SAFM
#Good day and welcome to the <UNK> Farms second-quarter 2016 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.
<UNK> <UNK>.
Please go ahead, sir.
Thank you.
Good morning and welcome to <UNK> Farms' second-quarter conference call.
We issued a news release this morning announcing net income of $47.6 million or $2.11 per share for second fiscal quarter of 2016.
This compares to net income of $71.2 million or $3.13 per share during last year's second quarter.
I will begin the call with some general observations.
But before I do, I will ask <UNK> to give the cautionary statement regarding forward-looking statements.
Thank you, <UNK>, and good morning, everyone.
This morning's call will contain forward-looking statements about the business, financial condition, and prospects of the Company.
The actual performance of the Company could differ materially from that indicated by the forward-looking statements because of various risks and uncertainties.
Those risks and uncertainties are described in our most recent annual report on Form 10-K and the Company's quarterly report on Form 10-Q, filed this morning with the SEC in connection with our second fiscal quarter ended April 30, and in our press release published this morning.
Those documents are available on our website at sandersonfarms.com.
You are cautioned not to place undue reliance on forward-looking statements made this morning and each speaks only as of today.
We undertake no obligation to update or revise our forward-looking statements.
And external factors affecting our business, such as feed grain costs, market prices for poultry, and the health of the economy, among others, remain volatile; and our view today may be very different from what it is a few days from now.
Thank you, <UNK>, and good morning.
As <UNK> mentioned, market prices for poultry products were mixed during the quarter when compared to our second quarter last year.
The average Georgia Dock price during our second quarter was 2.4% lower than last year's second quarter, averaging $1.12 per pound during the quarter compared to $1.14 per pound last year.
The Georgia Dock price for this week is $1.12 per pound, which compares to $1.16 per pound for the same week last year.
The Georgia Dock price reflects continued good demand for chicken in retail grocery stores.
Bulk leg quarter prices were lower for the quarter compared to last year's second quarter for reasons described by <UNK>, averaging $0.294 per pound during our second quarter this year compared to $0.35 per pound last year.
Through March, industry export volumes were down approximately 6.6% compared to last year, and export values were lower by 25.5%.
Compared to our first quarter, though, markets were significantly better.
Leg quarter prices improved during our second quarter by almost 35% when compared to our first quarter.
The current Urner Barry leg quarter quote is $0.35 per pound.
Prices for jumbo wings were higher during our second fiscal quarter than last year's second quarter.
Jumbo wings averaged $1.71 per pound, up 12% from the average of $1.52 per pound during last year's second quarter.
The current Urner Barry quote for jumbo wings is $1.38 per pound.
Boneless breast prices improved during April but on average were lower than last year's second quarter, decreasing 21.4% when compared to the second quarter a year ago.
The second quarter's average Urner Barry price was $1.18 per pound; today the Urner Barry quoted market for jumbo boneless breast is $1.17 per pound.
The overall result of these market price changes was a decrease of $0.089 per pound in our average sales price per pound of chicken sold.
We sold 928.9 million pounds of poultry (technical difficulty) during the second quarter, an increase from the 855.3 million pounds sold during last year's second quarter.
We processed 945.8 million pounds of dressed poultry during the quarter, up 9.4% from the 864.4 million pounds we processed during last year's second quarter.
We previously projected we would process 892.7 million pounds during the quarter, and higher-than-projected live weights and yields made up the difference from our projection.
We now expect to process approximately 3.75 billion pounds of fresh chicken this fiscal year, an increase of approximately 9% compared to 2015.
We estimate we will process approximately 953.1 million pounds in our third fiscal quarter and approximately 998.5 million pounds during our fourth fiscal quarter.
We have factored into those estimates the improved yields and live bird performance we have experienced the past two quarters.
Both of these estimates could be impacted by weather, bird performance, and other factors, some of which are beyond our control.
Results and margins at our prepared food plant improved during the second quarter, and we expect further improvement during the second half of the year.
We sold 44.7 million pounds of processed chicken at our prepared chicken plant through the first half of this year compared to 42.1 million pounds through the first half of last year.
The average sales price through the first half of the year decreased $0.023 per pound compared to last year.
Both live production and our processing plants have performed very well versus the industry peers during the first half of the year.
We certainly have opportunities that we are anxious to capture, but I have been pleased with our operations.
Sales at our big bird plants typically lag some competitors during times of weak commodity chicken markets, and that was certainly the case during our first quarter, but we saw improvements during our second quarter.
We have sales opportunities at all of our plants that we will work to capture as we move through the year.
At this point, I'll turn the call over to <UNK>.
(Operator Instructions) <UNK> <UNK>, JPMorgan.
<UNK>, I think you said you priced a portion of corn into September.
Traditionally, the last few years, <UNK> has not been ahead on corn.
I'm just curious: did you lock in prices because you are increasingly concerned about the potential for corn prices to rise.
Or more just that we're heading into a planting season, and corn prices can be volatile in general during that time.
Understood.
Thank you, <UNK>.
<UNK> <UNK>, Stephens Inc.
A question on exports.
<UNK>, you highlighted that we've gotten greater access to the export market.
What are prices in the export markets right now, and where do you expect them to go as the year progresses.
That's helpful.
Understood.
In my last question is more longer-term in nature.
We've been hearing a lot of concern about 2017 and the fact that you are going to have a lot more protein on the US market, with more beef, more pork, and potentially more chicken with the added capacity that's coming online.
Could you share with us how you're thinking about pricing into next year, how you're planning for next year.
That's helpful, thank you.
Thank you, <UNK>.
<UNK> <UNK>, BB&T Capital Markets.
<UNK>, thank you for that color on headcount.
I think it's really helpful.
And maybe I can just ask the other end of the supply equation, then, and just talk about weights, if you don't mind.
You know, I think you guys have been a little surprised by weights this year, just judging from your commentary.
And you talked about some new breeds that have been in place.
You have talked about some other factors that have led to weights being a little bit above expectations.
And I agree with recent comments that you guys have made that, you know, it seems like we're getting to a ceiling on weights.
I hear about this woody breast meat issue that runs through the industry from time to time, and people have been knocking off weights to try and get rid of that, but then they realized it's probably genetic related, and so it seems like weights are put back on.
So can you, one more time, kind of give us an update on weight growth expectation into 2017 as well.
Okay, that makes sense.
Thank you so much, <UNK>.
<UNK> <UNK>, Jefferies.
That's helpful.
But even those two, with the balance sheet you have, still doesn't, I think, stress your balance sheet.
But anything beyond that that might be a thought, or for now that's about where we should be thinking.
Maybe like a special dividend.
Has that ever crossed your mind.
I mean, your balance sheet is in such great shape.
And again, that's a testament to how well you have managed the business over time.
But anything beyond the two things you just discussed.
All of it was from those two buckets.
We were spot-on the number of head that we expected to process.
And then obviously we just do the arithmetic and multiply that by expected bird weights and yields.
And again, 2% of our miss was bird weight; 3.8% of the miss was yield.
We were spot-on the head.
For us.
It's up a little bit.
It's not that much bigger.
Yes, not that much.
Heads and pounds.
Both.
I think there are a multitude of factors.
I think 3% is about right.
I think you've got to look at the export market, and exports are down about 6% year to date.
Right.
7%, isn't it.
Through March.
Yes, yes.
Because we don't get that.
So that's done, the transition from, like, an older flock to now a more normal flock.
(multiple speakers)
Okay, thanks a lot.
I'll pass it on.
You bet.
<UNK> <UNK>, <UNK> Sachs.
---+
Well, McDonald's is going to break a mighty wing in two divisions, and I think that's some of the wings you've seen in this freezer are for that.
Freezer, yes.
We've got a feature coming on wings at one of the big houses.
We've got wing customers that want us to start freezing wings for them.
Help me, because I don't know the answer to this, but does the Olympics ever help.
Do they ever ---+ are they a big wing draw.
I've never known it ---+
Yes, never know.
So they've got the Olympics coming up too, <UNK>; I don't know if that will help or not.
Football is one, and it's going to be dull until we get to football.
And we're ready for it.
But they're going to go down to $1.20 to $1.30, and then they'll start going back up then.
And they'll slow down around Christmas and then go back up after Christmas.
What a lot of that is is Palestine coming ---+ as Palestine volume increases, all the cost at Palestine continues to drop lower.
Their plant costs, their hatchery costs, their milling costs, and ---+.
The other cost of goods sold was down 116 points, <UNK>; and 37 of that was attributable to improved efficiencies at Palestine.
And the rest of it is exactly what you said, just improved yields and higher live weights and pounds.
And for the rest of this year, we think we'll get another $0.005 a pound in Palestine.
And that will happen by October.
They are on their third line now, and they'll start their fourth line in July, and by August that ought to be mature.
End of August.
End of August they'll be mature, and they'll be at full capacity.
January.
It'll be January.
As soon as we start moving those costs out of SG&A and into cost of goods sold, yes, we'll start all over again.
And you'll see those efficiencies pop up one more time.
That's right.
Not one more time ---+ again, I'm sorry.
(laughter)
Thank you, <UNK>.
We're still putting them in rendering, and we still think it's going to be sometime in 2017.
We haven't had any indication from USTR or anything else that anything is thawing out there.
China is ---+ they continue to ---+ their poultry industry in China continues to struggle.
It's not as bad as it was, but they're still struggling.
And there's still political things on the plate that haven't been completely resolved.
So we think we've got to get into next year to lift that AI ban.
I don't think all of it has to return to leg quarters to get better breast meat prices.
I think there's a market for some of it.
Do we have those pounds.
Yes, right here.
I have got some information.
Let me see if I can get my hands on it.
You tell them what it is; I can't read that.
We've got some data for you comparing the first quarter of this year to the first quarter of last year about how many leg quarters are not ---+.
There it is.
It's roughly 3% less leg quarters being produced, and this is industrywide.
Now, that 3% reflects ---+ it's almost 15 million pounds of leg quarters over that quarter.
5 million pounds a month.
And then increased leg meat production and increased boneless thigh production ---+ those are both up 10%, 11%.
That's 14 million pounds of leg meat and 25 million, almost 26 million pounds of boneless thigh filets increase.
So there's been that much shift from a leg quarter over to deboned dark meat.
That's out of Agristat.
We can't hear you.
You've got a bad connection.
No.
Operator, let's see if we can take the next question.
I can't hear him ---+ getting worse.
I wouldn't think there's a lot of culling going on.
We don't do very much of that in our operation.
There's very little of that done.
And once hens get into production, they are there.
What happens is there is mortality that occurs in the pullets and then in the henhouse.
And a good operator has lower mortality than a poor operator.
And that mortality is a natural culling effect, but people don't go out and typically cull hens.
They might do that with males for different reasons, but they typically do not do it with hens.
I would explain it by mortality.
Yes.
I think the demand is ---+ I think there's more demand.
I think it has improved.
Now, I don't know ---+ I can't tell you how much ---+ I'm not ---+.
We don't do a lot.
It's not significant.
I still think if you put 100 consumers in a room, it's two-thirds/one-third ---+ two-thirds prefer the white meat.
That hasn't changed significantly, but there is more demand for that in the United States.
This shift in production came about because leg quarters got so cheap.
It didn't come about because of demand.
Right.
It had to do with cheap leg quarters, not unfulfilled demand here in the States.
But we are short of deboned dark meat every week now.
We are having to put a little more capacity in at some of our big bird deboning plants.
And we're a little bit short at our retail plants of deboned dark meat.
We have ---+ I don't know how much we are short; I can't quantify it, but we are short every week at our food service operations and at our tray pack plants.
But when you look at the volume that we produce of white meat versus the volume we produce of dark meat, percentage-wise there's no comparison.
We produce a lot more white deboned white meat than we do deboned dark meat.
And Agristats is the same way.
When you look at the industry as a whole, percentage-wise, deboned dark meat is a very low percentage of the sales.
Well, we know of one plant that is changing, getting out of big bird deboning right now.
But the rest of them are not contracting.
They are going to stay doing what they're doing.
Peco is going to be a big bird deboning plant, and Mountaire bought a plant that had been mothballed.
And at some point that ---+ I'm assuming that's going to be a big bird deboning plant.
That may be a couple of years away before that's going to be up and running.
But other than that one that's changing, the Pilgrim plant is going from big bird deboning to organic.
I think everybody else is holding their own.
Good.
Thank you all for spending time with us, and we will look forward to reporting our third quarter in August.
