Good morning and welcome to the Third Quarter 2019 Pilgrim's Pride Earnings Conference Call and Webcast. All participants will be in a 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 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 third quarter ended September 29, 2019. 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 with 8-Ks and are available online at www.sec.gov. Presenting to you today are Jayson Penn, 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 Jayson Penn.

Thank you, Dunham. Good morning, everyone, and thank you all for joining us today. For the third quarter of 2019, we reported net revenues of $2.78 billion, an adjusted EBITDA of $258 million, or 9% margin, and an adjusted EPS of $0.45. We significantly increased EBITDA by 66% compared to last year, driven by rebounded performance across all our businesses, including U.S., Mexico and Europe. Our performance remains well balanced and as a result of our vision to become the best and most respected company, creating the opportunity of a better future for our team members. To support our vision, we are continuing our strategy of developing a unique portfolio of diverse complementary business models, continuing to relentlessly pursue operational excellence, becoming a more value partner with our key customers in creating an environment for safe people, safe products and healthy attitudes. We are appreciative of our team members for the improvement of our operations as well as during Q3. Our performance along with the markets is continue to grow across all our global operations. In the U.S., we experienced a much better environment in our fresh business compared to a year ago, most notably in commodity large bird deboning. Our prepared foods business continues to grow, reflecting the investments made over the past few years. Our European operations have continued to mitigate recent input cost challenges and we expect our results in Europe to continue growing for the remainder of the year. In Mexico, the market was in line with seasonality and performed much better compared to 2018. Our Q3 results once again reflect the diversity and balance of our portfolio which gives us a more consistent, consolidated performance, despite the volatility of specific market segments and geographies. We will continue to evolve our portfolio to better adapt and…

Thank you, Jayson, and good morning, everyone. For the third quarter of 2019, net revenues were $2.78 billion, compared to $2.7 billion from a year ago. Adjusted EBITDA increased to $258 million, or a 9% margin, which represents a 66% improvement versus $166 million a year ago, or a 6% margin. Adjusted net income was $112 million, compared to $52 million in the same period in 2018, resulting in adjusted earnings of $0.40 per share, compared to $0.21 per share in the year before, or 114% increase. Operating margins were 6.5% in United States, 11.5% in Mexico and 4.9% in Europe respectively. Our operating profit in the USA was $125 million, close to 70% higher than the result a year ago. Our small bird and case-ready business continue to perform well and generate consistent top tier performance. Large bird deboning materially improved compared to Q3 of last year and contributed to the year-on-year improvement in the U.S. business as demand was in line with normal seasonality, despite some softness in the boneless breast pricing. Our U.S. prepared foods continue to grow following the investments in the last few years and increased 11% in revenue and volume year-over-year during Q3. This growth has been fueled by our investment in R&D, sales and marketing to execute new product innovation. We have other initiatives in place to accelerate growth in this market and we’re expecting it to contribute a great portion of total sales in next few years, while adding to the stability in consolidated markets. Our operating profit in Mexico substantially increased to $38 million from a very weak quarter a year ago. Market prices during the quarter were volatile, but in average in line with normal seasonality. We expect the results for the remaining of the year to improve as Mexico…

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Ben Theurer with Barclays. Please go ahead.

Hey, good morning Jayson, Fabio. Well, first of all, thanks for getting the question and congrats on the strong results. Two quick one, if I may. So you briefly touched on the synergies for the Tulip acquisitions. So, I was wondering, I mean obviously, you’re just in the early stages here, but you’ve seen more increased demand support from Europe and China as a result of ASF, and I was just wondering how you feel about the potential to turn the operation from call it from breakeven into positive territory. When do you expect the timing of the synergies to fall through? And then I have – in regards to that I have actually one question on Mexico, but I’ll leave to that one first. Thanks.

Hey, Ben, thanks for the question. Yeah, Tulip has started its turnaround is making significant changes in its production network, mix and cost to improve its profitability. We expect the profitability to be the lower legacy assets in U.K. But with the improvements in the operations and in the pork and prepare food markets, we expect it to be in line with our legacy operations in Tulip’s, similarly to what we did in Mexico.

As we mentioned, ASF is the great opportunity for them. They are the U.K. largest big farmer and have all four plants approved to be exported. Sales value has increased already 50% year-over-year. And with increasing import price in Europe, many of the cheap imports that today goes to U.K. will stop going.

Yeah, just to add, very similar to Mexico, very similar to the GNP acquisition. This will take some time and we believe 24 months is a good number for us to have this business right sided relative to our legacy business. As Fabio mentioned, 100% of our assets Tulip are now China approved. We’ve seen a lift in both revenues and volume to China as the EU as well as exporting meat into China as well. So, we’re seeing an immediate lift from the ASF impact in Tulip. And again, our operational efficiencies, our key customers’ strategy as we right size, the portfolio, the channels and mix of products and Tulip will take some time. We’re absolutely thrilled about the opportunity. The assets are well invested with Tulip and we’ve been on the ground for several weeks and we believe in the team and the people at Tulip. So, we’re really excited about this opportunity.

Okay. And then just a quick one on Mexico and obviously with the more color on dynamic and obviously with maybe crop price is going higher and we might as well even see more. Usually in Mexico, two strong quarters and the quarter assets just completely falls off and a lot of product still have at least, they somehow more technical into the slaughter process and you get a significant oversupply in the relatively short period of time. Have you seen any dynamics after now relatively two – relatively strong quarters particularly second quarter was very strong, third quarter continue to be strong? Anything we would expect them into 4Q something similar likely to happen like 3Q last year maybe some negative results just as a matter of fact, and it’s quite rational market?

Mexico has a different seasonality than U.S. And typically the third quarter is a weak quarter because of the school recession. So, like we always say despite…

Mexico is a growing economy. I think last number of the GDP growth was not great at Mexico, but in general is a growing economy. The population increase their disposable income. It leads to a significant growth in protein consumption. We’re increasing our volumes both in fresh with our expansion and in prepared foods by delivering innovative and expanding our premium value added products.

As Fabio said, economy in Mexico is relatively flat. It’s tied as you know to the U.S. economy. I will also say this, in a flat or declining economy, we do see trade down from other proteins into chicken. So, just because of the economy is called flat to weaker response over the last three quarters. We don’t expect to see any demand destruction of chickens in Mexico.

Okay. That’s all. Thank you very much and congrats.

Thank you.

Thanks, Ben.

Our next question comes from Heather Jones with HJR Research. Please go ahead.

Good morning. Thank you for taking the question. I may ask some repetitive things; I have been switching back and forth between calls. So, I was hoping to talk about the contracting season and how Pilgrim's is approaching this any differently this year, so if at all given the likelihood of stick shifts and supply demand in 2020? And any observations you have on how the industry is likely to approach contracting season given the same dynamics?

Yeah. Heather, thanks for the question. I would say the contracting season is moving somewhat slower this year. And there’s a lot of moving parts. The dynamics are becoming more dynamic as the time moves on. So, I would say it’s a little slow. We’re cautiously optimistic relative to where proteins are today versus where they’ll be within 30 and 60 days from now. So, we’re approaching this slow. We do know that ASF is becoming more part of the discussions. We do know for example, Australian beef trim this is something that is not been called widely discussed but the U.S. enforce beef are starting to slow down affecting the hamburger market. So while there are major QSR looking to contract beef on the forward basis, we’re also hearing that there’s not many sellers really willing to forward price. So, that’s falling into part of the chicken dynamics as well.

I’ll just add Heather, that is more on the prepare food side. Especially, on the trade pack, we have a differentiated business model. We have a true partnership with our key customers and we help them grow their brands while offering a full range of products from tailor natural, higher order attribute offerings like organic. So, we don’t have annual contract negotiations because our prices don’t follow the volatility of the commodity market. I did not react to chart increases in strong spot markets and does not follow the tracks. As an example, our volumes in this segment increased from last year and our prices are 3% higher.

Yeah, just a further on that, five years correcting that, our trade pack business has been very strong. We’ve been tight to short all year and we don’t. So part of our business is not contracted, but we’re delivering service and quality to our key customers growing their business as pulling through the demands through our business. And we’re seeing that every day in our case ready business.

So, when I am thinking about how PPC is positioned for and I’m thinking about the U.S. So, you have a portion of the business of cost plus, you have a trade pack and then you have your large bird. And the trade pack I get the key customer concept and it’s clearly served you guys really well. When I’m thinking about your exposure to potentially large price increases, is your large bird business really the only segment that would benefit in 2020 from strong pricing or are there certain thresholds in other businesses that if you surpass those pricing lose up for you?

Well, even within our small bird deboning that this is, Heather, we have upside as well with some of our non-contracted business. You mentioned our large bird deboning operations. We’ve made great strides over the last two years in this business operationally and from a sales perspective. We will gain all of the lift on the back half obviously and then the white meat lift as well. There’s some trade pack lifts as well from the dark meat perspective; we’re going to see that we do trade on the market. So, we do have that list as well. But again, our fresh meat service business, we have lift there from our commodity large business. I think as the commodities move, we’ll see not just our commodity big bird deboning business move, but we’ll see this shift throughout each sector of our business in smaller and larger ways. But you did highlight, the largest piece of our business will be impacted by big bird, but each one of our businesses will be impacted by higher commodities markets.

Awesome. I just have one last question. So you guys have just been very proactive and converting plants to more on trend, better margin businesses. Do you anticipate any conversions into 2020, whether it’s moving like dedicated plants like you did at Sanford or whatever, or should we anticipate any meaningful conversions going into 2020?

Yes, we have another key customer that will be coming on board. Very excited about that. It will be happening in Q1. There won’t be any major disruptions to our facility. But Heather, as he said, when we – our new management team came in 2011, one of our strategies was to create the most optimal portfolio and we’ve been relentless about that. And when we have great service and we have great quality and deliver to the customers’ expectations, we continue to grow, and we’re going to add to this portfolio in Q1 of 2020. So we’re really excited about that.

[Operator Instructions] Our next question comes from Tim Perz with Stephens Inc. Please go ahead.

Hey, thanks for the question, guys. This past weekend we saw reports that chicken being included in phase one trade deal. So, I said a couple of questions related to that. First, do you have any facilities that are cleared to import to China once the ban is lifted? Or could you walk us through the steps needed to be taken for that to happen?

Yeah, all of our plants are able to export. I think what we can’t export to China is because today they have a ban because of avian influenza since 2015. So different from all other countries in the world, which clear that ban after 6 months to 1 year, China kept that in place. So the moment they lift that ban, which is being imposed for trade reasons, we will be open to export to China, all of our plants are open to export to China.

Okay, thanks. That was helpful. And then, could you frame up the potential incremental sales opportunities that would bring for Pilgrim’s, I realize many parts go to rendering in the U.S., but understand that some are currently export. So, I’m just trying to frame up that potential earnings power uplift for the company? And then, is there any chance that China buys leg quarters this time around with the inflation that we’ve seen in the country. I understand that typically they just buy parts from us?

Yeah, that is a great question. I think there are direct opportunities and indirect opportunities. So I think the direct opportunities in the past, so we’ve been sending some parts to the rendering or selling to other destinations at a much discounted price with the opening of China, there is a good outlet for the parts. I think there are some indirect opportunities as well as China continues to consume more meat from other destinations. Those markets began an opportunity for the United States. China acquired some leg quarters in the past, I think in 2011 and in other years, so there is an opportunity for the leg quarters. But we believe that more than just direct impact is the indirect impact that they will help lift the leg quarter pricing throughout the world. And as you see, the inventories of leg quarters in U.S., we continue to be reduced. Inventories in the United States for leg quarters are 25% lower than a year ago. So there is a lot of opportunity in that regard. Even breast meat, today with the breast meat at the prices that they are trading here in the U.S. there are some opportunities to export to China or to other destinations.

Yeah, Tim, and in 2014 Pilgrim’s exported in excess of 200 million pounds to Hong Kong and China. So, there’s no reason why those numbers won’t go back to normalized levels. If you look at exports to China, export is outside the U.S. that really dominated trade. Brazilian pork exports to China were up 48%, beef is up 11% year-over-year, Argentine beef exports are up 104% year-over-year, and China now represents 70% of the total beef exports. And I talked about this a little earlier, but Australian beef exports to China were up 73% year-to-date. And their inventory appears to be liquidating and meet the demand, due to the drought, the ongoing drought in Australia. So there’s a lot of exports moving throughout the world into China. And they’re actually dominating the trade. The USDA, recently said, China is going to account for 30% of the world’s beef trade in 2020, and that’s up from about 8.5% in 2015. And they’re also going to account for about 35% of the world’s pork trade, that’s up from about 15% in 2015. So there’s an absolute availability for the U.S. if there’s a trade agreement in phase one for the U.S. market to resume and possibly exceed where it was in 2014.

Okay. Thanks. That’s super helpful. Do you have an approximation of the amount of pounds that were shipped to China and Hong Kong last year for Pilgrim’s?

No, I don’t have that number, Tim.

Okay. Thank you. Thanks anyways. I’ll pass it along.

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

Hey, good morning, everyone.

Hi, Ken.

Good morning, Ken.

I have two questions. First is on the Mexican operation, how do you think that the African swine fever, I know everybody talks about the Europe and selling the pork to China, as well as the U.S. How does it affect the Mexican operation when you think about your historical 10% margin? How incremental would that be to Mexico, if Africans swine fever trade continues and how is that work out for that business?

Ken, thanks for the question. I would say indirectly. So Mexico imports like what breast meat from Brazil, that’s one way to import the other ones obviously from the U.S. So, if African swine fever and the trade deals start to happen, you could see both of those import streams dry up a little bit, creating more of a supply issue in Mexico. And I would argue that supply and demand is very dynamic in Mexico. And so, you see the volatility that the Q-over-Q volatility in Mexico, it’s mostly due to the supply and demand basis as it flows through our results. So I would tell you, if there’s a lot of indirect ways to Pilgrim’s.

I think connected to that, Ken, there’s a lot of U.S. pork that is going to Mexico. There was very high competition, especially in Q1 this year that reduced a little bit. So as the ASF poses a big opportunity for the U.S. pork operations, less pork will go to Mexico, and that is a lift for the chicken market there.

Then a bigger question, and they tend to ask this on an often, maybe there’s greater clarity to this. If I think about your operations now, again, you’ve made progress with cost savings. You made progress with customer one. You keep on moving forward in terms of your margin structure, less commodity. If I was to take this environment and put it back five years ago, how much more profitability or how much more higher margins do you have relative to when you started this journey? And, because isn’t that the structural change that has actually happened? How do we quantify that? And how do we put that in terms of some parameters to that?

I think, Ken, we believe the compared results with our direct competitors, right. So, we have the benchmarking system, and we have the public traded competitors. What we want is to be those competitors. And they believe we have the best portfolio to be the best. As all of our operation improvements programs happened, what we saw over the last 7 to 8 years is that we created more than $1.2 billion in efficiencies, and you can test those efficiencies based on where we were in the rankings 8 years ago and where we are today. So today, we’re operating at the top tier in the segments we are. So I think the way to see this is that, whatever the market will be able to offer as profitability for the average company will be better than that. And I think that's the way to see.

Yeah, Ken, I would also argue that we're leaving a lot on the table. We've identified in mix portfolio operational efficiencies another $300 million that we absolutely are not capturing today that with better execution, and a better portfolio and strategy, we can capture that. So although we've made improvements, there's a lot still left on the table for us to capture.

[Operator Instructions] Our next question comes from Mike Piken with Cleveland Research. Please go ahead.

Hi, this is Chris on for Mike Piken. Thanks for taking my question. I'm curious if you can provide us an update on your labor situation, how you think about labor costs going into 2020?

Yeah, Chris, thanks for the question. I will tell you in a tight labor market. One of the competitive advantages that we've employed over the last year, we've actually with a shift in strategy have improved our labor. We are as a company fully staffed today. I couldn't tell you that a year ago or two years ago. So despite the tightening labor situation, our facilities at Pilgrim's are fully staffed today. Now we've taken about $55 million to $60 million of increased wages that have flown through the system over the last year. But I will absolutely argue that one of the reasons for our improved margins is our people. And making sure that our people remain at the foundation of our business has enabled us to move our mix forward and actually execute our strategy in a way in which we couldn't do a year ago or two years ago. So I will argue that in today's environment, our labor situation is at its peak, its best it's been in over the last three years despite the tightness in labor. And it's actually driven more revenues than we've invested in our people financially.

That's very clear. Thank you.

Our next question comes from Peter Galbo with Bank of America. Please go ahead.

Hey, guys, good morning. Thanks for taking the question.

Good morning.

Just wanted to do asked, you know, with one of your key customers re-launching the chicken sandwich here in the next few weeks and you know, breast prices on small birds trading at a pretty high premium to jumbo birds. I guess is there anything structural in that that should cause small bird you know breast prices to continue to be at a significantly higher level on a run rate basis going forward? Or is there something that can be done that you expect jumbo prices to kind of catch up in the near future? Is there not enough small bird capacity, can you convert you know some of your existing capacity over to small bird? Just any color there would be helpful.

Yeah. Peter just from commodity market basis, small bird breast meat is trading at 3X of jumbo meat. And that's a historical high spread. So I think that sort of tells – that tells a story. But I'll also argue that till October, one of our core competencies is this business. And while many companies have moved in and out of small birds, we've maintained our leadership positions in this business. And so structurally again, I think the historical spread tells you what's happening now if these – if the chicken sandwich continues to increase from a demand perspective. I think that does bleed over into the medium birds and some substitution between medium and jumbo birds will start to take place as that dynamic moves through the system. But small bird business is very, let's call it tight today as demonstrated by the price bird alone. And I also argue that you could see some shifting to medium bird to capture some of that sandwich meat, and then it'll substitute north to the jumbo verse. But again, our position is very strong in this business. Our team execute at very high levels in this business. And it remains a core competency. It will remain a core competency going forward.

And just maybe on that point, I mean, if you were to consider you know, changing overcapacity to do more small bird, if this really is a new dynamic. Just can you walk us through the dynamics of how long that would take, maybe you know cost implications, whether or not you're seeing any competitors who else competing small bird kind of thinking about doing a similar thing?

No, the barrier of entry is not great. We can make a shift. It does require some shifting on the backend of the facility. But front end from a live operations perspective through that supply chain, not an issue, but there will be some CapEx requirement back end. But again, there's not a wide note for companies to do more small birds. They haven't. Obviously, you'll see all of the new facilities come on or have been taste ready. They've been retail, they've been jumbo. They've been few new entrance participants in this business where we remained a leadership position.

Some of the challenges of converting a big bird plants to a small bird plant is also the entire network that you build for the big bird in terms of all your feed meal. So if you're going to start a small bird business, then you're feeding will be with excess capacity. You have growers that you set up that are set for large birds, and they take more time on the field. If you move to small birds, then you need to reduce that significantly. But the biggest barrier to entry is probably the position with the key customers. If you need to feel an entire small bird plant, you need to have a partnership with one of those customers. You cannot just build it and expect to sell the meat in the open market because there is no open market. It is a very tight spec that takes time to get the plants approve. You need to have a true partnership to really be successful in this business. And that's why we stayed in this business just like Jayson mentioned and we develop those relationships. So this is not a spot market that if you start producing small bird meet, you're going to be able to access. There's no spot market for this meat.

Our next question comes from Bryan Hunt with Wells Fargo Securities. Please go ahead.

Yes, thank you for the question. You know my first question is, you know, with the phase one agreement, potentially including poultry with China. Have you had any initial indications of orders from China and as well as have you seen any immediate bump ups in dark meat and/or crop pricing?

No. Bryan, yeah, it's simple answer. No, we haven't seen – we haven't seen anything recently. But I will tell you that over the last week, just short term dynamics, we have seen some increases in demand on like quarters. So whether speculators or not, our like quarter prices are starting to creep and we're taking up money for like quarters out front for the rest of the year. So I can't tell you what the full dynamic of that look like it and why that. But we are seeing some increased demand for like quarters whether it's ASF driven, Chinese speculators, I don't have that answer. But we are seeing like quarter start to trend upwards.

But again, if you look at the inventory, they are 25% lower than last year. And the industry in U.S. deboning a lot more like quarters for the domestic production. So the supply of like quarters for exports from the United States is actually being reduced.

One more add-on to that, there's been a different than 2018, Q3, Q4, there's been a floor, relative floor foot on breast meat. And the reason for that is export. So we're seeing more – we've taken export breasts meat orders to put a floor against breast meat over the last call it 30 to 60 days. We didn't see that last year. So that's been really putting the floor on breast meat this year. So the expectation for us is to trend near sideways for the rest of the year, just due to the exports if that should hold up.

And then my follow-up question is, Jayson, you talked about a little earlier that the company has identified you know, at least $300 million of incremental mix and savings benefits. Can you talk about what timeframe, you expect to maybe garner those benefits, as well as maybe where you see the biggest opportunities?

Yeah, I would expect it sooner than later. But I would tell you that 300 million should be captured within the next two years. That's our U.S. business. And it's really about moving again continuing the key customer strategy, our commercial, our big bird business has done a great job year-over-year, fantastic job from a sales execution perspective. We're moving up the page. We've been talking about this for at least five to seven years relative to our big bird deboning facilities, bit lagging the industry. And I will tell you that that's been our call it focus of operational excellence over the last year and a half. But our sales program is now being executed inside our facilities. We're gaining lots of momentum. So that's a big piece of our – that's a big piece of our operational excellence from where we've come and where we'll go as well. Again, we've got lots of room left on the table to continue to grow our prepared foods and branded business within the prepared food segment. We're still leaving a lot on the table from our prepared foods operationally, commercializing products with our go-to-market strategy as well. So lots of opportunities in prepared foods and continuing our big bird to excellent. So those two categories will bring us the majority of the incremental margins.

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

Thank you. We're encouraged by our year-to-date results in 2019. We expect to generate improved performance for the full year compared to 2018. We believe the outlook for global chicken consumption will remain positive and consumers around the world continue to view chicken as a compelling, healthy alternative. Our diverse portfolio differentiated products tailored to support key customer strategy in conjunction with our geographic footprint will continue to produce consistent performance and minimize margin volatility in challenging market conditions relative to peers. We will continue to identify new opportunities for both organic and acquisition growth, refine our portfolio and offer differentiated, customized high quality products to support our key customers' needs through constant innovation. Our team members are our competitive strength. We will continue to invest in our people who drive our results by providing them greater opportunities to contribute to our shared success. We'd like to thank everyone at Pilgrim's family, including our family farm partners, suppliers, and our customers who make our business possible. As always, we appreciate your interest in our company. Thank you for joining us today.

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