Pilgrims Pride Corp (PPC) 2018 Q1 法說會逐字稿

Good morning, and welcome to the First Quarter 2018 Pilgrim's Pride Earnings Conference Call and Webcast.

(Operator Instructions) At the company's request, the 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 first quarter ended April 1, 2018.

Yesterday afternoon, we issued a press release providing an overview of our financial performance for the quarter, including a reconciliation of any non-GAAP measures we may discuss. A copy of the release is available in the investor relations section of our website, along with the slides we will reference during this call. These items have also been filed 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'd like to remind everyone of our safe harbor disclaimer. Today's call may contain certain forward-looking statements that represent our outlook and current expectation 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 would 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 first quarter of 2018, consolidated net revenues were $2.75 billion versus $2.48 billion from a year ago, resulting in an adjusted EBITDA of $272 million or a 9.9% margin versus $228 million a year ago or a 9.2% margin. Our net income was $119 million compared to $94 million in the same period in 2017, while adjusted earnings were $0.53 per share compared to $0.38 per share in the year before.

We are very appreciative of our team members for getting us off to a great start for 2018. They've once again helped us deliver very solid results despite some seasonal softness in the commodity sector at the beginning of the quarter. The results are a testament to the breadth and diversity of our portfolio, which is designed to generate more consistent, higher margins over time; and give the potential to capture market upside while absorbing extreme conditions within the different segments. In addition, our key customer focus has continued to bring growth beyond the average market conditions. Though we were pleased with the progress, we're not satisfied. And then we'll continue to refine our portfolio strategy, which we believe will differentiate us from the competition. All our investments that we've made over the past few years are operating at expected levels. And together with the recent acquisitions, they are generating more value and continuing to contribute to the evolution of our portfolio and supporting our vision to become the best and most respected company in our industry.

During quarter 1, U.S. domestic demand was in line with normal seasonality, as chicken continues to represent excellent value compared to other proteins despite some movements in pork. Customer demand and margins within our small bird and case-ready operations have remained very robust. And our leading share in these markets has continued to give us a meaningful advantage relative to our peers with a narrower market focus. We're very pleased with our new organic facility at Sanford, North Carolina, which continues to exceed our expectations and profitability targets.

We believe our strategy of developing more customized solutions with each bird size and working with our key customers to support their growth expectations is generating great results and continue to enhance our margin profile and providing more consistent performance despite market fluctuations. While foodservice traffic has remained stagnant in early 2018, chicken servings are continuing to grow in menu importance and remains close to historical highs, according to NPD. Chicken dollar growth remains positive and has outpaced volume growth, which is an indication that the industry is increasing volume at greater profits.

The market environment within commodity large bird deboning during quarter 1 was generally in line with seasonality. We believe the unseasonably cold weather across the U.S. may have contributed to the late pickup in demand even though overall industry supplies remained limited. Dark meat prices were at a good level during -- due to solid exports, but boneless breast remained in a low level during the first part of the quarter and limiting the cutout before rebounding significantly higher towards the end of Q1. Also, our wings experienced a shift in demand due to foodservice operators promoting more boneless over traditional wings as a result of the higher price we saw last year.

Prepared Foods is growing at an impressive pace of 16% in revenue and 19% in volume. During the past few years, we've been investing in our U.S. Prepared Foods plants and our -- and in our operations and people to expand our capacities and capabilities. We're continuing to build -- in the build-out stage for innovation and marketing to drive strong growth for the future. These investments and focus have driven the increase in performance, and the potential for further growth remains (inaudible). We remain [fully committed] to Prepared Foods to give us an improved margin profile while reducing earnings volatility. Demand and pricing for U.S. chicken in the international markets has started to rebound since the beginning of the year as new quotas were approved. Freezer inventories on dark meat have continued to drop, reflecting better demand from export destinations as avian influenza has affected many of the chicken-producing regions globally.

The growth of our [highly] regarded Just BARE chicken brand continues to outperform expectations. While Just BARE has remained the top consumer choice on Amazon, and we are over-indexed relative to Amazon's overall fresh food growth, we have increased marketing support for the brand to ensure its continuous success in conjunction with other growth initiatives and including supply chain improvements, further innovation collaboration and exploration of new formats. We continue to see significant additional growth opportunities for Just BARE; and have made progress towards national distribution, which our -- is our ultimate goal. The transition to new clean package design to support that growth and market potential for Just BARE is going well. The brand's organic line was the first to transition, with the rest of the product line adopting the new design standards later this year. We see many benefits from the change, including significantly improved on-shelf impact scores based on internal testing; a reduction in packaging costs; and increased production flexibility, which is needed to support a national [expansion].

We had very strong performance at our Mexican operations in Q1, as the prior logistics and infrastructure dislocations caused by natural events normalized and demand returned. Volumes grew significantly during the quarter, driving a very strong EBITDA performance that is not only well above the level from a year ago but also above our expectations. The strength has continued as we've entered Q2. And that is seasonally stronger quarter for the region, and we see that as a positive indication for results. While the market recovery supported the strong performance in Q1, our team is focused on operational excellence. And continued differentiated products also contributed to improvements in the operations. We continue to place a very high priority on this market given our expectations that demand will remain a very robust growth trajectory given the steady rise in disposable income of Mexican consumers. We expect continued growth in demand throughout the first half of 2018 and for the full year and expect another strong financial result.

As a part of our strategy to strengthen our competitive position in Mexico, we've maintained the pace of new, innovative product introductions. Our Prepared Foods are growing at double-digit rate and generating great results under both the Pilgrim's and Del Dia. And both brands have continued to receive very favorable acceptance by consumers. While we've been generating very strong growth in Prepared Foods, we are still continuing to look for opportunities to grow in fresh, especially at retail. Production at our Veracruz complex is continuing to ramp nicely. And we will double the size of that facility, including a feed mill and the hatchery, by the end of this year. Our Mexican team remains committed to relentlessly pursuing operational and management excellence in every aspect of our business. And longer term, we continue that Mexico represents excellent growth prospect as demand for protein continues to outstrip supply.

Our European operations continue to report an improved performance compared to last year, with a 3% growth in volume and 70 basis points rise in margins. Our team was able to generate this strong performance due to continued focus on cost optimization, cost control, excellent customer relationships, synergy capture and our culture of constant innovation despite the changing competitive landscape. The new state-of-the-art hatchery in Newark, England we opened in late 2017 is performing well and will be supportive of our future growth and further improvements in the efficiencies of our live operations. We will continue to invest to optimize our production facilities across Europe.

Integration process is on a good momentum. And we're slightly ahead of our $50 million in expected synergies capture during the next 2 years, with detailed projects to support these that are now being clearly defined and starting to be executed. We have also benchmarked operational efficiencies in productivity, and have found more opportunities to create value through feed formulation improvements, yield management, labor efficiency at all of our European operations. Our focus on key customer strategy continues, with the -- with progress in Q1 with our key customers. This gives us a more resilient margin structure, which will be -- which we will continue to enhance through ongoing operation improvement initiatives. The business has established a reputation for providing fresh, high-quality and locally farmed poultry products; and is based on best-in-class production platform. We have a broad portfolio of products. including a significant emphasis and capability in Prepared Foods that is supported by value-added innovation capabilities. We are already seeing some positive results from the acquisition, with a significant share gain in Q4 at a large retailer and several other projects with key customers in Q1 to further optimize these relationships, highlighting our newly acquired operations are benefiting from our teams' enhanced focus on our key customer strategy. We will continue to extend that strategy to Europe, as we see incremental joint value creation opportunities there as we've seen in the U.S. and Mexico, which will drive even greater earnings performance.

Moving on to commodity prices. Corn prices have increased from their mid-January lows on increased export demand and lower projected corn production in Argentina. USDA currently forecasts the U.S. carryout at 2.18 billion bushels or 14.8% stocks-to-use. Although corn supplies are projected to be lower than forecasted at the beginning of the year, the current stocks-to-use is the second highest level in the post-ethanol era. U.S. farmers are currently planting the corn crop, and despite getting off to a slower start, U.S. soil conditions look favorable to somewhat growing. Soybean prices have also rallied since January on concerns that crop losses in Argentina have been only partially offset by a record crop in Brazil. USDA is currently forecasting post-ethanol-era record soybean ending stocks of 530 million bushels in the U.S. Soybean prices have also been extremely volatile following the potential for trade disruptions with China, which represents 61% of all soybean export demand. Like corn, soybean planting got off to a slow start, but farmers are currently catching up the pace. We will keep an eye on how the crop develops in the U.S. this summer. And although grain costs have increased, we had similar environment last year, showing any concerns over pricing could reverse quite quickly, depending on changes in weather conditions. And as such, we don't believe feed prices will pose a strong threat to margins in the medium term.

2018, USDA is forecasting total U.S. chicken industry production to grow at a rate slightly below last year's. While the overall size of the breeder flock may seem high relative to historical levels, part of the increase in the primary breeders -- is in the primary breeders segment given that the breeder market share shifts and continued change and a new generation of breeders. This shift to the new breed is yet to be completed. The most recent data on egg productivity, hatchability and chick mortality driven by breed shift has continued to be challenging and put constraints on our supplies. We believe the loss in productivity is structural and in the order of a 1.4% decline in broiler chicks hatched per layer. Considering this loss of productivity and higher mortality to support the growth in total heads, the -- and the magnitude that USDA is projecting, there's a requirement for significantly more breeders than in the past.

Despite more availability of other proteins, the outlook for chicken demand this year remains robust, as, we believe, the positive export environment can support an increase in total U.S. production across all protein complexes while continuing strong U.S. economic conditions, including very low unemployment and an improvement in disposable income. And that will drive households to ask for better-quality, higher-priced cuts of meat, and also overall consumption. While U.S. corn prices have moved lower year-to-date, we believe our relationship with key customers afford us an added level of protection. Globally chicken remains the fastest-growing protein in demand, and U.S. chicken continues to be very competitive.

While (inaudible) well balanced in terms of our bird size exposure, we will continue to look for opportunities to shift our product mix and reduce the (inaudible) portion of our portfolio by offering more differentiated products to key customers while also optimizing our existing operations by pursuing our operational improvement targets. We believe our key customer approach is strategic and creates a basis to further accelerate growth in important categories by providing more customized and innovative products to give us a clear competitive advantage. Operationally, the capital investments and restructuring we've made to the portfolio will also benefit results in 2018 and beyond. Although freight has been a challenge in all segments, our team has done a great job to be able to minimize much of the impact during Q1. Fabio will have more details on that in a few minutes.

Given our experience with state-of-the-art deboning equipment in Europe and Sanford and our quest to continuously improve the work environment and safety for our team members, we've made steady advances in developing robotic solutions for our processing facilities. Our focus has been on addressing process steps, where both economics and employee fatigue due to repetitive motion are key concerns. We are excited about the progress to date; and are in a position to test a proprietary, commercial-scale, proof-of-concept robotic technology in a labor-intensive process area where no automated solution exists today. The current plan is to test this technology in the latter part of Q3 of this year. We believe that our commitment to developing advanced automation technology will not only create a sustainable competitive advantage but also allow us to economically address the ongoing issue of labor availability in our industry.

In 2017, Pilgrim's continued to focus on sustainability, and we're very proud of our 2017 performance and are on track to meet our 2020 goals. Compared to 2016, we've decreased water use rate by 1%, fuel use rate by 3%, electricity use by 0.5% and our greenhouse gas emissions by an impressive 8%. Most importantly, we continued to make progress in team member health and safety, outperforming the industry average in total recordable incident rates and days-away restrictions and transfers rate; and reducing our severe incidents by 25% compared to 2016, far surpassing our 15% year-over-year reduction target. We promoted 165 team members internally during Q1, more than double from [2] years ago on a run rate basis. And we continued to stay focus on animal welfare, and in 2017 passed all of our external third-party audits with scores above 97%.

Our partnerships with our more than 5,200 family farm partners remain strong, and we paid them nearly $900 million to raise more than 2.2 billion chickens last year. In the coming months, we will release our Pilgrim's 2017 sustainability report update, which will detail our 2017 performance and provide an update on our progress towards meeting our 2020 goals. We're confident that by continuing to focus on sustainability, we'll continue to position Pilgrim's as a global industry leader in the production of high-quality, sustainable chicken products.

With that, I'd like to ask our CFO, Fabio Sandri, to discuss our financial results.

Thank you, Bill. And good morning, everyone.

Before I begin, as a reminder, because we closed the acquisition of Moy Park during Q3 of last year, U.S. -- the U.S. GAAP guidelines regarding transactions between common-control entities require a report to consolidate the historical full quarter of Moy Park into our financials. In the filings, our year-to-date and year-ago results have also been adjusted accordingly. Under this requirement, considering Moy Park both in 2018 and 2017, we reported $2.75 billion in net revenue during the first quarter of 2018, resulting in an adjusted EBITDA of $272 million or a 9.9% margin. That compares to $2.48 billion in net revenue and an adjusted EBITDA of $228 million or a 9.2% margin the year before. Net income was $119 million versus $94 million in the same quarter of 2017 or a 27% year-over-year increase, resulting in an adjusted earnings per share of $0.53 compared to $0.38 in the same quarter of last year.

Operating margins were 7% in U.S., 15% in Mexico and 4% in Europe, respectively.

Our first chicken operations in U.S. generated a solid performance during Q1. Our EBIT in U.S.A. was $127 million or 7% margins for Q1, as chicken has continued to be a compelling value proposition to consumers both in terms of overall price and in convenience despite high availability of other proteins, and demand was in line with seasonality. Small bird and case-ready were strong for us, with small bird pricing measured by EMI at near all-time highs. And while the cutout of the commodity sector was weaker at the start of Q1, it rebounded and finished the quarter strongly.

Following impacts from the hurricane last year, our Puerto Rico facility began operating again [in this quarter]. We'll expect to be back at full capacity at the end of Q2. Our sales in the Prepared Foods segments were also significantly better than last year, with an increase of 19% in volume. The commodity cutout has followed the normal seasonality into Q2. And our portfolio exposure to all bird sizes is designed to take advantage of the upside from commodities while minimizing the volatility and protecting the downside.

The environment in Mexico significantly improved, exceeding our expectations, during the quarter because the logistical and infrastructure disruptions associated with the earthquakes and hurricanes were resolved, which supported a much more favorable supply-demand balance. And the market in Mexico continues to perform well in Q2. Our EBIT in Mexico for Q1 was $53 million or 15% margins.

Considering the strength in Q1 and momentum in Q2, we believe Mexico will have another great year during 2018. And our long-term outlook on Mexico remains very positive, as we believe the country will continue to be a platform for future growth in chicken consumption as consumers seek better diets on higher disposable income. To support the growth in Mexico, we continue to invest in our production at the new Veracruz complex, constructing well, and its performance is also exceeding our expectations. And we expect to double the size of that operation, including a new feed mill and hatchery, by the end of this year. And as part of our targets to improve our differentiation in Mexico, we have been increasing our focus on Prepared Foods, including adding products using the Pilgrim's brands.

Our investment has continued to produce very good results, with Prepared Foods volume 33% higher than a year ago and with our Pilgrim's and Del Dia brand capturing 35% of the prepared food markets in the region. To maintain our growth and continue to innovate, we launched fresh chicken under the premium Pilgrim's brand, including no-antibiotics-ever which has continued to see strong demand. This strategy is supportive of our goal to increase our higher-margin differentiated products by having product coverage from entry, low level to premium, both fresh and prepared, in Mexico.

During Q1, the new European operations continued to improve sales on consistent margins. Our EBIT in U.K. and Europe was $21 million or a 4% margins for Q1. The integration is going well. And we are excited with the geographic diversification and growth potential for us while evolving our portfolio and creating a sustainable advantage to opportunities to capture of the upside in the market but protecting the downside. We are slightly ahead of our target of $50 million in synergies over the next 2 years, including optimizing the product portfolio, operational synergies and implementing zero-based budgeting. We will increase efficiency across the value chain by enhancing sources and -- sourcing and production, improving life costs, yield improvements and the global management of feed sourcing. We will leverage our marketing and sales infrastructure to optimize SG&A costs. The new hatchery in Newark, England is performing well and will contribute to our future growth while lowering costs and improving efficiencies. We have a proven history of successfully capturing synergies and delivering significant improvements. In most recent deals, we have meaningfully exceeded our initial synergy targets while building and improving the performance of the business beyond just the underlying market. We are confident we have the methodology and the team in place to singularly continue to grow the profits in our European operations and leverage their expertise and experience to improve the rest of our global operations. As Bill already mentioned, we are already seeing some positive results from the acquisition, with significant share gained in Q4 at a large retailer and several other projects with other key customers in Q1. And we will continue to strengthen additional relationships while supporting an improvement in the financial performance of the business.

During Q1, our SG&A reached 3.1% of sales, reflecting the inclusion of support for expanding the Just BARE brand nationally and investments for our new Prepared Foods products both in the U.S. and Mexico as well as the addition of the new European operations, as well as some reclassifications from costs to SG&A due to the new accounting standards.

We saw the increase in transportation due to the tight labor and changes in the ELD mandate. For the year, the total increase in freights will be $29 million, of which $23 million we already mitigated or in the process of mitigating through negotiation with our customers or price increases. For the quarter, the impact was $4 million. Despite this impact and the headwinds from (inaudible), we are on track to reach our target of $210 million in operational improvements and synergies for 2018, reflecting the benefits of the acquisitions and supporting the evolution of our mix and production capabilities and improving our ability to service key customers throughout the globe.

We will continue to prioritize our capital spending plans this year to optimize our product mix that is aiming at improving our ability to supply innovative, less-commoditized products; and strengthen partnerships with key customers. We expect to invest $300 million to $350 million on CapEx to account for the inclusion of GNP and Europe within the budget. We reiterate our commitment to investing in "strong return over capital employed" projects that will improve our operational efficiencies and tailor customer needs to further solidify competitive advantage for Pilgrim's.

Our balance sheet continues to be strong given our continued emphasis on cash flow from operating activities, focus on management of working capital and disciplined investments in high-return projects. During the quarter, our net debt reached $2.2 billion, with a leverage ratio of 1.5x pro forma last 12 months EBITDA, below our optimal range of 2 to 3x. Our leverage remains at the low level. And we expect to continue to generate strong cash flows, increasing our financial capabilities to pursue our strategic actions.

We are adjusting the outlook for 2018 interest expense to about $150 million, reflecting the payment of Moy Park corporate bonds that led to a one-off cost of $30 million or $0.05 a share in Q1 from the yearly repayments premium and arrangement fees. We also again received great support from investors, with the offering more than 3x oversubscribed to replace the European bonds with an increase of our 2025 and 2027 bonds, simplifying our total debt structure and reducing its total cost. Upon completion of the full redemption of the Moy Park bonds later this month, we expect our interest expense to normalize to the previous levels of $120 million per year.

We will continue to maintain a strong balance sheet and relatively low leverage. We remain focused on exercising great care in ensuring that we create shareholder value by optimizing our capital structure while preserving the flexibility to pursue our growth strategy. And we'll continue to consider and evaluate all relevant capital allocation strategies that will match the pursuit of our growth strategy. And we'll continue to review each prospect accordingly to our value-creating standards.

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

(Operator Instructions) Our first question comes from Farha Aslam with Stephens Inc.

First question, Bill, could you just share a little more detail about your grain comments? In 2018, what impact do you anticipate from grain on your costs? And how much of that can you pass on?

Yes. So, Farha, what we know now is really only what we can see if we use the forward curve. And if we were to use the current forward futures curve, it would impact us around $150 million, but I would caution using that number because we don't yet know confirmation of total acres planted. And while we think we're going to have excellent growing conditions, we think that the U.S. crop is going to be very healthy. As I said in the prepared remarks, our stocks-to-use rates showing just under 15% is going to be more than adequate to meet supply, so I'm reticent really to use that forward curve as an absolute. But if we were, again it would be about a $150 million impact.

Just to add, Farha, in terms of timing, because the grain is on [carriers, they say], the -- most of that impact will be in Q2 -- in Q3 and Q4, much less in Q2. Q2, in fact, using the forward curves today, will be around $35 million.

That's helpful...

And one other thing that I think we've talked about over the last few years that's relevant to this. We have structured our pricing contracts in such a way that we can move much quicker in terms of price to offset something like feed ingredient cost or, as we spoke earlier, freight cost increases as well.

Helpful. And you guys highlighted that your debt-to-EBITDA is only 1.5x below your optimal range. In terms of M&A, what are you seeing out there? And kind of what size of a transaction would you be able to fund with your balance sheet right now and be comfortable funding?

Farha, I think there are multiple ways of funding a transaction. It could be through equity. It could be through debt. I think we have ample support from both our shareholders and the bondholders to do, yes, any size of acquisition that we want. On the M&A, we have not changed our strategy. We still have our 2 strategic fronts, the chicken track and the prepared food track. We continue to see targets and options on both tracks, and we will execute this strategy when we believe it can create value for our shareholders. We consider ourselves prudent acquirers. And our value-creation strategy is based on synergies, operational excellence and more consistent earnings. We have a good balance sheet, again, and the support from the markets to do any type of acquisition.

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

Can you just elaborate on what you're thinking about the productivity and hatchability issues? I think you said you think it's structural. For how long? And then if the supply is coming down, my sense is most people now will be closer to the 1% production levels. Why do you think the breast pricing environment has not gotten stronger quicker? And I'll leave it there.

Okay, Ken, I'll take the last part of that, first, and then move into the breeders. I think that -- a couple things. We saw more breast inventory in the freezer than we have seen before. And I think the biggest impact, though, was from competing meats, particularly in pork, but with what we're seeing with our key customers, we see great demand for chicken, especially at retail. And as I said, again, in the prepared remarks, we see that chicken continues to win at foodservice with increased offerings on the menu, so I'm not overly concerned about the competing meats environment, but I think that did hamper the pickup in breast meat prices. We also believe that the weather, the lingering winter weather and several storms that went up the Northeast corridor also delayed the typical seasonal price pickup early in the quarter. Now we did see that again correct itself toward the latter part of the quarter, and I would say it's about normal now on a seasonal basis. We think this summer and as grilling season begins to mature is going to be a great demand environment for us. And we think that we will see a normal pricing environment as we go through the year. Back to the supply issue: We're basically in line with what USDA is calling for supply for the year, 1.5% to 2% above last year, but I would caution everyone looking at the breeder supply that it's going to have to look much larger than it's looked historically from an increased standpoint, because we are getting about 1.5% less productivity in terms of chicks per hen, so it's just simply going to require more hens to produce the same number of chicks. And we've certainly seen that in terms of breeder supply, egg sets and then chicks placed. I think we'll continue to see that. As I made the remark that it's structural, I don't think that it's going to go back to what we knew as normal 2 to 3 years ago, as the breed change is a permanent change. And with respect to at least one of the breeders, the big breeding companies, we've seen a change in their productivity even on their -- some of their legacy breeds and not their newer breeds, so I'm not sure what's going on there, but it's definitely impacting overall chicken supply.

Well, just to add, Ken, that while the production in the chicken industry is up 1.4% in Q1, according to USDA, the volumes on the small bird market is significantly lower, while the volumes on the big bird market are significantly higher. So because of the specific supply-and-demand of these 2 markets, what we are seeing is (inaudible), which is the commodity index, down year-over-year, while the prices according to the EMI small bird index are 9% higher than last year, higher than the 5-year average and close to all-time highs. So we are seeing a little bit of supply-demand difference between those 2 markets.

(Operator Instructions) Our next question comes from Heather Jones with Vertical Group.

So, first question, was wanting to know if you could walk us through -- because you mentioned the formula pricing you have in place is helping you offset freight and feed, et cetera, you have stronger results in your Prepared Foods, stronger results in small bird, so I was wondering if you can walk us through how you're thinking about your U.S. business in '18 versus '17, as far as the EBIT performance.

Yes. I think -- so what you'll see, Heather, is the -- a full year's impact of our Sanford, North Carolina organic operation. We just started that in late February in 2017, and in '18, will have a larger percentage of our portfolio, which that business is much more profitable than our regular business. So that's one. We've seen a significant decline in the number of head in small birds. It's down, I think, about 9% versus year ago. And so the value of those small birds continues to go up. We're the largest supplier of small birds in the U.S., and we've certainly seen better demand and pricing for those products. And we continue to improve our mix in that segment. In our case-ready business, again seeing very strong demand there. And we continue to grow that business with our key customers. We continue to have key customers ask us for more and more of that product. And then finally, most of our Prepared Foods improvement has been operational. We continue to benefit from our investments in the past in Prepared Foods. We're seeing great results in terms of just overall improvements in those operations and expect to continue to see that.

So just the follow-up to that question. Despite the weakness and -- I shouldn't say weakness but relative to last year the weakness in the big bird category, do you think there's a reasonable chance that's maybe not equal 2017 but come within range of that because of the other positives?

Yes, we see an opportunity for 2018 to be close to 2017. If the conditions that we believe will continue to improve in terms of our overall economy, consumer spending, we get a good crop this growing season, yes, we think it's going to be a good year.

Okay. And my second question is on Mexico. So an excellent turnout for Q1, but looking to the back of the year -- well, the remainder of the year, Q2 to Q4, you guys in your commentary talked about a good outlook. Do you think Q2 through Q4 results in Mexico should be up year-on-year? Or I mean, because you had a really good performance in Q2 and Q3 of last year. Do you think you can beat that this year?

Well, Q2 has certainly started off very strong, but 2 things that I'll say about Mexico. One, we expect that normal seasonality is going to exist in Mexico as it has for as far back as we can see. So that's one, but I would tell you what really gives me confidence about our results in Mexico is our management team. We have a management team that is absolutely focused on excellence, as opposed to success, and that -- they continually -- I wouldn't say surprise me, but I would say they continually exceed my expectations of what they can deliver. And I don't think that's going to change anytime soon. So we have a great market environment combined with even greater quality of our management team down there. And so I think that 2018's going to be an extremely good year in Mexico.

Yes. Comparing Q2, Q3 and Q4, Q2 was really strong last year. Q3, following the normal seasonality, was a little bit weaker. And Q4, we have all the disruptions. So we believe Q2 could be in line with last year, with Q3 as well. And we could do -- have a much better Q4 this year than we had last year.

The next question comes from Jeremy Scott with Mizuho.

I'm just wondering what your thoughts are on share buybacks. I appreciate the M&A activity might be picking up. And you have some dry powder on your balance sheet, but given where your stock multiple is today, I would assume that, when you're assessing your capital allocation and your earnings outlook, Pilgrim's might be the best opportunity out there. So just kind of wondering your thought process behind that and when we could see maybe a pickup in buybacks.

I'll make a brief comment, and then I'll let Fabio follow. So first off, I think you're right. And our current price, Pilgrim's shares represent one of the best values, I think, in the market, but we have to be cognizant of the size of our float. So, Fabio, if you can follow on that.

Yes. Last year, we bought -- not last year. '15 and '16, we bought around $210 million in share buybacks, but just like Bill mentioned, we need to be cognizant of the size of our float. If we continue to do buybacks, we will reduce debt, which will increase volatility. So despite being a great investment, we don't have any share buyback programs open. We have always the discussion in our board how can we create value to our shareholders and through acquisitions, through investing in our business in terms of CapEx, through investing in our business [often] in terms of share buybacks and also dividends. It's an ongoing conversation on how to create shareholder value. And share buybacks are one opportunity, but today we don't have any program open.

Got it. And I just wanted to ask about foodservice demand. I assume some of your competence and big bird improvements throughout the year has to do with the fact that we had some choppy weather and -- but now it seems like traffic is picking back up. Can you talk about how demand is trending in 2Q? And then separately, we've heard anecdotally that -- the boneless wing [division], which dominated last year, starting to wind down considering a drop in wing prices. And now restaurants are considering to tick back up in wing features heading in to football season. So is that consistent with what you're hearing from your end? And directionally, what's the next move in wings?

Yes, it is. As far as wings are concerned, with tepid growth in the number of head versus last year, that's going to govern that overall wing supply. So we look forward to a strong wing season, once football season starts again, with relative low inventories of wings. And I say relative compared to other years. We think that we'll see another strong wing season. As far as overall foodservice business goes, again, while we've had sort of tepid growth in traffic, chicken has gotten share away from other menu items. And that's why we're confident in terms of the foodservice environment for chicken.

If you look at the RPI, which is the Restaurant Performance Index, which includes expectations on growth and expectations on foodservice, it is going up right now. So we see the restaurants investing and preparing for growth as well.

All right. Maybe to just get one, squeeze one more in on organic. You talked about the obvious return benefits there. I know you have some good penetration with Amazon, but there seemed to be the gap maybe with Whole Foods. I'm just wondering if there is some marketing you have planned to bolster the Just BARE line.

Yes, we do. We've said in previous calls, and it remains our strategy, to take the Just BARE brand national. And we're talking to all of our key customers about that brand and where it fits in their meat case portfolio, and we're getting good response so far.

Our next question comes from Michael Piken with Cleveland Research.

Just wanted to sort of talk a little bit about NAE versus your expectations for how big the market might be. I know you guys have talked about getting to 25%, but how do you see that evolving over the next 5 to 10 years? Is this going to be a situation where eventually half the market will be NAE? Or how do you -- how big do you think you can eventually grow?

Well, we're over 30% now in terms of our U.S. production. And we think that we will move on up toward 50% of our total production in the next few years. I think the market will continue to grow for that product, but I would remind you, and we've stated this in the past, and it remains our strategy, that we don't do that on a speculative basis. We only convert our production to NAE when a key customer tells us that that's a need for their portfolio. And so given that, we're not all that concerned about overly competitive pressures from more chickens being converted to NAE. And so that'll remain our strategy going forward.

Right. And what type of impact does switching to NAE have in terms of the total number of pounds out there? Like, do you think that that's been another reason why we might be seeing a little bit more of a modest growth rate in terms of overall industry supply? Or do you think it's exclusively...

No, I think that's a good point. We see lower growth rates for the chickens. And we also see higher mortality and slightly more condemnations, so it does provide a damper on supply growth.

Our next question comes from Adam Samuelson with Goldman Sachs and Company.

I guess the first question, maybe digging a little bit more on the cost side in the U.S. and thinking about how the first quarter trended and what are the implications for the rest of the year. So it looks like your unit costs in 1Q were up about 7% or so in the U.S. business. And I know mix between prepared and fresh can move that around a little bit, but we're just trying to think about we've gotten an acceleration in feed cost inflation at least for the time being and through 2Q, given what's happened to soy meal, but talk about -- can you talk about kind of the forward trends on labor and the impact of hatchability and some of those productivity issues you're having on your cost footprint and some of the things you could be doing to mitigate those?

Yes. Well, I would remind you that we have a full quarter, full 13 weeks of organic chicken production in Q1 of '18 versus not that much in 2017. And that's a significant impact in our case-ready business. So that's one part. And then we saw overall feed cost inflation for the quarter year-over-year. Labor, I don't think it's any surprise that labor is much tighter this year versus last, although it was tight last year. And we continue to pay more for our labor now. We're going to offset a lot of that from a productivity standpoint, as we always do. So that's my comment to that. If Fabio do -- you have anything to add, feel free.

Yes, just to add to what you said there. Organic is around $11 per bushel. So it's a significant high cost in terms of feed compared to normal production.

Okay, that's helpful. And then just in the quarter and just thinking about the balance of the year, the price/mix up nearly 7% year-on-year. Can you talk about, I mean, the mix impact of that relative -- I imagine the organic is contributing mix versus kind of the straight price. It certainly would seem to be above kind of most of the industry benchmark pricing that we would look at.

Yes, well, the buckets that I would identify as organic. Again, small bird, as I mentioned before, small bird prices have continued to increase, as have our case-ready business because we're continuing to produce more value-added products even within our case-ready business. And the last bucket would be increase in our Prepared Foods volume, as both our costs and our pricing relative to the total portfolio are much higher in that segment.

Just the -- also the transportation costs, Adam, because they impacted the price, and they're going to impact the costs as well. We always manage our business with a net but in terms of accounting we need to add the transportation costs to the revenues and add the transportation costs to the COGS.

Okay. And then, Fabio, I just want to make sure I was clear on the comments on interest going forward. So did I hear correctly that it was 100 -- the expectation of $150 million for the year and that was inclusive of the loss -- of the $13 million loss on the debt refinancing in the first quarter?

Yes, that is correct.

Okay. And then it's $120 million after that, for next year.

Yes, yes. So we have $1 billion of -- $1 billion in 2025 and $850 million on our bonds on 2027, plus the revolver and the term loan. So with all that included, we will have $120 million in interest for the year.

(Operator Instructions) Our next question comes from Akshay Jagdale with Jefferies.

I wanted to follow Adam's questioning on the U.S. business. So the -- last year, you -- the comparisons were pretty easy for this quarter from a cost perspective because, last year, you were converting the plants to organic and NAE. So there was all the costs of those conversions included in the base. And then there was no revenue associated with it. This year, you've got the revenue, so despite that, your margins year-over-year were down, right? And so trying to put all of this together, where you're painting a positive picture but your margins were down. You're talking about small bird being 9% higher price, but what percentage of your revenue is small bird? Because it looks like the rest of the business might not be doing as well. So can you just help me understand the profit margin performance in 1Q relative to sort of the comparison that existed from last year?

Yes, sure. I think, Akshay, part of that was just the timing during the quarter. So we started off in January with very, very low breast meat prices in the big bird segment. And we believe, due to weather, they didn't pick up as seasonably quick -- as quickly as they do on a seasonal basis. So we had a drag through February into the first half of March on the big bird breast meat pricing, and that was definitely a drag in the quarter. Now toward the end of March, we saw that pick up. And they've returned to more seasonable -- seasonal patterns into Q2. So that was the biggest drag that we saw. And then, again, you mentioned the organic effect. That's true on the cost side, but again you saw a commensurate pickup in revenues as well.

Yes. And, Akshay, just in terms of total profitability, we actually have the same profitability absolute as last year. The margin is a little bit lower because of the inflation in terms of the costs that we mentioned in inflation and transportation. And with that, it increases the price, but kept the same amount of dollars, which -- I mean, this is a little bit the margin, but in absolute terms they actually made the same result in U.S. as last year. And as Bill mentioned, it's all about the portfolio. We made more dollars in the other segments, including the Prepared Foods, while it was less dollars in the big bird segments, which prices were lower than last year.

Got it. And just following up on the big bird side. So boneless, skinless, I think this is at $1.27 right now. And the comps for this quarter -- so, I mean, I think we reached $1.70-plus last year, during the summer. And your comments previously, I think, to Heather's question, was that you think we can get back to '17 levels. But, I mean, the -- right now I know that weather is still an issue, right, but you actually think that the boneless price could get to $1.70 this summer. Is that sort of what we'd need to do to get to a place where year-over-year your chicken U.S. business could be sort of in-line?

Yes. I think, if we see seasonal -- seasonably normal conditions in terms of barbecue season picking up, hot weather controlling supplies -- it sometimes does, export environment picking up to normal levels, I think it could definitely approach that. I'm not saying it will. I'm just saying that given certain conditions, it could.

And Akshay, I think boneless and breast is very important. It is a leading indicator, of course, but it's 24% of the bird. The cutout is lower than last year, as of now, not because of boneless but because of the seasonality of wings. And we expect the wings to follow some normal seasonality. And prices should recover coming to the build-up for the breeding season. And tenders, if you look at the trend, and sometimes they work together, tenders and boneless, it is an upward trend already. So boneless is up, but it's only...

Got it, but the -- yes, the boneless price...

This is 24%.

Sure. Yes, got it. So just one last one. This is mainly on the productivity issues and your view that it's structural, and it actually relates to the boneless prices. So what I'm -- so what's -- my question really is, when you buy these breeders, which happens 10 months in advance, right, of production, at least, you already know what sort of the productivity is going to be. And the reason you are buying these new breeders is because they take in less corn and soy and they actually produce a higher breast yield, right? So I know where -- so what's known is they're going to eat less corn and soy, and they're going to produce more breast meat yields. And what you also know is they're going to produce less eggs, so my question really is shouldn't we be tracking the breast yield? And isn't the fact that the breast price is so weak even as of today a function of this? I mean, isn't that the true productivity measure that we should be looking at? That's my main question. I have one follow-up.

Well, again I think you have to look at how many heads of chicken that we're going to get per 100 breeders that we have in inventory. And we know that it's going to take more breeders to produce the same number of chicks or head. And so that's really what we have to look at. And while it's -- yes, it's a given that yield continues to improve, because of the lower productivity at the breeder level, we're not going to get the same amount of breast meat increase that we used to when the breeder productivity was much higher.

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

Well, thank you.

And we look forward to another great year in 2018 and remain positive on the outlook for chicken consumption globally. Despite greater availability of other proteins, robust exports and continuing strength in the U.S. economy will compensate and drive more total protein consumption and absorb the supplies. With GNP and the newly acquired European operations, we're much better represented globally and are well positioned to improve our margin profile and reduce volatility despite specific market conditions. We will continue to look for opportunities in refining our portfolio to pursue differentiated, customized products while pursuing our key customer strategy in support of our vision of becoming the best and most respected company in our industry, creating the opportunity for a better future for our team members.

We'd like to thank everyone in the Pilgrim's family as well as our customers. And as always, 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.