Q2 2022 Pilgrims Pride Corp Earnings Call
Good morning, and welcome to the second quarter 2020 to Pilgrim's Pride earnings conference call and webcast.
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I'd now like to turn the conference over to you Andy Rydzewski.
Head of strategy Investor Relations and net zero program for telephones right.
Good morning, and thank you for joining us today as we review our operating and financial results for the second quarter ended on June 26, 2022 yesterday afternoon, we issued a press release, providing an overview of our financial performance for the quarter.
A reconciliation of any non-GAAP measures, we may discuss a copy of the release is available on our website at IR <unk> com along with slides for reference. These items have also been filed its form eight Ks and are available online at SEC Gov, Fabio Sandri, President and Chief Executive.
Officer, and Matt Galvin, Chief Financial Officer will present on today's call before we begin our prepared remarks, I would like to remind everyone of our safe Harbor disclaimer today's call may contain certain forward looking statements that represent our outlook and current expectations as of the day of this release, although additional fab.
Not anticipated by management may cause actual results to differ materially from those projected in these forward looking statements.
Further information concerning these factors have been provided in today's press release, our Form 10-K, and our regular filings with the SEC I would now like to turn the call over to Fabio Sandri.
Thank you Andy Good morning, everyone and thank you for joining us today for the second quarter of 2022 reported net revenues of $4 63 billion, a 27, 3% increase over the same quarter last year and on an adjusted EBITDA of $633 3 million up 67, 7% versus <unk>.
June of 2021, our adjusted EBITDA margin was 13, 5% compared to 10, 2% Q2 last year.
Our Q2 results continued to reflect the benefits of our strategy and portfolio, which enable us to capture upside in the market. Despite volatility in particular segments or geographies in the U S.
We experienced strong market fundamentals in the commodity <unk> given.
Our relentless focus on operational excellence, our big Bird Debone operation capitalize on those conditions to achieve extraordinary sales and margin performance, our case ready and small bird drove partnership with our key customer to recover inflationary costs continuing to produce solid stable performance and prepare just bare.
<unk> business experienced significant growth in retail further diversifying our portfolio.
Our pm business demonstrated.
That improvement as it mitigated the precedent inflationary headwinds and an extreme challenging consumer environment. The team accelerated operational excellent efforts and completed multiple rounds of negotiations with foodservice and retail customers to recover profitability are.
Our Mexico business also manage through extreme volatile market conditions.
Further amplified by seasonal challenges in life production at our locations. Nonetheless, the team leveraged our breath of operational excellence and geographic diversity to ensure sufficient supply to our customers in line with our vision, we remain committed to enhancing sustainability to our business. We continue to invest throughout the operation to reduce that.
Greenhouse emissions and achieve our net zero commitment by 2040.
As part of our hometown strong program, we have invested over $50 million in their local communities over the last few years. In addition, more than 370 team members. Our children of our team members have signed up for learning free high education degrees or trade certifications through our better futures program.
We have also form a sustainability committee on our board of directors, John Refi, our efforts related to environmental social and governance matters. We are grateful for the efforts of our team members to improve performance across all aspects of our business. During the first half of the year, we will remain disciplined and drive ownership in the execution of our store.
And continue to implement further improvement opportunities all of which must be done with an unwavering commitment to our team member health and safety.
Turning to feed inputs grain and oilseeds markets has moderated lately, but continues to experience extensive volatility in U S. Corn planted area is slightly up from the March USDA surveys, where soybeans declined as strong grain prices worked to prioritize corn planting despite the sluggish start.
Whether it will be extremely critical over the next several weeks as many key producing states have the potential for good production with good production is needed to offset the heat stress in the southern U S.
From a global standpoint, Western New York experiencing severe heat.
Whereas the outcome of our recent agreements between Russia, and Ukraine for grain exports remain extremely uncertain following recent events.
Tony harvesting record corn production and as pricing competitively into global demand. These unique circumstances contributed to significant market volatility to assess the potential ramifications on our business and global grain complex. We will continue to monitor the weather in U S and Europe as well as the impact of the Russia, Ukraine conflict.
We continue to adapt our grain positions to reflect our view on the risks we see on the market.
As for the supply of <unk> chicken Ludwig production increased <unk>, 2% relative to Q2 of last year driven by additional head count that was slightly offset by lower average LIBOR rates.
The industry continues to battle hatch ability headwinds that have consistently offset growth in egg sets, but recently, we have seen positive signs of flexibility improving quarter over quarter and the.
A year ago levels since mid Q2.
Our team implemented actions that developed in partnership with our primary breed their suppliers throughout the quarter. We found this counter measures effective as our rate of improvement in hatch ability exceeded industry averages.
Dissipated as improvements to continue further enabling supply needs to grow our business for the remainder of the year as for the avian influenza impact on U S. Broiler production remains the collectible and supply is still expected to grow nearly 1% in 2022 according to the USDA.
Similarly, we did not experience any notable interruptions given the effectiveness of enhanced by a security programs throughout the industry and our business.
The larger impact for our business has been on export restrictions of selective states some of which have regained eligibility for export given their fires elimination status additional opportunities will soon emerge as other states or weeks away from regaining their exports status.
They're all export business remained robust in its export volumes increased 5% year over year in April and May driven by a 20% increase in linked quarter as volume shipments compared to April may of 2021.
Dark meat inventories decreased one 8% year over year in June and are 21% down from March levels and leg quarter inventories declines were the primary driver of fewer dark meat pounds of starch.
Inventories could have been reduced even further but for logistical and shipping challenges experienced by the country and the whole industry.
The market continues to remain strong reflective of sustained global demand supported by strong oil pricing as well as current supply that's delivering by even if lives and in Europe , and a assessing critical southeast Asian markets.
Given current demand levels unexpected supply limitations, we expect chicken commodity prices to follow seasonal patterns you have to remain elevated above historical norms, which is demonstrated by the jumbo cutout prices that are currently 65% above the five year average.
We believe the domestic protein market will continue to favor chicken is a primary source of protein.
While the overall supply of protein available for calendar 'twenty two is expected to increase 8%. According to USDA availability in the second half of 2022 is expected to remain challenging driven by reduced production expectations in beef and pork in Q4 2022.
Industry called Starz supplies for which inventory flows has been inhibited due to supply chain constraints constraints also remained under pressure as June values for total protein and cold starts were two 6% below the five year average.
Overall demand for chicken remains remarkably strong as volumes increase despite higher cutout values.
Within the overall U S retail channels fresh volumes were in line with last year, while fully cook experienced double digit dollar growth along with a mild increase in volume. Similarly, the Deli Department unit sales were level to prior year. The dollar sales remain well above year ago values, even with increased pricing across retail departments win.
Compared to recent years, we believe additional growth opportunity may still exist as industry supply constraints could have impacted your ability to meet the strong demand. We believe consumers are actively adjusting their protein consumption towards more affordable options and in doing so favoring chicken.
Similarly, the foodservice channel maintained phase levels above the pre COVID-19 baseline.
Total despite significantly higher practice, mainly do it to rebound of the noncommercial channels.
To post solid year over year gains, especially in dedication and lodging segments and this factors that combined with the limited supply in the broader protein complex favourable market conditions still exist for our commodity business, albeit following normal seasonality.
As consumers is strong and increasingly feel the effects of inflation, we anticipated some shift towards retail demand, which we believe already began at the end of Q2, we believe our case ready business is well positioned to benefit from this potential trend given our service level to our key customers and differentiated portfolio of offerings.
In the life business, we realized significant sales growth and margin expansion given exceptionally strong market from the missiles, especially for our big bird the bonding business as I mentioned to ensure more resilient earnings profile over the long term, we maintain our discipline with key customers with a strong service level and quality products. We also.
Drove operational excellence efforts to mitigate the impacts of an extreme volatile inflationary environment.
We continue to focus on improving that staffing through investments in our people and communities through our hometown strong program enhancing recruiting and retention efforts and process automation based on these efforts we experienced solid improvements in our turnover applicant flow and absenteeism given increased staffing levels. We further.
Optimize our mix and service throughout the quarter.
This increased staffing levels helped drive our commodity big bird de boning business to more fully realize the benefits from outstanding market fundamentals and to improve its overall profitability relative to last quarter and same period last year.
<unk> also used this opportunity to strengthen relationships with key customers throughout retail and food service through service and quality. Although the cutout has recently taken off in line with normal seasonality overall business conditions remain strong given the expected tightness of the overall protein complex relative strong foodservice demand compared.
Pre COVID-19 levels and moderating input cost compared to earlier in India.
Our small business continued to grow given solid demand for <unk> and broadline distributors margins improve from growth with key customers progress in operational excellence and cost recovery from inflation.
In conjunction with the local community we have made substantial progress at Macy's from December 2021 tornado, we are extremely grateful for the efforts and look forward to growth opportunities for our people and business.
Similarly, our case ready business deliver size quarter over quarter revenue and profitability growth as it drove operational improvements and recovering inflationary costs given the strength of his key customer partnerships and differentiated product portfolio is well positioned to benefit from any increase within retail.
In prepared foods revenue grew 25% relative to last year, driven by foodservice growth on our just bare improvements branded innovation in retail and focus on key customers are prepared branded retail business grew 96% compared to last year and more than double our market share driven by strong customer acceptance.
And the customer reaction in addition margins expanded given improving product mix and operational efficiencies.
E Commerce continued to realize significant gains with total sales are up 50% throughout the first six months of the year driven by growth in both the retail and club channels. We've also built a significant online presence as ecommerce now accounts for over 20% of our total retail branded volume in additional.
Just bear has become the top E Commerce brand for a key customer and has experienced significant successful line in trial and conversion and grocery.
Although we continued to face volatile U S market conditions, and inflationary headwinds our diverse portfolio and key customer partnerships provide significant competitive advantages to navigate demand challenges between channels among customers and across different bird sizes.
These advantages may be further amplified given limited availability throughout the overall protein complex complex later in this year.
Affordability and flexibility of chicken and continued operational excellence throughout our facilities.
Throughout Q2.
M business faced some precedent pressures and inflation, which afford decade high in UK and approaching nearly 10% in the EU. This factor when coupled with continued ambiguity from the Russia and Ukraine conflict created a softening consumer environment across both retail and foodservice to address these challenges the team aggressive.
We implemented a series of supply chain solutions, including network optimization processing equipment upgrades enhanced procurement approaches and revised labor management practices.
The team also worked closely with key customers to optimize product mix and ensure sufficient cost recovery for market driven impacts such as grain ingredients labor and utilities, given the continuous waves of inflation throughout the quarter. The team conducted multiple rounds us sooner.
Sumer negotiation all drove significant process was made work remains as inflationary headwinds persist.
As expected all along.
Lifeboat operations improved as the price of lifeboat, increasing the region. This factor when combined with our improvements in operations and cost recovery export exports drove increased profitability. The team also cultivated grow to be a further diversification of our product portfolio and application of our key customer strategy.
The first half of the year. The combined business has lunch over 100, new products in a variety of branded and customer specific offerings are more embark team has become the sole supplier across fresh and fully cook for a key customer and one of the leading European retailers.
Our business food Masters, Richmond Park, and meat free brand grew market share through the period with introduction of Richmond, many and a variety of risks among meat free range extensions such as the Richmond meat free chicken thesis.
Consumers continue to embrace the mid snacking category, which also grew across the beard with refrigerators growing double digit revenue supported by an introduction of refrigerators meat free and limited edition flavors such as the pedigree.
Park operations secured placement of various new seasonal products into a variety of customers.
It was also recognized in major industry awards, including best Red meat product at the fluid management industry Today Awards and also recognized for our sustainability efforts as its more on the net zero strategy of the year by business Green leaders.
Pike inflationary headwinds and softening consumer demand throughout the UK and EU, our business is well positioned to navigate these conditions given its focus on key customers a day.
Portfolio and demonstrated operational improvements moving forward the business will continue to invest in our people to improve staffing implement supply chain solutions and conduct costumer negotiations for cost recovery from escalated impulse.
Taken together these activities should continue to drive margin improvements throughout the year, our Mexico business experienced seasonal challenges in live production and our locations. Nonetheless, we leveraged the diversity supply base across our regions.
Our superior customer service level equally important our fresh branded volume grew over 40% for the quarter and our retail channel sales experienced double digit growth.
Similarly, our prepared food business grew double digits led by our Pilgrim's and del Dia brands.
Our previously announced investments in capacity expansion remain on track with shouldn't enable additional sales by the end of the calendar year. Nonetheless, Mexico remain a volatile market given inflationary pressures and evolving global protein complex and overall businesses analogy.
Further drive profitable growth, we will make significant capital investments in the U S business over the next three years. This investments include capacity expansion, our Athens, Georgia facility for a key customer to accommodate existing demand and so it was numerous automation projects throughout all of our operations to drive operational excellence, we're just starting.
Building, a new plant to expand our protein conversion business, given customer demand and supply chain integration that will drive margin expansion and operational improvement opportunities also to further grow our portfolio of branded prepared products.
And supported the incredible growth of our just bare product line. We are committed to building a new fully cooked plant in the southeast of the United States to that end, we are exploring multiple options and screen, the best logistics labor and raw availability.
We are confident that these investments will drive further growth for our business. While also enhancing our key customer partnerships further diversifying our portfolio and supporting operational excellence as a result, we can generate stronger more consistent sales growth and margin expansion back to accelerate our business momentum and create further competitor.
The advantage for our business with that I would like to ask our CFO , Matt <unk> to discuss our financial results.
Thank you Claudio and good morning, everyone for the second quarter of 2022, net revenues were $4 $6 3 million versus $3 $64 billion, a year ago with adjusted EBITDA of $623 $3 million and a margin of 13, 5% compared to $371 six.
$2 million.
And a 10, 2% margin in Q2 last year, we achieved $370 7 million of adjusted net income compared to $153 $8 million in Q2 of 2021 adjust.
Adjusted EBITDA in the U S for Q2 came in at $529 million.
Compared to 237, one a year ago adjusted EBITDA margins in Q2 were 18% compared to 10, 5% a year ago.
Both gross and operating margins were higher compared to 2021, primarily due to higher commodity market pricing strong consumer demand improved operational efficiencies and growth with our key customers.
For our UK European businesses adjusted EBITDA margin came in at three 4% for Q2 compared to five 2% last year, However, improved versus last quarter, where we had EBITDA margins of one 2%.
As Bob previously mentioned, our U K business made significant progress despite rapid cost escalation extensive uncertainty from the Russia, Ukraine conflict and a challenging consumer environment.
Nonetheless, we anticipate further improvement throughout the year as the team continues to drive operational improvements and cost recovery efforts.
Mexico generated $59 $8 million and adjusted EBITDA in Q2 compared to $885 $7 million last year, although volumes have remained relatively steady due to balanced supply demand fundamentals the businesses experienced seasonal challenges in live production at our locations, which impacted our margins as we have discussed we experienced in the past.
Last on multiple occasions, our Mexico results can be volatile quarter to quarter.
All businesses across our geographies has been subject to continued inflation and significant market uncertainty, although Australia mitigated. These impacts we must continue to minor costs throughout our supply chain drive operational efficiency efforts and implement cost recovery measures.
We expect $115 million in Capex in the second quarter, bringing our total year to date to $196 million as Bob previously mentioned, we are investing in our U S business to drive growth through partnerships with our key customers further improve our operational excellence and to continue to diversify our portfolio.
Our current estimates indicate these investments will total approximately $450 million over the next three years.
As a reminder, during the earnings call in February I stated that Capex for 2022 would be between 410 and $430 million, we anticipate incremental spend in 2022 associated with these new projects to be approximately $150 million.
Our overall balance sheet and liquidity remains strong as we have approximately $1 $7 billion in total cash and credit available. We will continue to drive cash flow from operating activities working capital management and invest in high return on capital employed projects.
As of the end of Q2, our net debt totaled $2 7 billion with a leverage ratio of one five times, our last 12 months adjusted EBITDA, which is below our target ratio of two to three times, even though were increasing.
<unk> incremental amounts into our U S growth efforts, we do not see significant impact to our leverage ratio.
Net interest expense for the quarter totaled $37 million, our effective tax rate in the quarter was 23, 7%, we anticipate our full year effective tax rate to be between $24, 25% for the year.
These announced incremental investments by our disciplined approach to capital allocation as we look to profitably grow the company and will continue to align investment priorities with our overall strategy as a 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 answer session.
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Okay.
The first question comes from Dan.
Those of you with Stephens. Please go ahead.
Hey, Good morning, guys, Hi, Ben Good morning, Matt.
I wanted to ask first about the Europe segment.
Nice sequential improvement and margin results there Youre talking you talked about some of the progress you've made.
Should we expect to continue to see that improve and as we look at that business how much of that improvement would come from catching up on these higher grain cost and it also kind of speak to enrolled.
Versus capturing synergies the integration of recent acquisitions.
Alright. Thank you Ben Yes, Europe is facing an unprecedented situation that we are seeing as we mentioned.
Extensive inflation coming from grain and as I mentioned, but not only that also utilities labor logistics. So as an overall inflationary scenario as I mentioned 40 year high in UK and more than 10% inflation in EU.
As we've always discussed our business model in Europe , what's the more cost plus but it was not really a costless was more a green plus contract. So it wasn't important as part of our portfolio would be a more stable business, but it was suffering a lot because of our contracts were not incorporating all of this.
All other inflationary items into the composition of practice through negotiations with our key customers we have been over the.
Last year.
Cooperating all of those.
Factors into the new contracts and those contracts are adjusting as the factors change I think what's happening in Europe is we are always behind the inflation because as an inflation increases every week and every month, we go and negotiate with.
Customers in multiple rooms.
So there is a lot of improvement that is still to come in pricing through those new contracts that would be just implemented.
I will say that as far as now there's very little benefit from the integration. We are just starting the implementation of a shared service center in U K to support both <unk> business and capture significant synergies what has been improving is the collaboration to innovation as I mentioned we.
More than 100, new products in Europe over the last.
Quarter and that helps especially on the scenario, where we are seeing customer demand declining I think true innovation, we are helping our key customers to beat the competitors and grow faster than the market.
Okay. That's great. Thank you.
I appreciate the detail on the Capex and the progression of that over the next several years.
We noticed you accelerated your share repurchase a bit in the quarter as well how should we think about that.
As a part of your toolkit.
Just given the significant cash flow generation of the business.
Cash balances on the balance sheet.
Shipment and as you can see by our results we have a very strong balance sheet. The math just mentioned that we're below our leverage targets.
We have a lot of.
Are there to do acquisitions central grow our business and to do all other capital allocation strategies. We continue to believe that there's a significant opportunity for our shares. That's why we did some share repurchasing and we are deploying capital into growing our business not only capturing operation improvements through all that.
Automation projects that we are doing but also growing and supporting the growth of our key customers we are seeing.
Strong demand for chicken and we believe in the future there is support for all the.
New capacity that we're implementing.
Okay, great. Congrats on the results and good luck with the rest of the year. Thanks Man.
The next question is from Ben Theurer with Barclays. Please go ahead.
Hey, good morning, how are you Matt it seems like only been covering you.
Well, we'll keep the flow.
So just.
Following up on that.
Ben's question in regards to the capacity expansions in the announcements here.
You share a little more detail, particularly on the one Athens, Georgia, but should I think of it as an expansion project is that slaughter capacity or is it just packaging pellets and is that all going to be dedicated to the one key customer you have there who needs to growth or just just a little bit more detail around that expansion project.
That would be my first question.
Sure Yeah.
And for our operations already very efficient, but we're seeing a significant increase in the demand for this key customer in the small bird category and we saw an opportunity in Athens, Georgia to support its growth over the next year and we are investing in growing close to 20% 30%.
In a number of bids on that operation and also revamping all of the automation in the front end of negotiation. So it is.
He is a great opportunity to improve the operational efficiency of the plant, but also growing the capacity of 20% to 30% in that but it's not a significant growth, but it's very important for that specific customer and then we're also looking as part of those changes in automation is to really help our th G emissions footprint.
We're gonna be seeing significant reductions from the overall operations.
Focus of ours with our net zero commitment.
Okay perfect. Thank you very much and then secondly, you've just talked about it as one in the presentation, a little bit and obviously there has been industry things and you've been impacted as well on batch ability side.
But can you share a few more details maybe on what you've been doing recently too.
Improved hedge ability.
To get your output at least into better territory.
Of course, there is no one single silver bullet right on that.
Issue I think if you step back a little while where all business thought it was when we changed the genetics.
Overcame a problem in our industry.
The Woody breast.
We went to this new genetics. It has a great yield it has great quality, but it's more more difficult to manage and also have some hatch ability issues. So over the last two years, we've been battling as an industry. The hatch ability problem I think they've been partnering with our <unk>.
Eric supplier and we've been changing the way we manage the birds in terms of their weight. So we're changing also theyre sheet adapting to different grow each circumstances of each specific birth and theyre trying some feed.
Ingredients also to help them on managing their weight and with all that we've been able to capture and improve our hatch ability in a faster pace than the whole industry. We also need to be cognizant of that.
An industry, we're keeping our birds.
Longer in the field. So the average wage of our hands are higher which impacts the hatch ability as well so as we recover hatch ability.
We believe that the industry will take the average age of the hint a little bit lower which is a self fulfilling prophecy right, which will help the hatch ability once again.
Okay.
Thank you very much.
Sure.
The next question is from Ken Zaslow with bank.
<unk> of America.
Bank of Montreal. Please go ahead.
Hey, good morning, guys.
Okay.
Quick question on you know when you spend the capital spending can you talk about the returns and the timing of which you will get the returns on it.
Sure Ken we look at projects that were really aiming for.
Rosie projects tipping over 15% and when you think about these projects now that the timelines are completely the same across all of them, but we see these coming into play 12 to 18 months from now.
So we really start seeing the benefits and returns of these projects in general starting in 2024, and forwarding and some of them will come in a little bit differently.
As projects get completed, but we really sort of see the more fruition of the the benefits starting in 'twenty four.
The next question is on the labor availability it sounds like Youre getting a better mix.
You're improving your mix as you get more labor where are you on that progress.
Are you all the way there, 70% there and how much more is left.
To kind of realize more mix opportunity with labor constraints ship.
Sure.
It's a great question Ken.
We've been behind in terms of mix because of our labor availability and to your question I think we are 70% there from where you are if you have a gap.
Before we have closed that gap by 70%, we're still behind in dark meat the boenning.
We're still not there in the perfect mix for us and we're investing also in automation to help on the document the bonding with the new machines that are required less labor.
And we're also having a very strategic approach in every single geography, we don't we don't do one size fits all China solution. So we look at that every single.
Plant geography, where we operate and we understand the local market dynamics and we see also our internal actions of what we are doing we need to treat.
Team members better than all other companies that are competing with us that's the only way to have an engaged.
Our team members.
Of course that will produce a better all right. So, but we are increasing our labor wages in every single geography through different techniques.
Techniques and we are seeing also an improvement in overall labor I think as the inflation is outpacing.
The the wage increase throughout the economy.
Seeing more availability of labor coming to our plants in a.
A bigger number of people looking for jobs and that is helping as well the overall staffing up our plans.
Great I appreciate thank you guys.
Thanks, Ken.
The next question is from Adam Samuelson with Goldman Sachs. Please go ahead.
Hi, yes. Thank you good morning, everyone.
Morning.
Okay.
So I guess my first question is just thinking about.
The market is.
And kind of where it sits today, obviously kind of a commodity cut out.
We've been exceptionally strong.
The spring and summer, although we're coming off the highs and I just love to get kind of your color on.
Especially the decline in wings the phone quite precipitously.
Of late and as well kind of your current thinking on boneless breast meat were and that once it reached a three you can see yourself.
But 60 days yourself.
It does seem like that that really put out.
Harpoon system purchasing from some further processors and just how where do you see that that market progressing.
Over the balance of the year.
Sure sure. It's a great question. So we have a portfolio of diversified operations right and in the past as we see on the U b and other indicators that are more commodity pricing I mentioned before that on the more stable segments that we have small bird and case ready we're not seeing those X.
Extreme volatility in terms of prices either up or down we don't have a more stable margin and we tend to support our key customers to grow and compete in the market now going back to the very commodity big bird and what you've seen you be pricing we're seeing.
Very strong demand and especially because of the foodservice into chicken I think we're seeing some trend down on the on the retail and the food service to the chicken offerings. That's why we're seeing strong demand for chicken and it's been different each different part of the birds so starting with.
With boneless skinless breast, we've seen very strong pricing and we saw up to the fourth of July .
Very fast increase in pricing given this demand and it's mainly due to the growth of foodservice and it's mainly due to the what we call non commercial I think what we're returning.
The leisure and hotels conventions travel and also schools that.
And a strong ramp up in that boneless breast in that category and we're seeing some declines which is the normal seasonality. We expect the prices to start rising again and coming to the to labor day.
In September .
Tenders have follow.
The skinless boneless skinless it is still a great Q ISR category as well growing and we're seeing also leg quarters very strong, giving the international demand supported by the high prices of oil in the <unk>.
Developing economies and the very competitive mis internationally over the price of chicken compared to all the other proteins I think the weakest part of the blood has been the wings, which is very interesting because last year wings, where really the highlight of the cutoff for chicken.
During the pandemic, what we saw was the wings as a great.
Appetizer that all of the pizza parlors than all the other.
<unk>, so we're adapting and as the price of wings. When it reached more than $3 per pound last year, we see some of them are being taken out of the menu.
So a lot of.
<unk> took the wings out of the menu and replace with Boneless wings, which is breast meat.
So with that we saw a very sharp decline in the price of wings to the prices that we have today, a little bit of seasonality as well as we ended the football and the basketball season, but we expect also the wings June starts rising now.
Coming the football and basketball season, So wings are very competitive right now compare to the breast meat. So overall looking into the cut out.
The chicken we have on <unk>.
Strong fundamentals to support the levels that we are and some great.
Great opportunity, especially for wings.
Okay.
That's really helpful color.
Like just give us just typical Mexico and there you you alluded to more stable volumes.
So some.
Some pressure in the life market them.
That can be very volatile.
Soft or down there.
As we think about the third quarter typically.
Pre salt bid that was usually a seasonally softer period in.
In Mexico, and I'm, just wondering how we should well.
What's the current thinking on <unk>.
On performance for the Mexican operations.
Third quarter or back half.
Sure that's true Adam you're right Q3, typically is not the strongest quarter, it's kind of counter seasonal to U S is not the strongest quarter in in Mexico for chicken reach always recovered in Q4 because of what they call the festivities.
I think we're seeing also.
More competitiveness with the decline of prices on the commodity segment in U S going into Mexico, Mexico is also importing meat from other countries like Brazil. So we're seeing a strong demand there, but also strong competition with imported chicken and also other.
Production internal in the Mexico region.
Know Mexico has a big part of their market is alive board.
And this movement of lifeboats create.
Weakness in the bio security in the region because of that we also see some very big volatility in terms of diseases in the region. In Q2, we saw an impact in the mortality of the birds because of the dry weather and because of this less strong bias security that they have in Mexico, which has.
Already gone away getting Q3, so we see an increase in supply in Q3 from the overall production in Mexico and that.
Together with the softness in the market as it is not the strongest quarter has moderated the prices a little bit but overall like we always mentioned, Mexico is very volatile quarter over quarter, but very consistent year over year is a growing economy and we are seeing in chicken is a great vehicle for wind.
The consumer has a favorable income to be adding to the protein category.
Okay.
We should all that color is very helpful. I'll pass it on thanks, Thanks Eddie.
The next question is from Michael Higgins with Cleveland Research. Please go ahead, yes.
Yes, hi, good morning, just wanted to follow up a little bit on the hatch ability and you know you cited that you guys are seeing some improvement with your suppliers how about on the live production side like is the life production also improving in coordination with the haps and.
If in fact, the rest of the industry starts to improve on apps do you have any thoughts in terms of what 23 production might look like.
Sure.
Yeah, Michael I think we're seeing the hatch ability improve in terms of our expected production in the next Jim Youre seeing an improvement in hatch ability and that's what's going to drive the growth, we're expecting 1% to 1.5% growth and get put in.
<unk> for next year, we're not seeing any new capacity coming online and to that extent. We are also seeing a bottleneck in our hatcheries I think as of today, we are operating at the highest level with.
We've ever seen in the hatchery close to 95%, which is a sustainable Oh, I'll say that and that's because.
More eggs to have the same number of chicks right. That's the problem with hatch ability.
We're seeing the industry the entire industry evolving I think we all trying to manage that there's this new breed and getting more cash out of the eggs.
And I think.
The genetics, who need to have a significant shift if we want to get back to the old numbers that we have in etch ability as a reminder, Disney has a greater conversion. So it's a it's a great yield and a great conversion and if it changed a bridge to a new one.
Always something that is going to get right. So we don't know if there is a new generation coming on and we don't know if there is better.
Huge.
And better feed conversion on this new breed do improve the hatch ability.
Great and as a follow up on yeah, just to circle back on the live production side. You know are you guys, having any issues there and you know among the various bird classes. You know is there any difference in perhaps rates or among the small bird versus the trade pack versus blogs bird size. Thanks.
Oh sure yeah on the on the lives what is more important than what we really believe is what we call. The feed cost per pound of meat. This is the at the end of the day the.
The number that we watch everything is included in there right, including the hatch ability, but also feed conversion.
And I think this is what we monitor of course were concerned any hatch ability of course, we are dealing with it with it but if you change hatch ability, which will improve your egg cost, but if you lose.
Performance in the feed conversion is not a positive return for the industry overall because.
You can have a higher cost.
For pound of meat produced so it is a very complicated and technical calculation. Once again, we are really concerned and we are dealing with all the hatch ability, but we don't want to solve the hatch ability problems and create a feed conversion problem that at the end of the day, we produce the more expensive meat and.
Let's say that adjusted of course for the for the price of the feed inputs like corn and soy. So we're not we're seeing improvements in the life side on the feed conversion. So despite the hatch ability problem, we're seeing year over year improvements in.
The cost per pound of meat produced.
Our next question is from Peter Galbo.
Bank of America. Please go ahead.
Hey, guys good morning.
Peter.
Just a couple of modeling follow ups actually just just to kind of clean up the income statement did you guide our interest expense for the year and then maybe if you can just help US you know we can obviously see the you know the commodity pricing just how much was trade pack up in the quarter and maybe with your key customers. If you can give us the detail there.
You know relative to interest expense I mean, I didn't guide on this one but we were at $37 million for the quarter only 20% of our debt is at <unk>.
Floating rate so Peter so with interest rates rising a little bit you know, it's one of those once you guys can take a look and we've been up just a slight tick you know kind of quarter over quarter. So you guys can take a look at that but we're not seeing too big a difference at that $37 million or so per quarter view on net in net interest.
Tray pack I don't know if theres anything probably.
And that one we feel comfortable with kind of what we're doing here you'll be very much partnering with our key customers on this one but I'm not sure I didn't say myself I think are the as I mentioned, it's all a portfolio discussion right Peter so in.
Our case ready business, we've been recovering inflation that we're seeing are in.
Increasing volumes to support our key customers' growth and we had one of the best few rates, we ever had in compared to the industry where.
For sure ahead of all the industry, a few rates, especially for our key customers. We continued to see strong demand in the retail segment. We are seeing a starting of a trade down I think as the.
CPI as the inflation is hitting the consumer available income, we're seeing them trading a little bit down from extensive cuts to more affordable cuts and that is helping.
Chicken overall on their buying intentions, we will see an increase in buying intentions of chicken from all customers in the retail so we believe that going.
Into the next quarter, we're going to see a strong demand for chicken in the retail, but you seem very stable prices from our and each of the retail.
Oh, Oh, Oh, Okay, that's helpful and maybe I misheard this but.
I think you said that part of your retail business was up low double digits in dollars with relatively flat volume I just wanted to confirm that and then my second question just Fabio as you think about.
Europe , obviously, a difficult operating environment right now with input costs, but just you.
You know from a consumer standpoint, it feels like consumer confidence, they're getting dramatically weaker so just how youre thinking about that business over the next six.
At 12 months, if that consumer in particular is going to be a lot more pressure. Thank you very much.
No I think that's something that we're really monitoring closely which is the consumer confidence and of course, the impact of inflation into overall spending I think what.
Could be and it's an opportunity for us as well is that some weakness on the foodservice I think as the consumer gets pension there available income what tends to happen is that they will be more conservative, let's say ongoing out and trading down from foodservice to retail and what form it comes in.
To your point, we have a strong positioning in the retail we're supporting our key customers to grow and I think that's a great opportunity for us.
More than that as I mentioned, we're seeing some trade down from her extensive pets into more affordable cuts in chicken is the biggest benefits are off.
That trade down.
Coming forward.
We're not seeing a lot of promotional activity in any meat.
In the retail as the retail doesn't need to do any promotional activity to promote growth because there's limited supply and going to Q3, and Q4 going to see even more limited supply of beef and pork, which once again can benefit.
The chicken as we expect based on USDA numbers to grow production of chicken in Q3, and Q4 by around 1%. So there will be more availability of chicken.
She could drive more promotional activities on the retail and also chicken is the most affordable item in the protein category.
This concludes our question and answer session I would now like to turn the conference back over to Tom here.
Any closing remark.
Sure. Thank you and although we are pleased with our results for the second quarter and first half of the year market conditions continued to be exceptionally volatile and substantial inflationary headwinds continue to pose a challenge must continue to monitor the impacts of the global commodity inputs changes in overall protein complex inflationary costs throughout our supply.
Chain in movements throughout the labor market to date, we have successfully navigated those challenges based on our strategies of key customer focus portfolio diversification and operational excellence will continue to drive disciplined and ownership of these principles throughout our business with an unwavering commitment to team member safety and wellbeing gear.
Given our progress sustainable execution and dedicated team members and I look forward to driving these efforts for our business. Thank you all and this concludes our call.
The conference has now concluded. Thank you for attending today's presentation you may.
Now that's tomorrow.
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