Pilgrim's Pride Corporation (PPC) Q2 2022 Earnings Report, Transcript and Summary

Good morning, and welcome to the Second Quarter 2022 Pilgrim's Pride Earnings Conference Call and Webcast. [Operator Instructions] Please note that the 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 Andy Rojeski, Head of Strategy, Investor Relations and Net Zero Programs for Pilgrim's Pride.

Good morning, and thank you for joining us today, as we review our operating and financial results for the second quarter ended on June 26th, 2022. Yesterday afternoon, we issued a press release providing an overview of our financial performance for the quarter, including a reconciliation of any non-GAAP measures we may discuss. A copy of the release is available on our website at ir.pilgrims.com along with slides for reference. These items have also been filed as Form 8-K and are available online at sec.gov. Fabio Sandri, President and Chief Executive Officer, and Matt Galvanoni, 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. Further information concerning these factors has 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, we reported net revenues of $4.63 billion, a 27.3% increase over the same quarter last year, and an adjusted EBITDA of $623.3 million, up 67.7% versus Q2 of 2021. Our adjusted EBITDA margin was 13.5% compared to 10.2% of Q2 last year. Our Q2 results continue to reflect the benefits of our strategy and portfolio, which enables us to capture upsides in the market, despite volatility in particular segments or geographies. In the U.S., we experienced strong market fundamentals in the commodity cut out. Given our relentless focus on operational excellence, our big bird deboning operation capitalized 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. In Prepared, Just Bare and Pilgrim's business experienced significant growth in retail, further diversifying our portfolio. Our European business demonstrated improvement as it mitigated unprecedented inflationary headwinds and an extreme challenging consumer environment. The team accelerated operational excellent efforts and conducted multiple rounds of negotiations with foodservice and retail customers to recover profitability. Our Mexico business also managed through extreme volatile market conditions, further amplified by seasonal challenges in live production at our locations. Nonetheless, the team leveraged our breadth of operational excellence in 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 our operation to reduce our greenhouse emissions and achieve our Net Zero commitment by 2040. As part of our Hometown Strong program, we have invested over $15 million in our local communities over the last two years. In addition, more than 370 team members or children of our team members have signed up for learning free higher education degrees or trade certifications through our Better Futures program. We have also formed sustainability committee on our Board of Directors to amplify 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 strategies and continue to implement further improvement of 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 have moderated lately but continues to experience extensive volatility. In the U.S., corn planted area is slightly up from the March USDA survey where soybeans decline as strong grain prices work to prioritize corn planting despite the sluggish start. Weather will be extremely critical over the next several weeks as many key-producing states have the potential for good production where good production is needed to offset the heat stress in the Southern U.S. From a global standpoint, Western Europe is experiencing severe heat whereas the outcome of a recent agreement between Russia and Ukraine for grain exports remain extremely uncertain. Following recent events, the [indiscernible] harvesting record corn production and is pricing competitively into global demand. These unique circumstances contribute 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 that we see in the market. As for the supply of U.S. chicken, live weight production increased 0.2% relative to Q2 of last year, driven by additional headcounts that were slightly offset by lower average live weights. The industry continues to battle hatchability headwinds that have consistently offset growth in egg sets. But recently, we have seen positive signs of hatchability improving quarter-over-quarter and have spaced with the year-ago levels since mid Q2. Our team implemented actions that developed in partnership with our primary breeder suppliers throughout the quarter. We found this counter measures effective as our rate of improvement in hatchability exceeded industry averages. We anticipate these improvements to continue further enabling supply needs to grow our business for the remainder of the year. As for the avian influenza, the impact on U.S. broiler production remains in the negligible. 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 biosecurity programs throughout the industry and our business. The larger impact for business has been on export restrictions of selective space, some of which have regained eligibility for export given their virus elimination status. Additional opportunities will soon emerge, as other states are weeks away from regaining their export status. Overall, export business remains robust as export volumes increased 5% year-over-year in April and May, driven by a 20% increase in last quarter's volume shipments compared to April and May of 2021. Dark meat inventory has decreased 1.8% year-over-year in June and are 21% down from March levels. A flat quarter inventories declines were the primary driver of fewer dark meat pounds in storage. 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 deficits driven by avian influenza in Europe and ASF in critical Southeast Asian markets. Given current demand levels and expected supply limitations, we expect chicken commodity prices to follow seasonal patterns, yet 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 as a primary source of protein. While the overall supply of protein available for calendar 2022 is expected to increase 0.8%, 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 cold storage supply for which inventory flows has been inhibited due to supply chain constraints also remain under pressure, as June values for total protein in cold storage were 2.6% 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 cooked experienced double-digit dollar growth along with the mild increase in volume. Similarly, the Deli department unit sales were level to prior year, but dollar sales remain well above year-ago values. Even with increased pricing across retail departments when compared to recent years, we believe additional growth opportunities may still exist as industry supply constraints could have impacted to ability to meet this 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 maintains sales levels above the pre-COVID-19 baseline. In total, despite significantly higher prices mainly due to rebound of the non-commercial subchannel that continues to post solid year-over-year gains, especially in the education and lodging segments. When these factors are combined with the limited supply in the broader protein complex, favorable market conditions still exist for our commodity business, albeit following normal seasonality, As consumers struggle - 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 U.S. business, we realized significant sales growth and margin expansion given exceptionally strong market fundamentals especially for our big bird deboning 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 and inflationary environment. We continue our focus on improving net 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 optimized our mix and service throughout the quarter. This increased staffing levels helped us drive our commodity big bird deboning business to more fully realize the benefits from outstanding market from the measures and improve its overall profitability relative to last quarter and same period last year. The team also used this opportunity to strengthen relationships with key customers throughout retail and foodservice through service and quality. Although the cut out has recently tapered off in line with normal seasonality, overall business conditions remained strong given the expected tightness of the overall protein complex, relative strong foodservice demand compared to pre-COVID-19 levels, and moderating input cost compared to earlier in the year. Our small business continued to grow given solid demand for QSR and broadline distributors. Margins improved 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 Mayfield 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 delivered solid quarter-over-quarter revenue and profitability growth, as it drove operational improvements and recovery inflationary costs. Given the strength of this key customer partnerships and differentiated product portfolio, it 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 and Pilgrim's branded innovation in retail and focus on key customers. Our Prepared branded retail business grew 96% compared to last year, and more than double our market share driven by strong customer acceptance and customer reaction. In addition, margins expanded given improved product mix and operational efficiencies. E-commerce continued to realize significant gains as 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 e-commerce now accounts for over 20% of our total retail branded volume. In additional, Just Bare has become the top E-commerce brand for a key customer and has experienced significant successful line in trial and conversion in grocery. Although we continue to face volatile 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 later in this year, affordability and flexibility of chicken and continued operational excellence throughout our facilities. Throughout Q2, our European business faced unprecedent pressures and inflation which is four-decade high in U.K. and approached nearly 10% in 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 aggressively 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, ingredient, labor, and utilities. Given the continuous waves of inflation throughout the quarter, the team conducted multiple rounds of consumer negotiations. Although significant process was made, work remains as inflationary headwinds persist. As expected, our live pork operations improved as the price of life pork increased in the region. This factor when combined with our improvements in operations and cost recovery exports drove increased profitability. The team also cultivated growth via further diversification of our product portfolio and application of our key customer strategy. Throughout the first half of the year, the combined business have launched over 100 new products in a variety of branded and customer-specific offerings. Our Moy Park team has become the sole supplier across fresh and fully cooked for a key customer in one of the leading European retailers. Our Pilgrim's Food Masters Richmond pork and meat-free brand grew market share through the period with introduction of Richmond Mini and a variety of Richmond meat-free range expansion, such as the Richmond meat-free chicken pieces. Consumers continue to embrace the meat-snacking category, which also grew across the period with refrigerators growing double-digit revenue supported by the introduction of the Fridge Raiders meat-free and limited edition flavors such as the Peri-Peri. Our pork operations secured placement on various new seasonal products into a variety of customers. It was also recognized in major industry awards including best red meat product at the Food Management Industry Today Awards and also recognized for sustainability efforts as it's more on the Net Zero strategy of the year by business green leaders. Despite inflationary headwinds and softening consumer demand throughout the U.K. and EU, our business is well positioned to navigate these conditions given its focus on key customers, a diverse 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 customer negotiations for cost recovery from escalated inputs. Taking together these activities should continue to drive margin improvements throughout the year. Our Mexico business experienced seasonal challenges in live production in our locations. Nonetheless, we leveraged the diversity supply base across our regions through superior customer service levels. 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, which should enable additional sales by the end of the calendar year. Nonetheless, Mexico remains a volatile market given inflationary pressures and evolving global protein complex and overall business seasonality. To further drive profitable growth, we will make significant capital investments in U.S. business over the next three years. These investments include the capacity expansion in our Athens, Georgia facility for a key customer to accommodate existing demand as there were numerous automation projects throughout all of our operations to drive operational excellence. We just started 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 on branded Prepared products and support the incredible growth of our Just Bare product line, we are committed to building a new fully cooked plant in the southeast of United States. To that end, we are exploring multiple options ensuring 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 that accelerate our business momentum and creates further competitive advantage for our business. With that, I would like to ask our CFO, Matt Galvanoni, to discuss our financial results.

Thank you, Fabio. And good morning, everyone. For the second quarter of 2022, net revenues were $4.63 billion versus $3.64 billion a year ago with adjusted EBITDA of $623.3 million and a margin of 13.5% compared to $371.6 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. Adjusted EBITDA in the U.S. for Q2 came in at $520.9 million compared to $237.1 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 U.K. and European businesses, adjusted EBITDA margins came in at 3.4% for Q2 compared to 5.2% last year. However, improved versus last quarter where we had EBITDA margins of 1.2%. As Fabio 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 in adjusted EBITDA in Q2 compared to $85.7 million last year. Although volumes have remained relatively steady due to balanced supply-demand fundamentals, the business has experienced seasonal challenges in live production at our locations, which impacted our margins. As we've discussed and experienced in the past on multiple occasions, our Mexico results can be volatile quarter-to-quarter. All businesses across our geographies have been subject to continued inflation and significant market uncertainty. Although our strength has mitigated these impacts, we must continue to monitor cost throughout our supply chain, drive operational efficiency efforts and implement cost recovery measures. We spent $115 million in capex in the second quarter, bringing our total year-to-date to $196 million. As Fabio previously mentioned, we are investing in our U.S. business to drive growth in partnership 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 million and $430 million. We anticipate incremental spend in 2022 associated with these new projects to be approximately $150 million. Our overall bandwidth sheet liquidity remained 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, 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 1.5 times our last 12 months adjusted EBITDA, which is below our target ratio of two to three times. Even though we're increasingly investing 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% and 25% for the year. These announced incremental investments follow a disciplined approach to capital allocation as we look to profitably grow the Company and will continue to align investment priorities with our overall strategies and portfolio diversification, focus on key customers, operational excellence and commitment to team member health and safety. Operator, this concludes our prepared remarks. Please open the call for questions.

[Operator Instructions] The first question comes from Ben Bienvenu with Stephens. Please go ahead.

I want to ask first about the Europe segment. Nice sequential improvement in margin results there. You're talking - you've 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 costs that have also kind of peaked and rolled versus capturing synergies via integration of recent acquisitions?

All right. Thank you, Ben. Yes, Europe is facing an unprecedented situation, right? We are seeing, as we mentioned, an extensive inflation coming from grain, as we mentioned. But not only that, also utilities, labor, logistics. So it's an overall inflationary scenario. As we mentioned, 40-year high in U.K. and more than 10% inflation in EU. As we always discuss, our business model in Europe was a more cost plus. But it was not really a cost plus, was more a grain plus contract. So it was 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 these other inflationary items into the composition of practice. Through negotiations with our key customers, we've been over the last year incorporating all those factors into the new contracts. And those contracts are adjusting as these factors change. I think what's happening in Europe is, we are always behind the inflation because as the inflation increases every week and every month, we go and negotiate with our customers in multiple rounds. So there is a lot of improvement that is still to come in pricing through those new contracts that we just implemented. I will say that as far as now, there is very little benefit from the integration. We are just starting the implementation of a shared service center in U.K. to support both three business and capture significant synergies. What has been improving is the collaboration through innovation. As we mentioned, we launched more than 100 new products in Europe over the last quarter. And that helps, especially in a scenario where we are seeing customer demand decline. I think through 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. I - 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 on capital allocation, just given the significant cash flow generation of the business and the cash balances on the balance sheet?

Yes. Sure, Ben. And as you can see by our results, we have a very strong balance sheet. Matt just mentioned that we are below our leverage targets. So we have a lot of powder to do acquisitions and to grow our business and to do all other capital allocation strategies. We continue to believe that there is 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 operational improvements through all the 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 - this new capacity that we are implementing.

The next question is from Ben Theurer with Barclays. Please go ahead.

Yes. Good morning, Fabio and Matt. It seems like only Ben's covering you. We will keep the flow. So just in following up on Bienvenu's question in regards to the capacity expansions and the announcements here. Can you share a little more detail, particularly on the one Athens, Georgia, which is, I think, an expansion project? Is that slaughter capacity or is it just packaging capacity? And is that then all going to be dedicated to the one key customer you have there who needs the growth? Just a little bit more detail around that expansion project, that would be my first question.

Sure, Ben. Yes, the Athens operation is already very efficient. But we are seeing a significant increase in the demand for this key customer. It's 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% to 30% in number of birds on that operation and also revamping all the automation in the front end and existing ration. So it's a great opportunity to improve the operational efficiency of that plant. But also growing the capacity 20% to 30% in that plant. It's not a significant growth, but it's very important for that specific key customer.

And then, we're also looking as part of those changes in automation is to really help our GHG emissions footprint. So we're going to be seeing significant reductions from the overall operations. It's a big focus of ours with our Net Zero commitment.

Perfect. Thank you very much. And then second, you've talked about it as well, in the presentation a little bit and obviously there has been industry things and you've been impacted as well on the hatchability side. But can you share a few more details maybe on what you've been doing recently to improve hatchability and 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 we step back a little, where all this started was when we changed the genetics to overcome a problem in our industry, which was the woody breast. We went to this new generic that has a great yield. It has great quality. But it's more difficult to manage and also have some hatchability issues. So over the last two years, we've been battling, as an industry, this hatchability problem. I think we've been partnering with our genetic supplier and we've been changing the way we manage the birds in terms of their weight. So we're changing also their feed, adapting to different growing circumstances of each specific bird and we're 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 hatchability in a faster pace than the whole industry. We also need to be cognizant that as an industry, we are keeping our birds longer in the field. So, the average age of our hens is higher, which impacts the hatchability as well. So, as we recover hatchability, we believe that industry will take the average age of the hens a little bit lower, which it is a self-fulfilling prophecy rate which will help the hatchability once again.

The next question is from Ken Zaslow with Bank of Montreal. Please go ahead.

Quick question on you - when you spend the capital spending, can you talk about the returns and the timing in which you will get the returns on it?

Sure, Ken. We look at projects that - we're really aiming for ROCE projects tipping over 15%. And when you think about these projects, 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 would start seeing the benefits and returns of these projects, in general, starting in 2024 and forward. 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 benefit starting in 2024.

And then my next question is on the labor availability, it sounds like you're getting a better mix of - you're improving your mix as you get more labor. Where are you on that progress in terms of, are you all the way there, are you 70% there, and how much more is left for you to kind of realize more mix opportunity with the labor plus rates?

Sure. It's a great question, Ken. It's - we've been behind in terms of mix because of our labor availability. And to your - to answer your question, I think we are 70% there from where we were. If you have a gap before, we have closed that gap by 70%. We're still behind in dark meat deboning. We're still not there in the perfect mix for us. And we're investing also on automation to help on the dark meat deboning with the new machines that require less labor. And we're also having a very strategic approach in every single geography. We don't do one size fits all try solutions. So we look at 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 our team members better than all other companies that're competing with us. That's the only way to have an engaged team member force that will produce a better output, right? So - but we are increasing our labor wages in every single geography through different techniques. And we are seeing also an improvement in overall labor. I think as the inflation is outpacing the wage increase throughout the economy, we are seeing more availability of labor coming to our plants and a bigger number of people looking for jobs, and that is helping as well the overall staffing of our plants.

The next question is from Adam Samuelson with Goldman Sachs. Please go ahead.

So I guess my first question is just thinking about the market in kind of where it sits today, obviously kind of the commodity cut out. We've been exceptionally strong, the spring and summer, although we're coming off the highs. And I just - I'd love to get kind of your color on, especially, the decline in wings that've fallen quite precipitously of late, and as well kind of your - the current thinking on boneless breast meat where and once it reached 350 or so about 60 days or so ago. It does seem like that really put a halt to some purchasing from further processors and just how - where you see that market progressing over the balance of the year?

Sure. Sure, Adam, It's a great question. So we have a portfolio of diversified operations. right? And the practice we see on the UB and other indicators are more a commodity pricing. I mentioned before that on the more stable segments that we have, small bird and case-ready, we're not seeing those extreme volatility in terms of prices, either up or down. We will 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're seeing, UB pricing, you're seeing very strong demand and especially because of the foodservice into chicken. I think we're seeing some trend down on the retail and on foodservice to the chicken offerings. That's why we're seeing strong demand for chickens. And it's been different in each different part of the bird. So starting 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 with returning of the leisure and hotels, conventions, travel, and also schools, that support in a strong ramp-up in that boneless breast in that category. And we're seeing some declines, which is a normal seasonality. We expect the prices to start rising again coming to Labor Day coming in September. Tenders have followed the skinless - boneless skinless, it is still a great QSR category as well, growing. And we're seeing also leg quarters very strong given the international demand, supported by the high prices of oil in the developing economies and the very competitiveness internationally of the price of chicken compared to all the other proteins. I think the weakest part of the bird has been the wings, which is very interesting because last year wings were really the highlight of the cut out for chicken. During the pandemic, what we saw was the wings as a great appetizer that all the pizza parlors and all the other QSRs were adapting. And as the price of wings reach more than $3 per pound last year, we see some of them being taken out of the menu. So a lot of QSRs took the wings out of the menu and replaced with boneless wings, which is breast meat. So with that, we saw a very fast 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 to start rising now coming the football and the basketball season. So wings are very competitive right now compared to the breast meat. So overall, looking into the cut out of the chicken, we have strong fundamentals to support the levels that we are and some great opportunities, especially for wings.

Okay. That's some really helpful color. And then, just to Mexico and there you alluded to more stable volumes but you alluded to also some pressure in the live market and that could be very volatile kind of sector down there, just as we think about the third quarter typically pre-COVID, that was usually a seasonally softer period in Mexico. And I'm just wondering how we should - what's the current thinking 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 season at the U.S., not the strongest quarter in Mexico for chicken, which always recover 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. As you know, Mexico has a big part of their market as live birds and this movement of live birds creates a weakness in the biosecurity in the region. Because of that, we also see some very big volatility in terms of diseases in the region. In Q2, we saw the impact in the mortality of the birds because of the dry weather and because of this less strong biosecurity that they have in Mexico, which have already gone away during Q3. So, we'll see an increase in supply in Q3 from the overall production in Mexico. And that together with the softness in the market, as it's not the strongest quarter, have 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. It's a growing economy and we are seeing chicken as a great vehicle for - when the consumer has available income to get into the protein category.

The next question is from Michael Piken with Cleveland Research. Please go ahead.

Yes. Hi, good morning. Just wanted to follow-up a little bit on the hatchability and you cited that you guys are seeing some improvement with your suppliers. How about on the live production side like? Is the live production also improving in coordination with the hatch and if in fact the rest of the industry starts to improve on hatch, do you have any thoughts in terms of what '23 production might look like?

Sure. Yes, Michael, I think we're seeing the hatchability improve. In terms of our expected production in the next year, we are seeing an improvement in hatchability and that's what's going to drive the growth. We are expecting 1% to 1.5% growth in production for next year. We are 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 we've ever seen in the hatchery, close to 95%, which is unsustainable, I'll say that. And that's because we need more eggs to have the same number of chicks, right? That's the problem with hatchability. I think we're seeing the industry - the entire industry evolving. I think we're all trying to manage this new breed and getting more hatch out of the eggs. And I think the genetics will need to have a significant shift if we want to get back to the old numbers that we have in hatchability. As a reminder, this new bird has a greater conversion. So it's a great yield and a great conversion. And if we change the breed to a new one, there is always something that is going to give, right? So we don't know if there is a new generation coming on. And we don't know if there is better yields and better feed conversion on this new breed to improve the hatchability.

Great. And as a follow-up, yes just to circle back on the live production side. Are you guys having any issues there? And among the various bird classes, is there any difference in the hatch rates, or among the small bird versus the tray pack versus the large bird size? Thanks.

No. Sure. Yes, on the live, what is more important and 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 number that we watch. Everything is included in there, right? Including hatchability but also feed conversion. And I think this is what we monitor. Of course, we are concerned of the hatchability of course. We are dealing with it. But if you change hatchability 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 hatchability, but we don't want to solve the hatchability problem and create a feed conversion problem that at the end of the day we produce more expensive meat. And I'd say that adjusted of course for the price of the feed inputs like corn and soy. So we are not - we are seeing improvements in the live side on the feed conversion. So despite the hatchability problem, we're seeing year-over-year improvements in the cost per pound of meat produced.

And next question is from Peter Galbo with Bank of America. Please go ahead.

Matt, just a couple of modeling follow-ups actually just to kind of clean up the income statement. Did you guide interest expense for the year? And then maybe if you can just help us, we can obviously see the commodity pricing, just how much was tray pack up in the quarter and maybe with your key customers, you can give us the detail there?

Relative to interest expense, I mean I didn't guide on this one, but we were $37 million for the quarter, only 20% of our debt is at a floating rate. So, - Peter, so we know with interest rates rising a little bit, it's one of those ones you guys can take a look and we've been up just a slight tick, kind of quarter-over-quarter, so you guys can take a look at that. But we're not seeing too big a difference of that $37 million or so per quarter view on net interest. On tray pack, I don't know if there's anything, Fabio, to add on that one. We feel comfortable kind of what we're doing here. We're very much partnering with our key customers on this one, but I'm not sure I didn't see much difference.

I think on the - as I mentioned, it's all our portfolio discussion right, Peter. So in our case-ready business, we've been recovering inflation and we are seeing increase in volumes to support our key customers growth. And we have one of the best few rates. We have our hand and compared to the industry we're, for sure, ahead of all the industry few rates, especially for our key customers. We continue to see strong demand in the retail segment. We are seeing a starting of a trade-down. I think as we - CPI as the inflation is hitting the consumer available income, we're seeing them trading a little bit down from expensive cuts to more affordable cuts, and that is helping chicken overall. On the 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 we are seeing very stable prices from our end into the retail.

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 from a consumer standpoint, it feels like consumer confidence there is getting dramatically weaker. So, just how you're thinking about that business over the next six to 12 months if that consumer in particular is going to feel a lot more pressure. Thanks 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 is 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 that's where our portfolio comes into play. We have a strong position in the retail. We are supporting our key customers to grow. And I think that's a great opportunity for us. More than that, as I mentioned, we are seeing some trade-down from very expensive cuts into more affordable cuts and chicken is the biggest benefit of 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 is a limited supply. And going into Q3 and Q4, we're 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 which could drive more promotional activities on the retail and also chicken is the most affordable item in the protein category.

This concludes the question-and-answer session. I would now like to turn the conference back over to Fabio Sandri for any closing remarks.

Sure. Thank you. And although we are pleased with our results for the second quarter and first half of the year, market conditions continue to be exceptionally volatile and substation inflationary headwinds continue to pose a challenge. We must continue to monitor the impacts of the global commodity inputs, changes in overall protein complex, inflationary cost throughout our supply chain and 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. We will continue to drive discipline and ownership of these principles throughout our business with an unwavering commitment to team member safety and well-being. Given our progress, sustained execution, and dedicated team members, I look forward to driving these efforts for our business. Thank you all. And this concludes our call.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.