Sanderson Farms, Inc.
Q2 2015 Earnings Call Transcript

Published: 28 May 2015

[Operator:]

Good day, and welcome to the Sanderson Farms Second 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 the Chairman and Chief Executive Officer, Mr. Joe Sanderson. Please go ahead, sir.

[Joe Sanderson:]

Thank you. Good morning, and welcome to Sanderson Farms second quarter conference call. We issued a new release this morning announcing net income of $71.2 million or $3.13 per share for our second fiscal quarter of 2015. This compares to net income of $51 million or $2.21 per share during last year second quarter. I’ll begin the call with some general observations but before I do, I will ask Mike to give the cautionary statement regarding forward-looking statements.

[Mike Cockrell:]

Thank you, Joe, and good morning everyone. This morning's call will contain forward-looking statements about the business, financial condition and prospects of the company. 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 report on Form 10-Q filed this morning with the SEC. Also they are included in our press release published this morning. Those documents are available on our website at www.sandersonfarms.com. You are cautioned not to place undue reliance on the forward-looking statements made this morning and each such statement speaks only as of today. We undertake no obligation to update or to revise our forward-looking statements, external factors affecting our business such as grain cost, market prices for poultry meat, and the health of the economy among others remain volatile and our view today might be very different from our view a few days from now.

[Joe Sanderson:]

Thank you, Mike. Lower grain costs and continued good demand for chicken drove our results during our second fiscal quarter. Our sales volume of fresh and frozen chicken was up by 10.6% compared to last springs volume and reflect heavier birds and new production in Palestine. Our feed cost per pound for fresh chicken processed decreased $3.009 per pound during the quarter compared to last year second quarter and our net sales price per pound for chicken sold was down by $1.008 per pound during this year second fiscal quarter when compared to last year. Despite the slight decrease in overall selling prices, market prices continue to reflect good demand for chicken products. The Georgia dock price remains at a record high and reflects excellent demand for chicken at retail grocery stores. During calendar 2014, chicken sold at retail grocery stores increased 2.7% in pounds compared to 2013 and 6.7% in value and that trend is continuing in 2015. Chicken remains an attractive option to high-priced beef and retailers have not yet passed through the lower wholesale prices for pork. When that happens, pork prices might be more competitive with chicken prices but we expect continued good retail grocery store demand for chicken this summer. In addition to excellent demand at retail grocery stores, we are able to say for the first time since 2008 that demand in food service is also improving. Store traffic and same-store sales at most food service concepts have been higher since November, with the exception of weather impacted February. According to the U.S. Census Bureau, consumers in the United States spend 9.1% more in food and drinking establishments during the first calendar quarter of 2015 compared to 2014. And that represents a largest quarterly increase since 1993. While quoted market prices for boneless breast meat remain below the $2 per pound, we saw the last two summers, demand and pricing are good. Dark meat is another story. Export demand remains under pressure for several reasons including politics, avian influenza, economic factors and the strength of the U.S. dollar. Some countries continue to ban product from the United States pending a solution to the AI outbreak. Some, such as Russia and to some extent China have ban product for political reasons. Some like Angola and other countries heavily dependent on oil and their economy have fewer dollars to spend on chicken. Finally the strength of the dollar is weighing on many countries ability to afford United States goods. The result of all of these things is a weak export market and weak dark meat pricing. We expect all of these factors to weigh on the export market for the foreseeable future. Prices paid for bushel of corn and per ton of soybean meal were lower during the quarter compared to last year second fiscal quarter. The result was that our feed costs in flocks processed were lower. Planting progress is now ahead of historical averages, and while getting seeds in the ground doesn't mean a lot for future grain prices in feed cost, it is a necessary first step in realizing a good crop. Given where future prices closed yesterday on the Chicago Board of Trade, had we priced all of our needs to the end of the fiscal year yesterday's close, cash corn and soybean meal prices during fiscal 2015 would be $156 million lower than a year ago. This number does not include the additional volume of grain we will need to purchase this year to feed the additional chickens we have on the ground in Palestine. These lower costs would translate into a saving of almost $4.05 per pound of chicken for the year. In addition to our costs, we will be closely watching the chicken markets and production number. Weekly egg sets continue to trend higher than a year ago and the breeding flock is getting larger. There has been a significant amount of discussion one might even say anxiety regarding the recent increase in pullet placements and what that increase might mean for future chicken suppliers. Like others we believe at least a portion of the additions to the breeder flock are related to the export of hatching eggs to Mexico and that at least some of the egg produced by the larger breeder flock will not result in an increase in domestic production. Exactly what portion of the larger breeder flock is earmarked from Mexico would be a guess. In addition to the export issues at least a portion of the larger breeder flock represents a shift to a different breed with the lower rate of lay. However, despite the fact that portion of the breeder flock as earmarked for export demand and a portion of the larger flock will replace hands that are more productive, the bottom line is the industry is expanding. That certainly does not surprise us and expansion is a natural response to the margins the industry has experienced in the past two years. We continue to believe the industry will process between 3% and 4% more head of chickens during 2015 and that weight gains will add another 3% to pounds. As for 2016, we will know about that when we get there. We continue to believe at some point the industry will run into a processing capacity ceiling, but we cannot say for certain where that ceiling is. Despite higher production numbers, prices have held up well, assuming the industry can produce another 2.5% to 3% more head of chickens in 2016 before hitting the processing wall, it is possible the market can absorb that production. Beef prices will remain elevated next year. The macroeconomic improvements this year are primarily because of lower price gasoline and a slight improvement in employment numbers. Wages have not improved significantly and labor participation rates remain low. Should those numbers improve in 2016, it is possible the increase supply will not necessarily mean over supply. We will know that when we get there. I mentioned the impact of avian influenza on export markets and I continue to believe the impact on our export markets is our industries primary risk with respect to AI. Our industry historically does a good job with biosecurity and given the relatively short life cycle of chicken versus a turkey, chickens are not as vulnerable to the virus. That does not mean our flocks are free from risk. But we do believe the primary risk is a market risk. We’ll remain on guard and we’ll continue to stress the importance of strict adherence to our biosecurity program to our growers and to our employees. Much has been written and discussed in recent weeks regarding the production and use of antibiotic-free chicken. In response to the announcement about several large users of chicken that they will move to antibiotic-free chicken over time, several processors in our industry have responded that they too will move to the production of antibiotic-free product. After very deliberate careful and measured consideration of this issue, we informed our customers last week that we will continue our responsible use of antibiotics when prescribed by our veterinarians. This decision is based on animal welfare, environmental considerations and food safety. First, we believe we have a moral obligation to care for the animals under our stewardship. Just as our vets do not compromise their oath to relieve the suffering of animals, our obligation to care for the animals under our care is not subject to compromise. It is instructive to us that this discussion has revolved primarily around chickens and no one to our knowledge has suggested that other species be denied care and medicine. It seems to us that if an animal is sick and its suffering would be relieved from the use of FDA approved antibiotics, it dose not matter if it is a chicken, cow, hog, or household pet that animal should be treated. We also have a commitment to environmental stewardship. Sick chickens do not perform well. When a chicken get sick, it takes longer to reach market weight. It takes more feed to produce a pound of meat and it just performs poorly. Because its performance decreases, it takes more water, more feed, electricity, natural gas and other resources to raise the bird. More feed means more acres, more water, and more fertilizer to grow grain. Given the number of animals on the ground in the United States for food production, even small changes in the performance of those animals could have a significant negative environmental impact. Simply stated, neglecting the health of our chickens is inconsistent with our environmental sustainability goals, and our commitment to the judicious use of water and other natural resources. Finally healthy chickens are safe chickens and our judgment and based on the experience in Europe, unhealthy chickens are more likely to carry higher loads of salmonella, Campylobacter, and E. coli. Our company and our industry have made great strives in recent years to reduce these bacteria and that work is in jeopardy if we neglect bird health. Like everyone else, we understand the anxiety created by fear of antibiotic resistance caused by the misuse and overuse of antibiotics. We also are aware that there has been no credible scientific evidence that supports the notion that antibiotic resistance in humans is made more likely because of the use of antibiotics in chickens. Indeed, because of withdrawal periods mandated by the FDA, there are no antibiotic residues in chicken meat market in the United States. And in that sense, all chicken is antibiotic free. We will continue to work with our pharmaceutical suppliers to find alternatives to antibiotics important in human health. And we’re committed to using alternatives when they become available, but until such alternatives are developed, we’ll treat the animals under care as needed with antibiotics approve for use in chickens by the FDA. I’m pleased to report the startup of our Palestine, Texas facility continues to go well. I believe the successful startup reflects the success of our training program would prepare young managers to run the new operations. While startup has gone well, wet weather has put us slightly behind building chicken houses. We have commitments from all the growers we need, but because we’ve fallen behind getting houses built, we will likely delay the move to 900,000 birds per week originally targeted for November. We will began moving to 600,000 birds per week in July as originally scheduled. We continue to train managers to start operations at our new facilities in St. Pauls. The permitting process continues there and we plan to start construction on new facilities in June that will put us on schedule to open the new facilities during our fourth fiscal quarter of 2016. At this point, I will turn the call over to Lampkin, for more detailed discussion of the market and operations during the second quarter.

[Lampkin Butts:]

Thank you, Joe and good morning. As Joe mentioned market prices for poultry products were mixed during the quarter when compared to our second quarter last year. The average Georgia Dock price during our second quarter was 8.1% higher than last year second quarter averaging a $1.14 per pound during the quarter compared to $1.06 per pound last year. The Georgia Dock price for this week is a $1.16 per pound, which compares to $1.095 per pound for the same week last year. The Georgia Dock price reflects continued strong demand for chicken in retail grocery stores and remains at record levels. Bulk leg quarter prices were lower for the quarter compared to last year’s second quarter averaging $0.35 per pound during our second quarter this year, compared to $0.439 per pound last year for reasons described by Joe. Through March, industry export volumes were down under 10%, compared to last year and values were lower by 11.7%. The current Urner Barry a bulk leg quarter quote is $0.28 per pound but they’re trading lower than that. Prices for jumbo wings were higher during our second fiscal quarter than last year’s second quarter, jumbo wings averaged a $1.52 per pound up 40.3% from the average of a $1.09 per pound during last year’s second quarter. The current Urner Barry quote for jumbo wings was $1.48 per pound. Boneless breast prices improved significantly during April, but on average were lower than last year’s second quarter decreasing 4.4% when compared to the second quarter a year ago. The second quarter’s average Urner Barry price was a $1.50 per pound, today the Urner Barry quoted market for jumbo bonus breast meat is a $1.55 per pound. The overall result of these market price changes was a decrease of $1.08 per pound in our average sales price per pound of chicken sold. We sold 855.3 million pounds of poultry during the second quarter, an increase from the 773.1 million pounds sold during last year’s second fiscal quarter. We processed 864.4 million pounds of breast poultry during the quarter up 13.4% on the 762.2 million pounds we processed during last year’s second quarter. We previously projected, we would process 827.2 million pounds during the quarter and higher than projected live weights and yields made up the difference from our projections. We now expect to process approximately 3.4 billion pounds of fresh chicken this fiscal year an increase of approximately 11.2%, compared to 2014. We estimate we will process approximately 875 million pounds in our third fiscal quarter, approximately 887 million pounds during our fourth quarter. Both of these estimates could be impacted by weather, bird performance and other factors some of which are beyond our control. Results and margins in our prepared foods division improved during the second quarter and we expect further improvement during the second half of the year. We sold 42.1 million pounds of processed chicken at our foods division for the first half of this year compared to 33.3 million pounds for the first half of last year. The significant increase in pounds processed and sold reflects demand from a few new customers. The average sales price for the first half of the year increased $7.04 per pound compared to last year. At this point, I’ll turn the call over to Mike Cockrell.

[Mike Cockrell:]

Thank you, Lampkin. The 8.5% increase in net sales for the quarter to $716.6 million from $660.7 million last year was the result of the increase in pounds of poultry product sold offset by the slight decrease in sales price per pound. The 4.6% increase in our cost of sales for the three months ended April 30 as compared to the same three months of fiscal 2014 was the result of lower feed cost per pounds, poultry processed of $3.09 per pound or 11.8% offset by an increase in poultry pounds sold of 82.2 million pounds or 10.6%. And a 9.4% increase in prepared chicken pounds sold. Feed cost accounted for 47% of our cost of poultry products during the quarter and that compares to 48.8% last year. The $14.1 million increase in SG&A expenses for the first half of the year reflects increased accruals for advertising, additional trainee cost as we prepare for our growth and startup expenses in Palestine. We also rolled out $432,000 in Fayetteville, North Carolina expenses. Let me mention a couple of things about SG&A expenses for the balance of the year. As many of you know our SG&A expense has typically increased during our third and fourth fiscal quarters when we begin accruing for possible bonuses and an ESOP contribution. Under applicable accounting rules, we don’t begin accrual for these items until we deem payment of those bonuses or the ESOP probable. We’re typically in a position to gauge the probability of payment of these items after we get a better read on grain costs and chicken markets as we move through the summer growing season. Our employees will earn bonuses under our EPS bonus program, if the company earns at least $7.91 per share and we’ll earn top bonuses if we earn $8.97 per share or more. At the threshold level, this program would cost approximately $1.3 million. And a top bonuses are earned it would cost approximately $26 million. Our managers will also earn a bonus if the company’s earnings per operations profit place it in the top third of Agri Stats. At the threshold level, the Agri Stats bonus will cost $2.1 million and if the company finishes in the top 10% of Agri Stats, the program will cost approximately $6.4 million, if earned approximately 40% of our bonuses get booked to SG&A and approximately 60% is booked to cost of goods sold. With respect to the ESOP, the Board of Directors typically approve an ESOP contribution of approximately 4% or so of operating income and we will approve accordingly as we move through the balance of the year. Accruals for these programs if we deem them probable will affect the third quarter more than the fourth since we will accrue approximately three quarters of the estimated cost of these programs during the third quarter under catch-up accrual rules. In addition to the bonus compensation plan, SG&A during the third and fourth quarters will also include startup expenses at St. Pauls. As Joe mentioned, we hope to begin construction in June and we already have plant management on the payroll. We expect startup expenses of $370,000 during the third quarter and $1.3 million during the fourth quarter. Also if we were to accrue for the full EPS bonus during our third and fourth quarters, and assuming an accrual of our ESOP contribution consistent with previous levels, we estimate SG&A expenses of $48.2 million in Q3 and $37 million in Q4. We currently have no outstanding draws onto the revolver and we have $13.8 million in letters of credit that gives us $736.2 million available to us as needed. We also paid the fourth of five annual $10 million payments under our $50 million fixed term debt in April, leaving $10 million outstanding under that loan. Our debt to cap ratio with the end of the second quarter was 1% and that's down from 3.8% at the end of the last year second quarter. Our working capital at the end of the second quarter was $374.8 million and our shareholders equity was $973 million. On April 24, the Company entered into a new revolving credit agreement to among other things, increased the available credit to $750 million. The new facility also provides ample capital expenditure allowances for St. Pauls and another future poultry complex. The facility includes various commitments which management is comfortable with. It remains unsecured and unless extended, it will expire April 24 2020. During our second quarter, we repurchased 700,000 and three shares of Sanderson Farms common stock at an average price of 78.85 in open market transactions and those repurchases were pursuant to the stock repurchase plan designed to illuminate dilution caused by the company's equity compensation plans. Shortly thereafter, our Board of Directors replenished our authority to continue that plan in the future and management currently has the authority to repurchase up to another million shares in common stock. Our effective tax rate for the quarter and for the first six months of the year was 3.46% and 34.9% respectively. And for the balance of the year, we expect a tax rate of approximately 34.9%. We now expect to spend approximately $161.2 million on capital projects during 2015, and have spent $93.1 million through the first half of the year. Of this total, we spent $46.4 million in Palestine and our capital budget also includes $27.5 million for St. Pauls. We intend to use cash flow from operations to fund the balance of our capital budget. Our depreciation and amortization during the first half of the year totaled $35 million and we expect approximately $75 million for fiscal 2015. Maura, that completes our prepared remarks this morning and we'll now open the call for questions.

[Operator:]

Thank you, Mr. Cockrell. [Operator Instructions] And we'll move to our first called Farha Aslam at Stephens.

[Farha Aslam:]

Hi, good morning. Joe, you highlighted that you expect production for this year to be up around 6% to 7% and could be up another about 2% to 4% for next year. But yet you sound very, very confident about the market's ability to absorb that. Could you just give us some color in terms of what is exceeding your expectations in terms of demand that the market is able to absorb that with relatively little impact to pricing?

[Joe Sanderson:]

Well, we saw good demand in December and January, and then again March, April when boneless breast started moving up after the February slowdown, and in the face of more head about 3% more head and in increased pounds that we estimate was about 3%, probably total of 6% more volume. And we attribute that to lower gas prices and more jobs and more confidence. And so, in the face of about 6% more volume which we think we have had this year, we have had pretty good pricing domestically and we think that's what we are going to have for the rest of the year and we have done that without any improvements in wages or labor participation right. Neither one of those metrics have improved really, and if those two metrics began improving, then we are not fearful about another 3% head increase next year. We don’t think we will see the weight gains next year that we saw this year. We think most of that weight gains has happened. It was primarily in the big bird deboning region that we've seen that in Agri Stats. It wasn't in the other classes. It was in big bird deboning and we don't think that it can go nearly as much as it happened this year. So, we feel okay about it.

[Farha Aslam:]

Great. And then in terms of pricing, you expressed confidence about forward pricing. Urner Barry has highlighted that breast meat has recently been a little bit soft. Is there a particular reason? Is that seasonal? How do you expect breast meat pricing to progress from current levels?

[Joe Sanderson:]

Well, it is really counter seasonal. It's not seasonal. We think we had very mild weather. Some companies, there are three or four companies that ran last Saturday and they are going to run again this Saturday because their wage are too heavy. And their running birds here at the end of the month to May. People are out of money, they had a big Mother's Day, they had a big Memorial Day and they spent their money and there’s a lot of product hitting the market of these Saturday runs. And it is just too much product for this time of the month. Bonus is probably going to go down, some more of this week and then we think it will stabilize next week in - but it's just a time end of the month. People are out of money and too much volume hitting the market at that time.

[Farha Aslam:]

So it's short term in nature the weakness?

[Joe Sanderson:]

That's what we believe. Yes.

[Farha Aslam:]

Great. And then just a final question - on leg quarter pricing, do you anticipate the increased supply of dark meat in the U.S. to impact total bird pricing and breast meat pricing in particular?

[Joe Sanderson:]

More likely to show up in grocery stores, its more likely to show up as $0.29, 0.39, 0.49 features in the grocery store and take a little bit away from whatever other sales you might make in a grocery store. I don’t think it will effect - I don’t think it will affect food service at all. I think it will cannibalize sales and grocery and it might steal from pork, and it might steal from chicken sales and the grocery store if more than anything.

[Farha Aslam:]

Right. Thank you very much.

[Joe Sanderson:]

You bet. Thank you.

[Operator:]

Our next question comes from Ken Goldman at JPMorgan.

[Ken Goldman:]

Hey, good morning everybody. You have had a good call on corn. You have been short the market, and that's the way it is gone. Is it still your view that corn will go lower from here? We are seeing some mixed forecasts out there on our end.

[Joe Sanderson:]

Well, yes, we think it will go a bit lower but these are good values right now anywhere from $3.55 to $3.45 are good values and I think those, you know, I don’t want to be hardheaded like corn farmers were and keep it in the bin. I think these are good values and probably you should be owning a little bit at these levels, I don’t think you'll book it all but I think these are pretty good levels and very attractive levels and I think saw it around $3.295 to $3.05 I think those are attractive levels. I don’t think you would buy, I think $2.95 to $3.05 you might want to own some of that.

[Ken Goldman:]

So for an outsider modeling the Company, which is always hard to do, is it reasonable to assume that Sanderson Farms is a little bit more locked in than it usually has been the last year or two on these commodities?

[Joe Sanderson:]

No, I wouldn’t say you’re locked in, I think you would say, we were paying more attention and we owned some basis and we’re paying attention to the board on a daily basis and debts like you might have seen yesterday and the day before, that you might take some ownership for a week or two or three.

[Ken Goldman:]

One more question, if I can. You have made the decision not to sell to the gray markets to get into China. Some of your competitors seem to have made a different choice.

[Joe Sanderson:]

That’s right.

[Ken Goldman:]

Okay. Are you sticking with your plan? Are you still seeing the benefits from playing by the book a little bit? And I'm not trying to be sarcastic there; I'm just kind of curious just how you are looking at it because others are taking quite a different approach.

[Joe Sanderson:]

There is no benefit yet, some of the people, there are still some people going into Hong Kong. We understand and but isn't gray market. We have chosen not to do that and it's a long term decision for us. We don’t think to risk as worth it the chance that we might be turned out of China for the long haul for an extended period of time we are large player in China. We have a premium brand, we always have gotten a premium price for our product above the market we’re well known there and we are willing to - we’ve been out to that for like four months, and we're willing to be patient.

[Ken Goldman:]

Thank you, Joe.

[Operator:]

And we move now to Kenneth Zaslow with BMO Capital Markets.

[Kenneth Zaslow:]

Hi, good morning everyone. A couple questions - one is your gross margins sequentially declined about 170 to 180 basis points. Was that in line with your expectations? And would you expect to see a rebound sequentially in your gross margins? So sequentially since last quarter, I think that the drop in your gross margins sequentially were a little bit more than I would have thought. I get the seasonality but I thought things may have been a little bit stronger. I didn't know if this was the typical seasonality of how your gross margins sequentially contracted.

[Joe Sanderson:]

Ken I think the miss was primarily on the revenue side and I know you guys try to do a realized price model or you look at the markets and guess what we sold our pounds for and particularly our dark meat that might have been a little bit of surprise just because - as Lampkin mentioned in his prepared remarks, the market right now is $0.28 but we’re selling product for in some cases significantly below that and that was true throughout the quarter. So I guess to respond your question didn’t surprise us maybe a little bit and from that perspective, we wouldn't have guessed that but going forward I don't know, I mean like we always say we don’t know what the markets going to be. So I can't even try to guess what the operating gross margins might be next quarter.

[Kenneth Zaslow:]

Okay. But usually seasonally it improves from these levels. Is that a fair --?

[Joe Sanderson:]

Absolutely, that's correct.

[Kenneth Zaslow:]

Okay. What do you think is the weight ceiling? When you say that you don't think weights are going to go any further, higher than where they are for next year, how do you - what is the weight ceiling and how do you get there?

[Joe Sanderson:]

There one or two plants complexes running around a 10 pound bird. We are not but we’re going to experiment but our other plants because of marketing considerations cannot do that because of customers like service and you don’t see - like I said we have plants that ran last week in not Sanderson but in the industry and plants are running this week end because the weights are too big. And it's mainly markets and plant capacities that has to do with chilling, and there are just weight considerations and marketing considerations. We think there was a big move this year, began last fall and then we don't think there is going to be - we don't think there will be anything like that next year, all of this move was in the big bird deboning region too, it wasn't in Freight pack, was all in big bird deboning, and we just don't believe that’s going to happen next year at all.

[Kenneth Zaslow:]

Okay. And the other question I have is, can you - you talk about processing capacity limit, limiting, being limited. How do you, again, assess that there is a limitation? Where along the chain is it limited?

[Joe Sanderson:]

We think its primarily in the processing plants and it's a guess and it goes back to a calculation that begin in 2008 with the closure of some plants in 2008 and if you all go back and remember what, there were five plants closed in 2008, until those plants were reopened that lays three plants closed and then there were - how many plants closed in 2011, two more plants closed in 2011 and then there were some - we believe some rationalization of some capacity and addition to that. And then we’ve opened two plants since then and so if you look at the 19 state eggs sets in 2007 it was 220 million eggs, it's running now about 210, we think that may can get up to 215, 216 and we think that matches up with probably hatching and processing capacity and that will be another 2% to 3% on top of where we are right now. Now that just a guess but that kind of that is going to, if our calculations are right based on food placements and what we think is going to Mexico and what we think, we’re going to have more hens in that by the fall but we think they’re going to more hens and more egg production capacity then there is process capacity by the fall. So with people may have over ordered because it been so short but that’s what we think eggs it and translated into process capacity as is about 215, 216 million eggs in capacity.

[Kenneth Zaslow:]

Okay. If you were wrong in 2016 on production side, what would you be wrong on, and would it be more conservative or more aggressive?

[Joe Sanderson:]

Well, it would be that they could process eggs from 218 to 220 million eggs and say it as 215, 216 because the pullet placements and the resulting layer float would indicate why more than 215, 216 million.

[Kenneth Zaslow:]

Great. Thank you very much.

[Operator:]

And our next question comes from Adam Samuelson at Goldman Sachs.

[Adam Samuelson:]

Yes, thanks. Good morning. So maybe a question on the export markets. I know you just alluded with Ken that actual export pricing is a lot lower than the Urner Barry quote for leg quarters. Wondering if you could talk about how that has trended through March, April, May, if you've seen demand from places like Angola, where there aren't trade bans, actually get better or if you have seen the base of demand in the export market it worse. And along a similar line, how far would we be from thinking about rendering leg quarters?

[Joe Sanderson:]

Well, the demand has not improved, we at these prices when you get into the high teens, low 20s you think you should create some more demand maybe open up a market if not opened up, if those prices but we have not seen it yet, we’ve seen continued pressure to get products into these countries and the price continue to drop. We the low end – if you look at an FOB price, the low end of what we have booked in May is $0.09 or $0.10 a pound away from the rendering plant.

[Adam Samuelson:]

Okay.

[Joe Sanderson:]

There is still $0.09 or $0.10 per pound before you would even consider that in our situation.

[Adam Samuelson:]

Okay. No, that's helpful. And along the lines that you might see some of this find its way into the grocery store as specials, how are you thinking about the trajectory at the Georgia dock price over the next three to six months and that has basically gone nowhere but up, flat or up, for the last year and a half? Do you think there is a seasonal decline actually to come in Georgia dock or not?

[Joe Sanderson:]

I feel okay about the Georgia Dock through Labor Day, that may not come down a quarter or half after July 4 but it’s not going to come down a lot, I don’t believe, I think or Lampkin do you have any different feel to that?

[Lampkin Butts:]

No I don't.

[Joe Sanderson:]

I think we’re going to be all right through Labor Day generally speaking then I think you’ll see a seasonal decline after Labor Day.

[Adam Samuelson:]

Okay, that's helpful. And then maybe along -- a final question from me, thinking about the cadence of supply growth this year and that 6%-ish, 6% or so range, which quarter do you think is actually going to mark the peak for supply growth out of the domestic market?

[Joe Sanderson:]

I think first quarter, I think this quarter the summer quarter, if we get normal heat which is a question mark because of the weather pattern they’re projecting but if you do, you will see as weights come down, June, July, August, September the weights will come off. I know normally our weights will come off significantly in our big bird plants and I would imagine the industry weights will come down if we get to heat, and there will be less fewer – there will be fewer pounds of chicken on market. But in the fourth quarter when you did October, November, December you get add deal whether or not they will – you will see the 3% more chickens and you’ll see the 3% more weight and if we are making any kind of margin they’re going to run chickens and they will try to run them. Thanksgiving morning and let them go home for we don’t have our normal seasonal cutback but I think first quarter will be your biggest volume.

[Adam Samuelson:]

Okay, that's very helpful. I'll pass it along, thanks.

[Operator:]

We move now to Brett Hundley at BB&T Capital Markets.

[Brett Hundley:]

Hey good morning gentlemen. Joe, that was helpful, your going through the processing plant constraints and how you think about it. And I wanted to ask a follow-up to that because I think it's important to talk about constraints from an operating capacity standpoint as opposed to what we see in the pullet numbers, etc., because it really could be anyone's guess. When we talk about age reduction and what's going to Mexico it becomes harder. So if we think about processing capacity constraints, and everyone talks to this 3% number, when you go through what has happened since 2008, are you accounting for some of the expansion announcements that we have seen? Aside from just plant builds, I think we, ourselves, are seeing probably five to 10 expansion announcements. Do you account for that in your expectation of processing capacity constraints? And also what type of value do you put on plants running an extra shift or something like that? Because historically, when I have brought this up to industry people and I say, well, what if you run Saturdays or you add an extra shift here? They say, oh, well, our attendance on Monday is horrible. Yet, in the scenario that you just talked about with running some Saturdays to control weights, it doesn't seem like volume is getting hit all that much, given that the market has been a little bit softer than you'd like recently. So, anyway, I hope all that makes sense. But I just wanted to get your thoughts on that.

[Joe Sanderson:]

You bet, well to your first point we don’t know, I think all the expansions generally with the exception one or two are in place. There have been I think that Wayne make a – Wayne Poultry has made announcement, I don’t think that expansion maybe is in place and there maybe one more in Alabama that was small expansion that may not be in place. But I think all the others are in place. So Brett, I’m guessing, we’re guessing it, the 215, 216 is what we think, we don’t know that but whatever is, it is but that’s what we are estimating in.

[Lampkin Butts:]

One thing, Brett mentioned was the Saturday.

[Joe Sanderson:]

Saturday yes there is no, that you can run in occasional Saturday but you got to run them out of the birds you have, we ran on Saturday from time to time like before Memorial Day because of demand, we can’t sure if we have extraordinary orders which we have from time to time, we run them out the birds we have. If our birds are too big we have to run and take some age of the chicken but our hatcheries and most people are like, our hatcheries match up with our plant, we can’t, we don’t have and our Hens match up with our hatcheries you can’t all of the – you can’t plan on running a Saturday run every Saturday I mean your employees, most plants, your employees are not going to work every Saturday, so that is not there, you can the way to expand is to either convert lines to add line in the plant or convert line from we all 70 bird a minute lines, nobody else does it in the industry, we are the slowest lines in the industry but convert 90 bird a minute line to 140 a bird minute line. Is it doable anymore working, can they do it, is it legal. Yes you can convert 90 bird a minute line to a 140 bird a minute line and a lot of that has been done in the last 10 years and they were looking forward to converting 140s to 175s but that was pull back the USDA did not approve that. So I know a lot of people in the industry were looking forward to doing that but it’s conversion of lines, adding to lines, adding a new line but you can’t do Saturday on a regular basis.

[Brett Hundley:]

Okay.

[Lampkin Butts:]

You can’t nobody can have a shift because everybody is already running two shifts and you have to have one clean up shift within every 24 hours.

[Joe Sanderson:]

But there may be some expansions out there that have not been completed, you say eight to 10, I have – I know of the Wayne plant it’s the one that they follow and could may have one there that hadn’t been completed, the other one in Alabama, those were the two that I know about hadn’t been completed.

[Brett Hundley:]

Well, no. And you are right; when I was referring to that I was referring to the majority of those were probably announcements that reached back probably a year, year and a half. And it was more my curiosity of if you guys had an awareness of those as you were thinking about - capacity constraints. Okay. No, that's good color; I appreciate that. And then, Joe, also -- this is more like a longer-term question. When you think about dark meat values and in particular over the short-term how they've come down and the different ways that we are deboning those quarters and using that meat domestically, do you guys think about the potential for dark meat values and white meat values to almost -- reverse is probably too strong of a word, but kind of gravitate towards each other over time as the US uses more dark meat domestically?

[Joe Sanderson:]

We’ve seen them pretty close in the past bone of same meat versus white meat when white meat is under pressure and guess down to $1.25 and we’ve seen, but right now what’s getting ready to happen is people start deboning more dark meat and when we get past Labor Day when the demand for white meat you’re probably going to say pressure on dark meat and white meat past Labor Day. I have been reading about where people are, because the pressure on the export markets are going debone more and more dark meat and serve in the US that’s going to put more pounds of meat first in the US and which I don’t know what kind of answer that is. And then secondarily it’s going to compete with white meat and it’s going to compete with grocery stores. We need the export market. At the end of the day we need the industry needs the export market. And you put all you put a half proportion of these leg quarters in the form of whole eggs or in the form of boneless dark meat back in the domestic market and it’s going to do what it’s done in the past in 2006 and in 2008. And it will depress the domestic market and you’ve to look to history to see and then matter what form it see in it by the way.

[Brett Hundley:]

Okay. And then my last question is on the evolution of bird flu here. And one of the things that we have become concerned about is, obviously, this fall for migratory birds to bring the flu back into parts of the southern US. We worry about Texas, we worry about Mexico. And one of the things that we've heard in recent weeks is the industry discussion over vaccination. And I don't know if you have the stance that you would like to expound upon, on that. But one of the things I would be curious about - Mike, you might have an answer -- is just if the industry does move to vaccination and if the industry does need to step up biosecurity in any way, do you guys have an estimate for -- is there an increased cost that we should think about in fiscal 2016, anything associated with that?

[Joe Sanderson:]

Well we don’t intend to vaccinate I will tell you that this danger about vaccination well if we vaccinate anything it would be our brave ridge [ph] we would never vaccinate the birds. We have - we would have a contingency plan to vaccinate breeders if there were a huge outbreak, which we would not anticipate it wouldn’t Broiler flocks are not immune to exposure from any kind of vector. It could happen with an employee going into a flock or Broiler farms could be exposed and you could have an area where you would have multiple farms with an outbreak. But a wide outbreak of avian influenza among the Broiler flocks is would be extraordinary to me, but should that occur I think you would have a contingency plan to vaccinate breeders probably not Broiler.

[Brett Hundley:]

Okay.

[Joe Sanderson:]

And the cost would be minimal.

[Brett Hundley:]

Okay, I appreciate those thoughts.

[Operator:]

Our next question comes from Michael Piken at Cleveland Research.

[Michael Piken:]

Just a couple of questions -- number one, I just was wondering if you could walk us through how your employee comp structure would work, assuming we go out to 2016. Let's say that we end up exceeding the higher end of the threshold. How is that going to get reset by the Board for 2016? And how should we be thinking about those types of things, both from the ESOP and from a management bonus perspective?

[Mike Cockrell:]

Yeah good question our earnings per share bonus is always set based on a 20% return on equity you may recall last years bonus target was had a 6 in front of it this year it’s close to $9 and the reason for that obviously is our equity grew significantly last year and it is growing significantly this year. So at the end of fiscal 2015 and December management gets 2015 in the books and then we will compete this is just a straight math you compete with a 20% return on average equity would be for the year using a little bit of algebra get that number and we take it to our Board in January and ask them to approve it. I wouldn’t anticipate the Board would change their historical philosophy about that and hold us to a 20% return on equity and reset the number for 2016 and it will be higher than $9 a share obviously, because our equity average equity is going to be significantly higher. The agro stats portion has been set the same for many years our target is to be in the top 10% of agro stats, but we earn a bonus if we’re in the top 30% and so a much lower or third of the bonus if you’re on the top 30 two-thirds if you’re in the top 20 and then you earn top bonuses if you finish at the top 10%.

[Michael Piken:]

Great. And when you say top 10% and top 30%, is that on a plant-by-plant basis or is that for like within the big bird deboning and within retail and tray pack? Or how do you view this top 10% or top 30%?

[Mike Cockrell:]

Yeah our participants in that plan, which is top management that goes down to the top managers at the plant level as well it’s for Joe and Lampkin and I and the people in the general office it is a company wide number. We do separate out big bird and retail for the plant managers and the division managers at the plant for example we put all of our retail plants together and if those plants finish in the top 10% of all retail plants in the industry those mangers get a bonus Lampkin, Joe, and I don’t, because ours just has strictly to overall company performance. But the agro stats bonus as you heard in my numbers are a very small portion of that total bonus. I didn’t answer your question about the ESOP, but ESOP is always a 4% to 4.2% of operating margin and again that’s just math it behaves a little lower than that last year we caped it at $15 million. These numbers out there we have today that I hope everybody will find in the transcript when you are doing your models that’s based on the $15 million number as well.

[Michael Piken:]

Terrific. And then one longer-term question, just in terms of thinking about with all the expansions coming on the big bird deboning side and people adding weights, how do you see the profitability of big bird deboning versus retail tray pack or your small bird as we look out over the next couple of years? Will big bird still be, in your estimation, the most profitable segment of the business demand?

[Mike Cockrell:]

It has been for 20 years and we’re well on getting ready to build another one. So obviously we think it’s going to continue to be. We’ll say that tray pack has performed admirably for us. And we’re very pleased with our tray pack operations they’ve done a great job and I guess through March, November through March tray pack has actually.

[Joe Sanderson:]

Three out of four.

[Mike Cockrell:]

Three out, yes three out of the last four months than better.

[Joe Sanderson:]

Tray pack is big bird de-boning and so we’re very pleased with our tray pack operations.

[Mike Cockrell:]

Mike you’ve seen the chart that we include in our investor material and as Lampkin, always says you can take that chart back 20 years and big bird de-boning over the cycle certainly has been the most profitable market segment. I remember some saying in 2007 that market had hit its peak and could never perform well again and it just continues to, it’s a good market.

[Michael Piken:]

All right, terrific. Thanks a lot guys.

[Joe Sanderson:]

You bet. Thank you.

[Operator:]

We move now to Andrew Hendel with Beach Point Capital.

[Andrew Hendel:]

Thank you for taking my question and congratulations on the record-high production. Why was the average sale price of poultry products sold up 1.3% compared to Georgia Dock whole bird prices, which were up 8.1%? Was it because of the weight gains and big bird deboning, an increase in supply?

[Joe Sanderson:]

Hi, good question Andrew. You have to recall that we sell 45% of our pounds based on the Georgia Dock, 55% of our pounds were sold off of Urner Barry prices roughly out of the big bird deboning plant. So there is never going to be very good correlation in realized prices per pound versus the Georgia Dock because you got to grow their Urner Barry and the 55% of our pounds that get sold off of that, that market. And as we said at the beginning of the call, I watched the analyst and look at their numbers and I know almost everybody missed a little bit on revenue this quarter not everybody but most everybody did and I honestly believe it was just because our realized price versus the market was lower than it has been historically primarily because of dark meat. We sell 12 million pounds of leg quarters a week is more than 40% of that big bird and the realized prices versus Urner Barry for dark meat was I hadn’t looked at it but is probably as low as it’s ever been, I mean realized price versus the quoted dark meat price, that was the big miss.

[Andrew Hendel:]

Got it, thanks. That's very helpful. And I noticed yesterday that the US Chief Veterinary Officer, John Clifford, said that avian influenza epidemic will end in July. Is that consistent with your expectations?

[Joe Sanderson:]

No. no. I didn’t read what he said but what he is probably talking about is what had temperatures that virus disappear normally but that will not be I assume that what he was talking about.

[Lampkin Butts:]

That’s what he said.

[Joe Sanderson:]

He quote, he said because of heat.

[Lampkin Butts:]

But he is hopeful.

[Joe Sanderson:]

But that virus is still resides in the wild, in the waterfowl. And it may mutate which is it probably will and some but I would not say that is over and done and gone and it’s very likely to turn up and show up, when the migration begins not immediately but maybe in November, December, January, February at some point it will show up again I believe.

[Andrew Hendel:]

Great, thank you.

[Operator:]

We move now to Akshay Jagdale with KeyBanc.

[Akshay Jagdale:]

Good afternoon. So just on avian influenza, can you -- what is the risk, in your opinion? Or how are you thinking about the risk, when the birds start to migrate again, and its potential impact on the chicken industry?

[Joe Sanderson:]

Akshay, we think - we do not discount the risk of exposure and outbreak. We will be very intelligent about that and very strict in our biosecurity and we think that could happen that a farm or a group of farms that are close by one another, whether it's us or another integrator, could experience an infection and outbreak. It could happen but the biggest risk we believe is market risk and that is because of outbreaks like it’s already been experienced or because of vaccination which could occur that we lose market and that because we lose markets that dark meat piles up back in the United States and markets deteriorate because of it. I think market risk is a bigger risk than infection and outbreak.

[Akshay Jagdale:]

And is the jury still out on how this is being transferred, the disease? There was some article saying it could be airborne. Most of them are saying it's coming from the droppings and those somehow being transferred. But what are we -- you guys look at that more closely than we do, obviously. So what is your conclusion as to -- is there a conclusion, and what is it? How is the disease being spread?

[Joe Sanderson:]

Well, there has been – there has never been any evidence that it was ever airborne, they ever transmitted airborne. So I don’t, I’ll never say it couldn’t be but it never has been. My guess is has been transmitted like it always has been and that they have not figured it out yet and these people do not have experience with biosecurity and they don’t know what it means and there is a learning curve there and they are on the first step, they don’t, they never had any experience with this. And so I think we got a long way to go in Mid-West dealing with biosecurity.

[Akshay Jagdale:]

Okay. And just going back to some numbers on the production side -- first of all, thank you, as always, increasing the disclosure on the SG&A side; that was very helpful. But one of the things that you do that makes our life a lot easier is you give us these quarterly pound, how many pounds you are going to sell of produced numbers. And over the last year or so you have always -- if anything, you have been overshooting them. Can you help me understand that? Is it just the weather that you are miscalculating when you produce 3% more pounds because of higher weight? Or how should I be thinking of that?

[Joe Sanderson:]

We had a little bit higher weights in the first quarter than we anticipated but in the second quarter it was primarily because of our yields and the plants, they were extraordinary.

[Akshay Jagdale:]

Okay. So when you give us these -- for the remainder of the year, are you now assuming the yields that you produced this quarter, or is it more of an average number and not extraordinary? So in other words, could it be better than what you are saying again?

[Joe Sanderson:]

Well, it could be a little bit better.

[Mike Cockrell:]

It could be and for the third quarter number that Lampkin gave, we took live weights down a little bit because we always experience lower live weights in July, Akshay when it get really hot in Mississippi and we could be wrong on that. I appreciate the frustration that we miss the number this quarter but our yields were just extraordinary and we took them up a little bit in the numbers it’s that we quoted and we hope to get closer, it’s my fault.

[Akshay Jagdale:]

No, no. And I'm not frustrated. You guys did a great job with -

[Joe Sanderson:]

We always congratulate them when they beat our yield estimation though.

[Akshay Jagdale:]

Okay. And just so - you mentioned your guess on production of plus 6%. Was that through May or through April? I'm guessing that was based on average –

[Joe Sanderson:]

That was through April.

[Akshay Jagdale:]

April? So if the industry is up 6% and at least one of the top two guys is flat, does that mean the rest of the industry is producing 7% to 8% more pounds, what does that tell you about discipline in the industry? That's always a question you get and I know it's hard to judge. But -

[Mike Cockrell:]

Actually, we’re using USDA figures and we’re using their monthly figures plus some Agri Stats figures, we don’t have the April USDA do we? We do.

[Akshay Jagdale:]

The USDA, year to date, I think, is up 4.5%, if I'm not wrong. But that's without any adjustments.

[Lampkin Butts:]

Yes pounds, the pound and price.

[Mike Cockrell:]

Yes you’re right.

[Lampkin Butts:]

Lower percent.

[Akshay Jagdale:]

Anyway, the point I'm really making is --

[Lampkin Butts:]

That is on Agri Stats does, Agri Stats is more than that.

[Akshay Jagdale:]

The point I'm really -- I'm just trying to get your view on this question that we get all the time, which is

[Joe Sanderson:]

No, no. I know better than that, you know better than that too.

[Akshay Jagdale:]

Yes. So -

[Joe Sanderson:]

The industry is trying to get back to that maximum full production that we’re able to do last year but due to the metrics.

[Akshay Jagdale:]

Right. And then the discussion on how much capacity is there in the industry is obviously a healthy one. But everybody keeps increasing their production numbers for the last six months. So it seems like, so far, we haven't breached any capacity hurdles.

[Joe Sanderson:]

No that has been we have not seen, not 210 million eggs a week.

[Akshay Jagdale:]

And then on demand, I hear you. Things are pretty strong, but inventories are starting to build on boneless skinless breasts, too.

[Joe Sanderson:]

We don’t feel, we are okay with the bonus right now we think that build occurred primarily in December and January.

[Mike Cockrell:]

It came down a little bit this past month.

[Joe Sanderson:]

It came down the last month, that was some further processors we think that were put in stuff in the freezer to avoid the higher prices, main build in the freezer is dark meat and that is concerning and it tells you what is going on.

[Akshay Jagdale:]

Right. So you mentioned retailers haven't passed on the lower pork prices on to consumers. What is happening there, in your opinion? Why - is it just - what's the logic behind that? And if that does change - one would assume that that would change -- what do you think that would due to the Georgia dock price?

[Joe Sanderson:]

I think they’re just making more money in their sheltered by the higher price of beefs and they’re making more margin on pork and I don’t, I think as long as beef prices are high and until all the grocers change at same time, I don’t you want to have multiple grocers start running pork or running lower prices that makes the one next door to lower their price day and day here.

[Akshay Jagdale:]

But if that does happen, you think it will impact the Georgia dock? Right? That's what it will impact?

[Joe Sanderson:]

Not right away, I don’t think so remain I have always said they’re going some pork, some beef and some chicken it hadn’t we hadn’t seen any effect yet. I hadn’t more like to that will see more of that effect in the follow.

[Akshay Jagdale:]

Okay. And just one last one on avian flu again - so you mentioned this. But I would love for you to give us a little bit more color. The reason why the poultry or the chicken industry hasn't been as impacted as, let's say, table legs is why, again? Could you just -- is it better biosecurity mainly?

[Joe Sanderson:]

I think primarily it’s geography, I think the primary reason is geography, I think if you think where the ducks spend most of the time, ducks and waterfowl, is not where the chickens are. So geographies are primary defense and then secondarily I think is bio-security and you think about another thing, I don’t know anything about these all these breakouts, outbreaks have occurred in the Mid-West and there are no chickens in the Mid-West. It’s turkeys and lagoons and there are no broilers up there. And the amount of traffic on a broiler farm is minimal, I mean you may have one or two people going into a broiler farm to go to work and on a broiler farm you don’t have a lot of ducks and geese landing out in the pasture around a broiler farm like you may have around a turkey farm around and you know it’s just different animal primarily we protect it by geography and secondarily by the amount of traffic and thirdly by our broiler security. Almost every chicken farm is going to have a foot bath going into the chicken half and I don’t think any of those other farms ever had a foot bath. So I think those are the three differences geography being the main one.

[Akshay Jagdale:]

Okay. Thank you.

[Operator:]

We’ll go now to Francesco Pellegrino with Sidoti & Company.

[Francesco Pellegrino:]

Good afternoon guys. Just wanted to follow-up on some of Ken and Brett's questions regarding the ceiling for processing capacity limitations in the future. So it appears as if different parts of the supply chain are expanding quicker than other parts of the supply chain, and just not everyone is being on the same page when it comes to, I guess, even expansion. Could this lead to industry consolidation further upstream?

[Joe Sanderson:]

Like what do you mean upstream?

[Francesco Pellegrino:]

So at like the breeder and hatcher level. It seems like you are going to have a lot of supply at that part of the supply chain but you are not going to have enough processing capacity later on.

[Joe Sanderson:]

The breeder level is already consolidated upward to that there really, three against they are consolidated already.

[Francesco Pellegrino:]

Okay, so it's just a consolidated part of the industry just taking bigger and bigger bets on expanding quicker than the processing facilities is what you are saying?

[Joe Sanderson:]

Yes and the pullet numbers, we all own our own pullets and breeders already. There is nothing is the pullet numbers that you see increasing or not, they little bit of those numbers are the upstream primarily breeders but there are only two of those, most of those pullet numbers are already consolidated into the broiler industry, there are pullets in other companies pullets. We own our own breeder stock.

[Francesco Pellegrino:]

Right, and I know you've said, Mike, Sanderson Farms, at least, has done a better job of aligning the different parts of the supply chain within the Company. I was just wondering if maybe there would be opportunities outside Sanderson Farms for some sort of consolidation. But it seems as if that might not be the case.

[Joe Sanderson:]

Yes I don’t think so, no.

[Francesco Pellegrino:]

Okay, okay. And I just wanted to follow-up with some SG&A expenses. So it seems as if, year over year for the second half, looking at 2015, the numbers that you gave us, Mike -- I think you said $48 million in SG&A for the third quarter and $37 million for the fourth quarter.

[Joe Sanderson:]

Right.

[Francesco Pellegrino:]

That would make the second half of 2015 relatively flat with the second half of 2014. I know Joe was saying that avian influenza, just precautionary expenses, wasn't going to be that significant. We are talking foot baths, it sounds like. Relatively speaking, it sounds as if the bonus threshold is a lot higher but the bonus amount that's going to accrue to SG&A is going to be higher as well. Why is SG&A really just staying flat? Is it just a better job of monitoring operating expenses? Or is it that marketing expense in the second half coming down significantly?

[Joe Sanderson:]

Two things one marketing expense and then last year in 2014, we had the variant of the – or we had more start-up expenses at Palestine and we will have at St. Paul is this summer. Those were the two offsets against the bonus in the ESOP accrual.

[Francesco Pellegrino:]

Okay, okay. And I guess just a last question, just sticking on the avian influenza – some industry experts have said that avian influenza is going to be the new norm. Obviously, a lot of people are going to say when the birds start migrating down south again, this has a potential to pop up. But for the next couple of years, avian influenza will be a ongoing theme, obviously, to a lesser extent. Internally, what is Sanderson Farms thinking about dealing with avian influenza over the long-term I just thought of in 2015?

[Mike Cockrell:]

Joe has already said that we think the main risk is a market risk, there is not a lot we can do frankly Francesco, we’ve already got we think state-of-the-art biosecurity measures and we make sure that we emphasized our role is how important that is, we can’t stop the waterfall from migrating and we’re not going to be able to eliminate that virus in that wild bird population. You just deal with it, I mean I don’t sorry we don’t have an operational challenge, I don’t think.

[Francesco Pellegrino:]

Yes, I hear everything you’re saying. But when you say state-of-the-art biosecurity measures and I hear foot baths, I mean there's not a lot of technological advancements that come along with foot baths. I was just wondering if there were going to be any more significant expenses going forward that would sort of…

[Mike Cockrell:]

No.

[Lampkin Butts:]

We’re not aware of anything.

[Joe Sanderson:]

No there is no technology, you really go to one, two, three phases. And you start washing down trucks and as they move from feed mill to farm and farm to feed mill and from live haul to plant and farm to farm and it’s not a big expense, it’s mainly sanitation and limit in traffic from farm to farm and I mean it gets little more tedious but it’s not high-tech.

[Francesco Pellegrino:]

It sounds like a lot of labor expenses.

[Joe Sanderson:]

It is.

[Francesco Pellegrino:]

All right, all right. That's it for me, then, guys. Thanks again.

[Joe Sanderson:]

Thank you.

[Lampkin Butts:]

Thank you.

[Operator:]

Our final question comes from Jeremy Scott with CLSA.

[Jeremy Scott:]

Good, hey good afternoon guys. Thanks for taking the question.

[Jeremy Scott:]

Just wanted to touch on the antibiotics issue. I don't think that's going away anytime soon. Can you put some numbers around that? What is the difference in mortality rates? How much more feed per flock? What's the impact on productivity? Just trying to get an idea of the incremental cost per produced pound, if you have any high-level numbers on that. And then just from a competitive standpoint, are you worried that this is going to put you at a disadvantage, if we draw the parallels to the gestation crate issue, I think it was McDonald's that made that announcement back in 2012, and that kicked off a waterfall of announcements from restaurants and grocers and even distributors. Obviously, if this is what consumers want I don't think science is going to get in the way. So can you just comment on that?

[Joe Sanderson:]

Sure. Well our first deal is let me go to mortality first and animal welfare, the big deal is disease and condition you’re primarily dealing with is necrotic enteritis. And we use three antibiotics to deal with that, generally. And there is no option for this and there is nothing coming down the pike. We've had two major drug companies in and visited with them, and there are no options for this particular disease. What happens is when the birds get necrotic enteritis, they exhibit morbidity, lethargy, and death. And it can happen at any age and so we treat them with these antibiotics, none of which are terribly important in human medicine. Bacitracin is one, and it’s the primary medicine you may have heard of it, it’s a normally an ointment that may be used on your skin and if they were removed from human use, they would have insignificant impact but it kills chickens. It will kill them, and the mortality rate that we experience is much lower than the industry as a whole historically and but if you don’t use these antibiotics mortality can grow two or three or four or five percent higher than what we experience too as much as 20% higher than what we experience. And we see that in Agri Stats, and we hear of it from other companies. So I don’t know people might have big deal when they say they are going to antibiotic-free that they are going to take care of their chickens but and I try to, say they are going to do with animal welfare and man but fact the matter is a lot of chicken die, a lot more chicken die because they don’t get antibody, and its instructive also that they are not talking about cows and hogs. Now, why aren't they doing that? Why is it the chicken not cow and hog? I will tell you why is because they can’t grow them without antibiotics, because it's easier to see a chicken die and then cost as much as it does a cow and hog with the same principle applies, the same principle about antibiotic resistance applies. So somebody has got unravel that from me. That didn’t work for me but mortality is a consideration and we’re not - we think there is plenty of market out there for our chicken, we studied this we've talked to customers, we’ve talked to lot of people that cost we had looked at cost, this is just not cost for a just a matter of principle is not cost.

[Jeremy Scott:]

Okay. Do you worry, though, that there is going to be a series of announcements after this initial Tyson-McDonald's, to the point where you are trying to expand in the Northeast and the West, and obviously there's a concentration of concepts that cater to this?

[Joe Sanderson:]

No, I’m not worried about that. I mean this product is going to cost a lot more money and I don’t think that I think it's a niche market and McDonald's is not going to buy antibiotic-free. They are going to buy antibiotic-free that's important to human medicine that’s not antibiotic-free so, they are dancing and the hamburgers are not going to be antibiotic-free, now why that, why they just going to use our chicken, what about their hamburgers. Somebody is going to answer that question at some point. I mean, so I’m not really worried about it.

[Jeremy Scott:]

Okay. Thank you.

[Operator:]

And that concludes our question and answer session. Mr. Sanderson, I’d like to turn the call back over to you for any additional or closing remarks.

[Joe Sanderson:]

Thank you all for spending time with us this morning and we look forward to reporting our results to you throughout the year. Have a good day.

[Operator:]

Ladies and gentlemen, that concludes today's call. Once again we thank everyone for joining us.