Dunham Winoto - Director of IR Bill Lovette - President and CEO Fabio Sandri - CFO.

Farha Aslam - Stephens Heather Jones - Vertical Group Adam Samuelson - Goldman Sachs Mike Henry - Cleveland Research Lubi Kutua - Jefferies Bryan Hunt - Wells Fargo.

Good morning and welcome to the First Quarter 2017 Pilgrim's Pride Earnings Conference Call and Webcast. [Operator Instructions] At the Company's request, this call is being recorded. Please note that the slides referenced during today's call are available for download from the Investor Relations section of the Company's website at www.pilgrims.com.

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

Good morning and thank you for joining us today, as we review our operating and financial results for the first quarter ended March 26, 2017. 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 would like to remind everyone of our Safe Harbor disclaimer. Today's call may contain certain forward-looking statements that represent our outlook and current expectations as of the day of this release.

Other additional factors not anticipated by management may cause actual results to differ materially from those projected in these forward-looking statements. Further information concerning those factors has been provided in today's press release, our 10-K and our regular filings with the SEC. I'd now like to turn the call over to Bill Lovette..

Thank you, Dunham, good morning everyone and thank you for joining us today. For the first quarter of 2017, net revenues were $2.02 billion versus $1.96 billion from a year ago resulting in an adjusted EBITDA of $204 million or 10.1% margin versus $234 million a year ago or an 11.9% margin.

Our net income was $94 million compared to $118 million in the same period in 2016 while adjusted earnings were $0.38 per share compared to $0.46 per share in the year before. In line with our expectations, Q1 performance improved sequentially from Q4 driven by better results at our U.S.

operations while Mexico continue to produce solid performance for us despite less favorable impact from FX on cost. Pricing in the commodity segments started off slower than normal but strengthened during the remainder of the quarter and finished at a stronger level.

Exports have also continued to improve from the conditions a year ago as demand for U.S. chicken has remained firm in international markets. Domestically demand continues to be robust especially at retail and we expect chicken volumes to increase seasonally ahead of the upcoming summer grilling months.

Highlighting the diversity of our portfolio, small bird and case ready have remained strong during the period while large bird deboning has rebounded from a weaker than expected January and continued to improve was stronger exports and increasing domestic demand.

Our portfolio of well balanced mix of multiple bird sizes and geographical coverage, as well as a diverse product and channel exposure gives us the opportunity to leverage the better performance from large bird deboning to complement the strength of small bird in case ready while minimizing volatility unlike other producers with a narrower strategy.

Demand for our case ready and small bird continues to be strong and our leadership in these markets is proving to be an advantage over competitors. Despite the expected strong increase in U.S.

production of competing proteins, we believe more exports and a reduction in imports will drive total domestic per capita disappearance for 2017 to increase marginally up at 1.3%. Chicken continues to be very competitive in value and convenience and demand has remained very robust.

Traffic at retailers has been strong driving demand from our customers which is a positive sign that consumers appetite for chicken both in the fresh meat case and the deli segment despite higher availability of other proteins is not declined.

Within large bird deboning prices and volumes have continued to recover relative to last year supported by stronger export demand due to higher oil prices in a more stable U.S. dollars. During Q1 export market showed positive pricing momentum relevant to Q4 as well as a year ago, where leg quarter is up in the double digits.

We believe our Q1 export prices were partially driven by avian influenza bans on European and Asian product which increased demand for U.S. product.

Although the industry had two domestically reported cases of high path avian influenza during the quarter, inventories of leg quarters and other export oriented cuts were relatively low when they occurred in most export destinations also agreed to regionalize U.S. avian influenza bans at the state or even county level.

We also reduced our exposure to commodity sales due to increase in deboning three of our four facilities. With summer grilling season mirroring in a supportive export environment, we expect profits for large bird debone to further improve in the total cut-out to reflect strong demand across the entire cuts of the bird.

The integration of GNP is proceeding well and we have already identified additional synergies which puts us at an annualized rate of close to $30 million above our initial expectations of $20 million.

We have a sustainable competitive advantage with the Gold'n Plump brand which is ranked second among national brands in the upper Midwest region of U.S.

further our new premium Just BARE chicken with the strong presence in the better-for-you category is rapidly growing at a CAGR of 20% in the past five years and 38% during Q1 and has transformational growth potential as our national go-to-market offering for the most desired on trend consumer chicken brand including prepared foods.

We already started to grow and leverage our combined product offerings by introducing a new line of fully cooked sausages under the Gold'n Plump brand to complement the NAE veg-fed fully cooked line of artisanal chicken sausages we launched recently giving us a great solution to satisfy every consumer segment in this growing category.

We're also evaluating the expansion of our online GNP brand presence which is ranked first on Amazon to other categories. The Just BARE brand at Amazon continues to have good performance with a 360% increase in Q1 versus the same period last year and 60% sequentially.

For the remainder of 2017, we expect the completion of mostly announced capital investments we had announced last year to further increase our product portfolio differentiation, strengthen key customer relationships, and improve margin profile.

During the quarter, we completed our organic case ready conversion at the Sanford North Carolina complex on-time and on budget. We're excited about the potential of Stanford since that enables Pilgrims to be the largest producer of organic chicken nationwide.

We've also finished expansion at Moorefield West Virginia which will add 10% to our fully cooked prepared foods capacity. Also our Waco Texas facility is producing according to ramp up expectations. Market demand in Mexico was in line with expectations during the quarter and prices ended the quarter at a strong level.

While our operations performed well, the stronger dollar during the early part of the quarter reduced the contribution to the consolidated results as we were constrained by less favorable cost on fleet purchased in quarter four that impacted the cost of birds process in Q1.

That said, the dollar has weakened during the quarter and we believe our competitive position there remains strong. Although Mexico continues to have more volatility than the U.S. quarter to quarter, we expect it to be a double-digit contributor to our profits given the strong growth profile in positive supply demand scenario.

In terms of expectations for 2017, we believe that Mexico supply will increase in the range of 2% to 3% in line with the growth in 2016 and for market conditions to continue to be in good balance.

We are reliant on a small portion of hatching egg imports for our Mexican operations and the cost of those eggs is risen due to tighter supply and has also constrained Mexican chicken supplies in Q1.

We continue to ramp up our production in Veracruz and expect to reach 500,000 birds per week until the end of the year up from 200,000 birds per week today.

The integration of the acquired asset is complete and we have captured more synergies than originally targeted with profitability now equal to or better than our legacy operations while it was only half that before the acquisition. To strengthen our competitive position in Mexico, we're also continuing with our product innovation.

The launch of our new family of Pilgrims branded value-added products like last year was better than expected. The premium Pilgrim's brand was built based on the local fresh operation well known for high quality and excellence service both by retailers and consumers.

We're continuing to push and grow our market share for the well-established Del Dia brand which is positioned for best value targeted towards the largest consumer group in Mexico. This year we will have more exciting products which will be introducing under the Del Dia brand.

Corn prices have remained low due to historically high global stocks which are projected to increase over 5% from last year's levels. USDA is projecting Brazil and Argentina will have harvest record corn crops which could negatively impact U.S. corn exports in 2017 and 2018.

Record production of soybeans in North and South America is also pushing global stocks over 13% higher than last year further weighing on prices. Here in the U.S. farmers are projected to plant the combined 179.5 million acres of corn and soybeans, an increase of 2.1 million from last year.

Because of the large surpluses of both global grain and oilseed, we do not expect feed cost to have a negative impact on our results over the medium term.

For 2017 we continue to expect total industry production to increase by about 2% mostly on head as we believe rates will stay relatively stable compared to recent years as bird sizes are already closed to optimum now.

The industry inventories have also been reduced to a level that is more reflective of actual demand and should be well supported with prices.

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

In addition to supporting the growth of our key customers, our partnerships with them also create an opportunity for us to further accelerate growth in key categories while giving us a strategic advantage in strengthening these relationships.

Despite greater availability of proteins, the outlook for chicken demand in 2017 remains robust as we believe a positive export environment will absorb much of the increase in total U.S. production across all protein complexes while continuing strong U.S.

economic conditions including low unemployment, and improvement in disposable income will drive households to ask for better quality, higher price cuts on meats and overall more consumption.

While we're already well balanced in terms of our bird size exposure, we will continue to look for opportunities to shift our product mix and reduce the commodity portion of our portfolio by offering more differentiated customize products to key customers, while optimizing our operations by pursuing our operational improvement targets.

We're excited to release our 2016 sustainability report in the coming weeks. We have been on a remarkable journey in the past seven years achieving great progress in exceeding all the one of our environmental goals established in 2010.

We outperformed eight out of nine categories of our 2010 targets reducing electricity by 28%, natural gas usage by 33%, greenhouse gas emissions by 33%, and water used by 34% from 2010 to 2015.

To further demonstrate our commitment to continuous improvement, we will report 2016 performance in many environmental and social economic indicators including water use, energy consumption, governance, diversity and inclusion, team member health and safety, animal welfare, family farm partners and many other in product key sustainability performance indicators.

The safety of our team members is a condition for which we expect continuous improvement. We continue to outperform the industry in this area with DART and TRIR rates at 41% and 49% below industry average in 2015. We're proud that many of our facilities have been recognized for their safety performance records by North American Meat Institute and U.S.

Poultry and Egg Association in recent years. While we continue to make progress in this area, we're not satisfied with our results and we'll continue our efforts to improve our safety record in the future.

Extending sustainability and social awareness to our brands including GMP, we now have two additional strong consumer brands that fall into the better best category to complement our legacy both appealing the segments of shoppers who value quality, leading attributes, and community and social responsibility.

We are targeting discriminating consumers who are more health conscious and are looking for chicken that meets their definition of better for you. We produce chicken down the right way not the easy way just like we would for our own families. Nothing added you don't want an absolutely no shortcuts.

We raise chickens to raise goodness with offerings that fuel passions and help your people and our planning and the organic category will soon be the market leader as our own customers quickly realize our capability to supply them with organic chicken.

However, we do not operate in a vacuum and also recognize that in a world with finite natural resources, all poultry production systems must become more efficient and more productive before going to meet the challenge of feeding a world of the utmost responsibility and care.

Organic is not our only sustainable option, therefore we will adhere to the most stringent sustainability standards within the industry to produce our chicken while looking for opportunities to continually innovate. With that, I'd like to ask our CFO, Fabio Sandri to discuss our financial results..

Thank you, Bill, and good morning everyone. We reported 2.02 billion in net revenue during the first quarter of 2017 resulting in an adjusted EBITDA of 204 million or up 10.1% margin. That compares 1.96 billion in net revenue and on adjusted EBITDA of 234 million or an 11.9% margin the year before.

Net income was 94 million versus 118 million the same quarter of 2016 resulting in an adjusted earnings per share of $0.38 compared to $0.46 in the same quarter of last year. Operating margins were 8% in U.S. and 7% in Mexico respectively as better results in U.S. were partially offset by Mexico.

Our fresh chicken operations continue to produce strong results despite greater availability of proteins in general, chicken has continued to be an excellent value to consumer both in terms of overall price and convenience for the end users.

Also results of the commodity business have improved sequentially during Q1 and we expect the improvements to be sustained during the next quarter, especially during the grilling season.

The integration of GNP progressing well and we have identified opportunities for an additional $10 million in synergies beyond the initial expectations of $20 million for the total annualized rate of $30 million.

We have a competitive advantage in GNP and we believe there is a great potential to lever the Just BARE product line, a fast growing on trend consumer chicken brand across our entire national portfolio, including prepared foods.

The Mexican markets are from in line with expectations during the quarter and our operations produced solid results reflecting a good supply and demand environment. Despite the favorable impact of the exchange rates that inflated the feed cost purchase in Q4, which increased the cost of the birds profits during Q1.

The integration of the acquired operations is completed and we exceeded our prior synergy targets by $10 million.

During this quarter, the profitability of the acquired assets were for the first time higher than the profitability of the legacy demonstrating how we were able to leverage our geographical and private coverage, as well as our margin performance through integration and implementation of the new strategy.

Production at our new complex in Veracruz is striking well and its performance is exceeding our expectations and we expect to grow from 200,000 birds a week now to 500,000 birds a week by the end of the year. Our prepared foods in Mexico strategy is also performing better than expected.

The launch of the new premium Pilgrim's branded products that were based on our high quality local fresh operation was a great success. Our goal is to have product coverage starting from the entry level all the way up to the premium segment both fresh and prepared in Mexico. During Q1 '17 our SG&A was higher than year before which start 3.1% of sales.

Reflecting the inclusion of additional GNP operations, the support for GNP and Just BARE brands, as well as the support for the new product offerings in prepared foods both in U.S. and in New Mexico. We’ll continue to focus on adding value to our operations and to differentiate our products offering.

Our team continues to be relentless in their pursuit of operational excellence regardless of market conditions, and we continue to improve our mix, yield and efficiency according to our plan.

In line with our strategy, to recognize the contribution of our most important assets, our team members, we have elected to increase our operational pay at the rate of 1.5 times our previous target as they’re all asked to increase their commitment to continuous improvement in many environment and social economic indicators including water use, energy consumption, governance, diversity and inclusion, team member health and safety, animal welfare, family farm partners and many others.

We are progressing well with our capital spending plans this year to optimize our product mix that is aimed at improving our ability to supply differentiated, less commoditized products, and strengthening our partnership with key customers. CapEx in Q1 was higher than usual due to the completion of the strategic portfolios we mentioned.

We are updating our 2017 CapEx to 270 million to account for the inclusion of GNP and the completion of those strategic products. We reiterate our commitment to invest on strong return over invested capital projects that really improve our operational efficiencies and tailor customer needs to further solidify competitive advantage for us.

Our balance sheet continues to be solid due to our continued emphasis on cash flows from operation activities, focus on management of working capital and disciplined investment in high return projects.

During the quarter, due to the timing of the capital investments as well as GNP completion, our net debt was $1.3 billion with a leverage ratio of 1.5 times less 12 months EBITDA under our optimal range of 2 to 3 times.

Our leverage continues to be at a low level and we expect to continue to reduce it even further increasing our financial capability to pursue our strategic actions. The outlook for interest expense for 2017 should be in the range of $40 million. We bought back close to $50 million in shares during the quarter.

And since the beginning of the share buyback program, we have repurchased more than $231 million in shares on the open market by maintaining a strong balance sheet and a relatively low leverage.

Once again we’re confident of our ability to return cash to shareholders, and exercise great care in ensuring that we create shareholder value by optimizing our capital structure while preserving the flexibility to pursue our growth strategy.

We’ll continue to consider and evaluate all relevant capital allocation strategy that will match the pursuit of our growth strategy, and we continue to review each prospect according to our value creating standards. Operator, this concludes our prepared remarks. Please open the call for questions..

[Operator Instructions] The first question comes from Farha Aslam from Stephens. Please go ahead..

Hi, good morning. The first one is really on the U.S.

on two parts, first, could we talk about your value added strategies and ABS, how that's progressing right now? And then also if you could cover your efforts of improving that big bird operations, what you think is kind of more market oriented recovery, and what are company specific actions that you’re taking?.

Thank you, Farha, I’ll take the value added. We're well ahead of our schedule to beat 25% of our production in NAE. I think we targeted by the end of 2018. Fact of the matter is we're almost there now, just a few basis points away and we will for sure make that go by the end of this year. And that's been spurred by a couple of things.

One, we've had more key customers come to us asking for that product, and we've obliged because they’re key customers and we see the growth in that category. And then our acquisition of GNP company, and they were about half NAE before we acquired them. So that helped to settle on that goal.

We’re going to keep our eye on where consumers are going, and probably that’s where we’re going to go as well. On the improvement potential in our big bird operations, it's really comes down to a couple of things. Improving our yields and running volume through our plants to cover overhead cost. And that's what we've been focused on.

We've made some improvements in both those areas, and we’re pleased with our progress to date and look forward to making more progress as we go through this year. .

Even in that category, Farha, we’re also differentiating our portfolio. So we’re implementing a lot more leg deboning. So we’re exporting less commodity and selling more deboned legs in the domestic market..

That’s helpful. And just as a follow-up. Mexico is always hard for us to kind of get our arms around.

As we look into the second quarter, how are trends shaping up in Mexico? How should we think of the fall through of feed cost?.

So, quarter two is typically a very, very strong quarter for chicken companies in Mexico. And we look forward to great Q2 and we see pricing continuing to strengthen and demand is great. So we think we’re going to have a really good Q2 in Mexico..

Farha, the U.S. dollar is 10% higher today than same period last year in relation to the Mexican peso and all there is an immediate impact on the feed imports like we mentioned in Q4 that translated to a higher cost in Q1. But meat prices take a little longer to adjust.

But we're already seeing the change in the market prices in Mexico, and we’re already operating at a similar levels of profitability as last year..

That’s helpful. Thank you..

The next question comes from Heather Jones from Vertical Group. Please go ahead..

Good morning. So I have a couple of details questions first. On SG&A, even adjusted for the GNP acquisition, it was up roughly 30 bps relative to sales. And as we enter the Q, it looks like some of that was unallocated or allocated cost from JBS and all.

But just wondering how we should think about SG&A as a percent of sales for the core business going through '17..

We expect that percent to be in line with 2.5% to 3% as we are investing more in the marketing efforts, especially for the Just BARE brand that we believe that will be a national brand for us. So we think 2.5% to 3%..

Okay. And then when I did the math on GNP, its EBIT margin is meaningfully lower than your business. And even when we add back the synergies, it still was below.

So I guess my question is, do you think there’s the opportunity to move that business to the corporate average and, honestly, potentially move it to a premium given that - a lot of its product is more like premium type product?.

That’s a great observation. Our expectations for the Gold'n Plump brand and Just BARE brand ought to be ultimately higher margin than our other business in similar categories. I would remind you that same condition existed when we made the acquisition of the assets in Northern Mexico. That business was about half the margin of our legacy business.

And now just in the most recent quarter, that business slightly outperformed our legacy business in Mexico. We’re going to apply the same model as we did in Mexico to this integration, and that is going in, putting our cost control systems and strategies in place, improving the yields, lowering plant cost, improving mix.

That's been a big opportunity that we found at the company. And so our long term expectation is for that assets to produce higher margins than our legacy business in both of those categories. They have one operation that is small bird operation. And then the other operation is case ready and that’s primarily the brand Gold’n Plump and Just BARE..

Just to complement, our initial $20 million in synergies were based on back office integration, and the economies of scale on maturing equipment. But as we start to integrate our teams, we are discovering additional synergies by combining the best practices on both sides.

So we identify additional potential underlie through a breather change, and on improving rebounding yields. So we’re very excited about synergy..

To be honest, we might be a little conservative on our estimates there..

But it sounds like to get to your, like you’re saying, your goal to ultimately exceed the corporate average. That’s meaningfully above the 20 million.

I am interpreting that correctly?.

That’s absolutely correct..

Okay. Then I want to talk about production in the U.S. So you said 2% primarily ahead, and you mentioned restraint in weights.

But not only is the data showing year-on-year declines, but our conversations with multiple producers suggest that the complaints by customers over the years is finally coming to fruition and a number of producers are meaningfully cutting their weights.

And we understand that significant sized customers are actually moving from or are starting to move from large bird to small bird. So it would seem like it's - the outlook would not be just restraint in weights but actually good visibility into reduced weights. So I was wondering if you could speak to that..

I think directionally, that's correct. We’ve seen the total production or pounds produced move from the 7.5 and up category, down to the 6 to 7.5 category. We’ve definitely seen the shift. And the effect of that obviously is overall reduced pounds. We’ve also seen a slight increase in the tray-pack or case ready medium bird size.

Again, when you look at it in an aggregate, then again that represents a reduction versus the last five year average. So I think, again, directionally you're correct and that's why we think that we’ll see tepid increases in supplies going forward..

And I’ve heard that more than 50%, I want to say the number was 60%, but let’s just say more than 50% of all production in U.S. is now some form of AVS.

What impact does that have on mortality, livability or production, but also the lower density that's required for that kind of production? Does that require some kind of commensurate increase in the breeder flock?.

No, it should not. It should not provide the need for breeders. But what you said about density and to some extent mortality, is absolutely true. And again, we think that's supportive of the medium term keeping supplies relatively muted in relationship to demand.

The NAE category, No Antibiotics Ever, we believe is about a third of the industry right now. It's really hard to determine all those other categories either raised without antibiotics or raised without antibodies critical to human medicine. It's really hard to measure what that production is.

But we see both of those categories increasing in demand over time, and we think that's supportive to keeping supply and demand in good balance..

Over the last months, we see some reduction in hatchability for the overall industry, and we don't have all the reasons for it. It could be that we are still learning on how to deal with those birds with no antibiotics ever as well. But as we learn how to deal with those birds, I think the hatchability will improve..

Okay, thank you so much..

[Operator Instructions] The next question comes from Adam Samuelson from Goldman Sachs. Please go ahead..

Thanks, good morning everybody. I'm hoping to get a little bit of color on the plant upgrades and some of the manufacturing investments that you've been making, a little bit of thought on how those would've impacted the US performance in the quarter.

And especially as you look at the second quarter and beyond, as you lapse some of the big actions you took last year, how you’re thinking about the benefits or the easing compares from that versus new investments you’re going to make over the balance of the year?.

Thanks, Adam. There were three what I would call big project that we started last year. The conversion of our Mayfield Kentucky operation from a cutup facility to deboning, and that's going very well. We’re now in full production as we expected, and that's going to be accretive through the balance of this year.

The second one was our addition of a fully equipped plan in Moorefield, West Virginia. That project started in February and really started without a hitch of the line drying full capacity as we speak and performing as well as we expected it to.

I mean, finally the largest one was our conversion of our Sanford North Carolina complex to a organic production, and that project, I would tell you, exceeded our expectations in terms of ease of start up and ramping up production. We had to take that complex or plant down for three weeks to make the conversion.

So it impacted in Q1 our volume slightly, but we started back up February, the 27, and really haven't missed a beep. And again, that project is going better than expected, and we’re very pleased with the demand for that organic product.

We thought we would have maybe a little bit extra starting out, but fact is the demand has exceeded our expectations. So that's going very well too. And all of those projects along with some other minor project that we did are going better than expected, and I think will be accretive to the balance of 2017..

Just in terms of volumes, Adam, the volumes this quarter were 3% higher than the same period last year mainly because of the acquisition of GNP. Without taking that into consideration, the volumes what 2-3% lower than the same period last year exactly for the reasons that you mentioned.

Mainly on the Sanford plant, we need to shut down the plants, and, of course, we’ll reduce the weight because it used to be a big bird plant and that’s going to be a case ready organic plant. So a lot of reduction in volume in there.

Going forward, we expect the volumes next quarter to be accounted from GNP as well, 5% higher than same period last year..

Okay, that’s very helpful. And then maybe just on a separate topic. As you think about the market and retail, we haven’t had a Georgia dock published now for getting close to six months. I know directly, it was not the biggest driver of your tray-pack business per se.

But as the market gets closer to moving to alternative pricing benchmarks for those who did price after Georgia dock, can you talk about any impact that may or may not be having on retail tray-pack pricing competitiveness or how the new contract structures could impact that market segment?.

To be succinct, we have not missed the Georgia dock. It's really not been a subject of conversation or concern with our customers. Very few of our pounds were priced off of that market indicator anyway. And so it's really been a non-subject to be honest with you.

We price our retail products and our feed service products based on the value that we deliver to our key customers. And we have various mechanisms for doing that. That's part of the diversity of our portfolio which we think is a competitive advantage. And so it’s, again, it's been a non-factor.

We plan our products according to the value creation and the partnerships that we have. But in price discovery mechanism, there are other indexes that are still available. So there is the EMI small bird that used to correlate perfectly with Georgia Dock, and has been utilized as a substitute in some cases.

But just to illustrate the strength in the small bird market, this EMI small bird index is 10% higher today than it was in the same period last year. .

And that that index is based on actual invoices. It’s a good measure we believe..

That’s very helpful. I’ll pass it on..

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

Hi, this is Mike Henry in for Mike Piken. Thank you very much for the question. I know you had commented as relates to grain, but you didn’t expect to see an adverse impact as a result.

But I was wondering if you had any commentary that you could provide around whether or not you’ve locked in any prices at this point into later in the year, or if you're still pretty much on the open market. And then just as it relates to the antibiotic free market, there is more capacity coming online there amongst competitors.

I’m wondering if you’re seeing the premium that you had previously seen under any pressure of those spreads or narrowing.

Or is it still pretty resilient?.

First on the feeding ingredients. We have not priced our feeding ingredients very far out. We believe that stocks are more than adequate, and they’re growing. So we believe it's a prudent to stay closer to the market especially with a great harvest in South America, increase acreage in corn and soybeans in the US.

Planting pace is average above right now. Seems that we have good some sort of moisture. So outlook looks positive for maintaining tepid feed cost. So we don't see the need to price out very far out ahead of us. On the question regarding antibiotic free and the premiums, we continue to see demand growing there and in that category.

And we believe that those premiums are going to continue to exist at least for the customers we do business with. We don't produce that product speculatively. We reproduce it for key customers. And we have agreements with our key customers that are in line with the demand for that product.

So we're not concerned at this time that those premiums are going to suffer as a result..

[Operator Instructions] Our next question comes from Akshay Jagdale from Jefferies. Please go ahead..

Good morning. This is actually Lubi on for Akshay. I wanted to ask a question on the efficiency of the breeder flock. So in some of the data that we've been looking at, it seems that hatchability and livability has been down the last few years. Just curious first, is that consistent with what you guys are seeing.

And then, has it started to reverse recently, and what's your expectation for that going forward for the industry..

One thing that we've seen is a shift in breed selection. And the shift in breed selection has primarily for the purpose of better fee conversions and better yields. The flipside of that decision, those have been left productivity from the breeder side. In other words, less fertile eggs per hen., and lower hatchability.

So it's a trade-off that the companies make and we’ve been a part of that shift ourselves, and we believe that the numbers they are out that it’s the right decision to make. The trade-off fewer eggs and fewer chicks for better yields and better egg conversion. We say that, as an industry shift, we’ve been a big part of that..

And then can you share maybe how are you guys doing -- apologies if it was asked already on the call. But how are you guys doing on agro stats relative to your peers given some of the recent operational issues that you’ve faced.

And I guess in your view, to what extent is what the variance relative to your industry peers be related to maybe the levels of CapEx that you are spending? Do you think at some point you maybe weren’t investing enough in your plans?.

I don't believe that’s been the issue. We’ve spend inadequate CapEx in our plans to keep them productive and efficient. As far as our relative performance to our peers, we began this journey 6.5 years ago. We’ve made tremendous amount of progress both in mix management and cost management.

And I think that the biggest benefit that we've had is not segmenting our business and creating that diversity of different models. And we believe that's our competitive advantage, and that's what will allow us to outperform with higher margins and more consistency over the long period of time.

And you can look at both our publicly traded peers, in the last three years, we've been able to outperform those two, and we don't think that that's going to change. We’ll continue to change our models to make them relevant to where consumers are going.

And we’ll also continue to be very disciplined in cost management, yield improvement, product mix and enhancements as well. So we’re pleased with our trajectory now and going forward..

And just to complement, Lube. We don't expect to do every single quarter better than our competitors as we don't have a higher than average exposure to spot market or higher than average exposure to prepare foods.

But over the cycle, over the last eight quarters actually, just like you’ve mentioned, which was appeared with significant volatility on prices both domestically and internationally, our margins were better than the average company and better than the competitors..

And the other thing that I would mention too is we have the component that most companies don't have. All companies for that matter. And that is our Mexican operation which is more volatile. But if you really look at our returns over the last couple of years, it’s been surprisingly consistent.

Double digit and more consistent than we would've expected it to be, and I think that it's an absolute tribute to the quality of management that we have in that operation. And again, I'll go back and talk about our integration of GNP.

We’re going to use the same model as we used in Mexico, and we can say that we purchase that asset, and within two years, we took margins that were half of our legacy business when we started to at least as good as, if not better than, to date. So we think that that's a core competency of ours, and we’ll continue to do that..

Also Mexico has been a source of growth for us both in the M&A and in organic growth with our new complex in Veracruz..

Thank you, that's very helpful color. I'll pass it on..

The next question comes from Bryan Hunt from Wells Fargo. Please go ahead. Bryan Hunt from Wells Fargo, you are on the line..

I was wondering if you could touch on retail again. The warm weather obviously contributed to little pull-forward in terms of demand. But I was wondering, one could you talk about promotional placements whether those are up year over year given the consumers focus of value.

And then two, whether you gained any additional placements that are contributing to positivity around volume growth..

Sure, Bryan. I couldn’t hear all the questions, but I think I’ve the essence. So for the quarter, we saw chicken features increased by 3.3%, we saw pork features down actually 4%, beef features were up almost 10%, 9.7%.

But with beef features, growing that much, the surprising thing to us is how much volume demand that we got for retail all the way through the quarter and even into Q2. Our retail demand is extremely strong right now.

We're actually bringing in breast meat and other cuts from other segments to our retail plants to augment that demand which is typically good for margin accretion. And we think that's going to continue. I would point out a couple of things that are going on as we speak.

Just in the last couple of weeks, we've seen live cattle prices increased significantly as solid margins in the beef business has pulled cattle out of the feedlots at a more rapid rate. So we think we’re going to see beef prices actually go up.

And where we typically see, after Memorial Day, a decrease in chicken prices, I question whether or not we’re actually going to realize that this year given the strong demand for chicken now, low inventories, tepid supply growth, and good export demand for both beef and pork.

So what I'm really saying is the environment for demand and pricing for chicken looks to be very favorable right now..

And while we saw some reduction in the practice of pork and ground beef at the retailer over the last months, I’ll say that the spread between pork and beef and the retailer continues to be significant. So chicken is still the most competitive growth in meat case and that's why we’re seeing some increase in the features..

Just kind of shifting gears, I was wondering if you could talk about foodservice. I mean, foodservice overall appears to be a lackluster when you take a wide swath whether you’re looking at Black Box or Naptrack. Can you talk about - and you all intended to have a better mix of customers.

Can you talk about your foodservice growth and again whether you’ve added any maybe significant customers that are contributing to your confidence and volume growth for 2017?.

Great point. If you look at broader industries on foodservice, you will see that it's been a little bit weaker than more recent quarters. Restaurant performance index have been one. However, on our own foodservice demand, we've not seen that weakness. So we’re in great balance on our foodservice business.

We’re very selective in terms of how we go to market and at foodservice. And so we’re very pleased with how our business in foodservice is going right now..

There is great [cursor] [ph] between some companies are growing, some are shrinking. So that's why..

We think it’s important to partner with the right customers at both retail and foodservice, but especially foodservice..

And two final questions. One, you talked about your three big projects in 2016.

Could you remind us what the friction cost or the disruptions to operations may have been in 2016 from a total DART standpoint from those projects? And then in 2017, do you have anything of a similar magnitude that may add cost to 2017?.

I think our volumes in 2016 were significantly affected by those projects but going forward, we expect to have a better portfolio of differentiated products. When we do all the math around it, the volumes in the loss of revenues, we believe it’ll be around $100 million impact in 2016.

Going forward, we also believe that we can capture $174 million in operation improvements in 2017..

Fantastic. And my last question is, when you look at working capital, your inventories saw a material pop sequentially over $100 million and your AR was up as well. If you look historically going from Q4 to Q1, we haven't seen that type of movement in the last couple of years or even going back further over the last three years.

I was wondering, can you talk about why we saw pretty significant increases in working capital in Q1?.

Sure. That was because of the integration of GNP. So GNP brought the working capital both in terms of grain and both in terms of prepared finished products, and also accounts receivable. And more different than our operations, GNP buy a lot of their grain during harvest time and they consume that grain throughout the year.

And that accounts for a significant advantage that they have in the region that they are in the Midwest. So it's all account all because of GNP. If you think about in terms of sales, the numbers are in the same level of Q4..

Very good. I just wanted to clarify that. Thanks for your time..

[Operator Instructions] Our next question comes from Heather Jones of Vertical Group. Please go ahead..

Thanks for taking the follow up. And I apologize, but I think I missed some of the detail around your outlook language on Mexico. I heard you say something about, you expected a very strong Q2, but when I look at last year, it was a pretty, I mean a very, very substantial improvement sequentially from Q1 to Q2.

And so wondering if you could give us some commentary, or help me out since I missed it, what you're thinking for Mexico in Q2 and Q3. I appreciate it..

Sure. A couple of things about Mexico. Q2 is typically a very strong quarter for Mexico. And as we move into the - we’re moving into the quarter from Q1, and even till now, prices and demand have been very strong. So the point that we’re making from that is we expect this Q2 to be a typical strong quarter in Mexico..

Just to add, Q3 usually it has less demand due to the summer vacation and school resets in Mexico. So Q2 isn't as strong as Q3 as it’ll be weaker. As we see the live prices, and the prices of meat increase in Mexico, we are seeing the same profitability levels as we have in Q2 of last year.

Because of the exchange rate, the absolute numbers is a little bit lower. But in terms of profitability, it should be that..

Percent margin is what we think will be relatively the same as last year..

So absolute dollars maybe down a little, but I mean like last year was in the $70 million range on EBIT, we’re not talking about half of that, we’re talking about relatively modest on an absolute basis..

Yes, usually due to exchange rates..

Okay.

And then my final question is, on the 174 you mentioned operational improvements, I’m assuming that’s inclusive of getting back the issues from Waco et cetera last year?.

That’s correct. Yes. It's going to help on spreading fixed cost..

Okay, thank you for taking the follow-up..

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

Thank you. We will build on Q1 results and believe the remainder of 2017 will present to us many opportunities for further improvements. Feed cost expectations have continued to be muted and the outlook for chicken consumption remains strong despite availability of other proteins since greater export volumes and a strong U.S.

economy will drive more protein consumption across the board and absorb supplies.

We will continue to look for opportunities in refining our portfolio, to pursue even more differentiated customized products to satisfy our key customer's requirements as we believe this strategy is supportive of our goal to continuously improve our margin profile and reduce volatility despite specific market conditions.

We expect our cash flow generation to resume a strong path to growth and allow us to sustain the investments in strategic projects this year at a similar pace to last. Strengthening our operational efficiencies and tailored customer needs to further improve competitive advantages for Pilgrim.

We’d like to thank our team members, 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..