Q1 2023 Pilgrim's Pride Corporation Earnings Call

Good morning, and welcome to the first quarter 2023, Pilgrim's Pride earnings conference call and webcast.

All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero at the company's request. This call is being recorded. Please note that the slides referenced during today's call are available for download from the investors section of the company's at.

Www Dot Pilgrim's dotcom after today's presentation, there will be an opportunity to ask questions I would now like to turn the conference call over to Andy Rydzewski head of strategy Investor Relations and net zero programs for Pilgrim's.

Okay.

Good morning, and thank you for joining us today as we review our operating and financial results for the first quarter ended on March 26, 2023 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 dot programs Dot com along with the slides for reference. These items also had been filed its form eight Ks and are available online at SEC Gov, Fabio Sandri, President and Chief Executive Officer, and Matt Galvin, Chief Finance Officer.

We will present on today's call before we begin our prepared remarks, I would like to remind everyone of our safe Harbor disclaimer.

Today's call may contain certain forward looking statements that represent our outlook and current expectations as of the day of this release other additional factors not anticipated by management may cause actual results to differ materially from those projected in these forward looking statements.

Further information concerning these factors have been provided in yesterday's press release, our Form 10-K, and our regular filings with the SEC.

I would now like to turn the call over to Fabio Sandri.

Thank you Andy and good morning, everyone and thank you for joining us today for the first quarter of 2023, we reported net revenues of $4 17 billion, which was slightly below the same quarter last year.

Adjusted EBITDA was $151 9 million with margins of three 6% compared to $11 eight last year, our overall portfolio of geographies and business demonstrated resilience over the last years.

Doing just fine we experienced all time highs as well as near record lows and commodity hedges.

Also face dramatic inflation throughout their supply chain, you couldn't even grain inputs labor and Italy.

Along with other distinct challenging economic conditions in each of our regions to mitigate these challenges. We've also considered consistently driven our strategy key customer focus and operational excellence.

Business.

Able to capture the benefits of exceptionally favorable markets while.

Minimizing the impact of extremely adverse market conditions as a result, we can generate a more resilient earnings profile over the long term throughout Q1, our strategy has demonstrated their criticality as our overall business.

In each region improved its profitability relative to prior quarter and a very challenging environment in our U S business diversification with small bird that he's ready along with our branded offerings and prepare moderated the impact of depressed commodity cutout values. In addition, our key customer strategy was instrumental in <unk>.

Improvements in our production volumes and in our supply chain.

In the UK and Europe , our focus on operational excellence and the restructuring of our manufacturing network helped us increase production efficiencies.

These efforts were.

Beyond our production locations as we drove synergies in our back office support activities as well.

Innovation also continues to gain traction with key customers further diversifying and adding value to our portfolio.

For Mexico performance, improving supply demand fundamentals.

Become more balanced and inflation slow.

In addition, we continue to improve their efficiencies has been that there are issues in our live operations. We also benefited from favorable exchange rates and our diversified portfolio as both our fresh and branded offerings grew throughout the quarter.

Turning to feed ingredient recent USDA reports shoe ending stocks estimates steady at a historically tight 134 billion bushels demand has been impacted by the high prices in the first six months of the crop year with U S exports that were approximately 37% year over year domestically CT demand.

For ethanol was also 5% down and feed reserves due was down 7% versus the same period in prior years.

Stocks are expected to increase to more normal levels, depending on Brazil second crop.

Renting success in weather here in the U S and continue to export flows from the Black Sea.

Although critical development stages are still ahead, according to whether it's feasible for the large area in Brazil.

U S USDA prospective planting report show a favorable response to the elevated prices.

Corn to soybean price ratio with the planting intentions of 92 million acres and blending is well underway.

We titled Crops in U S and much starting to hit the market couldn't be carried the relative large weather risk premium.

The confirmation of more normal conditions and with the current market scenario, we expect this premise to reduce regarding soy.

He wants to oil price volatility and soybean production estimate voyage across South America, Brazil is harvesting a record crop well, Argentina crop is down 19 million.

Versus last year well.

Well South America Holtby production boost net larger and global soybean stocks are at acceptable levels. The soybean meal supplies constrain as Argentina is dependent on soybean imports to run their crushing industry. However, tepid soybean demand from China and weak soybean meal demand outside the U S has kept soybean meal.

Prices from returning to the Cape Q1 price.

F D a.

Active planting intentions for the 'twenty three 'twenty four soybean acres with $87 5 million acres essentially flat year over year.

Welcome these conditions will be critical as.

We entered the new crop year with historical diet endings stocks off 210 million bushels are forced with 8% stocks to use.

On the weak globally now.

Balance sheet has been relatively well supply and offer alternatives for global feed grain importers.

U S hard to read winter wheat is the main concern for northern hemisphere.

Due to the lingering dry conditions, while EU wheat conditions are promising much like corn and operational Black Sea exports corridor should be mentioned before you don't need me.

In the first three months of 2023 ready to Cook prediction on U S. Chicken experienced an increase of three 4% relative to Q1 2022, the more substantial year over year growth occurred in January before slowing in March in recent weeks.

Row, four squads are head counts were bolstered by a year over year improvements in hatch ability in late 2022 supporting mile Chick placements increase during the same period.

Considering more recent trends the rate of industry exits has slowed and it has been flat year over year. The industry's attention rate has declined year over year, despite our own improvements they.

Taking together aggregate chick placements over the trailing month has remained relatively flat year over year to negative numbers in recent weeks and the best way to any twenty-three outlooks indicated lower growth for Q2 and a decline in production during the second semester of 2023.

On the cold storage reported USDA inventories indicated at eight 3%.

Reduction from the end of 'twenty into any true throughout the end of March bringing inventories back near the five year average after seeing some rapid buildups towards the end of 'twenty to 'twenty two.

When analyzing the overall supply of protein USDA maintains the expectation of reducing domestic protein that they loved it.

This outlook includes the growth of chicken during Q1, and the growth of Turkey production. After the events of last year when factoring all of the Red meat supply USDA expects a decline in the availability primarily due to the contract in the U S beef production for park.

Export pork availability is expected to remain flat in the U S year over year.

U S domestic demand show mild growth in the first quarter of 'twenty to 'twenty three the retail channel.

It's a stable volume sold albeit at higher sales prices in the fresh department steadily increasing promotional activity provided volume support enabling sales volume to remain on par with year ago.

Well, it's two maintaining elevated dollar sales as a result chicken was able to grow both volume and dollar share in the meat category over the past year.

The industry needs remarkable resilience, despite a trend of reduction in unit purchases among consumers.

Overall frozen dollar sales grew or mild volume declines however, we see divergent trends toward the frozen value added and the freedom commodity categories.

Dollar sales for frozen value added category continued to trend positive as both increased volumes and higher price.

Meanwhile, the opposites remains true for the frozen commodity category is declining dollar sales were the result of significant volume declines that were not offset by year over year price increases.

From a location standpoint, the daily emerge as the fastest growing location for chicken is it seamless opinions <expletive> price and units equally important.

It increasingly became a destination for shoppers at the number of daily Chip daily Chicken trips increased two 5% a considerable increase relative to the same period last year, reflecting a broader consumer trend to siggi affordability and convenience.

We're encouraged by the potential of the retail channel given the continued tightening of competing proteins and above average wholesale markup for chicken, if such retailers can't afford to drive promotional activity to gain momentum with consumers who are looking for more affordable protein options, especially in this inflationary environment.

The food service category also showed increased demand.

While the first quarter foodservice demand grew volumes.

7% as both Q4 and full service restaurants experienced year over year growth.

Well sumit traffic has been stable, but we have seen more promotions of chicken items.

And the commercial segments, there's promotions have generated volume growth of nearly 5% raw wings tenders legs, and dark meat has good spirits, and especially infection will rebound and so all have grown volume double digits.

And then they're strips.

Also enjoyed a strong growth rate.

The non commercial segments continue to grow towards the preterm damage levels with volumes year over year, increasing nearly 12% led by the business and industry and the lodging segments.

As workers.

Recently returned to the office, we expect these segments to continue to increase.

On the exports.

We see demand is increasing strongly for U S chicken after posting year over year growth in early 'twenty three.

Through the first two months of Q1.

Export flows limited them, all kind of tie with three 3% growth year over year year to date exports performance has also enabled could start inventories all dark meat to reduced significantly since the end of June with February volumes, 21% below December we expect this inventory trend to continue for 2023.

Echo exports supply chains continue to improve.

Regarding the prevalence of high path AI in U S. This continues to be a great concern to all industry participants. However, the number of total largely populated it since the beginning of 2023, it's less than $1 million and less reported Keith found him at commercial broiler flocks was mid February .

Most of our trading partners are also responding by lifting behind that AI trade restrictions in accordance with our agreement with many great degree reducing their restrictions from state to county level and some two storms as well as following the world organization of animal health guidelines of limiting.

<unk> 28 days post clean and disinfect it.

With the exception of China.

These easy and lifting of restrictions are also aiding the industry record exports performance, we have yet to make headway with China on releasing states from high path AI restrictions, even that's all dependent there's four lifting these bands have been met.

Our geographical and channel diversification and U S continues to benefit our exports, allowing us to access over 80 markets globally, including China.

Our U S business continued to adjust to this prolonged challenges in commodity supply and demand fundamentals, while market dynamics improved throughout the quarter January was exceptionally difficult given elevated green costs and significantly low market prices, especially for breast meat and wings.

Our big Bird business was the most impacted by these conditions as revenues and profitability continued yourself.

The left the business improved each month throughout the quarter, even enhance fundamentals and focus on operational excellence. Although significant progress has been made substantial work remains to achieve sustainable margin levels.

Our diversified portfolio across bird sizes, and branded offerings moderated the impact of these challenging conditions in our small bird segments. We continue to improve our results compare to last quarter and last year, giving a growth with key customers continued recovery of inflation cost and operational performance.

He's ready Oh growth with key customers continued to outpace the industry average we expect additional uplift in a distressed seller at this growth to increased promotional activity improvements in mix and partnership with key customers.

Our prepared food business realized similar success of sales and profitability improved throughout increased business with key customers operational enhancements and lower raw material costs are fully Cooper brand that business continues to have strong momentum as ive just bear in dubious offerings increased 68% year over year.

Despite the extended challenges and market fundamentals elevated input cost and stubborn inflation, we remain committed to profitable growth in our U S business, our expansion in Athens, Georgia to support key customer growth remains on track.

So our investments to support operational excellence through automation and our new protein conversion plant in South Georgia are progressing as planned.

Throughout our U K and Europe business inflation continues to be at the highest levels seen over the past 40 years. Despite these challenges the chicken four categories remain religion as consumers continue to shift into those categories from other proteins.

Categories benefit are further amplified by our growth with key customers as we have both basic channel averages in both retail and foodservice.

From a supply chain standpoint, and continue to meet the gates costs through operational efficiencies and coffee coffee overall demand across our total portfolio has remained relatively stable across both branded and private label offerings, even as cost increases have been passed through the shelf or menu.

The team continues to drive growth through innovation with those costs.

And blended offerings Moy Park recently became the supplier of choice for a key customer involving a dedicated brand with distinct animal welfare standards throughout our entire supply chain all premiums food Masters team have continued to drive and expand usage through flavors and pack formats in a.

Nations in the free trade there is life. In addition, the Richmond brand continues to increase share for its recent introduction of meat free lineup.

The team has made significant progress in operational excellence throughout our network optimization, given the substantial headway in the consolidation of our production facilities.

To date, we have realized margin improvements sporting handset line efficiencies increase overhead utilization and better raw material sourcing. In addition, the integration of our back office support activities as I was thinking of steps forward as our new shared services support centers smell functional.

We will continue to explore and think just referring here for efficiency and realize the full position of the business.

It may also be amplified the continue stabilization of input cost increases in your study assessing levels and enhanced market fundamentals pork and chicken supply demand is becoming increasingly balanced where utilities and wheat prices have recently more they raised it from all time highs.

Our Mexico business also rebounded solidly throughout the quarter as protein availability stabilize and our difficult using life operation diminishes.

These factors were further augmented by increasingly favorable foreign exchange rates and inflation moderation.

The team's branded fresh portfolio continues to perform as it grew in double digits again compared to the same period last year, even though progress and desire to further diversify our portfolio into branded offerings. We mentioned two new brands unique taste in February and we will introduce the just bare into the Mexican market.

The performance of our branded prepare portfolio also have respectable performance given it to sustain our growth.

We are driving promotional activities to broaden our presence in value added and across retail and foodservice.

We're continuing to invest capacity and operational excellence to drive profitable growth our footprint expansion do you cut them and used to love we remain on track and we anticipate production to became available in the second half of this year.

As part of our journey to become an industry leader in sustainability, we've expanded our efforts beyond our processing facilities and we worked with the entire supply chain to achieve our ambitious sustainability targets as an example in Europe . Our team recently unveiled a state of the art poultry farm in the U K this time.

It employs a variety of innovative designs and technology and equipment. They can effectively enable to for them to become self sufficient in energy and operating at full capacity.

We will continue to evaluate opportunities and bring innovation throughout their supply chain across all regions.

With that I'd like to ask our CFO to discuss our financial results.

Thank you Fabio.

Morning, everybody.

For the first quarter 2023, net revenues were $4, one $7 billion versus $4. Two 4 billion a year ago with adjusted EBITDA of $151 9 million and a margin of three 6% compared to $501.8 million, an 11% 11, 8% margin in Q1.

Last year adjusted EBITDA margins in Q1 were one 8% in the U S compared to 15, 9% a year ago.

Our U K and Europe businesses adjusted EBITDA margin came in at five 3% for Q1 compared to one 2% last year in Mexico. Adjusted EBITDA in Q1 was eight 5% versus 16, 1% a year ago.

Moving to the U S results.

EBITDA for Q1 came in at $43 6 million.

Million compared to $411 $7 million a year.

Our U S. Big Bird business was impacted by continued volatility in the commodity chicken markets. We entered the first quarter on a downward slope in the commodity market pricing as we hit the end of January we began to experience steady improvement cut out pricing until we saw flattening of the curve towards the end of the quarter.

Our diversified product portfolio across bird sizes and brands along with our key customer partnerships help us capture the upside of the strong commodity market prices in Q1, 2022, well, helping us mitigate the impact of volatility in market prices in our big bird business during this quarter and.

In the U K and Europe adjusted EBITDA in Q1 was $66 $2 million versus $14 $8 million in 2022, U K and Europe business continues to face inflationary cost pressures. However through its previously discussed mitigation efforts in 2022 business has shown resilience unions profitability growth journey.

This has benefited from the back office integration and its network optimization programs, we incurred approximately $8 million of restructuring charges. During this quarter in support of the U K network optimization program.

Mexico generated $42 $1 million and adjusted EBITDA in Q1, compared to $75 $3 million last year and negative $15 $8 million in Q4, 2022 sequentially. The Mexican business profitability improved primarily due to more balanced supply demand fundamentals and.

The diminishing of recent bird disease challenges in its life operations.

Our SG&A in the quarter was lower year over year key drivers included a decrease in legal defense funding certain lower people related costs lower costs in the U K from impacts of the back office integration and a minor amount of net year over year Foreign exchange favorability.

Also during the quarter, we benefited from the conclusion of negotiations related to both property insurance and business interruption insurance claims in the U S and U K.

We spent $132 million in capex in the first quarter. The first quarter spending is higher on a run rate basis, primarily due to our investments in the Athens, Georgia expansion and a new protein conversion plant being constructed in south Georgia.

We reiterate our commitment to invest in strong <unk> projects that will improve our operational efficiencies through automation and children operation to address key customer needs to further solidify competitive advantages for Pilgrim's.

Although Q1 was challenging due to the volatility in the U S chicken commodity market, our overall balance sheet and liquidity position remains strong with approximately $1.15 billion in total cash and revolver availability at the end of the quarter and with the most recent completion of our $1 billion 10 year notes offering we further bolstered our law.

Quiddity position, we're very happy with the results of this all three especially given the conditions in the capital markets.

Given the high demand by investors, we were able to increase the size of our offering while maintaining an attractive interest rate.

In addition to adding cash toward balance sheet, we repaid our term loan and the diverse seeds from the offering.

The offering provides us flexibility and here he was more volatile time in the U S commodity markets allows us to explore further simplification of our capital structure, such as the elimination of subordination as with the potential unsecured structure as well.

Opportunistic with potential liability management exercises with our existing debt, including possibly paying down or 2027 notes.

As at the end of Q1, our net debt totaled $3 billion with the leverage ratio to three times, our last 12 months adjusted EBITDA, which is within our target ratio of two to three times.

Net interest expense for the quarter totaled $39 million, we anticipate our full year net interest expense to be between $160 million to $170 million.

Our effective tax rate for the quarter was impacted by a nominal pretax GAAP loss for the quarter and the multi tax jurisdictional nature of our business as I noted in our February call, we still anticipate our full year effective tax rate to be between 23 and 25%.

Our capital allocation approach will remain disciplined as we look to grow the company will continue to align our investment priorities with our overall strategic strategy of portfolio diversification focus on key customers operational excellence and commitment to team member health and safety.

Operator. This concludes our prepared remarks, please open the call for questions.

We will now begin the question and answer session in the interest of allowing equal access we request that you limit your questions to two then rejoin the queue for any follow up to ask a question you May Press Star then one.

So if you are using a speaker phone please pick up your handset before pressing the keys to minimize background noise.

To withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

The retailers as we are seeing.

Retail pricing is record high and much higher than the same time last year, which is reframing the consumer to increase its expanding their expanding morning dollars, but not a lot of love morning pounds. So.

We expect that to change with more promo promotional activity, especially as we're seeing the pricing of the other proteins to go higher as we are seeing lower.

Production for both beef and pork on the second semester. So we expect more promotional activity on the retail you mentioned the foodservice as well.

See a lot of promotional activity being expected for the she went Sars, especially on the second semester of this year again, driven by the lower availability of other proteins, especially beef and higher price.

Creating a lot of demand we saw some.

This industrial category to also be flat year over here and we expect that to resume during the second semester. So.

<unk> signals of improving demand.

That's why we believe that there is some good perspectives for the boneless breast on the wind side I think the lingering into lower price has.

And we're seeing those wings coming back into the menu and we're seeing more promotional activity from the wings concept.

Food service as well.

Okay, and then I just wanted to come back I think earlier question you talked I think I thought I thought I heard you say, a six 8% kind of operating margin in the U N. Europe was kind of where you thought the business could get to and I'm and if I missed that I apologize I did you say a time by which you.

You could get there and maybe as a related point, how would you frame and given a lot of the changes in portfolio and mix.

[noise] accomplished over time and understanding it's volatile how would you frame that that kind of margin potential of the U S business overtime.

Yeah, I think Europe is a more stable business when we look into the history.

So that's why it's easier to talk about the some expected margins right.

Investment level, we look at our portfolio right, we have beef pork and prepared foods, we are well balanced there. So there's a lot of.

Portfolio that we can.

Talk about to differentiate ourselves to the competitors in Europe , and do a better job of being a partner to do it.

So the key customers. So that's why it's easier to talk about the results in Europe of course, we expect that to be more towards Q4 and next year as we see those inflationary impacts moderating to a more normal level.

As we mentioned we have a lot of and we look at our portfolio of contracts is also important we have a lot more contracts in Europe that are cost plus I think we've mentioned before that a lot of those that we believe were cost plus was more.

Feed and Green plus because there was not a lot of inflation in the other areas, that's packaging utilities and labor.

We already moved all of those contracts to a more holistic view of the whole cost to be cost plus that's why it's easier to talk about expected margins in Europe than in U S.

You asked if we have a portfolio and as we saw the volatility in the comp.

Out of this segment is being extreme right all the other segments in the U S. On the prepared food small bird keys, Randy freshwater services has been very stable.

But the volatility in the commodity segment has been <unk>.

Stream over the last two years, but then we saw record high prices last summer and we're seeing some very significant low prices during Q4 and Q1.

That's why it's more difficult to talk about the expected.

Profitability in the U S.

Alright, well worth a shot I appreciate the I appreciate the color. Thank you.

Got it.

Yeah.

The next question is from Andrew <unk> of BMO. Please go ahead.

Hey, good morning, Thanks for taking my questions I.

I wanted to try and good morning, I wanted to go back to the U S chicken margins and I'm trying to put together all of what you just said so it sounds like demand is good supply is going to be lower in feed cost at least on the forward curves are coming down so and I understand what you're saying about about the grilling season, but when we get post the grilling.

And if I take those three things together are you anticipating that kind of your own portfolio U S. Chicken margin would be back to normal levels and if not I guess, what would it take to get that back there from based on your expectations.

Oh, yes, we expect that to be back to what we used to see in the peso at normal levels as I mentioned looking into our portfolio and we are well balanced but the commodity segment has been extremely volatile and that's the segment that we expect to stabilize over the next call.

The small birds and the case, where the business has been stable year over year and actually were being some nice improvements in our prepared foods offering.

For that to happen once again, we expect that the more.

Or normalization on the demand side, especially in that segment of our larger birds and more feature activity on the.

On the retail side and a lot of more promotions of chicken and chicken sandwiches in the in the foodservice.

Okay, Great. That's helpful. And then my other question is just on how you're thinking about.

The feed cost side with backwardation, particularly on the corn side are you thinking of maybe getting more aggressive walking those and do you feel like you're in a good position to continue to let that rod.

Kind of change in your approach as we get to potentially a more favorable cost environment.

Yes, we're always looking into the market and the drivers to establish a position more or less aggressive right. What we are seeing.

The indication today is a good acreage I think the high prices that we saw especially of course.

Worked and they saw some record acreage or planting intentions here in U S. I think it's all going to be depending on the weather as usual.

The crop is actually evolving really well right now the planting is growing ahead of the five year average. So we're seeing some good conditions on the crop I think theres also a change in the weather patterns from the linear to El Nino, which typically brings a good weather for the planting here in the us.

We're starting from a very tight carryout, but we expect with normal yields and with the acreage that we are seeing USDA.

Planting intentions.

Much better stocks to use ratio in a much better carryout for the next crop of course that will impact more the end of Q4 beginning of Q1 as there is a lag between we feeding the birds and they beat and the birds being processed so we expect that benefit to be late Q4.

The grain cost for our operations.

Great very helpful. Thank you very much.

Thank you. This concludes our question and answer session I would like to turn the conference back over to Fabio Sandri for closing comments.

Thank you again, although we face exceptionally difficult market conditions, our strategy of diversification keep customer focus and operational excellence are designed to mitigate this challenging transitory issues and cultivate long term profitable growth opportunities.

Throughout Q1. These drivers were once again affected as we drove improvement across all regions. Despite depressed market pricing elevated input cost and continued inflation moving forward. We will continue to drive these strategies, along with them and we've and commitment to our values and our team member wellbeing.

Continued focus and relentless execution, we can cultivate competitive advantages for our business, enabling a better future for all of our team members. Thank you for joining yesterday.

Yeah.

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