Pilgrim's Pride Corporation (NASDAQ:PPC) Q1 2024 Earnings Call Transcript May 3, 2024

Pilgrim's Pride Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to the First Quarter of 2024 Pilgrim’s Pride Earnings Conference Call and Webcast. [Operator Instructions] 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 website at www.pilgrims.com. After today’s presentation, there will be an opportunity to ask your questions. I would now like to turn the conference over to Mr. Andrew Rojeski, Head of Strategy, Investor Relations and Sustainability for Pilgrim’s. You may proceed, sir.

Andrew Rojeski: Good morning, and thank you for joining us today as we review our operating and financial results for the first quarter ended on March 31, 2024. 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 have also been filed as Form 8-Ks and are available online at sec.gov. Fabio Sandri, President and Chief Executive Officer; and Matt Galvanoni, Chief Financial Officer, will present on today’s call. Before we begin our prepared remarks, I would like to remind everyone of our safe harbor disclaimer.

Today’s call may contain certain forward-looking statements that represent our outlook and current expectations as of the day of this release. Other additional factors not anticipated by management may cause actual results to differ materially from those projected in these forward-looking statements. Further information concerning these factors have been provided in this morning’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.

Fabio Sandri: Thank you, Andy. Good morning, everyone and thank you for joining us today. For the first quarter of 2024, we reported net revenues of $4.4 billion, a 4.7% increase over the same quarter last year. Our adjusted EBITDA was $372 million, up 145% versus Q1 of 2023. Our adjusted EBITDA margin was 8.5% compared to 3.6% last year. Our Q1 demonstrates the results of consistent execution of our strategies. Over the past quarters, we experienced significant volatility in the commodity cutout values, persistent inflation and challenging labor markets. Nonetheless, we maintain a focus on key customers’ partnerships, portfolio diversification, growth of value-added offerings and a relentless pursuit of operational excellence.

While these efforts reduce downside risk, they are also further strengthening our competitive advantage. As a result, our business became increasingly well positioned to realize potential upside as enhanced market fundamentals emerge. In U.S., Case Ready increased its marketplace presence, given key customer growth supported by our differentiated offerings, whereas Big Bird improved profitability through continued progress in operational excellence and stronger commodity cutout values. Small Bird remains strong given significant growth in the deli and steady performance by QSRs. Prepared Foods further diversify our portfolio as our brands grew across Retail and foodservice. Our European business continued to make progress on its profitability journey.

During the quarter, the team secured additional business with several key customers in Retail. Efforts to further diversify our portfolio continue to gain traction as our brands grew faster than category averages. These efforts were augmented through the optimization of our manufacturing network and integration of corporate support activities. Mexico’s results improved through a combination of enhanced commodity fundamentals, exchange rate favorability and consistent execution of our strategies. Led by key customer partnerships, the business continued to grow across both Retail and foodservice. Branded offerings rose double digits compared to the same period last year, further diversifying our portfolio. Operational excellence efforts to enhance production efficiencies and reduce biosecurity risks remain on track.

We also continue to drive sustainability efforts. During the quarter, a third-party conducted a limited assurance audit of our GHG emission related to our sustainable linked bond. Based on this work our emissions intensity declined by 15.6% from 2019 to 2022. Moving forward, we will continue to invest in infrastructure, operating procedures and training that can reduce our emissions intensity. Also, our investments in organic growth continued progress as we initiated startup and production at our protein conversion facility in South Georgia. Similarly, our expansion efforts in Mexico to drive profitable growth and access new geographies remains as our new projects have progressed as scheduled. Looking at feed inputs. Global corn prices fell as additional demand for U.S. corn did not emerge in export market and South America growing season experienced suitable growing conditions.

As for the U.S., a normal growth season for corn should enable for a build on the ‘24, ‘25 ending stocks above less crops already comfortable levels. Like corn, U.S. and world soybean stocks are set to build in both the ‘23, ‘24 and the ‘24, ‘25 crop years, reaching historical comfortable levels. The South American soybean crop achieved record production, limiting U.S. export demand. As for the U.S., soybean acreage is expected to increase in this crop year, further increasing supply. Additional soybean crushing capacity is also expected to emerge, which may also lower the value of soybean meal. On wheat, balance sheets are somewhat more sensitive given the overall increase in demand and slight decrease in production in last crop year.

However, the increase in global stocks of all grains may serve as a counterbalance. Moving forward, weather and crop conditions also suggest an increase in yields versus last year despite lower planted acreage potentially increasing the supply. In the first 3 months of 2024, the USDA estimates indicated ready-to-cook production for the U.S. chicken decreased 1% relative to the first quarter of 2023, impacted by less production base than the prior year. Production was also impacted as head counts did not pace at levels equivalent to last year, mainly driven by reductions in Small Bird and Case Ready categories. Contrary to the other segments, the Big Bird segment grew production during the same period. Since early in the first semester, improved flock productivity amplified egg production, translating into increased egg sets.

Even with the high flock productivity, hatchability and mortality continues to be a challenge, offsetting a significant portion of increased sets. Based on the recent trends in egg sets, higher average lightweights and low feed pricing, USDA data suggests a 1.5% growth in chicken for the full year, assuming normal season patterns. However, continued hatchability and livability challenges may limit the ability of the industry to grow accordingly to the USDA estimates. For semi-cold storage supply of chicken, USDA-reported inventories indicated a 13% reduction from the end of 2023 through the end of March. Given this reduction, inventories are almost 11% below March 2023 levels. Inventory depletion came from both front and back half, allowing the industry to enter the second quarter with significantly reduced stock levels.

As for overall protein availability, USDA anticipates limited growth as increased imports of beef, additional pork production and the expected increase in chicken supply are more than offset by a significant decline in beef production, given reduced health herd size and increased retention. Domestic volume of chicken demand showed steady growth in the first quarter of 2024. The Retail channel experienced improved volumes. In the fresh department, demand has remained robust, while pricing remained stable. Volume has grown despite a lower share of chicken on promotion, suggesting consumer everyday purchases are improving year-over-year. Volumes rose across the category, especially on the boneless breast category, where the volume growth of our key customers outpaced the overall industry growth.

Overall frozen sales also experienced higher volumes. Consumers continue to favor frozen value-added over the frozen commodity category as value-added volumes more than offset the volume declines in commodity. Within the value added, our key customers also outpaced category growth rates, suggesting that our branded offerings are well suited to capitalize with further growth as the consumer looks for convenience and differentiated solutions in the frozen aisle. As for the Retail deli, unit and dollar growth remained robust as the department can offer strong value to consumers who may be looking to trade out of traditional foodservice meals to rationalize spending without sacrificing convenience. In the foodservice channel, revenue and volume sales improved in both commercial and noncommercial foodservice distributions subchannels.

The commercial distribution subchannel experienced larger dollar growth as rising fresh wholesale prices were able to be passed through to operators. Within the subchannel, the QSR category drove the majority of volume growth, also suggestive of consumers looking for more affordable meals. The non-commercial distribution subchannels continue to build steadily, especially education and health care, adding incremental volume relative to the first quarter of 2023. In the export channel, the value of export shipments remained steady, while higher pricing, while volumes declined on a year-over-year basis. Despite the volume decrease, leg quarter and dark meal – meat inventories fell more than seasonal norms and ended March significantly below the 5-year average.

Combined exports and domestic dark meat remain supportive of pricing as USDA leg price – quarter prices averaged 18% higher than the first quarter of 2023. Since combined domestic Retail and foodservice volume sales growth outstripped the supply growth experienced in the quarter, further cold storage inventories were drawn, more than the seasonal norm. As a result, the pricing for commodity chicken experienced above-average seasonal improvements, along with jumbo cutouts value above the 5-year average beginning in the second quarter. Our U.S. business experienced another strong quarter through a combination of enhanced market fundamentals and consistent execution of our strategies. Case Ready increased its market presence as our key customers grow faster than category averages.

Additional opportunities exist, given continued consumer interest in differentiated higher attribute offerings, growth in consumer-specific products and increasing retail spreads between chicken and other proteins. Small Bird remains strong given the robust growth by key customers in Retail deli and QSR. The team continues to drive operational excellence and growth, especially at our recent expanded facility in Athens, Georgia, as production continues to improve and ramp-up remains on schedule. Big Bird has continued its focus on operational excellence efforts to improve plant efficiencies, upgrade product mix and optimize live operations over the past year. When these efforts are combined with enhanced commodity cutout values, profitability increased dramatically from prior year.

Moving forward, we’ll continue to invest in our operations to accelerate margin expansion. On Prepared Foods, it demonstrated yet another strong performance as volume and profitability grew through increased distribution in both Retail and foodservice. Diversification to brands remains the key driver as the Just Bare and Pilgrim’s portfolio collectively grew 30% in Retail relative to prior year. Equally important, our efforts in digital continue to gain traction as sales increased 20% compared to last year. Turning to Europe. Our diversification lineup enables our business to meet the evolving needs of consumers and customers alike. Chicken grew more in volume and value than any other protein offering. While overall fresh pork demand fell, bacon, sausage and gammon all increased volume throughout the quarter.

Our branded portfolio also benefited from rising consumer confidence as net sales rose 6% compared to last year. Richmond and Fridge Raiders were particularly well received, as each great 6.5% and 9.6%, respectively. Growth with key customers continues to be a priority as the team secured multiple awards for new business in Retail throughout the quarter. Several potential opportunities remain, and the team will continue to cultivate partnerships to drive innovation. Our operational excellence efforts are becoming increasingly durable as margin improved compared to last year. While we’ve made progress in all areas, our advancements in ready meals have been the most pronounced as our network optimization has evolved, and the consumer starts returning to differentiated options.

The integration of our European business continued to progress well as we are already realizing benefits. Moving forward, we will continue to invest in growth, develop our innovation pipeline and evaluate opportunities to continue to optimize our network and enable a more customer focused, nimble organization. Mexico’s results given – also improved, given more balanced supply and demand fundamentals in commodity markets, favorable exchange rates and continued execution of our strategies. Led by the Retail channel, key customer partnerships grew over 13% during the quarter. Additional opportunities for growth remain in Retail and focuses through continued excellence in quality and service. Our diversification efforts to brands and prepared continues to make progress.

Fresh branded net sales grew over 10% from last year, driven by both established offerings and recent launches. Pilgrim’s grew in double-digits through increased investments in promotion and social media, whereas Favoritos grew over 4.5x, and UNIQUE taste rose 59% compared to last year. Similarly, Just Bare is realizing strong traction as the lineup sold up during the quarter. Prepared Food grew by nearly 20% from last year’s level, driven by success in QSR, foodservice and select retail lineups. The team also further cultivated its branded portfolio of value added through the range of the principally Italian meats, both retailers and consumers have been robust to-date. Operational excellence efforts continue to drive improvement in production and fixing.

To that, the team has implemented a series of projects to optimize the manufacturing footprint in fresh and enhance production efficiencies in prepared. We continue to invest in profitable growth throughout our business. In the U.S., our recently constructed protein conversion plant in South Georgia initiated its production, further diversifying our portfolio. We also invested in plant-specific upgrades in Case Ready to strengthen our relationship with key customers. Europe has also implemented a series of projects to improve labor efficiency, mix and yields over the past year, all of which are progressing as planned and these efforts are combined with our potential opportunities we can accelerate our ability to scale our presence of differentiated offerings, especially with key customers.

In Mexico, our progress to expand capacity are also on schedule. The hatcher and feed mill in the Merida region are slated for startup during the second quarter, whereas the boiler farms are scheduled for full completion in the second half of the year. Similarly, new pullet and breeder farms remain on track as production is already underway in several locations. Finally, we continue to drive sustainability in our business to enhance operating procedures, capital investments and improved team member training. When these efforts are combined with improvements in energy and infrastructure, our greenhouse emissions in density declined by 15.6% from 2019 to 2022. Moving forward, we will continue to identify opportunities and implement projects to reduce our emission footprint.

With that, I would like to ask our CFO, Matt Galvanoni, to discuss our financial results.

Matt Galvanoni: Thank you, Fabio. Good morning, everyone. For the first quarter of 2024, net revenues were $4.36 billion versus $4.17 billion a year ago, with adjusted EBITDA of $371.9 million and a margin of 8.5% compared to $151.9 million and a 3.6% margin in Q1 last year. Adjusted EBITDA margins in Q1 were 9.4% in the U.S. compared to 1.8% a year ago. For our Europe business, adjusted EBITDA margins came in at 6.4% for Q1 compared to 5.3% last year. In Mexico, adjusted EBITDA margin in Q1 was 9.2% versus 8.5% a year ago. Moving to the overall U.S. results. Our adjusted EBITDA for Q1 came in at $242.9 million compared to $43.6 million a year ago. Recovery in the commodity chicken market, along with continued operational improvements, drove strong year-over-year profitability improvement in our Big Bird business.

As mentioned in our previous earnings call, our Case Ready and Prepared Foods businesses have continued to increase distribution with key customers, driving both year-over-year and quarter-over-quarter profitability improvement. In Europe, coming off strong seasonal results in Q4, adjusted EBITDA in Q1 was $81.5 million versus $66.2 million in Q1 2023. As disclosed last year, included in the Q1 2023 results, was approximately $10.6 million of insurance proceeds recognized in that period. The European business has shown resiliency in its profitability growth journey. The business has benefited from its continued structural reorganization, including back-office integration and its network optimization programs. We incurred approximately $14.6 million of restructuring charges during the quarter in support of its network optimization program.

We anticipate that restructuring activities will continue through at least the end of the year. Mexico generated $47.5 million in adjusted EBITDA in Q1 compared to $42.1 million last year and $6.8 million in Q4. Sequentially, from Q4, the Mexican business profitability improved primarily due to more balanced supply-demand fundamentals and reductions in SG&A costs. Overall, our SG&A in the quarter was lower year-over-year, primarily due to a decrease in legal defense costs and other operational efficiencies achieved in all regions, partially offset by increased incentive compensation of costs recorded this quarter. We spent $108 million in CapEx in the first quarter. During the quarter, we completed construction of our new protein conversion point in South Georgia.

We will continue to prioritize our capital spending plans to ensure the safety of our team members, optimize our product mix and strengthen our partnerships with key customers. We reiterate our commitment to invest in strong ROCE projects that will drive operational efficiencies and tailor our operations to address key customer needs to further solidify competitive advantages for Pilgrim’s. At this time, we are not changing our full year CapEx spending estimate of between $475 million and $525 million. We have a strong balance sheet, and we’ll continue to emphasize cash flows from operating activities, management of working capital and disciplined investment in high-return projects. Our liquidity position remains very strong. At the end of the quarter, we had over $1.95 billion in total cash and available credit.

We have no short-term immediate cash requirements, with our bonds maturing between 2031 and 2034, and our U.S. credit facility not expiring until 2028. Our liquidity position provides us flexibility during times of volatility in U.S. commodity markets and allows us to explore further growth opportunities, including organic growth to meet our key customer’s needs. As of the end of Q1, our net debt totaled approximately $2.4 billion with a leverage ratio of slightly less than 2x our last 12-month adjusted EBITDA. Net interest expense for the quarter totaled $31 million. We anticipate our full year net interest expense to be between $120 million and $130 million. Our effective tax rate for the quarter was 22.9%. As I noted in our February call, we 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 and we’ll continue to align our investment priorities with our overall strategies of portfolio diversification, focus on key customers, operational excellence and commitment to team member health and safety. Operator, this concludes our prepared remarks. Please open the call for questions.

See also

30 Most Visited Websites in the World So Far in 2024 and

15 Fastest Growing Cities in California.

To continue reading the Q&A session, please click here.