Morning, welcome to the first quarter 2022 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 relations section of the company's website at www.pilgrims.com. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then One on a touch-tone phone. To withdraw your question, please press Star then Two. I would now like to turn the conference over to Andy Rojeski, Head of Strategy, Investor Relations, and Net Zero Programs 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 first quarter ended on March 27, 2022. Yesterday afternoon, we issued a press release providing an overview of our financial performance for the quarter, including a reconciliation of any non-GAAP measures we may discuss. A copy of the release is available on our website at ir.pilgrims.com, along with slides for reference. These items also have been filed as Form 8-K and are available online at sec.gov. Fabio Sandri, President and Chief Executive Officer, and Matt Galvanoni, Chief 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 those factors has been provided in today's press release, our 2021 Form 10-K, and in our first quarter 2022 Form 10-Q filings with the SEC. I will now turn the call over to Fabio.
Thank you, Andy. Good morning, everyone, and thank you for joining us today. For the first quarter of 2022, we reported net revenues of $4.24 billion, a 30% increase over the same quarter last year, and Adjusted EBITDA of $501.8 million, almost double Q1 of 2021. Our Adjusted EBITDA margin was 11.8% compared to 7.8% Q1 last year. US GAAP earnings per share was $1.15 versus $0.41 last year, an increase of over 180%. We are pleased with the overall performance in the first quarter. Our U.S. and Mexico business has effectively managed through volatile market conditions and mitigated the impact of inflation in commodity, labor, and ingredient costs.
Although our UK business has made significant progress in battling through market conditions, a challenging labor environment and rapid cost escalation, many of our contracts have a lag or never contemplated the magnitude of inflation that the country is facing. We are proud of our promising start to this fiscal year and remain confident that successful execution of our strategy of portfolio diversification, key customer partnership, and operational excellence will continue to provide stronger, more consistent results. Nonetheless, improvement opportunities exist, and we must drive our business with an unwavering commitment to our team members' health and safety. We must continue to manage through extreme volatile market conditions. The global complex across grains and oilseeds markets rallied through the first quarter as the Russia and Ukraine conflict disrupted shipments and increased the risk that Ukraine will be unable to harvest their current crop and plant new crops.
Russia also faces complications in their ability to export, impacting the markets for corn and wheat. Moreover, the region is a leading producer of fertilizer, and prolonged conflict could inhibit delivery to farms throughout the world. These conditions are further exacerbated by challenges in Brazil as soybean sales short of expectations, coming at roughly 125 million metric tons, as opposed to an estimate of 145 million. We're closely monitoring the progress of the status of Brazil's second corn crop and its impacts to the global corn supply. In the U.S., the current focus is on the weather, given its impact on the pace of planting and total acreage for corn, soybeans, spring wheat, and other crops. The current forecast indicates relatively cool and wet conditions, delaying planting and potentially limiting production. In addition, China has not approved certain South American regions for corn shipments.
Although we do not believe that this will significantly impact corn supply, the U.S. government also announced some changes to its policy regarding seasonal ethanol blend usage. Given these factors, commodity prices have rallied and been very volatile versus last year. As always, we have a prudent grain position that reflects our view on the risk on the market. As for supply and demand conditions for U.S. chicken, live weight production increased by 2.5% relative to Q1 last year, driven by additional headcounts and heavier average live weight. The industry continues to experience hatchability challenges and labor constraints, which constrain overall supply growth. As a result, supply is expected to grow less than 1% in 2022, according to the USDA.
The overall supply of protein will be impacted due to the limited availability in the other protein complexes, as USDA expects the domestic availability of beef, pork and turkey to increase only 0.3% year-over-year. Beef and pork availability is expected to remain flat, while turkey supply will likely be adversely impacted by avian influenza per USDA estimates. Despite logistical challenges that inhibit our inventory flow, total protein in cold storage remains 7% below the five-year average at the end of March. Domestic chicken demand remains steady throughout the first quarter relative to the same time last year. Although the retail channel are lower in compared to the pantry loading period of last year, it is still pre-COVID levels higher, and higher prices are supporting revenue gains. Fresh chicken volumes dipped marginally early during the year but strengthened later in the quarter.
Volume demands for frozen value-added products remain resilient even with increasing prices. The retail deli department posted year-over-year volume gains, with sales also above the pre-COVID 2019 levels. The food service channel exceeded year ago and pre-COVID baseline levels. While in food service distribution, the number of operators purchasing remained below pre-COVID baseline levels, rates per operator remained healthy and the number of operators increased year- over- year. Our QSR key customers continue to grow. Although the non-commercial segments posted significant year-over-year gains, it is still on a recovery path to achieve the pre-COVID levels of sales. As consumers increasingly feel the effects of inflation, we anticipate some shift towards retail demand. Despite increasing prices to last year, chicken still remains the most affordable, flexible, and available option relative to the other proteins.
As such, it is well positioned to benefit from changes in customer behavior and spending patterns. The export business remain robust as overall chicken inventories increased 5% from December 2021 to the end of the first quarter and up 2% from last year. Dark meat accounted for the largest increase as it grew on average 17% from last year, primarily driven by ocean container shipping disruptions throughout all US ports. Despite these challenges, USDA export sales increased by 1.7% relative to last year throughout February, driven by Asia and developing economies. Improvement in export volumes are reflective of a resurgence in global demand and supply deficits driven by the AI in Europe and Southeast Asia, as well as ASF in critical Southeast Asian markets.
The conditions are further amplified by supply disruptions from the Russia-Ukraine conflict, as both countries exported roughly 34% of their chicken production. Our export business had outpaced the industry growth, and we expect a continuation of this momentum given our diverse portfolio of bird sizes and broad dispersion of production facilities. Equally important, the impact on the US chicken industry has been relatively muted as less than 2.5 million broilers have been impacted by AI, while other countries have been more severely impacted. As a result, we may have additional opportunity and flexibility when considering export opportunities. We'll continue to monitor the impact of AI throughout our global business. Given sustained demand levels and supply limitations, we expect chicken commodity prices to remain elevated above historical normals, which is demonstrated by the jumbo cutout prices that are currently 82% above the five-year average.
Turning to our US business, the consistent execution of our strategies of key customer focus, portfolio diversification, operational excellence enable us and our teams to navigate volatile market conditions and drive strong results. Given the challenges in egg production, we are holding our hens out longer than industry average. Although our hatchability suffered, we increased our overall availability to our key customers. To address this challenge, we have partnered with our primary breeder suppliers to identify the root causes of the declining hatch. This deep dive includes the evaluation of male and female lines, feed formula, equipment, and management practice. Given initial results, we have already seen a positive impact to egg production and hatch, and we'll continue to implement these changes. Assuming continued progress, these measures should increase our supply in the second half of this year.
Equally important, we continue to aggressively monitor avian influenza and enforce heightened biosecurity protocols. To date, we have not experienced any significant business interruption from avian influenza. We continue to invest in our people and equipment to enhance yields, improve mix, and ensure sufficient capacity to support further expansions. Since 2020, we've increased hourly wages by close to 20% and have expanded our incentive programs across our hourly team members. This resulted in an approximately $30 million year-over-year increases in U.S. hourly employee costs in the first quarter only. On the demand side, we will evolve our pricing approaches and adjust mix to mitigate the impact of supply limitations and the current inflationary environment. We'll continue to partner with our key customers to ensure sufficient product availability to satisfy the demand, driving top-line growth for our business.
We're also working closely with our supply chain partners to ensure sufficient visibility and timing of cost increases. As a result, we can identify opportunities to offset those impacts and ensure sustainable margins throughout our business, invest in our key customers and value for our consumers. These activities have enabled us to navigate volatile market conditions throughout the U.S. We have captured the opportunities on the commodity market while maintaining the margins on the other business. Our commodity big bird deboning business is leading the way as it again generated the largest profit increase relative to last quarter and the same period last year. Both volume and revenue growth were driven by the food service channel and continued development of key customer relationships. This business is especially well-positioned to realize the benefits from the current market conditions, as chicken remains the most affordable and flexible offering throughout the protein industry.
Our small bird business realized both top and bottom line benefits for increased traffic from QSRs and broadline distributors. To mitigate the impact of the Mayfield tornado, we relocated birds throughout our network to effectively maintain our operations and the service level to our key customers. We also updated pricing to offset increased grain and other supply chain costs. Moving forward, we will continue to evaluate and adjust our mix according to key customer needs and industry trends. Our case-ready business delivered year-over-year revenue growth with stable margins. Facing logistics and labor issues, the team rose to the challenge throughout the quarter, and they partnered with key customers to ensure superior service levels and operational improvements to partially offset increase from grain, labor, and other supply costs. We expect these changes to generate continued growth from distribution and improved margins.
Our prepared foods sales grew over 35% relative to last year, driven by prioritization of key customers, pricing recovery, and increased volume. Our consistent focus on service and product quality paid dividends, especially for Just Bare, as we increased distribution and market share despite higher prices from increased input and labor costs. Margins improved year-over-year as the business lacked setbacks from 2021 winter storm and drove operational efficiencies. Given our continued growth, we initiated work on our previously approved expansion at our Moorefield facility. We expect additional capacity to become available in the latter half of the third quarter. The branded retail business for Just Bare has strong momentum, and sales have grown 51% year-over-year, and increased 11% from prior quarter. Our fully cooked Pilgrim's offerings has also gained significant traction.
Consumer demand for our branded offerings appear especially resilient at the point of sale, as we have not experienced any drop-off in demand from our pricing adjustments for inflation. E-commerce has enhanced our overall growth in retail and food service, as net sales have increased year- over- year. We are building our presence as we develop new partnerships and optimize relationships with the existing provider, and further cultivated our relationships with key customers. Turning to our European business, significant inflationary headwinds emerged throughout the supply chain, including feed, ingredients, labor, and utilities. The Russia-Ukraine conflict has made those impacts even more pronounced, especially in commodity prices, as key UK wheat rose over 40% during the quarter. To lessen the impact and meet key customer needs, the team expanded its procurement and operational reach beyond its traditional supply base.
To that end, they identified new suppliers in different countries to ensure sufficient raw material and ingredient availability. This differentiated approach resulted in improved service levels and increased top-line momentum. Excluding the impact of Pilgrim's Food Masters integration, sales grew 9% relative to last year. Our key customer strategy provided the foundation for further growth as we increased market share and secure additional distribution for our innovation. Our efforts are being recognized by consumers and leading grocers as Food Masters' Richmond brand was recognized as a top 50 brand in the UK. In addition, the team diversified its geographical reach to improve sales and margins. For example, our pork team is now contracting sales in the United States, Asia, and Africa. Furthermore, the team has identified it is realizing synergies with the recent acquisition of Food Masters in procurement, product development, and logistics.
The team has also diligently evaluated their cost base and have undertaken steps to improve productivity, some of which involve investments in equipment and/or wages, whereas others emphasize cost reduction. We expect further alignment of industry supply and demand fundamentals over the remainder of the year. These market conditions, when combined with our improvement and efforts underway and sustained execution, should generate improvement in margins in the second half of 2022. Our Mexico business grew net sales by 11.5% relative to Q1 of prior year, whereas operating margins declined slightly as increases in supply chain costs outpaced pricing recovery. Sales grew across all channels, with QSR leading the way, followed close by retail and food service. Our prepared foods business has another quarter of double-digit growth with our Pilgrim's, Del Día, and Alamesa brands.
Our branded fresh business unit had similar success with the Pilgrim's as it also grew double digits. Like the other business throughout our portfolio, Mexico faces significant inflationary cost challenges throughout our supply chain, especially grain. Nonetheless, we will continue to invest in our brands and production as we believe in the long-term growth of Mexican demand. We are growing our production with a hatchery and feed mill in the state of Campeche in the Yucatán Peninsula. Once complete, we can reach 100% of Mexico with our products. We expect the first loads to reach local markets by the end of this year under the current schedule. We are also investing in a hatchery in Mérida, which is slated to begin operations in December 2022. In addition, we are expanding processing capacity at our Poplar location.
Once complete, we can further adjust our mix to service additional demand in both retail and food service channels. This project begins early in Q2, and we expect completion in the latter half of Q3. Moving forward, we will need to remain vigilant given significant inflationary headwinds challenges to our entire business. Costs have dramatically increased in commodities, labor, logistics, other operational inputs. To ensure our business continues to grow and create value for our stakeholders, we must mitigate these impacts through operational efficiencies and grow with our key customers. We'll continue to monitor and adjust our business accordingly. With that, I would like to ask our CFO, Matt Galvanoni, to discuss our financial results.
Good morning, everyone. For the first quarter of 2022, net revenues were $4.24 billion versus $3.27 billion a year ago, with Adjusted EBITDA of $501.8 million and a margin of 11.8% compared to $253.8 million and a 7.8% margin in Q1 last year. We achieved $287.2 million of adjusted net income compared to $103 million in Q1 of 2021. Adjusted EBITDA margins in Q1 were 15.9% in the U.S. compared to 6.5% a year ago. For our U.K. and European business, Adjusted EBITDA margins came in at 1.2% for Q1 compared to 4.3% last year.
In Mexico, Adjusted EBITDA in Q1 was 16.1% versus 20.6% a year ago. Adjusted EBITDA in the US for Q1 came in at $412 million compared to $131 million a year ago. Both gross and operating margins were higher compared to 2021 due to higher commodity market pricing, strong consumer demand, improved operational efficiencies, and growth with our key customers. Our UK business has experienced increased volatility from the Russia-Ukraine conflict, a challenging labor market and rapid cost escalation, all of which negatively impacted margins. The UK businesses have made significant progress in addressing the recovery of inflationary cost increases through pricing to our customers. As we noted in our last earnings call, the first half of 2022 will be challenged, but anticipate seeing profit improvement in the second half of the year.
Mexico generated $75.3 million of Adjusted EBITDA in Q1 compared to $86.4 million a year ago. Volumes have remained strong due to balanced supply-demand fundamentals, and although grain and other input costs have increased, the business has undertaken efforts to improve efficiencies and recover these higher costs. As we've both discussed and experienced in the past, our Mexico results have high relative variability quarter to quarter. As Fabio previously mentioned, all businesses have been subject to market volatility and significant inflation. As such, we continue to monitor costs through our supply chain, progress our operational efficiency efforts, and implement other cost recovery measures as needed to mitigate these impacts. We spent $82 million in CapEx in the first quarter.
We'll continue to prioritize our spending throughout the year to cultivate growth for our business, strengthen key customer partnerships, and realize greenhouse gas emission reduction targets related to our sustainability-linked bonds in our net zero commitments. Our overall balance sheet and liquidity remain strong as we have approximately $1.7 billion in total cash and credit available. Moving forward, we will drive cash flow from operating activities, working capital management, investing in high return on capital employed projects. As of the end of Q1, our net debt totaled $2.7 billion, with a leverage ratio of 1.75x our last twelve months Adjusted EBITDA, which is below our target ratio of 2x-3x. Net interest expense for the quarter totaled $35 million.
Our effective tax rate in the quarter was 21.1%, which included certain discrete items in the quarter. As I noted in our February call, we still anticipate our full year effective tax rate to be between 25% and 27%, albeit likely at the lower end of that range. Our capital allocation approach will remain disciplined as we look to grow the company, and we'll continue to align our investment priorities with our overall strategies of portfolio diversification, focus on key customers, operational excellence, and commitment to team member health and safety. Operator, this concludes our prepared remarks. Please open the call for questions.
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 are using a speakerphone, please pick up your handset before pressing the keys to minimize background noise. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Ben Bienvenu with Stephens. Please go ahead.
Hey, thanks. Good morning, and congrats on a nice result.
Good morning, Ben.
I wanna ask as it relates to kind of the margin capture, margin realization in the quarter. You know, we've had a strong commodity big bird deboning backdrop for a while. You highlighted in your commentary in the release and then on this earnings call some of the operational improvements that you've been making. I know mix labor is still a challenge, but can you talk a little bit about the progress that you've made, your ability to potentially continue closing the gap relative to what kinda commodity margins might suggest, and how we should be thinking about the challenges you still face operationally that just might ebb and flow as we move through the year?
Sure. Thank you, Ben. As we talked in previous calls, we have a very diversified portfolio in all of our operations, and we also have a great geographic portfolio. In U.S., we operate in all segments, being small birds, medium birds, large birds, and also on the prepared foods. We created this portfolio because we believe that it's more resilient to downturns when the commodity markets are really weak. We also have the exposure to the commodity markets through our big bird operations, where we can capture the upsides when the commodity markets are really strong. We also talk about one of the pillars of our strategy that is relentless pursuit of operational excellence. We are always looking for opportunities to improve our operations.
So that those opportunities are generated through our zero-based budgeting approach and through the action plans that are created at every single plant, so we can improve our operations year- over- year. I think the issues that we are facing over the last two years has been on labor availability. We are seeing a strong demand for labor in U.S. We're seeing very difficult conditions to staff our plants to 100% of their levels. We will never able to produce the optimal mix that we want to maximize our profits. As I mentioned on the remarks, we've gave some significant increase to our labor force that impacted more than $30 million just in this quarter and account for more than 20% over the last two years, and have been able to staff our plants better.
With that, we've been capturing some yield improvements, and we're also producing a better mix. Once again, I think the improvements on the margins that we are seeing are mainly due to our possibility to capture this increase in the commodity markets that we are seeing. We are seeing very strong demand, and we are seeing very limited increase in production in United States.
Okay, perfect. My second question is related to the share repurchase program that you all put in place. In the diluted weighted average share count during the quarter, we don't see evidence of you all being active in the market. I see in the 10-Q that came out this morning, quarter end share count or share count as of yesterday was a little bit lower, so maybe you've exercised some of that. As you think about the cash windfall that you'll see through the midst of this cycle and your ability to continue to improve operationally, can you help us think about where share repurchase sits in terms of your capital spend priorities? Thanks so much.
Hey, Ben, it's Matt. Let me at least answer your first question, and then Fabio can jump in maybe more in a second. You'll see, you can find in the 10-Q that we purchased 1.1-1.2 million shares in the quarter. If you recall, we didn't really announce this till March ninth, March 10th, and our quarter ended March 2th. We purchased about $27 million worth of shares in the quarter. We did start down on that program and did execute. You're just not seeing much of it in your average, just because the average is across the entire quarter. We didn't start till basically the last two weeks of the quarter.
Yes, I think capital allocation is always one of our priorities here. What we want is to create value for our shareholders, right? Grow our company and create a better future for our team members. We want to grow our company. Absent of any big M&A or other opportunities, we'll continue to invest in increasing our organic operations. We mentioned here several initiatives in prepared foods in U.S., in fresh and prepared foods in Mexico and even in Europe. We're looking for opportunities on how to grow. Share repurchase are an option when we believe that there is a very good value for our shareholders on a buyback. I think in terms of capital allocation, it comes, of course, second to us growing our business and creating value.
Okay. Thank you both so much. Best of luck with the rest of the year.
All right. Thank you, Ben.
Our next question comes from Peter Galbo with Bank of America. Please go ahead.
Morning. Thank you guys for taking the question.
Sure. Morning, Peter.
Matt, maybe you can just help us from a modeling standpoint. You know, I know Fabio gave some color around USDA expectations for U.S. volume growth, but just how you're thinking about, you know, U.S. volume growth, you know, cadence over the remainder of the year. As a second to that, you know, how we should think about kind of higher feed costs, this latest round of higher feed costs flowing through. You know, I know you guys are probably hedged through, you know, part of the second quarter, but how we should think about those two items over the remainder of the year.
I think when we release the volume increases throughout the year, I think we know we have a very seasonal business, and you're gonna see that, the normal seasonality. You know, we do expect generally, you know, stronger Q2, with the grilling season, summer season, and then things starting to, you know, kind of more follow the seasonal trends that way. Related to our hedging portfolio, as Fabio said, look, we try to keep. Like, we take a look at the market, and we look it against our risk management practices, and we hedge. You know, we disclose certain things in our 10-Q, which was published this morning, that'll kinda give you a little bit of a flavor of, you know, kind of where we're at, kinda relative to this time, the end of the fourth quarter.
We are, you know, we definitely have taken a look at that and adjusted our hedging accordingly to how we see the risk in the market.
I think just adding to the USDA growth and expectation for our industry, it will depend a lot on the hatchability. We've been talking about this issue for some time now, but I think now we are seeing some initial results from everything that we are trying to do. We expect, like, Matt said, a little bit of an increase in Q3, and then compared to the strong quarter that we have in Q4 in terms of production, we expect very muted growth. Overall, like I mentioned, we're increasing close to 1%.
Got it. No, that's helpful. Thanks for that. Fabio, you know, helpful to get kind of the context around, you know, hatch. I guess, you know, one of the big questions we're getting is longer term with where chicken prices are right now, you know, you've seen an uptick obviously in pullets. It seems like hatch maybe starts to get better. I don't know when that, you know, starts to show up really in some of the externally reported numbers. The gap between chicken and some of the other proteins has really started to close, especially with beef and pork actually turning deflationary, you know, on a year-over-year basis this month. I'm just curious, you know, how are you thinking about maybe the limits on where jumbo breast meat can go?
You know, 3.30 is obviously a historically high level. Just seasonally or from your standpoint on improved hatch, when do things start to roll and normalize maybe to a, you know, closer to a something with a 2 handle on it? Thanks very much.
Well, sure. I think to your point, yes, we've been seeing some increase in pricing of chicken, but as you mentioned, the gap between the proteins continue to be very wide. I think it's closed a little bit, but it continues to be very wide. I think what we need to take into consideration is the difference between the commodity segments and some of more stable retail segments. The retailers are not experiencing the price that you're seeing on the commodity. That is a more day-to-day jumbo cutout in a combo that is mainly used for further processors and some other operations that we call industrial and some large food service industry.
In the retail business, we have a more stable model, where we try to mitigate all the effects of the inflation through operational efficiencies and in discussions in terms of growth and cost reduction with our key customers. To the retailers and to the end users, we are seeing a little bit of inflation, but not at the same levels that we are seeing at the commodity segment. What is happening is that in the past, we used to use commodity meat to augment the sales to the retail channel, helping their volumes during the summer and during some specific occasions. What is really difficult today is to get the commodity meat and then put in a tray and sell to retailers at a loss. That's what's happening. The availability to the retailers is also getting lower because of that.
We've been operating our plants at full capacity, and our growth is outpacing the industry, especially to our key customers. That is going to be a challenge for the summer, where the retailers will not have sufficient availability at the prices that they are having today.
The next question comes from Michael Piken with Cleveland Research Company. Please go ahead.
Yeah, good morning. Just wanted to talk a little bit more about, you know, kind of your outlook for Mexico and just, you know, where are they in terms of production, feed availability. I know they import a lot of grains here. You know, how reliant do you think Mexico might end up becoming on US chicken, and how will that impact your Mexico performance depending on the amount of product that moves in from the U.S.?
Sure, Piken. Thank you. Yeah, Mexico, as we always mention, is a very volatile market. We're seeing some small shifts in supply and demand can create big impact in overall pricing there. We saw a weak Q4, which is typically not what we expect, but was mainly due to an increased production and some increase in exports or imports from Mexico, especially from exports from U.S. as well. We're seeing that in that front, exports have increased during Q1, but given the high prices of all the other proteins, we expect a very difficult season of export to Mexico, again, because the high prices on the commodity segment here. We continue to increase our production in Mexico. We're doing everything that we can to supply the local market with tailored products.
We're expanding our production not only in the fresh, but also in the categories. We're opening new plants in the Mérida region. It's always going to be a very tight situation in Mexico, especially for Q2 and Q3, as we still don't have those production increases. We still normally have a very season of more diseases in Mexico, which constrain production there. Typically, we have a very small increase in supply during Q2 and Q3, which can affect prices. Of course, for the long term, we continue to invest in the growth in Mexico. As I mentioned, it is very volatile in quarter-over-quarter, but when we see year-over-year, they're very resilient and double-digit margin markets.
Great. Thanks. As a follow-up to that, you know, just are they having any issues with avian influenza in Mexico? You know, has the biosecurity improved there over the last couple of years, or are you still gonna be kind of, you know, having your breeder flock more in the U.S. to, you know, support that growth in Mexico? Thanks.
Sure. Biosecurity, as we talk about in U.S., is really strong. We have very good protocols. I think the problem in Mexico is that they have 30% of their market based on live sales. Those live animals move throughout the country and are slaughtered in small slaughter facilities in the big cities, especially in Mexico City. That creates a huge problem for biosecurity, and that's why we see a lot of more mortality there and some issues with, again, the biosecurity. That will continue, I believe, because the live sales continue in Mexico. The Mexican consumer puts a lot of its preference in the freshness, and they believe that a slaughter facility close to the end user has that convenience and has that value.
As we are growing our brand in Mexico, I think we're creating a strong cold chain, and we're creating more consumers in the retail with the branded products that they can trust on the quality of our products. Given the live movement that exists in Mexico, we always believe that there is very weaker biosecurity in the country.
The next question comes from Ben Theurer with Barclays. Please go ahead.
Thank you very much, and good morning, Fabio, Matt. Congrats on the strong results. The one thing I wanted to first dig into is the business over in Europe, and you've made it clear in your prepared remarks, but also in the press release about all the challenges around the pork market because of ASF found in Germany, but then at the same time, the labor shortages and other shortages. Just help us understand what you think about the next coming quarters in terms of possibility to raise pricing and to negotiate prices up in the European market to help offset all that cost pressure you're currently facing and get the profitability back into positive territory. That would be my first question.
Sure. Thank you, Ben. Yes. Europe is facing unprecedented impact in terms of inflation. I think the one important point that we have is in the past, we talk about they're having some cost-plus contracts, and that was the main structure of the contracts in Europe. It was a cost-plus based on grain. There was not a lot of influence of other costs to our contracts and to our overall cost structure. Today, only 30% of the inflation that we are seeing in the region is based on grain. Although, as we mentioned, because of the Russia-Ukraine war, we are seeing 40% increases in the wheat in U.K. Only 30% of the inflation or the increase in cost is due to grain.
What happened in the region was an unprecedented increase in all other costs, being utilities, CO2, micronutrients, labor, packaging, and transportation. Those are the ones that we need to address with our key customers and overall customers and include that into the formulas. I think the other issue that we're facing in Europe is that we have typically a three-month lag when negotiating those prices. As those prices escalate every day, we're always behind the eighth ball, and we're always trying to capture those increases into the prices. There is a lag, and because of the continuous increase in all costs, not only feed, we're always behind. We have great relationships there, like we mentioned. That's our stronger value for its innovation. We are innovating, creating new products, and we are doing all the renegotiations with the key customers on those contracts.
We believe that we have passed, and we have renegotiated contracts that includes all these other factors into the cost with all of our major key customers. We believe that our operation will improve starting already during the quarter, and we believe that in Q2, Q3, Q4, we're gonna see the benefits of those renegotiations. At the same time, of course, we are realizing the synergies especially on the back office of having those three companies together. As a matter of fact, we are going to produce some of the Richmond sausages in one of the former operations that we have in Pilgrim's UK. That is already opportunity to reduce costs and to increase sales by producing branded products into the facilities we already have in the Pilgrim's UK.
We are also benefiting from some innovation. The consumer in U.K. is also facing a constraint in their ability to buy products because of the inflation that is impacting every customer there. The inflation, especially in utilities, has been really impacting the availability of disposable income for, especially for groceries. We're innovating, creating new products that will address those issues to those customers and helping our retailers to continue to increase their top line.
Okay, perfect. My second question is really around the leverage profile, cash on hand and all that kind of stuff. I mean, obviously leverage came down in a decent way to 1.4x, and I think you usually aim for something right around 2x. At the same time, we're seeing a significant increase in cash to over $750 million, and you usually in the past have always been running more like $300 million, maybe $400 million. What's some of the more immediate plans of what to do with that cash? Is it paying down debt what you can? And how should we think about the leverage maybe towards the end of the year? Just to understand the triggers and drivers of capital allocation.
I think part of it is, this quarter too, we took advantage of our delayed draw that was expiring in February, and we borrowed about $194 million in February. It really very favorable interest rates. That part of it that was just 'cause we took advantage of that opportunity and the term loan that we negotiated back last summer. So that was something that we took advantage of to increase our cash balance. Look, I think we're. We mention it a lot. We're very focused on growth and, that growth can take different forms, and that could be more organic and in build outs of our plants. It could be M&A, it could be a lot of combinations of all that. I think we're very focused on that.
Our board is very committed to that. Fabio and I focus a great deal of time on that to grow the business and we see great opportunities to use that cash. I don't know, Fabio, if you want to add anything else to that.
Well, I think, like I mentioned, right, we want to create value for our shareholders and for sure, having $700 million in our balance sheet is not creating a lot of value. I don't think we can get a lot of use from that money. It's more to have sufficient liquidity for anything that can happen and to have availability for our growth prospects.
Okay, perfect. Well, Fabio, Matt, thank you very much. Congrats again.
Thank you. Thanks, Matt.
Our next question comes from Adam Samuelson with Goldman Sachs. Please go ahead.
Yes, thank you. Good morning, everyone.
Morning, Adam.
Adam.
Morning. First question, maybe coming back to the U.S., as we think about the current environment and obviously the commodity big bird deboning business, driving a tremendous amount of strength, how do we think about some of the breast meat prices, where they are impacting the prepared foods business, especially sequentially given the recent run-up, and again, also in the U.S., or just are you seeing. It doesn't seem obvious in the pricing, but impacts of potential export bans from AI impacting the leg quarter market. Pricing doesn't. It seems very different than 2015 so far in terms of market impact to date.
Sure. I think starting with the AI, I think we're seeing a seasonal wave of influenza close to what we have in 2015, and we're seeing a lot of cases throughout the world. We're seeing that some countries are even more impacted than us. Actually the AI in some countries, especially in Asia and also the pork issue in some countries in Asia, is helping us on the export of leg, especially of leg quarters. We're seeing an increase of the export to the Asian region in Q1 already, and we're seeing a lot of demand and asks about leg quarters for the incoming quarters. The AI throughout the world actually help our exports.
Now, the AI cases that we have in the U.S., despite not impacting our overall production, when you have an AI case in any state, we have either a temporary ban or some questioning about movements of products through those states. Given what happened in 2015, most of the nations have already regionalized the AI issues. After a week, we can resume export from regions that were not impacted by AI. Of course, because of our broad spectrum of plants, we are in 14 states, we can mitigate any specific AI issue in any specific country by rotating where we supply our products.
Of course, it creates a little bit of a logistics issue, especially today where we're having a lot of logistics issues both in U.S. and in the freight, but we can manage better than somebody that has only one plant, and if that plant is in a zone that it's impacted by AI. In terms of the prepared foods, what we are seeing on the retail is that prepared foods frozen, fully cooked products are 300% higher than the same period in 2019, and even 40% higher even when you consider the pantry loading period of last year. I think the consumer really understood the value of that product. When the food service was shut down, they went to the grocery and to the retail, and they really used those products as a convenience and a great taste product.
We're seeing that growth in our Just Bare and our Pilgrim's brands in the retail. As we're seeing inflation impacting the consumer in U.S., I believe that there will be an increase of sales from the retail away from food service. I think that it's very beneficial not only to fresh, but also to the fully cooked items. We've been pricing that according to the impact of the inflation that we are seeing on our operations, and we are seeing great demand for those products.
Okay. I guess just switching over in Europe, I think I was reading some of the comments earlier, when you've seen hog prices in Germany start to move more recently, U.K. still seems a bit more stagnant. I mean, I guess if I'm thinking about the Tulip operations specifically, is there a pathway for that business to reach profitability this year, given both the pricing dynamics on hogs and then the cost issues you're facing?
Sure. I think what you're seeing exactly the impact that we have in U.K., especially on the pork segment. We saw an increase in the cost of production with increase in wheat and soy. We were seeing stagnant demand because the overall inflation in U.K. creating different patterns on the behavior of the consumer. At the same time, we are the most integrated of the pork operators, and we were seeing the price of live animals really going much below the cost of production. As we are seeing the rebound of the live animals, we expect to have back the natural advantage that we have by having our own pigs, especially on the high welfare items.
We are seeing also an increase in the pricing, given the change in all the formulas that we mentioned in another discussion. We are very positive with the synergies from the integration, from the innovations that we are seeing there, and also because of the change of the dynamics, especially on the pork segment.
Okay, thank you.
Next question comes from Ken Zaslow with Bank of Montreal, excuse me. Please go ahead.
Hey, good morning, guys.
Hey, Ken. Good morning.
How much profitability do you think you're leaving on the table by not having your mix and labor there, and will you get that back in 2023?
Yeah, that's a really difficult question. I think we're giving some couple of points of profitability because of that. I think it is, like I mentioned, yields and mix as well. We are not deboning all the dark meat that we expected because of lack of labor. When you have lack of labor in a plant, you move all your employees to the front part of the operations, which is deboning the front. We end up with more leg quarters to export, which being a very profitable business, and we're being very favorable with the increase in the leg quarters. We could create a lot more value if we debone them, and we could also generate more volume to our food service business.
That is typically a 5-10 cent improvement in terms of profit. It is a significant value. Yes, we expect to have that back in 2023, not only with all the increases in salaries that we're giving to our employees, with all the programs that we are deploying, giving employees in our communities what we call a better future. We have programs where we're investing in our communities and with the Hometown Strong programs. We're investing more than $20 million into improvements into our communities, being in nothing related to our operations, being in parks, being in educational services. We believe that with that, we'll create a more engaged population. We're also giving one of the largest educational programs in rural America.
We are providing community college to any employee and their dependents free of charge from us because we believe that better employees and engaged employees will produce a lot more for us and will be more a more stable workforce. With all those initiatives. We're also investing in automation. I think over the last years, we talk about investing in automation. There is new machines on the dark meat deboning that requires less people, and we're heavily investing in those machines. Also in front deboning, we have one plant already with fully front deboning on the big bird segment, which is the hardest one to automate. On all the others, we have machines that create a good yield and a good product.
On the big bird, because of the variance in terms of sizes, it's very difficult to have a machine that capture good yields. We are partnering with one of our vendors, and produce a machine that is creating great yields, and the machine shows up every day, right? I think we're also improving our incentives with programs to help our employees being in childcare, being in transportation. With all those initiatives, and it's a long answer, we believe that we by 2023 will be fully staffed and having all of our mix at the optimal level.
Great. When I think about production beyond this year, besides the improvement of hatchability, how does production actually increase? Do you think that it'll be relatively muted for one, two, three, four years? How will you even see production increase over the next couple years?
Yeah, that's a great question. Over the last years, we saw at least six or seven plants that were built coming online. I think that was a great to support the growth of the consumption of chicken in the United States. As we look at where we are right now, we don't see any plants being built at the moment. Because of the building costs being so high and the lack of labor, it's really hard for any operator to build a plant. We need to study the region and see if there's labor available to staff 1,000 people plant, which is really hard. Also, getting all the permits required for a chicken plant has been really difficult.
We've been building one rendering plant, and it's been a nightmare to get the permits and even to have some municipality that allows to be there. It's been really difficult for our industry to build new plants. I believe that with the growth in the demand, we should increase the supply. I think another way of increasing supply is to wait. I think although the primary breeders solve the woody breast, they create a little bit of an issue on the hatchability. Now with the woody breast behind us, maybe we can increase the size of the birds and produce a small, you know, a little bit larger bird to increase total volumes. What we are seeing is also a movement from some of the operators on the small bird section to move to larger birds.
That will increase the overall availability of meat in U.S., but that will create a pinch in the small bird category. We're seeing that happening already, and we're seeing small lots at a very high price, even compared to historical levels. We believe that we can grow, in terms of improving the hatchability, like you mentioned, so we have more heads, and we can increase the size of the birds or the average size of the birds by some players moving out of the small bird category.
Great. I really appreciate that. Thank you.
You're welcome.
Thank you for your questions. I now turn the conference back to Fabio Sandri for closing remarks.
Well, thank you, everyone. Although we are pleased with our start of the year, market conditions are extremely volatile and significant inflationary headwinds present a challenge. We must continue to monitor the impacts of the global commodity inputs, changes in overall protein complex, and movements throughout the labor market. To date, we have successfully managed these challenges by prioritizing our key customers, leveraging our diverse portfolio, and driving operational excellence. We use this approach as we continue to invest in our business and focus on team members' safety and wellbeing. Given our demonstrated progress and continued execution, I look forward to supporting our key customers as we grow together. Thank you once again, everyone, and have a good day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.