Good morning and welcome to the Fourth Quarter Year End 2020 Pilgrim's Pride Earnings Conference Call and Webcast. All participants will be in listen-only mode. 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. After today's presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Dunham Winoto, Head of Investor Relations for Pilgrim's Pride. Please go ahead.

Thanks, Grant. Good morning, and thank you for joining us today as we review our operating and financial results for the fourth quarter and year-end of December 27, 2020. Yesterday afternoon, we issued a press release providing an overview of our financial performance for the quarter and for the year, including a reconciliation of any non-GAAP measures we may discuss. A copy of the release is available in the Investor Relations section of our website, along with the slides we will reference during this call. These items have also been filed as 8-Ks and are available online at sec.gov. Presenting to you today are Fabio Sandri, President and Chief Executive Officer, Chief Financial Officer; and Joe Waldbusser, Head of Commodity Risk Management. Before we begin our prepared remarks, I'd 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 those factors has been provided in today's press release, our 10-K, and our regular filings with the SEC. I'd now like to turn the call over to Fabio Sandri.

Thank you, Dunham. Good morning, everyone, and thank you for joining us today. For the full year 2020, we reported net revenues of $12.1 billion and adjusted EBITDA of $788 million or a 6.5% margin and an adjusted EPS of $1.02. For the fourth quarter of 2020, we reported net revenues of $3.1 billion and adjusted EBITDA of $205 million or a 6.6% margin, 27% higher than a year ago and an adjusted EPS of $0.25. Last year presented one of the most significant operating challenges across many industries here in the US and globally. I would like to express my sincere gratitude to our global teams for their continued commitment, dedication, and hard work in supporting our ability to keep our team members safe and healthy, while maintaining our ability to produce and supply customers during this challenging time. I could not be more proud of our team as they have continued to come together to support one another, our customers, and consumers. Safety is a condition at Pilgrim's and our team members responded admirably to the unprecedented conditions, supplying products to our customers. We are continuously adapting our global operations to the challenging channel demand while adjusting our operations to be able to maintain the operations at all of our plants and minimize any significant disruptions due to labor and health issues. We remain diligent in implementing precautionary proactive steps to better safeguard the wellness and health of each team member, while fulfilling our essential business duty as a food producer to consumers in every region where we operate. In terms of direct COVID-19 mitigating cost, we incurred roughly $20 million for the quarter and about $100 million for the full year. We're also providing $100 incentive bonds to any US team member who voluntarily chooses to receive a COVID-19 vaccination. The new incentive is designed to ensure that every Pilgrim's team member who wants to get vaccinated can do so as soon as vaccines are made available. Countering the significant challenge of last year, our portfolio strategy has continued to generate superior relative performance, outpacing the competition by delivering a 27% increase in EBITDA for Q4 and solid results for the full year. The results were driven by a resilient business model across all business units, including the US, Mexico, and Europe. The unique challenges presented as a result of COVID-19 have demonstrated the value and strength of our well-diversified portfolio strategy and our ability to generate more consistent results despite specific volatility. Our performance has remained well-balanced and is a result of our vision to become the best and most respected company, creating the opportunity for a better future for our team members. To support our vision, we are continuing our strategy of developing a differentiated portfolio of diverse complementary business models, continuing to relentlessly pursue operational excellence, becoming a more valued partner with key customers, and creating an environment for safe people, safe products, and healthy attitudes. During 2020, our team members remained focused on executing and delivering on our strategy regardless of individual market conditions. While markets were extremely challenged during the first half of the year, we made internal changes to our operations and adapted well to the evolution in market conditions to produce improved operational results in the second half. Despite the volatility, we have continued to deliver strong growth and achieved significant increases in relative performance against industry peers across all of our global operations. The diversity of our portfolio and our global footprint has continued to enhance the consistency of our consolidated results. For the year in the US, our retail and QSR business has performed extremely well due to the strong demand across our customer base. Operationally, our commodity large bird deboning continued to improve despite tough market conditions. Our Prepared Foods business remained resilient considering the challenging demand environment, and the business continues to evolve in anticipation of strong results in 2021, reflecting the investments made over the past few years. Our legacy European operations continued to evolve and we have further strengthened the ability to manage consistency by adopting a model to better mitigate future input cost challenges. Integration of our newly acquired European operations is on track, and the business has continued to contribute positively to our results. In Mexico, the market was very weak in the first half but rebounded strongly during the second half, once again producing very good performance on a full-year basis. For 2021, we will maintain our strategy while continuing to improve the portfolio to be even more responsive to individual market dynamics and increase our relative performance over the competition. We believe this approach will give us higher and more consistent results for the mid to long run and minimize the full peaks and troughs of the volatile commodity segments. During Q4, operating results in Mexico remained strong, while the US was most in line with seasonality, and Europe continued to increase despite the challenges during COVID-19. We are pleased with the results, especially when taking into account the disruption, less than optimal product mix, and added operating costs when compared to the environment in 2019. While market conditions in all our global operations have continued to improve during the quarter, foodservice demand globally still has not reached prior levels, and the environment remains quite challenging in some sectors where we operate. Disruptions from COVID-19 have continued to present a significant challenge on each individual country's demand for protein consumption, as well as the flow of global trade and generating volatility far beyond normal seasonal factors. We believe our portfolio strategy is especially best suited to counter the challenging market dynamics, generate higher and more consistent results for the mid to long run, and minimize the full peaks and troughs of the commodity segment. In the US, although COVID-19 remained challenging during Q4 in certain segments within foodservice, outside of those sectors, market conditions were mostly in line with typical seasonality. QSR volumes continued to be robust, and demand from our customers has been outperforming the industry as well as our expectations. Outside of QSR, demand from industrial foodservice customers was stable, but still below last year, and we do not expect volumes to return closer to prior levels until the population is more widely vaccinated. Similar to last quarter, commodity large bird deboning faced the most challenges during Q4. Operationally, however, we continued to improve our relative performance versus the industry across all business units, despite an increase in staffing challenges during December. We continue to adapt to the change in channel demand by increasing our volume mix to key customer retailers. Also, a large portion of our foodservice customers are also within the QSR segment, further offsetting the impact across our fresh business units. Our ability to offer a portfolio of differentiated products along with our key customer model are providing us better insulation against the volatility. We are also much better positioned to adjust production and channel mix, given our presence across all bird sizes from small to large. Despite challenging conditions for small birds within the traditional foodservice distribution, our demand continues to be strong driven by our key customers’ outperformance within the QSR and Retail and Deli. Our online volume for Just BARE brand case-ready remained strong and was up 230% in 2020, higher than the 57% increase for the previous year, and was more than five times the volume shipped during 2018. We're also gaining more brick and mortar retail distribution for our fresh Just BARE brands. Our market leadership in these categories and more differentiated product portfolio have continued to strengthen the growth of our competitive advantage versus the industry. While the commitment to our key customer strategy has been reflected in the consistency of our past results, the value of this approach has never been more relevant to our growth than during the current times of great uncertainties and challenges. To further support the growth of key customers, in 2020 we announced a couple of projects to further support our portfolio and differentiated products. We are doubling our case-ready capacity at our plant in Cold Spring, Minnesota, while also raising the mix of more stable margin case-ready products. We're also increasing production of our differentiated higher attribute Just BARE brand products by 20%. In addition, we are converting one of our commoditized large bird deboning facilities to better support strong demand from a key customer QSR in the much more stable small bird segment. The long-term relationships we have with key customers are giving us more opportunities to sustain our volume increases, since these customers rely on us to satisfy their need for growth. Many of our key customers maintain a leadership position in their respective categories. As a result, we are direct beneficiaries of the ability to outgrow the competition. Beyond driving pure growth, our key customer strategy also promotes trust, enhances long-term relationships, and strengthens our margin structure. In the US Prepared Food business, revenue declined 22% on 29% less volume year-over-year. Most of the volume decline was driven by schools that remained closed, partially offset by strength in retail consumer packages. The remainder of the volume declines were driven by the challenging foodservice and retail deli categories. We improved our sales margin rate by 36% by better optimizing the mix in foodservice and retail channels. In Q4, we shipped to new retail distribution channels in both our Pilgrim's brand and our Just BARE brand. Recently, we also introduced the Just BARE lightly breaded chicken breast to the market, and those sales exceeded our expectations in Q4. We are really excited about this differentiated product and the consumer response we are getting has been very positive. By simplifying our product portfolio to focus on growing our retail and foodservice branded mix, we have improved buying cost rates by 5%. At the end of Q4, industry supply was in a more favorable position than the close of Q3. Inventory was down 12% from 2019 and 3% lower to the close of Q3. Dark meat combined supplies were down 20% while paws were down 18% year-over-year. US exports of broiler meat and paw exports grew 6% for the year. In fact, paw sales for the industry were up 29% year-over-year from 2019, and all other measurable growth occurred in ASF impacted Southeast Asia. Mexico was still the largest market for US poultry and closed the year with a respectable 2% growth. In contrast to US exports, Pilgrim's exports outperformed and grew by 14% year-over-year, and we continue to be positive on our export potential for 2021. Stronger oil prices, a weaker US dollar, limited chicken inventory, and ASF in Southeast Asia are very impactful to global demand. In addition, high path AI continued to constrain most of Europe, restricting their supply and hampering their ability to export to those markets in which we compete. At the beginning of 2021, leg quarter prices increased by more than 10% versus Q4, which is very positive. Although China seems to be recovering a little faster than expected, there is still great demand for protein imports into China, and we cannot overlook the new ASF strain in China, which may be impacting the leader size products by their breeding stock. Despite reports of China curtailing some of their key volume imports of US dark meat due to logistic issues from COVID-19 testing on imported frozen foods, the rest of the world market pricing has counterbalanced some of the impact, and it has accelerated beyond our near-term expectations, primarily due to very robust demand from other developing countries. Regardless, we do believe that China will continue to be a large importer of US dark meat and paws and we should see this pool strengthening in Q2 of this year. All of these factors point to an increasing market for Pilgrim's and US exports. After a very challenging first half of 2020, our Mexican operations have continued to rebound strongly and deliver great results in the second half, including Q4, to finish the year similar to prior years. We adopted the operations well to generate strong performance despite volumes that were slightly lower than the same period in 2019, but higher than Q3. More normalized economic activities, continued good supply-demand balance in the market, and our increased share of low-commodity products, few imported chicken, and very good operational performance all contributed to the strength. We expect overall demand to continue to be solid while we remain agile and are continuing to adapt our facilities by shifting production to those channels that are experiencing better relative demand. Demand for Prepared Foods in Mexico also improved with volumes recovery, and we are currently experiencing better demand than pre-COVID. We remain committed to the long-term growth and demand prospects in Mexico. We are continuing to invest in our Del Dia, El Mesa, and premium Pilgrim's brand, both in the prepared and fresh markets, as well as seeking more market share in the modern channel, which will bring more stable margins to our operations. During Q4, our legacy European business delivered an EBITDA marginally below last year, driven by lower volumes, mostly due to the impact of the COVID-19 second lockdown on our foodservice volumes, which previously showed good recovery due to the implementation of drive-throughs, takeaways, and home deliveries. In addition to the reduction in volume, we also faced higher direct COVID-19 costs due to higher absenteeism, testing, and protecting the health of our workforce. Also impacting us in Q4 were higher feed costs, mainly due to the wheat, some of which will be included in our pricing starting this quarter with the remainder in Q2, reflecting a more responsive input cost mitigation model along with costs relating to AI outbreaks in Northern Ireland. For the full year, we reached an EBITDA that was 6% higher than the previous year, reflecting the strength and consistency of our business model, despite the significant hit of COVID-19 to our business profitability, which reduced our volumes and revenues by roughly 10%. Year-over-year results were driven by improved performance in our operations and agricultural sites, supported by CapEx and great execution of projects directed to higher efficiency and yields, as well as strict controls around our SG&A costs. Our relative performance to the industry across the last 12 months continues to show us outperforming the competition in Europe. Looking ahead to the next quarters, we anticipate an increase in feed costs and the foodservice pressure starting to improve with lockdown gradually easing, as the UK is currently already 12% vaccinated, but our pricing models are resilient along with the SG&A reductions, continued operational performance improvements, and our ability to adapt quickly to market changes should provide the support needed to mitigate the headwinds. We continue to be relentless in investing in innovation, delivering labor and yield improvements, driving better efficiencies, managing our cost base, and up-selling cost increases through lean manufacturing techniques and capital investments around automation and process flow, without sacrificing the health and wellbeing of our team members, which remain a condition of our operations. We're committed to delivering the safest work environment possible, improving the quality of our products while achieving our sustainability agenda and bird welfare targets. The performance of our newly acquired European operation has continued to improve with EBITDA on a positive momentum. We have not been profitable on an EBITDA basis for the last seven quarters in a row with margins also increasing in our consistent space. The improvement in performance was driven by robust demand at retail, partially offset by a reduction in foodservice, continued strength in pork exports, especially to China as well as the implementation of operational improvements and capturing of synergies. Export to China remains strong and we were up 52% in Q4 and up 88% for the full year during 2020. We also continue to evolve in our strategy and have delivered double-digit growth with our retail key customers during 2020. Integration of the new European operations is on track to expectations. Over the next few years, we expect to generate an EBITDA improvement to achieve a level that is competitive with leading companies with similar portfolios. We have expanded our distribution capability for the newly acquired European assets, strong through some recent wins to increase our retail exposure and strengthen our partnership with Key Customers. Our key customer strategy is working well as expected and has increased our volume by strong 17%. In Q4, our brand new refurbished site in Bromborough became fully operational for our retail packing business. We have invested in state-of-the-art food manufacturing technology with high levels of automation to serve our key customer and to further de-emphasize the proportion of commodities sales. Primo pork slicing, sausages, and value-added products will give scope for further growth and expansion in the future. We are optimistic about building upon our operational improvements by continuing to optimize our manufacturing footprint, extract best in-class operational excellence, capitalize on export opportunities, optimize the portfolio of channels, segments, and products as well as strengthening our goal business with key customers to drive innovation in value-added and higher margin areas. We have a great team in Europe dedicated to generating the best possible relative results by focusing on the factors within our control, while ensuring and protecting the safety and health of our team members. Turning to feed, corn prices have continued to move higher as the market sees lower projections for US corn stocks from USDA. In the January crop report, USDA lowered US production by 225 million bushels, resulting in an expected carryout of 1.5 billion bushels. We have also seen large export demand from China recently, which continues to support the USD projections for a 46% increase in exports from last year. Also, in the last crop report, USDA lowered their projected soybean carryout to 120 million bushels, the lowest expected carryout since 2014. Much like corn, large export demand to China has been a big driver in the lower stock projections. Looking at crops in South America, we have seen much better rainfall recently in much of the main growing regions of Brazil and Argentina, which is increasing our confidence in the size of corn and soybean crops. We believe these crops will help replenish global supplies later this spring and take pressure off the US, as the primary exporter for grain and oilseeds. We also expect farmers in the US to respond to the higher prices with increased acreage this spring, which will help boost supply this fall. The weak USDA is currently projecting an increase in production in stocks this year, with major exporter production increasing over 5 million tons despite the lower European crop. We are very optimistic about the prospect of a rebound in EU wheat production, especially in our main consumption area in Great Britain, where we have seen much better conditions to start the crop this year. According to the USDA, Q4 live weight production declined 1.4% relative to the prior year driven by headcount reductions in small birds. While pullet placement growth fluctuated throughout 2020, Q4 pullet placements were flat year-over-year. This was in line with expectations as the industry transitioned from purchasing enough pullets to fill out new capacity, especially in 2019 and into early 2020, to now maintaining and supporting the previously added capacity that has come online. As for supply, USDA currently expects production to grow by 0.7% versus 2020, much more modest compared to the past several years. It is important to recognize that the supply and demand fundamentals for chicken and the resulting pricing environment will ultimately determine the industry production outcome in 2021. During the transition from Q2 to the beginning of Q4 last year, COVID-19-related restrictions were slowly rolled back with many businesses and restaurants operating under modified environments to protect workers and consumer health. Although businesses have taken steps to ensure consumer safety, many individuals continue to remain at home more often, limiting potential exposure to orders and visiting grocery stores and restaurants less frequently. The foodservice channel has adapted quickly with a greater focus on a more off-premise-driven consumption environment. Despite the return of capacity limitations after the US experienced increased COVID-19 daily cases rate in November, changes implemented by operators to serve off-premise consumption prevented the industry from experiencing the same demand weakness experienced in April through May. In fact, Q4 foodservice demand has been comparable to that of Q3 even after a slight deceleration in demand during November and December. Most notably, the QSR segment continues to lead the foodservice recovery as we capitalize on the shift towards off-premise dining. Even as foodservice performance has improved, the current consumer environment still favors retail. While Prepared Daily demand is still recovering, overall retail chicken demand posted robust growth in Q4, driven by double-digit fresh and frozen dollar sales growth. Moving into 2021, we expect gradual easing of restaurant capacity restrictions and reopening of businesses and events as the population is more widely vaccinated, which will benefit overall chicken consumption across all segments. Since chicken continues to be one of the most affordable and versatile proteins, retail demand is expected to remain above pre-pandemic levels. Despite some volatility, the foodservice recovery is also expected to continue into 2021 led by the highly adaptable QSR segments, while demand in the remaining sectors of food service starts to improve as consumers are able to reengage in more normal activities. Our portfolio strategy is designed to adapt well to challenging macroeconomic conditions while minimizing the impacts from volatile market conditions. While we are already well balanced in terms of our bird size exposure, we remain diligent in seeking opportunities to incrementally diversify our product mix and reduce the commodity portion of our portfolio by increasing the number of differentiated products to key customers while optimizing our existing operations by pursuing operational improvement targets. Our key customer approach is strategic and creates the basis for forward acceleration of growth in important categories by providing more customized, high-quality, innovative products to give us a clear long-term sustainable competitive advantage while further improving the resilience of market fluctuations. Before we turn to the financials, I also want to mention that yesterday we announced Matthew Galvanoni, an executive with more than 26 years of finance and accounting experience with public traded companies has joined Pilgrim's as the Global Chief Financial Officer, effective March 15. Matt previously managed all financial-related responsibilities for the $4 billion North American division of a Fortune 500 global manufacturing company. We are excited to have Matt's considerable experience and expertise added to our senior leadership team and believe he will provide invaluable input in our pursuit of becoming the best and most respected company in our industry. Turning to our financials now. Our SG&A in the fourth quarter was higher versus a year ago, as we improved the efficiencies of our expenses but increased support for the expanding Just BARE brand nationally, and the investment for our new Prepared Food products both in the US and Mexico, as well as the inclusion of the new assets in Europe. Also included in the reported SG&A and some of them in COGS, there are $30 million in bonus accrual and legal fees. We'll continue to prioritize our capital spending plan this year to optimize our product mix that aims at improving our ability to supply innovative less commoditized products and strengthening partnership with key customers, even during these uncertain times. While we continue to evaluate all CapEx projects and defer those we deem non-essential, we reiterate our commitment to investing in strong return on capital employed projects that will improve our operational efficiencies and tailor to customer needs to further solidify competitive advantage for Pilgrim's. Our balance sheet continues to be robust giving our relentless emphasis on cash flows from operating activities, focus on management of working capital, and disciplined investment in high-return projects. Our liquidity position remained very strong with more than $1.5 billion in total cash and availability. We have no short-term immediate cash requirements with our bonds maturing in 2025 and 2027 and our term loan maturing in 2023. During the quarter, our net debt was $1.7 billion, the lowest since 2016, with a leverage ratio of 2.2 times last 12 months EBITDA. Our leverage remains at a manageable level and we expect to continue to produce positive cash flows this year, increasing our financial capability to pursue strategic actions. We expect 2021 interest expenses to be around $100 million to $130 million. We have a strong balance sheet and a leverage that is within our target, which supports us to act on great opportunities during these uncertain times. We remain focused on exercising great care in ensuring that we create shareholder value by optimizing our capital structure while preserving the flexibility to pursue our growth strategy. We'll continue to evaluate all relevant capital allocation strategies that will match the pursuit of our growth strategy and will continue to review each prospect accordingly to our value-creating standards. Operator, this concludes our prepared remarks. Please open the call for questions.

Our first question comes from Ben Theurer with Barclays. Please go ahead.

Fabio, just to follow-up on the US and just to understand a little bit the commentary. So, if we take a look at the roughly $58 million operating income loss and we adjust that with the $75 million settlement, that would bring us just in the US segment a little less than $20 million in operating income, which compared to the revenues of a little less than $1.8 billion is literally just not even a 1% operating income margin. So just to understand a little bit, what else within the quarter that might have impacted the US margin, just to come in a little shy of 1%? Is it the $30 million you've just mentioned with bonus accruals and legal accruals that’s also in there, so we should consider that as well or what is it that derailed a little bit versus maybe what expectations were or consensus was and I myself was trying to come out initially. Thank you.

Sure. Thanks, Ben. Compared to the same quarter last year, we have 1.1% lower volumes, which is in line with the industry. Our plant cost was $14 million higher due to the COVID costs, and our mix was not as efficient due to the inefficiencies caused by the lower availability of labor given the increase in COVID cases in the communities we were in during November and December. To your point, we also recognized $30 million in one-offs and the legal costs and our accrual on bonuses, which is a fundamental step in recognizing the great commitment of our team members to maintain safety.

Okay, perfect. And, just to get a little bit, I mean obviously the environment right now, grain cost is obviously going to be a challenge, but you've nicely elaborated on what you can do and how you're working in between the different bird sizes. Could you talk a little bit about what you're trying to do on the pricing side and you're showing it at least in the commodity side, I mean clearly prices were - the first few weeks of January were - look very promising and higher levels than in prior years, but is that enough to offset the grain cost and what else can you do in order to keep profitability in check?

Sure, thank you, Ben. First, I think we will always refer to our portfolio, right. We are well diversified in terms of exposure to commodity markets and with our production in more stable segments like small bird and the case-ready. Also, every year during our budgets and during our management methods, we identify opportunities for improving in our operations. This year, we identified another $100 million in operational improvements that we will pursue, and all of our team members already detailed plans on how to capture them, so we are always looking for operational improvements to be more productive and also to support our key customer growth. In terms of pricing, on the commodity segments, we are seeing that the current turn out is rising and not only for the big bird and boneless breast, but also across all meat types. Despite this increase, chicken continues to be the most affordable and available protein, and we are seeing an increase in pricing and reduction in availability of the competing proteins, especially beef. What’s happening in the boneless breast category is that we're seeing strong demand, which is outpacing 2020 by more than 9% this year starting in January.

Just boneless, correct?

Just boneless.

Just boneless breast?

Just boneless breast. And then that combined, medium and jumbo production was only 1% up, which is creating a good environment for pricing. But it's not only on the boneless what we are seeing the increase, wings continue to set new highs as the foodservice demand is very well supported by the delivery and the takeout and retail remains strong. The tenders have also been very strong across all segments similar to wings because of the delivery and takeout. I think it's very important too, we're seeing a very strong increase in the back half pricing, which is having some lower supply inventory of dark meat and a weaker US dollar and with the strong oil pricing, it's making some of the oil-dependent countries come back and do some significant buying from the US. So we're seeing strengthening in all meat types on the commodity segment. Combined with that in the other segments, we not only have a portfolio of products, we also have a range of contracts. Some of our products are grain-related, some of our products are cost-plus with grain and other inputs as well, and when we have the contract negotiations with our key customers, we will also discuss the increase in prices due to the increases in the feed.

Okay. Perfect. And then just one quick one if I might squeeze it in. What are you seeing in Mexico in terms of supply coming in? We know that when profitability is as high as it was over the last two quarters, it can be very attractive for some of the more independent guys coming in, but because of the critical COVID situation in Mexico, some of the live markets are still not as accessible. What are you seeing? Are you seeing more production coming in or would you expect profitability to stay at the more attractive levels as we have seen over the last two quarters?

Yes, Mexico is, like I mentioned in every call, right, quarter-over-quarter performance can be very volatile in Mexico given the market conditions, but Mexico has been very consistent on a year-over-year basis, and 2020 was no different, right. We saw extreme volatility during the quarters, but we finished the year in line with the previous year. In terms of supply/demand, I think we reached a level that is a good level of supply and demand. I think the high price of feed is preventing some marginal players, especially the live markets from coming into the market because they buy just the feed comfortably, right. They don't have the very well-diversified portfolio that we have with prepared foods and all segments, and also they don't have the sophisticated hedging and risk management that we have in both the US, Mexico, and Europe. So they are scared by the increase in the feed prices, which is preventing those marginal players from coming in, which is creating an environment of adequate supply and demand there. We expect that to continue. The big question for Mexico is how the economy is going to evolve, especially during the second semester, different than the US. There was not a lot of governmental help, and we saw the big challenge they had in the first semester of 2020. We expect that the economy to start to improve, and as trade between the US and Mexico starts to increase as well with the recovery of the US economy, the Mexican economy will follow suit, and we expect that this available income will flow to the increase in protein consumption in Mexico as we expect in the long run. Once again, the team in Mexico is the true differentiation. They have operational excellence, and we continue to outperform against our competitors.

Okay. Perfect. I'll leave it here. Thank you very much, Fabio. Talk to you later.

Thank you.

Our next question will come from Ken Zaslow, who is with Bank of Montreal. Please go ahead.

Just my first question is, how does this quarter at all forecast or predict what's going to happen for the rest of the year? Is this a representative quarter in terms of US chicken, is this a transitional quarter, how do you define this quarter in terms of how you think about the chicken outlook in light of the higher feed costs and the higher chicken prices, how does this quarter really represent the future?

Yes, thanks, Ken. As we always say, Q4 is never the strongest quarter for chicken, right. We have the Thanksgiving and year-end events that typically favor other types of proteins like hams and turkeys. So Q4 is never the strongest for chicken. What we always see is a rebound from Q4 starting in Q1, with much bigger consumption in the retail, with a lot of features on the retail and also in the foodservice. I think 2021 has started differently than all the years because of the continuation of the pandemic. So we are seeing very strong retail while foodservice has not picked up yet. As what we are expecting for 2021, in January, production is down 1.3% and the USDA's outlook gives the forecast of a 0.7% growth in 2021 in chicken production. We think that this will mostly come from an increased number of heads as we've seen in the small bird category, which saw the most consistent headcount reductions in 2020, rebounding with the return of foodservice later this year. What we are expecting for 2021 is, as the availability of chicken continues to be constrained, demand will continue to increase given the return of foodservice. As I mentioned in the prior question, the unknown is the increase in grain costs, and Joe can talk a little bit about our strategy in terms of hedging, but also the prospects for the new crop. We have a multitude of contracts and we believe that despite this increase, we see that increase in the cutout and the cost initiatives that we are taking, and the increase is that we can have with our key customers that we can count on that will create 2021, which is going to be much better than 2020.

I appreciate it. Thank you guys very much.

Our next question will come from Ben Bienvenu, who is with Stephens. Please go ahead.

This is actually Pooran on for Ben. Just wanted to ask, how are you doing achieving targeted live weights and do you think your live weights could be lower year-over-year given the operational challenges that you saw last year?

Yes, thanks for the question. Well, the overall live weight depends a lot on the portfolio that you're running, right. For Pilgrim's, we are achieving the expected live weights, but our overall live weight will probably be lower because we are converting one of our plants from the big bird segment, which is the commodity segment to small bird segment. That will reduce the - although we're going to increase a little bit the number of heads, we're going to reduce the overall size. So on average, Pilgrim's will probably reduce a little its overall size. I think that is somewhat true to the entire industry as well. In 2020, what we saw was the reduction, especially in the small bird category. As that small bird category comes back in 2021 with the easing of travel restrictions and the return of foodservice, we may see an average bird weight decrease, although we're going to see a little bit increase in heads. We have not seen any issues with our live weight and we expect that to continue with the difference of the portfolio.

Okay, thanks. And then as far as the Tulip business, I wanted to ask about something I read on the press release. We're thinking about Tulip being on track to achieve performance competitive with leading companies in the next few years. I just wanted to see if you could provide a little bit more detail on that. Is that a firm timeline? Is there any upside? Could you get there any sooner? If we could just get your take on that.

Sure. I think with all other acquisitions that we did, which always created a lot of value through the synergies and the integration, especially on the changing of our methodology of opening the gaps or identifying all the opportunities, and then closing the gaps with the methodology that we use. In prior acquisitions, we have always overachieved, and what we expect for Tulip is no different. What we mentioned when we did the acquisition was that we are going to enhance our key customer initiatives and we did that. As I mentioned, we increased more than 14% sales with the key customers, which are more profitable for us and also help our key customers to grow. In the operational achievements, we identified more than £20 million a year in operational improvements in Tulip, which is now Pilgrim's UK, and we expect in the two-year timeframe to achieve profitability close to the leading companies in Europe. I think as we always say, our vision is to become the best and most respected, and that is in line with that vision.

Yes. I appreciate the answers, Fabio. I'll jump back in the queue.

Thank you.

Our next question will come from Michael Piken who is with Cleveland Research. Please go ahead.

Just wanted to dig a little bit deeper into - I know you said you moved one of your plants operationally from big birds over to other segments, more fast food. If you could give an update on your mix, I know historically you've said it's roughly one-third big bird, one-third tray pack, kind of one-third small bird, if you could give an update kind of on how your relative mix between the segments is and what percentage of your business maybe is more on a cost plus or grain-based type contracts versus just spot margins, that would be helpful. Thanks.

Yes. Thank you. That change will not modify significantly the portfolio that we have. It's a relatively small plant, but we will continue to be well balanced. I think we will have now close to 35% on the small bird category, which is a little more than the other segments, but we will still be well balanced. In terms of contracts, like we mentioned, we have a very diversified type of contracts. Most of our contracts are market-based or contract-based, meaning we can negotiate prices because they are contracts with key customers, but we have close to 20% of our contracts in cost plus or grain-based.

Great. That’s really, really helpful. And then I guess just shifting over a little bit, I know you talked about gradual kind of recovery in foodservice this year. I mean are you starting to see signs from some of the bigger distributors that they are looking to take more product or are they kind of sniffing around or I guess maybe are you starting to see orders materialize or is it more just inquiries at this point? And after, would you be thinking about when that demand might start to show up in some of the numbers?

Yes, we're receiving more and more inquiries about it. I think everybody is looking at the overall protein category in the US, and what the distributors and foodservice operators are looking for is on the total availability of protein. So when you look at the USDA numbers, beef availability will be flat to a little bit down for 2021 compared to 2020, and pork will also reduce the increase that they had last year to close to a 1.5% increase. Chicken is no different. The USDA is expecting less than a 1% increase. The overall protein category in the US is going to grow less than 1%, and that is before we see the huge increase in exports that we are seeing in January. If that continues throughout the year, we're going to see a lower availability of overall protein in the US, and then the foodservice operator and distributors are looking for the best opportunities that they have, and chicken continues to be that best opportunity. I think contributing to that is also what people refer to as the chicken sandwich wars. We are seeing the growth of the chicken sandwich continue to have this halo effect on chicken in foodservice and we expect chicken to be heavily promoted in the QSRs, which represents a large portion of our overall chicken service.

Our next question will come from Peter Galbo with Bank of America. Please go ahead.

Fabio, maybe to ask like a higher-level question, as we think about total protein availability in the landscape, right. Chicken at least as we've seen is probably more reliant than beef or pork in terms of needing foodservice recovery to come back, in terms of the exposure of the industry. And I just wanted to see if that premise was fair or that's kind of how you look at it as well internally, but then also, as we think about your ability to realize pricing in 2021 and going forward, the need for foodservice recovery and as we look at those commodity chicken prices that we have access to, how much of that you would typically realize in your results? And I know there's a lot there, but maybe I'll leave it there, and then I have a follow-up.

Thank you, Peter. And once again I go back to our portfolio, right. We have proven that our portfolio can be resilient on the downside of the market because we have the categories of the small bird and the case-ready, which hold price much better than the commodity segment during downturns, but we also have the exposure to the commodity segment. So like I mentioned, we are well balanced. We have exposure to the commodity segment. When the commodity segments are really strong, we can benefit from that with direct and immediate pricing. Regarding negotiations with key customers, we consider a lot of things, right. We take into consideration freight increases, we consider grain increases, and we also look into the forward grain pricing. It's not only the immediate price on the grain but we look into the forward price of grain. That will take place in the negotiations that we have, and we have exposure to the grain contract-related pricing where we will have that. There are some delays on the pricing increases because of the duration of the contracts, but we will benefit from that in the future. Most of all, it is about the resilience of this portfolio and our ability to pass through the prices on the grain with our contract negotiations. I think the overall profitability of the chicken industry will also depend on the supply and demand balance. The industry is expected to grow less than 1% during this year and that is the growth in production. Again, we are seeing a big spike in the exports, which may signify reduction in domestic availability of meat, but despite all that, chicken continues to be a great value to both foodservice and retail.

Okay, now that's helpful. And maybe just two other quick ones. One on interest expense, I just want to make sure I heard you correctly, at $120 million and the second question on Europe, I think you've outlined that there are some operational improvements you've made in 2020 to improve profitability, maybe being offset by potentially lower exports after a very strong export year into 2021. So as we just think about profitability in Europe, is it kind of the case that 2021 should be a similar type year or at least how you're planning for today? Thanks very much.

Sure. In terms of the interest expense, yes, it’s $120 million, of course, we have the 2025 bonds that are callable and going to be callable during 2021. As we are seeing a very positive market, we believe that we will refinance that, and if we refinance, of course this interest expense will lower. We are seeing very low interest in the market right now, compared to that 2025 bond that pays 5.75. I think that will be an important position for us to reduce our interest expense and produce even more cash flow that we can invest in our business. In terms of Europe, I think every year we see operational improvements, we see the benefits of the integration, and in Europe, we are more retail-oriented. We saw an okay market this year and the foodservice was much weaker, but the retail continues to be strong, and we expect that to continue in 2021. We expect our retail business to continue to improve during 2021, we talk about growing with key customers, which reduces their cost as well as our costs, so improves our efficiency. We are expecting 2021 to have better margins in Europe.

Our next question will come from Adam Samuelson with Goldman Sachs. Please go ahead.

I guess my main question just quickly on the Prepared Foods business as we think about kind of that's in 2021 in the K. I think you gave utilization for the Prepared Foods businesses around the world at 68%, but the US business, I know it's been struggling with utilization and profitability for a while. Is that really just dependent on foodservice, institutional foodservice specifically in the US getting better, or have some of the actions you've taken around expanding some of those retail items under the Just BARE brand, kind of putting on a better path there without foodservice? Really just trying to think about the profitability of that component? And then I have a second quick follow-up.

Sure. Thanks, Adam. Yes, our service or our prepared business has a strong position in the foodservice. We have the Pierce brand, which is very strong in the foodservice category, and we also have a very big operation for the school lunch. So I think with the closing of the schools and with the downturn in the foodservice especially what we talk about is the street business that is down close to 20%. Overall foodservice is down 9%, but because QSRs are up close to 8%, but the street business or the foodservice restaurants is now close to 25%, so I think that impacted our business. We were able to counter that with a significant increase in our retail business, especially with Just BARE brand, but it's also with the Pilgrim's brand where we are gaining distribution throughout the year. There was a ramp-up on that to the point that we are almost full in our capacity of fully cooked products as of today. What we expect is the rebound and the return of schools with more mobility in foodservice will significantly increase both profitability and capacity utilization of our prepared food operation. But overall, we have increased the gross margin with the better bottom line on the retail business, especially on the branded side.

Okay, great. And then my follow-up just on the legal settlement, I just want to make sure clear that that's only for the announced settlement with the Direct Purchaser Class. And so I looked at one of your competitors this morning, they settled with all the classes and accrued for the opt-out plaintiff. So is that reasonable to think that there could be some additional accruals over the course of 2021, and kind of concurrent with that, lower legal expenses in 2021 of profitability maybe move through the work, the biggest parts of those litigation?

Yes. As we initially had some increased legal expenses in Q4 that impacted the US, more importantly than that, Adam, is that we are committed to the strongest level where all aspects of our ESG policies, that is, environmental, social, and governance. We're very proud of the commitments on our sustainability report and our recent investments in our Hometown Strong Program, where we are investing more than $20 million in projects that have a lasting impact in our communities for generations to come. We still have only $5 million that we are convinced was only for the direct purchases.

Okay, great. I appreciate it. Thank you.

Our next question will come from Rebecca Scheuneman with Morningstar. Please go ahead.

Good morning, and thanks for fitting me in. So first, as we look at 2021, there are obviously a lot of different puts and takes compared to 2020. We have higher grain prices, we also have a recovery in foodservice. Just kind of at a high level, I'm just kind of wondering how margins in 2021 are going to look compared to 2020. I believe you said that it should be higher directionally, I'm not sure if you're referring to each region or was that just the US.

Yes. Thank you. I think we should start talking a little bit about the way we treat our hedging policy or risk management in terms of mitigating the grain increases for 2021. I think Joe can help us with some of our policies and how we see this risk management.

Thank you for the question, Rebecca. Obviously, we've seen higher corn and soy prices really since late last summer, early last fall and it's been a combination of a few things: it's been the reduced supply, it's been bigger than expected demand for US exports, maybe in China. So we do see higher risk today for both the corn and soybean supplies out of the US. We probably alluded to the increased acres coming from higher prices generating more incentive for the farmers. We expect somewhere around a 9 million increase in acres of corn and soybeans next year, which should help those supplies in the fall. That being said, obviously with the higher risk in the balance sheets for corn and soy, we've said on our calls previously, we have an adaptive risk policy and it's measured against the risk we see in the market, and we have that position on today.

We managed the risk on the cost side. Like I mentioned, we have plans in place to capture the operational opportunities as we do every year, and we are very focused on this operational excellence, and all of our teams pay a lot of attention to improving our operations, which helps our customers and helps our bottom line. At the end, we also mitigate the increase in grain prices, with our portfolio of products and contracts. So, we have cost-plus and the grain-based contracts that help us mitigate that as well, and we have customer relationships, where we share the discussion about pricing, to help them be competitive, but also help the company to continue to grow and support their further growth. What we are seeing on the commodity segments is a great recovery in terms of pricing with the very positive supply demand and on the international markets, when we are seeing great pull for US products, which are very competitive in the international markets. We are seeing the issues with grain that we are mitigating with our policies and we are mitigating those price increases through our portfolio of products as well.

Great. That's good to hear. And then for my last question, I'm just wondering if you could provide a little update on staffing at the plant, if you're still experiencing a lot of absenteeism or if plants are staffed adequately, and related to that, if you expect wage inflation in the coming year? Thank you.

Yes sure, Rebecca. Yes, we saw in November and December as a consequence of the increase in the number of cases in the United States, that the plants started to have more staffing issues. I think it is regional or local. We have 33 plants across the United States and many others throughout the world and it's very local. So it was not anything widespread. Even with the wage increases, the approach that we have is always to be very specific to the local communities and identify the competitiveness of our regions in the local communities where we are inserted. So we are seeing some staffing challenges, especially during Q4. They are improving now, and we expect those as the vaccination continues, and we see as essential workers being vaccinated. We are seeing a reduction in that and we expect all of our plants to be fully staffed during Q2.

Great, thank you so much.

This will conclude our question-and-answer session. I would like to turn the conference back over to Fabio Sandri for any closing remarks.

Thank you all. We would like to reiterate our continued commitment to our valued team members to provide them with a safe and healthy work environment while supporting our duty to maintain food production and supply to customers. We're looking forward to 2021 and expect better results in spite of volatility. Our diverse portfolio of differentiated products tailored to support our key customer strategy in conjunction with our broad geographic footprint will continue to generate consistent performance and minimize margin volatility in challenging market conditions relative to competitors. We will continue to seek new growth potential, both organically and through acquisitions, and offer even more differentiated products within our business to support key customer needs by cultivating a culture of constant innovation. We would like to thank everyone in the business family, including our family farm partners, suppliers, and our customers, who make our business possible. As always, we appreciate your interest in our company. Thank you very much.

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