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spk09: Good morning, everyone, and welcome to the fourth quarter and fiscal year 2023 Pilgrim's Pride Earnings Conference call and webcast. All participants will be in a listen-only mode. Should you need assistance, please send to 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.pilgrim.com. programs.com. After today's presentation, there will be an opportunity to ask questions. At this time, I'd like to turn the floor over to Andrew Rogeski, Head of Strategy, Investor Relations, and Net Zero Programs for Pilgrims.
spk10: 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 31st, 2023. This morning, 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 have also 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 this morning's press release of Form 10-K and regular filings with the SEC. I would now like to turn the call over to Fabio Sandri.
spk02: Thank you, Andy. Good morning, everyone, and thank you for joining us today. For the fourth quarter of 2023, we reported net revenues of $4.5 billion. We had adjusted EBITDA of $310 million, and our adjusted EBITDA margin was 6.8%. Our Q4 performance demonstrated the continued effectiveness of our strategies of portfolio diversification, key customer focus, and operational excellence to create more stable results. The U.S. portfolio improved, giving growth with key customers in case-ready and enhanced production efficiencies with operational excellence in Big Bird. Our efforts to further add value to our portfolio through the prepared foods continue to gain momentum, given the growth of our branded offerings through retail and increased presence in food service. In our geographical diversification, the U.K. and European business continue to drive profitable growth from the impact of operational excellence efforts throughout our manufacturing network, increasing strength of key customers, and diversification through continued progress of our branded offerings. As for Mexico, the business in the quarter was impacted by weakened supply and demand fundamentals, but our efforts to diversify our portfolio through brands continue to flourish, as both new and existing offerings grew within the trade and customers alike, and we continue to grow with key customers across retail and food service. Our investments in operational excellence efforts to expand capacity and cultivate redundancy in live operation remain on track. For the fiscal year, net revenues were $17.4 billion. Adjusted EBITDA was $1 billion, with adjusted EBITDA margins of 6%. The U.S. faces depressed market conditions and elevated input costs in the first half of the year, but we maintain our leadership mindset and focus on controlling what we can control, the execution of our strategies to our relentless pursuit of operational excellence. As conditions evolved throughout the year, our business became increasingly well-positioned to capture the upside and further accelerate profitable growth. While pricing has not fully recovered to five-year averages, we're still navigating dynamic markets. Much changed through the past year. In the first half of 2023, there was substantial production growth and cold storage inventories above the long-term average. As a result, ample chicken supply was not fully offset by domestic demand, and increases in commodity chicken values typically experienced in the spring did not materialize. As we progressed throughout the year, given depressed market pricing and elevated cost environments, egg sets and chicks place fell, triggering more historical seasonal sets and placement patterns. When paired with growth in retail and food service demand later in the year, The overall slowdown of chicken production led to balanced markets and price movements aligned with historical patterns throughout Q3 and Q4. As for U.S. chicken supply, Q4 ready-to-cook production decreased 2.1% relative to last year, driven by fewer heads, despite slightly higher live weights. Starting in Q3 of 2023, we saw reduced egg sets on a year-over-year basis, and seasonal cuts at levels in line with the five-year average. Exits continue to trend in line with the five-year average throughout Q4 2023, and hatchability was similar to last year. Taken together, net-cheek placements later for production in Q4 declined year over year, reducing headcount. As indicated by sets, placements, and production data, supply in Q4 returned to more historical levels. Market pricing also declined seasonally, and trend near five-year average throughout the quarter, even with elevated production costs. While supply declined in the second half of calendar 2023, USDA broader production outlook suggests Q1 of 2024 to be on par with Q1 of 2023, followed by three-quarters of moderate growth, resulting in a yearly slight increase of 0.8%. This slight increase in chicken is coupled with a significant decline in beef production expected in 2024, as the USDA outlook suggests a 2.9 reduction for the balance of the year, as a smaller herd is expected to drive fewer cattle slaughter. Even with an expected increase in pork production of 2.20% and higher beef imports, U.S. implying net protein availability is expected to increase less than 1%. On the demand side for 2023, The U.S. retail market experienced positive pull in all categories. Fresh chicken was consistent with this overall trend as volume was 1.1 higher, but relatively flat in Q4 as white meat volume grew slow to levels compared to 2022. This differs from previous quarter where retail breast meat experienced large year-over-year growth. The white meat volume in Q4 was mostly impacted by an increase in dark meat offerings, especially more affordable cut. Starting the new year, demand for white meat has increased significantly and remains well-positioned as a great alternative to other proteins. Chicken, across other categories in the store, fare well in the quarter, as daily posted solid dollar and unit increases, while frozen value-added chicken continue to add incremental volume growth. The frozen commodity segment, which is much smaller than the value-added fresh and daily segments for chicken, continues its decline. Nevertheless, on the whole chicken, We provide its value to customers as a center of the template staple. The food service distribution channel continued its trend of higher volume sales with lower price levels. Similar to last quarter, chicken experienced volume growth in both value-added and commodity types across most subchannels. Encouraging signs of volume growth remain within the channel as chicken continues to serve a larger base of operators relative to prior year and realize increased buy rate. both of which had added to substantial increases compared to Q4 of 2022. The non-commercial subchannel maintained its trend, adding incremental volume throughout the quarter and the year. Turning to exports, global demand for chicken has been strong throughout the fourth quarter, given the global higher cost of other proteins and production movement disruptions in the Middle East. These disruptions have favored the U.S., as it backed few products delaying transit. In addition, Hypat, Avian Influenza, and some Southeast Asia countries are providing the U.S. additional opportunity as local supplies are tightening. As for Hypat, Avian Influenza, and U.S., the dynamics are relatively consistent with prior quarters, as most of our trading partners have adjusted their trade restrictions to minimize impacts as much as possible. Our manufacturing network across the United States also continues to enable access and service to multiple markets given our diversification of production facilities across several states and control zones. As for China, there has been limited movement on adherence to existing trade agreements. Since the majority of business is driven by chicken paws, there has been no material effect on broiler meat. The export market has also been impacted by an increased evolution by U.S. consumers to dark meat, as freezer inventories remain low relative to historical and season standards. As a result, overall stock levels remain relatively tight, providing further support for the overall market. Turning to feed grains, corn prices have eased as the supply picture in the U.S. has improved. A recently yield adjustment by USDA confirmed the 23-24 crop as a new record at 15.3 billion bushels. While some important weather periods lie ahead, With current forecasts for Brazil and Argentina to have a combined record production, global ending stocks for corn are forecasted to build significantly. Like corn, soybeans saw a recent adjustment to U.S. yields, which more moved forecast ending stocks 19% higher. South American soy production has been the key to recent price movement, with Argentina's production forecasted to rebound to 50 million metric tons from 25 million metric tons in last year's drought. USDA's Brazil forecast is currently 156 million metric tons, in line with last year's record production of 162 million metric tons. South America is continuing to price its global destination to compete with U.S. export demand. On top of soybean price reduction, soybean meal prices have fallen, as U.S. crush industry expansions yielded a record crush in Q4 of 2023. Argentina's rebound in soy production is playing a role in the global soy meal outlook as well. Soybean meal oil prices are also under pressure, as U.S. soy oil is facing competition from substitute fats and oils in food and feed, as well as renewable fuel channels. In a slightly different picture, wheat production is down year over year, and global ending stocks are forecasted to be tighter. In the U.S., Wheat acres for the 2024 harvest are lower as well. Nonetheless, prices have generally moved lower given the global feed-growing picture. Turning to the U.S. business, our consistent focus on execution of our strategies of key customer partnership, diversification, and operational excellence has sustained our profitability improvements despite uneven market fundamentals in the commodity segments and lingering inflation throughout the quarter. Our case-ready business continued to grow ahead of the industry given strong demand from key customers, enhanced promotional activity, and increased distribution through retail. Our offerings of differentiated higher attributes continues to gain momentum as we add the business throughout the quarter and beyond, further differentiating our portfolio. Big Bird continues to improve its operations through a combination of mixed optimization, live operation improvements, and labor effectiveness. These efforts continue to drive quarter-over-quarter improvements in production costs. Moving forward, we'll continue to invest in training and automation to drive further improvements in use and line efficiency. Small Bird continues to improve both volumes and profitability, giving robust demand from key customers and retail daily and QSRs. Performance was further aided by successful completing and startup of our Athens expansion project, strengthening our relationship with key customers and our operational excellence. reinforcing our foundation for profitable growth. Our efforts to further diversify our portfolio through value-added products continue to gain momentum, as Prepare Foods posted yet another strong quarter as volumes and profitability improved. Our branded offerings were exceptionally well-received as just there, and the Pilgrims brands collectively grew 59% compared to last year. Digital influence sales more than doubled, compared to last year, and it remains a key driver in our branded growth and repeat business. Food service also continues to increase marketplace traction through key customer relationships and targeted promotional activity. Moving forward, expanded distribution of our existing innovation through retail and further diversifying our portfolio in food service will be key to driving continued growth. Our investments in people over the past few years have resulted in a suitable net staffing and reduced turnover levels throughout our U.S. facilities. Even our sustained improvements, we were able to capture a significant portion of operational excellence initiatives throughout the plans. As for the U.K. and Europe, consumer sentiment has been steadily improved as inflation has shown signs of easing and real wage increase. Shockers? have also increasingly traded into chicken, pork sausage, and lamb relative to other categories. Given our diversified portfolio across proteins, our business was well positioned to capture those trends. Within retail, key customers grew faster than others throughout the trade and our offerings sold better than the category averages. Our branded portfolio continued to be particularly successful as net sales grew over 10% compared to the full year 2022. Richmond and rollover brands have been especially well received by customers. Throughout the sales have increased over 17% and 31% respectively. As consumers became increasingly confident in the overall economic outlook, prospects to further diversify through a recently launched brand innovation may become even more attractive. Our food service business remains relatively stable, even as consumers increase their at-home eating occasions, what can favor our strong retail presence. We continue to drive operational excellence throughout all aspects of our business. To that end, we streamline our management and back office, supporting during the quarter, giving our growth aspirations and diversified portfolio. Based on those efforts, we will increase our speed to market, enhance relationship with key customers, and further simplify our operations. We'll continue to explore alternatives to further drive profitable growth. In Mexico, throughout the quarter, the business experience weakened its supply and demand fundamentals from increased exports, imports, and lower exchange rates. Nonetheless, the team achieved positive margins during the quarter and improved profitability compared to last year through consistent execution of our strategies. Our presence with key customers continued to strengthen as volume increased double digits throughout the quarter. These efforts were further amplified by our efforts to diversify our portfolio through brands. Favoritos grew by 40% compared to Q3 and is nearly four times since the beginning of the year. Similarly, Unique Taste is up close to 20% for the quarter and has nearly doubled since the start of 2023. Also, the initial results from our recently launched Just Bear Fresh offering throughout retail has been very prominent. Our operational excellence efforts to expand our capacity remain on track, as we have completed construction of our hatchery and seed mill in Merida on schedule, with production expected to begin in March of 2024. Our efforts to enhance redundancy in live operations through relocation of our breeder farms is also progressing as planned. To date, we have finished over 60% of the project and anticipate on-schedule completion during the first half of this year. Our efforts to drive sustainability throughout our business continue to make progress. Throughout 2023, our teams identified innovative ways to improve our energy efficiency through updated processing and equipment management techniques. As a result, all regions improved their electrical and natural gas usage intensity. We continue to make progress for our social efforts, as Newsweek recently recognized Pilgrims as one of the America's greatest places for women and one of the America's greatest places for diversity. We also continue to invest in team member well-being through our Better Futures program, in which more than 490 Pilgrims team members and their children have enrolled in tuition-free higher education throughout 2023, and our Hometown Strong program that has approved more than 150 community projects for investments to date. We also continue our organic growth Our investments to support our key customer growth remained on target as our Athens expansion was completed on time and as planned. Performance to date has met our operational excellence goals, and production has achieved or surpassed quality and service expectations. Similarly, construction of our protein conversion facility in South Georgia is progressing as scheduled and anticipates a startup in March. We have already secured additional business with selected key customers, creating profitable growth in 2024 and beyond. Equally important, this investment further diversifies our portfolio and creates operational redundancy to ensure sufficient service level throughout our business. With that, Matt, if you can comment on our financial results.
spk04: Thank you, Fabio. Good morning, everyone. For the fourth quarter of 2023, net revenues were $4.53 billion versus $4.13 billion a year ago. with adjusted EBITDA of $309.5 million in a margin of 6.8 percent compared to $62.9 million in a 1.5 percent margin in Q4 last year. In the quarter, we reported gap net income of $135 million versus the gap net loss of $155 million in 2022. For fiscal year 2023, net revenues were $17.4 billion versus $17.5 billion in fiscal 22. with adjusted EBITDA of $1.03 billion and a 6.0% margin compared to $1.65 billion and a 9.5% margin last year. We achieved $321.6 million of GAAP net income this year versus $745.9 million in 2022. Adjusted EBITDA in the U.S. for Q4 came in at $200.3 million, with adjusted EBITDA margins at 7.5%. Our big bird business profitability significantly improved year over year, as throughout the second half of the year, commodity market pricing rose back to more historical, seasonal levels, along with further operational improvements achieved by the business. Also driving the improvement in the quarterly U.S. results are increases in profitability in both our case-ready and small bird businesses. These businesses utilize key customer partnerships to increase distributions. Our prepared foods business continued its momentum of branded product sales growth with both retail and food service customers. Finally, in the quarter, we recorded approximately $18 million of insurance proceeds associated with the winter storm that impacted our operations in Texas and Louisiana in February 2021. However, the impact of these proceeds were offset by a year-over-year increase in incentive compensation and other actuarial-related true-up charges during the quarter. For the fiscal year, our U.S. net revenues were $10.03 billion versus $10.75 billion in fiscal 2022, with adjusted EBITDA of $531.5 million in a 5.3% margin compared to $1.37 billion in a 12.7% margin last year. Coming out of a record 2022, the U.S. portfolio proved resilience in the face of depressed commodity market pricing in the first half of 2023 and recovering in the second half to post-solid financial results. In U.K. Europe, adjusted EBITDA in Q4 was $102.5 million versus $62.9 million in 2022. The European business delivered its seventh consecutive quarterly improvement in adjusted EBITDA. For the full year, Europe suggested EBITDA was $317.2 million versus $168.7 million in 2022. During the year, Europe announced a number of restructuring programs in pursuit of further operational excellence, including plant closures, back office support consolidation, and streamlining the management organization structure. These changes provide the foundation for further cost savings and will allow us to partner more efficiently with our key customers in the region. We recognize approximately $44 million in restructuring charges during the year and anticipate additional charges in the first half of the year as the restructuring program progresses. Mexico made $6.8 million in adjusted EBITDA in Q4 compared to losing $15.8 million last year. When considering the full year, Mexico made $185.5 million in adjusted EBITDA or an 8.7% adjusted EBITDA margin, bettering last year's 6.1% margin. The fourth quarter was seasonally challenged. However, in considering the full year, the supply-demand dynamic was well-balanced. Our Mexican team did an excellent job in managing a continually challenging live operations environment in the country. Our GAAP SG&A in the fourth quarter was lower than prior year, primarily due to reduced legal defense costs and cost efficiencies achieved in the U.S. and U.K. Europe. These reductions were partially offset by higher incentive compensation costs recorded in the court. Overall, our SG&A decreased year-over-year by approximately 9%. We finished the year spending $544 million in CapEx. This included approximately $29 million associated with the rebuild of the Mayfield, Kentucky hatchery following December 2021 tornado, in which we received insurance proceeds to cover. Also during the year, we incurred significant CapEx with the Athens, Georgia plant expansion, which started up in Q4 this year, and with the construction of the protein conversion plant in South Georgia, scheduled to start up by the end of Q1 2024. 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 our operations to address key customer needs to further solidify competitive advantages for Pilgrims. We are anticipating spending between $475 and $525 million in CapEx in 2024. As conditions evolve, we may revise our spending outlook to accommodate our growth aspirations. However, we will remain disciplined in our 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 $1.8 billion in total cash and available credit. We have no short-term immediate cash requirements with our bonds maturing between 2031 and 2034 and our U.S. credit facility not expiring until 2028. Our liquidity position provides us flexibility during times of volatility in the U.S. commodity markets and allows us to explore further growth opportunities, including organic growth to meet our customers' needs. At the end of the fiscal year, our net debt was approximately $2.6 billion, with a leverage ratio of approximately 2.5 times the last 12 months adjusted EBITDA, which is right in the middle of our targeted leverage ratio range of 2 to 3 times. Net interest expense for the year was approximately $167 million. However, this does include approximately $20 million in early extinguishment costs associated with the purchase of our 2027 notes during the fourth quarter. We anticipate our 2024 net interest expense to be between $125 and $135 million. Our full-year effective tax rate was 11.7%. Due to the mix of our multi-jurisdictional pre-tax earnings, routine income tax adjustments on discrete items were amplified, including the impact of changes in FX rates in certain jurisdictions. As such, our effective tax rate did not follow our more normalized levels of between 23% and 25%, which we expect for 2024. We will continue to follow a disciplined approach to capital allocation as we look to profitably grow the company. And we'll 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.
spk09: Ladies and gentlemen, at this time, we'll begin today's question and answer session. If you would like to ask a question, please press star and then one using a touch-tone telephone. If you are using a speakerphone, we do ask that you please pick up your handset prior to pressing the keys to minimize background noise. To withdraw your questions, you may press star and two. At this time, we'll pause momentarily to assemble the roster. Our first question today comes from Ben Thayer from Barclays. Please go ahead with your question.
spk03: Good morning, Fabio, Matt. First of all, congrats on a very strong finish in 2023. Two quick questions. So first one, probably more for Fabio. As we look into 2024, and obviously you've talked about it in the prepared remarks as it relates to just beef availability being tighter, those prices coming up, but then there should be more pork and still chicken should be the favorable one. So as we think about just the supply side and your role within that supply, what are you doing in order to grow maybe your production within the U.S., leveraging also the fact that feed cost has come down? So how should we think about Pilgrim's specific supply situation into 24 versus 23? That would be my first question, and then I'll have a quick follow-up.
spk02: Sure. Thank you, Ben. As we look at our portfolio, Ben, we have a strategy of organic growth in conjunction with all key customers. And I think we've been growing over the last year. As an example, in Q4, we increased ahead of the industry as the needs from our key customers demand more volume from us. I think part of that was because of our project in Athens that started during Q4 to supply growth for our key customers. The pricing of grain, which should be a benefit for the whole industry and for us overall, will not change our focus on our key customers. We have a well-diversified portfolio. We are well-balanced between small birds, trade pack, and big birds, and prepared foods, and we expect to continue that.
spk03: Okay, perfect. And then my second question, just as it relates to the trajectory and the delivery you had in the European results, because obviously we remember that in the past you had those issues where the cost plus was more like a grain plus and not necessarily that. Where would you say you stand right now in recovering all that input cost pressure you had from Brexit over the pandemic in Europe And what's like kind of the run rate profitability we should assume for 2024, just given the very strong results we've already seen in the fourth quarter? So how to think about European profitability in 2024? That would be my second question. Thank you.
spk02: Sure, Ben. Thank you once again. Yeah, 2021 and 2022 were very difficult for our European business. As you mentioned, most of our contracts with customers were based What we thought was cost-driven, but it was only grain-driven. All the other costs, like labor, packaging, ingredients, were expected to stay fixed. But as we saw some massive inflation in the European region, especially utilities, ingredients, packaging, everything, we saw this connection between our costing and our pricing. We renegotiated all those contracts during 2021, 2022, and we're seeing some of the benefits coming through our bottom line in 2023. I think combined with that, we also simplified our business. We integrated all the plants and businesses that we have in Europe. We have a very diversified portfolio there. Just as an example, we have the fresh pork and lamb business. We have poultry business. We have the meals business. We have a very robust branded business. We have also a prepare business and a food service business. So there are many segments that we serve in Europe. And as the consumer is gaining more confidence in Europe, as we see the inflation easening, he is going back to the retail and to the branded offerings. And we are seeing a benefit and we are capturing also that growth with our key customers in that region. As far as the future, again, as far as the future, as we restructure our network and we are benefiting from our lean structure right now, we expected to see those benefits coming to the bottom line and receive the strengthening of the region as a whole.
spk09: Our next question comes from Ben Bienvenu from Stevens Incorporated. Please go ahead with your question.
spk08: Hey, thanks. Good morning, everybody. Congratulations. I'd like to pick up where Ben left off on the Europe segment as it relates to any consideration we should give to seasonality in the business, notwithstanding the self-help initiatives that you all have underway. And then maybe reiterating the question he asked of what is the baseline profitability off of which we should model quarter-to-quarter earnings in this business? Because you ended the year just under 5% operating margins. You started the year at 2%. You've made fantastic progress, and margins went up sequentially every quarter during the year. So does that trajectory continue? Do we stabilize and vacillate off of some new baseline? Help us think about the possibilities there.
spk02: Well, of course, Dan. Thank you for the question. Yeah, as I mentioned, we have a very well-diversified portfolio. To your point, there is a little bit of seasonality in Europe. I think Q4 tends to be a strong quarter with year-end festivities, and we have a strong business in the branded, in the hams, and in the sausage business. Nonetheless, our businesses are growing faster than the industry. I think that's what we want to do, to partnership with our key customers, create and differentiate offerings, both in fresh, prepared, in the retail, and in the food service. And we're seeing a strong beginning of Q1. Of course, there is a little bit of seasonality. And the Q1 last year was still impacted by a very high inflationary period. And now we're seeing a deflationary period. So what we expected is a little bit of a reduction in revenues, but we expect a continue on a robust bottom line. Again, there is a little bit of seasonality in Q4, so we expect Q1 to continue to be strong compared to last year. but with seasonality not as strong as before. But for the year, we expect year-over-year growth with all the operational excellence initiatives that we took during 2023 to come into the full-year benefits in 2024.
spk08: Okay, very good. Thinking about the U.S. business, strong results in the fourth quarter. We've seen commodity fundamentals improve into the early part of 2024. It looks as though that should persist as we move through 2024. How should we be thinking about sequencing of profitability this year? And did you all have any weather disruptions or operational hiccups associated with the weather that we saw in January, early February, in the first quarter that we should be mindful of?
spk02: Yeah, thank you. As we look at our U.S. business, as I mentioned, we have a very well-developed 5.45 we are able to capture upsides in the commodity market and protect the downsides with a more stable small bar trade pack and the business and the prepared food business. Just looking to the drivers in terms of supply and demand, I think we are seeing some tailwinds in terms of cost, especially on the grain. As I mentioned, there is some record production in U.S. and in South America, which will provide us close to $188 million in cost reduction during the 2024 year. Of course, not all of that will go into the bottom line, as we have a lot of our pricing based on market or based on cost plus initiatives. But if you look at the supply, we're expecting muted supply growth during the Q1, and we're seeing some very strong demand for chicken. As I mentioned, I think chicken is a great value for the consumers. The spread between chicken and beef and pork are close to record levels. And we're seeing a strong increase in the promotional activity by the retailers. If you look at what's happening in retail right now, we're seeing the shoppers doing more trips and buying less every trip that they do. And that is really important for the retailer to drive traffic And chicken is a great way to drive traffic for the stores. So we're seeing the increasing promotional activity and an increase in the demand, especially from our key customers on that segment. On the food service, we're seeing some lower traffic and the consumers spending a little bit more at home. But what we are seeing is that an increase in penetration of the chicken offerings. So we're seeing strong demand both in food service and the retail starting of the year. Now, as the year progresses, we are expecting, or USDA is expecting, a little bit of an increase close to 1% in terms of supply for Q2 and Q3, which is in line with the expected seasonality or the grilling season. And then a slight growth in Q4 of 0.8% for a total of 0.8%. As I mentioned as well, The net availability of protein for the U.S. is expected to be really muted with the reduction of the beef prices. So everything on the drivers are in line for a strong year for chicken in 2024.
spk04: And then to your question on disruptions so far in Q1, we've had relatively minor disruptions from the weather relative to the storms earlier in the quarter. So nothing that was very impactful overall.
spk08: Great. Thanks for taking my questions.
spk09: Our next question comes from Andrew Shrelzik from BMO. Please go ahead with your question.
spk05: Hey, good morning. Thanks for taking the question. I wanted to just follow up on the prior question about the U.S. margin outlook. And, you know, if I think about your five-year average margin in the U.S. is just north of 6% operating margin. And You know, you said in the fourth quarter, the cutout was in line with the five-year average. Obviously, feed costs are heading well below the five-year average or constructive on the demand backdrop. So it seems to imply that 2024 U.S. margins could be solidly above that kind of five-year average, just north of 6% as well. Am I thinking about that correctly? Is there anything that I'm kind of missing within that picture?
spk02: No, great, Andrew. I think it goes back to the portfolio, as I mentioned. before. We have a well-balanced portfolio. I think the commodity pricing and the grain costs impact only partially our portfolio, as we demonstrated over 2021, 2022, and 2023. The tradeback and the small business are more cost-driven or margin-driven, and we have a great partnership and we continue to grow on those business to offset the volatility of the big bird. So some of the benefits of the lower grain costs will go through our bottom line, especially again on the commodity segments, but on the all other segments we expect more stable margins. To fair with the last year or normal years, as we always mentioned, we want to be the best operator. We want to capture the upsides and protect the downsides, and what we can say is that we will always perform above the competition, whatever the market will allow us to capture.
spk05: That makes good sense. My second question is on hatchability, and if I look at the slide and the data that you provided on that slide, hatchability has basically gone straight down this year. Some of that, I guess, is probably seasonal, but we're now outside, most recently, the five-year average. Can you just maybe talk about a little bit what's going on from a hatchability perspective. I think if I rewind, we were supposed to see increases in that kind of steadily and it hasn't really materialized. And so how are you thinking about hatchability going forward for the industry and the limitations that creates on production growth for chicken and 24?
spk02: Yeah, sure, Andrew. That has been a topic that we've been discussing over the last two to three years, right? I think the hatchability issue has started as we mentioned, as we changed, as the primary breeding companies changed their breeds to improve the quality and the yields on the breast meat. We started several years ago with the issue of the woody breast, and the reaction from the primary breeders was to change their breed to improve the quality and reduce that issue, and that impacted the hatchability. That as well as a breed that performs better on the conversion creates a little bit of a challenge on the live side, on the egg production and on the hatch. And I think that's what we saw, right? From 82% to close to 79% to 80% level, the impact of that change in the breed to our industry. Of course, we are improving our management. of the breeder side, and I think that has improved the hatchability, especially for us. We are better than the average company right now. But there are still some challenges on the hatchability that maybe with a new breed will resume the prior level that we used to have on the 80s, 82%. But I think it's still a management issue on the weight, especially of the male, and an overall hatchability of this new breed. So as we go throughout the years, we expect to get that better. As the number of or the volume that we expect for the incoming months or the next years and the expectations and a little bit of the bottleneck that that poses, I think that's why the industry is trying to increase the number of breeders. As we see, the pool of placements, it was a little bit higher than year over year. But that's the reaction of the industry, expecting to improve hatchability through age. As another issue that we have, we have a little bit of an older breeder age, which is impacting hatchability once again. And the increase in the breeding flock is going to counter that with a younger flock, which should be more productive.
spk05: Great. Okay, and if I could just squeeze one quick one in here. On the balance sheet and the cash balance, you talked about the strength of the balance sheet, the CapEx is coming in maybe a little higher than we had otherwise thought, but your cash balance is pretty robust. Your projects, generally speaking, are kind of winding down. How are you thinking about leveraging that cash balance? You talked about some optionality for growth, but I guess when you think about the opportunity set, what's attractive and how are you thinking about allocating the cash? Thanks.
spk04: Andrew, it's Matt. Thanks for the question. I think our main focus really, you know, I mentioned it a couple times in my prepared remarks, is really on organic growth and that growth with key customers. We've had some projects that we've been either executed or in the process of executing, which is providing us further production and kind of tightness with our key customers. And I think that's where we're going to probably see more of our cash from a CapEx, and that's why when I gave that range, it really did put a little bit of a caveat on that, that, you know, this could change with other broader, bigger organic growth opportunities that we have for that cash at this time. So that's something we've been executing on very well over the last, you know, year to 18 months, and I think we're going to be seeing more of that as we go forward. I don't know if Fabio wants to add any other color to that.
spk02: No, I'm against it, Andrew. We've always looked into how can we create value for the shareholders. We have a lot of growth initiatives. One, I think, to Matt's point, it is to grow with our key customers. But we have our targets in terms of acquisition. We will do an acquisition when we think it's accretive to us and will help us either on improving our portfolio in regions or in brands or in growing our prepared food offerings.
spk05: Great. Thank you very much. I'll pass it on.
spk09: Our next question comes from Peter Galbo from Bank of America. Please go ahead with your question.
spk06: Hey, good morning, guys. Just a couple of P&L questions from me. You know, Matt and Fabio, you talked about obviously the deflation we've seen in feed costs or in U.S. feed costs. Matt, I was just hoping maybe you could give us an update, you know, on the other part of the cost equation, so labor and conversion, just kind of what you're expecting for 24, and then maybe a blended either, you know, COGS inflation or deflation rate for the U.S.
spk04: Yeah, I think directionally, Peter, I think, you know, relative to labor, you know, as Fabio mentioned in his prepared remarks, we're getting to the point of being fully staffed, which is great. So that does, of course, come up. And then when you think about a PERT, per person basis, you know, our increases in 24 will not be as high as they were, shall we say, in 22 and, you know, early part of 23. Just the market is kind of becoming a little more stable relative to that. So we will see some levels of increase, but not to what we've seen in the past. But I think that the main driver that we're seeing, you know, from a cost perspective that's a huge chunk of our costs is the grain, which we are seeing the tailwinds, which is excellent, but When I think about the other key cost drivers, labor should be relatively in check, and ingredients and other things of that nature, nothing that is causing any level of extraordinary change.
spk02: Okay. I think as we do every year, we started the year looking at all the efficiencies that we can capture. We call this the opening the gaps, looking at all the opportunities in every single operation throughout our network, and then we created action plans to close those gaps or capture that operational excellence, as I mentioned. Every year, we expect it from $100 to $200 million in operational excellence, in operational effectiveness, and that is part COGS, part revenues, because we talk about improving the mix, we talk about reducing overall plant cost, and we talk about capturing improvements in yields. Of course, as Matt said, that is grain production. non impactful, but there is a little bit of inflation in terms of packaging ingredients and somewhat utilities that we can counter. So we are always expecting to improve our operations year over year. And that's an exercise that we do bottom up from all the operations at all the plants. And we sum and add up all the way through our total P&L.
spk06: Got it. That's helpful. And then just, Matt, on the SG&A front, you know, I think you obviously mentioned it's down about 9% for the year in 23. Just try to either get a sense on 24, either dollar growth rate in SG&A or a rough range. I think you've been between, you know, 125, 135 million a quarter, if that's still a fair range to use. Thanks very much.
spk04: Yeah, no, I think it's good. That's a decent range. I think what I would also kind of think about it, Peter, is, You know, this year we really did see a significant decrease from 2022 in legal defense costs. You know, I certainly don't anticipate us moving up to the 2022 levels. You know, certainly we'll have some level of increase in 2024 versus 23 because we'll get ourselves, you know, back in more of a, we believe hopefully in more of a stable incentive compensation cost that will kind of kind of true back up to more of a normalized level for the U.S. business. But I think if you kind of think about this, thinking 24 being somewhat between 2023 and 2022 is a reasonable way of thinking about it.
spk02: I think in the total SG&A, we're also benefiting from the consolidation of the back office in Europe, although there is a little bit of exchange rate impact there as well. Got it. Thanks, guys.
spk09: And our next question comes from Adam Samuelson from Goldman Sachs. Please go ahead with your question.
spk07: Yes, thank you. Good morning, everyone. Good morning, Adam. Good morning. So I guess the first question, just on Mexico, obviously that business, its short cycle, given the nature of that market, you alluded to a challenging October, which I think impacted the overall fourth quarter. Can you talk about the supply-demand trends as you look in the first quarter into the second, as we sit here today? And is there anything that would kind of have Mexico off the normal, a more normal seasonal cadence that you would have seen in prior years where typically the second quarter is the high point?
spk02: Yeah, sure. Thank you, Alan. Yeah, Mexico was a little bit weaker than expected in Q4, although better than the prior year. I think the major drivers were very cheap imports. coming from Brazil and also from the United States during Q4. And I think that combined with an increase in production in the overall industry during Q4 puts some pressure, especially on the live bird market. And we know, as I mentioned, the short cycle and how that market is really volatile. As we started Q1, as we always mentioned, Mexico can be very volatile quarter over quarter, but very strong and consistent year over year. We saw already an improvement from those levels. We're seeing the improvements right now. I think the year still started a little bit weaker than we expected, but we're seeing the improvements right now. As we see the strengthening in the pricing in the U.S., which will prevent export going there, I think there's a lot of work production also flowing from the United States to Mexico. But we are seeing already an improvement in the market right now, and as you mentioned, we expect the Q2 market to be really strong.
spk07: Okay, that's helpful. And if I could just follow up on the U.S. business, on your prepared business in the U.S., and I know there's been a lot of growth in the Just Bear brand. Can you maybe just talk about the profitability of the prepared foods business at this point? I know historically that was a more challenging situation. piece because of scale? Are we getting to a point now where prepared can be a more material earnings contributor? And if so, is there a thought about incremental capital and capacity needs in that unit?
spk02: Sure, and that's exactly the strategy, right, Adam, to have a portfolio that can capture the upsides in the market and protect the downsides. And I think prepared foods play a significant role there. As we have an exposure to the Big Bird market, we want to have the counter that volatility with a more stable prepared business that can benefit from cheaper inputs in the commodity. As 2022 and 2023 move along, we saw that strong growth on our brand. I think not only we are benefiting from lower commodity prices, but we're also capturing upsides because it's a differentiated product that really resonated with consumers. And that's what we are seeing, that strong demand. And we are helping our key customers with driving not only profits, but also driving traffic. As we see the commodity market improving, we can see a little bit of a reduction and a squeeze on the margins of that business. Again, we expect it to be more stable. We are seeing double-digit profitability in that business in 2023, and we don't expect that to be different in 2024. F for growth, you are correct. We talk about the growth with our key customers, and we are reaching the 100% capacity, especially in the fully cooked business with the JustBear brand, and also with the Pilgrim's brand, where we do a relaunch during the Q2.
spk07: I really, I appreciate that caller. I'll pass it on, thanks.
spk09: And ladies and gentlemen, our next question comes from Priya Ori Gupta from Barclays. Please go ahead with your question.
spk01: Great, thank you so much for taking the question. Andy, maybe just one to start with for you, or sorry, excuse me, Matt. Can we talk a little bit about working capital just with some of the relief that you're seeing on the green side? Is there scope for working capital to potentially be even a benefit this year as we think about your cash flow composition?
spk04: My initial reaction is yeah. I mean, I think we should be able to see some working capital benefits going forward, especially with where grain is going. It may take a bit of time to let that kind of fully get itself through inventory as such, but we are seeing that as definitely the direction we're taking, and we've seen that a little bit here in the fourth quarter. But as grain is starting to hit these kind of low four areas in corn, that is something that we're seeing that also, Priya.
spk02: I think also in terms of inventories, Priya, we've been pushing a lot of reduction in our inventories, especially for frozen categories. And we're seeing the overall inventories in the market also going down, especially on the dark meat. And that has helped the whole industry and helped our working capital.
spk01: That's helpful. So I guess as a follow-on, I may be building on one of the prior questions that sort of puts you guys in a little bit more of an enviable position when it comes to your cash flow generation, your existing cash. You've already sort of outlined the CapEx portfolio. guidance, as we think about that cash that's building, would you be able to maybe talk us through the scope to potentially increase some of those organic projects versus looking a bit more aggressively at inorganic opportunities, and how high of a cash balance would you be comfortable sitting on?
spk04: You know, I think when you talk about the inorganic versus organic, you know, Fabio had mentioned on the inorganic side, look, we've We want to grow our company, but we want to be very prudent relative to any type of acquisition that we do to make sure it's completely on strategy and we're paying a right and fair price for any type of acquisition that way. So we're certainly not excluding any opportunities for inorganic, but it's something that's got to be the right fit for us at the right price. Relative to organic, we have some capital needs that are out there. We've got opportunities to grow with our key customers. We are not going to, you know, we're going to be very, one thing I'll use the word prudent again on those types of investments, but we have opportunities to be more on the organic side relative to that growth. I don't think there's something that we look at as a cash limit, you know, as it relates to, you know, how high it can go. If there is a reason to do some type of buyback, we would consider that, but that is not number one on the list, as I've mentioned before. Great. Thank you so much.
spk09: And, ladies and gentlemen, with that, we'll be concluding today's question and answer session. I would like to turn the floor back over to Fabio for any closing remarks.
spk02: Yes, thank you, everyone, for attending our call. Our team faced exceptionally volatile market conditions throughout 2023. Nonetheless, they maintained focus on the strategies of key customer partnership, portfolio diversification, and operational excellence. And these efforts were combined with a leadership mindset, and commitment to our values, we elevated our performance and demonstrated an ability to drive profitable growth despite circumstances. Moving forward, we will continue to drive our strategies along with an unwavering commitment to team member safety, as well being along with an unyielding attention to quality, service, and sustainability. Given our progress and efforts, we can continue to cultivate a better future for our team members and achieve our aspiration of becoming the best and most respected company in 2024 MBA. Thank you, everyone.
spk09: Ladies and gentlemen, that concludes today's conference call. We thank you for attending today's presentation. You may now disconnect your lines.
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