Pilgrims Pride Corp
NASDAQ:PPC
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
25.39
53.82
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Pilgrims Pride Corp
You don't have any saved screeners yet
Good morning, and welcome to the Third Quarter 2021 Pilgrim's Pride Earnings Conference Call and Webcast. [Operator Instructions]. Please note that the slides referenced during today's call are available for download from the company's investor website at ir.pilgrims.com in the Events and Presentations section.
I would now like to turn the conference over to Pilgrim's Pride Chief Financial Officer, Matt Galvanoni. Please go ahead.
Good morning, and thank you for joining us today as we review our operating and financial results for the third quarter ended September 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 as 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 our regular filings with the SEC.
I will now turn the call over to Fabio.
Thank you, Matt. Good morning, everyone, and thank you for joining us today. For the third quarter of 2021, we reported net revenues of $3.8 billion, a 24% increase over the same quarter last year and adjusted EBITDA of $347 million, up nearly 14% versus Q3 last year and up 34% compared to Q3 2019.
Our adjusted EBITDA margin was 9.1% compared to 9.9% a year ago. Adjusted EPS was $0.67 versus $0.66 in the third quarter of 2020 and $0.45 in Q3 2019. I'm pleased with the performance this quarter as we continued facing challenges resulting from the ongoing pandemic and unprecedented economic conditions in U.K.
Our overall portfolio performed well in the third quarter despite labor shortages that affected our product mix in both the U.S. and U.K. In U.S., commodity chicken pricing remained well above 5-year averages and our diverse portfolio allows us to capture the upside while protecting us from future downsides.
Turning to the broader U.S. market. Chicken production in Q3 increased an estimated 1.8% over last year due to a slight increase in head along with higher average live weights, putting production at 0.3% greater on a year-to-date September basis. USDA data indicated that the hatch rate continued to decline throughout the quarter, suggested limited growth in the next months. USDA outlook indicates a 0.5% increase in supply in Q4 which will take the total increase for the year at 0.3%.
In the U.S. market, retail demand remained extremely strong throughout the quarter. While trip frequency has yet to return to pre-COVID levels, consumers are still buying more units per trip compared to 2019, and demand for fresh chicken remains above the pre-COVID base line. Meanwhile, Retail daily posted improvements year-over-year and frozen category continues to grow even when compared to extremely strong demand levels in Q3 last year.
Foodservice in U.S. continued to recover as commercial chicken demand was comparable to pre-COVID levels. However, the noncommercial channel of foodservice are still slow and chicken demand retained below 2019 levels for noncommercial outlets, such as schools and workplace cafeterias. The overall increase in demand has maintained pressure on already low cold core storage stocks, which remains 17% below September '20 levels. As a result of robust demand, commodity chicken pricing remains significantly above the 5-year average and only recently began to align with seasonal trends.
In our U.S. business, demand and pricing has been strong. However, we have not been able to capture all of this increased demand and pricing due to continued labor shortages. The labor shortage and its affects our product mix are ongoing challenges that will be with us for a while, affecting our ability to hand portion and trim products that command a higher margin. Unfortunately, labor is a nationwide problem across numerous industries, and it will take time to resolve.
A great example of our key customer partnership with our retail customers was to demonstrate our flexibility to itemize our product mix to continue to provide superior levels of services. In the U.S. market, retail sales in Q3 had a difficult comparison versus 2020 pantry loading, but still remain comfortably above 2019 levels in the fresh and frozen segments. However, given the trip frequency reduction, retail daily sales are still down versus 2019, but we see upside potential in this category as the improvements in unit sales continued.
Commercial foodservice in U.S. has experienced continued strength with full service restaurant demand improving again in Q3 with a second consecutive quarter of double-digit year-over-year growth. While QSR demand remains robust with Q3 improving 6% versus 2020 and nearly - 14% nearly versus 2019. We continue to monitor the commercial foodservice demand, while the industry address labor shortages. The noncommercial channel demonstrated strong year-over-year improvements with the reopening of schools. However, the channel continues to lag 2019 levels. Pilgrim's has adjusted volume 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.
Commodity large bird deboning continued its momentum throughout the year and once again generated significant improvements year-over-year. Chicken remains the most affordable meat protein, which supports the growth in the commodity sector. The volume, revenue and profit growth were driven by support from foodservice demand and overall strong market pricing.
Our case-ready business delivered volume and revenue growth versus the prior year, but is pressured by the increase in grain and labor cost. We adjusted prices in the second quarter and continued operational improvements to adjust these cost headwinds. We continue to partner with key customers to deliver both growth and value for them. Strong QSR and retail daily, demand drove year-over-year improvements in our small bird business. We continue to see strength in this business unit with our partnership with key QSR customers. In our U.S. Prepared Foods business, Q3 sales grew 45% year-over-year, driven by price adjustments to cover high input costs, including meat, labor, ingredients and supplies.
Year-over-year sales volume was up 6.5%, driven by strong demand of our retail consumer brands, Just BARE and Pilgrim's. Our volume in the consumer channel was up 16% versus Q3 last year and more than double 2019 levels as we are seeing the results of our efforts to positively grow our retail brands, supported by digital marketing. We continue to gain distribution and build the Just BARE brand through e-commerce, retail and club stores. And we had an additional boost in brand awareness from successful social media advertising and great customer reviews.
Corn prices moderated in Q3 as the U.S. began harvesting what is expected to be the largest crop since 2016. USDA is currently projecting a corn crop of just over 15 billion bushels, which is expected to increase from the carryout from 1.2 billion bushels last year to 1.5 billion bushels this year, even with a large estimate for U.S. export demand. China is also expected to see a recovery in supply after importing 28 million tons of corn this year while also seeing a 13 million ton increase in their domestic production. Although global energy and wheat markets are supporting corn currently, global stocks are in a better position than they were last crop year.
Soybean meal prices also fell during the quarter on expectations that the U.S. suppliers will build from last year. USDA is currently projecting a carryout of 320 million bushels, up from 256 million last year. Export demand is also expected to fall 8% from last year on lower demand from China. In addition to the U.S. supplies, Brazil is expected to produce a record 144 million tons, which should build global stocks even further. Meal prices are also being depressed by the large expected increase in demand for soybean oil into the renewable diesel, which is driving soybean oil prices higher.
European feed wheat prices increased in Q3 despite a 13 million ton increase in domestic production. In the U.K. specifically, where we source the majority of our wheat, we have seen a 50% increase in production from last year's poor harvest. Stocks in the main exporting countries declined again this year, driven lower by our large drop in Russian wheat production. Export tariffs in Russia are also having a negative impact on the production and availability of exportable wheat out of the Black Sea.
Overall, we feel confident in large supplies of corn and soybean that should be a tailwind for feed cost in U.S. and Mexico going into 2022. While wheat prices continue to remain high until we see a relief in global supplies next summer. USDA chicken inventory was flat from June to September, a period of time in which seasonal increases in total inventories will be expected and remains down 17% from previous year. Combined meat inventories have increased by 11% from June, but are down 17% year-over-year, which is in line with expectations despite continued export supply chain disruptions.
Regarding exports. Although the data is still incomplete for Q3, throughout August, total USDA broiler exports, including paws grew by 6.6%, driven by Mexico, up 27%. Exports to China grew 4%, primarily due to the paw market, which made up nearly 62% of China's U.S. poultry imports. The increase in poultry export volumes and value are driven by the competitiveness of U.S. poultry. Restrictions due to the Avian influenza and shipping bottlenecks around the world. We are optimistic that countries with COVID restrictions will ease through Q4 and will further support U.S. export demand.
Pilgrim's export volume grew combined to outpace the industry, and we are utilizing additional ports to avoid congestion on the East Coast and in the Gulf of Mexico. Our U.S. operations has managed to increase labor costs and higher grain prices through the benefit of a strong cutout and increased pricing to our customer base to recover these higher input costs. While effective operations are helping us to control costs.
Following our strategy of diversified portfolio and balance of cost plus market and fixed pricing contract structures provide us the platform to manage throughout the volatility of our input costs. Also, our team has done a fantastic job navigating both supply chain disruptions such as trucker shortages and inflationary pressures to support our key customers and deliver strong quarterly results.
Turning to our international business. Mexico continues to perform well, although easing from the levels achieved in Q2 as expected due to the seasonality of the business. In addition, we're beginning to see the effects of inflation on inputs. Grain pricing, however, has moderated since the first half of the year, allowing for more competitors to reenter the market. Also during the quarter, we saw a significant increase in chicken and pork imports into Mexico, causing pressure on market pricing. We continue to focus on our business through process improvements in our fresh business as prepared foods saw ongoing growth in QSR and foodservice, in addition to growth in our retail brands, Pilgrim's, Del Dia and Alamesa.
During Q3, we experienced unprecedented challenges in U.K. due to the current economic environment. We were faced with sudden serious labor shortages as EU workers returned home following Brexit affecting our ability to process back and transport products. This is in addition to the significant cost pressure from feed ingredients, especially oils and micronuclei, and increased cost for utilities, logistics, labor, and packaging. With these hits to our cost, Moy Park's EBIT was impacted both versus Q3 last year and versus the prior quarter. Although sales were robust, they were at significantly reduced margins as we experienced unprecedented costs to clear the backlog of birds we have been unable to process.
We began to see price recovery at the end of the quarter as we open negotiations with our customers to recoup some of the extraordinary costs we experienced, including a recent 300% increase in CO2 costs due to the much publicized fertilizer company slowdowns in U.K. This should provide support to margins as we move into Q4. We will continue to focus on operational excellence initiatives that deliver labor efficiencies, better agricultural performance and improving yields in order to maintain our supply to key customers and superior levels of services.
As in previous quarter, we are seeing consistent improvements in the Moy Park foodservice division, and we expect this channel will see significant recovery as COVID restrictions are lifted across the U.K. and European markets. Relative to the industry over the past 12 months, Moy Park continues to outperform the average of the competitors in Europe, and we will continue to deploy CapEx on projects that drive quality, safety and efficiency through reduced labor that tends to be an issue through the Moy Park business.
The Pilgrim's U.K. business continued to be severely impacted by increased grain costs and low hog prices due to the high supply in Europe. Despite market challenges, including worsening labor availability and inflationary pressures in U.K., we have been profitable on an EBITDA basis for the last 12 quarters in a row. During Q3, Pilgrim's U.K. year-over-year retail volume remained relatively flat prior to last year, while food services volumes demonstrated grow back to pre-COVID levels.
Also, our year-over-year volumes to China decreased due to the continued suspension of our export license at 2 plants as a result of COVID-19. Like Moy Park, Pilgrim's U.K. business has been affected by the labor and truck driver shortage and soaring energy costs. In addition, pork pricing has been depressed following China's decision to stop accepting hogs from Germany. While we continue to make progress within our operations, the improvements were not enough to overcome the external costs that are pressuring results.
We are optimistic about building our operational improvements by continuing to optimize our manufacturing footprint, extracting best-in-class operational excellence, capitalizing on export opportunities, optimizing our portfolio, and strengthening our growing business with key customers, to drive innovation in value-added, high-margin areas. We have a great team in Europe dedicated to generating results by focusing on factors within our control, while ensuring and protecting the safety and health of our team members. We are firmly committed in supporting the U.K. farming industry and supply our key customers in order to feed the United Kingdom and Ireland.
We're also excited about our portfolio products in U.K. and Europe, given that on September 24, we closed the Kerry Food Group's Meats and Meals acquisition. Going forward, this business will be known as Pilgrim's Food Masters. Pilgrim's Food Masters will support key customer relationships by providing an array of value-added protein products and prepared foods anchored by a portfolio of strong brands.
As one of the largest protein producers in U.K. and Ireland, we see the opportunity to innovate within our key customers and develop new products that will excite consumers in the region. Under this challenging environment, we are pleased with our overall performance and our results in the third quarter. We are committed to being the best and most respected company in our industry, and remain focused on producing high-quality food for people around the world in a sustainable manner while creating the opportunity of a better future for our team members.
With that, I would like to ask our CFO, Matt Galvanoni, to discuss our financial results.
Thank you, Fabio, and good morning, again. For the third quarter of 2021, net revenues were $3.83 billion versus $3.8 billion a year ago, with an adjusted EBITDA of $347 million and a 9.1% margin compared to $305 million and 9.9% margin in Q3 last year. We achieved $162.5 million of adjusted net income.
In the quarter, we reported GAAP net income of $61 million versus GAAP net income of $34 million in 2020. The most significant adjustment in the quarter was an additional $126 million accrual related to legal settlements. Adjusted EBITDA margins were 10.7% in the U.S., 13.1% in Mexico and 3% in Europe. Our adjusted EBITDA in the U.S. in Q3 was $263 million compared to $180 million a year ago and $176 million in 2019. Sales were up due to strong market pricing and slightly higher volumes compared to both 2020 and 2019.
Gross profit margins were higher compared to both 2020 and 2019 also. In Mexico, adjusted EBITDA in Q3 was $56.3 million versus $69.2 million a year ago and $45 million in 2019. Net sales were up due to higher market pricing and volumes. Over the last 5 quarters, Mexican business has benefited from a balanced market supply demand and dynamic. However, in addition to seasonal pricing decreases, recent increases in chicken and pork imports are headwinds to current market prices.
For Moy Park, adjusted EBITDA in Q3 was $19.8 million versus $39.6 million a year ago and $37.9 million in 2019. Pilgrim's U.K. had adjusted EBITDA of $8 million in Q3 compared to $15.4 million a year ago. As Fabio previously referenced, both Moy Park and Pilgrim's U.K. results were negatively impacted by labor shortages, energy cost increases and transportation challenges.
As the acquisition of Pilgrim's Food Masters closed at the end of our third quarter financial reporting period, we've only included our preliminary purchase price allocation of the acquisition within our September 26 balance sheet. We will begin recording Pilgrim's Food Master's financial results in the fourth quarter.
In total, we incurred COVID-related costs of approximately $6.2 million in the third quarter. However, this is a decrease of approximately $19 million compared to the prior year.
Overall, our SG&A in the third quarter was higher than prior year primarily due to an increase in legal defense costs. We'll continue to prioritize our capital spending plans this year to optimize our product mix and strengthen our partnerships with key customers. For example, during the quarter, we invested in automated deboning technology in our Live Oak Florida complex.
We anticipate our full year 2021 CapEx spend to be within our previously discussed range of $375 million to $400 million. We reiterate our commitment to invest on strong ROCE projects that will improve our operational efficiencies and tailor our operations to address key customer needs to further solidify competitive advantages for Pilgrim's.
Our balance sheet continues to be robust. Given our relentless emphasis on cash flows from operating activities, focus on management of working capital and disciplined investment in high-return projects. Our liquidity position remains very strong. Following the August increase and extension in our line of credit, we have approximately $1.7 billion in total cash and available credit.
At the end of the quarter, our net debt was $2.7 billion with a leverage ratio of approximately 2.2x the last 12 months of adjusted EBITDA. Even after our recent issuance of $900 million of senior notes to purchase the Kerry Foods Meats and Meals business at the end of the quarter, our leverage is at the lower end of our target leverage ratio of 2 to 3x.
We expect full year 2021 net interest expense to be approximately $115 million, exclusive of the debt extinguishment cost of $24 million we recorded in the second quarter. We will stay focused on creating shareholder value as we optimize our capital structure to continue executing our growth strategy. Our capital allocation strategies will remain aligned with our growth strategy and each opportunity will be evaluated against our value creation standards.
I'll now turn the call back over to Fabio for closing remarks.
Thank you, Matt. The topic of labor shortage came up several times in our remarks this morning. and I want to thank all of the Pilgrim's team members around the world who continue to work diligently to keep producing superior quality products for our customers, consumers and communities. As we always say, people is our most important asset, and you made the difference. I'd also like to thank all of our stakeholders, family farm partners, suppliers and customers. Everyone working together makes our business possible. We appreciate your interest in Pilgrim's. That concludes our call.
As the company will not be taking questions today, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.