Pilgrim's Pride Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 9 speakers on the call.

Operator

Good morning, and welcome to the Second Quarter 2023 Pilgrim's Pride Earnings Conference Call and Webcast. All participants will be in listen only mode. At the company's request, this call is being recorded. Please note that the slides referenced during today's call are available for download from the Investors section of the company's website at www.pilgrims .com. After today's presentation, there will be an opportunity to ask questions.

Operator

I would now like to turn the conference Call over to Andy Rojewski, Head of Strategy, Investor Relations and Net Zero Programs for Pilgrim's.

Speaker 1

Good morning and thank you for joining us today as we review our operating and financial results for the Q2 ended on June 25, 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.pilgrims.com along with the slides for reference. These items have also been filed as Form 8ks 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.

Speaker 1

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

Speaker 2

as of

Speaker 1

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 ks and our regular filings with the SEC. I would now like to turn the call over to Fabio Sandri.

Speaker 2

Thank you, Andy. Good morning, everyone, and thank you for joining us today. For the Q2 of 2023, we reported net revenues of $4,300,000,000 with an adjusted EBITDA of $249,000,000 translating to a 5.8% Margie, our strategies of portfolio diversification, key customer focus and operational excellence demonstrated As we grew margins relative to prior quarters across all regions, despite continuing challenging in market fundamentals in some of our business and overall Elevated production costs. In the U. S, our diversification across bird sizes in case ready and small bird Branded products and prepared offerings continue to mitigate depressed commodity cutout values in the big bird segment.

Speaker 2

Our key customer focus created a significant pipeline of promotional activities across leading retailers and food service providers. As for the U. K. And Europe, our continued focus on operational excellence and optimization of our manufacturing network and back office Support activities continue to support our growth trajectory. Our diversification efforts continue to gain momentum Several of our branded offerings grew faster than the category average.

Speaker 2

In Mexico, our live operations improved given our investments in diversification of our over the past several months. Our branded offerings continue to gain marketplace traction given the success of our recent launches. These efforts We're further aided by increasing balanced supply and demand fundamentals and favorable exchange rates. Starting with the U. S.

Speaker 2

In the Q2 of 2023, ready to cook production of U. S. Chicken experienced an increase of 2.2% relative to the Q2 of 2022. Production growth was supported by increased headcounts and the industry continues to shift production away from the smaller board segments Into the heavier weight ranges, supporting a consistent year over year growth in average live weight. Considering more recent trends as we progress into the Q3 2023, the industry has consistently placed fewer chickens over the prior 2 months, mostly due to a year over year reduction in hedgeability, suggesting a more strained supply scenario in the incoming quarters.

Speaker 2

The USDA 2023 outlook indicates smaller increases in supply for the balance of 2023, with growth in Q3 and flat production in Q4. As for overall supply of protein, USDA maintains the expectation of a smaller domestic production availability for the calendar 2023 With significant smaller production of beef for the remainder of the year. With the U. S. Consumer facing relatively lower beef and pork Availability.

Speaker 2

Lingering food inflation above recent historical levels, combined with significantly higher interest rates impacting available income, Chicken may be advantaged given its availability, affordability and flexibility. During the Q2 of 2023, domestic volume showed muted growth. The retail channel explains near increasing volumes across all departments. In particular, the fresh department was only marginally better across both front half and back half cuts, Supported by increased promotional activities, especially for dark meat, we remain positive on the potential of this category as tightening competing protein supplies Increased promotional activity is now beginning to drive sales volume more consistently. Elsewhere, in the retail The frozen and deli departments added incremental dollar sales through growth of prepared deli and value added frozen products, As consumers shift from a pattern of more store trips and less pantry stocking.

Speaker 2

In the foodservice channel, Revenue sales declined due to reduced year over year pricing, while volume sales increased. The commercial distribution from the channel witnessed the most Dollar sales declined, driven by fresh chicken pricing that remains well below the Q1 of 2022 pricing. However, the decline in dollar sales has translated to demand stimulation as indicated by an increased number of operations buying Translation to a 5% year over year volume sales increase. While the Q1 was characterized By volume growth, primarily from wings and tenders in the foodservice channel, we are now recently seeing year over year volume growth in breast meat, A positive sign for the supply and demand balance. The noncommercial distribution sub channels continue to work towards full recovery from the COVID-nineteen pandemic, Subchannel, the noncommercial remains an important outlet for chicken, in particularly value added products, and we are encouraged by the continued recovery of the subchannel.

Speaker 2

Pricing has shown signs of recent improving supply and demand balance, with gains steadily improving off lows since late June. And even more recently, Positive price movements on boneless brands, a counter seasonal movement for this time of the year. Throughout Q2, U. S. Broiler exports continue to grow at a healthy rate and attractive value.

Speaker 2

U. S. Broiler meat exports in April May Grew a combined 1.2%. Driving the growth in the Q2 were Taiwan, Mexico and China, all of which have grown volume year to date. As we've seen, continue to see positive sales growth in this channel, U.

Speaker 2

S. Cold storage inventories of combined dark meat are down 10% year over Current sales and industry inventory positions have enabled relatively steady leg bar pricing, Which trended seasonally, but played nearly 15% above the 5 year average. Hi, Pat, Ethan and influenza also slowed through the quarter as only 2 commercial outbreaks related to Turkey's occurred in April. Latos allowed many of the trade restrictions for certain states to expire. Other than China, we expect to see further easening of export Given our geographic and channel diversification in U.

Speaker 2

S, we increased our trading destinations to 89 countries overall, And our customer base continues to grow. We are very optimistic that exports will continue to balance U. S. Domestic sales further stabilized forward pricing, but remain vigilant to any occurrence of high path AI in the United States. Moving to Feeding Ingredients.

Speaker 2

Large Brazil production of both corn and soybean have replaced U. S. Exports and increased local ending stocks estimates. U. S.

Speaker 2

FDA recent estimate of current crop year ending stocks for corn increased 4.5% from last quarter estimates. Soybean and new stocks estimate for the current year increased as well, up 25,000,000 bushels in the most recent WASDE report. Taken together, this factor suggests some relief for the historical tight crop balance sheet. Looking ahead to next year, Yes. We recently raised corn planted acreage to 94,100,000 acres, 5,500,000 acres more than the previous year.

Speaker 2

Although corn prices experienced some volatility throughout the Q2, given unfavorable weather in May June, A change to a more active rainfall pattern across major production areas prior to key yield determining crop stages Reducing corn's future pricing throughout the quarter. Nonetheless, corn conditions were unchanged in the last crop progress Report with 57% in good to excellent state and 30% in fair conditions. While weather risk remains, Increased acreage and competitive price corn from Brazil should mitigate potential issues for the upcoming year. Even though the current soybean crop has also benefited from the shift to weather patterns, The overall impact was somewhat subdued, giving a transition to more corn and acreage. From this point on, August weather will be critical for soybean yields.

Speaker 2

On the left, domestic soybean meal should be well supported as U. S. Biofuel policy is supportive to soybean oil demand, And the crush industry continued to expand. Despite some price volatility during the Q2, wheat balance sheets are generally well supplied. Although the FDA July was the report indicate a drop of 2,800,000 metric tons in the upcoming year, it And volatility for feed ingredients globally.

Speaker 2

But availability continues to be better than prior years, given increasing production and consequent Increasing Ending Stocks. Throughout the past 12 months, our U. S. Business experienced a period of significant volatility. During this time, our supply chain incurred dramatic increases in grain and elevated cost of production inputs, including utilities, labor, ingredients and packaging.

Speaker 2

We also experienced extreme volatility in the commodities segment meat prices. Nonetheless, our diversification across both sizes, Branded offerings and prepared items, combined with our key customer partnership and focus on operational excellence, help mitigate those challenges, helping us to capture the upside in the market while protecting the downside. Throughout this period, our Big Bird team maintained an Short and very focused on operational excellence and drove improvements in production efficiency. During Q2, overall demand was somewhat muted Several industrial customers experienced a decline or limited volume growth given increased retail pricing levels. We are encouraged by the recent improvements in the commodity pricing, but further improvement is needed to achieve sustainable margin levels.

Speaker 2

Keith Reddy, continue to focus on partnership with key customers as the team cultivated a variety of promotional efforts over the next several months, Creating opportunities for mix enhancement and growth. Small bird remained relatively steady throughout the quarter, giving exceptional Strong performance in Delhi with key customers. The team also realized similar success in the foodservice channel from key customer partnerships among leading QSRs. Our Prepared Foods business continued to drive profitable growth relative to prior year through increased distribution with key customers, operational improvements and enhanced mix. Our momentum in Foodie Cook branded business is becoming increasingly durable as Just BARE and Pilgrim's Collectively grew 56% year over year, with over onethree of this growth driven by product innovation.

Speaker 2

Equally important, our marketing programs for Just BARE has been remarkably effective as our brand awareness more than doubled. E Commerce has realized similar success in prepared as it drove significant volume growth compared to prior year. We will continue to drive our strategy of portfolio stream optimization, and we'll continue to work in partnership with key customers to provide Shaded offerings through distinct operational capabilities, including organic and Novozza Biotix ever products for both fresh and prepared categories. We will also continue to invest in operational excellence and profitable growth. Our automation projects are on course And our Athens expansion and construction of a protein conversion plant in South Georgia are progressing as planned, and start up is still expected by the end of the year.

Speaker 2

Turning to U. K. And Europe. Our margin improvement efforts remain on track. Although inflation has moderated, costs continue to be challenging.

Speaker 2

Nonetheless, demand for our branded and customer specific offerings remain resilient even as cost increases were passed through on shelf or manual. In pork, supply and demand fundamentals in live operations have improved with the rationalization efforts of the herd, both in UK and Europe over the past 12 As market conditions continue to evolve, our vertical integration with pig farmers will be beneficial in our ability to ensure sufficient Our key customer strategy has once again proven instrumental as we have been awarded significant additional well over 250 new items over the next 6 months. We have also cultivated a strong promotional pipeline throughout the summer and beyond, which is expected to enhance mix and bring new users to our categories. Our diversification efforts throughout prepared offers continue to gain traction. Our frozen meals, snacking and hot dogs offering all grow faster than the category averages.

Speaker 2

In addition, our brand, Fridge Raiders, Officially became one of the top 100 most chosen brands among food manufacturers. We are seeing similar success in the alternative protein space As original, mid free increased shares over the past year in both frozen and fresh categories. We'll continue to drive operational excellence in manufacturing. Although we have made significant progress in our overall staffing levels, We remain vigilant regarding the impact on inflation, and we continue to invest accordingly in our teams to ensure sufficient labor availability. We have made strong progress in our network optimization efforts in the U.

Speaker 2

K. To realize production and cost efficiencies. As for Mexico, the overall business improved as growth in fresh reemerged throughout multiple channels, especially retail. Similarly, our prepared business grew to close to double digits, driven by branded offerings and success with the QSR channel. Our momentum was further amplified by increasing favorability market fundamentals and exchange rates.

Speaker 2

Additionally, our ongoing redesign of our live operations footprint, investment in housing and enhancements in management procedures significantly diminished previous issues related to board mortality Our diversification efforts As both are far exceeding historical category growth in fresh. We will also look to accelerate our branded growth as our team will launch a fresh offering of Just bear in Mexico and no antibiotic ever lineup that has realized significant success in the United States. Given these efforts, our Mexico business can further differentiate this portfolio, providing additional insulation for Market situations in the live market or lower priced chickens or pork imports. Our focus on operational excellence and geographic diversification remain steady as our investments in the Yucatan Peninsula and our live operation to ensure domestic growth remain on course. As part of our leadership journey in sustainability, we recently completed an inventory of our global greenhouse emissions We have also implemented a series of programs and monitoring systems to evaluate our energy usage intensity, resulting in notable improvements across our production network.

Speaker 2

Our sustainability efforts beyond our production facilities also continue. In the U. K, our pilot of an energy self sufficient poultry farm Recently released its 1st commercial flock. We continue to monitor our developments in all these areas and adjust accordingly to accelerate our progress. With that, I'd like to ask Concierge Marc Gavononi to discuss our financial results.

Speaker 3

Thank you, Fabio. Good morning, everyone. For the Q2 of 2023, net revenues were $4,310,000,000 versus $4,630,000,000 a year ago, With adjusted EBITDA of $248,700,000 and a margin of 5.8% compared to $623,300,000 and 13.5% margin in Q2 last year. Adjusted EBITDA margins in Q2 were 4.6% in the U. S.

Speaker 3

Compared to 18% a year ago. For our UK and Europe business, adjusted EBITDA margins came in at 5.2% for Q2 compared to 3.4% last year. In Mexico, adjusted EBITDA in Q2 was 12.2%, virtually flat to 12.3% a year ago. Moving to the overall U. S.

Speaker 3

Results, our adjusted EBITDA for Q2 came in at $113,500,000 compared to a quarterly profit $520,900,000 a year ago when the jumbo cutout was near all time highs. This dramatic change demonstrates our ability to capture the upside of Favorable industry conditions will mitigate the impact of industry downturns. Over the last two quarters, we have grown sequentially despite challenging market conditions. During April May, we saw slight improvements in commodity chicken pricing, whereas June reflected seasonal declines. Nonetheless, overall commodity cutout values remain below the 5 year average throughout the Q2.

Speaker 3

Over the past couple of weeks, we have seen an uptick in commodity Our diversified U. S. Product portfolio across bird sizes and brands, along with our key customer partnerships helped us mitigate the impact of the challenges in market pricing in our big bird business during the current quarter. The U. S.

Speaker 3

Small bird and prepared food businesses continued their strong In the UK and Europe, adjusted EBITDA in Q2 was $68,100,000 $42,600,000 in 2022. Although inflation has been moderating, certain costs do continue to escalate to the UK and Europe business. Through its previously disclosed I'm sorry, through its previously discussed mitigation efforts in 2022, the business has shown resiliency in its profitability growth journey, the business has benefited from the back office integration in its network optimization programs. During the Q2, we expanded the network optimization program with the announcement of the closure of our Ashton abattoir, which has been finalized here in July. As we optimize our fixed cost structure, it is important to note that our UK network footprint can continue to support growth with our key customers.

Speaker 3

We incurred approximately $30,000,000 of restructuring charges during the quarter in support of these changes. Mexico generated 67,200,000 adjusted EBITDA in Q2 compared to $59,800,000 last year. The Mexican business has experienced Both more balanced supply demand fundamentals and a reduction in bird disease challenges in its live operations due to the team's extraordinary efforts. Overall, our SG and A in the quarter was lower year over year, primarily due to a decrease in employee related costs in the U. S.

Speaker 3

And other targeted cost efficiencies achieved in our U. S. And U. K./Europe business. We spent $156,000,000 in CapEx The second quarter spending is higher on a run rate basis, primarily due to our investments in the Athens, Georgia expansion through automation and tailor our operations to address key customer needs to further solidify competitive advantages for Pilgrim's.

Speaker 3

Although Q2 was challenging due to volatility in the U. S. Chicken commodity market, our overall balance sheet and liquidity position remains strong. With the completion of our $1,000,000,000 of 10 year notes offerings in April and the cash we generated during the Q2, We have approximately $1,800,000,000 in total cash and revolver availability as of June 25. Our liquidity position provides us flexibility during this more volatile time in the U.

Speaker 3

S. Commodity markets and allows us to explore further simplification in our capital structure, Such as the elimination of subordinations of the potential unsecured structure, as well be opportunistic with possible liability management to exercise with our existing debt, including paying down our 2027 notes. As of the end of Q2, our net debt totaled $2,900,000,000 With a leverage ratio of 3.16 times our last 12 months adjusted EBITDA, which is just outside of our target range of 2 to 3 times. With the challenges we experienced in the Q4 of 'twenty two and our Q1 of 2023 profitability, our net leverage ratio is anticipated outside our target for the next couple of quarters. Net interest expense for the quarter totaled $39,500,000 We anticipate our full year net interest expense to be between $160,000,000 $165,000,000 As you saw in our earnings release, our effective tax rate in the quarter was significantly impacted by discrete tax items, primarily in Mexico and the UK.

Speaker 3

Due to the mix of our multi jurisdictional pre tax earnings for the 1st 6 months of this year, routine income tax adjustments on discrete items are being amplified, including the impact of changes in FX rates in certain jurisdictions. As such, our effective tax rate is not following Our more normalized level of between 23% 25%. Our best view for the full year effective tax rate is approximately 10%. However, this amount will fluctuate depending on the mix of earnings across tax jurisdictions. Our capital allocation approach will We remain disciplined as we look to grow the company and will continue to align our investment priorities with our overall strategies, portfolio diversification, growth with key customers, Operator, this concludes our prepared remarks.

Speaker 3

Please open the call for questions.

Operator

We will now begin the question and answer session. In the interest of allowing equal access, we request that you limit your questions The first question comes from Ben Thor with Barclays. Please go ahead.

Speaker 4

Yes. Good morning, Fabio and Matt. Congrats on the results. On the two questions, just the very first one, if we take a look at some of the expenses you've booked Help us understand where are we right now in the process? What else to expect?

Speaker 4

And what's like kind of a reasonable SG and A run rate go forward That we know, like kind of where to model that out. That would be my first question.

Speaker 3

Yes, it's Matt. Let's start with the restructuring. I think for us right now, Based on where we're at with the announced programs, we may have call it $3,000,000 to $5,000,000 left on those programs or any type of Cash costs that will drag through into Q3 that we couldn't, we'll say, expense ahead of time that had to be done during period itself. We are still continue to look for ways to optimize our network. We're always there for operational excellence, But relative to the programs we have right now, that's the remaining cost that we would have here down at the cash side.

Speaker 3

Going to remain relative to your SG and A question, When we think about the SG and A that's there today, I think that's a decent run rate. I mean, we're looking at things, I mean, you have to take the restructuring costs out and we try to exclude that for you. But We are starting to see more normalization on the SG and A. We've seen some of the efforts that we've done relative to the back office integration. We'll We continue to see some of that play through for some efficiencies as we go forward into 'twenty four and 'twenty five.

Speaker 3

But generally, I think the SG and A run rate we have now It's pretty decent when the model for it. I don't know if Fabio you want to add anything on the restructuring.

Speaker 2

No, just on the restructuring, I think you

Speaker 4

saw the benefits

Speaker 2

flowing into our results as we It's flowing into our results as we reduce the operational footprint without reducing our production. I think what we just did was move product from more efficient facilities and closing some smaller facilities that were not something that we need to invest on

Speaker 4

Okay, perfect. And then my second question is just around like general pricing dynamics In the U. S. And how you feel about the pricing across the different bird sizes, clearly, There was an impact again this quarter on a year over year basis, but how should we think about pricing within the 3 categories, Big, medium and small bird, from here onwards, also as it relates to some of the comments you made as to some of the Industry behavior on lower placements.

Speaker 2

Yes. I think we need to, as we mentioned, drill down to the specific I think on the small bird, the supply and demand is very well balanced. We are seeing pricing for the smaller birds Being on the 8 piece or in the deli mugs, higher than the 5 year average, it's going through a normal seasonality, But it's significantly higher than 5 year average. So the supply and demand, it's really stable, and we're seeing very good margins in those business. On case ready, I think the supply demand is also well in balance.

Speaker 2

What we expected was more feature activity during the Q2 that we've seen Actually, we're seeing some improvements right now. And as we mentioned on the prepared remarks, I think the advantage for That is more available and more affordable. So we're seeing a lot of promotional activity coming on. So we expect to see some demand increase on the retail That will make a more favorable supply demand structure. I think the weakness over the last Year already has been on the big bird commodity segment, right?

Speaker 2

As we look into the increase in production, Almost all the increase in production has been on that category. And as we see less Growth in the retail, it's also further enhanced more meat available in that category. So that's what has depressed the prices, especially on the breast meat, And we've seen the pricing below 5 year average. The other category that is also weak is wings. Looking forward, I think wins were weak because we saw some operators taking them off the menu because of the shortages and the high price of last year.

Speaker 2

As of now, we're already seeing a lot of foodservice operators bringing wings back to the menu and increasing their promotion of bone in wings instead of Boneless wings. For the breast meat, we are seeing increasing as well demand on the foodservice categories, And we expect one of the category that was really weak during the last 6 months, which is the industrial, which is further processors That we're also suffering from lower volume, albeit at high prices for them. So as we see More promotional activities in the retail, both for prepared foods overall and for the fresh categories. We're seeing more demand for the in this Commercial or commodity category. We're seeing some signals of increasing prices over the last 2 weeks, which is very encouraging.

Speaker 4

Okay. Perfect. Thank you.

Speaker 2

Thanks, Ben.

Operator

Our next question comes from Ben Bienvenu with Stephens Inc. Please go ahead.

Speaker 5

Hey, thanks. Good morning, everybody.

Speaker 2

Good morning, Ben.

Speaker 5

I wanted to follow-up on Ben's question just around kind of what you're Seeing across the various bird sizes and Fabio relative to your comments around the supply demand balance for each of those sizes, Have you all thought at all about any capacity conversions between sizes across your network, perhaps from big bird to smaller size? And if not, what would you need to see either from a magnitude of commodity big bird weakness or duration to make that consideration.

Speaker 2

It's a good question. Thank you, Ben. I think we're always looking on ways to improve our portfolio, right? And we mentioned in the past that We want to increase the value of our offerings to branded Prepared Foods, and we've been doing that growing our branded and our Prepared Foods operation. On the fresh side, We have an exposure to the commodity markets, and I think we look as a portfolio.

Speaker 2

So if you look over the last 12 We saw some very strong pricing on that commodity, and we saw our results last year that we were able to capture that upside. So it's a portfolio option for us that when the market is really depressed as it is right now, we have all the other segments with more stable margins 2nd level of our earnings. So we are happy with the portfolio that we have. Of course, we're always looking for Being diversified options or differentiated options like no antibiotics ever, organic, So we're always looking for those options to add value to our production. But overall, our portfolio is well balanced in the fresh categories.

Speaker 2

We are always investing to grow with our key customers. So I think it's more an issue of growth rather than just So we recently announced the increase in production in our Athens facility, which is in the smaller category. So if there's any balancing in our portfolio, I believe it's going to be true growth and it's going to be through the growth in partnership with our key customers.

Speaker 5

Okay, very good. My second question is on the Mexico segment, very strong results in the quarter. And I'm wondering any commentary you can provide What you're seeing so far in 3Q? And I know it's a difficult segment to forecast, but kind of what your expectations are for the year from that segment as well?

Speaker 2

Of course, we've always mentioned that Mexico is very volatile quarter over quarter, but we expect very steady and growth We have a particularly weak quarter last year. Q2 and Q4 last year were very challenging for Mexico With a lot of increasing production on domestic and also some strong exports from Brazil and U. S, Both in pork and chicken impacting, especially the North market in Mexico. What we are seeing today is a more balanced Supply and demand, we're seeing some increase in the demand because of the economy of Mexico is doing well. Of course, the Change rate is also helping their consumers over there.

Speaker 2

So we're seeing starting of the Q3 very promising. Usually, Q3 is not the strongest because of the schools being reset, but we're seeing very steady supply and demand so far in Mexico. As we mentioned, there is a lot of volatility there, especially because there is the live market operation That tends to be very susceptible to diseases. So the supply and demand actually can change rapidly there, but so far Has been very well balanced and with the demand being very strong.

Speaker 5

Okay. Thanks so much.

Operator

The next question comes from Peter Galbo with Bank of America. Please go ahead.

Speaker 6

Hey guys, good morning. Thanks for taking the question.

Speaker 3

Good morning,

Operator

Peter. So maybe before

Speaker 6

I end my question, Fabio, I take umbrage having come and grown up in Buffalo, New York, but there's an idea of a boneless wing versus bone in. So I just wanted That was on the record. But maybe just to start guys, on U. S, I actually wanted to dive into the costs On gross profit, it was actually down in the quarter and I think that was more driven by Lower kind of prepared food chicken prices more so than maybe input costs or feed costs, which I would think would start to be a tailwind going forward So maybe you can just comment on that into the back half of the year, how you're seeing the costs play out more so in the U. S, particularly as Chicken prices are still under pressure.

Speaker 2

Yes. I think analyzing the cost, as we mentioned, we have a Very unique approach to our opening the gaps in the operation and closing our gaps. So we have every supervisor, every plant Fully dedicated to identifying the opportunities that they have on a perfect operation.

Speaker 1

So we call that opening

Speaker 2

the gaps. And then we have a methodology for All those operations should close the gap with action plans and specific timing and specific responsibilities. So I think every year, we Identify those opportunities during the budgeting process, and then we created the action plans to close those opportunities during the year. This year has been very difficult, I think, because of staffing levels that we only achieved fully staffing levels right now. We're still training our operators and team members to achieve the best yields possible.

Speaker 2

So I think it's been a ramp up in In terms of capturing those operational excellence activities throughout the year, right now, we are already positive and we're Getting to our budgets. But for the 1st semester, I think it was, as I mentioned, difficult to close those gaps because of that Lack of labor into our plans.

Speaker 6

Go ahead. But is it fair to think about feed I mean, feed flipping to a tailwind kind of from a cost perspective in the second half?

Speaker 2

Yes, of course. As we talk about, I think there's availability of grain in the United States, weather permitting. Of course, I think for corn, We already passed that period, so weather was favorable for the production and yields. We have strong acreage, higher than last year. I think for soybeans, the period of weather is still ahead of us.

Speaker 2

So we expect better or normal weather through August, so we can capture The yields that we are expecting, but we are seeing the signaling on the future market pricing, which is lower than it is Today, that it could be calculated. I was just cautioned that there is a lot of portfolio In terms of pricing that we have, right, so we have some of our products are based on cost plus, are based on the grain. Of course, what can define the profitability of the chicken industry is the supply and demand of chicken, not Certainly the prices of corn and soy that we proved through the years that we can have a very strong profitability Even with high prices of grain and corn, and we can also have a margin not what we expected even with lower corn and soy. But Overall, of course, it's better for us to have a more stable and more in line with

Speaker 6

And then maybe just Back to your comments, I think you said on the second half in U. S. On production. I think you had industry growth you were quoting on kind of volumes growing in 3Q and maybe flattish 4Q. Is there any reason to think that you guys would be materially different from that either in a positive or negative direction?

Speaker 2

Yes. We have the leading indicators through USDA, right, which is the chip placements and the exits. I think if you look at the numbers Over the last 10 weeks, it has been lower year over year. So what we expect for the incoming 8 weeks is actually a lower I think what's happening in the industry is that despite having more eggs because we have a Lane block that is actually larger than last year's, the age It's higher and the hatchability is lower. So despite having a little bit more eggs, As you can see on the ag set number from USDA, the cheek placements are actually significantly lower than prior years.

Speaker 2

So I think that leading indicators made us believe that the production in Q3 and Q4 will be lower year over year.

Speaker 6

Got it. Okay, that's helpful. Thanks guys.

Speaker 2

Thank you. Thanks Peter.

Operator

The next question comes from Adam Samuelson with Goldman Sachs. Please go ahead.

Speaker 7

Yes, thank you. Good morning, everyone.

Speaker 3

Good morning, Adam.

Speaker 7

Good morning. So I guess my first question is in the U. S. And this was in the queue this morning. Your prepared chicken sales or prepared food sales were down 27% year over year.

Speaker 7

In the press release yesterday evening, you talked about your branded Just BARE and Pilgrim's prepared sales in the U. S. That were up 56% year over year. Hoping you can just help square that. Is that just a mix of how much wings are going through your prepared plants?

Speaker 7

Or help us Bridge kind of a pretty significant decline in prepared foods in the U. S?

Speaker 3

Well, I think part of it, Adam, is going to be price, right? Because you think about in the past, last year when we were having this, Their input costs are much higher commodity chicken price. That was the input cost, the base cost for the prepared business. And so from a price standpoint, That ended up really kind of impacting higher prices last year than compared to this year. But relative Growth, we feel very good about our volume growth, but it's really sort of a price difference than year over year.

Speaker 3

I don't know if Bob you want to add anything

Speaker 2

And I think you're right, Adam, especially on the lean category. As we saw, the lean pricing last year was close to $3 in this area is close to $1 right? So we price our prepared foods accordingly. Of course, we maintain our margins, and that's why we believe the This is a more stable business than all the others because we can maintain the margins despite highs and lows of the commodity pricing. We are also doing a lot of promotional activity this year, especially on the wins as well to further enhance and gain market share on that Category, on the food service mainly.

Speaker 7

Okay. All right. That's helpful color. And then as I think about the actions you're taking on Automation on improved efficiencies, some of the plant conversions in the U. S.

Speaker 7

And the restructuring in the EU. I was hoping if we could Kind of tie that all together a little bit in terms of how to think about the savings and at least the fixed cost reductions that You would see at least from the UK stuff and but kind of help us think about the earnings contribution from some of those investments and the timing that you would be looking to realize those over the next 12 months to 24 months?

Speaker 2

Yes, sure. It's a great point because we're always, as I mentioned, we're always looking for ways to opening gaps, identifying opportunities and capturing operational improvements. Some of these operational improvements translate into cost improvements. Some, and I'll say it's fifty-fifty on yield improvements, which helps On the margins and on the revenues. So instead of leaving meat on the bone, we deboned better, so we can sell that as a whole meat instead of On the rendering of protein conversion part.

Speaker 2

So fifty-fifty, I'll tell you. It is how we see that. The automation efforts also help on improving yields because the machine is better than operator that is not there, right? Still today, labor or a manual deboning yields better than the machine. But once again, the machine do its job every day, while we have a lot of turnover in our Operator and we have our team members, and we need to train them to capture the optimal yields in our plants.

Speaker 2

So the automation has been benefiting. And over the years, we've been disclosing what we expect in terms of operational efficiencies. And it's been around $100,000,000 to $200,000,000 in terms of operation improvements. A lot of that, it is to catch up with our industry that is never ending improving their efficiencies as well. And some of that will flow to the bottom line through the operational efficiencies.

Speaker 2

As in Europe, It's a little bit different because we not only that, we also have been optimizing our network As I mentioned, we are producing the same volume in just a low number or smaller number of Because we're consolidating some of the operations in the most efficient plants, which translate into better cost, Some better yields as well as the new facilities are highly automated and have better equipment and more trained skilled Labor, we expect, like I said, from $100,000,000 to $200,000,000 in operation improvements every year.

Speaker 7

Okay. And if I could squeeze one more follow-up just to Peter's last question. I think you kind of when you're talking about the production and output in the second half, Referring to industry numbers. The industry was up a bunch in production and output in 4Q 2022. Pilgrim's in the United States was down.

Speaker 7

So Are you assuming your own production to be flat to down in the United States in the second half of twenty twenty three? Or is it going to be up because your Comparisons are very different than the industry's.

Speaker 2

Sure. As we always mentioned, we always match our supply to our demand, especially with our key So we expect to be in line with the industry but in line with the expectations of our key customers. We have best Fuel rates in the industry, close to 99% to our key customers throughout the pandemic and right now and Expect to continue that. So we will adjust our production to that demand. We're seeing more promotional activity From our key customers, so we see some increasing demand over there.

Speaker 2

But typically, Q3 and Q4 Our periods where we have lower demand of chicken because of the Thanksgiving and year end. So normally, We reduced our outputs during those quarters. Comparing year over year, again, we expect to be in line with the industry and in line with the demand From our key customers.

Speaker 7

Okay. All right. I appreciate the color. I'll pass it on. Thanks.

Operator

Next question comes from Andrew Strelzik with BMO. Please go ahead.

Speaker 8

Hey, good morning. Thanks for taking the questions. For my first one, I guess I wanted to focus on the Big Bird segment. And you talked about Some of the recent improvements in cutout values as well as needing more improvement. And so I guess my question is Based on what you're seeing from a demand pickup perspective and the supply outlook, do you think that that's enough to get us in that segment back to supply demand balance?

Speaker 8

Or do we need More outsized actions on one side or the other. I don't know which one you think would be more likely, but from the supply side or the demand side. But is that enough to get us You think we need to be from a supply demand?

Speaker 2

Yes. I think looking at the supply and demand in specifically in the So we have 3 main segments of demand in the big bird. So it's the industrial, it is the food service and it is the national accounts, so The QSRs and further processes. I think the one that was lacking, foodservice has been strong. I think further process has been in pace with expectations.

Speaker 2

I think the one that has been weaker for us, it is the industrial category. And this industrial category is Prepared Foods Companies. And as we saw some of the latest Announcements and press releases, they are increasing their prices close to 10% year over year and reducing their volumes Close to 8%. It's the latest number that we saw on that industry. So that 8% translated to lower volume of Preparedness and lower demand for protein.

Speaker 2

Overall, I think once again, beef and pork have been very muted to down production, which is favoring chicken, but still is a lower demand than we expected in that category. As We see more promotional activity, and I think we're going to see some deflation in the retail. We expect to have a stronger demand, Especially in that category. Foodservice, once again, continued to be strong. International accounts continued to be strong.

Speaker 2

So that is one of The drivers that we need to a more balanced supply and demand. I think also the fresh retail with more promotional activity with the deflation as well In the retail, we can further enhance that demand in the big bird as we always use big bird to augment Our operation in the case ready for this period of time when we have big promotional activities. So those two Factors can help on the demand for that category. For the supply, I think what we are seeing once again is that the placements has down over the last 8 weeks, which will translate into lower production year over year for the coming quarters.

Speaker 8

Okay. Okay, great. And then there was a comment in the press release as it related to the U. S. The team is in the process of executing a variety of action items to further drive operational excellence.

Speaker 8

That was the quote. And I guess I was curious, are there kind

Speaker 2

of new or incremental things

Speaker 8

that you can Things that you can elaborate on within that or maybe as we roll through the back half of the year and into next year, if there's nothing newer, what are the key items there that we should I'll be focused on what do you think will be most impactful?

Speaker 2

Yes. Just like I mentioned, we Every year, we identify all the opportunities that we have, both in live and in the plant. We call that opening our guests. And then the team with a comprehensive plan with actions, responsibilities and timelines to close those gaps and achieve our operational improvements. A lot of that has been on yields.

Speaker 2

I think as I mentioned, over the last year, we have been not fully staffed And that has impacted the training. It has impacted the skill of our team members to do a Better yield improvements and a better yield on our operations. So there's a lot of training involved. There's a lot of Staffing our plans involved. I think that will help on the yields for us to capture that $100,000,000 to $200,000,000 like I mentioned.

Speaker 2

We also are investing a lot in our live operations with improved housing, which could help our fit conversions And we help our efficiency overall. And we help our feed conversions on top of what the primary breeders already deliver to their new breeds.

Speaker 8

Okay, great. Thank you very much.

Operator

This concludes our question and answer session. I would like to turn the conference over to Fabio Sandri for any closing remarks.

Speaker 2

Thank you again. Over the last months, we faced many external challenges. But together with our team, the consistent execution Our strategies of diversification, key customer focus and operational excellence are essential to navigate these transition issues and reinforcing our foundation Those strategies have demonstrated their effectiveness as margin improved despite challenging business conditions. We will continue to drive these strategies along with an unwavering focus on value and team members' well-being. Given these efforts, we can further strengthen our competitive advantage and cultivate a better future for our team members.

Speaker 2

Thank you for joining us today.

Operator

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

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Key Takeaways

  • For Q2 2023, Pilgrim’s Pride delivered net revenues of $4.31 billion and adjusted EBITDA of $249 million, with a consolidated margin of 5.8% versus 13.5% a year ago.
  • In the U.S., portfolio diversification across bird sizes, branded and prepared foods drove relative margin growth despite depressed big‐bird cutout values, while promotional activity stimulated retail and foodservice volumes.
  • In the U.K. and Europe, operational excellence and manufacturing network optimization—including the closure of the Ashton abattoir—helped lift adjusted EBITDA margins to 5.2% in Q2 from 3.4% a year ago.
  • Mexico improved live operations and capitalized on favorable exchange rates and balanced supply/demand, with branded and prepared offerings gaining traction and nearly doubling prepared-foods volumes year over year.
  • Pilgrim’s remains well-positioned financially with ~$1.8 billion of total cash and revolver availability, $156 million in Q2 CapEx funding automation and the Athens, GA expansion, and a net leverage ratio near 3.2× amid ongoing debt-management plans.
A.I. generated. May contain errors.
Earnings Conference Call
Pilgrim's Pride Q2 2023
00:00 / 00:00