Good morning, and welcome to the First Quarter 2020 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. After today’s presentation there will be an opportunity to ask questions. I would now like to turn the conference over to Dunham Winoto, Director of Investor Relations for Pilgrim’s Pride. Please go ahead.

Good morning, and thank you for joining us today as we review our operating and financial results for the first quarter ended March 29, 2020. 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 in the Investor Relations sections of our website, along with the slides we will reference during this call. These items have also been filed as 8-Ks, and are available online at www.sec.gov. Presenting to you today are Jayson Penn, President and Chief Executive Officer; and Fabio Sandri, 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 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 those factors has been provided in today’s press release, our 10-K and our regular filings with the SEC. I’d now like to turn the call over to Jayson Penn.

Thank you, Dunham. Good morning, everyone, and thank you all for joining us today. For the first quarter of 2020, we reported net revenues of $3.07 billion and adjusted EBITDA of $165 million or a 5% margin and a GAAP EPS of $0.27. Before I begin discussing more detailed results of our operations, I would like to express my gratitude to our global team members for their commitment, dedication, and continued hard work in supporting our ability to keep our team members safe and healthy while maintaining production supply to customers during this unprecedented crisis. At this time, while we’ve adapted our global operations to the change in channel demand, we’ve also adjusted our operations to be able to continue the operations at all our plants and minimize any significant disruptions due to labor and health issues. I would like to outline some of the precautionary proactive actions, we have implemented that go beyond our already rigid standards at all of our facilities to combat the spread of COVID-19 in accordance with health and disease guidelines recommended by specific government health authorities. We are taking these steps to better safeguard the wellness and health of each team member while fulfilling our central business duty as a food producer to people here in the U.S. and globally. We have increased the frequency of daily sanitation and cleaning at commonly used areas and repeatedly touched surfaces, limited visitors to our operations and offices, performed daily wellness screenings of team members which includes required temperature checks, self-screening and reporting, suspended all non-crucial business, travel and meeting attendance and implemented remote work for business, office team members where possible. Inside our plants we are promoting social distancing by staggering starts to shifts and breaks, increasing spacing in cafeterias and adding outdoor space to reduce…

Thank you, Jayson, and good morning, everyone. For the first quarter of 2020, net revenues were $3.07 billion versus $2.72 billion from a year ago, with an adjusted EBITDA of $165 million or 5% margin compared to $204 million or 8% margin for the year prior. Net GAAP income was $67 million, including one-time gain of approximately $22 million after tax for case settlement versus $84 million a year prior. Operating margins were 4.4% in United States, negative 7.3% in Mexico and 2.8% in Europe, respectively. Our operating profit in U.S. during Q1 was $85 million versus $115 million a year ago. We experienced significant volatility during the quarter across all of our fresh business units and particularly within the commodity segment. Our case ready operations were very strong and performed well as demand far outstripped supply at many retailers across the U.S. We further benefit from our strong key customer partnerships as well as our ability to react quickly to the demand shift by moving product to retail from foodservice. Despite some reductions in volume from QSR, during Q1 our small bird business results continue to be on the top of the industry. The market for large bird deboning was the most volatile; as pricing starts under pressure with increased production by the industry, followed by a quick increase in response to pantry loading before reverting to historical loans by early April. Despite the challenging environment, we continue to improve the operating efficiencies of our large bird deboning business while introducing more product differentiation in order to counter the volatility. Our consistent focus on key customer strategy is also yielding positive results, helping us to continue achieving an increasing relative performance against the peers. In Mexico, we reported an operating loss of $24 million, as the weak market environment…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Ben Theurer with Barclays. Please go ahead.

Hey, good morning, Jayson, Fabio, and Dunham. Thanks for taking my question and hope you’re all safe and sound. Two questions. So, one, you’ve talked about the industry reducing capacity within beef, pork, but also within chicken. Can you elaborate within that a little more on what you and particularly have been doing in terms of on your supply side, if you’ve been reducing some line speed output, et cetera? And where do you think we’re going to have within the next couple of weeks, particularly on the supply side within chicken and within PPC’s production? That will be my first question.

Yes. Sure, Ben. So we had said on the previous quarter that Q1 in 2020 will be around 6% increases in production, higher on the front-end and lower on the back-end. And with the extra working day allocated, the production for Q1 was 6.4% higher in pounds year-over-year. So that was right where we had expected that, that to be. Now recently those numbers are showing much, much lower. We’ve seen slaughter pounds 4% to 5% below last year’s numbers and they’re actually now 11.8% below the pre-COVID level. So the decreases are starting to come through fairly heavily. Chick placements are now showing decreases of nearly 8% year-over-year and they’re 10% down versus pre-COVID level. So we’re going to start to see some midterm cutbacks within our own business. We shifted our head from our commodity sectors into our case ready. So we really – one of the things we did was ramp through our case ready business and we downsized some of our commodity business. So there are a couple of things that we’re doing on the go forward. We’re obviously seeing the other proteins are right now down in production, most recently around 35%. So we’re starting to see those cutbacks cutting through the system on the near-term and our business is well positioned to capture some of that market that’s we’re seeing that space in.

Okay, perfect. Very clear. And then one for that would be actually, I guess, for Fabio. Within your and you’ve briefly managed it, but I couldn’t capture it, so clearly income, pretax income benefited significantly from a FX gain as well as this miscellaneous. Can you elaborate more what drove, first of all, the FX gain, but what’s behind miscellaneous? Because that $34 million figure was quite sizable.

Sure, thank you, Ben. So the FX gain is the hedge that we have against the operation in Mexico, the working capital. So we have 100% of our working capital that is in peso hedge in U.S. dollars. That’s what drove the FX gain. On the miscellaneous, it is a legal case. There was a settlement on a stockholder derivative action case brought by minority shareholders on PPC against JBS under the selling of Moy Park settlement. The settlement was agreed and PPC received a net cash payment of $35 million that’s created at one-time gain of approximately $0.09 per share.

Okay. Did you in the past somehow provision for that and that’s why you now take it back in?

No, we have not provisioned. So it was a net gain for us.

Okay, perfect. That’s all. I’ll go back into the queue. Thanks.

Thanks, Ben.

Our next question will come from Heather Jones with Heather Jones Research LLC. Please go ahead.

Good morning. Thanks for taking the question.

Good morning.

Hi, Heather.

So just wanted to try again on the volume question. So in your Q4 call, you mentioned that you would be transitioning one of your large bird plants to small bird. So I was wondering if, one, that’s still happening. And two, how should we be expecting Pilgrim’s volumes to trend in come in quarters? I appreciate the color, Jayson, you provided for the industry, but just what should we be thinking about in terms for you guys?

Yes. Heather, so the question around the facility transition, the right thing to do for us now is to push that off due to the added complexity that we would see within our facility. So we made the decision to and the right decision to push that off. And we’ll most likely bring that up in the first quarter of 2021. But until we see the environment clearing up, we’ll push that off. Regarding our volumes, Heather, we’ve cutback slightly as well as moving our headcount from big bird to our case ready business. So we cutback a few percentage points on the big bird side and a few percentage points on our small bird business. But again, we’re seeing these volumes flowing through the industry as well as our business. So we’ve cutback in two of our businesses in the U.S.

And I think, Heather, we have a significantly lower exposure to the foodservice than most of our competitors. And we have a higher exposure in the foodservice to QSR. As we see the QSR that Jayson mentioned coming back, we are seeing strong demand for our products in the, especially our key customers.

Yes. Heather, just to add on, over 50% of our foodservice volume is in the QSR segment and we are seeing those coming back today to very close to pre-COVID levels.

Okay. That’s consistent with what I’ve heard. Awesome. On Mexico, so when I look at the numbers and all, the pricing impact, even including FX, I mean, it wasn’t insignificant, but it wasn’t horrible. It seemed like the bigger driver of the deterioration was on the cost side and also relative performance there in that region deteriorated significantly too. So were there some unusual cost or something and that are going to abate as the year progresses? Just if you could help me understand what happened there.

Sure, Heather. As we mentioned, the chicken prices in the traditional markets were weaker and meaningful below the seasonal expectations for the majority of the quarter, but they reach normal levels by the end of Q1. And we expect our results to continue to be volatile and we’ve seen this before due to the local economy and the impact of the exchange rate. The exchange rate impacts our costs in terms of the grain that we purchase. As chicken demand in Mexico returns and the market recover its balance, we expect the fundamentals to improve. And once again I mentioned that in the prepare remark; our strong team in Mexico are two differentiation. They have strong operational excellence and market leadership. And we expect the strength in the relative performance against the industry peers to continue in the future. We continue to invest in Mexico. We are growing in the prepared foods. We are growing into fresh with our complex in Veracruz. And longer term, despite the volatility, we continue to see Mexico as a growing economy.

Okay, perfect. Thank you so much. I’ll get back in the queue.

[Operator Instructions] Our next question will come from Ben Bienvenu with Stephens. Please go ahead.

Hey, thanks. Good morning, guys.

Good morning.

Good morning.

I wanted to ask about in light of higher levels of absenteeism and plants grappling with COVID infections as well as kind of the recommendations from the CDC on how to operate facilities and mitigate risks associated with the spread, can you help us think through kind of the productivity and capacity utilization of your plants? And what it might take to get back to normal with respect to that?

Yes. Sure, Ben. Our absenteeism is varied across our business, but our teams have managed this really well. Our commercial teams have worked very closely with our key customers to simplify our mix so that we create a more optimal footprint. So just because we have absenteeism does not mean we have to be less efficient on the back-end of our facility. So I will tell you that our key customer relationships have really added a lot of value there. And so the efficiency of our facilities are actually very good due to the working relationships we have with our key customers. That’s been, again, our key customer relationships have given us a very strong competitive advantage in terms of us keeping our operations running smoothly. With regards to, we’ll call it, the new CDC guidelines, we believe that this, the recent executive order will provide a consistent and sound and guided platform for which we can rely upon as we navigate our business across the 14 states in which we do business here in the U.S. And we welcome the consistency, we look forward to working with local health and labor leadership, really, so we can continue to do two things together that we both have in common, which is to keep our team members safe and continue to provide safe food for our communities in our country.

Okay. That’s great color. Thanks. You gave some good detail in response to Heather’s question about the plant conversion. I’m curious as it relates to other capital projects in particular maybe upgrades for automation. Does the current labor environment change the math at all around how you might think about investing in automated deboning equipment, either for the front half or back half of the bird or any other equipment upgrades that you guys can make to make your plants more efficient and less exposed to labor tightness?

Yes. Ben, I think it’s a great question and this is something that pre-COVID we’ve been addressing and doing with inside of our facilities using more automation and more robotic. You’ve been hearing us talk about this for the last several years in terms of taking facilities down and putting in automation equipment. And that’s been, again, another competitive advantage I believe that’s helped us through the current environment. It doesn’t change the way we are going to invest in automation. We believe in automation, we believe in robotics and we’re going to continue to move down that path. It’s the right thing to do from a socioeconomic perspective for our team members and the right thing to do for our business.

Yes. Just as a reminder, we’ve invested more than $30 million in automation last year. And connecting to the absenteeism question, these automation projects helped a lot our plans to continue to run very efficiently this year.

Okay. Thanks. Good luck.

Thanks, Ben.

Now our next question will come from Ken Zaslow with Bank of Montreal. Please go ahead.

Hey, good morning, everyone.

Hi, Ken.

Hi, Ken.

Just three questions. One is, what are the costs associated with the COVID-19 in your plans? Second, what is the actual impact you think from the beef and pork cycles on chicken prices of late? And then I’ll have one more follow up.

Ken, regarding the costs, I’ll you tell you, they’re fairly minimal. We call it, non-impactful across the enterprise. One of the bigger costs I would say would be that we installed and built over 10,000 barriers inside of our facilities. So our engineering teams, our maintenance teams did an absolutely great job in a short period of time across all of our facilities to build these barriers where there may be 6-foot or less distance between our team members. Again, they built 10,000 of these within 30 days and did an absolutely great job with that. One of the other costs, we did offer a gratitude payment to our team members. And just thank you for doing what they’re doing in the U.S., and that was one of the higher incentives that we gave for gratitude. And that will be a $10 million payment, and we’ll do that. We’ll realize that and recognize that in Q2.

Beef and pork.

Yes, beef and pork. So on the beef and pork side, we’ve obviously seen the breast production. We’re seeing ground beef year-over-year higher numbers at 20% level and pork shops up 23% year-over-year. So we are seeing that that increase at the retail level. So we do believe chicken will be a more competitive product and a better value in the environment that we’re currently in.

And then my last question is, you did say – usually, you’re about one-third – big, small, medium, where are you now? And do you need to change it, given that 50% of your foodservice is QSR, and you said that’s largely back. Can you talk about that? And then I’ll leave it there. And thank you very much.

Yes, thank you. Yes, we’ve been developing and optimizing this portfolio over many years. And you followed us, and you’ve seen the changes in our plant setups and our plant dynamics, moving these products. We believe we’re in a sweet spot today. I think we may wind up tweaking this. We might find people more at the end of this, doing more eating at home. And we might increase our retail shift, but I’ll tell you, we believe we’re in a pretty good spot. And look, we took advantage of this opportunity to do more retail. I’ll attribute that to three things. And you just said it, our portfolio is one of them. We have deep relationships, and we have a deep network into the retail channel. And that enabled us to shift quickly into this channel when we needed to. We reached out to our key customers. Again, that’s another piece of how we were able to shift very quickly into retail channel. Our key customers gave us our first right of refusal for adding new growth items. We increased our IF business by 150% over the last 30 days. We increased our fresh bag parts to our commodity sector, moving it into the retail sector. We increased that business by over 250%. And I’ll tell you, the last piece of this is the culture of ownership and accountability that we have inside each of our businesses. We’re not a command-and-control operation. We have businesses that are autonomously run and when this opportunity for retail started shifting, we quickly – our teams quickly using a lot of agility, moved a lot of business into the retail channel. And over the last 30 days, our team has introduced and put on shelf 10 new SKUs, adding a significant amount of volume to help our retailers continue to grow their business. So three things, our portfolio, our key customer model and our culture of ownership and accountability really allowed us to take advantage of the current situation. And we believe we’re optimized, and we may not tweak the model a little bit after we see some – maybe there’s some permanent changes in the consumer habits after the pandemic.

Thank you very much.

Our next question will come from Michael Piken with Cleveland Research. Please go ahead.

Yes. Hi. Just wanted to touch base a little bit more on the kind of longer term production plans. I know some of the exits have been declining, but have you guys made any changes to your breeding flock. And what do you sort of see as kind of the longer trajectory – growth trajectory for the industry?

Yes. Michael, I would say that, again, we’ve made some short to medium-term adjustments, nothing permanent. We believed in the protein, we believed in the markets. And in terms of breeders and pullets, we’ve not made any changes there. We’re going to stick with our plan. And again, we initially said this, 2020’s growth will be around 3% to 4%. We still believe that’s going to be the case and we may see some declines – more declines towards the back end. Again, the first half of was – first Q was 6%. I think we’ll see some lower numbers here in Q2 and it may adjust slightly back up depending on what the market dynamics do. And obviously, the other proteins absolutely play a significant part relative to the protein space. So we’ll see how that – how those proteins react in Q2 and Q3 as well.

Okay, great. And then, shifting over to exports, I know you talked a little bit about the pickup in business to China. Obviously, the dollar has strengthened versus some of these currencies especially some of these oil markets. And you talked about the weakness in Mexico. I mean, how do you sort of see the export picture playing out. Is there a chance in your mind that there might be some restrictions placed on you guys in terms of exports if the domestic meat situation gets really tight, particularly with the red meat production down so much recently? Thanks.

Yes. Michael. So the USDA’s estimate on the front end of the year was around 4.5% growth. And I will tell you from a Pilgrim’s perspective, our perspective, we’ve seen 24% increase in our export sales. And so we’re running a little higher than 4.5% USDA number, but we anticipate for us for this year to grow our exports by about 15%, primarily driven by China. Our China run rate still show, and we said this few quarters back that we’re going to see a lift of between $75 million and $100 million to our bottom line. We still expect that to happen. And we’re actually more confident in our ability to grow our business in China, really for a couple of reasons. And they’re willing to adopted OIE guidelines as they relate to the regionalization in the event of a high past break. They’ve already shown that they will follow through with that. That was great news for us. And they’ve implemented a duty abatement process for the Chinese imports of poultry. And so I think those two things, Michael, really showed that there is intent for China and the U.S. to continue to do business in the poultry sector. Look, China, they’re still importing a lot of protein exports of pork to China by the four major pork exporting countries in January, they were up 129% beef ports in January by the major seven beef exporting countries. They were up 55% year-over-year and export to poultry to China by the three major exporting countries were up 77%. Just in March, beef exports to China was 113% year-over-year increased, pork was 202% and chicken was over 100%. So Michael, I think all indications for me are that China will be there and I don’t see any reason why that’s going to change and they’re still continuing to be a net – a large net importer of protein.

Michael, just to add to this, the exports are a great compliment to the overall cut out. So we typically export parts that we don’t typically consume in the United States, so paws and major leg quarters. So it’s not reducing the availability of chicken in the United States. It’s actually complimenting the overall cutout for the chicken producers.

Thank you.

Thank you. Our next question will come from Adam Samuelson with Goldman Sachs. Please go ahead.

Yes, thanks. Good morning everyone. So was hoping just to kind of wrap-up kind of the comments around kind of market environment, cost dynamics, I mean feeds become more favorable, but takes some time to roll through. As we think about April, we think about the second quarter just how, how are margins in aggregate when you roll those pieces up in April relative to the first quarter average. And I’m thinking mostly in the U.S. business, any commentary on Mexico and the EU is also appreciated.

I’ll give you the landscape right now, Adam, in terms of what we’re seeing in the marketplace. And again, this has been a very volatile past four months. And we’re still in this volatility period. But, look we’re seeing several reasons that are driving improved markets today. First retail demand continues to be robust, that was 70% at its peak and most recently, it’s still running 20% and pushing higher today in year-over-year numbers. That’s just the retail environment, the QSR business, it went through its trough and that business is now strengthening. And as I said this earlier those businesses are now operating at or very near pre-COVID levels. Even broad line we’re starting to see increases. So we’re seeing a 65% to 70% negative range and those levels are now actually the deficit cut in half. And we’re starting to see given our broad line business starting to come back with a fairly strong trajectory of improvement, as the shelter-in-place orders are expiring. Look, we’re seeing the less availability of other proteins that’s hitting the markets today. Cutbacks in the chicken industry, we’ve talked about those. They’re now at double digits below pre-COVID numbers. We’ve talked about this ground beef, pork, at the retail levels are 20% 25% higher year-over-year. And the chicken, right now it’s the value option for many households where the budgeted budgets are strapped. So these factors, what we’re seeing is a increase in the cutout. It’s been driving through the breast meat markets. That market has improved 25% just over the last week. And we know that’s a major driver in the value of the cutout. I think people are looking right now for, healthy foods. And I think foods that add to their wellbeing and I think chicken right now falls directly into that category.

Okay. So with what we know of how April pricing has played out and your view of May and June, I get that it’s incredibly volatile right now and things are changing. In the U.S. business with between the mix dynamics, it’s probably our net positive to you, but also the commodity price movements, which have been negative. Do you actually think you could have margins up quarter-on-quarter in the June quarter?

I think Adam, it will depend a lot on how the market will react to all the factors that Jayson just mentioned. Right? We have a very sharp decline in the cutout in the beginning of April to unprecedented levels, but we are seeing the market recovering and we expect that back to normality with everything Jayson said. As you also mentioned the feed inputs looking at today, prices will be a benefit of close to $200 million for the rest of the year, so we’re not looking only to Q2, we’re looking into the rest of the year. And I think the recovery is already in place.

Okay. All right. I appreciate the color. I’ll pass it on. Thank you.

Thank you.

Thanks Adam.

This will conclude our question-and-answer session. I would now like to turn the conference back over to Jayson Penn for any closing remarks.

Thank you. We would like to reiterate our continued commitment to our 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 a solid year in 2020 despite volatility, a diverse portfolio of differentiated products tailored to support our key customer strategy in conjunction with our broad geographic footprint, will continue to generate consistent performance and minimize margin volatility in challenging market conditions relative to competitors. We will continue to seek new growth potential both organically and through acquisitions while offering even more differentiated product portfolio within our businesses to support key customers’ needs by cultivating a culture of constant innovation. We’d like to thank everyone in 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.

The conference is now concluded. Thank you for attending today’s presentation and you may now disconnect.