Pilgrims Pride Corp (PPC) 2014 Q1 法說會逐字稿

Good morning and welcome to the first quarter 2014 Pilgrim's Pride earnings conference call and webcast.

(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 Rosemary Raysor, Investor Relations for Pilgrim's Pride. Please go ahead.

Good morning. Thank you for joining us today as we review our operating and financial results for the quarter ended March 30, 2014.

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 as 8-K available online at www.SEC.gov.

Presenting to you today are Bill Lovette, President and Chief Executive Officer and Fabio Sandri, our Chief Financial Officer.

Before we begin our prepared remarks, I would 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 the actual results to differ materially from those projected in these forward-looking statements. Further information concerning these factors has been provided in today's press release, our 10-K, and in many of our regular filings with the SEC.

I'd like now to turn the call over to Bill Lovette.

Good morning, everyone, and thank you for joining us today. We're very pleased to be here this morning sharing our first quarter results for 2014.

We've had a positive start to the year, with over $2 billion in net sales and EBITDA of $203.5 million, with a resulting EBITDA margin of 10.1%. Our net income of $98.1 million improved by 80% over 2013's reported $54.6 million, resulting in earnings per share of $0.38 for the quarter. This includes the effects of being a full taxpayer in the US for 2014.

Our financial results reflect the consistent execution of our strategy paired with continuously rising expectations. We've deployed resources to ensuring our place as a valued partner to our key customers through more targeted category management, detailed knowledge of our customers' preferences, and innovative solutions.

We are seeing many of our customers, especially within the food service sector, seeking expanded product offerings with chicken gaining a greater market share. To achieve this, we are systematically working through a product and customer segmentation strategy, identifying grow, sustain, and harvest strategies for each of our product offerings across our customer portfolio.

Given our supply chain consolidation and optimization decisions the past three years, coupled with our strategy to drive ownership and accountability deeper in the Company, our sales mix and price impact continues to drive incremental value to our bottom line. As an example, the average industry cut-out for the quarter declined 13.5% while Pilgrim's decreased only 2.1% this quarter, versus the same period last year.

We've been able to manage our portfolio well, and now the next step in creating growth and in reducing volatility is enhancing our family of brands. We are committed to developing these brands by appropriately aligning our core competencies with our customers' needs to establish an effective and deliverable brand promise. These steps align with our goal to be a full service provider to our key customers, assuring the quality and consistency of our brand, as well as building consumer loyalty.

The relentless pursuit of operational excellence has driven an evolution in our processes encompassing yields, plant costs, and ongoing operational improvements. We've achieved approximately $59 million in operational improvements year-to-date, resulting in an annualized run rate of $235 million against our target of $220 million for 2014.

You may also remember that during the propane gas shortage in February, we put in place a supplemental payment to assist our growers in offsetting the rapidly rising cost. We paid $3.5 million to our growers during the quarter, and while the program is finished now that the price of delivered propane has subsided, we are still seeing chickens processed in March and April with the lingering effects of the winter storms in January and February.

I do want to reiterate that we achieved the $59 million in operational improvements despite the challenges presented by the winter weather. Our value-added exports increased both on a volume and revenue basis, consistent with our goals to develop this channel. We've done this through targeted sales mix changes, adapting to dynamic market demand with the right products at the right time.

Some of our objectives for the remainder of the year include selling our Savoro brand in all retail sales channels in Mexico, as well as increased sales to direct customers in other destinations. We have double-digit dollar and volume goals that we are confident can be achieved throughout the course of the year, as well as key performance indicators for our export group to maintain premium sales price compared to the average company. We have a more comprehensive understanding of the export markets than our competitors, which is aided by our affiliation with JBS, providing more effective market access and better market intelligence on the ground.

The collective impact of changes we've implemented to date is that we're able to mitigate some of the risk inherent in a cyclical industry. Our portfolio breadth provides the flexibility to adapt quickly to changing market demands, while operationally we can adjust our production to meet consumer needs timely. We work in the mindset of being the best operator, regardless of market conditions.

Our Mexican operations had another very strong start to the year. Despite a weaker market when compared to last year, we compensated for the lower price with improved operations, and we were able to achieve higher margins than the same period last year. We saw strong demand for chicken enhanced by supply tightness in competing proteins during the quarter. The first quarter had similar pricing trends to last year and these conditions continue to date, creating a robust pricing environment into the second quarter. This is also seasonally the height of chicken demand in Mexico.

We've seen good progress to date on our Veracruz project that we mentioned in our last earnings call. We have a location identified and we're starting with the engineering and planning phases of the feed mill and hatchery, and we expect to have the first chickens available to sell during Q1 of 2015.

As we've been saying for several quarters now, the entire supply chain of the US industry has been constrained for a while. Starting with breeders, due to the reduction in supply chain in previous years, we will continue to see restrained supply likely through mid-2015. Cumulative pullet placements remain relatively unchanged, lagging both the prior year and five year average. It's possible to see some weight increases to shore up supplies, but, to date, availability of many fresh parts is apparently short of meeting current demand levels.

Although the six weeks trailing average of egg sets is 1.1% higher than 2013, broiler hatching levels have been lagging behind both the 5 and 10 year averages. Industry production in Q1 continued to be restrained by a lack of hatching eggs. Forecasted chick placements through May 2015 implies that an expansion of 1% to 2%, which may occur beginning later this year.

The most recently reported cold storage levels show a deep reduction in inventories, with the total chicken at 6% below the same time last year and 14% lower than the previous month. Wings also showed a significant decline in storage levels, indicating that demand has reacted to pricing levels in the market. At the same time, we've experienced a strong price increase in breast meat and even a shortage of product in the specific case of tenders.

Our net dock is now higher than at the same time last year, and Georgia dock reached $1.08 per pound for the first time. On that front, current demand is strong and shows no signs of letting up. Especially for tenders, small wads and boneless, skinless breast portions. Leg quarter demand remains well-supported with boneless dark meat consumption growing in the US year-over-year.

Chicken remains the most competitively priced protein, especially when compared to surging prices and lack of availability for other meats. The supply cycle for all three major proteins is strained now and we anticipate this will continue until mid-2015.

On the grain side, feed costs are forecasted to increase on expectations of lower plantings, but we do not see this as a threat to margins at this time. Planting and growing weather will be the next major market input for corn.

Recent contract highs on soybean meal indicate that stocks may be a bit lower than previously expected, while indications are currently that the vast majority of corn and soybean plantings will have good moisture and weather for the growing season. We currently have minimal coverage for corn and soy with the expectation that prices may decline after the June and September crop reports and have already identified an opportunity to cover a portion of our summer soybean meal needs from South America. We continue to evaluate alternative cost competitive options as we see an opportunity to do so.

At this time I'd like to ask our CFO, Fabio Sandri, to share some thoughts on our financial results.

Thank you, Bill and good morning everyone.

Our revenues of $2 billion were a product of our increasing pricing strength over the course of the quarter. Despite market prices lower than last year, our mix and operational improvements combined with the lower cost of inputs allow us to significantly improve our margins. During the quarter, we faced some challenges to the weather, which prevented a normal operation of our plants during certain cold days and incurred supplemental propane payments to assist our growers during the cold snap and increase the utility costs in our plants as well as increased transportation costs.

EBITDA of $203.5 million or 10.1% demonstrates the strength in both our US and Mexico operations and the ability for our team members to adapt to market and operational challenges. We continue to effectively manage our SG&A and the introduction of zero based budgeting has helped us to stay in line with last year's SG&A, despite strong bonus incentives paid for our team members. Included in SG&A is also $1.7 million in nonrecurring restructuring costs related to the shutdown of the Boaz plant during the quarter.

Our earnings per share of $0.38 for the first quarter includes the impact of becoming full taxpayers in the US for 2014. We recognized $52 million in income taxes during Q1, resulting in an effective tax rate of 35.7%, which we expect to be similar for the remainder of the year. Net interest expense for the quarter of $18.7 million was $5.9 million lower than in 2013, primarily as a result of our lower usage of our revolver combined with the refinancing of our term loans in the second semester of last year at more favorable terms.

In the net expense for the quarter, we have incurred $2.4 million in non-cash expenses for the early extinguish of the B1 tranche of our term loan, which was paid in full during the quarter. Subsequent to the end of the quarter, we also paid the more expensive term B2 loan in full without any make-whole or penalty fee, having now full variability of around $1.1 billion on the revolver and a new term loan with very competitive interest rates. We ended the quarter with a net debt of $155.5 million, less than 0.2 times last 12 month's EBITDA.

Given the strong debt markets, we continue to look for alternatives to reduce the cost of the 2018 notes or to take them out at the end of the year, when we have the redemption option. Our operating cash flow was $196 million, compared to $21 million in the prior year. Our effective management of our working capital continues to strengthen our cash flow. During the quarter, we generated an additional $40 million in free cash flow by continuing our process of reducing our finished goods inventory, maximizing our return on capital.

We continue to identify CapEx projects with great returns inside our Company. We invested $50 million in the first quarter, and we are committed to projects to continue to profitably grow our business, increase our productivity, quality, and safety.

Pilgrim's has an advantage compared to the other companies in live operations, and we are reviewing our [feed mill] footprint to identify opportunities to further increase our competitiveness in the sourcing and producing of feed. Additionally, we are reviewing options for our line optimization to expand our further process capabilities.

In Mexico, like Bill mentioned, we continue to advance in our plan to expand our capacity. We expect to start producing live birds in the first quarter of 2014 -- 2015.

We are also dedicating time and resources to determine how to best deploy our available capital and create shareholder value. We are evaluating accretive M&A opportunities to complement our portfolio as well as dividends.

Operator, this concludes our prepared remarks. Please open the call for questions.

(Operator Instructions)

Our first question comes from Brett Hundley with BB&T Capital Markets. Please go ahead.

Thank you and good morning, everyone.

Good morning.

Bill, I wanted to go back to commentary on the boneless, skinless market. Boneless, skinless around levels of this time last year. Do you think that breast meat can continue on the same trajectory that it took last year, and would just be curious to get your comments around that?

Brett, I do believe that it can continue on the same track last year. We're noticing that this year, different from this same time last year, trading values are much stronger, meaning that we've been selling breast meat at near market levels with no negative basis and in some cases positive basis. And, in particular, natural fall breast portions from small birds continues to be in very tight supply and great demand.

So, we may see a lull in June. I don't know that for sure. We did last year. But, breast meat at this moment seems very, very strong, and like I said in the prepared remarks, we've noticed a lot of food service operators have put incremental promotions on their calendar and are featuring more breast meat portions in their menu offerings.

Just to add also, the demand for tenders is very supportive of the breast meat, because tenders are very good demand, and breast meat can be a substitute for that.

Perfect. That's what I was going to ask. I appreciate that, Fabio.

And then my second question, Fabio, would you be disappointed if your capital structure remained as such into FY15? Would you be disappointed if you remained, quote, under-levered into FY15?

Brett, we're looking and our priority is to create shareholder value, so we're looking into what's the best and optimal capital structure. And, to that we're looking to all possibilities including dividends, acquisitions, and greenfields.

Okay. I'll leave it there. Thanks, guys.

Thank you.

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

Hello, good morning.

Good morning.

Bill, you had highlighted kind of the improvement in chicken pricing, but your contract structure is such that your pricing actually lags the spot market. If you had to give us a feel roughly, how much does your pricing lag? So, the improvement we've seen in spot pricing, when do you really get the full benefit of that?

Farha, you may have misunderstood my comment. In the prepared remarks, you may note that the market compared to last year declined by 13.2%, while our portfolio and total pricing only declined 2.1%, and that is attributable to the breadth of our portfolio and the diversity of our pricing strategy across our entire Company. And, while it's true that if you look at the spot market, not every pound that we sell is on the spot market, which is a huge benefit in a quarter like we just finished, as we just demonstrated.

But, at the same time, we do have a lot of our pricing that is either weekly quoted or monthly quoted, and it does catch up, and I think we just finished the month of April and it was remarkably strong in terms of margin, and I owe that to the strength that we gained in March and further into April. If you really look at the pricing charts, prices did not go above the five-year average until the first of March. So, we had two-thirds or actually more than two-thirds of the quarter where pricing was weak relative to last year and the five-year average, and it was only the last four weeks that we began to see a pick-up in pricing.

So, I think our portfolio effect definitely worked in our favor this quarter, and we'll continue picking up steam as we go into the year and as pricing improves.

And so, maybe I can ask that another way. If you look at pricing here in the second quarter that you're experiencing versus what you realized in the first quarter, year-over-year or sequentially, how do you think pricing will look for Pilgrims in the second and third quarters versus the first quarter?

Our net dock at this moment and for most of April has surpassed what it was last year, and the way we have our pricing structured overall, we will definitely benefit from stronger markets. At the same time, though, again due to the breadth of our portfolio and our pricing structure, if we see a decline either late this year or sometime in 2015 or whenever, as inevitably we will, I think that that's when the breadth of our portfolio effect will kick in and also be favorable.

So, said another way, we're not going to pick up in market pricing like a pure play big bird de-boning operator would, where 100% of our product is sold on the market, but we have enough of our business priced that way that we will definitely see a positive effect.

Okay. And then just on Mexico, your profits were better than we had expected. Going forward, how should we think about Mexico and the profitability in that business over the next two or three quarters?

The market is trending very similar to last year, so we're entering the phase of the calendar where demand is strongest for chicken in Mexico and we're seeing that reflected in pricing just in the last few weeks. And so, from a trend standpoint, we don't see it to be significantly different than last year. The difference is, feed costs are much lower this year, so that should help us expand margins in Mexico.

Okay.

Demand in Mexico is growing year-over-year as in any other developing economies, and that's why we chose Mexico to do our expansion. We expect margins in Mexico to be double-digit every year.

It is different seasonality when compared to the US, where the first and second quarters are stronger than the third and fourth. But, like I said, for the average of the year we expect double-digit margins.

Thank you.

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

Thank you. I guess my first question is could you quantify, on top of the $2.5 million in incremental propane payments, what your energy expenses were for the quarter or how much they increased, as well as your transportation cost?

Sure, Bryan. Great question. That was $3.5 million in the fuel supplement as opposed to the $2.5 million. If you look at the winter weather effects on utility cost and transportation cost, particularly in rail service where we had to augment corn and soy deliveries by truck as opposed to rail, it cost us in the tens of millions of dollars, incrementally, versus what we had expected. And, that's about as far as I can quantify it.

From specifically utilities, it was significantly more, about $4 million to $5 million more than we had expected it to be. But, all in all, when you take into account utilities, propane, and then transportation cost, it was in double-digit millions of dollars for the quarter.

Outstanding. I'd like to expand the discussion on pricing a little bit. You all are making a concerted effort to drive growth at your branded business, which should create some margin stability over time. Can you talk about the early successes on selling of branded and further processed goods and whether that is contributing currently to your outperformance on pricing relative to your peers?

Sure. Good question, Bryan. To note, we decreased, as a percentage of our portfolio over the past two years, our Prepared Foods business. We got out of some business that was not near as profitable as some other business that's not in the Prepared Foods, and so we shrunk that business down to where, basically, all the business that we have now is profitable, with the idea that we're now going to expand in further processed and Prepared Foods.

As I noted on the last call, we hired Chad Baker from Smithfield, who's spent his career in building valuable brands across a processed meat portfolio, and Chad has been with us now for about six or eight weeks, doing a great job. We've engaged in some brand research to better understand what we can promise in terms of our brands, and we'll be rolling that research through this year and developing, as I mentioned, a brand strategy to create growth and more stability in our earnings stream in the future. We're very excited about having a new team in Prepared Foods and we'll definitely be focused on that in the future.

And my last question is you all have mentioned M&A as an opportunity to put additional cash to work and maybe lever up the balance sheet. There was an attractive company in the food space, Michael Foods just sold for $2.6 billion. In the context of M&A, is there any way you can give us an idea of the -- whether that is a size of an acquisition that is outside of the realm of possibility, or are you looking for something that's much smaller on a tuck-in basis?

And that's my final question. I really appreciate your comments.

Sure. I would tell you that yes, that's not outside the realm of possibility. We have an extremely strong balance sheet today. We're seeing a lot of demand for our balance sheet to be re-levered in a way that creates shareholder value long term, and we're not afraid to look at a big deal, if you will.

We want to make sure that the deal that we look at is truly accretive from a long-term basis, and we're very busy right now making a lot of valuations on possibilities in M&A. We see that as a strategic part of our growth plan in the future.

Thank you very much.

The next question comes from Ken Zaslow with BMO Capital Markets. Please go ahead.

Good morning, everyone.

Good morning, Ken.

Can you talk about your -- you mentioned on your call that you were going to be sourcing corn or soybeans from South America. Is that different than last year? Can you just talk about that strategy?

Sure. We sourced corn last year from South America up to about 10% of our needs, I believe, through July and even some later than July. This year, though, we're sourcing soybean meal, and with US soy supplies being very tight and bases in South America being very favorable, we've been able to secure commitments for soybean meal into the summer for our needs in soy meal.

What competitive advantage do you have on that? Like, what's the price of which the advantage that you have by doing that ex -- or including freight?

It's very simple. With South American bases being much weaker than US bases and crush margins continuing to be very strong in the US, that's pulling both beans and meal into the US supply, and we're just taking advantage of that. We have an expansive global look across all commodities with our affiliation of JBS and our hiring of Aaron Wiegand last year from Bunge, and we are able to take advantage of that collective knowledge across the globe to make sure that we get the best value in all of our feed ingredients.

My last question is in terms of the customer segmentation of your brands. How far along are you in that? And, do you see your brands go all the way up to premium down to value, or are you going to be more concentrated on the value side and is there a real value to having a branded or customer segmentation of that? Just curious. It's an interesting strategy.

Good question, Ken. I believe at this moment that we'll have a plethora of brands across all the different value segments. Certainly, have participated in the value brand segment for many years with a couple of our different offerings.

We, as I mentioned I believe on the two previous calls, we've expanded greatly in some brands in the ABF, antibiotic-free category, continuing to grow that business, and premium brands certainly is not out of the question in terms of adding to our portfolio. So, it will be a diverse library of brands going forward.

Great, I appreciate it. Thank you.

(Operator Instructions)

The next question comes from, and I apologize for any mispronunciation, Sarkis Sherbetchyan, with B. Riley & Company. Please go ahead.

Good morning.

Good morning.

First question's around the CapEx. I think you had mentioned the Company plans to spend about $150 million for the year, and we've already spent about $48 million or $50 million of that. Can you maybe talk about the CapEx trends for the balance of the year?

Our target is $150 million, you're correct, and we've spent $50 million. Some of our projects were front loaded. That's why we spent a little bit more in Q1. But, the trends continue to be -- to reach $150 million. Always looking for projects with fast paybacks, quality, safety or customer needs.

The bulk of the CapEx spent this quarter, was that for the Veracruz?

No, the Veracruz project is spread throughout the year. The bulk of the investment was in our Mount Pleasant operation.

Okay. Interesting. And for the next question that I have, for the M&A opportunities that you had discussed, you did mention you're very busy making the valuations. Is this an opportunity that's potentially international in scope, or is this something that's more domestic? Can you maybe touch upon that?

The projects we've looked at so far have been mostly US domestic. We have looked in Mexico some, but we've decided to go greenfield there and the rest of the M&A activity has been looking at the US.

Sarkis, we believe that we want to produce where it's the most efficient to produce protein, especially chicken, and we believe that it's in North and South America. So it's very hard for us to go to any international operation as we don't believe that there is a source of competitiveness in those regions. We want to supply those regions but not from that specific region.

Okay. That's helpful. Understood. With regards to sourcing soy meal from South America, do you anticipate any type of infrastructure issues from the region, or is that all squared away?

That's all squared away. There are ports that have been used to import soy meal and soybeans in the US and we continue to use those.

Okay. That's helpful. Thank you very much.

The next question comes from Akshay Jagdale with KeyBanc. Please go ahead.

Good morning.

Good morning, Akshay.

First question, and I think you answered some of it, but why would you say, sequentially from December to this quarter, that your gross margins in the US actually get squeezed? Obviously, your revenue performance was phenomenal even relative to the industry. There was something going on, it seems like, in the non-feed COGS and you mentioned some of these propane costs and whatnot.

But generally speaking, there seems to be a seasonality factor in your business that moved your COGS up sequentially quite a bit. Can you just help me understand that? I mean, I don't know if it's too dense of a question, if we need to follow up offline I can.

I'm not sure I follow what you're saying.

Your gross margins in the US, right, went from 10.6% in the December quarter to 9.6%. And your revenues sequentially per pound were up $0.07 a pound. Your feed costs sequentially were down around $0.09. So, there's definitely a seasonal factor on the other COGS. But, can you just help me understand that a little bit?

Akshay, what I can tell you about the other COGS is that, with all the weather related effects, usually the size of the birds are a little bit influenced, so the birds are not as heavy as they were in Q4. It has a little bit of effect into the plant cost. But, it's not significant to talk about.

Okay.

That was not a major contributor, Akshay. Pricing was down in total, as I said in the prepared remarks, but our plant cost and yields actually improved sequentially.

Compared to the same quarter last year, as Bill mentioned, we captured $59 million in operational improvements.

Okay. And just on a separate topic, it was really encouraging to see that the production increase wasn't that much for you guys, I think 1.4% or something like that in the US. Where is your utilization rate today for -- as a percentage of the plants that you have open? So, where are you on capacity utilization, roughly, today?

We haven't changed our plans at all, Akshay. One of the things that happened in Q1, though, that made the production a bit lower than we had anticipated or even wanted was we had two major winter storms that rolled through the Southeast in late January into mid-February, and like other operators, we had several plants that were not able to operate multiple days during those periods of time.

And that, when we didn't operate those plants, obviously that pushed out the production. And so, we missed some volume due to that, but obviously have since recovered now that the weather's better and growth rates have gotten back on track.

So, what was the rough impact of this weather on your production? Was it 1 or 2 points, or more than that?

I'll have to get back to you specifically, but I think it was more than that.

And as your utilization of your current facilities, is it in the 90% range right now?

It's higher than that.

Okay. And just can you remind us, I know you went through this in length, but in terms of the industry being able to expand, it seems like the physical assets and increasing hen houses, et cetera, seems to be where the bottleneck is. Is that correct? And, can you just give us some color as to why that's taking long and why that might take more than a year to sort itself out?

Sure. If you go back through the last few years, all the way back to 2006, 2008, 2011, which were unfavorable years from a margin standpoint for the industry, that sent a signal to the primary breeders to shorten their supply chain because it's very disadvantageous economically for a primary breeder to have extra product and underutilization in their supply chain. That utilization really drives that margin in primary breeders.

And so, when they shortened up their supply chain over the last few years, they're not able to add length to that supply chain in a short period of time. So, it's going to take, likely, another year or two to get back, if they even choose to do that, to get back to where we were just a few years ago in terms of the number of breeders. If you go back to 2006 and 2007, we had 56 million, 57 million breeders in inventory, I believe, and we shortened that up to around 50 million the last couple -- within the last couple of years, and even a little bit less than that.

I believe we have 53 million or so, approximately 53 million in our breeder flock size now. And, actually the real reason that it's 53 as opposed to 50 or 51 is because we've lengthened the age of that breeder flock just to get the eggs. And, when we lengthen the age of that breeder flock, the productivity goes down significantly, and that's why you've seen the rate of hatch go down and, thus, we can set more sets eggs but that doesn't necessarily translate to more chicks.

And, if we look back at the past 6 to 12 months in pullet placements, then that's how we conclude that the industry is not going to grow in terms of pounds produced more than 1 to 1.5% into May of 2015. What we do beyond that, we don't really know, but with the information available, we can see as far into mid next year, and we just don't believe it's possible that the industry's going to grow, especially on a headcount basis, more than 1.5% to -- 1% to 1.5% into mid next year.

That's very helpful. One last one on -- can you just help us understand your acquisition filter here? So, you mentioned the type of assets you're looking for, maybe just talk about the financial filter when you're looking at these acquisitions. Thank you.

Obviously, the filter's focused on value and creating long-term shareholder returns. As has been noted, we've de-levered our balance sheet significantly and to create tax efficiencies and growth. We believe we've got a lot of room to lever back up and grow the Company in a way that can create incremental margin and incremental shareholder value.

Great. I'll pass it on. Thank you.

(Operator Instructions)

The next question comes from Hale Holden with Barclays.

It's Jamie Robins on for Hale.

Good morning.

Good morning.

My first question, on the $59 million in operating improvements that you mentioned, could you just provide a little bit more color on where those are coming from?

Sure. As has been the case the past three years, it comes from primarily two areas, yield improvements and plant cost improvements. That's where most of it's come. To a lesser extent, changing mix, which is actually a part of yield improvements, has also been a contributor.

One thing I would point out is we robustly implemented zero based budgeting late last year and we believe that that's been the biggest contributor of better efficiencies in our plants and lower costs per pound in our plants has been the implementation of zero based budgeting.

Just to add, when we look at the P&L, we're going to see those $50 million, because it's related to yields and cost, you're going to see both in the revenue side because we'll have more sellable meat and you're going to see 50% in the cost side, so you have lower plant cost.

Got it. That's very helpful. Thank you.

And then my second question, just in terms of M&A, Fabio, I believe you've previously stated that the Company's long-term target leverage around 2 times. Do you think you'd be willing to take leverage higher than that for the right acquisition?

I think only if the returns make sense. The 2 times is because we believe that the optimal capital structure, where we have a good tax shield without any compromising in our flexibility and increasing our risk profile. So, only if the target makes sense and, if it adds up, maybe we can go a little bit higher.

I might add a comment to that. If we found the right deal, we would be more aggressive in terms of our leverage. 2 times is a guideline or a target on a normalized basis, but we're not afraid to go higher for the right deal.

Got it. Thank you very much.

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

Thank you. I'd like to thank you all once again for joining us today. We're pleased with our progress our teams have made and are looking forward to the improvements we know we can still achieve.

I'd like to take this opportunity to thank our team members, our growers, and all of our stakeholders for their continued support of Pilgrim's as we work toward our vision of being the best managed and most respected company in our industry.

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