Sanderson Farms, Inc.
Q1 2017 Earnings Call Transcript

Published: 23 Feb 2017

[Operator:]

Good day and welcome to the Sanderson Farms Incorporated First Quarter Fiscal 2017 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Joe Sanderson. Please go ahead, sir.

[Joe F. Sanderson Jr.:]

Thank you. Good morning, and welcome to the Sanderson Farms' first quarter conference call. This morning, we announced net income of $23.2 million or $1.02 per share for our first quarter of fiscal 2017. This compares to net income of $10.7 million or $0.47 per share for our first quarter of fiscal 2016. I will begin the call with comments about general market conditions and grain cost and then turn the call over to Lampkin and Mike for a more detailed account of the quarter. Before we make any further comments, I will ask Mike to give the cautionary statement regarding forward-looking statements.

[D. Michael 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 regarding supply and demand factors, future grain and chicken market prices, economic conditions, production levels, and our growth plans. 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 most recent Annual Report on Form 10-K and in the company's Quarterly Report on Form 10-Q, which was filed with the SEC this morning in connection with our first fiscal quarter ended January 31, 2017.

[Joe F. Sanderson Jr.:]

Thank you, Mike. Results for the first quarter reflect higher dark meat market prices compared to the start of fiscal 2016 as all avian-influenza related export bans except for China's were lifted last summer. Demand from retail grocery store customers has remained stable and that stability is reflected in tray pack prices only slightly lower than during last year's first quarter. On the other hand, market prices for boneless breast meat sold through food service were lower compared to last year's first quarter, and remained seasonally weak through January. The boneless market has improved somewhat in February, but food service traffic remained stubbornly slow through the first quarter. On the other hand, market demand and prices for wings were seasonally strong during the quarter. While overall market prices for chicken were higher, during the quarter compared to last year, market prices for corn were slightly lower. Our feed costs were down $0.013 per pound of chicken processed during our first fiscal quarter. But despite record harvest, market prices for corn and soybean meal have moved higher as a result of strong export demand. Both corn and soybean balance tables are healthy as we head into the 2017 planting season and we still hope to have an opportunity to buy grain at prices that reflect healthy supply numbers. The next advanced grain markets will watch as the South American harvest, the March supply and demand report and the March 31 planting intentions report. The South American harvest is progressing well and expectations now are for good crops from the region. As 2017 agricultural outlook formed this morning, the USDA estimated corn acres in 2017 will be down 4 million acres to 90 million acres. And that acres planted in soybeans would be up to 88 million acres from 83.4 million acres last year. Both estimates were in line with market expectations. It is not unusual for the USDA to significantly revise its outlook before the March 31 planting intentions report. So, we will be watching for that report. We have not priced a significant portion of our grain needs and remain close to the market. Based on our cost to the first fiscal quarter and what we have priced so far, when combined with prices, we could have locked into the balance of the year at yesterday's close, our grain costs for fiscal 2017 would be approximately $56.6 million more than during fiscal 2016. This total increase of prices paid for grain, when offset by a slightly lower estimated basis, would translate into a $0.014 per pound increase in our cost per process pound of poultry. At our annual shareholders meeting two weeks ago, I told our shareholders we are focused on several things as we start fiscal 2017. As I just mentioned, we are watching the quality and quantity of the South American crops and we will be watching the March 31 planting intentions report. We will of course watch chicken production numbers and consumer spending behavior. The USDA is projecting that our industry will produce 2% more chickens during calendar 2017 than last year. Pullet placements have leveled off and egg sets are trending only 1.4% above last year. Export markets continue to face headwinds including a strong U.S. dollar, low oil prices and politics, but all countries except China have lifted AI-related bans and exports have improved. Finally, we will focus our efforts on our growth. Palestine is running full and St. Pauls began processing birds in January. We expect to move that plant to full production by the first fiscal quarter of 2018. I remain optimistic about 2017. I continue to believe grain markets will at worse be benign. The chill pack environment remains strong and supply and demand for tray pack products seems balanced. Food service and export demand are again the wild cards for 2017. The Restaurant Association's Restaurants Performance Index remains weak. This weakness continued in January as at least one survey showed traffic declined year-over-year by over 2% at casual dining. Regardless of the markets however, our plan for the balance of the year is to remain focused on what we can control, focus on our strategic growth plans and let the markets take care of themselves. At this point, I will turn the call over to Lampkin for a more detailed discussion of the chicken markets and our operations during the quarter.

[Lampkin Butts:]

Thank you, Joe and good morning everyone. As Joe mentioned, market prices for poultry products were higher during the quarter when compared to our first quarter last year. Market prices for chill pack products reflected good demand during the quarter, an average of $1.10 per pound compared to last year's $1.13 per pound. Bulk leg quarter prices during our first quarter averaged $0.29 per pound compared to $0.218 per pound last year. Final numbers for calendar 2016 reflected the volume of all broiler meat exported during the year was higher by 5% compared to 2015 as most all AI bans have been lifted. The average price for jumbo wings was higher during our first fiscal quarter compared to last year and reflected strong seasonal demand. Jumbo wing prices averaged $1.80 per pound during our first quarter this year compared to $1.57 per pound during last year's first quarter. Boneless breast meat prices averaged $1.06 during this year's first quarter compared with $1.11 per pound last year. We sold 967.2 million pounds of poultry products during the first quarter, a 12.4% increase from the 860.3 million pounds sold during last year's first quarter. Our processed pounds were up from 855 million pounds to 983.4 million pounds. This was 1.3% higher than our previous guidance, as yields were better than estimated. We expect to process approximately 1 billion pounds during our second quarter, up from 945.8 million pounds processed during last year's second quarter. We expect to process 1.1 billion pounds in both our third and fourth fiscal quarters, which estimates reflect a slight change in our target live weights. Prepared chicken sales were down $3.6 million on 1.5 million fewer pounds sold and a decrease in our sales price per pound of 1.4%. Our prepared chicken plant continues to perform well and is operating at near full capacity, but performance at the plant reflects weakness in food service demand. As you know, the Georgia Department of Agriculture hasn't published an index or a market price quote for chicken in over two months. And as we said both before and after the suspension of that service, the Georgia Dock Whole Bird quote was one of several price discovery mechanisms from which to start negotiating a price with our customers for fresh chicken. The suspension of the Georgia Dock quote had no material impact on our company, and we don't anticipate that the permanent suspension of the service will either. As we have said, only approximately 10% of our pounds were priced using a formula that referenced the Georgia Dock. And we began discussions with those customers regarding alternatives in December. We chose to not use or provide information to the new Georgia Premium Poultry Price Index because its design did not reflect the purposes for which we have used the Georgia Dock Whole Bird price, which was a starting place to negotiate with retail grocery store customers and in some cases as a base to pricing formulas. We believe that the previous quote accurately reflected the supply and demand dynamics of the market for retail grocery store product. The new Georgia Premium Poultry Price Index, as proposed, would have been just one index for all chicken, which we do not feel would have been an appropriate starting place to negotiate with our retail grocery store customers. Because it would not account for the several unique characteristics of retail grocery store products and the market into which that product is sold. Accordingly, the new Georgia Premium Poultry Price Index would not have met our needs. The Georgia Department of Agriculture has been a trusted market price discovery mechanism for many years and we appreciate their past and future support of our industry and our customers. We operated well during the first fiscal quarter and the year is off to a good start in terms of operations. We will continue to look for efficiency improvements and we will do everything we can to meet our goal of performing at the top of our industry. At this point, I'll turn the call over to Mike to discuss our financial statements.

[D. Michael Cockrell:]

Thank you, Lampkin. Net sales for the quarter totaled $688.3 million and that is up from $605.2 million in the same quarter last year. Our net income of $1.02 per share for the quarter as Joe said compares to $0.47 per share during last year's first quarter. Our cost of sales of poultry products for the three months ended January 31 as compared to the same three months a year ago increased 10.7%. That increase is a result of the increase in pounds sold offset by slightly lower feed costs. Our feed cost per pound of poultry processed decreased 4.9% to $0.249 per pound and that compares to $0.262 per pound last year. While our feed cost per pound of poultry products processed were lower by $0.013 per pound, our sales price per pound of poultry products increased 2.7% or $0.018 per pound compared to last year. This combination resulted in improved margins during this fiscal year compared to last. SG&A expenses for the first quarter were $15.8 million higher than the same three months a year ago. This increase is the result of higher marketing expenses of $7.7 million, higher start up costs at St. Pauls of $3 million and higher accruals for our equity comp plans of $2.9 million. The company booked no new accrual for performance shares during last year's first quarter, but booked $3.3 million in Q1 this year for the performance shares granted November 1, 2015. Those performance shares will be earned if return on equity and return on sales targets are reached when we average fiscal 2016 performance with fiscal 2017. The target ROE under those agreements is 12.6% and the target return on sales is 3.6%. While we are only one quarter into fiscal 2017, we now believe it is probable those targets will be reached. For the balance of the year, we're modeling $40 million per quarter for SG&A. St. Pauls is up and running, so SG&A will carry no more of their startup cost. And we began accruing for the new performance shares during last year, during the second quarter, and we did it during the first quarter this year. The guidance includes the increased advertising cost that we expect for the balance of the year. We spent $46.3 million on CapEx during the first quarter and have approved $105 million in CapEx for the fiscal year. The fiscal 2017 CapEx budget currently includes $13.7 million at St. Pauls, and of the $46.3 million we've spent so far this year, $11.7 million was spent at St. Pauls. Our depreciation and amortization during the first quarter totaled $22.6 million and we expect approximately $98.7 million for the full fiscal year. The company's effective tax rate for the three months ended January 31, 2017 was 35.0% as compared to 44.9% for the same three months last year. Recall that last year's effective tax rate during the first quarter and the long-term deferred tax liability, were impacted by the company's decision to take advantage of legislation enacted during last year's first quarter that allowed for bonus depreciation to be taken on qualifying assets, placed into service during the 2015 calendar year. The company expects its effective tax rate for the remainder of 2017 to be approximately 35%. With that, Denise, we will open the call for questions and answers.

[Operator:]

Thank you. And we'll take our first question from Heather Jones with Vertical Group. Please go ahead.

[Heather Jones:]

Good morning.

[D. Michael Cockrell:]

Good morning, Heather.

[Heather Jones:]

I have a few quick questions. So, Joe, setting aside your outlook on the feed cost side, how would you compare your optimism about supply and demand for poultry versus what you were thinking on the December call?

[Joe F. Sanderson Jr.:]

I think it's the same. We were a little surprised. Normally, we get the movement on boneless breast in January. We did not see that at all. We don't know why it came in February this year, beginning February the 6 or 8. I can't remember what date.

[D. Michael Cockrell:]

It was 8.

[Joe F. Sanderson Jr.:]

8. And it's moved every day since the 8, and it's totally food service. Retail has been good all of January, all of February, but food service did not make a move until February. And I have no idea why, but food service joined the parade in February and tenders have been moving for several weeks now. And finally, boneless and boneless has moved up every day for a couple of weeks. And here we are in the third week of February, and boneless is still moving, so I feel the same way I did. I feel like 2017 is going to be a lot like 2016 and boneless breast is moved up, I guess $0.20 a pound. $0.22?

[D. Michael Cockrell:]

$0.22.

[Joe F. Sanderson Jr.:]

$0.22 a pound in the last two weeks. So, it just came a month late.

[D. Michael Cockrell:]

The further processes are buying more product and there was more demand from them in February than we had in January. Our guys are hearing that some of the big contracts didn't get booked until the end of January. So they didn't, they weren't.

[Joe F. Sanderson Jr.:]

Yeah. But our street business is better too with most of our major distributors.

[Lampkin Butts:]

That was in the wings (19

[Joe F. Sanderson Jr.:]

The wings are over until March madness, but the white meat is good.

[Heather Jones:]

So going back to the further processed, do you think that is them taking advantage of what was an unusually weak market or do you think there's been a big step up in their end market demand?

[Joe F. Sanderson Jr.:]

We think they put a lot of stuff in the freezer in November and December, frankly, some of our customers were buying stuff particularly in December and January and put it in the freezer.

[Lampkin Butts:]

Cold storage for boneless was really high in January.

[Heather Jones:]

Okay. And then I had a question about ABF. So we've heard from multiple people that we talk to that some producers have been going to retailers and offering them no antibiotics ever product at basically the same prices they were previously offering conventional. And I'm sure you saw the announcement out of Tyson the other day that all brand is going to be converted to NAE. So I saw the results of the shareholder vote at your annual meeting, but I was just wondering, given the dynamics, do you still feel comfortable that there is going to be a large market at retail for conventional that you don't need to change your stance on ABF?

[Joe F. Sanderson Jr.:]

Absolutely, we have gone against the grain in the past. There was a time, I can't remember, how many years ago? 10 years ago, everybody went to marinated. Everybody wanted saltwater phosphate in the chicken. We decided not to do that. We lost some business. This is a marketing deal and we've taken another tack. We did not do this because we – you need to understand, we did this with research and we did it with advertising and then we did research after we did the advertising, to see if the advertising was being effective. And we did not do this blindly. Everybody does not want that product and everybody does not believe the claims on that product, nor do they understand the claims on that product and nor is that claim important to everybody. There are other claims that are more important than that claim. And studying the information we do not believe you can sell that product at the same price and maintain your margins. You can sell at same price for a while to get into a slot, but your margins are going to decline and you're going to have to eventually rise the price.

[Heather Jones:]

Okay.

[Joe F. Sanderson Jr.:]

Now that's what we believe and we're not doing that to be hard-headed or – we've done that by being thorough.

[Heather Jones:]

Okay. Thank you for the in-depth answer, I appreciate it.

[Joe F. Sanderson Jr.:]

You bet.

[Lampkin Butts:]

Thank you.

[Operator:]

And we'll take our next question from Ken Goldman with JPMorgan. Sir, please go ahead.

[Kenneth B. Goldman:]

Hi. Thank you for taking the question.

[Joe F. Sanderson Jr.:]

Good morning.

[Kenneth B. Goldman:]

Good morning. So, you generally are using the new forecast, at least publicly industry supply growth in the coming year. You use government numbers and you referenced the 2% number and I think you sort of blessed it by saying that you expect the pullet numbers or seeing pullet numbers flat, exports under pressure, et cetera. I'm just curious because we're already seeing egg sets up 1.5%, plus we have as the year ramps over the course of the year, some new facilities coming online, so from your perspective, I just want to make sure is that 2% reasonable in your view, or is it a little light, little heavy. I just kind of wanted to get a little bit clearer sense of how you're seeing that number?

[Joe F. Sanderson Jr.:]

We don't have any way of knowing what all the processors are going to do. We just don't have a clue, tell you the truth. It's based on pullet placements. It's based on egg sets we see now. We think and we've been told that one of the new plants is they're processing what they're going to process this year. They are not going to increase their production anymore. We will increase gradually throughout the year at St. Pauls. But what other people are going to do we don't know exactly. All we know is what the pullets are and we know what export of eggs are. So we don't see any explosion in supply. And we also believe, and I have said this three years in a row, I've been wrong twice, I may be right this year. I don't think there's going to be any increase in weights this year. More NAE if there is and I believe there will be, is not going to augur well for increased weights in the tray-pack region and we believe that there are going to be a number of the super birds that are going to be dropping back to accommodate some smaller birds that are being required by suppliers – I mean, by customers. And so we don't believe that you're going to see significantly heavier birds this year.

[Lampkin Butts:]

Ken, if you take our ramp-up at St. Pauls and Pico's new production, it represents a little over 1% more volume as a percent of the industry. (26

[Kenneth B. Goldman:]

Thank you. And now I'm going to try and figure out a way to get super birds into the title of my note.

[Joe F. Sanderson Jr.:]

You can do it. I've seen it.

[Kenneth B. Goldman:]

All right. Thank you. Okay.

[Operator:]

And we'll take our next question from Farha Aslam with Stephens Inc.

[Farha Aslam:]

Hi. Good morning.

[Joe F. Sanderson Jr.:]

Good morning, Farha.

[Farha Aslam:]

You highlighted solid demand at retail; in your press release you had pricing for your retail business down about 2.7%. Is that a level that we could expect retail to run for the full year? How do you think about retail pricing going forward?

[Joe F. Sanderson Jr.:]

Well, if we had old Georgia Dock right now, the Georgia Dock would be going up. Unfortunately we don't have it. And so our prices have remained flat. Our prices with our customers hadn't moved since Georgia Dock quit. But if we had it, it would be going up right now. We hope to have a new pricing index, probably we hope out of Urner Barry sometime in the future. We don't know when that's going to happen. But if you had one right now, it would be moving up. We think demand – I know demand at retail is excellent; it's been excellent all month. And we've actually run some tray-pack plants on the weekends, a couple of weekends this month. And so demand at retail is excellent. It was down compared to 2015. I think Lampkin quoted the Georgia Dock was $1.10 compared to $1.13 in 2015. And it was just down a little bit, but the demand has been excellent.

[Farha Aslam:]

Okay. But you're going to keep your prices flat until there is the UB index, you won't take your prices up?

[Joe F. Sanderson Jr.:]

I mean, we don't have any basis to take them up. And we've agreed with our customers we'll leave them where they are until we get a new index.

[Farha Aslam:]

Okay. And then on the export market, could you just provide some color on your outlook on export demand and what is pricing doing at the export market right now?

[Lampkin Butts:]

Farha, this is Lampkin. Good morning.

[Farha Aslam:]

Good morning.

[Lampkin Butts:]

We are optimistic about exports. We've seen some better demand in the last 30 days, primarily due to some countries in Europe and the EU that can't ship into the Middle East because of AI. We're getting some better demand from there and filling some gaps. So for most of February, we've been in the $0.27 to $0.29 FOB range for leg quarters. March we think is going to be $0.30 to $0.31, it's going to inch up a little bit. The weak peso in Mexico is hurting us a little bit, but even though the dollar is strong it's not as strong as it was, it's helping a little bit. Oil prices are certainly not back to normal, but in the $55 range, we've got a little better demand coming from countries that are dependent on oil prices. So those prices are moving up, getting better.

[Farha Aslam:]

That's helpful. And my final question is for Mike. Mike, usually you tell us or share with us your production plans for the year in terms of volume. Do you have that for us for today?

[D. Michael Cockrell:]

I do indeed. Hold on one second. These numbers are going to reflect – our number for the first quarter came in slightly ahead of what we guided toward, because our live weights – I mean, our yields were better than what we built into our model. But going forward in Q2 we expect to process 1 billion pounds and in Q3 1.064 billion pounds and in Q4 1.093 billion pounds for a total of the year 4.151 billion pounds.

[Farha Aslam:]

Great. Thank you so much.

[D. Michael Cockrell:]

Absolutely.

[Operator:]

And moving right along, we will take our next question from Michael Henry with Cleveland Research. Sir, please go ahead.

[Michael Stuart Henry:]

Hi. Thank you for taking my question. I apologize if this was asked and answered, because I did get disconnected earlier on in the call. Two quick ones, I guess, the question on the Georgia Dock going away, and the new pricing mechanism, is the Urner Barry what customers are really wanting to push for? I know you guys have talked in the past that you know you really let customers kind of decide where their starting point is, so is that kind of what you're seeing from customers or is there some other mechanism in addition to that, that people are kind of looking at? And then in addition to that, just as it relates to exports, could you talk a little bit about any potential benefit from the AI issues also in Asia and whether you see any greater likelihood of benefiting from the issues in China or trying to reopening because of the issues there as well. Thank you.

[Joe F. Sanderson Jr.:]

Well, our customers will be – we frankly initiated contact with Urner Barry because Urner Barry is widely respected in the food service market as a fair arbiter and price discovery mechanism. They talk to processors and they talk to end-users every day and everybody trusts their numbers, and we talked to them about if they would expand their – they know a lot of retailers and they know us, they know all the players and if they could just expand their listings to include the tray-pack parts, it would be good. We feel like the retailers would trust them and we think -- we have one and a half retailers on Urner Barry, that's out of about 40 or 45 that are our customers. So we think if we could get Urner Barry to expand their listings that that would be a good place to start. There's really no other, nothing else to work with other than a flat price or cost plus and we're not very fond of either one of those. And so that's what we're working on right now. I don't recall the other question, something about export.

[Lampkin Butts:]

Yeah, we get to see...

[Joe F. Sanderson Jr.:]

Yeah, the AI. AI in...

[Lampkin Butts:]

In EU.

[Joe F. Sanderson Jr.:]

Mainly in EU, but also China and Asia. What we've seen so far is better demand from some Middle East countries and better prices from Middle Eastern countries. They are not able to import any leg quarters from the EU, and so there's more demand there and it's translating into higher prices. I don't see that having any influence on China or whether China opens up or not. That's a completely different political challenge in China.

[Michael Stuart Henry:]

Okay. Thank you.

[Joe F. Sanderson Jr.:]

Thanks, Mike.

[Operator:]

Our next question comes from Adam Samuelson with Goldman Sachs. Sir, your line is now open.

[Adam Samuelson:]

Yes. Thanks. Good morning, everyone.

[Joe F. Sanderson Jr.:]

Good morning, Adam.

[Adam Samuelson:]

I was hoping to talk a little more in retail, and – some of your competitors have talked about a bit more competitive environment there and lower demand is competing protein prices have fallen, and availability has improved. Your comments seem to contradict that somewhat is – as you get into summer grilling season, and you start planning out the spring and summer with your customers, are you worried that they are going to shift some more of their meat case to ground beef and pork loin away from chicken and risk that you might have some more volume pressures on the retail side as you get into the peak demand season?

[Joe F. Sanderson Jr.:]

We are seeing no evidence of that through January and February. And going into even March. It's been really...

[Lampkin Butts:]

Between January and February, we've run 12 ships on Saturdays at different retail plants because demand has been that good, and lot of its – we're getting every feature that's available.

[Adam Samuelson:]

Yeah, that's helpful. And then as you look at your – the yield that you reported – they surprise a little bit to the upside, in this quarter and you adjusted some of your target weights for the balance of the year. Is there anything notable in the yield performance in terms of the (36

[Joe F. Sanderson Jr.:]

I think, it's all of that. Adam, you know, we've been pointing toward improved yields for two years now, damn near every quarter, yields just...

[D. Michael Cockrell:]

That's mainly...

[Joe F. Sanderson Jr.:]

It's everything.

[D. Michael Cockrell:]

It's mainly.

[Lampkin Butts:]

It's really.

[D. Michael Cockrell:]

It's mainly breast and wing yield where it's mainly work in the plant and plants maturing, and the Kinston plants maturing, the Palestine plant maturing. It's some of the – some of it's the breed, you get a little bit better out of the breed every year, and things like that. It's a lot of different little things that come together and stuff we work on all the time.

[Adam Samuelson:]

That's helpful. And then, finally, have you seen any impacts in the SG&A? Can you in any way quantify the marketing spend and the effectiveness, as you're seeing it, how are you measuring the returns of that spend? I mean, it's driven a very noticeable step-up over the last several years on your SG&A dollars. And how are you looking at the efficacy of that spend to evaluate that?

[Joe F. Sanderson Jr.:]

Well, there are a lot of ways to measure. But we have a company that in addition to our advertising company we have another company that does research that tracks consumer reaction to our advertising. And we had a meeting with them last week to determine whether or not our advertising was effective, our message was effective, our brand was effective and all of that kind of thing. And I can say that we were very pleased with what we heard, and we will continue our advertising program.

[Adam Samuelson:]

All right. Thank you very much.

[Joe F. Sanderson Jr.:]

Thank you, Adam.

[Operator:]

Our next question comes from Jeremy Scott with CLSA.

[Jeremy Scott:]

Good morning.

[Joe F. Sanderson Jr.:]

Good morning, Jeremy.

[Jeremy Scott:]

Just wanted to square up some of your comments on supply and demand, exports. I think, from December or actually from November on, we've seen a pretty significant uptick in exports. And as you've mentioned just now that that's continued into January and February, and how that shapes up with net domestic availability? It almost seems like if exports were to continue which according to your comments they should, the net domestic availability of chicken should probably be down assuming that 2% head growth is offset by a little bit of cut weights. So I was just wondering why hasn't your view on supply and demand fundamentals improved since December.

[D. Michael Cockrell:]

Well, the additional pounds of leg quarters being exported will absolutely be good for industry prices. And that's probably part of boneless breast. We've got better demand here, but also boneless breast has less dark meat to compete against, because exports are up. So some part of that move up in February in boneless breast prices. We are saying the domestic production will be up 2% in 2017 and if exports are up another 4% or 5% this year then we will have to deal with 1.6% more products to sell domestically in 2017.

[Jeremy Scott:]

Okay. And just to clarify on the food service comments was it just a shift in the inventory dynamics, or did you see something in February that suggested that food service traffic is starting to improve again?

[Joe F. Sanderson Jr.:]

Boneless is up. That's – we didn't...

[D. Michael Cockrell:]

It hadn't shown up in January...

[Joe F. Sanderson Jr.:]

It sure has.

[D. Michael Cockrell:]

...same store sales or traffic, foot traffic, it has not showed up there. We just had better demand in February.

[Joe F. Sanderson Jr.:]

They may be inventorying product for ads that are going to coming in March, April or May, maybe what's happening right now. It appears there is going to be – somebody is going to run chicken tenders because chicken tenders have run up from – I don't know what the low was, but...

[D. Michael Cockrell:]

$1.30, somewhere $1.30.

[Joe F. Sanderson Jr.:]

And they are up to what now? Chicken, it appears somebody is inventorying chicken tenders for some kind of ad is what it looks like to us. All of a sudden now somebody is buying a bunch of boneless breast. And we don't know if that's for ads or if it's – we won't know until we get the traffic data for February, if that's going through food service now or if it's for something in the future.

[Lampkin Butts:]

We polled our customers from our processing plant and through this time of February, they were not reporting any uptick.

[Jeremy Scott:]

Okay. If I could just ask maybe a longer term big picture question. If industry conditions hang on and margins normalize at levels somewhere around where they are now, where do you see your capital plans going, or your plants developments over the next five years?

[Joe F. Sanderson Jr.:]

Well, we will continue on our same track we've followed for the past. We will continue to grow the company. We've made – everybody knows that.

[Jeremy Scott:]

Good enough. Thank you.

[Lampkin Butts:]

Thank you.

[Joe F. Sanderson Jr.:]

You bet.

[D. Michael Cockrell:]

Thank you.

[Operator:]

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

[Joe F. Sanderson Jr.:]

Akshay?

[Akshay Jagdale:]

Yes. Good morning.

[Joe F. Sanderson Jr.:]

Good morning.

[Akshay Jagdale:]

Thank you. I was hoping somebody else would ask this question, so I don't have to be the bad guy, but...

[Joe F. Sanderson Jr.:]

You're not a bad guy.

[Akshay Jagdale:]

Yeah. If you can answer...

[Joe F. Sanderson Jr.:]

You just don't know better, Akshay.

[Akshay Jagdale:]

Yes. Can you give us any insights – I know this might not be the forum, but into the Attorney General's request? I mean, is it in your estimates, like, related to all these lawsuits, the same issue? Is it industry-wide or is it specific to you? Any color if you can.

[D. Michael Cockrell:]

No. And Akshay, we filed an 8-K yesterday and the 8-K speaks for itself.

[Akshay Jagdale:]

Okay. Got it. And then, just on the supply side of things. Where do you think we are as an industry in terms of age of the flock, because certainly pullet placements have slowed down, but looks like mature hen slaughter was at elevated levels for over a year. I don't know, if you have a sense, if that's normalized, if the age of the flock is sort of back to optimal levels. Any color there?

[Joe F. Sanderson Jr.:]

I think there was a little bit of a shift in the hen flock toward more of the Aviagen. The Aviagen went from about 28%, 29% of the hen flock to about 40%...

[D. Michael Cockrell:]

45%

[Joe F. Sanderson Jr.:]

...45% of the hen flock. And I think people were uncertain how she was going to perform. And I think people placed back in 2014 and 2015 some extra hens because they didn't know how she was going to perform. And she's performed pretty good, pretty well. And so I think there were some excess hens, particularly during 2016, and so that allowed people to sell hens early and keep the flock young. We think right now people may be having some problems with some hens. We've had culls, people trying to buy eggs right now, people are little short of eggs for whatever reason, maybe disease problems or something. I think you know if you will look at the USDA, the average hatchability has gone down from 84% down to 83%, and that means they're setting more eggs that are older out of older hens. So you can kind get a peek from the USDA information that while in 2015 and 2016 you had a young flock that was very productive, right now you've got an older flock. And also there are other phenomenon that's happening about almost 8% of the flock is for eggs for export. You've always got to account for that. And we think that the flock is about right now, and we think (47

[Akshay Jagdale:]

Super helpful. And then just going back to retail demand, so you mentioned couple of things that said, if there was an active measure of price right now, it would be going up because I think what you're saying is demand is pretty strong. Obviously none of us in the industry have a good sense of pricing, but what would you consider when you think of the opposite scenario where demand is weak, what do you see, like what would it look like to you? What kind of indications would you see, because we're hearing from many people that as beef prices are coming down, whether it's ground beef or any cuts of beef, competing proteins are having issue with prices. I think, Tyson mentioned it; Hormel mentioned it today. I know you're not seeing that yet, but at the same time, your retail pricing is sort of down slightly year-over-year. So I'm just trying to understand like if demand was to weaken at retail, how would you see that in sort of your shipments or just trying to understand that better?

[Joe F. Sanderson Jr.:]

I think you'd see excess product not going into trays and going into bulk pack product. We don't think you're likely to see that until after Labor Day.

[Lampkin Butts:]

We saw it in November, December...

[Joe F. Sanderson Jr.:]

Yeah, yeah.

[Lampkin Butts:]

...which is typical holiday stuff.

[Joe F. Sanderson Jr.:]

Yes, we had tons of it in November and December. We see it leaner, but since the turn of the year, it's been going like crazy.

[Lampkin Butts:]

Akshay, instead of running Saturdays to fill orders, you'd have excess product showing up and they sell in spot loads out of the tray pack plant. That's what was happening.

[Joe F. Sanderson Jr.:]

You'd have excess boneless breast that'd be going bulk out of a tray pack plant. And we don't usually have any dark meat but that's because of where we sell. We'd end up with excess white meat.

[Akshay Jagdale:]

I don't even remember the last time we had excess of retail chicken, but is there a time that comes to your mind like if we look back where this particular dynamic happened?

[Lampkin Butts:]

Not since 2008 (51

[Joe F. Sanderson Jr.:]

Not since probably 2003 and 2004. But since that time...

[Lampkin Butts:]

Yeah, it's been a long time.

[Joe F. Sanderson Jr.:]

Probably 2003 and 20044, but since that time, two things have happened

[Lampkin Butts:]

Low 7%.

[Joe F. Sanderson Jr.:]

Low 7%, there were 7% more chicken sold through the retail grocery stores and that has increased some every year since. And that with fewer pounds, I mean no new plants other than a conversion, the supply has been static basically, and the demand has increased almost every year since 2009 or after the great recession. And that's why demand has been so good there. Well, I'll take that back. Our plant in Kinston then Tyson converted a plant in Georgia.

[Lampkin Butts:]

And then the El Dorado, Arkansas closed.

[Joe F. Sanderson Jr.:]

El Dorado, Arkansas closed. So there was one new plant net.

[Akshay Jagdale:]

Perfect. And just one last one on the new pricing. We saw the announcement today as well from Urner Barry. But any idea on timing as to when...

[Joe F. Sanderson Jr.:]

We didn't...

[Akshay Jagdale:]

...of price mechanism?

[Joe F. Sanderson Jr.:]

We didn't see an Urner Barry...

[Lampkin Butts:]

I saw a headline, but it didn't have any details with it.

[Joe F. Sanderson Jr.:]

What did they say?

[Akshay Jagdale:]

Yeah, they just said they're going to do a composite price or something, but there was no details, yes.

[Joe F. Sanderson Jr.:]

Okay. We hadn't seen that. We've been having discussions with them for several weeks.

[Akshay Jagdale:]

Okay. I'll pass it on. Thank you so much. Appreciate it.

[Joe F. Sanderson Jr.:]

Good, you bet.

[Operator:]

Our next question comes from Eric Gottlieb with D.A. Davidson Investments. Please go ahead sir.

[Eric Mitchell Gottlieb:]

Good morning, gentlemen.

[Joe F. Sanderson Jr.:]

Good morning.

[Eric Mitchell Gottlieb:]

Couple of questions. Good morning. First on pricing and the second on grain. So with regard to Georgia Dock, given your comments that pricing would be higher now, would it incentivize customers to delay the process of switching over to another metric? And should we expect some kind of delayed wave of higher retail realized price once that happened?

[Lampkin Butts:]

(54

[Joe F. Sanderson Jr.:]

My guess is people are going to want to look at that for a little while...

[Lampkin Butts:]

Yeah, right.

[Joe F. Sanderson Jr.:]

...before they jump on it.

[Eric Mitchell Gottlieb:]

Got it. Okay. And then regarding grain, you had previously stated that corn should be $3 and soy meal was also inflated given the carry-out. I forgot your estimate there though. So (55

[Joe F. Sanderson Jr.:]

I mean, we think last year we paid $275 a ton for soy and the carry-out on beans was 190 million bushels, and so this year the carry-out's 407 million bushels. And so I don't know why in the world I can't get it in my head why soya is $330 a ton with more than double the carryout.

[Eric Mitchell Gottlieb:]

Well, we're hearing a couple of things that demand to Mexico, they're artificially raising grain prices because they're trying to buy ahead of the border tax, and then we're also hearing that local governments are going to try to push for a slowdown in grain imports as retaliation for the border tax. So, you've got artificial demand higher and then switching to lower, so it's a possibility anyway. My question is though, on that $3 or $3.10 number, given what you know now, what would you call the soy – where corn prices should be and were soybean should be, or where do you expect them to go?

[Joe F. Sanderson Jr.:]

I never argue with where our stock price is, and I never argue with where the board is. The board is what it is and our stock price is what it is. But I don't know, I'm a fundamentalist and when I see, we got 2.4 billion bushel carryout on corn, it seems to me that corn ought not to be $3.70 a bushel and we paid $3.55 last year, and I think the carryout was 1.9 billion bushels, and fundamentally to me, it's a little higher than I was expecting or my advisors were expecting. And so I'm not going to jump out and buy a bunch of this right now with a good crop coming in from South America. There are some currency issues. The real is a little stronger, which makes South American crops not as attractive, been good exports out of the U.S. So, I mean there a lot of issues that are involved in this. And you got to be aware of those, but it didn't make sense to go out and take a position with these prices, with these inventories.

[Eric Mitchell Gottlieb:]

Got it. Okay. And my last question is when you think about building out your plant network, I guess every other year, 2019 is probably going to – would be the next one, I guess. Would that be a retail facility given that your business in the last few have been over on big bird (58

[Joe F. Sanderson Jr.:]

Well, all of that will come in the same announcement.

[Eric Mitchell Gottlieb:]

Got it. Okay. With that, I'll pass it on. Thank you.

[Joe F. Sanderson Jr.:]

Thank you.

[Operator:]

And we'll take a follow-up question from Heather Jones with Vertical Group. Please go ahead, ma'am.

[Heather Jones:]

Hi. I just had two detail-ish follow-up questions. So on the $40 million per quarter SG&A guidance, did you say whether that included ESOP accruals or not?

[Joe F. Sanderson Jr.:]

It does not include any bonus or ESOP accrual.

[Heather Jones:]

Okay. And then on the part of your retail business that you're holding flat to where the Georgia Dock last was, that's just on that, I think I remember it like being like 17% of your business as Georgia Dock, it's just that piece of being held there, right?

[Lampkin Butts:]

10% of our business.

[Joe F. Sanderson Jr.:]

Yeah.

[Heather Jones:]

10%. Okay. Okay. Thank you so much.

[Joe F. Sanderson Jr.:]

You bet.

[Operator:]

And there are no further questions at this time. I turn the conference back over to Mr. Sanderson. Sir, please go ahead.

[Joe F. Sanderson Jr.:]

Good. Thank you for joining us this morning. And we look forward to reporting our results to you throughout the year. Thank you very much.

[Operator:]

That does conclude today's presentation. Thank you for your participation. You may now disconnect.