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Pilgrim's Pride Corporation (NASDAQ:PPC)
Q3 2017 Earnings Conference Call
Nov. 8, 2017, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Third Quarter 2017 Pilgrim's Pride Earnings Conference Call Webcast. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by 0. 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.

Dunham Winoto -- Director, Investor Relations

Good morning, and thank you for joining us today as we reveal our operating and financial results for the third quarter, ending September 24, 2017. Yesterday evening, we issued a press release providing the overview of our financial performance for the quarter, including reconciliation of any non-GAAP measures we may discuss. A copy of the release is available in the Investor Relations section of our website, along with the slides we will reference during this call. These items have also been filed as 8-Ks, and are available online at www.sec.gov. Presenting to you today are Bill Lovette, president and chief executive officer, and Fabio Sandri, chief financial officer.

Before we begin our prepared remarks, I'd like to remind everyone of our Safe Harbor disclaimer. Today's call may contain certain forward-looking statements that represent our outlook and current expectations as of the day of this release. Other additional factors not anticipated by management may cause actual results to differ materially from those projected in these forward-looking statements. Further information concerning those factors has been provided in today's press release, our 10-K, and our regular filings with the SEC. I'd now like to turn the call over to Bill Lovette.

Bill Lovette -- President & Chief Executive Officer

Thank you, Dunham, and good morning, everyone. Thank you all for joining us today. The third quarter of 2017, which includes the full quarter for Moy Park in accordance to U.S. GAAP, consolidated net revenues were $2.79 billion versus $2.5 billion from a year ago, resulting in an adjusted EBITDA of $464 million, or 16.6% margin, versus $237 million a year ago, or 9.5% margin. Our net income was $233 million compared to $99 million in the same period in 2016, while adjusted earnings were $0.98 per share compared to $0.41 in the year before.

We are appreciative of our team members and the results they delivered in Q3. As most of you know, over the past few years, we've created a portfolio strategy which is designed to deliver a more robust performance for the mid to long run rather than the short term, and structured to minimize the full peaks and troughs of the commodity markets. We expect our portfolio to give us the potential to capture the market upside while not creating more risk, and generating more consistent higher margins over time. All the CapEx investments we made over the last year are operating at expected levels, and together with the recent acquisitions, they're generating more value and continuing to contribute to the evolution of our portfolio in supporting our vision to become the best and most respected company in our industry.

During Q3, our U.S. operations performed very well across all business units. Mexico performed better than what was expected, given normal seasonality, and Europe experienced strong revenue growth and consistent margins. U.S. domestic demand for chicken was very firm across all bird sizes, and prices still represent good value compared to other proteins. Pricing in the commodity segment was at a solid level during Q3, as exports grew from a year ago, with demand for U.S. chicken staying quite robust in international markets. Demonstrating the effectiveness of our portfolio strategy of a well-balanced mix of multiple bird sizes, geographic coverage, as well as a diverse product exposure, our team leveraged a strengthened commodity market to sustain the momentum of the entire portfolio, giving us a differentiated approach and an opportunity to capture the upside while minimizing the downside.

Margins within our small-bird and cage-free operations have remained very healthy, and our leadership in these markets will continue to give us meaningful advantage relative to our peers, with a narrower market orientation. Chicken continues to be very competitive in value and convenience, and demand has been very resilient despite higher availability of other proteins. Despite the expected increase in U.S. production of competing proteins next year, more exports and reduction of imports are driving total domestic product protein per capita disappearance to be up a very modest 1.7% in 2018 compared to 2017.

While foodservice traffic has been under some pressure, the good news is chicken servings are continuing to grow, and menu importance is at its highest point according to NPD. Also, chicken dollar growth has outpaced volume growth, which is positive indication that the industry is increasing volume at greater profits.

During Q3, large-bird deboning maintained the rebound from a weaker-than-expected start of 2017, reflecting the improvement in demand from export and domestic markets. While pricing has been very solid during the summer, driven by strong demand for grilling season, it has since returned to reflect normal seasonality. Volumes and pricing of export-oriented cuts are on positive trend compared to a year ago, supported by stronger exports, due in part to ongoing AI-related supply issues and other chicken-producing countries around the world, thereby increasing demand for U.S. products. Specifically, for us, we've also reduced our exposure to commodity sales due to increase in leg deboning at 3 of our facilities, which will help us strengthen our price mix moving forward.

The integration of GNP is above expectations, and we're already close to delivering previously stated goal of $30 million, which is ahead of the target. We are progressing very well in improving the profitability of GNP, and quickly closing the gap relative to our legacy operations. Margins have improved 600 basis points since the acquisition early this year as we've applied our methods to generate operational improvements. Our goal is to strategically expand our Just Bare chicken brand in order to provide fresh and prepared-food chicken solutions to our customers that encompass private and captive labels, and good/better/best brand offerings. Just Bare is the top-selling chicken brand on Amazon Fresh, which has seen significant increase in sales dollars versus last year in its online channel.

Given our online momentum in the retail grocery space, we believe our partnerships represent an excellent opportunity to further improve the distribution of our product portfolio within these newer and emerging segments, including organic and NAE. With the majority of our strategic capital investments we announced last year already completed, we're very well-positioned for the future to further increase our product portfolio differentiation, strengthen our key customer relationships, and improve our margin profile.

Our Sanford, North Carolina facility is operating better than expected and makes us the largest producer of organic chicken in the United States. The addition of our new line at Moorefield has increased 10% to our fully cooked prepared-foods capacity that is already recovering well in comparison with last year from our improved operations at Waco. Also, in prepared foods, we are nearing the perfect order rate, which indicates we're on track in returning to our previous target of best-in-class service, while seasonality and meat prices in the U.S. should be favorable for our prepared-foods input costs.

Our team in Mexico delivered better-than-expected Q3 results, while the market was consistent with normal seasonality. We experienced an impact to market demand due to logistical issues as a result of an earthquake toward the end of Q3, which has since normalized. We expect chicken demand in Mexico to continue to outperform in the future as consumers there seek protein to improve their diet, given rising income levels. To satisfy demand, our team remains focused on operational excellence and innovation.

As a part of our strategy to strengthen our competitive positioning in Mexico, we have maintained the pace of new, innovative product introductions. We started the launch of fresh chickens under the Premium Pilgrim's brand, including NAE, which has seen strong demand. The momentum of our value-added Premium Pilgrim's brand program is growing, and we're generating great results in prepared foods, with more than 35% growth in volume year-to-date.

We continue to ramp up our production at the Veracruz complex and expect to double the size of the facility, including the feed mill and the hatchery. The integration of the acquired assets is complete, and we've captured more synergies than initially targeted, with a profitability now equal to or better than our legacy operations, while it was only half of that before the acquisition. Also, we've received multiple awards from customers for our consistency and high level of service. Longer-term, we continue to believe Mexico represents a very good growth prospect, as demand for protein continues to outstrip supply in the foreseeable future.

Our new European operations, Moy Park, generated strong sales growth and consistent margins in Q3. We're very excited about the potential opportunities in Moy Park because it creates a stronger, more diverse, and much more stable global chicken and prepared-foods leader in Pilgrim's. The acquisition aligns well with our strategic priorities as we continue to expand our geographical and brand footprint, and extending our global poultry leadership position into attractive, new markets. Moy Park also brings a strong reputation for providing fresh, high-quality, locally farmed poultry products in the U.K. and Europe.

By adding a top U.K. food company and one of Europe's leading poultry and prepared-foods producers, we've extended our geographic reach into the U.K. and continental Europe, while providing us a solid growth platform in the region for the future. By diversifying and further globalizing our portfolio, we're meaningfully improving our marginal structure while reducing earnings volatility across our business.

Further, with the addition of Moy Park's best-in-class production platform, we've significantly strengthened our prepared-foods portfolio and further improved our value-added innovation capabilities. We will extend our key customer strategy into Europe as we see incremental joint value creation opportunities there as we've seen in the U.S. and Mexico. Moy Park has a track record of sustained earnings growth, and given that a majority of the commercial agreements are structured more along long-term relationships with key customers, we have a more stable margin structure, which we'll continue to enhance through ongoing operational improvement initiatives.

The addition of Moy Park is not only about growth, but it's also about our reflection of strategy to have a well-diversified product portfolio and geographic and innovation capabilities while producing more consistent results. Together with Moy Park, we have an even stronger team in place with the ability achieve synergies and the potential to leverage innovation and consumer insights across the globe.

One feed costs, corn, and wheat prices have fallen to their lows of the year as harvest continues in the U.S. USDA is forecasting an increase in corn ending stocks to 2.34 billion bushels, despite a decline of more than 850 million bushels in production, a reflection of ample available global corn stocks. Harvest reports from the field are confirming the better-than-expected yields reported by USDA in the October WASDE. Global corn stocks -- excluding China -- are forecasted to be 120 million tons, which should be a headwind for U.S. exports. Global wheat stocks are forecasted to increase to 268 million tons this crop year, up 12 million tons from last year, reflecting the large global supply.

Soybean ending stocks are forecasted to increase to 430 million bushels despite a decline in yields this year, driven by a record 9.2 million planted acres. Rural soybean stocks are forecasted to increase again to 96 million tons despite growing demand for oilseed products. Cash value for soybeans and soybean mill are extremely weak, reflecting the surplus of soybeans globally. With global surpluses of both grains and oilseeds, we do not expect feed input costs to be a headwind to earnings in the medium term.

In 2018, USDA is forecasting a total U.S. chicken industry production to increase at a comparable pace to 2017. We believe the industry growth over the next few years will continue to be well-supportive of a balanced supply/demand environment, and we are confident our business will have the ability to outperform, given our broad portfolio and presence in all bird categories, as well as strong relationships with key customers. In addition to supporting the growth of key customers, our partnerships create an opportunity to further accelerate growth in key categories by providing more differentiated products, while giving us a strategic advantage and strengthening those relationships.

Despite greater availability of other proteins, the outlook for chicken demand in 2018 remains intact, as we believe supportive export environment will capture much of the increase of total U.S. production across all protein complexes, while continuing strong U.S. economic conditions will motivate households to demand better-quality, higher-priced cuts of meats, which ultimately translates to more overall consumption.

While we are already well-balanced in terms of our bird-size exposure, we'll continue to look for opportunities to shift our product mix and reduce the commodity portion of our portfolio by offering four differentiated customized products to key customers, while also optimizing our operations by pursuing our operational improvement targets. Our team is performing very well in executing our strategy and supporting our vision to become the best and most respected company in our industry. And so, with that, I'd like to ask our CFO, Fabio Sandri, to discuss our financial results.

Fabio Sandri -- Chief Financial Officer

Thank you, Bill, and good morning, everyone. Before I begin, please note that because we closed the acquisition of Moy Park during Q3, U.S. GAAP guidelines regarding transactions between common-control entities require our reports to consolidate the full quarter of Moy Park into our financials, with earnings prior to the acquisition being subtracted below the line and defining our year-to-date and year-ago results has also been adjusted accordingly.

Under these new requirements, considering Moy Park both in 2017 and 2016, we reported $2.79 billion in net revenue during the third quarter of 2017, which compares to $2.5 billion in net revenue the year before. Net income was $233 million, versus $99 million the same quarter of 2016, resulting in a GAAP earnings-per-share of $0.93, compared to $0.39 in the same quarter of last year. Adjusted operating margins were 17% in the U.S., 13% in Mexico, and 4% in Europe respectively. Results were robust across all business units in the U.S., Mexico was better than expectations, and Europe saw strong revenue growth and consistent margins.

Our reported consolidated operating margins' MPPS also include no recurring restructuring and acquisition charges related to Moy Park and GNP. That impacted our results by $19 million. Adjusting for the charges, our consolidated adjusted EBITDA would have been $464 million, with an adjusted operating income of $404 million and an adjusted EPS of $0.98.

Excluding Moy Park from the consolidated financials, U.S. and Mexico operations generated $2.28 billion in net revenue during the third quarter of 2017, which compares to $2.03 billion in net revenue the year before. Operating income rose 124% to $368 million versus $164 million last year, while adjusted EBITDA also significantly increased to $428 million, or 18.8% margins, compared to $211 million, or 10.4% margins, a year ago.

Our fresh chicken operations in U.S. continue to generate strong results. Despite higher availability of proteins in general, chicken has continued to be a compelling value to consumers, both in terms of overall price and in convenience for the end user in retail and food service. The clear-out of the commodity business stayed firm for much of the quarter before adjusting to normal seasonality after Labor Day. Our business units saw some impact from the hurricanes in U.S. -- even though we did not suffer any damage to our operations -- mainly due to a temporary reduction in demand due to logistic challenges.

Integration of GNP is better than expectations, and we have already captured close to $30 million target that we have previously announced. Given the pace, we are revising our synergy target higher to $40 million to better reflect the improvement we have made, and the new opportunities being laid out. Like Bill mentioned, we are making great progress in increasing the profitability of GNP, with margins now 600 basis points higher than when we first acquired the business in Q1 of this year and moving much closer to the level of our legacy operations.

The environment in Mexico was consistent with seasonality, and our team outperformed the market to generate Q3 results that were above our expectations. During this quarter, the profitability of the acquired operations in the north continue to remain close the legacy assets, demonstrating how we were able to leverage our geographical and product coverage, as well as capture synergies to increase our margin performance through integration and implementation of a new strategy.

Production at the new complex in Veracruz is tracking well, and its performance is also exceeding our expectations, and we expect to double its production by the end of the year. As part of our goal to improve our differentiation in Mexico, we have been increasing our focus on prepared foods, including adding products using the Premium Pilgrim's brand. Our investment has started to generate good results, with prepared foods up 35% year-to-date.

To maintain the momentum, we have also started the launch of fresh chicken under the Pilgrim's brand name, including No Antibiotics Ever, which has seen strong demand. This strategy is supportive of our goal to increase our higher-margin differentiated products, while having product coverage from interlevel to premium, both fresh and prepared, in Mexico. There was some disruptions at the end of the period due to the earthquake in Mexico, but we did not suffer any damage to our operations, and the local economy rebounded quickly.

During Q3, the new European operation Moy Park produced a strong sales growth and consistent margins. We look forward to integrating Moy Park because of the diversification of geography and the potential for growth, which will continue to evolve our portfolio, creating a sustainable advantage by being able to capture the upside in the market while protecting the downside. We are targeting $15 million in synergy over the next 2 years, including optimization of Moy Park's product portfolio, and implementing zero-based budgeting. We will increase efficiency across the value chain by optimizing sourcing and production, including live costs, yield improvements, and the global management of feed sourcing. We will leverage our marketing and sales infrastructure to optimize SG&A costs.

We have a proven history of capturing synergies and delivering significant operation improvements. In our most recent deals, we have actually exceeded our initial synergy targets while building on and improving the performance of the business beyond just the underlying markets. We are confident we have the methodology and the team to similarly continue to grow the profits at our OPO operations and leverage their expertise and experience to improve our global operations.

During Q3 2017, our SG&A was higher than the year before, at 3.7% of sales, reflecting the inclusion of additional GNP operations, the support for the GNP and Just Bare brands, the investment for our new product offerings in prepared foods, both in the U.S. and Mexico, and the addition of Moy Park. Also included in the number are the restructuring and acquisition charges mentioned earlier. Adjusting for these acquisition charges, SG&A will have been aligned with expectations at 3.1% of sales.

We are tracking well against our capital spending plans this year to optimize our product mix that is aimed, and improving our ability to supply differentiated, less-commoditized products, and strengthening partnerships with key customers. For next year, we expect to invest between $275 and $300 million on CapEx to account for the inclusion of GNP and Moy Park within our budget. To reiterate, our commitment to invest on strong return-on-capital employee products that will improve our operational efficiencies and tailored customer needs to further solidify competitive advantage for Pilgrim's.

Our balance sheet continues to be strong given our continued emphasis of cash flow from operation activities, focus on management of working capital, and disciplined investment in high-return projects. We also have been strategically building inventories in prepared foods to prepare for the upcoming wing season, which -- together with the logistic disruptions caused by the hurricanes in the U.S. -- slightly increased our working capital. During the quarter, our net BEP reached $2.2 billion, with a leverage ratio of 1.6 times the formal last 12 months' EBITDA, below our optimal range of 2 to 3 times. Our leverage remains at a low level, and we expect to continue to generate strong cash flows, increasing our financial capability to increase strategic options.

We issued a total of $850 million in bonds in late September and received great report from investors, with the offering more than 5 times oversubscribed. Given the existing capital structure, the outlook for 2018 interest expenses should be in the range of $100 million. We will continue to maintain a strong balance sheet and relatively low leverage. We will remain focused on exercising great care, ensuring that we create shareholder value by optimizing our capital structure while preserving the flexibility to pursue our gross strategy. We will continue to consider and evaluate all relevant cap allocation strategies that will match the pursuit of our growth strategy, and we'll continue to review each prospect according to our value-creating standards. Operator, this concludes our prepared remarks. Please open the call for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question and answer session. In the interest of allowing equal access, we request that you limit your questions to 2, then rejoin the queue for any follow-up. To ask a question, you may press star, then 1, on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys to minimize background noise. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster.

Our first question comes from Farha Aslam from Stephens, Inc. Please go ahead.

Farha Aslam -- Stephens, Inc. -- Managing Director

Hi, good morning.

Bill Lovette -- President & Chief Executive Officer

Good morning.

Fabio Sandri -- Chief Financial Officer

Good morning, Farha.

Farha Aslam -- Stephens, Inc. -- Managing Director

Congratulations on a good quarter.

Bill Lovette -- President & Chief Executive Officer

Thank you.

Fabio Sandri -- Chief Financial Officer

Thank you.

Farha Aslam -- Stephens, Inc. -- Managing Director

Bill, you're going into the contracting season for chicken with a full capacity. Could you give us some color on how you're approaching this contracting season differently versus last year, and perhaps some color on the overall contracting season and how it's progressing?

Bill Lovette -- President & Chief Executive Officer

Yeah. So, Farha, it's not going to be any different this year, going into 2018, than it's been the last...probably 3 to 4 years, at least. When we changed our construct in terms of fixed pricing 6 years ago, we really approached each year, by and large, the same way. Since we believe that demand for chicken will grow with both retail and food service, we think that the contract season, as it were, is going to be a healthy one. We think chicken is going to continue to be the protein of choice for the younger generation and those who are health-conscious and value-oriented. And so, for those reasons, we don't think that the contract season is going to be any different than it has been.

Fabio Sandri -- Chief Financial Officer

I think, Farha, the only difference is that while last year, we had some disruptions in operations because of the investments, this year, we have enough inventory and we have 100 percent service levels. I think that should help as well for us.

Farha Aslam -- Stephens, Inc. -- Managing Director

That's helpful. And then, since the quarter ended, you've seen chicken prices moderate. Could you share with us how we should think about your fourth-quarter earnings and margins, and your outlook for 2018 for pricing?

Bill Lovette -- President & Chief Executive Officer

On the moderation of pricing, it's really no different than any other year, except perhaps this year, we started a bit higher than we did the previous year in terms of moving from Q3 to Q4, but it's gone back to seasonal norms, as it were, and so, we think that our fourth quarter will be seasonally like most. The good news is that we see our operations are performing better than they were last year. We're picking up our pace and our operational improvements through the year, especially with GNP, as we mentioned in our prepared remarks. We're very pleased with our team right now in all three countries -- Mexico, the U.S., and Europe. We believe that the fourth quarter is going to be a solid quarter for us.

Fabio Sandri -- Chief Financial Officer

Also, we saw some softening in prices in the beginning of Q4 for Mexico, mainly because of the disruptions caused by the earthquake, but they're seeing a very quick rebound, and cost is already at the same levels as last year.

Farha Aslam -- Stephens, Inc. -- Managing Director

That's helpful. Thank you.

Operator

The next question will come from Ken Zaslow from BMO. Please go ahead.

Ken Zaslow -- BMO -- Managing Director

Hey, good morning, everyone.

Bill Lovette -- President & Chief Executive Officer

Good morning, Ken.

Ken Zaslow -- BMO -- Managing Director

Just a couple questions. One is your volumes. I know you went through some production issues in changing your plant configuration. Can you talk about the volumes and where they will be over the next quarter to next year? Are we back in some sort of -- reestablishing the growth algorithm?

Bill Lovette -- President & Chief Executive Officer

I'll give color, then I'll have Fabio give you the number side of it. So, one of the things that we've done -- and, I think this is reflective of the entire industry -- is we have been in the process of making a breed change to a better-yielding, better-converting bird, especially for case-ready and our large-bird deboning businesses. One of the byproducts to that has been a lower hatch. So, as we converted to this breed -- especially the male side of this breed -- our hatch was underperforming relative to our history, and we're still learning how to manage that male. Our hatch is improving now, but it's still not near where, historically, we have been, and so, that impacted our overall volume, especially early in this year. We're catching up now; we're nearly to capacity as we speak in terms of our live production pounds, and so, I think going into 2018, it'll be more normal, although I don't think the hatch percent of this breed is ever going to be what the prior breed was.

Fabio Sandri -- Chief Financial Officer

In terms of overall volume in the U.S., Ken, we are 6% higher, mainly due to the acquisition of GNP. Our prepared-foods operation is actually a little bit higher than last year, while the fresh operations are a little bit lower than last year because of what Bill mentioned, and also because of some disruptions in shipments at the end of the quarter because of the hurricane. We expect Q4 to be 6 to 7% volumes higher than the same period last year. Also, we are deboning more -- the leg quarters -- which reduced the total volume sold while increasing the profitability.

Bill Lovette -- President & Chief Executive Officer

So, you don't get to include the bone, skin, and trim sales -- they go into offal -- whereas we were selling the whole leg quarter before.

Ken Zaslow -- BMO -- Managing Director

My second question is on Moy Park. Can you talk about the seasonality of the margins, if there are any, as well as what is the margin potential of what we should think about as an ongoing margin run rate going into 2018, so we can just understand how that business develops? And with that, that's it.

Bill Lovette -- President & Chief Executive Officer

The chicken business in the U.K. and Europe is seasonal, and the seasons operate much like they do in the U.S. It's more consistent, though, on a margin basis, and we believe that we can apply our operating methods just like we've done in the U.S. and Mexico -- most recently in GNP -- and provide significant margin improvement over time. That's what we're most excited about with this Moy Park acquisition.

Fabio Sandri -- Chief Financial Officer

It's not only the seasonality, it's the sustainability as well, Ken, because most of their contracts are low-term partnerships with customers, so they have a much higher pass-through composition that we have at Pilgrim's. So, that's a very good composition to our portfolio, where we'll be able to capture the upsides while protecting the downsides on the market.

Ken Zaslow -- BMO -- Managing Director

What would you expect for the profitability next year, or the margin structures -- some sort of guideline? Are there any sort of parameters, just so we can come off the block understanding exactly where we are, just to stabilize it?

Bill Lovette -- President & Chief Executive Officer

In the prepared remarks, Fabio did state that we see -- right now-$50 million synergy captured, with about half of that coming in in 2018. Just as with Mexico and with GNP, we may be on the conservative side there a little bit, but for now, I think you can be safe in using those numbers.

Ken Zaslow -- BMO -- Managing Director

Thank you.

Operator

The next question will be from Heather Jones with Vertical Group. Please go ahead.

Heather Jones -- Vertical Group -- Managing Director/Analyst

Good morning.

Bill Lovette -- President & Chief Executive Officer

Good morning.

Fabio Sandri -- Chief Financial Officer

Good morning.

Heather Jones -- Vertical Group -- Managing Director/Analyst

I'm going to apologize ahead of time. I may have asked questions you already answered, but I was on another call. So, first, on Mexico, I think I heard you say that -- because we saw pricing weaken considerably toward the beginning of Q4. It's still down year-on-year, but not as much as it was early in the quarter. Did I hear you say that that was related to the hurricanes, and now, the business is normalizing there?

Bill Lovette -- President & Chief Executive Officer

The hurricanes and the earthquake disrupted a lot of distribution, especially in central and southern Mexico, but those have come back and rebounded to normalized levels, so we've seen a large uptick in price levels just in the last few weeks.

Heather Jones -- Vertical Group -- Managing Director/Analyst

Okay. So, at this time, your thought is that that business should approximate last year?

Bill Lovette -- President & Chief Executive Officer

Yes.

Fabio Sandri -- Chief Financial Officer

Yes.

Heather Jones -- Vertical Group -- Managing Director/Analyst

Okay. Then, on your big-bird side, you guys have made huge strides there, improving the relative performance there. I was wondering -- could you give us a sense of the cadence of that improvement during 2017? It sounds like that could be a meaningful tailwind for you guys into '18, and I was just wondering if you could help us understand that.

Bill Lovette -- President & Chief Executive Officer

Well, you have to think about the context. The company was not even in that business when we arrived 6 ½ years ago, and we went from 1 plant to 8 plants being in that business in the first 5 years we were here. We've since converted Sanford, North Carolina, away from big-bird into case-ready or organic program, and we've significantly improved -- just in the last 12 months -- our operating metrics in that business. We were actually better in 2014 and the first half of 2015 because we had converted so many operations and had so much critical mass there.

We sort of slipped in our performance beginning the last half of '15 through '16, and then we started improving in the first half of 2017. We've picked up the pace of that improvement significantly the last half of 2017, and expect that that pace will continue into '18. We're going to be better than an average operator in the large-bird deboning business through 2018. So, we're just about average now, which we do not find acceptable. We're going to surpass that in 2018 and be very proud of our large-bird deboning business next year. We made several management changes, we've got great leadership in that part of our business now, and we think that's going to be one of the stars of our company in the U.S. moving forward.

Fabio Sandri -- Chief Financial Officer

As we built our budgets last year, we identified the $174 million in operation improvements because of everything that Bill mentioned. Big-bird was an important part of that improvement. As we are going through our budgets right now, we are already identifying more opportunities in the big-bird, and we will expect to capture all those opportunities next year, probably in the range of $200 million again.

Heather Jones -- Vertical Group -- Managing Director/Analyst

For '18, OK. Then, looking at the U.S. supply side -- so, a few things that I'm juggling in my mind here is the last month that we have from the USDA showed almost a 6% increase in the flock, and it just -- our back-of-envelope math suggests that the industry has increased the holding time of their hens. And so, if we look at the pullet placements that we have today, and we assume a similar holding time, you're looking at a 4 to 5% increase in the flock for roughly the first half of '18, but you've got lower egg yield, your hatchability -- not "you" as in PPC, but the industry's hatchability should be better in '18, but you have easier weight comparisons in the summer. So, putting all of that together, I'm wondering what your thoughts are on how much increase we should see in pounds in '18.

Bill Lovette -- President & Chief Executive Officer

One thing you did not mention in all those numbers is the hen slaughter, and that goes down about 5.25%. So, obviously, what happened is we were extending the age of that breeder flock -- we were not killing those hens -- trying to get more eggs and more chicks, obviously. That's going to change because you can't hold those hens forever, and so, as we start pulling down the size of the flock, the age of the flock, while on the one hand, we'll see a pickup in productivity -- meaning more eggs per hen and better hatch -- the overall output, we don't believe is going to be more than about 2% in 2018.

So, the issue looking at those numbers -- even on a monthly basis, or even a quarterly basis -- is you have to think about a lot of things at one time: Age of the flock, how many we're killing, the productivity of that flock. But, when it's all said and done, to your point, we don't see more than about 2% or so of heads coming out in 2018 versus 2017. I think year-to-date, we've only seen about 1% increase in heads versus 2016, to that point.

Fabio Sandri -- Chief Financial Officer

And also, because of the lagging pullet placements as they reach maturity and become on the breeding flock, year-to-date in the first 6 months of 2017 -- actually, pullet placements are down compared to the same period last year.

Heather Jones -- Vertical Group -- Managing Director/Analyst

Okay. All right, thank you so much for that.

Fabio Sandri -- Chief Financial Officer

You're welcome.

Operator

Again, if you have a question, please press star, then 1. The next question will come from David Carlson with KeyBank Capital Markets. Please go ahead.

David Carlson -- KeyBank Capital Markets -- Analyst

Thank you, guys, for taking my questions. My first one is volume-related, and then I have a follow-up regarding grain cost during the quarter. Fabio, did you say volume in the U.S. segment was up 6% during the quarter?

Fabio Sandri -- Chief Financial Officer

Yes, mainly because of the acquisition of GNP. So, in the legacy business, in prepared foods, we were sliding up in terms of volume compared to the same period last year -- also, because of the new wing line -- and in fresh, we are slightly down.

David Carlson -- KeyBank Capital Markets -- Analyst

So, backing up, the GNP volume -- that would imply volume down about 1% or so with the legacy business. That's...300 basis points below the industry. How confident are you guys that you'd be able to produce at least in line with the industry, now that several of these plants are back online following a number of projects in 2016? And, I have a follow-up.

Bill Lovette -- President & Chief Executive Officer

We're confident we're going to maintain the pace of the industry going forward.

Fabio Sandri -- Chief Financial Officer

And, I think Bill mentioned it's because of the better management of the breeding flocks, we have more eggs available. Also, a little bit of the impact in the volume is because of deboning more legs. So, from percent there, it is less pounds, but more profits.

David Carlson -- KeyBank Capital Markets -- Analyst

Fair. Fabio, how much did lower grain costs benefit consolidated gross margin year-over-year?

Fabio Sandri -- Chief Financial Officer

Our year-over-year is almost flat, and this quarter, I think we're $20 million better because of lower grain prices.

David Carlson -- KeyBank Capital Markets -- Analyst

Thank you, guys.

Operator

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

Michael Piken -- Cleveland Research -- Partner/Analyst

Yeah, hi. Congratulations on the good quarter. If we could talk a little bit more about the export markets, and what you see as potential opportunities in 2018, what do you expect from an overall volume perspective and what do you think for yourselves in terms of potential volume growth?

Bill Lovette -- President & Chief Executive Officer

Michael, we believe that the export market in 2018 is going to look much like it did in 2017. What we have is avian influenza is being found in a lot of countries that traditionally export into Europe, the Middle East, into Asia, and what's happened is it's a zero-sum game because that creates more demand for U.S. chicken, and we haven't had any AI in the last 6 months, so we're pretty much open to all of our normal export markets. We see good demand for chicken, we think that 80% or so of the growth of chicken consumption globally is going to come from emerging markets in the next 10 to 15 years. Chicken represents a great value in terms of protein consumption, so I think it's mostly, if not all, good news from an export perspective going into next year and the years beyond.

Fabio Sandri -- Chief Financial Officer

Also, this year, our exports to Mexico are 10% lower than the same period last year, and as we see the economy in Mexico improving and the peso at a better value to the U.S. dollar, we see some potential to grow on the exports next year.

Michael Piken -- Cleveland Research -- Partner/Analyst

And then, just to follow up on that with respect to Mexico, what is the better environment for you? Is it an environment where there is a lot of U.S. chicken going into Mexico, or is the net-net better for your Mexican business to have fewer -- less competition from the U.S.? What benefits you?

Bill Lovette -- President & Chief Executive Officer

We constructed our portfolio down there to operate well in both environments. Most of the U.S. exports go into northern Mexico. We operate across the entire geography, so we customize our sales programs to fit U.S. exports coming into the northern part of the country and serving that part of Mexico in one way versus the central and southern part of Mexico a slightly different way. Going back to the acquisition of that asset a couple of years ago, that's one of the big jewels that we saw in being able to construct a portfolio in Mexico that's also diverse to accommodate for those imports coming in.

Michael Piken -- Cleveland Research -- Partner/Analyst

Okay, thank you.

Operator

The next question will be from Adam Samuelson with Goldman Sachs. Please go ahead.

Adam Samuelson -- Goldman Sachs -- Vice President

Yes, thanks. Good morning, everyone.

Bill Lovette -- President & Chief Executive Officer

Good morning.

Adam Samuelson -- Goldman Sachs -- Vice President

Back in the U.S. -- and, I'm just trying to disaggregate the U.S. performance year-over-year a little bit more clearly -- clearly, the big-bird values and the cutout there were up considerably year-over-year, and I would guess that's probably worth something on the order of $100 million of profit. You alluded that obviously, GNP is better, and there's incremental contribution in the EBIT there, but I would still be coming up...$70 or 80 million short on the year-on-year profit improvement. Maybe any incremental details on mix, on cost performance, that you could provide. I know you haven't produced the Q yet, so usually, there's some color on the EBIT bridge in that.

Bill Lovette -- President & Chief Executive Officer

Adam, we haven't really shifted -- other than the Sanford, North Carolina plant -- our mix around much, but we've made a lot of changes within each of the types of business in terms of mix, and one thing about the chicken business that I've learned over my career is that mix impacts profitability more so than just about any other single attribute price, or cost, or anything else.

And so, one of the things that is a great core competency of ours is managing mix, so, for example, in our small-bird deboning operation -- we have about 5 plants -- we've made a great improvement in mix management in that business, and it was far more profitable so far this year than it was last year. So, that's been a big contributor. Our other small-bird business -- our business that goes to QSR and rotisserie deli -- we continue to perform very well making improvements there.

Those products continue to be in greater demand over time, and the prices for those products continue to be very strong. So, not only have we made improvements in our large-bird deboning business, but we've managed the mix within each of those bird types extremely well, and we've taken a lot of cost out of the mix that we're producing. So, it's not been just one type of business.

Fabio Sandri -- Chief Financial Officer

I think the other factors that are partially connected to what Bill mentioned is the operation improvements, where we are in line to achieve our $174 million target, and the improvements in the prepared-foods operation, as well.

Bill Lovette -- President & Chief Executive Officer

And, I would remind you that last year -- 2016 -- by the way we measure was not a good year for us. One of the reasons it was not a good year is because we were spending a lot of time, effort, and capital in these big CapEx projects. If you remember, we told you last year that they were going to pay off for us, and I think you're seeing the benefits of that activity. And, we've identified more of those projects that we'll do over time. I think we're better at doing those projects than we were last year, so you'll see -- most likely -- less disruption when we do. But, we're definitely seeing the rewards for making those CapEx investments last year.

Adam Samuelson -- Goldman Sachs -- Vice President

All right. Well, maybe I can hone in on a couple of those. The product year-on-year -- of the $174 million, which was a full-year target, how much year-on-year was realized in the third quarter in any way to quantify the profit improvement in the prepared-food business? I'm just trying to disaggregate a little bit the overall market improvement. Clearly, there were higher prices that would accrue to your bottom line versus the actions that you undertook in the quarter -- plus, there was the M&A component with GNP.

Fabio Sandri -- Chief Financial Officer

This year, we are on pace to achieve the $174 million. We are close to $30 million in operation improvements in this quarter, and that is including the prepared-foods operation improvements, the big-bird operation improvements, and improvements in GNP as well.

Adam Samuelson -- Goldman Sachs -- Vice President

Okay. And, finally, on cash flow, it was a little bit hard to disaggregate because I think there's going to be some restatements in the prior quarters with how the Moy Park gets treated. What was the actual operating cash flow number for the quarter?

Fabio Sandri -- Chief Financial Officer

It was close to $200 million just in U.S., not considering the Moy Park acquisition.

Adam Samuelson -- Goldman Sachs -- Vice President

Right. And so, is that -- you talked about inventory. So, is inventory the big delta year-on-year there relative to healthy underlying EBITDA improvement?

Fabio Sandri -- Chief Financial Officer

Yes, that was the major impact in the working capital in this quarter. We are building the wing inventory for the wing seasons, and there were some disruptions as well because of the hurricanes in Florida and Texas on the exports. So, it's a little bit of uptick in the leg quarter inventory -- for the whole industry, but for us as well -- which increased the working capital during this quarter.

Adam Samuelson -- Goldman Sachs -- Vice President

Okay. That's helpful. I'll pass it on.

Operator

Once again, if you would like to ask a question, please press star, then 1. The next question will be from Akshay Jagdale with Jefferies. Please go ahead.

Akshay Jagdale -- Jefferies -- Managing Director/Analyst

Good morning. Thanks for taking my question. Fabio, I wanted to ask about the acquired business in terms of what you're going to be reporting and when we might expect to see that. Since you announced the deal, there have been several different data points that we can pull from to model that, and certainly, you've helped us as well offline. But, in today's numbers, for example, we've got a full two quarters now of P&L in U.S. dollars for the company. Can you give us a sense of how you are thinking about that in terms of filing four quarters of clean numbers for Europe that would help us model it? It's been a bit of a moving target in terms of what we've seen from JBS, what we saw at your Analyst Day, and now, what we're seeing in the quarterly report. So, just trying to get a high-level view of what your expectation is in terms of giving us more color on that business in U.S. dollar P&L terms.

Fabio Sandri -- Chief Financial Officer

Sure, great. Actually, in compliance with the U.S. GAAP rules -- again, because it was a common-control transaction -- we were required to consolidate Moy Park's entire quarter. As we go to the next quarter, our filings will reflect the year-to-date and year-ago results, so you have a full comparison, apples to apples, between our operation with Moy Park this year and what would be -- or, could have been -- our operations with Moy Park last year. So, as we end the year, you're going to see the full comparison.

Akshay Jagdale -- Jefferies -- Managing Director/Analyst

But, the margin profile that we're seeing now is a good starting point, even though it's just a quarter. 9% gross margins, 4% EBIT margins -- high-level -- is a good starting point, correct?

Fabio Sandri -- Chief Financial Officer

Yes, it is. Again, like you said, we expect $50 million in synergies over the next 2 years, being $25 million next year and $25 million the year following. So, what we expect is to expand that margin with the synergies. I will just remind you that this is the margin on U.S. GAAP standards, not in IFRS, as was believed before by JBS.

Akshay Jagdale -- Jefferies -- Managing Director/Analyst

Yes, that was my question, really. We've looked at it on an IFRS basis, so it's changed a little bit, but this is helpful. Bill, can I just challenge you a little bit on the issue of the age of the flock? The age of the flock is up slightly year-over-year, but over a 3- to 4-year period, from everything we can see, and the estimates we've seen from an industry source tell us, the age of the flock is actually down relative to 3 or 4 years ago and is only up slightly year-over-year. Is that also your understanding? We had from June of '14 for 2 ½ years, you had increased pullet placements year-over-year for 2 ½ years, and you had an increase in mature-hen slaughter, right? That's for 2 ½ years, which is an unprecedented time period to see both those moving in that direction. So, that also points to the age of the flock coming down over those 2 ½ years. So, I just want to make sure I'm understanding the age-of-the-flock issue correctly. Is the way I characterized it the way you'd also characterize it?

Bill Lovette -- President & Chief Executive Officer

Yeah, but I think you have to put age-of-flock in context, Akshay. The age-of-flock is going to move around from quarter to quarter. It's not a long-term phenomenon. The age of the flock this quarter is going to be different than last quarter -- it's going to go up, it's going to go down. You have to think about age of flock in conjunction with breed change, and the breed change has been more of the issue in terms of the lower productivity of that breeding flock. And so, the age-of-the-flock extension really is a byproduct of that flock being less productive and companies like ours needing the same number of eggs, therefore we have to hold those breeders longer. As we put more breeders down to compensate, which is the growth that you're pointing out, then we'll eventually pull that back to more normal levels. We typically slaughter a hen at 65 weeks of age, and so, we'll get back to that more normal level as we experience more pullets being placed.

Fabio Sandri -- Chief Financial Officer

On the comparison with 2 to 3 years ago -- actually, if you remember, 2 to 3 years ago, we have a big disruption in terms of supply of pullets in the breeding flock. In the end of 2014, you have to remember we were keeping our flock much longer in the field to produce the eggs. So, if you go to a more long-term and look at the age of the flock, it is still higher.

Akshay Jagdale -- Jefferies -- Managing Director/Analyst

Yeah. No, my point -- and, that's super helpful, what you just said -- my point is for the math of the breeder flock to translate into 2% more pounds next year would imply that you see another extended period of mature hen slaughter, right? I do think mature hen slaughter will go up, like you said, for a quarter or 2, but it's not my expectation that it's going to go up for another year because we just came off of a period where it was up a lot for a while. So, that's my point. I get exactly what you're saying about the breed, and that's had a meaningful impact on productivity -- completely understand that -- but for the mass of the breeder flock, which is up 6%, to then translate into 2% in pounds, you definitely need the mature hen slaughter to increase quite a bit, and for an extended period of time. That's all I was trying to get at, but I appreciate your response there.

And, just one last one from me: In terms of the current pricing trends, you mentioned that you just -- you characterized it as normal seasonality, except we started at a higher point. That's fair, but aren't you seeing some parts that are exceptionally weak, like boneless skinless breasts? I don't remember seeing at $1.03 literally ever, but can you talk a little bit about why that's happening, and why have wing prices recently started to come down? I guess it can't stay up forever, but I'm just curious to know, on those two parts, if you have any additional color on why they're moving a certain way, which is different from what they'd been doing recently.

Bill Lovette -- President & Chief Executive Officer

To be honest, the reason they're moving that way is because it's November, and we have Thanksgiving in November every year, and this cycle repeats itself. So, we're not seeing anything this year that's abnormal from any other year that we've been in the business. We've seen breast prices at near $1.00 or even under in other years, and really, the only difference this year versus last is we started at a much higher number, and in the fall, the slope of the curve was steeper, but we ended up at the same place as we were last year, so it's really no different. On the wings, we had a very strong early wing season. We've seen that abate just a bit, but it's our belief that as we go into Super Bowl season and basketball season going into the Final Four, we think that we'll see stronger wing prices, as we normally do for that time of year.

Fabio Sandri -- Chief Financial Officer

And, despite some weakness on the wing costs at restaurants, the demand for chicken and wings continues to go up year over year. Maybe not at the same pace that it was before, but the consumption and demand for wings continues to go up.

Akshay Jagdale -- Jefferies -- Managing Director/Analyst

Okay. I'll pass it on. Thank you.

Fabio Sandri -- Chief Financial Officer

Thank you.

Operator

Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Bill Lovette for closing remarks.

Bill Lovette -- President & Chief Executive Officer

Thank you. The outlook for chicken consumption remains strong despite more availability of other proteins since greater export volumes and a strong U.S. economy will drive more protein consumption across the board and absorb the supplies. We continue to look for opportunities in refining our portfolio to pursue even more differentiated customized products to satisfy demands of our key customers, as we believe this strategy is supportive of our goal to continuously improve our margin profile and reduce volatility despite specific market conditions.

Our recent acquisitions prove our team's capability and experience in applying our methods to generate operational improvements, key customer joint value creation, and we believe that our cash flow generation will remain robust and allow us to sustain the investments in strategic projects going forward, strengthening our operational efficiencies and tailored customer needs to further improve competitive advantages for Pilgrim's. I'd like to thank our team members and our customers, and always, we appreciate your interest in our company. Thank you all for joining us today.

Operator

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

Duration: 63 minutes

Call participants:

Bill Lovette -- President & Chief Executive Officer

Fabio Sandri -- Chief Financial Officer

Dunham Winoto -- Director, Investor Relations

Farha Aslam -- Stephens, Inc. -- Managing Director

Ken Zaslow -- BMO -- Managing Director

Heather Jones -- Vertical Group -- Managing Director/Analyst

David Carlson -- KeyBank Capital Markets -- Analyst

Michael Piken -- Cleveland Research -- Partner/Analyst

Adam Samuelson -- Goldman Sachs -- Vice President

Akshay Jagdale -- Jefferies -- Managing Director/Analyst

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