Sanderson Farms, Inc.
Q4 2013 Earnings Call Transcript

Published: 17 Dec 2013

[Operator:]

Good day, everyone, and welcome to the Sanderson Farms Incorporated Fourth Quarter Fiscal 2013 Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn things over to Mr. Joe Sanderson. Please go ahead, sir.

[Joe F. Sanderson:]

Thank you. Good morning, and welcome to Sanderson Farms' fourth quarter and year end conference call. This morning, we reported net income of $45.3 million or $1.97 per share for our fourth fiscal quarter of 2013. During the fourth quarter last year, we made $9.3 million or $0.41 per share. For the year ended October 31, 2013, we reported net income of $130.6 million or $5.68 per share. For fiscal 2012, we reported net income of $53.9 million or $2.35 per share. If you did not receive a copy of the release or 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.

[D. Michael Cockrell:]

Thank you, Joe, and good morning, everyone. This morning's call will contain forward-looking statements about the business, financial condition and prospects of the company. Examples of forward-looking statements include statements about future production levels, grain costs, poultry prices and economic conditions. 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 press release and also on our annual report on Form 10-K for the year ended October 31, 2013, and that report 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, which could change quickly based on the many external factors that affect our business. We undertake no obligation to update or to revise those forward-looking statements.

[Joe F. Sanderson:]

Thank you, Mike. Fiscal 2013 was a good year for Sanderson Farms. Overall, poultry markets were much improved for the year compared to 2012, although grain costs in flocks sold were up substantially for the full fiscal year compared to last year. Our net sales for the full year of $2.683 billion, a 12.4% increase over fiscal 2012, were another record for Sanderson Farms. Both our live production division and our processing plants ran well during the year, especially after we returned to full production in June. Also, we continued to mature our sales at the Kinston, North Carolina plant and other plants during the first half of the fiscal year. Our 2013 financial results allowed us to continue to strengthen our balance sheet and put us in a position to begin construction of our new complex in Palestine, Texas. We reduced long-term debt by approximately $121 million during the year. Our debt-to-cap ratio of 5.6% has our balance sheet in position to resume our growth strategy. While we have room to improve our performance, I am grateful for the efforts of our growers and employees during this past fiscal year and look forward to working with them to capture the opportunities available to us during the coming 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 grain and answer your questions.

[Lampkin Butts:]

Thank you, Joe, and good morning. Overall, market conditions improved during the year, but certainly softened during our fourth quarter compared to the feats achieved this past spring and summer. The average Georgia Dock price during our fourth was approximately 10.9% higher than last year's fourth quarter, averaging $1.06 per pound for the quarter. For the year, the Georgia Dock averaged $1.03 per pound, which represented a 10.4% increase over the $0.93 per pound average during fiscal 2012. The Georgia Dock price is currently $1.0425 per pound. As many of you know, the Georgia Dock price is a good indicator of supply and demand dynamics for products sold to retail grocery stores. The balance of supply and retail grocery demand has held relatively steady through most of the last 4 years. Bulk leg quarter prices were approximately 1.4% lower during the quarter compared to last year's fourth quarter, but for the full year were essentially flat with last year, decreasing 0.5% during fiscal 2013 compared to 2012. Urner Barry market prices for leg quarters averaged $0.482 per pound during the fourth quarter, $0.497 per pound for the year, and the current Urner Barry quote for bulk leg quarters is $0.41 per pound. Despite falling off slightly this fall, export demand remained relatively strong during fiscal '13, and the volume of poultry exports for calendar 2013 were up 1% through October compared to 2012, and the value was up 2.3%. The market for boneless breast meat started the year relatively soft before moving above $2 per pound in May for the first time since 2004. Prices during our fourth quarter were higher by 8.4% when compared to the fourth quarter a year ago, but were sharply lower than the peak last May. The quoted market price for boneless averaged $1.57 per pound during the fourth quarter and $1.62 per pound for the fiscal year. The Urner Barry market price for boneless breast is currently $1.33 per pound. Softness in the boneless breast market continues to reflect stubborn weakness in the market for protein consumed away from home and higher chicken production numbers this fall. While foot traffic through food service establishment remains challenged by macroeconomic conditions, the spike in boneless breast in May was triggered by menu shifts featuring chicken products at QSR and casual dining. Jumbo wing prices during our fourth quarter averaged $1.43 per pound, down 16.5% from the average of $1.71 per pound during last year's fourth quarter. For the year, jumbo wing prices were lower by 5.1% from an average of $1.58 per pound during fiscal 2012, to an average of $1.50 per pound during 2013. The current Urner Barry quote for jumbo wings is $1 per pound, and wing prices reflect a counter-seasonal drop in prices this fall. When you roll all of this together, our average sales price for poultry products during the full fiscal year was higher by $0.075 per pound compared to last year, increasing 9.64% for the year ended October 31, 2013, when compared to the year ended October 31, 2012. This increase of $0.075 per pound in our average sales price for chicken offset a $0.022 per pound increase in our feed costs and broilers processed, contributed to improved operating margins in our chicken business this fiscal year compared to last year. Our cash cost for corn delivered to our feed mills during this year's fourth quarter were lower than last year's fourth quarter, decreasing 32.8%, while the costs for delivered soybean meal decreased 1.6% during our fourth quarter compared to last year. For the year, we paid $72.2 million more for feed grains when compared to 2012. Remember that there is a lag in the time it takes for the cost of grain delivered to our mills to show up in our cost of goods sold because we recognize the cost of grain when we process the chickens that eat that grain. Our feed cost per pound in broiler flocks processed were lower by $0.042 or 9.7% during this year's fourth quarter compared to a year ago. For the year, feed cost in broilers processed were higher by $0.022 per pound or 5.7%. We competed well in the industry during 2013 in terms of operating efficiencies. That said, we have room for improvement as always and we will work hard this year to improve all of our operations and our sales execution. Like Joe, I'm grateful for everyone associated with Sanderson Farms, our employees, growers, customers and vendors, and look forward to the new year. At this point, I'll turn the call over to Mike for a discussion of the quarter's financial results.

[D. Michael Cockrell:]

Thank you, Lampkin, and good morning, again. Our financial performance during the fourth fiscal quarter of the year reflects the improved environment described by Joe and Lampkin. Our net sales for the quarter of $727.1 million was up from $648.4 million for the same quarter last year. The increase in net sales for the quarter reflects a 7.5% increase in our average sales price for poultry products compared to last year, and an increase in poultry pounds sold of 4.2%. Our cost of sales of poultry products for the quarter ended October 31 increased 1.4% when compared to the same quarter last year. This increase is a result of 4.2% more poultry pounds sold, offset by a 9.7% decrease in the cost of feed in broilers processed during the quarter. For the fiscal year, our net sales totaled $2.683 billion, and that's up 12.4% from the $2.386 billion during 2012. Cost of sales for the year increased 7.4% compared to last year, and totaled $2.377 billion. Our average sales price for poultry products sold during the year was up 9.6% compared to fiscal 2012. And our average cost per pound in our poultry business increased $0.033 or 4.6% compared to last year, reflecting those higher grain costs Joe described. For the year, feed cost comprised 54.2% of cost of goods sold, and that compares to 53.6% during fiscal 2012. In our prepared food business, we sold 2.3 million more pounds, a 4.9% increase, and we realized $0.073 per pound more and that was a 3.8% increase. During this year's fourth fiscal quarter, we processed 824 million pounds of dressed poultry and we sold 822 million pounds. We processed 3.041 billion pounds for the year and sold 3.031 billion pounds. For those of you modeling fiscal 2014, we currently expect to process 3.13 billion pounds of chicken during fiscal 2014 and that would represent a 2.5% increase in pounds processed compared to this year -- or compared to 2013. If we run our plants as we expect to, those pounds would be processed as follows

[Joe F. Sanderson:]

Thank you, Mike. Our feed grain costs during fiscal 2013 were significantly higher than during fiscal 2012, but moved lower during our fourth fiscal quarter. While grain market prices have come down from the highs, market prices for both corn and soybean meal remain above historical averages. If we had locked in prices for all of our current needs for fiscal 2014, including what we have already priced, at current values, that is if using the Chicago Board of Trade contract prices for current and future needs as it closed last night, our cost for grain during fiscal 2014 would be $194 million lower than during fiscal 2013. While that estimate is based on yesterday's cash market price for grain, I caution anyone building a model that prices have been volatile and I expect that volatility to continue. We have priced our corn and meal needs through December and no further. When final harvest numbers are known and reported in USDA's January report, the trade will know what the supply side of both corn and bean balance sheets will look like going forward. We should also benefit from lower basis paid per bushel of corn purchased during fiscal 2014. Basis was extraordinarily high during 2013 as a result of the tight carryout of both corn and beans. I agree with Lampkin that market conditions, while improved this year as a result of menu changes, continue to reflect weakness in consumer spending and lower consumption of protein away from home. I also continue to believe we will see meaningful demand improvement for chicken at food service, when Americans begin getting their jobs back in large numbers and gain some confidence that macroeconomic conditions are improving and that Washington is making progress on the fiscal and debt issues facing the country. I will share 5 things we're watching closely as we start the new fiscal year. First, the next event that will impact grain fundamentals is the quality and quantity of the South American crops. So we're keeping one eye on South America. As of today, the corn and soy crops in Brazil and the rest of South America are progressing nicely. Second, we have an eye on Washington and the political debate regarding the country's fiscal health. The significant negative impact the contentious debate regarding the debt ceiling had on American consumers in August of 2011 was repeated in October of 2013. And we are hoping -- hopeful recent progress in Washington means it will not be repeated. We are also hopeful that a successful resolution of the current debt and budget debate might actually spur some optimism and relief among consumers to open their pocketbooks a little more. Third, we will be carefully watching the Planting Intentions report in March. American farmers have every incentive to once again plant corn and soybeans on every available acre, and we anticipate they will. Fourth, we will, of course, watch chicken production numbers. We continue to believe that while depleted breeder flocks will remain a constraint to significantly higher production numbers, it is possible the industry could produce 2.5% to 3.5% more chicken during 2014. Although healthy, more optimistic and fully employed American consumers could easily absorb that increase, we won't know the impact higher production numbers will have on chicken markets until we get there. We know chicken will be competing once again during 2014 with high-priced beef. But the extent food service customers will feature chicken over beef, and the extent to which consumers filling their grocery carts will switch from high-priced beef to lower-cost options is simply unknowable today. While today's grain market suggests we will enjoy significantly lower costs during fiscal 2014, whether and to what extent we give some of those lower costs back to the chicken markets is a question we will have to wait to answer. Finally, we will focus our efforts on Palestine and work to get that new complex built and ready to begin operation. Construction is under way at the feed mill, hatchery and processing plant, and we are signing up growers. I remain optimistic for the long term. Our balance sheet is strong, we have significantly reduced our debt, and the company is in a position to continue our growth strategy. The new complex in Palestine demonstrates our optimism and our confidence in the long-term success of Sanderson Farms. The new complex will add value for our investors, opportunities for our employees and high-quality products for new customers. We are committed to continue to grow our company beyond Palestine as well, to add value for our shareholders and opportunities for our employees, and I am ready to do that. No matter the market conditions, we will continue to focus on those things we can control and manage the others as best we can. With that, we will now take your questions.

[Operator:]

[Operator Instructions] Today, we'll hear first from Farha Aslam with Stephens Inc.

[Farha Aslam:]

Joe, I know that long-term visibility in chicken is hard to achieve, but perhaps we could talk just short term. Looking at your October quarter versus what you're seeing here in the January quarter, could you just contrast what you're seeing in your retail trade pack plants versus what you're seeing in your big bird deboning plants?

[Joe F. Sanderson:]

Sure. Retail is very good right now. The Georgia Dock at $1.0425 is very strong. Margins are good there. Big bird deboning was boneless at -- where is boneless?

[Lampkin Butts:]

$1.33.

[Joe F. Sanderson:]

$1.33 quote and leg quarters at $0.41 and wings at $1.

[Lampkin Butts:]

$1.

[Joe F. Sanderson:]

Margins are compressed there, and the returns are much better in trade pack than they are in big bird deboning.

[Farha Aslam:]

And as we look forward into the spring, how are you thinking that retailers and food service operators will feature chicken versus beef and pork? And how do you think that will balance with the production that you anticipate?

[Joe F. Sanderson:]

We believe that the week past Christmas, we're going to see a lot of activity. We think we'll get an increase in boneless breast on Urner Barry. We certainly think that we're going -- we know we're going to have a lot of activity at retail with boneless breast as well and even -- we believe we'll have similar activity to what we had in 2013 chicken versus high-priced beef. We do not have the -- because we are not in the fast food market, we do not have the intelligence that other processors have regarding features in quick serve. But we have had some telephone calls from other people that supply quick serve asking us for boneless breast -- bulk boneless breast. So we believe there is going to be some features out there similar to what we had last May.

[Farha Aslam:]

Perfect. And my last question is regarding basis. How much do you think additional basis cost you in the fiscal 2013 year? And what kind of relief should we expect in 2014 for you on the basis number?

[Joe F. Sanderson:]

That is -- I'm going to let like Mike -- Mike...

[D. Michael Cockrell:]

Yes. Corn basis in fiscal 2013 versus '12 -- give me a minute, Farha.

[Joe F. Sanderson:]

You have '12?

[D. Michael Cockrell:]

I have '13 versus '14.

[Lampkin Butts:]

That's what it was in '13.

[Joe F. Sanderson:]

You don't have '12?

[D. Michael Cockrell:]

Yes, I don't have '12 to compare to.

[Joe F. Sanderson:]

Can you compare '13 and '14? We don't know the back half of the...

[D. Michael Cockrell:]

Yes, we don't know the back half of '14, but we're looking at $13 million lower in '14 based on what we estimate basis to be today versus '13, and soy basis down about $4 million.

[Farha Aslam:]

So can we tack on that basis number to that $194 million decline that we talked about regarding grain, or does that $194 million include that basis benefit?

[Joe F. Sanderson:]

It includes that basis benefit. Keep in mind, it could be larger or smaller. We booked -- Farha, we booked corn basis through March and a little bit through May. And we have booked soy -- how far have we gone on soy?

[D. Michael Cockrell:]

On basis?

[Joe F. Sanderson:]

Basis.

[D. Michael Cockrell:]

Yes, I'm not showing that.

[Joe F. Sanderson:]

March. We booked -- it's through March. We booked soy for 6 months, October through March.

[Operator:]

Next, we'll hear from Adam Samuelson with Goldman Sachs.

[Adam Samuelson:]

I think, first, on the supply fixture, Joe, maybe can you comment on the conversations you're having with your primary breeders and how the grandparent flock's evolving? And really, when you think you can actually see, if at all, that bigger inflection in pullet placements to really meet kind of what are very healthy industry margins at this point?

[Joe F. Sanderson:]

Our suppliers say we will not have any additional breeders until -- earliest would be May. They could put some -- we don't need any additional breeders. But the earliest he would have any available would be May. And he thought that was true of the other -- April, May would be the earliest they could go down and then they would have to mature for 26 weeks. And then they'd lay an egg and -- I mean, big numbers are not going to come until January 2015 is my judgment.

[Adam Samuelson:]

Okay. That's helpful. And then maybe on the market, first, maybe just talk about -- I mean, we...

[Joe F. Sanderson:]

I'm talking about -- I'm not talking about pullets. I'm talking about eggs and baby chicks. I mean, pullets are not -- pullets will be available, I believe, in April, May, June range.

[Adam Samuelson:]

Great. Maybe switching gears on the market, can you talk about -- you alluded to some counter-seasonal declines in wing prices? I mean, typically, the fall would be the bigger kind of wing period as you get into football season, yet you had a pretty sharp decline in wing prices over the last couple of months. Maybe talk about kind of what you're seeing in that market, and kind of -- with where the cold storage stocks are today, how that kind of will play out as you move into the new year?

[Lampkin Butts:]

Adam, this is Lampkin. Our wing prices have been soft this whole football season and declined, and leg quarters have, too, frankly. And both those cold storage numbers are up. We think that the wing, and probably the leg -- the wing thing is related to some more chickens this fall at heavier weights, which translates into more supply. And at the same time, when you compare this quarter to last quarter, this time last year, McDonald's was putting wings into cold storage, preparing for their wing rollout. And it turns out that, that rollout was not a huge success. So those wings, instead of going in the freezer, are coming out of the freezer. Those wings are on the market. You have a combination of those things going on, more supply, and then -- from more chickens and weights, and then more wings because they're not going into that McDonald's inventory.

[Joe F. Sanderson:]

I mean, the industry set 202 million, 203 million eggs in the spring and the summer, and those numbers were perfect for the spring and the summer. Those numbers were no good for October and November. And that's what happened. And it affected -- in August, we were selling boneless for $1.80, we were selling wings for $1.40 almost, and leg quarters for $0.45. But in October, boneless breast was down to $1.40, wings were off almost $0.40, and leg quarters had slipped $0.02 or $0.03. That's -- 200 million eggs produced too much meat for that time a year.

[Adam Samuelson:]

Okay. That's helpful. And then maybe, finally for me on the -- maybe just talk quickly about your view of the export markets and where we are. I mean, you talked earlier about that the dark meat inventories being up, but maybe give a review kind of how export demand is shaping up and some of the opportunities you're pursuing as you look into next year?

[Lampkin Butts:]

Well, export, as we get towards the end of the year has been a little soft. Prices have slipped a little bit each month. For the year, volume is going to be up. Mexico, Russia, Cuba, Angola are all going to be up. And it's just been slow this time of the year. And I think it ties back into what Joe was saying about a few too many chickens for this time of the year and for this season. But we feel good about exports next year. Don't expect anything to happen in January on price. I think price is not going to move up until later in the year, but we continue to get demand and orders from all the countries we ship to. We'll just be trying to ship to those markets that are paying the higher prices.

[Operator:]

Moving on, we'll hear from Akshay Jagdale with KeyBanc Capital Markets.

[Akshay S. Jagdale:]

Can you -- I just wanted to follow up on your production estimates. You're -- I think you're projecting a 2.5% increase in pounds processed. And I believe this year, your heads processed were up 1% and weights were up, too. Can you give me a sense of what your plan is? I know things can change, but what's driving the 2.5% increase? Is it heads? Is it weight? Is it a combination?

[Joe F. Sanderson:]

Headcount. We'll be running -- last year, we were cut back 6%, January through April, and -- January through May. And we'll be running in full capacity, January through May. That's -- we'll have an Easter cut. We'll be down New Year's holiday, Martin Luther King holiday. We'll have a cutback for Easter. We'll run 4-day weeks, a couple of weeks, around Easter. And then other than that, we'll be at full capacity. And that's the difference in our production level compared to 1 year ago.

[Akshay S. Jagdale:]

Right. So which is why the quarterly numbers on a year-over-year basis are -- you're going to see the most growth in 2Q of your fiscal year and 3Q, right, like around 4% and 6% year-over-year growth?

[Joe F. Sanderson:]

Yes. That's correct.

[Akshay S. Jagdale:]

Okay. And can you just talk a little bit about the industry? And if you can, maybe talk a little bit about the age of the flock and how it has impacted production this year and what impact it might have next year? Because that's a number that, us, on the outside, don't get to really see. But from what we can tell, the age was at all-time highs, almost some time last year. So can you just talk about that as a constraint for production, if I may?

[Joe F. Sanderson:]

What -- we don't actually see the age of the hen flock, but you can track the hatchability. The USDA -- we calculate the hatchability, and we see it a little bit in Agri Stats. The hatchability keeps dropping on the chicks placed versus chicks hatched, and part of that is weather right now, I think. But part of that is also people keeping hens longer. And they're trying to place as many chicks as they can, set as many eggs they can, and they're just holding hens. And you see them going from 201 million down to 199 million. That just means that the hen flock is less and less productive. And -- but we think the hen flock is very old and less productive. And during this weather that we're having right now, they're going to be even less productive. They'll be more productive when the days get longer and more sunshine and warmer. But the hen flock is old and not very productive right now.

[Akshay S. Jagdale:]

So it had, what, like a 1.5% impact on production roughly? Does that make sense to you? Maybe 1% or 2% maybe?

[Lampkin Butts:]

200 million, 202 million. Yes, it was down 1%.

[Joe F. Sanderson:]

1%.

[Akshay S. Jagdale:]

Okay. So do we -- should we expect the same next year? I mean, there's -- obviously, we are seeing some increase in the monthly pullet placement numbers -- not much but some. Part of that is to just replace the older hens but...

[Joe F. Sanderson:]

Well, part of that pullet placement is grandparent and parent stock, too, remember? It's hard -- and where is your pullet placement thing?

[Lampkin Butts:]

99% was the last -- the October report.

[Akshay S. Jagdale:]

Yes. No, the point I'm trying to make is just -- are you expecting the hen flock to be more or less productive next year? Should we expect another 1% negative from hatchability next year? Roughly, is that...

[Joe F. Sanderson:]

Yes. I think people are going to try to put out everything they can because I think margins are going to be good. And I think everybody is going to keep hens long and they're going to try to set everything they can. And I think hatchability is going to be under pressure all year because margins, I believe, are going to be good. And so I think you're going -- nobody's going to be able to get any new pullet in production until late fall. So they're going to keep hens, and hatch is going to be down and...

[Akshay S. Jagdale:]

And what -- in terms of the egg set numbers we're seeing recently, it seems they have -- the growth has tapered off as we're lapping some of the cutbacks from last year now. It's been around the $200 million range for almost 1.5 months now. It seems to be a better position to be in as we enter next year. Is that a fair statement? How -- what level of egg sets makes you feel good? And what level of egg sets will get you concerned, like you were 3 months ago when we were seeing -- sort of foreseeing an oversupply in November?

[Lampkin Butts:]

Well, I feel better about $200 million in April, May -- March, April, May, June. January and February are all unknown months. You don't ever know what's going to happen then. You get a lot of bad weather and snow, and people can't get out. When you get to March, April, May and you get a little bit of warm weather -- it just depends on weather. If everybody's snowed in, it's 9 degrees in Chicago, nobody's going to be out grilling. Northeast is socked in. Springtime is -- you'll never know about -- you're going to get features in January and February in the grocery stores, but you're not going to get too much grilling going on in January and February. We'll get a bump in January and maybe a bump in February. But the big move is March when springtime gets here.

[Akshay S. Jagdale:]

Okay. And then just a follow up on exports. What's going on? Like why is -- there's been a couple of theories, I guess, floating around as to why leg quarter prices had been weak. I know Lampkin talked about it a little bit. But is there some logistical issue that was driving that? That's what we heard. Or is it just that demand weakened? And if so, why did demand weaken?

[Joe F. Sanderson:]

I'm not aware of any logistic issues. Ocean freight is higher this time of the year because of icebreaking vessels, but that happens every year. The only -- we have not attributed anything to these price declines other than a lot of product in inventory and it's got to clear for prices to improve. The only thing we've heard is in Russia, they -- the local industry has increased production again this year, which they've done every year, and the wholesale market in Russia is down. So our leg quarters going in and competing against a cheaper fresh chicken and it's still cheaper than, but more competition from local. We've heard that in Russia. That's just one market though.

[Lampkin Butts:]

That's really the only thing.

[Joe F. Sanderson:]

Yes, I think there's just more meat. And you had tremendous growing weather in October and November and bigger chickens, huge chickens, 200 million eggs. I just think you had an oversupply situation in the fall.

[Akshay S. Jagdale:]

Just one last one, and thank you for answering all the questions. So you're expecting -- roughly, it looks like a $0.06 per pound decrease in cost, roughly, grain cost. About a 7% decrease in revenue, right, would offset that? We're seeing some margin compression now because there's too much chicken in the market today. But your view is -- is your view that margins for the year are likely to be relatively stable, at least, compared to what you reported this year?

[Joe F. Sanderson:]

I have no idea. We feel pretty good about the year.

[Operator:]

Next, we'll hear from Brett Hundley with BB&T Capital Markets.

[Brett M. Hundley:]

Mike, if you exclude the start-up expenses for the end of 2014, and I paint a scenario where you have very similar earnings in '14 compared to '13, is there any reason why your SG&A -- why your expense ratio would trend any differently in your opinion?

[D. Michael Cockrell:]

No. The only thing there, Brett, is -- good question. The bonuses and the ESOP that we paid this year, of course, was paid because of the higher earnings. The bonus award targets will be higher next year. As I think, you and I and others have discussed before, we based that on a 20% return on equity. Our equity is up significantly this year, so those targets will be higher. Of course, achieving those targets will be doable because you should have lower costs and depends on the grain market. But -- I mean, on the chicken markets, but who knows? Just watch that. We may not have those same bonus accruals, or we may. It just depends on profitability. So that's really the wildcard. It's the bonus accrual, which was $21.5 million this year, so that was a big slug of that increase. Other than that, the only other outlier is Palestine, which you just identified.

[Brett M. Hundley:]

Okay. That's very helpful. And Joe, would you buy a processing facility if the price was right and it was in a state that you're currently not operating in?

[Joe F. Sanderson:]

Sure.

[Brett M. Hundley:]

Okay. And there was a lot of boneless, skinless that went into cold storage during October. And I just want to get your guys' take on whether you're concerned about calendar Q4 levels in total and what this might mean for pricing during the calendar first half. But it sounds like you're not really concerned, just given phone calls being made, given expectations on featuring, et cetera. But I just wanted to get your viewpoint.

[Lampkin Butts:]

We were not aware of a lot of boneless going in the freezers in October. We have some customers that we sell fresh boneless to every week, and they usually maintain a certain level of boneless breast in inventory going into January, and their inventories are down. The cold storage inventory in October for boneless was right at 100%, sort of flat from the year before, a little higher than October. But leg quarter inventory and wing inventory were the only ones that seemed to impact the market. As Joe said, we think the next tick on boneless is up. As soon as the retailers get the Christmas behind them, they're going to go to boneless breast features.

[Brett M. Hundley:]

And Lampkin, can you give an update on China with the WTO decision? And when/how this could effect trade, earnings, et cetera?

[Lampkin Butts:]

Well, we won that WTO case on the tariff, but China has not dropped it yet. They're obviously in no hurry to do so, but when they drop that, our margins on that product will improve. It's a 55% to 60% tariff, 55% to 60% of the value of the chicken pull[ph] we pay in tariff to get in the country. So when that tariff drops, our margins improve on that product.

[D. Michael Cockrell:]

It could be $0.30 to $0.50 per share.

[Lampkin Butts:]

We do not have -- our contacts are the U.S. Poultry & Egg Export Council. They think it could be another 6 months before that drops.

[D. Michael Cockrell:]

And that is an annual number.

[Brett M. Hundley:]

Okay. Perfect. And then, just my last question is just -- Joe, I'd just be curious to get your opinion and maybe what you're hearing from your consultants on what corn acreage could look like in 2014.

[Joe F. Sanderson:]

We hadn't really discussed that. We think it's going to be a bunch. We really think soybeans are going to be up a lot. But we still think there's going to be a lot of corn planted, but we hadn't discussed acreage per se. But I think there's going to be a lot of it. And I think there are going to be a lot of corn and a lot of soy. It kind of depends on -- the soy is going to -- if South America makes a huge crop of soy, like they're making right now, not made -- but if they make a huge crop down there and world supplies balloon, everybody is projecting U.S. beans could go up 10 million acres right now. But if South America makes a huge crop of beans like they're talking about, maybe not so much will that happen in the U.S. in the spring. So that kind of depends on what South America does, I think. It will have an influence on what occurs. I don't have an answer to that right now.

[Operator:]

[Operator Instructions] We'll hear next from Ken Zaslow with BMO Capital Markets.

[Kenneth B. Zaslow:]

Just a couple of questions. I know a lot of questions have been asked. Joe, I guess, I'm a little -- It's a little strange. Why would you lock in basis for corn but not lock in the corn prices? I kind of would think about it the other way around, not again -- understanding I'm obviously an equity guy, I'm not a commodity guy. But basis seems not very good right now. But you would expect over time that farmers actually sell a lot of corn.

[Joe F. Sanderson:]

Well, they're not selling their corn very much. We just bought basis -- we bought basis through March and we bought it this week or last week. And we don't want to price it. But I don't want to tell you everything. But we want to see that January report. And the January report will be the final report and show us what -- better view of the yields and the supply, we think. And we -- you always buy the basis before you buy the board. You have to -- and you can't price it until you buy the basis. The way we do it -- you can buy futures, but we don't do that.

[Kenneth B. Zaslow:]

Okay. Fair enough. I just -- I didn't hear what you said about what the cost was. I know it's still[ph] a question. I just didn't hear it. Was $1.5 million what the bonus was for the quarter?

[D. Michael Cockrell:]

Yes, it's $21.5 million. Part of that, of course, was booked to SG&A and part of to cost of goods sold. $21.5 million, total bonus.

[Joe F. Sanderson:]

Does that include Agri Stats?

[D. Michael Cockrell:]

Yes.

[Joe F. Sanderson:]

Agri Stats and earnings per share, right.

[D. Michael Cockrell:]

$8.2 million was booked to SG&A, and $13.3 million was booked cost of goods sold.

[Kenneth B. Zaslow:]

Okay. Then going forward, you did obviously say $5.5 million for the Palestine in third and fourth quarter. Will there be anything in 2015? I know it's a long way away, but is there anything between...

[D. Michael Cockrell:]

No. In 2015, assuming the plant begins operating in January of 2015, which is our target, you might have noticed in our disclosure, we softened that a little bit and put the first calendar quarter of 2015. But we still think January, if weather -- they've had a little rain out there, but assuming weather and we get to catch up a little bit in January. And once you open it, you'll book it to cost of goods sold. You'll just have November and December of '15 that you're booking into SG&A. The first 2 months of that fiscal year, you will book some to SG&A. So there will be some, but it won't be as large as next year.

[Kenneth B. Zaslow:]

Okay. And then, Joe, you said in your commentary that you thought that the expansion of chickens will actually happen around January of 2015; coincidentally, the same time as your new plant is coming online. Can you talk to that timing? It seems, maybe, not the most fortuitous timing.

[Joe F. Sanderson:]

Well, when we build a plant, we build it for 50 years. And so it really doesn't matter to me about what happens that first year. We'll be -- that plant is going to be -- we're more interested in getting that plant -- trying to get people trained in that plant and the growers trained. And that plant will be ramping up over 4 quarters. And what happens in 2015 is not really material. The market is not material to me or that plant. We've already -- we've -- we kicked Kinston off in 2011. And do you remember what 2011 was like?

[Kenneth B. Zaslow:]

Yes. I do. Fair enough.

[Joe F. Sanderson:]

And today, as I look back, I'm so proud we've got Kinston, a chill pack plant with the Georgia Dock at $1.0425. I'm very proud we cranked Kinston up in 2011.

[D. Michael Cockrell:]

Let me correct something, Ken. They just handed me the number. And when we opened Kinston and Waco during the first quarter, during the first 2 months of '15, we did book about $4 million. So it's going to be -- you're going to book that in the first fiscal quarter of 2015 related to the new plant.

[Kenneth B. Zaslow:]

Okay. So it's $5.5 million for the third and fourth quarter together, and it's $4 million for the first quarter of 2015?

[D. Michael Cockrell:]

Right. It obviously ramps up as you get closer to opening the plant.

[Kenneth B. Zaslow:]

I just wanted to get the[ph] numbers of that.

[Joe F. Sanderson:]

You'll be training your hourly employees. You'll have your whole -- half your salaried employees or more than half your salaried employees. That's where all that's coming from.

[Kenneth B. Zaslow:]

And my final question is, Joe, I know you alluded to it, but I wanted to make sure, but you're still saying that the menu shift next year for the Mickey D's, the KFCs in the world will likely promote again the chicken, the boneless, skinless chicken products in that spring area time. There's no reason to believe they wouldn't, or -- I think that's what you said. I just want to make sure that, that's true.

[Joe F. Sanderson:]

I do think that. I don't know that it was -- I don't know they would all come the same month like it did in May, where you had all of them in May. That was just an unbelievable occurrence. But a couple of other processors have called us, asking us to quote them on boneless breast, which is unusual. We don't usually do that, and we don't normally have it available. So -- and we're in the same situation. You still have high-priced beef, and everybody knows it. So it wouldn't surprise me to see -- maybe it won't fall out the exact way that it happened last year. It won't be the same product, but the same circumstance is in place for that to happen.

[Operator:]

Next, we'll go to Michael Piken with Cleveland Research.

[Michael Piken:]

Most of my questions have been asked. I just have a couple of quick follow-ups. When you think about industry cost serve, specifically for kind of big bird deboning and, to some extent, retail trade packs, how much of a difference is there between the producers there and sort of the top quartile or third of the cost curve versus sort of the bottom of the cost curve? Is it more like $0.02 or $0.03 per pound differential? Or is it a bigger margin differential than that?

[Joe F. Sanderson:]

Bigger than that.

[Michael Piken:]

Okay. And have they kind of closed the gap in the last couple of years with kind of the good industry profitability or some of the smaller guys, as best you can tell, kind of doing stuff to improve their operations?

[Joe F. Sanderson:]

Not really.

[Michael Piken:]

Okay. So could you just give sort of a broad range. Is that like true for big bird and retail tray pack for both segments of the business?

[Lampkin Butts:]

I think so.

[Michael Piken:]

Okay, yes. I'm just trying to get a sense that if -- like if market conditions were to deteriorate, like at what level of profitability would we start to see some of the less efficient guys need to slow down, is sort of kind of the tack that I'm coming from.

[Joe F. Sanderson:]

Absolutely. So it will be the same thing you've always seen.

[Michael Piken:]

Okay. So there hasn't been any step-up? Okay, that's great. And then switching over to the export markets, if we were to sort of strip out the impact of the Mexican AI situation that happened during the second quarter of last year, do you think U.S. exports would have been up in 2013? And if we sort of assume a more normal operating environment in 2014, what's sort of your view on Mexico?

[Joe F. Sanderson:]

Let me ask you a question. Because our -- Mexico ships New York-dressed and that's their main product in it, the domestic producer. Yes. How does our leg quarter compete against that New York-dressed? That's what I'm saying. I mean, I think you're going to have -- I think you're in that market. What I was saying was most of the Mexican markets are local producers -- produces a New York-dressed whole bird. And our leg quarter down there is cheaper than that Mexican whole bird. So I think we're going to have -- I think you're going to -- we're going to still be in that market. And we've got a niche down there now, and we have distribution. And so I think regardless of AI, if there's no government interference, we're going to be in that market.

[Michael Piken:]

Okay, that's helpful.

[Joe F. Sanderson:]

AI may make it better, but I think we're in the market now.

[Michael Piken:]

Okay. And then my last question will just be sort of in general, I guess, as you think about kind of your future expansion plans. I mean, if we see that things get a little bit tougher in 2015, I mean, are you -- do you have sort of a certain target in terms of your leverage ratio that you're comfortable with? Or when would you sort of make the decision to move forward on your next plant or not, after Palestine?

[Joe F. Sanderson:]

Well, our balance sheet kind of tells us what to do. If our balance sheet is healthy and we make a good grain crop this summer, and if we have a location, you might make it before 2015.

[Operator:]

We'll take a follow-up from Akshay Jagdale.

[Akshay S. Jagdale:]

Just one -- this is a housekeeping one for Mike. The bonus payment, the numbers you quoted, does that also include the ESOP?

[D. Michael Cockrell:]

No. The $21.5 million is just the bonus. The ESOP was $8.4 million compared to $3.8 million a year ago.

[Akshay S. Jagdale:]

And for next year, should we assume similar numbers?

[D. Michael Cockrell:]

I don't know. I don't know, Akshay, the ESOP and the bonus will totally depend on the level of profitability. And the ESOP is generally 4.2% to 4.5% of operating income. And I don't know what that's going to be.

[Joe F. Sanderson:]

What's your model say?

[Michael Piken:]

That was an indirect way of asking is next year similar to this year.

[Operator:]

[Operator Instructions] Gentlemen, it appears we have no further questions. I'll turn the call back to you.

[Joe F. Sanderson:]

Good. Thank you, all, for spending time with us this morning. And on behalf of everyone at Sanderson Farms, we wish you a Merry Christmas, Happy Hanukkah and a happy and prosperous and peaceful new year. Thank you.

[Operator:]

That does conclude today's conference. Again, we do thank you all for joining us. You may now disconnect.