‹ back to March 2010 issueInside the turnaround of Pilgrim’s Pride

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Saving an $8-billion debt-laden company

When North America’s largest chicken producer, Pilgrim’s Pride Corporation (“Pilgrim’s”) faced an industry-wide downturn, coupled with rising commodity costs and excess capacity, the company sought counsel from the professionals of CRG Partners, including William Snyder, managing partner; Mike Darland, partner; Winston Mar, managing director; Mike Juniper and Sugi Hadiwijaya, directors; and Matt Farrell, senior consultant. Despite a variety of complex challenges, due to the management team’s early intervention, the CRG Partners team decided that Pilgrim’s could be turned around.

The results:

Pre-bankruptcy snapshot:

According to William Snyder, former Pilgrim’s chief restructuring officer (“CRO”), “the underlying economics of the poultry industry had deteriorated dramatically. In addition to the increased commodity costs of corn and soybean meal, depressed chicken prices had caused an oversupply in the market. These factors, and the company’s substantial debt, limited its ability to endure an industry downturn.”

For Pilgrim’s, the Energy Independence and Security Act of 2007 caused the price per bushel of corn to nearly triple due to the increased demand for cornmeal to produce ethanol. As its customer agreements did not contractually pass on these higher costs, an increase of this magnitude severely strained the company’s liquidity position and significantly impacted its profitability. Additionally in 2007, the acquisition of Gold Kist increased the company’s debt burden substantially, further contributing to its poor financial performance.

In early 2008, to address these issues, Pilgrim’s took several measures to mitigate the downturn, strengthen its competitive position and restore profitability. Specifically, the company began implementing measures to increase efficiencies and decrease costs, such as selling its turkey production business. Additionally, to fund operating expenses and reduce debt, in May 2008, the company completed a public offering of its common stock for approximately $177 million in net proceeds.  

Despite these efforts, and after looking into various reorganization scenarios, no viable out-of-court restructuring alternatives materialized and Pilgrim’s Pride filed for bankruptcy on Dec. 1, 2008.

The solution:

Pilgrim’s retained CRG Partners in November 2008 to support the company in an operational and financial restructuring and provide leadership and guidance throughout the bankruptcy process. William Snyder was appointed CRO, and, along with the other CRG professionals, he worked closely with the management team to quickly identify and implement a series of initiatives to improve performance, maximize cost reduction initiatives and evaluate strategic alternatives.

New management

Within 18 days of the filing, industry veteran Don Jackson was recruited as the new CEO of Pilgrim’s, who brought in other top managers. The management team was dedicated to achieving and sustaining a successful company and embraced the need for immediate tactical, strategic and cultural changes required to improve stability and profitability. Their quick action and commitment to improvement provided the foundation for a fast and successful turnaround.

Operational improvements

In the summer of 2008, Pilgrim’s introduced Lean engineering concepts but did not have the resources to dedicate to a company-wide adoption of these methods. With CRG Partners’ support, Pilgrim’s was able to increase the implementation of Lean programs across multiple facilities and demonstrate consistently large cost savings at several operating facilities. Lean engineering production efforts were implemented quickly, with the results dramatically exceeding initial estimates.

Supply chain optimization

Pilgrim’s was historically a production-driven company. With reduced market demand and excess product, it became the dominant provider to the commodity markets, thus experiencing volatile revenue patterns and a significant dependency on external conditions.

To countermand this, along with the operational consolidations, CRG improved the company’s leadership-team design and implemented a customer-demand supply chain to drive its total operations. This was a significant shift from forced production scheduling to a customer-focused plan based on long-term demand profiles and forecasts. In addition to better addressing the needs of its customers, this consumer-centric production plan allowed Pilgrim’s to focus on higher profit product lines, thereby reducing the amount of commodity products.

Cash flow forecast improvement

Prior to the filing, CRG Partners led the company’s efforts to improve the existing 13-week cash flow forecast by converting the budget to a book-cash basis, which accounts for outstanding float, yielding more accurate reporting. The company, with the guidance of CRG Partners, assigned budgeting responsibilities to key department heads in order to empower active employee involvement and develop ownership and accountability.

The cash flow revision process was a joint-effort, during which the collective thoughts and concerns of all stakeholders were considered. Pilgrim’s developed a robust cash flow forecast and a more accurate variance monitoring mechanism that provided precise information, which the stakeholders used to make timely and prudent decisions.

Vendor communications

At any one time, Pilgrim’s was feeding 200 million chickens at a cost of $42 million per week, and as the chickens could not survive more than a week without feed, vendor support was critical. CRG Partners established a robust vendor communication program to preserve relationships and favorable credit terms. Regular updates about the progress of the reorganization and answers to key questions allowed Pilgrim’s to conduct business normally throughout the bankruptcy process.

Out of $100 million in pre-petition obligations paid during the bankruptcy, $43 million was paid to critical vendors; in return, they extended credit on new or better terms totaling $200 million. This provided additional liquidity for Pilgrim’s to fund its operations and restructuring process without borrowing more from the DIP loan.

Legal considerations

With vast executory contracts, personal injury and workers’ compensation claims, as well as scheduled and filed proof of claims totaling over $6.5 billion, the legal challenges Pilgrim’s faced during its bankruptcy were daunting and potentially contentious. In order to exit bankruptcy as quickly as possible, CRG began the process of resolving the massive legal issues soon after the filing.

Once again, CRG Partners and the Pilgrim’s management team collaborated with stakeholders to find mutually agreeable solutions that sufficiently satisfied the creditors and provided the company with on-going trade support.

To address the 327 personal injury claims representing $156.5 million, CRG Partners strategically requested that the judge establish alternative dispute centers to consolidate the hearing locations. The reduction in hearing locations allowed a greater volume of claims to be settled quickly and, most importantly, prevented the possibility that hundreds of sympathetic local judges might grant large settlements to the claimants.

Exit strategy and funding

CRG Partners provided considerable guidance to Pilgrim’s as it explored potential exit strategies. In the end, both parties agreed that the best course of action was to accept an offer by JBS to purchase a 64% ownership interest for $8 million. A transaction with JBS resolved a multitude of issues presented with a stand-alone plan and ensured the company would emerge from bankruptcy before the end of 2009.

After reviewing over eight proposals for exit financing, Pilgrim’s chose CoBank to underwrite a $1.75 billion, single-lien credit facility that, due to the large size, would require many of the pre-petition lenders to roll their existing commitments. With the help of RaboBank as co-lead arranger, CoBank filled all commitments and completed a successful close, which was instrumental to the company’s emergence from bankruptcy.

With its exit financing in place, a consensual Plan of Reorganization (“The Plan”) and a rebounding stock, Pilgrim’s emerged from bankruptcy in December 2009 as a stronger, more viable enterprise, poised for sustained growth.

Key takeaways:

Due to proactive management and open communication between all stakeholders, Pilgrim’s confirmed The Plan within 13 months of filing despite the challenges of volatile commodity markets, high leverage and constrained liquidity.

The Plan provided for all creditors to receive 100% on allowed claims and equity maintained a 36% ownership interest in the reorganized entity, preserving $600 million in value.

The company’s cash position increased from a negative balance with approximately $140 million in DIP financing to $250 million in cash with the DIP credit facilitate completely paid down. Additionally, the company’s security prices are steadily on the increase, creating over $1 billion in value since the filing date.

With the feasibility of traditional bankruptcy processes currently in question, Pilgrim’s plan merged high-impact operational improvement programs, strategic cost reductions and financial restructuring to yield an overwhelmingly favorable outcome aimed at delivering maximum value for all stakeholders.