Pilgrim's Lovette details reasons for optimism in 2015

by Joel Crews
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Bill Lovette, president and CEO of Pilgrim's Pride Corp.
Bill Lovette, president and CEO of Pilgrim's Pride

KANSAS CITY, Mo. – During a Dec. 12 earnings call to discuss Pilgrim’s Pride’s Q4 and end-of-year results, Bill Lovette, president and CEO of Pilgrim’s Pride, reiterated what was announced earlier in the morning and addressed specific questions from analysts about market variables. For the fourth quarter ended Dec. 28, 2014, the company generated $2.1 billion in net revenue, up slightly from the same quarter a year earlier. Adjusted earnings per share for the quarter were 83 cents versus 55 cents the same quarter in 2013. Net income in 2014 was $712 million, and net revenues for the year were $8.6 billion, compared  with  $550 million and $8.4 billion, respectively, in 2013.

Lovette said in his remarks that Pilgrim’s does not follow the peaks and valleys of the current pricing trends. The company is buffered from the low pricing for poultry due to its resilience to market volatility, he said, thanks to its increasingly diverse product mix. Part of that mix includes increasing leg meat deboning the company is able to offer its customers. Large-bird deboning is another area of emphasis. In four years, said Lovette, the company has gone from being a minor player in the big-bird business to the leader in the segment. Pilgrim’s operates eight large-bird plants, but each is unique in its strategy, says Lovette, to be able to deliver when demand shifts. The approaches vary, he says “whether it's in certain geographies or even in product mix among the large-bird deboning segment. And we crafted it that way because we think that we'll continue to see demand change over time for different parts, prepared in different ways, and we want to remain relevant to the marketplace.”

Pilgrim’s finished 2014 meeting goals for yield and plant-cost improvements. And by applying zero-based budgeting, the company has identified $200 million in cost savings for 2015 that wasn’t realized in 2014. The savings will come in the form of plant-cost reduction and yield improvements, the former of which have increased over the past 18 months and are expected to continue. As mentioned previously by the company’s chief executive, part of that plant efficiency has been realized by technology that allows it to study videotape of processing workers at all positions and using software that analyzes movements in each position to make each line worker more efficient.

As an example, Fabio Sandri, CFO, said, “We identify the motions and understand the most effective way of deboning chicken. Lovette added: “It points us toward having the right amount of people per job, and it also makes those jobs more efficient and helps on our employee safety as well.” This process was adapted from beef processing operations JBS operates where efficiencies were realized.

Prepared foods is “gaining momentum” thanks to matching raw-material cost with revenue structure en route to delivering more consistent earnings. Lovette reminded analysts that the segment has decreased in size over the past year. With Prepared Foods constituting about 20 percent of the company’s total sales, Lovette said it is at a size that is appropriate for now, but goals include growing it in the future. That growth is fueled by demand at foodservice, notably among schools. “That's fully cooked products, a lot of patties, nuggets, strips that go into the school lunch program where the government purchases commodity chicken and then we take those chickens, debone them and turn them into value-added, further-processed products for school lunch,”Lovette said.

Of the approximate 50 million meals served in the school lunch program, Pilgrim’s is one of the largest suppliers of that product purchased by the government each year and significant investments in those fully cooked plants are part of the strategy for 2015 for these products. Fully cooked parts, including wings is a growth area in that space and is another example of supply not meeting demand.

Sandri added that the effect of lower gas prices is another factor influencing increasing demand but was not factored into projections or forecast for the coming year. “The American consumer is experiencing more available income and there could be a potential improvement, especially in the foodservice sector.”

As long as supply lags demand, Pilgrim’s sources products from outside its system. “As we grow our Prepared Foods business, over time, we'll see more of that product sourced on the outside,” said Lovette, from chickens not raised or slaughtered by Pilgrim's. “So, another way we can continue to grow our company is by adding Prepared Foods capacity and using meat purchases on the outside,” and that practice is expected to continue.

Another segment that came up repeatedly during the call was on the booming demand for rotisserie chicken. “It's been a very popular item,” said Lovette, due in large part to the value it offers consumers. Based on consumer research, some retail customers are lured to supermarkets and food centers specifically for rotisserie chickens. “Consumers are going into retailers,” said Lovette, “for the sole purpose of buying those rotisserie chickens, where they would buy two or three of those chickens,” and use them for multiple meals. In many cases, “that would be the primary point of purchase for that store visit,” he said. To address this shortage in supply vs. demand, Pilgrim’s has committed to increasing revenues to this segment moving forward.

Internationally, specifically in Mexico, the strategy is also to diversify products further. And despite the recent weakening of the peso vs. the dollar, demand in Mexico has not decreased. “That's one of the export markets where demand for leg quarters, for example, has remained very strong,” Lovette said, which is reason for confidence in that market in 2015.

CFO Sandri added: “Most of the grain that Mexico uses is imported from the US so that will be an impact for them,” he said. “We expect the prices in Mexico to adapt to that reality. Of course, there is always a lag on changing of prices.” Sandri also mentioned that 2015 capital expenditures are budgeted for $175 million, including a wastewater facility upgrade, renovations to leg meat deboning plants and expanding fully cooked plants in addition to infrastructure.

Port challenges

On the West Coast port issue that is wreaking havoc by tying up shipments for many in the meat and poultry industry, Lovette said Pilgrim’s has been fortunate and unaffected to date. He pointed out that most of the company’s exports utilize East Coast ports. However, a growing number of companies are diverting shipments to the East Coast and creating competition that previously didn’t exist. “So, it's certainly in our interest to have that issue resolved as soon as we can so that we could keep all product flowing for the export market.”

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