Pilgrims Pride Corp (PPC) 2016 Q3 法說會逐字稿

Good morning and welcome to the third-quarter 2016 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 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 25, 2016.

Yesterday afternoon we issued a press release providing an overview of our financial performance for the quarter, including an reconciliation of any non-GAAP measures we may discuss. A copy of the release is available in the investor relations section of our website, along with the slides we will reference during this call. These items have also been filed as 8-Ks and are available online at www.SEC.gov. Presenting to you today are Bill Lovette, President and Chief Executive Officer, and Fabio Sandri, Chief Financial Officer.

Before we begin our prepared remarks, I 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 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 Bill Lovette.

Thank you, Dunham. Good morning everyone and thank you all for joining us today. For the third quarter of 2016 net revenues were $2.03 billion versus $2.11 billion from a year ago, resulting in an adjusted EBITDA of $211 million or 10.4% margin versus $274 million a year ago or 13% margin. Our net income was $99 million compared to $137 million in the same period in 2015 while adjusted earnings were $0.40 per share compared to $0.58 per share in the year before.

In quarter three, we saw continued strength in our fresh business driven by our portfolio strategy of a well-balanced exposure to different bird sizes and geographical coverage, in conjunction with the diversity of our product and customer mix. Exports are improving compared to last year, which supports the commodity markets. In Mexico, demand was as expected and tracked in line with normal seasonality and last year. Our year-to-date operating performance proves we are on the right track in delivering to our strategy.

Addressing individual markets our case ready and small bird operations continue to perform well and our leadership in those markets provides us competitive advantage. Despite greater availability of other proteins, demand for chicken, particularly at retail, remains very strong. Orders from our retail customers have been robust despite fewer features, which is a positive indication that consumers' appetite for chicken, despite concerns about competing protein, has remain undiminished.

Within large bird deboned, prices and demand, which had been relatively weak during the first half have been improving as well, driven by the strengthening across all export markets. Although profits for large bird deboned are still not yet at comparable level to the other categories, these strengths from the back half and wings have helped returns in this segment. We believe our portfolio strategy of having presence in all bird sizes, small, medium and large, is differentiated and gives us a powerful platform over our peers that have a narrower focus. As each bird market has its own distinct supply demand dynamics, our broad portfolio gives us potential to leverage and balance the strength of specific markets to deliver better total performance.

Our strategy of partnering with key customers creates an opportunity to further accelerate growth in key categories. We believe our decision to partner with key customers that are growing in their respective industries will develop mutually beneficial goals giving us the strategic advantage and reducing the transactional nature of each relationship. Our prior announcement to enter organic chicken production illustrates the benefits of satisfying the needs of key customers and expanding into an emerging high-growth market. We are on track in preparing the conversion of one of our existing large bird facilities to produce USDA-certified organic chicken for retail consumers with the first birds coming to market near the end of Q1 2017.

Within food service, we've been outperforming the rest of the industry. Although the segment as a whole is currently a bit soft, our exposure to key customers that are growing faster than their own peers are generating better margins and less volatility for us. By partnering with key customers in food service that are expanding and leveraging our ABF production, we are able to move faster than the competition in growing our business.

To demonstrate our commitment to continuously improve upon our portfolio of fresh and value-added chicken products while addressing emerging market trends, on the last call we introduced our new ABF veg-fed fully cooked line of Artisanal chicken sausages. This line of sausages was created using extensive consumer participation to ensure it is on trend as we enter this fast growing $300 million-plus category.

With the success we have had in the marketplace for our ability to supply a differentiated products to our customers, they're coming back to us to supply them with more ABF fresh chicken. We are converting our case ready facility in Lufkin, Texas to ABF veg-fed production to support the growth of the key customers, which would put us at more than halfway to our target of having 25% of our chicken to be ABF by the end of 2018. If we take into account only the non-commodity portion of our production, our target translates to roughly 40% of our chickens.

Another important project that will improve our existing portfolio is the conversion of our Mayfield, Kentucky facility. We are taking what was previously the largest 8-piece cut up plant in the United States and shifting it to produce an improved mix of higher-margin products to meet the growth of key customers. We are also adding a new fully cooked line at Moorefield, West Virginia, which will be operational in Q1 of 2017, increasing our capacity and further improving profitability for our prepared foods business.

These projects are on schedule and demonstrate our competitive advantage. Unlike producers with a narrower market focus we have the option and flexibility to more precisely align our production capability with the most profitable customers and markets and customize to their requirements. Such value creation for projects give us more opportunities to differentiate our performance over our peers.

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. While operating and financial performance is of utmost importance to us, we will not compromise the quality of our products or sacrifice the safety of our team members. We continue to ramp up our largest prepared foods facility to full capacity and now expect that facility to be fully operational by the end of quarter one 2017. While the ramp-up is lower than anticipated, the upside once that facility is up and running at full speed, we will have a positive contribution to our profits.

Given our strong cash flow generation, we remain committed to redeploy 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 will continue to search for opportunities for better product mix and higher efficiencies that will translate into a better margin profile.

Export markets have remained steady, which is a positive for the back half of the bird and also supportive for improving the overall cutout value. In the absence of avian influenza outbreak domestically and challenges experienced by other export sources, mainly Brazil, volumes for US exports have been gaining momentum since the beginning of the year and we believe the improvement can be sustained. Pricing for leg quarters have nearly doubled from last year's levels reflecting strong international demand for US chicken. Inventories for leg quarters and other export oriented cuts have significantly declined from last year as global export shipments had been strong.

Market demand in Mexico was as expected during Q3 and consistent with normal seasonality. Our team was relentless and continued to deliver better operating performance as well as implement synergies with the newly acquired assets and just slightly more than a year since we closed the deal, we are continuing to improve performance. As a result, despite the impact of unfavorable grain cost and exchange rate, are profitability in Mexico has actually been steady, which is a positive sign for the potential leverage we have within our operations. Although Mexico continues to be more volatile than the US quarter to quarter, we expect it to be a double-digit contributor to our profits.

In terms of supply and demand for 2017, we expect Mexican producers to increase production by another 2% to 3% in line with the growth in 2016. Our new complex in Veracruz is performing above expectations with costs that are very competitive and can be used as a platform for future growth. We are continuing to further expand production at Veracruz and expect to significantly increase the size of supporting operations by 20 -- early 2017. We consider Veracruz to be an integral part of our long-term strategic plans in Mexico.

We are starting shipments of the new value added Pilgrim's brand to further diversify our Mexican business. This strategy is leveraging our Pilgrim's brand, which is known for high quality and excellent service, to value added categories to strengthen our position with consumers across all channels in Mexico. While we are expanding in the premium sector, we are also aggressively supporting our popular Del Dia brand, which delivers superior value to one of the fastest growing consumer segments in Mexico.

On feed costs, grain and oilseed prices have declined sharply in quarter three driven by the prospects of record yields in both corn and soybeans. Ideal growing conditions in July and August helped push forecasted ending stocks of corn 40% higher versus 2015 causing prices to trade at their lowest levels in seven years. The latest USDA reports indicate global stocks of grains have remained abundant and we do not expect grain prices to be at risk to our input costs in the medium-term.

During Q3, we had slightly negative impact from unrealized futures positions due to a customer commitment. As a reminder, this is typically not our policy to enter into long-term future positions as we believe the risk reward is not favorable and chicken is not a hedgeable commodity. Instead we have mostly managed our feed risk by ensuring we have properly structured portfolio of price and contracts. We expect industry production to grow by 1% to 2% this year in the US, slightly below our prior expectations. As we are already starting to see a deceleration in weight growth compared to last year.

For 2017, we believe the industry will grow by another 1% to 2%, mostly in head, as we believe there's less incentive for producers to materially increase bird size weights compared to recent years. The bird weights are already optimized currently. While strong US economic conditions are a positive for demand, we see -- we are beginning to see some signs of labor tightness affecting staffing availability across the industry, including our own operations, which is another factor that could impact and dampen production growth for the whole industry in 2017.

We believe the announced capacity additions to the industry over the next few years will be well supportive of a balanced supply demand environment and we remain convinced that our business will have the ability to outperform given our broad portfolio and presence in all bird categories as well as stronger -- strong relationships with our key customers.

Despite concerns over greater competition from other proteins, our outlook for chicken demand in 2017 remains very solid as we believe the increase in total US production across all protein complexes will be met with greater export demand, while strong US economic conditions, specifically very low jobless claims rate and higher disposable income, will drive many households to not only seek better and higher-priced cuts of meat, but also more consumption.

The environment for feed into next year should continue to be favorable and stocks to use, particularly in corn, is looking very good. As a result, we can feed costs will remain well contained and not represent a significant barrier to margins. With that, I'd 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 third quarter of 2016, resulting in an adjusted EBITDA of [$210.8 million] or a 10.4% margin. That compares to $2.11 billion in net revenue an adjusted EBITDA of $274 million or a 13% margin the year before. Net income was $99 million versus $137 million in the same quarter of 2015 or a 28% year-over-year decrease resulting in adjusted earnings per share of $0.40 compared to $0.58 in the same quarter of last year.

Operating margins were 8.2% in US and 7.4% in Mexico. Our fresh chicken operations continue to generate very competitive results. Demand for our case ready and small bird were strong while the commodity markets continued to improve as the environment for US exports improved, which is supported from the back of the bird pricing, overall cutouts and markets. Inventories of leg quarters and other export oriented cuts are down significantly, which is a positive for cold storage numbers while spot prices have nearly doubled compared to a year ago.

Included in our quarter results, our market to market impact of $18 million due to the impact of unrealized positions of a small portion of the fixed pricing contracts we have assumed during the year. It is an example of how volatile the feed market has become. But the falling import prices will compensate in the coming quarters as we produce and deliver the fixed-price products to our customers.

As we continue to transform our portfolio for the future, we continued to ramp up our largest prepared food facility to full capacity and now expect the facility to be fully operational by the end of Q1. Together with our new line in West Virginia. While the ramp up impacted our volumes this quarter, the upside is that once up and running to full speed, that plant will have a differentiated operation to support our key customers. During Q3, the Mexican market moderated in line with normal seasonality after a very strong Q2.

Despite the quality market dynamics our team has been relentless and continued to generated improved operational efficiency at the legacy plant and also implement synergies with the newly acquired assets. The integration is on track and we have already captured 90% of the expected [$50 million] in annualized synergies. The gap in margins between the legacy and the newly acquired operations is much smaller than initially and continues to improve.

Despite the impact of unfavorable feed costs and the big volatility on the value of the dollar relative to the peso during the quarter, our profitability in Mexico was steady in comparison to last year, which is a positive sign of the potential leverage we have within our operations. Production at the new Veracruz facility is ramping up faster than planned. This performance is also exceeding our expectations and we expect to continue to increase the size of the support team operations in the future with Veracruz as a key pillar in our growth within the Mexican market.

To supplement the strong demand in the popular Del Dia product line and grow our prepared foods in Mexico, we are starting the launch of premium value added products using the Pilgrim's brand to expand and strengthen our presence across all consumer channels. Our goal is to have [conduct] coverage starting from the entry level all the way up to the premium segment, both fresh and prepared.

We continue to expect G&A expenses for 2016 to be close to the target of 2.5% of net sales as we focus on adding value to our operations. We continue our strategy of capturing our operational improvements every year to add to the total when we first implemented the process five years ago and as our team continues to be relentless in their pursuit of operational excellence, regardless of market conditions. We are also building the budget for next year and the quality and magnitude of our action plans is encouraging.

Our balance sheet continues to be robust due to our continued emphasis on cash flow from operating activities, focused on management of working capital and disciplined investment in high return projects. During the quarter we generated operational cash flow of $242 million. Including the payments of $700 million special dividend back in Q2, our net debt reached $990 million with a leverage ratio of 1.05 times last 12 months EBITDA, well below our target of two to three times. Our leverage continues to be low and underlines how much room is left in our deck for our capacity for strategic actions. The outlook for interest expense for 2016 should remain in the range of $30 million to $40 million.

Also, as we continue to generate strong cash flow, we continue to increase the investment in our operations. The investment also underline our commitment to operational efficiency and tailored customer needs that have already proved competitive advantage for Pilgrim's. Year-to-date, we already deployed $174 million in projects, targeting improvements to our product mix, efficiency, and better service to our key customers.

We expect to exceed our target of $190 million and invest close to $220 million during 2016, as our strategic projects already described by Bill continue to evolve at a fast pace. Since the beginning of the share buyback program, we have acquired more than $120 million in shares while maintaining a strong balance sheet and a very low leverage.

Once again, we are confident in our ability to return cash to shareholders. And we exercise great care in ensuring that the dividend payment not only creates shareholder value, but also preserves our flexibility to pursue our growth strategy. We will continue to consider and evaluate all relevant capital allocation strategies that will match the pursuit of our growth strategy and we continue to review each prospect according to our value creation standards. Operator, this concludes our prepared remarks. Please open the call for questions.

(Operator Instructions)

Farha Aslam, Stephens.

Hi, good morning. First question is on the US. Bill, you noted that there is strong demand for chicken despite competing proteins. Could you highlight your outlook for the contracting season, especially given Pilgrim's revamped portfolio, how are you looking at that for 2017?

Farha, it's looking very well right now. We are seeing great demand, especially at retail as we move our portfolio into differentiated categories like ABF and veg-fed. We're finding that our key customers are coming to us more frequently for that differentiated portion of our portfolio, and it gives us a strategic advantage.

Even though we have seen a decline in features on chicken, chicken still maintains 43% share in the fresh case ready, meat case, pork is about 22%, and beef is about 35%. We've seen volumes year-to-date just overall case ready chicken in the fresh meat case increase just under 2%.

What that tells us is that especially at retail, chicken remains in strong demand. It's the less volatile, offering in the meat case. It's a better value for consumers, and we think that they realize that.

On food service, we've been very careful over the last few years to not try to be everything to every customer in food service. We've chosen well, I believe, our key customers in that segment, and we're realizing good growth, good demand at food service. And our customers there continue to come to us again for differentiated offerings and we see demand as continuing to be strong into 2017.

And so your outlook for pricing?

Pricing remains good. We don't typically talk about price as the first subject with our key customers and so we don't see a lot of changes in our portfolio with our key customers. On the commodity side, we believe that pricing in 2017 will look a lot like 2016. It'll be fairly lumpy, given the seasonality of pricing trends on a normal basis, but when you aggregate all of that out through the year, we don't see it to be largely different from 2016.

And the export markets as far as how we expect the profits to be actually a little bit higher in 2017 compared to 2016, as we started 2016 very soft.

That's a good point. We are going to realize export pricing much stronger in the back half of 2016 versus 2015. We think that's going to carry on into 2017 as some of our competitive countries like Brazil are still experiencing a combination of the lower feed supplies and higher currencies relative to the dollar.

That's helpful. And then just on to Mexico. Your outlook for the Mexican profitability going into the fourth quarter here?

We see it as normal as it relates to seasonality. October is usually relatively weak compared to the other two months. We see pricing picking up in November and getting stronger in December. Actually, we've seen it maybe a week or two earlier in terms of strengthening in the live market, which is a good positive indication right now for the Mexican market.

We saw the exchange rate also moderating a little bit, Farha, which is very positive for the Mexican economy.

That's helpful. Thank you.

Ken Zaslow, Bank of Montreal.

Good morning, everyone.

Good morning, Ken.

Just a couple questions. One is, can you talk about the conversion to the plants and if you had any issues? What the operational challenges are, where we are with the conversion, and just giving us some sort of timeline of when they'll dissipate?

Ken, I'm not sure which conversion you're talking about, but I'll talk about the three that we are doing right now. On our organic chicken production, we are on schedule and on target. We expect to deliver the first organic bird to the marketplace on or about March 1st of 2017. That project is going very well.

We actually have our first couple of cargoes of organic corn purchased and on the way to the port. On the Mayfield, Kentucky conversion, that project has gone fairly smooth. We are supposed to start that plant backup at the end of this week, so I don't see any issues there. That project is in support of, again, one of our key customers.

Our new fully cooked line in Moorefield, Virginia is on target as well. We expect it to be operational early, Q1 2017. That line will support our popular and profitable Pierce brand chicken, primarily fully cooked wings. We see that as being supported.

One other facility that is not yet in full operation is our Waco, Texas plant. We have been doing a lot of projects in that plant. We currently have three of our five lines running with the last two to start up later this year and we expect it to be fully operational sometime in Q1 of 2017.

Perfect. Thank you. And then just on the export side, what's your thinking on China reopening? What's the timing of that and how much of an impact will that have to you?

We don't currently have an idea in terms of timing. We have heard reports that China is close to opening up. If that happens, we see that as supported, primarily for wing markets, wingtips, specifically, and chicken feet. We see that as a positive move. We look forward to it.

Great. Thank you. That was my two questions.

Adam Samuelson, Goldman Sachs.

Great. Thanks. Good morning, everyone.

Good morning.

Maybe returning to taking Ken's question a little bit differently. Hoping you could quantify a little bit more the impact that these plant conversions and upgrades had both in the quarter as well as just maybe a full-year kind of sizing of what kind of the headwind has been this year? And as you think about those plans presumably returning to more normal operations for most of the calendar 2017, how to think about the net swing in terms of your P&L from those plants?

Thank you, Adam. The two plants that have impacted profit are our Mayfield, Kentucky plant we are just finishing a shutdown of actually a couple weeks, so that will impact Q4 in terms of volume. The other one is our Waco, Texas facility and the impact there has been an our prepared foods business.

And that's why we realize a decline in our prepared foods volume, primarily in quarter three that will extend on into our current quarter and somewhat into Q1 of 2017. But as we get the last two lines of that facility back up, we believe that volumes will then return to normal and that being a relatively stable and higher-margin category that we think best supportive to our profits.

Okay. And then in the quarter itself, I was wondering if you looked based on the disclosures in the Q, it seems that a good part of the margin decline in the US would have been fairly -- at least on the unit margin basis would have been attributable to both the feeds and the derivative losses that you incurred in the quarter.

Is that actually correct if I was to try to do a comparison unit margin's year-over-year and just talk about where you think you are today on the cost side versus where you're going to be heading into 2017?

Directionally that's true, but you have to realize that derivatives loss was a point in time loss and as we produce and sell the product to which that was attached, then we'll recover most if not all of that money over time. I would tell you, the other two categories where our volume and margins have been off from a historical basis have been in our large bird deboning business, and that's reflective of lower commodity pricing that the entire market has realized.

And then our prepared foods business which was impacted by our Waco, Texas plant not running at full capacity. Again, as I have addressed before, we expect that to be rectified sometime during quarter 1 of 2017.

And just a quick follow up there. On the big bird volumes, how much are you down both? Is that head, weights, combination?

It's a combination of both, but as we get into 2017, we will bring those facilities back up to normal production levels.

Okay.

The fact that we are also moving one of our big bird plants to the case ready organic facility.

Got it. Thank you.

(Operator Instructions)

Michael Piken, Cleveland Research.

Hi, good morning. Just wanted to touch base a little bit more on Mexico and your outlook for 2017. Even in the fourth quarter here, I know you said pricing was going to improve in the fourth quarter, but if you could just talk about your volume growth expectations for yourself next year as opposed to the industry and where you are on your synergies with some of the Tyson plants?

Sure. Thank you, Mike. As Fabio reported, we've captured already 90% of our synergies, so we are pretty much done there in terms of getting those synergies collected. We are very pleased with the performance of our entire Mexican business, particularly the integration of the newly acquired assets, that has gone very smooth.

We intend to grow our value added business in Mexico as Mexican consumers increasingly demand that type of product as they mature in their consumption habits relative to history. As we said, our growth potential is much greater in the southeast of Mexico with our new facility in Veracruz. They have aggressive plans to grow in that area of Mexico, which is fairly new for us.

We expect chicken production to be normal in terms of growth. It's typically between 2% and 3%. We think that we'll grow in line with the market if not slightly more, given our growth in Veracruz. So we are looking forward to another great year in Mexico as we experienced during the last few.

And just to add, Mexico is the largest partner of the US. It accounts for more than 20% of all the US exports.

Great. That's helpful. And then just shifting back to the US. There has been a recent pick up in some of the weekly egg set numbers over the last month and a half. How much of that is just due to the number of the big bird debone operators maybe not cutting back production as much as last year versus maybe the start of a trend? Thanks.

If you look at it over the long period of time, let's say the past five months, we have actually seen the breeder flock size decline by about 1.64%. I think the last couple of weeks increase is more of a timing issue around holiday cuts and Christmas and Thanksgiving, moving around a bit. Hatchery utilization has stayed roughly the same, so I don't really see a big change in egg sets or production going forward relative to where we have been through out the year.

Akshay Jagdale, Jefferies.

Good morning. Thanks for taking my question. I just wanted to follow up on the impact of these client closures. So let me just ask it a different way.

So far this year industry conditions have been pretty solid, I would say. Cost are down, pricing especially in the third quarter. Cut out was up after having some challenges in the first two.

I believe you have made a conscious decision to go through some maintenance projects and you have done them more sort of upfront instead of periodically. Can you just help me understand sort of relative to what you are expecting in terms of timing where you are? Because it seems like the first quarter there was like a weather-related impact in one of your plants. Second quarter the main issue was the prepared food issue.

I think that same prepared foods plant has continued to impact volumes and profits in 3Q. So can you just help me understand like how much of the profit performance you expected, how much of it is somewhat taking a little bit longer? Because it is costing you guys money to keep these plants or to go through maintenance for an extended period of time. So can you help me with that?

Because it seems like it had a huge impact in 2Q, I am estimating $0.07 or $0.08 in EPS, 3 points to volume. I don't know what the impact of the prepared foods plant was exactly in 3Q,but it seems like it was larger. Because industry margins got better in 3Q by a pretty significant amount and your margins got worse. So I'm just trying to understand how much of that is really Company specific and planned versus market related.

Most of these projects were planned and they are strategic in terms of continuing to change our portfolio to more value added products, particularly ABF, veg-fed, and organic. On the prepared food side, you are correct. We are doing a lot of work inside our Waco, Texas plant getting that plant in really good shape for the future. It is our largest prepared foods plant in volume, and we look forward to getting it -- running at full capacity sometime in Q1 of 2017, which we do believe will be additive to the margins.

But other than the Waco plant, all the others were strategic in nature and were planned. You can see that as reflected by our increase in capital spending. Obviously, that sets us up very well for growth and margin expansion in the future.

And so can you help us understand the market dynamic of this prepared food plant being closed? So is that -- obviously, that volume is being ceded to your competitor. How is that playing through in the market and is it as simple as you turn that plant back on that the demand is there? How should we think about that?

We do believe that demand is there and we don't see any issues with retaining and increasing in our business once that plant is in full production. One of our competitors had an issue a couple years ago in a similar nature and that demand remained the same and continues to grow. So we don't believe that's a significant issue going forward.

And just in terms of what you mentioned, we buy raw material on the external markets as well, so we buy wings, we buy breast meat on the open market. During this time what was happening is we were just not buying. So it was not that we were selling more or less fresh meat on the market.

Okay. I will get back in queue. Thanks.

(Operator Instructions)

Bryan Hunt, Wells Fargo.

Thank you. Good morning. My two questions are Bill, you talked a lot of projects, ABF, case ready, fully cooked, ongoing Mexican expansion projects. I was wondering if you would just give us a preview of what 2017 CapEx may look like? If you don't have an absolute number, maybe directionally relative to 2016.

Thank you, Brian. We expect for next year to repeat this year. So around $220 million in CapEx, it's a little bit higher than the initial expectation of $190 million as our strategic projects are moving fast.

Thanks, Fabio. And then my next question is your balance sheet remains very strong. I was wondering could you talk about the potential for balancing potential M&A opportunities with dividends and share repurchases, considering your larger shareholder's desire to deleverage?

Well, we have, as you noted, a lot of capacity on our balance sheet to grow. The last couple of years we've returned a lot of cash to shareholders, both in the form of dividends and share repurchases. But I can tell you that from a Pilgrim standpoint, we still have a burning desire to grow through acquisition.

We just -- we're going to make sure that whatever acquisition we undertake is a good value. An example most recently being the one in Mexico. I can assure you if we find good value and strategic acquisitions, then we are likely to move forward and get those done.

And just to build on that, Bryan. We have the two strategic fronts, the chicken track and the prepared food track and we will -- we continue to see targets or options on both of those tracks. We execute the strategy just like Bill mentioned when we can create value for all of our shareholders.

So it sounds like you have the capacity to do both, return cash to shareholders on an ongoing basis and do M&A?

Absolutely.

Thank you. I will get back in the queue.

Carla Casella, JPMorgan.

Hi. You talked a bit about the large bird deboning. What percentage of business today is the large bird?

We are on our fresh business, Carla, we are evenly split across our case ready business, our small bird business, and large bird deboning business. So it's roughly equal proportions.

Okay, great. And then did you say specifically what the plant shutdown impact was on margins? Did I miss it?

We did not specify that, but it largely was responsible for the decline in our volume.

Okay. Great. Thank you.

Akshay Jagdale, Jefferies.

Thank you. Thanks for taking the follow-up. Just to play the devil's advocate on the industry data. So you are right, the breeder flocks are down and obviously, the puller placement is still up 3%, but the September number was down a significant amount. But isn't that a function of the age of the breeder flocks coming down aggressively over the last year?

Aren't we toward the end of that trend?

So that's my first question. The breeder flock and the second on egg sets. I know there's a lot of seasonality, but since mid August you seen a sharp increase in the egg set numbers on a year-over-year basis. That seems to be coinciding with the lapping of the export growth that we saw in eggs that were being exported to Mexico.

Isn't that also a contributing factor now that it looks like Mexico, eggs exported to Mexico, which today I think are like 7% or 8% of all eggs available, that was 4% or something like that four years ago. That seems to have peaked and so as we are lapping that and exports are down, it seems to be coinciding with the egg set data sort of accelerating.

Those are my sort of two questions. One on the breeder flock and one is more on near-term related to Mexico. Love to get your thoughts.

Thank you, Akshay. So if you look at export of hatching eggs to Mexico, it's up about a 1.5% year to date and so then if you translate that back into what is the domestic availability of hatching eggs, it's up again year to date only about 1%. As you pointed out we have reduced the age of the breeding flock and for five months consecutively the breeder flock size has been less than the same month a year ago.

So I believe what's taking place is we've gotten that breeder flock age to where it should be. If you look at pullet placements, they are not up significantly year-over-year, so I believe that the breeder flock is pretty much set for where it's going to be in 2017. If you look at eggs sets just in the past few weeks, I think, again, that's reflective of two holidays being on Sunday, Christmas and New Year's and I don't -- we are not alarmed by the fact that it's gone up the last couple of weeks.

I don't see -- if you take everything into account, the number of hatching eggs that we are exporting to Mexico, and that will continue, the relative size of the breeder flock, and the hatchery capacity utilization, I don't really see any alarms come to mind that we are going to significantly produce more in 2017 that we did 2016.

And just one last one on retail chicken demand. I hear you on the volumes being good. The Georgia dock is ticking down, but it's held in really well, so that's also supportive of relatively strong demand. But when you look at the competing prices at retail for beef and pork, they really haven't come down and it looks like retailers are holding onto a ton of margin because the wholesale cuts for beef and pork are down massively.

So isn't there a risk that competition at the retail level will lead to these retailers to lower the price of beef and pork more so than they have and that might further impact the demand for chicken? I know there's a lot of concerns, but is that something that concerns you significantly? Or just would love to get your thoughts on that.

Sure. Great question. With what we see from what prices are actually doing and the relative drop in feature activity, chicken versus beef, so chicken has dropped about 4% in chicken feature activity but it has increased over 3% for beef. As you correctly pointed out, beef retails have not dropped significantly.

Pork retails have actually gone up relative to chicken. So with that plus what we are hearing from our retail customers, we believe that retail demand for chicken is going to remain strong in the foreseeable future. And I think from a consumer standpoint, consumers in their minds can go to the grocery store and they know that chicken is going to be less volatile in terms of price and it's a better value than beef and pork and that's, for those reasons, we think that demand will continue to be strong going into 2017.

And just to add actually, despite the potential drop in the prices of beef, the spread between the two proteins are still very large.

That's a good point. If you look at retail composite retails of ground beef, it's still $1.10 per pound higher than boneless, skinless chicken breast in the fresh meat case.

Thank you. Thanks for taking all of the follow-ups. Appreciate it.

You're welcome.

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

Thank you. Market conditions are playing out largely as we have expected both in the US and Mexico so far in 2016 and we expect market environment the rest of the year to remain solid. Prices in the commodity markets have been strengthening in recent quarters due to better exports, which would help drive improvements in large bird cut out.

Case ready and small birds should continue to perform well. For 2017 with feed cost expectations remaining muted, our outlook is for chicken demand to continue to be very solid as we believe the increase in total US production across all protein complexes will be met with greater export demand. As well as strong US economic conditions driving more protein consumption across the board and absorbing the supplies.

We will continue to refine our strategy of partnering with our key customers, broad customer and product mix, and geographical footprint to better accelerate our growth potential in key categories above and beyond our presence in different bird sizes. We will also seek ways to deliver higher margins through improved operational excellence. We would like to thank our team members and customers, as always, and appreciate your interest in our Company. Thank you all for joining us today.

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