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spk00: 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.
spk04: 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.
spk02: 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.
spk05: Matt Galvanone Thank you, Fabio, and good morning, everyone. For the fourth quarter of 2022, net revenues were $4.13 billion versus $4.04 billion a year ago, with adjusted EBITDA of $63 million in a margin of 1.5%, compared to $317 million in a 7.8% margin in Q4 last year. In the quarter, we reported a GAAP net loss of $155 million versus GAAP net income of $37 million in 2021. In the fourth quarter, we recorded a discreet income tax charge of $39 million associated with the previously disclosed Mexican tax matter that dates back to 2009 and 2010, which drove our full-year effective income tax rate to 27%. For the fiscal year, net revenues were $17.5 billion versus $14.8 billion in fiscal 2021. with adjusted EBITDA $1.65 billion in a 9.4% margin compared to $1.29 billion in an 8.7% margin last year. We achieved $746 million of gap net income this year versus $31 million a year ago. Adjusted EBITDA in the U.S. for Q4 came in at $15.8 million, with adjusted EBITDA margins slightly above break-even. Throughout the fourth quarter, commodity market pricing fell dramatically, below historical averages for most of the period. Our diversified U.S. product portfolio across bird sizes and brands, along with our key customer partnerships, partially mitigated the impact of declines in market pricing in our big bird business. For the fiscal year, our U.S. net revenues were $10.75 billion versus $9.11 billion in fiscal 21. with adjusted EBITDA of $1.37 billion in a 12.7% margin, compared to $896 million in a 9.8% margin last year. The U.S. had a tremendous full year 2022, demonstrating our ability to participate in the upsides of a strong commodity chicken pricing market during the first eight months of the year, while buffering the downside during significant market declines with the diversification of our U.S. portfolio. In Europe, adjusted EBITDA in Q4 was $62.9 million versus $24.7 million in 2021. Despite continued inflationary headwinds and input costs, the European business delivered its third consecutive quarterly improvement in adjusted EBITDA. For the full year, Europe's adjusted EBITDA was $168.7 million versus $137.8 million in 2021. Note that the second half of this year's adjusted EBITDA in Europe nearly doubled the first half's profitability. Also during the quarter, we completed ERP system integration of food masters. The overall back office integration of the UK and European business will continue into this year, which will provide the foundation for cost savings and further growth opportunities. Finally, Europe announced a number of restructuring programs in pursuit of further operational excellence. The manufacturing network optimization will reduce costs while still allowing the business to maintain sufficient capacity to grow with our key customers moving forward. We recognize approximately $30 million of restructuring charges in the fourth quarter and anticipate approximately $15 to $20 million of additional charges in the first half of 2023 associated with these programs. Mexico lost $15.8 million in adjusted EBITDA in Q4 compared to making $27 million last year. However, Mexico made $113 million in adjusted EBITDA or a 6.1% adjusted EBITDA margin for the full year. The second half of the year was dramatically impacted by bird disease in our live operations and a more unbalanced supply-demand dynamic in the market. Our Mexican team did an excellent job in keeping our fill rates high with our key customers while recovering from the live operations challenges. We've already seen significant improvement in financial results in January and as the market has moved more in balance and our operational improvements have taken hold. Overall, our GAAP SG&A in the fourth quarter was significantly lower than prior year, primarily due to the legal settlements recorded in 2021. However, even on an adjusted basis, our SG&A still decreased year over year by approximately 9%. We finished the year spending $487 million in CapEx. This included approximately $20 million to rebuild the Mayfield, Kentucky hatchery following the December 2021 tornado, in which we have received insurance proceeds to cover. As we start off 2023, we plan to be even more judicious in our capital spending prioritization as the U.S. chicken market improves from the steep decline incurred in the fourth quarter. We will continue to prioritize our capital spending plans to ensure the safety of our team members, optimize our product mix, and strengthen our partnerships with key customers. We reiterate our commitment to invest in strong ROCE projects, that will improve our operational efficiencies through automation and tailor operations to address key customer needs to further solidify competitive advantages for Pilgrims. One example of this is our previously announced plan to expand our Athens, Georgia facility, which we anticipate completing early in the fourth quarter. Also, we've made good progress in our construction of our protein conversion plant in South Georgia, which we anticipate completing by the end of the year. As the timing of certain capital spend will depend on U.S. market conditions, We are expanding our range of estimated capital spending in 2023 to $400 million to $500 million. As conditions evolve, we may revise spending either way to accommodate our growth aspirations. However, we will remain disciplined in capital allocation. We have a strong balance sheet and will continue to emphasize cash flows from operating activities, management of working capital, and disciplined investment in high-return projects. Our liquidity position remains very strong. At the end of the fiscal year, we had approximately $1.4 billion in total cash and available credit. We have no short-term immediate cash requirements, with our bonds maturing in 2027, 2031, and 2032, and our term loan maturing in 2026. Also in January, following the receipt of our investment-grade credit rating in 2022, we announced the registered exchange offers for our 2031 and 2032 notes for all bondholders to exchange the restricted notes for new registered notes. Bondholders have through February 15th to participate in the exchange. At the end of the fiscal year, our net debt was approximately $2.8 billion with a leverage ratio of less than 1.7 times the last 12 months adjusted EBITDA, which is below our target leverage ratio range of two to three times. Net interest expense of the year was approximately $144 million. We anticipate our 2022 net interest expense to be approximately $155 and $165 million in that range. As I mentioned previously, in the fourth quarter, we record a significant income tax charge in Mexico that drove our full-year effective income tax rate to 27%. We anticipate our effective tax rate to be between 23% and 25% in 2023. We will continue to follow our disciplined approach to capital allocation as we look to profitably grow the company and will continue to align investment priorities with our overall strategies of 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.
spk00: We will now begin the question and answer session. In the interest of allowing equal access, we request that you limit your questions to two, then rejoin the queue for any follow-ups. To ask a question, you may press star then one on your touch-tone phone. If you're using a speaker phone, please pick up your handset before pressing the key to minimize background noise. To withdraw from the question queue, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question is from Ben Bienvenu of Stevens. Please go ahead.
spk07: Hey, thanks. Good morning, guys.
spk04: Good morning, Ben.
spk07: So I want to ask my first question relative to supply demand in the U.S. market. You highlighted the USDA's estimate revision downward yesterday for broiler production this year. You talked about the pullet placements pointing to production cuts as we get to kind of the summer and the second half of this year. Do you see those cuts staying intact through the balance of this year? And then on the demand side, you know, are you seeing any indications of demand shift from beef and red meat to chicken yet, given the value that it offers consumers?
spk02: Yeah, thanks for the question, Ben. I think we need to always go back and look at our portfolio, right? And for Pilgrims, we have the exposure to the commodity market, and we've always mentioned that that is important for us. And we've captured the upside when the market was really strong in Q2 and Q3, but of course we were exposed to that segment in Q4. What happened in Q4, and I think we addressed a little bit on the prepared remarks, is that the expectations from USDA and from the market was that there was a significant reduction in the availability of protein in the Q4, giving the lower herd of these, and also the AI impact on the turkey. With that, and with the continued record profits on the commodity segment for chicken, the whole industry started placing more chicks, and as you can see on the chicks placement report from USDA, around 48 million birds a week more than previous year. We improved hatchability, but it was also a lot of more eggs. That came into the market during the Q4. What we saw in Q4 was an increase of close to 12% of availability of chicken on the big bird segment or the commodity segment. At the same time, we saw an increase of 8.5% availability in the case-ready segment. And as we saw, because of the higher availability than expected of beef and pork, the demand on the retail segment only increased by 1%, which means that all this 20% more production in the Big Bird and the case-ready segment ended up in the food service segment and the commodity segment, which pressured the prices to two levels that we have never seen, which created a severe loss for the Big Bird business in Q4. Starting in November and mid-November, as you can see, and you mentioned on the weekly cheek placements from USDA, we saw that a moderation of that increase to actually some reductions. And that's what we are seeing coming as production now in Q1. So, USDA numbers are expecting an increase of total chicken production in Q1 around 1%. We believe that the diet is cast on that one. But if the market don't continue to improve, we expect some significant reductions in chicken production for the second semester.
spk07: Okay. Now that maybe the pig is through the python on beef, and we should start to see shortages, are you seeing demand shift from red meat to chicken yet? I imagine... Given where wholesale prices are for chicken, there's a lot of margin for retailers maybe to feature chicken with more frequency.
spk02: Yeah, that's exactly right. I think over the last quarter, we also see that the retailers kept the price of chicken elevated, and that compressed the spreads between chicken and ground, especially ground beef and pork. So there was not a lot of promotional activity during the quarter, but we are seeing that changing right now. I think, yes, the retailers have a lot of availability to do promotional activity on chicken, and we are seeing some trading now from beef to chicken. Also very important is the food service promotional activity that they start setting for the year around this time. If the USDA expectations is correct, we're going to see the reduction of 6% in production of beef, and that should lead to higher prices and lower availability, which tends to favor LTOs and promotional activity on the food service for the chicken production. Okay, great. Thanks so much.
spk00: The next question is from Ben Thurr of Barclays. Please go ahead.
spk01: Yeah, good morning, Fabio, Matt.
spk02: Good morning, Ben.
spk01: So just along those lines, and you've talked a lot about, obviously, what the industry is doing in terms of bringing some of the production down. But at the same time, you've talked about spending maybe some $400 to $500 million in capex, adding capacity. Can you help us reconcile that? what kind of capacity that actually is you're adding and how you think about this in light of the production cuts and potentially postponing some of the delivery of these capital expenditures just to kind of keep the market in balance?
spk02: Sure, Vince. That is a great question. I think we need to also come back and tie to our strategy of key customers. We We plan our production based on the sales to our key customers. I think one good example on the retail side is while the industry only increased by 1% in Q4 on the retail side, we increased by 6% because the demand for our key customers continued to excel. So I think that is despite what the overall market is doing, our key customers continue to grow. On the CapEx expectations, on Athens, Georgia, it's a small bird plant to support food service sales to a key customer that continues to grow double-digit every year. So despite the market decreasing on the small birds, we continue to see more and more demand for our products. I think the increase in the market was all in the big bird category and on the case-ready category. And that is where the market is oversupply, and that's where we are seeing some reduction in production because of the severe losses. If you look into our portfolio, compared to the same period last year, actually the results on the small bird case-ready and on prepared foods were actually higher than the same period last year. The other investments that we announced It's one on a South Georgia project to increase our protein conversion offerings, which is margin-enhancing for us. Instead of selling to the outside market, we'll produce pet food and we'll produce food feed grade from our own operations.
spk01: Okay, perfect. And then within the international operations, you've highlighted it, obviously. In the UK, you've seen sequential trends, but then you have the restructuring in there. Is that something, the cost that you expect to continue to occur in the first quarter, or is that all done on the restructuring side? And when do you expect the benefits of the restructuring to kind of flow through into operating profit?
spk02: Yeah, there's some small impact in Q1 on the restructuring, but Basically, what we did was to adapt all of our operations, again, to the key customer's demand. And we saw that we could operate at a higher efficiency and higher operating levels in one case in the prepared food segment. From three plants, we will reduce to two plants that will operate at a higher level. There was some investment needed to operate on those two plants instead of three plants, and there were some write-offs that we had to do because we were shutting down one plan. And we expect that now the network rationalization is ready, and we don't expect any more changes on the upcoming quarters.
spk05: Yeah, it's Ben, it's Matt. You know, we recorded about $30 million in the fourth quarter, and I commented that we'll anticipate about $15 to $20 million of charges in the first half of the year. It's just the timing of when you can record those under GAAP and when they're incurred. So...
spk01: Perfect. Thanks, Matt. Thanks, Fabio.
spk00: The next question is from Adam Samuelson of Goldman Sachs. Please go ahead.
spk03: Yes, thank you. Good morning, everyone. Good morning, Adam. Hi. So, I mean, I appreciate the challenges in the Big Bird market in the fourth quarter, and prices have improved a little bit, but still not a challenge, not a kind of – Great start in January, necessarily. But can you help us think about the profitability, especially in TRAPAC, where the demand growth, there's a little bit oversupply there. Demand growth has been a little better, but nowhere near supply. Log pricing is a little bit lower year on year. And how to think about the profitability in the non-commodity parts, the non-big part parts of your U.S. chicken segment? year-over-year, first quarter, first half, with where the markets are laying out?
spk02: Sure. And again, as I mentioned, we have a well-diversified portfolio, and we can capture the upsides when the commodity markets are really strong, and we protect the downsides. And I think, once again, we proved that on Q4 and proved that throughout 2020 and 2021, that we can counter the big bird or commodity segment losses with the marches on the other business. What we are seeing on the small bird is the reduction of supply overall in the market. And we are seeing a continuous growth for pure birds with our key customers, both on the fresh food side, on the eight piece, and on the deli side. So our partnership with our retailers and promotions on the deli side has helped a lot the demand on the small bird. So we're seeing stable margins on the small bird, and that's how we built our portfolio. We also see significant growth on the small bird deboning segment, which is for food service and for specific QSR. So we continue to see growth in there. On the case already, again, after some really strong growth years in 2020, 2021, we see the demand continues to grow, but at a lower pace. I think we saw some new plants in that segment, and those plants put a little bit of pressure on the market, especially if they don't have a key customer. Because, as I mentioned, as the market grew only 1% in the fresh retail in 2022, our sales increased by 6%. And that's all driven by helping our key customers to grow. So we are seeing also moderation on the growth on that segment. Now, the Big Bird, once again, it is a supply-demand-driven. We expect the food service to grow in 2023 as the labor rates continue to be tight. I think we are seeing, despite some inflationary impact, into the consumer spending. We're seeing the consumers continue to go to the food service, and the food service, especially the non-commercial, growing at double digits, especially on the leisure and on the governmental side. And so we are expecting some significant improvement in the big market for 2023, of course, given the supply-demand continuing balance and the in line with the 1.1% expectations by the USDA.
spk03: Okay, that's helpful. Can I talk quickly on Mexico? Obviously challenges in the fourth quarter. Just help us think about kind of where profitability is there today, understanding that the live nature of that market will move quite rapidly, but just help us think about kind of where we've exited fourth quarter and through January.
spk02: Sure, yes. Mexico, we always mention that it is very volatile quarter over quarter, but stable year over year. I think in 2022, the market was in line with that expectation, very volatile, a very strong first quarter, and a very weak second quarter, especially because of increased production on the domestic side. But also, after a very strong first quarter, there was a lot of exports from Brazil that arrived late in Q3 and beginning of Q4, and also with the weak commodity markets in U.S., there's a lot of meat that end up in Mexico. We have our operational issues as well on the live because of some diseases, and because of that, we restructure our live operations, and we expect though the benefits from that restructuring to start in Q2 this year. We already see the market returning to normalization, let's say, in Mexico with double-digit margins during the quarter.
spk03: Okay, great. That's all helpful. I'll pass it on. Thank you.
spk00: The next question is from Peter Galbo of Bank of America. Please go ahead.
spk06: Hey guys, good morning. Thanks for taking the questions. Fabio, I was just wondering if you could help us understand a little bit. You have a slide in there in the deck around cold storage levels. Obviously, we can track those through USDA. Breast meat does come to mind. It's pretty much close to all-time highs of breast meat in cold storage. I understand that you're seeing the improvement and expecting a back half, but can you just help us frame know from the 250 million pounds of breast meat and cold storage like what is the actual time frame of how that gets worked through um what have you seen historically when you know levels get that high does it take three months six months just any kind of time frame around that would be super helpful yeah yes we see that especially during q4 with this increase in production on the commodity segment that um
spk02: the inventory for breast meat went up, especially on the IF, IQF segment. If you look into the retail numbers, the IQF demand during Q4 was down close to 10%, and that increased those levels. But if you look at the overall level of breast meat into inventory, that is close to two weeks of production. So it's not a significant number that will take a long time to be absorbed into the marketplace.
spk06: Got it. Okay, that's helpful. And then maybe just to follow up on Ben's question around Europe, I think you guys are kind of in a unique position to give an update on just the European consumer, particularly in the U.K. I think from the seat that we sit in, it was all doom and gloom headed into the fall. It seems like there's been a lot of headwinds that maybe have been alleviated on the consumer there. So maybe just give us an update on that. what you're seeing, you know, European consumer-wise from a top-line standpoint, and then just expectations for the year in that segment.
spk02: Yeah, I think we saw some elevated levels of inflation in getting into the consumer wallet during Q1 and Q2. And that was a reflection of the increase in utilities and in grocery throughout the entire Europe. We adjusted our operations, and in partnership with key customers, we did some innovation to reduce the cost of our products to mitigate that inflation. We're seeing that we have a portfolio that is very well positioned. We talk about this trade down in terms of proteins. We saw the consumption of red meat going down double digit in Europe overall, while the consumption of chicken and pork remains stable. So we have a portfolio that is well positioned to capture that trade down possibility from the consumer in UK. Now, what we are seeing is that inflation is moderating. I think utility costs are actually decreasing in UK right now, albeit from very high levels. And we are seeing some consumer confidence coming up from very low levels recently. So we have good expectations in terms of demand for chicken and pork for 2023. Also, our branded products, after suffering a little bit from volume, from price increases, they're reaching a level where the retailers are doing some special promotions and we're spending a little bit on trade. That is helping the volumes on the branded segment.
spk00: This concludes our question and answer session. I would like to turn the conference back over to Fabio Sandri for closing remarks.
spk02: Thank you. Throughout 2022, we experienced unprecedented cost escalation, market volatility, and consumer uncertainty. I would like to thank all of our team members for consistently living our values and driving our strategy despite these challenging times. Their leadership mindset and relentless focus on becoming the best we're instrumental in managing through these volatile times and driving strong results for the year. We have strengthening our foundation by driving branded growth, optimizing our manufacturing network, implementing synergies, and further expanding our portfolio through innovation. These efforts are combined with our wielding attention on team member safety, product quality, and sustainability. We are well positioned to create a better future for our team members and achieve our aspirations becoming the best and most respected company for 2023 and beyond. Thank you.
spk00: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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