Pilgrim's Pride Corporation

Good morning, and welcome to the second quarter of 2024 Programs 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 call over to Andrew Rogeski, Head of Strategy, Investor Relations, and sustainability for Pilgrim's Pride.

Good morning, and thank you for joining us today as we review our operating and financial results for the second quarter ended on June 30, 2024. Yesterday afternoon, we issued a press release providing an overview of our financial performance for the quarter, including a reconciliation of any non-GAAP measures we may discuss. A copy of the release is available on our website at ir.pilgrims.com, along with the slides for reference. These items have also been filed as Form 8Ks and are available online at sec.gov. Bobby Osondre, 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 will 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, our Form 10-K, and our regular filings with the SEC. I would now like to turn the call over to Fabio Sandri.

Thank you, Andy. Good morning, everyone, and thank you for joining us today. For the second quarter of 2024, we reported net revenues of $4.6 billion, a 5.8% increase over the same quarter last year. Our adjusted EBITDA was $666 million, up 164% versus Q2 of 2023. Our adjusted EBITDA margin was 14.4%, compared to 5.8% last year. Our Q2 results reflect the structure of our portfolio and our strategies to capture market upsides while minimizing downside risks. To that end, we continually invested in our business throughout cycles and market volatility, further strengthening our competitive advantage and creating opportunities to drive profitable growth as market conditions change. In the U.S., Our case-ready business continued to grow key customer partnerships in retail through differentiated offerings, promotional activities, and innovation. Margins in Big Bird expanded as commodity cut-out values increased and operational efficiencies improved. Small Bird also grew, giving increased demand from key customers in QSR and Delhi. Prepared Foods further diversified our portfolio given increased distribution of branded offerings and innovation across retail and food service channels. In Europe, the profitability journey continues to move forward. Throughout the quarter, the team optimized mix through key customer partnerships and further diversified the portfolio through a combination of branded offerings and innovation. The team also identified and implemented opportunities to enhance our manufacturing network, reinforcing our ability to scale for profitable growth. Mexico's results improved, giving continued balance in market supply and demand and consistent execution of our strategies. Sales with key customers grew double digits throughout retail, and diversification efforts in branded offerings across fresh and prepared continue to be exceptionally well-received as all have grown ahead of the market. Operational excellence efforts to increase capacity for profitable growth and reduce biosecurity risks all remain on track. Turning to feed inputs, grain prices declined throughout the quarter, with a favorable start to the U.S. corn growing season and more normal weather to finish the second crop in Brazil. Increased acreage for U.S. corn versus original March forecasts further pressured the market and raised confidence that both U.S. and global corn stocks will grow in the next crop year to very comfortable levels. the soy complex prices got lower as a sharp increase in the Argentine soybean crop offset slightly smaller production in Brazil, triggering a build for the 23-24 crop year. Likewise, a notable 3 million acre increase in U.S. soybean plantings, coupled with a favorable start to the growing season, raise confidence that both U.S. and global soybean stocks will also build further in 24-25. In wheat, Consolidated US and Canadian production are increasing compared to prior year. Expanded acreage in both Argentina and Australia have also increased opportunities for additional growth in supply. Taken together, these gains have more than offset production losses in Europe and the Black Sea. When these factors are combined with ample corn supply, wheat prices have drifted lower and reflect adequate stock levels. While favorable conditions currently exist for increased stock levels, risks still remain. As such, we continue to monitor weather conditions, global uncertainty related to conflicts in Europe and the Middle East, impact of regulations, and movement in exchange rates. As for supply, the USDA indicated ready-to-cook production for the U.S. chicken to increase 0.9% relative to the second quarter of 2023. Production growth was supported by larger average live weights, while all segments experienced minor declines in head counts relative to prior year. The reduction in head counts reflects the challenge in the live site, most notably the hashability and mortality issues experienced across the industry over the last years. Since early 2024, the industry layer flock has shown consistent year-over-year declines. Nonetheless, the younger and more efficient flock has supported increased egg production and domestic egg availability. These layer efficiencies have pushed hatchery utilization to record levels, but been offset by ongoing hatchability and mortality headwinds, resulting in lower heads reaching the plants. Based on the recent trends in layer flock, egg sets, and life weight, USDA data suggests a 0.8% growth in chicken production for the full year, assuming normal season patterns. As for overall protein availability, USDA anticipates mild growth as increased imports of beef and pork, additional pork production, and the expected increase in chicken supply expect to offset a decline in beef production from reduced herd size and increased retention. The domestic chicken demand maintains firm growth throughout the quarter. The retail channel experienced improved volume across all departments. In the fresh department, demand has remained robust. Consumers have relied on chicken, fulfilling their everyday center-of-plate protein needs in a challenging environment. Within the category, volumes rose in both white and dark meat cuts. In boneless, skinless breasts, Retail pricing has steadily declined since the end of 2022 and reached its lowest level over the past 18 months in June. In contrast, ground beef pricing has continually increased during this time. As a result, the retail spread between boneless breast versus ground beef recently hit an all-time high at the end of this quarter. This coincided with a strong quarterly performance from boneless breast, which saw sales growth post-material year-over-year improvements. Overall, the frozen sales also experienced higher volumes driven by the frozen value-added category. Consumers continue to favor frozen value-added over the frozen commodity category as value-added volumes more than offset the volumes declining commodity. As for the retail daily, unit and dollar growth remain robust. as the department can offer strong value to consumers who may be looking to trade out of traditional food service meals to rationalize spending without sacrificing convenience. In the food service channel, revenue and volume sales improve in both commercial and non-commercial food service distribution channels. The commercial distribution sub-channel experienced large dollar growth as rising fresh wholesale prices were able to be passed through operators. Main meat types, including breast meat, tenders, and wings, all continue to post positive volume growth, even with current prices, given the competitiveness of poultry. Within the sub-channel, the QSR category drove the majority of volume growth, suggesting consumers are seeking for more affordable meals. The non-commercial distribution sub-channel continues to build steadily as business and industry activity continues to increase. As for exports, Volumes have decreased almost double-digit, as domestic demands continue to grow for both bone-in and boneless dark meat and replace exported cuts. While volumes have declined, demand continues to be strong, and the supply chain is fluid with minimal disruptions. Based on these factors and seasonality, cold storage supplies of chicken reported by the USDA indicates a 12.6% reduction from the same-year levels. To date, there has been no new avian influenza outbreaks in commercial broiler farms, which continues to enable export supply. Nonetheless, there still has been no movement in China lifting its restrictions. Moving forward, we will continue to monitor bird health, domestic demand for dark meat, and exchange rates to identify and capture export opportunities. In the U.S., Inflationary wary customers increasingly saw chicken given its relative affordability, flexibility, and availability. These factors were augmented by continued elevated pricing from other proteins. As such, our diversified portfolio across bird sizes was well positioned to realize upsides from enhanced market conditions. In case ready, our team worked closely with key customers to ensure value through promotional activity and innovations. These efforts were also supported by efficiencies and cost improvements in production that provides additional opportunities for our key customers to invest in store traffic and shopper activation and reduce the overall prices to consumers. Our portfolio of differentiated, higher attribute offerings also continue to resonate with consumers, creating additional demand. Given these dynamics, our key customers experience growth in fresh chicken well above category averages. Furthermore, Case Ready continued to secure new business through operational excellence in quality and service. The team also deepened relationships with key customers through investments in the manufacturing network. As such, Case Ready simultaneously realized considerable improvements in net sales and profitability, compared to prior year, and reinforced the foundation for future growth. Our Big Bird business improved through continual optimization of mix, yields, line efficiencies, and labor productivity, along with enhanced commodity cutout values and reduced grain input costs. These combined factors drove significant margin expansion. In the Small Bird, our business grew from increased demand from key customers in QSRs and Alley. Similar to Case Ready, Small Bird's cost efficiencies supported our key customers' initiatives to further drive trafficking in their restaurants or retail deli locations. Small Bird's performance was further amplified through operational excellence. A recent Athens expansion continues to drive improvements in production efficiencies. The increased capacity has also generated additional profitable growth with key customers. Our diversification efforts through value-added offerings in Prepare continue to gain traction from increased distribution across retail and food service and extensive customer recognition of our branded offerings. Just Bear remains a key driver as net sales grew over 20% compared to prior year. Furthermore, our innovation initiatives under the Pilgrims brand garnered increased distribution from the new line of products, especially with key customers. We continue to strengthen our presence through commercial, as digital grew by 30% for our branded value-added offerings from last year. In Europe, consumer sentiment began to improve as wage growth surpassed inflation. Our diversified portfolio enabled us to meet the needs of customers and consumers alike, as our key customers delivered growth in the marketplace. Our branded business rose over 7% from last year, as both Frigerators and Richmond grew faster than the category average. Our chill meals business also improved margins through mix optimization and emphasis on convenience by consumers. Similar to other places of the world, fresh chicken continued to drive profitable growth as consumers recognized its relative affordability compared to other proteins. Our fresh pork business was consistent over years. Nonetheless, the team identified multiple opportunities to accelerate growth and managed to secure several new awards from key customers. The team also identified new export markets to further cultivate the demand. Our business has also developed a robust innovation pipeline to further drive profitable growth and diversify our portfolio. To date, the team has launched over 85 new products in retail. our Waitrose popcorn chicken with hickory barbecue sauce was awarded as the best ready-to-eat product by Food Management Today. These efforts are further amplified by progress in food service as the team continues to build business with both key customers and QSRs. The team has also developed plans to scale current relationships throughout Europe with new and existing offerings. As for operational excellence, the integration of our European business continued to progress really well. The team continues to realize benefits from a more customer-focused, efficient organization. Their extensive focus on quality, service, safety, and excellence in production are also being increasingly recognized throughout the industry as they recently received Processor of the Year at the UK National Egg and Poultry Award. Moving forward, the team will continue to invest with key customers, diversify our portfolio through innovation, and drive opportunities in operational excellence. Given these efforts, we can further scale profitable growth. Turning to Mexico, profitability improved significantly through balanced supply and demand fundamentals in the commodity market, favorable input costs, and continued execution of our strategies. In fresh, Our key customer partnerships continue to strengthen as net sales are up double digits compared to prior year. Our branded offerings continue to gain significantly marketplace traction as pilgrims and unique tastes have grown well ahead of the market. Similarly, the favoritos and just bear brands have grown more than 20% since the beginning of the year. Diversification through prepare continues to progress as net sales have increased across all channels compared to last year. Branded offerings continue to play a key role as the overall portfolio has grown by 8% compared to last year. Given Mexico's growth potential and status as a net importer of protein, we continue to invest and explore opportunities to increase our presence. In FRESH, our construction of a new hatchery, feed mill, and broiler farm is in the Merida region remain on track, and our efforts to enhance biosecurity through relocation of the breeding farms are on schedule. On fully operational, this project should enhance service and geographical diversification for the Mexican market. In PREPARE, we continue to evaluate multiple options to expand our presence in both fully cooked and par fry at either existing or new locations. We continue to identify opportunities to further drive profitable growth throughout our strategies. In the US, our protein conversion teams successfully ramped up production in our new Douglas facility in South Georgia. Demand from key customers remains strong, and additional growth opportunities continue to emerge from the growth of the pet food category. Given our progress and market potential, we're also expanding our protein conversion facility at our Sumter location. Based on these efforts, we'll further diversify our portfolio, reduce operational risks, and drive production efficiencies. As a result, We can differentiate and add value to our products to reduce the impact of industry cyclicality on our business, creating a more resilient earning stream. With that, I'd like to ask our CFO, Matt Galvanone, to discuss our financial results.

Thank you, Fabio. Good morning, everyone. For the second quarter of 2024, net revenues were $4.56 billion versus $4.31 billion a year ago. with adjusted EBITDA of $655.9 million and a margin of 14.4%, compared to $248.7 million and a 5.8% margin in Q2 last year. Relative to net revenues, we experienced year-over-year sales growth in the U.S. and Mexico in the quarter. In Europe, year-over-year net revenues were down less than 1%. As we have discussed in the past, in both the U.S. and Europe, many of our contracts have some level of cost-plus element, As such, with declining key input costs, our top line sales numbers will be reduced accordingly. Adjusted EBITDA margins in Q2 were 16.7% in the U.S. compared to 4.6% a year ago. For our Europe business, adjusted EBITDA margins came in at 7.4% for Q2 compared to 5.2% last year. And in Mexico, adjusted EBITDA margins in Q2 were 19.4% versus 12.2% a year ago. Moving to the U.S., our adjusted EBITDA for Q2 came in at $444.6 million, compared to $113.5 million a year ago. Year-over-year recovery in the commodity chicken markets, along with lower grain input costs and continued operational improvements, drove strong year-over-year profitability improvements in our Big Bird business. Our Case Ready, Small Bird, and Prepared Foods businesses have continued their momentum with increased distribution with key customers, driving both year-over-year and quarter-over-quarter profitability improvements. In our U.S. GAAP results, we did record a $71 million charge in the quarter associated with reaching a settlement associated with the previously disclosed growers' litigation. In Europe, adjusted EBITDA on Q2 was $96.2 million versus $68.1 million last year, Our European business took another step in its profitability growth journey through focus on key customer partnerships and innovative offerings. The business has also benefited from its network optimization programs and administrative reorganization efforts. We incurred approximately $36.7 million of restructuring charges during the quarter in support of these programs. We anticipate that restructuring activities will continue through at least the end of the year. Mexico generated $115.1 million in adjusted EBITDA in Q2 compared to $67.2 million last year. The Mexican business profitability improved primarily due to more balanced supply and demand fundamentals and lower grain input costs. After thorough analysis that began in Q2, we changed the functional currency for our Mexico business from the U.S. dollar to the Mexican peso, effective April 1st. The impact on the transition date was recognized in other comprehensive income and was not material. The primary effect of the change is that the impact to the translation of Mexico's balance sheet at the end of applicable reporting periods are no longer recorded through the income statement. This is consistent with how we treat Pilgrim's Europe. For further information on this change, please refer to Note 1 in our financial statements included in the Form 10-Q. Relative to our SG&A costs in the quarter, Excluding the year-over-year increases in legal settlement costs and incentive compensation accruals, SG&A was lower year-over-year by almost 5%. Although we anticipate some increased advertising and marketing costs in the second half of the year in support of our new, innovative products under our Pilgrims brand, we remain disciplined in our cost structure. Our effective tax rate for the quarter was 23.6%, which included certain net favorable discrete items. With the increase in our earnings ratio our higher tax jurisdictions, we anticipate that the full year tax rate will approximate 26%. We have a strong balance sheet, and we continue to emphasize cash flows from operating activities, management of working capital, and disciplined investment in high return projects. During Q2, we reduced our gross leverage by $164 million through open market purchases of our own debt for approximately $150 million in cash. As of the end of Q2, our net debt totaled less than $1.9 billion, with a leverage ratio of approximately 1.1 times our last 12 months adjusted EBITDA. Net interest expense for the quarter totaled $15.3 million. However, that amount is net of $11.2 million of gains recognized as part of the open market debt repurchases. Excluding the impacts of any net gains or losses on debt repurchases, we anticipate our full-year net interest expense to be between $100 and $110 million. Even following the debt repurchases at the end of the quarter, we had nearly $2.4 billion in total cash and available credit, driven by the strong free cash flow generation during the first half of the year. 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 U.S. commodity markets and allows us to pursue our growth strategy, including organic growth to meet our customers' needs. We spent $105 million in CapEx in the second quarter. With the increase in our free cash flow during the first half of the year, we plan to pursue additional capital projects with attractive returns during the second half of this year. These projects are focused on optimizing our product mix, growing with our key customers to meet specific product attributes they require, increasing operational efficiencies, and supporting our sustainability efforts. These projects are seen as growing Pilgrim's competitive advantage. As such, we are increasing our full-year CapEx spend estimate to $525 to $575 million. We have a strong focus on growth opportunities. First, over the last few years, we have invested in our plants to meet product attributes requested by our key customers, and we will continue to do so as we cultivate these relationships. Also, we foresee investments in additional protein conversion capacity to both upgrade our product mix and manage risk by reducing exposure to outside protein conversion operators. Finally, as we have discussed extensively, our U.S. prepared foods business has grown our branded portfolio through innovative and differentiated products, and we anticipate expanding our capacity to meet the growth trajectory of this portfolio. These near-term growth opportunities align to our overall strategies of portfolio diversification, focus on key customers, operational excellence, and our commitment to team member health and safety. Operator, this concludes our prepared remarks. Please open the call for questions.

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-up. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys to minimize background noise. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Ben Therer of Barclays. Go ahead, please.

Good morning, Fabio, ma'am. Thank you very much for your presentation. Thanks for taking my question. The first one is just about the growth opportunities and the capex you've just upped. I mean, obviously, it's a relatively small increase in quotation marks if you go, let's say, to the higher end of this. And your press release, you stated that obviously leverage is very low right now and that you have a great foundation to execute on your growth strategy. So I wanted to ask if you could maybe elaborate a little bit more as to what are the opportunities you're looking at be it M&A, be it buybacks, maybe a special dividend. Just where leverage stands right now, the cash flow generation, I mean, whatever, 10% increase in capex probably not going to bring your leverage significantly higher. So I just wanted to understand what are those growth opportunities that you're seeing? That would be my first question.

Yeah, thanks, Ben. As we're seeing strong demand for chicken and as we are seeing our key customer growth, demand growing even ahead of the market, we're seeing a lot of opportunities to support their growth. And I think with that, and we saw the investment we did at the Athens facility, and we are thinking about a lot of investments in other facilities to support that growth. We differentiated products, but as you mentioned, that's not going to change significantly our debt profile. I think we're always looking for ways to create shareholder value, right? Since in the past we mentioned that we'll look for opportunities for acquisitions in three major building blocks. One is on the chicken track where you can operate better than the other markets and create value. The second one is to differentiate our portfolio in branded prepared food offerings. We look to grow that business. We're growing organically, and as we mentioned, the Just Bear brands and the Pilgrim brands are growing ahead of the market. But we're always looking for opportunities, either in the U.S. or abroad, to increase the portfolio of prepared food branded business. And we're also looking for different geographies in the chicken categories. So those three main themes, let's say, continue to be our focus for our acquisition targets. Of course, we'll always be a prudent acquirer. I think in the past we've proven that we can create value on the acquisitions that we do. So we're always looking for opportunities, and we're seeing a lot of opportunities out there. I think I mentioned the organic growth potential will continue to grow on the protein conversion side. I think if we just ramp up our operation in Douglas, Georgia, very successfully. I think that operation added value to our products, especially the rendering products, and we have great partnerships with the pet food industry, so we'll continue to do that. I think that added value and reduced risk for our business as we don't rely on external renderers for our products. And I think The other ones are the ones you mentioned and dividends and share buybacks and buying back some of our debt. We're always looking for opportunities and we'll do as we can create value for our shareholders.

Okay, perfect. And then my second question is really if you could share a little bit trends for what you're seeing in the third quarter, particularly in the U.S. commodity market, but also Mexico. I mean, way above a little above $100 million in Mexico in operating income. I think you've never had that in the past. So how fast are some of the lifebird operators reacting to such levels of profitability and And similarly in the U.S., we've seen a little bit of an increase in exits. So maybe any comments you can share to like 3Q and then into 4Q capacity, what you're seeing and how that potentially impacts the market.

Sure. Thank you. I will start with Mexico. Because it's a growing economy, we're seeing the demand for chicken growing faster in Mexico. And we're excited about the opportunities and connected to your first question about growing markets. with the investment we had in the Merida region, so we can further diversify our geography locations and grow in Mexico. Mexico is a great or big importer of protein, and will continue to grow in the region. But as you know, it can be very volatile quarter over quarter. As we always mention, we expect that year over year to be more sustainable, and we will see very strong profitability and growth in the region, but quarter over quarter, it can be very volatile for exactly the reason that you mentioned, which is the live bird market. About 30% of the market in Mexico is of live birds. We sell live birds to distributors, and those distributors move those birds to small slaughterhouses around the city of Mexico mainly, and the consumers will buy what they believe is a fresh product. I think that market continues to be really volatile for what you mentioned, which is small operators that can come and go as the prices go up and down. I think we saw great profitability in that segment during Q1 and Q2, and we're seeing some continued profitability during Q3. As the live challenges continue to be big throughout the world. We were seeing some live challenges in terms of diseases, growth conditions, mortality throughout the world. And that's not a different in Mexico. We're seeing some challenges on the live market in that region. And that is being slowing down, I believe, the fast increase on those small operators. But I think they will eventually show up and the market will be a little bit more volatile. But So far during Q3, we're seeing some strong demand and continuous balance in the supply and demand. Q3 usually starts with schools off, which is a little bit different in terms of demand for chicken, but prices continue to be well supported and we're seeing good profitability in Mexico, not as volatile as we had in the past. In terms of U.S., I think we have the leading indicators, right? The layer flock is smaller than the same period last year by 3.8%. But it is more productive because it's a little bit younger. So we are seeing more eggs per hen being produced. So albeit we have a smaller layer flock, we have more eggs being available for our industry. The challenge continues to be the hatchability. I think with this increase in number of eggs, our hatching usage or the use in our hatchery has reached, I think, 96%, which is downtime high, older than 96%. But we're still seeing some very low hatchability. And that is because what we mentioned in the past as the performance of that bird and the It is structural, right? So as we mentioned, there is structural components, which is this new genetics that came to answer for a higher quality, higher yield bird. But we have been in struggle with the performance in terms of the hatchability, and we're seeing the lowest hatchability we've ever seen. And despite some improvements here and there, we believe that it will be really difficult in the short term to overcome that hatchability. We're also seeing some increased livability issues, meaning mortality. We're seeing more mortality. So we'll start with a lower breeding flock or layer flock, but it's more productive, so we have more eggs. That puts pressure on our hatching system. Then we have the hatchability issue, producing less chicks, and as we're placing those chicks, I think we're seeing some high mortality as well. So despite a little bit higher chicks placement, we're seeing a lower number of heads reaching the plants. They have a little bit higher weight, again, because the conversion of this bird is really better than the previous birds. But we are seeing a lower number of birds reaching our plants. And that is being what's keeping the production actually flat to a little bit over the same number last year. As going forward, we expect the industry to do the normal seasonal cuts. As we see, there is a strong demand for chicken in retail and food service. But as a normal seasonality, we expect the industry to follow the same patterns. And that's what we are seeing on the USDA numbers.

Thank you very much.

The next question comes from Peter Galbo of Bank of America. Go ahead, please.

Hey, guys. Good morning. Thanks for taking the question. And maybe just one from me on a broader thought. You know, Fabio, I think the big question we're getting, particularly with kind of the run that the stock has had as people try to put it into historical kind of context, like what's the best analogy in your mind to kind of the current cycle relative to past cycles where, you know, we have a situation with expensive ground beef or expensive beef and maybe a lower availability, you know, relatively benign or even helpful grain costs and then high chicken prices, you know, with limited supply growth. Like is there a good historical frame of reference for folks to use I think would just be helpful in terms of how you're thinking about it at this point. Thanks very much.

Sure. If you look into the past, and I think you can try to get similar conditions maybe in 2014, 2017, 2004. I think those are years. But I think the structure of this market changed a lot, right? As we always mention, especially for pyramids, we have a differentiated portfolio. I think in the past, we used to see a lot of contracts based on markets, based on commodity markets, even on the retail or on the small boards. I think what we have today is a very differentiated portfolio where we have two businesses, which is the small board and the case-ready business in the United States that are more stable. And as we mentioned, that is giving our key customers a lot of efficiency and giving the possibility for them to invest in traffic and in promotional activities with the reduction in the price of feed inputs mainly, while the commodity market will always be driven by supply and demand, and that is the big part. So as we see less of the market only driven by the commodity pricing or the supply and demand or the commodity pricing, I think we have a differentiating factor in terms of what was the profitability back in 2014, 2004, 2017 to what we have today. But in terms of what is happening in the market, once again, and I think that's what is similar, we're seeing less available beef with a reduced herd and with a higher price as we are seeing the live prices of beef the live animals to historical highs. And we're seeing the price to the end user higher, as we mentioned, with the difference between the cost of beef and the cost of chicken, the difference or the gap between ground beef and boneless, skinless breast for the end user has reached record highs in terms of gap. And I think what's different is that the consumer today different than in the past. It is looking for deals because they are feeling the pressure of the inflationary scenario, especially on the interest rates and price of gasoline and everything. So they are looking for better opportunities. This is also true in the food service. So we saw a little bit of a struggle on the food service industry in terms of food traffic, but the demand for chicken, so the penetration of chicken has increased. And actually, chicken is increasing in demand in the food service, despite the challenge that we are seeing with food traffic, especially on the full-service restaurants. Great. Thanks very much.

The next question comes from Andrew Stelznick of BMO. Go ahead, please.

Hey, good morning. Thanks for taking the questions. My first one, you know, the press release noted momentum and branded and value added in basically every one of your segments. So I was curious how your mix of those products has changed over the last couple of years within your portfolio, where you see that headed in the next couple of years, and how does that impact your overall margin profile over time?

Sure. Thank you, Andrew. As we mentioned, it's one of the sources of growth you'd expect in the future. We always talk about our portfolio in all the regions. And prepared food branded, it is a differentiating factor for us because it's more stable. As we have the exposure in the United States and other regions to the commodity segments, which is more volatile, we want to have a bigger portion of our portfolio with more stable margins. And that is the branded value-added category. I think we've been investing in differentiating factors, and I think the JustBear brand is a great example. It's a great product with differentiating attributes of reduced breading and in the higher tier. And it's both in the fresh and in the prepared foods. And also, we are launching new and innovative products in the Pilgrims brand. which to really excite the category. I think what we've been seeing over the last year is that the value-added prepared chicken category has been, let's say, boring. I think that's the word that most of our partner key customers have used. And I think we're trying to excite the category with new and innovative products. As you see more velocity and more distribution, we're seeing better margins for that segment for us.

Thank you. That's helpful. And then my second question, you talked about some of the, I guess, you know, structurally attractive attributes of the Mexico market and the opportunity for growth there, some of the current actions you're taking to expand your presence. I guess the question is, you know, kind of what are the ultimate aspirations in Mexico? How do you see kind of the longer-term opportunity for the business there? And, you know, what are the different mechanisms that you'll use to get there? Is it just through your current expansions? Is there more that you look to do there, you know, either internally or in other ways? So I guess, how do you frame that opportunity?

Thank you. Yes, again, like I mentioned, Mexico is a growing country. economy, a huge importer from the United States and other places in terms of protein. Our ambition is to be a more food company in Mexico. I think we have a great presence and a great visibility in the chicken category, but we also have some products in the value-added prepared food category. So as we mentioned, the Favoritos brand and some Other brands, we do some tacos, we do some frozen pizzas. So I think the ambition in Mexico is to really grow as a food company. I think we're seeing some opportunities of acquisitions, but we're also seeing opportunities to organic growth in the region.

Great. Thank you very much.

The next question comes from Jordan Lee of Goldman Sachs. Go ahead, please.

Hey, good morning. Thanks for taking my question. Can you talk about how you see disease pressure across the world affecting pull-to-trade, particularly in Newcastle and Brazil?

Yes. I think we're seeing some increase in diseases, like I mentioned. That is pressure to the live operations in some of the regions, but mainly they create problems in the trade. And we've seen avian influenza impacting a lot of regions from Southeast Asia to Europe to the Americas, mainly the United States and Mexico. I think those issues have been resolved in trade negotiations. I think a lot of the key importers of meat have regionalized the impact of the avian influenza. places different than China that tends to be a little bit more aggressive on trade. But all the other partners have identified where is the region and the risk of that particular disease, being Newcastle or Hypat AI, and have cut borders to where they accept exports. I think the recent example was in Brazil. I think they have a Newcastle case there, but I think they regionalized to the Rio Grande do Sul region where that disease was found. So I think the trade has been impacted in the short term, but in the long term and even in the medium term, I think the trade negotiations have identified what is the region and have minimized major disruptions.

Great, thank you. And focusing more on the UK, can you discuss the key drivers of and scope for further margin expansion in that region? And how does that differ between poultry, pork, and your prepared foods operations?

Yeah, thank you for the question. Yeah, in UK, we have a more diversified portfolio, not even in the chicken side. But as I mentioned, we have the meals business, the prepared food business, the fresh pork and poultry, and we have also a strong food service operation. I think we've been working on the integration over the last two to three years, and the integration in the manufacturing network, but also the integration in the back office. I think we're simplifying our structure there, and I think what we want to differentiate ourselves is through innovation. As I mentioned, there was a lot of praise, let's say, for the innovation that we launched over the last year, two years, really excites or creates more excitement on the category. As we're seeing the demand in the UK getting better with consumer sentiment, I think we mentioned on the prepared remarks that we are seeing the consumer sentiment improving as we are seeing wages growth ahead of inflation after a long time in Europe. We're seeing more excitement about the prepared foods and the branded category. I think that's been really important for our Richmond offerings, which we are seeing for the first time, I believe, this year, the branded offerings growing ahead of the private label offerings. Usually the private label offerings provide a better cost, but not necessarily a better experience. So I think we're really excited about the Frigerators brands and the Richmond brands. So I think the growth in profitability in UK is driven by the network integration and the back office integration, so it's our efficiencies, but also by leading innovation for our key customers. Thanks for the help. I'll pass it on.

Our next question comes from Heather Jones of Heather Jones Research. Go ahead, please.

Good morning. Thanks for the question. Good morning. I wanted to follow up on this U.S. supply and thanks for all the detail you provided on hatchability and hatch utilization and all, but just thinking about Q4, particularly given how strong industry profitability has been, how you're thinking about how the industry is going to do as far as seasonal cuts, it The profitability would suggest that the industry may not do the typical seasonal cuts, but I've also spoken with some producers that they're so limited on egg availability due to disease, hatch, et cetera, that they're sort of going to be forced to do the seasonal cuts. So just wondering how you're thinking about that and what we should expect there.

Yeah, sure. I think the normal seasonality of our industry is that – The demand for chicken during the Thanksgiving and the Christmas period and the winter is lower than what we see during the grilling season and even in January. So that's normal for our industry to do the seasonal cuts. As you mentioned, there is the additional issue that we are seeing in our industry in terms of hatchability and livability. And during the wintertime, we always have some struggles also in the growing because of the temperatures. We can speak for us, and we are seeing a strong demand for chicken, but we partner with our key customers, and we always supply what is needed for their features and for their demand. I think when you look into the USDA data, I think what they're suggesting is a moderate improvement or increase in terms of supply for the second half of the year, close to less than 2%. So to the overall growth for the year to be less than 1%, 0.9%. That's what the USDA data suggests, and that's what the size of the layer flock suggests.

And I think, Heather, also the demand for chicken right now, just with where the spreads are compared to ground beef, we sort of see that continue to flow in the second half of the year, too, from a demand perspective.

Okay. And then moving to Europe, so a large component of that business is cost pass-through. And so I was just wondering, you know, typically in those kind of contracts, pricing lags on the way up with cost and then vice versa on the way down. And so as we're looking at your margins, which were really strong during the quarter, how should we think about the second half of that? Like, was there margin help as... Pricing is lagging, costs on the way down. And how should we think about like a normalized margin level for that business?

Yeah, you're right. There is always a lag. And I think we mentioned that when the inflation was really strong and fast and we see some sharp increases, this lag is more pronounced, let's say. I think as we are seeing a more gradual reduction in terms of cost, that lag, albeit it still exists, will be not as... as big, let's say. I think the improvements that we are seeing in the bottom line are really based on the manufacturing improvements that we did and the restructuring and the simplification of our structure and on the growth, as I mentioned, on the innovation that we are launching on the market and some partnership with key customers that are growing ahead of the market. So there is a little bit of a lag, you're right, on the contracts. And There is a lot of pass-through in Europe, and I think Matt also mentioned that it impacted a little bit of revenues there, but maintain our margins. So that's the most important part.

Okay, wonderful. Thank you.

The next question comes from Priya Ori Gupta of Barclays. Go ahead, please.

Good morning, and thank you for taking the questions. Matt, I'd love to start with you. So it looks like you guys had an authorization to buy back about $200 million worth of bonds. On net, you bought back $150 million. I guess, can you just walk us through sort of the thought process behind how that was seen as the best use of cash, given that you're trending below your leverage, like meaningfully below your leverage target, and why sort of the bulk of that was targeted in the 31 note, given that there are potentially lower dollar bonds that are in your structure?

Yeah, so good question. You know, we were meeting with our board in the first quarter meeting that we had with, you know, we talked about, hey, cash generation is going strong. You know, one of the outlets that we had, one of the options that we have for cash usage is to, you know, buy back some debt. Spoke with the board about that and, you know, they authorized the $200 million. We looked to the market at that point, you know, the debt market at that point and said, you know, what bonds are liquid? What do we feel has the best NPV for us? And where can we see kind of most value, shall we say, on those repurchases? And that's why We bought what we bought, and as you noted, most of it was the 2031s. Those are also the ones that are most near due, although not for a while, of course. But we looked at that $200 million as that's something, but as we've alluded to, we've got sort of bigger views on some of the things we want to do from a growth strategy, but this was just an option that we could take here in the short term to utilize some of that cash to reduce gross leverage.

Okay, that's really helpful. And I think if we look at the working capital contribution during the quarter for your cash flow, it's strongest we've seen in quite some time. I mean, even stronger than my model suggests back in 2020. So how should we think about that benefit flowing through the rest of the year? Should we sort of see the normal seasonality with that coming down a bit, but potentially better than what we've seen historically.

Sorry, Priya. I think that's right. I don't foresee as strong a cash generation in the second half of the year as we did in the first, although stronger than historical norms, for sure. I think this one, we ended up having just a little bit of the confluence of the grain pricing declining But, you know, that certainly has been one, and now that'll start to, we believe, kind of flatten out here. So I think that we experienced some very strong free cash flow. I think also I mentioned we're going to also have higher second half capex spending when you kind of look at the, you know, from where we've been at at about, I think, about 213 for the first half of the year. And then the second half of the year, we kind of got it, you know, all the 525 to 575. So we'll see some of that cash utilized there, too. as you said, very strong in the first half. We see it to be seasonally, you know, to be stronger than historical norms in the second half, but probably not quite at the same pace as half one.

I think we also have to benefit on the working capital of the reduction of inventories. As you mentioned, there is a strong demand for export, and even our inventories on prepared food have been reduced. We built a little bit of inventory now for the school lunch program that starts later in September, but I think, as Matt mentioned, I think we expect normal working capital from the second semester. Great.

Thank you so much.

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

Thank you everyone for attending the call. We've built a portfolio and set up strategies focused on capturing market upsides while minimizing downside risks. Given our continued investment and disciplined execution throughout industry cycles, we have increased the potential and resilience of our earnings, reinforced our competitive advantage, and elevated the foundation for profitable growth. When these efforts are combined with the commitment to our values and relentless focus on team member safety and well-being, we can become the best and most respected company in our industry, creating the opportunity for a better future for our team members. Thank you very much.

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