Good morning and welcome to the fourth quarter and year-end 2017 Pilgrim’s Pride earnings conference call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. At the company’s request, the 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 fourth quarter and year ended December 31, 2017. Yesterday afternoon we issued a press release providing an overview of our financial performance for the quarter and for the year, 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 for joining us today. For the full year 2017, net revenues were $10.77 billion versus $9.88 billion from a year ago, resulting in adjusted EBITDA of $1.39 billion or 12.9% margin versus $1.03 billion a year ago or 10.4% margin. Our net income was $695 million compared to $441 million in the same period in 2016 while EPS was $2.79 a share compared to $1.73 a share in the year before. For the fourth quarter of 2017, net revenues were $2.74 billion versus $2.37 billion from a year ago, resulting in an adjusted EBITDA of $241 million or 8.8% margin versus $205 million a year ago or 8.7% margin. Our net income was $134 million compared to $71 million in the same period in 2016, while earnings were $0.54 per share compared to $0.28 per share in the year before. Our team delivered strong performance during 2017, and we are again very proud of their contributions. As we have continuously stated, our goal is to create a portfolio strategy which is designed to deliver more robust performance for the mid to long term rather than the short term, and structured to minimize the full peaks and troughs of the commodity markets. Last year, we achieved some important milestones to build on that strategy to improve upon our existing portfolio to generate more value for shareholders and get further in our vision to becoming the best and most respected company in our industry, creating an opportunity of a better future for our team members. In 2017, we completed several strategic capital investments to position ourselves well for the future, to further increase our product portfolio differentiation, strengthen key customer relationships, and improve our margin profile. Our Sanford, North Carolina facility continues to…

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 common control entities requires our reports to consolidate the full quarter and year of Moy Park into our financials. In the filings, our year-to-date and year-ago results have also been adjusted accordingly. Under this requirement, considering Moy Park both in 2017 and 2016 for the full year 2015, net revenues were $10.77 billion versus $9.88 billion from a year ago, with an adjusted EBITDA of $1.39 billion or a 13% margin compared to $1.03 billion or a 10% margin for the year before. GAAP EPS was $2.79 per share compared to $1.73 in the year before. Adjusted operating margins were 12% in the U.S., 11% in Mexico, and 4% in Europe respectively. We reported $2.74 billion in net revenue during the fourth quarter of 2017, resulting in an adjusted EBITDA of $241 million or an 8.7% margin. That compares to $2.37 billion in net revenue and an adjusted EBITDA of $205 million or 8.7% margin the year before. Net income was $134 million versus $71 million in the same quarter of 2016 for an 89% year-over-year increase, resulting in earnings per share of $0.54 compared to $0.28 in the same quarter of last year. Our fresh chicken operation in the U.S. continued to generate strong results for the full year and solid performance in Q4 despite losses from the hurricane that hit Puerto Rico and affected our assets on the island and disruptions in the U.S. We are very proud of our team members who have worked tirelessly to rebuild the operation of our facilities and our partners while assisting with rebounding and rebuilding the local community. Adjusting for the Puerto Rico…

[Operator instructions] Our first question comes from Ken Zaslow with BMO Capital Markets. Please go ahead.

Hey, good morning everyone. Just a couple questions. First is when you think about your quarter in terms of the profitability that was hit by the earthquake, the hurricanes, can you separate that out, and how much of that was in this quarter and how much will be evaporated going forward? How do we think about that?

Yes, I think it was around $20 million, Ken, in Q4, but we don’t expect that to be an ongoing event. As a matter of fact, in Mexico since the first of the year, we’ve seen our margins return to historically great margins for the start of the year. I think Mexico, if you think about Mexico quarter to quarter, we see volatility, but when you combine four quarters into a year and then you start comparing year to year, it’s amazingly consistent. We don’t see that changing in 2018.

Yes Ken, we have direct and indirect effects of the hurricanes and the earthquakes. The direct effect was mainly in Puerto Rico where we had losses in our property and we had the plant completely shut down. The indirect effect in the U.S. and Mexico was increasing inventory disruption in the production and disruption into the logistics, and that has cleared already in Q4. We don’t expect any further impact.

My second question is when I think about the U.S. margin structure in 2018 and ’19, do you think it’ll be similar to ’17? How do you think of it relative to ’17?

Yes, it’s a good question, and I think that’s really a good way to describe it, is we constructed our 2018 plan and saw the outcome, and we do that bottom-up, not top-down. It really looks a lot like 2017, and actually as Fabio mentioned in his prepared remarks, with the operational improvements that we expect to realize in 2018, it could be even better, so we’re bullish on 2018 in all three geographic reporting segments, and the U.S. is leading the pack there.

Yes Ken, industry production was up 2.5% in 2017 according to the USDA, and the cut-out price was actually up $0.07 despite the higher production of beef and pork as well in the market. Adding all the planned capacity for the next three years, if all plants are online at the expected time and considering the ramp-up period, and considering that the plants will have the labor required to operate, by the way, we will add 2.5% more capacity in 2018 and 2.7% more capacity in 2019. We believe that this increase in supply is very adequate to the increase in demand given the growth in exports and the growth in domestic food service and retail that we are seeing.

Great, appreciate it.

Our next question comes from Heather Jones with Vertical Group. Please go ahead.

Good morning guys I wanted to go back to Mexico, U.S. When I look at Q4 sales, and I’m just right now talking about the U.S., when I take out the extra week and adjust for a GNP run rate, the year-on-year increase is similar to--very similar to Q3 and Q2, but obviously the year-on-year improvement in EBIT is much lower. So you’ve got the impact from the hurricane and Mexico and all, but I was also wondering if you could just help us think about the dynamics in Q4 as far as other costs and all, like what caused the performance to deteriorate relative to Q3, and what will go away as we head into ’18.

I think, and Fabio can supply more data, but the one big thing that occurred between Q4 and Q3 is we saw significant price decline in Q4. I think maybe Q2 and Q3 prices were much higher than we anticipated, and then in Q4 they fell a little bit harder than we might have anticipated. That was the biggest driver in the U.S.

Yes, the volumes are higher because of the GNP operation, around 6%, while the volumes, if you take that out, were flat in the domestic USA. The reduction in volumes is mainly due to the increase of [indiscernible] and the reduction in weights of the birds in the Sanford plant from the conversion from big bird to organic case ready. Also in Q4, we saw some significant non-recurring events just like the Puerto Rico impact and the increase in SG&A because of the increase in bonus accrual.

Okay. Then your inventories were up--you mentioned an inventory impact, I can’t remember if it was from Puerto Rico or from Mexico, but you mentioned an inventory impact. But your inventories year-on-year, comparing apples to apples with Moy Park, were up 30%. I mean, that seems a little bit for just Puerto Rico, so was just wondering if you could help--

Yes, part of that, Heather, was planned and part of it was unplanned. The part that was planned, we--in order to boost our fill rates and service levels on our prepared foods product and getting ready for both school lunch program period and wing season, we built more prepared foods inventory than is typical, okay, so that was the planned part. The unplanned part as the slowdown in export volume a little bit more than we would have anticipated, but we felt like as we rounded the corner into 2018, prices would recover, and I think it’s going to turn out to be a good thing because we’re selling those export products at significantly higher prices now than we would have sold them had we not put them into inventory then.

We also increased the inventories, Heather, because of GNP. If you consider the 2016 ending inventories, GNP was not included in there. We included Moy Park, of course, because of U.S. GAAP rules, but GNP was not included.

Okay. Then I’m hoping you guys can help me with something that is just puzzling me. You mentioned the breed changes, and like you said, that’s not done.

That’s right.

I mean, but that did start at least a year ago, I want to say a little more than a year ago, but yet the last couple of months’ data has shown a marked deterioration in egg yield. You also got higher mortality, and then we track chicks placed relative to egg sets, and that number is now the lowest it’s been in at least 10 years. What I think is happening is it sounds like producers are setting more eggs than they normally--they’re setting eggs that they wouldn’t normally set that maybe are lower quality, and so they’re not hatching as well. But just trying to figure out, because you’ve got higher mortality because of disease and cold weather, this egg yield issue is getting worse - much worse, and I’m trying to put it all together and figure out exactly what’s going on.

Well, actually I think you said it pretty well, Heather. As an industry, we transitioned to these new breeds that provide better yields, and that’s the big plus of going to these new breeds. The flipside and negative effect is these new breeds produce less eggs per henhouse, down about 1.4% versus the other breeds, and we have higher mortality and lower hatch. So the net effect of all of that is you’ve got to have more hens in production if you’re going to maintain your level of production of chickens that come to the plant. That’s why we’ve seen such a ramp-up in the laying hen inventory. My calculations, just back of the envelope, are we need about a million breeders in inventory more to produce the same number of chicks because of all the things that you said and I repeated, so it’s just a reality of changing this breed. You know, when we bought GNP, they were using a breed that we had been transitioning away from, so we started harvesting the new breed several months ago, and we’ve seen as much as a 2% increase in yield on that new breed. But again, the downside is we’ve got to have more breeders in inventory and production in order to get the same number of chicks, so you’ve seen us do that, you’ve seen other companies do that. In fact, you’ve seen the whole industry do that, and that’s why we’ve had to place more pullets and we’ve also had to kill less hens. If you look at USDA data, the end of last year after about August, we killed significantly less hens because we were having to hold them to get the eggs; but of course, that older age hen flock also doubled down on less eggs and lower hatch.

But do you think--because I mean, if you look at the numbers, you’ve gone from a year-on-year change in egg yield per hen of a percent, percent and a half, to November and December was down about 3.5%, I think December was down 3.6%, so it’s gotten much worse. I just don’t understand--I understand what’s driving it, I don’t understand what caused the--I mean, I would argue that’s a step change in deterioration.

It is a structural change, and when these breeding companies are selecting for all these attributes, sometimes the desired attribute that ultimately is more dominant produces attributes like we’re discussing that are negatively correlated, and that’s exactly what we’re seeing. So this is structural, it’s going to be here for the period, but at the end of the day, we’re economically better off with choosing the breed that’s giving us the better meat yield, and that’s why companies like ours have done that.

Okay, thank you so much.

Our next question comes from Farha Aslam with Stephens. Please go ahead.

Hi, good morning. A question on your core operations. Could you share with us your incremental cost savings that you’re going to get on core PPC, GNP and Moy Park in 2018?

Okay Farha, we expect $210 million in operational improvements for 2018 - that is for the global operations. For Moy Park, we mentioned before it’s $50 million over two years, so our target for 2018 is $25 million. For Mexico, we expect $15 million of operational improvements in 2018, and for U.S. we expect $170 million.

That’s helpful, and how much do you think falls to the bottom line of the $210 million?

We did all of our plans already net of the increases that we believe will happen, both in terms of higher freight and higher labor costs, so we expect the full $210 million to hit the bottom line. Just to help, we typically see half of the improvement as an increase in revenues since we increased the yields, and half of the improvements are in plant costs as we improve our yields as well in our plant cost reduction and more efficient operations, and in our live operations.

That’s very helpful. Then my final question is on the export markets. Bill, you highlighted that they’re doing very well. How do you think that’s translating into U.S. pricing, and your outlook for India opening up would be really helpful.

Yes, well it’s really supporting more the back half of the bird, and we’re seeing solid pricing, solid demand. Demand and supply are well balanced right now, and the improvement came from Q4 where it was pretty soft, because some of those countries had filled their quota and the quota expired. As we got new quota reopened, that spurred demand and therefore prices, so I think it’s very solid. I don’t expect [indiscernible] through the year.

As back quarter prices increase internationally, we see an increase as well here in the leg meat or in the deboned dark meat here in the U.S. The prices are linked. The profitability of the deboned leg in the U.S. is higher than exporting back quarters, but every time the export market gets really hot, we see that increase in the U.S. as well.

Okay, that’s helpful. Thank you.

Our next question comes from David Carlson with Keybanc. Please go ahead.

Thank you. A couple questions. I hope everyone is well. Wanted to ask, looking at the Europe segment, it appears SG&A during the quarter was only down about $1 million, maybe 2 to 3% year-on-year. Can you kind of--I know you said $25 million in savings for 2018, $50 million over two years, but can you talk about how much you’ve captured here in the first couple quarters under your control?

Yes, we don’t expect any capture this quarter. Just to help you, we don’t expect a huge reduction in SG&A. Different from other operations where we can integrate the back office, the improvements in Moy Park are more on sharing our operational knowledge both in live operations and in plant, and in implementing our key customer strategy by focusing our R&D and our SG&A in the right customers, not in all customers.

Yes, to Fabio’s point, we’ve been very aggressive in placing our operational methodologies inside those operations. We’ve taken our labor management process and we’ve taken our live production process in. We’ve taken our revenue and mix management process there. We’re going to implement the same methodologies in the U.K. and continental Europe operations as we employed both in the U.S. and in Mexico, and we’re beginning to see significant improvements in labor cost, in yields, in productivity, in quality and service, and then we’ll take advantage of all of that by employing our key customer strategy the same that we did at Pilgrim’s seven years ago, where we won’t try to be everything to everyone. We’ll find those key customers where their needs align with our core competencies and then we’ll grow our volume with those customers and expand our margin with those customers. We plan to do that in the U.K. and continental Europe no different than we’ve done in the U.S.

Fair enough. Fabio, what was the impact you guys experienced? Maybe if you could parse out the impact that the U.S. segment experienced from higher labor and freight costs during the fourth quarter, and then did you--just a comment from a minute ago, do you anticipate the $170 million in cost savings in the U.S. segment, or I guess the $210 million overall, did you say that that would all fall to the bottom line?

Yes. On the $210 million, we expect everything to fall to the bottom line as we already incorporated the increase in the freight, as we mentioned, and the increase that we believe will happen in the labor force. In terms of the impact in Q4, I will say that there is no one size fits all strategy, or there is--we have P&Ls by plant, and we saw some of the lanes more affected by the constraints during the hurricane and the ELD, the electronic logging device mandate, more than others. We adapt our prices to our delivery options depending on the specific local conditions, so the impact was not in all of our operations but more significantly in some, and we adjusted our prices accordingly.

So pricing has already been taken to help offset those pressures. If you don’t mind me asking you to repeat, Fabio, if you don’t mind, your capex expectations for 2018, and then I’ll pass it off to the next caller.

Sure. Adding the operations of GNP and Moy Park, we expect between $300 million and $350 million, which is higher than our depreciation and shows the commitment that we have with implementing strategic operations and improving our portfolio.

Thank you so much, guys.

Our next question comes from Adam Samuelson with Goldman Sachs. Please go ahead.

Yes, thank you, good morning everyone. This is Brooke Roach on for Adam Samuelson. I was wondering if you guys could give us a little bit more color on your pricing and market outlook by key category, e.g. small bird, tray pack, big bird, and prepared.

So small bird pricing is very solid. Supply and demand for those small birds is such that we continue to see increasing demand both at retail and food service, and given the supply that’s really not growing, that continues to give us a lot of price courage for those products. In our tray pack operations, medium sized birds, we’re seeing great demand. We’re having to buy in meat from the outside to our tray pack operations because demand is currently exceeding our supply, our own supply, so pricing is very strong and I think will continue to be solid through the year there. Prepared foods pricing is steady, I would say. Actually as Fabio said in his prepared remarks, we’re getting some tailwinds there from lower priced breast meat that goes into some of those products. Export prices, as I mentioned before, are very solid and I think that will continue through the year as well.

Just to add to Bill’s comment, according to the USDA, in 2017 the industry reduced the number of heads in the small bird segment by 1%, and the prices according to the EMI Small Bird Index are 3% higher than last year.

The other thing I would mention, in Mexico the live price, and about a third of our chickens in Mexico are sold in the live forum, the live price in January was significantly higher than the live price in January 2017, so that’s an indication that demand is improving in Mexico.

Yes, the prices in pesos in the domestic market are 20% higher this year than they were a year ago, and the exchange rate has now moderated and is at the same level it was a year ago, so the prices are 20% higher both in pesos and in U.S. dollars.

Great, thank you. Then just one procedural follow-up question. Can you give us a little bit more clarity on the impact of tax reform in the quarter, and what was the underlying effective tax rate for 4Q on an adjusted basis?

Sure. The permanent changes from 35% to 21% going forward, so from 35% tax rate in the U.S. we expect a 21%, but because of this change, we have some deferred tax liabilities that now we value at the new tax rate, and that helped us in $32 million during this Q4.

Great, thank you. I’ll pass it on.

As a reminder, if you have a question, please press star then one. Our next question comes from Akshay Jagdale with Jefferies. Please go ahead.

Hi, good morning. This is actually Lubi on for Akshay. I just wanted to dig a little bit deeper into your thoughts on the supply side. I believe you mentioned that the breeder flock is up 3.2% year-over-year in your prepared remarks. We’re actually seeing closer to 5% in the latest chicken and eggs report, and actually really it’s been that way--it’s been in that range since August, so I’m not sure what the discrepancy is there. But even if it’s 3.2%, just in terms of bridging to the gap to the roughly--you know, I think the supply outlook is around 2% for 2018, is that all just explained by the breeder change and the loss of productivity, why the breeder flock growth is higher than the production growth? In one of the earlier questions, somebody mentioned that this change really has been in place for over a year, so I would have thought that the year-ago comparisons would also include this reduction in productivity.

So what you’re seeing in the last six months of 2017 are in fact the breed change, and as a result of the breed change we significantly as an industry decreased the number of hens taken to slaughter. So we left them in production because we needed the eggs, that expanded the overall size of the breeder flock, but as the breeder hens get older, they become less productive, so that’s why you saw the expansion in the total flock. But at the same time, eggs per 100 were down for the whole year 2.2%, and chicks per layer was down 1.7%, so we’re having to put more breeders in production in order to maintain the same number of chickens that we desire to bring into the plant, that’s the long and short of it.

And also Lubi, there is not only the breed change, there is also the generation change on that breed, so we are seeing not only ross but the competing breed is also changing the generation, and this new generation, despite having a better yield in terms of feed conversion and a better yield in terms of meat production or breast meat production, also produces less eggs. Just like Bill mentioned, when they select for some traits, selling more birds is actually their business but--so that is a point, that they need to sell more birds to us to produce the same number of eggs.

And chicks.

And chicks.

Got it, that’s helpful. Thanks. Then if I could just ask on your organic chicken business, if you could just provide some color on how big is that business today, how is it growing, and to the extent that you can provide any color just in terms of how we should think about profitability in that business relative to the rest of the domestic portfolio, that’d be helpful. Thank you.

That’s been--in my career, that’s been one of the best investments that I think I’ve been a part of in terms of how quickly the return improved. That was a large bird operation, very commodity oriented. We changed it to a tray pack operation which has been very profitable in and of itself, but then when we added the organic attribute, that took the profitability up significantly. It’s one of the most profitable chicken plants in the whole United States, and we’re very proud of it. We’re reaching the point probably in the next year to two years where we’re going to have perhaps make another decision to increase our organic production, because we’re going to run up against supply, and we’re either going to have to expand Sanford or we’re going to have go either build a greenfield or convert another operation. We haven’t made that decision yet, but I would say that decision is going to come at us within the next year or so.

I’ll add, Lubi, that it is not only the organic, also our no antibiotic ever production has also increased beyond our expectations. We had our initial target of 25%, and today 31% of our total production is a differentiated portfolio in the U.S., either organic or no antibiotics ever.

That’s helpful, thank you. I’ll pass it on.

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. We look forward to another great year in 2018 and remain positive on the outlook for chicken consumption. Despite greater availability of other proteins, our exports and continuing strength in the U.S. economy will compensate and drive more total protein consumption and absorb the supplies. With GNP and the newly acquired U.K. and continental Europe operations, we are much better represented globally and are well positioned to improve our margin profile and reduce volatility despite specific market conditions. We will continue to look for opportunities in refining our portfolio to pursue differentiated customized products to satisfy our key customers’ needs in support of our vision of becoming the best and most respected company in our industry, creating the opportunity for a better future for our team members. We’d like to thank everyone in the Pilgrim’s family as well as our customers, and as always we appreciate your interest in our company. Thanks for joining us today.

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