Pilgrims Pride Corp (PPC) 2016 Q4 法說會逐字稿

Good morning, and welcome to the fourth-quarter and year-end 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.

(Operator Instructions)

I would now like to turn the conference over to Dunham Winoto, Director of Investor Relations for Pilgrim's Pride. Please, go ahead.

Good morning, and thank you for joining us today as we review our operating and financial results for the fourth-quarter and year-ended December 25, 2016. Yesterday afternoon, we issued a press release providing an overview of our financial performance for the quarter and the year, including a reconciliation of any non-GAAP measures we may discuss. A copy of the release is available in the investor relations section of our 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, and good morning, everyone. Thank you for all joining us today. For the full year 2016, net revenues were $7.93 billion versus $8.18 billion from a year ago, resulting in an adjusted EBITDA of $899 million or 11.3% margin, versus $1.21 billion a year ago, or 14.8% margin. Our net income was $441 million compared to $646 million in the same period in 2015, while adjusted earnings were $1.75 per share compared to $2.60 a share in the year before.

For the fourth quarter of 2016, net revenues were $1.19 billion versus $1.96 billion from a year ago, resulting in an adjusted EBITDA of $172 million or 9% margin, versus $150 million a year ago, or 7.7% margin. Our net income was $71 million compared to $63 million in the same period in 2015, while adjusted earnings were $0.30 a share compared to $0.26 a share in the year before.

Our team achieved solid performance in 2016 as we closed the year on a positive trend. 2016 was a more challenging year than we initially expected, but presented many positive highlights of which we can be proud.

We announced our entry into USDA certified organic chicken production to strengthen our partnership with key customers, while positioning us to be the largest organic chicken producer, and complementing our ABF leadership. Last year, we were more than halfway towards our goal of having 25% of our production to be ABF by the end of 2018. And if we consider only the non-commodity portion of our production, the same target translates to roughly 40% of our chickens.

We diversified our geographical processing footprint in the upper Midwest by acquiring the GNP Company, and accelerated the non-commodity ABF share of our chicken production beyond our legacy facilities. In prepared foods, our vision for sustained growth has remained intact. We started the planned expansion of Moorefield, West Virginia, which will add to our higher-margin fully cooked capacity by 10%, starting in quarter one, and we completely revamped our Waco, Texas, facility that will be producing at normal capacity by the end of the current quarter.

All these mix changes in investments had an impact on our operational improvement target, as they increased overall production cost, but will translate into a more consistent and higher-margin profile business for the future. Our newly acquired assets in Mexico continue to perform well, now with margins approaching those of our legacy operations. We exceeded our expected synergy capture by close to $10 million annually.

We are continuing to further increase production at our new Veracruz complex, and expect to significantly expand the size of the supporting operations this year. These efforts are all a part of our strategy to further de-commoditize our portfolio and bring less volatility in our performance, as well as better margins.

Last but not least, we've paid $700 million in special dividends following the $1.5 billion that was initiated the year before, signifying our strong cash flow generation potential. And a focus on maximizing capital structure and shareholder value.

Our fresh business continued to perform well during Q4, driven by our portfolio strategy of a well-balanced mix of multiple bird sizes and geographical coverage in conjunction with the diversity of our product and channel exposure. Our presence in all bird sizes small, tray pack and large is a powerful advantage, because it gives us a differentiated platform versus our competition with a narrower focus. Each bird category has its own specific supply and demand dynamics, and our portfolio diversity gives us the potential to offset the strength and weakness within each individual market to deliver better overall performance.

To give more color on individual markets, our-case ready and small bird operations continue to deliver strong performance, and our leadership in these markets is giving us an edge over the competition. Despite greater availability of other proteins, demand for chicken, particularly at retail, has remained very robust. Traffic at grocery stores has been strong, driving demand for our retail customers, which is a positive sign that consumers' appetite for chicken, despite concerns about competing protein has not been impacted.

Reflecting the solid market conditions in these segments, the EMI small bird index remained very stable, similar to the Georgia Dock index before it. We expect small and case-ready birds to continue to have favorable market conditions, given the reduction in processing facilities over the years there, while producers continue to prioritize new capacities on larger birds. Within the large-bird deboning, prices and demand continued to recover relative to last year, supported by stronger export markets.

Although profits for large-bird deboning are still not yet at a comparable level to the other categories, the strengths of the back half and wings have helped solidify returns in this segment and contribute to a better cutout. We're very excited about our most recent acquisition, the GNP Company. This satisfied our chicken track strategy of filling voids both geographically and with consumer-facing brands.

Located in Minnesota, the nation's fourth-largest corn-producing state, and Wisconsin, this gives our production marketing footprint a stronghold in the upper Midwest, an area in which we were not strong before. It also provides a sustainable competitive advantage with the Gold'n Plump brand, which is ranked second among national brands in the upper Midwest region of the US.

Further, our new Just Bare chicken, the third-ranked national brand in the same region, is rapidly growing at a CAGR of 20% the past five years, and we believe it has transformational growth potential as our national go-to-market offering for the most desired on-trend consumer chicken brand. That said, the most exciting part of adding GNP to our family is the dedicated and passionate team of professionals who lead the business and the local support of the St. Cloud, Laburnum and Cold Spring, Minnesota, and Arcadia, Wisconsin, communities.

Export markets in Q4 have remained steady, which is a positive for the back half of the bird, and also supportive for improving the overall cutout. The absence of avian influenza outbreak domestically, as well as challenges experienced by other export sources due to bird diseases in the EU and Asia, demand and pricing for US exports has been gaining momentum since the beginning of last year, and we believe this improvement can be sustained into 2017.

Year-over-year pricing for leg quarters has increased nearly 40% 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's global export shipments in demand have been so strong. Market demand in Mexico was in line with expectations during Q4, and prices remained stable throughout the quarter.

Our operations produced very solid results; however, the strong dollar, which appreciated 20%-plus in Q4 alone, diminished the contribution to the consolidated results. As we have said before, although Mexico continues to have more volatility than the US quarter to quarter, we expect it to be a double-digit contributor to our profits. In terms of expectations for 2017, we believe Mexican producers will increase production by another 2% to 3%, in line with the growth of 2016, and for market conditions to continue to be in good balance.

Although we already have a strong position in Mexico, we are continuing with our product innovation. Last November, we launched our new family of Pilgrim's branded value-added products, both [part fried] and fully cooked, which was very well-received in the market. We have high expectations that our strategy of leveraging the premium Pilgrim's brand, well known for high quality and excellent service, will be a success.

At the same time, we are continuing to grow our market share of the well-established Del Dia brand, which is geared toward the largest consumer group in Mexico, those looking for the best value. In 2017, we have many new exciting products, which we will be introducing under this brand. We believe that we have a strong team in place in Mexico with the right structure, the best product mix, flexibility and great customer service, while always improving our operational performance.

On feed costs, corn prices have stayed in a relatively narrow range since the beginning of Q4, reflecting the ample corn supplies in the US, in addition to the large global grain stocks. Soybean meal prices rallied in January, as market participants began to worry that heavy rains in Argentina would affect production for the recently planted crop. This increase in soybean meal futures has been partially offset by a decrease in domestic premiums, which are trading at historically low levels.

A drier weather forecast in Argentina has taken out some of the enthusiasm for soybean meal; however, we do not expect feed cost to be a hurdle for margins in the medium term. For 2017, we expect total industry production to increase by 2%, mostly on heads, as we believe there's less incentive for producers to materially increase bird weights, compared to recent years of bird weights are close to optimum now.

While strong US economic conditions are positive for demand, we continue to see some signs of labor tightness affecting staffing availability across the industry, especially for new operations. Which is another factor that could impact production growth for the whole industry in 2017.

We continue to believe that 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 strong relationships with key customers. And as our key customers typically have better growth profiles than their peers, our partnerships will create an opportunity for us to further accelerate growth in key categories, while giving us strategic advantage and reducing the transactional nature of each relationship.

Despite production growth from other proteins, the outlook for chicken demand in 2017 should remain very solid as we believe robust export environment will absorb much of the increase in total US production across all protein complexes, while strong US economic conditions, including a very low unemployment and improvement in disposable income, will drive households to ask for better quality, higher-price cuts of meat and also more overall consumption.

While we are already well-balanced in terms of our bird size exposure, we will continue to look for opportunities to shift our product mix and reduce the commodity portion of our portfolio by offering more differentiated specialty products to key customers, while also optimizing our operations by pursuing our operational improvement targets. With that, I'd like to ask our CFO Fabio Sandri to discuss our financial results.

Thank you, Bill, and good morning, everyone. For the full year 2016, net revenues were $7.93 billion, versus $8.18 billion from a year ago, with an adjusted EBITDA of $399 million or an 11.3% margin, compared to $1.21 billion or a 14.8% margin for the year prior. Adjusted EPS was $1.75 compared to $2.60 in the year before.

Operating margins were 9% in the US and 11% in Mexico. We reported $1.91 billion in net revenue during the fourth quarter of 2016, resulting in an adjusted EBITDA of $172 million or a 9% margin. That compares to $1.96 billion in net revenue, and an adjusted EBITDA of $150 million, or a 7.7% margin the year before.

Net income was $71 million versus $63 million in the same quarter of 2015, or a 13% year-over-year increase. Resulting in an adjusted earnings per share of $0.30 compared to $0.26 in the same quarter of last year.

Our fresh chicken operations continue to generate very solid results. Demand for case-ready and small birds remains strong, while the commodity markets continue to improve as the environment for US exports improved from a year ago, which is supported for the back of the bird pricing, overall cutout and margin. Despite greater availability of other proteins, chicken has continued to be an excellent value to customers, both in terms of overall price and in convenience for the end-users.

In 2016, we invested a total of $270 million in CapEx, an amount significantly higher than our depreciation, in part to optimize our product mix. [While this strategic project is seen] as improving our ability to supply differentiated, less-commoditized products, and strengthen partnership with key customers, they had an impact on our operational improvement targets and our results in the short term, as they increased the overall production costs, while we reduced short-term production.

Despite this short-term impact, the strategic projects we're undergoing, especially organic plant and the investment in prepared foods, will enable us to build a more consistent and higher profile margin profile for the Business. We expect the large portfolio improvement projects we announced last year to be completed by the end of Q1.

The Mexican markets were in line with expectations during Q4, and our operations produced strong results, especially compared to the same period last year. Our performance reflected a favorable domestic supply and demand environment, despite the strengthening of the dollar against the peso throughout the quarter. The integration of the acquired operation is almost completed, and we exceeded our prior synergy targets by $10 million, which is a positive sign of the potential opportunities we have within those facilities to further strengthen our geographical and product coverage, as well as our margin performance.

As Bill mentioned, production at the new Veracruz facility is proceeding well, and its performance is exceeding our expectations. We consider Veracruz a key player in our growth within the Mexican market.

Also to supplement the strong demand in the popular Del Dia brand and grow our prepared foods in Mexico, we launched value-added products using the Pilgrim's name to expand and strengthen our presence across all consumer channels and income levels. Our goal is to produce coverage starting from the entry level all the way up to the premium segments, both fresh and prepared in Mexico.

During Q4 for 2016, we also increased our accruals for variable compensation, reflecting the performance of our individual business units. For 2017, we will continue to target SG&A expenses to be close to 2.5% of net sales as we focus on adding value to our operations.

We are continuing our strategy to capture operational improvements every year to add to the total when we first implemented the process five years ago, as our team continues to be relentless in their pursuit of operational excellence, regardless of market conditions. While our mix and production capabilities are continuously evolving to support the relationship with our key customers, our team members have identified and created action plans to capture $174 million in additional operational improvements during 2017.

Including the announced strategic projects to improve our portfolio mix, which we expect to flow through the bottom line. Of those, $174 million in additional operational improvements, $100 million will show in cost reduction, either to more efficient operation or improving (inaudible) and $74 million we show in sales through better use and better mix. Our balance sheet continues to be robust due to our continuing emphasis on cash flow from operating activities, focus on management of working capital and (inaudible) investments.

During the quarter, we generated operating cash flow of $224 million. Including the payment of $700 million in special dividend back in Q2, our net debt reached $892 million, with a leverage ratio below one-time last 12-months EBITDA. Our leverage continues to be low and underlines how much strength we have to for fulfill our strategic actions.

The outlook for interest expense for 2017 should remain in the range of $30 million to $40 million. As we continue to generate strong cash flows, we expect to sustain the pace of investment in our operations throughout 2017. As we comment before, we exceeded our initial CapEx target of 2016 and invested $270 million, which indicates our commitment to spend cash flows on strong return over investment projects that will strengthen our operation efficiencies, and tailor customer needs to further improved competitive advantages for us.

For 2017, we expect our strategic capital projects to continue to move at a fast pace, with a CapEx target of $220 million, which is also above our depreciation. We closed the acquisition of GNP Company during January. The acquisition was fully aligned with the chicken track part of our strategy, adding to our portfolio, both geographically and our consumer faith in brand.

Integration is on track, and we have already identified additional synergies to add to our $20 million in initial expectations. More importantly, we believe there is a great potential to lever the Just Bare products line, a fast-growing on-trend consumer chicken brand across our entire national portfolio, including prepared foods. Since the beginning of the share buyback program, we have purchased more than $272 million in shares on the open market, while maintaining a strong balance sheet and a low leverage.

Once again, we are confident of our ability to return cash to shareholders and exercise great care in ensuring that both the share repurchase and the dividend payments 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, and will match the pursuit of our growth strategy, and we will continue to review each prospect of (inaudible) to our value-creating standards.

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

(Operator Instructions)

Farha Aslam, Stephens Inc.

Could you just go through the costs that flowed through your P&L in 2016, kind of the projects that were related to it? You touched on a few. How much can we expect will flow through in 2017, or how much would be absent?

The cost that flowed through in 2016 is not only the cost that we invested, as we mentioned, we invested $270 million. It's also when we put some plants down, we have less production. For this year, we have around 3% less output from our plants, which increased our costs.

That relates to around $400 million less in sales and respective margins for those products. But like we mentioned, we believe that will strengthen our portfolio into a more less-commodity product.

As we look into 2017, can we expect that volumes will come back to that 3% volume, will come back? How should we think about the sales? Will that equate to another [$40 billion] sales coming back to you, and what kind of margin improvement opportunity do we get without [those lines being down]? Any color would be helpful.

Sure, Farha, I'll take that. We do expect in 2017 our volumes to be restored to our historic production levels that we expected in 2016. And in addition to that, we expect that the projects that we completed not only at the end of 2016 but a couple in early 2017 by the end of the current quarter will not only increase our production, but also improve our mix, which over time will help margin up our entire portfolio, as we said.

Again, part of that was due to some needed repair and maintenance on some of our facilities, other projects were about growing our value-added business. But all in all, we completed or will complete, about $200 million of CapEx that we believe will contribute to the $174 million improvement goal that we expect to realize in 2017.

That's helpful. Bill, you were very specific in the release saying particularly to impact (technical difficulty) could you share with us your confidence around that statement?

You were cutting out during your question, so I did not hear all of your question. Could you repeat that?

In your release you were very specific and noted that you do not expect chicken pricing to be impacted by competing meat. Could you share with us more color on what gives you confidence around that statement?

I was talking more about demand at retail than I was particularly overall chicken prices. We have seen demand at retail, as is normal during January, be very robust. Especially with our key customers, I can't speak for others, but while we believe we will see perhaps 4% or 5% more beef available in the US, and perhaps 2% more pork, we believe that chicken will remain a great value to the consumers as there's still a significant spread at retail prices from beef to chicken, and also from pork to chicken.

We also believe that the export environment will be very healthy and will clear some of this added production, as well. We don't see a significant impact for demand for chicken in 2017 due to the competing meat environment, and we believe chicken will remain very strong in demand.

I'll just add Farha that as we diversify our portfolio into more value-added products, like organic and ABF, those segments are less affected by the competition of other proteins, like more commodity segments. We need to look into the overall [all of] that we are building, and that portfolio has been a lot stronger than just commodity products.

That's helpful. Thank you.

Kenneth Zaslow, BMO Capital Markets.

I have two questions. Big-picture question. As I look at your prepared-chicken business over the last five years and into 2016, it continues to go down. Where will we see the inflection point of prepared foods, where maybe we would actually start to see growth in that business? And when I think longer term, where would you think the prepared foods business would be relative to your mix?

Great question. As you recall, Ken, much of that decrease in our portfolio of prepared foods was on purpose. In the early days of our arrival in 2011, 2012, we got out of some unprofitable business, and we reset our production footprint with a focus on margin as opposed to a focus on just value-added sales.

You asked about the inflection point and I would tell you that we are there now. From where we are today with the investments that we have made and continue to make in our prepared foods production footprint, we have a strong desire to now grow prepared foods as a percentage of our portfolio, and I think over the next five years you can see that the percentage, I think, has a chance to double from where it is currently.

I think, Ken, we already announced that we're implementing the line in Moorefield, West Virginia, and we expect our volumes in prepared foods to increase by 10% in 2017.

That's off the depressed number of 2016? You are not getting back to where you thought you would be before the challenges, plus 10%, it's 10% off what you are right now? Is that fair? Just trying to figure that out

As we continue to ramp up the operations, and we expect to be fully operational and at full capacity in Q1, we expect to add 10% to our capacity, so we would get back to the volumes we had previously.

Okay. And then my second question is with the changing administration, can you talk about how you are preparing and how that would affect your Business in terms of your Mexican operation, as well as acquiring corn, and just how you're thinking about how you are positioning, given the new presidential -- just seeing how you are thinking about that?

Ken, we're always concerned with our government's relationship with Mexico, as the US and Mexico are very important trade partners. For example, Mexico being the 15th largest economy, and the 11th largest in purchasing power, Mexico imports about 4% of the US corn crop. The US imports over $11 billion in fruits and vegetables, and over $100 billion in auto parts, trucks, cars and buses, so it's for this reason we believe that our relationship will continue to be strong, and well managed on both sides.

The Bank of Mexico predicts that during 2017, GDP will grow from 1.5% to 2.5%. We are seeing some inflation in Mexico, particularly in December, the inflation rate annualized at 3.36%, which is actually the highest we have seen in three years. On the other hand, the minimum wage has been raised in Mexico to MXN80 per day from MXN73.

We have seen fuel and electricity, as well as other cost rise, but on the other hand, unemployment rate remains very low in Mexico, and there are many factors that point to actually a strengthening economy from a consumer standpoint in Mexico, and so we are not changing our strategy as a result of anything you mentioned. We plan to grow our presence in value-added branded chicken over the next five years, and we also plan to grow our production levels and our market share in Mexico.

One other thing I would point out, in our position as the number-two producer of chicken in Mexico, that gives us a competitive advantage to other US companies who do not have that, as it provides an offsetting effect to any potential trade conflicts with the US.

And on the export picture, any worries or any concerns on the exports? You kind of came off saying very strong export picture. You don't think there would be any trade disruptions at all, is that your view?

We don't see anything to be overly concerned about at this moment. No.

Thank you very much.

(Operator Instructions)

Heather Jones, Vertical Group.

I have a couple of relatively simple questions, then I wanted to get into the prepared foods conversation more in depth. Going back to your comment on the EMI small bird index, I understand that they have been working on an index that could possibly replace the Georgia Dock index for retail contracts, and I was wondering if you could speak to that?

Heather, that index has been an index for quite some time, and it has tracked very closely to the Georgia Dock. I believe there is a slide in our investor presentation that we put online this morning that reflects that.

And it is our intent to use that index as a pricing mechanism at retail and in food service, as well. As we have been doing, actually, for quite a long period of time.

Heather, I'll just add, like we mentioned before, less than 5% of our contracts were based directly or indirectly in the Georgia Dock index. And like I mentioned, as we increase the differentiation of our products, Georgia Dock or any other market index is less important to us.

I understand that, thank you. Secondly, so you had issues with prepared during 2016, but in your fresh business, how are you guys tracking relative to your peers and your small-bird tray pack and your large-bird segments?

I remember over the last several years, you had made a lot of progress and it moved substantially higher in each of those categories. I just wondered if you could give us an update on where you stand now?

Sure, thank you for the question. We continue to be very, very competitive, if not one of the best in our tray-pack or case-ready operations as well as small-bird. We have leading positions in both.

We further differentiated our product line, especially in case-ready to more ABF, veg-fed, meeting the needs of our key customers. I would tell you that the one challenging area that we are not at all happy with right now is our large-bird deboning business. We grew rapidly over the last five years in that business, and that's an area that we have challenged our management team to get much better at.

We've got, I believe, the right team in place to do that. We have made investments in our operations to reflect that desire, and we look forward to getting much better in that segment in 2017.

And just in the portfolio transformation that we are doing, our plant in Sanford, North Carolina, has been transformed from a big-bird plant to a case-ready organic plant, in partnership with one of our key customers. So, we are always changing our portfolio to reflect our expectations in the future and our performance.

And what percentage of your large-bird production does Sanford represent? I had understood it was 650,000 bird a week, 700,000 bird a week. Was it 10% of your big-bird production? How should we think about that?

That's in the ballpark.

Okay. And then my final question is going to this prepared chicken -- if we look at the numbers that are in your K, it's roughly $400 million decline in 2016 versus 2015, and based upon average prices, it sounds like that's somewhere between 200 million pounds and 225 million pounds, and my understanding, clearly, prepared foods tends to be higher margin, but industry average is it would imply margins anywhere from 50% to 100% higher than average fresh margins.

If I think about that, it seems like those pounds could have cost you -- losing those pounds could have cost you somewhere on the order of about $40 million or so. And so, I am trying to think going forward into 2017, you get those pounds back, plus you get the expanded production, that it could be a very nice tailwind for you guys that would help counter some of the pricing pressures in some other areas of your business. I was wondering does my thinking make sense there?

Heather, generally, I think you have described it pretty well. I would tell you that we look at prepared foods not necessarily as higher-margin, but more consistent margin, and we use that business to offset some of the more commoditized portion of our portfolio. If you look at our tray-pack business, and even our some of our small-bird portfolio, those margins actually are higher than prepared foods.

The way we look at it each portion of that portfolio plays a specific role, and for that reason, we desire to grow that prepared foods business for those two reasons. One, higher margin than our, or less volatile margin than our commodity-oriented business, and more consistent. And we want to grow that as a part of our portfolio. So, I think generally speaking, you have characterized that pretty accurately.

Just to add to the [compilation] that I just did, as we have less pounds, we maintain our labor force that is high secured in those prepared food plants, so we have a much higher unit cost because of the lower pounds.

And one of the things we have not pointed out, Heather, that did contribute to volume changes, that is lowering volume, is we deboned a lot more of our leg quarters in 2016 than we'd historically had. When we report the sales pounds, the bones and trim are not included.

So, if we were to sell a leg quarter, you got the bones in the back included, as opposed to selling boneless leg meat, you don't have the back and you don't have the bones or the trims. It's much less volume, but it has provided a much better cutout, and that's why we did it.

Typically, we expect $0.05 to $0.07 premium in terms of margins by deboning, compared to selling plain leg quarters.

Forgive me for taking a little more time, but I want to clarify something. I understand that further process may not be higher margin than tray-pack and small-bird, but if I take your fresh US business in total, so all the commodity elements in large-bird rendering whatever, is prepared foods higher margin than that fresh business in total?

We expect it to be in the range if not slightly higher in margin as we improve our mix. I think that's a fair assessment.

Okay. Thank you.

Adam Samuelson, Goldman Sachs.

Maybe kind of staying in prepared a little bit. Two questions. First, one follow-up on Heather's question on the profit hit that you absorbed in 2016.

Fabio, you alluded higher unit costs associated with the lost production. If it's $40 million would be the normal EBIT associated with the lost sales, but you still have (inaudible) overhead labor. Should we be thinking (inaudible) potential of up to $100 million from those items that you have the proper overhead coverage in 2017?

Yes, in [that order of many], like I mentioned, we keep all the overhead there to train our labor force, even while we were doing the retuning of the plants.

Okay. That's helpful. And then within prepared, the commentary of late that we have seen, you talked about contracting for 2017. It seems like some of the prepared categories had a more difficult contracting round this year certainly than last year, and if that had any impact at all in your 4Q results?

No, that didn't have near as impact as our operational issues had, Adam.

As you look 2017, have you seen any, how would you characterize that competitive landscape on the prepared for the process side versus mid-last year or the last couple of years, especially given the service environment that has been tougher recently?

Good point. I think 2017 is somewhat of a more challenging environment as compared to the last two to three years.

It didn't have any impact on us. What we want to do in 2017 is restore our production capabilities, restore the confidence with our customers, our key customers and our ability to supply them and then get our volume back throughout the year.

Okay. That's helpful. I will pass it on.

(Operator Instructions)

Michael Piken, Cleveland Research.

I just wanted to touch a little bit more on that ABF, and whether you still think you are on track to eventually get to 25% of your volume from ABF, and what do you think is going to happen to the industry current premiums as more people enter that space?

We are actually ahead of schedule on reaching that 25%, as we said in the prepared remarks. We have had some key customers come to us and ask for specific products in that line, and we have been able to deliver that, which has helped us grow that at a higher rate.

The acquisition of the GNP Company also provided for more growth in that segment, as that was their model as well on the two brands, Gold'n Plump and Just Bare. We think we are ahead of schedule for our original goal.

Obviously, to your second part of the question, will those products be commoditized over time? I would say perhaps, but our strategy is really less about ABF, and more about tailoring these products to specific needs of our key customers.

So, we are not doing this out of speculation, we are doing this because we have relationships with key customers, who have identified a need for their product line, and then we have gone back and delivered against those needs, and that's why that our growth is what it is in ABF, as opposed to our speculating about where the market is going to go or not go.

Okay. Great. Shifting gears, you guys talked about the strength in retail, but can you talk at all about some of the trends you are seeing in food service, and how you expect that to play out over the course of the year?

What we see in food service is fast-casual growing at a much more rapid rate than any other segment in food service. Some QSR formats are growing, some are not. Casual dining has been the weakest part of the food service business.

We don't play to a large degree in casual dining. We have chosen to put more of our product in fast-casual and QSR, and so our business in food service I don't believe is reflective of total food service, as we have chosen to follow our key customers into the channels, or segments, that are growing at a more rapid rate.

Okay, great. And then lastly, anything you can provide in terms of color on the cadence of how you expect Mexico to play out would be helpful in terms of quarterly?

I know there's a lot more volatility down there, but would you expect it to follow the same type of pattern we saw in 2016, or would you expect a more steady margin profile throughout the course of the year? Thanks.

We have no reason to believe that 2017 will be different from a seasonality standpoint than any other year. It is sort of shaping up to be like a normal year down there for us. Actually, Q4 was much stronger than the previous year, and we have started out in 2017 Q1 in a stronger position from a demand and pricing standpoint.

The other thing that I would point out is, operationally, we continue to improve in Mexico. It's all good news, as far as we are concerned.

All right. Thank you.

Akshay Jagdale, Jefferies.

I have just jumped on the call, so if I missed something, please excuse me for that. Did you talk at all about this quarter and how it came in relative to your expectations, because obviously you don't give quarterly guidance, but generally you thought 4Q was going to be very similar to 3Q? I am just wondering what caused the sequential deterioration in the Business? Can you comment on that?

Just to compare this quarter with the same quarter last year, it was an improvement. We saw 13% better returns this quarter than the same quarter last year, so we saw an improvement in the overall market. In terms of the overall production, we continued to change our portfolio.

So we talk about this in the previous quarter on all the changes we are doing on the prepared foods operation, and on the Sanford operation, so that contributes to the lower volume in Q4. But we believe that we have to get a better margin profile for the future, and that's why we were doing that.

Sure. I appreciate that. But I know year over year it's slightly better, but last year this quarter it was pretty weak, and your US margins are about the weakest they have been since 2013 first quarter.

So, I am just trying to understand how much of that is issues with the prepared foods business that carried over, and certain aggressive actions you may have taken to improve you mix that might have impacted you short term, because we haven't seen this type of deterioration, let's say in the marketplace, industry margins-wise. Relative to industry, looks like you did slightly worse, so I am just trying to gauge that aspect.

I will tell you, Akshay, for sure, we did in the fourth quarter, we did have some effects of our prepared foods issues. We do expect, as we have said, to have our production back at more normalized rates by the end of this current quarter. We expect that will be behind us.

In the fourth quarter this year, one of the factors that provided for the improvement was the back half of the chicken pricing was much better than it was in previous years. We were coming out of the effects of avian influenza from the previous year.

From an overall pricing standpoint, as we said in the prepared remarks, our case-ready business and our small-bird business continues to be very robust. The large-bird deboning environment has been not as strong as in some periods, as you point out. But the other segments are much better, and that's why our portfolio strategy has benefited us, we believe, more than other producers.

And can you, the strategic capital investment, which obviously was a step up even relative to last quarter's CapEx guidance. What is that? What exactly are you spending that $70 million, $80 million, I forget exactly the number, incremental CapEx on? What are you doing with that, exactly?

So as we've talked about now for the last three or four quarters, we converted a big-bird plant to a case-ready plant. We will be the largest producer of certified organic chicken in the nation as a result of that. We also put in a brand new fully cooked line in our Moorefield, West Virginia, plant that should increase our prepared foods production by 10% from what it was.

We did a project at our Mayfield, Kentucky, plant to move from bone-in eight-piece production to boneless production for a key customer, so those are the primary ones. In addition to that, we completely retooled our Waco, Texas, plant, and set it up for being able to produce at a higher rate of production than it has been in 2016.

And just one last one for me, as it relates to retail price discovery. I know you and one of your largest competitors has come out and said that obviously the Georgia Dock is not a big percentage of your sales, your revenues are not really tied to Georgia Dock. Can you just talk a little bit more about how your retail price discovery mechanisms work today, and if anything has changed at all with all the focus on this pricing issue?

The negative commentary and one of your competitors getting subpoenaed by the SEC on this. Can you help us understand what is happening at the customer level with all the questions surrounding pricing? Thank you.

For us, nothing has changed in our strategy or our practice in terms of pricing our retail tray-pack production. Our relationships with our key customers provide for a relationship such that price is not the most important factor. And so again, for that reason nothing has changed in our pricing strategy, because of any particular price discovery mechanism or index or anything else.

Just to add to that, actually, we didn't have any discussion with any customer about this issue. It was more, I will say a media discussion, because we have very intelligent buyers and this price is part of a much larger discussion about quality, services, and tailoring of our products. As we mentioned, this is a price discovery mechanism, not a price determination.

Perfect. Thank you.

Bryan Hunt, Wells Fargo Securities.

You all always have efficiency improvements and projects in the pipeline, and you talked about how all the plant reorg and movements that you made in 2016 kind of muddled the picture. I was wondering, as you look to the projects that you're undertaking into 2017, is it possible for you to separate your anticipated efficiency in mix gains from recovering what you lost in 2016 from the disruptions?

Yes, sure. Like we mentioned, we expect $174 million in additional operational improvements during 2017, and that includes the strategic projects, and also specific projects in other business development plans. Of those, $100 million is cost reduction in terms of more efficient operation. Reduced labor costs, more automation, improved (inaudible) cost, and $74 million would be better yields and better mix that will show in sales.

Thank you for separating those out, Fabio. I was wondering, can you -- completely switching gears and looking at capital, can you give us an idea of what's left under your current repurchase program?

We repurchased close to $217 million out of goal or target of $300 million. So we have around $80 million, $85 million.

I guess looking at the potential for free cash flow this year, is there a reason not to expect that you would continue to buy back under that program?

We will continue with the program.

All right. And then you talk about looking at ongoing M&A, what's the universe of opportunities out there today versus when you completed Gold'n Plump?

I don't think the universe has really changed, Bryan. We continue to look very particularly at both the chicken track, as I described in the prepared remarks, looking for geographic and consumer-facing brand voids.

I think GNP is a great example of that. On the processed meats track, again, nothing has changed for what we're looking at. We continue to look at deals that are available, and we are going to go for value and not just go for top line or gross.

And Bryan, our value creation strategy is business synergies, operational excellence and more consistent targets. We have the balance sheet strength to pursue those right opportunities.

Very good. That's it for me.

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Lovette for any closing remarks.

Thank you. We're looking forward to 2017 with feed cost expectations remaining. Our outlook is for chicken demand to continue to remain quite solid, as we believe the increase in total US production across all protein complexes will be met with greater export demand, while the strong US economy should drive more protein consumption across the board and absorb the supplies.

With the addition of the GNP Company to our family, we have plans in place to leverage the strength of their brands as the national go-to market offering for the most sought after consumer chicken brands. We expect our cash flow generation to continue to be strong, allowing us to sustain the investments and strategic projects this year at a similar pace to last year, further strengthening our operational efficiencies and tailored customer needs to further improve competitive advantages for Pilgrim's.

We would like to thank our team members and our customers, as always, and 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.