Pilgrim's Pride - Earnings Call - Q1 2021

Transcript

Speaker 0

Good morning and welcome to the First Quarter twenty twenty one Pilgrim's Price Earnings Conference Call and Webcast. All participants will be in a listen only mode. 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.

I would now like to turn the conference to Danhil Bonito, Head of Investor Relations for Pilgrim's Pride. Thank you and over to you, sir.

Speaker 1

Good morning and thank you for joining us today as we review our operating and financial results for the first quarter ended 03/28/2021. Yesterday afternoon, we issued a press release providing an overview of our financial performance for the quarter, including a reconciliation of any non GAAP measures we may discuss. A copy of the release is available in the Investor Relations section of our website, along with the slides we will reference during this call. These items have also been filed as Form eight ks and available online at www.sec.gov. Presenting to you today are Fabio Santori, President and Chief Executive Officer and Matt Galvanoni, Chief Financial Officer.

Before we begin our prepared remarks, I'd like to remind everyone of our safe harbor disclaimer. Today's call may contain certain forward looking statements that represent our outlook and current expectations as of the day of this release. Other additional factors not anticipated by management may cause actual results to differ materially from those projected in these forward looking statements. Further information concerning those factors has been provided in today's press release of Form 10 k and our regular filings with the SEC. I'd like to turn the call over to Bobby Tanner.

Speaker 0

Sorry, Tanner. The the audio is speaking. Sorry, Tanner. Now you can go ahead, please. Ladies and gentlemen, sorry for the interruption.

You may go ahead, please.

Speaker 2

Okay. Thank you, Daniel. Good morning, everyone, and thank you for joining us today. For the 2021, we reported net revenues of $3,300,000,000 and adjusted EBITDA of $254,000,000 or a 7.8% margin compared to 5.4% a year ago and an adjusted EPS of $0.42 per share. It has now been slightly more than a year since the beginning of the COVID nineteen pandemic.

And for many companies here in The US and globally, the past twelve months has presented one of the most significant operating challenges. We made a commitment to prioritize the safety of our team members while maintaining our ability to produce and supply customers during this unprecedented operating environment across our global businesses. We also pledged to continue making decisions that are well aligned with our long term strategic vision and to support the goal of delivering sustainable long term outperformance relative to the competition. Safety is a condition of Peer Groups and our team members have continued to respond admirably to the unprecedented conditions, supplying products to our customers. We are continuously adapting our global operations to the change in channel demand while adjusting our operations to be able to maintain the operations at all of our plants and minimize any significant disruption due to labor and health issues.

We remain diligent in implementing precautionary proactive steps to better safeguard the wellness and health of each team member while fulfilling our essential business doing as a food producer to consumers in every region where we operate. Most recently, we maturely strengthened the effectiveness of this strategy by once again leading the industry and implementing a comprehensive vaccination program to further minimize the impact of COVID nineteen on the health and safety of our team members and potential disruptions to our operations. Over the past months, in The US, our focus has been on maintaining all of our interventions while facilitating access to the vaccine for our team members. To date, we have vaccinated more than 12,000 team members, and this number is increasing every day. We have achieved these results through education to encourage participation and by partnering with local government and health officials at facilities across the country.

In addition, we offer a $100 incentive bonus to every team member who chooses to be vaccinated. And we have halted operations in several locations during vaccinations to facilitate higher participation rates. We have safety protocols above all standards, but coupled with high vaccination rates at our facilities will continue to result in a safe working environment for our team members. We thank our governors and other state authorities who have supported vaccination of our workforce in many of the locations where we operate. In terms of direct COVID-nineteen mitigating costs, we incurred roughly $30,000,000 for the quarter.

Countering the significant challenge over the last twelve months, our portfolio strategy has continued to generate superior relative performance and outpaced the competition by delivering more than 50% increase in adjusted EBITDA for Q1. The results were driven by a resilient business model across all business units, including U. S, Mexico and Europe. The unique challenges as a result of COVID-nineteen presented an opportunity to demonstrate the value and strength of our well diversified portfolio, including our presence in multiple geographies and our ability to generate more consistent results despite specific market volatility. Our performance is the result of our vision to become the best and most respected company, creating the opportunity of a better future for our team members.

To support our vision, we are continuing our strategy of developing a differentiated portfolio of diverse complementary business models, continuing to relentlessly pursue operational excellence, becoming a more valued partner with key customer and creating an environment for safe people, safe products and healthy attitudes. Our team members have remained focused on executing and delivering on our strategy regardless of individual market conditions. While we are continuing to see incremental improvements in many of our markets, some challenges have remained and we continue to adapt by making internal change to our operations to be well aligned with market conditions. We are committed to deliver strong growth and achieve a significant increase in relative performance against industry peers across all of our global operations. During Q1 in U.

S, our retail and QSR business has remained solid due to strong demand across our customer base despite high inputs and operating costs and left an optimal mix due to labor shortages. The market for commodity large bird deboning experienced the largest improvement relative to the same period a year ago. Our prepared food business remained resilient considering the challenging demand environment and the business continued to grow in sales, reflecting the investments made over the past few years and in anticipation of strong results as COVID-nineteen restrictions are gradually lifted throughout 2021. In Q1, despite significant changes in feed costs, lower volume due to lockdowns, a reduction in export volumes and COVID-nineteen mitigating costs, our combined European operations, MyPark and Pilgrim's UK, will still generate a good performance. In Mexico, the market remained very favorable with strong results in the quarter compared to a very difficult 2020.

For 2021, we will maintain our strategy while continuing to improve the portfolio to be responsive and resilient to individual market dynamics and increase our relative performance over the competition. We believe this approach will give us higher and more consistent results for the mid to long run and minimize the full peaks and troughs of the volatile commodity sectors. In The U. S, COVID-nineteen restrictions continue to impact our Q1 results. Market environment improved throughout the quarter including a challenged February in part due to a significant weather event in Texas, Arkansas and Louisiana before a strong recovery as we exit the quarter.

The weather events impacted our slower and grow out operations but rebounded quickly. With gradual loosening of restrictions as a result of the increasing vaccinations, the market has been incrementally improving, especially in food service. Outside of foodservice, market conditions were mostly in line with typical seasonality and remained strong. QSI volumes continued to be robust and demand from our customers has been outperforming the industry and our expectations. Commodity large bird deboning generated the most improvement and recovered strongly driven by seasonality and much better support from food service and exports to one of the strongest markets we've seen in years.

We expect the strength in commodity can be sustained beyond q one as grilling season is just around the corner when chicken demand is seasonally the strongest historically. In addition, with more vaccinations, we believe that food service demand can return closer to pre COVID levels, while at the same time staffing challenges at our plants will likely be reduced as well, allowing us to produce a more optimal and more profitable mix of products. We expect to be a clear beneficiary from the expected recovery in foodservice demands through our diversified portfolio. We continue to adapt to the changes in channel demand by increasing our volume mix to key customer retailers. Our ability to offer a portfolio of differentiated products along with our key customer model are giving us better insulation against volatility.

We are also much better positioned to adjust product and channel mix given our presence across all budget sizes from small to large. Our retail volume is expected to improve over the same time last year in Q2 and we expect to continue our discussion with customers to better reflect the significant increase in operating costs, including labor and feed, as well as the general override tightness in supplies. Despite challenging conditions for small birds with the traditional food service distribution, our demand continues to be strong, driven by our key customer outperformance within the QSR and retail daily. Online sales are forecasted to grow around 22% over the next five years. We continue to deliver strong online growth of almost four times the projected category growth number, mainly driven by case ready and prepared portfolio across the Just BARE and Pilgrim's brands.

As of Q1, we posted roughly 85% growth versus last year. We are also gaining more brick and mortar retail distribution for our fresh Just BARE brand. Our market leadership in these categories and more differentiated product portfolios have continued to strengthen the growth of our competitive advantage versus the industry. The expansion of our case ready capacity at our plant in Cold Spring, Minnesota is now complete and almost double our mix of more stable margin case ready products, especially on our differentiated higher attribute Just Pair brands. We experienced a much more challenging labor environment in Q1 across The US operations.

We have rolled out more than $40,000,000 in strategic wage increases for our team members to mitigate the situation and to remain competitive within the market. At the same time, we continue implementing a long term strategy of introducing more automation in our operations to reduce operational challenges due to laborability in the future. In The U. S. Prepared Food business, our consumer packaged branded business grew 70% year over year, partially offsetting the year over year declines in schools and food service, which continue to be impacted by the pandemic.

In anticipation of the return in demand from these channels, we have been investing in our prepared food business to benefit from the recovery and we expand our production in Morfield, West Virginia. We continue to grow our branded consumer packaged business with more line extensions with our Just Pair and the renewed commitments on the Pilgrim's brands. We will diversify our product and channel mix to further stabilize our prepared margins. At the close of Q1, industry inventory continued to decline from its position at the end of Q4. USDA chicken inventory was down 11% from December 2020 to February 2021 and down 17% from the previous year.

Combined dark meat inventories dropped by 13% from December 2020 and are down 27% year over year. The year over year improvement in inventory was expected as early twenty twenty inventories reflected preparation for shipments to China that were initially delayed by the COVID nineteen pandemic. Quarterly inventory decrease has outperformed expectations even though the marine cargo industry faces some shortages, delays and a worldwide container imbalance. Up to February, the broiler industry grew its exports by 5%. The numbers are indicative of potential for a more balanced world trade portfolio as pandemic recovery efforts continued throughout 2021.

Exports to China have continued to grow strongly as it remains a good destination for pause while also having the potential for driving demand in other cuts in the future. Due to the recovery in demand, high fat AI and ASF impact in Europe and a weaker dollar, broiler exports continued its volume growth from 2020 at higher prices. Pyramid export volume grew by 14% during 2020. In 2021, we are expecting similar growth numbers and have committed to grow our business with clients that add value while seeking to expand and diversify our portfolio of destinations. Year to date, we have added several new direct clients and have continued to introduce our brands to new markets.

The ability to ship cargo quickly is the biggest headwind for the industry in early twenty twenty one, but we have taken strategic positions where appropriate and are confident in our supply chain's ability to execute prioritizing profitability for our business units. Compared to a very challenging Q1 last year, Mexico had another strong quarter following a robust second half performance during 2020, driven by a balanced supply demand and continuous improvements in our operational performance. We adapt the operations well to generate strong performance despite volumes in the fresh segment that were below those of 2020. Recall Q1 of last year, the market was oversupplied, which reflected a much higher than normal average bird weight and also contributed to the supply demand imbalance. More normalized economic activities, our increased share of non commodity products, and fewer imported chicken also contributed to the strength.

We expect overall demand to continue to be solid while we remain agile and are continuing to adapt our facilities by shifting production to those channels that are experienced better relative demand. Our prepared foods also rebounded well with strong demand. We maintained the pursuit of our strategy to invest in our brands in both fresh and prepared business, seeking to establish strong differentiated brands and products and at the same time increasing our share in modern channels with more stable margins over time. We expect challenging grain prices, volatility in the U. S.

Dollars and normalized demand should keep the supply demand equation fairly well balanced for Q2. While conditions in Mexico can be volatile quarter over quarter, we expect full year performance to remain consistent with our vision of long term continued growth for the region. Our team in Mexico continues to relentlessly focus on operational excellence and customer satisfaction and we remain committed in the long term growth and demand prospects in Mexico. In Q1, our combined European operations Moipark and Pilgrim's UK continued to capture operation improvements despite significant challenge in feed costs, lower volume due to lockdowns, export constraints to China and COVID-nineteen mitigating costs. Despite materially higher feed costs not yet passed on formula prices, COVID-nineteen mitigating costs of more than $4,000,000 and lower volumes due to the pandemic restrictions, primarily in food service, the business generated similar results to the prior year.

Countering the headwind, my part delivering implementing operational excellence initiatives continue to deliver labor efficient, improved yields and better agricultural performance. We expect Moipar performance to continue to improve in the coming quarters as the sharp increase in feed will be partially offset in the following quarter through our sales contract models, reflecting the mitigating of higher costs in the sales price and we are already beginning to see demand conditions improving as lockdowns in Europe and other restrictions are closed. We have maintained the performance of Prigmas UK operation with positive EBITDA contribution. During Q1, we experienced a reduction in volume at exports to China due to the suspension of our export license at two plants as a result of COVID-nineteen. As I referenced, during Q1, the overall market was down 25% from Q4 of last year.

We are working with the relevant authorities to regain the license this year. In addition, the prices in The EU and UK were under pressure because of ASF in Germany despite higher grain costs. However, prices have already started to recover. Our business is more integrated than the competition, which constrained our performance during the quarter due to weak prices of live animals. However, we believe over the long term, it remains the best model.

The integration of Pillars UK remain on track. Over the next few years, we expect to generate an EBITDA improvement to achieve a level that is competitive with leading companies with similar portfolios. We have expanded our distribution capability for the previous UK assets through some recent wins to increase our retail exposure and strengthening our partnership with key customers. Our key customer strategy is working well as expected and have increased our volume by 7% in q one to those customers. In q four of last year, our brand new refurbished site in Bromboro became fully operational for our retail packing business.

We have invested in state of the art food manufacturing technology with high levels of automation to serve our key customers to further deemphasize the proportion of commodity sales. Primary pork fluffing, sausages and value added products will give scope for further growth and expansion in the future. We are optimistic about building upon our operational improvements by continuing to optimize our manufacturing footprint, extract best in class operational excellence, capitalize export opportunities, optimize the portfolio of channels, segments and products, as well as strengthening our growth business with key customers to drive innovation in value added and high margin areas. Turning to feed ingredients, corn prices have rallied to prices we have not seen since 2013 following the historical drought in December 2012. A combination of increasing demand and lower production has provided the catalyst for the prices rally this year.

In their latest supply and demand estimate, USDA projects US corn ending stocks at 1,350,000,000 bushels, a decrease from last year's 1,900,000,000. Exports are projected at 2,700,000,000 bushels, up from last year's 1,800,000,000, driving higher higher primarily by increased exports to China. In addition to the higher export demand from China, there is concern in the market now that Brazil's second crop is not getting enough rain, which is creating more risk premium in the market. In the recent plant limitation reports, USDA reported that farmers intended to plant 91,100,000 acres, which was considerably less than we and the market had expected. We believe that actual planted acres for corn will eventually come in higher due to the higher prices for new crop we have seen recently and the good weather forecasted for planting.

Soybean meal prices have been somewhat supported but at levels very similar to where we started the year. The large crops in South America are providing competition now for the soybean and soybean meal exports which is waiting on US prices. Another contributing factor keeping soybean meal prices lower despite the high soybean prices is the growing demand for the renewable diesel, which is moving the value of the soybean production into oil away from meal. USDA reported that farmers intended to plant 87,600,000 acres, which was also less than the market expected, but much like corn, we expect the good weather forecast and the recent increase in new crop prices to incentivize farmers to plant more acres. Wheat prices in Europe has also recently risen from the following the rally in global corn markets.

With higher corn prices, we have seen wheat start to work into feeding rations globally, which is providing price support. We continue to see a major recovery in global wheat production, including an 80,000,000 ton increase in Australia. Crop conditions in The UK and Western Europe are significantly better than 2020, which supports our view of a larger recovery in production in our main sourcing area. And conditions in The US are also good as the crop comes out of dormancy. Overall, we feel good about the availability global for wheat.

According to the FDA, Q1 twenty twenty one live weight production decreased 3.4% or 1.8% reduction if we adjust for the work phase relative to prior year as a result of fewer headcount. Headcount restrictions were led by the small bulk category, while the medium and large segment increased head counts. The industry average live weight continued strength of year over year increases as medium to heavy birds account for a large share of the total headwater. Changing of weights within categories was less impactful. Pullet placements, which can be volatile, increased in Q1 twenty twenty one on a year over year basis by 1.7%.

Even the industry has seen generally higher trend in bullet mortality, displacements are expected to support current capacity within the industry. Looking ahead, the USDA twenty twenty one annual production outlook has been reduced since the beginning of the year, now reflecting a modest expectation of 0.4% growth year over year. The modest production outlook is the result of higher grain costs, expected pressure returns, and the effects of winter storms in the South during February, which has impacted the industry's ability to set eggs and chicks. The result the resulting production impact should be realized in q two twenty one with negligible impact throughout the remaining of the year. It is important to recognize that the supply and demand fundamentals for chicken and the resulting pricing environment will ultimately determine the industry production outcome in 2021.

The 2020 was highlighted by slowdown in the food service recovery as COVID-nineteen cases rate increased and capacity limitations in restaurants were extended. Retail demand strong during this time period and continue to do so throughout q one twenty one. As a result of increased vaccination and falling COVID nineteen daily rate cases, food service capacity restrictions has been eased throughout Q1 twenty twenty one in most areas of the country and The U. Consumer has become more comfortable in engaging in activities outside at home. Consumers have also benefited from the release of second and third stimulus funds further supporting the recovery in food service.

The results have been a marked improvement in Q1 food service demand versus Q4 twenty twenty. Despite a slight pause in the recovery during February winter storms throughout much of the South And Southeast, While food service demand for chicken has improved, retail demand strong throughout the quarter. Further demonstrating our goal to be a responsible steward of the environment and a good corporate citizen, we recently announced a commitment to achieve net zero greenhouse emissions by 02/1940. These actions reinforce our company's long term standing commitment to responsible environment stewardship and sustainable food production. In support of the initiative, last month, we successfully issued a 1,000,000,000 sustainable link bond tied to efforts to reduce greenhouse gas emissions intensity across all of our global operations.

The bond is the first of its kind to be issued by a global meat and poultry company and aligns with Pilgrim's vision to be the best and most respected company in our industry. Pilgrim has also adopted a holistic ESG strategy, which includes mandates to responsibly manage our environmental footprint, ensuring the well-being of animals under our care, provide a safe and healthy environment for our team members, and give back to society through community investment efforts such as Pigrants, Hometown Strong Initiatives, and Pigrants Better Futures. I recently announced three community college programs for team members and their children. We provide regularly updates on our progress and performance in our annual sustainability report, which can be found at sustainability.payments.com. With that, I would like to ask our CFO, Matt Galvanoni, to discuss our financial results.

Speaker 3

Thank you, Fabio, and good morning, everyone. First, I wanted to say that I look forward to working with all of you in the future, and that I'm very excited for this opportunity with Colbert's. For the 2021, net revenues were $3,270,000,000 versus $3,070,000,000 from a year ago, with an adjusted EBITDA of two fifty four million dollars or a 7.8% margin compared to $166,000,000 or a 5% margin for the year prior. GAAP net income was $100,000,000 versus $67,000,000 the year Operating margins were 3.4% in The U. S, 19% in Mexico, and 1.2% in Europe.

Our adjusted EBITDA in The U. S. During Q1 was $131,000,000 versus $137,000,000 a year Although the markets across our fresh business units were generally better compared to last year, direct as well as indirect costs related to COVID-nineteen mitigation drove higher operating costs. Also, the significant increases in grain costs late in the fourth quarter and through the first quarter pressured The U. Earnings this period.

We continue to price through these increases, but often are on a lag. Our case ready and QSR businesses remained strong while the market for large bird deboning rebounded due to an improvement in demand from foodservice. We expect the strength in the commodity sector to be sustained as we enter the summer grilling season when demand traditionally strongest and fewer COVID-nineteen restrictions with the further rollout of vaccinations will drive continued recovery in food service. We also continue to improve the operating efficiencies of our large bird deboning business while introducing further product differentiation in order to counter market volatility. However, labor availability challenges at some of our facilities constrained certain mix opportunities for the business.

In Mexico, we achieved a significant improvement compared to last year with $86,000,000 of adjusted EBITDA versus a loss of $17,000,000 in the prior year. Supply demand balance remains favorable in the 2020. Chicken prices, especially in the traditional markets, to stay at a high level and above the last three years. Within prepared foods in Mexico, we remain as the leader in developing the market and are on pace to launch a number

Speaker 2

of new products this year.

Speaker 3

Our strategy is supportive of the goal to increase our higher margin differentiated products while having product coverage from entry level to premium across multiple channels in both fresh and prepared. In Europe during Q1, we generated approximately $37,000,000 in adjusted EBITDA versus $45,000,000 last year. The performance for our legacy European operations, Moy Park, was impacted by higher feed costs and COVID-nineteen related impacts to both year over year volumes and costs. Despite the difficult conditions, we expect Moone Park's performance will recover in the coming quarters as feed costs start to stabilize, sales prices recover, COVID-nineteen expenses are reduced on a year over year basis as pandemic restrictions are eased. And as mentioned previously by Fabio, our Pilgrim's UK results were negatively impacted by the suspension of two export licenses to China and a reduction in tick prices during the quarter.

Our SG and A in the first quarter was slightly higher versus a year ago due to increased legal costs and our further support expand the Jusprayer brand nationally. We will continue to prioritize our capital spending plan this year to optimize our product mix that is aimed at improving our ability to supply innovative products and strengthen our partnerships with key customers. We reiterate our commitment to invest in strong growth

Speaker 2

fee products, projects that will

Speaker 3

improve our operational efficiencies and tailor the customer needs to further solidify competitive advantages for Pilgrim's. Our balance sheet continues to be robust, given our relentless emphasis on cash flows from operating activities, focus on management of working capital, and disciplined investment in high return products. Our liquidity position remains very strong with more than $1,200,000,000 of total cash and available credit. We have no short term immediate cash requirements with our bonds maturing in 2027 and the newly issued sustainably linked bond in 2031 as well as our term loan maturing in 2023. At the end of the quarter, our net debt was $1,900,000,000 and a leverage ratio of 2.2 times the last twelve months of EBITDA.

Our leverage remains at a manageable level, we expect to produce positive cash flows this year, increasing our financial capability to pursue strategic actions. Exclusive of the debt extinguishment costs we reported in the second quarter,

Speaker 2

we expect 2021 interest expense to

Speaker 3

be lower at around 115,000,000 to $120,000,000 as a result of the new sustainability and linked bond issuance. We will remain focused on extending great care in ensuring that we create shareholder value by optimizing our capital structure while preserving the flexibility to pursue our growth strategy, and we'll continue to consider and evaluate all relevant capital allocation strategies that will match the pursuit of our growth strategy, and we'll continue to review each prospect accordingly to our value creating standards. Operator, this concludes our prepared remarks. Please open the call for questions.

Speaker 0

Thank you. We will now begin the question and answer session. In the interest of allowing equal access, we request that you limit your question to two, then rejoin the queue for any follow-up. To ask a question, you may press star and then 1 on your touch tone phone. If you are asking a question using a speakerphone, please pick up your handset before pressing the keys to minimize background noise.

The first question comes from the line of Ben Turev from Barclays. Please go ahead.

Speaker 4

Hey, good morning, Fabio, Matt. Congrats on the results. Very strong first quarter here. Two quick ones. So first, obviously, the strength in Mexico in this quarter was particularly surprising, and it was even stronger than in the fourth quarter.

How sustainable do you think this very high level is? Or at what point of the more informal players going to come back into the market and kind of put an imbalance into what currently is a balance on the supply demand side? If you could elaborate a little bit on what you are seeing on the ground, that would be much appreciated. And then I have a second one. Thanks.

Speaker 2

Sure. Good morning, Ben. And as we always talk, Mexico, quarter over quarter can be quite volatile given the market conditions. But over the year, they they they have been very consistent. Last year was no different.

We saw more extreme volatility during the quarters than normal, but they finished the year in line with the previous years. And we started twenty three months very strong, like you mentioned. The supply and demand in Mexico has been a little bit out of balance. We are seeing a reduction in the supply because of the fear, as I mentioned, from the small players and the big players as well of the high feed cost and the uncertainty about the demand. As the mobility in Mexico has improved, as the demand has improved, this imbalance between supply and demand created higher prices that started in q four and continued throughout q one and continue to this day.

What can change is as the market is stabilized and we see more mobility, I believe that these small players and even the big players will start increasing production to a more stable supply and demand. I think for us, it's important too that we've been growing our our portfolio there. We continue to invest in the country. We are we intend to build a new complex in the South, region to support the growth for the Mexican in the, next years. And we are also investing a lot in our preparedness operations for this incoming, new customer in Mexico with a higher and better money that can buy these branded products and prepared foods.

Speaker 4

Yeah. Perfect. And then my my second question is, I mean, looking at at the current pricing environment and what we've been seeing on your results in The U. S, can you give us a little more like a kind of a sequential data points, how it went from January into March and what you're seeing in April in terms of profitability? I mean, we all know that prices are high, but cost is so is too.

So just to understand a little bit how the second quarter is currently shaping up and what we should expect for the summer period in terms of profitability.

Speaker 2

Sure. What we saw was a continued increase in the profitability from January to February and March. Of course, February was also impacted by the storm. We took a volume out of our operations and a lot of disruptions to to the mix. But what we saw was a rapid increase in terms of profitability from q one from Jan to Feb to March and now in in April.

We have a differentiated portfolio, as we always talk about, that protect us from the downside and but we have an exposure to the commodity segment that enables to capture the upside in the market. Looking at how we are behaving all this, we have the portfolio of segments, portfolio of products, but also a portfolio of contracts. We have some part of our portfolio that's close to 15% that can be adjusted, by market conditions So it's a cost plus operation. And we have the exposure to the commodity part, which is straight negotiated every day and we can follow on new beef.

The majority of our contracts are negotiated prices. And giving what you said about high input costs, but also the pressure global protein supply coupled with the recovering demand is creating a scenario where we believe that price realization is possible. And we have started negotiating with our key customers and all of our customers based on these fundamental conditions on the market.

Speaker 4

Perfect. And for the second quarter, just so you think that's definitely going to be significantly stronger on a year over year and on a sequential basis, correct?

Speaker 2

Well, as we leap last year, Q2 was heavily impacted by the COVID situation. Right? So I think that's an easy comp. But from what we are seeing, it was a significant increase month over month for this year. And, as we always, talk about the grilling season, is this the the strongest time for all the proteins?

And chicken continue to be the most affordable protein in both domestically and for the export markets.

Speaker 4

Perfect. Alright. Very good.

Speaker 0

The next question is from the line of Ben Bienvenu from Stephens Inc. Please go ahead.

Speaker 5

Hey. Good morning, everybody.

Speaker 2

Good morning. Good morning.

Speaker 5

You made some comments about labor in your prepared remarks. I know that's been a source of supply constraint in the industry. I wanna get a sense as to how that's progressing, how meaningful stimulus is as it relates to, you know, labor absenteeism or tightness. I know it's obviously a meaningful demand driver. How meaningful is it as it relates to labor availability?

And to the best that you can forecast, how do you expect the trend of labor availability looking as we move through the year?

Speaker 2

Kevin, that's something that is really impacting our industry and some other industries. We have experienced some labor shortages, and, it's the combination of the stimulus payments, income tax refunds, the enhanced unemployment benefits. The labor market today seems tighter than the one that we had when we were in full employment mode. So today, we're staffed less than we were even before the pandemic. We have continued to consider all options, of course, and are aggressively addressing the situation.

And we have a very surgical strategy that we look plant by plant, what's the labor situation in the specific region and the needs from that plant. We have considered all options, and we are mainly attacking attraction. So we need more people to be attracted to our plants. Of course, retention, we cannot lose anybody and also the management of the same things. Like I said in prepared remarks, we invested in our team members more than $40,000,000 in salary increases for 2021.

But over the long term, what we believe that can help us is the investment in automation. Over the last year, we reduced 2,200 positions through automation in our plans, and we expect to invest more than a $100,000,000 in the next year, which we believe could be a potential to reduce 5,600 positions in our operations.

Speaker 5

Okay. That's very helpful. My second question is related to, the European business. You know, feed cost obviously on the rise. You talked about some of the dynamics around tulip and pork exports.

It seems like there's some encouraging trends as it relates to getting exports back up to China. Can you talk about that piece of the business as well as just your ability to pass through price and catch up on the higher feed cost? How should we be thinking about, you know, margins trending there as we move through the year? And maybe give us some sense of, you know, feed cost continue to go up. Should we expect that those margins lag and we need these costs to kinda take a breather for that margin to reexpand?

What should we be looking for?

Speaker 2

Yeah. That's exactly right. And we have the fee cost models there in our pricing. Most of them incorporate the fee cost increase, but there is a lag. The lag in the price could be three to six months.

So as we see the rapid increase in the feed cost, our pricing model did not adjust immediately and the margins are compressed. But over time, like you said, we gain that margin back. We saw that in the the in the past, especially after 2019 when we have a rapid increase and then we have a reduction in the prices of of wheat in UK, and we saw that behavior. So we have a model in Europe that is more sustainable for the long term with an average return. Of course, we also had the disruptions because of the exports to China on on the pig operation.

We expect that to resume as we get the licenses back. Also, the ASF in Germany created a huge impact for our UK operation as the all the pigs in Germany, they were supposed to go to China because of ASF in in in Germany, end up in the European market, pressuring the domestic market of pigs while we have the rapid increase in the costs. We, as we mentioned, are more integrated in that region, which we believe created a strategic advantage. But during this time, it was a drag into the performance there. But we are already seeing prices recovering.

Prices in Germany and UK are recovering in the peak, and we expect China to continue to be a huge source of exports both for for the global markets. Right? Brazil, Australia, US, and Europe as well. I think sometimes we see China as a as a volatile market as they open and close this. But if you're looking at long term perspective, China and the whole Southeast Asia is a huge importer of, protein.

And as the population goes from the from the field to the big cities, that will continue to happen. And the China demand will continue to grow, and their supply will not be able to follow pace. So we believe that Europe has a great opportunity, especially in the high welfare areas to continue to export to China.

Speaker 3

Okay, great. Thanks. Good luck this summer.

Speaker 2

Thank you.

Speaker 0

Thank you. The next question is from the line of Mikhail Khan from Cleveland Research. Please go ahead.

Speaker 6

Yes, good morning. Wanna talk a little bit more about the feed cost situation, how you're sort of managing that. Have you guys locked in any of your bases or any of your feed costs, or are you guys pretty much, you know, purchasing on the open market right now?

Speaker 2

Sure. Yeah. We we have obviously seen prices increase recently as the market is becoming more and more concerned about the availability of US suppliers following the March intention reports. Right? Like I mentioned, it was a much smaller plant and intention than everybody expected.

And the combination of that with the exports to China, it's putting a lot of risk premium in the market currently. As we always talk, we have a strategy where we manage the the risk. So if we see a lot of upside risk, we extend our positions. If we see a lot of downside risk, of course, we reduce our position. We we don't have a fixed strategy on, days or or how much we need to be covered.

As of now, we have a a position that we think is the right one for the, for the risk that we are seeing in the market. We're seeing that there is a possibility of new acres to be found given the high prices that we have. So we see a downside risk that is much stronger than we saw in the past.

Speaker 6

Okay. And then my second question is related to kind of the give and take as foodservice comes back.

Speaker 2

I know you mentioned on

Speaker 6

the call that you see yourselves as a winner as full service restaurants sort of come back. But do you see that potentially adversely impacting your retail or fast food business? I mean, presumably, you know, people are gonna only eat one meal at a at a time. Like, within the construct of your business, is there particular channels that are particularly more favorable to you when certain channels are stronger than others? Thanks.

Speaker 2

No, great. It's a great point. I think we talk about our portfolio, and we are well diversified, and we are somewhat hedged, right? We are split evenly between food service and retail. We have increased the retail exposure last year as the food service went down, but we believe that that balance could come back in 2021 as the restrictions are eased and the food service continues to grow.

As a matter of fact, in March, the food service segment already exceeded March 2019, not compared to 2020, compared to 2019 in volume, And that is led mainly by the QSR growth and the recovery of some of the full service segment. The segment that is continues to be much lower is the recreation, lodging, and the schools. As the vaccination rates have increased and more consumers are willing to get out of home and have more home mobility, the volume in this, we call noncommercial segments, will continue to recover. I think on top of that, we're seeing a higher consumption of chicken in the food service segment. We have a survey by DataFinancial that shows that 27% of the customers are ordering chicken oriented meals more frequently than before the pandemic.

We also have the wing and tender concept that yet not fully opened, but created a very efficient delivery system. And, of course, I think it's in the news every day, what we are seeing the significant increase in chicken due to what's called the chicken sandwich wars. We're seeing more and more QSRs launching new chicken sandwiches, and the recent data is showing that these new offerings are being very successful, selling better than their expectations and being a great delivery of traffic for the QSR. So as the QSR demand continues to grow, I think chicken demand inside that QSR also increased. We believe that retail will moderate a little, but, we don't think we think that the the sum of both will continue to be very positive.

Speaker 6

Great. Thank you.

Speaker 0

Thank you. Next question is from the line of Peter Galbov from Bank of America. Please go ahead.

Speaker 7

Hey, guys. Good morning. Thanks for taking the Fabry, I just wanted to clarify a couple of things. One, I think in response to Ben Thur's question, you had said about 15% of your portfolio is tied to cost plus, and then another portion is tied to UB. I didn't know if you had given a percentage associated with that, an updated percentage there.

And then maybe just help us understand some of your comments around revolver being challenged despite strong demand. I mean is that really just on the feed cost side? Or or if you could walk through kind of, you know, small and and and medium birds just where kind of profitability sits today for each of those?

Speaker 2

Yeah. On on the UB side, it's our commodity exposure in the size of our big bird operations. Right? So the 15% of the contracts on the cost plus and the portion of the UB is related to our exposure to the commodity markets on the big part, which is a third of our fresh operations. The rest of our contracts, like I said, is more on the negotiated basis, and I think the environment is very conducive to for us to be able to get some price realization.

In terms of the profitability by segment, the small board was challenged because of the the retail deli. I think the retail deli despite the retail being really strong in 02/2020, the deli, because of the food traffic difference, people are not going to the to the retail at the same time that they used to be. The food sold on the deli has been very challenged. I think it's down close to 15%. And that is a significant part of our small bird operation.

On the other hand, the QSR continued to be really strong, which is compensated a little bit for that. If you look at the profitability of these three segments, there's also the timing of the price realization. The price on the feed is impacting all at the same time, while the commodity markets have increased much faster than the price realization that you can get on the other segments. Of course, as time passes, we're gonna have this contract renegotiations, and we are adjusting our prices for that new reality, not only of the costs, but also of the supply and demand. Because after all, the price realization is what's gonna help us enhance and increase the supply growth that is required for this market.

So as of today, the commodity segment is more profitable than all the others, followed very close by the case ready and some QSR segments.

Speaker 7

Got it. Okay. No. That's helpful just to understand as we think about modeling. I guess the other question, as it relates to kind of the average price per pound you saw in U.

S, you mentioned that mix maybe was a headwind there. Just is there anything you can help us dimensionalize the impact from lower mix in The U. S. On a dollar basis? And maybe what that was?

Is it not as much, you know, dark meat deboning being able to go on? Just just kinda what happened there.

Speaker 2

Yeah. I I think you're right. I think it is less dark meat deboning in a in a in a bigger picture. It's also less MSC. I think we're seeing the MSC industry in US also constrained as all operators try to move people from, let's say, lower value or less critical operations.

I think the most critical position that we have in a chicken plant is the deboning part. You need to debone the front of the bird. The leg quarter, you can always trade off a leg quarter for for a deep owned art meet. But on the front of the board, you actually need to do that. And that's why we're investing so heavily on automation.

In terms of quantifying, I think it is a significant number, but it's very hard to quantify as portfolio changes are difficult to pinpoint.

Speaker 1

Thanks very much.

Speaker 0

Sure. Thank you. The next question is from the line of Adam Samuelson from Goldman Sachs and Company. Please go ahead.

Speaker 8

Yes. Thanks. Good morning, everyone.

Speaker 3

Good morning, Adam. Good morning.

Speaker 8

Hi. So maybe continuing on kind of where you're with Peter on on some of those questions on kind of margins and profitability by by segment. Can you maybe, Fabio, just help us think about both in the quarter and kind of full the for the full year, what you're seeing in terms of nonfeed inflation, year over year kind of impacts of COVID related costs where I know 1Q is still a negative year on year, but then should probably flip to a positive as you get through some of the worst impacts last year. Freight, just making sure we we see the market environment. We see the grain cost piece, but some of those other variables do seem to be pretty volatile, and trying to just calibrate as we think about modeling the rest of the year in The US.

Speaker 2

Yeah. I think the biggest increase in terms of, known feed has been delayed. Right? And and I think the labor ability availability has created a mixed challenge. But $40,000,000 is how much we increase, our labor cost from one year to another.

And we're investing in our team members to also be very competitive on the market because if we continue to lose labor, and I think the whole US is losing labor, the operations can start to be challenged. And then at some point, we cannot produce the the full portfolio that we want. In terms of, utilities, we are seeing some increases in costs, but it's more localized. I don't think it's anything significant in some regions in terms of, water and in terms of electricity. There is some inflation in other parts like carton boxes and packaging.

I think it's normal cost that we need to offset with operational improvements. I think that's why our industry and specifically improvements has been investing so much in operational improvements. We've been able to counter all these increases in terms of labor, utilities, packaging, and ingredients with operational excellence initiatives. Yields are the best way to counter all this because it'd be way more productive and introduce more pounds per bird. Freight has been a challenge lately.

I think it's the availability of drivers rather than just freight. At some of our routes, you're gonna see difficulty to find a labor to drive the trucks. But so far, we've been able to, again, counter and mitigate all that with operational improvements. The biggest one, like I mentioned, is the labor.

Speaker 8

Okay. Alright. That's that's really helpful. And then I guess something that you you mentioned in in your prepared remarks, you talked about the diversity that Pilgrim's has. Again, this is US across bird classes bird sizes in different in different categories and the flexibility that it gives you.

Can you give an actual example of kinda where that's really been a big benefit over the last six, nine months with COVID and the demand disruption, how you see that benefiting you? I'm just trying to understand kinda are you actually moving your production between bird classes right now, or just help me understand kinda where you're doing that in practice?

Speaker 2

Yeah. I think it's less than moving on the bird sizes and more adapting to child challenges in the market. We increased our retail operation by three to 4% while the food service was really slow. So on the small birds, instead of selling for the deli, that was challenged. Even on the re as the retail was going up, the deli was challenged, we could produce more for the partner QSRs because it's the same size bird that we can move between packaging instead of putting in a in a in a in a daily format.

We can sell to an eight piece and sometimes even in even in a bag. So I think that's one of the big examples that we have. I think we can also use our internal meat on the big bird category when the food service was down on our food our prepared food operation so we can produce more retail oriented products with our internal meat on the big bird category. The kids ready operation as well, we could get some of the big bird meat that we have on our commodity plants and utilize our structure in the case ready plants to put it on a tray, the smaller, pieces for sure on a tray. So we could increase our tray pack operation even though we don't have that number of birds in that specific category utilizing external meat from the big bird category.

That's how we move the portfolio around. It's not a significant change, but it's enough to adapt to this market conditions. As for the long term, then because of our partnership with the key customers and we differentiate the strategy that we have to grow together with them, we can adapt our portfolio. One example, in 02/2017, we moved from the commodity segment to create one of the largest organic operations trade pack in the world. I think that's something that we do.

We're also moving one part. We just finished the the the growth of our Cold Spring operation into a more case ready to support the growth of key customers and to support the fast growing brand just there that is the number one selling online, and it's great at bricks and mortar as well. So I think if there is small changes, I don't think there is significant changes in size of birds even in our portfolio. And that is way more complicated because you need to adapt all your feed meal, your growing conditions, and and inside of our plants. But having the team portfolio help us be more agile to changes in the marketplace.

Also, it helps us in mitigating downturns, as I mentioned, right, to 10 to 20, and we saw that the power of our portfolio, we protected the downside that some commodity operators couldn't.

Speaker 8

Okay, great. That's helpful. I'll pass it on. Thank you.

Speaker 0

Thank you. Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back to Fabio Sarju for closing remarks. Thank you and over to you.

Speaker 2

Well, thank you all. We would like to reiterate our continued commitment to our valued team members to provide them with a safe and healthy work environment while supporting our duty to maintain food production and supply to customers. We are looking forward to an exciting 2021 and expect better results in spite of volatility. Our diverse portfolio of differentiated products tailored to support our key customer strategy in conjunction with our broad geographic footprint. We'll continue to generate consistent performance and minimize margin volatility in challenging market conditions relative to competitors.

We'll continue to seek new growth potential both organically and through acquisitions while offering even more differentiated products within our business to support key customer needs by cultivating a culture of constant innovation. We would like to thank everyone in the Bergmann's family including our family farm partners, suppliers and our customers who make our business possible. As always, we appreciate your interest in our company. Thank you for joining us today.

Speaker 0

Thank you very much. Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.