Good morning, and welcome to the Third Quarter 2022 Pilgrim's Pride Earnings Conference Call and Webcast. [Operator Instructions] 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 Relations section of the company's website at www.pilgrim.com. [Operator Instruction] I would like to turn the conference over to Andy Rojeski, Head of Strategy, Investor Relations and Net Zero Programs Pilgrim's Pride. Please go ahead.

Good morning, and thank you for joining us today as we review our operating and financial results for the third quarter ended on September 25, 2022. Yesterday afternoon, we issued a press release providing an overview of our financial performance for the quarter, including a reconciliation of any non-GAAP measures we may discuss. A copy of this release is available on our website at ir.pograms.com, along with the slides for reference. These items also have been filed at Form 8-K and are available online at sec.gov. Fabio Sandri, President and Chief Executive Officer; and Matt Galvanoni, Chief Financial Officer, will present on today's call. Before we begin our prepared remarks, I would like to remind everyone of our safe harbor disclaimer. Today's call may contain certain forward-looking statements that represent our outlook and current expectations as of the date 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 today's press release, our Form 10-K and our regular filings with the SEC. I would like now to turn the call over to Fabio Sandri.

Thank you, Andy. Good morning, everyone, and thank you for joining us today. For the third quarter of 2022, we reported net revenues of $4.47 billion, a 16.8% increase over the same quarter last year and our adjusted EBITDA of $460.5 million, up 32.7% versus Q3 of 2021. Our adjusted EBITDA margin was 10.3% compared to 9.1% in Q3 of last year. Our Q3 results continue to reflect the benefits of consistent execution of our strategies. Even with significant volatility of market fundamentals, our US business achieved solid results in the quarter with big bird deboning up seasonal and historical highs, while our key customer partnerships in case ready and small birds and our growth in prepared foods improve our bottom line. Our European business drove improvement despite severe inflationary pressure and prolonged challenges within the consumer environment. The team continued to accelerate operational improvements to help mitigate some of the inflationary headwinds in grains, utilities and other cost inputs. In addition, the team has announced a plan to optimize our manufacturing footprint to further enhance operational agility and flexibility. Equally important, the combined team launched a variety of new innovation and received a variety of accolades for its innovation as well as superior quality products. Our Mexico business was adversely impacted by extensive inflation, slowing demand. These challenges were amplified by issues with mortality in our live operations, mainly on our breeders. Taken together, the business experienced a decline in volumes, prices and profitability. The operations team implemented a significant change in our live operations footprint, and our sales teams are launching new innovation for diversification across sales channels and deeper expansion into branded offerings. We also published our 2021 sustainability report in August, which highlighted significant progress in our efforts to improve team member safety and well-being, reduced…

Thanks, Fabio. For the third quarter of 2022, net revenues were $4.47 billion versus $3.83 billion a year ago, with adjusted EBITDA of $460.5 million and a margin of 10.3% compared to $346.9 million and a 9.1% margin in Q3 last year. We achieved $260.7 million of adjusted net income compared to $162.5 million in Q3 of 2021. Adjusted EBITDA in the US for Q3 came in at $418.3 million compared to $263 million a year ago. Adjusted EBITDA margins in Q3 were 14.7% compared to 10.7% a year ago. Both gross and operating margins were higher compared to 2021. As we entered Q3, we noted declines in market pricing from all-time highs in May. During the third quarter, market pricing continued to decline, however, remained above historical averages for most of the period. Although we noted consumer demand showed normal seasonal movements during the quarter, supply grew above expectations, particularly during the latter half of the period. For our European business, adjusted EBITDA margins came in at 4.0% for Q3 compared to 3.0% last year and 3.4% in the prior quarter. We've continued to see improvements in the profitability of this business due to the efforts of the team to both find operational efficiencies and to recover the inflationary impact of key input costs. Mexico lost $6.3 million in adjusted EBITDA in Q3 compared to making $56.3 million last year. However, Mexico has made $128.9 million in adjusted EBITDA or a 9.3% adjusted EBITDA margin for the nine months ended in September. Volumes in the quarter declined given weakened market fundamentals and margins decreased given issues with breeder mortality. As we have discussed and experienced in the past on multiple occasions, our Mexico results can be quite volatile quarter-to-quarter. All businesses across our geographies have been subject to continued…

[Operator Instruction] The first question comes from Ben Theurer with Barclays. Please go ahead.

So my first question is really just on the outlook. And if you could repeat or clarify the commentary when you said there are some short-term challenges, were you referencing short-term challenges on the big bird piece in particular? Or are you seeing short-term challenges also in some of the smaller bird categories, in the medium-sized categories? If you could differentiate or be a little more precise on what you're seeing in the market here, that would be nice.

Of course, Ben. Thank you for the question. Yes, the short-term challenges that we are seeing are mainly on the commodity segment. I think as always, we need to remember that one of the most important aspects of our strategy, it is our diversification in terms of portfolio, not only across regions, but also across business. So in the US, we have exposure to the commodity segment, it is close to one third of our volume offerings. And on that segment, what we've been seeing is after very high prices during Q2 and Q3, we're seeing a significant pressure in terms of pricing for the Q4. On the other segments of retail and small birds, we are seeing very strong demand and continued strong repricing.

And then just on Mexico. I mean, obviously, it was one of those quarters and we all know those happen. But aside from the measures you can take short term, just to understand better, are the issues around the mortality is an industry-wide problem? Is it more of a Pilgrim-specific problem? And how long do you think it's going to take to get through those headwinds? I mean, obviously, inflation, that's tough to call. But particularly on the mortality side, when do you think you're going to be able to fix this?

Sure, Ben. And I think this was a perfect storm for us in Q3 in Mexico. We have, of course, the market challenges, which we always remind everyone that Mexico is a very volatile economy. We're seeing some very strong pricing and very strong demand during Q1 and Q2. And with that, we saw some challenges in Q3, both from the demand aspect because consumers were facing high inflation or high pricing. But also from the supply because there was a lot of product coming out of US and even Brazil reaching the region during Q3 . And our operations were affected more than the -- we believe, the other companies. I think we had a lot of our breeders in some regions that were safe in the past. But during this avian influenza season, we saw some impact in those regions. And that's why we diversify all of our breeding operations throughout Mexico and even in the US to mitigate those impacts in the future. We expect most of the impact was already felt in Q3. There is some residual impact in Q4 and Q1 next year, but mostly the biggest impact was in Q3, as we were bringing eggs from all of our network, including Europe, US, to support our key customers in Mexico.

The next question is from Ben Bienvenu with Stephens. Please go ahead.

So I want to ask about kind of the dichotomy we have where, as you said, production has ramped up in the short term. But when we look at pullet placement data, it's down pretty substantially in the last several months. Do you think that's a curbing of forward production? Do you think it's a reaction to kind of normalizing hatch rates and hatchability? What do you think is going on there versus kind of what we're seeing in the short term with high egg sales?

Of course, Ben. I just want to step back and remind where we were in the first half of 2022. So in the beginning of the year, we have this challenging hatchability rate and we have even lower staffing levels and the supply was very limited in terms of growth during those two quarters. I think during Q3, we started to see the improvement that we were expecting in the hatchability. And with a high number of eggs, we saw that increase in production that we mentioned of 2.8% during Q3 with some very high weeks during -- especially during September, and that posed a challenge on the commodity pricing. I think reflecting on the size of the flock that we have today and the better hatchability, the industry can improve its cost by reducing the number of layers because now we have all the that we need for the 2023 season. Given USDA expectations,

All right. Great. Very helpful. Shifting gears a little bit to Europe, I thought pretty impressive results in the quarter given some of the challenges that you cited. I know there's a continued plan of improvement as we move forward in that business. Can you give us a little bit more detail around some of the efficiency initiatives you have underway and how you think about kind of the tug-of-war between that dynamic and just broader inflation in the market pressing consumer demand?

Safe. Yes. We saw in Europe a reaction from the consumer given all the inflation where there is a reduction in demand for all proteins. As I mentioned, chicken and pork tends to be more resilient to downturn. And with the increase in pricing, we're seeing flat levels of volume now in chicken, while in the red meat, especially on beef, we're seeing double-digit reduction. What we are doing to mitigate that is -- there is always a lag in terms of our pricing and inflation. As we were seeing continuous inflation in Europe and especially UK over the months, we are always lagging that pass through to our prices. I think as we are catch up now, as we change all of our contracts to include other inflationary items not only grain, that continues to be elevated, but utilities, labor, packaging and other inputs, And we are continuing to support our key customers with innovation in terms of creating new products and new offerings to support their growth as well as our growth. Of course, we're also optimizing our network. We recently announced the closure of two operating facilities that were small, and we are concentrating our operations in other facilities with continued to support for growth in the future. We also consolidated our back office in UK and Europe. We now have one platform with SAP, which will create not only a better cost for us on combined entity, but also more agility on supporting our key customers.

The next question is from Ken Zaslow with Bank of Montreal. Please go ahead.

Can I talk about your US operations? Can you talk about if you took any extra pricing in tray pack or small bird? Or did you have a business -- a mix shift away from big bird? Or do you think that the outperformance was the stability in small bird and tray pack? How do you kind of frame it a little bit better, particularly given the pricing dynamic and a little bit of a volume decline that we saw? Just trying to kind of put it all together.

Great point, Ken. As I mentioned, it's all about the portfolio that we have. As I remind everyone, the prices that we see, especially through the UB only influx in the commodity segment of the chicken industry. Our other business, retail, QSRs, small birds, does not follow those market pricing. Rather, it have their own pricing models, depending on the type of offering that we have. We have differentiated offerings, normal, organic offerings. And also the value creation that we do in terms of tailored products that we do for our key customers. I think one great example of value creation with our key customer strategy was the growth that we have in the fresh retail segment during this quarter. The industry, according to IRI data, was down 1% year-over-year in terms of volume with many chicken producers chasing the high-priced commodity segment, as we mentioned. We continue to support our key customers in this segment, and we increased our sales in that segment during Q3 by 5% with growth with our key customers of 9%. I think that shows the strength of our products and how we can be a differentiating factor for growth and profitability, both for us and our key customers. We are happy with the portfolio that we have, Ken. I think we have a very well balance between the small bird, the retail and the big bird. As we mentioned to all, we can capture the upside in the commodity market through our exposure to the big bird segment, but we demonstrated in previous quarters that we can protect the downside with the more resilient business on the other segments.

Is there a downside margin that you think that you will not break through in this type of environment given -- is there a way to kind of frame it that you will -- if the margins on big bird is zero, will you guys still be at 5%, 6%? How do you frame that? And then my last question would be, do you think that Europe in 2023 can hit that 2%, 2.5% margin? And I'll leave it there, and I really appreciate your time.

Sure, Ken. I think, of course, what -- how we track our business is against our competitors, right? We're doing good guidance. And what we want is to always be better than our industry and we've been at the top of our industry for some time right now. It is all about the portfolio. Of course, we'll always keep our key customers competitive. I think we can offer -- and this is something that has not occurred this year, especially on the retail. Because of the high pricing of the commodity segment. Normally, we will use some big birds to help promotional activity on the retail. And that has always been a great way of supporting the big bird business and a great way for our portfolio. That didn't happen this year. Again, because of the high prices of the commodity, it is making no economic sense to put that big bird meat in a train and sell to the retailers. As I mentioned, the price of the retailers never reach the high levels that we saw in the commodity segment. So also, the retailers were not featuring a lot of chicken, and that's why I think the volumes this quarter were flat for the industry. Again, for us, it was up 9% in our key customers compared to last year. I think that can start to happen right now. We're seeing a lot of progress and a lot of intentions on doing more promotional activity, which can support the growth in the retail segment and can use some big bird meat in a very profitable way.

And then just on Europe?

In Europe, I think we will continue to improve our results. I think we mentioned that we now are catching up to all the cost increases, and we are optimizing our network. I think the benefits of the network optimization and even the back office integration, we're going to be seeing more in the second quarter of next year, not in the first quarter of this year. But yes, we expect the margins there to increase to profitable levels and investment levels. We have great expectations for our European business, and we also expect the economy to start to be covering starting next year.

The next question is from Peter Galbo with Bank of America. Please go ahead.

Fabio, maybe if I can just ask on the go-forward pricing in US, I guess I'm a little confused. In retail and small bird key customer, you tend to lag on pricing right on the way up and on the way down. So just as we've seen the commodity big bird market really materially roll, why wouldn't those other channels follow suit, even if just directionally, whether that's a quarter from now, two quarters from now, at some point next year? But just it sounds like you're expecting that that pricing might hold into next year, and I'm just curious why it wouldn't follow the broader commodity market if it does stay at these more normalized levels.

Sure, Peter. I think it's all about the portfolio of contracts that we have as well. Most of our contracts with the QSRs and retailers are not based on the commodity pricing. So we never experienced the high pricing that we saw in the commodity segment in the retail over Q1 and Q2 this year. So that's the main reason. Of course, we will keep our customers competitive with tailor-made offerings that are not considered commodity. What we can do and we will do is to, again, support promotional activity to help them sell more and extract more value with the big bird meat that we can trade back and sell to end users. That helps on the inflation side and that helps our key customers to grow their sales.

Alright. That's helpful. I mean I guess if I just think about dissecting your business right into the three parts, like it would imply that if the commodity market was slightly down in the third quarter, that retail and key customer had to be up again materially year-over- year pricing. So you would have started to see that pricing come through 3Q. So I guess that's maybe just some of the confusion. And then maybe just, Matt, just to clean up a couple of things. Did you guide interest expense for the rest of the year? And I think on SG&A this quarter, you were down a bit from where you've been running. So just is that third quarter SG&A number a decent run rate for 4Q and into next year?

Yes. Peter, it's Matt. I did not guide on net interest, but that $34 million that we had this quarter should be about where we look at next quarter, maybe slightly below that. And relative to SG&A, I think we may be slightly higher on an overall run rate. We had a couple of just somewhat minor credits that came through for an R&D tax credit and things of that nature that hits SG&A. But it shouldn't be too far off but maybe just slightly higher than we saw here in Q3.

On the bottom line of the US, we also need to mention that we have a much better staffing level in Q3 than we had in Q1 and Q2, which allow us to operate better, capture better yields and also improve our mix. Once again, I think the differentiating part of our portfolio is to be able to support our key customers with differentiated products, and those products does not follow the commodity pricing, either up or down.

Next question is from Adam Samuelson with Goldman Sachs. Please go ahead.

Maybe following up on some of the questions around kind of margin trajectory. And I guess thinking about the fourth quarter and the correction that you have seen in that big bird cutout with prices now approaching the five-year average, costs are well above the 5-year average given feed and broader inflation. So profitability kind of would now be tracking below those are moving to below those levels over time. How do I think about the profitability in big bird kind of stacked against the profitability in the in the retail and tray pack and small bird businesses? And does the US -- if pricing in big bird is at five-year averages and profitability kind of getting -- trending to below five-year averages, does your US business -- do the margins in the US business track to the five- year averages kind of above, in line, or better?

Thanks, Adam. Yes. I think we're seeing a compression of margins on the big bird segment, starting late Q3 and starting in Q4. And I think that has been a fast reduction in terms of overall cutout given everything that we mentioned in terms of demand and supply. I think looking forward, I think we tend to look at a more long-term approach. And if you think about next year, I think all the drivers that we are seeing are leading to a rebound in those prices. If you look at the expectations of both beef and pork in supply for next year, this is expected to be down 4.7% in terms of domestic availability. Pork is going to be up just marginally. So we're seeing a lot of promotional activity being planned, and this is the time of the year where both retail and the foodservice industry start planning for the promotional activity for next year. And we are seeing a lot of interest in promotional activity for chicken next year because we will have both the availability and we will have versatility and the good pricing that we are seeing today. So we have great expectations for next year. Again, as for Q4, and we're seeing high volatility in this big bird segment, and it's exactly what we expected and it's exactly why we created the portfolio that we created, where we would capture the upside that we had in Q1 and Q2 and protect the downside that we are seeing in Q3 and Q4.

Alright. And if I could just switch gears to Europe. And if I remember, you talked about more optimistically about margin prospects there into next year. Just how dependent on the consumer environment improving in the UK are you on that outlook? And specifically thinking on the Food Master side if that doesn't -- still faces a sluggish consumer environment. And I guess, a related question, it's a clarification. In the UK business in the quarter, the SG&A was down about $20 million relative to where it had been for the last three quarters since you bought Food Masters. And I just was -- want to clarify what's the right UK SG&A run rate because surprised to see it step down that much in that business.

Sure, Adam. It's Matt. Just a couple of comments on the SG&A, and we can talk offline. But don't forget the significant kind of FX impact because of the drop in the pound. So that was a big piece of that. And I have mentioned previously when Peter asked the question, there was an R&D tax credit, which is like $6 million to $7 million that hit as a credit in UK here this quarter. So those two were significant impacts to the SG&A, we'll call it, kind of run rate reduction.

Yes. I think as always, we focus on what we can control. So starting what we can control, we just mentioned the network optimization, where we're taking some small plants, not very competitive and we're investing in some of our biggest plants. So we gain competitiveness there that we are supporting our key customers with both growth and mitigating the inflation. And we're also integrating the back office, and I think that it will help the SG&A for sure. It will help the agility of our business. In terms of how much we are dependent on the improvement of the economy, I think the portfolio of products that we have on the chicken side and on the pork side are really more resilient. And as we saw in the latest number, we were seeing that the consumer has trading down from high end, especially lamb and beef to pork and chicken. So we have a business that is more resilient. In terms of the brands, and especially on the Food Masters, we're seeing some strength in the brands. We continue to invest in innovation, and we continue to improve our products to make sure that we are top of mind with our consumers and with our key customers. We are seeing a trend down in terms of brands to private label in UK, but we also have a big operation in terms of partnership with key customers in terms of the private label.

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

Thank you. We remain confident in the effectiveness in our strategies. The stability and strength of our key customer partnerships have enabled our combined business to navigate unprecedented inflation. Our diversified portfolio provides a broader set of offerings to meet evolving customer needs and customer preferences throughout all regions. In addition, our capital investments and network optimization efforts have increased our agility and flexibility, further enhancing our operational excellence. When these strategies are combined with a relentless focus on team member well-being and leveraging commitment to food safety and quality and our commitment to sustainability. We can navigate a challenging macro environment, mitigate volatile market fundamentals and strengthen our foundation for profitable growth, Thereby creating a better future for our team members and the communities we serve. Thank you for supporting our company.

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