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Executives

Gary Rhodes - VP Corporate Communications and IR

Clint Rivers - President and CEO

Bob Wright - COO

Rick Cogdill - CFO

Analysts

Eric Katzman - Deutsche Bank

Reza Vahabzadeh - Lehman Brothers

Ken Zaslow - BMO Capital Markets

Farha Aslam - Stephens Inc.

Robert Moskow - Credit Suisse

Christine McCracken - Cleveland Research

Diane Geissler - Merrill Lynch

Carla Casella - JPMorgan

Chris Bradshaw - Lehman Brothers

Bryan Hunt - Wachovia Securities

John Miller - Morgan Stanley

Pilgrim's Pride Corporation (PPC) F3Q08 (Qtr. End 05/28/08) Earnings Call July 29, 2008 11:00 AM ET

Operator

Good morning and welcome to the Pilgrim's Pride conference call to review the company's financial results for the third quarter of fiscal 2008. At the company's request this conference call is being recorded. Please note that slides referenced during today's call are available for downloading from the investor relations section of the company's website at www.pilgrimspride.com. Beginning today's call will be Gary Rhodes, Vice President of Corporation Communications and Investor Relations for Pilgrim's Pride. Mr. Rhodes, you may begin.

Gary Rhodes

Good morning and thank you for joining us today as we review our financial results for the third fiscal quarter and year-to-date. Earlier today we issued a press release that provides an overview of our financial performance for these periods. If you have not already seen this release, a copy is available on our website along with other downloadable information.

Joining me on today's call are Clint Rivers, President and Chief Executive Officer; Bob Wright, our Chief Operating Officer; and Rick Cogdill, Chief Financial Officer. On today's call we will review our third quarter financial results and the key factors of our performance during the period. We will also talk about some of the operating challenges facing our industry and the steps we are taking to return to profitability. After our prepared remarks, we will be happy to take any questions that you may have.

Before I turn the call over to Clint, I will remind everyone that today's call contains certain forward-looking statements. These include our expectations of future results, sales and cost of sales information and market dynamics. Actual results might differ materially from those projected in these forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those forward-looking statements is contained in today's press release, as well as in our forward-looking statement and risk factor disclosures contained in our Forms 10-K, 10-Q and 8-K, as filed with the SEC.

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

Clint Rivers

Thanks Gary, good morning everyone. Pilgrim's Pride today reported a net loss from continuing operations of $48.3 million or $0.69 per share on net sales of $2.2 billion for the third fiscal quarter of 2008. These results compared to net income of $63.3 million or $0.95 per share on sales of $2.1 billion for the same quarter of fiscal 2007.

Rick will go into more detail on the financials, later in the call but the year-over-year decline in profitability can be primarily attributed to two factors. Dramatically higher feed ingredient costs and sales price increases that were insufficient to offset these higher costs. A year ago industry production was reduced enough to drive a significant increase in market pricing, as a result Pilgrim's Pride and the industry as a whole returned to profitability in the back half of fiscal 2007 and in fact posted a modest profit for the full year.

However the cutbacks introduced so far this year has not been sufficient to boost breast meat pricing to levels needed to cover soaring feed costs. Simply put at this time there is still too much breast meat available to drive marker pricing significantly higher.

Slide 4, shows that consumers have only just began to see higher prices for meat and poultry in their local grocery stores. As you can see the consumer price index in June showed a 2.9% jump in meat and poultry compared to the year earlier. This is far below the sharp increases for other items such as cereals, bakery items, dairy, fruits and vegetables.

American consumers should brace themselves for sticker shock in the meat case over the next 12 months. The supply of meat in this country is going to be adjusted to allow producers to pass along the full effect of higher feed and energy cost, which we believe are here to stay for this foreseeable future.

Frankly, I believe one or two things are probably going to happen in our industry. Either industry production will be cut further like we saw last year or else the inevitable recovery will be postponed as overall demand will have to grow over time to offset these challenges. Over the past few months we have frequently been asked at what price does breast meat need to be in order to cover those costs.

Obviously this is a moving target based on several factors including the returns from other parts of the chicken. However, at this point assuming $6 corn and $350 soybean meal cost, I would market prices for breast meat need to be in the range of $215 for the industry to breakeven and roughly $225 per pound to get back to normalized levels of profitability.

On a modestly positive note the industry egg set data are beginning to look encouraging. Over the past three weeks year-over-year reductions have ranged from 2.4% to 3.9%. It appears that the industry is beginning to take a somewhat more rational disciplined approach to production in this difficult operating environment.

Nevertheless we believe that these levels of reductions point to a longer recovery period than we would have hoped for. We will be watching these data points closely as we head into the fall.

Moving back to the quarterly results feed costs once again proved a stiff headwind. Flooding in the Midwest propelled grain prices to new all time highs before backing off a bit recently, yet many year-over-year market price indicators continue to be unfavorable. Our total feed ingredient cost in the quarter climbed $266 million for 41% when compared to the same period a year ago. Prior to any risk management offsets.

Based on the actual cost incurred for the first three quarters of the fiscal year the current commodity futures markets for the remainder of the year. The company's total feed ingredient cost for fiscal 2008 would be up an estimated $900 million from last fiscal year, prior to any risk management efforts.

We are doing everything we can to manage through this extremely difficult operating environment. Over the past six months we have made some very tough, but necessary decisions to position our company to emerge from this down cycle as a much stronger more efficient competitor.

During the third quarter as previously announced we closed a processing plant in North Carolina and six distribution centers eliminating a total of approximately 1,100 positions. We continue taking steps to shorten our fixed price sales contract in prepared foods to 90-day periods in most cases, down from the standard one-year terms previously.

At times we have walked away from unprofitable sales or from accounts that wanted multi-year fixed pricing. We will let others assume these loosing propositions. This approach may hurt a bit in the short-term, but we are more focused on the long-term heath and profitability of our business. As we have said internally many times over the past year. We can make a bad sale any day we want there is no sense committing to a long-term agreement to do so.

As you know, during the quarter we also modified our debt covenants and raised $177 million in a stock offering to gain greater financial flexibility and to provide added liquidity to manage our business in this valuable time.

More recently we announced the consolidation of our El Dorado tray pack business in to six other facilities and the closure of our distribution centre in El Paso. This will position our case ready division to operate more efficiently as the El Dorado facility is converted into a low cost supply plant that feeds chicken into out further processed business.

While this change will eliminate 600 positions in El Dorado, our contract growers and employees in live operations will not be affected at this time. This conversion should be completed about mid-September.

As we said earlier this month the consolidation in El Dorado concluded the formal review of our operations that began back in March. We have no plans to close consolidate or sell other facilities at this time. That is not to say that unforeseen events or substitute offers could not arise at some point to change these intentions. Since it is a of public company we must always be open to making decisions, which we deem to be in the best long-term interest of our shareholders.

Looking ahead there is no question that our feed cost will continue to be a significant concern for our industry. Pilgrim's Pride is part of a broad based coalition of third companies that is urging the Federal government to fix its badly flawed F&L policy. Before the food versus fuel debate sends the global economy into an even greater tailspin and leads to even more food shortages.

A rapidly growing base of American consumers, their wallets pinched to the gas pump and grocery store are joining us in this fight. We are pleased about the EPA's announcement last week that it plans to take additional time to review Texas governor Rick Perry's request for a waiver of the renewable fuel standard.

While we believe the correct response to governor Perry's request is obvious to most of the US population given the pain they are feeling from the sharply higher prices for just about everything made from corn or oil. It is important for the EPA to digest all of the facts and compelling economic data that overwhelmingly support a waiver of the fuel standards.

I want to share a few comments about production, before I turn it over to Bob. As you know we have taken steps to reduce our second half of the year production by 5% year-over year. In the third quarter our total pounds were down 1.33%. For the fourth fiscal quarter we are projecting total pounds to be down approximately 8.7%. This will get us to the 5% overall reduction number for the back half of the fiscal year.

Going forward we will continue to monitor our production needs and adjust our plans as our business or the cost environment dictate. As we continually monitor and optimize our production mix we may add production in some areas while decreasing it in others. Again all this will be done with an eye towards maximizing our company wide operating performance.

With that I will turn the call over to Bob to discuss our operations.

Bob Wright

Thank you, Clint. Good morning everyone. As Clint said overall market pricing clearly is not where it needs to be for producers to cover their feed costs. If you look at prices for chicken products during the quarter on slide 5, it was a mixed bag. In the third fiscal quarter breast meat declined 12% and wings were down 26% versus the same period a year earlier. Leg quarters on the other hand increased 2% and Georgia dock rose 5%.

Since the end of the third fiscal quarter breast meat prices have declined another 10% to $1.33 per pound and wing prices have dropped 1% to $0.97 per pound. Only leg quarters and the Georgia dock have shown any signs of strength increasing 6% and 13%, $0.89 and $0.52 respectively.

Leg quarters in fact have been one of the few bright spots this year. Our export demand remained strong and we are having absolutely no difficulty meeting any commitments to our customers. In fact, we are currently booking Leg quarters for September delivery at a significant premium to the current market. Container shortages that have posed logistical issues for exporters appear to be gradually improving.

We have seen some customers trading down to dark meat as a result of the weak economy. This has created some disproportionate retail demand for certain dark meat products. As a result in some cases we have had to limit the quantities of dark meat we are willing to sell, because it can cause a significant out of balance position to the white meat purchases. It is important to remember that in the end we have to sell the entire chicken.

One positive development in the export market is demand among Middle East countries for US whole birds. Until recently undervalued products such as leg quarters, wing tips and paws were the typical products exported by the United States. With the strength of the Brazilian currency and the weak US dollar our whole birds are now extremely competitive with Brazilian products. We have been creating products to meet this new demand and expect to begin shipping in August.

As Clint mentioned earlier we have shortened the duration of sales contracts in most cases to 90 days, to help us pass along rising input costs. Overall this strategy has been effective as the most recent 90-day contracts coming due have been renegotiated at higher prices.

We have also walked away from unprofitable sales for accounts that wanted multi-year fixed pricing. Remarkably it appears that there are still some producers in our industry that are willing to take these market risks both at a current loss and well beyond what we believe they can reasonably hedge in the open market.

We are glad that a lot of our competitors load upon contracts of this nature and pricing. We will stick to our strategy of rationalizing our product mix and exiting poor or marginal sales.

Turning now to egg sets on slide 6. As Clint noted recent egg set data from the USDA gives us some signs of optimism with regard to future domestic pricing. Egg sets have been down year-over-year for the past 17 weeks with declines of 2.4% or more for the past three weeks. In addition chick placements over the same three-week period have ranged from essentially flat to down 1.8%.

These factors point to a reduction in supply in the future, which hopefully will exert some positive pressure on pricing. However it appears that any impact from these reductions probably will not occur until the summer growing seasons ends. In the end though there must be upward pressure on pricing given that our feed cost per pound rose by more than $0.04 or 43% in the third quarter when compared to the same quarter last year.

In addition to pricing and feed ingredients costs, we have also seen a sharp increase in energy cost. In total our energy costs have risen $18.7 million year-over-year for the third quarter. According to the energy information administration natural gas prices in the third quarter of fiscal 2008 were up a 110% and diesel was up 63% compared to a year ago. As slide 9 shows, there is no relief in sight.

Given all the downward pressure on margins from increased input costs and lack of sufficient upward movement in pricing, it is more important than ever to find ways to operate more efficiently. Clint outlined some of the larger steps we have taken such as converting our El Dorado facility to a supply plant.

This consolidation will have a positive effect on our future results. Our Prepared Foods division will benefit from the lower meat cost. Our case-ready operations will benefit from spreading a lower amount of fixed costs over its produce pounds. These benefits are a direct result of our increased size following our acquisition of Gold Kist.

However, there are plenty of other steps that we are taking to lower our cost as well. For example, we have slashed 100's of SKUs from our product mix so that we can focus on the faster turning more profitable items that our customers want. We have lowered the speed limit on our fleet of 1,700 commercial vehicles. With the help of our drivers we expect to save more than $3 million a year in fuel expenses.

Also taking a closer look at potential product mix changes in our plans. We found opportunities with Deli Wogs that will save us a million dollars by moving production closer to our customers. These are just a few examples of the cost saving opportunities identified by our employees. I am tremendously proud of the way they have responded to the challenges facing our business and we are confident that there are many more ideas to come.

Another area where we have been diligent is the maximizing of the synergies from the Gold Kist acquisition. To-date we have realized $282 million of synergies, $63 million of which occurred in the third quarter, bringing our annual run rate to $252 million. While we are reaping the benefits of our synergies we are also keeping a close watch over capital expenditures. We are taking a very disciplined approach to these investments by focusing primarily on those projects that have paybacks of six months or less.

As a result looking at slide 10, we now expect our capital investment for fiscal 2008 to be in the range of $130 million to $150 million down from our previous guidance of $170 million to $190 million.

With that I will turn it over to Rick for a financial update. Rick?

Rick Cogdill

Thank you, Bob. Before I begin, I would like to remind everyone that last quarter we exited the turkey business and as such that segment is now being reported as discontinued operation. I will only be discussing the results of continuing operations today, which excludes that segment.

As shown on slide 11, we realized the net loss from continuing operations of $0.69 a share for the quarter ended June 28 of this year versus net income of $0.95 for the same quarter last year. For the nine months, our loss from continuing operations was $2.85 per share, which compares to a net loss of $0.30 per share on a pro forma basis for the same period last year or net income of $0.22 per share on a reported basis.

When both of the periods being reported there were some non-recurring or other infrequently occurring items. For the three and the nine-month periods of fiscal 2008, we incurred asset impairment and restructuring charges totaling approximately $2.2 million and $13.2 million net of tax respectively or $0.03 and $0.19 per share.

These charges are related to the closing of one of our processing plant and administrative office and six distribution centers. As we noted in our press release announcing the realignment of our El Dorado processing plants and the additional closure or sale of the distribution center in El Paso, Texas. We do not anticipate any material charges related to these two events.

Additionally the results for the nine-month period of fiscal 2008 included a non-recurring income tax charge of approximately $13 million or $0.19 per share, related to an adjustment in the deferred taxes as a result of the newly enacted tax law in Mexico.

Finally, included in the nine-month period of fiscal 2007 were charges of $14.5 million or $0.14 a share related to the early extinguishment of debt incurred by the company in connection with the financing of the Gold Kist acquisition.

Turning to sales, as shown on slide 12, in the third quarter sales increased 4.9% or $103 million from the same period last year. Our US other segment which includes our non-chicken distribution center, rendering and commercial egg businesses, is responsible for $56.3 million of this increases with the US chicken making up $19.8 and the remaining $26.8 million coming from our Mexico operations.

Our US other segment benefited from strong pricing in both commercial egg and rendered products, which are generally tied to soybean meal prices and bio-fuel’s. The US chicken sales increase of 1.1% was driven almost entirely by sales pricing, as volumes sold were essentially flat year-over-year.

Slide 13 shows our net sales for the first nine-month of fiscal 2008, compared to the pro forma of prior year period, increased 7.5% or $444.2 million, on essentially flat volumes. This increase was due to a 4.9% increase in the US chicken sales pricing which contributed $241 million of this increase. Our US other division sales improved by $154 million due again to improved selling prices for commercial eggs and rendered products.

Slides 14 and 15 show that EBITDA reconciliations for the quarter and for the first nine months and despite the high feed cost, we achieved $16.9 million positively of the EBITDA for third fiscal quarter. Net interest expense decreased $5 million to $34.9 million when compared to the third quarter of 2007 due primarily to lower average outstanding interest rates on our debt.

Slide 16 and 17 summarizes our operating results for the quarter and the first nine months of fiscal 2008. For the quarter, we recorded an operating loss of $42.5 million, which compares to an operating profit of a $136.9 million in the same period of last year.

Once again this decrease resulted primarily from the increased feed cost, which resulted in a $185.6 million declined in our US chicken operations. This is offset by a $13.5 million improvements in our US other operations.

Slide 18 and 19 summarize our current debt agreements and maturities. Our total debt declined by a $111.5 million, when compared to the second quarter, as we used proceeds from our equity offering during the quarter to pay down debt. At the end of quarter, our total debt outstanding was just over $1.5 billion. However, as a reminder there are no significant maturities on any of this debt until 2013.

The effective interest rate on our outstanding debt is approximately 7.25% and our net debt to capital ratio at the end of the third quarter was 56.1%, down from 60% at the end of second quarter. Total liquidity under our debt facilities at the end of third quarter stood $591.2 million, an increase of approximately $97.3 million from the end of the prior quarter.

Slide 20 shows the status of the revised financial covenants that Clint mentioned earlier and as we previously reported these revisions are temporary for the most part and we will return to their original levels in the first quarter of fiscal 2010.

I will now turn the call back to Clint for a few final comments before we open up for questions. Clint?

Clint Rivers

Thanks Rick. There is no question that our industry is enduring one of the toughest most difficult periods in recent memory particularly with the U.S. economy in or near recession. Looking ahead we will continue to do everything in our control to position the company for return to profitability as a stronger more efficient competitor. I previously announced production cut remain in place and we will continue to monitor industry conditions to determine appropriate productions levels as we enter fiscal 2009.

In addition, we will redouble our efforts to pass along higher feed cost to our customers. More generally it is times like these when chicken can capitalize on its position as the healthiest best value protein. These difficult economic times when inflationary pressures are hitting food products hard, consumers see chicken as a way to get more for their money without sacrificing taste and quality.

This concludes our prepared remarks. Operator, please open up the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen at this time, we will open the floor for questions. (Operator Instructions). Our first question will come from Eric Katzman, Deutsche Bank

Eric Katzman - Deutsche Bank

Hi good morning everybody.

Rick Cogdill

Good morning Eric

Eric Katzman - Deutsche Bank

There is a little bit surprise to see that your production was only down 1.3% in pounds and is there a reason why that internally that it took longer to bring the number down as you indicated for the fiscal fourth quarter?

Clint Rivers

Eric, I would say you got to consider back to the quarter we are comparing against and when you compare back to the third quarter last year, that was the period of time we had our deepest production cuts for the prior year. So, you are comparing to a quarter where production was already down to a lower level. Now I think that is the primary reason for it.

Eric Katzman - Deutsche Bank

Okay and then as you are no doubt are aware yesterday Tyson suggested that there could be some type of what say potential recovery in breast meat pricing in the December quarter given what is going on. I mean do you share that kind of cautious optimism and what do you think would make this Q as breast prices at that point?

Clint Rivers

Well, I can not predict very well, when that is going to occur, only that we have seen some more reduction in egg sets in recent weeks and if that continues one would think that that would have to drive some market improvement. However, I would also say that demand appears to be off a little bit from what we would expect because I do not think any others would have expected us to be at $1.33 breast market at this time a year. So, I think it is hard to predict going forward but as the industry responds with needed production cuts, we should get to that point, typically we do see production or demand fall off in the fall and so we have got to take that into account as well because we think demand is down somewhat now, it could be down further in the fall as well and so the production cut needs to be to deeper level that it has been obviously so. However, hopefully all that will occur in and we can see some strengthening in breast prices as we go into the winter.

Eric Katzman - Deutsche Bank

Then a last question, I will pass it on the sales figure. The U.S. chicken number was reasonable but it seems like a lot of the strength came as you said in exports and then there is the whole other part of the business, which I never really focus all that much on. How sustainable is the pricing in some of these disbursed products that you put through the distribution system?

Clint Rivers

The other category that included are rendering and our egg business. In our rendering business we expect those markets to remain high and expect them to stay strong, in terms of eggs, the markets are down some there so we are seeing some slippage more we have been on eggs in the prior quarter, so yet to be seen what will happen there as we go into the fall.

Eric Katzman - Deutsche Bank

Okay. Thanks. I will pass it on.

Clint Rivers

Okay.

Operator

Thank you. Our next question will come from Reza Vahabzadeh from Lehman Brothers.

Reza Vahabzadeh - Lehman Brothers

Good morning Reza Vahabzadeh from Lehman Brothers.

Clint Rivers

Good morning.

Reza Vahabzadeh - Lehman Brothers

You talked about the reduction almost termination of the longer term prepared foods contracts in this quarter from preceding quarters. How helpful was that if any in terms of helping your margins in this quarter, can you talk about that?

Clint Rivers

However there is not been a lot of help from that this quarter. We have contracts we did not have in place prior at the beginning of this calendar year. We have been able to get to shorter time frame. We still have some business, a fair amount of prepared food business with them, annual contracts that will be negotiating here in the near future. So I would not say that seen a lot of help from that in this last quarter, because of the cost on the feed side continued to clamp so much that most of the benefit that we would have seen is being offset with that.

Reza Vahabzadeh - Lehman Brothers

However, would you, I mean would some of these contracts have had some losses for you in the last quarter that may have abated in the June quarter because of the reduction of these current contracts or not really?

Clint Rivers

There are some contracts that we have had a better position this last quarter than we would have had in the second quarter.

Reza Vahabzadeh - Lehman Brothers

Okay.

Clint Rivers

However, not substantial.

Reza Vahabzadeh - Lehman Brothers

Okay and I do not know if I heard you right Clint, but did you say that you need boneless skinless breast to get up to 215 for the company to break even?

Clint Rivers

Yes I think we have said 215 for break even level on breast meat and 225 to get back to a normalized level of profitability.

Reza Vahabzadeh - Lehman Brothers

You are talking about the whole company's operating income or just for that particular type of product?

Clint Rivers

Have it for that particular type of product that is sold on commodity market.

Reza Vahabzadeh - Lehman Brothers

I see okay. You talked about the operating loss in the fourth quarter given the environment you mentioned that in the press release. Are we supposed to take that to mean that operating losses will be similar to this third quarter or materially lower in the fourth quarter to next years quarter and I do not mean to get a projection from you I am just trying to get little color?

Clint Rivers

What I would say is, it is too early to tell since we do not know what is going to be going on markets for breast meats especially the reminder of the quarter. I would say that there is potential for the fourth quarter to be worse than the third quarter because you look at feed ingredients pricing although the grain markets have retracted in the last few weeks going into July we had the absolute highest growing markets and so those products are been fed to birds today and rainy retraction in the markets those bird would come out of the field weeks from now. So we actually went into the quarter with the peak grain markets.

Reza Vahabzadeh - Lehman Brothers

Got it, and lastly for you Rick, was the working capital much of a use of cash in this quarter or not?

Rick Cogdill

It was somewhat increase and again as Clint mention that the feed ingredient cost did go up and we obviously had put some of that into the inventory during the quarter. We will file our queue today but I think inventory was up, hold on one second. Here we go, yes, inventory was up quite a bit inventories up over $175 million. That is for the nine months, five and a half the quarter number there.

Reza Vahabzadeh - Lehman Brothers

Okay, I will look at the 10-Q, thank you

Rick Cogdill

Thanks.

Operator

Thank you. Our next question will come from the Ken Zaslow of BMO Capital Markets.

Ken Zaslow - BMO Capital Markets

Hi, good morning everyone.

Rick Cogdill

Good morning Ken.

Ken Zaslow - BMO Capital Markets

I just want a clarification, you said 215 is break-even 225 is normalizing margin?

Rick Cogdill

Correct, that is what it said.

Ken Zaslow - BMO Capital Markets

So, if your breast price is at 133 and you did not have 5% loss on your margins why would that 25 well it looks like 15 plus $0.75, $ 0.85 differential only be a small modest below your break even level, was there hedging gains in here?

Rick Cogdill

I do not follow your question Ken.

Ken Zaslow - BMO Capital Markets

Is the difference between break-even and normalize margins is $0.10 on breast prices? The margin that you put up this quarter, which was a loss, but breast prices were at $1.33.

Rick Cogdill

Well not all of our breast meat in the company is sold on those markets. So, that does not, you cannot equate those apples-to-apples.

Clint Rivers

That is right. That is at a smaller percentage really of the total mix that will be sold on that commodity market?

Ken Zaslow - BMO Capital Markets

Okay, the other question is where there're hedging in, in this quarter? It looks like you probably bought forward corn pretty well, is that a fair assessment?

Rick Cogdill

Yes. As we have said in the past, we continue to be active in the markets and trying to mitigate all of our commodity risks and we really do not talk about the effect of those. So, we are going to continue to not discuss that.

Ken Zaslow - BMO Capital Markets

How would you rank yourself in terms of operating efficiency across the industry? You mention some project and can these projects catapult you too to the top quota or how do we think about that?

Rick Cogdill

Well, we have an awful lot of plans, Ken and many of those plans are operating asset highest level of efficiency. However, we have got some other operations that we continue to work on rationalizing the mix and the processes in that is one of the things that we have announced recently with our changes in El Dorado. However, in total we are operating very well. You do have any time your cut back and you do have some increased cost on some of your fixed charges later but with these markets it is a responsible thing to do.

Ken Zaslow - BMO Capital Markets

Would you have a cost savings expectation for 2009 even on the projects? It sounds like you are really making a major effort on the cost savings effort. Is there like a paradigm that we can actually think about as well?

Rick Cogdill

No, we have not tried to total those up and come up with the number like that. We just continue to work on the opportunities as we have and they continue to develop and so we have not come up with an annual number on that.

Ken Zaslow - BMO Capital Markets

Great, appreciate it. Thanks.

Operator

Thank you and our next question will come from Farha Aslam from Stephens Inc.

Farha Aslam - Stephens Inc.

Good morning.

Rick Cogdill

Good morning Farha.

Farha Aslam - Stephens Inc.

Hi could you just give some color regarding your sales, what percentage of your volume is sold on any type of contract?

Rick Cogdill

Yes I do not think that numbers really changed from what we said before. We are still in 35% to 40 % that was sold on some a mark a fixed price type contract.

Farha Aslam - Stephens Inc.

That is fixed price, and then --

Rick Cogdill

Yes, that'd be. That is right and as Bob mentioned we have shortened the duration of those contracts. I heard about 17% that was carried over from the end of last calendar year that are on annual contracts and everything beyond that the other 20% is on the shorter terms fixed contract.

Then beyond that everything is either some market related contract or on the spot basis but --

Farha Aslam - Stephens Inc.

Okay.

Rick Cogdill

The bulk of that is going to be market related right so.

Farha Aslam - Stephens Inc.

So about 17% of your volume is on fixed annual if I am right and then---

Rick Cogdill

That is what we entered into last year at the end of last calendar year before we went from annual to this 90-day bankrupt.

Farha Aslam - Stephens Inc.

So then another 17% is variable to --

Rick Cogdill

17 to 20 that is about right.

Farha Aslam - Stephens Inc.

17 to 20 and than the rest of your sales are market based?

Rick Cogdill

Market index, market based that is right. So it might be tied to Georgia dock it might be tight to other market indexes.

Bob Wright

We also have cost plus agreements, we have price list agreements, so we have that 17% is fixed through the end of the calendar year, and then we have about the same amount that is fixed usually on a 90 day duration and then it is renegotiated and the balance would be all the rest, cost plus market related, summer index to grain cost, just a variety of other types of agreements.

Farha Aslam - Stephens Inc.

So, on the part that is market index, market base et cetera, is it breast meat that drives it, is it whole birds? If we had to kind a get a feel so what are the key components that drive pricing in that market based bucket. What would you say is there?

Bob Wright

Well, if we are selling whole birds most of those are index to the Georgia dock.

Farha Aslam - Stephens Inc.

Okay

Bob Wright

That is being doing well. Where we have spot sales on things like breast meat and wings those are usually related to the earn a berry market which as we mentioned is down significantly year-over-year.

Farha Aslam - Stephens Inc.

Okay

Rick Cogdill

You have others that are tied to wing market on the formula price or a tender market on a formula price. So its can be whatever the product is, might be tied to a formula base contract, based on that market.

Farha Aslam - Stephens Inc.

Okay and my finial question it goes back to Ken, in this quarter, did you benefit at all from grain hedging and going forward because your results were surprisingly good. Going forward do you anticipate any, could you comment at all on what type of grain hedges you might benefit from in the fourth quarter?

Rick Cogdill

Now we are really not going to comment on our hedging activity. As we have mentioned more than a year ago, when we brought on a senior executive in that arena that we intended to get more active and looking at all the commodity risk exposure we had and we said that we will use all tools to our disposal whether they are put through calls or hedges or what have you and we continue to do that and have done that. So, beyond that we are not going to disclose specifically where we are on hedges or what the results are as we really do not think from a competitive nature we need to be talking about that.

Farha Aslam - Stephens Inc.

Okay, thank you very much.

Operator

Thank you, our next question will come from Robert Moskow from Credit Suisse.

Robert Moskow - Credit Suisse

Thank you, actually two questions. One is have you seen the news item today about the US chicken industry negotiating lower export contracts with Russia for next year. I think it is a 20% cut in the import quota and then it gets lower as the years go on. Why do you think a contract like that was negotiated and what do you think it will mean to pricing for leg quarters.

Then secondly can you talk just more broadly about what the benefits of scale are in this industry. I mean, by my math Pilgrim’s Pride and Tyson have actually been operating at the low end of profitability. A lot of these small very focused may be low cost producers that are private; I mean they are actually on the high end of profitability. So how is scale helping and why is not it helping more?

Clint Rivers

To your first question, first we are aware that there was a group of industry participants that met with the Russian government. The letter of understanding is non-binding. It was agreed to basically under a threat from the Russian government that if they were not to come to agreement the Russians were going to implement some new import quality standards, which essentially would ban most of the US production because of chlorine and [no chiller water] and certain other things. So, it was really done under duress and considered to be the lesser of the two evils.

In the short term, I do not see this will make any difference. One of the things this year that we have seen in exports is that a number of new countries have really come into the marketplace and been much bigger buyers than they have been historically. As their economy has improved and their demand for protein increases at a time when the US dollar is low, creating a great value. To the extent that that continues that will more than offset whatever loss production comes from the Russian market.

From a Pilgrim's Pride perspective, we have five of our plants that export some percentage of their production to Russia. That is five out of 33 slaughter plants. So, although we have exposure there it is not a huge piece of our business.

Robert Moskow - Credit Suisse

Okay. The scale question I had?

Bob Wright

I think, you make a good point there, and on our own scale from the overhead category there is definitely some benefits to scale. In our production facilities ability to move products around and load plants with products that run more efficiently to take advantages of the strengths of each particular plant. I think we are in a better position to do that. However, on the sales side company of our size we really are selling into all of the markets and we can not just restraint ourselves to a particular niche market that a smaller producer might be able to do and I think that maybe some of what you see.

Robert Moskow - Credit Suisse

Okay. Well thank you for that. I appreciate it.

Clint Rivers

Yes.

Operator

Thank you. Our next question will come from Christine McCracken with Cleveland Research.

Christine McCracken - Cleveland Research

Good morning.

Clint Rivers

Good morning.

Christine McCracken - Cleveland Research

Just wanted to follow-up on your comments relative to the production cuts that we have seen thus far certainly promising but I do not believe at the levels that we need to see to get to the 215 bonus prices that you expect for breakeven. Can you talk about what magnitude of cuts would we need to get to get back to that level of pricing?

Clint Rivers

That is a difficult question to answer Christine. I would say remember a few months back than we were projecting the need for cuts into that 3% to 4% range and if we had accomplished that as an industry back at that point in time we would be in a different situation today. However, as we go forward our production level as we commented on earlier is at 8.7% level. So we think that it needs to be more in that 8% to 10% type of range to get where we need to go when the markets…

Christine McCracken - Cleveland Research

It seems like though you have taken a leadership position clearly cutting production at more aggressively than some of your peers. However, without the participation of the industry it seems like it’s going to be hard to get that level. What do you think is keeping your competitors at this point from cutting more aggressively in order to get back to breakeven? It does not seem like this level of loss, losses for the industry universally is sustainable. What is the, you cannot probably speak for them but maybe you have some ideas on that?

Clint Rivers

No, I cannot speak for them. Only I would tell you is that, I think that because of coming into the summer and some announced production cuts there are probably some in the industry they felt that the heavier demand on exports, the summer season, the production cuts that were done by others may be enough to fuel the markets and bringing breast meat pricing up. However, as we see that has not occurred. I hope that that will bring some different thinking and more rationalization as people look at their business and what is good business and take a more aggressive action there. However, so I can not speak to exactly what they have done, but I hope with the situation as it continues unfold that we will see more support there, because as you say we have lead the industry last year as well as this year.

Christine McCracken - Cleveland Research

Clint do not we ultimately really need a cut at the breeder level. In order for these cuts to be sustainable and get an ongoing or sustainable price increase in order to offset this feed cost escalation?

Clint Rivers

Well that is right you do not necessarily have to have a cut at that level to get a reduction in slaughter. However, for that to be a long-term reduction then it would make sense for those pullet place must be reduced, so that it has a long-term effect.

Christine McCracken - Cleveland Research

However, we haven’t seen that yet?

Clint Rivers

We are seeing a little bit of it, but not the magnitude we need to see.

Christine McCracken - Cleveland Research

So it is just a waiting game at this point?

Clint Rivers

That is right.

Christine McCracken - Cleveland Research

I leave it there, follow up later thanks.

Clint Rivers

Thank you.

Operator

Thank you our next question will come from Diane Geissler from Merrill Lynch.

Diane Geissler - Merrill Lynch

Hi good morning.

Clint Rivers

Good morning, Diane.

Diane Geissler - Merrill Lynch

Just working out some numbers here on the production side and given the color you have given on the third quarter and fourth quarter when we see that 8.7% reduction in the fiscal fourth quarter, is that what we should be thinking about your first half of '09, you will maintain that. It will be bigger in the first half of the '09, it will be smaller in first half '09? If you could just give some commentary there, I understand we have a seasonal move down in demand generally, so you generally see a pull down anyway but that would be helpful.

Clint Rivers

Well, it is difficult to answer that for one reason you know our year-over-year comparisons as we talked about earlier keep changing because last year was a year of cutbacks. What I can tell you is that those cuts are in place today and will remain in place until we see the industry turnaround and whether we make any other adjustments to that will depend on our business and what we see that we need to supply.

Diane Geissler - Merrill Lynch

Okay, so if we were looking for about 1.9 billion pounds produced in the September quarter even if you look may be sequentially would you expect the December quarter to be similar to that? I am trying to factor out the function of the percentage and just think about in absolute terms.

Clint Rivers

Yes, well our production does change seasonably to some degree, so you would need to factor that in as well.

Diane Geissler - Merrill Lynch

Actually it went up in December versus September last year though.

Clint Rivers

Yes, but it gets comparing year-to-year, it gets difficult as we have altered those production levels based on prior cut-backs.

Diane Geissler - Merrill Lynch

Okay, all right well. I will just work through some absolute numbers and maybe talk to you off-line.

Clint Rivers

Okay

Diane Geissler - Merrill Lynch

The other question I had was on the food service contracts just a little clarity there, are there 90 day, the 90 day contract are you fixed in a volume for an annual basis and then revisiting some formula every 90 days or you actually renegotiating whether or not you have the volume every 90 days.

Clint Rivers

We do both.

Diane Geissler - Merrill Lynch

Is there one that is there?

Clint Rivers

Well I mean…

Diane Geissler - Merrill Lynch

As the percentage of the volume or

Clint Rivers

Yes I mean it would be our preference as well as the food service customers that we really have an agreement to supply them going forward and there maybe volume as you mentioned for a year but that we make adjustments to the pricing on a quarterly basis. That would be the predominant of the two.

Diane Geissler - Merrill Lynch

You are finding that I mean obviously that is what you would hope that your contracting structure would look like but is that what you are actually finding. When you are doing your negotiations?

Clint Rivers

Generally, yes not all the time, no, there are some that have opted that, we will negotiate every 90 days as to whether we have the volume or not dependent on what the pricing needs to be.

Diane Geissler - Merrill Lynch

Okay, well I just bring it up because I am sure you heard on the Tyson call yesterday about they are concerned about assurance and supply? I am just trying to factor that in, are you seeing that anxiety from your customer base just to that degree that you came away from their call with?

Clint Rivers

No I would say we are not seeing a high degree of that kind of anxiety. I mean most of our customers we have done business with for a very long time and we have been there for them and they know we will be going forward and the issue just becomes at what price can they afford to buy it and us for to sell it.

Diane Geissler - Merrill Lynch

Okay. All right, I appreciate that. Thank you.

Operator

Thank you. Our next question will come from Carla Casella, J.P. Morgan.

Carla Casella - JPMorgan

Hi, and my question is around the hedging I know it is been about a year now since you brought in the new head of commodity, risk management, can you just talk about anything you are doing to certainly now versus than do you think there are significant opportunities going forward as well or you like to see your commodity risk management say similar to how it operates today?

Clint Rivers

Well Carla I would say just you know we operate different today than we did over year ago when that is the reason we brought in someone in that level. While we do not comment on our hedging strategies I mean they are as volatile as these market shave been, its been difficult to figure out what type of positions to take and I will tell you as that we are active on a regular basis communicating and trying to do things that we think are smart for our business. We continue to do that on our ongoing basis.

Carla Casella - JPMorgan

What is the realignment of your division had also related to commodity risk management or was that completely unrelated?

Clint Rivers

Yes. It is completely unrelated and really our division alignments were really already in place. It was aligning personnel with sales and operations and called assurance together under that division leadership to just make sure that we focused on our customers and efficiencies better by having the kind of team work with communication we wanted to have in each one of those divisions.

Carla Casella - JPMorgan

Okay so the commodity risk management is purely focused on all your purchases and it does not matter as much as how well you are forecasting each of the businesses. Is that correct? However, the two are not some tied in terms of the performance?

Clint Rivers

Well that is two from the organizational structure are not tied, that is not to say that we do not have some business that we do that are tied to the market spread. We look at that on our customer-by-customer basis.

Carla Casella - JPMorgan

Okay, great. It sounds as if, with your debt covenants through the remainder of the year and into early next year, is that correct?

Clint Rivers

Yes I mean that we when we realigned those debt covenants last quarter, we tried to get something that would give us enough room for the 2008, 2009 year to whether these challenges that we foresight ahead us and obviously debt covenants something we had to continue to keep your eye up for and its not a another thing which you do not actively look at manage on our a day-day basis but we are going to be fairly proactive in our entire capital structure like we always have in our back.

Carla Casella - JPMorgan

When you said those comments, I am assuming that commodity prices the time remains at those levels or were taken some improvement?

Clint Rivers

No, we did a range of analysis from base case to worse case and best case and now it is somewhere in those ranges is where we came up with where we thought was reasonable to go to the banks with.

Carla Casella - JPMorgan

Okay, great. Thanks a lot.

Operator

Thank you. Our next question will come from Chris Bradshaw with Lehman Brothers.

Chris Bradshaw - Lehman Brothers

Good morning.

Clint Rivers

Good morning.

Rick Cogdill

Good morning

Chris Bradshaw - Lehman Brothers

Just follow up on Carlos question if, if you did have a hedge in place in the quarter. Would that have had a cash benefit or would it really just depend on the duration of their grain hedge?

Clint Rivers

Well I mean any hedges or green activity can go with either direction there, either making money or loosing money but to cash in recent terms of one sort of a final resolution and settlement. Clearly if you have open positions you have margin issues that you got to deal with, so I am assuming a whole lot of them that had a deal with something. I have not seen a whole lot of them that have not generally had a corresponding cash impact.

Chris Bradshaw - Lehman Brothers

Yes. On the timing it just depends on whether the position was still open at the end of the quarter? Is that what you are saying and that and then you are not going to be help us with on disclosing your hedge position obviously. So then I will ask you the next question is in the quarter if, I just think about the cash burn rate from your operations and can certainly wait for the 10-Q to get some of this, but I would be curious what that cash burn rate was if you have that handy and what I am really trying to get out is, had the current run rate because you have already said 4Q could be really no better. So at the current run-rate how many quarters of liquidity and flexibility would you have before running into a bit of a problem?

Clint Rivers

Yes, I am not going to speculate into that activity but when you get to Q, you can analyze about it.

Chris Bradshaw - Lehman Brothers

Okay. Then I had just a quick follow-up on Rob’s question and if I think about what the past would be from here for the Russia quota situation and I realized it, it sounds like there was a bit course or whatever and may be not quite, as one industry participant and not only for you speaking for the entire industry, but what would the path be from here for the Russia quota situation to become more real and then if it does not become more real should we be concerned that some worse alternative is in the offering?

Bob Wright

I do not understand what do you mean by more real?

Chris Bradshaw - Lehman Brothers

So, the implication was if the quota or is it the agreement may be did not have real piece to it?

Bob Wright

Well, it is a non-binding bilateral understanding but I mean I think it would be safe to assume that the Russian government will try to enforce it, starting in 2009 and that there will be some reduction to U.S. imports going forward; I think those are probably safe assumptions.

Chris Bradshaw - Lehman Brothers

Okay. Alright, and then separately and my final question is, it seems like we just started to see I do not know if I would call it a movement at this point. However, we have seen some change in some municipalities in New York, DC, California, seems to be moving in this direction too, to have a calorie count disclosure on food service menus. So I am wondering if you have spoken with your customers about it that that is something that they are concerned about it if they have seen any impact even on a localized basis at this point I just be to here to get your take and what that could mean for chicken, in particular?

Bob Wright

Well, we do provide to many of our customers, nutritional data, on products that we produce for them. In food service establishments, many of the products are proprietary and depending on how those products get formulated they could change the nutritional value of those particular products. So, we have from a R&D standpoint worked with some of the customers to either take certain ingredients out, remove allergens from the product, those kinds of things and we will probably see more of that as those kind of menu practices proliferate through the country.

Chris Bradshaw - Lehman Brothers

Are you seeing anything or are there solutions in the work that adjust portion size at all which and that is the key one for me, because if they are adjusting portion size then I would guess, I worry, would make it to back to supply chain too, the processing side?

Clint Rivers

We have seen the little bit of that but not a lot, but I think what you see is the consumer potentially trading down to lower price meals on the menu. I think you would see there is the lot of the QSRs have probably seen more people go into their value menus and what not versus maybe eating some of the higher end sandwiches and there are certainly some of that going on. Chicken on the calorie count side, chicken would stack up probably everything more favorably relative to some other protein

Especially a grilled product versus a power fried product, a grill chicken breast is extremely healthy and whether it is measuring sodium or whatever it is going to have superior nutritional results than most of the other things on the menu.

Chris Bradshaw - Lehman Brothers

Well, thanks so much.

Operator

Thank you. Our next question will come from Bryan Hunt, Wachovia Securities.

Bryan Hunt - Wachovia Securities

Thank you, just a follow up on your annual contracts. Can you tell us when you cycle through a majorities of those and now when you maybe down to basically zero on your sales mix?

Clint Rivers

We would love to be at zero on January 1. As Rick mentioned there is about 17% of our volume that was contracted prior to January 1 of this year on an annual basis. However, all of those will expire come the end of this calendar year and going forward we would look to negotiate those again with some quarterly adjustment.

Bryan Hunt - Wachovia Securities

Based on your historical experience trying to migrate customers to this 90-day contract. What is the walk away percentage? How many customers have said thanks, but no thanks?

Clint Rivers

Very few.

Bryan Hunt - Wachovia Securities

Very few. Okay.

Clint Rivers

Very few. The reality is although as an industry, we have done a lot of annual pricing historically. Most of their other ingredients are not purchased on an annual basis. The dairy prices may change weekly, their beef prices may change weekly, their bakery prices will fluctuate, so it is really the chicken industry that is the anomaly here. It is not pricing overall and so we are really moving more towards a model to way the other food products are sold at both retail and food service.

Bryan Hunt - Wachovia Securities

Last question, if there is the happenstance that you need more liquidity, and you said you would not consider selling any of your operations. What about rendering or eggs, do you consider those as non-core as and when you look at your product mix?

Clint Rivers

We really do not consider the non-core. They are directly tied to, in most cases, to our processing operations and it is a critical issue to the industry that you be able to handle and process your rendered products. So, I think we actually might be a little bit unique and actually we have been reflecting that in other segments. I think most of our peers; probably reflect that up in their chicken operations as opposed to having them broken out. So, I would not think that the rendering has anything that we would want to divest from our business.

Bryan Hunt - Wachovia Securities

All right, thank you very much.

Operator

Thank you, our next question will come from John Miller, Private Investor.

John Miller - Morgan Stanley

Yes, I am with Morgan Stanley. I was wondering about your Mexico operation, is that profitable?

Clint Rivers

It was, profitable this quarter.

Rick Cogdill

Yes, it was. It a had a pretty decent quarter, all in all had a operating income again just like our US Chicken business, not up to snuff as last year, but it was profitable it made just under $7 million operating income this year.

John Miller - Morgan Stanley

What percentage of your business is that?

Rick Cogdill

It is very small, it is down to about 6% of revenues.

John Miller - Morgan Stanley

We have just had a 25% reduction in the cost of corn and about not that much in the price of meal. If we stay at this level, will you attain the $2.50 costs for poultry?

Rick Cogdill

I think, if you listen to the comments that we have prepared. That the level where we are today on where the market has retreated is inline with the example that Clint gave were now at $6 corn and $350 soybean. We needed breast meat to be at $215 or $225 and $225 to get to normalized profitability and that is more going to be a faction of the selling prices I think at that point than anything and supplies are going to have to be the driver of that.

John Miller - Morgan Stanley

Well, looking down the line we are going to see lower reduction of cattle and hogs, should not that help immensely?

Clint Rivers

It should, I mean that is a part of what has to be rationalized through this whole time of increased cost and still those herds have not gotten reduced to the level that they need to be to be profitable for the producers.

John Miller - Morgan Stanley

The '09 cattle prices are about $0.15 to $0.20 a pound higher, so I mean that should …

Clint Rivers

It is beginning to move in the right direction.

Bob Wright

As cattle and pork prices are increasing given the current economic conditions people should migrate more to chicken and that should help the demand.

John Miller - Morgan Stanley

I noticed the super markets have really taking advantage of the cheap chicken. When I go into the super market and see a $1.99 or $2.29 for a whole bird per pound that is taking advantage of you, is not it?

Clint Rivers

Well I think, many of the retailers have been promoting either whole birds or drum sticks and ties versus breast meat. It is good to hear that some of the retailers are promoting breast meat as well.

John Miller - Morgan Stanley

Yes, but that does not answer the question. I mean they are lapping a dollar on the whole bird price. That is a pretty big increase?

Clint Rivers

Well, we know how we are selling whole birds and I can assure you, they are selling it for $2.29 a pound then they have a pretty good profit, and they will.

John Miller - Morgan Stanley

There is nothing you can do about this?

Clint Rivers

We do not control retail prices.

John Miller - Morgan Stanley

I know, but that is part of the problem there. The pricing is cheap and their pricing is high so you are caught in the middle.

Clint Rivers

Well I do not know that all retailers share that same pricing strategy, but in your example that may well be.

John Miller - Morgan Stanley

Okay, thank you very much.

Clint Rivers

Thank you.

Operator

Thank you ladies and gentlemen at this time we are out of time for questions. So I would like to turn the conference call back over to Clint Rivers.

Clint Rivers

I appreciate you all joining us here today and we look forward to talking to you again at the end of our fourth quarter. Thank you.

Operator

Thank you ladies and gentlemen this conference call has now concluded you may now disconnect at this time have a great weekend.

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