Pilgrim's Pride Corporation (PPC) Q1 2018 Earnings Report, Transcript and Summary

Good morning and welcome to the First Quarter 2018 Pilgrim's Pride Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] 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 first quarter end of April 1, 2018. 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'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 first quarter of 2018 consolidated net revenues were $2.75 billion versus $2.48 billion from a year ago, resulting in adjusted EBITDA of 272 million or 9.9% margin versus 228 million a year ago or 9.2% margin. Our net income was 119 million compared to 94 million in the same period in 2017, while adjusted earnings were $0.53 per share compared to $0.38 per share in the year before. We're very appreciative of our team members for getting off to a great start for 2018. They've once again helped us deliver very solid results despite some seasonal softness in the commodity sector at the beginning of the quarter. The results are a testament to the breadth and diversity of our portfolio, which is designed to generate more consistent higher margins overtime and have the potential to capture market upside while absorbing extreme conditions within the different segments. In addition, our key customer focus has continued to bring growth beyond the average market conditions though we're pleased with the progress we're not satisfied and will continue to refine our portfolio strategy, which we believe will differentiate us from the competition. All our investments that we've made over the past few years are operating at expected levels and together with the recent acquisitions they're generating more value and continuing to contribute to the evolution of our portfolio and supporting our vision to become the best and most respected company in our industry. During the quarter one U.S. domestic demand was in line with normal seasonality as chicken continues to represent excellent value compared to other proteins, despite some movements and pork. Customer demand and margins within our small-bird in case ready operations have remained very robust and our leading share in these markets is continued to give us a meaningful advantage relative to our peers with a narrower market focus. We're very pleased with our new organic facility at Sanford North Carolina which continues to exceed our expectations and probability targets. We believe our strategy of developing more customer solutions of each bird size and working with our key customers to support their growth expectations is generating great results and continued to enhance our margin profile and providing more consistent performance despite market fluctuations. While food service traffic has remained stagnant in early 2018, chicken servings are continuing to grow and menu importance and remains close to historical highs according to NPD. Chicken dollar growth remains positive and has outpaced volume growth which is an indication that the industry is increasing volume and greater profits. Market environment within commodity large bird deboning during quarter one was generally in line with seasonality. We believed unseasonably cold weather across the U.S. may have contributed to the late pickup in demand even though overall industry supplies remain limited. Dark meat prices were at a good level during due to solid exports, but boneless breast remained at a low level during the first part of the quarter and limiting the cut out before abounding significantly higher towards the end of Q1. Also our wings experience a shift in demand due to food service operators promoting more boneless over traditional wings as a result of the higher price we saw last year. Prepared Foods just growing in an impressive pace of 16% in revenue and 19% in volume, during the past two years, we've been investing in our U.S. prepared foods plants, in our operations and people to expand our capacities and capabilities. We're continuing to build out in the bill out stage for innovation marketing to drop strong growth for the future. These investments and focus have driven the increase in performance and the potential for further growth remains healthy. We remain committed to prepared foods to give us an improved margin profile by reducing earnings volatility. Demand in pricing for U.S. chicken in international markets has started to rebound since the beginning of the year as new quotas were approved. [Indiscernible] on dark meat have continued to drop reflecting better demand from export destinations as even influenza has affected many of the chicken producing regions globally. The growth of our regarded Just Bare chicken brand continues to outperform expectations, while Just Bare has remained the top consumer choice on Amazon and we are over index relative Amazon's the overall fresh food growth. We have increased marketing support for the brand to ensure its continued success in conjunction with other gross initiatives and including supply chain improvements, further innovation collaboration and exploration of new formats. We continue to see significant additional growth opportunities for Just Bare and it may progress towards national distribution, which is our ultimate goal. The transition to a new clean package designed to support that growth in market potential for Just Bare is going well. The brands organic line was the first to transition with the rest of the product line adopting the new design standards later this year. We see many benefits from the change including significantly improved on shelf impact scores based on internal testing, reduction in packaging costs and increased production flexibility, which is needed to support our national expansion. We had very strong performance at our Mexican operations in Q1 as the prior logistics and infrastructure dislocations caused by natural events normalize and demand returned. Volumes grew significantly during the quarter, driving a very strong EBITDA performance that is not only well above the level from a year ago, but also above our expectations. The strength has continued as we've entered Q2 and have had a seasonally stronger quarter for the region and we see that as a positive indication for results. While the market recovery supported the strong performance in Q1, our teams focus on operational excellence and continued differentiated products also contributed to improvements in the operations. We continue to place a very high priority on this market given our expectations that demand will remain very robust, growth trajectory given the steady rise in disposable income of Mexican consumers. We expect continued growth and demand throughout the first half of 2018 and for the full-year and expect another strong financial result. As a part of our strategy to strength in our competitive position in Mexico, we've maintained the pace of new, innovative product introductions. Our prepared foods are growing at double-digit rate and generating great results under both the Pilgrims and Del Dia and both brands have continued to receive very favorable acceptance by consumers. While we've been generating very strong growth in prepared foods we're still continuing to look for opportunities to grow and fresh especially at retail. Production at our Vera Cruz complex is continuing to ramp nicely and we'll double the size of that facility, including the feed mill in Hatchery by the end of this year. Our Mexican team remains committed to relentlessly pursuing operational and management excellence in every aspect of the business. And longer term, we continue that Mexico represents excellent growth prospects as demand for protein continues to outstrip supply. Our European operations continued to report an improved performance compared to last year with 3% growth in volume and 70 basis points rise in margins. Our team was able to generate this strong performance due to continued focus on cost optimization, cost control, excellent customer relationship, synergy capture in a culture of talks and innovation despite the changing competitive landscape. The new state-of-the-art hatchery and in Newark, England, we opened in late 2017 is performing well and will be supportive of our future growth and further improvements in the efficiencies of our lab operations. We'll continue to invest to optimize our production facilities across Europe. Integration process is on a good momentum and we're slightly ahead of our $50 million in expected synergies capture during the next two years with detail projects to support these that are now being clearly defined and starting to be executed. We have also benchmarked operational efficiencies and productivity and found more opportunities to create value through feed formulation improvements, yield management, labor efficiency and all of our European operations. Our focus on key customer strategy continues with the progress in Q1 with our key customers. This gives us a more resilient margin structure which will continue to enhance through ongoing operation improvement initiatives. The business has established a reputation for providing fresh quality and locally farm poultry products and is based on best in class production platform. We have a broad portfolio of products including a significant emphasis in capability in prepared foods that is supported by value added innovation capabilities. We are already seeing some positive results from the acquisition with significant share gain in Q4 and a large retailer and several other projects with key customers in Q1 to further optimize these relationships. Highlighting our new newly acquired operations are benefiting from our team's enhanced focus on our key customer strategy. We will continue to expand that strategy to Europe as we see incremental joint value creation opportunities there as we've seen in the U.S. and Mexico which will drive even greater earnings performance. Moving on to commodity prices, corn prices have increased from their mid-January lows on increased export demand and lower projected corn production in Argentina. USDA currently forecast the U.S. carry out at 2.18 billion bushels or 14.8% stocks to use. Other corn supplies are projected to be lower than forecasted at the beginning of the year, the current stocks to use is the second highest level in the post ethanol era. U.S. farmers are currently planting the corn crop and despite getting off to a slower start, U.S. weather conditions look favorable to summer growing. Soybean prices have also rallied since January, on concerns that crop losses in Argentina have been only partially offset by a record crop in Brazil. USDA is currently forecasting post ethanol era record soybean ending stocks of 530 million bushels in the U.S. Soybean prices have also been extremely volatile following the potential for trade just disruptions of China which represent 61% of all soybean export demand. Like corn, soybean planning got off to a slow start. The farmers are currently catching up the pace. We'll keep an eye on how the crop develops in the U.S. this summer and although grain cost have increased, we had similar environment last year showing any concerns over pricing, good reverse quite quickly depending on changes in weather conditions and as such we don't believe feed prices will pose a strong for it in the margins in the medium term. 2018 USDA is forecasting total U.S. chicken industry production to grow at a rate slightly below last year. While the overall size of the breeder flock may seem high relative to historical levels part of the increase in the primary breeder segment given that the breeder market share shifts and continued change in a new generation of breeders. This shift to the new breed is yet to be completed. The most recent data on a productivity hatchability and chick mortality driven by breed shift has continued to be challenging and put constraints on our supplies. We believe the loss in productivity is structural and in the order of 1.4% decline in broiler chicks hatched per layer. Considering this loss of productivity and higher mortality to support the growth in total heads in the magnitude that USDA is projecting, there is requirement for significantly more breeders than in the past. But more availability of other proteins the outlook for chicken demand this year remains robust as we believe the positive export environment can support an increase in total U.S. production across all protein complexes while continuing strong U.S. economic conditions, including very low unemployment and an improvement in spite of Blanco [ph]. That will drive households to ask for better quality higher price cuts of meat and also overall consumption. While U.S. prices of moved lower year-to-date, we believe our relationship with key customers afford us an added level of protection. Globally chicken remains the fastest growing protein and demand in U.S. chicken component is to be very competitive. As we're already well balanced in terms of our bird size exposure, we will continue to look for opportunities to shift our product mix and reduce the commodity portion of our portfolio by offering more [indiscernible] our existing operations by pursuing our operational improvement targets. We believe our key customer approach is strategic and creates a basis to further accelerate growth in important categories by providing a more customized and innovative products to give us a clear competitive advantage. Operationally the capital investments and restructuring we've made to the portfolio also benefit results in 2108 and beyond. Although freight has been a challenge in all segments, our team has done a great job to be able to minimize much of the impact during Q1. Fabio will add more details on that in a few minutes. In our experience with state-of-the-art deboning equipment in Europe and Sanford and our quest to continuously improve the work environment and safety for our team members, we've made steady advances in developing robotic solutions for our processing facilities. Our focus has been on addressing process steps where both economics and employee fatigue due to repetitive motion are key concerns. We are excited about the progress to date and are in a position to test a proprietary commercial scale, proof of concept, robotic technology and a labor intensive process area where no automated solution exists today. The current plan is to test this technology in the latter part of Q3 of this year. We believe that our commitment to developing advanced automation technology will not only create a sustainable competitive advantage, but also allow us the economically address ongoing issue of labor availability in our industry. In 2017, Pilgrim's continued to focus on sustainability, we're very proud of our 2017 performance in our own track to meet our 2020 goals. Compared to 2016, we decreased water use rate by 1%, fuel use rate by 3%, electricity used by 0.5% and our greenhouse gas emissions by an impressive 8%. +Most importantly, we continue to make progress and team member health and safety, outperforming the industry average in total recordable incident rates and days away restrictions and transfers rate and reducing our severe incidence bought 25% compared to 2016, while suppressing our 15% year-over-year reduction target. We promoted 165 team members internally during Q1 more than double from years ago on a run rate basis. And we continue to stay focused on animal welfare and in 2017 passed all of our external third party audits with scores above 97%. Our partnerships with our more than 5,200 family farm partners remain strong and we paid them nearly $900 million to raise more than 2.2 billion chickens last year. In the coming months, we will release our Pilgrim's 2017 sustainability report update, which will detail our 2017 performance and provide an update on our progress towards meeting our 2020 goals. We're confident by continuing to focus on sustainability we'll continue to position Pilgrims as a global industry leader in the production of high quality sustainable chicken products. With that, I'd like to ask our CFO, Fabio Sandri to discuss our results.

Thank you Bill, and good morning everyone. Before I begin, as a reminder, because we closed the acquisition of Moy Park during Q3 of last year, the U.S GAAP guidelines regarding transaction between common control entities require our reports to consolidate the historical full quarter 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 2018 and 2017, we reported 2.75 billion in net revenue during the first quarter of 2018, resulting in an adjusted EBITDA of 270 million or 9.9% margin. That compares to 2.48 billion in net revenue and an adjusted EBITDA of 228 million or 9.2% margin a year before. Net income was 119 million versus 94 million in the same quarter of 2017 or 27% year-over-year increase, resulting in adjusted earnings per share of $0.53 compared to $0.38 in the same quarter of last year. Operating margins were 7% in U.S. 15% in Mexico and 4% in Europe respectively. Our fresh chicken operation in the U.S. generated solid performance during Q1. Our EBIT in the U.S. sale was 127 million or 7% margins for Q1 as chicken has continued to be a compelling value proposition to consumers both in terms of overall price and in convenience. Despite higher availability of other proteins and demand was in line with seasonality. Small bird and case ready were strong for us, with small bird price measured by EMI at near all-time high, while the cut out of the commodity sector was weaker at the start of Q1 it we bonded and finished the quarter strongly. Following the impact from the hurricane last year our Puerto Rico facility began operating again in the quarter, we expect to be back at full capacity at the end of Q2. Our sales in the prepared food segments were also significant better than last year with an increase of 19% in volume. The commodity cut out has followed the normal seasonality into Q2 and our portfolio exposure to all bird sizes is designed to take advantage of the upside from community while minimizing the volatility and protecting the downside. The environment in Mexico significantly improved exceeding our expectation during the quarter because the logistical and infrastructure disruptions associated with earthquakes and hurricanes were resolved, which supported a much more favorable supply demand balance and the market in Mexico continues to perform well in Q2. Our EBIT in Mexico for Q1 was $53 million or 15% margins. Considering the strength in Q1 and momentum in Q2, we believe Mexico will have another great year doing 2018. And our long term outlook on Mexico remains very positive. As we believe the country continues to be a platform for future growth in chicken consumption, as consumers seeks better diet on higher disposable income. To support the growth in Mexico, we continue to invest in our production at the new Vera Cruz complex is striking well and its performance is also exceeding our expectations. And we expect to double the size of that operation including a new feed, new hatchery by the end of this year. As part of our targets to improve our differentiation in Mexico, we have been increasing our focus on prepared foods including adding products using the Pilgrim's brand. Our investments have continued to produce very good results with prepared foods volume 33% higher than a year ago and with our Pilgrim's and Del Dia brands capturing 35% of the prepared food market in the region. To maintain our growth and continue to innovate, we launched fresh chicken on the premium Pilgrim's brand including no antibiotic ever which have received strong demand. This strategy supportive of our want to increase our higher margin differentiated products by having product coverage from entry, low level to premium, both fresh and prepared in Mexico. During Q1, the European operations continued to improve, sales on consistent margins. Our EBIT in U.K. and Europe was 21 million or 4% margins for Q1. Integration is going well and we are excited with the geographic diversification and growth potential for us while evolving our portfolio and creating a sustainable advantage through opportunities to capture the upside in the market, but respecting the downside. We're slightly ahead of our target of $50 million in synergies over the next two years, including optimizing the product portfolio, operational synergies, and implementing zero base budgeting. We will increase efficiency across the value chain by enhancing sourcing and production, improving live cost, yield improvements, and the global management of feed sourcing. We will leverage our marketing and sales infrastructure to optimize SG&A costs. The new hatchery in Newark, England is performing well and will contribute to our future growth while lowering cost and improving it. We have a proven history of successfully capturing synergies and delivering significant improvement. In our most recent deals, we have meaningfully exceeded our initial targets while building on and improving the performance of the business beyond just the underlying markets. We are confident we have the methodology and the team in place to similarly continue to grow the profit in our operations and leverage their expertise and experience to improve the rest of our global operations. As Bill already mentioned, we're already seeing some positive results from the acquisition with significant share gain in Q4 at a large retailer. And several other projects with other key customers in Q1. And we will continue to strengthen additional relationships while supporting the improvement in the financial performance of the business. During Q1, our SG&A reached 3.1% of sales reflecting the inclusion of support for expanding the Just Bare brand nationally, investment for our new prepared foods products both in U.S. and Mexico as well of the addition of the new European operations, as well some reclassifications from cost to SG&A due to the new accounting standards. We saw an increased interest for patient due to the tight labor and changes in the yield de-mandate. For near the total increase in freight will be $29 million of which $22 million we already mitigate or in the process of mitigating to negotiation with our customers or price increases. For the quarter, the impact was $4 million. Despite this impact and the headwinds from new compartments we are in track to meet our target of $210 million in operation improvement and synergies for 2018. Reflecting the benefits of the acquisition and supporting the evolution of our mix and production capabilities and improving our ability to service key customers throughout the globe. We continue to prioritize our capital spending plans this year to optimize our product mix and improving our ability to like innovative less commoditized products and strengthen partnership with key customers. We expect to invest $300 million to $350 million on CapEx to account for the including of GNP and Europe within the budget. We reiterate our commitment to investing in strong return on capital employed projects that will improve our operational efficiencies and tailored customer needs to further solidify competitive advantage Pilgrim. Our balance sheet continues to be strong given our continued emphasis on cash flow from operations activities, focus on management of working capital, and disciplined investments in high return projects. During the quarter, our net debt reached 2.2 billion with a leverage ratio of 1.5 times pro forma less 12-month EBITDA, below our optimal range of 2 to 3 times. Our leverage remains at the low level and we expect to continue to generate strong cash flows, increasing our financial capability to pursue our strategic actions. We're adjusting the outlook for 2018 interest expense to about $150 million, reflecting the payment of Moy Park corporate bonds that led to a one-off cost of $30 million or $0.05 per share in Q1 from the yearly repayments premium and arrangement fee. We also again received great support from investors with the offering more than three times oversubscribed to replace the European bonds with an increase of our 2025 and 2027 bonds, simplify our total debt structure and reducing its total cost. Upon completion of the full redemption of the Moy Park Bonds later this month, we expect our interest expense to normalize to the previous levels of $120 million per year. We'll continue to maintain a strong balance sheet at a relatively low leverage. We'll remain focused on exercising great care in ensuring that we create shareholder value by optimizing our capital structure by preserving the flexibility to pursue our growth strategy. And we will continue to consider and evaluate all relevant capital allocation strategies that will match the pursuit for growth strategy that will continue to review each prospects accordingly to our value creating standards. Operator, this concludes our prepared remarks. Please open the call for questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Farha Aslam with Stephens Inc. Please go ahead.

Hi, good morning.

Good morning, Farha.

Good morning, Farha.

First question, Bill, could you just share a little more detail about your grain comments in 2018 what impact you anticipate from grain on your cost and how much of that can you pass on?

Yeah so Farha, what we know now is really only what we can see if we use the forward curve and if we were to use the current forward futures curve it would impact us around $150 million. But I would caution using that number because we don't yet know confirmation of total acres planted and while we think we're going to have excellent growing conditions. We think that the U.S. crop is going to be very healthy as I said in the prepared remarks are our stocks to use right show at just under 15% is going to be more than adequate to meet supplies so I'm reticent really to use that forward curve as an absolute but if we were again it would be about $150 billion impact.

Yes, to add for in terms of timing because the grain is on carry feed they say that most of that impact will be curing in Q3 and Q4 much less into Q2. Q2 impact using the four curves today would be around $35 million.

That's helpful.

And one other thing that that I think we've talked about over the last few years that's relevant to this. We have structured our pricing contracts in such a way that we can move much quicker in terms of price to offset something like feeding green cost or as we spoke earlier freight cost increases as well.

Helpful and you guys highlighted that you were adjusted EBITDA in only 1.5 times below your optional range, in term of M&A, what are you seeing out there and kind of what size the transaction would you be able to find with your balance sheet right now and be comfortable funding?

But I think there are multiple ways of funding a transaction could be to record he too bad I think we have ample support from both shareholders and the bond holders here do and by the recognition that we want. On the M&A we have and they we have not changed our strategy is to have there are too stupid to current to contract and the prepared contract we continue to see targets and options on both track the record strategy when we begin create a value for our shareholders. We can see their own selves group of acquired another leg region starters be the synergies prisoner accident and more concerned that they have the balance here again and the support from the markets to do when you have a market it's.

Our next question comes from Ken Zaslow with Bank of Montreal. Please go ahead.

Hey, good morning, everyone.

Good morning.

Good morning, Ken.

You just elaborate on what you're thinking about the productivity and hatchability issues I think you think it's structural for how long it is if the supply is having again if it makes sense is you know first of all there will be closer to the 1% production levels. Why do you think the breast price environment has not gotten stronger quicker and I'll leave it there?

Okay. Ken. I'll take the last part of that first and then move into the breeders. Yeah I think a couple things we saw more breast inventory in the freezer than we had seen before and I think the biggest impact was from competing meats particularly in pork. But what we're seeing with our key customers we see great demand for chicken specially at retail and as I said again in the prepared remarks we see that chicken continues to do when it food service with increased offerings on the menu. So I'm not overly concerned about the competing meats in the environment but I think that did hamper the pickup in breast meat prices. We also believe that the weather the lingering which are weather in several storms that went up the Northeast Corridor also delayed the typical seasonal price pickup early in the quarter and we did see that again correct itself toward the latter part of the quarter and I would say it's about normal now on a seasonal basis. We think this summer as grilling season begins to mature is going to be a great demand environment for us and we think that we'll see a normal pricing environment as we go through the year. Back to the supply issue, we're basically in line with what USDA is calling for supply for the year, 1.5% to 2% above last year. But I would caution everyone looking at the breeder supply it is going to have to look much larger than it's looked historically from an increase standpoint of girls who are getting about 1% half less productivity in terms of chicks per hen. So it's just simply going to require more hens to produce the same number of chicks and we've certainly seen that in terms of breeder supply, eggs sets and then chicks placed I think we'll continue to see that. As up made the remark that it structural I don't think that it's going to go back to what we knew as normal two to three years ago as the breed change is a permanent change. And with respect to at least one of the breeders the big breeding companies we are seeing a change in their productivity even on their some of their legacy breeds and not they're not there they're newer breed so I'm not sure what's going on there but it's definitely impacting overall chicken supply.

I will just add Ken that the wild production in the chicken industry at 1.4% in Q1 according to USDA. The volumes on the small board market significantly lower while the volumes on the big bear market are significantly higher. So because of this specific supply and demand of these markets what we are seems to do we which is the commodity index down year-over-year where the prices according to EMI small bird index or 9% higher than last year, higher than the five year average includes long term highs. So we are seemed a little bit of supply demand difference between those two markets.

Great, appreciate it.

[Operator Instructions] Our next question comes from Heather Jones with Vertical Group. Please go ahead.

Good morning.

Good morning, Heather.

So first question I was frightened to know if you could walk us through because you mentioned the formula pricing you have in place of helping you offset freight and feed it et cetera. You have stronger result in your prepared food, strong stronger results in small bird. So I wondered if you could walk us through how you're thinking about your U.S. business and 2018 versus 2017, as far as the EBIT performance.

Yeah, I think so what you'll see Heather is, the four years impact of our Sanford, North Carolina or organic operation, we had just started that in late February in 2017 and in '18 will have a larger percentage of our portfolio which - that businesses is much more profitable than our regular business, so that's one. We've seen a significant decline in the number of head in small birds it's down I think about 9% versus year ago and so the value of those small birds continues to go up. We're the largest supplier of small birds in the U.S. and we've certainly seen better demand and pricing for those products and we continue to improve our mix in that segment. In our case ready business again, seeing very strong demand there and we continue to grow that business with our key customers. We continue to have key customers ask us for more and more of that product. And then finally most of our Prepared Foods improvement has been operational. We continue to benefit from our investments in the past and prepared foods we're seeing great results in terms of just overall improvements in those operations and expect to continue to see that.

So just - there's a follow up to that question, despite the weakness and - I shouldn't say weakness, but relative to last year the weakness in the big bird category, do you think there's a reasonable chance that maybe not equal 2017, but come within range of that because of the other positives.

Yeah, we see an opportunity for 2018 to be close to 2017. If the conditions that we believe will continue to improve in terms of our overall economy consumer spending, we get a good crop you know this growing season, yeah, we think it's going to be a good year.

Okay and my second question is on Mexico, so an excellent turn out for Q1, but looking to the back of the year - well, of the remainder of the year, Q2 through Q4, you guys in your commentary talked about a good outlook. Do you think Q2 through Q4 results in Mexico should be up year-on-year or I mean - because you had a really good performance in Q2 and Q3 of last year, you think you can beat that this year?

Well Q2 has certainly started off very strong, but two things that I'll say about Mexico. One, we expect that normal seasonality is going to exist in Mexico as it has for - as far back as we can see, so that's one. But I would tell you what really gives me confidence about our results in Mexico is our management team. We have a management team that is absolutely focused on excellence as opposed to success and that they continually - I wouldn't say surprise me, but I would say they continually exceed my expectations of what they can deliver and I don't think that's going to change anytime soon. So we have a great market environment combined with even greater quality of our management team down there and so I think that 2018 is going to be an extremely good year in Mexico.

Yeah, comparing Q2, Q3 and Q4, Q2 was really strong last year. Q3, following the normal seasonality was a little bit weaker and Q4, we have all the disruptions, so we believe Q2 could be in line with last year with Q3 as well and we could have a much better Q4 this year than we had last year.

Okay, that makes sense. Thank you.

The next question comes from Jeremy Scott with Mizuho. Please go ahead.

Hey, good morning. Just wondering what your thoughts are on share buybacks. I appreciate the M&A activity might be picking up and you have some drag out around your balance sheet, but given where your stock multiples today, I assume that when you're assessing your capital allocation and your earnings outlook, Pilgrim's might be the best opportunity out there. So just kind of wondering your thought process behind that on one that you can see maybe a pickup in buybacks?

I'll make a brief comment, then I'll let Fabio follow, first off I think you're right at our current price, Pilgrim's shares represent one of the best values I think in the market. But we have to be cognizant of the size of our float. So Fabio if you can follow on that.

Yeah, last year we bought - not last year, '15 and '16 we bought around $210 million in share buybacks, but just like Bill mentioned, we need to be cognizant of the size of our float. If you continued you do buybacks we reduce that and we'll increase volatility, so despite being a great investment we don't have any share buyback programs open. We have always the discussion in our board how can we create value to our shareholders and through acquisitions, through investing in our business in terms of CapEx, we invest in our business in terms of share buybacks and also dividend. It is an ongoing conversation how to create shareholder value and share buybacks are one opportunity, but today we don't have any program open.

Got it, and I just want to ask about food service demand, I assume some of your confidence in big bird improvement throughout the year has to do with - and in fact we had some choppy weather, but now seems like traffics picking back up. Can you talk about how demand is trending in 2Q and then separately we heard anecdotally that the boneless wing portion which dominated last year is starting to wind down considering a drop in wing prices and now restaurants are considering a take back up and in the wing features heading into football season, so is that consistent with what hearing from your end and directionally what's the next move in wings?

Yes it is, as far as wings are concerned with tepid growth in the number of head versus last year and that's going to govern that that overall wing supply and so we look forward to a strong wing season once football season starts again with relative low inventories of wings and I say relative compared to other years, we think that we'll see another strong wing season. As far as overall food service business goes again, while we've had sort of tepid growth in traffic, chicken has gotten share away from other menu items and that's why we're confident in terms of food service environment for chicken.

If you look if you the RPI, which is the Restaurant Performance Index, which includes expectations on growth and expectations on food service, it is going up the right balance, so we the restaurants investing and preparing for growth as well.

Alright, let me get one squeezed on more on organic, you talked about the - obviously the turn back is there, I know you have some good penetration with Amazon, but there seem to be a gap maybe with Whole Foods, just wondering if there's some marketing you have planned to bolster the Just Bear line?

Yeah, we do we've said in previous calls and it remains our strategy to take that Just Bear brand national. And we're talking to all of our key customers about that brand and where it fits in their meat case portfolio and we're getting good response so far.

Okay, thanks. I'll jump back in.

Our next question comes from Michael Piken with Cleveland Research. Please go ahead.

Yeah, I just wanted to sort of talk a little bit about NAE versus your expectations for how big the market might be. I know you guys have talked about 10% to 25%, but how do you see that evolving over the next five to ten years? Is this going to be a situation where eventually task market will on year, how big do you think it can eventually roll?

Well we were over 30% now in terms of our U.S. production and we think that we'll move on up toward 50% of our total production in the next few years. I think the market will continue to grow for that product, but I would remind you and we've stated this in the past, it remains our strategy that we don't do that on a speculative basis we only convert our production to NAE when a key customer tells us that that's a need for their portfolio and so given that we're not all that concerned about overly competitive pressures from more chickens being converted to NAE and so that will remain our strategy going forward.

Great and what type of impact is switching again have in terms of the total number of pounds out there. Do you think that that's been an another reason why we might be seeing a little bit more of a modest growth rate in terms of overall industry supply or do you think that's [indiscernible].

No, I think that's a good point, we see lower growth rates for the chickens and we also see higher mortality and slightly more condemnations, so it does provide a damper on supply growth.

Alright, thank you very much.

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

Yes, thank you. Good morning everyone.

Good morning.

I guess the first question maybe digging a little bit more on the cost side in the U.S., I mean thinking about how the first quarter is trended and what it paces for the rest of the year, so it looks like your unit costs in 1Q are up about 7% or so in the U.S. business and I know prepared and fresh can move that around a little bit, but I'm just trying to think about, we've gotten an acceleration in feed cost inflation at least for the time being through 2Q, given what's happened to Samuel, But talk about - you talk about kind of the forward trends on labor and the impact at hatchability and some of those productivity issues you are having on your cost footprint and some of the things you could be doing to mitigate those.

Yeah, well I would remind you that we have a full quarter, full 13 weeks of organic chicken production in Q1 of '18 versus not that much in 201 7 and that's a significant impact in our in our case ready business, so that's one part and then we saw overall feed cost inflation for the quarter year-over-year, labor I don't think it's any surprise that labor is much tighter this year versus last, although it was tight last year and we continue to pay more for our labor now. We're going to offset a lot of that from a productivity standpoint as we always do. So that's my comment to that. Fabio if you have anything to add feel free.

Yeah just to add to what you said Bill, organic is around [indiscernible], so it's a significant cost in terms of feed there to normal production.

Okay, that's helpful and then just in that quarter and just thinking about the balance of the year, the price mix up nearly7% year-on-year. Can talk about the mix impact of that relative –imagine the organic is contributing mix versus kind of the straight price certainly would seem to be above kind of most of the industry benchmark pricing that we would like to have.

Yeah, well the buckets that I would identify are organic again small bird as I mentioned before. Small bird prices have continued to increase as have our case ready business because we're continuing to products even within our case ready business. And then the last bucket would be increase in our Prepared Foods volume as both our cost and our pricing relative to the total portfolio or are much higher in that segment.

Also transportation cost Adam, the impact of the price and the impact of the cost as well. We always managed our business with a net, but in terms of accounting, we need add the transportation cost to the revenues and add transportation cost to the cogs.

Okay and then Fabio I just want to make sure I was clear on the comments on interest going forward, so did I hear correctly that it was an expectation of 150 million for the year and that was inclusive of the loss of the - 13 million loss on the debt refinancing in the first quarter?

Yes, that is correct.

Okay and then what is 120 after that per share?

Yes we have $ 1billion on 2025 and $850 million on our bonds on 2027 plus the revolver and the term loan, so with all that included we will have $120 million in interest for the year.

Alright, perfect. Much appreciated thank you.

Thank you.

[Operator Instructions] Our next question comes from Akshay Jagdale with Jefferies. Please go ahead.

Good morning thanks. Thanks for taking the question. I wanted to follow Adam's questioning on the U.S. business, so the last year you - the comparisons were pretty easy for this quarter from a cost perspective because last year you were converting the plants to organic and NAE, so that was all the cost of those conversions included in the base and then there was no revenue associated with it. This year you've got the revenue, so despite that your margins year-over-year were down right and so trying to put all of this together where you're painting a positive picture where your margins were down. You are talking about small bird being 9% higher price, but what percentage of your revenue of small birds is it looks like you know the rest of the business might not be doing as well. So can you just help me understand the profit margin performance in 1Q relative to sort of the comparison that that existed from last year?

Yeah, sure I think Akshay part of that was just timing during the quarter, so we started off in January with very, very low breast meat prices in the bird segment and we believe due to weather they didn't pick up as seasonably as quickly as they do on a seasonal basis. So we had a drag through February and the first half of March on the big bird breast meat pricing and that was definitely a drag in the quarter. Now, toward the end of March we saw that pick up and they've returned to more seasonal patterns into Q2, so that was the biggest drag that we saw and then again you've mentioned the organic effect that strew on the cost side but again you saw commensurate pick up and in revenues as well.

And actually just in terms of total profitability, we actually had the same profitability, absolute as last year. Margins were a little bit too lower because of the inflation in terms of the cost that we mentioned and the inflation interest rotation, but that increases the price, but kept the same amount of dollars, which - this is a little bit the margin, but in absolute terms we actually made the same result in U.S. as last year. And as Bill mentioned it's all about the portfolio, we made more in dollars leave other segments including the prepared foods while with a less dollars in the big bird segment, which prices were lower than last year.

Got it and just following up on the big bird side, so boneless, skinless, I think they're at $1.27 right now and the comps for this quarter so I mean I think we reached $1.70 plus last year during the manner and in your comment previously I think to Heather's question was that you think we can get back to '17 levels, but I mean the - right now, I know the weather's still an issue right, but you actually think that the boneless price would to get to $1.70 this summer, is that sort of what we need to do get to a place where year-over-year your chicken in the US business could be in line.

Yeah I think if we if we see seasonal - seasonally normal conditions in terms of barbecue season picking up, hot weather controlling supply as it sometimes does, export environment picking up to normal levels, I think it could definitely approach that. I'm not saying it will, I'm just saying that given certain conditions it could.

And actually I think boneless and breast is very important, it is the leading indicator of course, but it's 24% of the bird, the cut out is lower than last year as of now not because of boneless, but because of the seasonality of wings and we expect the wings to follow some new normal seasonality and price concern recall their coming to the buildup for the breeding season and tenders if you look at the trend and sometimes they work together tenders and boneless it is in a board trends already so.

Got it, but the -

But it's only 24%.

The boneless price..

It's 24%.

Yeah, got it. So just one last one, this is mainly on the productivity issues and your view that it's structural and actually relates to the boneless prices. So what I'm so what's my question really is when you buy these breeders which happens ten months in advance right of production at least you already know what sort of the productivity is going to be and the reason you're buying these new breeders is because take in less corn and soy and they actually produce higher breast meats right. So I know where so what's known is they can eat less corn and soy and they going to produce more breast meat yields and what you also know is they're going to produce less eggs, so my question really is shouldn't we be tracking the breast yield and is in the fact that the breast prices is so weak even as of today, a functional less I mean isn't that the true productivity measure that we should be looking at but that's my main question I have one follow-up?

Well again, I thank you after look at how many heads of chicken that we're going to get per 100 breeders that we have an inventory and we know that it's going to take more breeders to produce the same number of chicks or head and so that's really what we what we have to look at. And while it's yes it's a given that yield continues to improve because of the lower productivity at the breeder level. We're not going to get the same amount of breast meat increase that we used to when the breeder productivity was much higher.

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

Well thank you and we look forward to another great year in 2018 remain positive on the outlook for chicken consumption globally. Despite a greater availability other proteins robust exports and continuing strength in the U.S. economy will compensate and drive more total protein consumption and absorb the supplies. With GNP in the newly acquired European operations were 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 and refining our portfolio to pursue differentiated customized products while presenting our key customer strategy and support of our vision for the coming the best and most respected company in our industry creating the opportunity for a better future for our team members. We would like to thank everyone in the Pilgrim's family as well as our customers and was always bring 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.