Q4 2019 Earnings Call

team members to support

Foundation we are continue our strategy of developing a unique portfolio of diverse complimentary business models continuing to relentlessly pursue operational excellence and becoming a more valued partner with key customers and creating an environment for Safe People Safe products and healthy attitudes.

During 2019 or team members have remained focused on executing and delivering on our strategy regardless of market conditions smelled the market started strong during the first day of the year. Second half was weaker than expectations despite the volatility. We have continued to deliver strong growth and Achieve significant increase in relative performance against industry peers across all our Global operations the diversity of our portfolio and our Global footprint have contributed to enhancing the consistency of our Consolidated results in the US experience a much better environment in our fresh business compared to a year ago operationally our results have a commodity large bird deboning also improve versus the year prior despite the relatively tougher environment see in the second half of 2019 are prepared foods business continues to evolve reflecting in the Investments made over the past few years. We've adopted our legacy mode.

European operations to better

Mitigate future input cost challenges integration of the newly acquired operations is on track and the business is already contributing positively to our results in Mexico. The market was in line with seasonality and results for the full year 2019 also improved versus the year before for 2020. We will maintain our strategy while continuing to improve the portfolio to better respond to individual market dynamics and vitamin or relative performance over the competitions. We believe this approach will give us a higher and more consistent results for the mid the long run and minimize the full Peaks and troughs of a volatile commodity sectors are u s fresh chicken business or continuing to improve operational in Q4 back to the very tough demand conditions. We saw during last year's fourth-quarter the market for commodity large bird deboning in 2019 was still challenging but slightly better year-on-year the commodity large bird bath.

improved throughout the entire quarter

It was closer to the five-year average driven by strengths and wings and leg quarters while boneless breast contributed only with marginal improvements within the less commoditized small bird in case Reddy segments with the customer demand was in line with normal seasonality a retail trade pact rotisserie and qsrs and which business have continued to outperform peers by generating robust young adults driven by strong demand for our chickens from our key customers a market leadership in these categories in more differentiated product portfolio have continued to support the growth of our competitive Advantage versus the industry the commitment to our key customer strategy remains relevant to our growth revenues from Key customers have more than doubled over the last eight years reducing our dependency on pure commodity sales. We continue to leverage our key customers strategy to earn more business and accelerate growth Beyond just the underlying market conditions as example.

Of how the strategy is supportive to our growth. We have begun the conversion of one of our commodity big birdie boating facilities.

Small bird deboning we're doing this to fulfill their expansion plans as a demand has continued to outstrip our production capacity. We also believe this conversion will deliver benefits and values similar to our Sanford plant by reducing the proportion of volatile commodity sales in this quarter. We are expanding the list of our Partnerships by adding a new key customer as more companies recognize on a ship and Trust our ability to rely out reliably Supply them with differentiated Innovative products Beyond driving growth our key customer approached also promotes trust and faith is long-term relationships and strengthens our margin structure.

We have an increase in our mix of specialty Birds including no antibiotics ever and organic attributes to support the evolution in our customers expectations and market growth. We're expanding our breastfeed portion and capabilities while increasing dark meat debone capacity by 40% to de-emphasize or exposure to the volatility of pure commodity markets are just bear case ready net sales grew 67% year-on-year during Q4 and 15% compared to Q3. Our growth continues to be fueled by our strong online presence We are continuing to invest in Automation and Robotics to support demand for our products while maintaining the impact of tight labor conditions on margins within our us prepared foods. We grew Food Service Revenue by 2% while the overall was relatively flat year-on-year 94-84 for we also grew our retail customer Revenue by 12% driven by key customer growth. This channel shift was driven by the strength of our well-regarded food service Brands Pierce and palm.

Yes last quarter.

Going through service channels began getting distribution with our new just bear items that are all natural clean label and contains no antibiotics over which will drive future growth for us to schedule year 2019. Our total prepared foods net sales grew 10% the retail Channel led the growth with 22% year-on-year gains. Our Innovation is fueling the growth as indicated by the increase in our new products launched in the past couple of years, which represented 14% of our total net sales following China's lifting of the ban on us chicken We Are Baptist on leveraging the advantage of our global resources to develop an effective export sales strategy and channel approach specifically for that market We Believe recent announcement of a reduction in retaliatory tariffs from 35% to 30% is also good news to make us chicken even more compelling although us poultry exports closed the year with marginal increase of only 1% We are beginning to Thursday.

the impact of ASF on

To demand and the impact of China lifting a five-year ban on us poultry correspondingly Q4 export Prices rose by 13% year-on-year versus the year-ago Thursday. We are closely monitoring the impact of coronavirus and the demand environment while there could be some short-term logistical challenges in the long-term. We expect China's proteins Supply shortfall to Thursday. We continue to believe positive impacts of ASF will be more visible going forward. We remain focused diversifying our export destination country mix and Vigilant about developing contingency sales strategies to encourage any trade disruptions due to disease or unforeseen disputes with existing trade partners.

Market environment in Mexico during Q4 was tough as weak macro conditions contributed to more uncertainties in consumer spending. Although volume growth was solid chicken prices, especially in the commodity sector were below seasonal expectations. Despite a difficult Market environment in Q4 operation are Mexican operations have continued to perform. Well, I'm still able to generate an improvement in results for the full year 2019 compared to the year before as noted prices in the commodity sector or week during the quarter, but our increased share of non commodity products strong execution and growth and prepared foods have helped to partially offset the weakness and allow us to outperform the competition. We continue the growth with are very cute Veracruz project, which is Thursday adding a meaningful contribution to our operating performance. We continue to lead in developing the market and prepared foods in Mexico by launching a significantly more products to meet demand. Yep.

Making great advances in our prepared foods, too.

Business with Innovation as the core confidence of our strategy we generate excellent results under premium Del Dia and pilgrims Brands. Both of which have continued to receive very favorable Baptists by consumers at retail Club stores and qsrs. We have a strong team in Mexico committed to continue delivery of strong results following the birth of trend established during the last two quarters in our key for our Legacy European operations again reported ebitda that was continuing Improvement compared to the previous year despite both flashing volumes and revenue year-over-year, the implementation of improved methodologies to better reflect and mitigate feature input cost challenges as well as incremental operational improvements achieve wage increase labor efficiency Investments and Automation and focus on higher yields have also driven better performance. We are further developing our key customer strategy along with enhanced. Yep.

Can you optimization initiatives to give us better management of our mix and increased margin contributions?

We believe our European Legacy operations continues to have potential opportunities to extract more value from the business by implementing the strategy in order to deliver a relative performance that is above the competition in Europe. We remain supportive of our customers development and expect to see further growth in following quarter's driven by increased consumer interest in poultry products and meat-free snacking.

We've been an important partner for our customers and Retail and Foodservice reflecting consumer Trends in generating a pipeline of innovation and product development in the poultry and non-meat segments of our business in Europe after joining our team for only the First full quarter. Our newly-acquired European operations perform. Well and are already Jenning generating positive thoughts performance was driven by robust holiday demand strength and pork exports as well as initial implementations of operational improvements.

all of our Europe European

In fresh Park facilities are approved for China. So we're well positioned to benefit from even more export opportunities there further with the addition of our operations, best-in-class highly integrated production platform. We have significantly strengthened our brand portfolio and further increased our value-added Innovation capabilities to European customers. We're building our Innovation Pipeline with Keiko and entered the plant-based protein sector as well as launch premium sausages in the quarter integration of the new European operations is tracking well to expectations over the next few years. We continue to expect to generate an ebitda improvement to achieve a level that is competitive with leading companies with similar portfolio pilgrims has a proven history of success successful and efficient Integrations of companies. We have Acquired and we will apply similar methodologies in integrating the new operations. We're optimistic about building upon their existing operations.

Improvements by continuing to optimize has manufacturing footprint extract best-in-class operational excellence optimize the purple.

We have channels segments and products as well as strengthening grow business with key customers to drive Innovations in high-margin areas.

We are leveraging resources available through both our Legacy and newly acquired operations in Europe in conjunction with our Global team in order to further strengthen our competitive Advantage by increasing our ability to offer key customers much wider selection highly differentiated Innovative products to fulfill the growth in consumer demand. We look forward to sharing Innovation and best practices internally to enhance our operational and financial efficiency and position pilgrims as a whole for increased profitability and more consistent margins corn prices have fallen since the end of the quarter long way down by good growing conditions in South America lack of follow-through from phase one trade deal and uncertainty in Chinese demand. The usda's final corn crop production came in at 13.7 billion bushels, which was higher than the market had previously estimated. USDA is projecting a corn carry out of one point nine billion bushels, which combined with large wage.

and supplies outside of the us we feel is more than adequate to cover demand soybean meal prices have also been

Under pressure as the market is feeling more confident in the large soybean crops in Brazil and Argentina with large South American supplies in the usda's projection for us carry-out 425 million bushels. We feel there that there are more than enough supplies to meet Global demand.

We've seen an increase in wheat prices in the UK recently as a result of poor planning conditions late last year in Western Europe. Although prices are higher than we expected. We see adequate wheat supplies globally off. We are positioned to consume other feed grain sources besides wheat in our UK operations, and we look at as we look ahead to the spring us Farmers have the ability to plant wage significantly larger crop than last year when adverse weather impacted planting the prospects for larger crops in the US combined with large crops outside the US should keep both corn and soybean meal prices for being a headwind to see cost this year.

For this year USDA is expecting a growth of 4% production slightly above three-per-cent increase in 2019 predrag productivity trended below 2018 for much of the 2nd June 2019 the growth in egg sets and placements has been primarily due to larger layer flocks as hatch rates in 2019 remained in line and 2018 latest pull it together, which can be volatile shows. The continued growth and place is relative to a year ago levels with much of the place that growth supporting new capacities that began in 2019, despite. The new capacities We Believe capacity growth will not be disruptive to the industry's supply-demand balance in the mid to near-term the outlook for chicken demand in the less commoditized segments this year continues to show an overall balance is supply and demand with the US economy continuing to be strong low unemployment and higher disposable income or driving households to consume. Yep.

proteins throughout the day

Turning to the NPD group Food Service demand for chicken through Bob Broadline distribution continues to show strength and both dollar and volume growth in addition to demand growth and Broad line distribution national chain Q Sr. Demand continues to grow as shown through increased chicken servings in 2020. We expect this trend to continue with increased us are features contributing to increase in demand giving the relative value of chicken versus other proteins, despite growth both chicken and other competing proteins and 2019. The retail segment has shown positive Dollar growth coming from all three categories of fresh frozen and Deli we expect additional support with more feature activities by retailers as the year progresses.

Well, we were already balanced in terms of our bird size exposure. We will continue to seek opportunities to incrementally diversify our product mix and reduce the commodity portion of our portfolio off by increasing the number of differentiated products to key customers while optimizing our existing operations by pursuing operational Improvement targets are key customer approaches strategic and creates a basic to further accelerate growth and important categories by providing more customized high-quality Innovative products to give us a clear long-term sustainable competitive advantage that I'd like to ask our CFO Fabio sandri to discuss our financial results.

Thank you, Jason and good morning, everyone.

For the full year 2019 net revenues were 11.4 billion vs. 10.9 billion from a year ago with an adjusted ebitda of 974 million or a 9% margin compared to $798 million or a 7% Margin for the year prior. Net. Gap income was 466 million vs. 248 million year prior adjusted EPS was a dollar sixty two compared to a dollar Twenty Eight in the year before operating margins were 6.4% in Us 8.9% in Mexico and 3.3% in Europe will respect for the first quarter of 2018. Net revenues worth 3.06 billion compared to two point six billion from a year ago adjusted ebitda increase to 162 million or a 5% margin representing a 46% Improvement versus 111 million a year ago or a 4% margin.

Gaap, net income was 92 million or 37 cents per share operating margins were 3.2% in the US 2.5% in Mexico and 2.1% in Europe respectively already including our acquisition during a significant part of the quarter excluding the impact of one-time asset acquisition net gain to reflect independent valuation of the newly acquired operations in Europe and exchange rate adjustments adjusting that income was thirty-five million compared to twenty 1 million in the same period in 2018 resulting in adjusted earnings of fourteen cents per share compared to $0.09 per month in the year before what a 56% increase our operating profit in US during Q4 was sixty-two million a significant Improvement versus a loss of ten million a year ago are small bird cage read business continued to perform well and generate consistent top-tier performance.

although the market for large

For the morning was only slightly better compared to Q4 of last year. We have continued to improve the operational efficiencies of the business while introducing more product information in order to offset summer volatility are consistent focus on key customer strategy is also using positive results helping us to achieve a maturing place in relative performance at Grant's industry peers us prepared foods have continued to expand following the investments in the last few years. Thank you for we increase our retail consumer Revenue by 12% driven by key customer growth this growth. It's fueled by our investment in R&D sales and marketing to execute new product Innovation. We have other initiatives in place to accelerate growth in this market and you are expecting it to contribute of a great third portion of our total sales in the next few years while adding to the stability in Consolidated margins operating profit in Mexico is 9 million as a week broader macron.

environment constraint consumers

Sending in demand despite some volume growth chicken prices, especially in the traditional markets were below seasonal expectations within prepare Foods in Mexico. We remain as the leader in developing the mark and we launched many new products this year are strategies supportive of the global of the goal to increase our higher-margin differentiated products while having product coverage from entry level to prestige across multiple channels in both fresh and prepared in Mexico are strong team in Mexico. Is there a true differentiation with their operational excellence and Market leadership and we expect the strength in relative performance against against industry. If you continue in the future partner over quarter can be quite volatile Mexico given specific market conditions, but Mexico has been very consistent on a year-over-year basis and expect this positive trend to continue as the demand for protein grows.

In Europe, when considering or Legacy operations operating profits increased significantly from last year due to better operational efficiencies and input costs mitigation. We're further developing our key customer service including more integration. We are newly acquired operations and enhanced Revenue optimization initiatives to give us better management of our mix and increase margin contribution will also continue to leverage our marketing and sales infrastructure to optimize sg&a costs. We believe we can maintain and lead in relative results to the industry after only being a part of our team for 1/4 the newly acquired the European assets delivered improved performance and are already contributing positively to Reb the results due to the strength in experts and good Muslim and as well as the initial implementation of operation improvements and synergies since all of our pre-owned fresh Port facilities are now approved for China. We are well-positioned to further benefit from log.

Strength in export opportunities. The integration is tracking well to expectations and over the next few years. We are expecting to generate an image.

Them improvements to achieve a level that is competitive with leading companies with similar portfolios. We are proud of our history of successful and efficient integrating companies and we will apply seem methodologies integrating the new operations to achieve comparable results this year. We achieve sixty million dollars in operation improvements and synergists in the United States Mexico and Europe a little shy of our Target a major achievement given the significant investment. We did in our team member wages what greatly improve our attention and turn over numbers for 2020. Our teams have identified and developed place to capture additional hundred and twenty five million.

Our sg&a, the fourth quarter was 3.8% of sales higher relative to a year ago as we increase support for expanding the just bear brand nationally and the investment for our new prepare food products both in us and Mexico as well as the inclusion of the nearly Assets in Europe and acquisition costs will continue to prioritize our Capital spending plans this year to optimize product mix that is aimed at improving your ability to supply Innovative less commoditized products and strengthen Partnerships with key customers with our growth in Europe. We expect to spend about $3,000 in capex this year higher than our depreciation any reiterate our commitment to invest on strong return on Capital employed projects that we improve our operational efficiencies and Taylor took her needs to further solidify competitive advantages for parents are balance sheets continue to be strong giving our continued emphasis on cash flow from operating activities focus on management off.

capital and discipline investments in

I returned projects during the quarter are not that was two billion dollars without leverage ratio of 2.1 times last 12 months ebitda, our leverage remains at a good level, and we expect to continue to produce strong cash flow this year increasing of financial capability pursue strategic options. We expect twenty-twenty interest expenses of around a hundred two hundred and thirty million dollars. We have strong balance sheet and the relatively low leverage. We remain focused on exercising great care in ensuring that we create shareholder value by optimizing our capital structure while preserving the flexibility to pursue with a good strategy and will continue to consider and evaluate all relevant Capital location strategies that will match the pursuit of our growth strategy and continue to review each Prospect accordingly to our value-creation a standards operator. This concludes our prepared remarks. Please open the call for questions.

We will now begin the question-and-answer session in the interest of allowing equal access. We request that you limit your questions to 2 then rejoin the queue for any follow-up to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone pick up your handset before pressing the keys to minimize background noise to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.

And our first question will come from been there are of Barclays, please go ahead.

Hey, good morning. Jason Fabio. Thanks for taking my question. First question. First question is about the pricing Dynamics and the u.s. Actually nicely laid out in age that boneless. The best grade prices are pretty much at low-level over over the compared to the past history. What are you expecting? And what do you prepare for going into the coming quarters and into the summer season? Is there anything you've seen in early potential feature activity were dead. Well, you could expect that. There's going to be better demand and prices going into a better territory or would you expect that this particular category continues to be very much on the page pressure. I don't have another question. I would be my first one then this is this is Jason. So I would say let's start with the the fundamentals.

USDA is

Expecting us chicken production to increase by 4% year-over-year in 2019. That number was 352. So we're going to see another 1% on the market from an export standpoint. We were also see an increase of around four and half percent down to the USDA. So we're going to see some increases in exports as as well. I think offsetting offsetting this the USDA has also projected wage a flat availability in both Pork and Beef which is positive for for chicken in in the two thousand twenty years. So I'd say the fundamentals wage increase exports and then uh flat numbers in availability for the competing proteins. We're also going to see been as we saw the 3% increase in wage.

production we

So sorry seven per-cent increase in large bird deboning in Q4. And that was one of the reasons why we saw some Q4 depressed breast meat numbers. Then we're also seeing that as an overhang into the q1 format. So what we're going to see is is 4% year-over-year, but I'm going to see the front half of 2020 a little bit more pressured relative to breast meat and production. So we might see five to six percent on the front end of 2020 and we'll see two to three percent on the back end giving us that that 4% average number. So based on the way pull it placements are coming across going to see a higher higher number in the front end versus the back end and we're also seeing as of late some increased features from chicken. But again, will yep

To see less competing.

Teens, uh available in the back half of the year. We'll see some ASF impact, uh, start heading towards the back half of the year and we'll start to see those wage retail feature start to come through starting Q2 through the rest of the year. So we believe the fundamentals are are in line and we recognize there's pressure on breast me today, but we believe that pressure will be relieved throughout the years the year goes on.

Okay, perfect. And then on Europe you've talked about that. Did you have a significant Improvement on on the Legacy business but also to your lips started to to contact you would in a positive way. Could you elaborate a little more in detail? Is it because of your applying the best practices in each of it? I remember to your lip was mainly because of the lot of the office prepared foods, um, and and the more sophisticated product that something basically taken over into the legacy mode Park business. And what have you been doing with the Tulip operation a uh to actually after such a short period of time to be already slightly slightly positive because if I remember right it was negative at the beginning that's that's that's right. And so there's a lot of things happening in in the two of operations. So, you know, we we've done this before we've acquired the GMP team successfully we took on the job.

Assets in Mexico boy Park as well. So

We have we have some positive experiences in Acquisitions and it always starts with people having having the best team in place having that structure of ownership accountability in in the right place. And and then we're looking at operational improvements. That's this the second that second pillar so we have our engineering teams in industrial engineering teams Thursday through these facilities looking at operational excellence. We have synergies we have we have streams and uh of people looking for packaging looking for other type of operational improvements and then there's a portfolio. So we're improving the portfolio here and a tulip and you know, the the China factor is is obviously in in place here. So we have the 5th Quarter and we have Trotters also, you know being exported and we said this on our uh-oh pinning remarks that all of our avatars are approved for Thursday.

For for China as well here.

So we have a we have the China impact. We have the team. We have a portfolio and we're also working on key on our key customer strategy just to add to this. We have the opportunities to increase the wage these across the value chain, we can optimize purchasing and production and we are improving yields and the Global Management of feed sourcing. We also leverage our infrastructure in UK optimize the support costs and use our Innovation leadership at Moorpark to deliver growth at tulip. I think more important than the synergies with our key customers strategy. We believe that we can add value to our operations into our customers by providing a much broader portfolio of products and just like you said like any operations and geographies we expect to achieve a level results that is competitive or leading companies with similar platform. We talk about the opportunities and prices have increased for exports for two but also there is an increase in part prices in Europe and Ed.

Many of the cheap Imports that were coming to the UK are being reduced even giving a great opportunity for domestic meet.

Okay.

Okay, perfect. Thank you very much. I'll leave it here.

Our next question comes from Heather Jones of Heather Jones Research, LLC, please go ahead good morning.

So I wanted to follow up on your comment about the plant conversion was wondering if you could give us color on that as far as like timing, you will it take any pounds out. What will that do to your mix? Cuz you all have talked about you know being roughly a third a third a third. I mean, what does that mix look like after this if you break flush flush that out some for us sure Heather the conversion will take place between Q2 and Q3. It will take off obviously when you take a uh-oh doubt of the large bird emoting sector and put it into a small bird. Deboning sector will will will lose lose some pounds on the front page and then at some point some point in time, we'll have some line speed increases and take those those pounds back up. So I would say somewhere in the mm.

2020

1 range will be back back into our indoor tonnage. Um, but again a to Q2 Q3 temporary shortage on pounds and then we'll we'll take those Downs back up. I think the most important part is that we are growing at our key customers. So in this segment, it's much more profitable operation for us and we will help again differentiate our portfolio and it's one plant in twenty-six. So it's not a meaningful volume for us.

But I mean, I think if I remember correctly y'all have like eight Big Bird plants. So this takes out one. I mean am I right in thinking that third third third is from the shift. I mean does not go to like forty.

3525 I mean, how should we pick tank it about that mix? I think you can you can you can post a shift into your into your numbers certainly, but I think the the the month I think I'll I'll continue on on the obvious comments. The the fact is even though Heather we are let's say a Thursday of our production volumes and Big Bird deboning. I will argue that within that segment with the mix with in the mix. Our teams have been adding value to the white meat of that bird. So we're continuing to take our business away from a commodity sector on the front half of the bird and and the back half. So so with this with this one shift key, you'll you will see some, you know, if if you if you model if you'll see some movement, uh big big to small again, but you'll you'll also continue to suck.

adding value to the front half of our

Of our Birds even in that big bird segment again. That's the mix with in the mix. Our portfolio will will change and we're going to continue to optimize our per month. It's deliver the the the best mix to our shareholders.

Okay, thank you. And my follow-up question is Jason. You mentioned you still expect the benefit of ASF to show up, you know to the boss sizable, but you said something about second half so it's wondering what prompted that comment. Um, I mean, what are you are you seeing constraints on the export capacity side? I mean what made you say second half that's my fault. I would I would say this. I'm not sure if we can we can estimate that the time the timing here as as you know, the the we we estimated this ASF to really start in in the queue age of nineteen. It's rolled. It's rolled into the queue one. I think due to the coronavirus you're going to see some more roll rolling again. We haven't seen any impact.

On on chicken Imports due to the crew.

One of ours we have seen some impact of the reduced flows into China. They have created some excess supplies on the market and I'd say especially in the US market the price impact of the amplify because of the trade expected an increase in China purchases in February out of the US and these purchases really haven't haven't materialized. We do know that the Chinese government is seeking to expand the medium Imports to stabilize the domestic Supply. But um, uh, we know that beef remains at 20% higher this time the last year Park is 120 month 70% higher chickens up, you know, 16% off of very low low base. And again, I have not seen any impacts directly. There are supply chain concerns about monitoring pretty carefully and not only in regards to our us shipments but our UK pork shipments as well in in the China and we're seeing these Logistics including some block shipments of birth.

Feed so we're seeing some issues on travel restrictions with.

And within China, we don't know the extent of of the chicken Market, but there are some calling going on in in China China. We know that there are some restrictions also off on some uh live Supply blockage as well. So we're starting to see some of these impacts that's impacting the live supply chain in China and what we do believe is that when the virus is under control and the lockdown practices removed trade flows are going to resume and when they do whether that's cute two or three, we believe the demands going to recover more quickly than the supply so we believe that when demand starts to V bottom will start to see that supply chain recover, but it'll take a little bit more money for that supply chain to recover and this is where I get to see the rolling effect of of ASL. I think we're going to start to see it. We're already shipping to to China today. We have a heavy dead.

For our our China products. I think you might have you might have read even as late as as yesterday Heather.

That there is going to be some restrictions removed on some tariffs. So you could see some tariff restrictions being removed on that 30% That was 35%, So if that happens, we'll start to see this this movement out of the u.s. Relatively quicker rather than than later and it'll give us a month in age to compete against against Brazil who's also shipping meet in into China. So I think fear the timing Heather it, you know, it's just a lot of different factors that are that are coming into play here.

Okay. Thank you so much.

Our next question comes from Ken's as low of Bank of Montreal, please. Go ahead guys. Can you talk about the

start to

you

instructure going to continue to this quarter. How do you think about it a little bit, you know over the next, you know, once it's 3/4 sure can look as we you know, as long as we know there is a technical recession in Mexico in 2019. And we expect the economy to stagnate this this year. So we we we believe that there's upside potential with Mexico the passage of the USMC a is going to provide a boost for the economy. We've had four years of uncertainty in Mexico. That's certainly going to help I would argue that over the last you know, many years Mexico has produced double digit ebitda margins. We've seen we've we've seen em, but at the end of the day, we have a very smooth, uh, and well operating team in Mexico that delivers delivers the results Thursday.

yes, we had a

Difficult, you know to for that that spilled over into q1. We're already seeing the uh, the market recover and we'll have a seasonal Q2 Q3 and off-key forget. I don't see anything structural involved here. We did see a we did see a deep trough in Q4 and it's spilling over to Q one but can at the end of the day we don't believe in it. There's anything structural that's that's changing in in in Mexico. And Canada is in Mexico is the proxy for developing economies. Right what you use were the the protein consumption grows as we see growth in disposable income. We are also diversifying our our our our projects over there growing the premium value-added products and we are also growing our fresh production with our expectations in Veracruz. Can you talk about your personal or Pilgrim's Pride personal shipments to China? Have you guys done anything have your hearing anything else?

What do you guys how is it reflective you what you're hearing? You know, when your operations are you guys, you know gearing up for more exports. Are you guys doing anything to change any color on that would be helpful.

I'll leave it there. Yeah. Sure. Sure. Can we are we are packing we are packing pause. We are packing drumsticks. We're packing whole legs. We're packing leg quarters. We are packing wingtips. We're packing gizzards and we are shipping all of the above items. We have a heavy heavy demand for orders eat despite the what we're you know Hearing in the marketplace with coronavirus and Logistics, but we we are taking orders we have we have currently 25 million dollars of orders on the books. We are receiving wire transfers for those orders and we are shipping. So, um, despite what we're hearing with the logistics issues. We are we are packing and we are shipping for PRC off and can as you know, we have an extensive network that we can export if there is any disruption in in China, we've course can divert those projects to to other places. Africa has been a little bit slow.

In 2018, but Latin America has actually increased their their demands.

Thank you.

Our next question comes from Peter galbo of Bank of America, please. Go ahead.

Hey guys. Good morning. Thanks for taking the question Jason. I was hoping you could expand on your comments a little bit from from the last question just on possible tariff reduction from the app sent down to a lower level. I know there have been some articles floating around earlier in the week on potential tariff exemptions on on beef and pork. But but nothing at least official yet out on on chicken. So just any combination be very helpful. Absolutely. We got confirmation yesterday that chicken will be included into the commodity mix.

And do we do we know what that level is going is going to or that that's to be determined. I'm not sure that there are any any levels it could be from 0 to 30, but I don't have any details on what those levels might be. I think as the week progresses will will will find out more next week. It's okay and then just just on the on the plant converging as well. I mean, it makes complete sense from where we sit just just curious what you're seeing from the competitive environment maybe of your private competitors who are also going through Thursday potential plant conversions and and whether or not you know, you think this helps just clean up some of the profitability issues in the in the big bird deboning for the industry as a whole.

Yes. I can't speak for for for anyone else. But but uh, I will tell you when one of our strategic pillars is to have an optimized portfolio. And so Thursday our our our team is looking looking out front and we we are seeing that you know reading the team leads here and you know from a commodity standpoint our key customers strategy enables a tighter footprint we're able to use more of our finite resources towards cheat customers while building building relationships and building pipelines of innovation for our key customers. So, you know relative to the the the rest of the industry. I really can't speak to that. We we've stayed in this small bird business. So in 2011, when we came to this, uh company or new management team drawing we were a leader in small Burg.

shortly

After the the the big bird market started to uh, really take off in the commodity markets where we're very high. There are a lot of start-up operations between call 2015-2019 and most of the new operations that are that are and have come into the marketplace or Big Bird operations. And again, I'll I'll double down on this even inside of our big bird operations. We're D commoditizing the products that we offer from a white lie perspective and a back half perspective. So we're doing this in in in many ways, but one big shift in 2020 will will be that large bird too small bird deboning operation and then back within the next we're going to be D commoditizing white lie again, and that that works best for us in our portfolio and our key customer strategy as well.

and I think we could because we have these diverse diverse customers we

We also have a lot of operations we can maximize and optimize the footprint. I think if you have a single plant that is a big bird operation and if you want to reduce the size of the month, you'll be very inefficient in terms of feed mill in terms of of of hatcheries. So I think it's it's much more complicated for a small player to do this to do any conversion them for for a company like us with this multitude of segments.

Our next question comes from Ben Bienvenu of Stevens, please go ahead.

Good morning. Thanks for taking my questions. Laurie Beth on you mentioned comments around some of the Investments that you guys are making. We saw it can be volatile quarter-to-quarter. But this year we've seen that kind of steadily moved higher and throughout the year. Should we be thinking about the full year nineteen sg&a absolute number and growing off of that or taking the fourth quarter and sequentially growing off of that. Just how much of an aberration versus a trend change is the fourth quarter for STNA.

I think I'll do for was a little bit different than than than the others so we can expect the same level year-over-year. We don't expect you for it to happen again. I think it was off the integration of the newly acquired European assets into the specific water.

Okay fair enough. So the the the integration of Thule obviously contributing significantly, but the big increases in in the US and Mexico or unlikely to to repeat them. Yes, because that's consistent with the improvements that they're doing in terms of marketing and supporting the national brand. Just bear Brands. Okay. Great. Okay, great. I want to ask you talked about the demand picture in Mexico. What is supply look like and chasing your comments around wage production in the first half of the and lower and the back half of twenty-twenty makes perfect sense given the capacity increases we've seen I'm curious about. Is there any impact on the Mexico Market from abundant supplies in the US that does any of that product spill over into the Mexico Market when there's a cheap alternative in the US as well or the wage.

It's mutually exclusive.

United States Fridays take around 22% of the exports of the United States. So it is is the largest partner. I think what happened last year where exports to Mexico increase around 5% year-over-year. What's the substitution of the Brazilian meat as the Brazilian exports instead of going to Mexico start going to other destinations? Especially China. We saw the Mexico then and because also of the prices of breast meat being so competitive they started import more breast meat from United States.

We don't expect that to to happen. Once again next year as we are seeing more and more exports from Brazil going to other destinations and they did not renew the quota Thursday from Brazil to Mexico. We don't know if that's going to be renewed this year or not. So even if there is a little bit more exports from United States to Mexico expect that to change back to the Mexican operations.

Perfect. Very helpful. Thanks so much.

Yeah, man, I think Mexico is the largest partner for you.

Our next question comes from Michael Pekin of Cleveland research, please go ahead. Yeah. Just wanted to dig in a little bit more in terms of you know, your customer program and just I wanted to talk about you know, the Nae Market specifically. Are you seeing any signs of that market becoming more saturated or more competitive as other companies are moving there or are you still expecting to hold the traditional premiums you've gotten for that type of product?

Yeah, Michael. Thanks for the question. So and and you're you're you're you're right to combine the the Nae discussion with the key customer strategies. We we we produce any products for our key customers and if you think about it from a from a on the retail on the retail shelf life, we we produce any any products for our customers to be a total solution provider. So we might be providing five feet of shelf space with nae and the rest of the 25 feet of shelf space will will have conventional product next to it. So when we think about any we obviously may have have some value and margins built built into that piece. But when you think about the our total picture with our key customer strategy, we're able to deliver any place.

conventional products to provide a total

Solution for our customers. So we're really not seeing any dilution or any any any uh, uh margin issues relative to any still as robust as it was when we started our our programmed years ago, and we're continuing to grow our our any offerings and and profile and also in terms of feature Michael on the on the retail. We're seeing more and more features on the nae and organic. Although it saw a features in the retail lower here over here until 4. We're seeing a rebound number one, but even in Q4, we saw an increase in the nae and organic category.

Okay, great. And then my second question is, you know, just in terms of the sandwich Wars that have been going on at us are I would imagine that it's been with for the small bird. I mean, is there any opportunity for the public commodity big burger recipe pricing to benefit from some of these sandwich Wars or the two markets completely kind of split from each other, or is there a potential that the small bird gets tight enough that people need to start slicing up the big bird and maybe it'll help that press Meat Market a little bit. Thanks.

Michael I would say

The meat blocks are entirely different but you what you will see in and we have seen is some sliding from small bird offerings into the system which Market into the medium through the medium Birds. We're starting to see some medium Birds because of the the the tightness in Supply. There's actually a 3X value of small bird need to Big Bird meet in terms of pricing. So you're seeing a significant, uh price differential between them and Big Bird, but you're starting to see some medium Burger be slide into the sandwich category and then uh on that uh with with that basis, we're also seeing a whole big jumbo meet sliding into the into the medium burst space but not on a large volume. It depends on what's going to be offered in 2020 if the sandwich

Category continues to grow you'll see more media meet slide into the sandwich.

I agree that's pulling some more. Uh more big bear meat. There are some technologies, uh, in in in the market from a operation standpoint that can obviously take a big bird me tax cut it down into the medium and small berby for sandwiches the mouth feels much much different and uh, that's why we're starting to see this bifurcation and pricing between the small box and the and the and the Big Bird meet. The consumer's is is is noticing that now feel and they're they're they're paying for that organoleptic attribute that the small bird meat delivered to the sandwich. I think Michael also with the sandwich words. I think you can create a halo effect for other offerings of chicken. We're seeing more chicken breakfast offerings and also more emotional nuggets. I think there is some pull because of the sundry Schwartz for order chicken parts, and that's could help the breast meat.

Our next question comes from Adam Samuelson of Goldman Sachs, please. Go ahead. Yes. Thank you. Good morning. Everyone a lot of

The grounds been covered. I was hoping that just talked with your prepared Food business quickly you made a reference in the press release at the business continues to evolve and I know home businesses has been a bit more challenge over the last few years from a margin perspective and just wanted to get an update on kind of profitability and kind of scope for margin has been that busy said you've restarted recalibrated the mix.

I think Adam just like we talked about it's about the portfolio. Right? We we partner with our key customers and we offer from fresh from simple offerings or normal box to a BF and and and organic and also on the prepared food side. I think there are two Dynamics happening on the prepare for side. The brass meet has been on opportunity for lodging or the prepared foods. We can grow with cheap brass mix and on the wing side. It's being more headwind as we seeing on the cut out. She chicken wings continue to have faith is strong price and also tenders so I think it's it depends on the category. I think on the Nuggets offering and on the products based on breast meat you have a great opportunity in terms of cost and on wings and tenders we did to differentiate with Innovation and a lot of our peers friend that is has a great penetration in the food service.

Okay, that's helpful. And then just second question and it touches back on the plane conversion.

But maybe focusing on the the remainder of the of your big bird business whether it's he's talking about from a both plant level cost is also plant level. Margin how you see those relative to the rest of the Big Bird industry at this point, you know going back a few years that those plants were not optimized for Big Bird production and the cost position wasn't where you would have hoped it to be kind of where are we now and how much more opportunity is there to come and if there is more opportunity, is there a incremental capital investment that's got to be made there. Yeah, Adam, I will say this and you're you're absolutely right between 2011 and 2015. We we converted seven facilities into the Big Bird deboning category and I will, I will argue today and and we've been very transparent with this that we were we were we're we had a negative result ugh relative to the industry dead.

I will tell you today we are.

We are an average company over the last uh over the last twelve months. We've improved that business relative to the competition wage around fifty million dollars. It's it's been one of the biggest movers for us in 2019. We've been very quiet about moving that those numbers from a uh, a negative deviation to the industry to now so now average we've we've fixed our business from an operational standpoint inside these facilities started with people and wage labor. And as we fix that piece of our business, we're able to uh, take on a more sophisticated mix both from a white meat standpoint and a and a dog standpoint. So the the mix relative to the value ad that we were bringing to our big bird operations. We wouldn't have been able to execute that sales program.

in the past years, but as

Our operations are are running. Well, we were able to transfer that, uh that mix into our operating profits. So, um are sites now are are moving past average just like the rest of our businesses which we are operating within their light categories and the top third of their business are sites. Now he's continued to move out of average and into the is it the top twenty-five and of course as we can move this plan from one segment to the other we can upgrade the bottom part of our sales, right? So we will take the most basic sales and the the least profitable sales that we have in all of our operations. We will upgrade and again just like this and said we are one of the leads in the small category for sure in the top quartile of operations.

All right. I appreciate the call. I thank you.

This concludes our question-and-answer session.

I would like to turn the conference back over to Jason pen for closing remarks.

Thank you. We're looking forward to successful 2020. Although we were pleased with our 2019 results. We're actively seeking more opportunities to achieve an even greater relative performance against just reappears in 2020 by improving Upon Our well proven strategy are diverse portfolio differentiated products tailored to support our key customers strategy in conjunction with our broad Geographic football will continue to generate consistent performance and minimize Market volatility and challenging market conditions relative to competitors will continue to seek new growth potential both organically in a position as while offering even more differentiated product portfolio within our businesses to support key customers needs by cultivating a culture of constant Innovation. We believe the prospect for strong and chicken consumption globally will remain as consumers worldwide continue to view chicken has a compelling healthy option. Our team members are are competitive Advantage. We will continue to age

Justin or people who drive our result

By providing them greater opportunities to contribute to our shared success. We'd like to thank everyone in the pilgrims Family including our family farm Partners suppliers and our customers who make our business possible has always we appreciate your interest in our company. Thank you for joining us today.

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