Sanderson Farms, Inc.
Q1 2015 Earnings Call Transcript

Published: 24 Feb 2015

[Operator:]

Good day, everyone and welcome to the Sanderson Farms' First Quarter 2015 Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Joe Sanderson. Please go ahead, sir.

[Joe Sanderson:]

Thank you. Good morning, and welcome to Sanderson Farms' first quarter conference call. This morning we announced net income of $66.5 million or $2.87 per share for our first quarter fiscal 2015. This compares to net income of $28.9 million or $1.25 per share for our first quarter of 2014, I’ll be in the call with comments about general market conditions and grain cost and then turn the call over to Lamp and Mike for more detailed account of the quarter. Before we make any further comments, I'll ask Mike to give the cautionary statement regarding forward-looking statements.

[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 regarding supply and demand factors, future grain and chicken market prices, economic conditions, production levels and our future growth plans. The actual performance of the company could differ materially from that indicated by the forward-looking statements because of various risks and uncertainties. Those risks and uncertainties are described in our most recent Annual Report on Form 10-K and in the Company’s quarterly on Form 10-Q which was filed with the SEC this morning in connection with our first fiscal quarter ended January 31, 2015.

[Joe Sanderson:]

Thank you, Mike. The first quarter marked a solid start to fiscal 2015. Demand from retail grocery store customers has remained strong and that stability has reflected in Georgia dock whole bird price that hover at or near record territory throughout the first quarter. In addition food service demand showed signs of life during December and January probably the result of lower price gasoline, before softening in February as a result of cold winter weather. Quoted market prices for boneless breast meat, tenders, wings and leg quarters were all higher during the quarter compared to last year’s first fiscal quarter, while overall our market prices for chicken were higher during the quarter compared to last year, market prices for corn and soybean meal were all lower, were both lower. Our feed costs were down $0.325 per pound for chicken processed during our first fiscal quarter. Market prices for corn and soybean meal have moved higher since last year’s harvest, but the record crops of both corn and soybeans in 2014 sufficiently restock both corn and soybean balance tables as we head into the 2015 planting season. The next advance to grain markets worldwide over South American harvest, the March supply and demand report and the March 31 planning intentions report. The South American crops are progressing well and expectations now are for bumper crops from that region. And as agricultural outlook from last year that the USDA reported that it expects the number of acres planted to both corn and soybeans to decline in 2015. That news pushed future prices for both crops higher, but many are skeptical of USDA's lower bean plantings. Slightly fewer corn acres was expected, but those acres have to go somewhere and soybeans are logical choice, is not unusual for the USDA to significantly revise its outlook before the March 31 planting intentions report, so we will be watching for that report. Farmers have been reluctant sellers since the harvest, expanded own farm storage capacity has [lapped] into hold on the grain, but projected carryout ratios for both corn and soy support lower prices. At some point farmers will have to sell gain, for this reason we remain short both corn and soybean meal, while we have about a portion of our solid basis through October and corn basis through July, we are for the most part pricing our grain needs hand to mouth. Based on our cost for first fiscal quarter and what we have priced so far in February when combined with prices we could have locked into the balance of the year at yesterday’s close, our grain costs for fiscal 2015 would be approximately 121 million less than during fiscal 2014. We also expect basis to be lower for the year, indeed based on the basis we’ve priced so far we estimate lower corn and soy meal basis to save another 3.7 million during fiscal 2015. This total decrease in prices paid for grain and lower estimated basis in fiscal 2015 will translate into $0.036 per pound decrease in our cost per processed pound of poultry. At our Annual Shareholders Meeting two weeks ago I told our shareholders we are focused on several things as we start fiscal 2015. First as I just mentioned we are watching the quality and quantity of the South American crops, a strong harvest in this region would take some pressure of U.S. grain export. Second we will be watching the March 31 planning intentions forward. Third we will of course watch chicken production numbers and consumer spending behavior. The SDA is projecting our industry to produce 3.6% more chicken during 2015 than last year. Pullet placements have trended higher than this, but we understand eggs from some of these breeders are earmarked from Mexico and I have some data I will share later with you regarding this. In any event financially healthy, more optimistic, fully employed American consumers who continue to spend less at the gas pump could easily absorb that increase. We expect that chicken will be competing once again during 2015 with high price beef, although we expect pork prices will be lower than last year. Finally we will focus our efforts on our growth, Palestine is up and running and we will move that plant to full production over the next year. We will also continue our due diligence on site for our second North Carolina plant. We are optimistic about where we are in that regard and hope to soon announce a definite site in days to begin construction. We remain optimistic about 2015 we believe lower grain markets will give us an opportunity to make good margins with hard work and a little help from the chicken markets. The chill pack environment is strong and could improve even more seasonally as we move past Easter and into the summer. Food service demand is the wild card for 2015 but recent signs of life in that market give us reason to be optimistic. Lower gasoline prices helped and we have to believe that once consumers completes remaining deferred maintenance projects around the house they will use gasoline money to take the family out to eat. While we don’t supply QSRs we believe one reason for the strength in the bonus market during January was a result of chicken promotional activities at QSRs. Regardless of the market however our plan for the balance of the year is to remain focused on what we can control focus on our strategic growth plans and let the markets take care of themselves. At this point I will turn the call over to Lampkin for a more detailed discussion of the chicken markets and our operations during the quarter.

[Lampkin Butts:]

Thank you, Joe and good morning. As Joe mentioned market prices for poultry products were higher during the quarter when compared to our first quarter last year. The Georgia Dock price for whole birds reflected continued strong chill pack demand during the quarter and averaged $1.14 per pound compared to last year’s $1.04 per pound. Bulk leg quarter prices during our first quarter averaged $0.4202 per pound compared to $0.4103 per pound last year. Our numbers for calendar 2014 reflected the volume of all roller parts exported during the year was essentially flat with 2013 and we expect the export markets to steady during calendar 2015. The exception to our outlook is for POSS, the industry continues to be unable to ship POSS to China which locked us out of the market following the discovery of avian influenza in wild birds and non-commercial flocks in the Pacific Northwest. AI was later discovered in commercial turkey flocks. We shipped approximately 5 million pounds of POSS per month to China when that market is open and whilst that market could cost us as much as 4.3 million pretax per month. We continue to hear the ban may last for months, but we can’t be certain about the length of the ban. The average price for jumbo wings was significantly higher during our first fiscal quarter compared to last year. Jumbo wing prices averaged to $1.61 per pound during our first quarter this year compared to $1.06 per pound during last year’s first quarter. Boneless breast prices averaged $1.42 per pound during the 2015 first quarter compared to a $1.33 last year. We sold 766.8 million pounds of poultry products during the first quarter, a 6.4% increase from the 720.4 million pound sold during last year’s first quarter. Our process pounds were up from 728.3 million to 774.9 million pounds, this was higher than our previous guidance as live weights and yields were both better than estimated. We expect to process approximately 827.2 million pounds during our second quarter, up from 762.2 million pounds processed during last year’s second quarter. Prepared food sales were up $14.9 million or 6.9 million more pounds sold and an increase in our sales price per pound of 4%. Our sales team has done a good job identifying new customers for the foods plant and we expect better performance for the year. Our performance during the first fiscal quarter was good, we are pleased to be off to a good start. We will continue to look for efficiency improvements and we’ll do everything we can to meet our goal of performing at the top of our industry. At this point, I’ll turn the call over to Mike to discuss our financial statements.

[Mike Cockrell:]

Thank you, Lampkin. Net sales for the quarter totaled $667.4 million and that’s up from 584.9 million for the same quarter last year. Our net income of $2.87 a share during the quarter compares to net income of $1.25 per share again last year’s first quarter. Our cost of sales of poultry products for the three months into January 31 as compared to the same three months a year ago decreased 0.6%. This decrease is a result of lower feed cost offset by the increase in pounds of poultry products sold. Our feed cost per pound and poultry products processed during the quarter decreased 10.1% or to $0.0291 per pound and that compares to $0.0324 per pound last year. While our feed cost per pound of poultry products processed were low about $0.0327 per pound, our sales price per pound of poultry products sold increased 5.3% or $4.1 per pound compared to last year. This combination resulted in significantly improved gross margins. SG&A expenses for the first quarter of 2015 were $14.5 million higher, than the same three months a year ago. This increase is a result of higher accruals for sales and marketing expenses, accruals related to the Sanderson Farms Championship and higher trainee cost as the company prepares to continue its growth strategy. The two items in SG&A expense that increased the most though were start-up expenses and stock compensation expenses. The start-up expenses of course related to Palestine. We had previously guided the $4.5 million to $5 million during the quarter and those expenses came in light of $4.8 million. Costs associated with that plant will now be reported as cost of goods sold. During fiscal 2014, the company did not accrue any expenses associated with our performance share plan until the second fiscal quarter, that plan awards equity to key managers in the company when certain return on sales and return on equity targets are met over a two-year performance cycle. Last year management couldn’t determine that it was probable that the 2013 and 2014 cycle would generate returns that would trigger payout of the shares until we were two quarters into the year. However, given our performance in '14 and the first quarter of fiscal 2015, management now believes it is probable that the performance shares granted that are related to the 2014 and 2015 performance cycle will be earned, and generally accepted accounting principles required that we book a catch up accrual once we deem payout probable. That said the second quarter SG&A will actually benefit since we started accruing that performance cycle one quarter earlier than last year. This analysis has spilled out in pretty good detail on Page 7 of our Form 10-Q for those that want to study it further. We are estimating SG&A expenses to be approximately $13 million a quarter for the balance of the year. This estimate does not include any accrual for the Bonus Award Program or the ESOP, since it is too early in the year to deem payment of either of those probable. Our balance sheet remained strong at the end of the quarter. We had shareholders equity of $963.1 million and networking capital of $398 million. Our current ratio was 3.7

[Operator:]

Thank you very much. [Operator Instructions]. We’ll take our first question from Adam Samuelson from Goldman Sachs.

[Adam Samuelson:]

Maybe my first question on the impact of China is I thought my understanding was there was opportunities to maybe redirect that to other markets and maybe that would find its way to China. Is that not true or is it the import ban that came in place in January really prohibit some of that re-export business that you might have perceived in the past? And is that really -- or is it the West Coast ports that have really back up that product? And talk about how long you think that this situation might resolve, might take to resolve itself?

[Joe Sanderson:]

Adam we made a determination to abide by the ban, we did not want to go through another market and get into China, we determined that there could have been long-term adverse consequences if we had tried to do that. So we decided to begin rendering once the ban was in place, we ship China out of Gulf Coast ports and the West Coast didn’t have anything to do with those. Now we just sat to abide by the ban.

[Adam Samuelson:]

And I want to clarify on the feed cost tailwind. I think in the press release it's at 121 million year-over-year if you marked it as of yesterday. I think the Q it's at 114 million, I think last quarter including the incremental volumes at Palestine it was 14 million if that’s not apples-to-apples the 121 or 114 includes or excludes the incremental fee that you’d consume at Palestine?

[Mike Cockrell:]

That’s right the 121 million is apples-to-apples Adam that compares this year to last year just on the price decrease. From a cash basis because we’re going to be buying more grain in Palestine that number is 32.5 million and the difference between what’s in the queue that was prior this close and the 121 is yesterday’s close just to show you how quickly those markets can change.

[Joe Sanderson:]

And so is up $8 just going in….

[Mike Cockrell:]

And again this morning so that number would maybe closer to what’s in the queue today because prices are up a little bit.

[Adam Samuelson:]

And then maybe just a final question on your own performance in the quarter on the volume side. You came in pretty healthy above your own expectations on volumes. Can you talk about what drove the production upside in the quarter, how that may have changed the expectations for the year and if you are seeing any better productivity in your own flocks that might have broader industry consequences as you think about industry supply this year?

[Mike Cockrell:]

Our birds grew exceptionally well, converted well and the yield, plants did a super job across the board with yields. And we just didn’t leave much on the table to tell you the truth, the weights were running now, we will not particularly our deboning plants will be hard to achieve in the summer time. But we are able to maintain these weighs through May and then probably get back to them in October. But just did a really fine job of growing and processing and hatching and everything else this quarter.

[Adam Samuelson:]

And is there any change in the volume kind of expectations for the year that relative to what you talked about in December?

[Mike Cockrell:]

No we’re sticking to the same estimates as Lampkin said we estimate 827 million pound during Q2, 881 million in Q3 and 902 million in Q4, and as Joe said the head process was right on our estimate that that number it was all because of superior performance during the quarter from a yield and live weight standpoint that push that Q1 number up.

[Operator:]

We’ll take our next question from Michael Piken from Cleveland Research.

[Michael Piken:]

I just wanted to dig a little bit more deeper into some of the production data and specifically have you heard anything about some of the pullets potentially being headed over to Mexico and if that is true, if you could quantify how much and what that might mean for U.S. exports to Mexico’s finished chicken?

[Joe Sanderson:]

What our analysts have done is they have spoken with USDA and they have gathered some data going back to January of 2014, USDA keeps up with the hatching egg exports out of the USA going to different destinations, I have that chart in front of me through December of 2014 and beginning in January of 2014 there were million dozen eggs being exported out of the U.S. to Mexico about the same number going to Canada and 1.5 million dozen going to the rest of the world, different places in the world for about 3.5 million dozen which took up 4.3% of the hatching flock in the United States of the layers in the U.S. Now beginning in August of 2014 that number to Mexico moved to 1.7 million dozen and in September it moved to 3.7 million dozen, and it is staying pretty close to 3.6 million dozen since January, October of 2014 it was 3.7 million, November was 3.3, December is 3.4 and that Canada has remained unchanged, the rest of the world has remain unchanged and if you project going forward that Mexico was going to be around 3.5 million, 3.6 million dozen per month, then Canada is going to be about 900,000 dozen per month, rest of world is going to be 15 million to 16 million dozen per month which is Canada and rest of world has been unchanged, Mexico has been the same now beginning in September of 2014, that’s going to take 5% to 7% of the total layers in the United States. The question is in my mind that will pull the hatching eggs back in U.S. that will give you may be pushed the U.S. production, you’ll have to push it to get 2% growth out of it plus weight.

[Michael Piken:]

Yes, that was going to be my next question actually was, what are your expectations on weight? In January I know you guys indicated you had a great performance and it seems like the bird weights have been somewhere it's trending up 4% or 5% year-over-year, I know the comps get tougher in the summer months, but do you have a forecast for how much weights might be up this year and then how that impacts total production?

[Joe Sanderson:]

According to Agro Stat it's all in big bird deboning region and people are pushing over nine pounds, a lot of them are and I think that will continue to kind of moderate it, was it on the weekly USDA? There were two weeks and first two weeks of January that moved up to six [points] and then move back down to closer to six pound average now. And I don’t know what that’s, maybe cold weather and little bronchitis we hear that’s going around in the industry, but it looks like they've moderated the last six weeks, I expect that weight to stay where it is, it's not going to go down, cheap feed and that really does well in the processing plant.

[Michael Piken:]

And then last question on, if you guys could provide a little bit more quantification in terms of POSS market in terms of what that might mean for inside, be little helpful in terms of the total number pounds and the difference in pricing between rendering versus sending it to China?

[Mike Cockrell:]

So $4.3 million pre-tax per month, when we go rendering plant instead of shipping to China, the difference is 4.3 million per month operating margin.

[Operator:]

We’ll go next to Ken Goldman from JP Morgan.

[Ken Goldman:]

I’m wondering if you could add a little bit of color on where you're seeing particular strengths or less strength in what you expected in terms of U.S. demand and really International demand as well. Any color you can give in terms of parts areas of the country, just it is helpful to hear your perspective on things Joe and what you’re seeing out there that’s either better or worse than you what you anticipated last quarter?

[Joe Sanderson:]

Food service was better than what we thought retail was really strong, we had 1st February we were very short product. There were some further processors that were short and buying product, first week February we were extremely short retail product and then all the snow and ice and bad weather hit particularly the Northeast corridor, and it killed all the markets. All the markets have been soft since all this weather start hitting across the Midwest and the Northeast, I have no doubt and I think that’s affected beef and pork as well. Pork has softened and I think that has everything to do with weather. I don’t think it’s because there is more pork or heavier hogs, and I think as soon as the sun shines and it’s a little warm and people can get out in their backyards and start grilling and I think the whole complexion of the protein is complex is going to change. And you’re going to see that there are fewer cattle and people have more dollars in their pockets, that’s what I think. I think it’s going to be fine, but like it’s 34 in Mississippi this morning and I am not going to cook on my big green egg and nobody in the south is. And I know they’re not in New Jersey or New York or Pennsylvania, it’s just everybody is locked up tight.

[Ken Goldman:]

34 sounds pretty good to me right now.

[Joe Sanderson:]

February was going to be a good month, February was going to be fine and all of a sudden nobody can get out and go. And February the markets have held reasonably well but just when the snow hit it that shut everybody down.

[Ken Goldman:]

If I could ask one follow up and then I had a question on China. So in your opinion Joe just to make sure I understand it sounds like you’re blaming and I know you don’t sell beef and pork. But more of these slight in prices on weather than on currency and international demand and the port issue. Is that fair?

[Joe Sanderson:]

No I don’t have a sense of the impact of the port issue or the strong dollar on pork or beef exports. I don’t have any sense of that, I am saying the bulk of U.S. demand is seasonal and weather related. I think you’re going to have a probably different picture for chicken and whole protein complex past Easter and when the grilling season gets here.

[Ken Goldman:]

And then can you update us on what U.S. lobbying organizations or the government are doing in terms of China’s ban. I thought this was something that China really wasn’t supposed to be doing but I haven’t heard as much as maybe I hope for in terms of protest or push back from our side?

[Lampkin Butts:]

The United States Poultry and Egg Export Council and the National Chicken Council, AFS, USDA they’ve all engaged in conversations with their counterparts in China. And it’s just low yield, and they just they don’t want to talk about it, they’ll look at it later, we're just not getting much feedback. Every contact we have, everybody we know that could possibly help we’ve got them engaged but nothing is solid yet.

[Joe Sanderson:]

ESPR, they’re going to let us sit for 30 or 60 days and then there is something they will extract from us and we think we know what it is.

[Lampkin Butts:]

They haven’t said, they haven’t verbalized.

[Operator:]

We’ll go next to Kenneth Zaslow from BMO Capital Markets.

[Kenneth Zaslow:]

Just couple of follow ups. In terms of the food service side of it, can you talk about from your business standpoint have you seen in December and I think you said January there was a pickup. Was it noticeable in your volumes or was it something that you just heard throughout the industry? Could you just talk about that and how you came up with the idea that food and services is turning?

[Lampkin Butts:]

Mainly the earn-and-bury boneless market moving up and the tender market moving up, we didn’t necessarily see in any system orders, but just demand from further processors and the way those earn-and-bury markets moved up.

[Joe Sanderson:]

And as you know Ken in your reports you quote some of the casual dining industry statistics and early returns in January before this weather got bad, you're actually seeing some concepts that hadn’t had positive traffic in years reporting some slight increases in traffic. I mean it just felt better out there generally and of course McDonald’s has announced the tender promotion and we’ve been saying since last fall intuitively that make sense that you're going to see more of that during the year.

[Kenneth Zaslow:]

That was my next question, could you tell me about the promotional activity because it seems like that we’ve seen a major ramp up in the shift within the food service sector towards chicken. Have you seen on your end or you're just hearing as you said you alluded to the McDonald’s is it more to that as evidence that this is really another shift that’s here to more chicken offerings?

[Joe Sanderson:]

I mean we got Subway, Subway is running chicken right now and Burger King is promoting chicken. Burger King is going in, McDonald’s is coming in March. And who was -- somebody was going 12 loads a week during January, Keystone, do you remember that?

[Mike Cockrell:]

I don't.

[Lampkin Butts:]

Ken we’re seeing it in the marketplace with customers like Joe and Mike have already mentioned McDonald’s and Burger King, Subway and then also the customers we sell through from our food plant, we’re hearing from them that they're going to affect your chicken.

[Kenneth Zaslow:]

And my last question is how well you think these chicken margins at these levels could last, can we start seeing this until 2016? Because it seems like the environment is not changing too radically but yes there is a lot of push back on the top of the cycles and things like that. How do you perceive, because it seems like again these margins seems more sustainable than maybe anybody thought initially?

[Joe Sanderson:]

I think we’re good through our -- I don’t know how much pork is coming on and how much going to be exported. I read an article yesterday that said maybe, I guess it was Bob, said maybe they are not willing to spend quite as much as I thought they would, now that they are down in the 60s. But we'll lose ad activity maybe with pork but people are not going to eat pork and we don’t compete with pork at food service.

[Lampkin Butts:]

We so far are retailers, they are seeing the cheap pork and they say yes we got to beat you there but they are not backing away from chicken, they don’t put chicken just as much -- and some of them are going to take the margin on the pork and not drop the price.

[Kenneth Zaslow:]

I guess my question was more towards the actual operating margin that you delivered this quarter and last quarter. Is that sustainable through 2016?

[Joe Sanderson:]

'16, I don’t know, I hadn’t planned cropping in '16 -- I got to say what crops going to be like.

[Kenneth Zaslow:]

If we are assuming normal crop?

[Joe Sanderson:]

No, I can’t talk about '16 here, that too far away. We sympathize that you have to Ken but we can’t.

[Operator:]

The next question from Farha Aslam from Stephens Incorporated.

[Farha Aslam:]

I have couple of questions. Starting with dark meat, Joe how much of your dark meat do you use Sanderson debone now? And could you just talk about the price differential you're getting on deboned dark meat versus commodity and what your outlook is for those prices?

[Joe Sanderson:]

We’re deboning less than 10%, we are deboning in Laural and [Whyco] and Palestine and their differential varies but probably $0.04 $0.05 per pound versus the quarter, probably an upgrade and net upgrade of nickels pound something like that probably.

[Farha Aslam:]

And any outlook for like quarter prices now that the port is open but China and Russia remain closed?

[Joe Sanderson:]

We think there'll be a seasonal improvement when you get to spring.

[Farha Aslam:]

So, do you anticipate a recovery on prices back to last year’s levels or just kind of any color you can give us about the degree of recovery we should expect?

[Lampkin Butts:]

Well there dark meats are little solid drive now. Markets like Mexico are very good, good returns. You got other markets that are -- they are just soft, interruptions in Angola and Ghana both Russia is closed, China is closed it’s just bad, there are various 36 now and 42 in the first quarter and that’s just an indication of sluggish demand in those export markets.

[Farha Aslam:]

The degree of recovery you’d expect, once spring summer you said that we could expect a recovery about any color on what level?

[Lampkin Butts:]

Well I think we could get back to where we were in the first quarter.

[Farha Aslam:]

And then just overall for 2015 and 2016, what do you expect your production growth for pounds produced for the whole entire industry in terms of increase this year and next year based on the analysis that there is a portion of eggs that will go to Mexico?

[Joe Sanderson:]

The industry don’t run up against processing while I have to calculate that I don’t know that but the most the industry has ever done is 220 million eggs and I don’t think that the processing capacity is there to do that right now. So I think it’ll be under 220 million eggs a week, although we’ve added back some and then Pico was adding a plant to come on in 2016, so maybe 220 million eggs a week you could get up to that.

[Farha Aslam:]

During the summer months?

[Joe Sanderson:]

It will be 2017 before that happens.

[Farha Aslam:]

So back to 2015 and 2016…

[Joe Sanderson:]

In 2015 I think you’re on 2% to 3% more headcount and little bit more weight.

[Farha Aslam:]

And then in 2016?

[Joe Sanderson:]

I don’t know that, I imagine about the same.

[Farha Aslam:]

And your outlook for demand, would you say that demand so far in 2015 is going back, is there drivers in 2016 that could absorb a 2% to 3% increase in supply for OUS chicken?

[Joe Sanderson:]

If the economy continues to improve, yes.

[Operator:]

We’ll take our next question from Brett Hundley from BB&T Capital Markets.

[Brett Hundley:]

Just wanted to follow on that line of questioning actually because previously you guys have talked about maybe 209 million eggs that’s being sort of the top of capacity and if you were to run that through to rest of this year on average you kind of get to about 2.8% increase in headcount for the year when you just run that average 209 million level. And so I was trying to think about where we could go from there and of course you just talked about some of the processing capacity that’s coming online from both you guys Pico. But what I don’t have a good read into is what’s happening on the housing front both at the breeder level and boiler flock level. And so I was just curious if you had any comments on what you’re seeing and hearing from within the industry and maybe if you wanted to talk to exit level on where exit levels could go beyond 2015 just based around what’s happening at a housing standpoint?

[Joe Sanderson:]

We’re hearing that the house is being built; some of the housing is being built for these eggs that are going to Mexico. Some of the broader housing houses are being built to increase the square footage for these larger birds and there might be we’re building 500 houses in Palestine and Pico is building houses getting ready to in Arkansas. And then lot of houses are being built just because of this increase in live weight which requires more space for the bird. And then I am assuming there maybe some expansions in a couple of places I don’t know about, small expansions, there is some.

[Brett Hundley:]

And do you guys have an idea on what that adds up to as far as capacity in other words basically housing is following?

[Joe Sanderson:]

I don’t think there is a large expansion beyond what I said of 2% to 3% because of that, if the USDA numbers are right about these eggs being exported then you wouldn’t have a lot of expansion going on domestically.

[Brett Hundley:]

And do you guys have an understanding of whether there is a fair amount of -- I appreciate the work done on the data side. But do you have an understanding on whether is a repopulation and grow back in the flock in Mexico on the broader side? Or whether this is largely sustainable in other words guys went out of business in Mexico and companies are going to sustainably be bringing hatching eggs in order to foster further slaughter ops there or they are using these hatching eggs to further repopulate supply that’s been lost in recent years?

[Joe Sanderson:]

That I don’t know, we have no idea of what -- we don’t know what is happening in Mexico, I think they just made the decision, just they don’t want bigger flocks down there because raising influenza.

[Brett Hundley:]

And then Lampkin I don’t know, we have heard from some people that not materially but just on the margin that Mexico was going to Brazil for some of its products just giving currency changes things like that. I am reading here recently that Brazil food is cutting back on production because there is some near-term strikes and things like that within the country and so, I am just curious if maybe if you’d seen that or and if so maybe if the U.S. can take back some Mexican customers that maybe had gone to Brazil over the interim?

[Lampkin Butts:]

We haven’t seen any change in Mexico related to Brazil, Brazil ships hold for us, don’t normally compete with our local orders.

[Brett Hundley:]

And then just two more quick one, Mike just can you give us a sense of bonus accrual and ESOP at full realization for the year, so if one thought that you would be on a path to realize the full benefit we could add that in ratably or make assumptions on when that will come in on top of the SG&A guidance that you gave?

[Joe Sanderson:]

Coming in the third quarter.

[Mike Cockrell:]

It would come in the third quarter last year Brett we accrued right at $6 million in the third quarter and $6 million in the fourth quarter for the bonus accrual, and for the ESOP we accrued 10.9 million in Q3 and 4 million in Q4 both of those were at full payout as I said in my prepared remarks we don’t know yet whether or not we’re going to get to that point in our third quarter, but if we do we’ll begin, if management deems payment of those probable will start again in Q3.

[Brett Hundley:]

And then just last quick question for you guys, I mean when I talk to people about the issue I sound pretty confident than I realize I probably need to talk to people in the industry. So just love to get your take on your confidence that this personal issue it's largely in the Northwest and pretty much all amongst wild birds, your confidence that won’t indeed find its way to the southeast and the process that you guys and any industry have in place to protect against that?

[Joe Sanderson:]

I don’t believe it will, I have never really thought it would make us way to the North American continent, because I never thought it would get to Canada much less to the Pacific Northwest it was a -- those show birds and ducks and where they originally thought they were and strictly won’t be in Asia, and have they intermingled was almost freakish, how they got to Canada and to Washington and Oregon and California. They have to jump about three flyways to get over here to Mississippi flyway. I don’t believe it happened, wild duck yes, but because I know they have tag wild ducks and they found them another flyways, but I will never say never, but it would be very difficult for them to get over here and getting one of our flocks it'll be very difficult.

[Operator:]

We’ll take our next question from Jeremy Scott from CLSA.

[Jeremy Scott:]

I just want to follow up on that line of questioning, with regards to the new houses built out for higher weight birds, we’re seeing birds coming at 3% to 4% like you mentioned. How much of that can be explained by the shift to big birds? And how much of that could be explained towards pushing birds to the higher weights and what is the exact -- what is the limit to how much you can push these birds this year?

[Mike Cockrell:]

The big bird deboning complex that we see in agro stats the average live weight is more right now, its 70 but you’ve got some companies within that complex within that group of companies that are growing to 9 to 10 pound chicken I guess everybody could move to a 9 pound chicken if they wanted to.

[Joe Sanderson:]

But you’ve got some growing at 7 pound.

[Lampkin Butts:]

Right, 7.5 is the low end.

[Mike Cockrell:]

And a lot of that’s market driven Jeremy depending on which market they’re selling into at the end of the day we don’t know we don’t know what these other companies are going to do with their live weights we know we’ve moved our target weight up. There is no ability in the other markets in the retail market or the fast food market the small bird to move lab weights materially, any movements going to have to be in that big bird deboning market.

[Joe Sanderson:]

Freight pack made their move two years ago, three years ago and the smaller birds and that’s not going to go any bigger. And the fast food is not going to grow, and I think the move that’s being made the last move has being made in the big bird deboning right now.

[Jeremy Scott:]

And can you just talk about the market for wings prices have been very resilient to start the year. Is this just a story of very strong demand from some of these emerging brands or is there promotions going on? Can you just add some commentary there that’d be helpful?

[Joe Sanderson:]

Good demand from football season and those concepts you mentioned, Super Bowl is over now we need the March Madness to start wings are a little soft now it dropped to about 50 which is still a very good price for wings, but it’s the same type demand we’ve been seeing. The wing demand pick back up when the comforts championship start it will be two more weeks and then your demand will start picking back up last probably three or four weeks.

[Jeremy Scott:]

I guess the question is, are you seeing more restaurants feature wings versus couple of years ago?

[Joe Sanderson:]

Yes absolutely and two of those concepts are building -- both of them are building 100 to 150 restaurants a year.

[Jeremy Scott:]

And then just on prepared foods, what is your estimate for volume growth for the remainder of the year now that we’re lapping some of the new customer additions in the back half of 2014. And what’s the good benchmark for pricing or how sticky is the average revenue per pound should poultry prices start to come under some pressure?

[Lampkin Butts:]

I think pricing is going to be 3% or 4% up and the volume is going to move up as a possibility growth up there is going to be in that QLF don’t be in both, I know the jump is going to be in that QLF which is your prices stood.

[Joe Sanderson:]

We can get those numbers I just don’t have that.

[Mike Cockrell:]

I don’t know I don’t have the feature quarters as Lampkin said we sold 7 million more pounds during this year first quarter than a year ago and the average sales price up there was up almost $0.08 a pound, we think that’s sustainable if you look at what we did last year but I don’t have the quarter-by-quarter data in front of me Jeremy.

[Jeremy Scott:]

And just lastly quick one on the marketing budget. Can you give me an estimate of what the full year marketing budget is and is this a program I think I asked it a couple of years ago but is this a program that you’re going to implement on a more permanent basis or is this just a more opportunistic strategy so if you could help me out with your strategy on this one?

[Joe Sanderson:]

It’s something we don’t have in place going forward.

[Lampkin Butts:]

Last year we spent right at $8 million Jeremy and we’re accruing for closer to 13 right now for the year but we’re in the middle of talking about what our strategy is going to be for the year and if we change that we’ll update the market next quarter, but we’re looking at it now.

[Operator:]

We’ll go next to Akshay Jagdale from KeyBanc.

[Akshay Jagdale:]

So just want to reconcile a lot of data you guys gave which is helpful. But how do I reconcile the 8% of supply of layers eggs going to Mexico to sales of 2% or 3% growth in adds here, I am having hard time with that. Can you just walk me through the general basics there, if they can -- didn’t you say that all the eggs going to Mexico and other destinations equate to about 8%?

[Joe Sanderson:]

No, it adds up to 7%. If you're adding and maybe USDAs numbers and I cannot -- I don’t know how accurate that is, but that’s what it is at 7%.

[Akshay Jagdale:]

So how much, so it's 7% this year and last year was what 5 or something or?

[Joe Sanderson:]

Last year it was 4%.

[Akshay Jagdale:]

So in a sense that we’re taking out 3% of our supply and spending more -- 3% more of supply this year is going to exports. So how do we reconcile that with sort of 3% more or 2% more heads in the U.S., so do we even have those many layers and the pullets et cetera that we're putting forward, that we didn’t even get to 2% on eggs?

[Mike Cockrell:]

The weekly eggs have to run in 2.9% more in the 19 state and in the total state they are running 2.9% more now the hatch they are pushing in the domestic flock they are pushing the flock, I can tell that about the hatchability coming out.

[Lampkin Butts:]

If you look at 2014, I’d say if you look at 2014 with the breeder flock we had in place last year the domestic industry was setting 205, 206 and in some weeks 208 million eggs last year. So fast forward to February of 2015 we’ve got 2% more breeders on the ground, some of those breeders are producing eggs for Mexico and the industry is still setting 206, 205 is really not a material change from where we were last spring it's just comparing year-on-year we're up that 3%. But the flock, the breeder flock was there to produce these eggs last fall there were just some weeks when they wouldn’t and some weeks they did.

[Joe Sanderson:]

I can tell you by the hatch that they are pushing on their older birds and they are pushing them and if they were younger birds they'd be running 84%.

[Akshay Jagdale:]

And just what is you read on production has been up by so far this year, I mean you guys prior to agro stat data because weekly production data from the USDA is pointing to almost the 10% increase calendar year-to-date in production. So that sounds very high, but what’s your read on what production is up by year-to-date this calendar year?

[Joe Sanderson:]

The weekly USDA data is not as good as their monthly data in my judgment. The monthly data is showing -- it's running 3% total, 3% and 4%. If you look at the monthly data it's just 3% and 4%.

[Akshay Jagdale:]

Yes, that’s what I thought, so again we should ignore that weekly data to a larger extent. And then you guys, can you talk a little bit about the what percentage of supply in '14 according to agro stats was big bird deboning? And how was that changed compared to '13 or even '10 if you roughly add that, because there are lot of companies have increased their big bird deboning production mix and I am trying to get a sense of how much that's increased?

[Mike Cockrell:]

It's running about 40% of the total.

[Akshay Jagdale:]

And how much is it up by?

[Mike Cockrell:]

I would say last year was 35%. It's not up that much, it's up couple of percent.

[Akshay Jagdale:]

And over a five-year period would you say it's up like 5 percentage points or so or more?

[Joe Sanderson:]

I am not going to speculate, let me get the data.

[Mike Cockrell:]

We can talk about the data offline if you want but just my question is really there is more of the mix coming into big bird, does that in any way change your view of long-term profitability of this segment? Because obviously the small bird segment recently reset pricing at a much higher rate than historical levels. I think profitability there has improved significantly recently. So are you seeing, do you see longer term let’s say over the next five years or so the big bird deboning segment to have slightly lower margins compared to historical levels because more people are coming here?

[Joe Sanderson:]

It hasn't happened here, I can tell you that. I can tell you that it hadn’t happened -- not per head and you remember when the demand for those products are increasing as well the demand for white meat and wings and chicken tenders are increasing as well and so the demand is not declining for white meat.

[Akshay Jagdale:]

And just one last one, just in terms of your feel of what’s happening in the industry this time around this cycle obviously it lasted -- people are making money much longer in this cycle than we’ve seen pretty much ever. I mean is the industry behaving any differently in this prosperous period than you’ve seen in the past or you still believe that it’s pretty much behaving the same way there was just some structural constraints that have exceeded the growth?

[Joe Sanderson:]

I think there is structural constraints, I think breeder flock is one, I think processing capacity is another one, hatchery capacity is another, I think there’re physical constraints -- I don’t think you have a different generation leading the companies and I don’t know that they want to build complexes.

[Akshay Jagdale:]

So you do think it’s a little different because that’s previously you didn’t think so, is it fair to say your thoughts have changed a little bit there?

[Joe Sanderson:]

Maybe…

[Operator:]

We’ll go next to Francesco Pellegrino from Sidoti & Company.

[Francesco Pellegrino:]

So just following up some of the international themes and I apologize if it’s been touched on a bit already. But the African growth in Opportunity Act seems as if there is some illegal anti-dumping duties against U.S. chicken happening in that region. What are you hearing from lobby as regarding a go since it's up for a renewal something that you see getting tied up in political red tape and putting it out towards fourth quarter?

[Lampkin Butts:]

We’re optimistic that South Africa is going to open to chicken from USA sometime this year this summer would be the soonest but we’re optimistic about getting that market back.

[Francesco Pellegrino:]

If you get that market back just looking at where the report came in and the decrease in export towns from the month earlier where the sites. What type of impact could we really see that going forward, if we get I guess a go of where it’s been at a past performing and we clean up its anti-dumping occurrence in the region? Do you see significant supply shifting to that region or?

[Lampkin Butts:]

Well we think it would definitely make the top 15 in volume, we think it could be 75,000 to 100,000 metric tonne market which is rushing with close was 250,000 metric tonnes but if we get that market open that’s going to take a little pressure off of export volumes. They were also taken Gizzards, they buy Gizzards.

[Francesco Pellegrino:]

I guess just to shift to company level question for a bit as the product mix begins the shift at the company, I see like big birds boning eventually being about 61% upper mark 55% last year of your volume of your total volume process, what are you looking I mean you’re also looking at a facility in the Carolina region where big birds are boning. Where would you eventually like to get this product mix at? Because right now I see that at the end of the year being 60% big birds are boning, 40% retail you have something in the work for the Carolina region. What’s the ideal product mix right now for the company in the future?

[Lampkin Butts:]

We need a deboning plant in the east and then we think we’ll -- and then next plant we hadn’t decided sort of Tray Pack [indiscernible] but likely we’ll go back west and hadn’t determine what kind of plant that would be -- we don’t know yet. But haven’t decided on that plant. We won’t be balanced in -- we don’t continue to build, we know that.

[Francesco Pellegrino:]

So you're talking about next plant possibly Tray Pack nothing really definitive, yet I know you're focusing on flocking in a location for the Carolina plant. But looking at cash on the balance sheet for a second, I mean you have a $0.22 quarterly dividend, you did a the $0.50 special dividend in the couple of quarters ago, you have a $173 million of cash right now, lower CapEx spending for the rest of the year, Carolina plant is going to cost on average about, correct me if I am wrong, 110 million. 2015 still looking relatively healthy going on previous calls you’ve been pretty vocal in terms of where your discussions with the Board. Is there any additional or incremental commentary that you can share with us where is your cash being utilized after Carolina plant? And I guess maybe second plant after that because it still seems that as if you'll have significant cash on hand.

[Joe Sanderson:]

We evaluate all kind of options we like to return, we said we wanted to buy some stock back that has been put out in our performance, in our bonus program that stock buyback is still out there and then we like to return dividends to our shareholders and we have plants to build beyond North Carolina, so we have a lot of things on our mind.

[Francesco Pellegrino:]

Just mentioned that you want to like focusing on buying back stock and I know in the past you’ve been pretty vocal about where you see the valuation of this company, I think you valued it anywhere at $10 to $15 per share per processing facility today. In this environment what do you see the valuation of Sanderson Farms at? And that would be my last question.

[Joe Sanderson:]

I don’t put a price on…

[Francesco Pellegrino:]

You have in the past though.

[Joe Sanderson:]

I don’t remember doing that.

[Operator:]

And there is no further questions in the queue. I’d like to turn the call back over to Joe Sanderson for any additional or closing remarks.

[Joe Sanderson:]

Thank you all for spending time with us this morning and we'll look forward to reporting our second quarter results to you in May. Thank you very much.

[Operator:]

This does conclude today’s conference. We thank you for your participation.