Pilgrim’s Net Income Grows on GNP Acquisition

Completed GNP acquisition, integration and synergy capture underway

Pilgrim’s Pride Corp. (NASDAQ: PPC), the second-largest chicken producer in the US after Tyson Foods Inc. (NYSE: TSN), announced its Q4 FY16 and full-year FY16 financial results on February 08th, 2017.

The Greeley, Colorado-based Pilgrim’s, which is majority-owned by Brazil-based meatpacker JBS S.A., produces fresh, frozen, and fully cooked chicken products under the Pilgrim’s and Country Pride brands with distribution primarily through retailers and food service distributors. The Company operates chicken processing plants and prepared foods facilities in 12 US states, Puerto Rico and Mexico, and employs approximately 38,200 people. Pilgrim’s processes nearly 142 million pounds of chicken a week, according to PoultryUSA, behind Tyson, which processes over175 million pounds a week. Read more about Pilgrim’s financial results below.

Q4 FY16 financial highlights

During Q4 FY16, Pilgrim’s Pride reported a 2.7% decline in net revenue to $1.91 billion versus the prior year’s same period. Revenues from the Company’s US operations, which account for nearly 83.8% of the total revenue, fell 3.7% Y-o-Y. Revenues from the Mexican business, which accounts for 16.2% of the total revenue, were up 3.9% Y-o-Y.

During the reporting quarter, Pilgrim’s cost of sales dipped 4% Y-o-Y to $1.72 billion. Gross margin expanded 130 basis points (bps) Y-o-Y to 9.5%. Selling, general, and administrative expenses advanced 4.6% Y-o-Y to $55.4 million, while adjusted EBITDA climbed 14.8% Y-o-Y to $172.2 million or a 9% margin. Operating income grew 15.3% to $124.3 million. As a result, Q4 FY16 net income rose to $70.61 million, or $0.28 per diluted share versus $63.14 million, or $0.25 per diluted share, in the year-ago comparable quarter. The Company’s adjusted earnings came in higher at $0.30 per share during the reporting quarter. Cash flow from operations amounted to $224.4 million during Q4 FY16.

FY16 financial highlights

For the full-year 2016, Pilgrim’s revenue fell 3% to $7.93 billion versus $8.18 billion recorded in the year-ago same period. Operating income plunged 31.7% to $713.5 million from $1.04 billion in the prior year. As a result, net income for FY16 fell 31.8% to $440.5 million, or $1.73 per diluted share, from $645.9 million, or $2.50 per diluted share, in the prior year. For the full-year 2016, adjusted earnings came in at $1.75 per share versus $2.60 per share recorded in the prior-year’s corresponding period.

During the year, the Company invested $272.5 million in capital expenditure in its operations, up 55% Y-o-Y, including strategic projects on product mix changes to reduce impact of commodity markets, strengthen operational efficiencies as well as tailored customer needs, and improve margin profile. Small and case-ready birds continue to deliver strong performance, despite greater availability of other proteins. The Company launched premium, Pilgrim’s-branded value added products in Mexico, complementing the existing popular Del Dia range of products, and providing improved coverage of all consumer market segments.

Other highlights

Cash flow: Pilgrim’s Pride exited the quarter with cash and cash equivalents of approximately $120.3 million, down from $439.6 million at the end of 2015. Long-term debt (net of current portion) was $1.01 billion against $985.5 million as of December 27th, 2015. At the end of 2016, the Company generated $755.5 million of cash from its operating activities, down 22.7% year-over-year.

Share repurchases and dividend: During FY16, Pilgrim’s repurchased over $200 million worth of its common stock and returned $2.2 billion in special dividends over the last two years.

Acquisition of GNP: On November 30th, 2016, Pilgrim’s announced that it is acquiring smaller rival GNP Company in a $350 million deal that will increase its offerings of organic and antibiotic-free product offerings. Pilgrim’s has completed the GNP acquisition, and integration and synergy capture is underway. GNP has production facilities in Gold Spring and Luverne, Minnesota, and Arcadia, Wisconsin, and provides premium branded and custom chicken products with distribution in nearly all 50 states under the Just Bare and Gold’n Plump brands. GNP has approximately 400 family farm partners and more than 1,700 employees. The GNP plant in Cold Spring alone has 700 employees who process 1 million birds a week.

The transaction is expected to close in Q1 FY17 and is subject to regulatory review and customary closing conditions. The acquisition of GNP’s Just Bare product lines is seen to be a value-add to Pilgrim’s existing no-antibiotics-ever and organic production capabilities, while strengthening its footprint in higher-margin chicken segments and expanding its presence in the upper U.S. Midwest. GNP ranks 19 among US producers of broiler chickens, slaughtering 1.9 million birds and processing just under 9 million pounds of chicken weekly, according to Watt PoultryUSA. GNP’s 2015 sales amounted to $443.4 million.

GNP boasts state-of-the-art assets in geographic areas where Pilgrim’s is not currently present, providing Pilgrim’s the opportunity to expand its production and customer bases, while maintaining high standards for quality service and great-tasting products, according to Pilgrim’s Chief Executive Bill Lovette. Pilgrim’s believes that GNP’s use of innovative technologies such as gas stunning, aeroscalding, and automated deboning, which is meant to reduce the birds’ stress levels before killing, will enhance production efficiencies by increasing the rate of adoption of new technologies in its existing facilities.

The deal is expected to add to Pilgrim’s EPS in 2017 and generate about $20 million a year in synergies. Pilgrim’s expects to capture about $28 million in tax savings and improve cash-flow capabilities following the buyout.

Antibiotic-free chicken: Meat companies and restaurants are increasingly seeking to sell poultry raised on organic grain and without antibiotics. The change also addresses consumer concerns about health risks from eating meat raised with certain antibiotics that could lead to antibiotic-resistant superbugs, a health hazard for humans. Tyson intends to remove antibiotics important to human medicine from its flocks by September 2017. To take advantage of the trend, GNP has also pledged to remove all antibiotics from chickens sold under its Gold’n Plump brand by 2019. The Company already sells organic chicken and chicken raised without antibiotics under its Just Bare brand. Hence, the acquisition of GNP would enable Pilgrim’s to strengthen its position in natural and organic chicken products and ready-to-eat foods.

Strengthens presence in organic chicken category: Pilgrim’s is in the process of converting one of its plants to process certified organic chicken and estimates the plant will be completely converted some time in 2017. Once up and running, Pilgrim’s estimates that it would account for roughly 20% of the organic chicken production in the US. It would also be able to cater to consumer preferences such as organic naturally antibiotic free (NABF). Organic chicken now makes up about 2% of total commercial production in the US, but this category is growing at a faster clip of 31% CAGR. Once the plant is fully converted, organic chicken would account for approximately 3% to 4% of the Company’s total US production.

Strategic investments: In FY16, Pilgrim’s unveiled a $190 million strategic capital investment plan designed to enhance growth and expand production of its Pierce Chicken brand. The investment plan is tailored to meet customer needs through targeted investments in feed production, fresh chicken and prepared foods, including case-ready.

Of the total investment, $18 million would be used for a Pilgrim’s case-ready facility to streamline deboning and packaging processes, and $25 million for the Moorefield prepared foods facility to enhance existing fully cooked chicken lines and add an additional line to meet growth demands for the Pierce Chicken brand. Moreover, $35 million would be used to set up a new feed mill in Nashville, Arkansas, to lower feed costs, enhance feed conversion and improve live poultry performance. Lastly, $20 million would be used at the Mayfield poultry complex to reengineer the facility to improve its value-added product mix in alignment with the needs of a key customer.

Guidance for full year FY17

Pilgrim’s Pride intends to boost its commercial performance on the back of its unique portfolio strategy, sound customer relationships and strategic business expansion across different geographical locations. Notably, the Company believes that its prepared foods business would be stronger in 2017, with the inclusion of new capacities at the Moorefield facility. Additionally, the Company believes that its CapEx investment worth $270 million in 2016 would enhance its competitive strength in the market, moving ahead.

Stock Performance

Pilgrim’s stock ended the day at $20.67, gaining 0.49%, at the close on Friday, February 17th, 2017, having vacillated between an intraday high of $20.79 and a low of $20.20 during the session. The stock’s trading volume was at 1,294,597 for the day. The Company’s market cap was at $5.11 billion as of Friday’s close.

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