Earnings Call Transcript - PPC Q1 2023

Operator, Operator

Good morning, and welcome to the First Quarter 2023 Pilgrim's Pride Earnings Conference Call and Webcast. This call is being recorded at the company's request. The slides mentioned during today's call can be downloaded from the Investors section of the company's website at www.pilgrims.com. After the presentation, there will be a chance to ask questions. I will now hand the conference call over to Andy Rojeski, Head of Strategy, Investor Relations, and Net Zero Programs for Pilgrim's.

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 first quarter ended on March 26, 2023. 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 the slides for reference. These items also have been filed as Form 8-K and are available online at sec.gov. Fabio Sandri, President and Chief Executive Officer; and Matt Galvanoni, Chief Finance 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 day of this release. Other additional factors not anticipated by management may cause actual results to differ materially from those projected in these forward-looking statements. Further information concerning these factors has been provided in yesterday's press release, our Form 10-K, and our regular filings with the SEC. I would now like 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 first quarter of 2023, we reported net revenues of $4.17 billion, which was slightly below the same quarter last year. Our adjusted EBITDA was $151.9 million with margins of 3.6% compared to 11.8% last year. Our overall portfolio of geographies and business demonstrated its resilience over the last years. During this time, we experienced all-time highs as well as near-record lows in commodity values. We've also faced dramatic inflation throughout our supply chain, including grain inputs, labor and utilities, along with other distinct challenging economic conditions in each of our regions. To mitigate these challenges, we've also consistently driven our strategy of key customer focus and operational excellence. Our businesses were able to capture the benefits of exceptionally favorable markets while minimizing the impact of extremely adverse market conditions. As a result, we could generate a more resilient earnings profile over the long term. Throughout Q1, our strategies demonstrated their criticality as our overall business in each region improved its profitability relative to the prior quarter in a very challenging environment. In our U.S. business, diversification with small bird and case-ready, along with our branded offerings in Prepared moderated the impact of depressed commodity cutout values. In addition, our key customer strategy was instrumental in driving improvements in our production volumes and in our supply chain. In the U.K. and Europe, our focus on operational excellence and the restructuring of our manufacturing network helped us increase production efficiencies. These efforts were extended beyond our production locations as we drove synergies in our back-office support activities as well. Our innovation also continued to gain traction with key customers, further diversifying and adding value to our portfolio. As for Mexico, performance improved in supply-demand fundamentals became more balanced and inflation slowed. In addition, we continue to improve our efficiencies as we map our issues in our live operations. We also benefited from favorable exchange rates in our diversified portfolio as both our fresh and branded offerings grew throughout the quarter. Turning to feed ingredients. Recent USDA reports show ending stocks estimate steady at a historically tight 1.34 billion bushels. Demand has been impacted by the high prices in the first six months of the crop year, with U.S. exports down approximately 37% year-over-year. Domestically, core demand for ethanol was also down 5%, and feed/residual was down 7% versus the same period in the prior year. The ending stocks are expected to increase to more normal levels, depending on Brazil's second crop planting success and weather here in the U.S. and continued export flows from the Black Sea. Although critical development stages are still ahead, current weather is favorable for the large planted area in Brazil. In the U.S., USDA's prospective planting report shows a favorable response to the elevated prices and the corn-to-soybean price ratio with planting intentions of 92 million acres, and planting is well underway. With titled crops in the U.S. and much time at hand, the market currently carries a relative large weather risk premium. With the confirmation of more normal conditions and with the current market scenario, we expect those premiums to reduce. Regarding soy, Q1 saw price volatility as soybean production estimates diverged across South America. Brazil is harvesting a record crop, while Argentina's crop is down 19 million tons versus last year. While South American soybean production was net larger and global soybean stocks are at acceptable levels, the soybean meal supply is constrained as Argentina is dependent on soybean imports to run their crushing industry. However, tepid soybean demand from China and weak soybean meal demand outside the U.S. has kept soybean meal prices from returning to the Q1 highs. USDA prospective planting shows intentions for the '23 to '24 soybean acreage of 87.5 million acres, essentially flat year-over-year. Crop conditions will be critical as we enter the new crop year with historically tight ending stocks of 210 million bushels or 4.8% stocks-to-use. On the wheat, globally, balance sheets have been relatively well supplied and offer alternatives for global feed grain importers. The U.S. hard red winter wheat is the main concern for Northern Hemisphere due to the lingering dry conditions, while EU wheat conditions are promising, much like corn, and operational Black Sea export corridor should be mentioned before mid-May. In the first three months of 2023, ready-to-cook production on the U.S. chicken experienced an increase of 3.4% relative to Q1 2022. The more substantial year-over-year growth occurred in January before slowing in March in recent weeks. Growing first-quarter headcounts were bolstered by year-over-year improvements in hatchability in late 2022, supporting the increased chick placements during the same period. Considering more recent trends, the rate of industry excess has slowed, and it has been flat year-over-year. The industry's hatching rate has declined year-over-year despite our own improvements. Taken together, aggregate chick placements over the trailing month have remained relatively flat year-over-year to negative numbers in recent weeks. And the 2023 outlook indicated lower growth for Q2 and a decline in production during the second semester of 2023. On the cold storage, reported USDA inventories indicated an 8.3% reduction from the end of 2022 throughout the end of March, bringing inventories back near the 5-year average after seeing some rapid buildup towards the end of 2022. When analyzing the overall supply of protein, the USDA maintained the expectation of reducing domestic protein availability. This outlook includes the growth of chicken during Q1 and the growth of turkey production after the AI events of last year. When factoring all of the red meat supply, USDA expects a decline in availability, primarily due to the contracting U.S. beef production of 4.5%. As for pork, availability is expected to remain flat in the U.S. year-over-year. U.S. domestic demand showed mild growth in the first quarter of 2023. The retail channel experienced stable volumes sold, albeit at higher sales prices. In the fresh department, steadily increasing promotional activity provided volume support, enabling sales volume to remain on par with a year ago, while still maintaining elevated dollar sales. As a result, chicken was able to grow both volume and dollar share in the meat category over the past year, demonstrating its remarkable resilience despite a trend of reduction in unit purchases among consumers. Overall, frozen dollar sales grew on mild volume declines. However, we see divergent trends for the frozen value-added and the frozen commodity categories. Dollar sales for the frozen value-added category continued to trend positive as both increased volumes and higher price. Meanwhile, the opposite remains true for the frozen commodity category as declining dollar sales were the result of significant volume declines that were not offset by year-over-year price increases. From a location standpoint, the deli emerged as the fastest-growing location for chicken as it simultaneously grew in price and units. Equally important, it increasingly became a destination for shoppers as the number of deli chicken trips increased 2.5%, a considerable increase relative to the same period last year, reflecting a broader consumer trend of seeking affordability and convenience. We are encouraged by the potential of the retail channel, given the continued tightening of competing proteins and above-average wholesale markup for chicken. As such, retailers can further drive promotional activity to gain momentum with consumers who are looking for more affordable protein options, especially in this inflationary environment. The foodservice category also showed increased demand. Throughout the first quarter, foodservice demand grew volumes of 7% as both QSR and foodservice restaurants experienced year-over-year growth. Consumer traffic has been stable, but we have seen more promotions of chicken items. In the commercial segment, those promotions have generated volume growth of nearly 5%. Raw wings, tenders, legs, and dark meat have experienced an exceptional rebound as all have grown volume double digits. Value-added tender strips and legs have also enjoyed a strong growth rate. The non-commercial segments continue to grow towards the pre-pandemic levels, with volumes year-over-year increasing nearly 12%, led by the business and industry and the lodging segment. As workers increasingly return to the office, we expect these segments to continue to increase. On the export, we see demand is increasing strongly for U.S. chicken after posting year-over-year growth in early 2023. Through the first two months of Q1, export volumes were at an all-time high with 3.3% growth year-over-year. Year-to-date, export performance has also enabled cold storage inventories of dark meat to reduce significantly since the end of 2022, with February volumes 21% below December. We expect this inventory trend to continue for 2023 as export supply chains continue to improve. Regarding the prevalence of high path AI in the U.S., this continues to be of great concern to all industry participants. However, the number of total birds depopulated since the beginning of 2023 is less than 1 million, and the last reported case found in the commercial broiler flock was mid-February. Most of our trading partners are also responding by lifting the high path AI trade restrictions in accordance with our agreement with many significantly reducing their restrictions from state to county level and some to zones as well as following the World Organization of Animal Health guidelines of limiting bans to 28 days both clean and disinfected. With the exception of China, this easing and lifting of restrictions are also aiding the industry's record export performance. We have yet to make headway with China on releasing states from high path AI restrictions, even as all the parameters for lifting this ban have been met. Our geographical and channel diversification in the U.S. continues to benefit our exports, allowing us to access over 80 markets globally, including China. Our U.S. business continued to adjust to these prolonged challenges in commodity supply and demand fundamentals. While market dynamics improved throughout the quarter, January was exceptionally difficult, given elevated grain costs and significantly low market prices, especially for breast meat and wings. Our big bird business was the most impacted by these conditions as revenues and profitability continue to suffer. Nonetheless, the business improved each month throughout the quarter given enhanced fundamentals and intense focus on operational excellence. Although significant progress has been made, substantial work remains to achieve sustainable margin levels. Our diversified portfolio across bird sizes and branded offerings moderated the impact of these challenging conditions. In our small bird segment, we continue to improve our results compared to last quarter and last year, giving our growth with key customers, continued recovery of inflation costs, and operational performance. In case-ready, our growth with key customers continued to outpace industry averages. We expect additional opportunities to accelerate this growth through increased promotional activity, improvements in mix, and partnerships with key customers. Our Prepared Foods business realized similar success as sales and profitability improved throughout the increased business with key customers, operational enhancements, and lower raw material costs. Our fully cooked branded business continues to have strong momentum as our Just Bare and Pilgrim's offerings increased 68% year-over-year. Despite extended challenges in market fundamentals, elevated input costs, and stubborn inflation, we remain committed to profitable growth in our U.S. business. Our expansion in Athens, Georgia to support key customer growth remains on track. Also, our investments to support operational excellence through automation and our new protein conversion plants in South Georgia are progressing as planned. Throughout our U.K. and Europe business, inflation continues to be at the highest level seen over the past 40 years. Despite these challenges, the chicken and pork categories remain resilient as consumers continue to shift into those categories from other proteins. These categories' benefits are further amplified by our growth with key customers as we have outpaced channel averages in both retail and food service. From a supply chain standpoint, the team continues to mitigate costs through operational efficiencies and cost recovery. Overall demand across our total portfolio has remained relatively stable across both branded and private label offerings, even as cost increases have been passed through the shelf to our menu. The team continues to drive growth through innovation with both customer and branded offerings. Moy Park recently became the supplier of choice for a key customer, involving a dedicated brand with distinct animal welfare standards throughout our entire supply chain. Our Pilgrim's Food Masters team has continued to drive and expand usage through flavor and packed formats, innovations in the Fridge Raiders line. In addition, the Richmond brand continues to increase share for its recent introduction of meat-free liner. The team has made significant progress in operational excellence throughout our network optimization, given the substantial headway in the consolidation of our production facilities. To date, we have realized margin improvements for enhanced line efficiencies, increased overhead utilization, and better raw material sourcing. In addition, the integration of our back-office support activities has taken a step forward as our new shared services support center is now functional. We will continue to explore alternatives to further enhance our efficiencies and realize the full potential of the business. Progress may also be amplified by continued stabilization of input costs, increasingly steady stacking levels, and enhanced market fundamentals. Pork and chicken supply demand is becoming increasingly balanced where utilities and wheat prices have recently moderated from all-time highs. Our Mexico business also rebounded solidly throughout the quarter as protein availability stabilized and our difficulties in live operation diminished. These factors were further augmented by increasingly favorable foreign exchange rates and inflation moderation. The team's branded fresh portfolio continues to perform as it grew in double digits again compared to the same period last year. Given our progress and desire to further diversify our portfolio into branded offerings, we entered two new brands, Unique Taste and Favorites, and we will introduce the Just Bare into the Mexican market. The performance of our branded prepared portfolio is also respectable, given its sustained growth. We are driving promotional activity to broaden our presence in value-added and across retail and food service. We're continuing to invest capacity and operational excellence to drive profitable growth. Our footprint expansion in the Yucatan Peninsula remains on track, and we anticipate production to become available in the second half of this year. As part of our journey to become an industry leader in sustainability, we've expanded our efforts beyond our processing facilities, and we work with the entire supply chain to achieve our ambitious sustainability targets. As an example, in Europe, our team recently unveiled a state-of-the-art poultry farm in the U.K. This site employs a variety of innovative designs, technologies, and equipment that can effectively enable the firm to be completely self-sufficient in energy and operating at full capacity. We will continue to evaluate opportunities and bring innovation throughout our supply chain across all regions. With that, I would like to ask our CFO, Matt Galvanoni, to discuss our financial results.

Matthew Galvanoni, Chief Finance Officer

Thank you, Fabio. Good morning, everybody. For the first quarter of 2023, net revenues were $4.17 billion versus $4.24 billion a year ago, with adjusted EBITDA of $151.9 million and a margin of 3.6% compared to $501.8 million and an 11.8% margin in Q1 last year. Adjusted EBITDA margins in Q1 were 1.8% in the U.S. compared to 15.9% a year ago. For our U.K. and Europe businesses, adjusted EBITDA margins came in at 5.3% for Q1 compared to 1.2% last year. In Mexico, adjusted EBITDA in Q1 was 8.5% versus 16.1% a year ago. Moving to the U.S. results, our adjusted EBITDA for Q1 came in at $43.6 million compared to $411.7 million a year ago. Our U.S. big bird business was impacted by continued volatility in the commodity chicken markets. We entered the first quarter on a downward slope of the commodity market pricing. As we hit the end of January, we began to experience steady improvement in cutout pricing until we saw flattening of the curve towards the end of the quarter. Our diversified U.S. product portfolio across bird sizes and brands, along with our key customer partnerships, helped us capture the upside of the strong commodity market prices in Q1 2022 while helping us mitigate the impact of volatility in market prices in our big bird business during this quarter. In the U.K. and Europe, adjusted EBITDA in Q1 was $66.2 million versus $14.8 million in 2022. The U.K. and Europe business continues to face inflationary cost pressures. However, through its previously discussed mitigation efforts in 2022, the business has shown resiliency in its profitability growth journey. The business has benefited from the back-office integration and its network optimization programs. We incurred approximately $8 million of restructuring charges during this quarter in support of the U.K. network optimization program. Mexico generated $42.1 million in adjusted EBITDA in Q1 compared to $75.3 million last year and negative $15.8 million in Q4 2022. Sequentially, the Mexican business profitability improved primarily due to more balanced supply-demand fundamentals and the diminishing of recent bird disease challenges in its live operations. Our SG&A in the quarter was lower year-over-year. Key drivers included a decrease in legal defense funding, certain lower people-related costs, lower costs in the U.K. from impacts of the back-office integration, and a minor amount of net year-over-year foreign exchange favorability. Also during the quarter, we benefited from the conclusion of negotiations related to both property insurance and business interruption insurance claims in the U.S. and the U.K. We spent $132 million in CapEx in the first quarter. The first quarter spending is higher on a run rate basis, primarily due to our investments in the Athens, Georgia expansion and our new protein conversion plant being constructed in South Georgia. We reiterate our commitment to invest in strong ROCE projects that will improve our operational efficiencies through automation and tailor operations to address key customer needs to further solidify competitive advantages for Pilgrim's. Although Q1 was challenging due to volatility in the U.S. chicken commodity market, our overall balance sheet and liquidity position remains strong with approximately $1.15 billion in total cash and revolver availability at the end of the quarter. And with the most recent completion of our $1 billion 10-year notes offering, we further bolstered our liquidity position. We are very happy with the results of this offering, especially given the conditions in the capital markets. Given the high demand by our investors, we were able to increase the size of our offering while maintaining an attractive interest rate. In addition to adding cash to our balance sheet, we repaid our term loan with proceeds from the offering. The offering provides us flexibility during this more volatile time in the U.S. commodity markets and allows us to explore further simplification in our capital structure, such as the elimination of subordinations with a potential unsecured structure as well as the opportunistic with potential liability management exercises with our existing debt, including possibly paying down our 2027 notes. As of the end of Q1, our net debt totaled $3 billion with a leverage ratio of 2.3x our last 12 months adjusted EBITDA, which is within our target ratio of 2 to 3x. Net interest expense for the quarter totaled $39 million. We anticipate our full year net interest expense to be between $160 million and $170 million. Our effective tax rate for the quarter was impacted by a nominal pretax GAAP loss for the quarter and the multi-tax jurisdictional nature of our business. As I noted in our February call, we still anticipate our full year effective tax rate to be between 23% and 25%. Our capital allocation approach will remain disciplined as we look to grow the company. We will continue to outline our investment priorities with our overall strategic 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 of Barclays.

Ben Theurer, Analyst

Congrats on the results. So my two questions, let's start off with the U.S. And obviously, there was a nice sequential improvement. And you kind of called out that January was still soft, but things got better. The question is if we look into a second and then maybe a little bit of a sneak preview into the third quarter, how confident are you of the ability to drive higher profits, maybe getting that profit margin into mid-single-digit range? Do you think there's some potential just given maybe some of the grain costs on a year-over-year basis coming down? Prices seem to have started to go in the right direction. So how should we think about the onset of summer in the grilling season and PPC's positioning as to the profitability? That would be my first question.

Fabio Sandri, President and Chief Executive Officer

Of course, thank you, Ben, for the question. Yes, looking into the future, we need to also think about the segments that we operate. I think we've always talked about the portfolio that we have. And when analyzing Q4 and Q1, we see that the supply and demand has been in balance for the small birds and for the case-ready category. I think the segment that is suffering from an imbalance in supply and demand is the commodity segment or the big birds. Looking into the data on the Q1 increase in production, we can see that almost all of the growth occurred in that same segment in the big bird category. So what we are seeing is that a stable demand in food service and retail, which once again has been very positive for the small bird and case-ready categories of our portfolio, but the commodity category is completely out of balance. We're seeing an increase in production, and we don't see a strong demand for the commodity segment, especially on the boneless breast and on the wings. As we are seeing the exits coming down in our industry, we believe it is in that category because of the severe losses that the category is suffering; we will see the overall portfolio go up. I think the main drivers for that is going to also be the grilling season. As we know, demand during the grilling season increases in both the foodservice and the retail front. And when the demand on the retail front increases, we can augment our offerings on the case-ready side by buying meat from the big bird category. So we expect that more promotional activity on the retail, the increased demand in foodservice, and on the retail during the grilling season, coupled with a moderation in the increase of production or even a reduction as USDA is expecting to put more supply and demand balance for the commodity category, which will take our portfolio higher.

Ben Theurer, Analyst

Okay. Perfect. Very good, very clear. And my second question is on the European/U.K. business. It was interesting to see because I think that $8 million restructuring was still part of that U.K. business, which you've talked about in the last conference call. So just wanted to understand, where you are right now on the restructuring? Is there still more to come and maybe the magnitude of it? And what do you think as the business normalizes as you get your production to the levels where you want to be? What's like kind of a level of operating income on a quarterly basis or annual basis, you think is reasonable for that business, just given that you acquired the Kerry business, but we never saw the business like in full swing performing properly with the legacy Moy Park plus the Kerry. So what's like that go-forward run rate? Because I remember prior to the issues, Moy Park was a very steady, stable, easy to forecast. So how does that combined with Kerry look like?

Fabio Sandri, President and Chief Executive Officer

Yes. Great point. I think there's a lot of moving parts in Europe. I think we were over the last year, restructuring our activities. We have some plants that have spare capacity. So we moved some of the capacity to more efficient plants. And that's what we saw on the restructuring. And that's the improvement in the results that we are seeing because we are still facing some very high inflation on that, which we need to translate into prices, and we are always behind when capturing those inflationary impacts into the prices. I think we also saw an increase in wheat over the last year. But now I think the benefits are also we are expecting are going to happen with the moderation of inflation, with reduction of the utilities, and reduction of wheat. In terms of the network, we're always looking into opportunities of what we can do, especially because we are combining three businesses. As we mentioned, there are some benefits from the back office integration as well. But we believe that the majority of the restructuring that we need to do was already done. So in terms of what we expect from this business, I think we have the clear vision of being the best operator in Europe as we have the same vision here in the U.S. and Mexico. And margins in the range of 6% to 8% are what we believe can be achieved in that segment.

Ben Theurer, Analyst

That's operating, correct?

Fabio Sandri, President and Chief Executive Officer

Operating, yes.

Operator, Operator

The next question is from Ben Bienvenu of Stephens.

Ben Bienvenu, Analyst

I want to ask Fabio, thanks for giving that kind of framework as we think about demand and supply moving through the summer. I want to ask about cold storage. Inventory levels are still elevated. In light of that supply-demand framework that you gave us, how do you think about cold storage levels whittling down? And how many months do you think we have before we start to see those inventories become more reasonable on a path to what sounds like a stronger back half of this year.

Fabio Sandri, President and Chief Executive Officer

Yes. Thanks. Looking into the cold storage, I think the overall levels, we saw an increase in 2022. But I think over the beginning of 2023, we're seeing some significant decreases. The most impactful part on the cold storage has always been on the legs, right, or leg quarters because that's a big impact for the export. We've been seeing significant demand on the export front, and we're seeing the leg quarter inventory at record lows. The areas that we saw some increases are in the breast meat and on the wings, and a category called 'other.' I think what we believe is in this other category. It's a lot of fodder processing. So fodder processing wings or fodder process bones or boneless breast. So when analyzing the size of that, it's almost a week of production. So it's not a significant amount. But we believe it is in this inventory. It's some fodder processors that took advantage of very low commodity pricing to build some inventories.

Ben Bienvenu, Analyst

Okay. That's great. My second question is on Mexico. A nice sequential improvement. You discussed kind of the snapback and fundamentals there to a more balanced level. What's your outlook at the moment on the visibility you have for that business as we move into the second quarter?

Fabio Sandri, President and Chief Executive Officer

Yes. Thank you. Mexico has been very volatile lately. And I think it's something that we always mention that they can be very volatile quarter-over-quarter, but year-over-year, they tend to be more stable. I think we are seeing a more balanced supply and demand in Mexico. I think we're still seeing a lot of imports from pork from the U.S., from breast meat from Brazil, reaching the Mexican market. But yet, I think the industry in Mexico adapted their supply and demand to what they expect on the economy. The economy is doing better in Mexico lately. And as we always mentioned, chicken is the most resilient to the inflationary events. I think in Mexico, there was a little bit of trade down out of proteins actually during Q4 because of the economic environment. But we are seeing that economic environment improving. And most of that operation is trading back into the protein and chicken is the entry protein in Mexico.

Operator, Operator

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

Peter Galbo, Analyst

Fabio, I was wondering maybe if we could just get an update with regards to Athens, maybe a couple of details there. One, I think if I have it correctly, you kind of announced the expansion program around this time last year, just when you would expect that kind of to be completed and that we would start to see that showing up in the numbers? And then the second part of that is just upon completion, if you can give us a rough estimate, we've always thought about your business as one-third, one-third, one-third, but between kind of the three segments. Just upon completion of that, where small bird will kind of land as a percentage of your overall U.S. mix?

Fabio Sandri, President and Chief Executive Officer

Thank you, Peter. The Athens project is crucial for us as it supports our key customer growth. Our strategy focuses on growing alongside our key customers. We anticipate approximately a 20% increase in our small bird category with this plant expansion. It adds an additional line, but it won't significantly alter our portfolio; it will contribute some points to the small bird category. The key aspect is to continue evolving our portfolio towards greater profitability and stability, enabling us to grow alongside our key customers. We expect to start operations at that plant in Q4 of this year.

Matthew Galvanoni, Chief Finance Officer

Yes. Most of the benefits will start to become evident at the beginning of next year because as we ramp up in the fourth quarter, it will take a little bit of time. However, by the first quarter, we should be seeing the full benefits of that expansion.

Peter Galbo, Analyst

Got it. No, that's helpful, guys. And maybe just to go back to Ben Theurer's question. U.S. in Q2. I just want to make sure that we're kind of all on the same page here. You're expecting U.S. operating profit to be positive, I would imagine, in the second quarter. And then if I can just get you to comment, consensus for the second quarter right now is around $250 million of EBITDA. Just any comment you could make there on how you see things shaping up relative to consensus in the quarter.

Fabio Sandri, President and Chief Executive Officer

Sure. I think we're seeing all the positive drivers in the market. We're seeing the industry reducing production. We are seeing some more demand in terms of retail with more feature activity on the foodservice as we go to the grilling season. So the drivers are there, and we expect that to be in line with those expectations.

Operator, Operator

The next question is from Adam Samuelson of Goldman Sachs.

Adam Samuelson, Analyst

There seems to be a seasonal improvement in boneless breast prices, but I want to question that a bit. As we approach the end of April, prices have stalled around $1.40 a pound, which is much better than the lows we experienced in December and January. However, when comparing to last year at this time, the industry's year-on-year production has slowed down compared to a few months ago, even though most of this production increase is in larger birds. I'm trying to understand why demand for boneless breast appears sluggish, possibly due to weaker food service and further processing demand, as well as a limited pull-through into retail for tray-pack. The seasonal increase we’re seeing seems minimal, and I am trying to reconcile that with your statement that demand is generally good.

Fabio Sandri, President and Chief Executive Officer

Yes, you are correct about the key drivers. We're anticipating that supply increases will slow down, and for the second half of the year, we're expecting a decline compared to last year's figures. Last year at this time, despite the same production levels and sufficient demand, we experienced record prices for boneless breast and wings. We predict comparable conditions for supply and demand this year, although we are starting from a significantly lower price point. The fundamentals of supply and demand remain in play. Retailers are currently active in promotions, evidenced by record-high retail prices which are substantially higher than at the same time last year. This is preventing consumers from increasing their spending; they are spending more money but not significantly more in volume. We anticipate that this will change with increased promotional efforts, especially as the prices of other proteins rise due to lower production of beef and pork in the second half of the year. This should lead to more promotional activities in retail. In the foodservice sector, particularly quick-service restaurants, we expect increased promotional initiatives in the upcoming months, again due to the reduced availability of other proteins and price increases. In the industrial segment, particularly among fodder processors, we noticed a slowdown, largely due to the same high pricing issues affecting retail, resulting in weak demand. We have seen some categories in this segment remain flat compared to last year, but we expect them to pick up in the latter half of the year. With regards to chick placements, we're observing some moderation, even negative trends compared to last year, but strong indicators of improving demand signal good potential for boneless breast. On the wing front, the prolonged lower price has lasted longer than we anticipated; typically, wing prices bounce back more quickly. However, wings are gradually returning to menus, and there is increasing promotional activity from foodservice focusing on wings as well.

Adam Samuelson, Analyst

Okay. In response to an earlier question, I thought I heard you mention that a 6% to 8% operating margin in Europe is what you believe the business could achieve. If I missed it, I apologize. Did you indicate a timeline for when you think you could reach that? Additionally, considering the changes in portfolio and mix you've achieved over time and acknowledging the volatility, how would you assess the margin potential of the U.S. business moving forward?

Fabio Sandri, President and Chief Executive Officer

Yes, I believe Europe is a more stable market when we consider its historical performance. This stability allows us to discuss expected margins with greater confidence. We assess our reinvestment levels and our diverse portfolio, which includes beef, pork, and prepared foods, giving us a balanced approach. This portfolio allows us to distinguish ourselves from competitors in Europe and to be a better partner to key customers. Hence, it's easier to address our performance expectations in Europe. We anticipate that our results will trend positively by Q4 and into next year as inflationary pressures ease to more typical levels. Additionally, our portfolio of contracts plays a critical role; we have a significant number of cost-plus contracts in Europe. Previously, we viewed many of these contracts as cost-plus related mainly to feed and grain, especially since inflation was lower in areas like packaging, utilities, and labor. We have now adapted these contracts to account for the overall costs comprehensively, which simplifies our margin discussions in Europe compared to the U.S. In the U.S., while we have a solid portfolio, the commodity segment has experienced extreme volatility. Other segments, such as prepared foods, small bird, case-ready, and fresh food services, have remained stable, but the commodity segment has fluctuated dramatically over the past two years. Last summer saw record high prices, while we are now experiencing significantly lower prices in Q4 and Q1, making it challenging to forecast profitability in the U.S.

Adam Samuelson, Analyst

All right. Worth a shot. I appreciate the color.

Matthew Galvanoni, Chief Finance Officer

Thank you, Adam.

Operator, Operator

The next question is from Andrew Strelzik of BMO.

Andrew Strelzik, Analyst

I wanted to revisit the U.S. chicken margins and summarize what you just mentioned. It seems that demand is strong, supply is set to decrease, and feed costs, according to the forward curve, are declining. I understand your comments regarding the grilling season. However, looking beyond that, if I consider those three factors, do you expect your overall U.S. chicken margin to return to normal levels? If that's not the case, what would be necessary to achieve that based on your outlook?

Fabio Sandri, President and Chief Executive Officer

We do expect to return to the levels we used to see in the past. Looking at our portfolio, it is well balanced, although the commodity segment has been very volatile. We anticipate that segment will stabilize in the coming quarters. The small bird and case-ready businesses have been consistently stable year-over-year, and we are actually observing positive progress in our Prepared Foods offering. For that to occur, we expect normalization in demand, particularly in the larger bird segment, alongside increased retail activity and more promotions for chicken and chicken sandwiches in foodservice.

Andrew Strelzik, Analyst

Okay. Great. That's helpful. And then my other question is just on how you're thinking about the fee cost side with backwardation, particularly on the corn side. Are you thinking of maybe getting more aggressive locking those in? Do you feel like you're in a good position to continue to let that ride? Any kind of change in your approach as we get to potentially more favorable feed cost environment?

Fabio Sandri, President and Chief Executive Officer

Yes. We're always looking into the market and the drivers to establish a position more or less aggressive. What we are seeing, the indication today is a good acreage. I think the high prices that we saw, especially on corn, worked, and we saw some record acreage or planting intentions here in the U.S. I think it's all going to be depending on the weather, as usual. The crop is actually evolving really well right now. The planting is going ahead of the 5-year average. So we're seeing some good conditions on the crop. I think there's also a change in the weather patterns from the La Nina to El Nino, which typically brings good weather for the planting here in the U.S. We're starting from a very tight carryout. But we expect with normal yields and with the acres that we are seeing in USDA planting intentions, a much better stocks-to-use ratio and a much better carryout for the next crop. Of course, that will impact more the end of Q4, beginning of Q1 as there is a lag between refeeding the birds and the birds being processed. So we expect that benefit to be late Q4 and beginning of Q1. But there are some very positive perspectives in terms of the grain cost for our operations.

Operator, Operator

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

Fabio Sandri, President and Chief Executive Officer

Thank you again. Although we faced exceptionally difficult market conditions, our strategies of diversification, key customer focus, and operational excellence are designed to mitigate these challenging transitory issues and cultivate long-term profitable growth opportunities. Throughout Q1, these strategies were once again affected as we drove improvements across all regions despite depressed market pricing, elevated input costs, and continued inflation. Moving forward, we will continue to drive these strategies, along with unwavering commitment to our values and our team member wellbeing. Given continued focus on relentless execution, we can further cultivate competitive advantages for our business, enabling a better future for all of our team members. Thank you for joining us today.

Operator, Operator

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