Pilgrim's Pride Corporation

Good morning and welcome to the fourth quarter and fiscal year 2022 Pilgrims Pride Earnings Conference call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. At the company's request, this call is being recorded. Please note that the slides referenced during today's call are available for download from the investor 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 Rajewski, Head of Strategy, Investor Relations, and Net Zero Programs for Pilgrim.

Good morning, and thank you for joining us today as we review our operating and financial results for the fourth quarter and fiscal year ended on December 25, 2022. Yesterday afternoon, we issued a press release providing an overview of our financial performance for the quarter and the year, 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 also have been filed as Form 8Ks and are available online at sec.gov. Fabio Sandri, President and Chief Executive Officer, and Matt Galvinoni, 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 have been provided in yesterday's press release 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 fourth quarter of 2022, we reported net revenues of $4.13 billion, We had adjusted EBITDA of $63 million, and our adjusted EBITDA margin was 1.5%. Our Q4 performance highlights the importance of our strategies of portfolio diversification, key customer focus, and operational excellence to mitigate market volatility. In the United States, our Big Bird Debolting business experienced unbalanced supply and demand and a period of severely negative margins. However, our diversified offerings and key customer relationships in a more stable case-ready and small-bird business, along with our prepared foods, partially compensated impact, generating break-even EBITDA margins for the quarter. Our UK and Europe business has completed a variety of steps to enhance our operational excellence through optimization of our manufacturing network and integration of back-office activities. The team also continues to work in partnership with key customers, to mitigate persistent inflationary challenges. These steps and future efforts have and will further enhance margins and reinforce the foundations to scale profitable growth for the next year and beyond. In Mexico, our business faces a challenging quarter, given unbalanced supply and demand fundamentals, increased pressure for imported chicken, and continued challenges with our live operations. the team strengthening its relationship with key customers and grew its branded presence in prepared foods by double digits. For the fiscal year, the net revenues were $17.5 billion, an 18.2% increase over last year. Adjusted EBITDA was $1.6 billion, up nearly 28% compared to 2021. Adjusted EBITDA margin for the year was 9.4% compared to 8.7% in 2021 and 6.5% for 2020. Throughout the year, we experienced remarkable inflationary headwinds and exceptional market volatility. We are pleased with how our team engaged with key customers in all regions to ensure superior service levels and mitigate inflationary costs. Our diversified portfolio of branded and private label offerings enable us to adjust to rapidly changing consumer needs throughout the year. When these efforts are combined with our improvements in operational excellence, we establish growth both in sales and adjusted income margins. Turning to feed ingredients, recent USDA reports have lowered final production estimates for the 2022 U.S. corn and soybean crop. December 1st corn stocks were down 7% year-on-year, where soybean fell 4% versus the previous year. Demand estimates were also reduced in line with the production cuts. The demand rationing is primarily centered on the export market. U.S. corn exports in the first four months of the crop year were down approximately 30 percent versus last year. Corn for ethanol demand has also been lowered in that time. U.S. soybean export demand estimates were reduced by USDA January 1, the report, absorbing most of the production cuts, but still, netting tighter ending stocks from previous estimates and previous years. Crush margins remain strong and support the ongoing crush industry expansion. Globally, a dry start to Argentina's soy production has their crop estimates shrinking, but Brazil production is expected to help swell global soy stocks. As for wheat, USDA's general report increased 2022 and 2022 work carryout by one millimetre tons, With steady exports from the Black Sea, Russia wheat exports are on pace to hit the expectation of 43 million tons, up 35% year-on-year. Australia's production estimates are nearly 40 million metric tons, making it the largest crop in the last 10 years. Wheat markets look to be well-supplied and are providing alternatives to foreign demand. Looking ahead, Increased area and production of Brazil crops, continued black sea flows, and reduced import costs year over year offer a pathway to more comfortable supplies and lower prices. But with all the growing season weathers, risk is still ahead. As for U.S. chicken supply, ready-to-cook production increased 6% relative to Q4 of last year, driven by headcount and a higher average life weight. This was the continuation of trends beginning mid-year, as the industry maintained improved hatchability while continuing to increase egg sets relative to 2021. In addition to the growth in head counts, industry liveweights materially increased in Q4, growing on an average 2% relative to last year, as the industry continued to reduce its production of small birds and increase placements in all other weights. This approach was particularly dramatic for the big bird segment, as production pounds increased 12% from Q4 of 2021, more than any other segment. This growth in chicken production was in response to positive supply and demand fundamentals throughout most of 2022, and expectations for a tightened, competing protein landscape in Q4. However, both broiler and beef production outpaced USDA expectations, driving total protein availability much higher than anticipated in Q4. Combined with smaller demand growth, This additional availability contributes to increasing cold storage levels and apply pressure to commodity markets, resulting in severe weak seasonal pricing during the quarter. With weak market pricing persisting throughout November and December, the growth of industry exits slow recently. As a result, the most recent USDA outlooks expect production to grow only 1.1% in 2023, a slow downward revision from previous forecasts. Given the current rate of production, USDA estimates and suggests a decline in the second half of the year. Chicken may also benefit from other dynamics throughout the global protein complex. Beef production is expected to decline 6% in 2023, given the extended herd liquidation over the past several years. Moreover, the rebuild may take longer than previous cycles, given the relatively lower level of beef cows. As for pork, availability is expected to remain flat in U.S. as protein availability is expected to decline 0.4% from 2022 levels. These factors, when combined with pressure consumer available income, suggest chicken may be advantaged given its availability, affordability, and flexibility. Similar to trends experienced in Q3, domestic chicken demand experienced stable volumes in the fourth quarter. The retail channel continued to grow dollar sales at double-digit rate, while volume sales remained relatively flat. Fresh chicken volume sales were most flat throughout the quarter, as continued growth of dark meat volume sales were offset by volume declines from white meat and whole bird options. In the frozen department, growth invalid added items, both volume and dollar sales, highlighting the increased consumer demand for value-added products, which has remained robust even in the face of elevated pricing. Meanwhile, frozen meat items have provided mild dollar growth, but the material lower volume sales. The retail deli department consistently provided double-digit dollar growth throughout the year and maintained this trend in Q4. More recently, we are seeing additional promotional support throughout the store, which may stimulate further demand and provide price relief to consumers who have experienced elevated grocery bills throughout the year. The food service channel grew volume and dollar sales, but experienced varying results depending on subchannel. In food service distribution, volume demand was able to improve incrementally, as stable breast meat demand was offset by improvements in a variety of the other cuts, such as wings, tenders, strips, and thighs. We are encouraged by the subchannel as it continues to serve a large base of operators relative to the prior year, and has shown increased willingness for promotional activity and limited time offers. The non-commercial sub-channel continues to pose significant year-over-year gains, driven by an increasing number of operators buying, as well as an improved buy rate. Both positive signs as the sub-channel looks to reach and surpass 2019 pre-COVID levels of demand. Although the U.S. had remarkable market fluctuations throughout the year across chicken parts, each experienced relative similar demand dynamics, albeit at different times. Throughout 2021 and early 2022, there was a shortage of wings, given exceptional demand from food service and the whole-wing pricing approach or exceed five-year highs per USDA. As a result, food service operated adjusted their menus, everyday pricing, and feature activity, which incurred limited demand and support a return to historical market prices or below. Given this decline and extended period of relative low prices, now more operators are purchasing wings to support their menus, and the market is responding, as USDA whole wing price has trended upward in January. As for boneless, skinless breasts, It experienced a significant run-up throughout the first half of the year and achieved an all-time high in May for the USDA. These record values, combined with the remarkably strong cutout on value, enticed additional production later in the year, despite normal declines in seasonal demand and elevated grain pricing. In addition, many retailers opted to preserve elevated chicken pricing, reducing the spreads for boneless, skinless breast against ground beef and pork. Despite the spread compression, sales of boneless still grow 1% in volume compared to the same period last year. As for food service, commercial broadline volumes grew nearly 2%, despite consumers increasingly shifting to at-home consumption, given persistent inflation, whereas non-commercial grew at a robust 10%. Despite growth across both channels, the significant increase in supply along with suppressed demand drove a dramatic decline in prices through Q4. Given this pressing decline, retail and food service customers have adjusted tactics by increasing promotional activity to spur interest. From a production standpoint, data suggests lower growth rates throughout the second half of 2023 as access and hatch utilization have dropped compared to prior quarters. Most recent pullet placements, which are down 8.6% over the past eight trailing months, also support USDA projections of slower growth rates through the second half of 2023. These combined factors suggest that better supply and demand balance fundamentals may be emerging as overall chicken pricing, including boneless, skinless breast, has trended upward throughout January and February. U.S. broiler exports continue to outperform expectations in Q4, Despite the continued findings of high-tech AI in the U.S., Mexico, China, Angola, and the Philippines, as we saw a big volume grain in Q4. Year-to-date, exports have reached all-time highs in both volume and values, according to USDA FAS trade data. The markets were supported by progressively favorable exchange rates to U.S. dollar, high-price alternative proteins, and the need to bolster terminal inventories as the holiday season approached. The industry continues to enjoy increasing more fluid and export supply chain, which we are expecting to continue throughout 2023. The prevalence of the high-tech AI in the U.S. continues to be of great concern. The current outbreak, which began in February of 2022, is the largest we have ever seen. To date, we've seen 754 outbreaks in commercial and backyard flocks in 47 states, with over 51 million birds being depopulated. In contrast to 2015, where we had outbreaks in only 15 states and just over 50 million birds killed or depopulated. As in 2015, the greatest impacts in this current break are being seen in commercial ag layers and in the turkey industry. Broilers have had some events, but the actual impact has not been material for most. Besides the broilers' industry commitment to biosecurity in our farms, the primary reason we are seeing much less financial harm is due to having regionalization agreements with most of our trading partners, limiting high-path AI bans to either the state, country, or zone level. In 2015, we had 14 trading partners that placed bans on the entire U.S. Today, we have only two markets that ban the entire U.S., and they are not materialized. We continue to make progress with our trading partners as they need for U.S. poultry considerable. For example, Taiwan, one of our largest trading partners, recently moved to non-poultry findings as a disqualified for export. This new prompted the release of 10 states that are now eligible to export to Taiwan as of January 19th of this year. Our trading relationship with China remains a concern. To date, China has yet to follow our regionalization agreement, limiting bans to the state for 90 days post an outbreak. As for today, only four of the significant broiler-producing exporting states continue to have access to the China market. We have facilities in these states, and we are maximizing our opportunity on paws and boning parts for China from Big Bird, Case Ready, Small Bird, and Fresh Board service plants. Our geographic and channel diversity in the U.S. continues to benefit our business. China is a very important market for U.S. poultry, and we're hoping for a return to our regionalization agreement in the near future. We have seen some signs of positive moments, with more U.S. poultry processing and cold storage being approved for export to China in recent months, as well as the animation of the COVID-related bans on some of our plants. After reaching all-time highs early in the year, our U.S. business faced a challenge quarter, giving severe declines in cut-out values, historically elevated input costs, and continued inflationary headwinds. These impacts were especially difficult for our commodity business, as revenues and profitability fell significantly from prior quarters and last year to heavy losses. Despite Q4, the business grew both top and bottom line relative to 2021, given the record straining cutout values in the first eight months of 2022. Moving forward, we'll continue to pursue improvements in operational excellence to mitigate weak market fundamentals. In Small Bird, our focus on growth with key customers, recapture of inflationary costs, and recovery from the Mayfield tornado drove improvements in both the quarterly and annual basis in both net sales and profitability. Our keys-ready business continue to grow, and while the market only increased 1% in Q4, our key customers' volume increased by close to 6%. Prepare Foods improved profitability throughout the quarter and the year throughout enhanced mix and operational efficiencies. Bear momentum continued as Just Bear and Pilgrim's revenues collectively grew by 53% compared to Q4 of 2021 and 70% compared to prior year through key customer partnerships, new distribution, and innovation. Our presence in e-commerce continued to grow despite lapping significant gains in Q4 last year. Throughout 2022, our e-commerce business grew 48% and now accounts for over 23% of our branded sales. Despite short-term challenges in the commodity segment, we remain confident in the prospects of the overall USA portfolio and continue to grow and add value to our business. To date, we've made significant progress on our Athens expansion in Georgia to support key customers' growth. Similarly, our investment in operational excellence through automation in our new protein conversion plant remain on track. As for the UK and Europe business, consumers continue to face challenging inflationary headwinds. Given the relative affordability of chicken and pork, Many are switching from other proteins into those categories. In addition, our balanced portfolio across retail and food service has provided the flexibility to serve customers as they transition among grocery outlets, QSR, and local restaurants. Within retail, our branded offerings have maintained their market share, despite recent price increases to mitigate inflation. Equally important, we have either maintained or secured new business through innovation and superior services. The team continues to work in partnership with key customers to mitigate costs from continued inflation. Although significant process has been made throughout the quarter and past year, works remain as costs are expected to increase, albeit not as pronounced throughout 2023. Our team also maintains its focus on operational excellence through implementation of a variety of previously announced steps to optimize our manufacturing network and integrate back office activities. Significant progress has been made, and future efforts are slated throughout 2023. These ongoing efforts will provide the necessary scale to future acquisitions, expand our portfolio of offerings, and meet growth demands from key customers. As a result, we now have an enhanced portfolio to profitably grow our business. These efforts may be further aided by pork and chicken fundamentals, as market pricing appears to be trending towards more sustainable levels. A variety of input prices, such as natural gas and grain, have seemed to stabilize, albeit at very elevated levels. Although risk remains, yearly signs throughout the month of January are really promising. Turning to Mexico, the business experienced a challenging cost environment, given continued issues in all live operations. From a demand standpoint, inflationary headwinds continue to pressure consumers while growing domestic supply and growing imports from the United States and Brazil arrive during the quarter. As a result, the market continues oversupply. Despite these challenges, the team leveraged our broader geographic portfolio to maintain our service levels, especially with key customers. The business also grew its branded presence by double digits, demonstrating its ability to resonate with customers and consumers despite the difficult environment. We are seeing significant improvement in the beginning of 2023, both at our operations and at the market, and remain confident in long-term prospects for both our prepared foods and French-branded business, given the growth potential in Mexico over the coming years. As such, we will continue our investments to drive profitable growth and operational excellence. We also continue to make significant progress on our sustainability efforts as we receive external recognition for improvements across all facets of our ESG scores relative to last year. We have conducted a variety of greenhouse emissions assessments throughout our locations and identified multiple opportunities to improve our operations, simultaneously reducing our emissions and enhancing our operational efficiencies. Our hometown's strong and better features programs continue to be exceptionally well received. Throughout 2022, we have approved investments of $15 million in our communities, and over 1,000 team members have signed up for our free educational programs. With that, I would like to ask our CFO, Matt Galvanone, to discuss our financial results.