Q4 2020 Pilgrims Pride Corp Earnings Call
Good morning, and welcome from the fourth quarter and year end 2020, Pilgrim's Pride earnings conference call and webcast all participants will be in listen only mode.
You mean, the system play signal 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 of www stockholder in Stockholm.
After todays presentation, there will be an opportunity to ask questions.
I would now like to turn the conference over to Tom will now the head of Investor Relations for pilgrims Pride Visco.
Please go ahead.
Thanks, Brad Good morning, and thank you for joining US today as we review of our operating and financial results for the fourth quarter and year end of December 27 2020.
Yesterday afternoon, we issued a press release, providing an overview of our financial performance for the quarter and for the year, 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.
As items that would also be part of that case and are available at our roulette available online at Www SEC Gov.
Sending to you today are Bob <unk>, President and Chief Executive Officer, Chief Financial Officer, and Joe <unk>.
The commodity risk management.
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.
I think the additional factors not anticipated by management may cause actual results to differ materially from those projected this forward looking statements.
Great information concerning those factors has been provided in today's press release, our 10-K and our regular filings with the ICC.
I would like to turn the call over to Fabio Sandri.
Thank you Brandon good morning, everyone and thank you for joining us today for the full year 2020, we reported net revenues of $12 1 billion and adjusted EBITDA of 788 million or 16, 5% margin and then the adjusted EPS of $1.02 from the full quarter of 2020, we reported net revenues of three.
1 billion and adjusted EBITDA of $205 million or six 6% margin of 27% higher than a year ago and then the adjusted EPS of <unk> 25 cents.
Last year presented one of the most significant operating challenges across many industries here in U S and globally I'd like to express my sincere gratitude to our global teams for their continued commitment dedication and hard work in supporting our ability to keep our team members see from healthy one.
Maintaining our ability to produce and supply customers. During this challenging time I could not be more proud of our team as they have continued to come together to support one another and our customers and consumers safe.
Safety is the condition of Goodman and our team members have responded admirably to the unprecedented conditions supplying the products to our customers.
Continuously adapting our global operations to the challenging channel demand, while adjusting our operations to be able to maintain the operations at the all of our plants and minimize any significant disruptions 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 duty of the food production.
The consumers in every region, where we operate.
In terms of direct COVID-19, mitigating costs, we incurred of roughly $20 million from the quarter and about the $100 million from the full year. We're also providing in the 100 dollar incentive bonus to any U S team member, who voluntarily chooses to receive of COVID-19 vaccination the new incentive.
He is designed to ensure that every business team member who wants to get vaccinated can do so as soon as vaccines that made available cash.
Entering the significant challenges of last year, our portfolio strategy has continued to generate superior relative performance and our pace of the competition by delivering a 27% increase in EBITDA for Q4 and solid results from the full year.
The results were driven by our resilient business model across all business units, including the U S Mexico and Europe. The unique challenges as the result of the COVID-19 presented an opportunity to demonstrate the value and strength of our well diversified portfolio strategy and our ability to generate multiple systems results. Despite specific volte.
The city.
Our performance has remained well balanced and it's the result of our vision to become the best and most respected company, creating the opportunity of a balance sheet future for our team members to support the vision. We have continued our strategy of developing a differentiated portfolio of diverse complementary business models continue to relentlessly.
Our suite of operational excellence, becoming out of more valued partner with key customers and creating an environment for safe people safe products and healthy attitudes moving.
Like the 'twenty our team members remain focused on executing and delivering on our strategy regardless of the individual market conditions, while the markets were extremely challenged during the first half of the year, we made the internal changes to our operations and adapt well to the evolution of the market conditions to produce and improve.
<unk> results in the second half.
Despite the volatility and have continued to deliver strong growth and achieve a significantly increasing the relative performance against industry peers across all of our global operations.
Diversity of our portfolio and the global footprint has continued to enhance the the consistency of whole consolidated results for the year in U S retail and <unk> business has performed extremely well due to the strong demand across our customer base operationally, our commodity large bird debone them also continued to improve.
Despite the tough market conditions.
Best of business remain resilient, considering the challenging demand environment and the business continues to evolve in anticipation of strong results in 2021, reflecting the investments made in moving the past few years.
Our legacy European operations continue to evolve and have further strengthening the line.
The ability to manage the consistency by adapting our model to better mitigate future input cost challenges integration of our newly acquired European operations on track and the business has continued to contribute positively to our results in Mexico. The market was very weak in the first half, but the rebounded strongly during the.
The second half also again, producing a very good performance on the full year basis.
For 2021, we will maintain our strategy, while continuing to improve the portfolio to be even more responsive.
The individual market dynamics and increase our relative performance over the competition with the.
The lead 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 volatility of.
Commodity segments.
During Q4 operating results in Mexico remained strong while the US was mostly in line with seasonality in Europe continued to increase despite the challenges due to COVID-19, we are pleased with the results, especially when taking into account the disruption less than optimal product mix and average operating cost when compared to the environment interest.
The 19th.
While market conditions in all of our global operations that continue to improve during the quarter foodservice demand globally steel has not reached the levels and the environment are still quite challenging in some sectors, where we operate.
He is robson from COVID-19 has continued to present a significant challenge on each individual countries demand for protein consumption as well as the flow of global trade and generate the volatility far beyond normal seasonal factors.
We believe our portfolio strategy, especially best suited to counter the challenging market dynamics, the generate higher and most consistent results from the mid to long run and minimize the full peaks and troughs of the commodity segment.
In the U S. Although COVID-19 remain challenged during Q4 in certain segments within foodservice outside of those sectors. The market conditions were mostly in line with typical seasonality.
Our volumes continued to be robust and demand from our customers has been outperforming the industry and our expectations outside of the forgive us that the man from industrial foodservice customers was stable, but still below last year and we do not expect volumes to return closer to prior levels until the population is more widely vaccinated.
Two last quarter commodity large bird <unk> was once again, the most challenging during Q4.
Operationally however, we continue to improve the relative performance versus the industry across all business units. Despite an increase of staffing challenges during December.
We continue to adapt to the change in channel demand by increasing our volume mix to peak customer retailers also large portion of our foodservice customers and also within the <unk> segment further offsetting the impact of across our fresh business units, our ability to offer a portfolio of differentiated provenance, along with our key customer the model.
Giving us better installation against the volatility we're also much better positioned to adjust production and channel mix given the presence across all but the sizes from small to large.
Despite challenging conditions for small bugs within the traditional foodservice distribution of demand continues to be strong driven by our key customers out of the performance within the <unk> and retail daily.
All line volume for just bare brand Kate Randy remained strong and was up 230% in 2020 higher than the 57% increase for the year before and most of more than five times of the volume shipped during 2018, we're also gaining more brick and mortar retail distribution for just.
Our fresh just bare brands our market leadership in this category of spend more differentiated the product portfolio have continued to strengthening the growth of our competitive advantage versus the industry.
While the commitment to our key customer strategy has been reflected in the consistency of our past results. The benefits of coach has never been more out of them. Just your gross spend doing the couldnt times of great. The uncertainties and challenges to further support the Greek the growth of key customers in 2020, we announced a couple of projects to further support the portfolio.
The differentiated products like doubling of Keith ready capacity out there of planting cold spring, Minnesota.
I'll also the reason that makes us more stable margin keeps revenue products.
The rest of the raising by 20% of our production of our differentiated higher to the judge.
Bear Ben.
In addition, we are converting one of our commoditize large, but the bonding facilities to better support strong demand from our key customer of <unk> in the much more stable small bulk segments. The.
The long term relationships, we have with key customers are giving us more opportunities to sustain the volume increases since these customers rely on us to satisfy their need for growth. In addition, many of our key customers to maintain our leadership position in the respective categories. As a result, we are beneficiaries of the ability to outgrow the competition.
The one driving future growth our key customer strategy also promotes trust enhances long term relationships and strengthens our margin structure.
In the us prepare for the business revenue declined 22% from 29% less volume year over year. Most of the volume decline was driven by schools that remain closed.
The offset by strength in retail consumer package, the remainder of the volume declines were driven by the challenging foodservice and retail deli categories.
Our sales margin rate by 36% by better optimizing the mix of food service and retail channel in Q4, we shipped two new retail distribution channels in both of the business brand and our just bare brand recently, we also introduced the just standard lightly breaded chicken breast with the market and both.
<unk> sales exceeded our expectation in Q4, we are really excited about this differentiated product and the consumer response, we are getting heavy being very positive.
Simplifying our product portfolio to focus on growing our retail and foodservice spending we have improved the plant cost rates by 5%.
At the end of Q4 industry supply between the more favorable position than the close of the Q3 inventory was down 12% from 2019 and 2% down to the close of Q3 that can meet combined supplies were down 20% White paws were down 18% year over year U S exports.
Brian the meet them pause the exports grew 6% for the year in fact pulse interest one of the industry went up 39% year over year from 2019, and all of the measurable growth occurred in the ASF impact of the Southeast Asia.
Mexico was still the largest market from U S poultry and closed the year with the respectable 2% growth.
And contracts to the U S exports humans of exports outperformed and grew by 14% year over year and we continue to remain positive on their exports of potential fortune 1021.
Stronger oil prices of weaker U S dollar limit the chicken the inventory and ASF in southeast Asia are very impactful to global demand. In addition, hi, Pat the I continue to constrain most of Europe restricting their supply and the hampering their ability to export to those markets in which we compete.
In the beginning of 2021 leg quarter prices already increased by more than 10% versus Q4, which is very positive.
Although China seems to be recovering a little faster than expected due to greater demand for protein imports into China, and we cannot overlook the new Esf's training, China that may be impacting the liter size.
<unk> by the breeding stock.
Despite the reports of China curtailed some of their key one or so of <unk> dark meat due to logistic issues from COVID-19 testing on imported frozen food the rest of the world market pricing has counterbalance some of the impact and it has accelerated beyond our near term expectations, primarily due to a very robust demand.
From other developing countries.
We do believe the China will continue to be of large importer of U S. Dark meat, the impulse and you should see the spool strengthening in Q2 of this year.
All of these factors point to an increase in market from opinion and U S exports.
After a very challenging first half of 2020, our Mexican operations has continued to rebound strongly and delivered great results from the second half including for the finished the year similar to prior years, we adopted the operations of Bell the generate strong performance. Despite the volumes there was slightly lower than the same period.
In 2019, but higher than Q3.
More normalize the economic activities continued good supply demand balance in the market and I repeat the share of non commodity products. She was bumped the chicken and a very good operational performance all contributed to the strength, we expect overall demand to continue to be solid.
Remain agile and we are continuing to adapt our facilities by shifting production should also channel are experiencing better relative demand.
Demand for prepared foods in Mexico also improved with the volumes recovering and we are currently experiencing better demand and pre COVID-19. We remain committed in the low perm growth in demand prospects through the Mexico, we have.
The continued to invest the meltdown.
I'll, let Mr and premium pilgrims brand both in the prepare and fresh markets as well as seeking more market share in the modern channel, which will bring more stable margins to our operations.
In Q4.
The legacy of European business really from an EBITDA margin you would be low last year, driven by low volumes, mostly due to the impact of the COVID-19 second lockdown on our foodservice volumes.
Which previously has been showing good recovery due to implementation of the REIT true takeaways and home delivery. In addition to the reduction in volume. We're also faced the tied to direct COVID-19 costs due to higher of Synthes testing and protecting the health of our workforce.
Also impacting us in Q4, where the higher feed costs, mainly due to the wheat some of which will be included in our pricing starting this quarter with the remainder in Q2, reflecting our more responsive input cost mitigation model along with costs relating to <unk> at the base in Northern Ireland.
For the full year, we reached an EBITDA of about 6% higher than previous year, reflecting the strength and consistency of our business model. Despite the significant piece of COVID-19 to our business profitability, which reduced our volumes and revenue by roughly 10%.
The year over year results were driven by improved performance in the operations and agricultural sites supported by Capex and great execution of projects directed to high efficiency and yields as well as strict controls on all of that our SG&A costs.
Our relative performance to the industry across the last 12 months continues to show us outperforming the competition in Europe.
Looking ahead to the next quarters, we anticipate an increase of feed costs and the foodservice pressure starting to improve with lockdown gradually easing as the U K is currently already 12% vaccinated, but our press the models all do retrospective along with the SG&A reductions continued operation performance.
And our ability to adapt quickly to market changes should provide the support needed to mitigate the headwinds.
We continue to be relentlessly and investing in innovation and even the labeling need improvement driving better efficiencies managing our cost base and offsetting cost increases through lean manufacturing techniques and capital investments around automation and process flow without sacrificing the health and wellbeing of our team members, which remain the condition to.
Our operations.
We're committed to delivering the safest work environment borstal, improving the quality of our products, while achieving our sustainability agenda.
And Budd welfare targets.
The performance of our newly acquired the European Operation has continued to improve with EBITDA on the opposed to keep the momentum.
We have not been profitable on an EBITDA basis for the last seven quarters in the row with margins also increasingly consistent space. The improvement in performance was driven by robust demand at retail partially offset by a reduction of foodservice continuous strength in pork exports, especially to China as well as the implementation of operation of improve.
<unk> and capturing of synergies.
Part of the China remained strong and were up 52% from Q4 and up 88% from the full year during 2020.
We also continue to evolve in our strategy and have the delivered double digit growth with all retail key customers during 2020.
The integration of the new European Operation is on track to expectations over the next few years, we expect to generate an EBITDA improvement to achieve a level that is competitive with leading companies with similar portfolio.
We have expanded our distribution capability for the newly acquired the rupee method.
Through some recent wins to increase the retail exposure and strengthen our partnership with key customers. Our key customer strategy is looking well as expected and have increased the volume by strong 17% in Q4, our brand new refurbished, citing low model became fully operational for a weekend packing business.
We have the invest in the state of the art food manufacturing technology with high levels of automation sort of a key customer into full deemphasize the proportion of commodity sales.
Pork slightly sausages and value added products will give scope for further growth and expansion in the future.
We are optimistic of about building owner operation improvements are continuing to optimize our manufacturing footprint extract the best in class of operational excellence capitalize the export opportunities optimize the portfolio of channel segments and products as well the strengthening our global business with key customers to drive innovation in value added in the higher.
The margin areas.
We have a great team in Europe dedicated to generating the best possible relative results by focusing of the fought the risk factors within our control weighting of suing and protecting the safety and health of all of our team members.
Turning to feed corn prices have continued to move higher as the market the seats little of projections for U S. Corn stocks from the USDA and Theyre generally crop report USDA lowered U S production by 225 million bushels, resulting in the expected Carryout of $1 5 billion bushels will also have seen wanted.
Export demand from China recently, which continues to support the USB projectiles for a 46% increase in exports from last year.
So in the last crop report USDA lowered their projected soybean carryout 220 million bushels, the low as expected Carryout since 2014, most of like corn large export demand to China has been the big driver in the low end stuff projections looking at the crops in South America, we have seen much better the rainfall.
<unk> recently.
And much of the main growing regions of Brazil, and Argentina, which is increasing our confidence in the size of corn and soybean crops. We believe describes who help replenish the global supply of <unk> later, this spring and take pressure off of the U S. As the primary export therefore grain and oilseeds.
Also expect farmers in the U S to respond to the higher prices, we had increased the acreage the spring, which will help the supply if this fall.
USDA is currently projecting an increase in production of the stocks this year with major export the production increasing over 5 million tonnes, despite the lower European crop.
We are very optimistic about the prospect of a rebound in the EU wheat production, especially in the main consumption area in Great Britain, where we have seen much better conditions to start the crop this year.
According to the USDA Q4, lively production declined one 4% relative to the prior year, driven by head count reductions and small box while pullet.
Net placements growth fluctuate of two 2020 Q4 free the placements were flat year over year. This was in line with expectation as the industry transitioned from purchasing in the bullets to fill up the new capacity, especially meant 2018 and into early 2022, non maintaining and supporting the previously you have the capacity there.
Come on line.
As for the supply.
The currently expects production to grow by 0.7%.
Versus strength of 'twenty much more modest compared to the past several years. It is important to recognize that the supply and demand fundamentals for chicken and the resulting pricing environment, we will ultimately determine the industry production outcome in 2021.
During the transition from Q2, two at the beginning of Q4 last year COVID-19 related restrictions have slowly been rolled back with mainly business in the restaurants operating under modified the environments to protect and consumer health.
Although businesses have taken steps to ensure consumer safety. Many individuals continue to remain at home more often limited potential of exclusion to audience and visiting grocery store and restaurants less frequently.
The foodservice channel has adapted quickly.
With the greater focus on the more off premise driven consumption environment. Despite the return of capacity limitations. After the U S experienced increased COVID-19 daily cases rate in November Chung changes implemented by operators.
Sort of off premise consumption prevented the industry from explained the same demand weakness experienced in April through May in fact, Q4 for the service demand has been comparable of that of Q3, even after a slight deceleration in demand during November and December most notably the <unk> segment.
<unk> to lead the foodservice recover as the capitalize on the shift towards off premise then the 90.
Even as the service performance has improved the current consumer environment still favors retail.
While preparing daily demand is still recovering overall retail chicken demand posted robust growth in Q4, driven by double digit fresh and frozen dollar sales growth.
Moving into 2021, we expect gradual easing of restaurant capacity restrictions and the reopening of the business in the event as of the pollution is more widely vaccinated with benefit overall chicken consumption across all segments.
The chicken continues to be one of the most affordable and versus the proteins retail demand is expected to remain above pre pandemic levels.
Despite some volatility the foodservice recovery. It's also expected to continue in 2021 led by the highly adaptable keyword search segments, while demand in the remaining sectors of foodservice start to improve as well as consumers are able to re engage in more normal activities.
Our portfolio strategy is designed to adapt well to challenging macroeconomic while minimizing the impacts from volatile market conditions.
While we are already well balanced in terms of our both sides of exposure, we remain diligent in seeking opportunities to incrementally diversify.
Product mix and reduce the commodity portion of our portfolio by increasing the number of differentiated products to key customers, while optimizing our existing operations by force.
Sort of operational improvement target of.
Key customer approach is strategic and creates the basis for further the affiliation.
The growth in important categories by providing more customized high quality innovative products to give us a clear long term sustainable competitive advantage, while further improving the resilience of market fluctuations.
Before we turn to the financials I also want to mention that yesterday, we announced Matthew Maloney and executive with more than 26 years of finance and accounting experience with public traded the company has joined the convenience as the global Chief Financial Officer.
The effective as of March shifting.
Net previously managed all financial relate the responsibility for the 4 billion dollar of North American Division of a function of 500 global manufacturing company.
We're excited to add Matt considerable experience and expertise to our senior leadership team and believe he will provide the valuable in our pursuit of becoming the best and most respected company in our industry.
Turning to our national Snow, our SG&A in the fourth quarter was higher versus a year ago as we improve the efficiencies of our expenses, but increase the support for the expanding just bare brand nationally and the investments for our new prepared foods products, both in the U S and Mexico as well as the inclusion of the new.
The us it's in there also.
Also included in the reported SG&A and some of them the Cogs there of $30 million of bundle accrue and legal fees.
We'll continue to prioritize our capital spending plan this year to optimize our product mix net.
Aimed at improving our ability to supply innovative less commoditized products and strengthening partnership with key customers. Even during these uncertain times, while we continue to evaluate all capex projects and deferred those whom we deemed non essential we reiterate our commitment to investing of strong return on capital employed projects that will improve on.
Pension of efficiencies and being at the customer needs to fund of some competitor.
Okay.
<unk> four pillars.
Our balance sheet continues to be robust gives me a relentless emphasis on cash flow from operating activities focus on management of working capital and disciplined investment in high return projects and liquidity position remain very strong the more than $1 5 billion in total cash and the Halo meetings.
We have most of it.
Needed cash requirements with the bonds maturing in 2025, and 2027 and our term loan maturing in 2023.
During the quarter, our net debt was $1 $7 billion, the lowest since 2016 and the leverage ratio of two two times less 12 months EBITDA.
Our leverage remains at a manageable level and we expect to continue to produce positive cash flow this year, increasing our financial cut the ability to pursue strategic actions.
The 'twenty 'twenty, one of interest expenses of around $100 million to $130 million.
We have a strong balance sheet and the leverage that is within the target which are supportive for us to act on great opportunities. During these uncertain times, we remain focused on exercising great care in ensuring that we create shareholder value by optimizing our capital structure, while preserving the flexibility to pursue of growth strategy and will come.
Continue to consider and evaluate all relevant capital location of strategies that will match the pursuit of our growth strategy and will continue to review each prospect of it accordingly to our value creating standards.
Operator, this concludes our prepared remarks.
We open the call for questions.
We will now begin the question answer session.
Interest of allowing equal access we request that you limit your questions to two of them.
We're enjoying the queue for any follow up.
South of your question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys to minimize background noise.
Withdraw your question. Please press Star then two at this time of a pause momentarily to assemble our roster.
Our first question comes from Ben Theurer with Barclays.
Please go ahead.
Hey, good morning, and thanks for taking my question just.
The follow up on on the U S interest to us.
Understand a little bit the commentary so if we take a look at the roughly $58 million operating income loss and we adjust that with the 75 million settlement that would bring us just from the U S segment to a little less than $20 million in operating income, which compared to the <unk>.
The news.
Of the little less than $1 8 billion is literally just the.
Not even the.
The 1% operating income margin, so just to understand a little bit what else.
Within the quarter that might have impacted the U S margin just to come in a little shy of 1% as at the $30 million, you've just mentioned with bonus accruals and legal accruals. That's also in the air So we shoot that consider as well of what what is it basically kind of derail that little bit vs.
Maybe what expectations were.
<unk> wasn't and I myself was trying to come out initially.
Sure. Thanks, Brent compared to the same quarter last year, we have one 1% lower volumes, which is in line with the with the industry a blank cost was $40 million higher due to the COVID-19 costs and of our mix was not as efficient as it was due to the inefficiencies caused by the lower availability of labor given.
The increase from Covid cases in the commodity Screwing circuit during November and December to your point, we also recognized $30 million and one offs and of the legal costs and other non accrual for bonus which is the fundamental step in recognizing the great commitment of our team members to maintain the safety of our team members in the court.
<unk>.
Okay, perfect and just to.
Get a little bit I mean, obviously the environment right now of grain cost is obviously going to be of a challenge, but you've nicely elaborated on what you can do and how youre working in between the different.
The different bird sizes.
Could you talk a little bit about what you're trying to do on the pricing side and you're showing it at least from the commodity side I mean, clearly prices what the first few weeks of January were.
Look very promising and higher level than in prior years, but is that enough to offset the grain cost and what else can you do in order to keep profitability in check.
Sure sure. Thank you Vivek.
Firstly I think it will always refer to our portfolio, we are well diversified in terms of exposure to commodity markets and we'd all of production and more stable segments like the small bird and the case right.
Also every year during our budget centering our management methods, we densify opportunities for improving our operations. This year, we identified another $100 million in operational improvements that we will pursue and all of our team members already detailed plans on how to capture.
So we are always looking for operation of improvements to be more productive in the also to support our key customer growth in terms of the pricing on the commodity segments. We're seeing that the current the cut out is rising and the only for four of the big bird and boneless breasts, but also across all.
All of media types.
This increase chicken continues to be the most affordable in the Haynesville protein and Youre seeing the increase in pricing and reduction of the availability of the competing proteins, especially beef so what's happening in the boneless breast category is that we're seeing from strong demand, which is outpacing 2020 by more than 90% of this year starting January.
What the problem is correct.
Just for the final question.
Boneless breast.
And then the combined media and Jumbo production was only 1% up.
Which is creating a good environment for pricing, but it's not only on the bonus what we're seeing of the increased wins continued to set of new new highs of the food service demand is very well supported by the delivery and the take out and the retail remains strong with tenders has also been very strong across all segments.
The other two wings because of the.
Delivery and takeout and I think the the very important too we're seeing a very strong increase in the back half of pricing.
She is having the lower supply of inventory of the dark meat and the weaker U S dollar and with the sort of oil pricing, it's making some of the volume dependent countries to come back and.
Some significant.
Buying from the U S.
So we're seeing strengthening in all.
MC bites on the commodity segment.
Combined to that in the other segments, we not only half of portfolio of products. We also have a portfolio of contracts.
Some of our products are greatly related some of our products are cost plus with the.
We bring in all of their inputs as well and when we have the contract negotiations with all the key customers. We will also discuss the increasing prices due to the increases in the feed.
Okay Perfect and then just one quick one if I might squeeze it in what are you seeing in Mexico in terms of supply coming in we know theres usually.
When profitability is as high as it was the over the last two quarters, it's very attractive for some of the more independent guys coming in but because of the critical Covid titration.
In Mexico, the ton of a life markets is still not as accessible. So what are you seeing are you are you seeing like more production coming in or would you expect profitability.
Two to stay in the in the more attractive levels as of course, we have seen over the last two quarters.
Yes, Mexico is.
Like I mentioned, the every I think I recall right quarter over quarter performance can be very bolt of in Mexico, given the market conditions, but Mexico has been very consistent on the year over year basis. In 2020. There is no difference right we call more extreme volatility during the quarters, but we finished the year in line with the previous year.
In terms of the supply demand and I think we reach a level that is.
A good level of supply and demand I think the high price of feed is preventing some marginal players, especially on the life of market to come to the market because the by just the feed of debate right and they don't have the the very well diversified portfolio that we have with prepared foods and all the segments and also.
They don't have the sophisticated.
Hedging.
And the risk management that we have in both the U S Mexico and Europe. So they are scared by the increase in the in feed prices, which is preventing gross margin no players to come in which is creating an environment of adequate supply and demand. There we expect that to continue.
The Big question from Mexico, with all of the economy is going to evolve, especially during the second semester different than the U S. There was not a lot of the Gulf of mental health and a saw the big challenge. They had in the first semester of 2020, we expect that the the economies of the start of the GP.
Moving as the trade between the U S of Mexico has started to increase as well with the recovery of the U S economy of that the Mexico economy, we will follow suit and we expected that the the.
This available income.
The flow to the increase in the in the protein consumption in Mexico as we expect in the long run and then once again the team in Mexico is the true differentiation they have operational excellence and the continued to over perform against the competitors.
Okay perfect I'll leave it here. Thank you very much property.
Okay.
Our next question will come from Ken Zaslow of Swift.
Think of Montreal.
Okay.
Hey, good morning, everyone.
One of the gas.
Despite the first question is how does this quarter at all.
Forecast or predict what's going to happen for the rest of the year is it a representative quarter in terms of U S. Chicken is this a transitional quarter.
Do you define this quarter in terms of how you think about the chicken outlook.
In light of the higher feed costs and the higher chicken prices, where are we in the warehouse this quarter really.
The represent the future.
Yeah. Thanks, Ken as we always say Q4 is never the strongest quarter for chicken right. We have the Thanksgiving and the year end events that it's.
Typically phase of all other.
Types of proteins like hams and turkeys. So Q4 is never the strongest support for chicken.
All of these fee is the rebound from Q4, starting in Q1.
With that.
Much bigger consumption in the retail.
A lot of features on the retail and also in the food service I think kind of 'twenty to 'twenty. One has stuck the different in all of the years because of the continuation of the pandemic So youre seeing.
Very strong retail while foodservice has locked.
Because of yet.
What we are expecting for 'twenty 'twenty, one in January productions of down one 2%.
And the USDA outlook.
The forecast of 0.7% growth from 2021 and chicken production.
We think that this will mostly come from increased the number of heads as we'd seen the small but the category, which saw the most consistent the head count reductions in 2020 rebounding with the return of the food service later this year. So what we are expecting for 2021 is as the.
The availability of.
Chicken will continue to be constrained the demand will continue to increase giving the return of the foodservice.
And so it isn't it.
As I was talking on the prior question I think the areas of the unknown of the increase in the Green often Joe can talk a little bit about the R. R.
Our strategy in terms of hedging, but also of the prospects for the the new crop and we have a multitude of contracts and we believe that despite this increase we see that increasing the codell and the cost initiatives that we're taking and the increases that we can.
Have with our key customers that we can count on that and half of 2021, which is going to be much better than in 2020.
I appreciate it thank you guys very much.
Our next question will come from Ben Yeah end of year, who is with Stephens. Please go ahead.
Hi, guys. This is actually <unk> on for Ben.
I just wanted to ask Hey, just wanted to.
Ask how are you doing achieving targeted live weights and do you think youre live weights could be lower year over year, given operational challenges that you saw last year.
Yeah. Thanks for the question well the overall LIBOR it depends a lot on the portfolio that you're running right for pilgrims are we are.
Achieving the expected lightweights, but our overall lifeway through probably go lower because we are converting one of our plans from the Big Bird segment, which is the Colombian segment to small bird segment that will reduce the.
Although we are going to increase the little bit the number of beds, we're going to reduce the overall size. So in average coupons will probably reduce the little its overall size I think Ian that is somewhat is true to the entire industry itself in the 'twenty 'twenty. What we saw was the reduction of especially on the small bird category.
So that small Bell Canada comes back in 2021 with the easing of the <unk>.
Travel restrictions and the return of a different service we may see.
Average, but the wait to go down.
Although we are going to see a little bit the increase in heads.
So we have not seen any issues in the amount of lightweight.
We expect that to continue with the difference of the portfolio.
Okay. Thanks, and then.
As far as the the tulip business.
I wanted to ask about something I read on the on the press release.
We're thinking about two of being on track to achieve performance competitive with leading companies and.
The next few years.
I just wanted to see if you could provide a little bit more detail on that.
Is that a firm timeline is there any outside could you get there sooner.
If we could just get your take on that.
Sure I think with all the.
Acquisitions that we did with the always created a lot of value to the synergies.
The integration, especially on the on the changing of foreign methodologies of opening the gaps are identifying all of the opportunities and then closing the gaps with the metabolic without the use so in the prior acquisitions of it always over achieved.
And what we expect for Keith is no different so we mentioned the when we did the acquisition was that the we're going to enhance our key customer.
Initiatives and we did that as I mentioned, we increased more than 14% of sales on with the key customers, which are more profitable for us and also helped on key customers to grow also in the operational achievements. We then to find more than 20 million pounds a year in the MLP.
Nation improvements.
Got it.
The tulip, which is now good wins in the U K.
And we expect the.
Two year timeframe.
To achieve profitability close to the of leading companies.
In Europe, I think as we always say our vision is to become the best the most respected and that is in line with the division.
I appreciate the answers Bobby I'll I'll jump back in the queue.
<unk>.
Thank you.
Our next question will come from Michael Python.
What are your planned research. Please go ahead.
Yes, hi, good morning, just wanted to dig a little bit deeper into I know you said you moved out of one of your plants operationally from our big bird over to other segments of more fast food.
If you could give an update on your mix.
Barclays, but its roughly one third big bird, one third tray pack kind of one.
Third small bird if you could give an update kind of on how your relative mix between the segments and then what percentage of your business, maybe it's more on a cost plus or grain based type contracts versus just spot margins that would be helpful. Thanks, Yeah. Thank you of that change we will not modify significantly the.
The portfolio that we have with the with the rest.
A relatively small plant, but we will continue to be well balanced I think we will have more close to 35% on the small bird category, which is the little bit more than the other segments, but the who.
It was to be well balanced in terms of the contracts like the mentioned we have a very diversified type of contracts most of our contracts are market based on our contract base, meaning we can negotiate the prices because of their contract with key customers.
We have close to 20% of our contracts in cost plus all of my own or doing the base.
Okay.
Great that's really really helpful.
Then I guess just.
Shifting over a little bit I know you talked about a gradual kind of recovery in full service.
Foodservice the theory I mean are you starting to see signs from some of the bigger distributors that they're looking to take more product or are they kind of sniffing around or I guess, maybe kind of are you starting to see orders materialize or is it more just inquiries at this point and how should we be thinking about when that demand might start to show up.
One of the numbers.
Yeah Yeah.
So we're seeing more in the morning prior to the nowadays I think everybody is looking at the overall protein category in U S and what the distributors and also the foodservice operators are looking at.
The total availability of protein. So when you look at the USDA numbers beef availability would be flat to a little bit though for 'twenty 'twenty, one compared to 2020 and fourth we will also reduce the increase that a half last year to close to one 5% increase.
Chicken is no different than USDA is expecting 1% less than 1% increase so the overall protein cat.
Category in the west is going to grow less than 1% and that is before we see the huge.
The increase in exports that we're seeing in January if that continues throughout the year, we are going to see a lower avail of.
Ability of overall protein in the West and then the foodservice operator, and also the distributors sort of looking for the best opportunities that they havent chicken continue to be the.
The best opportunity I think contributing to that is also of what people are referring to the chicken Sandwich Wars, we were seeing that the growth of the chicken Sandwich continues to have this halo effect on the chicken on the food service and.
We expect chicken to be heavily promoted in the queue of science, which represents the largest portion of our overall kicks out of it.
Our next question will come from Peter Galbo Bank from them.
Sure.
Please go ahead.
Hey, probably the only done them good good morning, Thanks for taking the question.
One of the pizza.
Part of that just maybe to ask where the higher level question as we think about total protein availability in the landscape right.
Chicken of at least the.
We've seen it.
Probably more reliant.
The report.
In terms of needing foodservice recovery to come back in.
In terms of the the exposure of the industry.
I just wanted to see of that if that premise was fair or that's kind of how you look at it as well internally, but then also.
Think about your ability to realize pricing kind of in 2021 and going forward.
The need for foodservice recovery.
We look at the commodity.
Chicken prices that the we had access to.
How much of that you would typically realized in your results and I know, there's a lot there, but maybe I'll leave it there in the follow up.
Well thank you Peter.
Once again I go back to our portfolio of right we have.
Moving.
That the portfolio can be resilient on the download the award on the.
On the market because we have the <unk>.
Categories of the small bird and the kids ready, which holds price much of it.
Other than the commodity segments during the downturn, but we also have the exposure to the commodity segments like I mentioned, we are well balanced. So we have the exposure to the commodity segments. So when the commodity segment side of really strong we can benefit from that with the.
The direct and immediate pricing well the negotiations with key customers of course, we take into consideration of a lot of things right the take into consideration the free.
The increases were taken into consideration of the grain increases and we also look into the forward grain pricing not only the immediate.
The price on the grain, but looking to the fourth price of great and that will take place in the negotiation that we have and we have the exposure to the range.
Contract related pricing wherever we have that there is some delays on the on the pricing increases because of the duration of the contracts, but we will benefit from that in the future.
I think most of all of it is about the resilience of this portfolio and our ability to pass through the prices on the grain with our contract negotiations I think the overall profitability. The chicken industry will also depend on the supply and then.
Manned Dallas I think as we have mentioned the industry is expected to grow less than 1%. During this year and that is the growth in production I think again, we are seeing a big spike in the exports, which me.
Signify a reduction in domestic I think the ability of meat, but despite all of that chicken continues to be of great value to both.
Food service and retail.
Okay.
That's helpful and maybe just two.
Two other quick one.
Non interest expense I, just want to make sure I heard you correctly it at $120 million and the second question on Europe.
I think I think you've outlined that there are some operational improvements you've made.
In 2020 to improve profitability, maybe being offset by.
Yeah.
Essentially lower export tap of our very strong export year.
In the 'twenty one so as we just think about profitability in Europe is it kind of the case the 'twenty one should be a similar type year or at least it is how youre planning for today. Thank you very much.
Sure in terms of the interest.
<unk> one of the Huntington and $20 million of of course, we have the 2025 of bonds that are callable and I'm gonna be callable. During 2021. So what we are seeing a very positive market. So we believe that we will refinance that and if we refinance of course. This interest expense is going to be lower as we are seeing very low.
The interest in the market right now compared to that 20 to 25 of the bond at the five and three quarters, but I think that it will be a great.
An important position for us to reduce our interest expense and produce even more cash flow of that we can't investing though I know of.
Business with the.
And as of the Europe I think every year, we see operational improvements, we see the benefits of the integration.
And in.
In Europe, we are more retail oriented so we saw key market this year and the foodservice was much weaker but the retail continued to be strong and we expect that to continue in 2021.
Expected our retail business to continue to improve during 2021, we talk about growing with the key customers, which reduces their cost as well as all costs. So improves our efficiency. So we are expecting 2021 with better margins in Europe.
Our next question will come from Adam Samuelson.
Please go ahead.
Good morning, everyone.
The other I guess my main question just quickly on the prepared foods business as we think about kind of that from 2021 and in.
In the K I think he gave the utilization for prepared foods businesses around the world the 68%.
I mean, the U S business that now has been struggling with utilization and profitability for a while is that really just dependent on foodservice institutional foodservice specifically in the U S getting better or have some of the actions you've taken around expanding some of those retail items are.
Under the just bare brand kind of cutting of.
Putting a lot of better path there without concern of it.
Really just trying to get the profitability of that component.
A second quick follow up.
Sure. Thanks, Adam Yes.
Yes, our foodservice or our prepared business have a strong position in the food service, we have the Pierce brand, which is the very strong.
In the food service category and we also have a very big operation for the school school lunch, So I think with the.
The closing of the schools and with the downtime on the set of especially what we talk about the the street piece of it like that is down close to 20% overall for the service is down 9%, but because the <unk> sides of up close to 8%, but the strict business or the foodservice restaurants.
Close to 25%, so I think that impacted our business.
Able to counter that with the significant increase in our retail business that especially with the just bare brand, but it's also with the <unk> spin where we are gaining distribution throughout the year. So there was the ramp up on that is to the point of that were almost full.
Best of luck.
The fully cooked.
Products are as of today.
I think what we are expecting is the rebound in the return of the screws with more of mobility and the food service, which will significantly increase the profitability and the capacity utilization of our prepared food operation but.
Overall, we have increased the the gross margin with the more.
I think.
With the better about the line on the retail business, especially on the branded side.
Okay, Great and then my follow up just on the legal settlement.
I just wanted to make sure it's clear the that's the only for.
For the announced a settlement with the direct purchase of their classroom. So if I looked at one of your competitors. This morning, they settled with all of the classes and accrued for the opt out plaintiffs so that reasonable to think there could be additional accruals over the course of 'twenty, one kind of concurrent with that.
Legal of lower legal expenses in 2021 of applicability of maybe move through the work of the biggest part of the litigation.
Yeah, as we mentioned they have some increased legal expenses. We thank you for that impact of the DRAM I think more important than than that.
Adam is that we are committed to the service level of all aspects of our ESG policies as the environment, the social and the governance, we're very proud of the commitments from our sustainability report and our recent investments of in the hometown the stroke program.
We are investing more than $20 million and projects that have a lasting impact in our communities for generations to come the.
You know of any $5 million that we accrued this was the only for the yes, the direct purchases.
Okay, Great I appreciate it thank you.
Yes.
Yes.
Our next question will come from Rebecca <unk> with Morningstar. Please go ahead.
Hi, good morning, and thanks for fitting me in so first I'm just kind of as we look at 2021, there's obviously a lot of different puts and takes the <unk>.
In 'twenty, we have higher grain prices.
I have a recovery of and.
In foodservice and this kind of at a high level I'm just kind of wondering how margin from 'twenty. One are gonna look compared to 20.
2020, I believe you said that it should be.
<unk>.
The higher Directionally I'm not sure if you're referring to each region or was that just the last one.
Yeah. Thank you I think of it just start with parking of little bit about the.
The way, we treat our hedging policy or risk management on terms of mitigating the green increases for 2021, I think Joe can help us with the.
Some of our policies and how we.
There is a risk management. Thank you for the question Rebecca obviously, we've seen the higher corn and soy prices really since the late last summer early last fall and it's been a combination of a few things it's been the reduced supply instead of the bigger than expected demand for U S exports from China. So we do see higher risk today to vote.
The corn and soybean supplies out of the U S probably alluded to the increased acres coming from higher prices generating more incentive for the farmers, we expect somewhere around the 9 billion increase of acres of corn and soybean mixture, which should help boost supplies in the fall that being said, obviously with the higher risk to the balance sheet for <unk>.
So we.
Like we said on our calls previously we haven't had the active risk policy and and it's and it's measured against the risks we see in the market and we have that position on today.
We managed the risk from the cost side. We also like I mentioned have plans in place to capture the operation of opportunity like we do every year and we are very.
Okay.
Focus on this operational excellence in all of our teams pay a lot of attention on the improving the operations, which helps our customers and helps the bottom line and then at the end. We also mitigate the increase in the great prices with our portfolio of products and contracts. So we have the cost plus.
The grain based contracts that help us mitigate that and also we have the deep customer relationships, where we share.
The discussion about the pricing to help them being competitive but also help the company to continue to grow in support of their further growth and what we're seeing on the commodity segments.
A great recovery in terms of pricing with the the.
Very positive supply and demand and on the international markets, but when we are seeing is the.
<unk> for U S products, which are very competitive from the international markets, where we're seeing.
The issues with the claim that we are mitigating in the world.
Our policy and we are mitigating those price increases through our ports.
Portfolio of products Cisco.
Oh, great that's got the here.
And then from my last question I'm, just wondering if you could provide a little update on staffing at the plant that you're still experiencing.
A lot of absenteeism or if the plants are staffed adequately and related to that do you expect low.
Wage inflation and the Kodiak. Thank you.
Yeah sure. Okay, Yes, we saw in November and December as a consequence of the increase the number of cases in the United States that the the plants have starting to have a staffing more staff and just because I think it is regional or local.
The 33 plants across the United States and the others many others throughout the world and it's very local so it was not anything widespread any of them with the wage increases the approach that we have as always to be very specific to the local communities and day to find the competitiveness of.
<unk> already just in the local.
The communities, where we are inserted.
So we are seeing some staffing challenges, especially the salt that especially during Q4. They are improving now and we expect those as the vaccination continues and we see as essential workers being vaccinated, we're seeing a reduction of that then we expect volatile plants too to be fully staffed.
During the Q2.
Great. Thank you so much.
This will conclude our question and answer session I would like to turn the conference back over to Fabio Sandri for any closing remarks.
Thank you all we would like to reiterate our continued commitment to our valued team members to provide them with the safe and healthy work environment, while supporting our duty to maintain foot production and supply to customers. We're looking forward to 2021 and expect the better results in spite the volatility or the voice.
Volume of differentiated products tailored to support the key customer strategy and cause the ocean with our broad geographic footprint will continue to generate consistent performance.
And minimize margin volatility in challenging market conditions relative to competitors, we will continue to seek new growth potential both organically and through acquisitions or the offering even more differentiated products within the business to support key customer needs by cultivating a culture of constant innovation, we will like to.
Everyone in the 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 very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.