Pilgrim's Pride - Earnings Call - Q3 2021

Transcript

Speaker 0

Good morning, and welcome to the Third Quarter twenty twenty one Pilgrim's Pride Earnings Conference Call and Webcast. All participants will be in listen only mode. Please note that the slides referenced during today's call are available for download from the company's investor website at ir.pilgrims.com in the Events and Presentations section. I would now like to turn the conference over to Pilgrim's Pride Chief Financial Officer, Matt Galvanoni. Please go ahead.

Speaker 1

Good morning, and thank you for joining us today as we review our operating and financial results for the third quarter ended 09/26/2021. 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 on our website at ir.pilgrims.com, along with slides for reference. These items also have been filed as Form eight Ks and are available at sec.gov. Fabio Sandri, President and Chief Executive Officer, and I 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 date of this release. Other additional factors not anticipated by management may cause actual results to differ materially those projected in these forward looking statements. Further information concerning those factors has been provided in today's press release, our Form 10 ks and in our regular filings with the SEC. I will now turn the call over to Fabio.

Speaker 2

Thank you, Matt. Good morning, everyone, and thank you for joining us today. For the 2021, we reported net revenues of €3,800,000,000 a 24% increase over the same quarter last year and adjusted EBITDA of $347,000,000 up nearly 14% versus Q3 last year and up 34% compared to Q3 two thousand and nine. Our adjusted EBITDA margin was 9.1% compared to 9.9% a year ago. Adjusted EPS was $0.67 versus $0.66 in the 2020 and $0.45 in Q3 twenty nineteen.

I am pleased with the performance this quarter as we continued facing challenges resulting from the ongoing pandemic and unprecedented economic conditions in UK. Our overall portfolio performed well in the third quarter despite labor shortages that affected our product mix in both The US and UK. In US, commodity chicken pricing remained well above five year averages and our diverse portfolio allow us to capture the upside while protecting us from future downsides. Turning to the broader US market, chicken production in Q3 increased an estimated point 8% over last year due to a slight increase in head along with higher average live weights, putting production at 0.3% greater on a year to date September basis. USDA data indicated that the hatch rate continued to decline throughout the quarter, suggested limited growth in the next month.

USDA outlook indicates a 05% increase in supply in Q4, which will take the total increase for the year at 0.3%. In The U. S. Market, retail demand remained extremely strong throughout the quarter. While trip frequency has yet to return to pre COVID levels, consumers are still buying more units per trip compared to 2019 and demand for fresh chicken remains above the pre COVID baseline.

Meanwhile, retail daily posted improvements year over year and frozen category continues to grow even when compared to extremely strong demand levels in Q3 last year. Foodservice in U. S. Continued to recover as commercial chicken demand was comparable to pre COVID levels. However, the non commercial channel of foodservice are still slow and chicken demand retained below 2019 levels for non commercial outlets such as schools and workplace cafeterias.

The overall increase in demand has maintained pressure on already low cold storage stocks, which remained 17% below September 20 levels. As a result of robust demand, commodity chicken pricing remained significantly above the five year average and only recent began to align with seasonal trends. In our US business, demand and pricing have been strong. However, we have not been able to capture all of this increased demand and pricing due to continued labor shortages. The labor shortage and its effects our product mix are ongoing challenges that will be with us for a while, affecting our ability to hand portion and trim products that command a higher margin.

Unfortunately, labor is a nationwide problem across numerous industries and will take time to resolve. A great example of our key customer partnership with our retail customers was to demonstrate our flexibility to optimize our product mix to continue to provide superior levels of services. In The U. S. Market, retail sales in Q3 had a difficult comparison versus 2020 pantry loading, but still remained comfortably above twenty nineteen levels in the fresh and frozen segments.

However, given the trip frequency reduction, retail daily sales are still down versus 2019, but we see upside potential in this category as year over year improvement in unit sales continues. Commercial Foodservice in U. S. Has experienced continued strength with foodservice restaurants demand improving again in Q3 with a second consecutive quarter of double digit year over year growth, while QSR demand remains robust with Q3 improving 6% versus 2020 and nearly 14% nearly versus 2019. We continue to monitor the commercial food service demand while the industry addressed labor shortages.

The non commercial channel demonstrated strong year over year improvements with the reopening of schools. However, the channel continues to lag 2019 levels. Business has adjusted volume and mix between channels to adapt to changing consumer demand patterns. We are well positioned to adjust production and channel mix given our presence across all bird sizes from large to small. Commodity large bird deboning continued its momentum throughout the year and once again generated significant improvements year over year.

Chicken remains the most affordable meat protein, which supports the growth in the commodity sector. The volume, revenue and profit growth were driven by support from foodservice demand and overall strong market pricing. Our case ready business delivered volume and revenue growth versus the prior year, but it's pressured by the increasing grain and labor costs. We adjusted prices in the second quarter and continued operational improvements to adjust these cost headwinds. We continue to partner with key customers to deliver both growth and value for them.

Strong QSR and retail deli demand drove year over year improvement in our small bird business. We continue to see strength in this business unit with our partnership with key QSR customers. In our U. S. Prepared Foods business, Q3 sales grew 45% year over year driven by price adjustments to cover high input costs including meat, labor, ingredients and supplies.

Year over year sales volume was up 6.5 driven by strong demand of our retail consumer brands, Just DARE and Pilgrim's. Our volume in the consumer channel was up 16% versus Q3 last year and more than double twenty nineteen levels, as we are seeing the results of our efforts to purposefully grow our retail brands supported by digital marketing. We continue to gain distribution and build the Just BARE brand through e commerce, retail and club stores. And it had an additional boost in brand awareness from successful social media advertising and great customer reviews. Prices moderated in Q3 as The U.

Began harvesting what is expected to be the largest crop since 2016. USDA is currently projecting a corn crop of just over 15,000,000,000 bushels, which is expected to increase from the carry out from 1,200,000,000 bushels last year to 1,500,000,000 bushels this year, even with a large estimate for US export demand. China is also expected to see a recovery in supply after importing 28,000,000 tons of corn this year, while also seeing a 13,000,000 ton increase in their domestic ton Although global energy and wheat markets are supporting corn currently, global stocks are in a better position than they were last crop year. Soybean meal prices also fell during the quarter on expectations that The US suppliers will build from last year. USDA is currently projecting a carryout of three twenty million bushels, up from two fifty six million last year.

Export demand is also expected to fall 8% from last year on lower demand from China. In addition to The US supplies, Brazil is expected to produce a record 144,000,000 tonnes, which should build global stocks even further. Meal prices are also being depressed by the large expected increase in demand for soybean oil into the renewable diesel, which is driving soybean oil prices higher. European feed wheat prices increased in Q3 despite a 13,000,000 tonne increase in domestic production. In The UK specifically, where we source the majority of our wheat, we have seen a 50% increase in production from last year's poor harvest.

Stocks in the main exporting countries declined again this year, driven lower by our large drop in Russian wheat production. Export tariffs in Russia are also having a negative impact on the production and availability of exportable wheat out of the Black Sea. Overall, we feel confident in large supplies of corn and soybean that should be a tailwind for feed cost in US and Mexico going into 2022, while wheat prices continue to remain high until we see a relief in global supplies next summer. USDA chicken inventory was flat from June to September, a period of time in which seasonal increases in total inventories will be expected and remains down 17% from previous year. Combined dark meat inventories have increased by 11% from June, but are down 17% year over year, which is in line with expectations despite continued export supply chain disruptions.

Regarding exports, although the data is still incomplete for Q3, throughout August, total USDA broiler exports, including paw, grew by 6.6%, driven by Mexico, up 27%. Exports to China grew four percent, primarily due to the poll market, which made up nearly 62% of China's US poultry imports. The increase in poultry export volumes and value are driven by the competitiveness of US poultry, restrictions due to the avian influenza and shipping bottlenecks around the world. We are optimistic that countries with COVID restriction will ease through Q4 and will further support US export demand. Ugres export volume grew combined to outpace the industry and we are utilizing additional ports to avoid congestion on the East Coast and in the Gulf Of Mexico.

Our US operations has managed to increase labor costs and higher grain prices through the benefit of a strong cutout and increased pricing to our customer base to recover this higher input costs, while effective operations are helping us to control costs. Following our strategy of diversified portfolio and balance of cost plus market and fixed pricing contracts structures provide us the platform to manage throughout the volatility of our input costs. Also, our team has done a fantastic job navigating both supply chain disruptions such as trucker shortages and inflationary pressures to support our key customers and deliver strong quarterly results. Turning to our international business, Mexico continues to perform well, although easing from the levels achieved in Q2 as expected due to the seasonality of the business. In addition, we're beginning to see the effects of inflation on inputs.

Grain pricing however has moderated since the first half of the year, allowing for more competitors to reenter the market. Also during the quarter, we saw a significant increase in chicken and pork imports into Mexico, causing pressure on market pricing. We continue to focus on our business through process improvements in our fresh business as Prepared Foods saw ongoing growth in QSR and foodservice, in addition to growth in our retail brands, Pilgrim's, Del Dia and Alameda. During Q3, we experienced unprecedented challenges in UK due to the current economic environment. We were faced with sudden serious labor shortages as EU workers returned home following Brexit, affecting our ability to process, pack and transport products.

This is in addition to the significant cost pressure from feed ingredients, especially oils and micronutrients, and increased cost for utilities, logistics, labor and packaging. With this hit to our cost, Moy Park's EBIT was impacted both versus Q3 last year and versus the prior quarter. Although sales were robust, they were at significantly reduced margins as we experienced unprecedented costs to clear the backlog of birds we have been unable to process. We began to see price recover at the end of the quarter as we opened negotiations with our customers to recoup some of the extraordinary costs we experienced, including a recent 300% increase in CO2 costs due to the much publicized fertilizer company slowdowns in UK. This should provide support to margins as we move into Q4.

We will continue to focus on operational excellence initiatives that deliver labor efficiencies, better agricultural performance and improve yields in order to maintain our supply to key customers and superior levels of services. As in previous quarter, are seeing consistent improvements in the Moy Park Foodservice division and we expect this channel will see significant recovery as COVID restrictions are lifted across The UK and European markets. Relative to the industry over the past twelve months, Moipark continues to outperform the average of the competitors in Europe and we will continue to deploy CapEx on projects that drive quality, safety and efficiency through reduced labor that tend to cease through the Moipark business. The Pilbara's UK business continued to be severely impacted by increased grain costs and low hog prices due to the high supply in Europe. Despite market challenges, including worsening labor availability and inflationary pressures in UK, we have been profitable on an EBITDA basis for the last twelve quarters in a row.

During Q3, Famous UK year over year retail volume remained relatively flat prior to last year, while food services volumes demonstrated grow back to pre COVID levels. Also, our year over year volumes to China decreased due to the continued suspension of our export licenses to plants as a result of COVID-nineteen. Like Moipark, Piedmont's UK business has been affected by the labor and truck driver shortage and soaring energy costs. In addition, pork pricing has been depressed following China's decision to stop accepting hogs from Germany. While we continue to make progress within our operations, the improvements were not enough to overcome the external costs that are pressuring results.

We are optimistic about building our operational improvements by continuing to optimize our manufacturing footprint, extracting best in class operational excellence, capitalizing on export opportunities, optimizing our portfolio and strengthening our growing business with key customers to drive innovation in value added high margin areas. We have a great team in Europe dedicated to generating results by focusing on factors within our control while ensuring protecting the safety and health of our team members. We are firmly committed in supporting UK farming industry and supplying our key customers in order to feed The United Kingdom and Ireland. We're also excited about our portfolio products in UK and Europe, given that on September 24, we closed the Kari Food Group's Meats and Meals acquisition. Going forward, this business will be known as Pigments Food Nesters.

Pigments Food Nesters will support key customer relationship by providing an array of value added protein products and prepared foods anchored by a portfolio of strong brands. As one of the largest protein producers in UK and Ireland, we see the opportunity to innovate within our key customers and develop new products that will excite consumers in the region. Under this challenging environment, we are pleased with our overall performance and our results in the third quarter. We are committed to being the best and most respected company in our industry and remain focused on producing high quality food for people around the world in a sustainable manner while creating the opportunity of a better future for our team members. With that, I would like to ask our CFO, Matt Galvanoni, to discuss our financial results.

Speaker 1

Thank you, Fadio, and good morning again. For the 2021, net revenues were $3,830,000,000 versus $3,800,000,000 a year ago, with an adjusted EBITDA of $347,000,000 and a 9.1% margin compared to $3.00 $5,000,000 and 9.9% margin in Q3 last year. We achieved 162,500,000 of adjusted net income. In the quarter, we reported GAAP net income of $61,000,000 versus GAAP net income of $34,000,000 in 2020. The most significant adjustment in the quarter was an additional $126,000,000 accrual related to legal settlements.

Adjusted EBITDA margins were 10.7% in The U. S, 13.1% in Mexico, and 3% in Europe. Our adjusted EBITDA in The U. S. In Q3 was $263,000,000 compared to $180,000,000 a year ago and $176,000,000 in 2019.

Sales were up due to strong market pricing and slightly higher volumes compared to both 2020 and 2019. Gross profit margins were higher compared to both 2020 and 2019 also. In Mexico, adjusted EBITDA in Q3 was $56,300,000 versus $69,200,000 a year ago and $45,000,000 in 2019. Net sales were up due to higher market pricing and volumes. Over the last five quarters, Mexican business has benefited from a balanced market supply demand dynamic.

However, in addition to seasonal pricing decreases, recent increases in chicken and pork imports are headwinds to current market pricing. For Moy Park, adjusted EBITDA in Q3 was $19,800,000 versus $39,600,000 a year ago and $37,900,000 in 2019. Pilgrim's UK had adjusted EBITDA of $8,000,000 in Q3 compared to $15,400,000 a year ago. As Fabio previously referenced, both Moy Park and Pilgrim's UK results were negatively impacted by labor shortages, energy cost increases and transportation challenges. As the acquisition of Pilgrim's Food Masters closed at the end of our third quarter financial reporting period, we've only included our preliminary purchase price allocation of the acquisition within our September 26 balance sheet.

We will begin recording Pilgrim's Food Masters financial results in the fourth quarter. In total, we incurred COVID related costs of approximately $6,200,000 in the third quarter. However, this is a decrease of approximately $19,000,000 compared to the prior year. Overall, our SG and A in the third quarter was higher than the prior year, primarily due to an increase in legal defense costs. We will continue to prioritize our capital spending plans this year to optimize our product mix and strengthen our partnerships with key customers.

For example, during the quarter, we invested in automated deboning technology in our Live Oak, Florida complex. We anticipate our full year 2021 CapEx spend to be within our previously discussed range of $375,000,000 to $400,000,000 We reiterate our commitment to invest in strong ROCE projects that will improve our operational efficiencies and tailor our operations to address key customer needs to further solidify competitive advantages for Phillips. 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 projects. Our liquidity position remains very strong.

Following the August increase and extension in our line of credit, we have approximately $1,700,000,000 in total cash and available credit. At the end of the quarter, our net debt was $2,700,000,000 with a leverage ratio of approximately 2.2 times the last twelve months of adjusted EBITDA. Even after a recent issuance of $900,000,000 of senior notes to purchase the Carried Foods, Meats and Meals business at the end of the quarter, our leverage is at the lower end of our target leverage ratio of two to three times. We expect full year 2021 net interest expense to be approximately $115,000,000 exclusive of the debt extinguishment cost of $24,000,000 we recorded in the second quarter. We will stay focused on creating shareholder value as we optimize our capital structure to continue executing our growth strategy.

Our capital allocation strategies will remain aligned with our growth strategy, and each opportunity will be evaluated against our value creation standards. I'll now turn the call back over to Fabio for closing remarks.

Speaker 2

Thank you, Matt. The topic of labor shortage came up several times in our remarks this morning and I want to thank all of the Pilgrim's team members around the world who continue to work diligently to keep producing superior quality products for our customers, consumers and communities. As we always say, people is our most important asset and you made the difference. I also like to thank all of our stakeholders, family farm partners, suppliers and customers. Everyone working together makes our business possible.

We appreciate your interest in Pilgrim's. That concludes our call.