Pilgrim's Pride - Earnings Call - Q2 2019

Transcript

Speaker 0

Good morning and welcome to the Second Quarter twenty nineteen Pilgrim's Pride Earnings Conference Call and Webcast. All participants will be in listen only mode. 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 now like to turn the conference over to Mr.

Dunham Winoto, 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 second quarter ended June 3039. 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 Saundra, Chief Financial Officer.

Before we begin our prepared remarks, 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 our regular filings with the SEC. I'd now like to turn the call over to Jason Penn.

Speaker 2

Thank you, Dunham. Good morning, everyone, and thank you all for joining us today. For the 2019, net revenues were $2,840,000,000 unchanged from a year ago. Adjusted EBITDA increased to $349,000,000 or 12% margin, which is a 35% improvement versus $259,000,000 a year ago or 9% margin. Adjusted net income was $171,000,000 compared to $113,000,000 in the same period in 2018, resulting in adjusted earnings of $0.69 per share compared to $0.45 in the year before or 53% increase.

We believe our well balanced performance is a result of our vision to create opportunities for our team members to drive and prosper. To support our vision, we are continuing our strategy to provide safe, high quality, differentiated products, relentlessly pursue excellence in our operations, unlock value by focusing on key customers whose priorities for growth and innovation match our own and optimize our product and portfolio mix to produce consistent results. I truly believe that our results start with our people. As our team members thrive, so does our business. This year, we are on pace

Speaker 3

to

Speaker 2

promote more team members than in any year in our history. Our efforts provide competitive compensation on the job training and development opportunities, a safe working environment that exceeds industry standards, and opportunities for advancement in our organization are promoting the strength of our team members while providing more resilient, consistent results for Pilgrim's. We are thankful for our team members for the improvement of our operations as well as results during Q2 and for producing a solid 2019. Our performance, along with the markets, has continued to increase across all our global operations. In The U.

S, we experienced a much better environment in our fresh business compared to a year ago, most notably in commodity large bore deboning. Our prepared foods business has improved in performance, reflecting the investments made over the past few years. Our European operations have begun to overcome recent input cost challenges, and we expect our results in Europe to continue growing for the remainder of the year. In Mexico, we had a strong recovery as the market significantly rebounded last quarter after an unseasonably weak Q1. Our Q2 results demonstrate the diversity and balance of our portfolio, which gives us a more consistent consolidated performance despite the volatility of specific market segments and geographies.

We will continue to evolve our portfolio to better adapt and respond to individual market dynamics and improve our relative performance over the competition. We believe this approach will give us a higher and more consistent results from the mid to long run and minimize the full peaks and troughs of the volatile commodity sectors. Compared to the very challenging demand conditions we experienced during last year's summer in The US, the market for commodity large bird deboning in q two has improved. The commodity large bird cutout was robust throughout the entire quarter, which was much closer to the five year average, driven by strength in wings, leg quarters and tenders with boneless slightly lagging. In our less commoditized small bird and case ready segments, customer demand was in line with normal seasonality.

Again, leadership position in these markets and more differentiated product portfolio continues to give us a competitive advantage relative to our peers with a narrower market approach. The margin stability within our small bird and case ready operations has continued to give us an offset to the more volatile commodity sectors to bring us a more consistent margin platform while still giving us an opportunity to capture the upside potential. The commitment to our key customer strategy remains relevant to our growth. Revenues from key customers more than doubled over the last eight years, reducing our relative dependency on pure commodity sales. Our strong relationships with key customers have continued to contribute to the outperformance in our case ready business.

We will leverage our key customer strategy to earn more business and accelerate growth beyond just the underlying market conditions. Beyond driving growth, our key customer approach also promotes trust, enhances long term relationships, and strengthens our margin structure. We are continuing to further differentiate our portfolio to reduce the impact of pure commodity markets. We have been increasing our mix of specialty birds, including no antibiotics ever and organic attributes to support the evolution in our customers' expectations and market growth. Specialty birds will account for over 40% of our U.

S. Fresh portfolio during 2019, which is more than double to less than 20% just a few years ago. Mid last year, we moved one of our larger bird deboning plants to full NAE, the first one for us in this size category, which is supportive of our goal to double NAE contracted volume of large bird deboned in 2019 versus 02/2018. We're expanding our breast meat portioning capabilities and increasing dark meat deboned capacity by 25% to deemphasize our commodity exposure to volatility of pure commodity markets. We're continuing to install more front half auto deboning equipment to support strong demand for our products while minimizing the impact of tight labor conditions on margins.

In q two, through a partnership with a key customer, we significantly expanded distribution of Just BARE case ready chicken by over 1,000 new points of sale. Additionally, we continue to improve our Just BARE chicken innovation capabilities. We're growing beyond retailers and expect to start shipping new prepared food items by leveraging the Just BARE chicken brand in q three and q four this year. There are also new Just BARE chicken items in the r and d pipeline to sustain our already strong innovation capabilities. The performance of our prepared foods operations has been improving supported by innovation, sales and marketing.

We grew a robust 12% in revenue and 14% in volume year over year during Q2 respectively. As mentioned, we are extending the reach of our well regarded Just BARE brand and entering into the prepared food segment and foodservice channel. We will use a multi tiered brand hierarchy for Pierced Chicken, Gold Kiss Chicken, and Just BARE to drive operational efficiency, meet the needs of diverse the diversity of our customers, and deepen the strength of our pipeline. Our flagship, Pierce Chicken, continues to capitalize on our heritage and leadership of back of the house flavor. The brand is diligently focused on including premium whole muscle products without sacrificing our commitment to flavor and labor saving convenience.

Gulcas chicken will be targeted towards the opportunity to expand beyond k 12 into other food service segments such as health care and commercial restaurants by leveraging stringent portion control as a key benefit. The brand has taken on a new look, but maintains the same quality our customers have come to expect. Finally, we have successfully solved our customers' needs for a product that is all natural, clean label, and carries a no antibiotics ever commitment consumers are seeking at the table with the launch of Just BARE chicken into food service. Our export business continued to perform well during q two. US frozen inventory has remained low and export pricing has increased approximately 15% from the same period a year ago to reflect strong demand.

Despite the increase in price, U. S. Export dark meat continues to represent an attractive value relative to other proteins. We have remained proactive in diversifying our country of destination mix and are relentless in developing alternate sales strategies in the event we encounter any trade disruptions due to animal diseases or unfortunate unforeseen disputes with existing trade partners. We experienced much better market conditions sequentially in Mexico in q in q two compared to q one.

Returned in much more normal growing conditions and strong demand drove prices higher. Availability of imported pork from The US has been significantly reduced and has presented less competition to chicken. While Mexico can be a volatile quarter to quarter, we believe it will continue to outperform on a full year basis in line with its performance in the past. We expect demand for chicken in Mexico will continue to outstrip our supply given rising disposable income and consumers' desire to improve their protein diet. We believe the country will remain a good proxy for chicken growth in other emerging markets.

Our team's focus on operational excellence and offering differentiated products continues. We again grew volumes in double digits in prepared foods in Mexico during Q2. 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 generating excellent results under both premium Pilgrim's and Velvea brands, both of which have continued to receive very favorable acceptance by consumers at retail, club stores, and QSRs. And after a couple of quarters, a very challenging input cost increases driven by higher grain, utilities, labor and packaging, our European operations generated improving results throughout Q2.

We also exited the quarter much stronger than we began, confirming a trend that we've already seen in the monthly results the previous quarter. While lower wheat costs certainly presented less of a headwind during Q2, increased implementation of our key customer strategy also enabled us to better work through some of the input cost increases by adjusting price models compared to previously. In addition, we have been more successful in capturing synergies and improving efficiency and yields to mitigate the higher costs that impacted us in the previous quarter to deliver a stronger overall performance in the second quarter. The results reflected in a material improvement in EBIT performance quarter over quarter, which grew 91%, which is in line with the results from a year ago on flattish revenue and volume. However, that we what we consider to be an even better perspective of the improvement we have been making in the business is that EBIT during the last month of q two was higher than the same period a year ago, confirming a positive trend seen every single month this year so far.

On the revenue side, we'll be we'll be reflecting the input cost changes within our pricing models in the following quarters while operationally we maintain focus on cost optimization, cost control, synergy capture, and a culture of constant innovation. These combined factors will continue to support our EBIT run rate trend for the rest of the year and will help us deliver solid margins. We continue to expect our second half results in Europe to be an improvement over those which were delivered in the first half of the year. More importantly, our relative performance during the last twelve months has remained above average of our competition in Europe. The ready to eat segment, we have recently launched microwavable heat and eat wings in an easy in an easy open pouch, and it is now on sale in several retailers in The UK and Ireland.

We have also partnered with a well regarded snack company in the development and launch of a chicken based snack, applying our coating technology and flavoring in a package that extends shelf life of the product up to twenty one days. With innovations and partnerships in the meat free and snack segments supported by a growing consumer demand and continued investment in equipment, technology and operational efficiencies, we expect to expand our margins and profitability. Turning turning to feedstock, corn prices have rallied since mid May reflecting production losses due to unprecedented flooding during The US planting season. USDA confirmed the loss of corn production in the June WASDE by lowering both planted acres and yield for corn. A record amount of acres filed for prevent plant insurance is expected by the market and was also confirmed in the June 28 planting survey report.

However, from a global perspective, large increases in corn production and other major world exporters likely help help offset some of the losses in US production as well as a rebound in global wheat production in The EU and the Black Sea region. Despite a reduction in soybean acres from the March planting intentions report, soybeans in The US are forecasted to be extremely well supplied. Globally, the supply of soybeans should also remain plentiful considering the reduction in overall demand. Due to the poor start to The US crops this year, we will be watching weather very closely as unexpected weather events will likely create more volatility. We will take the necessary coverage as the production risk warrants.

For 02/2019, the USDA is expecting total US chicken industry production to grow at a rate below last year. While breeder egg performance has marginally improved in 2019 and has led to increased egg sets, the industry has not seen similar improvements in the hatch rate. Latest poll data, which can be volatile, shows that cumulative April and May placements have increased relative to year ago levels, which much of these likely supplying new facilities. By the announced new capabilities, we believe that some of the new plants are intended to replace existing Saturday schedules while tight labor environment in The US is difficult, market conditions last year likely to weigh in on at least some of the expansion plans. We believe the 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. The outlook for chicken demand in the less commoditized segments this year continues to be very good overall, the supply and demand there remains well balanced. With The US economy continuing to be strong, low unemployment and higher disposable income are driving households to consume more proteins throughout the day. According to the NPD group, food service demand for chicken through broad broad line distribution continues to show strength in both dollar and volume growth, and we expect more future activities by retailers coming this fall. While we are 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 increasing the number of differentiated products to key customers while optimizing our existing operations by pursuing operational improvement targets.

Our key customer approach is strategic and creates a basis to further accelerate growth in important categories by providing more customized, high quality, innovative products to give us a clear long term competitive advantage. 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 $2,840,000,000 with adjusted EBITDA of $349,000,000 or a 12.3% margin. Adjusted net income of $171,000,000 resulted in adjusted earnings of $0.69 per share. Operating margins were 9.8% in U. S, 17.5% in Mexico and 4.5% in Europe respectively.

In The U. Our EBIT was $187,000,000 nearly double the results a year ago. Small bird and case ready continue to be consistent markets as chicken has remained compelling to customers despite higher availability of other proteins. Large bird deboning significantly improved relative to q two of last year and also contributed to a sequential improvement in US business as demand was much more in line with seasonality despite higher supply of chicken in this specific segment. Prices were solid the entire quarter and demand was firm.

Our US prepared foods sales continue to improve. Revenue increased by increased by 12% and volumes have grown 14% to last year. The investments we made in the past few years have begun to produce results and we expect to continue to grow in this segment. As Jason mentioned, we are bringing our successful Just BARE brand into the prepared foods segment and food service channel, supportive of our differentiated portfolio strategy. We have other 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 substantially increased sequentially to $68,000,000 from $10,000,000 in Q1 and was also above last year's $62,000,000 A return to much more normal growing conditions along with a reduction in competing proteins drove demands and prices higher. Our strong team in Mexico is our true differentiation due to their strong operational focus and excellent determination, we and expect this trend of outperformance relative to the competition to continue in the future. Quarter over quarter can be quite volatile in Mexico given market conditions, but Mexico has been very consistent on a year over year basis and this market characteristics should remain unchanged. To maintain our growth and continue to innovate, we have launched fresh chicken in Mexico under the premium fragrance 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 Pilgrim's and DelVir brands, which have received great acceptance by consumers.

Indicating the potential opportunity remaining ahead, we grew volumes again by double digits in Prepared Foods in Mexico during Q2. Our strategy is supportive of the goal to increase our higher margin differentiated products by having product coverage from entry level to premium across multiple channels in both fresh and prepared in Mexico. Europe EBIT was $204,000,000 $24,000,000 similar to last year as our operation began to mitigate the industry wide input cost challenges we have been experienced since last year. The increased implementation of our key customer strategy enabled to better work through some of the input cost increases by adjusting our pricing models during the quarter. In addition, we have been more successful in capturing synergies and improving efficiency and yields to mitigate the higher costs that impacted us in the previous quarter to deliver an increasing performance during the second quarter finishing with strong momentum.

We will continue to leverage our marketing and sales infrastructure to optimize SG and A costs and along with our key customer strategy, we will maintain our lead in relative results to the industry. In Q2, our SG and A was 3.1% of sales, which is unchanged from last year despite our support for expanding the Just BARE brand nationally and investment for our new Prepared Foods products both in U. S. And Mexico. We continue to target $125,000,000 operation improvements for 2019 as we extract additional improvements in the efficiencies of our operations.

We 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 strengthen partnerships with key customers. We expect to invest about $300,000,000 on CapEx, and we reiterate our commitment to invest on strong return on capital employed projects that will improve our operational efficiencies and tailor customer needs to further solidify competitive advantage for payments. Our balance sheet continues to be strong given our continued emphasis on cash flow from operational activities, focus on management of working capital and disciplined investment in high return products. During the quarter, our net debt reached CHF1.7 billion with a leverage ratio of 2.1x 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 relatively low leverage. We remain focused on exercising great care and ensuring that we create shareholder value by optimizing our capital structure while preserving the flexibility to pursue our growth strategy. And we continue to consider and evaluate all relevant capital allocation strategies that will match the pursuit of our growth strategy and we continue to review each prospect according to our value created standards. Operator, this concludes our prepared remarks. Please open the call for questions.

Speaker 0

We will now begin the question and answer session. The first question comes from Ben Theurer with Barclays. Please go ahead.

Speaker 4

Hey, good morning, Jason and Fabio. And first of all, on the strong results. First question I have, and you've talked a little bit about it, obviously, the volatility, corn, soy, what's going on with wheat in Europe, global supply and the weather issues. With that in mind, have you taken any positions, any derivatives? Have you done any purchases?

Any futures positions to somehow mitigate maybe some of the volatility into the back half? And if so, could you could you share at what what level you've you've locked in? That would be my first question.

Speaker 2

Yeah. Ben, good morning. This is Jason. So I would say this, nothing is different from what we've said in the previous calls. We monitor the market.

We adjust our coverage to match the risks we see in those markets. You know, as as we know, The US growing season didn't get off to a great start

Speaker 5

Mhmm.

Speaker 2

Due to record rainfalls, and our hedge position during that time reflected our concern over that potential. And since the end of the planting season, we've seen a moderation in The US weather, and The US farmer likely planted more more corn acres than than we actually expected. So we've seen a significant decrease in the demand for US corn from competing grains in countries with ample supply. So if the weather continues to remain the current pattern, we feel more confident about The US corn supplies than we did at the start of the season, but we'll continue to monitor the development and adjust that risk strategy as needed.

Speaker 4

Okay. Perfect. Thanks for that clarification. And then following up on and you have some nice charts in your presentation a little bit on the pricing dynamics seen during the quarter and obviously the implications for that. Could you share a little bit what you expect for the back half in the different categories on the cutout value?

Obviously, is a broad range. But just to get a little bit of a sense what you've been seeing in terms of some of the feature activity, particularly on the foodservice, but also on the retail side and for to get a little bit of a sense on how demand for you looks into 3Q, which should be a little bit of a slowdown versus 2Q, but just to get a little better the seasonality and what you expect pricing is gonna look like into the back half?

Speaker 2

Yeah. Sure. So let let me just start start with sort of what's what's the lay of the land. The the jumbo cutout in q two was supported by wings tenders and dark meat. That was the overall cutout was by 11% stronger than q two of last year.

Mhmm. And so we're also seeing really heavy featuring of wings and tenders. We've seen a commensurate price response to that. The small bird cutouts, so let's say that small bird side of the business, which is actually a significant part of our portfolio. According to the USDA, the industry supply has been reduced for the small group category and is down over 3% year to date, following a 9% decrease in supply in 02/2018.

So our business, however, at at Pilgrim's, we've maintained the industry leading position in the space. We've not reduced our presence in this category. It's one really that has a lot less market volatility. And on the demand side of that, our key customer relationships in the chicken sandwich business has really continued to allow us to outpace the industry of growth overall in this category. So when we talk about cutouts, we talk about pricing, we talk about markets, I really want you to get a a bigger sense of of the picture for us is that we're we're not just about the parts, and we're not just about jumbo breast meat.

I'll hit that piece, but jumbo breast meat is trading currently at a near five year low, and we believe just for a couple of reasons. And the first, and this has been well advertised, but the front side of the outdoor grilling season got off to a sluggish start due to weather and colder than normal sea seasonal. We we believe the featuring was there, but the consumer was not activating activating those those those features at the market. Secondly, we saw some competing proteins, in particular, pork disappearance affected really due to two reasons. Increase of the pork production is up by about 4% at optimal growing conditions.

And then on the other side, we have about a 4% year over year decrease of US exports in the in the first half of the year driven by some over oversupply of pork in China, which we believe is caused by some increased hog pull rate that was driving near near term inventories higher. So our belief is that it's gonna take some time for the trade flows to reach The US market. While the original estimates sooner, we believe that early two thousand twenty, we should see the the domestic impact for that. But despite despite the the weakness in in breast meat, the industry production tonnage, just note, is only up about 1.2% year to date. Chick placements were about 1.4%.

Breeder flock is is relatively steady. Pole placements were up 3.6%. We believe that the availability of those poles hitting the market is gonna be about two and a half percent in q four, so very much in line with our expectations. And then on the demand side, at food service, chicken remains relatively healthy. It's continuing to grow at about a 1.9% year to date rate.

Broadline sales around up I guess around 11% and close to 8% in tonnage year to date. That's 11% in dollars. And the majority of that growth is is really driven by the QSRs, and we're seeing promotions close to about 20% more year to date than they were in 02/2018. And on the retail side, we're still seeing retail features up five to 6% year over year, and breast meat features since late May have become more consistent, and they're trading positive year over year.

Speaker 4

Okay. Perfect. That's very good. Thanks for the clarification and the good color on the markets and congrats again. Thank you.

Speaker 3

Thank you.

Speaker 0

The next question comes from Ben Bienvenu with Stephens Inc. Please go ahead.

Speaker 6

Thanks. Good morning, guys.

Speaker 1

Good morning, guys.

Speaker 7

I wanted to ask about Mexico. I know typically 2Q is the seasonal peak, but it looks like the pricing momentum has sustained into 3Q. You talked about some of the benefit you got from tighter pork supply and a little bit higher pork prices. Would love to hear your thoughts on 3Q in the back half of the year in light of, the better supply demand balance you mentioned, the removal of the pork tariff? And then also, is there any evidence so far that, ASF isn't having any impact on the Mexico market?

Speaker 2

K. So I'll I'll start. So I I would say that the markets are now reverting back to more normalized conditions. The weather, again, is turning more favorable. We continue to have positive outlook on Mexico.

We're confident in our team to deliver those consistent results. Just to recall, during Q1 in Mexico, we saw unusually better late Q4 'eighteen and Q1 'nineteen weather that drove, our improved growing conditions, and we also saw less disease pressure. The more than normal seasonal supply caused some outstripping of the q one demand. In q two, we saw that weather worsen for growing conditions, which slowed the growth and decreased livability. So prices doubled at the start of q two.

We had a we had a, as you as you saw, a really fantastic q two, which helped our bottom line improvements. I would say on the on the on the quotas, you know, it's pretty interesting, the dynamic there, as the, roughly year long 20% tariff has dropped in May, We've actually seen the same at the same time, an increase of import price by approximately 70% of the bone in hams, is actually the big item. So a net price increase of 50%. It's still early to see the full long term effect of the tariff removal, of course, anytime that market becomes more efficient, we're we're in favor of that then.

Speaker 3

And then just the seasonality for Mexico is different than The US. During the q three, normally, school is on vacation, so there is a different pattern in terms of family heating, and we see a a slower demand for chicken and for all the proteins. So we don't expect as strong of the performance in terms of prices in q two. But like Jason mentioned, our team in Mexico is really strong. And whether if the market condition is good or bad, we can always beat our competition.

Speaker 7

Understood. And then I I'd like to follow-up on the feature demand activity that you mentioned. It sounded like you said, you had quite a bit better feature demand, particularly on breast meat, as you said, yet breast meat prices have been under pressure. It sounds like that's weather driven, which makes a lot of sense. The grilling season has been hampered by that, there was less follow through from activation of those features.

Do you think if we get resumption or continuation of features into the fall, like it sounds like we will, you'll get better activation of those features? And then if you could just talk a little bit more about your expectation for for the fall on food service feature demand and how that compares to to what you've seen year to date.

Speaker 2

Yeah. Yeah. Ben Ben, thanks. We we believe that there are actually going to be more, featuring of breastfeed year over year. Again, the second second half of q two, we saw those activations starting to roll roll through plus the the feature starting to come through.

We believe that's going to continue into into q three and potentially q four. On the on the food service operator side, we we also believe that there's going to be more chicken LTOs. There's gonna be more sandwich features, and we believe that that trend is gonna be sorry. That trend is gonna continue to grow throughout q three and '4 as well, just like it did in q one and q two with that 20% increase.

Speaker 3

And then just in terms of competing proteins, we also see significant volatility in the pork prices. But for the year to date, pork prices are up 3% in the wholesale. And in addition to that, price of ground beef is up 3% during the year. So with that, the spread between pork and beef at the retail to boneless, especially, increased significantly. And that, is triggering some more featuring, especially on regular boneless breast.

Speaker 7

Awesome. Congrats on a great quarter and good luck in the back half.

Speaker 3

Thank you, Ben. Thanks, Ben.

Speaker 0

The next question comes from Jeremy Scott with Mizuho. Please go ahead.

Speaker 6

Hey, thanks guys. Good morning. You talked about some of the chicken capacity coming online and that replacing Saturday work. What are your expectations for total industry production growth into 2020? And what about just the tray pack segment?

Obviously, we're hearing very different things, but if you know, we're looking at the chick the egg set data and the chick placement data, then it certainly wouldn't indicate that there's a huge ramp up in production coming. So maybe just kinda give us your internal expectations and and how you're adjusting to that market.

Speaker 2

Yeah. Thanks. We we agree. We're we're in line, Jeremy, with the USD expectations of one to 2%. That's holding holding true on the front end.

We we know that there's a pull up placements at the in q four will will be hitting the market at about a 2.4% rate. So we did expect to see a higher second semester than the first semester of productions, but that's relatively in line with with our own expectations as well as the FDA. We know that there's one or two trade pack plans coming on towards the end of the year. We recognize that it most likely will be a medium to slow slow start up. We also know that food at home is growing over food service.

So we we also believe that, that, that new production will will be, used through the supply chain, based on our demand expectations.

Speaker 3

Right. Jeremy, just adding all the planned increased capacity for the next three years, if all plants are online and expecting, added the expected time and consider the ramp up and given that they have people to run the plants, we will be between what Jason said, 23% over the next years. We believe that that increase in supply is adequate to the increase in demand, given the growth in exports and the growth in domestic food service and and retail. We're also seeing that that the significant expansion of both beef and pork since 02/2018 are slowing down, and we are even seeing a reduction in production in beef in 2020. So in total, protein availability, I think it's gonna be a great year for chicken.

And just going back to the trade pack, I think it's important to mention that we have a differentiated business model when you compare to the branded competitors and the spot market competitors. We have partnerships with our key customers, and we help them grow their brands while offering a full range of products from tailored natural to higher order attributes like the organic production. We don't have these annual contract negotiations because our prices don't follow the volatility of the commodity markets in that segment. And just as a as a reference, our volumes in that segment increased 4% with prices a little higher than the same period last year.

Speaker 6

Yeah. That I guess that was my my follow-up question, which is this it seems like in the first half and certainly this quarter, there's been an acceleration in foodservice volume growth versus that at retail. And then within foodservice, it seems like QSR is, certainly well below well above the the full service segment. And so I'm just trying to trying to understand how your prepared foods division, or how the volume growth in your prepared foods will outperform that of your more commoditized product. Is that your expectation for the back half?

Speaker 2

Yeah. We've we've been growing that business. We're investing in that business, Jeremy, and we're absolutely putting our resources there to grow our prepared foods business. So our expectation is to continue to outperform the growth of the market as we have in the first semester of of this year, and we'll continue to take that to take that through. I'll I'll hit your I'll hit the retail side of this as well.

I I can't speak for for others, but our partnerships and Fabio briefly hit on this, our partnerships with our our key customers in this space have allowed us to grow with them and then to grow with us. And we've actually been short to tight in that case ready retail segments that we are supporting our customers, and they're growing with us, and we're growing with them. And I think there's might be a little slack in the in the industry there, but our business is is flush, and our relationship with our key customers are flourishing today.

Speaker 6

Got it. If I could just squeeze in one more on Europe. I wonder if you can unpack the volume moves in the quarter. Everything we're hearing from QSR operators seems to suggest good news on the foodservice side. So wondering if there's an issue in in the retail business, or are you choosing your customers more selectively post the, you know, the passing through of the feed wheat?

Or is there something else we should be thinking about on the volume side?

Speaker 3

I think that that's correct. We are part implementing our key customer partnership methodology and strategy in Europe as well. We are selecting the key customers that we want to participate. We are providing a much better service than all the other suppliers in Europe through our innovation, through our commercial teams, and we believe that with the key customer partnership, we can grow with them while selecting better our partners. We cannot do everything to everyone.

We dedicated our resources to our two key key customers.

Speaker 2

Okay. To follow on, which is exactly what we've executed in The US and and Mexico, Mexico and and we're we're in in process of in doing doing that in The UK and those volumes are a result of that.

Speaker 6

Got it. Okay. Thank you guys.

Speaker 0

The next question comes from Heather Jones with Heather Jones Research LLC. Please go ahead.

Speaker 8

Hi, everyone.

Speaker 3

Good morning, Heather. Good morning.

Speaker 8

I'm gonna say ahead of time that I have got joined the call very late, so I may be asking questions that have already been asked. So I apologize in advance if I do. As far as Mexico, they recently removed tariffs on US pork, and so exports there over the last few weeks have accelerated significantly. But from what I understand, some producers in Mexico were are exporting more pork than normal due to what's going on with different trade flows. So I was wondering if you are seeing a looser protein supply demand backdrop in Mexico because of more US pork coming in, or is it still pretty tight?

Speaker 2

Yeah. We we actually haven't seen that, Heather. Know, again, this 20% tariff has just dropped. But in turn, the the bone in hand, which is the big item into into Mexico, we've seen an increase in price by approximately 70%. That's just that's recent very recent numbers.

So really, we have a net price increase of 5050%. We're really not seeing really anything anything there. I'll tell you just on the on the backstory of Mexico. Brazil has increased their exports into China, which also competes with exports into Mexico. So that we should see that starting to diminish in terms of the breast meat that was flowing into Mexico.

We should start to see that slow down a little bit to relieve some pressure some pressure there, which actually there isn't any pressure, but it it it'll take some some meat that would have gone into Mexico off that market.

Speaker 8

And so The US, its exports into is chicken, poultry exports into Mexico right now. Have you we've seen an increase in breast meat exports out of The US given what you just said about Brazil, or is it still vast majority dark meat?

Speaker 2

It's it's the the vast majority is dark meat, but there's there's absolutely white meat going into going into Mexico. The the the Brazilian situation is very recent, so that that'll just stop the stop the increase of orders coming into Mexico, but it it it won't affect anything current.

Speaker 3

But to your point, Heather, the exports of Brazil to Mexico are typically breast meat. And as of today, because of everything that Jason said on the exports of Brazil breast meat going more into China, US breast meat is more competitive than Brazil breast meat into Mexico. Not to mention that our product is fresh and Brazilian product will be frozen.

Speaker 8

The US will be fresh and Brazil will be frozen?

Speaker 3

Yes.

Speaker 8

Is that is that what you just said? Yes. And okay. Thank you. And then in your press release, you had mentioned strong I can't remember how you phrased it, but, basically, strong retail demand.

And from what I understand, from what I remember is your key customers, your pricing doesn't fluctuate as much as maybe some of your peers do. So when we're thinking about strong retail demand and and proven results from Pilgrim's, is that just more that it's taking product off of those spot markets because good volumes are flowing through retail? Is that am I understanding that correctly?

Speaker 2

That's right. And I'll and I'll speak on the and this is I'm not speaking on behalf of the industry here, but I will tell you from from our our standpoint, our view, we've been tight to short on case ready retail supply and demand. So our key customer strategy is absolutely working. Again, it's a it's a partnership with our key customers. We're we're supporting their business to grow their business.

And as a as a company, our business has been short short to tight on production capacity.

Speaker 3

And you're right, Heather. We our process will follow the volatility of the commodity markets because of the partnership we have with the key customers and our volumes in the case ready segment are up 4% compared to last year and prices are a

Speaker 1

little bit higher than last year.

Speaker 8

Okay. Perfect. Thank you so much.

Speaker 0

The next question comes from Brian Hunt with Wells Fargo. Please go ahead.

Speaker 9

Recently, if you look at pricing data for boneless leg quarters, they're exceeding skinless boneless breasts. And there's talk and evolution to the next breed of bird to be less breast meat oriented and more like corn oriented. I was wondering, one, what are you doing to potentially capitalize on this trend? And then two, given that U. S.

Exports more dark meat than than white meat, do you do you believe that the export trends could potentially, you know, continue to fuel the the better pricing on on dark meat versus white on a go forward basis?

Speaker 2

Yeah. The thanks. So, yes, there's an absolute trend. There's more deboning of of dark meat, and most of that is for domestic domestic use. Regarding the breed, I I won't go into the in too too deep into the into the detail.

But in in order for it to really work, you have to have a complex that's that deep bones close to a 100% of that mix because that dark meat, if it stays on the bone, it's, you know, 25¢ versus, call it, a dollar on breast meat or 40¢ on a dollar. So they have to have the right the right specific mix to make that breed change work. But we we actually were doing some research. We have some pen trials in our one of our test farms in Texas. And I I will tell you if if the cutout works and the and the economics make sense, then we'll absolutely look at at moving some some breeds in certain complexes where we do more dark meat deboning than than than in some other locations.

Regarding Great.

Speaker 3

Okay. Yep. Yep. Yep. Ahead.

Speaker 9

No. No. You're I I was gonna switch gears, but keep going. Yeah. Okay.

Speaker 2

So regard regarding the the mix relative to retail, dark meat, white meat, we we don't know if there's a substitution of white meat for dark meat at their at their retail case. We do know that and and this is a test you know, really a testament to what we've been doing here in the last eight years. We we've been in working with more dark meat into prepared foods. We've been working with more dark meat with our customers, increasing our customer mix, increasing our product mix, our portfolio. So we've been doing much more retail into sorry, dark meat into retail.

But it's if you think about the growth, and we we know that re that dark meat at retail is growing by about 10% year over year. But if you think about the the big absolute numbers, the the delta between re retail dark and retail light So there's six times more white meat sold at retail than dark meat. So although there is growth at the retail level of dark meat, it's still at fairly small numbers, but absolutely growing.

Speaker 7

Great. And then,

Speaker 9

Fabio, you mentioned that they feel good about the capital structure, but you had flexibility to potentially optimize the capital structure. I'm wondering if I heard that correctly. I mean, where do you feel like optimal cap structure is? And what are the actions you will take to optimize it further from where you are today?

Speaker 3

Brian. Thank you. Our primary objective is to create shareholder value. Right? And within that, we want to grow our company, and we're looking to opportunities for m

Speaker 2

and a. And we have

Speaker 3

two strategic fronts, the chicken track and the prepared food track. We continue to see targets or options on both tracks, so we execute the strategy and believe you can create the the the proper value. Just like we demonstrate with the next acquisition, the GMP and the Moi Park. We will continue to invest in our operations, increasing operational efficiencies and further differentiating our portfolio. And we'll consider and evaluate all the other relevant capital structure strategies like dividends and share buybacks.

We've already mentioned that our optimal capital structure is between two and three times levered, and we are in the two times. So we have ample capacity in our balance sheet to promote our growth strategy.

Speaker 2

Yeah. Just to just to follow on, just on an m and a perspective, we have a proven track record of integrating assets that are accretive to our legacy business. We look really for three things, geography or brands that we don't have, a business that we can significantly improve, or one that we can acquire and quickly be accretive. So really those three things hit our hit our targets for growth.

Speaker 9

Very good. I'll pass it off

Speaker 3

to somebody else. Thank you.

Speaker 0

The next question comes from Rebecca Scheuneman with Morningstar. Please go ahead.

Speaker 10

Good morning. Jason, you're talking a lot about shifting to more prepared food and value added type products. I was wondering if you could give me an example of what you're talking about. And I'm wondering if these products, how they'll be priced, if they'll be still kinda, you know, formulaic based on I I believe most of your products formulaic placed based on different feed inputs. Or if it'll be priced more like a traditional packaged food with less price.

Speaker 2

Yeah. It's it's more traditional. That's that's the idea when when we speak about brands and and more prepared foods. It's really gonna stay away from the primary aspects of our business and move towards, call it, hate to use this term, the CPG pricing, but it's the the those brands will absolutely will will extract value and and create value from the the sales of those brands. And, you know, example is our our Just BARE brands at even at food service going to the the, you know, k 12 markets.

We're we're absolutely excited about that. We'll be creating a clean a clean label, a a product that consumers that will meet consumers' needs. And, again, we're we're separating this the primary aspects of our business from our prepared foods business as we as we grow our brands there.

Speaker 3

And, Rebecca, the objective is to create a higher, more stable margins. Right? So the prepared foods act as a as a great edge to our exposure to the commodity market.

Speaker 10

Right. Right. Yeah. I I definitely understand the appeal. So are you saying your Just Beer brand, even though it's technically it it's not prepared.

Right? It's just a pure organic or no antibiotics ever have has those qualities, but it would still it would command list pricing?

Speaker 2

Absolutely. We're actually moving that into prepared foods, retail, and and food service. So, yes, list price pricing Okay.

Speaker 10

We command. My last question then, still related is, can you just kinda disclose what percentage of your current product or revenues are at this list price and where you think that could get to over time?

Speaker 3

This pricing? I think, again, like what we mentioned, we have a very broad portfolio of pricing. So it depends on the segment. On the spot market or the big bird, there's a lot of prices that are connected to UV contracts. On the tray pack, we have the two partnerships where we have discussion about how can we help our customers to grow.

So the pricing there is more negotiated. On the small bird segment, there is some components of cost plus and, some components of grain markets. Mhmm. So and then on the prepared food, just like we mentioned and and Jason mentioned, they're more, CPG type for list prices. So I think, what we try to do in our portfolio, not only in products, but also in prices is to mitigate any risk in any specific sector.

Speaker 10

Okay. Thank you.

Speaker 0

The next question comes from Ken Zaslow with Bank of Montreal. Please go ahead.

Speaker 5

Hey, good morning everyone.

Speaker 1

Good morning. Good morning, Ken.

Speaker 5

I just go I know a lot of questions have been asked. I I just wanna ask one kind of bigger picture question, I guess. In the press release, you talked about European operations, how you expect the momentum to continue into the second half. Can you give us that type of outlook for Mexico as well as The US? I know we there's been a lot of questions around it.

I was just curious if there's some sort of parameters to which you could do that same thing that you did with the European operation.

Speaker 3

Sure, Ken. I I think it depends on the business model that we have in each region. Right? Mexico is a more volatile market. There's a lot of volatility in the in the in the live markets and in the chicken markets in Mexico.

In Europe, we have a lot of our products and a lot of our partnerships in a cost plus type. So it's much easier to give some indication of what's coming on the next quarters. Quarter. Again, Mexico, we have a Q1 that was really below our expectations, and we have a really strong Q2. The guidance we gave on Mexico is that we regardless of the market conditions because of the differentiated products and our strong management will be better than the competitors.

I think it also it it depends a lot on the on the type and structure of the markets that we have. In US, we can give a a better view in some segments. But on the big bird deboning, for example, I think the market will dictate a lot of profitability. We've been trying to differentiate our products, and Jason mentioned the new antibiotics ever even in the big bird segments, but that is still a more volatile segment. And, that's what we are trying to build our portfolio.

In Europe, we are more stable. In Mexico, we can we are more volatile, but we can capture the upside in the market. And in US, we have a more well rounded portfolio.

Speaker 5

My my last question, Jason, the the key customer relations, project that you're doing and and been doing for seven, eight years, can you talk about what the runway left is? And can you add can you start moving certain customers from, like, for a lack of better word, you know, the bottom rung to the middle rung and the middle rung to the top rung? How does that process work? And, you know, where are you in the stage? Because, again, it seems like this strategy is is working phenomenally.

So I just kinda wanna see what the runway is, where it's going, in the next, you know, one to three years.

Speaker 2

Yeah. Ken, thanks thanks for the question. It's a strategy that continues to evolve. Again, we we started this strategy. We implement this.

We we were trying to do everything for everybody and and really, determine that we needed to put our resources into several key customers. We're growing, extremely well with those key customers. Know, that's based on the premise of service, quality, trust, scale, you know, scope, growth, and profitability for for both both partners. And there's much more runway left. Again, the the key customer starts with trust with us, and and we must deliver that.

And we're continuing to expand on our key customers, and it is a an evolving process, Ken, but there's there's, lots of runway to go there. Next question.

Speaker 5

Are you gonna be able to progress the you know, is there room to progress? And, again, I don't know if you call them, you know, platinum gold and silver or high, low, medium, whatever. But is there a way to progress the customers through the through the ranks? And or have you gotten everybody into that top rank and and you have to add new customers? Like, what is the the evolution?

And and and I don't know. Just if there's any color to that, and then I'll leave it there. And I really appreciate it.

Speaker 2

Yeah. Sure. Sure, Dan. Really, we have we have that we have priority customers. We have customers within each business units that are that are critically important to our business, and it is it is our it is our absolute goal to to make those priority customers key customers.

But, again, if if there's there's five filters that that we run through, and our customer runs through as well. They they look at us as key suppliers. And if we can work work out those those big picture details, then we're absolutely moving and continuing to move our priority customers into the key customer status.

Speaker 5

Okay. I appreciate it. Thank you guys very much.

Speaker 2

Sure thing. This

Speaker 0

concludes our question and answer session. I would like to turn the conference back over to Jason Penn for closing remarks.

Speaker 2

Thank you. We are encouraged by results in the 2019 and believe the outlook for global chicken consumption will remain positive as consumers around the world continue to view chicken as a compelling healthy alternative. Our diverse portfolio of differentiated products tailored to support our key customer strategy in conjunction with our geographic footprint will continue to generate consistent performance and minimize margin volatility in challenging market conditions relative to peers. We will continue to identify new opportunities, including Europe, for both organic and acquisition growth, refine our portfolio and offer differentiated, customized, high quality products to support our key customers' needs through constant innovation. Our team members are our competitive strength.

We will continue to invest in our people who drive our results by providing them greater opportunities to contribute to our success. We would like to thank everyone in the Pilgrim's family, including our family farm partners, suppliers and our customers who make our business possible. As always, we appreciate your interest in our company. Thank you for joining us today.

Speaker 0

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