Good morning, and welcome to the First Quarter 2021 Pilgrim's Pride Earnings Conference Call and Webcast. [Operator Instructions]. 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 Relations section of the company's website at www.pilgrims.com. [Operator Instructions]. I would now like to turn the conference to Dunham Winoto, Head of Investor Relations Corporate bills, right. Thank you, and over to you.

Good morning, and thank you for joining us today as we review our operating and financial results for the first quarter ended March 28, 2021. 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 that we discuss. A copy of the release is available on the Investor Relations section on our website, along with the slides we'll reference during this call. These items have also be filed as Form 8-K and available online at www.sec.gov. Presenting to you today are Fabio Sandri, our President and Chief Executive Officer; and Matt Galvanoni, Chief Financial Officer. Before we begin our prepared remarks, I'd 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 date of this release. Other additional factors not anticipated by management and cause our actual results to differ material from those projected in these forward-looking statements. Further information considering those factors has been provided in today's press release, on Form-8K and our regular filings with the SEC. I would like to turn the call over to Fabio Sandri.

Thank you, Dan. Good morning, everyone, and thank you for joining us today. For the first quarter of 2021, we reported net revenues of $3.2 billion and adjusted EBITDA of $254 million or a 7.8% margin compared to 5.4% a year ago, and an [Technical Difficulty]. In addition, we offer $100 incentive bonus for every team member who chooses to be vaccinated. And we have halted operations in several locations during vaccinations to facilitate higher participation rates. We have safety protocols above all standards, but coupled with higher definition rates at our facilities will continue to result in a safe working environment for our team members. We thank our governors and other state authorities who have supported vaccination of our workforce in many of the locations where we operate. In terms of direct COVID-19 mitigating costs, we include roughly $30 million for the quarter. Countering the significant challenge over the last 12 months, our portfolio strategy has continued to generate superior relative performance and outstate the competition by delivering more than 50% increase in adjusted EBITDA for Q1. The results were driven by our resilient business model across all business units, included U.S., Mexico and Europe. The unique challenges as a result of COVID-19 presented an opportunity to demonstrate the value and strength of our well-diversified portfolio, including our presence in the world and our ability to generate more consistent results despite specific market volatility. Our performance is the result of our vision to become the best and most respected company, creating the opportunity for a better future for our team members. To support our vision, we are continuing our strategy of developing a differentiated portfolio of diverse, complementary business models, continue to relentlessly pursuit operational activity, becoming a more value pointy customer in creating an environment for safe people,…

Thank you, Fabio. Good morning, everyone. First, I want to say I look forward to working all of you in the future, and that I'm very excited in this opportunity to holders. For the first quarter of 2021, net revenues were $3.27 billion versus $3.07 billion from a year ago, with an adjusted EBITDA of $254 million or a 7.8% margin, compared to $166 million or a 5% margin for the year prior. GAAP net income was $100 million versus $67 million a year prior. Operating margins were 3.4% in the U.S., 19% Mexico and 1.2% in Europe. Our adjusted EBITDA in the U.S. during Q1 was $131 million versus $137 million a year ago. Although the markets across our fresh business units were generally better compared to last year, direct result of indirect costs related to COVID-19 mitigation drove higher operating costs. Also the significant increase in grain costs late in the fourth quarter and through the first quarter pressured the U.S. earnings this period. We continued price through these increases, but often are on the lag. Our case ready and QSR businesses remained strong, while the market for large bird deboning rebounded due to an improvement in demand from foodservice. We expect the strength in the commodity sector to be sustained as we enter the summer grilling season, and demand traditionally is strong. And fewer COVID-19 restrictions of the further rollout of vaccinations to drive continued recovery in foodservice. We also continue to improve the operating efficiencies of our large birds while introducing further product differentiation or accounting market volatility. However, labor availability challenges in some of our facilities constrained certain mix opportunities for the business. In Mexico, we achieved a significant improvement compared to last year, with $86 million of adjusted EBITDA versus a loss of $17…

[Operator Instructions]. The first question comes from the line of Ben Theurer from Barclays.

Matt, congrats on the results. Very, very strong first quarter here. Two quick ones. So first, obviously, the strength in Mexico in this quarter was particularly surprising, and it was even stronger than in the fourth quarter. How sustainable do you think this very high level is? Or at what point the more informal player is going to come back into the market and kind of put an imbalance into what currently is a balance on the supply demand side? If you could elaborate a little bit on what you are seeing on the ground, that will be much appreciated. And then I have a second one.

Sure. And we always talk Mexico quarter-over-quarter can be quite volatile given the market conditions. But over the year, they have been very consistent. Last year was no different. We saw more extreme volatility during the quarters than normal, but we finished the year in line with the previous years. In the third quarter, very strong, like you mentioned, the supply/demand in Mexico has been a little bit out of balance. We are seeing a reduction in the supply because of the fear, as I mentioned, from the small players, as big players as well, of the high feed cost and the uncertainty about the demand. As the mobility in Mexico has increased, as the demand has improved, this imbalance between supply and demand created higher prices that started in Q4 and continued throughout Q1 and continued to this day. What can change is as the market stabilize and we see more mobility, I believe that these small players and even the big players who have start increasing production to a more stable supply and demand. I think for us, it's important too that we've been growing our portfolio there. We continue to invest in the country. We are - we intend to build a new complex in the South region to support the growth for the Mexican in the next years. And we are also investing a lot in our prepared foods operations for this incoming new customer in Mexico with a higher and better money that it can buy these branded products and prepared foods.

Perfect. And then my second question is, I mean, looking at the current pricing environment and what we've been seeing on your results in the U.S., can you give us a little more like kind of a sequential data points, how it went from January into March and what you're seeing in April in terms of profitability? I mean, we all know that prices are high, but cost is so is too. So just to understand a little bit how the second quarter is currently shaping up and what we should expect for the summer period in terms of profitability.

Sure. What we saw a continued increase in profitability from January to February and March. Of course, February was also impacted by the storm. We took volume out of our operations, a lot of disruption to the mix, but what we saw was a rapid increase in terms of profitability from Q1 from Jan, to Feb, to March and now in April. We have a differentiated portfolio, as we always talk about, that protect us from the downside. And - but we have an exposure to the commodity segment that enables to capture the upside in the market. Looking at how we are behaving in all this, we have the portfolio of segments but far of papers, but also a portfolio of contracts. We have some part of our portfolio that's close to 15% that can be adjusted by market conditions of grain, so it's a cost-plus operation. And we have the exposure to the commodity part, which is straight negotiated every day, and I can follow-on up. The majority of our contracts are negotiated cases. And even, as you said, about higher food costs, but also the pressure tool but Foton supply, coupled with the recovery in demand. It's clearly a scenario where we believe that transferization is possible, and we have started negotiating with our key customers and all our customers based on these fundamental conditions in the market.

Perfect. And for the second quarter, just - so you think that's definitely going to be significantly stronger on a year-on-year and on a sequential basis, correct?

Well, as we see last year, Q2 was heavily impacted by the COVID situation, right? So I think that's an easy comp. But from what we are seeing, it was a significant increase month-over-month for this year. And as we always talk about in the grilling season gives us the strongest time for all the proteins, and chicken continues to be the most affordable protein in both domestically and for the export markets.

The next question is from the line of Ben Bienvenu from Stephens Inc.

You made some comments about labor in your prepared remarks. I know that's been a source of supply constraint in the industry. I want to get a sense as to how that's progressing, how meaningful stimulus is as it relates to labor [indiscernible] or tightness. I know it's obviously a meaningful demand driver. How meaningful is it as it relates to labor availability? And to the best that you can forecast, how do you expect the trend of labor availability looking at maybe through the year?

Yes, and that's something that is really impacting our industry and some other industries. We have experienced some labor shortages, and it's a combination of the stimulus payments, income tax refunds and we have unemployment benefits. The labor market today seems tighter than the one that we have when we were in full employment mode. So today, we're staffed less than we were even before the pandemic. We have continued to consider all options of course and are aggressively addressing the situation, and we have a very surgical strategy that we look, plant by plan what's the labor situation in the specific region and the needs from that plant. We have considered all options and that we are may attacking a traction, so we need more people to be attracted to our plants. Of course, retention, we cannot lose anybody, and also the management of the same place. Like I said in the prepared remarks, we invested in our team members more than $40 million in salary increases for 2021. But over the long term, what we believe that can help us is the investment in automation. Over the last year, we reduced 2,200 positions through automation in our plants, and we're expecting just more than $100 million in the next year, which we believe will be a potential to reduce 5,600 positions in our operations.

Okay. That's very helpful. My second question is related to the European business. Feed cost, obviously, on the rise. You talked about some of the dynamics around tulip and forecast ports. It seems like there's some encouraging trends as it relates to getting exports back up to China. Can you talk about that piece of the business as well as just your ability to pass through price and catch-up on the higher feed costs? How should we be thinking about margins trending there as we move through the year? And maybe give us some sense of if feed cost continues to go up, should we expect that those margins lag and we need feed cost to kind of take a breather for that margin to reexpand? What should we be looking for?

Yes. That's exactly right. And we have the feed cost models there in our pricing. Most of them incorporate the feed cost increase, but there is a lag in the past 3 to 6 months. So as we see the rapid increase in the feed cost, our pricing model did not adjust immediately, and the margins are compressed. But over time, like you said, we gained that margin back. We saw that in the past, especially after 2019, when we have a rapid increase and then we have a reduction in the prices of wheat in U.K., and we saw that behavior. So we have a model in Europe that is more sustainable for the long term with an average return. Of course, we also had the disruptions because of the exports to China on the pig operation. We expect that to resume as we get the licenses back. Also the ASF in Germany created a huge impact for our U.K. operation as the - all the pigs in Germany, they were supposed to go to China because of ASF in Germany, and that - in the European market, especially the domestic market of pigs, while we have the rapid increase in the costs. We, as we mentioned, are more integrated in that region, which we believe created a strategic advantage. But during this time, it was a drag into the performance there. But we are already seeing prices recovering. Prices in Germany and U.K. are recovering in pig, and we expect China to continue to be a huge source of exports, both for the global markets, right, Brazil, Australia, U.S. and Europe as well. I think sometimes we see China as a volatile market as they open globally. But if you're looking at low-term perspective, China and the whole Southeast Asia is a huge importer of protein. And as the population goes from the field to the big cities, that will continue to happen. And the China demand will continue to grow and their supply will not be able to follow pace. So we believe that Europe has a great opportunity, especially in the high welfare areas to continue to export to China.

The next question is from the line of Michael Pike from Cleveland Research.

Just want to talk a little bit more about the feed cost situation, how you're sort of managing that. Have you guys locked in any of your basis or any of their feed costs? Or are you guys pretty much purchasing on the open market right now?

Sure. Yes. We have obviously the process increase recently as the market is becoming more and more concerned about the availability of U.S. supplies or in the March plantation report, like we mentioned. We have a much smaller plant intention than everybody expected. And the combination of that with the exports to China, there's been a lot of risk really in the market currently. As we always talk, we have a strategy where we manage the risk. So if we see a lot of upside risk, we extend our positions. If we see a lot of downside risk, of course, we reduce our position. We don't have a fixed strategy on days or how much we need to be covered. As of now, we have a position that we think is the right one for the risk that we are seeing in the market. We're seeing that there is a possibility of new wafers to be found given the high prices that we have. So we see a downside risk that is much stronger than we saw in the past.

Okay. And my second question is related to kind of the give and take as foodservice comes back. I know you mentioned on the call that you see yourselves as a winner as full-service restaurants sort of come back. But do you see that potentially adversely impacting your retail or fast food business? I mean, presumably, people are going to only eat one meal at a time. Like within the construct of your business, is there a particular channel that are particularly more favorable to you when certain new channels are stronger than others?

Yes. It's a great point. I think we talk about our portfolio, and we are well diversified, and we are somewhat hedged, right? We are split evenly between foodservice and retail. We have increased the retail exposure last year as the foodservice has been down. But we believe that, that balance could come back in 2021 as the restrictions are eased and the foodservice continues to grow. As a matter of fact, in March, the foodservice segment already exceeded March 2019, not compared to '20, compared to '19 in volume, and that is led mainly by the QSR growth and the recovery of some of the full-service segment. The segment that continues to be much lower is the recreation lodging and the schools. As the vaccination rates have increased and more consumers are willing to get out of home and have more mobility, the volume in days not we call no commercial segments will continue to recover. I think on top of that, we're seeing a higher consumption of chicken in the foodservice segment. We have a survey by data focal that showed that 27% of the customers are ordering chicken-oriented meals more frequently than before the pandemic. We also have the wing and tender concept that yet not fully opened, but created a very efficient delivery system. And of course, I think it's in the news every day, what we are seeing is the significant increase in chicken due to what's called the chicken sandwich wars. We're seeing more and more QSRs launching new chicken sandwiches. In the recent data it's showing that these new offerings are being very successful, faring better than their expectations and being a great delivery of traffic for the QSR. So as the QSR demand continues to grow, I think chicken demand inside that QSR also increased. We believe that retail will moderate a little, but we don't think - we think that the sum of both will continue to be very positive.

The next question is from the line of Peter Galbo from Bank of America.

Sorry. I just wanted to clarify a couple of things. One, I think in response to Ben Theurer's question, you had said about 15% of your portfolio is tied to cost plus. And then another portion is tied to UV. I didn't know if you had given a percentage associated with that, an updated percentage there. And then maybe just help us understand some of your cost around small bird being challenged despite strong demand. I mean, is that really just on the feed cost side? Or if you could walk through kind of large, small and medium birds just where kind of profitability sits today for each of those.

Yes. On the UV side, it's our commodity exposure within the size of our big bird operations, right? So the 15% of the contracts on the cost plus, and the portion of the UV is related to our exposure to the commodity markets on the big bird, which is a third of our fresh operations. The rest of our contracts, like I said, it's more on the negotiated businesses. And I think the environment is very conducive to - for us to be able to get some price realization. In terms of the profitability by segment, the small bird was challenged because of the retail deli. I think the retail deli, despite the retail being really strong in 2020, the deli, because of the foot traffic difference, people are not going to the retail at the same time that they used to be, the food sold on the deli has been very challenged. I think it's down close to 15%, and that is a significant part of our small bird operation. On the other hand, the QSR continues to be really strong, which is compensated a little bit for that. If you look at the profitability of these 3 segments, there's also the timing of the price realization. The price on the feed is impacting all at the same time, while the commodity markets have increased much faster. Then the fresh realization is they can get on the other segments. Of course, as the time passes, we're going to have this contract renegotiations, and we are adjusting our prices for that new reality, not only of the cost, but also of the supply and demand because, after all, the price realization is what's going to help us enhance and increase the supply growth that is required for this market. So as of today, the commodity segment is more profitable than all the others, followed very close by the case-ready and some QSR segments.

Got it. Okay. No, that's helpful just to understand as we think about modeling. And I guess, the other question as it relates to kind of the average price per pound you saw in U.S., you mentioned that mix maybe was a headwind there. Just - is there anything you could help us dimensionalize the impact from lower mix in the U.S. on a dollar basis and maybe what that was? Is it not as much dark meat deboning being able to go on? Just kind of what happened there?

Yes. I think you're right. I think it is less dark meat deboning in a bigger picture and it's also less MSC. I think we're seeing the MSC industry in U.S. also constrained as all operators try to move deeper from, let's say, lower value or less critical operations. I think the most critical position that we have in chicken plant is the deboning part. You need to debone the front of the bird. The headquarter, we can always trade-off our headquarter for a deboned dark meat. But on the front of the bird, you actually need to do that. And that's why we're investing so heavily on automation. In terms of quantifying it, I think it is a significant number, but it's very hard to quantify as portfolio changes are difficult to pin point.

The next question is from the line of Adam Samuelson from Goldman Sachs.

Yes. So maybe continuing on kind of where you are with Peter on some of those questions on kind of margins and profitability by segment, can you maybe, Fabio, just help us think about, both in the quarter and kind of for the full year, what you're seeing in terms of non-feed inflation year-over-year, kind of impacts of COVID-related costs, where I know 1Q is still a negative year-on-year, but then should probably flip to a positive as you get through some of the worst impacts last year? Just making sure we see the market environment, we see the grain cost piece, but some of those other variables do seem to be pretty volatile. I'm trying to just calibrate as we think about modeling the rest of the year in the U.S.

Yes. I think the biggest increase in terms of non-feed has been delayed, right, and I think the labor availability has created a mix challenge. But $40 million is how much we increased our labor costs from one year to another. And we're investing in our team members to also be very competitive on the market because if we continue to lose labor, and I think the whole U.S. is losing labor, the operations can start to be challenged. And then at some point, we cannot produce the food portfolio that we got. In terms of utilities, we are seeing some increases in cost, but it's more localized. I don't think it's anything significant in some regions in terms of water and in terms of electricity. There is some inflation in other parts like carton boxes and packaging. I think it's normal cost that we need to offset with operational improvements. I think that's why our industry has specifically been - has been investing so much in operational improvements. We've been able to counter all these increases in terms of labor, utilities, packaging and ingredients with operational excellence initiatives. These are the best way to counter all this because of we'd be way more productive and introduce more pounds per bird. Freight has been a challenge lately. I think it is the availability of drivers rather than just freight at some of our routes. You're going to see a difficult defined labor to drive the trucks. But so far, we've been able to, again, counter and mitigate all that with operational improvements. The biggest one, like I mentioned, is the labor.

Okay. All right. That's really helpful. And then I guess, something that you mentioned in your prepared remarks. You talked about the diversity that Pilgrim's has. I think it's U.S. across bird classes, bird sizes and different categories and the flexibility that it gives you. Can you give an actual example of kind of where that's really been a big benefit over the last 6, 9 months with COVID and the demand disruption, how you see that benefiting you? I'm just trying to understand kind of are you actually moving your production between bird classes right now? Or just help me understand kind of where you're doing that in practice.

Yes. I think it's less the moving on the bird sizes and more at that to challenges in the market. We increased our retail operation by 3% to 4%, while the foodservice was really slow. So on the small birds, instead of selling for the deli that was challenged, even when the - as the retail was going up, the deli was challenged. We could produce more for the partner QSRs because of the same-size bird that we can move between packaging, instead of putting it in a deli format. We can sell an 8 - piece and sometimes even in the bag. So I think that's one of the big examples that we have. I think we can also use our internal meat on the big bar category when the foodservice was down on our food - on our prepared food operation. So we can produce more retail-oriented products with our internal meat on the big broad category. The case-ready operation as well, we could get some of the big bird meat that we have on our commodity plants and utilize our structure in the case-ready plants to put it on a tray to smaller pieces, for sure on the tray. So it could increase our trade back operations, even though we don't have that number of birds in that specific category, utilizing external meat from the big bird categories. That's how we move the portfolio around. It is not a significant change, but it's enough to adapt to these market conditions. As for the long term, and because of our partnership with the key customers, and we differentiate the strategy that we have to grow together with them, we can adapt our portfolio. One example, in 2017, we moved from the commodity segment to create one of the largest organic operations trade back in the world. I think that's something that we do. We're also moving - or we just finished the growth of our Cold Spring operation into a more case-ready to support the growth of key customers and to support the fast-growing brand just there that is [indiscernible] selling online, and it's great at bricks-and-mortar as well. So I think if there is small changes, I don't think there is significant changes in size of birds even in our portfolio. That is way more complicated because we need to adapt all your [indiscernible], your growing conditions and inside the portfolio. But having the food portfolio help us to be more agile to changes in the marketplace. Also, it helps us in mitigating downturns, as I mentioned, right? Back to '20 and we saw that the power of our portfolio, we've protected the downside that some commodity operators couldn't.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back to Fabio Sandri for closing remarks. And over to you.

Well, thank you, all. We would like to reiterate our continued commitment to our valued team members to provide them with a safe and healthy work environment, while supporting our duty to maintain food production and supply to customers. We're looking forward to an exciting 2021 and expect better results, in spite of volatility. Our diverse portfolio of differentiated products still to support our key customer strategy in conjunction with our broad geographic footprint. We will continue to generate consistent performance and minimize margin volatility in challenging market conditions relative to competitors. We'll continue to seek new growth potential, both organically and through acquisitions, while offering even more differentiated products within our business to support key customer needs and cultivating a culture of constant innovation. We would like to thank everyone in the Pilgrim's family, including our family farm partners, suppliers and our customers who make our business possible. As always, we appreciate your interest in our company. Thank you for joining us today.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.