New Owner Gives Wings to Pilgrim’s Pride Turnaround; Brazil’s JBS Plucks Record Profit Just Four Years After Bankruptcy

New Owner Gives Wings to Pilgrim’s Pride Turnaround
Brazil’s JBS Plucks Record Profit Just Four Years After Bankruptcy
DAVID KESMODEL
March 20, 2014 5:34 p.m. ET

ATHENS, Ga.—A system of rotating metal blades slicing into chicken legs at Pilgrim’s Pride Corp.’s sprawling plant here helps illustrate why the company is carving out record profits four years after emerging from bankruptcy.Pilgrim’s, acquired in late 2009 by Brazilian meatpacker JBS SA, JBSS3.BR +0.64% spent $1.3 million on the automated machinery two years ago so it could cut dark meat into smaller portions in Athens. The move has helped Pilgrim’s increase sales in countries such as Angola, an oil-rich African nation where consumers prefer smaller drumsticks and thighs that are less pricey than bigger cuts. Selling those smaller pieces adds up to about 10% more revenue in Angola than Pilgrim’s would generate by shipping whole leg quarters, the way U.S. chicken is usually exported.
Angola, the third-largest export market for U.S. chicken by volume, represents a small part of Pilgrim’s $8.4 billion in annual revenue. But the move reflects a drive under JBS to garner more profit per pound that has sharply improved earnings at Pilgrim’s, the second-largest U.S. chicken processor after Tyson Foods Inc. TSN +0.91%
“We want to make sure we get the maximum amount of revenue for each bird relative to the cost of that bird,” said Pilgrim’s Chief Executive Bill Lovette.
Pilgrim’s push for profits includes deboning chickens more efficiently to produce more salable meat and cost cuts that range from idling underperforming plants to reducing free Gatorade for workers. Just replacing paper-towel dispensers with electric hand dryers saved $3 million annually, executives say. Pilgrim’s also has eliminated 5,500 U.S. jobs, or 15% of its U.S. workforce, since 2010.
Its net income more than tripled last year to a record $550 million as its sales rose 3.6%. That was strong even in an industry that is broadly prospering, thanks in part to people switching away from pricier beef and pork. Tyson reported a 33% increase in operating profit for its chicken unit in the year ended last September, while Sanderson Farms Inc.SAFM +0.36% ‘s net income more than doubled in the year through October.
Pilgrim’s stock price has risen more than threefold since 2011, closing two cents higher at $19.40 at 4 p.m. in Nasdaq Stock Market trading on Thursday.
Pilgrim’s was led for decades by Lonnie “Bo” Pilgrim, a Texan who began it as a feed store with his brother in the 1940s. The company expanded rapidly through acquisitions to become the biggest U.S. chicken processor, but was felled in 2008 by heavy debt and spiking prices for animal feed.
JBS, known for wringing inefficiencies out of poorly run companies, paid $800 million for a 64% stake to lift Pilgrim’s out of bankruptcy. It marked the Brazilian beef giant’s first foray into chicken. JBS now owns about 75%, and its North American beef and pork division shares a corporate headquarters with Pilgrim’s in Greeley, Colo.
JBS in late 2010 recruited Mr. Lovette, an industry veteran who spent 25 years at Tyson. He grew up in the business, working summers on the processing lines at his family’s Holly Farms. He quickly found areas ripe for change. Pilgrim’s Pride was “trying to be all things to all customers” under its previous owners, leading it to embrace sales opportunities that sometimes brought little profit, he said.
Mr. Lovette also felt the company suffered from a mostly top-down management style. He made managers at its roughly three dozen plants in the U.S. and Mexico more accountable for improving productivity and sales, and introduced bonus programs to incentivize supervisors on processing lines.
In one of Pilgrim’s biggest moves, executives negotiated major changes to chicken contracts with food-service, restaurant and retail customers. Pilgrim’s, which supplies chicken to companies including Wal-Mart Stores Inc. WMT +1.34% and Yum Brands Inc.,YUM +1.42% long sold much of its processed meat on fixed, 12-month contracts. That saddled Pilgrim’s with significant risk when feed costs suddenly swung higher.
Pilgrim’s persuaded many customers to agree to more flexible contracts that adjust its chicken prices based on fluctuations in feed costs and market prices for chicken. Mr. Lovette said the shift—which some rivals have adopted—contributed significantly to improved earnings.
Pilgrim’s pushed managers to find other ways to increase revenue. Pilgrim’s now gets about a fifth of its revenue from overseas, mostly in Mexico, where it also produces chicken. But most of its growth in coming years likely will come outside the U.S., as wealthier consumers in regions including Africa and Asia eat more meat.
Angola is one example. Chicken demand there has risen amid population and income growth fueled by oil, as well as a stronger currency that made U.S. products less expensive.
Pilgrim’s declined to detail its exports to Angola, but said they have grown faster than the industry’s overall rate. Total U.S. chicken shipments to Angola rose 14% by volume last year, and the value more than doubled to $232 million from 2008 to 2013, according to the U.S. Department of Agriculture.
JBS had relationships with customers in Angola—whose national language, like Brazil’s, is Portuguese—that helped Pilgrim’s expand sales there. “We have used their international offices as a springboard to move us closer to” key customers, said Jayson Penn, Pilgrim’s executive vice president of sales and operations.
Pilgrim’s today ships chicken to about 100 countries from the U.S., up from 80 before JBS bought it. Revenue from U.S. chicken exports rose 23% to $716 million last year from $581 million three years earlier.
Meanwhile, executives are also slashing costs companywide.
The efforts are on display at the six-decade-old Athens plant, where the cuts this year included reducing how much Gatorade Pilgrim’s provides its roughly 1,500 hourly employees on breaks. “It was astronomical—the amount we spent just on that,” said Brandt Meeks, operations manager of the Athens facility.