Pilgrim's Pride Corporation (PPC) Q2 2017 Earnings Report, Transcript and Summary

Good morning and welcome to the Second Quarter 2017 Pilgrim's Pride Earnings Conference Call and Webcast. [Operator Instructions] At the Company's request, this call is being recorded. Please note that the slides referenced during today's call are available for download from the Investor Relations section of the Company's website at www.pilgrims.com. After today's presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Dunham Winoto, Director of Investor Relations for Pilgrim's Pride. Please go ahead.

Good morning and thank you for joining us today, as we review our operating and financial results for the second quarter ended June 25, 2017. Yesterday afternoon we issued a press release providing an overview of our financial performance for the quarter, including a reconciliation of any non-GAAP measures we may discuss. A copy of the release is available in the Investor Relations section of our website, along with the slides we will reference during this call. These items have also been filed as 8-Ks and are available online at www.sec.gov. Presenting to you today are Bill Lovette, President and Chief Executive Officer; and Fabio Sandri, Chief Financial Officer. Before we begin our prepared remarks, I would like to remind everyone of our Safe Harbor disclaimer. Today's call may contain certain forward-looking statements that represent our outlook and current expectations as of the day of this release. Other additional factors not anticipated by management may cause actual results to differ materially from those projected in these forward-looking statements. Further information concerning those factors has been provided in today's press release, our 10-K and our regular filings with the SEC. I'd now like to turn the call over to Bill Lovette.

Thank you, Dunham, good morning everyone and thank you all for joining us today. For the second quarter of 2017, net revenues were $2.25 billion versus $2.03 billion from a year ago, resulting in an adjusted EBITDA of $421 million or 18.7% margin [Technical Difficulty] $283 million a year ago or 13.9% margin. Our net income was $234 million compared to $153 million in the same period in 2016 while adjusted earnings were $0.93 per share compared to $0.58 per share in the year before. We are very proud of our entire team and their performance last quarter. In the past few years, we've created a portfolio of strategy which is designed to deliver more robust performance for the mid to long run rather than the short term and structured to avoid the full peaks and troughs of the commodity markets to give us the potential to capture market upside while not creating more risk generating more consistent higher margins over time. All the investments we made over the last year to add value to our portfolio are operating as expected at expected levels and contributed to our results in Q2. Our team performed very well in executing our strategy supporting our vision to become the best and most respected company in our industry. Our US operations were strong across the board and Mexico increased sequentially with normal seasonality together with great execution from our team there. Domestic demand for chicken was very firm across all bird sizes and prices still represent good value compared to other proteins. Pricing in the commodity segment was at a solid level during the entire quarter as exports grew from a year ago and demand for US chicken remaining very robust in international markets demonstrating the effectiveness of our portfolio strategy of well balanced mix, multiple bird sizes, geographical coverage as well as a diverse product and channel exposure, our team was able to leverage the much stronger commodity markets last quarter to supplement the ongoing strength of the rest of the portfolio giving us a differentiated approach and the opportunity to capture the upside while minimizing volatility. Our small bird and case ready operations have continued to generate healthy margins and our leadership in these markets has continued to prove to be an advantage relative to our peers. Chicken continues to be very competitive in value in convenience and demand has remained very resilient especially at retail. Traffic at grocery outlets has been firm driving demand from our customers, which is a positive sign that consumers appetite for chicken both in the fresh meat case and in the deli segment despite higher availability of other proteins has not declined. While food service traffic continues to be challenged overall, chicken servants continue to grow and menu importance is at its highest point according to MPD. Despite the expected strong increase in US production of competing proteins this year, we believe more exports and a reduction in imports will drive the total domestic per capita disappearance to be at the very modest 1% compared to 2016. Large bird deboning is also significantly rebounded from a weaker than expected start earlier in the year and continue to improve with healthy demand in the export and domestic markets. Prices and volumes were at a much better level supported by stronger exports in part to ongoing AI related supply issues and other chicken producing countries in the world increasing demand for US products. The export markets showed positive pricing momentum relative to Q1 as well as a year ago with leg quarters up in the double digits. Specifically for us we've also reduced our exposure to commodity sales due to an increase in leg deboning at three of our facilities which will help us strengthen our price and mix moving forward. Domestic pricing was also very solid going into summer driven by strong demand for grilling season. Looking ahead we're still very - have a very supportive environment and as expected the cut out for the commodity markets can be sustained at good levels. The integration of GMP is tracking very well to expectations and we expect to deliver previously identified annualized run rate synergies of 30 million. We have a sustainable competitive advantage with the Gold'n Plump brand which has been a very good brand in recognition among end consumers. Also our premium Just BARE chicken has a strong presence in the better for you category and is rapidly growing at a CAGR of 20% for the past five years and as a transformational growth potential as our national go-to market offering for the most desired on trend consumer chicken brand including prepared foods. We recently added a new line of fully cooked sausages under the Gold'n Plump brand to complement our NAE veg-fed fully cooked line of artisanal chicken sausages we launched recently giving us a more complete solution to satisfy every consumer segment in this growing category. We are looking at the potential expansion of our online GMP brand presence which is ranked first on Amazon to other categories. The Just BARE brand at Amazon continues to have great performance with a 305% increase in Q2 versus the same period last year. Given our online momentum and retail grocery space, we believe our partnerships present an excellent opportunity to further improve the distribution of our product portfolio with an on trend segments including NAE. With the majority of our capital investments we announced in 2016 already completed, we are on track to further increase our product portfolio differentiation, strengthen key customer relationships and improve our margin profile. Our Sanford North Carolina is operating above expectations and positions Pilgrim's to be the largest producer of organic chicken nationwide, while the finished expansion of our new line at Moorefield West Virginia will add 10% to our fully cooked prepared foods capacity that has already recovering well in comparison to last year from our improved operations at Waco. While prepared foods are currently challenged by high meat input cost, our growth vision to expand this business unit remains intact as it's our central focus to focus on minimizing volatility through the different cycles. Consistent with Q2 of last year, Mexico had a very strong quarter. Results were driven by robust market demand and less than optimal growing conditions due to drier than expected weather, while a more favorable currency environment was also a positive factor. We continued to ramp up production at our Veracruz complex and expect to double the size of this facility. The integration of the acquired asset is complete and we have captured more synergies than initially targeted with profitability now equal to or better than our legacy operations, while it was only half of that before the acquisition. We continued to believe that Mexico represents a long-term growth prospect as demand for protein continues to outstrip supply for the foreseeable future. As a part of our strategy to strengthen our competitive position in Mexico, we're continuing with product innovation. The momentum of our value added Pilgrim's brand program is growing and we generate great results in prepared foods with more than 30% growth in volume year-to-date. The premium Pilgrim's brand is based on the well-known high quality and excellent service both by retailers and end consumers. We are committed to developing the Del Dia brand as our best value brand targeted toward the largest consumer group in Mexico. This year we'll have many more new exciting products which will be introducing under the Del Dia brand in order to increase the categories where our brand is currently participating. Grain and oilseed prices have been volatile recently due to change in weather forecast in Western Corn Belt. While in the short term, corn and soybean prices could remain volatile due to changes in weather conditions, we expect large global surpluses and a very good South American harvest to help minimize the impact of higher feed prices by buffering against potential yield losses in the US. Additionally, given ample grain supplies outside the US, we think domestic farmers will be limited in selling for exports. We expect grain supplies to be more than sufficient to meet demand. We expect the total US industry production to increase by slightly more than 1% this year that is chicken production, mostly on head as we believe late growth will be needed compared to recent years as bird sizes which have been a source of production growth in the past are partially constrained by shifting consumer demand preference toward smaller birds, a sector in which we are the leading player. Industry inventories have also reduced to a level that is more reflective of actual demand and should be well supported with prices. Our expectations at this time are for the industry to grow in 2018 at a similar pace as this year. We believe industry growth over the next few years will continue to be well supported with a balanced supply and demand environment and we're confident that our business will have the ability to outperform given our broad portfolio and presence in all bird categories as well as strong relationships with key customers. In addition to supporting the growth of our key customers, our partnerships create an opportunity to further accelerate growth in key categories by providing a more differentiated product offering while giving us a strategic advantage in strengthening these relationships. Despite greater availability of other proteins, the outlook for chicken demand for 2017 remains intact as we believe the supportive export environment will capture much of the increase in total US production across all protein complexes while continuing strong US economic conditions will motivate households to demand better quality, higher price cuts of meat which ultimately translates to more overall consumption. While we are already well balanced in terms of our bird size exposure, we will continue to look for opportunities to shift our product mix and reduce commodity portion of our portfolio by offering a more differentiated customized products to our key customers while optimizing our operations by pursuing our operational improvement targets. In July, we released our 2016 sustainability report. The comprehensive report covers nearly 90 different important sustainability aspects and detail of the company's performance against its 2010 environmental targets and explores key sustainability achievements in 2016 and reveals our new ambitious 2020 sustainability goals. We're very proud of the sustainability progress we've made. Since 2010, we've reduced energy use by 28%, greenhouse gas emissions by 33% and water use by 34%. We continue to make progress outperforming the industry in overall total recordable incident rate and our DART rate, important measures for our team members health and safety, training up 100% of our team members on our family farm partners in accordance with Pilgrim's animal welfare program. Eliminating the use of antibiotics critically important human medicine for disease prevention and compensating Pilgrim's family farm partners or our growers $639 million to raise our birds. Importantly, our 2016 report outlines our ambitious 2020 goals which are aligned with our vision to become the best and most respected company in our industry and create an opportunity for a better future for our team members. By 2020, we will achieve a combined score of 92.5% on the Pilgrim's animal health and welfare scorecard across all complexes, reduce severe injury incidents by 15% year-on-year, fully implement the Pilgrim's supplier code of business ethics and conduct, reduce water use intensity by 10%, reduce natural gas used up 14%, reduce electricity use by 12% and reduce greenhouse gas emissions by 14%. We are confident in our progress to date coupled with our ambitious goals for 2020 and we will continue to position Pilgrim's as a global industry leader in the production of high quality sustainable chicken products. We will adhere to the most stringent sustainability standards with any industry to produce our chicken while looking for opportunities to continuously innovate including new investments and strategic projects and automation. With that I'd like to ask our CFO Fabio Sandri to discuss our financial results.

Thank you Bill and good morning everyone. We reported 2.25 billion in net revenue during the second quarter of 2017 which compares to 2.03 billion in net revenue marked for the year before. Net income was 234 million versus 153 million in the same quarter of 2016 resulting in an earnings per share of $0.93 compared to $0.58 in the same quarter last year. Operating margins were 15% in US and 22% in Mexico respectively as results vastly improved both in US and Mexico across all segments. Our operating margin and EPS includes a write-off of an idle asset in Athens, Alabama that we've sold to local municipalities. That impacted our results by close to $3.5 million. Adjusting for that impartment and from exchange rate gains, our adjusted EBITDA reached 421 million or an 18.7% margin compared to an adjusted EBITDA of 283 million or 13.9% margin the year before. Our fresh chicken operations continue to generate robust results despite higher availability of proteins in general. Chicken has continued to be an excellent value to consumers both in terms of overall price and in convenience, but in retail and food service. Also the cut out of the commodity business have increased sequentially and year over year during Q2 supported by improvements in all cuts of the bird and we expect the performance to continue to be strong during Q3 despite normal seasonality. The integration of GMP is on track and for synergy capture of total analyzed rate of $30 million, above our initial expectations of $20 million. We have a sustainable competitive advantage in GMP. And I believe there is great potential to leverage just their product line, a fast growing on trend consumer chicken brand across our entire national portfolio including prepared foods as well as to further develop our online strategy. The Mexican markets performed above our expectations during Q2. We experienced the normal seasonality with expected pickup in demand while good operations, growth in prepared food sales and positive currency movement have positive contribution to our results. During this quarter, the profitability of the acquired operations in the north where at the same level as the legacy assets demonstrating how we were able to leverage our geographical and private coverage as well as capture synergies to increase our margin performance through integration and implementation of a new strategy. Production at the new complex in Veracruz is tracking well and its performance is exceeding our expectations and we expected to double its production by the end of the year. Our prepared foods in Mexico strategy is also performing better than expected. The launch of the new premium Pilgrim's branded products that were based on the reputation of our high quality local fresh operation has been well received both by customers and consumers. This strategy is supported of our goal to increase our higher margin differentiated products while having product coverage from entry level to premium both fresh and prepared in Mexico. During Q2 2017 our SG&A was higher than the year before at 2.7% of sales, reflecting the inclusion of additional GMP operations, the support for the GMP and just their brands as well as the support for our new product offerings in prepared foods both in US and Mexico. We will continue to focus on adding value to our operations and to differentiate our product offerings and services. Our teams continue to be relentless in their pursuit of operational excellence regardless of market conditions and continue to improve our mix, use and efficiency according to our plan. In line with our strategy to recognize the contribution of our most important asset, our team members, we increased our operational pay at a rate of 1.5 times our previous target as well as to increase our commitment to continuous improvement in many environmental and social economic indicators, including while use energy consumption, governance, diversity and inclusion, team member health and safety, animal welfare, family farm partners and many others as detailed by Bill in our sustainability report. We are tracking well against our capital spending plans this year to optimize our product mix that is aiming at improving our ability to supply differentiated less commoditized products and strengthen partnership with key customers. As the portfolio change, projects are now complete and operating well, we are targeting to invest $250 million on CapEx to account for the inclusion of GNP within our budgets. We reiterate our commitment to invest on strong return over invested capital projects that will improve our operational efficiencies and tailored customer needs to first solidifying our competitive advantage. Our balance sheet continues to be strong given our continued emphasis on cash flows from operations, focus on managing our working capital and disciplined investment in high return projects. During the quarter, our net debt reached $1.14 billion with a leverage ratio of 1.1 times less 12-month EBITDA below our optimal range of two to three times. Our leverage remains at a low level and we expect to continue to generate strong cash flows, increasing our financial capability to pursue strategic options. We expanded our term loan facility to 2020 with great support from our banking partners. And the outlook for interest expense for 2017 continues to be in the range of $40 million to $50 million. Since the beginning of the buyback program, we have repurchased more than $230 million in shares in the open market, while maintaining a strong balance sheet and a low leverage. Once again, we are confident of our ability to return cash to shareholders and exercise great caring ensuring that we create shareholder value by optimizing our capital structure by preserving the flexibility to pursue our growth strategy. We'll continue to consider and evaluate all relevant capital allocation strategies that will match the pursuit of our growth strategy and we'll continue to review each prospect accordingly to our value creation standards. Operator, this concludes our prepared remarks, please open the call for questions.

[Operator Instructions] The first question comes from Farha Aslam with Stephens Incorporated. Please go ahead. Farha Aslam, your line is now open. All right. Next question comes from Heather Jones with Vertical Group. Please go ahead.

I guess first on retail price. So, clearly there's - the industry is in flux for some, the benchmarks that different companies are using and right now, it's difficult to track exactly how pricing is trending year-on-year. But if we look at some of the EMI whole bird metrics, we're looking at mid to high-teens year-on-year increases and so just wondering if you could give us a sense of what you're seeing on the realized pricing there. I mean does that seem extreme to you because the new UB composite, we don't have a year ago, but it's remained strong on a sequential basis. So just if you could tell us what you're seeing there on the retail price.

Demand has been extremely strong at retail through late spring and all the way through to now and we think that even beyond, it's going to continue to be strong and that's what's driven pricing and of course, our strategy with our key customers is to price our product portfolio based on that which really meets their needs. As we said in the past, we didn't have much at all of our product that was tied to Georgia Dock that as you referred those is no longer existent and so we treat each of our customers based on their own portfolio and the value that our products represent to their customers and we have the ability to change those prices as needed, based on the input cost as we experience. So we're very excited about our pricing strategy. We're very excited about the fact that demand for chicken remain extremely robust at retail and we think we've got the right solutions for our key customers to bring consumers increasingly into their stores.

Okay. And moving on to weights, so the last few weeks, we've had year-on-year increases and it seems like it's just this year has been more milder as far as temps, but normalized weights continue to trend down and I'm just wondering, I know the bigger issue is related to [indiscernible] but you also have like the slow growth push and then the recent memo out of the FSIS regarding potentially treating [indiscernible]. So I guess my question is, how early do you think we are in a cycle of reducing waste? Do you think we go back to normal next year or do you think we are in the early innings of reductions in that large bird segment?

I think that the consumer and our customers really are the ones who have voted here and I think that for the first time, Heather, I guess in the last 10 or 15 years, we've seen a period where we failed to see continued growth in average bird weights. I don't think that's going to change in the foreseeable future, in other words, I think we're either going to stay about where we are or as the mix shifts to different bird sizes for different products, we may in fact see a decline as for example tray-pack business grows as a total of the entire industry, we may see that mix shift pressure the total aggregate bird weights. And so I think that's what we've seen going on and I think it's driven by consumers and customers and I don't see that trend changing significantly in the near term.

The next question comes from Adam Samuelson with Goldman Sachs. Please go ahead. Sorry, the next question comes from Farha Aslam from Stephens. Please go ahead. Adam Samuelson with Goldman Sachs, please go ahead.

Maybe a question and I apologize I've been jumping on another conference call on volumes in the quarter. You had a, I think the US volumes were down year-on-year, you are comping against the plant closure last year. I'm just wondering if you could give a little bit more color on your production in the second quarter, both on the live side as well on the further process, a little bit more transparency on your own volume production for the year.

Sure, Adam. Our volumes were 5% higher than last year in US and flat in Mexico. The growth in US was mainly due to the acquisition of GNP. Not proceeding GNP, the volumes were flat in USA, mainly due to the increase deboning of legs, so we have less volume and the weight reduction by the conversion of our plant in Sanford, North Carolina from Big Birds to organic case ready. We expect volumes next quarter to be 6% to 7% higher than the same period last year, as all investments are now completed and we increased the volume of these operations.

That's helpful. And then just a question on Mexico, as you look forward seasonally, the third quarter typically is seasonally a slower quarter after the second quarter is usually a seasonal peak. Should we expect the normal level of seasonality or is there something in terms of your own cost performance, currency, feed cost outlook that that would support a stronger margin kind of outlook than the past experience would suggest?

I'll take the first part of that and Fabio can follow-up, Adam. We see normal seasonality in Mexico, although our operations are performing very well, very pleased with our teams executing our strategy there and we believe that Mexico will continue to be a great performer in margin.

Adam, like we said, Mexico has a different seasonality than US. The third quarter typically is less - show less demand due to the summer vacations and the research there. But Mexico is a growing economy, as the population increases their disposable income, it leads to a significant growth in the growth in consumption. We are increasing our volumes, both in fresh and in prepared foods by introducing the new line of premium value added products, using the Pilgrim's brand and want to expand our channel presence. FX can have significant change as well. We are seeing the level of the peso gaining against the US. So we expect to have a strong quarter in Q3, but in line with normal seasonality.

[Operator Instructions] The next question comes from Michael Piken with Cleveland Research. Please go ahead.

Hi. This is Mike Henry in for Mike Piken. And I guess following up from Adam's. I guess can you guys talk at all about investments that you've made to reduce the seasonality swings that you've seen in Mexico and then in addition to that, kind of wondering how you could compare your NAE and organic business in terms of profitability versus your whole, is it more profitable at this point from a margin basis, is there upside there on a margin basis or is it running below and it's going to continue to run below and kind of what are your thoughts there?

Sure. I'll take the antibiotic free or NAE first and then we'll move to Mexico. So the reason for our increase in producing more NAE product is absolutely correlated to demand by our key customers. Our approach is not to just produce antibiotic free birds and then go try to sell them on a speculative basis, it's all tied to demand from our key customers and to be specific, it is more profitable than our average product sales, but the important thing too is it helps us sell the entire portfolio. So we can go to a key customer and offer a bundled solution that includes NAE, it includes prepared foods, it includes other products and when we do that, it also helps us improve efficiency, lower our costs and again improve the entire market basket profitability, if you will. So that's the role that NAE plays in our portfolio. We'll continue to grow that as customer demand and consumer demand grows for that type of product and we're a leading producer of that class today and expect that we'll continue to grow our volumes in that way. On Mexico, we're doing essentially the same thing there that we're doing in the US and that we're growing our Prepared Foods business, we're growing our branded business in Mexico, as Mexican consumers move up the value chain and their disposable income increases over time, they know our brand as a fresh product with high quality, great service and so they follow that brand in the categories that they can afford as their standard of living improves and so we're very excited about what we're doing in Mexico. We're always looking for differentiated ways to grow, either by acquisition or by organic growth. As you'll note, we've built a brand new complex in Veracruz a couple of years ago. We're in the process of doubling production of that complex as we speak and we'll continue to look for ways to grow there.

Thanks. And just to clarify, the third quarter volume up 6 to 7, is that, that is of the legacy business or is that inclusive of GNP?

That includes GNP.

I'm sorry. Say that, sorry, it's inclusive?

It includes GNP. Yeah.

[Operator Instructions] The next question comes from Bryan Hunt with Wells Fargo Securities. Please go ahead.

My first question is, looking at the industry in the last couple of quarters, labor tightness has become a somewhat of a headwind on the cost line item. I was wondering if you talk about labor turnover rates and then what you're seeing from a labor inflation rate issue, just to kind of maintain the status quo on your employee levels.

As Fabio mentioned, this year, in reviewing our wages, we decided to increase our rate of increase by 1.5 times what we typically do. So we have seen pressure in the labor market, but I would tell you of all of our operations in the United States, we have four of those plants where we've seen the biggest issue and we're looking at different ways to mitigate that increase in cost and risk by going to more automation and we're investing heavily in automating our processes, taking labor out, making jobs easier. But at this point, from a widespread basis, it has not been problematic overall, other than in just a few operations for to be exact and we're addressing, mitigating that cost and risk in those four.

And Bryan, just to compliment that, we are treating that strategically. So we are looking to every different market and seeing the competition for the labor force in that specific market and adjusting the pay on those markets. So it's not an overall pressure on overall increase, rather it is specific actions that we are doing to mitigate those competitions in those specific markets.

Sorry, just to be specific, we are partnering with a sister company, an investment made by JBS Scott technologies that is in the robotics business and we're increasingly using robotics more in our operations, especially in our front half of the boning operations. We think we can combine vision technology, X-ray technology along with robotics to make those jobs much easier for our team members.

You read my mind. That was going to be my follow-up on Scott. Thank you. If you also - kind of switching gears, you always give us an idea of how you're tracking on efficiency improvements and cost reductions. Can you remind us of your goal for the year and maybe where you're tracking through the first half?

Sure. Like we mentioned, our program goes beyond only costs. It's centered against operational improvements. The two major buckets are on plant efficiencies. As we have all of our major projects finalized and all of our plants operating at a plant capacity and fully staffed just like you've mentioned, we expect to reach our target and capture $174 million in annualized gains. We have every level of the organization engaged in to achieving our improvement targets and we have detailed action plans on each of these targets. Typically and it's usual questions, we see half of the operational improvements as an increase in revenue, because it increased the yields. And the other half in cost per pound as we improve the efficiency of our plant.

And Fabio, can you give us an idea of where you stand through the second quarter on that 174 target?

We are on track.

Okay. And then one last question. You continually talk about using some of your capital and your availability to grow the business through acquisition, there was a further process chicken operator in Alabama that was recently sold to [indiscernible] and I was wondering if one, is that type of acquisition you're looking at in terms of capabilities and if so, did you have a look at that?

Certainly. That's the type of operation that we would look at and we're very familiar with that asset and decided that it just didn't fit what we were looking for in terms of quality of asset and go to market strategy. So we passed on it. I would remind you though our acquisition strategy has not changed and it served us well so far, we're looking for assets that provide geographic diversity, fills voids in geography and brings brand that we currently don't have or allows us to enter segments that we're not currently strong in.

And of course, we have the track on the prepared foods where we want to reduce the volatility of the chicken segment.

[Operator Instructions] The next question comes from Farha Aslam with Stephens. Please go ahead.

Hey, guys. This is Dan Shapiro on for Farha. Just a quick one for me and apologies if we missed this. Can you just talk about the sustainability of wing prices as we head into football season here? Obviously, well above your levels, we've heard a lot of talk about the growth in wing restaurants, but just anything else driving really the high prices there?

I think a couple of things. Wings are increasing in demand as well as tenders. We see the same phenomenon in tenders. The one thing that stands out to me is relatively low inventories coming out of last wing season, and especially going into this wing season, with increasing demand and the lack of supply, that's what continues to drive pricing. I think we'll continue to have a robust market for wings as we start in to football season starting actually this week and next. So we're excited about that.

The next question is a follow-up from Heather Jones with Vertical Group. Please go ahead.

Thanks for taking the follow-up. Just really quick, you mentioned something about I can't remember the exact quote, but there's something about small bird supply demand balance being relatively tight and I may be misremembering, so I apologize if I am, but I thought that sometime this year, there were like certain fast food contracts that would be, that were three years and linked and were going to be renegotiated. So I was just wondering if I'm correct on that, does this position you to not only be able to hopefully increase the spreads that you enjoy that last contract around?

Demand for small birds, Heather, continues to be very robust. The supply of small birds, as we've seen the last 10 or 15 years, has not grown materially. And with increasing demand for, especially the retail deli, wads, the rotisserie, fully cooked birds and the cut up birds as well as bonus from small birds, we're continuously pricing very, very strong. I don't see that that's going to change in the near term or even longer term.

This concludes our question-and-answer session. I would like to turn the conference back over to Bill Lovette for any closing remarks.

Thank you. The outlook for chicken consumption remains strong, despite more availability of other proteins since greater export volumes and a strong US economy will drive protein consumption across the board and absorb the supply. We continue to look for opportunities in refining our portfolio to pursue an even more differentiated customized product to satisfy our key customers' needs as we believe this strategy is supportive of our goal to continuously improve our margin profile and reduce volatility, despite specific market conditions. We believe our cash flow generation will remain robust and allow us to sustain the investments in strategic projects this year at a similar place to last year, strengthening our operational efficiencies and tailoring customer needs to further improve competitive advantages for Pilgrim's. We'd like to thank our team members for their excellent work and our customers and always appreciate your interest in our company. Thank you all for joining us today.

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