Pilgrim’s Pride – North American Strategic Update – 31
March 2021
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Laston Charriez (LC)
Specialist:
Former Head, Marketing at Pilgrim's Pride Corp
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Agenda:
1. Chicken and pork demand outlook
2. Pilgrim's Pride (NASDAQ: PPC) – price-fixing regulatory scrutiny and industry impact
3. Food waste and sustainability pressures
4. Impacts of consumer attitudes towards animal health and welfare
5. Mid-term growth and profitability outlook
Contents
Q: Could you give an overview of the meat processing industry, pulling out some high-level trends? What are
3
the main drivers and who are the top competitors?
Q: Has coronavirus fundamentally changed any parts of the industry other than foodservice?
Q: Could you give an overview of the different product types Pilgrim’s Pride offers and the different
categories it operates in?
4
4
Q: Could you expand on why the foodservice industry prefers larger birds? You mentioned customers and
channels such as foodservice and grocery have different preferences between large birds and smaller ones. 4
Q: What inflationary pressures is Pilgrim’s Pride facing, such as input cost or larger birds needing lower-
quality feed, and what are the sources of these? Have there been any rising costs, whether expected or
unexpected?
Q: How sustainable do you think the rising costs are, such as gasoline and feed? Do you think these are
short-term increases, or is the industry entering a period of higher secular input cost growth?
5
5
Q: Who is leading in automation? Is Pilgrim’s Pride putting the right investment behind automation, or is it
waiting until it has no choice?
5
Q: Could you discuss the regulatory environment around chicken price fixing? What do you think are some
pitfalls of the industry and the culture?
6
Q: How does Pilgrim’s Pride manage cost better as a vertically integrated business vs players such as Tyson,
who struggles to command a price premium?
6
Q: How would you assess the profitability between the different channels? How does the cost structure differ
between making products for foodservice customers who want larger birds and customers who want smaller
birds? What’s the potential margin from retail vs foodservice?
7
Q: What are your thoughts on Pilgrim’s Pride’s newly appointed global CFO, Matthew Galvanoni?
Q: Why do you think Pilgrim’s Pride decided to enter the pork segment? What were some synergies? Could
this indicate more diversification?
Q: How is the shift to e-commerce impacting Pilgrim’s Pride?
7
8
8
Q: What are the cost implications of shipping products, especially fresh items? I believe shopping via
Instacart or online platforms incurs a higher premium. Is the higher price premium across the board, or is it
the difference between delivery and click-and-collect? Is the cost structure higher because of e-commerce
and having products on the first or second page of search results?
9
Q: What are some challenges of running marketing campaigns in a digital landscape, as marketing spend is
allocated to e-commerce channels? You mentioned earlier the benefits lie with a higher utilisation rate and
getting your product to the first page.
9
Q: How might consumers decreasing their red and processed meat consumption impact Pilgrim’s business
model’s long-term feasibility? What is the company doing to adapt to this shifting consumer behaviour?
10
Q: Could you expand on additional trends such as meat and protein alternatives? What are the main drivers
of this industry?
10
Q: Do you think alternative meat will pose a larger threat domestically as prices decline or is chicken fairly
unexposed, especially if alternative meat remains a premium product?
Q: How do you think Pilgrim’s Pride will use the USD 1bn capital it raised from an ESG-linked bond? The
company became the first US poultry producer to assume such a bond in March 2021.
Q: What are some developing sustainability issues for Pilgrim’s Pride and how is the company addressing
these? Could you elaborate on the unique protein conversion business you highlighted? Are you aware of
what competitors are doing to meet these same challenges?
Q: What is your outlook for Pilgrim’s Pride? What are the best- and worst-case scenarios over the next six
months?
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Pilgrim’s Pride – North American Strategic Update
Transcription begins at 00:00:00 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled Pilgrim’s Pride – North American Strategic Update.
I am Nyree Hinton and I will be facilitating today’s Interview with Mr Laston Charriez, former Head of
Marketing at Pilgrim’s Pride Corp.
Laston, before we get started with today’s Interview, please state I agree or I disagree to the following
statement: You understand the definition of material, non-public information and agree not to disclose any
such information or any other information which is confidential during this Interview.
LC: I agree.
NH: Could you start by giving an overview of your background and the roles you’ve held in the industry?
LC: I joined Procter & Gamble straight out of Purdue University and bachelor and my master’s. I was in
Procter & Gamble for 20-something years, 13 of them international in Guatemala and Mexico, Puerto Rico,
Venezuela, and then I was in Cincinnati, the responsible person for the Charmin Bear, so that’s my claim to
fame while at P&G. I left P&G and joined Sara Lee as Vice President of Consumer Shopper Activation and
Insights and Innovation. I was responsible for the launch of Jimmy Dean Delights among many other product
within the prepared food items, Jimmy Dean, Hillshire Farm, Sara Lee, etc. After Sara Lee, I was at Western
Union as Senior Vice President of Marketing for the Americas and then became CMO or Head of Marketing at
Pilgrim’s Pride in 2017. That’s my career, and then we can speak about Pilgrim’s Pride.
[00:01:50]
Q: Could you give an overview of the meat processing industry, pulling out some high-level trends? What are
the main drivers and who are the top competitors?
LC: The top competitors are Tyson, Pilgrim’s, JBS, who owns more than 60% of Pilgrim’s Pride and is the
largest protein company in the world, they’re both in Greeley, Colorado, so Pilgrim’s headquarters is in the
same building as JBS. Sanderson Farms, Cargill, Foster Farms, Purdue, that’s in the United States. There are
many other, (inaudible 02.37) and other Brazilian manufacturers throughout the globe. The state of the
industry is very interesting, for two reasons. With COVID in the United States particularly, home
consumption, meaning buying for retail, has gone on exponentially as foodservice went down, which is around
35% of the business, really depressed because people are staying home. That has created an unbalance of
inventory, meaning too much big bird commercial meat available because it’s not being consumed at
restaurants, jails, cafeterias, schools, etc, vs too little of case-ready and small-bird type of products available.
That is the biggest thing that’s happening in the space. As it pertains to trends, there are going to be two or
three trends that were pre-COVID, like upscaling, higher value. Those are moving consumers to higher-value
items with less bad-for-you stuff in them, so vegetable-fed, natural, organic and certified for humane
treatment of animals. Those are things that were growing, and I expect with more Gen Z consumers coming in
and younger millennials starting their next households, that will continue to grow. Other trends that should be
back after COVID are going to be sustainability and automation, those two should be propelling and taking
some really high speed or high gear for many reasons, but those are pretty much the trends.
Private and confidential 3
[00:04:48]
Q: Has coronavirus fundamentally changed any parts of the industry other than foodservice?
LC: Before COVID, Amazon Fresh, Peapod and direct-to-consumer sales were very, very small because many
consumers weren’t trusting that they could order online without touching the chicken or looking at the
chicken, etc. With COVID, consumers just gave a lot of trust to their retailers, meaning click and collect has
grown immensely, whereas you don’t have to go into a Walmart, you pick up a click and collect, the same with
Krogers, the same with Publix, but Amazon has exponentially grown. Before, the growth of Just Bare chicken
inside of Amazon was more than 500%, so that tells you that from 2019 to 2020, because consumers are
saying, “Yes, I’m not going into a supermarket,” Amazon is there, they make 40% of their sales just on
Amazon, they’re ordering online and say, “Well, how about some chicken thighs?” They place the order, Just
Bare chicken happens to be the number one inside of Amazon and searches and with the highest reviews that
has accelerated the brand significantly, and that’s a Pilgrim’s Pride product.
[00:06:42]
Q: Could you give an overview of the different product types Pilgrim’s Pride offers and the different categories
it operates in?
LC: Pilgrim’s has five business units. One is case-ready, and that’s retail, and they tend to be small or medium,
6-7lb birds. The second one is small bird, which is small birds, literally like the name, it’s 4-5lb. That tends to
be for Chick-fil-A and other quick-service restaurants that want small birds. They also work for some
rotisseries as well, so those small birds work for both servicing Chick-fil-A and other QSRs that want that type
of bird, plus rotisserie. They have a prepared foods division that makes prepared foods, meaning part-fried
products that you just finish at home, or prepared foods for foodservice that are sent to large wholesalers like
US Foods, Sysco, etc, that serve schools, colleges, jails, restaurants. They also have a big bird, which is also a
commercial unit. They tend to service 8lb or larger birds, and those are mostly for foodservice or for
restaurants that want a large breast or large pieces of chicken, and those birds serve that purpose, like the
Olive Gardens of the world, etc, but that would be the business unit that sells them. They have also a protein
conversion business, where whatever is not utilised within the business unit for servicing the key customers is
used, there’s nothing wasted, from the feathers to the blood, to the internals of the animal, all are sent to a
protein conversion system or a business unit that they are in charge of selling or up-selling those. They sell to
pet food companies like Blue, they can sell protein meals for many other things, so they utilise the chicken
across the board. Pilgrim’s has 26 feed mills in the United States.
[00:09:23]
Q: Could you expand on why the foodservice industry prefers larger birds? You mentioned customers and
channels such as foodservice and grocery have different preferences between large birds and smaller ones.
LC: The foodservice likes bigger birds because portions in the United States have grown significantly in the
last 20 years, and a larger portion in an Olive Garden, if you want a large pasta with chicken meal, you want a
large portion. An 8lb-plus bird provides a large portion which is larger than your typical hand, a small bird
can’t provide that as a breast, so that’s why they’re purpose-grown there. Large birds, big birds tend to be
cheaper per pound vs a smaller bird, and they take a little bit longer to produce, from 42 days for a small bird
to almost 60 days for a large bird, and that difference is you feed them more, but you tend not to feed them the
most expensive feed, so there’s a trade-off there. The preference for restaurants to have larger portions. They
will go for the big bird. The preference for retail is to have this 6-7lb, which is a medium bird, if you want to
think about it, and they prefer it because on a tray they tend to trade out for 1lbwith a four-piece 1lb, so it’s all
about how it looks on a tray and how it more or less fits. Then, last, small is Chick-fil-A particularly. They’ve
Private and confidential 4
been very specific because they prefer smaller birds where they’re being tender. That is associated with their
humongous material growth that Chick-fil-A has had. By utilising smaller birds, they claim they have a
preferred flavour and consumers have rewarded them in the kind of growth that they have obtained. That’s my
opinion. I don’t have data.
[00:12:00]
Q: What inflationary pressures is Pilgrim’s Pride facing, such as input cost or larger birds needing lower-
quality feed, and what are the sources of these? Have there been any rising costs, whether expected or
unexpected?
LC: After COVID, this is going to come back – you’ve seen what happened in Texas with the amount of snow,
prices of gas have gone up. Gas is an important cost because you transport the eggs to farms, and you raise the
chickens at farms and you ship them to a plant, which tend to be close, but still you pay gas there. There’s also
a cost of shipping after the chicken is processed to all over the United States to many distribution centres or to
wholesalers or to retailers, so cost of gas is a significant cost, and it’s going up significantly. Their feed is going
up. Because cost of gas, there’s more ethanol in the United States particularly that is used for gasoline, so that
is putting pressure. It literally goes over USD 7 for corn, so that is also putting pressure, and also soybean.
We’re talking feed is going to be inflationary, and it’s going to increase, and if both corn and soybean are going
up in price, total feed costs go up because you can’t flip up between one mix vs the other, and that’s what they
typically do, is they feed in some soybean when soybean is cheaper and more corn when corn is cheaper in the
United States. In Europe, it’s wheat that is replaced with corn. They don’t have as much corn. Soybean is used
in both places, but that would really exacerbate their cost.
Last that’s going to increase their cost is going to be talent, specifically as it pertains to with very little
immigration still that is legal right now. After COVID, most beef in poultry farms got a black eye because of the
safety of team members and people that actually prepared because of COVID, so they are hurt and their ability
to recruit if USD 15 per hour minimum payment goes in the US, that cost is going to be translated to higher
costs of recruiting talent, and that’s going to be another pressure on their ability to maintain their costs lower.
[00:15:03]
Q: How sustainable do you think the rising costs are, such as gasoline and feed? Do you think these are short-
term increases, or is the industry entering a period of higher secular input cost growth?
LC: No, I think short term for feed and gas as it pertains to balancing out issues with the refineries in the
south and just more gas utilisation, as more refineries ramp up to fulfil the need, then gas will stabilise and go
lower. Also, winter will come back, so that’s less driving, etc, so gas and feed are going to be short term,
meaning 6-8 months. Talent is longer term, I don’t think that’s going to change because I don’t believe there’s
going to be a lot of legal immigration opening, or illegal, for that matter, that’s going to take a measure on their
talent. I believe that that’s why they’re going to move more capital to automation and robotics, to make sure
they can deal with less human capital, less humans at the plants, and they can run more automatically.
[00:16:28]
Q: Who is leading in automation? Is Pilgrim’s Pride putting the right investment behind automation, or is it
waiting until it has no choice?
LC: They were waiting, just to be totally transparent, but they have, and this is lasting because I did it
personally to that plant, they have the leading organic chicken plant in the world in Sanford, North Carolina.
They have controlled atmosphere gas thinning, they are lulled to sleep, they have automated white meat de-
Private and confidential 5
boning and automated dark meat de-boning at that plant, and that plant USDA Organic, no antibiotics ever,
vegetable and grain-fed, non-GMO ingredients. It’s a superb plant. You can eat on the floor, that plant is that
beautiful. It’s a stunning USD 250m plant, and that’s public data, so you can look it up. That plant, if they
could replicate that throughout, then I would say they are in the lead regarding automated white and dark
meat de-boning, but the truth of the matter is, until COVID, they were not under. Pilgrim’s and the rest of the
industry were not at the bleeding edge or trying to automate, because a shoulder cutter is very good, a human
shoulder cutter can be really, really good, and they don’t have capital associated with it, and because salaries
were not as high as they could eventually become there was not a huge incentive to automate. That has
changed with COVID and with the talent shortage that I told you. I believe they’re going to double invest in
capital to automate and robotics, for two reasons, lack of talent and safety of the team members.
[00:18:41]
Q: Could you discuss the regulatory environment around chicken price fixing? What do you think are some
pitfalls of the industry and the culture?
LC: This is a tricky one because I have an NDA for some things that I cannot speak about and specific
individuals, but what I can say is in general this is an industry that people rotate from one business to another,
so they know each other, many of the medium and higher executives. With that, there tend to be people that
would know each other in RFPs or bidding. They may know each other and they may choose not to compete or
they may choose to not be as assertive competition if they know the place. Not even talking to each other, just
knowing, “They’re going to bid. Let’s not bid,” that type of thing, because of so much knowledge across the
industry, so that can affect the competition in the industry. The regulatory environment, I think it’s going to
get harder for them given the new administration, but I don’t know, that’s my belief, so that is what I believe.
How can I say this? There is something that can challenge that, which is Costco. I don’t know how much you
know, they opened their own plant in Nebraska. If Costco is successful with that plant, and they’re already
going into a year and maybe three months since that plant opened, if they’re successful on their own behest to
have a plant to produce for the rotisserie chickens and they keep adding plants, it could happen like in dairy.
I don’t know how much you know about dairy, which is Safeway, Albertsons, Kroger, Walmart, they all opened
their own dairies and they took away the power from the Deans of the world and the large dairy manufacturers
in the United States, because now they’re buying commodity product, which was gallons of milk, straight from
their own plants, and they eliminated a lot of the potentiality for price fixing or non-competitiveness in the
industry. If that were to blossom, meaning more of these large retailers owning their own supply, that could
really hurt the competitiveness on the industry or the ability to garner higher margins, but again, there’s only
person has done it, and that has been Costco, and the jury is still out on were they successful or not.
NH: Are the barriers to opening this type of plant really high with chickens?
LC: Yes, because this is a vertically integrated industry. For example, Pilgrim’s has in the US 26 feed mills, 31
processing plants, four protein conversion plants, four pet food plants, 33 hatcheries, 32,000 team members,
33 million birds per week and nine billion pounds per year. We’re talking, the vertical integration is really hard
to break through because you need to have all those plant managers, operation managers, sales managers to
run these plants at that peak of perfection, and it’s not for the faint of heart, so that has significantly higher
barriers of entry than even dairy, as I mentioned before.
[00:22:57]
Q: How does Pilgrim’s Pride manage cost better as a vertically integrated business vs players such as Tyson,
who struggles to command a price premium?
LC: Tyson is very capable, so don’t get me wrong, but I think the key customer strategy that Pilgrim’s has is
(audio distortion 23.48-23.50) better at being predictive of where their costs are going to go and how they’ll be
Private and confidential 6
able to pass cost to their key customers. Let me explain. They have H-E-B, Kroger, Costco, Publix, Chick-fil-A,
Gordon Food Service and US Foods as key customers. When you have these numbers of key customers, you
have a geographic diversification because Publix is really strong in the southeast. Kroger is a national player, if
you think about it, but not totally national. H-E-B is in Texas, humongous. Costco is in international, but it’s
skewed slightly to the west. Chick-fil-A is in the southeast and growing really fast nationally, but it’s really,
really strong in the southeast. Gordon is a midwest stronghold. US Foods is a national player. Because of these
key customers, they have scale, so they can be predictive about the demand that is required to serve all these.
They have the scope because, like I said, they have big birds that they can sell to the US Foods and Gordon
Food Service, so they use the big bird for them. They have small birds that they use for Chick-fil-A, and those
plants are five dedicated plants just for Chick-fil-A, then they have rotisserie with Costco, and Publix, and
Kroger and H-E-B that they provide rotisserie, and they are the largest rotisserie, and they have the ability to
manage profitability because they can pass with reasonable advance any cost in fees or cost in gas costs that
are significantly ahead of a pre-contract delta, they call it, they can pass to these key customers.
It’s agreed upon a trust, “Hey, let me show you, you show me,” type of agreement, and they say, “If feed is this
much higher, we’re going to trigger a price increase.” Tyson does not do that as well, and they only have one
huge key customer that is called Walmart that they do that with, but with all others they don’t, so there are
more of a, “Buy it for me because I’m Tyson,” type of mentality, whereas the people at Pilgrim’s do a really
good job with customer intimacy. I’ve seen it in action, they are very, very good at understanding the key
customer needs, and if they have a need, they will serve their need to make sure they’re never out of chicken.
[00:26:35]
Q: How would you assess the profitability between the different channels? How does the cost structure differ
between making products for foodservice customers who want larger birds and customers who want smaller
birds? What’s the potential margin from retail vs foodservice?
LC: 8lb live weight chicken, which is big bird, is really at the mercy of the commodity, so you have less pricing
power, and there’s an industry pricing, and you typically sell at the price of the Uber pricing, it’s a pricing tool
that the industry uses, so that big bird, you have less pricing power than any other part of the business. You’re
at the mercy of the gods, really. Big bird, breast is this much, and it’s public every day, and you’re like, “OK, I
sell it at that day,” or you can put it in the freezer and you lose value if you put any bird in the freezer. Big bird
fresh is significantly better than big bird in the freezer, and big bird that gets exported is even lower in the
value chain, so you don’t want to export unless you’re forced to, make sense? Because you don’t sell it, you
smell it, you have to be willing to sell at commodity price. That’s the foodservice part. Because Pilgrim’s has
less big bird than other competitors, then they’re more diversified and they’re less at the mercy of the
commodity. They have significantly more business in the tray pack, meaning retail consumer brands like
Kroger, Publix, H-E-B, that they sell generic branded for the retailer product as well as Costco for their refresh,
and that’s a 6lb weight. Tray pack is negotiated with long-term contracts and they have the ability to pass feed
cost and grain and market cost with reasonable usability to their partners.
Small bird is 100% contract pricing, and they have a contract pricing with Chick-fil-A, Chick-fil-A needs more,
they add another plant, and then they probably are going to add another plant, I believe, I don’t know for a
fact, because Chick-fil-A, even with COVID, they continue to grow. If they keep growing at this clip, they may
need or have to invest in a new plant, just brand-new, for Chick-fil-A, or, which is something they’ve done
before, is take a big bird plant and flip it to a small bird plant. That takes time and planning and patience, but
that can be done. Makes sense? The pricing power is predicated upon long-term contracts, and the type of bird
you have and the elasticity of demand of these folks.
[00:30:08]
Q: What are your thoughts on Pilgrim’s Pride’s newly appointed global CFO, Matthew Galvanoni?
Private and confidential 7
LC: What I’ve heard is good things. These are people that are in this industry, not necessarily at Pilgrim’s,
some at Pilgrim’s, and they told me he’s brand-new. He seems like a really nice, good hire, bottom line. That’s
it. The person that he’s replacing, Fabio Sandri, who is now the CEO, he’s done this job for 10 years, so Fabio
knows all of the tricks. He’s an extremely smart person, I respect the heck out of Fabio, and is one of those
people that has intellectually really, really high standards and can see the profit at the end of the rainbow.
Fabio is going to have to train him and see how he can add value, but in the meantime, they’re really in a very
good place financially ways because Fabio is such a smart operational and profit-minded CEO that spent 10
years as a CFO and now he’s a CEO. I wouldn’t bet against Fabio on ability to drive profitable business because
that’s what he is very talented at.
[00:31:49]
Q: Why do you think Pilgrim’s Pride decided to enter the pork segment? What were some synergies? Could
this indicate more diversification?
LC: As you may know, the way that we got into western Europe was through the acquisition on Moy Park.
Moy Park is the largest chicken producer in western Europe, and that said, with Brexit, there was a lot of
uncertainty of having plants in Northern Ireland, Ireland and the UK, which is where Moy Park operates the
majority, they also have Luxembourg and they have France, but the majority of their plants were outside the
continent. Great Britain, with Brexit, there was going to be uncertainty, so, “Shoot, do we only compete in
Great Britain now that the continent is closed?” Given that uncertainty, Tulip appeared on the horizon and the
Danish Crown that own it was willing to sell it for an incredibly low price. Again, Fabio was the CEO at that
moment, he saw the value that this could create and the potentialities of not being able to sell outside of the
Great Britain continent to say, “Maybe this is the way to diversify, make our platform bigger in the proteins,
not only chicken but also pork. If we do the upper channel efficiencies that they had replicated on Moy Park,”
which they had already proven they can do that, and they translate that to Tulip and make it a much more
efficient plant, “then there could be profits to be gained.” Last but not least, if the UK pork can been shipped to
the largest pork consumption country in the world, which is China, and if you were to operationally be efficient
with Tulip, you have preference to ship to China, and that could be really profitable if done well. You can’t ship
pork from the US to China right now, but you can from the UK to China.
[00:34:28]
Q: How is the shift to e-commerce impacting Pilgrim’s Pride?
LC: Two really good examples. (1) Amazon Fresh. I think I mentioned that I was part of that. We launched a
digital-first chicken, which was the Just Bare chicken. Price fix, meaning we overpack up to 20% more in every
pack to make sure that we fit, it’s 1lb, or 2lb or 2.5lb, but never under because you’ll get sued by the FDA or
whatever. You want to make sure you overpack. Same pricing, people will get the same price all the time, so
when you say, “Alexa, fresh chicken,” Alexa will ask you, “Do you want to repeat the chicken thighs you
ordered last time? You ordered Just Bare chicken.” You say yes, and that’s automated into your shopping cart
because 20% of Amazon’s searches are done now on Alexa. The previous purchase gets in your cart a great
number of times because it’s just repeat, repeat, repeat, so that has created a habit, and that’s solidified just for
chicken. The number one inside of Amazon and the number one selling in the digital market is that way. (2)
Instacart, and Shipt and click and collect have made it very easy for consumers to start trusting more on fruits
and vegetables and meat that were parts that before that not even 15% of consumers were willing to buy to
their carts without looking. With COVID, and just the explosion of Instacart and click and collect, they are
trusting more and saying, “Hey, you can pick my tomatoes, you can pick my chicken,” so the intellectual
barriers that consumers had before have significantly dropped, and that’s not only in the US but has happened
in the continent, meaning in western Europe, and the UK particularly.
I don’t expect that to slow down, even after COVID, that people are going to go back to stores. Many stores, I
have to be totally, and I have panels in my current consulting that I can tell you this, many consumers never
Private and confidential 8
enjoy going to a Walmart. Now they’re saying, “I can do both. I can get the Walmart low prices without having
to go inside the store by doing click and collect. I’m never going back to the store.” Those are people on some
of the panels that I work with right now, so that’s not me believing, that’s consumers saying, “I’m very happy
with it, and I’m going to continue doing it even after COVID,” so I think this is not a short term, this is a long-
term trend.
[00:37:41]
Q: What are the cost implications of shipping products, especially fresh items? I believe shopping via Instacart
or online platforms incurs a higher premium. Is the higher price premium across the board, or is it the
difference between delivery and click-and-collect? Is the cost structure higher because of e-commerce and
having products on the first or second page of search results?
LC: There are costs, and just like DoorDash passes you a cost because you pay for convenience, you order
Papa John’s and you say, “Let me do it in DoorDash because it’s easier,” you’re paying the intermediary, which
is DoorDash. The same thing happens with Instacart. In Instacart, you can be very successful if you do
coupons smartly inside of Instacart because a coupon gets you first page, and no one goes below the third of
the page, so you want to be on the top third of the page on Instacart and be a featured coupon and say, “Look
at me, look at me, I have a coupon.” Those coupon redemptions, we’re talking a paper coupon, and I don’t
know how much you know about paper coupon and newspaper, those, when you’ve got 3% people refunding,
actually using the coupon, you’ve got a party. We’re talking 13% redemption to up to 30% redemption, and you
have to cap the coupons because otherwise of course you spend all your money in coupons. You can, inside an
Instacart. You can actually say, “Yes, I only have USD 10,000, and that’s it. I’m not going to spend more,” and
it turns off the moment that you get to the USD 10,000. There’s no overspending that you can, so that’s why
for a supplier, Instacart is a brilliant thing, which is you can get a coupon, I got you to buy my chicken and I
never overspend, so that’s beautiful, beautiful controls. The same happens inside of some apps, like in digital
coupons, apps that you can actually do coupons on until you exhaust the money, and that’s it, vs a paper
coupon that’s an open invitation to fraud, potentially, or to just people over-expend. Make sense? Yes, there’s
going to be a higher cost for convenience, but for many shoppers and consumers, they’re willing to pay it.
Maybe in the future they won’t, but today they are.
[00:40:40]
Q: What are some challenges of running marketing campaigns in a digital landscape, as marketing spend is
allocated to e-commerce channels? You mentioned earlier the benefits lie with a higher utilisation rate and
getting your product to the first page.
LC: There are lots of challenges. You need to have people in your organisation that are capable of
understanding return on advertising spend, we call it ROAS. You have to have A-B testing for these coupons or
anything inside of Amazon because you have two components. First you have your slotting fees, which you pay
to be able to be inside of Amazon, so that’s the slotting fee, as we call it, and also you have to pay for Amazon
media, and if you want to be a strategic partner, you have to have both. It’s not cheap, it’s not for the faint of
heart, but if you do, you have a higher probability of being higher in the search, and in the case of Just Bare,
we had eight out of the top 10 searches with the term fresh chicken were Just Bare. That guarantees you you’re
going to be in the cart of many, many consumers because you’re going to be the first thing. If they put chicken
thighs, boom, Just Bare is going to be popping in the first search. If you have reviews that are four stars are
above, it’s almost always you’re going to get in the cart. If the product performs, then they keep repeating, so
it’s a beautiful, lovely, great repeat, repeat, repeat, so those are the benefits. The bad thing is you need to have
people that are very aware on return advertising spend, people that can do testing, A-B testing, people that can
do content calendars that are relevant by distribution side. It may be cold here in Denver today, but it’s warm
as heck in Miami, so you can’t show the same commercial and saying, “For your grilling,” if in Denver it’s still
14 degrees, you’re not going to be grilling. Make sense? You have to be very, very good at contextual and push,
showing the right campaign to the right individual according to their IP address, and that’s not easy. It can be
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done, but it’s not easy.
[00:43:14]
Q: How might consumers decreasing their red and processed meat consumption impact Pilgrim’s business
model’s long-term feasibility? What is the company doing to adapt to this shifting consumer behaviour?
LC: When I was there, we were learning about the potentiality of some of our brands to have plant-based, so
they would be chicken and mix, so plant-based, some chicken and, so we call those hybrid, as well as actually
plant-based products that were branded under some of the Pilgrim’s brands. We did that. I don’t know where
they are, sincerely. I left, so I don’t know where they are with that. That said, JBS that owns more than 60% of
Pilgrim’s, they have launched their own plant-based, and because they’re in the same building, they would
know or learn from each other what works, what doesn’t work, so they’re definitely going to be there. Where is
plant-based going to go? It’s going to grow, don’t get me wrong. It’s going to grow because of Gen Z and
millennials are expecting more out of protein manufacturers. They’re expecting that we are better stewards of
the globe and the planet, and if it can be proven that plant-based is actually better for the carbon footprint,
then that’s going to grow. That’s it. There’s growth for both, and that’s what I’m saying, is there are so many
young consumers throughout the globe outside of US and whatever that will require great protein. I think the
challenge is going to be do we have enough to fill nine billion people. That’s the question. I think everyone’s
going to grow, not only the chicken producers or the beef producers, pork producers and the plant-based
producers all are going to go, but because there’s a need to feed nine billion people, that’s going to be the
challenge.
[00:45:47]
Q: Could you expand on additional trends such as meat and protein alternatives? What are the main drivers of
this industry?
LC: There are three things. (1) Demographics, of course, which is the millennials, younger millennials,
younger millennial males that are creating their new households and they’ve just had a crash course on
learning how to cook. 1% or 2% of households during COVID, they ran out of things they knew how to cook, so
they experimented with a bunch of things, from meal kits to plant-based, and they couldn’t eat burgers every
day, so they said, “What if I replace on Mondays the burger I eat on Sunday with a plant-based?” Maybe they
tried Impossible Burger or whatever. They say, “This is decent,” so yes, that has been the key growth, is
particularly younger millennials, Gen Z households that are new that were forced to try new things, and they
tend to like that consistency, so that’s already set. (2) Trade actually, meaning our customers. They have
become bullish on alternative meat and provided, I think, too much share to some, and if you go to an actual
store, they are disproportionate in the size of the freezer or the fresh aisle that they’re getting disproportionate
of the returns.
Why? Because they have longer, so they’re not smell-it, so the expiration day is longer, and because of that,
they can sustain a longer period on the shelf, so they’re giving higher space to these, but at the same time
they’re creating out-of-stocks on fresh meat, so I don’t know if that’s in their best, how can you call it? Is the
right thing to do, but the customers are doing it. (3) QSR, when QSRs like Starbucks, and Burger King, and
McDonald’s and many others have changed menus to have Impossible Burgers or these types of plant-based
products in their menu, they’re making it normalised. It’s like, “I can have a chicken sausage or I can have
Impossible Burger.” That ability to order ubiquitously, all of a sudden you get accustomed to the flavour, the
blend taste that those things have, then you buy it again, so those are the three factors, so demographics,
customers at the retail and the QSR.
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[00:49:10]
Q: Do you think alternative meat will pose a larger threat domestically as prices decline or is chicken fairly
unexposed, especially if alternative meat remains a premium product?
LC: Yes, I think the prices are really high at this moment, and because of that, you do a double take. Again,
you could replace one meal, Meatless Monday kind of thing, and, “Yes, I feel OK,” but if you have a fixed
stipend for meat, let’s say, or for groceries, let’s say USD 129 per week that you allocate to that, all of a sudden
you’re putting too much on alternative meat, then you’ve got to take it somewhere. Something has got to give if
you have a fixed budget or you’re going to put more money behind that. That’s what I’ve seen, and this is
Laston, what I’ve observed on panels and whatever, is people are going to pretty much stay at, “Hey, I should
be spending USD 200,” or USD 100 per week or whatever it is per week. They have a stipend for groceries. If
all of a sudden it’s too high, they’ll start looking for alternatives. At this moment, plant-based is still high on a
per-pound basis compared to chicken and to many others, so if there’s going to be more competition or higher
capacity that can actually go down, and if it goes down maybe there are going to be more episodes or more
meals that are actually centre plate becomes a plant-based vs chicken, beef or pork.
[00:51:10]
Q: How do you think Pilgrim’s Pride will use the USD 1bn capital it raised from an ESG-linked bond? The
company became the first US poultry producer to assume such a bond in March 2021.
LC: I go back, and this is me, Laston, expressing, that’s Fabio at his best, meaning the former CFO, now the
CEO. He sees the sustainability trend, he sees ways to get cheaper money, in exchange for (inaudible 51.59)
he’s got to derive, meaning either lower carbon footprint, do something great for the environment. If he can
see that and then translate that into lower cost of money for his capital expansions, he will do it and he will do
it first, and that’s what I believe is what he proved with this new ESG-linked bond. I believe that that’s, again,
him saying, “Yes, I need USD 1bn. I got it at a cheap, cheap place and I’m going to use that money to expand
the Minnesota plant, automation and robotics so I can lower my talent cost, going forward, and improve my
throughput and the higher value add of my mix.” That’s what I believe. Again, it could be different, but
knowing Fabio as I know him, I think that’s what he was thinking all along, but he also gets kudos because he’s
going to be the first company already with an ESG-linked bond. Does that make sense? He’s like, “I’m first,
and again, I got a cheaper deal because I’m committing to this,” and he’s going to find ways to deliver because
he does, he will deliver against that, but he’s all with the time value of money concerned he has across the
board. He’s very astute at doing that.
[00:53:23]
Q: What are some developing sustainability issues for Pilgrim’s Pride and how is the company
addressing these? Could you elaborate on the unique protein conversion business you highlighted? Are
you aware of what competitors are doing to meet these same challenges?
LC: They have, as I told you, so many plants, and water is an issue, so water, sustainability of water, water
treatment and how close they are to urban because water is a limited supply. If you think about the plants,
they’re mostly in the southeast or with Texas, all the way to West Virginia and Virginia, and then they have a
couple of plants in Minnesota, Wisconsin, so they’re mostly a kind of southeast company, and there’s plentiful
water there, but water treatment has become an issue even in those locations. If climate change comes, water
is going to be a problem, and that is not going to go away. I think water treatment and water availability are
huge, looming issues that industry is going to have to face. Foster Farms is mostly in California, and that’s a
competitor, but they’re going to have trouble because it’s really hard to get water in California, or Washington
or Oregon where they are, so there are going to be competitors, they’re going to be in deep trouble to fulfil
community availability of water, for them, for the plants, for the farms and for the communities, so that’s truly
an issue. The second sustainability issue is going to be team member safety, and that’s safety of shoulder
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cutters, safety of processing and people, and that’s going to drive more automation, and that’s a sustainability
issue in the way that how can you sustain a business with 32 plants, 33,000 employees in the US alone if you
can’t recruit? That’s a sustainability issue, the way I see it.
Then, last but not least is how are they going to be able to fulfil the needs of the rest of the globe as it pertains
to protein demand? That includes plant-based, pork, beef, chicken and lamb. Those places that have a high
population growth like Africa as well as some parts of Asia, they are going to demand better-quality protein,
and you’re not there, meaning there’s no large chicken processors based in Africa of the size that Pilgrim’s is.
They’re going to have a make a choice, do they play there or not? Thailand has a lot of chicken processing
facilities. Is that sufficient to fulfil the needs of the Far East? No. What I’m telling you is capital has to be
reassessed and removed to places where there’s going to be more demand, and nobody has taken that,
embracing it and saying, “How do we get this done?” Somebody’s going to have to figure it out.
[00:57:15]
Q: What is your outlook for Pilgrim’s Pride? What are the best- and worst-case scenarios over the next six
months?
LC: The best-case scenario is that case-ready growth, meaning that more people buying for home
consumption does not decline substantially after COVID. Pre-COVID, it grew so much. All of a sudden the
number of meals eaten at home has grown significantly higher, that after COVID that doesn’t go back to
previous, because it will unbalance them and hurt them. Right now, they moved more capacity to case-ready
small bird and took it away from big bird. If they have to rebalance, again, remember that you can’t do it in a
day. You have to have eggs, and it takes 42-60 days for these eggs to grow, and you have to change the whole
supply chain. They can’t flip it in a second, so it’s hard if demand were to. I don’t believe so. I believe both
case-ready and smaller bird are going to continue to be higher than they were a year ago. There’s going to be of
course a return to big bird and fresh food services, meaning going back to people going out, and that’s going to
change, but if they can balance the flip back to commercial, they’re going to be in a very good place. What’s
going to be challenging is rotisserie particularly has been hurt, because although click and collect has grown
and you can buy chicken, just say, “I want chicken thighs,” and it’s on a tray, buying rotisserie without seeing
or looking at the bird, that has really hurt.
I think that’s long term, of all their businesses, rotisserie that is purchased to go, if people are not going into
the stores much, that’s going to continue hurting, and it’s a long-term demand hit because people stopped
going into the store, therefore they’re not buying rotisserie. Many of the trips for Costco, if you believe it or
not, were just buying a USD 4.98 rotisserie chicken and a bottle of wine. Think about that. You will go to drive
to Costco just to do that. People are not doing that, so that must have hurt rotisserie in just sheer number of
trips, and that, long term, is going to be challenged. I think they’re well-positioned because they’re the largest
organic manufacturer, because they have the largest capacity of natural veg-fed product out there. They’re in a
very good place to have underserved (inaudible 01.00.12) shoppers by providing really good-quality products,
so having more no antibiotics ever than anyone, vegetable, green fed and non-GMO as well as organic, they are
in a very good place to do it right if they double down on brands, and that’s a different discussion, and if they
can survive the flip back to higher demand in commercial and lower demand at home.
[01:00:44]
NH: Let me close by saying thank you for your input, Laston. It was a really great Interview, and thank you,
clients, for joining Third Bridge Forum’s Interview today. If you would like a private call or meeting with
Laston, please let your relationship manager know. Goodbye.
LC: Thank you. Bye-bye.
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Transcription ends at 01:00:58 of the recorded material
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