Earnings Call Transcript - PPC Q3 2022

Operator, Operator

Good morning, and welcome to the Third Quarter 2022 Pilgrim's Pride Earnings Conference Call and Webcast. Please note that the slides referenced during today's call are available for download from the Investor Relations section of the company's website at www.pilgrim.com. I would like to turn the conference over to Andy Rojeski, Head of Strategy, Investor Relations and Net Zero Programs Pilgrim's Pride. Please go ahead.

Andy Rojeski, Head of Strategy, Investor Relations and Net Zero Programs

Good morning, and thank you for joining us today as we review our operating and financial results for the third quarter ended on September 25, 2022. Yesterday afternoon, we issued a press release providing an overview of our financial performance for the quarter, including a reconciliation of any non-GAAP measures we may discuss. A copy of this release is available on our website, along with the slides for reference. These items have also been filed at Form 8-K and are available online at sec.gov. Fabio Sandri, President and Chief Executive Officer; and Matt Galvanoni, Chief Financial Officer, will present on today's call. Before we begin our prepared remarks, I would like to remind everyone of our safe harbor disclaimer. Today's call may contain certain forward-looking statements that represent our outlook and current expectations as of the date of this release. Other additional factors not anticipated by management may cause actual results to differ materially from those projected in these forward-looking statements. Further information concerning these factors has been provided in today's press release, our Form 10-K and our regular filings with the SEC. I would like now to turn the call over to Fabio Sandri.

Fabio Sandri, President and Chief Executive Officer

Thank you, Andy. Good morning, everyone, and thank you for joining us today. For the third quarter of 2022, we reported net revenues of $4.47 billion, a 16.8% increase over the same quarter last year and our adjusted EBITDA of $460.5 million, up 32.7% versus Q3 of 2021. Our adjusted EBITDA margin was 10.3% compared to 9.1% in Q3 of last year. Our Q3 results continue to reflect the benefits of consistent execution of our strategies. Even with significant volatility of market fundamentals, our US business achieved solid results in the quarter with big bird deboning up seasonal and historical highs, while our key customer partnerships in case ready and small birds and our growth in prepared foods improved our bottom line. Our European business drove improvement despite severe inflationary pressure and prolonged challenges within the consumer environment. The team continued to accelerate operational improvements to help mitigate some of the inflationary headwinds in grains, utilities and other cost inputs. In addition, the team has announced a plan to optimize our manufacturing footprint to further enhance operational agility and flexibility. Equally important, the combined team launched a variety of new innovations and received a variety of accolades for its innovation as well as superior quality products. Our Mexico business was adversely impacted by extensive inflation and slowing demand. These challenges were amplified by issues with mortality in our live operations, mainly on our breeders. Taken together, the business experienced a decline in volumes, prices and profitability. The operations team implemented a significant change in our live operations footprint, and our sales teams are launching new innovations for diversification across sales channels and deeper expansion into branded offerings. We also published our 2021 sustainability report in August, which highlighted significant progress in our efforts to improve team member safety and well-being, reduced greenhouse gas emissions intensity, and enhanced animal welfare. We have also approved significant investments in our plants to cultivate further momentum in our journey towards net zero by 2040. Turning to feed ingredients, recent USDA reports have lowered estimates for US corn and soybean production. The FDA's most recent forecast for corn shows a historically tight stocks-to-use ratio of 8.3% and ending stocks of 1.17 billion bushels, close to last year and to our drought-stricken crop. Soybean faces a similar dynamic as stocks are currently at 200 million bushels with a stocks-to-use ratio of 4.5%, a little lower than the last few years. With the expected tighter crop balance sheet, the focus is now on expected demand. Currently, a combination of factors, including a strong US dollar, logistical issues on the Mississippi River and steadily increasing exports from Ukraine, are reducing the export expectations and balancing the supply and demand in the United States. Factors such as continued Black Sea grain flows, South American planting and growing conditions, and inflationary macro events on global import demand will be critical in providing direction for prices and US spring planting. As for US chicken supply, ready-to-cook production increased 2.8% relative to Q3 of last year, driven by additional head counts. Beginning in late Q2, the industry began to experience improved hatchability quarter-over-quarter and year-over-year. This trend continued throughout Q3, adding incremental chick placements and supporting already elevated feed counts, which have resulted in increased head counts throughout the quarter. The clients from all-time highs emerging the jumbo cutout values beginning in June. Considering the recent growth in production, the USDA has revised the 2022 annual poultry production outlook up to 2.2% year-over-year, driven by growth in both Q3 and Q4. Hatchery utilization remained elevated at well above historical averages and surpassed 95% in August alone. Furthermore, hens were kept in service longer as both overall age grew and slaughter levels declined relative to last year. These factors suggest chicken production deviated from typical seasonal reductions to realize fundamental poultry supply and demand throughout most of 2022 and potentially benefit from a tightening competing protein landscape in Q4 from reducing export production in beef and pork. However, the increased broiler production occurred prior to the industry experiencing the expected beef and pork production declines, applying pressure to the protein market and resulting in more precipitous seasonal price erosion for commodity chicken. Given these dynamics, chicken in cold storage increased 14% year-over-year. Nevertheless, it remains in line with historical norms as inventory is roughly 1% below the five-year average. We continue to monitor the potential impact of industry-specific risks, including avian influenza. Despite the recent uptick throughout the states, our locations have not experienced any significant disruption other than export risk. Moving forward, we will continue to vigorously enforce our biosecurity protocols and monitor trends to minimize potential risk and impact. On the US demand side, domestic chicken demand varied by channel throughout the third quarter relative to the same time last year. The retail channel continued to grow sales at a rapid rate, but volume sales were stable relative to the prior year, despite very low promotional activities. Fresh chicken volumes were mostly flat throughout the quarter, highlighted by growing dark meat, which offset volume declines from higher-priced breast meat. The frozen food channel maintained growth in value-added items, both in volumes and dollars, which highlights the increased consumer demand for value-added products, a trend we've seen since early 2020. Meanwhile, frozen commodity items have experienced dollar growth but at lower volume sales. The retail deli department posted slightly year-over-year sales gains with double-digit dollar growth sales as well. Overall trends for chicken consumption in the retail segment remained resilient as the share of spending has increased relative to other proteins. Both fresh and frozen chicken have increased bias relative to beef and pork despite retail pricing compression among the competing proteins. Typically, chicken has been more resilient to inflation and economic downturn in retail than other proteins. The food service channel grew volumes and dollar sales, but experienced varying results depending on subchannel. In food service distribution, volume demand was flat relative to Q3 2021, albeit at a high dollar sales value. However, the subchannel continues to serve a large base of operators relative to 2019 and 2020, which have supported the channel to offset declines in volume per operator. The non-commercial subchannel continues to post significant year-over-year gains as it moves along the recovery path to 2018 pre-COVID levels of sales. With the current supply and demand balance, opportunities for limited-time offers and other promotional activities to stimulate chicken demand at food service and retail are present. As for exports, margin trends appear favorable for the remainder of 2022 and early 2023. Although we continue to outpace the industry on broiler meat export growth, we did experience a slower period of demand in the last one-third of Q3, while some destinations analyze the impact of currency exchange rates and the availability of remaining annual quarters. Currently, we are experiencing robust trade as demand across our markets is increasing weekly, especially in West Africa and certain countries in the Persian Gulf. Demand in Southeast Asia is stable and expected to strengthen as buyers prepare to buy for January arrivals given new quarters. Logistics were strained throughout the year, but we are seeing an increase in the availability of dray carriers and ocean carriers offering a greater availability of reefer equipment in most ports. Our ability to ship containers has increased significantly recently, and we expect this to continue. Given the increased US production as of late, we have additional opportunities to move this product into export markets at supportive pricing. The impacts of the continued presence of high-path avian influenza have been minimized by efforts made with most of our trading partners. With the exception of China, Taiwan, and some minor markets, most of our trading partners recognize the situation to the county level or even a zone around an infected farm. As for China, the biggest impact is relative to paws, which is not a major export market for parts at this point. Because of our geographic diversity, we still experience high pricing due to the lack of available supply. For our US business, we had a strong quarter, given our combined strategies of key customer focus, portfolio diversification across bird sizes, and a relentless pursuit of operational excellence. Our case-ready products grew incrementally while ensuring sufficient cost recovery to mitigate inflationary headwinds given the strength of key customer relationships. Since chicken remains relatively affordable compared to other proteins, the team continues to explore promotional activities to drive profitable growth with key customers across both branded and private label segments. The small bird category also showed solid growth and continued cost recovery from inflation as demand from key customers in quick-service restaurants and retail continued to increase. Our big bird business improved quarterly profitability relative to last year, even as market fundamentals moderated throughout the period to historical levels. As we enter the fourth quarter, current market fundamentals represent near-term challenges. As such, we are continuing to cultivate key customer partnerships with selected quick-service restaurants and distributors while diversifying our portfolio. Plant staffing levels have improved in all regions and supported optimization of mix opportunities as they become available. Moving forward, we will continue to invest in automation, portioning, and other projects to further improve our operational performance. In prepared foods, revenues increased 18% relative to the prior year, driven by growth in Just Bare and Pilgrim's branded innovation and key customer partnerships throughout retail. Market share from our retail branded business nearly doubled from prior years due to further diversification of our offerings and increased distribution. Margins expanded from improved mix and continued cost recovery from inflationary headwinds. E-commerce posted strong sales gains relative to last year, with sales increasing over 65%. Given our holistic approach to drive conversion with both pure-play and omnichannel efforts, e-commerce now accounts for over 20% of our branded volume. Moving to Europe, throughout Q3, our business battled significant inflation as cost pressures continued to escalate due to historically high feed, energy, and labor costs. The retail environment became especially challenging as consumers became increasingly price-sensitive and transitioned to lower-priced tier values and economy offerings. These issues were further amplified by rising concerns regarding natural gas costs, CO2 availability, avian influenza, grain, and the impact of the conflict between Russia and Ukraine. Given these issues, the team accelerated its operational excellence efforts to help mitigate cost escalation. We continue our work to enhance our staffing levels. We also prepared a series of countermeasures to lessen the impact of potential availability issues related to natural gas or CO2, including increased stockpiles, an expanded network of suppliers, and improved operating procedures. Recent announcements by the UK government to cap natural gas prices and the diversification of food production as a key priority may further aid these efforts. We also continue to monitor the impact of avian influenza throughout the region and enhance our biosecurity protocols. Our operational excellence efforts extended beyond our production facilities and live operations. In September, we integrated Food Masters' information technology systems into the broader Pilgrim's organization. As a result, we now have a common back-office platform throughout our entire UK and European operations to manage the business, increasing our scale, flexibility, and agility. Our diversified portfolio and select macro factors also moderated the impact of challenging market conditions. Although overall protein consumption was challenged, consumers transitioned to chicken and pork due to their relative affordability and versatility. Our offerings in both branded and private label allowed our business to adjust to rapidly changing customer needs and consumer preferences. Live pork prices also improved in the UK. We also drove our key customer strategy. To that end, we conducted multiple sessions to identify ways to offset inflation headwinds and reduce time to recover costs from various inputs. We also recently announced efforts to optimize our manufacturing network. These challenges will absorb this capacity at legacy sites while improving operational flexibility to further cultivate our growth. As a result, we can support our collective efforts with key customers to increase distribution and launch innovative offerings. Our Mexico business faced difficult circumstances throughout the third quarter as sustained high inflation impacted overall demand while extended issues with bird mortality increased production costs and impacted our volumes. As a result, Mexico experienced a decline in both revenue and profitability relative to the previous quarter and the previous year. To address these challenges, the team is focused on enhancing our key customer partnerships and diversification into strategic channels, notably retail, club, and food service chains. Given this increased focus, the business can further mitigate volatility in commodity prices, enhancing profitability for the overall business depending on market conditions. Despite increased production costs, the team continued to support existing demand and service levels with our key customers using our diversified supply base. We continue to see progress in our fresh products and prepared foods under the leadership of the Pilgrim's and Del Dia brands. From an operations standpoint, the team implemented plans to adjust chicken production in areas with significant mortality issues, including accelerated relocation in affected areas. Even though short-term challenges exist, we remain confident in the long-term prospects of our business. We experienced significant sales growth in our branded offerings over the past year and launched a variety of innovations with leading retailers during the quarter. We also made significant progress in our efforts to drive sustainability throughout our organization. Over 370 team members or their children have signed up to earn free higher education as part of our Better Futures program. We are also partnering throughout our supply chain with growers and other providers to identify and prioritize ways to reduce greenhouse gas emissions. We continue to drive meaningful progress in safety as we have outpaced industry performance over the past three years. As a result, we are currently on track to achieve the majority of our 2030 sustainability initiatives. We are investing in our business to drive organic growth, especially with key customers, and we explore M&A opportunities to further diversify our portfolio across segments and geographies. We are continuing to embed automation throughout our production facilities. Taken together, these efforts further strengthen our foundation for profitable growth, creating a better future for our key members. With that, I would like to ask our CFO, Matt Galvanoni, to discuss our financial results.

Matt Galvanoni, Chief Financial Officer

Thanks, Fabio. For the third quarter of 2022, net revenues were $4.47 billion versus $3.83 billion a year ago, with adjusted EBITDA of $460.5 million and a margin of 10.3% compared to $346.9 million and a 9.1% margin in Q3 last year. We achieved $260.7 million of adjusted net income compared to $162.5 million in Q3 of 2021. Adjusted EBITDA in the US for Q3 came in at $418.3 million compared to $263 million a year ago. Adjusted EBITDA margins in Q3 were 14.7% compared to 10.7% a year ago. Both gross and operating margins were higher compared to 2021. As we entered Q3, we noted declines in market pricing from all-time highs in May. During the third quarter, market pricing continued to decline; however, it remained above historical averages for most of the period. Although we noted consumer demand showed normal seasonal movements during the quarter, supply grew above expectations, particularly during the latter half of the period. For our European business, adjusted EBITDA margins came in at 4.0% for Q3 compared to 3.0% last year and 3.4% in the prior quarter. We've continued to see improvements in the profitability of this business due to the efforts of the team to find both operational efficiencies and to recover the inflationary impact of key input costs. Mexico lost $6.3 million in adjusted EBITDA in Q3 compared to making $56.3 million last year. However, Mexico has made $128.9 million in adjusted EBITDA or a 9.3% adjusted EBITDA margin for the nine months ended in September. Volumes in the quarter declined given weakened market fundamentals, and margins decreased due to issues with breeder mortality. As we have discussed and experienced in the past on multiple occasions, our Mexico results can be quite volatile quarter-to-quarter. All businesses across our geographies have been subject to continued inflation and significant market uncertainty. Although our strategy has mitigated these impacts, we must continue to monitor costs throughout our supply chain, drive operational efficiency efforts, and implement cost recovery measures. During the quarter, we completed the $200 million share repurchase program announced in March. Additionally, we spent $146 million in CapEx during the quarter as we made progress on our previously announced organic growth investments and as we rebuilt our hatchery in Mayfield, Kentucky, following the tornado in December last year. We recognized $16.2 million of property insurance proceeds in the quarter as miscellaneous income, as the accounting for these insurance proceeds recognizes income at the time we received the commitment from the insurance carriers to fund the rebuild. We included this as a non-GAAP adjustment to our income statement, as the cost of the actual rebuild is accounted for as CapEx as the funds are spent. Our overall balance sheet and liquidity remain strong, with over $1.6 billion in total cash and credit available. As of the end of Q3, our net debt totaled approximately $2.5 billion, with a leverage ratio of 1.33x our last 12 months adjusted EBITDA, which is below our target ratio of 2X to 3X. Net interest expense for the quarter totaled $34 million. Our effective income tax rate year-to-date is 22.0%. We anticipate our full year effective tax rate to be between 22% and 23%. We will continue to follow our disciplined approach to capital allocation as we look to profitably grow the company, and we'll continue to align investment priorities with our overall strategies of portfolio diversification, focus on key customers, operational excellence, and commitment to team member health and safety. Operator, this concludes our prepared remarks. Please open the call for questions.

Operator, Operator

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

Ben Theurer, Analyst

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

Fabio Sandri, President and Chief Executive Officer

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

Ben Theurer, Analyst

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

Fabio Sandri, President and Chief Executive Officer

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

Operator, Operator

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

Ben Bienvenu, Analyst

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

Fabio Sandri, President and Chief Executive Officer

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

Ben Bienvenu, Analyst

Alright. Great. Very helpful. Shifting gears a little bit to Europe, I thought pretty impressive results in the quarter given some of the challenges that you cited. Can you give us a little bit more detail around some of the efficiency initiatives you have underway and how you think about the tug-of-war between that dynamic and just broader inflation in the market pressing consumer demand?

Fabio Sandri, President and Chief Executive Officer

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

Operator, Operator

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

Ken Zaslow, Analyst

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

Fabio Sandri, President and Chief Executive Officer

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

Ken Zaslow, Analyst

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

Fabio Sandri, President and Chief Executive Officer

Sure, Ken. I think, of course, how we track our business is against our competitors, right? We're doing good guidance. We aim to always be better than our industry, and we've been at the top of our industry for some time now. It is all about the portfolio. Of course, we'll always keep our key customers competitive. I think we can offer — and this is something that has not occurred this year, especially on retail. Because of the high pricing of the commodity segment. Normally, we would use some big birds to help promotional activity on the retail front. That has always been a great way of supporting our big bird business and a great way for our portfolio. That didn't happen this year again because the high prices of the commodity make it economically unfeasible to put that big bird meat in a tray and sell it to the retailers. As I mentioned, the price in retail never reached the high levels we saw in the commodity segment. This has also led to retailers not featuring a lot of chicken, which I think is the reason why the volumes this quarter were flat for the industry. For us, however, it was up 9% with our key customers compared to last year. I believe we are seeing more promotional activity planned now, and we are making significant progress, which can support growth in the retail segment while utilizing some big bird meat in a profitable way. In Europe, I think we will continue to improve our results. We mentioned that we are now catching up to all the cost increases, and we are optimizing our network. The benefits of the network optimization and even the back-office integration will be more visible in the second quarter of next year, not in the first quarter of this year. But yes, we expect the margins there to increase to profitable levels, and we have great expectations for our European business as well as for the economy, which we expect to begin recovering starting next year.

Operator, Operator

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

Peter Galbo, Analyst

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

Fabio Sandri, President and Chief Executive Officer

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

Peter Galbo, Analyst

If I think about dissecting your business into the three parts, it would imply that if the commodity market was slightly down in the third quarter, that retail and key customers had to be up again materially year-over-year pricing. So you would have started to see that pricing come through in Q3. So I guess that's maybe some of the confusion. And then maybe just, Matt, just to clean up a couple of things. Did you guide interest expense for the rest of the year? On SG&A this quarter, you were down a bit from where you've been running. So just is that third quarter SG&A number a decent run rate for Q4 and into next year?

Matt Galvanoni, Chief Financial Officer

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

Fabio Sandri, President and Chief Executive Officer

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

Operator, Operator

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

Adam Samuelson, Analyst

I would like to follow up on some of the questions regarding margin trends. Considering the fourth quarter and the adjustments observed in the big bird market, with prices nearing the five-year average while costs remain significantly higher due to feed prices and overall inflation, it seems that profitability is now expected to fall below those historical levels over time. How should I assess the profitability of big bird in comparison to the profitability of the retail, tray pack, and small bird segments? Additionally, if pricing for big bird aligns with five-year averages and profitability trends downward, how do the margins in the US business compare to the five-year averages? Do they fall in line, exceed, or lag behind those levels?

Fabio Sandri, President and Chief Executive Officer

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

Adam Samuelson, Analyst

If I could switch topics to Europe, you mentioned being optimistic about margin prospects there for next year. How much of that depends on the consumer environment improving in the UK? Specifically, regarding Food Masters, if it continues to face a sluggish consumer environment. Additionally, I'd like some clarification on the UK business this quarter, where SG&A was down about $20 million compared to the past three quarters since the Food Masters acquisition. Could you clarify what the appropriate SG&A run rate for the UK should be? I was surprised to see such a significant decline in that business.

Matt Galvanoni, Chief Financial Officer

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

Fabio Sandri, President and Chief Executive Officer

Yes. As always, we focus on what we can control. Starting with what we can control, we just mentioned the network optimization, where we're taking some small plants that are not very competitive and investing in some of our biggest plants. We gain competitiveness in this area that we are supporting our key customers with both growth and mitigating inflation. In terms of how much we are dependent on the improvement of the economy, I think the portfolio of products we have on chicken and pork is more resilient. As we saw in the latest number, we noted that consumers are trading down from high-end products, especially lamb and beef to pork and chicken. We have a business that is more resilient. Regarding the brands, especially on the Food Masters side, we're seeing some strength in the brands. We continue to invest in innovation and continue to improve our products to ensure that we are at the top of mind with our consumers and with our key customers. We are observing a trend down in brands to private label in the UK, but we also have a substantial operation regarding partnerships with key customers in the private label.

Operator, Operator

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

Fabio Sandri, President and Chief Executive Officer

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

Operator, Operator

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