Pilgrim's Pride Corporation (PPC) Q4 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the Fourth Quarter and Year-End 2018 Pilgrim's Pride Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] At the company's request, this call is being recorded. Please note that the slides referenced during today's call are available for download from the Investor Relations section of the company's Web site 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 30, 2018. 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 Web site, 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 on our regular filings with the SEC. I'd now like to turn the call over to Bill Lovette.

Thank you, Dunham. Good morning, everyone and thank you for joining us today. For the full-year 2018, consolidated net revenues were $10.9 billion versus $10.8 billion from a year ago, resulting in an adjusted EBITDA of $798 million or 7% margin versus $1.39 billion [ph] a year ago or 13% margin. Our adjusted net income was $318 million compared to $707 million in the same period in 2017. Adjusted earnings were $1.28 per share compared to $2.84 per share in the year before. For the fourth quarter of 2018, net revenues were $2.66 billion versus $2.74 billion from a year ago, resulting in an adjusted EBITDA of $111 million or 4% margin versus $241 million a year ago or 9% margin. Adjusted net income was $21 million, compared to $134 million in the same period in 2017, resulting in an adjusted earnings of $0.09 a share compared to $0.54 a share in the year before. Our team members have remained focused on executing and delivering the best performance possible during 2018 against differing market conditions across our global footprint. In the US, we experienced a very difficult environment in commodity chicken, partially offset by Prepared Foods which has been accelerating, and it's improving. In Europe, we tracked the expectations in extracting synergies despite feed cost pressures in Europe during the second half. Mexico had stronger than seasonal performance in the first-half, a weak Q3 and then a recovery as we exited the year. Though we're proud of our progress we've made sin terms of our relative operating performance to the competition over the last years and all regions we're in, we're not satisfied and are continually identifying opportunities against our zero-based approach and refining our portfolio strategy to better adapt to specific market dynamics. We continue to believe this approach will give us higher and more consistent results for the mid to long run and minimize the full peaks and troughs of the volatile commodity sectors. While we face more challenging supply-demand balance in the US commodity market, we continue to leverage our key customer approach to drive growth beyond just the underlying market conditions. We are applying a similar strategy at our European operations and expect to extract improvements in line to what we've seen in other geographies. Our team across the different regions remains motivated in capturing more growth opportunities and product differentiation, both organically as well as through acquisitions to generate greater value while contributing to the evolution of our portfolio and supporting our vision to become the best and most respected company in our industry. During the last quarter of 2018, we also suffered from weather disruptions at some of our U.S. facilities due to hurricanes, which generated a direct impact on our facilities and results, but also resulted in larger than our deal of commodity sized birds to sell into a market that we're even weaker than seasonal. Most important, during this period the inefficiencies also limited our ability and fully capturing our operational improvement targets. Under these challenges and experiencing the lowest cut out in the U.S. during the last decade along with a strong dollar weak oil prices which further limited export volumes. Our teams are able to produce a stronger operating performance when compared to many other years with more favorable market price. We believe this performance is a validation of our team, the effectiveness of our diversified portfolio strategy and our proven methodology in extracting operational improvements over the years. While the environment for the U.S. commodity large bird de-boning was very weak entering Q4 we did see an earlier than seasonal rebound during December with the momentum appearing to hold through early this quarter. Commodity bonus prices have already reached levels comparable to a year ago with wings appreciably stronger which is incrementally positive. While we typically see a seasonal uptick in overall chicken demand during Q1 as consumers increased their chicken consumption post the holidays, we believe this year the increase is even more noticeable as retailers, foodservice operators and consumers are recognizing and responding well the attractive prices for chicken. We believe this is favorable signal for the upcoming summer grilling season when we expect to have further pickup and demand for chicken. Customer demand was mostly in line with normal seasonality in the less commoditized segments. Margins within our small bird and case-ready operations have continued to perform better than commodity - and served as a partial offset and our leading position in these markets and differentiated product offerings have continued to give us a competitive advantage relative to our peers with a more narrow market focus. For 2018 sources of negative impacts to our U.S. business, we're the large bird cut-out, lot production and breeder costs, investments in brands and prepared foods growth as well as salary and wage increases given to our team members. These impacts to profitability will partially offset by improvements in portfolio mix, fee conversion rate, plant costs and yields. In foodservice, we are seeing more chicken promotions particularly for wings following a year consisting mostly of deep features in 2018 as operators are sensing an opportunity to drive an improvement in their results and competitiveness, which appears the market turn and focus. Domestic retailers are also starting to promote more chicken as they seek to drive stronger traffic into their stores. We continuously refine our strategy or differentiate our portfolio and reduce the share of commodity sales to further insulate our margins from market fluctuation and improve our relative performance to our competitors. For example even within each of our bird size classifications we have multiple strategies to improve our product diversity and market exposure. We've grown our revenues to keep customers by over 100% in the last seven years and the proportion total chickens we produce going to these customers are continuing to grow reducing our dependency on commodity sales. Our key customer strategy also drives growth, promotes loyalty, enhances long-term relationships and strengthens our margin structure. We are continuing to increase the percentage of specialty birds including No-Antibiotics-Ever and certified organic and expect them to be over 40% of our U.S. fresh portfolio during 2019, up from less than 20% a few years ago. Mid-last year we moved one of our large bird de-boning plants to full No-Antibiotics-Ever, the first one for us in this size category in support of the plan to double our No-Antibiotics-Ever contracted volume of large bird de-boning products in 2019 versus 2018. We also expect to initiate breast meat portioning business and increase the dark meat de-boning capacity by 25% to de-emphasize our exposure to the volatile pure commodity markets. We're installing more automatic de-boning equipment to support growth for our key customer while minimizing the impact of tight labor conditions to optimize our margins and small birds being the largest producer in that segment. It's afforded us the opportunity to benefit from the positive market dynamics, supply in this category was reduced last year and pricing has been much more resilient versus other sectors. These are just a few of the initiatives we have in store for 2019 and fresh chicken; we're very excited about them. Within Prepared Foods our results are accelerating in momentum and growing at a solid pace of 11% in revenue and 14% in volume year-over-year, during Q4 12% and 15% for the full-year respectively. As you know, during the last few years we've been making investments in our U.S. Prepared Foods plants operations and people to expand our capacities and capabilities to meet our key customers' expectations. We have begun to realize results from these investments and are generating the expected performance. We're growing our volume in sales and continuing to build out innovation and marketing to drive strong growth for the future, which we believe can be sustained. The investments and focus have yielded an increase in performance and further growth prospects remain available. Our commitment to growth in Prepared Foods gives us an improved margin profile by reducing earnings volatility within our entire portfolio. We're expecting Prepared Foods to account for a larger proportion of our total results over the next few years, and to support these growth initiatives, we're also updating Pilgrim's brand with the fresh innovative new packaging which features more updates in design and offers the opportunity to grab to the consumer at the shelf. We're moving all Pilgrim's brand at SKU in to New York, and we're starting with our Prepared Foods items. Our JUST Bare chicken brand continued this national expansion plan and solidified its fresh chicken online sales leadership. JUST Bare has a strong presence in the better for you category and is rapidly growing double-digits in the past five years, and has that's transformational growth potential as our national go-to-market offering for the most desired on-trend consumer chicken brand. We also see multiple opportunities to extend the strength of JUST Bare and the Prepared Foods. Starting last year we expanded our rotisserie distribution using the JUST Bare brand and in the Northeast and Midwest markets increasing brand awareness and distribution growth. Amidst continued uncertainties regarding the direction of international trade in the U.S. export demand has been steady which is encouraging considering the strength in U.S. dollar. Q4 freezer inventories were within 10% percent of prior year indicating export demand roughly in line with what we expect to see on a seasonal basis. We had some volume impact from quotas last year in some countries, but they're already resolved in 2019 as the year begins. U.S. chicken is remaining attracted relative to other global exporters as we have very good access to grain and leadership position in technology and very competitive cost. Market conditions in Mexico are soft at the beginning of Q4, but recovered during - as the quarter progressed. Low prices in Q3 drove a reduction in supply during Q4 while demand also improved. Despite an increase in imports of competing pro teams specifically forward, due to global trade issues, we believe chicken demand can continue to grow in line with historical rates. While Mexico can be volatile quarter to quarter, historically, our operations have produced very good margin performance on a full-year basis and we expect this trend to continue in the future. For all of 2018, Mexico recorded nearly 11% EBITDA margin. We believe our performance in 2019 in Mexico will follow similar seasonality patterns relative to past years. Our team's focus on operational excellence and offering differentiated product continues. We generated record volumes and margins in prepared foods during Q4. As a part of our strategy to strengthen our competitive position, we're maintaining a pace of new innovative product introductions. Our prepared foods business is growing at a double digit rate and generating excellent results under both Premium Pilgrims and Del Dia, both brands have continued to receive very favorable acceptance by consumers at retail, club stores and quick service restaurants. Our European operations have continued to produce better performance on a full-year basis in 2018 compared to the prior year with an 8% growth in revenue and $17 million expansion and adjusted EBIT. Despite 24% increase in fee cost, which is mainly complete due to weather events in Europe. Our results are proof of our more stable business model. Our team members have also improved operations and contributed to the strong performance by continuing to focus on cost optimization, control excellent customer relationships, synergy capture and a culture of constant innovation while maintaining a very consistent margin performance. As the cost of ingredients in particular wheat, given weather impacts across Europe and utilities increases, we work within our supply agreements with customers to reflect and recover or mitigate these costs in subsequent quarters. Where we have no formal supply agreements, we are engaging immediately to recover these higher input costs. The integration process is going well and we're tracking to our run rate and capturing $50 million in expected synergy targets. Our team has continued benchmarking operational efficiency, productivity and found additional opportunities to create value through feed formulation, yield management and labor efficiency across our European operations. We're applying these methodologies in Europe to generate operational improvements and focus on closing the gaps to our legacy operations. The emphasis on applying our key customer strategy is also continuing and will give us more resilient margin structure. We're also looking for additional value creation potential in Europe as we have in the U.S. and Mexico to drive greater earnings performance. As a part of the integration activities, our team is driving for an increased focus on utilization of the whole chicken while opening up more opportunities and diversifying into new markets for dark meat, offal and other products. We will continue investing to optimize our production facilities across Europe to make them more efficient and competitive. The increase in operational focus is already starting to pay off as our European operations have improved their relative performance over the competition. Beyond that, we're looking to deploy capital and opportunities across Europe to drive our future growth both organic and inorganic and further improve the diversification. Market prices for corn averaged 7% higher in Q4 than last year reflecting the lower corn carryout in the U.S. Inversely, soybean mill prices averaged 3% lower in Q4 and are currently about 10% lower than in the same period last year, reflecting the record surplus of soybeans. The trade disruptions with China is expected to leave the U.S. with record large soy - surplus of soybeans in 2019. We expect to see more competition for corn and soybean mill exports out of South America starting in Q2. There also can be a potential for U.S. farmers to plant more corn acres this year in response to relatively better economics for corn in certain parts of the country. In Europe as we mentioned food prices averaged 24% higher in Q4 versus a year ago, reflecting lower supply due to a major drought across central Europe. That said, falling prices are already showing a more than 10% discount to current prices reflecting an expectation for higher supplies coming this fall. Uncertainty still remains with regard to trade between U.S. and China. But we believe feed in prices should not be a treat to margins due to record high soybean carryout, more competition from South America for exports and the potential for increased corn acres in the U.S. this year. For 2019, the USDA is expecting total chicken industry production to grow at a range below the last years. While breeder egg performance has marginally improved recently, the latest placement data has also been down along with hatch rates while egg sales have been flat to offset the improved. Also despite the announced new capacities and some of these are replacing existing Saturday schedules while in a tight labor market the U.S. and difficult market conditions last year are likely to weigh on at least some of the expansion plans. As a result, we believe capacity growth will be fairly measured in the mid-to-near term. With slower growth expected in beef and pork an increasing in a similar range last year we expect a more favorable shift in chicken consumption among competing proteins. Also the implementation of the new trade agreements with trading partners should gradually reduce the amount of domestic protein availability putting less pressure on chicken and driving more demand. The outlook for chicken demand in the less commoditized segment this year continues to be good overall and supply and demand there remains relatively better balanced. With the U.S. economy continuing to be strong, low employment and higher disposable income are driving households to consume more protein throughout the day. Foodservice operators are also already starting to turn their focus to chicken, and we expect to see more feature activity in our retailers this coming summer. While we are already well-balanced in terms of our bird size exposure, we'll continue to look for opportunities to incrementally shift our product mix and reduce the commodity portion of our portfolio by offering more differentiated products to key customers while also optimizing our existing operations by pursuing our operational improvement targets. We believe our key customer approach is strategic and creates the basis to further accelerate growth in important categories by providing a more customized and innovative products to give us a clear competitive advantage. Last September, we released our 2017 sustainability highlights report compared to 2016, we decreased severe incidence by 26%, significantly outperforming our 15% year-over-year reduction target. We also reduced water and fuel use intensity by 1.3% and 2.7% respectively and decrease greenhouse gas emission intensity by an impressive 8.2%. We maintained our focus on animal welfare, passing all third-party audits with scores ranging from 97% to 100%. Back in 2015, we set ambitious 2020 sustainability goals to ensure that we stay focused on continuous improvement. We remain focused on these goals outperforming our team member health and safety goal by 11% in 2017. In addition, we're on track to beat our goals in supply chain responsibility, natural gas use intensity, electricity use intensity, greenhouse gas emissions intensity, and animal welfare. Water use has posed a challenge and we'll heighten our focus to ensure that we make progress on our 2020 promise. We're confident our focus on sustainability will continue to position us as a global industry leader in the production of high quality sustainable chicken products. To improve our consumer awareness while supporting our vision to be the best and most respected company in our industry, we successfully launched two brand new Web site that more accurately portray who we are as collective Pilgrim's, a global organization, pilgrims.com, pilgrimsusa.com were launched in mid-December offering the platforms to share our global and U.S. stories respectively and amplify our presence in the marketplace with mobile optimize online presence. Before I turn over to Fabio, I would like to recognize the work of our team, we're executing our strategies which produced a clear long-term margin advantage versus our peers in this exciting dynamic and cyclical industry. Our portfolio is specifically designed to minimize the impact from the cyclicality of specific market segments. The changes we initiated eight years ago have made a tangible difference and the result is evident in all three geographic regions in which we operate. It magnifies our relentless pursuit of operational excellence and presence in diverse and differentiated business models, segments and channels. For the long term, we expect our competitive advantage to sustain. So with that, I'd like to ask our CFO, Fabio Sandri to discuss our financial results.

Thank you, Bill, and good morning everyone. For the full-year 2018, net revenues were $10.9 billion versus $10.3 billion from a year ago with an adjusted EBITDA of $798 million or a 7% margin compared to $1.39 billion or 30% margin for the year prior. Net income was $248 million versus $695 million the year prior. Adjusted EPS was $128 per share compared to $284 in the year before. Adjusted operating margins were 4% in U.S., 9% in Mexico and 4% in Europe respectively. We reported $2.66 billion in net revenue during the fourth quarter of 2018 resulting in adjusted EBITDA of $111 million or a 4% margin. That compares to $2.74 billion in net revenue and an adjusted EBITDA of $241 million or a 9% margin the year before. Adjusted profit per share was $0.09 compared to $0.54 in the same quarter of last year. Our EBITDA in the USA was $5 million after adjusting $50 million for losses related to the weather events in USA and Puerto Rico. Small birds and case ready continue to be a relatively stable market as Chicken has remained compelling to consumers despite higher availability of other properties. On the other hand similar to Q2 and Q3, large bird de-boning commodity was very challenged during most of Q4 although prices bottomed out and then recovered as we neared the end of the year. Regardless of market conditions we have the portfolio diversification in the all bird sizes, including both commodity, and more stable segments such a small bird and case-ready which is designed to maintain a more consistent margins over the long-term, while protecting the downside. As we've mentioned, we were impacted by weather disruptions due to the hurricane at some of our complexes. The $50 million adjustment is related to direct expenses due to the events, but the actual financial and or operational impacts were more extensive and as the downside limited our ability to optimize the mix, moving up to a sell into a less profitable segment of the market and further depressing margins. We also deployed that in ideal to normalize the affected composites delaying us from producing a more profitable mix of bird sooner. U.S. Prepared food sales have to continue to improve relative to last year with a strong 14% increase in the volume for the quarter and 15% for the year respectively. Adjusting for the extra week in 2017, the growth in 2018 was even more impressive at 18%. The investments we made in the last few years have begun to produce results and we are extracting the benefit. We have additional initiatives in place accelerate growth in this market and we believe the improvement in prepared foods can be sustained. We are expecting it to contribute a greater portion of our total sales in the next few years, while adding to the stability and consolidated margins. After a very strong first-half market conditions and weak Q3, Mexico markets improved during Q4. Our adjusted EBIT was $70 million or a 5% margin. The environment was weaker at the start of Q4, but progressively improved throughout the quarter as the supply adjusted and demand increase. While we still have a strong competition from other proteins and growing conditions have been better than past years. We have a very strong team in Mexico, who has been over delivering performance for us in relative terms to the major competition in the past few years. Due to their strong operational focus and excellent recognition, and we expect this trend to continue in the future. To maintain our growth and continue to innovate, we launched fresh chickens in Mexico under the premium business brand including No-Antibiotics-Ever which have continued to see strong demand. Also we are preparing our Prepared Foods opportunity in Mexico and producing excellent financial performance through both the Pilgrim's and the Del Dia brand which have received great acceptance by consumers. Our strategy is supportive of a global goal to increase our higher margin differentiated products. We're having probably coverage from entry level to premium, both fresh and prepared. Our adjusted EBIT in Europe was $30 or a 4% margin after adjusting for $4 million in restructuring costs. The integration is on track and remains cautious about the geographical diversification and growth potential for us while evolving our portfolio increase - low advantageous opportunities to capture the upside in the market, but protecting the downside. Although we have made good progress in terms of optimizing the product portfolio, operational synergies and implementing zero-based budgeting, we were hurt by 24% higher cost in wheat ingredients due to the drought in Europe in the second-half. That will still need to be pass-through of prices through formula of encounter. Higher feed ingredients were related to a $30 million negative impact from cost during the year. We will continue to focus on increasing the efficiency across the value chain by enhancing sourcing and production, improving live cost improvements and the global management of feed sourcing. We will leverage our marketing and sales infrastructure to optimize SG&A cost. We have a very good track record of successfully capturing synergies and delivering better operating results by improving the relative performance to the competition and the markets. We are confident we have the methodology and team in place to similarly continue to grow the profits at our peer operations and leverage our expertise and experience to improve the rest of our global operations. As part of the integration activities, our team is driving for an increased focus and utilization of the whole bird to identify more opportunities and strengthen our cut-outs. We'll continue to build additional key customer relationships, identify value creation potential and support and improvement in the financial performance of our business. During Q4, our SG&A reached 3.2% of sales, in line with recent levels and reflecting the inclusion of support for expanding the Just BARE brand nationally, the investments for our new Prepared Foods products both in U.S. and Mexico as well as the addition of the new European operations. We reached $100 million in operational improvements and synergies in 2018 in line with the year before but with lower additional goal. While we made some improvements to the efficiencies of our operations, they were offset by higher labor, the weather disruptions and subsequent longer than expected normalization in the U.S. impact on mix and also higher grain costs in Europe as we mentioned. We will continue to prioritize our capital spending plans this year to optimize our product mix that is aimed at improving our ability to supply innovative less commoditized products and strengthening partnership with key customers. We expect to invest $285 million on CapEx and reiterate our commitment to invest on strong return on capital employed projects, we'll improve our operational efficiencies and tailor customer needs to further solidify competitive advantages for Pilgrim's. Our balance sheet continues to be strong given continued emphasis on cash flows from operating activities, focus on management of working capital, and disciplined investment in high-return projects. During the quarter, our net debt reached $2 billion with the leverage ratio of 2.5 times pro forma last 12 months EBITDA. Our leverage remains at a good level and expect to continue strong cash flows in 2019, increasing our financial capability to pursue strategic actions. We expect 2019 interest expense in the range of $130 million. We have a strong balance sheet and a relatively low leverage. We remain focused on exercising great care and ensuring that we create shareholder value by optimizing our capital structure while preserving the flexibility to pursue a growth strategy and we continue to consider and evaluate all relevant capital allocation strategies that will match the pursuit of our growth strategy and we'll continue to review each prospect according 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] The first question is from Ben Theurer of Barclays. Please go ahead.

Yes. Good morning, Bill, Fabio, thank you very much for taking my question. Actually on the U.S., I wanted to follow-up on some of the qualities commentary you made looking into the first couple of weeks of 2019 and going forward. So what is it would you have seen especially on the big bird side in terms of demand, and how do you feel about pricing going more towards the grilling season as you've mentioned some of the drivers already? I'd like to understand a little bit how you prepare yourself for a hopefully better feature season into summer and what do you think more prices are going to, or is it still too early to say some of the directionary - where the direction is going that would be my first question?

Thanks, Ben. We saw this coming as early as December and that our key customers especially in retail were planning to ramp up their features. And in January, we anticipated that what we anticipated an increase demand at retail actually was a little bit stronger than what we thought it was as a matter of fact we had to bring in meat from other size categories and our retail trade pact plans to augment the supply that we have there which is indicative of really strong demand and we think that's encouraging. We see a little bit stronger than normal January demand at retail. We've seen more featuring at foodservice. And so what that's caused is a relatively strong demand given that the supply has stayed relatively flat if not down at the end of Q4 especially in that large bird segment. So I think that set us up pretty good to see the increased pricing that we all realized in the markets indicated beginning in January. We think we're going to see normal seasonal patterns this year. We think we're going to see more foodservice promotions of chicken as we've already started to and given him them the supply that we see growing - no more than 2% to 3%. We think it's going to set up to be a fairly balanced year. So that's what we're seeing right now, and the other thing that we're doing not to just relay on commodity prices, as I said in my prepared remarks we're doing a lot in our Big Bird de-boning sector to create value added products. We're de-boning more of our legs, we're portioning more of our breasts, we turned - as I said the one plant into antibiotic - no antibiotics ever. We're increasing the sales out of that plant for that product which would get a premium over the commodity prices. So we feel encouraged at what we're seeing in the market and even more encouraged with what we're doing with our own mix.

On the third of care out [ph] of the Bird, Ben, we're also seeing some increase in exports as the market are reacting to the low prices of the specially the like quarters.

Okay, perfect. And then just one out of curiosity with Tyson acquiring the assets of Brazil Foods over in Europe, clearly you've become active in Europe before that, for Moy Park transaction. And I assume you were interested in those assets at some stage as well. Could you have - comment at some way how that potentially impacts your competitive position of Moy Park in Europe? And what ultimately maybe made the difference of why you were not for reengaging in the transaction? Thanks.

We don't think that that single transaction affects our competitive position at all. We remain focused on growing in Europe as you probably know most all of our chicken production is in the U.K. and we sell about 93% of that production within the U.K. and we get a premium for British and UK grown poultry and we are extremely satisfied with that. What we desire to do to augment our supply for our foodservice business which we expect to grow in our non-branded business, which we expect to grow is to increase production or acquire production in areas that have a lower cost basis such as Eastern Europe or perhaps parts of Asia or other parts of the world that can bring that lower cost supply for the products that the consumers don't attach a premium to. And so, we remain focused on that. We are in that market. We are traveling to that market. We're looking for opportunities and that's not changed.

Okay. All right. Perfect. Thank you very much. I'll leave it here. Thanks.

Thank you, Ben.

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

Good morning.

Good morning.

First question is on tray-pack pricing. Could you give us a sense of what we should anticipate for that for you guys this year on a year-on-year basis?

Sure. We're encouraged by our pricing in our tray-pack operations. As we've been saying for several years now, Heather, our strategy may be a little bit different from other participants in that. All of our trade back product goes to our key customers and we have an arrangement with those key customers based on quality, based on service, largely based on selling their brands. And we have a mutual agreement where we're going to keep them competitive in their marketplace. And so that allows us to move pricing when it's needed, whether it's up or down and it's proven to be really good for our key customers and obviously very good for us. We see continued growth in that category as I said we're having to augment our meat supply going into those plants, and we expect in the next 12 months to 18 months to be increasing our capacity to put more meat in a tray because our key customers in that category are growing. So we feel really good about the pricing there. We continue to evolve our mix into more value added products that consumers are asking for. And so, that's one of our best businesses in our portfolio and it's among the best of the chicken business in the U.S.

And Heather, I think just - just adding on what you said, we have two partnerships that are key customers because we help them grow their brand while we offer a full range of products from [indiscernible] natural to the higher order attributes like you're gaining. We don't have any contract negotiations because our prices don't follow the volatility of the commodity markets. We did not react to sharp increases in strong spot market and does not follow the troughs.

And one other thing I would add to Heather just to remind you that we're now able to offer our key customers a national brand in Just BARE chicken to fill that segment for their customers who want a branded differentiated better for me product. And so we're able to offer a total chicken solution for diner, whether it's the rotisserie birds for the deli, the value added prepared foods products for the deli and the frozen section and for the fresh meat case.

Okay. Thank you. And then on conversions, so back in 2017 you guys converted a plant to a Baber plant to organic and I think you reference something earlier in the call that I just didn't catch. Weren't you converting another big bird plant to small bird this year? And did you say something else about another conversion?

We converted one of our big bird plants to no antibiotics ever. We're doing more portioning for breast filets and tenders in our big bird plants. And then longer term we do expect that demand for our small bird de-bone products with the key customer will grow and will place the opportunity to convert or the possibility to convert a big bird plant to that category as well. So that's still on our plan.

Okay. But that's not happening right now.

That's not happening right now.

Okay. Thank you.

[Operator Instructions] The next question is from Ken Zaslow of Bank of Montreal. Please go ahead.

Hey, good morning everyone.

Good morning.

My first question is what is the process and timing through to which you're able to pass through pricing in Europe for the higher lead cost, I understand that more in the U.S. and I understand that dynamic, can you just talk about the dynamic and the timing?

It's different for different customers Ken. But typically 10 weeks to 13 weeks is the lag time. Now in the cases where we don't have a formula in place we go much sooner. The other thing that I would mention that we're changing is typically or historically I'll say only the feed ingredients have been in those escalator agreements. We're now including not only feed ingredients but we're including utility cost changes, labor cost changes and other packaging and other cost changes so that we get the full effect of the cost impact as it happens to increase. And our team is going out much quicker to our retailers and we're employing our key customer strategy in Europe just like we have in the U.S. where we say it is our obligation and our responsibility to keep our key customers competitive in their markets for their customers and our consumers. And we see that paying off handsomely as we have increased our volume with the key customers that we desire to grow with.

So we would expect not just current quarter that you're in but the quarter after that we will start to see a meaningful change in the margin structure for where you are today to more normalized levels in not this quarter, but the quarter after that that 10 weeks to 30 weeks is that how to think about it?

Yes, that that you should see a price response 10 weeks to 13 weeks after the actual cost goes up.

And my second question is, can you talk about the foodservice demand. You know, as you said in your prepared remarks that you had more wing featuring. Can you talk about other featuring, how that sort of progressed throughout the year, what type of strength that will lead to in pricing?

Yes. In a general sense, we do see more foodservice features planned for this year, particularly on wings as we're experiencing high demand for wings right now and the price response has been commensurate with that, but we think we'll see tender, great tenderloin demand and through promotions and also breast fillet or sandwiches and other products, so we believe we'll see much stronger foodservice demand through the year for 2019 than we saw in 2018.

Great. Thank you.

The next question is from Jeremy Scott of Mizuho. Please go ahead.

Hi. Thanks. Good morning. Just wanted to follow-up on the comments on Europe, so, your contracting strategy, it sounds like you're passing through some of the operational risk to your customers. Can you talk about some of the key offsets that you might receive from that, so lower premium on the pricing or just generally a more stable margin but typically I can see the upside if you do get a price increase.

I would go back, Jeremy to our key customer strategy whereas, before we tried to serve virtually everybody and anybody in the marketplace and we, just like we did in the U.S. seven or eight years ago, we pulled back and we've deployed our resources and innovation and service and quality and mix to the key customers that we wanted to grow with. And so, what that allows us to do is make price less important in the total value proposition. And it does a couple of things. One, it makes our mix better, allows us to create a more profitable mix. It also allows our key customers to grow in the products that they want to feature with their customers and have greater amount of customer loyalty there. And so, it's a win-win for both of us. And so, we've taken on a lot of business with some key customers and then commensurately we've lost business with some customers that we desired to not do as much with.

And also, we have the potential increase in efficiency with all the synergies that we generated through the integration with [indiscernible] mix. We are ahead of the $50 million target over the two-year period. That was a fundamental factor for the good results year over year despite the $30 million having in because of the increase in these prices.

Right. And then just on the U.S., you made some comments around labor and how it may impact the ramp in chicken capacity, so first what are you seeing in your plans in terms of retention and is it [indiscernible] bid up in the wages for some of your key workers? And then secondly, are your internal expectations for chicken production growth over the next couple of years meaningfully lower than the external expectations just because of this problem?

I think our expectations for chicken supply growth are probably in line with most of what you see. 2% to 3% this year, I wouldn't expect a material change in 2020 over 2019, even with the new operations that are be - are going to be coming on board. The availability and supply of labor is definitely putting pressure on the ability to grow. We are increasing our wages. I don't know Fabio, if you have a …

$50 million…

-- $50 million year-over-year, so definitely we're having to pay more to get labor in addition to that we're installing more automation than we would have - had this not been the case. Giving up some yield, but in order to keep our plants running at capacity we realized, we're not going to have the labor supply that we would in and therefore have to automate and so we're also continuing to develop - trying to develop some proprietary automation to do some of the more difficult tasks in our plant to alleviate that pressure on labor. And I think every company is facing a - virtually that same pressure.

All right. And just on that to - your investment, can you share what percentage of your fresh chicken volumes today are sold as to both late quarters? And what's the expectation after you increase this de-boning mix?

It's minimal in terms of commodity like ours especially compared to five years or seven years ago. And I think we have one plant in our Big Bird network where we don't de-bone legs, and it's a plant, is close to the port that is more conducive to export. So we're wrapping up leg de-boning in we're ramping up like the [indiscernible] in all of our plants.

Yes, the big investment in terms of automation has been on de-boning the front of the bird.

Got it, got it. And maybe just last one, China implications, is there a reasonable expectations for P&L impact if we do get the reestablishment of the pork trade?

I think that would be net positive. Would it be material? I'm not sure I would go that far, but it would certainly be positive.

Okay. Thank you.

The next question is from Akshay Jagdale of Jefferies. Please go ahead.

Good morning. Thanks for taking the question. So I wanted to ask about demand. I know you mentioned future activity. It looks like it's going to be better this year, but can you just give us some context like now that we've had - we've gone through 2018. How would you characterize sort of what happened last year right? I mean obviously demand was pretty weak and much weaker than anyone expected. So when you look back and you look at all the data available like how would you summarize sort of what happened last year and then I have a follow-up for this year.

Last year obviously with the trade disruptions we had particularly in pork, we had cheaper pork prices competing with all proteins and retailers took advantage of those lower wholesale prices in pork and to some extent beef and put most of their features on beef and pork, very little featuring on chicken last year and we saw commensurate decrease in demand for chicken through 2018. We began in talking to our key customers in mid Q4 of 2018 they indicated that that was going to change in 2019 beginning in January and sure enough that that's been the case. We've seen stronger demand actually for chicken at retail in January. And it's moved through February and as I mentioned, Akshay, we're having to augment more of our supply in our retail plants than it has been normal because of that increased demand and that's pulling me from that big bird sector which is in some years fairly normal. We didn't get that last year and that's primarily what caused the large bird de-boning products to be much lower in price is because they weren't flowing into those retail plants as normal. And so what's different in 2019 versus 2018 is we're back to that normal pattern of big bird meat flowing into retail plants to augment the supply and at least in our case, I can't speak for everyone, but we've seen it a little bit stronger early this year than has been more.

Just to quantify, Akshay, the feature activity was 23% lower in 2018 when compared 2017. And in Q4 feature activity was 37% lower last year, we'll go back to 2017.

Okay that's super helpful. So you're saying - just so I understand that it's retail features because that's what you're talking about, but related to the big bird segment because there's an all - there's sort of an overflow out of that segment into retail that typically happened that was negatively impacted last year by this retail feature reduction. Am I understanding that correctly?

That's exactly, right.

Good. Good. And then so let's, can I ask about the foodservice side, the restaurant side of things. So how are you thinking about demand there and how it may be contributed to the weakness in 2018 and what's the thought in 2019 because what I hear, I'm sure you hear is too. Obviously McDonald's focused on fresh beef, everyone followed, there's a lot of beef available. Last year there was a lot of pork available last year. So it's going to be even more beef and pork available this year. So can you give us a high level view of like foodservice demand, what happened in 2018 and what maybe you're seeing in 2019.

In 2018 largely the same condition in foodservice as we saw in retail. What's different in 2019 versus 2018 is particularly early in the year we've seen much more featuring of [indiscernible] and tenders and we've seen a commensurate price response to that and we think that will carry through the year and then we think we'll see more restfully or sandwich promotions in foodservice. Sandwich offerings, chicken sandwich offerings as retail continues to outpace virtually anything else on the menu and we don't think that will change this year. And I think foodservice operators they don't want to overdo one particular product. So we think chicken will get more of the share promotions in 2019 at foodservice than we did in 2018.

And also as the foodservice prepared for their promotion, there is some preparation requirement. They cannot change the menus on the fly. And if you look at the prices of ground beef it's actually increased year-over-year, while the prices of Jumbo meats than [indiscernible] has been increasing.

Got it. One last one and this is your performance I guess relative to the industry, however you look at it right. You talk a lot about diversification, prepared foods and certainly I see it - I recognize it…

Yes.

-- but perhaps for investors who just look at let's say one metric like 0.3% margin in U.S. right, like that's the lowest it's been since 4Q 2012. Can you just help us put into perspective that number right like if you weren't diversified, where would that be several years ago? One of your competitors has talked about like a 600 point gap between their margins and sort of the industry the industry margins as a good proxy. And in the fourth quarter, it looks like you guys outperformed the commodity margin by a 1,000 basis points. So I do see the benefits of mix and everything you talk about, but can you help us just think through how you think about it and the impact structurally today versus when you started this journey? Thank you.

Sure. Thanks. Great question, actually. So our long-term incentive plan for management is solely based on our margins versus our visible competition in each of our regions. And so, for Europe it's clear with - if you see the publicly available results versus our results, we're - where we're clearly the winner there, and in Mexico clearly the winners there. In the U.S., we're also - we had a really for 2018, we had a really great year with the exception of two months October and November. Through the summer, we had as big a spreads versus our competitors as we've had in probably any year that I can remember. And then when we got the December numbers recently and our spread was back in December to where it was through the summer so clearly we like our mix we like our diversified portfolio and we like our relentless pursuit of operational excellence. And so, if you go back and look at the cut out for 2018, go back and compare that to where it was in 2011 which was a really tough year for the whole industry, and an extremely challenging year for Pilgrim's from a profitability standpoint, and then compare what we did in 2018. I think you see the results of our strategy, the results of our diversification, the hard work of our team, and I don't think that's going to change in the future, as a matter of fact we continue to try to refine that mix to make that spread larger because as we make the spread larger our management team and our overall team benefits from doing that.

And actually, I think our strategy and diversified portfolio used to be measured against the changes in the cycles and over time. We don't expect to compare every single quarter, as we don't have the higher than average exposure to stock markets, for a higher than average exposure to [indiscernible] but over the last five years although appeared with significant volatility on prices both domestically and internationally our margins were higher than all our public competitors in all of our geography and much higher than the average company compared to our benchmark.

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

Thank you for joining us today. We look forward to 2019 and believe the outlook for chicken consumption globally remains positive as consumers continue to eat chicken as a compelling healthy alternative. Our diverse portfolio, differentiated products and key customer strategy in conjunction with our geographic footprint will continue to generate a more consistent performance and minimize margin volatility compared to peers despite specific market conditions. We'll continue to identify new opportunities including Europe both organically and through acquisitions to refine our portfolio and offer differentiated customized products while pursuing our key customer strategy. I'd like to thank everyone in the Pilgrim's family as well as our customers, and always appreciate your interest in our company.

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