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Operator: Good morning, and welcome to the Second Quarter 2020 Pilgrim’s Pride Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] At the company’s request is being recorded. Please note that slides referenced during today’s call are available for download from the Investors 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 call over to Andy Rojeski, Head of Strategy, Investor Relations and Net Zero programs for Pilgrim’s.

Andy Rojeski: Good morning, and thank you for joining us today as we review our operating and financial results for the second quarter ended on June 25th, 2023. 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 on our website at ir.pilgrims.com, along with the slides for reference. These items have also been filed as Form 8-Ks and are available online at sec.gov. Fabio Sandri President and Chief Executive Officer; and Matt Galvanoni, Chief Financial Officer, will present on today’s call. 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 these factors have been provided in yesterday’s press release, our Form 10-K and our regular filings with the SEC. I would now like to turn the call over to Fabio Sandri.

Fabio Sandri: Thank you, Andy. Good morning everyone and thank you for joining us today. For the second quarter of 2023, we reported net revenues of $4.3 billion with an adjusted EBITDA of $249 million, translating to a 5.8% margin. Our strategies of portfolio diversification, key customer focus and operational excellence demonstrated their effectiveness as we grew margins relative to prior quarters across all regions, despite continuing challenging market fundamentals in some of our business and overall elevated production costs. In the US our diversification across bird sizes in case-ready and small bird, branded products and prepared offerings continue to mitigate depressed commodity cutout values in the Big Bird segment.

Our key customer focus created a significant pipeline of promotional activities across leading retailers and food service providers. As for the UK and Europe, our continued focus on operational excellence and optimization of our manufacturing network and back-office support activities continue to support our growth trajectory. Our diversification efforts continue to gain momentum and several of our branded offerings grew faster than the category average. In Mexico, our live operations improved, given our investments in diversification of our footprint over the past several months. Our branded offerings continue to gain marketplace traction given the success of our recent launches. These efforts were further by increasing balanced supply and demand fundamentals and favorable exchange rates.

Starting with the US. In the second quarter of 2023, ready-to-cook production of U.S. chicken experienced an increase of 2.2% relative to the second quarter of 2022. Production growth was supported by increased headcounts, and the industry continues to shift production away from the smaller bird segments into the heavier weight ranges, supporting a consistent year-over-year growth in average live weight. Considering more recent trends as we progress into the Q3 2023, the industry has consistently placed fewer chickens over the prior two months, mostly due to a year-over-year reduction in hatchability, suggesting a more strained supply scenario in the incoming quarters. The USDA 2023 outlook indicates smaller increases in supply for the balance of 2023, with growth in Q3 and flat production in Q4.

As for overall supply of protein, USDA maintains the expectation of a smaller domestic production availability for the calendar 2023, with significant smaller production of beef for the remainder of the year. With the US consumer facing relatively lower beef and pork availability, lingering food inflation above recent historical levers, combined with significantly higher interest rates impacting available income chicken may be advantaged given its availability, affordability, and flexibility. During the second quarter of 2023, domestic volume showed muted growth the retail channel experienced new increase in volumes across all departments. In particular, the first department was only marginally better across both front half and back half cuts, supported by increased promotional activities, especially for dark meat.

We remain positive on the potential of this category as tightening competing protein supplies and increased promotional activity is now beginning to drive sales volume more consistently. Elsewhere in the retail category, the frozen and dairy departments added incremental dollar sales through growth of prepared dairy and value-added frozen products, pointing to sustained consumer demand for value-added chicken products. We see some contraction of the frozen commodity segment as consumers shift from a pattern of more store trips and less pantry stock. In the food service channel, revenue sales declined due to reduced year-over-year pricing, while volume sales increased. The commercial distribution from the channel witnessed the most dollar sales decline, driven by fresh chicken pricing that remains well below the first quarter of 2022 pricing.

However, the decline in dollar sales has translated to demand stimulation as indicated by an increased number of operations buying, translation to a 5% year-over-year volume sales increase. While the first quarter was characterized by volume growth, primarily from wings and tenders in the food service channel, we are now recently seeing year-over-year volume growth in breast meat, a positive sign for the supply and demand balance. The non-commercial distribution food channels continue to work towards full recovery from the COVID-19 pandemic, adding dollar sales through increased volumes and higher prices in the value-added category. While relatively smaller than the commercial food channel, the noncommercial remains an important outlet for chicken.

In particular, value-added products, and we are encouraged by the continued recovery of the subchannel. Pricing have shown signs of recent improving supply and demand balance with wings steadily improving of low since late June and even more recently, positive price movements on boneless breast, a counter seasonal movement for this time of the year. Throughout Q2, US broiler exports continue to grow at a healthy rate and attractive value. US broiler meat exports in April and May grew a combined 1.2%, driving the growth in the second quarter where Taiwan, Mexico, and China, all of which have grown volume year-to-date. As we see — continue to see positive sales growth in this channel, US cold storage inventories of combined dark meat are down 10% year-over-year in May and declined more than seasonally expected from the end of March.

As a result, inventories remain nearly 40% below the five-year average. Current sales and industry inventory positions have enabled relatively steady network pricing, which trended seasonally, but paid nearly 15% above the five-year average. High path avian influenza also slowed through the quarter as only two commercial outbreaks related to turkeys occurred in April, that was allowed many of the trade restrictions for certain states to expire. Other than China, we expect to see further easing of export restrictions during Q3. Given our geographic and channel diversification in US, we increased our trading destinations to 89 countries, overall and our customer base continues to grow. We are very optimistic that exports will continue to balance US domestic sales and further stabilize forward pricing, but remain vigilant to any occurrence of high path AI in the United States.

Moving to feed ingredients. Large Brazil production of both corn and soybean have placed US exports and increased local ending stocks estimates. USDA recent estimate of current crop year ending stocks for corn increased 4.5% from last quarter estimates. Soybean and new stocks estimates for the current year increased as well, up 25 million bushels in the most recent [Indiscernible] report. Taken together, these factors suggest some relief for the historical tight crop balance sheet. Looking ahead to next year, yesterday recently raised corn planted acreage to 94.1 million acres, 5.5 million acres more than the previous year. Although corn prices experienced some volatility throughout the second quarter, given unfavorable weather in May and June, a change to a more active rainfall pattern across major production areas prior to key yield determining crop stages reduced corn future pricing throughout the quarter.

Nonetheless, core conditions were unchanged in the lab crop progress report with 57% in good to excellent states and 30% in fair conditions. While weather risk remains, the increased acreage in competitive price corn from Brazil should mitigate potential issues for the upcoming year. Even though the current soybean crop has also benefited from the shift to weather patterns, the overall impact was somewhat to give you a transition to more corn acreage. From this point on, August weather will be critical for soybean yields. Nonetheless, domestic soybean mill should be well supported as US biofuel policy is supportive to soybean oil demand and the crush industry continued to expand. Despite some price volatility during the second quarter, with balance sheets are generally well supplied.

Although USDA July was the report indicated a drop of 2.8 million metric tons in the upcoming year it was literally offset by an increase in stocks from the current cycle. Recent events related to the Ukraine/Russia conflict has increased global prices and volatility for feed ingredients globally. But availability continues to be better than prior years, given increasing production and consequent increasing ending stocks. Throughout the past 12 months, our US business experienced a period of significant volatility, during this time, our supply chain incurred dramatic increases in grain and elevated cost of production inputs, including utilities, labor, ingredients and packaging. We also experienced extreme volatility in the commodity segment meat prices.

Nonetheless, our diversification across both sizes, branded offerings and prepared items, combined with our key customer partnerships and focus on operational excellence help mitigate those challenges, helping us to capture the upside in the market, while protecting the downside. Throughout this period, our Big Bird team maintained an extraordinary focus on operational excellence and drove improvements in production efficiency. During Q2, overall demand was somewhat muted as several industrial customers experienced a decline or limited volume growth, given increased retail pricing levels. We are encouraged by the recent improvements in the commodity pricing, but further improvement is needed to achieve sustainable margin levels. Case-ready continue to focus on partnership with key customers as the team cultivated a variety of promotional efforts over the next several months, creating opportunities for mix enhancement and growth.

Small Bird remained relatively steady throughout the quarter, given exceptional strong performance in value with key customers. The team also realized similar success in the food service channel from key customer partnerships among leading QSRs. Our prepared foods business continued to drive profitable growth relative to prior year to increase distribution of key customers, operational improvements and enhancement mix. Our momentum in fully cooked branded business is becoming increasing durable as Just BARE and Pilgrim’s collectively grew 56% year-over-year, with over one-third of this growth, driven by product innovation. Equally important, our marketing programs for Just BARE has been remarkably effective as our brand awareness more than double.

E-commerce has realized similar success in prepared as it drove significant volume growth compared to prior year. We will continue to drive our strategy of portfolio optimization, and we’ll continue to work in partnership with key customers to provide differentiated offerings through distinct operational capabilities, including the organic and biotics ever products for both fresh and prepared categories. We will also continue to invest in operational excellence and profitable growth. Our automation products are on course and our Athens expansion and construction of a protein conversion plant in South Georgia are progressing as planned, and startup is still expected by the end of the year. Turning to UK and Europe, our margin improvement efforts remain on track.

Although inflation has moderated, costs continue to be challenging. Nonetheless, demand for our branded and customer-specific offerings remain resilient even as cost increases were passed through on shelf or menu. In pork, supply and demand fundamentals in large operations have improved with the rationalization efforts of the herd, both in UK and Europe over the past 12 months. As market conditions continue to evolve, our vertical integration with pig farmers, will be beneficial in our ability to ensure sufficient supply and midterm growth aspirations. Our key customer strategy has once again proven instrumental, as we have been awarded significant additional distribution for both existing and new products. Innovation will continue to play a critical role as we are slated to launch well over 250 new items over the next six months.

We have also cultivated a strong promotional pipeline throughout the summer and beyond, which is expected to enhance mix and bring new users to our categories. Our diversification efforts throughout prepared offerings continue to gain traction, our frozen meals, snacking and hot dogs offering all grow faster than the category average. In addition, our brand Fridge Raiders officially became one of the top 100 most chosen brands among food manufacturers. We’re seeing similar success in the alternative protein space, as Richmond meat-free increased shares over the past year in both frozen and fresh categories. We’ll continue to drive operational excellence in manufacturing. Although we have made significant progress in our overall staffing levels, we remain vigilant regarding the impact on inflation.

And we continue to invest accordingly in our teams to ensure sufficient labor availability. We have made strong progress in our network optimization efforts in the UK to realize production and cost efficiencies. As for Mexico, the overall business improved as growth in fresh reemerge through our multiple channels, especially retail. Similarly, our prepared business grew too close to double-digits, driven by branded offerings and success with the QSR channel. Our momentum was further amplified by increasing favorability market fundamentals and exchange rates. Additionally, our ongoing redesign of our live operations footprint, investment in housing, and enhancements in management procedures significantly diminished previous issues related to board mortality and provided additional protection for the potential biosecurity challenges.

Our diversification efforts through our branded innovation continues to be exceptionally well received by retailers and consumers alike. At the early results from our recent launch of Favorites and unique taste are very promising as both are far exceeding historical category growth in fresh. We will also look to accelerate our branded growth as our team will launch a fresh offering of Just BARE in Mexico and no antibiotic ever lineup that has realized significant success in the United States. Given these efforts, our Mexico business can further differentiate its portfolio, providing additional installation from market situations in the live market or lower-priced chickens or pork imports. Our focus on operational excellence and geographic diversification remains steady as our investments in the Yucatán Peninsula and our live operations to ensure domestic growth remain on course.

As part of our leadership journey and sustainability, we recently completed an inventory of our global greenhouse emissions throughout the entire supply chain in conjunction with an independent third party. We have also implemented a series of programs and monitoring systems to evaluate our energy usage intensity, resulting in notable improvements across our production network. Our sustainability efforts beyond our production facilities also continue. In the UK, our pilot of energy self-sufficient poultry farm recently released its first commercial flock, we’ll continue to monitor our developments in all these areas and adjust accordingly to accelerate our progress. With that, I would like to ask our CFO, Matt Galvanoni, to discuss our financial results.

Matthew Galvanoni: Thank you, Fabio. Good morning everyone. For the second quarter of 2023, net revenues were $4.31 billion versus $4.63 billion a year ago, with adjusted EBITDA of $248.7 million and a margin of 5.8% compared to $623.3 million and a 13.5% margin in Q2 last year. Adjusted EBITDA margins in Q2 were 4.6% in the U.S. compared to 18% a year ago. For our UK and Europe business, adjusted EBITDA margins came in at 5.2% for Q2 compared to 3.4% last year. In Mexico, adjusted EBITDA in Q2 was 12.2%, virtually flat to 12.3% a year ago. Moving to the overall US results. Our adjusted EBITDA for Q2 came in at $113.5 million compared to a quarterly profit of $520.9 million a year ago when the Jumbo Cutout was near all-time highs.

This dramatic change demonstrates our ability to capture the upside of favorable industry conditions, while mitigating the impact of industry downturns. Over the last two quarters, we have grown US profitability sequentially, despite challenging market conditions. During April and May, we saw slight improvements in commodity chicken pricing, whereas June reflected seasonal declines. Nonetheless, overall commodity cutout values remain below the five-year average throughout the second quarter. Over the past couple of weeks, we have seen an uptick in commodity cutout values, though. Our diversified US product portfolio across bird sizes and brands, along with our key customer partnerships, helped us mitigate the impact of the challenges in market pricing in our Big Bird business during the current quarter.

The US Small Bird and prepared food businesses continued their strong 2023 performance. In the UK and Europe, adjusted EBITDA in Q2 was $68.1 million versus $42.6 million in 2022. Although inflation has been moderating, certain costs do continue to escalate to the UK and Europe business. Through its previously disclosed — I’m sorry, through its previously discussed mitigation efforts in 2022, the business has shown resiliency in its profitability growth journey. The business has benefited from the back office integration and its network optimization programs. During the second quarter, we expanded the network optimization program with the announcement of the closure of our Ashton Avatar, which has been finalized here in July. As we optimize our fixed cost structure, it is important to note that our UK network footprint can continue to support growth with our key customers.

We incurred approximately $30 million of restructuring charges during the quarter in support of these changes. Mexico generated $67.2 million in adjusted EBITDA in Q2 compared to $59.8 million last year. The Mexican business has experienced both more balanced supply/demand fundamentals and a reduction in bird disease challenges in its live operations due to the team’s extraordinary efforts. Overall, our SG&A in the quarter was lower year-over-year, primarily due to a decrease in employee-related costs in the US and other targeted cost efficiencies achieved in our US and UK, Europe business. We spent $156 million in CapEx in the second quarter. The second quarter spending is higher on a run rate basis, primarily due to our investments in the Athens, Georgia expansion and our new protein conversion plant being constructed in South Georgia.

We reiterate our commitment to investing strong ROCE projects that will improve our operational efficiencies through automation and tailor our operations to address key customer needs to further solidify competitive advantages for Pilgrim’s. Although, Q2 was challenging due to volatility in the US chicken and commodity market, our overall balance sheet and liquidity position remains strong. With the completion of our $1 billion of 10-year notes offerings in April and the cash we generated during the second quarter, we have approximately $1.8 billion in total cash and revolver availability as of June 25th. Our liquidity position provides us flexibility during this more volatile time in the US commodity markets and allows us to explore further simplification of our capital structure such as the elimination of subordinations and a potential unsecured structure as well be opportunistic with possible liability management exercise with our existing debt, including paying down our 2027 notes.

As of the end of Q2, our net debt totaled $2.9 billion with a leverage ratio of 3.16 times our last 12 months adjusted EBITDA, which is just outside of our target range of two to three times. With the challenges we experienced in the fourth quarter of 2022 and our first quarter 2023 profitability, our net leverage ratio is anticipated to remain outside our target for the next couple of quarters. Net interest expense for the quarter totaled $39.5 million. We anticipate our full year net interest expense to be between $160 million and $165 million. As you saw in our earnings release, our effective tax rate in the quarter was significantly impacted by discrete tax items, primarily in Mexico and the UK. Due to the mix of our multi-jurisdictional pretax earnings for the first six months of this year, routine income tax adjustments on discrete items are being amplified, including the impact of changes in FX rates in certain jurisdictions.

As such, our effective tax rate is not following a more normalized level of between 23% and 25%. Our best view for the full-year effective tax rate is approximately 10%. However, this amount will fluctuate depending on the mix of earnings across tax jurisdictions. Our capital allocation approach will remain disciplined as we look to grow the company and we’ll continue to align our investment priorities with our overall strategies, portfolio diversification, growth with key customers, operational excellence and commitment to team member health and safety. Operator, this concludes our prepared remarks. Please open the call for questions.

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

Ben Theurer: Yes, good morning Fabio and Matt, congrats on the results. On the two questions, just the very first one. If we take a look at some of the expenses you booked through a restructuring in the UK and we remember you had a few of those in the past as well. So, just help us understand where are we right now in the process? What else to expect? And what’s like kind of a reasonable SG&A run rate going forward so that we know like kind of where to model that out. That would be my first question.

Matthew Galvanoni: Yes, it’s Matt. Let’s start the restructuring. I think for us, right now, based on where we’re at with the announced programs, we may have, call it, $3 million to $5 million left on those programs or any type of kind of cash costs that will kind of drag through into Q3 that we couldn’t we say expense ahead of time that had to be done during kind of the period itself. We are still continuing to look for ways to optimize our network, we’re always there to provide operational excellence. But relative to the programs we have right now, that’s the remaining cost that we would have here that of the cash — kind of remain relative to your SG&A question. We think about the SG&A that’s there today. I think that’s a decent run rate.

We’re looking at things — I mean you have to take the restructuring costs out and we try to exclude that for you. But we are starting to see more normalization on the SG&A. We’ve seen some of the efforts that we’ve done relative to the back-office integration. We’ll continue to see some of that play through for some efficiencies as we go forward into 2024 and 2025. But generally, I think the SG&A run rate we have now is pretty decent in the model for. I don’t know, Fabio, you want to add anything on the restructuring.

Fabio Sandri: Well, just on the restructuring, I think you saw the benefits flowing into our results as we reduce the operational footprint without reducing our production. I think what we just did was move product from more efficient facilities and closing some smaller facilities that were not something that we need to invest in the long run.

Ben Theurer: Okay, perfect. And then my second question is just around like general pricing dynamics in the US and how you feel about the pricing across the different bird sizes. Clearly, there was an impact, again, this quarter on a year-over-year basis. But how should we think about pricing within the three categories, big, medium and small bird from here onwards, also as it relates to some of the comments you made as to some of the industry behavior on lower placements?

Fabio Sandri: Yes, I think we need to, as you mentioned, drill down to the specific categories. I think on the small bird; the supply and demand is very well balanced. We are seeing pricing for the smaller birds being on the piece or in the deli works higher than the five-year average. It’s going through a normal seasonality, but it’s significantly higher than the five-year average. So, the supply and demand it’s really stable, and we’re seeing very good margins in those businesses. On case-ready, I think the supply/demand is also well in balance. What we expected was more future activity during the Q2 that we’ve seen actually, we’re seeing some improvements right now. And as we mentioned on the prepared remarks, I think the advantage for chicken is that is more available and more affordable.

So we’re seeing a lot of promotional activity coming on. So, we expect to see some demand increase on the retail that will make up a more favorable supply/demand structure. I think the weakness over the last year already has been on the Big Bird commodity segment, right? As we look through the increase in production, Almost all the increase in production has been on that category. And as we see less growth in the retail, it’s also further enhanced more meat available in that category. So, that’s what depressed the prices, especially on the breast meat and we’ve seen the pricing below five-year average. The other category that’s also weakest is wings. Looking forward, I think wings were weak because we saw some operators taking them off the menu because of the shortages and the high price of last year.

As of now, we’re already seeing a lot of foodservice operators bringing wings back to the menu and increasing their promotion of bone-in wings instead of boneless wings. For the breast meat, we are seeing increasing as well, demand on the foodservice categories. And we expect one of the category that was really weak during the last six months, which is the industrial, which is further processors that we’re also suffering from lower volume, albeit at high prices for them. So, as we see more promotional activities in the retail, both for prepared foods, overall, and for the Fresh categories, we’re seeing more demand for the — in this commercial or commodity category. We’re seeing some signals of increasing prices over the last two weeks, which is very encouraging.

Ben Theurer: Perfect. Thank you.

Fabio Sandri: Thanks Ben.

Operator: Our next question comes from Ben Bienvenu with Stephens Inc. Please go ahead.

Ben Bienvenu: Hey thanks. Good morning everybody.

Fabio Sandri: Good morning Ben.

Ben Bienvenu: I wanted to follow-up on Ben’s question just around kind of what you’re seeing across the various bird sizes. And Fabio, relative to your comments around the supply/demand balance for each of the sizes. Have you all thought at all about any capacity conversions between sizes across your network, perhaps from Big Bird to smaller size? And if not, would you need to see either from a magnitude of commodity Big Bird weakness or duration to make that consideration?

Fabio Sandri: It’s a great question. Thank you, Ben. I think we’re always looking on ways to improve our portfolio, right? And we mentioned in the past that we want to increase the value of our offerings to branded prepared foods, and we’ve been doing that, growing our brand and in our prepared foods operation. On the fresh side, we have an exposure to the commodity markets. And I think we look at the portfolio. So, if you look over the last 12 months, we saw some very strong pricing on the commodity. And we saw our results last year that we were able to capture that upside. So, it’s a portfolio option for us that when the market is really depressed as it is right now, we have all the other segments with more stable margins that can level of our earnings.

So, we are happy with the portfolio that we have. Of course, we are always looking for opportunities to improve being diversified options or differentiated options like no antibiotics ever, organic. So, we’re always looking for those options to add value to our production. But overall, our portfolio is well balanced in the fresh categories. We are always investing to grow with our key customers. So I think it’s more an issue of growth rather than just converting operations. So, we recently announced the increase in production in our Athens facility, which is in the small category. So if there’s any balancing in our portfolio, I believe it’s going to be through growth and it’s going to be through the growth in partnership with our key customers.

Ben Bienvenu: Okay, very good. My second question is on the Mexico segment. Very strong results in the quarter. And I’m wondering any commentary you can provide around what you’re seeing so far in 3Q? And I know it’s a difficult segment to forecast, but kind of what your expectations are for the year from that segment as well?

Fabio Sandri: No, of course. We’ve always mentioned that Mexico is very volatile quarter-over-quarter, but expect a very steady growth levels during the year. And we have a particularly weak quarter last year. Q3 and Q4 last year were very challenging for Mexico with a lot of increasing production on domestic and also some strong exports from Brazil and US, both in pork and chicken impacting, especially the North market in Mexico. What we are seeing today is a more balanced supply and demand. We are seeing some increase in the demand because of the economy of Mexico is doing well. Of course, the exchange rate is also helping their consumers over there. So we’re seeing, starting of the Q3, very promising. Usually, Q3 is not the strongest because of the schools being reset, but we’re seeing very steady supply and demand so far in Mexico.

As I mentioned, there is a lot of volatility there, especially because there is the live market operation that tends to be very susceptible to diseases. So, the supply and demand actually can change rapidly there. But so far, has been very well balanced and with the demand being very strong.

Ben Bienvenu: Okay. Thanks so much.

Operator: The next question comes from Peter Galbo with Bank of America. Please go ahead.

Peter Galbo: Hey guys. Good morning. Thanks for taking the question. So, maybe before I get my questions, Fabio I take Umbridge having come and grown in Buffalo, New York that there is an idea of [Indiscernible] so I just wanted to — that was on the record. But maybe just to start, guys, on US, I actually wanted to dive into the costs on gross profit. It was actually down in the quarter. And I think that was more driven by lower kind of prepared food chicken prices more so than maybe input costs or feed costs which I would think would start to be a tailwind going forward, just given where corn and soybean have moved. So, maybe you can just comment on that into the back half of the year, how you’re seeing the costs play out more so in the US, particularly as chicken prices are still under pressure.

Fabio Sandri: Yes, I think analyzing the cost. As we mentioned, we have a very unique approach to our opening the gaps in the operation and closing our gaps. So, we have every supervisor, every plant fully dedicated to identifying the opportunities that they have on a perfect operation. So, we call that opening the gaps. And then we have a methodology for all those operations to close the gap with action plans and specific timing and specific responsible. So, I think every year, we identify those opportunities during the budgeting process, and then we create the action plans to close those opportunities during the year. This year has been very difficult. I think because of staffing levels that we only achieve fully staffing levels right now, we’re still training our operators and team members to achieve the best yields possible.

So, I think it’s been a ramp-up in terms of capturing those operational excellence activities throughout the year. Right now, we are already positive and we’re getting to our budgets. But for the first semester, I think was as I mentioned, difficult to close those gaps because of that lack of labor into our plants. Go ahead.

Peter Galbo: But is it fair to think about feed, I mean, feed flipping to a tailwind kind of from a cost perspective in the second half?

Fabio Sandri: Yes, of course. As we talk about, I think there’s availability of grain in the United States, weather permitting, of course, I think for corn, we already had that period. So weather was favorable for the production and yields. We have strong acreage higher than last year. I think for soybeans; the period of weather is still ahead of us. So, we expect better for — normal weather through August, so we can capture the yields that we are expecting. But we are seeing the signaling on the future market pricing, which is lower than it is today, that it could be capelin. I’ll just caution that there is a lot of portfolio in terms of pricing that we have, right? So, we have — some of our products are based on cost plus, are based on the grains.

Of course, what can define the profitability of the chicken industry is the supply and demand of chicken, not necessarily the prices of corn and soy that we proved through the years that we can have a very strong profitability even with high prices of grain and corn and we can also have margins not what we expected, even with lower corn and soy. But overall, of course, it’s better for us to have a more stable and more in line with expectations price of corn rather than volatility.

Peter Galbo: Got it. Okay. No, that’s helpful. And then maybe just back to your comments, I think you said on the second half in US on production. I think you had industry growth you were quoting on kind of volumes growing in 3Q and maybe flattish in 4Q. Is there any reason to think that you guys would be materially different from that, either in a positive or negative direction?

Fabio Sandri: Yes. We have the leading indicators through USDA, right, which is the chick placements and the exits. I think if you look at the numbers over the last 10 weeks, it has been lower year-over-year. So, what we expect for the incoming eight weeks is actually a lower production year-over-year. I think what’s happening in the industry is that despite having more eggs because we have a laying block that is actually larger than last year’s. The age is higher and the hatchability is lower. So despite having a little bit more eggs, as you can see on the eggs number from the USDA, the chick placements are actually significantly lower than prior years. So, I think that leading indicators made us believe that the production in Q3 and Q4 will be lower year-over-year.

Peter Galbo: Got it. Okay, that’s helpful. Thanks guys.

Fabio Sandri: Thanks Peter.

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

Adam Samuelson: Yes, thank you. Good morning everyone.

Fabio Sandri: Morning Adam.

Adam Samuelson: Actually, my first question is in the US, and this was in the Q this morning. Your prepared chicken sales our prepared food sales were down 27% year-over-year. In the press release yesterday evening, you talked about your branded, Just BARE and Pilgrim’s prepared sales in the US that were up 56% year-over-year. Hoping you can just help square that? Is that just a mix of how much wings are going through your prepared plants? Or help us bridge kind of a pretty significant decline in prepared foods in the US?

Matthew Galvanoni: Well, I think part of it, Adam, is going to be price, right? Because you think about in the past, last year, when we were having this their input costs are a much higher commodity chicken price that was the input cost, the base cost for the prepared business. And so from a price standpoint, that ended up really kind of impacting higher prices last year than compared to this year. But relative to growth, we feel very good about our volume growth, but it’s really sort of a price difference than year-over-year. I don’t know, Fabio, you want to add anything to that.

Fabio Sandri: No. And I think you’re right, Adam, especially on the main category, as we saw, the wing pricing last year was close to $3 and this year it’s close to $1, right? So the price are prepared for accordingly. Of course, we maintain our margins. And that’s why we believe it’s the prepared foods is a more stable business than all the others because we can maintain the margins despite highs and lows of the commodity pricing. We are also doing a lot of promotional activity this year, especially on the wings as well to further enhance and gain market share on that category on the food service, mainly.

Adam Samuelson: Okay. That’s helpful color. And then as I think about the actions you’re taking on automation on improved efficiency, some of the plant conversions in the US and the restructuring in the EU. I was hoping if we could kind of tie that all together a little bit in terms of how to think about the savings and at least the fixed cost reductions that you would see at least from the UK stuff and — but kind of help us think about the earnings contribution from some of those investments and the timing that you’d be looking to realize those over the next 12 to 24 months?

Fabio Sandri: Yes, sure. It’s a great point because we’re always, as I mentioned, we’re always looking for ways to opening gaps, identifying opportunities and capturing operational improvements. Some of these operational improvements translate into cost improvements some, and I’ll say it’s 50/50, on yield improvements, which helps on the margins and on the revenues. So, instead of leaving meat on the bone with the bone better so we can sell that as a whole meat on the rendering or protein conversion part. So 50/50, I’ll tell you, it is how we see that. The automation efforts also help on improving yields because the machine is better than operator that is not there, right? Still today, labor or a manual deboning yield is better than the machine.

But once again, the machine do its job every day while we have a lot of turnover in our operators and we had our team members, and we need to train them to capture the optimal yields in our plants. So, the automation has been benefiting. And over the years, we’ve been disclosing what we expect in terms of operational efficiencies and it’s been around $100 million to $200 million in terms of operation improvements. A lot of that, it is to catch up with our industry that is never ending improving their efficiencies as well, and some of that will flow to the bottom line through the operational efficiencies. As in Europe is a little bit different because with not only that, we also have been optimizing our network structure. As I mentioned, we are producing the same volume in just a low number of — or a smaller number of plants because we are consolidating some of the operations in the most efficient plants, which translate into better cost, some better yields as well as the new facilities are highly automated and have better equipment and more trained, skilled labor.

We expect, like I said, from $100 million to $200 million in operational improvements every year.

Adam Samuelson: Okay. And if I could squeeze one more follow-up, just to Peter’s last question. I think you kind of — when you’re talking about the production and output in the second half, again referring to the industry numbers, the industry was up a bunch in production and output in 4Q 2022. Pilgrim’s in the United States is down. So are you assuming your own production to be flat to down in the United States in the second half of 2023? Or is it going to be up because your comparisons are very different than the industries.

Fabio Sandri: Sure. As we always mentioned, we always match our supply to our demand, especially with our key customers, right? So we expect to be in line with the industry, but in line with the expectations of our key customers. We have best fuel rates in the industry, close to 99% to our key customers throughout the pandemic and right now, and we expect to continue that. So, we will adjust our production to that demand. We’re seeing more promotional activity from our key customers. So we see some increasing demand over there. But typically, Q3 and Q4 are periods where we have lower demand of chicken because of the Thanksgiving and year-end. So normally, we reduced our outputs during those quarters. Comparing year-over-year, again, we expect to be in line with the industry and in line with the demand from our key customers.

Adam Samuelson: Okay. I appreciate the color. I’ll pass it on. Thanks.

Operator: Next question comes from Andrew Strelzik with BMO. Please go ahead.

Andrew Strelzik: Hey good morning. Thanks for taking the questions. For my first one, I guess, I wanted to focus on the Big Bird segment. And you talked about some of the recent improvements in cutout values as well as needing more improvement. And so I guess my question is, based on what you’re seeing from a demand pickup perspective and the supply outlook, do you think that, that’s enough to get us in that segment back to supply/demand balance or do we need more outsized actions on one side or the other. I don’t know which one you think would be more likely, but some business side on the demand side. But is that enough to get us where you think we need to be from a supply/demand ?

Fabio Sandri: Yes, I think looking at the supply and demand in specifically in the Big Bird category. So we have three main segments of demand in the Big Bird. So, it’s the industrial, it is the food service and international accounts, the QSRs and further processors. I think the one that was lacking, food service has been strong. I think further process has been in pace with expectations. I think the one that has been weaker for us, it is the industrial category. And this industrial category is Prepared Foods companies. And as we saw some of the latest announcements and press releases, they are increasing their prices close to 10% year-over-year and reducing their volumes, close to 8%. That’s the latest number that we saw in that industry.

So that 8% translating to lower volume of Prepared Foods and lower demand for protein, overall, I think once again, beef and pork have been very muted to down production, which is favoring chicken, but it still is a lower demand than we expected in that category. As we see more promotional activity. And I think we’re going to see some deflation in the retail. We expect to have a stronger demand, especially in that category, foodservice, once again, continued to be strong, and the national accounts continue to be strong. So that is one of the drivers that we need to a more balanced supply and demand. I think also the Fresh retail with more promotional activity with the deflation as well in the retail can further enhance that demand in the Big Bird, as we always use Big Bird to augment our operation in the case-ready for this period of time when we have big promotional activities.

So, those two factors can help on the demand for that category. For the supply, I think what we are seeing, once again, is that the chick placement has been down over the last eight weeks, which will translate into lower production year-over-year for the coming quarters.

Andrew Strelzik: Okay, great. And then there was a comment in the press release as it related to the US business, that the team is in the process of executing a variety of action items to further drive operational excellence. That was the quote. And I guess I was curious, are there kind of new or incremental things that you can elaborate on within that? Or maybe as we roll through the back half of the year and into next year, if there’s nothing newer, what are the key items there that we should be focused on that you think will be most impactful?

Fabio Sandri: Yes. Just like I mentioned, we — every year, we identify all the opportunities that we have, both in live and in the plant, we call that opening our gaps. And then the team put a comprehensive plan with actions, responsible and timelines to close those gaps and achieve our operational improvements. A lot of that has been on yields. I think as I mentioned, over the last year, we’ve been not fully staffed and that has impacted the training. It has impacted the skill of our team members to do a better yield improvements and a better yield on our operations. So, there’s a lot of training involved. There is a lot of staffing our plants involved. I think that will help on the yields for us to capture that $100 million to $200 million, like I mentioned.

We also are investing a lot in our live operations with improved housing, which could help our feed convergence and help our efficiency overall. And it will help our feet conversions on top of what the primary breeders already deliver to their new breeds.

Andrew Strelzik: Okay, good. Thank you very much.

Operator: This concludes our question-and-answer session. I would like to turn the conference over to Fabio Sandri for any closing remarks.

Fabio Sandri: Thank you, again. Over the last month, we faced many external challenges. But together with our team, the consistent execution of our strategies of diversification, key customer focus and operational excellence are exception to navigate this transition issues and reinforcing our foundation for long-term profitable growth. Those strategies have demonstrated their effectiveness as margin improved despite challenging business conditions. We will continue to drive these strategies along with and delivering focus on value and team members well-being. Given these efforts, we can further strengthen our competitive advantage and cultivate a better future for our team members. Thank you for joining us today.

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