Second Quarter Loss Reported by Pilgrim's Pride

US - Pilgrim's Pride Corporation has reported a net loss of $128.1 million, or $0.60 per share, on net sales of $1.9 billion for the second quarter, which ended on 26 June 2011. For the comparable quarter a year ago, the company reported net earnings of $32.9 million, or $0.15 per share, on total sales of $1.7 billion.
calendar icon 1 August 2011
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Bill Lovette, president and chief executive officer, commented: "Our second-quarter financial results reflect the significant challenges facing our industry this year from the combination of record-high feed costs, weaker-than-expected consumer demand and an oversupply of chicken. Pilgrim's total feed-ingredient purchases through the first six months of 2011 were more than $400 million higher than a year ago. At this time of year, we are usually benefitting from stronger market pricing and increased demand from both food-service and retail but to date, neither that demand nor pricing has materialised."

Market prices for some key chicken products were down sharply compared to a year ago. Boneless skinless breast meat in the second quarter averaged $1.34 per pound versus $1.61 a year ago, while the market price for wings was $0.77, compared to $1.23/lb. last year. The average market price for leg quarters was $0.46/pound, up $0.10 from a year ago, while Georgia Dock prices stayed essentially flat at $0.865/lb.

At the same time, feed ingredient costs climbed dramatically. Market prices for corn averaged $6.99 per bushel, up 92.5 per cent from a year ago, while soybean meal averaged $361.15 per ton, a 29.4 per cent increase. Feed ingredient purchases, which represent the largest component of Pilgrim's cost of goods sold, were nearly $255 million higher during the quarter than the year-ago period. The company recognised $5.7 million in net mark-to-market losses related to changes in the fair value of its derivatives during the second quarter, as corn prices dropped sharply in late June as the quarter closed.

Mr Lovette said that Pilgrim's is making structural changes in its book of business in order to share the cost burden from higher grain prices. The company is in discussion with customers to move toward a more viable business model that ties pricing for chicken products closer to the market, such as through a combination of market- and cost-based pricing.

During the second quarter, Pilgrim's sales and volume in food-service and retail rose slightly. Export demand remained very strong during the quarter, with sales, volume and pricing hitting all-time highs for the period. Year-to-date export sales are up 65 per cent and volumes have climbed 50 per cent – far outpacing growth in overall US chicken exports.

"Our partnership with JBS USA is helping us enter new markets and increase our penetration in many existing markets," Mr Lovette explained, noting that Pilgrim's share of the US export market for chicken has climbed from 17 per cent to 24 per cent.

He said the company is making good improvement toward its target of $400 million annualized improvement in plant costs and yield improvements by the end of 2011. Through the first six months of the year, Pilgrim's had achieved an estimated $270 million in annualised improvement. In addition, Pilgrim's is moving closer to its goal of performing in the top 25 per cent of chicken companies as measured by Agristats, an industry benchmarking service.

"This is a clear sign that we are focused on the right things that can move the needle for us, including improving the mix impact. We need to capture every opportunity to improve our business and maximize the sales mix from each bird that comes through our plants," Mr Lovette said.

In addition, Pilgrim's cost-reduction efforts are continuing, as Selling, General & Administrative (SG&A) expense as a percentage of sales was 2.7 per cent, down from 3.7 per cent a year ago. The company also continues to realise synergies from its integration with JBS USA. To date, the two companies have captured an estimated $258 million in combined synergies through areas such as transportation and logistics, purchasing, information technology and insurance.

On 24 June, Pilgrim's announced an amendment to the financial covenants in its credit facility. The amendment suspends the existing fixed-charge coverage covenant and the senior secured debt covenant until the fourth quarter of fiscal 2012 and sets certain financial covenant levels at terms more favourable to the company. In support of that agreement, JBS USA provided a $50 million loan to Pilgrim's.

Mr Lovette added: "This is an unprecedented time for our industry. But industry production cuts are accelerating, with egg sets so far in July declining six per cent when compared to a year ago. At the same time, we remain focused on the fundamentals of our business – improving yields and sales mix, reducing costs and operating more efficiently. We have attracted new talent in key leadership positions, and we are showing good improvement in those areas of our business that we can control. We have ample liquidity and the amendment to our financial covenants gives us runway to significantly improve our business and to position Pilgrim's as a much leaner and better managed company for 2012."

For the first six months of fiscal 2011, Pilgrim's reported a net loss of $248.9 million, or $1.16 per share, on sales of $3.8 billion. This compares to a net loss of $12.6 million, or $0.06 per share for the comparable period in 2010. The year-ago results included net reorganisation expenses of $18.5 million and administrative restructuring expenses of $52.7 million.

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