Pilgrim's Pride Corporation (PPC) Q1 2021 Earnings Report, Transcript and Summary

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, safe products and healthy assets. Our team members have remained focused on executing and delivering on our strategy, regardless of individual market conditions. Our ABR continued to see incremental improvements in many of our markets. Some challenges have remained, and we continue to adapt by making internal change to our operations to be well aligned with market conditions. We are committed to deliver strong growth and achieve a significant increase in relative performance against industry peers across all of our global operations. During Q1 in U.S., our retail and QSR business has remained solid due to strong demand across our customer base, despite high input in operating costs and less than optimal mix due to labor shortages. The market for commodity in March barebone experienced the largest improvement, relative to the same period a year ago. Our prepared food business remains resilient, considering the challenging demand environment, and the business continues to grow its sales, reflecting the investments made over the past few years and in anticipation of strong results as COVID-19 restrictions are rapidly listed throughout 2021. In Q1, despite significant changes in feed costs lower volume due to lockdowns, a reduction in mix portfolios and COVID-19 mitigating costs, our combined European operations, Moypark and in the U.K., which is still generating good performance. In Mexico, the market remains very favorable with strong results in the quarter compared to a very difficult Q1 of 2020. For 2021, we will maintain our strategy while continuing to improve the portfolio, to be responsive and resilient to individual market dynamics, and it create a relative performance over the competition. We believe this approach will give us higher and more consistent results for the mid- to long run, and minimize the full peaks and trough of the volatile commodity sectors. In U.S., COVID-19 restrictions continue to impact our Q1 results. Market environment improved throughout the quarter, including a challenged February, in part due to a significant weather event in Texas, Arkansas and Louisiana, which have all recovered as we exit the quarter. The weather event impacted our SAR and blowout operations, but rebounded quickly. With gradual losing of restrictions as a result of the increase in vaccinations, the market has been incrementally improving, especially in food service. Outside of foodservice, market conditions were mostly in line with difficult seasonality and remain strong. QSI volumes continue to be robust, and demand from our customers have been outperforming the industry and our expectations. Commodity large bird deboning generated the most improvement and recovered strongly driven by seasonality and much better support from foodservice and experts to all of the strongest markets we've seen in years. We expect the strength in commodity can be sustained beyond Q1 as really is just around the corner, but chicken demand is seasonally the strongest historically. In addition, with more vaccinations, we believe that foodservice demand can return over to pre-COVID levels, while at the same time, staffing challenges of our plants will likely be beta as well, allowing us to produce a more optimal and profitable mix of products. We expect to be a clear necessary from the expected recovery foodservice demands through our diversified portfolio. We continue to adapt to the changes in channel demand by increasing our volume mix to key customer retailers. Our VIP offer a pro of differentiated products along with our key customer model are giving us better installation against working. We're also much better positioned to adjust product and channel mix, even our presence across all but sizes from small to large. Our retail volume is expected to improve over same time last year in Q2. We expect to continue our discussion with customers to better reflect the significant increase in operating costs, including labor and fees as well as the general oversight in supplies. Despite challenging conditions for small birds with the traditional foodservice distribution, our demand continues to be strong, driven by our key customer outperformance within the QSR and retail deli. Online sales are forecasted to grow around 22% over the next 5 years. We continue to deliver strong online growth of almost 4x the projected category growth number, mainly driven by case-ready and prepared portfolio across the just bare and finer spends. As of Q1, we posted roughly 85% growth versus last year. We are also gaining more brick-and-mortar retail distribution for our fresh, Just BARE brand. Our market leadership in these categories and more differentiated product portfolio have continued to strengthen the growth of our competitive advantage versus the industry. The expansion of our case-ready capacity at our plant in Hosting, Minnesota is now complete and almost double our mix of more stable margin case revenue products, especially on our differentiated high attribute Just BARE brand. We experience a much more challenging labor environment in Q1 across the U.S. operations. We have rolled out more than $40 million in strategic wage increases for our team members to mitigate the operation and to remain competitive within the market. At the same time, we continue implementing a long-term strategy of introducing more automation in our operations to reduce operational challenges to labor and again in the future. In the U.S., prepared food business, our consumer-packaged branded business grew 70% year-over-year, partially offsetting the year-over-year decline in Schools and foodservice, which continue to be impacted by the dynamic. In anticipation of the return in demand from these channels, we have been investing our prepare business to benefit from the recovery, and we expand our production in more field West Virginia. We continue to grow our branded consumer package business with more line extensions with our just BARE and the renewed commitments on the partner spends. We will diversify our product and channel mix to further stabilize our prepared margins. At the close of Q1, industry inventory continued to decline from its position at the end of Q4. USDA chicken inventory was down 11% from December 2020 to February 2021, and about 17% from the previous year. Combined or with vendors dropped by 13% from December 2020 and are down 27% year-over-year. the year-over-year improvement in inventory was expected as early 2020 inventories reflected preparation for shipments to China that were initially delayed by the COVID-19 dynamic. Quarterly ETR decrease have outperformed expectations, even though the Merian cargo industry faced some shortages, delays and worldwide container imbalance. But to February, the pride industry grew its export by 5%, and the numbers are indicative of potential for a more balanced low-trade portfolio, as the pandemic recovery efforts continued throughout 2021. Exports to China have continued to grow strongly, and it has remained a good destination for us while also having the potential for driving demand in other parts in the future. Due to recovering demand, high SAI and ASF impact in Europe, and a weaker dollar, rather exports are continuing to continue some growth for 2020 at higher prices. On export volume grew by 14% during 2020. In 2021, we are expecting similar growth numbers and have committed to grow our business with core and value of set to expand and diversify our portfolio of destinations. Year-to-date, we have added several new direct clients and have continued to introduce our brands to new markets. The best sheet are quickly is the biggest headwind for the industry in early 2021. We have taken strategic positions very appropriate and we're confident in our supply chain's ability to execute, prioritizing profitability for our business units. Compared to a very challenge Q1 last year, Mexico had another strong quarter over robust second half performance to 2020, driven by a balanced supply demand and continuous improvement in our operational performance. We adapt the operations well to generate strong performance, despite volumes in the fresh segment that were below those of these 2020. We hope Q1 of last year, the market was oversupplied, which we take much higher-than-normal average turn rate and also contribute to the supply/demand in bats. More normalized economic activities and increased share of non-commodity products, and forepart that chicken also contribute to the strength. We expect overall demand to continue to be solid, while we remain agile and are continue to adapt our facilities by shifting production to those channels that are experienced at Ardent. Our prepared foods also rebounded well with strong demand. We maintained the pursuit of our strategy to invest in our brands in both fresh and prepared business, seeking to establish strong differentiated brands and products and, at the same time, increasing our share in modern channels with more stable margins over time. We expect challenging grain prices volatility in the U.S. dollars and normalize demand should keep the supply-demand equation fairly well balanced for the future. Our positions in Mexico can be volatile quarter-over-quarter. We expect full year performance to remain consistent with our vision of long-term continued growth for the region. Our team in Mexico continues to relentlessly focus on operational excellence and customer satisfaction, and we remain committed in long-term growth and demand prospects in Mexico. In Q1, our combined European operations, Walt Mark and Beers U.K., continue to capture operational improvements, despite significant challenges in feed costs, lower volume due to lockdown, export constraints to China and COVID-19 mitigating costs. On my part, despite materially higher feed costs, Morton formula prices. COVID-19 mitigating costs of more than $4 million and lower volumes due to the pandemic restrictions, strong in foodservice, the business generated similar results to the prior year. Countering the headwinds by part implementing operational excellence initiatives continue to deliver labor efficiency, improve yields and better agricultural performance. We expect more of our performance to continue to improve in the coming quarters as the sharp increase in fee were partially offset in the following quarter through our sales contract models, reflecting the mitigating of higher costs in the sales price, and we are already beginning to see demand conditions improving at the lockdowns in Europe and other restrictions are flows. We have maintained the performance of previous U.K. operation with positive EBITDA contribution. During Q1, we experienced a reduction in volume to China due to the suspension of our export license at 2 plants as a result of COVID-19. As a reference, during Q1, the overall market was down 25% from Q4 of last year. We are working with relevant authorities to regain the license this year. In addition, big presses in the EU and U.K. were under pressure because of ASS in Germany, despite higher grain costs. However, it has already started to recover. Our business is more integrated than the competition, which could trade our performance during the quarter due to weak prices of live animals. However, we believe over the long term, it remains the best small. The integration of timescale remains on track. Over the next few years, we expect to generate an EBITDA improvement to achieve a level that is competitively leading companies with similar portfolios. We have expanded our distribution capability for the previous U.K. assets through some recently to increase our retail exposure and strengthening our partnership with key customers. Our key customer strategy is working well as expected and have increased our volume by 7% in Q1 to those customers. In Q4 of last year, our brand-new refurbished site in Danboro became fully operational for our retail packing business. We have invested in state-of-the-art food manufacturing technology with high levels of automation to serve our key customers to further deemphasize the proportion of commodity sales. Pharmaport flats, softies and value-added products will give scope for further growth and expansion in the future. We're optimistic about building upon our operational improvements by continuing to optimize our manufacturing footprint, extract best-in-class operational excellence couple is expert opportunities, optimize the portfolio of channels, segments and products as well as strengthening our growth business with key customers to drive innovation in value-added and high margin areas. Ingredients, core prices, et cetera, to [indiscernible] seen since 2013, following the historical trough in December of 2012. A combination of increasing demand and lower production has provided the catalyst for the process rally this year. In their made supply demand estimate, USDA projects U.S. corn ending stocks at 1.35 billion bushels, a decrease from last year 1.9 billion. Exports are projected at 2.7 billion bushels, up from last year's 1.8 billion, driving higher primarily by increased exports to China. In addition to the higher export demand from China, there is full selling in the market now that Brazil's second crop is not getting enough rain, which is creating more risk premium in the market. In the recent plantation reports, USDA reported that pharmas intended to produce 91.1 million acres, which was considered less than we and the market had expected. We believe that actual asset takers for corn were eventually coming in higher due to the higher prices for the new crop we have seen recently and the good weather forecasted for planting. High yield prices has been somewhat supported by that levels very similar to where we started the year. The large crops in North America are providing competition now for the soybean. And soybean exports, which is waiting on is prices. Another contributing factor keeping soybean yield prices lower despite the higher soybean prices is the growing demand for the renewable diesel, which is moving the value of the soybean production into oil away from you. USDA reported that farmers intended to plant 87.6 million acres, which was also less than the market expected. But much like corn, we expect a good weather forecast and the recent increase in new crop prices to incentivize farmers to plant more acres. Wheat prices in Europe have also recently risen from the following the rally in global corn markets. With higher point prices, we are seeing wheat start to work into feeding rations globally, which is providing rice support. We continue to see a major recovery in global wheat production, including an 80 million-ton increase in Australia. Crop conditions in the U.K. and Western Europe are significantly better than 2020, which supports our view of a larger report basin production in our main sourcing area. And conditions in U.S. are also come out AMC. Overall, we feel good about it and it global for a week. According to the USDA, Q1 21 live weight production decreased 3.4% or 1.8% reduction if we adjust for the word pace relative to prior year as a result of fewer headcount. Headcount restrictions were led as a smaller category, while the medium and large segment increased headcounts. The industry average live weight continued trends of year-over-year increases as medium to abort account for a large share of the total [indiscernible], changing of weight within categories was less impactful. The placements, which can be for increase in Q1 '21 on a year-over-year basis by 1.7%. Even if the industry has seen generally higher trend in pullet mortality, the statements are expected to support current capacity within the industry. Looking ahead, the USDA 2021 annual production outlook has been reduced since the beginning of the year, now reflecting a modest expectation of 0.4% growth year-over-year. The modest production uplift is the result of higher grain costs expected to pressure returns and the effects of winter storms in the South during February, which has impacted the industry's ability to set eggs and chicks. The results, the resulting production impact should be realized in Q2 trailing one, with negligible impact throughout the remaining FDA. It is important to recognize that the supply and demand fundamentals for chicken and the resulting pricing environment will ultimately in the industry production outcome in 2021. The fourth quarter of 2020 was highlighted a slowdown in the foodservice recovery as COVID-19 cases rate increase and capacity limitations investments were extended. We feel demand strong during this time period and continue to do so throughout Q1 '21. As a result of increased vaccination, a falling COVID-19 daily rate cases, foodservice capacity restrictions has been eased throughout Q1 '21. In most areas of ore, and the U.S. consumer has become more profitable and engaging in activities outside at home. Consumers have also benefited from the need of second and third stimulus funds, further supporting the recovery in foodservice. The results has been a marked improvement Q1 for sales demand versus Q4 '20, despite a slight part in the recovery in February winter storms throughout much of the South and Southeast. While foodservice demand for chicken has improved, retail demand strong throughout the quarter. Further demonstration our goal to be a responsible steward of the environment and a good corporate assistant. We recently announced a commitment to achieve net zero greenhouse emissions by 2040. These actions reinforce our company's longstanding commitment to responsible environmental stewardship and sustainable food production. In support of the initiative, let's not we successfully issued a $1 billion sustainable linked bond tied to efforts to reduce greenhouse gas emissions intensity across all of our global operations. The bond is the set of its going to be issued by a global meat and poultry company and aligns with Pipe's vision to be the best and most respected company. IVUS has also adopted a holistic ESG strategy with increased mandates to responsibly manage our environmental footprint, ensuring the working of animals on the Air care, provide a safe and healthy environment for our team members and give back to society to commit the investment efforts such as parents, home health, strong initiatives and business benefits. And we announced three community college programs for key members and their treatments. We provide regular updates on our progress and performance in our annual sustainability report, which can be found at sustainability of paris.com. With that, I would like to ask our CFO, Matt Galvanoni, to discuss our financial results.

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 million in the prior year. Supply-demand balance remains favorable in the second half of 2020. Chicken prices, especially in traditional markets, continues to be at a high level and above the last 3 years. Within Prepared foods in Mexico, we remain the leader in developing the market and are on pace to launch a number of new products this year. Our strategy is affordable with goal to increase our higher-margin differentiated products while having product coverage from entry-level to premium across multiple channels in both fresh and prepared. In Europe during Q1, we generated approximately $37 million in adjusted EBITDA versus $45 million last year. The performance for our legacy European operations in Park was impacted by higher feed costs and COVID-19 related impacts to both year-over-year volumes and costs. Despite the difficult conditions, we expect new parts performance will recover in the coming quarters as see costs start to stabilize, sales prices recover, COVID-19 expenses are reduced on a year-over-year basis as pandemic restrictions are. And mentioned previously by Fabio, our COTAP results were negatively impacted by the suspension of 2 export licenses to China and reduction in take prices during the quarter. Our SG&A during the first quarter was slightly higher versus year ago due to increased legal costs and our further supports expand the Just BARE brand national. We will continue to prioritize our capital spending plans this year to optimize our product mix that is aimed at improving our ability to supply innovative products and strengthen our partnership with key customers. We reiterate our commitment to invest in strong growth products projects that will improve our operational efficiencies and tailor customer needs to further solidify competitive advantages for Pilgrim's. Our balance sheet continues to be robust. Given a relentless emphasis on cash flows from operating activities, focus on management of working capital and diseases in high-return projects. Our liquidity position remains very strong with more than $1.2 billion of total cash and available credit. We have no short-term immediate cash requirements with our bonds maturing in 2027 and the newly issued usually lease by in 2031 as well the term loan in 2023. The end of the quarter, our net debt was $1.9 million and a leverage ratio of 2.2x the last 12 months of EBITDA. Our leverage remains at a man level, and we expect to produce positive cash flow this year, increasing our financial capability versus strategic actions. Exclusive of the debt distribution and costs were recorded in the second quarter, we expect 2021 interest expense to be lower at around $115 million to $120 million as a result of new sustainability in Lat bond issues. We will remain focused on exercising great care into ensuring that E*TRADE shareholder value by optimizing our capital structure, while preserving the flexibility to pursue our growth strategy, and we'll continue to consider inviting all beta capital allocation strategies that will amass the pursuit of our growth strategy, and we'll continue to engage prospect accordingly to our value-creating standards. Operator, this concludes our prepared remarks. Please open the call for questions.

[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.