Good Morning and welcome to the second quarter 2020 Pilgrim's Pride Earnings Conference Call and Webcast. [Operator Instructions] Please note that slides referenced during today's call are available for download from the Investor Relations section of the company's website at www.pilgrims.com.

After today's presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Dunham Winoto, Head of Investor Relations for Pilgrim's Pride. Please go ahead..

Good morning, and thank you for joining us today as we review our operating and financial results for the second quarter ended June 28, 2020. 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 in the Investor Relations section of our website along with the slides we will reference during this call. These items have also been filed as 8-Ks and are available online at www.sec.gov.

Presenting to you today are Fabio Sandri, Interim President and Chief Executive Officer and Chief Financial Officer; and Charles von der Heyde, President of Pilgrim's Mexico. Before we begin our prepared remarks, I'd like to remind everyone of our safe harbor disclaimer.

Today's call may contain certain forward-looking statements that represent our outlook and current expectations as of the day of this release. Other additional factors not anticipated by management may cause actual results to differ materially from those projected in these forward-looking statements.

Further information concerning those factors has been provided in today's press release, our 10-K and our regular filings with the SEC. I'd now like to turn the call over to Fabio Sandri..

Thank you, Dunham. Good morning, everyone, and thank you for joining us today. For the second quarter of 2020, we reported net revenues of $2.82 billion and adjusted EBITDA of $112 million or a 4% margin and a GAAP EPS loss of $0.02 per share.

Before I begin, I would like to express my sincere gratitude to our global teams for their commitment, dedication and continued hard work in supporting our ability to keep our team members safe and healthy while continuing to maintain our ability to produce and supply customers during this challenging time.

Safety is a condition at Pilgrim's, and our team members responded admirably to the unprecedented conditions supplying products to our customers. I would also like to thank all the health care professionals and first responders who have remained diligent in helping to maintain the safety and health of our team members.

We are continuously adapting our global operations to the change in channel demand while adjusting our operations to be able to maintain the operations at all plants and minimize any significant disruption due to labor and health issues.

I would like to reiterate the precautionary proactive actions we have implemented that go beyond our already rigid standards at all our facilities to further minimize the spread of COVID-19 in accordance with health and disease guidelines recommended by specific government health authorities.

We are taking these steps to better safeguard the wellness and health of each team member while fulfilling our essential business duty as a food producer to people here in U.S. and globally.

We have increased the frequency of daily sanitation and cleaning of commonly used areas and repeatedly touched surfaces; limited visitors to our operations and offices; performed daily wellness screening of our team members, which includes required temperature checks, self-screening and reporting; suspended all known crucial business travel and meeting attendance; and implemented remote work for business office team members where possible.

Inside our plants, we implemented -- we are promoting social distancing by staggering starts, shifts and breaks, increasing spacing in cafeterias, installing portions between workstations and adding outdoor space to reduce density in our break areas.

We have mandated PPE available to our team members and are also requiring masks to be worn 100% of the time while on our property. We also completed the installation of UV and bipolar ionization at all of our processing plants in the United States. We removed vulnerable populations from our facilities.

As communities, our plants experience increased cases, and we are offering them full pay and benefits. For those team members who are not able to come to work due to illness related to COVID-19, we are requiring them to self-isolate and shelter at home with short-term disability benefits.

We are offering free preventive care to all team members and offering free life health online services that allow for virtual doctors' visits at no cost. Turning to the results of our business. Despite the volatility and challenging market environment in Q2, we have continued to achieve a superior relative performance to our competition.

For the full quarter, operating performance and yield was in line with results a year ago as well as sequentially but was more than offset by challenging market dynamics in U.S. as well as Mexico.

However, when considering the month of June alone, which we think is a much better representation of the performance of our operations, we experienced a significantly improved environment across all of our business. Compared to June in 2019, U.S.

was virtually the same, Europe was slightly better, while Mexico was in line, even when taking into account all the disruptions, less-than-optimal product mix and added operating costs.

In spite of the difficult global market conditions, our results have maintained well balanced and the results of our vision to become the best and most respected company, creating the opportunity of a better future for our team members.

To support our vision, we are continuing to -- our strategy of developing a unique portfolio of diverse complementary business models, continue to relentlessly pursue operational excellence, becoming a more value partner to our key customers and creating an environment for safe people, safe products and healthy attributes.

In Q2, our team members remain committed to execute on our strategy of delivering the best relative results regardless of market conditions.

The disruptions caused by COVID-19 on each individual country's demand for protein consumption as well as the flow of global trades presented a unique and significant challenge the world has never seen before and generated volatility far beyond normal seasonal factors, which persisted during Q2 from Q1.

In U.S., in the first half of the Q2, the market was significantly challenged before a gradual loosening of travel and movement restrictions due to COVID-19 rather than improvement in channel demand, especially from foodservice.

Similar to last quarter, large bird deboning was once again the most volatile during Q2 with quick moves between lows and highs and remained challenged compared to '19. Operationally, however, we continue to improve our relative performance versus the industry across all businesses, including large bird deboning.

In Europe, implementation of the strategy at the legacy operations to better mitigate future input cost challenges have continued to produce the expected results, while integrating of our newly acquired operations is on track. In Mexico, the market was again weak for much of Q2 before improving in June.

Direct COVID-19 mitigation costs were roughly $40 million for the quarter in U.S. But that excludes indirect costs that are more difficult to precisely quantify such as overall disruptions to our operations, less optimal mix and production inefficiencies.

Despite the challenges, the diversity of our portfolio and our global footprint continues to minimize the impact of volatility due to individual market conditions and increases the resilience of our operations.

We will maintain our strategy while continuing to improve the portfolio to better respond to individual market dynamics and generate a relative increase in performance over our peers. We believe this approach will give us higher and more consistent results for the mid- to long run and minimize the full peaks and troughs of the commodity sectors.

In Q2, we also again saw greater-than-normal volatility within our U.S. fresh chicken business.

The first half of the quarter was significantly challenged and was far below normal seasonality as implementation of stay-at-home orders national-wide continue to disrupt channel demand by increasing our retail business while reducing foodservice and also materially increased the volatility within our business.

Despite the sharp decline in foodservice requirements, we were able to quickly respond to the shift in channel demand by increasing our volume mix to key customer retailers. During the month of June, we have started to see our U.S.

volumes returning to be more in line with the normal run rate as business in some states have gradually reopened, driving improvement in foodservice demand. A large portion of our foodservice customers are also within the QSR segment, which further dampened the impact across our fresh business units.

Our portfolio of differentiated products along with our key customer model are giving us better insulation against the volatility.

We are much better positioned to adjust product and channel mix given our presence across all 3 bird sizes and strong customer relationship while we continue to make relative operational improvements in our large bird deboning operations. The market was again extremely volatile during Q2 versus Q1.

The cutout bounced within a short time frame during the quarter between lows and the highs. The cutout has been constrained by weak leg quarter pricing, which has been impacted by not only soft export demand but also difficultly in producing the optimal mix at the plants due to higher-than-normal during absenteeism due to COVID-19.

However, reduction in egg sets and chick placement in late Q1 are starting to bring better balance to industry supply and demand, and prices have already begun to react and seem to be stabilizing. Within the less commoditized small bird and case-ready segments, market supply and demand balance was again relatively better in Q2.

Demand from our retailers have remained strong. Our case-ready business has continued to be stable and generated great results driven by strong demand for our chickens, especially from key customers. Demand for our Just BARE retail case-ready for Q2 was up 80%, with online up even stronger at 205%.

Our market leadership in these categories and a more differentiated product portfolio have continued to strengthen the growth of our competitive advantage versus the industry.

While the commitment to our key customer strategy has been reflected in the consistency of our past results, the value of this approach has never been more relevant to our growth than during the current period of uncertainties and challenges.

As another example of how we are further supporting the key customer growth, we intend to double our case-ready capacity at our plant in Minnesota by increasing the number of heads processed at the plant through automation, raising the mix of case-ready products.

With this addition, we expect to increase by 20% of production of differentiated, high-attribute Just BARE brand products. The strong relationship we have with key customers give us many opportunities to sustain our increasing volume and realize their needs for growth.

In addition, many of our key customers maintain a leadership position in their respective categories. As a result, we are the direct beneficiaries of their ability to outgrow their competition. Beyond driving pure growth, our key customer strategy also promotes trust, enhances long-term relationships and strengthens our margin structure. In U.S.

Prepared Foods, revenues declined 18%, 19% less volume. The sales decline was driven by the mix of foodservice, schools and delis that were all impacted by shutdowns. With the shift in demand increasing to more retail cook-at-home items, we have adjusted by increasing production of retail bags, which grew 76% by shipping more to current key customers.

This shift has also given us the opportunity to gain new distribution for our brands, Pilgrim's and Just BARE within more traditional bricks-and-mortar stores as well as acquiring new shoppers for our brands through the online sales that ship direct-to-consumer homes. Our national account business remained relatively steady with a 2% increase.

At the end of June, total U.S. chicken inventory was up 2% compared to last year. The main drivers in this increase were leg quarters, which were up 22%; and breast inventory, which was up 20%. Increase in breast inventory reflects the reduction in foodservice demand due to COVID-19.

While leg quarters rose due to the impact of labor shortages on large bird deboning as well as the volatility in global demand for chicken, which was affected by the strengthening of the dollar, shelter in place and weak oil prices.

When compared to Q1, overall inventory fell by 7% to 855 million pounds, with leg quarters and drumsticks falling by 20% and 25%, respectively. The inventory reduction is mostly driven by the acceleration of exports to China, which are up 157 million tons year-to-date in May, with more shipments occurring in April and May.

Year-to-date, China is the second-largest destination of U.S. broiler exports, behind Mexico. However, in May, China was the #1 destination, surpassing Mexico by 3 million metric tons -- 3,000 metric tons.

Drumsticks inventory reduction reflects a mix simplification due to less deboning across the industry caused by labor shortages, coupled with strong drumsticks demand in China. Overall, year-to-date, U.S. broiler exports have increased 5%. The largest growth has occurred in Southeast Asia as a result of ASF.

In addition to the Chinese market opening, the Philippines, Vietnam and Taiwan markets grew by 45%, 19% and 9%, respectively. By the end of Q2, our export volume grew year-over-year by 12%, and our export revenue has grown 15%. Our sales to China has remained strong despite some weakness in dark meat demand in other parts of the world.

Our commitment to maximize export value proposition has allowed us to quickly respond to changing demand around the world while offering support to our domestic business as product mix and supply levels evolve. During the quarter, we added 6 new destinations to our country mix.

And year-to-date, we have added 67 new importers to our client base as we continue to further broaden and diversify our relationships. While we expect China to continue to be a significant growth driver, we also saw growth from Southeast Asia, outside of Hong Kong and China, the Middle East, the Caribbean and Latin America as well as Africa.

We remain positive as we have demonstrated resilience and position ourselves to return value regardless of market conditions. Market environment in Mexico during Q2 remained challenged as the effect of weak market conditions, which added to uncertainties in customer spending, have persisted.

In addition, the peso continued to be weak, putting additional pressure on the results. Chicken prices were also below seasonality driven by better-than-expected growing conditions before rebounding much closer to normal levels by the end of the quarter.

Similar to our other global operations, results from the month of June in Mexico were significantly improved compared to the beginning of Q2 and was in line with last year's performance despite the unfavorable mix impact and added operating costs.

We have adapted our facilities by shifting production to those channels that are experiencing better relative demand. Our increased share of noncommodity products, strong execution and stability in branded and prepared foods also help to partially offset the general market weakness.

We continue to believe in the long-term growth and prospects in Mexico. The results of our prepared foods in Mexico has continued to outperform our expectations. We continue to lead in developing the market in prepared foods by launching significantly more products to meet demand.

We are making great advances in our prepared foods with innovation as the core competency of our strategy. We are generating great results under premium Pilgrim's and Del Dia brand, both of which have continued to receive very favorable acceptance by consumers at retail, cold stores and QSRs. Moving to Europe.

Our legacy operations, Moy Park, delivered an EBIT performance that was in line with both the previous quarter and the same period last year as we benefit from a great exposure to the retail segment in Europe versus other regions, which remained strong and partially offset the reductions in foodservice demand.

This result was also achieved despite the significant impact of COVID-19 in our operations, primarily the additional cost to keep our team members safe and the place running as well as less optimal mix because of the drop in volume, mainly in our foodservice business unit and external sales from our agri business unit.

Although our volumes and net sales were below Q1 and the same quarter of last year, our strong operational performance and improved SG&A management helped to mitigate the impact of COVID-19 during Q2. As a result, EBIT was roughly in line with Q1 and the same period a year ago.

With feed costs relatively stable, we continue to improve efficiencies in our operations by optimizing our manufacturing network, improving labor management and implementing more automation in order to reduce cost and drive higher yields.

We are continuing to invest capital not only in our automation but also to keep our assets well maintained to enhance the safety of our members, ensure the quality of our products and the compliance with the environment and bird welfare rules.

Our relative performance measured as the results of the last 12 months continued to show us improving and above the average of the competition in Europe, which validates the effectiveness of our strategy.

Towards the end of the quarter, we have begun to see some foodservice operators reopening as well as better demand and volumes through our QSR customers. Retail demand for our products has remained strong, which should further support an improvement in demand within foodservice through the coming months.

We have remained diligent and we will implement the appropriate measures and corresponding actions as conditions evolve. Our newly acquired European operations performance has continued to present consecutive growth, generating an increasing positive EBITDA, achieving one of the best Q2 results in the last 5 years.

The performance was driven by robust demand at retail, partially offset by a reduction in foodservice, continued strength in pork exports, especially to China, as well as the implementation of operational improvements and capture of synergies. Exports to China were up by more than 130% in Q2, which was an acceleration compared to Q1.

We have now doubled the proportion of exports to China as a total of our sales, which we expect to drive the strength of our overall exports in the near future. All of our European fresh pork facilities are approved for China. So we are well positioned to benefit from export opportunities.

We also continue to evolve in our strategy, and we will significantly increase our volumes with a new key customer in the next quarters. Integration of the new European operations is tracking well to expectations.

Over the next few years, we continue to expect to generate an EBITDA improvement to achieve a level that is competitive with leading companies with similar portfolios. We have a proven history of successfully and efficiently integrating companies we have acquired, and we will apply similar methodologies in integrating the new operations.

We have expanded our distribution capacity for the newly acquired European assets through some recent wins to increase our retail exposure and strengthening our partnership with key customers.

We are optimistic about building upon our operational improvements by continuing to optimize its manufacturing footprint, extract best-in-class operational excellence, capitalized export opportunities, optimize the portfolio of channels, segments and products as well as strengthening our growth business with key customers to drive innovation in value-added and higher-margin areas.

We are levering resources available through both our legacy and newly acquired operations in Europe in conjunction with our global team in order to further strengthen our competitive advantage by increasing our ability to offer key customers a much wider selection of highly differentiated, innovative products to fulfill the growth in consumer demand.

We remain excited to share innovation as best practice internally to ensure operation and financial efficiency and position Pilgrim's as a whole for increased profitability and more consistent margins.

We have a great team in Europe dedicated to generate the best possible relative results by focusing on factors within our control while ensuring the protection and the safety and health of our team members. Moving to feed inputs.

Corn prices fell over 8% during the quarter, weighted down by the economic impact of COVID-19 and the expectation of a record crop in the United States. Although farmers ultimately planted fewer acres than the market had expected. USDA is currently forecasting a new crop surplus of 2.65 billion bushels, which includes a 20% increase in U.S.

export demand. Although corn prices initially rally at the beginning of Q3, prices have since fallen back to where they started in the quarter. Crop conditions continue to remain favorable. And although weather conditions can change, we are optimistic about current crop and the likelihood of a record U.S. corn carryout.

Soybean prices fell nearly 13% during Q2 after increasing at the end of Q1 on more concerns that COVID-19-related supply chain issues will decrease supply. After the market realized that there were no major impacts to supply, prices quickly retreated at the start of the quarter.

The USDA raised the new crop carryout estimate for soybeans to 425 million bushels and estimated that also include a nearly 25% increase in export demand. As with corn, soybean conditions remain favorable, and we are very optimistic about the U.S. soybean crop. Given the outlook remains favorable for U.S.

supplies, both for corn and soybeans, we do not see feed input prices in North America being a headwind to margins. In Europe, feed wheat prices fell 3.5% during the quarter, following an increase in prices at the end of Q1.

Large increases in wheat purchases initially pushed prices higher during the crisis but quickly fell as normal purchasing patterns continued.

With harvest just started in the U.K., and although supplies are projected to be lower and prices higher than last year, we continue to have access to cheaper available alternative grains to help offset the higher-than-expected wheat prices in U.K.

According to the USDA, Q2 production in the chicken industry was flat relative to Q2 '19 as head reductions were mostly offset by increased live weight. The industry decreased process headcounts but maintained a consistency trend in layer flock, with the most recent month 2.2% above year ago levels.

With a larger layer flock, the market has adapted by maintaining the ability to grow in the long term while showing restraint and flexibility in the near term as indicated by the year-over-year reduction in Q2 egg sets and chick placements being down 1.8% and 4.1%, respectively.

Although pullet placements have remained above year ago levels, they are made to support new capacity and are not expected to significantly disrupt the industry longer-term supply and demand balance.

In continuation of Q1, during Q2, COVID-19-related restrictions resulted in consumers staying at home more frequently than last year, shifting a large portion of chicken demand towards retail. This shift created an expected short-term imbalance in supply and demand.

The result was a temporarily reduced pricing, driving an industry response to reduce law in large numbers to rebalance supply and demand dynamics. While chicken has been impacted by the supply/demand imbalance, COVID-19 has also caused supply chain disruptions for other competing proteins.

The subsequent reduction in total protein availability enabled prices to be near to more normalized ranges. More recently, consumers have remained elevated levels home protein consumption as more individuals continue to work from home while also minimizing their exposure to crowded areas such as restaurants.

As a result, retail demand for chicken, like that of all proteins, has remained robust throughout the quarter. While foodservice demand still trades below year ago levels, this channel has also been improving since early April led by the QSR segment.

In response to robust retail demand and a rebound in foodservice, the industry has great egg sets and chick placement back to 2019 levels but still below levels seen in January and February. For the second half, the USDA expects production to be at or slightly below Q3 and Q4 of 2019.

With the fluid macro environment and high employment, consumer uncertainty will continue to impact the channels differently. We expect the restriction of restaurant capacity, social distance guidelines, consumer concerns for individual health and adjustments to the change in personal economic situation to increase the frequency of at-home meals.

As chicken continues to be one of the most affordable and versatile proteins, retail demand is likely to remain strong, while we expect foodservice demand will remain more volatile, at least in the near term.

However, we believe the QSR's ability to easily adapt to off-premise and offer value-oriented food has positioned it to lead the recovery and outperform the foodservice segment. Our strategy is well suited to the challenging macroeconomic as well as market conditions.

While we are already well balanced in terms of our bird size exposure, we will remain seeking opportunities to incrementally diversify our production mix and reduce the commodity portion of our portfolio by increasing the number of differentiated products to key customers while optimizing our fixing operations by pursuing operational improvement targets.

Our key customer approach is strategic and creates a basis to further accelerate growth in important categories by providing more customized, high-quality, innovative products to give us a clear, long-term, sustainable competitive advantage. With that, let's turn to additional details in our financials.

Our SG&A in the second quarter was 3.3% of sales, slightly higher versus a year ago as we improved the efficiencies of our expenses but increased support from expanding the Just BARE brand nationally and investments for our new prepared foods production, both in U.S. and Mexico, as well as the inclusion of the new assets in Europe.

We will continue to prioritize our capital spending plans this year to optimize our product mix that is aimed at improving our ability to supply innovative, less commoditized products and strengthening partnership with key customers.

Even during these uncertain times while we continue to evaluate all CapEx projects and defer those we deem nonessential. We reiterate our commitment to investing on strong return on capital employed projects that will improve our operational efficiencies and tailor customer needs to further solidify competitive advantage for our company.

Our balance sheet continues to be robust given our commitment and emphasis on cash flow from operating activities, focus on management of working capital and disciplined investments. Our liquidity position remains strong with more than $1 billion in total availability.

We have no short-term immediate cash requirements, with our closest bonds maturing in 2025 and the next one in 2027, respectively, and our term loan maturing 2023. During the quarter, our net debt was $2.1 billion, with a leverage ratio of 2.9x last 12 months' EBITDA.

Our leverage remains at a manageable level, and we expect to continue to produce positive cash flow this year, increasing our financial capability to pursue strategic actions. We expect 2020 interest expenses of around $130 million to $140 million.

We have a strong balance sheet and a leverage that is within our target, which are supportive for us to act on the great opportunities during these uncertain times.

We remain focused on exercising great care and ensuring that we create shareholder value by optimizing our capital structure, by preserving the flexibility to pursue a growth strategy and we'll continue to consider and evaluate all relevant capital allocation strategies that will match the pursuit of our growth strategy, and we'll continue to review each prospect accordingly to our value-creating standards.

Operator, this concludes our prepared remarks. Please open the call for questions..

[Operator Instructions] Our first question today is from Ben Theurer of Barclays..

I have a question to understand a little bit more your commentary around the performance intra-quarter. So if we could put it into perspective, I mean, last year, during the second quarter, you had, in the U.S., about $190 million operating income. And you closed this year at, call it, $40 million.

And you said June was essentially flat or in line with last year June.

So could you share with us the magnitude of the loss you saw maybe in April, May and where we're trending to and to understand a little bit where we're going into the third quarter, just with all the commentary you had about supply/demand, pricing improvement, et cetera, just to understand a little bit better how much the actual impact was in April, May?.

Yes. Thank you, Ben. Yes, April and May deeply impacted by the shutdown in foodservice, right? So during those 2 months, we saw a sharp decline in overall market, but not only that, a sharp reduction in demand.

So there were periods of times where there was no demand at all for any protein, while the production was struggling to keep people also to produce. So the first 2 months were deeply impacted by that.

But as the demand resumed, especially on the QSR section and as we see a stronger pull from the retailers, we saw a rebound in market prices and our operations coming online with better efficiencies. So that's why we tried to show the market that during those 2 months, there was the big reduction in the quarter.

While in June, in all geographies, compared to the same period last year, we were in line..

Okay. Perfect. And then actually taking advantage of Charles being on the call, a question on Mexico.

With the exposure to the live bird market and, obviously, the challenges you have through the quarter, there's still plenty of restrictions in certain states in place in terms of the stoplight system here in Mexico, what are you seeing currently in that relevant piece of your business? I mean I understand the whole Prepared Foods segment and the formal channel but more the informal live bird market.

What are you seeing there in terms of dynamics? And how have the more independent ones reacted recently?.

Thank you, Ben. Yes, thanks for your question. Actually, what we see here for the last, let's say, 30 days, has been a strong reopening of markets country-wise. Just remembering here, the federal government has implemented a system of like lights. Red light means everything is shut down, and then orange is partially open and then green is totally open.

But this is just a guidance that the federal government gives to the states, but it is up to the states and ultimately, to the cities to decide how much you do reopen or not. And what we see today, country-wise, to be very straightforward, basically, everything is open. Everything is operating right now.

So obviously, there are some restrictions, especially still on bars and restaurants, but everything else is working, flowing normally. And to your specific questions on live markets, live markets have rebounded strongly since the beginning of June, which was basically when the economies got reopen.

And currently, we see good demand for that segment and basically working in normal parameters compared to last year..

Our next question today is from Heather Jones of Heather Jones Research LLC..

So on your tray pack plants -- or just your plants and -- well, I'll just stick with tray pack in the U.S. So one of the issues, a fallout for the entire meat packing industry was labor and product mix, et cetera.

Could you let us know where your plants are today? Are you back to normal in the sense of product mix, second processing, et cetera, in your tray pack plants so that you're able to take advantage fully of that stronger demand? Or just if you could just give us an update on that..

Yes. At the beginning of this pandemic, we see a significant increase in absenteeism. And that impacted the mix for the entire industry but also for the entire protein industry in U.S. So we saw a reduction in beef and pork production.

For the chicken industry, what we saw is exactly what you mentioned, Heather, that is, a production of a less optimal mix. So we moved people from the dark meat deboning and from other areas to the front deboning, which is the most important area, to not stop our operations.

We saw numbers up to 20% absenteeism at the beginning, not only because people were afraid of coming to work or afraid of leaving their homes, but also because on abundance of caution, we sent all the team members, 65 and up, that are what we consider vulnerable population to home with full pay. I think that impacted our operations significantly.

As we've seen the markets improved with less cases in the plants and less cases in the overall environment, we're bringing back that population, which is helping on us to achieve the better mix.

So during the Q2, if you think about direct effects related to the extra cleaning of our production in common areas, the extra PPE, including masks and safety shoes that we are providing to our team members and installation of physical barriers in all the production areas, we saw an impact of around $40 million for the quarter.

We don't expect this cost to continue going forward, and we expect our operations to resume with a better mix than we had in Q2 during Q3. I think one important point, too, was that in conjunction with our key customers, we reduced the number of SKUs. So we simplified the operation of our plants.

And that helped as well in the increase in the operational efficiencies..

I just want to parse one of your statements.

Did you say you're going to resume full operations or you have? Like, meaning, if I look at one of your tray pack plants today versus where they were in February, are they still not at optimal mix? Or have they returned to optimal mix, and we'll get that full benefit for all of Q3?.

Yes. They have been resuming their optimal mix during Q3. We expect to finish Q3 with the optimal mix..

And then my follow-up question, and it's still related to tray pack is, I had heard that there have been -- that due to the plant problems we're talking about, that there had been some losses of retail business within the -- just can you tell me whether Pilgrim's lost any retail business as a result of absenteeism, these issues? Or is your retail customer base the same as it was pre-COVID?.

Yes. We have not lost any customer. As we discussed before, we have a key customer strategy, which is highly differentiated, right? We don't do annual bids. What we do is a deep relationship where we help them grow their business, which help us grow as well.

And because of that, we approved doubling our capacity of retail products in our Cold Spring, Minnesota plant. And that was to support our growth of our key retailers and support the phenomenal growth of our Just BARE brand.

Through the increase in automation, we will add 100 million pounds of tray pack capacity, increasing our tray pack overall production by 10%. What happened during Q2 was that, at some point, we were not able to fill all the orders of the customers. So we have not lost any customers, but we were not able to fill all the orders for their needs..

Our next question today will come from Ken Zaslow of Bank of Montreal..

So can we just go back to Mexico for a second? So just understanding it. So at this point, the level of profitability is similar to last year, including and excluding COVID costs. So things have -- so the supply/demand dynamics have become more balanced. Is that my understanding of what you're saying? I just want to make sure..

Go ahead, Charles..

Oh, sorry, the question was for me. Ken, thanks for your question. Yes, as you saw, as Fabio has made the comment, so June results were in line with basically last year. And July -- month of July was very strong as well. So it continued strong as the month of June was. So right now, margins are pretty stable and positive..

Great. And then one just question on the U.S.

As you see the big bird profitability kind of waning a little bit, have you thought that there may be a greater level of production cuts? Or do you think that the production levels will be constant with what we see in the egg sets and pullet placements? Is there any change that you would expect with production levels going for the next 3 to 8 months? And that -- I'll leave it there..

Yes, Ken. The jumbo cutout is running close to last year numbers. However, we are achieving this outcome with different categories behavior to last year. Boneless breast has actually outpaced last year according to USDA's most recent numbers and continue to see strengthening in recent weeks.

The higher demand in both retail and QSR, both boneless-centric channels, and flat supply has been supportive of the growth.

The weakest part is the leg quarters, which are trading at the bottom of the 5-year range driven by a 14% reduction in dark meat deboning production in the domestic market, increasing the availability of the leg quarter exports by around 6% since the beginning of the pandemic.

And this is a reversal in the trend of increasing deboning across the industry, coupled with weaker export and pricing because of the pandemic.

So given that the cutout is relatively stable and these other expectations about the reopening of the foodservice, the rebound in the price of oil and the resume of the exports, we don't expect to see any significant cuts in our industry. USDA is forecasting a flat production compared to 2019, with Q3 down a little bit, 1.5% and Q4 down 0.2%.

And consider the egg sets and chick placement during the Q2, I think the die is kind of cast for Q3 with those numbers..

And our next question today is from Ben Bienvenu of Stephens..

I want to ask -- pre-COVID, you all had plans to convert capacity from big bird to small bird. Recognizing you're getting back on track with respect to mix and managing your plants efficiently, how does that change the time line that I believe you delayed that conversion into 2021. It was a bit nebulous last we heard an update from you.

Any refresh on those plans would be helpful to hear about..

Okay. Thank you, Ben. Yes, foodservice has seen different levels of recovery. The QSR has exceeded our expectations. In fact, our key customers are significantly outpacing 2019 levels. Nearly 50% of our foodservice is QSR, which help us offset some of the weakness in the other foodservice categories.

Smaller chains, independent and noncommercial foodservice channels, such as foods and lodging, have shown improvements since April but are still recovering slowly and at much lower levels relative to pre-COVID levels, close to 40%.

So with that new set of numbers, we reconnect and we decide to resume the conversion of that big bird plant to the small bird segment still in 2020..

That's great to hear. Separately, you touched on leg quarters. Any update you could give us on export markets? And are we at a price point where just at an absolute price point, leg quarters out of the U.S.

become more attractive and receive support from the export markets? And if you think about the 2 factors, the lack of leg quarter deboning driving up higher leg quarter supplies and then exports on the demand side, can you just kind of talk us through how you think the landscape looks going forward with respect to that particular cut?.

Sure, Ben. Yes, U.S. chicken exports were up 5% year-over-year through May. So there was a significant increase in Mexico and Asia. I think, like you mentioned, the weakening oil prices and the exchange rate headwinds have reduced buying power in Africa and Latin America.

Recent months has shown a slowdown in exports, mainly due to the shutdown in foodservice and economic activity throughout the world during COVID-19, right? So there was a lot of shutdowns in all -- throughout the world in Latin America and in Africa. But we expect the exports to resume in Q3 and Q4.

We still believe in good export opportunities for the balance of 2020. Like you said, the current pricing is very attractive for most of our destinations, and we continue to increase our client base at Pilgrim's and destination mix as well as introduce nontraditional export items to our clients.

You touched a very important point, which is, in a way, it's a zero-sum game in terms of dark meat. We are deboning less for the domestic production because of the foodservice shutdowns in the U.S., which is creating more leg quarters in the export market. As we see the foodservice resuming here in U.S.

and the availability of labor improving for the entire industry, we will start deboning more. So we will reduce the pressure on the export market with commodity leg quarters..

Our next question is from Michael Piken of Cleveland Research..

Just wondering how you're thinking about the supply of competing proteins and how much of an impact that's having on where shipping prices are today, and any sort of thoughts you have on how future activity might look at retail for the rest of the summer through Labor Day..

Yes, Michael. I think during Q2, we saw the labor availability for the alternative proteins, beef and pork, with some challenges. And we saw some sharp reduction in total output.

The numbers the USDA presented was down 11% in beef and close to 5% in pork, which was completely different from the expectations and from the trends where they were increasing production. As the labor has returned, the operations have resumed, we are seeing an increase in production for Q3 for both beef and pork.

We see beef, the expectation for USDA is the beef production to be up 1.5%, while pork is going to rebound much higher to a 9% increase in production. So that's a lot of meat for both beef and pork. The -- other the -- I think the best option is also the exports.

If you look at domestic availability, it's not growing at the same pace as the production because beef and pork are also exporting a lot more. The protein hole as people continue to talk about in China continue to exist. And we are seeing some ASF cases and some avian influenza cases throughout the world. And we're seeing U.S.

as the most productive and most available protein producer in the world, and the exports are up for both beef and pork during this quarter. Also during this quarter, we saw the reduction in egg sets and chick placement on chicken.

So we're seeing a pretty well balanced protein supply and demand during this next weeks, but we will see an increase in protein supply for the overall United States during Q3. We expect the retail to resume our features. I think what we haven't seen over the last month is the featuring activity at the retail.

Because of the lack of supply and the big demand, retailers decide not to feature protein. I think there was no need for featuring the protein. And we're seeing that featuring resuming. Features for chick, chicken and also pork are year-over-year as of now, and we expect that feature activity to pick up during Q3..

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

Just one quick one for me. Charles, you had mentioned that Mexico is now at least contributing positive EBIT. But Fabio, on the U.S. side, I just wanted to understand or clarify volumes have -- in June were kind of flat year-over-year. Pricing is still a bit volatile.

But just in terms of the EBIT contribution for U.S., it would still seem that in 3Q, it would still be down on a year-over-year basis and not necessarily flat. And I just want to make sure that I understood that correctly because I think there's been some confusion around some of the commentary..

Yes. Peter, we need to look at the overall portfolio, right? If you look at the cutout on the big bird, we are seeing that the overall cutout for big bird is flat year-over-year in 2020 compared to 2019. There are some tailwinds in terms of grains. We see ample supply, like we mentioned on the prepared remarks.

So there is a headwind -- a tailwind in terms of the grain, expect it to be around $75 million for the second semester of 2020. So with that, we can compensate the extra cost of running the plants with the extra precautions that we are doing because of the COVID-19.

And when we look at the overall portfolio for Pilgrim's, we -- the commodity portion of our portfolio is close to 20%.

So when you think about the fresh food services and our exposure to QSRs, which is more than 50% of our foodservice, both in the small birds and in our operations in case-ready, which are very robust, we see that our portfolio is working, and we can see a better performance than the competition..

Our next question today is from Adam Samuelson of Goldman Sachs..

So two questions. First, just on Mexico, I know there is reporting differences between you and your main competitor. But the margin gap that you're reporting in the relative performance, that gap seems to be widening, both in the second quarter but also over recent quarters.

And I just would love to get -- Fabio or Charles, just get kind of perspective on kind of where you think some of the mix differences or contributors to that would be and kind of how you think about maybe narrowing that performance gap moving forward..

Yes. Adam, thanks for your question. So during periods of troughs or like exceptional periods of bad margins like we had in Q1 and Q2, it is pretty clear that our competitors do have an advantage, especially for 2 reasons.

One is the diversified portfolio they have in Mexico, like they have a very strong business in [Table X], and Table X for the last 6 months has really been skyrocketing in prices and demand and also in the pork business. So this is one reason for a difference of the spread.

The other one they have a wider footprint than we have, so specifically, in 2 large areas like the Peninsula area, which is like Yucatan, Quintana Roo, Cancun, in those areas, where we cannot be present due to distance, at least for the time being, and then in the northwest as well.

So the diversified portfolio, combined with a widespread footprint, gives them more stability when we have a trough. That goes without saying that we have been -- in order to reduce volatility, we have been expanding our prepared food business and as well producing more branded fresh products, especially for retail.

So we want to have a more stable and balanced portfolio. But finally, it's also a fact that during normal periods, the history of the last at least 10 years, have shown that we constantly outperform competition. And we do expect that once the margins are normalized again that we're going to be performing better again. So that would be my answer.

Thanks for your question..

And I think that answer is valid for all of our operations, right? It's how we build our portfolio. We don't expect to beat our public comparables or even the nonpublic competition every single quarter. But over the cycle, over the long run, we've proven that we beat them, and I think Charles' words are valid to U.S. and to Europe as well..

That's very helpful. And my second question was more in the U.S.

You've given color commentary around this already, but the mix and kind of production disruption kind of impact in the second quarter, just from an EBIT or a percent margin, if you could frame, care to give a little bit more clarity on what that specifically was when thinking about moving forward and specifically on those 2 items, how you would frame the sizing of the impact in the third quarter..

Yes. I think there was a big shift between retail and foodservice during the quarter, right? So we saw the shutdowns, and we saw a big demand on the demand. We reacted quickly, and we shift a little bit of our mix to our capabilities, of course. And we increased by 7% of sales at the retail.

But that was not enough to match with the increase in the needs. And that's why we are expanding our capacity in our Minnesota plant. We want to help our key customers to grow, and that's important for us.

Just like you said, the impact in terms of cost is more on the operations because of the nonoptimal mix and the added extra cost because of the COVID. The impact in the United States are north of $40 million, like I said in the Q2, around $50 million in the world, but $40 million just for that quarter in Q2.

We don't expect this cost to continue as we implemented all the measures. On the indirect costs, we see that the complete shutdown of foodservice impacted market prices and volumes, and we expect that to resume as the markets are reopening..

Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Fabio Sandri for any closing remarks..

Yes. Thank you, all. We would like to reiterate our continued commitment to our valued team members to provide them safe and healthy work environment while supporting our duty to maintain food production and supply to our customer. We're looking forward to a good year in 2020 in spite of the volatility.

Our diverse portfolio of differentiated products tailored to support our key customer strategy in conjunction with our broad geographic footprint will continue to generate consistent performance and minimize margin volatility in challenging market conditions relative to competition.

We will continue to seek new growth potential, both organically and through acquisitions, while offering even more differentiated product portfolio within our business to support key customers' needs by cultivating a culture of constant innovation.

We would like to thank everyone in the Pilgrim's family, including our family farm partners, suppliers and our customers who make our business possible. As always, we appreciate your interest in our company. Thank you for joining us today..

The conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines..