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Pilgrims Pride Corp  (NASDAQ:PPC)
Q1 2019 Earnings Call
May. 02, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the First Quarter 2019 Pilgrim's Pride Earnings Conference Call and Webcast. All participants will be in a listen-only mode. (Operator Instructions) At the company's request this call is being recorded. Please note, that the slides referenced during today's call are available for download from the Investor Relations section of the company's website at www.pilgrims.com. After today's presentation, there will be an opportunity to ask questions.

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

Dunham Winoto -- Director of Investor Relations

Good morning, and thank you for joining us today as we review our operating and financial results for the first quarter ended March 31, 2019. Yesterday afternoon we issued a press release providing an overview of our financial performance for the quarter, including a reconciliation of any non-GAAP measures we may discuss. A copy of the release is available in the Investor Relations section of our website along with the slides we will reference during this call. These items are also been filed as 8-K and are available online at www.sec.gov. Presenting to you today are Jayson Penn, President and Chief Executive Officer; and Fabio Sandri, Chief Financial Officer.

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

I'd now like to turn the call over to Jayson Penn.

Jayson Penn -- Chief Executive Officer

Thank you, Dunham. Good morning, everyone and thank you all for joining us today. It's a pleasure to join you this morning on my first earnings call as the CEO of Pilgrim's. It's an honor to serve in this role and I am extremely excited in leading this team to capitalize on the many opportunities we have ahead of us.

Before we begin, we would like to express our gratitude to Bill Lovette, we wish him all the best and thank him for his leadership for defining our strategy, executing it, extracting outstanding results to put us where we are today, as a global leading producer of chicken. Since we began our journey eight years ago, we have considerably improved our relative performance, margin profile, and minimize volatility from the specific market segments. My 30 year experience in the chicken industry has taught me the value of people and quality.

Moving forward, we will be placing additional resources in these two areas to differentiate ourselves further from the competition. We are extremely fortunate to have great team members, and we will continue to invest in our people, as well as to innovate and improve the quality of our products. We will continue to execute on our existing strategy which has made a leader, we'll focus on people, food safety & quality, relentless pursuit of operational excellence, emphasis on key customers and optimizing the mix of our portfolio. As part of the management team that originally developed the strategy, I'm deeply committed to continue executing this methodology as a base for our future growth.

Our key customer approach has been a success and we will continue evolving to be even a more valuable partner. We have materially improved our competitive position with a diversified portfolio of on-trend products and brands. We significantly strengthened our presence in Mexico and extended our international footprint to the UK and Europe giving us a leadership position worldwide. We are committed to continue extracting operational improvements, strengthening our growth profile and delivering even better, more consistent financial performance.

For the first quarter of 2019 net revenues were $2.72 billion versus $2.75 billion from a year ago, resulting in an adjusted EBITDA of $204 million or an 8% margin versus $272 million a year ago or 10% margins. Adjusted net income was $87 million compared with $132 million in the same period in 2018 resulting in adjusted earnings of $0.35 per share compared to $0.53 per share in the year before. We'd like to thank our team members for producing a solid start for 2019. Despite facing deferring market environments across our global footprint we were able to deliver a sequential increase in performance.

In the U.S. we experienced a much better environment, particularly in commodity large bird deboning. Momentum in our Prepared Foods business has continued and the improvement has been accelerating. Input cost headwinds in Europe have continued to impact the operations during the quarter, and Mexico encountered softer than expected seasonal performance. The Q1 results once again illustrate the effectiveness of our portfolio strategy, which gives us a well-balanced consolidated performance despite the volatility of specific market segments. We will continue to refine our portfolio to better adapt and respond to individual market dynamics to give us a better relative performance over the competition. We believe this approach will give us a higher and more consistent results for the mid to long run, and minimize the full peaks and troughs of the volatile commodity sectors. We will also leverage our key customer strategy to earn more business and drive increasing growth beyond just the underlying market conditions.

Following a very challenging market in 2018, U.S. commodity large bird deboning rebounded well and improved sequentially through Q1. As we indicated on our last call, we saw an earlier than seasonal increase during December and the momentum was maintained throughout the quarter and into Q2. Commodity bonus prices have already exceeded the levels comparable to year ago and are close to the 5-year average, and wing prices are near historical highs. While we typically see a seasonal uptick in overall chicken demand during Q1 as we see more chicken consumption after the holidays, we believe this year, the increase is even more pronounced as retailers, food service operators, and consumers are recognizing and reacting to the attractive prices for chicken. After promoting deep import for much of last year, retailers and QSR operators are back to more normal chicken featuring activities, also given the evolving global situation of ASF, African Swine Fever, more pork and beef are moving out of the U.S. and reducing overall domestic availability, which is positive for chicken demand and pricing. We believe these are favorable signals for the upcoming summer grilling season, and we expect to have further pickup in demand for chicken.

In the other less commoditized sectors, customer demand was in line with normal seasonality. Our leading position in these markets in differentiated product offerings have continued to give us a competitive advantage relative to our peers with a more narrow market approach. The margin stability within our small bird and case-ready operations has continued to provide us with a strong and consistent margin platform while our presence in large bird deboning provides for the potential to capture the upside. We remain committed to deploying our key customer strategy to drive greater overall growth. Revenues from key customers have more than doubled over the last eight years reducing our relative dependency on pure commodity sales.

Beyond driving more growth, our key customer approach promotes trust, enhances long-term relationships and strengthens our margin structure. We are continuing to increase the percentage of specialty birds including No-Antibiotics-Ever and organic attributes and expect them to be over 40% of our U.S. portfolio during 2019, up from less than 20% just a few years ago. With last year, we moved one of our large bird deboning plants to full NAE, the first full NAE for us in this size category in support of the plan to double our NAE contract evolving the large bird deboning offerings in 2019 versus 2018.

We are expanding our breast meat portioning capabilities and increasing our dark meat deboning capacity by 25% to deemphasize our exposure to the volatility of pure commodity markets. We're continuing to install more front-half automatic deboning equipment to support growth for multiple key customers while minimizing the impact of tight labor conditions to optimize our margins. As largest producer of small birds in the industry, we are well positioned to benefit from the positive market dynamics. We expect supply in this category to continue to be constrained as producers are not adding more capacity and likely to continue to trim production or even move away from this segment resulting in much more resilient pricing versus other sectors.

Within Prepared Foods, our results are accelerating in pace. We grew robust 17% revenue and 15% in volumes year-over-year during Q1, respectively. We've been heavily investing in our U.S. Prepared Foods business to increase our capacities and capabilities to meet customer expectations. Our team members are driving growth while continuing to pursue future opportunities for more concentrated efforts in innovation and marketing. The investments in these operations and the focus of our people have yielded an increase in performance and further growth prospects remain available. We are generating the expected performance are very pleased with the results. We anticipate Prepared Foods to account for a larger portion of our total results over the next few years and we continue to reduce the volatility of our commodity sales mix.

We continue to build out innovation capabilities in the branded business, and we will be launching new Prepared Foods items in both, the Just BARE chicken and Pilgrims brands. There is also Just BARE chicken new item development in progress in Del Dia, and in the fresh meat case. In addition, we continue to increase the distribution of Just BARE expanding into the California market, and will grow with Amazon as they build out their fresh grocery delivery business. We are supporting the branded business with advertising, continuing the Who Makes Your Food campaign for Just BARE chicken featuring our growers and expanding the campaign capitalized in the summer grilling season in addition to supporting the Just BARE rotisserie with digital and radio advertising.

Just BARE chicken packages from our state-of-the-art facility in Minnesota feature trace code allowing you to learn where you're chicken was raised. We are also supporting the Pilgrim's brand with advertising, leveraging the work of our team in Mexico. All of these initiatives strongly support our branded business, and are driving growth with key customers. Our export business performed well during Q1 and we expect the strength to be sustained, U.S. frozen inventory is at record lows and expect export pricing has correspondingly increased approximately 16% from the end of Q4. Even with this, U.S. export dark meat prices continue to represent an attractive value relative to other proteins. We are continuing to improve our dark meat mix away from pure commodity to further strengthen our margin profile. We are diversifying our country of destination mix in a relentless and developing alternative sales strategies in the event we counter any trade disruptions due to animal diseases or unfortunate and unforeseen disputes with existing trade partners.

We experienced weaker than seasonal market conditions in Mexico during Q1, better than expected growing conditions and softer seasonal demand of dampened prices. Chicken demand was also affected by more availability of imported pork from U.S. during the quarter, but we believe chicken demand can continue to grow in line with historical rates longer term. The environment has already started to recover in Q2 and prices have begun to react positively with growing conditions reverting back to normal, demand improving, and competition from pork imports declining.

Our team's focus on operational excellence in offering differentiated products continues. We grew volumes by more than 20% in Prepared Foods in Mexico during Q1, which is a record as part of our strategy to strengthen our competitive positioning, we are maintaining the pace of new innovative product introductions. Our Prepared Foods business is growing at a double-digit rate generating excellent results under both, Premium and Del Dia brands, both of which have continued to receive very favorable acceptance by consumers at retail, club stores and QSRs.

In line with the whole industry, our European operations continued to be impacted by significant increase in input costs, including key ingredients, mainly wheat due to the prolonged hot weather last year, as well as significantly higher utilities, labor and packaging. These increases resulted in excess of $18 million in the quarter, of which $13 million were partially offset by cost reduction initiatives synergies and price adjustments of some which have taken longer and expected to be passed on and reflected in the contracts. Volumes are flat year-over-year but 2% higher sequentially versus Q4 despite the reduction in results. We are starting to see an improvement month over month as we adjust our prices based on our key customer's contracts and expect a full recovery within our pricing models. We are also entering the barbecue summer season when we can expect profitability to return to at least similar level seen last year.

We will continue the emphasis on cost optimization, cost control, synergy capture and a culture of constant innovation. We are nearing the end of the integration process, and we have achieved a run rate above our initial expectations of capturing $50 million at synergies over two years which includes benchmarking operational efficiency and productivity, increasing yields and optimizing labor at our European operations. Similar to our experiences in other regions, our key customer strategy has helped us to create a more resilient margin structure, and will support our efforts to pass on prices or mitigate through value engineering, increases in input costs, and changes in the market environment.

Also as a part of maximizing the cut-out our team is driving for increased focus on the whole carcass utilization by opening up more opportunities and diversifying into new markets for dark meat, offal and other products. This increased operational focus is paying off as our European operations despite a tough first quarter have continued to perform better than the competition on a relative basis. Beyond the immediate term, we are looking to deploy capital in opportunities across Europe to drive our future growth, both organic and inorganic, and further improve overall diversification of the portfolio and footprint.

Freight prices fell in the first quarter reflecting the increase in expected inventories of corn in the U.S. USDA currently forecasting foreign ending stocks (ph) at 2.03 billion bushels, up from 1.78 billion bushels to the start of the quarter. Large production increases in South America are currently hurting the export competitiveness of U.S. corn, which is driving the surplus higher. Farmers are projected to increase planted acres to 92.8 million acres, up 3.6 million acres from last year which could further adds to the 2019 surplus.

Soybean meal prices remained low reflecting large U.S. surplus, as well as recovery of production in Argentina, the world's largest soybean meal exporter. Large ending stocks, as well as weaken demand from ASF in China should keep prices in check. With large surpluses both corn and soybeans, we do not expect these costs to be a headwind to margins in the medium term. For 2019 the USDA is expecting total U.S. chicken industry production to grow at a rate below last year, while redirect performance has marginally improved recently. As led to increase access, the industry has not seen similar improvements in the hatchery. Latest product data, which can be volatile, shows increased pullet placements over the last quarter with much of these likely supplying new facilities. Despite announced new capacities, we believe some of the new plants are intended to replace existing Saturday schedules while a tight labor environment in the U.S. and the 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 not be disruptive for the industry supply demand balance in the mid to near-term. Despite the expected growth in beef and pork production, final approval and implementation of new trade agreements with trading partners, should gradually reduce denounce domestic protein availability, drive prices of competing meats higher to support an increase in chicken demand. Another important factor affecting supply demand balance in chicken is the ASF outbreak. The spread and evolution of ASF globally, could have a significant impact on the fundamental balance of chicken market conditions. First, it should drive reduction in domestic availability of competing proteins, as well as increase demand for U.S. chicken globally above and beyond the resolution of any trade negotiations. Second, regions impacted by ASF will likely consume less soybeans, giving there are even more benign fee environment, considering the already large domestic carry out in the U.S. soybeans along with large South American harvest.

The outlook for chicken demand, nonetheless commoditized segments this year continues to be very solid overall the supply demand that remains in good balance. With the U.S. economy continuing to be strong, low unemployment and higher disposable income are driving households to consume more protein throughout the day. Food service operators are already starting to turn their focus to chicken and we expect more feature activities by retailers this coming summer. While we are already well balanced in terms of our birth size exposure, we will continue to seek 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 operational improvement targets. We believe our key customer approach is strategic and creates a basis to further accelerate growth in important categories providing more customized, highly quality, innovative products to give us a clear competitive advantage.

Before I turn it over to Fabio, I'd like to recognize the great work of our team in executing our strategy, which produces a clear long-term margin advantage versus our peers in this dynamic and cyclical industry. Our portfolio specifically designs and minimize the impact from the cyclicality of specific market segments. The changes we initiated eight years ago and made a tangible difference, the result is evident in all three geographic regions in which we operate. Magnifies our relentless pursuit of operational excellence and presence in diverse and differentiated business models, segments and channels. For the long-term, we are dedicated to continue extending our competitive advantage by increasing the emphasis on investments in our people and innovation while improving the overall quality of our products.

With that, I'd like to ask our CFO, Fabio Sandri, to discuss our financial results.

Thank you, Jason, and good morning everyone. For the first quarter of 2019, net revenues were $2.72 billion versus $2.75 billion from a year ago, with an adjusted EBITDA of $204 million or an 8% margin compared to $272 million or a 10% margin for the year prior. Adjusted net income was $87 million versus a $132 million the year prior. Adjusted EPS was $0.35 compared to $0.63 the year before. Operating margins were 6.1% in U.S., 2.9% in Mexico and 2.5% in Europe. Our EBIT in USA was $150 million, small bird and case-ready continue to be consistent markets as chicken has remained compelling to consumers, despite higher availability of other proteins. In contrast to the second half of last year, large bird deboning recovered strongly contributing to a sequential improvement in U.S. business.

The rebound in price and demand helped for the entire quarter and have continued as we entered Q2. We expect to see a better supplying demand dynamic in the domestic market, driven by more exports of all proteins out of the U.S. as trade issues are getting resolved and to satisfy global demand doing to the AFS outbreak. Both retailers and QSRs operators are also running more chicken features in Q1, as well as Q2, and we expect the normal seasonality during the barbecue season this year to boost demand. Our fresh volumes were in line with last year with the downtime for equipment installed in two of our facilities, compensated by better productivity in all of our other operations.

We remain committed to deploy technology along with other resources available, to counteract tight labor conditions and improve the consistency of our margins with more value-added differentiated products. Our U.S. Prepared Food sales has continued to improve relative to last year with an accelerated pace. Revenue has increased 15% and volume has grown 17% relative to last year. The investments we made in past few years have begun to produce results and we believe we have more positive results to come. We have additional initiatives in place to accelerate growth in this market and we are expecting it to contribute a greater portion of our total sales in next few years while adding to the stability in consolidated margins. Our EBIT in Mexico was lower than expectations at $10 million. The market was impacted by superior growing conditions for chicken, while softer than seasonal demand due to more important has further curbed prices. At the closing of the quarter, the environment has already started to improve and local prices reacted sharply. Demand is better with improved consumer confidence, also helped by a slowing in imports along with our return to more normal growing conditions for chicken.

We have a very strong team in Mexico, for have been over-delivering performance for us in terms of relative performance to the major competition in the past few years. Due to their strong operational focus and excellent determination, we expect this trend to continue in the future. Quarter-over-quarter can be quite volatile in Mexico like the last year approved, the Mexico has been very consistent on a year-over-year basis. To maintain our growth and continue to innovate, we have launched fresh chicken in Mexico under the premium Pilgrim's brand, including no antibiotics ever, which has continued to see strong demand. Also we are growing our prepared foods opportunity in Mexico and producing excellent financial performance for both of the Del Dia and the Pilgrim's brands, which have received great assessments by consumers.

You can find the potential opportunities. Remaining ahead, we grew on volumes by more than 20% in prepared foods in Mexico during Q1, which was a record. Our strategy is supportive of the global change increase, our higher margin differentiated products for having product coverage from entry level to premium, both fresh and prepare in Mexico. EBIT in Europe was $30 million. We're capturing all of our expected synergies and operational improvements and we remain confident about the geographic diversification and growth potential for us. While evolving our portfolio and creating a sustainable advantage through 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 impacted by the higher cost Jayson already mentioned, in meat ingredients and other inputs that will still need to be passed through our process, to our formulas and contracts, what creates a temporary compression of our margins. The challenging conditions in the input environment is currently affecting the whole industry and to offset that impact, we will continue to focus on increasing efficiencies across the value chain by enhancing sourcing and production, improving live cost and the improvement of the global management of feed sourcing. We will leverage our marketing and sales infrastructure to optimize SG&A costs and the increasing operational focus is paying off as our European operations despite the tough first quarter, have continued to perform better than the competition on a relative basis.

In Q1, our SG&A was 3% of sales, reflecting our support for expanding the Just BARE brand nationally and the investments for our new prepared foods products, both in U.S. and Mexico. Our target is $125 million in operational improvements for 2018, as we continue to extract improvements in the efficiencies of our operations. Our target for 2019, was a little lower than the previous year as we have up to offset tight labor conditions and so it's challenging input costs and environment in Europe, as we mentioned. We'll continue to prioritize our capital spending plans this year to optimize our product mix, that is aim in improving our ability to supply innovative, less commoditized products and strengthening our partnerships with key customers.

Fabio Sandri -- Chief Financial Officer

We expect to have $285 million on CapEx and reiterate our commitment to invest on strong return over capital employed projects that will improve our operational efficiencies and tailored customer needs to further solidify competitive advantages for payables. Our balance sheet continues to be strong, giving our continued emphasis on cash flows from operating activities, focus on management of working capital and disciplined investments in high return projects.

During the quarter, our net debt reached $1.9 billion with a leverage ratio of 2.6X last twelve months EBITDA. Our leverage remains at a good level, and we expect to continue to generate strong cash flows this year, increasing our financial capability to pursue our strategic options. We expect 2019 interest expense in the range of $130 million.

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

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

Questions And Answers

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question today comes from Ben Theurer with Barclays. Please go ahead.

Ben Theurer -- Barclays -- Analyst

Hi. Good morning, Jason, Fabio. Thanks for taking my question and congratulations on the results. So my two questions. First of all, the one thing -- and you've mentioned it already within the prepared remarks, but I wanted to follow up on feed cost in the U.S., I mean, clearly the ASF was affecting pickup particularly in China. There is obviously less demand for soy in that market, which should drive costs down. Have you've done any hedging into some -- have you been locked in some of the low price environment to kind of have a better planning capability around the cost, considering it's been relatively low recently. So will be my first question. And then my second question is, you've also spoken a little bit about the food service, feature activity. How much is that? Would you say higher compared to last year and what would you expect from the retail segment in terms of the follow-up on feature activity? Just to get a little bit of a sense where we're going into particularly 2Q and 3Q, which are definitely the most important ones from a feature activity. Thanks.

Jayson Penn -- Chief Executive Officer

Sure Ben. I'll take this question. So we see a big recovery in supplies in both the U.S. and other major exporters for both corn and beans. Prices shouldn't be a headwind to margins in the medium-term, our approach to the market hasn't changed and we're going to secure our needs consistent with our view of the risk of corn and soybeans. Relative to ASF, we're seeing significant demand losses in China for both corn and soybean mill. Soybean mill trade is going to be affected more, considering China's market for the share of global trade, which is about 75%. China's core market is much less important to the global corn trade. In regards to hedging strategies, we don't disclose our strategy there. Regarding your question on food service from that major QSRs, we've seen the 41% increase quarter-over-quarter, relative to increase LTOs from a foodservice perspective; I'll carry that on to retail perspective. In 2018 over 2017, we saw 23% decrease in retail features and 2019 over 1018 Q1, we saw 11% increase year-over-year in features, so we're starting to see the features come back for chicken. If I'm carrying it forward then I would tell you that based on what we're hearing from our resources on the buy side, the major is uncertainty of the pork market. So as this cash and futures markets continue to diverged in the lean hog markets, our buyers are telling us that they're not going to be risking the potential upside of that pork market and they're going to be continuing to feature more chicken this growing season.

And then in the food service sales, measure in the broad line distributors, we are having a 7% to 8% increase in chicken sales. Some parts are actually seeing a much better performance than last year with wings going up 13%, breast meat going up 8%. So we're seeing a great pickup in demand in the broad line food service.

Ben Theurer -- Barclays -- Analyst

Perfect. Jayson and Fabio, thank you very much.

Operator

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

Heather Lynn Jones -- The Vertical Trading Group -- Analyst

Good morning, and congratulations Jason on the new position.

Jayson Penn -- Chief Executive Officer

Thank you, Heather.

Heather Lynn Jones -- The Vertical Trading Group -- Analyst

I wanted to follow-up a question to Ben. So speaking of retail feature, we saw our stock back ahead of Easter and over the past week, we've seen the Jumbo BSD market come down a few cents and just wondering if you could give us your assessment of what's causing that weakness. And when you expect retail feature activity did tick backup and in Q2?

Jayson Penn -- Chief Executive Officer

Yes, Heather. Thanks for the question. Relative to the big bird markets are receiving a little bit -- that's doesn't concern me as much on. I'm really looking forward to this sort of beginning of that grilling season when these features start to come back. I think there's typically a low right now relative to features, that we typically see a low here. In some cases we've seen some upside but this situation does not concern me at all relative to where we are on Jumbo pricing because, again as I answered Ben's question in this way, we're hearing on the buy side that the retailers are looking to do more chicken featuring just because of the uncertainty they're seeing in the pork markets.

And also, of course Jumbo is very important, Jumbo bonus breast (ph) is one of the most important parts of the bird, and one of the reasons we grow birds in the U.S., but we are seeing a great pickup in the other parts. So we see let quarters much higher year-over-year with the increase in exports, and the increase in prices. Also wins have come through the normal increase year-over-year. So the Jumbo cut out is actually going higher despite the flat, as Jason mentioned.

Heather Lynn Jones -- The Vertical Trading Group -- Analyst

Yes, that's an excellent plan, and leads to my next question. You mentioned increasing your dark meat deboning capabilities by, I think it was 25%. Do you have flexibility in that? Because from what I understand, a few months ago, there was nearly a $0.20 advantage in deboning. But what the rally, in quarters we've seen that advantage has narrowed greatly and given your comments on ASF and export demand and all, it could potentially go away completely. So I'm just wondering and this deboning capabilities that you're adding. Do you all have flexibility switch back and forth?

Jayson Penn -- Chief Executive Officer

Heather, we do have some flexibility. But I will tell you following these dark meat market for 25 years. What happens is that you will see a leading indicator of light quarters fall and then you'll see right behind it, you'll see the deboning numbers come back together so it's -- there is a -- on the front end, we'll see it spread and then we'll also see that spread narrow as the meets catch up fairly quickly. Same on the downside, we see on the downside of late quarters start to move the other way that the debone mutual will stay high and then will descended on leg quarter numbers. So there's always a natural spread between the cut out, so a whole egg to light quarters to drums and buys, etcetera. So the concern really for us it's not really worried about that temporary spread. We have a strategy, that's the deboning more legs to not be commoditized and we'll continue to follow that strategy.

Heather Lynn Jones -- The Vertical Trading Group -- Analyst

Well, also can you help us keep (ph) with the full portfolio?

Fabio Sandri -- Chief Financial Officer

Heather. I think it's important to have both of the parts and not enter and exit the market. Just like Jason mentioned, we can have a little bit of flexibility, but the strategy is to add value to those parts.

Heather Lynn Jones -- The Vertical Trading Group -- Analyst

Okay. Awesome. Thank you so much.

Operator

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

Ben Bienvenu -- Stephens Inc. -- Analyst

Hi. Thanks, good morning. I wanted to ask about Mexico. You talked about supply demand backdrop improving sequentially month-over-month into 2Q. I was curious to get some update on progress you're making with zero based budgeting and portfolio refinement. And then I think at the end of 4Q you talked about while quarter to quarter is volatile. You thought the full year might be similar to last year, year-over-year. Do you still expect that to be true? Just any commentary you can provide on those results stabilizing through the balance of the year would be helpful.

Fabio Sandri -- Chief Financial Officer

Yes. On the year-over-year I think we've seen this volatility in Mexico. Sometimes we have disruptions because of exchange rate, sometimes we have disruptions because of the elections there. So last year we saw a big volatility with the strong first semester and a weak second semester. Seasonality in Mexico is a little bit different than U.S., but to your point, we continue to expect this year to be at the same levels as last year. The disruptions in Q1 were mainly to some issues that Mexico had on gathering distribution and also, as we mentioned, the impact of the exports of parts from U.S. at a very lower price to Mexico. As trade resumes to other regions and as the prices of pork has increased in the domestic market, we are seeing a reduction in that competition in Mexico and also growing conditions in Mexico were better than expected, which created a little bit increase in the production of chicken for Q1.

For Q2 returning to the normal growing conditions and all the players are also adjusting their production due to the supply and demand situation and we are seeing a much better improvement in the supply and demand in that region.

Jayson Penn -- Chief Executive Officer

Just to add, we have a positive outlook on Mexico. We've got a great team down there, they have a very consistent business and as Fabio mentioned, you can't compare them over individual quarters but we string this quarters together. They have very solid and we have very consistent business in Mexico. Again, this is the situation mostly supply rate related. We saw less disease pressure in this Q1, that's more than normal seasonal supply outstrip in Q1 demand. So again, I'll hurry on to say that our Q2 results in Mexico are off to a great start.

Fabio Sandri -- Chief Financial Officer

I think again to the portfolio question, it continued to develop our branded products in Mexico. Still have a very important part of the market as a live sales we sell live to wholesalers who process those birds to small consumers. We want to reduce that part of our portfolio, we continue to invest in our prepared parts but especially in the not part of the mix.

Ben Bienvenu -- Stephens Inc. -- Analyst

That's a helpful commentary. Thanks. Then I wanted to ask about Moy Park, to what extent or if anything, what have you done strategically operationally to the contingency plans for Brexit and just update the thoughts on your positioning with respect to that potential in that down road.

Jayson Penn -- Chief Executive Officer

Yes, sure Ben. I'll start and I'll kick it over to Fabio. There are many puts and takes with either direction that Brexit takes. Our expectation is that in the margin effect is going to remain mostly neutral. And just as a reminder, 93% of our UK production remains in the UK. So, since 2016 our team has been continuously planning to be working pretty closely with our key customers and building in logistics and redundancies. We've got strategic positioning of finished goods labeling closing stock, just about everything that you can think of. So, I'll tell you, the team has done a great job so far and they are fully prepared for either October decision or decision beyond that.

Just to mention the impact that we had on our operations in this quarter, it's already impact from Brexit although Brexit has not occurred yet, which is in the labor. I think we are seeing the labor situation in UK getting tighter as some immigrants are moving out of the country. So, we're suffering the effects of the Brexit despite the Brexit has not occurred yet.

Operator

Our next question comes from Jeremy Scott with Mizuho. Please go ahead.

Jeremy Carlson Scott -- Mizuho Securities -- Analyst

Thank you. Good morning. And, Jason, congratulations on new role Just kind of stepping back, I mean you've had 30 years in the chicken sector. I'm sure you've seen a lot. So, I wonder if you could share a bit on your vision for Pilgrim's over the next 5 years, your thoughts on business mix in the U.S., international priorities for investment, other key areas of focus.

Jayson Penn -- Chief Executive Officer

Yes, thanks for the question, Jeremy. Look, as I mentioned in my prepared remarks. I was part of the team that formed and executed our current strategy. It's the one in which we still in full at today. And just to remind you that strategy centers around people and food safety, operational excellence is really in the fundamentals of our business. Having an optimized mix in portfolio. Of course, our key customer strategy, which we've been speaking up over the last eight years. The only significant thing that I'll add, and this fits squarely into the strength of our mix in our portfolio, Jeremy, is the emphasis on our prepared foods business growth and execution. We've left that one lagging behind and we're definitely going to be spending a significant amount of resources, Jeremy in this one area.

Jeremy Carlson Scott -- Mizuho Securities -- Analyst

And just on your comments on food service and retail operators being nervous about the supply of pork going forward. So, I guess in the conversations that you're having our operators looking to lock in chicken volumes or contracts further out, are you seeing any stocking up of product?

Jayson Penn -- Chief Executive Officer

Yes, thanks for the question, Jeremy. We're not seeing any stocking up of inventory per se, in other fact, we've seen breast meat (ph) inventories decline to a level of about of which 2017 numbers but now really what's happening is they're looking into lock in some ads. So, they're reaching out sort of ahead of schedule and ensuring that there is some supply in the season. So again we're not seeing anything bought forward and to the earlier question why are we seeing some negativity here on bonus where we're hearing about ASF. We're just not really seeing the impacts that are currently hitting us today, but we're seeing those buyers reach out looking for the front end of the season as earlier than usual.

Jeremy Carlson Scott -- Mizuho Securities -- Analyst

Okay. And just on your answer to Heather's question around boneless dark meat relative to leg quarters, if there is a structural demand shift for both leg quarters on global trade and prices keep moving up. I would assume, at some point, your boneless dark meat customers, which are largely domestic may resist or switch to breast meat etc. So, could you see a scenario we're pursuing more bone or pursuing more both leg quarters makes a lot more sense and bonus.

Jayson Penn -- Chief Executive Officer

First, I will tell you that would be a great problem to have. So, I will argue that I've not seen demand destruction yet from dark meat deboning too. We've actually seen dark meet prices over breast meat prices and have been held their consistently. So, if there's always that chance, but again I think that would be a good problem to have and I'll deal with that problem when we get there.

Fabio Sandri -- Chief Financial Officer

And Jeremy, I think you said 30 years, you've seen all but I think this industry is very dynamic. Your changes every day and we are seeing a change as well in the demand for some of the products as we have more Hispanic areas. We have a shift in our demographic, we're seeing more demand for dark meat in U.S. I think there is always the competition with boneless and white meat. But I think is a change in the demographic. I'll add as well that we continue to change our portfolio and having more (inaudible) and the organic operations, and we need to add value to the dark meat on those operations as well. So, exporting just booklet quarters, there is no premium on organic and no premium or no antibiotics ever and as we move to the domestic market, we can capture those premiums.

Jayson Penn -- Chief Executive Officer

Finally, I'll add this. In many cases, the dark meat on '90s is here to stay item you can look across even some national QSRs, there's dark meat that's fully embedded in those menus they are here to stay. And I'll add growing on menus, as well.

Operator

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

Kenneth Bryan Zaslow -- BMO Capital Markets Equity Research -- Analyst

Good morning, everyone. Jason, congratulations on the new position. And let me ask question, when you look out two or three years from now, what do you think your biggest contributions would be on a strategic point of view? It sounds like you expect to keep things kind of go where they going, what do you expect to do to change your strategy or do anything to leave a legacy.

Jayson Penn -- Chief Executive Officer

Thanks, Ken. The first one is going to be around people having the right people, having a great team here. We have a great team in place and it's really investing energy in people and allowing them to grow. I think that would be my legacy. I will tell you relative to the business side and I mentioned this earlier, is going to be around prepared foods business growth and execution as well as developing our brands.

Kenneth Bryan Zaslow -- BMO Capital Markets Equity Research -- Analyst

And then my next question really is just -- I guess I only get two. Can you frame how you're thinking about the earnings power relative to history over the next 12 months? Are you thinking more alike 2017 type of operating environment, are thinking about ? How do you see this because this is something that we have -- I don't think I've ever seen. I've only done this 20 years and I know you've been here by about five or six years it sounds like, but I haven't seen this type of environment. Can you talk about how you would frame the environment with African swine fever, the U.S. China deal, as well as low commodity -- low feed costs.

Fabio Sandri -- Chief Financial Officer

It's so fluid -- we know that it's a meaningful disrupter in the pork supply, it's already causing some near-term pork disappearance in the U.S. Our first market impact that we've seen is actually in Mexico and Fabio mentioned this earlier, U.S. exported 15% less pork to Mexico on a year-over-year basis and this is -- that part in parcel has led to that. We've not seen such a price turnaround in Mexico in the last 8 years that I've been here relative to what's happened and I have to say that's part what this ASF has done just in Mexico by having pork removed and this less pork going down into that market. So, I would say that it's, and you said it best, it's unprecedented. We know that the USDA's reporting, in their estimates are calling for a decrease of almost 3 kilograms per capita pork availability in China '19 or '18 that's a significant number in availability.

Jayson Penn -- Chief Executive Officer

Again, I'll just have to go back to uncertainty. I don't think that we know that it has a potential to be a major disrupter in protein to what that effect looks like again I go back to your words, it's, -- this is unprecedented and I don't think I can put a number on that. And Ken I think, looking into the long-term perspective, we all know that there is limited opportunity for growth in pork and beef in terms of availability and demand for protein will continue to grow, in U.S, but even more so in the emerging markets. And again if you take the low term perspective chicken continues to be the best option for supply for that growth. We can have temporary disruptions in the pork because of diseases or temporary disruptions in some of the markets, because of other issues, but long-term perspective is chicken business to continue to grow to supply the protein that the world will continue to demand, especially on the emerging markets.

Fabio Sandri -- Chief Financial Officer

Ken, one other -- I'll just throw this in there. China historically only purchase like quarters when our largest off taker which was Russian was absent from the market we had a large downward corrections in commodity chicken prices. Really haven't seen a normalized market where China is taken U.S. dark meat and if there is something that is agreed upon between the 2 governments, I think we're going to see a pretty good -- and could see a significant impact there. Today, we and the industry has done a very good job of diversifying our country mix and lessening our dependence on any one country. So, U.S. dark meat is -- if it's not the most affordable sources of protein in the world. And should there be an agreement with China, our expectation that we're going to be able to export dark meat to China primarily for further processing then, of course, is going to have a positive impact on the commodity dark meat pricing as we discussed earlier in the U.S. and it spread to other export markets and domestic market. Again what that number looks like, it should there be any agreement. We don't know.

Jayson Penn -- Chief Executive Officer

To add to what Jason just mentioned, despite the ban to export to China right now. We are already seeing prices in the entire region going up and exports to countries like Vietnam is up 50% year-over-year.

Kenneth Bryan Zaslow -- BMO Capital Markets Equity Research -- Analyst

But just to be clear, but probably, you said an interesting thing you don't think this could be a structural change to the market you think this is something that the world will adjust to and you go back to your long-term growth of chicken consumption. I'm just curious if that's what you're thinking.

Jayson Penn -- Chief Executive Officer

I think you can have some disruptions and can have some changes in the temporary but overtime again chicken continue to be the option for growth in the protein. It can be enhanced by what we're seeing right now, but I think the world demand and supply will adjust to this as well. I think the fact is it does not change as a long-term perspective for chicken, which is very positive.

Operator

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

Adam L. Samuelson -- Goldman Sachs Group Inc -- Analyst

Yes, thanks, good morning everyone. So, may be first. Jason, I like to continue, you made a comment about kind of further more resources, investment on the prepared food side and would just love to hear maybe a little bit more thought if you could share just in terms of, is that something where, hey, we've got to go in and really make bigger upgrades to our product to our facilities ourselves or we need to make and that's going to be a bigger target for inorganic growth than it has been three to four or something else along that along that line.

Jayson Penn -- Chief Executive Officer

Thanks, it's both even and I'll call it capital assets that we have to improve upon. So, we built out a team of over the last year, to which we didn't have interest in 2017. So we've built out a marketing team and innovation team and research and development team. We're doing much more work in those areas where we have not really valued up those areas in the past. So just building out the team and actually putting that team resources to use will greatly impact our business in 2019. Again on the capital side, we'll be investing more capital in our assets in this business. And again we've said this too in terms of our growth strategy, we're going to grow in Prepared Foods and as well as geographic areas, those are the two areas which we're looking for growth. So on human assets and capital as well.

Fabio Sandri -- Chief Financial Officer

Adam, last year we invested $348 million, which is significantly higher than all depreciation, which demonstrates our commitment to the operational efficiencies and to build a differentiated portfolio just like Jason mentioned. For 2018, we're expecting to be in the $280 million range and some projects that we have are what we already mentioned, on the automation of our plants, we are building also two new feed mills to improve our live operations, then we're investing also in UK in the Balomina plant to add value-added products.

Adam L. Samuelson -- Goldman Sachs Group Inc -- Analyst

Okay, that's helpful. And then I think it was responses to Ken's question just before, so I just on China-U.S. trade deal, I mean, your sense from industry context that you will see the poultry regulations kind of which mean beyond just the band from Avian flu from a couple of years ago. We haven't set late quarters to China and any meaningful quantity what a decade. Do you think those get meaningfully ease and how quickly do you think that product flow could restart, if we did.

Jayson Penn -- Chief Executive Officer

That's a great question, Adam. I think anytime you're dealing with the two major governments, timing is never of the essence. Obviously, we would like to see the market open sooner than later. We haven't shipped anything directly to China since 2015. So, we're anxious to get those markets open and should they opened it will make and meaningful difference. But in terms of timing, Adam, I couldn't actually even think about...

Adam L. Samuelson -- Goldman Sachs Group Inc -- Analyst

I guess what I'm really asking to others the plant level certifications in place to revert back to in case the government's to regional quarter. Do we have to then go plant by plant to get the certifications reissued or just sort if you like, is there a fire framework that we really have that we can just relaunch and restart quickly or is it going to take a little bit more time to build that?

Jayson Penn -- Chief Executive Officer

Thanks for the question, I don't believe that there is a plant by plant issue. I think it's a countrywide issue and the country ban is lifted and we should be eligible to export to China, Adam.

Adam L. Samuelson -- Goldman Sachs Group Inc -- Analyst

Okay. And then just quickly on the -- I apologize, I jumped on late. I might have missed this, but as we think about some of the, for the cost pressures that you've been facing in Europe both on the feed and the labor side, did you outline any kind of timeline when you think those could flip obviously if Europe has a better wheat crop this summer that should help or just did you provide any timeline for when you think you should be getting back on the right track from a growth perspective or cost perspective in Europe.

Jayson Penn -- Chief Executive Officer

Yes, we mentioned in our prepared remarks. We're currently experiencing overhang with that $40 million of increase in grain costs and we're just now beginning to see that price capture and I'll not only will be capturing grain costs but we're going to beginning recovered the rest of the inflationary items, so it's not captured in the current models, which are labor -- utilities packaging and the other ancillary items. So, we're going to see this overhang neutralized by the end of Q2 and we going to realize the effects of our updated models in the back half of the year, so I'd argue and in the back half of the year we'll start to see the margins improving from the overhang.

Operator

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

Jayson Penn -- Chief Executive Officer

Thank you. We're off to a solid start in 2019 and believe the outlook for chicken consumption globally remains positive as consumers continue to view chicken it's compelling healthy alternative, our diverse portfolio in 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 will 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. Our team members are our competitive strength. We are very fortunate for them and we will continue to invest in them. We are also motivated and innovative and to improve our quality of our products. We'd like to thank everyone in the Pilgrim's family, as well as our customers. As always, we appreciate your interest in our company.

Operator

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

Duration: 63 minutes

Call participants:

Dunham Winoto -- Director of Investor Relations

Jayson Penn -- Chief Executive Officer

Fabio Sandri -- Chief Financial Officer

Ben Theurer -- Barclays -- Analyst

Heather Lynn Jones -- The Vertical Trading Group -- Analyst

Ben Bienvenu -- Stephens Inc. -- Analyst

Jeremy Carlson Scott -- Mizuho Securities -- Analyst

Kenneth Bryan Zaslow -- BMO Capital Markets Equity Research -- Analyst

Adam L. Samuelson -- Goldman Sachs Group Inc -- Analyst

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