean, what do you think supply is going to end up at, I mean the USDA number seems reasonable to you and more importantly would love to get your view on demand? I mean prices have been much stronger than I had expected and everyday they are stronger than I expect. So, I’m wondering if that’s just supply being tight or if you are actually seeing more demand and if you could give some color on what kind of customers that are driving that, that will be great?

Bill Lovette

Right. So we do see increased demand at retail, especially as it relates to whole birds and I just covered that with -- responded to a question from the previous caller. We also see increased demand for boneless thigh meat at retail and we see increasing feature activity for boneless breasts, perhaps as substitution due to the high prices of beef. At food service, overall demand is virtually flat, but in some key segments like QSR and fast casual, we know that there is going to be increase future activity especially using breast meat as a component.

So we think that the current suppliers well supported by growing demand. I don’t believe or we don’t believe that that’s going to change in the foreseeable future. And again, I just finished talking about the breeder flock size. If you go back over the past year, the industry draw down the breeder flock size to a level that you’d have to go back to the mid ‘90s to find a lower number and as companies are laying breeders longer, the productivity of those flocks are going down, so hatchability is falling somewhat, egg production at the end of the life is falling somewhat. So we believe that that is also going to be constraint at least in the next six to eight perhaps 12 months to supply.

Akshay Jagdale - KeyBanc

And just on specific part wing prices, obviously, they been on a tear, and we are seeing some feature or some large quick serve restaurant, probably is going launch another wing product and I’m assuming that’s going to have a positive impact on wing prices, I mean, what are you seeing from your customers on wing demand and do you think wing prices are sustainable here or they could go even higher?

Bill Lovette

We think wing prices in the range that they’ve traded this past year are sustainable and the reason that we think that is the supply constraint that I just talked about plus increasing demand from the wing centered restaurant operators. For example it was reported within the last month that one of those operators is building 17 new stores, we calculated those 17 new stores would need 8 loads of wings per week, that are currently not being purchased.

So as that segment grows, as we see other operators who have traditionally not served wings bring that on to the menu. We think that demand is going to continue to be very, very strong. We also see that supporting breast meat prices because they more and more even those wing centric operators put boneless wings on menu made from breast meat.

Akshay Jagdale - KeyBanc

Okay. Great. I’ll pass on. Thanks for taking the follow ups.

Operator

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

Bill Lovette

Thank you. And I’m proud of our team and the value they bring to the table. Our management and team members continue to execute our strategy and results validate that we are on the right track for continued success. Thank you all for joining us this morning. We appreciate your continued support at Pilgrim’s.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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