Q2 2023 Pilgrim's Pride Corporation Earnings Call
Okay.
Good morning, and welcome to the second quarter 2023, Pilgrim's Pride earnings conference call and webcast all participants.
Participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
At the company's request. This call is being recorded please note that the slides referenced during today's call are available for download from the investors section of the company's website at Www Dot Pilgrim's.
Dot com.
After todays presentation, there will be an opportunity to ask questions I would now like to turn the conference call over to Andy Rydzewski head of strategy Investor Relations and net zero programs for Pilgrim's.
Good morning, and thank you for joining us today as we review our operating and financial results for the second quarter ended on June 27, 2023 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> children's Dot com along with the slides for reference.
<unk> items have also been filed a form 8-K 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.
Other additional factors not anticipated by management may cause actual results to differ materially from those projected in these forward looking statements.
Information concerning these factors have been provided in yesterday's press release, our Form 10-K, and our regular filings with the SEC I would now like to turn the call over to Fabio Sandri.
Thank you Randy good morning, everyone and thank you for joining us today for the second quarter of 2023, we reported net revenues of $4 3 billion adjusted EBITDA of 249 million translating to a five 8% margin.
This is a portfolio diversification key customer for us.
Israel excellence demonstrated their effectiveness as we grew margins relative to prior quarters across all regions. Despite continuing challenging market fundamentals in some of our business and overall elevated production cost in the U S. Our diversification across bird sizes, and keeps Randy and smoke guard branded products.
And preferred offerings continue to mitigate depressed commodity cutout values in the big Bird segment.
Customer focus created a significant pipeline of promotional activities across leading retailers and food service providers.
That's for the U K and Europe , our continued focus on operational excellence optimization of our manufacturing network and back office support activities continued to support our growth trajectory.
First vacation efforts continued to gain momentum with several more branded offerings grew faster than the category average.
In Mexico, our 11th races improves given our investments and diversification of our footprint over the past several months.
Our branded offering continued to gain market place traction given the success of our recent launches. These efforts were further aided by increasing balance supply and demand fundamentals and favorable exchange rates.
Starting with the U S. In the second quarter of 2023 ready to Cook production, a few guys chicken experienced an increase of two 2% relative to the second quarter of 2022.
Production growth was supported by increased head count and the industry continues to shift production away from the smaller segments each of the heavier weight ranges supporting a consistent year over year growth in average library.
Considering more recent trends as we progress into the Q3 2023, the industry High school speed consistently placed fewer chickens, even the prior two months, mostly due to a year over year reduction in catch ability, suggesting a more strained supply scenario in the coming quarters.
The U S. P. A 2023 outlook indicates smaller increases in supply for the balance of 2023 with growth in Q3 affected production in Q4.
As for overall supplier facing U S. D. I mean is the expectation for smaller domestic production availability for the calendar 'twenty to 'twenty three with significantly smaller production of beef for the remainder of the year.
With the U S consumer facing relatively lower beef and pork.
Okay.
Food inflation above recent historical efforts combined with significantly higher interest rates impacting our vehicles.
She can maybe advantage given its availability.
The ability and flexibility.
During the second quarter, Australia to treat domestic volume Shouldnt music growth the resale channel experienced nearly increasing volumes across all departments in particular, the fresh departments was only marginally better across both front and back half good supported by increased promotional activities.
For decades, we remain positive on the potential of this category, especially in competing proteins suppliers and increased promotional activity is beginning to drive sales and more consistently.
Elsewhere in the retail cabinet category, the frozen and Deli departments added incremental dollar sales through growth of the third daily and value added food products pointing to sustained consumer demand for value added chicken products, we see some contraction of the frozen commodity segment as consumers shifted from.
Pattern more store trips and less than three spots.
In the foodservice channel revenue sales decline due to reduce it.
Your pricing and volumes increase.
The commercial distribution channel witnessed the most dollar sales decline driven by fresh chicken pricing that remains well below the first quarter of 2022 pricing. However, the declining dollar sales has translated to demand stimulation as indicated by an increased number of corporations buying cars.
Relation to a 5% year over year volume sales in Greece.
Well the first quarter was characterized by volume growth primarily from wings and tenders in the foodservice channel. We have recently seen year over year volume growth in breast meat, a positive sign for the supply and demand balance.
Locomotion distributions to the channels continue to work towards recovery from the COVID-19, pandemic, adding dollar sales to increase volumes and higher prices in the value added category.
Relatively smaller than the commercial channel the noncommercial remains an important outlet for chicken in particularly value added products and we are encouraged by the continued recovery of the flip chip.
Prices have shown signs of recent improving supply and demand balance we've been steadily improving off low since late June and even more recently positive price movements on boneless breasts are counter seasonal movement for this time of the year.
Throughout Q2 U S thermal exports continue to grow at a healthy rate and attractive U.
U S brother in meat exports. The neighborhood me grew a combined one 2% driving the growth in the second quarter, with Taiwan, Mexico, and China, all of which have grown volumes year to date as we've seen continue to see positive sales growth in this channel U S cold storage inventories of combined dark.
Meet are down 10% year over here, you me and deploying more than seasonally expected from the end of March.
As a result inventories remained nearly 40% below the five year average.
Print sales in industry inventory positions have enabled relatively steady lakeport pricing, which trended seasonally but plate space nearly 50%, 15% above the five year average.
High path avian influenza also slowed through the quarter, that's only two commercial breaks related to Turkey's court.
Great.
Well both allowed many of the trade restriction for certain states to expire.
Other than China, we expect to see further easing of export restrictions during Q3.
Customer base continues to grow well.
We are very optimistic that exports will continue to balance the best domestic sales and further stabilized full of pricing, but remain vigilant to any acquaintance.
High path AI in the United States.
Moving to feed ingredient.
Brazil production of both corn and soybeans have been placed U S exports and increased local ending stocks estimates.
U S D a.
And estimate the current crop year, ending stocks for colon increased four 5% from last quarter estimates soybean and your stock's estimates for the current year and Christmas fell 25 million bushels in the most recent was the reports.
Looking ahead to next year yesterday recently raised corn planted acreage to $94 1 million acres $5 5 million acres more than the previous year, although corn prices experienced some volatility throughout the second quarter given the favorable weather in May and June a change to a more active rainfall.
And across the major production areas prior to key determining crop stages, reducing future pricing throughout the quarter. Nonetheless quite conditions were unchanged in the last crop progress report with 57% in good to excellent state and 30% is fair conditions while.
While weather risk remains increase acreage in competitive price points in Brazil should mitigate potential issues for the upcoming year.
Even though the current soybean crop has also benefited from the shift to weather.
Patterns.
So the overall impact was somewhat subdued give you a transition to more corn acreage from disappoint.
Almost whether will be critical for soybean yields nonetheless, domestic soybean meal should be well supported as the U S.
Biofuels policy is supportive to soybean oil demand and the crush industry continued to expand.
Despite some price volatility during the second quarter with balance sheets are generally well supplied.
Although USDA July was the reports indicate that drop off too.
8 million metric tons in the coming year. It was literally offset by an increase in stocks from the current cycle.
Recent events related to the Ukraine, Russia conflict has increased global prices and volatility for feed ingredients globally, but availability continues to be better than prior years, given increasing production and consequent increasing ending stocks.
Throughout the past 12 months, our U S business experienced a period of significant volatility during this time, our supply chain and clear dramatic increases in grain and elevated cost of production equals, including utilities labor ingredients and packaging.
Also experienced extreme volatility in the commodity segment meat prices.
On the left our diversification across both sizes.
I ended offerings and prepared items combine to meet our key customer partnership and focus on operational excellence helped mitigate those challenges, helping us to capture the upside in the market while protecting the downside.
Throughout this period, our big Bird <unk> maintain an extraordinary focus on operational excellence and drove improvements in production efficiency. During Q2 overall demand was somewhat muted at several industrial customers experience a decline or limited volume growth given increases with steel pricing levels. We are encouraged by the recent.
Improvements in the commodity pricing, but further improvement is needed to achieve sustainable margin.
Keith ready continue to focus our partnership with key customers as the team cultivated a variety of promotional efforts over the next several months, creating opportunities for mix enhancement and they're all.
Small bird remained relatively steady throughout the quarter given exceptional strong performance in value with key customers. The team also realized similar success in the foodservice channel from key customer partnerships, among leading U S stocks.
Our prepared foods business continues to drive profitable growth relative to prior year to increase distribution with key customers operational improvements enhance it makes our momentum fully Cooper branded business is becoming increasing variable. It's just there and vigorous collectively grew 56% year over year.
With over one third of this growth driving by product innovation.
Equally important our marketing programs were just there has been remarkably effective I think Brandon when there is more than double E. Commerce has realized similar success in prepared as it drove significant volume growth compared to prior year.
<unk> continues to drive their strategy of portfolio student with utilization and we'll continue to work in partnership with key customers to provide differentiated offerings through distinct operational capabilities. It could be organic and moorthy biotics every products for both fresh and prepared categories.
We will also continue to invest in operational excellence and profitable growth. Our automation projects that are of course, and our Athens expansion and construction of a floating conversion plant in south Georgia are progressing as planned and the startup is still expected by the end of the year.
Turning to U K and Europe , our margin improvement efforts remain on track, although inflation has moderated cost continued to be challenging.
Nonetheless demand for branded and customer specific offerings remain resilient, even if the cost increases were passed through and shelf or imagine.
In pork supply and demand fundamentals and live operations have improved with the restroom and digitization efforts of the hard both in U K and Europe over the past 12 months.
As market conditions continue to evolve our vertical integration with big farmers will be beneficial in our ability to ensure sufficient supply and meet our growth aspirations.
Our key customer strategy has once again proven instrumental as we have been awarded significant additional distribution for both existing and new products.
<unk> will continue to play a critical role as we are slated to launch well over 250, new items over the next six months.
I've also cultivated a strong promotional pipeline. So all this summer and beyond which is expected to enhance mix and bringing new users to our categories.
Our diversification efforts well prepare offerings continues to gain traction our frozen meals snacking can help dogs offering all grew faster than the category averages. In addition, our brand foods razors officially became one of the top 100, most chosen brands amongst food manufacturers.
We're seeing similar success in the alternative protein space, which model mid three <unk> shares over the past year in both frozen and fresh categories.
We will continue to drive operational excellence manufacturing, although we have made significant progress in our overall staffing levels. We remain vigilant regarding the impact of inflation and we continue to invest accordingly in our teams to ensure sufficient labor availability.
We made strong progress in our network optimization efforts in the U K to realize production and cost efficiencies.
As for Mexico, the overall business improve its growth in fresh remarriage throughout multiple channels, especially retail similarly.
Repair business growing to close to double digits, driven by branded offerings and success with that keep us our channel.
Our momentum was further amplified by increasing visibility market fundamentals and exchange rates.
Additionally, our ongoing redesign of our lives operations footprint investment in housing and enhancements and management procedures significantly diminished previous issues related to board mortality and provided additional protection from potential buyer security challenges.
Our diversification efforts through our branded innovation continues to be exceptionally well received by retailers and consumers alike.
Early results from our recent launch of publishers and unique tastes are very promising as both are far exceeding its oracle category growth in fresh we will also look to accelerate that branded growth as our team and the launch of fresh offering of just bear in Mexico, and no antibiotic ever lineup that has realized significant.
First in the United States.
These efforts our Mexico business can further differentiate this portfolio, providing additional insulation from market includes durations in the life market or lower priced chickens are pork imports.
Our focus on operational excellence and geographic diversification remains steady as our investments in the Yucatan Peninsula and there are a lot of operation to ensure domestic growth remain on course.
As part of our leadership journey sustainability.
We recently completed an inventory of four global greenhouse emissions throughout the entire supply chain in conjunction.
With an independent third party.
Yeah.
We have also implemented a series of globals and monitoring systems to evaluate their own energy usage intensity, resulting in multiple improvements across our production network.
Our sustainability efforts beyond production facilities also continue in the U K our pilots have been energy self sufficient poultry farm recently released its first commercial flock, we've continued to evolve into our developments in all these areas and adjust accordingly to accelerate our progress.
In mind I'd like to ask our CFO myself, a moment to discuss our financial results.
Thank you Bob.
Good morning, everyone for the second quarter of 2023, net revenues were $4 three $1 billion versus $4 $63 billion, a year ago with adjusted EBITDA of $248 $7 million and a margin of five 8% compared to $623 $3 million and 13, 5%.
Margin in Q2 last year.
Adjusted EBITDA margins in Q2 were four 6% in the U S compared to 18% a year ago for U K and Europe business adjusted EBITDA margins came in at five 2% for Q2 compared to three 4% last year in Mexico. Adjusted EBITDA in Q2 was 12, 2% virtually flat.
At 12, 3% a year ago.
Moving to the overall U S results, our adjusted EBITDA for Q2 came in at $113 5 million compared.
Compared to a quarterly profit of $529 million a year ago, when the jumbo cutout was near all time highs.
This dramatic change demonstrates our ability to capture the upside of favorable industry conditions, while mitigating the impact of industry downturns.
Over the last two quarters, we have grown U S profitability sequentially. Despite challenging market conditions. During April and May we saw slight improvements in commodity chicken pricing, whereas June reflected seasonal declines nonetheless overall commodity cutout values remained below the five year average throughout the second quarter over the past couple of weeks, we have seen in <unk>.
Up tick in commodity cutout values, though.
Our diversified U S product portfolio across bird sizes and brands along with our key customer partnerships helped us mitigate the impact of the challenges and market pricing in our big bird business during the current quarter.
The U S small bird and prepared food businesses continued their strong 2023 performance.
In the U K and Europe adjusted EBITDA in Q2 was $68 1 million versus $42 $6 million in 2022, although inflation has been moderating certain cost do continue to escalate to the U K and Europe business through.
Through its previously disclosed I'm sorry through its previously discussed mitigation efforts in 2022, the business has shown resiliency and its profitability growth journey.
Business has benefited from the back office integration and its network optimization programs.
During the second quarter, we expanded the network optimization program with the announcement of the closure of our Ash Abattoir, which has been finalized here in July .
As we optimize our fixed cost structure is important to note that our U K network footprint can continue to support growth with our key customers.
We incurred approximately $30 million of restructuring charges during the quarter and supported these changes.
Mexico generated $67 $2 million and adjusted EBITDA in Q2 compared to $59 $8 million last year.
The Mexican business has experienced both more balanced supply demand fundamentals and a reduction in bird. These birds disease challenges, it's alive operations due to the team's extraordinary efforts.
Overall, our SG&A in the quarter was lower year over year, primarily due to a decrease in employee related costs in the U S and other targeted cost efficiencies achieved in our U S and UK Europe because.
We spent $156 million in capex in the second quarter. The second quarter spending is higher on a run rate basis, primarily due to our investments in the Athens, Georgia expansion and our new protein conversion plant being constructed in south, Georgia, we reiterate our commitment to investment strong <unk> projects that will improve our op.
Operational efficiencies through automation and tailor our operations to address key customer needs to further solidify competitive advantages for Pilgrim's.
Although Q2 was challenging due to the volatility in the U S chicken the commodity markets, our overall balance sheet and liquidity position remained strong with the completion of our $1 billion of 10 year notes offerings in April and the cash we generated during the second quarter, we had approximately $1 $8 billion in total cash and revolver.
As of June 25th.
Our liquidity position provides us flexibility during this more volatile time in the U S commodity markets allows us to explore further simplification of our capital structure, such as the elimination of subordination to the potential unsecured structure as well be opportunistic with possible liability management exercise with our existing debt, including paying down our 2027 notes.
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As of the end of Q2, our net debt totaled $2 9 billion with a leverage ratio of 316 times. Our last 12 months adjusted EBITDA, which is just outside of our target range of two to three times.
With the challenges we experienced in the fourth quarter of 'twenty two in our first quarter 2023 profitability. Our net leverage ratio is anticipated to remain outside our target for the next couple of quarters.
Net interest expense for the quarter totaled $39 $5 million.
We anticipate our full year net interest expense will be between 160 and $165 million.
As you saw in our earnings release, our effective tax rate in the quarter was significantly impacted by discrete tax items, primarily in Mexico, and the U K due to the mix of our multi jurisdictional pre tax earnings for the first six months of this year routine income tax adjustments on discrete items are being amplified, including the impact of changes in <unk>.
FX rates in certain jurisdictions.
As such our effective tax rate is not falling into a more normalized level of between 23 and 25%.
Best view for the full year effective tax rate is approximately 10%. However, this amount will fluctuate depending on the mix of earnings across tax jurisdictions.
Our capital allocation approach will remain disciplined as we look to grow the company and will continue to align our investment priorities with our overall strategies portfolio diversification growth with key customers operational excellence and commitment to team member health and safety.
Operator. This concludes our prepared remarks, please open the call for questions.
We will now begin the question and answer session in the interest of allowing equal access we request that you limit your questions to two then rejoin the queue.
Any follow up to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to minimize background noise.
To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question comes from Ben Oh, we're with Barclays. Please go ahead.
Yeah, Good morning, Fabio and Matt Congrats on the results.
On the two questions just the very first one if we take a look at some of the expenses would be booked through a restructuring in the U K and we remember you had a few of those.
In the past as well so just help us understand where are we right now in the process what else do you expect and what it's like kind of a reasonable SG&A run rate going forward. So that we'd now like kind of worked to model that out that would be my first question.
Yes, it's Matt.
Let's start with the restructuring I think for us right now.
Based on where we're at with the announced programs. We may have call it $3 million to $5 million left on those programs or any type of kind of cash costs that will kind of dragged through.
Into Q3 that we Couldnt will say expense ahead of time that has to be done during the.
Period itself.
Our still continue to look for ways to optimize our network.
We're always there to operational excellence, but relative to the programs. We have right now that's the remaining cost that we would have years out of the cash side.
China remained relative to your SG&A question, we think about the SG&A. That's there today I think that's a decent run rate. We're looking at things I mean, you have to take the restructuring costs out and when he tried to exclude that for you, but we are starting to see more normalization on the SG&A. We've seen some of the efforts that we've done relative to the back.
Office integration I will continue to see some of that play through for some efficiencies as we go forward into 'twenty four and 'twenty five.
Generally I think the SG&A run rate, we have now is pretty decently in the model for I don't know five do you want to add anything on the restructuring well just on the restructuring I think you saw the benefits flowing into our results as we reduce the operational footprint without reducing our production I think what we just did was move.
Product for more efficient facilities and closing some smaller facilities that word of mouth.
Something that we need to invest in the long run.
Okay Perfect and then my second question is just around like general pricing dynamics are and in the U S and how you feel about the pricing across the different bird sizes.
Clearly there was there was there was an impact again this quarter on a year over year basis, but how should we think about pricing within the free categories Big medium and small bird from here onwards, I'll say as it relates to some of the comments you made as to some of the industry behavior on.
Lower placements.
Yes, I think we need to as you mentioned drill down into the specific categories. I think on the small bird disappointing demand is very well balanced we are seeing pricing for the smaller birds being on the hps or in the daily blogs.
Higher than the five year average is going through a normal seasonality, but is significantly higher than the five year average so that supply and demand, it's really stable and we're seeing very good margins in those business on case ready.
I think the supply and demand is also willing bonus what we expected was more feature activity during the Q2 that you've seen.
Actually we're seeing some improvement right now and as we.
And on the prepared remarks, I think the the advantage for chicken is there just more available and more affordable. So we're seeing a lot of promotional activity coming along so we expect to see some demand increase on the retail and will make a more favorable supply and demand.
Structure.
I think the weakness over the last year.
Year already has been on the big bird commodities segments right that as we look into the increase in production.
Almost all the increase in production has been on that category.
And as we see less.
Growth in the retail it's also Florida enhanced more meat available in that category. So that's what that depresses the prices, especially on the breast meat.
And it seemed the pricing below five year average the other category with its also a weakest queens.
Looking forward I think wings were weak because we saw some operators taking them off the menu because of the shortages and the high price of last year as of now we're already seeing a lot of foodservice operators, bringing leans back to the menu and increasing their promotion of bone in wings instead of boneless links.
For the breast meat, we are seeing.
Increasing as well demand on the foodservice categories and we expect one of the candidate that was really weak during the last six months, which is the industrial which is further processors that we're also suffering from lower volume, albeit at high prices for them.
So as we see more of them.
More promotional activities in the retail both for prepared foods overall and for the fresh categories. We've seen more demand for the in this commercial or commodity category, we're seeing some signals of increasing prices over the last two weeks, which is very encouraging.
Okay.
Perfect. Thank you.
Thanks Donna.
Our next question comes from Ben B M. W. With Stephens Inc. Please go ahead.
Hey, Thanks, good morning, everybody.
Martin, but I wanted to.
I wanted to follow up on Dan's question, just around kind of what youre seeing across the various bird sizes and Fabio relative to your comments around.
The supply demand balance for each of the sizes have you all thought at all about any capacity conversions between sizes across your network, perhaps from big bird to smaller size and if not what.
What would you need to see either from a magnitude of commodity big bird weakness, our duration to make that consideration.
That's a good question. Thank you, but I think we're always looking on ways to improve our portfolio right. I know you mentioned in the past that would be once you increase the value of our offerings to branded prepared foods and we've been doing that's growing our brand and our prepared foods operation on the fresh side.
We have.
Closer to the commodity markets and I think we look as a portfolio. So if you look over the last 12 months, we saw some very strong pricing on that commodity and install our results last year that we were able to capture that upside. So it's is.
As a portfolio option for us.
When the market is really depressed as it is right now we have all the other segments with more stable margins that can level. Our earnings. So we are happy with the portfolio that we have of course, we will always looking for opportunities to improve being diversified diversified options or different issue.
The options like no antibiotics ever organic so we're always looking for those options to add value to our production, but overall our portfolio is well balanced in the fresh categories. We are always investing to grow with our key customers. So I think it's more.
Well nishu of growth rather than just converting operations. So we recently announced the <unk>.
Increasing production in our Athens facility, which is in the smaller category. So if theres any.
Hello theme in our portfolio I believe is going to be true growth and it's gonna be two the growth in partnership with our key customers.
Okay very good and my second question is on the Mexico segment very strong results in the quarter and I'm wondering any commentary you can provide around what you're seeing so far in <unk> and I know, it's a difficult segment to forecast, but kind of what's your expectations are for the year from that segment as well.
Now of course, we've always mentioned in Mexico is very volatile quarter over quarter, whether you expect a very steady and growth levels. During the year, then we have a particularly.
Weak.
Quarter last year, Q3, and Q4 of last year were very challenging for Mexico with.
A lot of increasing production on domestic and also some.
Strong exports from Brazil, and U S bookings pork and chicken impacting especially the north market in Mexico, what we're seeing today is a more balanced.
Supply and demand we are seeing some increase in the demand.
Because of the economy of Mexico is doing well of course the exchange rate is also helping their consumers over there. So we are seeing.
Starting on the Q3 very promising usually Q3 is not the strongest because of the the schools the resets, but we're seeing very steady supply and demand so far in Mexico as I mentioned, there is a lot of.
Volatility there, especially because there is the live market operation that tends to be very susceptible to two diseases. So the supply and demand actually can change rapidly there, but so far has been very well balanced and with the demand being very strong.
Okay. Thanks, so much.
The next question comes from Peter Galbo with Bank of America. Please go ahead.
Hey, guys. Good morning, Thanks for taking the question.
So maybe before I get my question, Fabio I take umbrage, having come and grown up in Buffalo, New York, but Theres, an idea of a boneless wing versus bone and so I just wanted to confirm that that was a that was on the record but.
Maybe just to start guys on U S. I actually wanted to dive into the to the costs on gross profit you know it was it was actually down in the quarter and I think that was more driven by you know lower kind of prepared food chicken prices more so than than maybe input costs or feed costs, which I would think would start to be a.
<unk> going forward, just given where corn and soybean have moved so maybe you can just comment on that into the back half of the year, how youre seeing the costs you know play out more so in the U S, particularly as as chicken prices are still under pressure.
Yeah, I think I'm allowed them to call.
As he mentioned he has a.
Very unique approach to our opening the gaps in the operation and closing our gap. So we have every supervisor acid plants are fully dedicated to identifying the opportunities that they have perfect operation. So we call that the opening of the gaps and then we have a methodology for all of those operations to close the gap.
With action plans and specific timing and specifics of responsible so I think every year we.
You densify those opportunities during the budgeting process and then we created action plans to close those opportunities during the year.
This year has been very difficult.
I think because of staffing levels that we only achieve fully staffing levels right now we're still training our operators and team members to achieve the best yields possible. So I think it's been the ramp up in terms of capturing those operational excellence activities throughout the year right now.
Already positive.
Getting to our budgets, but for the first semester.
As I mentioned difficult to close those gaps because of that.
Lack of labor into our plans.
That's right.
Go ahead.
But is it fair to think about feed I mean feed flipping to a tailwind kind of from a cost perspective in the second half.
Yeah of course, as we've talked about I think there's availability of grain in the United States weather permitting of course, I think for corn, we already.
Past that periods. The weather was favorable for the production and yields we have shrunk acreage higher than last year I think for soybeans.
The period of weather.
Still ahead of us so we expect the bedroom or normal weather two hours. So we can captured the yields that we are expecting but we are seeing the signaling on the future market pricing, which is lower than it is today that it could be.
Opinion I'll just caution that there is a lot of.
Portfolio in terms of pricing that we have right. So we have some of our products are based on cost plus our base on the grain.
Of course, what Ken defined the profitability of the chicken industry is the supply and demand of chicken not necessarily the prices of corn and soy that we've proved through the years that we can have a very strong profitability, even with high prices of grain and corn and it can be also have our margins.
From what we expected, even with lower corn and soy, but overall of course, it's better for us to have a more.
And.
More in line with expectations price of corn and soy rather than the volatility.
Got it Okay. No. That's helpful. And then and then maybe just back to your comments I think you said on the second half and in U S on production.
I think you had industry growth you were quoting on and kind of volumes growing in <unk> and maybe flattish in <unk> is there any reason to think that you guys would be materially different from that either in a positive or negative direction.
Yes, we have the leading indicators through U S D right, which is the chick placements and egg sets I think if you look at the numbers over the last 10 weeks it has been lower year over year.
So what we expect for the incoming eight weeks is actually a lower production year over here I think what's happening in the industry is that despite having more eggs because we have a leg length block that is actually larger.
Then last years.
The.
H is higher and the hatch ability if slower so despite having a little bit more heng.
As you can see on the egg set number from the USDA. The chick placements are actually significantly lower than prior years, So I think that leading indicators.
It is believed that the production in Q3, and Q4 will be lower year over year.
Got it okay. That's helpful. Thanks, guys.
Thanks Peter.
The next question comes from Adam Samuelson with Goldman Sachs. Please go ahead.
Oh, yes, thank you and good morning, everyone.
Well Ana good morning, So I guess my first question is in the U S. And this was in the queue. This morning.
Are you prepared chicken sales are prepared foods sales were down 27% year over year in the press release yesterday evening, you talked about your branded just bear in Pilgrim's prepared sales in the U S that were up 56% year over year I'm, hoping you can just help square that is that just a miss.
How much wings are going through your prepared plants are more help us.
Bridge kind of a pretty significant decline.
In prepared foods and in the in the U S.
Well I think part of it Adam is going to be price right. Because you think about in the past you had last year when we were having.
Their input costs are much much higher commodity chicken price.
That was the input cost the base cost or the prepared business and so from a price standpoint.
That.
Ended up really kind of impacting higher prices last year than compared to this year, but relative to growth. We feel very good about our volume growth, but it's really sort of a price difference year over year I don't know if you want to add anything to that and I think you're right that in especially on the main category as we saw the wing pricing last year.
It was close to $3 in the theater is close to $1 right. So the price our prepared foods. Accordingly of course, we maintain our margins and that's why we believe it's the prepared foods is a more stable business than all the others because we can maintain the margins despite the highs and lows of the commodity pricing. We're also.
We're doing a lot of promotional activity this year, especially on the wins as well to further enhance and gained market share in that category on the foodservice mainly.
Okay.
That's helpful color and then as I think about the actions you're taking on.
Automation on it on an improved efficiencies some of the plant conversions in the U S and in the restructuring in the EU I was hoping if we could.
Kind of tie that altogether, a little bad in terms of how to think about the savings and and.
At least the fixed cost reductions that that you would see at least from the U K stuff and but.
Kind of help us think about the earnings contribution from some of those investments and the timing that you would be you'd be looking to realize those over the next 12 to 24 months.
Yeah sure. It's a great point, because we're always as I mentioned, we're always looking for ways to opening gaps identifying opportunities and capturing operational improvements. Some of these operational improvements translate into cost improvements some.
And I'll say, it's 50 50 owned yield improvements, which helps on the margins and on the revenue so instead of leaving meat on the bone with the bond. So we can sell that as a whole needs instead of on the rendering them or putting consortium partners.
So 50 50, I will tell you that it is how we see that.
The automation efforts also help on improving yields because the machine is better than a operator that is not there right still today.
Labor or Emmanuel de boning yields better than the machine, but once again the machine do its job every day, while we have a lot of turnover in our.
Operators and our team members and we need to train them to capture the optimal yields in our plants. So the automation has been benefiting and over the years, we've been disclosing what we expect in terms of operational efficiencies and it's been around 100 to two.
$100 million in terms of operation improvements.
A lot of that it has to catch up with our industry that is never ending improving.
Their efficiencies as well and some of that will flow to the bottom line through the operational efficiencies.
Europe is a little bit different because we not only that we also has been has been optimizing our network infrastructure as I mentioned, we've got producing the same volume in just some low number.
Mueller number of plants because they are consolidated some of the operations in the most efficient.
Plants, which translate into better cost some better yields as well as the new facilities are highly automated and have competitive equipment and more trained skill.
Labor.
We expect like I said from $100 million to $200 million in operational improvements every year.
Okay, and if I can squeeze in one more a follow up just to Peter's last question and then kind of when you're talking about the production and I'll put it in the second half again, referring to industry numbers. The industry was up a bunch and production and I'll put into <unk> 'twenty to Pilgrim's in the United States was down so or are you are you assuming your own production.
<unk> to be flat to down in the United States in the second half of 2023 or is it going to be up because your comparisons are very different than the industries.
Sure isn't always mentioned, we always are.
Matt sure supply towards demand, especially with our key customers right. So we expect to be in line with the industry, but in line with the expectations of our key customers we have.
Best fill rates in the industry.
Close to 99% to our key customers to all the time then.
Right now in <unk>.
Spectra continue that so we will adjust our production.
To that demand, we're seeing more promotional activity from our key customers. So we see some increase in demand over that but typically Q3, and Q4 are periods, where we have lower demand of chicken because of the state.
Thanks, giving and year end, so normally we reduce our outputs during those quarters comparing you want to view here again, we expect to be in line with the industry and in line with the demand from our key customers.
Alright, I appreciate the color I'll pass it on thanks.
Yeah.
Next question comes from Andrew.
Charles <unk> with BMO. Please go ahead.
Hey, good morning, Thanks for taking the question.
For my first one I guess I wanted to focus on that on the Big Bird segment and you talked about some of the recent improvements in cutout values as well as needing more improvement and so I guess my question is.
Based on what you see from a demand pickup perspective, and the supply outlook do you think that's enough to get us in that segment back to supply demand balance or do we need.
More outsized actions on one side or the other I don't know, which would you think would be more likely but but but.
Is that enough to get us, where you think we need to be from a supply demand.
Yeah, I think looking at the supply and demand in specific in the quarter, but big Bird category. So we have three main segments of demand in the big bird. So it's the industrial it is the foodservice and international accounts.
The <unk> and further processors.
I think the <unk>.
One that was lacking.
Service has been strong I think further process has been in pace with your expectations I think the one that has been weaker for us. It is the industrial category and this industrial categories is prepared foods companies and as we saw some of the latest.
[noise] announcements in press releases, they are increasing their prices close to 10% year over year and reducing their volumes close to 8%. That's the latest number that we saw in that industry, so that 8% translating to lower volume of prepayments and lower demand for protein overall.
I think once again beef and pork has been very muted to balance production, which is favoring chicken, but it still is a lower demand than we expected in that category as we see more promotional activity and I think we're going to see some deflation in the retail.
We expect to have a stronger demand, especially in that category.
Service once again continued to be strong into national accounts continues to be strong. So that is one of the other.
The drivers that we need to a more balanced supply and demand I think also the fresh retail with more promotional activity with the deflation as well in the retail can further enhance that demand in the big bird as we always do use big bird to augment our operation in the key.
Ready.
For this period of time when you have.
Big promotional activities. So those two factors can help on the.
On the demand for that category for the supply I think what we are seeing once again is that the placements has been down over the last eight weeks, which will translate into lower.
That's on a year over year for the incoming clubs.
Okay, Okay, great and then.
<unk>.
There was a there was a comment in there.
Press release as it related to the U S business.
<unk> is in the process of executing a variety of action items to further drive operational excellence that was the.
And I guess I'm, just curious are there kind of new or incremental things that you can elaborate on within that or maybe as we roll through the back half of the year and into next year.
If there's nothing new or what are the key items there that we should.
I'd be focused on do you think would be most impactful.
Yeah, just like I mentioned, we every year, we identify all of the opportunities that we have both in life and in the plant we call that that opening our guests and then the team with a comprehensive plan with actions responsible and timelines to close those gaps and achieve our operational.
A lot of that has been on yield.
I think as I mentioned over the last year, we've been not fully staffed and that has impacted the training. It has impacted the skill of our team members to do.
Further yield improvements and a better yield on our operation. So there is a lot of training involved there is a lot of staffing our plants involved I think that will help on the yields for us to capture that $100 million to $200 million like I mentioned, we also are investing a lot into our live operations with improved housing which could help.
Our fifth convergence.
Our efficiency overall, and we will help our feed conversion is on top of what the primary breeders already.
Through their new breeds.
Okay, great. Thank you very much.
This concludes our question and answer session I would like to turn the conference over to Fabio Sandri for any closing remarks.
Thank you again over the last months, we facing many external challenges, but together with our team the consistent execution of our strategies of diversification deep customer focus and operational excellence are essential to navigate this transition issues and reinforcing our foundation for long term profitable growth.
Those strategies have demonstrated their effectiveness that's margin improved despite challenging business conditions. We will continue to drive this strategy along with an a new evening focus on value and team members of L. B.
Given these efforts we can further strengthen our competitive advantage and cultivate a better future for our team members.
Thank you for joining us today.
The conference has concluded. Thank you for attending today's presentation you may now disconnect.