Sanderson Farms, Inc.
Q4 2018 Earnings Call Transcript

Published: 21 Dec 2018

[Operator:]

Good day and welcome to the Sanderson Farms Fourth Quarter and Fiscal 2018 Conference Call. Today’s conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Joe Sanderson. Please go ahead, sir.

[Joe Sanderson:]

Good morning and welcome to Sanderson Farms fourth quarter and fiscal year-end conference call. I apologize to each of you, I have bit of bronchitis and I'm hoarse I feel fine, so I'm going to proceed doing my part this morning and I apologize for my voice. This morning we reported a net loss of $43.2 million or $1.95 per share per share for our fourth fiscal quarter of 2018. During the fourth quarter of last year, we made $72.9 million or $3.20 per share. For the year-ended October 31, 2018 we reported net income of $61.4 million or $2.70 per share. For fiscal 2017, we reported net income of $279.7 million or $12.30 per share. The results for the quarter and fiscal year include an adjustment of $9.6 million or approximately $0.32 per share, net of income taxes to report live inventories on hand at October 31, 2018 at the lower of cost or net realizable value as required by general accepted accounting principles. Results also include cost and inefficiencies caused as a result of two hurricanes during the quarter that affected our operations in North Carolina and Georgia. If you do not receive a copy of the release and the company's financial summary, they are available on our website at www.sandersonfarms.com. Before we continue, I will ask Mike to give the cautionary statement regarding forward-looking statements.

[Mike Cockrell:]

Thank you, Joe and good morning everyone. This morning’s call will contain forward-looking statements about the business, financial condition and prospects of the company. Examples of forward-looking statements include statements about future earnings, expenditures, supply and demand factors, production levels, grain cost and supply, poultry prices growth plans and economic conditions. The words beliefs, expects, anticipates, estimates, modeled, should and plans and similar words are intended to identify forward-looking statements. The actual performance of the company could differ materially from that indicated by the forward-looking statements because of various risks and uncertainties. Those risks and uncertainties are described in our press release and in the Annual Report on Form 10-K for the year ended October 31, 2018 which was filed with the SEC this morning. All forward-looking statements speak only as of today and are based on our current expectations, beliefs and assumptions. Those could change based on the mainly external factors affecting our business. We undertake no obligation to update or revise forward-looking statements.

[Joe Sanderson:]

Thank you, Mike. Our financial results for the fourth fiscal quarter and year-ended October 31 reflect weak market prices for products produced in our big bird food service plans. Reduced features for chicken products and retail grocery stores inefficiencies during our fourth quarter caused by two hurricanes slightly higher cost for feed grain and a downward adjustment to live inventories to value that inventory at net realizable value. Overall poultry market prices decreased for the year compared to fiscal 2017, and grain prices were slightly higher during the year. That said, feed cost and flocks sold were higher only about a third of a certain pound as improved efficiencies, partly offset the higher prices paid for grain. Our net sales for fiscal 2018, were $3.236 billion and our net income $2.70 per share. We sold a record 4.44 billion pounds of poultry products. We repurchased and cancelled 823,385 shares of common stock during the fourth quarter at an average price of [$101.37] per share. We moved our new Saintpolis, North Carolina plant to full production, continued construction of our new Tyler, Texas complex and we ended the year with no debt on our balance sheet. While we have room to improve our performance, I am very grateful for the efforts of our growers and employees during this past fiscal year and look forward to working with them to capture the opportunities available to us during the coming fiscal year. With that introduction, I'll ask Mike and Lampkin to provide some details on the quarter and I will return after they finish to discuss our focus during fiscal 2019 and to answer your questions.

[Lampkin Butts:]

Thank you and good morning everyone. This is Lampkin. As Joe said overall market prices for chicken were lower during this fiscal year compared to fiscal 2017 and our feed costs per pound for the year were higher by only 1.3%. Trade backed market prices during our fourth quarter and the fiscal year continued to reflect relatively balanced supply and demand dynamics, but volumes reflect fewer features at retail grocery stores and at national food service restaurants during the year, which we believe is a result of lower wholesale prices for competing proteins. For the year our trade backed market prices were lower by $0.013 cents per pound compared to 2017, as improvement in our mix saw our overall average market price for sales increased $0.025 per pound. For the fourth quarter trade backed sales prices were lower by $0.043 per pound, compared to the fourth quarter of 2017. Our mix was better however, so that our net average sales price during the fourth quarter were lower by less than $0.01 per pound. Sequentially market prices were lower by $0.018 per pound and our mix was flat. We remain constructive on our outlook for the trade backed markets during 2019. Bulk leg quarter market prices were approximately 24.8% lower during the quarter compared to last year's fourth quarter and for the full year were lower by 5.5% compared to fiscal 2017. Urner Barry market prices were leg quarters averaged $0.283 per pound during the fourth quarter and $0.331 for the fiscal year. Total industry export volumes for the calendar year through October was higher by 4% compared to 2017. Market prices boneless breast during our fourth quarter were lower by 26.1% compared to the fourth quarter a year ago. The quoted market price for boneless averaged $0.953 per pound during the fourth quarter and a $1.09 per pound for the fiscal year. Boneless prices have weakened substantially since September and the Urner Barry market price for Jumbo boneless breast is currently $0.94 per pound. Jumbo wing market prices during the fourth quarter averaged $1.46 per pound, that's down 30.2% from the average of $2.09 per pound during last year's fourth quarter. For the year Jumbo wings market prices were lower about 25.2% from an average of [$1.93] per pound during 2017 to an average of $1.44 per pound during 2018. The current Urner Barry quote for Jumbo wings is a $1.46 per pound. Our averages sales priced for poultry products during the full fiscal year was lower by $0.069 per pound compared to last year decreasing 9.2% for the year ended October 31, 2018 compared to the year ended October 31, 2017. This decrease in our average sales price for chicken was an addition to higher feed costs, and live and processed. For the full fiscal year feed cost and live and processed were higher about $0.32 per pound or 1.3%. For the fourth quarter our overall cash cost were varying delivered to our feed mills were higher than last year's fourth quarter. Prices paid for calling delivery during our fourth quarter were lower by 1.3% compared to last year's fourth quarter, while our soybean prices were higher -- soybean mill prices were higher by 1.9%. Our feed cost per pound in grower and flocks process were higher by $0.01 or 4% during this year's fourth quarter compared to a year ago. During this year's fourth fiscal quarter, we processed 1.158 billion pounds of breast poultry and sold 1.145 billion pounds. We processed 4.503 billion pounds during fiscal 2018 and sold 4.443 billion pounds. For those of you modeling fiscal 2019, we currently expect to process 4.625 billion pounds of breast poultry during fiscal 2019, which would represent a 2.7% increase in pounds processed compared to 2018. If we run our plans as expected those pounds would be processed as follows

[Mike Cockrell:]

Thank you, Lampkin. Net sales for the fourth fiscal quarter totaled $798.1 million and that’s down from the $919.9 million for the same quarter last year. The decrease in net sales for the quarter reflects the decrease in pounds for poultry product sold or 0.6% and a 15.4% decrease in our average sales price to poultry products. Our cost of sales for poultry products for the quarter ended October 31 increased 4.2% and that reflects a 4% increase in cost of feed and boilers processed during the quarter partially offset by a decrease in pounds sold. For the fiscal year net sales totaled $3.24 billion down 3.2% from $3.34 billion last year. Cost of sales for the year increased 10.1% compared to a year-ago and totaled $2.975 billion. The average cost per pound in our poultry business increased $0.243 or 4% compared to last year and that reflects higher non fee related cost of goods sold and slightly higher fee cost. We sold $20.8 million more pounds of prepared chicken a [24.4%] increase in our sales price average $0.0489 per pound lower, and that's a 2.4% decrease. SG&A expenses for fiscal 2018 were up $5.7 million compared to last year due primarily to an increase in administrative salaries, increase legal fees, startup costs at our Tyler, Texas facility and increased trainee expenses. That was partially offset by bonus accruals and the ESOP contribution which was less than last year. For fiscal 2019, we're modeling $212.7 million for SG&A. That estimate includes no accrual for bonus compensation plans or the ESOP since both of those items are dependent upon profitability. We'll consider the probability of earning a bonus and an ESOP contribution as we move through the year and we will adjust this estimate accordingly. The estimate for 2019 reflects $9.5 million and startup cost at our new Tyler facility and we estimate that SG&A expenses will be broken out as follows

[Joe Sanderson:]

Thank you, Mike. Our feed costs during fiscal 2018 were higher than the previous year for the first time in five years, but only slightly. Given the supply of feed grain and uncertainties regarding trade issues we expect flat to lower cost during fiscal 2019. If we had locked in prices for all of our needs for fiscal 2019, including what we have already priced at current values that is if using the Chicago Board of Trade contract prices for current and future needs as it closed last night, our cash cost for grain during fiscal 2019 would be $8.1 million less than during fiscal 2018. However, we believe the Board is high relative to supply. Given that the carryout of both corn and soybeans is healthy and given ample worldwide supplies of both grains we should be able to buy grain at prices similar to if not lower than last year. We have taken opportunity to price our corn and soy meal needs through December, and we will remain patient for now on the rest of the year. As always on this year I will share a few things we're watching closely, as we start a new fiscal year. First as always we will keep one eye on the South American crops. As of today the corn and soy crops in Brazil and the rest of South America are progressing nicely. Second we will watch United States planting intentions report next March. Most everyone believes, corn acres will increase in 2019 while soybean acres will decrease and we will closely watch that report. Third we will watch chicken production numbers, USDA estimates that the industry will produce around 2.5% to 3% more pounds of chickens during calendar 2019 compared with 2018. Several new facilities and expansions have been announced that if completed will add new production in our industry over the next several years. However, based on what we read it appears the new production represented by announced expansions will not only come to market over several years, but will also be split between the retail trade freight market and the big bird foodservice market, whether or not and to what extent that new production exceeds additional demand for chicken in those two markets remains to be seen. What we will do is to continue to execute our growth strategy and let the markets take care of themselves. We will of course also be watching the chicken market. Market prices for boneless breast meat produced at our big bird plants for the foodservice markets are at historic lows. Furthermore, based on publicly available information a couple of our peers in North Carolina will be bringing additional big bird production to market in 2019. In addition, we returned our Hazlehurst plant to big bird production during November, and we will transition Hammond back to big birds some time in late spring. That additional production will contribute to an already challenging environment, add some increase in demand. As we have mentioned several times in recently calendar 2018 we saw virtually no future activity for chicken from food service establishments. One might expect these low prices to attract some future activity during 2019, which will help the demand side of the equation. As Lampkin said, we feel good about retail grocery demand going forward at least for everyday business. Volumes during 2018 suffered from a lack of feature activity of grocery stores, as many chose to take advantage of relatively low wholesale prices for beef and pork during the year. Of course the product produced at our retail grocery plants doesn't go into a tray to get sold in grocery stores, it is packable and compete, sort of already served foodservice market. Export demand has firmed somewhat recently, and we expect meat prices to move higher from where they are right now. Finally, we will focus our efforts on getting Tyler opened and maturing both tray pack and foodservice sales. We have opened three new process and plants over the last six years, and with no new construction currently envisioned during 2019, we will work to return the operations and sales at those new plants. While our overall performance in some areas during 2018 was good, we have identified significant opportunities in our operation in areas where we underperformed in 2018. We started the New Year in pretty good shape. Our balance sheet is strong, we started fiscal 2019 debt free and the company is well-positioned to continue on its gross strategy in the future. The new Tyler complex demonstrates our optimism and our confidence in the long-term success for Sanderson Farms and our industry. The new complex will add value for our investors, opportunities for our employees and their communities and more high quality products for new customers. We are committed to continue our growth beyond Tyler, but we will take this year to work on our operations and sales at our existing facilities. Market conditions are challenging, as we start the year. But no matter the market conditions we will continue to focus we will continue to focus on those things we can control and manage the others as best we can. With that, we will now take your questions.

[Operator:]

Thank you. [Operator Instructions] And we'll take our first question from Heather Jones with Vertical Group.

[Heather Jones:]

So I have I guess a couple of questions on to your comment about USDA's projection on chicken production, 2.5% to 3%. I was wondering if you could share with us your view of the likelihood of achieving that and if we do achieve that, it would seem like based upon the flock that we've got on the ground, the pose that we've been placing it would seem like you would have to have a really big acceleration and pull of placement. So just wondering if you could share with us your thoughts on that?

[Joe Sanderson:]

I agree there has to be an acceleration of pull of placement. So processed flock looks like -- our hand flock and processed flock, right now does not look like it can do that. We are placing -- we started placing last April to Tyler. I feel certainly other two plants in North Carolina are going to start producing well in mid January I think for sure and I'm assuming -- we've heard is that the primary graders are having difficulty getting flocks out, one for certain. And we think the other one, call it, our primary breeder because -- and I don't know why, I think the integrators would like to have more -- I just don't think they can put out for right now. But I agree with what you said the pull of placement need to get to the 130% of 2018. I think that's what the industry want to do.

[Heather Jones:]

And you started placing in April and if these plants start running one in January, clearly they were placed in a while back. So we've already …

[Joe Sanderson:]

They should be placed same time we were.

[Heather Jones:]

Right. So you've already seen some of those placements and yet the pull it placements have been honestly lackluster. Like when are we going to -- when do you think we'll get the acceleration that would be needed to open these plants on time?

[Joe Sanderson:]

I can’t answer that. It -- people can answer that, there are two primary breeders. And they don't talk -- we don't talk a lot of them.

[Heather Jones:]

My second question is in the last week there's been a pretty significant given that it's this time of year when I think I've only found a couple of years when you get a rally in pricing in December. So you've had a rally, are what we're hearing is that cutter demand has been up substantially because of greater further process demand. So my question is on feature like what you see feature activity at retail over the next couple of months and are you hearing anything about increased feature at food service because it would seem like there's something going on that's driven this meaningful step up in demand over the last couple of weeks, so just wonder if you can give us your thoughts on that.

[Lampkin Butts:]

Good morning Heather, this is Lampkin. How are you?

[Heather Jones:]

I'm awesome.

[Lampkin Butts:]

You know, we attribute this, the rates move up in boneless breasts, we attribute some of that to a lot of holiday cutbacks we have not been running. We normally don't particularly prior to Thanksgiving and Christmas and we think that that's part of, just that little bit of supply coming up has helped the market. We're seeing -- for the first time this year we're seeing some chicken sandwich features on television for restaurant accounts, and that certainly helps, there's boneless breast going into Mexico now that we weren't getting before when boneless was above $1 and we got to this fall where our price was better than the Brazilian breast meat that goes into Mexico. So we attribute it to that. We looked at our -- we attributed to the run up in December to that and we look at January we have good features at retail but I wouldn't say that's a huge change but with good features at retail, we are hearing anecdotally that there are going to be more features January, February that future activity is going to be going a bit better for boneless breast drop.

[Operator:]

And we'll take our next question from Ken Goldman with JPMorgan.

[Ken Goldman:]

Hi, thank you. A couple questions from me, I can't recall the last time Sanderson Farms has really discussed issues with operations in sales maybe not being as strong as you had hoped. So I want to make sure I'm hearing you correctly, that that's what you're talking about, it sounds like you're talking about this being a little bit of a retrenchment year when it comes to that. I guess secondly, can you elaborate on what some of those challenges are? And then my last question and I know this is a lot, but I'm just trying to get a sense, you guys talked in the press release about how the strong balance sheet will allow you to manage through the industry cycle which makes sense, but why would this cycle not last at least another couple of years right? It's hard for me to see beef supply coming down next year much, so maybe there will still be beef featured and certainly we are seeing more capacity coming online. So just help us understand if you can if there's any hope that we have that we get out of the sort of downward cycle in the next two years?

[Joe Sanderson:]

This is Joe. We sit down every year and looking at our operations, this is nothing new, we do this annually and look at our operations versus top 25% in our agro stats and live processing sales mix every year and we identify thinking of $100 million annually that we try to improve our operational goals annually, and we just did that last week for a day and a half roughly. We do it every year. And some of them in live production from option processing and some of them in sales and some of it’s in mix that we try to pick-up the next year. We never get all of it. Some years we get higher, some years we will get two-thirds of it, that is not anything new for us.

[Mike Cockrell:]

Really the only thing that is -- Hi, Ken. This is Mike. The only thing that is new as we mentioned Joe mentioned at the end of his script this is going to be the first time in eight years that we haven't been build out a plant, we're going to finish Tyler in January move it for production and the point he was making at the end is this would be a good year without building a new plant to focus on that we just have that would be one of our primary focuses, be constructing it.

[Joe Sanderson:]

And we've mentioned in here in the script that we’ve got $65 million that we're investing in our plants. I think bracket out, but a big portion is that is to amplify I'll use that word our product mix in our plants, particularly in the big bottom plants and …

[Mike Cockrell:]

We've got plenty to do…

[Joe Sanderson:]

Yes, we've got -- and just to improve our product mix at our plants, so we've already started on that and but this is something we do every year and we have been doing it every year. What was other …?

[Ken Goldman:]

You said the strength of our balance sheet is great but what's going to keep this cycle from less than two years?

[Joe Sanderson:]

Well I don’t know but I've been through three down years in row and I mean I don’t feel threatened at all …

[Mike Cockrell:]

No I mean in the last two years Ken as you know from your experience too there will be a change, I mean there would be some operators that wouldn’t be able to survive that kind of cycle if it last to that long and without balance sheet with the confidence to hang in there all the way through that if that's the case. Normally if you look at the last four cycles in the industry …

[Joe Sanderson:]

That has been 9 months.

[Mike Cockrell:]

But they were triggered by an event, a drought, a great recession, avian influenza, a Russian ban, there could be ...

[Joe Sanderson:]

As you go back and look at 2002, 2006, 2008 and 2011 which was down cycle that Mike was talking about the duration was eight or nine months for all four of them and they were [brutal] and we hadn't had a strong out cycles I guess maybe the 90s, I don't remember, I can't remember back that far but it was -- but I'm confident, I'm not worried about that, we don't worry about, I think say the future. But I know what happens is that operators survive, more operators don't and we just be one of those good operators and well so and take care of our customers and ….

[Lampkin Butts:]

This is Lampkin I'll just add to the this cycle is about price it’s about the chicken prices and so either something has happened to the price, I mean -- I'm sorry something has to happen to the demand or the supply even more. And saying then we want ….

[Ken Goldman:]

Most supply get worse before it gets better there?

[Joe Sanderson:]

Well you got the new production coming on. But that doesn't mean that the change in supply.

[Ken Goldman:]

Okay.

[Joe Sanderson:]

And then there’s new plant, we are committed and we're going to go forward but there's a lot of other supply out there.

[Operator:]

And we'll take our next question from Kenneth Zaslow with Bank of Montreal.

[Kenneth Zaslow:]

Just a couple of questions. One is I know that there's always capacity coming online. Are you hearing any delays or even facilities that are not going to come online based on what you're hearing?

[Joe Sanderson:]

No, no, I never worried about that.

[Kenneth Zaslow:]

Okay. Second question is the breeding -- the breeders, I've heard that there's a good ongoing positive, is that also reason why the prices have gone up a little bit? I heard they're not as efficient the activity is that also the case?

[Joe Sanderson:]

That's a contributing factor. Yes, the last number was 62 point -- 82.1, I'm sorry 82.1 so it's down. That it got up in the summer. It got up back to 83 for a few weeks in the summer and then it’s back down a little bit in the wintertime time. And no doubt that these heavy yielding birds are more difficult to deal with then the conditional type birds the industry was using. So the hatch is down just a little bit.

[Kenneth Zaslow:]

Okay. And my final question is obviously that you will not be paying accrual bonus in '18. What are the chances and how do you foresee that in 2019 and what would it be based on?

[Joe Sanderson:]

Based on our profitability and our profitability start to 20% return on equity, so I mean have bonus is based on 20% return on equity. So we have to make a lot of money before we pay a bonus.

[Mike Cockrell:]

Yes. This year that target was $13 a share at the low end and $16 a share at the top end, Ken. Our equity will determine that. After the Tax Reform Act, the Board changed that a little bit. It's about a 22% return on average equity. So, it's going to be in the mid teens and it'll be an aggressive target. Don't have a clue right now, whether the market’s going to allow us to even performing well, earn that, but we will make the call as we move through the year. And we'll publish those targets in January after the Board meets and such.

[Kenneth Zaslow:]

So, you’d be at an EPS in the mid teens to be able to get your accruals?

[Mike Cockrell:]

That's the target to earn a bonus. That's correct.

[Kenneth Zaslow:]

Would the increased promotional activity be enough to change the direction of demand, and I'll leave it there.

[Mike Cockrell:]

Well, I think it will, absolutely.

[Operator:]

And we'll take our next question from Mike Piken with Cleveland Research Company.

[Unidentified Analyst:]

Hi. This is Sam on for Mike. I wonder if I could ask you a quick question about exports. Is the China resolution good or bad, given the potential impact on soybean prices, and are you seeing any improvement in the export market? Thanks.

[Lampkin Butts:]

Is China net positive because of chicken, or net negative because it's going to drive soybean prices up?

[Unidentified Analyst:]

Yes.

[Lampkin Butts:]

So, if we get China back, is it good, because we get to sell chicken or bad because soy goes up.

[Joe Sanderson:]

It is what it is. I don't -- we don't have anything to do with China. That is government. It's like a drought. Same thing we say about a drought, would a drought be good or bad. It would be bad and then it would be good. China's the same way. If we get China, ship pulse, good, and then they produce more chicken, bad. Drought bad, corn soybean prices go up, losses, then good. So, same answer, same both ways, good and then bad.

[Unidentified Analyst:]

Is there any other commentary on the other export markets you could have?

[Joe Sanderson:]

The export markets are improving?

[Unidentified Analyst:]

Yes.

[Joe Sanderson:]

We expect them to move up in January, I don't know what this oil price going down is going to -- it hadn't impacted it yet, but I looked at the bulletin before I came down here, oil cost $45 a barrel, and that is not good for chicken. Leg quarter inventories are in good shape, manageable. We think the leg quarter's bottomed out a few weeks ago, and we're selling a couple of cents higher going into January. Exports are moving.

[Operator:]

And we’ll take our next question from Adam Samuelson with Goldman Sachs.

[Adam Samuelson:]

So, maybe just to start going -- I know it’s discussed in the prepared text and Lampkin, I think you alluded to good kind of everyday sales at retail and also alluded to seeing some future kind of visibility better but -- as we look into the first quarter. Do you have any sense going into the spring? As we think back to the 2018 experience, it was really in the second quarter and in May and April, and especially in May and June when the retail future activity was very disappointing and the sell-through was disappointing. And so, have your retailers started to engage you about this activity level or are they waiting to see if it a little bit more features in the first quarter, which always happens to some extent at the time of the year as you get past Christmas. If the sell through is there or just help us frame kind of visibility you really have and especially we get the spring which is the season that really matters?

[Lampkin Butts:]

Yes. We don’t have -- we really don’t have any visibility into the spring. Our retailers, some of them book 30 days out, some of them engage with us two months. But, beyond that, we don’t have any visibility. We look at our January figures and they look similar to -- it looks similar to what we've been seeing from the retailers for the last half of 2018. So, we haven't seen a change at retail yet. We just -- we have seen some chicken sandwich features on television recently and that's something that we haven't seen all the year. And we are hearing -- actually anecdotally, we're hearing from just talking to customers on the phone and from Urner Barry that feature activity is going to be up in January. And that -- they seem to be talking across the board.

[Joe Sanderson:]

As short-term, Adam, we don’t know about March, April, May yet.

[Adam Samuelson:]

And then, kind of on a separate point, a few weeks ago, the Company had some changes to the policies on antibiotic use. And just, is there any -- give any thoughts on -- is there a cost implication that we should we be mindful of as we move into the New Year? I mean you’re still -- I believe you’re going to be using ionophores. So, it’s not that no antibiotic ever per se, but just -- and you factored in and thought about cost implications and any productivity hit that might emerge?

[Joe Sanderson:]

Well, there were two antibiotics that we will not use for prevention, gentamicin and virginiamycin. There is -- there are other antibiotics we will use for prevention and for treatment, plus the ionophores. So, it’s just the two that are important in human -- have been deemed important to human medicine. Those are the two that we won't be using as of March 1. And we will not market it that way or that was just decision that we made, Board made after our recommendations. And we won't know -- you have to do a year beginning in March to see what the cost is. We're going to do some things to mitigate the loss of those two antibiotics. Virginiamycin is not -- there are other antibiotics that can replace that. The gentamicin, the one used de novo in the hatchery would be the one that is not replaceable. So, we'll have to do things on the farm and in the hatchery, and I'm talking about breeder farms and in hatchery, and in brood areas on the farm and take baby chicks out to take care of the baby chicks to protect them from E. coli. That's what gentamicin was for. And so, I think it's going to be marginal, but I don't know that. It will be a year from March before we’ll know.

[Adam Samuelson:]

Okay. It's very helpful. And then, just the last one for me. Some of the investments in the existing plants, what's the kind of payback that you are targeting on those investments? Any details that you can provide on kind of where you’re putting the capital?

[Joe Sanderson:]

Well, pay back, it’ll start paying back the week after you put it in. And on some of them, it's 12 months payback; and some of it, it’s two or three-year payback. We are doing all kinds of -- the special projects plus regular CapEx budget. We have some carve-outs in our finance agreement, we call those special projects, and then we have a regular capital budget. And most of the time, it's one, two or three-year payback. They’re quick.

[Operator:]

And we'll take our next question from Jeremy Scott with Mizuho.

[Jeremy Scott:]

So, just on your closing comments, Joe, around growth, and you're going to take 2019 to reassess and work on sales and operations. So, I'm pretty -- so it seems you're pretty comfortable taking a pause here, you mentioned that 2019, first year in eighth that you're not going to be building a plant but this does that also mean that you're not going to be actively looking for sites for your next product…

[Joe Sanderson:]

No. It does not mean that at all. We were -- we're acting -- we're actively looking for a site today and tomorrow. And we’ll take the weekend off and will be actively looking for a site. The week -- I just don't, we don't need to build anything right now. We need to get Tyler started up, we need to get everybody trained, well trained at all three of our new plants, we need to get everything sold, we need to get the new product, we're going to be producing some new product over the next year out of our all of our plants, we need to get all of that sold. Tyler needs to be mature, St. Pauls, the hurricane threw us for a loop at St. Pauls and Kinston. We lost a lot of people that were displaced, need to get them back on the tour. No, but I still want site next Wednesday, day after Christmas.

[Jeremy Scott:]

Maybe the next question. What's a reasonable expectation for when let's say that the market -- the economics of the chicken market is going to improve over the next year, what the reasonable expectation for us to think about modeling the next plant for you, when?

[Joe Sanderson:]

I don't know the answer to that.

[Lampkin Butts:]

[Indiscernible] that side, Jeremy, it's a good question. We're not modeling anything for ‘19, I'll tell you that.

[Joe Sanderson:]

No. We will not do that. We need to get everybody focused. We got a lot of projects in our plants. Engineering needs to get done, and we've got a lot of stuff going on in 12 plants, get that done next year. And then we'll worry about -- and find a site and we'll worry about that later. I'm not worried about anything else right now.

[Jeremy Scott:]

I was going to say, the only thing that we're seeing right now is record premiums of thigh meat to breast meat. So, can you just walk us through maybe some of the dynamics there that you're seeing? And I'm guessing, the equipment upgrade that you mentioned in some of your deboning plants are addressing that dynamic.

[Joe Sanderson:]

That will be a good insight. Yes.

[Jeremy Scott:]

Okay, all right. Thanks, guys.

[Operator:]

And we'll take our next question from Benjamin Theurer with Barclays.

[Benjamin Theurer:]

Hey. Good morning, everybody. So, two questions. Number one, from start-up of Tyler, have you seeing much of issue in terms of getting labor? I mean, with all the migration stuff and usually it's like first-generation immigrants that tend to do those jobs. So, how difficult has it been for you, considering there're a lot of nearby facilities to actually get the labor force you need in order to be up and running in three, four months time.

[Joe Sanderson:]

We feel very good about where we started, the labor availability there has been very good, the interest is high. One of the things that that we look for in a site is an area that labor is available. So, that was on the list for Tyler and it looked good, it was part of our reason for going there. As we've hired people and began training them, we've already hired 300 or 400 people that will be there when we start up. And we won't get the full production in three or four months. We will ramp-up over a year’s time, maybe even for sometimes 14 to 15 months. So, so far labor has been good.

[Benjamin Theurer:]

And then my next question is around dividends, share buybacks, capital location. Clearly, you've just made very clear that 2019 is not going to be a year where you are going to invest to the new plant; you have the one up in running; you definitely start next Wednesday looking for fieldwork to dupe the next one but that might be couple of years out. Now, the question is, of what you've been doing with about 800,000 plus shares repurchased, the 1 million that is approved, the question is would you like consider server increase in share buybacks and about the level of dividend? If I remember right in the past, even in years where you had challenging quarters, like the one in 2018, you still kind of tried to maintain at least the dividend level you had in the prior year. So, what should we expect for dividends 2019 and what should we expect for share repurchases for 2019?

[Joe Sanderson:]

Well, we've never reduced our dividend and I don’t -- our dividend has been solid. So, I can’t imagine -- that's not an issue…

[Mike Cockrell:]

One thing, you said 1 million shares. We actually have authority to buy back 2 million shares of stock; we bought 823,000 during the quarter. That’s okay. You saw -- it was 1 million and our Board increased it to 2 million last spring. We've got that much authority. We’ve never been active buying back stock when we had to borrow money to do it, and we wouldn’t do that. We have done that before but not particularly doing that. We still have some more we wanted to get back and we’ll see how that plays out. But, that's still on table of course, but a change in dividend policy has never been anyway but up.

[Benjamin Theurer:]

Okay. So, assuming flat to maybe slightly up, that's a fair, and on the share buyback, if you have to cash on the level of valuation where the stock price is. Because I remember once you said like, stock below 100 is a good way to allocate your money.

[Mike Cockrell:]

No doubt about that, Ben. You’re right.

[Operator:]

And will take our next question from Eric Larson with Buckingham Research Group.

[Eric Larson:]

I'd like to get back on the good thing versus bad thing, expand on that a little bit. We haven't [technical difficulty] to what kind of the cold storage numbers we've got, some more coming out tomorrow. The bad news is that the chicken numbers have continued to go up. The good news is that it seems to be in that other category. Can you kind of help triangulate how we should be looking at that? And then, what we haven't talked about, which was probably an issue in featuring in 2018, this might be a different recovery cycle for chicken versus ‘13, ‘14, ‘15, because we have a lot more beef and lot more pork out there now than we did in the last upturn cycle. So, can you give us your thoughts, Joe, on how you kind of triangulate to kind of the cold storage numbers and what competitive supplies might be, is that more of a bullish factor now or still kind of a neutral or a bearish factor in your mind?

[Joe Sanderson:]

You bet. I think the cold storage, we don't know what's in that other category. It is not supposed to be any of the primary products. But, some of my people believe it is not very accurate. They just can't believe that is fall of [ph] product that it's supposed to be. Even without that though there's a lot of bonus spread on the last report, there -- it was burdensome on boneless breast. And a lot of our customers that are not -- that are further processors were buying boneless breast and freezing at 70 cents pound, putting it in the freezer and further processing it, putting it in the bag, 5 pound bags and selling it in retail grocery stores and warehouse clubs. And they were making a mint on it, and they're still doing that. They’re buying heck out of it and making a lot of money on it. So, it's sold by us and it's -- and they're buying it and they're selling for the process as fast as it can. But, I think that that number is right, the other category, I have no idea. As far as beef and pork, and this is the first time in my career that I have seen beef and pork affect chicken markets in this manner. I don't ever remember it happening before, like it did this year when chicken supplies were up only 1%, 1.5%, and we had -- and beef and pork took features away from us, from foodservice and at retail grocery stores and a result of that our prices declined. I’ve never seen that before. What I do believe however, if grain prices went up for whatever reason, the drought more than likely, and one of any country like Brazil or China, Europe to a lesser extent or the U.S., if there were to be a drought and there were to be a down cycle caused by drought and it affected chickens negatively, no matter what the supply of beef and pork, there would be a reversal of fortunes, and the industry -- the chicken industry would react to that, supply would decline and no matter how much beef and pork there would be, you’d have an adjustment in the chicken business. I don't care how much beef and pork there was. This is a unique situation.

[Eric Larson:]

It makes sense. So, the other question Joe that I have is, the industry is obviously in loss conditions now, but it's been a quarter, maybe it's been three, four, five months or something like that which…

[Joe Sanderson:]

I don't think all the industry is in a loss. I think there are few people in a loss. I think tray packers are making money, I think the fast food people are making money. I think there are a lot of big bird deboners that have product sold on a flat market or that are trimming. It's people that -- we are not in any of those categories. We're doing -- all ours are sold on market basically and people that are sold on market, like we are, are different. And there might be a third, but I would guess, two-thirds industry companies, we’re still in the black. And even if they are not, it hadn't been long enough and it hadn't been deep enough to cause anybody any pain. So, it's going to be a while.

[Eric Larson:]

That was exactly -- your last part of your answer that was exactly what I was trying to get at. It hasn't been long enough or deep enough et cetera to change any production behavioral patterns is kind of what I was assuming would be the answer. So, then, just the final thing is, Joe, I can help you find a site, but my problem is I might not get it to you until maybe next Thursday. That's probably a little late.

[Joe Sanderson:]

That’d be all right.

[Eric Larson:]

Again, thanks for the answers and wish all of you a happy holiday.

[Joe Sanderson:]

Thank you very much. Same to you.

[Operator:]

And we'll take our final question from Akshay Jagdale with Jefferies.

[Akshay Jagdale:]

So, I wanted to -- first, I wanted to ask about production year-to-date, the USDA number, which again we can all debate the quality of that, but that's all we have right now. What are you seeing as year-to-date production increase because we're seeing like 2.9% on their numbers but wondering do you have a better number for us right now, year-to-date production…

[Lampkin Butts:]

No, I don't have anything

[Joe Sanderson:]

2.8% was October. Total up, now that's the USDA number that's about that. You guys take exports off of that.

[Akshay Jagdale:]

No. Yes, we'll get to that in a second. But, just the 2.8 has happened on chicks placed that have been up only 0.6. So, the point I'm trying to get a better sense of is according to our numbers what's happened there is livability is up about a 100 bps or added about a 100 bps and weights are up again in aggregate by about a 100 bps. So, you've got like a year where hatch was down for mostly the year pretty dramatically, rate of lay was down, I think there was a lot of breaking of eggs going on as well and yet we produced it looks like close to 3%. So, it looks like the productivity issues are getting better in aggregate. So, am I my thinking about that correctly?

[Joe Sanderson:]

The livability is going to be down for the year. Livability is going to be down compared to a year ago, and that's probably because of no antibiotics ever. It's going to be down three quarters of 1%. The reason the pounds are up is going to be live weight gain and the live weight gain is in two categories or four categories. The fast food weight is up a little bit and the whole bird and parts are up a little bit. Weight gain is where almost all of it has come from.

[Akshay Jagdale:]

So, again, some things are impossible to predict even for people like you who’ve been in the industry for so long. So, it's obvious that we get [indiscernible] even more often. So, it wasn't too long ago where we are thinking, weights have reached some ceiling. So, when we look at next year…

[Joe Sanderson:]

I still think that.

[Akshay Jagdale:]

Yes. But to -- given what happened this year you think that makes it difficult to do another one point increase from weight gains?

[Joe Sanderson:]

No. I mean, I think so, yes. I think the weight gain this year came mainly out of the smaller bird region, and I don’t think they can do that. But, you're going to have -- if people are still having problems with this woody breast, I think it's going limit to the amount of weight gain that the big bird deboners can put up. And that's why -- that was really what I thought we’ll have much weight gain in 2018. Because I knew everybody was holding the birds down, and they did it. The weight gain in 2018 came from fast food people and 10 or 12 plants in the category of whole bird and parts, but 10 or 12. And those two categories accounted for all of the weight gain in 2018. And I don't believe those two can do it, and I don’t believe the big birds, which is there are probably 35 plants there. And if they're still having trouble with woody breast, they will not take their weights up.

[Akshay Jagdale:]

Go it. And then…

[Joe Sanderson:]

I think you will have some weight, it’s just natural. I mean, it’s just the way the bird is. Every year they take days, age off. If they’re raising 62 days, they will weight just a little bit lower. So there will be some weight gain, the big weight gains are over but there have been a little bit.

[Akshay Jagdale:]

Go it. And then, just where do you guys stand on the age of the of the flocks? It looks like from the data they’ve got considerably younger year-over-year but any -- what's your perspective on that, anything?

[Joe Sanderson:]

Right now, I think it’s getting back to normal, it’s probably 62.5 days. But if they can't get these pullets out, you’re going to see a major -- they are going to need more than 100%, 101%, if we're going to get -- if they're going to get 102%, 103%, they don't have to let this hen flock age up a little bit, which I think you'll see maybe starting in March, April, May. Just like it did last year.

[Akshay Jagdale:]

Right. And then just going back to question that was asked about that length of the cycle, and you're talking about events usually seeing the catalysts, right. So, the events -- we can't foresee any one of those, a drought or embargo or anything like that. Barring that what would you need to see for you to say the industry is cutting back, right? Like, I mean I think what I'm hearing from you is there's -- what we're seeing in the market right, if there's new plant coming on to the tune of 3% higher capacity next year, that's an expansionary behavior. Those companies are asking for more pullets, that's also expansionary behavior. There is question whether the companies can produce as many pullets. But again, what would you need to see to say, okay, there's some rationality and the cycle is starting to carry? What would you need to see other than events that we cannot foresee, right? You need to see some supply terms, right?

[Joe Sanderson:]

Yes. You're not going to get 3% out of the new plants next year. You'll get that -- you'll get -- let's say they all are at 1.25 million, which should be 3.6 million out 165 million is what we slaughter, process roughly. You'll get that in 2020. You won't get that next year.

[Lampkin Butts:]

I mean with our plant for example, we're not going to start slaughtering chickens until February, and that first week, they will know their way into the plant. So, you'll process 10,000 head and then you'll do it again and then slowly as -- it's not like they're all going to open at full production.

[Joe Sanderson:]

By summertime, let's say by May, June, my guess is each one of those plants will be processing maybe 500,000 or 600,000 a week; they'll be at half capacity. So, that will give you 1% tolling by June, July. It'll be the next -- it'll be six months later before you'll be at full capacity, which will give you the 2 plus percent. You don't start plant on the full capacity. It's got to come from other expansions from some other people to get to your other -- they will come from Raeford, Mountaire, and Sanderson, it'd be from some other expansion from some other people, which I don't know about.

[Operator:]

That concludes today's question-and-answer session. I'd like to turn the call back to our presenters for any additional or closing remarks.

[Joe Sanderson:]

Thank you all for spending some time with us. And on behalf of everyone at Sanderson Farms, we wish you all a Merry Christmas, happy Hanukkah, and happy and prosperous and peaceful New Year. Thank you.

[Operator:]

And that concludes today's presentation. We thank you for your participation. You may now disconnect.