Pilgrim's Pride - Earnings Call - Q1 2019
May 2, 2019
Transcript
Speaker 0
Good morning and welcome to the First Quarter twenty nineteen Pilgrim's Pride Earnings Conference Call and Webcast. All participants will be in a listen only mode. At the company's request, this call is being recorded. Please note that the slides referenced during today's call are available for download from the Investor Relations section of the company's website at www.pilgrims.com. After today's presentation, there will be an opportunity to ask questions.
I would like to now turn the conference over to Dunham Wanato, Director of Investor Relations for Pilgrim's Pride. Please go ahead.
Speaker 1
Good morning and thank you for joining us today as we review our operating and financial results for the first quarter ended March 3139. 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 eight Ks and are available online at www.sec.gov. Presenting to you today are Jason Penn, 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 disclaimer. Today's call may contain certain forward looking statements that represent our outlook and current expectations as of the day of this release. Other additional factors not anticipated by management may cause 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 ks and in our regular filings with the SEC. I'd now like to turn the call over
Speaker 2
to Jason Penn. Thank you, Dunham. Good morning, everyone, and thank you all for joining us today. It's a pleasure to join you this morning on my first earnings call as the CEO of Pilgrim's. It's an honor to serve in this role, and I'm extremely excited to be leading this team to capitalize on the many opportunities we have ahead of us.
Before we begin, we would like to express our gratitude to Bill Lovett. We wish him all the best and thank him for his leadership for defining our strategy, executing it and extracting outstanding results to put us where we are today as a global leading producer of chicken. Since we began our journey eight years ago, we have considerably improved our relative performance, margin profile and minimized volatility from specific market segments. My thirty year experience in the chicken industry has taught me the value of people and quality. Moving forward, we will be placing additional resources in these two areas to differentiate ourselves further from the competition.
We are extremely fortunate to have great team members and we will continue to invest in our people as well as innovate and improve the quality of our products. We will continue to execute upon our existing strategy, which has made us a leader. We'll focus on people, food safety and quality, relentless pursuit of operational excellence, emphasis on key customers and optimizing the mix of our portfolio. As part of the management team that originally developed this strategy, I'm deeply committed to continue executing this methodology as a base for our future growth. Our key customer approach has been success and will continue evolving to be even a more valuable partner.
We have materially improved our competitive position with a diversified portfolio of on trend products and brands. We significantly strengthened our presence in Mexico and extended our international footprint to The UK and Europe, giving us a leadership position worldwide. We are committed to continue extracting operational improvements, strengthening our growth profile and delivering even better, more consistent financial performance. For the 2019, net revenues were $2,720,000,000 versus $2,750,000,000 from a year ago, resulting in adjusted EBITDA of $2.00 $4,000,000 or an 8% margin versus $272,000,000 a year ago or 10% margin. Adjusted net income was $87,000,000 compared to $132,000,000 in the same period in 2018, resulting in adjusted earnings of $0.35 per share compared to $0.53 per share in the year before.
We'd like to thank our team members for producing a solid start for 2019. Despite facing differing market environments across our global footprint, we were able to deliver a sequential increase in performance. In The U. S, we experienced a much better environment, particularly in commodity large bird deboning. Momentum in our prepared foods business has continued and the improvement has been accelerating.
Input cost headwinds in Europe have continued to impact the operations during the quarter and Mexico encountered softer than expected seasonal performance. The Q1 results once again illustrate the effectiveness of our portfolio strategy, which gives us a well balanced consolidated performance despite the volatility of specific market segments. We will continue to refine our portfolio to better adapt and respond to individual market dynamics and give us a better relative performance over the competition. We believe this approach will give us a higher and more consistent results for the mid to long run and minimize the full peaks and troughs of the volatile commodity sectors. We will also leverage our key customer strategy to earn more business and drive increasing growth beyond just the underlying market conditions.
Following a very challenging market in 2018, U. S. Commodity large bird deboning rebounded well and improved sequentially through Q1. As we indicated on the last call, we saw an earlier than seasonal increase during December and the momentum was maintained throughout the quarter and into Q2. Commodity boneless prices have already exceeded the levels comparable to a year ago and are close to the five year average.
Wing prices are near historical highs. While we typically see a seasonal uptick in overall chicken demand during Q1 as we see more chicken consumption after the holidays, we believe this year the increase is even more pronounced as retailers, foodservice operators and consumers are recognizing and reacting to the attractive prices for chicken. After promoting beef and pork for much of last year, retailers and QSR operators are back to more normal chicken featuring activities. Also given the evolving global situation of ASF, African swine fever, more pork and beef are moving out of The U. S.
And reducing overall domestic availability, which is positive for chicken demand and pricing. We believe these are favorable signals for the upcoming summer grilling season, and we expect to have further pickup in demand for chicken. In the other less commoditized sectors, customer demand was in line with normal seasonality. Our leading position in these markets and differentiated product offerings have continued to give us a competitive advantage relative to our peers with a more narrow market approach. The margin stability within our small bird and case ready operations has continued to provide us with a strong and consistent margin platform, while our presence in large bird deboning provides for the potential to capture the upside.
We remain committed to deploying our key customer strategy to drive greater overall growth. Revenues from key customers have more than doubled over the last eight years, reducing our relative dependency on pure commodity sales. Beyond driving more growth, our key customer approach promotes trust, enhances long term relationships and strengthens our margin structure. We are continuing to increase the percentage of specialty birds including no antibiotics ever and organic attributes and expect them to be over 40% of our U. S.
Portfolio during 2019, up from less than 20% just a few years ago. Mid last year, we moved one of our large bird deboning plants to full NAE, the first full one for us in this size category in support of the plan to double our NAE contracted volume of large bird debone offerings in 2019 versus 2018. We are expanding our breast meat portioning capabilities and increasing our dark meat debone capacity by 25% to deemphasize our exposure to the volatility of pure commodity markets. We're continuing to install more front half automatic deboning equipment to support growth for multiple key customers while minimizing the impact of tight labor conditions to optimize our margins. As the largest producer of small birds in the industry, we are well positioned to benefit from the positive market dynamics.
We expect supply in this category to continue to be constrained as producers are not adding more capacity and likely to continue to trim production or even move away from the segment, resulting in much more resilient pricing versus other sectors. Within Prepared Foods, our results are accelerating in pace. We grew a robust 17% in revenue and 15% in volumes year over year during Q1, respectively. We've been heavily investing in our U. S.
Prepared Foods business to increase our capacities and capabilities to meet customer expectations. Team members are driving growth while continuing to pursue future opportunities through more concentrated efforts in innovation and marketing. The investments in these operations and the focus of our people have yielded an increase in performance and further growth prospects remain available. We're generating the expected performance and are very pleased with the results. We anticipate prepared foods to account for a larger portion of our total results over the next few years and we continue to reduce the volatility of our commodity sales mix.
We continue to build out innovation capabilities in the branded business and we will be launching new prepared foods items in both the Just BARE chicken and Pilgrim's brands. There's also Just BARE chicken new item development in progress in deli and in the fresh meat case. In addition, we continue to increase the distribution of Just BARE expanding into the California market and will grow with Amazon as they build out their fresh grocery delivery business. We're supporting the branded business with advertising, the Who Makes Your Food campaign for Just BARE chicken featuring our growers and expanding the campaign to capitalize on the summer grilling season in addition to supporting the Just BARE rotisserie with digital and radio advertising. Just BARE chicken packages from our state of the art facility in Minnesota feature a trace code allowing you to learn where your chicken was raised.
Are also supporting the Pilgrim's brand with advertising, leveraging the work of our team in Mexico. All of these initiatives strongly support our branded business and are driving growth with key customers. Our export business performed well during Q1 and we expect the strength to be sustained. U. S.
Frozen inventory is at record lows and expect export pricing has correspondingly increased approximately 16% from the end of Q4. Even with this, U. S. Export dark meat prices continue to represent an attractive value relative to other proteins. We are continuing to improve our dark meat mix away from pure commodity to further strengthen our margin profile.
We're diversifying our country of destination mix and are relentless in developing alternative sales strategies in the event we counter any trade disruptions due to animal diseases or unfortunate and unforeseen disputes with existing trade partners. We experienced weaker than seasonal market conditions in Mexico during Q1, better than expected growing conditions and softer seasonal demand have dampened prices. Chicken demand was also affected by more availability of imported pork from U. S. During the quarter, but we believe chicken demand can continue to grow in line with historical rates longer term.
The environment has already started to recover in Q2 and prices have begun to react positively with growing conditions reverting back to normal, demand improving and competition from pork imports declining. Our team's focus on operational excellence and offering differentiated products continues. We grew volumes by more than 20% in prepared foods in Mexico during Q1, which is a record. As part of our strategy to strengthen our competitive positioning, we are maintaining the pace of new innovative product introductions. Our prepared foods business is growing at a double digit rate and generating excellent results under both premium and DelVia brands, both of which have continued to receive very favorable acceptance by consumers at retail, club stores and QSRs.
In line with the whole industry, our European operations continued to be impacted by a significant increase in input costs, including heat ingredients, mainly wheat due to the prolonged hot weather last year as well as significantly higher utilities, labor and packaging. These increases resulted in excess of $18,000,000 in the quarter, of which $13,000,000 were partially offset by cost reduction initiatives, synergies and price adjustments of some of which have taken longer and expected to be passed on and reflected in the contracts. Volumes are flat year over year, but 2% higher sequentially versus Q4. Despite the reduction in results, we are starting to see an improvement month over month as we adjust our prices based on our key customers' contracts and expect a full recovery within our pricing models. We're also entering the barbecue summer season when we can expect profitability to return to at least similar levels seen last year.
We'll continue the emphasis on cost optimization, cost control, synergy capture and a culture of constant innovation. We are nearing the end of the integration process and we have achieved a run rate above our initial expectations of capturing $50,000,000 in synergies over two years, which includes benchmarking operational efficiency and productivity, increasing yields and optimizing labor at our European operations. Similar to our experiences in other regions, our key customer strategy has helped us to create a more resilient margin structure and will support our efforts to pass on prices or mitigate through value engineering, increases in input costs and changes in the market environment. Also
Speaker 3
as
Speaker 2
a part of maximizing the cutout, our team is driving for increased focus on the whole carcass utilization by opening up more opportunities and diversifying into new markets for dark meat, offal and other products. This increased operational focus is paying off as our European operations despite a tough first quarter have continued to perform better than the competition on a relative basis. Beyond the immediate term, we are looking to deploy capital and opportunities across Europe to drive our future growth, both organic and inorganic, and further improve overall diversification of the portfolio and footprint. Grain prices fell in the first quarter, reflecting the increase in expected inventories of corn in The U. S.
USDA is currently forecasting corn ending stocks at 2,030,000,000 bushels, up from 1,780,000,000 bushels to the start of the quarter. Large production increases in South America are currently hurting the export competitiveness of U. S. Corn, which is driving the surplus higher. Farmers are projected to increase planted acres to 92,800,000 acres, up 3,600,000 acres from last year, which could further add to the twenty nineteen surplus.
Soybean meal prices remain low, reflecting large U. S. Surplus as well as recovery of production in Argentina, the world's largest soybean meal exporter. Large ending stocks as well as weakened demand from ASF in China should keep prices in check. With large surpluses both corn and soybeans, we do not expect feed costs to be a headwind to margins in the medium term.
For 2019, the USDA is expecting total U. S. Chicken industry production to grow at a rate below last year, While breeder egg performance has marginally improved recently and has led to increased excess, the industry has not seen similar improvements in the hatchery. Latest pullet data, which can be volatile, shows increased pullet placements over the last quarter with much of these likely supplying new facilities. Despite the announced new capacities, we believe some of the new plants are intended to replace existing Saturday schedules, while a tight labor environment in The U.
S. And the difficult market conditions last year are likely to weigh on at least some of the expansion plans. As a result, we believe capacity growth will not be disruptive to the industry supply demand balance in the mid to near term. Despite the expected growth in beef and pork production, final approval and implementation of new trade agreements with trading partners should gradually reduce the amount of domestic protein availability, drive prices of competing meats higher and support an increase in chicken demand. Another important factor affecting supply demand balance in chicken is the ASF outbreak.
The spread and evolution of ASF globally could have a significant impact on the fundamental balance of chicken market conditions. First, it should drive reduction in domestic availability of competing proteins as well as increased demand for U. S. Chicken globally above and beyond the resolution of any trade negotiation. Second, regions impacted by ASF will likely consume less soy meal giving us an even more benign feed environment considering the already large domestic carryout in The U.
S. Soybeans along with large South American harvest. The outlook for chicken demand in the less commoditized segments this year continues to be very solid overall and supply demand there remains in good balance. With The U. S.
Economy continuing to be strong, low unemployment and higher disposable income are driving households to consume more proteins throughout the day. Foodservice operators are already starting to turn their focus to chicken and we expect more feature activities by retailers this coming summer. While we were already well balanced in terms of our bird size exposure, we will continue to seek opportunities to incrementally shift our product mix and reduce the commodity portion of our portfolio by offering more differentiated products to key customers while also optimizing our existing operations by pursuing operational improvement targets. We believe our key customer approach is strategic and creates a basis to further accelerate growth in important categories by providing more customized, highly quality, innovative products to give us a clear competitive advantage. Before I turn it over to Fabio, I'd like to recognize the great work of our team in executing our strategy, which produces a clear long term margin advantage versus our peers in this dynamic and cyclical industry.
Our portfolio is specifically designed to minimize the impact from the cyclicality of specific market segments. The changes we initiated eight years ago have made a tangible difference. The result is evident in all three geographic regions in which we operate, magnifies our relentless pursuit of operational excellence and presence in diverse and differentiated business models, segments and channels. For the long term, we are dedicated to continue extending our competitive advantage by increasing the emphasis on investments in our people and innovation while improving the overall quality of our products. With that, I'd like to ask our CFO, Fabio Sandri, to discuss our financial results.
Speaker 3
Thank you, Jason, and good morning, everyone. For the 2019, net revenues were EUR 2,720,000,000.00 versus EUR 2,750,000,000.00 from a year ago with an adjusted EBITDA of EUR $2.00 4,000,000 or an 8% margin compared to EUR $272,000,000 or a 10% margin for the year prior. Adjusted net income was EUR 87,000,000 versus EUR 132,000,000 the year prior. Adjusted EPS was EUR $0.03 5 compared to EUR $0.05 3 the year before. Operating margins were 6.1% in The U.
S, 2.9% in Mexico and 2.5% in Europe. Our EBIT in USA was EUR 150,000,000. Small bird and case ready continue to be consistent markets as chicken has remained compelling to consumers despite higher availability of other proteins. In contrast to the second half of last year, large bird deboning recovered strongly contributing to a sequential improvement in U. S.
Business. The rebounding price and demand held for the entire quarter and has continued as we entered Q2. We expect to see a better supply and demand dynamic in the domestic market, driven by more exports of all proteins out of U. S. As trade issues are getting resolved and to satisfy global demand due to the ASF outbreak.
Both retailers and QSRs operators are also running more chicken features in Q1 as well as Q2, and we expect the normal seasonality during the barbecue season this year to boost demand. Our fresh produce were in line with last year with the downtime for equipment installed in two of our facilities compensated by that better productivity in all of our other operations. We remain committed to deploy technology along with other resources available to counteract tight labor conditions and improve the consistency of our margins with more value added differentiated products. Our U. S.
Prepared food sales has continued to improve relative to last year with an accelerated pace. Revenue has increased 15% and volume has grown 17% relative to last year. The investments we made in past few years have begun to produce results and we believe we have more positive results to come. We have additional initiatives in place to accelerate growth in this market and we are expecting it to contribute a greater portion of our total sales in the next few years, while adding to the stability in consolidated margins. Our EBIT in Mexico was lower than expectations at $10,000,000 The market was impacted by superior growing conditions for chicken, while softer than seasonal demand due to more imported pork has further curbed the prices.
At the closing of the quarter, the environment has already started to improve and local prices reacted sharply. Demand is better with improved consumer confidence, also helped by a slowing in pork imports along with our return to more normal growing conditions for chicken. We have a very strong team in Mexico who has been over delivering performance for us in terms of relative performance to the major competition in the past few years due to their strong operational focus and excellent determination and we expect this trend to continue in the future. Quarter over quarter can be quite volatile in Mexico like the last year proved, but Mexico has been very consistent on a year over year basis. To maintain our growth and continue to innovate, we have launched fresh chicken in Mexico under the premium Pilgrim's brand, including no antibiotics ever, which have continued to see strong demand.
Also, we are growing our prepared foods opportunity in Mexico and producing excellent financial performance through both the Del Dia and the Pilgrim's brands, which have received great acceptance by consumers. Signifying the potential opportunities remaining ahead, we grew volumes by more than 20% in prepared foods in Mexico during Q1, which was a record. Our strategy is supportive of the goal to increase our higher margin differentiated products, while having product coverage from entry level to premium, both fresh and prepared in Mexico. EBIT in Europe was $30,000,000 We are capturing all of our expected synergies and operation improvements and we remain confident about the geographic diversification and growth potential for us, while evolving our portfolio and creating a sustainable advantage through opportunities to capture the upside in the market, but protecting the downside. Although we have made good progress in terms of optimizing the product portfolio, operational synergies and implementing zero based budgeting, we were impacted by the higher costs, as Jason already mentioned, in meat ingredients and other inputs that will still need to be passed to our process through our formulas and contracts, but creates a temporary compression of our margins.
The challenging conditions in the input environment is currently affecting the whole industry. And to offset that impact, we will continue to focus on increasing efficiencies across the value chain by enhancing sourcing and production, improving life costs, yield improvements and the global management of feed sourcing. We will leverage our marketing and sales infrastructure to optimize SG and A costs and the increase in operational focus is paying off as our European operations despite the tough first quarter have continued to perform better than the competition on a relative basis. In Q1, our SG and A was 3% of sales, reflecting our support for expanding the Just BARE brand nationally and the investments for our new Prepared Foods products, both in The U. S.
And Mexico. We are targeting 125,000,000 in operational improvements for 2019 as we continue to extract improvements in the efficiencies of our operations. Our target for 2019 is a little lower than the previous year as we have to offset tight labor conditions as well as challenging input cost environment in Europe as we mentioned. We will continue to prioritize our capital spending plans this year to optimize our product mix that is aimed at improving our ability to supply innovative, less commoditized products and strengthening our partnership with key customers. We expect to invest $285,000,000 on CapEx and reiterate our commitment to invest on strong return over capital employed projects that will improve our operational efficiencies and tailor customer needs to further solidify competitive advantages for Peugeot.
Our balance sheet continues to be strong, giving our continued emphasis on cash flows from operating activities, focus on management of working capital and disciplined investments in high return projects. During the quarter, our net debt reached EUR 1,900,000,000.0 with a leverage ratio of 2.6 times less twelve months EBITDA. Our leverage remains at a good level and we expect to continue to generate strong cash flows this year, increasing our financial capability to pursue our strategic options. We expect 2019 interest expense in the range of $130,000,000 We have a strong balance sheet and a relative low leverage. We remain focused on exercising great care in ensuring that we create shareholder value by optimizing our capital structure, while preserving the flexibility to pursue our growth strategy.
And we'll continue to consider and evaluate all relevant capital allocation strategies that will match the pursuit of our growth strategy and continue to review each prospect accordingly to our value creating standards. Operator, this concludes our prepared remarks. Please open the call for questions.
Speaker 0
Thank you. We will now begin the question and answer session. Our first question today comes from Ben Boyer with Barclays. Please go ahead.
Speaker 4
Hey, good morning, Jason, Savio. Thanks for taking my question and congratulations on the results. So my two questions. So first of all, the one thing and you've mentioned it already within the prepared remarks, but I wanted to follow-up on feed cost in The U. S.
I mean, you said with ASF affecting pig herd, particularly in China, there is obviously less demand for soy in that market, which should further drive costs down. Have you done any hedging into summer? Have you done locked in some of the low price environment to kind of have a better planning capability around the cost considering it's been relatively low recently? So that will be my first question. And then my second question is you've also spoken a little bit about the foodservice feature activity.
How much is that would you say higher compared to last year? And what would you expect from the retail segment in terms of the follow-up on feature activity? Just to get a little bit of a sense where we're going into particularly 2Q and 3Q, which are definitely the most important ones from a feature activity? Thanks.
Speaker 2
Yes, sure, Ben. I'll take this question. So we've seen a big recovery in supplies in both The U. S. And other major exporters for both corn and beans.
Prices shouldn't be a headwind to margins in the medium term. Our approach to the markets hasn't changed and we're going to secure our needs consistent with our view of the risk of corn and soybeans. Relative to ASF, we're seeing significant demand losses in China for both corn and soybean meal. Soybean meal trade is going to affect more considering China's market for the share of global trade, which is about 75%. China's corn market is much less important to the global corn trade.
In regards to hedging strategies, we disclose our strategy there. Regarding your question on foodservice, Ben, from the major QSRs, we've seen a 41% increase quarter over quarter relative to increased LTOs from a foodservice perspective. I'll carry that on to a retail perspective. In 2018 over 2017, we saw a 23% decrease in retail features and 2019 over 2018 in Q1, we saw 11% increase year over year in features. So we're starting to see the features come back for chicken.
If I carry it forward, Ben, I would tell you that based on what we're hearing from our sources on the buy side, The major concern is the uncertainty of the pork market. So as this cash and futures markets continue to diverge in the lean hog markets, our buyers are telling us that they're not going to be risking the potential upside of that pork market and they're going to be continuing to feature more chickens this growing season.
Speaker 3
Yes, Ben. And in the foodservice sales measure in the broad line distributors, we are having a 7% to 8% increase in chicken sales. Some parts are actually seeing a much better performance than last year with wings going up 13%, breast meat going up 8%. So we're seeing a great pickup in demand in the broad line foodservice.
Speaker 4
Okay, perfect. Well, Jason, Fabio, thank you very much.
Speaker 3
Thank you.
Speaker 0
Our next question comes from Heather Jones with Vertical Group. Please go ahead.
Speaker 5
Good morning and congratulations, Jason, on the new position.
Speaker 2
You, Heather. So
Speaker 5
I had I wanted a follow-up question to Ben's. So speaking of retail feature, we saw a setback, ahead of Easter. And over the past week, we've seen the jumbo BSD market come down a few cents. And just wondering if you could give us your assessment of what's causing that weakness and when you expect retail feature activity to tick back up in Q2?
Speaker 2
Heather, thanks for the question. Relative to the big bird markets receding a little bit, that doesn't concern me as much. I'm really looking forward to this sort of the beginning of the grilling season when these features start to come back. I think there's typically a lull right now relative to features. So we typically see a low here.
In some cases, we've seen some upside, but this situation does not concern me at all relative to where we are on jumbo pricing because, again, as I answered Ben's question in this way, we're hearing on the buy side that the retailers are looking to do more chicken featuring just because of the uncertainty they're seeing in the pork markets.
Speaker 3
And also, of course, is very important. Jumbo boneless breast is one of the most important parts of the bird and one of the regions we grow in The U. But we are seeing a great pickup in the other parts. So we're seeing leg quarters much higher year over year with the increase in exports and increasing in prices. Also wings have come to the normal increase year over year.
So the jumbo cutout is actually going higher despite boneless being a bit flat as Jason mentioned, temporarily.
Speaker 5
No. And that's yes, that's an excellent point. It leads to my next question. You mentioned increasing your dark meat demoning capabilities by, I think, was 25%. Do you have flexibility in that?
Because from what I understand, a few months ago, there was nearly a $0.20 advantage in deboning. But with the rally in quarters we've seen that advantage has narrowed greatly. And given your comments on ASF and export demand and all, it could potentially go away completely. So I
Speaker 2
was just
Speaker 5
wondering, in this deboning capabilities that you're adding, do you all have flexibility to switch back and forth?
Speaker 2
Heather, we do have some flexibility. But I will tell you, following these dark meat markets for twenty five years, what happens is that you'll see a leading indicator of leg quarters pull and then you'll see right behind it, you'll see the deep learning numbers come back together. So it's there is a on the front end, we'll see a spread. And then we'll also see that spread narrow as the meats catch up fairly quickly. Same on the downside.
We see it on the downside. If leg quarters start to move the other way, the debone meats will stay high and then they'll descend to the leg quarter numbers. So there's always a natural spread between the cutouts of whole legs to leg quarters to drums and thighs, etcetera. So the concern really for us is not really worried about that temporary spread. We have a strategy that's to debone more legs to not be commoditized, and we'll continue to follow that strategy.
Speaker 3
And also to help our customers with the full portfolio, Heather, I think it's important to have both of the parts and not enter and exit the market. Just like Jason mentioned, we can have a little bit of flexibility, but the strategy is to add value to those parts.
Speaker 0
Okay, awesome. Thank you so much.
Speaker 6
Thank you, Adam.
Speaker 0
Our next question comes from Ben Bienvenu with Stephens. Please go ahead.
Speaker 7
Hey, thanks. Good morning. Good morning. I ask wanted about Mexico. You talked about supply demand backdrop improving sequentially month over month into 2Q.
I was curious to get some update on progress you're making with zero based budgeting and portfolio refinement. And then I think at the end of 4Q, you had talked about while quarter to quarter is volatile, you thought the full year might be similar to last year over year. Do you still expect that to be true? And just any commentary you can provide on those results stabilizing through the balance of the year would be helpful.
Speaker 3
Yes. On year over year, I think we're seeing this volatility in Mexico. Sometimes we have disruptions because of exchange rates. Sometimes we have disruptions because of the elections there. So last year, we saw big volatility with a strong first semester and a weak second semester.
Seasonality The in Mexico is a little bit different than U. S, but to your point, we continue to expect this year to be at the same levels as last year. The disruptions in Q1 were mainly due to some issues that Mexico had on gasoline distribution. And also as we mentioned, the impact of the exports of pork from U. S.
At a very lower price to Mexico. As trade resumes to other regions and as the prices of pork has increased in the domestic market, we are seeing a reduction in that competition in Mexico. And also growing conditions in Mexico were better than expected, which created a little bit increase in the production of chicken for Q1. For Q2, we are returning to the normal growing conditions and all the players are also adjusting their production to the supply and demand situation. And we are seeing a much better improvement in the supply and demand in that region.
And just to add, we have
Speaker 2
a positive outlook on Mexico. We've got a great team down there. They run a very consistent business. And I think as Fabio mentioned, you can't compare them over individual quarters, but when we string those quarters together, they have very solid and we have a very consistent business in Mexico. Again, this is the situation mostly supply rate related.
We saw less disease pressure in this Q1 that more than normal seasonal supply outstripped the Q1 demand. So again, I'll hurry on to say that our Q2 results in Mexico are off to a great start.
Speaker 3
I think, again, to the portfolio question, we continue to develop our branded products in Mexico. Mexico still have a very important part of the market as a live sales. We sell live birds to wholesalers who process those birds to small consumers. We want to reduce that part of our portfolio. We continue to invest in our prepared foods, especially in the North Part of Mexico.
Speaker 7
That's helpful commentary. Thanks. Then I wanted to ask about Moy Park. To what extent or if anything, what have you done strategically, operationally, the contingency plan for Brexit? And just updated thoughts on your positioning with respect to that potential event down the road.
Speaker 2
Yes, sure, Ben. I'll start and I'll kick it over to Fabio. There are many puts and takes with either direction that Brexit takes. Our expectation is that the margin effect is going to remain mostly neutral. And just as a reminder, 93% of our UK production remains in The UK.
So since 2016, our team has been contingency planning to be working pretty closely with our key customers on building in logistics and redundancies. We've got strategic positioning of finished goods, labeling, frozen stocks, right, just about everything that you can think of. So I'll tell you the team has done a great job so far and they're fully prepared for either an October decision or a decision beyond that.
Speaker 3
Just to mention the impact that we had on our operations in this quarter, it's already an impact from Brexit, although Brexit has not occurred yet, which is in the labor. I think we are seeing the labor situation in UK getting tighter as some immigrants are moving out of the country. So we're affecting we're suffering the effects of the Brexit, despite that Brexit has not occurred yet.
Speaker 7
Okay. Thanks very much. Best of luck.
Speaker 0
Our next question comes from Jeremy Scott with Mizuho. Please go ahead.
Speaker 6
Hi, thank you. Good morning. Jason, congratulations on the new role. Just stepping back, I mean, you've had thirty years in the chicken sector. I'm sure you've seen it all.
So I wonder if you could share a bit on your vision for Pilgrim's over the next five years, your thoughts on business mix in The U. S, international priorities for investment, other key areas of focus.
Speaker 2
Yes. For the question, Jeremy. Look, as I mentioned in my prepared remarks, I was part of the team that formed and executed our current strategy. It's the one in which we still employ today. And just to remind you that strategy centers around people and food safety, operational excellence, it's really the fundamentals of our business, having an optimized mix and portfolio and of course, our key customer strategy, which we've been speaking of over the last eight years.
The only significant thing that I'll add and this fits squarely into the strength of our mix and our portfolio, Jeremy, is the emphasis on our prepared foods business growth and execution. We've left that one lagging behind and we're definitely going to be spending a significant amount of our resources, Jeremy, in this one area.
Speaker 6
Got it. And just on your comments on foodservice and retail operators being nervous about the supply of pork going forward. So I guess in the conversations that you're having, are operators looking to lock in chicken volumes or contracts further out? Are you seeing any stocking up of product?
Speaker 2
Yes. Thanks for the question, Jeremy. We're not seeing any stocking up of inventory per se. As a matter of fact, we've seen breast meat inventories decline to a level of that of which 2017 numbers. But really what's happening is they're looking to lock in some adds.
So they're reaching out sort of ahead of schedule and ensuring that there's some supply in season. So again, we're not seeing anything bought forward. And to the earlier question of Heather, why are we seeing some negativity here on boneless when we're hearing about ASF. We're just not really seeing the impacts that are currently hitting us today, but we're seeing those buyers reach out looking for the front end of the season. Got it.
Earlier than usual.
Speaker 6
Okay. And just on your answer to Heather's question around boneless dark meat relative to leg quarters. If there is a structural demand shift for both leg quarters on global trade and prices keep moving up. I would assume at some point that your boneless dark meat customers, which are largely domestic may resist or switch to breast meat, etcetera. So could you see a scenario where pursuing more bulk leg quarters makes a lot more sense than boneless?
Speaker 2
Yes. First, I'll tell you that would be a great problem to have. So I will argue that I've not seen demand destruction yet from dark meat deboning to we've actually seen dark meat prices over breast meat prices and have been held there consistently. So there's always that chance. But again, I think that would be a good problem to have, and I'll deal with that problem when we get there.
Speaker 3
And Jeremy, think you said thirty years, you've seen it all, but I think this industry is very dynamic. It changes every day. And we're seeing a change as well in the demand for some of the products as the we have more Hispanic and as we have a shift in our demographic, we're seeing more demands for dark meat in U. S. I think there's always the competition with boneless and white meat, but I think it's a change in the demographic.
I'll add as well that we continue to change our portfolio and have it more antibiotics ever and the organic operations. And we need to add value to the dark meat on those operations as well. So exporting just local headquarters, there's no premium on organic and no premium on no antibiotics ever. And as we move to the domestic market, we can capture those premiums.
Speaker 2
Jeremy, just finally, I'll add this. In many cases, the dark meat on menus is a here to stay item. So you can look across some even some national QSRs, there's dark meat that's fully embedded in those menus and they're here to stay. And I'll add growing on menus as well.
Speaker 6
Right. Got it. Thanks guys.
Speaker 0
Our next question comes from Ken Zaslow with Bank of Montreal. Please go ahead.
Speaker 3
Hey, good morning everyone.
Speaker 2
Good morning. Good morning, Ken.
Speaker 8
Jason, congratulations on the new position. Let me ask you a question. When you look out two or three years from now, what do you think your biggest contributions would be on a strategic point of view? It sounds like you expect to keep things kind of going where they're going. But what do you expect to do to change the strategy or do anything to leave a legacy?
Speaker 2
Yes. Thanks, Ken. The first one is going be around people, having the right people, having a great team here. We a great team in place and it's really about investing energy in people and allowing them to grow. I think that would be my legacy.
I will tell you relative to the business side of the skin, and I mentioned this earlier, is going to be around Prepared Foods business growth and execution as well as developing our brands.
Speaker 8
Great. And then my next question really is, guess, only get two. So I'll just can you frame how you're thinking about the earnings power relative to history over the next twelve months? Are we thinking are you thinking more like a 2017 type of operating environment? Are you thinking about a 2015?
Like how do you see this? Because this is something that we've I don't think I've ever seen I've only done this twenty years and I know you beat me up by about five or six years, it sounds like. But I haven't seen this type of environment. Can you talk about how you would frame the environment with African swine fever, The U. S.-China deal as well as low commodity low feed costs?
Speaker 2
Look, it's fluid. We know that it's a meaningful disruptor in the pork supply. Already causing some near term pork disappearance in The U. S. Our first market impact that we've seen was actually in Mexico and Fabio mentioned this earlier.
U. S. Exported 15% less pork to Mexico on a year over year basis. And this is that part in parcel has led to that quick we've not seen such a price turnaround in Mexico in the last eight years that I've been here relative to what's happened. And I have to say that's part of what this ASF has done just in Mexico by having pork removed or at least less pork going down into that market.
So I would say that it's and you said it best.
Speaker 8
I mean,
Speaker 2
it's unprecedented. We know that the USDA is reporting and their estimates are calling for a decrease of almost three kilograms per capita of pork availability in China 2019 over 2018. That's a significant number in availability. Again, just have to go back to uncertainty. I don't think that we know.
We know that it has a potential to be a major disruptor in protein to what that effect looks like. Again, I'll go back to your words. This is unprecedented, and I don't think I can put a number on that.
Speaker 3
And Ken, I think looking into the long term perspective, we all know that there is limited opportunity for growth in pork and beef in terms of availability. And the demand for protein will continue to grow in U. S, but even more so in the emerging markets. And again, if you take the long term perspective, chicken continues to be the best option for supplying for that growth. We can have temporary disruptions in the pork because of diseases or temporary disruptions in some of the markets because of other issues.
But long term perspective is chicken chicken business to continue to grow to supply the protein that the world will continue to demand, especially on the emerging markets.
Speaker 2
Yes. Ken, one other I'll just throw this in there. China historically only purchased leg quarters when our largest off taker, which was Russia, was absent from the market. We had a large downward corrections in commodity chicken prices. So really haven't seen a normalized market where China has taken U.
S. Dark meat and if there's something that is agreed upon between the two governments, I think we're going to see a pretty good and could see a significant impact there. Today, we and the industry have done a very good job of diversifying our country mix and lessening our dependence on any one country. So U. S.
Dark meat is not is one of it, if it's not the most affordable quality sources of protein in the world. And should there be an agreement with China, our expectation that we're going to be able to export dark meat to China primarily for further processing. And of course, is going to have a positive impact on that commodity dark meat pricing as we discussed earlier in The U. S. And it'll spread to other export markets and the domestic market.
Again, what that number looks like, should there be an agreement, we don't know.
Speaker 3
To add to what Jason just mentioned, despite our ban to export to China right now, we are already seeing prices in the entire region going up and some exports to countries like Vietnam is up 50% year over year.
Speaker 8
But just to be clear, Fabi, you said an interesting thing. You don't think this could be a structural change to the market. You think this is something that the world will adjust to and you'll go back to your long term growth of chicken consumption. Is that I'm just curious if that's what you're thinking.
Speaker 3
I think you can have some disruptions and you can have some changes in the temporary. But over time, again, chicken continue to be the option for growth in the protein. It can be enhanced by what we are seeing right now. But I think the world demand and supply will adjust to this as well. I think it doesn't the fact is it does not change its long term perspective for chicken, which is already very positive.
Speaker 8
Won't disagree with you. That's perfect. Thank you.
Speaker 0
Thank you. Our next question comes from Adam Samuelson with Goldman Sachs. Please go ahead.
Speaker 9
Yes, thanks. Good morning, everyone.
Speaker 1
Good morning, Good morning, Adam.
Speaker 9
So maybe first, Jason, I'd like to continue. Just you made a comment about kind of further more resources and investment on the prepared food side. And would just love to hear maybe a little bit more thought if you could share just in terms of is that something where, hey, we've got to go in and really make bigger upgrades to facilities ourselves? Or we need to make that's going to be a bigger target for inorganic growth than it has been heretofore or something else along that line?
Speaker 2
Thanks, Adam. It's both human and I'll call it capital assets that we have to improve upon. So we've built out a team over the last year to which we didn't have in 2017. So we built out a marketing team, an innovation team and research and development team. We're doing much more work in those areas where we have not really valued up those areas in the past.
Just building out the team and actually putting that team resources to use will be will greatly impact our business in 2019. Again, on capital side, we'll be investing more capital in our assets in this business. And again, we've said this too in terms of our growth strategy. We're going to grow in prepared foods as well as geographic areas. Those are the two areas in which we're looking for growth.
So both human assets and capital as well, Adam.
Speaker 1
To build on the
Speaker 3
CapEx, Adam, last year we invested $348,000,000 which is significantly higher than our depreciation, which demonstrates our commitment to the operational efficiencies and to build that differentiated portfolio, just like Pete just mentioned. For 2019, we're expecting to be in the $280,000,000 range. And some projects that we have are what we already mentioned on the automation of our plants. We're building also two new feed mills to improve our live operations. And we're investing also in UK in the Bellamina plant to add value added products.
Speaker 9
Okay. That's helpful. And then just I think it was in response just to Ken's question just before. So just on a China U. S.
Trade deal, I mean, is your sense from industry context that you will see the poultry regulations kind of, which I mean, just the ban from avian flu from a couple of years ago, we haven't sent leg quarters to China in any meaningful quantity in, what, a decade. Do you think those get meaningfully eased? And how quickly do you think that product flow could restart if we did?
Speaker 2
Yes. That's a great question, Adam. I think anytime you're dealing with two major governments, timing is never of the essence. Obviously, we would like to see the market open sooner than later. We haven't shipped anything directly to China since 2015.
So we're
Speaker 5
anxious
Speaker 2
to get those markets open and should they open, it'll make a meaningful difference. But in terms of timing, Adam, I couldn't even think about
Speaker 9
Well, I guess what I'm really asking is are the plant level certifications in place that revert back to in case the governments do reach in a quarter? Do we have to then go plant by plant to get the certifications reissued? Or just like is there a prior framework that we really have that we can just relaunch and restart quickly? Or is it going to take a little bit more time to build that out?
Speaker 2
Yes. Thanks for the question. I don't believe that there is a plant by plant issue. I think it's a countrywide issue. The country ban is lifted and we should be eligible to export to China, Adam.
Speaker 9
Okay. And then just quickly on the EU and I apologize if I jumped on late and I might have missed this. But as we think about some of the cost pressures that you've been facing in Europe, both on the feed and the labor side, did you outline any kind of time line when you think those could flip? Obviously, if Europe has a better wheat crop this summer, should help. But just did you provide any time line for when you think you should be getting back on the right track from a growth perspective or a cost perspective in Europe?
Speaker 2
Yes. So we mentioned in the prepared remarks, we're currently experiencing overhang with that $40,000,000 of increase in grain cost. And we're just now beginning to see that price capture. And I'll add, we're not only we'll be capturing grain costs, but we're going to beginning to recover the rest of the inflationary items. So it's not captured in the current models, which are labor, utilities, packaging and the other ancillary items.
So we're going to see this overhang neutralized by the end of Q2 and we're going to realize the effects of our updated models in the back half of the year. So I'd argue, Adam, the back half of the year, we'll start to see the margins improve from the overhang.
Speaker 9
All right. I appreciate the color. Thanks very much.
Speaker 0
This concludes our question and answer session. I would like to turn the conference back over to Jason Penn for any closing remarks.
Speaker 2
Thank you. We're off to a solid start in 2019 and believe the outlook for chicken consumption globally remains positive as consumers continue to view chicken as a compelling, healthy alternative. Our diverse portfolio and differentiated products and key customer strategy in conjunction with our geographic footprint will continue to generate a more consistent performance and minimize margin volatility compared to peers despite specific market conditions. We will continue to identify new opportunities, including Europe, both organically and through acquisitions to refine our portfolio and offer differentiated customized products while pursuing our key customer strategy. Our team members are our competitive strength.
We're very fortunate for them and we will continue to invest in them. We're also motivated and innovative and to improve our quality of our products. We'd like to thank everyone in the Pilgrim's family as well as our customers. As always, we appreciate your interest in our company.