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…

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…

[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.