Sanderson Farms, Inc.
Q4 2015 Earnings Call Transcript

Published: 17 Dec 2015

[Operator:]

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

[Joe Sanderson:]

Thank you. Good morning and welcome to Sanderson Farms' fourth quarter and year end conference call. This morning we've reported net income of $27.4 million or $1.22 per share for our fourth fiscal quarter of 2015. During the fourth quarter of last year we made $93.1 million or $4.04 per share. For the year ended October 31, 2015, we've reported net income of $216 million or $9.52 per share. For fiscal 2014, we've reported net income of $249 million or $10.80 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 of about future earnings, capital expenditures, supply and demand factors, production levels, grain cost, poultry prices and general 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 this morning for our fiscal year ended October 31. All forward looking statements speak only as of today and are based on our current expectations, beliefs, and assumptions and those could change quickly based on the many external factors affecting our business and we undertake no obligation to update or to revise our forward-looking statements.

[Joe Sanderson:]

Thank you, Mike. Fiscal 2015 was a successful year for Sanderson Farms. Overall poultry markets decreased for the year compared to fiscal 2014, but grain cost and flock 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 $2.8 billion, a 1% increase over fiscal 2014, was another record for our company. We completed construction of our new Palestine, Texas plant. We made progress on sales at our prepared food division. We finish the year in a competitive position in our industry and our managers earned both EPS and Agristat bonuses. Our 2015 financial results allowed us to complete construction of our Palestine complex continued to strengthen our balance sheet pay a special dividend to our shareholders and put us in a position to begin construction of our new complex in St. Pauls, North Carolina. We've reduced long-term debt by $10 million during the year and ended the year with no long-term debt. While we have room to improve our performance, I'm grateful for the efforts of our growers and employees during this past fiscal year and look forward to working with them to capture the opportunity available to us during the coming year. With that introduction, I'll ask Lampkin and Mike to provide details on the quarter. And I will return after they finish to discuss our focus during fiscal 2016 and answer your question.

[Lampkin Butts:]

Thank you, Joe. As Joe said, overall market prices for chicken declined during the year, but we benefited from significantly lower grain cost for the year. The average Georgia dock price during our fourth quarter was approximately 1.2% higher than last year's fourth quarter averaging a $1.15 per pound for the quarter. For the year the Georgia dock averaged to $1.15 per pound which represented a 5.6% increase over the $1.09 per pound averaged during fiscal 2014. The Georgia dock price is currently a $1.13 per pound. Retail grocery demand remained strong as chicken continues to complete against relatively half priced beef and improving economic conditions, increases demand for protein. Bulk leg quarter prices were approximately 53.3% lower during the quarter compared to last year's fourth quarter and for the full year we’re lower by 31.5% compared to 2014. Urner Barry quoted market prices for leg quarters averaged $0.21 per pound during the fourth quarter and $0.31 for the year, but realized prices were lower than that. Total industry export volume through October was lower about 15% compared to 2014 and it seems every possible headwind remains for export market. The strong U.S. dollar, lower oil prices, avian influenza related bans and politics are all negatively affecting export demand. Market prices for boneless breast during our fourth quarter were lower about 29.5% when compared to the fourth quarter a year ago. The quoted market price for boneless averaged $1.28 per pound during the fourth quarter and a $1.42 per pound for the fiscal year. Boneless prices have weakened substantially since October and Urner Barry market price for boneless breast is currently a $1.09 per pound. This weakness is a result of an oversupply of meat in the big bird markets. The industry produced 4% more pounds of chicken in 2015 through October while at the same time domestically -- domestic availability grew by 4.1% as a result of the decrease in the number of pounds exported. As a result the pounds available for domestic consumption grew by over 8% through October and that supply was too much for the domestic market to absorb, market prices weakened as a result. Jumbo wing prices during our fourth quarter averaged $1.48 per pound, down 1.3% from the average of $1.50 per pound during last year’s fourth quarter. For the year jumbo wing prices were higher by 26.9% from an average of $1.20 per pound during fiscal 2014 to an average of $1.52 per pound during fiscal 2015. The current Urner Barry quote for jumbo wings is $1.48 per pound. When you roll all of this together our average sales price for poultry products during the full fiscal year was lower by $0.095 per pound compared to last year, decreasing 11% for the year ended October 31 when compared to the year ended October 31, 2014. This decrease in our average sales price for chicken offset by $0.054 per pound decrease in our peak cost broilers processed contributed to a decline in operating margins in our chicken business this fiscal year compared to last year’s near record margin. Our cash cost per grain delivered to our feed mills during this year’s fourth quarter were lower than last year’s fourth quarter. Prices paid for corn during our fourth quarter were flat with last year’s fourth quarter while soybean meal prices were lower by 21%. For the year, we paid $145 million less for feed grains when compared to fiscal 2014. Our feed cost per pound in broiler flocks processed were lower by $0.053 or 16.6% during this year’s fourth quarter compared to a year ago. For the year feed cost in broilers processed were lower by $0.054 per pound, 16.2%. Like Joe I am grateful for everyone associated with Sanderson Farms employee, growers, customers and vendors and look forward to the New Year. At this point, I’ll turn the call over to Mike for a discussion of the quarter’s financial results.

[Mike Cockrell:]

Thank you, Lamp. Our financial performance during our fourth fiscal quarter and for the year reflects another successful year for Sanderson Farms. Our net sales for the quarter totaled $679.6 million and that’s down from $760.9 million for the same quarter last year. The decrease in net sales for the quarter reflects 24.5% decrease in our average sales price for poultry products compared to last year, and that was offset by an increase in poultry pounds sold of 16.1%. Our cost of sales of poultry products for the quarter ended October 31 increased 2.6% reflecting the 16.1% increase in poultry pounds sold offset by 16.6% decrease in the cost of feed and broilers processed. For the fiscal year our net sales totaled $2.803 billion and that’s up 1% from $2.775 billion in fiscal 2014. Cost of sales for the year increased 2.6% compared to last year and totaled $2.312 billion. Our average sales price for poultry products sold during fiscal 2015 was down 11% compared to last year, but the average cost per pound in our poultry business decreased $0.066 or 9.5% compared to last year. And that’s reflects lower grain cost. For the year, feed grain cost comprised 45% of our COGS and that compares to 48.5% last year. In our prepared chicken business for the year, we sold 14.4 million more pounds than last year and that’s a 19% increase and we realized $0.036 per pound more, and that’s is 1.8% increase. During this year’s fourth quarter, we process 912.9 million pounds of poultry and we sold 896 million pounds. We processed 3.44 billion pounds for the full year fiscal and we sold 3.42 billion. For those of you modeling fiscal 2016, we currently expect to process 3.6 billion pounds of dressed poultry next year which would represent a 4.8% increase in pounds processed compared to fiscal 2015. If we run our plans as expected, those pounds would be processed as follows; 807.8 million in Q1; 892.7 million in Q2; 930 million in Q3; and 974.8 million in Q4. Of course, these estimates are subject to change as a result of weather, change in our target lab ways market conditions and other factors. SG&A expenses for fiscal 2015 were up $16.1 million compared to last year due primarily to an increase in administrative salaries and an increase in the amortization of equity compensation stock awards. For fiscal 2016, we are modeling $122 million for SG&A which is a $33 million reduction from 2015, but this estimate includes no accruals under our bonus compensation plans or the ESOP. Management will consider the probability of any bonus compensation as we move through the year and we’ll adjust this estimate accordingly. Estimated SG&A expenses for fiscal 2016 include startup associated with the new St. Pauls complex and we estimate that startup cost to be $630,000 in Q1, $1.5 million in Q2, $2.2 million in Q3 and $2.8 million in Q4. We estimate SG&A expense will break out about 29.5 million in the first quarter, 29.9 million in the second quarter, 30.7 million in Q3 and 31.8 million in the last quarter. At the end of our fiscal year, our balance sheet reflected stockholder equity of $1.030 billion and net working capital of $401.5 million. Our total debt at yearend was $10 million and our total debt-to-cap ratio was less than 1% at the end of year. For the year we spent a 160.8 million on CapEx improvements and we paid $31.1 million in dividends. CapEx included 50.6 million in Palestine. For fiscal 2015, our interest expense was 2.1 million, a decrease from 2.6 million for last year and reflects our lower outstanding debt. Our effective tax rate was 35.4% and going forward remodeling 35.9%. We now expect our CapEx for construction and maintenance during fiscal 2016 to be $203 million and we’ll fund that back with cash on hand, internally generated working capital cash flows from operations and as needed liquidity provided by our revolver. Of that total a 139.7 million will be spent on the new complex in St. Pauls, the Company has the $750 million unsecured revolving line of credit of which 732.8 million was available to us on October 31. Our depreciation and amortization during fiscal 2015 was 74.7 million and we expect approximately 84.5 million next year as we begin operations in Palestine and begin deprecating those new assets. We're modeling 20.3 million in deprecation for the first quarter, 21.4 million for the second quarter 21.4 million for Q3 and then 21.3 million in Q4. With that Joe, that’s my report and we'll turn it back over to you for a discussion on what we're looking at in ’16.

[Joe Sanderson:]

Thank you, Mike. Our feed grain costs during fiscal 2015 were significantly lower than during 2014, and we expect even lower cost during fiscal 2016. If we had locked in prices for all of our needs for fiscal 2016 including what we have already priced at current values that is using the Chicago Board of Trade contract prices for current and future needs as it closed last night. Our cash cost for grains during fiscal 2016 would be $53.6 million lower than during fiscal 2015, that number is larger than we discussed in our Investor Conference in October as market prices for both corn and soybean meal have moved lower. We will also benefit from lower basis paid for bushel soybean meal purchased during fiscal 2016 and have actually priced much of our meal basis for the full fiscal year. I will share a few things we're watching closely as we start the new fiscal year. First, next event that will impact grain fundamentals will be the quality and quantity of South American crop, so we're keeping one on South America. As of today the corn and soya crops in Brazil and the rest South America are progressing nicely. Second, we will be carefully watching the planning intentions report this coming March, mostly corn acres will increase in 2016. We will closely watch that report. Third, we will of course watch chicken production numbers, while depleted breeder flocks constrained production numbers during much of 2014. Breeder flocks were definitely rebuilt during 2015. We have seen pullet placements trend higher all year especially through the fall and the number of hens projected to be in production next spring represented an estimated 7.8% increase over 2015. While we're uncertain of the exact number, we believe a majority of the additional hens will be needed to produce hatching eggs for the export market. In any event the breeder flock has been rebuilt while the breeder flock is larger, exits have been lower than a year ago numbers the past few weeks. Those lower egg sets represent production in January and February and it appears some in the industry are responding to the market weakness we have seen this fall, whether or not this trend continues will depend on chicken markets as we start the New Year. If export markets return and chicken markets improve, we believe the industry has a breeder flock at its disposal that could produce 1% to 2% more head in 2016 whether or not it does so will depend on the market. Finally, we will focus our efforts on Palestine and work to get that new complex to full production, which we now expect to happen by August and we'll continue construction of our new complex in St. Pauls North Carolina. While short term fundamentals for our fiscal 2016 appear challenging in the big bird market, I remain optimistic forward and focused on the long-term. Our balance sheet is strong and we're essentially debt free. And the company is in a position to continue our growth strategy. The new complex in St. Pauls demonstrates our optimism and confidence in the long term success of Sanderson Farms and our industry. The new complex will add value for our investors, opportunities for our employees and high quality products for new customers. We're committed to continue to grow our company beyond St. Pauls as well to add more value for our shareholders and new opportunities for our employees and I'm ready to do that. No matter the market conditions we will continue to focus on those things we can control and manage the others as best we can. With that we will now take your questions.

[Operator:]

[Operator Instructions] And we'll go first to Ken Goldman with JPMorgan.

[Tom Palmer:]

Hi, it's Tom Palmer on for Ken, thanks for taking my questions.

[Joe Sanderson:]

You bet.

[Tom Palmer:]

Hi, it's Tom Palmer on for Ken. Thanks for taking my questions. I wanted to go back first to your outlook on feed pricing. You did mention that they've come down and that was your view especially on soybean meal coming out of the investor conference couple of months back. From where you stand today, do you see more downside to pricing or do you think that this is a good time to be locking in your feed cost?

[Joe Sanderson:]

We think there's a bit more downside, not very much on meal but you know nobody knows that. But as of last night we own about half of our soybean meals through July. We -- when we got down below $280 a ton we became buyers and actually filled some orders last night in the overnight market. And we think there is another -- when Argentina devalued the peso that knocked another $2 or $3 off of it and values look good there, they're running $30 and $40 and $50 a ton cheaper than a year ago and that's with a better basis to buy, that looks like a good value to us. Corn on the other hand at $368 or so I believe this morning is about a dime a bushel higher than it was in -- at a good point in December and we're going to wait till after the 1st of the year and see what it looks like after the first year on corn.

[Tom Palmer:]

Okay, thank you for that. One follow up, you mentioned Urner Barry you're pricing tends to run a little below it in this market environment. In recent weeks have you seen it firming up at all, I mean we've seen just from Urner Barry a little bit incrementally positive on the commentary?

[Joe Sanderson:]

Where the week or two before Christmas is not a good time to evaluate markets, tenders and wings are moving up right up now. They are firmer. For us we're on our cut back, so the market is firm for us, but it's not firm for the industry, I don’t think. We believe soon as Christmas is over all the markets are going to move up. We are actually short next week but that is -- we're in our cut back mode so that's not a really good indicator but we believe the week after Christmas boneless breast is going to move possibly -- probably to Georgia Dock, and we feel pretty good about the markets the week after Christmas.

[Operator:]

And we'll go next to Farha Aslam with Stephens Inc.

[Farha Aslam:]

Question about demand, have you seen any changes in retail demand as pork and beef prices have come down in the last few weeks?

[Lampkin Butts:]

No, this is Lampkin, good morning. Our retail demand is a little soft but it’s mainly due to the holiday. Turkey's enhanced for Christmas. What we've seen at retail is continued excellent demand for chicken other than the holiday stuff. We're competing against cheaper features for beef and pork both but we're still getting plenty of chicken features. So we're not -- we haven't seen any changes.

[Joe Sanderson:]

And the retail price of beef and pork have really not come down appreciably, the grocery stores are maintaining their margins on beef and pork. They are not taking their price down on beef and pork. So that's one reason Georgia dock is staying as high it is. There's not additional volume of chicken either in that space, at retail and that's another reason Georgia dock is staying where it's staying.

[Farha Aslam:]

And that leads to my follow up on Georgia dock. Georgia dock pricing has been very firm and it's actually now poised to tick up. Could you share with us your outlook on Georgia dock pricing for the next year?

[Joe Sanderson:]

We think it’s going to remain pretty close to what it did in 2015, we think it’s going to be firm and there is not additional volume in that market space. Our outlook is good for the Georgia dock and for retail chicken sales.

[Farha Aslam:]

Great and my final question is on the export markets. Could you share with us your outlook on the recovery in exports and your thoughts on leg quarter pricing?

[Joe Sanderson:]

We think that the export markets are going to improve next year if we continue to be free from avian influenza. We haven’t had any show up yet and we’re seeing a number of countries that have lifted the bans. Those countries that have lifted the bans -- we hadn’t gotten orders from the countries yet, they announced that they’re going to lift the ban and then they have to go through paper work between their government and USDA. But we’re expecting that to happen after the 1st of the year. So, we think the next move there is up, buying a return of AI [ph].

[Operator:]

And next to Michael Piken with Cleveland Research.

[Michael Piken:]

Just wanted to circle back a little bit more on the production numbers for next year and you talked about a headcount increase of potentially 1% to 2% if markets improve. If things stays static, I mean we get little bit of a seasonal rebound in pricing mix. What is your baseline forecast for both number of head and total pounds for the industry in 2016?

[Joe Sanderson:]

We’re basing that number -- we would back in that. If you look at the hens that are out there and then look at the number of eggs being exported it would say that there are no hens available for that 1% or 2%. But we believe those egg numbers maybe off a little bit. So we do believe there could be 1% or 2% more head available. We don’t believe there is going to be a lot more weight gain next year. We think most of the weight gain has already occurred. And we don’t believe you’re going to see the weight gains that you saw in ’15 again in 2016. We think that’s pretty much done. But we do think you could see 1% or 2% more headcount. And I’m inclined right now to say it’s closer to 1% because big bird deboning is actually cut back, we think all of this cut back is in big bird deboner and you’re going to continue to see that until margins return. And they are not there right now $0.15 leg quarter and $1.08 boneless breast which we think is going to move, but it’s going to take a while for egg sets and then production to catch up. So the first quarter, at least first calendar quarter is going to be lower than 2015. So we believe 1% to 2% was very little weight gain next year.

[Michael Piken:]

Shifting gears just wanted to and I appreciate the color regarding the SG&A expenses. If you could just remind us about when some of the ESOP and management bonuses kick in at like what earning level or returns do you guys need before those bonuses start to accrue and how should we be thinking about that?

[Mike Cockrell:]

Good morning Michael this is Mike. As you know all of our salaried employees earn up to 25% of their salary in a bonus if we achieve certain earnings per share targets. Those targets are set by our board in January, but they’re based off of a 20% return on average equity and we ran that math this morning, you’re looking at a top level of the bonus award program which is going to be around $10.50 a share, this year it was $9 a share, last year it was $8 and change. So obviously as our equity has grown, those targets increase. So you’re looking at probably right at $10 a share at the midpoint and $10.50 a share at the top. The ESOP is different now, the ESOP -- the board looks at profitability and looks at other obligations of the company and puts all that together in October and makes a decision about the ESOP but it has typically been right at 4% of our gross profit of [multiple speakers] 4%-4.5%, but you won’t see any of that till the third quarter.

[Michael Piken:]

Okay, that's helpful. Then I guess just lastly as you think about what happens if some of these export markets reopen, what product is going to be eligible to be exported? Will it be chicken that's been sitting in the freezer during the AI? My understanding is that product would not be eligible, it would only be product eligible for chickens slaughtered after a certain date. But maybe you kind of walk us through what product and how quickly we could see a recovery in leg quarter pricing if some of these markets reopen. And then I will pass it on.

[Joe Sanderson:]

We have not heard that but it wouldn't matter, what's sitting in the freezer is the overage of what's in the freezer is only about six bulk loads of product. So, what’s in the freezer is not a big deal.

[Mike Cockrell:]

If these countries open, there are countries taken product now, so the product that’s in there will have other countries to go to. If the countries start opening up, it's gone up. I don't think there will be a problem getting that -- getting product out of the freezers and into the export market.

[Michael Piken:]

Okay. Great. I'll pass it on. Thanks.

[Operator:]

[Operator Instructions] We'll go next to Ken Zaslow with Bank of Montreal.

[Kenneth Zaslow:]

Just a couple of questions. One is so just to make sure I understand the production and headcount and weight, so you're assuming that for 2016 total production for the industry would be up, will be somewhere between 1% and 2% including weight. 1% on head weight and maybe a little bit extra on weight is kind of what you're thinking?

[Joe Sanderson:]

Yes.

[Kenneth Zaslow:]

Okay and when you were talking about the outlook for corn and soybean, I was actually surprised that you didn't say anything about South America. Is there -- I guess why would you not put the -- why would you not expect any pressure from South America to continue to put pressure on soybean meal as well as corn? But you left that out, I don't know if it was a --.

[Joe Sanderson:]

No, we do believe that, that's what we think South American, the crop in South America has put pressure on and we'll continue to put pressure on. But we think, I mean, we were looking at $300 meal and now we think maybe $265 is the bottom on U.S. meal.

[Kenneth Zaslow:]

Okay

[Joe Sanderson:]

There have been few events that have occurred one is reduction in Texas on sales of South American beans and the others is the devaluation of the Argentina currency, that occurred this morning. And those two events have put pressure on U.S. meal and then right now favorable weather in South America has put pressure on the U.S. crop, a bumper crop so far. Now if that weather were to change or in the planning intentions if 2 million acres don't get planted in the U.S. that could change on a dime. So that's why we've started buying.

[Kenneth Zaslow:]

Okay. Did you give us a heads up of how you're thinking about the upcoming quarters in terms of margin because it sounds like you're trying to --.

[Joe Sanderson:]

The first quarter?

[Kenneth Zaslow:]

The upcoming quarter. Not the one that -- the next -- the one that we're in right now.

[Joe Sanderson:]

Well, what do you want me to do, give me a pen [multiple speakers].

[Kenneth Zaslow:]

Yes because it sounds like big bird -- and on top of that can you just give a sense of the size [ph] between big bird, small bird and medium-size bird? And will there be some sort of normalization among them? Just a lot of color on that. I think there has been a lot of discussion about that now.

[Mike Cockrell:]

Well, retail is good, I don't know anything about small bird, but I would assume it was okay, I think all the -- in Agri Stats at least half of in the October at least -- participants in big bird were in red the once that were not were probably flat priced and that will be over in December. I can tell you that $1.08 Urner Barry and $0.15 leg quarter does not work, it's not a devastating thing, but it's not pretty. But it's not a good place to be, so that's about as much color as I can handle right now.

[Operator:]

We'll take our next question from Adam Samuelson with Goldman Sachs.

[Jason Fraprie:]

This is Jason on for Adam. I guess on the big bird margin profile can you just talk a little bit, you were saying earlier that margins are close to breakeven there. Can you talk a little bit about the spread between the different quartile producers and where you guys fall there? And where you would think the majority of the production cuts would be coming from that? Thanks.

[Joe Sanderson:]

In the big bird deboning we have most of our plants are not flat priced, we have one plant that has most of its product flat priced that plant is doing pretty well. The other 5 plants are on the market, those plans are not doing well. There is no formula, doesn't matter how good you are growing the chicken or process and yielding the chicken, when you're selling boneless meat at $1.8 minus $0.15 leg quarter, that formula does not work and so it's just not a good place to be. And we do really well growing the chicken and really well processed and yield in, but that doesn’t matter when you're selling product on a market basis for right now.

[Jason Fraprie:]

Okay. I guess on that front if you think about it from a longer-term perspective on the cost side, like what are from a cost perspective what are the spreads on maybe a per pound or a per bird difference between the top 25% producers and the bottom 25%?

[Joe Sanderson:]

On the cost side, well it's normally -- it normally runs $0.10 per pound, between the good and best and the worst.

[Operator:]

We'll go next to Francesco Pellegrino with Sidoti & Company.

[Francesco Pellegrino:]

Good morning, guys. I think it was Lampkin that was addressing some of the questions from Farha but when you guys started talking about some of a little bit about the international market outlook and how you see some of these countries potentially lifting the ban next year, is this more of a second-half calendar 2016 event as compared to maybe in the first half of 2016?

[Joe Sanderson:]

I think it will be first half '16, as long as we don't have avian influenza return. These countries, the countries that have lifted the bans, I would think they'll start buying products in January.

[Francesco Pellegrino:]

Some of these countries that have lifted the bans I've noticed have been some of the smaller buyers. Could it be considered that these guys have maybe been a little bit premature in their actions? I know when we looked at when the avian influenza outbreak occurred it was May. I would think that a majority of these countries would at least wait until the birds start migrating back north and the theory is that they start migrating north they are a little bit weaker, they are more susceptible to getting the virus and also spreading the virus. Just thinking that it might be a little bit later on in 2016 than the first half and that maybe some of these countries have been a little bit too overanxious in their actions. Just wondering if you had any commentary on that?

[Joe Sanderson:]

Well the last outbreak was in June and normally these countries wait 90 days and after 90 days they'll reopen. So it's been six months, so they have had plenty of time. Your point is well taken, they could wait and see the full migration but the fact that they've lifted the ban now makes me think that that trade will begin.

[Mike Cockrell:]

You still have other headwinds like Lampkin said, beyond avian influenza as it's affecting not only us but other proteins as well. The currency -- the strength of the dollar is a significant headwind. Angola is not buying product because of the price of oil, and then Russia and China are not buying because of political reasons. And there -- it's more than avian influenza, it's going to be a task regardless.

[Joe Sanderson:]

There is one other thing about the bird flu, the countries that have lifted the ban, if we did have some outbreaks of the bird flu, they could ban just a county or state instead of the whole country. There has been a lot of APHIS has worked with each of these countries to convince them they should regionalize and not ban all of the United States, so that's another thing that could.

[Mike Cockrell:]

We think that might happen this time around if we do have another outbreak. It will be regionalized with a lot of these countries rather than banning the whole United States.

[Francesco Pellegrino:]

All right. That was helpful. I just want to touch on one other thing and then I will pass it along in the queue. Joe, you were talking about I guess less than ideal leg quarter and boneless breast meat pricing and the last time we saw live inventory adjustment was back in 2011. When I start thinking about a live inventory adjustment, should I be thinking about it on a cutout part of the bird or about or of the bird in its entirety?

[Joe Sanderson:]

It's a whole bird, I mean a whole cutout you have to look at, those are primary -- I mean that's 90% of the chicken though, when you take the leg quarter and the breast are most of it, along with major part left is the wing. But we go through that exercise every quarter. We did for this quarter and it didn't warrant an adjustment to inventory.

[Francesco Pellegrino:]

When you went through the exercise this quarter, could you maybe tell us how many pennies above --.

[Joe Sanderson:]

No, you're digging too deep now.

[Francesco Pellegrino:]

Okay, you can’t knock me for trying, but I appreciate it.

[Joe Sanderson:]

Good try, but most important thing to tell you, it didn't warrant an adjustment to our inventory.

[Francesco Pellegrino:]

But it was closer than it was.

[Joe Sanderson:]

Absolutely.

[Francesco Pellegrino:]

A lot closer.

[Joe Sanderson:]

Absolutely.

[Francesco Pellegrino:]

Okay, I appreciate it. That’s it for me.

[Joe Sanderson:]

Very good.

[Mike Cockrell:]

Thank you so much.

[Operator:]

We'll go next to Brett Hundley with BB&T Capital Markets.

[Brett Hundley:]

Hey, good morning guys.

[Joe Sanderson:]

Good morning.

[Brett Hundley:]

I just want to go back to a question before on trading values or prices relative to the UV. Maybe another way to ask it would be, do you guys expect that trading values in Q1, in your fiscal Q1 can be better or tighter I guess I should say relative to values depressed levels that we saw in fiscal Q4?

[Joe Sanderson:]

No. You had decent prices in August and the first two weeks of September, after that November and December prices are a $1.11 breast and $0.15 leg quarters, all of November and all of December. Now we think we're going to get improved prices in January but our first quarter is not going to be better than the fourth quarter.

[Brett Hundley:]

Okay. And then on Palestine you guys mentioned, Joe I think you mentioned you don't expect full production until August. Now it had been May, at least what I remember and …

[Joe Sanderson:]

That’s correct, you are right.

[Brett Hundley:]

Okay. Can you just go through reasoning for that? I mean I know Pico has been delayed. Is it reasoning similar to the Pico issue or is it something else? Just wanted to get color on that?

[Joe Sanderson:]

I don't know what Pico, do you know what Pico looks like?

[Mike Cockrell:]

No.

[Joe Sanderson:]

Our issue is rain primarily. We were delayed in getting houses built at the beginning, when we started up because of rain in Texas. We got all the houses committed. The sign up was very rapid, very easy getting our growers out there and we knew that before we started we had done an analysis like we always do and we knew there were plenty of growers. We signed up the growers and then we got behind because of rain in Texas at the very beginning and it’s just delayed us. Now we could -- frankly we could meet the May deadline but if we did meet the May deadline we would be down to a seven day layout period and we decided that it would -- the market the way it was, we didn't need to rush to get the -- ramp the plan up fast, we didn't need to do that. And so we decided to stay at a 14 day layout, get the houses built and to stay at a 14 day layout until we got all the houses built. Now it started raining again.

[Mike Cockrell:]

Last week.

[Joe Sanderson:]

It started raining again in Texas this winter. Normally that area gets about 40 inches of rain a year, it’s like Bryan, College Station, Waco and Palestine, that’s normally a 40 inch and last year they got over 60 inches of rain and we just got behind from the beginning, and -- but we got -- we had plenty of labor out there, plenty of chicken house, I don't really know about Pico. I do know they're way behind, but we're about 90 days behind and it's because of rain.

[Mike Cockrell:]

And I know we talked about this before but that startup in Palestine has been as good as any plant we've ever.

[Joe Sanderson:]

Yes, it's been spectacular.

[Mike Cockrell:]

It’s spectacular.

[Joe Sanderson:]

And every grower is committed, we just don’t have the houses built yet.

[Brett Hundley:]

Okay.

[Joe Sanderson:]

And there's another thing, the construction crews. We normally have 12 to 15 people on a construction crew, they are building, the contractors are building for us out there because of the labor market. They're running seven and eight people per crew. So it's taking a little longer to build the houses well, that's not as big a factor as the rain but it's a factor, it's taking a little longer to build a farm.

[Brett Hundley:]

Appreciate it.

[Joe Sanderson:]

So those are two factors.

[Brett Hundley:]

Appreciate the comments. Just two others for me. Joe, you've made some comments previously about the type of asset growth that you want to see overtime and where you'd like to see assets. And certainly Mike or Lampkin if you want to chime in on this, too. But with your balance sheet here you're going to have ongoing favorability beyond St. Pauls even. And just wanted to get a sense of with your market outlook being what it may be, can you talk a little bit more about the buy versus build decision? I think maybe some people out there might like to see you buy in this type of environment potentially if you're going to use your balance sheet. And I was just curious if the buy option is there for you potentially and if you would rather move that way instead of a build or what your view might be?

[Joe Sanderson:]

You know we're fairly familiar with all the assets that are out there. I think I would take one of our new complexes over any of the assets that we know that might be available based on the condition of the assets, the environmental quality of the assets, the geographic location of the assets, the labor availability, all those things, there are 50 things that we look at when we build a complex. And when you consider all of those things, we just think what we put together is better than what with the buy. Now something were to come up you bet you we do it in a heartbeat. But we don’t know of anything that’s available that would match what we could build. And we are absolutely looking at locations right now beyond St. Pauls.

[Brett Hundley:]

Okay, that’s very clear, I appreciate it. And then if I can just slip in one quick one I’ll yield the floor. I’ve heard some larger grocers have taken a tougher stance on contracting for 2016, and that some smaller chicken producers have been maybe more willing to step up and take on lower pricing for market gains. Have you guys seen this, is it material at all, is it something to be not worried about but just is it something for us to be cognizant about if you could just talk to that and again I’ll yield the floor? Thank you.

[Joe Sanderson:]

You bet. I don’t think it’s material. We’ve been through I guess half a dozen contract renegotiation with retail. You’re talking about retailer grocery stores?

[Brett Hundley:]

Yes, sir…

[Joe Sanderson:]

And I would say one of those was more competitive than normal but the others were very much like what we’ve seen in the last two years.

[Operator:]

We’ll go next to Andrew Hendel with Beach Point Capital.

[Andrew Hendel:]

Good morning and thank you for taking my question. I was just wondering why was there such a disparity between Georgia Dock whole bird prices and boneless chicken prices. Shouldn’t there be greater correlation between the two?

[Joe Sanderson:]

It’s two different market segments. The Georgia Dock is primarily retail grocery stores and there has been on appreciable new production in that market since we’ve built the Kinston processing plant. That was the last addition of 2011 when any additional volume went into that market segment. On the other hand in the big bird market arena there was probably 8% more product added to that market because of additional pounds, the additional head at Palestine and the backup in the export arena. So, they are two totally different markets and particularly big bird got a lot more pounds put in last year.

[Mike Cockrell:]

And just the supply demand dynamics of those two different market segments can move as we’ve seen since 2008 in opposite directions.

[Joe Sanderson:]

And yes and beef, the shortage in beef showed up particularly in grocery store.

[Operator:]

And we’ll go next to Jeremy Scott with CLSA.

[Jeremy Scott:]

Just want to dig in a little bit on the supply picture, first in the last couple of months. If I use your model and I back out into layers for domestic production, you isolate those hens, I get them up plus 2% in September, October and yet I have eggs that’s down 1% to 2%. What explains that? Is it egg breaking or is it something else?

[Joe Sanderson:]

I think that’s what it is. We think we dump our excess egg and we need to go through cut back like we do for our fall cut back and holiday cut back, they just get dumped. And we think that’s what people are doing.

[Jeremy Scott:]

And then when you mentioned earlier looking forward 9% increase in pull up pricing, do you think that’s explained away by increasing hatch egg exports, that implies that you’re going to see another leg up in hatch exports, correct?

[Joe Sanderson:]

No, actually every bit of, if you look at the USDA number zone, hatching egg exports, what is out there right now will account for every bit of that.

[Mike Cockrell:]

Every bit of the additional pull, if you look at the 8 million dozen eggs in October of 2015 that went into the export market, when you back into the number of hens it would take to produce those eggs that’s 9.4% of the current laying flock, I mean it’s a significant number. And it went up a good bit in October versus September. Now at some point those comps become a little more difficult Jeremy but we still think a significant number of these pullets are going to be devoted to that.

[Jeremy Scott:]

Yes and I guess that was my question. I mean we're already seeing the mismatch now, if I back out September was the biggest comp, right, so if I back out into layers for domestic production I get those up 2% in September, October. So the increase going forward is the comps become tougher, so the 9% increase if we're not getting another leg up in hatching exports how do I match those two together?

[Mike Cockrell:]

Yes, I think you are right through the fall is that 2% number which is -- what Joe is saying he is looking forward in 2016, now the pullet placements continue to go up 8% and 9% a month which I don't think they will, then you got a start scratching your head a little bit.

[Joe Sanderson:]

Yes I would say I don't think you have the process capacity.

[Mike Cockrell:]

Right, I don't either and I think it will level off and if don’t Jeremy then we got another conversation to have because I don't know, don't know where you are going to put them.

[Jeremy Scott:]

Okay. I wanted to follow up on some of the retail demand question. We're starting to see a little bit of softness in restaurant traffic and I think that was probably somewhat a contributor to the decline in the big bird margins in addition to the oversupply. But Georgia Dock has been resilient. If we see consumer spending continue to soften, would you expect retailers to start cutting prices in beef and pork or increase their featuring? And if they do that, is there an elevated risk that retail tray pack margins could follow big bird margins down?

[Joe Sanderson:]

I don't see that happening at the grocery store. I mean, if they're not going to eat out they're going to go to the grocery store and the trend since 2008 has definitely been traffic in the grocery store. People have been buying more products at the grocery store the whole time. And what they haven't been doing has been going out to eat and we definitely saw what -- except probably for the first six months of 2015 where we did see increased traffic at food service, had slowed down in September, October -- have you got anything in November?

[Mike Cockrell:]

Preliminary numbers are soft.

[Joe Sanderson:]

Yes.

[Mike Cockrell:]

It's kind of soft.

[Joe Sanderson:]

It slowed down September, October, November.

[Jeremy Scott:]

I guess my question really is about the spread between beef, pork and chicken. Can we get to a more normalized level? Because right now retail margins on beef and pork are some of the highest they've ever been. Does that normalize or do you think they will hold those margins for the remainder for the next six months?

[Joe Sanderson:]

I think they are going to hold it as long as they can, I mean nobody was expecting beef prices to be where there are right now carcass prices and I'm surprised where they are frankly. I know there are more pounds because the carcasses are higher but the headcount on cattle are not supposed to be high in 2016 and not supposed to be a lot more ahead of cattle processed. And I don't know what it's going to take to get out of this on cattle. And they are backed up a little bit on exports and so is pork. I guess it's a dollar that's doing it too but I think this is a bad time to be evaluating all of that.

[Jeremy Scott:]

Okay. And then just lastly on your capital strategy, I know you have 200 million set aside for your plant expansion. What is your take on share buybacks? I know you did 55 million this year. Is that in the budget for next year with your shares are trading at pretty depressed levels at this moment and you have a good outlook for 2016?

[Joe Sanderson:]

Well, when we do our math our calculation for share buyback and compare that to a plan, to buyback our math says you got to be in -- the stock has got to be in the 40s to match the return of a new complex. So at $75 or [$74], it says build a plant, build a complex. So, we made that other buyback because we didn't want to dilute and we'll do that again on our performance shares when that stock gets up to a certain point those shares get up to a certain point that we award through our incentive programs, we're going to buy that back, that's what we did, how many shares we’ve bought?

[Mike Cockrell:]

We bought back 700,000

[Joe Sanderson:]

And when that flow accumulates again we'll do that again.

[Mike Cockrell:]

And Jeremy, we go through that math and I think you and I have talked about this, when we go through that math we look at you can spend a 150 million bucks and add 15% capacity to the company and even those $74 may appear to be a really good price for the stock, to buy that back you spend the same money and you'd only get 8% of the company back when you can add 15% more capacity and we like that as we've been able to create some value for our shareholders doing that and we just like putting it back into the company, that doesn't mean the Board doesn’t look at all of its options of course.

[Joe Sanderson:]

We do.

[Operator:]

And at this time, there are no other questions in queue. I will turn it back to Mr. Sanderson for any closing remarks.

[Joe Sanderson:]

Good. Thank you all for joining us this morning and we will look forward to our next conference call, Merry Christmas and Happy Chanukkah to each one of you.

[Operator:]

And that does conclude today's conference call. We appreciate your participation.