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Executives

Rosemary Geelan – IR

Bill Lovette – President and CEO

Fabio Sandri – CFO

Analysts

Farha Aslam – Stephens Inc.

Brett Hundley – BB&T Capital Markets

Bryan Hunt – Wells Fargo Securities, LLC

Karru Martinson – Deutsche Bank

Hale Holden – Barclays Capital

Sarkis Sherbetchyan - B. Riley & Company

Ken Zaslow – Bank of Montreal

Akshay Jagdale - KeyBanc Capital Markets

Pilgrim’s Pride Corp (PPC) Q4 2013 Results Earnings Conference Call February 20, 2014 11:00 PM ET

Operator

Good morning and welcome to the year end 2013 Pilgrim's Pride earnings conference call and webcast. All participants will be in listen only mode. (Operator’s Instructions) At the company's request this call is being recorded. Please note that the slides references are available for download from the investor relations section of the 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 and for joining us today as we review our operating and financial results for the year end, December 29, 2013. Yesterday afternoon we issued a press release, providing an overview of our financial performance for the quarter, including a reconciliation of any non-GAAP measures we may discuss. A copy of the release is available in the Investor Relations section of our website, along with the slides we will reference during this call. These items have also been filed as 8-Ks 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.

Before we begin our prepared remarks 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 current expectations as of the day 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. Further information concerning those factors have been provided in today's press release and many of our regular filings with the SEC.

I’d like now to turn the call over to Bill Lovette.

Bill Lovette

Good morning everyone and thank you for joining us today. We are pleased to be here today to share our successes during 2013 fiscal year. Pilgrim's net revenue for the quarter would reflect one less weak in fiscal 2013 compared to fiscal 2012 were $2.05 billion as compared to $2.19 billion in 2012. We generated EBITDA for the quarter of $196.5 million, an increase of $132 million over our 2012 results. Our EBITDA margin improved to 9.6% over the prior year's 2.9% for the same quarter. We reported net income of $143 million or $0.55 per share, compared to $23 million or $0.9 per share in the fourth quarter of 2012.

Three years ago, we introduced a new strategy to transform Pilgrim's into the best-managed and most respected company in our industry. We said we were going to hold our teams accountable for being a valued partner with our key customers for relentless pursuit of operational excellence after growing value-added exports. Our results continue to validate the effectiveness of this approach. From our solid financial outcomes to our improved standing in the major Benchmarking services. We have made it our passion to provide our key customers with dedicated resources needed to address the challenges they encounter in their businesses.

For example during 2013, we worked with a key regional retailer and developed a unique brand of antibiotic free chicken. We are already one of the nation's largest producers and marketers of ABF chicken and we stand ready to support our customers as they grow our customers as they grow this category. We are committed to driving innovation in this category to help our customers adapt to changing consumer interest. This dedication to providing thoughtful solutions is a part of why we have had such a successful contract-negotiating season. We continued our approach of creating pricing models specific to our customers' needs to ensure they have the committed volumes and quality essential to their success.

Our persistence and determination to achieve operational excellence continues to be a key factor in our performance. Our progress, yields, and efficiency provided $132 million much incremental improvements this year resulting in cumulative improvements of $642 million over our baseline of 2010. We have an additional $220 million of improvements already targeted for 2014. Mixed management continues to be an area of competitive advantage for us driving what we like to refer to as the portfolio effect. Additionally our ability to operate a value added business with a best-in-class commodity cost orientation creates a unique advantage in the market place.

During 2013, we continued to die vest ourselves of operations outside our core competencies. Better product selection and management improved the efficiency at our plants allowing us to focus on sales mix and consistent EBITDA margin generation. These accomplishments enabled us to reach our goal of consistently being a top third performer. We are pleased with the innovations our team has made today innovating new products in the growing categories such as ABF, our Savora line, and e-products for key customers.

Now it's time for us to take the next step and invest in our brands regions and segments where we have room to expand. To leave that effort, we recently hired Chad Baker, formally of Smithfield Foods to head our prepared goods business unit. Chad has more than 20 years experience in the food industry and brings a heightened strategic focus to our growing branded products line. He has a track record of impressive success in this area and we look forward to him joining us on March 1st.

Our value added exports demonstrated steady growth throughout the year. We believe 2014 is going to present us with the opportunity to aggressively grow this category and we remain committed to that portion of our business. Across the business there is good possibility that 2014 could be as strong or even stronger than 2013. And why do I say that? Let's look at protein supply fundamentals.

Pork, which recently has been producing more than last year going to see some significant PED virus-driven supply challenges for the summer months during what is already traditionally high supply period. Beef is also facing supply pressures as producers balance the high prices of feeder cattle against retention needs. What this means for chicken is even with potentially higher supplies, which by the way we have not seen at this time. There should be a price strength as competing proteins reach even higher levels.

On the cost side, the most recent was the report implied increased export demand for grains. Our risk management approach to feed ingredients continues to be centered around sourcing ingredients from the most efficient priced regions. Recent spikes in propane prices have impacted live operations across the industry while fuel costs are – grow our managed expenses. We are aware of the burden, the volatility and unusually cold conditions nationwide had placed on our growers. To address this we have structured a supplemental allowance for our growers who have been impacted by the increase in price of propane.

We are pleased with our Mexican operations results during the quarter. After a weak Q3, we saw improvement in market demand and pricing. We have identified a project in Veracruz, which will enable us to expand first with live sales and work toward a new processing facility in the near future. This was a new geographic market with a growing economy making an ideal area for us to expand using a grower model similar to our U.S. operations.

So before I turn the call over to Fabio, I want to emphasize that we are both excited and pleased with our continued results and our drive and passion to further improve our results remains high.

At this time, I’d like to ask our CFO, Fabio Sandri, to share some results on our financial results. Fabio?

Fabio Sandri

Thank you, Bill, and good morning, everyone. We report the net revenue for the $2 billion, compared to $2.2 billion in 2012. I want to remind you again that the fourth quarter 2012 included an extra week when compared to this fourth quarter 2013. We generated net income of only $143 million during the quarter achieving total net income of $550 million for full year, or $2.12 per share. Our EBITDA margin 9.6% for the quarter and 9.5% for the year, clearly demonstrating benefit of pricing strategy and the portfolio brand and mitigation effect against volatility in the chicken market.

SG&A for the whole year was 2.50% of our net revenues, a reduction over 2012 even with the significant increase in incentives pay recognizing our team members' strong performance during 2013. While we accrue incentive bonus every quarter, the year total reflects year-end true up base on our financial results.

Throughout the year, we have demonstrated effective management of our cash flows. In 2013, we reduced working capital by more than $180 million by managing inventory, accounts receivable and accounts payable most efficient levels to our business. There, together with the strong cash flow from our operations led us to generate $273 million in free cash flow during the fourth quarter adding to $788 million during 2013.

Over the past three years, we have had substantially improve debt profile and that didn't occur by accident. We have responsibly applied our resources in a disciplined manner and utilize our free cash flow generation to pay off our most expensive debt. Our December 30th – on December 30, immediately after our year-end we made a $205 million payment in full of the term B1 loan. We made a –we have a mandatory cash flow sweep that will occur in April and we nearly tied the term loan B2 s well. We will still have the $500 million in outstanding notes that matures in 2018 [ph] and we are looking to our options on how to benefit from the strong capital market and now reducing grade [ph].

Our anticipated interest expense for 2014 should be under $60 million based on our current projections. We ended the fiscal year with a leverage of less than .4 times our times our trading 12-month EBITDA. Today, we have one of the strongest in the balance sheets in the industry with liquidity of more than $1.3 billion. Going forward, we have an opportunity to grow our top line and capture incremental benefits to improve shareholder value.

We will continue to grow our business to focus and efficiency to focus capture expenditure. In 2013, we had spent $150 million in capital projects. We expect to spend about $150 million during 2014 with approximately $80 million dedicated to maintenance, safety and quality projects and the remainder driving profit improvement with projects having significant returns. We already achieved a significant advantage to the average company in the industry benchmarks and we believe that our management teams are now strategic investments will lead us to the top of the list.

One of the opportunities is even regards to expanding our presence in Mexico. They are both MMA and greenfield opportunities complement our existing portfolio that we consider under the right conditions and our liquidity positions provides us with plenty of flexibility and accelerating growth opportunities. Like we had mentioned, we had already started the greenfield project in Veracruz that we generate growth in regions where we are not present today. The investment in this project is included in their $150 million CapEx for 2014.

We estimated that going forward our effective tax rate will be in line with the industry norms, as we have visualized the bulk of our NOLs. This should put us in the mid of 30% range for 2014. Over the last few years, we grew our sales by 23% while improving our profitability. Our results both financial and operational clearly illustrate the impact of disciplined execution of our strategy at every level of our innovation.

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

Question-and-Answer Session

We will now begin the question-and-answer session. In the interest of allowing equal access, we request that you limit your questions to two. Then, rejoin the queue for any follow up. (Operator’s Instructions).

And our first question is from Farha Aslam of Stephens. Please go ahead.

Farha Aslam – Stephens, Inc.

Hi. Good morning.

Bill Lovette

Good morning.

Farha Aslam – Stephens, Inc.

Congratulations on a great quarter.

Fabio Sandri

Thank you.

Bill Lovette

Thank you.

Farha Aslam – Stephens, Inc.

And then just driving with the U.S. contracts now that the contract season is pretty much closed could you give us some color on how the contracting season went and how you anticipate pricing in those contracts slowing through the P&L?

Bill Lovette

Yes, so we – from our perspective contracting season went very well. We stayed with the same strategy that we had for 2013 going into that year in late 2012 by not focusing on a fixed price, 12 month fixed price contracts. The percentage of those is about the same as 2013, which was less than 5%. Rather as we have said before Farha, we created a spread business, and I think the fourth quarter was a great demonstration for that, the fourth quarter 2013 that is, and I would remind you to look at what feed cost did. Feed cost was down in a significant way but also pricing was down as well.

So we kept our margin improving, as a result of that spread that we created. We think that's the right strategy for our business and we we'll continue to focus our pricing strategy in that way. So we feel like flowing through the P&L this year, if feed costs remain about where they are today and pricing actually I think has a chance to be even stronger than it is today and I think that sets up a good environment for margin consideration through that spread.

Farha Aslam – Stephens, Inc.

And then just – if you look at the outlook for your U.S. and Mexico business, I know it's hard to kind of read a full year profitability but are you thinking that you can match this year? Or if you – for 2015 in the U.S. and in Mexico how will you think of kind of normal or the outlook for earnings for 2014 versus 2013 in your two major businesses?

Bill Lovette

Well as I've said in the prepared remarks, I think that 2014 – if you look at the fundamentals of the chicken supply, we think the dies [ph] cast from a breeders' standpoint, pulls us place for the whole year of 2013 over '12 is only up three-quarters of 1%. If you look at the second semester of '13, they were up 2.3% and we're already seeing through week seven that we're not placing anymore chickens than we did last year. Latest average weights are with maintaining about where they were last year and so total RPC [ph] production is basically the same. We don't see any reason for that supply situation to change.

You know perhaps late in fourth quarter of 2014 I think would be the earliest that we would see material amount of hatching egg supply different than 2013. So on the supply side; we don't see a significant amount of growth. When you couple that with the supply economics of competing proteins, mixing the PED virus issue in pork, the cattle supply issue, we think that 2014 is setting up for a relatively strong pricing here, relative to where it is today and relative to where it was in the fourth quarter. Feed costs looked to be significantly lower at this moment.

While we don't know about the '14, '15 crop there's indications that we're going to plant 92 million acres of corn perhaps just under 80 million acres of soybeans if we get the weather, which is the big unknown at this moment then feed costs could continue to be needed relative to '13. So again that's a factor and leading us to believe that 2014 could be as good or perhaps even better year than 2013.

Fabio Sandri

Farha, I just want to remind you that in terms of earnings, we should talk in '12 and '13 we consume all of our NOLs. So in '14, we'll see the impact of being a taxpayer. So that will have an impact on earnings.

Farha Aslam – Stephens, Inc.

Okay. That's very helpful. Thank you.

Operator

Our next question comes from Brett Hundley of BB&T Capital. Please go ahead.

Brett Hundley – BB&T Capital Markets

Hi. Thank you and good morning, everyone.

Bill Lovette

Good morning.

Brett Hundley – BB&T Capital Markets

Bill, I had an industry question for you to lead off with. Your margins in the U.S. continue to impress us coming in above our expectations and certainly you know I want to congratulate you guys for that. My question is how overall industry pricing fits into that going forward and you know pricing year to date has been somewhat lackluster from our view and maybe if you disagree with that I'd love to hear your comments but I – you know if you do agree that pricing has been somewhat lackluster to start the year what do you think that this is due to? And it certainly sounds like you expect things to pick up due to PED, beef, et cetera but I just want to get your overall commentary on that.

Bill Lovette

Good question, Brett. So, I take it to mean or you think lackluster means 2014 lower than the previous year and I would agree that it is through the first seven weeks composite cut-out pricing's down about 15%. But as I look forward, I think that composite cut out pricing is actually going to go higher as we move into grilling season and throughout the year because the competing protein supply pressures are going to get greater as we move into the year.

Let me back up and talk about our observations during the contracting season. We noticed that our competitors were apparently taking more fixed pricing than they did the previous year. That was just an anecdotal observation that we made.

We did not go with that strategy. We stayed with the same pricing strategy as we had going into 2013 as I mentioned because again we believe that pricing is going get stronger, as we move into the summertime and we think it will be solid even in the back half of the year. And so again keeping with the idea that we run more of a spread business today, we kept our pricing strategy such that we could follow the chicken markets.

I still believe that the profitability of the chicken industry is based on the supply and demand of chicken, as opposed necessarily to the cost of feed. I think 2013 was a great testament of that as we paid the highest prices for feed ingredients, as we have in a long time. Yet the profitability of the industry was as good or better than it's been in a long time.

Some of our competitors apparently may not see it that way. And so they may have been willing to take lower pricing based on the fact that feed costs appeared to be going lower. And I can understand why some might think that as the profitability was strong in '13 and some may have thought that the supply of chicken was going to grow more rapidly as it's actually turning out to be.

As we said late last year, we don't believe that the breeder stock or the parent stock supply chain is – exist today to grow significantly – the number of breeders and therefore the number of hatching eggs that it would take to grow in '14 over '13 in a significant way. And so that's why we believe that the supply side of chicken will be conducive to relatively strong pricing as we go through the year.

So I trust that answers your question. If you have a follow up, we'll be glad to address it more.

Brett Hundley – BB&T Capital Markets

It does and I have another follow up, but just very quickly. That's an interesting point. So you're saying that comp's taking more fixed pricing year on year is more a function of their decision making as opposed to retail led or retail force.

Bill Lovette

Absolutely.

Brett Hundley – BB&T Capital Markets

Okay. And then on the ABF product I would love to get some commentary a really three main questions I have that are related to that. Clearly, I think there's a bigger push for ADF from the consumer and we expect that going forward. Can you just describe the process for Pilgrim's of moving over to ABF? Can you talk about maybe what that does to company production levels? Does it actually hurt production in the process? And then can you talk about the pricing that that gives you on that product? I'd appreciate it.

Bill Lovette

Sure. Well, the move in us growing in that category is strictly tied on our strategy of being a more valuable partner to our key customers. We stay close with our key customers' needs. Their needs are driven by their customers, who are the ultimate consumer and the consumer is clearly calling for an increase of supply in ABF chicken and as such, we have a plan to grow in that category. And as I said, we are already one of the largest and we expect that we are going to convert more complexes in the next couple of years to ABF chicken.

It does have an effect on the grow outside and the cost and again there's a lot of moving parts that go into the cost increases in ABF verses conventional depending on the size of bird that one is growing, depending on the type of housing that those birds are growing in, depending on the type of feed ingredients available in and around that location, it could be as much as 10% to 15% higher in cost or even greater. Again, there is not just one component that drives that increase in cost. But again, the consumer has clearly spoken and voted with their wallets and as such in order to remain relevant to the market place, we're going to grow in that category.

Brett Hundley – BB&T Capital Markets

Thank you.

Fabio Sandri

Brett, I just want to remind of another thing is that the ABF is growing in some segments in some specific parts of the bird. while all parts of the bird would be ABF, right? So even feathers, blood, guts and everything will be ABF so the 10% to 15% they had mentioned is on the whole bird but some of the parts will not capture premium in cost. The premium but it will capture increase in cost of being ABF.

Brett Hundley – BB&T Capital Markets

That's helpful. Thank you.

Operator

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

Bryan Hunt – Wells Fargo Securities, LLC

Thanks for taking my questions. I was wondering if you could explore with us a little bit more, you know, the project in Mexico, the relative cost and timing in which that facility will come online.

Bill Lovette

Sure Brian. You know we've been looking at ways to diversify our business in Mexico, especially geographically for a lot of reasons.

One, the consumption of chicken continues to grow robustly throughout the entire country. Our operations are fairly close together north of Mexico City and so, as we were looking at other areas to grow Veracruz, you know, turned out to be one of the areas that we like. We like it for the following reasons.

There's a large population area close to the state of Veracruz. It's growing and chicken consumption on that population continues to grow robustly. It's also near a port where a lot of feed grains, feed stuffs are imported in the country so that was another factor that weighed in our decision.

And it's – while it is geographically diverse it's not so far away from our main base of operations there that management – you know, we can get to that region fairly soon and stay pretty close to it. So for all those reasons we chose the state of Veracruz to grow.

We're looking for land as we speak. We've identified some different options for that. As Fabio I think stated we're going to start with live chicken sales first. We'll build our feed mill and a hatchery, import hatching eggs and then build out our breeder supply there. And then the next step is we'll build a processing plant as the needs tell us to.

Fabio Sandri

Bryan, just in terms – like you mentioned it's a modular project we expect it to be operational early next year and investments for this first phase is already included in the $150 million CapEx for 2014 that I mentioned.

Bryan Hunt – Wells Fargo Securities, LLC

And when you say operational, it sounds like just these first phases will be operational. You won't be doing any processing and probably until maybe 2016. Is that maybe a fair assessment?

Bill Lovette

Probably '15 or '16.

Fabio Sandri

Yes. We will start selling live chickens early next year and processing plant will be probably one to two years after that.

Bryan Hunt – Wells Fargo Securities, LLC

All right. Great. And then my next question is – you know and Bill you mentioned diversity. If I look at your sales for the processed chicken and your 10-K as a percent of total, it looks like they've come down pretty consistently.

So, one, the hiring of the individual from Smithfield is interesting. But, two, do you think there is an opportunity to diversify your protein base through acquisition and or greenfield, given how strong your balance sheet is today? I mean you a lot about growing into a next phase.

One, does that mean just diversity of geography, additional further processed proteins or could it possibly mean additional proteins?

Bill Lovette

I'll address the last part of your question first and then work back toward the first part. We absolutely are and will be interested in diversifying not only geographically but also in protein. As you well know, you know, 75% of our stock is owned by JBS, the largest meat company in the world. We think our core competencies include selling of value-added portfolio and so we don't necessarily intend to limit that to just chicken.

If there are some compelling interests out there in terms of a multi-approaching play then we're certain we would be interested in considering that so that answers the first part – or last part of your question.

To address the first part – so our prepared foods, which is our value-added or further, processed chicken business, we did decrease, you know, over the last three years about 10%. So it's about 30% now of our total, you know, portfolio invests and we did that on purpose. We did that for a reason.

We have believed – based on our analysis – that we had some of that business that was just simply not adding value. As a matter of fact, if you use market basis as the value of raw material then in many cases we were destroying that. So in order to make that business more impactful from a margin perspective, we set a strategy – a couple of years ago – to make that business smaller and focusing on the margin creation of the business that we had left and now we're going to bring on the resources to grow that business in the right way in right implying are more profitable.

So I do expect that you will see that 30% grow over time to a larger number but it will grow because it's more profitable, as opposed just for growing for growth sake. We are very excited to bring Chad Baker to our team. Chad has, like I said, a 20-year track record of brand building and selling for the processed, primarily pork, and so we're glad that Chad has decided to join our team.

Bryan Hunt – Wells Fargo Securities, LLC

And maybe one last question. If you look at your balance sheet, I mean the leverage below half a turn on net basis it sounds like it's going to be another good year profitability. What's the plan for – after you pay off the term loan B2 – what's the kind of practice for distribution of crash amongst growth opportunities shareholders and potentially debt reduction and include in that discussion your optimal capital structure?

Fabio Sandri

Okay, Bryan. And, you know, our priority is to create the shareholder value, right? So, we are looking to all possibilities to do so. It includes dividends, it includes share buy backs and the growth of our company through acquisitions or Greenfields.

To your point we are also looking – our opportunities on the market till we find the existing notes they matures to 2018. We are paying 778 [ph], which we believe it's much higher than our [INDISCERNIBLE] would suggest. So the notes will be callable [ph] in 2014 and we believe that we can significantly reduce our yields in our interest cost and with renegotiation of those notes.

Talking about optimal capital structure, the optimal capital structure is the one provides good tax shelter and reduce our cost of capital while not compromising flexibility and without increasing our risk profile, right? So we believe that the sweet spot – so to speak – is to maintain our leverage between two times EBITDA.

Bryan Hunt – Wells Fargo Securities, LLC

Okay. Very good. Thanks for your time.

Operator

Our next question is from Karru Martinson of Deutsche Bank. Please go ahead.

Karru Martinson – Deutsche Bank

Good morning. When you guys talked about additional, you know, targeted savings I think I heard $120 million. I mean where are those savings going to come from and what's the time line you think those are going to be realized?

Bill Lovette

Sure. That target actually is $220 million over...

Karru Martinson – Deutsche Bank

Okay. Sorry about that.

Bill Lovette

Yeah. $220 million in 2014 above 2013. And again, the same two categories – we look at in generating those economic benefits are yield improvements and processing plant cost improvements primary. Those are the two major buckets that we look at and we believe we still have a lot of run way left to go in those two categories.

For the first time effectively, we used a zero-based budgeting approach in 2014. Our team did very well with that approach, and we take every budget line item down to the absolute zero base and build it up from there.

And what we found that when one takes that approach we find opportunities for generating value that you wouldn't ordinarily find if you just constructed budget based on history or what you might have done last year or based on experience so we think zero-based budgeting is going to play a big part in aiding us to generate future value in the company.

We're also taking a much more scientific approach to decision making across our management team driving that all the way down to the people who work on the line. We've also constructed some incentive schemes for our hourly paid workforce where they get the share in value creation, as it relates to yields, processing costs live production costs, all the different cost buckets so it's an entire team approach and we're excited about the possibilities that exist from it.

Fabio Sandri

I just want to add some and say that we only reached Mr. Huntington [ph] $2 million. It was not a target set on the prime management. I think it was through this process. Every level of the organization identified and we rolled out those improvements into our budget. So that gives me a confidence that we had reached those targets because we have every level of our organization involved in that process.

Bill Lovette

And I would add, you know, improving efficiencies, improving yields, improving everything is part of our DNA. It's just how we operate as a company. And so you know, it'll be a $220 million targeted this year. I'm very confident that we'll achieve that target as we have beaten the other targets we have set and then we'll go into 2015 with another aggressive and impressive target as well.

Fabio Sandri

Also, just in terms of where you're going to see those $220 million it's part yields part operational improvement. So you're going to see I'll say 50% in revenues, 50% in cost. So yields it needs more favorable bounce so more price so it's going to show in revenues and in cost.

Bill Lovette

I think one more thing I would add to this. If you look at our SG&A over the last four or five years, three to four years specifically, we've done, I think – our team has done an impressive job of reducing our SG&A cost. Fabio mentioned it was 2.15% for the year and we've actually – if you go back to 2007, we've cut our SG&A by more than half of what it was in dollar terms for that year. At the same time, Fabio mentioned we have grown ourselves by 22%. So again that's just part of our DNA. It's part of who we are. We'll continue to work very effectively in reducing all of our costs.

Karru Martinson – Deutsche Bank

All right. I certainly remember those old days of SG&A standing. I'm happy to see at these levels. When you look at the cash balance here certainly I hear you that you're going to be paying off some debt here but how should we think about what you guys want to keep on cash on the balance sheet?

Fabio Sandri

Well, again, we are looking into our balance sheets and using as a leverage toward growth, right? So, our priority is to create the shareholder value. So, there are dividend opportunities there, share buyback opportunities but mainly acquisitions and retails.

Bill Lovette

Yes. I would add too you know our business, the chicken business, per se is a commodity business. In the last four or five years, we've seen much more volatility associated with that business and, you know, the more volatility that you have in a company or an industry calls for the need for more cash on hand. And as we look forward, you know, we're going to keep that in mind.

But also in mind I would tell you that just as efficiency and cost savings is part of our DNA so is growth going to be a part of our DNA. And one of the things that we'll look toward when thinking about ways to grow our company is, you know, how do we change the dynamic of that volatility? Is there a way to grow and at the same time decrease the earnings volatility that are inherent with our existing business model? So that will be a consideration as we look forward.

The other thing I would point out is if you go back and look at 2012 into 2013, one of the things that we've improved is the consistency of our earnings even in a volatile market place. And I think that also weighs on the decision of how much cash on hand to keep as our confidence on our business model to create cash flow on a forward looking basis.

Karru Martinson – Deutsche Bank

Thank you very much, guys. Appreciate it.

Operator

As a reminder in the interest of time we do request that you limit your questions to two and then rejoin for any follow up. Our next question is from Hale Holden of Barclays. Please go ahead.

Jamie Robbins – Barclays Capital

Good morning. This is Jamie Robins on for Hale.

Bill Lovette

Good morning.

Fabio Sandri

Good morning.

Jamie Robbins – Barclays Capital

I guess my first questions I was wondering if you could just provide a little more color on Chad Baker's background and what specifically his mandate is. Would you guys bringing him in?

Bill Lovette

Sure. So Chad began his career at Hormel, spent a few years with Hormel in regional sales roles. Then he moved to Smithfield and basically moved into a marketing role. I think he was a product manager for the bacon category. And then he's moved on up in the Smithfield organization and his most recent role was Senior Vice President of Sales Marketing for Smithfield Foods both retail and food Service and also their specialty business.

The mandate for Chad coming on board is to help us build out better our brand building capabilities, our value-added capabilities. And as I alluded to before on purpose we shrank further processed chicken business in difference to margin creation. And now that we have what we would consider right sized now we desire to grow that in the right way and Chad's mandate will be to grow our further process in branded chicken business.

Fabio Sandri

Just add some color on how we changed management company over the past few years. You know in the past few years we have integrated complex where we used to just produce cooked products just because we have the availability of raw material. Today we believe that the preparedness operation is option. We don't need to cook just because we have the raw materials. We have the sales team. We have the customers so we can that chicken outside in the market. We only cook or produce products the net debt further processed products, if they are profitable. And I think that's Chad's mandate to add and create more value out of that.

Jamie Robbins – Barclays Capital

Okay. Great. That's very helpful. And then, Fabio, if I could just ask you a little bit more. I know you gave clarity around your thoughts on the capital structure and you mentioned valuating options on the 2018 notes. Do you think you would have a plan in place on that in the first half or is that more of a second half event?

Fabio Sandri

I think PC are callable [ph] in December. It's more for the second half. The 78 [ph] like I said the notes you can call them only after December 14th. So we will have a plan on that either to renegotiate or pick them out.

Jamie Robbins – Barclays Capital

Okay. That's all for me. Thank you very much.

Fabio Sandri

Thank you.

Operator

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

Sarkis Sherbetchyan – B. Riley & Company

Good morning.

Fabio Sandri

Good morning.

Bill Lovette

Good morning.

Sarkis Sherbetchyan – B. Riley & Company

Just a few quick ones here. I recall that you had a couple of idled U.S. facilities. I'm wondering if you are planning to use that as a source of capital in order to embark on your growth projects, if maybe we could start with that one.

Fabio Sandri

No. We are thinking those are held defensive so we don't plan to sell them in this short term or in the near future.

Sarkis Sherbetchyan – B. Riley & Company

Okay. And then I think you did mention that the capital project in Venezuela, or sorry Veracruz, you had budgeted that inside that $150 million for 2014. Do you have a ballpark as to what it would cost for 2015 to build out, you know, phase 2 of that project?

Fabio Sandri

Phase 2 would be close to $20 million to $30 million.

Sarkis Sherbetchyan – B. Riley & Company

Okay. That's helpful. Thank you very much.

Fabio Sandri

But not all that will be consuming. As we mentioned it is going to be build in stages. So, it's not going to be all in '15.

Sarkis Sherbetchyan – B. Riley & Company

That's helpful. Thank you.

Operator

Our next question is from Ken Zaslow of Bank of Montreal. Please go ahead.

Ken Zaslow – Bank of Montreal

Hey, good morning to everyone.

Bill Lovette

Good morning.

Fabio Sandri

You too.

Ken Zaslow – Bank of Montreal

When kind of look out a little bit further out in the distance you guys used to put out normal margin structure for the US. I have to believe that margin structure is actually different now, given all the changes. Can you give us an update on what you think the right operating margin would be for you know what your target of "normal" is or what you are targeting?

Bill Lovette

Ken, that's always an interesting question to talk about normal operating ranges, given the volatility of our business. We have said the past couple of years that you look back over I think a 10-year period 6% to 8% EBITDA margins were "normal" in our business. That sort of got blown up, if you will, during the 2008 through 2011, 2012 period due to the volatility. We'd gone back though. If you take 2012 and '13 as an example, it's more of that range.

I would tell you going forward based on the operational improvements and the sustainable competitive advantage we have today, we would certainly move toward the upper end if not somewhat over that range looking forward.

Again what we don't know is what the weather is going to do this summer, after we get the next year's crop planted. That's going to weigh on profitability and then we also – while we believe the numbers highly suggest that we're not going to see significant growth in chicken supply until sometime in maybe 2015, we don't know what the price of chicken is going to be either.

But I think it would be a reasonable estimation to think about margin creation, EBITDA margin creation, certainly in the, you know, 6% to maybe 9% range going forward. We're a better operator than the average company obviously. We are a top third company and even moving better than a top third company so I think we expect at least of ourselves to be in the upper part of whatever that normalized range will be.

Ken Zaslow – Bank of Montreal

And my second question is and I will leave it here is – it – you talk on two sides. One is the volatility but the other side is that it's a spread business and you're doing better with that. To me, I 'm almost getting a sense of – I guess my question is what drives the spread if you are focusing more on the spread side of it and you're kind of taking out the volatility of chicken prices and volatility of the corn prices? It just seems like, you know, if you kind of maintain that spread and you can kind of keep it maybe it's not as volatile as, you know, outside of some random event of – a biblical event of, you know, the drought two years ago. I mean I am not talking about that but it seems like what drives margin? It almost seems like you have actually stabilized it so you keep talking about volatility. Maybe it is more stable and can you just address that?

Bill Lovette

Sure. I think the one thing that creates – has created that stability is the discipline of the industry to not allow profitability in the past to drive supplies in the future. I think we all have an understanding that, you know, our industry is mature, especially in the US consumption of total meat in the last five years has not grown and our growth in the future is going to come from markets outside the US.

And so we have a different model of today than we had 10 or 15 years ago in that consumption in this country is not growing as robustly as it used to. And I think that discipline really, Ken, is the one ingredient that has made for more stable earnings that we've seen.

We've certainly seen a lot of volatility in feed ingredient cost even as recent as this past year. And I don't know what – I mean you can make a solid argument for corn and soybean, meal being much cheaper in 2014 and '15, given the rebuilding of inventories of world [ph] corn and growing inventories of soy beans. But we just don't know what the next weather event in either South America, North America or even eastern Europe may present in terms of the supplies of those feed ingredients.

Fabio Sandri

I'll just add that it's also – there is also a lot of – do with our approach to risk management. So we try to reduce the volatility on the input so we can be more of a spread business that we could go add it.

Ken Zaslow – Bank of Montreal

Great. I appreciate it. Keep going. You guys are doing a good job. Take care.

Fabio Sandri

Thank you, Ken.

Operator

(Operator Instructions) And our next question is from Akshay Jagdale of KeyBanc.

Akshay Jagdale – KeyBanc Capital Markets

Good morning and congratulations on a good quarter.

Bill Lovette

Thank you.

Fabio Sandri

Good morning, Akshay.

Akshay Jagdale – KeyBanc Capital Markets

So just one quick one for Fabio just to set up the question. What was the – your revenue per pound down by in the US this quarter?

Fabio Sandri

It was revenue per pound was close to $1.2, $1.25.

Akshay Jagdale – KeyBanc Capital Markets

So it was down what – something like mid single digits?

Fabio Sandri

It was down – yeah mid single digits. No, it was down close to 2%, compared to the same quarter last year. Close to 2%.

Akshay Jagdale – KeyBanc Capital Markets

Okay. Not much at all. So, Bill, I just I'm trying to understand the variables for '14. So corn costs – what are corn costs for you guys going to be down by right now how much per pound or in million dollars would they be down by roughly?

Bill Lovette

That would be a great piece of information for us to have. The truth is, Akshay, we don't know. We know what the future's markets imply. But like I said even though we believe that we're going to plant 92 million acres of corn and just under 80 million acres of soybeans, we don't know what the weather is going to be. So past June or July, it's really very, very difficult to know what feed costs are likely to be past that. We believe net feed cost will be lower in 2014. It's just almost impossible at this moment to tell you exactly by how much.

Akshay Jagdale – KeyBanc Capital Markets

Okay. So maybe I'll ask in a different way because it looks like feed costs are going to be down, your productivity savings are, you know, stepping up significantly. So you have a lot of and savings and productivity that if you wanted you could invest back into pricing to gain share. But I'm just trying to understand the dynamics of, you know, the March [ph] spot market, the cut out price, which is like you said down about 15% yet for the quarter your price is down, you know, 2% or 3%. So what kind of price decrease in the spot market in the cut out would it take for 2014 to be lower than this year, you know, at the EBIT level? So if you – do we need – if the cut out's down by 20% for the whole year it would be safe to say I think that 2014 results might not be the same as '13. Can you just give a sense because I agree with everything you're saying in that price to trend but I'm just trying to understand what kind of pricing you would think is – for the cut out is a good outcome?

Bill Lovette

Yeah, I – it's hard to say. You can look at composite cut-out values and think about if it were more than 20% to 25% lower than that would certainly weigh on earnings. But I would remind you too that you can't look just at price because mix and how we manage mix as I said from the prepared remarks has become a competitive advantage for us and that's why that you'd not seen our total value, in terms of total pricing, go down as much as the market has gone down. It's the way that we manage mix. And that's one of the competitive advantages that we'll continue to have I think verses other companies. And while we may not be as opposed to just that sheer market decline. But again to answer your question, 25% or more I guess that would be probably significant enough to impact earnings.

Akshay Jagdale – KeyBanc Capital Markets

Okay. I'll leave it there. Thank you.

Fabio Sandri

Thank you.

Operator

In the interest of time this concludes our question-and-answer session. I'd like to turn the conference back over to Bill Lovette for closing remarks.

Bill Lovette

Thank you. We've had a strong year and we have seen consistent performance across the company, as we hold everyone to the high standards. I want to thank our team members, shareholders and customers for their continued support. These past three years have been a defining period in changing the culture and results for Pilgrim's. I'd like to take this opportunity to invite to you join us as we host an open Investor Day In New York on March 13th. Thank you for all joining us this morning.

Operator

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

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