Unidentified Analyst: Great. Thanks. We really appreciate it.
Operator: The next question comes from Heather Jones with Heather Jones Research, LLC. Please proceed.
Heather Jones: Good morning, everyone.
Fabio Sandri: Good morning, Heather.
Heather Jones: Good morning. So really quickly, Fabio, going back to a comment you made in your prepared comments about hatchability possibly limited the ability of the industry to reach the USDA projected production increase this year. I was wondering if you could give us some sense of where you all think it could – the year could end up. And how you’re thinking about that in second half versus first half given the disease issues that the industry has had, along with the hatchability challenges?
Fabio Sandri: Yes. What we’re looking into the USDA numbers, I think they are expecting an increase during the third and fourth quarter. And once again, I think that the hatchability problems will continue to be prevalent over that time. As I mentioned, I think for the hatchability to have a significant change, we would need either a breeder change, which is structural, and it takes time, and we haven’t heard about a new breed coming, or on the management side. And I think the importance of the – on the management side is that it’s a cost structure. Once again, this is a very difficult animal to handle and you need the individual, let’s say, attention. And to have that, you need to increase the cost of your operation.
So you need to have either more housing because you need to segregate those males by weight and give individual feed formulation for each one, or you need to have more people managing those males, which translate into higher cost. So I think it’s an efficiency/cost discussion because you may have more – a better hatchability, but your cost is going to be much higher as well. So at the end of the day, your egg costs could increase if you have all this labor and more housing involved. And that is the challenge of the industry. Of course, when the profitability of the complex is really high, that increase in egg cost makes sense. But that is maybe not true during Q4 or Q1 next year or over time. So that is the biggest challenge that our industry has in terms of balancing cost of the eggs and the hatchability.
Heather Jones: And that’s what makes you think the Q3, Q4 numbers USDA is putting out there could possibly be a challenge?
Fabio Sandri: Exactly.
Heather Jones: Okay. Moving over to Q2. So as you guys noted, the commodity market strengthened considerably late in the quarter, and they’ve like started strengthening again over the past week. So I was just wondering – and then you’ve had really strong Retail feature of chicken, or at least in the things that we’re tracking. So I was just wondering, is it feasible to think that U.S. pricing for Q2 could be materially higher than what you saw in Q1?
Fabio Sandri: Yes, Heather. I think when you look at the average prices during Q1, we started from a low position during January. When we saw a steady increase up to maybe mid-February, when we saw – when we normally see a reduction in the normal seasonality, we saw steady prices. And now as I mentioned, we are seeing the prices increasing. So every year, we expect the grilling season to help on the pricing. And as we mentioned, we tend to augment the demand on the Retail side with the Big Bird. We’ve put a lot of, let’s say, pressure on the commodity prices to go up. And I think before the grilling season, we are seeing this right now over the last 3 weeks, and that started really early. And that is what’s putting pressure on the commodity meat.
I think the foodservice, as I mentioned, continue to be strong and good demand, especially on the QSR side. And we’re expecting more promotional activity on the foodservice as well putting pressure on the commodity segment. I think it’s interesting to see that through the USDA numbers, the volume in terms of chicken for the Q1 was down, but the volume in the Big Bird was up. So we saw very strong pricing in Q1 on the commodity segment even with an increase in production on the Big Bird complexes. So yes, I think we are seeing that, that is the potential, of course, for a great grilling season and an increase, especially on boneless breast. I think wings continue to increase year-over-year, for sure with the return to the menu on several of the foodservice operators.
The last quarters continue to be very strong, given the competitiveness of the chicken meat on the international markets and the reduction in frozen inventories that we are seeing and the tenders also continue to be really strong on the marketplace with some tender concepts really growing. So I think the weakness has been on the white meat on the boneless breast. But to your point, the strength in the Retail has been what’s affecting the pricing on the commodity segment.
Heather Jones: Excellent. Thank you so much. I appreciate it.
Fabio Sandri: Thanks, Heather.
Operator: The next question comes from Priya Ohri-Gupta with Barclays. Please proceed.
Priya Ohri-Gupta: Good morning, thank you so much for taking the questions. First, I was wondering if we could just touch on the CapEx again. So Matt, I know you said that you are leaving your outlook for CapEx unchanged at this point. There are additional projects that you’re exploring, which suggest that there could be some upward pressure on that number. But as we look at where CapEx spend came in for the first quarter, it feels a little light. So I was just wondering if you could touch on sort of what prompted or what led to this lower CapEx spend earlier in the year? And sort of what that suggests for the pipeline?
Matt Galvanoni: Yes. No, thanks, Priya. I think it’s really just a little bit on timing when cash is expended. We’re finishing up some projects, notably South Georgia. So some of those bills will be coming through here in April and May to finish and consume actual CapEx cash dollars out the door. But no, I think that the overall view of the $475 million to $525 million is the best one we have right now. But as you – as I noted, and as you just repeated, we are exploring some opportunities that would – that could potentially take that number up a little bit here this year. Well, let’s see.
Priya Ohri-Gupta: Okay, thank you. And then just on the working capital side, that was a pretty nice source of cash year-over-year. Is that the kind of trend that we should expect to persist for the remainder of the year, just as we think about sort of where free cash flow generation could be by the end of ‘24? Thanks.
Matt Galvanoni: I think you saw – yes, I think that generally, the trend is in that direction, but we have to consider, though, here in the first quarter, we really saw some reductions in some of our finished goods inventories. And we’ve also seen that reduction in the grain cost, right? That’s really started to get itself – the site into inventory or live inventory costs. And that – in grain right now has been a little flat, right? So to try to say will it continue that trend yes, directionally, but probably not at the pace we’ve seen just because of the live costs and the grain has been – it sort of flattened out a little bit over the last month or so.
Priya Ohri-Gupta: That’s helpful. Thank you.
Operator: And at this time, we are showing no further questioners in the queue. And this does conclude our question-and-answer session. I would now like to turn the conference back over to Fabio Sandri for any closing remarks.
Fabio Sandri: Well, thank you. Thank you, everyone, for attending the call. Over the past several years, our business has faced volatile market conditions, given changes in commodity cutout values, persistent inflation and changes in consumer behavior. Throughout these times, our teams have continually focused on execution of our strategies to minimize downside risk while being able to capture market upside as conditions evolve. Given our approach, we can simultaneously reinforce our competitive advantage, drive profitable growth and generate more resilient earnings. When these efforts are combined with our focus on values, along with our relentless commitment to safety and well-being, we can become the most trusted and respected company in our industry, creating opportunities for a better future for our team members. Thank you very much.
Operator: Thank you. The conference has now concluded. Thank you for attending today’s presentation and you may now disconnect.
