Good morning and welcome to the Fourth Quarter and Year End 2019 Pilgrim's Pride Earnings Conference Call and Webcast. All participants will be in a listen only mode. [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 fourth quarter and year ended December 29, 2019.

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

These items have also been filed with 8-Ks and are available online at www.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..

Thank you, Dunham. Good morning, everyone, and thank you all for joining us today. For the full year 2019, we reported net revenues of $11.4 billion and adjusted EBITDA of $974 million or 9% margin and a GAAP EPS of $1.83.

For the fourth quarter of 2019, we reported net revenues of $3.06 billion and adjusted EBITDA of $162 million or a 5% margin and a GAAP EPS of $0.37.

We continued to outpace the competition by growing EBITDA by strong 46% and 22% for the quarter and for the full year respectively, compared to 2018 driven by an improved operating performance across all our business units, including the U.S., Mexico and Europe.

Our results of remain well-balanced and are result of our vision is to become the best and most-respected company creating the opportunity for a better future for our team members.

To support our vision, we are continuing our strategy of developing a unique portfolio and diverse complementary business models, continuing to relentlessly pursue operational excellence and becoming a more valued-partner with key customers and creating an environment for safe people, safe products and healthy attitudes.

During 2019, our team members have remained focused on executing and delivering on our strategy, regardless of market conditions. While the market started strong during the first half of the year, the second half was weaker than expectations.

Despite the volatility, we've continued to deliver strong growth and achieved a significant increase in relative performance against industry peers across all our global operations. The diversity of our portfolio and our global footprint has contributed to enhancing the consistency of our consolidated results.

In the U.S., we experienced a much better environment in our fresh business, compared to a year ago. Operationally, our results at our commodity large bird deboning also improved versus the year prior, despite the relatively tougher environment seen in the second half of 2019.

Our prepared foods business continues to evolve, reflecting in the investments made over the past few years. We've adopted our legacy European operations to better mitigate future input costs challenges, integration of the newly acquired operations is on track and the business has already contributing positively to our results.

In Mexico, the market was in line with seasonality and results for the full year 2019 also improved versus the year before. For 2020, we will maintain our strategy while continuing to improve the portfolio to better respond to individual market dynamics and widen 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 for the volatile commodity sectors. Our U.S. fresh chicken business are continuing to improve operationally in Q4 compared to the very tough demand conditions we saw during last year's fourth quarter.

The market for commodity large bird deboning in 2019 was still challenging, but slightly better year-on-year. The commodity large bird cutout improved throughout the entire quarter and was closer to the 5 year average, driven by strengths and wings and leg quarters, while boneless breast contributed only with marginal improvements.

Within the less commoditized small bird in case ready segments, the customer demand was in line with normal seasonality. Our retail trade pack, rotisserie, and QSR sandwich business continued to outperform peers by generating robust results driven by strong demand for our chickens from our key customers.

Our market leadership in these categories in more differentiated product portfolio have continued to support the growth of our competitive advantage versus the industry. The commitment to our key customer strategy remains relevant to our growth.

Revenues from key customers have more than doubled over the last 8 years, reducing our relative dependency on pure commodity sales. We continued to leverage our key customer strategy to earn more business and accelerate growth beyond just the underlying market conditions.

As an example of how the strategy is supportive to our growth, we have begun the conversion of one of our commodity big bird deboning facilities to small bird deboning. We're doing this to fulfill their expansion plans as the demand has continued to outstrip our production capacity.

We also believe this conversion will deliver benefits and values similar to our Stanford plant by reducing the proportion of volatile commodity sales.

In this quarter, we are expanding the list of our partnerships by adding a new key customer, as more companies recognize our leadership and trust our ability to reliably supply them with differentiated innovative products.

Beyond driving growth, our key customer approach also promotes trust, enhances long-term relationships and strengthens our margin structure. We have an increasing our mix of specialty birds including no antibiotics ever and organic attributes to support the evolution in our customers' expectations and market growth.

We're 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. Our Just BARE case ready net sales grew 67% year-over-year during Q4 and 15% compared to Q3. Our growth continues to be fueled by our strong online presence.

We are continuing to invest in automation and robotics to support demand for our products, while maintaining the impact of tight labor conditions on margins. Within our U.S. prepared foods, we grew food service revenue by 2%, while the overall was relatively flat year-on-year during Q4.

In Q4, we also grew our retail customer revenue by 12%, driven by key customer growth. This channel shift was driven by the strength of our well-regarded food service brands Pierce and Gold Kist.

Last quarter, retail and food service channels began gaining distribution with our new Just BARE items had our all natural, clean label and contains no antibiotics ever, which will drive future growth for us. For the full year 2019, our total prepared foods net sales grew 10%. The retail channel led to growth with 22% year-on-year gains.

Our innovation is fueling this growth as indicated by the increase in a new products launched in the past couple of years, which represented 14% of our total net sales. Following China's lifting of the ban on U.S.

chicken, we're focused on leveraging the advantage of our global resources to develop an effective export sales strategy and channel approach specifically for that market. We believe recent announcement of a reduction in retaliatory tariff from 35% to 30% is also good news to make chicken even more compelling. Although U.S.

poultry exports closed the year with marginal increase of only 1%, we're beginning to see the impact of ASF on poultry demand and the impact of China lifting a five year ban on U.S. poultry. Correspondingly, Q4 export prices rose by 13% year-on-year versus the year ago. We are closely monitoring the impact of coronavirus and the demand environment.

While there could be some short-term logistical challenges in a long-term, we expect China's proteins supply shortfall to remain. We continued to believe positive impacts of ASF will be more visible going forward.

We remains focused, diversifying our export destination, country mix and vigilant on developing contingency sales strategies to encourage any trade disruptions due to disease or unforeseen disputes with existing trade partners.

Market environment in Mexico during Q4 was tough, as weak macro conditions contributed to more uncertainties in consumer spending. Although volume growth was solid, chicken prices especially in the commodity sector were below seasonal expectations.

Despite a difficult market environment in Q4, our Mexican operations have continued to perform well and we're still able to generate an improvement in results for the full year 2019, compared to the year before.

As noted, prices in the commodity sector are week during the quarter, but increased share of non-commodity products, strong execution and growth in prepared foods have helped to partially offset the weakness and allow us to outperform the competition.

We continue to grow with Veracruz project, which is already adding a meaningful contribution to our operating performance. We continue to lead in developing the market in prepared foods in Mexico by launching a significantly more products to meet demand.

We were making great advances in our prepared foods business with innovation as the core competence of our strategy. We generate excellent results under premium Del Dia and Pilgrim's 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 continued delivery of strong results. Following the positive trends established during the last few quarters in Q4, our legacy European operations again reported EBIT that was continuing improvement compared to the previous year, despite both flattish volumes and revenue year-over-year.

The implementation of improved methodologies to better reflect and mitigate future input costs challenges as well as incremental operational improvements achieved through increased labor efficiency, investments in automation, and focus on higher yields have also driven better performance.

We are further developing our key customer strategy along with enhanced revenue optimization initiatives to give us better management of our mix and increased margin contribution.

We believe our European legacy operations continues to have potential opportunities to extract more value from the business by implementing the strategy in order to deliver a relative performance that is above the competition in Europe.

We remain supportive of our customers; development and expect to see further growth in following quarters, driven by increased consumer interests in poultry products and meat free snacking.

We have been an important partner for our customers and retail QSR and food service, reflecting consumer trends in generating a pipeline of innovation and product development in the poultry and non-meat segments of our business in Europe.

After joining our team, for only the first full quarter, our newly acquired European operations performed well and are already generating positive EBITDA. The performance was driven by robust holiday demand, strength in pork exports as well as initial implementations of operational improvements.

All of our European fresh pork facilities are approved for China, so we're well-positioned to benefit from even more export opportunities there.

Further, with the addition of our operations best-in-class, highly-integrated production platform, we have significantly strengthen our brand portfolio and further increased our value added innovation capabilities to European customers.

We're building our innovation pipeline with key customers and entered the plant-based protein sector as well as launched premium sausages in the quarter. Integration of the new European operations is tracking well to expectations.

Over the next few years, we continue to expect to generate an EBITDA improvement to achieve a level that is competitive with leading companies with similar portfolio. Pilgrim's has a proven history of successful and efficient integrations of companies we have acquired and we will apply similar methodologies in integrating the new operations.

We're optimistic about building upon their existing operational improvements by continuing to optimize manufacturing footprint, extract best-in-class operational excellence, optimize the portfolio of channels, segments and products as well as strengthening grow business with key customers to drive innovations in high margin areas.

We are leveraging resources available through both our legacy and newly-acquired operations in Europe in conjunction with our global team in order to further strengthen our competitive advantage by increasing our ability to offer key customers a much wider selection, highly-differentiated innovative products to fulfill the growth in consumer demand.

We look forward to sharing innovation and best practices internally to enhance our operational and financial efficiency and position Pilgrim's as a whole for increased profitability and more consistent margins.

Corn prices have fallen since the end of the quarter, way down by good growing conditions in South America, a lack of follow-through from Phase I trade deal and uncertainty in Chinese demand. The USDA's is final top crop projection came in at 13.7 billion bushels, which was higher than the market had previously estimated.

USDA is projecting a corn carry out at 1.9 billion bushels, which combined with large corn supplies outside of the U.S., we feel is more than adequate to cover demand.

Soybean prices have also been under pressure as the market is feeling more confident in the large soybean crops in Brazil and Argentina with large South American supplies and the USDA is projection for U.S. carry out of 425 million bushels, we feel that there are more-than-enough supplies to meet global demand.

We've seen an increase in wheat prices in the UK recently as a result of poor planning conditions late last year in Western Europe. Although prices are higher than we expected, we see adequate wheat supplies globally and we are positioned to consume other feed grain sources besides wheat in our UK operations. As we look ahead to the spring, U.S.

farmers have the ability to plant significantly larger crop than last year where adverse weather impacted planting. The prospects for larger crops in the U.S. combined with large crops outside the U.S. should keep both corn and soybean meal prices from being a headwind to seed cost this year.

For this year, USDA is expecting a growth of 4% of production, slightly above and 3% increase in 2019. Pre-reg productivity trended below 2018 for much of the second half of 2019. The growth in egg sets and placements has been primarily due to larger layer flocks as hatch rates in 2019 remained in line with 2018.

Latest pullet data which can be volatile, shows the continued growth in placements relative to a year ago levels, with much of the placement grow supporting new capacities that began in 2019. Despite the new capacities, we believe, capacity growth will not be disruptive to the industry supply demand balance in the mid to near-term.

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 in both dollar and volume growth. In addition to demand growth in broad line distribution, national chains QSR demand continues to grow is shown through increased chicken surveys in 2020.

We expect this trend to continue with increased U.S. QSR features contributing to increased chicken demand, giving the relative value of chicken versus other proteins. Despite growth, both chicken and other competing proteins in 2019, the retail segment has shown positive dollar growth coming from all three categories of fresh, frozen and deli.

We expect additional support with more future activities by retailers as the year progresses.

While we are already balanced in terms of our bird size exposure, we will continue to seek opportunities to incrementally diversify our product mix and reduce the commodity portion of our portfolio by increasing the number of differentiated products to keep 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 more-customized, high-quality, innovative products to give us a clear long-term, sustainable competitive advantage. With that, I'd like to ask our CFO, Fabio Sandri, to discuss our financial results..

Thank you, Jayson, and good morning everyone. For the full year 2019, net revenues were $11.4 billion versus $10.9 billion from a year ago with an adjusted EBITDA of $974 million or a 9% margin, compared to $798 million or a 7% margin for the year prior. Net GAAP income was $466 million versus $248 million the year prior.

Adjusted EPS was $1.62, compared to $1.28 in the year before. Operating margins were 6.4% in U.S. 8.9% in Mexico and 3.3% in Europe respectively. For the fourth quarter of 2019, net revenues were $3.06 billion compared to $2.66 billion from a year ago.

Adjusted EBITDA increased to $162 million or a 5% margin, representing a 46% improvement versus $111 million a year ago, with a 4% margin. GAAP net income was $92 million or $0.37 per share. Operating margins were 3.2% in the U.S. 2.5% in Mexico and 2.1% in Europe respectively, already including our acquisition during a significant part of the quarter.

Excluding the impact of one-time asset acquisition net gain to reflect independent valuation of the newly acquired operations in Europe and exchange rate adjustments, adjusted net income was $35 million compared to $21 million in the same in 2018, resulting in adjusted earnings of $0.14 per share compared to $0.09 per share in the year before or a 56% increase.

Our operating profit in U.S. during Q4 was $62 million, a significant improvement versus a loss of $10 million a year ago. Our small bird and case ready business continued to perform well and generate consistent top tier performance.

Although the market for large bird deboning was only slightly better compared to Q4 of last year, we have continued to improve the operational efficiencies of the business, while introducing more product differentiation in order to offset some of the volatility.

Our consistent focus on key customer strategy is also using positive results, helping us to achieve a material increase in relative performance against industry peers. Our U.S. prepared foods have continued to expand following the investments in the last few years. In Q4, we increased our retail consumer revenue by 12%, driven by key customer growth.

This growth has been 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 anywhere expecting to contribute to a greater portion of our total sales in the next few years while adding to the stability in consolidated margins.

Operating profit in Mexico was $9 million as a weak brother macro-environment constrained consumer spending and demand. Despite some volume growth, chicken prices especially in the traditional markets were below seasonal expectations.

Within prepared foods in Mexico, we remained as the leader in developing the market and we launched many new products this year. Our strategy supportive of the goal to increase our high margin, differentiated products while having product coverage from entry level to premium across multiple channels in both fresh and prepared in Mexico.

Our strong team in Mexico is our true differentiation with their operational excellence and market leadership, and we expect the strength in relative performance against industry peers to continue in the future.

Quarter-over-quarter can be quite volatile in Mexico given specific market conditions, but Mexico has been very consistent on a year-over-year basis and we expect this positive trend to continue as a demand for protein growth.

In Europe, while considering our legacy operations, operating profits increased significantly from last year due to better operational efficiencies and input cost mitigation.

We're further developing our key customer strategy, including more integration with our newly acquired operations and enhanced revenue optimization initiatives to give us better management of our mix and increase margin contribution. We will also continue to leverage our marketing and sales infrastructure to optimize SG&A costs.

We believe we can maintain and lead in relative results to the industry.

After only being a part of our team for one quarter, the newly acquired European assets delivered improved performance and are already contributing positively to our EBITDA results due to the strength in exports and good domestic demand as well as the initial implementation of operational improvements and synergies.

Since all of our European fresh pork facilities are now approved for China, we are well positioned to further benefit from the strength in export opportunities.

The integration is tracking well to expectations as over the next few years, we're expecting to generate an EBITDA improvement to achieve a level that is competitive with leading companies with similar portfolio.

We're proud of our history of successful and efficient integrating companies and we will apply similar methodology in integrating the new operations to achieve comparable results.

This year we achieved $60 million in operation improvements in synergies in United States Mexico and Europe, a little shy of our targets but a major achievement given the significant investment we did in our team member wages, but greatly improve our retention and turnover numbers.

For 2020, our teams have identified and developed plans to capture additional $125 million. Our SG&A in the fourth quarter was 3.8% of sales, higher relative to a year ago as we increase support for expanding the Just BARE brand nationally and the investment for our new prepared foods products, both in U.S.

and Mexico, as well as the inclusion of the newly assets in Europe and acquisition costs. We will 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 commoditize products and strengthened partnerships with key customers.

With our growth in Europe, we expect to spend about $350 million in CapEx this year, higher than our depreciation and we reiterate our commitment to invest on strong return on capital employed projects that will improve operational efficiencies and tailored customer needs to further solidify competitive advantages for Pilgrim.

Our balance sheet continue to be strong, given our continued emphasis on cash flow from operating activities, focus on management of working capital and discipline investments in high-return projects. During the quarter, our net debt was $2 billion with a leverage ratio of 2.1 times less 12 months EBITDA.

Our leverage remains at a good level and we expect to continue to produce strong cash flow this year, increasing our financial capability to pursue strategic options. We expect 2020 interest expenses of around a $100 million to $230 million. We have a strong balance sheet and the relative 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 will 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 accordingly to our value creating standards.

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

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Benjamin Theurer of Barclays. Please go ahead..

So my first question -- first question is about the chicken pricing dynamics in the U.S. and you actually nicely laid out in your presentation that boneless, breast meat prices up pretty much at the low levels over compared to the past history.

What are you expecting? And what do you prepare for going into, the coming quarters and into the summer season? Is there anything, you've seen an early potential feature activity, where you could expect that there's going to be better demand and prices going into a better territory Or would you expect that this particular category continues to be very much under price pressure? And I have another question.

That would be my first one..

Yes. Ben, this is Jayson. So, I would say, let's start with the fundamentals. USDA is expecting U.S. chicken production to increase by 4% year-over-year. In 2019, that number was 3%, so we're going to see another 1% on the market. From an export standpoint, we also see an increase of around 4.5% according to the USDA.

So, we'll see some increases in exports as well. I think offsetting this; the USDA has also projected a flat availability in both pork and beef, which is a positive for chicken in the 2020 year. So, I'd say that fundamentals show increased exports and then a flat numbers in availability for the competing proteins.

We're also going to see Ben, as you saw the 3% increase in production, we also saw a 7% increase in large bird deboning in Q4 that was one of the reasons why we saw some Q4 depressed breast meat numbers and then we're also seeing that as an overhang into the Q1 format.

So, what we're going to see is 4% year-over-year, but we're going to see the front half of 2020, a little bit more pressure relative to breast meat and productions. So we might see 5% to 6% on the front end of 2020, and we'll see 2% to 3% on the back end, giving us that, that 4% average number.

So based on the way pullet placements are coming across, we're going to see higher, a higher number from the front end versus the back end. And we're also seeing as of late, some increased features from chicken. But again, we'll start to see less competing proteins available in the U.S. and back half of the year.

We'll see some ASF impact start hitting towards the back half of the year. And we'll start to see those retail features start to come through starting Q2 through the rest of the year.

So, we believe the fundamentals are in line, and we recognized there's pressure on breast meat today, but we believe that pressure will be relieved throughout the years as the year goes on..

Okay, perfect. And then on Europe, you've talked about that, that you have a significant improvement on the legacy business, but also Tulip started to contribute in a positive way.

Could you elaborate a little more in detail? Is it because of your applying the best practices in each of it? I remember Tulip was mainly because of a lot of the prepared foods and the more sophisticated product that's something you've basically taken over into the legacy Moy Park business? And what have you been doing with the Tulip of operation to actually offer such a short period of time to be already slightly positive, because if I remember right, it was negative at the beginning?.

That's right. And so, there's a lot of things happening in the Tulip operations. So, we've done this before. We acquired the GMP team successfully. We took on the assets in Mexico, Moy Park as well. So, we have some positive experiences in acquisitions.

And it always starts with people, having the best team in place, having that structure of ownership and accountability in the right place, and then we're looking at operational improvements, as this the second pillar. So, we have our engineering teams in -- industrial engineering teams through these facilities, looking at operational excellence.

We have synergies. We have streams of people looking for packaging, looking for other types of operational improvements. And then there's a portfolio, so we're improving the portfolio here at Tulip, and the China factors is obviously in play here. So, we have the fifth quarter, and we have charters being, being exported.

And we said this on our opening remarks that all of our apertures are approved for China as well here. So, we have the China impact, we have the team, we have a portfolio, and then we're also working on our key customers strategy..

Then just to add to this, we have the opportunities to increase the efficiencies across the value chain. We can optimize purchasing and production, and we're improving yields and the Global Management off feed sourcing.

We also leveraged our infrastructure in UK to optimize the support costs and use our innovation leadership at Moy Park to deliver growth at Tulip. I think more important than the synergies, with our key customer strategy, we believe that we can add value both to our operations and to our customers by providing a much broader portfolio of products.

And just like Jayson said, like any operations and geographies, we expect to achieve a level of results that is competitive with leading companies with similar portfolio.

We talk about the ASF opportunities and prices have increased for exports for Tulip, but also there is an increase in pork prices in Europe, and many of the cheap imports that were coming to the UK have been reduced giving a great opportunity for the domestic meat..

Our next question comes from Heather Jones of Heather Jones Research LLC. Please go ahead..

So, I want to follow up on your comment about the plant conversions.

I was wondering if you could give us color on that as far as like timing, are you -- will it take any pounds out? What will that do to your mix? Because you've all talked about being roughly a third, a third or a third, I mean, what does that mix look like after this, if you could just flush that out some for us?.

Sure. Heather, the conversion will take place between Q2 and Q3. It will take -- obviously, when you take a bird out the large bird deboning sector and put it into a small bird deboning sector will lose some pounds on the front end, and then at some point, at some in time will have some line speed increases and take those pounds backup.

So I'd say, somewhere in the 20221 range, we'll be back into our tonnage. But again, Q2, Q3 temporary shortage on pounds and then we'll take those pounds back up..

I think the most important part; Heather is that, we are growing with our key customers. So, in this segment, it is much more profitable operation for us and it will help us -- again differentiate our portfolio and its one plant in 26. So, it's not a meaningful volume for us..

But I mean, I think, if I remember correctly, you have like 8 big bird plant. So, this takes out one, I mean, am I right in thinking that third, third, third is going to shift.

I mean, does it go to like 40, 35, 25, I mean, how should we be thinking about that mix?.

I think you can post a shift into your numbers certainly. But I think the -- I think I'll continue on the Fabio's comments.

The fact is, even though Heather, we are, let's say a third of our production volume is in big bird deboning, I will argue that within that segment, with the mix within the mix, our teams have been adding value to the white meat of that bird.

So, we're continuing to take our business away from a commodity sector on the front half of the bird and the back-half. So, with this one shift, you will see some. If you model us, you'll see some movement big, big to small again, but you'll also continue to see us adding value to the front half of our birds, even in that big bird segment.

Again, that's the mix within the mix. Our portfolio will change and we're going to continue to optimize our portfolio to deliver the best mix to our shareholders..

Thank you. And my follow up question is. Jason, you mentioned, you still expect the benefit of ASF to show up. You've noted that be sizable, but you said something about second half.

So, I was wondering what prompted that comment, I mean, what are you -- are you seeing constraints on the export capacity side? I mean, what made you say, second half? That's my follow-up..

Thanks Heather. I would say this. I'm not sure if we can estimate the timing in here. As you know, we estimated this ASF to really start in a Q4 of '19. It's rolled into the Q1 I think due to the coronavirus. You're going to see some more rolling again. We haven't seen any impact on on chicken imports due to the coronavirus.

We have seen some impact of the reduced flows into China that have created some excess supplies on the market. And I'd say especially in the U.S. pork market, the pricing has been amplified because of the trade expected an increase in China purchases in February out of the U.S. and these purchases really haven't materialized.

We do know that the Chinese government is seeking to expand meat imports to stabilize the domestic supply, but we know that beef remains at 20% higher this time than last year.

Pork is 127% higher, chickens up to 16% of a very low base; and again while we've not seen any impacts directly, there are supply chain concerns we're monitoring pretty carefully and not only regards to U.S. shipments but our UK pork shipments as well in China. And we're seeing these logistics, including some block shipments of animal feed.

So, we're seeing some issues on travel restrictions within China. We don't know the extent of the chicken market, but there's some calling going on in China. We know that there's some restrictions also on some live supply blockage as well. So, we're starting to see some of this impact that's impacting the lives supply chain in China.

And what we do believe is that, when the virus is under control and the lockdown practices remove, trade flows are going to resume; and when they do whether that's Q2 or Q3, we believe that demand is going to recover more quickly than the supplies.

So, we believe that when demand starts to debottom, we'll start to see that supply to recover, but it will take a little bit more time for that supply seem to recover and this is where I see the rolling effects of the ASF. I think we're going to start to see it. We're already shipping to China today. We have a heavy demand for our China products.

I think you might have read even as late as yesterday, Heather, that there is going to be some restrictions removed on some tariffs. So, you could see some tariff restrictions being removed on that 30% that was 35%. So, if that happens, we'll start to see this movement out of the U.S.

relatively quicker rather than later, and it'll give us an edge to compete against Brazil, who is also shifting meat into China. So, I think due to the timing, Heather, there's a lot of different factors that are coming into play here..

Our next question comes from Ken Zaslow of Bank of Montreal. Please go ahead..

In terms of Mexico, can you talk about the situation there? Has it started to improve? Or is this margin structure, again, continue into this quarter? How do you think about it a little bit over the next one to three quarters?.

Sure, Ken. Look, as you know there is a technical recession in Mexico in 2019, and we expect the economy to stagnate this year. So, we believe that, there's upside potential with next year. The passage of the USMCA is going to provide a boost for the economy. We've had four years of uncertainty in Mexico and that's certainly going to help.

I would argue that, over the last many years, Mexico has produced double-digit EBITDA margins. We've seen troughs. We've seen peaks. But at the end of the day, we have a very smooth and well operating team in Mexico that delivers the results. And yes, we had a difficult Q4 that spilled over into Q1.

We're already seeing the market recover and we'll have a seasonal Q2, Q3 three and Q4 again. I don't see anything structural in volunteer. We did see a deep trough in Q4 and its spilling over to Q1, but Ken, at the end of the day, we don't believe there's anything structural that's changing in Mexico..

And Ken, as you know, Mexico is the proxy for developing economies, right? What to use, where the protein consumption grows, as we see growth in disposable income? We are also diversifying our products over there, growing the premium value-added products, and we are also growing your fresh production with our expansion in Veracruz..

And then can you talk about your personal or Pilgrim's Pride personal shipments to China? Have you guys done anything? Are you hearing anything? What do you guys -- how is it reflective in what you're hearing on your operations? Are you guys gearing up for more exports? Are you guys doing anything to change? Just any type of color on that would be helpful and I'll leave it there..

Yes. Sure, Ken. We are packing. We are packing pullets. We are packing drumsticks. We are whole eggs. We're packing the leg quarters. We are packing wing tips. We're packing gizzards and we are shipping all of the above items. We have a heavy demand for orders eat despite that what we're hearing in the marketplace with coronavirus and logistics.

But, we are taking orders. We have currently $25 million of orders on the books, and we are receiving wired transfers to those orders and we are shipping. So, despite what we're hearing with the logistics issues, we are packing and we are shifting for PRC..

And Ken, as you know, we have an extensive network that we can export. If there isn't any disruption in China, we of course can divert those projects to other places. Africa has been a little bit slow in 2019, but Latin American has actually increased their demands..

Our next question comes from Peter Galbo of Bank of America. Please go ahead..

Jason, I was hoping you could expand on your comments a little bit from last question just on possible tariff reduction from the 30% down to a lower level? I know there have been some articles floating around earlier in the week on potential tariffs exemptions, on beef and pork, but nothing at least official yet out on chickens.

So just any commentary be very helpful?.

Absolutely, we got confirmation yesterday that chickens will be included into the commodity mix..

And we know what that level is going to or….

That's to be determined. Peter, I'm not sure if there're any levels, it could be from 0 to 30, but I don't have any details on what those levels might be. I think as the week progresses, we'll find out more next week..

And then, just on the plant conversion as well, I mean, it makes complete sense from where we sit.

Just curious what you're seeing from the competitive environment, some of maybe your private competitors who are also going through potential plant conversions and whether or not you think, this helps just clean up some of the profitability issues in the big bird deboning for the industry as a whole?.

Yes. Peter, I can't speak for anyone else, but I will tell you one of our strategic pillars is to have an optimized portfolio. And so our team is looking out for it and we are seeing that you're reading the leads here. And from a commodity standpoint, our key customer strategy enables a tighter footprint.

We're able to use more of our finite resources towards key customers while building relationships and building pipelines of innovation for our key customers. So, relative to the rest of the industry, I really can't speak to that.

We've stayed in this small bird business, so in 2011, when we came to this company, our new management team, we're a leader in small bird. Shortly after the big bird market started to really take off in the commodity markets where we're very high and there were a lot of startup operations between called 2015 and 2019.

And most of the new operations that already have come into the marketplace for big bird operations and again I'll double down on this. Even inside of our big bird operations, we are de-commoditizing the products that we offer from a white meat perspective and a back half perspective.

So, we're doing this in many ways, but one big shift in 2020 will be that large bird to small bird deboning operation. And then, the mix within the mix were going to be de-commoditizing white meat again, and that works best for us in our portfolio and our key customer strategy as well..

And I think because we have diverse customers and we also have a lot of operations, we can maximize and optimize the footprint. I think if you have a single plant, that is a big bird operation, and if you want to reduce the size of the birds, you will be very inefficient in terms of feed mill, in terms of hatcheries.

So, I think it's much more complicated for a small player to do this, to do any conversion than for a company like us with this multitude of segments..

Our next question comes from Ben Bienvenu of Stephens. Please go ahead..

On SG&A, Fabio, earlier you made some comments around some of the investments that you guys are making. We saw SG&A, it can be volatile quarter-to-quarter, but this year, we've seen it kind of steadily move higher throughout the year.

Should we be thinking about the full year '19 SG&A absolute number and growing off of that or taking the fourth quarter and sequentially growing off of that? Just how much of an aberration versus a trend change is the fourth quarter for SG&A?.

No, I think our Q4 was a little bit different than the others. So, we can expect the same level year-over-year. We don't expect Q4 to happen again. I think it was more the integration of the newly acquired European assets into the specific quarter..

Okay. Fair enough. So, the integration of Tulip obviously contributing significantly, but the big increase in U.S.

and Mexico are unlikely to repeat?.

Yes, because that could persistent with the improvements they are doing in terms of marketing and supporting the national brand, the Just BARE brand..

Okay, great. I want to ask. You talked about, the demand picture in Mexico. What does supply look like? And Jason, your comments around elevated production in the first half of the U.S. and lower in the back half of 2020 makes perfect sense given the capacity increases we've seen.

I'm curious, is there any impact on the Mexico market from abundant supplies in the U.S. that does any of that product spillover into the Mexico market when there's a cheap alternative in the U.S.

as well? Or are those markets mutually exclusive?.

Yes, Ben. I think Mexico is the largest partner for United States, right. They take around 22% of the exports of the United States. So, it is the largest partner. I think what happened last year where exports to Mexico increased around 5% year-over-year, was the substitution of the Brazilian meat.

As the Brazilian exports instead of going to Mexico, start going to other destinations, specialty China. We saw the Mexico then, and because also of the prices of breast meat being so competitive, they started importing more breast meat from United States.

We don't expect that to happen once again next year, as we are seeing more and more exports from Brazil going to other destinations and they did not renew the quotas from Brazil to Mexico. We don't know if that's going to be renewed this year or not.

So, even if there is a little bit more exports from the United States to Mexico, we expect that that impact the Mexican operations..

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

Yes. Just wanted to dig in a little bit more in terms of your key customer program and just I wanted to talk about the NAE market specifically.

Are you seeing any signs of that market becoming more saturated and more competitive as other companies are moving there? Are you still expecting to hold the traditional premiums you've gotten for that type of product?.

Michael, thanks for the question, and you are right to combine the NAE discussion with the key customer strategy piece. We produce the NAE products for our key customers. And if you think about it from a retail shelf, we produce NAE products for our customers to be a total solution provider.

So, we might be providing 5-feet of shelf space with NAE and the rest of the 25-feet of shelf space will have conventional product next to it. So when we think about NAE, we obviously have some value and margins built into that piece.

But when you think about our total picture with our key customer strategy, we're able to deliver NAE plus our conventional products to provide a total solution for our customers.

So, we're really not seeing any deletion or any margin issues relative to NAE, still as robust as it was when we started our programs years ago, and we're continuing to grow our NAE offerings and profile..

And also in terms of feature, Michael on the retail, we're seeing more and more features on the NAE and organic. Although we saw features in the retail lower year-over-year in Q4, we're seeing a rebound now in Q1, but even in Q4, we saw an increase in the NAE on an organic category..

Okay, great. And then my second question is. Just in terms of the sandwich wars that have been going on at QSR, I would imagine that it's been with for the small bird.

I mean, is there any opportunity for the commodity big bird, breast meat pricing to benefit from some of these sandwich wars? Or are the two markets completely kind of split from each other? Or is there potential that the small bird gets tight enough that people need to start slicing up the big bird and maybe it'll help the breast meat market a little bit?.

Michael, I would say the meat blocks are entirely different, but what you will see and we have seen is, some sliding from small bird offerings into the sandwich market into the medium bird. So, we're starting to see some medium birds because of the kindness in supply. There's actually a 3x value of small bird meat to big bird meat in terms of pricing.

So, you've seen a significant price differential between small bird and big bird, but we're starting to see some medium bird slide into the sandwich category. And then on that, with that basis, we're also seeing a little bit of jumbo meat sliding into the medium bird space, but not in a large volume.

It depends on what's going to be offered in 2020, if the sandwich category continues to grow. You'll see more medium meats slide into the sandwich category thus pulling some more big bird meat.

There are some technologies in the market from an operation standpoint that can obviously take a big bird meat and cut it down into medium and small bird meat for sandwiches. The mouth feels much different and that's why we're starting to see this bifurcation in pricing between the small bird and the big bird meat there.

Consumer is noticing that mouth feel and they're paying for that organoleptic attribute that the small bird meat delivers to the sandwich..

I think, Michael, also with the sandwich wars, I think you can create a halo effect for other offerings of chicken. We're seeing more chicken breakfast offerings and also more promotional nuggets. I think there is some pool because of the sandwich wars for other chicken parts, and that could help the breast meat..

Our next question comes from Adam Samuelson of Goldman Sachs. Please go ahead..

A lot of ground has been covered. I was hoping to just talk about your U.S. Prepared Foods business quickly. You made a reference in the press release that the business continues to evolve. I know that business has been a bit more challenge over the last few years from a margin perspective.

I just wanted to get an update on kind of profitability and kind of scope for margin enhancement in that business as you've reset and re-calibrated the mix..

I think, Adam, just like we talk about, it's about the portfolio, right. We partner with our key customers, and we offer from fresh -- from simple offerings or normal products to ABF and organic and also on the Prepared Food side. I think there are two dynamics happening on the Prepared Food side.

The breast meat has been on opportunity for the Prepared Foods. We can grow with cheap breast meat. And on the wing side, it's being more headwind as we've seen on the cutout, chicken wings continue to have a really strong price and also tenders. So I think it depends on the category.

I think on the nuggets offering and on the products based on breast meat, you have a great opportunity in terms of cost and on wings and tenders. We need to differentiate with innovation and a lot of our peers brand that it has a great penetration in the foodservice..

Okay. That's helpful.

And then just second question and it touches back on the plant conversion, but maybe focusing on the remainder of your big bird business, whether it's -- can you talk about from a -- both plant level cost as also plant level margin, how you see those relative to the rest of the big bird industry? At this point, I know, going back a few years that those plants were not optimized for big bird production and the cost position wasn't where you would have hoped it to be kind of where are we now and how much more opportunity is there to come in.

If there is more opportunity, is there incremental capital investment that's got to be made there?.

Yes. Adam, I will say this, and you're absolutely right between 2011 and 2015, we converted seven facilities into the big bird deboning category. And I will argue today, and we've been very transparent with this that we were -- we had a negative result relative to the industry. I will tell you today, we are at average company.

Over the last 12 months, we've improved that business relative to the competition by around $50 million. It's been one of the biggest movers for us in 2019. We've been very quiet about moving that those numbers from a negative deviation to the industry.

So on average, we've fixed our business from an operational standpoint inside these facilities, started with people and labor. And as we fix that piece of our business, we were able to take on a more sophisticated mix both from a white meat standpoint and a dark meat standpoint.

So the mix relative to the value-add that we were bringing to our big bird operations, we wouldn't have been able to execute that sales program in the past years, but as our operations are running well, we were able to transfer that mix into our operational profit.

So our sites now are moving past average, just like the rest of our businesses, which we are operating within their like categories in the Top 3 of their business. Our sites now are to continue to move out of average and into the Top 25.

And of course, Adam, as we can move this plant from one segment to the other, we can upgrade the bottom part of our sales, right. So we will take the most basic sales and the least profitable sales that we have in all of our operations and we will upgrade.

And again just like Jayson said, we are one of the leaders in the small bird category for sure in the top quartile of operations..

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

Thank you. We are looking forward to successful 2020. Although we are pleased with our 2019 results, we are actively seeking more opportunities to achieve an even greater relative performance against industry peers in 2020 by improving upon our well-proven strategy.

Our diverse portfolio of differentiated products tailored to support our key customer strategy in conjunction with our broad geographic footprint will continue to generate consistent performance and minimize margin volatility in challenging market conditions relative to competitors.

We will continue to seek new growth potential, both organically and through acquisitions, while offering even more differentiated product portfolio within our businesses to support key customers' needs by cultivating a culture of constant innovation.

We believe the prospect for strong growth in chicken consumption globally will remain as consumers worldwide continue to view chicken as a compelling healthy option. Our team members are our competitive advantage. We will continue to invest in our people who drive our results by providing them greater opportunities to contribute to our shared success.

We would like to thank everyone in the 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..

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