June 6, 2011 - The Wall Street Transcript has just published Food Products Report offering a timely review of the Food sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
Ian Corydon joined B. Riley & Co., LLC, in 2002 as an Equity Research Analyst. Mr. Corydon's coverage universe includes companies in the consumer, retail and restaurant industries, as well as special situations. He was named Director of Research of B. Riley & Co. in 2007. Mr. Corydon earned a bachelor's degree from the University of California, Los Angeles, and an MBA in finance from the University of Southern California Marshall School of Business.
TWST: We would like to talk about the processed meat industry. You indicated you cover one company in the space.
Mr. Corydon: We cover Pilgrim's Pride (PPC), which is the second largest poultry processor.
TWST: You said it's in your "restructuring" category. Is that one of the specialties at B. Riley at this point?
Mr. Corydon: Yes, we identified "post-reorg" as an interesting coverage area. Post-reorgs tend to outperform the market. They tend to lack Wall Street coverage. They tend to be misunderstood and underfollowed because of the taint of the bankruptcy filing, and those things tend to lead to higher returns than the market.
TWST: What attracted you to Pilgrim's Pride other than the fact that it's restructuring?
Mr. Corydon: During the restructuring process, they were able to close facilities that they wanted to get out of. They were able to reduce their debt burden substantially and got a new management team. So they were able to emerge a much stronger player than they were before they entered bankruptcy.
TWST: How has Pilgrim's Pride reacted to rising commodity prices?
Mr. Corydon: They have hedged 100% of their corn needs and 50% of their soybean meal needs through the end of the year.
TWST: Where do you see opportunities now that they have gone through bankruptcy? Where can they grow?
Mr. Corydon: Well, there is growth and then there is improving their existing operations. They think they can take a lot of costs out of the organization. They are going back to manual deboning in their big bird plants. They had been using machines to debone, and that proved to be very inefficient. And in a company that processes this volume of chicken, if they can just get a little bit more efficiency there, that will be a big saving. And then in terms of growth, I think there are two things. One, with help from JBS they can get access to more global markets that JBS sells to but Pilgrim's Pride typically hadn't. And then Pilgrim's also has a plan to open idle facilities.
TWST: Are these plants they already own?
Mr. Corydon: Yes, they are.
TWST: Plants that were shut when they restructured. What is going on in the industry at this point? What does production look like versus demand?
Mr. Corydon: Well, we think production is going to be up about 1% for the industry this year. Demand is improving, but it's still a bit weak, especially in food service at restaurants. Consumer demand, I think, as the economy improves, will continue to improve. Regarding chicken prices, the trend for whole broilers, they're actually up about 1.5% year over year. And we're really seeing in January, February, we were expecting chicken prices and the part structure to remain weak just because of the excess supply in cold-storage inventory. But in March we saw chicken prices, both in the parts and whole bird, start to pick up. The weakness that we continue to see is in whole wings. Prices for whole wings are down about 40% or so year over year.
TWST: Will the industry behave this time around and not overproduce as things improve?
Mr. Corydon: I think right now, given that the industry is going to be operating at a loss, that producers are going to be more reluctant to bring on production. Marginal players may cut production or even go out of business. We think the state of feed costs and chicken prices will force producers to be rational.
TWST: What does Pilgrim's Pride's balance sheet look like?
Mr. Corydon: The company is sitting on a fair amount of debt, over a billion dollars' worth, but it is much less than when the company entered bankruptcy. We think that in a normal year - and we think normal year hopefully would be in 2012 - chicken prices will be higher and feed prices lower. In that kind of environment, we think a 7.5% EBITDA margin is achievable, and the company could produce cash flow somewhere along lines of 500 to 600 million.
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