Pilgrim's Pride Corporation (PPC) Q4 2014 Earnings Report, Transcript and Summary

Good morning, and welcome to the Fourth Quarter and Year-End 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 Dunham Winoto, Director of Investor Relations for Pilgrim's Pride. Please go ahead.

Good morning, and thank you for joining us today as we review our operating and financial results for the fourth quarter and year ended December 28, 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, Chief Financial Officer. Before we begin our prepared remarks, I'd like to remind everyone of our Safe Harbor statement. 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 actual results to differ materially from those projected in these forward-looking statements. Further information concerning those factors has been provided in today's press release, our 10-K and our regular filings with the SEC. I'd like to now turn the call over to Bill Lovette.

Good morning, everyone, and thank you for joining us today. We generated $2.1 billion net revenue during the fourth quarter of 2014, resulting in adjusted EBITDA of $368 million or 17.4% margins to account for the early retirement of debt and foreign currency translations. Our net income of $167 million compared favorably to the same quarter of 2013 with a 17% year-over-year increase. Adjusted earnings per share was $0.83 compared to $0.55 in the same quarter of last year. For the full year of 2014, net revenues were $8.6 billion versus $8.4 billion from a year ago, while earnings were $2.74 per share compared to $2.12 in the year before. Q4 was a strong close to a year of what we believe is another step forward in our goal to becoming the top operator in the poultry industry. Critical enablers are our portfolio strategy and management model, which yielded diversified sales mix, ensuring we can adapt quickly to changes in market supply as well as endure volatile environments while being relentless on operational efficiency. It is important to take a few minutes to remind everyone that we do not expect to follow the full peaks and troughs of the broader industry pricing trends. Rather, our portfolio strategy means that we will benefit from strong markets and at the same time be buffered from some of the impacts of lower pricing, given our lower overall volatility. The net benefit is we believe that we will have a better margin structure relative to our peers over an extended period of time. In line with this strategy, we are continuing to increase our leg meat deboning capacity in order to diminish much of the negative impact of pure commodity sales and demand uncertainties in export markets, while at the same time taking advantage of evolving consumer demographics and taste within the U.S. market. Also, by increasing leg meat deboning, we will be able to offer a more complete mix and become a more valuable partner to our key customers. Yet another example of our diversification strategy is in our -- in large bird deboning, where, in a period of 4 years, we've transformed from a minor player to the leader, which contributes to our superior blended margin profile. More important, though, we have created a strategy to diversify both geographically and in product mix within this category to take advantage of emerging trends and demand. We are also continuing to strengthen our key customer relationships by providing them the ability to source a greater variety of products from us than ever before in order to make our company a valued partner. We believe this sort of partnership, many of which tend to be longer terminator, is important as we think both sides will benefit in an up as well as a down market environment. Although we've won multiple awards from our customers, we are not satisfied with where we are now and always striving to improve our ability to better service these accounts. We're continuing to find ways to grow our broad-line foodservice business by looking for greater innovation and in our ability to provide the industry's best mix of quality, product, reliability and support. We are building on what we believe is a competitive advantage to our company, and that is our culture and our people. We are seeing a lot of excitement as we roll out new tools and methods to improve our sales mix and operational efficiency. We finished 2014 in line with our target for yield and plant cost improvements. And through successful execution and feedback loop, there's a foundation of 0-based budgeting, we've identified another $200 million in cost savings for 2015 over 2014. While we recognize the value of efficient plants and equipment, we believe the opportunities we've identified are a direct result of our people. Our team has only just begun to create value through 0-based budgeting method and through the continuous cycle of identifying gaps and then closing them through our management method. We believe we will set new standards for the industry. Turning to Prepared Foods. Our strategy is gaining momentum. First, we believe we are doing a much better job with matching our raw material costs and revenue structure as a way to deliver more consistent earnings. For example, we are aligning the way we sell our products with the way we procure our raw materials, thus limiting our exposure to fluctuating commodity markets. We are now very diligent in requiring our sales teams to ensure that within each of our contracts, cost and revenue are matched accordingly. In addition, we are also layering in extra deliverables such as SKU rationalization, exiting unprofitable business, diversifying customer base and maximizing product mix. We are doing this -- all of this as we strive to be the best in class in every category we compete. As a part of that interested initiative, this year, we're planning significant investments in our fully cooked operations to capitalize on increased demand for these products. Such level of discipline and commitment to growth will allow our Prepared Foods business to provide more consistency in our earnings over time. Internationally, we are also continuing to refine our value-added strategy by diversifying our product mix further, developing access to new markets and pursuing opportunities to enter new channels abroad. This diversification is proving especially relevant today as we encounter some headwinds in some of our traditional export markets, including recently imposed trade restrictions due to isolated cases of avian influenza on the West Coast and more temperate demand from oil-dependent market as these economies are impacted by currency devaluations and general macro instability. Despite this short-term volatility abroad, we continue to believe our diversification investments we've been making will help us ride out the near-term market conditions by maintaining a more balanced level of inventories and also developing sufficient demand for our products elsewhere. Our affiliation with JBS is, of course, a competitive advantage as it strengthens our insights into export markets relative to our peers by providing us with a more effective overall market access as well as superior market intelligence. We believe that for the long term, chicken produced in the U.S. will fill a key demand function for strong growth and protein consumption around the globe, especially in developing economies. As an example, even with the challenges faced in 2014, with the closing of the Russian market, trade barrier feud of avian influenza found in wild birds in Washington and Oregon. Exports of total U.S. poultry set a record for volume shift at more than 4.1 million metric tons. All our exports, excluding chicken paws, accounted for the largest component of this at 3.1 million metric tons. So in summary, despite near-term challenge of a strengthening U.S. dollar and trade restrictions, the future growth of our exports is very bright. We saw much improved Q4 results in Mexico compared to a year ago despite some weakness in pricing at the beginning of the quarter, which was in part due to low seasonality. That said, prices rebounded strongly by the end of Q4, while inventories have remained quite low at the beginning of this year, both of which are positives. With this as a backdrop, even with the effects of a stronger dollar, we've started the year on a positive note and we expect Pilgrim's Mexico to be a strong contributor for 2015. At this time, I would like to share with you a few updates regarding our projects in Mexico. The construction at Veracruz is progressing well. And although we faced delays due to higher-than-normal rainfalls in the past 5 months, we're scheduled to begin production this summer. On the Tyson de Mexico front, we are progressing well, and we expect the final outcome from Mexico antitrust authorities during Q1. We expect no change to our prior outlook for stable corn and soybean meal in 2015 due to near-record yields and stocks in the U.S. and South America. And as such, we do not anticipate input costs to present a barrier to our ability to deliver results this year. In addition, a stronger U.S. dollar should encourage more planting of corn and soybean with our farmers abroad, which ultimately will be beneficial for us. We see industry supply growing roughly 3%, in line with current ag sets and our expectations. We continue to see demand more than outpacing supply, even if there is a slight moderation in some export models. We would like to point out that on the supply side, recent pullet placement data is not fully reflective of domestic growth as some ags have been diverted to Mexico in far greater number than historically, given the strong biosecurity environment of the U.S. Also indicative of a fairly robust demand environment, inventory has remained relatively low levels with cold storage at 6% below a year ago. Note that this represents less than 1 week of production, a metric we consider quite healthy for our industry as a whole. As we begin the year, pricing has held up with breast meat and tenders at higher levels than last year. And despite temporary uncertainties in the export markets, cutouts have also remained higher than last year. We continue to see positive signs for demand, and chicken continues to be the best-valued protein available for retail and foodservice. Having just closed our January monthly results, we're pleased that our strong financial performance and cash flow generation continues, and we're very delighted that we are off to a strong start for 2015. With that, I'd like to ask our CFO, Fabio Sandri, to address our financial results.

Thank you, Bill, and good morning, everyone. We recorded $2.1 billion in net revenue during the fourth quarter 2014, resulting in adjusted EBITDA of $368 million or 17.4% margin. That compares to $2 billion in net revenue and an adjusted EBITDA of $197 million or 9.6% margin the year before. Our net income of $167 million compared favorably to the same quarter of 2013 with a 17% year-over-year increase even after the impact of $25 million due to the early retirement of the 2018 notes and $23 million in noncash foreign exchange translation due to the rally of the dollar against the Mexican peso at the end of the year. Adjusted for these extraordinary items, earnings per share reached $0.83 per share compared to $0.55 in the same quarter of last year. For the full year 2014, net revenues were $8.6 billion versus $8.4 billion a year ago with an adjusted EBITDA of $1.4 billion compared to $810 million. Earnings per share were $2.74 compared to $2.12 in the year before. Our results were commendable for both U.S. and Mexican operating units throughout the entire year. Our SG&A expense has continued at 2.2% of net sales despite the increasing incentive accruals for the level of performance our team members have delivered. The level of competitiveness of our SG&A, focusing on adding value to our operations, shows our commitment to operational excellence, not only in the industrial standpoint, but also from our sales and support teams. The strength of our balance sheet is due to our relentless focus on cash flows from operating activities, continuous management of working capital and disciplined investment in high-return projects. During the quarter, we generated $206 million in free cash flow after taxes and after $41 million in capital investments, leading us to a net cash position of $572 million at the end of the year. Our strong cash generation leaves us plenty of room to continue to seek the right investment opportunity. It also provides us with the ability to increase our plans for capital projects in 2015, similar to what we did in 2014. We will continue to focus on opportunities with a rapid return on our investment and projects that increase our efficiency, quality and safety. For 2015, we've dedicated funds to a wastewater facility upgrade, leg meat deboning and fully cooked expansions, infrastructure and various cold chain projects. Each of these projects improves our ability to provide the best quality product to our customers while returning value to our business. In total, we expect to invest $175 million in 2015. Given our strong cash flow generation, last month, we announced a special dividend payment of $5.77 per share for a total of about $1.5 billion based on the existing number of shares outstanding. We believe the special dividend is proof positive of a promise we made 3 years ago when we implemented our strategy to optimize our capital structure and a testament to our financial discipline and our confidence in the future. True we are confident of our ability to return cash to shareholders. We exercise great care in ensuring that the dividend payments not only create shareholder value, but also preserves our flexibility to pursue our growth strategy. Our leverage is below 1x EBITDA and our commitment to pursue the right growth strategy remains intact. We will continue to review each prospect accordingly to our value-creating standards. We are also pleased with the support from our bank group to the new facility we just executed, where we were able to secure funding for the company at very competitive terms. With this new facility, we expect the interest expense for 2015 to be in the range of $35 million. Operator, this concludes our prepared remarks. Please open the call for questions.

[Operator Instructions] Our first question is from Farha Aslam of Stephens Inc.

Can you talk about the supply-demand outlook for the full year '15 as well as into 2016, kind of what you see in terms of supply growth and your confidence around that 3% number, what you see supply growing in 2016 and how you expect demand relation to that supply?

Okay. So we see demand currently and for the rest of the year strong, actually. As I've mentioned, Farha, in the prepared remarks, chicken still represents the best value in protein. Although we've seen some movement in pork prices, we don't see that as an imminent threat to chicken demand. And it's very -- demand is very solid at retail tray pack chicken now and we believe that'll continue to grow. Rotisserie chicken is sold at retail daily. Demand continues outsupply -- outpace supply and our pricing and the industry pricing is reflective of that. Foodservice fresh cut-up chicken demand is very strong, and we're growing our business in this segment by double-digit percents. And then in Prepared Foods, we see fully cooked parts and school foodservice demand continue to outpace industry capacity. So on the demand side, it looks very favorable for this year. On the supply side, one of the leading indicators that we always look at is our breeder supply. And if you look at current -- size of the current breeder flock, it's about 53 million. I think the change that we began to recognize last year is the increase of exports of fertile hatching eggs to Mexico. If you look at September, October and November, fertile hatching egg exports to Mexico were up over 200% for those months on average versus the same period a year ago. And so if you take 53 million birds that represents the current flock, and then you set aside, if you will, about 5% of that flock or 2.65 million of those, then you have a breeder's flock supply for the U.S. market of 50.35 million. And if you go back and compare that number to the last couple of years, it fundamentally has not grown. So we still see that hatching egg supply is not going to be burdensome in terms of increased production. And then I looked at some numbers supplied by Agri Stats earlier in the week and found some interesting facts. If you go back to 2008, the industry slaughtered 8.35 billion head. And by 2011, that slaughtered head had declined by approximately 8% to 7.7 billion. And it's actually remained about that same level through 2014 at about 7.7 billion. If you look at live weight pounds produced, it was 47.1 billion in 2008. It declined to 45.06 billion in 2011. And in 2014, for the first time since 2008, it reached 47.3 billion, so only 200 million more pounds above 2008 levels. And then on the average weight side, the average weight in 2008 was 5.64, and it's averaged just above 6 from 2011 through 2014. So with all of that data in mind, what it tells me is the industry remains fairly disciplined on the supply side and demand has been increasing for chicken against the backdrop of increasing beef and pork supplies.

Farha, I would just add on to the demand. We're still evaluating the impact of the lower gas prices. The American consumer is experiencing more available income and there could be a potential improvement, especially in the foodservice sector.

That's very helpful. And just as a follow-up on the port issue that we're seeing in -- on the West Coast, do you anticipate any near-term impacts to your business in terms of both chicken as well as potentially more competition from pork and beef?

Great question. So far, we've not been affected by the West Coast slowdown as most of our exports are shipped off the East Coast. One of the things that we're keeping our eye on, though, is as other producers and exporters divert product to the East Coast ports, that's causing more product to roll through East Coast ports and thereby creating competition for shipments off the East Coast. So it's certainly in our interest to have that issue resolved as soon as we can so that we could keep all product flowing for the export market.

Our next question is from Brett Hundley of BB&T Capital Markets. Brett M. Hundley - BB&T Capital Markets, Research Division: Bill, very respectfully, I will admit that I kind of chuckled at your -- how you guys won't ride the peaks and troughs of the industry because I'm pretty sure you're riding the peaks right now. Your performance is very good in the U.S. compared to the spot margins that we calculate. And so maybe you can give investors more color as to how you -- how your business is insulated if and when the market does eventually come off. And maybe as a part of that, you can talk about the cost savings. You guys have called out a substantial number of cost savings over the past few years and I'd be curious to see how you guys think about the level of those cost savings that the company can continue to hold onto going forward, even as market conditions eventually come off.

Okay. I'll start somewhere in there with those questions. Thank you, Brett. I would tell you that during the peak times of pricing for spot commodity chicken, we absolutely did not realize the peak from a competitive standpoint. We saw other producers realize much more from that period than we did, but I think it's a testament to our portfolio strategy that in periods like Q4, we still performed at a very high level despite a decline in pricing. And it's really not very complicated, Brett. We are -- we have a very balanced portfolio of businesses, from retail tray pack, from fresh foodservice, the smaller birds that go into the bone-in fried chicken QSR segment to the retail rotisserie deli. And then as I said, we've become the leading producer now in large bird deboning. But it's been our strategy even within those segments that also is a huge contributor to our consistency of earnings. For example, in the large bird segment, we have 8 plants, but yet we have different strategies, whether it's in certain geographies or even in product mix among the large bird deboning segment. And we crafted it that way because we think that we'll continue to see demand change over time for different parts, prepared in different ways, and we want to remain relevant to the marketplace in that respect. So again, it's really our portfolio strategy that creates that consistency of earnings and insulates us from the severe peaks and troughs that we see.

Just, Brett, in terms of the operation improvements, I think it's part of a greater management model that we are implementing that is based on a culture that is result-oriented, data-driven and [indiscernible]. And I think the key fundamental thing is to integrate all levels of our organization into the process of identifying the opportunities and setting the action plans to capture it. So we believe it is a continuous effort and it continues to be something that will drive value for us. Brett M. Hundley - BB&T Capital Markets, Research Division: Okay. And then just my second question is on your Prepared Foods business. I was just hoping to get a little bit of an update here, just about how you feel that this business is trending, if you can kind of reiterate what percentage of mix. I think it was up to -- potentially up to 1/4 of your business, but if you can just touch on that. And also where you guys have bigger exposure. Are you bigger in foodservice there or retail?

Yes. So in our Prepared Foods business, I will remind you that over the past 4 years, we've actually decreased that business as a percentage of our total company. We have it now at a level or size. I think it's roughly 20% of our total sales, and we think that's the right size for now. But we're interested in growing that business because we think we can do so with better performance than historical at Pilgrim's, and we want to capture growth trends and demand for those products. And a couple of examples of that I mentioned, we see school foodservice demand growing and there's not enough industry capacity to keep up with that growth. And also, we see certain fully cooked parts, notably wings, increasing demand. We have a great brand for foodservice and deli with our Pierce brand, and we're able to capture a premium from the marketplace because of the innovation within that brand, the reliability, the service, the quality, and it's been continuous a great brand for us. So as I said in the prepared remarks, we have some aggressive investment plans for increasing our fully cooked capacity there in order to keep up with increasing demand. I would tell you that business, from a foodservice versus retail standpoint, is more foodservice but it's growing at retail and deli as opposed to the branded offering in the frozen section for us.

I'll just add to that, Brett. As a part of our portfolio, the Prepared Foods will also provide some consistent earnings to us. We -- and we have the opportunity to grow our business by outsourcing meat outside Pilgrim's in our buy versus growth strategy. Brett M. Hundley - BB&T Capital Markets, Research Division: You guys mostly source -- you source boneless, skinless, outside the company for that business, correct?

We do.

Our next question is from Adam Samuelson of Goldman Sachs.

So a couple of questions and maybe first, Bill, touching on some of the market kind of volume kind of growth expectations on the supply side that you alluded to and touching on Brett's question just now. Can you talk about what your own internal sales volume expectation would be for 2015 and if you actually intend to actually raise more chicken internally? Or would any volume growth on the sales side really come from externally sourced meat?

Yes. From a production side, Adam, I think we'll be roughly in line with our market expectations of growth. And then as we grow our Prepared Foods business, over time, we'll see more of that product sourced on the outside, in other words, from chickens not produced by Pilgrim's or slaughtered by Pilgrim's. So that's yet another way that we can continue to grow our company, is by adding Prepared Foods capacity and using meat purchase on the outside.

And also on the Prepared, if we try to match the prices that we sell the product in a fixed price, it only makes sense to buy a fixed price from external because otherwise we will not be hedging anything if we source from internal.

Right. So what -- can you just help me think through how much of your sales volume today or the actual on -- is sourced externally or how much really are you short chicken fundamentally?

Well, we don't disclose that specifically, but I would tell you that we've been increasing the amount of product purchased on the outside for Prepared Foods and that will continue to grow in the future.

Okay. That's all very helpful. And then maybe a little bit more color on the cost-saving initiatives and help us think through some of the key buckets there for 2015 on the $200 million. And can you quantify the impact of lower gasoline and diesel prices on your live production costs? And how much of that would be included in the $200 million target?

Yes. So the $200 million is much like last year, equally balanced between plant cost reduction and yield improvements. Those are the primary sources of that value creation and has been for the last 3 to 4 years. An increasing share of that has come from plant cost reduction as opposed to yield improvements over the last probably 18 months, and we think that, that will continue to be the trend. What was the second part of your question again?

The impact of lower gasoline and diesel prices on your live production costs and if that's included in the $200 million kind of value creation number.

Actually, we did not include that because we had wrapped up our budgeting process before we saw the dramatic decline of gasoline prices, so that's not in there. We would expect that to have not a great amount of cost reduction live production as more of the live production cost is influenced by corn and soybean meal, which also tracks to the decreasing level of all commodities over time. And so again, I don't see that being all that much related.

Just in terms of the opportunities, especially in labor management, we are implementing a new system where we tape every single operation. We identify the motions and understand the most effective way of deboning a chicken. So that is very important to us as a good tool to manage our labor.

Yes. Just a few more points on that. So what Fabio is referring to is we actually videotaped each individual job, and we run the video through a software program that engineers each job to be as efficient from a motion standpoint as possible. So it does a couple of things: one, it points us toward having the right amount of people per job, and it also makes those jobs more efficient and helps on our employee safety as well. So it's been a great program that we actually discovered from JBS in the feeds business and we're applying it to our chicken business and it's having a great effect, both from a safety standpoint and an economic standpoint.

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

I like to how you kind of phrased the whole demand side. What I was hoping for is, do you have any anecdotal stories within the company that has shown a change of demand function of either you're seeing more -- a shift within the portfolio, a sort of anecdotal evidence? It's just more interesting to get, like, actually a company-specific example. That would be great.

Yes. I alluded to a couple, Ken. School foodservice. So that's fully cooked products, a lot of patties, nuggets, strips that go into the school lunch program where the government purchases commodity chicken and then we take those chickens, debone them and turn them into value-added further processed products for school lunch. There's -- if you look at all the government programs combined, there's something like 50 million meals served every day, and we're one of the largest participants in producing those meal components that the government purchases. And that part of the market is growing. At the same time, some industry capacity has been taken out by our competitors and so we're enjoying actually more demand than we have capacity. And so that's one way that we're addressing investments in our fully cooked capacity. On another side of the market, one of the fastest-growing categories in the past few years has been the rotisserie deli logs sold by retailers. It's been a very popular item, represents a great value for consumers. We've actually tracked some consumer research that suggests consumers are going into retailers and -- for the sole purpose of buying those rotisserie chickens, where they would buy 2 of those chickens or 3 of those chickens, take them home, have multiple meal occasions from those chickens in various forms and that would be the primary point of purchase for that store visit. And just like in school foodservice, supply in that category has not kept pace with demand and we're the largest participant in that category. So the net result of that is we've increased our revenue per unit quite handsomely for that category.

So my next question is -- sorry, on the Mexico side, do you plan on pricing through some of the FX? And how quickly can you do that?

Pricing through the currency?

The currency. I think that Mexico will adapt to their own supply and demand. And rather than passing through the FX, I think that will come into prices through the increasing in cost of grain. Most of the grain that Mexico uses is imported from the U.S. So that will be an impact for them. So we expect the prices in Mexico to adapt to that reality. Of course, there is always a lag on changing of prices.

And I think the most important evidence of what Fabio said is through the recent devaluation of the peso to the dollar, we've not seen chicken demand go lower. It actually continues to be very strong in Mexico. That's one of the export markets where demand for leg quarters, for example, has remained very strong. And so that's what give us confidence about 2015 for Mexican business.

And again, on Mexico, it's one of the economies we believe is developing and there is a lot of growth in demand for proteins in those type of economies. So we expect them to continue to grow. And they are, in a way, not being able to grow in line with the demand -- the supply because of disease in the country and because of the lack of capacity.

No, I'm just trying to figure out why you excluded the FX from your results or how you said it. And I'm assuming that you think it's a temporary impact, that you'll recover it, I guess, is kind of what I thought that you were implying.

Well, that impact of the FX is just a translation of the assets that we have in Mexico into U.S. dollars. So it's a noncash translation exchange.

Our next question is from Akshay Jagdale of KeyBanc.

This is actually Lubi on for Akshay. I just wanted to ask quickly about M&A. Could you maybe just give us a sense of your level of interest in doing a deal and also whether you're seeing anything out there that interests you and maybe what the valuations look like?

Yes. So our interest in growing through acquisition remains very high, very strong. The issue is making sure that we find the right target at the appropriate value. And I think we've demonstrated that in 2014. We laid out our strategy in March at our Investor Day, and that same strategy remains today. We see chicken track where -- either through geographic voids or brand voids. We may find something compelling. And then we have a branded processed foods track that we're also looking at. And if and when we find the right value in that space, then we remain interested there as well.

That's helpful. And then just wanted to follow up quickly on the topic of your margins, your U.S. chicken business margins versus the industry. So at its Investor Day in December, Tyson said that they think when the industry is at breakeven levels, they expect their chicken -- their U.S. chicken business to earn around 5% margins. I'm just wondering if you could give us a sense of what you think is sort of where you would expect your business to be at the trough of the chicken cycle.

I think you can compare it through yourself our margins to those margins that are publicly available. And I think that tells part of the story as to why we're confident in our portfolio strategy. We're now at -- in the top third, the top quartile profitability in the industry, and as I said before, we're not satisfied with that. We're -- our strategy and our vision calls for us to be the best operator, and we're going to work very diligently in pursuing that.

And Lubi, we benchmark our profit from operations with all the other companies, and like Bill mentioned, being the top third and our target is to be the best. We'll always have a premium over the average company. So if you're benchmarking the average company as the reference, we will always be above that.

[Operator Instructions] Our next question is from Ian Caster [ph] of IKK Holdings [ph] .

So I want to clear something up here. I have 2 questions. The first question is, it seems like everybody's asking questions about you being at peak of the cycle. But as I see it and I see spot -- where spot margins are and I see grain and the outlook and I see what's been weighing on the back half of the bird and some temporary issues in terms of export bans and the West Coast port situation, why, when I'm modeling out your company, I'm getting closer to $3.50 than $3 in earnings for '15 and I'm getting to a pretty good year in '16. So why are we at peak, which is what everybody seems to think, is part of question one. Question two, part 2 of question one is for supply, everybody seems to think that the back half of the year is going to be up 7% to 9% based on pullets up 5 and weights up 4. I think we got to clarify that for some people in terms of what you're seeing in terms of egg sets and weights. Weights right now are currently running up 4, if I'm correct, but the back half has material comparisons versus right now. So maybe if you could speak to that because I'm kind of thinking about weights in the back half kind of flat to up 2 max. So those 2 questions will be my part of question one.

Okay. Thanks, Ian. Well, we've never said that we're at peak, so that's not something that we focus on. What we have talked a lot about and continue to talk about is our portfolio and the consistency of earnings that that's going to provide no matter where we are in the cycle. And we did that very deliberately early on when we arrived and created the vision and the strategy with that in mind. In terms of the weight, I went through, I think, and answered Farha's question sort of where we've been the last 4 or 5 years in the industry and I think those numbers demonstrate that there has been structural change in -- on the part of chicken -- the chicken industry. And the fact that since 2011, we've remained roughly on an average weight per head basis at about 6 to 6.1 pounds per head. I would also remind you that from a breeder supply standpoint, if you back out the amount of breeders that it requires to ship 3.5 million to 4 million dozen hatching eggs to Mexico, which is now the levels that we're seeing, then you get back to a breeder flock size that's really no larger at this moment than we've had the last couple of years. So even though we've seen an increase in pullet placements, going back as far as almost a year ago, those eggs are not finding their way back to the U.S. supply. And so I don't think that certainly for the current environment, first half and even into the back half of 2015, that we have a huge runaway in supply risk out there. And then as you get into 2016, until we see that change in the breeder flock in a large way, then I think the supply situation remains approximately what it looks like today.

And also, I will add that in terms of peak and valleys, since 2008 and 2011, a lot of capacity was taken out of our industry and we don't see a lot of capacity coming back online. So what we see is the supply not growing at the same pace as the demand, so what we see is a continuous time where supply and demand is in balance.

Got it, got it. So just taking that all and trying to understand relative to where pricing is and supply is, 2015 should be -- seems to be shaping up as a better year than 2014 and indications are that 2016, I know it's early, should be a pretty good year.

I can't argue with your assertion there.

Okay. Got it. And then the second question is just you're going to be throwing off a ton of free cash flow. You mentioned about doing a value-accretive M&A. Can you talk about other priorities of cash in terms of you just paid out a large special dividend, but let's just say you're unable to do any large accretive M&A just because nothing comes your way this year, what your uses of cash will be.

I think that we mentioned before we're continuing to invest in our company. So we expect to invest $175 million in CapEx this year in our operations. And on the other alternatives, we're looking through all the other alternatives like dividends, like share repurchases and all the other alternatives to create shareholder value.

Got it. Got it. All right. And then just lastly, on the demand side, is there anything that's temporary that you're seeing in nature? Or is everything that you're seeing kind of structural in that this demand should outpace supply for not only the current quarter but for the upcoming future this year and next?

Yes, I don't see anything necessarily temporary that we're seeing. What we've been seeing the last, really, couple of years continues to be the trends. As I mentioned in some of the categories of demand growth, don't see that changing.

I think the only thing that can be temporary but we have not included in our projections and we haven't felt the full impact is the reduction in gasoline prices that will create more available income for the consumers. I don't know how temporary is the low gas prices, but that could give a boost, especially to foodservice.

Got it. Got it. So wrapping it up, 2015 is off to a better start than '14 and '16 looks to be a good year as well.

Sounds great to us.

[Operator Instructions] I'm showing no additional questions. This concludes our question-and-answer session. I'd like to turn the conference back over to Bill Lovette for any closing remarks.

Thank you, and though we're pleased with our 2014 results, we will not be complacent. We'll continue to drive ownership and accountability at every level in our company, even as we develop new tools and methods to further improve our sales mix, operational efficiency and margins. We think about in '15 as another great opportunity as fundamentals so far are shaping up to provide another positive economic environment for poultry suppliers. As we begin the year, demand for chicken has remained strong, outpacing supply. And with these improvements we've implemented, Pilgrim's is well positioned to reap the benefits. Thank you, all, for joining us today.

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