Pilgrim's Pride's (PPC) CEO Bill Lovette on Q2 2016 Results - Earnings Call Transcript

| About: Pilgrim's Pride (PPC)

Pilgrim's Pride Corporation (NYSE:PPC)

Q2 2016 Earnings Conference Call

July 28, 2016 09:00 AM ET

Executives

Dunham Winoto - Director of IR

Bill Lovette - President and CEO

Fabio Sandri - CFO

Analysts

Farha Aslam - Stephens Inc.

Ken Zazlow - Bank of Montreal

Adam Samuelson - Goldman Sachs

Michael Henry - Cleveland Research

Bryan Hunt - Wells Fargo

Operator

Good morning, and welcome to the Second Quarter 2016 Pilgrim’s Pride Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] At the company’s request, this call is being recorded. Please note that the slides referenced during today’s call are available for download from the Investor Relations section of the company’s website at www.pilgrims.com. After today's presentation, there will be an opportunity to ask questions.

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

Dunham Winoto

Good morning and thank you for joining us today as we review our operating and financial results for the second quarter ended June 26, 2016. 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 information concerning those factors have been provided in today’s press release, our 10-K, and our regular filings with the SEC.

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

Bill Lovette

Thank you, Dunham and good morning, everyone. Thank you for joining us today. For the second quarter of 2016, net revenues were $2.03 billion versus $2.05 billion from a year ago, resulting in an adjusted EBITDA of $283 million or 13.9% margin versus $426 million a year ago or 20.7% margin. Our net income was $153 million compared to $241 million in the same period in 2015, while adjusted earnings were $0.58 per share compared to $0.94 per share in the year before.

During quarter two, our results improved further sequentially compared to the last two quarters driven by our portfolio strategy of having a well-balanced exposure to different bird sizes and geographical coverage, in conjunction with the diversity of our product and customer mix. We structured this portfolio to allow us to capture strong commodity market value, while buffering us from weaker markets to generate lower volatility and higher margins over the mid to long-term. We believe our results this quarter strongly reflect the competitive advantage provided by this portfolio strategy.

Retail demand for chicken continue to be robust, despite the increased availability of other protein, while in food service chicken remains a compelling solution for operators in driving greater customer traffic.

Pricing in the spot market strengthened seasonally, and volumes picked up with reopening of most export markets helping us to reduce some of the cold storage inventory built up during the last year, due to the export bans related to avian influenza. With export demand strengthening and domestic demand remaining solid, we expect the commodity sector to continue on positive trajectory as we move through the seasonally stronger part of the year, and as warmer weather impacts growing conditions.

Similarly in Mexico, conditions were much more favorable in the last quarter with prices rebounding following adjustment in supply by the producers and strong seasonal demand. The market environment in case-ready and small birds remain very positive, and we are well position to benefit from the strength given our leading share in these markets. While our strategy of maintaining presence in small birds and the industry shift toward big birds has contributed to our ability to outperform other producers with a narrower focus.

And we are just not -- we are not just relied on the strength of specific markets to deliver better performance instead, our strategy of selecting and partnering with key customers has also given us the ability to accelerate in key categories.

As we’ve said before, we do not intend to be everything to everyone. We believe it is better to partner with few customers that are growing in their respective segments and develop mutually beneficial relationships that are more strategic and less transactional. And it makes sense for those customers to partner with us, since we have the broadest product offering in the industry, which makes us a very convenient one stop shop.

As a top chicken producer, we have the ability to scale well with them, as they expand and our footprint advantage gives them the geographical coverage they need. By partnering with the key customers, we can reduce the risk profile of our operations and the impact of volatile commodity markets on our earnings.

Our recent announcement to produce UFDA certified organic chicken is an excellent example of our commitment to partnering with key customers. Our team saw creative solutions to satisfy an emerging consumer demand preference, such as organic and antibiotic or ABF, which will strengthen our relationships with customers, and add to our already comprehensive product offering.

We see organic as an opportunity to leverage our leadership in ABF chicken, where we’re already the largest producer and we expect 25% of our chicken to be ABF by the end of 2018. As a leading ABF producer, our footprint and capability easily scale production are in full alignment with our key customers’ desire to grow their organic business. And for us, there are several benefits. It gives us an exposure to a market that is growing north of 30%, while at the same time widening the breadth of our portfolio and improving the ability to sell the other more convenient or more conventional products.

We are on track in preparing the conversion of one of our existing big bird facilities to produce organic chicken for retail consumers, when the first chicken come in the market near the end of quarter one, 2017. We look forward to becoming the leader in this growing differentiated market. The previously announced conversion project at our Mayfield, Kentucky is also -- plant is also on schedule.

We are taking what was previously the largest eight piece cutout facility in the United States and shifting it to produce an improved mix of higher margin products to meet the growth of key customers. These projects demonstrate our distinct competitive advantages and unlike producers with a narrower market focus we have the exposure to multiple bird sizes and customer segments, which gives us the option and flexibility to align our production capability at the margin with the most profitable customers and markets. Such joint value creation projects give us opportunities to further differentiate our performance over our peers.

Prepared Foods is another important component of our portfolio strategy and we have positioned our Pierce brand to be the main growth driver. And an effort to continue to focus on our operational excellence and provide quality products to our customers, we will also continue to update our facilities to the latest steadier standards. During quarter two our largest Prepared Foods facility was down for refrigeration and process upgrades impacting our sales during the quarter. We will perform roughly the same upgrades at another facility during quarter four of this year.

We are excited about the launch of our new ABF veg-fed [indiscernible] line of our artisanal chicken sausages. These are great testing made with only natural all natural ingredients and nothing artificial is added. They are plain labeled and nimbly processed to meet the needs of today’s consumer. In fact this line of sausages was created using extensive consumer participation to ensure it is on trend and as we enter this fast growing $300 million plus category.

This represents another key differentiation to our diverse portfolio of fresh and value added chicken products. These upgrade the new products together with our line expansion in our Moorefield West Virginia plant are supportive of our continuous effort to grow prepared food operation and complement our portfolio of products.

For 2016 given our cash generation potential we are reiterating our commitment to reinvesting some capital back into our operations in support of our growth prospects in fresh chicken and Prepared Foods while maximizing return on capital and shareholder value. We believe our targeted spending plan will further enhance growth potential with key customers and our own Pierce brand chicken. These projects are on schedule and we will continue to search for new opportunities for a better product mix and higher efficiency that will translate into a better margin profile.

Export market volumes have improved sequentially most recently South Korea officially reopened to the U.S. Chicken. The decision by most export partners to adopt the regionalization policy for U.S. chicken instead of a countrywide band is a positive as it creates a more supportive demand environment and will minimize market disruption in case of future outbreaks. Although we’ve had far fewer cases of U.S. avian influenza compared to last year. We remain vigilant and are continuing to practice extensive biosecurity measures at all production complexes both in the U.S. and Mexico.

Our operations in Mexico were a strong contribution to quarter two results driven by an improved supply demand environment, better operating performance and increased synergies of the newly acquired assets. Further supply adjustments created a supply demand condition, which was much more favorable to pricing. We continue to expect the market to grow by 2% to 3% in 2016 compared to an expansion of 6% in supply last year.

Our team remains dedicated on improving productivity and lowering our operating cost. We’re continuing to close and have meaningfully narrowed the gap in performance between our legacy and the newly acquired Northern Mexico operations. We’ve also implemented a new organizational structure, in which ownership and accountability are driven deeper into the organization allow faster and more decentralized decision making to better adapt specific changes in the Mexican market. Our new complex in Veracruz is performing above expectations with cost that are very competitive and can be used as a platform for growth in the future.

Veracruz is an internal part of our long-term strategic plan that will grow from 2% to 4% production of our total product in Mexico by year end. To further diversified Mexico business we are initiating strategy to take advantage of our Pilgrim brand position known for high quality and excellent service to value added categories closer to the Mexican consumer.

We are also aggressively supporting our popular Del Dia brand, which delivers superior value to one of the fastest growing consumer segments in Mexico. While feed ingredients had a much more volatile especially in the later part of the quarter due to concerns of supply shortage and weather conditions in South America. We believe medium term fundamentals continue to be favorable. Corn prices have traded lower in July helped by a good start to the growing season and in line with weather condition in the U.S. on top of 7% increase in planning acreage by domestic farmers.

To put this into context global grain stocks are on track to grow again in 2016, which will put us closely to historical highs. We continue to expect chicken industry production to grow by 2% to 3% in 2016 in the U.S. despite very solid industry profitability last year and so far this year. Producers have been very deliberate about adding new supplies compared to the past as indicated by the marginal growth in the breeder flock so far this year while egg sets and chick placements data are flat to up slightly year-to-date are reflecting a balanced supply demand environment.

We believe the announced capacity additions to the industry over the next few years will be supportive of a balanced supply demand environment and we continue to be convinced that our business will have the ability to outperform given the breadth of our portfolio and strong relationships with key customers.

As we move further in differentiating our product offerings our portfolio strategy, we are making progress and continuing to discover innovative methods to improve our flock hill and finished product quality. For example, we are working closely with a large agro-bio to the customers' probiotics for our chickens which improves the guest stability, flock hill and optimally results in improved quality. We are finding real success in this in expanding the program rapidly.

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

Fabio Sandri

Thank you, Bill, good morning, everyone. We reported $2.03 billion in net revenue during the second quarter of 2016 resulting in an adjusted EBITDA of $283 million or 13.9% margin. That compares to $2.05 billion in net revenue and an adjusted EBITDA of $426 million or 20.7% margin the year before.

Net income was $153 million versus $242 million at the same quarter of 2015 resulting in adjusted earnings per share of $0.58 compared to $0.94 in the same quarter of last year. Operating margins reached 11.7% with 9.8% in U.S. and 20.5% in Mexico. Margins continue to improve from both Q4 and Q1 demonstrating the resilience of our portfolio and our ability to adapt to different market scenarios.

In U.S. demand for our case-ready and small birds remain strong, while environment in the commodity markets continue to improve relative to the second semester of last year. As low prices drove demand and industry regained much of the access to export countries resulting in increasing pricing and lower levels of cold storage inventories.

Within case-ready, our team leveraged key customer relationships and differentiated approach in product mix, customization, and market segmentation to strengthen our margin opportunities.

We have significant downtime with our largest prepared food facility, which impact short-term volumes and results of that specific segment during this quarter. Together with the similar process improvement at a different facility in next quarters and investments in new line in our facility in Moorefield, West Virginia we are preparing our operations for growth and long-term sustainability.

Our Mexican operations continuously strongly to the results of our portfolio as supply demand significantly improved as producers quickly adapt industry supplies from the second semester of last year. The integration of the newly acquired assets is on track and it has already captured 70% of the expected $50 million in annualized synergies. We are very pleased with how well our team is integrating the newly acquired assets with the gap in margins narrowing significantly relative to the legacy plans ever since we started the integration process.

Production of the new Veracruz facility is ramping up nicely and its performance is exceeding our expectations. We expect Veracruz to play an important role in our growth within the Mexican market. To supplement the strong demand in the popular Del Dia product line we are introducing premium value added products, using the famous brand to expand our channel presence.

We continue to expect SG&A expense for 2016 to be close to the target of 2.5% of net sales as we focus on adding value to our operations. We remain on track to capture or target operational improvement this year to add to the total when we first implemented the process five years ago, as our key members continue to be relentless in their pursuit of operational excellence.

As part of our capital spending plan for 2016, we are deploying $190 million of cash flow back into the business to ensure the sustainability and quality improvement of our operations. The value is higher than our depreciation and shows our commitment to operational efficiencies and favorable customer mix that can generate competitive advantage for Pilgrim’s. During the first semester we already deployed $93 million in projects, targeting improvements to our product mix, efficiencies and better service to our key customers.

Our balance sheet continue to be strong due to our relentless focus on cash flows from operating, continued management of working capital and disciplined investments in high return projects. During the quarter, we generated operational cash flows of $111 million despite a significant improved impact to working capital due to a spike in feed cost that increase our live inventories.

The cost of feed have already returned to previous levels and we expect to gain the working capital back in the next quarters. After the payment of the $700 million special dividend our net debt reached $1.08 billion and the leverage ratio of 1.15 times last 12-month EBITDA. Our leverage continues to be low and underlying how much room is left in our debt strategy for strategic actions.

The outlook for interest expense for 2016 remains in the range of $30 million to $40 million. Over the last two years we returned $2.2 billion in dividends to our shareholders and have repurchased $107 million in shares, while maintaining a strong balance sheet and a very low leverage.

Once again, we are confident of our ability to return cash to shareholders, and we exercise great care in ensuring that the dividend payment not only creates value, but also preserves our flexibility to pursue our growth strategy. We will continue to consider and evaluate all relevant capital allocation strategies that will match pursuit of our growth strategy and continue to review each prospect accordingly to our value creating standards.

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

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. In the interest of allowing equal access we request that you limit your questions to two then rejoin the queue for any follow-up. [Operator Instructions] our first question comes from Farha Aslam with Stephens Inc. please go ahead.

Farha Aslam

Yes, good morning.

Bill Lovette

Good morning, Farha.

Farha Aslam

Could you just share with us the restructuring kind of volume and maybe some cost the total net cost that you anticipate? Because it seems like you’re growing it through the P&L whereas other companies might take something like that as extraordinary.

Fabio Sandri

Well if you compare the volumes of this quarter to the same quarter last year, we are in line in terms of fresh counts, but we are down on prepared food due to the alluded that prepared food plant that it was down. And everything is down to the bottom-line we don’t do adjusted for that.

Farha Aslam

Okay. And that’s going to affect you again in the fourth quarter?

Fabio Sandri

Not in the same magnitude as this quarter, but will affect the volumes in the fourth quarter as well.

Farha Aslam

Okay. And then on Mexico, do you anticipate the strong trends that you saw this quarter to continue into the second half of the year. How sustainable are those profits?

Bill Lovette

I’ll take that. Our Mexican business is performing very well. I think as you and others have followed this industry there in the past, we all know that Q3 is typically not as good quarter as other quarters. That continues to follow a seasonal pattern and we don’t expect that to change.

But we just returned from Mexico last night we had our board meetings there, showed quality of assets and more importantly the quality of our management team to our Board and they were impressed. And I couldn’t be more excited about what we’re doing in Mexico. We see great opportunity to continue to grow our presence there both in organic development of our existing business model, which as you know is largely cyclical and market driven for basic commodity oriented chicken.

But one thing that we’re doing as we alluded to in the prepared remarks is we’re initiating a strategy where we want to get closer to those fast growing segments of the Mexican consumer market that the plays a lot of value on convenience and packaged foods like we see here in the U.S. and we remain committed to building strong stable brands down here as we talked about with our Del Dia brand and entering a premium market segment as we also alluded to.

And I’m really excited as I said about the quality of our management team. We continue to add talent and development to our team. And as a result we’ll continue to deliver best-in-class performance. And as we also said we’re ahead of our schedule in terms of capturing the synergies that we outlined last year when we closed that the purchase of the new asset.

Fabio Sandri

Like we always say Mexico is a growing economy and as the population increase their disposable income it leads to a significant growth in protein consumption. Mexico is a big importer of meat, so we expect high profitability in that market compared to all the other markets.

And just like you said Mexico has a different seasonality than U.S. with the third quarter showing less demand due summer vacation and school recess.

Farha Aslam

Okay, very helpful. Thank you.

Operator

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

Ken Zazlow

Hey, good morning everyone.

Bill Lovette

Good morning.

Ken Zazlow

Just following up on the two upgrades, can you talk about what the change in margin structure that will do and how that impact you not today, but let’s say ‘17-18. Is this a meaningful change in how we should be thinking about your margin structure going forward? Is this a little tweak. How do we think about it?

Bill Lovette

Great question Ken thanks for asking. These are really targeted at the long-term. Our Prepared Foods plants most of those were built in the mid to late-80s and as most plants built in that timeframe they require repeated infrastructure investment and we’re doing that. We’re also replacing a lot of the processing equipment the fryers and ovens, blenders, forming equipment, scaling equipment those sorts of things.

And so it’s really a long-term commitment and it’s going to be a huge commitment any time that we or any other company does that it’s going to be short-term disruption, because you have to take these plant down to do that type of major investment project. So this is really focused on the long-term. And yes, we do expect to be margin accretive over the long-term.

Fabio Sandri

We’re adding a lot of technology to that operation with real time monitoring of temperatures and quality that we can do from centralized operations not only from the operations on site, but also centralized here.

Ken Zazlow

So is it fair to say, it’s worth 50 to 100 basis points over the long-term to your margin structure, if you kind of consider just normal environment. Is that the way to think about? Or is that too aggressive? And just as a follow-on, I know we’re only allowed two questions. As you do all the ABF and organic, can you all kind of phrase how much margin accretion that will be? Because it seems like whatever we think today’s margin structure is and we all have different issues on it. There is a incremental margin structure say in 2018-19 to think about.

Bill Lovette

Ken, I’ll take the last part first, and then address the foods margin accretion. We do expect better margins from the ABF production and organic production as well. Our thinking though is more consistency, less volatility and sustainability that’s at the end of the day, this is -- this activity is focused on our key customers, we’re not doing this for the market in general or all customers. This is very targeted activity to a few key customers that we’ve identify jointly within this need. And it will definitely be a better margin, but more importantly than the better margin in any single quarter. The main focus here is sustainability and continuity and taking out the commodity risk that is sort of inherent in the cyclical chicken business.

On the Prepared Foods margin lift, I don’t know that we’re ready to talk specifically in terms of basis point accretion, but again that’s also focused on enhancing our portfolio with margins that are even more sustainable and less volatile as we create a portfolio that has much more continuity than this company had in the past.

Ken Zazlow

Great, I appreciate it. Thank you.

Bill Lovette

You’re welcome.

Operator

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

Adam Samuelson

Great. Thanks. Good morning, everyone.

Bill Lovette

Good morning.

Adam Samuelson

Maybe first, I want to go back to the plant kind of maintenance turnaround that you’re doing in the second quarter, did and doing planning during the fourth. Your gross profit dollars declined by more than the revenue dollars in the quarter by 100%, very sharp detrimental is the right way to sort of size it, that if most of the volume decline was the prepared food plants somewhere between $80 million, $90 million of it was would be attributable to the -- of the gross profit decline would be attributable to prepared food plant. The big bird margins I would guess were down something $0.10ish a quarter year-on-year. And so that would probably be $50 million, $60 million in the balance of the mix just more fresh chicken versus prepared. Or am I thinking about of that bridge in the wrong way?

Bill Lovette

Adam, I’ll let Fabio handle some of the details. But I do want to remind you that, the comp period second quarter last year was a margin environment that is rarely if at all seen in the past in the chicken industry. We had a 20.7% EBITDA margin, and I would hesitant to say that’s probably not normal, we’re very grateful to had it and think that our portfolio allowed us to take advantage of very strong markets, but markets in general haven’t been as strong this most recent second quarter as last year, and again our is really on long-term sustainability of our margins and taking out some of that volatility with the portfolio strategy that we’ve had.

So this, while prepared foods did have an impact overall commodity prices also had an impact and we’re a larger player in the large bird deboning sector which we know prices in that category had declined.

The last thing I would remind you of is, if you look at Q2 of this year and go back even sequentially to the last two quarters before, we’ve improved our results sequentially every quarter from the fourth quarter of last year into the first quarter this year and now the second quarter. So I think our management team has done a really great job of continuing to adjust our portfolio so we do have that sustained improvement over the long-term.

Fabio Sandri

And just on the details yeah you are correct in terms of the volume on the prepared foods and other than that thinking about our long-term portfolio just like you alluded to the cut out is down 13% in the chicken business year-over-year. Although it’s better than last quarter, it’s 13% lower than the same quarter last year, which affect directly the big bird deboning, which is the more commoditized segment of our portfolio.

In the other hand case ready and fresh food services to smaller and medium birds the profitability continue to be in line with the same quarter last year.

Adam Samuelson

That’s helpful. And the spirit of the question is entirely to think about what the sustainable performances in the quarter versus where this clearly some discrete items impacting the results as I hope you would appreciate that. May be just a second question on the market outlook and specifically on cold storage in second half. You’ve just seen some pretty sharp increases in wing inventories and then leg quarter inventories have started to drift higher again on the leg quarter? Are you seeing a backup of exports? Is it people may be not running with the dark meat deboning as aggressively as they had been in the later part of last year. May be a little bit context and outlook for those parts of the cutouts moving forward. Thanks.

Fabio Sandri

Well, that’s correct we saw a little bit of increase in the inventory especially on the late quarter. Over the last days of the second quarter, but that’s due to the Ramadan in some of the regions and as we have alluded to some producers change back from deboning to the straight leg quarter as it was offering a better margin. As Korea reopens again we are seeing a pickup in demand and we are seeing those inventories going down.

Adam Samuelson

Anything on wings?

Bill Lovette

We’ve seen, as you’ve pointed out a fairly rapid increase and wings up quarter-over-quarter, I think it’s up 72%. I think that’s partly seasonal event as we ended the football and basketball season from last year. We think that those inventories will began to decline as football season starts in a few weeks. And then we move into the fall spring of the next sport season.

So, we believe that we’re seeing the absolute height of wing inventories and they’ll go down from here we’ve also seen a breast meat inventories. And we think that some of the customers or users of breast meat took advantage of relatively weak markets in the first and second quarter to build inventories for the time of the year like right now when we see breast prices have risen.

So, we expect to see those breast inventories decline also leg quarter inventories actually are down 28% from the same period last year. So we think that we’ll see both domestic and export demand pick up for the back half of chicken. And I know a lot of companies have struggled with labor for deboning the back half of the bird, and that has contributed to a decline in deboning leg meat.

And we’ve seen now a subsequent rise in the values of both boneless thigh meat and boneless leg meat. And we think we’re well positioned with the investments we made in the last 12 to 18 months to debone more and more of our back half. So we think that’s good for us.

Adam Samuelson

All right. That’s some helpful color. I’ll pass it on.

Operator

Our next question comes from Michael Henry with Cleveland Research. Please go ahead.

Q – Michael Henry

Hi, good morning. Thank you for the question. Just wondering, if you guys could give some more color on your, what you’ve done if you’re on the market at all with grains into the second half of this year and into 2017? And how that’s expected to impacting potentially margins as well as moving into and how that’s impacting the Mexican market as well?

And then just second question, what do you guys think as accounting for part of the disparity between kind of whole placements and some of the egg set placements that we’re seeing there? Thanks.

Bill Lovette

Okay, thank you. Our strategy with respect to purchasing corn and soybean meals specifically hasn’t changed. We stay close to the market in terms of tenure or time. We do that because we believe our pricing strategy as we changed it over the past few years is conducive to not actually adding more risk by buying futures contracts or derivatives contracts for a longer period of time.

I think we have seen a great example in Q2 with how volatile the futures markets can be, and many times completely disconnected to the fundamentals of supply and demand for either corn or soybeans. And so what we do is we’ll protect the price of the physical corn and soybean mill, we have coming to our meals. That turns out to be 30 to 45 days depending on basis trading levels.

And we’ve seen even going out just that far how volatile that market can be and how that can affect our MTM going forward. And for what one I am thankful that we didn’t have long-term positions own going through this extreme volatile time, because it could have been a real headache for us from an MTM standpoint. Our strategy actually worked very well for us. I think we mark-to-market just about $1.8 million for the quarter. And that’s what we attempt with our strategy.

There is actually keep volatility and risk out of our supply chain as oppose to be what could be added with buying up future contracts for the long-term.

Fabio Sandri

The egg sets difference.

Bill Lovette

Yeah, so I think what we’ve seen with egg sets is absolutely a testament to the discipline of our industry that we’ve seen the last really two to three years. And I know you folks fallow the pullet placements, and we’ve seen a disconnect in pullet placements, and egg sets, chicks placed in total production. And I believe this is due to a couple of factors actually. While we’ve seen I think something like a 7.2% increase year-to-date in pullet placements, the breeder flock in total is only up about 0.5%. Egg production, hen production or egg production from hen is up about 1%.

So I think the two factors that disconnect those pullet placements and the breeder flock totals are number one, we continue to see robust exports of hatching eggs, like exports this period was up about 10.5%. And that accounts, if you take the total number of hatching eggs exported, it accounts for between 8% and 8.5% of the breeder flock, with about 0.5% of that going to Mexico, another portion going to Canada, and then the rest, rest of the world.

And so I think the exports of hatching eggs account for a lot of pullet placement increase. The other thing and I think we’ve mentioned this in quarters before we’re in the midst of seeing a breed change in our industry as more participants have move toward large bird deboning. One of the breeds available on the market is more conducive most from a fee conversation standpoint and a breast meat yield standpoint.

And I believe that primary breeder company has had to increase the number of grandparent flocks and multiplier flocks that are also reported by USDA and the company that’s not going to have that market share perhaps is really not doing anything. So net-net you’re seeing the total multiplier flock increase. But that doesn’t mean that we’re going to get added hatching egg set as a result of that increase.

So I think those two factors are contributing to the disconnect between pullet placements and egg and egg set and chicks placements.

Michael Henry

Thank you.

Operator

Our next question is from Akshay Jagdale from Jefferies. Please go ahead.

Unidentified Analyst

Hey good morning this is actually [indiscernible] on for Akshay. Can you hear me?

Bill Lovette

Yes we can Luby.

Unidentified Analyst

Okay. So you’ve talked about how your portfolio has outperformed many of your peers due to your diversified portfolio strategy. And that’s been evident in your results. I’m wondering if you could talk a little bit about many how feasible it may or may not be for other industry participants to copy of your strategy. I mean is it likely that we start to see more production shifting back from big bird from small bird?

Bill Lovette

Great question. I really don’t believe so and there is several regions that I don’t believe that’s going to be the case. If you have an operation that has been either small or medium bird size and you transfer that to the big bird segment it requires significant increase in the number of houses, chicken houses required to grow those big birds because they require more space. And once you build that capacity you sort of contractually obligated to keep that production in place.

And so if one were to contemplate going back to small birds than you would have a lot extra housing needs that would -- if you wanted to keep that same amount of housing and production, you’d have to increase heat. And of course the main constrain of increasing heat is the line speeds that are regulated by USDA and you’d have to add infrastructure to the plant. You’d have to add hatcher capacity and feed mealing capacity. And we just haven’t seen that being done very often in our industry.

So I think there is a natural wall if you will of converting from large birds back to small birds. I would also tell you that it takes a different skill set from a sales standpoint. If you’re a large bird deboning producer you basically sell most of your product on a formula price or to spot market. And it’s quite frankly a simpler proposition from a sell standpoint.

On the other hand producing small birds requires that you set up a program around a bell curve distribution normal distribution of that entire flock. And the different sizes within that normal distribution end up going to different market segments. And so you have to be very well versed and have your management team set up to do that. So again it requires a very different strategy from selling large bird to bone products.

Fabio Sandri

Luby and adding to that. Another differentiating factor to us is not only the capacity to supply all sizes is the relationship with the key customers. While some other participants can copy in terms of having a portfolio or changing plan. We can supply those customers the full portfolio being organic ABF, small birds, three pack, big bird suite turns into an advantage for them and for us. And that is something that the other participants cannot copy.

Unidentified Analyst

Thank you, it’s very helpful. And then I think you mentioned in your commentary that domestic retail demand remained robust during the quarter. But it does seem at least to us that towards Georgia Duck price has weaken somewhat over the last several weeks and months could you maybe comment on what you think might be driving trends in the Georgia Dock?

Bill Lovette

I think it’s just a reflection of the overall increase in total meat production. But I’d remind your Georgia Dock quarter-over-quarter has only going down $0.028 a pound where the [indiscernible] jumbo breast meat price has gone down $0.162 a pound and cutting stocks gone down $0.584. So I think that Georgia Dock prices reflective of those small whole bird and whole bird form or cutout form that into specific channel as oppose to some of the [indiscernible] markets that are more focused on pure commodity products and primarily from the larger birds.

Unidentified Analyst

Great. Thanks. I’ll pass it on.

Operator

[Operator Instructions] Our next question comes from Bryan Hunt with Wells Fargo. Please go ahead.

Bryan Hunt

Good morning and thanks for taking my questions.

Bill Lovette

Good morning.

Bryan Hunt

Hi, how are you? I was wondering if you could talk about your strategy of purchasing product externally versus working with your contract growers and what you may be doing in light of relatively depressed prices associated with higher inventories. How quick can you adjust this buy versus grow strategy?

Bill Lovette

Actually Bryan we can adjust very quickly. We buy raw material primarily for our prepared foods segment. And so we make that buy versus grow decision based on what we know that we can produce those commodity inputs for prepared foods versus what the market is trading at any given time and we have the ability to go in and out of the open market very quickly.

We don’t commit on a fixed price basis for sure any of our internal meat to our prepared foods business. If we do supply internally it’s on the market base formula. So that we stay true to that value-added proposition and then we take advantage of weaker markets when they are in fact weaker and go out only open market and purchase that product.

Bryan Hunt

And is there any way you can throw some metrics around how much you’re purchasing externally today versus where you were maybe a year ago?

Bill Lovette

I think it’s at times a significant amount and again we monitor the market end at times it’s more than others when we believe it’s more accretive to buy that product at the open market price versus take our own meat and sell it. And since I would mention also that that’s where our key customer strategy comes into play because what we attempt to do with our own production is make sure that we have our product placed with our customers that fit their needs for demand and in all times we can buy any of that raw material size specific that is on the open market and we adjust our pricing strategy on the back end with prepared foods to be reflected with those market values too. So we minimize the risk there.

Fabio Sandri

We typically buy 30% to 50% on external markets and I think what we just need to be careful is that we buy specific parts in the prepared foods it’s more towards the front. So it’s wings, tenders and breast meat. So while the cut out is lower than last year that was a big impact of the leg quarters. So some parts are actually higher than last year. So we need to be careful with that too.

Bryan Hunt

Okay, very good. And my next question is we talked I think you all talked a little bit about this on the supply side, but I was wondering if you look at placements they fall in short of a year ago and I think 7 of the last 11 weeks. Do you feel like industry is in a phase of production consolidation relative to where it may have been in Q4 or Q1 given where inventories are? And how does that make you feel about the outlook for margin improvement from where we are today our overall prices, do you feel like we bottomed on the pricing side? And that’s it from me thanks.

Bill Lovette

It actually makes us have a positive notion about the discipline that we continue to see exhibited by the entire industry and I think what we saw last year in response to the export situation is producers had to take a breadth there and so if we’re going to get very low prices for the back half of the birds than we’re going to be more measured about how we’re going to grow more chickens and I think we’ve seen that played out over the first semester of 2016.

And so that gives us more confidence that we’re going to do the right thing with respect to maintaining that discipline. We’ve certainly had the hatching egg supply to grow much more if we chose not to export those eggs I think in May we exported 81 million hatching eggs or so outside of the country. The industry could have chosen to set some of those eggs domestically, but that was not the choice that was made. And so again that gives us confidence that we’re going to continue to be disciplined as an industry.

Bryan Hunt

Very good. Thank you.

Operator

Our next question is from Carla Casella from JPMorgan. Please go ahead.

Unidentified Analyst

Hi this is [indiscernible] for Carla. Quick question does the proposed changes in the JBS organizational structure changed the way you look at your business or capital structure anyway?

Fabio Sandri

No I think this change in JBS we continuous to be a public traded company PPC has its own Board and we have our own governance. So I don’t think that changes anything for us.

Bill Lovette

And as I’ve said to investors in the past few weeks and months, I believe that for JBS shareholders like any shareholder to realize maximum value from the PPC asset the more transparency we can provide to the market by being a publicly traded company is overall a positive for value creation of this specific asset as oppose to just being a small part of the much larger company. And for that reason I believe that what I see is it’s better for PPC to remain as a publicly traded entity.

Unidentified Analyst

Thanks. And the quick -- another question sorry if I missed this but how much of your Mexican production is exported to the U.S.?

Bill Lovette

Zero, all of our Mexican production is sold in Mexico. Mexico is a net importer, as a matter of fact the largest import market for U.S. produced chicken.

Fabio Sandri

Yeah Mexico imports account for more than 20% of all U.S. exports.

Unidentified Analyst

Thanks.

Operator

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

Bill Lovette

Thank you as we entered the second half of 2016 market conditions are playing out largely as we’ve expected both in the U.S. and Mexico. Demand from exports is picking up, prices in the commodity markets have improved over the last two quarters, while the environment in case ready and small birds remains robust.

While our strategy of maintaining presence in small birds and the industry shift toward big birds is contributed to our ability to outperform other producers with a narrower focus, we’re not just relying on the strength of specific markets to deliver better performance. Instead our strategy of partnering with key customers broad customers and product mix and geographical footprint allow us the ability to accelerate in key categories above and beyond our presence in the different bird sizes.

Our team also remains committed to see creative solutions to maintain our leadership and new consumer demand trends in chicken such as organic and antibiotic free. And supports the growth and needs of our key customers. I’d like to thank our team members, 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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