Sanderson Farms, Inc.
Q4 2016 Earnings Call Transcript

Published: 15 Dec 2016

[Operator:]

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

[Joe Sanderson:]

Thank you. Good morning and welcome to Sanderson Farms fourth quarter and year-end conference call. This morning, we reported net income of $76 million or $3.36 per share for our fourth fiscal quarter 2016. During the fourth quarter of last year, we made $27.4 million or $1.22 per share. For the year ended October 31, 2016, we reported net income of $189 million or $8.37 per share. For fiscal 2015, we reported net income of $216 million or $9.52 per share. If you did not receive a copy of the release and accompanying financial summary, they are available on our website at www.sandersonfarms.com. Before we continue, I will ask Mike to give the cautionary statement regarding forward-looking statements.

[Mike Cockrell:]

Thank you, Joe, and good morning, everyone. This morning’s call will contain forward-looking statements about the business, financial condition and prospects of the Company. Examples of forward-looking statements include statements about future earnings, expenditures, supply and demand factors, production levels, grain cost and supply, poultry prices, and general economic conditions. The words beliefs, expects, anticipates, estimates, model, should, plans and similar words are intended to identify forward-looking statements. The actual performance of the Company could differ materially from that indicated by the forward-looking statements because of various risks and uncertainties. Those risks and uncertainties are described in our press release and in the annual report on Form 10-K for the year ended October 31, 2016, which was filed with the SEC this morning. All forward-looking statements speak only as of today, and are based on our current expectations, beliefs and assumptions, and that could change quickly based on mini external factors that affect our business. We undertake no obligation to update or to revise forward-looking statements.

[Joe Sanderson:]

Thank you, Mike. Fiscal 2016 was a successful year for Sanderson Farms. Overall, poultry market prices decreased for the year compared to fiscal 2015, but grain cost flocks sold were also lower for the fourth quarter and the full fiscal year compared to last year. Our net sales for the full year of $2.816 billion were another record for Sanderson Farms. We moved our new Palestine, Texas plan to full production in October. We are near completion of our new St. Pauls North Carolina complex. We made progress on sales of prepared chicken, we finish the year in a competitive position in our industry, and we have no debt on our balance sheet. While we have room to improve our performance, I’m very grateful for the efforts of our growers and our employees during this past fiscal year and look forward to working with them to capture the opportunities available to us during the coming year. With that introduction, I will ask Lampkin and Mike to provide details on the quarter, and I will return after they finish to discuss our focus during fiscal 2017 and answer your questions.

[Lampkin Butts:]

Thank you, Joe. Good morning, everyone. This is Lampkin. As Joe said, overall market prices for chicken declined during the year but we benefited from lower grain cost for the year. The average Georgia Dock price during our fourth quarter was approximately 4% lower than last year’s fourth quarter, averaging $1.10 per pound for the quarter. For the year, the Georgia Dock averaged $1.12 per pound, which represented a 2.7% decrease from $1.15 per pound average during 2015. The Georgia Dock price is currently $1.09 and three quarter cents per pound and is consistent with strong retail grocery demand for chicken. Bulk leg quarter prices were approximately 46% higher during the quarter, compared to last year’s fourth quarter, but for the year were lower by 6.2%, compared to fiscal 2015. Urner Barry market prices for leg quarters averaged $0.307 per pound during the quarter and $0.289 for the year. Total industry export volume through October was higher by 2%, compared to 2015 on improved export conditions once most AI bans were lifted this summer. The strong U.S. dollar, lower oil prices and politics continue to negatively affect export demand. Market prices for boneless breast during our fourth quarter were higher by 7.4% when compared to the fourth quarter a year ago. The closing market price for boneless averaged $1.38 per pound during the fourth quarter, and $1.24 per pound for the fiscal year. Boneless best prices have weekend substantially since September and the Urner Barry market price for boneless breast is currently $1.06 per pound. Just as the Georgia Dock price has and continues to be consistent with relatively strong demand and steady supply, the Urner Barry boneless breast meat quote price reflects weak demand in food service and higher production. Jumbo wing prices during our fourth quarter averaged $1.62 per pound, up 9.5% from the average of $1.48 per pound during last year’s fourth quarter. For the year, Jumbo wing market prices were higher by 3.9% from an average of $1.52 per pound during fiscal 2015 to an average of $1.58 per pound during fiscal 2016. The current Urner Barry quote for Jumbo wings is $1.78 per pound, and this price reflects seasonally strong demand for wings. Our average sales price for poultry products during the full fiscal year was lower by $0.06 per pound compared to last year, decreasing 7.9% for the year ended in October 31, 2016 compared to the year ended October 31, 2015. This decrease in our average sales price for chicken was offset to some extent by lower feed cost and broilers processed. For the year, feed cost and broiler processed were lower by $2.4 per pound or 8.7%. For the fourth quarter, our cash costs for grain delivered to our feed mills were lower than last year’s fourth quarter. Prices paid for corn delivered during our fourth quarter were lower by 4.6% compared to last year’s fourth quarter, while soybean meal prices were lower by 10.6%. Our feed costs per pound in broiler flocks processed were lower by $0.0142 or 5.3% during this year’s fourth quarter compared to a year ago. Like Joe, I am grateful for everyone associated with Sanderson Farms, our employers, growers, customers, and vendors, and look forward to the New Year. At this point, I will turn the call over to Mike for a discussion of the quarter’s financial results.

[Mike Cockrell:]

Thank you, Lampkin. Our financial performance, as Joe said, during the fourth fiscal quarter and the year reflects another successful year for the Company. Net sales for the quarter totaled $790.8 million and that’s up from $679.6 million for the same quarter last year. The increase in net sales for the quarter reflects an increase in poultry products sold of 13.5% and a 4.3% increase in our average sales price for poultry products compared to last year. Our cost of sales of poultry products for the quarter ended October 31 increased 7.2%, reflecting the 13.5% increase in pounds sold, offset by 5.3% decrease in the cost of feed and broilers processed during the quarter. For the fiscal year, net sales totaled $2.816 billion, up 0.4% from the $2.803 billion in fiscal 2015. Cost of sales for the year increased 2.1% compared to a year ago and totaled $2.362 billion. Our average sales price in poultry products sold during fiscal 2016 was down 7.9% compared to last year and the average cost per pound in our poultry business decreased $0.037 per pound or 6% compared to a year ago. We sold 1.2 million more pounds of prepared chicken this year, a 1.4% increase, and we realized $0.047 per pound less, a 2.3% decrease. During this year’s fourth fiscal quarter, we processed 1.01 billion pounds of dressed poultry and we sold 1.017 billion pounds. We processed 3.765 billion pounds during the fiscal year, and we sold 3.731 billion pounds. For those of you modeling 2017, we currently expect to process 4.183 billion pounds of dressed poultry during fiscal 2017, and that would represent an 11.1% increase in pounds processed compared to 2016. If we run our plants as expected, those pounds would be processed as follows

[Joe Sanderson:]

Thank you, Mike. Our feed grain costs during fiscal 2016 were lower than during fiscal 2015, and we expect flat to lower costs during fiscal 2017. If we locked in prices for all of our needs for fiscal 2017, including what we’ve already priced at current values that is if using the Chicago Board Trade contract prices for current and future needs as it closed last night, our cash cost for grain during fiscal 2017 would be $34 million higher than during fiscal 2016. However, we believe the Board is high relative to supply. Given that the carryout of both corn and beans is well above a year ago, we believe we should be able to buy grain at prices similar to if not lower than last year. We will remain patient. As always, on this yearend call, I will share a few things we’re watching closely as we start a new fiscal year. I also want to spend a few minutes to discussing market prices which have garnered a lot of interest lately. First, as always, we will keep an eye on the South American crops. As of today, the corn and soy crops in Brazil and the rest of South America are progressing nicely. Second, we will watch the United States planting intentions report next March. Most everyone believes corn acres will decrease in 2017, while soybean acres will increase. And we will closely watch that report. Third, we will of course watch chicken production numbers. We are seeing pullet placements trend higher for two years, but that hasn’t translated into significantly higher exits. Finally, we will focus our efforts on St. Pauls and work to get that new complex opened and running. Market quotes used by Sanderson Farms as a starting point to negotiate prices for fresh chicken products have received a good bit of attention in recent weeks, and I will share our thoughts on the issue. As most of you know, our Company produces both, larger sized birds in our big bird plants and medium sized birds in our tray pack plants. Products produced from these two size birds are typically sold to different types of customers. Most widely products produced at our big bird plants are sold in the form of bulk pack, boneless breast meat, chicken tenders and jumbo wings to food service customers. Leg quarters produced at our big bird plants are primarily sold into the export markets or as fresh whole legs to further processors. Fresh chicken products at our tray pack plants are cut, packaged, pre-priced and shipped primarily to retail grocery store customers. Most of the products sold from our big bird plants are priced using formulas based on price quotes published daily by Urner Barry. UB surveys the market to determine supply and demand dynamics for the types of products sold at our big bird plants, and we price the products accordingly. Not only is pricing of products from our big bird plants very different from the pricing of the products from our tray pack plants, but pricing of individual parts from our big bird plants can be very different. Leg quarter pricing for example is heavily influenced by export demand, while jumbo wings move seasonally stronger during football season. This time last year, the supply and demand dynamics for leg quarters was very poor, while for wings it was very good. I say this to illustrate this point, not only are the supply and demand dynamics of the big bird and tray pack markets often very different, even the supply and demand dynamics for individual parts of the chicken produced at our big bird plants can be and often are very different. Since the 2008 great recession put pressure on consumer traffic and most all food service establishments, demand for products sold for use of food service has experienced swings from dismal to really good. In 2008 for example, demand for boneless breast meat sell through food service was extraordinary weak as consumers lost their jobs, became cautious and began to eat outside of the home much less frequently. Contrast that with demand for fresh chicken and other proteins at grocery stores. As consumers dined out less frequently, they cooked in their homes much more frequently. That trend has continued since 2008. And while demand for chicken purchased at retail grocery stores has increased significantly, the supply of chicken produced for those customers has increased only slightly. We estimate based on various sources that pounds of chicken sold through retail grocery stores during 2016 has been between 25% and 30% higher than in 2007. On the other hand, our Kinston, North Carolina plant opened in 2011 represents the only net increase in production facilities devoted to tray pack customers. Live weights are up around 13%, but with demand up over 25%, the supply of chill pack product has not kept pace. Pricing for retail grocery store chicken has been good and has improved steadily since 2008, and this is consistent with the supply and demand dynamics. We price a portion of our production from our tray pack plants based on formulas that use the Georgia Dock whole bird price as its base. For the past 40 years and until recently, both processors and retail grocers have trusted the Georgia Dock price as a fair and accurate reflection of the dynamics of the retail grocery store market for chicken. Some have written or asked about what they see as a disconnect between the Urner Barry whole bird price and the Georgia Dock whole bird price. The fact of the matter is, we don’t price amounts of chicken at either price. We use these quoted market prices as the base for negotiated formulas, but individual part put in to trays, wrapped, chilled and packaged for our customers are not priced at the Georgia Dock or the Urner Barry whole bird price. Boneless breast in a tray will be priced at the Georgia -- at the whole bird price plus a negotiated spread. Drumsticks might be put into tray and sold at the whole bird price minus a negotiated spread. Whole birds for retail grocery customers are sold not at the Georgia Dock whole bird price, but at that price minus a negotiated spread. When that spread is subtracted, realize prices are actually very close to the Urner Barry whole bird quote. Similarly, we don’t price amounts of product off the Urner Barry whole bird quote. The only Urner Barry quotes I pay attention to are the separate daily quotes for jumbo boneless, tenders and wings. The Urner Barry whole bird price is not relevant to our business and any comparison of the Urner Barry and Georgia Dock whole bird price is as far as our business is concerned, like comparing apples and grapefruit. Those of you who follow the chicken markets closely, know that since 2008, the Urner Barry boneless breast quote has ranged from the low of a $1.06 per pound to high of $2.14 per pound. The low points came in 2008 and again in 2011 and 2015 when demand for fresh chicken from food service customers was very low. We are at that low point again today as food service demand now and for most of 2016 has been flat at best. The highest came in 2013 and 2014 when because of record beef prices, many food service customers abandoned beef products in favor of more profitable chicken items. On the other hand, the Georgia Dock price moved pretty steady upwards from 2008 to its record high in 2015 as consumers demanded more protein from retail grocery stores. This demand surged after the great recession in 2008 and grew even stronger in 2013 and 2014 in the face of record high beef and pork prices. While the price is down from its record high in 2015, the move upwards is understandable as demand has increased consistently each year since 2008. Some have asked what would happen if the Georgia price quote went away or underwent significant changes, the answer is nothing. If changes or recent adverse publicity on how that price is set cause either our customers or us to lose confidence in that pricing index, then either or both parties will look for another benchmark. If another benchmark is used however, the formulas negotiated and used to derive the ultimate wholesale price for individual parts will also change. Like now, formulas will be negotiated based on a customer’s mix, location, volume and needs. I am confident new formulas will allow us to sell and our customers to buy chicken at prices that reflect supply and demand. Finally, while whatever price benchmarks used to price retailer grocery tray products are important to our business, it is important to remember that our negotiations with customers ultimately determine the price. And we are confident our price is fairly and accurately reflects supply and demand dynamics. Indeed while we use both Urner Barry and the Georgia Dock price as the base for pricing, different chill pack customers, the end results in terms of net sales price is very, very close. We have four plants devoted to tray pack production, all with the capacity to process 1,250,000 head per week. Applying our historical yields to our target live weights would produce 7.4 million processed pounds per week or approximately 38% of our mix in processed pounds. Of course, not all of that production ends up in a tray, destined for grocery stores. Almost half of those pounds, 18% of our total mix are backs, necks, gills and products that don’t make it into a tray. In addition, not everything that ends up in a tray is priced using a Georgia Dock based formula. We have one customer using a different benchmark, altogether for tray pack production and one using a combination of Georgia Dock and Urner Barry based formulas. All of our customers for tray pack products buy a large portion of their needs on contractually negotiated flat price ad business. Indeed for some customers, most of what they buy as flat price are negotiated ad business. During the week of Thanksgiving, when our customers are focused on different proteins, tray pack product is often sold on to the spot market at negotiated prices. When you subtract all of these pounds from the 38%, 10.15% of our mix has been priced using formulas that used the Georgia Dock whole bird price as the base during 2016. 3.3% of our mix are chill pack products sold on Urner Barry based formulas. Approximately 6.5% of our chill pack is based flat price at negotiated prices or some combination of these programs. Let me mention one other thing about the Georgia Dock and then we will answer any additional questions you may have in just a movement. Both suppliers and buyers have demonstrated significant confidence in the Georgia Dock over the years, but I can totally understand while some may have lost confidence in that benchmark, while today we have no indications at yet. Should it occur, we will simply find a new benchmark to use and beginning negotiation with our customers. That said, I should also mention that based on our conversations with representatives at the Georgia Department of Agriculture, we believe they are going about their review of their service in the right way. We understand from our communications with them that they understand to take their time developing a new formula. They will seek input from every constituency group that is impacted by the benchmark, including end users and that they will periodically review and revise their formula as appropriate. We understand their process is going to be transparent and they will invite buyers, sellers, regulators and any other interested party to comment; we agreed as what they should do. Our balance sheet is strong. We are debt free, and the Company is in a position to continue our growth strategy. The new complex in St. Pauls demonstrates our optimism and confidence in the long-term success of Sanderson Farms and our industry. The new complex will add value for our investors, opportunities for our employees, and high-quality products for new customers. We are committed to continuing to grow our Company beyond St. Pauls as well to add more value for our shareholders and new opportunities for our employees, and I’m ready to do that. No matter the market conditions, we will continue to focus on those things we can control and manage the others. With that, we will now take your questions.

[Operator:]

Thank you. [Operator Instructions] And we’ll take our first question from Ken Goldman with JP Morgan. Please go ahead.

[Tom Palmer:]

Good morning. It’s Tom Palmer on for Ken. How are you?

[Joe Sanderson:]

Good morning.

[Tom Palmer:]

Just first, I had a follow-up on the Georgia Dock pricing discussion. It sounds like customers have not been switching to new pricing models at this point. So, first, is that correct; did I hear that right? And then, second, it has been a couple of weeks without a published price, what are they using as the reference price in that interim period?

[Joe Sanderson:]

We’re using the last published price, and we have not had anybody switch as of yet. We’ve had -- of course we’ve had five or six calls from customers, but nothing has happened yet. Either -- this is -- I would expect something that change in the future; that can’t go an unpublished price forever though. We understand -- Mike talked with a lawyer representing Department of Agriculture, yesterday, and they are working on their new system as rapidly as they can, but they’re not going to be hasty. But nothing has changed. We’re using the last published quote.

[Tom Palmer:]

Okay. Thanks. And follow-up on the marketing, it sounds like it’s going to have another step up in the coming year. I realize some of that is that the marketing spend started in the second quarter. But it seemed like on a run-rate basis, it also was coming up a bit. Could you talk about where you’re seeing increased investment on that side and how the campaign is progressing?

[Joe Sanderson:]

We just don’t annualize it. It’s not really a step up, it’s we didn’t really go on television until July. And we will be on television starting -- we’re doing our Christmas commercials now, which is totally different. We will actually start in January. And it would just be -- same rate as we had starting in July last year, but we will start in January of this year. And we feel very good about the campaign.

[Operator:]

And we’ll take our next question from Ken Zaslow with BMO Capital Markets. Please go ahead.

[Ken Zaslow:]

Just a question, Joe, when you were talking about the outlook, obviously you guys gave a lot of details of all the cost structure. If these commodity costs are kind of flattish to maybe downish and then the chicken price is somewhat soft, so are you kind of thinking that the margin structure should be within the range of what we’re seeing in 2017? Is that -- 2016 kind of parlaying into 2017? Is there any major shift in the margin structure that you’re seeing today that would change the general relationship of what you’ve earned over the last year?

[Joe Sanderson:]

We kind of think 2017 is going to be similar to 2016. With these carry outs on beans and corn, obviously farmers are hanging on to it right now, but we believe they’re going to have to turn loose of it after the first of the year to fund their -- take care of their debt and all sort of fund they’re planning for the spring time. So we think we will have an opportunity to make a buy first 90 days of the calendar year of 2017. And if we get to ramp up, we think we’re going to get in St. Pauls -- we think our margin structure will be pretty good for 2017.

[Ken Zaslow:]

And just a follow-up, it is early with the election and it seems like there is a potential that the economy may be able to rebound. Can you talk about if food service -- we’ve been I thought 8 year, but I might off by a couple of years, but I don’t remember the last time food service demand was actually good.

[Joe Sanderson:]

2007. It’s been that long since we’ve had good food -- that’s ahead of us. That’s something that we’re looking forward to with these two new big bird deboning plants instead of selling boneless breasts. What we averaged this year, $1.23? We want to average $1.43 for the year instead of $1.23 for the year. And if food service -- if the economy gets back and food service gets back, then you get to average $1.43 instead of $1.23 for boneless, and we are doing -- how many pounds of boneless, 12 million?

[Lampkin Butts:]

12 million a week.

[Joe Sanderson:]

And go up with St. Pauls and $0.20 pound on that really works nicely for us.

[Ken Zaslow:]

So, just to make sure I understand it, what type of change in food service would dictate that type of change in breast prices? I’m not asking exactly; I’m sure you don’t have exactly but how do you think about it? Would you need food service to sell 1% or 2% and that will get you there…

[Joe Sanderson:]

I think you need 3% GDP for that to happen; you need wages to grow; you need underemployment to improve; you need labor participation rates to go up; you need all of those things. And we haven’t had that since 2007. And surely the good news of President Trump, Republican, that’s going to be the priority for them. I mean, that’s not going to happen in January and it might not happen by June, but you can get that trajectory going and get that started in 2017 and realize it in 2018. That’s what you’re -- that’s the whole they do. I mean that’s what middle America is looking for; that’s what people in Pennsylvania and Wisconsin and Michigan; that’s what the whole deal is about.

[Operator:]

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

[Farha Aslam:]

So, just building on the Ken’s question regarding your outlook for next year, Joe, you highlighted that you expect costs to be pretty similar. What about kind of earnings and pricing, because your first quarter in 2016 was pretty weak? How are we starting out this year, and kind of your outlook for earnings for 2017?

[Joe Sanderson:]

That’s your job, Farha, that’s not mine.

[Farha Aslam:]

Okay.

[Joe Sanderson:]

I’ll tell you though a little bit. Last year, we were selling leg quarters at $0.13, $0.14, $0.15 pound and leg quarters today are $0.23, $0.24 per pound and in January leg quarters are up. We are selling leg quarters for January -- they are going to be $26, $26.5 pound, they are better. So, leg quarters are almost double what we were selling for them. We do 14 million pounds leg quarters a week. So, leg quarters are double the price and they are going to be improved in January over December. So, wings are higher than a year ago and tenders are higher than a year ago and breast meat is the same. I don’t know how Georgia Dock is compared to a year ago. It’s a little bit lower but tray pack is still pretty good. And I don’t have a grain cost compared to a year ago. That’s same. And so, compared to a year ago, we are in a better place than we were a year ago.

[Farha Aslam:]

Okay. So, you’re going to start the year off on a pretty strong footing. Do you have any sort of targets that you’re looking for in terms of EPS for 2017?

[Joe Sanderson:]

We always -- target on what?

[Mike Cockrell:]

Earnings per share.

[Lampkin Butts:]

Earnings per share.

[Joe Sanderson:]

We always shoot for -- we have to do 20% return on equity.

[Mike Cockrell:]

Farha, if you had -- we ended the year with $1.2 billion in equity. And if you just do the algebra to get to a 20% return on that, that’s the $11.51 per share.

[Joe Sanderson:]

That’s if we don’t get that, we don’t get a bonus.

[Mike Cockrell:]

That’s typically what the Board looks at in January when they set those bonus targets, and can’t get out ahead of them, but if they do, what they typically do, a 20% return on average equity is about $11.5.

[Farha Aslam:]

That’s a big number. And then, my final question has to go back to the Georgia Dock question. Your retail pricing and Georgia Dock, if the Georgia Dock is reset to a new level when that new Georgia Dock quote comes out, does all your retail gets re-priced? Is there a fundamental difference in profitability in your retail business when that new Georgia Dock comes out?

[Joe Sanderson:]

What we would do is -- if this happens like I think it’s going to happen, if the new George Dock -- if they include further processors, retailers, distributors and the new Georgia Dock comes out, and if they -- we have never quoted them a price, they never ask us for a price. If we are included and other processors are included, we don’t know where they get their pricing information. But if this whole thing gets redone, and the Georgia Dock is lower, just say it’s lower by $0.10 a pound and instead of being -- what is it now? 109 or say comes out 99, then, we will go to our customers and we will renegotiate their spreads. We will -- if they don’t want to be on the Georgia Dock, we will go on Urner Barry or we will do something. But, what our customers are going to pay for chicken is going to be the same thing. But we will have -- they have to pay the same thing. And the difference between the Georgia Dock and Urner Barry for example, spreads are higher on Urner Barry. And if you will think about the Urner Barry, our customers on Urner Barry pays lower prices in the winter and higher prices in the spring and summer, because of seasonality of the Urner Barry prices. On the Urner Barry breast and drums and thighs are higher in the spring and summer, lower in the winter. And their wing prices are higher in the fall and during football season through March Madness and lower in the summer. So the Urner Barry pricing is just backwards of the Georgia Dock. Georgia Dock is higher in the spring and it doesn’t -- Georgia Dock is steadier, doesn’t fluctuate as much as Urner Barry. But regardless of what you are on, you still won’t get same money for your ticket. The margins are just going to be higher.

[Farha Aslam:]

That’s helpful. And one last one. Could you provide update on the lawsuit, where we stand with that?

[Mike Cockrell:]

Farha, we can’t comment on the lawsuit other than to say we intend to vigorously defend ourselves in court and look forward to the opportunity to do that.

[Joe Sanderson:]

Tell her what the steps are.

[Mike Cockrell:]

Yes. I mean, right now, the schedule of course is public and the schedule is that after the first of the year, the defendants will have an opportunity to file a motion to dismiss. And I don’t know exactly how long it will take for that to happen. But if you get by -- late spring or early summer get a ruling of that in the court, then the case will proceed depending on the outcome of that. But that’s the next big step.

[Joe Sanderson:]

It’s a five-year process.

[Farha Aslam:]

We’ll watch it for the next five years. Thank you.

[Mike Cockrell:]

Thank you.

[Joe Sanderson:]

Thank you.

[Operator:]

And we’ll take our next question from Michael Piken with Cleveland Research. Please go ahead.

[Michael Piken:]

Hi. I just wanted to dig a little bit more to your feed cost outlook. Do you have any thoughts in terms of where you might be more -- have to take a more aggressive position?

[Joe Sanderson:]

Say -- about where we made jump in?

[Michael Piken:]

Yes. And where you are, how much basis you got locked in since your update in October.

[Joe Sanderson:]

We have -- I can update you on our basis -- in October, I believe, we told you that we had booked our solid basis. Since then, we have booked a lot of corn basis through end of our fiscal year. So, we are ready. We lacked a little bit of corn basis for the fourth quarter, but we’ve got more than half of it booked. I would think with the carryout that we should be able to buy corn $3 to $3.10 at some point. It’s not anywhere near that right now. Meal, last year, we had a good meal, last year in January and February, meal was trading around $275 a ton; it’s not anywhere near that right now. But with this carryout and with the South American crop coming, Brazil is going to start to harvest in any day now. And since that Brazilian crop becomes available, I would think sometime in January it’s going to cut the legs out from under U.S. beans. And I would think we ought to have an opportunity sometime January, February to buy some good meal, all is going to make more meal available to us I think. So, I think in the first calendar quarter, we ought to be able to buy some better values than we see right now.

[Michael Piken:]

Okay. But how about -- the basis that you did walk in, was that at a more favorable level than last year or how do you basically compare…

[Joe Sanderson:]

Meal was a little bit more favorable. Corn was pretty close, the same; it may have been a few cents cheaper, a little bit better, a little bit better but not materially.

[Michael Piken:]

Okay, great. And then, could you also talk a little bit more about kind of your thoughts for industry expansion and just kind of what you’re seeing in terms of expectations for headcount, weights and which category you might see more expansion between big bird and tray pack?

[Mike Cockrell:]

I don’t see anything in tray pack. I do not believe -- and also it’s third year in a row, I’ll tell you my expectations for weights, I’ve been wrong two years, I will be right eventually. I do not see much expansion in live weights for 2017. I was wrong in 2015 and 2016, but do not -- I believe the industry is getting close to the edge, close to the wall on live weights. We don’t see as many of the 10-pound chickens right now in the live weights in Agri Stats, as we saw last year. And we understand that some people are going to reduce some live weights because woody breasts from 9 pounds down to 7.5 pounds; haven’t seen that yet. But we understand that’s going to happen. On headcount, we think maybe 1% and 1.5%. You need to remember that we will make a lap here on these pullet placements; 8%, 9% of these hens out there are for eggs for export. So, I think you’ll just see marginal -- it will be our annualized in our plant in Palestine and then St. Pauls; you’re going to see a very slow ramp at Peco’s plant. And I think that’s going to be the majority of the expansion in the industry.

[Operator:]

And we’ll take our next question from Heather Jones from the Vertical Group. Please go ahead.

[Heather Jones:]

So, I had a question on China. Their breeder situation has become pretty critical and a number of the places that they were sourcing breeders from now have issues with AI. So, I was just wondering if you could give us some sense of what you expect from them regarding becoming -- looking to ban on U.S. exports.

[Lampkin Butts:]

Heather, this is Lampkin. We think -- we’ve been optimistic that we might get China back, which would mean AI ban lifted and I’m not talking about the tariffs, but at least if the ban lifted, so we could ship pullets [ph] back in there. We thought sometime in 2017 we might get there. Having said that, I’ve got to see how Trump gets along with China. But we’ve got some indications in Washington that 2017, it might happen; that was before the election. So that’s really all I know. I do know that this has more to do -- this is political. This is China wanting plans to approve to ship cooked chicken into United States and that is in the work; it is not finalized, but it is in the works. And if that happens, we’re not opposed to that, because if that happens, we believe that would open that market or at least the AI ban.

[Heather Jones:]

Well, also, I mean aren’t they going to -- I mean everything hearing and reading, it sounds the situation is super critical there, so doesn’t it give them a sense of urgency to get this resolved?

[Lampkin Butts:]

It should, and I understand that the local producers are producing enough that prices -- local prices there are improving.

[Heather Jones:]

Okay.

[Lampkin Butts:]

I just don’t have any information about how the government is responding to that. They’ve been more interested in what’s going on in Washington than taking care of the local producers.

[Heather Jones:]

Right. And then, I follow the news out of the USDA about the new GIPSA rules and open it up for a comment period. I know it will just be your take but what is your expectation with the new administration on the GIPSA front?

[Lampkin Butts:]

Well, I don’t know. But I think we’ve been in better shape with the new administration, I think we in better shape to have a favorable ear about those regulations.

[Heather Jones:]

Okay.

[Lampkin Butts:]

I don’t know for sure, but you would think that.

[Heather Jones:]

And my final question is on breast meat. So, Joe, you mentioned, if we can get 3% GDP growth, have food service demand improved, and I think we’re clearly all hopeful that that will happen. If it takes a while longer to happen than people are anticipating, what is your expectation of breast meat pricing for your fiscal 2017 given even though Peco will be a slow ramp, it’s there, with St. Pauls plant and then the full year annualization of Palestine? What could you see breast meat pricing do in 2017?

[Joe Sanderson:]

I think it will be very similar to 2018 -- I mean, 2016 I think it will be very similar. But with the pricing that we had in 2016, you probably going to see some more ads in food service with the values. But I still think there is enough meat out there that you’re going to see pricing very similar to what we saw in 2016; there is plenty of meat. And so, I think pricing will be pretty much the same.

[Heather Jones:]

So, you do think food service, given how cheap pricing has gotten, you do think cheap food service will promote chicken more despite the fact that we have much cheaper beef around?

[Joe Sanderson:]

Yes.

[Operator:]

And we’ll take our next question from Jeremy Scott from CLSA.

[Jeremy Scott:]

Joe, I appreciate all the commentary on Georgia Dock, I think those disclosures are helpful. I want to ask about feed conversion which had another great year; I think it’s down now four of the last five years, looking at this on an annual basis but how much do you attribute that to higher big bird mix, how much do you attribute to internal efficiencies? The point of my question is if you bought all of your feed in fiscal 2017 at the same price as fiscal 2016, what would be the decline in feed cost per pound?

[Joe Sanderson:]

Let me tell you a little bit. There are whole lot of things that go into that. We believe that our breeder -- that breeder improves every year a little bit and that’s some of it. We learned some about growing the bird a little bit better every year. When we go in to Palestine with all new housing, same thing is going to happen with St. Pauls, when you get brand new housing and brand new location, that’s better every year as well. And it’s a whole combination of things that make for better feed conversion. And our nutrition gets a little better every year and just a whole lot of things that make for that. And we would expect 2017 to be a little bit better absent weather, absent some disease problem, which we didn’t have either one of those very much in 2016. So, we would expect a little bit of improvement in feed conversions in 2017 again. And 2 points of feed conversion is worth 30 points off of live cost.

[Jeremy Scott:]

Okay. So, there is a real deflationary trend in feed cost based on better breeder improvement, based on Palestine and the new plants; so, whenever you open up a new plant, there is improvement in feed cost. Does that level off at some point or do you think that trend can continue for next couple years as you open up the St. Pauls?

[Joe Sanderson:]

That does not ever -- I mean that’s been going on for 40 years. Genetics causes that and new and better nutrition causes that and I don’t expect that to quit, I expect that to continue.

[Jeremy Scott:]

Okay. Maybe in the same context there, all other COGS -- I would have to assume you are experiencing higher labor costs and a leveling off of some energy costs, but it seems like you are getting a lot of improvement there from a productivity standpoint. I am assuming it’ll go up next year as you open a new plant, but what’s the runway there for all other COGS?

[Joe Sanderson:]

You had -- as Palestine came on up in production, your overall plant cost got better and better and better and better each quarter. At the end of the year, your total plant cost ended up down for the year compared to 2015, your overall plant cost was down substantially compared to 2015. You also had on the P&L, you also had freight savings and some of that was fuel costs and some of that was some logistical efficiencies that we achieved that we believe we’ll see some more of that in 2017. I don’t that know that we will get that plant cost -- we will see that plant cost continue, because you’ll be -- you’ll probably see that in 2018. You’ll probably do this to reverse as you start up St. Pauls, you might see it in the fourth quarter and then see it in 2018.

[Jeremy Scott:]

I guess just the crux of my question is, is there an annual margin accretion from internal efficiencies that you’ve targeted or you think…

[Joe Sanderson:]

Yes. We’ve targeted -- I can’t remember the amount. I’m not going to announce it, obviously. We target it every year. In 2015, we got two thirds of what we targeted; 2016, we didn’t quite do that well, but we targeted -- we don’t report it, but that’s our internal operation results based on Agri Stats. We look at everything and we target it internally, don’t have anything to do with our bonus or anything, it’s just stuff we go after. And we don’t report it like other people do. It’s our own internal stuff and we review it with all our managers every quarter and I get to say what I think about it.

[Lampkin Butts:]

And we target efficiencies in live production and processing and in sales, it’s across all operations.

[Operator:]

And we will take our next question from Adam Samuelson from Goldman Sachs.

[Brooke Roach:]

Good morning. This is Brooke Roach on for Adam. Thanks for taking the question.

[Joe Sanderson:]

You bet. Thank you.

[Brooke Roach:]

I was wondering, given the relatively healthy margins that we’ve seen in the U.S. poultry industry, particular in your industry in recent quarters, are you surprised there haven’t been more announcements of plans to build new processing capacity?

[Joe Sanderson:]

I’m not -- the larger players -- in 2011, there were assets for sale and only people that bought them were people from overseas primarily. Wayne did buy a plant from Perdue in Alabama, I believe. But main buyers were from Mexico and South Korea, and Tyson has a strategy of buy rather than build and I think -- and maybe diversifying to some other products besides chicken. And it really -- to build a complex, it’s $150 million to $160 million. And I think that shrinks the number of people that can do it to just a few people that can go out there and do that. And so, I am not -- based on the strategy that the people that have the ability to do it based on their strategy, it does not surprise me that we are the ones that are primarily building new complexes.

[Brooke Roach:]

And as one follow-up question, last year, you experienced relatively benign winter weather environments and had higher yields than you were probably expecting in your outlook for pounds processed in 1H 2016. Are you assuming a return to the more typical colder weather conditions in your pounds processed outlook for early 2017?

[Mike Cockrell:]

Yes. We modeled a very similar conversion in weights for Q1.

[Lampkin Butts:]

If we get severe weather really anytime during the year that will absolutely impact those numbers. But we modeled similar weights to last year.

[Operator:]

And we’ll take our next question from Francesco Pellegrino with Sidoti & Company. Please go ahead.

[Francesco Pellegrino:]

Mike, you started off with guidance and you raised 2017 pound processed guidance by 3.7%, which is a pretty big number, just I don’t know how you were able to increase the number, because just two months ago at the investor day we were looking for about 4.03 billion pounds and now we’re getting guidance for 4.18 billion. Greater efficiencies, is it just getting St. Pauls ramped up sooner in the year as compared to later? And then maybe just where the 2018 number would be?

[Mike Cockrell:]

Yes. St. Pauls is going to come on a little faster than our earlier guidance, that’s part of it and we hope to get it done in a year now, Lampkin?

[Lampkin Butts:]

12 months.

[Mike Cockrell:]

Yes, 12 months to put that in perspective in Palestine to...

[Lampkin Butts:]

16 months.

[Mike Cockrell:]

Yes, 16 months, 18 months. So that’s part of it. We trued up some live weights and increased live weights a little bit, not a lot; most of it is the other. As you know, I’ve never been very good at projecting pounds processed, and I’ve missed it, I take that’s me.

[Francesco Pellegrino:]

You have been conservative.

[Mike Cockrell:]

Right.

[Francesco Pellegrino:]

Okay. Then, just shifting gears for a bit, when I think about -- and Joe, at that Investor Day -- and you guys always do a great job just rolling out some really great industry experts, you had discussed a little bit your retail pricing formula and how you thought over the course of 2016 it would really be a wash. You did some significant discounting in the first half of 2016 and we saw things improving, at least in the second half. And at least how I track your discount on the retail side which I know you don’t give a lot of transparency into, I am backing into a number that sort of seems as if your discount per pound compared to some blend or some proportional blend between Georgia Dock and Urner Barry was relatively high and higher than the third quarter. So, just a little bit of color about where pricing was a dynamic thing that might have changed over the past two months?

[Joe Sanderson:]

It wouldn’t be unusual for that discount to be larger in the fourth quarter, just because of Thanksgiving.

[Francesco Pellegrino:]

Right, the seasonality, but you had a convergence of Urner Barry and Georgia Dock coming together. And I thought when the two indexes converge, you actually decrease your discount.

[Joe Sanderson:]

We have very little product based off Urner Barry, 3% of…

[Lampkin Butts:]

Of the tray pack, a lot from the big bird deboning plants…

[Francesco Pellegrino:]

Okay. So, it’s more weighted towards the -- whether it is 1% sequential decrease in Georgia Dock with a 4% decrease year-over-year in Georgia Dock that really contributed to I guess more significant…

[Joe Sanderson:]

The Georgia Dock -- you’re talking about the big change and was the decline in boneless breast prices from September to October. If you’re looking to pricing -- and that was a biggest factor. It didn’t have anything to do with tray pack. So, our tray pack product has been fairly stable. We had some excess product in our tray pack plants around Thanksgiving, the week before Thanksgiving, two weeks before Thanksgiving. But that’s normal, that didn’t -- that wasn’t any different in 2015, 2016, 2014. The big deal affecting our pricing was decline in boneless breast meat after September. Nothing else declined appreciably. Tenders declined a little bit, leg quarters went down a penny, but the big decline was in boneless breast meat. It went from $1.40 something in August to $1.06 by the end of October. That was only significant price change of any product we had, one in tray pack.

[Francesco Pellegrino:]

And I guess when I just start thinking about the export markets, I know Heather brought up China. What is the industry sentiment about Russia going forward? And when I look at where export numbers were in 2014 or for the full year in 2013, it is a pretty sizable export market that the industry currently is not selling into. And just what type of impact could that have on domestic production in regards to if that channel were to open up?

[Lampkin Butts:]

We don’t have any reason to think Russia is going to open.

[Joe Sanderson:]

Because of Crimea, all the sanctions U.S. -- when Russia invaded Crimea, all of your -- Canada and the U.S., over a period of time put all kind of sanctions on Russia. Russia immediately shut down. They wanted to do that to protect their local industry. All of those sanctions are going to have to be lifted…

[Lampkin Butts:]

They’ve extended for another year.

[Joe Sanderson:]

Yes. And we were -- what was our tonnage to Russia?

[Lampkin Butts:]

250,000 metric tons a year when they close.

[Joe Sanderson:]

Yes, when they close. They’ve gone from 900,000 metric tons down to 250,000 metric tons. It was a small market by that time and all of that has to be unwound and relation restored, and I just don’t see that anywhere near in the cards for Russia. They have built up with huge industry that they are now and they are exporting product out of Russia. I guess, it’s whole birds; their product is very expansive and the industry was subsidized to be built. But they don’t like American protein coming in there, I can tell you that. But it’s a long way from being a market for us.

[Francesco Pellegrino:]

Okay, I appreciate that clarification and that’s it from me. Thanks again, guys.

[Joe Sanderson:]

Thank you very much.

[Operator:]

And we’ll take our next question from Eric Gottlieb with DA Davidson.

[Eric Gottlieb:]

A lot of my questions are answered, but I just have a few clarifications. So, your assumptions of earnings being on par next year and then the contrast to that with the weak first quarter, does this mean as a run rate beyond that first quarter or factoring that in meaning we will be probably less than the last three quarters?

[Mike Cockrell:]

We gave our sentiments for the first quarter, not the year; we’re certainly not guiding anybody anywhere. But that said in response to Farha’s question, we said if you get grain cost equal to or little below 2016 and chicken markets are about the same, yes, you end up with the same runway. Of course, as you just observed, if you get out of the gate quicker which we have in our first quarter, we could give a little a way to the market when we get to next summer and still get to the same point. But we don’t know what chicken prices are going to be next summer.

[Eric Gottlieb:]

Okay, thanks.

[Mike Cockrell:]

Absolutely.

[Eric Gottlieb:]

Switching gears a little bit, now, customers that may or may not renegotiate when the Georgia Dock goes away or changes or whenever that happens, would the formula stay for as long as they normally do? Are pricing of contracts going to become a little bit shorter or do you expect them to?

[Joe Sanderson:]

Not necessarily shorter. I think what you’re describing will be worked out one customer event, and supply and demand will set the price.

[Eric Gottlieb:]

Fair enough. And then, I won’t hold you to this, but when do you actually think the Georgia Dock comes back?

[Mike Cockrell:]

I don’t know. I spoke with some of their representatives yesterday and they said, I could certainly talk about this today, but they are waiting on companies to get sufficient data to them to start resetting it. And that’s obviously beyond their control. They ask for affirmation from companies and we provided that but apparently some companies have not and they are waiting on that. They didn’t indicate the time.

[Eric Gottlieb:]

Okay. And my last question is, not specific for you; I have been asking this to pretty much every company. Have you factored in or have you expected -- have you modeled in expectations of higher minimum wages going forward or you’ll cross that bridge when it comes to it? And then contrast that with expectations of lower corporate taxes.

[Mike Cockrell:]

No to the taxes; our wages are significantly higher than minimum wage everywhere we operate very significantly. So we have not.

[Joe Sanderson:]

Our starting wage is $11.85 an hour.

[Mike Cockrell:]

So, we haven’t made any assumptions here.

[Lampkin Butts:]

Way above minimum wage -- more than $4 above minimum wage.

[Operator:]

And there are no further phone questions at this time.

[Joe Sanderson:]

Good. Thank you all for spending time with us this morning. And on behalf of everyone at Sanderson Farms, we wish you all a merry Christmas and a happy and prosperous New Year.

[Operator:]

Ladies and gentlemen that does conclude today’s conference. Thank you for your participation. You may now disconnect.