Earnings Call Transcript - PPC Q4 2022

Operator, Operator

Good morning, and welcome to the Fourth Quarter and Fiscal Year 2022 Pilgrim's Cries 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 at www.pilgrim.com. After today's presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Andy Rojeski, Head of Strategy, Investor Relations and Net Zero Programs for Pilgrim's.

Andy Rojeski, Head of Strategy, IR and Net Zero Programs

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

Fabio Sandri, President and CEO

Thank you, Andy. Good morning, everyone, and thank you for joining us today. For the fourth quarter of 2022, we reported net revenues of $4.13 billion. We had adjusted EBITDA of $63 million and our adjusted EBITDA margin was 1.5%. Our Q4 performance highlights the importance of our strategies of portfolio diversification, key customer focus, and operational excellence to mitigate market volatility. In the United States, our Big Bird deboning business experienced some down supply and demand and a period of severely negative margins. However, our diversified offerings and key customer relationships in a more stable Case Ready and Small Bird business along with our Prepared Foods, partially compensated impact, generating breakeven EBITDA margins for the quarter. Our U.K. and Europe business has completed a variety of steps to enhance our operational excellence through optimization of our manufacturing network and integration of back office activities. The team also continues to work in partnership with key customers to mitigate persistent inflationary challenges. These steps and future efforts have further enhanced margins and reinforced the foundations to scale profitable growth for the next year and beyond. In Mexico, our business faces a challenging quarter given an imbalance of supply and demand fundamentals, increased pressure for imported chicken, and continued challenges to our live operations. Nonetheless, the team is strengthening its relationships with key customers and grew its branded presence in Prepared Foods by double digits. For the fiscal year, the net revenues were $17.5 billion, an 18.2% increase over last year. Adjusted EBITDA was $1.6 billion, up nearly 28% compared to 2021. Adjusted EBITDA margin for the year was 9.4% compared to 8.7% in 2021 and 6.5% for 2020. Throughout the year, we experienced remarkable inflationary headwinds and exceptional market volatility. We are pleased with how our team engaged with key customers in all regions to ensure superior service levels and mitigate inflationary costs. Our diversified portfolio of branded and private label offerings enabled us to adjust to rapidly changing consumer needs throughout the year. When these efforts are combined with our improvements in operational excellence, we established growth both in sales and adjusted EBITDA margins. Turning to feed ingredients. Recent USDA reports have lowered final production estimates for the 2022 U.S. corn and soybean crop. December 1st corn stocks were down 7% year-on-year, whereas soybean fell 4% versus the previous year. Demand estimates were also reduced in line with the production cuts. The demand rationing is primarily centered on the export market. U.S. corn exports in the first four months of the crop year were down approximately 30% versus last year. Corn for ethanol demand has also been lower in that time. U.S. soybean export demand estimates were reduced by USDA January WASDE report, absorbing most of the production cuts, but still netting tighter ending stocks from previous estimates and previous years. Crush margins remained strong and supporting ongoing crush industry expansion. Globally, a dry start to Argentina soy production has their crop estimate shrinking, but Brazil production is expected to help swell global soy stock. As for wheat, USDA's general report increased 2022 and 2023 forecasts by 1 million metric tons. With steady exports from the Black Sea, Russia wheat exports are on pace to hit the expectation of 43 million tons, up 35% year-on-year. Australia's production estimates are nearly 40 million metric tons, making it the largest crop in the last 10 years. Which markets look to be well supplied and are providing alternatives to foreign demand. Looking ahead, increased area and production of Brazil crops, continued Black Sea flows and reduced input costs year-over-year offer a pathway to more comfortable supplies and lower prices. But with all the growing season weather, risk is still ahead. As for U.S. chicken supply, ready to cook production increased 6% relative to Q4 of last year, driven by headcount and a higher average live weight. This was the continuation of trends beginning mid-year as the industry maintained improved hatchability while continuing to increase egg sets relative to 2021. In addition to the growth in headcounts, industry live weights materially increased in Q4, growing on average 2% relative to last year as the industry continued to reduce its production of small birds and increased placements in all other ways. This approach was particularly dramatic for the Big Bird segment as production pounds increased 12% from Q4 of 2021, more than any other segment. This growth in chicken production was in response to positive supply and demand fundamentals throughout most of 2022 and expectations for a tighter competing protein landscape in Q4. However, both broiler and beef production outpaced USDA expectations, driving total protein availability much higher than anticipated in Q4. Combined with smaller demand growth, this additional availability contributed to increasing cold storage levels and applied pressure to commodity markets, resulting in severely weak seasonal pricing during the quarter. With weak market pricing persisting throughout November and December, the growth of industry egg sets slowed recently. As a result, the most recent USDA outlooks expect production to grow only 1.1% in 2023, a slight downward revision from previous forecasts. Given the current rate of production, USDA estimates and suggest a decline in the second half of the year. Chicken may also benefit from other dynamics throughout the global protein complex. Beef production is expected to decline 6% in 2023, given the extended herd liquidation over the past several years. Moreover, the rebuild may take longer than previous cycles in a relatively lower level of beef cows. As for pork, availability is expected to remain flat in the U.S. as protein availability is expected to decline 0.4% from 2022 levels. These factors, when combined with pressured consumer income suggests chicken may be advantaged given its availability, affordability, and flexibility. Similar to trends experienced in Q3, domestic chicken demand experienced stable volumes in the fourth quarter. The retail channel continued to grow dollar sales at a double-digit rate, while volume sales remained relatively flat. Fresh Chicken volume sales were mostly flat throughout the quarter as continued growth of dark meat volume sales were offset by volume declines from white meat and whole bird options. In the frozen department, growth in value-added items both in volume and dollar sales highlights the increased consumer demand for value-added products, which has remained robust even in the face of elevated pricing. Meanwhile, frozen meat items have provided mild dollar growth, but with materially lower volume sales. The retail deli department consistently provided double-digit dollar growth throughout the year and maintained its strength in Q4. More recently, we are seeing additional promotional support throughout the store, which may stimulate further demand and provide price relief to consumers who have experienced elevated grocery bills throughout the year. The foodservice channel grew volume and dollar sales but experienced varying results depending on the channel. In Foodservice Distribution, volume demands improved incrementally as stable breast meat demand was offset by improvements in various other cuts, such as wings, tenders, strips, and thigh. We are encouraged by the food channel as it continues to serve a large base of operators relative to the prior year and has shown increased willingness for promotional activity and limited time offers. The noncommercial sub-channel continues to post significant year-over-year gains, driven by an increasing number of operators buying, as well as an improved buy rate. Both positive signs as the sub-channel looks to reach and surpass 2019 pre-COVID levels of demand. Although the U.S. had the marketable fluctuations throughout the year across chicken parts, each experienced relatively similar demand dynamics albeit at different times. Throughout 2021 and early 2022, there was a shortage of wings given exceptional demand from foodservice, and the wing pricing approached or exceeded five-year highs for USDA. As a result, foodservice operations adjusted their menus, everyday pricing and feature activity which incurred limited demand and supported the return to historical market prices or below. Given the decline in the extended period of relatively low prices, more operators are purchasing wings to support their menus and the market is responding as USDA whole wing prices have trended upward in January. As for boneless skinless breasts, it experienced significant burnout throughout the first half of the year and achieved an all-time high in May for the USDA. These record values combined with the remarkably strong cutout on value and additional production later in the year despite normal declines in seasonal demand and elevated grain pricing. In addition, many retailers opted to preserve innovative chicken pricing, reducing the spreads for boneless skinless breasts against ground beef and pork. Despite the spread compression, sales of boneless still grew 1% in volume compared to the same period last year. As for foodservice, commercial broadline volumes grew nearly 2% despite consumers increasingly shifting to at-home consumption, given persistent inflation, whereas non-commercial grew at a robust 10%. Despite growth across both channels, the significant increase in supply along with suppressed demand drove a dramatic decline in prices through Q4. Given these pricing declines, retail foodservice customers have adjusted tactics, increasing promotional activity to spur interest. From a production standpoint, data suggests lower growth rates throughout the second half of 2023 as egg sets and hatch placements have dropped compared to prior quarters. Most recent pullet placements, which are down 8.6% over the past eight trailing months, also support USDA projections of slower growth rates through the second half of 2023. This combination suggests that better supply and demand balance from the mentors may be emerging as overall chicken pricing, including boneless skinless breasts have trended upward throughout January and February. U.S. broiler exports continue to outperform expectations in Q4 despite the continued findings of high path avian influenza in the U.S., Mexico, China, Angola, and the Philippines. As we saw substantial volume growth in Q4. Year-to-date, exports have reached all-time highs in both volume and values according to FDA data. The markets were supported by progressively favorable exchange rates to the U.S. dollar, high-priced alternative proteins, and the need to bolster terminal inventories as the holiday season approached. The industry continued to enjoy an increasingly fluid exports supply chain, which we are expecting to continue throughout 2023. The prevalence of high path avian influenza in the U.S. continues to be of great concern. The current outbreak, which began in February of 2022, is the largest we've ever seen. To date, we've seen 754 outbreaks in commercial and backyard flocks in 47 states with over 51 million birds being depopulated. In contrast to 2015, where we had outbreaks in only 15 states and just over 50 million birds depopulated. As in 2015, the greatest impacts in this current break are being seen in commercial egg layers and in the turkey industry. Broilers have had some events, but the actual impact has not been material for most. Besides the Broilers industry commitment to biosecurity in our farms, the primary reason we are seeing much less in our supply chain harm is due to having regionalization agreements with most of our trading partners, limiting high path avian influenza bans to either the state, country, or zone level. In 2015, we had 14 trading partners that imposed a ban on the entire U.S. Today, we have only two markets that ban the entire U.S. and they are of significant size. We continue to make progress with our trading partners as the need for U.S. poultry is considerable. For example, Taiwan, one of our largest trading partners, recently moved to non-poultry refining and has qualified for export. This new prompt has allowed the release of 10 states that are now eligible to export to Taiwan as of January 19 of this year. Our trade relations with China remain a concern. To date, China has yet to follow our regionalization agreement, limiting bans to the state for 90 days post an outbreak. As of today, only four of the significant broiler-producing exporting states continue to have access to the Chinese market. We have facilities in these states and we are maximizing our opportunity by exporting parts for China from Big Bird, Case Ready, Small Bird, and fresh food service. Our geographic and channel diversity in the U.S. continues to benefit our business. China is a very important market for U.S. poultry and we're hopeful for a return to our regionalization agreement in the near future. We have seen some signs of positive momentum with more U.S. poultry processing and cold storage being approved for export to China in recent months, as well as the elimination of the COVID-related bans on some of our plants. After reaching all-time highs during the year, our U.S. business faces a challenging quarter due to severe decreases in values, historically elevated input costs, and continued inflationary headwinds. This impact was especially difficult for our commodity business as revenues and profitability fell significantly from prior quarters and last year, resulting in heavy losses. Despite Q4, the business grew both top and bottom line relative to 2021 given the record strength in cutout values in the first eight months of 2022. Moving forward, we will continue to pursue improvements in operational excellence to mitigate weak market fundamentals. In Small Bird, our focus on growth with key customers, recapture of inflationary costs, and recovery from the Mayfield tornado drove improvements both quarterly and annually in both net sales and profitability. Our case ready business continued to grow and while the market only increased 1% in Q4, our key customers’ volume increased by close to 6%. Prepared Foods improved profitability throughout the quarter and the year through enhanced mix and operational efficiency. Brand momentum continues as revenues collectively grew by 53% compared to Q4 of 2021 and 70% compared to the prior year through key customer partnerships, new distribution, and innovation. Our presence in e-commerce continued to grow despite lapping significant gains in Q4 last year. Throughout 2022, our e-commerce business grew 48% and now accounts for over 23% of our branded sales. Despite short term challenges in the commodity segment, we remain confident in the prospects of the overall portfolio and continue to grow and add value to our business. To date, we've made significant progress on our Athens expansion in Georgia to support key customer growth. Similarly, our investment in operational excellence through automation in our new protein conversion plant remains on track. As for the U.K. and Europe business, consumers continue to face challenging inflationary headwinds. Given the relative affordability of chicken and pork, many are switching from other proteins into those categories. In addition, our balanced portfolio across retail and foodservice has provided the flexibility to serve customers as they transition among grocery outlets, QSR, and local restaurants. Within retail, our branded offerings maintained their market share despite recent price increases to mitigate inflation. Equally important, we have either maintained or secured new business through innovation and superior service. The team continued to work in partnership with key customers to mitigate costs and continued deflation. Although significant progress has been made throughout the quarter and the past year, work remains as costs are expected to increase albeit not as pronounced throughout 2023. Our team also maintained its focus on operational excellence through the implementation of a variety of previously announced steps to optimize our manufacturing network and integrate back office activities. To date, significant progress has been made and future efforts are slated throughout 2023. These ongoing efforts will provide the necessary scale for future acquisitions, expand our portfolio of offerings, and meet growth demands from key customers. As a result, we now have an enhanced portfolio to profitably grow our business. These efforts may be aided by pork and chicken fundamentals as market pricing appears to be trending towards more sustainable levels. Similarly, a variety of input prices, such as natural gas and grain have begun to stabilize albeit at very elevated levels, although risks remain; early signs throughout the month of January are promising. Turning to Mexico, the business experienced a challenging cost environment given continued issues in our live operations. From a demand standpoint, inflationary headwinds continue to pressure consumers, while growing domestic supply and increasing imports from the United States and Brazil arrived during the quarter. As a result, the market continued to experience an oversupply. Despite these challenges, the team leveraged our broader geographic portfolio to maintain our service levels, especially with key customers. The business also grew its branded presence by double digits, demonstrating its ability to resonate with customers and consumers despite a difficult environment. We are seeing significant improvements in early 2023, both in our operations and the market and remain confident in long-term prospects for both our Prepared Foods and Fresh branded business given the growth potential in Mexico over the coming years. As such, we will continue our investments to drive profitable growth and operational excellence. We also continue to make significant progress on our sustainability efforts, as we received external recognition for improvements across all facets of our ESG scores relative to last year. We have conducted a variety of greenhouse emissions assessments throughout our locations and identified multiple opportunities to improve our operations, simultaneously reducing our emissions and enhancing our operational efficiencies. Our Strong and Better Futures program continues to be exceptionally well received. Throughout 2022, we approved investments of $50 million in our communities and over 1,000 team members have signed up for our free educational programs. With that, I would like to ask our CFO, Matt Galvanoni, to discuss our financial results.

Matt Galvanoni, CFO

Thank you, Fabio, and good morning, everyone. For the fourth quarter of 2022, net revenues were $4.13 billion versus $4.04 billion a year ago, with adjusted EBITDA of $63 million and a margin of 1.5% compared to $317 million and a 7.8% margin in Q4 last year. In the quarter, we reported a GAAP net loss of $155 million versus GAAP net income of $37 million in 2021. In the fourth quarter, we recorded a discrete income tax charge of $39 million associated with a previously disclosed Mexican tax matter that dates back to 2009 and 2010, which drove our full year effective income tax rate to 27%. For the fiscal year, net revenues were $17.5 billion versus $14.8 billion in fiscal 2021, with adjusted EBITDA of $1.65 billion and a 9.4% margin compared to $1.29 billion and an 8.7% margin last year. We achieved $746 million of GAAP net income this year versus $31 million year ago. Adjusted EBITDA in the U.S. for Q4 came in at $15.8 million with adjusted EBITDA margin slightly above breakeven. Throughout the fourth quarter, commodity market pricing fell dramatically, below historical averages for most of the period. Our diversified U.S. product portfolio across bird sizes and brands, along with our key customer partnerships, partially mitigated the impact of declines in market pricing in our big bird business. For the fiscal year, our U.S. net revenues were $10.75 billion versus $9.11 billion in fiscal 2021 with adjusted EBITDA of $1.37 billion and a 12.7% margin compared to $896 million and a 9.8% margin last year. The U.S. had a tremendous full year 2022, demonstrating our ability to participate in the upsides of a strong commodity chicken pricing market during the first eight months of the year while buffering the downside during significant market declines with the diversification of our U.S. portfolio. In Europe, adjusted EBITDA in Q4 was $62.9 million versus $24.7 million in 2021. Despite continued inflationary headwinds and input costs, the European business delivered its third consecutive quarterly improvement in adjusted EBITDA. For the full year, Europe's adjusted EBITDA was $168.7 million versus $137.8 million in 2021. Note that the second half of this year's adjusted EBITDA in Europe nearly doubled the first half profitability. Also during the quarter, we completed ERP system integration of Food Masters. The overall back office integration of the UK and European business will continue into this year, which will provide the foundation for cost savings and further growth opportunities. Finally, Europe announced a number of restructuring programs to pursue further operational excellence. The manufacturing network optimization will reduce costs while still allowing the business to maintain sufficient capacity to grow with our key customers moving forward. We recognized approximately $30 million of restructuring charges in the fourth quarter and anticipate approximately $15 million to $20 million of additional charges in the first half of 2023 associated with these programs. Mexico lost $15.8 million in adjusted EBITDA in Q4 compared to making $27 million last year. However, Mexico made $113 million in adjusted EBITDA or 6.1% adjusted EBITDA margin for the full year. The second half of the year was dramatically impacted by bird disease in our live operations and a more unbalanced supply-demand dynamic in the market. Our Mexican team did an excellent job in keeping our fill rates high with our key customers while recovering from the live operations challenges. We've already seen significant improvement in financial results in January as the market has moved more in balance and our operational improvements have taken hold. Overall, our GAAP SG&A in the fourth quarter was significantly lower than prior year, primarily due to the legal settlements recorded in 2021. However, even on an adjusted basis, our SG&A still decreased year-over-year by approximately 9%. We finished the year spending $487 million in CapEx. This included approximately $20 million to rebuild the Mayfield, Kentucky hatchery following the December 2021 tornado, for which we received insurance proceeds to cover. As we start off 2023, we plan to be even more judicious in our capital spending prioritization as the U.S. chicken market improves from the steep decline incurred in the fourth quarter. We will continue to prioritize our capital spending plans to ensure the safety of our team members, optimize our product mix, and strengthen our partnerships with key customers. We reiterate our commitment to invest in strong ROCE projects that will improve our operational efficiencies through automation and tailor our operations to address key customer needs to further solidify competitive advantages for Pilgrim's. One example of this is our previously announced plan to expand our Athens, Georgia facility, which we anticipate completing early in the fourth quarter. Also, we've made good progress in our construction of our protein conversion plant in South Georgia, which we anticipate completing by the end of the year. As the timing of certain capital spend will depend on U.S. market conditions, we're expanding our range of estimated capital spending in 2023 to $400 million to $500 million. As conditions evolve, we may revise spending either way to accommodate our growth aspirations. However, we will remain disciplined in capital allocation. We have a strong balance sheet and we will continue to emphasize cash flows from operating activities, management of working capital, and disciplined investment in high-return projects. Our liquidity position remains very strong. At the end of the fiscal year, we had approximately $1.4 billion in total cash and available credit. We have no short-term immediate cash requirements with our bonds maturing in 2027, 2031, and 2032, and our term loan maturing in 2026. Also in January, following the receipt of our investment grade credit rating in 2022, we announced the registered exchange offers for our 2031 and 2032 notes for all bondholders to exchange the restricted notes for new registered notes. Bondholders can register by February 15 to participate in the exchange. At the end of the fiscal year, our net debt was approximately $2.8 billion with a leverage ratio of less than 1.7 times the last 12 months adjusted EBITDA, which is below our target leverage ratio range of 2 to 3 times. Net interest expense for the year was approximately $144 million. We anticipate our 2022 net interest expense to be approximately $155 million and $165 million in that range. As I mentioned previously, in the fourth quarter we recorded a significant income tax charge in Mexico that drove our full year effective income tax rate to 27%. We anticipate our effective tax rate to be between 23% and 25% in 2023. 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

We will now begin the question-and-answer session. The first question is from Ben Bienvenu of Stephens. Please go ahead.

Ben Bienvenu, Analyst

Thanks. Good morning, guys.

Fabio Sandri, President and CEO

Good morning, Ben.

Ben Bienvenu, Analyst

So I want to ask my first question relative to supply demand in the U.S. market. You highlighted the USDA's estimate revision downward yesterday for broiler production this year. You talked about the pullet placements pointing to production cuts as we get to the summer and the second half of this year. Do you see those cuts staying intact through the balance of this year? And then on the demand side, are you seeing any indications of demand shifting from beef and red meat to chicken yet given the value that it offers consumers?

Fabio Sandri, President and CEO

Yes. Thanks for the question, Ben. Yes, I think we need to always go back and look at our portfolio, right? For Pilgrim's, we have the exposure to the commodity market, and I’ve always mentioned that it's important for us. And we've captured the upside when the market was really strong in Q2 and Q3. But of course, we were exposed to that segment in Q4. What happened in Q4? I think we addressed a little bit in the prepared remarks is that the expectations from USDA and from the market was that there was a significant reduction in the availability of protein in Q4, easing the lower herd of this. And also the avian influenza (AI) impact on turkey. With that and with the continued record profits in the commodity segment for chicken, the whole industry started placing more chicks that you can see on the chick placement report from the USDA, around 4 million to 8 million a week more than previous year. We improved hatchability, but it was also a lot more eggs that came into the market during Q4. What we saw in Q4 was an increase of close to 12% availability of chicken on the big bird segment or the commodity segment. At the same time, we saw an increase of 8.5% availability in the case ready segment. Because of the higher availability than expected of beef and pork, the demand on the retail segment only increased by 1%, which means that all this 20% more production in the big bird and the case ready segment ended up in the foodservice segment and the commodity segment, which pressured the prices, at Q2 levels that we've never seen before, creating a severe loss for the big bird business in Q4. Starting in mid-November, as you can see, and we mentioned on the weekly chick placements from USDA, we saw moderation of that increase to actually some reductions, and that's what we are seeing coming as production now in Q1. So USDA numbers are expecting an increase of total chicken production in Q1 around 1%. We believe that is set in stone. But if the market doesn't continue to improve, we expect some significant reductions in chicken production for the second half.

Ben Bienvenu, Analyst

Okay. Now that it seems like the beef supply is stabilizing and we should start experiencing shortages, are you noticing a shift in demand from red meat to chicken? Given the current wholesale prices for chicken, there appears to be a substantial margin for retailers to promote chicken more frequently.

Fabio Sandri, President and CEO

Yes, that's correct. Over the last quarter, we noticed that retailers maintained higher chicken prices, which reduced the difference in price between chicken and ground beef, particularly ground beef and pork. There wasn't much promotional activity during the quarter, but we're beginning to see that change. Retailers have ample stock to promote chicken, and we're observing a shift in some purchases from beef to chicken. It's also crucial to note that foodservice promotional plans typically begin around this time of year. If the USDA's forecasts hold true, we can expect a 6% reduction in beef production, which should result in higher prices and decreased availability, benefiting limited time offers and promotional activities for chicken.

Ben Bienvenu, Analyst

Okay, great. Thanks so much.

Operator, Operator

The next question is from Ben Theurer of Barclays. Please go ahead.

Ben Theurer, Analyst

Yes. Good morning, Fabio and Matt.

Fabio Sandri, President and CEO

Hi, Ben.

Matt Galvanoni, CFO

Good morning, Ben.

Ben Theurer, Analyst

So just along those lines and you've talked a lot about obviously what the industry is doing in terms of bringing some of the production down. But at the same time, you've talked about spending maybe some $400 million to $500 million in CapEx adding capacity. Can you help us reconcile what kind of capacity that actually is you're adding and how you think about this in light of the production cuts and potentially postponing some of the delivery of these capital expenditures just to keep the market in balance?

Fabio Sandri, President and CEO

It's a great question. We need to connect our strategy with our key customers. Our production is planned based on sales to these customers. For instance, on the retail side, while the industry saw only a 1% increase in Q4, we grew by 6% thanks to strong demand from our key customers. This trend indicates that our key customers are thriving despite the overall market situation. Regarding our capital expenditure expectations for Athens, Georgia, we're developing a small bird plant to enhance foodservice sales to a key customer that consistently grows in double digits every year. Even though the market for small birds is declining, we are experiencing increasing demand for our products. The market's growth was primarily in the big bird and case ready categories, where there is an oversupply leading to reduced production due to significant losses. When we compare our portfolio to the same period last year, the results for small bird, case ready, and prepared foods have actually been better. Additionally, we've announced investments in a project in South Georgia aimed at enhancing our protein conversion offerings, which will improve our margins by allowing us to produce pet food and food-grade feed internally instead of selling to the outside market.

Ben Theurer, Analyst

Okay, perfect. And then within the international operations, you've highlighted it, obviously, in the U.K, you've seen sequential trends, but then you have restructuring in there. Is that something that cost that you expect to continue to occur in the first quarter? Or is that all done on the restructuring side? And when do you expect the benefits of the restructuring to kind of flow through into operating profit?

Fabio Sandri, President and CEO

Yes, there's some small impact in Q1 on restructuring, but basically what we did was to adapt all of our operations, again, to the key customers' demand. We saw that we could operate at a higher efficiency and higher operating levels in the Prepared Foods segment. From three plants, we will reduce to two plants, which will operate at a higher level. There was some investment needed to operate on those two plants instead of three plants. And there are some write-offs that we had to do because we were shutting down one plant. We expect that now the network rationalization is ready and we don't expect any more changes in the upcoming quarters.

Matt Galvanoni, CFO

Yes. Ben, it's Matt. We recorded about $30 million in the fourth quarter and I committed that we'll anticipate about $15 million to $20 million of charges in the first half of the year. It's just the timing of when you can record those under GAAP and when they're incurred.

Ben Theurer, Analyst

Okay. Perfect. Thanks, Matt. Thanks, Fabio.

Operator, Operator

The next question is from Adam Samuelson of Goldman Sachs. Please go ahead.

Adam Samuelson, Analyst

Yes. Thank you. Good morning, everyone.

Fabio Sandri, President and CEO

Good morning, Adam.

Adam Samuelson, Analyst

Hi. So I appreciate the challenges in the big bird market in the fourth quarter. Prices have improved a little bit, but still not a kind of great start in January necessarily. But can you help us think about the profitability, especially in tray pack where the demand growth has been a little better, but nowhere near supply log pricing, a little bit lower year-on-year? How should we think about the profitability in the non-commodity parts, the non-Pilgrim parts of your U.S. chicken segment year-over-year first quarter, first half with where the markets are laying out?

Fabio Sandri, President and CEO

Sure. And again, as I have mentioned, we have a well-diversified portfolio, and we can capture the upside when the commodity markets are really strong, and we protect the downside. Once again, we proved that in Q4 and proved that throughout 2020 and 2021 that we can counter the big bird or commodity segment losses with the margins on the other businesses. What we are seeing on the small bird is the reduction of supply overall in the market. We are seeing a continuous growth for Pilgrim's with our key customers, both on the fresh food side, on the eight-piece and on the deli side. So our partnership with our retailers and promotions on the deli side have helped a lot in the demand for the smaller segment. We are seeing stable margins on the small bird. That's how we build our portfolio. We also see significant growth in the small bird deboning segment, which is for foodservice and for specific QSRs, so we continue to see growth there. On the case-ready front, again, after some really strong growth years in 2020 and 2021, we see that demand continues to grow, but at a slower pace. I think we saw some new plants in that segment and those plants put a little bit of pressure on the market, especially if they don't have a key customer. As I mentioned, as the market grew only 1% in the fresh retail in 2022, our sales increased by 6%, and that's all driven by helping our key customers to grow. We also expect the foodservice to grow in 2023 as the labor rate continues to be tight. Despite some inflationary impact on consumer spending, we are seeing consumers continue to go to foodservice, particularly the non-commercial segment growing at double digits, especially on the leisure and government side. We are expecting some significant improvement in the big bird market for 2023, of course, given the continuing imbalance and the supply, with the production in line with the 1.1% expected by USDA.

Adam Samuelson, Analyst

Okay, that's helpful. Can I just have quickly on Mexico? Obviously, challenges in the fourth quarter. Just help us think about kind of where profitability is there today, understanding that the live nature of that market will move quite rapidly, but just help us think about kind of where we've exited fourth quarter and through January?

Fabio Sandri, President and CEO

Sure, yes. Mexico, we always mention that it is very volatile quarter over quarter but stable year-over-year. I think in 2022, the market was in line with that expectation of volatility, a very strong first quarter and a very weak second quarter. Especially because of increased production on the domestic side, but also after a very strong first quarter, there was a lot of exports from Brazil that arrived late in Q3 and beginning of Q4 and also with the weak commodity markets in the U.S. There's a lot of meat that ended up in Mexico. We have our operational issues as well on the live side due to some diseases and because of that, we had to restructure our live operations. We expect the benefits from that restructuring to start in Q2 this year. We already see the market returning to more stability in Mexico, with double-digit margins during the quarter.

Adam Samuelson, Analyst

Okay, great. That's all helpful. I'll pass it on. Thank you.

Operator, Operator

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

Peter Galbo, Analyst

Hey, guys. Good morning. Thanks for taking the questions.

Fabio Sandri, President and CEO

Good morning.

Peter Galbo, Analyst

Fabio, I would like to get some clarity on the slide regarding cold storage levels. We can monitor those through USDA, and breast meat levels are nearing all-time highs for fresh meat in cold storage. I recognize that you're seeing improvement and expect better results in the latter half of the year. However, could you provide some context on the 250 million pounds of breast meat in cold storage? What is the typical timeframe for that to be processed? Historically, when levels are this elevated, how long does it take? Is it around three months, six months? Any timeframe you can provide would be very helpful.

Fabio Sandri, President and CEO

Yes, we see that especially during Q4, with this increase in production on the commodity segment, that the inventory levels have surged, especially on the IQF segment. If you look into the retail numbers, the IQF demand during Q4 was down close to 10%, contributing to those levels, but if you look at the overall level of breast meat in inventory, that is close to two weeks of production. So it's not a significant number that will take a long time to be absorbed into the marketplace.

Peter Galbo, Analyst

Got it. Okay, that's helpful. And then maybe just to follow-up on Ben's question around Europe. I think you guys are kind of in a unique position to give an update on just the European consumer, particularly in the U.K. like I think from the seat that we sit in, it was all doom and gloom headed into the fall? It seems like there's been a lot of headwinds that maybe have been alleviated on the consumer there. So maybe just give us an update on what you're seeing European consumer-wise from a top line standpoint, and then just expectations for the year in that segment?

Fabio Sandri, President and CEO

Yes, I think we saw some elevated levels of inflation getting into the consumer wallet during Q1 and Q2. And that was a reflection of the increase in utilities and in grocery prices throughout Europe. We adjusted our operations. In partnership with key customers, we did some innovation to reduce the cost of our products to mitigate that inflation. We're seeing that we have a portfolio that is very well positioned. We talked about this trade-down in terms of proteins. We saw the consumption of red meat going down double digits in Europe overall, while the consumption of chicken and pork remains stable. So we have a portfolio that is well-positioned to capture that trade-down in consumer preferences in the U.K. Now, what we are seeing is inflation moderating. I think utility costs are actually decreasing in the U.K. right now, albeit from very high levels. We are seeing some consumer confidence coming up from very low levels recently. So we have good expectations in terms of demand for chicken and pork for 2023. Also, our branded products after suffering a little bit from volume, from price increases are reaching a level where retailers are starting to do special promotions, and we are spending a little bit on trade that is helping the volumes on the branded segment.

Operator, Operator

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

Fabio Sandri, President and CEO

Thank you. Throughout 2022, we experienced unprecedented cost escalation, market volatility, and consumer uncertainty. I would like to thank all of our team members for consistently leading our values and driving our strategy despite these challenging times. Their leadership mindset and relentless focus on becoming the best were instrumental in managing through these volatile times and driving strong results for the year. We have strengthened our foundation by driving branded growth, optimizing our manufacturing network, implementing synergies, and further expanding our portfolio through innovation. We did that combined with our new leading attention on team member safety, product quality, and sustainability. We are well-positioned to create a better future for our team members and achieve our aspiration of becoming the best and most respected company for 2023 and beyond. Thank you.

Operator, Operator

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