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…

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…

[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.