Sanderson Farms, Inc.
Q3 2016 Earnings Call Transcript

Published: 25 Aug 2016

[Operator:]

Good day and welcome to the Sanderson Farms Third Quarter 2016 Conference. 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 Sanderson:]

Thank you. Good morning and welcome to Sanderson Farms' third quarter conference call. Lampkin Butts; and Mike Cockrell are with me this morning. We reported net income for our third fiscal quarter of $54.7 million or $2.42 per share, this compares to net income of $50.9 million or $2.27 per share during last year’s third quarter. I will begin this morning’s call with a few general comments before turning the call over to Lampkin and Mike. However, before making any further comments, I'll 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 our believe about grain cost and chicken prices, consumer demand, production levels, the supply of fresh chicken products, economic conditions and our expansion plans. 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 annual report on Form 10-K for the fiscal year ended October 31, 2015, as well as subsequent quarterly reports on Form 10-Q filed with the SEC. We filed our third quarter Q this morning. You are cautioned not to place undue reliance on any forward looking statement made this morning and each such statement speaks only as of today. We undertake no obligation to update or to revise forward-looking statements. External factors affecting our business such as grain cost, market prices for poultry meat and the overall health of the economy among others remain volatile and our view this morning might be very different from our view a few days from now.

[Joe Sanderson:]

Thank you, Mike. Our results reflect a continued favorable supply and demand balance for fresh chicken sold to retail grocery store customers and lower grain cost compared to last year’s third quarter. Market prices for products produced in our big bird deboning plants were mixed compared to last year. The Georgia Dock whole bird price remained relatively strong through the quarter, the average market prices for boneless breast meat were lower and market prices for leg quarters were higher. Food service demand remains static and flat demand combined with increased domestic suppliers caused by weak export demand are keeping a lid on market prices for breast meat. Export demand remains under pressure from several factors including political issues, a relatively strong U.S. dollar and lower oil revenues for our export partners dependant on oil revenues to fuel their economies. All avian influenza related bans have been lifted except for China, and that has supported leg quarter prices. However, market prices remained below historical averages. Feed costs were lower during our third fiscal quarter and for the first nine months of the year compared to our last fiscal year. As this year’s grain crop meets current expectations and the most recent USDA estimates, we could enjoy benign or even lower grain cost in fiscal 2017 as well. Based on what we have priced to-date and assuming we have priced our remaining needs through the end of the fiscal year at yesterday’s closing prices on Chicago Board of Trade, our cash cost for feed grain purchase would be approximately $53.4 million lower this fiscal year than last year. These lower costs will translate into approximately $0.015 lower grain cost per pound of chicken processed, once fully priced into our flocks. We have priced our corn needs through the first two weeks of October, and our soybean meal needs through September. In addition to these lower costs, a good harvest of this year’s crop could extend the lower cost in the fiscal 2017. While the crop is certainly not yet in the bin, and we have priced none of our fiscal 2017 needs at this time, had we priced all of our 2017 needs at yesterday’s close, our cash grain costs during fiscal 2017 would be essentially flat with this fiscal year, assuming we purchase the same volume in 2017 as in 2016, and assuming our basis is the same as this year. Of course, we will purchase more grain during 2017 as we feed more chickens in Palestine and St. Pauls. I am very pleased with our progress in Palestine where our processing plant is currently near fully capacity. The plant represents over 14% more production for the Company and when added to the new production at our St. Pauls North Carolina facility, will create opportunities for our employees, customers and most importantly, our shareholders. Construction continues in St. Pauls and we remain on schedule to complete the plant during the first quarter of fiscal 2017. At this point, I’ll turn the call over to Lampkin for a more detailed discussion of the market and our operations during the third quarter.

[Lampkin Butts:]

Thank you, Joe, and good morning everyone. Market prices for poultry products were mixed during the quarter when compared to our third quarter last year. The Georgia Dock whole bird price during our third quarter averaged $1.1175 per pound compared to $1.16 per pound average during last year’s third quarter. The Georgia Dock price for this week is $1.105 per pound, which compares to $1.1525 per pound for the same week last year. The Georgia Dock price continues to reflect good demand for chicken in retail grocery stores. Bulk leg quarter prices were up for the quarter compared to last year’s quarter, increasing 29.6%. Despite this increase, prices remained below historical averages because of headwinds in our export markets. For the first half of the calendar year, overall industry exports of broiler meat is down 5% compared to the same period last year. Quoted bulk leg quarter prices averaged $0.3333 per pound during our third quarter this year versus $0.2572 per pound during last year’s third quarter. Our Urner Barry frozen bulk leg quarters are currently quoted at $0.29 per pound. We expect leg quarter prices to remain under pressure for as long as export demand remains soft. As Joe mentioned, several headwinds are likely to remain in place for the foreseeable future. Prices for jumbo wings were lower during our third quarter. Jumbo wings averaged $1.42 per pound, down 3.6% from the average of $1.48 per pound during last year’s third quarter. The Urner Barry quote is currently $1.50 per pound. Boneless breast prices were lower during our third quarter, decreasing by 12.7% when compared to the third quarter a year ago. This year's third quarter average Urner Barry price of $1.29 per pound compares to an average of $1.48 per pound during last year's third quarter. Today, the Urner Barry quoted market for boneless breast is a $1.63 per pound. The Urner Barry market price for boneless has improved $0.26 per pound during August, as a result of reduced supplies caused by lighter birds and excellent demand from further processors. The overall result of these market price changes was a decrease of $0.032 per pound in our average sales price per pound of poultry products sold compared to last year's third quarter. During last year's fourth quarter, both leg quarter and boneless breasts prices were under considerable pressure as a result of challenges in our export markets. Leg quarter quoted market prices during last year's fourth quarter averaged $0.21 per pound and the boneless breast quote averaged a $1.28 per pound. Today, the quoted markets for these products are $0.29 and a $1.63. And we expect September leg quarters to be $0.02 to $0.03 per pound higher than June and July leg quarter prices. Leg quarter prices moved down this summer to a range of $0.23 to $0.25 per pound, and September looks to be $0.25 to $0.285 per pound. As a result, our fourth quarter is off to a much better start than last year. While our overall average sales price for poultry products was lower during the third quarter compared to last year, we enjoyed an almost $0.02 per pound advantage from lower feed cost. Our average feed cost per pound processed during the third quarter was $0.254 per pound, down from $0.272 per pound during last year's third quarter. We sold 924.6 million pounds of poultry during our third quarter, a 2.8% increase from the 899.7 million pounds sold during last year's third quarter. We processed 953.6 million pounds of dressed poultry during the quarter, up 7.2% from the 889.2 million pounds we processed during last year's third quarter. For the first nine months of the year, we sold 2.71 billion pounds of poultry products compared to 2.52 billion for the same period last year and processed 2.7 billion pounds this year compared to 2.53 billion last year. We expect pounds processed during our fourth fiscal quarter to be approximately 998.5 million pounds, up compared to the same quarter last year by 9.4%. We now expect to process 3.75 billion pounds this year, an increase of approximately 9.1% compared to 3.44 billion pounds processed during fiscal 2015. We sold 24.2 million pounds of prepared chicken products at our prepared chicken plant during the quarter, up from 24.1 million pounds last year. Our average sales price of that facility decreased 3.2%. At this point, I'll turn the call over to Mike.

[Mike Cockrell:]

Thank you, Lampkin. Net sales for the quarter totaled $728 million and that's down 1.6% from the $739.9 million during the same quarter last year. As Lampkin mentioned, the decrease was a result of a decrease in our average sales price for poultry products and that was offset by the increased volume. Our cost of sales for the three months ended July 31st as compared to the same three months last year decreased 2.3% as an increase in pounds of poultry products sold were offset by lower feed cost. Feed cost and flocks processed decreased almost $0.02 per pound compared to last year’s third quarter. And in addition to lower feed cost per pound, non-feed related cost of goods sold decreased $0.024 per pound during this year’s third quarter compared to last year. $0.013 per pound of that improvement is the absence of bonus accruals this year and right at a penny of that improvement is the result of improved efficiencies at Palestine. SG&A expenses during our third quarter of ‘16 were $44.6 million and that compares to $47.3 million for the same quarter of fiscal 2015. Year-to-date SG&A expenses include $7.9 million accrued for an ESOP contribution and that compares to $11 million accrued during the first nine months of last year. And we expect to accrue approximately $2.6 million for the ESOP during our fourth fiscal quarter. The Company’s effective tax rate for the quarter was 35.3% and for the balance of the year, we expect the rate to be 35.2%. We spent a $126.1 million on CapEx through the third quarter and that includes $65.8 million in St. Pauls. We’ve now approved approximately $229.7 million for the full fiscal year of which $139.7 million is for St. Pauls. Our depreciation and amortization was $62.3 million year-to-date and we continue to expect approximately $84 million for the year. We also declared $14.9 million in dividends through the first three quarters of the year. And as of today only approximately $16.4 million in letters of credit are outstanding under our $715 million committed revolver, and we do remain debt free. Before we open up the call for questions, I would like to remind everybody that the Company will host an investor conference in New Orleans at the Windsor Court on Friday morning, October 14, 2016. We’ll host a dinner at Acme Oyster House the night before on Thursday October, 13, and the conference will start at 07

[Operator:]

Absolutely. Thank you, sir. [Operator Instructions] And we’ll move to our first question from Ken Goldman with JP Morgan. Please go ahead, sir.

[Tom Palmer:]

Hi, it’s actually Tom Palmer on for Ken. Thanks for taking my questions.

[Joe Sanderson:]

You bet. Good morning.

[Tom Palmer:]

Good morning. I think you have been looking for around 1% more head and around 1% more weight in 2017. So, I think last time you spoke it was around 2% total industry supply growth as the outlook for next year. Does that still hold; has there been any change, given the light numbers we’ve seen over the summer?

[Joe Sanderson:]

Yes, we’re comfortable with that number.

[Lampkin Butts:]

WASDE is projecting 2.6% more pounds. So, that’s their report. With what we’ll run in the St. Pauls and the ramp up at Palestine, that’s about 1% more head [indiscernible].

[Joe Sanderson:]

I would say 1% to 2%. We think there’d be a smaller weight gain in 2017 than it has been in the past. We know some companies are bringing weights down. And we hear, there is going to be some other people may bring weights down in 2017. So, I would say total of 2%. Our weights will not go up in 2017.

[Tom Palmer:]

Interesting, thank you. And just a follow-up, could you provide a bit more detail on the advertising campaign? I think it's around antibiotic-free. How are you spreading the message, how long do you expect to run the campaign, and any traction you’re getting with customers initially?

[Joe Sanderson:]

We’ve been out to see our customers and they’re very supportive. We’ve had one that didn’t care for it, just to be honest with you, because they carry antibiotic-free products. But our message in the campaign is that all chicken are free of antibiotic when they leave the farm, they have to be because of FDA and USDA regulation. So, we are -- and we say that you have to pay more for antibiotic-free product. That’s the message in the campaign. And we are tracking consumer response to it. And more than 75% of our responses have been positive.

[Tom Palmer:]

And the medium that you’re conveying this message, is it print…?

[Joe Sanderson:]

Print, radio and television, primarily television. How many – do you know?

[Lampkin Butts:]

23, 24 markets.

[Joe Sanderson:]

Where we sell chicken across the southeast, southwest and out west, Denver, Phoenix, primarily all of Texas, Louisiana, Mississippi, Florida, North Carolina, Pennsylvania, Alabama, Southeast, Southwest and West and a little bit in Mid-Atlantic.

[Operator:]

And we’ll move to our next question from Farha Aslam with Stephens Inc.

[Farha Aslam:]

Just a follow-up on the marketing program. Could you share with us kind of -- should we expect another incremental $5 million to $6 million going forward in every quarter or is this a limited run program?

[Joe Sanderson:]

No, it's permanent. We feel like we have to do it. And to support our retailers and based on the response we’ve gotten, we’re going to continue it for the foreseeable future.

[Farha Aslam:]

And when we look at SG&A for the new plant, how much should we figure in for the new plant SG&A starting in -- I think, it's the January quarter?

[Mike Cockrell:]

Say that again, Farha.

[Farha Aslam:]

SG&A for January…

[Joe Sanderson:]

SG&A for …

[Farha Aslam:]

Yes, how should we account for St. Pauls; are we putting it in -- is that startup cost and SG&A in the October quarter or January quarter?

[Joe Sanderson:]

It should be January.

[Mike Cockrell:]

It's going to end in January when we start processing chickens there. We'll have another $3.5 million in the first quarter of fiscal 2017 and then that'll be over.

[Joe Sanderson:]

What will October quarter be?

[Mike Cockrell:]

The October quarter, $3 million.

[Farha Aslam:]

And then, recently the USDA initiated a leg quarter purchase program. Do you expect that to impact leg quarter pricing, and when would that benefit be seen?

[Joe Sanderson:]

This is a -- how much volume is there...?

[Lampkin Butts:]

Well, it’s $18 million at current -- $18 million at current market is 60, 70 million pounds, leg quarters are [indiscernible] over a two or three-month period. It …

[Joe Sanderson:]

It's not a lot of volume.

[Lampkin Butts:]

If it's coming all out of the freezers, that’s about half what’s in...

[Joe Sanderson:]

Yes, it's about half what’s in…

[Lampkin Butts:]

It’s usually not material but it helps a little bit.

[Joe Sanderson:]

It's a little bit of -- the market has moved up in September, it's kind of seasonal, that's a normal kind of time for it to start get a little bit better.

[Farha Aslam:]

And my final question is on China. Recently China implemented or extended tariffs on U.S. chicken. That's kind of unusual given that they lost the WTO case. Any thoughts on the political climate there, any chance of it opening up to U.S. chicken?

[Joe Sanderson:]

That was probably a signal. They're still trying to get their cooked canned chicken into the U.S. Was that the 4%?

[Lampkin Butts:]

That’s 4%; that’s not the anti-dumping duty of…

[Joe Sanderson:]

This is a 4% duty and it was -- they're sitting and waiting and trying to get canned cooked chicken in, and it's taking longer and longer and longer, and while the FDA have put it in rulemaking, it hadn't gotten past rulemaking and this is just a little signal we think that they're tired of waiting.

[Operator:]

We'll move to our next question from Ken Zaslow with Bank of Montreal.

[Ken Zaslow:]

Just a couple of questions. One is, how much production do you expect in 2017? I don't know if I heard that?

[Lampkin Butts:]

2% more.

[Ken Zaslow:]

And your gross margin -- you kind of laid out the idea that your feed cost is somewhat stable going into 2017, would you expect this type of gross margin to be the fair run rate going forward?

[Joe Sanderson:]

What we've posted in this quarter?

[Ken Zaslow:]

Yes, it seems like there's not a lot of much movement up or down around like -- again, the feed costs seem relatively innocuous, the breast prices going up a little bit, this going down a little bit; it just seems like we're in this status quo region. Is that a fair assessment or is that not right?

[Joe Sanderson:]

I have no idea.

[Lampkin Butts:]

It’s going to depend on the economy and exports; if those two get better...

[Joe Sanderson:]

How you would hope the economy would getter under new regime…

[Lampkin Butts:]

Get exports back to normal.

[Joe Sanderson:]

I don’t -- I mean every year is different. To me -- I don’t…

[Ken Zaslow:]

But what do you think is the major shock for next year, I guess is maybe a better way of asking the question…?

[Joe Sanderson:]

I think that -- I would think a new administration and a new congress has a chance to improve our economy. And I think that’s number one. I think that would be the first order of business of any administration, whichever. And I think at some point -- the economy outside of the U.S. is pretty weak, and so I think we’re going to have the headwind of a strong dollar for a while. So, I don’t think exports are ready to get a lot stronger, but I do think we could, again seeing a better economy in the U.S. in 2017 and 2018, it doesn’t look like there is going to be huge -- nobody is running to expand in the poultry industry to amount to anything. So, I don’t think that’s going to be a problem. It’s going to be the economy in the United States I think is what we could happen for us over the next couple of years.

[Ken Zaslow:]

Okay. And then, once the October quarter or the January end quarter goes down, your $3.5 million -- you get reset lower at $3.5 million per quarter going forward, is that -- that was what you said before?

[Joe Sanderson:]

Not for quarter.

[Mike Cockrell:]

Not for quarter.

[Joe Sanderson:]

It ends in the January quarter in the G&A.

[Mike Cockrell:]

Right.

[Joe Sanderson:]

St. Pauls ends then.

[Ken Zaslow:]

Right. So, then you get back to a more of a normalized SG&A level?

[Joe Sanderson:]

Yes.

[Mike Cockrell:]

Yes, absolutely.

[Ken Zaslow:]

And then, my final question is, it's interesting that you made a very strong comment that breast prices surged in August which I think is -- but you kind of mentioned it more, not as weather related but more as demand related.

[Lampkin Butts:]

It was both, it was both. Its heat related; live weights are down across the industry; supply is down, but there has been good demand from further processors, and actually a couple of integrators have been buy up some extra loads of breast. And that’s going to continue until about Labor Day; and they’ve indicated they are not going to be buying anymore after Labor Day.

[Ken Zaslow:]

So, it’s not permanent. That’s -- it's unusual for you to mention a temporary thing. So, you don’t think it’s permanent, I guess…

[Joe Sanderson:]

No.

[Lampkin Butts:]

It’s heat related.

[Joe Sanderson:]

It’s those two factors. And we think they are probably buying a product for an add, for a big national account.

[Ken Zaslow:]

Okay, great. I appreciate it. Thank you.

[Joe Sanderson:]

You bet.

[Operator:]

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

[Adam Samuelson:]

Yes, thanks. Good morning everyone.

[Joe Sanderson:]

Good morning, Adam.

[Adam Samuelson:]

So, I guess my first question on that supply outlook gentlemen, looking at margins today certainly in your own P&L are actually fairly healthy by historical standards. Some of the weight gains that we’ve seen the last couple of years have tapered off and seemingly more significantly in August. But, at this level of profitability, do you think that the industry -- are you surprised you wouldn't expect industry production to be higher next year than up kind of 2%, 2.5% given margins where they are or where do you think the constraint is? Because it seems like the margin structure today is still quite good; the feed costs are very benign and especially the comment that you think weights are actually going to go down across the industry -- flat or down across the industry next year, I thought that was interesting given current market environment.

[Joe Sanderson:]

The reason I think that, we are aware of -- it's mainly related to the woody breast problem. We know of some processors that have taken weights down hoping to get out of the woody breast problem. And we heard recently that some end users, some chain end users are considering requiring their suppliers to move to a smaller chicken because they’re having problems with woody breast in their restaurants. We can’t go any higher with our weights because of our customers. What we did in 2016 is what we -- we maxed out on weights in the plants and with our customers and with our grow-out houses. And so, we’re there. We don’t want to do anymore. And so, it's a lot of different things across the industry that I think is -- why I think you won’t see a large weight gain in 2017.

[Adam Samuelson:]

That's helpful. And then, on the retail side, I know the Georgia Dock has been slowly drifting down as we get out of the summer, can you talk about the retail landscape as you look into the fall? Beef supplies are recovering; we got a lot of pork out there; and certainly the competition from ground beef should be I would think intensifying. What are you seeing at the retail level; are you concerned that the domestic market is going to struggle to absorb all this protein, poultry, beef, and pork?

[Joe Sanderson:]

I don’t think people are going to eat ground beef seven days a week. I think they’re going to eat chicken. I think the market will drift down as we get into the fall, but I think it will recover in January like it always does. People are not going to eat ham and pork seven days a week. They’re going to eat chicken, it's less expensive and it's healthier. And I am not worried about that. Typically what affects chicken is overproduction of chicken; it's not beef and it's not pork. We may lose an add some time but where we'll lose is to turkey around Thanksgiving in turkey and ham around Thanksgiving and Christmas. But the adds you're going to see the first week of January is going to be chicken, it's not going to be beef and pork.

[Adam Samuelson:]

And if I could just squeeze one final one in -- I know you commented earlier on China. Can you just confirm, are you still rendering all the paws that you used to send over there?

[Joe Sanderson:]

We are.

[Operator:]

[Operator Instructions] And we'll move to our next caller from Michael Piken with Cleveland Research.

[Mike Henry:]

Hey, guys. This is Mike Henry in for Mike Piken. Thank you for taking the question. With respect to the leg quarters in China, you guys I think had previously commented that you thought that market may reopen in 2017; wondering if that’s still a possibility from your view. And then, with the increased capacity that you guys have, I think in the past paws were about $5 million pre-tax per month if I am remembering that correctly. Wondering what that number would look like now at your current kind of production rate and kind of what paws you are maybe turning out, if that market were to reopen? And then, just another one on Mexico demand, curious what you guys are seeing there as well.

[Joe Sanderson:]

It was -- at the time when we started rendering, it was $4.3 million per month pre-tax.

[Mike Cockrell:]

February of ‘15.

[Joe Sanderson:]

In February of 2015; it would be 15% more than that at least because they're really jumbo paws; so, it's more than 15% because they're premium paws out of Palestine. And then, St. Pauls, it's going to be premium as well. And now, it's about half that because what's going into Hong Kong is getting a lower market price because it costs more to go into Hong Kong and subsequently to their final destination, wherever that is. So, whoever is packing for Hong Kong is getting paid less then. And yes, we do believe, there's a chance that China will open up in 2017. It is USDA's intention, USDA, not the Congress and maybe not the administration, but it is USDA's intention to open the market in the U.S. for canned cooked chicken. They're going through the rulemaking process. I also think a new administration might be able to make that happen with China. There seems to be a personal problem between this administration and the Chinese government, and it shows itself in a lot of different ways. There're lot of tariffs and lot of different trade barriers that U.S. has imposed on China and likewise China on U.S. products. There were something mentioned about when this 4% tariff was renewed this week or last week, whenever it was, first of this week, there was something mentioned about the U.S. renewed some tariffs on steel and something else out of China. And so, there is a lot of stuff that’s going on. All we know about is chicken but there is lots of stuff going on the U.S. side of things as well.

[Mike Henry:]

Thanks. And on Mexico?

[Joe Sanderson:]

What’s the question about Mexico?

[Mike Henry:]

Just what have you been seeing in terms of demand and pricing into that market more recently in July and August?

[Lampkin Butts:]

Mexico is still good, it’s just the volume going in there is down a little bit from last year. It’s been our primary destination, a little softer this summer than what we’re seeing for September but still a very good market, a good export destination.

[Joe Sanderson:]

There is more competition as Arkansas had -- ban from Mexico was lifted on the state of Arkansas this summer. And so, there is product from Arkansas that’s now going into Mexico. And then, Brazil is now shipping frozen white meat into Mexico. So, a little more competition there than there was a year ago. We have really good access to Mexico out of Texas. So, that we have a little bit of an advantage because where we’re located geographically. And so, the market kind of favors us a little bit shipping out of Texas.

[Mike Henry:]

Great. Thank you.

[Joe Sanderson:]

Thank you.

[Operator:]

And our next question will come from Akshay Jagdale with Jefferies.

[Akshay Jagdale:]

Hey, good morning. This is actually Luby [ph] filling in for Akshay.

[Joe Sanderson:]

Good.

[Unidentified Analyst:]

First question is more of a modeling question. So, I think you had said previously that for fiscal 2017, you expect to process a little over 4 billion pounds of poultry; is that still a reasonable estimate or has that changed at all?

[Lampkin Butts:]

It hasn’t changed, Luby. [Ph] We’re fine tuning our processing schedule right now for fiscal 2017. And the next time, we’re somewhere in public and webcasting, we’ll update that number. But it is going to be in that same ballpark, yes. It won’t change this year. [Multiple speakers] We’ll fine tune that number as we get the end of this quarter.

[Unidentified Analyst:]

Okay, that’s helpful. And then, second question, a little bit more of a bigger picture question. So, some of your competitors have talked about the fact that they have a fairly balanced business model in terms of the segments of the chicken market in which they participate, right, so meaning big bird versus small bird or tray pack or further processed et cetera. So, just curious if portfolio mix is something that you guys think about or do you see any need to change your portfolio mix at all?

[Joe Sanderson:]

No. We participate in three market segments. Our further processing, which we want to keep at about 10%, and we’re not there, we’re about 6%; 5% to 6% and further processing, so we need to expand that a little bit. And then the other two market segments are tray pack and big bird deboning. But we do not have any appetite for small bird at all. We were in that for a long time and the margins started shrinking on small bird in the early 90s and we exited that market segment. And we don’t -- and it's still according to Agri Stats that market segment -- I am going to look at the screen right now. That market segment is about a fourth of the market and the margins there are about half of tray pack and about two thirds of big bird deboning. If you go back for 20 years, it's the same way.

[Unidentified Analyst:]

And then, just finally, if you could provide any update on your plans to build an additional plant beyond St. Paul. I think you had said on the last call that you’re scouting some locations just any update on that?

[Joe Sanderson:]

We are doing our homework diligently, and we’re not ready to announce anything yet. We like to get it tied down a little tighter before we make an announcement. I don’t know when that will happen, but we do intent to build beyond St. Pauls.

[Operator:]

[audio gap] with Sidoti & Company.

[Francesco Pellegrino:]

So, my first question, Joe, just to revisit the woody breast meat issue, it seems like it is more of a quality issue. Are we talking about just the size of the breasts on these birds; are we talking about genetics? I was speaking with a producer of animal grade choline a couple of weeks ago, and they said that incorporating more choline into animal feed could potentially solve this issue. But I am not sure if incorporating more choline could have some issue with the labeling that we are seeing at retail outlets. I was just wondering what the industry is doing to solve the woody breast meat issue.

[Joe Sanderson:]

Well, we think it's primarily genetics. And we think it’ll be a couple of years before -- maybe even three years before the breeders can get this corrected. We try to do it in the plant. We have extra people on the line palpating and culling it out, so our customers don’t get it. That product can go to somebody that’s making nuggets, it can be ground up. It's not a -- it's good product. It's just -- it's hard and it doesn’t need to go into chicken salad or that need to go into a fillet or anything like that, but it can be ground up and put in a chicken nugget. Another thing, if it does get passed, we have a further processing customer that takes that product, and they find some of it, they freeze it and put it in the freezer. And when it comes out of freezer, it's gone; it's fine. But it's a genetic thing and the guys selling choline just want to sell more choline I think.

[Lampkin Butts:]

It's a quality, it's not a wholesomeness issue…

[Joe Sanderson:]

Yes, it doesn’t have anything to do with wholesome or not, it’s just a quality issue. So, we try to screen it out, so our customers don't get it.

[Francesco Pellegrino:]

Makes sense to me. One of the things that I always look forward to for -- I guess, the Investor Day that you guys hosted, you gave a lot of commentary about the dynamics between Georgia Dock and Urner Barry; in fact, last year you were seeing Urner Barry increasing while we were seeing a majority of the cutouts for Urner Barry decreasing. Where we’re seeing the Georgia Dock prices right now, do you think if we solve the woody breast meat problem that there is more upside to Georgia Dock given the run that Georgia Dock has had over the past couple of years?

[Joe Sanderson:]

Well, most of the time those two markets are barely related. There's -- they both react though to seasonal influences. And summer time both are stronger than they are in November and December. Both of them -- majority of the -- retail grocery will sell a little bit lower and food service sell bit more in the summer than they do around Thanksgiving and Christmas. So, they have seasonal tendencies. And around the holiday, Labor Day, they’ll both sell little bit more around Labor Day, but both of them tail off after Labor Day. And that has to do with a number of factors. People spend money prior to Labor Day, getting kids back in school. They spend money on school supplies and school clothes, and so they don't have as much money to spend. I think there's a lot of different factors that affect both markets. So, they're parallel. And people are eating more out of grocery stores than they are going out to eat, and that's been true since 2008.

[Francesco Pellegrino:]

But with Georgia Dock there is a lot less volatility in the pricing as compared to Urner Barry…

[Joe Sanderson:]

Absolutely, I agree with that. I agree with that 100%.

[Francesco Pellegrino:]

And Georgia Dock seemed like it hit a peak of 1.15 before the woody breast meat really became an issue. And when you think of this preprocessed yield, boneless breast meat representing probably like 25% of the bird, I was just wondering if…

[Joe Sanderson:]

Woody breast though was not affecting the Urner Barry market. That's not affecting it.

[Lampkin Butts:]

Or Georgia Dock.

[Joe Sanderson:]

Or Georgia Dock. Woody breast is not doing that. That is a supply and demand dynamic. And boneless breast prices have the widest range of any product out there.

[Lampkin Butts:]

Always has.

[Joe Sanderson:]

And always has. I'm going back, I don't know if I can give you the year, I think it was 2003, maybe 2004 it was, boneless breast went up to $2.54 a pound. And by August 1st, it was down to $1.75 per pound in a matter of 60 days I think and maybe didn’t take that long, maybe 45 days. But it’s just a volatile product, and it goes up, comes down; we’ve gone up about $0.30 pound in August. It’s just supply and demand.

[Francesco Pellegrino:]

So, it’s more something that affects the retail Urner Barry market as compared to the Georgia Dock market, the woody…

[Lampkin Butts:]

Well, they are two different markets -- it affects Urner Barry market…

[Francesco Pellegrino:]

Okay, that’s all from me. Thanks again guys.

[Joe Sanderson:]

Thank you.

[Lampkin Butts:]

Thank you.

[Operator:]

And it appears we have no further telephone questions at this time. I’d like to turn the conference back over to Mr. Joe Sanderson for any additional or closing remarks.

[Joe Sanderson:]

Good. Thank you all for spending time with us this morning. And we’ll look forward to seeing some of you in New Orleans and then reporting our year-end results in December.

[Operator:]

And this concludes today’s call. Thank you for your participation. You may now disconnect.