Good morning, and welcome to the Second Quarter 2021 Pilgrim's Pride Earnings Conference Call and Webcast. 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 company's investor website at ir.pilgrims.com in the Events and Presentations section. I would now like to turn the conference to Julie Kegley of Financial Profiles for Pilgrim's Pride. Thank you, and over to you.

Good morning, and thank you for joining us today as we review our operating and financial results for the second quarter ended June 27, 2021. 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 slides for reference. These items also have been filed as Form 8-Ks and are available online at www.sec.gov. Presenting on today's call are Fabio Sandri, President and Chief Executive Officer; and Matt Galvanoni, Chief Financial Officer. Before we begin our prepared remarks, I would like to remind everyone of our safe harbor disclaimer. Today's call may contain forward-looking statements that represent our outlook and current expectations as of the date of this release. Other additional factors not anticipated by us 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 Form 10-K and in our regular filings with the SEC. I'd now like to turn the call over to Fabio Sandri.

Thank you, Julie. Good morning, everyone, and thank you for joining us today. For the second quarter of 2021, we reported net revenues of $3.6 billion and adjusted EBITDA of $372 million, or a 10.2% margin compared to 4% a year ago, and an adjusted EPS of $0.63 per share. We are extremely pleased with the results of our core business during the quarter. Although the pandemic continued to affect our business, our second quarter revenues and adjusted EBITDA grew significantly versus the prior year. More importantly, our U.S. and Mexico revenues and adjusted EBITDA surpassed second quarter 2019 results. The results were driven by a resilient business model across all business units, including the U.S., Mexico, and Europe. The unique challenges of COVID-19 presented an opportunity to demonstrate the value and strength of our well-diversified portfolio, including our presence in multiple geographies and our ability to generate more consistent results despite specific market volatility. We remain guided by our principles of an uncompromising commitment to the safety of our team members, our ability to provide high-quality food globally, and our responsibility to provide continued employment opportunities and benefits for our team members during these dynamic times. We have offered employment incentives and bonuses to those who receive the vaccine. We adhere to safety protocols that exceed standards, and coupled with high vaccination rates at our facilities, we are creating a work environment where employee safety is paramount. We thank the governors and other state authorities in many of the locations where we operate who have supported the vaccination of our workforce. Labor availability continues to be a significant challenge for us due to pandemic unemployment benefits that are still available in some states and Brexit impacts on the labor market in the U.K. Although we are gaining ground in the U.S., labor shortages continue to affect our product mix by limiting our ability to produce higher value products. I believe the labor challenges will further stabilize in the third quarter in the U.S., with the U.K. labor market improving towards the end of the year. In the U.S. market, COVID continues to affect where people eat and how they buy their food. Retail remained strong, although it was down slightly from a very strong Q2 2020. Retail value gained ground from the first quarter, benefiting from a slight increase in average trips per week. Although not at pre-COVID levels, shoppers are starting to feel more at ease going into stores. Food service in the U.S. is seeing a rapid recovery as most restaurant restrictions were eased in Q2, and consumers' increased mobility has driven demand back above 2019 levels. There were fewer than anticipated commercial restaurants closed, driving demand as purchases per operator increased. Food service demand is expected to taper after the initial surge of pent-up demand and summer travel comes to an end. Retail demand is expected to ease, although it will remain above 2019 base levels as consumers keep freezers and pantry stocked. The non-commercial channel is expected to remain below 2019 levels until a new school year begins. We have adjusted volume and mix between channels to adapt to changing consumer demand, whether that’s foodservice making a comeback or retail consumers shifting between curbside pickup and in-store shopping. We are well positioned to adjust product and channel mix, given our presence across all bird sizes from large to small. Commodity large bird deboning continued its momentum from the first quarter and generated the largest profit improvement year-over-year. This volume, revenue, and profit growth was driven by support from foodservice and a strong export market. The continued strength in the third quarter in this business is evident, and we continue to see momentum in foodservice reopening. Our case-ready business delivered volume and revenue growth versus the prior year, especially due to the increase in grain and labor input costs. We have implemented price increases and operational improvements to address a significant portion of these cost headwinds and continue to partner with key customers to deliver both growth and value for them. The reopening trajectory of foodservice, strong QSR demand, and retail daily improvements drove year-over-year and sequential increases in our small bird volumes, revenues, and profitability. We see continued strength in this business unit with a further improvement in foodservice reopenings and the strong demand for QSR key customers. Our U.S. Prepared Foods sales volume was up 3.5%. Operational performance improved year-over-year despite increases in underlying raw material costs, and our branded retail growth has been extremely strong, driven by investments in our Just BARE and Pilgrim's brands. Our consumer packaged foods experienced over 200% growth in the second quarter. In addition, we have added branded distribution in major retailers where we previously didn't have a presence. In the second quarter, according to USDA data, the U.S. chicken supply increased 2.4% year-over-year, lagging significant production declines in April 2020. Despite the increase, growth appears to be constrained due to poor hatchability. A comparison of our FDA statistics for egg hatch versus chicks placed illustrates the shortfall in hatching. Commodity pricing across all cuts has remained consistently strong, trending near the top or above historical ranges. Whole Food pricing remains stable also near the top of historical ranges. Corn prices increased during the quarter as the market focused on expected low corn crop ending stocks and smaller-than-expected new crop planted area. In the latest report, USDA reported crop ending stocks at 1.1 billion bushels, the lowest level since the 2012-2013 crop year. In June, the planting intentions report, USDA reported new crop planted area at 92.7 million acres, although an increase of almost 2 million acres from last year, it was below expectations. The FDA is projecting new crop ending stocks could increase to 1.4 billion with a production increase of nearly 1 billion bushels from last year. Given the strong export demand we are seeing for corn, we believe the market will remain very sensitive to weather changes for the balance of the summer with relatively low old corn crop stocks. Unlike corn, soybean meal prices have been under pressure since last quarter, weighted down by higher-than-expected domestic production. Soybean oil prices have increased sharply since the first quarter, causing higher processing rates, which resulted in the oversupply of soybean meal in the U.S. The FDA is forecasting old crop ending stocks at 135 million bushels, the lowest level since the 2013-14 crop, and a modest increase of 155 million bushels for the new crop. Despite the relatively low soybean carryout, soybean meal prices remain moderated by the increased value of soybean oil, driven by the growing demand for renewable diesel. We expect to see relatively good supplies of domestic soybean meal as a result of renewable diesel initiatives despite a relatively low soybean carryout. Looking at wheat, we expect a large rebound in production in Europe this year, including more than a 50% increase in the U.K., our largest sourcing region. Combined with large supply increases in other exporting countries, we feel very good about the wheat supplies heading into the fall. As we have said previously, our risk management approach is adapted to the conditions and risks we see in the market, and we feel very comfortable with our current strategy based on the risks we see in the market today. Our U.S. business has managed increased labor costs and higher and more volatile grain prices through the benefit of a strong cutout and increased pricing to our customer base, to recover these higher input costs. While effective operations are helping to control costs, following our strategy of a diversified portfolio and balance of cost-plus market and fixed price contract structures provides us the platform to manage through the volatility of our input costs. At the close of Q2, industry chicken inventory was relatively flat to its position at the end of Q1. However, USDA indicated inventory was down 15% from previous years even after a marginal movement over a marked increase in June. Combined dark meat inventories are down 10% year-over-year. Quarterly inventory levels have been unable to build despite year-over-year supply growth as healthy retail and food service demand have maintained a consistent draw on supply. Turning to export markets, pulp prices were 54% higher in Q2 compared to a year ago. Both pricing and demand exceeded expectations and nontraditional export items were upgraded from frozen inventory. While the data is still incomplete for Q2, total broiler export sales for May grew by approximately 4%. From a regional perspective, the industry enjoyed gains in most geographies with the exception of the Middle East and Asia, where significant declines occurred due to COVID issues in some of the larger poultry importing countries. It's also noteworthy that China was down 16.5% on imports of U.S. broiler meat due to a softer pork market. Pork congestion issues and larger-than-expected imports of poultry in Q4 2020 have impacted this. That being said, the pork market in China is displaying very strong demand and historically high prices. Export numbers indicate a more balanced trade scenario for the remainder of the year. Although some countries have experienced a resurgence of COVID issues, others are managing the pandemic well. We expect ongoing issues to improve in the second half of the year. It's still prudent to recognize that dark meat shipments to China are very low relative to last year, which bodes well for future dark meat demand. We are already seeing an uptick in China demand for U.S. products as we enter Q3. Our Mexican operations delivered strong results in Q2 given a well-balanced supply-demand equation. Our fresh business continued to improve its efficiency, while Prepared Foods saw double-digit growth, encouraging very strong performance in the QSR and foodservice channels. We continue to invest in our Pilgrim's, Del Dia, and Alamesa brands and we expect chicken and Prepared Food consumption to continue to grow in the coming years. Our Mexican team continues to be relentlessly focused on delivering exceptional operational results. Moving to Europe, the Moy Park business has continued to produce steady results despite rising grain prices through the first six months of the year. Moy Park delivered an improving EBITDA sequentially in the first summer quarter. The price formulas have partially addressed the increase in feed costs. However, along with grain costs, other operating costs like labor and utilities continued to climb during the quarter. We continue pursuing the recovery of these costs in the second half of the year. We continue to be pleased with Moy Park's relative performance to the industry over the past 12 months. Issues arising from Brexit such as mix changes and labor shortages along with seasonal influenza consequences affect our ability to export some of our dark meat production, impacting results. Moy Park was able to mitigate some of the severe feed and other cost impacts through further operational excellence initiatives that continue to deliver labor efficiencies, better agricultural performance, and improved yields while maintaining tight control over SG&A costs. We have seen consistent improvement in Moy Park foodservice sales as this sector showed significant recovery year-over-year despite COVID-19 restrictions experienced throughout the second quarter. Although under continued cost pressures, Moy Park's performance is improving, and we expect it to continue to improve as feed costs stabilize, COVID-19 costs decrease, and restrictions are eased. The Pilgrim's U.K. business has been negatively impacted by increased grain costs and extremely low prices due to African swine fever in Germany, which negatively impacted exports to China, backing up supply in Europe. This business is benefiting from operational execution, but improvements are outweighed by sluggish pricing in the U.K. Despite market challenges, including worsening labor availability in the U.K., we have now been profitable on an EBITDA basis for the last nine quarters in a row. During Q2, our year-over-year retail volume declined as the retail market fell compared to last year as foodservice normalized and category sales began to return to pre-COVID levels. Our year-over-year volumes to China also decreased due to the continued suspension of our export licenses at two plants as a result of COVID-19. We expect the licenses to be reinstated later this year; however, total sales volume showed a 2% growth, while the decline in retail sales was compensated by sales into the foodservice market. We are optimistic about building our operational improvements by continuing to optimize our manufacturing footprint, extracting best-in-class operational excellence, capitalizing on export opportunities, optimizing our portfolio, and strengthening and growing our business with key customers to drive innovation in value-added higher-margin areas. We have a great team in Europe dedicated to generating results by focusing on factors within our control while ensuring and protecting the safety and health of all team members. To further strengthen our portfolio in the U.K. and our relationship with key customers and to continue executing against our growth strategy, we signed an agreement to acquire the Meats and Meals business of Kerry Consumer Foods. The Meats and Meals business acquisition will position Pilgrim's as the leading food company in the U.K. and Ireland with a value-added protein and Prepared Foods business anchored by a portfolio of strong brands. With 2020 sales of more than GBP 725 million and 4,500 team members, this business’ well-balanced portfolio of products, brands, and consumer base aligns with our growth strategy. This acquisition will support our strategy of developing a differentiated portfolio of diverse complementary business models, continue to relentlessly pursue operational excellence, and becoming a more valued partner with key customers. With new and innovative products, we aim to create an environment for safe people, safe products, and healthy expectations. We expect to transition this transaction to close early in the fourth quarter of 2020. Finally, I would like to point out that we recently released our 2020 sustainability report, which includes the five-year results of our 2015 sustainability goals and aggressive new global targets that will guide our sustainability strategy over the next decade and beyond. The report details the company's progress in key priority areas: animal care, team members, environment, communities, customers, consumers, and suppliers across our operations in the U.K., Europe, Mexico, and the United States. Pilgrim's has established ESG as core to our business strategy, adopting industry-leading initiatives that build on the company's long-standing commitments to sustainable food production and differentiated social initiatives. Pilgrim's is the first major global meat and poultry company to offer a sustainability-linked bond tied to efforts to reduce greenhouse gas emissions intensity across its global operations. In addition, we committed to achieve net-zero greenhouse gas emissions by 2040, the most ambitious commitment of its kind in our sector. We are committed to being the best and most respected company in our industry, and we want to serve as a leader that can help drive the entire supply chain forward. We remain focused on producing high-quality foods for people around the world in a sustainable manner that is both ambitious and collaborative while creating opportunities for a better future for our team members. With that, I would like to ask our CFO, Matt Galvanoni, to discuss our financial results.

Thank you, Fabio, and good morning, everyone. For the second quarter of 2021, net revenues were $3.64 billion versus $2.82 billion a year ago, with an adjusted EBITDA of $372 million and a 10.2% margin compared to $112 million and a 4% margin in Q2 last year. We achieved $154 million adjusted net income, which includes the discrete income tax charge in the quarter of $32 million associated with the U.K.'s increased statutory income tax rate from 19% to 25%. We reported a GAAP net loss of $167 million versus a loss of $6 million in 2020. The most significant adjustment in the quarter was a $396 million accrual related to legal settlements. Adjusted EBITDA margins were 10.5% in the U.S., 18.9% in Mexico, and 5.2% in Europe. Our adjusted EBITDA in the U.S. in Q2 was $237.1 million versus $93.7 million a year ago, and $236.4 million in 2019. Sales were up due to strong market pricing and slightly higher volumes compared to both 2020 and 2019. Gross profit margins were higher than 2020 due to significant COVID-19 impacts last year; however, were down compared to 2019 due to higher grain costs and labor inefficiencies. In Mexico, adjusted EBITDA in Q2 was $85.7 million versus a loss of $27.7 million a year ago and a positive $75.8 million in 2019. Net revenue was up due to higher market pricing and slightly higher volumes. The Mexican business has benefited from a balanced supply-demand dynamic. From linked operations, adjusted EBITDA in Q2 was $33.5 million versus $34.7 million a year ago and $37.3 million in 2019. Pilgrim's U.K. had adjusted EBITDA of $15.7 million in Q2 compared to $12.3 million a year ago. Volumes have continued to improve during the year with the gradual reopening of the U.K. and European economies. However, gross profit is down year-over-year as we've been able to pass through some but not all of the grain cost increases experienced in the first six months of the year. In total, we incurred COVID-related costs of approximately $12 million in the second quarter of 2021. This is a decrease of approximately $37 million compared to the prior year. Overall, our SG&A in the second quarter was higher than the prior year, primarily due to legal costs associated with various U.S. litigation matters and increased investment in our brands. We will continue to prioritize our capital spending plans this year to optimize our product mix and strengthen our partnership with key customers. We reiterate our commitment to invest in strong ROCE projects that will improve our operational efficiencies and tailor our operations to address key customer needs to further solidify competitive advantages for Pilgrim's. Our balance sheet continues to be robust given 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 remains very strong, with more than $1.25 billion in total cash and available credit. At the end of the quarter, our net debt was $1.8 billion with a leverage ratio of 1.6x last 12 months adjusted EBITDA. Our leverage is below our target ratio of 2 to 3x, and we continue to expect to generate strong operating cash flows this year. We expect 2021 interest expense to be approximately $110 million, exclusive of the debt extinguishment costs of $24 million we recorded in the second quarter and any interest expense associated with the pending Kerry transaction financing. We'll stay focused on creating shareholder value as we optimize our capital structure to continue executing our growth strategy. Our capital allocation strategies remain aligned with our growth strategy, and each opportunity will be evaluated against our value-creation standards. Operator, this concludes our prepared remarks. Please open the call for questions.

First question is from the line of Ben Theurer from Barclays.

Yes. Perfect. Congrats on the results. First question, just could you elaborate a little more in detail on that close to $400 million for litigation settlements? Because if I look at it on an LTM basis, we're now close to like $600 million, of which a lot was like the price fixing last year. But just to understand, if the incremental $400 million from the last quarter, is that already all settled in cash? Or is a lot of that like just in order to be prepared if there is more to come? And do you think this is it? That would be the first question.

Yes, we can't comment on active investigations and litigation. However, the company continues to cooperate with the Department of Justice on its investigation and will continue to defend against the claims and to resolve its material litigation in a manner that we believe is in the best interest of the company and the shareholders. Based on that, that is a combination of actual settlements and accruals that we expect to happen.

Okay. So it's not all with an actual settlement as there's partially as accrual?

No.

Okay. That's good. Now, regarding the U.S. market, the underlying performance is clearly on an upward trend, and it seems you will begin to implement pricing increases along with a potential easing of costs. However, you've pointed out challenges such as labor shortages and other cost-related issues. How do you assess the current quarter and what comes next, particularly once the benefits of improved labor availability take effect and you become more efficient at your facilities? How do you see profitability evolving in the second half based on the current market conditions?

Yes. Thank you. It's a long answer, Ben. But on the pricing and contracts, we have this differentiated portfolio. I've been talking about this for years, right? That protects us from the downside, and we have exposure to the commodity segments that enable us to capture upside in the market. All of these different segments are behaving differently during the last year, to be honest, right? So commodity is really strong right now, and we are seeing a strong demand in the foodservice that is growing really fast, while retail continues to be strong. So as of today, the commodity segments are way more profitable than all other segments. The small bird segment has continued its strength with the growth of the QSRs. But the contracts that we have in those segments are more connected to grain pricing, and that profitability is very stable. So we have a very stable part of our portfolio and a part of our portfolio that is really connected because commodity prices that we can achieve the results that we are achieving. Going forward, what we are seeing in the market is that retail will continue to be strong. I think consumers are back to older habits of more trips to the grocer, which will help the daily section. So retail continues to be very strong. And the foodservice is reopening. I think today, we are seeing that traffic is close to only 6% lower than the pre-pandemic levels. So a very good level of affordability. While the non-commercial part of the food services is still 29% to 30% down. And we expect the schools to reopen very soon for the next year, which will boost the foodservice industry. So going forward, we continue to expect or we expect to see retail continue to be strong and the commodity segments to be really demanded given the extra increase in the foodservice.

The next question is from the line of Ben Bienvenu from Stephens.

I want to ask first about the grain side of things and the feed cost. And then my second question is about Mexico. So on the feed side of things, I appreciate your commentary on the current. I noticed in your disclosures that you're not overly hedged from derivative coverage exposure, but you are as hedged as you've been in a few years. And so I'm curious kind of your thoughts around how you're positioned relative to the market? Any commentary you could provide on basis exposure as well? And what we should be considering relative to your positioning around all of that as we head into the back half of the year?

Sure. Thank you, Ben. Well, like we said previously, our risk management strategy is adapted to the risks we see in the market, and we feel very comfortable with where we are positioned right now. What we are seeing is that we are following the summer crop developments in the U.S. very closely, given the low stock situation we have for both corn and soybeans. While there have been some areas that have been drier than we would like, particularly in the Western Corn Belt, we think overall, the U.S. crops are in an okay condition now, but require additional monitoring, for sure. In addition to the condition in the U.S. crops, and despite some volatility and recent cancellations, we are still seeing strong demand for corn and expect that to continue in the next years. Given all that, we're looking at an increase in feed cost of approximately $300 million in the U.S. for the second semester, with Q3 being impacted the most. While we are seeing that impacting our cost around $0.08 per life pound, the commodity pricing and even the normal pricing and the cutout has increased by significantly more than that, almost $0.30. So the commodity pricing has been able to offset these grain prices so far. Our position, as we mentioned, is not the largest we've ever had as we are monitoring all these costs, and we believe that we have the right position right now.

Okay. That's great. My second question on Mexico. Congratulations on the solid results. I'm curious just given that, that market can be incremental from quarter to quarter what you're seeing so far in the third quarter, you noted a stronger economic environment, more balanced supply and demand, better product mix on the non-commodity piece of your business. Maybe just any color you could give as we look to the back half of the year on that business?

Yes. Temperamentally, it's a good time now. Thank you for that. We know that quarter-over-quarter, the performance can be very volatile. What we are seeing in Mexico is that we have a well-balanced supply and demand scenario right now, and we expect that to continue in Q3. Our fresh business continues to improve its efficiencies. And while the Prepared Foods saw a very strong double-digit growth anchored in a very strong performance in the QSRs and service channels. The economy is recovering well. We are watching the COVID cases pretty close right there, but we don't expect a major impact in the current positive recovery trend of the economy. Our key members and our team continue to be focused on delivering these operational results and committed to supporting the growth of the Mexican economy.

The next question is from the line of Michael Piken from Cleveland Research.

Just wanted to talk a little bit more about the hatchability issues within the industry. When do you see that improving? And how is your hatchability doing? And what steps are you taking to improve that?

Yes. Thank you, Michael. Yes, hatchability has been an issue in the industry, and that is constraining the industry from exceeding the growth that everybody is expecting, which is less than 1% for 2020. The main reason for the hatchability issues is that when we try to solve the blotting breed issue, as you remember, two or three years ago, the genetic selection of this new breed prioritized quality, feed conversion, and carcass utilization rather than reproductive traits. So even with the larger flock that we are having right now, it is producing fewer eggs and fewer eggs are hatching. Some of that can also be explained by management. We expect that we can manage better around making a recoup of 0.5% to 1%. The gap today is close to 2.5%. So 0.5% to 1%, we believe that we can recoup with better management of this new breed. But the rest will take a much longer term because we will need a breach.

Great. And then shifting gears. You talked a little bit about the adverse mix effects. And maybe if you could talk about the steps you're taking or your thoughts on automation and how much that might play into your future plans? And do you have any projected CapEx spending related to that, if you are going to go to more automation?

Sure, sure. And again, like you said, the labor market is really tight. And it has been constrained not only by the impact of discontinued governmental benefits but now what we are seeing is the reopening of the economy after COVID putting big competition for a very small labor pool. As we mentioned, we are considering all options. We are aggressively addressing the situation on the attraction, retention, and management of our labor force, and of course, investing in automation. We are happy to see that our staffing levels have improved over the last three months, and it has helped our mix effect, but we will need to continue to invest in automation because we don't believe the labor force is going to increase significantly in the coming future. Over the last two years, we've reduced 2,200 positions with automation, and we expect to invest around $100 million more in the next year to reduce around 5,600 positions. We are also investing in some new technology in big bird deboning automation, which is very unique, and we expect those plans to be operational later this year.

Is your question answered, Mr. Piken? As no response on the line, we will move to the next question, which is from the line of Adam Samuelson from Goldman Sachs.

I’d like to start with a question regarding the hatchability. Your volumes in the U.S. were largely unchanged this quarter, while industry production increased by about 2.5%. Can you clarify if this relates to hatchability in your operations, labor availability, or perhaps a mix issue on the prepared poultry side for foodservice? Please help us understand your shipment volumes in comparison to the industry and your production outlook for the latter half of the year.

Yes. Of course, Adam. Thank you. Yes, our production during the quarter was flat, a little bit up, but in total, flat year-over-year with the industry is increasing by 2.5%. But we need to remember that during the pandemic, our production did not reduce as much as the industry. So despite being flat year-over-year, and the industry is higher, the industry reduced more than us in Q2 last year. It's not a matter of hatchability. We are having the same issues in hatchability as everybody else. We are in line with the market. It was also related a little bit to the storm that we saw in Texas. It happened last quarter but impacted a little bit of our feed conversion and volumes in this quarter.

Got it. That's really helpful. And Fabio, you talked earlier about the impact of feed inflation on your costs. You've kind of alluded to some of the labor challenges. I'm just trying to think about maybe non-feed inflation in aggregate, whether it's labor, materials, packaging, how we should think about what your non-feed inflation is running at through the second quarter and what you think through the balance of the year, particularly as we kind of try to check that against the pricing side of things as we come off some of the seasonal peaks from here?

Sure, sure. And I think, Adam, we're seeing inflation everywhere in our country and in other countries right now. I think it starts with freight. We are seeing freight increasing by between 10% and 20% in terms of cost depending on the lane we're in, and we are watching very closely for any potential disruptive supply chains. The increase in freight for us in the quarter is about $15 million. But 65% of that freight is spent on deliveries directly to our customers, so most of which has been recouped. The remaining we need to mitigate through pricing. As we mentioned, we are seeing the supply and demand situation in a very favorable situation for the chicken part. We believe that we can pass all those cost increases in terms of freight to our contracts. There are other increases in cost as we mentioned, which is labor. Labor is in a really short position right now. We increased our salaries close to $40 million on an annualized basis. With that, we've been able to improve our staffing levels. We are seeing soybean meal and soybean oil also in our Prepared Foods has increased inflation-wise. But all in all, we have a differentiated portfolio. Again, we have a differentiated portfolio not only of products but also of contracts. While the supply/demand in the chicken industry continues to be balanced, we believe that we can pass through these cost increases to our prices. As I mentioned in the other answer, the chicken demand continues to be really strong, and we expect to remain strong for the next quarters.

The next question is from the line of Peter Galbo from Bank of America.

Fabio, I just want to ask a couple of clarifying questions in regards to some of the prepared comments you gave. First, on the retail business. I know you said you're having pricing discussions at this point to offset some of the cost increases. I just wasn't sure if you had said you're going to be able to offset all of the cost increase or just partial on the retail side? And then just as you were talking about kind of schools getting back in the fall and some of the commercial business, just what have you kind of seen early days? Are you seeing any kind of preordering ahead, with people worried about not being able to get product? Anything you can tell us on that side of the business?

Yes. Thank you. Retail continues to be really strong, and we're seeing lower demand today versus 2020 because of pantry loading. However, we are seeing demand greater than 2019 levels, which is very good for our production and our key customers. We have this key customer strategy. We discuss with them all the time about bulk pricing. There is a lot of pressure in terms of costs both in feed and non-feed costs. We've been discussing with them how we can pass this through the prices and help them continue with innovation and support in terms of volume. We are seeing today a very tight market for retail because labor in the retail operation is very intensive, and the labor situation has been quite challenging. So production in the retail segment has been constrained by labor. We are supporting our key customers by providing them the best on-time and full service that we've seen in years. Additionally, we're seeing some increases for the retail in the chicken side because the delta between chicken and beef and pork has never been as large as it is right now. That is very supportive of demand for chicken. So even with the increases that we are seeing, chicken continues to be the best value and the best option for the end user.

Got it. Okay. And then on schools, maybe I missed the comments on some of the commercial side.

Yes, sure. When we refer to commercial, which includes the schools and other segments, yes, we are seeing some preordering and we're seeing some expectation of a big increase there. As I mentioned, it's close to being down by 30% right now in that segment. We expect that to stabilize and get to normal levels by early 2022.

Got it. Okay. Okay. And then I guess just putting that all together, right, as we're thinking about some of the sequential headwinds and tailwinds, right? Labor, I think you said is improving sequentially on the margin, feed you're rolling through some of the higher costs. But just looking back historically at periods where chicken prices are relatively high, you've been able to earn a pretty substantial level of EBITDA in your higher EBITDA quarters, right, second and third quarter. So as we're thinking about modeling out the third quarter, is it fair to assume that you're expecting a similar level relative to Q2? I mean is that putting it all together the right way? Or are there other things we're missing?

Yes. We are seeing the supply and demand equation to be similar to Q2. Of course, as we enter the fall, we always see some decline in pricing, but we're also seeing some reduction in the feed side. Of course, the cost of feed in Q3 will still be impacted by the cost of what we purchased in Q2. So we expect the mitigation of or the reduction in feed costs to be more in Q4 than in Q3. Therefore, we still see some elevated feed costs in Q3. But again, we are seeing the supply and demand in a very good position. We are also seeing some reopening of food service as well. Ultimately, it will depend on the COVID numbers; if there are any more restrictions or we go back to some sort of movement restrictions in food service, we could see the supply and demand shift less positively. However, as of today, we are really optimistic about what we are seeing.

Thank you. The next question is from the line of Ken Zaslow from Bank of Montreal.

I have a quick question regarding the labor impact this quarter. I'm trying to piece everything together, not just in terms of costs but also related to the delivery issues you mentioned with dark meat. How should we approach this? Do you believe that the situation will be resolved in 2022, leading to a noticeable change compared to this year? I apologize if I'm going over the same points again.

No, sure. Well, again, labor is what we're trying to manage better. As we said, there are so many moving parts, and it's hard to define what the impact is. It's impacting mix, right? So we can't be as productive as we want. There is an impact on cost, of course, and yields. We are losing yields as well because as you debone everything the same day, so we roll front, or you sell fronts, you see a lot of yield losses. It's very significant. On the other hand, we are working with our key customers to simplify our mix, too. We are deboning less and putting in some simple forms and reducing the number of SKUs. Many moving parts right now. The good news is that we expect in 2022 that to be resolved. We're investing in more automation, and we are seeing the labor force start to increase, and the number of applicants is improving as governmental assistance is reduced. So we expect that 2022 the labor market will improve from the levels we are at today. We believe that with all the operational improvements we will implement, we will achieve a better operational standard compared to where we are today.

Okay. And my last question is what prevents Pilgrim's Pride from getting to the 2017 or that type of level margins in 2022? Do you just need the lever to come back? Is it positioned there already? Or do you need other things to happen given that you've progressed on your strategy, you've progressed on your efficiencies and the market seems to be going that way? Is that a way to think about it? Is it the labor the inhibiting factor to getting to that 2017 margin structure? Or is there anything else we should be thinking about?

Yes. Well, 2017 was a strong year in the commodity segment, but at the same time, we didn't have the grain cost increases that we are seeing today with all the disruptions. Of course, you're right. On the operational side, we have a lot of opportunities given the labor situation where we are in. I think that could create an environment to come close to 2017 levels, but that will also require the supply and demand to be in balance. If you look in terms of supply, we are seeing very limited opportunity to increase supplies. We don't have any new plants coming online, and we still have the hatchability issue that we expect to get some improvements in, but not significant improvements in hatchability that we need to significantly increase production for next year. We expect production next year to increase close to 1% to 2% as we are seeing this year. It all depends on supply and demand, Ken. If we see the economy remains strong, as we are currently experiencing in retail, we expect to continue strong and foodservice is strong. Yes, we can see 2017 level margins.

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Fabio Sandri for closing remarks. Over to you, sir.

Thank you. I would like to take this opportunity to speak directly to our team members to thank you for your continued dedication to maintaining food production and supplying our customers during these extraordinary circumstances. You are the reason for our success. I would also like to thank everyone in the Pilgrim's family who makes our business possible, including our family farm partners, suppliers, and customers. Thank you all for joining us today. We appreciate your interest in Pilgrim's.

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