Pilgrim's Pride Corporation (PPC) Earnings Call Transcript & Summary

Good day, and welcome to the Pilgrim's Pride conference call. [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. And I would now like to turn the conference over to Dunham Winoto, Head of Investor Relations. Please go ahead, sir.

Thank you, Cole. Good afternoon, everyone, and welcome to today's call to discuss Pilgrim's Pride acquisition of Kerry Consumer Foods' Meats and Meals business. Joining me on the call is Fabio Sandri, Chief Executive Officer; and Matt Galvanoni, Chief Financial Officer. The slide presentation and press release regarding the transaction are available on our website. I'd like to remind everyone of our safe harbor disclaimer. Today's presentation may contain certain forward-looking statements that represent our outlook and current expectations as of the day of this event. Other additional factors not anticipated by management may cause actual results to differ materially from those projected in these forward-looking statements. At this time, I'd like to turn the call over to Fabio.

Thank you, Dunham. Good afternoon, everyone, and thank you for joining us. This is an exciting day for Pilgrim's. I'll provide a high-level overview of the transaction as well as the compelling strategic rationale. Like Dunham mentioned, the slide presentation is available at our website. We're very excited about the opportunity to acquire Kerry Consumer Foods' Meats and Meals business. This transaction will further enhance our position as a stronger and more diverse leading global player by expanding our portfolio of prepared foods and brands. It aligns with our strategic priorities as we continue growing our geographical footprint in U.K. and Ireland. Kerry has an excellent reputation for providing high-quality prepared foods throughout its many brand offerings. The Meats and Meals business management team is highly accomplished and will be a great fit with our global teams. We are solidifying our growth platform in Europe. By diversifying and further globalizing our portfolio, we will enhance our margin structure while reducing volatility across our business. And just as important, with the addition of the Kerry Consumer Foods' business, we'll significantly strengthen our brand portfolio and further improve our value-added innovation capabilities. We are very excited about the opportunity to own such iconic brands like Denny, Richmond and Fridge Raiders. Also, the Kerry team has been very successful in the launch of its meat-free products and direct-to-consumer platform, and it's a great growth prospect for all this business. The transaction values the enterprise value of this business at approximately GBP 680 million or $952 million based on a 1.4 exchange rate. The purchase price represents an 8.5x multiple based on expected stand-alone 2021 EBITDA. We intend to finance the transaction with a mix of cash on hand, utilization of our credit facilities and future debt issuance, if needed. We continue to target a 2 to 3x net leverage ratio. And even with the opportunity to make such an important acquisition aligned with our strategy, we stayed inside the target range. Importantly, we are confident that our future cash generation will reinforce our strong credit profile while providing the ample free cash flow for deleveraging and facilitating future strategic acquisitions. We want to remind that we recently were upgraded to investment-grade by one of the credit risk agencies. In sum, this acquisition is immediately accretive and will drive growth for our shareholders and deliver increased benefit to our customers, broaden our branded portfolio diversification and position Pilgrim's as one of the clear leaders in the protein and prepared food sectors in the U.K. Let me reiterate our excitement about the ways in which this transaction advances our strategic priorities and position Pilgrim's for even greater growth and success. As you can see on Slide 4, we have a disciplined approach to M&A. Following our successful acquisitions of the assets in Mexico, GNP, Moy Park and most recently, Tulip. This acquisition represents the logical next step in the evolution of our expanding our brand portfolio, continued diversification of our protein production and expanding our geographical footprint. Acquiring these businesses from Kerry will advance our diversification strategy as we're increasing our exposure in the attractive U.K. and Irish markets. We look forward to [ wear ] their iconic brands portfolios such as Denny, Richmond and Fridge Raiders and benefiting from Kerry's position in the meat-free category, where it has enjoyed significant sales growth and market penetration since its launch in late 2019. The business is well invested with 9 plants in U.K. and the Republic of Ireland. Also, this acquisition will bring the opportunity for Pilgrim's to enter the direct-to-consumer channel with the Oakhouse food business, along with Rollover's unique hot food-to-go platform. We always mention that people is our most important asset, and we are excited to welcome Nick Robinson, Chief Executive Officer of the business, his leadership team and all of the Meats and Meals team members to the Pilgrim's family. We share many common values and look forward to collaborating with them to achieve future success for the combined companies. We expect a seamless transition for all of the employees, customers and partners. The acquisition of Kerry business will greatly enhance our portfolio of brands and offerings, expanding our prepared foods portfolio with the addition of high value-added capabilities, while reducing exposure to pure commodity products. Further, this business will bring to Pilgrim's an established portfolio of attractive, well-known consumer brands that deliver affordable, healthy and great-tasting quality products. Together with this Kerry business, we look forward to sharing innovation and best practices to enhance our operational and financial efficiency, deliver increased benefits to our key customers and position Pilgrim's for increased profitability and more consistent margins. The Meats and Meals business has actively leveraged innovation through their operations, and we look forward to our key customers benefiting from their portfolio of innovation, innovative products and product development platforms. We also expect to capture synergies, opportunities in the back office over the course of the next few years. Turning to Slide 6 and 7. This transaction is especially compelling because of the further expansion into the Republic of Ireland and overall product diversification benefits that Pilgrim's will be able to realize. On a pro forma basis, the combined company has the potential to generate over $13 billion in revenue, with 26% generated by prepared foods. This slide also illustrates how transaction is consistent with our ongoing focus on expanding into new markets and enhancing our capabilities, particularly when evaluating M&A opportunities. On Slide 8, we can see a little more details about the industrial footprint. As you can see, the addition of the Meats and Meals business will establish Pilgrim's as a leading protein and prepared foods company, and represents a significant platform for growth in Europe and its export destinations. With the addition of these businesses, Pilgrim's demonstrating his commitment to its strategy of diversifying its product portfolio and expanding its geographical reach. Turning now to Slide 9. The slide provides a breakdown of Kerry's Meats and Meals brands, products and sales channels. Kerry has well-established long-term relationships with key customers, and we look forward to continue to support our new and all key customers in their growth and innovation needs. Speaking about innovation, the Meats and Meals business has a roster of leading brands in the U.K. and Ireland. We are thrilled about the future of adding these iconic brands, along with innovative meat-free products and direct-to-consumer platforms into the Pilgrim's portfolio, and we can expand and stretch these brands into new categories. To finish, acquiring the Kerry Meats and Meals business aligns well with our strategic priorities. This business is already well positioned with long-term customer relationship and poised for growth. We plan to continue to drive operational excellence, promote the iconic brands we will acquire and leverage the team's local knowledge and experience. With this acquisition, we will further transform Pilgrim's as a leading company in the protein and prepared food sector, with an enhanced margin profile and extended portfolio of prepared foods. This transaction will advance our strategy to enhance our geographical scale and reach and drive further diversification across attractive markets and products. This business is a natural fit with Pilgrim's. And together, we will continue to deliver the high-quality protein products in the industry, just as we always have, while expanding our presence in prepared foods. We are very excited about the benefits of this acquisition. It's all about growth. All of this adds up to enhanced value creation for our shareholders and key customers. With the Kerry Food (sic) [ Kerry Foods' ] Meats and Meals business, our future will be brighter than ever and we look forward to providing additional updates as we progress through the approval process. Thank you. With that, we will be happy to answer your questions. Operator?

[Operator Instructions] Our first question today will come from Ben Theurer with Barclays.

Fabio, first of all, congrats as well on the transaction. Now just a few questions. So -- well, no, one question, one follow-up. Could you elaborate a little bit on the way like -- just to go into more detail around the financing and what you're planning? And because we've talked a lot about what you've been doing on the financing side, getting leverage down, getting interest costs down. So just to understand a little bit the dynamics behind? And obviously, you say that there might be some debt issuance. So just to understand a little bit what the mix of the sources is going to be on the financing side for this acquisition?

Yes. Sure, Ben. Thanks. We have availability of cash today, and we have availability of our revolver, and we have availability in our credit facilities. So we can finance this acquisition with the cash on hand and availability. But for the long term, we believe that we will issue a bond to have a better capital structure. But according to the calculations and according to the last 12 months EBITDA and the pro forma, we'll be inside the leverage targets of 2 to 3x. We've seen a great opportunity in the market today to issue new debt with a 10-year with a very attractive, and like I mentioned, we just got the BBB or investment grade from one of the agencies.

Okay. Perfect. And you've said it's basically it's going to be cash earnings per share accretive basically immediately. Can you walk us through the accretion? Because it seems like that just on an EBITDA multiple, it's a bit higher, but just to understand how we end up on the accretion side, and that's obviously on a stand-alone basis. But where do you see, like, more additional synergy potential over the next couple of years also combining it with your existing assets, be it Moy Park or Tulip?

No. Sure, Ben. I think this is a business that is a double-digit EBITDA, right? So this acquisition is all about growth and diversification of our portfolio. We have some synergies in the back-office for sure, with a much bigger operation in U.K., but it's all about the innovation and how can we support the growth of our key customers. If you take into consideration, this is a double-digit EBITDA business and take into consideration the last issuance that we have on that and the cash that we have on hand, you can see an accretion of close to $0.20 to $0.25 per share.

Is it $0.30 per share, roughly?

$0.20. $0.20 to $0.25 in the first year. Of course, as we grow the business and enhance the margin portfolio, we expect a higher accretion.

And our next question will come from Ben Bienvenu with Stephens.

Congrats on the deal. So I want to ask on -- the margins are attractive. It's nicely accretive. That's great. I'm curious what the historical EBITDA cadence looks like? Is this a growing asset or something that would require bringing into the fold and investing in a bit to get to grow again? I'm curious what the historical growth trajectory of either the top line or the EBITDA of the business looks like?

Yes. Thanks for the question. And yes, if you look at the historical performance of this business, it has been very stable. I think it has some minimal growth and there is a lot of new fronts that were generated over the last few years. An example was the meat-free and also the direct-to-consumer platforms. So we expect both of those segments to generate a lot of growth over the next years. And also, we believe with some investments, we can expand the reach of the iconic brands that they have to different products, especially connected with our current operations in Moy Park and PPC U.K.

Okay. Great. And in terms of the deal itself and how it fits into your overall strategy, it fits squarely into moving into more value-added products, stabilizing the margin, diversifying the business and growing the platform. In terms of the product categories, is this the direction you think you want to head in? Or is this within a suite of options that you want to build out within your European operations? I'm curious how emblematic do you think this is of M&A in the years to come?

Thank you. Yes. As we talk about the value-creating M&A opportunities that we have, we have the dual track, right? We believe that we can grow in the chicken industry where we have the technology, we have the knowledge, and we can generate synergies with operational improvements in any geography. And on the geographies where we are, we want to expand our portfolio into a more value-added, which, like you said, it's higher margin and reduce the volatility of our results. So we want to, one, again, reduce the volatility of our results and generate synergies. And we can do that with the prepared foods or in the chicken business.

[Operator Instructions] Our next question will come from Peter Galbo with Bank of America.

Fabio, I just wanted to clarify, the $0.20 to $0.25 of accretion in the first year, is that with the amortization or does it exclude it the way that you're thinking about it?

That is with the amortization expecting us to issue a proportion of the acquisition with new debt based on the same interest rates that we got on the lesson. I think the market actually improved when we got the -- also the upgrade from one of the rating agencies. So we believe that we can issue at some levels.

Peter, that's with the amortization in the interest expense, but this does not include amortization on intangibles. We'll have to go through that process through the purchase accounting process, okay? So that does include the debt interest cost, but it will -- at this stage, we still have a ways to go on the intangibles net interest -- net interest [ for the accretion expense there ].

Of course, because that will depend on how we allocate the purchase price.

Got it. Okay. So it's including the interest, but excluding the amortization of intangibles because you just don't know that number at this point.

That's correct. That's correct, Peter.

Okay. Okay. And then just on like synergies, if there's a number that you can quantify, and maybe probably what I didn't hear in your comments was this is more of a pork-focused, just looking at some of the brands, a lot more pork-focused. Obviously, you had done the deal with Tulip. What did you learn from Tulip that made you comfortable to kind of do another deal more focused on pork? And if we look at the prepared -- the margins here, right, 10.5% or 10% to 10.5%, the U.S. peers would suggest you can get the kind of low- to mid-teens on EBITDA margins? Just is there a trajectory there? Or is there anything that would inhibit you from being able to do that? I know there's a lot of questions there, but thanks for the information.

Sure, Peter. Thanks. And again, yes, we believe this is a double digit, for sure, type of business. And there are some synergies. And especially on the back-office, I think there is some synergies on the purchasing that we achieved on the Tulip in terms of packaging, in terms of ingredients. 40% of their purchases is in chicken and pork. And less than synergies, I think what we believe is we can leverage that to create differentiated product lines, especially under their iconic brands. So it's -- again, it's all about growth, but there are some synergies, especially on the back office. We truly believe in accountability and ownership and the same way that we integrated the business that we acquired from Danish Crown. We believe that we have great teams that can achieve growth and generate their own operational improvements with the -- our methodologies. And that's how we believe we can create value.

And our next question will come from Adam Samuelson with Goldman Sachs & Company.

I guess, first, just maybe, Fabio, to put a finer point on the synergy comment. Does the Kerry business procure raw materials from either Tulip or from Moy Park today as the third-party sales when you actually consolidate it, will it look any different? And if not, just how do we think about opportunities to maybe optimize the supply chain, optimize your own internal production upstream?

Sure, Adam. They do procure from the PPC U.K. and from Moy Park. That is not the majority of their procurement. And like I mentioned, I think there is an opportunity to integrate the value chain, but it's less on synergies, and it's more on creating special programs that can enhance the value of the brands, like using domestic chicken from U.K. They did rely a lot on meat from other places than U.K., and we believe that it can leverage that to create more value to the unique brands.

Okay. All right. That's helpful. And then in your comment, I mean you made this point on several occasions about trying to stabilize, bringing in higher and more stable margin businesses in the portfolio and the benefits you think that brings at the enterprise level. Should we infer anything about that as we think about the balance of the business where if you think about your North American operations, there are some more volatile businesses that are still in the portfolio? Does that make you less predisposed to continue investing there? Or are you happy with that business and you're trying to add on more stable businesses to bring up the aggregate as opposed to maybe addition by subtraction?

Yes. I think you're right. It's all about the overall portfolio, right? With this acquisition, we can see that we reduced the U.S. proportion of our portfolio from 65% to 55%. So today, U.S. is going to be 55% and U.K. and Europe will be close to 35%, and the rest will be in Mexico that we also expect to grow there. We are happy with the exposure that we have to the commodity markets as we mentioned during the last 10 years about our portfolio. We have the capability to capture upsides in the commodity market when it happens with our exposure to the commodities, especially in the big bird segment, which now is very profitable. But we have the protection on the trough of this that is always happened in our segment with our business outside the U.S. and also with the retail and the small bird business in the U.S. So we want to grow in the prepared foods line because it's a higher value-added and higher-margin business. But we are happy with some exposure to the commodity like we have. We are always looking for opportunities to enhance our portfolio and move to segments that we believe in the long term makes more sense. We -- as you know, move some plants from the commodity segment to case-ready and pure organic, and we're always looking for opportunities. But we want to have some exposure to the commodity markets.

Okay. And if I can just squeeze a quick final one in, just on the growth side for the Kerry business. You talked about it being a fairly stable business in recent years, but you seemed optimistic about the growth. I mean what -- these are pretty mature geographies. But just help us think about what kind of volume or revenue growth would you be kind of happy with in that kind of outcome?

Yes. I think the most of the growth will come from these new ventures or new business that I just started with the branded meat-free products and also the direct-to-consumer segments. But I think there is also some growth opportunities on the brands, on the current brands with some developments and some stretch into different categories. I don't think it is double-digit growth because I don't think that market in U.K. and Europe is growing at that pace. But with those 2, we can reach some significant growth.

And our next question will come from William Reuter with Bank of America.

I was curious to hear if you talked to the rating agencies. Your leverage is obviously going up in the transaction, but geographic diversification and product diversification are improving a lot. So do you think that they will have a favorable view for you? Or do you think that's unfavorable? I guess, what have you heard?

Yes, I think it is a favorable view. As we mentioned, our leverage is going up, but we're still inside the range that we believe it is optimal. I think, of course, today, that is much cheaper than it used to be in history. And also, it's about the portfolio, right? We're adding a business that is more stable in terms of margins, and higher margin portfolio. And to your point, we're also diversifying from just a pure concentration or a high concentration to the United States. So it's a great diversification play. It is a good increase into the value-added and convenience segment. And despite the acquisition, it is inside our sweet spot in terms of leverage of 2 to 3x. We are in a position where our business is generating cash as well, and we expect that up to the end of the year, we will be able to deleverage to more inside the 2 to 3x leverage.

That's helpful. And then just one follow-up. You mentioned that they have exposure to plant-based meat-free products. I guess, do you expect that this is an area where you're going to continue to be investing further? A lot of those companies are relatively rich, trade at big multiples, expensive. I guess, what are your thoughts there?

I think it's an important segment that is growing in the market. I think we'll always be a subsegment of the protein. We're doing investments in Mexico, and we were doing investments in U.K. as well and we are doing investments in U.S., especially on supporting the growth of our key customers. Like everything we do, we partner with our key customers and we identify the needs, their needs, right, to help them grow. And that's why we developed those subsegments. An example of what we did was on the organic segment, and we are very successful in partnership with one key customers where we created the most effective and advanced organic plant in the world for one of our key customers. And we want to do the same with the meat-free category. It's less about substitution, and it's more about supporting the growth of this segment and supporting the growth of our key customers.

And our next question will come from Carla Casella with JPMorgan.

Wondering -- a number of your most recent transactions have been in the U.K. and Ireland and Europe. Are you just seeing better opportunities there? Or is this purposely to diversify away from the U.S.? Or do you see valuations more fair there? And are there other opportunities that you're seeing?

Yes. Thank you. I think it is the opportunistic timing. In Europe, we're seeing, yes, as we mentioned, a little lower multiples. We are prudent acquirers, and we always say we want to create value for our shareholders. We understand how to create value and understand how to integrate assets, and we demonstrate that with the acquisitions of GMP out of Mexico and the other acquisitions in Europe. So it's more about timing and when the acquisitions and the opportunity arises. Of course, we diversify away from the U.S. We created a more diversified portfolio. But if there is the same opportunity in the U.S., especially on the prepared foods or on the branded side, we'll for sure pursue those acquisitions.

And our next question will come from Ben Theurer with Barclays.

Just a quick follow-up. So you've talked a lot about diversification going into prepared foods, meat alternatives and so on. Do you think there's potential to learn from that acquisition? And then just potentially bring this on an organic basis to the United States or even Mexico and just to kind of expand what you learn from there and then to also engage in growth here? Or is that not something of consideration because you usually go the M&A way?

I think it's a great point, Ben. And I think it's the competencies that we are bringing with this asset, and especially the team, right? I think we saw that the team led by Nick, they launched this meat-free and they have been very successful. Also, they have great knowledge and competency on developing brands, and that is something that we can leverage throughout the entire global network.

And our next question will come from Lucas Ferreira with JPMorgan.

Fabio, do you have some data to share on the performance of the brands of other [ meat ] brands, how they have been behaving in terms of market share and how competition is looking like? Correct me if I'm wrong, but I was looking at aggregate numbers for the division. Last year's numbers were down in terms of revenues. So if you can comment on how 2020 was for them? And what do you expect for 2021?

Yes, sure. In terms of the behavior of the brands, we've been seeing that they're very stable. Like I mentioned, this business has been very stable over time. They're not been growing a lot of market share. We believe that we can make those brands with some investment, again, and to expand and stretch those brands into different categories, especially with partnering with our key customers and in conjunction with innovation and the competencies that we have both at Moy Park and PPC U.K.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Once again, thank you all for participating, and we are very excited about this opportunity and the -- we welcome the Kerry Consumer Food (sic) [ Kerry Consumer Foods ] Meats and Meals team into the Pilgrim's family. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.