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Edited Transcript of PPC earnings conference call or presentation 31-Oct-19 1:00pm GMT

Q3 2019 Pilgrims Pride Corp Earnings Call

GREELEY Nov 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Pilgrims Pride Corp earnings conference call or presentation Thursday, October 31, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dunham Winoto

Pilgrim's Pride Corporation - Director of IR

* Fabio Sandri

Pilgrim's Pride Corporation - CFO

* Jayson Penn

Pilgrim's Pride Corporation - CEO & President

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Conference Call Participants

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* Benjamin M. Theurer

Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director

* Bryan Cecil Hunt

Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst

* Heather Lynn Jones

Heather Jones Research LLC - Founder

* Kenneth Bryan Zaslow

BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst

* Peter Thomas Galbo

BofA Merrill Lynch, Research Division - Associate

* Tim Perz

Stephens Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good morning, and welcome to the Third Quarter 2019 Pilgrim's Pride Earnings Conference Call and Webcast. (Operators Instructions) At the company's request, this call is being recorded. Please note that the slides referenced during today's call are available for download from the Investor Relations section of the company's website at www.pilgrims.com.

After today's presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Dunham Winoto, Director of Investor Relations for Pilgrim's Pride. Please go ahead.

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Dunham Winoto, Pilgrim's Pride Corporation - Director of IR [2]

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Good morning, and thank you for joining us today as we review our operating and financial results for the third quarter ended September 29, 2019.

Yesterday afternoon, we issued a press release providing an overview of our financial performance for the quarter, including a reconciliation of any non-GAAP measures we may discuss. A copy of the release is available in the Investor Relations section of our website, along with the slides we will reference during this call.

These items have also been filed with 8-Ks, are available online at wwww.sec.gov.

Presenting to you today are Jayson Penn, 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 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 Jayson Penn.

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Jayson Penn, Pilgrim's Pride Corporation - CEO & President [3]

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Thank you, Dunham. Good morning, everyone, and thank you all for joining us today.

For the third quarter of 2019, we reported net revenues of $2.78 billion and adjusted EBITDA of $258 million or a 9% margin, and an adjusted EPS of $0.45.

We significantly increased EBITDA by 66% compared to last year driven by a rebound in performance across all our businesses, including U.S., Mexico and Europe. Our performance remains well balanced, and as a result of our vision to become the best and most respected company, creating the opportunity of a better future for our team members. To support our vision, we are continuing our strategy of developing a unique portfolio of diverse complementary business models, continuing to relentlessly pursue operational excellence, becoming a more valued partner with our key customers and creating an environment for safe people, safe products and healthy attitudes.

We are appreciative of our team members for the improvement of our operations as well as during Q3.

Our performance, along with the markets has continued to grow across all our global operations. In the U.S., we experienced a much better environment in our fresh business compared to a year ago, most notably in commodity large bird deboning. Our Prepared Foods business continues to grow, reflecting the investments made over the past few years. Our European operations have continued to mitigate recent input cost challenges, and we expect our results in Europe to continue growing for the remainder of the year.

In Mexico, the market was in line with seasonality and performed much better compared to 2018. Our Q3 results once again reflect the diversity and balance of our portfolio, which gives us a more consistent consolidated performance despite the volatility of specific market segments and geographies.

We will continue to evolve our portfolio to better adapt and respond to individual market dynamics and improve our relative performance over the competition. We believe this approach will give us a higher and more consistent results for the mid- to long run and minimize the full peaks and troughs of the volatile commodity sectors.

Compared to the very challenging demand conditions we experienced during last summer in the U.S., the market for commodity large bird deboning in Q3 was materially better. The commodity large bird cutout improved throughout the entire quarter and is much closer to the 5-year average driven by strength in wings, leg quarters and tenders, with boneless breast lagging.

In our less commoditized small bird and case-ready segments, customer demand was in line with normal seasonality. We are continuing to experience strong growth for our retail tray pack, rotisserie and QSR sandwich businesses with key customers. Our market leadership in these categories and more differentiated product portfolio continues to give us a competitive advantage. The margins stability within our small bird and case-ready operations has continued to give us an offset to the more volatile commodity sectors to bring us a more consistent margin platform while still giving us an opportunity to capture the upside potential.

The commitment to our key customer strategy remains relevant to our growth. Revenues from key customers more than doubled over the last 8 years, reducing our relative dependency on pure commodity sales. We continue to leverage our key customer strategy to earn more business to accelerate growth beyond just the underlying market conditions. Beyond driving growth, our key customer approach also promotes trust, enhances long-term relationships and strengthens our margin structure.

We are continuing to further differentiate our portfolio to reduce the impact of pure commodity markets. We've been increasing our mix of specialty birds, including no antibiotics ever and organic attributes to support the evolution in our customers' expectations and market growth. Specialty Birds will account for over 40% of our U.S. fresh portfolio during 2019, which has more than doubled, but less than 20% just a few years ago.

We have now converted 2 large bird deboning plants to full NAE, supportive of our goal to double any contracted volume of large bird debone in 2019 versus 2018. We are expanding our breast meat portioning capabilities while increasing dark meat debone capacity by 40% to deemphasize our exposure to the volatile of pure commodity markets. We are continuing to invest in automation and robotics to support strong demand for our products while minimizing the impact of tight labor conditions on margins.

In our U.S. Prepared Foods, we grew 11% in revenue and volume year-over-year during Q3. This growth has been fueled by our investments in R&D as well as sales and marketing to support new product innovation. For this school year, we introduced new items to excite school menus, including roasted wings and breaded drumsticks. We've also extended the reach of our well regarded Just BARE brand this quarter with the launch of our portfolio of our Prepared Foods products into both food service and retail channels. The Just BARE portfolio provides solutions that satisfy our customers' needs for a product that is all-natural, clean label and contains no-antibiotics-ever. We are also innovating through new marketing strategies in the digital channel, as we continue our path to become digital-first chicken, we are rolling out technologies that allow for store-level geo-targeting. These new emerging technologies allow us to use our media dollars more effectively by targeting only consumers who shop stores where our products are sold and fit our target consumer profiles.

Finally, our Just BARE brand remains the top-seller chicken with largest online retailer with great potential as the footprint into new geographies continues to expand. Volume in this channel is growing at double-digit rates. We will continue developing our branded business to deliver our key customer strategy of becoming a more valued partner with our key customers and developing a unique portfolio of diverse complementary business models.

Our export business continued to perform well during Q3. U.S. frozen chicken inventory was down 4% year-over-year from 2018 at the close of Q3. Meanwhile, export pricing has increased approximately 46% from the same period a year ago during last quarter, reflective of the solid demand, although prices have moderated as we enter Q4. We have remained proactive in diversifying our country of destination mix and are relentless in developing alternative sales strategies in the event we encounter any trade disruptions due to animal diseases or unforeseen disputes with existing trading partners.

Market conditions in Mexico, in Q3, were in line with normal seasonality and were significantly better than the same quarter last year. As a reminder, Q3 from Mexico, is traditionally the softest in the entire year, as schools are closed and we experienced a reduction in chicken demand at retail. Prices in the commodity sector were volatile in the quarter, but our increased share of noncommodity product sales has helped to stabilize margins. Market environment in Q4 so far has started in line with typical seasonality as we expect to generate improved performance for the full year.

We continue to lead in developing the market in Prepared Foods in Mexico. This year alone, we have launched 20% more products compared to a year ago, we are making great advances in our Prepared Foods business with innovation as the core competence of our strategy. We're generating excellent results under premium Pilgrim's and Del Dia brands, both of which have continued to receive very favorable acceptance by consumers at retail, club stores and QSRs. We have a strong team in Mexico committed to continue delivery of strong results.

After a challenging first half of the year when we faced high input costs driven by higher grain, utilities, labor and packaging, the EBIT of our European operations improved during the previously reported second quarter and continued the positive trend into our third quarter, growing 10% year-on-year and 6%, sequentially.

Despite a cooler weather during the grilling season, we generated an increased performance, driven by the soft softening input costs and further recovery in mitigation in the prior quarter's input cost inflation, along with additional synergies, supply chain optimization and other operational improvements.

We generated 4% improvement in revenue while continuing to maintain focus on cost optimization, cost control, synergy capture and a culture of constant innovation. These combined factors will continue to support our EBIT run rate trend into the last quarter that will help us in continuing to improve margins. We believe our European operations can continue to produce better performance relative to the same period last year. More importantly, our relative performance during the last 12 months has remained above the average of the competition in Europe.

Finally, as commented in previous quarters, we continue to support innovation or value-added operations with a significant investment to expand our gluten-free capability and targeting a growing consumer trend for gluten-free products. Although still small, our nonmeat operations and their margins are expected to grow strongly over the next few years driven by robust consumer demand, investment in equipment, operational efficiencies and partnerships. We continue to support our customers' development and expect to see further growth in following quarters driven by increased consumer interest in meat-free snacking. We have been an important partner in meat-free innovation over the last quarter, in particular, with our QSR partners.

2 weeks ago, we announced the closure of the Tulip acquisition. We are very excited about the additional -- the addition of the Tulip team to Pilgrim's. This transaction further enhances our position as a leading global player by expanding our portfolio, Prepared Foods and brands while strengthening our leadership position in the U.K. market, in line with our strategic priorities as we continue growing our geographical footprint and extending our global reach into attractive new markets.

We are solidifying our growth platform, both in Europe and globally. By diversifying in further globalization of our portfolio, we're enhancing our margin structure while reducing volatility across our businesses. Further, with the addition of Tulip's best-in-class, highly integrated production platform, we have significantly strengthened our brand portfolio, further improved our value-added innovation capabilities. We're optimistic about building upon Tulip's existing operational improvements by continuing to optimize its manufacturing footprint, extract best-in-class operational excellence, optimize the portfolio of channels, segments and products as well strengthen and grow business with key customers to drive innovations in high margin areas. Tulip has launched a number of new award-winning products in both the sausage and bacon categories recently, and we will capitalize on that momentum.

And now with all of Tulip's fresh pork facilities have been approved for China, we are well positioned to benefit from export opportunities there. Together with Tulip, we look forward to sharing innovation and best practices to enhance our operational and financial efficiency and position Pilgrim's, as a whole, for increased profitability and more consistent margins.

Tulip has actively leveraged innovation throughout its operations, and we look forward to benefiting from its portfolio of innovative products and its product developed platform. We also expect to capture significant synergy opportunities over the course of the next few years. Pilgrim's has a proven history of successful and efficient integrations of companies we've acquired, and we will apply similar methodologies in integrating Tulip.

Turning to feedstock. Corn prices have retreated off their summer highs as U.S. corn production has come in much higher than had been expected at the end of Q2. USDA confirmed the larger corn harvest with an increased yield to 168.4 bushels per acre in the October crop report. This pushed U.S. carryout to a comfortable 1.9 billion bushels, which is well above the market's expectations.

Soybean prices have recently rallied as the market is responding to the reduced expectation for U.S. soybean carryout. The USDA lowered its U.S. ending stocks to 460 million bushels in the October report. Although this is down from last year's record large carryout, world's soybean supplies remains ample to satisfy demand as evidenced by extremely weak basis for soybean products globally.

Feed wheat prices in Europe remaining at low levels due to the increase in supplies from a year ago. USDA recently raised EU wheat production to 152 million tons, confirming a bumper harvest across the continent. Although we are going to see higher corn prices than last year as a result of the smaller U.S. corn crop, soybean oil prices are in line with last year and wheat prices in Europe will be lower than 2018. We do not see a significant increase in feed cost going into 2020.

For 2019, USDA is expecting total U.S. chicken industry production to grow in line with last year in the 2.5% range. For next year, USDA expects the more modest production growth of 1.6%, prereg productivity began 2019 with modest improvements, but more recently, has trended below 2018 levels. The growth in excess and placements has been primarily due to larger layer fought as hatch rates have remained in line with 2018.

Latest pullet data, which can be volatile, showed continued growth in placements relative to year ago levels with much of these likely supplying new facilities. Despite the announced new capacities, we believe capacity growth will not be disruptive to the industry supply-and-demand balance in the mid to near term.

Despite the expected growth in beef and pork production, final approval and implementation of new trade agreements with trading partners should gradually reduce the amount of domestic protein availability, drive prices of competing meats higher and support an increase in chicken demand. The outlook for chicken demand in the less commoditized segments this year continues to show an overall balance in supply and demand.

With the U.S. economy continuing to be strong, low unemployment and higher disposable income are driving households to consume more proteins throughout the day. According to the NPD Group, food service demand for chicken through broad line distribution continues to show strength on both dollar and volume growth. In addition to demand growth and broad line distribution, national chain QSR demand continues to grow, as shown through the increase in chicken servings in 2019. The retail segment has shown positive dollar growth, and we expect additional support with more feature activities by retailers in the new year.

Last August, we released our 2018 sustainability report as a leading global food company. Pilgrim's is proud to provide high-quality, sustainable poultry, retail-ready and prepared food solutions that contribute to improving the lives of families around the world. Our team is committed to living our values every day and realizing our vision to become the best and most respected company in our industry, creating the opportunity of a better future for our team members.

In alignment with the decision, we've established a comprehensive sustainability strategy that addresses priority issues critical to the long-term success of our business and the interest of our key stakeholders.

We thank our team members and their families, our family farm partners, customers, suppliers and stakeholder partners who have pushed us to achieve more, and as a result, have made our success possible. We have continued to make great strides in accomplishing our 2020 sustainability goals, and we are pleased to share both our progress and the areas where we must endeavor to improve.

From 2015 to 2018, we've decreased our greenhouse gas emission intensity by 20% on the 2020 goal of 14% reduction. We have decreased our natural gas use intensity by 11% on a 2020 goal of 14% reduction, and we are on track to achieve a 95% or better on our animal health and welfare scorecard for our live operations. Our 2018 sustainability report is available online and provides additional detail regarding our sustainability strategy and progress towards all of our 2020 sustainability goals. While we are already well balanced in terms of our bird size exposure, we will continue to seek opportunities to incrementally shift our product mix and reduce the commodity portion of our portfolio by increasing the number of differentiated products to key customers while optimizing our existing operations by pursuing operational improvement targets.

Our key customer approach is strategic and creates a basis to further accelerate growth in important categories by providing a more customized, high-quality, innovative products that give us a clear, long-term competitive advantage.

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

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Fabio Sandri, Pilgrim's Pride Corporation - CFO [4]

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Thank you, Jayson, and good morning, everyone. For the third quarter of 2019, net revenues were $2.78 billion compared to $2.7 billion from a year ago. Adjusted EBITDA increased to $258 million or a 9% margin, which represents a 66% improvement versus $156 million a year ago or a 6% margin. Adjusted net income was $112 million compared to $52 million in the same period in 2018, resulting in adjusted earnings of $0.40 per share compared to $0.21 per share in the year before or a 114% increase. Operating margins were 6.5% in the United States, 11.5% in Mexico and 4.9% in Europe, respectively.

Our operating profit in the U.S.A. was $125 million, close to 70% higher than the result a year ago. Our small bird and case-ready business continued to perform well and generate consistent top-tier performance. Large bird deboning materially improved compared to Q3 of last year and contributed to the year-on-year improvement in U.S. business as demand was in line with normal seasonality, despite some softness in the boneless breast pricing.

Our U.S. Prepared Foods continue to grow following the investments in the last few years, and increased 11% in revenue and volume year-over-year during Q3. This growth is being fueled by our investment in R&D, sales and marketing to execute new product innovation. We have other initiatives in place to accelerate growth in this market, and we are expecting it to contribute a great portion of our total sales in the next few years while adding to the stability in consolidated margins.

Our operating profit in Mexico substantially increased to $38 million from a very weak quarter a year ago. Market prices during the quarter were volatile, but in average, in line with normal seasonality. We expect our results for the remaining of the year to improve as Mexico continues to grow in chicken demand.

Within Prepared Foods in Mexico, we remain as the leader in developing the market and have launched 20% more new products compared to the same period last year. Our strategy is supportive of the goal to increase our higher-margin differentiated products. While having product coverage from entry-level to premium across multiple channels in both fresh and prepared. Our strong team in Mexico is our true differentiation, with their operational excellence and market leadership, and we expect this trend to outperform relative to the competition to continue in the future.

Quarter-over-quarter can be quite volatile in Mexico, given market conditions, but Mexico has been very consistent on a year-over-year basis. Europe's operating profit was $25 million, stronger than last year and an improvement over last quarter as our operations began to mitigate the industry-wide input cost challenges we have been experiencing since last year. Despite cooler weather during the barbecue season, increased implementation of our key customer strategy enables us to better work through some of the input cost increases by adjusting our pricing models during the quarter.

In addition, we have been more successful in capturing synergies and improving efficiency and yields to mitigate the higher cost and impacted us during the late 2018 and early this year. We expect to finish this year with strong momentum in results. We will continue to leverage our marketing and sales infrastructure to optimize SG&A costs, and along with our key customer strategy, will remain our lead in relative results to the industry.

As we close the Tulip acquisition in October, where we include Tulip's contribution starting in Q4. We are excited about the potential for Tulip to improve its performance, and we're impressed with the quality of the management team and the quality of the assets. We believe that there are many opportunities for synergies and growth through the creation of one of the leading food companies in the U.K.

Our SG&A during Q3 was 3.4% of sales, slightly higher versus a year ago as we increased support for expanding the Just BARE brand nationally and the investments for our new Prepared Foods products, both in the United States and Mexico. We'll continue to prioritize our capital spending plans this year to optimize our product mix that is aimed at improving our ability to supply innovative, less commoditized products and strengthening partnership with key customers.

We're investing roughly $300 million in CapEx and reiterate our commitment to investment in strong return on capital employed projects that will improve our operational efficiencies and tailored 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 was $1.7 billion with a leverage ratio of 1.8x last 12 months EBITDA. Even after the closing of the Tulip acquisition, our pro forma leverage will stay below 2x net debt over EBITDA.

Our leverage remains at a good level, and we expect to continue to produce strong cash flows this year, increasing our financial capability to pursue our strategic options.

We expect 2019 interest expenses and related '20 interest expenses in the range of $130 million. We have a strong balance sheet and a low leverage. We will 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 continue to consider and evaluate all relevant capital allocation strategies that will match the pursuit of our growth strategy and continue to review each prospect according to our value-creating standards.

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

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Questions and Answers

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Operator [1]

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[Operators Instructions) Our first question comes from Ben Theurer with Barclays.

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Benjamin M. Theurer, Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director [2]

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Jayson, Fabio, congrats on the strong results. Two quick ones, if I may. So you briefly touched on the synergies for the Tulip acquisitions. So I was wondering, I mean obviously you're just in the early stages here. But we've seen more increased demand support from Europe and China as a result of ASF, and I was just wondering how you feel about the potential to turn the operation from, call it, from EBITDA breakeven into positive territory? When do you expect the timing of the synergies to fall through? And then I have -- in regards to that, I have actually one question in Mexico. But I'll leave with that one first.

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Fabio Sandri, Pilgrim's Pride Corporation - CFO [3]

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Ben, Thanks for the question. Yes. Tulip has started this turnaround is making significant changes in its production network, mix and cost to improve its profitability. We expect the profitability to be below our legacy assets in U.K. But with the improvements in the operations and in the pork and Prepared Foods markets, we expect it to be in line with our legacy operations in 2 years, similar to what we did in Mexico. As you mentioned, ASF is a great opportunity for them. They are the U.K. largest big farmer and have all 4 plants approved to be exported. Sales value has increased already 50% year-over-year. And with increasing import price in Europe, many of the cheap imports today goes to U.K. We will stop going.

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Jayson Penn, Pilgrim's Pride Corporation - CEO & President [4]

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Yes. Yes. Just to add, Ben. Very similar to Mexico, very similar to the GNP acquisition, this will take some time. And we're -- we believe 24 months is a good number for us to have this business rightsized relative to our legacy business. Just as Fabio mentioned, 100% of our assets, Tulip, are now China approved. We've seen a lift in both revenues and volume to China as the EU as well as exporting meat into China as well. So we're seeing an immediate lift from the ASF impact in Nielsen and Tulip. And again, our operational efficiencies, our key customer strategy as we rightsize the portfolio, the channel, the mix of products, and Tulip, it will take some time, but we're absolutely thrilled about the opportunity. The assets are well invested with Tulip. And we've been on the ground for several weeks, and we believe in the team and the people at Tulip. So we're really excited about this opportunity.

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Benjamin M. Theurer, Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director [5]

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Okay. Got you. And then just a quick one on Mexico and I will be more -- call it informal dynamic. And obviously, that maybe coal prices going higher. Remind us where you're going to see more of that. But usually, in Mexico, it's like you get 2 strong quarters and the quarter after it just completely falls off the cliff because a lot of private guys who still need somehow more chicken going into the slaughter process, and you get a significant oversupply in the relatively short period of time. Have you seen any dynamics after now relatively 2 -- relatively strong quarters? Particularly second quarter was very strong and our third quarter continued to be strong. Anything you would expect into 4Q, something similar likely to happen, like 3Q last year, maybe some negative results just as a matter of fact that it's quite irrational market still? Nothing that we have seen yet.

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Fabio Sandri, Pilgrim's Pride Corporation - CFO [6]

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Yes. Ben, Mexico has a different seasonality than U.S. And typically, the third quarter is a weak quarter because of the school recession. So like we always say, despite the fall off, Mexico is a growing economy. I think last number of the GDP growth was not great at Mexico. But in general, it's a growing economy. And the population increase, they're disposable income. It leads to a significant growth in protein consumption. We are increasing our volumes, both in fresh, with our expansion in the Veracruz and in Prepared Foods by delivering and expanding our premium value-added products.

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Jayson Penn, Pilgrim's Pride Corporation - CEO & President [7]

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Yes. As Fabio said, the economy in Mexico is relatively flat. It's tied, as you know, to the U.S. economy. I'll also say this. In a flat or declining economy, we do see trade down from other proteins into chicken. So just because of the economy is, call it, flat to weaker response over the last 3 quarters, we don't expect to see any demand disruption of chicken in Mexico.

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Operator [8]

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Our next question comes from Heather Jones with HJR Research.

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Heather Lynn Jones, Heather Jones Research LLC - Founder [9]

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I may ask some repetitive things as I have been switching back and forth between calls. So I was hoping to talk about the contracting season? And how Pilgrim's is approaching this any differently this year, if at all, given the likelihood of big shifts in supply/demand in 2020? And any observations you have on how the industry is likely to approach contracting season given these same dynamics?

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Jayson Penn, Pilgrim's Pride Corporation - CEO & President [10]

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Yes. Heather, thanks for the question. I would say the contracting season is moving somewhat slower this year. And there's a lot of moving parts as the dynamics are becoming more dynamic as the time moves on. So I would say it's a little slow. We're cautiously optimistic relative to where proteins are today versus where they'll be within 30 and 60 days from now. So I -- we're approaching this low. We do know that ASF is becoming more part of the discussions. We do know, for example, Australian beef trend, which is something that's not been, call it, widely discussed, but the U.S. imports of beef are starting to slow down affecting the hamburger market. So while there are major QSRs looking to contract beef on a forward basis, we're also hearing that there's not many sellers willing to forward price. So that's falling into as part of the chicken dynamics as well.

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Fabio Sandri, Pilgrim's Pride Corporation - CFO [11]

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I'll just add, Heather, that it's more on the Prepared Food side, especially on the trade back, we have a differentiated business model. We have a true partnership with our key customers, and we help them grow their brands while offering a full range of products from tailored, natural, higher order attributes offerings like organic. So we don't have annual contract negotiations because our prices don't follow the volatility of the commodity markets. I do not react with sharp increases in strong spot markets and does not follow the troughs. As it makes sense, our volumes in this segment increased from last year, and while our prices are 3% higher.

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Jayson Penn, Pilgrim's Pride Corporation - CEO & President [12]

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Yes. So just to further on that, Heather. Fabio is correct in that. Our tray pack business has been very strong. We've been tight. We've been tight to short all year, and we don't. So part of our business is not contracted. But we're delivering service and quality to our key customers, growing their business as a pull -- pulling through the demand through our business, and we're seeing that every day in our case-ready business.

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Heather Lynn Jones, Heather Jones Research LLC - Founder [13]

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So what I'm thinking about how PPC is positioned for -- and I'm thinking about the U.S. So you have a portion of the business that is cost-plus. You have tray pack. And then you have your large bird. And the tray pack, I get the key customer concept, and it's clearly served you guys really well. But when I'm thinking about your exposure to potentially large price increases, is your large bird business, really the only segment that would benefit in 2020 from strong pricing? Or are there certain thresholds in the other businesses that if you surpass those, pricing moves up for you?

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Jayson Penn, Pilgrim's Pride Corporation - CEO & President [14]

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Well, even within our small bird deboning business, Heather, we have some -- we have upside as well with some of our noncontracted business, you mentioned our large bird deboning operations. We've made great strides over the last 2 years in this business operationally. And from a sales perspective, we'll gain all of the lift, we're getting all of the lift on the back half, obviously. And then the white meat lift as well. There is some tray pack lifts as well from a dark meat perspective. We're going to see that we do trade on the market. So we do have that lift as well. But again, there's our fresh food service business. We have lift there from our commodity large business. I think as the commodities move, we'll see not just our commodity big bird deboning business move, but we'll see this shift throughout each sector of our business in smaller and larger ways, but you did highlight the largest piece of our business will be impacted by big bird, but each one of our businesses will be impacted by higher commodity markets.

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Heather Lynn Jones, Heather Jones Research LLC - Founder [15]

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Awesome. I just have one last question. So you guys have just been very proactive in converting plants to more on trend, better margin businesses. Do you anticipate any conversions into 2020, whether it's moving like dedicated plants, like you did at Sanford or whatever, or should we anticipate any meaningful conversions going into 2020?

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Jayson Penn, Pilgrim's Pride Corporation - CEO & President [16]

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Yes. We have another key customer that will be coming on board. Very excited about that. It will be happening in Q1. There won't be any major disruptions to our facility. But Heather, as you said, when we -- our new management team came in 2011, one of our strategies was to create the most optimal portfolio, and we've been relentless about that. And when we have great service, and we have great quality and deliver to the customers' expectations. We continue to grow, and we're going to add to this portfolio in Q1 of 2020. So we're really excited about that.

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Operator [17]

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[Operators Instructions) Our next question comes from Tim Perz with Stephens Inc.

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Tim Perz, Stephens Inc., Research Division - Associate [18]

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This past weekend, we saw reports that chicken be included in a phase 1 trade deal. So I just had a couple of questions related to that. First, do you have any facilities that are cleared to import to China once the ban is lifted? Or could you walk us through the steps needed to be taken for that to happen?

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Fabio Sandri, Pilgrim's Pride Corporation - CFO [19]

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Yes, all of our plants are able to export. I think what we can't export to China is because today, they have been a ban because of avian influenza since 2015. So different from all other countries in the world, which is clear that ban after 6 to -- 6 months to 1 year. China kept that in place. So the moment they lift that ban, which is being imposed for trade reasons, we will be open to export to China. All of our plants are open export to China.

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Tim Perz, Stephens Inc., Research Division - Associate [20]

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Okay. That was helpful. And then could you frame up the potential incremental sales opportunity that would bring for Pilgrim's? I realize many pauses go to rendering in the U.S. but understand that some are currently exported. So I'm just trying to frame up the potential earnings power uplift for the company? And then is there any chance that China buys leg quarters this time around with the inflation that we've seen in the country? I understand that, typically, they just buy parts from us.

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Fabio Sandri, Pilgrim's Pride Corporation - CFO [21]

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Yes. That is a great question. I think there are direct opportunities and indirect opportunities. So I think the direct opportunities in the past. So we've been sending some cost to the rendering or selling to other destinations at a much discounted price. With the opening of China, there is a good outlet for the cost. I think there are some indirect opportunities as well as China continues to consume more meat from other destinations. Those markets began an opportunity for the United States. China acquired some leg quarters in the past. I think in 2011 and in other years. So there is an opportunity for leg quarters. But we believe that more than just direct impact is the indirect impact that they will help lift the leg quarter pricing throughout the world. And as you see, the inventories of leg quarters in U.S., we continue to be reduced. Inventories in the United States for leg quarters are 25% lower than a year ago. So there's a lot of opportunity in that regard, even breast meat. Today, with the breast meat at the prices that they are trading here in the U.S. There are some opportunities to export to China or to other destinations?

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Jayson Penn, Pilgrim's Pride Corporation - CEO & President [22]

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Yes, Tim. And in 2014, Pilgrim's exported in excess of 200 million pounds to Hong Kong and China. So there's no reason why those numbers won't go back to normalized -- call it normalized levels. If you look at exports to China, exporters outside the U.S. have really dominated trade. Brazilian pork exports to China are up 48%. Beef is up 11% year-over-year. Argentine beef exports are up 104% year-over-year. And China now represents 70% of their total beef exports. And I talked about this a little earlier, but Australia beef exports to China are up 73% year-to-date, and their inventory appears to be liquidating and meet the demand due to the drought, the ongoing drought in Australia. So we're -- there's a lot of exports moving throughout the world into China, and they're actually dominating the trade. The USDA recently said, China is going to account for 30% of the world's beef trade in 2020, and that's up from about 8.5% in 2015 and they're also going to account for about 35% of the world's pork trade. That's up from about 15% in 2015. So there's an absolute availability for the U.S. if there's a trade agreement in phase 1 for the U.S. market to resume and possibly exceed where it was in 2014.

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Tim Perz, Stephens Inc., Research Division - Associate [23]

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Okay. That was super helpful. Do you have an approximation of the amount of pounds that were shipped to China and Hong Kong last year for Pilgrim's?

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Jayson Penn, Pilgrim's Pride Corporation - CEO & President [24]

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No. I don't have that number, Tim.

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Operator [25]

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

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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [26]

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I have 2 questions. First is on the Mexican operation, how do you think that the African swine fever. I know everybody talks about the Europe on the sell-in the pork to China as well as the U.S., how does it affect the Mexican operation? And when you think about your historical 10% margin, how incremental would that be to Mexico, if African swine fever trade continues? And how does that work out for that business?

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Jayson Penn, Pilgrim's Pride Corporation - CEO & President [27]

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Yes. Ken, thanks for the question. I would say, indirectly, so Mexico imports like -- press me from Brazil. That's one way to import, the other one is obviously from the U.S. So if African swine fever and the trade deals start to happen. You could see both of those import streams dry up a little bit, creating more of a supply issue in Mexico. And I would argue that supply and demand is very dynamic in Mexico. And so you see the volatility, the Q-over-Q volatility in Mexico. It's mostly due to the supply-and-demand basis as it flows through our results. So I would tell you, there's a lot of indirect ways. So that's 2 of them.

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Fabio Sandri, Pilgrim's Pride Corporation - CFO [28]

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I think, connected to that, Ken, there's a lot of U.S. pork that is going to Mexico. There was a very high competition, especially in Q1 this year. So that reduced a little bit. So as the ASF poses a big opportunity for the U.S. pork operation, less pork will go to Mexico. And that is a lift for the chicken market there.

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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [29]

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Then a bigger question, and I tend to ask this on and off and maybe the greater clarity to this is, if I think about your operations now, again, you've made progress with cost savings, you made progress with customer one. You keep on moving forward in terms of your margin structure less commodity. If I was to take this environment and put it back 5 years ago, how much more profitability? Or how much more higher margins do you have relative to when you started this journey? And -- because isn't that the structural change that has actually happened. How do we quantify that? And how do we put that in terms of some parameters to that?

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Fabio Sandri, Pilgrim's Pride Corporation - CFO [30]

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I think, Ken, we believe the -- compare our results with our direct competitors, right? So we have the benchmarking system. Then we have the public-traded competitors. What we want is to beat those competitors, and we believe we have the best portfolio to be the best. As all of our operational improvements programs happen. What we saw over the last 7 to 8 years is that we created more than $1.2 billion in efficiencies. And you can test those efficiencies based on where we were in the ranking 8 years ago and where we are today. So today, we're operating at the top tier in the segments we are. So I think the way to see this is that whatever the market will be able to offer as profitability for the average company will be better than that. And I think that's the way to see.

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Jayson Penn, Pilgrim's Pride Corporation - CEO & President [31]

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Yes. Ken, I would also argue that we're leaving a lot on the table. We've identified, in mix portfolio, operational efficiencies, another $300 million that we absolutely are not capturing today that with better execution and a better portfolio and strategy, we can capture that. So although we've made improvements, there's a lot still left on the table for us to capture.

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Operator [32]

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(Operator Instructions) Our next question comes from Mike Piken with Cleveland Research.

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Unidentified Analyst, [33]

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This is [Chris] on for Mike Piken. I'm curious if you can provide us an update on your labor situation, how you think about labor costs going into 2020?

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Jayson Penn, Pilgrim's Pride Corporation - CEO & President [34]

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Yes. [Chris], thanks for the question. I will tell you, in a tight labor market. One of the competitive advantages that we've employed over the last year, we've actually with a shift in strategy has improved our labor. We are as a company fully staffed today. I couldn't tell you that a year ago or 2 years ago. So despite the tightening labor situation, our facilities at Pilgrim's are fully staffed today. Now we've taken about $55 million to $60 million of increased wages that have flowed through the system over the last year. But I will absolutely argue that one of the reasons for our improved margins is our people and making sure that our people remain at the foundation of our business has enabled us to move our mix forward and actually execute our strategy in a way in which we couldn't do a year ago or 2 years ago. So I will argue that in today's environment, our labor situation is at its peak. It's at its best it's been over the last 3 years despite the tightness in labor, and it's actually driven more revenues than we've invested in our people financially.

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Operator [35]

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Our next question comes from Peter Galbo with Bank of America.

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Peter Thomas Galbo, BofA Merrill Lynch, Research Division - Associate [36]

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Just wanted to ask, with one of your key customers relaunching the chicken sandwich here in the next few weeks. Breast prices on small birds trading at a pretty high premium to jumbo birds. I guess is there anything structural in that should cause small bird breast prices to continue to be at a significantly higher level on a run rate basis going forward? Or is there something that can be done that you expect jumbo prices to kind of catch-up in the near future? Is there not enough small bird capacity? Can you convert some of your existing capacity over to small bird? Just any color there would be helpful.

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Jayson Penn, Pilgrim's Pride Corporation - CEO & President [37]

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Yes. Peter, just from a commodity market basis, small bird breast meat is trading at 3x of jumbo met. And that's a historical high spread so I think that sort of tells -- that tells a story. But I'll also argue that Pilgrim's -- one of our core competencies is this business. And while many companies have moved in and out of small birds, we've maintained our leadership position in this business. And so structurally, I'll -- again, I think the historical spread tells you what's happening now. If these -- if the chicken sandwich continues to increase from a demand perspective, I think that does bleed over into the medium birds and some substitution between medium and jumbo birds will start to take place as that dynamic moves through the system, but small bird business is very, call it, tight today as demonstrated by the price spread alone. And I'll also argue that you could see some shifting to medium birds to capture some of that sandwich need, and then it will substitute north to the jumbo birds. But again, our position is very strong in this business. Our team executes at very high levels in this business, and it remains a core competency. It will remain a core competency going forward.

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Peter Thomas Galbo, BofA Merrill Lynch, Research Division - Associate [38]

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And just maybe on that point, I mean if you were to consider changing over capacity to do more small bird, if this really is a new dynamic, just -- can you walk us through the dynamics of how long that would take, maybe cost implications, whether or not you're seeing any competitors who also compete in small bird, kind of thinking about doing a similar thing.

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Jayson Penn, Pilgrim's Pride Corporation - CEO & President [39]

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No. The barrier to entry is not great. We can make a shift. Some -- it does require some shifting on the back end of the facility, but front end from a live operations perspective through that supply chain, not an issue, but there'll be some CapEx required in the back end. But again, there's not a wide moat for companies to do more small birds. They haven't. Obviously, you see all of the new facilities come on or have been case-ready. They've been retailed. They've been jumbo-ed. There have been very few new entrant participants in this business where we've remained at the leadership position.

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Fabio Sandri, Pilgrim's Pride Corporation - CFO [40]

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Some of the challenges of converting a big bird plant to a small bird plant is also the entire network that you build for the big bird in terms of all your feed mill. So if you're going to start a small bird business, then you're feeding will be with excess capacity. We have grower -- growers that you set up that are set for large birds and they take more time on the field. If you move to small bird, then you need to reduce that significantly. But the biggest barrier to entry is probably the position with the key customers. If you need to fuel an entire small bird plant, you need to have a partnership with one of those customers. You cannot just build it and expect to sell the meat in the open market because there's no open market. This is a very tight spec. It takes time to get the plants approved. You need to have a true partnership to really be successful in this business. And that's why we stayed in this business just like Jayson mentioned, and we develop those relationships. So this is not a spot market that if you start producing small bird meat, you're going to be able to access. There is no spot market for this meat.

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Operator [41]

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Our next question comes from Bryan Hunt with Wells Fargo Securities.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [42]

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My first question is with the phase 1 agreement potentially, including poultry with China, have you had any initial indications of orders from China? And as well as have you seen any immediate bump ups in dark meat and/or pulp pricing?

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Jayson Penn, Pilgrim's Pride Corporation - CEO & President [43]

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No -- Yes. Bryan, yes. A simple answer, no. We haven't seen -- we haven't seen anything recently. But I will tell you that over the last week, just short-term dynamics, we have seen some increases in demand on leg quarters. So whether speculators or not, our leg quarter prices are starting to creep, and we're taking up money for leg quarters out upfront for the rest of the year. So I can't tell you what the full dynamic of that will look like and the why of that. But we are seeing some increased demand for leg quarters, whether it's ASF driven China speculators. I don't have that answer, but we are seeing leg quarter start to trend upwards.

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Fabio Sandri, Pilgrim's Pride Corporation - CFO [44]

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But again, if you look at the inventories, they are 25% lower than last year. And the industry in U.S. is deboning a lot more leg quarters for the domestic production. So the supply of leg quarters for exports from the United States is actually being reduced.

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Jayson Penn, Pilgrim's Pride Corporation - CEO & President [45]

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Yes. One more add-on to that, there's been a -- different than 2018 for Q3, Q4, there's been a floor -- relative floor put on breast meat. And the reason for that is export. So we're seeing more -- we've taken export breast meat orders to put a floor against breast meat over the last, call it, 30 to 60 days. We didn't see that last year. So that's been really putting the floor on breast meat this year. So the expectation for us is to trend near sideways for the rest of the year just due to the exports if that should hold up.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [46]

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And then my follow-up question is, Jayson, you talked a little earlier that the company has identified at least $300 million of incremental mix and savings benefits. Can you talk about what time frame you expect to maybe garner those benefits as well as maybe where you see the biggest opportunities?

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Jayson Penn, Pilgrim's Pride Corporation - CEO & President [47]

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Yes. I would expect it sooner than later. But I would tell you that $300 million should be captured within the next 2 years. That's our U.S. business. And it's really about moving -- again, continuing the key customer strategy, our commercial, our big bird business has done a great job year-over-year. Fantastic job from a sales execution perspective. We're moving up the page. We've been -- Bryan, we've been talking about this for at least 5 to 7 years relative to our big bird deboning facilities a bit lagging the industry. And I will tell you that we -- that's been our, call it, focus of operational excellence over the last 1.5 years. But our sales program is now being executed inside our facilities. We're gaining lots of momentum. So that's a big piece of our -- that's a big piece of our operational excellence from where we've come and where we'll go as well. Again, we've got lots of room left on the table to continue to grow our Prepared Foods and branded business within the Prepared Foods segment. We're still leaving a lot on the table from our Prepared Foods operationally, commercializing products with our go-to-market strategy as well. So lots of opportunities in Prepared Foods and continuing our big bird marks to excellence. So those 2 categories will bring us the majority of the incremental margins.

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Operator [48]

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

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Jayson Penn, Pilgrim's Pride Corporation - CEO & President [49]

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Thank you. We are encouraged by our year-to-date results in 2019. We expect to generate improved performance for the full year compared to 2018. We believe the outlook for global chicken consumption will remain positive and consumers around the world continue to view chicken as a compelling, healthy alternative. Our diverse portfolio of differentiated products tailored to support key customer strategy in conjunction with our geographic footprint, will continue to produce consistent performance and minimize margin volatility and challenging market conditions relative to peers.

We will continue to identify new opportunities for both organic and acquisition growth, refine our portfolio and offer differentiated customized high-quality products to support our key customers' needs through constant innovation.

Our team members are our competitive strength. We will continue to invest in our people who drive our results by providing them greater opportunities to contribute to our shared success.

We'd like to thank everyone at Pilgrim's family, including our family farm partners, suppliers and our customers who make our business possible. As always, we appreciate your interest in our company.

Thank you for joining us today.

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Operator [50]

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