Pilgrims Pride Corp

NASDAQ:PPC

Earnings Call Transcript 2019-Q2

[Operator]

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

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

[Dunham Winoto, Director, IR]

Good morning and thank you for joining us today as we review our operating and financial results for the second quarter ended June 30, 2019. Yesterday afternoon, we issued a press release providing an overview of our financial performance for the quarter, including a reconciliation of any non-GAAP measures we may discuss. A copy of the release is available in the Investor Relations section of our website, along with the slides we will reference during this call. These items have also been filed with 8-Ks 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.

[Jayson Penn, CEO & President]

Thank you, Dunham. Good morning, everyone, and thank you all for joining us today. For the second quarter of 2019, net revenues were $2.84 billion, unchanged from a year ago. Adjusted EBITDA increased to $349 million or a 12% margin, which is a 35% improvement versus $259 million a year ago or 9% margin. Adjusted net income was $171 million compared to $113 million in the same period in 2018, resulting in adjusted earnings of $0.69 per share compared to $0.45 in the year before or a 53% increase.

We believe our well-balanced performance is a result of our vision to create opportunities for our team members to thrive and prosper. To support our vision, we are continuing our strategy to provide safe, high quality differentiated products, relentlessly pursue excellence in our operations, unlock value by focusing on key customers whose priorities for growth in innovation match our own and optimize our product and portfolio mix to produce consistent results.

I truly believe that our results start with our people. As our team members thrive, so does our business. This year, we are on pace to promote more team members than in any year in our history. Our effort to provide competitive compensation, on-the-job training and development opportunities, a safe working environment that exceeds industry standards and opportunities for advancement in our organization are promoting the strength of our team members while providing more resilient, consistent results for Pilgrim's.

We're thankful for our team members for the improvement of our operations as well as results during Q2 and for producing a solid first half 2019. Our performance, along with the markets, has continued to increase across all our global operations. In the U.S., we experienced a much better environment in our fresh business compared to a year ago, most notably in commodity large bird deboning. Our Prepared Foods business has improved in performance, reflecting the investments made over the past few years. Our European operations have begun to overcome recent input cost challenges, and we expect our results in Europe to continue growing for the remainder of the year.

In Mexico, we had a strong recovery as the market significantly rebounded last quarter after an unseasonally weak Q1. Our Q2 results demonstrate the diversity and balance of our portfolio, which gives us a more consistent consolidated performance despite the volatility of specific market segments and geographies. We will continue to evolve our portfolio to better adapt and respond to individual market dynamics and improve our relative performance over the competition. We believe this approach will give us a higher and more consistent results for the mid- to long run and minimize the full peaks and troughs of the volatile commodity sectors.

Compared to the very challenging demand conditions we experienced during last year's summer in the U.S., the market for commodity large bird deboning in Q2 has improved. The commodity large bird cutout was robust throughout the entire quarter, which was much closer to the 5-year average driven by strength in wings, leg quarters and tenders, with boneless slightly lagging.

In our less commoditized small bird and case-ready segments, customer demand was in line with normal seasonality. Again, our leadership position in these markets and more differentiated product portfolio continues to give us a competitive advantage relative to our peers with narrower market approach. The margin stability within our small bird and case-ready operations has continued to give us an offset to a more volatile commodity sector to bring us a more consistent margin platform while still giving us an opportunity to capture the upside potential.

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

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

Mid-last year, we moved one of our large bird deboning plants to full NAE, the first one for us in this size category, which is supportive of our goal to double NAE contracted volume of large bird deboning in 2019 versus 2018. We're expanding our breast meat portioning capabilities and increasing dark meat debone capacity by 25% to de-emphasize our commodity exposure to volatility of pure commodity markets. We're continuing to install more front half auto-deboning equipment to support strong demand for our products while minimizing the impacts of tight labor conditions on margins.

In Q2, through a partnership with a key customer, we significantly expanded distribution of Just BARE case-ready chicken by over 1,000 new points of sale. Additionally, we continue to improve our Just BARE chicken innovation capabilities. We are growing beyond retailers and expect to start shipping new prepared food items by leveraging the Just BARE chicken brand in Q3 and Q4 this year.

There are also new Just BARE chicken items in the R&D pipelines to sustain our already strong innovation capabilities. The performance of our Prepared Foods operations has been improving, supported by innovation, sales and marketing. We grew a robust 12% in revenue and 14% in volume year-over-year during Q2, respectively. As mentioned, we are extending the reach of our well-regarded Just BARE brand and entering into the Prepared Foods segment and foodservice channel. We will use a multi-tiered brand hierarchy for Pierce Chicken, Gold Kist Chicken and Just BARE to drive operational efficiency, meet the needs of diverse -- the diversity of our customers and deepen the strength of our pipeline.

Our flagship, Pierce Chicken continues to capitalize our heritage and leadership of back-of-the-house labor. The brand is diligently focused on including premium whole muscle products without sacrificing our commitment to flavor and labor saving convenience. Gold Kist Chicken will be targeted towards the opportunity to expand beyond K-12 and to other foodservice segments such as health care and commercial restaurants by leveraging stringent portion control as a key benefit. The brand has taken on a new look but maintains the same quality our customers have come to expect. Finally, we have successfully solved our customers' needs for product that is all natural, clean label and carries a no-antibiotics-ever commitment consumers are seeking at the table with the launch of Just BARE chicken into foodservice.

Our export business continued to perform well during Q2. U.S. gross inventory has remained low, and export pricing has increased approximately 15% from the same period a year ago to reflect strong demand. Despite the increase in price, U.S. export dark meat continues to represent an attractive value relative to other proteins.

We have remained proactive in diversifying our country of destination mix and are relentless in developing alternate sales strategies in the event we encounter any trade disruptions due to animal diseases or unfortunate, unforeseen disputes with existing trade partners.

We experienced much better market conditions sequentially in Mexico in Q2 compared to Q1. The return to much more normal growing conditions and strong demand drove prices higher. Availability of imported pork from the U.S. has been significantly reduced and presented less competition to chicken. While Mexico can be volatile quarter-to-quarter, we believe it will continue to outperform on a full year basis in line with its performance in the past. We expect demand for chicken in Mexico will continue to outstrip our supply, given rising disposable income and consumers' desire to improve their protein diet. We believe the country will remain a good proxy for chicken growth in other emerging markets.

Our team's focus on operational excellence and offering differentiated products continues. We again grew volumes in double digits in Prepared Foods in Mexico during Q2. As part of our strategy to strengthen our competitive positioning, we are maintaining the pace of new innovative product introductions. Our Prepared Foods business is generating excellent results under both premium Pilgrim's and Del Dia brand, both of which have continued to receive very favorable acceptance by consumers at retail, club stores and QSRs.

And after a couple of quarters of very challenging input cost increases, driven by higher green, utilities, labor and packaging, our European operations generated improving results throughout Q2. We also exited the quarter much stronger than we began, confirming a trend that we've already seen in the monthly results the previous quarter. While lower wheat costs certainly presented less of a headwind during Q2, increased implementation of our key customer strategy also enabled us to better work through some of the input cost increases by adjusting price models compared to previously. In addition, we have been more successful in capturing synergies and improving efficiency and yields to mitigate the higher costs that impacted us in the previous quarter to deliver a stronger overall performance in the second quarter.

The results reflected a material improvement in EBIT performance quarter-over-quarter, which grew 91%, which is in line with the results from a year ago on flattish revenue and volume. However, what we consider to be an even better perspective of the improvement we have been making in the business is that EBIT during the last month of Q2 was higher than the same period a year ago, confirming a positive trend seen every single month this year so far.

On the revenue side, we'll be reflecting the input cost changes within our pricing models in the following quarters while operationally, we maintain focus on cost optimization, cost control, synergy capture and a culture of constant innovation. These combined factors will continue to support our EBIT run rate trend for the rest of the year and will help us deliver solid margins.

We continue to expect our second half results in Europe to be an improvement over those which were delivered in the first half of the year. More importantly, our relative performance during the last 12 months has remained above average of our competition in Europe.

In the ready-to-eat segment, we have recently launched microwavable heat-and-eat wave in an easy open pouch, and it is now on sale in several retailers in the U.K. and Ireland. We have also partnered with a well-regarded snack company in the development and launch of a chicken-based back, applying our coating technology and flavoring in a package that extends shelf life of the product up to 21 days. With innovations and partnerships in the meat-free and snack segments supported by a growing consumer demand and continued investment in equipment, technology and operational efficiencies, we expect to expand our margins and profitability.

Turning to feedstock. Corn prices have rallied since mid-May, reflecting production losses due to unprecedented flooding during the U.S. planting season. USDA confirmed the loss of corn production in the June largely by lowering both planted acres and yield for corn. A record amount of acres filed for prevent plant insurance is expected by the market and is also confirmed in the June 28 planting survey report.

However, from a global perspective, large increases in corn production in other major world exporters likely help offset similar losses in U.S. production as well as a rebound in global wheat production in the EU and the Black Sea region. Despite a reduction in soybean acres from the March planting intentions report, soybeans in the U.S. are forecasted to be extremely well supplied. Globally, the supply of soybean should also remain plentiful, considering the reduction in the overall demand. Due to the poor start to the U.S. crops this year, we will be watching weather very closely as unexpected weather events will likely create more volatility. We will take the necessary coverage as the production risk warrants.

For 2019, the USDA is expecting total U.S. chicken industry production to grow at a rate below last year. While breeder egg performance has marginally improved in 2019 and has led to increased excess, the industry not seen similar improvements in hatch rate. Latest pullet data which could be volatile shows that cumulative April and May placements have increased relative to year-ago levels, which much of these likely supplying new facilities.

Despite the announcement of new capabilities, we believe that some of the new plants are intended to replace existing Saturday schedules while tight labor environment in the U.S. is difficult market conditions last year are likely to weigh in on at least some of the expansion plans. We believe the capacity growth will not be disruptive to the industry supply/demand balance in the mid- to near term.

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

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, foodservice demand for chicken through broadline distribution continues to show strength in both dollar and volume growth, and we expect more future activities by retailers coming this fall.

While we are already well-balanced in terms of our growth size exposure, we will continue to seek opportunities to incrementally shift our product mix and reduce the commodity portion of our portfolio by increasing the number of differentiated products to key customers while optimizing our existing operations by pursuing operational improvement targets.

Our key customer approach is strategic and creates a basis to further accelerate growth in important categories by providing more customized, high-quality innovative products to give us a clear long-term competitive advantage. With that, I'd like to ask our CFO, Fabio Sandri, to discuss our financial results.

[Fabio Sandri, CFO]

Thank you, Jayson, and good morning, everyone. For the second quarter of 2019, net revenues were $2.84 billion with adjusted EBITDA of $349 million or up 12.3% margin. Adjusted net income of $171 million resulted in adjusted earnings of $0.69 per share. Operating margins were 9.8% in the U.S., 17.5% in Mexico and 4.5% in Europe, respectively.

In the U.S., our EBIT was $187 million nearly double the results a year ago. Small bird and case-ready continue to be consistent markets as chicken has remained compelling to customers despite higher availability of other proteins. Large bird deboning significantly improved relative to Q2 of last year and also contribute to a sequential improvement in U.S. business as demand was much more in line with seasonality, despite higher supply of chicken in the specific segment.

Prices were solid the entire quarter and demand was firm. Our U.S. Prepared Foods sales continue to improve. Revenue increased by 12% and volumes have grown 14% to last year. The investments we made in the past few years have begun to produce results, and we expect to continue to grow in this segment. As Jayson mentioned, we are bringing our successful Just BARE brand into the Prepared Foods segment and foodservice channels, supportive of our differentiated portfolio strategy. We have other initiatives in place to accelerate growth in this market, and we are expecting it to contribute a greater portion of our total sales in the next few years, while adding to the stability in consolidated margins.

Our EBIT in Mexico substantially increased sequentially to $68 million from $10 million in Q1 and was also above last year, $62 million. Our results -- a return to much more normal growing conditions, along with the reduction in competing proteins, drove demand and prices higher. Our strong team in Mexico is our true differentiation. Due to their strong operational focus and excellent determination and we expect this trend of out performance relative to the competition to continue in the future.

Quarter-over-quarter can be quite volatile in Mexico, given market conditions but Mexico has been very consistent on a year-over-year basis, and this market characteristics should remain unchanged. To maintain our growth and continue to innovate, we have launched fresh chicken in Mexico under the Premium Pilgrim's brand, including no-antibiotics-ever, which have continued to see strong demand.

Also, we are growing our Prepared Foods opportunity in Mexico and producing excellent financial performance through both the Pilgrim's and Del Dia brands, which have received great acceptance by consumers. Indicating the potential opportunity remaining ahead, we grew volumes again by double digits in Prepared Foods in Mexico during Q2. Our strategy is supportive of the goal to increase our higher-margin differentiated products while having product coverage from entry level to premium across multiple channels in both fresh and prepared in Mexico.

Europe EBIT was $204 million -- $24 million similar to last year, as our operation began to mitigate the industry-wide input cost challenges we have been experiencing since last year. The increased implementation of our key customer strategy enables to better work through some of the input cost increases by adjusting our pricing models during the quarter.

In addition, we have been more successful in capturing synergies and improving efficiency and yields to mitigate the higher costs that impacted us in the previous quarter, to deliver an increase in performance during the second quarter, finishing with strong momentum. We will continue to leverage our marketing and sales infrastructure to optimize SG&A costs and, along with our key customer strategy, we will maintain our lead in relative results to the industry.

In Q2, our SG&A was 3.1% of sales, which is unchanged from last year despite our support for expanding the Just BARE brand internationally and the investments for our new Prepared Foods products both in U.S. and Mexico. We continue to target $125 million in operational improvements for 2019 as we extract additional improvements in the efficiencies of our operations.

We'll continue to prioritize our capital spending plans this year to optimize our product mix, that is aimed at improving our ability to supply innovative, less commoditized products and strengthened partnership with key customers. We expect to invest about $300 million on CapEx, and we reiterate our commitment to invest on strong return on capital employed projects that will improve our operational efficiencies and tailor customer needs to further solidify competitive advantages for Pilgrim's.

Our balance sheet continues to be strong, given our continued emphasis on cash flow from operational activities, focus on management of working capital and disciplined investments in high-return projects. During the quarter, our net debt reached $1.7 billion with a leverage ratio of 2.1x last 12 months EBITDA. Our leverage remains at a good level, and we expect to continue to generate strong cash flows this year, increasing our financial capability to pursue other strategic options. We expect 2019 interest expense in the range of $130 million.

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

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

[Operator]

[Operator Instructions]. The first question comes from Ben Theurer with Barclays.

[Benjamin Theurer, Barclays Bank]

First of all, congrats on the strong results. First question I have, and you've talked a little bit about it. Obviously, the volatility, corn, soy, what's going on with wheat in Europe, global supply and the weather issues? With that in mind, have you taken any positions, any derivatives, have you done any purchases, any futures positions to somehow mitigate maybe some of the volatility into the back half? And if so, could you share at what level you've locked in? That would be my first question.

[Jayson Penn, CEO & President]

Ben, this is Jayson. So I would say this, nothing is different from what we've said in the previous calls. We monitor the market. We adjust our coverage to match the risks we see in those markets. As you know, the U.S. growing season didn't get off to a great start. We had record rainfalls and our hedge position during that time reflected our concern over that potential. And since the end of the planting season, we've seen a moderation in the U.S. weather, and the U.S. farmer likely planted more corn acres than we actually expected.

So we've seen a significant decrease in the demand for U.S. corn from competing grades in countries, with ample supply. So the weather continues to remain the current pattern. We feel more confident about the U.S. corn supplies than we did in the start of the season but we'll continue to monitor the development and adjust that risk strategy if needed.

[Benjamin Theurer, Barclays Bank]

Okay, perfect. And then following up on -- and you have some nice charts in your presentation, a little bit on the pricing dynamics seen during the quarter and obviously, the implications for that. Could you share a little bit, what do you expect for the back half in the different categories on the cutout value? Obviously, this is a broad range, but just to get a little bit of a sense, would you have been seeing in terms of some of the future activity, particularly on the foodservice but also on the retail side? And for it to get a little bit as a sense, on how demand for year looks into -- into 3Q, which should be a little bit of a slowdown versus 2Q but just to get a little bit of the seasonality? And what do you expect pricing is going to look like into the back half?

[Jayson Penn, CEO & President]

Yes, sure. So let me just start with sort of what's the lay of the land. The jumbo cutout in Q2 was supported by wings, tenders and dark meat. That was the overall cutout was by 11% stronger than Q2 of last year. And so we're also seeing really heavy featuring of wings and tenders. We see a commensurate price response to that. The small bird cutouts, and let's say that small bird side of the business, which is actually a significant part of our portfolio, according to the USDA, the industry supply has been reduced for the small bird category and is down over 3% year-to-date, following a 9% decrease in supply in 2018.

So our business, however at Pilgrim's, we maintained the industry-leading position in this space. We've not reduced our presence in this category. It's one really that has a lot less market volatility. And on the demand side of that, our key customer relationships in the chicken sandwich business has really continued to allow us to outpace the industry of growth overall in this category. So, when we talk about cutouts, we talk about pricing, we talk about markets, I really want you to get a bigger sense of the picture for us is that, we're not just about the parts and we're not just about jumbo breast meat.

I'll hit that piece, but jumbo breast meat's trading currently at a near five year low, and we believe just for a couple of reasons. And the first, and this has been well advertised but the front side of the outdoor grilling season got off to a sluggish start due to the weather and colder-than-normal season [indiscernible]. We believe the featuring is there but the consumer was not activating those features at the market.

Second is we saw some continued proteins, in particular, pork disappearance affected really due to 2 reasons: increase of the pork production is up by about 4% and optimal growing conditions, and then on the other side, we have about a 4% year-over-year decrease of U.S. exports in the first half of the year, driven by some oversupply of pork in China, which we believe is caused by some increased hog pull rate, that is driving near-term inventories higher. So our belief is that, it's going to take some time for the trade flow to reach the U.S. market, while the original estimates are sooner, we believe that early 2020, we should see, the domestic impact for that.

But despite the weakness in breast meat, the industry production tonnage, just note, is only up about 1.2% year-to-date. Chick placements were about 1.4%, breed a flock is relatively steady, pull placements were up 3.6%. We believe that the availability of those pulls sitting in the market's going to be about 2.5% in Q4. So very much in line with our expectations.

And then on the demand side, that foodservice, chicken remains relatively healthy. It's continuing to grow at about a 1.9% year-to-date rate. Broadline sales around up, I guess around 11% and close to 8% in tonnage year-to-date. That's 11% in dollars. And the majority of that growth is really driven by the QSRs, and we're seeing promotions close to about 20% more year-to-date than they were in 2018. And on the retail side, we're still seeing retail features up 5% to 6% year-over-year, and breast meat features since late May have become more consistent and are trading positive year-over-year.

[Operator]

The next question comes from Ben Bienvenu with Stephens Inc.

[Benjamin Bienvenu, Stephens Inc.]

I wanted to ask about Mexico. I know typically, 2Q is the seasonal peak but it looks like the pricing momentum has sustained into 3Q. You talked about some of the benefit you got from tighter pork supply, a little bit higher pork prices. I would love to hear your thoughts on 3Q and back after the year, in light of the better supply/demand balance you mentioned, the removal of the pork tariff? And then also, is there any evidence so far that ASF isn't having any impact on Mexico market?

[Jayson Penn, CEO & President]

Okay. So I'll start. So I would say that the markets are now reverting back to more normalized conditions. The weather again is turning more favorable. We continue to have positive outlook on Mexico. We're confident in our team to deliver those consistent results. And just to recall, during Q1 in Mexico, we saw unusually better late Q4 '18 and Q1 '19 weather, that drove our improved growing conditions. And we also saw less of these pressures. So the more-than-normal seasonal supply caused some outstripping of the Q1 demand.

In Q2, we saw that weather worsened for growing conditions but slowed the growth and decreasing ability, so prices doubled at the start of Q2. We had, as you saw, really fantastic Q2, which helped our bottom line improvements. I would say on the quarters, it's pretty interesting the dynamic there. As the roughly year-long 20% tariff has dropped in May, we've actually seen same, at the same time, an increase of import price by approximately 70% of the bone in hands which is actually the big item, so a net price increase of 50%. It's still early to see the full long-term effect of the tariff removal, but of course, anytime that market becomes more efficient, we're in favor of that, Ben.

[Fabio Sandri, CFO]

And Ben, just as a note, Mexico was different than U.S. During the Q3, normally, there's schools on vacation. So there is a different pattern in terms of family eating. And we see a slower demand for chicken and for all the proteins. So we don't expect as strong as a performance in terms of prices in Q2. But like Jayson mentioned, our team in Mexico is really strong and whether is the market conditions good or bad, we can always beat our competition.

[Benjamin Bienvenu, Stephens Inc.]

Understood. And then I'd like to follow-up on the feature demand activity that you mentioned. It sounded like you said, you had quite a bit better feature demand, particularly in breast meat, as you said, yet, breast meat prices have been under pressure. It sounds like, that's weather-driven, which makes a lot of sense. Grilling season has been hampered by that, and there is less follow-through from activation of features. Do you think, if we get a resumption or continuation of features into the fall, like it sounds like, we will, you'll get better activation of those features? And then, if you just talk a little bit more about your expectation for the fall on foodservice feature demand? And how that compares to what you've seen year-to-date?

[Jayson Penn, CEO & President]

Yes, yes. Ben, thanks. We believe that there are absolutely going to be more featuring of breast meat year-over-year. Again, in second half of Q2, we saw those activations starting to roll through, plus the features starting to come through. We believe that's going to continue into Q3 and potentially Q4. On the foodservice operator side, we also believe that there's going to be more chicken LTOs, there's going to be more sandwich features, and we believe that, that trend is going to continue to grow throughout Q3 and Q4 as well. Just like it did in Q1 and Q2 with that 20% increase.

[Fabio Sandri, CFO]

And Ben, just in terms of competing proteins, we also see significant volatility in the pork prices. But for the year-to-date, pork prices are up 3% in the wholesale. And in addition to that, price of ground beef is up 3% during the year. So with that, the spread between pork and beef at the retail to boneless, especially increased significantly. And that is triggering some more featuring, especially on the regular boneless breast.

[Operator]

[Operator Instructions]. The next question comes from Jeremy Scott with Mizuho.

[Jeremy Scott, Mizuho Securities]

You talked about some of the chicken capacity coming online and that replacing Saturday work. What are your expectations for total industry production growth into 2020? And what about just the trade pack segment? Obviously, we're hearing very different things with this. We're looking at the chick, the egg size data and the chick placement data and it certainly wouldn't indicate that there's a huge ramp-up in production coming. So maybe just kind of give us your internal expectations? And how you're adjusting to that market?

[Jayson Penn, CEO & President]

Yes. Thanks. We agree. We're in line, Jeremy, with the USDA expectations of 1% to 2%. That's holding true on the front end. We know that there's a pullet placements in Q4, will be hitting the market at about a 2.4% range. So we did expect to see a higher second semester, than the first semester of productions. But that's relatively in line with our own expectations, as well as the USDA. We know that there's 1 or 2 tray pack plants coming on towards the end of the year. We recognize that it most likely will be a medium to slow startup. We also know that food at home is growing over foodservice. So we also believe that, that new production will be used through the supply chain based on our demand expectations.

[Fabio Sandri, CFO]

Jeremy, just on adding all the plant increased capacity for next 3 years, if all plants are online and expecting under the expected time and considering the ramp-up, and given that they have people to run the plants, we will be between, what Jayson said, 2% and 3% over the next years. We believe that their increase in supply is very great to the increase in demand, given the growth in exports and the growth in domestic service and the retail. We're also seeing that the significant expansion of both beef and pork since 2018 are slowing down. And we are even seeing a reduction in production beef in 2020. So in total, protein availability, I think, is going to be a great year for chicken.

And just going back to the tray pack, I think it's important to mention that we have a differentiated business model, when you compare to the branded competitors and the spot market competitors. We have partnerships with our key customers. And we help them grow their brands, while offering a full range of products from tailor natural, to higher order attributes like the organic production. We don't have these annual contract negotiations, because our prices don't follow the volatility of the commodity markets in that segment. And just as a reference, our volumes in that segment increased 4%, with prices a little higher than same period last year.

[Jeremy Scott, Mizuho Securities]

Yes, I guess that was my follow-up question, which is this, it seems like in the first half and certainly this quarter, there has been an acceleration in foodservice volume growth versus that at retail. And then within foodservice, it seems like QSR is certainly well below -- well above the full service segment. And so I'm just trying to understand, how your Prepared Foods division or how the volume growth in your Prepared Foods will outperform that of your more commoditized products? Is that your expectation for the back half?

[Jayson Penn, CEO & President]

Yes, we've been growing that business. We're investing in that business, Jeremy, and we're absolutely putting our resources there to grow our Prepared Foods business. So our expectation is to continue to outperform the growth in the market, as we have in the first semester of this year, and we'll continue to take that through. I'll hit your -- I'll hit the retail side of this as well. I can't speak for others, but our partnerships, and Fabio briefly hint on this, our partnerships with our key customers in this space have allowed us to grow with them and then to grow with us. And we've actually been short to tight in that case-ready retail segments. So we are supporting our customers, and they're growing with us, and we're growing with them. And I think there is -- might be a little slack in the industry there. But our business is flush, and our relationship with our key customers are flourishing today.

[Jeremy Scott, Mizuho Securities]

Got it. If I could just squeeze in 1 more on Europe. Wonder if you could unpack the volume moves in the quarter. Everything we're hearing from QSR operators seems to suggest good news on the foodservice side. So wondering, if there's an issue in the retail business or are you choosing your customers more selectively post the passing through of the feed wheat? Or is there something else we should be thinking about on the volume side?

[Fabio Sandri, CFO]

No, I think that's absolutely correct. By mentioning our key customer partnership methodology and strategy in Europe, and we are selecting the key customers that we want to participate. We are providing a much better service than all the other suppliers in Europe through our innovation, through our commercial teams. And we believe that, with the key customer partnership, we can grow with them, while selecting better our partners. We cannot do everything to everyone. We dedicated our resources to our true key customers.

[Jayson Penn, CEO & President]

To follow on, which is exactly what we've executed in the U.S. and Mexico and we're in process of doing that in the U.K. and those volumes are a result of that.

[Operator]

The next question comes from Heather Jones with Heather Jones Research LLC.

[Heather Jones, Heather Jones Research]

I'm going to say ahead of time that I have got -- joined the call very late, so I may be asking questions that have already been asked. So I apologize in advance, if I do. As far as Mexico, they recently removed tariffs on U.S. pork and so exports there, over the last few weeks have accelerated, significantly. But from what I understand, some producers in Mexico are exporting more pork than normal, due to what's going on with different trade flows. So I was wondering, if you are seeing a looser protein supply/demand backdrop in Mexico the cause of more U.S. pork coming in? Or is it still pretty tight?

[Jayson Penn, CEO & President]

Yes, we actually haven't seen that, Heather. Again, this 20% tariff was just dropped. But in turn, the bone in hand, which is the big item into Mexico, we've seen an increase in price by approximately 70%. That's just recent -- very recent numbers so, really have a net price increase of 50%. We're really not seeing really anything there.

I'll tell you just on the back story of Mexico. Brazil has increased their exports into China, which also competes with exports into Mexico. So that -- we should see that starting to diminish in terms of the breast meat that was flowing into Mexico, we should start to see that flow down a little bit to relieve some pressure there, which actually there isn't any pressure, but it'll take some meat, that would have gone into Mexico off that market.

[Heather Jones, Heather Jones Research]

And so the U.S. is exporting -- it's chicken, poultry exports into Mexico right now. Have we seen an increase in breast meat exports out of the U.S., given what you just said about Brazil? Or is it still vast majority dark meat?

[Jayson Penn, CEO & President]

It's the vast majority -- it's dark meat, but there's absolutely white meat going into Mexico. The Brazilian situation is very recent. So that'll just stop the increase of orders coming into Mexico, but it won't affect anything current.

[Fabio Sandri, CFO]

To your point, Heather, the exports of Brazil to Mexico are typically breast meat. And as of today, because of everything that Jayson said on the exports are Brazil, breast meat more into China. U.S. breast meat is more competitive than Brazil breast meat into Mexico. Not to mention that our product is fresh and Brazilian product will be frozen.

[Heather Jones, Heather Jones Research]

The U.S. will be fresh and Brazil will be frozen?

[Fabio Sandri, CFO]

Yes.

[Jayson Penn, CEO & President]

Yes.

[Heather Jones, Heather Jones Research]

Is that what you just said?

[Fabio Sandri, CFO]

Yes.

[Heather Jones, Heather Jones Research]

Okay. And then, in your press release, you had mentioned, strong -- I can't remember how your phrased it, but basically strong retail demand. And from what I understand, from what I remember is your key customers, your pricing doesn't fluctuate as much as maybe some of your peers do. So when we're thinking about strong retail demand and proven results for Pilgrim's, is that just more that, it's taking product off of those spot markets because good volumes are flowing through retail? Is that -- am I understanding that correctly?

[Jayson Penn, CEO & President]

That's right, and I'll speak -- I'm not speaking on behalf of the industry here, but I will tell you from our standpoint, our view. We've been tight to short on case-ready retail supply and demand. So our key customer strategy is absolutely working. Again, it's a partnership with our key customers who are supporting their business to grow their business. And as a company, our business has been short to tight on production capacity.

[Fabio Sandri, CFO]

And you're right, Heather. We -- our prices don't follow the volatility of the commodity markets because of the partnership we have with the key customers. Then our volumes in their case-ready segment are up 4% compared to last year and prices are a little bit higher than last year.

[Operator]

[Operator Instructions]. The next question comes from Bryan Hunt with Wells Fargo.

[Bryan Hunt, Wells Fargo Securities]

Recently, if you look at pricing data for boneless leg quarters, they're seating skinless, boneless, breast and there's talk of an evolution to the next breed of bird to be less breast meat-oriented and more leg quarter-oriented. I was wondering, 1, what are you doing to potentially capitalize on this trend? And then 2, given that U.S. exports more dark meat than white meat, do you believe that the export trends could potentially continue to fuel the better pricing on dark meat versus white on a go-forward basis?

[Jayson Penn, CEO & President]

Yes. Thanks. So yes, there's an absolute trend, there's more deboning of dark meat and most of that is for domestic use. Regarding the breed, I won't go into the -- too deep into the detail. But in order for it to really work, you have to have a complex that debones close to 100% of that mix, because that dark meat, if it stays on the bone, it's $0.25 versus call it $1 on breast meat or $0.40 on the dollar. So they have to have the right specific mix to make that breed change work.

But we actually -- we're doing some research, we have some -- and trials in our 1 of our test farms in Texas. And I will tell you if the cutout works and the economics make sense, then we'll absolutely look at moving some breeds in certain complexes, where we do more dark meat deboning than in some other locations. Regarding...

[Bryan Hunt, Wells Fargo Securities]

No, go ahead. I was going to switch gears but keep going.

[Jayson Penn, CEO & President]

So regarding the mix, relative to retail dark meat, white meat, we don't know if there's substitution of white meat for dark meat at the retail case. We do know that, and this is really a testament to what we've been doing here in the last 8 years, we've been working with more dark meat into Prepared Foods. We've been working more dark meat with our customers, increasing our customer mix, increasing our product mix, our portfolio. So we've been doing much more retail into -- sorry, dark meat into retail.

But if you think about the growth, and we know that, that dark meat or retail is growing by about 10% year-over-year. But if you think about it, the big absolute numbers, the delta between retail dark and retail white is a 6x. So there's 6x more white meat sold at retail than dark meat. So although, there is growth at the retail level of dark meat, it's still at fairly small numbers, but absolutely growing.

[Bryan Hunt, Wells Fargo Securities]

Great. And then Fabio, you mentioned that, it feels good about the capital structure, which you had the flexibility to potentially optimize the capital structure. I'm wondering, if I heard that correctly, I mean, where do you feel like optimal cap structure is? And what are the actions you will take to optimize it further from where you are today?

[Fabio Sandri, CFO]

Yes, Bryan, thank you. Our common objective is to create shareholder value, right? And within that, we want to grow the company. And we're looking to opportunities for M&A, and we have two strategic fronts, the chicken track and the prepared food track. We continue to see targets or options on both tracks and we execute the strategy and believe we can create proper value.

Just like we demonstrate with the Mexican acquisition, the GNP and the Moy Park. We will continue to invest in our operations, increase the operational efficiencies and further differentiating our portfolio. And we will consider and evaluate all the other revenues and capital strategies like dividends and share buybacks. We already mentioned that our optimal capital structure is between 2x and 3x levered and we are in the 2x. So we have ample capacity in our balance sheet to promote our growth strategy.

[Jayson Penn, CEO & President]

Yes. Just to follow on, just from an M&A perspective, we have a proven track record of integrating assets that are accretive to our legacy business. We look really for 3 things: geography or brands that we don't have a business, that we can significantly improve and one that we can acquire and quickly be accretive. So it's really those 3 things hit our targets for growth.

[Operator]

The next question comes from Rebecca Scheuneman with Morningstar.

[Rebecca Scheuneman, Morningstar Inc.]

So Jayson, you're talking a lot about shifting to more prepared food and value-added type products. I was wondering, if you could give me an example of what you're talking about. And I'm wondering, if these products, how they'll be priced, if they'll be still kind of formulaic based on, I believe, most of your products formulaic-based on different feed inputs? Or if it will be priced more like a traditional packaged food with list price?

[Jayson Penn, CEO & President]

Yes, it's a more traditional, that's the idea when we speak about brands and more Prepared Foods. It's really going to stay away from the primary aspects of our business and move towards, call it, I hate to use this term as CPG pricing. But it's those brands will absolutely -- will extract value and create value from the sales of these brands. And example is our Just BARE brands and even in foodservice, going to the K-12 markets, we're absolutely excited about that be creating a clean label, a product that consumers several meat consumers need. And again, we are separating the primary aspects of our business from our Prepared Foods business, as we our grow brands there.

[Fabio Sandri, CFO]

And Rebecca, the objective is to create higher, more stable margins, right? So the Prepared Foods acts has as a great hedge to our exposure to the commodity market.

[Rebecca Scheuneman, Morningstar Inc.]

Right, right. Yes, I definitely understand the appeal. So are you saying your Just BARE brand, even though it's technically -- it's not prepared, right? It's just a pure organic or no-antibiotics-ever, has those qualities, but it would still -- it would command list pricing?

[Jayson Penn, CEO & President]

Absolutely. We're actually moving that into Prepared Foods retail and foodservice. So yes, pricing commit.

[Rebecca Scheuneman, Morningstar Inc.]

My last question then, still related is, can you just kind of disclose, what percentage of your current product or revenues are at this list, price? And where do you think that could get to over time?

[Fabio Sandri, CFO]

List pricing? I think we mentioned, we have a very broad portfolio of pricing. So it depends on the segment. On the spot market or a big bird, there's a lot of prices that are connected to contracts. On the tray pack, we have the three partnerships, where we have discussion about, how can we help our customers to grow. So the pricing there is more of negotiated. In the small bird segment, there is some components of cost plus and comps and components of grade markets. So -- on the prepared food, just like we mentioned and Jayson mentioned, they are more CPG type or mixed price. So I think, what we try to do in our portfolio, not only in products, but also in prices is to mitigate any risk in any specific segment.

[Operator]

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

[Kenneth Zaslow, BMO Capital Markets]

I know a lot of questions have been asked. I just want to ask 1 kind of bigger-picture question, I guess. In the press release, you talked about European operations, how you expect the momentum to continue into the second half. Can you give us that type of outlook for Mexico as well as the U.S.? I know we did threw a lot of questions around it. I was just curious, if there's some sort of parameters to which you could do the same thing, that you did with the European operation?

[Fabio Sandri, CFO]

Sure, Ken. I think it depends on the business model that we have in each region, right? Mexico is a more volatile market. There's a lot of volatility in the live markets and in the chicken markets in Mexico. In Europe, we have a lot of our products and a lot of our partnerships in a cost plus type. So it's much easier to give some indication on what's coming on the next quarters.

Again, Mexico, we have our Q1 that was really below our expectations and we have a really strong Q2. The guidance we gave on Mexico is that we -- regardless of the market conditions, because of the differentiated products and our strong management would be better than the competitors. I think it's -- it depends a lot on the type and structure of the markets that we have.

In the U.S., we can give a better view in some segments. But on the big bird deboning, for example, I think the market would dictate a lot of profitability. We've been trying to differentiate our products and Jayson mentioned the even in the big bird segments. But that is still a more volatile segment. And again, that's what we are trying to build our portfolio. In Europe, we are more stable. In Mexico, we are more volatile but we can capture the upside in the market and in the U.S., we have a more well-rounded portfolio.

[Kenneth Zaslow, BMO Capital Markets]

My last question, Jayson, the key customer relations project that you're doing and doing for 7, 8 years, can you talk about what the runway left is? And can you add -- can you start moving certain customers from like, for a lack of a better word, the bottom rung to the middle rung and the middle rung to the top rung? How does that process work? And where are you in the stage, because again, it seems like this strategy is working phenomenally. So I just kind of wanted to see what the runway is, where it's going in the next 1 to 3 years?

[Jayson Penn, CEO & President]

Yes, Ken. Thanks for the question. It's a strategy that continues to evolve. Again, we started this strategy. We implement this, and we are trying to do everything for everybody and really determine that we needed to put our resources into several key customers. We are growing extremely well with those key customers. That's based on the premise of service, quality, trust, scale, scope, growth and profitability for both partners. And there's much more runway left. Again, the key customer starts with trust with us and we must deliver that. And we're continuing to expand on our key customers and it is an evolving process, Ken. But there's lots of runway to go there.

[Kenneth Zaslow, BMO Capital Markets]

Are you going to be able to progress the -- is there room to progress? And again, I don't know, if you call them Platinum, Gold and Silver or high, low, medium, whatever, but is there a way to progress the customers through the ranks? And -- or have you gotten everybody into that top rank and you have to add new customers like, what is the evolution? And I don't know, just if there's any color to that and then I'll leave it there. I really appreciate it.

[Jayson Penn, CEO & President]

Yes. Sure, Ken. Really, we have priority customers, we got customers within each business units that are critically important to our business. And it is our absolute goal to make those priority customers key customers. But again, if there's 5 filters that we run through and our customer runs through as well. They look at us as key suppliers. And if we can work out those big picture details, then we are absolutely moving and continuing to move our priority customers into the key customer status.

[Operator]

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

[Jayson Penn, CEO & President]

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

We will continue to identify new opportunities, including Europe, for both organic and acquisition growth, refine our portfolio and offer differentiated, customized high-quality products to support our key customers needs through constant innovation. Our team members are our competitive strength. We will continue to invest in our people to drive our results by providing them greater opportunities to contribute to our 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.

[Operator]

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