A Flock of Troubles; Pilgrim’s Pride Faces a Crisis Led Off by a Huge Poultry Recall, Founder Steadfast that East Texas Empire is Upright in its Dealings - The Dallas Morning News January 19, 2003

By: Katherine Yung
The Dallas Morning News
January 19, 2003

In January 2001, Lonnie 'Bo' Pilgrim, the multimillionaire chicken king of East Texas, reached the culmination of more than half a century of work.

Pilgrim's Pride Corp., the company he controls and helped found, had just bought WLR Foods Inc. The acquisition would transform Pilgrim's into the No. 2 company in the poultry industry, behind only giant Tyson Foods.

What started out as two brothers and their feed store in the town of Pittsburg 55 years ago had grown into a chicken colossus, employing nearly 25,000 workers at plants, feed mills, hatcheries, breeder farms and other facilities stretching from the Northeast to the Southwest and into Mexico.

Today, just two years later, this empire is confronting a crisis.

Last October, Pilgrim's issued the largest meat recall in the U.S. Department of Agriculture's 140-year history. The company voluntarily called back 27.4 million pounds of ready-to-eat Wampler turkey and chicken deli meats in response to an outbreak of listeriosis that killed eight people, caused three miscarriages and sickened 43 other people.

Pilgrim's also shut down its Franconia, Pa., plant that produced the suspect meat for a month. The factory had been part of WLR.

The company now faces a class-action lawsuit filed in November in Philadelphia on behalf of those who suffered injuries as well as the thousands of consumers who bought the recalled meat.

Pilgrim's strongly denies that its turkey and chicken caused the deaths and illnesses.

'The recall will be history because there's no evidence of the listeria coming from our product,' Mr. Pilgrim said in an interview. When asked whether investigators would be able to find evidence, he said, 'I know they will not.'

Whether or not that prediction comes true, the recall is casting a harsh spotlight on the low-profile Pilgrim's, a company with a string of environmental regulatory violations over the last decade.

The unwanted attention comes as Pilgrim's barely made any money in its latest fiscal year ending in September. And it would have lost money in its fiscal first quarter that ended last month had it not been for two special gains on its balance sheet.

Questions are also mounting over who will lead Pilgrim's at one of its most critical junctures. Chief executive David Van Hoose, 61, announced in November that he will retire at the end of March, but so far the company has yet to name a replacement. Mr. Pilgrim, 74, said his two sons and one daughter have no interest in becoming CEO. But expect the poultry giant to continue to be controlled by the Pilgrim family. Mr. Pilgrim and one of his sons, Pat Pilgrim, said the family plans to retain ownership of the majority of the company's stock even after Bo is gone.

Important supplier

On a scale unimaginable just a decade ago, what happens to Pilgrim's matters to a lot of people.

The company is the nation's third-largest supplier of chicken and fifth-largest supplier of turkey. It also ranks as the second-largest chicken company in Mexico.

Order a chicken sandwich, nuggets or legs at Wendy's, Kentucky Fried Chicken or Arby's, and more than likely, your food will have come from Pilgrim's.

Scan the meat departments of grocery stores in Dallas, Fort Worth, Houston, San Antonio, Oklahoma City, Phoenix and other major cities, and you are likely to find an assortment of Pilgrim's chicken products.

The company found a way to compete against Tyson by focusing on selling not fresh whole birds but more profitable prepared chicken products, such as nuggets, strips and breast fillets, to fast-food chains and other food service customers. It also concentrates on retail markets where it can be successful.

'They have an excellent reputation,' said Jack Mason, director of quality assurance and regulation at Arby's Inc. 'They will be growing in volume for us.'

Nowhere does Pilgrim's matter more than in East Texas where Pittsburg, home to the company's headquarters, is often referred to as 'Bo's town.'

Pilgrim's has transformed the area's Piney Woods into a hub of chicken production. Broilers, or young chickens fit for cooking by radiant heat, have developed into a $ 1.1 billion market in Texas and the third-largest commodity market in the state, even slightly ahead of cotton.

None of this would have come about without the tenacity of Mr. Pilgrim, a self-described workaholic who served as CEO of his company for 30 years.

After graduating from high school in the mid-1940s, he became a partner with one of his brothers, Aubrey, at Farmer's Feed and Seed Co. in Pittsburg. The feed business led them into chicken production, and by the 1960s they had begun delivering their meat to restaurants and grocery stores in East Texas.

In 1966, a heart attack killed Aubrey, who became yet another victim of the disease that stalked the Pilgrim family. Heart disease also felled two other brothers and their father, who died when Bo was 11 years old. Bo himself underwent open-heart surgery in 1975 and suffered a mild heart attack in 1982.

But he kept the company going, dressing up in Pilgrim garb to hawk his chicken in television commercials. 'It's a mind-boggling thing. I'd put it right up there with marriage and my first bicycle,' he told viewers in 1984 when introducing whole boneless chicken, one of the company's major product innovations. He also promoted Pilgrim's leaner chicken with the memorable tagline, 'Nobody likes a fat chicken.'

Fowls weren't the only things that brought Mr. Pilgrim recognition.

In 1989, he gained notoriety for walking onto the Texas Senate floor and handing out $ 10,000 checks to nine senators two days before they were to vote on a controversial overhaul of Texas' workers' compensation laws, which he supported. The brazen act won him the 'Bonehead of the Year' award from the Bonehead Club of Dallas, a men's club devoted to fun and pranks. It also led to changes in the state's ethics laws.

The lobbying reflected Mr. Pilgrim's status as one of Texas' top Republican campaign donors. His company contributed $ 570,000 to mostly Republican candidates and committees during the 2001 to 2002 election cycle, according to the Center for Responsive Politics, a research group that tracks money in politics. In early January, Mr. Pilgrim attended the swearing-in ceremony of new Texas Sen. John Cornyn in Washington, D.C.

Keeping it in the family

Today, Pilgrim's is run like the family-owned corporation it is. The company has been publicly traded since 1986, but Mr. Pilgrim owns or controls 8.3 million, or 62 percent, of its Class A shares and 16.8 million, or 61 percent, of its Class B shares. That means he calls the shots, including electing the company's directors.

Mr. Pilgrim makes millions doing business with his company. It pays him fees for his personal guarantee on certain of its debt obligations. Pilgrim Interests Ltd., a family partnership, earned nearly $ 3 million from these fees in fiscal 2002.

Mr. Pilgrim also leases the company an airplane, a contract that earned him $ 608,500 in fees and operating expenses during Pilgrim's most recent fiscal year. In addition, he received $ 750,000 for renting out his egg production facilities to Pilgrim's, not to mention millions earned in egg grower fees in previous years. Still, the $ 15 million operation has lost money overall, Mr. Pilgrim said.

Pilgrim's recently terminated another contract, under which its co-founder sold grown chickens to the company, in response to a new corporate ethics law passed by Congress last year. Mr. Pilgrim made a million from this contract in fiscal 2001 and lost $ 428,000 in fiscal 2002.

The related party transactions extend into Pilgrim's top management. Three top executives, including CEO Mr. Van Hoose, earned a total of a million dollars from contracts to grow out chickens on their farms. Last year, Pilgrim's also made a total of $ 313,939 in loans to seven of its top executives, excluding Mr. Pilgrim. The loans were due at the end of 2002 but carried interest rates of only 2.69 percent per year.

For all his successes and controversies, Mr. Pilgrim makes no secret of his belief that he is serving a higher calling. 'In life, I'm still on track on doing the Lord's will,' said the longtime Sunday school teacher who tried to witness to billionaire Ted Turner five years ago at a Fortune 500 breakfast in Philadelphia.

He defines the Lord's will as 'living righteously and doing right with people, employees and customers in all situations.'

'Paramount concern'

That aspiration will be put to the test in dealing with the fallout from Pilgrim's recall.

Though it is the largest in USDA history, the recall represents only 7 percent of Pilgrim's annual turkey production and less than 1 percent of its total poultry production. Yet it could develop into a public relations nightmare for the company, raising the possibility that long-term sales of the Wampler brand could suffer, analysts and industry experts said. In its fiscal first quarter, Pilgrim's estimated it lost $ 30 million in sales because of the recall alone. Excerpts of some government inspection records from the plant during the month before the recall detail several food safety violations, including previous days' meat residue left on equipment; unknown foreign black particles seeping into a frozen meat container; and red mold, black oil, rust and a live cockroach found in various parts of the plant.

U.S. Representative Henry Waxman, D-Calif., has asked for the USDA's inspection records of the plant to determine whether the federal agency looked the other way when it saw evidence of safety violations. The inquiry could lead to more revelations about the Franconia plant.

'Overcoming this recall is the most paramount concern for them right now,' said Ronald Neysmith, an analyst at Standard & Poor's.

In mid-October, he placed Pilgrim's 'BB' corporate credit rating and its other ratings on CreditWatch with negative implications. The company's Class B shares reached a low of $ 5.28 after the recall but have since risen above $ 8.

A poll conducted for Pilgrim's showed that 10 percent of consumers were aware that the company was involved in the recall, Mr. Van Hoose told Wall Street analysts in a conference call in late October.

'The amount of money paid [in a recall] generally is a drop in the bucket compared to losing a month's worth of sales, compared to losing consumers' confidence in your product,' said Dave Babcock, an attorney at Marler Clark, a Seattle law firm that represents victims of food-borne illnesses but is not involved in the Pilgrim's lawsuit.

Pilgrim's isn't the only possible culprit of the listeria outbreak. In early and mid-November, the Jack Lambersky Poultry Co., in Camden, N.J., recalled 4.4 million pounds of turkey and chicken meat because of listeria contamination.

Some of the meat in the Lambersky recall contained a strain of listeria indistinguishable from the one in the outbreak, the Centers for Disease Control and Prevention found. The two ready-to-eat turkey products from Pilgrim's with listeria harbored strains different from the one in the outbreak, the agency said.

However, inspectors did find two environmental samples taken from the floor drains of Pilgrim's Franconia plant with the type of listeria matching the one found in the outbreak. That raised the possibility that the bacteria could have found its way into some meat.

Routine tests for listeria contamination at the Franconia plant a few months before the recall indicated a possible problem and should have raised a red flag for Pilgrim's, a USDA spokesman said.

When asked about this, Mr. Pilgrim said, 'There is listeria in most meatpacking plants in the places where they found it - in the drains.' He repeatedly cited the fact that the strain of listeria involved in the outbreak hasn't been found in any of Pilgrim's meat.

The Centers for Disease Control and Prevention has completed its investigation of the listeria outbreak, but its final report isn't expected to either blame or exonerate Pilgrim's, said Sami Gottlieb, an epidemic intelligence service officer at the CDC.

Kenneth Moll, the lawyer suing Pilgrim's, said he expects the company to eventually settle the lawsuit. His law firm reached a settlement in 2000 with Sara Lee Corp. over another listeria outbreak that caused 21 deaths.

'What these cases turn on is the strength and substance of what the public agency's investigation was,' Mr. Babcock, the attorney, said.

Pilgrim's expects its product recall insurance policy to cover the costs of the recall and any liability claims, Mr. Pilgrim said. Already the company has asked for and received a $ 4 million advance payment from its insurer. But Pilgrim's cannot yet estimate how much the recall will ultimately cost, Mr. Pilgrim said.

Contrary to rumors, the company doesn't intend to shut down the Franconia plant and exit the turkey business, he said.

Environmental woes

Contaminated meat isn't the only criticism facing Pilgrim's. The company's environmental record has also come under scrutiny.

The Texas attorney general's office is evaluating the amount of penalties it should assess Pilgrim's for failing to obtain permits for more than two years for a commercial egg-laying operation near Pittsburg.

The penalties will also cover violations after the company obtained the permits last September. Those violations occurred when Pilgrim's piped wastewater from the egg-laying operation to a pasture in order to avoid paying the cost of trucking it to a facility for disposal, a spokesman for the attorney general's office said.

In West Virginia, the state's Department of Environmental Protection is suing Pilgrim's for violating storm water and treated wastewater discharge limits and failing to sample for storm water pollutants at its Moorefield poultry processing plant. The plant, which sits on the south branch of the Potomac River, also failed to contain wastewater at its truck-washing facility, the suit alleges.

Over the last five years, the Environmental Protection Agency has assessed Pilgrim's a total of $ 65,025 in fines. The penalties came primarily from two charges of clean water violations at the company's plants in Mount Pleasant.

When asked about these problems, Mr. Pilgrim said that his company is continuing to upgrade its standards and its staff.

'Any sin against the environment is a sin against God. We are very conscientious about doing the very best job that can be done,' he said. 'We get cited for the things we do wrong but not the 99 percent of things we do right.'

Pilgrim's has improved its record with the Texas Commission on Environmental Quality.

During the years 1987 through 1991, the state regulatory agency regularly slapped the company with penalties for violating environmental regulations. Then in 1995, Pilgrim's received a fine of half a million dollars for unauthorized wastewater discharges at its Lufkin plant and other violations.

Since then, the commission has fined the company twice - in 1999 and 2000. Lousy timing For Pilgrim's, the current environmental allegations against it and the recall couldn't have arrived at a worse time.

Last year, the company suffered from depressed chicken prices and an outbreak of avian influenza in its Virginia operations, which killed millions of its turkeys and chickens.

Most of the profit it made in fiscal 2002 came from an $ 11.9 million tax benefit from changes in the tax laws in Mexico.

Without the tax benefit, Pilgrim's would have earned $ 1.9 million in net income, its worst performance since a loss in fiscal 1996. Its interest expense on its debt exceeded its operating income.

The acquisition of WLR, the country's seventh-largest poultry company, loaded Pilgrim's up with long- term debt, which has more than doubled over the last four years to $ 434 million.

Yet in order to compete against Tyson, Pilgrim's will need to spend millions investing in equipment and plants on the East Coast to convert WLR's largely commodity chicken business into more profitable prepared products.

The challenge doesn't faze Mr. Pilgrim.

'Agriculture is a highly leveraged investment that carries a lot of debt,' he said. 'But there are lots of blessings passed on to the consumer.'