Good Morning and welcome to the second quarter 2020 Pilgrim's Pride Earnings Conference Call and Webcast. [Operator Instructions] Please note that slides referenced during today's call are available for download from the Investor Relations section of the company's website at www.pilgrims.com. After today's presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Dunham Winoto, Head of Investor Relations for Pilgrim's Pride. Please go ahead.

Good morning, and thank you for joining us today as we review our operating and financial results for the second quarter ended June 28, 2020. Yesterday afternoon, we issued a press release providing an overview of our financial performance for the quarter, including a reconciliation of any non-GAAP measures we may discuss. A copy of the release is available in the Investor Relations section of our website along with the slides we will reference during this call. These items have also been filed as 8-Ks and are available online at www.sec.gov. Presenting to you today are Fabio Sandri, Interim President and Chief Executive Officer and Chief Financial Officer; and Charles von der Heyde, President of Pilgrim's Mexico. Before we begin our prepared remarks, I'd 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. Further information concerning those factors has been provided in today's press release, our 10-K and our regular filings with the SEC. I'd now like to turn the call over to Fabio Sandri.

Thank you, Dunham. Good morning, everyone, and thank you for joining us today. For the second quarter of 2020, we reported net revenues of $2.82 billion and adjusted EBITDA of $112 million or a 4% margin and a GAAP EPS loss of $0.02 per share. Before I begin, I would like to express my sincere gratitude to our global teams for their commitment, dedication and continued hard work in supporting our ability to keep our team members safe and healthy while continuing to maintain our ability to produce and supply customers during this challenging time. Safety is a condition at Pilgrim's, and our team members responded admirably to the unprecedented conditions supplying products to our customers. I would also like to thank all the health care professionals and first responders who have remained diligent in helping to maintain the safety and health of our team members. We are continuously adapting our global operations to the change in channel demand while adjusting our operations to be able to maintain the operations at all plants and minimize any significant disruption due to labor and health issues. I would like to reiterate the precautionary proactive actions we have implemented that go beyond our already rigid standards at all our facilities to further minimize the spread of COVID-19 in accordance with health and disease guidelines recommended by specific government health authorities. We are taking these steps to better safeguard the wellness and health of each team member while fulfilling our essential business duty as a food producer to people here in U.S. and globally. We have increased the frequency of daily sanitation and cleaning of commonly used areas and repeatedly touched surfaces; limited visitors to our operations and offices; performed daily wellness screening of our team members, which includes required temperature checks, self-screening and…

[Operator Instructions] Our first question today is from Ben Theurer of Barclays.

I have a question to understand a little bit more your commentary around the performance intra-quarter. So if we could put it into perspective, I mean, last year, during the second quarter, you had, in the U.S., about $190 million operating income. And you closed this year at, call it, $40 million. And you said June was essentially flat or in line with last year June. So could you share with us the magnitude of the loss you saw maybe in April, May and where we're trending to and to understand a little bit where we're going into the third quarter, just with all the commentary you had about supply/demand, pricing improvement, et cetera, just to understand a little bit better how much the actual impact was in April, May?

Yes. Thank you, Ben. Yes, April and May deeply impacted by the shutdown in foodservice, right? So during those 2 months, we saw a sharp decline in overall market, but not only that, a sharp reduction in demand. So there were periods of times where there was no demand at all for any protein, while the production was struggling to keep people also to produce. So the first 2 months were deeply impacted by that. But as the demand resumed, especially on the QSR section and as we see a stronger pull from the retailers, we saw a rebound in market prices and our operations coming online with better efficiencies. So that's why we tried to show the market that during those 2 months, there was the big reduction in the quarter. While in June, in all geographies, compared to the same period last year, we were in line.

Okay. Perfect. And then actually taking advantage of Charles being on the call, a question on Mexico. With the exposure to the live bird market and, obviously, the challenges you have through the quarter, there's still plenty of restrictions in certain states in place in terms of the stoplight system here in Mexico, what are you seeing currently in that relevant piece of your business? I mean I understand the whole Prepared Foods segment and the formal channel but more the informal live bird market. What are you seeing there in terms of dynamics? And how have the more independent ones reacted recently?

Thank you, Ben. Yes, thanks for your question. Actually, what we see here for the last, let's say, 30 days, has been a strong reopening of markets country-wise. Just remembering here, the federal government has implemented a system of like lights. Red light means everything is shut down, and then orange is partially open and then green is totally open. But this is just a guidance that the federal government gives to the states, but it is up to the states and ultimately, to the cities to decide how much you do reopen or not. And what we see today, country-wise, to be very straightforward, basically, everything is open. Everything is operating right now. So obviously, there are some restrictions, especially still on bars and restaurants, but everything else is working, flowing normally. And to your specific questions on live markets, live markets have rebounded strongly since the beginning of June, which was basically when the economies got reopen. And currently, we see good demand for that segment and basically working in normal parameters compared to last year.

Our next question today is from Heather Jones of Heather Jones Research LLC.

So on your tray pack plants -- or just your plants and -- well, I'll just stick with tray pack in the U.S. So one of the issues, a fallout for the entire meat packing industry was labor and product mix, et cetera. Could you let us know where your plants are today? Are you back to normal in the sense of product mix, second processing, et cetera, in your tray pack plants so that you're able to take advantage fully of that stronger demand? Or just if you could just give us an update on that.

Yes. At the beginning of this pandemic, we see a significant increase in absenteeism. And that impacted the mix for the entire industry but also for the entire protein industry in U.S. So we saw a reduction in beef and pork production. For the chicken industry, what we saw is exactly what you mentioned, Heather, that is, a production of a less optimal mix. So we moved people from the dark meat deboning and from other areas to the front deboning, which is the most important area, to not stop our operations. We saw numbers up to 20% absenteeism at the beginning, not only because people were afraid of coming to work or afraid of leaving their homes, but also because on abundance of caution, we sent all the team members, 65 and up, that are what we consider vulnerable population to home with full pay. I think that impacted our operations significantly. As we've seen the markets improved with less cases in the plants and less cases in the overall environment, we're bringing back that population, which is helping on us to achieve the better mix. So during the Q2, if you think about direct effects related to the extra cleaning of our production in common areas, the extra PPE, including masks and safety shoes that we are providing to our team members and installation of physical barriers in all the production areas, we saw an impact of around $40 million for the quarter. We don't expect this cost to continue going forward, and we expect our operations to resume with a better mix than we had in Q2 during Q3. I think one important point, too, was that in conjunction with our key customers, we reduced the number of SKUs. So we simplified the operation of our plants. And that helped as well in the increase in the operational efficiencies.

I just want to parse one of your statements. Did you say you're going to resume full operations or you have? Like, meaning, if I look at one of your tray pack plants today versus where they were in February, are they still not at optimal mix? Or have they returned to optimal mix, and we'll get that full benefit for all of Q3?

Yes. They have been resuming their optimal mix during Q3. We expect to finish Q3 with the optimal mix.

And then my follow-up question, and it's still related to tray pack is, I had heard that there have been -- that due to the plant problems we're talking about, that there had been some losses of retail business within the -- just can you tell me whether Pilgrim's lost any retail business as a result of absenteeism, these issues? Or is your retail customer base the same as it was pre-COVID?

Yes. We have not lost any customer. As we discussed before, we have a key customer strategy, which is highly differentiated, right? We don't do annual bids. What we do is a deep relationship where we help them grow their business, which help us grow as well. And because of that, we approved doubling our capacity of retail products in our Cold Spring, Minnesota plant. And that was to support our growth of our key retailers and support the phenomenal growth of our Just BARE brand. Through the increase in automation, we will add 100 million pounds of tray pack capacity, increasing our tray pack overall production by 10%. What happened during Q2 was that, at some point, we were not able to fill all the orders of the customers. So we have not lost any customers, but we were not able to fill all the orders for their needs.

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

So can we just go back to Mexico for a second? So just understanding it. So at this point, the level of profitability is similar to last year, including and excluding COVID costs. So things have -- so the supply/demand dynamics have become more balanced. Is that my understanding of what you're saying? I just want to make sure.

Go ahead, Charles.

Oh, sorry, the question was for me. Ken, thanks for your question. Yes, as you saw, as Fabio has made the comment, so June results were in line with basically last year. And July -- month of July was very strong as well. So it continued strong as the month of June was. So right now, margins are pretty stable and positive.

Great. And then one just question on the U.S. As you see the big bird profitability kind of waning a little bit, have you thought that there may be a greater level of production cuts? Or do you think that the production levels will be constant with what we see in the egg sets and pullet placements? Is there any change that you would expect with production levels going for the next 3 to 8 months? And that -- I'll leave it there.

Yes, Ken. The jumbo cutout is running close to last year numbers. However, we are achieving this outcome with different categories behavior to last year. Boneless breast has actually outpaced last year according to USDA's most recent numbers and continue to see strengthening in recent weeks. The higher demand in both retail and QSR, both boneless-centric channels, and flat supply has been supportive of the growth. The weakest part is the leg quarters, which are trading at the bottom of the 5-year range driven by a 14% reduction in dark meat deboning production in the domestic market, increasing the availability of the leg quarter exports by around 6% since the beginning of the pandemic. And this is a reversal in the trend of increasing deboning across the industry, coupled with weaker export and pricing because of the pandemic. So given that the cutout is relatively stable and these other expectations about the reopening of the foodservice, the rebound in the price of oil and the resume of the exports, we don't expect to see any significant cuts in our industry. USDA is forecasting a flat production compared to 2019, with Q3 down a little bit, 1.5% and Q4 down 0.2%. And consider the egg sets and chick placement during the Q2, I think the die is kind of cast for Q3 with those numbers.

And our next question today is from Ben Bienvenu of Stephens.

I want to ask -- pre-COVID, you all had plans to convert capacity from big bird to small bird. Recognizing you're getting back on track with respect to mix and managing your plants efficiently, how does that change the time line that I believe you delayed that conversion into 2021. It was a bit nebulous last we heard an update from you. Any refresh on those plans would be helpful to hear about.

Okay. Thank you, Ben. Yes, foodservice has seen different levels of recovery. The QSR has exceeded our expectations. In fact, our key customers are significantly outpacing 2019 levels. Nearly 50% of our foodservice is QSR, which help us offset some of the weakness in the other foodservice categories. Smaller chains, independent and noncommercial foodservice channels, such as foods and lodging, have shown improvements since April but are still recovering slowly and at much lower levels relative to pre-COVID levels, close to 40%. So with that new set of numbers, we reconnect and we decide to resume the conversion of that big bird plant to the small bird segment still in 2020.

That's great to hear. Separately, you touched on leg quarters. Any update you could give us on export markets? And are we at a price point where just at an absolute price point, leg quarters out of the U.S. become more attractive and receive support from the export markets? And if you think about the 2 factors, the lack of leg quarter deboning driving up higher leg quarter supplies and then exports on the demand side, can you just kind of talk us through how you think the landscape looks going forward with respect to that particular cut?

Sure, Ben. Yes, U.S. chicken exports were up 5% year-over-year through May. So there was a significant increase in Mexico and Asia. I think, like you mentioned, the weakening oil prices and the exchange rate headwinds have reduced buying power in Africa and Latin America. Recent months has shown a slowdown in exports, mainly due to the shutdown in foodservice and economic activity throughout the world during COVID-19, right? So there was a lot of shutdowns in all -- throughout the world in Latin America and in Africa. But we expect the exports to resume in Q3 and Q4. We still believe in good export opportunities for the balance of 2020. Like you said, the current pricing is very attractive for most of our destinations, and we continue to increase our client base at Pilgrim's and destination mix as well as introduce nontraditional export items to our clients. You touched a very important point, which is, in a way, it's a zero-sum game in terms of dark meat. We are deboning less for the domestic production because of the foodservice shutdowns in the U.S., which is creating more leg quarters in the export market. As we see the foodservice resuming here in U.S. and the availability of labor improving for the entire industry, we will start deboning more. So we will reduce the pressure on the export market with commodity leg quarters.

Our next question is from Michael Piken of Cleveland Research.

Just wondering how you're thinking about the supply of competing proteins and how much of an impact that's having on where shipping prices are today, and any sort of thoughts you have on how future activity might look at retail for the rest of the summer through Labor Day.

Yes, Michael. I think during Q2, we saw the labor availability for the alternative proteins, beef and pork, with some challenges. And we saw some sharp reduction in total output. The numbers the USDA presented was down 11% in beef and close to 5% in pork, which was completely different from the expectations and from the trends where they were increasing production. As the labor has returned, the operations have resumed, we are seeing an increase in production for Q3 for both beef and pork. We see beef, the expectation for USDA is the beef production to be up 1.5%, while pork is going to rebound much higher to a 9% increase in production. So that's a lot of meat for both beef and pork. The -- other the -- I think the best option is also the exports. If you look at domestic availability, it's not growing at the same pace as the production because beef and pork are also exporting a lot more. The protein hole as people continue to talk about in China continue to exist. And we are seeing some ASF cases and some avian influenza cases throughout the world. And we're seeing U.S. as the most productive and most available protein producer in the world, and the exports are up for both beef and pork during this quarter. Also during this quarter, we saw the reduction in egg sets and chick placement on chicken. So we're seeing a pretty well balanced protein supply and demand during this next weeks, but we will see an increase in protein supply for the overall United States during Q3. We expect the retail to resume our features. I think what we haven't seen over the last month is the featuring activity at the retail. Because of the lack of supply and the big demand, retailers decide not to feature protein. I think there was no need for featuring the protein. And we're seeing that featuring resuming. Features for chick, chicken and also pork are year-over-year as of now, and we expect that feature activity to pick up during Q3.

Our next question is from Peter Galbo of Bank of America.

Just one quick one for me. Charles, you had mentioned that Mexico is now at least contributing positive EBIT. But Fabio, on the U.S. side, I just wanted to understand or clarify volumes have -- in June were kind of flat year-over-year. Pricing is still a bit volatile. But just in terms of the EBIT contribution for U.S., it would still seem that in 3Q, it would still be down on a year-over-year basis and not necessarily flat. And I just want to make sure that I understood that correctly because I think there's been some confusion around some of the commentary.

Yes. Peter, we need to look at the overall portfolio, right? If you look at the cutout on the big bird, we are seeing that the overall cutout for big bird is flat year-over-year in 2020 compared to 2019. There are some tailwinds in terms of grains. We see ample supply, like we mentioned on the prepared remarks. So there is a headwind -- a tailwind in terms of the grain, expect it to be around $75 million for the second semester of 2020. So with that, we can compensate the extra cost of running the plants with the extra precautions that we are doing because of the COVID-19. And when we look at the overall portfolio for Pilgrim's, we -- the commodity portion of our portfolio is close to 20%. So when you think about the fresh food services and our exposure to QSRs, which is more than 50% of our foodservice, both in the small birds and in our operations in case-ready, which are very robust, we see that our portfolio is working, and we can see a better performance than the competition.

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

So two questions. First, just on Mexico, I know there is reporting differences between you and your main competitor. But the margin gap that you're reporting in the relative performance, that gap seems to be widening, both in the second quarter but also over recent quarters. And I just would love to get -- Fabio or Charles, just get kind of perspective on kind of where you think some of the mix differences or contributors to that would be and kind of how you think about maybe narrowing that performance gap moving forward.

Yes. Adam, thanks for your question. So during periods of troughs or like exceptional periods of bad margins like we had in Q1 and Q2, it is pretty clear that our competitors do have an advantage, especially for 2 reasons. One is the diversified portfolio they have in Mexico, like they have a very strong business in [Table X], and Table X for the last 6 months has really been skyrocketing in prices and demand and also in the pork business. So this is one reason for a difference of the spread. The other one they have a wider footprint than we have, so specifically, in 2 large areas like the Peninsula area, which is like Yucatan, Quintana Roo, Cancun, in those areas, where we cannot be present due to distance, at least for the time being, and then in the northwest as well. So the diversified portfolio, combined with a widespread footprint, gives them more stability when we have a trough. That goes without saying that we have been -- in order to reduce volatility, we have been expanding our prepared food business and as well producing more branded fresh products, especially for retail. So we want to have a more stable and balanced portfolio. But finally, it's also a fact that during normal periods, the history of the last at least 10 years, have shown that we constantly outperform competition. And we do expect that once the margins are normalized again that we're going to be performing better again. So that would be my answer. Thanks for your question.

And I think that answer is valid for all of our operations, right? It's how we build our portfolio. We don't expect to beat our public comparables or even the nonpublic competition every single quarter. But over the cycle, over the long run, we've proven that we beat them, and I think Charles' words are valid to U.S. and to Europe as well.

That's very helpful. And my second question was more in the U.S. You've given color commentary around this already, but the mix and kind of production disruption kind of impact in the second quarter, just from an EBIT or a percent margin, if you could frame, care to give a little bit more clarity on what that specifically was when thinking about moving forward and specifically on those 2 items, how you would frame the sizing of the impact in the third quarter.

Yes. I think there was a big shift between retail and foodservice during the quarter, right? So we saw the shutdowns, and we saw a big demand on the demand. We reacted quickly, and we shift a little bit of our mix to our capabilities, of course. And we increased by 7% of sales at the retail. But that was not enough to match with the increase in the needs. And that's why we are expanding our capacity in our Minnesota plant. We want to help our key customers to grow, and that's important for us. Just like you said, the impact in terms of cost is more on the operations because of the nonoptimal mix and the added extra cost because of the COVID. The impact in the United States are north of $40 million, like I said in the Q2, around $50 million in the world, but $40 million just for that quarter in Q2. We don't expect this cost to continue as we implemented all the measures. On the indirect costs, we see that the complete shutdown of foodservice impacted market prices and volumes, and we expect that to resume as the markets are reopening.

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

Yes. Thank you, all. We would like to reiterate our continued commitment to our valued team members to provide them safe and healthy work environment while supporting our duty to maintain food production and supply to our customer. We're looking forward to a good year in 2020 in spite of the volatility. Our diverse portfolio of differentiated products tailored to support our key customer strategy in conjunction with our broad geographic footprint will continue to generate consistent performance and minimize margin volatility in challenging market conditions relative to competition. We will continue to seek new growth potential, both organically and through acquisitions, while offering even more differentiated product portfolio within our business to support key customers' needs by cultivating a culture of constant innovation. We would like to thank everyone in the Pilgrim's family, including our family farm partners, suppliers and our customers who make our business possible. As always, we appreciate your interest in our company. Thank you for joining us today.

The conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.