Good morning and welcome to the third quarter 2020 Pilgrim's Pride earnings conference call and webcast. All participants will be in listen-only mode. [Operator Instructions]. At the company's request, this call is being recorded. Please note that the slides referred 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 the opportunity to ask questions. I would now like to turn the conference over to Dunham Winoto, Head of Investor Relations for Pilgrim's Pride. Please go ahead, sir.

Good morning and thank you for joining us today as we review our operating and financial results for the third quarter ended September 27, 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 section 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 Fabio Sandri, President and Chief Executive Officer and Chief Financial Officer and Joe Waldbusser, Head of Commodity Risk Management. 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 those factors has been provided in today's press release, our 10-K and our regular filings with the SEC. I would now like to turn the call over to Fabio Sandri.

Thank you Dunham. Good morning everyone and thank you all for joining us today. For the third quarter of 2020, we reported net revenues of $3.08 billion and adjusted EBITDA of $305 million or a 9.9% margin, 18% higher than a year ago and on an adjusted GAAP EPS of $0.66. I would like to express my sincere gratitude to our global teams for their continuing commitment, dedication and hard work in supporting our ability to keep our team members safe and healthy while maintaining our ability to produce and supply customers during this challenging time. I could not be more proud of our team as they have continued to come together to support one another, our customers and consumers. Safety is a condition at Pilgrim's and our team members responded admirably to the unprecedented conditions supplying products to our customers. They were continuously adapting our global operations to the change in channel demand while adjusting our operations to be able to maintain the operations at all our plants and minimize any significant disruption due to labor and health issues. We remain diligent in implementing precautionary proactive steps to better safeguard the wellness and health of each team member while fulfilling our essential duty as a food producer to consumers in every region where we operate. Direct COVID-19 mitigation costs of roughly $27 million for the quarter and close to $77 million year-to-date. The direct costs are related to the extra cleaning of our production and common areas, the extra PPE including masks and safe shoes that we are providing to all of our team members and the installation of physical barriers in our production areas. We also installed dual technology UV and bipolar ionization in every plant to filter the air and neutralize potential viruses. We are offering free…

[Operator Instructions]. The first question is from Benjamin Theurer with Barclays. Please go ahead.

Hi. Good morning, Fabio and Dunham. This is Antonio Hernandez on behalf of Ben Theurer. My question is regarding COVID-19. How is your current level of absenteeism at plants? How is that evolving in recent weeks considering there are continuously high number of patients in the U.S.? I am not sure if you can provide some kind of a run rate of protective measures related to COVID-19 during the quarter? And what do you see going forward? Thanks.

Yes. Thank you and good morning. First, as we face this global Coronavirus pandemic, we have been guided by three principles. First, an uncompromised commitment to the safety of our team members. Second, recognizing and embracing our responsibility to provide quality food for the country and of course endeavoring to provide continued employment opportunities and benefits to our team members during a time of unprecedented economic upheaval. So the direct cost are related to the extra cleaning in our production and common areas. We are also providing the PPE, including the masks and safety shoes to all of our team members and we installed physical barriers in our production areas. And of course, we are maintaining social distancing in whatever areas we can. We have built more than 10,000 barriers within the first 30 days of this pandemic and we continue to upgrade those barriers. We also installed the dual technology UV and bipolar ionization in every plant to filter the air and neutralize potential viruses. As I mentioned, we are offering fee live health online services for all of our team members that allow for virtual doctor visits at zero cost. And above all CDC guidelines, we removed the vulnerable team members from facilities with full pay and benefits during community outbreak and that is creating some challenges to operations because by removing those people, we have less people at our plants. The situation is very fluid. It varies from plant to plant, but over the last month, we have increased our staffing to close to the levels that were before COVID. So we are already running a much better mix than we were during the Q2. And we are seeing a very good increase in our absenteeism levels. As people are more familiar with what we are doing as we are gaining the trust of the entire communities, people the less reluctant to return to work and with that we have been improving our ability to execute the optimal mix. Of course, we are also working with our key customers to simplify our mix to create a more optimal footprint. And with the frequent communication with them, we are ensuring that our team members, we expect to return to the optimal operation in this quarter.

Perfect. Thanks a lot and congrats on the results.

Your next question is from Ken Zaslow with Bank of Montreal. Please go ahead.

Hi. Good morning everyone.

Good morning Ken.

Just two questions. One is, as you change your mix, what was the mix between big, small and medium, say last year? And then what do you think it's going to be now? And then what do you think it is going to be in about a year from now, as you adjust your product mixes?

Yes. Ken, we are well balanced between small birds, tray pack and large bird deboning. What we are doing is, as the demand has been shifting to more retail, we have been shifting our operations. Also with the growth of QSR, we have also adapted those conditions. What we are doing for 2021 is to, first, move that plant from big bird deboning to small bird deboning, which will increase our presence in that segment. We are also doubling the capacity in our Minnesota plant to comply or support the growth of our key customers and our Just BARE brand which has doubled the sales in the online channel over this quarter. Looking into overall portfolio, we moved from 46% of our total sales in retail to around 51%, just in 2020 with small changes in our operations. For next year, we expect 2% increase in that portfolio to the retail and 1% to 2% increase in small bird with those two conversions.

Great. My next question is, can you talk about the sustainability of the Mexican margins? Particularly, I did see that there was a little bit of a FX benefit. How do you think about the Mexican operation? I think you did say that it's still continuing the momentum into the fourth quarter. Then how do you think about it for 2021? How do we frame it in our minds?

Yes. Sure, Ken. And we have been talking about Mexico over the last years that they are very volatile quarter-over-quarter but they are more stable if you take a longer period of time or within a year. What happened in the first quarter or in first semester in Mexico was complete imbalance in supply and demand. So the industry increased supply during the first semester and at the same time, demand, because of the COVID-19 really create a challenged environment. As you remember, in Mexico, there was no support from the government with COVID-19, like we had in U.S. and Europe. There was no governmental stimulus or unemployment benefits. It created a sharp slowdown and recession in the region which really affected the demand, both in the foodservice and retail. While within U.S., we saw an increase in retail compensating, at least partially, the shutdown in foodservice that didn't happen in Mexico. And that's why the supply and demand was completely off-balance. As the industry adapted their supply for the Q3 and we at Pilgrim's adapted to their situation as well, we reduced our cost and we also cut production, the supply and demand improved a lot and we the rebound in the foodservice end demand in Q3. And now, we have very stable prices during this time in Mexico. We expect this to continue during Q4. Q4 has always been a stronger quarter for Mexico with the festivities. We don't know at which point that will be reduced because of the COVID restrictions. We are seeing some increasing cases in Mexico. So there could be some more restrictions in Q4. But given the supply and demand situation that we are in right now, the results are sustainable. Now, for Q1, we expect the industry to increase production to adequate supply and demand and the return to more normal levels, Mexico is really volatile quarter-over-quarter, again, but we expect to be very stable year-over-year. Of course, our strategy is supportive of the growth to increase the high margin differentiated products as well. We saw a little bit of impact in the prepared foods, especially on the more affordable products during Q1. But we continue to invest and the highly differentiated Pilgrim's products continue to sell really well. Longer term, despite the volatility, Mexico is a growing economy and as the population increase their disposable income, it leads to a significant growth in protein consumption.

Great. I really appreciate the answer.

Thank you Ken.

The next question is from Ben Bienvenu with Stephens Inc. Please go ahead.

Hi. Good morning.

Hi Ben.

I want to ask, you touched on in your opening comments with ASF in China and Germany. I want to ask on Germany more specifically. I would think that's a nice boon for the Tulip business. Just curious on what you are seeing in that business, both as it relates to the impact on the domestic market and then an uptick in potential demand from that market as well? And how do you think you are positioned capture that benefit?

Yes. Thank you Ben. The operations in Europe are more focused on the retail. So we produce most of our products in U.K. for the retail U.K. market. And because of the high welfare, we command a premium in that region. The big competition, as you refer, is on the foodservice sector of the imported products from Poland and Germany, mainly and Spain on the pork side. As the Germans have these issues with their production and because of the ban in China, it actually increases the sales in the U.K. market. It also creates the opportunity for our U.K. products to be sold into China. So what we saw is that, on the, what we call fifth quarter products, a significant increase in pricing. But on the normal products like loins and others, we see the prices more stable because it's is a zero-sum game at the end of the day. So it increases the opportunity to China. So that was welcome. I think our sales have, like we mentioned, have doubled during Q3 and we are seeing some very stable pricing. But it also increases the competition in the foodservice segment in U.K..

Okay. Great. My second question is related to grain. And apologies if I missed this in your opening comments. I did hear your overview of the market. Could you talk about how you are positioned relative to the markets? Are you more hand-to-mouth at the moment? Do you have any bases secured? Any color you could offer there on you are positioned through the balance of fourth quarter and into next year would be helpful.

Hi Ken. This is Joe. Thank you for the question. Obviously we have seen prices of corn and soybean meal increase in the last few months which have been the result of a few factors. For corn, we have seen a reduction from the supply side with USDA reporting six million fewer planted acres than they originally estimated back in March. We also saw our final stocks for 2019 end up being 200 million bushels less than was expected when the final counting was done. On the current crop, we actually, for the acres that were planted, see pretty good yield, above trend line yield. So it's not an issue on the supply side in terms of U.S. production. But on the demand side, we have also seen less bigger export demand, primarily driven by China. Still, the USDA is projecting a carryout of around 2.1 billion bushels and that includes a 30% increase in export demand from last year. So even if export demand ends up higher than what USDA is projecting, corn stock should still be in line with previous years. On soybeans, USDA is projecting a 290 million bushel carryout which should be the lowest carryout in five years. This projection though includes a 31% increase in export demand, driven by China in addition to the increased export demand in Argentina, which is one of the world's largest sole seed exporting countries, is in the midst of a historic economic crisis which is causing farmers there to hold back available supplies from the market adding more pressure to the U.S. to meet this demand. We believe the market is likely to feel anxious about U.S. soybean supplies until there is a resolution to this currency situation in Argentina or until South America's supplies can be available to meet this demand. In terms of how we are positioned, we have always said that our hedging strategy is adaptive to the market conditions and the risk we see and we feel very comfortable with where we are in corn and soy. We do recognize the risk to soybean supplies in U.S. and our positions reflect that.

Okay. Awesome. Thanks and best of luck.

Thank you Ben.

[Operator Instructions]. Your next question is from Michael Piken with Cleveland Research. Please go ahead.

Yes. Hi. Good morning. I just wanted to touch base a little bit more in terms of the move, I guess, into retail and some of that big bird product, is that being chopped up and put into trays? And how is that impacting some of the margins on the commodity business?

Yes. Mike, there is a lot of products on the big birds, especially during promotional seasons, seasonality during the summer that some of the big birds end up being put in the tray to be sold in the retailers. We continue to do that. I think the challenge to the industry is that we need to have the labor available and the facilities available to do more of that. And that's why the industry has not increased more of the production to the tray pack as we want or as the demand continues to grow. It's also because of that that we are increasing the capacity in our Minnesota plant. So as of today, yes, we are buying big bird meat and we continue to put it on the tray, especially during Saturdays. And I think the whole industry is doing that.

Okay. Great. And then my second question is, just looking at the, you mentioned that your absentee rates were starting to down, you are starting to get back to normal mix. In terms of some of deboned dark meat, are you starting to return that to historic levels? And what could that mean for the leg quarter prices, which has seen the most pressure? Can that help? Or is the fact that China is taking more pork, can that help with leg quarters? I mean why haven't leg quarter prices moved if there's deboned dark meat potentially being produced and it seems like, at the very least, try and to take in more U.S. pork?

Yes. You are right, Mike. Because of the absenteeism and also the foodservice industry in U.S., the industry produced 3% more leg quarters in July and August than the same period last year despite a lower total production. That puts a lot of pressure in the leg quarter prices. As we are seeing more the reopening of the foodservice and as we are seeing the absenteeism and staffing of our plants increasing, for us and for the whole industry, we are seeing more deboning. We are already at levels comparable to last year in terms of deboning which will reduce the pressure in the leg quarters. Of course, China has been also more active in the leg quarter market over the last month and we are seeing that in the leg quarter inventory, that was up a sequential basis up to August. But we are seeing a reduction. And also the inventory, today, is down 9% compared to the peak Q1 average that we have. So those two factors can contribute to the reduction in the leg quarter production which is a commodity item, as we mentioned. And the China interest, I think we saw over the last weeks, although not today, the increase in the oil prices and the reduction in the dollar, which increased the availability of dollars from developing countries which also increases the demand for leg quarters. So what cold help on the leg quarters going forward is both on supply and demand. On supply, it is exactly what you said, less leg quarters because of the improvement in labor efficiencies and the more sales in the domestic market on the foodservice. And on the demand because of low prices and because of more available income in the developing economy.

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

Hi guys. Good morning. Thanks for taking the question. Fabio, just as I am thinking about it, the small bird and the retail channels obviously have been tremendously profitable for you guys during this time period and with the plan conversion coming. But with commodity big bird remaining and the cutout that you have here remaining under such pressure, just at what point does it make sense to start talking about converting another plant, whether that's to retail or to small bird? Because it just seems like that big bird portion is not going to improve without more capacity either being converted or taking out in the market in some capacity?

Sure. Thank you Peter. I think the decision to convert the plant is a more long term decision. And we always make those decisions combined with our key customers' strategy. As we see the demand of these key customers growing, we take actions in our portfolio. And that makes a lot of sense for us to do that conversion right now from that operation from big bird to small birds to support this growth. I think, again, you need to look into a more broader long term perspective. We continue to expect to foodservice sector to rebound. If you look at the foodservice sector today, the foodservice restaurants are down 13% year-over-year and that is impacting the big bird deboning, for sure, while the QSRs are up 9%. As we go to more normal operations as we see maybe the development of vaccines, we don't know that's going to happen or we see more openings of the restaurants, we expect the foodservice restaurants, especially on the foodservice to regain some market share that they are not operating today. So I think it is a long term decision. And it's also a very difficult decision to move from big bird to smaller, because we have the growers and we have the feed mills. It's all built to that specific bird. Our plants in United States are really customized to that specific segment. So any conversion, it really requires significant capital and requires some significant changes in the overall supply chain, both starting from the growers, your feed mills and your field operations. So it's a high capital investment that needs to be supported for the long run. So that's why we don't see a lot of conversions in our industry. Of course, if this situation continues for a longer period of time, you can see some conversions. I think also it is important to know that some other players don't have the key customer relationships that we have. And moving from the big bird to the small bird or to the case-ready require a customer and a key customer to support. And since they don't have those relationships, it's harder for them to do some conversions.

All right. No, that's helpful. And then maybe jus to follow-up, given where the balance sheet is now and something you talked about in your prepared remarks, how should we think about M&A potential, maybe from a geographic perspective? Or does it make sense to bigger in pork in Europe and going into 2021? Just any help there. And then maybe you could also comment any updates on your CFO search? Thanks very much.

Sure. In terms of strategy, I think our strategy continues the same. And our growth strategy continues, in fact. And as we mentioned, we have already strong balance sheet. We are looking to increasing our prepared foods operations and our branded operations to create a more balanced portfolio and we are also looking for chicken assets where we can extract more value from operational efficiencies. We are seeing targets, both in U.S. and outside U.S., geographical diversification and to growth in Europe and we will evaluate all alternatives to our value creation standards. In terms of the CFO, we are in the process of finding another CFO. We already engaged recruiting firms and we should have news in the near future.

Great. Thanks very much guys.

The next question is from Adam Samuelson with Goldman Sachs & Co. Please go ahead.

Yes. Thank you. Good morning everyone.

Good morning Adam.

So maybe first just a clarification and a little more detail on the expansion of the Minnesota plant for case-ready and the conversion of the Texas plant to small bird from big bird. What's the net impact on your production volume? And what's the capital cost for those projects?

Yes. In terms of total volume, I think it should be just a little bit up. We expect to grow in line with USDA expectations on the industry for 2021, which is a little bit lower than 1%. As we have more birds in Minnesota but we also reduce the weight in our operation on the big bird that we are transforming to small birds. So we expect to be for 2021 in line with those two. In terms of investments, it's not very significant to our total CapEx. As the conversion of the small bird plant, it's a simpler conversion. Of course, that QSR requires some DSIs, which is portioning equipment and some marination equipment. And we are going to invest in automation in that plant as well. Today, it is a manual deboning operation. And we are going to invest into automated deboning. So the investment is close to $20 million to $25 million in that operation. And in case of the case-ready operation, it's close to $70 million. So overall, it is a total of $100 million that we are going to invest in those two conversions.

Okay. That's helpful color. And then the follow-up was, I just want to make sure I heard some things right in the prepared remarks. You talked about the prepared food business in the U.S. declining 26%, I think is what I heard. And maybe hoping just to expand on that? That's a business that I think that has a few more challenges over the year? And is it really just a question of return to school and foodservice traffic? Or how do we think about that business from a margin profile moving forward?

Yes. That's exactly it. In our prepared foods business, we have a strong brand which is the Pierce brand. That is mainly a foodservice brand. We also are very strong in the school with our Gold Kist brand. Both those segments are the ones that are most affected by the COVID-19. The non-commercial foodservice, that includes schools, were down 66% at Q2 and now they are down 43%. We are seeing some school reopens which could help but it's a segment that is still down 40%. On what we call the commercial foodservice, which is the street business, there our Pierce is a leading brand in wings and in chunks. We saw that in Q2, they end up 36% lower than the prior year. But they are rebounding and then today they are close to 4% lower than the same period last year. So the foodservice business has been recovering and with that our Pierce brand has recovered in our volumes. But the school system is still close to 40% lower than the prior year. And that's why we are investing in more retail branded business. As we mentioned, our Pilgrim's brand has increased more than 30% and we have been very successful in expanding the Just BARE from the fresh category, where it has been very successful on the online segment and also on the higher attribute segment in our key customers to the prepared food segment.

All right. Great. That's helpful color. I will pass it on. Thank you.

Thank you Adam.

The next question comes from Carla Casella with JPMorgan. Please go ahead.

Hi. My question is regarding your leverage. That three times target, how comfortable or how high would be comfortable taking that in the event of additional M&A? And are you seeing any more M&A opportunities, just given the volatility in the worldwide protein market?

Yes. Thank you Carla. We set these targets of two to three times because it's the best capital structure that can protect and reduce our interest payments while not creating any problem for our bonds and for our leverage. The two to three times is in normal operations. Of course, during some acquisitions, if we have a great plan on how to reduce that back, we can go further. I don't think there is a number that is specific on where we go. I think it's more about what is the plan to deleverage. And of course, the plan to deleverage could include the issue of stock. And that's why Pilgrim's, as a public traded company, has that opportunity to use the stock as a currency, not to increase the leverage to points where we don't think it is prudent in the case of significant acquisition that will be transformational for the company.

Okay. And just one last one.

Sorry, in terms of M&A, yes, we are seeing more targets. Of course, the whole situation about traveling has created some challenges in terms of seeing and visiting assets. But we are seeing some targets that are still very interesting to us and could create a lot of value for our shareholders.

Okay. Great. And then just in the event that JBS is able to list the U.S. business, would that cause any need for a change in your structure?

Yes. We don't believe so. I think JBS has said many times that they continue to support Pilgrim's to be a public traded company. And just as I mentioned, it is a great way for us to keep our growth. We can use the equity as a currency in the case of a very important and transformational event for Pilgrim's.

Okay. Thank you.

[Operator Instructions]. Gentlemen, there are no more questions registered at this time. I would like to turn the conference back over to Fabio Sandri for closing remarks.

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 are looking forward to closing 2020 with good results in spite of the volatility. Our diverse portfolio of differentiated products tailored to support our key customer strategy in conjunction with our broad geographic footprint, we 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 products portfolio within our business to support key customers' needs by cultivating a culture of constant innovation. We will 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.