Pilgrim's Pride Corporation

Good morning and welcome to the third quarter 2023 Pilgrims Pride earnings conference call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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 investor section of the company's website at www.pilgrims.com. After today's presentation, there will be an opportunity to ask questions. I would like now to turn the conference call over to Andy Rogeski, Head of Strategy, Investor Relations, and Net Zero Programs for Pilgrims.

Good morning, and thank you for joining us today as we review our operating and financial results for the third quarter ended on September 24, 2023. Yesterday, 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.toderms.com, along with slides for reference. These items have also been filed as Form 8Ks and are available online at sec.gov. Bobby Osondre, President and Chief Executive Officer, and Matt Galmanoni, 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 expectation as of the day of this release. Other additional factors not anticipated by management may cause actual results to differ materially from those projected in these forward-looking statements. Further information concerning these factors have been provided in yesterday's press release, our Form 10-K, and our regular filings with the SEC. I would now like to turn the call over to Fabio Sandri.

Thank you, Andy. Good morning, everyone, and thank you for joining us today. For the third quarter of 2023, we reported net revenues of $4.4 billion, with adjusted EBITDA of $324 million, translating to a 7.4 percent margin. Throughout the quarter, we experienced very volatile market fundamentals and persistent consumer inflation. Nonetheless, we remain focused on our strategies of diversification, key customer partnerships, and operational excellence. Given our consistent execution, we improve margins relative to prior quarters across all regions. In the U.S., our key customer partnerships drove significant growth in case-ready and strong performance in small birds, where our operational excellence efforts improve our efficiencies in big birds. We continue to further diversify our portfolio in both branded fresh products and prepared offerings, giving our growth with leading retailers and food service providers. Based on these combinated efforts, the U.S. improved its profitability compared to previous quarters. As for the U.K. and Europe, we further diversify our marketplace presence through branded innovation and recently launched new products, secure additional long-term supply arrangements with key customers, and draw further efficiencies in our manufacturing network and back office through operational excellence. As a result, we have reinforced our foundations for profitable growth. In Mexico, we experienced a strong third quarter, given improvements in live operations, favorability in feed inputs and currency, and balanced supply and demand fundamentals. Our diversification through branded and prepared offerings continue to gain marketplace traction, and our operational excellence efforts to drive efficiencies and expand capacities remain on track. In the third quarter of 2023, ready-to-cook production of U.S. chicken experienced a decrease of 1.9% relative to the same period last year. USDA estimates primarily influenced by fewer headcounts along with more typical changes in industry production given seasonal trends. The most recent USDA outlook for Q4 of 2023 indicates that the industry continues to reduce excess and chicks placement relative to last year. suggesting a more restrained supply scenario in the near future. Concerning our cold storage supply, reported September 2023 USDA cold storage inventories are below prior year and indicate the levels have declined relative to June 2023. Breast meat remains in line with the end of June levels, and dark meat inventories continue to trend below last year. Considering the overall supply of protein, USDA expects a slight reduction in domestic protein availability for the remainder of the calendar 2023. This reflects a view of slow-growing broiler supply paired with contracting beef and pork availability. With relative lower beef and pork availability, food inflation higher than historical average, and current economic uncertainty, chicken may be advantaged given its availability, affordability, and flexibility. Domestic volume demand for chicken improved significantly in the third quarter of 2023. The retail channel momentum continued, providing more balanced growth in volumes across all departments. The fresh department was supported by volume growth coming across both front half and back half cuts, and we are finally seeing increased promotional activities. remain positive on the potential of this category, affecting competing protein supplies. Increasing competing meat prices and more normal promotional activity have contributed to consistent sales volumes over the quarter. Elsewhere in the retail category, the frozen department has added incremental volume and unit sales, and we are now seeing volume sales growth from both the commodity and value-added frozen segments. Meanwhile, the daily prepared department has steadily added in both units and dollar sales. In the food service channel, volume sales also increased. Commercial distribution volume demand has improved as the number of operators purchasing chicken has grown, and those operators already with chicken have experienced an increase in velocity. Similar to retail, Q3 of this year was reflected of a more balanced volume growth across front half cuts and back half cuts. the non-commercial distribution sub-channel increased volumes, albeit at relatively lower prices compared to the record prices of last year. As a result of improving retail and food service volume sales and balanced supply during the quarter, wholesale pricing for commodity chicken experienced price improvements during August and September, especially on breast meat and tenders, providing a lift to cut-out pricing. Commodity prices have recently reverted to the normal seasonal pricing patterns and are now close to historical average, which is not a sustainable level considering the industry elevated costs from grain, labor, and other inputs relative to pre-pandemic levels. Nonetheless, the supply-demand balance appears to be improving as we enter Q4 of 2023. On the exports, Q3 was remarkably stable and with solid demand for U.S. broilers. the reduction of 2.2% on year-over-year exports was mainly driven by China, where sales were down 28%, mainly due to ongoing high-fat avian influenza and relatively limited eligibility for export among poultry-producing states. Excluding this impact, U.S. exports have been up 2.5% year-over-year, a good indication that strong demand exists for U.S. products globally. HyPAP even influenced a re-emerging commercial turkey flocks toward the end of September and beginning of October. Although these were the first detections since mid-April and occur far from major broiler producing states, it does increase vigilance throughout the industry. As for business implications, most of our trading partners have adjusted their trade restrictions to reflect impact zones or states in the event of a commercial outbreak. Other than China, we did not expect to see material disruption to trade in the event of an HPAI break in commercial broilers. Consistent with the previous quarter, as volume sales have maintained growth in the channel, U.S. cold storage inventories of combined dark meat have trended below a year ago and are 19% below the five-year average, driven by a 32% reduction in year-over-year lead quarter inventories at the end of September. Based on our current trajectory, We expect our exports to continue to outpace last year as we further diversify our client base and country of destination portfolios. With exporting, supporting an already healthy U.S. dark meat market potentially exists for relatively strong pricing and demand than typical expected in the fourth quarter. Turning to feed ingredients, harvest is progressing in the U.S. Despite below-trend yields, the historically Large corn acreage has contributed to a recovery in U.S. corn ending stocks for the 2023-2024 crop year. Production is forecast at just over 15 billion bushels, making it the largest crop since 2016. Ending stocks are currently forecasted at 2.1 billion bushels, an increase of 55 percent year-over-year. The large U.S. production comes shortly after a record Brazilian corn crop that is still competitively priced. Global ending stocks for 2023-2024 are forecasted to swell 14 million metric tons, assuming favorable South American weather and Argentina's production returns to normal levels after a remarkably weak prior year. As for soybeans, U.S. crops is estimated to be nearly 4% lower year over year because of a reduced acreage and limited yield improvements, resulting in another year with historical low ending stocks. Nonetheless, Last year's record crop in Brazil remained competitive in export markets, creating a last demand for the U.S. production. Though only in the planting stage, both Brazil and Argentina's soy crops are expected to be larger year over year, boosting global supply. Like corn, South American weather will be key in realizing growth. U.S. soybean meal markets should be well-supplied, giving continued crush industry expansion. Assuming Argentina's forecast rebound in soybean production is realized, further price pressure could arise. Although soybean oil flows can be heavily influenced by biofuel policies, the growth in production and diversification of import inflows should balance supply and demand. Turning to wheat, global production is currently forecast to fall by 6 million metric tons from last year, largely driven by a drop from Russia's record crop. Wheat production increased 4.4 million metric tons from last year, whereas Australia and Argentina estimate have been reduced, giving slightly unfavorable growing conditions. Black Sea exports continue without an agreement between Russia and Ukraine, but should be monitored. Our U.S. business continues to navigate very volatile market fundamentals and big bird segments, along with persistent consumer inflation. Our diversified portfolio across bird sizes mitigated these prolonged challenges, and we maintained our intense focus on operational excellence and cultivation of key customer partnerships. Within Big Bird, the team continued to drive action plans to further enhance operational excellence in our manufacturing locations. During the quarter, we achieved improvements in production efficiencies both at the live operations and at our clients. These efforts were also aided by enhanced market fundamentals during the quarter, but work still remains to consistently realize sustainable margin levels. In case ready, the team improved our volumes through key customer partnerships. We increased distribution, additional promotional activity, and improved the mix. In addition, the team maintained its operational excellence in both quality and service levels, despite significant disruptions from Hurricane Idalia in the southeastern United States. Equally important, we further diversified our sales pipeline. We differentiated high-attribute efforts that helps driving traffic and differentiation to our key customers. Small Board remains strong, given stable demand from QSRs, robust daily performance with key customers, and sustained operational excellence. Given their consistent quality and service levels, the team secured additional business throughout the quarter and beyond across retail and food service. Our efforts to further diversify our portfolio to prepare foods continue to gain momentum. as the team realized significant growth through increased distribution, promotional activities, and innovation. In retail, our fully-cooked branded offerings Just Bear and Pilgrims collectively grew 65% compared to last year. Within food service, the team reinvigorated growth with distributors, schools, and commercial chains through our targeted expansion teams. Digitally-influenced sales continue to play a role on commerce for prepared branded offerings. Our key customer media partnerships and investments have demonstrated their effectiveness, as click-through rates are nearly double industry standards, and consumer acquisition costs have fallen off. Equally important, digital sales increased 90% over the past year. Given the exceptionally well-received shopper reaction, we look forward to increased partnership through the trade to further diversify our portfolio through branded offerings. Similar to the U.S., our UK and European business experience on the environment will continue consumer inflation. Improved pork fundamentals and relative affordability of chicken help mitigate this impact, but the team remains focused on our strategies. To that end, the business trended its key customer partnership with leading retailers and food service providers through targeted promotional activities and customer-specific offerings. The team also secured additional long-term business with selected retailers, through efficient supply chain capabilities and differentiated product offerings. Our diversification through branded products continue to progress as both Fridgeraders and the Richmond brand gain share throughout the quarter. Innovation also continues to play a key role as we launch over 100 items, many of which are designed to reinvent our fresh meals category. our new product performance is becoming increasingly recognized throughout the trade as we receive multiple awards for development and launch execution. We continue to drive diversification and key customer focus through operational excellence efforts. To date, we've made significant progress in the optimization of our manufacturing network and back office support activities. Moving forward, we'll explore additional opportunities throughout our production footprint to increase efficiencies and drive scale to meet our growth aspirations. We will also continue to closely monitor various economic indicators. Wage growth is now ahead of inflation, and consumer confidence has resumed its upward trajectory. Based on these factors, consumers may be willing to increase protein consumption, trade up within retail, or pursue away-from-home eating opportunities in food service. Given our diversified portfolio and key customer presence across channels and operational capabilities, we're all positioned to adjust to these trends and accelerate our growth. Turning to Mexico, the business experienced a strong performance in the third quarter, given improvements in live operation, grain, and currency favorability, and more balanced supply and demand fundamentals in the region. The business strengthened its key customer focus giving continued growth with leading retailers and QSRs. Even important, our diversification efforts through branded offerings continue to gain traction among retailers and consumers alike. In prepared foods, the previous brand grew double digits compared to last year, whereas our within-just-bare launch has been exceptionally well-received through the marketplace. Moving forward, we'll further cultivate our branded presence through additional marketing supports for the unique tastes and favoritos and the introduction of a just there fresh offering. We continue our commitment to driving profitable growth to continue investment and operational excellence. We have completed our expansion in the Merida region and expect to initiate production in the first quarter of 2022, increasing the geographical diversification of operators. Also, our projects to enhance biosecurity for live operation are progress as planned, and it should be completed according to schedule. We're also proud to have published our sustainability report in September to highlight our continued progress on our journey to becoming a leader in environment, social, and governance matters. We have made significant progress against the United Nations Sustainability Development Goals since 2019, as our team members' Global Safety Index improved by 54%, and our Scope 1 and 2 greenhouse emissions intensity fell by 20%. We continue to invest in the communities in which we serve As we have funded over $15 million in projects through our Hometown Strong initiative, and we provided higher education tuition free for 350 team members or members of their families through our Better Futures program.