"While this quarter is historically the weakest due to lower demand at this time of year, we encountered unusually tough circumstances due to high finished inventories, combined with rapidly increasing feed and other costs associated with our inventory levels, severe winter storms and depressed prices for chicken products," said Bill Lovette, Pilgrim's president and CEO. "As part of our plan to reduce working capital, we made the decision to liquidate inventories in the first quarter. While this decision helped our balance sheet by reducing inventories and turning assets into cash, it had a significant negative effect on margins and overall net revenue per pound sold in the quarter. At the same time, lower capacity utilization - including on our prepared-foods line - led to higher operating costs, and winter storms throughout much of the Southeast in mid-January closed a large number of our plants for several days at a time and hurt consumer demand."
Market prices for breast meat averaged $1.26 per pound, down 10% from a year ago, while market prices for wings fell 38%, to $1.00 per pound.
Sales and volume in fresh foodservice remained flat, while sales and volume in frozen foodservice and retail improved, although net sales per pound were down slightly. Export demand remained very strong during the quarter, with volume rising 90% to an all-time record for the period and sales increasing by a similar amount. The company attributed export gains to the lower value of the dollar as well as chicken's value proposition versus higher-priced beef and pork in international markets.
Feed ingredient purchases, which represent the largest component of Pilgrim's cost of goods sold, were approximately $188 million higher during the quarter than the year-ago period. The company recognized $32.0 million in net mark-to-market gains related to changes in the fair value of its derivatives during the first quarter. As of today, Pilgrim's has covered 100% of its anticipated corn needs and approximately 50% of its soybean meal usage through the end of 2011.
Lovette said sales mix remains Pilgrim's single largest opportunity to drive revenue growth and sustained profitability. As part of the plan to improve the value of its product mix, Pilgrim's recently realigned its sales and operations groups by customer segment. Under the new structure, Pilgrim's has established the following business units: Commercial Business, Fast Food, Retail, Prepared Foods-Small Bird Deboning and Prepared Foods-Further Processed. Each of Pilgrim's U.S. operations, as well as Puerto Rico, has been assigned to one of these business units. Each group is led by a general manager who is accountable for a selected group of plants for a customer segment. The general manager directs sales and operations of this segment and is accountable for the product mix, capital needs and financial performance of each business.
"We are taking our existing line-of-business approach a step further by creating truly integrated business units," said Lovette. "This realignment will fundamentally improve our business by driving responsibility and accountability deeper into the organization. Each of these teams will truly 'own' the product mix and the responsibility for achieving the best value possible. We will benchmark each unit's performance against the industry segment in which it participates, and they will be expected to operate in the top 25 percent of that segment."
Looking ahead, he sees a mixed outlook for the chicken industry in 2011. On a positive note, chicken is expected to be increasingly popular among value-conscious consumers, with retailers and foodservice operators featuring chicken more frequently on menus or in weekly ads. In addition, the company has recently succeeded in negotiating additional price increases with some of its retail and foodservice customers in response to continued increases in feed costs.
"Clearly 2011 is going to be a challenging year. Despite now having covered nearly all of our anticipated grain needs through the end of 2011, we are facing at least $500 million in higher feed costs this year. Our customers recognize that the unrelenting upward march of corn and soybean meal is placing extreme pressure on chicken producers and that there must be some sharing of the cost burden in order to ensure a viable business model. To achieve that, we will continue to look at further price increases and will execute structural changes in our book of business with regard to fixed versus market-based pricing," Lovette said. "At the same time, it is absolutely critical that we strengthen our balance sheet, capture our estimated $400 million in plant-related cost improvements and seize the significant sales mix opportunities available across our asset base."
Source: Pilgrim's Pride Co