Pilgrim's Pride Corporation (NASDAQ:PPC) Q4 2021 Earnings Conference Call February 10, 2022 9:00 AM ET

Company Participants

Matt Galvanoni – Chief Financial Officer
Fabio Sandri – President and Global Chief Executive Officer

Conference Call Participants

Operator

Good morning and welcome to the Fourth Quarter and Fiscal Year 2021 Pilgrim's Pride Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please note that the slides referenced during today's call are available for download from the company's investor website at ir.pilgrams.com in the Events and Presentations section. As a reminder, today's conference is being recorded.

I would now like to turn the conference over to Pilgrim's Pride Chief Financial Officer, Matt Galvanoni. Please go ahead, sir.

Matt Galvanoni

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 December 26, 2021. 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 also have been filed with Form 8-Ks and are available online at sec.gov. Fabio Sandri, President and Chief Executive Officer, and I 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 those factors has been provided in today's press release, our Form 10-K and in our regular filings with the SEC.

I will now turn the call over to Fabio.

Fabio Sandri

Thank you, Matt. Good morning everyone and thank you for joining us today. For the fourth quarter of 2021, we reported net revenues of $4 billion, a 30% increase over the same quarter last year, being 20.6% organic growth and 9.4% of sales contribution from the acquisition of Pilgrim's Food Masters. We had adjusted EBITDA of $317 million, up 54% versus Q4 last year and up 96% compared to Q4 2019. Our adjusted EBITDA margin was 7.8% compared to 6.6% a year ago and 5.3% in Q4 2019. Adjusted EPS was $0.56 versus $0.25 in the fourth quarter of 2020 and $0.14 in Q4 2019. For the 2021 fiscal year, net revenues were $14.8 billion, a 22% increase over last year and adjusted EBITDA of $1.3 billion was up 64% compared to the previous year.

Adjusted EBITDA margin was 8.7% compared to 6.5% for 2020 and 8.5% in 2019. Adjusted EPS was $2.28 in 2021 and $1.02 in 2020 and $1.62 in 2019. We're pleased with our overall performance in the fourth quarter of the year. Our U.S. and Mexico business have shown strength throughout the year with robust demand driving growth market pricing. Our European business was severely challenged in the second half of the year, while battling inflationary headwinds and labor shortages. We welcome Pilgrim's Food Masters in late September and are excited to have them as part of the Pilgrim's family, improving our portfolio and generating strong profitability in the fourth quarter.

With the addition of the branded prepared foods in Europe with our presence and differentiated portfolios in the U.S. and Mexico, we have an excellent base with the synergies and scale for further growth in the future. We are proud of the successful execution of our strategy to have a diverse portfolio of products across multiple geographies to provide more consistent financial results. We still have significant opportunities and we have remained focused on execution and on serving our key customers while keeping our key members health and safety at the forefront.

Turning to general market conditions for U.S. chicken. In the fourth quarter, industry production was up 1.1% over Q4 2020 on increased headcount and heavier average live weights. Production grew despite ongoing poor hatchability rates. USDA outlook for 2022 indicates an expected 1.6% annual increase in supply with stronger year-over-year growth expected in the first half of the year. It is important to note, in an effort to produce more eggs, the industry is holding its flock longer. The industry is selling more eggs, but by holding the hands longer, the hatchability perform declines due to the age of the hen.

In the U.S. market, overall domestic demand was very strong for the year. Foodservice saw year-over-year improvements due to the sustained recovery in both the commercial and noncommercial segments, while annual foodservice demand was also 4% higher than 2019 pre-pandemic levels. 2021 commercial restaurant volume, sales remain above 2020 and 2019 as operators increase their chicken purchases. Although still below 2019 levels, the noncommercial segment also posted significant year-over-year growth as the education, recreation and lodging sub-segments recover significantly to support the volume growth.

The retail channel while demanding less volume when compared to the pantry loading during 2020, continue to exceed demand levels experienced in 2019. Demand for fresh chicken in 2021 declined versus prior year, however, was up 4% versus 2019, while retail daily posted positive year-over-year improvement. Combined, the net increase in demand pressured cold storage stocks, which remain 14% below December 2020 levels. As a result of sustained strong demand, which we estimated to be above pre-COVID baselines coupled with only mild supply growth, prices for commodity chicken should remain sustained as demonstrated by the jumbo cutout, which priced at 71% above the five-year average during the fourth quarter. Even with the increase in prices, we see chicken to be the most affordable and most available meat protein option as the aggregate production of all other meat proteins is anticipated to be down year-over-year in 2022.

Turning to our business segments. In U.S. chicken very strong consumer demand supported market pricing at high levels as we continue to work with our customers to pass along the inflationary input costs and increased labor costs with experience. Our mix continues to be impacted due to the continued labor shortages. The labor shortage affects our ability to hand portion and trim products that command a higher margin. As we have been seeing, labor is a national-wide problem across numerous industries and while showing signs of improvement, it will still take time to resolve.

We will continue to invest in automation to increase the safety of our team members and reduce repetitive and redundant tasks. In the U.S. market, our retail sales in Q4 were flat year-over-year. However, the performance beat the overall market, which was down 3% due to a difficult comparison versus 2020 pantry loading. With trip frequency increased in Q4 above the 2019 baseline, we saw retail daily sales improved year-over-year versus 2019. We see upside potential in the category as year-over-year improvements in unit sales continued and chicken remains the most affordable meat protein for the customer.

Commercial foodservice in U.S. has experienced continued strength with foodservice restaurant demand improving again in Q4 with a third consecutive quarter of double-digit year-over-year growth. Contributing to the commercial foodservice year-over-year improvement with foodservice restaurant growth and operators continue to increase by rates of chicken. Mainly data suggest that certain core items such as standards, strips and nuggets, increased penetration during 2021. We believe this is due to the prevalence of off-premise eating and chicken's versatility and convenience. The noncommercial channel posted a third consecutive quarter with year-over-year growth, topping 40% with the recovery in orders from education, recreation and lodging segments. However, the channel continues to lack 2019 levels.

Pilgrim's has adjusted volumes and mix between channels to adapt to changing consumer demand patterns. We are well positioned to adjust production and channel mix, given our presence across all bird sizes from large to small. Commodities large bird deboning continued its momentum throughout the year and also again in the fourth quarter generated the largest profit improvement year-over-year. The volume, revenue and profit growth were driven by support from foodservice demand and overall strong market pricing.

Our case-ready business delivered revenue growth in the quarter versus the prior year, but is pressured by the increase in grain and labor costs. We have negotiated prices in order to recover the increased costs we are experiencing, but most importantly we continue to partner with key customers, delivering superior service levels and generating both growth and value for them. Strong QSR and improved retail daily demand drove year-over-year revenue and profitability improvements in our small bird business for both the quarter and the full year. We continue strengthening this business unit with our partnership with key QSR customers.

In our U.S. Prepared Foods business Q4 sales grew over 50% year-over-year and volume was up 7%. Margins improved despite higher input costs as we focus our product lines on more profitable segments. For the full year, we grew our top-line by 25%, has significantly improved our operations. During the fourth quarter, our branded products Just BARE and Pilgrim's, sales grew 94% year-over-year, repair sales were up 385% versus Q4 2020, while fresh was up 45%. New product innovation is driving sales and leading our category growth as innovation reached 30% of sales. We continue to gain distribution and build the Just BARE brand through e-commerce channels. These channels represent 25% of prepared and case-ready branded sales and remain a strong channel for the Just BARE brand with the fourth quarter e-commerce sales up 56% versus Q4 last year.

We experienced significant inflation in our feed inputs. Corn prices varied in Q4 as outside commodity and macro markets provided support to grains. USDA has reported a domestic corn crop of more than 15 billion bushels which is expected to increase the carry out to 1.5 billion bushels this year from 1.2 billion last year, even with the large demand estimates, particularly from exports. We have recently seen a slowdown in both the ethanol market and the corn export market in China. We feel confident on an increase in corn stocks this year even if prices stay elevated on inflation concerns and strength in the energy markets.

Soybean meal prices have rapidly increased in recent weeks due to production concerns from the South American exporters. Persistent drought has reduced soybean production potential, notably in Southern Brazil and Argentina, USDA projecting a U.S. soybean carryout of 350 million bushels, up from 257 million last year. We expect production losses in South America and global growth in vegetable oil demand to continue supporting oil seeds markets in the near term.

European feed wheat prices peaked during Q4, but have recently come off of their highs as larger crops were realized from the southern hemisphere exporters. We believe stocks in the major wheat exporters have bottomed out and are set to increase both this year and next year. Geopolitical tensions in the Black Sea continue to be monitored, but we believe the expansion in the world wheat suppliers will help ease feed cost and wheat over the medium term. As always, we have a current grain position that reflects our view on the risk in the market with anticipation of this increase in supply of grain in 2022.

USDA chicken inventory was down 14% from the previous year. Combined, dark meat inventories decreased 3% from September 2021 and are down 8% year-over-year. The decrease was expected given only marginal production growth and strong demand. We believe the margin of 1% increase in Q4 inventories compared to September were due to export supply chain disruptions. Total USDA broiler export sales through November were flat driven by declines in shipments to China and Vietnam related to intermittent COVID lockdowns that affected demand offset by increases in export sales to Mexico and Cuba.

China’s pricing and consumer demand for paw, however, remain historically high levels that are expected to continue through 2022. Exports are unique executive of a resilient market and a more balanced growth trade environment despite supply chain issues with ports and container lead supplies. As we enter Q1, we are seeing increased demand in markets most affected by COVID in 2021, along with ongoing growth in other markets carrying over from 2021.

As the supply chain begins to recover, we expected exports this year to outpace 2021 and achieve new record volumes. The drivers for the U.S. chicken export growth in 2022 will be the recovery of COVID impacted foreign markets and their currencies and improved supply chain environment and higher oil prices. Any additional spread of AI influenza and AI swine fever overseas will bolster U.S. exports as those countries impacted will have negative effects on their ability to export to certain countries.

U.S. export volumes continue to outpace the industry, and we expect this to continue as we expand our client and country base. We are taking specific positions where appropriate and we are confident in our ability to execute throughout the supply chain, prioritizing profitable business for us. I mentioned AI flu as it relates to other countries. And as you likely know, there has been reported cases of high path AI in wild birds in U.K. and in U.S. in the Carolinas, Virginia, Indiana and Florida. Related to the U.K., we are closely monitoring the situation, but there has not been a significant impact to Moy Park. We have a strong biosecurity protocol and we have implemented extended measures in those regions where AI has been found.

Turning to our international business, Mexico has another strong year. During Q4, Mexico's volume increased 3.4%, while net revenues increased 8.7%. EBITDA margins were impacted by weaker demand at the beginning of Q4, combined with the arrival of additional chicken import quotas. However, demand picked up again in early November and lasted through the end of the year.

As we begin 2022, we are seeing much stronger demand than is typical for this time of the year. As is often the case with Mexico, our results can be quite volatile quarter-to-quarter, but are stable on our annualized basis. In Mexico, we continue to invest in our brands. Our prepared foods business with our Pilgrim's Del Dia and Alamesa brands, again grew sales double digits in 2021. In the Fresh business, we also grew double digits with our Pilgrim's brand and still evolving into higher-value segments, including the successful launch of [indiscernible] as we seek to increase our brand awareness in modern channels.

We continue to be excited about opportunities in Mexico. We continue investing in expansions in Veracruz and investing in line expansions in current operations in order to support the growth in both our fresh and branded business.

Moving to the U.K. and Europe, In Q4, our Moy Park business as well as the poultry initiatives as a whole continued to face steep cost increases and labor challenges. In addition to COVID-related absences, post-Brexit rules have made it more difficult for EU workers to enter the U.K., causing some workers to simply return home. While Moy Park’s Q4 revenue and volume grew 7% year-over-year, EBITDA was impacted by cost increases, including grains, nutrients, utilities and freight.

During the second half of the year, pricing did not keep pace with inputs. However, we continue to negotiate with key customers and are establishing new pricing models to recover and mitigate the inflationary impact facing the business. As always, we will continue to deliver operational excellence through programs designed for labor efficiencies, better agricultural performance and improving yields in addition to tight SG&A control.

As we expect negotiation with our customers to wrap up in the first quarter, the challenging environment is expected to continue in the first half of 2022, with improvements coming in the back half. Additionally, we improved CapEx deployment, order bookings, pricing and foodservice recovery. We are confident that Moy Park will continue to grow and return to its profitable growth trajectory.

Despite the challenging environment, we are very proud of our fee rates to our key customers and high-quality products that enable us to increase our share of the market. As a result of our superior value offerings, we are able to achieve a significant long-term volume increase with one of our key customers in the U.K. that will deliver efficiencies for both parties.

In Pilgrim's U.K. business, volumes and sales grew at a rate of less than 1% each. Sales were negatively impacted by lower export prices and lower EU meat prices. The market remains very challenging with downward pressure on peak prices due a surplus of pigs in Germany, resulting from export bans associated with the African swine fever. Feed prices have continued to rise, while labor and utility costs remain inflated. As a result, despite having an advantage when compared to the market, the live operations are at an unsustainable loss due to market pricing being below cost of production.

With the lots of producers are incurring, the U.K. breeding herd has started to downsize and conservative estimates that are approximately 7.5% of fouls have been removed from production in the past six months. Despite the significant herd production, pig prices across EU and China are currently at unsustainable levels. Looking ahead, our facilities that could not export to China have been audited and is awaiting approval to regain access.

Although current market pricing of prime parts to China is low, it is the best market for some other parts of the pig. We expect that market conditions will continue to be challenging in the first quarter of 2022 due to the backlog of pigs, no profitability and headwinds on labor supply chain inflation. However, we are negotiating our contracts with our key customers to address recovering of the inflationary factors, and we expect the market will begin to turn in Q2 due to the herd reduction.

Given through the significant headwinds, we are committed to support and add value to our key customers in this difficult time and to deliver high-quality products to consumers. As the largest producer of high welfare pig U.K., we are adapting our portfolio to current market conditions and driving forward with numerous operational excellence initiatives.

To conclude on Pilgrim's U.K., I'm pleased to say that we are rewarded for our leading sustainability program. Sustainability is part of our culture throughout the company, and I am proud of the team for their efforts being recognized.

Turning to Pilgrim’s Food Masters, the meats and meals business were acquired in the last September. Food Masters posted a solid quarter in a challenging environment, with revenue and profitability in line with expectations. We outperformed the market in our U.K. branded meat portfolio, which share against each of our pillar brands. Richmond Sausages, refrigerated meat snacks and Denis's Meats in the Irish market. Within Meatfree, our Richmond brand continued to gain traction with market share growth of 84%, driven by strong brand activation, new retail listings and the launch of Richmond Meatfree bacon.

With our Meal Solutions business, chilled ready meals grew well ahead of the market with double-digit growth from increasing contributions from new business wins that are secured over the last 12 months. Our food to go business well over recorded strong growth at the evening of COVID restriction in UK benefit the category.

During Q4, raw material cost increases, rising supply chain costs and disruptions driven by labor availability impacted margins. In response, we work with our key customers to recover in [indiscernible] and other inflationary and made good progress in what continues to be a dynamic environment.

While it was a busy period commercially for Food Masters, we moved forward in several important strategic initiatives. Our CapEx building progress to plan with the construction underway and expansion of our snacking capacity in investments of approximately $5 million.

Integration activities are progressing well, and we are investing significantly in technology to drive efficiencies and improving ways of working to enable future growth. As we enter 2022, we expect to see further volatility in UK and Irish markets. However, we believe our Food Masters business is well positioned to deliver growth from our strong base industry, leading brands and private label solutions.

With our history of successful acquisitions in U.S., Mexico and UK, we have demonstrated our ability to grow our business and diversify our portfolio in a disciplined manner. We look forward to leverage again our global scale to grow and our portfolio and provide current and future customers with high-quality products.

Another very important priority for our global business is progressing our sustainability agenda. We are focusing on advancing the company through a number of ESG-related initiatives. We committed on being net zero greenhouse emissions by 2040. In support of this initiative in April, we issued a $1 billion bond of sustainable linked, which require us to reduce our global greenhouse emissions intensity by 30% by 2030.

We are happy to report that we are ahead of our target reductions as we close 2021. As we think about our social scorecard, we are very proud that we have again achieved a safety record that is far superior to the industry. Safety is a condition appearance, and our progress in this area has been outstanding. Also, during the year, we follow through our commitment to create a better future for our team members through our hometown strong contributions where we developed projects to support the communities we are inserted.

Finally, we continue to strengthen our overall compliance programs to first-class standards.

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

Matt Galvanoni

Thank you, Fabio. For the fourth quarter of 2021, net revenues were $4.0 billion versus $3.1 billion a year ago, with an adjusted EBITDA of $316.7 million and a 7.8% margin, compared to $205.4 million and 6.6% margin in Q4 last year.

We achieved $138 million of adjusted net income compared to $60.4 million in Q4 2020. In the quarter, we reported GAAP net income of $36.8 million versus being essentially flat in 2020. The most significant adjustment in the current quarter was related to an additional $132 million accrual related to legal settlements.

For the fiscal year, net revenues were $14.8 billion versus $12.1 billion in fiscal 2020 with adjusted EBITDA of $1.3 billion and an 8% – 8.7% margin compared to $788 million and a 6.5% margin last year. We achieved $557.4 million of adjusted net income this year.

For the year, we reported GAAP net income of $31 million versus GAAP net income of $94.8 million in 2020. Adjusted EBITDA margin for the quarter were 11% in the U.S., 6.3% in Mexico and 2% in Europe. For the fiscal year, adjusted EBITDA margins were 9.8% in the U.S., 14.8% in Mexico and 3.5% in Europe.

Adjusted EBITDA in the U.S. in Q4 was $265 million compared to $74.9 million a year ago and $115.9 million in 2019. Sales were up due to increased pricing supported by strong consumer demand. Gross profit margins were higher compared to both 2020 and 2019. In Mexico, adjusted EBITDA in Q4 was $27 million versus $77.7 million a year ago and $6.7 million in 2019.

Net sales were up due to higher volumes at relatively flat year-over-year pricing. However, margins were negatively impacted due to elevated input costs, primarily grain.

In Europe, adjusted EBITDA in Q4 was $24.7 million versus $52.8 million in 2020. As Fabio previously stated, our UK business' profitability was significantly impacted by inflationary headwinds in the quarter. Grain, nutrients, utility, packaging, labor and transport costs, all are significantly higher year-over-year.

Relative to these costs, Moy Park experienced approximately $150 million of annualized cost increases over the last quarter. The team continues down the path to finalize contracting structures with our customers to mitigate these cost increases. Also included in Pilgrim's UK's fourth quarter results is an $8 million charge to reduce its inventory value due to the market price of pigs being so depressed.

Similar to Moy Park, the Pilgrim's UK team is working diligently with customers to recover the increase in input costs as it has been occurring as current pricing levels are unsustainable. As Fabio mentioned, we are very pleased with our first quarterly results from Food Masters. Its fourth quarter adjusted EBITDA margins were 9%. This business is not immune to the inflationary headwinds in the UK and is anticipated to feel some of this impact in the first quarter of 2022.

However, we are confident in recovering the impacts of these increased costs to pricing and are very excited about the growth prospects for this newly acquired business. Company-wide, we incurred COVID-related costs of approximately $6 million in the fourth quarter compared to $18 million in the prior year.

For the full year, we incurred $37 million of COVID-related costs compared to approximately $100 million in 2020. Overall, our SG&A in the fourth quarter was higher than prior year, primarily due to the addition of Food Masters and increases in legal defense costs. We finished the year spending $382 million in CapEx.

We'll continue to prioritize our capital spending plans in 2022 to 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 anticipate spending $410 million to $430 million of capital this year with the addition of Food Masters, increased spending on automation and for projects to support our journey to net zero greenhouse gas emissions by 2040. We have a strong balance sheet. We will 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 $1.7 billion in total cash and available credit. We have no short-term immediate cash requirements with our bonds maturing in 2027, 2031 and 2032 and our term loan maturing in 2026.

At the end of the fiscal year, our net debt was $2.8 billion with a leverage ratio of less than 2.2x the last 12 months adjusted EBITDA, which is at the lower end of our target leverage ratio range of 2x to 3x. Net interest expense for the year was approximately $115 million. Exclusive of the debt extinguishment cost of $24.7 million we recorded in the second quarter. We anticipate our 2022 net interest expense to be between $125 million and $135 million. Also, we anticipate our effective tax rate to be between 25% and 27% in 2022.

As always, we are focused on optimizing our capital structure to create shareholder value and grow the company. Our capital allocation strategies will remain aligned with our growth strategy and each opportunity to be evaluated against our value creation standards.

I will now turn the call back over to Fabio for closing remarks.

Fabio Sandri

Thank you, Matt. As we conclude the call, I'd like to speak to the devastating tornadoes in December. As the largest employer in the Greece County, Kentucky, which suffer overwhelming loss of life, we have committed $1 million in relief and instituted a $4.5 million annualized wage increase for the team members at our Mayfield production facility.

We did this to show our support for and commitment to this community, which we are so proud to be part of it. We stand with Mayfield and its entire community in our tops and in our prayers during this time of recovery and healing.

Finally, I would like to thank all of our global team members for everything they do for the Pilgrim's family every day. Your dedication and support in this very challenging environment, the past two years has not gone unnoticed. We thank you and commend you for continuing to provide high-quality products to our consumers.

That concludes our remarks today. Thank you for your interest in Pilgrim's.

Operator

Thank you. And as the company will not be taking questions today, the conference is now concluded. We thank you for attending in today’s presentation. You may now disconnect your lines.

Question-and-Answer Session

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