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Pilgrim's Pride (NASDAQ:PPC)

Q2 2014 Earnings Call

July 31, 2014 9:00 am ET

Executives

Rosemary Raysor -

William W. Lovette - Chief Executive Officer, President, Director and Member of JBS Nominating Committee

Fabio Sandri - Chief Financial Officer and Principal Accounting Officer

Analysts

Brett M. Hundley - BB&T Capital Markets, Research Division

Farha Aslam - Stephens Inc., Research Division

Kenneth B. Zaslow - BMO Capital Markets U.S.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Operator

Good morning, and welcome to the Second Quarter 2014 Pilgrim's Pride Earnings Conference Call and Webcast. [Operator Instructions] At the company's request, this call is being recorded. Please note that the slides referenced during today's call are available for download from the Investor Relations section of the company's website at www.pilgrims.com. [Operator Instructions]

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

Rosemary Raysor

Good morning. Thank you for joining us today as we review our operating and financial results for the quarter ended June 29, 2014. 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 would 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 the forward-looking statements. Further information concerning these factors has been provided in today's press release, our 10-K and many of our regular filings with the SEC.

And now, I'd like to turn the call over to Bill Lovette.

William W. Lovette

Good morning, everyone, and thank you for joining us today. We recognized $2.2 billion in net revenue for the second quarter of 2014. Our EBITDA of $338.6 million over 15.5% margin improved over an already strong comparison point of $264.6 million or 12.1% margin for the same period in 2013. Our net income of $190.4 million or $0.73 per diluted share reflects the impact of being a full taxpayer during the current year.

Our consistent margin performance is a direct result of the discipline we've demonstrated in applying our strategy. Our partnership with key customers has enabled us to continue to support them with the products in high demand during an extended period of tightening chicken supplies. We're developing innovative offerings to engage consumers, and we're seeing increased demand for small birds at fast food and in the deli case.

Our energy and resources will continue to be directed towards further improvement in maximizing the advantage derived from the breadth of our portfolio. We continue to benefit from having a complementary offering of both small bird and large bird deboning products valued by key customers.

After a period of rationalizing our Prepared Foods sales volumes, we are now realizing a nice improvement in profitability from sales in this business unit.

Our relentless pursuit of operational excellence has resulted in continued improvements to yields, reduced plant costs and improved safety for our employees. In fact, we recently learned that 8 different Pilgrim's facilities will soon be recognized for their excellence by the Joint Industry Safety and Health Council, based on the reported injury and illness rates at these locations over the past 3 years. We are pleased to see our team members' commitment to health and safety acknowledged publicly.

We continue to innovate new ways to view our business and optimize our operations. We are seeing a lot of excitement as we roll out new tools and methods to improve sales mix and operational efficiency.

Given our results to date, we're very confident that we will exceed our $220 million target for yield and plant cost improvements. This is in large part due to the successful execution and feedback loop that is the foundation of zero-based budgeting. While we recognize the value of efficient plants and equipment, we believe the competencies we've identified are the direct result of our people. Our team has only just begun to create value with the ZBB method, and through the continuous cycle of identifying gaps and then closing them through effective management, we still see plenty of meat on the bone.

I should also point out the positive results we generated still include lingering effects of the propane shortage in February and March, as those costs rolled into May.

The next component of our strategy, increasing sales of value-added exports, has shown great progress so far this year as well. We have increased both volume and revenue year-over-year in part due to optimized mix value. Whole leg volumes have shown increases while we continue to convert our sales from commodity bulk frozen leg quarters into value-added products that consumers demand in foreign markets. We've also seen development of our Savoro brand and wholesale channels in Mexico. Our chicken franks have found a positive reception in key markets with triple-digit growth year-over-year. And to top it off, we've increased sales to direct customers at the final destination, improving margins on those sales.

Export growth continues at a steady pace, and to continue supporting our growth objective, we recently brought on board Alexander Ivannikov to head our Export Business Unit. Alexander brings several years of experience in the global protein space, and we are pleased to have Alex on our team and look forward to his leadership in this role.

Our Mexican operations delivered strong margins once again with April and May driving the strength, while June started to show a somewhat counter-seasonal softening. During the third quarter, we typically see a slight downward trend as school holidays impact demand, but the flexibility of the operating environment enables companies to adjust more quickly to pricing volatility. As a case in point, we are now seeing prices for live and processed chicken strengthen again, and believe demand will continue to support solid margins.

We view Mexico as a strong center of growth and our efforts to expand in that region are progressing well. Our project in Veracruz has construction underway on both the feed mill and hatchery, and we've already begun signing up contract growers to support the facility. We are on target to begin sales by June of 2015.

With that in mind, we're very pleased with the transaction we recently entered into to acquire Tyson Foods' Mexican operating unit. We will pay $400 million in purchase price in cash, free of debt, and anticipate the combined entity will generate incremental sales of $650 million for Pilgrim's. We have a deep expertise in the country, and the acquisition is highly complementary to our existing operations in terms of geography and portfolio. We expect the antitrust reviews to conclude and enable us to complete the purchase before year end. The strategic move is exactly the type of accretive purchase we've been talking about since our Investor Day earlier this year.

Looking at the industry progress, we continue to see breeder supply issues impact egg availability, egg production rates and hatchability. We don't expect material improvement until some time in 2015 at the earliest. There are several factors that are influencing this dynamic and it takes time to resolve them. Egg sets are increasing but cumulative placements, year-to-date, continue to lag.

We've also seen significant declines in cold storage levels to date. Beef supplies remain lower and pork supplies are limited as well. Recent USDA retail sales data showed choice beef at close to $6 per pound in June, showing the fifth straight month of record highs. Select beef averaged $5.46 per pound in June, a record high for the eighth straight month. With average pork prices above $4 a pound in May and June, the fact that chicken prices have eased off a bit is positive news for our industry. We would expect poultry prices to benefit from the pricing environment across the entire protein complex.

Chicken markets have shown continued strength in whole bird, with the second quarter reflective of healthy pricing across the board. Demand pressures have held prices relatively strong and we believe this will continue well into 2015. After a period where wings had a somewhat tepid pricing environment, we're seeing them strengthen once again. Adding to that, the Georgia Dock whole bird market continues to be at record levels.

It's important to recognize here that Pilgrim's results don't just follow the full peaks and troughs of pricing trends. Our portfolio effect shields us from some of the lower prices, at the same time means we don't have the volatile spikes in pricing either. The overall impact should be a more stable margin structure over time.

On the feed ingredient fronts, we're seeing indications of continued pricing environment for historically high yields for both corn and soybeans. Most of the U.S. has had adequate moisture levels, and there are strong implications from recent acreage and stock reports that stocks to use is more favorable and there will likely be a healthy rebuilding of corn and soybean stocks for the current crop year.

While indications are that fewer acres were planted, expectations for high yields imply a crop size similar to last year. As we near harvest, it appears we could be in for record corn and soybean crops in the U.S., coming off large crops harvested from South America as well. As stocks are rebuilt, prices will likely retreat and we see some downside opportunity for feed ingredients.

So at this time, I'd like to ask our CFO, Fabio Sandri, to discuss our financial results.

Fabio Sandri

Thank you, Bill, and good morning, everyone. We reported net sales of $2.2 billion for the second quarter, with EBITDA of $338.6 million or 15.5% margins. We generated net income of $190.4 million or $0.73 per share during the quarter, reflecting our position of full taxpayers, both in U.S. and in Mexico. As our operation delivers strong results both in the U.S. and in Mexico, our SG&A expense increased year-over-year, in part due to higher annual performance bonus accruals.

Looking to our balance sheet, the strong cash flow from operating activities, combined with our focus on cash flow generation and our discipline in managing our working capital, has enabled us to generate more than $100 million in free cash flow, reducing our net debt to 0 as of quarter end. This resulted in a reduction of $8.4 million of interest expense in the quarter, or $13.8 million year-to-date when compared to last year. We recently established a new revolver in Mexico with better terms than we have previously, and we continue to monitor the market to identify opportunities to reduce our interest costs even further by either renegotiating or extinguishing our last piece of debt, which is the 2018 notes.

With our balance sheet stronger than ever, we continue to look for additional greenfield or M&A opportunities that can create value for our shareholders, and that can lay a path for sustainable growth and reduced volatility. As we have indicated, our strategy is directly towards growth in complementary segments and geographies, and we will continue to seek diversified opportunities to enhance our position in the branded and packaged foods category.

Our focus is on improving in opportunities that are accretive, with cash flow supportive of rapid deleveraging. We have exhibited a disciplined approach to improving operations and we have demonstrated we know how to create value within that condition. We will continue to evaluate each prospect that presents itself, but we have the restraint necessary to wait until an opportunity arrives where we can add value to our shareholders.

With that in mind, we are very pleased with the transaction we recently entered into, acquire Tyson Foods' Mexican operating unit. We will pay the $400 million purchase price in cash, free of any debt, and we anticipate that the combined entity will have a $1.6 billion company, with strong brands and an extended footprint in the growing Mexican chicken market.

The acquired assets are not running at the same level as the PPC operation, and we see a lot of opportunities to capture synergies, standardize practices and better serve our customers. We expect the antitrust reviews to conclude and enable us to complete the purchase before the year end. This strategic move is exactly the type of an accretive purchase we have been discussing throughout the year.

As mentioned before, we recently entered into a new revolving agreement to cover potential working capital needs in Mexico. This agreement is at a lower rate than our previously revolver and does not have any unused fees. While we anticipated that our cash flow will cover our working capital needs, the new agreement provides flexibility as we integrate the newly acquired assets.

Our CapEx spending for the quarter was $43.1 million, spent primarily on safety, quality and on increasing our operational efficiency, reducing costs in U.S. and expanding capacity in Mexico through the greenfield project in Veracruz, which will enable us to be more flexible with sales mix and increase our product offerings.

We remain committed to funding projects featuring a rapid payback period, as this is one of the more effective uses of our free cash flow. And we'll continue to evaluate and approve projects that may push us above our regional estimated spend of $150 million for the year.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Brett Hundley from BB&T Capital Markets.

Brett M. Hundley - BB&T Capital Markets, Research Division

So my first question actually goes back to the facilities that you intend to acquire in Mexico. Fabio, you talked a little bit about how they're not running at the same levels. Can you go into a little more detail, I guess, about how long it takes to bring them up to your level or to garner synergies, best practices, et cetera? And then just -- can you talk about if pricing differs between geographies, does it differ at all where those plants are located versus where yours are, et cetera?

Fabio Sandri

Sure, Brett. We -- they are not -- they are very profitable, but they're not just at the same level as the PPC operation. There's a little bit difference between pricing in regions, but we believe that that's not the biggest difference that we have. I think we are operating at a better level. We'll look into the synergies that we have and we believe that in one year, we will be able to achieve the full potential of the synergies.

William W. Lovette

Yes, Brett, I'd like to add to that. We believe there's a great team of people in that operating unit. But we operate our Mexican business really no different than we operate here in the U.S. We have a clear strategy and vision of being the best managed and most respected operator in the industry. We have a management methodology that we follow and a process, a defined process that we follow, improving mix, improving yields, improving plant costs are all key parts of that operating model. And as you well know, we are, if not the most efficient in terms of SG&A, in the U.S. and Mexico, we're certainly there close to the top, and we see it no different in Mexico.

The great thing about operating with this new unit is, it gets us into a different geographic region in Mexico, in the North Central. That's a part of Mexico that we don't currently serve with a great deal of products. And so that allows us to, again, operate in a geographic region, basically supplying a new consumer base.

We also have some duplicative assets, primarily in distribution centers, and so that will allow us to create synergies from a logistic and transportation point of view. And so, again, as Fabio said, we look forward to getting -- earning the antitrust clearance and getting approval and starting to work on improving that operation.

Fabio Sandri

The other benefit, Brett, is that they have a prepared food brand in -- local in Mexico, which is Del Dia, where we believe that we can leverage just like we are doing with our Savoro brand internationally.

Brett M. Hundley - BB&T Capital Markets, Research Division

Okay, that's really helpful, I appreciate that. My second question is just back more towards the U.S., Bill. I'd love to get some broader comments from you. As we've watched corn and meal values come down, it looks like feed could potentially be really helpful for you and the industry in 2015. And so what we're trying to do is compare that to the supply expectations that we expect, and we expect demand to remain strong next year, but I'm trying to get a handle on supply. And so I wanted to talk to you about, if you can give some comments on what the ability is for the industry to expand next year? And so what is available from breeders, just how much head can be put down from breeders, what would be your weight outlook, and together, can you go through maybe a low case of what supply could increase in calendar 2015, and then maybe a high case of what supply can increase? I think that would be really helpful as we try and bring together these different moving parts.

William W. Lovette

Brett, so it all starts in our business with purchasing a pullet from the primary breeder company. And as we've talked now for well over a year, that industry had reduced its supply chain, thereby reducing the amount of breeders available to buy. And then at the same time, as we've seen the mix in the U.S. grow in large bird deboning, there have been some dynamics in the breeder supply chain, where those high-yielding breeds have become less productive from an egg production and hatchability standpoint. So you have those 2 dynamics going on at the same time.

We do know that if you start at the pedigree level, it can take as much as 170 weeks to begin to grow that supply chain. We don't know, because we're not in that business, where that expansion, if at all, is, in that 170 week process. But all indications are that we don't see a material or significant amount of growth available from the breeder supply in the next 12 months. So that gets us at least into the back half of 2015. And it would be just a complete guess on my part, if I were to try to put any numbers around that. But I mean, I think, the low side is probably staying where we are in terms of supply or growing a small amount because, again, we don't see any growth that's going to happen in the first half of 2015. And if we do get growth, it's going to be in the back half, and I think, even at that, it will be relatively small.

Yes. And as a follow-on to your point, I think what that really means is, with beef and pork where they are and where we think they'll be in the next 12 months, and with what I just said, I mean, I think, this really sets up a nice pricing environment for margin creation through 2015 especially given adequate corn and soy supplies.

Operator

The next question is from Farha Aslam of Stephens Inc.

Farha Aslam - Stephens Inc., Research Division

A question around your Tyson de Mexico acquisition. Could you just share with us what the current EBITDA of that business is? What type of synergies you plan to achieve and when? And a little bit more color around the brands and the products that you're going to move forward with, as a combined entity in Mexico.

Fabio Sandri

Well, as I mentioned, they are profitable. I think they are in the single-digit, close to double-digit EBITDA margins.

William W. Lovette

We can't disclose exactly what those are, but I think it's fair to say that there's a pretty good-sized gap, if you see our numbers in Mexico for this quarter and the last 12 months. We're what we think is best-in-class operator in Mexico. Again, as I mentioned in the previous answer, there's a reason for that. It doesn't come by luck. We have a very defined and disciplined operating model that we'll take into that new business and apply to that.

As far as brands and mix, that's a part of our improvement plan. We think that there's opportunity to improve the sales mix in that operation. Fabio mentioned the Del Dia brand, that gives us yet another avenue to reach Mexican consumers and ability to grow our product offering with that brand. And we think there's a growing demand in northern Mexico for product.

I would just remind you that while we, like any other chicken producer in the U.S., enjoy the benefit of having a strong trading partner like Mexico, we're also a producer inside of Mexico and we're committed to healthy growth of the local chicken production. And we continue to grow our company in Mexico, creating more jobs, paying more taxes and contributing responsibly to the local Mexican communities in which we operate. We're excited to be able to operate in a different geographic region now with the acquisition that was announced on Monday, and look forward to providing our leadership and commitment and growth opportunities for the La Laguna area of North Central Mexico. And we believe that there's a great team of people there. And now that we bring a long, tenured expertise of doing business in Mexico, we're confident that the business will continue to become stronger and grow even larger, benefit -- benefiting the local economy as well as greater Mexico.

Farha Aslam - Stephens Inc., Research Division

And just again, on the synergies that you expect to get from that business. And I wasn't sure if that $650 million in sales you mentioned was those sales of Tyson de Mexico or also included the new facility that you're starting up?

William W. Lovette

Yes, good question. So that does not include the new complex in Veracruz; that will be incremental. The $650 million is simply their annualized run rate, and we see that as a minimum amount as it would be our plan to grow that business from its current state.

And as far as synergy, I think you can look at the same thing that we've done in the U.S. and Mexico the last 3 years. We have a keen eye toward creating efficiencies with SG&A. We have a keen eye in terms of increasing plant yields, reducing plant costs and improving sales mix. So those are the primary sources of value that we expect to create there.

Fabio Sandri

I think there is also the reduction of risk by operating throughout the entire Mexico, instead of concentrated just in the central part of the Mexico just like we were before. And the increase in portfolio breadth that we will have. We will have food solutions from Prepared Foods produced in Mexico and in U.S. and fresh products produced in Mexico.

Farha Aslam - Stephens Inc., Research Division

Great. And then my second question goes back to kind of Brett's question earlier. I mean, clearly right now, you're benefiting from very strong trends, but you're also executing at a very good level. Just could you give us some color about near-term margins and profit that you expect your business to generate? And then what, on a normalized, longer-term basis, you think Pilgrim's can execute at?

William W. Lovette

Yes. So clearly in this past quarter, I mean, you see we produced a 13.7% operating margin. And yes, we did that in an environment where we had relatively strong chicken prices and declining ingredient cost. Going forward, just on a seasonal basis, we might expect chicken prices to decline somewhat from where they were in May and June. But at the same time that that's going on, we have declining feed cost again, which would provide somewhat of an offset. And that's just the macro environment in which we operate.

What we really focus on and spend our energy and time on is that which we can control. And as you know, we've spent a lot of time talking about our improvements in yields, our improvements in plant costs. In the past 2 years, we've frankly gotten more improvements in yields than plant costs as a mix of our improvement targets. We're very pleased, though, that this year it's been more plant cost reduction contribution to that $220 million target than yields. And while we still are improving our yields, we are improving our plant costs even more.

And we talked a lot in the last 6 to 12 months about the implementation of zero based budgeting, and what we really like about that is it opens gaps. And we have a culture here where we reward people for opening gaps. A lot of managers, especially those with a lot of experience, sometimes aren't too proud to come to management and say, "Hey, I've discovered this gap that we have in our operation and I'm happy to report, I'm not doing as good as I could." Well, we've learned that if we reward our management team for opening those gaps, and then reward them even more financially with closing that gap, then that creates the improvement model that you've seen take place here at Pilgrim's the last 3 years. So it's really more of the controllables that we focus on. We'll continue to improve our zero based budgeting model, and we expect that, that will continue to keep us as a best-in-class operator in the chicken business.

Operator

Our next question is from Ken Zaslow of Bank of Montréal.

Kenneth B. Zaslow - BMO Capital Markets U.S.

Just talking big picture about your strategy going forward, can you talk about what asset or what the availability of assets in prepared meats would be? Because it seems like, if you guys do take the zero based budgeting and your balance sheet and maybe run it out, and obviously Hillshire went away. But are there other assets that you are able to look at and then if there's an availability and there's something coming your way, how do you see that because that would obviously transform the company pretty dramatically?

William W. Lovette

That's a good point, Ken. There are other assets that are operating and assets that we believe that we could add value to. As far as availability, that remains to be seen. But the strategy that we laid out in March at our Investor Day has not changed. And I think we've demonstrated through our activities around Hillshire brands, through our activities in building the new complex in Veracruz, and then finally, through the announcement on Monday of our acquisition in Mexico demonstrates that we're focused on growing our company. We'll continue to look for options available to us, and that's really all I can say at this moment.

Kenneth B. Zaslow - BMO Capital Markets U.S.

Okay. My second question is, and I'm assuming the answer is not a big deal, but I need to ask it, is, the impact if Russia decided to ban chicken legs or anything like that out of there, what do you think that impact would be on leg prices, and is it substantial or material to how you guys look at your outlook?

William W. Lovette

I think both our company and our industry, over the last few years, has demonstrated that we really don't have a reliance on the Russian market as we did 10 years ago or so. We've done a really good job, particularly Pilgrim's, I think, has done a good job of diversifying our product mix and portfolios such that I honestly don't believe that it will have a material impact for sure on Pilgrim's or even the greater industry.

We operate today, Ken, much more on a global marketplace, and so when a specific country bans product from one country, that opens an opportunity in yet another part of the world. And I think the value of our affiliation with JBS, and its growing presence in chicken in Brazil, creates an environment where we have that diversity and we're able to have the market intelligence that gives us a benefit and allows us to move products around in such a way that we're not beholden by one country.

Fabio Sandri

I think that speaks a little bit to one of the key pillars of our strategy, which is growing our value-added exports. So over the last 2 years, we have reduced our dependency on Russia and especially on leg quarters, frozen leg quarters, and increase our value-added exports. Less sensitive to that type of event.

Operator

[Operator Instructions] Our next question is from Akshay Jagdale from KeyBanc.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

So first, just on modeling, if you can help us in the U.S. chicken business, what are feed costs going to look like near-term based on your hedging relative to this quarter? And perhaps, if you were to lock in where the futures curve is today, what would '15 look like? I'm at $0.41 this quarter in feed cost per pound. So that's one question.

And also, related to modeling, how do we model volumes here for U.S. chicken, because the back half comps are pretty easy because last year, for several reasons, the volumes were down. So those are my 2 modeling questions ,and I have one more on more strategic, long-term.

William W. Lovette

Okay. I'll cover the second part of your question first. In terms of volume for the back half of the year. I mean, I think it's clear from an industry standpoint, we're still placing fewer chicks than a year ago. So there's not a lot of growth, if any, that are going to come from more chicken production. One way we've been able to grow actually ourselves is in moving our mix in some cases to larger birds, but more importantly to improving our yields. When we improve our yields, the entire scale that actually provides, actually in some cases, a significant amount more meat to sell at, obviously, a much better value. So we think there are some growth opportunities for us in the back half of the year as we continue to improve yields, but really not in a significant way. And we think that's going to be a positive from a pricing standpoint.

On the first part of your question, we've stayed very close to the market on our feed ingredients as we continue to experience an inverse market condition. And with our pricing model that we changed a couple of years ago, buying forward corn and soybean meal is not something that is necessary to either create or enhance margin because we're more or less on the market. And as we said before, the chicken market is really driven by the supply and demand of chicken as opposed to the supply and demand of feed ingredients. So we don't really see the need to hedge or forward buy ingredients all that far out.

We see an opportunity, using all sorts of financial tools, we have the ability to do that, but it's not something that is required for margin creation. And I think your question was really focused on breast meat cost as opposed to breast meat price, but we can send -- we think that with falling feed ingredient prices and improvements in plant cost and yields, our costs will continue to improve.

Fabio Sandri

I'll just add actually that, remind you that it takes 45 to 60 days to raise the birds that will be processed. So there is a lag between the price of corn and soy that we are seeing on the board and the price of corn and soy in the chickens that we are processing. So with that, we don't see any big changes in the cost or on the feed cost in the birds we are going to process in the third quarter compared to the second quarter.

William W. Lovette

Yes. And just to be a little more specific, July was the first month of our third quarter and it was an absolutely great solid performance. We continue to see improvements. And so we're bullish about the chicken business for the back half of '14 and even on into 2015.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

And then just sort of a follow-up on Farha's question on normal earnings. I mean, what's clear from your performance over the last 1.5 years is you've improved your performance relative to the market considerably, not only closed the gap, but now it certainly seems like, at least this quarter and the last couple of quarters, you are in the top quartile. Maybe you can comment on the Agri Stats numbers to confirm that. So in a market for commodity chicken that's very attractive from a margin perspective, you're clearly doing very, very well.

My question is really, in a scenario when the margins for the commodity players turn around, which might happen at some point, what does the bottom end look like? So what's the bottom end of the normal margin range? Like what's -- with your new structure on the cost side and you continue to work on it, but also the way you're managing margins, what do you think the bottom is on the margin structure now compared to when you took over?

William W. Lovette

Well, we operate like all other companies in an environment where feed ingredient cost and market prices are -- have a driving impact on margins. And there's 2 things that we know for sure, Akshay. With the current environment, we produced a 13.7% operating margin for Q2, that's one.

And then 2, as I mentioned before, we have a lot of capacity to improve what we're doing now with zero based budgeting and our strategy of relentless pursuit of operational excellence. So if the aforementioned market conditions are conducive, then I will validate what you said, and that is we're very confident that we'll remain as a best-in-class performer in the chicken business.

Specifically, the bottom end of the range, we're still in a cyclical business. It's hard to tell from year-to-year what feed ingredient costs are going to be, and separately, what the demand and supply for chickens are and, therefore, what prices are going to be. But if we continue to have the kind of operating environment that we've had for 2013 and now 2014, then I can assure you, we're confident that there's enough room to continue to improve that we're going to be operating at the top of the range of what's possible in chicken margin creation. And yes, I'll just leave it at that. Fabio?

Fabio Sandri

I think I'll just complement that with something that Bill mentioned before. We have a very big portfolio of products and contracts with our customers. So in the trough or in the -- when the markets are not so strong, we don't see our prices going as down as a few commodity spot player because we have fixed-price contracts, we have case ready, we have small birds. So we have -- we believe that we have smaller volatility compared to a spot operator.

Operator

[Operator Instructions] This concludes our question-and-answer session.

I would like to turn the conference back over to Bill Lovette, closing remarks.

William W. Lovette

Well, thank you. At the beginning of this year, we challenged our management team with the statement that 2014 would usher in the year of rising -- a revolution of rising expectations. We're very pleased with the response to this challenge as they have delivered a performance that we expect will exceed many of our key performance indicators, particularly our target of $220 million of operational improvements. This commitment allows us to continue to operate in the top of the industry, as we've said. And with the engagement of our team members, our growers and the rest of our stakeholders, we continue to make significant strides toward our goal of being the best managed and most respected company in the industry. Thank you all for your continued support.

Operator

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

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Source: Pilgrim's Pride's (PPC) CEO William Lovette on Q2 2014 Results - Earnings Call Transcript
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