Pilgrim’s Pride Corporation (NASDAQ:PPC) Q4 2023 Earnings Call Transcript

Pilgrim’s Pride Corporation (NASDAQ:PPC) Q4 2023 Earnings Call Transcript February 26, 2024

Pilgrim’s Pride Corporation beats earnings expectations. Reported EPS is $0.59, expectations were $0.42. PPC 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, everyone, and welcome to the Fourth Quarter and Fiscal Year 2023 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.Pilgrim’s.com. After today’s presentation, there will be an opportunity to ask questions. At this time, I would like to turn the floor over to Andrew Rojeski, Head of Strategy, Investor Relations and Net Zero Programs for Pilgrim’s.

Andy Rojeski: Good morning, and thank you for joining us today as we review our operating and financial results for the fourth quarter and fiscal year ended on December 31, 2023. This morning, we issued a press release providing an overview of our financial performance for the quarter and the year, 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 date 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 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 fourth quarter of 2023, we reported net revenues of $4.5 billion. We had adjusted EBITDA of $310 million, and our adjusted EBITDA margin was 6.8%. Our Q4 performance demonstrated the continued effectiveness of our strategies of portfolio diversification, key customer focus, and operational excellence, to create more stable results. The US portfolio improved, given growth with key customers in Case Ready and enhanced production efficiencies, with operational excellence in Big Bird. Our efforts to further add value to our portfolio through the Prepared Foods continued to gain momentum, given the growth of our branded offerings through retail and increased presence in food service.

In our geographical diversification, the UK and European business continue to drive profitable growth from the impact of operational excellence efforts throughout our manufacturing network, increasing the strength of key customers, and diversification through continued progress of our branded offerings. As for Mexico, the business in the quarter was impacted by weakened supply and demand fundamentals, but our efforts to diversify our portfolio through brands continued to flourish, as both new and existing offerings grew within the trade and customers alike, and we continue to grow with key customers across retail and food service. Our investments in operational excellence efforts to expand capacity and cultivate redundancy in live operation remain on track.

For the fiscal year, net revenues were $17.4 billion. Adjusted EBITDA was $1 billion, with adjusted EBITDA margins of 6%. The US faced depressed market conditions and elevated input costs in the first half of the year, but we maintained our leadership mindset and focus on controlling what we can control, the execution of our strategies through our relentless pursuit of operational excellence. As conditions evolved throughout the year, our business became increasingly well positioned to capture the upsides and further accelerate profitable growth. While pricing has not fully recovered to five-year averages, we’re still navigating dynamic markets. Much changed through the past year. In the first half of 2023, there was substantial production growth and cold storage inventories above the long-term average.

As a result, ample chicken supply was not fully offset by domestic demand, and increases in commodity chicken values typically experienced in the spring, did not materialize. As we progressed throughout the year, given depressed market pricing and elevated cost environments, excess in chicks place fell, triggering more historical seasonal sets and placement patterns. When paired with growth in retail and food service demand later in the year, the overall slowdown of chicken production led to balanced markets and price movements alignment with historical patterns throughout Q3 and Q4. As for US chicken supply, Q4 ready to cook production decreased 2.1% relative to last year, driven by fewer heads despite slightly higher live weights. Starting in Q3 of 2023, we saw reduced excess on a year-over-year basis, and seasonal cuts at levels in line with the five-year average.

Excess continued to trend in line with the five-year average throughout Q4 2023, and hatchability was similar to last year. Taken together, net chick placements slated for production in Q4 declined year-over-year, reducing headcount. As indicated by set, placements and production data, supply in Q4 returned to more historical levels. Market pricing also declined seasonally, and trend near five-year averaged throughout quarter, even with elevated production costs. While supply declined in the second half of calendar 2023, USDA broader production outlook suggests Q1 of 2024 to be on par with Q1 of 2023, followed by three quarters of moderate growth, resulting in a yearly slight increase of 0.8%. This slight increase in chicken is coupled with a significant decline in beef production expected in 2024, as USDA outlook suggests a 2.9% reduction for the balance of the year, as a smaller herd is expected to drive fewer cattle slaughter.

Even with an expected increase in pork production of 2.1% and higher beef imports, US implying net protein availability is expected to increase less than 1%. On the demand side for 2023, the US retail market experienced positive flow in all categories. Fresh chicken was consistent with this overall trend as volume was 1.1 higher, but relatively flat in Q4, as white meat volume grew slow to levels compared to 2022. This differs from previous quarters where retail breast meat experienced large year-over-year growth. The white meat volume in Q4 was mostly impacted by an increase in dark meat offerings, especially more affordable cuts. Starting the new year, demand for white meat has increased significantly and remains well positioned as a great alternative to other proteins.

Chicken across other categories in the store, fared well in the quarter, as daily posted solid dollar and unit increases, while frozen value-added chicken continued to add incremental volume growth. The frozen commodity segment, which is much smaller than the value-added fresh and daily segments for chicken, continued its decline. Nevertheless, on the whole chicken, we provided value to customers as a center of the plate staple. The food service distribution channel continued its trend of higher volume sales with lower price levels. Similar to last quarter, chicken experienced volume growth in both value-added and commodity types across most sub-channels. Encouraging signs of volume growth remain within the channel as single continues to serve a larger base of operators relative to prior year, and realized increased buy rates, both of which had added to substantial increases compared to Q4 of 2022.

The non-commercial sub-channel maintained its trend, adding incremental volume throughout the quarter and the year. Turning to exports, global demand for chicken has been strong throughout the fourth quarter, given the global higher cost of other proteins and production movement disruptions in the Middle East. These disruptions have favored the US as it backfilled products delayed in transit. In addition, high path avian influenza in some Southeast Asia countries, are providing the US additional opportunity as local supplies are tightening. As for high path avian influenza in the US, the dynamics are relatively consistent with prior quarters, as most of our trading partners have adjusted their trade restrictions to minimize impacts as much as possible.

Our manufacturing network across the United States also continues to enable access and service to multiple markets, given our diversification of production facilities across several States and control zones. As for China, there has been limited movement on adherence to existing trade agreements. Since the majority of business is driven by chicken paws, there has been no material effect on broiler meat. The export market has also been impacted by an increased evolution by US consumers to dark meat as freezer inventories remain low relative to historical and season standards. As a result, overall stock levels remain relatively tight, providing further support for the overall market. Turning to feed grains, corn prices have eased as the supply picture in the US has improved.

A recently yield adjustment by USDA confirmed the 2023-2024 crop as a new record at 15.3 billion bushels. While some important weather periods lie ahead, with current forecast for Brazil and Argentina to have a combined record production, global ending stocks for corn are forecasted to build significantly. Like corn, soybean saw a recent adjustment to US yields, which more move it forecast ending stocks 19% higher. South American soy production has been the key to recent price movement, with Argentina’s production forecasted to rebound to 50 million metric tons from 25 million metric tons in last year’s drought. USDA’s Brazil forecast is currently 156 million metric tons, in line with last year’s record production of 162 million metric tons.

South America has continued to price its global destination to compete with US export demand. On top of soybean price reduction, soybean meal prices are falling, as US crush industry expansions yielded a record crush in Q4 of 2023. Argentina’s rebound in site production is playing a role in the global soy meal outlook as well. Soybean meal oil prices are also under pressure as US soy oil is facing competition from substitute fats and oils in food and feed, as well as renewable fuel channels. In a slightly different picture, wheat production is down year-over-year, and global ending stocks are forecasted to be tighter. In the US, wheat acres for the 2024 harvest are lower as well. Nonetheless, prices have generally moved lower, given the global feed grain picture.

Turning to the US business, our consistent focus on execution of our strategies of key customer partnership, diversification, and operational excellence, has sustained our profitability improvements despite the NIFA market fundamentals in the commodity segments, and lingering inflation throughout the quarter. Our Case Ready business continued to grow ahead of the industry, given strong demand from key customers, enhanced promotional activity, and increased distribution through retail. Our offerings of differentiated higher attribute continues to gain momentum as we added business throughout the quarter and beyond, further differentiating our portfolio. Big Bird continues to improve its operations through a combination of mix optimization, live operation improvements, and labor effectiveness.

These efforts continue to drive quarter-over-quarter improvements in production costs. Moving forward, we’ll continue to invest in training and automation to drive further improvements in yield and line efficiencies. Small Bird continues to improve both volumes and profitability, given robust demand from key customers and retail daily and QSRs. Performance was further aided by successful completing and startup of our Athens expansion product, strengthening our relationship with key customers and our operational excellence, reinforcing our foundation for profitable growth. Our efforts to further diversify our portfolio through value-added products, continued to gain momentum as Prepared Foods posted yet another strong quarter, as volumes and profitability improved.

Our branded offerings were exceptionally well received as Just Bare, and the Pilgrim’s brands collectively grew 59% compared to last year. Digital influenced sales more than double compared to last year, and it remains a key driver in our branded growth and repeat business. Food service also continues to increase marketplace traction through key customer relationships and targeted promotional activity. Moving forward, expanding distribution of our existing innovation through retail and further diversifying our portfolio in food service, will be key to driving continued growth. Our investments in people over the past few years have resulted in a suitable net staffing and reduced turnover levels throughout our US facilities. Given our sustained improvements, we were able to capture a significant portion of operational excellence initiatives throughout the plants.

As for the UK and Europe, consumer sentiment has steadily improved as inflation has shown signs of easing and real wage increase. Shoppers have also increasingly traded into chicken, pork sausage and lamb relative to other categories. Given our diversified portfolio across proteins, our business was well positioned to capturing on those strengths. Within retail, key customers grew faster than others throughout the trade and our offerings saw better than the category averages. Our branded portfolio continued to be particularly successful, as net sales grew over 10% compared to the full year 2022. Richmond and Rollover brands have been especially well received by customers. Throughout, the sales have increased over 17% and 31%, respectively. As consumers became increasingly confident in the overall economic outlook, prospects to further diversify through our recently launched brand innovation may become even more attractive.

Our food service business remains relatively stable even as consumers increase their at-home eating occasions, work in favor our strong retail presence. We continue to drive operational excellence throughout all aspects of our business. To that end, we streamlined our management and back office supporting during the quarter given our growth aspirations and diversified portfolio. B0ased on those efforts, we’ll increase our speed to market, enhance relationship with key customers, and further simplify our operations. We’ll continue to explore our alternatives to further drive profitable growth. In Mexico, throughout the quarter, the business experienced weakening supply and demand fundamentals from increased exports, imports, and lower exchange rates.

Nonetheless, the team achieved positive margins during the quarter and improved profitability compared to last year through consistent execution of our strategies. Our presence with key customers continued to strengthen as volume increased double digits throughout the quarter. These efforts were further amplified by our efforts to diversify our portfolio through brands. (Favoritos) grew by 40% compared to Q3 and is nearly four times since the beginning of the year. Similarly, unique taste is up close to 20% for the quarter, and has nearly doubled since the start of 2023. Also, the initial results from our recently launched Just Bare fresh offering throughout retail, has been very promising. Our operational excellence efforts to expand our capacity remain on track as we have completed construction of our hatchery and feed mill in Merida on schedule, with production expected to begin in March of 2024.

Our efforts to enhance redundancy in live operations through relocation of our breeder farms is also progressing as planned. To date, we have finished over 60% of the project, and anticipate on schedule completion during this first half of this year. Our efforts to drive sustainability throughout our business continue to make progress. Throughout 2023, our teams identify innovative ways to improve our energy efficiency through updated processing and equipment management techniques. As a result, all regions improved their electrical and natural gas usage intensity. We continue to make progress for our social efforts, as Newsweek recently recognized Pilgrim’s as one of the Americas greatest places for women and one of the Americas greatest place for diversity.

We also continue to invest in team member well-being through our Better Futures program, in which more than 490 Pilgrim’s team members and their children have enrolled in tuition-free higher education throughout 2023, and our Hometown Strong program that has approved more than 150 community projects for investments to date. We’ll also continue our organic growth. Our investments to support our key customer growth remains on target as our Athens expansion was completed on time and as planned. Performance to date has met our operational excellence goals, and production has achieved or surpassed quality and service expectations. Similarly, construction of our protein conversion facility in South Georgia is progressing as scheduled, and anticipate a startup in March.

We have already secured additional business with selected key customers, creating profitable growth in 2024 and beyond. Equally important, this investment further diversifies our portfolio and creates operational redundancy to ensure sufficient service level throughout our business. With that, Matt, if you can comment on our financial results.

Matt Galvanoni: Thank you, Fabio. Good morning, everyone. For the fourth quarter of 2023, net revenues were $4.53 billion versus $4.13 billion a year ago, with adjusted EBITDA of $309.5 million and a margin of 6.8%, compared to $62.9 million and a 1.5% margin in Q4 last year. In the quarter, we reported GAAP net income of $135 million versus a GAAP net loss of $155 million in 2022. For fiscal year 2023, net revenues were $17.4 billion versus $17.5 billion in fiscal 2022, with adjusted EBITDA of $1.03 billion and a 6.0% margin, compared to $1.65 billion and a 9.5% margin last year. We achieved $321.6 million of GAAP net income this year versus $745.9 million in 2022. Adjusted EBITDA in the US for Q4 came in at $200.3 million, with adjusted EBITDA margins at 7.5%.

Our Big Bird business profitability significantly improved year-over-year as throughout the second half of the year, commodity market pricing rose back to more historical seasonal levels, along with further operational improvements achieved by the business. Also driving the improvement in the quarterly US results are increases in profitability in both our Case Ready and Small Bird businesses. These businesses utilize key customer partnerships to increase distribution. Our Prepared Foods business continued its momentum of branded product sales growth, with both retail and food service customers. Finally, in the quarter we recorded approximately $18 million of insurance proceeds associated with the winter storm that impacted our operations in Texas and Louisiana in February 2021.

However, the impact of these proceeds were offset by year-over-year increase in incentive compensation and other actuarial related true-up charges during the quarter. For the fiscal year, our US net revenues were $10.03 billion versus $10.75 billion in fiscal 2022, with adjusted EBITDA of $531.5 million and a 5.3% margin, compared to $1.37 billion and a 12.7% margin last year. Coming out of a record 2022, the US portfolio proved resilience in the face of depressed commodity market pricing in the first half of 2023, and recovering in the second half to post solid financial results. In UK Europe, adjusted EBITDA in Q4 was $102.5 million versus $62.9 million in 2022. The European business delivered its seventh consecutive quarterly improvement in adjusted EBITDA.

For the full year, Europe’s adjusted EBITDA was $317.2 million versus $168.7 million in 2022. During the year, Europe announced a number of restructuring programs in pursuit of further operational excellence, including plant closures, back office support consolidation, and streamlining the management organization structure. These changes provide the foundation for further cost savings and will allow us to partner more efficiently with our key customers in the region. We recognized approximately $44 million of restructuring charges during the year and anticipate additional charges in the first half of the year as restructuring program progresses. Mexico made $6.8 million in adjusted EBITDA in Q4 compared to losing $15.8 million last year. When considering the full year, Mexico made $185.5 million in adjusted EBITDA, or an 8.7% adjusted EBITDA margin, bettering last year’s 6.1% margin.

The fourth quarter was seasonally challenged. However, in considering the full year, the supply-demand dynamic was well balanced. Our Mexican team did an excellent job in managing continually challenging live operations environment in the country. Our GAAP SG&A in the fourth quarter was lower than prior year, primarily due to reduced legal defense costs and cost efficiencies achieved in the US and UK Europe. These reductions were partially offset by higher incentive compensation costs recorded in the quarter. Overall, our SG&A decreased year-over-year by approximately 9%. We finished the year spending $544 million in CapEx. This included approximately $29 million associated with the rebuild of Mayfield, Kentucky hatchery following December 2021 tornado, in which we received insurance proceeds to cover.

Also, during the year, we incurred significant CapEx with the Athens, Georgia plant expansion, which started up in Q4 this year, and with the construction of the protein conversion plant in South Georgia scheduled to start up by the end of Q1 2024. We’ll 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 improve our operational efficiencies through automation and tailor our operations to address key customer needs to further solidify competitive advantages for Pilgrim’s. We are anticipating spending between $475 million and $525 million in CapEx in 2024.

As conditions evolve, we may revise our spending outlook to accommodate our growth aspirations. However, we will remain disciplined in our capital allocation. 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 fiscal year, we had approximately $1.8 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 US credit facility not expiring until 2028. Our liquidity position provides us flexibility during times of volatility in the US commodity markets, and allows us to explore further growth opportunities, including organic growth to meet our customers’ needs.

At the end of the fiscal year, our net debt was approximately $2.6 billion, with a leverage ratio of approximately 2.5x the last 12 months Adjusted EBITDA, which is right in the middle of our targeted leverage ratio range of 2x to 3x. Net interest expense for the year was approximately $167 million. However, this does include approximately $20 million in early extinguishment costs associated with the purchase of our 2027 notes during the fourth quarter. We anticipate our 2024 net interest expense to be between $125 million and $135 million. Our full year effective tax rate was 11.7%. Due to the mix of our multi-jurisdictional pre-tax earnings, routine income tax adjustments on discrete items were amplified, including the impact of changes in FX rates in certain jurisdictions.

As such, our effective tax rate did not follow a more normalized levels of between 23% and 25%, which we expect for 2024. We’ll continue to follow our disciplined approach to capital allocation as we look to profitably grow the company, and we’ll continue to align 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.

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Q&A Session

Operator: [Operator Instructions] Our first question today comes from Ben Theurer from Barclays. Please go ahead with your question.

BenTheurer: Yes. Good morning. Fabio, Matt. First of all, congrats on a very strong finish in 2023. Two quick questions. So, first one probably more for Fabio, as we look into 2024, and obviously you’ve talked about it in the prepared remarks as it relates to just these availability being tighter, those prices coming up, but then there should be more pork and still chicken should be the favorable one. So, as we think about just the supply side and your role within that supply, what are you doing in order to grow maybe your production within the US, leveraging also the fact that feed cost has come down. So, how should we think about Pilgrim’s specific supply situation into 24 versus 2023? That would be my first question, then I have a quick follow up.

Fabio Sandri: Sure, thank you, Ben. As we look at our portfolio, Ben, we have a strategy of organic growth in conjunction with our key customers. And I think we’ve been growing over the last year. As an example, in Q4, we increase ahead of the industry, as the needs from our key customers demand more volume from us. I think part of that was because of our project in Athens that started during Q4 to supply growth for our key customers. The pricing of grain, which should be a benefit for the whole industry and for us overall, will not change our focus on our key customers. We have a well-diversified portfolio. We are well balanced between Small Birds, tray-pack and Big Birds, and Prepared Foods, and we expect it to continue that.

BenTheurer: Okay, perfect. And then my second question just as it relates to like the trajectory and the delivery you had in the European results, because obviously we remember that in the past, you had those issues where the cost plus was more like a grain plus and not necessarily that. Where would you say you stand right now in recovering all that input cost pressure you had from Brexit over the pandemic in Europe, and what’s like kind of the run rate profitability we should assume for 2024, just given the very strong results we’ve already seen in the fourth quarter? So, how to think about European profitability in 2024? That would be my second question. Thank you.

Fabio Sandri: Sure, Ben. Thank you once again. Yes, 2021 and 2022 were very difficult for our European business. As you mentioned, most of our contracts with the customers were based what we thought was cost-driven, but it was only grain-driven. All the other costs, like labor, packaging, ingredients, were expected to stay fixed, but as we saw some massive inflation in the European region, especially utilities, ingredients, packaging, everything, we saw disconnection between our costing and our pricing. We renegotiated all those contracts during 2021, 2022, and we are seeing some of the benefits coming through our bottom line in 2023. I think, combined with that, we also simplified our business. We integrated all the plans and businesses that we have in Europe.

We have a very diversified portfolio there. Just as an example, we have the fresh pork and lamb business. We have poultry business. We have the meals business. We have a very robust branded business. We have also a prepared business and a food service business. So, there are many segments that we serve in Europe. And as the consumer is gaining more confidence in Europe, as we see inflation easing, he is going back to the retail and to the branded offerings, and we are seeing a benefit and we are capturing also that growth with our key customers in that region. As far as the future, again – yes, sorry. As far as the future, as we restructure our network and we are benefiting from our lean structure right now, we expected to see those benefits coming to the bottom line and we see the strengthening of the region as a whole.

Operator: Our next question comes from Ben Bienvenu from Stephens, Inc. Please go ahead with your question.

Ben Bienvenu: Hey, thanks. Good morning, everybody. Congratulations. I’d like to pick up where Ben left off on the Europe segment as it relates to any consideration we should give to seasonality in the business, notwithstanding the self-help initiatives that you all have underway. And then maybe reiterating the question he asked of, what is the baseline profitability off of which we should model quarter-to-quarter earnings in this business? Because you ended the year just under 5% operating margins. You started the year at 2%. You’ve made fantastic progress and margins went up sequentially every quarter during the year. So, does that trajectory continue? Do we stabilize and vacillate off of some new baseline? Help us think about the possibilities there.

Fabio Sandri: Well, of course, Ben. Thank you for the question. Yes, as I mentioned, we have a very well-diversified portfolio. To your point, there is a little bit of seasonality in Europe. I think Q4 tends to be a strong quarter with year-end festivities and we have a strong business in the branded, in the hams, and in the sausage business. Nonetheless, our businesses are growing faster than the industry. I think that’s what we want to do, to partnership with our key customers, create and differentiate offerings both in fresh, prepared, in the retail and in the food service. And we are seeing a strong beginning of Q1. Of course, there is a little bit of seasonality, and Q1 last year was still impacted by a very high inflationary period, and now we’re seeing a deflationary period.

So, what we expected is a little bit of a reduction of revenues, but we expect a continuing on our robust bottom line. Again, there is a little bit of seasonality in Q4. So, we expect Q1 to continue to be strong compared to last year, but with seasonality not as strong as Q4. But for the year, we expect year-over-year growth with all the operational excellence initiatives that it took during 2023 to come into the full year benefits in 2024.