Pilgrim's Pride - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered strong profitability despite seasonally softer volumes: Adjusted EBITDA rose 69.9% YoY to $525.7M (12.0% margin) while GAAP EPS increased 73.7% YoY to $0.99; revenue declined 3.5% YoY to $4.37B on a 14-week prior-year comp.
• Mix and cost execution underpin results: U.S. margins benefited from robust Big Bird cutout values, demand in Case Ready/Small Bird, and Prepared Foods brand growth; Europe expanded margins through footprint/back-office optimization; Mexico saw counter-seasonal commodity strength.
• Management flagged non-GAAP charges (litigation $95M; pension settlement $10.9M), while highlighting operational excellence and diversified portfolio strategy as drivers of margin resilience across cycles.
• 2025 outlook: CapEx $450–$500M, effective tax rate ~25%, SG&A $130–$135M/quarter, D&A ~$440M; strong liquidity (~$3.1B cash + available credit) and net leverage ~0.5x LTM Adjusted EBITDA position PPC to fund organic growth and portfolio upgrades.
• Capital return catalyst: Special cash dividend of $6.30/share (~$1.5B) announced March 14, 2025, signaling balance sheet strength and confidence in branded growth; projects include expanding Prepared Foods capacity and small bird, converting a big bird plant to case-ready, and protein conversion expansion.

What Went Well and What Went Wrong

What Went Well

• Demand and mix: “Our diversified portfolio…unlock consumer value through differentiated offerings,” driving U.S. Case Ready and Small Bird demand across retail, QSR, and deli; Big Bird margins expanded on strong seasonal pricing and operational improvements.
• Europe margin progress: >100bps YoY margin improvement driven by manufacturing optimization, back-office integration, and branded innovation (Richmond, Fridge Raiders) growing ahead of categories.
• Mexico momentum: Counter-seasonal commodity values strengthened; fresh branded products up ~10%; ramp-up at Mérida with continued capacity investments to support key customers.

What Went Wrong

• Revenue softness vs tough comp: Net sales down 3.5% YoY due to a 14-week prior-year period (53-week FY), despite strong pricing/mix and margin gains.
• U.S. Street expectations: Bank of America noted U.S. performance “came in a bit below expectations relative to the Street,” reflecting grain-based contract pass-throughs and portfolio stability that mutes commodity upside in some subchannels.
• Operational headwinds: Weather (Douglas/Live Oak storms, short facility downtime for air-chill conversion) and industry hatchability challenges constrained supply growth in parts of Q4/Q1, though PPC’s geographic diversification mitigated impact.

Transcript

Operator (participant)

Good morning and welcome to the fourth quarter and fiscal year 2024 Pilgrim's Pride Earnings Conference call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. At the company's request, this call is being recorded. Please note that the slides referenced during today's call are available for download from the investor 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 Andrew Rojeski, Head of Strategy, Investor Relations, and Sustainability for Pilgrim's Pride.

Andrew Rojeski (Head of Strategy, Investor Relations and Sustainability)

Good morning and thank you for joining us today as we review our operating and financial results for the fourth quarter and fiscal year ended December 29, 2024. Yesterday afternoon, we issued a press release providing an overview of our financial performance for the quarter and the year, including a reconciliation of any non-GAAP measures we may disclose. A copy of the release is available on our website at ir.pilgrims.com, along with slides for reference. These items have also been filed as Forms 8-K and are available online at sec.gov. Fabio Sandri, President and Chief Executive Officer, and Matt Galvanoni, Chief Financial Officer, will present on today's call. Before we begin our prepared remarks, I would like to remind everyone of our safe harbor disclaimer. Today's call may contain certain forward-looking statements that represent our outlook and current expectations as of the 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 Global CEO)

Thank you, Andy. Good morning, everyone, and thank you for joining us today. I look forward to reviewing our Q4 and full year 2024 results today with you and invite everyone for our upcoming Investor Day on March 14 for a more detailed view on our long-term vision, strategies, and methods. For the fourth quarter of 2024, we reported net revenues of $4.4 billion, along with Adjusted EBITDA of $526 million and an Adjusted EBITDA margin of 12%. Our Q4 performance reflects the execution of our strategies of a diversified portfolio that can capture market upsides while offering differentiated products that answer to consumer demand, combined with our relentless pursuit of operational excellence. Our U.S. fresh portfolio improved compared to last year as Big Bird extended margins to a combination of strong, stable commodity cut-out values, progress in operational excellence, and enhanced mix.

Case Ready and Small Birds also drove profitable growth to improve performance and production efficiencies and increase key customer demand in retail, QSR, and deli. Prepared Foods grew sales compared to last year as interest strengthened for our brand offerings in retail and food service, further diversifying our portfolio. In Europe, margins expanded, given continued optimization of our manufacturing network and integration of support activities, including our back office. Overall, sales remained stable in retail as consumers increasingly migrated across our diversified portfolio into key meals, branded offerings, and poultry. Food service grew double digits from a combination of additional distribution and increased traffic for away-from-home eating occasions. Mexico experienced a stronger Q4 as commodity market pricing increased throughout the quarter. In both fresh and prepared, sales to key customers continued to grow from prior year. Similarly, momentum for our branded offerings increased throughout the marketplace, further diversifying our portfolio.

For the fiscal year 2024, net revenues were $17.9 billion, with an adjusted EBITDA of $2.2 billion, translating into an adjusted EBITDA margin of 12.4%. Throughout 2024, the U.S. experienced improved chicken demand, lower grain costs, and positive commodity cut-out values. When these factors were combined with key customer growth and progress in operational excellence, profitability increased compared to prior year. Our Europe business undertook a variety of steps to improve our manufacturing network, simplify our structure, and drive innovation. Based on these efforts, we've strengthened our marketplace presence and expanded margins. In Mexico, commodity sales benefited from reduced input costs and balanced supply demand that generated more stable pricing. These factors were further amplified by growth with our key customers and increased interest in our branded offerings among consumers, improving margins compared to last year. Turning to supply in the U.S., USDA indicated ready-to-cook production for the U.S.

production to grow 2.5% compared to the fourth quarter of 2023. Increases in headcount accounted for the production growth, as average live weights were comparable to last year. Throughout 2024, the industry layer flock consistently declined year over year. However, sustained efficiencies, improvements in the flock, coupled with reductions in exports of eggs, triggered an increase in egg sales, resulting in record egg utilization. Similar to earlier in the year, hatchability continues to be challenged, even with the benefits from seasonality based on USDA data. As a result, industry rates still trail prior year, limiting realization of increased sales. As hatchability continues to lag historical averages, USDA data also suggests the industry has placed additional eggs to offset the productivity challenges. Improved feed conversion, yields, and live weights also further mitigate those issues.

The USDA's most recent production report indicated that ready-to-cook production increased by 1.3% for the year, driven by significant growth in the second half. For 2025, USDA is projecting growth of 1.4%, with increases in egg sets and placements partially compensated by continuing challenges in hatchability and mortality. The USDA also reports overall protein availability to grow only 1.2%, with a significant decline in overall beef availability, leading to a supportive demand environment for chickens. As for the demand in the U.S., fresh proteins in retail benefited as the cost of eating out increased more rapidly than eating at home. Boneless skinless breast pricing at retail remained very competitive, significantly lower than two years ago and stable compared to prior year, while dark meat continues to increase in domestic demand.

While the entire fresh meat department experienced sales growth during the quarter, chicken's significant pricing advantage compared to the other proteins continued to enable growth and satisfy strong consumer demand for a healthy center of the plate option. The remainder of chicken at retail continued to build on the strong foundation set earlier in the year. Growth in both the deli and frozen value-added demonstrates chicken's ability to meet the needs of consumers seeking to rationalize spending without sacrificing convenience. In food service, dollar and volume sales both grew in commercial and non-commercial distribution subchannels. Both were specifically bolstered by strong demand for value-added products. Volume and dollar growth also indicate continued transition from food service restaurants to QSRs, suggesting consumers are favoring a relatively less expensive away-from-home option to stretch their dollars further. U.S. export volume was lower year over year, while pricing remained at positive levels.

Domestic demand for dark meat in the U.S. continues to be the key for increased values and limited export availability. At the end of Q4, overall inventory declined as cold storage inventory dropped 1% month over month and was 8% lower compared to last year. Both breast meat and dark meat once again fell year over year, with still anticipated export demand to remain strong despite some redirection of trade flows triggered by multiple high-path AI outbreaks in the eastern and the southeastern United States. Most U.S. trading partners, other than China and Taiwan, have reduced their levels to zones and counties. As such, the geographic diversity of our production locations in the U.S. continues to provide flexibility to transition production should outbreaks occur. In addition, Taiwan has recently established a re-entry procedure to follow if disruptions emerge, which further mitigates the impact of potential barriers.

Turning to feed, corn appreciated moderately in Q4 as strong U.S. yields somewhat mitigated price gains from healthy corn export demand. In contrast, soybean yields fell as new soybean yield processing capacity increased supply for domestic consumption. Taken together, overall feed costs slightly declined. U.S. yields lowered the final yields for the 2024 corn and soybeans in their January crop report. Even with those changes, both corn and soy realized improved yields. Nonetheless, corn stocks in the U.S. and globally are expected to contract versus the prior year. Given this contraction, the likely trading range and market volatility for corn is expected to increase during the first half of 2025. The limited demand from China for corn and potential for strong growth in U.S. corn acreage versus last year have currently limited upsides so far. In contrast, soybean stocks are expected to grow in both the U.S.

And globally compared to last year, as Brazil's increased production is expected to more than offset crop losses from dryness in Argentina. As such, soybean yield is anticipated to be well supplied across the globe. In wheat, global stocks are expected to decline slightly compared to last year. Nonetheless, winter wheat plantings in the fall of 2024 throughout the U.S. and Europe, better than expected harvests in Australia and Argentina, and increased acreage in the U.K. may improve availability and pricing for next year. Moving forward, we'll continue to monitor changes in global grain demand, planting, and development of the second crop in Brazil and U.S. planting intentions and conditions moving forward. Turning to the U.S., our diversified portfolio across both sizes benefited from elevated demand compared to seasonal trends. As such, commodity cut-out values were notably higher than the average of the past five years.

Furthermore, input costs declined slightly throughout the quarter as declines in soybean meal more than offset an increase in corn. Given this environment, profitability in our Big Bird business improved significantly compared to last year. Our progress in operational excellence to improve yields, mix, and labor productivity further amplified our performance. In Case Ready, retail demand remained strong as consumers increasingly sought chicken, given its relative affordability. Growth with our key customers continued to accelerate as our sales increased significantly above the category average. When these factors are combined with a continued focus on quality and service, Case Ready's profitability improved considerably compared to last year. Case Ready also continues to cultivate its competitive advantage through differentiated offerings and operational capability. To that end, during the quarter, we converted one of our locations to air chill technology in partnership with a key customer.

As a result, we consolidated our leadership in this differentiated category and reinforced our key customer relationship. Given these recent investments, along with our leadership in the organic and the no-antibiotics-ever chicken categories, Case Ready continues to enhance its competitive advantage through higher attributes and differentiated offerings. Additional growth opportunities continue to emerge as we help our key customers to differentiate and generate robust demand from consumers. Small Bird also benefited from further demand in QSRs and deli as our key customers continue to increase their marketplace presence. When combined with our advances in operational excellence, our profitability grew substantially compared to Q4 of 2023. Our diversification through Prepared Foods continued its momentum. In the fourth quarter, our sales to key customers significantly outpaced the category average.

Brands continue to play an instrumental role as the share of Just Bare has increased by over 200 basis points compared to last year. In addition, the recent relaunch of Pilgrim's gained traction given continued consumer affinity, given its high quality and through increased distribution. Similarly, our food service business continues to grow through additional distribution and increased velocity through our portfolios. In Europe, we continue to improve our business through integration of our support functions and optimization of our manufacturing network. Through this effort, we've consistently driven margin expansion while cultivating a more nimble, customer-focused organization to scale profitably growth in 2025 and beyond. During the quarter, the environment became increasingly attractive as consumer sentiment improved as wage growth continued to surplus inflation. As such, our poultry and chilled meals business benefited from category growth in both value and volume in grocery.

Our branded portfolio realized similar gains given its growth through the quarter, led by Fridge Raiders and Rollover, as each grew faster than the category. We continue to leverage the Richmond consumer affiliation and expand its portfolio. It recently received Grocery's Best New Product Award for its roast chicken sausage. Our food service business also experienced similar success as net sales increased double digits. Innovation remains a priority to drive profitable growth. To that end, we strengthened our partnership with key customers through innovation with a series of investments in line extensions, new products, and packaging updates. When combined with a working brand, we have launched and renewed a significant portion of our portfolio of products with several launches in this fourth quarter. Our efforts continue to be remarkably well received by customers as innovation now accounts for over 6% of our net sales.

Our efforts in sustainability also have generated commercial benefits for key customers. During the quarter, we were recently awarded incremental business. Given our animal welfare standards, we will continue to explore opportunities throughout the trade based on our differentiated performance and standards. Turning to Mexico, margins increased from better supply-demand fundamentals and continued execution of our strategies. In the live bird market, commodity values increased throughout the quarter, and overall grain costs fell slightly compared to Q3 of 2024. Key customer relationships strengthened as retail fresh volumes grew in the high single digits. Noticeably, the volume rose over 15%, and the momentum in our fresh branded offerings continued as volumes grew nearly 10% compared to the same quarter last year. We continue to diversify our portfolio through value-added offerings given the growth in our prepared food business.

Our key customer volumes continue to grow in both retail and food service, and our innovation pipeline has been well received through the trade. Efforts to reduce our operational risk in live operations and extend our production capacity remain on track. Our ramp-up for production in Mérida is proceeding as planned, and our relocation of the breeder farms remains on track. We recently brought online additional production and prepared foods in our Porvenir plant, as well as we continue to explore opportunities for expansion. We also continue our journey in sustainability. To that end, we've driven a reduction in our Scope 1 and Scope 2 emissions intensity across all regions. In addition, we continue to explore solutions from leading industry partners that leverage our operational capabilities. As such, we've collaborated with Green Gas USA to transform our biogas into renewable natural gas at our sun-powered facility.

Based on this effort, we can reduce emissions while further supporting the renewable energy market. Moving forward, we'll continue to drive efforts to further reduce our emissions footprint. With that, I'd like to ask our CFO, Matt Galvanoni, to discuss our financial results.

Matt Galvanoni (CFO)

Good morning, everyone. As I review our financial performance, please note that our fourth quarter of 2023 and fiscal year 2023 periods were 14-week and 53-week periods respectively, which will impact the period-over-period comparison. For the fourth quarter of 2024, net revenues were $4.37 billion versus $4.53 billion a year ago, with Adjusted EBITDA of $525.7 million and a margin of 12% compared to $390.5 million and a 6.8% margin in Q4 last year.

For fiscal year 2024, net revenues were $17.9 billion versus $17.4 billion in fiscal 2023, with Adjusted EBITDA of $2.21 billion and a 12.4% margin compared to $1.03 billion and a 6% margin last year. Adjusted EBITDA in the U.S. for Q4 came in at $371.6 million, with Adjusted EBITDA margins at 14.2%. Our Big Bird business profitability significantly improved year over year as commodity market pricing improved, grain costs were lower, and the business achieved further operational improvements. Also driving the improvement in the quarterly U.S. results were increases in profitability in both our case ready and small bird businesses. These businesses continue to deliver high quality and strong customer service, allowing us the opportunity to increase distribution with our key customers. Our prepared foods business continued its momentum of branded product sales growth with both retail and food service customers.

During the quarter, within our U.S. GAAP earnings, we recorded $95 million in litigation-related settlement charges. Also, in the quarter, we finalized the U.S. pension plan termination program that commenced earlier in the year and recorded $10.9 million in pension settlement charges. This pension obligation termination is now fully complete. For the fiscal year, our U.S. net revenues were $10.63 billion versus $10.03 billion in fiscal 2023, with adjusted EBITDA of $1.56 billion and a 14.7% margin compared to $531.5 million and a 5.3% margin last year.

The U.S. business maintained its momentum throughout the year with increased sales volumes and delivering operating efficiencies with the backdrop of supportive commodity markets and lower grain costs. In Europe, adjusted EBITDA in Q4 was $117.1 million versus $102.5 million in 2023, a 14.2% increase. For the full year, Europe's adjusted EBITDA improved 28.3% to $407 million in 2024 from $317 million in 2023.

Europe drove improved profitability through further operational excellence, including plant closures, consolidation of support functions, and streamlining the overall management organization structure. These efforts over the last two years have provided the foundation for further cost savings, and it has allowed us to partner more efficiently with our key customers in the region. We recognize approximately $93 million from structuring charges during the year. While we continue to pursue efficiency measures, we anticipate the vast majority of the charges for these programs are behind. Mexico made $36.9 million in Adjusted EBITDA in Q4 compared to $6.8 million last year. When considering the full year, Mexico made $248.5 million in Adjusted EBITDA or an 11.8% Adjusted EBITDA margin, bettering last year's 8.7% margin. Through the year, the supply-demand fundamentals were well balanced in Mexico.

Our GAAP SG&A expenses in the fourth quarter into the full year were higher than prior periods, primarily due to increased legal settlement expenses and higher incentive compensation costs, partially offset by cost efficiencies primarily achieved in Europe. Net interest expense for the year was approximately $100 million, excluding the gain on the realized debt purchases we completed earlier in the year. Currently, we forecast the 2024 net interest expense to be between $65-$75 million. Our full-year effective tax rate was 23.0%. We recorded a discrete tax planning item in the fourth quarter, which lowered our full-year effective tax rate from our pace through the first three quarters of the year. For 2025, we anticipate our effective tax rate to approximate 25%. We have a strong balance sheet, and we'll continue to emphasize cash flows from operating activities, management of working capital, and disciplined investment in high-return projects.

As of the end of the year, our Net Debt totaled approximately $1.15 billion, with a leverage ratio of approximately 0.5 times our last 12 months' Adjusted EBITDA. Our liquidity position remains very strong, and at the end of the fiscal year, we had approximately $3.1 billion in total cash and available credit. We have no short-term immediate cash requirements, with our bonds maturing between 2031 and 2034, and our U.S. credit facility is not expiring until 2028. Our liquidity position allows us to explore further growth opportunities, including organic growth, to meet our key customers' needs. We finished the year spending $476 million of CapEx. This included the conclusion of the construction of the protein conversion plant in South Georgia and other growth projects to support differentiating product attributes for our key customers.

We will continue to prioritize our capital spending plans to ensure the safety of our team members, optimize our product mix, and strengthen our partnerships with key customers. Currently, we forecast spending between $450-$500 million in CapEx in 2025, primarily to sustain our operations and for other more routine growth projects. We are intently focused on growth opportunities. First, over the last two years, we have invested in our plans to meet both growth targets and product attributes requested by our key customers, and we will continue to do so as we cultivate these relationships. Also, we foresee investments in additional protein conversion capacity to both upgrade our product mix and manage risk by reducing our exposure to outside protein conversion operators.

Finally, as we've discussed extensively, our U.S. Prepared foods business has grown our branded portfolio through innovative and differentiated products, and we anticipate expanding our capacity to meet the growth trajectory of this portfolio.

Finally, we have a great business in Mexico and have organic growth opportunities in both fresh and prepared. These near-term growth opportunities align to our overall strategy to portfolio diversification, focus on key customers, operational excellence, and our commitment to team member health and safety. Please note, we may revise CapEx spending estimates to accommodate our growth aspirations. We will continue to follow a disciplined approach to capital allocations as we look to profitably grow the company and continue to align investment priorities with these overall strategies. We are looking forward to our investor day on March 14th to share with you our strategic outlook, more detailed views on these growth opportunities, and further commentary on our capital allocation philosophy.

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

Operator (participant)

Thank you. We will now begin the question-and-answer session. In the interest of allowing equal access, we request that you limit your questions to two, then rejoin the queue for any follow-up. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys to minimize background noise. To withdraw your question, you may press star then two. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Ben Theurer with Barclays. Please go ahead.

Benjamin Theurer (Managing Director and Head of LatAm Equity Research)

Hi, yeah, good morning, and thanks for taking my question, Fabio. Matt, congrats on the results.

Fabio Sandri (President and Global CEO)

Good morning, Matthew.

Benjamin Theurer (Managing Director and Head of LatAm Equity Research)

Yeah, so to start off, maybe just to talk a little bit about the market dynamics, what happened in the fourth quarter and as we're moving into the first quarter. Clearly, 4Q was very strong. I mean, it feels like there was still a little bit of disruption from the hurricanes late September, early October, coupled with AI. So maybe help us understand a little bit what's been driving these very strong cut-out values, particularly on the Big Bird side as you think about it throughout the fourth quarter, but also what you're showing early stage in January still being very elevated. So that would be my first question. And second question, that would be more for Matt in regards to the capital allocation on the guidance for the CapEx of $450-$500 million.

It kind of feels a little low of what you can do given the $2 billion in cash that you have available versus what tends to be a long-term average, more like $500 million. So anything that you can share maybe in terms of the thoughts around dividends or any other way of cash return, just given where the leverage is. Thank you very much.

Fabio Sandri (President and Global CEO)

Sure. Thank you, Ben. Yeah, you're right. There's always some seasonality in the chicken business, and typically, Q4 is the weaker quarter in the year. It's because of the seasonality of the consumption, because of Thanksgiving and Christmas. What we saw this year was a very strong demand for chicken. I think that is because of the relative affordability of chicken and some of the menu penetration in food service.

In Q4 and throughout the year, we saw an increase in demand in retail and food service for chicken. In the retail, most notably, we saw in the frozen food category and on the fresh category, and also on the deli, so we saw those three categories leading the demand in the retail, and in the food service we also saw, despite a reduction in the traffic that especially affected the food service restaurants, the QSRs continue to grow the demand for chicken. I think that's because of the chicken promotions and the menu penetration that we've been seeing, so both the retail and the food service actually increased during Q4, year over year.

At the same time, what we saw during Q4, because of some of the storms and some of the bad weather and the continued problem with hatchability and mortality, production was up close to 1.4%, but the Big Bird category, which was the more commoditized one, was actually flat. So we saw an increase in demand because of the factors that I mentioned with a flat production in the commodity category. And that sustained the prices at the stable levels. And as a matter of fact, now in Q1, we typically see this, which is a rebound in the demand for chicken. We're seeing prices actually going up almost every day in the commodity category.

Matt Galvanoni (CFO)

And, Ben, this is Matt. Thanks. That's a completely fair question relative to where our cash position sits today and our overall leverage.

I think I go back to what I mentioned in the prepared remarks that right now we're guiding at a $450-$500 on, we'll call our sustaining CAPEX, plus more routine or smaller growth projects. As I mentioned before and in the prepared remarks, we are really looking at growth opportunities, organic growth opportunities, to partner with our key customers to increase our protein conversion. Our prepared business needs to expand its capacity. And I think we'll be able to talk more about that at the investor day in about a month. And we really look forward to talking about that and just kind of overall capital allocation philosophy and thoughts at that time.

Benjamin Theurer (Managing Director and Head of LatAm Equity Research)

Yep. Thank you very much. Congrats again.

Operator (participant)

Thank you. The next question comes from Peter Galbo with Bank of America. Please go ahead.

Peter Galbo (Director and Head of US Consumer Staples Equity Research)

Hey, guys. Good morning. Thank you for the question.

Maybe to pick up just on Ben's question around the U.S., Fabio. I think a little bit of the pressure this morning is probably that the U.S., even seasonally, still came in a bit below expectations relative to the street. So just trying to get maybe a layer deeper on the underlying. I know that you have some contracts, obviously, that are more grain-based. And so we don't have the details of the 10-K yet, but was there more of a pass-through element just in pricing on grain that maybe hit you in the fourth quarter more so than anticipated? Just any additional color maybe by subchannel would be helpful as we think about 4Q relative to your own expectations and relative to where the street was.

Fabio Sandri (President and Global CEO)

Well, sure. I think we've been always talking about our portfolio, right?

We have exposure to the commodity markets through our Big Bird operations, but that is a third of our portfolio. The other two-thirds of our portfolio are more on the small birds and the case-ready operations, which tend to be way more stable. I think, as you mentioned, because our contracts and pricing in those other segments are more grain-based or a negotiation that we keep the prices unless something changes, either in cost or in the supply and demand. When you look at the comparison year over year, we actually improved in every single category because of our operational excellence initiatives. There is a lot of operational excellence that went through the bottom line. For the year, we have more than $100 million in operational improvements, but those segments are more stable.

And that's why we are able to capture the upsides when the market is really strong, but protecting the downsides. And I think that's what makes our bottom line less volatile. And we've been working in this portfolio over time to make sure that we, again, can benefit from the commodity cycles and can capture the upsides while protecting the downsides. Also, on the prepared foods, we've been growing our brands and through distribution. And we, of course, it's an offset to the commodity cycle as a lot of the raw materials for these prepared foods is the commodity meat. So I think that's why Q4 was not even stronger than it could be. But when you look at year over year, there's a significant improvement. And when we look into the yearly, I think we saw how the portfolio reacts when prices really change.

So we are more stable, but we're able to capture those upsides.

Peter Galbo (Director and Head of US Consumer Staples Equity Research)

Great. Thank you for that. And, Matt, maybe just a couple of quick ones modeling-wise for 2025. I think you said net interest expense of $65-$75. I just wanted to make sure that I heard that correctly. And then just the two others, if you could help us with D&A and then just how you're thinking about SG&A expense as well. Thanks very much.

Sure. From an SG&A perspective, I would kind of model us at sort of this $130-$135 million a quarter. I think that'll give you a good range there to use. Relative to D&A, in about a $440 number annually, $440 million. And then the net interest expense, that's based on kind of the current guide on the capital expenditures of the $450-$500 million.

And just using that kind of as the baseline to kind of look at that relative to cash generation during the year and cash use, based on an estimate of what we can do for net interest income too.

Got it. Thanks very much, guys.

Operator (participant)

Thank you. The next question is from Andrew Strelzik with BMO. Please go ahead.

Andrew Strelzik (Equity Research Analyst)

Hey, good morning. Thanks for taking the questions. My first one I wanted to ask about Mexico. I just wanted to better understand what drove the counter-seasonal kind of improvement in cut-out values that you talked about, and kind of how to think about, given that margins in Mexico into 2025 or through 2025. I assume that first-quarter margins are probably going to be up year over year, but just trying to better understand what's going on in Mexico and how to think about the outlook there.

Fabio Sandri (President and Global CEO)

Sure. Once again, we're really happy with the margins we have in Mexico. It's a growing economy. We continue to invest there. As I mentioned, we just started a new complex in the peninsula, in the Mérida region. So we're diversifying our geographic position in Mexico and capturing those growth opportunities. I think Mexico can be very volatile in quarter over quarter. But when we look at the year number, it's typically more stable and double digits in terms of EBITs. So once again, we believe in the economy of Mexico and continue to invest there. I think what we saw this year was a strong demand for the chicken products. I think we saw also that with the high prices of the commodities in the United States, especially leg quarters and breast meat, we saw more demand in the domestic market in Mexico.

The big volatility in Mexico typically comes from the live market. I think we've mentioned this many times. There is still a market in Mexico where we produce the birds, and we sell them live to wholesalers. We distribute those birds to small slaughterhouses that will sell the meat to the consumers, especially around Mexico City. This live market is highly volatile because there's a lot of small competitors that can appear and go as the profitability is strong or weak in that segment, which, again, once again, causes a high volatility there. I think we've been able to improve our presence in that market. We continue to grow in that market as well, which is stable in Mexico, but we continue to differentiate our portfolio with the growth of prepared foods and the growth of our branded fresh offerings.

That is the market that continues to be highly volatile. This year, I think we saw some diseases in Mexico that impacted the live production, and that created a little bit more volatility there. We don't know if that is going to be the case in 2025. Of course, we follow a very strong biosecurity in Mexico, but the movement of these live birds increases the risk in terms of biosecurity. That's why we have a disease in Mexico, which is higher than in the U.S. That's what creates more volatility in Mexico. But once again, we continue to expect increasing demand for chicken. Chicken continues to be an affordable category for the Mexican families. We continue to invest in Mexico to grow our production there.

Matt Galvanoni (CFO)

Yeah, Andrew, it's Matt. Just when we look back at Q1 of last year, Mexico's Adjusted EBITDA margins of 9.2%.

Very, very solid. Q1 of last year [was a] great year overall, and so just something just to consider when you think about Q1 2025. We are wrapping 9.2% margins, which were solid, so.

Andrew Strelzik (Equity Research Analyst)

Got it. Okay. Okay. That's clear, and that's helpful. My other question is going back to the U.S. side, and if I think back to the summer, U.S. margins were excellent, but breast prices were basically around the five-year average level. Now we're coming into this year with above-average seasonal prices, so I guess I'm trying to think about, given the way you're talking about supply and demand, the right way to think about breast prices over the summer.

Again, I mean, do you think the setup here is to get to above-normal prices or hold above-normal prices as we get into the summer, or the setup more similar to last year, especially in the context of feed costs, which, especially on the corn side, have gone up a little bit? Thanks.

Fabio Sandri (President and Global CEO)

Yeah. I think the demand for the breast meat continues to be really strong, as I mentioned. Last year, we saw prices close to the five-year average. I think the five-year average had also highly impacted, because of our very high prices during the 2022 period. So I expect the demand to continue to be strong. If we look into the supply we are seeing with the egg sets and chick placements and day-olds, what we are seeing on the hatchability numbers and mortality numbers, that demand, according to the U.S.

Demand will be close to 1.4%. And that is more in the first semester rather than the second semester. Beef, and if you look into the overall protein availability in the U.S., will be close to 1% when you look at all the other proteins, especially if the beef curve is really below as the U.S. demand is expecting. And because of the delta in pricing, we're seeing at retail, boneless breast compared to ground beef. It's what we typically compare. It's at the highest level in history. So there's a strong demand in retail for the chicken products. And that goes over the supply in the case-ready category because it takes Big Bird meat, which is the commodity meat, to augment the strong demand, especially during the summer. That's what tends to increase the commodity pricing on the commodity segment.

So I expect the continuing strong demand for chicken, especially during the summer. And I think the prices will react accordingly.

Andrew Strelzik (Equity Research Analyst)

Great. Thank you very much.

Operator (participant)

Thank you. The next question is from Heather Jones with Heather Jones Research. Please go ahead.

Heather Jones (Equity Research Analyst)

Good morning. Congratulations on the quarter.

Fabio Sandri (President and Global CEO)

Morning, Heather.

Heather Jones (Equity Research Analyst)

Good morning. I wanted to really ask for clarification because, Fabio, some of your prepared comments I had a difficulty understanding. So really quickly, on bird flu, you mentioned some of the U.S. export partners that have changed to a county level as opposed to state level. And I know Mexico does that, but I was wondering if you could repeat those comments. Which countries have switched to doing just county level?

Fabio Sandri (President and Global CEO)

Yeah. I think the biggest reduction in terms of exports, if you look into the United States, has been Southeast Asia, especially Taiwan.

I think Taiwan was the one that is creating a new procedure. It's not a, I don't know specific on county levels, but they are changing their protocols to take these ban levels more into some zones. Okay. I think Taiwan is the big change, and that was the big change for this year. Again, overall, high-path AI, as we mentioned many times, I think has been a big issue for turkeys and for the egg industry. For us, we have the biosecurity protocols at the maximum. We have a very widespread production footprint. We have 23 complexes. And even our houses are very spread, as you know very well. And each farm has typically three to four houses. So we have 110,000-150,000 birds in each of one of those primary farms.

So I think our biosecurity and our geographic diversification helps on creating less impact on high-path AI in terms of losing birds. But as you mentioned, the export bans are the ones that are really impactful for our business. But as we are seeing a very strong demand in the external markets for the American product because of its affordability and competitiveness compared to all other proteins and even all other chicken geographies. And we're seeing also strong demand here in the United States, especially for the dark meat. And that is limiting the availability of exports of leg quarters. So very strong pricing over the year.

Heather Jones (Equity Research Analyst)

Okay. Thank you for that. And then moving back to the U.S. Big Bird, I hate to belabor this point, but I just was wondering, so the U.S. profitability was a little light.

I understand that you've got a diversified business, and two-thirds of the business, the pricing doesn't move around a lot. But I was wondering if also there was effect from the Douglas complex being down. Because my understanding is that because of the loss of a lot of that housing, that you guys might be having to buy WOGs on the outside to process. And so I was just wondering if you could talk qualitatively to how the Douglas complex impacted results during the quarter. And when do y'all expect that complex, the housing there, to be back to normal?

Fabio Sandri (President and Global CEO)

Oh, yeah. Thank you for the question. Once again, yeah, that was a devastating storm that we have in the Douglas. We helped the community. We invested in the community. We donated $1 million to help with the efforts to improve and rebuild the community.

We, unfortunately, lost a lot of housing in that region. I think we've been building houses. We've been getting houses on the market, and we've been improving our production there. What we did, we have a lot of other operations in the region. We moved some birds around, and we've been able to operate the complex at a very satisfying operational level. We're not focusing the losses of Douglas in just that complex. Of course, it was more impacted than others. We also have some impact in Live Oak because of the storm. We're moving birds around. Again, we are with a very efficient operation there, and we are with a great efficiency in all the other complexes through this movement of birds. I think we're also impacted a little bit in the quarter by the change in our facility that we moved to air chill.

I think we stayed down for close to a week in that facility. But I think those were not very impactful for the quarter or our March quarter. I think that we expect to continue to impact our operation. We expect the Douglas ramp-up to be close to Q3, Q4, as building houses is not as simple as it was in the past. But we see a great level of commitment from our growers. And we see a great level of commitment from the authorities also on helping on financing those houses and the permitting on those houses.

Heather Jones (Equity Research Analyst)

Perfect. Thank you so much for that, color.

Operator (participant)

Thank you. The next question comes from Pooran Sharma with Stephens. Please go ahead.

Pooran Sharma (Managing Director of Equity Research)

Thank you. And congrats on the quarter. Sure. Yeah.

I just wanted to focus on. I think you kind of mentioned this in the prepared remarks, but I wanted to dive into hatchability, livability. It looks like trends still look challenged for production. Just wondering if you could give us an update if there's a fix on the way. Could you maybe just remind us what those fixes are and what are the potential timelines here?

Fabio Sandri (President and Global CEO)

Of course. Thank you. Yeah. It's a cool question. And we've seen this hatchability issue for a while now. It all started with a new breed. And this new breed has great numbers in terms of yields and in terms of conversion. So I think what the genetic company does is that they always try to answer the questions from the industry. And that's what we want: quality, yields, and conversion costs. And this new breed answered those questions.

It has improved numbers, close to 1%-2% every year on those categories, and a very good quality. Unfortunately, it is a bird that is really difficult to manage on the live side. I think on the live side, it generates a smaller amount of eggs, but also has a very low hatch. As we're looking into the numbers, actually, 2025 is starting with a lower number than we saw in 2024. There is always some seasonality because of the weather. 2025 is actually starting lower from 2024, which was the lowest on record for the hatchability. It is about animal handling on the live side. The United States is structured to have minimal interaction with the birds. We leave the birds in the houses to create the fertile eggs.

But because of the difficult management of these birds, we need to have individual management of these birds. We have that in Europe, in Mexico, and somewhat in Brazil, so we've seen better hatchability there. But it is the structure of the houses and the way we manage the birds. We change, and we've been changing our protocols through spending more time to manage these birds, specifically the weight of these birds, because the weight impacts the hatchability. And we are spending more time in the houses, but we will need to change the structure of the houses. We completely need to change the way we manage those birds. And as I mentioned, that helps in the biosecurity. We also have partner farms that keep the breeders for us. And it is all scattered throughout the country. And we need to invest in those houses and change all the management.

That takes a lot of time. There's no silver bullet for the improving hatchability. We expect to get better at managing this breed with time.

Pooran Sharma (Managing Director of Equity Research)

Okay. Great. I appreciate that commentary. I guess just furthermore, just fleshing out your commentary here, you mentioned that you had weather disruptions. We've seen this Arctic weather come in. I think a lot of people are talking about that. I think you mentioned Big Bird production may have been flat at some point. Just wondering how to think about this for Q1, given we have seen this colder weather kind of persist.

Fabio Sandri (President and Global CEO)

Yeah. Yeah. The weather is always a challenge for us, especially because we saw some really cold weather in the south, right? At some point, we had snow in Florida. That disrupts for a little while.

But I don't think it is a persistent or a significant event that will impact the productivity or the production or even the demand in that region for a long time. I think we always have one or two weather events. Of course, we mentioned also the mini hurricane that we have in the Douglas region that was really impactful for that operation. But I think we will always have those types of events. And that's why the geographic diversification that we have allowed us to keep great service levels to our key customers and didn't disrupt a lot into our bottom line.

Pooran Sharma (Managing Director of Equity Research)

Great. I appreciate the color. Congrats again on the quarter. I'll jump back in the queue.

Fabio Sandri (President and Global CEO)

Thank you.

Operator (participant)

Thank you. The next question comes from Priya Ohri-Gupta with Barclays. Please go ahead.

Priya Ohri-Gupta (Managing Director and Co-Head of US High Grade Research)

Good morning. Thank you. And congrats on the quarter.

Matt, I was wondering if we could start with you a little bit, really strong free cash flow performance to round out the year. As we look to 2025 and some of the comments around volatility on the input side, could you maybe walk us through how we should think about working capital as contributing to cash flow? How much of a drag should it be, or could we see a potentially neutral outcome? And then secondly, maybe Fabio, if you could touch on the impact that the business could potentially see with regards to some of the tariffs that are being considered, not just globally, but also with regards to Mexico. And if you could walk us through any puts and takes between the U.S. and the Mexican businesses and how that dynamic could affect both of those things.

Matt Galvanoni (CFO)

Sure. Thanks for the questions, Priya.

I'll start, and then I'll pass it over to Fabio after. When you think about our cash flows for 2024, when I look at our working capital contributions, we're significant, right? I mean, we were in that over $300 million just in working capital for this past year. I don't anticipate having that type of uplift. I think with the grains being kind of low where they were, really it provided us a nice benefit last year. Now, I'm not necessarily predicting a major drag against this year because I think we've got enough offsets with corn being a bit higher, soy being a bit lower. I just think that the working capital impact will be more flat-ish. We should still have very, very strong free cash flow. But I just don't think the working capital is going to be that type of benefit that we saw in 2024.

Hopefully, that helps.

Fabio Sandri (President and Global CEO)

Yeah. We saw a significant reduction in our finished goods inventory as well, as we all saw the closing inventories in the whole U.S. going down year over year. On the tariff side, I think there's still a lot of uncertainty about if, when, and where these tariffs will be in place, and also, what will be the answer from the trading partners? We mentioned Mexico, right? Mexico is our largest trading partner. What we export, and we export close to 24% of the U.S. exports go to Mexico, and it's typically leg quarters, MSC, and traded for prepared foods, so it's a very important source for Mexico. I think it's more than 70% of the Mexican imports of chicken come from the United States, so I don't expect massive or any important reduction in that trade.

I think the Mexicans are very concerned about food inflation, and I think this is a great opportunity for Mexico to bring very competitive meat to their country. Of course, we also have a large operation in Mexico, and Mexico is a growing economy. As I mentioned, we will continue to invest in growing our operation there, but there's also other proteins that they import from the U.S. It's mainly pork, and I think that also, I don't expect a big impact in that trade. But if that happens, of course, we will have the benefit of having our operation in Mexico, so there's a little bit of hedge for us if there's any problem in trade with Mexico from having the operations there. I think the other big part of the trade is corn that goes a lot from the United States to Mexico.

And I also don't expect any disruption from in that trade. Once again, I think the Mexico country is very concerned about food inflation and having the access to the USA corn, which is the cheapest in the world, is very important for their economy.

Priya Ohri-Gupta (Managing Director and Co-Head of US High Grade Research)

Okay. Thank you so much for the color.

Operator (participant)

Interesting questions. Thank you. This concludes our question and answer session. I would like to turn the conference over to Mr. Sandri for any closing remarks.

Fabio Sandri (President and Global CEO)

Well, thank you, everyone, for attending today's call. 2024 was a very successful year. I'd like to thank our team members for demonstrating a leadership mindset, driving our values, and elevating our performance throughout the year. Following our strategies, we captured the upside from enhanced market conditions, grew our presence with key customers, further diversified our portfolio, and improved production efficiency through operational excellence.

As a result, we collectively established new financial and operational milestones for our business. Nonetheless, our vision is to be the best and most respected company in our industry, creating a better future for our team members and their families. And that remains the same. To that end, I look forward to accelerating our work throughout 2025 and beyond. Thank you, everyone.

Operator (participant)

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