Applied Digital Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 31, 2024

There are 9 speakers on the call.

Operator

Good morning, and welcome to the Third Quarter of 2024 Pilgrim's Pride Earnings Conference Call and Webcast. All participants will be in listen only mode. 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.pilgrims.com. After today's presentation, there will be an opportunity to ask questions.

Operator

I would now like to turn the conference over to Andrew Wojzewski, Head of Strategy, Investor Relations and Sustainability for Pilgrim's Pride. Please go ahead.

Speaker 1

Good morning, and thank you for joining us today as we review our operating and financial results for the Q3 ended on September 29, 2024. 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 have also been filed as Form 8ks and are available online at sec.gov. Fabio Sandre, President and Chief Executive Officer and Matt Galvanoni, Chief Financial Officer, will present on today's call.

Speaker 1

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 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 ks and our regular filings with the SEC. I would now like to turn the call over to Fabio Sandri.

Speaker 2

Thank you, Andy. Good morning, everyone, and thank you for joining us today. For the Q3 of 2024, we reported net revenues of $4,600,000,000 a 5.2% increase over the same quarter last year. Our adjusted EBITDA was 660,000,000 dollars versus $324,000,000 in Q3 of 2023. Adjusted EBITDA margin was 14.4% compared to 7.4% last year.

Speaker 2

Our Q3 results demonstrates the benefit from consistent execution of our strategies. Our diversified portfolio continued to capture the upsides of positive commodity market fundamentals, whereas our key customer partnerships enable collaboration that simultaneously drove demand and unlock value for consumers. The efforts were further amplified through the growth of our brands and continued focus on operational excellence and in quality, service and innovation. In the U. S, Big Bird benefited from sustained improvements in production efficiencies, lower input costs and enhanced commodity cutout values.

Speaker 2

Case Ready continued to reinvest with key customers, resulting in greater than category average growth. The momentum of a small bird increased given continued interest in chicken in the deli and among QSRs. Europe expanded margins from benefits in manufacturing network restructuring and optimized organizational structure. Diversification efforts continue to gain traction given the growth from our leading brands and extensive industry recognition and awards from our recently launched innovation. These efforts were further amplified by incremental distribution with key customers.

Speaker 2

While Mexico experienced a decline in demand given normal seasonality and disruptions from the hurricanes, we continue to grow our business with key customers across retail and foodservice. Our diversification and operational excellence efforts remain on track as our brands grew ahead of the market and our investments in growth and risk mitigation proceed as scheduled. Turning to supply. USDA indicated ready to cook production for the U. S.

Speaker 2

Chicken grew 2.7% compared to the Q3 of 2023. Increases in headcount and average line weight drove production growth. Throughout 2024, the industry layer flock has consistently declined year over year. However, a more efficient flock, along with reductions in exports, have increased exits, pushing hatchery utilization to record levels. While pulley placements have grown by 0.7% year to date, increased mortality has muted potential production gains.

Speaker 2

Like trends early in the year, hatchability challenges have prevented full realization of increased sets. Based on recent trends along with projections for the remainder of 2024, USDA data suggests growth in chicken production of approximately 1.7% for the full year. This growth indicates a response to firm demand exhibit during the quarter. As for overall protein availability, the USDA anticipates 2.3% growth as the expected increase in chicken supply is augmented by increased beef imports and additional pork production. Domestic chicken demand was strong throughout the quarter.

Speaker 2

With inflation still a major concern, consumers continue to shift shopping towards retail and eating patterns in food service. Chicken demand in the retail channel improved volume across all departments. In fresh, consumers continue to rely on chicken fulfilling their everyday center of the plate protein needs in a challenging environment as volume roses in both white and dark meat cuts. For boneless skinless breast, everyday retail pricing per USDA has continued to decline and fell below $4 per pound, a 5.4% reduction from last year and over 16% reduction since September 2022. In contrast, other proteins consistently rose during the quarter and throughout the past 2 years.

Speaker 2

As an example, the retail spread between boneless skinless breast versus ground beef recently hit another all time high, surpassing the previous record set in the Q2 of 2024. This coincided with a strong quarterly performance from boneless skinless breast, which saw sales post notably year over year growth. The remainder of chicken at retail continue to build on the strong foundation set earlier in the year. Growth in both the deli and frozen value added demonstrated chicken's ability to meet the needs of consumer seeking to rationalize spending without sacrificing convenience. In foodservice, revenue and volume sales both grew in commercial and non commercial distribution sub channels.

Speaker 2

The commercial distribution sub channels realized large dollar increases, while non commercial continued to build steadily as business and industry activity increased. Breast meat, tenders and wings all continue to post positive volume growth at current prices, given the relative affordability of poultry. Within the foodservice subchannels, QSRs continues to drive the most volume growth, suggesting consumers continue to seek more affordable meals. Given chicken's propensity towards QSR and overall versatility, it has continued to post strong growth despite a reduction in the away from home eating occasions. In export, U.

Speaker 2

S. Broiler volume was 11.3% lower, while pricing is at strong levels. Robust demand for dark meat in U. S. Continued to shift production from local markets, limiting availability for export.

Speaker 2

We anticipate export demand will remain strong as competing protein prices continue to make chicken the most appealing global option given its relative affordability. While the potential for a port strike in the East Coast and Gulf disrupted some shipments late in the quarter, it had a limited impact. Disruptions to the supply chain were not material to the market as shipments quickly rebounded in the beginning of Q3. And overall, cold storage remains relatively low as supplies are down 7% compared to last year and 9% below the 5 year average. Breast meat and dark meat inventories both fell year over year.

Speaker 2

Despite recent outbreaks of high pet avian influenza in the Western U. S, the majority of chicken producing states have not been affected. Nonetheless, we continue to take the necessary precautions to safeguard our farms given seasonal changes in migratory patents. The geographical diversification of our production facilities provides flexibility to shift the business should any isolated commercial breaks surface. China remains the exception on trade restrictions and no movement on lifting current bans has emerged.

Speaker 2

Nevertheless, the majority of US trading partners continue to reduce ban to zones or to county level with only a few banning the entire state. Turning to feed, input prices were fairly stable throughout the quarter as the U. S. Realized generally favorable weather for the development of the corn and soybean crops. Given the low price of corn relative to recent years, stronger than expected demand for U.

Speaker 2

S. Corn exports emerged, pulling down stocks from previous years and cutting to supplies from the current year. While the U. S. Began with a smaller initial supply, record U.

Speaker 2

S. Corn yields created a still comfortable new crop carryout estimated of about 2,000,000,000 bushels. Moving forward, the corn market will respond to South American weather and the magnitude of China imports. Both globally and in U. S, soybean stocks continue to build.

Speaker 2

Despite a record U. S. Soybean crop and lower board future prices, changes in exchange rate encourage expansion in South America soybean planting. The soybean processing industry also continued to expand, leaving the soybean meal market well supplied and limiting the upside in meal prices. In wheat, 20 four-twenty five production increased marginally.

Speaker 2

However, this was offset by a decrease in initial supply, creating expectations that global wheat ending stocks will be down slightly versus prior year. Global import demand for wheat is lower this year, giving better crops from several traditional wheat importers in the Middle East and North African regions. As a result, wheat prices remain basically flat in Q3, reflecting balanced supply and demand. While the current WASDE projections suggest growing stocks in U. S.

Speaker 2

For all major crops and relatively narrow price ranges for feed inputs, there's still risks. As such, we will continue to monitor changes in global grain demand, production weather in South America, exchange rate changes and geopolitical events. In the U. S, consumers are still aware and concerned about high prices and continued inflation. Within retail, grocery buyer behaviors indicate consumers are purchasing less per trip while shopping more frequently, indicated a stretched household budget.

Speaker 2

Additionally, many consumers indicated cutting food service spend as a top method of cost saving, reducing dining allowed occasions or adjusting their food habits to enable their spending to go further. Given the affordability of chicken and our diversified portfolio, our team was well positioned to unlock value for the consumer. To that end, our team continued to focus on operational excellence efforts across all locations to enhance quality, service and mix. Equally important, we overcame disruptions late in the quarter from Hurricane Helene to ensure superior fill rates to our key customers. Case Ready benefited from increased protein demand throughout retail.

Speaker 2

Interest in chicken was amplified given the reduction in price of chicken that created new record spreads between ground beef and boneless skinless breasts. Furthermore, our approach with key customers adapted to reflect changes in input cost, creating opportunities for additional investments in promotional activity, generating more demand. Our case ready business grew together with our key customers as increased distribution and continued consumer interest in our differentiated higher attribute offerings drove volumes ahead of the fresh category averages. In small birds, QSR demand for chicken continued to grow with better penetration despite softening traffic throughout food service, whereas daily remained the fast growing category in retail. When these factors are combined with expansion of our key customers, along with improvements in operational excellence, small bird grew significantly compared to last year.

Speaker 2

In big bird, we continue to drive new improvements from capital investments and team member retention and training. These efforts were further aided by mix enhancements throughout our facilities and across our customer base. When these efforts are combined with strong commodity cutout values, along with a reduction in input costs, our business improved considerably from depressed margins last year. Our prepared foods continue to gain momentum. We have expanded our marketplace presence and diversification throughout retail, deli and food service, driven by incremental distribution and leading consumer innovation.

Speaker 2

Commerce continue to play a role as digital sales increased by 32% compared to prior year. In Europe, we have completed a variety of actions to enhance our agility and innovation capabilities to further cultivate partnerships with key customers. As part of these efforts, we have increased our integration and synergies throughout the diversified portfolio across protein and channels. On fresh offerings, we have strong presence in poultry, pork and lamb. These segments constitute roughly onethree of overall net sales in Europe.

Speaker 2

Poultry is the largest with approximately twothree of the segment's net sales. We are a major player in the retail value added and prepared segment with UK leading brands such as Richmond and innovative protein snacking brands with refrigerators. And we are a category leader in both the chilled and frozen meals business. Taken together, this business comprises nearly half of the total net sales in Europe. Food service is the 3rd part of our business.

Speaker 2

It includes a variety of frozen and prepared offerings designed to meet the needs for retail deli, leading QSRs and other distribution channels. Turning to the consumer. Confidence improved year over year as wage growth continues to outpace inflation, helping our branded products to continue to grow faster than category average. Demand for offerings in poultry and chilled meals outpaced total retail growth, whereas demand in pork, both fresh and prepared, continue to lag. Within foodservice, sales have not yet returned to pre COVID levels.

Speaker 2

Nonetheless, consumers are becoming increasingly interested in food away from home options as average spend, frequency per week and participation rate have all increased over past years. Our diversified portfolio across brands, proteins and repair items benefit from these trends. Sales of our branded offerings increased 7% from last year as refrigerators and Richmond continue to grow faster than category average. Similarly, our poultry and chilled meals offering grew ahead of the market. In pork, we have secured several new awards in bacon, cooked meats and sausages across retail and food service.

Speaker 2

We have complemented these diversification efforts to continue expansion of our exports business in both pork, poultry and lamb. To that end, we now have over 150 clients, open 18 additional markets and increased our customer base by 53%. We continue to cultivate our innovation pipeline to enhance mix and drive profitable growth. During the quarter, we launched over 280 new products, many of which receive awards from various leading retailers for best product, quality and innovation. Our efforts to unlock value from our manufacturing network optimization and integration of our corporate support activities continue to remain on track as we have realized the anticipated benefits.

Speaker 2

Moving forward, we will continue to evaluate additional opportunities to enhance our production efficiencies and drive a more innovative, agile and responsive organization to meet customer and key customer needs. In Mexico, we experienced some market volatility as chicken demand follow typical seasonal changes, combined with some disruptions from hurricanes during the late September. In fresh, we experienced significant key customer growth above category in both retail and food service. Our branded efforts continue to gain momentum as sales from Pilgrim's and Favoritos grew 20% and 60%, respectively. Just Bear has realized similar success as sales are up nearly 30% from previous quarter.

Speaker 2

We continue to diversify our portfolio through value added as sales increased 7% compared to last year. Pilgrim's branded prepared offerings also had the most momentum as sales grew almost 40% compared to last year. Our investments in operational excellence to expand capacity and mitigate operational risk remain on track. We ramp up our production in Merida and relocation of our breeder farms continue to proceed as planned. We also supported the continued growth of our prepared business in par fry and fully cooked offerings through building new capacity.

Speaker 2

Earlier this year, this week, we published our 2023 sustainability report to provide an update on our efforts to became an industry leader in environment, social and government matters. We continue to embed sustainability as a core component to our overall business strategy as means to drive a more robust food system through industry leading initiatives. To that end, we have decreased our absolute scope 1 and 2 emissions by 17% since 2019. And now, we use over 14% renewable electricity in our global operations. We have also certified 100% of our facilities in the United States and Europe according to the GFSI standards by independent third parties and improve our global safety index performance by 24% since 2022.

Speaker 2

Our Better Future programs continue to be exceptionally well received as over 1500 team members have signed up for the program since inception. With that, I'd like to ask our CFO, Marco Vannoni to discuss our financial results.

Speaker 3

Thank you, Fabio. Good morning, everyone. For the Q3 of 2024, net revenues were $4,580,000,000 versus $4,360,000,000 a year ago, with adjusted EBITDA of $660,400,000 and a margin of 14.4 percent compared to $324,000,000 and a 7.4% margin in Q3 last year. Relative to net revenues, we experienced year over year sales growth of approximately 12% in the U. S.

Speaker 3

In the quarter, driven by higher commodity chicken pricing and growth with our key customers in Case Ready and Small Bird. Mexico's revenues were down year over year due to the decrease in market pricing for chicken. In Europe, year over year net revenues were essentially flat. As we have discussed in the past, in both the U. S.

Speaker 3

And Europe, many of our contracts have some level of cost plus element. As such, with declining key input costs, our top line sales number will be reduced accordingly. Adjusted EBITDA margins in Q3 were 18% in the U. S. Compared to 7% a year ago.

Speaker 3

For our Europe business, adjusted EBITDA margins came in at 8.6% for Q3 compared to 6.1% last year. In Mexico, adjusted EBITDA margins in Q3 were 9.7% versus 12.4% a year ago. Moving to the U. S, our adjusted EBITDA for Q3 came in at $499,400,000 compared to $174,100,000 a year ago. Year over year recovery in the commodity chicken markets, along with lower grain input costs and continued operational improvements drove strong year over year profitability improvement in our Big Bird business.

Speaker 3

Our Case Ready, Small Bird and Prepared Foods businesses have continued their momentum with increased distribution with key customers, driving both year over year and quarter over quarter profitability improvements. In our U. S. GAAP results related to specific financial impacts from Hurricane Helene in the quarter, we did incur $8,000,000 of charges, primarily related to writing down inventory lost in the storm. Also, we recorded a $10,700,000 charge in the quarter associated with the termination and settlement of our U.

Speaker 3

S. Pension plans. We anticipate that we will incur an additional approximate $14,000,000 charge in the 4th quarter when the settlement of the U. S. Pension liabilities is finalized.

Speaker 3

Note that the cash outlay for this settlement is anticipated to be less than $1,000,000 In Europe, adjusted EBITDA in Q3 was $112,000,000 versus $80,400,000 last year. Our European business took another step in its profitability growth journey through focus on key customer partnerships and innovative offerings. The business has also benefited from its network optimization programs and administrative reorganization efforts. We incurred approximately $30,800,000 of restructuring charges during the quarter in support of these programs. We anticipate that restructuring activities will continue through at least the end of the year.

Speaker 3

Mexico generated $49,000,000 in adjusted EBITDA in Q3 compared to $69,500,000 last year. Although Mexico had strong EBITDA margins approaching 10% in the quarter, profitability decreased year over year primarily due to more normal seasonal trends this year. Relative to our SG and A costs, we incurred higher year over year advertising and marketing costs in support of our branded products in the quarter. Our effective tax rate for the quarter was 27.3% with our year to date effective rate at 25%, which we expect to approximate our full year effective tax rate. We have a strong balance sheet and we continue to emphasize cash flows from operating activities, management of working capital and disciplined investment in high return projects.

Speaker 3

As of the end of Q3, our net debt totaled $1,300,000,000 with a leverage ratio of approximately 0.65 times our last 12 months adjusted EBITDA. Net interest expense for the quarter totaled $19,500,000 Excluding the impacts of any net gains or losses on debt repurchases that occurred during the year, we anticipate our full year net interest expense to be between $90,000,000 $95,000,000 At the end of the quarter, we had nearly $3,000,000,000 in total cash and available credit, driven by the strong free cash flow generation during the year. We have no short term immediate cash requirements with our bonds maturing between 2,031 and 2,034 and our U. S. Credit facility not expiring until 2028.

Speaker 3

Our liquidity position provides us flexibility during times of volatility in the U. S. Commodity markets and allows us to pursue our growth strategy, including organic growth to meet our customers our key customers' needs. We spent $104,000,000 in CapEx in the 3rd quarter. This amount of cash spend in the quarter is considerably less than forecasted.

Speaker 3

However, we are continuing with our plan to pursue additional capital projects with attractive returns through the end of the year and into 2025. These projects are focused on optimizing our product mix, growing with our key customers to meet specific product attributes they require, increasing operational efficiencies and supporting our sustainability efforts. These projects are seen as growing Pilgrim's competitive advantage. Our capital project review process is very detailed and as such it takes time for larger projects to commence. We will remain disciplined in our capital allocation approach and our cash management and will proceed with our plan in a prudent manner.

Speaker 3

We now estimate our full year CapEx spend to approximately $475,000,000 We are intently focused on growth opportunities. First, over the last few years, we've invested in our plans to meet both growth targets and product attributes requested by our key customers, and we will continue to do so as we cultivate these relationships. Also, we foresee investments in additional protein conversion capacity to both upgrade our product mix and manage risk by reducing our exposure to outside protein conversion operators. Finally, as we've discussed extensively, our U. S.

Speaker 3

Prepared Foods business has grown our branded portfolio through innovative and differentiated products, and we anticipate expanding our capacity to meet the growth trajectory of this portfolio. Also, we have a great business in Mexico and have organic growth opportunities in both fresh and prepared. These near term growth opportunities align to our overall strategies of portfolio diversification, focus on key customers, operational excellence and our commitment to team member health and safety. Operator, this concludes our prepared remarks. Please open the call for questions.

Operator

We will now begin the question and answer session. The first question comes from Ben Theurer from Barclays. Please go ahead.

Speaker 4

Yes, good morning, Fabio, Matt. Congrats on another outstanding quarter here, first of all. First question really would be just around Europe and the strength that you've seen here. I mean, obviously, the margin now, adjusted EBITDA around about 8.5%, a nice improvement also versus just about a year ago, but also sequentially. Maybe help us understand what are you seeing in the market?

Speaker 4

Is it the combination of just all the restructuring that you've put in place that is helping you to get those better profitability levels? Is it just the consumer that got better? Is it cost? What's driving it? How should we think about it also go forward as like kind of a normalized margin environment?

Speaker 4

So Europe, that would be my first topic. And then I have a quick follow-up.

Speaker 2

Of course. Good morning, Ben. And I think it's a combination of all of the above, of course. We are seeing consumer confidence increasing in Europe, as we mentioned, as the salaries are growing faster than inflation for the first time. I think in the past, over the last few years, we saw inflation growing over then the salary growth.

Speaker 2

So that was creating a compression on the spending for the customer, especially on the utilities sector. Now we're seeing a deflation in Europe. We're seeing utilities coming down and we're seeing the price everyday prices of grocery and other spending going down. So again, we are seeing the confidence increasing. It's not at the same level as it was before, but it is increasing compared to last year.

Speaker 2

That is helping our portfolio, especially on the meals side and on the branded side. So consumers as they have more confidence, they are going back to some of the refrigerated meals where we are a leader in that market. Also, we are seeing the growth of our brands. As consumers are coming back from spending more on brands and less on private label offerings. I think also we are seeing in terms of cost and competitiveness that the chicken business, which is one of the largest components of our portfolio there, winning in the marketplace and continue to grow.

Speaker 2

And similar to everywhere in the world, we are seeing the decrease in prices of chicken because we have a lot of contracts in Europe that are connected to cost. So as we pass that advantage to the retailers, we are seeing the growth of the chicken, which is benefiting our portfolio. And also different than in U. S. That we will for sure talk about, consumers in Europe are coming back to food service.

Speaker 2

So we're seeing the food service market growing faster than what's happening or rebuild rebounding faster than what's happening in U. S. And some of our key customers are experiencing some tremendous growth in the foodservice segment. So the foodservice segment in chicken is growing in Europe and the consumer confidence is helping with our portfolio. And of course, as we mentioned, we spent the last 2 years reorganizing our manufacturing network.

Speaker 2

We have some redundancies in some of our operations, especially sliced cooked meats and some sausage production that we rationalized and created a structure with the central shared services that is both nimble and more efficient to help, as we said and we mentioned, more than 200 new products in terms of innovation with a lower cost to our key customers.

Speaker 4

So that 8.5%, 9%, is that a good benchmark? Should we think about that go forward as a good target level, probably? Yes.

Speaker 2

As we mentioned, I think that we always compare ourselves to the best on those regions and that's what we're trying to do and we see companies in Europe that could achieve that type of profitability and we think that is what it should be sustainable.

Speaker 3

Yes, Ben, we've in the past said EBIT margins of 6% to 8% and this quarter our adjusted EBIT margin was 5.8%. So the team is really getting to those targeted levels.

Speaker 4

Fantastic. Good. And then on the U. S. And that's actually you made a nice commentary and just wanted to talk about a little bit the trends what you're seeing with increased production, but then a little bit that foodservice weakness as we go into the Q4 that usually should be seasonally a little bit weaker, but we haven't seen much on like pricing declines that's holding in.

Speaker 4

Can you help us understand what you're seeing in the market? Why prices have been so stable from 3Q into 4Q so far? And a little bit, what's your expectation on the demand side, retail versus foodservice in the nearer term 4Q and then heading into 1Q?

Speaker 2

Sure, sure. Sure, Ben. I think the price stability that we are seeing in Q4 in relative terms, right, we always see some seasonality in the chicken prices. And we are seeing the cutout on the commodity value coming down from the levels that we had in Q3 is mostly because of the strong demand that we are seeing. I think I mentioned the food service.

Speaker 2

And starting with food service, food service has been struggling with food traffic. But when we look at the chicken consumption in the food service, we're seeing some increase in penetration and growth. As a matter of fact, the overall food service growth in terms of volume of chicken is 4% higher than the same period last year. I think that 4%, there's a lot of growth in the non commercial, as we mentioned, but even the commercial, which is the QSRs and full service restaurants, there is an increase of 2% in volume of chicken. The segment that is really struggling is the full service restaurants, where the consumption of chicken in volume is down 0.8%.

Speaker 2

So overall, despite the struggle in food service in general in terms of traffic, we are seeing strong penetration of chicken and we're seeing some strong demand there. I think overall, the consumer is, as we mentioned, looking to stretch their budgets. And what's happening is the food traffic that is lowering food service is moving to the retail. We're seeing more trips albeit with smaller baskets, but we're seeing more trips to the retail. And the fresh category, I think the overall protein fresh category is winning.

Speaker 2

We saw an increase in fresh chicken of close to 3% in volume in retail. And that strong retail, it is supporting the prices of breast meat in the commodity market because as we always have during the summer, we have a lot of big bird meat commodity going to the retail markets because of strong demand. And with that continuation, that is happening even during Q4. So we're seeing some commodity products, big bird products going to the retail in the tray pack area. So when you look at the jumbo cutout, it's very well supported right now, despite a little bit lower than Q3, which is normal for this time of the year.

Speaker 4

And you expect that to hold also into 1Q as a spectrum rebounding a little bit, right?

Speaker 2

Yes. We also drew down into the supply, right? And I think the supply of chicken has been higher than the same period last year, but it is in line with the strong demand that we are seeing. And given the excess, the size of the layer flock, we expect to have a very balanced supply and demand. And as you mentioned, the prices over the last 2 weeks have been steady, which is not the seasonality we expected for this time of the year.

Speaker 4

Thank you. I'll pass it on. Congrats again.

Operator

The next question is from Peter Galbo with Bank of America. Please go ahead.

Speaker 5

A little bit more into

Operator

I'm sorry, there you go. I delayed getting you in there. You can begin now.

Speaker 3

Hey, guys. Can you

Speaker 5

hear me okay?

Speaker 3

We can now. Thanks, Peter.

Speaker 5

Good morning, Peter. Hey, good morning. Good morning. Tommy, just one question from me on particularly around U. S.

Speaker 5

Price realization in the quarter, I think pricing was up about 10%. You spoke about retail prices being down I think in the mid single digits. Obviously, we can kind of all see what the commodity market did. And so that implies some maybe improvement in what's happened in small bird pricing kind

Speaker 2

of as the fallout. So I

Speaker 5

was hoping you could expand a little bit on what you saw small bird in the quarter as it relates to price, just given that's probably the hardest piece of the business for us to track externally. And I know that that ties a lot into your key customers, but any broad comments there on small bird pricing would be very helpful. Thank you.

Speaker 2

Yes. Sure. On the small bird pricing, what we are seeing and it is connected to the trend that I mentioned on the food service. I think as consumers try to stretch their budgets and less trips to the food service, there is a component of the retail that is winning, which is the deli segment. I think if you look at the numbers in deli, the volumes are up close to 6% year over year.

Speaker 2

As I mentioned, our key customers are actually growing faster than that category with close to 14%. But as consumers move the traffic away from food service, they are going to the deli as well as a great substitute for a very convenient meal for their households. And chicken is a big portion of the deli. And the whole birds, especially for the small bird category, it is the largest part of this deli. So we're seeing the deli woks growing really fast and then we're seeing strong demand for the small birds, which is translating to prices of the small birds or the wogs, right, as we call.

Speaker 2

So, I think that combined on the small bird category with the deboning for the QSRs, especially our key customers, that are the ones that continue to grow. We are seeing some strong demand for small birds. Of course, as we look into production over the last, let's say, decade, we're seeing a reduction in the small bird production. For Q3, in terms of heads, the reduction was close to 4%, a little bit higher weight, but that doesn't affect too much the deli wag market. But we're seeing a reduction in supply.

Speaker 2

So the supply demand structure for the small birds is very well supported.

Speaker 5

Thank you, Fabio. That's actually super, super helpful. If I can just click in on that a bit more. So if I'm hearing you correctly as it pertains to deli, the consumer insight that you're seeing is essentially that rotisserie birds or small birds in the deli are a more convenient meal option, maybe at that $5 price point and that's what you're observing the consumer, at least within the box, if they're going into the grocery channel from a QSR, even within the box, they're translating into deli. I just want to make sure that I understand.

Speaker 2

No, that's exactly right. It is a very convenient meal. It's very affordable and an easy fix for the family.

Speaker 5

Got it. Thanks very much, guys.

Operator

The next question comes from Andrew Strelzik with BMO. Please go ahead.

Speaker 6

Hey, good morning. Thanks for taking the questions. I was hoping you could maybe share some color on how the recent hurricanes in the Southeast and Florida are impacting supply demand and how you expect that to play out from here? And maybe if you could give us an update on the status or impact to your plants and operations?

Speaker 2

I know you called out some

Speaker 6

of the charges, but just specifically operationally, kind of how that's playing out? And I guess, lastly, within that, I appreciate all the color on the demand side, which sounds really great. But I was just wondering if you think some of that supply disruption from the hurricanes could be contributing to that recent stabilization or maybe I'm making

Speaker 2

too much of that? Yes, okay. Thank you, Andrew. Yes, no, first of all, we were relieved that all of our team members were safe. Despite that there was a direct hit from the hurricanes Helane and Milton in 2 of our communities.

Speaker 2

It was Live Oak, Florida and Douglas, Georgia. So just on how we prepare for those and those, this is not our first hurricane, right? We have many of them hitting our operations in the past, especially because we have a lot of operations in the south. So we have a preparedness plan that include the preventive shutdowns, of course, to help our team members. And in many of our locations, we have emergency generators and fuel tanks.

Speaker 2

We have depopulation crews and we have several trailers of supplies located around in strategic positions to be used in case of need. Our facilities were not directly impacted by the hurricanes. We have minor damage from those hurricanes, but the issue has been on the partner growers. Many of them were severely impacted, especially on the Douglas, Georgia area. And many houses were totally destroyed, not only for us, but some in the industry, as I mentioned.

Speaker 2

I think also it was really important to say that many of these growers were out of electricity for several days. We were impacted, again, like I mentioned, especially in Douglas, but we were able to rebalance our production to other facilities. We have 23 operating facilities and we maintain an excellent level of service to our key customers. So there was no disruption to our key customers. What will take time, it is to build this grow out base back to 100% again.

Speaker 2

We believe it will take from 9 months to 12 months for that grow out base to be rebuilt. To help it, we have engaged with the local congressman and the Georgia Air Commissioner because these growers need financial assistance to rebuild their housing. We also put a crew together to help them with design and to building as soon as we have the financial assistance.

Speaker 6

We

Speaker 2

also help the impact communities with basic supplies, like I mentioned on the trailers and supplies that we have. And I want to shout out to our key retailers key customer retails that they help us with those supplies and we were able to help the community in need. And we are also committing to $1,000,000 to support the necessary repairs in the Douglas community. As Matt mentioned, we included $9,000,000 loss, mainly loss of live birds in inventory in our financials. As how much that is impacting the market, I think during that week, I think we have a little reduction in the overall production.

Speaker 2

But at the same time, we also have disruptions from the consumers, right? A lot of operations, retail, food service were down during that week, some even for weeks without electricity. So we saw an impact in demand as well. For the foreseeable future, let's say, or for the next month, I think the industry has enough capacity to support the growth. I think we will continue to rebuild those houses.

Speaker 2

So I don't expect a significant impact into the marketplace because of the hurricane. Of course, there were disruptions during that week, but we saw some companies killing on Saturdays to recover from the days that they were down. We were going to see a little bit of reduction in Douglas facility, but we are redirecting production from other facilities to make sure that we have we don't have a significant impact into our key customers and to the community in Douglas.

Speaker 6

And I guess, just quickly following up on that last point before I ask my other question, that would then not really just from utilization rate perspective or what have you, would not really impact your margin capture either? I just want to confirm that.

Speaker 2

Yes. I think we will redirect. Of course, Douglas will need to have lower volumes for a while, but we can redirect some chicks from and chickens from our nearby locations. So you maintain a level of utilization in Douglas that will make sense for our whole team members and our production there.

Speaker 6

Got it. Okay. That's extremely helpful. And then my other question on the topic of capital allocation. Can you just maybe review again how you're thinking about your capital allocation priorities?

Speaker 6

Obviously, the cash balance continues to grow very nicely. How much cash do you need on the balance sheet to run the business? And maybe if you could talk about with I believe the CapEx number for this year comes down a little bit and you're looking at some internal growth projects, how CapEx next year might shape up? Thank you.

Speaker 2

No, okay. And just in terms of how much cash we need to run the business, of course, much less than what we have today. But so looking into all options to create shareholder value, right? I think the option that we believe can create the most in the long term is to continue to grow our company and we can go into the details of our growth strategy. I think Matt already mentioned, we are seeing a lot of opportunities with key customers.

Speaker 2

Mentioned the growth in the retail that has been phenomenal. Our growth is much higher than the industry average. While the industry increased by 3% in the fresh category, our Pilgrim's grew 17% in the retail category, which is a great statement to how much value we are creating in terms of differentiated offerings and the key customers' quality and service. So we see tremendous opportunity there. We also see the growth of the prepared foods.

Speaker 2

The frozen fully cooked area in the retail is growing close to 10% and Pilgrim's is growing close to 18%. It's once again because of the innovation, the partnership with key customers, because of the growth of our Just BARE brand. So, we're seeing a lot of opportunities in organic growth in the Prepared Foods as well. And also there is acquisitions. We are seeing some M and A activity, especially outside U.

Speaker 2

S, mainly in Mexico and Europe, where we can improve our portfolio and reduce the volatility of our results. So we have a great growth strategy that can create value for the shareholders on the long run. Now, in the short term, given the excess cash that we have, we're also looking for opportunities. We have some acquisition of debt that we did in the past because of the difference in yields. We thought that that opportunity is not as great today.

Speaker 2

Of course, we have share buybacks. But I think even the liquidity that we have in the marketplace is also limited and we have special dividends. And as we have those discussions at our board, we are seeing opportunity for dividends for the future as well.

Speaker 6

Great. Thank you very much.

Operator

The next question is from Heather Jones with Heather Jones Research LLC. Please go ahead.

Speaker 7

Good morning. Congratulations on a great quarter.

Speaker 1

Thank you. Good morning, Heather.

Speaker 7

Good morning. I had a couple of questions on the production side and I guess I wanted to follow-up on the Helene impact. So your U. S. Volumes were up about 1.5% during Q3.

Speaker 7

But given the impact of Douglas, and I know you all are moving chicks around to keep that plant running, but how should we think about your production growth in Q4 given that you're having a new chix around clearly there's some impact on supply. So just how should we think about that for you guys in Q4? I know you're comping against an extra week, but adjusted for that.

Speaker 2

Yes. Like I mentioned, I think the big impact to us in Q4, we have in Douglas, we stayed close to a week down at the beginning of the quarter and that impacted the volumes, we will impact the volumes for the quarter for sure. And we have some damage to the hatchery, which we lost a lot of chicks in the hatchery. So, I think that is the biggest impact that we have. As we mentioned, we lost a lot of houses in that region.

Speaker 2

I think the industry lost maybe close to what we lost. So we will see some reduction in Douglas total production. But as I mentioned, we will try to reduce out time first in some of the houses. We have an optimal out time that maintain. We can reduce, so we will gain some of this square footage back.

Speaker 2

We will rebuild the houses. For sure, I know you're asking about the specific Q4,

Speaker 6

but

Speaker 2

I think over the long term, over the next 6, 9, 12 months, we will rebuild this housing. But I think more important, again, we will maintain an operation that makes the Douglas plant efficient, albeit a little bit lower by moving some birds from nearby locations that we have. So I think all in all, we can expect that the volumes in Q4 to be close to the same volumes we have last year. I don't think it will be a significant impact. Again, because we will try to dilute the impact from one specific plant with birds that we have in all others.

Speaker 7

Okay. Thanks for that. And then I just wanted to ask about broader industry production trends. So and I'm sure you all have noticed the same thing, but since the very beginning of September. So we've been having this improvement in Hatch.

Speaker 7

But since the beginning of September, there's been a very pronounced gap between what chicks placed would suggest versus what has actually been slaughtered. And I mean, some of that could be explained by the hurricane. But my understanding is that mortality has dramatically improved as the industry from the first half. And yet, we've got this big gap between chicks placed and hedge slaughtered. So I was wondering what you all think is going on and when will that resolve itself and just any thoughts you all have on that?

Speaker 2

Okay. And this is a great discussion, right, that we're having since 2 years ago. And again, everything started with this new genetic. As I mentioned, it is a great genetic. It has a great feed conversion.

Speaker 2

It has great yields, but it comes with a price, let's say. And the price has been the hatchability. And as you already mentioned, the hatchability has improved, but it has been a very slow improvement. Over this year, we went from really low 77% to kind of 77.5%. And I think as part of the improvement, it is the seasonality of the weather.

Speaker 2

So we're seeing the hatchability improvement just like prior years, you always see an improvement during the fall coming into the winter. So part of this slow improvement is even seasonality. But nonetheless, as I mentioned, I think the industry will learn how to manage this breed that is, like I mentioned, a great conversion. But on dealing with it on the life side in terms of fertility, it is really difficult. And again, the industry structure in U.

Speaker 2

S. Is not prepared to take care of individual animals, just like Europe do or Brazil does. In those geographies, there is a very detailed and let's say specific treatment separating the birds by weight in the houses and they have a much better hatchability than the industry in U. S. So we know how to do it.

Speaker 2

It's just complicated and expensive. And that's why the industry in U. S. Haven't figured out yet how to improve the hatchability at a faster pace. As we mentioned, I think there is the mortality is paying at all.

Speaker 2

I think it's improved a little bit, but the mortality has been a big issue since this new breed was incorporated into our production. And the mortality is happening on the hatching layers. So we're seeing increased bullet placements because we need to replace the high mortality that we are seeing on this hatching layer. But also we are seeing mortality in the broilers. And that's what's creating this little gap between what we are placing and what is coming to production.

Speaker 2

And if you look into the number of heads, right, Heather, we're seeing, as we mentioned, an increase in excess close to 3%. But then if you look at number of heads, during Q3, we actually produced almost minus 1% in terms of heads. We compensated with weight and a little bit of mix because we're producing more big birds than small birds. As I mentioned, the production of small birds have been reducing. But in total heads, year over year, we're down 1% and in the quarter was close to 0.7%.

Speaker 2

So it is the mortality that is impacting these birds. Of course, they convert really well and they have great yields. So we're seeing the in terms of weights, we're seeing a little bit of the compensation for that. But I think that is difficult to manage this breed. It is, like I said, a very efficient breed, but really difficult.

Speaker 2

The industry will learn how to manage it or there will be a new genetic that it happens every 3, 4 years. But we don't expect fast improvement in the hatchability or even the mortality in the shorter term, which is preventing the industry to increase production even more as you mentioned, right. Our hatcher utilization, as Matt commented, is that the highest ever. So, it is really difficult for the industry to increase overall production in a significant way. And that's why the USDA is expecting the growth of chicken for next year to be close to 1.5%, 1.7%.

Speaker 7

Bobby, I just wanted to clarify something really quickly. So earlier in the year, mortality was really bad and there were all these disease issues. But if we use this gap that you highlighted, as a proxy for mortality, it's as bad as it was earlier in the year and yet all the disease issues have abated. So do you just think that producers have just gotten worse at their husbandry or I mean just this is a weird trend in things that should actually be improving. And so I'm not trying to belabor this, but obviously it's important.

Speaker 2

No, no, of course. It has improved, but the mortality is still higher. I think that is my point. And as we start and we have some vaccination against the that's starting against the pneumovirus, I think as you vaccinate at the beginning, it actually creates even lower or higher mortality because you vaccinate, but we should improve over time. So, vaccination sometimes have actually a negative effect in the short term.

Speaker 7

Okay. All right. Thank you.

Operator

The next question is from Puran Sharma with Stephens Inc. Please go ahead.

Speaker 8

Hi, guys. Thanks for taking my questions and congrats on the strong quarter.

Speaker 6

Thank you. Thank you, Martin.

Speaker 8

Sure. If we could just touch base on Mexico, I think you've shared a lot of color on the U. S. Throughout the call. So just wanted to focus my attention on Mexico.

Speaker 8

You could just kind of remind me of seasonality. I know you called it in the press release, but any color you could share in regards to Mexico? And then kind of what you are seeing so far would be helpful.

Speaker 2

Yes, sure. I think as we always talk about Mexico is really challenging and volatile quarter over quarter, but year over year has been a great market for us. It's a growing economy or we continue to invest into growing that region. But Q3 is typically the weaker quarter for Mexico as the consumer as the schools going to recess, we have a shift in the consumer behaviors and that creates a little bit lower demand. At the same time, because a really strong Q2, which incentivized a really strong Q2, which incentivized, especially on the live markets, a bigger production.

Speaker 2

So what we had in Mexico during Q3 this year, which happens every year. It's a higher production with lower demand. And we saw prices, especially during September, to be really compressed, especially on the live market, which is really volatile. I think going forward, as we see every year, we see the rebound in demand as the schools go back and the families continue to go to their normal behavior and buy more food out of home. And we are seeing also the economy doing well.

Speaker 2

I think during the Q3, we also saw some volatility in Mexico because of the local elections. So not the American elections, but the local elections in Mexico create a little bit of but the local elections in Mexico create a little bit of volatility in terms of the currency, which impacted our cost, but also in terms of the behaviors of the families. I think people trying to save more money and we saw an impact in demand or volatile demand during that time. Now as we have more information about what the new government is going to do is a continuation of the current government. We are seeing the demand and the economy overall going back.

Speaker 2

So I think that's why despite being a good return in Mexico or good results, it was a little bit lower than same time last year and lower than Q2. But there is normal seasonality and then we have those effects. There was a little bit of impact of the hurricane, which reached that region earlier than the United States, which was right at the end of the quarter. But I think we are seeing, again, a growing economy. Chicken is at a great place in Mexico, We will continue to invest to grow in the region.

Speaker 2

Yes.

Speaker 3

I'd just complement just slightly. Just if we think back to Q3 of 'twenty three, that was a bit of a counter seasonal quarter for us in Mexico. It's a little bit stronger than it normally is. And then I think we just got back to more seasonal trends here, Q3 of 2024 just relative to that, but still really very happy with nearly 10% EBITDA margins for the business this quarter.

Speaker 8

Okay. Thank you. I appreciate the detail. I guess for the last one, if I could just kind of focus in on the U. S.

Speaker 8

Here and just kind of honing in on the supply side here. You mentioned an improvement in your own kind of production efficiencies. I was wondering if you could kind of just share some color on that, like what are you doing operationally? And are you seeing kind of the improvement in hatch rates that we're seeing in the public data like 0.5% that you quoted? Or are you able to kind of outpace that?

Speaker 2

Yes. I think as we mentioned, it is the individual attention to the animal on the breeder side that is making the difference on the hatchability. And we are testing some changes to our houses by separating some of the birds by weight and changing and adapting their feed to their individual weights, let's say, a Fitbit for chicken. So, we're seeing some increase in the hatchability, actually a little bit higher than what the industry is improving. I think we're always looking to the cost of producing the egg.

Speaker 2

And in that, we are already better than the industry. So it's the overall cost that we look, not necessarily only hatchability. So I think we're seeing some improvements over there. But as the whole industry, I think the level is still much lower than previous

Speaker 8

breeds. Great. Thank you for the color guys. I'll just hang it up there since we're a bit over. Congrats again on the

Speaker 1

quarter. Thank you.

Operator

The next question is from Orgis Ozlani with Barclays. Please go ahead.

Speaker 2

Hi. Thank you for taking the question. This is Orgis asking in for Priya. And just to follow on one of the prior questions, given that net leverage is well below your target, how are you thinking about it? And what does the current landscape for M and A in Mexico looks like?

Speaker 2

Thank you.

Speaker 3

Yes. I'll go back to the growth opportunities that Fabio talked about and I talked about in our prepared remarks. And as I mentioned in my prepared remarks, our CapEx spend is less than what we had what I had forecasted coming into the second half of the year, but it's really just timing. And we are well on our way in our plans to increase our capacity relative to our key customers, prepared foods business. And then when you talk about Mexico, it's both looking from an organic and inorganic growth perspective.

Speaker 3

And as Fabio has mentioned in the past, some opportunities we see in the M and A side and some complementary businesses in Mexico, but it's also the growth of both our fresh and prepared business in Mexico organically. So, we see a lot of opportunities from a growth perspective and where that cash will be utilized. It's a little bit more just relative to timing right now and the amount of detail we spend on getting through our capital projects and that really disciplined approach, it just takes a little bit of time to kind of get that off the ground.

Speaker 2

Thank you.

Operator

This concludes the question and answer session. I would like to turn the conference over to Fabio Sandri for any closing remarks.

Speaker 2

Thank you and thank you everyone for attending today's call. Our portfolio is designed to capture these attractive market fundamentals, while mitigating the downside risks. We built on this approach to investments in our key customer partnerships that collectively grew our business and drive value for consumers. These strategies are further amplified by our consistent improvement in people and operational excellence. While we've made progress, we remain relentless in executing those strategies, leaving our values and driving our commitment to team member safety and well-being.

Speaker 2

Based on these efforts, we can achieve our vision to be the best, most respected company in our industry, creating a better future for our team members and their families. Thank you, everybody.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Applied Digital Q3 2024
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