Pilgrims Pride Corp (PPC) 2016 Q2 法說會逐字稿

Good morning, and welcome to the second quarter 2016 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 website at www.pilgrims.com. After today's presentation there will be an opportunity to ask questions. I would now like to turn the conference over to Dunham Winoto, Director of Investor Relations for Pilgrim's Pride. Please go ahead.

Good morning, and thank you for joining us today, as we review our operating and financial results for the second quarter ended June 26, 2016. 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 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 you today are Bill Lovette, President and Chief Executive Officer, and Fabio Sandri, 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 actual results to differ materially from those projected in these forward-looking statements. Further information concerning those factors have been provided in today's press release, our 10,-K and our regular filings with the SEC. I would now like to turn the call over to Bill Lovette.

Thank you Dunham, and good morning everyone. Thank you for joining us today. For the second quarter of 2016 net revenues were $2.03 billion, versus $2.05 billion from a year ago, resulting in an adjusted EBITDA of $283 million, or 13.9% margin, versus $426 million a year ago, or 20.7% margin. Our net income was $153 million compared to $241 million in the same period in 2015, while adjusted earnings were $0.58 per share, compared to $0.94 per share in the year before. During Quarter 2 our results improved further sequentially compared to the last two quarters, driven by our portfolio strategy of having a well balanced exposure to different bird sizes and geographical coverage, in conjunction with the diversity of our product and customer mix. We structured this portfolio to allow us to capture strong commodity market value, while buffering us from weaker markets to generate lower volatility and higher margins over the mid to long-term. We believe our results this quarter strongly reflect the competitive advantage provided by this portfolio strategy.

Retail demand for chicken continued to be robust, despite the increased availability of other protein, while in food service chicken remains a compelling solution for operators in driving greater customer traffic. Pricing in the spot market strengthened seasonally, and volumes picked up with the reopening of most export markets helping us to reduce some of the cold storage inventory built up during the last year, due to the export bans related to Avian influenza. With export demand strengthening and domestic demand remaining solid, we expect the commodity sector to continue on a positive trajectory, as we move through the seasonally stronger part of the year, and as normal weather impacts growing conditions. Similarly in Mexico, conditions were much more favorable in the last quarter, with prices rebounding following adjustment in supply by the producers, and strong seasonal demand.

The market environment in case-ready and small birds remained very positive, and we're well-positioned to benefit from the strength given our leading share in these markets. While our strategy of maintaining presence in small birds and the industry shift toward big birds, has contributed to our ability to outperform other producers with a narrower focus, and we are not just relying on the strength of specific markets to deliver better performance. Instead our strategy of selecting and partnering with key customers has also given us the ability to accelerate in key categories.

As we have said before, we do not intend to be everything to everyone. We believe it is better to partner with key customers that are growing in their respective segments, and develop mutually beneficial relationships that are more strategic and less transactional, and it makes sense for those customers to partner with us, since we have the broadest product offering in the industry which makes us a very convenient one-stop shop.

As a top chicken producer, we have the ability a to scale well with them as they expand in our footprint advantage gives them the geographical coverage they need. By partnering with the key customers, we can reduce the risk profile of our operations, and the impact of volatile commodity markets on our earnings. Our recent announcement to produce USDA-certified organic chicken is an excellent example of our committed to partnering with key customers.

Our team sought creative solutions to satisfying emerging consumer demand preference, such as organic and antibiotic free, or ABF, which will strengthen our relationships with customers, and add to our already comprehensive product offering. We see organic as an opportunity to leverage our leadership in ABF chicken, where we're already the largest producer, and we expect 25% of our chicken to be ABF by the end of 2018. As a leading ABF producer, our footprint and capability to easily scale production are in full alignment with our key customers' desire to grow their organic business, and for us there are several benefits. It gives us an exposure to a market that is growing north of 30%, while at the same time widening the breadth of our portfolio, and improving the ability to sell the other more convenient, or more conventional products.

We're on track in preparing the conversion of one of our existing big-bird facilities to produce organic chicken for retail consumers. With the first chicken coming to market near the end of quarter one 2017. We look forward to becoming the leader in this growing differentiated market. The previously-announced conversion project at our Mayfield, Kentucky plant is also on schedule. We're taking what was previously the largest eight piece cut up facility in the United States, and shifting it to produce an improved mix of higher margin products to meet the growth of key customers.

These projects demonstrate our distinct competitive advantage, and unlike producers with a narrower market focus, we have the exposure to multiple bird sizes and customer segments, which gives us the option and flexibility to align our production capability at the margin, with the most profitable customers and markets. Such joint value concentration projects give us opportunities to further differentiate our performance over our peers.

Prepared foods is another important component of our portfolio strategy, and we have positioned our Pierce brand to be the main growth driver. In an effort to continue to focus on operational excellence and provide quality products to our customers, we will also continue to update our facilities to the latest state-of-the-art standards. During Quarter 2 our largest prepared foods facility was down for refrigeration and process upgrades impacting our sales during the quarter. We will perform roughly the same upgrades at another facility during Quarter 4 of this year.

We are excited about the launch of our new ABF veg-fed fully cooked line of artisinal chicken sausages. These are great tasting made with only natural, all natural ingredients, and nothing artificial is added. They are clean labeled and minimally processed to meet the needs of today's consumer. In fact, this line of sausages was created using extensive consumer participation, to ensure it is on trend, and as we enter this fast-growing $300-plus million category. This represents another key differentiation to our diverse portfolio of fresh and value-added chicken products.

These upgrades and new products together with our line expansion at our Moorefield, West Virginia plant are supportive of our continuous effort to grow the prepared foods operation, and complement our portfolio of products. For 2016 given our cash generation potential we are reiterating our commitment to reinvesting some capital back into our operations, in support of our growth prospects in fresh chicken and prepared foods, while maximizing return on capital and shareholder value. We believe our targeted spending plan will further enhance growth potential with key customers, and our own Pierce brand chicken. These projects are on schedule, and we will continue to search for new opportunities for a better product mix and higher efficiency that will translate into a better margin profile.

Export market volumes have improved sequentially. Most recently South Korea officially reopened to US chicken. The decision by most export partners to adopt a regionalization policy for US chicken instead of a country-wide ban, is a positive as it creates a more supportive demand environment, and will minimize market disruption in case of future outbreaks. Although we have had far fewer cases of US Avian influenza compared to last year, we remain vigilant and are continuing to practice extensive bio-security measures at all production complexes, both in the US and Mexico. Our operations in Mexico were a strong contributor to Quarter 2 results, driven by an improved supply demand environment, better operating performance, and increased synergies of the newly-acquired assets. Further supply adjustments created a supply/demand condition which was much more favorable to pricing. We continue to expect the market to grow by 2% to 3% in 2016, compared to an expansion of 6% in supply last year. Our team remains dedicated on improving productivity and lowering our operating costs. We're continuing to close, and have meaningfully have narrowed the gap in performance between our legacy and the newly acquired northern Mexico operations.

We have also implemented a new organizational structure in which ownership and accountability are driven deeper into the organization, to allow faster and more de-centralized decision making, to better adapt to specific changes in the Mexican market. Our new complex in Veracruz is performing above expectations, with costs that are very competitive, and can be used as a platform for growth in the future. Veracruz is an integral part of our long-term strategic plan, and it will grow from 2% to 4% of our total production in Mexico by year-end.

To further diversify our Mexico business we are initiating a strategy to take advantage of our Pilgrim's brand position, known for high-quality and excellent service, to value-added categories closer today the Mexican consumer. We are also aggressively supporting our popular Del Dia brand, which delivers superior value to one of the fastest growing consumer segments in Mexico. While feed ingredients have been much more volatile, especially in the latter part of the quarter due to concerns over supply shortage and weather conditions in South America, we believe medium term fundamentals continue to be favorable.

Corn prices have traded lower in July by a good start to the growing season and in line weather conditions in the US, on top of 7% increase in planted acreage by domestic farmers. To put this into context global grain stocks are on track to grow again in 2016, which will put us close to historical highs. We continue to expect chicken industry production to grow by 2% to 3% in 2016 in the US, despite very solid industry profitability last year, and so far this year. Producers have been very deliberate about adding new supplies compared to the past, as indicated by the marginal growth in the breeder flock so far this year, while egg sets and chick placement data are flat to up slightly year-to-date, are reflecting a balanced supply/demand environment. We believe the announced capacity additions to the industry over the next few years will be supportive of a balanced supply/demand environment, and we continue to be convinced that our business will have the ability to outperform given the breadth of our portfolio, and strong relationships with key customers. As we move further in differentiating our product offerings through our portfolio strategy, we're making progress and continuing to discover innovative methods to improve our flock health, and finished product quality. For example, we are working closely with a large agri bio firm to develop customized probiotics for our chickens, which improves digestibility, flock health, and ultimately results in improved quality. We are finding real success in this and expanding the program rapidly. With that, I would like to ask our CFO Fabio Sandri to discuss our financial results.

Thank you Bill, and good morning everyone. We reported $2.03 billion in net revenue during the second quarter of 2016, resulting in an of adjusted EBITDA of $283 million, or 13.9% margin. That compares to $2.05 billion in net revenue, and an adjusted EBITDA of $426 million, or 20.7% margin for the year before. Net income was $153 million versus $242 million in the same quarter of 2015, resulting in adjusted earnings per share of $0.58, compared to $0.94 in the same quarter of last year. Operating margins reached 11.7%, with 9.8% in US and 20.5% in Mexico. Margins continued to improve from both Q4 and Q1, demonstrating the resilience of our portfolio and our ability to adapt to different market scenarios.

In the US, demand for our [kings red] and small birds remains strong, while environment in the commodity markets continue to improve relative to the second semester of last year. As low prices drove demand and the industry regained much of the activity to export countries, resulting in increasing pricing and lower levels of cold storage inventory. Within case-ready our team leveraged key customer relationships, and differentiated approach in product mix, customization in market segmentation to strengthen our margin opportunities. We had significant downtime at our largest prepared food facility, which impacted short-term volumes and results of that specific segment during this quarter. Together with the similar process improvement at a different facility in the next quarters, and investments in new line in our facility in Moorefield, West Virginia, we are preparing our operations for growth and long-term sustainability.

Our Mexican operations contributed strongly to the results of our portfolio, as supply/demand significantly improved as producers quickly adapt to industry supplies from second semester of last year. The integration of the newly-acquired assets is on track, and we have already captured 70% of the expected $50 million in annualized synergies. We are very pleased with how well our team is integrating the newly acquired assets, with the gap in margin narrowing significantly relative to the legacy plants ever since we started the integration process.

Production at the new Veracruz facility is ramping up nicely, and its performance is exceeding our expectations. We expect Veracruz to play an important role in our growth within the Mexican market. To supplement the strong demand in the popular Del Dia product line, we are introducing premium value-added products using the Pilgrim's brand to expand our channel presence. We continue to expect SG&A expense for 2016 to be close to the target of 2.5% of net sales, as we focus on adding value to our operations. We remain on track to capture our target operational improvements this year, to add to the total when we first implemented the process five years ago, as our team members continue to be relentless in their pursuit of operational excellence.

As part of our capital spending plan for 2016 we are deploying $190 million of cash flow back into the business, to ensure sustainability and quality improvement of our operations. The value is higher than our depreciation, and shows our commitment to operational efficiency, and tailor customer needs that can generate to competitive advantage for Pilgrim's. We are in the first semester. We already deploying $93 million in projects, targeting improvements to our project mix, efficiency and better service to our key customers. Our balance sheet continues to be strong, due to our relentless focus on cash flows from operating, continuous management of working capital, and disciplined investments, high return projects.

During the quarter we generated operational cash flows of $111 million, despite the significant improved impact to working capital due to a spike in feed costs that increased our live inventory. The cost of feed has already returned to previous levels, and we expect to gain the working capital back in the next quarters. After the payment of the $700 million special dividend, our net debt reached $1.08 billion, with a leverage ratio of 1.15 times last 12-months EBITDA.

Our leverage continues to build, and underline how much room is left in our debt capacity for strategic actions. The outlook for interest expense for 2016 remains in the range of $30 million to $40 million. Over the last few years we returned $2.2 billion in dividends to our shareholders, and have repurchased $107 million in shares, while maintaining a strong balance sheet and a very low leverage. Once again, we are confident are of our ability to return cash to shareholders, and we exercise great care in ensuring that the dividend payment not only creates value, but also preserves our flexibility to pursue our growth strategy. We will continue to evaluate all relevant capital allocation strategies that will match the pursuit of our growth strategy, and we continue to review each prospect accordingly to our value creating standards. Operator, this concludes our prepared remarks. Please open the call for questions.

We will now begin the question and answer session. In the interest of allowing equal access, we request that you limit your questions to two, then rejoin the queue for any follow-up. (Operator Instructions). At this time we will pause momentarily to assemble our roster. The first question comes from Farha Aslam with Stephens Inc.. Please go ahead.

Good morning.

Morning, Farha.

Could you share with us the restructuring kind of volume, and maybe some costs the total net cost that you anticipate in because it seems like you are flowing it through the P&L, where as other companies might take something like that as extraordinary?

Well, if you compare the volumes of this quarter to the same quarter last year, we are in line in terms of fresh pounds, but we are down with prepared food pounds, due to the alluded prepared food plant that was down. And everything was down to the bottom line. We don't adjust it for that.

Okay. And that's going to affect you again in the fourth quarter?

Not in the same magnitude as this quarter but it will effect the volumes in the fourth quarter as well.

Okay. And then on Mexico, do you anticipate the strong trends that you saw this quarter to continue into the second half of the year? How sustainable are those profits?

I will take that. Our Mexican business is performing very well. I think as you and others have followed this industry in the past, we all know that Q3 is typically not as good a quarter as other quarters. That continues to follow a seasonal pattern, and we don't expect that to change, but we just returned from Mexico last night. We had our Board meetings there, showed the quality of assets and more importantly the quality of our Management Team to our Board, and they were very impressed and I couldn't be more excited about what we're doing in Mexico.

We see great opportunity to continue to grow our presence there both inorganic development of our existing business model, which as you know is largely cyclical and market driven for basic commodity oriented chicken, but one thing that we're doing as we alluded to in the prepared remarks is we're initiating a strategy where we want to get closer to those fast-growing segments of the Mexican consumer market that place a lot of value on convenience and packaged foods like we see here in the US, and we remain committed to building a strong stable of brands down there, as we have talked about with our Del Dia brand, and entering a premium market segment as we also alluded to.

And I'm really excited as I said about the quality of our Management Team. We continue to add talent and development to our team, and as a result we will continue to deliver Best-in-Class performance, as we also said we're ahead of our schedule in terms of capturing the synergies that we outlined last year when we closed the purchase of the new asset.

Like we always say, Mexico is a growing economy and as the population increase their disposable income it leads to significant growth in protein consumption. Mexico is a big importer of meat, so expect high profitability in that market compared to all of the other markets. Just like you said Mexico has a different economy than US, with the third quarter showing less demand during summer vacation and school recess.

Okay. Very helpful. Thank you.

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

Hey. Good morning everyone.

Good morning.

Just following up on the two upgrades. Can you talk about what the change of margin structure that will do, and how that impacts you? Not today but like say 2017, 2018. Is this a meaningful change of how we should be thinking about your margin structure going forward, is this a little tweak? How do we think about it?

Great question, Ken. Thanks for asking. Those are really targeted at the long-term. Our prepared foods plants most of those were built in the mid to late 80's, and as most plants about the in that time frame, they require repeated infrastructure investment and we're doing that. We're also replacing a lot of the processing equipment, the fryers and ovens, blenders, forming equipment and scaling equipment, those sort of things, and so it's really a long-term commitment, and it's going to be a huge commitment. Any time that we or any other company does that, it's going to be short-term disrupted, because you have to take these plants down to do that type of major investment project. So this is really focused on the long-term, and yes, we do expect it to be margin accretive over the long-term.

We're adding a lot of technology to that operation. With the real-time monitoring of our temperatures and quality, that we can do from centralized operations not only from the operations on-site, but also centralized here.

So is it fair to say it's worth 50 to 100 basis points over the long-term to your margin structure, if you had to consider just normal environment? Is that the way to think about it? Or is it that too aggressive? And just as a follow-on and I know we're only allowed two questions is, as you're doing all of the ABF and organic, can you also kind of phrase how much margin accretion that will be? Because it seems like whatever we think today's margin structure is, if we have all have different views on it there is an incremental margin structure of say in 2018, 2019 to think about?

Ken, I'll take the last part first and then address the prepared foods margin accretion. We do expect better margins from the ABF production and organic production as well. I'm thinking, though, is more consistency, less volatility, and sustainability. That at the end of the day this activity is focused on our key customers. We're not doing this for the market in general, or all customers. This is a very targeted activity to a few key customers that we have identified jointly with them this need, and it will definitely be a better margin, but more importantly than the better margin in any single quarter, the main focus here is sustainability and continuity in taking out the commodity risk that is sort of inherent in the cyclical chicken business. On the prepared foods margin lift, I don't know that we're ready to talk specifically in terms of basis point accretion, but again that's also focused on enhancing our portfolio with margins that are even more sustainable, and less volatile as we create a portfolio that has much more continuity than this Company has had in the past.

Great. I appreciate it. Thank you.

You are welcome.

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

Great. Thanks. Good morning everyone.

Morning.

Maybe first I want to go back to the plant kind of maintenance turnaround that you're doing in the second quarter, and are planning to do in the fourth. Your gross profit dollars declined by more than the revenue dollars in the quarter. It was 100%, a very sharp decremental. Is the right way to sort of size it, that if most of the volume decline was the prepared foods plants somewhere between $80 million to $90 million of it would be attributable to, of the gross profit decline would be attributable to the prepared food plant, your big-bird margins I would guess were down something $0.10 a quarter year-on-year, and so that would probably be a $50 million, $60 million, and the balance would be mix, just more fresh chicken versus prepared, or am I thinking about that bridge in the wrong way?

Adam, I'll let Fabio handle some of the details, but I do want to remind you that the comp period the second quarter last year was a margin environment that is rarely if at all seen in the past in the chicken industry. We had a 20.7% EBITDA margin, and I would hasten to say that is probably not normal. We're very grateful to have had it and think that our portfolio allowed us to take advantage of very strong markets, but markets in general haven't been as strong, this most recent second quarter as last year, and again our focus is really on long-term sustainability of our margins, and taking out some of that volatility with the portfolio strategy that we've had.

So yes, while prepared foods did have an impact, overall commodity prices also had an impact, and we're a large player in the large-bird deboning sector, which we know prices in that category have declined. The last thing I will remind you of is if you look at Q2 of this year, and go back even sequentially to the last two quarters before, we have improved our results sequentially every quarter from the fourth quarter of last year into the first quarter of this year, and now the second quarter. So I think our Management Team has done a really great job of continuing to adjust our portfolio so that we do have that sustained improvement over the long-term.

And just on the details, Adam, yes you're correct in terms of the volume on the prepared foods, and other than that thinking about our long-term portfolio just like you alluded to the cut up is down 13% in the chicken business year-over-year, although it's better than last quarter it's 13% lower than same quarter last year, which affects directly the big-bird deboning, which is the more commoditized segment of our portfolio. In other hand, case ready and fresh [inaudible], which are smaller and medium birds, the profitability continued to be in line with the same quarter last year.

So that's helpful. And the spirit of the question is entirely to think about what the sustainable performance is in the quarter versus where there's clearly some discrete items impacting the results, so I hope you appreciate that. Maybe just a second question on the market outlook, and specifically on cold storage and second half. You have seen some pretty sharp increases in wing inventories, and then leg quarter inventories are starting to drift higher again. On the leg quarters is it, are you seeing a backup of exports? Is it people maybe not running the dark-meat deboning as aggressively as they had been in the latter part of last year? Maybe a little bit of context and outlook for those parts of the cut out moving forward? Thanks.

That's correct. We saw a little bit of increase in the inventories especially on the leg quarter. Over the last days of the second quarter, but that's due to the Ramadan in some of the regions, and as we alluded to some producers changed back from deboning to the straight leg quarters, offering a better margin. As Korea reopens again we are seeing a pickup in demand, and we are seeing those inventories going down.

And anything on wings?

We have seen as you pointed out a fairly rapid increase in wings, wings are up quarter-over-quarter. I think it's up 72%. I think that's partly a seasonal event as we ended the football and basketball season from last year, and we think that those inventories will begin to decline as football season starts in a few weeks, and then we move into the fall and spring of the next sports season.

So we believe that we're seeing the absolute height of wing inventories, and that'll go down from here. We have also seen a rise in breast meat inventories, and we think that some of the customers or users of breast meat, took advantage of relatively weak market in the first and second quarter to build inventories for the time of the year like right now, when we see breast prices have risen.

So we expect to see those breast inventories decline also. Leg quarter inventories actually are down 28% from the same period last year, and so we think that we'll see both domestic and export demand pick up for the back half of the chicken, and I know a lot of companies have struggled with getting enough labor for deboning the back half of the bird, and that has contributed to a decline in deboning leg meat, and we have seen now a subsequent rise in the values of both boneless thigh meat and boneless leg meat, and we think we're well-positioned with the investments that we have made in the last 12 to 18 months to debone more and more of our back halves. So we think that's good for us.

All right. Some helpful color. I'll pass it along.

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

Hi. Good morning. Thank you for the question. Just wondering if you guys could give some more color on what you have done if you're in the market at all with grains into the second half of this year and into 2017, and how that's expected to impact potentially margins, as well as moving into and how that's impacting the Mexican market as well? And then just a second question, what do you guys think is accounting for part of the disparity between pullet placements and some of egg sets and placements that we're seeing there?Thanks.

Okay. Thank you. Our strategy with respect to purchasing corn and soybean meal specifically hasn't changed. We stay close to the market in terms of tenor or time. We do that because we believe our pricing strategy as we have changed it over the past few years is conducive to not actually adding more risk, by buying futures contracts or derivatives contracts for a longer period of time. I think we have seen a great example in Q2 with how volatile the futures markets can be, and many times completely disconnected to the fundamentals of supply and demand for either corn or soybeans, and so what we do is we'll protect the price of the physical corn and soybean meal that we have coming to our mills.

That turns out to be 30 to 45 days depending on basis trading levels, and we have seen even going out just that far how volatile that market can be, and how that can affect our MTM going forward, and for one I'm thankful that we didn't have long-term positions owned going through this extreme volatile time, because it could have been a really headache for us from an MTM standpoint. Our strategy actually worked very well for us. I think we have marked-to-market just about $1.8 million for the quarter, and that's what we attempt to do with our strategy. It was actually keep volatility and risk out of our supply chain, as opposed to what could be added with buying up futures contracts for the long-term.

Yes.

Yes. So I think what we have seen with egg sets is absolutely a testament to the discipline of our industry that we have seen in the last really two to three years, and I know you folks follow the pullet placements, and we have seen a disconnect in pullet placements and egg sets, chicks placed in total production, and I believe this is due to a couple of factors actually. While we have seen I think something like a 7.2% increase year-to-date in pullet placements, the breeder flock in total is only about 0.5%.

Egg production, hen production, or egg production from hens is up about 1%. So I think that the two factors that disconnect those pullet placements and the breeder flock totals are number one, we continue to see robust exports of hatching eggs, exports this period was up about 10.5%, and that accounts if you take the total number of hatching eggs exported, it accounts for between 8% and 8.5% of the breeder flock, with about half of that going to Mexico, another portion going to Canada, and then the rest of the world. And so I think the export of hatching eggs account for a lot of that pullet placement increase. The other thing that, and I think we have mentioned this in quarters before, we're in the midst of seeing a breed change in our industry, as more participants have moved toward large-bird deboning. One of the breeds available on the market is more conducive, both from a fee conversion standpoint and a breast meat yield standpoint. And I believe that primary breeder company has had to increase the number of grandparent flocks and multiplier flocks, that are also reported by USDA and the company that's not going to have that market share perhaps is really not doing anything, so net/net you're seeing the total multiplier flock increase, but that doesn't mean that we're going to get added hatching eggs set as a result of that increase. So I think those two factors are contributing to the disconnect between pullet placements and eggs and egg set chicks placed.

Thank you.

Our next question is from Akshay Jagdale from Jefferies. Please go ahead.

Hey. Good morning. This is actually [Lou Be] on for Akshay. Can you hear me?

Yes, we can, Lou B.

Okay. So you have talked about how you are portfolio has out performed many of your peers due to your diversified portfolio strategy, and that's been evident in your results. I'm wondering if you can talk a little bit about maybe how feasible it may or may not be for other industry participants to copy your strategy? Is it likely that we start to see more production shifting back from big-bird to small-bird?

Great question. I really don't believe so and there's several reasons that I don't believe that's going to be the case. If you have an operation that has been either small or medium bird size, and you transfer that to the big-bird segment, it requires a significant increase in the number of houses, chicken houses required to grow those big birds, because they require more space, and once you build that capacity you are sort of contractually obligated to keep that production in place, and so if one were to contemplate going back to small birds, then you would have a lot of extra housing needs that would, if you wanted to keep that same amount of housing in production you would have to increase heads.

And of course, the main constraints of increasing head is the line speeds that are regulated by USDA, and you would have to add infrastructure to the plant, you would have to add hatchery capacity, and feed milling capacity, and we just haven't seen that being done very often in our industry. So I think there is a natural wall, if you will, of converting from large birds back to small birds. I would also tell you that it takes a different skill set from a sales standpoint.

If you're a large-bird deboning producer you basically sell most of your product on a formula price, or on the spot market, and it's quite frankly a simpler proposition from a sales standpoint. On the other hand, producing small birds requires that you set up a program around a bell curve distribution, normal distribution of that entire flock, and the different sizes within that normal distribution end up going to different market segments, and so you have to be very well-versed and have your management team set up to do that. So again, it requires a very different strategy from selling large-bird deboned products.

Adding to that another differentiation factor to us is not only the capacity to supply all sizes, is the relationship with the key customers. While some other participants can copy in terms of having a portfolio or changing plans, we can supply those customers the food portfolio being organic, ABF, small-bird, straight back, big birds, we currently to an advantage for them and for us. And that is something that the other participants cannot copy.

Thank you. That's very helpful. And then I think you mentioned in your commentary that domestic retail demand remained robust during the quarter. But it does seem at least to us that Georgia dock price has weakened somewhat over the last several weeks and months. Could you maybe comment on what you think might be driving trends in the Georgia dock?

I think it's just a reflection of the overall increase in total meat production, but I would remind you, Georgia dock quarter-over-quarter has a only gone down $0.028 a pound where the [earner berry] jumbo breast meat price has gone down $0.0162 a pound, and cutting stock has gone down $0.0584. So I think that Georgia dock price is reflective of those small whole bird and whole bird form or cut-up form, that goes into specific channels as opposed to some of the earner berry markets that are more focused on pure commodity products, and primarily from the larger birds.

Great, thanks. I'll pass it on.

(Operator Instructions). Our next question comes from Bryan Hunt with Wells Fargo. Please go ahead.

Good morning, and thanks for taking my questions.

Good morning.

First of all. Hi. How are you? I was wondering about you could talk about your strategy of purchasing product externally versus working with your contract growers, and what you may be doing in light of relatively depressed prices associated with higher inventories? How quick can you adjust this buy versus grow strategy?

Actually, Bryan we can adjust very quickly. We buy raw material primarily for our prepared foods segment, and so when we make that buy versus grow decision based on what we know that we can produce those commodity for prepared foods, versus what the market is trading at any given time, and we have the ability to go in and out of the open market very, very quickly. We don't commit on a fixed-price basis for sure any of our internal meat to our prepared foods business. If we do supply it internally it's on a market base formula, so that we stay true to that value-added proposition. Then we take advantage of weaker markets when they are in fact weaker, and go out on the open market and purchase that product.

And is there any way you can throw some metrics around how much you're purchasing externally today, versus where you were maybe a year ago?

Well, I think it's at time a significant amount and again, we monitor the market and at times it's more than others, when we believe it's more accretive to buy that product at the open market price, versus take our own meat and sell it, and since, I would mention also that that's where our key customer strategy comes into play, because what we attempt to do with our own production is make sure that we have our product placed with our key customers that fit their needs for demand, and at all times we can buy any of that raw material size specific that is on the open market, and we adjust our pricing strategy on the back-end with prepared foods to be reflective of those market values, too. So we minimize the risk there.

We typically buy 30% to 50% on external markets, and I think what we just need to be careful is that we buy specific parts in the prepared foods it's more towards the front, so it's wings, tenders, and breast meat. So while we the cutout is lower than last year it was a big impact of the leg quarters. So some parts are actually higher than last year, so we need to be careful with that.

Yes. Okay. Very good. And my next question is, we have talked, I think you all talked a little bit about there on the supply side, but I was wondering if you look at placements they fall in a short of a year ago I think 7 of the last 11 weeks. Do you feel like the industry is in a phase of production consolidation relative to where it may have been in Q4 or Q1? Given where inventories are? And how does that make you feel about the outlook for margin improvement from where we are today? Our overall prices. Do you feel like we have bottomed on the pricing side? And that's it for me. Thanks.

It actually makes us have a positive notion about the discipline that we continue to see exhibited by the entire industry, and I think what we saw last year in response to the export situation, is producers had to take a breath there and say if we're going to get very low prices for the back half of the bird, then we're going to be more measured about how we're going to grow more chickens. I think we have seen that played out over the first semester of 2016. And so that gives us more confidence that we're going to do the right thing with respect to maintaining that discipline. We have certainly had the hatching egg supply to grow much more if we chose not to export those eggs. I think in May we exported 81 million hatching eggs or so outside of the country. The industry could have chosen to set some of those eggs domestically, but that was not the choice that was made. And so again, that gives us confidence that we're going to continue to be disciplined as an industry.

Very good. Thank you.

Our next question is from Carla Casella from JPMorgan. Please go ahead.

Hi. This is [Ne] on for Carla. Quick question. Does the proposed changes in the JBS organizational structure change the way you look at your business or capital structure in any way?

No. I think the change in JBS continues to be a public traded company, PPC has its own Board and we have our own governance, so I don't think that changes anything for us.

And as I have said to investors in the past few weeks and months, I believe that for JBS as shareholders, like any shareholder to realize maximum value from the PPC asset, the more transparency we can provide to the market by being a publicly traded company, is overall a positive for a value concentration of this specific asset, as opposed to just being a small part of a much larger company. And for that reason I believe that what I see is it's better for PPC to remain as a publicly traded entity.

Thanks. And another quick question. Sorry if I missed this, but how much of your Mexican production is exported to the US?

Zero. All of our Mexican production is sold in Mexico. Mexico is a net importer as a matter of fact, the largest import market for US produced chicken.

Yes. Mexico imports account for more than 20% of all US exports.

Thanks.

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

Thank you. As we enter the second half of 2016 marketing conditions are playing out largely as we had expected, both in the US and Mexico. Demand from exports from picking up, prices in the commodity markets have improved over the last two quarters, while the environment and [cage uaity] in small birds remains robust. While our strategy of maintaining presence in small birds, and the industry shift toward big birds has contributed to our ability to outperform other producers with a narrower focus, we're not just relying on the strength of specific markets to deliver better performance.

Instead our strategy of partnering with key customers, broad customer and product mix, and geographical footprint, allow us the ability to accelerate the key categories above and beyond our presence into different bird sizes. Our team also remains committed to seek creative solutions to maintain our leadership in new consumer demand trends in chicken, such as organic and antibiotic free, and support the growth and needs of our key customers. We would like to thank our team members, customers, and always appreciate your interest in our Company. Thank you all for joining us today.

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