Q3 2019 Earnings Call
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I'd now like to turn the conference over to done them window director of Investor Relations for pilgrims Pride. Please go ahead.
Good morning, and thank you for joining us today.
Our operating results for the third quarter ended September 29.
Right.
Yesterday afternoon, we issued a press release regarding Olivia.
Or.
A reconciliation of non-GAAP measures may discuss.
A copy of the religious available in Investor Relations section. So we're all website.
It's likely we'll reference during this call.
Hey, sorry.
Okay well.
Bill on line please.
See dot com.
Presenting to you today are different than rather than a chief executive officer.
Before we get our prepared remarks like to remind everyone of our safe Harbor disclaimer.
Further information concerning those factors.
Right after that today's press release, our 10-K regular pilots with assay see my life during the call over to get some debt.
Thank you Doug good morning, everyone and thank you all for joining us today.
For the third quarter of 2019 reported net revenues of $2.78 billion, adjusted EBITDA of $258 million or 9% margin and adjusted EPS of 45 cents.
We are appreciative of our team members for the improvement of our operations as well as during Q3.
The U.S., we experienced a much better environment in our fresh business compared to a year ago, most notably in commodity large bird debone in our prepared foods business continues to grow reflecting the investments made over the past few years.
Our European operations have continued to mitigate recent input cost challenges and we expect our results in Europe .
To continue growing for the remainder of the year in Mexico. The market was in line with seasonality it performed much better compared to 2018.
Our Q3 results once again reflect a diversity and balance of our portfolio, which gives us the more consistent consolidated performance. Despite the volatility of specific market segments and geographies.
We will continue to evolve our portfolio to better adapt in responding individual market dynamics and improve our 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 are the volatile commodity sectors.
The market for commodity large bird debone into Q3 wasn't materially better commodity large bird cut out improved throughout the entire quarter in as much closer to the five year average driven by strength in wings.
Headquarters and tenders with boneless breast lagging.
No less commoditized small bird in case ready segments customer demand was in line with normal seasonality.
We're continuing to experienced strong growth for our retail tray pack rotisserie chicken QSR sandwich businesses with key customers our market leadership in these categories and more differentiated product portfolio continues to give us a competitive advantage.
The commitment to our key customer strategy remains relevant to our gross revenues from key customers more than doubled over the last eight years, reducing our relative dependency on pure commodity sales, we continue to leverage our key customer strategy to earn more business accelerate growth beyond just the underlying market condition.
And beyond driving growth our key customer approach also promote chaucer.
And as long term relationships it strengthens our margin structure.
We are continuing to further differentiate our portfolio to reduce the impact of pure commodity markets.
We've been increasing our mix, especially the birds, including no antibiotics ever inorganic 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 doubled but less than 20% just a few years ago.
We have now converted to large bird feed daunting plants could fall and a supportive of our goal to double any contracted volumes as large bird debone in 2019 versus 2018.
We're expanding our breast meat, fortunately capabilities, while increasing dark meat deep on capacity by 40% to de emphasized our exposure to the volatile a pure commodity markets.
We're continuing to invest in automation robotics to support strong demand for our products, while minimizing the impact is tight labor conditions on margins.
We've also extended to reach or well regarded just bear brand this quarter. The launch of our portfolio for prepared foods products into both foodservice and retail channels to just bear portfolio provide solutions that satisfy our customers' needs.
For a product that is all natural clean label.
And contains no antibiotics ever.
We're also innovating through new marketing strategies in the digital channel as we continue our path to become digital first chicken, we're rolling out technologies that allow for store level Geo targeting.
These new emerging technologies allow us to use our media dollars more effectively by targeting only consumers she shops doors, where products are sold and fit our target consumer profiles.
Finally, or just bear brand remains a top seller chicken largest online retailer with great potential yes. The footprint. It's a new geography is continues to expand.
Our export business continued to perform well during Q3, U.S. frozen chicken inventory was down 4% year over year from 2018 at the close of Q3. Meanwhile, export pricing is increased approximately 46% from the same period a year ago during last quarter reflective of the solid demand although price.
As a moderated as we enter Q4, we have remain proactive in diversifying your country of destination mix and our relentless in developing alternative sales strategies in the event, we count or any trade disruptions due to animal diseases or unforeseen disputes with existing trading partners.
Market conditions in Mexico in Q3 were in line, but normal seasonality or significantly better than the same quarter last year.
As a reminder, Q3 for Mexico, a traditionally the softness in the entire year at schools are closed and we experienced a reduction in chicken demand at retail.
Price isn't the commodity sector were volatile in the quarter, but our increased share of non commodity product sales that helped to stabilize margins market environment. In Q4. So far it started in line with typical seasonality as we expect to generate improved performance for the full year.
We continue to be developing and market in prepared foods in Mexico. This year alone, we have launched 20% more products compared to a year ago, we're making great advances in our prepared foods business with innovation at the core competence of our strategy, we're generating excellent results under premium Pilgrim's and dealt via brands both of which.
Have continued to receive very favorable acceptance by consumers at retail flux doors and QSR, we have a strong team in Mexico committed to continued delivery of strong results.
After a challenging first half of the year, when we faced high input costs, driven by higher grain utilities labor and packaging EBIT of our European operations improved during the previously reported second quarter. He continued the positive trend into our third quarter growing 10% year on year and 6% sequentially.
Despite a colder weather during the <unk> grilling season, we generated an increased performance driven by the soft softening input cost and further recovery and mitigation that prior quarters input cost inflation, along with additional synergies supply chain off the rate optimization and other operational improvements we generated 4% improvement.
Relative to the same period last year.
Although still small our non meet operations and their margins are expected to grow strongly over the next few years driven by robust consumer demand investment in equipment operational efficiencies and partnerships. We continue to support our customers development expect to see further growth in following quarters driven by increased consumer interest.
The need three snacking.
We had been an important partner and meat free innovation over the last quarter in particular with our QSR partners.
Two weeks ago, we announced the closure of the Tulip acquisition, we're very excited about the additional the addition of the tulip team to tell rooms. This transaction further enhances our position as a leading global player by expanding our portfolio prepared foods and brands, while strengthening our leadership position in the UK market logic.
Our strategic part priorities as we continue growing our geographical footprint and extend your global reach into your attractive new markets were solidifying our growth platform, both in Europe and globally by diversifying it further globalization of our portfolio, we're enhancing our margin structure, while reducing volatility across our businesses.
Further with the addition of true ups best in class highly integrated production platform, we have significantly strengthen our brand portfolio to further improve our value added innovation capabilities. We're optimistic about building upon tulips existing operational improvements by continuing to optimize manufacturing footprint extract best.
In class operational excellence optimize the portfolio of channeled segments and products as well as strengthening ROE business with key customers to drive innovation in high margin areas to what this launch a number of New award winning products in both the sausage and Bacon categories recently, and we will capitalize on that momentum.
And now that all tubes fresh pork that still facilities have been approved for China, we are well positioned to benefit from export opportunities. There together, what you'll have to look forward to sharing innovation and best practices, So to answer operational and financial efficiency and physician Pilgrim's as a whole for increased profitability.
Okay and more consistent margins.
Two up is actively leverage innovation drought its operations and we look forward to benefiting from its portfolio of innovative products and its product developed platform. We also expect to capture significant synergy opportunities over the course of the next few years Pilgrim's is proven history, its successful and efficient integrations of companies we require.
And we will apply similar methodologies in integrating tool.
Turning to feedstock corn prices have retreated off their summer highs as U.S. corn production is coming in much higher than had been expected at the end of Q2 U.S.T.A. confirmed the larger corn harvest when it increased yield to she wants 68.4 bushels per acre in the October crop report this push U.S. Kerry.
Carry out to a comfortable 1.9 billion bushels, which is well above the market's expectations soybean prices have recently rallied as the market is responding to the reduced expectation for U.S. soybean carry out do you Sta lowered its U.S. ending stocks to 460 million bushels and the October .
The report although this is down from last year's record large carry out world soybean supplied remains ample to satisfy demand as evidenced by extremely weak basis for soybean products globally.
[noise] feed wheat prices in Europe remain at low levels due to the increased in supplies from a year ago. U.S.D.A. recently raised eight you wheat production to 152 million tons, confirming a bumper harvest across the continent, Although we're gonna see higher corn prices in last year's results into smaller U.S. corn crop.
So I'd be meal prices are in line with last year and wheat prices in Europe will be lower in 2018, we do not see significant increase in feed costs going into 2020 for 2019, U.S. Da's expecting total U.S. chicken industry production to grow in line with last year in the 2.5% range for next year you have.
He expects to more modest production growth of 1.6% redirect productivity began 2019 with modest improvements, but more recently have trended below 2018 levels. The growth in excess of placements has been primarily due to larger layer fought attach rates have remained in line with 2018.
Despite the expected growth in beef and pork production final approval and implementation of new trade agreements with trading partner should gradually reduce the amount of domestic protein availability dry prices of competing the tire and support and increase in chicken demand the outlook for chicken demand in the less commoditized segments.
This year continues to show an overall balance.
In addition to demand growth in broad line distribution national chain QSR demand continues to grow as shown through the increase in chicken servings in 2019.
The retail segment has shown positive dollar growth and we expect additional support with more feature activities by retailers in the new year.
And realizing our vision to become the best and most respected company in our industry, creating the opportunity to better future for our team members in line with decision. We've established a comprehensive sustainability strategy that addresses priority issues critical to the long term success of our business and the interest of our key stakeholders stakeholders.
First our national natural gas use intensity by 11% on a 2020 goal of 14% reduction and we're on track to achieving 95% or better on or animal health and welfare scorecard for our life operations. Our 2018 sustainable stay to build report is available online and to.
While we will we are already well balanced in terms of our bird size exposure, we will continue to seek opportunities to incrementally shipped our product mix and reduced the commodity portion of our portfolio by increasing number of differentiated products to key customers, while optimizing our existing operations by pursuing operate.
He showed improvement targets.
Our key customer approach, a strategic and creates a basis to further accelerate growth in important categories by providing a more customized high quality innovative products. They give us a clear long term competitive advantage with that I'd like to ask our CFO Fabio sandri to discuss our fine.
Actual results. Thank you, Jason and good morning, everyone.
The third quarter of 2019 net revenues were two point 78 billion compared to 2.7 billion from a year ago, adjusted EBITDA increased to 258 million or a 9% margin, which represents a 66% improvement versus 156 million a year ago or a 6% margin.
Adjusted net income was 112 million compared to 52 million same period in 2018, resulting in adjusted earnings of 40 cents per share compared to 21 cents per share in the year before or idling, 114% increase operating margins were 6.5% in United States 11 in that.
5% in Mexico, a 4.9% in Europe , respectively.
Operating profit in the USA, what the 125 million close to 70% higher doesn't result, a year ago are small bird and keys rented business continued to perform well and generate consistent top tier performance large bird deboning materially improved compared to Q3 of last year and contribute to the year on year improved.
And in U.S. business as demand was in line with normal seasonality. Despite some softness in the boneless breast pricing.
Are you asked prepared foods continue to grow following the investments in the last few years any increased 11% being revenue and volume year over year. During Q3. This growth is be fueled by our investments in R&D sales and marketing to execute to new product innovation.
We have other initiatives in place to accelerate growth in this market and we are expecting you to contribute a great portion of our total sales in next few years, while adding to the stability in consolidated marks.
Our operating profit de Mexico substantially increased to 38 million from a very weak quarter, a year ago market prices during the quarter were bullet, though but in average in line with normal seasonality. We expect our results for the remaining of the year to improve as Mexico continues to grow in chicken demand.
We didn't prepared foods, the Mexico, we remain a leader in developing the market and it has launched 20% more new products compared to the same period last year. Our strategy is supportive of the goal to increase our higher margin differentiated products, well, having probably coverage from entry level to premium across multiple channels in both.
Fresh and prepared.
How strong thing Mexico is our true differentiation with their operational excellence and market leadership, and we expect this trend to outperformed relative to the competition to continue in the future.
Quarter over quarter can be quite volatile in Mexico, given market conditions of the Mexico has been very consistent on a year over year basis.
Europe's operating profit was 25 million stronger than last year, and an improvement over last quarter as our operation began to meet mitigates the industry wide input cost challenges, we had being experienced the things last year. Despite cooler weather during the barbecue season, increasing implementation of our key customer strategy in.
With us to better work through some of the input cost increases by adjusting your pricing models. During the quarter. In addition, we have being more successfully capturing synergies and improving efficiency and yields to mitigate the higher cost that impacted us during the late 2018 and early this year.
Aspect to finish this year with strong momentum the results, we will continue to leverage our marketing and sales infrastructure to optimize SGN a cost now along with our key customer strategy, we will remain our lead relative results to the industry.
As we close the truly position in the October will include tweaks contribution starting in Q4, we are excited about the potential for to live to improve its performance and very impressed with the quality of the management team and the quality of the actions. We believe that there are many opportunities for synergies and grow through the creation of one of the leading.
The Companys UK.
Question, either in Q3 was 3.4% of sales slightly higher versus a year ago as we increased support for expanding to just bear brand nationally and investments for our new prepared foods products, both in United States in Mexico, We will continue bragging rights 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 partnership with key customers. We are investing roughly $300 million in capex and reiterate our commitment to investment and strong return on capital employed projects that we improved our operational efficiencies and tailored customer needs to focus alluded.
Five competitive advantage for viewers.
Our balance sheets continues to be strong Europe continued emphasis on cash flow from upgrade the activities focused on management of working capital and disciplined investments the high return projects during the quarter. Our net debt was 1.7 billion with a leverage ratio of 1.8 times last 12 months EBITDA even after that.
Closing of the dilutive acquisition, our pro forma leverage will stay below two times net debt over EBITDA.
We have a strong balance sheet and the low leverage you will remain focused on their side and great care, ensuring that we create shareholder value by optimizing our capital structure, while preserving the flexibility to pursue while growth strategy and we continue to consider and evaluate all relevant capital allocation strategies that will match the pursuit of growth stay.
Right and continue to review each prospect according to our value creating standards.
Operator. This concludes our prepared remarks, please open the call for questions.
We will now begin the question answer session and the interest of allowing equal access we request that you limit your questions to then rejoin the queue for any follow up to.
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Our first question comes from Ben <unk> with Barclays. Please go ahead.
Good morning, James in Colombia, well first of all thanks for taking the question.
Thats it.
On the results.
Two quick one if I may say you briefly touched on on synergies for the tool of acquisitions. So I was wondering.
Obviously, you're just in the early stages, but.
We've seen more improved student support from from Europe , and China the results.
I was just wondering how you feel about the potential to turn the operation from call it somewhat EBITDA breakeven.
Positive territory when do you expect the timing of synergies to fall. So and then I have in regards to that has actually been question in Mexico, but I'll leave that one first thanks.
Hi, Ben Thanks for the question. Yeah. Clearly has started its turnaround is making significant changes in its production meant to work mix and cost to improve its profitability, we expect to profitability to be lower legacy assets in UK.
But with the improvements in the operations and pork and prepare food markets, we expected to be line with our legacy operations in juniors similar to what we did in Mexico as I mentioned assets the greater opportunities for them. They are the UK lard just be farmer and have all four plants have proved to be exported.
This value has increased already 50% year over year and with increased important riots in Europe . Many of the cheap imports that today goes to UK will stop going.
Yes, just just sat at just to add Ben.
Yeah.
So very very similar to Mexico very similar to.
To the GMP acquisition.
This will take this will take some time and where we believe 24 months is a good number for us to have this have this business.
Right sided relative to our legacy business.
Bob you mentioned, 100% of our.
Assets to look for now China, China approved.
We've seen a lift in both revenues and volume to China as the you as well is exporting neat into China as well so.
There were seeing a meat immediate lift from the VA assess impacted.
In the Nielsen tool up and again, our operational efficiencies our key customer strategy.
As we right size the portfolio with the channel the mix of products until it will take some time or absolutely thrilled about the opportunity the assets.
Well well invested.
With two of then and we have been underground for several weeks in and we believe in the team and the people. It at two up so we're really excited about this opportunity.
Thank you.
Just a quick one in Mexico, and I was more call. It Didnt fall more time normally chemotherapy with coal prices going higher.
You might as well you can see more of that 6 million in Mexico.
Strong quarters in the quarter offsets is complete and falls off because a lot of private guys and skill at least some.
More to go into into the smaller process when you get a significant oversupply and evolved since you short period of time.
Have you seen any dynamics loss, while relatively to relatively strong quarters puts you can then the second quarter was very strong enough. What's called a continued to be so anything you would expect into fourq to something similar likely to happen, but three key last year, maybe some some negative results just as a matter of fact of its quite rational market still.
Yes promotion Mex, nothing that seemed ups.
Mexico has a different seasonality than U.S. and typically the coordinator is a week what because at the school recession. So like we always say despite follow Mexico is a growing economy I think last number.
Off the GDP growth was not great that Mexico, but in general is the growing economy and the population increase their disposable income it leads to significant growth in Brocal assumption, we're increasing our volumes bolting fresh with our expansion into very cruise.
And in prepared foods by delivering innovate and extending our premium value added products yet.
Fabio said the net net the economy in Mexico is relatively flat. It's tied tied as you know two did to the U.S.U.S. The economy I I will I'll also say say this and end up flat or ordered.
Declining economy, we do see trade trade down from other proteins into chicken so.
Just because of the economy is call it flat to two weaker response over the last three quarters, we don't expect to see any demand.
Demand destruction chicken in Mexico.
Okay perfect well that's all thank you very much in comfort on the wealth.
Thank you thanks Ben.
Our next question comes from Heather Jones with H.A.J.R. Research. Please go ahead.
Good morning, Thank you second question.
I may ask some repetitive.
Switching back and forth between calls.
So.
I was hoping to talk about the contracting season.
And.
[laughter], how pilgrim is approaching this any differently. This year if at all given the likelihood of big shifts and supply demand in 2020.
And any observations you have on how.
The industry is likely to approach contracting season, given the same dynamic.
Yet Heather thanks, Thanks for the question.
I would say the contracting season is moving somewhat slower this year and there's a lot of moving parts as it is the dynamics are art are.
Becoming.
More more dynamic as as the time.
Moves on so I would say, it's a little it's a little slow.
We're cautiously optimistic.
Relative to where proteins are today versus where there will be within 30 and 60 days from now so I. We're approaching this the slow we do know that that that asset.
Is becoming more part of the discussions.
We do know for example.
Australian.
Be trend this is something that that is not been.
Call. It was widely discussed but the in the U.S. imports of veith are starting to slow down affecting the hamburger market said there. While there are major QSR is looking to contract beef.
On the forward basis. We're also hearing that there's not many self sellers willing willing to forward price. So that's falling into as part of the chicken dynamics as well.
I'll just add ahead of that it's more on the prepared food side, especially on the tray pack, we have a differentiated business model.
We have a two partnership with our key customers and we help them grow their brands, while offering a full range of problems from Taylor natural higher order out to do it to offerings like organic so we don't have annual contract negotiations because our prices don't follow the volatility of the commodity market.
I do not react with sharp increases in strong spot markets and does not followed the the trucks doesn't make sense or volumes into segments increased from last year and move our prices up 3% higher.
Yes. It just took just a further for just a further on that.
Had thought probably at five is correct and that our tray pack business has been very strong we've been tight we've been tied to short.
All year and we don't so part of our business is not is not contracted.
But we're delivering service and quality to our key customers growing their business.
Paul pulling through the demands or through our to our business and we're seeing we're seeing that every day in art in our case ready business.
So what I'm thinking about how PBC is positioned for and I'm thinking about the U.S.
So you have you know a portion of the business of cost plus.
You have a tray pack.
And then you have your large bird and you know the tray pack I I get the key customer concept and.
Clearly served you guys really well when I'm thinking about your exposure to.
Potentially large price increases.
Is your large bird business really the only segment that would benefit and 2020 from strong.
Hi, thinking.
Or.
Are there certain thresholds any other businesses that have used to paso's.
Pricing themselves.
Well well, even within our small bird di di boating.
Business Heather we have some we have we have.
We have upside as well with some of our non contracted business are you mentioned, our large bird de boating operations. We've we've made great strides over over the last two years.
In this business operationally and from a from a sales perspective, what gain all of the lift will gain on the left on the on the on the back half obviously and then then the white the white meat lift as well.
There's some there is some tray pack lift as well from from a dark the perspective, we're going to see that we do trade on on the market. So we do we do have that left as well, but again, there's a there are a fresh foodservice business. We have we have lift there from our commodity won business I think as the commodities move Wolf.
See not just our commodity big bird Deboning business move, but we'll see this will see this shift throughout each sector of our business in smaller in larger ways, but you did highlight the largest piece of our business will be impacted by by big bird, but each one of our businesses what will be impacted by by a higher.
Our commodity markets.
Awesome I just have one last question do you guys have just been very proactive and.
Converting plants to more on trend.
Better margin businesses.
Do you anticipate any.
Conversions and to into 2020.
Whether it's moving like dedicated plants like you did it sanford or or or whatever I should we anticipate any meaningful conversions going into 2020.
Yes, we have we have another key customer that will be coming onboard very excited about that.
It will it will be happening in Q1, there won't be any major disruptions to our facility but.
Heather, but as as you as you said you know when we are new management team.
Okay came in 2011, one of our strategies was to create the most.
Optimal portfolio and we've been relentless about that and.
When we have great service than we have great quality and deliver deliver to the customers expectations. We continue to grow and we're going to add to this portfolio in Q1 of 2020, so really excited about that.
Again, if you have a question. Please press Star then one.
Our next question comes from 10 per ads with Stephens Inc. Please go ahead.
Hey, Thanks for the question guys.
Past weekend, we saw reports that chicken being included in phase I phase one trade deal. So I just had a couple of questions related to that.
First.
You have any facilities that are cleared to import to China. Once the band is lifted or could you walk us through the steps needed to be taken for that to happen.
Yes, all of our plants are able to export I think what are we cant export to China is because today they have a band because of even influenza since 2015, so different from all other countries in the world reach cleared that Ah that's been after six to six months to one year.
China kept that employees. So the moment they leave that band, which is being imposed for portrayed reasons, we will be opened to exports to China all of our plants are.
Oh, Okay exports to China.
Okay. Thanks that was helpful. And then could you frame up the potential incremental sales opportunities that would bring for pilgrim's realize many pause go to rendering and the U.S., but understand that summer currently export. So I'm just trying to frame up the potential earnings power uplift for the company and then is there any chance that China buys like.
Orders this time around what the inflation that we've seen in the country I understand it typically they just by pause from us.
Yes that is that it's a great question I think there are direct.
Opportunities in indirect opportunities. So I think the direct opportunities in the pause so we're being sending some foster the rendering or selling through other bets missions that that much discounted price with the opening of China that is that is a good outlet for for the costs I think there are some indirect.
Opportunities as well as China continues to consume more meat from other destinations those markets began an opportunity for the United States.
China acquired somewhat quarters in the past I think in 2011 and other years. So there is an opportunity for leg quarters, but we believe that more than just direct impact is the indirect impact that they will help lift.
Leg quarter pricing throughout the world and as you see the inventories of let partisan your west the continued to to be reduced inventory exiting even if they for leg quarters are 2020, 5% lower than a year ago. So areas. So theres a lot of opportunity in that regard even breast meat today.
With the breast meat at the prices that they're trading hearing the last there are some of the midstream exports to China or to other destinations that Tim and in 2014 Pilgrim's exported in excess of 200 million pounds to Hong Kong and China. So.
Well, if theres Theres no reason why those numbers won't go back to north normalized call it normalized normalized levels.
If you look at exports to China export is outside the U.S. it really dominated trade Brazilian pork exports to China are up 48%.
Beat is up 11% year over year Argentine beef exports are up 104% year over year in China now represent 70% of their total beef exports.
I talked about this little earlier, but Australia beef exports to China are up 73% year to date.
They're in the inventory appears to be liquidating and meet the demand due to the drought the ongoing drought in.
So we're.
There's a lot of exports.
Moving throughout the world into China.
And they are actually dominating the trade U.S.T.A.
Recently said, China is going to account for 30% of the world's beef trade in 2020, and that's up from about eight and half percent in 2015.
And they're also going to account for about 35% of the worlds portrayed that's up from about 15% 2015, So there's absolute.
Availability for the U.S.
Yes, Theres a trade agreement in phase one.
For the U.S. market to resume.
And possibly exceed where where it was in 2014.
Okay. Thanks, So super helpful. Do you have an approximation of the amount of pounds ever shipped to try and on Hong Kong last year for Pilgrim's.
No I.
I don't have that number two.
Thank you thanks anyway, so I'll pass it along.
Our next question comes from Ken Zaslow with Bank of Montreal. Please go ahead.
Hey, good morning, everyone.
Hey, Ken.
I have two questions first is on the Mexican operation.
How do you think that the African swine fever, I know everybody talks about the Europe on the telling the courts to China as well the U.S. how does it affect the Mexican operation and when you think about you know your historical 10% margin.
How incremental would that be to Mexico. If it you know African swine fever trade continues and has that work out for that business. Yeah. I can fix the question I would say in indirectly so.
Mexico imports.
What breast meat from Brazil that that's one that's.
One way to enforce the other one is obviously from from the U.S.. So if if African swine fever, and the trade deals start to happen you could see both of those import streams.
Dry up a little bit.
Creating some more of a supply issue in Mexico, and I would argue that.
Supply and demand.
No.
It is very it's very dynamic in Mexico.
And so now that you see the volatility that the Q over Q volatility in Mexico, it's mostly due to the supply and demand.
Basis as as it flows through our results so.
<unk>, there's a lot of indirect ways. So that's that's two of them I think a connected to that can there's a lot of the U.S. pork that is going to Mexico. There was a.
Very high competition, especially in Q1 non this you keep <unk>, that's a reduced a little bit so as the JSF.
Poses a big opportunity for the U.S. Far Corporation less Fourq will go to Mexico and that is a a lift for the chicken market there.
Then a bigger question <unk> and they tend to ask this.
It off and maybe the greater clarity to this is.
If I think about your operations now again, you've made progress with cost savings you made progress with.
Customer one you keep on moving forward in terms of your margin structure less commodity.
Does it take this environment.
And put it back five years ago.
How much more profitability or how much more higher margins you have relative to when you started this journey and it's the biggest isn't that the structural change that is actually happen how do we quantify that and how do we put that in terms of.
Some parameters to that.
I think Ken.
We believe the.
Comparable results that are a direct competitors right. So we have to benchmarking system and then we have the public traded competitors. What we want used to be does come back. There was any believe we have the best portfolio to to be the best.
As.
All of our operation improvements programs happen, what we saw over the last seven to eight years is that the degree did more than $1.2 billion inefficiencies and you can test those efficiencies bays on where we were into ranking eight years ago and that reactivate. So today, we're operating at the top tier.
In the segments. We are so I think the wait to see this is that whatever the market will be able to offer as profitability for the average company will be better to that and I think that's the way to seek.
Can I I would also argue that we're leaving a lot on the table.
We have up we've identified in mix portfolio operational efficiencies. Another 300 million million dollars that that that we absolutely are are not capturing today that that with a with better execution and a better portfolio and strand strategy, we can capture that so.
Although we have made improvements there's there's a lot still left on the table for us to capture.
But again, if you'd like to ask a question. Please press Star then one our next question comes from Mike Pekin, Let's Cleveland Research. Please go ahead.
Hi, This is Chris on my bike and thanks for taking my question I'm curious if you can provide us an update on your labor situation I think about labor cost going into 20 Twond.
Yep.
Correct, Chris Thanks for the question.
I will tell you it in a tight it a tight labor market.
One of the one of the competitive advantages that weve that we've employed over the last year, we actually with a shift in strategy have improved our labor we are as a as the company full fully staffed today I couldn't tell you that a year ago.
For two years ago, so despite the tightening labor situation.
Our our facilities that at 12 runs are fully staffed today now we've taken we've taken about a $55 million to $60 million of increased wages that.
Flow through the system over the over the last year.
But I I will absolutely argue that.
One of the reasons for our improved margins.
Is our people and making sure that our our people remain at the foundation of our business has enabled us to move our mix forward and actually execute our strategy in a way in which we couldn't do a year ago or two two years ago. So.
I will argue that that in today's environment. Our labor situation is is at its peak. It's at its best it's been in over the last three years. Despite the tightness in labor and it's actually driven more more more revenues than we invested in it.
In our in our people financially.
That's great. Thank you.
Our next question comes from Peter Galbo with Bank of America. Please go ahead.
Hey, guys. Good good morning, Thanks for taking the question good morning.
Just wanted to ask you know with with one of your key customers Relaunching. The chicken sandwich here in the next you know next few weeks.
And you know breast prices on small birds trading at a pretty high premium to the jumbo bird I guess is there anything structural in that that should cause small bird breast prices to continue to be I'm at a significantly higher level on a run rate basis going forward or.
Is there something that can be done you know that that you expect jumbo prices to kind of catch up in the near future is there not enough small bird capacity can you convert some of your existing capacity over to small bird just just any color there helpful. Yet.
Peter just will not come just from a commodity market basis.
Small small bird breast meat is trading at three X.
John Jumbo meat and that's that's a historical high spread so I think that sort of tells.
That tells the story a story.
But I'll also argue that.
Cobra one of our core competencies is this business.
And while many many companies have moved in and out of a small birds, we maintain our leadership position in this business and so I'm struck structurally I I'll again, I think the the historical spread tells you what is.
Happening now if if these if that chicken sandwich continues to.
Increase from a demand perspective, I think that does bleed over into into the the median birds and some some substitution between medium and jumbo birds, well, we'll start to take place as that dynamic moves through the system, but small bird business is is there.
Ill call it tight today as demonstrated by but by the by the price spread alone.
And also argue that you could see some shifting to medium medium bird to capture some of that sandwich meat and then it'll substitute north to the jumbo burst, but again our position is very strongly this business. We are our team executes at very high levels in this business.
Yes, and it remains a core competency it will remain a core competency going forward.
And just maybe on that point I mean, if you were to consider you know changing over over capacity to do more small bird. If that's really is a new dynamic just can you walk us the dynamics of of how long that would take maybe you know cost implications, whether or not you're seeing any any competitors who else moving forward.
Or kind of thinking about doing a similar thing.
No that's backed barrier of entry is not it's not great.
We can make a we can make a shift.
Some it does require some shifting on the back into that facility, but trucked front end from a lot of operations perspective.
Sure through that supply chain, not an issue, but there'll be some capex required the backend, but again, there's not there's not a wide vote for companies to do more do more small birds.
They haven't.
Actually if you see all of the new facilities come on or have been I've been case ready they've been retail they've been they've been jumbo they've been very few new entrant participants in this business square, where weve remained.
You mentioned leadership position some of the challenges of converting a big but France do a smaller plant is also the the entire network that you build for the big Bird in terms of all your feud meal. So if you're going to start a small bird business then you're feeling it will be we'd ask excess capacity you have grower growers that you said.
That's our set for for large parts and they take more time on the field. If you move to small barn, then you need to reduce that significantly but the biggest barrier to entry is probably the position. We the key customers. If you need to fuel an entire small but plant you need to have a partnership we not one of those customers.
You cannot just build it and expect to sell the meat in the open market to because Theres no open market is a very tight spec. It takes time to get the plants approve you need to have a true partnership.
To really be successful in this business and that's why we stayed in this business just like Jason mentioned and we develop those relationships. So this is not a spot market that if you start.
Producing small, but me you're going to be able to access there's no spot market for this means.
Our next question comes from Bryan Hunt with Wells Fargo Securities. Please go ahead.
[noise], yes. Thank you for the question.
My first question as you know with the phase one agreement potentially including poultry with China have you had any initial indications of orders.
From China, and as well as have you seen any.
The bump ups and dark meat and our call pricing.
No.
Yes, we have brought Brian yes, it's a simple simple after no. We haven't we haven't seen we haven't seen anything recently, but I will tell you that at over the last week just strip short short term dynamics, we have seen some increases in.
Demand on like quarter, so whether speculators or or not on our leg quarter prices are starting to creep and what we're taking us money for leg quarters out out front for the rest of the year. So I I can't I can't tell you what the full dynamic that looked like it and the why of that but we are.
Seeing some.
Increased.
Demand for leg quarters, whether its say assaf driven in China speculators I don't have that answer, but we are seeing like quarter start to trend trend upwards, but again, if you look at to the inventory there are 25% lower than last year and the industry in U.S. as the Bonnie a lot more leg quarters for the domestic production. So.
So the did the supply of leg quarters for exports from the United States is actually being reduced one one more add onto that there's been a.
It's different than 2018 or Q3 Q4, there's there's been a floor.
Relative floor put on breast breast meat.
And the reason for that is export so we're seeing more we've taken export breast meat orders to put a floor against breast meat.
Over the last.
Call. It 30 to 60 days, we didn't see that we didn't see that last year. So that's been really putting the floor on breast meat.
This year so the expectation.
For us is to try and near sideways for the rest of year, just due to the export it for if that if that should hold up.
And then my follow up question as Jason you talked a little earlier, but the company has identified.
At least $300 million with incremental you know mix and savings benefits can you talk about what timeframe.
You expect to maybe garner those benefits as well as maybe where you see the biggest opportunities yeah I would just I would expect it sooner than later, but.
I would tell you that 300 million should be captured with it within the next two years necessary. That's our that's our U.S. business. It's really it's really about moving again, continuing the key customer strategy our.
Our commercial our big Bird business has done a great job year over year fantastic job from a from a sales execution perspective, we're moving up the page we'd been we'd probably we've been talking about this.
For at least five to seven years relative to our big Bird Deboning facilities.
Lagging the industry and I will tell you that we that's been our our call it.
Focus of operational excellence over the last year and a half but our sales.
Program is now being executed inside our facilities were gaining lots of momentum. So that's that's a big piece of our that's a big piece of our our operational excellence from where we've come and we're well go as well again, we've got lots lots of room left on the table to continue to grow.
Our prepared foods and branded business within the prepared foods segment.
We're still we're still leaving a lot a lot on the table from our prepared foods operationally.
Commercializing products it with our go to market strategy as well so lots of opportunities in prepared foods and continuing our big bird our big during March two two excellent. So those two those two categories will bring us the majority of the incremental.
Margins.
This concludes our question and answer session I would like to turn the conference back over to Jason pen for any closing remarks.
Thank you we're encouraged by our year to date results in 2019 expect to generate improved performance for the full year compared to 2018, we believe the outlook for global chicken consumption will remain positive that consumers around the world continue to view chicken us a compelling healthy alternative our diverse portfolio differentiated product.
Tailor to support key customer strategy in conjunction with our geographic footprint will continue to produce consistent performance minimize market volatility in challenging market conditions relative to peers. We will continue to identify new opportunities for both organic and acquisition growth, we're fire portfolio and offer deferrals.
Shaded customize high quality products to support our key customers needs through constant innovation. Our team members are competitive strength, we will continue to invest in or people, who drive our results by providing them greater opportunities to contribute to our shared success.
We'd like to thank you everyone that told her family, including our family Foreign partners suppliers and our customers make our business possible as always we appreciate your interest in our company. Thank you for joining us today.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.