Q2 2020 Pilgrims Pride Corp Earnings Call

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After today's presentation, there will be an opportunity to ask questions I.

I would now like to turn the conference over to Don I'm wondering.

Head of Investor Relations for Pilgrim's Pride. Please go ahead.

Good morning, and thank you.

Today.

Our operating results.

Quarter ended June 28, 2020.

Yesterday afternoon, we should a press release.

Writing an overview.

For the quarter.

Putting a reconciliation of any non got major who may discuss.

A copy of the release is available in Investor Relations section of our website.

I would like to reference during this call.

These items.

Okay and available online.

Yes, I see that go.

Chris I think you today, obviously foundry interim president and Chief Executive Officer, and Chief Financial Officer.

And just wondering I personally believe spectacle.

Before we get our prepared remarks.

Hi, everyone <unk> Safe Harbor disclaimer.

Today's call may contain certain forward looking statements that represent.

Oh no growth expectations.

This release.

Under the original Packers anticipated by management, they caught that your results to differ materially.

It was projected to this work looking statements.

Further information concerning those practice has been provided in todays press release or okay, and I get all pilots would actually see no what the journey called the part of your foundry.

Thank you Doug good morning, everyone and thank you for joining us today and the second quarter. After integrating reported net revenues of two point 82 billion, an adjusted EBITDA of 400 than 12 million or a 4% margin.

GAAP EPS loss of two cents per share.

Got it begins I'd like to express makes you feel the attitude DJO global teams for their commitment dedication and continued hard work you supporting our ability to keep their team member safe and healthy while continuing to meet in their ability to produce the supply customers. During this challenging time safety is a condition up there was no team members who responded.

Admittedly Judy do the conditions supply problems to our customers.

I also like to thank all the health care professionals and first responders, who have remained diligent didn't help beat you maintained the safety and health.

Our team members were continuously adopting our global operations to the change in channel demand why not just you know breaches to be able to maintain your breach instead, all plants and minimize any thinking it's going to be was reps and due to labor and health issues.

I'd like to retreat. The precautionary corrective actions, we have implemented that go beyond our already read just standards and all our facilities to further to minimize the spread the schools in <unk> in accordance with health into these guideline recommended by specific government health apart.

We are taking these steps to better citic weren't the wellness and helped us each team member waffle, feeling you always fishing business duty.

Producer to people here in U.S. and globally.

We have agreed with the biggest hesitation in cleaning up commonly use area and repeatedly touched the surface is limited visitors to our operations and office, but from the baby wellness screening if our team members, which includes required pepper to checks.

Health screening and reporting suspended all know crucial business travel and meeting. It then anything tended to be more work for business office and team members where possible if other Glenn.

We amended we're promoting social businesses like that going to start shipping Sunday.

Greetings spacing catheters, you some portions of the workstations and adding outdoor space to reduce density in our great care.

We haven't been they could be available to our team members and then also reporting metrics to be 1% to 100% of the time well north purpose.

We also completed installation of usually in bipolar I and innovation at all about processing plants, the United States.

We remain vulnerable populations from all facilities. That's communities worked plastics be increased cases, and you're off framed and food pay and benefits.

But those team members, who are not able to come toward.

Due to illness related to pull the Nike, we are requiring them to self isolate and sheltered home why show why short then disability benefits.

Our offering free preventive care to all team members and offering free life help online services that often virtual doctors' visits at no cost.

Turning to the results of our business, despite the volatility and challenging market environment to get you would have continued to achieve disappeared relative performance to our competition.

The fourth quarter operating performance in your lumping in line with results. So your goal that's a lot of fish sequentially, but was more than offset by challenging market dynamics in U.S. as well as Mexico.

However, rental figuring the month of June alone, which we think it's a much better representation of the performance of our operations. We experienced a significant proved to be environment across all of our business compared to June in 2019, U.S. was roughly the same Europe was slightly bad there well, Mexico, what we might even thinking.

You have called all the disruption less than optimal probably make and added operating costs.

In spite of the difficult global macro conditions our results have.

Maintained well balanced and the results of our vision to become the best the most respected company, creating the opportunity for better feature for our team members to support our vision.

Continuing to our strategy of developing unique portfolio of diverse complimentary business models complete youd relentlessly pursue operational excellence, becoming a more value, but not too are key customers. They created an environment of course these people six products and healthy afterwards.

Thank you our team members remain committed to executing our strategy of delivering the best relative results regardless of market conditions.

Disruptions caused by holding Nike on each individual country demand for protein consumption as well as the flow of global trade has entered a unique and significant challenge the will have never seen before and generated volatility far beyond normal seasonal factors, which persisted doing could you think you one.

Any less the first half of the Q the market because significantly challenge before a gradual news the need of travel and Mophie movement restrictions due to colder 19, nothing like you pretty much in channel demand, especially from foodservice.

Similar to last quarter lots, but the bonding was once again the most of all about doing good acute you would break moves between who knows and high then remain challenged compared to 90.

Operationally however, we continue to be there relative performance versus the industry across all business units, including large bird Bonnie in Europe imitation of the strategy at the legacy operations to better mitigate future input cost challenges. That's continued to produce the expect results by integrating off or.

Newly acquired operation, it's on track in Mexico, the market that was again a week when much of cute you before improving in June.

Direct coping 19 mitigation crossword, roughly 40 minutes for the quarter to U.S., but that excuse indirect costs that are more difficult to precisely quantify so just overall, just but disruptions to our operations, that's optimal mix and production inefficiencies. Despite the challenges the diversity of airport.

For them and their global footprint continues to minimize the impact of volatility due to individual market condition and increase the resilience of our operations. We maintain our strategy I continue to improve the portfolio to embedded respond to the video market dynamic and generate a relative increase in performance over our peers.

We believe this approach will give us higher and more consistent results for the mid to long run and minimize the food peaks and troughs.

The commodity sectors.

You do you also get solved greater than normal volatility within our U.S. fresh chicken business. The first half of the part that was significantly challenge and was far below normal seasonality as implementation of stay at home orders National wide continued to disrupt shadow demand by increasing our retail business why reducing foodservice.

And also maturity, Greece, the volatility because our business.

Despite the sharp decline in food service requirement, we were able to quickly respond to the shift in channel demand by increasing our volume makes two key customary dealers. During the month of June we have started to see our U.S. volumes returning to be more in line with a normal run rate has businesses since they have gradually reopened.

I really do many food service demand.

A large portion of our food service customers are also within the QSR segment, which sort of dampened the fact across our fresh business units.

Our portfolio of differentiated products, along with our key customer model I, giving us better installation against the volatility was much better positioned to adjust the product and channel mix given a presence up all across all three but sizes and strong customer relationships.

Well, we continue to make relative operational improvements in our large bird debone him operations. The market was again extremely volatile during Q2, I think you well because I don't bounce within a short timeframe during the quarter, making lows in.

The cut out has been constrained by weak leg quarter pricing, which has been impacted by not only soft export demand, but also difficult you producing the optimal mix at the blank did you hide in normal up 50 is doing to cover 90. However, we definitely makes sense and chicks placement in late Q1 are starting to bring better Dallas to either.

Three supply and demand and prices have already begun to react into seem to be stabilized.

Within the last commoditize small burdening case ready segment marketed supply demand balance once again relative better in Q2.

That's a more retailers have remained strong.

Keith read the business has continued to be stable and generate great results driven by strong demand for our chickens, especially from key customers demand for our just bear with their case ready for acute you, what's an 80% with online even stronger at 205% or the market leadership in this case.

Degrees and more differentiated product portfolio has continued to strengthen the growth of our competitive advantage versus the industry.

While the commitment to our key customer strategy has been reflected in the consistency of our past results develop this approach has never been more or less relevant to our growth that during the current bid offer uncertainties and challenges as another example of how we are further supporting the key.

Customer growth, we intend to double our kids ready capacity at our plants in Minnesota by increasing the number of heads process at the plant why through automation raising the makes us keys ready drugs. With this addition, we expect increased by 20% of production of differentiated high after you bid just their brand.

Products.

The strong relationship we haven't he gets much like gives us many opportunities to sustain or increasing volume.

And realize their needs for growth. In addition, many of our key customers maintain a leadership position in their respective categories.

As a result, we had to direct beneficiaries of their ability to outgrow their competition beyond driving pure growth our key customer strategy also promote stress.

Since we opened relationships and strengthened our margin structure.

And do you have to bear fruits revenues declined 18, or 19% less volume. The sales decline was driven by the mix of food service schools, and Dallas, that's where all impacted by shutdowns.

The shifts in demand increasing to more retail cook at home items, we have adjusted by increasing production of retail bags, which grew 76%, but shipping more to current key customers. The shift has also given us the opportunity to gain new distribution for our brands vigorous and just bear with didn't more traditional brick.

So mark their stores as well the plane use shoppers for all brands through the online sales that should direct to consumer homes.

Our national account business remained relatively steady with a 2% inquiries.

At the end of June photo West Chicken inventory was up 2% compared to last year. The main drivers in these inquiries were leg quarters, which would go up to 52% and better inventory, which was up 20%.

Increasing that inventory reflects the reduction for the service the men due to Cook in my team. So I like what the as robust as to the impact of labor shortages and dark meat Vone, that's relative volatility global demand for chicken, which was affected by the strengthening of the dollar shelter in place and weak oil prices.

When compared to Q1 overall inventory fell by 7% to 855 million Boes Weve headquarters in domestic falling by 20% than 25% respectively.

Inventory reduction was mostly driven by the acceleration of exports to China, which are up and 57 million tons year to date. The me with most shipments occurring in deeper than me.

Year to date, China is the second largest deflation a few exploit that exports behind Mexico.

I have however in me China was the number one destination suppressing meth, Mexico by 3 million metric tons 2000 metric tons domestic inventory reduction reflects the mixed simplification due to less the body across the industry caused by labor shortages, coupled with strong domestic demand in China.

We're all year to date U.S. grain exports have increased 5%.

A lot of skilled has occurred in southeast Asia as a result of assets. In addition to the Chinese market opening the Philippines, Vietnam in Taiwan markets grew by 45, 99% respectively.

By the end of Q2, our export volume grew year over year by 12% and our expert revenue has grown 15%.

Sales to China has remained strong despite some weakness in dark meat demand in other parts of the world our commitment to maximize expert value proposition has allowed us to quickly respond to changing demand around the world wide offering support to our couldn't domestic business has started to make and supply levels.

During the quarter, we've added six new destinations to our country mix and year to date, we have added 67, new importance to our client base as we continue to further broaden and diversify our relationships.

We expect China continues to be significant growth driver. We also saw broad from southeast Asia outside of Hong Kong and China, The Middle East the Caribbean in Latin America, as well as Africa, we remain positive as we have demonstrated resilience and position ourselves too thin value regardless of market conditions.

Marketing fundamentally Mexico. During Q2 remain challenged has the effect of weak macro conditions, which editorial 50. These customer spending has persisted. In addition, the physical tended to be week, putting additional pressure on the results chicken prices were also below seasonality.

Driven by better than expected growing conditions before rebounding much closer to normal levels by the end of the board.

He left you are all their global operations results from the month of June in Mexico, where significantly improved compared to the beginning of Q2 and was in line with last year's performance. Despite the unfavorable mix impact and added operating costs.

We have adapted our facilities by shifting production those channels that are experiencing better relative demand.

Increased share of non commodity products single application and stability in branded in prepared foods has also helped to partially upset the general market weakness, we continue to believe in long term growth and prospect in Mexico.

The result of our prepared foods, the Mexico has continued to outperform or expectations. We continue to lead in developing the marketing prepared foods by launching significantly more products to meet demand, we're making great advances in our prepared for the business with innovation at the core competency off our strategy, we're generating great results under.

Premium pigments and they'll be up Ren both of which have continued to receive very favorable except as may consumer at retail bookstores and QSR.

Moving to Europe, our legacy operations, what part deliver unlimited funds than what you line with both the previous quarter and the same period last year as we benefit from a great exposure to the retail segment in Europe versus other regions, which remains strong and partially upset the reductions in foodservice them. It is a result was also.

Despite the significant impact of course relating to their operations primarily.

The additional costs to keep our team member safe in the past running as well as less optimal mix because of the dropping volume many in our foodservice business unit and external sales from our Agri business unit.

Although our volumes and that Theres little below Q1, and the same quarter of left here are strong operational performance and improve at Chile management helped to mitigate the impact of schools in 19. During Q2 as a result, EBIT was roughly in line with Q1 and the same.

Period, a year ago.

We feed cost relative stable, we continue to improve efficiencies in operations by optimizing our manufacturing network, improving labor management implementing more automation in order to reduce cost and drive higher yields.

Yeah. Good teachers, that's kept all maloney automation, but also to keep our assets them and they do they have to safety. If our team members you should the quality of our products and the compliance with the environment, though and bird welfare rules.

Good performance measures as the result of the less 12 months consented to show with improving and above the average of the competition in Europe, which validates the effectiveness of arthritis.

What is the end of the quarter, we have began to see some foodservice operators reopening as well as better demand and volumes to our QSR customers.

We still demand for our products has remained strong.

It should sort of support them improvement in demand within for instead of it should be commitments. We have remained diligent and we've implemented the appropriate measures and correspond the actions as conditions evolve.

Our newly acquired you bring you appeal operations. The phones have continued to present consecutive growth generating an increasingly positive EBITDA achieving one of the best future results in the last five years.

Performance was driven by robust demand that retail partially offset by a definitely foodservice continued strength in pork exports, especially to China and sell at the implementation of operational improvements and capture of synergies exports to China.

By more than 130, plus I think you choose which wasn't a full operation compared to Q1.

We have no double the proportion of exports to China has a third auto sales, which we expect to driven the strength of the off our overall exports in the near future.

All of our European fresh pork facilities are approved for China. So we are well positioned to benefit from export opportunities. We also continue to evolve in our strategy and move significantly increased our volumes with the new key customer in the next quarters.

Integration of the newer field operations distracting melted expectations over the next few years, we continue to expect to generate an EBITDA improvement to achieve a level that is competitive we're leading companies would seem like portfolios. We have a proven history of successfully and efficiently integrating companies, we have acquired and we'll apply similar methodology.

Integrating the new operations, we have expanded their distribution capacity for the nearly a friday that marine assets to some recent wins to increase the with their exposure and strengthening our partnership with key customers. We're optimistic about building upon our operational improvements by continuing to optimize its manufacturing footprint.

Extract the best in class operational excellence capitalize exported opportunities optimize the portfolio of channel segments and products as well a strengthening our real business with key customers to drive innovation in value added and higher margin areas.

We are leveraging resources available to both our legacy and newly acquired operations in Europe, you can the junction without a global team in order to further strengthen our competitive advantage by increasing our ability to offer key customers a much wider selection of highly differentiated innovative products to fulfill the growth in consumer demand remaining.

Cider to sharing innovation as best practice internally to ensure operation and financial efficiency and physician payments as a whole for increased profitability and more consistent margins.

We have a great team in Europe dedicated to generate the best possible relative results by focusing on factors within our control, while ensuring the protection and the safety and health of our team members.

Moving to feed imports corn prices fell over 8% during the quarter weighted down by the economic impact of school in lighting and the expectation of a record crop in the United States, Although farmers ultimately planted fewer acres then the market had an expected.

The AIDS currently forecasting a new crop surplus of two point 65 billion bushels, we didn't lose a 20% increase in U.S. export demand, although corn prices initially rally at the beginning of Q3 prices have since fallen back to where they started at the forefront crop conditions continue to remain favorable and other weather conditions.

Change, we're optimistic about current crop and the likelihood of a record U.S. corn carry out.

So I think immune status tell nearly 13% during Q2 after increasing at the end of Q1 or more concerns and then.

Moving 19 related supply chain issues will decrease of blood after the market realized that there were no major impacts to supply breakfast quickly, we treat that at the start to the carpet.

Yesterday raised the new crop Carryout estimate for soybeans to 425 million bushels, an estimated that also include the nearly 25% degrees in export demand.

As with corn soybean conditions remain favorable and we're very optimistic about the U.S. soybean crop given the outlook remains favorable for U.S. supplies, both for corn and soybeans, we do not see fit input prices in North America being a headwind to margins.

In Europe feed wheat prices fell 3.5% during the quarter following a liquid prices at the end of Q1 large increases in wheat purchases initially push prices higher during the crisis, but quickly fell as normal purchasing patterns continue.

Harvest has just started in UK and although supplies are projected to be lower and price is higher than last year. We can change event has access to cheaper available alternatives brings to help offset the higher than expected with prices in UK.

According to Derisk the future production in the chicken industry was flat relative to get to 19 has had reductions were mostly offset by increased lifeway.

The industry degrees process headcounts and maintain the consistency trained and layer FLC with the most recent month, 2.2% above year ago levels with the larger layer flood the market has a death by maintaining the ability to grow into roll up then why showing restraint and flexibility in the near term as indicator.

By the year over year reduction in Q2 exits and chick placements being down 1.8 and moved 4.1, respectively.

Although pullet placements have remain above year ago levels, there need to support new capacity and there are not expected significantly disrupt the industry longer term supply and demand balance.

In continuous ration of Q1 during Q2 Coven 19 related restrictions resulted in consumer stay at home more frequently than last year.

Shifting a large portion of chicken demand towards retail.

This shift greeted unexpected short term imbalance of supply and demand. The result was the temporarily reduced pricing driving a linzess response to reduce London. The members numbers to rebalance supply and demand dynamics, well chicken has been impacted but supply demand imbalance overnight. He has also calls supply.

Changes ruptures for other competing proteins subsequent reduction in total booking availability enabled prices to be near to more normalized ranges.

More recently consumers have remained elevated levels health at home protein consumption has more individuals continued to work from home office also minimizing their exposure to crowded areas such as investments as a result retail demand for chicken like that all bookings have remained robust.

Throughout the quarter.

Our foodservice demands to trades below years ago levels. This channel has also been improving since early April led by the QSR segment.

In response to a both retail demand and the rebound in foodservice the industry has great access and chick placements back to 2019 levels, but still below levels seen in January and February.

For the second half the U.S.J. expect production to be at or slightly below Q3 in Q4 up 2019.

With the fluid market environment and high employment.

Consumer sensitive you continue to impact the channels differently.

Expected restriction of restaurant capacities, social distance the guidelines consumer concerns for individual health and adjustments to the change in personal economic situation to create the frequency of at home use.

His chicken continues to be was the most affordable and versatile proteins retail demand is likely to remain strong and expect foodservice demand we remain more volatile at least in EMEA sector. However, we believe the QSR is the ability to recently adapt to off premise and offer value oriented food has positioned us to lead the recall.

Sorry, and outperform the foodservice segment.

Our strategy is well suited to the challenging macroeconomic as well as market conditions, while we are already well balanced in terms of our board size exposure, we remain seeking opportunities to incrementally diversify our production mix and it gives the commodity portion of our portfolio by increasing the number of differentiated brother.

So key customer, while optimizing our fixed operations by pursuing operational improvement targets.

Our key customer approaches strategic increase.

Basis to further accelerate growth any important categories by providing more customized high quality innovative project stupid you gave us a clear long term sustainable competitive advantage.

With that less than two additional details in our financials.

Yes, you named the second quarter was 3.3% of sales slightly higher versus a year ago as we improve the efficiencies of expenses, but increased support from expanding that just bear brand nationally and investment for our new prepared foods production is both in U.S. and Mexico as well as the inclusion of the new assets in Europe.

We will continue to prioritize our capital spending plans this year to optimize our product mix that is aimed at improving our ability to supply innovative less commoditized products.

And strengthening partnership with key customers even during these uncertain times, while we continue to evaluate all capex projects and the short those we deemed non essential we reiterate our commitment to Vesneo sole return on capital employed project that will improve our operational efficiencies and Taylor customer needs to further solidify competitive.

Vintage for a company.

Our balance sheet continues to be robot, given our committed mint and emphasis on cash flow for operating activities focused on management of working capital and disciplined investments.

Liquidity position remains strong with more than a billion dollars in total availability, we have more short term immediate cash requirements with our closest bonds maturing 2025, and the next running 2027, respectively and our term loan maturing 2023.

During the quarter, our net debt was 2.1 billion.

With a leverage ratio of 2.9 times less 12 months EBITDA, our leverage remains at a manageable level and expect to continue to produce positive cash flow this year, increasing our financial capability to pursue strategic actions.

We expect Twentytwenty interest expenses of around 130 $240 million.

We have a strong balance sheet and the levers that is within our target.

Which are supportive for us to act on a great opportunities. During these uncertain times, we remain focused on exercising great carrying ensuring that we create shareholder value by optimizing our capital structure by preserving the flexibility to pursue growth strategy and we'll continue to consider and evaluate all relevant capital allocation strategies that we matched the pursuit.

Our growth strategy and we'll continue to review each prospect according to our value creating standards.

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

We will now begin the question and answer session any interest of allowing equal access we request that you limit your questions to two then rejoin the queue for any follow up.

Well ask a question you May press Star then one on your touch 10 sad.

If you are using a speakerphone please pick up your handset before passing the keys to minimize background noise.

So with all your question. Please press Star then too.

Hi, <unk> pause momentarily to assemble our roster.

Our first question today is from Ben.

Of Barclays. Please go ahead.

Hey, good morning, Fabio Charles Hook, both if you're doing well.

Morning.

Good morning perspective.

I have a question to understand a little bit more your commentary around the performance inter quarter. So if we could put it into perspective, I mean last year. During the second quarter, you have and the U.S. about $190 million operating income and you close this year it call. It 40 million and you've said June was essentially.

The flat or in line with last year June so could you share with us the Max it.

Oh the loss you saw maybe in April may and where we're trending to and to understand a little bit where we're going into into the third quarter. Just with all the commentary you had about supply demand pricing improvement et cetera, just to understand a little bit better how much the actually impact was April may.

Yeah. Thank you then yeah April and May we're deeply impacted by the ship bombing foodservice right. So during those two months, we saw a sharp decline in overall market, but did not only that a sharp reduction in the men. So there was a periods of times.

Where there was no the men at all for any protein a while the production was struggling to keep people also to produce so the first two months were deeply impacted by that but as the demand resumed especially on the QSR.

Section and as we see a stronger pool from the retailers, we saw rebound in market presses and our operations are coming online we better efficiencies.

So that's why we tried to to show the markets that are doing those two month that was the big reduction in the quarter while in June in all geographies compared to the same period last year, we worrying line.

Okay perfect.

And then actually taking advantage of tourists being on the call out quite a question on on Mexico with the exposure to the life bird market and obviously the challenges you have sort of a quarter, but there's still plenty.

Plenty of restrictions and certain states in place.

In terms of stoplights system here in Mexico.

Where are you seeing currently and that relevant piece of your business I mean, I understand the whole prepared foods segment and the former channel, but more beat the income of life bird market, where are you seeing there in terms of dynamics and how have the more independent and one's reacted recently.

Thank you Ben good morning.

Thanks for your question actually what we sense here for the last let's say 30 days as being a a strong reopening of markets. A concert was just remembering to you at the federal government has implemented the system of like life's Rep read a lot.

No I was just shut down and then Orange is partially open and then greenest totally open but this is just the guidance that the federal government do you still the states, but is it is up to the space and ultimately the cities.

Sites or how much you do reopen or not and what we seem to be comp rewards to be very straight forward based never seems open Allison is operating right. Now. So obviously does some restrictions, especially the steel on on bars and restaurants, but everything else is working flowing normally.

And your specific questions on live markets like markets up rebounded strongly.

Since the beginning of June which was basically one the economies gluck's reopened on currently we're seeing good demand for that segment.

Basically working.

In normal parameters compared to last year.

Okay.

Thanks, Charles Thank you very much for color.

You're welcome.

Our next question today is probably Heather Jones up Heather Times Research LLC. Please go ahead.

Good morning, Thanks for taking the question.

HM.

Hi, so.

Oh sure tray pack plants, or just your plants and well I'll stick with tray pack and the U.S.

So one of the issues fall for all the entire meat packing industry is was labor and product mix and et cetera.

Could you must know where your plants are today are you back to normal in the sense of product mix.

Second processing et cetera, and your tray pack plant, so that you're able to take advantage fully of that stronger demand or just if you could just give us an update on that.

Yeah.

Beginning of this and then if you see a.

Significantly increasing the percentage.

And that's the impact that the mix for the entire industry, but also for the entire protein industry anyway. So we saw a reduction in beef and pork production for the chicken industry. What we saw is exactly what you mention whatever that is a a production of a less.

Optimal mix. So we move people from the dark meat departing from other areas to the from the voting, which is the most important area to move to stop our operations.

We saw numbers up to 20% absenteeism at the beginning not only because people were afraid of coming to work or afraid of leaving their homes, but also because on an abundance of caution we send all the team members 65 enough.

That are weak, but we consider vulnerable population to home with food pay I think that impacted our operations significantly as we see the markets improved with the less cases in the plants and less cases in the overall environment, we're bringing back that population, which is helping on past you.

Achieve the the better mix.

So during the Q2, if you think about direct effects related to be extra cleaning up our production in common areas you actually have to be any including Mexico masks and features that we have provided to our team members and installation of physical bears and all the production areas, we saw an impact of around $40 million.

For the court, we don't expect this cost to continue going forward that and then we expect our operations to resume with a with a better mix and then we have in Q2 during Q3.

I think one important 0.2 was that in conjunction with our key customers. We've reduced the number of SK use so we simplify the operation of our plants and that helped us well in view in the increasing the operational efficiencies.

I just want parsed one of your statements you say you're going to resume.

Full operations are you have like meaning.

If I look at one of your tray pack your tray pack plants today versus where they were on February are they still not at optimal mix or or have they returned to optimal mix and we'll get that full benefit for all our country.

Yeah, Dave there have been resuming their optimal mix during Q3.

We expect to finish Q3 with a with the optimal mix.

And then my follow up question instill related to tray pack is I had heard that there'd been.

That due to the is the plant problems, we're talking about that there had been some and.

Had been some losses of retail business within within the did can you tell me whether pilgrims lost any retail business as a result of absenteeism. These issues or art art is your retail customer base. The same as it was pretty kind of it.

Yeah, we have not lost or any customer as we discussed before we have a key customer strategy, which is highly differentiated right. We don't do.

Annual bids why we do is a deeper relationship where we help them grow their their business, which help us to grow as well and because of that where we approved doubling our capacity with your products enough called Springs, Minnesota plant and levels to support our growth of our key retailers and support the come.

One of them a growth of hard just background.

Through the increase in automation or were you add the hundred million pounds of trip that capacity, increasing I've tray pack overall production by 10%.

What happened during Q2 was that at some point, we will not able to feel all the others awful off the customers. So we have not lost any customers, but we will not able to fuel all the orders.

And then.

Okay, that's really good to hear thank you.

Yes.

Our next question today will come from Ken Zaslow of Bank of Montreal. Please go ahead.

Hey, good morning, everyone.

Monica.

Morning.

Can we just go back to Mexico for a second so just the understanding it so at this point.

The level of profitability is similar to last year.

Including or excluding covert cost so things have so the supply demand dynamics have become more balanced. It is that my understanding of what you're saying I just wanted to make sure.

Go ahead Charles.

Oh, sorry, the question was from its monetize thanks. Thanks for question Oh, Yes us as you saw US probably that's made the comment so drawn results were in line with basically last year and the two largest muscle July was very strong as well. So its continued strong as the months of June Ross So.

Well no margins are pretty stable and positive.

And then one just question on the U.S. as you see the big Bird.

Profitability, no kind of waiting a little bit have you thought that there maybe a greater levels of production cuts or do you think that the production levels will be constant with what we see an egg sets and Paul's place is there any change that you would expect with production levels going for the next three to eight months.

And that I'll leave it there.

Second the jumbo could ALC is running close to last year numbers. However, we are achieving this outcome with different categories behavior to last year boneless breast has actually outpaced last year. According to us. The most recent numbers and continue to see strength in recent weeks.

Hi demand in both retailing QSR, both bolus centric channels and flat supply has been supportive of the growth.

The the weakest park the of the leg quarters, which are trading at the bottom of the five year range driven by a 14% reduction in document debone production domestic markets.

Increasing the availability of the led parts like quarter exports by around 6% since the beginning of the and then.

And this is the reversal in the trend of increasing the boenning across the industry, coupled with weaker exporting pricing because of the band then.

So given that the cut out is relatively stable and these other expectations about the reopening of the foodservice the rebound in the price of oil and the resume off the exports. We don't expect to see any significant cuts in there in.

Industry U.S. D is forecasting a flat.

Reduction compared to 2019 with Q3 down a little bit on point by 5% and Q4 now.

<unk>, 0.2%.

And consider the egg sets and chicks placed during the Q2 I think the dice kind of cast for Q3 with those numbers.

Great I really appreciate it stay safe.

Thank you.

And our next question today is from bad began to know at Stephens. Please go ahead.

Thanks, Good morning, everybody.

Hi, good morning about.

Well I want to ask no pre Coburn you all had plans to convert capacity from big bird to small bird.

You know recognizing.

You're getting back on track with respect to mix and managing air plants sufficiently.

How does that change the timeline, but I believe you had delayed that conversion into 2021. It was a bit navios last week or not they come you any refresh on those plans would be helpful to hear about.

Okay. Thank you Ben Yeah, foodservice has seen differing levels of recovery. The QSR has exceeded our expectations. In fact, our key customers are significantly outpacing 2019 levels nearly 50% of our foot census, QSR, which help us offset some of the weakness in the other.

Hi, this category.

Smaller chains independent and loan commercial foodservice channels.

Susan and lodging have some improvements since April but are still recovering slowly and that much lower levels relative to pre coated levels close to 40%. So with that a new set of numbers, we re collects and and we decide to resumed the conversion of that.

Big Bird plant to the small bird segment stealing twentytwenty.

That's great to hear okay.

Separately, you touched on leg quarters any update you could give us on export markets and you know you are we at a price point, where just on an absolute price point leg quarters, how the U.S. become more attractive and receive support from the export markets.

And you know if you think about the two factors or the lack of like quarterly boenning driving up higher like quarter supplies.

And then exports on the demand side can you just kinda talk us through how you think the landscape looks going forward with respect to that particular cut.

Sure event, Yeah, U.S. chicken exports were up 5% year over year to me. So there was a significant increase in Mexico in Asia I think like you mentioned, the weakening oil prices and the exchange rate headwinds have reduced buying power in Africa, and Latin America.

Recent months have shown a slowdown in exports many due to the shutdown foodservice and economic activity throughout the world doing Cobiz Nike right. So there was a lot of shadows in all throughout the World in Latin America and in Africa, but do you expect the exposed to resume in Q3 in Q4, we do believe in good export opportunities for the.

Balance of Twentytwenty like you said the current pricing is very attractive for most of our destinations and they continue to increase our client base that feelings and this nation mix as well as introduce nontraditional export license to our clients.

Yeah, that's a very important points pitches in the way, it's a zero sum game in terms of dark meat, we are the burning less for the domestic production because of the foodservice shutdowns in the west which is creating more like waters in the export market as we see the foodservice resuming hearing U.S. and the availability of labor improving for me.

Our industry, we will start the ball anymore. So we reduce the pressure on the export market with a commodity like workers.

Okay, that's great Thanks, and best of luck with backup.

Thank you.

Our next question is from Michael Picken of Cleveland Research. Please go ahead.

Well I was wondering how we're thinking about the acquired computing public who how about sort of on top of call them on my work for comprises lots of all of them well I'm sort of a lower crop love on how Oh, we thought for whom I've looked at retail further up the department so everyday.

Yeah, Michael I think during Q2, we saw the labor availability for the alternative proteins beef and pork wouldn't get some challenges and we saw from sharp reduction in total Walt but the numbers a U.S.D.A. presented was down 11%.

In beef and close to 5% in Fourq, which was a completely different from the expectations and from the trends where they were increasing production as the label has returned the operations have resumed and we are seeing an increase in production for Q3 for both beef.

<unk> and pork, we see beef the expectation for you see a is the beef production to be up 1.5% well talk is going to rebound much.

Hi, two up 9% increasing production.

So that's a lot of a of meat for bolt beef and pork.

The.

Although the I think the best option is also be exports. If you look at domestic availability is not growing at the same pace as the production because beef and pork are also exporting a lot more.

Good the booking whole with people continue to talk about in China continue to exist and we're seeing some assets cases, and some avian influenza gazes to all the world and the scene.

You asked as the most productive and most the variable protein producer in the world and the exports are up for both beef and pork during this quarter.

Also during this quarter, we saw the reduction in excess of chicks placed on chicken. So we're seeing a pretty well balanced are thinking supply and demand are doing this this next weeks.

But we will see an increase in printing supply for the overall United States during Q3.

Yeah.

Yeah, we expect the retail to resume they are features I think.

The thing that we haven't seen over the last month is the featuring activity at the retail because of the lack of supply and the you know the the big demand retailers decided not to feature a protein I think there was no need for featured a broken in there seemed that a that featuring resuming.

Features for Chick chicken and all support are up year over year as a as of now and we expect that a feature activity to pick up during Q3.

Great. Thank you.

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

[music].

Hey, guys. Good morning, Thanks for taking my question.

Just one quick one from from me Charles You mentioned that that Mexico. You know is now at least contributing positive EBIT, but but probably on the U.S. side I just wanted to understand or clarify volumes have if in June were kind of flat year over year.

Pricing is still you know a bit volatile, but just in terms of the EBIT contribution for U.S.

It would still seen in Threeq, you know it would still be down on a year over year basis, and not necessarily slot and I just want to make sure that I understood that correctly X. I think there's been some confusion around.

Some of the commentary.

Yeah, because they're willing to look at the overall portfolio right. If you look at to the cut out on the Big Bird, we're seeing that the overall cut out for big Bird is flat year over year in 2020 compared to 2019 data from they wins in terms of grain or we see handful.

Supply like we mentioned on the on the prepared remarks. So there is a headwind or tailwind in terms of the grain expected to be around $75 million for the second semester of 2020.

So with that we can compensate the extra costs of running the plant with the extra reporting that we are doing because of golden monkey.

So.

Yes.

We look at the overall portfolio for buildings, we are the commodity portion of our portfolio is close to 20%. So when you think about the fresh food services and our exposure to QSR switches more than 50% of our foodservice both in the small birds and in our operations in case ready, which.

Our very robust we see that our portfolio of is working and we can see a better performance than.

And the competition.

Got it thank you.

Our next question today is from Adam Samuelson of Goldman Sachs. Please go ahead.

Hi, yes. Thank you good morning, everyone.

So two questions first I'm, just on Mexico, and I know there is reporting differences between you and your and your main competitor, but the the margin gap the you're importing the number relative performance that gap is why it seems to be widening.

Closed in the second quarter, but also over recent quarters I, just would love to get Fabio our Charles just get kind of perspective on kind of where are you seeing some of the mix differences are contributors to that would be and kind of how you think about maybe narrowing that performance got moving forward.

Yes, good morning, Adam. Thanks for question. So as you know during periods of troughs or like SAP smoke beers bad margins like we had in Q wanting to do it is pretty clear that our competitors do have an advantage, especially for two reasons one at the divorce diversified portfolio.

They have in Mexico like a remote they have a very strong business and table eggs on table like for the last six months has really been skyrocketing and crisis and demand also and the park business. So this is one reason for four or defense or the spread the other one is a they have a wider footprint than we had.

So specifically into large areas like a the peninsula, which use Mike you've got dunkin donut hole knock on corn in those areas where are we cannot be present your to distance at least for the time being I'm done on the northwest a as well so [noise].

The other diversified portfolio combined with a widespread footprint gives them more stability or one we'd have a a trough.

Goes without saying that we have being a in order to reduce volatility.

We have been expanding our prepared food business and that's wellness producing more ground up the fresh products, thus far with Dell. So we want to have a more stable and unbalanced sub portfolio, but the finally, it's also a fact that number during normal peers are the historical last at least 10 years have stronger we constantly oh.

From competition and we do expect that once the.

Margins are normalized again that we gonna be performing better gun. So that would be my my answer. Thanks for your question.

And now.

I think that says it's valid for all of our operations rise is how we build our portfolio, we don't expect to be our public comparable or even the no funded from competition every single quarter, but over the cycle over the long run we've proven that we'd be them.

And I think Charles was a are valid to U.S. and to Europe as well.

That's very helpful and my second question was more in the U.S. and you're giving color commentary around this already but.

The the mix and kind of production disruption kinda impact in the second quarter just from a.

He bed or a percent margin if you could frame.

You'll get a little bit more clarity on what Pat specifically was thinking about moving forward and specifically on those two items, how you would frame the the sizing of the impact in the third.

Yeah.

I think there was a big shift between retail and foodservice during the quarter right. So we saw the shut downs I mean, you saw a big demand on the demand we reacted quickly and we shift a little bit of our makes to our capabilities of course and increased by 7% Oh sales at the retail but that was not enough to.

Match with the increase in the needs and that's why we are expanding our capacity in our Minnesota plant, we want to help our key customers to grow and that's important for us.

Just like you said the impact in terms of cost it's more on the operations because of the loved the non optimal mix and the add that extra cost because of the causing.

The direct.

In fact in United States are north of $40 million like I said in the coming into Q2 around a $50 million in in the world, but $40 million just for that quarter into two we don't expect this cost to continue as we implemented all the measures.

On the indirect costs.

We see that the copied should don't consider this impacted market prices and volumes and.

We expect that to resume as the as the market our reopening.

Okay. All right. That's a that's helpful. I appreciate the Carl Potluck.

Ladies and gentlemen, this will conclude our question and answer session. At this time I'd like to turn the conference back over the Fabio Sandri for any closing remarks.

Yes. Thank you all feel like you're reiterating continued commitment to evaluate team.

Value team members that provide then safe and healthy work environment, while supporting no duty to maintain.

Production and supply to our customers are looking forward to a good hearing twentytwenty inspite of the volatility our diverse portfolio of differentiated products still which support the key customer strategy in conjunction with our broad geographic footprint, we continue to generate consistent performance and minimize munching volatility challenge.

Market conditions relative to competition, we will continue to seek new growth potential both organically and through acquisitions, while offering even more differentiated product portfolio within our business to supporting customers needs by cultivating a culture of constant innovation.

I would like to thank everyone in the biggest family, including our family fun partners suppliers and customers, who make our business possible as always we appreciate your interest in that company. Thank you for joining us today.

[noise] Other conference has now concluded we thank you for attending today's presentation.

You may now disconnect your lines.