Q2 2021 Pilgrims Pride Corp Earnings Call
Okay.
Good morning, and welcome to the second quarter 2021 pilgrims pride.
The conference call and webcast.
All participants will be in listen only mode.
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At the company's request this call is being recorded.
Please note that the slides of the French during today's call on available for download from the.
On the Investor website at IR Dot pilgrims dot com in the events and presentations section.
After todays presentation, there will be an opportunity to ask questions.
I would not exist on the conference the Julie Kelly of financial profile for pilgrims pride, Thank you and over to you.
The company good morning, and thank you for joining US today as we review our operating and financial results for the second quarter ended June 27.2021.
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 made the Scott.
A copy of the release is available on our website at IR Dot pilgrims dot com along with slides for reference.
These items also have been filed in form 8 Ks and are available online at Www SEC Gov.
Presenting on today's call are Fabio Sandri, President and Chief Executive Officer and Matthew.
Of the Noni Chief Financial Officer.
Before we begin our prepared remarks, I would like to remind everyone of our safe Harbor disclaimer.
Today's call May contain forward looking statements that represent our outlook and current expectations as of the day of the release.
Other additional factors not anticipated by management.
The only cause actual results to differ materially from those projected in these forward looking statements.
Further information concerning those factors has been provided in today's press release, a bunch of NK and in our regular filings with the SEC.
I'd now like to turn the call over to Fabio Sandri.
Thank you Julien good morning, everyone and thank.
Thanks for joining us today for the second quarter of 2021, we reported net revenues of $3.6 billion on adjusted EBITDA of 372 million or of 10, 2% margin compared to 4% of a year ago and on an adjusted EPS of <unk> 63 per share.
On the accumulative pleased with the results of our core business during the quarter.
Although the pandemic continues to affect our business, our second quarter revenues and adjusted EBITDA grew significantly versus the prior year, but more importantly, our U S from Mexico revenues and adjusted EBITDA surpassed second quarter of 2019 results. The results were driven by our resilient business model across all business units, including.
In the U S, Mexico and Europe, the unique challenges of COVID-19 presented an opportunity to demonstrate the value and strength of our well diversified portfolio, including a presence in multiple geographies and our ability to generate more consistent results despite specific market policies.
We remain guided by our principles.
1 of the uncompromising commitment to the safety of our team members our duty to provide high quality foods globally and the responsibility to provide continued employment opportunities and benefits for our team members during the pandemic.
<unk> offered employment incentives and bonuses in addition to bonuses to those who received the vaccine.
We hold safety protocols above all tenants and when coupled with high vaccination rates at our facilities, we are creating a work environment with our employee safety front and center, we think of the governors and other state authorities. The many of the locations, where we operate who have supported the of explanation of our workforce.
Labor availability.
The ability continues.
Difficult challenge for us, depending make unemployment benefits to enabling some states and Brexit impacts on the labor market in the U K, although we are gaining ground in the U S. Labor shortages continue to affect our product mix by limiting our ability to produce higher value products. We believe the labor challenges will further.
Further stabilize in the third quarter and in the west with the UK labor market improving towards the end of the year.
In the U S market Covid continues to effect, where people eat and how the buy their food retail remains strong although that will slightly from a very strong Q2, 2020 retail deli gain growth from the first.
Quarter benefiting from the slight increase in average trips per week, although not at pre COVID-19 levels shoppers are starting to feel more of that is going into stores.
Foodservice in the U S. The senior rapid recovery is most restaurants restrictions were eased in Q2 and consumers increased mobility bolstering Q2.
Price demand back of both 2019 levels fewer de risk the anticipated commercial restaurants close.
I think the mandates chicken purchases per operator increased foodservice demand is expected to total after the initial surge of pent up demand and somewhat travel comes through on them.
Retail demand is expect to EPS.
For the meaning of both 2019 base levels as consumers to keep the freezers and pantry stocked.
The non commercial channel with respect to remain below 2019 levels until the New school year begins Douglas has adjusted the volume and mix between channels to adapt to changing consumer demand.
Whether that's for the service, making a comeback of retail.
Tail consumer shifting between curbside pickup and in store shopping.
On a well positioned to adjust product and channel mix, given our presence across all bird sizes from large to small commodity large bird. The bonding continued its momentum from the first quarter and generated the largest profit improvement year over year.
Although it is volume revenue and profit growth was driven by support from foodservice and a strong export market. We continued strength in the third quarter in this business.
And we continue to see momentum in foodservice reopening of.
The case ready business delivered volume and revenue growth versus the prior year, but especially.
By the increase in grain and labor input costs, we have implemented price increases on operation of improvements to address significant portion of these cost headwinds and continue to partner with key customers to deliver both growth and value for them.
On the airport charge, Victoria of foodservice reopening strong <unk> demand and retail daily.
The improvements drove year over year and sequential increases in our small but volumes revenues and profitability. We see continued strength in this business unit with the further improvement in foodservice reopening and the strong demand for <unk> of our key customers.
The rest of the pet food sales volume was up 3.5% operational.
Special performance improved year over year, despite increases in underlying raw material costs and our branded retail growth has been extremely strong driven by investments in our just there and pilgrims brand or consumer packaged foods experienced over 200% growth in the second quarter. In addition, we have added branded distribution of major.
On a per square, we previously didn't have a presence.
In the second quarter. According to the USDA data the U S chicken supply increased 2.4% year over year lapping significant production declines in April 2020, despite the increases growth appears to be constrained due to poor hatch ability a comparison.
And 1 of 50, a statistics for exits versus chicks place illustrates the shortfall of hatching.
Commodity pricing across all cuts have remained consistently strong trending near the top or above historical ranges cobalt pricing remains stable also near the top of historical ranges.
Corn prices increased during the quarter.
Arthur with the market focus on expected low <unk> Corp.
All of corn crop and the stocks and smaller than expected new crop planted area and the latest about the report USDA reported the old crop ending stocks at $1.1 billion bushels, the lowest level since the 2012.2013 crop here in the June.
Planting intentions report USDA reported new club crop planted area at $92.7 million acres, although on an increase of almost 2 million acres from last year. It was below expectations.
The FDA is projecting new crop ending stocks could increase to $1.4 billion with the production increase of nearly 1 billion bushels from last year.
The strong export demand, we're seeing from corn, we believe the market will remain very sensitive to weather changes for the balance of the summer with relatively low on corn crop.
Crop stocks.
Corn and soybean meal prices were under pressure since last quarter weighted down by a higher than expected domestic production.
So I mean.
Oil prices have increased sharply since the first quarter, causing higher price processing rates, which resulted in an oversupply of soybean meal in the U S. The USDA forecast the old crop and the stocks at the 135 million bushels, the lowest level since the 2013.14 crop and a modest increase of 155 million.
Bush of 4 new crop despite the relatively low soybean carryout soybean meal prices remain moderated by the increased value of soybean oil driven by the growing demand for renewable diesel we expect to see relatively good supplies of the domestic soybean meal is the result of renewable diesel the initiatives. Despite the relatively low soybean carryout.
Looking at wheat.
We're expecting a large rebound in production in Europe, this year, including of more than 50% increase in the UK, our largest sourcing region.
Finally, the large supply increases in the other exporting countries, we feel very good about the wheat supplies heading into the fall.
As we had said previously of risk management approaches.
The adapted to the conditions and risks we've seen the market and we feel very comfortable with our current strategy based on the risk we see in the market today.
Of that business has managed increased labor costs, and higher and more volatile green prices through the benefit of a strong cut out and increased pricing to our customer base to recover the higher input costs.
While the effective operation of helping to control costs. Following our strategy of a diversified portfolio of imbalance of cost plus market and fixed price contract structures provides us the platform to manage through the volatility of our input costs.
At the close of Q2 industry of chicken inventories of what's the right.
Typically flat.
2 of its position at the end of Q1, However, USDA indicated inventory was down 15% from previous years, even after the marginal mode over the month increase in June.
Combined the dark meat inventories are down 10% year over year.
Part of the lean inventory levels has been unable to build despite year over year supply growth.
Healthy retail and foodservice demand have maintained consistent draw on supply.
Turning to export markets pulp prices were 54% higher in Q2 compared to a year ago, both pricing and demand exceeded expectations and non traditional export items were upgraded from frozen inventory.
On the data is doing.
As the for Q2 total USDA broiler export sales from <unk> grew by approximately 4%.
From a regional perspective, the industry enjoyed gains in most geographies with the exception of the Middle East and Asia are significant declines occurred due to COVID-19 issues and some of the larger of poultry importing countries.
It is also lot.
<unk> completed that China was down 16, 5% on imports of U S broiler meat due to a softer pork market.
Congestion issues and larger than expected imports of poultry in Q4, 2020, that'd be said the pull marketing Chinese display very strong demand and historically high prices.
Export numbers are indicative of.
Lots of work more balanced trade scenario from the remainder of the year, although some countries have experienced a resurgence of COVID-19 issues. Other are managing dependent on meeting well, we expect those with ongoing interest to improve in the second half of the year.
Still prudent to recognize the the dark meat shipments to China are very low relative to last year, which.
Both of them both for the future dark meat demand, we've already seen an uptick in China demand for the west whole legs as we enter Q3.
Our Mexican operations delivered strong results in Q2, given the well balanced supply demand equation of fresh business continued to improve its efficiencies of prepared foods saw double digit growth anchored the various.
Very strong performance in the <unk> and foodservice channels, we continue to invest in the del Dia and elements of the brands and we expect chicken and prepared food consumption to continue to grow in the coming years, our Mexican team continues to be a relentless focus on delivering exceptional operational results.
Moving to Europe, the Moy Park business has continued.
Both of our steady results despite the trending green prices through the first 6 months of of the year Moy Park deliver on improving EBITDA sequentially from the first in the first quarter the per.
<unk> Formula have addressed partially the increase in feed costs, however, along with green costs other operating costs like labor and utilities continued to climb during the quarter we continue.
Pursuing the recovery of these costs in the second half of the year.
The continued to be pleased with my parts of relative performance to the industry from the past 12 months.
Issues arising from Brexit, such as mix changes in labor shortages, along with even the influence of consequences affect on our ability to export some of our dark meat production.
The prevailing results Moy Park was able to mitigate some of the severe feed on the other of cost impacts through further operational excellence initiatives. The continued to deliver labor efficiencies better agricultural performance and improved yields while keeping tight control over SG&A costs, we have seen consistent consistent improvement in Moy Park.
For the service sales is the.
The sector shows significant recovery of year over year. Despite COVID-19 restrictions of experience throughout the second quarter.
Although under continued cost pressures most parts of performance is improving and will continue to do so as feed cost stabilized COVID-19 costs came down and the restrictions are eased.
Impact of the Deepness of UK business has been negatively impacted by increased grain costs and extremely low hog prices due to African swine fever in Germany, which negatively.
That the exports to China backing up the supply in Europe.
The business is benefiting from operational execution, but improvements are outweighed by.
By the sluggish breed pricing in the UK.
Despite market challenges, including the worsening labor ability in the UK, we have now been profitable on an EBITDA basis for the last 9 quarters in the wrong during.
During Q2 of our year over year retail volume decline of the retail market sales versus last year as foodservice normalizing category sales beginning to return.
Return to pre Covid levels also are year over year of volumes to China decreased due to the continued suspension of our export license of 2 plants as the results of COVID-19, we expect the licenses to be reinstated last later this year. However, total sales volume of show of 2% growth led to declining retail sales was compensated by sales.
And to the foodservice market.
We are optimistic about building our operational improvements by continuing to optimize our manufacturing footprint extracting best in class of operational excellence capitalizing on export opportunities optimizing our portfolio and strengthening and growing business with key customers to drive innovation and.
Value added higher margin areas, we have a great team in Europe, the dedicated to generating results by focusing on factors within our control, while ensuring and protecting the safety and health of all team members.
The front of Australia, and our portfolio of their key and our relationship with key customers and to continue the executing against our growth strategy. We.
The agreement to acquire the meet the neo business of carry consumer foods the.
Amidst the neo business acquisition will position <unk> as the leading food company in UK and Ireland with the value added protein and prepare for the business anchored by a portfolio of strong brands with 2020 sales of more than 725 million pounds and 404.
4500 team members the business well balanced portfolio of products brands and consumer base aligns with our growth strategy. This acquisition will support our strategy of developing a differentiated portfolio of diverse complementary business models continue to relentlessly pursue operational excellence and becoming more value.
Finally on Ricky customers, with new and innovative products and creating the environment for safe people safe products and help the assets. We expect the transition this transaction to close early in the fourth quarter of 'twenty slate and finally I'd like to point out that we recently released our 2020 of sustainability report, which.
It includes the 5 year results of our 2015 sustainability goals and aggressive new globe, both targets that will guide our sustainability strategy over the next decade and beyond.
The reports of the deals of the Companys progress and key priority areas animal care team members environment communities customers and consumers and.
On suppliers across our operations in the U K, Europe, Mexico, and the United States.
The risks has established ESG score 2 of our business strategy adopting industry, leading initiatives that build on the company longstanding commitment to sustainable food production and differentiated social initiatives.
The business is the first.
Major of global meat, and poultry company to offer of sustainability linked bond price.
Efforts to reduce greenhouse gas emissions intensity across the global operations. In addition, we committed to achieve of net zero greenhouse gas emissions by 2040 of the most ambitious commitment of its kind of in the sector.
We're committed to.
Being the best and most respected companies of our industry and we want to serve as the leader that can help drive the entire supply chain forward, we remain focused on producing high quality of food for people around the world in a sustainable manner that is both the ambitious on collaborative way of creating the opportunity of a better future for our team members with that I would like to ask our CFO Matt of ammonia.
Discuss our financial results.
Thank you Bobby and good morning, everyone for the second quarter of 2021 net revenues were $3.64 billion versus $2.8 2 billion a year ago with an adjusted EBITDA of $372 million and the 10, 2% margin compared to a 112 million.
The nurse and a 4% margin in Q2 last year.
We achieved $154 million of adjusted net income, which includes the discrete income tax charges in the quarter $32 million associated with the UK increased statutory income tax rate from 19% of 25 per cent.
We reported a GAAP.
Net loss of $167 million versus a loss of $6 million from 2020, the most significant adjusted in the quarter was the $396 million accrual related to legal settlement.
Adjusted EBITDA margins were 10, 5% in the U S 18, 9% of Mexico and 5.2 percentage.
Yeah.
Our adjusted EBITDA on the U S. In Q2 was $237.1 million versus $93.7 million of a year ago and $236.4 million in 2019.
Sales were up due to strong market pricing and slightly higher volumes compared to both 2020 and 2019.
Gross.
EBITDA margins were higher than 2022, the significant COVID-19 impacts last year, however were down compared to 2019 due to higher grain costs and labor inefficiencies.
In Mexico adjusted EBITDA in Q2 was $85.7 million versus the loss of $27.7 million a year ago and of positive 70.
$75.8 million in 2019 net.
Net revenue was up due to higher market pricing and slightly higher volumes. The Mexican business has benefited from a balance supply demand dynamic from.
Our adjusted EBITDA in Q2 was $33.5 million versus $34.7 million, a year ago and $37.3 million.
The problem 2019.
Pilgrims U K had adjusted EBITDA of $15.7 million in Q2 compared to $12.3 million a year ago volume.
The continued to improve during the year with the gradual reopening of the U K and European economies. However, gross profit is down year over year as we've been able to pass through some but not all.
The cost increases experienced in the first 6 months of the year.
In total we incurred COVID-19 related cost of approximately $12 million in the second quarter 2021.
The decrease of approximately $37 million compared to the prior year.
Overall, our SG&A in the second quarter was higher than prior year, primarily due to legal cost.
All of the grid the shoe with the various U S litigation matters and increased investment in our brands.
We will continue to prioritize our capital spending plans this year to optimize our product mix and strengthen our partnership with key customers. We reiterate our commitment to investing strong <unk> projects that will improve our operational efficiencies and Taylor.
Cost of operations to address key customer needs to further solidify competitive advantages for pilgrims are.
Our balance sheet continues to be robust given our relentless emphasis on cash flows from operating activities focus on management of working capital and disciplined investment in high return projects, our liquidity position remains very strong.
Taylor on $2.5 billion of total cash and available credit.
At the end of the quarter on net debt was $1.8 billion.
With the leverage ratio of 1.6 times last 12 months adjusted EBITDA, our leverage is below our target ratio of 2 to 3 times and we continue to expect to generate strong operating cash flows this year.
We expect 2000.
More than 1 interest expense to be approximately $110 million exclusive of the debt extinguishment costs of $24 million, we recorded in the second quarter and any interest expense associated with the financing of the pending carry transaction.
We will stay focused on creating shareholder value is the optimize our capital structure to continue executing.
Any of our growth strategy, our capital allocation strategies remain aligned with our growth strategy in each opportunity the evaluated against the value creation standards.
Operator. This concludes our prepared remarks, please open the call for questions.
Thank you very much.
We'll now begin the question and answer session.
20 of the interest of following allowing equally.
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At this time, we will pause momentarily to assemble our roster.
Okay.
The first question is from the line of.
Of Ben Theater from Barclays. Please go ahead.
Okay perfect. Thank you very much good morning, sorry of good morning, Matt Congrats on the results of first.
First question just could you elaborate a little more in detail on that close to 400 million for full litigation settlements because.
If I look at it on the on an LTM basis, we're now close.
600 million of which a lot of was like the price fixing last year, but just to understand if there was incremental $400 million from the last quarter is that.
Already all of settled in cash or is a lot of that like just in order to be prepared if there is more to come and do you think this is this is it.
That would be the first question.
Good morning, Ben Yeah, we can't comment on the active investigation of litigation that however.
The company continues to cooperate with the department of Justice on it I think that's the nation and will continue to defend against the claims and to resolve its material litigation in the manner that we believe it's the best interests of the company of the shareholders based on debt that is.
Nation of the actual settlements and accruals that we expect G&A of it.
Okay. So it's not all with an actual settlement is theres, partially there really isn't.
Okay. That's good.
And then the second just on the U S. If we take a look at the underlying performance I mean, it's being clearly on an improving.
The company name it seems like you start to get pricing through and maybe a little bit of an easing on the cost side.
So you've highlighted labor shortage and in certain other issues on the cost side, how do you think about the current quarter and what's what's next once those benefits run out in terms of getting labor back in being.
In being more efficient on the facilities and ultimately for pushing those price increases through with your key customers. So where do you where do you think the profitability was heading into the second half just based on more of the current environment is.
Yeah think of us alone.
Ben.
On the pricing in the contract.
We have the differentiated portfolio of been talking about this for years right. The protects us from the downside and we have an exposure to the commodity the segments that the enables to capture upsides in the market. All of these different segments are behaving differently during the.
The last year to true.
The honest right so on.
Is really strong right now and we are seeing of strong demand in the foodservice.
That is growing really fast while the retail continues to be strong so as of today of the commodity the segments are way more profitable than all other segments. The small bulk segment continued strength with the growth of the <unk>.
Commodity, but the contracts that we have in those segments on more connected to the grain pricing.
And that profitability is very stable.
So we have a very stable part of our portfolio and are part of a portfolio that is really connected to the on commodity prices that we can.
Achieve.
The results that we are achieving going forward. What we are seeing in the market is that retail will continue to be strong I think consumers are back to older habits of more trips to the grocery which will help the.
Also the Deli section so the retail continues to be true.
In the foodservice is reopening I think today, we are seeing the the traffic is close to where the 66% lower than the pre pandemic levels. So very good level of really while the non commercial.
Part of the food services too.
29% to 30% down and we expect the schools to reopen the very soon from the next.
Yes, which will boost of the foodservice industry. So going forward. The we continue to expect or we expect to see retail continued to be strong and the commodity segments should be really demanded with giving the.
Extra increase in the foodservice.
Okay perfect. Thank you very much Pablo.
Sure.
Thank you.
The next question is from the line of Bon ton of Aneel from Stephens. Please go ahead.
Hey, Thanks, good morning, everybody.
Bye bye.
Want to ask.
Ask first about the grain side of things on the feed cost and then.
And then my second question is about Mexico. So on the feed side of things I. Appreciate your commentary on the current F&B.
I noticed in your disclosures that.
Youre not overly hedged from derivative coverage exposure, but you are.
Got it.
In a few years and so I'm curious kind.
Kind of of your thoughts there around how you are positioned relative to the market any commentary you could provide on on basis exposure as well and what we should be considering relative to your positioning.
Positioning on around all of that as we head into the back half of the year.
Sure. Thank you.
Well like we said previously on risk management strategy of the adaptive to the risk of fee on the market and we feel very comfortable with where we are positioned right now what we're seeing is that we are following the summer crop developments in the U S. Very close given the low stock situation, we have for both corn and soybeans. So while there has been some areas that.
That had been drier than we would like particularly in the western corn belt, we think overall the U S crop on email K condition, though but would require additional monitoring for sure.
In addition to the condition of the U S crops and despite some volatility in recent cancellations were still seeing strong demand for corn and expect.
<unk> debt to continue into next year and given all of that we're looking on an increase in feed costs of approximately $300 million in U S for the second semester with the Q3 being impacted on the most.
While we are seeing that the impacting our cost around 8 cents per live pound what we're.
Is that the commodity of living in the the.
Normal pricing and the Colonel <unk> has increased by significantly more than that kind of almost 30 cents. So the commodity price has been able to offset the screen prices. So far our positions as you mentioned are not.
The largest we ever have that we are monitoring all of these costs and we believe.
As seen on we have the right the cause.
<unk> right now.
Okay. That's great. Thank you.
My second question on Mexico, Congratulations on the the solid results I'm curious just given that that market can be temperamental from quarter to quarter.
What youre seeing so far in the third quarter, you noted a stronger.
The market environment more balance F&D better product mix on the non commodity piece of of your business. Maybe just any color you could give as we looked at the back half of the year on that business.
The typical Minto has a good day, thank you for debt.
We know debt quarter over quarter of the performance can be variable.
Vault, though what we're seeing in Mexico is that we have a well balanced supply and demand scenario right now and we expect that to continue in Q3, our fresh business continues to improve its the efficiencies and while the prepared foods saw a very strong double digit growth anchored in the very strong performance of the queue of starts and service channels.
Economic of the economy is recovering well.
We are watching the the the Covid cases are pretty close right there, but we don't expect a major impact in the current positive recovery trend of the economy.
And as I mentioned are always our team members and our team continues to be focused on delivery of these operational results.
Soles and committed to growth in support of the growth of the Mexican economy.
Yeah.
Awesome. Thank you and best of luck on the back half. Thank you Ben.
Thank you. The next question is from the line of Michael Picken from Cleveland Research. Please go ahead.
Yes, good morning.
Just wanted to talk a little bit more about the hearts of ability on the issues.
This is within the industry, where do you see that I'm approving on how are your how's your heart's ability doing and what steps are you taking kind of improve that.
Yeah. Thank you Michael Yeah hatch ability has been the issue in the industry and that is constrained.
The <unk> the industry to exceed the growth that everybody is expecting which is less than 1% for 2020 the.
The main reason for the hit the ability of issues is that when we tried to solve the deluge of breath the E.
Issue as we remember 2 or 3 years ago the genetics.
Election of this new breed price alright tries the quality feed conversion the carcass utilization rather than discrete.
Traits, so even with the largest work that we are having right now it is producing less eggs and less.
Our hedging.
Some of.
Headaches that can also be explained by management and the expected debt, we can manage better around and we can recoup.
Half of a percent Q1, 1% the.
The GAAP today's close to 2 and a half per cent.
So half of a percentage of 1% we believe the weekend.
The recoup with the better management of these new breed, but the rest will take a much longer time, because we need the breed change.
Great and then shifting gears on you talked a little bit about the adverse mix of facts and maybe if you could talk about you know kind of the steps you're taking in or your thoughts on auto.
Of the nation and how much that might play into your future plans on do you have any protected the capex spending related to that if you are going to go to more automation.
Sure sure.
Again like you said the the labor.
Market is really tight and it has been.
All of them not only constrained by the impact of discontinued the governmental benefits, but now what we are seeing that the reopening of the economy. After the COVID-19, it's pudding of.
Big competition for a very small labor pool and as we mentioned we are considering all options.
1 we are aggressively addressing the situation on the.
The attraction retention and management of the is that the Synthes and all of our Labor force and of course investing in the automation.
We are happy to see that our staffing levels have improved over the last few months and it has helped our mix effect, but we will need to continue to invest in automation because.
We don't believe the labor.
For Cisco on the increased significantly in the income in the future we over the last 2 years reduce the 200 positions without the missions and we expect to invest around the 100 million more million dollars in the next 2 years to reduce around 5600 positions we.
Investing also in some new technology in big birds, the bonding automating that big but the blending which is a very.
Very unique.
And we expect that those plants to be operational about this year.
We are in the question and answer from cyclical.
Sure.
Yeah.
It seems there's no response from the line within the most of the next question that is from the line of Adam Samuelson from Goldman Sachs. Please go ahead.
Hi, Thanks, and good morning, everyone.
Good morning, good morning.
So I guess first question, maybe keying off of the Mikes question on about the hatch ability just trying to get a sense of your volumes in the U S were basically flat.
In the quarter industry production was up about 2.5%.
I'm, just trying to get a sense.
In terms of your internal productions is is that the hatch ability on your own operations is that the labor availability is there an issue around mix maybe on the prepared to on the prepared poultry side for foodservice just help us think about your own volume shipments relative to the industry.
How youre thinking about your production on the back half of the year.
Yeah of course on Adam Thank you and yes on production during the quarter was flat a little bit up but the total flat you know on a year over year with the industries, the increasing by 2 and a half per cent, but we need to remember that the doing the pandemic on production.
Nixon did not reduce as much of the industry. So despite being flat year over year and the industry is higher but the industry the screen more than the us in Q2 last year, it's not a matter of hatch ability, we're having the same issues and hatch ability as everybody else. We are in line with the market. It was also relate.
Out of a bit with the storm that we saw in Texas.
It happened last quarter, but impacted a little bit of a feed conversion and the volumes this quarter.
Yeah.
Got it that's that's really helpful and then Fabio.
You talked earlier about the impact of of feed.
Later on.
On your costs, you've kind of alluded to some of the labor challenges I'm just trying to think about maybe non feed inflation in aggregate, whether it's labor.
The materials packaging.
How how we should think about what your non feed of inflation.
In place running at the through the second quarter, and what you think sort of through the balance of the year.
Particularly as we kind of try to check.
Check out against the the pricing side of things as we need to come off some of the seasonal peaks.
From here.
Sure sure.
I think other than when we were seeing.
On the inflation everywhere in the country and in other countries right I think it starts with the freight the freight right. We've seen freight the increasing by between 10 and 20% in terms of cost.
Of course, depending on the lane, where we are in and we are watching really close to any potential disruption.
Each of the supply chain in the supply chain.
The increase in trade for them for us in the quarter is about $50 million, but 65% of that freight is spent on deliveries directly to our customers. So most of which has been recouped. The remain we need to meet to get to pricing and as the ism.
As I mentioned, we are seeing the supply and demand situation in a very favorable situation for the chicken.
The pricing.
And we believe that we can pass all of those costs in terms of free to all the contracts there's other.
Kris.
In the cost saves in the dimension, which is labor labor as I mentioned to be in a really short position right. Now we increase our salary is close to $40 million in an annualized basis.
And with that we are being able to improve our staffing levels, we are seeing soybean.
In the meal, but soybean oil also on the prepared foods.
The increase in terms of inflation the.
All of the law, we have this differentiated portfolio of and again, we have of differentiate the portfolio from not only of products, but also of contracts.
While the supply and demand.
The chicken industry continues to be imbalanced, we believe that it can pass through these prices this cost increases to our process and.
As I mentioned in the other.
Answer the chicken demand continue to be really strong and we expect it to be really strong from the next quarters.
Alright.
It's really helpful color I'll pass it on thanks.
Thank you.
The next question is from the lineup features out of the from Bank of America. Please go ahead.
Hey, guys. Good morning, Thanks for taking the question.
Pardon me I just want to ask a couple of clarifying questions in regards to.
That's all of your comments you gave.
First on the on the retail business I know you said you are having pricing discussions at this point.
To offset some of the cost increases that I just wasn't sure. If you had said youll be going to be able to offset all of the cost increase or just partial on the retail side.
And then just as you as you were talking about kind of schools getting.
Some of them from kind of fall in some of the commercial business. Just what are you kind of seen early days are you seeing any kind of preordering of had people worried about not being able to get product.
Anything you can tell us kind of on on that side of the business.
Yeah.
Thank you.
Retail continues to be really strong and.
Getting back the.
Lower demand today versus 2020, because of the pantry loading, but we are seeing demand greater than 2019 levels, which is of area.
Good for them for our production and other key customers. We have this key customer strategy, we have discussions with them all the time on the bulk per.
And as I was talking to all of them. There is a lot of pressure in terms of costs voting feed and non feed.
Feed costs.
We've been discussing with them how can we pass these through the prices and help them continue with the innovation and continue with the <unk>.
The features in terms of volume.
And we're seeing today, a very tight market for the.
Retail because the labor in the retail operation is very intensive and we'd be in.
Very challenging the labor situation going on so somebody mentioned right. So the production in the retail segment, hence the constrained by labor So what we.
We are doing is to support our key customers and giving them the best the.
On time in full debt we've seen in years.
As we have seen also from features increasing for the retails for the retail in the chicken find because of the delta between the chicken and the beef.
Clark has never been.
Big as it is right now so that is very supportive on the demand for chicken.
So even with the increases that we're seeing.
Chicken continues to be the best value on the best option for the end of it.
Got it okay.
And then on schools, maybe maybe I missed the the comments on some of the commercial side, yes sure on.
The 1 we call non commercial which is the the schools and other segments. The yes, we are seeing some preordering and we're seeing some expectation of of.
The increase there as I mentioned this.
He has done on close to 30% right.
Right now in that segment and we expect that the 2 of stabilized and they get to normal levels by by early 2022.
Got it okay. Okay, and then I guess, just putting that altogether right as we're thinking about some of the some of the sequential headwind and tailwind right Labor I think you said it is maybe improving sequentially on the margin.
Margin fee, you're rolling through some of the higher cost, but just looking back historically at periods, where chicken prices are relatively high.
You've been able to earn a pretty substantial level of EBITDA in your higher higher EBITDA quarters, right. The second and third quarter. So that's 1.
We're thinking about modeling out the.
Quarter is is it fair to assume that.
You're expecting a similar level of relative to <unk> I mean is that putting it altogether of the right way or are there other things we're missing.
Yes, we are seeing supply and demand.
Equation to be similar to Q2 of course.
As we enter the fall, we always see some declining pricing, but we are also seeing some some reduction in the feed side of course of the cost of the fees in Q3 will still be impacted by the cost of the what the purchase in Q2. So we expect the mitigation of the or the reduction in feed cost.
The third would be more in Q4 than in Q3, so as to see some elevated feed costs in Q3, but we are seeing once again discipline of them in the very good position and we are seeing some reopening of the foodservice.
As well I think it will all depend as well on the Covid numbers. If there is any more restriction and we go.
Go back to some sort of restriction in terms of movement or in terms of the the foodservice we can see.
The supply and demand to get the less in the in the positive position that we are seeing right now but as of today, we have here.
Really.
Domestic about the what we're seeing.
Got it that's very helpful commentary, thanks very much.
Thank you.
Thank you.
Next question is from the line of ascent.
Ken Zaslow from Bank of Montreal. Please go ahead.
Good morning, everyone.
Good morning, Kevin.
Just a quick 1 on this 1 I know we've talked about a lot of just trying to put it altogether the.
On the labor how much do you think it impacted this quarter not just the cost side, but also delivering you did say the dark meat.
How do we kind of put it together and then would you say that within the 2022 it would be.
<unk>.
And therefore 2022 should have a relative change relative to this year is that the way to think about I'm just trying to put it together.
Sorry for beating a dead horse here.
Yeah, No again labor is.
What we're trying to manage the better and as we said there is so many moving parts of it is really hard to define.
Line, what is the impact because there is impacting mix right. So we can the bone as much as we want the there is impact in cost of course on yields we are losing yields as well because as you're doing the bone everything the same day, so the ROE, France or you sell France, you'll see a lot of the yield losses.
It is very significant on the other hand, we are working with our key customers to simplify our mix as well. So we are deploying last we're putting some simple forms reducing the number of skus. So theres a lot of moving parts I think the good news.
It's included in your point is that we expect in 2022 debt.
Can be resolved.
We are investing them on automation and we are seeing the labor force and we're seeing the number of applicants increasing already as the government assistance is reduced so we expect the 2022.
The the labor market to be improved from the levels that are today.
We believe the with all of the operational improvements that we are doing the business, we will get to by the operation standards, Let's say to where we are today.
And my last question is what prevents.
Pilgrims pride from getting to the 2.2017 or that type of level of margins in 2020.
And do you just need the lever to come back.
The position there already or do you need other things to happen given that you've progressed on your strategy you progressed on your efficiencies.
The market seems to be going that way is that a way to think about it the labor the inhibitor.
Uh huh.
The 2 getting to that 2017 margin structure or is there anything else that we should be thinking about.
Yes, well of 2017 was the strong year in the commodity segment, but at the same time, we don't have the increase in the feed that we have seen today with all of the disruptions we have it in the.
And the use of that we're seeing in the in the in the feed side.
Of course, you're right on the operational side, we have a lot of opportunities given the labor situation that where we are in and I think that.
Could create an environment, where we get close to 2017 levels, but that will also require.
Acquired the supply and demand to be imbalance. If you look at in terms of supply is.
He is very limited.
Opportunities to increase.
Supplies, we don't have any new plants coming online and we still have the hatch ability.
Issue that we expect to get something back but not the significant.
The improvements in hatch ability that we need to significantly increase the production for next year. So we expect the production next year or 2 increased close to 1% to 2% as we've ever seen.
This year, it's all depend on the supply demand Ken if you have seen the economy really strong as we are seeing right now and.
And the retail we expect to continue to be strong on the foodservice strong yes, we can see 2017 level of margins.
Okay. Thank you very much.
Okay.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Fabio Sandri for closing comments.
Over to you.
Thank you I'd like to take this opportunity to speak directly to our team members to thank you for your continued dedication to maintaining food production and supplying our customers. During these extraordinary circumstances you want the reason for our success I would also like to thank everyone in the previous families who makes our business possible, including.
Our family Farm partners suppliers and customers. Thank you all for joining US today. We appreciate your interest income.
Yes.
Thank you very much.
The conference has now concluded thank.
Thank you for attending today's presentation you may now disconnect.