Sanderson Farms, Inc.
Q4 2014 Earnings Call Transcript

Published: 18 Dec 2014

[Operator:]

Good day, and welcome to the Sanderson Farms' Fourth Quarter 2014 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' fourth quarter and year-end conference call. This morning we reported net income of $93.1 million or $4.04 per share for our fourth fiscal quarter of 2014. During the fourth of last year we made $45.3 million or $1.97 per share. For the year ended October 31, 2014 we reported net income of $249 million or $10.80 per share. For fiscal 2013 we reported a net income of $130.6 million or $5.68 per share. If you did not receive a copy of the release and accompanying financial summary they are available on our website at www.sandersonfarms.com. Before we continue, I will ask Mike to give the cautionary statement regarding forward-looking statements.

[Mike Cockrell:]

Thank you, Joe, and good morning everyone. This morning's call will contain forward-looking statements about the business, financial condition, and prospects of the company. Examples of forward-looking statements include statements about future production levels, grain costs, poultry prices and economic conditions. The actual performance of the company could differ materially from that indicated by the forward-looking statements because of various risks and uncertainties. Those risks and uncertainties are described in our press release and in our Annual Report on Form 10-K which was filed with the SEC this morning for our fiscal year ended October 31, 2014 All forward-looking statements speak only as of today and are based on our current expectations, beliefs and assumptions which could change quickly based on the many external factors affecting our business. We undertake no obligation to update or to revise forward-looking statements.

[Joe Sanderson:]

Thank you, Mike. Fiscal 2014 was a successful year for Sanderson Farms. Overall poultry markets improved only slightly for the year compared to 2013, but grain cost and flocks sold were substantially lower for the fourth quarter and the full fiscal year compared to last year. Our net sales for the full year of $2.775 billion or 3.4% increase over fiscal 2013 were another record for Sanderson Farms. We continued to mature our sales at Kinston, North Carolina plant and other plants during the year. We made progress on sales of our prepared foods division. We finished the year in a competitive position in our industry and our Managers earned both earnings per share and Agri Stats bonuses. Our 2014 financial results allowed us to continue to strengthen our balance sheet to pay a special dividend to our shareholders, to increase our regular dividend rate and put us in a position to complete construction of our new complex in Palestine, Texas. We reduced long term debt by approximately $20 million during the year. Our debt to cap ratio of 2.2% has our balance sheet in a position to continue our growth strategy. While we have room to improve our performance, I am most grateful for the efforts of our growers and our employees during this past fiscal year and look forward to working with them to capture the opportunities available to us during the coming year. With that introduction, I will ask Lampkin and Mike to provide details on the quarter and I will return after they finished to discuss grain and answer your questions.

[Lampkin Butts:]

Thank you, Joe, and good morning everyone. As Joe said, overall market prices for chicken improved only slightly during the year, but we benefitted from significantly lower grain cost for the year. The average Georgia Dock price during our fourth quarter was approximately 7.1% higher than last year’s fourth quarter averaging $1.13 per pound for the quarter. For the year, the Georgia Dock averaged $1.09 per pound which represented a 5.7% increase over the $1.03 per pound average during fiscal 2013. The Georgia Dock price is currently $1.1375 per pound. Retail grocery demand remains strong as chicken continues to compete against relatively high priced beef and improving economic conditions increases demand for protein. Bulk leg quarter prices were approximately 6.5% lower during the quarter compared to last year's fourth quarter, and for the full year were lower by 9.6% compared to fiscal 2013. Urner Barry market prices for leg quarter prices averaged $0.45 per pound during the fourth quarter and during the year and the current Urner Barry quote for bulk leg quarters is $0.44 per pound. Despite actions taken by Russia earlier this year to ban imports of chicken from the United States, export demand remain relatively steady during 2014 and the volume of poultry export for calendar 2014 were up slightly through October when compared to 2013. The market for Boneless breast at the start of the year relatively soft before moving above $2 per pound in May for only the third time in history. Prices during our fourth quarter were high about 15.8% when compared to the fourth quarter a year ago. The quoted market price for boneless averaged $1.82 per pound during the fourth quarter and $1.68 per pound for the fiscal year. Boneless prices have weakened seasonally through November and December as expected and Urner Barry market price for boneless breast is currently $1.33 per pound. Jumbo wing prices during our fourth quarter averaged $1.50 per pound up 5.2% from the average of $1.43 per pound during last year’s fourth quarter. For the year, Jumbo wing prices were lower about 19.9% from an average of $1.50 during fiscal 2013 to an average of $1.20 per pound during fiscal 2014. The current Urner Barry quote for Jumbo wings is $1.50 per pound. When you roll all of this together, our average sales prices for poultry products during the full fiscal year was higher by 0.375 [ph] of $0.01per pound compared to last year increasing 0.9% for the year ended October 31, 2014 when compared to the year ended October 31, 2013. This increase in our average sales price for chicken coupled with the $7.03 per pound decrease in our feed cost and broilers processed contributed to improving operating margins in our chicken business this fiscal year compared to last year. Our cash costs for corn delivered to our feed mills during this year’s fourth quarter were lower than last year’s fourth quarter, decreasing 23.2% while the costs for delivered soy bean meal decreased 10.5% during our fourth quarter compared to last year. For the year, we paid $182.5 million less for feed grains when compared to fiscal 2013. Remember that there is a lag and the time it takes for the cost of grain delivered to our mills to show up in our cost of goods sold because we recognize the cost of grain when we process the chickens that eat that grain. Our feed cost per pound and broiler flocks processed were lower by $6.06 or 17.1% during this year’s fourth quarter compared to a year ago. For the year feed cost and broiler processed were lower by $7.03 per pound or 18%. Like Joe I am grateful for everyone associated with Sanderson Farms. Our employees grow as customers and vendors and look forward to the New Year. At this point, I’ll turn the call over to Mike for discussion of the quarter’s financial results.

[Mike Cockrell:]

Thank you, Lampkin and good morning again. Our financial performance during the fourth quarter and the year does reflect the improved environment described by Joe and Lampkin. Net sales for the quarter totalled $760.9 million and that’s up from $727.1 million for the same quarter last year. The increase in net sales for the quarter reflects an 8.7% increase in our average sales price of poultry products compared to last year and a decrease in poultry pounds sold at 6.1%. Our cost of sales of poultry products for the quarter ended October 31 decreased 11% when compared to the same quarter during fiscal '13. This decrease is a result of a 17.1% decrease in the cost of feed and broilers processed during the quarter and a 6.1% decrease in poultry pounds sold. For the fiscal year, our net sales totalled $2.775 billion and as Joe said that’s up 3.4% from the $2.683 billion last year. Cost of sales for the year decreased 5.2% compared to a year ago and totalled $2.254 billion. Our average sales price in poultry products sold during the fiscal year was up just under 1% compared to last year and the average cost per pound in our poultry business decreased $6.02 or 8.3% compared to last year reflecting the lower grain cost. For the year, grain cost comprised 48.5% of cost of goods sold and that compares to 54.2% last year. In our prepared foods business, we sold $27.2 million more pounds of products this year and that’s a 55.7% increase over a year ago and we also realized $4.04 per pound more than we did last year and that’s a 2.2% increase. During this year fourth fiscal quarter we processed $796.7 million pound of breast chicken and sold $771.4 million pounds. We processed $3.058 billion pounds for the year and we sold $3.045 billion pounds. For those of who modelling fiscal 2015, we currently expect to process $3.351 billion pounds of breast chicken during the fiscal year which would represent a 9.6% increase over pounds processed in fiscal 2014. If we run our plants as expected, those pounds will be processed as follows; $741.4 million pounds in Q1, $827.2 million pounds in Q2, $880.7 million pounds in Q3 and $902.1 million pounds in Q4. Of course these estimates were subject to change as a result of weather changes and target lab weights, market conditions and other factors. SG&A expenses for fiscal 2014 were up $38.8 million compared to last year due primarily to the increase in the accrual and payment of an ESOP contribution during 2014 that was greater than last year and the accrual of incentive bonuses. These expenses also reflect increased advertising expenses; start up expenses at Palestine and higher trainee cost. We spent $7.8 million advertising during fiscal 2014 and that compares to only a $1 million last year as we did make a decision to launch a TV ad campaign in our primary markets to increase work brand awareness. We’re going to evaluate that campaign and the success of that campaign in January and if it meets our expectations we’ll continue to campaign in fiscal 2015. At the end of the fiscal year our balance sheet reflected stock holders equity at $897.9 million and net working capital of $363.1 million. Our total debt at year end was $20 million and our total debt to cap ratio was 2.2% at October 31, 2014. For the year we spent $171.6 million on capital improvements and we paid $30.5 million in dividends. For fiscal 2014 interest expense was $2.6 million, a decrease from the $6.1 million expense for interest during fiscal 2013 and reflects our lower outstanding debt. Our effective tax rate was 34.4% and going forward we continue to model 34.4% as our effective tax rate. We now expect our CapEx for construction and maintenance during the next fiscal year to be $116.1 million and we’ll fund that by cash on hand, internally generated working capital cash flow from operations, and if needed liquidity provided by our revolving credit facility. We spend about $104.6 million on the new power steam facility during fiscal '14 and we expect the total cost of that complex to be approximately $150 million. The company does have a $600 million unsecured revolving line of credit of which $586.2 million was available at the end of the fiscal year. Our depreciation and amortization during fiscal '14 totalled $64.3 million, and we now expect approximately $75 million for fiscal 2015 as we begin operations in Palestine and begin depreciating those new assets over there. I am modelling $16.3 million in depreciation for Q1, $18.9 million for Q2, $19.6 million for Q3 and $20 million for Q4. Effective October 29, 2014 we did amend our revolving credit agreement to increase the CapEx limitations in the agreements but the committed threat under the revolver remains at $600 million unless extended that credit facility will expire in October 2018 and it does remain unsecured. Joe with that, I’m through with the financial report and we’ll turn it back to you.

[Joe Sanderson:]

Thank you, Mike. Our feed grain cost during fiscal 2014 were significantly lower than during fiscal 2013 and we expect even lower cost during fiscal 2015. If we had locked in prices for all of our needs for fiscal 2015 including what we have already priced at current values that is of using the Chicago Board of Trade contract prices for current and future needs as it closed last night, our cash cost for grain during fiscal 2015 would be $14 million lower than during fiscal 2014 and that number reflects the addition of volume required during the year at Palestine. If you left Palestine out and compared apples-to-apples that number would be around $90 million. That number is lower than we discussed at our Investor Conference in October as market prices for both corn and soy bean meals have moved higher. Nearby corn prices continue to balance what appears to be a long term desire to support December 2015 futures to limit acreage loss to beans against fully adequate near by suppliers. Because of recent moves higher, we remain on the market for grain and believe final harvest numbers will reflect ample suppliers of both corn and beans. We should also benefit from lower basis paid per bushel of corn purchased during fiscal 2015. Basis was extraordinarily high during 2013 and 2014 as a result of the tight carry out of both corn and beans. While farmers have increased storage capacity for grain at some point they will become sellers. I will share a few things we are watching closely as we start the new fiscal year. First, the next event that will impact grain fundamentals is the quality and quantity of the South American crops, so we are keeping one eye on South America. As of today, the corn and soy crops in Brazil and the rest of South America are progressing nicely. Second, we will be carefully watching the planning intentions reported next March. Some believe the recent increase in market price for corn as designed to limit corn acreage reductions in light of ample suppliers. I suspect corn will lose some acres to beans in 2015 and we will closely watch that report. Third, we will of course watch chicken production numbers. While depleted breeder stocks constrained production numbers during much of fiscal 2014, it is possible the industry could produce 22.5% and 30.5% more chicken during 2015. We have seen product placements trend higher through the fall and exit numbers have followed suit [ph]. Although healthy to more optimistic and fully employed American consumers could easily absorb that increase, we won’t know the impact higher production numbers will have on chicken markets until we get there. We know chicken will be competing once again during 2015 with half priced beef, both in retail grocery stores and at food service, but the extent food service customers will feature chicken over beef an extent to which consumers filling their grocery cards will continue to switch from half priced beef to lower cost to options is not knowable today. While today’s grain market suggest we will enjoy lower cost during 2015 whether and to what extent we get some of those lower cost back to the chicken market is a question we will have to wait to answer. Finally, we will focus our efforts on Palestine and work to get that new complex to full production. While our short term fundamentals for fiscal 2015 are positive, I remain optimistic for and focussed on the long term. Our balance sheet is strong, we’re essentially debt free and the company is in a position to continue our growth strategy. The new complex and Palestine demonstrates our optimism and confidence for the long term success of Sanderson Farms. The new complex will add value for our investors, opportunities for our employees, and hard quality products for new customers. We are committed to continue to grow our company beyond Palestine as well, to add value to our shareholders and opportunities for our employees and I am ready to do that, no matter the market conditions we will continue to focus on those things we can’t control and manage the others as the best we can. That process started two weeks ago with a lively discussion among our top Managers on where we left money on the table this year and I will look forward to getting that back this year. With that, we will now take your questions.

[Operator:]

Thank you. (Operator Instructions) And we’ll go to our first question from Kenneth Zaslow with BMO Capital Markets.

[Kenneth Zaslow:]

Hey good morning, everyone.

[Joe Sanderson:]

Good morning, Ken.

[Kenneth Zaslow:]

Hey, just a question. You know the outlook for chicken prices, has that changed at all given the recent movement in beef or pork prices or do you continue to expect that the supply and demand to be matched therefore we should have a relatively strong chicken outlook for breast prices and legs and wings?

[Joe Sanderson:]

I think that’s just a seasonal thing and we still think I mean there’s not going to be any more beef, we’re still going to have 4% less beef and fewer animals to process and I’m comfortable about that. I think the environment is going to be fine for chicken and you know the question is more about chicken than it’s about beef and pork in my mind and I’m comfortable with that. We are a bit more optimistic about the consumer in 2015 than we have been in the past and it feels like the economy is moving in the right direction and that’s going to we feel like there will be a bit more demand and the -- but I’m not concerned at all about supply of beef.

[Kenneth Zaslow:]

Okay. And then the follow up question to that is you mentioned about that the economy; gas prices and oil prices have obviously come down. Would you expect that to change the foodservice dynamics and what about the direct impact of benefit to you guys? Can you quantify and help us out with that?

[Joe Sanderson:]

Didn’t we get they spent $150 billion. Yeah, -- where gas prices are its going to pump $150 billion back into the economy we think and some of that will go into food service. And some will go elsewhere but some of it will go to food service. And that along with increases an hour’s work and increases in the size of the -- the number of people working and there is one other factor up.

[Kenneth Zaslow:]

What you guys did [ph]? 2% increase in wages.

[Joe Sanderson:]

Yeah, wages and wages all of those factors together with gasoline is worth about $450 billion those are going to be available in 2015 is disposable income, an increase in disposable income. And that we also think we’ll start seeing improvement in labor participation rate, not backed fully but the first improvements we’ve seen since 2008. And that’s what I was talking about being a little more optimistic about the economy and the beginnings of restoration of food service demand and a healthier consumer.

[Kenneth Zaslow:]

Great, greatly appreciate it.

[Joe Sanderson:]

Absolutely.

[Operator:]

We’ll go to our next question from Farha Aslam with Stephens Inc.

[Farha Aslam:]

Hi, good morning.

[Joe Sanderson:]

Good morning, Farha.

[Farha Aslam:]

Joe, the chicken industry is currently experiencing very positive trends in terms of profitability, yet you highlighted that you expect chicken production to only be up 2.5% to 3.5% next year. Could you just share with us why you think that that level will remain just what fairly constraint in 2015 and then share with us your thoughts about how production could look out into 2016?

[Joe Sanderson:]

Well it’s raining about 2% to 3% right now. I believe it could [Indiscernible] at the last exit which saw over – it’s running about 2.9% and I think they are pushing the flock right now. And if you go back and look at the bigger flock in 2011 and that’s kind of the size of the breeder flock we’re in – we’re looking to have say about the spring of this year 2015 and then you look at the exits of that breeder flock, that would indicate to me egg sets of 207 million, 208 million eggs peak [ph] 209 and that kind of matches what we think is close to processing capacity and that also maybe housing capacity. We think there’s a little constraint with housing capacity. We don’t think there’s a lot of extra housing out there; we think people are having trouble getting their houses built. There’s not a lot of -- it’s difficult to get houses built, there’s not a lot of people out there that have extra houses and there’s not a lot of people building houses. I’m talking about builders. So that’s what I’m talking about. I think it’s more of a 2016 deal than it is 20. I think this is going to take the industry that long to get all the infrastructure in place to – I think the primary breeders will be ready, but I don’t know that the industry will be ready to really ramp up too much.

[Farha Aslam:]

Okay. And just as a follow on, you had highlighted to Ken’s question you know some solid foodservice demand on the back of lower gasoline prices. Could you just share with us what you’re seeing in that retail market and what is your outlook for that Georgia Dock whole bird price, kind of some color around that would be great?

[Joe Sanderson:]

Yeah, grocery store or retail?

[Farha Aslam:]

What do you think in terms of..?

[Mike Cockrell:]

It’s fine. It’s good. It is slowed this week and it will slow next week. Nobody wants to talk to any of our salesmen. They are talking to Turkey and Ham people, but we’ve already – we will be short beginning – actually we’ll short foodservice beginning day after Christmas. Everything is going – we’ll be short everything the day after Christmas in the first week of January – all of our tray pack – I would anticipate to Georgia Dock moving backup first two weeks of January that would not surprise me a bit if it move back – its strong and I anticipate a good Georgia Dock.

[Farha Aslam:]

Thanks. And one final question just around your new plant and kind of additional cost -- about first quarter and into next year? How [indiscernible] new cost related to that plant and on the cost of goods sold line and SG&A line?

[Mike Cockrell:]

Farha, this Mike. How are you this morning?

[Farha Aslam:]

Good. Thank you.

[Mike Cockrell:]

Good. We’re modelling $4.5 million in SG&A during Q1, as you know we’ve said we’re going to open that plant or begin processing around February the 9th, so there really won’t be any cost of good sold impact during the first quarter to speak up, because it’s going to open up at the end of or beginning of the second quarter. So all the Palestine costs during Q1 will go to SG&A. And then we will start processing and all of the costs associated with the plant will go into cost of goods sold starting in the second quarter, second, third and fourth.

[Joe Sanderson:]

It will be similar to Kinston. Do you have any idea what Kinston had? What it look. Well it will be just like Kinston and it was and it – when did Kinston startup? January.

[Mike Cockrell:]

January of 2011.

[Joe Sanderson:]

January of 2011, we will look at that and we will get some data, we will get some information on that.

[Mike Cockrell:]

Yeah.

[Farha Aslam:]

Great. Thank you very much.

[Mike Cockrell:]

Thank you, Farha.

[Operator:]

And we’ll go to our next question from Michael Piken with Cleveland Research.

[Michael Piken:]

Yes, hi. I just wanted to dig a little bit deeper in terms of the feed cost outlook and your strategies, and maybe you could let us know like have you locked in your basis out for any significant length of time and if so is it just on soybean meal or on corn as well? Thanks.

[Joe Sanderson:]

We’ve bought soy through March, actually as of yesterday.

[Lampkin Butts:]

Soy basis.

[Joe Sanderson:]

Soy basis. It was pretty strong through January, so we’ve bought January by itself and then we bought February, March. Yesterday, it had gone down a bunch. There was a lot of exported beans and meal through January. And that – those export orders were kind of declined a lot after January, so basis came off a good bit after January. So basis was a lot softer after January and meal. We have corn bought through January, corn basis bought through January, we are actually getting bids on corn. It wasn’t as strong, but we think it’s going to be a little bit softer, so we’re getting bids on corn today. Fact of the matter is the farmers have stored and held and done a good job of that. The funds have gotten in to corn and it has moved the price of corn up a dollar a bushel since October. But fact of the matter is the crop is still out there and it will come in the market at some point. And so we are very close on corn and meal and we’re confident particularly if the South American crop keeps progressing as it has both corn and soy that we’re going to have opportunity to buy both of them at better prices than where they are today.

[Michael Piken:]

Okay. Great. And then could you just quantify at all like how much of savings you might have on basis this year, you just said it was significant or did that 90 million number the feed cost savings without Palestine include basis?

[Mike Cockrell:]

No, that number assumed we paid the same for basis during 2015 as we did for 2014.

[Michael Piken:]

Okay. So…

[Joe Sanderson:]

The big savings will be the – will probably be in the fourth quarter anyway, won’t it.

[Mike Cockrell:]

Yeah. It would be.

[Joe Sanderson:]

Where we paid so much for basis was primarily in the fourth quarter of 2014 that’s when basis was very, it wasn’t so high, it wasn’t terribly high during the first three quarters. It might be – it was in the last quarter when soy basis was $90 and $120 a ton. I don’t recall corn; off top of my head I do recall soy basis has been extremely high in August and September.

[Michael Piken:]

Okay, terrific. And then just shifting gears, I know the U.S. market is still close to Russia, but what type of impact do you think lower oil price might have and demand in other parts of the world potentially and what type of impact could that have on the leg quarter market?

[Joe Sanderson:]

Well I think it will have the same similar impact in countries we ship to. It will free up a little bit more disposable income and certainly could help us. There is a lot of our export customers right now are little concern about the value of the dollar and competing with that particularly in the former Soviet Union countries, Turkistan, Turkmenistan, Tajikistan, those countries are – its a little difficult to get product into those countries through Russia now, so I think there might be a little pressure on prices for that part of world. But other than that, I think export demand will be very good.

[Michael Piken:]

Okay. Thank you very much.

[Joe Sanderson:]

Thank you.

[Operator:]

And we’ll go to our next question from Brett Hundley with BB&T Capital Markets.

[Brett Hundley:]

Hey, good morning, guys.

[Joe Sanderson:]

Good morning, Brett.

[Brett Hundley:]

Hey, just so I’m crystal clear, I mean, I think you and others have been talking about this for a while, but I just want to make sure I’m clear, so on the 2.5% to 3.5% expectations on a supply increase, does that include weight? And again just trying to build from the ground up, I just wanted to get your thoughts Joe on -- we’re going to have a certain level of headcount typically the industry can move weights higher by about 50 to 100 basis points? And then I get a lot of questions on can hatch reverse itself next year and add a little bit more supply, will the weight of this new breed add a little bit more supply? So can you just kind of bridge up on that 2.5% to 3.5% and just detail whether it includes weight or not?

[Joe Sanderson:]

Yeah. It’s doesn’t include weight, when I say 2.5% to 3.5%, I think that we’re looking at 2.5% right now and 3.5% in summer forward in the second half of the year, that’s headcount. Weights are going to be up another 1% that’s mainly going to come in the big bird segment, that’s not going to come in the small bird or tray pack, that would just be in the big bird segment. And that roughly 25% of – 25% to 30% of the industry and that will just mainly be among the big bird. And that will happen now through the spring and then it will go back down in the summer. In summer time they won’t be able to achieve the weight that they are doing right now. So, when you get to the summer through, let say through September those weights will come back down to about quarter of a pound a chicken probably. So part of the time July, August, September when you get maybe to that 3%, 3.5% you won’t have the weight there that you will have in the spring and fall. I’m talking about headcount when I’m talking about 2.5% to 3.5%.

[Brett Hundley:]

And is an improved hatch in the 2.5% to 3.5% or would any improved hatch be additive to that?

[Joe Sanderson:]

No. There is not going to be any improved hatch. If you look at the USDA reports right now, the hatch is running 83% and what that means is they are pushing the flock right now, right now every set and every egg they can.

[Brett Hundley:]

I appreciate that detail. And back to feed for just a minute, I mean, honestly there’s more philosophical than anything else, but when I look at the feed complex right now or today rather, you’d talk about corn value is coming back up, funds have gotten involved, corns back up above four, we got Russia driving the grain complex today it seems. But I’m just curious your ease or unease about rather you are confident about being able to see feed come back down, everyone talks about logistical issues in the U.S., South America, certainly it looks like conditions in South America are going to be good again this year, but do you have any regrets on hedging your grain out longer when feed went lower and do you worry about feed not being the tailwind that some hope next year, can you just speak to that a little bit?

[Joe Sanderson:]

So, I don’t regret anything, I mean, I didn’t – we would – even if we – you know, we had good buy in October, it still wouldn’t as low as we thought it was going, because when we see 2 billion bushel carryout, we’re thinking $2.80 to $3 corn, and it didn’t get to $2.80, it didn’t get $2.90, it got $3.05 and we bought some $3.05 corn. So I don’t – I have no regret. That was a decision. We had an active – we had a buying program in place, but it was lower than $3.05, $3.05 or just step one, 2 billion bushel carryout that crop is still there, is still out there and 2 billion bushel crop is not $4 corn, they’ve just done a good job of storing it, they don’t want to pay taxes, own it in this fiscal year, this calendar year, they’re going to wait till after January and then the funds got in, there are two factors, they stored it and the funds got in and both those things are going to change at some point. So, we believe corn is going to be cheaper at some point. We got over 400 million bushels of beans and we think soybean meal is going to be cheaper, by some amount. And I don’t know the exact number, but if you look at the futures sales are going to be cheaper.

[Brett Hundley:]

Okay. That’s interesting. So you think that you have on farm storage and rail network logistics kind of baked into the price that you want to see on these commodities and you still think that will get there just given these high carry outs?

[Joe Sanderson:]

Well, the rail stuff was a problem through December that has cleaned up little bit and it will get better when these export, these 100 car trains go into the Gulf with exports get through. That’s part of it. Now the oil part was part of it too. And – but for us where we’re located, Texas was a problem with the rail and Mississippi was a problem with rail. And then I know there was a problem in North Dakota with rail. And that hadn’t been resolved. But Mississippi and Texas is resolving.

[Brett Hundley:]

Okay. That’s really helpful. And then just my last question, I don’t know if I’m reading too much into this, but Joe in your prepared comments, your initial prepared comments you made a statement that you guys think you have room to improve performance going forward, is that something market driven or is that something internal?

[Joe Sanderson:]

As some we do every year, we look – we get Agri Stats and we look at live production. We look at processing and we look at sales, and we identify stuff where we didn’t perform in the top 25% in every category. And we say, we can – unless there is some like – we haul live chickens from McComb to Hammond and that’s a 50 minute, 50 mile drive and I can’t do anything about that. But a yield and a plant, I can do some about that. Feed conversion, we can do some about that. Sales, we can do some about that. Anything we can do something about we identify those things, but we’re not in the top 25% and we identify that, we quantified how much money it is and those are our operational goals for 2015 and we had plenty of opportunity to do it. Normally when we do that this year we had screw up with our males that affected us for about four months. And that of course was on the list. And our hatch – we’ve never had a hatch down like that. And – so we just had our – we do it every year always have.

[Brett Hundley:]

Would you care to quantify what the opportunity is next year on a price per pound basis?

[Joe Sanderson:]

On per pound basis?

[Brett Hundley:]

Yeah.

[Joe Sanderson:]

I don’t have it per pound basis, but it was a lot of money.

[Brett Hundley:]

Okay. Well, thanks. Thanks for your time guys.

[Joe Sanderson:]

Absolutely thank you. Operator And we’ll go to our next question from Jeremy Scott with CLSA.

[Jeremy Scott:]

Hi, good morning, guys.

[Joe Sanderson:]

Good morning, Jeremy.

[Jeremy Scott:]

Just want to really dive into some of the production flexibility and circle back around on the discussion on industry discipline, you talked about constraints in the hens flock, but it seems like the chicken industry is following the hog industry by significantly increasing the finishing weights to take advantages of those current margins. If I just look over the past four weeks weights are up about 4%, total production of 8%. So I guess my first question is, is there a risks that these numbers become more sustainable maybe not in the 4% range, but somewhere above the 1% you expect?

[Joe Sanderson:]

You have waste, Bob. Jeremy, I’m looking at a chart. Just a minute. Where do you show on weights up? This is just through October.

[Jeremy Scott:]

I’m looking at the middle part of the November through…?

[Joe Sanderson:]

I don’t have that Jeremy.

[Jeremy Scott:]

I guess an even better way to ask that question is with breast meat in cold storage starting to accumulate and prices normalizing on a year-over-year basis, is it a fair statement to say that right now the industry is producing more chicken than what customers can currently absorb?

[Joe Sanderson:]

We think the customers are the ones that are storing it. I don’t think its processors. I think its further processors that are storing it right now. Some of our customers are storing breast meat right now and anticipation of higher prices after the first of the year.

[Jeremy Scott:]

Okay. And then just I want to get back to the 3.5% to 4.5% and really just talk about what’s from a feature shift versus a traffic growth, what’s your expectation? We’ve already seen significant feature in promotional activity shift in 2014 particularly within casual dining some of the largest QSR chains, but I’m just understand – I’m wondering regards your expectation that the industry will easily absorb that 2015 increase. Is the story mostly better consumer demand or what part of that is the incremental feature shift?

[Joe Sanderson:]

We didn’t see as much feature activity in 2014 as we did in 2013. 2013 was where we saw huge television, advertising for feature – featuring chicken and that’s what drove it and they all did the same time in May and we didn’t see that in 2014. We don’t know, we do not have firsthand knowledge of any features that are coming in 2015. There are rumors that that’s coming in 2015, but it just rumors. But we don’t have any firsthand knowledge, it make sense to me with 2% to 3% more chickens out there and high-priced 4% fewer pounds of beef that people would anticipate featuring chicken that they would want to feature chicken.

[Jeremy Scott:]

Okay. Thank you.

[Joe Sanderson:]

Thank you.

[Operator:]

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

[Adam Samuelson:]

Hi. Thanks. Good morning everyone.

[Mike Cockrell:]

Good morning, Adam.

[Adam Samuelson:]

So, question on cash. And first Mike the CapEx number that you gave for next year, to be clear, that assumes no incremental spending on North Carolina?

[Mike Cockrell:]

That’s correct.

[Adam Samuelson:]

And would – I mean, do you get the approvals on the timing, maybe walk us through the timing on North Carolina as you deal with the local government down there and when you could actually be putting shovels on the ground and how much incremental that could be in 2015 if it goes on your internal schedule?

[Joe Sanderson:]

I think we would know by the end of January and you can probably start in March, April, I don’t have a clue about how much you spend though. We will give you those numbers when they are available to us. There are several unknowns about that budget right now, Adam, but we’ll get on and obviously report them when we know. But if we start to spend the money, you would spend money start in the no earlier than the end of the second fiscal quarter. And so you really only looking at the third and fourth quarter where you would have any material amount of spend and it would look a lot like Palestine just not in terms of when you spend it but just not as much because we had build a feed meal in Palestine that $150 million, we’d probably be $125 to $130 be less than that, less than that.

[Adam Samuelson:]

Okay. That’s some very helpful color. And that leads me to the second question where you look at the balance sheet today and I mean, functionally you could fund that off net cash or pretty close to it or it certainly with the cash generation that would be coming over the next – you anticipate over the next 12 months. Can you help us think about Joe what would be thought process behind a larger special dividend or cash return or is it really just keeping that balance sheet powder dry for capacity expansion beyond North Carolina or other opportunities is they arise?

[Joe Sanderson:]

Well, we would – we’ll do one thing at a time. We’re going to build another plant first and then we would look – depending upon what kind of year we had and what the outlook was after that we would certainly look at our next October. We would look at the outlook and see what our capital commitments were and we would certainly consider a special dividend.

[Lampkin Butts:]

We paid for Palestine out of cash flow and as you just indicated we got enough cash on the balance sheet right now over $170 million, $160 million at the end of the quarter to build the second plant, but we’re going to continue to add production capacity add and that’s been our pattern and it made our stock worth more and it has return more to our shareholders. There’s another way we can return that and will -- board will certainly look at that as I do every – at the end of every year, I don’t think we do anything toward the end of the fiscal as Joe has just said.

[Adam Samuelson:]

Okay. Appreciate the color. And then finally from me, remind us again, the bonus payout threshold, its 20% ROE, so I guess that’s what an $0.08 EPS number roughly and what the max payouts to the ESOP and stock comp would be in that scenario?

[Lampkin Butts:]

Yeah. Of watch in January, our Board meets January the 23rd and 24th and they will approve the bonus award program for fiscal 2015. As you just said the 20% ROE which is usually the middle point of that target is north of $8 a share unless they follow a different, I would expect them to do that again, and then the total max payout this year was $26.2 million that included the Agri Stats bonus, the Agri Stats bonus was about $5 million of that.

[Adam Samuelson:]

Okay. It’s very helpful. I’ll pass it on.

[Lampkin Butts:]

Thank you so much Adam.

[Joe Sanderson:]

Thank you.

[Operator:]

We’ll go to our next question from Akshay Jagdale with KeyBanc Capital Markets.

[Unidentified Analyst:]

Hi, good morning. This is actually Ruby [ph] on for Akshay. Just a sort of general question, and most of my questions have already been answered, but for 2015 it seems like the industry sort of setting up for another good year, just let some of the constraints we’ve talked about potentially on the supply side, the high price of competing proteins and maybe some relief at the gas pump as well, but I’m just curious in your view what you think is the biggest risk in 2015 and maybe you can give us some puts and takes as you see them for 2015?

[Joe Sanderson:]

I would think some failure in the South American crop would be one – that would be the first thing I think that could keep these grain prices from coming back down. That would be the first thing that could get you. And then, you know, maybe a bad planting season here, if hog production were to explode in summer maybe chicken production in the fourth quarter more than I can see, something like that, I think risk is on the grain side.

[Unidentified Analyst:]

Got it. That’s helpful. And then, any updates as far as your plans to build out facility in North Carolina?

[Joe Sanderson:]

No, we are waiting to hear from the public officials there.

[Unidentified Analyst:]

Okay. That’s all I had. Thanks. I’ll pass it on.

[Lampkin Butts:]

Thanks.

[Operator:]

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

[Francesco Pellegrino:]

Good morning, guys.

[Lampkin Butts:]

Good morning, Francesco.

[Francesco Pellegrino:]

So regarding my questions have already been answered, but I just want to follow-up with one quick question about the industry and I guess the direction of the company overall. So, we have the Palestine facility coming online in early 2015, we are talking about a potential Carolina facility coming online in 2016 depending upon what happens out there and I know you said you are waiting to hear back on that. And then I think during the Investor Day in mid October, Joe, you had mentioned something that you had already approached the board about an addition of one or two facilities within the big bird deboning line and it seems as if you guys will be growing out capacity significantly, you had in fact approached the board about these new opportunities. And I guess my question with where we’re seeing USDA consumption patterns going in the future, are these facilities being thought about in terms of maintaining market share or stealing market share from competitors?

[Joe Sanderson:]

Well we’ll be doing both. Some of our customers are growing and so we’ll be supplying some of our own customers and then there will be some market growth and then it will be taking some market share as well.

[Francesco Pellegrino:]

So you’ll be extending a little bit greater than the rest of the industry then?

[Joe Sanderson:]

Yes. We’ve been doing that since…

[Unidentified Company Speaker:]

…'93.

[Joe Sanderson:]

'93, I guess.

[Francesco Pellegrino:]

All right. That was my only question. Thanks again guys.

[Joe Sanderson:]

Thank you so much.

[Operator:]

We have no further questions at this time.

[Joe Sanderson:]

Good. Thank you all for spending time with us this morning and on behalf of everyone at Sanderson Farms, we wish each of you a Merry Christmas, a Happy Hanukkah and a Happy and Prosperous and Peaceful New Year. Thank you.

[Operator:]

That concludes today’s conference. We appreciate your participation.