Sanderson Farms, Inc.
Q1 2016 Earnings Call Transcript

Published: 26 Feb 2016

[Operator:]

Good day, everyone, and welcome to the Sanderson Farms First Quarter 2016 Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Joe Sanderson, Chairman and CEO. Please go ahead, sir.

[Joe F. Sanderson Jr.:]

Thank you. Good morning and welcome to Sanderson Farms' first quarter conference call. This morning we announced net income of $10.7 million, or $0.47 per share, for our first quarter of fiscal 2016. This compares to net income of $66.5 million, or $2.87 per share, for our first quarter of fiscal 2015. 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'll ask Mike to give the cautionary statement regarding forward-looking statements.

[D. Michael Cockrell:]

Thank you, Joe, and good morning, everyone. This 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 future growth plan. The actual performance of the company could differ materially from that indicated by the forward-looking statements because of various risks and uncertainties. These risks and uncertainties are described in our most recent annual report on Form 10-K and on the company's quarterly report on Form 10-Q filed with the SEC this morning in connection with our first fiscal quarter.

[Joe F. Sanderson Jr.:]

Thank you, Mike. Results for the first quarter reflect lower market prices compared to the start of fiscal 2015. Demand from retail grocery store customers has remained stable, and that stability is reflected in a Georgia dock whole bird price that was only slightly lower than during last year's first quarter. On the other hand, market prices for food service and export products were significantly lower compared to last year's first quarter. While those markets improved somewhat in January, they remained oversupplied, primarily as a result of weak export demand. Quoted market prices for boneless breast, tenders, wings and leg quarters were all lower during the quarter compared to last year's first fiscal quarter. While overall market prices for chicken were lower during the quarter compared to last year, market prices for corn and soybean meal were also lower. Our feed costs were down almost $0.03 per pound of chicken processed during our first fiscal quarter. Market prices for corn and soybean meal have moved lower as a result of last year's near record harvest. And both corn and soybean balance tables are healthy as we move into the 2016 planting season. The next events to grain markets we'll watch are the South American harvest, the March supply and demand report, and the March 31 Planting Intentions Report. The South American crops are progressing well, and expectations now are for good crops from that region. At its 2016 Agricultural Outlook Forum this morning, the USDA estimated corn acres in 2016 will be up 2 million acres to 90 million acres, and that acres planted in soybeans would be down slightly to 82.5 million acres. 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. Farmers remain reluctant sellers at current values. Expanded on-farm storage capacity has allowed them to hold onto grain, but projected carry-out ratios for both corn and soy support current market prices. We have bought a portion of our soybean meal through September and corn through March. Based on our cost through the first fiscal quarter and what we have priced so far, when combined with prices we could have locked in through the balance of the year at yesterday's close, our grain costs for fiscal 2016 would be approximately $61.4 million less than during fiscal 2015. This total decrease of prices paid for grain and lower estimated basis in fiscal 2016 would translate into a $0.015 per pound decrease in our cost per processed 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 2016. As I just mentioned, we are watching the quality and the 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% to 2.5% more chicken during calendar 2016 than last year. Pullet placements have trended higher than this, but we believe eggs from some of these breeders are earmarked for Mexico. Export markets continue to face the same headwinds they have faced since January of 2015, including avian influenza related bans, a strong U.S. dollar, low oil prices and politics. While some countries have lifted AI-related bans and exports have improved, some products that might normally be sold in the export market are instead still being sold domestically, and the food service market is oversupplied. Finally, we will focus our efforts on our growth. Palestine is up and running and we will move that plant to full production by the fourth fiscal quarter of 2016. We will also continue construction of our newest plant in St. Pauls. I remain optimistic about 2016. I believe grain markets will, at worst, be benign. The chill pack environment remains strong, and supply and demand for tray pack products seem balanced. Food service and export demand are the wild cards for 2016. Lower gasoline prices help consumers. But recent stock market volatility and uncertainty about the global economy are hampering food service demand. The Restaurant Association's Restaurant Performance Index fell sharply in December and stood below 100 for the first time since February 2013, which signifies contraction in key industry indicators. The contraction continued in January, as at least one survey shows traffic declined year-over-year by 1.8% at casual dining and by almost 1% at QSRs. At least a portion of that decline, however, was probably due to severe weather in many parts of the country in January. 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'll 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 lower during the quarter when compared to our first quarter last year. The Georgia dock price for whole birds reflected continued strong chill pack demand during the quarter and averaged $1.13 per pound compared to last year's $1.14 per pound. Bulk leg quarter prices during our first quarter averaged $0.218 per pound compared to $0.422 per pound last year. Final numbers for calendar 2015 reflected the volume of all broiler parts exported during the year was lower by 16% when compared with 2014. The average price for jumbo wings was also lower during our first fiscal quarter compared to last year. Jumbo wing prices averaged $1.57 per pound during our first quarter this year compared to $1.61 per pound during last year's first quarter. Boneless breast prices averaged $1.11 per pound during the 2016 first quarter compared to $1.42 last year. We sold 860.3 million pounds of poultry products during the first quarter, a 12.2% increase from the 766.8 million pounds sold during last year's first quarter. Our processed pounds were up from 774.9 million pounds to 855 million pounds. This was almost 6% higher than our previous guidance as live weights and yields were both better than estimated. We expect to process approximately 892.7 million pounds during our second quarter, up from 864.4 million pounds processed during last year's second quarter. Prepared foods sales were up $3.6 million on 1.9 million more pounds sold, offset by a slight decrease in our sales price per pound of 24% (10

[D. Michael Cockrell:]

Thank you, Lampkin. Net sales for the quarter totaled $605.2 million, and that's down from $667.4 million for the same quarter during fiscal 2015. Our net income of $0.47 per share during the quarter compares to $2.87 per share during last year's first quarter. Our cost of sales for poultry products for the three months ended January 31 as compared to the same three months a year ago increased 5.5%. This increase is a result of the increase in pounds sold, offset by the lower feed cost. Our feed cost per pound of poultry products processed decreased 10% to $0.262 per pound and that compares to $0.291 per pound last year. While our feed cost per pound of poultry products processed were lower by $0.029 per pound, our sales price per pound of poultry products decreased 20.2% or $0.165 per pound compared to last year. This combination, obviously, resulted in significantly lower margins during this year's first quarter. And as Joe mentioned, that was primarily at our big bird plants. SG&A expenses for the first quarter of 2016 were $7.8 million lower than the same three months a year ago. This decrease is a result of lower startup cost, as startup cost at St. Pauls were $1 million during the quarter, and at Palestine, last year in the first quarter, they were $4.8 million. We estimate startup cost at St. Pauls will be approximately $1.5 million in the second quarter, $2.2 million in the third quarter, and $2.8 million in the fourth quarter. Accruals under our equity compensation plans were lower by $3.1 million. The company booked no accrual for performance shares that were granted on November 1, 2014. Those performance shares will be earned if certain return on equity and return on sales targets are reached when we average fiscal 2015 performance with fiscal 2016 performance. We are too early into fiscal 2016 to determine whether or not it's probable that those targets are going to be reached, and we'll reevaluate that judgment at the end of the second quarter. Should we determine that the targets become probable, the accrual will range between $1.1 million and $4.5 million. Our balance sheet remained strong. At the end of the quarter, shareholders' equity was $1.04 billion and net working capital was $434.8 million. The only debt on our balance sheet is $10 million in current debt, and we'll pay that off in April. We ended the quarter with $155 million in cash, and we also collected $34 million in a tax refund in February after the quarter ended. We spent $25.3 million on CapEx during the first quarter and have approved $212.6 million for the fiscal year. That fiscal 2016 capital budget includes $139.7 million in St. Pauls. And of the $25.3 million in CapEx during the quarter, $5.4 million was spent at St. Pauls. Our depreciation and amortization during Q1 was $19.9 million, and we expect approximately $85 million for the year. A little bit about that effective tax rate. The company's effective tax rate for the three months ended January 31 was 44.9%. And that is higher than our guidance and it compares to 35.2% for the three months ended January 31, 2015. As of January 31, 2016, the company's long-term deferred income tax liability was $81 million and that compares to $52.2 million at October 31, 2015, an increase of $28.8 million. The increase in both the effective tax rate and the long-term deferred tax liability is primarily attributable to the company's decision to take advantage of legislation enacted during the first quarter of fiscal 2016 that allowed for bonus depreciation to be taken on qualifying assets placed in service during the 2015 calendar year. This legislation and the company's election to accelerate depreciation on those items resulted in a favorable impact on the company's first quarter income tax receivable, but had an unfavorable effect on the tax deductions that are based on levels of pre-tax income, most especially the Internal Revenue Code Section 199 Domestic Production Activities deduction. Had the company not elected to take advantage of this legislation, our effective tax rate would have been approximately 35.1%. The higher tax rate cost approximately $2 million during the quarter or $0.09 per share after income tax. The company expects its effective rate for the remainder of the fiscal year to be approximately 35.1%, and as I mentioned earlier, we did collect that $34 million refund in February after the quarter ended. With that, Nicky, our prepared remarks are over. And you can open the line for questions.

[Operator:]

Thank you. Our first question will come from Ken Goldman with JPMorgan.

[Kenneth B. Goldman:]

Good morning, everyone.

[D. Michael Cockrell:]

Good morning, Ken.

[Lampkin Butts:]

Good morning.

[Joe F. Sanderson Jr.:]

Good morning.

[Kenneth B. Goldman:]

Two questions for me. Lampkin, you mentioned that as a company you are always looking for efficiency improvements. That's nothing new.

[Lampkin Butts:]

Right.

[Kenneth B. Goldman:]

But as you look at what some of the packaged food producers are doing, companies like Campbell, Mondelez, I won't go as far as Kraft, but are there things you can learn from them in terms of your own cost structure? Again, I realize, I guess, making chicken is pretty different than producing corn flakes. But just looking at some of these margin numbers coming in, does it make you – does it incent you to be more, I guess, aggressive with your own P&L?

[Joe F. Sanderson Jr.:]

Agri Stats.

[Lampkin Butts:]

Yeah. The businesses you mentioned, I don't know anything about them. We capture and identify opportunities by looking at just about everything that goes on in our industry, and that's through Agri Stats. And so that's between looking at Agri Stats and looking and comparing our own operations as improvements materialize, that's where we develop our targets for opportunities.

[Kenneth B. Goldman:]

Okay. I will follow-up on that one afterward. But my second question is – you highlighted market prices for Georgia dock as reasonably close to last year's levels. I'm curious, the prices in the quarter that you actually received for tray pack, were they at similar levels to these market prices or did they trail a bit? And, I guess, how are those prices trending into 2Q as well?

[Lampkin Butts:]

I would say they're very similar to what we...

[Joe F. Sanderson Jr.:]

Tray pack was about like last year. The prices, particularly in November and December, we were selling boneless breasts off of $1.11 Earnaberry. And we were selling leg quarters off of – the market was $0.15 for November and December. And that is a no go. That doesn't work. January, we got about a nickel-a-pound improvement in leg quarters, and we got $0.10 improvement in boneless breast. And I think you all know how many pounds a week we do of boneless breast and leg quarters.

[Lampkin Butts:]

16 million pounds of leg quarters and about 12 million pounds of boneless breast.

[Joe F. Sanderson Jr.:]

And you multiply that times a nickel-a-pound and times $0.10 a pound, and January was a much better month. And it doesn't take but a little bit to make that work. But tray pack were about the same.

[Lampkin Butts:]

Ken, as far as the realized prices versus the Georgia dock, our realized prices are going to track very close to that. The only thing that would mess or makes that different is the number of add features that there are during any particular month or quarter. And during the first quarter, we were, what, 5% realized value below...

[D. Michael Cockrell:]

We were (20

[Lampkin Butts:]

Yeah.

[D. Michael Cockrell:]

(20

[Lampkin Butts:]

Well, what happens in November and December, though...

[Joe F. Sanderson Jr.:]

Yeah, you got...

[Lampkin Butts:]

...you got hams and turkeys. So you have excess product in November and December. And you don't have chicken (20

[Joe F. Sanderson Jr.:]

Right. And those features that we negotiated with our retail customers at prices below the Georgia dock, obviously, are the things that'll mess you up versus the Georgia dock. But we come in pretty close to that.

[Kenneth B. Goldman:]

Great. Thank you for the color.

[Joe F. Sanderson Jr.:]

You bet.

[Operator:]

And the next question will come from Ken Zaslow with Bank of Montreal. And your line is open. Please check your mute button. And Ken has stepped away. The next question will come from Farha Aslam with Stephens.

[Farha Aslam:]

Hi. Good morning.

[Joe F. Sanderson Jr.:]

Good morning.

[Farha Aslam:]

A couple of questions. The first one is volume for the year – I know you have saved it for the second quarter. Do you have a read for the year?

[D. Michael Cockrell:]

Yes. For the year, we anticipate pounds will be 200 – no, I'm sorry, 3.653 billion pounds in 2016 and that's up 6.1% from 3.44 billion pounds in 2015.

[Farha Aslam:]

That's very helpful. Thank you. And then, Joe, could you help us with the export markets? They seem to be recovering a little bit better than we had anticipated kind of highlighting your better-than-anticipated pricing in the quarter. Any color you could give us on what's driving that right now in your outlook for exports?

[Joe F. Sanderson Jr.:]

Farha, exports are much better. Of course, we haven't had – there's been one outbreak of AI in Indiana and it did not cause any disruptions other than...

[Lampkin Butts:]

South Korea.

[Joe F. Sanderson Jr.:]

...South Korea, who we thought was going to open, remained closed. And, of course, China remains closed, although that doesn't affect leg quarters. But AI ban is still in place there. But product is going into South Africa. That's a new market. That's taking a little pressure off. And these other countries that had AI bans in place of either – they either opened up or at least considered regions and only banned regions. So, all of that has impacted dark meat prices. The other thing that that's impacted dark meat is more and more whole eggs are being sold domestically, and more and more deboned dark meat is being sold domestically. Leg quarter inventories were down in the cold storage report. And some of it's better exports and some of it's fewer product being produced in different – in other forms.

[Lampkin Butts:]

Fewer leg quarters available for export.

[Farha Aslam:]

And your outlook for prices?

[Joe F. Sanderson Jr.:]

We probably averaged $0.15 a pound during this first quarter net – I mean, FOB. And those prices have moved up into the $0.20s. We're booking right now $0.23 to $0.26. And we think post Easter it has room to get up into the high $0.20s. We still have headwinds from cheap oil and those economies that are impacted and currency – the strong dollar still impacting exports.

[Farha Aslam:]

Great. And my last question and I'll pass it on. Mike, I didn't think I would ever, like, ask this question in the first quarter this year, but you have no bonus accruals. It looks like pricing is strengthening a little bit better than we had anticipated. What are the thresholds that Sanderson would have to meet that you have to start accruing the bonuses?

[Joe F. Sanderson Jr.:]

$10.

[D. Michael Cockrell:]

It's right at $10 a share, Farha. We have a long way to go to get there.

[Joe F. Sanderson Jr.:]

20% on $1 billion in equity.

[Farha Aslam:]

Thank you very much.

[Joe F. Sanderson Jr.:]

Absolutely. Thank you.

[Operator:]

And the next question will come from Michael Piken with Cleveland Research.

[Michael Leith Piken:]

Yeah. Good morning. Just wanted to dig a little bit deeper into your expectations for expansion this year. I know you'd mentioned 2% to 2.5% in terms of total pounds. But how do you sort of see the entire North American protein complex, and is that a comfortable amount? Given that there is more beef, I would expect it to come on the market later this year.

[Joe F. Sanderson Jr.:]

We think – right now, the industry has been very cautious about putting – setting eggs. Egg sets are running less than 1%. And we think that's going to continue. Weights are running in – USDA weights are running about 1.25% higher than a year ago. I've been thinking that we're not going to be that much weight gain, but it appears there is. Agri Stats is showing 2% heavier birds. And I think Agri Stats is probably closer than USDA. So I think we'll have 2.5% more pounds of chicken available in the market this year. The question is to me the biggest deal – are exports going to – are they going to be domestic? Are the pounds going to be in – are they going to get shipped offshore? Right now, exports are better than deboned dark meat. Deboned thighs are not really any better than a leg quarter shipped offshore. Everybody – it was for about six or eight months, but not anymore. The price on that deboned dark meat has declined significantly. And the only thing we're deboning is to satisfy our customer needs. And that deboned dark meat is actually cannibalizing. Well, you see what it's doing to the price of boneless breast. But we feel pretty good about what price is going to do post Easter.

[Michael Leith Piken:]

Okay. Great. And then just your thoughts on the impact of more beef on the market. I mean, is it your view that chicken is cheaper, and it still won't matter, or...?

[Joe F. Sanderson Jr.:]

I don't think there's going to be a huge impact. I always – you know what I've always said, they're not going to eat chicken seven days a week and I don't think they're going to eat beef seven days a week either. And prices – the price of beef is still pretty high. The price of beef hadn't gone down dramatically at the grocery store. The grocers are keeping their margins on beef and pork. What'll probably happen is – well, I don't – you might see some more features at the grocery store. But for March, we're going to be short of tray pack all of March. We have an Easter cut in there, but we're going to be short of tray pack product for the whole month of March. We've got ads booked for almost every week of March. So I'm not – I don't think we're going to get overrun by beef in 2016.

[Michael Leith Piken:]

Okay. Great. And then lastly, could you provide an update on the Chinese fall market and any thoughts around timing or anything along those lines? Thanks.

[Joe F. Sanderson Jr.:]

Well, we've been thinking it was going to be 2017 before China open back up. And I think that's a conservative way to look at that. There's a possibility it could open before that, but I think the conservative thing is to think 2017. We were told last summer and out of Washington, and I still – I'm holding on to that.

[Michael Leith Piken:]

All right. Thank you.

[Joe F. Sanderson Jr.:]

You bet.

[Operator:]

And the next question, we'll go back to Ken Zaslow with Bank of Montreal.

[Kenneth B. Zaslow:]

Hey. Good morning, everyone. Sorry about that.

[Joe F. Sanderson Jr.:]

Good morning. That's all right.

[Kenneth B. Zaslow:]

I had a (30

[Michael Leith Piken:]

Price.

[Lampkin Butts:]

Price, which prices, Ken? You mean the way our competitors price product? Is that...

[Kenneth B. Zaslow:]

Yes, sir (31

[Joe F. Sanderson Jr.:]

How are they pricing it?

[Lampkin Butts:]

I'm not aware.

[D. Michael Cockrell:]

Yeah. We're not familiar with how they price it, Ken.

[Joe F. Sanderson Jr.:]

Everything – I mean all of ours is – and we bid against really mainly it's two other people.

[Lampkin Butts:]

For tray pack.

[Joe F. Sanderson Jr.:]

For tray pack, and everybody – it's always based off the Georgia dock.

[Lampkin Butts:]

But when we compete for a food service distributor's business, we quote Urner Barry and our competition, Urner Barry based. Some...

[Kenneth B. Zaslow:]

So you don't think there's anything...

[Lampkin Butts:]

What's that?

[Kenneth B. Zaslow:]

Yeah. No, go ahead. You go ahead.

[Lampkin Butts:]

Well, I was going to say some further processors will take flat prices for 12 months, quotes based on flat prices and then retail, breast chicken for retail based off the Georgia dock. And that's what we see when we – in a competitive bid, that's what we see.

[Joe F. Sanderson Jr.:]

Yeah. We don't anticipate changing the way we do business.

[Kenneth B. Zaslow:]

Yeah. I figured that. I just didn't know if there was opportunity because there seems to be one fairly large player out there who has kind of more stabilized their longer term margin structure with how they're changing the pricing, or at least it seems they're...

[Joe F. Sanderson Jr.:]

Their product mix is different than ours, but what they sell in our category, they sell it just like we do.

[Kenneth B. Zaslow:]

Okay.

[Joe F. Sanderson Jr.:]

Mainly what they sell is tray pack like we do.

[Kenneth B. Zaslow:]

Okay.

[Joe F. Sanderson Jr.:]

When they sell fast food, they either sell it cost plus or they sell it flat price, and we don't do that. I mean, we don't do that. And then I'm sure they sell their further processed kind of like we do. And right now, that's pretty good. You've got low price grain and you've got low-cost raw material coming into your further processing plant; that works. That's good.

[Kenneth B. Zaslow:]

Okay.

[Joe F. Sanderson Jr.:]

That model changes though when you've got $6 corn or boneless breast is at $1.75 or $1.85. Right now it's beautiful.

[Kenneth B. Zaslow:]

Okay. Fair enough. And then just to make sure I get this, the chicken industry, if you go back into history, there's always so much volatility year to year that one year you can lose money, another year you can make money. But this time around, you didn't – we had a very quick period of time where you kind of hit the bottom, November-December, and it already seems like it's already recovering. Is there something that – and I always hate to be the person that says, oh, this time it's different. But I guess what I'm trying to figure out is why did we not go into the losses that you've historically seen given how strong the profitability was six months to nine months ago? And can you help us understand maybe if there's any changing of the industry dynamic, how you see it?

[Joe F. Sanderson Jr.:]

I don't know why it – there isn't an expansion going on. It looked like it with the pullet placements. But we might be at a capacity wall, you know? And some of the larger players may be at capacity and have not added any capacity. And some of the smaller ones may be at capacity. Where's the egg set? Bang up there. If you look at your 19 State egg set, the industry hasn't set – what's the biggest egg set in the last four years? 211 million?

[D. Michael Cockrell:]

Yeah. (35

[Joe F. Sanderson Jr.:]

And that may be it. We've added a couple of plants, but nobody else has really done that. And the USDA did not come out with the new line speeds. And so you might be at a capacity. Since back in 2007, on the 19 State total, the industry was setting 220 million eggs. That was the max. Since that time, there are three or four plants shuttered. And I don't know what the capacity is right now, but we think it's less than 220 million eggs. We thought it was going to be 215 million or 216 million frankly, but I don't know if it's because in November and December there were several companies losing money, big bird typically, and exports were not favorable. And so everybody – some people are being very cautious, particularly in the big bird arena. It does feel different.

[Kenneth B. Zaslow:]

Yeah, it definitely does. And then my very last question is, if Mexican margins don't – or continue to be weak, are you worried that pullets will not be moving as much to Mexico? And then I'll leave it there.

[Joe F. Sanderson Jr.:]

I couldn't hear that.

[D. Michael Cockrell:]

Say that again, Ken. I'm sorry.

[Joe F. Sanderson Jr.:]

We can't hear you.

[Kenneth B. Zaslow:]

Yep. If Mexican profitability...

[D. Michael Cockrell:]

If Mexican profitability...

[Kenneth B. Zaslow:]

Profitability, not that you guys do any business in Mexico, but you guys said that some pullets go to Mexico, if the Mexican profitability comes down, are you worried that the pullets may not be – from the U.S. may not be moving to Mexico?

[Joe F. Sanderson Jr.:]

Well, you mean the eggs or the export?

[Kenneth B. Zaslow:]

Yeah.

[Joe F. Sanderson Jr.:]

Eggs.

[Lampkin Butts:]

We think that's...

[Joe F. Sanderson Jr.:]

I think they're going to have to have the eggs.

[Lampkin Butts:]

Yeah, they're going to – where else are they going to set them? If you built a breeder operation in the United States, specifically to produce egg for your Mexican operation, and margins are bad there, I mean, there's not hatchery capacity for them to go into. They'll do the same thing big bird de-boners were doing in November and December, they'll break eggs.

[Joe F. Sanderson Jr.:]

Yeah, they'll break eggs.

[Kenneth B. Zaslow:]

Okay. Thanks, fair enough.

[Joe F. Sanderson Jr.:]

You bet.

[Kenneth B. Zaslow:]

Thank you very much.

[Joe F. Sanderson Jr.:]

Thank you.

[Operator:]

And the next question will come from Brett Hundley, BB&T Capital Markets.

[Brett Michael Hundley:]

Hey, good morning, guys.

[Joe F. Sanderson Jr.:]

Good morning, Brett.

[Brett Michael Hundley:]

I wanted to go back to volumes during the quarter. They were much bigger than we were expecting. Of course, you guys talked about how they were about 6% above your expectation on the processing side due to weight and yields. And 6% is a pretty big number. And so I was just wondering, what were the key drivers of that excess during the quarter and why are they not moving into Q2. Your guidance on processed pounds for Q2 is in line with what you gave last quarter.

[Michael Leith Piken:]

Yeah. Brett, this is Mike. Our head processed were actually right on what we anticipated. Our live weights were up by about 1.5% more than what we had forecast. And the rest of it was yields. Our plants are yielding very, very well. And to be perfectly honest, when they come in with their estimate every quarter, they ask me, do you want me to build in a higher yield than what we've done? And I'd say, no, let's just leave it at our targets. So that's my fault. But yields were much better than I estimated that they would be.

[Brett Michael Hundley:]

So then, do you think...

[D. Michael Cockrell:]

That's not a bad problem.

[Brett Michael Hundley:]

No, no. Not at all. It really helps your earnings within our model. And do you think then that the number that Lampkin gave, again, for Q2 is going to prove conservative there? And really, I mean, Joe, you talked about it, how weights are kind of ticking up above your expectation, it sounds like. Is it just low priced feed? Or is it something else out there?

[Joe F. Sanderson Jr.:]

Well, I think part of it is breed. The breed we have, there are a lot of people switching to that breed, not only in big bird deboning, but also in tray pack. Over the last year there have been a lot of companies – there's been a lot of growth in the use of that breed and the breed has performed exceedingly well and I think that's helped a lot. The growth rate is – not the rate of growth, but performance of that bird in feed conversion and in yield has been superb and I think that has something to do with it.

[Brett Michael Hundley:]

Okay. Another story that's maybe gaining some steam here recently is, coming out of Brazil and with their currency where it is, with the crops that they've had, the country has been exporting a lot of corn and corn prices are really starting to tick up locally. And one of the thoughts that we had had was potentially the U.S. chicken processors would become more competitive with their Brazilian counterparts on the global market here as the year unfolds, given that relative feed cost profile that's basically proliferating in Brazil right now versus the U.S. We spoke with a Brazilian processor the other day and then he said, it is possible that U.S. chicken processors could become more competitive this year and that you could see U.S. exports ticked up on a relative basis. Do you guys have an opinion on that? Are your export guys talking about this at all? I'd just be curious to get your thought and then I just have one more question.

[Joe F. Sanderson Jr.:]

We don't compete so much with Brazil. Brazil mainly ships whole birds around the world – whole chickens, and we ship mainly leg quarters. And there is a – Brazil's labor cost has gone up over the years and they don't have – 10 years ago – the products are different and we ship different products and kind of go even to different markets. And I've never considered Brazil a big competitor with U.S. products. They don't have a market for the boneless breast meat like we do and so they can't – they don't ship a lot of leg quarters. They ship a little bit, but not a lot like we do and so I've never really considered them a competitor in the export market.

[Lampkin Butts:]

(44

[Joe F. Sanderson Jr.:]

No. At $0.25 leg quarter, they can't do anything with that.

[Brett Michael Hundley:]

I thought that the U.S. was trying to push more whole birds into the Middle East, for instance, as an export opportunity but maybe I'm...

[Joe F. Sanderson Jr.:]

Yeah. Well, that's true for some processors. But, it's not a big, huge market.

[Brett Michael Hundley:]

Okay.

[Joe F. Sanderson Jr.:]

Leg quarters compared to whole birds is, I mean, it's not even close.

[Brett Michael Hundley:]

No. That's understandable. All right. I appreciate your perspective and then just my last question. Your prepared foods business continues to grow. Clearly you're growing on the fresh side as well with the plant that you're building. I'm just curious, is it Sanderson's intention to keep pace on the fresh side with prepared foods? In other words, do you always want your prepared foods business to be of certain percentage mix of your total sales or is it okay for your fresh meat growth to outpace prepared over time in your deals? Thank you.

[Joe F. Sanderson Jr.:]

We actually want prepared foods to be at about 10% of our total sales. Last year it was about 7%, with Palestine and St. Pauls coming on, it's going to fall further behind. So we need to increase our volume of prepared foods.

[Brett Michael Hundley:]

Would you buy something, Joe?

[Joe F. Sanderson Jr.:]

Yes.

[Brett Michael Hundley:]

Thank you.

[Joe F. Sanderson Jr.:]

Thank you.

[Operator:]

And the next question will come from Francesco Pellegrino with Sidoti & Company.

[Francesco Pellegrino:]

Good morning, guys.

[Joe F. Sanderson Jr.:]

Good morning.

[Francesco Pellegrino:]

I was wondering if you could provide some color in regards to chicken supplies and cold storage and what this could possibly be in regards to a possible read through given that we're at record level of cold storage levels?

[Joe F. Sanderson Jr.:]

What was the total?

[Lampkin Butts:]

800?

[Joe F. Sanderson Jr.:]

800, yes.

[Francesco Pellegrino:]

Yeah. 825?

[Joe F. Sanderson Jr.:]

Yeah. I looked at it. I see the total. Well, I think the one thing, the one product that's in there, the leg quarters are not a problem. That amount probably about four or five boats worth of leg quarters.

[D. Michael Cockrell:]

Yeah. Leg quarters are down (46

[Joe F. Sanderson Jr.:]

It's the boneless breast.

[D. Michael Cockrell:]

Boneless breast ticked up, but...

[Joe F. Sanderson Jr.:]

Don't you think that's further processed?

[D. Michael Cockrell:]

We know. We know of some.

[Joe F. Sanderson Jr.:]

Yeah. That's probably – the boneless breast is probably being put in there by further processors that thought that first quarter was the bottom of the boneless breast market. And they've put it in there, and they'll bring it out in the spring and summer and put it in when boneless breast is higher. I don't know what – I looked at it, but I don't remember, the other category?

[D. Michael Cockrell:]

The other category, it was big.

[Joe F. Sanderson Jr.:]

That's...

[D. Michael Cockrell:]

From a year ago, down from December.

[Joe F. Sanderson Jr.:]

But the boneless breast is the one I noticed, and that's – we're putting some of that up for somebody. But it's not for us.

[Francesco Pellegrino:]

I saw that wings were up 52% year-over-year. Boneless breast is up 17%. It sounds as if the boneless breast meat is up just due to some of the favorable pricing that we've experienced over the past couple of months, and as you said it's going to further processing. Any insight on maybe the wings in cold storage?

[Joe F. Sanderson Jr.:]

More about the wings, I don't know about the wings.

[Lampkin Butts:]

I think a year ago wings got high enough that people put some in the freezer for safety stock to get them through the Super Bowl. And I think that number will start working its way down. Now that the Super Bowl is over and we get March madness behind us, I think that number will come down.

[Joe F. Sanderson Jr.:]

And then it'll go back up in the summer.

[Lampkin Butts:]

Yeah.

[Joe F. Sanderson Jr.:]

Your build inventory in wings in the summertime.

[Francesco Pellegrino:]

All right. Maybe I'll crunch some math on my end, but I thought wing consumption for the Super Bowl was only supposed to be up 2.5%, so I wasn't sure why the jump would be that much for wing inventory in cold storage. But I'll crunch some numbers. Maybe we can circle back a little bit later about that. In addition, can you provide us with a little bit of a recap in regards to where maybe the top-15 international countries are in regards to their bans of U.S. broiler meat exports?

[Joe F. Sanderson Jr.:]

Bans?

[Francesco Pellegrino:]

Yeah.

[Joe F. Sanderson Jr.:]

Russia – Russia would be – they were what, 300...

[D. Michael Cockrell:]

250,000 metric tons.

[Joe F. Sanderson Jr.:]

250,000 metric tons. China was – it was all paws and wingtips, but it was significant money wise.

[Francesco Pellegrino:]

Can we make this easier? Who's lifted the bans? I know last quarter it was South Korea, South Africa. Russia, it sounds as if there's something that's going to be there for quite some time.

[D. Michael Cockrell:]

Yeah. Russia is...

[Joe F. Sanderson Jr.:]

Russia is done (49

[D. Michael Cockrell:]

(49

[Francesco Pellegrino:]

Right. Who's lifted...

[D. Michael Cockrell:]

South Korea has a ban in place for the whole USA, and China does.

[Francesco Pellegrino:]

Okay.

[D. Michael Cockrell:]

And everybody else has either lifted the ban or they regionalized. They consider United States by regions.

[Joe F. Sanderson Jr.:]

Everybody else is open.

[D. Michael Cockrell:]

So as long as they – we're – the only countries we cannot export to right now are South Korea and China.

[Lampkin Butts:]

And Russia.

[D. Michael Cockrell:]

And Russia, right.

[Francesco Pellegrino:]

Okay. And just my last question, not sure if it's going to be anything, a material opportunity for the U.S. broiler industry. But given the new trade deal with Iran, when I look at the chart of the Middle East region in regards to U.S. broiler meat exports, obviously Iran has not been on this chart for a couple of years. Is there any type of opportunity there for the U.S. broiler industry? I saw that Russia has just signed a trade agreement for poultry exports to Iran. Anything material there?

[D. Michael Cockrell:]

We don't have anything in the works, but it certainly would be an opportunity to...

[Joe F. Sanderson Jr.:]

We used to ship to Iran.

[D. Michael Cockrell:]

To sell our product, yes.

[Francesco Pellegrino:]

Any idea of the size of that market in metric tons?

[D. Michael Cockrell:]

No. Last year Iraq bought 6,500. So I don't think it's huge. But it would help. It'd be helpful.

[Francesco Pellegrino:]

All right. Didn't think it'd be that big, wasn't necessarily sure. I appreciate the color, guys. Thanks, again.

[D. Michael Cockrell:]

You bet.

[Operator:]

Thank you. And there appears to be no further questions at this time. Mr. Sanderson, I'd like to turn the conference back to you for any additional or closing remarks.

[Joe F. Sanderson Jr.:]

Good. Thank you for joining us this morning. And we look forward to reporting our second quarter results later on this year. Thank you all.

[Operator:]

Thank you, sir. And that does conclude today's conference. Thank you for your participation. And you may now disconnect.