Pilgrims Pride Corp (PPC) Q4 2018 Earnings Conference Call Transcript

PPC earnings call for the period ending December 30, 2018.

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Pilgrims Pride Corp  (NASDAQ:PPC)
Q4 2018 Earnings Conference Call
Feb. 14, 2019, 9:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning and welcome to the Fourth Quarter and Year-End 2018 Pilgrim's Pride Earnings Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions) At the Company's request, this call is being recorded. Please note that the slides referenced during today's call are available for download from the Investor Relations section of the Company's website at www.pilgrims.com. After today's presentation, there will be an opportunity to ask questions.

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

Dunham Winoto -- Director, Investor Relations

Good morning and thank you for joining us today as we review our operating and financial results for the fourth quarter and year ended December 30, 2018. Yesterday afternoon, we issued a press release, providing an overview of our financial performance for the quarter and for the year, including a reconciliation of any non-GAAP measures we may discuss. A copy of the release is available in the Investor Relations section of our website, along with the slides we will reference during this call. These items have also been filed as 8-Ks and are available as -- and are available online at www.sec.gov.

Presenting to you are Bill Lovette, President and Chief Executive Officer; and Fabio Sandri, Chief Financial Officer.

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

I'd now like to turn the call over to Bill Lovette.

William W. Lovette -- President and Chief Executive Officer

Thank you, Dunham. Good morning, everyone, and thank you for joining us today. For the full year 2018, consolidated net revenues were $10.9 billion versus $10.8 billion from a year ago, resulting in an adjusted EBITDA of $798 million or 7% margin versus $1.39 billion a year ago or 13% margin. Our adjusted net income was $318 million compared to $707 million in the same period in 2017. Adjusted earnings were $1.28 per share compared to $2.84 per share in the year before.

For the fourth quarter of 2018, net revenues were $2.66 billion versus $2.74 billion from a year ago, resulting in an adjusted EBITDA of $111 million or 4% margin versus $241 million a year ago or 9% margin. Adjusted net income was $21 million compared to $134 million in the same period in 2017, resulting in an adjusted earnings of $0.09 a share compared to $0.54 a share in the year before.

Our team members have remained focused on executing and delivering the best performance possible during 2018 against differing market conditions across our global footprint. In the US, we experienced a very difficult environment in commodity chicken, partially offset by Prepared Foods, which has been accelerating in its improvement. In Europe, we tracked expectations in extracting synergies despite feed cost pressures in Europe during the second half. Mexico had stronger than seasonal performance in the first half, a weak Q3 and then a recovery as we exited the year.

While we are proud of our progress we've made in terms of our relative operating performance to the competition over the last years and all reasons we're in, we're not satisfied and are continually identifying opportunities against our zero-based approach and refining our portfolio strategy to better adapt to specific market dynamics. We continue to believe this approach will give us higher and more consistent results for the mid to long run and minimize the full peaks and troughs of the volatile commodity sectors. While we face more challenging supply/demand balance in the US commodity market, we continue to leverage our key customer approach to drive growth beyond just the underlying market conditions.

We're applying a similar strategy at our European operations and expect to extract improvements, in line to what we've seen in other geographies. Our team across the different regions remains motivated in capturing more growth opportunities and product differentiation, both organically as well as through acquisitions to generate greater value, while contributing to the evolution of our portfolio and supporting our vision to become the best and most respected company in our industry.

During the last quarter of 2018, we also suffered from weather disruptions at some of our US facilities due to hurricanes, which generated a direct impact on our facilities and results, but also resulted in larger than ideal of commodity size birds to sell into a market that were even weaker than seasonal. Most important, during this period, the inefficiencies also limited our ability from fully capturing our operational improvement targets. Under these challenging and -- challenges and experiencing the lowest cutout in the US during the last decade, along with a strong dollar, weak oil prices, which further limited export volumes, our teams were able to produce a stronger operating performance when compared to many other years with more favorable market prices. We believe this performance is a validation of our team, the effectiveness of our diversified portfolio strategy and our proven methodology in extracting operational improvements over the years.

While the environment for the US commodity large bird deboning was very weak entering Q4, we did see an earlier-than-seasonal rebound during December with the momentum appearing to hold through early this quarter. Commodity boneless prices have already reached levels comparable to a year ago, with wings appreciably stronger, which is incrementally positive. While we typically see a seasonal uptick in overall chicken demand during Q1 as consumers increase their chicken consumption post the holidays, we believe this year the increase is even more noticeable as retailers, foodservice operators and consumers are recognizing and responding well to the attractive prices for chicken. We believe this is favorable signal for the upcoming summer grilling season when we expect to have further pickup in demand for chicken.

Customer demand was mostly in line with normal seasonality in the less commoditized segments. Margins within our small bird and case ready operations have continued to perform better than commodity and served as a partial offset and our leading position in these markets and differentiated product offerings have continued to give us a competitive advantage relative to our peers with a more narrow market focus.

For 2018, sources of negative impacts to our US business were the large bird cutout, live production and breeder costs, investments in brands and Prepared Foods growth as well as salary and wage increases given to our team members. These impacts to profitability were partially offset by improvements in portfolio mix, de-conversion rate, plant cost and yields. In foodservice, we are seeing more chicken promotions, particularly for wings, following a year consisting mostly of beef eaters in 2018 as operators are sensing an opportunity to drive an improvement in their results and competitiveness, which appears to mark a turn in focus. Domestic retailers are also starting to promote more chicken as they seek to drive stronger traffic into their stores.

We continuously refine our strategy to differentiate our portfolio and reduce the share of commodity sales to further insulate our margins from market fluctuation and improve our relative performance to our competitors. For example, even within each of our bird size classifications, we have multiple strategies to improve our product diversity and market exposure. We've grown our revenues to key customers by over 100% in the last seven years and the proportion of total chickens we've produced going to these customers are continuing to grow, reducing our dependency on commodity sales. Our key customer strategy also drives growth, promotes loyalty, enhances long-term relationships and strengthens our margin structure.

We are continuing to increase the percentage of specialty birds, including No-Antibiotics-Ever and certified organic and expect them to be over 40% of our US fresh portfolio during 2019, up from less than 20% a few years ago. Mid-last year, we moved one of our large bird deboning plants to full No-Antibiotics-Ever, the first one for us in this size category and support of the plan to double our No-Antibiotics-Ever contracted volume of large bird debone products in 2019 versus 2018.

We also expect to initiate breast meat portioning business and increase dark meat deboning capacity by 25% to deemphasize our exposure to the volatile pure commodity markets. We are installing more automatic deboning equipment to support growth for our key customer, while minimizing the impact of tight labor conditions to optimize our margins. In small birds, being the largest producer in that segment, it's afforded us the opportunity to benefit from the positive market dynamics. Supply in this category was reduced last year and pricing has been much more resilient versus other segments -- sectors. These are just a few of the initiatives we have in-store for 2019 in fresh chicken. We're excited about them.

Within Prepared Foods, our results are accelerating in momentum and growing at a solid pace of 11% in revenue and 14% in volume year-over-year. During Q4, 12% and 15% for the full year, respectively. As you know, during the last few years, we've been making investments in our US Prepared Foods plants, operations and people to expand our capacities and capabilities to meet our key customers' expectations. We have begun to realize results from these investments and are generating the expected performance.

We're growing our volume and sales and continuing to build out our innovation and marketing to drive strong growth for the future, which we believe to be sustained. The investments and focus have yielded an increase in performance and further growth prospects remain available. Our commitment to growth in Prepared Foods gives us an improved margin profile by reducing earnings volatility within our entire portfolio. We're expecting Prepared Foods to account for a larger proportion of our total results over the next few years.

And to support these growth initiatives, we're also updating Pilgrim's brand with a fresh innovative new packaging, which features more eye-catching design and offers the opportunity to grab the consumer at the shelf. Removing all of Pilgrim's branded SKUs to new art work starting with our Prepared Foods items.

Our Just BARE chicken brand continued its national expansion plan and solidified its first -- its fresh chicken online sales leadership. Just BARE has strong presence in the better for you category and is rapidly growing double-digits in the past five years and has transformational growth potential as our national go-to-market offering are the most desired on-trend consumer chicken brand.

We also see multiple opportunities to extend the strength of Just BARE and the Prepared Foods. Starting last year, we expanded our rotisserie distribution using the Just BARE brand into the Northeast and Midwest markets, increasing brand awareness and distribution growth. Amidst continued uncertainties regarding the direction of international trade in the US, export demand has been steady, which is encouraging, considering the strength of the US dollar. Q4 freezer inventories were within 10% of prior year, indicating export demand, roughly in line with what we expect to see on a seasonal basis.

We had some volume impacts from quotas last year in some countries, but they're already resolved in 2019 as the year begins. US chicken has remained attractive relative to other global exporters as we have very good access to growing the leadership position in technology and very competitive costs. Market conditions in Mexico were soft at the beginning of Q4, but recovered during -- as the quarter progressed. Low prices in Q3 drove the reduction in supply during Q4, while demand also improved. Despite an increase in imports of competing proteins, specifically pork due to global trade issues, we believe chicken demand can continue to grow in line with historical rates.

While Mexico can be volatile quarter-to-quarter, historically our operations have produced very good margin performance on a full year basis and we expect this trend to continue in the future. For all of 2018, Mexico recorded nearly 11% EBITDA margins and we believe our performance in 2019 in Mexico will follow similar seasonality patterns relative to past years.

Our team's focus on operational excellence and offering differentiated product continues. We generated record volumes and margins in Prepared Foods during Q4. As a part of our strategy to strengthen our competitive position, we're maintaining the pace of new innovative product introductions. Our Prepared Foods business is growing at a double-digit rate and generating excellent results under both premium Pilgrim's and Del Dia, both brands have continued to receive very favorable acceptance by consumers at retail club stores and quick service restaurants.

Our European operations have continued to produce better performance on a full year basis in 2018 compared to the prior year with an 8% growth in revenue and $17 million expansion in adjusted EBIT despite 24% increase in feed cost, which is mainly complete due to weather events in Europe. Our results are proof of our more stable business model, where our team members have also improved operations and contributed to the strong performance by continuing to focus on cost optimization, control excellent customer relationships, synergy capture and a culture of constant innovation, while maintaining a very consistent margin performance.

As the cost of ingredients, in particular, wheat, given weather impacts across Europe in utilities increases, we work within our supply agreements with customers to reflect and recover or mitigate these costs in subsequent quarters. Where we have no formal supply agreements, we're engaging immediately to recover these higher input costs. The integration process is going well and we are tracking to our run rate in capturing $50 million in expected synergy targets.

Our team has continued benchmarking operational efficiency, productivity and found additional opportunities to create value through feed formulation, yield management and labor efficiency across our European operations. We're applying these methodologies in Europe to generate operational improvements and focus on closing the gaps to our legacy operations. The emphasis on applying our key customer strategy is also continuing and will give us more resilient margin structure. We're also looking for additional value creation potential in Europe as we have in the US and Mexico to drive greater earnings performance.

As a part of the integration activities, our team is driving for an increased focus on utilization in the whole chicken, while opening up more opportunities and diversifying into new markets for dark meat, all whole and other products. We will continue investing to optimize our production facilities across Europe to make them more efficient and competitive.

The increase in operational focus is already starting to pay off as our European operations have improved their relative performance over the competition. Beyond that, we're looking to deploy capital in opportunities across Europe to drive our future growth, both organic and inorganic and further improve this diversification.

Market prices for corn averaged 7% higher in Q4 than last year, reflecting the lower corn carryout in the US. Conversely, soybean meal prices averaged 3% lower in Q4 and are currently about 10% lower than in the same period last year, reflecting record surplus of soybeans. The trade disruptions with China is expected to leave the US with record large surplus of soybeans in 2019 and we expect to see more competition for corn and soybean meal exports out of South America starting in Q2. There also can be a potential for US farmers to plant more corn acres this year in response to relatively better economics for corn in certain parts of the country.

In Europe, as we mentioned, feed prices averaged 24% higher in Q4 versus a year ago, reflecting lower supply due to a major drought across Central Europe. That said, fall wheat prices are already showing a more than 10% discount to current prices, reflecting an expectation for higher supplies coming this fall. Uncertainty still remains with regard to trade between US and China, but we believe feed input prices should not be a threat to margins due to record high soybean carryout, more competition from South America for exports and the potential for increased corn acres in the US this year.

For 2019, the USDA is expecting total chicken industry production to grow at a range below last year's, while breeder egg performance has marginally improved recently. The latest fillet placement data has also been down along with hatch rates, while egg sets have been flat to offset the improvement. Also, despite the announced new capacities, and some of these are replacing existing Saturday schedules, while in a tight labor market in the US and difficult market conditions last year are likely to weigh on at least some of the expansion plans. As a result, we believe capacity growth will be fairly measured in the mid to near-term.

With slower growth expected in beef and pork increasing in a similar range last year, we expect a more favorable shift in chicken consumption among competing proteins. Also, the implementation of the new trade agreements with the trading partners should gradually reduce the amount of domestic protein availability, putting less pressure on chicken and driving more demand. The output for chicken demand in the less commoditized segment this year continues to be good overall and supply and demand there remains relatively better balanced.

With the US economy continuing to be strong, low employment and higher disposable income regarding households to consume more proteins throughout the day. Foodservice operators are already starting to turn their focus to chicken and we expect to see more feature activity with our retailers this coming summer. And while we're already well-balanced in terms of our bird size exposure, we'll continue to look for opportunities to incrementally shift our product mix and reduce the commodity portion of our portfolio by offering more differentiated products to key customers, while also optimizing our existing operations by pursuing our operational improvement targets.

We believe our key customer approach is strategic and creates the basis to further accelerate growth in important categories by providing a more customized and innovative products to give us a clear competitive advantage. Last September, we released our 2017 sustainability highlights report. Compared to 2016, we decreased severe incidents by 26%, significantly outperforming our 15% year-over-year reduction target. We also reduced water and fuel use intensity by 1.3% and 2.7%, respectively, and decreased greenhouse gas emission intensity by an impressive 8.2%.

We've maintained our focus on animal welfare, passing all third-party audits with scores ranging from 97% to 100%. Back in 2015, we set ambitious 2020 sustainability goals to ensure we stay focused on continuous improvement. We remain focused on these goals, outperforming our team member health and safety goal by 11% for 2017. And in addition, we're on track to beat our goals in supply chain responsibility, natural gas use intensity, electricity use intensity, greenhouse gas emission intensity and animal welfare. Water use has posed a challenge and we'll heighten our focus to ensure that we make progress on our 2020 promise. We're confident our focus on sustainability will continue to position us as a global industry leader in the production of high-quality sustainable chicken products.

To improve our consumer awareness, while supporting our vision to be the best and most respected company in our industry, we successfully launched two brand-new websites that more accurately portray who we are as collective Pilgrim's, a global organization. Pilgrims.com, pilgrimsusa.com were launched in mid-December, offering the platforms to share our global and US storage, respectively, and amplify our presence in the marketplace with mobile optimized online presence.

Before I turn over to Fabio, I would like to recognize the great work of our team for executing our strategies, which produced a clear long-term margin advantage versus our peers in this exciting, dynamic and cyclical industry. Our portfolio is specifically designed to minimize the impact from the cyclicality of specific market segments. The changes we initiated eight years ago have made a tangible difference and the result is evident in all three geographic regions in which we operate. It magnifies our relentless pursuit of operational excellence and presence in diverse and differentiated business models, segments and channels. For the long-term, we expect our competitive advantage to sustain.

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. For the full year 2018, net revenues were $10.9 billion versus $10.8 billion from a year ago, with an adjusted EBITDA of $798 million or 7% margin compared to $1.39 billion or 13% margin for the year prior. Net income was $248 million versus $695 million in the year prior. Adjusted EPS was $1.28 per share compared to $2.84 per share in the year before. Adjusted operating margins were 4% in the US, 9% in Mexico and 4% in Europe, respectively.

We reported $2.66 billion in net revenue during the fourth quarter of 2018, resulting in an adjusted EBITDA of $111 million or a 4% margin. That compares to $2.74 billion in net revenue and an adjusted EBITDA of $241 million or a 9% margin the year before. Adjusted profit per share was $0.09 compared to $0.54 in the same quarter of last year. Our EBIT in USA was $5 million after adjusting $50 million for losses related to the weather events in USA and Puerto Rico. Small bird and case ready continued to be a relatively stable market, as chicken has remained compelling to consumers despite higher availability of other proteins.

On the other hand, similar to Q2 and Q3, the large bird deboning commodity was very challenged during most of Q4. Although, prices bottomed out and then recovered as we neared the end of the year. Regardless of market conditions, we have the portfolio diversification in all bird sizes, including both commodity, more stable segments, such as small bird and case ready, which is designed to maintain more consistent margins over the long-term, while protecting the downside.

As Bill mentioned, we were impacted by weather disruptions due to the hurricane at some of our complexes. The $50 million adjustment is related to direct expenses due to the events, but the actual financial and operational impacts were more extensive. As the downtime limited our ability to optimize the mix leaving us to sell into a less profitable segment of the market and further depressing margins. We also took longer than ideal to normalize the affected complexes, delaying us from producing a more profitable mix of birds sooner.

US Prepared Foods sales have continued to improve relative to last year with a strong 14% increase in volume for the quarter and 15% for the year, respectively. Adjusting for the extra week in 2017, the growth in 2018 was even more impressive at 18%. The investments we made in the past few years have begun to produce results and we are extracting the benefit. We have additional initiatives in place to accelerate growth in this market and we believe the equipment in Prepared Foods can be sustained. 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.

After a very strong first half market conditions and a weak Q3, Mexico market improved during Q4. Our adjusted EBIT was $70 million or a 5% margin. The environment was weaker at the start of Q4, but progressively improved throughout the quarter as supply adjusted and demand increased. While we still have strong competition from other proteins and growing conditions have been better than past years, we have a very strong team in Mexico who has been over-delivering performance in relative terms to the major competition in the past few years due to their strong operational focus and excellent determination and we expect this trend to continue in the future.

To maintain our growth and continue to innovate, we 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 preparing our Prepared Foods opportunity in Mexico and producing excellent financial performance through both the Pilgrim's and the Del Dia brand, which have received great acceptance by consumers. Our strategy is supportive of the global goal to increase our higher margin differentiated products, while having proper coverage from entry level to premium, both fresh and prepared.

Our adjusted EBIT in Europe was $20 million or a 4% margin after adjusting for $4 million in restructuring costs. The integration is on track and remain constant about the geographical diversification and growth potential for us, while evolving our portfolio in creating sustainable advantageous new opportunities to capture the upside in the market, but protecting the downside. Although, we have made good progress in terms of optimizing the product portfolio, operational synergies and implementing zero-based budgeting, we were hurt by 24% higher costs in wheat ingredients due to the drop in Europe in the second half. That will still need to be passed through our prices through our formulas in contrast.

Higher feed ingredients translated to a $30 million negative impact on costs during the year. We will continue to focus on increasing the efficiency across the value chain by enhancing sourcing and production, improving live cost, good improvements and the global management of feed sources. We will leverage our marketing and sales infrastructure to optimize SG&A costs.

We have a very good track record of successfully capturing synergies and delivering better operating results, while improving the relative performance to the competition and the markets. We are confident we have the methodology and team in place to similarly continue to grow the profits at our peer operations and leverage their expertise and experience to improve the rest of our global operations. As part of the integration activities, our team is driving for an increased focus and utilization of the whole bird to identify more opportunities and strengthen our cutout. We will continue to build additional key customer relationships, identify value-creation potential and support improvement in the financial performance of our business.

During Q4, our SG&A reached 3.2% of sales in line with recent levels and reflecting the inclusion of support for expanding the Just BARE brand nationally, the investment for our new Prepared Foods products both in US and Mexico as well as the addition of the new European operations. We reached $100 million in operational improvements and synergies in 2018, in line with the year before, but below our additional goal. While we made some improvements to the efficiencies of our operations, they were offset by higher labor, the weather disruptions and subsequent longer than expected normalization in US, impact on mix and also higher grain costs in Europe as we mentioned.

We are continuing to prioritize our capital spending plans this year to optimize our product mix that is aimed at improving our ability to supply innovative less commoditized products and strengthening partnership with key customers. We expect to invest $285 million on CapEx and recreate our commitment to invest on strong return on capital employed projects to 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 flows from operating activities, focus on management of working capital and disciplined investment in high return projects. During the quarter, our net debt reached $2 billion with the leverage ratio of 2.5 times pro forma last 12 months EBITDA. Our leverage remains at a good level and expect to continue strong cash flows in 2019, increasing our financial capability to pursue strategic actions. We expect 2019 interest expense in the range of $130 million.

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

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

Questions and Answers:

Operator

We will now begin the question-and-answer session. In the interest of allowing equal access, we request that you limit your questions to two, then rejoin the queue for any follow up. (Operator Instructions) The first question is from Ben Theurer of Barclays. Please go ahead.

Ben Theurer -- Barclays -- Analyst

Yeah. Good morning, Bill, Fabio. Thank you very much for taking my question. Actually on the US, I wanted to follow up on some of the qualitative commentary you made looking into the first couple of weeks of 2019 and going forward. So what is it what you have seen especially on the big bird side in terms of demand? And how do you feel about pricing going more toward the grilling season as you've mentioned some of the drivers already? I'd like to understand a little bit how you prepare yourself for a hopefully better feature season into summer and what do you think where prices are going to or is it still too early to say some of the direction -- where the direction is going that would be my first question?

William W. Lovette -- President and Chief Executive Officer

Thanks, Ben. We saw this coming as early as December and that our key customers especially in retail were planning to ramp up their features in January. We anticipated that and what we anticipated an increased demand at retail actually was a little bit stronger than what we thought it was. As a matter of fact, we had to bring in meat from other size categories into our retail tray pack plants to augment the supply that we had there, which is indicative of really strong demand and we think that's encouraging. We see a little bit stronger than normal January demand at retail. We've seen more featuring at foodservice. And so what that's caused is a relatively strong demand, given the supply that stayed relatively flat, if not down in -- at the end of Q4, especially in that large bird segment. So I think that sets us up pretty good to see the increased pricing that we all realized in the markets indicated beginning in January.

We think we're going to see normal seasonal patterns this year. We think we're going to see more foodservice promotions of chicken as we've already started to. And given the supply that we see growing, no more than 2% to 3%, we think it's going to set up to be a fairly balanced year. So that's what we're seeing right now. And the other thing that we're doing, not to just rely on commodity prices, as I've said in the prepared remarks, we're doing a lot in our big bird deboning sector to create value-added products. We are deboning more of our legs, we're portioning more of our breasts, we turned, as I said, the one plant into antibiotic -- No-Antibiotics-Ever. We're increasing the sale side of that plant for the product, which we get a premium over the commodity prices. So we feel encouraged at what we're seeing in the market and even more encouraged with what we're doing with our own mix.

Fabio Sandri -- Chief Financial Officer

On the total cutout of the bird, Ben, we're also seeing some increase in exports as the market are reacting to the low prices of the, especially the leg quarters.

Ben Theurer -- Barclays -- Analyst

Okay, perfect. And then just one out of curiosity with Tyson acquiring the assets of preserved foods over in Europe, clearly you've become active in Europe before that through the Moy Park transaction. I assume you were interested in those assets at some stage as well. Could you have comment at some way how that potentially impacts your competitive position of Moy Park in Europe? And what ultimately maybe made the difference of why you were not for engaging in the transaction? Thanks.

William W. Lovette -- President and Chief Executive Officer

We don't think that that single transaction affects our competitive position at all. We remain focused on growing in Europe. As you probably know, most -- all of our chicken production is in the UK and we sell about 93% of that production within the UK and we get a premium for British and UK -- grown poultry and we are extremely satisfied with that. What we desire to do to augment our supply for our foodservice business, which we expect to grow in our non-branded business, which we expect to grow is to increase production or acquire production in areas that have a lower cost basis such as Eastern Europe or perhaps parts of Asia or other parts of the world that can bring that lower cost supply for the products that the consumers don't attach a premium to. And so we remain focused on that. We're in that market, we're traveling to that market, we're looking for opportunities and that's not changed.

Ben Theurer -- Barclays -- Analyst

Okay. All right. Perfect. Thank you very much. I'll leave it here. Thanks.

William W. Lovette -- President and Chief Executive Officer

Thank you, Ben.

Fabio Sandri -- Chief Financial Officer

Thanks.

Operator

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

Heather Jones -- Vertical Group -- Analyst

Good morning.

William W. Lovette -- President and Chief Executive Officer

Good morning.

Heather Jones -- Vertical Group -- Analyst

First question is on tray pack pricing. Could you give us a sense of what we should anticipate for that for you guys this year on a year-on-year basis?

William W. Lovette -- President and Chief Executive Officer

Sure. We're encouraged by our pricing in our tray pack operations. As we've been saying for several years now, Heather, our strategy may be a little bit different from other participants and that all of our tray pack product goes to our key customers. And we have an arrangement with those key customers based on quality, based on service, largely based on selling their brands and we have a mutual agreement, where we're going to keep them competitive in their marketplace. And so that allows us to move pricing when it's needed, whether it's up or down and it's proven to be really good for our key customers and obviously very good for us. We see continued growth in that category. As I've said, we're having to augment our meat supply going into those plants and we expect in the next 12 months to 18 months to be increasing our capacity to put more meat in the tray because our key customers in that category are growing. So we feel really good about the pricing there. We continue to evolve our mix into more value-added products that consumers are asking for. And so that's one of our best businesses in our portfolio and it's among the best of the chicken business in the US.

Fabio Sandri -- Chief Financial Officer

And Heather, I think just what Bill -- just adding on what Bill said, we have true partnerships with our key customers because we help them grow their brands, while we offer a full range of products from tailor national to the higher other attributes, like the organic. We don't have annual contract negotiations because our practice don't follow the volatility of the commodity markets. We do not react to sharp increases in strong spot markets and does not follow the troughs.

William W. Lovette -- President and Chief Executive Officer

And one other thing I would add too Heather just to remind you that we are now able to offer our key customers a national brand in Just BARE chicken to fill that segment for their customers who want a branded, differentiated, better for you product. And so we are able to offer a total chicken solution for a retailer, whether it's rotisserie, birds for the Deli, the value-added Prepared Foods, products for the Deli under the frozen section and for the fresh meat case.

Heather Jones -- Vertical Group -- Analyst

Okay. Thank you. And then on conversion. So back in '17, you guys converted a plant to -- a big bird plant to organic. And I think you referenced something earlier in the call that I just didn't catch. Weren't you converting another big bird plant to small bird this year and did you say something else about another conversion?

William W. Lovette -- President and Chief Executive Officer

No. We converted one of our big bird plants to No-Antibiotics-Ever. We're doing more portioning for breast fillets and tenders in our big bird plants. And then longer-term, we do expect that demand for our small bird debone products with the key customer will grow and will place the opportunity to convert -- or the possibility to convert a big bird plant to that category as well. So that's still on our plans.

Heather Jones -- Vertical Group -- Analyst

But that's not happening right now?

William W. Lovette -- President and Chief Executive Officer

That's not happening right now.

Heather Jones -- Vertical Group -- Analyst

Okay. Thank you.

Operator

(Operator Instructions) The next question is from Ken Zaslow of Bank of Montreal. Please go ahead.

Ken Zaslow -- Bank of Montreal -- Analyst

Hey. Good morning, everyone.

William W. Lovette -- President and Chief Executive Officer

Good morning.

Ken Zaslow -- Bank of Montreal -- Analyst

My first question is, what is the process and timing to which you were able to pass through pricing in Europe for the higher lead cost? I understand the one in the US, I understand that dynamic. Can you just talk about the dynamic and the timing?

William W. Lovette -- President and Chief Executive Officer

It's different for different customers, Ken. But typically 10 to 13 weeks is the lag time. Now, in the cases where we don't have a formula in place, we go much sooner. The other thing that I would mention that we're changing is typically or historically, I'll say, only the feed ingredients have been in those escalator agreements. We're now including not only feed ingredients, but we're including utility cost changes, labor cost changes and other packaging and other cost changes, so that we get the full effect of the cost impact as it happens to increase. And our team is going out much quicker to our retailers and we are employing our key customer strategy in Europe, just like we have in the US, where we say it is our obligation and our responsibility to keep our key customers competitive in their markets for their customers and our consumers and we see that paying off handsomely as we have increased our volume with the key customers that we desire to grow with.

Ken Zaslow -- Bank of Montreal -- Analyst

So we'd expect not to just turn quarter that you're in, but the quarter after that, we would start to see a meaningful change in the margin structure from where you are today to more normalized levels, in not this quarter, but the quarter after, is that the 10 to 13 weeks, is that how to think about it?

William W. Lovette -- President and Chief Executive Officer

Yeah. That -- you should see a price response 10 to 13 weeks after the actual cost goes up.

Ken Zaslow -- Bank of Montreal -- Analyst

My second question is, can you talk about the foodservice demand? As you said in your prepared remarks that you had more wing featuring. Can you talk about other featuring? How that's going to progress throughout the year? And what type of strength that will lead to in pricing?

William W. Lovette -- President and Chief Executive Officer

Yeah. In a general sense, we do see more foodservice features planned for this year, particularly on wings as we are experiencing high demand for wings right now and the price responses have been commensurate with that. But we think we'll see tender -- great tenderloin demand and -- through promotions and also breast fillet for sandwiches and other products. So we believe we'll see much stronger foodservice demand through the year for 2019 than we saw in 2018.

Ken Zaslow -- Bank of Montreal -- Analyst

Great. Thank you.

Operator

The next question is from Jeremy Scott of Mizuho. Please go ahead.

Jeremy Scott -- Mizuho -- Analyst

Hey. Thanks. Good morning. Just want to follow up on the comments on Europe. So your contracting strategy, it sounds like you're passing through some of the operational risks to your customers. Can you talk about some of the key offsets that you might receive from that? So lower premium on the pricing or just generally a more stable margin, but you typically have to see the upside if you do get a price increase?

William W. Lovette -- President and Chief Executive Officer

I would go back, Jeremy, to our key customer strategy, whereas before we tried to serve virtually everybody and anybody in the marketplace. We -- just like we did in the US seven or eight years, we've pulled back and we've deployed our resources in innovation and service and quality and mix to the key customers that we wanted to grow with. And so what that allows us to do is make price less important in the total value proposition. And it does a couple of things. One it makes our mix better, allows us to create a more profitable mix, it also allows our key customers to grow in the products that they want to feature with their customers and have greater amount of customer loyalty there. And so it's a win-win for both of us. And so we've taken on a lot of business with some key customers and then commensurately we've lost business with some customers that we desired to not do as much with.

Fabio Sandri -- Chief Financial Officer

And also, we have the potential to increase in efficiency with all the synergies that we have generated through the integration with Pilgrim's US and Pilgrim's Mexico. We are ahead of the $50 million target over the two-year period. That was a fundamental factor for the improved results year-over-year despite the $30 million headwind because of the increase in wheat prices.

Jeremy Scott -- Mizuho -- Analyst

And I just -- on the US, you mentioned comments around labor and how it may impact the ramp in chicken capacity. So first, what are you seeing in your plants in terms of retention? And is it forcing you to bid up the wages for some of your key workers? And then secondly, are your internal expectations for chicken production growth over the next couple of years meaningfully lower than the external expectations just because of this problem?

William W. Lovette -- President and Chief Executive Officer

I think our expectations for chicken supply growth are probably in line with most of what you see. 2% to 3% this year, I wouldn't expect a material change in 2020 over 2019, even with the new operations that are going to be coming on-board. The availability and supply of labor is definitely putting pressure on the ability to grow. We are increasing our wages, I don't know, Fabio, if you have a...

Fabio Sandri -- Chief Financial Officer

$50 million.

William W. Lovette -- President and Chief Executive Officer

$50 million year-over-year. So definitely, we're having to pay more to get labor. In addition to that, we're installing more automation than we would have had, had this not been the case, giving up some yield, but in order to keep our plants running at capacity, we realize we're not going to have the labor supply that we would and therefore have to automate. And so we're also continuing to develop -- trying to develop some proprietary automation to do some of the more difficult tasks in our plant to alleviate that pressure on labor. And I think every company is facing virtually that same pressure.

Jeremy Scott -- Mizuho -- Analyst

All right. Just on that, your deboning investment, can you share what percentage of your fresh chicken volumes today are as sold as bulk leg quarters? And what's the expectation after you increase this deboning mix?

William W. Lovette -- President and Chief Executive Officer

It's minimal in terms of commodity leg quarters, especially compared to five, seven years ago. I think we have one plant in our big bird network where we don't debone legs and it's a plant that's close to the port that is more conducive to export. So we're ramping up leg deboning in all of our plants.

Fabio Sandri -- Chief Financial Officer

Yeah. The big investment in terms of automation has been on deboning the front of the bird.

Jeremy Scott -- Mizuho -- Analyst

Got it, got it. Maybe just last one. In China implications, is there reasonable expectations for a P&L impact if we do get a reestablishment of the power trade?

William W. Lovette -- President and Chief Executive Officer

I think that would be net positive. Would it be material, I'm not sure I would go that far, but it would certainly be positive.

Jeremy Scott -- Mizuho -- Analyst

Okay. Thank you.

Operator

The next question is from Akshay Jagdale of Jefferies. Please go ahead.

Akshay Jagdale -- Jefferies -- Analyst

Good morning. Thanks for taking the question. So wanted to ask about demand. I know you mentioned feature activity, it looks like it's going to be better this year. But can you just give us some context, like now that we've had -- we've gone through '18, how would you characterize sort of what happened last year, right? I mean, obviously, demand was pretty weak and much weaker than anyone expected. So what -- when you look back and you look at all the data available, like how would you summarize sort of what happened last year? And then I have a follow-up for this year.

William W. Lovette -- President and Chief Executive Officer

Last year, obviously, with the trade disruptions that we had particularly in pork, we had cheaper pork prices competing with all proteins and retailers took advantage of those lower wholesale prices in pork and to some extent beef and put most of their features on beef and pork, very little featuring on chicken last year and we saw a commensurate decrease in demand for chicken through 2018. We began and talking to our key customers in the mid Q4 of 2018, they indicated that that was going to change in 2019, beginning in January. And sure enough, that's been the case. We've seen stronger demand actually for chicken at retail in January and it's moved through February. And as I mentioned, Akshay, we're having to augment more of our supply in our retail plants than has been normal because of that increased demand. And that's pulling meat from that big bird sector, which is in some years, fairly normal. We didn't get that last year and that's primarily what caused the large bird deboning products to be much lower in price is because they weren't flowing into those retail plants as normal. And so what's different in '19 versus '18 is we're back to that normal pattern of big bird meat flowing into retail plants to augment the supply. And at least in our case, I can't speak for everyone, but we've seen it a little bit stronger early this year than has been normal.

Fabio Sandri -- Chief Financial Officer

Just to quantify, Akshay, the feature activity was 23% lower in 2018 when compared to 2017. And in Q4, the feature activity was 37% lower last year when compared to 2017.

Akshay Jagdale -- Jefferies -- Analyst

Okay. That's super helpful. So you're saying just so I understand that it's retail features because that's what you're talking about, but related to the big bird segment because there's sort of an overflow out of that segment into retail that typically happened that was negatively impacted last year by this retail feature reduction, am I understanding that correctly?

William W. Lovette -- President and Chief Executive Officer

That's exactly correct.

Akshay Jagdale -- Jefferies -- Analyst

Okay. Good. Good, good. And then so let's -- can I ask about the foodservice side, the restaurant side of things? So how are you thinking about demand there? And how it may be contributed to the weakness in '18? And what's the thought in '19? Because the -- what I hear, I'm sure you hear this too is obviously McDonald is focused on fresh beef, everyone followed, there's a lot of beef available. Yes, the last year, there's a lot of pork available last year, there's going to be even more beef and pork available this year. So can you give us a high level view of like foodservice demand, what happened in '18 and what maybe you're seeing in '19?

William W. Lovette -- President and Chief Executive Officer

In 2018, largely the same condition in foodservice as we saw in retail. What's different in 2019 versus '18 is particularly early in the year, we are seeing much more featuring of wings and tenders and we've seen a commensurate price response to that and we think that that will carry through the year and then we think we'll see more breast fillet or sandwich promotions in foodservice. Sandwich offerings, chicken sandwich offerings at retail continues to outpace virtually anything else on the menu and we don't think that will change this year. And I think foodservice operators, they don't want to overdo one particular product segment. So we think chicken will get more of the share of promotions in 2019 at foodservice than we did in 2018.

Fabio Sandri -- Chief Financial Officer

And also as the foodservice prepared for their promotion, there is some preparation required, they cannot change the menus on the fly. And if you look at the prices of ground beef, it's actually increased year-over-year, while the prices of the jumbo meats and trimmed has been decreasing.

Akshay Jagdale -- Jefferies -- Analyst

Got it. One last one and this is your performance, I guess, relative to the industry, however you look at it, right. You talk a lot about diversification, Prepared Foods and certainly I see it, I recognize it. But perhaps for investors who just look at, let's say, one metric like 0.3% margin in US, right, like that's the lowest it's been since 4Q '12. Can you just help us put into perspective that number, right? Like if you weren't diversified, where would that be several years ago? One of your competitors has talked about like a 600 basis point gap between their margins and sort of the industry margins as a good proxy. And in the fourth quarter, it looks like you guys outperformed the commodity margin by 1,000 basis points. So I do see the benefits of mix and everything you talk about, but can you help us just think through how you think about it and the impact structurally today versus when you started this journey? Thank you.

William W. Lovette -- President and Chief Executive Officer

Sure. Thanks. Great question, Akshay. So our long-term incentive plan for Management is solely based on our margins versus our visible competition in each of our regions. And so for Europe, it's clear if you see the publicly available results versus our results, we're clearly the winner there. And in Mexico, clearly the winner there. In the US, we're also -- we had really, for 2018, we had a really great year with the exception of two months, October and November. Through the summer, we had as big a spreads versus our competitors as we've had in probably any year that I can remember. And then when we got to December numbers recently and our spread was back in December the way it was through the summer. So clearly, we like our mix, we like our diversified portfolio and we like our relentless pursuit of operational excellence. And so if you go back and look at the cutout for 2018, go back and compare that to where it was in 2011, which was a really tough year for the whole industry and an extremely challenging year for Pilgrim's from a profitability standpoint and then compare what we did in 2018, I think you see the results of our strategy, the results of our diversification, the hard work of our team and I don't think that's going to change in the future. As a matter fact, we continue to try to refine that mix to make that spread larger because as we make the spread larger, our Management team and our overall team benefits from doing that.

Fabio Sandri -- Chief Financial Officer

And Akshay, I think our strategy in our diversified portfolio needs to be measured against the changes in the cycles and over time. We don't expect to compare every single quarter as we don't have the higher than average exposure to spot markets or higher than average exposure to Prepared Foods. But over the last five years, over a period with significantly volatility on prices, both domestically and internationally, our margins were higher than all our public competitors in all of our geographies and much higher than the average company compared to our benchmarks.

Operator

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

William W. Lovette -- President and Chief Executive Officer

Thank you for joining us today. We look forward to 2019 and believe the outlook from chicken consumption globally remains positive as consumers continue to view chicken as a compelling healthy alternative. Our diverse portfolio, differentiated products and key customer strategy in conjunction with our geographic footprint will continue to generate a more consistent performance and minimize margin volatility compared to peers despite specific market conditions. We'll continue to identify new opportunities, including Europe, both organically and through acquisitions to refine our portfolio and offer differentiated customized products, while pursuing our key customer strategy. We'd like to thank everyone in the Pilgrim's family as well as our customers and always appreciate your interest in our Company.

Operator

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

Duration: 62 minutes

Call participants:

Dunham Winoto -- Director, Investor Relations

William W. Lovette -- President and Chief Executive Officer

Fabio Sandri -- Chief Financial Officer

Ben Theurer -- Barclays -- Analyst

Heather Jones -- Vertical Group -- Analyst

Ken Zaslow -- Bank of Montreal -- Analyst

Jeremy Scott -- Mizuho -- Analyst

Akshay Jagdale -- Jefferies -- Analyst

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