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Edited Transcript of SAFM earnings conference call or presentation 27-Feb-20 4:00pm GMT

Q1 2020 Sanderson Farms Inc Earnings Call

LAUREL Mar 15, 2020 (Thomson StreetEvents) -- Edited Transcript of Sanderson Farms Inc earnings conference call or presentation Thursday, February 27, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* D. Michael Cockrell

Sanderson Farms, Inc. - CFO, Chief Legal Officer, Treasurer & Director

* Joe F. Sanderson

Sanderson Farms, Inc. - Chairman & CEO

* Lampkin Butts

Sanderson Farms, Inc. - President & Director

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Conference Call Participants

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* Adam L. Samuelson

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Benjamin M. Theurer

Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director

* Benjamin Shelton Bienvenu

Stephens Inc., Research Division - MD

* Eric Jon Larson

The Buckingham Research Group Incorporated - Director of Equity Research

* Heather Lynn Jones

Heather Jones Research LLC - Founder

* Jacob Samuel Nivasch

Crédit Suisse AG, Research Division - Research Analyst

* Kenneth B. Goldman

JP Morgan Chase & Co, Research Division - Senior Analyst

* Kenneth Bryan Zaslow

BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst

* Peter Thomas Galbo

BofA Merrill Lynch, Research Division - Associate

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Presentation

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Operator [1]

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Please standby, we're about to begin. Good day and welcome to the Sanderson Farms Incorporated First Quarter 2020 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.

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [2]

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Thank you. Good morning and welcome to Sanderson Farms First Quarter Conference Call. This morning we announced a net loss of $38.6 million or $1.76 per share for our first quarter of fiscal 2020. This compares to a net loss of $17.8 million or $0.82 per share for our first quarter of fiscal 2019. I will begin the call with comments about general market conditions and grain costs, and then turn the call over to Lampkin and Mike for a more detailed account of the quarter.

Before we make any further comments, I will ask Mike to give the cautionary statement regarding forward-looking statements.

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D. Michael Cockrell, Sanderson Farms, Inc. - CFO, Chief Legal Officer, Treasurer & Director [3]

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Thank you, Joe, and good morning, everyone. This morning's call will contain forward-looking statements about the business, financial condition and prospects of the company. Examples of forward-looking statements include statements regarding supply and demand factors, future grain and chicken market prices, economic conditions, production levels and our future growth plans. The actual performance of the company could differ materially from that indicated by the forward-looking statements because of various risks and uncertainties. These risks and uncertainties are described in our most recent annual report on Form 10-K and on the company's quarterly report on Form 10-Q for the quarter ended January 31, 2020, which was filed with the SEC this morning.

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [4]

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Thank you, Mike. The results for the first quarter reflect continued challenging market conditions for products produced for food service customers at our plants processing a larger bird. Demand for retail grocery store customers has remained stable and that stability is reflected in overall average chill pack prices that were slightly higher than during last year's first quarter.

On the other hand, market prices for boneless breast meat, chicken tenders and boneless thigh meat sold for food service customers were lower compared to last year's first quarter. And, in fact, quoted boneless breast meat market prices fell to all-time lows in January and remained there into February. Those prices have moved higher over the past week, however.

Cash market prices for corn were higher during the quarter compared to last year, while soybean meal prices were lower. Our feed costs per pound of chicken processed were higher by $.0153 per pound when compared to chicken processed -- when compared to the first fiscal quarter of 2019. Both corn and soybean balance tables are healthy as we head into the 2020 planting season, but corn basis remains much higher than last year. As a result, we have bought little corn basis past April, while we have most of our soybean meal basis bought for the full fiscal year.

The next events that will impact grain markets are the South American harvest and the March 31 Planting Intentions report. The South American harvest is progressing very well and expectations now are for good crops from the region. At its 2020 Agricultural Outlook Forum last week, USDA estimated corn acres in 2020 will be 94 million acres versus 89.7 million acres last year, and that acres planted in soybeans would be 85 million acres versus 76.1 million acres last year. It is not unusual for the USDA to significantly revise its outlook before the March 31 Planting Intentions report. So we will be watching for that report.

We have priced our grain needs through March. We have bought substantially all our soybean -- all our soy meal basis for the full fiscal year, but have low corn basis price past April. Based on our calls through the first fiscal quarter and what we have priced so far, when combined with prices we could have locked in for the balance of the year at yesterday's close, our grain cost for fiscal 2020 would be flat with fiscal 2019 based on 2019 volumes.

I've told our shareholders at our annual meeting 2 weeks ago that in addition to grain crops in South America and the Planting Intention of United States farmers, we are focused on several things as we start fiscal 2020. We will, of course, watch chicken production numbers. The USDA is projecting that our industry will produce 4.3% more chicken during calendar 2020 than last year, which will compete with more pork as well. According to USDA data, pullet placements are higher by over 2% in the recent months. And egg sets and chicks placed are trending higher by 4% compared to last year.

I have several reasons to remain optimistic about 2020. First, we are operating well in all areas of our business, while our model of selling fresh chicken at market prices does not compete when commodity market prices are at historic lows. Both our live production and our processing divisions start the year in a very strong position. Second, I believe grain markets will, at worse, be benign.

Finally, while market prices for boneless breast meat produced at our plants processing larger birds for food service customers remain under pressure and market conditions during our first fiscal quarter were very challenging, we continue to be positive about our opportunities in both domestic and export markets over the next year.

With respect to domestic markets, we expect to see continued favorable demand in retail grocery stores. Chicken remains favorably priced compared to other proteins, and we believe that, that dynamic will continue. We also believe we will see improved demand from food service customers supported by an increase in promotional activities at quick service restaurants for chicken.

With respect to the export markets, the outbreak of African swine fever in China has affected the worldwide supply of pork, bringing a significant protein deficit that should ultimately benefit poultry markets in the United States. At the end of 2019, China lifted its nearly 5-year ban on the import of United States poultry, and we resumed shipments to China almost immediately. Since the ban was lifted, we have shipped or have customer orders for approximately 18 million pounds of chicken products including dark meat parts to China. This includes 137 loads of dark meat and 283 loads of chicken feet.

We continue to receive strong indications of interest for our products from buyers in China, and we were pleased to see the recent announcements regarding the reduction of tariffs on United States poultry, which should further support our business. While the devastating coronavirus is currently disrupting the markets, depressing demand and negatively affecting shipping logistics and slowing China's economic growth rate, we believe demand for protein from China is strong and we expect to benefit in 2020 when we [return into] an open market.

Finally, we will focus our efforts on our growth, operations in Tyler will reach near full production by August of 2020 and we are seeking a new site for our next plant.

At this point, I will turn the call over to Lampkin for a more detailed discussion of the chicken markets and our operations during the quarter.

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Lampkin Butts, Sanderson Farms, Inc. - President & Director [5]

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Thank you. Joe. Good morning, everyone. Overall, market prices for poultry products were higher by $0.0258 per pound or 4% during the quarter when compared to our first quarter of last year. Overall, average market prices for chill pack products reflected good demand during the quarter and averaged just under $0.01 higher per pound during the quarter compared to the first quarter of fiscal 2019 based on mix improvements.

Chill pack prices were lower by $0.0025 per pound sequentially, again mostly all mix. Bulk leg quarter prices during our first quarter averaged $0.315 per pound compared to $0.257 per pound last year. The final number for calendar 2019 showed the volume of all global meat exported was higher by one half of 1% compared to 2018.

The average quoted market price for jumbo wings was higher during our first quarter compared to last year and reflected a good Super Bowl season.

Jumbo wing prices averaged $1.61 per pound during our first quarter this year compared to $1.56 per pound during last year's first quarter. Boneless breast prices averaged $0.92 during this year's first quarter compared to $0.95 a pound last year.

We sold 1.15 billion pounds of poultry products during the first quarter, an 8.2% increase from the 1.06 billion pounds sold during last year's first quarter. Our processed pounds were up from 1.06 million (sic) [1.06 billion] to 1.17 billion pounds. That is 3.2% higher than our guidance for pounds processed during the first quarter as both the number of head processed during the quarter and live weights were higher than our estimate.

We expect to process approximately 1.23 billion pounds during our second quarter, up from 1.08 billion pounds processed during last year's second quarter. We expect to process approximately 1.29 billion pounds in Q3 and 1.27 billion pounds in Q4.

Prepared chicken sales were $51.6 million, down $6 million or 10.5% on 4 million [PO] pounds sold. Our average sales price per pound of prepared chicken was higher, about $0.053 per pound or 2.9%.

We remain focused on our operations during the quarter and we will maintain that focus as we move Tyler toward full production in April. As Joe noted, our big bird mix -- our big bird product mix is a challenge in the environment we faced November through February, but we will continue to look for efficiency improvements and do everything we can to meet our goal of performing at the top of the industry.

At this point, I'll turn the call over to Mike to discuss financial statements.

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D. Michael Cockrell, Sanderson Farms, Inc. - CFO, Chief Legal Officer, Treasurer & Director [6]

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Thank you, Lampkin. Net sales for the quarter totaled $823.1 million and that's up from $743.4 million for the same quarter last year. Our net loss was $1.76 per share during the quarter compared to a net loss of $0.82 per share during last year's first quarter.

Our cost of sales of poultry products for the first 3 months ended January 31 as compared to the same 3 months a year ago increased 17.9%. This increase is a result of more pounds sold and an increase in the average cost of goods sold. Ramp-up inefficiencies at Tyler and additional cost inherent in the tray pack plant accounted for $1.2 per pound of our higher cost of goods sold compared to last year's first quarter. We expect to get 3/4 of $0.01 of that back by September 2020.

Nonfeed-related COGS were higher by $74.3 million or $0.027 per pound compared to last year. Several factors contributed to this. First, lower than capacity volumes impacted cost per pound. The Brazos and McComb plants were down a week during the quarter for the installation of new equipment. Labor costs were up $31.7 million or $0.0167 per pound compared to last year, and fixed costs were higher by $8 million or just under 1/2 of $0.01 per pound, as we have begun depreciating some of the equipment we've been adding to the plants over the last year.

The change in benefit of the reversal of the fiscal year-end LOCOM adjustment was 2/3 of $0.01 higher in Q1 '19 than this year. Our feed cost per pound of poultry products processed were higher by -- were higher at $0.2597 per pound compared to $0.2444 per pound last year. While our cost per pound of poultry products sold were higher by $0.055 per pound, our sales price per pound of poultry products increased only 4% or $0.0258 per pound compared to last year, and this combination obviously resulted in lower operating margins during this year's first quarter.

SG&A expenses for the first fiscal quarter of 2020 were $9 million lower than the same 3 months a year ago. This decrease compared to last year is the result of a $1.4 million reduction in trainee costs, the elimination of $9.3 million in Tyler start-up cost and lower stock compensation expenses. These reductions were offset by higher legal and other expenses. We're modeling $50 million for SG&A expenses in Q2, $50 million in Q3 and $52 million in Q4. And these estimates include no accrual for a potential ESOP contribution or bonus awards.

We spent $71.2 million on CapEx during the first quarter and we've approved $203.8 million in CapEx for the 2020 fiscal year. The fiscal 2020 capital budget currently includes $40 million for several large-scale equipment upgrades at our processing plants in Bryan, Texas; McComb and Laurel, Mississippi; and Moultrie, Georgia. We've also budgeted $15 million during fiscal 2020 for a new hatchery under construction right now in Jones County, Mississippi, and that will replace the Laurel, Mississippi, hatchery. Our depreciation and amortization during the first quarter totaled $36.7 million and we expect approximately $154.6 million in depreciation for the full fiscal year.

And Rochelle, that is all of our prepared remarks and you can now open the call for questions.

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Questions and Answers

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Operator [1]

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Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions) And our first question today, we'll hear from Heather Jones with Heather Jones Research.

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Heather Lynn Jones, Heather Jones Research LLC - Founder [2]

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I wanted to ask a quick question about -- on the cost. Using the pounds which you all are projecting for Q2 and given some of these conversions are over, how should we be thinking about nonfeed cost per pound in Q2?

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D. Michael Cockrell, Sanderson Farms, Inc. - CFO, Chief Legal Officer, Treasurer & Director [3]

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Yes. The labor is baked in, Heather. That's not going anywhere. You're going to get back the inefficiencies at Tyler, 3/4 of $0.01 a pound. You're going to get a little bit of that back in Q2. Your volumes are going to be higher, which are going to help. You might model $0.01 lower, but I wouldn't model any lower than that, and then you're going to get some more back in Q3.

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Heather Lynn Jones, Heather Jones Research LLC - Founder [4]

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Okay, and then going to China. So talking about the tariff reduction that they announced, now my understanding is that the different distributors have to offer that and then they awarded it. It's not like a blanket waiver, is that correct?

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [5]

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That is correct.

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Lampkin Butts, Sanderson Farms, Inc. - President & Director [6]

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They agree that the China has published -- China published the list of things that they dropped the tariffs on completely. Poultry was not on it, but they allowed the importers to apply for that tariff exemption, which they've all -- the ones we deal with have all applied for.

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Heather Lynn Jones, Heather Jones Research LLC - Founder [7]

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So the ones you deal with you said have all applied for waiver and they have been awarded the waiver?

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Lampkin Butts, Sanderson Farms, Inc. - President & Director [8]

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Yes. A waiver up to 30% that is still in place.

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Heather Lynn Jones, Heather Jones Research LLC - Founder [9]

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Okay. And given that waiver -- I mean how competitive is U.S. product into China right now?

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Lampkin Butts, Sanderson Farms, Inc. - President & Director [10]

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Well, it's pricing in. If they drop the 30%, it's just going to be more, that much better for us. But we've got product on the water, so it's competing.

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Heather Lynn Jones, Heather Jones Research LLC - Founder [11]

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And then my final question is on the strength that we've seen in the BSB market of late. Is that -- in your view, is that mainly just seasonal strength? Or have you started to see any of the QSR step in and buy for their anticipated needs? Like what do you think is driving this recent strength?

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [12]

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I think it's several things. I -- we think it has to do -- I think with the price of boneless right now, I think it's bought some market share. We are exporting a good bit of boneless into Mexico right now. Brazil does not have -- is not -- has no quota right now to ship any boneless into Mexico, so -- and with our price, the U.S. is shipping a good bit of boneless. We believe that further processors are buying a good bit of boneless at these prices and fabricating and putting boneless away right now in anticipation of higher prices. We also believe, without knowing, that there may be some quick service restaurants putting some product up for features that are going to break in the spring. I think all those dynamics are happening.

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Operator [13]

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And next, we'll move to Peter Galbo with Bank of America.

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Peter Thomas Galbo, BofA Merrill Lynch, Research Division - Associate [14]

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Joe, there were some reports out this morning that some of the ports in China have actually started to lower the wait times to offload product from ships, and I'm just wondering from any of the importers you have spoken to just over the past couple of days, have you heard about any incremental easing as people are returning to work that they're actually able to move more product through the ports in a more orderly fashion?

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [15]

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Well, it's gotten better.

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D. Michael Cockrell, Sanderson Farms, Inc. - CFO, Chief Legal Officer, Treasurer & Director [16]

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I asked Anthony this morning. He had not heard anything because I saw that same report, Peter, but I haven't heard that from our guys.

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Lampkin Butts, Sanderson Farms, Inc. - President & Director [17]

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I haven't heard anything in the last couple of days, but I will say it's a little slower getting stuff out of the port. But we hadn't missed the -- we haven't -- we've had everything we shipped that's on schedule, we've gotten in except 4 -- we had 4 loads diverted to a different port in Korea to unload, but everything else has gotten in.

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [18]

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Yes. But it's -- it is kind of -- but we've -- out of all we shipped over there, and we started shipping right at the 1st of December, and we've only had 4 vessels that were diverted and we've probably -- I don't know how many have landed, but we got our -- and they may go from 1 port in China to another port in China, but we got all -- we've gotten almost every one of ours in. And it's kind of getting back -- getting slowly back to normal.

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Peter Thomas Galbo, BofA Merrill Lynch, Research Division - Associate [19]

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Got it. No, that's really helpful. And just a quick clarification on the tariff comments. Is it your understanding that the waiver, as your importers applied for, would go to that 0% effective March 2nd similar to the other protein? That would just be helpful to clarify. Thanks.

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Lampkin Butts, Sanderson Farms, Inc. - President & Director [20]

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Well, if approved. We don't know about the approval yet, but it's our understanding it would happen quickly if they are approved -- if China approves it.

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Peter Thomas Galbo, BofA Merrill Lynch, Research Division - Associate [21]

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Got it. Okay. Okay. That's helpful.

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Operator [22]

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And next, we'll move to Ken Goldman with JPMorgan.

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Kenneth B. Goldman, JP Morgan Chase & Co, Research Division - Senior Analyst [23]

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I have 2 quick ones. One, what's your appetite for buying back stock at these levels? And two, is there any reason to expect earnings to be anything other than positive in the second quarter as you see it right now? I feel like Ken Zaslow asking his brief bottom line questions. So I will steal some of his thunder.

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [24]

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I'll give you the first one. I'd rather build a plant than -- isn't it $70, $75, $80-something is where you'd buy stock rather than build a plant? I think that's the target the last time we looked at it. And I'd rather -- at these prices, you'd rather -- you're better off building a plant. And what was the second question?

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D. Michael Cockrell, Sanderson Farms, Inc. - CFO, Chief Legal Officer, Treasurer & Director [25]

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To that point too, Ken, we bought stock back. We bought 850,000 shares back at $100. We never borrowed money to buyback stock. I don't understand your question. $128 is -- kind of lights you up a little bit, but we hadn't borrowed money to do that in the past. And then the second question...

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [26]

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He is asking about the second quarter. Profitability in the second quarter.

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D. Michael Cockrell, Sanderson Farms, Inc. - CFO, Chief Legal Officer, Treasurer & Director [27]

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Yes. You are making us predict (inaudible).

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [28]

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I don't have a clue about that. Maybe you are aware, it wouldn't, but it did not. I mean, we selling breast at $0.70 a pound doesn't work.

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D. Michael Cockrell, Sanderson Farms, Inc. - CFO, Chief Legal Officer, Treasurer & Director [29]

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We'll observe this. You probably noticed that we did not book a lower of cost or market entry at the end of the first fiscal quarter. So we obviously think it's going to be much improved, but don't know about...

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [30]

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We've got March and April to go, and boneless has got to improve. Dark meat is improving. March, dark meat is going to be better than February. But boneless has got to get up. We can't sell boneless for $0.68, $0.70 a pound, and we have 7 plants deboning and doesn't matter what you pay for corn when you are selling boneless at $0.70 a pound.

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Kenneth B. Goldman, JP Morgan Chase & Co, Research Division - Senior Analyst [31]

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Understood.

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [32]

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You bet.

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Operator [33]

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Next we'll move to Benjamin Theurer with Barclays.

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Benjamin M. Theurer, Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director [34]

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So I wanted to follow up and put a little bit into perspective what you've been shipping to China. So you've mentioned in the press release and in your prepared remarks that you've had shipped approximately 18 million pounds. How has been the velocity of shipments recalled in the last 4 to 5 weeks since the more severe coronavirus outbreaks and some of the delays in the offloading in China? Have you continued to ship? Have you slowed down shipments? Because I remember you gave guidance last quarter call in December on your potential benefit from the chicken feet sending -- shipping them over. So just to understand if there is going to be a revision on that number because of lower levels of shipment?

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Lampkin Butts, Sanderson Farms, Inc. - President & Director [35]

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No. We continued to ship. We haven't slowed down anything, and as I mentioned earlier, everything we've gotten over there has gotten into the country. So we haven't slowed down.

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Benjamin M. Theurer, Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director [36]

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Okay. And how is your progress on getting the quality of the paws? Because that was one of the discussions we had 2 months ago, the grade A. Where do you think your target is going to be? Gave you started to further improve that, work on that, just to get a feel of what the potential volume could be?

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Lampkin Butts, Sanderson Farms, Inc. - President & Director [37]

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Yes, it's gotten better. We've still got some work to do. But it's slowly gotten better in terms of the [plant]. They've been trying to pack them and quality coming out of the houses, but it's not up to where we wanted across the board. I don't know if we recalculated our -- what this paw market is worth of. With what we've done so far, market prices -- we can recalculate that. We haven't done it.

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [38]

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Today, pre-tax, it's $65 to $70 million. And if we can get -- we could add $30 to $40 million to that if we can get everything right. The paws coming out of the boiler house and the grading in the plants, we can add $30 to $40 million to that we believe.

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Benjamin M. Theurer, Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director [39]

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Okay. Now that $65 million to $70 million, is that for fiscal 2020? Or would that be an annualized figure, that's fiscal 2020?

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [40]

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Yes.

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Benjamin M. Theurer, Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director [41]

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Okay.

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [42]

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That's annualized.

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Benjamin M. Theurer, Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director [43]

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Okay, perfect. Well, thank you very much for that.

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Operator [44]

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And next, we'll move on to Ben Bienvenu with Stephens.

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Benjamin Shelton Bienvenu, Stephens Inc., Research Division - MD [45]

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Mike, I think you made some comments around McComb and Brazos being down in the quarter for equipment upgrades. I think Moultrie is supposed to be down for a week in 2Q. Recall, that's...

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [46]

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February. It's done.

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Benjamin Shelton Bienvenu, Stephens Inc., Research Division - MD [47]

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Got it. Okay. Are there -- it's done, okay. Are there any others scheduled for maintenance upgrades or equipment upgrades that we should be aware of...

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [48]

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We had -- we have Waco and Palestine to put some dark meat deboning in, but we have delayed that, primarily because of China business. And so we don't have anymore -- anything else scheduled right now.

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Benjamin Shelton Bienvenu, Stephens Inc., Research Division - MD [49]

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All right. And then, Joe, you mentioned it's been difficult to price your corn basis. Any thoughts on when you think that improves? And I'll leave the question there, keep it simple question.

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [50]

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I don't know. We -- frankly we booked April yesterday. We went out first of the week and sought basis through July, corn -- basis through July and it was still sky high. And we just booked April. And my thought is perhaps it might get better when the March 31 Planting Intentions come out. And if it comes out with a big number, 92, 93, 94 million acres, it might -- that might break something loose. But if not, I'm going to buy hand to mouth. I have no need to go out and -- I mean the basis is high, as high as I've ever seen. And in the East, for Kinston and Adel, it's sky high because they have a small crop out of Ohio and Indiana. I understand that, but not in the Midwest. I don't understand Illinois and Nebraska. But the farmers are -- I understand the farmers being upset about the prices on the Chicago Board of Trade. They have -- the price has been low for them since 2012 and they're hurting. And I got that, but I'm selling boneless breast for $0.70 a pound and...

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D. Michael Cockrell, Sanderson Farms, Inc. - CFO, Chief Legal Officer, Treasurer & Director [51]

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You feel their pain?

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [52]

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I feel, obviously. I empathize. But I'm not going to pay...

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D. Michael Cockrell, Sanderson Farms, Inc. - CFO, Chief Legal Officer, Treasurer & Director [53]

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But you have to sell it. Yes.

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [54]

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I can't store mine.

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Benjamin Shelton Bienvenu, Stephens Inc., Research Division - MD [55]

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Fair enough.

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Operator [56]

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And next, we'll move to Robert Moskow with Crédit Suisse.

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Jacob Samuel Nivasch, Crédit Suisse AG, Research Division - Research Analyst [57]

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This is Jake Nivasch on for Rob. Just a quick question on pricing. I guess, you mentioned that food service, specifically quick serve, demand should ramp up this year, seeing some promos in the spring. Can you just provide some color on, I guess, how this would exactly benefit the overall chicken pricing environment, considering and, correct me if I'm wrong, but most of the quick-serve supplies are from smaller birds and it's a way smaller portion of total supply growth? So I guess how -- what would happen with the bigger bird supplies? And would that continue to pressure pricing? I'm just trying to get some -- just some color on just how pricing would improve for quick serve.

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Lampkin Butts, Sanderson Farms, Inc. - President & Director [58]

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We see -- in the past, we've seen the best Urner Barry market prices for boneless skinless breast when breast sandwiches are -- new breast items are featured heavily on television nationwide. We've seen that when McDonald's and Burger King and Wendy's, when they're all promoting, we see enough demand for boneless breast, and I'm talking about out of a Jumbo plant that it moves the market. And we -- those 3 I mentioned, we don't sell any of them directly. But when they're buying and selling a lot of product through their restaurants, the markets respond to that.

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [59]

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And they -- you can take breast out of our plants, out of a 9 pound, 9.25 pound chicken and fabricate a 4-ounce piece of chicken out of it, and that's what happens a lot of times. When there is not enough of the 7.5 pound chicken or -- they'll take our boneless and cut that 4, 4.5 ounce portion out of our boneless.

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D. Michael Cockrell, Sanderson Farms, Inc. - CFO, Chief Legal Officer, Treasurer & Director [60]

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Yes. We've seen some of that. We've actually sold some to fabricators who have turned around and sold it to another fast-food company that's got a really popular sandwich right now.

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Lampkin Butts, Sanderson Farms, Inc. - President & Director [61]

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But even that breast meat was out of a 6.5 to 7 pound, not a small bird.

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Jacob Samuel Nivasch, Crédit Suisse AG, Research Division - Research Analyst [62]

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Yes. Super helpful. And just a follow-up, just kind of an overall supply question just for the market. When should we expect to see this -- the elevated supply levels kind of taper off? The 4% is kind of the high end of the range. And is this -- yes, is it largely coming from capacity expansion? And if so, when should we see that expansion kind of taper off? Just in terms of the -- from what you can tell. When should we see a more balanced supply/demand dynamics?

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [63]

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I think what's likely to happen is, I think China and the China business and what we believe is going to happen in the quick-service restaurants is going to bail the industry out. And 4% would be too much along with the pork. And that's too much protein, but we're probably -- the industry is probably going to get bailed out because of the export market and because of the feature business that we think is going to happen. Now when that export market disappears, whenever that is, and I don't know when that's going to be, and when this feature business disappears, and I don't know when that's going to be, and all that meat stays and that -- and you will go through a period of losses, and that's what will -- and when that happens, that's when the 4% will disappear. There will be a time of challenge and that's when the 4% goes away. But I think the industry is likely going to get bailed out this year because of extraordinary circumstances in China, and Popeyes chicken challenge is going to be a catalyst for other chicken sandwiches. And I think these events are going to bail the industry out in 2020.

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Jacob Samuel Nivasch, Crédit Suisse AG, Research Division - Research Analyst [64]

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Got it. Okay. I guess I was more focused on specifically supplies in terms of -- is the 4%? Do you think is that largely the elevated number there? Is that largely coming from capacity expansion or is that just more utilization of existing supply -- existing plants? And I guess if it is some expansion, when should we see that kind of taper off? If you have any color, that'd be helpful.

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [65]

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Well, I think it's from expansion. If you look at chick placements and egg sets, half of that -- it's run about 8 million a week, and half of that was announced. That's Sanderson, Mountaire, Costco, Simmons and our neighbor up in North Carolina, Raeford. About half of that, you can account for it. And then Cook and Wayne added lines and that will account for about 4 million -- roughly about 4 million a week, all that put together roughly. And then there is another 4 million that just showed up, 7.5 to 8 million a week eggs and chick placements. And so that's people that have just either -- they didn't announce, they just showed up. And that's people that have either run their lines from 140 to 175 or added a line or something nobody knows about. So that is the result of tremendous profitability in 2014, 2015, 2017, wanted to expand. And that's what they did, and so what's going to stop that is red ink. And when that happens, it will go away. And that's -- and -- but I think 2020 entries don't get bailed out, maybe 2021 as well.

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Operator [66]

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And next, we'll move to Eric Larson with Buckingham Research.

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Eric Jon Larson, The Buckingham Research Group Incorporated - Director of Equity Research [67]

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So a couple of things. I'm curious on the persistent increase in weights. Are -- is the industry holding back a little bit? Joe, just hoping that they get a perennial increase in price and it's a little bit sort of inconsistent with what we hear that your quality of grain feed, your corn is just not quite as good this year. So you actually have to feed more grain. So I guess -- could you talk about the persistent increase in weights that we've seen and what happens there?

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [68]

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Well, we have had a very mild winter and our weights at our company got way out of line in January, and so we had to run probably 3 Saturdays at big bird plants to get our weights back down to our target weight and our weights are back to normal. And I believe we're at least a day younger, may be 2 days younger right now than we were a year ago and -- on our big bird. But our conversion rates are just spectacular right now. I don't know about the corn and soy. I hadn't heard (inaudible). Yes. I don't think -- our corn and soy is fine. So I think the industry ran a lot. I think that's what happened in January to bounce back. The industry had to run a lot of Saturdays to get our weights down a little bit. But the weights we see indicate that the industry has a heavier bird, particularly in the big bird deboning region or segment, definitely a bigger bird in that category.

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Eric Jon Larson, The Buckingham Research Group Incorporated - Director of Equity Research [69]

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Got it. Okay. Yes. So maybe if the whole industry has experienced this kind of very mild winter and they're trying to do this catch up and stuff here as well, when you kind of look at, you've drifted up in boneless over the last 2-3 weeks a bit, but you've drifted down in wings, which is kind of counterseasonal because you're going into March Madness and that is when you generally get that big wing demand and so we've seen a little bit of drop in -- I think in leg -- I think in quarters and in wings recently and maybe this is -- the weakness here near term is just maybe a blow off of people trying to catch up with weights across the industry, is that possible?

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [70]

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Yes. Quarters are going up right now, by the way. At March, leg quarters are going to be $0.03 to $0.04 a pound. Don't know about wings yet. They hadn't made a move yet. Boneless and leg quarters though are both going up, and wings hadn't done anything. We think they've bottomed out.

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Eric Jon Larson, The Buckingham Research Group Incorporated - Director of Equity Research [71]

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Got it.

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Lampkin Butts, Sanderson Farms, Inc. - President & Director [72]

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We're a little too early for March Madness to hit the wings, but it's coming.

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Eric Jon Larson, The Buckingham Research Group Incorporated - Director of Equity Research [73]

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Yes, I would assume that you're probably getting pretty close to that because you're only a couple Saturdays, Sundays away here from selection day and I would imagine you need a couple of weekends' prep to get that. But the final question that I have here and I -- we get this cold storage data, I'm not sure how relevant it is and I think -- Mike, you made a comment to me once that you thought that maybe also in pork that there is a bunch of meat that's going into cold storage. It's sitting in ports in New Orleans and it's already tagged, maybe already sold for shipment, but its getting caught up and tallied up in this cold storage number. It is maybe distorting the numbers. How do you feel about it? I mean does that make sense? And how should we think about that?

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [74]

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I think its -- I think cold storage data is important and I wish I had brought that with me. That is on my desk. First thing I do in that cold storage thing is look at that last category, other. And I think that -- and half of -- almost half of that 950,000 pounds, 1 million pounds -- billion, whatever it is -- 950 million is other. And we don't know what -- we think that is an error, and I don't think anybody knows what that is.

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Lampkin Butts, Sanderson Farms, Inc. - President & Director [75]

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When we see that total number running 950 or above, we think that's too much and it sort of matches up with the cold storage that we deal with. They're all bursting at the seams. They're all full. And the total makes sense. I don't think that -- I don't know that they report the categories right.

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [76]

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I don't either. The boneless -- the breast meat is too high and it's too much. But we pack, beginning in November. We pack frozen breast meat for one of our customers, and every year when the market gets down to these levels, they put boneless breast meat, further processor, puts this boneless breast meat in the freezer that he will pull out in spring -- when boneless -- it's $0.68, $0.70 cents a pound, and he will pull that out when boneless breast meat goes to $1.20, $1.30. He will pull it out and run it and further process it. So it doesn't surprise me, but it's -- and the leg quarters, that doesn't bother me because I think that is staging to go to China. So I can understand breast meat and I can understand the leg quarters.

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Eric Jon Larson, The Buckingham Research Group Incorporated - Director of Equity Research [77]

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Okay.

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [78]

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The other category is the one, nobody knows what it is, that is the one that bothers me a little bit. I do think that is meat -- is significant and it could be this other category that may be something that is -- that is supposed to be chicken wattles and stuff like that. It can't be that many, it can't be that. It's got to be something else.

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Eric Jon Larson, The Buckingham Research Group Incorporated - Director of Equity Research [79]

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Got it. Yes, that's very helpful. I mean it's something that I watch pretty closely too, so I pulled it up while we were talking and, you're right, about half of that increase in the last report was in that other category. So if that's a mystery to you, it's certainly a mystery to us.

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [80]

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Well, I think that's the one that is -- I don't know what that is.

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Operator [81]

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Next we'll move to Mike Piken with Cleveland Research Company.

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Unidentified Analyst, [82]

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Thanks guys. It's Chris. I'm on the line for Mike. Taking a longer term view, do you guys think maybe the coronavirus creates a situation in China where they will be more dependent on imported proteins than we previously thought?

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D. Michael Cockrell, Sanderson Farms, Inc. - CFO, Chief Legal Officer, Treasurer & Director [83]

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I've read -- I've seen that theory batted around. At the end of the day, it's unprecedented and by definition that means we don't know exactly how it's going to play out. But the theory is the province where they've had most of the problems and where the quarantine has been most severe is where a lot of chickens and other protein are processed, and they haven't been able to get feed in there to feed the animals and the wet market is going to be closed. Yes, I mean I think theoretically that makes sense, but at the end of the day, let's wait and see what happens there.

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [84]

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If they want to do it, they can go to commercial, they can go to large-scale commercial chicken...

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D. Michael Cockrell, Sanderson Farms, Inc. - CFO, Chief Legal Officer, Treasurer & Director [85]

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Processors and sell the live birds, yes...

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [86]

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No, they can go to a commercial poultry industry in China...

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D. Michael Cockrell, Sanderson Farms, Inc. - CFO, Chief Legal Officer, Treasurer & Director [87]

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Long term.

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [88]

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Yes. And for short term, they're going to have to import. They could develop a commercial industry opposed to wet markets and go to a commercial pork and commercial poultry industry. But for the short term over the next 3, 4, 5 years -- but the problem they have is they have avian influenza and multiple serotypes. That's their danger.

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Unidentified Analyst, [89]

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Fair enough. Thank you. The second one is, you guys mentioned a new plant. I guess given the tightness in small bird and the relative strength in that category, are you guys maybe be looking to add in the small bird category? Or how are you guys thinking about where you guys want to add capacity or maybe plant once you guys kind of choose a location?

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [90]

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We would add either a tray pack or big bird deboning. We would not do small bird.

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Unidentified Analyst, [91]

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Fair enough.

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Operator [92]

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And we'll hear from Adam Samuelson with Goldman Sachs next.

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Adam L. Samuelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [93]

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So maybe first, Joe, you alluded in one of the earlier questions to exports and QSRs bailing out the industry this year. I mean how do you frame what bailing -- is bailing out just meaning avoiding losses or does bailing out, in your mind, mean prospects of above long-term average margins? I mean there is just a wide range of outcomes of how volatile the pricing has been, and if you could kind of just narrow, kind of, what that could be?

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [94]

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I think that the China exports could probably take all of this 4% expansion in pounds, and it’s going to be dark meat primarily, and I think they could take all of the expansion in pork. And by taking those extra pounds off the market, once it gets going, that's going to do 2 things. It takes the dark meat out of the U.S. and it takes the pork. That's going to help 2 ways. It’s going to help us at retail, the pork -- taking the pork. And it's going to help us by having, the industry I'm talking about, by taking the dark meat. I also think they're going to be -- I believe they're going to be features at QSR on chicken sandwiches. I think that they have to get in the ballgame. I don't have any inside information on that, but I that think they cannot allow -- the competitors cannot sit still and let 2 people dominate the chicken sandwich segment. The other players have to be relevant in that. And so that's why I said what I did.

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Adam L. Samuelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [95]

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Okay. No, that's very helpful color. And then my second question was on the retail market and just how you've kind of alluded to a balanced kind of supply/demand and pricing, mostly on mix, that modestly, but I'm just trying to get a sense as you look forward for the next kind of couple of months how kind of feature planning is going? Looking at the USDA data year-to-date, it seems like feature activity is pretty similar to last year. I'm wondering if -- what you're seeing in engagement with retailers, you think there is a pickup coming that could take some more breast meat off the market?

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Lampkin Butts, Sanderson Farms, Inc. - President & Director [96]

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I think seasonally -- I think we will get seasonally better demand and better feature activity in retail.

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [97]

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It hadn't been -- it has not been great, to tell you the truth. We got 1st of January like we always do, right after Christmas, but February has been pretty slow. If this pork gets exported like we think it will, that's going to help us a great deal. But hog prices are cheap -- very, very cheap and it's hurting us with features at grocery stores right now. It's been very slow in February. Prices have held up, but we are not getting -- February, we're getting very little feature activity.

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Adam L. Samuelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [98]

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Okay. Thank you for that color.

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Lampkin Butts, Sanderson Farms, Inc. - President & Director [99]

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We need to get past Easter. It will be better after Easter, I think.

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Adam L. Samuelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [100]

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Okay. That color is super helpful. I'll pass it on.

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Operator [101]

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And next, we'll move to Ken Zaslow with Bank of Montreal.

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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [102]

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Just a couple of questions, follow-ups more than anything else. When you think about production levels, what is your full year production and how do you think it breaks down between the first half and the second half?

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Lampkin Butts, Sanderson Farms, Inc. - President & Director [103]

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Production levels first half versus second half?

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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [104]

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Yes.

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [105]

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I think they're going to be the same.

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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [106]

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You don't think that the industry production...

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [107]

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You're talking about the industry production?

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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [108]

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Yes, the industry production for the year. My understanding is there is a lot more plants coming on in the front half and then maybe slow down, but I don't know if you believe that or not. There is a couple of theories out there.

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [109]

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I don't -- I think that the -- if the industry is profitable, which I think it will be, past -- after April, May, breast prices and leg quarters do what we think they are going to do. And I think you will have the same -- you will have this 4% increase all year.

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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [110]

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Okay. You keep on referring to the idea that you want to build more capacity, that's always been a long-term thought. Recently though, you said there has been a labor constraint and the ability for you to get --seek a plant, has that changed? Or do you feel the easing of that where there is a greater probability that you will be able to seek a plant?

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [111]

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Well, we hadn't been able to find a site with ample labor yet, but we are -- there are 50 things we look for. One of the things you can do about locating a site, I won't tell you everything, but you could go back and look 10 years back and see what the unemployment rate was 10 years ago or 15 years ago and see what historically unemployment was and you might see what the labor was and anticipate that you're going to have a recession and look at something in the past and not what it is today. And today, everything is hot as a pistol, but you can go back and look and see what it was say 2007, which was a normal year and see what your unemployment was then and labor availability was and look at that, and that might give you some idea of what you could expect when the economy gets normal. And another thing we look for is an aquifer where we can have wells for our facility and where our growers can drill wells. That's a couple of things we look for. Our checklist has 50, 50 plus things on it, but those are a couple of things.

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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [112]

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Great.

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [113]

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Right now, you can't find any place that has plenty of labor. But you could go back -- go ahead.

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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [114]

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Sir, no, can you continue I. That's what I thought. It just seemed like your tone changed that, given where your stock price is, I think it was one of the first questions that you would prefer to build, but I didn't know if your tone changed where, "Hey, we're finding more opportunities to build." But it doesn't seem like that has changed, is that fair?

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [115]

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That's fair. We want to have a new site for the next one. We're not ready to break ground today.

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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [116]

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Okay. My last question is in terms of the logistics of getting product to China, I think you made it pretty clear that you're still getting your products in. Do you think it's more of a desire and willingness for China to buy? Or do you think it's more logistics? I guess I'm trying to think -- I think that's more the question because it seems like ASF is obviously there, but what's going to give China the desire and willingness to actually really change their direction? Is it more a political relationship with President Trump? Or how does that evolve? I guess that's a pretty loaded question, but is it more desire or is it logistic issues and what's going to change? And I'll leave it there.

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [117]

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Do you mean to go ahead and start pulling product in?

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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [118]

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Yes, exactly, really moving exports, right.

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Lampkin Butts, Sanderson Farms, Inc. - President & Director [119]

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They need the protein. Right now, they don't have the demand that they will because of the coronavirus and people are just now starting to move back around again. They've had restaurants. I mean they've had local ordinances banning restaurants from opening. They hadn't needed protein over the last month because of the coronavirus...

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [120]

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(inaudible) going to groceries. I mean their whole economy is disrupted right now.

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Lampkin Butts, Sanderson Farms, Inc. - President & Director [121]

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But once they get that -- once that settles down and...

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [122]

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They're going to need more.

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Lampkin Butts, Sanderson Farms, Inc. - President & Director [123]

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I know there is a big question mark about coronavirus, not just there but in other places too, but they're going to need it.

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [124]

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They're going to need it and they're going to need more.

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Lampkin Butts, Sanderson Farms, Inc. - President & Director [125]

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They're going to need more of it than they did.

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Operator [126]

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And that will conclude the question-and-answer session. At this time, I would like to turn the call back over to Mr. Joe Sanderson for any additional or closing remarks.

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Joe F. Sanderson, Sanderson Farms, Inc. - Chairman & CEO [127]

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Good. Thank you for spending time with us this morning and we look forward to reporting our results to you throughout the year. Thank you very much.

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Operator [128]

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And that will conclude today's call. Thank you for your participation.