Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Pilgrims Pride Corp (NASDAQ:PPC)
Q3 2019 Earnings Call
Oct 31, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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

I would now like to turn the conference over to 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 third quarter ended September 29, 2019.

Yesterday afternoon, we issued a press release providing an overview of our financial performance for the quarter, including a reconciliation of any non-GAAP measures we may discuss. A copy of the release is available in the Investor Relations section of our website, along with the slides we will reference during this call. These items have also been filed with 8-Ks and are available online at www.sec.gov.

Presenting to you today are Jayson Penn, President and Chief Executive Officer; and Fabio Sandri, Chief Financial Officer.

Before we begin our prepared remarks, I 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 Jayson Penn.

Jayson Penn -- President & Chief Executive Officer

Thank you, Dunham. Good morning, everyone, and thank you all for joining us today. For the third quarter of 2019, we reported net revenues of $2.78 billion and adjusted EBITDA of $258 million or 9% margin, and an adjusted EPS of $0.45. We significantly increased EBITDA by 66% compared to last year, driven by rebounded performance across all our businesses, including U.S., Mexico and Europe.

Our performance remains well balanced, and as a result of our vision to become the best and most respected company creating opportunity of a better future for our team members. To support our vision, we are continuing our strategy of developing a unique portfolio of diverse, complementary business models, continuing to relentlessly pursue operational excellence, becoming a more value partner with our key customers and creating an environment for safe people, safe products and healthy attitudes.

We are appreciative of our team members for the improvement of our operations as well as during Q3. Our performance along with the markets has continued to grow across all our global operations. In the U.S., we experienced a much better environment in our fresh business compared to a year ago most notably in commodity large bird deboning. Our Prepared Foods business continues to grow reflecting the investments made over the past few years.

Our European operations have continued to mitigate recent input cost challenges and we expect our results in Europe to continue growing for the remainder of the year. In Mexico, the market was in line with seasonality and perform much better compared to 2018.

Our Q3 results once again reflect the diversity and balance of our portfolio, which gives us a more consistent consolidated performance, despite the volatility of specific market segments and geographies. We will continue to evolve our portfolio to better adapt and respond to individual market dynamics and improve our relative performance over the competition. We believe this approach will give us a higher and more consistent results for the mid- to long-run and minimize the full peaks and troughs of the volatile commodity sectors.

Compared to the very challenging demand conditions we experienced during last summer in the U.S., the market for commodity large bird deboning in Q3 was materially better. The commodity large bird cutout improved throughout the entire quarter, and was much closer to the five-year average driven by strength in wings, leg quarters and tenders with boneless breast lagging. In the less commoditized small bird and case-ready segments, customer demand was in line with normal seasonality.

We are continuing to experience strong growth for our retail tray pack, rotisserie and QSR sandwich businesses with key customers. Our market leadership in these categories, and more differentiated product portfolio continues to give us a competitive advantage. The margin stability within our small bird and case-ready operations has continued to give us an offset to the more volatile commodity sectors to bring us a more consistent margin platform, while still giving us an opportunity to capture the upside potential.

The commitment to our key customer strategy remains relevant to our growth. Revenues from key customers more than doubled over the last eight years reducing our relative dependency on pure commodity sales. We continue to leverage our key customer strategy to earn more business and accelerate growth beyond just the underlying market conditions. Beyond driving growth, our key customer approach also promotes trust, enhances long-term relationships and strengthens our margin structure.

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

We have now converted to large bird deboning plants to full NAE, supportive of our goal to double NAE contracted volume of large bird deboned in 2019 versus 2018. We are expanding our breast meat portioning capabilities, while increasing dark meat deboning capacity by 40% to de-emphasize our exposure to the volatile pure commodity markets. We are continuing to invest in automation and robotics to support strong demand for our products while minimizing the impact of tight labor conditions on margins.

In our U.S. Prepared Foods, we grew 11% in revenue and volume year-over-year during Q3. This growth has been fueled by our investments in R&D, as well as sales and marketing to support new product innovation. For the school year, we introduced new items to excite school menus including roasted wings and breaded drumsticks.

We've also extended the reach of our well-regarded Just BARE brand this quarter with the launch of our portfolio of our Prepared Foods products into both food service and retail channels. The Just BARE portfolio provides solutions that satisfy our customers' needs for our product that is all natural, clean label and contains no antibiotics ever

We are also innovating through new marketing strategies in the digital channel. As we continue our path to become digital first chicken, we are rolling out technologies that allow for store level geo targeting. These new emerging technologies allow us to use our media dollars more effectively by targeting only consumers who shop stores where our products are sold and fit our target consumer profiles.

Finally, our Just BARE brand remains a top seller chicken largest online retailer with great potential if the footprint into new geographies continues to expand. Volume in this channel is growing at double-digit rates. We will continue developing our branded business to deliver our key customer strategy of becoming a more value partner with our key customers and developing a unique portfolio of diverse complementary business models.

Our export business continued to perform well during Q3. U.S. frozen chicken inventory was down 4% year-over-year from 2018 at the close of Q3. Meanwhile, export pricing has increased approximately 46% from the same period a year ago during last quarter, reflective of the solid demand, although prices had moderated as we enter Q4.

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

Market conditions in Mexico in Q3 were in line with normal seasonality and were significantly better than the same quarter last year. As a reminder, Q3 for Mexico was traditionally the softness in the entire year as schools are closed and we experienced a reduction in chicken demand at retail. Prices in the commodity sector were volatile in the quarter, but our increased share of non-commodity product sales has helped to stabilize margins.

Market environment in Q4 so far has started in line with typical seasonality as we expect to generate improved performance for the full year. We continue to lead in developing the market in Prepared Foods in Mexico. This year alone, we have launched 20% more products compared to a year ago. We are making great advances in our Prepared Foods business with innovation as the core competence of our strategy. We are generating excellent results under premium Pilgrim's and Del Dia brands, both of which have continued to receive very favorable acceptance by consumers at retail, club stores and QSRs. We have a strong team in Mexico committed to continue delivery of strong results.

After a challenging first half of the year, when we faced high input costs, driven by higher grain, utilities, labor and packaging, the EBIT of our European operations improved during the previously reported second quarter and continued the positive trend into our third quarter, growing 10% year-on-year and 6% sequentially.

Despite a cooler weather during the growing season, we generated an increased performance driven by the soft -- softening input costs and further recovery and mitigation, the prior quarter's input cost inflation, along with additional synergies, supply chain optimization and other operational improvements.

We generated 4% improvement in revenue while continuing to maintain focus on cost optimization, cost control, synergy capture and a culture of constant innovation. These combined factors will continue to support our EBIT run rate trend into last quarter, and will help us in continuing to improve margins. We believe our European operations continue to produce better performance relative to the same period last year.

More importantly, our relative performance during the last 12 months has remained above the average of the competition in Europe. Finally, as commented in previous quarters, we continue to support innovation or value-added operations with a significant investment to expand our gluten-free capability and targeting a growing consumer trend for gluten-free products.

Although still small, our non-meat operations and their margins are expected to grow strongly over the next few years, driven by robust consumer demand, investment in equipment, operational efficiencies and partnerships. We continue to support our customers' development and expect to see further growth in following quarters driven by increased consumer interest in meat-free snacking.

We have been an important partner in meat-free innovation over the last quarter, in particular with our QSR partners. Two weeks ago, we announced the closure of the Tulip acquisition. We are very excited about the additional -- the addition of the Tulip team to Pilgrim's. This transaction further enhances our position as a leading global player by expanding our portfolio of prepared foods and brands while strengthening our leadership position in the U.K. market, in lines with our strategic priorities as we continue growing our geographical footprint and extend your global reach into attractive new markets.

We're solidifying our growth platform both in Europe and globally. By diversifying in further globalization of our portfolio, we are enhancing our margin structure while reducing volatility across our businesses. Further, with the addition of Tulip's best-in-class, highly integrated production platform, we have significantly strengthened our brand portfolio that further improved our value-added innovation capabilities. We are optimistic about building upon Tulip's existing operational improvements by continuing to optimize its manufacturing footprint, extract best-in-class operational excellence, optimize the portfolio of channels, segments and products, as well strengthen and grow business with key customers to drive innovations in high margin areas.

Tulip has launched a number of new award winning products in both the sausage and bacon categories recently, and we will capitalize on that momentum. And now that all of Tulip's fresh pork facilities have been approved for China, we are well positioned to benefit from export opportunities there.

Together with Tulip, we look forward to sharing innovation and best practices to enhance our operational and financial efficiency and position Pilgrim's as a whole for increased profitability and more consistent margins. Tulip has actively leveraged innovation throughout its operations, and we look forward to benefiting from its portfolio of innovative products and its product developed platform. We also expect to capture significant synergy opportunities over the course of the next few years.

Pilgrim's has a proven history of successful and efficient integrations of companies we've acquired, and we will apply similar methodologies in integrating Tulip.

Turning to feedstock, corn prices have retreated after summer highs as U.S. corn production is coming much higher than had been expected at the end of Q2 . USDA confirmed the larger corn harvest when it increased yield to 168.4 bushels per acre in the October crop report. This pushed U.S. carryout to a comfortable 1.9 billion bushels, which is well above the market's expectations. Soybean prices have recently rallied as the market is responding to the reduced expectation for U.S. soybean carryout.

The USDA lowered its U.S. ending stocks to 460 million bushels in the October report, although this is down from last year's record large carryout, world soybean supply remains ample to satisfy demand as evidenced by extremely weak basis for soybean products globally. Feed wheat prices in Europe remained at low levels due to the increase in supplies from a year ago. USDA recently raised EU wheat production to 152 million tons, confirming a bumper harvest across the continent.

Although we are going to see higher corn prices than last year as a result of the smaller U.S. corn crop, soybean prices are in line with last year and wheat prices in Europe will be lower than 2018. We do not see a significant increase in feed costs going into 2020. For 2019, USDA is expecting total U.S. chicken industry production to grow in line with last year in the 2.5% range. For next year, USDA expects the more modest production growth of 1.6%, breeder egg productivity began 2019 with modest attributes, but more recently has trended below 2018 levels. The growth in egg sets and placements has been primarily due to larger layer flock as hatch rates have remained in line with 2018.

Latest pullet data which can be volatile showed continued growth in placements relative to year ago levels with much of these likely supplying new facilities. Despite the announced new capacities, we believe capacity growth will not be disruptive to the industry's supply and demand balance in the mid- to near-term.

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

With the U.S. economy continuing to be strong, lower unemployment and higher disposable income are driving households to consume more proteins throughout the day. According to the NPD Group, food service demand for chicken through broadline distribution continues to show strength on both dollar and volume growth.

In addition to demand growth in broadline distribution, national chain QSR demand continues to grow as shown through the increase in chicken servings in 2019. The retail segment has shown positive dollar growth and we expect additional support with more future activities by retailers in the New Year.

Last August, we released our 2018 sustainability report. As a leading global food company, Pilgrim's is proud to provide high quality sustainable poultry, retail-ready and prepared food solutions that contribute to improving the lives of families around the world. Our team is committed to living our values every day and realizing our vision to become the best and most respected company in our industry, creating the opportunity of a better future for our team members.

In line with the decision, we've established a comprehensive sustainability strategy that addresses priority issues critical to the long-term success of our business and the interest of our key stakeholders. We thank our team members and their families, our family farm partners, customers, suppliers and stakeholder partners who have pushed us to achieve more, and as a result have made our success possible.

We have continued to make great strides in accomplishing our 2020 sustainability goals and we are pleased to share both our progress and the areas where we must endeavor to improve. From 2015 to 2018, we have decreased our greenhouse gas emission intensity by 20%, on a 2020 goal of 14% reduction. We have decreased our natural gas use intensity by 11% on a 2020 goal of 14% reduction, and we are on track to achieve 95% or better on our Animal Health and Welfare Scorecard for our live operations. Our 2018 sustainability report is available online. It provides additional detail regarding our sustainability strategy, and progress toward all of our 2020 sustainability goals.

While we are already well balanced in terms of our bird sized exposure, we will continue to seek opportunities to incrementally shift our product mix and reduce the commodity portion of our portfolio by increasing the number of differentiated products to key customers, while optimizing our existing operations by pursuing operational improvement targets. Our key customer approach is strategic and creates a basis to further accelerate growth in important categories by providing a more customized, high-quality, innovative products that give us a clear, long-term competitive advantage.

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

Fabio Sandri -- Chief Financial Officer

Thank you, Jayson, and good morning, everyone.

For the third quarter of 2019, net revenues were $2.78 billion compared to $2.7 billion from a year ago. Adjusted EBITDA increased to $258 million or 9% margin, which represents a 66% improvement versus $156 million a year ago or a 6% margin. Adjusted net income was $112 million compared to $52 million in the same period in 2018, resulting in adjusted earnings of $0.40 per share compared to $0.21 per share in the year before, or 114% increase.

Operating margins were 6.5% in United States, 11.5% in Mexico and 4.9% in Europe, respectively. Our operating profit in the USA was $125 million, close to 70% higher than the result a year ago. Our small bird and case-ready business continued to perform well and generate consistent top tier performance. Large bird deboning materially improved compared to Q3 of last year and contribute to the year-on-year improvement in the U.S. business, as demand was in line with normal seasonality, despite some softness in the boneless breast pricing.

Our U.S. Prepared Foods continue to grow following the investments in the last few years, and we increased 11% in revenue and volume year-over-year during Q3. This growth is being fueled by our investment in R&D, sales and marketing to execute new product innovation. We have other initiatives in place to accelerate growth in this market and we are expecting it to contribute a great portion of our total sales in the next few years, while adding to the stability in consolidated margins.

Our operating profit in Mexico substantially increased to $38 million from a very weak quarter a year ago. Market prices during the quarter were volatile, but in average in line with normal seasonality. We expect our results for the remaining of the year to improve as Mexico continues to grow in chicken demand.

Within Prepared Foods in Mexico, we remain as a leader in developing the market and have launched 20% more new products compared to the same period last year. Our strategy is supportive of the goal to increase our higher margin differentiated products, while having product coverage from entry-level to premium across multiple channels in both fresh and prepared. Our strong team in Mexico is our true differentiation with their operational excellence and market leadership. And we expect this trend to outperform relative to the competition to continue in the future.

Quarter-over-quarter can be quite volatile in Mexico, given market conditions, but Mexico has been very consistent on a year-over-year basis. Europe's operating profit was $25 million, stronger than last year and an improvement over last quarter as our operation began to mitigate the industrywide input cost challenges we had been experiencing since last year.

Despite cooler weather during the barbecue season increased implementation of our key customer strategy enables us to better work through some of the input cost increases by adjusting our pricing models during the quarter. In addition, we have been more successful in capturing synergies and improving efficiency and yields to mitigate the higher costs that impacted us during the late 2018 and early this year.

We expect to finish this year with strong momentum in the results. We will continue to leverage our marketing and sales infrastructure to optimize SG&A costs, and along with our key customer strategy will remain our lead in relative results to the industry.

As we close the Tulip acquisition in October, where we include Tulip's contribution starting in Q4. We are excited about the potential for Tulip to improve its performance and very impressed with the quality of the management team and the quality of the assets. We believe that there are many opportunities for synergies and growth through the creation of one of the leading food companies in the U.K.

Our SG&A during Q3 was 3.4% of sales, slightly higher versus a year ago as we increased support for expanding the Just BARE brand nationally and investments for our new Prepared Foods products both in the United States and Mexico. We'll continue to prioritize our capital spending plans this year to optimize our product mix, that is aimed at improving your ability to supply innovative, less commoditized products and strengthening partnership with key customers.

We are investing roughly $300 million in capex and reiterate our commitment to investment in strong return on capital employed projects that we improve our operational efficiencies and tailored customer needs to further solidify competitive advantage for Pilgrim's. Our balance sheet continues to be strong, given our continued emphasis on cash flow from operating activities, focus on management of working capital and disciplined investments in high return projects. During the quarter, our net debt was $1.7 billion with a leverage ratio of 1.8 times last 12 months EBITDA. Even after the closing of the Tulip acquisition, our pro forma leverage will stay below 2 times net debt over EBITDA.

Our leverage remains at a good level, and we expect to continue to produce strong cash flows this year, increasing our financial capability to pursue our strategic options. We expect 2019 interest expenses and 2020 interest expenses in the range of $130 million. We have a strong balance sheet and the low leverage. We 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 continue to review each prospect according to our value creating standards.

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

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Ben Theurer with Barclays. Please go ahead.

Ben Theurer -- Barclays -- Analyst

Good morning, Jason and Fabio. Well, first of all, thanks for getting the question and congrats on the strong results. Two quick one, if I may. So you briefly touched on the synergies for the Tulip acquisitions. So, I was wondering, I mean obviously, you're just in the early stages here, but you've seen more increased demand support from Europe and China as a result of ASF, and I was just wondering how you feel about the potential to turn the operation from call it from EBITDA breakeven into positive territory? When do you expect the timing of the synergies to fall through? And then I have -- in regards to that I have actually one question on Mexico, but I'll leave to that one first. Thanks.

Jayson Penn -- President & Chief Executive Officer

Hey, Ben, thanks for the question. Yes, Tulip has started its turnaround. It's making significant changes in its production network, mix and cost to improve its profitability. We expect the profitability to be below legacy assets in U.K. But with the improvements in the operations and in the pork and prepared food markets, we expected to be in line with our legacy operations in Tulip's, similarly to what we did in Mexico.

Fabio Sandri -- Chief Financial Officer

As we mentioned, ASF is a great opportunity for them. They are the U.K. largest -- big farmer and have all four plants approved to be exported. Sales value has increased already 50% year-over-year. And with increasing quoted price in Europe, many of the cheap imports that today goes to U.K. will stop going.

Jayson Penn -- President & Chief Executive Officer

Yes, just to add, Ben, very similar to Mexico, very similar to the GNP acquisition. This will take some time and we believe 24 months is a good number for us to have this business right sided relative to our legacy business. As Fabio mentioned, 100% of our assets Tulip are now China approved. We've seen a lift in both revenues and volume to China as the EU as well is exporting meat into China as well. So, we're seeing immediate lift from the ASF impact in Tulip.

And again, our operational efficiencies, our key customer strategy as we right size, the portfolio, the channels and mix of products and Tulip will take some time. We're absolutely thrilled about the opportunity. The assets are well invested with Tulip and we've been on the ground for several weeks and we believe in the team and the people at Tulip. So, we're really excited about this opportunity.

Ben Theurer -- Barclays -- Analyst

Okay. Perfect. And then just a quick one on Mexico and obviously the more, call it, informal dynamic and obviously with maybe crop price is going higher as well, and we might as well even see more of that. Usually in Mexico, two strong quarters and the quarter after it just completely falls off a cliff because a lot of private guys who still need somehow more technical into the slaughter process and you get a significant oversupply in a relatively short period of time.

Have you seen any dynamics after now relatively two -- relatively strong quarters, particularly second quarter was very strong, now third quarter continue to be strong. Anything we would expect into 4Q something similar likely to happen like 3Q last year maybe some negative results just as a matter of fact, and that it's quite irrational market still? Nothing that we have seen yet.

Jayson Penn -- President & Chief Executive Officer

Mexico has a different seasonality than U.S. And typically the third quarter is a weak quarter because of the school recession. So, like we always say despite...

Fabio Sandri -- Chief Financial Officer

Mexico is a growing economy. I think last number of the GDP growth was not great at Mexico, but in general is a growing economy. The population increase their disposable income. It leads to a significant growth in protein consumption. We're increasing our volumes both in fresh with our expansion in the Veracruz and in Prepared Foods by delivering -- and expanding our premium value-added products.

Jayson Penn -- President & Chief Executive Officer

Yes. As Fabio said, economy in Mexico is relatively flat. It's tied as you know to the U.S. economy. I will also say this, in a flat or declining economy, we do see trade down from other proteins into chicken. So, just because of the economy is, call it, flat to weaker response over the last three quarters. We don't expect to see any demand disruption of chicken in Mexico.

Ben Theurer -- Barclays -- Analyst

Okay. That's all. Thank you very much, and congrats on the results.

Jayson Penn -- President & Chief Executive Officer

Thank you.

Fabio Sandri -- Chief Financial Officer

Thanks, Ben.

Operator

Our next question comes from Heather Jones with HJR Research. Please go ahead.

Heather Jones -- HJR Research -- Analyst

Good morning. Thank you for taking the questions. I may ask some repetitive things as I have been switching back and forth between calls. So, I was hoping to talk about the contracting season. And how Pilgrim's is approaching this any differently this year, if at all given the likelihood of big shifts and supply demand in 2020? And any observations you have on how the industry is likely to approach contracting season given these same dynamics?

Jayson Penn -- President & Chief Executive Officer

Yes. Heather, thanks for the question. I would say the contracting season is moving somewhat slower this year. And there's a lot of moving parts. The dynamics are becoming more dynamic as the time moves on. So, I would say it's a little slow. We're cautiously optimistic relative to where proteins are today versus where they'll be within 30 days and 60 days from now. So, we're approaching this slow. We do know that ASF is becoming more part of the discussions. We do know for example, Australian beef trend this is something that is not been called widely discussed but the U.S. imports of beef are starting to slow down affecting the hamburger market. So while there are major QSRs looking to contract beef on the forward basis, we're also hearing that there's not many sellers really willing to forward price. So, that's falling into part of the chicken dynamics as well.

Fabio Sandri -- Chief Financial Officer

I'll just add, Heather, that it is more on the prepare food side. Especially, on the tray pack, we have a differentiated business model. We have a true partnership with our key customers and we help them grow their brands while offering a full range of products from tailor natural, higher order attribute offerings like organic. So, we don't have annual contract negotiations because our prices don't follow the volatility of the commodity markets. I did not react to chart increases in strong spot markets and does not follow the troughs. As an example, our volumes in this segment increased from last year and while our prices are 3% higher.

Jayson Penn -- President & Chief Executive Officer

Yes, just further on that, Heather. Fabio is correct in that. Our tray pack business has been very strong. We've been tight to short all year and we don't -- so part of our business is not contracted, but we're delivering service and quality to our key customers growing their business as pulling through the demands through our business. And we're seeing that every day in our case ready business.

Heather Jones -- HJR Research -- Analyst

So, I am thinking about how PPC is positioned for and I'm thinking about the U.S. So, you have a portion of the business as cost plus, you have a tray pack and then you have your large bird. And the tray pack I get the key customer concept and it's clearly served you guys really well. When I'm thinking about your exposure to potentially large price increases, is your large bird business really the only segment that would benefit in 2020 from strong pricing or are there certain thresholds in other businesses that if you surpass those pricing moves up for you?

Jayson Penn -- President & Chief Executive Officer

Well, even within our small bird deboning business, Heather, we have upside as well with some of our non-contracted business. You mentioned our large bird deboning operations. We've made great strides over the last two years in this business operationally and from a sales perspective. We will gain all of the lift on the back half obviously, and then the white meat lift as well. There is some tray pack lifts as well from the dark meat perspective; we're going to see that we do trade on the market. So, we do have that lift as well.

But again, our fresh meat service business, we have lift there from our commodity large business. I think as the commodities move, we'll see not just our commodity big bird deboning business move, but we'll see this shift throughout each sector of our business in smaller and larger ways. But you did highlight, the largest piece of our business will be impacted by big bird, but each one of our businesses will be impacted by higher commodity markets.

Heather Jones -- HJR Research -- Analyst

Awesome. I just had one last question. So you guys have just been very proactive and converting plants to more on trend, better margin businesses. Do you anticipate any conversions into 2020, whether it's moving like dedicated plants like you did at Sanford or whatever, or should we anticipate any meaningful conversions going into 2020?

Jayson Penn -- President & Chief Executive Officer

Yes, we have another key customer that will be coming on board. Very excited about that. It will be happening in Q1. There won't be any major disruptions to our facility. But Heather, as he said, when we -- our new management team came in 2011, one of our strategies was to create the most optimal portfolio and we've been relentless about that. And when we have great service and we have great quality and deliver to the customers' expectations, we continue to grow, and we're going to add to this portfolio in Q1 of 2020. So we're really excited about that.

Operator

[Operator Instructions] Our next question comes from Tim Perz with Stephens Inc. Please go ahead.

Tim Perez -- Stephens Inc. -- Analyst

Hey, thanks for the question, guys. This past weekend we saw reports that chicken being included in phase one trade deal. So, I said a couple of questions related to that. First, do you have any facilities that are cleared to import to China once the ban is lifted? Or could you walk us through the steps needed to be taken for that to happen?

Jayson Penn -- President & Chief Executive Officer

Yes, all of our plants are able to export. I think what we can't export to China is because today they have a ban because of avian influenza since 2015. So different from all other countries in the world, which clear that ban after six months to one year. China kept that in place. So the moment they lift that ban, which is being imposed for trade reasons, we will be open to export to China, all of our plants are open to export to China.

Tim Perez -- Stephens Inc. -- Analyst

Okay, thanks. That was helpful. And then, could you frame up the potential incremental sales opportunities that would bring for Pilgrim's? I realize many parts go to rendering in the U.S., but understand that some are currently export. So, I'm just trying to frame up that potential earnings power uplift for the company? And then, is there any chance that China buys leg quarters this time around with the inflation that we've seen in the country. I understand that typically they just buy parts from us?

Fabio Sandri -- Chief Financial Officer

Yes, that is a great question. I think there are direct opportunities and indirect opportunities. So I think the direct opportunities in the past, so we've been sending some parts to the rendering or selling to other destinations at a much discounted price. With the opening of China, there is a good outlet for the parts. I think there are some indirect opportunities as well as China continues to consume more meat from other destinations. Those markets began an opportunity for the United States.

China acquired some leg quarters in the past, I think in 2011 and in other years, so there is an opportunity for leg quarters. But we believe that more than just direct impact is the indirect impact that they will help lift the leg quarter pricing throughout the world. And as you see, the inventories of leg quarters in U.S., we continue to be reduced. Inventories in the United States for leg quarters are 25% lower than a year ago. So there is a lot of opportunity in that regard. Even breast meat, today with the breast meat at the prices that they are trading here in the U.S. there are some opportunities to export to China or to other destinations.

Jayson Penn -- President & Chief Executive Officer

Yes, Tim, and in 2014 Pilgrim's exported in excess of 200 million pounds to Hong Kong and China. So, there's no reason why those numbers won't go back to normalized levels. If you look at exports to China, export is outside the U.S. that really dominated trade. Brazilian pork exports to China were up 48%, beef is up 11% year-over-year, Argentine beef exports are up 104% year-over-year, and China now represents 70% of the total beef exports. And I talked about this a little earlier, but Australian beef exports to China were up 73% year-to-date. And their inventory appears to be liquidating and meet the demand, due to the drought, the ongoing drought in Australia.

So there's a lot of exports moving throughout the world into China. And they're actually dominating the trade. USDA, recently said, China is going to account for 30% of the world's beef trade in 2020, and that's up from about 8.5% in 2015. And they're also going to account for about 35% of the world's pork trade, that's up from about 15% in 2015. So there's an absolute availability for the U.S. if there's a trade agreement in phase one for the U.S. market to resume and possibly exceed where it was in 2014.

Tim Perez -- Stephens Inc. -- Analyst

Okay. Thanks. That's super helpful. Do you have an approximation of the amount of pounds that were shipped to China and Hong Kong last year for Pilgrim's?

Jayson Penn -- President & Chief Executive Officer

No, I don't have that number, Tim.

Tim Perez -- Stephens Inc. -- Analyst

Okay. Thank you. Thanks, anyways. I'll pass it along.

Operator

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

Ken Zaslow -- Bank of Montreal -- Analyst

Hey, good morning, everyone.

Jayson Penn -- President & Chief Executive Officer

Hi, Ken.

Fabio Sandri -- Chief Financial Officer

Good morning, Ken.

Ken Zaslow -- Bank of Montreal -- Analyst

I have two questions. First is on the Mexican operation, how do you think that the African swine fever, I know everybody talks about the Europe and selling the pork to China, as well as the U.S. How does it affect the Mexican operation when you think about your historical 10% margin? How incremental would that be to Mexico, if African swine fever trade continues and how does that work out for that business?

Jayson Penn -- President & Chief Executive Officer

Ken, thanks for the question. I would say indirectly. So Mexico imports like what breast meat from Brazil, that's one way to import, the other ones obviously from the U.S. So, if African swine fever and the trade deals start to happen, you could see both of those import streams dry up a little bit, creating more of a supply issue in Mexico. And I would argue that supply and demand is very dynamic in Mexico. And so, you see the volatility that the Q-over-Q volatility in Mexico, it's mostly due to the supply and demand basis as it flows through our results. So I would tell you, there's a lot of indirect ways, so that's two of them.

Fabio Sandri -- Chief Financial Officer

I think connected to that, Ken, there's a lot of U.S. pork that is going to Mexico. There was very high competition, especially in Q1 this year that reduced a little bit. So as the ASF poses a big opportunity for the U.S. pork operations, less pork will go to Mexico, and that is a lift for the chicken market there.

Ken Zaslow -- Bank of Montreal -- Analyst

Then a bigger question, and they tend to ask this on and off, maybe there's greater clarity to this. If I think about your operations now, again, you've made progress with cost savings. You made progress with customer one. You keep on moving forward in terms of your margin structure, less commodity. If I was to take this environment and put it back five years ago, how much more profitability or how much more higher margins do you have relative to when you started this journey? And, because isn't that the structural change that has actually happened? How do we quantify that, and how do we put that in terms of some parameters to that?

Jayson Penn -- President & Chief Executive Officer

I think, Ken, we believe the -- compare results with our direct competitors, right. So, we have the benchmarking system, and we have the public traded competitors. What we want is to be those competitors. And they believe we have the best portfolio to be the best. As all of our operation improvements programs happened, what we saw over the last seven years to eight years is that we created more than $1.2 billion in efficiencies, and you can test those efficiencies based on where we were in the rankings eight years ago and where we are today. So today, we're operating in the top tier in the segments we are. So I think the way to see this is that, whatever the market will be able to offer as profitability for the average company will be better than that. And I think that's the way to see.

Fabio Sandri -- Chief Financial Officer

Yes, Ken, I would also argue that we're leaving a lot on the table. We've identified in mix portfolio operational efficiencies another $300 million that we absolutely are not capturing today that with better execution, and a better portfolio and strategy, we can capture that. So although we've made improvements, there's a lot still left on the table for us to capture.

Operator

[Operator Instructions] Our next question comes from Mike Piken with Cleveland Research. Please go ahead.

Chris Johnson -- Cleveland Research -- Analyst

Hi, this is Chris on for Mike Piken. Thanks for taking my question. I'm curious if you can provide us an update on your labor situation, how you think about labor costs going into 2020?

Jayson Penn -- President & Chief Executive Officer

Yes, Chris, thanks for the question. I will tell you in a tight labor market, one of the competitive advantages that we've employed over the last year, we've actually with a shift in strategy have improved our labor. We are as a company fully staffed today. I couldn't tell you that a year ago or two years ago. So despite the tightening labor situation, our facilities at Pilgrim's are fully staffed today.

Now we've taken about $55 million to $60 million of increased wages that have flown through the system over the last year. But I will absolutely argue that one of the reasons for our improved margins is our people. And making sure that our people remain at the foundation of our business has enabled us to move our mix forward and actually execute our strategy in a way in which we couldn't do a year ago or two years ago. So I will argue that in today's environment, our labor situation is at its peak. It's at its best it's been over the last three years despite the tightness in labor. And it's actually driven more revenues than we've invested in our people financially.

Chris Johnson -- Cleveland Research -- Analyst

That's very clear. Thank you.

Operator

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

Peter Galbo -- Bank of America -- Analyst

Hey, guys, good morning. Thanks for taking the question.

Jayson Penn -- President & Chief Executive Officer

Good morning.

Peter Galbo -- Bank of America -- Analyst

Just wanted to asked, you know, with one of your key customers relaunching the chicken sandwich here in the next few weeks, and you know, breast prices on small birds trading at a pretty high premium to jumbo birds. I guess is there anything structural in that that should cause small bird breast prices to continue to be at a significantly higher level on a run rate basis going forward? Or is there something that can be done that you expect jumbo prices to kind of catch up in the near future? Is there not enough small bird capacity, can you convert you know some of your existing capacity over to small bird? Just any color there would be helpful.

Jayson Penn -- President & Chief Executive Officer

Yes. Peter just from a commodity market basis, small bird breast meat is trading at 3 times of jumbo meat. And that's a historical high spread. So I think that sort of tells -- that tells a story. But I'll also argue that Pilgrim's -- one of our core competencies is this business. And while many companies have moved in and out of small birds, we've maintained our leadership positions in this business. And so structurally again, I think the historical spread tells you what's happening now if these -- if the chicken sandwich continues to increase from a demand perspective, I think that does bleed over into the medium birds and some substitution between medium and jumbo birds will start to take place as that dynamic move through the system. But small bird business is very, let's call it tight today as demonstrated by the price spread alone. And I'll also argue that you could see some shifting to medium bird to capture some of that sandwich meat, and then it will substitute north to the jumbo birds. But again, our position is very strong in this business. Our team execute at very high levels in this business. And it remains a core competency. It will remain a core competency going forward.

Peter Galbo -- Bank of America -- Analyst

And just maybe on that point, I mean, if you were to consider you know, changing overcapacity to do more small bird, if this really is a new dynamic. Just can you walk us through the dynamics of how long that would take, maybe you know cost implications, whether or not you're seeing any competitors who also compete in small bird kind of thinking about doing a similar thing?

Jayson Penn -- President & Chief Executive Officer

No, the barrier of entry is not great. We can make a shift. It does require some shifting on the backend of the facility. But front end from a live operations perspective through that supply chain, not an issue, but there will be some capex required in the back end. But again, there's not a wide note for companies to do more small birds. They haven't. Obviously, you'll see all of the new facilities come on or have been case ready. They've been retail, they've been jumbo. They've been very few new entrant participants in this business where we've remained a leadership position.

Fabio Sandri -- Chief Financial Officer

Some of the challenges of converting a big bird plants to a small bird plant is also the entire network that you build for the big bird in terms of all your feed mill. So if you're going to start a small bird business, then you're feeding will be with excess capacity. You have growers that you set up that are set for large birds, and they take more time on the field. If you move to small birds, then you need to reduce that significantly.

But the biggest barrier to entry is probably the position with the key customers. If you need to feel an entire small bird plant, you need to have a partnership with one of those customers. You cannot just build it and expect to sell the meat in the open market because there is no open market. It is a very tight spec that takes time to get the plants approve. You need to have a true partnership to really be successful in this business. And that's why we stayed in this business just like Jayson mentioned and we develop those relationships. So this is not a spot market that if you start producing small bird meet, you're going to be able to access. There's no spot market for this meat.

Operator

Our next question comes from Bryan Hunt with Wells Fargo Securities. Please go ahead.

Bryan Hunt -- Wells Fargo Securities -- Analyst

Yes, thank you for the question. You know my first question is, you know, with the Phase 1 agreement, potentially including poultry with China. Have you had any initial indications of orders from China and as well as have you seen any immediate bump ups in dark meat and/or crop pricing?

Jayson Penn -- President & Chief Executive Officer

No. Bryan, yes, the simple answer, no, we haven't seen -- we haven't seen anything recently. But I will tell you that over the last week, just short term dynamics, we have seen some increases in demand on leg quarters. So whether speculators or not, our leg quarter prices are starting to creep and we're taking up money for leg quarters out front for the rest of the year. So I can't tell you what the full dynamic of that look like and why that. But we are seeing some increased demand for leg quarters whether it's ASF driven, Chinese speculators, I don't have that answer. But we are seeing leg quarter start to trend upwards.

Fabio Sandri -- Chief Financial Officer

But again, if you look at the inventory, they are 25% lower than last year. And the industry in U.S. deboning a lot more leg quarters for the domestic production. So the supply of leg quarters for exports from the United States is actually being reduced.

Jayson Penn -- President & Chief Executive Officer

One more add-on to that, there's been a different than 2018, Q3, Q4, there's been a floor, relative floor foot on breast meat. And the reason for that is export. So we're seeing more -- we've taken export breast meat orders to put a floor against breast meat over the last call it 30 to 60 days. We didn't see that last year. So that's been really putting the floor on breast meat this year. So the expectation for us is to trend near sideways for the rest of the year, just due to the exports if that should hold up.

Bryan Hunt -- Wells Fargo Securities -- Analyst

And then my follow-up question is, Jayson, you talked about a little earlier that the company has identified, you know, at least $300 million of incremental mix and savings benefits. Can you talk about what timeframe, you expect to maybe garner those benefits, as well as maybe where you see the biggest opportunities?

Jayson Penn -- President & Chief Executive Officer

Yes, I would expect it sooner than later. But I would tell you that $300 million should be captured within the next two years. That's our U.S. business. And it's really about moving again continuing the key customer strategy, our commercial, our big bird business has done a great job year-over-year, fantastic job from a sales execution perspective. We're moving up the page. We've been talking about this for at least five to seven years relative to our big bird deboning facilities, bit lagging the industry. And I will tell you that that's been our call it focus of operational excellence over the last year and a half. But our sales program is now being executed inside our facilities. We're gaining lots of momentum.

So that's a big piece of our -- that's a big piece of our operational excellence from where we've come and where we'll go as well. Again, we've got lots of room left on the table to continue to grow our prepared foods and branded business within the prepared food segment. We're still leaving a lot on the table from our prepared foods operationally, commercializing products with our go-to-market strategy as well. So lots of opportunities in prepared foods and continuing our big bird marks to excellence. So those two categories will bring us the majority of the incremental margins.

Operator

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

Jayson Penn -- President & Chief Executive Officer

Thank you. We're encouraged by our year-to-date results in 2019. We expect to generate improved performance for the full year compared to 2018. We believe the outlook for global chicken consumption will remain positive and consumers around the world continue to view chicken as a compelling, healthy alternative. Our diverse portfolio of differentiated products tailored to support key customer strategy in conjunction with our geographic footprint will continue to produce consistent performance and minimize margin volatility in challenging market conditions relative to peers.

We will continue to identify new opportunities for both organic and acquisition growth, refine our portfolio and offer differentiated, customized high quality products to support our key customers' needs through constant innovation. Our team members are our competitive strength. We will continue to invest in our people who drive our results by providing them greater opportunities to contribute to our shared success. We'd like to thank everyone at Pilgrim's family, including our family farm partners, suppliers, and our customers who make our business possible. As always, we appreciate your interest in our company. Thank you for joining us today.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

Dunham Winoto -- Director, Investor Relations

Jayson Penn -- President & Chief Executive Officer

Fabio Sandri -- Chief Financial Officer

Ben Theurer -- Barclays -- Analyst

Heather Jones -- HJR Research -- Analyst

Tim Perez -- Stephens Inc. -- Analyst

Ken Zaslow -- Bank of Montreal -- Analyst

Chris Johnson -- Cleveland Research -- Analyst

Peter Galbo -- Bank of America -- Analyst

Bryan Hunt -- Wells Fargo Securities -- Analyst

More PPC analysis

All earnings call transcripts

AlphaStreet Logo