Pilgrim's Pride (PPC) William W. Lovette on Q4 2015 Results - Earnings Call Transcript

| About: Pilgrim's Pride (PPC)

Pilgrim's Pride Corp. (NYSE:PPC)

Q4 2015 Earnings Call

February 11, 2016 9:00 am ET

Executives

Dunham Winoto - Director, Investor Relations

William W. Lovette - President, Chief Executive Officer & Director

Fabio Sandri - Chief Financial Officer

Analysts

Farha Aslam - Stephens, Inc.

Kenneth B. Zaslow - BMO Capital Markets (United States)

Brett Michael Hundley - BB&T Capital Markets

Adam L. Samuelson - Goldman Sachs & Co.

Lubi Kutua - Jefferies LLC

Bryan C. Hunt - Wells Fargo Securities LLC

Operator

Good morning and welcome to the Fourth Quarter and Year-End 2015 Pilgrim's Pride Earnings Conference Call and Webcast. All participants will be in listen-only mode. At the company's request, this call is being recorded.

Please note that the slides referenced during today's call are available for download from the Investor Relations section of the company's website at www.pilgrims.com. After today's presentation, there will be an opportunity to ask questions.

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

Dunham Winoto - Director, Investor Relations

Thanks, Gary. Good morning and thank you for joining us today as we review our operating and financial results for the fourth quarter and year-ended December 27, 2015. 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'll reference during this call. These items have also been filed as 8-Ks and are available online at www.sec.gov.

Presenting to you today are Bill Lovette, President and Chief Executive Officer; and Fabio Sandri, Chief Financial Officer. Before we begin our prepared remarks, I'd like to remind everyone of our Safe Harbor disclaimer. Today's call may contain certain forward-looking statements that represent our outlook and current expectations as of the day of this release.

Other additional factors not anticipated by management may cause actual results to differ materially from those projected in these forward-looking statements. Further the information concerning those factors has been provided in today's press release, our 10-K, and our regular filings with SEC.

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

William W. Lovette - President, Chief Executive Officer & Director

Thank you, Dunham, good morning everyone and thank you for joining us today. For the full year 2015, net revenues were – sorry, $8.18 billion versus $8.58 billion from a year ago, resulting in an adjusted EBITDA of $1.21 billion or 14.9% margin versus $1.35 billion a year ago or 15.8% margin.

Our net income was $646 million compared to $712 million in the same period in 2014, while adjusted earnings were $2.60 per share compared with $2.96 per share in the year before. Also contributing to the financial results were our relentless pursuit of operational excellence which captured close to $180 million last year or just over $1 billion in cumulative improvements over the last – past five years when using 2010 as a baseline.

For the fourth quarter of 2015, we recorded net revenues of $1.96 billion, resulting in an adjusted EBITDA of $150 million or 7.7% margin versus $2.11 billion, an adjusted EBITDA of $368 million or 17.4% margin a year ago. Our net income was $63 million as compared to $167 million in the same quarter of 2014 with an adjusted earnings per share of $0.26 compared to $0.83 in the same quarter of last year.

I am proud to say that, for the full year 2015, our team achieved a commendable performance closing the year with a solid result despite a challenging market. Although 2015 was a tougher year than we expected, there are many positives. In fact, if we compared our performance in 2014, a year when the industry enjoyed the highest cutouts due to tight supplies that led to record high breast prices, wing, leg quarter prices in 2015 when cutouts were significantly lower and access to export markets was significantly limited, and yet our combined margins were only down slightly, but our U.S. margins were comparable year-on-year.

We believe this performance is a validation of the effectiveness of our portfolio strategy. We do not expect to follow the full peaks and troughs of broader industry pricing trends; instead, the diversity of our product and customer mix means that we will benefit from strong markets, and at the same time be cushioned from some of the impacts of lower pricing giving us an overall volatility, lower volatility and higher margins. Rather, our broad mix strategy gives us the potential to outperform others over an extended period of time. Despite what we have achieved so far we are not complacent as we believe there are still more work to be done.

Our team continues to identify opportunities in high growth categories, and once identified, we're willing to deploy the appropriate resources when necessary for the needs of our key customers to offset the impact from weaker commodity pricing. We can see the results from this strategy already. For example, our case ready and small bird segments have been strong partially offsetting weaker spot markets, and we're continuing to work with key retail customers to develop innovative solutions to meet their needs, while enhancing our ability to diversify our customer base and broaden our portfolio. In Fresh Chicken, our operating strategy leverages our well balanced mix of bird sizes to match key customers with specific plants. Together, with our ability to optimize product mix, we have the ability to further maximize our profitability and risk management across our entire business.

We're also continuing our progress with prepared foods' sales and operations. Within this segment, our well-regarded Pierce brand remains strong and continues to be the preferred brand by many foodservice and retail deli customers. We're on track to sustainably grow margins and support increasing demand not only from key customers, but also by expanding our footprint to new accounts where we did not have a prior presence.

As a part of that push, our team is focusing their efforts on leading regional and national chain operators, school foodservice, and main broad-line distributors as the customer – as the major customer segments.

In order to support these growth initiatives in Fresh Chicken and prepared foods, we are reinvesting cash flow back into the business to maximize return on capital and shareholder value. During Q4 2015 and throughout 2016, we've initiated a targeted capital spending plan to further enhance growth with key customers in our own Pierce brand chicken. We're excited to share some of the details with you today.

During quarter four 2015, we invested $18 million in one of our case ready processing plants in order to streamline processes in deboning and packaging, tailoring it to meet the growth needs of a key retail customer. The project was completed within the financial budget and on time, and is currently meeting the expectations determined during project design.

We recently approved and project – work has begun and project work has begun on adding a new fully cooked chicken line and enhancing other fully cooked chicken lines at our Moorefield, West Virginia prepared foods plant. We plan to spend approximately $25 million on this project in order to meet the growth demands of Pierce brand chicken line among others. The project is estimated to be completed by the fourth quarter of 2016.

We've also acquired property in the Nashville, Arkansas area and plan to begin construction on a new feed mill. This new feed mill will produce feed for the De Queen Arkansas chicken complex. The cost of the new mill is expected to be approximately $35 million and will lower our feed costs while improving feed conversion and live performance.

And finally, we are planning to invest approximately $20 million at our Mayfield, Kentucky complex in order to transform that facility towards an improved mix of value-added products to meet the growing demands of a key customer. Engineering of the project has begun, and we expect it to be complete by the fourth quarter of 2016. We also expect to add approximately 150 new jobs in 2016 as a result of the project. As a part of our zero-based budgeting process, our team has identified and developed plans to capture $185 million in operational improvements for 2016, which will add to the cumulative total of over $1 billion that we already have captured.

Although the export market could remain challenged in 2016 due to domestic avian influenza situation and other global economic factors, we see more potential for upside compared to last year.

First, bulk leg quarter prices are already at levels that can stimulate some demand from consumers in emerging economies who are seeking a cost-effective protein. Second, with more chicken producing countries around the world reporting avian influenza, we believe the governments of export markets will be more willing to adopt regionalization policy instead of imposing a country-wide ban for future outbreaks, with South Africa's recent agreement to re-open their market to the U.S. chicken following this template.

That said, we are continuing to be diligent and continuing to place all of our production complexes on a high biosecurity alert. We've also implemented improved training all of our team members involved. And as before, we continue to test every broiler flock prior to slaughter and constantly look for the presence of the virus in our breeders. We have a localized response plan ready to employ at all of our production complexes in the event of an active infection in our own birds or those owned by others nearby.

Market conditions in Mexico during Q4 were significantly below expectations and remained challenging. Although demand in Q4 was close to normal, seasonality, better growing conditions, greater supply of the bulk commodity products from the U.S. which pressured domestic prices lower, and the strong U.S. dollar which raised feed costs, created a tough margin headwind for our Mexican operations.

In 2016 so far, markets have started (11:16) stronger as the Mexican industry is forecast to grow chicken production by 2% to 3% compared to 6% last year reducing some of the supply concerns. Meantime, our team continues to be focused on improving productivity and lowering our operating cost. The integration of the newly acquired Northern Mexico operations is going well and we are on track to capture $50 million in annualized synergies.

Our new complex in Veracruz has begun commercial production of live chickens and we expect it to grow from 2% to 4% of our total production in Mexico by year-end. We remain confident that the newly acquired Northern Mexico business and Greenfield in Veracruz will position us to be a much stronger player in all geographies in Mexico and serve the future growing needs of this market.

Our expectations are for corn and soybeans to remain in abundant supply, given the very healthy corn and soybean carryout levels as well as positive harvest seasons in South America. Therefore, we believe that input costs, primarily feed, will continue to be benign and present little headwind for our margins in 2016.

The industry continues to be disciplined in terms of U.S. supply. Although, monthly pullet data tend to be volatile and have occasionally been at the high end of our expectations, we see modest growth of the breeder flock, and more importantly, little to no increase in egg sits and chick placements as a positive.

We believe that at least part of the reason is because chicken producers are being disciplined and are much quicker to react than in the past and in adjusting supply growth to the actual market conditions.

Specifically, we've also seen larger than seasonal production cuts last quarter, as confirmed in recent USDA data. Furthermore, on the live side, we expect less growth coming from big bird weight this year versus last. As such, our expectations are for supply to grow 2% to 3% in 2016, which is consistent with our previous outlook.

We are continuing to see positive demand growth from our key customers particularly at quick-service restaurants and (13:37) service traffic remains solid. Prices for wings and breast cuts have been moving higher seasonally, which is supported by the better cutout. Therefore, assuming existing supply growth rates, we believe that this year's supply and demand to remain roughly in balance. Although cold storage inventories remain high compared to last year, we've already seen some reduction and expect greater stability in 2016, since it's due primarily to the export situation and not a general lack of demand.

Overall, we continue to see positive signs for demand and chicken continues to be the most attractive protein option available for retail and foodservice. With 2015 behind us, we are looking forward to 2016. Regardless of market conditions, we are on track in our commitment to becoming the best-managed and most-respected company in our industry. We strive to generate greater shareholder value and we intend to reinvest cash flow back in the business to support our growth initiatives and improve alignment with our strategy of becoming a valuable partner with our key customers and on our relentless pursuit of operational excellence.

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

Fabio Sandri - Chief Financial Officer

Thank you, Bill, and good morning everyone. For the full-year 2015 net revenues were $8.18 billion versus $8.58 billion from a year ago, with an adjusted EBITDA of $1.21 billion or a 14.9% margin compared to $1.35 billion or 15.8% margins for the year prior. Adjusted EPS was $2.60 compared to $2.96 in the year before. We reported $1.96 billion in net revenue during the fourth quarter of 2015 resulting in an adjusted EBITDA of $150 million or up 7.7% margins; that compared to a $2.11 billion in net revenue and an adjusted EBITDA of $368 million or a 17.4% margin the year before.

Net income was $63 million versus $167 million in the same quarter 2014, resulting in an adjusted earnings per share of $0.26 compared to $0.83 in the same quarter last year. Despite the weaker cutouts and lack of access to many large export markets last year, our combined margins in fiscal 2015 held up well and were comparable to 2014.

In our U.S. operations, margins were slightly higher in contrast to previous year. For context, we delivered such margin performance in an environment that was significantly weaker in compared to 2014 which was one of the best years ever for the industry. These results reflect the cumulative work we have done to create the portfolio strategy that will resist better to volatility specific markets.

Since 2010, we increased our sales by 20%, growing both domestically and internationally, while achieving just over $1 billion in total operation improvements to enhance our margin profile and position our business to the top-quartile of our industry. And despite lower venue of the cutout, we were able to generate close to $180 million last year improvements as some of these gains are related to better use and not only cost savings.

For 2016, we expect SG&A expense to be close to target at 2.5% of net sales as we continue to focus on adding value to our operations.

Furthermore, we have just finished our BBB (17:21) process for 2016, and we are pleased to announce that we have identified and developed action plans to capture close to $185 million in operational improvements this year, to add to the total when we first implemented the process five years ago, as our team members continue to be relentless in their pursuit of operational excellence.

The integration process of Mexico is on track. Last year, we captured $7.6 million in annualized synergies and we expect to achieve $50 million in 2016 with major opportunities by leveraging our combined skills of purchasing of ingredients and feed inputs, redundancies in distribution and back-office operations, and growing our prepared foods operations.

While industry conditions were more challenging than initially expected in second half in Mexico, mainly due to the increasing imports and domestic production, combined with exchange rate impact on our input costs, we are already seeing some evidence of a gradual market improvement as supplies are likely to grow at a slower pace in 2016 compared to last year, which should help bring the market back to a better supply and demand balance.

As Bill already highlighted, we remain committed to find ways to maximize shareholder value and optimize return on capital. As part of our target capital spending plan for 2016, we are reinvesting $190 million of cash flow back into the business to ensure the sustainability and quality improvement of our operations. That value is higher than our depreciation and shows our commitment to operational efficiencies and tailored customer needs that can generate competitive advantage for our company.

Our balance sheet continues to be strong due to our relentless focus on cash flow from operations, continuous management of working capital, and disciplined investments in high return projects. During the quarter, we generated $88 million in free cash flow after taxes and capital investments, reaching a net debt of $575 million and a leverage ratio of 0.49 times last 12 months' EBITDA. The outlook for interest expenses for 2016 should remain in the range of $30 million to $40 million.

We continue with our commitment to create shareholder value, our financial discipline, and our confidence in the future. In line with that, our Board has approved an extended $300 million share buyback program, which doubles the prior $150 million over the next 12 months.

In 2015 alone, we returned $1.5 billion back to our shareholders as dividend, grew our company in the key geographies such as Mexico through acquisitions and Greenfields, and throughout the end of the fiscal year we have repurchased $99 million in shares, while maintaining a strong balance sheet and a very low leverage.

We'll continue to consider all and evaluate all relevant capital allocation strategies that will match the pursuit of our growth strategy. And we accept strong cash flow from operations. Our commitment to pursue the right growth strategy remains unchanged.

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

Question-and-Answer Session

Operator

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

Farha Aslam - Stephens, Inc.

Hi. Good morning.

William W. Lovette - President, Chief Executive Officer & Director

Good morning, Farha.

Fabio Sandri - Chief Financial Officer

Good morning.

Farha Aslam - Stephens, Inc.

Two questions. The first on Mexico, could you share with us, do you anticipate being profitable in March and kind of the cadence of the recovery you expect in Mexico?

William W. Lovette - President, Chief Executive Officer & Director

We do expect to become – be profitable in March. Actually, Farha, our business is profitable now. In the fourth quarter, we were profitable in our legacy business in Mexico. We were not profitable in the newly acquired business in Northern Mexico, but as Fabio pointed out, we did capture an annualized rate of synergies of almost $8 million. We fully expect to capture nearly $50 million in synergies in the current year. And we see that business improving kind of dramatically as we implement our operational strategies in Northern Mexico.

Fabio Sandri - Chief Financial Officer

Farha, we are also seeing positive evidence on the export markets, especially on the Middle East, which is taking away some pressure of the Mexican markets, especially on the Northern part.

Farha Aslam - Stephens, Inc.

That's helpful. And just as a follow-up, your special dividend; is that something you're still looking at in terms of returning capital to shareholders? Could you just give us some color on how you're thinking about a potential dividend?

William W. Lovette - President, Chief Executive Officer & Director

I'll start and Fabio can follow. Obviously a dividend is still an option on the table. If you look at our balance sheet, if you look at our net debt position, our leverage ratio, we have a very, very strong balance sheet for – a business in our market. Returning cash to shareholders through a dividend is an option. We chose at this moment to return cash to shareholders in the form of expanding our share repurchase plan that we announced last year. But again, it still remains an option.

Fabio Sandri - Chief Financial Officer

Yeah. Like he said, Farha, we'll continue to consider all relevant capital structure strategies.

Farha Aslam - Stephens, Inc.

That's helpful. Thank you.

Operator

The next question comes from Ken Zaslow with BMO Capital Markets. Please go ahead.

Kenneth B. Zaslow - BMO Capital Markets (United States)

Hey. Good morning, everyone.

William W. Lovette - President, Chief Executive Officer & Director

Hi, Ken.

Fabio Sandri - Chief Financial Officer

Good morning.

Kenneth B. Zaslow - BMO Capital Markets (United States)

Can you talk about your pricing strategy, because there is a competitor out there that is seemingly changing how they are doing their pricing and kind of moving more to a structural margin structure rather than ebbing and flowing with Urner Barry and Georgia Dock prices. Can you talk about if there is opportunities for that? And then, just a follow-up on Farha's question. Is there – are you closing in on an acquisition or any other capital? Is there a reason why you decided to hold-off on the special dividend?

William W. Lovette - President, Chief Executive Officer & Director

I'll take the second part first, Ken, and then talk about pricing. We continue to look for opportunities to grow our company through acquisition. We don't have anything to announce today, obviously, but we remain diligent in looking. And we just felt like, at this moment, expanding our share repurchase plan was the best option that we wanted to take. And again, as I just mentioned, all options are still on the table in terms of growing our company and returning shareholder value.

On the pricing front, we've not significantly changed our strategy from where it's been the last two years. I will tell you, we've added some more cost plus profit component not in a material way or significant way, but we have added to that; and we believe that's going to serve us well as we go into the future. And we never expected prices to remain as high as they were in 2014. We knew that at some point pricing would be weaker as we saw in 2015, and I believe our pricing strategy and operational strategy really served us well when you compare the margins that we generated in 2015 relative to the cutout in 2015 as compared to 2014. I think that validates, as we said, the balanced portfolio that we've created over the last five years.

Kenneth B. Zaslow - BMO Capital Markets (United States)

Okay. Thank you.

Operator

The next question comes from Brett Hundley with BB&T Capital Markets. Please go ahead.

Brett Michael Hundley - BB&T Capital Markets

Hey, good morning guys. Thanks for taking my questions.

William W. Lovette - President, Chief Executive Officer & Director

Good morning, Brett.

Brett Michael Hundley - BB&T Capital Markets

Bill, I'm going to put some words in your mouth and you can tell me if it works or not. Your commentary, in your prepared remarks, you were talking about maybe seeing a better year in 2016 if and as the export markets come back. Can I read that as 2016 earnings, you would potentially see a better view relative to 2015 if the export environment normalizes?

William W. Lovette - President, Chief Executive Officer & Director

We see the export situation actually better now than in 2015. And I would point to a couple of things. Pricing has dropped, we believe, to the extent that it stimulates demand. And also we've seen more avian influenza breaks in foreign countries. And we've seen more regionalization strategies by our foreign export country customers as opposed to entire country bans. Again, reminding everyone that South Africa has re-opened its market to us, and I think the quota is something like 65,000 metric tons; that's a market that we didn't have in 2015. So definitely the export situation looks better for 2016 than it did in 2015.

Addition to that, as we talked last year, we invested in dark meat deboning operations last year, so we have more and better options to sell our dark meat relative to the export market, and those plans and strategies are going well.

So all that in a nutshell, given the discipline that we're seeing on the supply side despite the pullet placement fluctuations that we saw and the volatility we saw on that last year, gives us a reason to be very positive about margin creation in 2016. And I can tell you in January it's already started out with a strong year. We are pleased with where we are right now.

Fabio Sandri - Chief Financial Officer

And, Brett, that should help Mexico as well as the open market – as the external market opens. During 2015 we sent a lot of product to Mexico, and as the external market opens that should take the pressure out of that market.

Brett Michael Hundley - BB&T Capital Markets

Okay. I appreciate that answer. And then, just a follow-up, I guess, two-parts. I mean, Fabio, the increase in the share repurchase, it's – I don't know, it's kind of interesting to me. It's still – when you consider your balance sheet as a backdrop, it's still small relative to kind of an optimal capital structure that you've talked about previously, even if you were to fully use all that $300 million. So I don't know, maybe just as a comment, I mean, I'm sure you're exploring many different opportunities for your balance sheet right now. And maybe you go fully and up the share repurchase all the way to $1.5 billion or something and take it private and combine it with JBS USA and come back to the market, but that's, of course, just a comment. But I just found the share repurchase interesting, and if you have any additional comments on that, I'd love to hear it.

But separately, Fabio, do you think that we're going to see the full $185 million in cost savings in 2016? I mean, will we see that from the analyst side, or how would you tell us to think about the benefit that that could bring to the bottom line?

Fabio Sandri - Chief Financial Officer

Sure. First of all, it is hard to – we cannot comment on the first part. We just believe that we consider and evaluate all relevant capital structure strategies, so dividends, share repurchases.

Of course, we want to grow our company and we have two strategic fronts: the chicken track and what we call prepared food track. We continue to see the targets and options on both tracks, and we will execute that strategy when we believe we can create the value for the shareholders.

In terms of the operational excellence, we have that through our zero-based budgeting process. So we identified all those opportunities and we have action plans to capture those. Usually, they are 50% in terms of better yields and 50% in better costs, and we already used the cutouts that we have currently on the yield calculations. So we expect half of that value in terms of better sales or better yields and half of that in cost reductions.

William W. Lovette - President, Chief Executive Officer & Director

I would remind you, Brett, one way to look at that as you asked and actually validated is go back to 2011. If you look at the cutout value in 2011 and compare it to 2015, it was very similar. In fact, in the fourth quarter of 2015, those three months added together, we saw the lowest breast meat prices since 2004 even below 2011.

So if you think about the fact that we made overall 7.7%, I believe it was, EBITDA margins for the quarter and domestically they were something like over 9% margins in an environment where the cutout was lower than 2011. I think that validates what we've been saying about our operational improvements.

Brett Michael Hundley - BB&T Capital Markets

Thanks for that comment.

Operator

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

Adam L. Samuelson - Goldman Sachs & Co.

Yes. Thanks. Good morning everyone.

William W. Lovette - President, Chief Executive Officer & Director

Good morning.

Adam L. Samuelson - Goldman Sachs & Co.

Maybe first just on the market and I guess I'd love to hear your thoughts on the supply discipline that the big bird industry in particular appears to have, at least partially seen in the fourth quarter and at the start of the year. Can you comment on how – what do you think has actually changed, if anything, such that the big bird guys' margins basically got to zero, maybe slightly in the red, and actually slowed down, but at the same time you haven't actually seen any permanent capacity closures of any sort and the pullet and the breeder flock is unchanged such that that productive capacity can really come back into the market at a moments' notice. How do you think those two factors play into the 2016 market outlook?

William W. Lovette - President, Chief Executive Officer & Director

Adam, I think you said it. It's the lack of profitability in that segment. And when that happens – and if you look at profit per head, we saw a huge reduction in profit per head in the large bird deboning segment. Actually the case ready business is more profitable today. And in the latter stages of the fourth quarter, even the small bird profitability on a per head basis was about equal to what the large bird deboning segment was on average.

So when that happens, the large bird operators obviously are going to pull back and be disciplined in order to get pricing up, and that's exactly what's happened. We started in January with much better pricing and we believe we'll follow seasonal trends. We think the feed cost is not going to be a margin headwind for us in that business. So we're profitable in our large bird deboning business now, and expect to have a good year in that segment and even better year in the small bird and in our case ready businesses.

Adam L. Samuelson - Goldman Sachs & Co.

Okay. That's helpful. And maybe just on the export side, you alluded in your prepared remarks kind of better confidence today in export markets and that low dark meat pricing was incenting an improvement in demand? Do you have a forecast for what U.S. exports can actually be this year? And as a result, what would per capita domestic availability will look like in both year-over-year versus 2015, but, I think, also more importantly, versus 2014 because we had a really big spike last year?

William W. Lovette - President, Chief Executive Officer & Director

I believe that exports will grow in 2016 over 2015. We had a 13% drop in 2015 over 2014, one of the lowest amounts that we've seen in a few years. And so we believe with improving conditions that we'll see growth in export markets, which will be supported especially given that we don't see more than 2% to 3% of supply growth in total.

Fabio Sandri - Chief Financial Officer

I think also the whole industry is investing in more deboning on the dark half. So even the exports can go lower, but we are exporting more value-added products because instead of exporting a commodity like a leg quarter we are exporting deboned legs or whole legs. So I think that can contribute as well.

Adam L. Samuelson - Goldman Sachs & Co.

Okay. All right. Thank you very much.

Operator

The next question comes from Akshay Jagdale with Jefferies. Please go ahead.

Lubi Kutua - Jefferies LLC

Good morning. This is Lubi filling in for Akshay. First question, just going back to your outlook on supply for 2016. So you mentioned 2% to 3% growth for the industry as a whole. I was just wondering if you have a specific view on supply growth by the different segments of the market, so what is your expectation for big bird versus small bird or tray pack?

William W. Lovette - President, Chief Executive Officer & Director

I think in the small bird category there is going to be perhaps some growth, not more than 2%. I believe in case ready there is no more production capacity coming on in that segment, so I don't see – hardly any growth there. The only growth that could come from case ready would be in weight and I don't think there is a significant amount of weight that's going to come in. And we think there will be maybe 3% growth in the large bird deboning business that will create overall 2%, 3% growth. So I don't see growth in supply in any of those segments to be problematic in terms of pricing for 2016.

Lubi Kutua - Jefferies LLC

Okay. That's helpful. And then, if I can ask on – what are you seeing in terms of demand in retail grocery domestically? It seems maybe Georgia Dock has come in a little bit – do you think that has anything to do maybe with pork prices coming down and what's your expectation given that, especially towards the end of the year, beef prices are likely to come down as well? Thank you.

William W. Lovette - President, Chief Executive Officer & Director

Our retail business, particularly our case ready business started the year in a very robust way in terms of demand. As a matter of fact, we've had to supplement meat from buying on the outside plus from our other businesses into our case ready plants just to meet demand, had good feature activity so far. And that business is really rocking for us right now. And we expect it to continue to be very solid.

On the foodservice side, particularly at quick-service restaurants, we've seen robust demand and that's despite the RPI falling for the first time in December since I think 2013. (39:15) So overall, foodservice remained a little bit weak; in our portfolio, we actually did not see that, and our food service business remains very strong. And that points to why we're expanding our prepared foods capacity.

Our prepared foods business is largely targeted towards foodservice, and especially on fully cooked chicken, our demand is very strong. And we believe that once we get this new line built and the increase capacity on existing lines, we'll probably be looking for other opportunities to either convert plants and put in more prepared foods capacity and continue to see that growing our margins. And prepared foods have been particularly strong in the last couple of quarters and remain so today.

Fabio Sandri - Chief Financial Officer

Just to add on that retail comment, I think we are trying to differentiate our products through partnership with our key customers. So we are increasing our antibiotic feed programs, we are increasing our (40:30) to tailor some specific customer needs.

Lubi Kutua - Jefferies LLC

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

Operator

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

Bryan C. Hunt - Wells Fargo Securities LLC

Thank you for your time. Just one – first question kind of a data point, can you tell us what selling prices were for your U.S. business and Mexico business year-over-year? How much of those were down?

William W. Lovette - President, Chief Executive Officer & Director

Prices – are you talking about for 2015?

Bryan C. Hunt - Wells Fargo Securities LLC

Yes. For the fourth quarter of 2015, if you've got that. I mean, usually it is in your Q and it'll be in your K, but I was wondering if you can give it to us on the call.

Fabio Sandri - Chief Financial Officer

Prices on U.S. was – compared to the same quarter last year were close to 13% lower and in Mexico they were 23% lower.

Bryan C. Hunt - Wells Fargo Securities LLC

All right, thank you. That's very useful. I guess, my first question is, Bill, if I look at your comments talking about Mexico pricing improving sequentially and the cost savings there, as well as you said January was very good. It sounds like there is a good anticipation that Q1 will be better than Q4. Is that kind of a fair clarification of your statements?

William W. Lovette - President, Chief Executive Officer & Director

That's fair.

Bryan C. Hunt - Wells Fargo Securities LLC

Okay. And then, second, JBS S.A. management had an analyst meeting a couple weeks ago. And they said their assumption was EBITDA margins for PPC would be between 10% and 15%, and this was down in Brazil. So I was wondering – again is that maybe a fair clarification of where the year might play out, and the difference between 10% and 15% is material. So I was wondering what are the major assumptions behind a 15% type of EBITDA margin.

William W. Lovette - President, Chief Executive Officer & Director

Bryan, as you well know, we don't give guidance, but if you look at the macroenvironment market conditions, the situation around corn and soy balances, I think it's very possible that margins could be in that range, and again with a lot of unknowns out there with respect to the strength of the dollar, with respect to avian influenza, with respect to weather this summer, it's just really impossible to know what the environment is going to be that would make the margin either 10% or 15%. But in that range is certainly possible, and we're looking forward to another great year at PPC.

Fabio Sandri - Chief Financial Officer

I think, Bryan, it's also an effect of the portfolio of products that we have. So we have the big bird deboning, we have the small birds, we have the tray pack. We saw at Q4 some of these segments were weaker than others. We see strong, like Bill mentioned, retail business. So it will all depend on what will be the behaviors of these categories during 2016. That's why we expect it to be between 10% and 15%.

William W. Lovette - President, Chief Executive Officer & Director

And a point not to be overlooked, Bryan, is the fact that if an investor wants to invest in the chicken market in the U.S., PPC is really the best option from a diversification standpoint. We are in all segments in the chicken business in the U.S. We're not just in one or two, or PPC doesn't have other proteins. And then, we also have the market in Mexico that, over time, I think we've demonstrated has been a great business for us and is indicative of why we think investing in that business there with the acquisition and the expansion is a great long-term proposition for our business in return to shareholders.

Bryan C. Hunt - Wells Fargo Securities LLC

And then, maybe my last question is – really two parts. One, you talked about contracting in the past your volume, and you all seem to time the market really well in terms of contracting. Is there any idea you can give us what percentage of your volume for 2016 might be under contract? As well as maybe as a second part of that, when you look on the purchasing side, you all have moved to a formula where you're buying more meat on the open market versus producing everything yourself. With skinless boneless breast down close to $1 a pound, $1.15 a pound. Do you see yourself buying a lot more in the open market in 2016 versus 2015? And that is it from me. Thank you for your time.

William W. Lovette - President, Chief Executive Officer & Director

Thank you Bryan. For our prepared foods business, yes, we continue to buy more of our needs on the open market and take advantage of those lower commodity prices, and it explains in part why our margins in prepared foods continue to improve. It's certainly not the only reason. In terms of what part of our business is contracted, I would tell you that an overwhelming part of our business is contracted. Now, just because we say it's contracted doesn't mean it's fixed price. We do very little 12-month fixed pricing today, but we do a lot of pricing either on formula, on a cost plus profit basis, or in ways that we can change it to meet the risk profile of our inputs. So most of our business is contracted. It's just not fixed price, if that was your question.

Bryan C. Hunt - Wells Fargo Securities LLC

That's good clarification. Thank you.

Operator

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

William W. Lovette - President, Chief Executive Officer & Director

Thank you. We believe our performance in 2015 generally reflected the cumulative work that we've done over the past five years to be a valued partner with our key customers, be relentless in pursuit of operational excellence, and strategically grow our value-added exports. But our journey doesn't stop here. In fact, we're still in the early innings of who we aspire to be the best managed and most respected company in our industry.

With our portfolio approach and our high-growth strategy in place, we're excited about the opportunities for 2016 as we remain committed to maximize return on capital and shareholder value and continue working on factors within our control. We'd like to thank our team members, our customers and always appreciate your interest in our company. Thank you all for joining us today.

Operator

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

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