Feed Costs up $500M Hits Pilgrim's Results

US - Pilgrim's Pride has reported its financial results for first quarter of fiscal year 2011: a net loss of more than $120 million. Feed costs for the year are estimated to be $500 million higher than last year, and the CEO has announced a re-structuring of the business.
calendar icon 3 May 2011
clock icon 5 minute read

Pilgrim's Pride Corporation has reported a net loss of $120.8 million, or $0.56 per share, on net sales of $1.9 billion for the first quarter ended 27 March 2011. For the comparable quarter a year ago, the company reported a net loss of $45.5 million, or $0.21 per diluted share, on total sales of $1.6 billion.

Bill Lovette, Pilgrim's president and chief executive officer, commented: "While this quarter is historically the weakest due to lower demand at this time of year, we encountered unusually tough circumstances due to high finished inventories, combined with rapidly increasing feed and other costs associated with our inventory levels, severe winter storms and depressed prices for chicken products.

"As part of our plan to reduce working capital, we made the decision to liquidate inventories in the first quarter. While this decision helped our balance sheet by reducing inventories and turning assets into cash, it had a significant negative effect on margins and overall net revenue per pound sold in the quarter. At the same time, lower capacity utilisation – including on our prepared-foods line – led to higher operating costs, and winter storms throughout much of the Southeast in mid-January closed a large number of our plants for several days at a time and hurt consumer demand."

Market prices for breast meat averaged $1.26 per pound, down 10 per cent from a year ago, while market prices for wings fell 38 per cent, to $1.00 per pound.

Sales and volume in fresh food-service remained flat, while sales and volume in frozen food-service and retail improved, although net sales per pound were down slightly. Export demand remained very strong during the quarter, with volume rising 90 per cent to an all-time record for the period and sales increasing by a similar amount. The company attributed export gains to the lower value of the dollar as well as chicken's value proposition versus higher-priced beef and pork in international markets.

Feed ingredient purchases, which represent the largest component of Pilgrim's cost of goods sold, were approximately $188 million higher during the quarter than the year-ago period. The company recognised $32.0 million in net mark-to-market gains related to changes in the fair value of its derivatives during the first quarter. As of today, Pilgrim's has covered 100 per cent of its anticipated corn needs and approximately 50 per cent of its soybean meal usage through the end of 2011.

Mr Lovette said sales mix remains Pilgrim's single largest opportunity to drive revenue growth and sustained profitability. As part of the plan to improve the value of its product mix, Pilgrim's recently realigned its sales and operations groups by customer segment. Under the new structure, Pilgrim's has established the following business units: Commercial Business, Fast Food, Retail, Prepared Foods-Small Bird Deboning and Prepared Foods-Further Processed. Each of Pilgrim's US operations, as well as Puerto Rico, has been assigned to one of these business units. Each group is led by a general manager who is accountable for a selected group of plants for a customer segment. The general manager directs sales and operations of this segment and is accountable for the product mix, capital needs and financial performance of each business.

Mr Lovette continued: "We are taking our existing line-of-business approach a step further by creating truly integrated business units. This realignment will fundamentally improve our business by driving responsibility and accountability deeper into the organisation. Each of these teams will truly 'own' the product mix and the responsibility for achieving the best value possible. We will benchmark each unit's performance against the industry segment in which it participates, and they will be expected to operate in the top 25 per cent of that segment."

Looking ahead, he sees a mixed outlook for the chicken industry in 2011. On a positive note, chicken is expected to be increasingly popular among value-conscious consumers, with retailers and food-service operators featuring chicken more frequently on menus or in weekly ads. In addition, the company has recently succeeded in negotiating additional price increases with some of its retail and food-service customers in response to continued increases in feed costs.

"Clearly 2011 is going to be a challenging year," said Mr Lovette. "Despite now having covered nearly all of our anticipated grain needs through the end of 2011, we are facing at least $500 million in higher feed costs this year. Our customers recognise that the unrelenting upward march of corn and soybean meal is placing extreme pressure on chicken producers and that there must be some sharing of the cost burden in order to ensure a viable business model. To achieve that, we will continue to look at further price increases and will execute structural changes in our book of business with regard to fixed versus market-based pricing. At the same time, it is absolutely critical that we strengthen our balance sheet, capture our estimated $400 million in plant-related cost improvements and seize the significant sales mix opportunities available across our asset base."

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