Pilgrim's Pride Corporation (PPC) Q3 2017 Earnings Report, Transcript and Summary

Good morning, and welcome to the Third Quarter 2017 Pilgrim's Pride Earnings Conference Call 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. [Operator Instructions]. 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 third quarter ended September 24, 2017. Yesterday evening, 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'd 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, and good morning, everyone. Thank you all for joining us today. For the third quarter of 2017, which includes the full quarter for Moy Park in accordance to U.S. GAAP, consolidated net revenues were $2.79 billion versus $2.5 billion from a year ago, resulting in an adjusted EBITDA of $464 million or 16% -- 16.6% margin versus $237 million a year ago or 9.5% margin. Our net income was $233 million compared to $99 million in the same period in 2016, while adjusted earnings were $0.98 a share compared to $0.41 in the year before. We're appreciative of our team members and the results they delivered in Q3. As most of you know, over the past few years, we've created a portfolio strategy which is designed to deliver a more robust performance for the mid to long run, rather than the short term, and structured to minimize the full peaks and troughs in the commodity markets. We expect our portfolio to give us the potential to capture the market upside, while not creating more risk and generating more consistent higher margins over time. All the CapEx investments we made over the last year are operating at expected levels. And together, with the recent acquisitions, they're generating more value and continuing to contribute to the evaluation of our portfolio and supporting our vision to become the best and most respected company in our industry. During Q3, our U.S. operations performed very well across all business units. Mexico performed better than what was expected, given normal seasonality, and Europe experienced strong revenue growth and consistent margins. U.S. 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 Q3 as exports grew from a year ago with demand for U.S. chicken remaining quite robust in the international markets. Demonstrating the effectiveness of our portfolio strategy of the well-balanced mix of multiple bird sizes, geographic coverage as well as the diverse product and channel exposure, our team leveraged the strength in commodity markets to sustain the momentum of the entire portfolio, giving us a differentiated approach and an opportunity to capture the upside, while minimizing the downside. Margins within our small bird and case-ready operations have remained very healthy, and our leadership in these markets will continue to give us meaningful advantage relative to our peers with a narrower market orientation. Chicken continues to be very competitive in value and convenience, and demand has been very resilient despite higher availability of other proteins. Despite the expected increase in U.S. production of competing proteins next year, more exports and obduction of imports are driving total domestic protein per capita disappearance to be up a very modest 1.7% in 2018 compared to 2017. While foodservice traffic has been under some pressure, the good news is chicken servings are continuing to grow and menu importance is at its highest point according to NPD. Also, the chicken dollar growth has outpaced volume growth, which is positive indication that the industry is increasing volume at greater profits. During Q3, large bird deboning maintained the rebound from a weaker-than-expected start of 2017, reflecting the improvement in demand from export and domestic markets. While pricing has been very solid during the summer driven by strong demand for grilling -- by grilling season, it has since returned to reflect normal seasonality. Volumes and pricing to our export-oriented cuts are on a positive trend compared to a year ago, supported by stronger exports, due in part to ongoing AI-related supply issues and other chicken-producing countries around the world, thereby increasing demand for U.S. products. Specifically, for us, we've also reduced our exposure to commodity sales due to increase in leg deboning at 3 of our facilities, which will help us strengthen our price mix moving forward. The integration of GNP is above expectations, and we're already close to delivering previously stated goal of $30 million, which is ahead of target. We're progressing very well and improving the profitability of GNP and quickly closing the gap relative to our legacy operations. Margins have improved 600 basis points since the acquisition early this year as we've applied our methods to generate operational improvements. Our goal is to strategically expand our Just BARE chicken brand in order to provide fresh and prepared food chicken solutions to our customers that encompass private and captive labels and good, better, best offerings -- brand offerings. Just BARE is the top-selling chicken brand on AmazonFresh, which has seen significant increase in sales dollars versus last year in this online channel. Given our online momentum in the retail grocery space, we believe our partnerships represent an excellent opportunity to further improve the distribution of our product portfolio within these newer and emerging segments, including organic and NAE. With the majority of our strategic capital investments we announced last year already completed, we are very well positioned for the future to further increase our product portfolio differentiation, strengthen our key customer relationships and improve our margin profile. Our Sanford, North Carolina facility is operating better than expected and makes us the largest producer of organic chicken in the United States. The addition of our new line at Moorefield has increased 10% to our fully cooked Prepared Foods capacity that is already recovering well in comparison with last year from our improved operations at Waco. Also in Prepared Foods, we are nearing the perfect order rate, which indicates we are on track in returning to our previous target of best-in-class service, while seasonality and meat prices in the U.S. should be favorable for our Prepared Foods input cost. Our team in Mexico delivered better than expected Q3 results, while the market was consistent with normal seasonality. We experienced an impact to the market demand due to logistical issues as a result of an earthquake towards the end of Q3, which has since normalized. We expect chicken demand in Mexico to continue to outperform in the future as consumers there seek protein to improve their diet, given rising income levels. To satisfy demand, our team remains focused on operational excellence and innovation. As a part of our strategy to strengthen our competitive positioning in Mexico, we have maintained the pace of new innovative product introductions. We started the launch of fresh chickens under the premium Pilgrim's brand, including NAE, which has seen strong demand. The momentum of our value-added premium Pilgrim's brand program is growing, and we're generating great results in Prepared Foods with more than 35% growth in volume year-to-date. We continue to ramp up our production at the Veracruz complex and expect to double the size of the facility, including the feed mill in Atri. The integration of the acquired assets is complete, and we've captured more synergies than initially targeted with the profitability now equal to or better than our legacy operations, while it was only half of that before the acquisition. Also, we've received multiple awards from customers for our consistency and high level of service. Longer term, we continue to believe Mexico represents a very good growth prospect as demand for protein continues to outstrip supply in the foreseeable future. Our new European operations, Moy Park, generated strong sales growth and consistent margins in Q3. We're very excited about the potential opportunities in Moy Park, because it creates a stronger, more diverse and much more stable global chicken and Prepared Foods leader in Pilgrim's. The acquisition aligns well with our strategic priorities as we continue to expand our geographical and brand footprint, and extending our global poultry leadership position into attractive new markets. Moy Park also brings a strong reputation for providing fresh, high-quality, locally-farmed poultry products in the U.K. and Europe. By adding a top U.K. food company and one of Europe's leading poultry and prepared foods producers, we have expanded our geographic reach into the U.K. and continental Europe, while providing us a solid growth platform in the region for the future. By diversing and further globalizing our portfolio, we are meaningfully improving our margin structure, while reducing earnings volatility across our business. Further, with the addition of Moy Park's best-in-class production platform, we've significantly strengthened our Prepared Foods portfolio and further improved our value-added innovation capabilities. We will expand our key customer strategy into Europe as we see incremental joint value creation opportunities there as we've seen in the U.S. and Mexico. Moy Park has a track record of sustained earnings growth, and given that a majority of the commercial agreements are structured more along long-term relationships with key customers. We have a more stable margin structure, which we'll continue to enhance through ongoing operational improvement initiatives. The addition of Moy Park is not only about growth, but it's also about our reflection of strategy to have a well diversified product portfolio and geographic and innovation capabilities, while producing more consistent results. Together with Moy Park, we have an even stronger team in place with the ability to achieve synergies and the potential to leverage innovation and consumer insights across the globe. On feed costs, corn and wheat prices has fallen to their lows of the year as harvest continues in the U.S. USDA is forecasting an increase in corn ending stocks to 2.24 billion bushels despite a decline of more than 850 million bushels in production, a reflection of ample available global corn stocks. Harvest reports from the field are confirming the better than expected yields reported by USDA in the October WASDE. Global corn stocks, excluding China, are forecasted to be 120 million tons, which should be a headwind for U.S. exports. Global wheat stocks are forecasted to increase to 268 million tons this crop year, up 12 million tons from last year, reflecting the large global supply. Soybean ending stocks are forecasted to increase 430 million bushels despite a decline in yields this year, driven by a record 90.2 million planted acres. World soybean stocks are forecasted to increase again to 96 million tons, despite growing demand for oilseed products. Cash values for soybean and soybean mill are extremely weak, reflecting the surplus of soybeans globally. With global surpluses of both grains and oilseeds, we do not expect feed input costs to be a headwind to earnings in the medium term. 2018, USDA is forecasting a total U.S. chicken industry production to increase at a comparable pace to 2017. We believe the industry growth over the next few years will continue to be well supported of a balanced supply-demand environment, and we're confident 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 key customers, our partnerships create an opportunity to further accelerate growth in key categories by providing more differentiated products, while giving us a strategic advantage in strengthening those relationships. Despite greater availability of other proteins, the outlook for chicken demand in 2018 remains intact as we believe supported export environment capture much of the increase of total U.S. production across all protein complexes, while giving -- or while continuing strong U.S. economic conditions will motivate households to demand better quality, higher price cuts and meats, which ultimately translates to more overall consumption. While we are already well balanced in terms of our bird size exposure, we'll continue to look for opportunities to shift our product mix and reduce the commodity portion by our portfolio by offering more differentiated customized products to key customers, while also optimizing our operations by pursuing our operational improvement targets. Our team is performing very well and executing our strategies, supporting our vision to become the best and most respected company in our industry. And so with that, I'd like to ask our CFO, Fabio Sandri, to discuss our financial results.

Thank you, Bill, and good morning, everyone. Before I begin, please note that because we closed the acquisition of Moy Park during Q3, the U.S. GAAP guidelines regarding transaction between common-controlled entities required our reports to consolidate the full quarter of Moy Park into our financials with earnings prior to the acquisition being subtracted below the line. In the filings, our year-to-date and year ago results has also been adjusted accordingly. Under this requirement, considering Moy Park both in 2017 and 2016, we reported $2.79 billion in net revenue during the third quarter of 2017, which compares to $2.5 billion in net revenue the year before. Net income was $233 million versus $99 million in the same quarter of 2016, resulting in a GAAP earnings per share of $0.93 compared to $0.39 in the same quarter of last year. Adjusted operating margins were 17% in U.S., 13% in Mexico and 4% in Europe, respectively. Results were robust across all business in the U.S. Mexico was better than expectations and Europe saw strong revenue growth and consistent margins. Our reported consolidated operating margins and EPS also include nonrecurring restructuring and acquisition charges related to Moy Park and GNP, that impacted our results by $19 million. Adjusting for the charges, our consolidated adjusted EBITDA would have been $464 million with an adjusted operating income of $404 million and an adjusted EPS of $0.98. Excluding Moy Park from the consolidated financials, U.S. and Mexico operations generated to $2.28 billion in net revenue during the third quarter of 2017, which compares to $2.03 billion in net revenue the year before. Operating income rose 124% to $368 million versus $164 million last year. While adjusted EBITDA also significantly increased to $428 million or 18.8% margins compared to $211 million or 10.4% margins a year ago. Our fresh chicken operations in U.S. continue to generate strong results. Despite higher availability of proteins in general, chicken has continued to be a compelling value to consumers, both in terms of overall price and in convenience for the end-user in retail and foodservice. The cut out of the commodity business stayed firm for much of the quarter, before adjusting to normal seasonality after Labor Day. Our business unit saw some impact from the hurricanes in U.S., even though we did not suffer any damage to our operations, mainly due to a temporary reduction in demand due to logistic challenges. Integration of GNP is better than expectations, and we have already captured close to $30 million target that we have previously announced. Given the pace, we are revising our synergy target higher to $40 million to better reflect the improvement we have made and the new opportunities being laid out. Like Bill mentioned, we are making great progress in increasing the profitability of GNP with margins now 600 basis points higher than when we first acquired the business in Q1 of this year, and moving much more closer to the level of our legacy operations. The environment in Mexico was consistent with seasonality and our team outperformed the market to generate Q3 results that were above our expectations. During this quarter, the profitability of the acquired operations in the north continue to remain close to the legacy assets, demonstrating how we were able to leverage our geographical and product coverage as well as capture synergies to increase our margin performance through integration and implementation of our new strategy. Production at the new complex in Veracruz is tracking well, and its performance is also exceeding our expectations, and we expect to double its production by the end of the year. As part of our goal to improve our differentiation in Mexico, we have been increasing our focus on Prepared Foods, including adding products using the premium Pilgrim's brand. Our investment has started to generate good results with Prepared Foods up 35% year-to-date. To maintain the momentum, we have also started the launch of fresh chicken under the Pilgrim's brand name, including No-Antibiotics-Ever, which have seen strong demand. This strategy is supportive 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. There was some disruptions at the end of the period due to the earthquake in Mexico, but we did not suffer any damage to our operations and the local economy rebounded quickly. During Q3, the new European operations, Moy Park, produced a strong sales growth and consistent margins. We look forward to integrating Moy Park because of the diversification of geography and the potential for growth, which will continue to evolve our portfolio creating a sustainable advantage by being able to capture the upside in the market, but protecting the downside. We are targeting $50 million in synergy over the next 2 years, including optimization of Moy Park's product portfolio and implementing zero-based budgeting. We will increase efficiency across the value chain by optimizing sourcing and production, improving life cost, yield improvements and the global management of feed sourcing. We will leverage our marketing and sales infrastructure to optimize SG&A costs. We have a proven history of capturing synergies and delivering significant operation improvements. In our most recent deals, we have actually exceeded our initial synergy targets, while building on an improving -- and improving the performance of the business beyond just the underlying markets. We are confident we have the methodology and the team to similarly continue to grow the profits at our -- of our field operations and leverage their expertise and experience to improve our global operations. During Q3 2017, our SG&A was higher than the year before at 3.7% of sales, reflecting the inclusion of additional GNP operations, the support from the GNP and Just BARE brands, the investment for our new product offerings in Prepared Foods both in U.S. and Mexico, and the addition of Moy Park. Also included in this number are the restructuring and acquisition charges mentioned earlier. Adjusting for these acquisition charges, SG&A would have been in line with expectations at 3.1% of sales. We're tracking well against our capital spending plans this year to optimize our product mix that's aimed at improving our ability to supply differentiated, less commoditized products and strengthen partnership with key customers. For next year, we expect to invest between $275 million and $300 million on CapEx to account for the inclusion of GNP and Moy Park within our budget. We reiterate our commitment to invest on strong return on capital employed projects that will improve our operational efficiencies and tailored customer needs to further solidify competitive advantage procurement. Our balance sheet continues to be strong, given our continued emphasis on cash flow from operation activities, focus on management of working capital and disciplined investment in high return projects. We also have been strategically building inventories in Prepared Foods to prepare for the upcoming winter season, which together with the logistic disruptions caused by the hurricanes in U.S., slightly increased our working capital. During the quarter, our net debt reached $2.2 billion with a leverage ratio of 1.6x pro forma last of 12 month's EBITDA, below our optimal range of 2 to 3x. Our leverage remains at the low level, and we expect to continue to generate strong cash flows, increasing our financial capability to pursue strategic options. We issued a total of $850 million in bonds in late September and received great support from investors with the offering more than 5x oversubscribed. Given the existing capital structure, the outlook for 2018 interest expenses should be in the range of $100 million. We will continue to maintain a strong balance sheet and a relatively low leverage. We will remain focused on exercising great care in ensuring that we create shareholder value by optimizing our capital structure, while preserving the flexibility to pursue our growth strategy. We will 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 creating standards. Operator, this concludes our prepared remarks. Please open the call for questions.

[Operator Instructions]. Our first question comes from Farha Aslam with Stephens Inc.

You're going into the contracting season for chicken with the full capacity. Could you give us some color on how you're approaching this contracting season differently versus last year? And perhaps some color on the overall contracting season and how it's progressing?

Yes. So far it's not going to be any different this year going into 2018, than it's been in the last probably 3 or 4 years at least. When we changed our construct in terms of fixed pricing, what, 6 years ago, we really approached each year by and large the same way. Since we believe that demand for chicken will grow at both retail and foodservice, we think that the contract season as it were, is going to be a healthy one. We think chicken is going to continue to be the protein of choice for younger generation and those who are health conscious and value oriented. And so for those reasons, we don't think that the contract season is going to be any different than it has been.

I think, Farha, the only difference is that while last year we had some disruptions in our operations because of the investments, this year we have enough inventories and we have 100% service levels. I think that should help as well for us, so.

That's helpful. And then since the quarter ended, you've seen chicken prices moderate. Could you share with us how we should think about your fourth quarter earnings and margins and your outlook for 2018, for pricing?

All right. So on the moderation of the pricing, it's really no different than any other year. Except, perhaps this year we started a bit higher than we did the previous year in terms of moving from Q3 to Q4, but it's gone back to seasonal norms as it were. And so we think that our fourth quarter will be seasonally, like most -- the good news is, that we see our operations are performing better than they were last year. We're picking up our pace in our operational improvements through the year, especially with GNP as we mentioned in our prepared remarks. And we're very pleased with our team right now in all 3 countries; Mexico, and the U.S. and in Europe. We believe that fourth quarter is going to be a solid quarter for us.

Also, we saw some softening in prices in the beginning of Q4 for Mexico, but because -- mainly off the disruptions caused by the earthquake, but we're seeing a very quickly rebound in profits already at the same levels as last year.

The next question will come from Ken Zaslow with BMO.

Just a couple of questions. One is, your volumes. I know you went through some production issues in changing your plant's configuration. Can you talk about the volumes and where they will be over the next, call it, quarter or 2 next year? Are we back at some sort of reestablishing the growth algorithm?

I'll give color, and then I'll have Fabio give you the number side of it. So one of the things that we've done, and I think this is reflective of the entire industry is we have been in the process of making a breed change that to a better yielding and better converting bird, especially for case-ready and our large bird deboning businesses. And one of the byproducts of that has been a lower hatch. So as we converted to this breed, especially the male side of this breed, our hatch was underperforming relative to our history. And we're still learning how to manage that male. Our hatch is improving now, but it's still not near where historically we have been. And so that impacted our overall volume, especially early in this year. We're catching up now. We're nearly to capacity as we speak in terms of our live production pounds. And so I think going into 2018, it will be more normal. Although, I don't think the hatch percent of this breed is ever going to be what the prior breed was.

Yes. In terms of overall volumes in U.S., Ken, we are 6% higher, mainly due to the acquisition of GNP. Our Prepared Foods operation is actually a little bit higher than last year, while the fresh operations are a little bit lower than last year because of what Bill mentioned, and also because of some disruptions in shipments at the end of the quarter because of the hurricane. We expect Q4 to be 6% to 7% volumes higher than the same period last year. Also we are deboning more the leg quarters, which reduced the total volumes sold, while increasing the profitability.

Yes. So you don't get to include the bone and skin and trim sales they go into all fall, whereas we were selling whole leg quarter before.

And my second question is on Moy Park. Can you talk about the seasonality of the margins, if there are any? And as well as what is the margin potential, what we should think about as an ongoing margin run rate going into 2018, so we just could understand how that business develops? And with that, that's it.

The chicken business in U.K. and Europe is seasonal and the seasons operate much like they do in the U.S. It's more consistent though on a -- on margin basis, and we believe that we can apply our operating methods just like we've done in the U.S. and Mexico, most recently, in GNP and provide significant margin improvement over time. And that's what we're most excited about with this Moy Park acquisition.

It's not only the seasonality, it's the sustainability as well, Ken, because most of their contracts are long time -- long-term partnership with customers. So they have a much higher pass-through composition than we have at Pilgrim's. So that's a very good composition to our portfolio where we will be able to capture the upsides, while protecting the downsides on the market.

What would you expect for the profitability for next year or the margin structure? Some sort of guidelines? Is there any sort of parameters just so we can come off the blocks, understanding exactly where we are, just to stabilize it?

Yes. In the prepared remarks, Fabio did state that we see, right now, $50 million synergy capture with about half of that coming in 2018. Just as with Mexico and with GNP, we may be on the conservative side there a little bit, but for now, I think you can be safe in using those numbers.

The next question will be from Heather Jones with Vertical Group.

I'm going to apologize ahead of time. I may have ask questions you've already answered, but I was on another call. So first on Mexico. I think I heard you say this that -- because we saw pricing weaken considerably towards the beginning of Q4. It's still down year-on-year, but not as much as it was early in the quarter. Did I hear you say that, that was related to the hurricanes and now the business is normalizing there?

The hurricanes and the earthquake disrupted a lot of distribution, especially in central and southern Mexico, but those have come back and rebounded to normalized levels. So we've seen a large uptick in price levels just in the last few weeks.

Okay. So at this time, your thought is that, that business should approximate last year?

Yes.

Yes.

Okay. Then on your big bird side, you guys have made huge strides there improving the relative performance there. I was wondering could you give us a sense of like the cadence of that improvement during 2017? So -- I mean, because it sounds like that could be a meaningful tailwind for you guys into '18. I was just wondering if you could help us understand that.

Yes. Well, you have to sort of think about the context. The company was not even in that business when we arrived 6.5 years ago. And we went from nearly 1 plant to 8 plants of being in that business in the first 5 years we were here. We've since converted Sanford, North Carolina away from big bird into case-ready for our organic program, and we significantly improved, just in the last 12 months, our operating metrics in that business. We were actually better in 2014, in the first half of 2015, because we had converted so many operations and had so much critical mass there, we sort of slipped in our performance. Beginning the last half of '15, through '16 and then we started improving in the first half of 2017. We've picked up the pace of that improvement significantly the last half of 2017 and expect that, that pace will continue into '18, and we're going to be better than an average operator in the large bird deboning business through 2018. So we're sort of just about average now, which we do not find acceptable. We're going to surpass that in 2018 and be very proud of our large bird deboning business next year. We've made several management changes. We've got great leadership in that part of our business now, and we think that's going to be one of the stars of our company in the U.S. moving forward.

And Heather, as we built our budgets last year, we identified the $174 million in operation improvements because of everything that Bill mentioned. Big bird was an important part of that improvement. As we are going through our budgets there right now, we are already identifying more opportunities in the big bird. And we will expect to capture all those opportunities next year, probably in the range of $200 million again.

Okay, for '18. Okay. Then looking at the U.S. supply side, so a couple -- a few things that I'm juggling in my mind here is the last month that we have on the USDA showed almost a 6% increase in the flock, and it just -- and our back-of-the-envelope math suggest that the industry has increased the holding time of their hens. And so if we'd look at the pullet placements that we have to date, and we assume a similar holding time, you're looking at, call it, 4% to 5% increase in the flock for roughly the first half of '18. But you've got lower egg yield, improve -- your hatchability, not you, as in PPC, but the industry's hatchability should be better in '18, but you have easier weight comparisons in the summer. So putting all of that together, wondering what your thoughts are on what -- how much increase we should see in pounds in '18?

Yes. So one thing you did not mention in all of those numbers is the hen slaughter, that was down about 5.25%. So obviously, what happened is as we were extending the age of that breeder flock, we were not killing those hens trying to get more eggs and more chicks, obviously. That's going to change, because you can't hold those hands forever. And so as we start pulling down the size of the flock, the age of the flock, while on the one hand, we'll see a pick up in productivity, meaning more eggs per hen and better hatch, the overall output we don't believe is going to be more than about 2% in 2018. So the issue looking at those numbers even on a monthly basis or even a quarterly basis is you sort of have to think about a lot of things at one time; age of the flock, how many we're killing, the productivity of that flock. But when it's all said and done, to your point, we don't see more than about 2% or so of heads coming out in 2018 versus 2017. And I think year-to-date, we've only seen about 1% increase in head versus 2016 to that point.

And also because of the lagging pullet placements as they need to mature to become the breeding flock, year-to-date, in the first 6 months of this 2017, actually pullet placements are down compared to the same period last year.

[Operator Instructions]. The next question will come from David Carlson with KeyBanc Capital Markets.

My first one's volume related, and then I have a follow-up regarding grain cost during the quarter. But Fabio, did you say volume in the U.S. segment was up 6% during the quarter?

Yes, mainly because of the acquisition of GNP. So in the, let's call it legacy business, in Prepared Foods, we were slightly up in terms of volume compared to the same period last year also because of the new wing line. And in fresh, we were slightly down.

So backing out the GNP volume, that would imply volume down about 1% or so at the legacy business. That's 300 basis points below the industry. How confident are you guys that you'd be able to produce at least in line with the industry now that several of these plains are back online following the number of projects in 2016? And I have a follow-up.

Yes. We're confident we're going to maintain the pace of the industry going forward.

And I think, Bill mentioned this, because of the better management of the breeding flocks we have more eggs available. Also, a little bit of the impact in the volume is because of deboning more legs. So some percent there, it is less pounds, but more profits.

Fair. How much did -- Fabio, how much is the lower grain cost benefit consolidated gross margin year-over-year?

Well, year-over-year, I think we're almost flat. In this quarter, I think we're $20 million better because of lower grain prices.

The next question comes from Michael Piken with Cleveland Research.

If we could talk a little bit more about the export markets and what you see as potential opportunities in 2018? What do you expect from an overall volume perspective and what do you think free yourself in terms of potential volume growth?

Michael, we believe that the export market in 2018 is going to look much like it did in 2017. But what we have is avian influenza is, I think, found in a lot of countries that traditionally export into Europe, the Middle East, into Asia and what has happened is, it's a zero-sum game because that creates more demand for U.S. chicken, and we haven't had any AI in the last 6 months. So we're pretty much open to all of our normal export markets, and we see good demand for chicken. We think that 80% or so of the growth of chicken consumption globally is going to come from emerging markets in the next 10 to 15 years. Chicken represents a great value in terms of protein consumption. And so I think it's mostly, if not all, good news from an export perspective going into next year and the years beyond.

Also, this year, our exports to Mexico are 10% lower than the same period last year. And as we see the economy in Mexico improving and the pace of better value to the U.S. dollar, we see some potential of growth for the exports next year.

And then just a follow-up on that, with respect to Mexico, like what is the better environment for you? Is it an environment where there's a lot of U.S. chicken going into Mexico? Or is it net-net better for your Mexican business to have fewer, but less competition from the U.S., what benefits you more?

Yes. We constructed our portfolio down there to operate well in both environments. Most of the U.S. exports go into northern Mexico. We operate across the entire geography. And so we customize our programs, sales programs to fit U.S. exports coming into the northern part of the country and serving that part of Mexico in one way versus the central and southern part of Mexico a slightly different way. And going back to the acquisition of that asset a couple of years ago, that's -- it's one of the big jewels that we saw in being able to construct a portfolio in Mexico that's also diverse to accommodate for those imports coming in.

The next question will be from Adam Samuelson with Goldman Sachs.

So I guess, maybe back in the U.S., and I'm just trying to maybe disaggregate the U.S. performance year-over-year a little bit more clearly, probably the big bird values and the cut out there were up considerably year-over-year. And I would guess that's probably worth something on the order of $100 million of profit. You alluded there, obviously, GNP is better and there is incremental contribution in the EBIT there. But I would still be coming up $70 million, $80 million or so short on the year-on-year profit improvement. Maybe just any kind of incremental details on mix, on kind of cost performance that you could provide? I know you haven't produced the Q yet, so usually there is some color on the EBIT bridge in that?

Adam, we haven't really shifted other than the Sanford, North Carolina plant, we really haven't shifted our mix around much. But we've made a lot of changes within each of the types of business in terms of mix and one thing about the chicken business that I've learned over my career is that mix impacts profitability more so than just about any other single attribute, price or cost or anything else. And so, one of the things that is a great core competency of ours is managing mix. And so, for example, in our small bird deboning operation, which we have about 5 plants. We've made a great improvement in mix management in that business and it was far more profitable so far this year than it was last year. So that's been a big contributor. Our other small bird business, our business that goes to QSR and our Q3 Deli, we continue to perform very well making improvements there. Those products continue to be in greater demand over time and the prices for those products continue to be very, very strong. So not only have we made improvements in our large bird deboning business, but we've managed the mix within each of those birds types extremely well, and we've taken a lot of cost out of the mix that we're producing. So it's not been just one type of business.

And I think the other factor is that are partially connected to what Bill mentioned is the operation improvements, where we are on line -- in line to achieve our $174 million target and the improvements in the Prepared Foods operation as well.

And I would remind you, last year, 2016 -- by the way, we measured it was not a good year for us. And one of the reasons it was not a good year is because we were spending a lot of time, effort and capital in these big CapEx projects. And we -- if you remember, we told you last year that they were going to pay off for us, and I think you're seeing the benefits of that activity. And we've identified more of those projects that we'll do over time. I think we're better at doing those projects than we were last year, so you'll see most likely less disruption when we do. But we're definitely seeing the rewards for making those CapEx investments last year.

And maybe humming on a couple of those. The product -- your year on -- of the $174 million, which was a full year target, how much year-on-year was realized in the third quarter? And any way to quantify the profit improvement in the Prepared Foods business? I'm just trying to disaggregate a little bit the kind of overall market improvement. Clearly there were higher prices that would accrue to your bottom line versus the actions that you undertook in the quarter, plus there was the M&A component with GNP.

Yes. Since we are on pace to achieve the $174 million, we are close to $30 million in operation improvements in this quarter. In terms -- and that is -- it is included the Prepared Foods operation improvements, the big bird operation improvements and the improvements in other -- GNP as well.

Okay. And then just finally, on cash flow, it was a little bit hard to disaggregate because I think there were some restatements in the prior quarters with how the Moy Park gets treated. What was the actual operating cash flow quarter -- operating cash flow number for the quarter?

It was close to $200 million, adjusting in that -- are considering on the Moy Park acquisition.

Right. And you've talked about inventory. So is -- inventory is the big kind of delta year-over-year there relative to healthy underlying EBITA improvement?

Yes. That was the major impact in the working capital in this quarter. We're building the wing inventory for the wing season. And there were some disruptions as well because of the hurricanes in Florida and in Texas on the exports. So we see a little bit of uptick in the leg quarter inventory for the whole industry, but for us as well, which increased our working capital during this quarter.

[Operator Instructions]. The next question will be from Akshay Jagdale with Jefferies.

Fabio, I wanted to ask about the acquired business in terms of just what you're going to be reporting and when we might expect to see that. There has been -- since you announced the deal, I mean, there has been several different data points that we can pull from to model that. And certainly, you've helped us as well off-line. But in today's numbers, for example, there was -- we've got a full 2 quarters now of P&L in U.S. dollars for the company. Can you give us a sense of how you're thinking about that in terms of filing maybe like 4 quarters of clean numbers for Europe? That would help us model it. Because it's been a bit of a moving target in terms of what we've seen from JBS, what we saw at your Analyst Day and now what we're seeing in the quarterly reports. So just I'm trying to get a high-level view of what your expectation is in terms of giving us more color on that business in U.S. dollars P&L terms?

Sure, great. Well, Akshay, in compliance with the U.S. GAAP rules, again, because it was a common-controlled transaction, we were required to consolidate Moy Park for the entire quarter. As next quarter -- as it goes to the next quarter, we will -- our filings will reflect the year-to-date and year ago results. So we have a full comparison, apples-to-apples, between our operation with Moy Park this year and what will be or could have been our operations with Moy Park last year. So as we end the year, you're going to see the full comparison.

But the margin profile that we're seeing now is a good starting point even though it's just a quarter, 9% gross margins, 4% EBIT margins, sort of high level is a good starting point, correct?

Yes, it is. And again, like we said, we expect $50 million in synergies over the next two years, being $25 million next year and $25 million the year following. So what we expect is to expand that margin with the synergies. I'll just remind that this is the margin on U.S. GAAP standards, not in IFRS, as it was released before by JBS.

Yes, yes. That was my question really. Because we have looked at it on an IFRS basis, and so it's changed a little bit. But this is helpful. Can I -- Bill, can I just challenge you a little bit on the issue of the age of the flock. I do -- I mean, the age of the flock is up slightly year-over-year, but over a 3- to 4-year period, from everything we can see and the estimates we've seen from an industry source tell us that the age of the flock is actually down relative to 3 or 4 years ago and is only up slightly year-over-year. Is that also your understanding? Because you -- we had from June of '14 to -- for 2.5 years, you had increased pullet placements year-over-year for 2.5 years and you had an increase in mature hen slaughter, right? That's for 2.5 years, which is an unprecedented time period to see both those moving in that direction. So that also points to the age of the flock coming down over those 2.5 years. So I'm just -- I just want to make sure I'm understanding the age of the flock issue correctly. Is it -- is the way I characterized it, the way you would also characterize it?

Yes. But I think you have to put age of flock in context, Akshay. The age of flock is going to move around from quarter-to-quarter. It's not a long-term phenomenon. The age of the flock this quarter is going to be different than last quarter, it's going to go up, stay down. You have to think about the age of the flock in conjunction with breed change and the breed change has been more of the issue in terms of lower productivity of that bleeding flock. And so the age of the flock extension really is a byproduct of that flock being less productive in companies like ours needing the same number of eggs, therefore, we have to hold those breeders longer. As we put more breeders down to compensate, which is the growth that you're pointing out, then we'll eventually pull that back to more normal levels. We typically slaughter a hen at 65 weeks of age, and so we'll get back to that more normal level as we experience more pullets being placed.

Just on the comparison on 2 to 3 years ago, actually if you remember, 2 to 3 years ago, we had a big disruption in terms of supply of pullets and in the breeding flock. In the end of 2014, as you remember, we were keeping our flock much, much longer in the field to produce the eggs. So if you go to a more long term and look at the age of the flock, it is still higher.

Yes. And that's super helpful, what you just said. But my point is, for the math of the breeder flock, right, to translate into 2% more pounds next year, right, would imply that you'd see another extended period of mature hen slaughter, right? I do think mature hen slaughter will go up, like you said, for a quarter or 2, but it's not my expectation that it's going to go up for another year, because we just came off of a period where it was up a lot for a while. So that's -- my point is, I get exactly what you're saying about the breed and that's had a meaningful impact on productivity, completely understand that. But for the math of the breeder flock, which was up 6%, to then translate into 2% in pounds, you definitely need the mature hen slaughter to increase quite a bit and for an extended period of time. That's all I was trying to get at, but I appreciate your response there. And just one last one for me, in terms of the current pricing trends, you mentioned that you've sort of just -- you characterized it as normal seasonality, except we started at a higher point. That's fair. But aren't you seeing like some parts that are exceptionally weak like boneless, skinless breasts. I mean, I think I don't remember seeing it at $1.03 literally ever, but can you talk a little bit about why that's happening and why have wing prices recently started to come down? I mean, I guess it can't stay up forever, but just curious to know on those 2 parts, if you have any additional color on why they're moving a certain way, which is different from what they had been doing recently?

To be honest, it's -- the reason they're moving that way is because it's November and we have Thanksgiving in November every year and this cycle repeats itself. So we're not seeing anything this year that's abnormal from any other year that we've been in the business. We've seen breast prices at near dollar or even in -- under in other years and the only difference really this year versus last is we started at a much higher number and the fall, the slope of the curve was steep, but we ended up at the same place as we were last year. So it's really no different. On the wings, we had a very strong early wing season. We've seen that abate just a bit, but it's our belief that as we go into Super Bowl season and basketball season going in final 4, we think that we'll see stronger wing prices as we normally do that time -- for that time of the year.

And despite seeing some weakness, so I think on the wing cost of restaurants, the demand for chicken and wings continue to go up year-over-year. So maybe not at the same pace than it was before, but the consumption and demand for wings continue to go up.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Bill Lovette for closing remarks.

Thank you. The outlook for chicken consumption remains strong despite more availability of other proteins, since greater export volumes and a strong U.S economy will drive more protein consumption across the board and absorb the supplies. We continue to look for opportunities in refining our portfolio to pursue even more differentiated customized products to satisfy demands of our key customers as we believe this strategy is supportive of our goal to continuously improve our margin profile and reduce volatility, despite specific market conditions. Our recent acquisitions prove our team's capability and experience in applying our methods to generate operational improvements, key customer joint value creation, and we believe that our cash flow generation will remain robust and allow us to sustain the investments in strategic projects going forward, strengthening our operational efficiencies and tailored customer needs to further improve competitive advantages for Pilgrim's. I'd like to thank our team members and our customers, and always, we appreciate your interest in our company. Thank you all for joining us today.

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