Q1 2022 Pilgrims Pride Corp Earnings Call
Good morning, and welcome to the first quarter 2022 right.
Alright earnings conference call and that path.
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<unk> W. W adopt their green Dot com.
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I would now like to turn the conference over to Andy, but yes, he had a strategy.
A lot of that.
Please go ahead.
Good morning, and thank you for joining us today as we review our operating.
For the first quarter ended March 27 2022.
Yesterday afternoon, we issued a press release, providing an overview of our financial performance for the quarter, including a reconciliation of any non-GAAP measures we may discuss.
A copy of the release is available on our website at IR.
Along with the slides for reference.
Item also happened.
K and are available online at SEC Gov.
Andre President and Chief Executive Officer, and Matt Galvin Chief financial.
Officer presenting on today's call before we begin our prepared remarks, I would like to remind everyone of our safe Harbor disclaimer today's call may contain certain forward looking statements that represent our outlook and current expectations as of today. This release other additional factors not anticipated.
If I may.
Cause actual results to differ materially from those projected.
Looking savings.
Further information concerning those factors has been provided in today's press release, our 2021 and Form 10-K and in our first quarter 2022 Form 10-Q filings with the SEC.
I will now turn the call over to Fabio.
Thank you Andy and good morning, everyone and thank you for joining yesterday for the first quarter of 2022 reported net revenues of $4 24 billion, a 30% increase over the same quarter last year and adjusted EBITDA was 501 8 million almost double Q1 of 2021, our adjusted EBITDA margin was 11.
8% compared to $7 eight in Q1 last year U S. GAAP earnings per share was $1 15 versus 41 since last year, an increase of over 180%.
We are pleased with the overall performance in the first quarter, our U S and Mexico business has effectively manage through volatile market conditions and mitigated the impact of inflation and commodity LIBOR and ingredient costs, although our U K business has made significant progress indefinitely through market conditions are challenging labor environment.
And rapid cost escalation many of our contracts have a lag or never contemplated a magnitude of inflation that the country is facing.
We are proud of a promising start to this fiscal year and remain confident that successful execution of our strategy of portfolio diversification key customer partnership and operational excellence, we continue to provide stronger more consistent results.
The last improvement opportunities.
And we must drive our business with an unwavering commitment to our team members health and safety. He must continue to manage through extreme volatile market conditions, the global complex across the globe grains, and oilseeds markets really through the first quarter as the Russian and Ukraine conflict disrupted shipments and increased the risk that Ukraine will be.
Unable to harvest their crops and plan to new crops.
Russia also faces complications and their ability to export impacting the markets for corn and wheat.
Moreover, the region as a leading producer of fertilizer and prolonged conflict inhaled delivery forms throughout the world.
These conditions are sort of exacerbated by challenges in Brazil, soybean fell short of expectation coming up.
Roughly 125 million metric tons as opposed to an estimate of the funded a 45 minute. We're closely monitoring the progress of the standards in Brazil, second corn crop and its impact to the global corn supply in the U S. The current focus is under whether you have anything back on the pace of planting and total acreage for corn and soybeans.
Wheat and other crops the current forecast indicate relatively.
Relatively cool and wet conditions, the late planting and potentially limiting production. In addition, China has not approved certain south American regions for corn shipments. Although we do not believe that this was significantly better or supply U S. Government also announced some changes to its policy regarding seasonal ethanol chain usage.
Given these factors commodity prices have rallied and being very volatile versus last year and as always we have a pretty great position that reflects our view on the risk in the market.
As for supply and demand conditions for U S. Chicken lightweight production increased by 2.5% why don't you. After Q1 last year driven by additional head count and heavier average lightweight the industry continues to experience that you deliver your challenges and labor constraints, which constrained overall supply growth.
As a result, the Bai is expected to grow less than 1% in 2022, according to the USDA.
The overall supply of floating will be impacted due to the limited availability and the other protein complexes as USDA expected domestic I feel it would be to just beef barky pork and Turkey to increase only 3% year over year beef and pork availability is expected to remain flat, while Turkey supply will likely be.
Adversely impacted by avian influenza through USDA estimates, despite logistical challenges than inhibits our inventory flow total protein in cold storage remains 7% below the five year average at the end of March.
Domestic chicken demand remained steady throughout the first quarter relative to the same time last year, although the retail channel are low when compared to the pantry loading periods of last year. It is Q3.
Covid levels higher and higher prices are supporting revenue games fresh chicken volumes different marching in Italy during the year, but strengthening later in the quarter volume demand for frozen value added products remain resilient, even with increasing prices.
Deli Department posted year over year bottoming games, which sales also above the pre COVID-19 levels.
The food service channel exceeded year ago, and pre Covid basically line levels waning foodservice distribution the number of operators purchasing remain below pre COVID-19 basically baseline level, Rick Spurr operated remained healthy and the number of operators, we're seeing fleet increased year over year.
With our key customers continue to grow although the noncommercial segments posted significant year over year gains to on a recovery path to achieve the pre COVID-19 levels of sales as consumers increasingly feel the effects of inflation, we anticipate some shifts towards retail demand despite increasing prices do last year. She can.
Still remains the most affordable flexible and available option relative to the other proteins as such is well positioned to benefit from changes in customer behavior and spending patterns.
The expert business remain robust as overall chicken inventories increased 5% from December 31 to the end of the first quarter and up 2% from last year.
Dark meat accounted for the largest increase as it grew on average 17% from last year, primarily driven by ocean container shipping disruptions throughout the all U S sports. Despite these challenges USDA export sales increased by one 7% relative to last year throughout February driven by Asia and developing economies.
The improvement in the export volumes are reflective of a resurgence in global demand and supply that is.
Driven by the AI in Europe , and Southeast Asia, as well as assessing critical South East Asian markets. The conditions are further amplified by the supply disruption from the Russia, Ukraine conflict and both countries are exported roughly 35, 4% of their chicken production.
Our export business has outpaced the industry growth and we expect a continuation of just momentum given our diverse portfolio of bird sizes and brothers suppression of production facilities, you could important impact on U S chicken industry hasn't been relatively muted at less than $2 5 million brought on there have been impacted by a one.
Other countries have been more severely impacted as a result, we may have additional opportunity and flexibility when considering exporting countries.
We will continue to monitor the impact of AI trials, our global business, you have sustained demand levels and supply limitations, we expect chicken commodity prices to remain elevated above historical norms, which is demonstrated by the jumbo cutout prices. There are currently 82% above the five year average.
Turning to our U S business and the consistent execution of our strategies of fee customer focused but followed diversification of operational excellence enable us and our teams to navigate volatile market conditions and drive strong results.
Given the challenges in egg production, we are holding our hands out longer than industry average, although our hatch are glitchy suffered leanne. Please on overall capability to our key customers to address this challenge we have partnered with our primary breeder supplier student to find the root causes of the declining hatch.
I have included the evaluation of male and female lines she'd formula.
With Mint and management practice given initial results, we have already seen a positive impact to egg production and hatch and will continue to implement this kind of just change.
Assuming continued progress these measures should increase our supply in the second half of this year equally important we continue to aggressively monitor even influenza and enforce heightened in guiding security protocols to date, we have not experienced any significant business interruption from avian influenza.
We continue to invest in our people and equipment to enhance yields improved mix and ensure sufficient capacity.
To support further expansions since 2020, we've increased R&D wages by close to 20% and have expanded our incentive programs across our hourly team members. This resulted in an approximately 30 million year over year increases in U S hourly employee costs in the first quarter only.
On the demand side, we will evolve our pricing approaches and it just makes to mitigate the impact of supply in the mutations in the current inflationary environment. We will continue to partner with our key customers to ensure sufficient product availability to satisfy the demand driving top line growth for our business. We're also working closely with our supply chain partners to ensure.
Sufficient visibility and timing of cost increases.
As a result, we can identify opportunities to offset those impacts and ensure sustainable margins throughout our business invest in their key customers and value for our customers.
The activities have enabled us to navigate volatile market conditions throughout the U S. We have captured the opportunities on the commodity market, while maintaining the margin on the other business.
Our commodity big Bird debone businesses, leading the way as it off.
Again generated the largest profit increase relative to last quarter and the same period last year, both volume and revenue growth were driven by the food service channel and continued development of key customer relationships. This business is especially well positioned to realize the benefits from the current market conditions and chicken and remains the most affordable.
And flexible offering throughout to the protein industry.
Our small bird business realized both top and bottom line benefits for increased traffic from <unk> and broadline distributors to mitigate the impact of the makes a tornado we relocated bugs throughout our network to effectively maintain our operations and the service level to our key customers. We also updated pricing to offset.
Increased grain and other supply chain costs moving forward, we will continue to evaluate and adjust our mix accordingly to key customer needs and industry trends.
Our case ready business delivered year over year revenue growth with stable margins.
Leasing logistics and labor issues the team rose to the challenge throughout the quarter and they partner with key customers to ensure superior service levels and operational improvements to partially offset increased from grain labor and other supply costs.
We expect these changes to generate continued growth from distribution and improving margins.
Our prepared food sales grew over 35% relative to last year, driven by prioritization of key customers pricing recovery and increase the volume of course.
<unk> focus on service and product quality pay dividends, especially for just there as we increase distribution and market share despite higher prices from increased input and labor costs.
Margin improved year over year after the business landscape next from 'twenty to 'twenty, one winter storm and drove operational efficiencies given our continued growth we initiated work on our previously approved the expansion at our Moorefield facility, we expect additional capacity to become available in the latter half of the third quarter.
The branded retail business for just there has strong momentum and sales have grown 51% year over year increase of 11% from prior quarter.
Fully cooked business offerings has also gained significant traction consumer demand for our branded offerings appears especially resilient at the point of sale as we have not experienced any drop off in demand from our pricing adjustments for inflation.
E Commerce has enhanced our overall growth in retail and foodservice net sales have increased year over year over here. We're building a presence as we develop new partnerships and optimize the relationship with the existing provider and fourth theyre cultivated relationships with key customers.
Turning to our European business significant inflationary headwinds emerge throughout the supply chain, including feed ingredients labor and utilities, the Russia, Ukraine conflict has made those impacts even more pronounced especially in commodity prices as the key U K wheat rose over 40% during the quarter.
To lessen the impact and meet customer needs. The team expanded its procurement and operational reach beyond its traditional supply base did that and they didn't find new suppliers in different countries to ensure sufficient raw materials and ingredients availability.
This differentiated approach resulted in improved service levels and increased topline momentum excluding the impact of the August Woodmac integration sales grew 9% relative to last year, our key customer strategy provided the foundation for further growth as we increased market share and secure additional distribution for our innovation.
Our efforts are being recognized by consumers in leading grocers and food Masters, which mom brand was recognized as a top 50 brand in the U K.
In addition, the team diversified its geographical reach to improve sales and margins.
Simple our porting is now contracted sales in the United States Asia and Africa. Furthermore, the team has identified and is realizing finishes with the recent acquisition of theirs in procurement, probably debottleneck and logistics.
The team has also diligently evaluated their cost base and have undertaken steps to improve productivity some of which involve investments in equipment and or wages, whereas other emphasize cost reduction we expect further alignment of industry supply and demand fundamentals over the remainder of the year.
These market conditions, when combined with our improvement and efforts underway and sustained execution should generate improving margins in the second half of 'twenty.
Our Mexico business grew net sales by 11, 5% relative to Q1 of prior year, whereas operating margins declined slightly as increases in supply chain costs outpaced pricing recovery sales grew across all channels with <unk>, leading the way Halloween close by retail and foodservice.
Our prepared foods business has another quarter of double digit growth without England del Dia and all amazing brands or branded fresh business units had similar success with the business as it also grew double digits.
Like the other business throughout our portfolio, Mexico faces significant inflationary cost challenges throughout their supply chain, especially great. Nonetheless, we will continue to invest in our brands and production as we believe in the long term growth of Mexico and demand.
We are growing our production we had a hatchery in feed me under state of competitor in the Yucatan Peninsula.
Complete we can reach 100% of Mexico with our products. We expect the first loads to reach local markets by the end of this year under the current schedule.
We're also investing hatching merida, which is slated to begin operations in December 'twenty two.
In addition, we are expanding processing capacity our football allocation. Most complete we can further adjust their mix to service additional demand in both retail and foodservice channels. This project begins early in Q2 and expect completion in the later half of Q3.
Moving forward, we will need to be to remain vigilant given significant inflationary headwinds challenges where entire business coffee has dramatically increasing commodities labor logistics and other operational inputs to ensure our business continues to grow and create value for our stakeholders and must mitigate these impacts through operational efficiencies and growing.
Our key customers and continue to monitor and adjust our business accordingly with that I'd like to ask our CFO , Matt Gulf ammonia to discuss our financial results.
Good morning, everyone for the first quarter of 2022, net revenues were $4 to $4 billion versus $3, two $7 billion, a year ago with adjusted EBITDA of $501 $8 million and average and a margin of 11, 8% compared to $253 $8 million and ease.
Seven 8% margin in Q1 last year, we achieved $287 $2 million of adjusted net income compared to $103 million in Q1 of 2021.
Adjusted EBITDA margins in Q1 were 15, 9% of the U S compared to six 5% a year ago for our UK and European business. Adjusted EBITDA margins came in at one 2% for Q1 compared to four 3% last year in Mexico. Adjusted EBITDA in Q1 was 16, 1% versus 20.
6% a year ago.
Adjusted EBITDA in the U S for Q1 came in at $412 million compared to $131 million a year ago, both gross and operating margins were higher compared to 2021 due to higher commodity market pricing strong consumer demand improved operational efficiencies and growth with our key customers.
Our U K business has experienced increased volatility from the Russia, Ukraine conflict challenging labor market and rapid cost escalation all of which negatively impacted margins U K businesses had made significant progress in addressing the recovery of inflationary cost increases through pricing to our customers as we noted in our last earnings call.
The first half of 2022 will be challenged but anticipate seeing profit improvement in the second half of the year.
Mexico generated $75 $3 million adjusted EBITDA in Q1, compared to $86 $4 million a year ago.
Volumes have remained strong to do to balance supply demand fundamentals and although grain and other input costs have increased the business has undertaken efforts to improve efficiencies and recover these higher costs.
As we both discussed and experienced in the past our Mexico result at high relative variability quarter to quarter as Fabio previously mentioned all businesses have been subject to market volatility and significant inflation and as such we continue to monitor costs through our supply chain progress our operational efficiency efforts and implement other cost recovery measures.
I just needed to mitigate these impacts.
We spent $82 million in Capex in the first quarter, we will continue to prioritize our spending throughout the year to cultivate growth of our business strengthened key customer partnerships.
And realized greenhouse gas emission reduction targets really towards sustainability linked bond Internet zero commitments.
Our overall balance sheet and liquidity remains strong as we have approximately $1 $7 billion in total cash and credit available moving forward, we will drive cash flow from operating activities working capital management investing in high return on capital employed projects.
As of the end of Q1, our net debt totaled $2 7 billion with a leverage ratio of 175 times. Our last 12 months adjusted EBITDA, which is below our target ratio of two to three times net.
Net interest expense for the quarter totaled $35 million, our effective tax rate in the quarter was 21, 1%, which included certain discrete items in the quarter as I noted in our February call. We still anticipate our full year effective tax rate to be between 25, and 27%, albeit likely at the lower end of that range.
Our capital allocation approach will remain disciplined as we look to grow the company and we will continue to align our investment priorities with our overall strategy and portfolio diversification focus on key customers operational excellence and commitment to team member health and safety.
Operator. This concludes our prepared remarks, please open the call for questions.
We will now begin the question and then a quick question.
Allowing collapses.
Got you limit your questions to two.
Rejoin the queue for any follow up.
I'll ask a question you May press Star then one on your Touchtone phone well if you are using a speakerphone. Please pick up your handset before pressing.
Turning to my background noise.
Your question please.
At this time, we will pause momentarily to assemble our roster.
[laughter].
Our first question comes from Ben <unk> with Stephens. Please go ahead.
Hey, Thanks, good morning, and congrats on a nice result.
Good morning, Ben.
I wanted to ask as it relates to kind.
The margin capture margin realization in the quarter, we've had a strong commodity big bird <unk> backdrop for awhile.
But you highlighted in your commentary in the release and then on this earnings call. Some of the operational improvements that you've been making I know mix labor is still a challenge, but can you talk a little bit about the progress that you've made your ability to potentially continue closing the gap relative to what kind of commodity Martin might suggest and how we should be thinking of.
About.
The challenges you still place operationally that that just might ebb and flow through the year.
Sure. Thank you.
They talk in previous calls we have a very diversified portfolio right now.
All of our operations and then we also have a great geographic.
Portfolio, so in any less we operate in.
All segments being small birds medium birds large birds and also on the prepared foods we.
We created this portfolio because we believe that is more resilient to downturns when the commodity markets are really weak, but we also have the exposure.
The commodity markets through our big Bird operations, where we can capture the upside when the commodity markets are really strong.
We also talk about the one of the pillars of our strategy that is a relentless pursuit of operational excellence. So we're always looking for opportunity to screen prove our operations. So that those opportunities are generated through our zero based budgeting approach and through the action plans that are created every single plant. So we can improve our <unk>.
Operations year over year, I think the issues that we are facing over the last two years has been on labor availability. We are seeing a strong demand for labor in U S. We're seeing a very difficult conditions to staff, our plans to 100% of their laterals. So we will never able to produce the.
Two more mix that we want to maximize our profits.
As I mentioned on the remarks, we gave some significant increase to our labor force.
That impacted more than 30 million just in this quarter and accounted for more than 20% over the last two years, and then being able to staff. Our plans further with that we've been capturing some yield improvements.
And we're also producing a better mix, but once again I think the improvements on the margins that we are seeing are mainly due to our.
[noise] possibility to capture this increase in the commodity markets that we are seeing we're seeing very strong demand and we are seeing a very limited increase in production in United States.
Okay, Okay perfect.
My second question is related to.
The share repurchase program that you all put in place.
And the diluted weighted average share count during the quarter, we don't see evidence of you all being active in the market I see in the 10-K that came out this morning quarter in share counts or share count as of yesterday. It was a little bit lower maybe with exercise some of that but as you think about the cash windfall.
That you'll see through the midst of the cycle and your ability to continue to improve operationally.
Can you help us think about where share repurchase sits in terms of your capital spending priorities.
Thanks, so much.
Hey, Ben It's Matt Let me at least answer your first question and Fabio can jump in maybe more in the second we you'll see it you can find in the 10-Q that we purchased about 111 2 million shares in the quarter.
If you recall, we didn't really announce this till March 9th March 10th in our quarter ended March 27, and so we purchased about $27 million worth of shares in the quarter. So we did start down on that program and it did execute you're just not seeing much of it in your average just because the average is across the entire quarter and we didn't start till.
Basically the last two weeks of the quarter.
And I think capital allocation is always one.
One of our priorities here, what we wanted to create value for our shareholders and grow our company and create a better future for our team members. So we want to grow our company. So absent of any big M&A or other opportunities, we'll continue to invest in increasing our organic operations, we mention here.
Several initiatives being prepared foods senior class in fresh and prepared foods in Mexico, and even in Europe . So we're looking for opportunities on how to grow.
Share repurchases are an option when we believe that the there is a very good value for our shareholders on the buyback I think in terms of capital location. It comes of course, a second to us growing our business and creating value.
Okay. Thank you so much best of luck with the rest of the year.
Thank you Matt.
Our next question comes from Peter Galbo with Bank of America. Please go ahead.
Good morning, Thank you guys for taking the question.
Sure Good morning, Peter.
Matt maybe you can just help us from a modeling standpoint.
I know Fabio gave some some color around USD expectations for for U S volume growth, but just how youre thinking about U S volume growth Kate.
Cadence over the remainder of the year.
And then second to that.
You know, how we should think about kind of feet higher feed cost with this latest round of higher feed costs flowing through I know you guys are probably hedged through part of the second quarter, but how we should think about those two items over the remainder of the year.
I think what it relates to volume.
Increases throughout the year I think we know we have a very seasonal business and you're going to see that normal seasonality. So we do expect generally stronger Q2 with the grilling season summer season, and then starting to kind of more following seasonal trends that way.
Related to our hedging portfolio and it's it's Fabio said look we try to keep them like we take a look at the market. When we look at against our risk management practices and we hedge we disclosed certain things in our 10-Q, which was published this morning that I'll kind of give you maybe a little bit of a flavor of kind of where we're at relative to this time at the end.
For the fourth quarter.
But we are we.
Definitely have taken a look at that and adjusted our.
Hedging accordingly to how we see the risks in the market.
I think just adding to the U S D. A growth in your expectation for industry will depend a lot on the hatch ability we've been talking about this issue for for some time now, but I think now we're seeing some initial results from everything that we're trying to do and we expect like Matt said, a little bit of an increase in Q.
Three and then compared to the strong quarter that'd be having Q4 in terms of production, we expect very muted.
And so in overall like I mentioned, we are increasing close to 1%.
Got it no. That's helpful. Thanks for that and probably helpful to get kind of the context around.
I guess you know one of the big questions. We're getting is.
Longer term with where chicken prices are right now you've seen an uptick obviously in politics. It seems like hatch maybe starts to get better I I don't know when that starts to show up really in some of the externally reported numbers.
But the gap between chicken and some of the other proteins has really started to close, especially with beef and pork.
Turning deflationary you know on a year over year basis. This month I'm just curious you know.
How are you thinking about maybe the limits on where jumbo breast meat can go you know $3 30 is obviously, yes.
The historically high level.
But just seasonally or from your standpoint on the unimproved task when the things start to roll and normalize maybe two are closer to what something with a two handle on it thanks very much.
Oh sure I think.
Two to your point, yes, we've seen some increasing pricing chicken, but as he mentioned the gap between the proteins continue to be very wise I think it's close a little bit but it continues to be very wide I think.
We need to take into consideration is the difference between the commodity segments and some of more stable retail segments. The retailers are not experiencing the price that youre seeing on the commodity.
So that is a more day to day jumbo meat in the Chromebook is mainly used for further processors and some other operations maybe call industrial and some are large foodservice industry.
In the retail business, we have a more stable model, where we try to mitigate all of the effects of the inflation through operational efficiencies and discussions in terms of growth and cost reduction with our key customers. So to the retailers and to the end users we are seeing a little bit of inflation.
But not at the same levels that we are seeing at the commodity segment. What is happening is that in the past we used to use commodity meat to augment the sales to the retail channel helping their volumes during the summer.
And do any some specific occasions.
What is really difficult today to get that commodity meat, and then put in a tray and sell to retailers at a loss.
So that's what's happening the availability to the retailers is also getting more because of that we've been operating our plants at full capacity and our growth is outpacing the industry, especially to our key customers, but that is going to be a challenge for the summer where the retailers will not have sufficient available.
At the prices that they are having today.
The next question comes from Michael Blackman with Cleveland Research. Please go ahead.
Yes. Good morning, just wanted to talk a little bit more about you know kind of your outlook for <unk>.
Mexico, and just you know where are they in terms of production feed availability I know they import a lot of Gran Tierra.
How reliant Mexico Mike.
The timeline you expect and.
How will that impact your Mexico performance.
Monotonically come you up.
Sure.
Yes in Mexico, as we always mentioned is a very volatile.
Market, we've seen some small shifts in supply and demand can create big in fact theme overall pricing that we saw weak Q4, which is typically not what we expect those mainly doing too and increase production and some increase in exports or imports from Mexico, especially from exports from U S as well.
We're seeing that in depth from exports have increased during Q1, but given the high prices of all the other proteins. We expect a very difficult a season of exports to Mexico again because of the high prices of the commodities segment here, we continue to increase our production in Mexico, we're doing everything that.
We can supply.
The local market with tailored products and we are expanding our production not only in the fresh but also in the categories in may and we'll be opening new plants in the region, but it's always going to be a very tight situation in Mexico, especially for Q2 and Q3.
We still don't have those production increases and if you normally have a very sees.
Season of.
More diseases in Mexico with.
Constraining production there so typically we have a very small.
Small increase in supply during Q2, and Q3, which can affect prices, but of course for the long term, we continue to invest in the growth in Mexico and as I mentioned it is variable.
And quarter over quarter, but let me see year over year, they're very resilient and double digit margin buckets.
Great Thanks, and as a follow up to that just are they having any issues with avian influenza in Mexico and has the bio security improve there in the over the last couple of years or are you still going to be kind of having.
Having your breeder flock more in the U S.
Support that growth in Mexico.
Sure Bio security is and as we talk about in U S is really strong. So we have a very good protocols I think the problem in Mexico is that they have 30% of their market is based on life sales. So those live animals are they move throughout the country and are slaughtered.
In small water facilities in the big cities, especially in in the city of Mexico. So that creates a huge problem for bio security and that's why we see a lot of more mortality there and some issues will again be a buyer of security so.
That will continue I believe because the life sales continue in Mexico, the Mexican consumer with a lot of its preference in the freshness and they believe that Oh.
Slaughtered.
Facility close to the end user has that the convenience and <unk> that are there.
That's a value, but as we are growing our branding Mexico I think they believe we're creating a strong cold chain, Eric creating more.
Consumers in the retail with the branded products that they can trust on the quality of our products.
But given the live movements that exactly that.
Existing Mexico, we've always believed that there is.
There are weaker.
Biosecurity G in the country.
The next question.
From Bob <unk> with Barclays. Please go ahead.
Yes. Thank you very much and good morning, Savio map the Congress on the strong results.
The one thing I wanted to first dig into.
The business over in Europe , and are you you've made it clear in your prepared remarks, but also in the press release about all the challenges around the <unk>.
Arc market because of this.
That's found in Germany, but then at the same time, the labor shortages that number shortages. So just help us understand what do you think about the next coming quarters in terms of possibility to raise pricing and to negotiate prices up in the in the European market to help offset.
All that cost pressure, you're currently facing and get those get the profitability back into positive territory that would be my first question.
Sure. Thank you Ben yes.
Facing unprecedented impact in terms of inflation and I think the important point that we have is in the past we talk about it they are having some cost plus contracts and that was the.
The main structure of the contracts in Europe , but it was a cost plus based on grade. So there was not a lot of influence of all the costs to our contracts and to our overall cost structure.
Today, only 30% of the inflation that we're seeing in the region is based on green, although as we mentioned.
Because of the Russia and Ukraine.
Yeah.
War, we're seeing 40% increases in the in the wheat in U K, but only 30% of the inflation or the increase in cost is due to great. What happened in the region was in.
Unprecedented increase in all other costs being utilities, Soo Choo micro nutrients LIBOR packaging and transportation. So those are the ones that we need to address with our key customers and overall customers and include that into the formula.
I think the other issue that were facing in Europe is that we have typically a three month lag when negotiating those prices.
Those prices escalate everyday we're always behind the eight ball and we're always trying to capture those increases linked to the prices. So there is a lag and because of the continues.
The increase in all costs not only feed we're always behind but we have great relationships. There like we mentioned that are stronger.
Value Phillip for its innovation, we are innovating and creating new products and we are.
Doing all the renegotiations with our key customers on those contracts. We believe that we have passed and we have renegotiated contracts that includes all of these other factors into the cost with all of our major customers and we believe that operation will improve starting.
Randy improve during the quarter and we believe that in Q2 Q3 Q4 are going to see the benefits of those renegotiations at the same time of course, we are realizing the synergies.
Especially on the back office of having those three.
Companies together as a.
As a matter of fact, we are going to produce some of the Richmond.
So just in one of the former operations that we havent given US okay. So that is already a opportunity to reduce cost and to increase sales by producing bran.
<unk> products each of the facilities, we already have in the few minutes U K and we are also benefiting from some innovation there.
<unk>.
The consumer in U K is also facing a constrained in their ability to buy products because of the inflationary that is impacting every customer there and the inflation, especially in utilities has been really really impacting the.
The availability of disposable income for especially for groceries, and we're innovating, creating new products that we will address those issues to those customers and helping our retailers to continue to increase their top line.
Okay Perfect and then my second question is really around the leverage profile, our cash on hand, and all that kind of stuff I mean, obviously leveraged to come down in a in a decent way to two one to three quarters and I think you usually you a more like something odd around two times at.
At the same time, we're seeing a significant increase in cash to over $750 million and you're usually in the past you've always been running more like 300, maybe $400 million. So.
That's one of the more immediate plans of what to do with that cash is it is it paying down debt. What you can and how shall we think about the leverage maybe towards the end of the year.
Just to understand.
Triggers and drivers of capital allocation.
Well I think part of it is this quarter. Two we took advantage of our delayed draw that was expiring in February and we borrowed about $194 million in February I, Didnt really very favorable interest rates at that part of it that is just because we took advantage of that opportunity.
And the.
Term loan that we negotiated back last summer. So that was something that we took advantage of to increase our cash balance look I think we're we.
We mentioned it a lot we're very focused on growth and that growth can take different forms and that could be a more organic in and build out of our plants. It could be M&A can be a lot of combination of all of that and I think we're very focused on that our board is very committed to that Saudi and I focus.
There's a time on that to grow the business and we see great opportunities to use that cash RFID. If you want to add anything else to that.
I mentioned, what we want to create value for our shareholders and for sure having $700 million and our balance sheet is not creating a.
A lot of value I don't think they can get a lot of you from that money. It's more to have sufficient liquidity for anything that can happen and to have availability for our growth prospects.
Okay, perfect well Fabio Matt. Thank you very much Congress again kabam.
Okay.
Yeah.
Okay.
Our next question.
Hum with Goldman.
Uh huh.
Hi, Thank you good morning, everyone. Good.
Good morning.
So first question, maybe coming back to the U S.
About the current environment and obviously.
The commodity big Bird business.
Driving it.
This amount of strength, how do we think about.
Some of the breast meat prices are where they are impacting the.
The prepared foods business.
Especially sequentially given given given the recent run up.
And I guess also in the U S are you seeing it doesn't seem obvious in pricing but.
Impacts of potential export bans from AI impacting leg quarter market pricing doesn't it seems very different than the 2015, so far in terms of market impact.
Sure I think starting with the AI I think we're seeing.
A season of avian influenza close to what we have in 2015, and we've seen a lot of cases throughout the world and we've seen that some countries even more impacted than us so actually the AI in some countries, especially in Asia and also the the pork issue and some countries in Asia is helping us on the export.
Of late especially for that quarter. So we're seeing the increase of the exports to the Asian.
Region in Q1 already and we're seeing a lot of demand and asks about leg quarters for the coming quarters. So the AI.
Throughout the world actually help our exports now the AI cases that we have in U S. Despite not impacting our overall production. When you have an AI case in any state we have either a temporary ban or some questioning about the movement of <unk>.
Through those states, but given what happened in 2015, most of the nations have already regionalized.
The AI issues. So after a week, we can resume exports from regions that were not impacted by AI and of course because of our broad.
Spectrum of our plants. We are in 14 states, we can mitigate any specific AI issue in any specific country by rotating where we supply our products. So of course, it creates a little bit of a logistic issue, especially today, where we're heavy a lot of logistic issues both in U S and in the freight.
But we can manage better than somebody that has only one plant and if that plant is in the zone that it's impacted by AI.
In terms of the prepared foods, what we're seeing on the retail is that prepared foods frozen fully cooked products are 300% higher than the same period in 2019, and even 40% higher even when you consider the pantry loading a period of last year I think the.
Really understood the value of that product. They win the foodservice was shut down they went to the grocery into the retail and they.
Really use those products physical convenience.
Great taste product and we're seeing that growth in our just there in our two biggest brands in the retail as we're seeing inflation impacting the consumer in the U S. I believe that there will be an increase of sales from the retail out from foodservice.
And I think that it's a very beneficial both to fresh but also to the fully cooked items, we've been pricing that accordingly to the impact of the inflation that we're seeing on our operations and we're seeing great demand for those products.
Okay, and then I guess just.
Switching over in Europe .
I think his readings and some of the comments earlier.
I mean, you've seen hog prices and in Germany, you start to move more recently U K still seems a bit more a bit more stagnant.
I mean, I guess, what I'm thinking about the tulip operations, specifically is there a pathway for that business to reach profitability. This year given both the pricing dynamics on hogs and then the cost issues you're facing.
Sure I think what youre seeing exactly the impact that we have in your case, especially on the pork segment. We saw an increase in the cost of production with increasing in wheat and soy at where we were seeing.
Stagnant demand because the overall inflation in U K and are creating different patterns on the on the behavior of the consumer and at the same time, we are the most integrated of the pork operators and we were seeing the price of live animals.
Really going much below the cost of production.
We are seeing the rebound of the live animals, we expect to have a back the the natural advantage that we have by having our own big especially on the the high welfare.
And we are seeing also an increase in the pricing given the change in the all the formulas that we mentioned in another discussion. So we are very.
Positive.
The synergies from the integration from the innovations that we are seeing there and also because of the changing dynamics, especially on the pork segment.
Okay. Thank you.
Our next question comes from Ken Zaslow with Bank of Montreal Mondrian Excuse me. Please go ahead hey, good.
Morning, guys.
Good morning.
Much profitability do you think you're leaving on the table by not having a mixed lever there when you get that back in 2023.
Yeah that's.
A really difficult question.
I think we're giving some some couple of points of profitability because of that.
I think it is like I mentioned yields.
And mix as well we are not the bony all the dark meat that we like.
Active because of lack of labor when you have lack of labor in a plant you move all your employees to the shrunk part of the of the of the operations, which is the bone into front. So we end up with more leg quarters.
To export, which being a very profitable business and we are being very favored to favour.
Favorable with the increase in the linked quarters, but we could create a lot more valuation debone them and we could also generate more volume to our food service business that is typically a 5% improvement in terms of profit. So it is a significant value and yes, we.
Expect to have that.
In 2023, not only with all the increases in salaries that were giving to our employees with all the programs that we are deploying giving now.
Boys in our communities are what we call a better future. So we have programs by reinvesting in our communities and weeds to hometown strong programs sort of investing more than $20 million into improvements into our committed to be in nothing related to our operations being embarks b in our educational services.
And we believe that that will create a more engaged.
Population, we're also giving.
Giving one of the largest educational programs in the Rural America, we are providing a community college to any employee and their dependents are free of charge from us because we believe that bather employees and engaged employees, who produce a lot more for us and will be more and more.
Stable workforce, so with all of those initiatives and we are also investing in automation I think over the last years, we talk about investing in automation. There is new machines on the dark meat the bonding that requires less people in the rains heavily investing in those machines also and from the border we have won.
<unk> already with the <unk>.
Fully from the Bonnie on the Big Bird segment, which is the hardest one to automate all the others. We have machines that are create a good view than a good product, but on the big bird because of the variance in terms of sizes. Its very difficult should have a machine that capture the huge but we are partnering.
With one of our vendors and we are able to produce a machine that is creating a great yields and the machines shows up every day right. So I think we're.
Also he proved the hour synthes, which programs to help our employees being in childcare being in transportation, So with all those initiatives since a long answer.
Great.
When I think about production beyond this year, besides the improvement in attach ability.
How does production actually increased.
It'll be relatively muted for 1234 years like how does that even how do you will even see production increase over the next couple of years.
Yeah, that's that's a great question over the last year.
Or at least.
Six or seven plants that were built coming online and I think that was a great to support the growth of the consumption of chicken in the United States as we look at where we are right now we don't see any plants being built.
Deals at the moment because of the building cost.
Being so high and the lack of labor, it's really hard for any operator to build the plant we'd need to study the region and see if there is labor available to staff up 1000.
People plant, which is really hard also getting all the permits required for a chicken plant has to be really difficult to sleeping beauty when rendering plant and we've been a nightmare to get the permits and even to have someone who's hypallage that allow us to be there. So it's been really difficult for him.
Industry to build new plants, but I believe that with the growth in the demand we should decrease the supply I think another way of increasing supply has to wait.
I think.
Although the primary breeders solve the woody breast they created a little bit of an issue on the hatch ability, but now with the Woody breast behind US maybe if you can increase the size of the birds and produce a.
Small you know a little bit.
Larger where we increased total volumes and what we are seeing is also a movement from some of the operators in the small bird infection to move to larger birds definitely increased the overall availability of meet any less but that will create a pinch in the small bird category and we're seeing that happening.
Already and were seeing small law because at the very high price even compare to historical levels. So we believe that we can grow.
In terms of improving the hatch ability like emissions. So we'd have more heads and we can increase the size of the birds are the average size of the birds by some players moving out of the small bird category.
Great I really appreciate that thank you.
Chicken.
Thank you for your questions I'll now turn the conference.
Javier quantities.
Sure.
Well. Thank you everyone. Although we are pleased with our start of the year market conditions are extreme volatile and significantly inflationary headwinds present, a challenge we must continue to monitor the impacts of the global commodity inputs changes in overall protein complex and movements throughout the labor market to date, we have successfully managed these chat.
And just by prioritizing our key customers leveraging our diverse portfolio and driving operational excellence. We used. This approach has continued to invest in our business and focus on team member safety and that'll be even our demonstrated progress and continued execution and look forward to supporting our key customers as we grow together. Thank you once again everyone.
And have a good day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.