Good morning, and welcome to the Second Quarter 2018 Pilgrim's Pride Earnings Conference Call and Webcast. All participants will be in listen-only mode. At the company's request, this call is being recorded. Please note that the slides referenced during today's call are available for download from the Investor Relations section of the company's website at www.pilgrims.com. After today's presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Dunham Winoto, Director of Investor Relations for Pilgrim's Pride. Please go ahead.

Good morning, and thank you for joining us today, as we review our operating and financial results for the second quarter ended July 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 (sic) [yesterday's] (00:02:02) press release, our 10-K and on 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 second quarter of 2018, consolidated net revenues were $2.84 billion versus $2.75 billion from a year ago, resulted in an Adjusted EBITDA of $283 million or 10% margin versus $449 million a year ago or 16.3% margin. Adjusting for the derivative loss, adjusted EBIT was $212 million or 7.5% margin compared to $375 million or 13.6% margin last year. Our net income was $107 million compared to $234 million in the same period in 2017, while adjusted earnings were $0.53 per share compared to $0.92 per share in the year before. We'd like to show our gratitude to our team members for once again delivering a solid performance in the wake of a challenging pricing environment in the U.S. protein sector in Q2. Their commitment and dedication have helped us deliver good results despite some counter-seasonal softness in the commodity sector during the quarter. The results are a testament to the breadth and diversity of our portfolio, which is structured to generate more consistent higher margins over time under different market environment in the segments that we're in, while giving us the opportunity to capture any upside. At the same time, we're leveraging our key customer approach to continue driving growth for us beyond the average market conditions. Though we're pleased with the progress we've made in terms of our relative performance to our peers over the last eight years in every region we operate, we're not satisfied and we'll continue to refine our portfolio strategy, which we believe will give us even more differentiation versus our competition. The investments we've made over the past few years are operating at expected levels while the acquisitions are continuing to generate greater value and contribute to…

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 requires us to report the consolidated historical full quarter of Moy Park into our financials. In the filing, 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 $2.84 billion in net revenue during the second quarter 2018, resulting in adjusted EBITDA of $283 million or up 10% margin. That compares to $2.75 billion in net revenue and an adjusted EBITDA of $449 million or up 16.3% margin the year before. Adjusting for the $24 million grain derivative loss and one-time events, our adjusted EBIT was $212 million or up 7.5% margin compared to $375 million or up 13.6% margin the year before. Net income was $107 million versus $234 million in the same quarter of 2017, or up 54% year-over-year decrease resulting in an adjusted earnings per share of $0.53 compared to $0.90 in the same quarter of last year. Adjusted operating margins were 7% in U.S., 17% in Mexico, and 5% in Europe. Our fresh chicken operations in U.S. operated well under the market conditions of Q2. Our EBIT in the U.S. was $124 million when adjusted for the derivative market-to-market or 7% margin for Q2. Small-bird and case-ready continue to be strong for us and demand was in line with normal seasonality in the non-commodity sectors with small-bird pricing measured by EMI at near all-time highs as chicken has continued to be a compelling value proposition to customers despite higher availability of other proteins. On the other hand, the large-bird deboning commodity was (00:23:16) seasonal and challenging during the most of the quarter, while…

We will now begin the question-and-answer session. The first question comes from Farha Aslam of Stephens Inc. Please go ahead.

Hello?

Hello. Good morning, Farha.

Hi. Good morning. So could we talk about your grain costs? Clearly we took a mark-to-market extraordinary charge in the quarter; how does that flow through your P&L in the subsequent periods this year? And any hedges on grain we could discuss kind of going forward?

Thanks for the question, Farha. So our – would say our commodity risk management team continues to do a very good job in managing our commodity risk, and so during the development and growing season for corn and soybeans, given the drought conditions that South America experienced and the lowering of the carry-outs by USDA, we thought it prudent to hedge our grain purchases with buying commodities futures contracts and we did that at the beginning and throughout the mid part of the quarter. But as you know, the trade environment changed significantly with the discussions among Chinese trade partners and European trade partners and that caused both corn and soybean markets to go down significantly at a very, very rapid pace. And in so doing, the value of those futures contracts decreased significantly. Our commodity team did a great job as I said in rolling those futures into physical corn and soybean mill from a forward (00:33:20) purchases, and so even though we took a one-time mark-to-market loss on those futures contracts, what we have now is a forward-bought physical feed ingredients at prices under the current market and we have that position well into the harvest season. So, we feel like we're very well-positioned from a competitive standpoint on our feed cost going through the rest of this growing season.

So, Farha, there is no impact on future performance or future results because we took the market-to-market position of $24 million in this quarter. So is, as of, we will buy the grain at market prices in the future (00:34:14).

But we did convert most of those futures contracts into physical, again at prices lower than the current market is today.

That's helpful. And then when you think about the pricing pressure in the commodity market, is that impacting pricing in the value-added market? And how should we think about pricing for retail and pricing for value-added into 2019, given the current commodity pressure?

Yes, I'm going to assume the term commodity refers to the large-bird deboning chicken segment.

Yeah.

And in that thing it certainly doesn't help pricing on virtually any chicken products if they had to be priced today with the exception I would say of the small-bird components, because those two markets are really not tied together. It has affected some of the case-ready pricing and the primary impact there is, during the summertime, we've seen product that comes from the big-bird segment going into case-ready plants and get packed for the fresh retail market. When demand did not grow seasonally, as it typically does this year, then that commodity breast meat primarily did not flow into those case-ready plants and backed up into the other market channels, distributor and foodservice and so forth, and so that put an immense amount of pricing pressure on those spot sales or the most commoditized portion of the chicken market. So, yes, I would agree that it has pressured all chicken products with the exception of small-bird components.

Yeah. Just to support that, Farha, if you look at UB (00:36:16), which is the commodity index, it is down 22% year-over-year, while the prices, according to the EMI, small-bird indexes are higher than last year and actually higher than the five-year average and close to all-time highs. Also, the gap between the small-bird breast and the big-bird breast is the highest we've ever seen.

That's helpful. Thank you.

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

Hey. Good morning, everyone.

Good morning.

Good morning, Ken.

So I just have one question. When you think about the chicken margin outlook, what is the most likely course to reverse or improve the chicken margin outlook, particularly in the commodity side? Do you think it's more about that we need to see margins actually get worse, so you're going to see a production cut? Or do you think that the promotional activity will pick up and you'll start to see a resurgence of margins? Or is there another avenue where (00:37:24) is kind of like middling level, right, that's neither terrible nor great, but we want to see some sort of inflection point. So what do you think is the catalyst to make it change?

A couple of things, Ken. We definitely need to see more retail future activity for chicken as we've lost some of our share of that future activity to beef and pork as we've previously said. And we think that we'll see a pickup in that activity as we go later into the summer. Typically, we do see that in August going into September. The other component that I would say is related to profitability and margin is declining feed cost. As you know, we started the year thinking that for us at least we would see as much as $150 million cost impact to corn and soy. Well, the trade talk has taken that out and whereas we saw an increase in feed cost through most of Q2, we believe based on the positions that we have today, we're going to see a decline in feed costs. So more future activity bringing greater demand at retail and then lower feed cost are the two components that I would offer.

Just to give more color on what you have mentioned, our live operation was impacted in U.S. by $48 million because of the higher grain cost and the higher chick cost despite better conversions than last year.

And do you think that there would be – I mean, you don't think there's a level at which we would get a production cut, because again that kind of like modest profitability for everybody, so there doesn't seem to be anything – so you think the way the margins get better is, just do you think the dynamics get better; you don't need a production cut. Is that a fair assessment of what you're saying?

I'm not sure about a production cut. I will say that we continue to be pressured by the lack of productivity or the fall of productivity of our breeder flock. For sure, we think that's a natural cap. We also see a natural cap in the labor supply issue that all manufacturing and the whole economy faces in the U.S. So, I think those two things will definitely create a ceiling on production increases.

Great. I appreciate it. Thank you very much.

The next question comes from Heather Jones of the Vertical Group. Please go ahead.

Good morning. This is not one of my questions, but just something you just said, Fabio, I want to clarify. You said something about $48 million impact from higher feed and chick costs in U.S. and yet in the 10-Q, it says that feed costs were up $60 million – $61 million in all. So, I'm just trying to figure out the disparity between those two?

That's because – sure, sure and that's because that's not volume adjusted. We have 1.5% more volume in U.S., so that is the total impact...

Okay. Okay.

...when you look at just – I'm talking about rate and the impact of the chick cost and higher feed, and again despite better conversions.

Okay. So, moving on the questions, talking of supply constraints, so we've seen an improvement in livability, hatchability; it's better than – sorry, it's down year-on-year, but it's better than it was earlier in the year, but was wondering if you could give us an update on what you're seeing on the breeder side. And just everyone's well aware of the multitude of plants that are coming on late this year into 2019, and yet we have these breeder constraints, and just I'm wondering how you're reconciling the two in your mind?

Yes. So, on the current production footprint, while you're right, we've seen an improvement from where we were with the chick per hen productivity, and we believe that the change is structural and we're not going to get back to where we were say two years to three years ago. So that's going to continue to put somewhat of a ceiling on our ability to grow with our current footprint, notwithstanding the fact that we do have more complexes coming on. But in that regard, starting up a new complex with a new labor pool is going to be I think difficult at best. And we've heard anecdotally of some operations that have been in operation for a couple of years now that still aren't up to full capacity for no other reason than the lack of labor availability. So, we don't think that that's going to change in the next two years to three years.

But I mean, if you look at the – if you just take the stated capacity of the new plants that are being added, and let's just say that's a – it's a low single-digit increase, but not one – let's just say, it's 2% to 3%. If you look at these breeder constraints and the other constraints, I mean, how do you think the industry gets to the point where it can populate those plants given these broader constraints? How does that happen, or does the existing footprint have to shrink? I just – I'm having difficulty reconciling the two in my mind.

I think that's a very good question. I don't have the answer to that, Heather, because we're not one of the companies that is building a new complex right now. So I would direct you to ask those who are. We've tried to further switch some of the breeds that we still want to change out. And we've been told by the breeder that we desire to have this going to be well into mid next year before we can even get some of the new breed that we're trying to purchase.

I think just like you mentioned, Heather, the ramp up of this plants will take longer, not only because of the breeders, but also because of the labor and we are seeing that happening in other segments and with the chicken plants that have been recently opened. Just the ramp-up will take, instead of the normal nine months, will take almost two years because...

Okay.

...of the breeders and because of the staffing.

And then my second question is on (00:44:41) relative performance. So when I look at where I model – think Tray-Pack should have been for the quarter, small bird, big bird, and then just what I assume a relatively conservative assumption of prepared foods, it seems like your relative performance deteriorated some, even adjusting for that mark-to-market, it deteriorated some in Q2. So, you mentioned some prepared foods investments, you mentioned some (00:45:09) production costs; like, can you help us to understand what drove that and when that should reverse itself?

Yeah. The gap in U.S. like I started to disclose was around $48 million with high feed and chick cost, again despite better conversions than last year. Our operations actually improved by $10 million with the operation improvement initiatives and increased volume, more than offsetting the increase in salary we gave to our team members. Our SG&A was $10 million higher on investments, just like you mentioned in our Just BARE brand and some admin expenses. If you look at the commodity cut-out, it was 22% lower than last year and affected directly our big bird segment, impacting the bottom line by close to $120 million, while our non-commodity segments and operational improvements in yields that's manifested in (00:46:04) sales improve our mix and price by $20 million. So if you look at the gap between last year and this year, these are the main buckets.

Okay. All right. Thank you so much.

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

Hi. Good morning.

Good morning.

Good morning.

Hope you can expand on what you mean by refining your portfolio strategy in the U.S. Maybe you can answer in the context of short-term versus long-term. In the short-term, how do you mitigate the pricing risk in big bird? I think in the past you talked a little bit about buy-versus-grow, but just wondering to what extent that is effective when you have overall sales volume weakness. And then, over the longer term, when you look at the market today versus a decade ago and how your customer demands have changed, is the mid-cycle earnings power of a large big bird plant, deboning plant structurally lower today or are we reading too much into this cyclical swamp in breast meat?

I'll offer a few examples. If you remember February of 2017 or last year, we converted a large bird deboning operation that was largely just sold on the commodity spot market. We spent $130 million on the operation, converted it to an organic tray pack plant. That's changed the profitability of that operation significantly and continues to stay in line with our expectations. We have some case-ready plants, one newly acquired one to be specific, where we don't have enough capacity to put all the meat in a fresh retail trade. We're going to spend some capital dollars to finish out the packaging portion of that plant so that we can get an optimum amount of meat in a tray, and that's yet another example of changing our mix. In the large bird deboning segment, there are certain value-added products even in those plants that we can develop and grow to take out the spot market effect, if you will, for those operations. So it's a continuing evolution of upgrading our mix and developing a more diverse portfolio even within our segments.

One example of that is the conversion of one of our plants to No-Antibiotics-Ever (00:48:52) which is the first conversion that we've done in the big bird segment. We are leading the other segments in that category, but we just now converted one big bird operation. To that another example is to use, just like Bill mentioned, more foodservice in a box with some branding and some specific trimming (00:49:13) to specific customers targeting a much higher value-added operation even within the commodity segment.

Can you talk a little bit about the elasticity of your organic and ABF pricing when you have commodity price declines of such magnitude?

Sure. When we convert a facility to No-Antibiotics-Ever, the pricing on that product is pretty well set. We don't do that as a speculative activity thinking that we're just going to go out and sell it and someone is going to pay us more. We already have agreements with customers when we do that to pay us a defined premium relative to the traditional type products. So there's no question when we do that that we're going to have a higher margin for the long-term.

And then, the $25 million increase in freight, can you talk a little bit about your conversations with your customers and maybe the process around passing that through, or is that just – you expect it following its own pattern (00:50:30) as long as it remains as high?

Yeah, it hasn't changed since we reported last quarter. We think that we'll realize an increase of about $30 million through the year, and then we'll recover somewhere in the low- to mid-$20 million of that. So most of that we're going to do to recover and it's not going to be a material impact to profitability.

Based on what you're seeing today, do you expect that to be a tailwind in 2019?

We don't think the driver shortage, which is the root cause of this, is going to get any better in 2019. So we think it's going to continue to be a challenge and we'll have to work with our customers to make sure that our products are priced in such a way that we cover those increase in freight cost.

Got it. Thank you.

The next question comes from Ben Theurer of Barclays. Please go ahead.

Hey, good morning, Bill, Fabio. So thanks for taking my question. Just wanted to quickly follow-up on your strategy going forward and I guess you've talked a lot about it, but obviously there was the impact from the derivative and then you decided to roll it into physical. You took about (00:51:57) $24 million hit. So if we actually adjust for that that is roundabout a 250-basis-point impact on your cost of sales just in the U.S. So going forward, are you basically just literally not going to engage that much in the derivatives market? We can really account for the write-off in 2Q as a one-time event, because we've not been seeing you guys adjusting for that in the past and it just popped up now as an adjustment. So really want to make sure that we're not going to see derivatives. I mean, I understand you do (00:52:30) future positioning by physical feed ingredient, but just to understand where we are on that going forward and then I have a follow-up on that.

Sure. Well, we view the use of derivatives as a risk management tool and I would tell you given the right market atmosphere where we're going to continue to use those as a tool when we see the need. Fact of the matter is we took the opportunity given the rapid fall in price on corn and soybean meal to convert those into physical purchases. And so, through most of the harvest season in this crop year, we've locked in our feed ingredient cost. But if markets change and we see the need to employ purchase of derivative contracts or financial products again, then we'll employ that strategy as needed.

Okay.

I think the reason for the call out was just to demonstrate the performance of the business during the quarter, not with some impact from future purchases, because these are future purchases, not purchases from this quarter. I think that was the reason for the call out.

Okay. And the roughly 250 bps assumption, that's correct, right?

Yes.

Okay. Yeah, and then my follow-up question, so if we adjust for that, I mean, clearly we are in an environment where cost of sales is higher. But you've mentioned something, I just want to understand this right so that we get the outlook for the second half properly. So you've mentioned feed cost now is actually at a lower level than a year ago and that's how it looks like if you just take a look at this year pricing, but what you've locked in, what percentage does that compare roughly to your actual cost you had in the second half so that we get an understanding at least from the feed ingredient point of view, how does cost of sale looks like on a year-over-year basis for the back half of 2018?

Because of the market-to-market of $24 million, what we believe now the reality is that then we start with normal market prices in Q3 and that was the reason for the market-to-market hit. And when we transformed this $24 million from derivatives to physical, it's actually at a little better condition than the market is today. So expect to have a little bit of a benefit from that $24 million market-to-market loss last quarter.

Okay. Understood. Thank you very much.

The next question comes from Adam Samuelson of Goldman Sachs & Company. Please go ahead. Adam Samuelson - Goldman Sachs & Co. LLC: Yes. Thank you. Good morning, everyone.

Good morning, Adam. Adam Samuelson - Goldman Sachs & Co. LLC: A lot of grounds have been covered today. Wanted to ask you a little bit about the second half and I think last question covered kind of the view on a much more balanced year-over-year fee cost outlook for the back half, but thinking about the impact of the commodity businesses and big bird on the back half, I mean, the big bird cut-out remains 20%-plus below year ago levels. Can you go through some of the outlook for the different cuts within that as we go into the fall? And thinking about is it really we need retail features (00:56:12) to kind of start stacking in a little bit more boneless breast meat to put some support into that market, at least relative to where we've been on a year-on-year basis or are we looking at a point where boneless in the fall can be $1 and like quarters remain – will start (00:56:32) tracking below year ago levels and the wing comps get easy, but still the big – you still have pretty challenging competitors (00:56:38) on the cut-out for several more quarters?

Right. So we would view, Adam, the commodity market or the large bird deboning market in general as remaining challenging for the rest of the year. Although, we would believe that sometime yet the summer we may see some lift from retail features, but fact of the matter is we're sort of short on time that we can enjoy that as we get through Labor Day. And I think that you called it fairly correctly with potentially wings getting a lift, I would say tenders could get a lift, but by and large we think that the back half of the chicken will remain fairly steady and the breast meat conformer to that (00:57:35) will remain fairly weak through the rest of the year.

Adam, if you look at the comparable last year, during Q2 and Q3 you have a very strong summer with very strong wing and very strong breast meat prices. But at the fall, we saw a big drop in prices last year as well. So the comps will get a lot easier for sure. Adam Samuelson - Goldman Sachs & Co. LLC: That's fair. But just given even without the feed cost kind of normalizing or settling out on a year-on-year basis, you still have the other kind of cost dynamics, which remain kind of in place. And I'm just wondering, I mean, given the implications of that for the industry, I mean, doesn't that put the big bird deboning industry in the red by the fourth quarter, given the normal seasonality of prices?

It's possible, but from our standpoint, we're not going to stand still. We're going to continue to work on our mix, develop more value-added products in that segment such that we can get a better return (00:58:42) so the spot market would avail to us. Adam Samuelson - Goldman Sachs & Co. LLC: Okay. And then, just a quick question on Mexico, if I may. I know seasonally second quarter is always strong and you improved this quarter, but on a year-on-year basis, I mean is the decline – help me just think about the decline year-on-year in the Mexico business. I know currency wasn't helpful, but beyond that just some of the pieces in Mexico and how to bridge that.

We think we're going to have another great year in Mexico. And if you've noticed through each year, the quarters are fairly lumpy, but as I remember seeing the numbers yesterday, we're amazingly consistent. When you compare year-to-year, we don't think 2018 is going to be a lot different than – that has been (00:59:37) the last couple of years with great performance for the whole year.

Yeah. Just like you mentioned, there is some volatility on quarter-to-quarter with Q3 not being as strong as the Q2 and Q4. If you remember last year, we have unseasonable weak Q4 because of the hurricanes and because of the earthquake in Mexico and also the volatility in exchange rate. And we expect to have a stronger Q4 this year. So when you look at total of the year, we expect as strong of a year as we have last year. Adam Samuelson - Goldman Sachs & Co. LLC: Okay. That's helpful. I appreciate the color. Thank you.

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

Thank you. And we look forward to a second half of 2018 to remain positive on the outlook for chicken consumption globally. Despite the volatility in the commodity sector, we believe chicken continues to be the most compelling protein everywhere around the world. With our newly acquired European operations and last year's acquisition of GNP, we're much better represented globally and well-positioned to improve our margin profile and reduce volatility despite specific market conditions. We will continue to look for opportunities, including Europe to refine our portfolio and offer differentiated customized products while pursuing our key customer strategy in support of our vision and becoming the best and most respected industry, creating the opportunity of a better future for our team members. I'd like to thank everyone in the Pilgrim's family as well as customers and also thank you for your interest in our company today. Thank you for joining us.

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